SEMI-ANNUAL REPORT
IAI INTERNATIONAL FUND
APRIL 30, 2000
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI INTERNATIONAL FUND
SEMI-ANNUAL REPORT
APRIL 30, 2000
(UNAUDITED)
Fund Manager's Review ....................... 2
Fund Portfolio .............................. 6
Notes to Fund Portfolio ..................... 8
Statement of Assets and Liabilities ......... 9
Statement of Operations ..................... 10
Statements of Changes in Net Assets ......... 11
Financial Highlights ........................ 12
Notes to Financial Statements ............... 13
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors .................... Inside Back Cover
<PAGE>
FUND MANAGER'S REVIEW
IAI INTERNATIONAL FUND
IAI INTERNATIONAL FUND
FUND MANAGEMENT
PETER NORTON
HOW HAS THE FUND PERFORMED?
The IAI International Fund generated a return of (6.31)% for the six-month
period ending April 30, 2000 compared to the MSCI EAFE Index, which produced a
return of 6.84%. From November 1999 through February 2000, the Fund was
adversely impacted by its small-to mid-cap bias and its underweight position in
technology. Following a restructuring exercise in late February, the Fund
outperformed the EAFE Index by 3.5%, largely due to an increase in the average
market capitalization and strong stock selection.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Benefiting from its new structure since March, the Fund was positively impacted
by several consumer-related holdings in Japan and the UK. Specifically, Honda
Motors, the Japanese automobile manufacturer was up 34% while AstraZeneca, a
pharmaceutical company rose 23% during this period.
WERE THERE ANY SIGNIFICANT CHANGES?
In late February, the Fund was restructured to reflect a large cap core EAFE
mandate, and existing allocations to small cap and emerging markets stocks were
eliminated. While continuing to implement an investment strategy that emphasizes
a value approach and bottom-up stock selection based on fundamental analysis,
several enhancements related to portfolio construction and risk control were
introduced. The Fund now invests in securities comprising the top 15% of the
EAFE Index by market capitalization. In addition, portfolio controls have been
instituted which allow for better management of benchmark risk relative to
geographic regions and economic sectors.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
From the latter half of 1999 and into early 2000, markets were characterized by
very narrow leadership resulting from: 1) outperformance by the very largest
stocks, and 2) outperformance by technology and telecommunications stocks. This,
coupled with an investor preference for growth strategies over the disciplined
value approach adhered to by the Fund, had a negative impact on performance.
Since February, however, markets have rallied with an emphasis on larger stocks,
particularly financial and consumer staple-related issues. As a result, the Fund
has benefited from its overweight position in both of these sectors, as well as
its higher average market capitalization.
WHAT IS YOUR OUTLOOK FOR THE FUND?
We believe that international markets are likely to continue a trend that began
in the US markets in recent years whereby investors express a preference for
larger companies. The Fund is positioned to benefit from such a preference,
reflecting a structure that is more balanced by market cap, country and sector
classifications. We are excited by the prospects for the Fund as it is
positioned today and believe that the changes will result in competitive
performance results for the future.
2
--------------------------------------------------------------------------------
<PAGE>
FUND MANAGER'S REVIEW
IAI INTERNATIONAL FUND
PORTFOLIO WEIGHTING:
IAI INTERNATIONAL FUND VS. EAFE INDEX
4/30/00
----------------------------- Country Returns
IAI EAFE for the 6 Months
International Fund Index Ended 4/30/00
--------------------------------------------------------------------------------
