ANNUAL REPORT
IAI GLOBAL EQUITY FUNDS
IAI International Fund
OCTOBER 31, 1999
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
-----------------
IAI INTERNATIONAL FUND
ANNUAL REPORT
OCTOBER 31, 1999
Fund Manager's Review .............................. 2
Fund Portfolio ..................................... 6
Notes to Fund Portfolio ............................ 9
Statement of Assets and Liabilities ................ 10
Statement of Operations ............................ 11
Statements of Changes in Net Assets ................ 12
Financial Highlights ............................... 13
Notes to Financial Statements ...................... 14
Investment Adviser and Manager, Custodian,
Legal Counsel, Independent Auditors,
Distributor, Directors .............. Inside Back Cover
<PAGE>
FUND MANAGER'S REVIEW
---------------------
IAI INTERNATIONAL FUND
IAI INTERNATIONAL FUND
FUND MANAGEMENT
HILARY J. FANE
HOW HAS THE FUND PERFORMED?
The IAI International Fund generated a return of 11.11% for the twelve months
ending 10/31/99. In comparison, the Morgan Stanley EAFE Index produced a return
of 23.37%. The Fund benefited from strong stock selection in Australia, Germany
and Switzerland, and an exposure to emerging markets. Conversely, an underweight
exposure to the Japanese market, as well as overall stock selection in Japan,
the UK and several continental European countries detracted from overall
performance results.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Performance of the Fund's holdings was mixed. Several of the best performing
stocks were in Japan where Hitachi, Namco and NTT provided strong returns.
Several of the Fund's Australian holdings also generated strong results as
natural resource-related stocks rebounded sharply. Within the emerging markets
component of the Fund, Asian stocks provided the best performance gains. Less
successful for the Fund were several of its UK holdings.
WERE THERE ANY SIGNIFICANT CHANGES?
Changes with regard to the overall allocation to the major geographic regions
were modest. Within the Far East, the Fund increased its allocation to Japan,
while within Europe, the exposure to France was reduced mid-year following the
sale of Qualis L.P., a privately held, early-stage developing company which
represented 16.6% of the Fund's net assets on 3/31/99. In recent months, the
Fund eliminated its allocation to international small cap stocks, and following
a period of strong outperformance, reduced its commitment to emerging markets.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
Stock markets worldwide rebounded sharply from the steep declines experienced in
the summer of 1998. Asian markets in particular have enjoyed spectacular gains.
This recovery was largely predicated on significantly improved economic outlooks
for much of the world, in part due to efforts of central banks to spur economic
growth with lower interest rates. In recent months, however, value-oriented
investors have been severely disadvantaged by the strong rally enjoyed by growth
stocks.
WHAT IS YOUR OUTLOOK FOR THE FUND?
The most notable event within the Pacific Basin over the past twelve months has
been the recovery of the Japanese market. In addition, the strength of the yen
has further boosted returns. Excluding Japan, the recovery of other Asian
economies is expanding beyond the export sectors into other domestic sectors, an
indication that the recoveries are becoming more self-sustaining.
In Europe, economies are experiencing a slow but steady cyclical recovery,
which has led to improved pricing power for many basic industries. Corporate
restructuring is further advanced than it is in Japan, as is the process of
industrial consolidation, both of which are improving shareholder returns.
The Fund continues to overweight the Pacific Basin, particularly
Australasia and Singapore, and although the Fund cautiously increased the
commitment to Japan over the course of the year, it remains modestly underweight
relative to the benchmark. Within Europe, the Fund maintains a near-market
weighting in continental Europe, coupled with a low exposure to the UK.
