As filed with the Securities and Exchange Commission on January 24, 1997
1933 Act Registration No. 333-14233
1940 Act Registration No. 811-7865
SECURITIES AND EXCHANGE COMMISSION
- ------------------------------------------------------------------------------
Washington, DC 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. 1 X
---
Post-Effective Amendment No.__
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 1 X
---
LIFEUSA FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
3700 First Bank Place, P.O. Box 357
Minneapolis, Minnesota 55440
(Address of Principal Executive Offices)(Zip Code)
(612) 376-2700
(Registrant's Telephone Number, including Area Code)
Christopher J. Smith Copy to:
Investment Advisers, Inc. Michael J. Radmer, Esq.
3700 First Bank Place Dorsey & Whitney
P.O. Box 357 220 South Sixth Street
Minneapolis, Minnesota 55440 Minneapolis, Minnesota 55402
(Name and Address of Agent for Service)
Approximate date of proposed public offering:
As soon as practicable after the effective date of this
Registration Statement.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
Title of Proposed Proposed
Securities Amount Maximum Maximum Amount of
Being Being Offering Price Aggregate Registration
Registered Registered Par Unit Offering Price Fee
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock * * * $500
$.01 par value
- -------------------------------------------------------------------------------
</TABLE>
*Pursuant to Regulation 270.24f-2 under the Investment Company Act of 1940,
Registrant hereby elects to register an indefinite number of shares of its
Common Stock.
The Registrant hereby amends this Registration Statement under the
Securities Act of 1933 on such date or dates as may be necessary to delay its
effective date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall thereafter become
effective in accordance with the provisions of Section 8(a) of the Securities
Act of 1933 or until the Registration Statement shall become effective on such
date as the Commission, acting pursuant to Section 8(a), may determine.
<PAGE>
LIFEUSA FUNDS, INC.
FORM N-1A
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
Item Number Caption Prospectus Caption
- ----------- ------- ------------------
<S> <C> <C>
1 Cover Page Cover Page of Prospectus
2 Synopsis Fund Expense Information
3 Condensed Financial Information Investment Performance
4 General Description of Registrant Investment Objectives and Policies;
Description of Common Stock; Additional
Information
5 Management of the Fund Fund Expense Information; Management;
Additional Information; Custodian,
Transfer Agent and Dividend Disbursing
Agent
5A Management's Discussion of Fund Performance Not Applicable
6 Capital Stock and Other Securities Dividends, Distributions and Tax Status;
Description of Common Stock; Additional
Information
7 Purchase of Securities Being Offered Computation of Net Asset Value and
Pricing; Distribution of Portfolio
Shares; Purchase of Shares; Right of
Accumulation; Systematic Investment Plan;
Group Systematic Investment Plan; Group
Purchases; Automatic Investment Plan;
Exchange Privilege; Retirement Plans;
Authorized Telephone Trading
8 Redemption of Repurchase Redemption of Shares; Systematic Cash
Withdrawal Plan; Exchange Privilege;
Authorized Telephone Trading
9 Pending Legal Proceedings Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Caption Statement of Additional Information
- ------ ------- -----------------------------------
<S> <C> <C>
10 Cover Page Cover Page of Statement of Additional
Information
11 Table of Contents Table of Contents
12 General Information and History Management
13 Investment Objectives and Policies Investment Objectives and Policies;
Investment Restrictions
14 Management of the Fund Management
15 Control Persons and Principal Holders of Management; Capital Stock
Securities
16 Investment Advisory and Other Services Management; Prior Agreements; Custodian,
Counsel and Auditors; Transfer Agent and
Dividend Disbursing Agent
17 Brokerage Allocation Portfolio Transactions and Allocation of
Brokerage
18 Capital Stock and Other Securities Capital Stock
19 Purchase, Redemption and Pricing of Net Asset Value and Public Offering Price
Securities Being Offered
20 Tax Status Tax Status
21 Underwriters Plan of Distribution
22 Calculation of Performance Data Investment Performance
23 Financial Statements Financial Statements
</TABLE>
<PAGE>
Prospectus Dated January __, 1997
LIFEUSA FUNDS, INC.
3700 First Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
Telephone 1-800-864-4725
LifeUSA Funds, Inc. (the "Fund") is an open-end management investment company
consisting of the following six separate diversified investment portfolios (each
a "Portfolio" and, together, the "Portfolios"): LifeUSA Aggressive Growth
Portfolio, LifeUSA Growth Portfolio, LifeUSA Global Portfolio, LifeUSA Balanced
Portfolio, LifeUSA Current Income Portfolio and LifeUSA Principal Preservation
Portfolio. Each Portfolio offers investors a convenient means of investing in
shares of certain mutual funds (the "Underlying Funds") within certain
predetermined percentage ranges.
This Prospectus sets forth concisely the information which a prospective
investor should know about the Portfolios before investing and it should be
retained for future reference. A "Statement of Additional Information" dated
January 1, 1997, which provides a further discussion of certain areas in this
Prospectus and other matters which may be of interest to some investors, has
been filed with the Securities and Exchange Commission and is incorporated
herein by reference. For a free copy, call or write the Fund at the address or
telephone number shown above.
AN INVESTMENT IN THE LIFEUSA PRINCIPAL PRESERVATION FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE
PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FUND EXPENSE INFORMATION..................................................3
INVESTMENT OBJECTIVES AND POLICIES........................................5
PRINCIPAL PORTFOLIO RISK FACTORS..........................................7
DESCRIPTION OF UNDERLYING FUNDS...........................................9
MANAGEMENT................................................................15
DISTRIBUTION OF FUND SHARES...............................................16
COMPUTATION OF NET ASSET VALUE AND PRICING................................16
PURCHASE OF SHARES........................................................17
RIGHT OF ACCUNULATION.....................................................18
SYSTEMATIC INVESTMENT PLAN................................................19
GROUP SYSTEMATIC INVESTMENT PLAN..........................................19
GROUP PURCHASES...........................................................20
AUTOMATIC INVESTMENT PLAN.................................................20
REDEMPTION OF SHARES......................................................20
EXCHANGE PRIVILEGE........................................................23
AUTHORIZED TELEPHONE TRADING..............................................24
SYSTEMATIC CASH WITHDRAWAL PLAN...........................................24
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS...................................25
INVESTMENT PERFORMANCE....................................................26
RETIREMENT PLANS..........................................................26
DESCRIPTION OF COMMON STOCK...............................................27
COUNSEL AND AUDITORS......................................................27
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT...................27
ADDITIONAL INFORMATION....................................................27
APPENDIX..................................................................A-1
</TABLE>
-2-
<PAGE>
PORTFOLIO EXPENSE INFORMATION
<TABLE>
<CAPTION>
Aggressive Current Principal
Shareholder Transaction Expenses Growth Growth Global Balanced Income Preservation
- ---------------------------------------- ------------- ---------- --------- ------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed
on Purchases 5.75% 5.75% 5.75% 5.75% 5.75% None
Sales Load Imposed
on Reinvested Dividends None None None None None None
Redemption Fees* None None None None None None
Exchange Fees None None None None None None
</TABLE>
__________________________________________
*Each Portfolio charges a $10.00 fee
for the payment of redemption proceeds by wire
<TABLE>
<CAPTION>
Annual Fund Operating Expenses
(as a percentage of Aggressive Current Principal
average daily net assets) Growth Growth Global Balanced Income Preservation
- ---------------------------------------- ------------- ---------- --------- ------------ ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Management Fee None None None None None None
Rule 12b-1 Fee* 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Other Expenses** None None None None None None
Total Fund Operating Expenses*** 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
- ----------------------------------------
</TABLE>
* After fee waiver
** After expense reimbursement
*** After 12b-1 fee waiver and expense reimbursement
LifeUSA Securities, Inc., the Portfolios' principal underwriter, has
voluntarily agreed to waive the Rule 12b-1 Fee in excess of 0.50% of each
Portfolio's average daily net assets until May 1, 1998. Absent such voluntary
waiver, each Portfolio would pay 0.75% of its average daily net assets as the
Rule 12b-1 Fee. Half of the post-waiver Rule 12b-1 Fee (0.25%) will be
designated for the provision of shareholder services while the remainder shall
be designated for the provision of distribution services. See the section
"Distribution of Portfolio Shares" for more information. The figures for Other
Expenses set forth in the table above are based on estimated amounts for the
current fiscal year. Absent the Adviser's and LifeUSA Securities' voluntary
reimbursement of Other Expenses until May 1, 1998, each Portfolio would pay
0.47% of its average daily net assets as Other Expenses. Absent the Rule 12b-1
Fee waiver and the reimbursement of Other Expenses, each Portfolio's Total Fund
Operating Expenses for the current fiscal year, as a percentage of average daily
net assets, would be 1.22%.
Besides the Total Fund Operating Expenses set forth above, each Portfolio
will also indirectly pay its pro rata share of the fees and expenses incurred by
the Underlying Funds. The investment returns of each Portfolio, therefore, will
be net of the expenses of the Underlying Funds in which it invests. The
following chart shows the expense ratio (as of December 31, 1996 and including
net of voluntary fee waivers) of each of the Underlying Funds in which the
Portfolios may invest.
-3-
<PAGE>
<TABLE>
<CAPTION>
Underlying Fund Expense Ratio
----------------------------------- ------------------------
<S> <C>
IAI Bond Fund 1.10%
IAI Capital Appreciation Fund* 1.25%
IAI Developing Countries Fund 2.00%
IAI Government Fund 1.10%
IAI Growth Fund 1.25%
IAI Growth and Income Fund 1.25%
IAI International Fund 1.65%
IAI Latin America Fund* 2.00%
IAI Midcap Growth Fund 1.25%
IAI Money Market Fund .60%
IAI Regional Fund 1.21%
IAI Reserve Fund .85%
IAI Value Fund 1.25%
</TABLE>
__________________________________
* Absent voluntary fee waivers, the expense ratios of IAI Capital
Appreciation Fund would be 1.40% and IAI Latin America Fund would
be 3.00%.
Based on a weighted average of the expense ratios of the Underlying Funds
in which each Portfolio is expected to invest at the commencement of investment
operations, the approximate expense ratio for each Portfolio is expected to be
as follows: LifeUSA Aggressive Growth Portfolio 1.74%, LifeUSA Growth Portfolio
1.75%, LifeUSA Global Portfolio 2.08%, LifeUSA Balanced Portfolio 1.78%, LifeUSA
Current Income Portfolio 1.58% and LifeUSA Principal Preservation Portfolio
1.10%.
Example:
Based upon the levels of total Portfolio operating expenses listed above as
well as the pro rata share of the expenses of the Underlying Funds (also as
listed above), you would pay the following expenses on a $1,000 investment,
assuming a five percent annual return and redemption at the end of each period:
<TABLE>
<CAPTION>
1 Year 3 Years
------ -------
<S> <C> <C>
LifeUSA Aggressive Growth Portfolio 74 109
LifeUSA Growth Portfolio 74 109
LifeUSA Global Portfolio 77 119
LifeUSA Balanced Portfolio 75 110
LifeUSA Current Income Portfolio 73 105
LifeUSA Principal Preservation Portfolio 11 35
</TABLE>
The purpose of the above table is to assist you in understanding the
various costs and expenses that an investor in a Portfolio will bear directly or
indirectly. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
Long term investors may pay more than the economic equivalent of the
maximum front-end sales charge permitted by the National Association of Sales
Dealers, Inc. rules regarding investment companies.
FUND DIRECTORS
Madeline Betsch Richard E. Struthers
W. William Hodgson J. Peter Thompson
George R. Long Charles H. Withers
Noel P. Rahn
-4-
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Fund is an open-end diversified investment company that currently
offers six managed investment portfolios. Each Portfolio seeks to achieve its
investment objective by investing within specified ranges among mutual funds as
set forth below (the "Underlying Funds"). By investing in Underlying Funds, the
Portfolios (except Principal Preservation Portfolio) seek to maintain different
allocations between mutual funds depending on a Portfolio's investment objective
and strategy. Allocating investments between mutual funds permits each such
Portfolio to attempt to optimize performance consistent with its investment
objective. Each Portfolio's investment objective may not be changed without
shareholder approval. There can be no assurance that a Portfolio's investment
objective will be achieved.
-4-
<PAGE>
The investment ranges are based on the degree to which the Underlying Funds
selected are expected in combination to be appropriate for a Portfolio's
particular investment objective and strategy. If, as a result of appreciation or
depreciation, the percentage of a Portfolio's assets invested in an Underlying
Fund exceeds or is less than the applicable percentage limitations set forth
above, the Adviser will consider, in its discretion, whether to re-allocate the
assets of a Portfolio to comply with the limitations. The specific Underlying
Funds in which each Portfolio may invest and the investment ranges applicable to
each Underlying Fund may be changed from time to time by the Fund's Board of
Directors without the approval of a Portfolio's shareholders, provided that this
Prospectus is appropriately supplemented or amended.
LIFEUSA AGGRESSIVE GROWTH PORTFOLIO
The Aggressive Growth Portfolio seeks to provide long-term capital
appreciation by investing in mutual funds that emphasize small to medium-sized
domestic companies. In general, the Aggressive Growth Portfolio should offer
investors the potential for a high level of capital growth, while subjecting
investors to a medium to high level of principal risk. The Aggressive Growth
Portfolio currently intends to invest in the following Underlying Funds within
the percentage ranges set forth below:
<TABLE>
<CAPTION>
Investment Range
(Percent of the Aggressive
Underlying Funds Growth Portfolio's Assets)
---------------- --------------------------
<S> <C>
IAI Capital Appreciation Fund 10 - 80%
IAI Value Fund 10 - 80%
IAI Regional Fund 10 - 80%
</TABLE>
LIFEUSA GLOBAL PORTFOLIO
The Global Portfolio seeks to provide long-term capital appreciation by
investing primarily in mutual funds that emphasize the securities of companies
not located in the United States. The Global Portfolio will also invest in a
mutual fund that emphasizes large domestic companies. In general, the Global
Portfolio should offer investors the potential for a high level of capital
growth while subjecting investors to a high level of principal risk. The Global
Portfolio currently intends to invest in the following Underlying Funds within
the percentage ranges set forth below:
-5-
<PAGE>
<TABLE>
<CAPTION>
Investment Range
(Percent of the
Underlying Funds Global Portfolio's Assets)
---------------- -------------------------
<S> <C>
IAI International Fund 10 - 70%
IAI Developing Countries Fund 10 - 70%
IAI Latin America Fund 10 - 70%
IAI Growth Fund 10 - 50%
</TABLE>
LIFEUSA GROWTH PORTFOLIO
The Growth Portfolio seeks to provide long-term capital appreciation by
investing in mutual funds that emphasize the securities of medium-sized to large
domestic companies. In general, the Growth Portfolio should offer investors the
potential for a low level of income and the potential for a high level of
capital growth, while subjecting investors to a medium to high level of
principal risk. The Growth Portfolio currently intends to invest in the
following Underlying Funds within the percentage ranges set forth below:
<TABLE>
<CAPTION>
Investment Range
(Percent of the
Underlying Funds Growth Portfolio's Assets)
---------------- ------------------------
<S> <C>
IAI Growth Fund 20 - 60%
IAI Growth and Income Fund 20 - 60%
IAI Midcap Growth Fund 20 - 60%
</TABLE>
LIFEUSA BALANCED PORTFOLIO
The Balanced Portfolio seeks to provide long-term capital appreciation with
some level of current income by investing in both equity and fixed income mutual
funds. In general, the Balanced Portfolio should offer investors the potential
for a medium level of income and the potential for a medium level of capital
growth, while subjecting investors to a medium level of principal risk. The
Balanced Portfolio currently intends to invest in the following Underlying Funds
within the percentage ranges set forth below.
<TABLE>
<CAPTION>
Investment Range
(Percent of the
Underlying Funds Balanced Portfolio's Assets)
---------------- ----------------------------
<S> <C>
IAI Bond Fund 0 - 60%
IAI Government Fund 0 - 30%
IAI Reserve Fund 0 - 40%
IAI Capital Appreciation Fund 0 - 30%
IAI Developing Countries Fund 0 - 20%
IAI Growth Fund 0 - 60%
IAI Growth and Income Fund 0 - 40%
IAI International Fund 0 - 30%
IAI Latin America Fund 0 - 20%
IAI Midcap Growth Fund 0 - 30%
IAI Regional Fund 0 - 30%
IAI Value Fund 0 - 30%
</TABLE>
-6-
<PAGE>
LIFEUSA CURRENT INCOME PORTFOLIO
The Current Income Portfolio seeks to provide current income by investing
in mutual funds that emphasize fixed income securities. In general, the Current
Income Portfolio should offer investors the potential for a medium to high level
of income, while subjecting investors to a medium level of principal risk. The
Current Income Portfolio currently intends to invest in the following Underlying
Funds within the percentage ranges set forth below:
<TABLE>
<CAPTION>
Investment Range
(Percent of the Current
Underlying Funds Income Portfolio's Assets)
---------------- --------------------------
<S> <C>
IAI Bond Fund 10 - 80%
IAI Government Fund 10 - 80%
IAI Reserve Fund 10 - 80%
IAI Money Market Fund 0 - 30%
</TABLE>
LIFEUSA PRINCIPAL PRESERVATION PORTFOLIO
The Principal Preservation Portfolio seeks to provide liquidity and
preservation of capital by investing 100% of its assets in the IAI Money Market
Fund. In general, the Principal Preservation Portfolio should offer investors
the potential for a low level of income while subjecting investors to a low
level of principal risk.
GENERAL
In unusual market conditions, when the Adviser believes a temporary
defensive position is warranted, each of LifeUSA Aggressive Growth, LifeUSA
Growth, LifeUSA Global, LifeUSA Balanced and LifeUSA Current Income Portfolios
may invest without limitation in IAI Money Market Fund. If a Portfolio maintains
a temporary defensive position, investment income may increase and may
constitute a large portion of a Portfolio's return.
Please see the Prospectus section "Principal Portfolio Risk Factors" for a
discussion of the risks associated directly with investing in the Portfolios.
For information about the investment objectives of each of the Underlying Funds
and the investment techniques and risks associated with each of them, please see
the Prospectus section "Underlying Funds" and the Appendix to the Prospectus, as
well as the Statement of Additional Information section "Investment Objectives
and Policies".
PRINCIPAL PORTFOLIO RISK FACTORS
STOCK MARKET RISK
Stock market risk is the possibility that stock prices in general will
decline over short or even extended periods. The stock market tends to be
cyclical, with periods when stock prices generally rise and periods when stock
prices generally decline. Also, investments in foreign stock markets can be as
volatile, if not more volatile, than investments in U.S. markets.
To illustrate the volatility of stock prices, the following table sets
forth the extremes for U.S. stock market returns as well as the average return
for the period from 1926 to 1995, as measured by the Standard & Poor's 500
Composite Stock Price Index:
-7-
<PAGE>
Average Annual U.S. Stock Market Returns (1926-1995)
Over Various Time Horizons (%)
----------------------------------------------------
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years 20 Years
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best + 53.9 + 23.9 + 20.1 + 16.9
Worst - 43.3 - 12.5 - 0.9 + 3.1
Average + 12.5 + 10.3 + 10.7 + 10.7
</TABLE>
Average return may not be useful for forecasting future returns in any
particular period, as stock returns are quite volatile from year to year and
interim losses are inevitable. For example, after the "bear market" of
1973-1974, it took four years for many investors to recover their losses
(assuming dividends were reinvested).
BOND MARKET RISK
The bond market is typically less risky than the stock market, although
there have been times when some bonds were just as risky as stocks. For example,
bond prices fell 48% from December 1976 to September 1981. The risk of bonds
declining in value, however, may be offset in whole or in part by the high level
of income that bonds provide. Bond prices are linked to prevailing interest
rates in the economy. The price volatility of a bond depends on its maturity;
the longer the maturity of a bond, the greater its sensitivity to interest
rates. In general, when interest rates rise, the prices of bonds fall;
conversely, when interest rates fall, bond prices generally rise. From time to
time, the stock and bond markets may fluctuate independently of one another. In
other words, a decline in the stock market may in certain instances be offset by
a rise in the bond market, or vice versa.
FOREIGN SECURITIES' RISK
For U.S. investors, the returns of foreign investments are influenced by
not only the returns on foreign common stocks themselves, but also by currency
risk -- i.e., changes in the value of the currencies in which the stocks are
denominated. In a period when the U.S. dollar generally rises against foreign
currencies, the returns on foreign securities for a U.S. investor may be
diminished. By contrast, in a period when the U.S. dollar generally declines,
the returns on foreign securities may be enhanced.
Other risks and considerations of international investing include the
following: differences in accounting, auditing and financial reporting
standards; generally higher commission rates on foreign portfolio transactions;
the smaller trading volumes and generally lower liquidity of foreign stock
markets, which may result in greater price volatility; foreign withholding taxes
payable on a Portfolio's foreign securities, which may reduce dividend income
payable to shareholders; the possibility of expropriation or confiscatory
taxation; adverse changes in investment or exchange control regulations;
difficulty in obtaining a judgment from a foreign court; political instability
which could affect U.S. investment in foreign countries; and potential
restrictions on the flow of international capital.
CONCENTRATION RISK
The Portfolios are concentrated in the Underlying Funds, so investors
should be aware that each Portfolio's performance is directly related to the
investment performance of the Underlying Funds in which it invests and each
Portfolio's allocation among the Underlying Funds. First, changes in the net
asset values of the Underlying Funds affect each Portfolio's net asset value.
Second, over the long-term, each Portfolio's ability to meet its investment
objective depends on the Underlying Funds meeting their investment objectives.
-8-
<PAGE>
MANAGER RISK
The Adviser manages each Portfolio according to the traditional methods of
"active" investment management, which involve the buying and selling of
securities based upon economic, financial and market analysis and investment
judgment. Manager risk refers to the possibility that the Adviser may fail to
execute each Portfolio's investment strategy effectively. As a result, each
Portfolio may fail to achieve its stated objective.
AFFILIATED PERSON RISK
The Adviser, the investment adviser and manager of the Fund, and the
directors and officers of the Fund presently serve as investment adviser and
manager, directors and officers, respectively, of the Underlying Funds.
Therefore, conflicts may arise as these persons fulfill their fiduciary
responsibilities to the Fund and the Underlying Funds.
PORTFOLIO TURNOVER
The portfolio turnover rate is not expected to exceed 25% annually. A
portfolio turnover rate of 25% for a Portfolio would occur if one quarter of a
Portfolio's investments were sold within a year. The Adviser will purchase or
sell securities: (i) to accommodate purchases and sales of Portfolio shares; and
(ii) to maintain or modify the allocation of the Portfolios' assets between the
Underlying Funds in which the Portfolios invest within the percentage limits
described under "Investment Objectives and Policies."
INVESTMENT RESTRICTIONS
Each Portfolio is subject to certain other investment policies and
restrictions described in the Statement of Additional Information, some of which
are fundamental and may not be changed without the approval of the shareholders
of a Portfolio. As a fundamental policy, each Portfolio will not invest 25% or
more of its assets in any one industry, except for investment companies which
are members of the IAI Mutual Funds. Also as a fundamental policy, each
Portfolio may borrow only for temporary or emergency purposes in an amount not
exceeding one-third of its total assets. Please refer to the Statement of
Additional Information for a further discussion of each Portfolio's investment
restrictions.
Please see the Appendix to the Prospectus for information concerning the
principal risk factors of the Underlying Funds.
DESCRIPTION OF UNDERLYING FUNDS
The following is a concise description of the investment objectives and
techniques of each of the Underlying Funds in which the Portfolios may invest.
There can be no assurance that the investment objectives of the Underlying Funds
will be met. Additional information regarding the investment techniques for the
Underlying Funds and the risks associated with investing in the Underlying Funds
is located in the Appendix to this Prospectus, in the Statement of Additional
Information and in the prospectus of each of the Underlying Funds. No offer is
made in this Prospectus of any of the Underlying Funds.
-9-
<PAGE>
IAI BOND FUND
IAI Bond Fund's investment objective is to provide a high level of current
income consistent with preservation of capital. IAI Bond Fund pursues its
objective by investing primarily in a diversified portfolio of investment grade
bonds and other debt securities of similar quality. Investment grade securities
are those securities rated within the four highest grades assigned by Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P").
