<PAGE>
GLOBAL EQUITY FUNDS
ANNUAL REPORT
IAI Developing Countries Fund
IAI International Fund
JANUARY 31, 1996
IAI LOGO
MUTUAL FUNDS
<PAGE>
[PHOTO OF GLOBE]
<PAGE>
Table of Contents
-----------------
IAI Developing Countries Fund, IAI International Fund
Annual Report
January 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Chairman's Letter....................... 2
Fund Manager's Reviews
IAI Developing Countries Fund.......... 4
IAI International Fund................. 7
Fund Portfolios
IAI Developing Countries Fund..........10
IAI International Fund.................12
Notes to Fund Portfolios................15
Statements of Assets and Liabilities....16
Statements of Operations................17
Statements of Changes in Net Assets.....18
Financial Highlights
IAI Developing Countries Fund..........20
IAI International Fund.................21
Notes to Financial Statements...........22
Independent Auditors' Report............27
Federal Tax Information.................28
IAI Mutual Fund Family..................30
Distributor, Adviser, Custodian,
Legal Counsel, Independent Auditors,
Directors................Inside Back Cover
</TABLE>
<PAGE>
Chairman's Letter
-----------------
IAI Developing Countries Fund, IAI International Fund
A Great Time To Diversify
[PHOTO]
Noel P. Rahn,
Chairman
The year ended January 31, 1996 was one of the best periods in my memory for
U.S. stocks and bonds. The economy has been behaving just right; not too fast to
bring back inflation, and not too slow to bring on a recession. In addition,
American business is the most productive in the world. It's a perfect recipe for
continued success in the markets.
But just as the investment world was gloomy in 1994, let's not assume that
1995's performance is the norm either. As we've seen so far in 1996, stocks and
bonds can be volatile. That's particularly important to remember when prices are
high. One of the most important investment principles is diversification--not
putting all your eggs in one basket.
By investing in mutual funds, you have already taken a step toward
diversification. A typical mutual fund invests in dozens of securities, a much
more diversified portfolio than you can generally achieve on your own. But
another way to diversify is to broaden your investment horizon into areas that
haven't done quite as well. One example: international funds.
Developed and developing markets throughout the world have not matched the U.S.
economy during the past year. As a result, their securities markets have lagged
the United States. Since international markets largely move independently of the
United States, an investment overseas is considered an excellent way to
diversify a portfolio. This is particularly true when our markets are nearing or
achieving all-time highs.
If investing internationally is not for you, then there are other ways to
diversify your portfolio. If you've got mutual funds that invest in just one
type of investment objective, then you might want to consider broadening your
investment horizon. Of course, whether you focus on growth, income or a blend of
the two depends on your time horizon. If you're investing for a retirement
that's 30 years down the road, then you can afford to take more risk than if you
need the income from those investments right away.
Regardless of the time frame, the U.S. markets will continue to be impacted by
the performance of the economy, the outlook for inflation, and the level of
interest rates. Over the next six months, the presidential primary season will
also play a role. All of these events are truly unpredictable and uncontrollable
by the average investor. That makes investing a continuing challenge, and
another reason to stay diversified.
2
<PAGE>
Chairman's Letter
-----------------
IAI Developing Countries Fund, IAI International Fund
Economic Outlook
Larry Hill, IAI's Chief Fixed Income Officer, provides his economic outlook
below, as published recently in the Adviser.
We believe that the bond market will continue to be volatile throughout 1996.
The economy, which began 1996 on a weak note, will likely perk up as we move
through the year. This perception of a stronger economy will cause fixed income
investors to be conservative in their investment approach. True, the first
quarter data may have been penalized by an unusually rough winter throughout the
U.S. We also think that the government-generated economic data for the first
quarter may be unreliable because of the federal government shutdowns that
occurred in December and January. Nevertheless, the rest of the year is likely
to appear strong in comparison.
We are also concerned that inflation, which has been running about 2.5% per
year, could begin to creep up later this year. One uncertainty is the
possibility that China will step up its demand for worldwide grain to feed 1.3
billion people who live in that country. That would put a severe strain on
agriculture prices. As we have seen, any signs of inflation or faster economic
growth creates volatility in the bond market.
Bonds offer two components of total return: coupon payments and changes in net
asset value caused by interest rate movements. Unlike 1995, when bond investors
earned most of their returns from rising net asset values, 1996 will likely be a
year of single-digit returns, primarily from coupon yields. Returns in the 5-7%
range are about average for bond returns during recent decades.
Please read the Fund Manager's Reviews, which follow this letter, for a detailed
perspective on the Funds' performance and our strategy going forward. We
appreciate your continued trust and confidence in IAI. If there is any way we
can serve you better, please let us know by calling our toll-free Investor
Services Hotline at 1-800-945-3863.
Sincerely,
/s/ Noel P. Rahn
- ----------------
Noel P. Rahn
Chairman
3
<PAGE>
Fund Manager's Review
---------------------
IAI Developing Countries Fund
IAI Developing Countries Fund
[PHOTO]
Roy C. Gillson
IAI Developing Countries
Fund Manager
"Investors
are beginning to
rediscover developing
countries after a
two year lull."
Fund Objective
The IAI Developing Countries Fund is designed for aggressive investors seeking
long-term capital appreciation from opportunities offered by investing in equity
securities of companies within developing countries. Since the Fund invests in
issues of international stocks in lesser developed countries, investors often
use it as a diversification technique in conjunction with other IAI Mutual Funds
which invest in less volatile markets.
Fund Positioning For the Past Year
Until the beginning of 1996, developing countries lagged their more mature
counterparts around the world. As a result, the IAI Developing Countries Fund
produced a total return of 8.53% for the period February 10, 1995 through
January 31, 1996. In contrast, the Morgan Stanley EAFE Index, a measure of more
mature markets, was up 16.48% for the period ended January 31, 1996, while the
Standard & Poor's 500, which measures the U.S. stock market, was up 38.62%.
Reasons for investor caution overseas include the apparent pullback from
capitalism in Russia, as well as the slowing growth of Far East Asian economies
and the severe recession in Mexico following the devaluation of the peso.
We believe that the Mexican government has been successful in stabilizing the
economy and the banking industry. By the fall of 1995, the Mexican economy began
to expand modestly, driven by strong exports. The IAI Developing Countries Fund
owns several Mexican companies including Telefonos de Mexico, a large
telecommunications company. The Fund is modestly overweighted in Latin America
as a whole, with holdings in Argentina, Brazil, Chile, Columbia and Peru. We are
devoting significant research effort to these companies.
Despite the political chill in Russia, the economies in Eastern Europe grew in
1995 for the first time in three years. In Poland, we purchased the stock of a
company called Elektrim, which was part of a consortium that was granted a
cellular phone license for the country. China also continues to generate
opportunities. Recently, the Fund purchased Guangdong Electric Power
Development, China's largest electric utility, and Sinocan, the country's
largest steel producer. Both stocks trade on the Hong Kong exchange.
Fund Positioning Going Forward
Investors are beginning to rediscover developing countries after a two year
lull. The U.S. stock market has had a tremendous run, and prices are getting
high in relation to earnings. Although developing markets are for aggressive
investors who can tolerate risk, we believe that the current values are
extremely attractive.