2
- --------------------------------------------------------------------------------
<PAGE>
FUND MANAGER'S REVIEW
---------------------
IAI INTERNATIONAL FUND
PORTFOLIO WEIGHTING:
IAI INTERNATIONAL FUND VS. EAFE INDEX
10/31/99
-------------------------------- Country Returns
IAI EAFE for the 12 Months
International Fund Index Ended 10/31/99
- --------------------------------------------------------------------------------
AFRICA
Egypt --% --% (7)%
South Africa -- -- 16%
EUROPE
Austria -- -- (14)%
Belgium 3 1 (5)%
Denmark -- 1 (8)%
Finland 6 2 103%
France 12 10 25%
Germany 8 10 8%
Greece -- -- 114%
Ireland -- 1 (1)%
Italy 3 4 2%
Netherlands 2 5 13%
Norway -- -- 4%
Poland -- -- (1)%
Portugal 6 1 (18)%
Spain 3 3 1%
Sweden -- 2 48%
Switzerland -- 6 --%
Turkey -- -- 90%
United Kingdom 15 20 13%
FAR EAST
Australia 8 2 12%
Hong Kong 3 2 27%
India -- -- 63%
Israel -- -- 32%
Japan 22 29 59%
Malaysia -- -- 184%
New Zealand 2 -- 9%
Philippines -- -- 8%
Singapore 2 1 90%
South Korea -- -- 175%
Taiwan -- -- 31%
Thailand -- -- 17%
LATIN AMERICA
Argentina 1 -- 21%
Brazil 1 -- 5%
Chile -- -- 19%
Mexico 1 -- (37)%
Peru -- -- 17%
OTHER COUNTRIES 2 --
CASH -- --
================================================================================
TOTAL 100% 100%
================================================================================
3
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<PAGE>
FUND MANAGER'S REVIEW
---------------------
IAI INTERNATIONAL FUND
TOP TEN STOCK HOLDINGS
<TABLE>
<CAPTION>
% of Net Assets
----------------------
Issues Country Industry 10/31/99 10/31/98
- ---------------------------------- ----------- ------------------- ---------- ---------
<S> <C> <C> <C> <C>
Sekisui Chemical Japan Materials 3.73 1.83
Eisai Japan Consumer Goods 3.67 2.05
Nippon Yusen Kabushiki Kaisha Japan Services 3.16 1.75
Brisa-Auto Estradas de Portugal Portugal Capital Equipment 2.92 1.02
Banco Pinto & Sotto Mayor Portugal Financial 2.71 1.71
Goodman Fielder Australia Consumer Goods 2.64 -
Mitsubishi Heavy Industries Japan Capital Equipment 2.56 -
Groupe Danone France Consumer Goods 2.54 2.00
CNP Assurances France Financial 2.54 1.14
Japan Airlines Japan Services 2.53 -
================================== =========== ==================== ========= =========
TOTAL 29.00 11.50
================================== =========== ==================== ========= =========
</TABLE>
TOP FIVE COUNTRIES
% OF NET ASSETS
AS OF 10/31/99 AS OF 10/31/98
JAPAN 21.6% 11.5%
UNITED KINGDOM 14.4% 9.1%
FRANCE 12.2% 22.9%
GERMANY 8.3% 8.4%
AUSTRALIA 7.8% 5.3%
4
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<PAGE>
FUND MANAGER'S REVIEW
---------------------
IAI INTERNATIONAL FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
IAI INTERNATIONAL FUND EAFE INDEX
10,000 10,000
Nov-89 10,350 10,505
Dec-89 10,833 10,895