Other debt securities in which IAI Bond Fund may invest include, but are not
limited to, securities of, or guaranteed by, the United States Government, its
agencies or instrumentalities, bank certificates of deposit, bankers'
acceptances, debt securities of foreign issuers, and commercial paper rated at
least Prime-2 by Moody's or A-2 by S&P or otherwise issued by companies having
an outstanding unsecured debt issue currently rated A or better by Moody's or
S&P. Under normal market conditions, at least 65% of IAI Bond Fund's total
assets will be invested in debt obligations and government securities with
maturities at the time of acquisition of one year or more. Although IAI Bond
Fund generally will not make direct purchases of common stock, IAI Bond Fund may
purchase preferred stock and convertible securities. IAI Bond Fund will limit
its investments in such securities to a maximum of 10% of its net assets.
IAI CAPITAL APPRECIATION FUND
The investment objective of IAI Capital Appreciation Fund is long-term
capital appreciation. IAI Capital Appreciation Fund will pursue its objective by
investing primarily in equity securities of U.S. companies that IAI believes
have above-average prospects for growth. In general, IAI Capital Appreciation
Fund will concentrate on companies that have superior performance records, solid
market positions, strong balance sheets and a management team capable of
sustaining growth. Although IAI expects IAI Capital Appreciation Fund will
invest primarily in the common stocks of smaller emerging and mid-sized
companies, generally companies that have a market capitalization less than $5
billion, it may invest in the securities of companies of any size that offer
strong earnings growth potential. In addition to common stocks, IAI Capital
Appreciation Fund may also invest in securities convertible into common stocks,
nonconvertible preferred stocks and nonconvertible debt securities when IAI
believes that these securities offer opportunities for capital appreciation.
Current income will not be a substantial factor in the selection of securities.
IAI DEVELOPING COUNTRIES FUND
The investment objective of IAI Developing Countries Fund is to provide
long-term capital appreciation. IAI Developing Countries Fund seeks to achieve
its objective by investing primarily in equity securities of companies domiciled
or otherwise having substantial operations in developing countries. Under normal
conditions, at least 65% of IAI Developing Countries Fund's total assets will be
invested in securities of companies domiciled or otherwise having substantial
operations in developing countries. Developing countries include those generally
considered to be developing or emerging by the World Bank or the International
Finance Corporation, as well as countries that are classified by the United
Nations or otherwise regarded by their authorities as developing. IAI Developing
Countries Fund may also invest in securities of companies that derive 50% or
more of their total revenue from either goods or services produced in developing
countries or sales made in such developing countries and companies that maintain
50% or more of their assets in developing countries. Determinations as to
eligibility will be based on publicly available information and inquiries made
to the companies. IAI Developing Countries Fund will not necessarily seek to
diversify investments on a geographic basis or on the basis of the level of
economic development of any particular country. IAI Developing Countries Fund
focuses on equity securities, however, it may also invest in other types of
instruments including debt securities. IAI Developing Cpuntries Fund has
established no minimum rating criteria for the debt securities in which it may
invest, and such securities may not be rated at all for creditworthiness.
-10-
<PAGE>
IAI GOVERNMENT FUND
The investment objectives of IAI Government Fund are to provide
shareholders with a high level of current income and with preservation of
capital. In seeking to achieve its objectives, IAI Government Fund will invest
its assets primarily in securities issued, guaranteed or collateralized by the
United States Government, its agencies or instrumentalities whether or not
backed by the "full faith and credit" pledge of the United States Government and
in repurchase agreements pertaining to such securities. Under normal market
conditions, IAI Government Fund will invest at least 65% of its total assets in
securities issued, guaranteed or collateralized by the United States Government,
its agencies or instrumentalities (excluding, for purposes of calculating this
minimum, CMOs as described below, which are secured by obligations of the U.S.
Government, its agencies or instrumentalities but are issued by private
issuers). The mortgage-related securities in which IAI Government Fund may
invest include pass-through securities. In addition, IAI Government Fund may
invest up to 35% of its assets in securities of private issuers that are
collateralized by pools of mortgages issued or guaranteed by the United States
Government, its agencies or instrumentalities, called collateralized mortgage
obligations ("CMOs").
IAI GROWTH FUND
The investment objective of IAI Growth Fund is long-term capital
appreciation. IAI Growth Fund pursues its objective by investing primarily in
equity securities of established companies that are expected to increase
earnings at an above average rate. In general, IAI Growth Fund concentrates on
companies that have strong management, leading market positions, strong balance
sheets, and a well defined strategy for future growth. In selecting investments
for IAI Growth Fund, IAI utilizes several valuation techniques to determine
which stocks offer the best combination of intrinsic value and earnings growth
potential. The goal is to have an acceptable balance of risk and reward in the
portfolio. Under normal circumstances, at least 65% of IAI Growth Fund's assets
will be invested in growth-type securities. IAI Growth Fund may also invest in
government securities, investment-grade corporate bonds and debentures,
high-grade commercial paper, preferred stocks, certificates of deposit or other
securities of U.S. and foreign issuers when IAI perceives an opportunity for
capital growth from such securities or so that IAI Growth Fund may receive a
return on its idle cash. IAI Growth Fund currently intends to limit its
investments in debt securities to securities of U.S. companies, the U.S.
Government and foreign governments and governmental entities.
IAI GROWTH AND INCOME FUND
The primary investment objective of IAI Growth and Income Fund is capital
appreciation, with income being its secondary objective. IAI Growth and Income
Fund pursues its objectives by investing primarily in equity securities which
offer the potential for capital appreciation and secondarily by investing in
income-producing equity securities. IAI Growth and Income Fund invests primarily
in common stocks and may invest in securities convertible into common stocks,
nonconvertible preferred stocks and nonconvertible debt securities. In selecting
investments, IAI Growth and Income Fund considers a number of factors, such as
product development and demand, operating ratios, utilization of earnings for
expansion, management abilities, analyses of intrinsic values, market action and
overall economic and political conditions. Dividend income is a consideration
secondary to IAI Growth and Income Fund's primary objective of capital
appreciation.
-11-
<PAGE>
IAI INTERNATIONAL FUND
The primary investment objective of IAI International Fund is capital
appreciation with current income (principally from dividends) being a secondary
objective. IAI International Fund pursues its objectives by investing, under
normal circumstances, at least 95% of the value of its net assets in equity and
equity-related securities of non-United States issuers. IAI International Fund
invests primarily in equity securities which have the potential for
above-average capital appreciation. Equity securities in which IAI International
Fund will invest include, but are not limited to, common stocks, securities
convertible into common stock, preferred stock, partnership interests and other
equity participations. When the anticipated total return from debt securities
significantly exceeds the anticipated total return from foreign equity
securities, or for temporary defensive purposes, up to 50% of IAI International
Fund's portfolio may be comprised of cash, cash equivalents, bonds and other
debt securities of both United States and foreign issuers. Under normal
circumstances, however, IAI International Fund currently intends to invest a
significant portion of its assets in countries that generally are representative
of the market capitalization of the securities of the countries comprising the
Morgan Stanley Capital International Europe, Australia, Far East ("EAFE") Index,
an unmanaged index of foreign common stocks. IAI International Fund may also
invest in developing countries, which investments involve exposure to economic
structures that are generally less diverse and mature than in the United States,
and to political systems which may be less stable. IAI International Fund will
limit its investments in developing countries not included in the EAFE Index to
not more than 15% of its total assets.
IAI LATIN AMERICA FUND
The investment objective of IAI Latin America Fund is long-term capital
appreciation. IAI Latin America Fund seeks to achieve its objective by investing
primarily in the securities of Latin American issuers. Such objective may not be
changed without shareholder approval. There can be no assurance that IAI Latin
America Fund will achieve its investment objective. Under normal conditions, at
least 65% of the Fund's total assets will be invested in securities of Latin
American issuers and at least 50% of IAI Latin America Fund's total assets will
be invested in Latin American equity securities. For purposes of this
Prospectus, Latin America is defined as Argentina, Belize, Brazil, Bolivia,
Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico,
Nicaragua, Paraguay, Peru, Panama, Uruguay and Venezuela. Latin America Fund
defines securities of Latin American issuers as follows: (a) securities of
companies organized under the laws of a Latin American country or for which the
principal trading market is located in Latin America; (b) securities that are
issued or guaranteed by the government of a Latin America country, its agencies
or instrumentalities, political subdivisions, or the country's central bank; (c)
securities of Latin American issuers, as previously defined, in the form of
depositary shares. Determinations as to eligibility will be based on publicly
available information and inquiries made to the companies. IAI Latin America
Fund intends to allocate investments among at least four countries at all times
and does not expect to concentrate investments in any particular industry. IAI
Latin America Fund's equity investments consist of common stock, preferred stock
(either convertible or non-convertible), sponsored or unsponsored depository
receipts (including American Depository Receipts, American Depository Shares and
Global Depository Shares) and warrants. These may be restricted securities and
may also be purchased through rights. Securities may be listed on the securities
exchanges, traded over-the-counter, or have no organized market.
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<PAGE>
IAI MIDCAP GROWTH FUND
The investment objective of IAI Midcap Growth Fund is long-term capital
appreciation. IAI Midcap Growth Fund will pursue its objective by investing in
equity securities of medium-sized U.S. companies that IAI believes have
above-average prospects for growth. IAI Midcap Growth Fund will invest at least
65% of the value of its total assets in medium-sized companies that have a
market capitalization between $500 million and $5 billion. Under normal market
conditions, the weighted average capitalization of IAI Midcap Growth Fund's
investment portfolio will range from $1 billion to $3 billion. In general, IAI
Midcap Growth Fund concentrates on companies that have superior performance
records, solid market positions, strong balance sheets and a management team
capable of sustaining growth. Investments in such companies are generally
considered to be less volatile than less capitalized emerging companies.
However, such companies may not generate the dividend income of larger, more
capitalized companies. Dividend income, if any, is a consideration incidental to
IAI Midcap Growth Fund's objective of capital appreciation. IAI Midcap Growth
Fund invests primarily in common stocks. However, it may invest in securities
convertible into common stocks, nonconvertible preferred stocks and
nonconvertible debt securities when IAI believes that these securities offer
opportunities for capital appreciation. Current income will not be a substantial
factor in the selection of securities.
IAI MONEY MARKET FUND
IAI Money Market Fund's investment objective is to provide shareholders
with a high level of current income consistent with the preservation of capital
and liquidity. IAI Money Market Fund is designed for investors who seek maximum
stability of principal. IAI Money Market Fund's investment objective may not be
changed without shareholder approval. There can be no assurance that IAI Money
Market Fund will achieve its investment objective. IAI Money Market Fund is
subject to the investment restrictions of Rule 2a-7 under the Investment Company
Act of 1940 in addition to its other policies and restrictions discussed below.
Rule 2a-7 requires that IAI Money Market Fund invest exclusively in securities
that mature within 397 days and that it maintain an average dollar weighted
maturity of not more than 90 days. Rule 2a-7 also requires that all investments
by IAI Money Market Fund be limited to United States dollar-denominated
investments that: (1) present "minimal credit risks," and (2) are at the time of
acquisition "Eligible Securities." Eligible Securities include, among others,
securities that are rated by two Nationally Recognized Statistical Rating
Organizations ("NRSROs") in one of the two highest categories for short-term
debt obligations, such as A-1 or A-2 by Standard & Poor's Corporation ("S&P") or
P-1 or P-2 by Moody's Investors Service, Inc. ("Moody's"). It is the
responsibility of IAI to determine that IAI Money Market Fund's investments
present only "minimal credit risks" and are Eligible Securities. IAI Money
Market Fund's Board of Directors has established written guidelines and
procedures for IAI and oversees IAI's determination that IAI Money Markets
Fund's portfolio securities present only "minimal credit risks" and are Eligible
Securities. Rule 2a-7 also requires that (1) 95% of the assets of IAI Money
Market Fund be invested in Eligible Securities that are deemed First Tier
Securities, which include, among others, securities rated by two NRSROs in the
highest category (such as A-1 and P-1), (2)IAI Money Market Fund may not invest
more than 5% of its total assets in Second Tier Securities (i.e., Eligible
Securities that are not First Tier Securities) and (3)IAI Money Market Fund's
investment in Second Tier Securities of a single issuer may not exceed the
greater of 1% of IAI Money Market Fund's total assets or $1,000,000.
-13-
<PAGE>
In pursuing its investment objective, IAI Money Market Fund's assets will
be invested in short-term money market obligations, including securities issued,
or guaranteed by, the United States Government, its agencies or
instrumentalities; bank obligations, including time deposits, certificates of
deposit, and bankers' acceptances issued by domestic banks or their foreign
branches or by foreign banks; domestic and foreign commercial paper; repurchase
agreements; U.S. dollar-denominated obligations issued or guaranteed by one or
more foreign governments, or any of their political subdivisions, agencies or
instrumentalities, including obligations of supranational entities; and other
short-term corporate obligations, including those with floating or variable
rates of interest. IAI Money Market Fund may also invest in loan participation
interests and other participation interests in securities in which IAI Money
Market Fund may invest, subject to IAI Money Market Fund's quality and
diversification requirements.
IAI Money Market Fund's investments are subject to price variations
resulting from rising or falling interest rates and are subject to the ability
of the issuers of such investments to make payments at maturity. However,
because IAI Money Market Fund will invest only in securities that present
minimal credit risks and are highly liquid, fluctuations in principal are
expected to be minimal. IAI Money Market Fund may also hold cash, which may not
earn interest, to facilitate stabilizing its net asset value per share and for
liquidity purposes.
IAI REGIONAL FUND
The investment objective of IAI Regional Fund is capital appreciation. IAI
Regional Fund does not expect to provide significant current income to
investors. IAI Regional Fund pursues its objective by investing at least 80% of
its equity investments in companies which have their headquarters in Minnesota,
Wisconsin, Iowa, Illinois, Nebraska, Montana, North Dakota or South Dakota (the
"Eight State Region"). IAI Regional Fund invests primarily in common stocks but
may also invest in securities convertible into common stocks, nonconvertible
preferred stocks, and nonconvertible debt securities. In selecting investments
for IAI Regional Fund, IAI considers a number of factors, such as product
development and demand, operating ratios, utilization of earnings for expansion,
management abilities, analyses of intrinsic values, market action and overall
economic and political conditions. Along with investments in nationally
recognized companies, IAI Regional Fund invests in companies which are not as
well known because they are newer or have a small capitalization, but which
offer the potential for capital appreciation.
IAI RESERVE FUND
IAI Reserve Fund's investment objectives are to provide its shareholders
with high levels of capital stability and liquidity and, to the extent
consistent with these primary objectives, a high level of current income. IAI
Reserve Fund pursues its objectives primarily through investment in a
diversified portfolio of investment grade bonds and other debt securities of
similar quality. IAI Reserve Fund will maintain a dollar weighted average
maturity of its investment portfolio of twenty-five (25) months or less. Other
debt securities in which IAI Reserve Fund may invest include securities of, or
guaranteed by, the U.S. Government, its agencies or instrumentalities, corporate
debt obligations, debt securities of foreign issuers, mortgage-related
securities, commercial paper rated at least Prime-2 by Moody's or A-2 by S&P or
otherwise issued by companies having an outstanding unsecured debt issue
currently rated A or better by Moody's or S&P, bank certificates of deposit and
other short-term instruments and repurchase agreements relating to such
securities.
-14-
<PAGE>
IAI VALUE FUND
The investment objective of IAI Value Fund is long-term capital
appreciation. IAI Value Fund does not expect to provide significant current
income to investors. IAI Value Fund pursues its objective primarily by investing
in securities believed by management to be undervalued and which are considered
to offer unusual opportunities for capital growth. The following are typical,
but not exclusive, examples of investments that are considered for IAI Value
Fund (1) equity securities of companies which have been unpopular for some time
but where, in the opinion of IAI, recent developments suggest the possibility of
improved operating results; (2) equity securities of companies which have
experienced recent market popularity but which, in the opinion of IAI, have
temporarily fallen out of favor for reasons that are considered non-recurring or
short-term; and (3) equity securities of companies which appear undervalued in
relation to popular securities of other companies in the same industry. Although
there is no formula as to the percentage of assets that may be invested in any
one type of security, IAI Value Fund generally is primarily invested in common
stocks. IAI Value Fund may also acquire preferred stocks, fixed income
securities, and securities convertible into or which carry warrants to purchase
common stocks, or other equity interests.
MANAGEMENT
Each of the Portfolios was created on November 6, 1996, as a separate
portfolio represented by a separate class of common stock of LifeUSA Funds,
Inc., a Minnesota company incorporated on April 26, 1996. Under Minnesota law,
the Fund's Board of Directors is generally responsible for the overall operation
and management of the Portfolios. Investment Advisers, Inc. (the "Adviser")
serves as the investment adviser and manager of the Portfolios. The Adviser
manages in excess of $17 billion for other investment companies, pension and
profit sharing plans, portfolios of foundations, religious, educational and
charitable institutions, trusts, municipalities and individuals. The Adviser's
ultimate corporate parent is Lloyds TSB Group plc, a publicly-held financial
services organization headquartered in London, England. Lloyds TSB Group plc is
one of the largest personal and corporate financial services groups in the
United Kingdom, and is engaged in a wide range of activities including
commercial and retail banking. The Adviser's address is that of the Fund.
Pursuant to an Investment Advisory and Administrative Services Agreement
with the Fund (the "Agreement"), the Adviser provides the Portfolios with
investment advisory services and is responsible for the overall management of
the Portfolios' business affairs subject to the authority of the Board of
Directors. The Agreement also provides that each Portfolio shall pay the fees
and expenses of outside legal counsel, independent public accountants, and
custodians, as well as certain expenses incurred in connection with the
registration of Portfolio shares for sale to the public, interest and, in
certain circumstances, taxes and extraordinary expenses. The Portfolios pay no
compensation to the Adviser under the Agreement. The Adviser may, at its option,
reimburse Portfolio expenses from time to time. Any such reimbursement is
voluntary and may be discontinued at any time upon proper notice. The Adviser
also may absorb or reimburse Portfolio expenses from time to time, in its
discretion, while retaining the ability to be reimbursed by a Portfolio for such
amounts before the Portfolio's fiscal year end. This practice would have the
effect of lowering a Portfolio's overall expense ratio and of increasing yield
to the investors, or the converse, at the time such amounts are absorbed or
reimbursed, as the case may be. Until May 1, 1998, the Adviser and LifeUSA
Securities, Inc. have agreed to reimburse or absorb all of each Portfolio's
operating expenses except the Rule 12b-1 Fee. The Adviser shall not be liable
for any loss suffered by a Portfolio in the absence of willful misfeasance, bad
faith or negligence in the performance of its duties and obligations.
Day-to-day investment decisions for each Portfolio are the responsibility
of the Adviser's asset allocation committee.
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<PAGE>
DISTRIBUTION OF PORTFOLIO SHARES
Each Portfolio has adopted a written plan of distribution (the "Plan") in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended
(the "1940 Act") pursuant to which it pays a fee as described below. Under the
Plan, each Portfolio has entered into a Distribution and Shareholder Services
Agreement with LifeUSA Securities, Inc. ("LSI"), pursuant to which a Portfolio
will pay LSI a fee for servicing Portfolio shareholder accounts and for
distributing Portfolio shares (the "Rule 12b-1 Fee"). Each Portfolio has agreed
to pay LSI a Rule 12b-1 Fee at an annual rate of .75% of a Portfolio's average
daily net assets. LSI has voluntarily agreed to waive its fee in excess of .50%
of a Portfolio's average daily net assets through May 1, 1998. LSI is a
wholly-owned subsidiary of LifeUSA Holding, Inc., and is affiliated with LifeUSA
Insurance Company, which is licensed to issue life insurance and annuity
business in all states except New York and is represented by over 130 marketing
organizations nationwide. LSI's address is 300 South Highway 169, Minneapolis,
Minnesota 55426-1191.
Although LSI is the principal underwriter of Portfolio shares, LSI may
enter into agreements with investment dealers that are members of the NASD and
certain other financial services firms ("Authorized Dealers"). To become an
Authorized Dealer, a dealer or financial services firm must enter into a sales
agreement with LSI.
LSI may, at its option, reimburse or absorb Portfolio expenses from time to
time. Any such reimbursement is voluntary and may be discontinued at any time
upon proper notice. Until May 1, 1998, the Adviser and LSI have agreed to
reimburse all of each Portfolio's operating expenses except the Rule 12b-1 Fee.
The Rule 12b-1 Fee may be used by each Portfolio to compensate LSI for the
provision of certain services to Portfolio shareholders and Authorized Dealers.
The services provided may include services provided to shareholders and
Authorized Dealers, such as answering inquiries regarding a Portfolio and
providing reports and other information, and services related to the maintenance
of Portfolio accounts. LSI may use the Rule 12b-1 Fee to make payments to
Authorized Dealers that provide such services.
The Rule 12b-1 Fee may also be used by LSI for the purposes of financing
any activity which is primarily intended to result in the sale of shares of a
Portfolio. The expenses of such activities include, by way of example but not by
way of limitation, costs of prospectuses, Statements of Additional Information,
annual reports, semiannual reports, quarterly reports and monthly letters to
prospective shareholders, expenses associated with the preparation and
distribution of sales literature and advertising of any type, compensation and
benefits paid to and expenses incurred by personnel, including supervisory
personnel, involved in direct mail and advertising activities and activities
relating to the direct marketing of Portfolio shares to the public, and
compensation to Authorized Dealers for selling Portfolio shares.
COMPUTATION OF NET ASSET VALUE AND PRICING
Each Portfolio is open for business each day the New York Stock Exchange
("NYSE") is open. The Adviser normally calculates a Portfolio's net asset value
("NAV") as of the close of business of the NYSE, normally 3 p.m. Central time. A
Portfolio's NAV is the value of a single share. The NAV is computed by adding up
the value of a Portfolio's investments, cash, and other assets, subtracting its
liabilities, and then dividing the result by the number of shares outstanding.
This determination is made by appraising each Portfolio's investments (i.e., the
Underlying Funds) at the price of each such investment determined at the close
of the NYSE.
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<PAGE>
PURCHASE OF SHARES
GENERAL
The minimum initial investment to establish an account is $2,500. Once the
account minimum has been met, subsequent Portfolio purchases can be made for
$100. Such initial investment may be allocated between Portfolios as desired, as
long as a minimum of $1,000 is allocated to any one Portfolio. Additional
purchase programs are described in the sections " Right of Accumulation",
"System Investment Plan", "Group Systematic Investment Plan" and "Group
Purchases" below.
You may purchase shares of each Portfolio through LSI or any Authorized
Dealer at the public offering price which is the NAV of such shares next
determined after receipt of an order plus, for all Portfolios other than
Principal Preservation Portfolio, a sales charge that varies depending on the
size of your purchase. Purchase orders received by LSI or an Authorized Dealer
by the close of trading on the NYSE will be effected at that day's NAV, provided
that such order is transmitted to the Portfolios' transfer agent by 3:00 p.m.
Central time that same day, less any sales charge. Such sales charge is
allocated between LSI and any applicable Authorized Dealer as set forth below.
<TABLE>
<CAPTION>
Sales Charge as % Portion of Offering
Sales Charge as % of of Net Amount Price Retained by
Amount of Purchase Offering Price Invested Dealer
- ------------------ -------------- -------- ------
<S> <C> <C> <C>
Less than $100,000 5.75% 6.10% 5.00%
$100,000 but less than $250,000 4.25% 4.44% 3.50%
$250,000 but less than $500,000 3.00% 3.09% 2.25%
$500,000 but less than $1,000,000 2.25% 2.30% 1.75%
$1,000,000 and over 1.00% 1.01% 0.75%
</TABLE>
To purchase shares, forward the completed application and a check payable
to "LifeUSA Funds" to the Portfolios. Third party checks will not be accepted
for initial account investments. Upon receipt, your account will be credited
with the number of full and fractional shares which can be purchased at the NAV
next determined after receipt of the purchase order by a Portfolio, less any
applicable sales charge. Alternatively, you may purchase Portfolio shares by
bank wire. Information on purchases by wire is set forth below.
Purchases of shares are subject to acceptance or rejection by a Portfolio
on the same day the purchase order is received and are not binding until so
accepted. Except as required by law, it is the policy of the Portfolios and LSI
to keep confidential information contained in the application and regarding the
account of an investor or potential investor in a Portfolio. Share certificates
are not issued for a Portfolio.
