SEMI-ANNUAL REPORT
IAI Global Equity Fund
IAI International Fund
APRIL 30, 1999
[IAI Logo]
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
-----------------
IAI INTERNATIONAL FUND
SEMI-ANNUAL REPORT
APRIL 30, 1999
(UNAUDITED)
Letter to Shareholders ...................... 2
Fund Manager's Review ....................... 4
Fund Portfolio .............................. 8
Notes to Fund Portfolio ..................... 12
Statement of Assets and Liabilities ......... 13
Statement of Operations ..................... 14
Statements of Changes in Net Assets ......... 15
Financial Highlights ........................ 16
Notes to Financial Statements ............... 17
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors .................... Inside Back Cover
<PAGE>
LETTER TO SHAREHOLDERS
----------------------
IAI INTERNATIONAL FUND
ECONOMIC MOMENTUM EXPECTED TO CONTINUE
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, follows.
Robust economic growth and slowing inflationary trends sent analysts to their
history books to identify when past economic data was as positive as recent
statistics. Economic growth in 1998 was at its fastest pace in 15 years while
the inflation rate increased at its lowest rate since 1961. These trends have
carried over to the first quarter. With jobs plentiful and consumers
experiencing favorable real wage increases, consumer confidence is high.
Combined with tax refunds and year-end incentive pay to produce, this is one of
the strongest periods for retail sales in the last 10 years.
During previous economic expansions, conventional wisdom linked strong demand
growth with rising inflation. This normally provoked the Federal Reserve to
tighten monetary policy to reduce demand and prevent an acceleration of
inflation. However, this time even the Fed seems to be skeptical of that
linkage. In a speech in early April, Federal Reserve Vice Chair Alice Rivlin
stated:
"Tight labor markets have long been seen as harbingers of inflation (as higher
wages led to higher prices) and lower productivity (as less skilled and
experienced workers were drawn into the labor market). But recent experience
suggests that, at least in the context of intense global and domestic
competitiveness, as well as a continuing revolution in computers and
telecommunications, tight labor markets can provide incentives for managerial
innovation, skills acquisition and higher productivity, thereby leading to
higher growth with little inflation."
During the quarter, the Fed left rates unchanged and signaled they were
maintaining a neutral policy stance. Fears of a possible tightening, however,
negatively impacted financial markets in February. By quarter-end the equity
market had recovered to push through the 10,000 mark on the Dow and interest
rates, following a steep rise in February, stabilized.
Ms. Rivlin mentioned several of the factors that have allowed strong U.S. growth
with low inflation. While our economy is experiencing good times, weakness
persists in Asia, Russia and Latin America and growth has slowed in Europe. This
has contributed to declining commodity and input prices as global demand remains
soft. The only commodity showing strength has been oil, driven by production
cut-backs by oil producing countries. Another factor favoring low inflation has
been the strength of the dollar. Real interest rate differentials between the
2
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<PAGE>
LETTER TO SHAREHOLDERS
----------------------
IAI INTERNATIONAL FUND
ECONOMIC MOMENTUM EXPECTED TO CONTINUE (CONT.)
U.S. and our major trading partners widened in favor of the dollar during the
quarter. Strength in the dollar makes imports less expensive, effectively
eliminating the ability of U.S. producers to raise prices.
We expect economic momentum to continue throughout the year. However, the pace
of the expansion will moderate toward a real GDP growth rate of 3%. Over the
past three years the U.S. economy has been unusually robust in the fourth and
first quarters, only to slow significantly in the second and third quarters. The
increase in oil prices, if sustained, will help slow the economy by cutting into
consumers' disposable income. Finally, the rise in interest rates during the
quarter will slow economic growth.
Please read the Fund Manager's Review, which follows this letter, for a detailed
perspective on Fund 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.
3
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<PAGE>
FUND MANAGER'S REVIEW
---------------------
IAI INTERNATIONAL FUND
IAI INTERNATIONAL FUND
[PHOTO]
HILARY J. FANE
IAI INTERNATIONAL FUND
MANAGER
HOW HAS THE FUND PERFORMED?
The IAI International Fund generated a return of 11.42% for the six-month period
ending April 30, 1999 compared to the Morgan Stanley EAFE Index, which produced
a return of 15.44%. The Fund benefited from an overweighting of the Pacific
Basin, and in particular, Japan. Emerging markets and small cap stocks also
contributed positively to overall performance results. Conversely, an
overweighting of the euro-zone markets and an underweighting of the UK detracted
from performance, as did cash levels.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Several of the Fund's best performing stocks were in Japan where we saw Namco,
NTT and Nippon Yusen each gain more than 25% in US dollar terms. Our Australian
holdings also generated strong results as natural resource-related stocks
rebounded sharply.
WERE THERE ANY SIGNIFICANT CHANGES?
Changes with regard to the overall allocation to the major geographic regions
were modest. Within the Far East, we increased the exposure to Japan to market
weight by adding to existing holdings and introducing new ones. Most notably, we
established positions in Japan Airlines and Nippon Oil.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
In the final months of 1998, world markets recovered the majority of the sharp
losses suffered in earlier months, while in the early months of 1999, the
markets were driven by two dominant factors: strength in Japanese equities,
offset by weakness in the euro.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Expansionary monetary policy in the major economic nations has so far offset
most of the negative economic impact from the Asian crisis but growth forecasts
have been downgraded. Producer prices are falling in the US, Europe and Japan,
putting pressure on corporate cash flow. Asian economies show signs of bottoming
at low levels, while Asian companies are being helped by lower interest rates.
The US dollar has recovered to fair value against most European
currencies. Sterling remains the most overvalued of the major currencies, while
in contrast, the Canadian dollar is the most undervalued. Europe's new currency,
the euro, has declined more than 12% against the US dollar since its
introduction on January 1, 1999.
We continue to maintain an overweight position in the Pacific Basin
relative to the benchmark, particularly Australia and Singapore. Within
Continental Europe, we are maintaining a near-market weight, coupled with a low
exposure to the UK. Our commitment to emerging markets and small cap stocks was
modestly increased.