/s/ Roy C. Gillson
Roy C. Gillson
Fund Manager
4
<PAGE>
Fund Manager's Review
---------------------
IAI Developing Countries Fund
Portfolio Weighting:
IAI Developing Countries Fund vs. IFC Investable Index
<TABLE>
<CAPTION>
1/31/96
------------------------------------
IAI Country Returns
Developing Countries IFC Investable for the Year
Fund Index Ended 1/31/96
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Africa
South Africa 5% 19% 28%
Europe
Czech Republic 2 1 (10%)
Greece 4 2 16%
Poland 3 1 34%
Portugal 2 1 (2%)
Turkey 3 3 21%
United Kingdom 2 -- 23%
Far East
China 4 1 (8%)
India 3 2 (33%)
Indonesia 7 5 29%
Malaysia 9 19 21%
South Korea 7 3 (5%)
Taiwan 3 3 (28%)
Thailand 3 5 14%
Latin America
Argentina 2 4 26%
Brazil 10 10 (1%)
Chile 4 7 (5%)
Colombia 2 1 (38%)
Mexico 8 9 19%
Peru 3 1 37%
Other Countries -- 3 --
Cash 14 -- --
=====================================================
Total 100% 100%
=====================================================
</TABLE>
Top Ten Stock Holdings
<TABLE>
<CAPTION>
% of Net Assets % of Net Assets
Issues Country Industry 1/31/96 7/31/95
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Perusahaan Otomobil Nasional Malaysia Consumer Durables 3.06 2.99
Malaysian International Shipping, foreign Malaysia Transportation 2.79 2.04
Tofas Turk Otomobil GDR Turkey Consumer Durables 2.76 1.36
Taipei Fund Taiwan Country Fund 2.69 --
Semen Cibinong, foreign Indonesia Producer Manufacturing 2.64 1.94
Samsung Electronics Preferred South Korea Electronic Technology 2.63 1.47
Bidvest South Africa Financial 2.56 2.58
Elektrim Poland Producer Manufacturing 2.55 2.33
Guangdong Electric Power Development Class B China Utilities 2.48 --
Texniki Et Boloy Greece Producer Manufacturing 2.48 2.43
===========================================================================================================================
Total 26.64% 17.14%
</TABLE>
5
<PAGE>
Fund Manager's Review
---------------------
IAI Developing Countries Fund
Note to Chairman's Letter & Fund Manager's Review
Performance data for the IAI Developing Countries Fund includes changes in share
value and assumes reinvestment of all dividends and capital gains. Past
performance is not a guarantee of future results. The Fund's investment return
and principal may fluctuate, so that when redeemed, shares may be worth more or
less than the original cost. More complete information about the Fund, including
charges and expenses, is available in the prospectus. Please read the Fund's
prospectus carefully before investing. All indices cited are unmanaged, and are
either trademarks, registered trademarks or copyrights of their respective
sponsoring companies.
<TABLE>
<CAPTION>
Top Five Countries
% of Net Assets
[PERFORMANCE GRAPH APPEARS HERE]
As of 1/31/96 As of 7/31/95
<S> <C> <C>
Brazil 9.9% 10.4%
Malaysia 9.2% 7.8%
Mexico 8.0% 15.1%
South Korea 7.3% 6.8%
Indonesia 7.0% 8.7%
</TABLE>
<TABLE>
<CAPTION>
Value of $10,000 investment+
[PERFORMANCE GRAPH APPEARS HERE]
IAI
Developing Countries IFC
Fund/1/ Investable
(Inception 2/10/95) Index*
- ---------------------------------------------------------------
<S> <C> <C>
2/10/95 $ 9,670 $ 9,871
3/31/95 $ 9,900 $ 9,845
4/30/95 $10,451 $10,258
5/31/95 $10,560 $10,642
6/30/95 $10,770 $10,706
1/31/96 $10,853 $11,471
</TABLE>
<TABLE>
<CAPTION>
Total Return+
Through 1/31/96
Since Inception
2/10/95**
================================================
<S> <C>
IAI Developing Countries Fund/1/ 8.53%
................................................
IFC Investable Index 14.71%*
</TABLE>
+ Past performance is not predictive of future performance
* Since 2/1/95
** Not Annualized
/1/ Fees and expenses are currently being voluntarily waived to 2.00% of
average daily net assets.
6
<PAGE>
Fund Manager's Review
---------------------
IAI International Fund
IAI International Fund
Fund Objective
The primary investment objective of the IAI International Fund is capital
appreciation. A secondary objective is current income, principally from
dividends. Typically, the Fund invests in stocks representative of the Morgan
Stanley Europe Australia and Far East (EAFE) Index. However, the Fund also
invests in other countries, including developing countries.
Fund Positioning For the Past Year
During the period, the EAFE Index was up 16.48% while IAI International Fund
produced a total return of 20.15% for the year.
The IAI International Fund had two major strategies over the last year: an
underweighting in Japan and an overweighting in emerging markets. During the
period, we lowered our weighting in Japan from 27% of the portfolio to 23%. In
contrast, the EAFE Index is 40% weighted in Japan which performed poorly in the
last half of the year before recovering. Although the Japanese economy has
improved somewhat, the country's banking system is still saddled with serious
problems related to the deflation in real estate values. Our holdings in Japan
include Canon, Hitachi and Nippon Telegraph & Telephone.
The second largest country weighting is the United Kingdom, which represents
about 18% of the portfolio. Glaxo Wellcome, a major pharmaceutical company, has
been one of the Fund's best performers, tracking the positive fortunes of its
U.S. counterparts. Recent purchases include two French companies, Lyonnaise des
Eaux-Dumez and Lafarge. Lyonnaise des Eaux-Dumez is a very successful water
utility company. Lafarge is one of the three largest global cement companies
with a very large market share in France. Both companies generate excess cash
flow which is being invested in emerging markets where massive infrastructure
construction is taking place.
The Asian stock markets came back to life in January of 1996. The Hong Kong
market was up 14% during the month. Emerging markets in Indonesia and Thailand
have risen almost as much. Although our emerging market exposure was not
advantageous for most of 1995, it became an advantage late in the period. In
December, we made a timely decision to increase our emerging market exposure
from 5% to 7%.
Fund Positioning Going Forward
The U.S. economy is in the late stages of its economic cycle, whereas many
international economies are just emerging from recession. Because these foreign
markets tend to move independently of U.S. stocks, they present a powerful
diversification opportunity for equity investors. Early indications are that
1996 is likely to be a better year for international investing than 1994 or
1995.
/s/ Roy C. Gillson
Roy C. Gillson
Fund Manager
[PHOTO]
Roy C. Gillson
IAI International
Fund Manager
"Because foreign markets tend to move
independently of U.S. stocks, they present a
powerful diversification opportunity for equity investors."