Jan-90 10,641 10,492
Feb-90 10,165 9,762
Mar-90 9,790 8,747
Apr-90 9,570 8,680
May-90 10,211 9,673
Jun-90 10,441 9,590
Jul-90 10,680 9,727
Aug-90 9,890 8,785
Sep-90 8,963 7,564
Oct-90 9,550 8,744
Nov-90 9,468 8,231
Dec-90 9,417 8,368
Jan-91 9,658 8,641
Feb-91 10,326 9,570
Mar-91 9,973 8,997
Apr-91 10,168 9,088
May-91 10,131 9,186
Jun-91 9,659 8,513
Jul-91 10,202 8,934
Aug-91 10,290 8,755
Sep-91 10,648 9,251
Oct-91 10,716 9,384
Nov-91 10,396 8,949
Dec-91 10,977 9,414
Jan-92 11,134 9,215
Feb-92 11,144 8,888
Mar-92 10,782 8,304
Apr-92 11,095 8,345
May-92 11,476 8,906
Jun-92 10,997 8,487
Jul-92 10,326 8,272
Aug-92 10,306 8,794
Sep-92 10,075 8,623
Oct-92 9,825 8,173
Nov-92 10,045 8,253
Dec-92 10,284 8,298
Jan-93 10,488 8,299
Feb-93 10,825 8,553
Mar-93 11,448 9,301
Apr-93 11,947 10,186
May-93 11,999 10,403
Jun-93 11,739 10,244
Jul-93 12,156 10,604
Aug-93 13,013 11,179
Sep-93 12,992 10,930
Oct-93 13,639 11,269
Nov-93 13,086 10,287
Dec-93 14,346 11,032
Jan-94 15,147 11,967
Feb-94 14,947 11,936
Mar-94 14,178 11,425
Apr-94 14,694 11,912
May-94 14,810 11,846
Jun-94 14,594 12,016
Jul-94 14,912 12,134
Aug-94 15,352 12,424
Sep-94 14,803 12,036
Oct-94 15,066 12,439
Nov-94 14,429 11,844
Dec-94 14,411 11,921
Jan-95 13,588 11,466
Feb-95 13,848 11,436
Mar-95 14,513 12,152
Apr-95 14,681 12,613
May-95 14,715 12,465
Jun-95 14,588 12,250
Jul-95 15,410 13,016
Aug-95 15,282 12,523
Sep-95 15,386 12,771
Oct-95 15,084 12,431
Nov-95 15,200 12,780
Dec-95 15,720 13,298
Jan-96 16,324 13,356
Feb-96 16,373 13,404
Mar-96 16,348 13,692
Apr-96 16,731 14,094
May-96 16,373 13,838
Jun-96 16,384 13,919
Jul-96 15,886 13,516
Aug-96 15,961 13,549
Sep-96 16,471 13,912
Oct-96 16,422 13,773
Nov-96 17,069 14,325
Dec-96 17,043 14,144
Jan-97 16,713 13,652
Feb-97 17,112 13,879
Mar-97 17,044 13,932
Apr-97 16,989 14,010
May-97 18,053 14,925
Jun-97 18,650 15,751
Jul-97 18,891 16,009
Aug-97 17,606 14,817
Sep-97 18,242 15,649
Oct-97 16,746 14,451
Nov-97 16,294 14,306
Dec-97 16,333 14,435
Jan-98 16,542 15,099
Feb-98 17,768 16,071
Mar-98 18,187 16,569
Apr-98 18,638 16,704
May-98 18,347 16,627
Jun-98 17,327 16,756
Jul-98 17,294 16,931
Aug-98 14,903 14,836
Sep-98 14,935 14,385
Oct-98 15,857 15,889
Nov-98 16,309 16,707
Dec-98 16,632 17,370
Jan-99 16,259 17,323
Feb-99 16,017 16,914
Mar-99 16,566 17,625
Apr-99 17,665 18,342
May-99 17,147 17,401
Jun-99 17,955 18,083
Jul-99 18,132 18,626
Aug-99 18,116 18,699
Sep-99 17,873 18,891
Oct-99 17,614 19,603
AVERAGE ANNUAL RETURNS+
THROUGH 10/31/99
1 Year 5 Years 10 Years
================================================================================
IAI INTERNATIONAL FUND 11.11% 3.18% 5.83%
- --------------------------------------------------------------------------------
EAFE Index 23.37% 9.52% 6.96%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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.