4
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<PAGE>
FUND MANAGER'S REVIEW
---------------------
IAI INTERNATIONAL FUND
PORTFOLIO WEIGHTING:
IAI INTERNATIONAL FUND VS. EAFE INDEX
4/30/99
------------------------------ Country Returns
IAI EAFE for the 12 Months
International Fund Index Ended 4/30/99
========================================================================
AFRICA
Egypt --% --% (23)%
South Africa -- -- (31)%
EUROPE
Austria -- -- (18)%
Belgium -- 2 13%
Denmark -- 1 (8)%
Finland 5 2 64%
France 11 9 11%
Germany 11 9 4%
Greece -- -- 44%
Ireland -- -- 4%
Italy 3 5 8%
Netherlands 4 6 3%
Norway -- -- (23)%
Poland -- -- (29)%
Portugal 4 1 (24)%
Spain 2 3 (1)%
Sweden 1 2 1%
Switzerland 3 7 --%
Turkey -- -- (16)%
United Kingdom 14 23 8%
FAR EAST
Australia 8 3 19%
Hong Kong 3 2 40%
India -- -- (24)%
Israel 1 -- 2%
Japan 19 23 21%
Malaysia 1 1 (10)%
New Zealand 2 -- 1%
Philippines -- -- 16%
Singapore 2 1 24%
South Korea 1 -- 108%
Taiwan -- -- (3)%
Thailand -- -- 16%
LATIN AMERICA
Argentina 1 -- (4)%
Brazil 1 -- (37)%
Chile -- -- (6)%
Mexico 1 -- (5)%
Peru 1 -- (28)%
OTHER COUNTRIES 1 --
CASH -- --
========================================================================
Total 100% 100%
========================================================================
5
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<PAGE>
FUND MANAGER'S REVIEW
---------------------
IAI INTERNATIONAL FUND
TOP TEN STOCK HOLDINGS
<TABLE>
<CAPTION>
% of Net Assets
---------------------
Issues Country Industry 4/30/99 10/31/98
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nippon Telegraph & Telephone Japan Services 3.19 1.14
Hitachi Japan Capital Equipment 3.04 1.68
Swatch Group Class B Switzerland Consumer Goods 2.82 1.67
Broken Hill Proprietary Australia Materials 2.72 1.61
Sekisui Chemical Japan Materials 2.70 1.83
UPM - Kymmene Finland Materials 2.50 1.77
Eisai Japan Consumer Goods 2.46 2.05
Nippon Yusen Kabushiki Kaisha Japan Services 2.41 1.75
Tomkins United Kingdom Multi-Industry 2.35 1.19
Telecom Italia Italy Services 2.33 2.48
================================================================================================
TOTAL 26.52 17.17
================================================================================================
</TABLE>
TOP FIVE COUNTRIES
% OF NET ASSETS
AS OF 4/30/99 AS OF 10/31/98
JAPAN 19.3% 11.5%
UNITED KINGDOM 14.1% 9.1%
FRANCE 11.6% 22.9%
GERMANY 11.4% 8.4%
AUSTRALIA 8.0% 5.3%
6
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<PAGE>
FUND MANAGER'S REVIEW
---------------------
IAI INTERNATIONAL FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS GRAPH]
<TABLE>
<CAPTION>
May-89 Jun-89 Jul-89 Aug-89 Sep-89 Oct-89 Nov-89 Dec-89
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IAI INTERNATIONAL FUND -2.15 -0.08 10.33 -1.20 3.13 -3.63 3.50 4.67
9,785 9,777 10,788 10,658 10,991 10,593 10,964 11,475
EAFE INDEX -5.42 -1.66 12.58 -4.48 4.57 -4.00 5.05 3.71
9,458 9,301 10,470 10,001 10,459 10,041 10,548 10,939
</TABLE>
[WIDE TABLE CONTINUED]
<TABLE>
<CAPTION>
Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IAI INTERNATIONAL FUND -1.77 -4.47 -3.69 -2.24 6.69 2.25 2.29 -7.39
11,272 10,768 10,371 10,138 10,816 11,060 11,313 10,477
EAFE INDEX -3.70 -6.96 -10.40 -0.77 11.44 -0.86 1.43 -9.68
10,534 9,801 8,782 8,715 9,712 9,629 9,767 8,821
</TABLE>
[WIDE TABLE CONTINUED]
<TABLE>
<CAPTION>
Sep-90 Oct-90 Nov-90 Dec-90
<S> <C> <C> <C> <C>
IAI INTERNATIONAL FUND -9.38 6.56 -0.87 -0.54
9,494 10,117 10,029 9,975
EAFE INDEX -13.91 15.61 -5.87 1.66
7,594 8,780 8,265 8,402
</TABLE>
[WIDE TABLE CONTINUED]
<TABLE>
<CAPTION>
Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IAI INTERNATIONAL FUND 2.56 6.92 -3.41 1.95 -0.37 -4.66 5.62 0.86
10,230 10,938 10,565 10,771 10,732 10,232 10,807 10,900
EAFE INDEX 3.26 10.75 -5.98 1.01 1.07 -7.32 4.94 -2.01
8,676 9,609 9,034 9,125 9,223 8,548 8,970 8,790
</TABLE>
[WIDE TABLE CONTINUED]
<TABLE>
<CAPTION>
Sep-91 Oct-91 Nov-91 Dec-91
<S> <C> <C> <C> <C>
IAI INTERNATIONAL FUND 3.49 0.64 -2.99 5.59
11,280 11,352 11,013 11,628
EAFE INDEX 5.67 1.44 -4.64 5.20
9,288 9,422 8,985 9,452
</TABLE>
[WIDE TABLE CONTINUED]
<TABLE>
<CAPTION>
Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IAI INTERNATIONAL FUND 1.43 0.09 -3.25 2.90 3.44 -4.18 -6.10 -0.19
11,794 11,804 11,421 11,752 12,157 11,649 10,938 10,917
EAFE INDEX -2.11 -3.55 -6.57 0.50 6.72 -4.71 -2.53 6.31
9,253 8,924 8,337 8,379 8,943 8,521 8,306 8,830
</TABLE>
<TABLE>
<CAPTION>
Sep-92 Oct-92 Nov-92 Dec-92
<S> <C> <C> <C> <C>
IAI INTERNATIONAL FUND -2.24 -2.49 2.24 2.38
10,673 10,407 10,641 10,894
EAFE INDEX -1.94 -5.22 0.97 0.55
8,658 8,207 8,287 8,332
</TABLE>
[WIDE TABLE CONTINUED]
<TABLE>
<CAPTION>
Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IAI INTERNATIONAL FUND 1.98 3.21 5.75 4.37 0.43 -2.17 3.56 7.04
11,110 11,467 12,126 12,656 12,710 12,435 12,877 13,784
EAFE INDEX 0.02 3.05 8.75 9.52 2.14 -1.54 3.52 5.42
8,333 8,588 9,339 10,227 10,446 10,285 10,648 11,225
</TABLE>
[WIDE TABLE CONTINUED]
<TABLE>
<CAPTION>
Sep-93 Oct-93 Nov-93 Dec-93
<S> <C> <C> <C> <C>
IAI INTERNATIONAL FUND -0.16 4.98 -4.06 9.63
13,762 14,448 13,862 15,197
EAFE INDEX -2.23 3.10 -8.72 7.24
10,975 11,315 10,329 11,077
</TABLE>
[WIDE TABLE CONTINUED]
<TABLE>
<CAPTION>
Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IAI INTERNATIONAL FUND 5.58 -1.32 -5.15 3.64 0.79 -1.46 2.18 2.95