EUROPE
Austria -% 1% (14)%
Belgium - 1 (22)%
Denmark - 1 8%
Finland - 3 82%
France 8 11 15%
Germany 14 9 15%
Ireland - 1 (8)%
Italy 4 4 10%
Netherlands 5 5 1%
Norway - 1 1%
Portugal - 1 4%
Spain - 2 8%
Sweden - 3 53%
Switzerland 11 5 (8)%
United Kingdom 19 19 (3)%
FAR EAST
Australia 6 2 2%
Hong Kong - 2 12%
Japan 28 27 3%
New Zealand - 1 (2)%
Singapore - 1 (1)%
OTHER COUNTRIES 4 -
CASH 1 -
================================================================================
TOTAL 100% 100%
================================================================================
3
--------------------------------------------------------------------------------
<PAGE>
FUND MANAGER'S REVIEW
IAI INTERNATIONAL FUND
TOP TEN STOCK HOLDINGS
<TABLE>
<CAPTION>
% of Net Assets
---------------------
Issues Country Industry 4/30/00 10/31/99
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HSBC Holdings United Kingdom Financial 4.29 -
DaimlerChrysler Germany Consumer Durables 3.90 -
Siemens Germany Producer Manufacturing 3.61 -
ING Groep Netherlands Financial 3.56 -
Unilever United Kingdom Consumer Non-Durables 3.35 -
Matsushita Electric Industrial Japan Electronic Technology 3.19 -
Barclays United Kingdom Financial 3.13 -
BASF Germany Producer Manufacturing 3.06 1.42
UBS Switzerland Financial 2.89 -
Novartis Switzerland Health Technology 2.80 -
======================================================================================================
TOTAL 33.78 1.42
======================================================================================================
</TABLE>
TOP FIVE COUNTRIES
% OF NET ASSETS
[BAR CHART]
AS OF 4/30/00 AS OF 10/31/99
JAPAN 28.5% 21.6%
UNITED KINGDOM 22.1% 14.4%
GERMANY 13.9% 8.3%
SWITZERLAND 10.8% 0.0%
FRANCE 8.3% 12.2%
4
--------------------------------------------------------------------------------
<PAGE>
FUND MANAGER'S REVIEW
IAI INTERNATIONAL FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
IAI INTERNATIONAL INDEX EAFE INDEX
10,000 10,000
10,669 11,144
10,910 11,049
11,159 11,207
10,334 10,122
9,365 8,714
9,979 10,075
9,893 9,483
9,839 9,641
10,091 9,955
10,789 11,025
10,421 10,366
10,624 10,471
10,586 10,583
10,093 9,808
10,660 10,293
10,751 10,086
11,126 10,658
11,197 10,812
10,863 10,310
11,470 10,846
11,633 10,617
11,644 10,240
11,265 9,567
11,593 9,615
11,991 10,261
11,490 9,778
10,789 9,531
10,768 10,132
10,527 9,935
10,266 9,417
10,496 9,508
10,746 9,560
10,959 9,562
11,311 9,854
11,961 10,716
12,484 11,735
12,537 11,986
12,266 11,802
12,702 12,218
13,597 12,880
13,575 12,593
14,252 12,984
13,673 11,852
14,990 12,710
15,827 13,787
15,618 13,752
14,814 13,163
15,354 13,724
15,475 13,648
15,249 13,844
15,581 13,980
16,041 14,314
15,467 13,867
15,742 14,331
15,076 13,646
15,058 13,734
14,198 13,210
14,470 13,175
15,164 14,001
15,340 14,531
15,375 14,362
15,243 14,114
16,101 14,996
15,968 14,428
16,076 14,713
15,761 14,322
15,882 14,724
16,426 15,321
17,056 15,387
17,108 15,443
17,082 15,775
17,482 16,238
17,107 15,943
17,119 16,036
16,599 15,572
16,677 15,610
17,211 16,028
17,159 15,868
17,835 16,504
17,808 16,296
17,463 15,729
17,880 15,990
17,809 16,052
17,752 16,141
18,863 17,195
19,487 18,147
19,739 18,445
18,397 17,071
19,061 18,030
17,498 16,649
17,025 16,482
17,066 16,631
17,285 17,396
18,565 18,516
19,003 19,090
19,475 19,245
19,171 19,156
18,105 19,306
18,071 19,506
15,571 17,093
15,606 16,574
16,569 18,306
17,041 19,248
17,378 20,013
16,989 19,959
16,736 19,488
17,310 20,306
18,457 21,133
17,917 20,048
18,761 20,834
18,946 21,459
18,929 21,543
18,676 21,765
18,405 22,585
17,932 23,376
18,769 25,477
17,226 23,862
16,935 24,509
17,929 25,465
17,244 24,130
AVERAGE ANNUAL RETURNS+
THROUGH 4/30/00
Six Months* 1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
IAI INTERNATIONAL FUND (6.31)% (6.56)% 2.37% 5.60%
--------------------------------------------------------------------------------
EAFE Index 6.84% 14.17% 10.67% 9.21%
+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.