5
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<PAGE>
FUND PORTFOLIO
--------------
IAI INTERNATIONAL FUND
OCTOBER 31, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 91.9%
Market
Quantity Value (a)
- ------------------------------------ -------- ---------
ARGENTINA - 0.4%
Telefonica de Argentina ADR
(SERVICES) 2,660 $ 68,163
- ------------------------------------ -------- ----------
AUSTRALIA - 7.8%
Australia & New Zealand Banking
Group (FINANCIAL) 28,060 185,070
Boral (MATERIALS) 211,379 317,924
Broken Hill Proprietary Company
(MATERIALS) 44,639 461,069
Goodman Fielder
(CONSUMER GOODS) 535,136 494,517
----------
1,458,580
- ------------------------------------ ------- ----------
BELGIUM - 2.4%
Agfa Gevaert
(CONSUMER GOODS) (b) 17,993 360,125
Compagnie Maritime Belge
(SERVICES) 1,600 82,413
----------
442,538
- ------------------------------------ ------- ----------
CHILE - 0.2%
Enersis ADR (ENERGY) 1,861 41,873
- ------------------------------------ ------- ----------
EGYPT - 0.1%
Suez Cement GDR
(MATERIALS) (b) (c) 1,565 25,683
- ------------------------------------ ------- ----------
FINLAND - 5.3%
Fortum (ENERGY) 72,223 349,233
Orion-Yhtyma Class B
(CONSUMER GOODS) 12,360 293,636
UPM-Kymmene (MATERIALS) 11,239 354,431
----------
997,300
- ------------------------------------ ------- ----------
Market
Quantity Value (a)
- ------------------------------------ -------- ---------
FRANCE - 12.2%
CNP Assurances (FINANCIAL) 16,142 $ 475,114
Credit Lyonnais (FINANCIAL) (b) 1,940 58,630
Groupe Danone (CONSUMER GOODS) 1,867 475,925
Dexia France (FINANCIAL) 3,356 472,726
Eridania Beghin-Say
(CONSUMER GOODS) 3,242 368,061
Suez Lyonnaise des Eaux (SERVICES) 2,714 437,926
----------
2,288,382
- ------------------------------------ ------- ----------
GERMANY - 6.2%
BASF (MATERIALS) 5,920 266,036
Bayer (MATERIALS) 8,452 345,614
Deutsche Bank (FINANCIAL) 4,168 298,810
Veba (ENERGY) 4,775 257,999
----------
1,168,459
- ------------------------------------ ------- ----------
GREECE - 0.1%
Hellenic Telecommunications
Organization (SERVICES) 350 7,417
- ------------------------------------ ------- ----------
HONG KONG - 2.4%
Axa China Region (FINANCIAL) 275,500 237,576
Dairy Farm International Holdings
(CONSUMER GOODS) 263,258 206,658
----------
444,234
- ------------------------------------ ------- ----------
HUNGARY - 0.2%
MOL Magyar Olaj GDR (ENERGY) 2,195 44,213
- ------------------------------------ ------- ----------
ITALY - 3.3%
ENI (ENERGY) (b) 29,000 169,494
Telecom Italia (SERVICES) 89,426 438,999
----------
608,493
- ------------------------------------ ------- ----------
See accompanying Notes to Fund Portfolio.
6
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<PAGE>
FUND PORTFOLIO
--------------
IAI INTERNATIONAL FUND
OCTOBER 31, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- ------------------------------------ -------- ---------
JAPAN - 21.6%
Eisai (CONSUMER GOODS) 25,000 $ 686,326
The Hachijuni Bank (FINANCIAL) 2,000 14,584
Hitachi (CAPITAL EQUIPMENT) 37,000 399,569
Japan Airlines (SERVICES) 141,000 472,882
MINOLTA (CONSUMER GOODS) 68,000 278,229
Mitsubishi Heavy Industries
(CAPITAL EQUIPMENT) 122,000 478,133
Nippon Mitsubishi Oil (ENERGY) 84,000 370,257
Nippon Yusen Kabushiki Kaisha
(SERVICES) 137,000 590,744
Sekisui Chemical (MATERIALS) 141,800 697,043
The 77 Bank (FINANCIAL) 4,000 47,451
----------
4,035,218
- ------------------------------------ ------- ----------
MEXICO - 0.5%
Telefonos de Mexico Series L
ADR (SERVICES) 1,124 96,102
- ------------------------------------ ------- ----------
NETHERLANDS - 2.1%
Koninklijke Luchtvaart
Maatschappij (SERVICES) 14,114 384,253
- ------------------------------------ ------- ----------
NEW ZEALAND - 1.9%
Carter Holt Harvey (MATERIALS) 276,544 349,967
- ------------------------------------ ------- ----------
PHILIPPINES - 0.1%
Petron (ENERGY) 318,400 26,566
- ------------------------------------ ------- ----------
PORTUGAL - 5.6%
Banco Pinto & Sotto Mayor
(FINANCIAL) 24,394 507,728
Brisa-Auto Estradas de Portugal
(CAPITAL EQUIPMENT) (b) 13,892 546,889
----------
1,054,617
- ------------------------------------ ------- ----------
SINGAPORE - 1.7%
Elec & Eltek International 7,000 23,800
Neptune Orient Lines
(SERVICES) (b) 198,000 286,801
----------
310,601
- ------------------------------------ ------- ----------
Market
Quantity Value (a)