7
<PAGE>
Fund Manager's Review
---------------------
IAI International Fund
Portfolio Weighting:
IAI International Fund vs. EAFE Index
<TABLE>
<CAPTION>
1/31/96
---------------------------------------- Country Returns
IAI EAFE for the Year
International Fund Index Ended 1/31/96
===========================================================================================================
<S> <C> <C> <C>
Africa
South Africa 1% --% 28%
Europe
Belgium 5 3 31%
France 8 1 22%
Germany 6 7 24%
Ireland 1 -- 23%
Netherlands 3 4 28%
Spain 8 2 33%
Turkey 1 -- 21%
United Kingdom 18 16 23%
Far East
Australia 2 4 23%
Israel 1 -- 18%
Hong Kong 3 4 56%
Indonesia 1 -- 29%
Japan 23 40 6%
Malaysia 3 2 21%
New Zealand 2 1 20%
Singapore 3 1 22%
South Korea 1 -- (5%)
Thailand 1 -- 14%
Latin America
Argentina 1 -- 26%
Brazil 1 -- (1%)
Chile 1 -- (5%)
Mexico 2 -- 19%
Other Countries -- 15 --
Cash 4 -- --
==========================================================================================
Total 100% 100%
==========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Top Ten Stock Holdings
% of Net Assets
----------------------
<S> <C> <C> <C> <C>
Issues Country Industry 1/31/96 1/31/95
- -------------------------------------------------------------------------------------------------------------------
Nippon Yusen Kabushiki Kaish Japan Transportation 3.32 2.60
Nippon Telegraph & Telephone Japan Utilities 3.29 --
Hitachi Japan Producer Manufacturing 3.26 2.82
Bayer Germany Process Industries 3.23 2.77
Koninklijke PTT Nederland Netherlands Commercial Services 3.22 3.96
Glaxo Wellcome United Kingdom Health Technology 3.17 2.72
Telefonica de Espana Spain Utilities 3.06 2.86
Canon Japan Producer Manufacturing 3.03 3.06
Malaysian International Shipping, foreign Malaysia Transportation 3.02 2.09
Jardine Strategic Singapore Financial 3.01 2.78
===================================================================================================================
Total 31.61% 25.66%
</TABLE>
8
<PAGE>
Fund Manager's Review
---------------------
IAI International Fund
Top Five Countries
% of Net Assets
[PERFORMANCE GRAPH APPEARS HERE] [PLOT POINTS TK]
<TABLE>
<CAPTION>
As of 1/31/96 As of 1/31/95
<S> <C> <C>
JAPAN 23.5% 26.8%
UNITED KINGDOM 17.9% 15.3%
FRANCE 8.7% 8.4%
SPAIN 8.2% 7.5%
GERMANY 6.2% 5.0%
</TABLE>
Value of $10,000 investment+
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
IAI INTERNATIONAL FUND EAFE INDEX*
(Inception 4/23/87)
<S> <C> <C>
4/23/87 $10,030 $10,000
1/31/88 $ 9,040 $ 9,323
1/31/89 $11,418 $11,985
1/31/90 $12,723 $12,565
1/31/91 $11,547 $10,348
1/31/92 $13,312 $11,036
1/31/93 $12,540 $ 9,939
1/31/94 $18,111 $14,331
1/31/95 $16,247 $13,731
1/31/96 $19,517 $15,994
</TABLE>
Note to Chairman's letter & Fund Manager's Reviews
Performance data for the IAI International Fund includes changes in share value
and assumes reinvestment of all dividends and capital gains. Past performance is
not a guarantee of future results. The Fund's investment return and principal
may fluctuate, so that when redeemed, shares may be worth more or less than the
original cost. More complete information about the Fund, including charges and
expenses, is available in the prospectus. Please read the Fund's prospectus
carefully before investing. All indices cited are unmanaged, and are either
trademarks, registered trademarks or copyrights of their respective sponsoring
companies.
<TABLE>
<CAPTION>
Average Annual Returns+
Through 1/31/96
Since Inception
1 Year 5 Years 4/23/87
=======================================================================
<S> <C> <C> <C>
IAI International Fund 20.15% 11.07% 7.92%
.......................................................................
EAFE Index 16.48% 9.10% 5.51%*
</TABLE>
+ Past performance is not predictive of future performance
* Since 5/1/87
9
<PAGE>
Fund Portfolio
--------------
IAI Developing Countries Fund
January 31, 1996
(percentage figures indicate percentage of total net assets)
Common Stocks -- 74.1%
<TABLE>
<CAPTION>
Market
Quantity Value (a)
- ------------------------------------------------------------
<S> <C> <C>
Argentina -- 1.7%
Transportadora de Gas del Sur ADR
(Energy Minerals) 10,000 $126,250
- ------------------------------------------------------------
Brazil -- 4.0%
Telecomunicacoes Brasileiras ADR
(Utilities) 2,280 127,110
Usiminas Siderurgicas de Minas Gerais
ADR (Non-Energy Minerals) 1,500 16,590
Usiminas Siderurgicas de Minas Gerais
ADR (Non-Energy Minerals) (c) 13,750 152,075
--------
295,775
- ------------------------------------------------------------
Chile -- 3.8%
Enersis ADR (Utilities) 5,300 145,750
Maderas Y Sinteticos ADR
(Process Industries) 6,650 132,169
--------
277,919
- ------------------------------------------------------------
China -- 3.9%
Guangdong Electric Power
Development Class B
(Utilities) (b) 309,980 182,812
Sinocan (Process Industries) 286,000 106,343
--------
289,155
- ------------------------------------------------------------
Czech Republic -- 1.5%
Skoda Koncern Plzen
(Consumer Durables) (b) 5,005 113,992
- ------------------------------------------------------------
Greece -- 4.2%
Delta Informatics
(Technology Services) 14,500 130,447
Texniki Et Boloy
(Producer Manufacturing) 13,250 182,308
--------
312,755
- ------------------------------------------------------------
India -- 3.1%
Grasim Industries GDR
(Consumer Durables) 6,650 115,377
Indian Petrochemicals GDR
(Energy Minerals) 9,400 111,672
--------
227,049
- ------------------------------------------------------------
Indonesia -- 7.0%
Bank Bali, foreign (Financial) 50,000 $126,554
Bank International Indonesia,
foreign (Financial) 32,000 122,888
Inti Indorayon Utama,
foreign (Process Industries) 70,000 67,968
Semen Cibinong, foreign
(Producer Manufacturing) 62,000 194,130
--------
511,540
- ------------------------------------------------------------
Malaysia -- 9.2%
Kelang Container Terminal
(Transportation) 56,000 134,520
Land & General (Process Industries) 55,000 113,858
Malaysian International Shipping,
foreign (Transportation) 66,000 204,944
Perusahaan Otomobil Nasional
(Consumer Durables) 60,000 224,982
--------
678,304
- ------------------------------------------------------------
Mexico -- 8.0%
DESC Series B (Financial) (b) 28,000 109,286
Fomento Economico Mexicano
Class B (Commercial Services) 41,000 116,433
Grupo Carso ADR (Financial) (b) (c) 10,300 141,007
Grupo Financiero Bancomer
Class B (Financial) (b) 300,000 125,168
Telefonos de Mexico ADR
(Utilities) 2,850 96,544
--------
588,438
- ------------------------------------------------------------
Peru -- 2.9%
Credicorp (Financial) (b) 5,669 104,309
Telefonica del Peru Class A
(Utilities) 48,500 106,222
--------
210,531
- ------------------------------------------------------------
Poland -- 2.6%
Elektrim (Producer Manufacturing) 35,500 187,941
- ------------------------------------------------------------
</TABLE>
See accompanying Notes to Fund Portfolios on page 15
10
<PAGE>
Fund Portfolio
--------------
IAI Developing Countries Fund
January 31, 1996
Common Stocks (cont.)