5
--------------------------------------------------------------------------------
<PAGE>
FUND PORTFOLIO
IAI INTERNATIONAL FUND
APRIL 30, 2000
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 98.4%
Market
Quantity Value (a)
----------------------------------------------------------------------
AUSTRALIA - 6.4%
Broken Hill Proprietary Company
(Energy Minerals) 24,589 $ 264,571
National Australia Bank
(Financial) 25,007 342,318
Telstra (Utilities) 67,482 289,017
---------
895,906
----------------------------------------------------------------------
FRANCE - 8.3%
Banque Nationale de Paris
(Financial) 4,747 384,588
France Telecom (Utilities) 722 111,988
Suez Lyonnaise des Eaux
(Utilities) 1,794 282,024
Total Fina (Energy Minerals) 2,520 383,293
---------
1,161,893
----------------------------------------------------------------------
GERMANY - 13.9%
BASF (Producer Manufacturing) 9,967 431,906
DaimlerChrysler (Consumer
Durables) 9,428 549,888
RWE (Energy Minerals) 7,019 226,440
Siemens (Producer
Manufacturing) 3,444 509,397
Veba (Utilities) 4,716 233,587
---------
1,951,218
----------------------------------------------------------------------
ITALY - 3.9%
Enel (Utilities) 70,130 297,827
Telecom Italia (Utilities) 19,800 125,047
Telecom Italia Mobile
(Technology Services) 32,550 128,444
---------
551,318
----------------------------------------------------------------------
Market
Quantity Value (a)
----------------------------------------------------------------------
JAPAN - 28.5%
BRIDGESTONE (Consumer
Non-Durables) 15,000 $ 325,469
East Japan Railway
(Transportation) 56 331,622
Fuji Photo Film (Consumer
Non-Durables) 8,000 320,518
Hitachi (Electronic Technology) 26,000 310,340
HONDA MOTOR (Consumer
Durables) 7,000 312,839
Matsushita Electric Industrial
(Electronic Technology) 17,000 449,873
NEC (Electronic Technology) 13,000 353,644
NIPPON TELEGRAPH &
TELEPHONE (Utilities) 27 334,768
Sakura Bank (Financial) 39,000 273,532
SANKYO (Health Technology) 16,000 352,348
Sharp (Electronic Technology) 18,000 347,259
TOSHIBA (Electronic
Technology) 32,000 310,303
---------
4,022,515
----------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
6
--------------------------------------------------------------------------------
<PAGE>
FUND PORTFOLIO
IAI INTERNATIONAL FUND
APRIL 30, 2000
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS (CONT.) - 98.4%
Market
Quantity Value (a)
----------------------------------------------------------------------
NETHERLANDS - 4.5%
ING Groep (Financial) 9,172 $ 501,689
Royal Dutch Petroleum (Energy
Minerals) 2,556 147,681
---------
649,370
----------------------------------------------------------------------
SWITZERLAND - 10.8%
Nestle (Consumer Non-Durables) 200 353,386
Novartis (Health Technology) 282 394,849
Roche Holding (Health
Technology) 35 366,376
UBS (Financial) 1,660 407,643
---------
1,522,254
----------------------------------------------------------------------
THAILAND - 0.0%
Siam City Bank (Financial) (b) 30,825 243
----------------------------------------------------------------------
UNITED KINGDOM - 22.1%
AstraZeneca Group (Health
Technology) 8,100 340,859
Barclays (Financial) 17,150 440,693
BP Amoco (Energy Minerals) 37,913 328,995
British Telecommunications
(Utilities) 17,500 315,219
CGU (Financial) 23,308 335,030
HSBC Holdings (Financial) 54,345 604,684
Tesco (Consumer Non-Durables) 81,131 278,055
Unilever (Consumer
Non-Durables) 78,300 472,067
---------
3,115,602
======================================================================
TOTAL INVESTMENTS IN COMMON
STOCKS
(COST: $13,945,088) ..................................... $13,870,319
======================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $13,945,088) (c) ................................. $13,870,319
======================================================================
OTHER ASSETS AND LIABILITIES
(NET) - 1.6% .............................................. $228,580
======================================================================
TOTAL NET ASSETS ........................................ $14,098,899
======================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
7
--------------------------------------------------------------------------------
<PAGE>
NOTES TO FUND PORTFOLIO
IAI INTERNATIONAL FUND
APRIL 30, 2000
(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)
At April 30, 2000, 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 ................................... $13,945,088
===========
Gross unrealized appreciation ................................... $ 737,968
Gross unrealized depreciation ................................... (812,737)
-----------
Net unrealized depreciation ..................................... $ (74,769)
===========
8
--------------------------------------------------------------------------------