16,046 15,833 15,018 15,565 15,688 15,459 15,796 16,262
EAFE INDEX 8.48 -0.26 -4.29 4.27 -0.55 1.44 0.98 2.39
12,016 11,985 11,471 11,961 11,894 12,065 12,184 12,475
</TABLE>
[WIDE TABLE CONTINUED]
<TABLE>
<CAPTION>
Sep-94 Oct-94 Nov-94 Dec-94
<S> <C> <C> <C> <C>
IAI INTERNATIONAL FUND -3.58 1.78 -4.23 -0.12
15,680 15,959 15,284 15,266
EAFE INDEX -3.13 3.35 -4.78 0.65
12,085 12,490 11,892 11,969
</TABLE>
[WIDE TABLE CONTINUED]
<TABLE>
<CAPTION>
Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IAI INTERNATIONAL FUND -5.71 1.91 4.80 1.16 0.23 -0.86 5.63 -0.83
14,394 14,669 15,373 15,552 15,587 15,453 16,323 16,188
EAFE INDEX -3.82 -0.26 6.27 3.79 -1.17 -1.73 6.25 -3.79
11,512 11,482 12,202 12,664 12,516 12,300 13,069 12,574
</TABLE>
[WIDE TABLE CONTINUED]
<TABLE>
<CAPTION>
Sep-95 Oct-95 Nov-95 Dec-95
<S> <C> <C> <C> <C>
IAI INTERNATIONAL FUND 0.68 -1.96 0.77 3.42
16,298 15,978 16,101 16,652
EAFE INDEX 1.98 -2.66 2.81 4.06
12,823 12,481 12,832 13,352
</TABLE>
[WIDE TABLE CONTINUED]
<TABLE>
<CAPTION>
Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Jul-96 Aug-96
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IAI INTERNATIONAL FUND 3.84 0.30 -0.15 2.34 -2.14 0.07 -3.04 0.47
17,292 17,343 17,317 17,723 17,343 17,356 16,828 16,907
EAFE INDEX 0.43 0.36 2.15 2.93 -1.82 0.59 -2.90 0.25
13,410 13,459 13,748 14,151 13,894 13,976 13,571 13,604
</TABLE>
[WIDE TABLE CONTINUED]
<TABLE>
<CAPTION>
Sep-96 Oct-96 Nov-96 Dec-96
<S> <C> <C> <C> <C>
IAI INTERNATIONAL FUND 3.20 -0.30 3.94 -0.15
17,448 17,396 18,081 18,054
EAFE INDEX 2.68 -1.00 4.00 -1.26
13,969 13,829 14,383 14,202
</TABLE>
[WIDE TABLE CONTINUED]
<TABLE>
<CAPTION>
Jan-97 Feb-97 Mar-97 Apr-97 May-97 Jun-97 Jul-97 Aug-97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IAI INTERNATIONAL FUND -1.94 2.39 -0.40 -0.32 6.26 3.31 1.29 -6.80
17,704 18,127 18,054 17,997 19,123 19,756 20,011 18,650
EAFE INDEX -3.48 1.66 0.39 0.56 6.53 5.54 1.64 -7.45
13,708 13,935 13,989 14,067 14,986 15,816 16,075 14,877
</TABLE>
[WIDE TABLE CONTINUED]
<TABLE>
<CAPTION>
Sep-97 Oct-97 Nov-97 Dec-97
<S> <C> <C> <C> <C>
IAI INTERNATIONAL FUND 3.61 -8.20 -2.70 0.24
19,324 17,739 17,260 17,301
EAFE INDEX 5.62 -7.66 -1.00 0.90
15,713 14,510 14,364 14,494
</TABLE>
[WIDE TABLE CONTINUED]
<TABLE>
<CAPTION>
Jan-98 Feb-98 Mar-98 Apr-98 May-98 Jun-98 Jul-98 Aug-98
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IAI INTERNATIONAL FUND 1.28 7.41 2.36 2.48 -1.56 -5.56 -0.19 -13.83
17,523 18,821 19,266 19,743 19,435 18,355 18,320 15,786
EAFE INDEX 4.60 6.44 3.10 0.81 -0.46 0.78 1.04 -12.37
15,160 16,137 16,637 16,772 16,695 16,825 17,000 14,897
</TABLE>
[WIDE TABLE CONTINUED]
<TABLE>
<CAPTION>
Sep-98 Oct-98 Nov-98 Dec-98
<S> <C> <C> <C> <C>
IAI INTERNATIONAL FUND 0.22 6.17 2.85 1.98
15,821 16,797 17,276 17,618
EAFE INDEX -3.04 10.45 5.15 3.97
14,444 15,953 16,775 17,441
</TABLE>
[WIDE TABLE CONTINUED]
<TABLE>
<CAPTION>
Jan-99 Feb-99 Mar-99 Apr-99
<S> <C> <C> <C> <C>
IAI INTERNATIONAL FUND -2.24 -1.49 3.43 6.63
17,223 16,967 17,549 18,712
EAFE INDEX -0.27 -2.36 4.20 4.07
17,394 16,983 17,697 18,417
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS+
THROUGH 4/30/99
Six Months* 1 Year 5 Years 10 Years
================================================================================
<S> <C> <C> <C> <C>
IAI INTERNATIONAL FUND 11.42% (5.21)% 3.76% 6.47%
- --------------------------------------------------------------------------------
EAFE Index 15.44% 9.81% 9.02% 6.30%
</TABLE>
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* NOT ANNUALIZED
NOTE
TO FUND
MANAGER'S
REVIEW
PERFORMANCE DATA FOR THE IAI INTERNATIONAL FUND INCLUDES CHANGES IN SHARE VALUE
AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. PAST PERFORMANCE IS
NOT A GUARANTEE OF FUTURE RESULTS. THE FUND'S INVESTMENT RETURN AND PRINCIPAL
MAY FLUCTUATE, SO THAT WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN THE
ORIGINAL COST. MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING CHARGES AND
EXPENSES, IS AVAILABLE IN THE PROSPECTUS. PLEASE READ THE FUND'S PROSPECTUS
CAREFULLY BEFORE INVESTING. ALL INDICES CITED ARE UNMANAGED, AND ARE EITHER
TRADEMARKS, REGISTERED TRADEMARKS OR COPYRIGHTS OF THEIR RESPECTIVE SPONSORING
COMPANIES.
7
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<PAGE>
FUND PORTFOLIO
----------------------
IAI INTERNATIONAL FUND
APRIL 30, 1999
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 98.3%
Market
Quantity Value (a)
- ---------------------------------------------------------------------------
ARGENTINA - 1.1%
Gas Natural Ban Class B
(Energy) 40,315 $ 77,436
Telefonica de Argentina Class B
ADR (Services) 2,550 95,306
YPF Class D ADR (Energy) 1,799 75,558
----------
248,300
- ---------------------------------------------------------------------------
AUSTRALIA - 8.0%
Boral (Materials) 243,952 399,391
Broken Hill Proprietary
(Materials) 56,613 641,066
David Jones (Services) 163,000 164,653
Goodman Fielder (Consumer
Goods) 311,451 301,398
Henry Walker Group (Energy) 95,000 118,380
M.I.M. Holdings (Materials) 459,948 271,329
----------
1,896,217
- ---------------------------------------------------------------------------
BELGIUM - 0.3%
Compagnie Maritime Belge
(Services) 1,600 70,257
- ---------------------------------------------------------------------------