<TABLE>
<CAPTION>
Market
Quantity Value (a)
- -----------------------------------------------------------
<S> <C> <C>
Portugal -- 2.2%
Portucel Industrial Empresa
(Process Industries) (b) 25,200 $161,611
- -----------------------------------------------------------
South Africa -- 5.0%
Bidvest (Financial) 23,300 188,326
South African Iron & Steel
Industrial (Non-Energy Minerals) 204,750 180,078
--------
368,404
- ----------------------------------------------------------
South Korea -- 4.7%
Korea Electric Power (Utilities) 1,400 60,279
Pohang Iron & Steel
(Non-Energy Minerals) 1,720 133,702
Samsung Electronics
(Electronic Technology) (b) 34 6,085
Shinhan Bank (Financial) 6,335 143,182
--------
343,248
- ----------------------------------------------------------
Taiwan -- 2.7%
Taipei Fund (Country Fund) (b) 3,000 198,001
- -----------------------------------------------------------
Thailand -- 3.1%
Charoen Pokphand Feedmill,
foreign (Process Industries) 20,300 110,553
Srithai Superware
(Consumer Durables) 1,400 9,669
Srithai Superware, foreign
(Consumer Durables) 15,300 105,663
--------
225,885
- ----------------------------------------------------------
Turkey -- 2.8%
Tofas Turk Otomobil GDR
(Consumer Durables) (b) 362,000 202,721
- ----------------------------------------------------------
United Kingdom -- 1.7%
Five Arrows Chile Investment
Trust (Financial) 21,500 63,641
Ocean Wilsons (Financial) 44,000 63,160
--------
126,801
==========================================================
Total Investments in Common Stocks
(Cost: $5,261,668)............................ $5,446,320
==========================================================
</TABLE>
Non-Convertible Preferred Stocks -- 10.3%
<TABLE>
<CAPTION>
Market
Quantity Value (a)
- -----------------------------------------------------------
<S> <C> <C>
Brazil -- 5.9%
Banco Nacional (Financial) (d) 5,300,000 $ --
Centrais Electric Sta Cat
Class B (Utilities) (b) 240,000 137,410
CIA Tecidos Norte de Mina
(Process Industries) (b) 350,000 152,081
Multibras (Consumer Durables) 141,000 142,716
--------
432,207
- ----------------------------------------------------------
Colombia -- 1.8%
Banco Ganadero ADR (Financial) 8,800 132,001
- ----------------------------------------------------------
South Korea -- 2.6%
Samsung Electronics
(Electronic Technology) (b) 1,720 193,631
==========================================================
Total Investments in Non-convertible
Preferred Stocks
(Cost: $779,262)................................$ 757,839
==========================================================
Total Investments in Long-Term
Securities
(Cost: $6,040,930)..............................$6,204,159
==========================================================
</TABLE>
Short-Term Securities -- 13.4%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------
U.S. Government Obligations -- 13.4%
U.S. Treasury Bill
<S> <C> <C> <C>
5.06% 04/25/96 $1,000,000 $988,589
===========================================================
Total Investments in Short-Term
Securities
(Cost: $988,485)...................................$988,589
===========================================================
Total Investments in Securities
(Cost: $7,029,415) (e)...........................$7,192,748
===========================================================
Other Assets and Liabilities (Net) -- 2.2%
.................................................$ 164,261
===========================================================
Total Net Assets.................................$7,357,009
===========================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 15
11
<PAGE>
Fund Portfolio
--------------
IAI International Fund
January 31, 1996
(percentage figures indicate percentage of total net assets)
Common Stocks -- 96.0%
<TABLE>
<CAPTION>
Market
Quantity Value (a)
- ---------------------------------------------------------
<S> <C> <C>
Argentina -- 0.7%
Transportadora de Gas del Sur
ADR (Energy Minerals)............ 80,000 $ 1,010,000
- ---------------------------------------------------------
Australia -- 1.8%
M.I.M. Holdings
(Energy Minerals)................ 2,267,600 2,803,588
- ---------------------------------------------------------
Belgium -- 5.1%
Compagnie Maritime Belge
(Transportation)................. 17,000 1,355,998
Societe Generale de Belgique
(Financial)...................... 9,000 3,354,037
Solvay Et Cie
(Process Industries)............. 5,410 3,006,538
-----------
7,716,573
- ---------------------------------------------------------
Brazil -- 0.7%
Usiminas Siderurgicas de
Minas Gerais ADR
(Non-Energy Minerals)............ 90,000 995,400
- ---------------------------------------------------------
Chile -- 0.7%
Enersis ADR (Utilities).......... 40,000 1,100,000
- ---------------------------------------------------------
France -- 8.7%
Eridania Beghin-Say
(Process Industries)............. 22,300 3,898,723
Lafarge
(Producer Manufacturing)......... 46,000 3,106,112
Lyonnaise des Eaux-Dumez
(Utilities) (b).................. 20,000 1,873,605
Rhone Poulenc Class A
(Process Industries)............. 185,100 4,312,404
-----------
13,190,844
- ---------------------------------------------------------
Germany -- 6.2%
Bayer (Process Industries)....... 16,400 4,891,673
RWE (Utilities).................. 11,380 4,466,644
-----------
9,358,317
- ---------------------------------------------------------
Hong Kong -- 2.9%
Hong Kong Telecommunications
(Utilities)...................... 2,308,000 4,387,946
- ---------------------------------------------------------
Indonesia -- 0.8%
Bank Bali, foreign
(Financial)...................... 450,000 1,138,991
- ---------------------------------------------------------
Ireland -- 1.0%
Irish Life (Financial)........... 375,000 1,518,555
- ---------------------------------------------------------
Israel -- 1.3%
Israel Fund ADR (Financial)...... 2,100,000 1,533,000
Israel Fund Warrants
(Financial) (b).................. 560,000 100,800
NUR Advanced
Technologies ADR
(Producer Manufacturing) (b)..... 80,000 370,000
-----------
2,003,800
- ---------------------------------------------------------
Japan -- 23.5%
Canon (Producer Manufacturing)... 243,000 4,591,123
Hitachi (Producer Manufacturing). 490,000 4,949,726
Kamigumi (Transportation)........ 395,000 3,842,304
KAO (Process Industries)......... 330,000 4,166,861
Mitsubishi Heavy Industries
(Producer Manufacturing)......... 515,000 4,089,557
Nippon Telegraph & Telephone
(Utilities)...................... 659 4,995,688
Nippon Yusen Kabushiki Kaish
(Transportation)................. 900,000 5,042,324
Toray Industries
(Process Industries)............. 610,000 3,971,006
-----------
35,648,589
- ---------------------------------------------------------
Malaysia -- 3.0%
Malaysian International
Shipping, foreign
(Transportation)................. 1,473,333 4,575,034
- ---------------------------------------------------------
</TABLE>
See accompanying Notes to Fund Portfolios on page 15
12
<PAGE>
Fund Portfolio
--------------
IAI International Fund
January 31, 1996
<TABLE>
<CAPTION>
Common Stock (Cont.)