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
IAI INTERNATIONAL FUND
APRIL 30, 2000
(UNAUDITED)
<TABLE>
<S> <C> <C>
------------------------------------------------------------------------------------------------
ASSETS
Investments in securities, at market (cost: $13,945,088) $ 13,870,319
Cash 548,780
Receivable for investment securities sold 17,719
Dividends receivable 171,318
Interest receivable 2,953
Other 8,002
------------
TOTAL ASSETS 14,619,091
------------
LIABILITIES
Payable for investment securities purchased $ 494,559
Unrealized depreciation on foreign currency contracts (Note 6) 7,447
Accrued management fee 18,186
------------
TOTAL LIABILITIES 520,192
------------
NET ASSETS $ 14,098,899
============
NET ASSETS REPRESENTED BY:
Paid in capital $ 17,416,242
Overdistributed net investment income (10,399)
Accumulated net realized loss on investments (3,193,963)
Unrealized depreciation on:
Investment securities $ (74,769)
Other assets and liabilities denominated in foreign currency (38,212) (112,981)
--------- ------------
NET ASSETS $ 14,098,899
============
Shares of capital stock outstanding (10 billion shares
authorized, $0.01 par value) 1,401,152
============
NET ASSET VALUE, REDEMPTION AND OFFERING PRICE PER SHARE $ 10.06
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
--------------------------------------------------------------------------------
<PAGE>
STATEMENT OF OPERATIONS
IAI INTERNATIONAL FUND
SIX MONTHS ENDED APRIL 30, 2000
(UNAUDITED)
<TABLE>
<S> <C>
-------------------------------------------------------------------------------
NET INVESTMENT INCOME
INCOME
Dividends (net of foreign income taxes withheld of $19,001) $ 153,799
Interest 7,833
------------
TOTAL INCOME 161,632
------------
EXPENSES
Management fees 120,489
Compensation of Directors 4,390
------------
TOTAL EXPENSES 124,879
Less fees reimbursed by Advisers (4,390)
------------
NET EXPENSES 120,489
------------
NET INVESTMENT INCOME 41,143
------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized losses on:
Investment securities (1,915,911)
Foreign currency transactions (199,238)
------------
Net realized loss (2,115,149)
Net change in unrealized appreciation or depreciation on:
Investment securities 1,196,540
Other assets and liabilities denominated in foreign currency (26,610)
------------
Net unrealized gain 1,169,930
------------
NET LOSS ON INVESTMENTS (945,219)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (904,076)
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
--------------------------------------------------------------------------------
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
IAI INTERNATIONAL FUND
<TABLE>
<CAPTION>
Six months ended
April 30, 1999 Year ended
(unaudited) October 31, 1999
----------------- -----------------
<S> <C> <C>
OPERATIONS
Net investment income $ 41,143 $ 444,295
Net realized gain (losses) (2,115,149) 452,773
Net change in unrealized appreciation or depreciation 1,169,930 2,629,810
------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (904,076) 3,526,878
------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (226,421) -
Net realized gains - -
------------- --------------
TOTAL DISTRIBUTIONS (226,421) -
------------- --------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 20,068,777 110,742,722
Net asset value of shares issued in reinvestment
of distributions 177,078 -
Cost of shares redeemed (23,719,273) (130,683,209)
------------- --------------
DECREASE IN NET ASSETS FROM CAPITAL SHARES TRANSACTIONS (3,473,418) (19,940,487)
------------- --------------
TOTAL DECREASE IN NET ASSETS (4,603,915) (16,413,609)
NET ASSETS AT BEGINNING OF PERIOD 18,702,814 35,116,423
------------- --------------
NET ASSETS AT END OF PERIOD $ 14,098,899 $ 18,702,814
============= ==============
INCLUDING UNDISTRIBUTED (OVERDISTRIBUTED) NET
INVESTMENT INCOME OF: $ (10,399) $ 506,910
============= ==============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
--------------------------------------------------------------------------------
<PAGE>
FINANCIAL HIGHLIGHTS
IAI INTERNATIONAL FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended
Six months ended Period from January 31,
April 30, 2000 Year ended February 1, 1998 to --------------------------------------
(unaudited) October 31, 1999 October 31, 1998++ 1998 1997 1996
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 10.90 $ 9.81 $ 10.26 $ 12.11 $ 13.24 $ 12.06
------- ------- ------- ------- ------- -------
OPERATIONS
Net investment income 0.05 0.18*** 0.10 0.20 0.24 0.19
Net realized and unrealized
gains (losses) (0.73) 0.91 (0.52) (0.34) 0.08 2.17
------- ------- ------- ------- ------- -------
TOTAL FROM OPERATIONS (0.68) 1.09 (0.42) (0.14) 0.32 2.36
------- ------- ------- ------- ------- -------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (0.16) -- (0.03) (0.32) (0.28) (0.16)