Directors and officers of LifeUSA Securities, Inc. or any of its affiliated
companies, their full-time and part-time employees, sales representatives and
retirees, and the spouses, siblings, direct ancestors or direct descendants of
such persons may purchase shares of the Portfolios at the NAV without the
imposition of a sales charge. These persons must give written assurance that
they have bought for investment purposes, and that the securities will not be
resold except through redemption or repurchase by, or on behalf of, the
respective Portfolio. These persons are not required to pay a sales charge
because of the reduced sales effort involved in their purchases.
All correspondence or inquiries relating to purchase of shares or
completing the account application should be directed to LifeUSA Funds
Shareholder Services at the address or phone number listed under "Additional
Information". Dealer inquiries should be directed to LifeUSA Securities, Inc. at
1-888-446-5782 (this is a toll-free call).
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<PAGE>
BANK WIRE PURCHASES
Shares may be purchased by having your bank wire federal funds (funds of
the Federal Reserve System) to the Portfolios' bank.
Wire orders will be accepted only on days your bank, the transfer agent,
the Portfolios and Norwest Bank Minnesota are open for business. The payment
must be received by the Portfolios before the close of business to be credited
to your account that day. Otherwise, it will be processed the next business day.
The wire purchase will not be considered made until the wired amount is received
and the purchase is accepted by the Portfolios. If the wire order does not
contain the information stated below, the Portfolios may reject it. Any delays
that may occur in wiring federal funds, including delays in processing by the
banks, are not the responsibility of the Portfolios or the transfer agent.
You must pay any charge assessed by your bank for the wire service. If a
wire order is rejected, all money received by the Portfolios, less any costs
incurred by the Portfolios or the transfer agent in rejecting it, will be
returned promptly.
If the wire order is for a new account, you should call LifeUSA Shareholder
Services at the phone number listed under "Additional Information" to advise
them of the investment and to obtain an account number and instructions. The
wire should be sent to: Norwest Bank Minnesota, Routing Number 091000019,
Minneapolis, Minnesota, Attn: IAI Mutual Funds Account Number 6355002264. It
should state the following:
"Credit LifeUSA Funds Account # ____ for future credit to personal
account # ___ (your account number) for _______ (your name) and
_____________ (Portfolio name)."
A completed application must be sent to the Portfolios and received by the
Portfolios before the wire is sent.
If the wire order is for an addition to an existing account, the wire must
include the information required above for new accounts. As soon as the wire is
sent, you should call LifeUSA Shareholder Services, as described above, and
advise them of your name, your account number and the name of the bank
transmitting the federal funds.
RIGHT OF ACCUMULATION
The sales charge applicable to each purchase of the shares of all
Portfolios other than LifeUSA Principal Preservation Portfolio is based on the
next computed net asset value of all Portfolio shares held by the shareholder
(including dividends reinvested and capital gains distributions accepted in
shares) plus the cost of all Portfolio shares currently being purchased. For
example, if you already own shares with a net asset value of $90,000 and you
decide to invest in additional shares having a public offering price of $10,000,
you will pay a sales charge equal to 4.25% of your entire additional $10,000,
since the total value of your investment is now $100,000. It is the obligation
of each shareholder desiring this sort of sales charge reduction to notify
LifeUSA Securities, Inc., through his or her dealer or otherwise, that he or she
is entitled to the discount.
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<PAGE>
SYSTEMATIC INVESTMENT PLAN
Each Portfolio provides a convenient, voluntary method of purchasing shares
through a Systematic Investment Plan.
The principal purposes of the Systematic Investment Plan are to encourage
thrift by enabling you to make regular purchases in amounts less than normally
required and to employ the principle of dollar cost averaging, described below.
By acquiring Portfolio shares on a regular basis pursuant to a Systematic
Investment Plan, or investing regularly on any other systematic plan, the
investor takes advantage of the principle of dollar cost averaging. Under dollar
cost averaging, if a constant amount is invested at regular intervals at varying
price levels, the average cost of all the shares will be lower than the average
of the price levels. This is because the same fixed number of dollars buys more
shares when price levels are low and fewer shares when price levels are high. It
is essential that the investor consider his or her financial ability to continue
this investment program during times of market decline as well as market rise.
The principle of dollar cost averaging will not protect against loss in a
declining market, as a loss will result if the Systematic Investment Plan is
discontinued when the market value is less than cost and Portfolio shares are
redeemed.
A Systematic Investment Plan may be opened with an initial investment of
$500 and by indicating your intention to invest $100 or more monthly effective
as of the 4th and/or the 18th day of each month (or the next business day),for
at least one year. You will receive a confirmation showing the number of shares
purchased, purchase price, and subsequent new balance of shares accumulated. A
Systematic Investment Plan may be used to purchase shares in only one Portfolio
until the normal account and Portfolio minimums have been reached.
An investor has no obligation to invest regularly or to continue the
Systematic Investment Plan, which may be terminated by the investor at any time
without penalty. Under the Systematic Investment Plan, any distributions of
income and realized income and realized capital gains will be reinvested in
additional shares at the NAV unless a shareholder instructs a Portfolio in
writing to pay them in cash. Each Portfolio reserves the right to increase or
decrease the amount required to open and continue a Systematic Investment Plan,
and to terminate any Systematic Investment Plan after one year if the value of
the amount invested is less than $500.
GROUP SYSTEMATIC INVESTMENT PLAN
This Plan provides employers and employees with a convenient means for
purchasing Portfolio shares under various types of employee benefit and thrift
plans, including payroll withholding and bonus incentive plans. The Plan may be
started with an initial cash investment of $100 per participant for a group
consisting of five or more participants. The shares purchased by each
participant under the Plan will be held in a separate account in which all
dividends and capital gains will be reinvested in additional shares at the NAV.
To keep an account open, subsequent payments totaling $50 per month must be made
into each participant's account. If the group is reduced to less than the
minimum number of participants, a minimum monthly payment of $100 will be
required. The Plan may be terminated by the Portfolios or the shareholders at
any time upon reasonable notice. For more information, please contact LifeUSA
Funds Shareholder Services at the address or phone number listed under
"Additional Information".
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<PAGE>
GROUP PURCHASES
An individual who is a member of a qualified group may also purchase
Portfolio shares at a reduced sales charge applicable to the group as a whole.
Such reduced sales charge is calculated by taking into account not only the
dollar amount of the Portfolio shares being purchased by the individual group
member, but also the aggregate dollar value of Portfolio shares previously
purchased and currently held by other members of the group. A "qualified group"
is one which (i) has been in existence for more than six months; (ii) has a
purpose other than acquiring Portfolio shares at a discount; (iii) satisfies
uniform criteria which enable LSI to realize economies of scale in distributing
such shares. A qualified group must have more than ten members, must be
available to arrange for group meetings with representatives of LSI or
Authorized Dealers, must agree to include sales and other materials related to
the Portfolios in its publications and mailings to members at reduced or no cost
to LSI, and must seek, upon request, to arrange for payroll deduction or other
bulk transmission of investments to the Portfolios. For more information, please
contact LifeUSA Funds Shareholder Services at the address or phone number listed
under "Additional Information".
AUTOMATIC INVESTMENT PLAN
Existing shareholders may arrange to make regular investments of $100 or
more per Portfolio on a monthly or twice a month basis, effective as of the 4th
and/or the 18th day of each month (or the next business day), through automatic
deductions from their checking or savings accounts. Such investors may, of
course, terminate their participation in the Automatic Investment Plans at any
time upon written notice to a Portfolio. Any changes or instructions to
terminate existing Automatic Investment Plan must be received at least 30 days
before the date on which the change or termination is to take place. Investors
interested in participating in the Automatic Investment Plan should complete the
Automatic Investment Plan portion of the account application.
REDEMPTION OF SHARES
GENERAL
You may redeem your Portfolio shares through your Authorized Dealer, by
mail or by telephone. All redemptions are made at the NAV next determined after
a redemption request has been received in good order. Requests for redemptions
must be received by 3:00 p.m. Central time to be processed at the NAV for that
day. Any redemption request in good order that is received after 3:00 p.m.
Central time will be processed at the price determined on the following business
day. If the transfer agent is requested to redeem shares for which a Portfolio
has not yet received good payment, the Portfolio may delay payment of redemption
proceeds until it has assured itself that good payment has been collected for
the purchase of the shares. In the case of purchases by check, it can take up to
10 business days to confirm that the check has cleared and good payment has been
received. Redemption proceeds will not be delayed when shares have been paid for
by wire or when the investor's account holds a sufficient number of shares for
which funds already have been collected.
Payment for shares redeemed will ordinarily be made within seven days after
a redemption has been executed. Under unusual circumstances, a Portfolio may
suspend redemptions or postpone payment to the extent permitted by Federal
securities laws. The proceeds of the redemption may be more or less than the
purchase price of your shares, depending upon, among other factors, the market
value of the Portfolio's securities at the time of the redemption. If the
redemption is for over $50,000, or the proceeds are to be paid or mailed to an
address other than the address of record, or an address change has occurred in
the last 15 days, it must be requested in writing with a signature guarantee, as
described below.
If you are not certain of the requirements for a redemption, please contact
LifeUSA Shareholder Services at the address or phone number listed under
"Additional Information".
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THROUGH YOUR AUTHORIZED DEALER
The Authorized Dealer is responsible for promptly transmitting redemption
orders. Redemptions requested by dealers will be made at the NAV determined at
the close of regular trading (3:00 p.m. Central time) on the day that a
redemption request is received in good order by the transfer agent.
BY MAIL
Requests for redemption in writing are considered to be in "proper or good
order" if they contain the following:
- A letter of instruction, including the account registration, fund
number, the account number and the dollar amount or number of
shares to be redeemed.
- Signatures of all registered owners whose names appear on the
account.
- Any required signature guarantees.
- Other supporting legal documentation, if required (in the
case of estates, trusts, guardianships, corporations,
unincorporated associations, retirement plan trustees or others
acting in representative capacities).
The dollar amount or number of shares indicated for redemption must not
exceed the available shares or NAV of your account at the next-determined
prices. If your request exceeds these limits, then the trade will be rejected in
its entirety.
Mail your request to LifeUSA Shareholder Services at the address listed in
the section "Additional Information".
BY TELEPHONE
Investors other than IRA accounts may redeem up to $50,000 per day over the
telephone by contacting LifeUSA Shareholder Services at the number listed in the
section "Additional Information". In times of unusual economic or market
changes, the telephone redemption privilege may be difficult to implement. If
you are unable to execute your transaction by telephone, you may want to
consider placing the order in writing and sending it by mail or overnight
courier.
Checks will be made payable to the current account registration and sent to
the address of record. If there has been a change of address in the last 15
days, please use the instructions for redemption requests by mail described
above. A signature guarantee will be required.
Although telephone redemptions may be a convenient feature, you should
realize that you may be giving up a measure of security that you may otherwise
have if you terminated the privilege and redeemed your shares in writing. See
the section "Authorized Telephone Transactions" for more information.
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RECEIVING YOUR PROCEEDS BY FEDERAL FUNDS WIRE
For shareholders who established this feature at the time they opened their
account, telephone instructions will be accepted for redemption of amounts up to
$50,000 ($1,000 minimum) and proceeds will be wired on the next business day to
a predesignated bank account. Wire redemption requests will only be processed on
days your bank, the transfer agent, the Portfolios and Norwest Bank Minnesota
are open for business.
In order to add this feature to an existing account or to change existing
bank account information, please submit a letter of instructions including your
bank information to LifeUSA Shareholder Services at the address listed in the
section "Additional Information". The letter must be signed by all registered
owners, and their signatures must be guaranteed.
Your account will be charged a fee of $10 each time redemption proceeds are
wired to your bank. Your bank may also charge you a fee for receiving a Federal
Funds wire.
Neither the transfer agent nor any of the Portfolios can be responsible for
the efficiency of the Federal Funds wire system or the shareholder's bank.
OTHER IMPORTANT REDEMPTION INFORMATION
Redemption instructions must be signed by the person(s) in whose name the
shares are registered. For your protection, and to prevent fraudulent
redemptions, a signature guarantee must accompany the following requests:
- Redemption requests over $50,000.
- Requests for redemption proceeds to be sent to someone other
than the registerd shareholder.
- Requests for redemption proceeds to be sent to an address
other than the address of record.
- Registration transfer requests.
- Requests for redemption proceeds to be wired to your bank
account (if this option was not selected on your original
application, or if you are changing the bank wire information).
A signature guarantee may be obtained only from an eligible guarantor
institution as defined in Rule 17Ad-15 of the Securities Exchange Act of 1934,
as amended. An eligible guarantor institution includes banks, brokers, dealers,
municipal securities dealers, government securities dealers, government
securities brokers, credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings associations. The
signature guarantee must not be qualified in any way. Notarizations from notary
publics are not the same as signature guarantees, and are not accepted.
Circumstances other than those described above may require a signature
guarantee. If the shares are held of record in the name of a corporation,
partnership, trust or fiduciary, a Portfolio may require additional evidence of
authority prior to accepting a request for redemption. Please contact LifeUSA
Shareholder Services at the address or phone number listed under "Additional
Information" for more information.
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A Portfolio shareholder who redeems a Portfolio account has a one-time
privilege to reinstate such account by purchasing Portfolio shares at the NAV
without the imposition of a sales charge up to the dollar amount redeemed. The
reinstatement privilege may be exercised by a written request along with a check
for the amount to be reinstated to the transfer agent within 30 days after the
date the request for the redemption was accepted by the transfer agent or LSI.
The reinstatement will be made at the NAV per share next determined after the
notice of reinstatement is received and cannot exceed the amount of the
redemption proceeds. Alternatively, the reinstatement privilege may be exercised
through the shareholder's Authorized Dealer within 30 days after the date the
redemption request was accepted by the transfer agent or LSI.
Following a redemption or transfer request, if the value of a shareholder's
interest in a Portfolio falls below $500, such Portfolio reserves the right to
redeem such shareholder's entire interest and remit such amount. Such a
redemption will only be effected following: (a) a redemption or transfer by a
shareholder which causes the value of such shareholder's interest in such
Portfolio to fall below $500; (b) the mailing by such Portfolio to such
shareholder of a notice of intention to redeem; and (c) the passage of at least
six months from the date of such mailing, during which time the investor will
have the opportunity to make an additional investment in such Portfolio to
increase the value of such investor's account to at least $500. Each Portfolio
reserves the right to impose a service charge of $15 per year for Portfolio
accounts that fall below the $500 level.
EXCHANGE PRIVILEGE
The Exchange Privilege enables shareholders to purchase, in exchange for
shares of a Portfolio, shares of another Portfolio. Such Portfolio will have a
different investment objective from the original Portfolio, and a shareholder
should read the appropriate Prospectus disclosure before making such an
exchange. Shareholders may exchange shares of a Portfolio for shares of another
Portfolio distributed by LSI provided that the Portfolio whose shares will be
acquired is duly registered in the state of the shareholder's residence and the
shareholder otherwise satisfies the Portfolio's purchase requirements. Principal
Preservation shares purchased directly by an investor and exchanged for shares
of another Portfolio will be subject to a sales charge differential, which is
the percentage rate of the sales charge of the Portfolio shares being acquired.
Principal Preservation Portfolio shares obtained through automatic reinvestment
of dividends and capital gains distributions will not be charged a sales charge
differential when exchanged into another Portfolio.
Because excessive trading can hurt Portfolio performance and shareholders,
there is a limit of four exchanges out of each Portfolio per calendar year per
account. Accounts under common ownership or control, including accounts with the
same taxpayer identification number, will be counted together for purposes of
the four exchange limit. Each Portfolio reserves the right to temporarily or
permanently terminate the Exchange Privilege of any investor who exceeds this
limit. The limit may be modified for certain retirement plan accounts, as
required by the applicable plan document and/or relevant Department of Labor
regulations. Each Portfolio also reserves the right to refuse or limit exchange
purchases by any investor if, in the Adviser's judgment, such Portfolio would be
unable to invest the money effectively in accordance with its investment
objectives and policies, or would otherwise potentially be adversely affected.
Portfolio shareholders wishing to exercise the Exchange Privilege should
notify the Portfolios in writing or, provided such shareholders have authorized
a Portfolio to accept telephone instructions, by telephone. At the time of the
exchange, if the net asset value of the shares redeemed in connection with the
exchange is greater than the investor's cost, a taxable capital gain will be
realized. A capital loss will be realized if at the time of the exchange the net
asset value of the shares redeemed in the exchange is less than the investor's
cost. Although the Portfolios do not currently charge a fee for use of the
Exchange Privilege, they reserve the right to do so in the future. Each
Portfolio reserves the right to terminate or modify the Exchange Privilege in
the future.
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AUTHORIZED TELEPHONE TRADING
Investors can transact account exchanges and redemptions via the telephone
by completing the Authorized Telephone Trading section of the account
application. Investors requesting telephone trading privileges will be provided
with a personal identification number ("PIN") that must accompany any
instructions by phone. Shares will be redeemed or exchanged at the next
determined net asset value. All proceeds must be made payable to the owner(s) of
record and delivered to the address of record.
In order to confirm that telephone instructions for redemptions and
exchanges are genuine, the Portfolios have established reasonable procedures,
including the requirement that a personal identification number accompany
telephone instructions. If a Portfolio or the transfer agent fails to follow
these procedures, such Portfolio may be liable for losses due to unauthorized or
fraudulent instructions. To the extent these reasonable procedures are followed,
none of the Portfolios, their transfer agent, or any affiliated broker/dealer
will be liable for any loss, injury, damage, or expense for acting upon
telephone instructions believed to be genuine, and will otherwise not be
responsible for the authenticity of any telephone instructions, and,
accordingly, the investor bears the risk of loss resulting from telephone
instructions. All telephone redemptions and exchange requests will be tape
recorded. Telephone redemptions are not permitted for IRA accounts. For
redemptions from these accounts, please contact LifeUSA Shareholder Services at
the address or phone number listed under "Additional Information".
If you provide your PIN to another, please be advised that such person will
be able to transact in your account and you will have given up a measure of
security that you may otherwise have by keeping your PIN private.
SYSTEMATIC CASH WITHDRAWAL PLAN
Each Portfolio has available a Systematic Cash Withdrawal Plan for any
investor desiring to follow a program of systematically withdrawing a fixed
amount of money from an investment in shares of a Portfolio. An investment of
$10,000 is required to establish the plan. Payments under the plan will be
monthly or quarterly in amounts of $100 or more. Shares will be sold with the
closing price on the 15th of the applicable month (or the next business day). To
provide funds for payment, such Portfolio will redeem as many full and
fractional shares as necessary at the redemption price, which is net asset
value.
Payments under this plan, unless pursuant to a retirement plan, should not
be considered income. Withdrawal payments may exceed dividends and distributions
and, to this extent, there will be a reduction in the investor's equity. An
investor should also understand that this plan cannot insure profit, nor does it
protect against any loss in a declining market. Careful consideration should be
given to the amount withdrawn each month. Excessive withdrawals could lead to a
serious depletion of capital, especially during periods of declining market
values.
For more information or to obtain a Plan application, please contact
LifeUSA Funds Shareholder Services at the address or phone number listed under
"Additional Information".
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DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
The policy of all Portfolios other than Principal Preservation Portfolio is
to pay dividends from net investment income semiannually and to make
distributions of realized capital gains, if any, annually. Principal
Preservation Portfolio will declare daily and pay monthly dividends from net
investment income and will distribute annually net realized capital gains, if
any. However, provisions in the Internal Revenue Code of 1986, as amended (the
"Code"), may result in additional net investment income and capital gains
distributions by a Portfolio. When you open an account, you should specify on
your application how you want to receive your distributions. The Portfolios
offer three options: Full Reinvestment--your dividend and capital gain
distributions will be automatically reinvested in additional shares of the
Portfolio; Capital Gains Reinvestment--your capital gain distributions will be
automatically reinvested, but your income dividend distributions will be paid in
cash; and Cash--your income dividends and capital gain distributions will be
paid in cash. Distributions taken in cash can be sent via check or transferred
directly to your account at any bank, savings and loan or credit union that is a
member of the Automated Clearing House (ACH) network. Unless directed otherwise
by the shareholder, each Portfolio will automatically reinvest all such
distributions into full and fractional shares at net asset value, without the
imposition of a sales charge.
Each Portfolio intends to qualify for tax purposes as a regulated
investment company under Subchapter M of the Internal Revenue Code during the
current taxable year. If so qualified, each Portfolio will not be subject to
federal income tax on income that it distributes to its shareholders.
Distributions are subject to federal income tax, and may also be subject to
state or local taxes. If you live outside the United States, your distributions
could also be taxed by the country in which you reside. Your distributions are
taxable when they are paid, whether you take them in cash or reinvest them in
additional shares.
For federal income tax purposes, each Portfolio's income and short-term
capital gain distributions are taxed as dividends; long-term capital gain
distributions designated as capital gain dividends are taxed as long-term
capital gains regardless of the length of time the shareholder has held the
shares. Annually, the Adviser will send you and the IRS a statement showing the
amount of each taxable distribution you received in the previous year.
Upon redemption of shares of a Portfolio, the shareholder will generally
recognize a capital gain or loss equal to the difference between the amount
realized on the redemption and the shareholder's adjusted basis in such shares.
Such gain or loss will be long-term if the shares have been held for more than
one year. Under the Code, the deductibility of capital losses is subject to
certain limitations.
Whenever you sell shares of a Portfolio, the Adviser will send you a
confirmation statement showing how many shares you sold and at what price. You
will also receive an account statement quarterly and a consolidated transaction
statement annually. However, it is up to you or your tax preparer to determine
whether this sale resulted in a capital gain and, if so, the amount of tax to be
paid. Be sure to keep your account statements; the information they contain will
be essential in calculating the amount of your capital gains.
The foregoing relates to federal income taxation as in effect as of the
date of this Prospectus. For a more detailed discussion of the federal income
tax consequences of investing in shares of a Portfolio, see "Tax Status" in the
Statement of Additional Information.
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INVESTMENT PERFORMANCE
From time to time the Portfolios may advertise performance data including
monthly, quarterly, yearly or cumulative total return, average annual total
return and yield figures. All such figures are based on historical earnings and
performance and are not intended to be indicative of future performance. The
investment return on and principal value of an investment in the Portfolios will
fluctuate, so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
Total return is the change in value of an investment in a Portfolio over a
given period, assuming reinvestment of any dividends and capital gains. A
cumulative total return reflects actual performance over a stated period of
time. An average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period.
Yield refers to the income generated by an investment in a Portfolio over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all funds. Because this
differs from other accounting methods, the quoted yield may not equal the income
actually paid to shareholders.
For additional information regarding the calculation of such total return
and yield figures, see "Investment Performance" in the Statement of Additional
Information. Further information about the performance of the Portfolios will be
contained in the Portfolios' annual report to shareholders which, when
available, may be obtained without charge from the Portfolios.
Comparative performance information may be used from time to time in
advertising or marketing a Portfolio's shares, including data on the performance
of other mutual funds, indexes or averages of other mutual funds, indexes of
related financial assets or data, and other competing investment and deposit
products available from or through other financial institutions. The composition
of these indexes, averages or products differs from that of a Portfolio. The
comparison of a Portfolio to an alternative investment should be made with
consideration of differences in features and expected performance. A Portfolio
may also note its mention in newspapers, magazines, or other media from time to
time. A Portfolio assumes no responsibility for the accuracy of such data. For
additional information on the types of indexes, averages and periodicals that
might be utilized by a Portfolio in advertising and sales literature, see the
section "Investment Performance" in the Statement of Additional Information.
RETIREMENT PLANS
Shares of the Portfolios may be an appropriate investment medium for an
Individual Retirement Account ("IRA"). Persons desiring information about
establishing an IRA should contact LifeUSA Shareholder Services at the address
or phone number listed under "Additional Information". The minimum initial
investment to establish an IRA account is $2,000, as long as at least $1,000 is
allocated to any one Portfolio. All retirement plans involve a long-term
commitment of assets and are subject to various legal requirements and
restrictions. The legal and tax implications may vary according to the
circumstances of the individual investor. Therefore, you are urged to consult
with an attorney or tax advisor prior to the establishment of such a plan.
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DESCRIPTION OF COMMON STOCK
All shares of each Portfolio have equal rights as to redemption, dividends
and liquidation, and will be fully paid and nonassessable when issued and will
have no preemptive or conversion rights.