Market
Quantity Value (a)
- --------------------------------------------------------------
<S> <C> <C>
Mexico -- 1.7%
Grupo Financiero Bancomer
Class B (Financial) (b) 3,000,000 $ 1,251,681
Telefonos de Mexico ADR
(Utilities) 37,100 1,256,763
------------
2,508,444
- --------------------------------------------------------------
Netherlands -- 3.2%
Koninklijke PTT Nederland
(Commercial Services) 126,960 4,877,507
- --------------------------------------------------------------
New Zealand -- 2.7%
Carter Holt Harvey
(Non-Energy Minerals) 1,951,550 4,161,600
- --------------------------------------------------------------
Singapore -- 3.0%
Jardine Strategic (Financial) 1,341,000 4,559,400
- --------------------------------------------------------------
South Africa -- 0.8%
Bidvest (Financial) 150,000 1,212,395
- --------------------------------------------------------------
South Korea -- 0.4%
Samsung Electronics
(Electronic Technology) (b) 3,487 623,908
- --------------------------------------------------------------
Spain -- 8.2%
Banco Popular Espanol (Financial) 20,300 3,635,411
Iberdrola (Utilities) 440,000 4,124,123
Telefonica de Espana
(Utilities) 316,000 4,638,163
------------
12,397,697
- --------------------------------------------------------------
Taiwan -- 0.4%
Taipei Fund (Country Fund) (b) 10,000 660,000
- --------------------------------------------------------------
Thailand -- 0.7%
Charoen Pokphand Feedmill,
foreign (Process Industries) 194,700 1,060,321
- --------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------
Turkey -- 0.6%
Tofas Turk Otomobil GDR
(Consumer Durables) (b) 1,700,000 $ 952,000
- --------------------------------------------------------------
United Kingdom -- 17.9%
BICC (Producer Manufacturing) 471,100 2,057,195
Booker (Process Industries) 329,800 1,883,680
British Steel
(Non-Energy Minerals) 650,000 1,686,843
Glaxo Wellcome
(Health Technology) 330,800 4,805,951
Hanson (Financial) 1,071,737 3,283,323
Ocean Group (Transportation) 687,000 4,038,042
Paterson Zochonis Class A
(Consumer Non-Durable) 75,770 441,926
Peninsular & Oriental Steam
Navigation (Transportation) 159,669 1,323,178
Rolls-Royce
(Electronic Technology) 1,396,296 4,303,999
Tomkins
(Producer Manufacturing) 800,000 3,336,289
------------
27,160,426
==============================================================
Total Investments in Common Stocks
(Cost: $132,444,025)..............................$145,621,335
==============================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 15
13
<PAGE>
Fund Portfolio
--------------
IAI International Fund
January 31, 1996
<TABLE>
<CAPTION>
Non-convertible Preferred
Stock -- 0.6%
Market
Quantity Value (a)
- ------------------------------------------------------
<S> <C> <C>
South Korea -- 0.6%
Samsung Electronics
(Electronic Technology) (b) 7,500 $ 844,317
======================================================
Total Investments in Non-convertible
Preferred Stock
(Cost: $614,991)..........................$ 844,317
======================================================
Total Investments in Long-Term
Securities
(Cost: $133,059,016)......................$146,465,652
======================================================
Short-Term Securities -- 3.9%
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------
U.S. Government Obligations -- 3.9%
U.S. Treasury Bills
5.09% 04/04/96 $4,000,000 $3,965,352
5.06 04/25/96 2,000,000 1,977,180
----------
5,942,532
======================================================
Total Investments in Short-Term Securities
(Cost: $5,942,180)........................$ 5,942,532
======================================================
Total Investments in Securities
(Cost: $139,001,196) (e)..................$152,408,184
======================================================
Other Assets and Liabilities (net) -- (0.5%)
..........................................$ (744,924)
======================================================
Total Net Assets
..........................................$151,663,260
======================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 15
14
<PAGE>
Notes to Fund Portfolios
------------------------
IAI Developing Countries Fund, IAI International Fund
January 31, 1996
(a)
Market values of securities are stated in U.S. dollars and are determined as
described in Note 1 to the financial statements, under "Security Valuation."
(b)
Currently non-income producing security.
(c)
Represents security sold within terms of a private placement memorandum exempt
from registration under Section 144A of the Securities Act of 1933. This issue
may be only sold to other qualified institutional buyers and is considered
liquid under guidelines established by the Board of Directors.
(d)
This security has been deemed illiquid under guidelines approved by the Board of
Directors.
(e)
At January 31, 1996, the cost of securities for federal income tax purposes and
the aggregate gross unrealized appreciation and depreciation based on that cost
were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
IAI Developing Countries Fund IAI International Fund
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Cost for federal tax purposes $7,031,767 $139,001,960
------------------------------------------------------
Gross unrealized appreciation $ 610,257 $ 19,484,154
Gross unrealized depreciation (449,276) (6,077,930)
------------------------------------------------------
Net unrealized appreciation $ 160,981 $ 13,406,224
======================================================
</TABLE>
15
<PAGE>
Statements of Assets and Liabilities
------------------------------------
IAI Developing Countries Fund, IAI International Fund
January 31, 1996
<TABLE>
<CAPTION>
IAI Developing IAI International
Countries Fund Fund
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments in securities, at market
(Cost: $7,029,415 and $139,001,196) (see Fund Portfolios) $7,192,748 $152,408,184
Cash in bank on demand deposit 150,688 829,684
Dividends receivable 4,580 316,172
Unrealized appreciation on foreign currency contracts held,
at value (Note 6) -- 288,108
Organization costs (Note 1) 19,525 --
Other 2,915 11,079
-------------------------------------------
Total assets 7,370,456 153,853,227
-------------------------------------------
Liabilities
Payable for investment securities purchased -- 1,970,268
Unrealized depreciation on foreign currency contracts held,
at value (Note 6) -- 4,321
Accrued investment advisory fees 4,697 121,282
Accrued distribution fees -- 32,694
Accrued dividend-disbursing, administrative,
and accounting fees 7,517 38,310
Other accrued expenses 1,233 23,092
-------------------------------------------
Total liabilities 13,447 2,189,967
-------------------------------------------
Net assets applicable to outstanding capital stock $7,357,009 $151,663,260
===========================================
Represented By:
Capital stock $ 6,968 $ 114,588
Additional paid-in capital 7,131,959 136,729,313
Undistributed net investment income 5,539 --
Accumulated net realized gains on investments 49,240 1,108,639
Unrealized appreciation or depreciation on:
Investment securities $ 163,333 $ 13,406,988
Other assets and liabilities ---------- ------------
denominated in foreign currency (30) 303,732
163,303 13,710,720
-------------------------------------------
Total -- representing net assets applicable
to outstanding capital stock $7,357,009 $151,663,260
===========================================
Shares of capital stock outstanding; authorized
10 billion shares each of $.01 par value stock 696,842 11,458,824
-------------------------------------------
Net asset value per share of outstanding capital stock $ 10.56 $ 13.24
===========================================
</TABLE>
See accompanying Notes to Financial Statements on page 22
16
<PAGE>
Statements of Operations
------------------------
IAI Developing Countries Fund, IAI International Fund
<TABLE>
<CAPTION>
IAI Developing IAI International
Countries Fund Fund
Period from February 10, 1995* Year ended
to January 31, 1996 January 31, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Investment Income
Income
Dividends (net of foreign income taxes withheld
of $6,522 and $530,611) $ 46,626 $ 3,723,029
Interest (net of foreign income taxes withheld of
$0 and $1,670) 26,371 252,372
-----------------------------------
Total income 72,997 3,975,401
-----------------------------------
Expenses
Investment advisory fees 44,712 1,368,001
Distribution fees 8,943 358,236
Dividend-disbursing, administrative, and accounting fees 10,731 429,883
Custodian fees 25,686 103,835
Amortization of organization costs 4,650 --
Compensation of Directors 8,001 5,625
Audit fees -- 22,766
Printing and shareholder reporting 10,725 56,165
Registration fees 7,593 9,150
Other expenses 1,200 24,991
-----------------------------------