- ------------------------------------ -------- ---------
SOUTH AFRICA - 0.3%
Bidvest Group (CONSUMER GOODS) 2 $ 13
Iscor (MATERIALS) 32,170 12,460
Sappi Limited (MATERIALS) 4,600 38,102
----------
50,575
- ------------------------------------ ------- ----------
SPAIN - 2.9%
Endesa (ENERGY) 13,383 267,726
Iberdrola (ENERGY) 18,365 267,570
----------
535,296
- ------------------------------------ ------- ----------
THAILAND - 0.2%
Hana Microelectronics, foreign
(CAPITAL EQUIPMENT) (b) 12,179 42,910
Siam City Bank, foreign
(FINANCIAL) (b) 30,825 240
----------
43,150
- ------------------------------------ ------- ----------
UNITED KINGDOM - 14.4%
Britannic (FINANCIAL) 11,030 199,098
Greenalls Group (SERVICES) 44,766 227,723
Hyder (SERVICES) 34,947 313,972
Rank Group (SERVICES) 106,504 331,624
Rolls-Royce (CAPITAL EQUIPMENT) 127,243 451,007
Royal & Sun Alliance Insurance
Group (FINANCIAL) 42,430 288,251
Safeway (SERVICES) 108,380 339,688
Tomkins (MULTI-INDUSTRY) 105,349 356,551
United Biscuits (SERVICES) 54,592 192,156
----------
2,700,070
==================================== ======= ==========
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $18,411,891)......................................... $17,181,750
==================================== ======= ==========
See accompanying Notes to Fund Portfolio.
7
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<PAGE>
FUND PORTFOLIO
--------------
IAI INTERNATIONAL FUND
OCTOBER 31, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
NON-CONVERTIBLE PREFERRED
STOCKS - 2.7%
Market
Quantity Value (a)
- ------------------------------------ -------- ---------
BRAZIL - 0.6%
Banco Bradesco (FINANCIAL) 13,700,000 $ 67,693
Tele Norte Leste Participacoes
(SERVICES) 2,880,000 48,460
-----------
116,153
- ------------------------------------ ------- -----------
GERMANY - 2.1%
ProSieben Media (SERVICES) 9,803 401,889
==================================== ======= ===========
TOTAL INVESTMENTS IN NON-CONVERTIBLE
PREFERRED STOCKS
(COST: $559,210) $ 518,042
==================================== ======= ===========
TOTAL INVESTMENTS IN SECURITIES
(COST: $18,971,101) (d) $17,699,792
==================================== ======= ===========
OTHER ASSETS AND LIABILITIES
(NET) - 5.4% 1,003,022
==================================== ======= ===========
TOTAL NET ASSETS $18,702,814
==================================== ======= ===========
See accompanying Notes to Fund Portfolio.
8
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FUND PORTFOLIO
-----------------------
IAI INTERNATIONAL FUND
OCTOBER 31, 1999
(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)
At October 31, 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 ......................... $ 19,585,139
============
Gross unrealized appreciation ......................... $ 862,447
Gross unrealized depreciation ......................... (2,747,794)
------------
Net unrealized depreciation ........................... $ (1,885,347)
============
9
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<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
-----------------------------------
IAI INTERNATIONAL FUND
OCTOBER 31, 1999
<TABLE>
- --------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments in securities, at market (cost: $18,971,101) $ 17,699,792
Receivable for investment securities sold 270,814
Receivable for Fund shares sold 955,209
Dividends receivable 351,940
Interest receivable 1,538
Other 10,696
------------
TOTAL ASSETS 19,289,989
LIABILITIES
Bank overdraft 3,274
Payable for investment securities purchased 550,088
Unrealized depreciation on foreign currency contracts 5,611
Payable for Fund shares redeemed 88
Accrued management fee 28,114
------------
TOTAL LIABILITIES 587,175
------------
NET ASSETS $ 18,702,814
============
NET ASSETS REPRESENTED BY:
Paid in capital $ 20,889,660
Undistributed net investment income 174,879
Accumulated net realized loss on investments (1,078,814)
Unrealized depreciation on:
Investment securities $ (1,271,309)
Other assets and liabilities denominated in foreign currency (11,602) (1,282,911)
------------ ------------
NET ASSETS $ 18,702,814
============
Shares of capital stock outstanding (10 billion shares
authorized, $0.01 par value) 1,715,943
============
NET ASSET VALUE, REDEMPTION AND OFFERING PRICE PER
SHARE $ 10.90
============
</TABLE>
See accompanying Notes to Financial Statements.