CHILE - 0.4%
Enersis ADR (Energy) 2,851 54,169
Supermercados Unimarc ADR
(Consumer Goods) 12,491 46,841
----------
101,010
- ---------------------------------------------------------------------------
COLOMBIA - 0.3%
Banco Ganadero Class C ADR
(Financial) 6,420 60,990
- ---------------------------------------------------------------------------
EGYPT - 0.3%
Suez Cement GDR
(Materials)(c) 3,635 62,080
- ---------------------------------------------------------------------------
FINLAND - 5.0%
Fortum (Energy) 83,223 444,690
Orion-Yhtyma Class B (Consumer
Goods) 6,940 139,520
UPM-Kymmene (Materials) 19,400 588,097
----------
1,172,307
- ---------------------------------------------------------------------------
Market
Quantity Value (a)
- ---------------------------------------------------------------------------
FRANCE - 11.6%
CNP Assurances (Financial) 13,582 $ 340,592
Compagnie des Alpes (Services) 2,100 64,482
Dexia France (Financial) 3,844 538,917
Eridania Beghin-Say (Consumer
Goods) 3,768 523,477
Groupe Danone (Consumer
Goods) 2,030 543,424
La Rochette (Materials)(b) 44,500 130,425
Rubis (Materials) 2,500 62,321
Suez Lyonnaise des Eaux
(Services) 3,167 539,506
----------
2,743,144
- ---------------------------------------------------------------------------
GERMANY - 8.5%
BASF (Materials) 4,180 183,326
Bayer (Materials) 9,204 391,494
Berliner Elektro Holding (Capital
Equipment) 4,600 50,376
BHF-Bank (Financial) 6,700 252,375
Deutsche Bank (Financial) 7,067 410,327
Dyckerhoff & Widmann
(Materials) 1,430 130,124
Fuchs Petrolub (Materials) 1,850 150,725
KM Europa Metal (Materials) 2,800 162,798
VEBA (Energy) 5,120 281,164
----------
2,012,709
- ---------------------------------------------------------------------------
GREECE - 0.1%
Hellenic Telecommunications
Organization (Services) 520 12,095
- ---------------------------------------------------------------------------
HONG KONG - 2.8%
Axa China Region (Financial) 241,500 185,398
Dairy Farm International
Holdings (Consumer Goods) 100,562 148,832
First Tractor (Capital Equipment) 294,000 58,796
Giordano International
(Consumer Goods) 505,000 234,566
Yanzhou Coal Mining (Energy) 100,000 23,482
----------
651,074
- ---------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
8
- --------------------------------------------------------------------------------
<PAGE>
FUND PORTFOLIO
----------------------
IAI INTERNATIONAL FUND
APRIL 30, 1999
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- -----------------------------------------------------------------------
HUNGARY - 0.5%
MOL Magyar Olaj GDR
(Energy) 2,900 $ 64,655
Pick Szeged GDR (Consumer
Goods) 8,800 55,864
----------
120,519
- -----------------------------------------------------------------------
INDONESIA - 0.3%
PT Astra Agro Lestari (Materials) 225,000 68,878
- -----------------------------------------------------------------------
ISRAEL - 1.0%
Bank Hapoalim (Financial) 26,973 64,445
Blue Square-Israel ADR
(Consumer Goods) 5,186 71,956
ECI Telecom ORD (Services) 2,631 97,018
----------
233,419
- -----------------------------------------------------------------------
ITALY - 2.5%
Caffaro (Materials) 42,500 47,217
Telecom Italia (Services) 101,705 547,750
----------
594,967
- -----------------------------------------------------------------------
JAPAN - 19.3%
Eisai (Consumer Goods) 31,000 580,447
Hitachi (Capital Equipment) 98,000 715,922
Japan Airlines (Services) 72,000 226,800
Mazda Motor (Consumer Goods) 85,000 362,460
Mitsui Wood Systems (Capital
Equipment) 74,000 176,065
NAMCO (Consumer Goods) 13,100 296,318
New Japan Radio (Capital
Equipment) 16,000 109,915
Nippon Mitsubishi Oil (Energy) 4,000 17,861
Nippon Telegraph & Telephone
(Services) 69 751,477
Nippon Yusen Kabushiki Kaisha
(Services) 146,000 568,760
Sekisui Chemical (Materials) 95,000 635,111
Toyoda Gosei (Materials) 13,000 104,662
----------
4,545,798
- -----------------------------------------------------------------------
Market
Quantity Value (a)
- -----------------------------------------------------------------------
MALAYSIA - 0.6%
Boustead Holdings (Multi-
Industry) 48,236 $ 33,308
Land & General (Multi-
Industry)(b) 214,000 40,322
Petronas Dagangan (Energy) 74,400 59,520
----------
133,150
- -----------------------------------------------------------------------
MEXICO - 1.0%
Corporacion GEO Series B
(Financial)(b) 9,455 39,805
Embotelladoras Argos (Consumer
Goods) 24,000 28,571
Grupo Carso Series A-1 (Multi-
Industry) 10,600 51,107
Grupo Radio Centro ADR
(Services) 4,370 27,312
Telefonos de Mexico Series L
ADR (Services) 1,054 79,840
----------
226,635
- -----------------------------------------------------------------------
NAMIBIA - 0.1%
Namibia Breweries (Consumer
Goods)(b) 58,000 31,493
- -----------------------------------------------------------------------
NETHERLANDS - 3.9%
Boskalis Westminster (Capital
Equipment) 9,700 152,926
European Vinyls Corporation
International (Materials) 2,000 19,680
KLM Royal Dutch Airlines
(Services) 14,876 451,742
Macintosh Retail Group
(Consumer Goods) 5,950 155,502
Ten Cate (Consumer Goods) 3,850 152,965
----------
932,815
- -----------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
9
- --------------------------------------------------------------------------------