Total expenses 122,241 2,378,652
Less fees reimbursed by Advisers or Distributor (45,293) --
-----------------------------------
Net expense before expenses paid indirectly 76,948 2,378,652
-----------------------------------
Less expenses paid indirectly (Note 3) (5,460) (4,035)
-----------------------------------
Net expenses 71,488 2,374,617
-----------------------------------
Net investment income 1,509 1,600,784
-----------------------------------
Net Realized and Unrealized Gains (Losses)
Net realized gains (losses) on:
Investment securities $173,230 $ 5,961,691
Foreign currency transactions (620) 2,313,151
-------- -----------
172,610 8,274,842
Net change in unrealized appreciation or depreciation on:
Investment securities 163,333 16,505,634
Other assets and liabilities denominated in
foreign currency (30) 150,633
-------- -----------
163,303 16,656,267
-----------------------------------
Net gain on investments 335,913 24,931,109
-----------------------------------
Net increase in net assets resulting
from operations $337,422 $26,531,893
===================================
</TABLE>
* Commencement of operations
See accompanying Notes to Financial Statements on page 22
17
<PAGE>
Statements of Changes in Net Assets
-----------------------------------
IAI Developing Countries Fund, IAI International Fund
<TABLE>
- -------------------------------------------------------------------------------------------------------
<S> <C>
Operations
Net investment income
Net realized gains
Net change in unrealized appreciation or depreciation
-----------------------------------
Net increase (decrease) in net assets resulting from operations
-----------------------------------
Distributions to Shareholders From:
Net investment income
Net realized gains
-----------------------------------
Total distributions
-----------------------------------
Capital Share Transactions (Note 4)
Net proceeds from sale of shares
Net asset value of shares issued to shareholders in
reinvestment of distributions
Cost of shares redeemed
-----------------------------------
Increase in net assets from capital share transactions
-----------------------------------
Total increase in net assets
Net assets at beginning of period
-----------------------------------
===================================
(including undistributed net investment income of $5,539
for Developing Countries Fund, $0 and $53,632
for International Fund)
</TABLE>
* Commencement of operations
18
<PAGE>
<TABLE>
<CAPTION>
IAI Developing IAI International
Countries Fund Fund
Period from February 10, 1995* Year ended Period from April 1, 1994
to January 31, 1996 January 31, 1996 to January 31, 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 1,509 $1,600,784 $ 1,330,889
172,610 8,274,842 5,048,018
163,303 16,656,267 (13,501,663)
- -----------------------------------------------------------------------------------------------------------
337,422 26,531,893 (7,122,756)
- -----------------------------------------------------------------------------------------------------------
-- (1,654,416) --
(123,990) (10,800,484) (9,634,926)
- -----------------------------------------------------------------------------------------------------------
(123,990) (12,454,900) (9,634,926)
- -----------------------------------------------------------------------------------------------------------
10,822,797 122,833,831 102,091,160
123,486 12,226,866 9,532,735
(3,802,706) (133,948,117) (93,188,329)
- -----------------------------------------------------------------------------------------------------------
7,143,577 1,112,580 18,435,566
- -----------------------------------------------------------------------------------------------------------
7,357,009 15,189,573 1,677,884
-- 136,473,687 134,795,803
- -----------------------------------------------------------------------------------------------------------
$7,357,009 $151,663,260 $136,473,687
===========================================================================================================
</TABLE>
See accompanying Notes to Financial Statements on page 22
19
<PAGE>
Financial Highlights
--------------------
IAI Developing Countries Fund
Per share data for a share of capital stock outstanding throughout each period
and selected information for each period indicated are as follows:
<TABLE>
<CAPTION>
Period from
February 10, 1995 ****
to January 31, 1996
- -------------------------------------------------------------------------------
<S> <C>
Net Asset Value
Beginning of period $10.00
-------------------------------
Operations
Net investment income --
Net realized and unrealized gains (losses) .83
-------------------------------
Total from operations .83
-------------------------------
Distributions to Shareholders From:
Net realized gains (.27)
-------------------------------
Total distributions (.27)
-------------------------------
Net Asset Value
End of period $10.56
===============================
Total investment return* 8.53%
Net assets at end of period (000's omitted) $7,357
Ratios
Expenses to average daily net assets*** 2.15%**
Expenses to average daily net assets
(net of expenses paid indirectly) 2.00%**
Net investment income to average daily net assets*** .04%**
Portfolio turnover rate (excluding short-term securities) 41.9%
</TABLE>
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions at
net asset value.
** Annualized
*** The Fund's adviser voluntarily waived $45,293 in expenses for the period
ended January 31, 1996. If the Fund had been charged these expenses, the
ratio of expenses to average daily net assets would have been 3.42% and the
ratio of net investment income to average daily net assets would have been
(1.23%). The ratio of expenses to average daily net assets includes
expenses paid indirectly by the Fund.
**** Commencement of operations
20
<PAGE>
Financial Highlights
--------------------
IAI International Fund
Per share data for a share of capital stock outstanding throughout each period
and selected information for each period indicated are as follows:
<TABLE>
<CAPTION>
Year ended Period from Years Ended March 31,
January 31, April 1, 1994 to ---------------------------------
1996 January 31, 1995+ 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value
Beginning of period $ 12.06 $ 13.45 $ 11.22 $ 11.02 $ 10.75
-----------------------------------------------------------------------
Operations
Net investment income .19 .11 .06 .06 .15
Net realized and unrealized
gains (losses) 2.17 (.62) 2.56 .60 .67
-----------------------------------------------------------------------
Total from operations 2.36 (.51) 2.62 .66 .82
-----------------------------------------------------------------------
Distributions to Shareholders From:
Net investment income (.16) -- (.34) (.04) (.22)
Net realized gains (1.02) (.88) (.05) (.42) (.33)
-----------------------------------------------------------------------
Total distributions (1.18) (.88) (.39) (.46) (.55)
-----------------------------------------------------------------------
Net Asset Value
End of period $ 13.24 $ 12.06 $ 13.45 $ 11.22 $ 11.02
=======================================================================
Total investment return* 20.15% (4.14%) 23.85% 6.18% 8.10%
Net assets at end of period
(000's omitted) $151,663 $136,474 $134,796 $59,248 $36,239
Ratios
Expenses to average net assets*** 1.66% 1.72%** 1.74% 1.91% 2.00%
Expenses to average net assets
(net of expenses paid indirectly) 1.66% n/a n/a n/a n/a
Net investment income to
average net assets 1.12% 1.04%** .87% 1.42% 1.39%
Portfolio turnover rate
(excluding short-term securities) 39.2% 27.6% 50.9% 28.6% 35.1%
</TABLE>
* Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of all distributions at net asset
value.
** Annualized
***Beginning in fiscal 1996, the ratio of expenses to average net assets
includes expenses paid indirectly by the Fund.
+ Reflects fiscal year end change from March 31 to January 31.
21
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Developing Countries Fund, IAI International Fund
January 31, 1996
[1] Summary of Significant Accounting Policies
IAI Investment Funds III, Inc. is registered under the Investment Company Act of
1940 (as amended) as a diversified, open-end management investment company. IAI
Developing Countries Fund and IAI International Fund are separate portfolios of
IAI Investment Funds III, Inc. The Developing Countries Fund commenced
operations on February 10, 1995. The funds have a primary objective of capital
appreciation mainly through investment in equity securities of developed and
emerging countries.
On November 9, 1994, the Board of Directors elected to change the fiscal year
end of the IAI International Fund from March 31 to January 31. Accordingly,
these financial statements include the ten-month period from April 1, 1994 to
January 31, 1995.