10
- --------------------------------------------------------------------------------
<PAGE>
STATEMENT OF OPERATIONS
-----------------------
IAI INTERNATIONAL FUND
YEAR ENDED OCTOBER 31, 1999
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME
INCOME
Dividends (net of foreign income taxes withheld of $116,120) $ 841,549
Interest 64,260
----------
TOTAL INCOME 905,809
----------
EXPENSES
Management fees 442,623
Compensation of Directors 8,834
Interest expense 18,891
----------
TOTAL EXPENSES 470,348
Less fees reimbursed by Advisers (8,834)
----------
NET EXPENSES 461,514
----------
NET INVESTMENT INCOME 444,295
----------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities 823,521
Foreign currency transactions (370,748)
----------
Net realized gain 452,773
Net change in unrealized appreciation or depreciation on:
Investment securities 2,504,126
Other assets and liabilities denominated in foreign currency 125,684
----------
Net unrealized gain 2,629,810
----------
NET GAIN ON INVESTMENTS 3,082,583
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,526,878
==========
See accompanying Notes to Financial Statements.
11
- --------------------------------------------------------------------------------
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------
IAI INTERNATIONAL FUND
<TABLE>
<CAPTION>
Period from
Year ended February 1, 1998 to Year ended
October 31, 1999 October 31, 1998* January 31, 1998
- ------------------------------------------------------------ ------------------ --------------------- -----------------
<S> <C> <C> <C>
OPERATIONS
Net investment income $ 444,295 $ 419,119 $ 1,501,033
Net realized gains (losses) 452,773 (472,529) 7,064,040
Net change in unrealized appreciation or depreciation 2,629,810 1,349,562 (8,133,615)
-------------- -------------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 3,526,878 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 110,742,722 141,661,893 132,201,297
Net asset value of shares issued in reinvestment of
distributions - 91,242 11,993,205
Cost of shares redeemed (130,683,209) (171,169,607) (185,054,041)
-------------- -------------- --------------
DECREASE IN NET ASSETS FROM CAPITAL SHARES TRANSACTIONS (19,940,487) (29,416,472) (40,859,539)
-------------- -------------- --------------
TOTAL DECREASE IN NET ASSETS (16,413,609) (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 $ 18,702,814 $ 35,116,423 $ 63,348,647
============== ============== ==============
INCLUDING UNDISTRIBUTED (OVERDISTRIBUTED) NET
INVESTMENT INCOME OF: $ 506,910 $ 62,615 $ (121,935)
============== ============== ==============
</TABLE>
*Reflects fiscal year end change from January 31 to October 31.
See accompanying Notes to Financial Statements.
12
- --------------------------------------------------------------------------------
<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
October 31, February 1, 1998 to
1999 October 31, 1998++
------------- ----------------------
<S> <C> <C>
NET ASSET VALUE
Beginning of period $ 9.81 $ 10.26
------- -------
OPERATIONS
Net investment income 0.18*** 0.10
Net realized and unrealized
gains (losses) 0.91 (0.52)
------- -------
TOTAL FROM OPERATIONS 1.09 (0.42)
------- -------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income - (0.03)
Net realized gains - -
------- -------
TOTAL DISTRIBUTIONS - (0.03)
------- -------
NET ASSET VALUE
End of period $ 10.90 $ 9.81
======= =======
Total investment return* 11.11% (4.15)%
Net assets at end of period
(000's omitted) $18,703 $35,116
RATIOS
Expenses to average net assets
(including interest expense) 1.77% 1.76%**
Expenses to average net assets
(excluding interest expense) 1.70% 1.70%**
Net investment income to
average net assets 1.71% 1.28%**
Portfolio turnover rate (excluding
short-term securities) 107.6% 50.2%
</TABLE>
[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.