<PAGE>
FUND PORTFOLIO
----------------------
IAI INTERNATIONAL FUND
APRIL 30, 1999
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- ------------------------------------------------------------------------
NEW ZEALAND - 1.9%
Carter Holt Harvey (Materials) 168,210 $ 246,634
Restaurant Brands (Consumer
Goods) 123,500 96,069
Wrightson (Services) 442,500 96,578
----------
439,281
- ------------------------------------------------------------------------
NORWAY - 0.1%
Petroleum Geo-Services
(Energy)(b) 1,600 27,021
- ------------------------------------------------------------------------
PERU - 0.6%
Alicorp (Consumer Goods)(b) 153,890 23,512
Credicorp ADR (Financial) 5,420 54,877
Edegel Class B (Energy) 198,740 41,082
Telefoncia del Peru Class B ADR
(Services) 1,195 18,000
----------
137,471
- ------------------------------------------------------------------------
PHILIPPINES - 0.4%
Universal Robina (Services) 550,239 105,634
- ------------------------------------------------------------------------
PORTUGAL - 3.8%
Banco Pinto & Sotto Mayor
(Financial) 19,216 358,864
Brisa-Auto Estradas (Capital
Equipment) 12,620 535,459
----------
894,323
- ------------------------------------------------------------------------
SINGAPORE - 1.7%
Amteck Engineering (Capital
Equipment) 210,000 147,564
GPE Industries (Capital
Equipment) 220,000 61,600
Hong Leong Finance, foreign
(Financial) 37,500 92,560
United Overseas Bank, foreign
(Financial) 13,481 104,282
----------
406,006
- ------------------------------------------------------------------------
Market
Quantity Value (a)
- ------------------------------------------------------------------------
SOUTH AFRICA - 0.6%
Bidvest Group (Consumer Goods) 10,424 $ 84,865
Iscor (Materials) 155,500 48,399
----------
133,264
- ------------------------------------------------------------------------
SOUTH KOREA - 0.6%
Pohang Iron & Steel, foreign
(Materials) 1,120 94,557
Samsung Electronics, foreign
(Consumer Goods) 531 40,836
----------
135,393
- ------------------------------------------------------------------------
SPAIN - 1.9%
Catalana Occidente (Financial) 1,000 22,590
Fuerzas Electricas de Cataluna
Class A (Energy) 19,518 185,866
Iberdrola (Energy) 17,650 247,447
----------
455,903
- ------------------------------------------------------------------------
SWEDEN - 0.9%
ICB Shipping Class B (Services) 18,250 117,168
N&T Argonaut Class B
(Services)(b) 165,000 102,990
----------
220,158
- ------------------------------------------------------------------------
SWITZERLAND - 2.9%
Forbo Holding (Materials) 60 25,025
Swatch Group Class B
(Consumer Goods) 931 665,306
----------
690,331
- ------------------------------------------------------------------------
TAIWAN - 0.4%
Taipei Fund IDR (Financial)(b) 1,000(d) 85,800
- ------------------------------------------------------------------------
THAILAND - 0.4%
Chareon Pokphand Feedmill,
foreign (Consumer Goods)(b) 31,030 40,130
Hana Microelectronics, foreign
(Capital Equipment)(b) 32,960 62,164
Siam City Bank, foreign
(Financial)(b) 30,825 249
----------
102,543
- ------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
10
- --------------------------------------------------------------------------------
<PAGE>
FUND PORTFOLIO
----------------------
IAI INTERNATIONAL FUND
APRIL 30, 1999
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- --------------------------------------------------------------
UNITED KINGDOM - 14.1%
Blue Circle Industries (Materials) 54,080 $ 358,574
Britannic (Financial) 11,030 177,084
Delta (Electronic Technology) 47,500 125,060
Greenalls Group (Services) 44,766 282,581
Holidaybreak (Services) 34,500 148,333
Hyder (Services) 26,977 336,235
Invensys (Capital Equipment) 38,754 197,985
Low & Bonar (Consumer Goods) 24,500 76,538
Medeva (Consumer Goods) 53,220 99,413
Rolls-Royce (Capital Equipment) 108,726 504,237
Safeway (Services) 64,620 269,250
Tomkins (Multi-Industry) 130,217 554,104
United Biscuits (Services) 59,701 186,025
---------
3,315,419
- --------------------------------------------------------------
UNITED STATES - 0.4%
Morgan Stanley India Investment
Fund (Multi-Industry)(b) 5,940 48,634
ROC Taiwan Fund (Financial) 5,867 40,108
---------
88,742
==============================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $23,209,876).............................. $23,155,146
==============================================================
NON-CONVERTIBLE PREFERRED STOCKS - 4.2%
Market
Quantity Value (a)
- --------------------------------------------------------------------
AUSTRIA - 0.1%
Baumax (Consumer Goods) 800 $ 13,967
- --------------------------------------------------------------------
BRAZIL - 1.1%
Centrais Electricas de Santa
Catarina Series B (Energy) 74,600 35,074
Centrais Electricas de Santa
Catarina Series B GDR (Energy) 120 5,570
Embratel Participacoes ADR
(Services)(b) 1,750 28,437
Mineracao de Trinidade-Samitri
(Materials) 2,424,235 25,587
Tele Centro Sul Participacoes ADR
(Services) 1,310 69,594
Tele Norte Leste Participacoes
(Services)(b) 3,680,000 64,328
Usinas Siderurgicas de Minas
Gerais ADR (Materials) 6,700 18,942
-----------
247,532
- --------------------------------------------------------------------
GERMANY - 2.9%
Koenig & Bauer (Capital
Equipment) 7,500 174,585