The shares of each Portfolio have noncumulative voting rights, which means
that the holders of more than 50% of the shares voting for the election of
directors can elect 100% of the directors if they choose to do so. On some
issues, such as the election of directors, all shares of each corporation vote
together as one series. On an issue affecting only a particular series, such as
voting on the advisory agreement, only the approval of the series is required to
make the agreement effective with respect to such series.
Annual or periodically scheduled regular meetings of shareholders will not
be held except as required by law. Minnesota corporation law does not require an
annual meeting; instead, it provides for the Board of Directors to convene
shareholder meetings when it deems appropriate. In addition, if a regular
meeting of shareholders has not been held during the immediately preceding
fifteen months, shareholders holding three percent or more of the voting shares
of a Portfolio may demand a regular meeting of shareholders of such Portfolio by
written notice of demand given to the chief executive officer or the chief
financial officer of such Portfolio. Within thirty days after receipt of the
demand by one of those officers, the Board of Directors shall cause a regular
meeting of shareholders to be called and held no later than ninety days after
receipt of the demand, all at the expense of such Portfolio. An annual meeting
will be held on the removal of a director or directors of such Portfolio if
requested in writing by holders of not less than 10% of the outstanding shares
of such Portfolio.
The shares of each Portfolio are transferable by delivery to such Portfolio
of transfer instructions. Transfer instructions should be delivered to LifeUSA
Shareholder Services at the address listed under "Additional Information". Each
Portfolio is not bound to recognize any transfer until it is recorded on the
stock transfer books maintained by such Portfolio.
COUNSEL AND AUDITORS
The firm of Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, MN
55402, provides legal counsel for the Portfolios. KPMG Peat Marwick LLP, 4200
Norwest Center, Minneapolis, MN 55402, serves as independent auditors for the
Portfolios.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Each Portfolio self-custodies its assets under Rule 17f-2 of the 1940 Act
and maintains its portfolio of investment company securities in the book entry
system of the transfer agent of the Underlying Funds. The Adviser acts as each
Portfolio's and Underlying Funds transfer agent and dividend disbursing agent,
at P.O. Box 357, Minneapolis, MN 55440.
ADDITIONAL INFORMATION
LifeUSA Funds Shareholder Services is available to respond to shareholder
inquiries Monday through Friday from 8:00 a.m. to 5:00 p.m. Central time. Its
phone number is 1-800-864-4725. To contact LifeUSA Shareholder Services by mail,
please write "LifeUSA Shareholder Services, P.O. Box 357 , Minneapolis, MN
55440." Overnight deliveries should be addressed to "LifeUSA Shareholder
Services, 3700 First Bank Place, 601 Second Avenue South, Minneapolis, MN
55402". Dealer inquiries should be directed to LifeUSA Securities, Inc. at
1-888-446-5782 (this is a toll-free call).
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Each Portfolio will send to its shareholders a six-month unaudited and an
annual audited financial report, each of which includes a list of investment
securities held. To reduce the volume of mail you receive, only one copy of most
Portfolio reports, such as the Portfolio's Annual Report, may be mailed to your
household (same surname, same address). Please contact LifeUSA Shareholder
Services if you wish to receive additional shareholder reports.
In the opinion of the staff of the Securities and Exchange Commission, the
use of this combined prospectus may possibly subject all Portfolios to a certain
amount of liability for any losses arising out of any statement or omission in
this Prospectus regarding a particular Portfolio. In the opinion of the
Portfolios' management, however, the risk of such liability is not materially
increased by use of a combined prospectus.
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APPENDIX
PORTFOLIO SECURITIES AND OTHER INVESTMENT TECHNIQUES
OF UNDERLYING FUNDS
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements relating to the securities in
which it may invest. In a repurchase agreement, a Fund buys a security at one
price and simultaneously agrees to sell it back at a higher price. Delays or
losses could result if the other party to the agreement defaults or becomes
bankrupt.
BORROWING
Each Fund may borrow from banks (or through reverse repurchase agreements)
for temporary or emergency purposes. If a Fund borrows money, its share price
may be subject to greater fluctuation until the borrowing is paid off. If a Fund
makes additional investments while borrowings are outstanding, this may be
considered a form of leverage.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in securities that are
considered illiquid because of the absence of a readily available market or due
to legal or contractual restrictions (except IAI Developing Countries and IAI
Money Market Funds, each of which may invest up to 10% of its net assets in such
securities). However, certain restricted securities that are not registered for
sale to the general public but that can be resold to institutional investors may
be considered liquid pursuant to guidelines adopted by the Board of Directors.
The institutional trading market is relatively new, and the liquidity of the
Fund's investments could be impaired if trading does not develop or declines.
FOREIGN SECURITIES
Each Fund may invest in securities of foreign issuers in accordance with
its investment objective and policies. In considering whether to purchase
securities of foreign issuers, the Adviser will consider the political and
economic conditions in a country, the prospect for changes in the value of its
currency and the liquidity of the investment in that country's securities
markets. Each of IAI Growth and Income, IAI Emerging Growth, IAI Midcap Growth,
IAI Regional and IAI Value Funds currently intends to limit its investment in
foreign securities denominated in foreign currency and not publicly traded in
the United States to no more than 10% of the value of its total assets. Each of
IAI Capital Appreciation Fund and IAI Growth Fund intends to limit its
investment in such securities to no more than 15% of the value of its total
assets.
IAI Government Fund may also invest in non-U.S. Government bonds and other
fixed income securities including fixed income securities issued by corporations
and foreign entities, whether dollar-denominated or not, securities issued or
guaranteed by one or more foreign governments or any of their political
subdivisions, agencies or instrumentalities, and obligations of supranational
entities, that are rated within the four highest grades by Moody's or S&P or are
determined by the Adviser to be of comparable quality. For a description of
Moody's and S&P ratings, see Appendix A to the Statement of Additional
Information.
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IAI Bond Fund may invest in securities issued by foreign issuers, whether
dollar-denominated or not, including securities issued or guaranteed by one or
more foreign governments or any of their political subdivisions, agencies or
instrumentalities, including obligations of supranational entities, that are
determined by the Adviser to be of comparable quality to the other obligations
in which IAI Bond Fund may invest. IAI Bond Fund currently intends to invest no
more than 25% of the value of its total assets in non-dollar denominated
securities of foreign issuers.
VENTURE CAPITAL
Each equity fund may invest in venture capital limited partnerships and
venture capital funds which, in turn, invest principally in securities of early
stage, developing companies. Investments in venture capital limited partnerships
and venture capital funds present a number of risks not found in investing in
established enterprises including the facts that such a partnership's or fund's
portfolio will be composed almost entirely of early-stage companies which may
lack depth of management and sufficient resources, which may be marketing a new
product for which there is no established market, and which may be subject to
intense competition from larger companies. Any investment in a venture capital
limited partnership or venture capital fund will lack liquidity, will be
difficult to value, and a Fund will not be entitled to participate in the
management of the partnership or fund. If for any reason the services of the
general partners of a venture capital limited partnership were to become
unavailable, such limited partnership could be adversely affected.
In addition to investing in venture capital limited partnerships and
venture capital funds, a Fund may directly invest in early-stage, developing
companies. The risks associated with investing in these securities are
substantially similar to the risks set forth above. A Fund will typically
purchase equity securities in these early-stage, developing companies; however
from time to time, a Fund may purchase non-investment grade debt securities in
the form of convertible notes. IAI Capital Appreciation Fund currently intends
to limit its investments in securities described in this section to no more than
5% of its net assets.
LEVERAGED BUYOUTS
Each domestic equity fund may invest in leveraged buyout limited
partnerships and funds which, in turn, invest in leveraged buyout transactions
("LBOs"). An LBO, generally, is an acquisition of an existing business by a
newly formed corporation financed largely with debt assumed by such newly formed
corporation to be later repaid with funds generated from the acquired company.
Since most LBOs are by nature highly leveraged (typically with debt to equity
ratios of approximately 9 to 1), equity investments in LBOs may appreciate
substantially in value given only modest growth in the earnings or cash flow of
the acquired business. Investments in LBO partnerships and funds, however,
present a number of risks. Investments in LBO limited partnerships and funds
will normally lack liquidity and may be subject to intense competition from
other LBO limited partnerships and funds. Additionally, if the cash flow of the
acquired company is insufficient to service the debt assumed in the LBO, the LBO
limited partnership or fund could lose all or part of its investment in such
acquired company.
ADJUSTING INVESTMENT EXPOSURE
Each Fund, other than IAI Money Market Fund, can use various techniques to
increase or decrease its exposure to changing security prices, interest rates,
currency exchange rates, commodity prices, or other factors that affect security
values. These techniques include buying and selling options and futures
contracts, entering into currency exchange contracts or swap agreements,
purchasing indexed securities, and selling securities short. Because some Fund
assets may be invested in restricted securities and thus may not be associated
with short-term movement in the financial markets, that portion of a Fund's
assets may not be able to participate in market movements. Each Fund may invest
in futures contracts in amounts corresponding to its investments in such
restricted securities in order to participate fully in market movements.
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TEMPORARY DEFENSIVE POSITIONS
In unusual market conditions, when the Adviser believes a temporary
defensive position is warranted, each Fund may invest without limitation in
investment-grade fixed income securities, that is, securities rated within the
four highest grades assigned by Moody's Investors Service, Inc. or Standard &
Poor's Corporation, or money market securities (including repurchase
agreements). Money market securities will only be purchased if they have been
given one of the two top ratings by a major ratings service or, if unrated, are
of comparable quality as determined by the Adviser. IAI Midcap Growth and IAI
Capital Appreciation Funds, for temporary defensive purposes, may also invest
without limitation in common stocks of larger, more established companies. If a
Fund maintains a temporary defensive position, investment income may increase
and may constitute a large portion of a Fund's return.
DEPOSITARY RECEIPTS
In addition to investing in such securities directly, IAI International,
IAI Developing Countries and IAI Latin America Funds may invest in the
securities of foreign issuers in the form of sponsored and unsponsored American
Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) or other securities convertible into securities of
foreign issuers. Generally, such securities evidence ownership of and may be
converted into securities issued by a foreign corporation. The issuers of
unsponsored depository receipts are not obligated to disclose material
information in the United States, and therefore, there may not be a correlation
between such information and the market value of such securities.
FOREIGN INDEX LINKED INSTRUMENTS
IAI International, IAI Developing Countries and IAI Latin America Funds may
invest in instruments issued by the U.S. or a foreign government or by private
issuers that return principal and/or pay interest to investors in amounts which
are linked to the level of a particular foreign index ("Foreign Index Linked
Instruments"). Foreign Index Linked Instruments may offer higher yields than
comparable securities linked to purely domestic indexes but also may be more
volatile. Foreign Index Linked Instruments are relatively recent innovations for
which the market has not yet been fully developed and, accordingly, they
typically are less liquid than comparable securities linked to purely domestic
indexes. In addition, the value of Foreign Index Linked Instruments will be
affected by fluctuations in foreign exchange rates or in foreign interest rates.
Foreign currency gains and losses with respect to Foreign Index Linked
Instruments may affect the amount and timing of income recognized by such Fund.
BRADY BONDS
IAI International, IAI Developing Countries and IAI Latin America Funds may
invest in Brady Bonds and other sovereign debt securities of countries that have
restructured or are in the process of restructuring sovereign debt pursuant to
the Brady Plan. Brady Bonds are debt securities issued under the framework of
the Brady Plan, a mechanism for debtor nations to restructure their outstanding
external indebtedness. Brady Bonds have been issued only recently and,
accordingly, do not have a long payment history.
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ZERO COUPON SECURITIES
Each Fund may invest in zero coupon securities. Such securities are debt
obligations which do not entitle the holder to periodic interest payments prior
to maturity and are issued and traded at a discount from their face amounts. The
discount varies depending on the time remaining until maturity, prevailing
interest rates, liquidity of the security and the perceived credit quality of
the issuer. Zero coupon securities can be sold prior to their due date in the
secondary market at the then-prevailing market value which depends primarily on
the time remaining to maturity, prevailing levels of interest rates and the
perceived credit quality of the issuer. The market prices of zero coupon
securities are more volatile than the market prices of securities of comparable
quality and similar maturity that pay interest periodically and may respond to a
greater degree to fluctuations in interest rates than do such non-zero coupon
securities.
CLOSED-END INVESTMENT COMPANIES
A number of countries have authorized the formation of closed-end
investment companies to facilitate indirect foreign investment in their capital
markets. IAI International, IAI Developing Countries and IAI Latin America Funds
may invest up to 10% of its total assets in securities of closed-end investment
companies. Shares of certain closed-end investment companies may at times be
acquired only at market prices representing premiums to their net asset values.
In the event that shares acquired at a premium subsequently decline in price
relative to their net asset value or the value of portfolio investments held by
such closed-end companies declines, a Fund and its shareholders may experience a
loss. If a Fund acquires shares of closed-end investment companies, Fund
shareholders would bear both their proportionate share of expenses in such Fund
(including management and advisory fees) and, indirectly, the expenses of such
closed-end companies.
WHEN-ISSUED/DELAYED DELIVERY TRANSACTIONS
The Funds may purchase portfolio securities on a when-issued or
delayed-delivery basis. When-issued and delayed-delivery transactions are
trading practices wherein payment for and delivery of the securities take place
at a future date. The market value of a security could change during this
period, which could affect the market value of the Fund's assets.
BELOW INVESTMENT GRADE SECURITIES
IAI Latin America, IAI Developing Countries, IAI Bond and IAI Reserve Funds
may also invest in below investment grade securities. Such securities are
commonly referred to as junk bonds. Each of IAI Bond and IAI Reserve Funds
currently intends to limit such investments to 15% and 10%, respectively, of its
total assets and not to invest in junk bonds rated lower than B by Moody's or
S&P. IAI Latin America and IAI Developing Countries Funds do not currently
intend to invest more than 5% of their net assets in junk bonds. Securities
rated in the medium to lower rating of categories of nationally recognized
statistical rating organizations and unrated securities of comparable quality
are predominately speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the security and generally
involve a greater volatility of price than securities in higher rating
categories. See Appendix A to and "Investment Objectives and Policies" in the
Statement of Additional Information for additional information regarding ratings
of debt securities.
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FOREIGN CURRENCY TRANSACTIONS
The value of the assets of a Fund as measured in United States dollars or a
foreign currency or currencies may be affected favorably or unfavorably by
changes in foreign currency exchange rates and exchange control regulations, and
each Fund may incur costs in connection with conversions between various
currencies. Each Fund will conduct its foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through forward contracts to purchase or sell
foreign currencies. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
directly between currency traders (usually large commercial banks) and their
customers.
Each Fund may enter into foreign currency transactions for hedging purposes
only and may not speculate on the fluctuations of foreign currency exchange
rates. Each Fund may hedge against adverse changes in foreign currency exchange
rates between the trade and settlement dates with respect to foreign securities
it is purchasing or during the holding period with respect to foreign securities
in its portfolio. With respect to foreign securities in its portfolio, each Fund
may hedge a maximum of 50% of the value of its investment portfolio by
establishing the value of such securities in U.S. dollars. Additionally, each
Fund may hedge a maximum of 25% of the value of its investment portfolio by
establishing the value of such securities in another foreign currency or
currencies which IAI believes to be more stable than the currencies in which
such securities are denominated.
When a Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to establish the cost or
proceeds in U.S. dollars or another foreign currency. By entering into a forward
contract in such currency for the purchase or sale of the amount of foreign
currency involved in an underlying security investment, the Fund is able to
protect itself against a possible loss between trade and settlement dates of a
transaction or during the period of an investment in a foreign security
resulting from an adverse change in the relationship between such two
currencies. However, this tends to limit potential gains which might result from
a positive change in such currency relationships. A Fund may also hedge its
foreign currency exchange rate risk by engaging in currency financial futures
and options and forward foreign currency transactions.
When the Adviser believes that the currency of a particular foreign country
may suffer a substantial decline against the U.S. dollar or another foreign
currency, it may enter into a forward contract to sell an amount of foreign
currency approximating the value of some or all of a Fund's portfolio securities
denominated in such foreign currency. The forecasting of short-term currency
market movement is difficult and the successful execution of a short-term
hedging strategy is uncertain.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a contract. Accordingly, it may be
necessary for a Fund to purchase additional currency on the spot market (and
bear the expense of such purchase) if the market value of the security is less
than the amount of foreign currency the Fund is obligated to deliver when a
decision is made to sell the security and make delivery of the foreign currency
in settlement of a forward contract. Conversely, it may be necessary to sell on
the spot market some of the foreign currency received upon the sale of the
portfolio security if its market value exceeds the amount of foreign currency
the Fund is obligated to deliver.
If a Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If a Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of foreign currency and the date it enters into an offsetting contract for
the purchase of the foreign currency, the Fund would realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
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currency it has agreed to purchase. Should forward prices increase, the Fund
would suffer a loss to the extent the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell. Although such
contracts tend to minimize the risk of loss due to a decline in the value of the
hedged currency, they also tend to limit any potential gain which might result
should the value of such currency increase. A Fund will have to convert its
holdings of foreign currencies into U.S. dollars from time to time. Although
foreign exchange dealers do not charge a fee for conversion, they do realize a
profit based on the difference (the "spread") between the prices at which they
are buying and selling various currencies.
RISKS ASSOCIATED WITH UNDERLYING FUNDS
INTEREST RATE RISK
The fixed income funds are subject to interest rate risk. Interest rate
risk is the potential for a decline in bond prices due to rising interest rates.
In general, bond prices vary inversely with interest rates. When interest rates
rise, bond prices generally fall. Conversely, when interest rates fall, bond
prices generally rise. The change in price depends on several factors, including
the bond's maturity date. In general, bonds with longer maturities are more
sensitive to changes in interest rates than bonds with shorter maturities. In
managing these Funds, the Adviser will adjust the duration of the investment
portfolio in response to economic and market conditions. Duration is generally
considered a better measure of interest rate risk than is maturity. Duration is
a measure of the expected change in value of a fixed income security (or
portfolio) for a given change in interest rates. For example, if interest rates
rise by one percent, the market value of a security (or portfolio) having a
duration of two generally will fall by approximately two percent. In some
situations, the standard duration calculation does not properly reflect the
interest rate risk of a security. In such situations, the Adviser will use more
sophisticated analytical techniques, such as modeling principal and interest
payments based upon historical experience or expected volatility, to arrive at
an effective duration that incorporates the additional variables into the
determination of interest rate risk. These techniques may involve estimates of
future economic parameters which may vary from actual future outcomes. These
principals of interest rate risk also apply to U.S. Treasury and U.S. Government
agency securities. As with other bond investments, U.S. Government securities
will rise and fall in value as interest rates change. A security backed by the
U.S. Treasury or the full faith and credit of the United States is guaranteed
only as to the timely payment of interest and principal when held to maturity.
The current market prices for such securities are not guaranteed and will
fluctuate.
CREDIT RISK
The fixed income funds are also subject to credit risk. Credit risk, also
known as default risk, is the possibility that a bond issuer will fail to make
timely payments of interest or principal to a Fund. The credit risk of a Fund
depends on the quality of its investments. Reflecting their higher risks,
lower-quality bonds generally offer higher yields (all other factors being
equal).
CALL RISK
The fixed income funds are also subject to call risk. Call risk is the
possibility that corporate bonds held by a Fund will be repaid prior to
maturity. Call provisions, common in many corporate bonds held by a Fund, allow
bond issuers to redeem bonds prior to maturity (at a specified price). When
interest rates are falling, bond issuers often exercise these call provisions,
paying off bonds that carry high stated interest rates and often issuing new
bonds at lower rates. For a Fund, the result would be that bonds with high
interest rates are "called" and must be replaced with lower-yielding
instruments. In these circumstances, the income of a Fund would decline.
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RISKS OF LOWER-RATED DEBT SECURITIES
IAI Latin America, IAI Developing Countries, IAI Bond and IAI Reserve Funds
may invest in debt securities commonly known as "junk" bonds. Such securities
are subject to higher risks and greater market fluctuations than are
lower-yielding, higher-rated securities. The price of junk bonds has been found
to be less sensitive to changes in prevailing interest rates than higher-rated
investments, but is likely to be more sensitive to adverse economic changes or
individual corporate developments. During an economic downturn or substantial
period of rising interest rates, highly leveraged issuers may experience
financial stress which would adversely affect their ability to service their
principal and interest payment obligations, to meet their projected business
goals or to obtain additional financing. If the issuers of a fixed-income
security owned by a Fund were to default, a Fund might incur additional expenses
to seek recovery. The risk of loss due to default by issuers of junk bonds is
significantly greater than that associated with higher-rated securities because
such securities generally are unsecured and frequently are subordinated to the
prior payment of senior indebtedness. In addition, periods of economic
uncertainty and change can be expected to result in an increased volatility of
market prices of junk bonds and a concomitant volatility in the net asset value
of a share of a Fund.
The secondary market for junk bonds is less liquid than the markets for
higher quality securities and, as such, may have an adverse effect on the market
prices of certain securities. The limited liquidity of the market may also
adversely affect the ability of a Fund to arrive at a fair value for certain
junk bonds at certain times and could make it difficult for a Fund to sell
certain securities. For a description of Moody's and S&P ratings, see Appendix A
to the Statement of Additional Information.
GENERAL FOREIGN INVESTMENT RISK FACTORS
Investments in foreign securities involve risks that are different in some
respects from investments in securities of U.S. issuers, such as the risk of
fluctuations in the value of the currencies in which they are denominated, the
risk of adverse political and economic developments and, with respect to certain
countries, the possibility of expropriation, nationalization or confiscatory
taxation or limitations on the removal of funds or other assets of a Fund.
Securities of some foreign companies are less liquid and more volatile than
securities of comparable domestic companies. There also may be less publicly
available information about foreign issuers than domestic issuers, and foreign
issuers generally are not subject to the uniform accounting, auditing and
financial reporting standards, practices and requirements applicable to domestic
issuers. Because a Fund can invest in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates may affect the value of securities in the portfolio. Foreign currency
exchange rates are determined by forces of supply and demand in the foreign
exchange markets and other economic and financial conditions affecting the world
economy. A decline in the value of any particular currency against the U.S.
dollar will cause a decline in the U.S. dollar value of a Fund's holdings of
securities denominated in such currency and, therefore, will cause an overall
decline in a Fund's net asset value and net investment income and capital gains,
if any, to be distributed in U.S. dollars to shareholders by a Fund. Delays may
be encountered in settling securities transactions in certain foreign markets,
and the Fund will incur costs in converting foreign currencies into U.S dollars.
Custody charges are generally higher for foreign securities.
FOREIGN INVESTMENT RISK FACTORS:
DEVELOPING COUNTRIES FUND AND LATIN AMERICA FUND
IAI Developing Countries Fund and IAI Latin America Fund are designed for
aggressive investors interested in the investment opportunities offered in
developing countries. To the extent that IAI International Fund invests in
developing countries, the Fund may be subject to additional risk. While the
Adviser believes that investing in developing countries presents the possibility
for significant growth over the long-term, it also entails significant risks.
Many investments in developing countries can be considered speculative, and the
price of securities and value of currencies can be much more volatile than in
the more developed markets. This difference reflects the greater uncertainties
of investing in less established markets and economies.
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Investing in foreign securities typically involves additional risks than
investing in securities of U.S. issuers. These risks are often heightened for
investments in developing countries and include, but are not limited to, the
risk of fluctuations in the value of the currencies in which they are
denominated, including the devaluation of the currencies of such countries
relative to the U.S. dollar, the risk of adverse political and economic
developments and the possibility of expropriation, nationalization or
confiscatory taxation or limitations on the removal of funds or other assets of
the Funds. Additionally, the economies of many developing countries continue to
experience significant problems, including high inflation rates, high interest
rates, large external debt and continuing trade deficits and are characterized
by extreme poverty, high unemployment and a significant dependence on limited
industries. Because the Funds will invest in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates may affect the value of securities in the portfolio. Foreign currency
exchange rates are determined by forces of supply and demand in the foreign
exchange markets and other economic and financial conditions affecting the world
economy. A decline in the value of any particular currency against the U.S.
dollar will cause a decline in the U.S. dollar value of a Fund's holdings of
securities denominated in such currency and, therefore, will cause an overall
decline in a Fund's net asset value and net investment income and capital gains,
if any, to be distributed in U.S. dollars to shareholders by such Fund. In many
developing countries, there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. In addition, there also may be less publicly
available information about foreign issuers than domestic issuers, and foreign
issuers generally are not subject to the uniform accounting, auditing and
financial reporting standards, practices and requirements applicable to domestic
issuers. The foreign securities markets of many of the countries in which the
Funds may invest may also be smaller, less liquid and subject to greater price
volatility than those in the United States. As an open-end investment company,
each Fund is limited in the extent to which it may invest in illiquid
securities. Further, the Funds may encounter difficulties or be unable to pursue
legal remedies and obtain judgments in foreign courts. These factors could make
foreign investments, especially those in developing countries, more volatile.