***Calculated using average shares outstanding during the period.
+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.
13
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI INTERNATIONAL FUND
OCTOBER 31, 1999
[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 gain or loss 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
14
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI INTERNATIONAL FUND
OCTOBER 31, 1999
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
investment income or net realized gains may differ from its ultimate
characterization for tax purposes.
The Fund may be subject to foreign taxes on income, gains on investments, or
currency repatriation. The Fund accrues such taxes as applicable.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income has been decreased by $332,031
and accumulated net realized losses have been decreased by $332,031.
For federal income tax purposes, the Fund had a capital loss carryover of
approximately $465,437, at October 31, 1999, 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, if any, 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
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
Through March 15, 1999, 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.
15
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI INTERNATIONAL FUND
OCTOBER 31, 1999
[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>
Period from
Year ended February 1, 1998 to Year ended
October 31, 1999 October 31, 1998 January 31, 1998
- ------------------------------------------- ------------------ --------------------- -----------------
<S> <C> <C> <C>
Sold 10,611,930 13,642,998 10,833,124
Issued for reinvested distributions - 8,519 1,143,039
Redeemed (12,474,759) (16,247,561) (15,399,390)
------------------ --------------------- -----------------
Increase (decrease) in shares outstanding (1,862,829) (2,596,044) (3,423,227)
================== ===================== =================
</TABLE>
[5] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the year ended October 31, 1999, purchases of securities and sales proceeds,
other than investments in short-term securities, for the Fund aggregated
$26,547,743 and $42,798,899, respectively.
16
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI INTERNATIONAL FUND
OCTOBER 31, 1999
[6] FOREIGN CURRENCY COMMITMENTS
At October 31, 1999, the Fund had entered into foreign currency exchange
contracts. The unrealized depreciation on those contracts at October 31, 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 Received Currency to be Delivered Depreciation
- ------------ -------------------------------------- ------------------------- -------------
<S> <C> <C> <C> <C> <C>
11/02/99 1,203,000 Japanese Yen 11,787 U.S. Dollar $ 259
11/02/99 6,637 New Zealand Dollars 3,487 U.S. Dollar 127
11/04/99 70,323 British Pounds 115,949 U.S. Dollar 552
11/05/99 36,842 British Pounds 60,991 U.S. Dollar 534
11/08/99 94,380 European Monetary Unit 100,968 U.S. Dollar 1,756
11/16/99 36,439 European Monetary Unit 39,494 U.S. Dollar 1,189
11/30/99 35,398 European Monetary Unit 38,404 U.S. Dollar 1,194
============ ====================================== ========================= =============
$5,611
============ ====================================== ========================= =============
</TABLE>
17
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<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
IAI INTERNATIONAL FUND
THE BOARD OF DIRECTORS AND SHAREHOLDERS
IAI INVESTMENT FUNDS III, INC.:
We have audited the accompanying statement of assets and liabilities, including
the fund portfolio, of IAI International Fund (a portfolio within IAI Investment
Funds III, Inc.) as of October 31, 1999, and the related statement of operations
for the year then ended, the statements of changes in net assets for the year
ended October 31, 1999, the period from February 1, 1998 to October 31, 1998 and
the year ended January 31, 1998, and the financial highlights for each of the
periods presented on page 13 of the annual report. These financial statements
and the financial highlights are the responsibility of the fund's management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1999, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of IAI
International Fund as of October 31, 1999, and the results of its operations,
the changes in its net assets and the financial highlights for the periods
stated in the first paragraph above, in conformity with generally accepted
accounting principles.
KPMG LLP
Minneapolis, Minnesota
December 17, 1999
18
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<PAGE>
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19
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<PAGE>
(THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.)
20
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<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 LLP
4200 Norwest Center
Minneapolis, MN 55402
DISTRIBUTOR
Rafferty Capital Markets, Inc.
1311 Mamaroneck Avenue
White Plains, New York 10605
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
J. Peter Thompson
Charles H. Withers
----------
<PAGE>
[LOGO] IAI
MUTUAL FUNDS
C/O FIRSTAR MUTUAL FUND SERVICES, LLC,
P.O. BOX 701, MILWAUKEE, WISCONSIN 53201 USA
800.945.3863
99-119