Significant accounting policies followed by the Funds are summarized below:
Security Valuation
Investments in securities traded on national or international securities
exchanges are valued at the last reported sales price at the close of each
business day. Securities traded on the over-the-counter market are valued at the
last reported sales price or if the last sales price is not available, the last
reported bid price is used. Investments denominated in foreign currencies are
adjusted daily to reflect changes in exchange rates. Securities, including debt
securities and restricted securities, for which quotations are not readily
available are valued primarily using dealer-supplied valuations or at their fair
value as determined in good faith using consistently applied procedures under
the general supervision of the Board of Directors.
Short-term securities with maturities of 60 days or less from the date of
acquisition are valued at amortized cost. Short-term securities with maturities
greater than 60 days from the date of acquisition are marked-to-market on a
daily basis.
Foreign Currency Translations and Forward Foreign Currency Contracts
The Funds invest in foreign securities. The market value of securities and other
assets and liabilities denominated in foreign currencies is translated daily
into U.S. dollars at the closing rate of exchange. Purchases and sales of
securities, income and expenses are translated at the exchange rate on the
transaction date. Exchange gains (losses) may also be realized between the trade
and settlement dates on security and forward contract transactions. The Funds do
not isolate that portion of the result of operations resulting from changes in
foreign exchange rates on investments from the fluctuations arising from changes
in market prices of securities held. Such fluctuations are included with the net
realized and unrealized gain or loss from investments.
The Funds may enter into forward foreign currency exchange contracts for
operational purposes and to hedge against adverse exchange rate fluctuations.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Funds and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Funds are subject to the credit risk that the
other party will not complete the obligations of the contract.
22
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Developing Countries Fund, IAI International Fund
January 31, 1996
[1] Summary of Significant Accounting Policies (cont.)
Federal Taxes
Since it is each Fund's policy to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to its shareholders, no provision for income taxes is
required. In order to avoid the payment of any federal excise taxes, the Funds
are required to distribute substantially all of their net investment income and
net realized gains on a calendar year basis.
Net investment income and net realized gains (losses) may differ for financial
statement and tax purposes primarily due to differing treatments for foreign
currency transactions, passive foreign investments companies (PFICs), and losses
deferred due to "wash sales." The character of distributions made during the
year for net investment income or net realized gains may also differ from its
ultimate characterization for tax purposes.
The Funds may be subject to foreign taxes on income, gains on investments, or
currency repatriation. The Funds accrue such taxes as applicable.
On the statement of assets and liabilities for the Developing Countries Fund, as
a result of permanent book-to-tax differences, undistributed net investment
income and accumulated net realized gains have been increased by $4,030 and
$620, respectively, resulting in reductions to additional paid-in capital of
$4,650.
Security Transactions and Investment Income
The Funds record security transactions on trade date, the date the securities
are purchased or sold. Dividend income is recorded on the ex-dividend date or
upon receipt of ex-dividend notification in the case of certain foreign
securities.
Security gains and losses are determined on the basis of identified cost, which
is the same basis used for federal income tax purposes. Investment income is
recorded net of foreign taxes withheld where recovery of such taxes is
uncertain.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date.
Distributions from net investment income are paid semi-annually. Capital gains,
if any, are primarily distributed as of the end of the calendar year. Additional
capital gains distributions as needed to comply with federal tax regulations are
distributed during the year.
Concentration of Risk
Investments in countries with limited or developing capital markets may involve
greater risks than investments in more developed markets and the prices of such
investments may be volatile. The consequences of political, social or economic
changes in these markets may have disruptive effects on the market prices of the
Funds' investments and the income it generates, as well as the Funds' ability to
repatriate such amounts.
23
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Developing Countries Fund, IAI International Fund
January 31, 1996
[1] Summary of Significant Accounting Policies (cont.)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported results of operations during the reporting period. Actual results
could differ from those estimates.
Organization Costs
Organization costs are being amortized over 60 months on a straight-line basis.
[2] Commitments and Contingencies
For purposes of obtaining certain types of insurance coverage for the Funds and
its officers and directors, the Funds are policyholders in an industry-sponsored
mutual insurance company (the Company). In connection with its obligations as
policyholders, the Funds have made payments to the Company which have been
capitalized. Also, the Funds are committed to make future capital contributions,
if requested by the Company.
The Developing Countries Fund and the International Fund have available lines of
credit of $1,000,000 and $15,000,000, respectively, with a bank at the prime
interest rate. To the extent funds are drawn against the line, securities are
held in a segregated account. No compensating balances or commitment fees are
required under the lines of credit. There were no borrowings outstanding at
January 31, 1996.
[3] Fees and Expenses
Under the terms of an investment advisory agreement, each Fund pays Investment
Advisers, Inc. (Advisers) a monthly management fee which for Developing
Countries Fund is based on average daily net assets, and is calculated at annual
rates of 1.25%, 1.10% and 1.00% respectively, for the first $200 million in net
assets, the next $200 million in net assets, and those net assets in excess of
$400 million. International Fund's management fee is based on average month-end
net assets and is calculated at annual rates of 1.00%, 0.85%, 0.75%, and 0.70%
respectively, for the first $100 million in net assets, the next $100 million in
net assets, the next $100 million in net assets and those net assets in excess
of $300 million in net assets.
Each Fund also pays an annual fee to Advisers for acting as the Funds' dividend-
disbursing, administrative, and accounting services agent. The fee is computed
monthly on the average daily net assets for Developing Countries Fund, and
average month-end net assets for International Fund, at an annual rate of .30%.
24
<PAGE>
Notes to financial Statements
-----------------------------
IAI Developing Countries Fund, IAI International Fund
January 31, 1996
[3] Fees and Expenses (cont.)
The Funds have adopted a plan of distribution with IAI Securities, Inc.
(Distributor), the Funds' distributor. Under the Plan, the Funds pay Distributor
a monthly fee to cover expense incurred in the distribution and promotion of the
Funds' shares. The fee is computed monthly based on average daily net assets for
Developing Countries Fund and average month-end net assets for International
Fund at an annual rate of .25%.
In addition to the advisory, distribution, and the dividend-disbursing,
administrative, and accounting services fees, the Funds are responsible for
paying their operating expenses, including costs incurred in the purchase and
sale of assets. Advisers and Distributor have contractually agreed to reimburse
International Fund to the extent total expenses, excluding costs incurred in the
purchase and sale of assets, exceed, on an annual basis, 2.00% of average month-
end net assets. Advisers and Distributor are also currently voluntarily waiving
fees and expenses for Developing Countries Fund in excess of 2.00% of average
daily net assets.
As a result of earnings on cash balances on account with the custodian,
Developing Countries and International Funds' custodian fees were reduced by
$5,460 and $4,035, respectively, for the period ended January 31, 1996, and are
included in "expenses paid indirectly" on the statements of operations.
[4] Capital Stock
The Funds each have authorized 10 billion shares of $.01 par value stock.