ProSieben Media (Services) 7,291 343,296
Rheinmetall (Capital Equipment) 8,300 162,030
-----------
679,911
- --------------------------------------------------------------------
SOUTH KOREA - 0.1%
Samsung Electronics, foreign
(Consumer Goods) 1,000 39,461
====================================================================
TOTAL INVESTMENTS IN NON-CONVERTIBLE
PREFERRED STOCKS
(COST: $1,028,951)..................................... $ 980,871
====================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $24,238,827)(e)................................. $24,136,017
====================================================================
OTHER ASSETS AND LIABILITIES
(NET) - (2.5%)......................................... $ (584,317)
====================================================================
TOTAL NET ASSETS....................................... $23,551,700
====================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
11
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FUND PORTFOLIO
-----------------------
IAI INTERNATIONAL FUND
APRIL 30, 1999
(UNAUDITED)
(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)
Quantity disclosed in units. One unit represents 100 shares.
(e)
At April 30, 1999, the cost of securities for federal income tax purposes and
the aggregate gross unrealized appreciation and depreciation based on that cost
were as follows:
Cost for federal tax purposes ........................... $ 25,303,992
============
Gross unrealized appreciation ........................... $ 1,445,914
Gross unrealized depreciation ........................... (2,613,889)
------------
Net unrealized depreciation ............................. $ (1,167,975)
============
12
- --------------------------------------------------------------------------------
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
-----------------------------------
IAI INTERNATIONAL FUND
APRIL 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market (cost: $24,238,827) $ 24,136,017
Cash 649,785
Receivable for investment securities sold 493,613
Receivable for Fund shares sold 1,654,780
Dividends receivable 236,754
Other 8,002
------------
TOTAL ASSETS 27,178,951
------------
LIABILITIES
Payable for investment securities purchased 1,251,199
Payable for Fund shares redeemed 2,336,582
Unrealized depreciation on foreign currency contracts held,
at value (Note 6) 5,300
Accrued management fee 34,170
------------
TOTAL LIABILITIES 3,627,251
------------
NET ASSETS $ 23,551,700
============
NET ASSETS REPRESENTED BY:
Capital stock $ 26,057,210
Undistributed net investment income 114,062
Accumulated net realized loss on investments (2,508,046)
Unrealized depreciation on:
Investment securities $ (102,810)
Other assets and liabilities denominated in foreign currency (8,716) (111,526)
---------- ------------
NET ASSETS $ 23,551,700
============
Shares of capital stock outstanding (10 billion shares
authorized, $0.01 par value) 2,155,341
============
NET ASSET VALUE, REDEMPTION AND OFFERING PRICE PER
SHARE $ 10.93
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
- --------------------------------------------------------------------------------
<PAGE>
STATEMENT OF OPERATIONS
-----------------------
IAI INTERNATIONAL FUND
SIX MONTHS ENDED APRIL 30, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME
INCOME
Dividends (net of foreign income taxes withheld of $42,439) $ 286,269
Interest 39,603
----------
TOTAL INCOME 325,872
----------
EXPENSES
Management fees 255,534
Compensation of Directors 4,178
Interest expense 18,891
----------
TOTAL EXPENSES 278,603
Less fees reimbursed by Advisers (4,178)
----------
NET EXPENSES 274,425
----------
NET INVESTMENT INCOME 51,447
----------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized losses on:
Investment securities (492,435)
Foreign currency transactions (151,993)
----------
Net realized loss (644,428)
Net change in unrealized appreciation or depreciation on:
Investment securities 3,672,625
Other assets and liabilities denominated in foreign currency 128,570
----------
Net unrealized gain 3,801,195
----------
NET GAIN ON INVESTMENTS 3,156,767
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,208,214
==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
14
- --------------------------------------------------------------------------------
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------
IAI INTERNATIONAL FUND
<TABLE>
<CAPTION>
Six months ended Period from
April 30, 1999 February 1, 1998 to Year ended
(unaudited) October 31, 1998* January 31, 1998
----------------- --------------------- -----------------
<S> <C> <C> <C>
OPERATIONS
Net investment income $ 51,447 $ 419,119 $ 1,501,033
Net realized gain (losses) (644,428) (472,529) 7,064,040
Net change in unrealized appreciation or depreciation 3,801,195 1,349,562 (8,133,615)
------------- -------------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 3,208,214 1,296,152 431,458
------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (104,831) (2,498,912)
Net realized gains -- (7,073) (9,915,596)
------------- -------------- --------------
TOTAL DISTRIBUTIONS -- (111,904) (12,414,508)
------------- -------------- --------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 65,320,441 141,661,893 132,201,297