Brokerage commissions, custodial services, and other costs relating to
investment in foreign countries and developing markets are generally more
expensive than in the United States. Such markets have different clearance and
settlement procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. The inability of
a Fund to make intended security purchases due to settlement problems could
cause such Fund to miss attractive investment opportunities. Inability to
dispose of a portfolio security due to settlement problems could result either
in losses to a Fund due to subsequent declines in value of the portfolio
security or, if a Fund has entered into a contract to sell the security, could
result in possible liability to the purchaser.
Several countries restrict, to varying degrees, foreign investments in
their securities markets. Government and private restrictions take a variety of
forms, including (a) limitations on the amount of funds that may be introduced
into or repatriated from the country (including limitations on repatriation of
investment income and capital gains); (b) prohibitions or substantial
restrictions on foreign investment in certain industries or market sectors, such
as defense, energy and transportation; (c) restrictions (whether contained in
the charter of an individual company or mandated by the government) on the
percentage of securities of a single issuer which may be owned by a foreign
investor; (d) limitations on the types of securities which a foreign investor
may purchase; and (e) restrictions on a foreign investor's right to invest in
companies whose securities are not publicly traded. In some circumstances, these
restrictions may limit or preclude investment in certain countries or may
increase the cost of investing in securities of particular companies.
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A Fund's interest and dividend income from foreign issuers may be subject
to non-U.S. withholding taxes. A Fund also may be subject to taxes on trading
profits or on transfers of securities in some countries. The imposition of these
taxes will increase the cost to a Fund of investing in any country imposing such
taxes. For U.S. tax purposes, U.S. shareholders may be entitled to a credit or
deduction to the extent of any foreign income taxes paid by such Fund. See
"Dividends, Distributions and Tax Status."
Each Fund may purchase sovereign debt instruments issued or guaranteed by
foreign governments or their agencies. Sovereign debt may be in the form of
conventional securities or other types of debt instruments such as loans or loan
participations. The sovereign debt in which a Fund may invest may involve a high
degree of risk, including the risk of default. Governmental entities responsible
for repayment of the debt may be unable or unwilling to repay principal and
interest when due, and may require renegotiations or rescheduling of debt
payments. In addition, prospects for repayment of principal and interest may
depend on political as well as economic factors. A Fund may have limited
recourse in the event of default on a sovereign debt instrument.
Many of the currencies of developing countries have experienced steady
devaluations relative to the U.S. dollar, and major devaluations have
historically occurred in certain countries. Devaluations in the currencies in
which a Fund's portfolio securities are denominated may have a detrimental
impact on such Fund. Some developing countries also may have managed currencies
which are not free floating against the U.S. dollar. In addition, there is a
risk that certain developing countries may restrict the free conversion of their
currencies into other currencies. Further, the currencies of certain developing
countries may not be internally traded.
Many developing countries have experienced substantial, and in some periods
extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of certain developing countries.
The governments of many developing countries have exercised and continue to
exercise a significant influence over many aspects of the private sector.
Government actions concerning the economy could have a significant effect on
market conditions and prices and/or yields of securities in which a Fund
invests.
In some countries, the securities of banks or other financial institutions
are among the most actively traded securities. Each Fund is restricted in its
ability to invest in securities of an issuer which, in its most recent year,
derived more than 15% of its revenues from "securities related activities," as
defined by the rules under the Investment Company Act of 1940.
RISKS OF TRANSACTIONS IN DERIVATIVES
The Adviser may use futures, options, swap and currency exchange agreements
as well as short sales to adjust the risk and return characteristics of a Fund's
portfolio of investments. If the Adviser judges market conditions incorrectly or
employs a strategy that does not correlate well with a Fund's investments, use
of these techniques could result in a loss, regardless of whether the intent was
to reduce risk or increase return. Use of these techniques may increase the
volatility of a Fund and may involve a small investment of cash relative to the
magnitude of risk assumed. In addition, these techniques could result in a loss
if the counterparty to the transaction is unable to perform as promised.
Moreover, a liquid secondary market for any futures or options contract may not
be available when a futures or options position is sought to be closed. Please
refer to the Statement of Additional Information which further describes these
risks.
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PREPAYMENT RISKS
IAI Government Fund is subject to prepayment risk. Prepayment risk is the
possibility that, as interest rates fall, homeowners are more likely to
refinance their home mortgages. When home mortgages are refinanced, the
principal on GNMA certificates held by the Fund is "prepaid" earlier than
expected. IAI Government Fund must then reinvest the unanticipated principal in
new GNMA certificates, just at a time when interest rates on new mortgage
investments are falling.
Prepayment risk has two important effects on IAI Government Fund:
- When interest rates fall and additional mortgage prepayments must
be reinvested at lower interest rates, the income of Government
Fund will be reduced.
- When interest rates fall, prices on GNMA securities will not rise
as much as comparable Treasury bonds, as bond market investors
anticipate an increase in mortgage prepayments and a likely
decline in income.
SPECIAL RISK FACTORS ASSOCIATED WITH INVESTING IN SMALL COMPANIES
Investing in small companies involves greater risk than is customarily
associated with investments in larger, more established companies due to the
greater business risks of small size, limited markets and financial resources,
narrow product lines and the frequent lack of depth of management. The
securities of small companies are often traded over-the-counter and may not be
traded in volumes typical on a national securities exchange. Consequently, the
securities of small companies may have limited market stability and may be
subject to more abrupt or erratic market movements than securities of larger,
more established growth companies or the market averages in general. Therefore,
shares of Capital Appreciation Fund are subject to greater fluctuation in value
than shares of a conservative equity fund or of a growth fund which invests
entirely in more established growth stocks. Capital Appreciation Fund will
attempt to reduce the volatility of its share price by diversifying its
investments among many companies and different industries.
SPECIAL RISK FACTORS ASSOCIATED WITH INVESTING IN REGIONAL FUND
The objective of capital appreciation along with the policy of
concentrating equity investments in the Eight State Region means that the assets
of IAI Regional Fund will generally be subject to greater risk than may be
involved in investing in securities which do not have appreciation potential or
which have more geographic diversity. For example, IAI Regional Fund's net asset
value could be adversely affected by economic, political, or other developments
having an unfavorable impact upon the Eight State Region; moreover, because of
geographic limitation, IAI Regional Fund may be less diversified by industry and
company than other funds with a similar investment objective and no such
geographic limitation.
SPECIAL RISK FACTORS ASSOCIATED WITH INVESTING IN VALUE FUND
In selecting securities judged to be undervalued, the Adviser will be
exercising opinions and judgments which may be contrary to those of the majority
of investors. In certain instances, such opinions and judgments will involve the
risks of either:
(a) a correct judgment by the majority, in which case losses may be
incurred or profits may be limited; or
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(b) a long delay before majority recognition of the accuracy of the
Adviser's judgment, in which case capital invested by IAI Value Fund in an
individual security or group of securities may be nonproductive for an extended
period. Generally, it is expected that if a IAI Value Fund investment is
"nonproductive" for more than two to three years, it will be sold.
In many instances, the selection of undervalued securities for purchase by
IAI Value Fund may involve limited risk of capital loss because such lack of
investor recognition is already reflected in the price of the securities at the
time of purchase.
It is anticipated that some of the portfolio securities of IAI Value Fund
may not be widely traded, and that IAI Value Fund's position in such securities
may be substantial in relation to the market for the securities. Accordingly, it
would under certain circumstances be difficult for IAI Value Fund to dispose of
such portfolio securities at prevailing market prices in order to meet
redemptions. IAI Value Fund may, when management deems it appropriate, maintain
a reserve in liquid assets which it considers adequate to meet anticipated
redemptions.
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LIFEUSA FUNDS, INC.
Statement of Additional Information
dated January ___, 1997
LifeUSA Aggressive Growth Portfolio LifeUSA Balanced Portfolio
LifeUSA Growth Portfolio LifeUSA Current Income Portfolio
LifeUSA Global Portfolio LifeUSA Principal Preservation Portfolio
This Statement of Additional Information relates to the funds named above
(the "Portfolios"), each of which is a series of LifeUSA Funds, Inc. (the
"Fund"). This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the Portfolios' current Prospectus dated
January __, 1997. This Statement of Additional Information is incorporated into
the Portfolios' Prospectus by reference. To obtain copies of the Prospectus,
write or call the Portfolios at P.O. Box 357, Minneapolis, MN 55440, telephone:
1-800-864-4725. Dealer inquiries concerning the Portfolios should be directed to
LifeUSA Securities, Inc. at 1-888-446-5782 (this is toll-free call). Please
retain this Statement of Additional Information for future reference.
TABLE OF CONTENTS
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<TABLE>
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Page
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INVESTMENT OBJECTIVES AND POLICIES......................................2
INVESTMENT RESTRICTIONS.................................................19
PORTFOLIO TURNOVER......................................................23
INVESTMENT PERFORMANCE..................................................23
MANAGEMENT..............................................................26
PLAN OF DISTRIBUTION....................................................33
CUSTODIAN; COUNSEL; ACCOUNTANTS.........................................34
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE......................34
CAPITAL STOCK...........................................................35
NET ASSET VALUE AND PUBLIC OFFERING PRICE...............................36
TAX STATUS..............................................................36
LIMITATION OF DIRECTOR LIABILITY........................................37
FINANCIAL STATEMENTS....................................................38
STATEMENTS OF ASSETS AND LIABILITIES....................................40
APPENDIX A - RATINGS OF DEBT SECURITIES.................................A-1
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INVESTMENT OBJECTIVES AND POLICIES
The Prospectus discusses the investment objectives of LifeUSA Aggressive
Growth Portfolio, LifeUSA Growth Portfolio, LifeUSA Balanced Portfolio, LifeUSA
Current Income Portfolio, LifeUSA Principal Preservation Portfolio and LifeUSA
Global Portfolio (a "Portfolio" or the "Portfolios" as appropriate)and each of
the IAI Mutual Funds (the "Underlying Funds") in which the Portfolios may
invest, as well as the policies Investment Advisers, Inc. (the "Adviser")
employs to achieve those objectives. This section contains supplemental
information concerning the types of securities and other instruments in which
the Underlying Funds may invest, the investment policies and portfolio
strategies the Underlying Funds may utilize and certain risks attendant to such
investments, policies and strategies. There can be no assurance that the
respective investment objectives of the Portfolios or the Underlying Funds will
be achieved.
REPURCHASE AGREEMENTS
Each Underlying Fund may invest in repurchase agreements relating to the
securities in which it may invest. A repurchase agreement involves the purchase
of securities with the condition that, after a stated period of time, the
original seller will buy back the securities at a predetermined price or yield.
An Underlying Fund's custodian will have custody of, and will hold in a
segregated account, securities acquired by such Underlying Fund under a
repurchase agreement or other securities as collateral. In the case of a
security registered on a book entry system, the book entry will be maintained in
an Underlying Fund's name or that of its custodian. Repurchase agreements
involve certain risks not associated with direct investments in securities. For
example, if the seller of the agreement defaults on its obligation to repurchase
the underlying securities at a time when the value of the securities has
declined, an Underlying Fund may incur a loss upon disposition of such
securities. In the event that bankruptcy proceedings are commenced with respect
to the seller of the agreement, an Underlying Fund's ability to dispose of the
collateral to recover its investment may be restricted or delayed. While
collateral will at all times be maintained in an amount equal to the repurchase
price under the agreement (including accrued interest due thereunder), to the
extent proceeds from the sale of collateral were less than the repurchase price,
an Underlying Fund could suffer a loss.
REVERSE REPURCHASE AGREEMENTS
Each Underlying Fund may invest in reverse repurchase agreements. In a
reverse repurchase agreement, an Underlying Fund sells a portfolio instrument to
another party, such as a bank or broker-dealer, in return for cash and agrees to
repurchase the instrument at a particular price and time. While a reverse
repurchase agreement is outstanding, an Underlying Fund will maintain
appropriate liquid assets in a segregated custodial account to cover its
obligation under the agreement. An Underlying Fund will enter into reverse
repurchase agreements only with parties whose creditworthiness has been found
satisfactory by the Adviser, the Underlying Fund's investment adviser and
manager. As a result, such transactions may increase fluctuations in the market
value of an Underlying Fund's assets and may be viewed as a form of leverage.
Presently, the Underlying Funds do not intend to invest more than 5% of its net
assets in reverse repurchase agreements.
SECURITIES OF FOREIGN ISSUERS
Investing in foreign securities may result in greater risk than that
incurred by investing in domestic securities. There is generally less publicly
available information about foreign issuers comparable to reports and ratings
that are published about companies in the United States. Also, foreign issuers
are not subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to United
States companies.
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<PAGE>
It is contemplated that most foreign securities will be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign companies are less liquid and
more volatile than securities of comparable United States companies. Similarly,
volume and liquidity in most foreign bond markets is less than in the United
States and at times volatility of price can be greater than in the United
States. Commissions on foreign stock exchanges are generally higher than
commissions on United States exchanges, although the Underlying Fund will
endeavor to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
foreign stock exchanges, brokers and listed companies than in the United States.
With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of an
Underlying Fund, political or social instability, or diplomatic developments
which could affect United States investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the United
States' economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
The Adviser is not aware at this time of the existence of any investment or
exchange control regulations which might substantially impair the operations of
an Underlying Fund as described in the Prospectus and this Statement of
Additional Information. It should be noted, however, that this situation could
change at any time.
The dividends and interest payable on certain of an Underlying Fund's
foreign portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to an Underlying
Fund's shareholders. The expense ratio of an Underlying Fund should not be
materially affected by such Underlying Fund's investment in such foreign
securities.
ILLIQUID SECURITIES
Each Underlying Fund may also invest up to 15% (10% for IAI Money Market
Fund and IAI Developing Countries Fund) of its net assets in securities that are
considered illiquid because of the absence of a readily available market or due
to legal or contractual restrictions. However, certain restricted securities
that are not registered for sale to the general public that can be resold to
institutional investors may be considered liquid pursuant to guidelines adopted
by the Board of Directors. In the case of a Rule 144A Security, such security is
deemed to be liquid if:
1. IAI reasonably expects to be able to resell the security to a qualified
institutional buyer, as defined in paragraph (a)(1) of Rule 144A, who is aware
of the Fund's reliance upon Rule 144A in selling the security without
registration, as required by paragraph (d)(2) of Rule 144A;
2. the Rule 144A Security is not (a) of the same class as securities listed
on any national securities exchange or quoted in NASDAQ as determined under
paragraph (d)(3)(i) of Rule 144A, or (b) a security of a registered investment
company (other than a closed-end investment company); and
3. the issuer (a) is a foreign government eligible to register securities
under Schedule B of the Securities Act of 1933, (b) is a company that files
periodic reports under the Securities Act of 1934 on Forms 8-K, 10-Q, 10-K or
20-F or provides information under Rule 12g3-2(b) thereunder, or (c) has agreed
in writing to provide the holder and any prospective purchaser of the Rule 144A
Security with reasonably current financial information as required under
paragraph (d)(4)(i) of Rule 144A.
-3-
Other securities are deemed to be liquid if IAI determines that the
security can be disposed of within seven days in the ordinary course of business
at approximately the amount at which the Fund has valued the instrument for
purposes of calculating the Fund's net asset value. In making this
determination, IAI will consider such factors as may be relevant to the Fund's
ability to dispose of the security, including but not limited to, the following
factors (none of which, standing alone, would necessarily be determinative):
1. the frequency of trades and quotes for the security;
2. the number of dealers willing to purchase or sell the security and the
number of potential purchasers;
3. dealer undertakings to make a market in the security; and
4. the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of transfer).
It is not possible to predict with assurance the maintenance of an
institutional trading market for such securities and the liquidity of an
Underlying Fund's investments could be impaired if trading declines.
EXTENDIBLE NOTES
IAI Government Fund is permitted to invest in extendible notes in
accordance with its investment objectives and policies. An extendible note is a
debt arrangement under which the holder, at its option, may require the issuer
to repurchase the note for a predetermined fixed price at one or more times
prior to the ultimate maturity date of the note. Typically, an extendible note
is issued at an interest rate that can be adjusted at fixed times throughout its
term. At the same times as the interest rate is adjusted by the issuer, the
holder of the note is typically given the option to "put" the note back to the
issuer at a predetermined price (e.g., at 100% of the outstanding principal
amount plus unpaid accrued interest) if the extended interest rate is
undesirable to the holder. This option to put the note back to the issuer (i.e.,
to require the issuer to repurchase the note) provides the holder with an
optional maturity date that is shorter than the actual maturity date of the
note.
Extendible notes may be issued with maturity dates in excess of seven years
from the date of issuance. However, if such extendible notes provide for an
optional maturity date of seven years or less, then such notes are deemed by
Government Fund to have been issued for the shorter optional maturity date.
Accordingly, investment in such extendible notes would not be in contravention
of the fundamental investment policy not to invest in securities having a
maturity date in excess of seven years from the date of acquisition. Investment
in extendible notes is not expected to have a material impact on the effective
portfolio maturity of Government Fund.
An investment in an extendible note is liquid, and the note may be resold
to another investor prior to its optional maturity date at its market value. The
market value of an extendible note with a given optional maturity date is
determined and fluctuates in a similar manner as the market value of a fixed
maturity note with a maturity equivalent to the optional maturity of the
extendible note. Compared to fixed term notes of the same issuer, however,
extendible notes with equivalent optional maturities generally yield higher
returns without a material increase in risk to Government Fund.
The creditworthiness of the issuers of extendible notes is monitored and
rated by Moody's and by S&P. The creditworthiness of such issuers is also
monitored by the Adviser. Government Fund does not have a current intention of
investing in the coming year more than 5% of its net assets in extendible notes.
-4-
VARIABLE OR FLOATING RATE INSTRUMENTS
Each Underlying Fund may invest in variable or floating rate instruments.
Such instruments (including notes purchased directly from issuers) bear variable
or floating interest rates and carry rights that permit holders to demand
payment of the unpaid principal balance plus accrued interest from the issuers
or certain financial intermediaries. Floating rate securities have interest
rates that change whenever there is a change in a designated base rate while
variable rate instruments provide for a specified periodic adjustment in the
interest rate. These formulas are designed to result in a market value for the
instrument that approximates its par value.
DELAYED-DELIVERY TRANSACTIONS
Each fixed income Underlying Fund may buy and sell securities on a
delayed-delivery or when-issued basis. These transactions involve a commitment
by an Underlying Fund to purchase or sell specific securities at a predetermined
price or yield, with payment and delivery taking place after the customary
settlement period for that type of security (and more than seven days in the
future). Typically, no interest accrues to the purchaser until the security is
delivered. Each Underlying Fund may receive fees for entering into
delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, each Underlying
Fund assumes the rights and risks of ownership, including the risk of price and
yield fluctuations. Because an Underlying Fund is not required to pay for
securities until the delivery date, these risks are in addition to the risks
associated with such Underlying Fund's other investments. If an Underlying Fund
remains substantially fully invested at a time when delayed delivery purchases
are outstanding, the delayed-delivery purchases may result in a form of
leverage. When delayed-delivery purchases are outstanding, an Underlying Fund
will set aside appropriate liquid assets in a segregated custodial account to
cover its purchase obligations. When an Underlying Fund has sold a security on a
delayed-delivery basis, such Underlying Fund does not participate in further
gains or losses with respect to the security. If the other party to a
delayed-delivery transaction fails to deliver or pay for the securities, an
Underlying Fund could miss a favorable price or yield opportunity, or could
suffer a loss.
Each Underlying Fund may renegotiate delayed-delivery transactions after
they are entered into, and may sell underlying securities before they are
delivered, which may result in capital gains or losses.
DOLLAR ROLLS
In connection with its ability to purchase securities on a when-issued or
forward commitment basis, a fixed income Underlying Fund may enter into "dollar
rolls" in which such Underlying Fund sells securities for delivery in the
current month and simultaneously contracts with the same counterparty to
repurchase similar (same type, coupon and maturity) but not identical securities
on a specified future date. An Underlying Fund gives up the right to receive
principal and interest paid on the securities sold. However, an Underlying Fund
would benefit to the extent of any difference between the price received for the
securities sold and lower forward price for the securities purchased plus any
fee income received. Unless such benefits exceed the income and capital
appreciation that would have been realized on the securities sold as part of the
dollar roll, the use of this technique will diminish the investment performance
of an Underlying Fund compared with what such performance would have been
without the use of dollar rolls. Each Underlying Fund will hold and maintain in
a segregated account until the settlement date cash, government securities, or
liquid high-grade debt securities in an amount equal to the value of the
when-issued or forward commitment securities. The benefits derived from the use
of dollar rolls may depend, among other things, upon the Adviser's ability to
predict interest rates correctly. There is no assurance that dollar rolls can be
successfully employed. In addition, the use of dollar rolls by an Underlying
Fund while remaining substantially fully invested increases the amount of an
Underlying Fund's assets that are subject to market risk to an amount that is
greater than such Underlying Fund's net asset value, which could result in
increased volatility of the price of such Underlying Fund's shares.
-5-
MORTGAGE-BACKED SECURITIES
Each Underlying Fund may purchase mortgage-backed securities issued by
government and non-government entities such as banks, mortgage lenders, or other
financial institutions. A mortgage-backed security may be an obligation of the
issuer backed by a mortgage or pool of mortgages or a direct interest in an
underlying pool of mortgages. Some mortgage-backed securities, such as
collateralized mortgage obligations or CMOs, make payments of both principal and
interest at a variety of intervals; others make semiannual interest payments at
a predetermined rate and repay principal at maturity (like a typical bond).
Mortgage-backed securities are based on different types of mortgages including
those on commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and an
Underlying Fund may invest in them if the Adviser determines they are consistent
with such Underlying Fund's investment objective and policies.
The value of mortgage-backed securities may change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Non-government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these securities
and may lower their total returns.
STRIPPED MORTGAGE-BACKED SECURITIES
IAI Government and Bond Funds may invest in stripped mortgage-backed
securities. Such securities are created when a U.S. government agency or a
financial institution separates the interest and principal components of a
mortgage-backed security and sells them as individual securities. The holder of
the "principal-only" security (PO) receives the principal payments made by the
underlying mortgage-backed security, while the holder of the "interest-only"
security (IO) receives interest payments from the same underlying security. The
prices of stripped mortgage-backed securities may be particularly affected by
changes in interest rates. As interest rates fall, prepayment rates tend to
increase, which tends to reduce prices of IOs and increase prices of POs. Rising
interest rates can have the opposite effect.
ASSET-BACKED SECURITIES
IAI Government and IAI Bond Funds may invest in asset-backed securities.
Asset-backed securities represent interests in pools of consumer loans
(generally unrelated to mortgage loans) and most often are structured as
pass-through securities. Interest and principal payments alternately depend upon
payment of the underlying loans by individuals, although the securities may be
supported by letters of credit or other credit enhancements. The value of
asset-backed securities may also depend on the creditworthiness of the servicing
agent for the loan pool, the originator of the loans, or the financial
institution providing the credit enhancement.
ZERO COUPON BONDS
Each Underlying Fund may invest in zero coupon bonds. Zero coupon bonds do
not make interest payments; instead, they are sold at a deep discount from their
face value and are redeemed at face value when they mature. Because zero coupon
bonds do not pay current income, their prices can be very volatile when interest
rates change. In calculating its dividends, an Underlying Fund takes into
account as income a portion of the difference between a zero coupon bond's
purchase price and its face value.
A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.
-6-
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury bond and selling them as individual
securities. Bonds issued by the Resolution Funding Corporation (REFCORP) and the
Financing Corporation (FICO) can also be separated in this fashion. Original
issue zeroes are zero coupon securities originally issued by the U.S.
government, a government agency, or a corporation in zero coupon form.