Net realized gains -- -- -- (1.39) (1.17) (1.02)
------- ------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS (0.16) -- (0.03) (1.71) (1.45) (1.18)
------- ------- ------- ------- ------- -------
NET ASSET VALUE
End of period $ 10.06 $ 10.90 $ 9.81 $ 10.26 $ 12.11 $ 13.24
======= ======= ======= ======= ======= =======
Total investment return* (6.31)% 11.11% (4.15)% (1.04)% 2.39% 20.15%
Net assets at end of period
(000's omitted) $14,099 $18,703 $35,116 $63,349 $116,191 $151,663
RATIOS
Expenses to average net assets
(including interest expense) 1.70%** 1.77% 1.76%** 1.67% 1.65% 1.66%
Expenses to average net assets
(excluding interest expense) 1.70%** 1.70% 1.70%** 1.67% 1.65% 1.66%
Net investment income to
average net assets 0.58%** 1.71% 1.28%** 1.42% 1.56% 1.12%
Portfolio turnover rate
(excluding short-term
securities) 142.7% 107.6% 50.2% 76.4% 32.1% 39.2%
</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 JANUARY 31 TO OCTOBER 31.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
--------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI INTERNATIONAL FUND
APRIL 30, 2000
(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 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
13
--------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI INTERNATIONAL FUND
APRIL 30, 2000
(UNAUDITED)
[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.
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
The Fund, together with other Funds advised by Advisers, has an available joint
line of credit of $25,000,000 with Firstar Bank, N.A. at the prime interest rate
less 2%. To the extent funds are drawn against the line, securities are
segregated by the Fund. No compensating balances are required under the line of
credit, however, a commitment fee of .10% per annum on the commitment amount of
the line is payable quarterly in arrears. Advisers has agreed to pay the
commitment fee on behalf of the Fund. During the six months ended April 30,
2000, the Fund did not access the line of credit.
14
--------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI INTERNATIONAL FUND
APRIL 30, 2000
(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:
Six months ended Year ended
April 30, 2000 October 31, 1999
--------------------------------------------------------------------------------
SOLD 1,954,878 10,611,930
ISSUED FOR REINVESTED DISTRIBUTIONS 16,785 -
REDEEMED (2,286,454) (12,474,759)
------------------------------------
INCREASE (DECREASE) IN SHARES OUTSTANDING (314,791) (1,862,829)
====================================
[5] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the six months ended April 30, 2000, purchases of securities and sales
proceeds, other than investments in short-term securities, for the Fund
aggregated $19,694,404 and $22,804,504, respectively.
15
--------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI INTERNATIONAL FUND
APRIL 30, 2000
(UNAUDITED)
[6] FOREIGN CURRENCY COMMITMENTS
At April 30, 2000, the Fund had entered into foreign currency exchange
contracts. The unrealized depreciation on those contracts at April 30, 2000 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>
Unrealized
Exchange Appreciation/
Date Currency to be Received Currency to be Delivered (Depreciation)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
05/01/00 7,724,263 Japanese Yen 73,996 U.S. Dollar $ (2,524)
05/02/00 51,139 European Monetary Unit 47,546 U.S. Dollar (942)
05/03/00 62,148 European Monetary Unit 57,704 U.S. Dollar (1,067)
05/04/00 39,736 British Pounds 62,971 U.S. Dollar (787)
05/04/00 36,076 Swiss Francs 21,470 U.S. Dollar (502)
05/08/00 13,318 British Pounds 20,810 U.S. Dollar 31
05/31/00 101,589 European Monetary Unit 94,238 U.S. Dollar (1,656)
============================================================================================
$ (7,447)
============================================================================================
</TABLE>
[7] SUBSEQUENT EVENT
On June 12, 2000, the Fund's board of directors recommended that the IAI Funds
be reorganized into comparable mutual funds advised by a subsidiary of Federated
Investors, Inc. (Federated Investors). On June 16, 2000 Investment Advisers,
Inc. (Advisers), the IAI Funds' investment adviser, announced they had entered
into an agreement with Federated Investors to sell the IAI Funds, including the
IAI International Fund, to Federated Investors. The proposed acquisition must be
approved by the IAI Funds' shareholders. Proxy statements requesting shareholder
votes will be mailed in July 2000. If approved, the acquisition is expected to
occur in September 2000.
16
--------------------------------------------------------------------------------
<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
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