Net asset value of shares issued in reinvestment of
distributions -- 91,242 11,993,205
Cost of shares redeemed (80,093,378) (171,169,607) (185,054,041)
------------- -------------- --------------
DECREASE IN NET ASSETS FROM CAPITAL SHARES TRANSACTIONS (14,772,937) (29,416,472) (40,859,539)
------------- -------------- --------------
TOTAL DECREASE IN NET ASSETS (11,564,723) (28,232,224) (52,842,589)
NET ASSETS AT BEGINNING OF PERIOD 35,116,423 63,348,647 116,191,236
------------- -------------- --------------
NET ASSETS AT END OF PERIOD $ 23,551,700 $ 35,116,423 $ 63,348,647
============= ============== ==============
INCLUDING UNDISTRIBUTED (OVERDISTRIBUTED) NET
INVESTMENT INCOME OF: $ 114,062 $ 62,615 $ (121,935)
============= ============== ==============
</TABLE>
*REFLECTS FISCAL YEAR END CHANGE FROM JANUARY 31 TO OCTOBER 31.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
15
- --------------------------------------------------------------------------------
<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:
Six months ended Period from
April 30, 1999 February 1, 1998 to
(unaudited) October 31, 1998++
- --------------------------------------------------------------------------------
NET ASSET VALUE
Beginning of period $ 9.81 $ 10.26
------- ---------
OPERATIONS
Net investment income 0.04 0.10
Net realized and unrealized
gains (losses) 1.08 (0.52)
------- ---------
TOTAL FROM OPERATIONS 1.12 (0.42)
------- ---------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income -- (0.03)
Net realized gains -- --
------- ---------
TOTAL DISTRIBUTIONS -- (0.03)
------- ---------
NET ASSET VALUE
End of period $ 10.93 $ 9.81
======= =========
Total investment return* 11.42% (4.15)%
Net assets at end of period
(000's omitted) $23,552 $ 35,116
RATIOS
Expenses to average net assets
(including interest expense) 1.83%** 1.76%**
Expenses to average net assets
(excluding interest expense) 1.70%** 1.70%**
Net investment income to
average net assets 0.34%** 1.28%**
Portfolio turnover rate
(excluding short-term
securities) 49.2% 50.2%
[WIDE TABLE CONTINUED]
<TABLE>
<CAPTION>
Years ended
January 31, Period from
--------------------------------- April 1, 1994 to
1998 1997 1996 January 31, 1995+
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 12.11 $ 13.24 $ 12.06 $ 13.45
------- -------- ------- -------
OPERATIONS
Net investment income 0.20 0.24 0.19 0.11
Net realized and unrealized
gains (losses) (0.34) 0.08 2.17 (0.62)
------- -------- -------- -------
TOTAL FROM OPERATIONS (0.14) 0.32 2.36 (0.51)
------- -------- -------- -------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (0.32) (0.28) (0.16) --
Net realized gains (1.39) (1.17) (1.02) (0.88)
------- -------- -------- --------
TOTAL DISTRIBUTIONS (1.71) (1.45) (1.18) (0.88)
------- -------- -------- --------
NET ASSET VALUE
End of period $ 10.26 $ 12.11 $ 13.24 $ 12.06
======= ======== ======== ========
Total investment return* (1.04)% 2.39% 20.15% (4.14)%
Net assets at end of period
(000's omitted) $63,349 $116,191 $151,663 $136,474
RATIOS
Expenses to average net assets
(including interest expense) 1.67% 1.65% 1.66% 1.72%**
Expenses to average net assets
(excluding interest expense) 1.67% 1.65% 1.66% 1.72%**
Net investment income to
average net assets 1.42% 1.56% 1.12% 1.04%**
Portfolio turnover rate
(excluding short-term
securities) 76.4% 32.1% 39.2% 27.6%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE
DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT NET ASSET
VALUE.
** ANNUALIZED.
+ REFLECTS FISCAL YEAR END CHANGE FROM MARCH 31 TO JANUARY 31.
++ REFLECTS FISCAL YEAR END CHANGE FROM JANUARY 31 TO OCTOBER 31.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
16
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI INTERNATIONAL FUND
APRIL 30, 1999
(UNAUDITED)
[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
International Fund is a separate portfolio of IAI Investment Funds III, Inc. The
Fund has a primary objective of capital appreciation mainly through investment
in equity securities of developed and emerging countries. This report covers
only the International Fund (the Fund).
Significant accounting policies followed by the Fund are summarized below:
SECURITY VALUATION
Portfolio securities are valued at the close of the New York Stock Exchange on
each trading day. Listed and unlisted securities for which such information is
regularly reported are valued at the last sale price of the day or, in the
absence of sales, at values based on the closing bid or the last sale price on
the prior trading day. Long-term and short-term "non-money market" debt
securities are valued by a portfolio pricing service. Securities which cannot be
valued by the portfolio pricing service are valued using dealer-supplied
valuations, or are valued under consistently applied procedures established by
the Board of Directors to determine fair value in good faith. Short-term "money
market type" debt securities having a remaining maturity of 60 days or less at
acquisition are valued at cost adjusted for amortization to maturity of any
premium or discount. Forward foreign currency exchange contracts are valued
based on the closing prices of the forward currency contract rates in the London
foreign exchange markets on a daily basis as provided by a reliable bank or
dealer.