LOWER-RATED DEBT SECURITIES
Issuers of high yield securities may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments or the issuer's inability to meet specific
projected business forecasts or the unavailability of additional financing. The
risk of loss due to default by the issuer is significantly greater for the
holders of high yield securities because such securities may be unsecured and
may be subordinated to other creditors of the issuer.
High yield securities frequently have call or redemption features which
would permit an issuer to repurchase the security from an Underlying Fund. If a
call were exercised by the issuer during a period of declining interest rates,
an Underlying Fund likely would have to replace such called security with a
lower yielding security, thus decreasing the net investment income to an
Underlying Fund and dividends to shareholders.
An Underlying Fund may have difficulty disposing of certain high yield
securities because there may be a thin trading market for such securities. The
secondary trading market for high yield securities is generally not as liquid as
the secondary market for higher rated securities. Reduced secondary market
liquidity may have an adverse impact on market price and an Underlying Fund's
ability to dispose of particular issues when necessary to meet such Underlying
Fund's liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to adversely affect an
Underlying Fund's net asset value. In addition, an Underlying Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
on a portfolio holding or participate in the restructuring of the obligation.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS
IAI Bond and IAI Government Funds may invest in loans and other direct debt
instruments. Direct debt instruments are interests in amounts owed by a
corporate, governmental, or other borrower to lenders or lending syndicates
(loans and loan participations), to suppliers of goods or services (trade claims
or other receivable), or to other parties. Direct debt instruments are subject
to an Underlying Fund's policies regarding the quality of debt securities.
Purchasers of loans and other forms of direct indebtedness depend primarily
upon the creditworthiness of the borrower for payment of principal and interest.
Direct debt instruments may not be rated by any nationally recognized rating
service. If an Underlying Fund does not receive scheduled interest or principal
payments on such indebtedness, an Underlying Fund's share price and yield could
be adversely affected. Loans that are fully secured offer an Underlying Fund
more protection than an unsecured loan in the event of non-payment of scheduled
interest or principal. However, there is no assurance that the liquidation of
collateral from a secured loan would satisfy the borrower's obligation, or that
the collateral can be liquidated. Indebtedness of borrowers whose
creditworthiness is poor involves substantially greater risks, and may be highly
speculative. Borrowers that are in bankruptcy or restructuring may never pay off
-7-
<PAGE>
their indebtedness, or may pay only a small fraction of the amount owed. Direct
indebtedness of developing countries will also involve a risk that the
governmental entities responsible for the repayment of the debt may be unable,
or unwilling, to pay interest and repay principal when due.
Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks to an Underlying
Fund. For example, if a loan is foreclosed, an Underlying Fund could become part
owner of any collateral, and would bear the costs and liabilities associated
with owning and disposing of the collateral. In addition, it is conceivable that
under emerging legal theories of lender liability, an Underlying Fund could be
held liable as a co-lender. Direct debt instruments may also involve a risk of
insolvency of the lending bank or other intermediaries. Direct debt instruments
that are not in the form of securities may offer less legal protection to the
Underlying Fund in the event of fraud or misrepresentation. In the absence of
definitive regulatory guidance, an Underlying Fund relies on the Adviser's
research in an attempt to avoid situations where fraud or misrepresentation
could adversely affect such Underlying Fund.
A loan is often administered by a bank or other financial institution that
acts as agent for all holders. The agent administers the terms of the loan, as
specified in the loan agreement. Unless, under the terms of the loan or other
indebtedness, an Underlying Fund has direct recourse against the borrower, it
may have to rely on the agent to apply appropriate credit remedies against a
borrower. If assets held by the agent for the benefit of an Underlying Fund were
determined to be subject to the claims of the agent's general creditors, such
Underlying Fund might incur certain costs and delays in rendering payment on the
loan or loan participation and could suffer a loss of principal or interest.
IAI Bond and IAI Government Funds limit the amount of the assets that they
invest in any one issuer or in issuers within the same industry. For purposes of
these limitations, an Underlying Fund generally will treat the borrower as the
"issuer" of indebtedness held by such Underlying Fund. In the case of loan
participations where a bank or other lending institution serves as financial
intermediary between an Underlying Fund and the borrower, if the participation
does not shift to such Underlying Fund the direct debtor/creditor relationship
with the borrower, SEC interpretations require such Underlying Fund, in
appropriate circumstances, to treat both the lending bank or other lending
institution and the borrower as "issuers" for the purpose of determining whether
such Underlying Fund has invested more than 5% of its total assets in a single
issuer. Treating the financial intermediary as an issuer of indebtedness may
restrict an Underlying Fund's ability to invest in indebtedness related to a
single financial intermediary, or a group of intermediaries engaged in the same
industry, even if the underlying borrowers represent many different companies
and industries.
LENDING PORTFOLIO SECURITIES
In order to generate additional income, each Underlying Fund may lend
portfolio securities to broker-dealers, banks or other financial borrowers of
securities. As with other extensions of credit, there are risks of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. However, an Underlying Fund will only enter into
loan arrangements with broker-dealers, banks or other institutions which the
Adviser has determined are creditworthy under guidelines established by the
Underlying Fund's Board of Directors. Each Underlying Fund may also experience a
loss if, upon the failure of a borrower to return loaned securities, the
collateral is not sufficient in value or liquidity to cover the value of such
loaned securities (including accrued interest thereon). However, an Underlying
Fund will receive collateral in the form of cash, United States Government
securities, certificates of deposit or other high-grade, short-term obligations
or interest-bearing cash equivalents equal to at least 102% of the value of the
securities loaned. The value of the collateral and of the securities loaned will
be marked to market on a daily basis. During the time portfolio securities are
on loan, the borrower pays an Underlying Fund an amount equivalent to any
dividends or interest paid on the securities and an Underlying Fund may invest
the cash collateral and earn additional income or may receive an agreed upon
amount of interest income from the borrower. However, the amounts received by an
Underlying Fund may be reduced by finders' fees paid to broker-dealers and
related expenses. Presently, the Underlying Funds do not intend to lend more
than 5% of its net assets to broker-dealers, banks, or other financial borrowers
of securities.
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<PAGE>
SWAP AGREEMENTS
Swap agreements can be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease an
Underlying Fund's exposure to long- or short-term interest rates (in the U.S. or
abroad), foreign currency values, mortgage securities, corporate borrowing
rates, or other factors such as security prices or inflation rates. Swap
agreements can take many different forms and are known by a variety of names. An
Underlying Fund is not limited to any particular form of swap agreement if the
Adviser determines it is consistent with such Underlying Fund's investment
objective and policies.
Swap agreements will tend to shift an Underlying Fund's investment exposure
from one type of investment to another. For example, if an Underlying Fund
agrees to exchange payments in dollars for payments in foreign currency, the
swap agreement would tend to decrease an Underlying Fund's exposure to U.S.
interest rates and increase its exposure to foreign currency and interest rates.
Depending on how they are used, swap agreements may increase or decrease the
overall volatility of an Underlying Fund's investments and its share price.
The most significant factor in the performance of swap agreements is the
change in the specific interest rate, currency, or other factors that determine
the amounts of payments due to and from an Underlying Fund. If a swap agreement
calls for payments by an Underlying Fund, such Underlying Fund must be prepared
to make such payments when due. In addition, if the counterparty's
creditworthiness declines, the value of a swap agreement would be likely to
decline, potentially resulting in losses. An Underlying Fund expects to be able
to eliminate its exposure under swap agreements either by assignment or other
disposition, or by entering into an offsetting swap agreement with the same
party or a similar creditworthy party.
Each Underlying Fund will maintain appropriate liquid assets in a
segregated custodial account to cover its current obligations under swap
agreements. If an Underlying Fund enters into a swap agreement on a net basis,
it will segregate assets with a daily value at least equal to the excess, if
any, of an Underlying Fund's accrued obligations under the swap agreement over
the accrued amount such Underlying Fund is entitled to receive under the
agreement. If an Underlying Fund enters into a swap agreement on other than a
net basis, it will segregate assets with a value equal to the full amount of
such Underlying Fund's accrued obligation under the agreement.
INDEXED SECURITIES
Each Underlying Fund, other than IAI Money Market Fund, may purchase
securities whose prices are indexed to the prices of other securities,
securities indexes, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined by
reference to a specific instrument or statistic. Gold-indexed securities, for
example, typically provide for a maturity value that depends on the price of
gold, resulting in a security whose price tends to rise and fall together with
gold prices. Currency-indexed securities typically are short to
intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
-9-
<PAGE>
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies. The Adviser will use its judgment in determining whether
indexed securities should be treated as short-term instruments, bonds, stocks,
or as a separate asset class for purposes of an Underlying Fund's investment
policies, depending on the individual characteristics of the securities. Indexed
securities may be more volatile than the underlying instruments. Presently, each
of the Underlying Funds does not intend to invest more than 5% of its net assets
in Indexed Securities.
ECONOMIES OF JAPAN, THE UNITED KINGDOM AND GERMANY
IAI International Fund may from time to time concentrate more than 25% of
its total assets in the economies of Japan, the United Kingdom and Germany. This
section includes a general discussion of the economy of Germany. The economies
of Japan and the United Kingdom are further described in the Prospectus.
Germany is a federated republic with a population of approximately 80
million and a democratic parliamentary form of government. The German economy is
organized primarily on the basis of private sector ownership, with the state
exerting major influence through ownership in certain sectors, including
transportation, communication and energy. Unification of West Germany with the
formerly communist controlled East Germany took place in 1990.
Industrial activity makes the largest contribution to the German gross
national product. Although only 5% of German businesses are large-scale
enterprises, such large-scale businesses account for over half of industrial
production and employ over half the industrial labor force. Trading volume,
therefore, tends to concentrate on relatively few companies with both large
capitalizations and broad stock ownership. Historically the German economy has
been strongly export oriented. Privatization of formerly state owned enterprise
in what was once East Germany is in progress, but will make little difference to
the predominance of large scale businesses in overall industrial activity and
the stock market.
German equity securities trade predominantly on the country's eight
independent local stock exchanges, the Frankfurt exchange accounting for 70% of
turnover. Subject to the provisions of pertinent securities law, mainly the
Stock Exchange Law of 1896, as amended, the council, management and other
executive organs of the stock exchanges constitute self-administering and
self-regulatory bodies. The "Working Group of German Stock Exchanges"
headquartered in Frankfurt, of which all eight stock exchanges are members,
addresses all policy and administrative questions of national and international
character.
Prices for active stocks, including those for larger companies are quoted
continuously during stock exchange hours. Less actively traded stocks are quoted
only once a day. Equity shares are normally fully-paid and non-assessable.
Orders for stock executed for large customers on the stock exchanges are
negotiable. A federal stock exchange turnover tax, ranging up to 0.25%, is
levied on all securities transactions other than those between banks acting as
principal. Nonresidents such as the Underlying Fund are charged half these
rates.
German equity securities are denominated in Deutchemarks. Deutchemarks are
fully convertible and transferable into all currencies, without administrative
or legal restrictions, for both nonresidents and residents of Germany. Since
1974, the Deutchemark has traded on a floating exchange rate basis against all
currencies.
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NO RATING CRITERIA FOR DEBT SECURITIES -
DEVELOPING COUNTRIES FUND AND LATIN AMERICA FUND
IAI Developing Countries Fund and IAI Latin America Fund have established
no rating criteria for the debt securities in which it may invest. Therefore,
the Underlying Funds may invest in debt securities either (a) which are rated in
one of the top four rating categories by a nationally recognized rating
organization or which possess similar credit characteristics ("investment grade
securities") or (b) which are rated below the top four rating categories or
which possess similar credit characteristics ("high yield securities"). Ratings
are one of several factors utilized in performing a credit analysis of issuers.
Issuers of high yield securities may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments or the issuer's inability to meet specific
projected business forecasts or the unavailability of additional financing. The
risk of loss due to default by the issuer is significantly greater for the
holders of high yield securities because such securities may be unsecured and
may be subordinated to other creditors of the issuer.
High yield securities frequently have call or redemption features which
would permit an issuer to repurchase the security from the Underlying Fund. If a
call were exercised by the issuer during a period of declining interest rates,
the Underlying Fund likely would have to replace such called security with a
lower yielding security, thus decreasing the net investment income to the
Underlying Fund and dividends to shareholders.
IAI Developing Countries Fund and IAI Latin American Fund may have
difficulty disposing of certain high yield securities because there may be a
thin trading market for such securities. The secondary trading market for high
yield securities is generally not as liquid as the secondary market for higher
rated securities. Reduced secondary market liquidity may have an adverse impact
on market price and an Underlying Fund's ability to dispose of particular issues
when necessary to meet an Underlying Fund's liquidity needs or in response to a
specific economic event such as a deterioration in the creditworthiness of the
issuer.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to adversely affect IAI
Developing Countries Fund's net asset value. In addition, the Underlying Fund
may incur additional expenses to the extent it is required to seek recovery upon
a default on a portfolio holding or participate in the restructuring of the
obligation.
ADDITIONAL RISK CONSIDERATIONS ASSOCIATED WITH FOREIGN INVESTING
Investors should consider carefully the substantial risks involved with
respect to investing in securities of companies and governments of foreign
nations, which are in addition to the usual risks inherent in domestic
investments. Such risks are heightened with respect to investments in developing
countries. There may be less publicly available information about foreign
companies comparable to the reports and ratings published about companies in the
United States. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards, and auditing practices
and requirements may not be comparable to those applicable to United States
companies. Foreign markets typically have substantially less volume than the New
York Stock Exchange and securities of some foreign companies are less liquid and
more volatile than securities of comparable United States companies. Commission
rates in foreign countries, which are generally fixed rather than subject to
negotiation as in the United States, are likely to be higher. In many foreign
countries there is less government supervision and regulation of stock
exchanges, brokers and listed companies than in the United States.
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Investments in developing countries may be subject to potentially higher
risks than investments in developed countries. These risks include (i) less
social, political and economic stability; (ii) the small current size of the
markets for such securities and the currently low or nonexistent volume of
trading, which may result in a lack of liquidity and in greater price
volatility; (iii) certain national policies which may restrict the Underlying
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the limited
development and recent emergence, in certain countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in certain countries may be slowed or reversed
by unanticipated political or social events in such countries.
Despite the recent dissolution of the Soviet Union, the Communist Party may
continue to exercise a significant role in certain (particularly Eastern
European) countries. To the extent of the Communist Party's influence,
investments in such countries will involve risks of nationalization,
expropriation and confiscatory taxation. The communist governments of a number
of such countries expropriated large amounts of private property in the past, in
many cases without adequate compensation, and there can be no assurance that
such expropriation will not occur in the future. In the event of such
expropriation, an Underlying Fund could lose a substantial portion of any
investments it has made in the affected countries. Further, no accounting
standards exist in many developing countries. Finally, even though certain
currencies may be convertible into U.S. dollars, the conversion rates may be
artificial to the actual market values and may be adverse to Underlying Fund
shareholders.
Certain countries, which do not have market economies, are characterized by
an absence of developed legal structures governing private and foreign
investments and private property. Certain countries require governmental
approval prior to investments by foreign persons, or limit the amount of
investment by foreign persons in a particular company, or limit the investment
of foreign persons to only a specific class of securities of a company that may
have less advantageous terms than securities of the company available for
purchase by nationals.
Authoritarian governments in certain countries may require that a
governmental or quasi-governmental authority to act as custodian of an
Underlying Fund's assets invested in such country. To the extent such
governmental or quasi-governmental authorities do not satisfy the requirements
of the 1940 Act to act as foreign custodians of the Underlying Fund's cash and
securities, an Underlying Fund's investment in such countries may be limited or
may be required to be effected through intermediaries. The risk of loss through
governmental confiscation may be increased in such countries.
An Underlying Fund endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when an Underlying Fund
changes investments from one country to another or when proceeds from the sale
of shares in U.S. dollars are used for the purchase of securities in foreign
countries. Also, some countries may adopt policies which would prevent an
Underlying Fund from transferring cash out of the country, withhold portions of
interest and dividends at the source, or impose other taxes, with respect to an
Underlying Fund's investments in securities of issuers of that country. Although
an Underlying Fund invests only in foreign nations which it considers as having
relatively stable and friendly governments, there is the possibility of
expropriation, nationalization, confiscatory or other taxation, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), default in foreign government securities, political or social
instability or diplomatic developments that could affect investments in
securities of issuers in those nations.
An Underlying Fund may be affected either unfavorably or favorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, by exchange control regulations and by indigenous economic
and political developments. Through an Underlying Fund's flexible policy,
management endeavors to avoid unfavorable consequences and to take advantage of
favorable developments in particular nations where from time to time it places
an Underlying Fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses. However, in the absence of willful misfeasance, bad faith or gross
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negligence on the part of the investment manager, any losses resulting from the
holding of an Underlying Fund's portfolio securities in foreign countries and/or
with securities depositories will be at the risk of the shareholders.
An Underlying Fund's ability to reduce or eliminate its futures and related
options positions will depend upon the liquidity of the secondary markets for
such futures and options. Each Underlying Fund intends to purchase or sell
futures and related options only on exchanges or boards of trade where there
appears to be an active secondary market, but there is no assurance that a
liquid secondary market will exist for any particular contract or at any
particular time. Use of stock index futures and related options for hedging may
involve risks because of imperfect correlation between movements in the prices
of the futures or related options and movements in the prices of the securities
being hedged. Successful use of futures and related options by an Underlying
Fund for hedging purposes also depends upon the investment manager's ability to
predict correctly movements in the direction of the market, as to which no
assurance can be given.
SPECIAL CONSIDERATIONS AFFECTING LATIN AMERICA
Latin America is a region rich in natural resources such as oil, copper,
tin, silver, iron ore, forestry, fishing, livestock, and agriculture. The region
has a large population (over 300 million) representing a large domestic market.
The region has been transitional over the last five years from the stagnant
1980s which were characterized by poor economic policies, higher international
interest rates, and limited access to new foreign capital.
High inflation and low economic growth have given way to stable manageable
inflation rates and higher economic growth. Changes in political leadership, the
implementation of market-oriented economic policies, such as privatization,
trade reform and monetary reform have been among the recent steps taken to
modernize the Latin American economies and to regenerate growth in the region.
Various trade agreements have also been formed within the region such as the
Andean Pact, Mercosur and NAFTA. The largest of these is NAFTA, which was
implemented on January 1, 1994.
Latin American equity markets can be extremely volatile and in the past
have shown little correlation with the U.S. market. Currencies are typically
weak, but most are now relatively free floating, and it is not unusual for the
currencies to undergo wide fluctuations in value over short periods of time due
to changes in the market.
Mexico's economy has been transformed significantly over the last 6-7
years. In the past few years, the government has sold the telephone company, the
major steel companies, the banks and many others. The major state ownership
remaining is in the oil sector and the electricity sector. The U.S. is Mexico's
major trading partner, accounting for two-thirds of its exports and imports. The
government in consultation with international economic agencies, is implementing
programs to stabilize the economy and foster growth. For example, Mexico, the
U.S. and Canada implemented the North American Free Trade Agreement. This
cooperation is expected to lead to increased trade and reduced barriers.
In the early 1980s, Mexico experienced a foreign debt crisis. By 1987,
foreign debt had reached prohibitive levels, accounting for 90 to 95 percent of
GDP. By the end of 1994, a large current account deficit, fueled in part by
expansionary policy, and the burden of its large national debt forced the
Mexican government to devalue the peso, triggering a severe crisis of
confidence. Both the crisis and measures taken to stabilize the economy since,
have led to severely reduced domestic demand, which has been only partially
offset by positive trade-related activity.
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<PAGE>
Brazil entered the 1990s with declining real growth, runaway inflation, an
unserviceable foreign debt of $122 billion, and a lack of policy direction. Over
the past two years, Brazil was able to stabilize its domestic economy through a
process of balancing the government budget, the privatization of state
enterprises, deregulation and reduction of red tape and introducing greater
competition in the domestic business environment. Inflation has been reduced to
about 3% a month from 50% a month since mid-1994. A major long-run strength is
Brazil's natural resources. Iron ore, bauxite, tin, gold, and forestry products
make up some of Brazil's basic natural resource base, which includes some of the
largest mineral reserves in the world. In terms of population, Brazil is the
sixth-largest in the world with about 155 million people and represents a huge
domestic market.
Chile, like Brazil, is endowed with considerable mineral resources, in
particular copper. Economic reform has been ongoing in Chile for at least 15
years, but political democracy has only recently returned to Chile.
Privatization of the public sector beginning in the early 1980s has bolstered
the equity market. A well organized pension system has created a long-term
domestic investor base.
Argentina is strong in wheat production and other foodstuffs and livestock
ranching. A well-educated and skilled population boasts one of the highest
literacy rates in the region. The country has been ravaged by decades of
extremely high inflation and political instability. Thanks to structural
reforms, the revitalized Argentine economy has been among the top three fastest
growing economies in the world over the last three years. The newly created
Argentine economic institutions have integrated the country with the rest of the
world, leaving the state to concentrate on its essential functions.
Privatization is ongoing and should reduce the amount of external debt
outstanding. The markets for labor, capital and goods and services has been
deregulated. Nearly all non-tariff barriers and export taxes have been
eliminated, the tariff structure simplified and tariffs sharply reduced.
Venezuela has substantial oil reserves. External debt is being
re-negotiated, and the government is implementing economic reform in order to
reduce the size of the public sector. Internal gasoline prices, which are
one-third those of international prices, are being increased in order to reduce
subsidies. Plans for privatization and exchange and interest rate liberalization
are examples of recently introduced reforms.
FOREIGN CURRENCY TRANSACTIONS
Each Underlying Fund, other than IAI Money Market Fund whose foreign
currency holdings must be denominated in U.S. dollars, may hold foreign currency
deposits from time to time and may convert dollars and foreign currencies in the
foreign exchange markets. Currency conversion involves dealer spreads and other
costs, although commissions usually are not charged. Currencies may be exchanged
on a spot (i.e., cash) basis, or by entering into forward contracts to purchase
or sell foreign currencies at a future date and price. Forward contracts
generally are traded in an interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. The parties to a
forward contract may agree to offset or terminate the contract before its
maturity, or may hold the contract to maturity and complete the contemplated
currency exchange.
Such Underlying Funds may use currency forward contracts to manage currency
risks and to facilitate transactions in foreign securities. The following
discussion summarizes the principal currency management strategies involving
forward contracts that could be used by the Underlying Funds.
In connection with purchases and sales of securities denominated in foreign
currencies, an Underlying Fund may enter into currency forward contracts to fix
a definite price for the purchase or sale in advance of the trade's settlement
date. This technique is sometimes referred to as a "settlement hedge" or
"transaction hedge." the Adviser expects to enter into settlement hedges in the
normal course of managing an Underlying Fund's foreign investments. An
Underlying Fund could also enter into forward contracts to purchase or sell a
foreign currency in anticipation of future purchases or sales of securities
denominated in foreign currency, even if the specific investments have not yet
been selected by the Adviser.
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Each Underlying Fund may also use forward contracts to hedge against a
decline in the value of existing investments denominated in foreign currency.
For example, if an Underlying Fund owned securities denominated in pounds
sterling, it could enter into a forward contract to sell pounds sterling in
return for U.S. dollars to hedge against possible declines in the pound's value.
Such a hedge, sometimes referred to as a "position hedge," would tend to offset
both positive and negative currency fluctuations but would not offset changes in
security values caused by other factors. An Underlying Fund could also hedge the
position by selling another currency expected to perform similarly to the pound
sterling -- for example, by entering into a forward contract to sell
Deutschemarks or European Currency Units in return for U.S. dollars. This type
of hedge, sometimes referred to as a "proxy hedge," could offer advantages in
terms of cost, yield, or efficiency, but generally would not hedge currency
exposure as effectively as a simple hedge into U.S. dollars. Proxy hedges may
result in losses if the currency used to hedge does not perform similarly to the
currency in which the hedged securities are denominated.
Under certain conditions, SEC guidelines require mutual funds to set aside
appropriate liquid assets in a segregated custodial account to cover currency
forward contracts. As required by SEC guidelines, each Underlying Fund will
segregate assets to cover currency forward contracts, if any, whose purpose is
essentially speculative. Each Underlying Fund will not segregate assets to cover
forward contracts entered into for hedging purposes, including settlement
hedges, position hedges, and proxy hedges.