Transactions in shares of capital stock during the periods indicated were as
follows:
<TABLE>
<CAPTION>
IAI Developing IAI International
Countries Fund Fund
- -------------------------------------------------------------------------------------------------------------------
Period from February 10, 1995 Year ended Period from April 1, 1994
to January 31, 1996 January 31, 1996 to January 31, 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sold 1,042,319 9,473,961 7,523,392
Issued for reinvested distributions 12,731 960,998 734,433
Redeemed (358,208) (10,290,719) (6,963,029)
---------------------------------------------------------------------------
Increase in shares outstanding 696,842 144,240 1,294,796
===========================================================================
</TABLE>
25
<PAGE>
Notes to financial Statements
-----------------------------
IAI Developing Countries Fund, IAI International Fund
January 31, 1996
[5] Purchases and Sales of Securities
For the period ended January 31, 1996, purchases of securities and sales
proceeds, other than investments in short-term securities, for each Fund were as
follows:
- --------------------------------------------------------------------------------
Purchases Sales
- --------------------------------------------------------------------------------
IAI Developing Countries Fund $ 7,159,459 $ 1,291,685
IAI International Fund $54,257,086 $63,732,054
[6] Foreign Currency Commitments
At January 31, 1996, the International Fund had entered into foreign currency
exchange contracts. The unrealized appreciation and/or depreciation on those
contracts at January 31, 1996 is included in unrealized appreciation or
depreciation on other assets and liabilities denominated in foreign currency.
The terms of the open contract are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Exchange Unrealized Unrealized
Date Currency to be Delivered Currency to be Received Appreciation Depreciation
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
02/05/96 261,381 U.S. Dollars 350,048 Australian Dollars $ -- $ 665
02/05/96 693,273 U.S. Dollars 457,003 British Pounds -- 2,742
02/06/96 173,702 U.S. Dollars 114,353 British Pounds -- 914
02/07/96 363,092 U.S. Dollars 540,155 New Zealand Dollars 270 --
04/11/96 14,029,400 French Franc 2,800,000 U.S. Dollars 49,245 --
04/11/96 11,314,620 French Franc 2,300,000 U.S. Dollars 81,534 --
04/18/96 977,929,000 Japanese Yen 9,400,000 U.S. Dollars 157,059 --
- ---------------------------------------------------------------------------------------------------------
$288,108 $4,321
=========================================================================================================
</TABLE>
26
<PAGE>
Independent Auditors' Report
----------------------------
IAI Developing Countries Fund, IAI International Fund
The Board of Directors and Shareholders
IAI Investment Funds III, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the fund portfolios of IAI Developing Countries Fund and IAI International Fund
(separate portfolios within IAI Investment Funds III, Inc.) as of January 31,
1996, and the related statements of operations for the period from February 10,
1995 (commencement of operations) to January 31, 1996 (IAI Developing Countries
Fund) and the year ended January 31, 1996 (IAI International Fund), the
statements of changes in net assets for the period from February 10, 1995 to
January 31, 1996 (IAI Developing Countries Fund only), the year ended January
31, 1996 and the period from April 1, 1994 to January 31, 1995 (IAI
International Fund only), and the financial highlights for the periods presented
on pages 20 and 21 of the annual report. These financial statements and the
financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased but not received, we request confirmations
from brokers and where replies are not received, we carry out other appropriate
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of IAI
Developing Countries Fund and IAI International Fund at January 31, 1996, and
the results of their operations, the changes in their net assets and the
financial highlights for the periods stated in the first paragraph above, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 8, 1996
27
<PAGE>
Federal tax Information
-----------------------
IAI Developing Countries Fund, IAI International Fund
We are required by federal tax regulations to provide shareholders with certain
information regarding dividend distributions paid during our fiscal year. The
figures provided are for information purposes only and should not be used for
reporting to federal or state revenue agencies. You will receive all necessary
tax information on Form 1099-DIV, Dividends and Distributions, in January of
each year.
(A) includes distribution of short-term capital gains, if any, which are taxable
as ordinary income.
IAI Developing Countries Fund
<TABLE>
<CAPTION>
- ----------------------------------------------------
Payable Date Ordinary
Income (A)
- ----------------------------------------------------
<S> <C> <C>
December 1995 $.2691
IAI International Fund
- ----------------------------------------------------
Payable Date Ordinary Long-Term
Income (A) Capital Gain
- ----------------------------------------------------
June 1995 $.1695 $.1821
December 1995 .5044 .3223
====================================================
$.6739 $.5044
</TABLE>
28
<PAGE>
Federal Tax Information
-----------------------
IAI International Fund
IAI International Fund
The Fund has elected to pass through the credit for taxes paid in foreign
countries for the calendar year December 31, 1995. In accordance with current
tax laws, the Foreign Tax and Foreign Income per share is as follows:
<TABLE>
<CAPTION>
Special 1995 Tax Information (unaudited)
==============================================================================
Country Foreign Tax Foreign Income
Factor Factor
==============================================================================
<S> <C> <C>
Australia .017 .023
Belgium .037 .072
Chile .005 .002
France .118 .103
Germany .054 .066
Hong Hong .000 .023
Japan .125 .109
Malaysia .000 .030
Mexico .000 .012
Netherlands .046 .040
New Zealand .040 .034
Spain .181 .158
United Kingdom .377 .328
</TABLE>
The portion of foreign taxes allocated to your account is indicated on
Form 1099-DIV.
The factor used to determine the total 1995 foreign income is 7.64973.
29
<PAGE>
IAI Mutual Fund Family
----------------------
IAI Developing Countries Fund, IAI International Fund
<TABLE>
<CAPTION>
To diversify your portfolio, please consider all of the mutual funds in our fund family
====================================================================================================================================
Secondary
IAI Fund Primary Objective Objective Portfolio Composition
....................................................................................................................................
<S> <C> <C> <C>
IAI Developing Capital Appreciation -- Equity securities of companies in
Countries Fund developing countries
- ------------------------------------------------------------------------------------------------------------------------------------
IAI International Fund Capital Appreciation Income Equity securities of non-U.S. companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Emerging Growth Fund Capital Appreciation -- Common stocks of small to medium-sized
(closed to new investors emerging growth companies
as of 2/1/96)
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Capital Appreciation Fund Capital Appreciation -- Common stocks of medium-sized growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Midcap Growth Fund Capital Appreciation -- Common stocks of medium-sized growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Regional Fund Capital Appreciation -- Common stocks of Upper Midwest companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Growth Fund Capital Appreciation -- Common stocks with potential for above-average
growth and appreciation
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Value Fund Capital Appreciation -- Common stocks which are considered to
be undervalued
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Growth & Income Fund Capital Appreciation Income Common stocks with potential for long-term
appreciation, and common stocks that are expected
to produce income
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Balanced Fund Total Return Income Common stocks, investment grade bonds and
[Capital Appreciation + Income] short-term instruments
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Bond Fund Income Capital Preservation Investment grade bonds
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Minnesota Tax Free Fund Tax-free Income Capital Preservation Investment grade municipal bonds
[Exempt from Federal Income Taxes]
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Government Fund Income Capital Preservation U.S. Government securities
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Reserve Fund Stability/Liquidity Income The portfolio has a maximum average maturity of 25
months, investing primarily in investment grade bonds
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Money Market Fund Stability/Liquidity Income The portfolio's average dollar-weighted maturity is
less than 90 days, investing in high quality, money
market securities
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
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<PAGE>
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<PAGE>
DISTRIBUTOR
IAI SECURITIES, INC.
INVESTMENT ADVISER
AND MANAGER
INVESTMENT ADVISERS, INC.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
LEGAL COUNSEL
Dorsey & Whitney P.L.L.P.
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
Noel P. Rahn
Richard E. Struthers
J. Peter Thompson
Charles H. Withers
<PAGE>
[LOGO]
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