FOREIGN CURRENCY TRANSLATIONS AND FORWARD FOREIGN CURRENCY CONTRACTS
The Fund invests in foreign securities. The market value of securities and other
assets and liabilities denominated in foreign currencies is translated daily
into U.S. dollars at the closing rate of exchange. Purchases and sales of
securities, income and expenses are translated at the exchange rate on the
transaction date and are recorded in realized and unrealized appreciation or
depreciation on foreign currency transactions. Exchange gains or losses may also
be realized between the trade and settlement dates on security and forward
currency contract transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in the market prices of securities held. Such fluctuations
are included with the net realized and unrealized gain or loss from investments.
The Fund may enter into forward foreign currency exchange contracts for
operational purposes and to hedge against adverse exchange rate fluctuations.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Fund and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Fund is subject to the credit risk that the
other party will not complete the obligations of the contract.
FEDERAL TAXES
Since it is the Fund's policy to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to its shareholders, no provision for income taxes is
required. In order to avoid the payment of any federal excise taxes, the Fund is
required to distribute substantially all of its net investment income and net
realized gains on a calendar year basis.
Net investment income and net realized gains (losses) may differ for financial
statement and tax purposes primarily due to differing treatments for foreign
currency transactions, passive foreign investment companies (PFICs), and losses
deferred due to "wash sales." The character of distributions made during the
year for net investment income or net realized gains may differ from its
ultimate characterization for tax purposes.
17
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI INTERNATIONAL FUND
APRIL 30, 1999
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The Fund may be subject to foreign taxes on income, gains on investments, or
currency repatriation. The Fund accrues such taxes as applicable.
For federal income tax purposes, the Fund had a capital loss carryover of
approximately $835,000, at October 31, 1998, which, if not offset by subsequent
capital gains, will expire in 2006. It is unlikely the Board of Directors will
authorize a distribution of any net realized gains until the available capital
loss carryover is offset or expires.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
The Fund records security transactions on trade date, the date the securities
are purchased or sold. Dividend income is recorded on the ex-dividend date or
upon receipt of ex-dividend notification in the case of certain foreign
securities.
Security gains and losses are determined on the basis of identified cost, which
is the same basis used for federal income tax purposes. 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 annually at the end of the
calendar year. 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
Fund's investments and the income it generates, as well as the Fund's ability to
repatriate such amounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the financial statements. Actual results could
differ from those estimates.
[2] COMMITMENTS AND CONTINGENCIES
INSURANCE
For purposes of obtaining certain types of insurance coverage for the Fund and
its officers and directors, the Fund is a policyholder in an industry-sponsored
mutual insurance company (the Company). The Fund is committed to make capital
contributions, if requested by the Company.
LINE OF CREDIT
The Fund had available a line of credit of $6,660,000, with a bank at the prime
interest rate. To the extent funds were drawn against the line, securities were
held in a segregated account. No compensating balances or commitment fees were
required under the line of credit. There were no borrowings outstanding at April
30, 1999.
18
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI INTERNATIONAL FUND
APRIL 30, 1999
(UNAUDITED)
[3] FEES AND EXPENSES
Under terms of the Fund's Management Agreement, Investment Advisers, Inc.
(Advisers) is required to pay for all expenses of the Fund, except certain costs
(primarily those incurred in the purchase and sale of assets, taxes, interest
and extraordinary expenses), in return for the Fund paying an all inclusive
management fee (unified fee) to Advisers. The fee is equal to an annual rate of
1.70% declining to 1.30% of average daily net assets. The fee is paid monthly.
The Management Agreement further provides that Advisers will reimburse the Fund
for the fees and expenses it pays to Directors who are not "interested persons"
of the Fund or reduce its fee by an equivalent amount.
[4] CAPITAL STOCK
The Fund has authorized 10 billion shares of $.01 par value stock. Transactions
in shares of capital stock during the periods indicated were as follows:
<TABLE>
<CAPTION>
Six months Period from
ended February 1, 1998 to Year ended
April 30, 1999 October 31, 1998 January 31, 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SOLD 6,493,531 13,642,998 10,833,124
ISSUED FOR REINVESTED DISTRIBUTIONS -- 8,519 1,143,039
REDEEMED (7,916,962) (16,247,561) (15,399,390)
---------------------------------------------------------
INCREASE (DECREASE) IN SHARES OUTSTANDING (1,423,431) (2,596,044) (3,423,227)
=========================================================
</TABLE>
[5] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the period ended April 30, 1999, purchases of securities and sales proceeds,
other than investments in short-term securities, for the Fund aggregated
$14,059,858 and $23,737,940, respectively.
[6] FOREIGN CURRENCY COMMITMENTS
At April 30, 1999, the Fund had entered into foreign currency exchange
contracts. The unrealized depreciation on those contracts at April 30, 1999 is
included in unrealized depreciation on other assets and liabilities denominated
in foreign currency. The terms of the open contracts are as follows:
<TABLE>
<CAPTION>
Exchange Unrealized
Date Currency to be Delivered Currency to be Received Depreciation
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
10/7/99 395,063 Hong Kong Dollar 48,900 U.S. Dollar $1,991
10/7/99 656,823 Hong Kong Dollar 81,300 U.S. Dollar 3,309
======================================================================================
$5,300
======================================================================================
</TABLE>
19
- --------------------------------------------------------------------------------
<PAGE>
(THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.)
20
- --------------------------------------------------------------------------------
<PAGE>
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
http://www.iaifunds.com
CUSTODIAN
The Chase Manhattan Bank
1 Chase Manhattan Plaza
New York, NY 10005-1402
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
J. Peter Thompson
Charles H. Withers
<PAGE>
---------------
U.S. POSTAGE
PAID
MINNEAPOLIS MN
PERMIT #26388
---------------
[IAI Logo]
MUTUAL FUNDS
P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440-0357 USA FAX 612.376.2737
800.945.3863