Successful use of forward currency contracts will depend on the Adviser's
skill in analyzing and predicting currency values. Forward contracts may
substantially change an Underlying Fund's investment exposure to changes in
currency exchange rates, and could result in losses to an Underlying Fund if
currencies do not perform as the Adviser anticipates. For example, if a
currency's value rose at a time when the Adviser had hedged an Underlying Fund
by selling that currency in exchange for dollars, such Underlying Fund would be
unable to participate in the currency's appreciation. If the Adviser hedges
currency exposure through proxy hedges, an Underlying Fund could realize
currency losses from the hedge and the security position at the same time if the
two currencies do not move in tandem. Similarly, if the Adviser increases an
Underlying Fund's exposure to a foreign currency, and that currency's value
declines, such Underlying Fund will realize a loss. There is no assurance that
the Adviser's use of forward currency contracts will be advantageous to an
Underlying Fund or that it will hedge at an appropriate time. The policies
described in this section are non-fundamental policies of the Underlying Funds.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS
Each Underlying Fund, other than IAI Money Market Fund has filed a notice
of eligibility for exclusion from the definition of the term "commodity pool
operator" with the Commodity Futures Trading Commission (CFTC) and the National
Futures Association, which regulate trading in the futures markets, before
engaging in any purchases or sales of futures contracts or options on futures
contracts. Each Underlying Fund intends to comply with Section 4.5 of the
regulations under the Commodity Exchange Act, which limits the extent to which
an Underlying Fund can commit assets to initial margin deposits and option
premiums.
The above limitation on an Underlying Fund's investments in futures
contracts and options, and such Underlying Fund's policies regarding futures
contracts and options discussed elsewhere in this Statement of Additional
Information may be changed as regulatory agencies permit. With respect to
positions in commodity futures or commodity option contracts which do not come
within the meaning and intent of bona fide hedging in the CFTC rules, the
aggregate initial margin and premiums required to establish such positions will
not exceed five percent of the liquidation value of the qualifying entity's
portfolio, after taking into account unrealized profits and unrealized losses on
any such contracts it has entered into; and, provided further, that in the case
of an option that is in-the-money, the in-the-money amount may be excluded in
computing such 5 percent.
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FUTURES CONTRACTS
When an Underlying Fund purchases a futures contract, it agrees to purchase
a specified underlying instrument at a specified future date. When an Underlying
Fund sells a futures contract, it agrees to sell the underlying instrument at a
specified future date. The price at which the purchase and sale will take place
is fixed when an Underlying Fund enters into the contract. Some currently
available futures contracts are based on specific securities, such as U.S.
Treasury bonds or notes, and some are based on indexes of securities prices,
such as the Standard & Poor's 500 Composite Stock Price Index (S&P 500). Futures
can be held until their delivery dates, or can be closed out before then if a
liquid secondary market is available.
The value of a futures contract tends to increase and decrease in tandem
with the value of its underlying instrument. Therefore, purchasing futures
contracts will tend to increase an Underlying Fund's exposure to positive and
negative price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When an Underlying Fund sells a
futures contract, by contrast, the value of its futures position will tend to
move in a direction contrary to the market. Selling futures contracts,
therefore, will tend to offset both positive and negative market price changes,
much as if the underlying instrument had been sold.
FUTURES MARGIN PAYMENTS
The purchaser or seller of a futures contract is not required to deliver or
pay for the underlying instrument unless the contract is held until the delivery
date. However, both the purchaser and seller are required to deposit "initial
margin" with a futures broker, known as a futures commission merchant (FCM),
when the contract is entered into. Initial margin deposits are typically equal
to a percentage of the contract's value. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments to settle the change in value on a daily basis. The party that has a
gain may be entitled to receive all or a portion of this amount. Initial and
variation margin payments do not constitute purchasing securities on margin for
purposes of an Underlying Fund's investment limitations. In the event of the
bankruptcy of an FCM that holds margin on behalf of an Underlying Fund, such
Underlying Fund may be entitled to return of margin owed to it only in
proportion to the amount received by the FMC's other customers, potentially
resulting in losses to such Underlying Fund.
PURCHASING PUT AND CALL OPTIONS
By purchasing a put option, an Underlying Fund obtains the right (but not
the obligation) to sell the option's underlying instrument at a fixed strike
price. In return for this right, an Underlying Fund pays the current market
price for the option (known as the option premium). Options have various types
of underlying instruments, including specific securities, indexes of securities
prices, and futures contracts. An Underlying Fund may terminate its position in
a put option it has purchased by allowing it to expire or by exercising the
option. If the option is allowed to expire, an Underlying Fund will lose the
entire premium it paid. If an Underlying Fund exercises the option, it completes
the sale of the underlying instrument at the strike price. An Underlying Fund
may also terminate a put option position by closing it out in the secondary
market at its current price, if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium paid, plus related
transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to suffer
a loss if security prices do not rise sufficiently to offset the cost of the
option.
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WRITING PUT AND CALL OPTIONS
When an Underlying Fund writes a put option, it takes the opposite side of
the transaction from the option's purchaser. In return for receipt of the
premium, such Underlying Fund assumes the obligation to pay the strike price for
the option's underlying instrument if the other party to the option chooses to
exercise it. When writing an option on a futures contract an Underlying Fund
would be required to make margin payments to an FCM as described above for
futures contracts. An Underlying Fund may seek to terminate its position in a
put option it writes before exercise by closing out the option in the secondary
market at its current price. If the secondary market is not liquid for a put
option an Underlying Fund has written, however, such Underlying Fund must
continue to be prepared to pay the strike price while the option is outstanding,
regardless of price changes, and must continue to set aside assets to cover its
position. If security prices rise, a put writer would generally expect to
profit, although its gain would be limited to the amount of the premium it
received.
If security prices remain the same over time, it is likely that the writer
will also profit, because it should be able to close out the option at a lower
price. If security prices fall, the put writer would expect to suffer a loss.
This loss should be less than the loss from purchasing the underlying instrument
directly, however, because the premium received for writing the option should
mitigate the effects of the decline.
Writing a call option obligates an Underlying Fund to sell or deliver the
option's underlying instrument, in return for the strike price, upon exercise of
the option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
COMBINED POSITIONS
An Underlying Fund may purchase and write options in combination with each
other, or in combination with futures or forward contracts, to adjust the risk
and return characteristics of the overall position. For example, an Underlying
Fund may purchase a put option and write a call option on the same underlying
instrument, in order to construct a combined position whose risk and return
characteristics are similar to selling a futures contract. Another possible
combined position would involve writing a call option at one strike price and
buying a call option at a lower price, in order to reduce the risk of the
written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
CORRELATION OF PRICE CHANGES
Because there are a limited number of types of exchange-traded options and
futures contracts, it is likely that the standardized contracts available will
not match an Underlying Fund's current or anticipated investments exactly. An
Underlying Fund may invest in options and futures contracts based on securities
with different issuers, maturities, or other characteristics from the securities
in which it typically invests, which involves a risk that the options or futures
position will not track the performance of such Underlying Fund's other
investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match an Underlying
Fund's investments well. Options and futures prices are affected by such factors
as current and anticipated short-term interest rates, changes in volatility of
the underlying instrument, and the time remaining until expiration of the
contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. An Underlying Fund may purchase or sell
options and futures contracts with a greater or lesser value than the securities
it wishes to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although this
may not be successful in all cases. If price changes in an Underlying Fund's
options or futures positions are poorly correlated with its other investments,
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the positions may fail to produce anticipated gains or result in losses that are
not offset by gains in other investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS
There is no assurance a liquid secondary market will exist for any
particular options or futures contract at any particular time. Options may have
relatively low trading volume and liquidity if their strike prices are not close
to the underlying instrument's current price. In addition, exchanges may
establish daily price fluctuation limits for options and futures contracts, and
may halt trading if a contract's price moves upward or downward more than the
limit in a given day. On volatile trading days when the price fluctuation limit
is reached or a trading halt is imposed, it may be impossible for an Underlying
Fund to enter into new positions or close out existing positions. If the
secondary market for a contract is not liquid because of price fluctuation
limits or otherwise, it could prevent prompt liquidation of unfavorable
positions, and potentially could require an Underlying Fund to continue to hold
a position until delivery or expiration regardless of changes in its value. As a
result, an Underlying Fund's access to other assets held to cover its options or
futures positions could also be impaired.
OTC OPTIONS
Unlike exchange-traded options, which are standardized with respect to the
underlying instrument, expiration date, contract size, and strike price, the
terms of over-the-counter options (options not traded on exchanges) generally
are established through negotiation with the other party to the option contract.
While this type of arrangement allows an Underlying Fund greater flexibility to
tailor an option to its needs, OTC options generally involve greater credit risk
than exchange-traded options, which are guaranteed by the clearing organization
of the exchanges where they are traded.
OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES
Currency futures contracts are similar to forward currency exchange
contracts, except that they are traded on exchanges (and have margin
requirements) and are standardized as to contract size and delivery date. Most
currency futures contracts call for payment or delivery in U.S. dollars. The
underlying instrument of a currency option may be a foreign currency, which
generally is purchased or delivered in exchange for U.S. dollars, or may be a
futures contract. The purchaser of a currency call obtains the right to purchase
the underlying currency, and the purchaser of a currency put obtains the right
to sell the underlying currency.
The uses and risks of currency options and futures are similar to options
and futures relating to securities or indexes, as discussed above. An Underlying
Fund may purchase and sell currency futures and may purchase and write currency
options to increase or decrease its exposure to different foreign currencies. An
Underlying Fund may also purchase and write currency options in conjunction with
each other or with currency futures or forward contracts. Currency futures and
options values can be expected to correlate with exchange rates, but may not
reflect other factors that affect the value of an Underlying Fund's investments.
A currency hedge, for example, should protect a yen-denominated security from a
decline in the yen, but will not protect an Underlying Fund against a price
decline resulting from deterioration in the issuer's creditworthiness. Because
the value of an Underlying Fund's foreign-denominated investments changes in
response to many factors other than exchange rates, it may not be possible to
match the amount of currency options and futures to the value of an Underlying
Fund's investments exactly over time.
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ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS
Each Underlying Fund will comply with guidelines established by the
Securities and Exchange Commission with respect to coverage of options and
futures strategies by mutual funds, and if the guidelines so require will set
aside appropriate liquid assets in a segregated custodial account in the amount
prescribed. Securities held in a segregated account cannot be sold while the
futures or option strategy is outstanding, unless they are replaced with other
suitable assets. As a result, there is a possibility that segregation of a large
percentage of an Underlying Fund's assets could impede portfolio management or
an Underlying Fund's ability to meet redemption requests or other current
obligations.
INVESTMENT RESTRICTIONS
LIFEUSA FUNDS, INC.
As indicated in the Prospectus, each Portfolio is subject to certain
policies and restrictions which are "fundamental" and may not be changed without
shareholder approval. Shareholder approval consists of the approval of the
lesser of (i) more than 50% of the outstanding voting securities of a Portfolio,
or (ii) 67% or more of the voting securities present at a meeting if the holders
of more than 50% of the outstanding voting securities of a Portfolio are present
or represented by proxy. Limitations 1 through 8 below are deemed fundamental
limitations. The remaining limitations set forth below serve as operating
policies of each Portfolio and may be changed by the Board of Directors without
shareholder approval.
Each Portfolio may not:
1. Purchase the securities of any issuer if such purchase would cause the
Portfolio to fail to meet the requirements of a "diversified company" as defined
under the Investment Company Act of 1940, as amended (the "1940 Act").
As currently defined in the 1940 Act, "diversified company" means a
management company which meets the following requirements: at least 75% of the
value of its total assets is represented by cash and cash items (including
receivables), Government securities, securities of other investment companies,
and other securities for the purposes of this calculation limited in respect of
any one issuer to an amount not greater in value than 5% of the value of the
total assets of such management company and not more than 10% of the outstanding
voting securities of such issuer.
2. Purchase the securities of any issuer (other than "Government
securities" as defined under the 1940 Act and the Underlying Funds) if, as a
result, 25% or more of the value of the Portfolio's total assets would be
invested in the securities of companies whose principal business activities are
in the same industry.
3. Issue any senior securities, except as permitted by the 1940 Act or the
Rules and Regulations of the Securities and Exchange Commission.
4. Borrow money, except from banks for temporary or emergency purposes
provided that such borrowings may not exceed 33-1/3% of the value of the
Portfolio's net assets (including the amount borrowed). Any borrowings that come
to exceed this amount will be reduced within three days (not including Sundays
and holidays) to the extent necessary to comply with the 33-1/3% limitation.
This limitation shall not prohibit the Portfolio from engaging in reverse
repurchase agreements, making deposits of assets to margin or guarantee
positions in futures, options, swaps or forward contracts, or segregating assets
in connection with such agreements or contracts.
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<PAGE>
For purposes of applying this restriction, to the extent the Portfolio
engages in reverse repurchase agreements, because such transactions are
considered borrowing, reverse repurchase agreements are included in the 33-1/3%
limitation. Each Portfolio will not invest more than 5% of its total assets in
reverse repurchase agreements.
5. Act as an underwriter of securities of other issuers, except to the
extent that in connection with the disposition of portfolio securities the
Portfolio may be deemed to be an underwriter under applicable laws.
6. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments. This restriction shall not prevent the
Portfolio from investing in securities or other instruments backed by real
estate or securities of companies engaged in the real estate business.
7. Purchase or sell commodities other than foreign currencies unless
acquired as a result of ownership of securities. This limitation shall not
prevent the Portfolio from purchasing or selling options, futures, swaps and
forward contracts or from investing in securities or other instruments backed by
commodities.
8. Make loans to other persons except to the extent not inconsistent with
the 1940 Act or the Rules and Regulations of the Securities and Exchange
Commission. This limitation does not apply to purchases of commercial paper,
debt securities or repurchase agreements, or to the lending of portfolio
securities.
9. Purchase securities on margin, except that the Portfolio may obtain such
short-term credits as may be necessary for the clearance of purchases or sales
of securities and provided that margin payments in connection with transactions
in options, futures, swaps and forward contracts shall not be deemed to
constitute purchasing securities on margin.
10. Sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options, swaps and forward futures contracts are
not deemed to constitute selling securities short.
For purposes of applying this restriction, a Portfolio will not sell
securities short except to the extent that it contemporaneously owns or has the
right to obtain, at no added cost, securities identical to those sold short.
11. Mortgage, pledge or hypothecate its assets except to the extent
necessary to secure permitted borrowings. This limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed in
a segregated account in connection with such contracts.
12. Participate on a joint or a joint and several basis in any securities
trading account.
13. Invest more than 15% of its net assets in illiquid investments.
14. Invest directly in interests (including partnership interests) in oil,
gas or other mineral exploration or development leases or programs, except the
Portfolio may purchase or sell securities issued by corporations engaging in
oil, gas or other mineral exploration or development business.
Any of a Portfolio's investment policies set forth under "Investment
Objective and Policies" in the Prospectus, or any restriction set forth above
under "Investment Restrictions" which involves a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after an acquisition of securities or
utilization of assets and results therefrom. With respect to Restriction 13, a
Portfolio is under a continuing obligation to ensure that it does not violate
the maximum percentage either by acquisition or by virtue of a decrease in the
value of the Portfolio's liquid assets.
-20-
<PAGE>
Because of their investment objectives and policies, the Portfolios will
each concentrate 25% or more of their assets in the mutual fund industry. In
accordance with the Portfolios' investment programs set forth in the Prospectus,
each of the Portfolios may invest 25% or more of its assets in certain
Underlying Funds. However, each of the Underlying Funds in which each Fund will
invest will not concentrate 25% or more of its total assets in any one industry.
UNDERLYING FUNDS
Each Underlying Fund is subject to certain policies and restrictions which
are "fundamental" and may not be changed without shareholder approval.
Shareholder approval consists of the approval of the lesser of (i) more than 50%
of the outstanding voting securities of an Underlying Fund, or (ii) 67% or more
of the voting securities present at a meeting if the holders of more than 50% of
the outstanding voting securities of an Underlying Fund are present or
represented by proxy. Limitations 1 through 8 below are deemed fundamental
limitations. The remaining limitations set forth below serve as operating
policies of each Fund and may be changed by the Board of Directors without
shareholder approval.
Each Underlying Fund may not:
1. Purchase the securities of any issuer if such purchase would cause the
Underlying Fund to fail to meet the requirements of a "diversified company" as
defined under the Investment Company Act of 1940, as amended (the "1940 Act").
As currently defined in the 1940 Act, "diversified company" means a
management company which meets the following requirements: at least 75% of the
value of its total assets is represented by cash and cash items (including
receivables), Government securities, securities of other investment companies
and other securities for the purposes of this calculation limited in respect of
any one issuer to an amount not greater in value than 5% of the value of the
total assets of such management company and not more than 10% of the outstanding
voting securities of such issuer.
2. Purchase the securities of any issuer (other than "Government
securities" as defined under the 1940 Act) if, as a result, more than 25% of the
value of the Underlying Fund's total assets would be invested in the securities
of companies whose principal business activities are in the same industry.
For purposes of applying this restriction, a Fund will not purchase
securities, as defined above, such that 25% or more of the value of the
Fund's total assets are invested in the securities of companies whose
principal business activities are in the same industry.
3. Issue any senior securities, except as permitted by the 1940 Act or the
Rules and Regulations of the Securities and Exchange Commission.
4. Borrow money, except from banks for temporary or emergency purposes
provided that such borrowings may not exceed 33-1/3% of the value of the
Underlying Fund's net assets (including the amount borrowed). Any borrowings
that come to exceed this amount will be reduced within three days (not including
Sundays and holidays) to the extent necessary to comply with the 33-1/3%
limitation. This limitation shall not prohibit the Underlying Fund from engaging
in reverse repurchase agreements, making deposits of assets to margin or
guarantee positions in futures, options, swaps or forward contracts, or
segregating assets in connection with such agreements or contracts.
For purposes of applying this restriction, to the extent the Underlying
Fund engages in reverse repurchase agreements, because such transactions are
considered borrowing, reverse repurchase agreements are included in the 33-1/3%
limitation.
-21-
<PAGE>
5. Act as an underwriter of securities of other issuers, except to the
extent that in connection with the disposition of portfolio securities the
Underlying Fund may be deemed to be an underwriter under applicable laws.
6. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments. This restriction shall not prevent the
Underlying Fund from investing in securities or other instruments backed by real
estate or securities of companies engaged in the real estate business.
7. Purchase or sell commodities other than foreign currencies unless
acquired as a result of ownership of securities. This limitation shall not
prevent the Underlying Fund from purchasing or selling options, futures, swaps
and forward contracts or from investing in securities or other instruments
backed by commodities.
8. Make loans to other persons except to the extent not inconsistent with
the 1940 Act or the Rules and Regulations of the Securities and Exchange
Commission. This limitation does not apply to purchases of commercial paper,
debt securities or repurchase agreements, or to the lending of portfolio
securities.
9. Purchase securities on margin, except that the Underlying Fund may
obtain such short-term credits as may be necessary for the clearance of
purchases or sales of securities and provided that margin payments in connection
with transactions in options, futures, swaps and forward contracts shall not be
deemed to constitute purchasing securities on margin.
10. Sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options, swaps and forward futures contracts are
not deemed to constitute selling securities short.
11. Except as part of a merger, consolidation, acquisition, or
reorganization, invest more than 5% of the value of its total assets in the
securities of any one investment company or more than 10% of the value of its
total assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting securities of
any one investment company.
12. Mortgage, pledge or hypothecate its assets except to the extent
necessary to secure permitted borrowings. This limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed in
a segregated account in connection with such contracts.
13. Participate on a joint or a joint and several basis in any securities
trading account.
14. Invest more than 15% of its net assets in illiquid investments (10% for
IAI Developing Countries Fund and IAI Money Market Fund).
15. Invest directly in interests (including partnership interests) in oil,
gas or other mineral exploration or development leases or programs, except the
Underlying Fund may purchase or sell securities issued by corporations engaging
in oil, gas or other mineral exploration or development business.
Any of an Underlying Fund's investment policies set forth under "Investment
Objectives and Policies" in the Prospectus, or any restriction set forth above
under "Investment Restrictions" which involves a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after an acquisition of securities or
utilization of assets and results therefrom. With respect to Restriction 14, an
Underlying Fund is under a continuing obligation to ensure that it does not
violate the maximum percentage either by acquisition or by virtue of a decrease
in the value of the Underlying Fund's liquid assets.
-22-
<PAGE>
PORTFOLIO TURNOVER
Each Portfolio's turnover rate is not expected to exceed 25% annually. A
Portfolio may purchase or sell securities to: (a) accommodate purchases and
sales of its shares, (b) change the percentages of its assets invested in each
of the Underlying Funds in response to market conditions, and (c) maintain or
modify the allocation of its assets between equity and fixed income funds and
among the Underlying Funds within the percentage limits described in the
Prospectus.
The turnover rates of the Underlying Funds have ranged from 39.2% to 284.1%
during their most recent fiscal years. There can be no assurance that the
turnover rates of these Underlying Funds will remain within this range during
subsequent fiscal years. High turnover rates may result in higher expenses being
incurred by the Underlying Funds.
INVESTMENT PERFORMANCE
Advertisements and other sales literature for each Portfolio may refer to
monthly, quarterly, yearly, cumulative and average annual total return. Each
such calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts. Each of
monthly, quarterly and yearly total return is computed in the same manner as
cumulative total return, as set forth below.
Cumulative total return is computed by finding the cumulative rate of
return over the period indicated in the advertisement that would equate the
initial amount invested to the ending redeemable value, according to the
following formula: CTR = (ERV-P) 100
-------
P
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end
of the period of a hypothetical
$1,000 payment made at the
beginning of such period; and
P = initial payment of $1,000
Average annual total return is computed by finding the average annual
compounded rates of return over the periods indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment
of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end
of the period of a hypothetical
$1,000 payment made at the
beginning of such period.
-23-
<PAGE>
A Portfolio may quote yield figures from time to time. The "yield" is
computed by dividing the net investment income per share earned during a 30-day
period (using the average number of shares entitled to receive dividends) by the
net asset value per share on the last day of the period. The yield formula
provides for semiannual compounding which assumes that net investment income is
earned and reinvested at a constant rate and annualized at the end of a
six-month period.
The yield formula is as follows:
YIELD = 2[(a-b + 1)6 -1]
---
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the net asset value of the Portfolio.
In advertising and sales literature, each Portfolio may compare its
performance with that of other mutual funds, indexes or averages of other mutual
funds, indexes of related financial assets or data, and other competing
investment and deposit products available from or through other financial
institutions. The composition of these indices, averages or products differs
from that of a Portfolio. The comparison of a Portfolio to an alternative
investment should be made with consideration of differences in features and
expected performance.
The indexes and averages noted below will be obtained from the indicated
sources or reporting services, which the Portfolios believe to be generally
accurate. Each Portfolio may also note its mention in newspapers, magazines, or
other media from time to time. However, such Portfolio assumes no responsibility
for the accuracy of such data.
For example, (1) a Portfolio's performance or P/E ratio may be compared to
any one or a combination of the following: (i) the Standard & Poor's 500 Stock
Index and Dow Jones Industrial Average so that you may compare the Portfolio's
results with those of a group of unmanaged securities widely regarded by
investors as representative of the U.S. stock market in general; (ii) Standard
and Poor's 500 Composite Stock Price Index, a well diversified list of 500
companies representing the U.S. Stock Market; (iii) Wilshire 5000 Equity Index,
which consists of more than 6,000 common equity securities, covering all stocks
in the U.S. for which daily pricing is available; (iii) Wilshire 4500 Equity
Index, which consists of all stocks in the Wilshire 5000 except for the 500
stocks in the Standard and Poor's 500 Index; (iv) Morgan Stanley Capital
International EAFE Index, an arithmetic, market value-weighted average of the
performance of over 900 securities listed on the stock exchanges of countries in
Europe, Australia and the Far East; (v) MSCI EMF Index, an arithmetic, market
value-weighted average of the performance of securities listed on the stock
exchanges of twenty-two developing countries; (vi) MSCI EAFE + Select EMF Index
- - an arithmetic, market value-weighted average of the performance of securities
listed on the stock markets of Europe, Australia, the Far East and fourteen
developing countries; (vii) Goldman Sachs 100 Convertible Bond Index, which
currently includes 71 bonds and 29 preferreds. The original list of names was
generated by screening for convertible issues of $100 million of greater in
market capitalization. The index is priced monthly; (viii) Salomon Brothers GNMA
Index, which includes pools of mortgages originated by private lenders and
guaranteed by the mortgage pools of the Government National Mortgage
Association; (ix) Salomon Brothers High-Grade Corporate Bond Index, which
consists of publicly issued, non-convertible corporate bonds rated Aa or Aaa. It
is a value-weighted, total return index, including approximately 800 issues with
maturities of 12 years or greater; (x) Lehman Long-Term Treasury Bond, which is
composed of all bonds covered by the Shearson Lehman Hutton Treasury Bond Index
with maturities of 10 years or greater; (xi) Merrill Lynch Corporate and
Government Bond, which consists of over 4,000 U.S. Treasury, Agency and
investment grade corporate bonds; (xii) Lehman Corporate (Baa) Bond Index, which
consists of all publicly offered, fixed-rate, nonconvertible domestic corporate
bonds rated Baa by Moody's, with a maturity longer than 1 year and with more
than $25 million outstanding . This index includes over 1,000 issues; (xiii)
Bond Buyer Municipal Index (20 year) Bond, a yield index on current coupon
-24-
<PAGE>
high-grade general obligation municipal bonds; (xiv) Standard & Poor's
Preferred Index, a yield index based upon the average yield of four high-grade,
non-callable preferred stock issues; (xv) NASDAQ Industrial Index, which is
composed of more than 3,000 industrial issues. It is a value-weighted index
calculated on price change only and does not include income; (xvi) Composite
Index, which consists of 70% Standard & Poor's 500 Index and 30% NASDAQ
Industrial Index; (xvii) Composite Index, which consists of 65% Standard &
Poor's 500 Index and 35% Lehman Long-Term Corporate AA or Better Bond Index;
(xviii) Composite Index, which consists of 65% Lehman Long-Term Corporate AA or
Better Bond Index and a 35% weighting in a blended equity composite (75%
Standard & Poor's/BARRA Value Index and 25% Standard & Poor's Utilities Index.);
(xix) Lehman Long-Term Corporate AA or Better Bond Index - consists of all
publicly issued, fixed rate, nonconvertible investment grade, dollar
denominated, SEC-registered corporate debt rated AA or AAA; (xx) Lehman Brothers
Aggregate Bond Index - which is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB or better. The index has a market value of over
$4 trillion; (xxi) Lehman Brothers Mutual Fund Short (1-5) Government/Corporate
Index, a market weighted index that contains individually priced U.S. Treasury,
agency and corporate investment grade bonds rated BBB or better, with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion;
(xxii) Lehman Brothers Mutual Fund Intermediate (5-10) Government/Corporate
Index, a market weighted index that contains individually priced U.S. Treasury,
agency, and corporate securities rated BBB or better, with maturities between 5
and 10 years. The index has a market value of over $600 billion; (xxiii) Lehman
Brothers Mutual Fund Long (10+) Government/Corporate Index, a market weighted
index that contains individually priced U.S. Treasury, agency and corporate
securities rated BBB or better, with maturities greater than 10 years. The index
has a market value of over $900 billion; (xxiv) Russell 2000 Stock Index, which
consists of the smallest 2,000 stocks within the Russell 3000; a widely-used
benchmark for small capitalization common stocks; (xxv) Ibbotson Associates
Yearbook, which consists of various mutual fund performance data; (xxvi) Lipper
Balanced Fund Average, an industry benchmark of average balanced funds with
similar investment objectives and policies, as measured by Lipper Analytical
Services, Inc.; (xxvii) Lipper Non-Government Money Market Average, an industry
benchmark of average non-government money market funds with similar investment
objectives and policies, as measured by Lipper Analytical Services, Inc.;
(xxviii) Lipper Government Money Market Fund Average, an industry benchmark of
average government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.; (xxix) Lipper Small
Company Growth Fund Average, which is the average performance of small company
growth funds as defined by Lipper Analytical Services, Inc. Lipper defines a
small company growth fund as a fund that by prospectus or portfolio practice,
limits its investments to companies on the basis of the size of the company;
(xxx) Russell 3000 Index, which consists of approximately 3,000 of the largest
stocks of U.S. domiciled companies commonly traded on the New York and American
Stock Exchanges or the NASDAQ over-the-counter market, accounting for over 90%
of the market value of publicly traded stocks in the U.S; (xxxi) other groups of
mutual funds, including the IAI Funds, tracked by: (A) Lipper Analytical
Services, Inc., a widely used independent research firm which ranks mutual funds
by overall performance, investment objectives, and assets; (B) Morningstar,
Inc., another widely used independent research firm which rates mutual funds; or
(C) other financial or business publications, which may include, but are not
limited to, Business Week, Money Magazine, Forbes and Barron's, which provide
similar information; (2) the Consumer Price Index (measure for inflation) may be
used to assess the real rate of return from an investment in a Portfolio; (3)
other U.S. or foreign government statistics such as GNP, and net import and
export figures derived from governmental publications, e.g., The Survey of
Current Business, may be used to illustrate investment attributes of a Portfolio
or the general economic business, investment, or financial environment in which
such Portfolio operates; (4) the effect of tax-deferred compounding on a
Portfolio's investment returns, or on returns in general, may be illustrated by
graphs, charts, etc. where such graphs or charts would compare, at various
points in time, the return from an investment in such Portfolio (or returns in
general) on a tax-deferred basis (assuming reinvestment of capital gains and
dividends and assuming one or more tax rates) with the return on a taxable
basis; and (5) the sectors or industries in which a Portfolio invests may be
compared to relevant indices or surveys (e.g., S&P Industry Surveys) in order to
evaluate a Portfolio's historical performance or current or potential value with
respect to the particular industry or sector.
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<PAGE>
MANAGEMENT
The names, addresses, positions and principal occupations of the directors and
executive officers of the Portfolios are given below.
<TABLE>
<CAPTION>
Name and Address Age Position Principal Occupation(s) During Past 5 Years
- ---------------- --- -------- -------------------------------------------
<S> <C> <C> <C>
Noel P. Rahn* 57 Chairman of the Noel P. Rahn has been Chief Executive Officer
3700 First Bank Place Board and a Director of the Adviser since 1974. Mr.
P.O. Box 357 Rahn is also Chairman of the IAI Mutual Funds.
Minneapolis, Minnesota 55440
Richard E. Struthers* 44 President, Director Richard E. Struthers is Executive Vice
3700 First Bank Place President and a Director of the Adviser and
P.O. Box 357 has served the Adviser in many capacities
Minneapolis, Minnesota 55440 since 1979. Mr. Struthers is also President
and a Director of the IAI Mutual Funds.
Madeline Betsch 54 Director Madeline Betsch, until April 1994, was
19 South 1st Street Executive Vice President, Director of Client
Minneapolis, Minnesota 55401 Services, of CME-KHBB Advertising since May
1985, and prior thereto was a Vice President
with Campbell-Mithun, Inc. (advertising
agency) since February 1977. Ms. Betsch is
currently retired. Ms. Betsch is also a
Director of the IAI Mutual Funds.
W. William Hodgson 72 Director W. William Hodgson served as information
1698 Dodd Road manager for the North Central Home Office of
Mendota Heights, Minnesota 55118 the Prudential Insurance Company of America
from 1961 until 1984; he is currently
retired. Mr. Hodgson is also a Director of
the IAI Mutual Funds.
George R. Long 66 Director George R. Long serves as Director of Pacific
29 Las Brisas Way Industries and has been Chairman of Mayfield
Naples, Florida 33963 International (financial consultants and
venture capitalists) since 1973. Mr. Long is
also a Director of the IAI Mutual Funds.
J. Peter Thompson 65 Director J. Peter Thompson has been a grain farmer in
Route 1 southwestern Minnesota since 1974. Prior to
Mountain Lake, Minnesota 56159 that, Mr. Thompson was employed by Paine
Webber, Jackson & Curtis, Incorporated, (a
diversified financial services concern), most
recently as Senior Vice President and General
Partner. Mr. Thompson is also a Director of
the IAI Mutual Funds.
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<PAGE>
Charles H. Withers 69 Director Charles H. Withers was Editor of the Rochester
Rochester Post Bulletin Post-Bulletin, Rochester, Minnesota from 1960
P.O. Box 6118 through March 31, 1980; he is currently
Rochester, Minnesota 55903 retired. Mr. Withers is also a Director of
the IAI Mutual Funds.
Archie C. Black, III 34 Treasurer Archie C. Black is a Senior Vice President and
3700 First Bank Place Chief Financial Officer of the Adviser and has
P.O. Box 357 served the Adviser in several capacities since
Minneapolis, Minnesota 55440 1987. Mr. Black is also Treasurer of the IAI
Mutual Funds.
William C. Joas 34 Secretary William C. Joas is a Vice President of the
3700 First Bank Place Adviser and has served as an attorney for the
P.O. Box 357 Adviser since 1990. Mr. Joas is also
Minneapolis, Minnesota 55440 Secretary of the IAI Mutual Funds.
Susan J. Haedt 34 Vice President, Susan J. Haedt is a Vice President of the
3700 First Bank Place Director of Mutual Adviser and Director of Fund Operations .
P.O. Box 357 Fund Operations Prior to joining the Adviser in 1992, Ms.
Minneapolis, Minnesota 55440 Haedt served as a Senior Manager at KPMG Peat
Marwick LLP, (an international tax, accounting
and consulting firm). Ms. Haedt is also Vice
President, Director of Operations of the IAI
Mutual Funds.
</TABLE>
* Directors of the Portfolios who are interested persons (as that term is
defined by the Investment Company Act of 1940) of the Portfolios.
Each Portfolio has agreed to reduced initial subscription requirements
for employees and directors of the Portfolio or the Adviser, their spouses,
children and grandchildren. With respect to such persons, the minimum initial
investment in one or more of the IAI Family of Funds is $500; provided that the
minimum amount that can be allocated to any one of the Portfolios is $250.
Subsequent subscriptions are limited to a minimum of $100 for each of the
Portfolios.
No compensation is paid by a Portfolio to any of its officers. Directors
who are not affiliated with the Adviser receive from the LifeUSA Funds and IAI
Mutual Funds a $15,000 annual retainer, $2,500 for each Board meeting attended,
$3,600 for each Audit Committee meeting attended (as applicable) and $1,800 for
each Securities Valuation Committee meeting attended (as applicable). Each
Portfolio will pay, on a quarterly basis, its pro rata share of these fees based
on its net assets. Such unaffiliated directors also are reimbursed by the
Portfolios pro rata for expenses incurred in connection with attending meetings.
For the Underlying Funds, the pro rata payments of directors fees and expenses
will be based on each Underlying Fund's net assets less Underlying Fund shares
held by the Portfolios.
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<PAGE>
<TABLE>
<CAPTION>
Aggregate Compensation
Aggregate Compensation from the
from each Portfolio* 19 IAI Mutual Funds and
Name of Person, Position 6 LifeUSA Portfolios*
------------------------ --------------------- ------------------------
<S> <C> <C>
Betsch, Madeline - Director $0 $32,200
Hodgson, W. William - Director $0 $32,200
Long, George R. - Director $0 $32,200
Thompson, J. Peter - Director $0 $32,200
Withers, Charles H. - Director $0 $32,200
</TABLE>
------------------------------------
* For the calendar year ended December 31, 1996; excludes expenses
incurred in connection with attending meetings.
The Board of Directors for each of the Portfolios has approved a Code of
Ethics. The Code permits access persons to engage in personal securities
transactions subject to certain policies and procedures. Such procedures
prohibit the acquiring of any securities in an initial public offering. In
addition, all securities acquired through private placement must be pre-cleared.
Procedures have been adopted which implement blackout periods for certain
securities transactions, as well as a ban on short-term trading profits.
Additional policies prohibit the receipt of gifts in certain instances.
Procedures have been implemented to monitor employee trading. Access persons of
the Adviser are required to certify annually that they have read and understood
the Code of Ethics. An annual report is provided to the Portfolios' Board of
Directors summarizing existing procedures, identifying material violations and
recommending any changes needed.
Investment Advisers, Inc., the Portfolios' investment adviser, is an
affiliate of the Hill Samuel Group ("Hill Samuel"). Hill Samuel is an
international merchant banking and financial services firm headquartered in
London, England. Hill Samuel owns controlling interests in over seventy
insurance, merchant banking, financial services and shipping services
subsidiaries located in Western Europe, Asia, the United States, Australia, New
Zealand and Great Britain. The principal offices of Hill Samuel are located at
100 Wood Street, London EC2 P2AJ.
Hill Samuel is owned by Lloyds TSB Group plc ("Lloyds TSB"), a
publicly-held financial services organization headquartered in London, England.
Lloyds TSB is one of the largest personal and corporate financial services
groups in the United Kingdom, engaged in a wide range of activities including
commercial and retail banking. The principal offices of Lloyds TSB are located
at St. George's House, 6 - 8 Eastcheap, London, EC3M 1LL.
INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES AGREEMENT
BETWEEN THE ADVISER AND LIFEUSA FUNDS, INC.
Effective November 6, 1996, the Portfolios entered into an Investment
Advisory and Administrative Services Agreement with the Adviser. Pursuant to the
Investment Advisory and Administrative Services Agreement, the Adviser has
agreed to provide each Portfolio with investment advice, statistical and
research facilities, and certain equipment and services, including, but not
limited to, office space and necessary office facilities, equipment, and the
services of required personnel and, in connection therewith, the Adviser has the
sole authority and responsibility to make and execute investment decisions for a
Portfolio within the framework of such Portfolio's investment policies, subject
to review by the directors of the Portfolio. In addition, the Adviser has agreed
to provide or arrange for the provision of required administrative, stock
transfer, redemption, dividend disbursing, accounting, and certain shareholder
services including, without limitation, the following: (1) the maintenance of a
Portfolio's accounts, books and records; (2) the calculations of the daily net
asset value in accordance with an Portfolio's current Prospectus and Statement
of Additional Information; (3) daily and periodic reports; (4) all information
necessary to complete tax returns, questionnaires and other reports requested by
-28-
<PAGE>
a Portfolio; (5) the maintenance of stock registry records; (6) the processing
of requested account registration changes, stock certificate issuances and
redemption requests; (7) the administration of payments and dividends and
distributions declared by an Underlying Fund; (8) answering shareholder
questions; and (9) providing reports and other information.
The Portfolios pay no compensation to the Adviser under the Invesment
Advisory and Administrative Services Agreement. Each Portfolio is responsible
for its own expenses that are not expressly assumed by the Adviser or any other
organization with which the Portfolios may enter into an agreement for the
performance of services. Each Portfolio is liable for such non-recurring
expenses as may arise, including litigation to which a Portfolio may be a party,
and it may have an obligation to indemnify its directors and officers with
respect to such litigation.
MANAGEMENT AGREEMENT BETWEEN THE ADVISER AND UNDERLYING FUNDS
Effective April 1, 1996 (February 1, 1996 for IAI Capital Appreciation Fund
and November 6, 1996 for IAI Latin America Fund), each Underlying Fund entered
into a written agreement with the Adviser (the "Management Agreement"). Pursuant
to the Management Agreement between each Underlying Fund and the Adviser, the
Adviser has agreed to provide each Underlying Fund with investment advice,
statistical and research facilities, and certain equipment and services,
including, but not limited to, office space and necessary office facilities,
equipment, and the services of required personnel and, in connection therewith,
the Adviser has the sole authority and responsibility to make and execute
investment decisions for an Underlying Fund within the framework of such
Underlying Fund's investment policies, subject to review by the directors of the
Underlying Funds. In addition, the Adviser has agreed to provide or arrange for
the provision of all required administrative, stock transfer, redemption,
dividend disbursing, accounting, and shareholder services including, without
limitation, the following: (1) the maintenance of an Underlying Fund's accounts,
books and records; (2) the calculations of the daily net asset value in
accordance with an Underlying Fund's current Prospectus and Statement of
Additional Information; (3) daily and periodic reports; (4) all information
necessary to complete tax returns, questionnaires and other reports requested by
an Underlying Fund; (5) the maintenance of stock registry records; (6) the
processing of requested account registration changes, stock certificate
issuances and redemption requests; (7) the administration of payments and
dividends and distributions declared by an Underlying Fund; (8) answering
shareholder questions; (9) providing reports and other information; and (10)
other services designed to maintain shareholder accounts. The Adviser may also
pay qualifying broker-dealers, financial institutions and other entities that
provide such services. In return for such services, each Underlying Fund has
agreed to pay the Adviser an annual fee as a percentage of such Underlying
Fund's average daily net assets as set forth below, with the exception of
Reserve Fund which has agreed to pay an annual fee at the rate of .85%.
<TABLE>
<CAPTION>
IAI IAI Midcap Growth, IAI Bond
Capital Appreciation IAI Value and IAI and IAI Government IAI Money
Daily Net Assets Fund Regional Funds Funds Market Fund
- ---------------- -------------------- ------------------ ------------------- -----------
<S> <C> <C> <C> <C>
For the first $250 million 1.40% 1.25% 1.10% 0.60%
For the next $250 million 1.35% 1.20% 1.05% 0.55%
Above $500 million 1.30% 1.10% 1.00% 0.50%
</TABLE>
-29-
<PAGE>
<TABLE>
<CAPTION>
IAI Growth
IAI Developing IAI and
Countries International IAI Growth IAI Latin
Daily Net Assets Fund Fund and Income Funds America Fund
- ----------------- -------------- ------------- ----------------------- -------------
<S> <C> <C> <C> <C>
For the first $100 million 2.00% 1.70% 1.25% 3.00%
For the next $100 - $250 million 1.95% 1.45% 1.15% 2.95%
For the next $250 - $500 million 1.75% 1.30% 1.10% 2.75%
Above $500 million 1.65% 1.30% 1.00% 2.65%
</TABLE>
Under the Management Agreements, except for brokerage commissions and other
expenditures in connection with the purchase and sale of portfolio securities,
interest expense, and, subject to the specific approval of a majority of the
disinterested directors of an Underlying Fund, taxes and extraordinary expenses,
the Adviser has agreed to pay all of an Underlying Fund's other costs and
expenses, including, for example, costs incurred in the purchase and sale of
assets, taxes, charges of the custodian of an Underlying Fund's assets, costs of
reports and proxy material sent to Underlying Fund shareholders, fees paid for
independent accounting and legal services, costs of printing Prospectuses for
Underlying Fund shareholders and registering an Underlying the Adviser Fund's
shares, postage, insurance premiums, and costs of attending investment
conferences. The Management Agreement further provides that the Adviser will
either reimburse an Underlying Fund for the fees and expenses it pays to
directors who are not "interested persons" of such Underlying Fund or reduce its
fee by an equivalent amount. The Adviser is not liable for any loss suffered by
an Underlying Fund in the absence of willful misfeasance, bad faith or
negligence in the performance of its duties and obligations. Some of the
Underlying Funds currently waive a portion of their fee, as directed in the
Portfolios' prospectus.
Until March 1, 1998, IAI has voluntarily agreed to waive its fee in excess
of 2.00% of Latin America Fund's average daily net assets.
SUBADVISORY AGREEMENTS FOR IAI INTERNATIONAL FUND, IAI DEVELOPING COUNTRIES
FUND AND IAI LATIN AMERICA FUND
Under the Subadvisory Agreements between IAI International Ltd. and the
Adviser, the Adviser has delegated to IAI International Ltd. the sole authority
and responsibility to make and execute investment decisions for IAI
International, IAI Developing Countries and IAI Latin America Funds within the
framework of such Funds' investment policies, subject to review by the Adviser
and the Funds' directors. Under the Subadvisory Agreements, the Adviser has
agreed to pay IAI International Ltd. an annual fee as a percentage of a Fund's
average daily net assets as set forth below:
IAI LATIN AMERICA FUND
<TABLE>
<CAPTION>
Fee IAI International
Daily Net Assets Receives Annually
---------------- --------------------
<S> <C>
For the first $100 million .675%
For the next $100 - $250 million .65%
For the next $250 - $500 million .625%
Above $500 million .60%
</TABLE>
With respect to IAI Latin America Fund, until March 1, 1998, IAI
International has voluntarily agreed to waive its fee in excess of .625% of the
Fund's average daily net assets.
-30-
<PAGE>
IAI DEVELOPING COUNTRIES FUND
<TABLE>
<CAPTION>
Fee IAI International
Daily Net Assets Receives Annually
---------------- --------------------
<S> <C>
For the first $200 million 1/2 of 1.25%
For the next $200 million 1/2 of 1.10%
Above $400 million 1/2 of 1.00%
</TABLE>
IAI INTERNATIONAL FUND
<TABLE>
<CAPTION>
Fee IAI International
Daily Net Assets Receives Annually
---------------- ----------------------
<S> <C>
For the first $100 million 1/2 of 1.00%
For the next $100 million 1/2 of .85%
For the next $100 million 1/2 of .75%
Above $300 million 1/2 of .70%
</TABLE>
DURATION OF AGREEMENTS
Each Investment Advisory and Administrative Services, Management and
Subadvisory Agreement will terminate automatically in the event of its
assignment. In addition, each Agreement is terminable at any time without
penalty by the Board of Directors of an Underlying Fund or by vote of a majority
of an Underlying Fund's outstanding voting securities on not more than 60 days'
written notice to the Adviser, and by the Adviser on 60 days' notice to an
Underlying Fund. Each Agreement shall continue in effect from year to year only
so long as such continuance is specifically approved at least annually by either
the Board of Directors of an Underlying Fund or by vote of a majority of the
outstanding voting securities, provided that in either event such continuance is
also approved by the vote of a majority of directors who are not parties to the
Agreement or interested persons of such parties cast in person at a meeting
called for the purpose of voting on such approval.
PORTFOLIO MANAGERS FOR THE UNDERLYING FUNDS
Each Underlying Fund is managed by a team of investment professionals which
is responsible for making the day-to-day investment decisions for such
Underlying Fund. The teams managing the Underlying Funds are as follows:
Martin Calihan has responsibility for making the day-to-day management
decisions for IAI Capital Appreciation Fund. Mr. Calihan is a Vice President and
has served as an equity analyst for the Adviser since 1992. Before joining IAI,
Mr. Calihan was an equity analyst with Morgan Stanley and Company from 1991 to
1992, and with State Street Research Management from 1990 to 1991. Mr. Calihan
has managed IAI Capital Appreciation Fund since its inception.
Suzanne Zak and David McDonald have responsibility for the management of
IAI Growth Fund. Ms. Zak is a Senior Vice President and has served as an equity
portfolio manager since joining IAI in 1992. Before joining IAI, Ms. Zak had
been a Managing Director of J & W Seligman from 1985 to 1992. Mr. McDonald has
managed IAI Growth Fund since September 1994, when he joined IAI as a Vice
President and equity portfolio manager. Before joining IAI, Mr. McDonald was a
Managing Director of Wessels Arnold & Henderson from 1989 to 1994 and an
Associate Portfolio Manager with IDS Financial Services from 1986 to 1989.
-31-
<PAGE>
Donald Hoelting has responsibility for the management of IAI Growth and
Income Fund. Mr. Hoelting is a Vice President of IAI and has served as an equity
portfolio manager of IAI since joining IAI in April 1996. Prior to joining IAI,
Mr. Hoelting was Chief Investment Officer and Portfolio Manager for Jefferson
National Bank and Trust from 1989 to 1996.
Suzanne Zak has responsibility for the management of IAI Midcap Growth
Fund. Ms. Zak has managed IAI Midcap Growth Fund since its inception.
Mark Hoonsbeen has responsibility for the management of IAI Regional Fund.
Mr. Hoonsbeen is a Vice President and has managed IAI Regional Fund since he
joined IAI in 1994. Before joining IAI, Mr. Hoonsbeen served as an equity
portfolio manager for The St. Paul Companies Inc. from 1986 to 1994.
Douglas Platt and Donald Hoelting have responsibility for the management of
IAI Value Fund. Mr. Platt has managed IAI Value Fund since 1991. Mr. Platt is a
Senior Vice President and has served as a portfolio manager of IAI since 1967.
Mr. Hoelting has managed the Fund since August 1996. Mr. Hoelting is a Vice
President for IAI and has served as an equity portfolio manager of IAI since
joining IAI in April 1996.
R. David Spreng has been responsible for Underlying Fund investments in
restricted securities, including equity and limited partnership interests in
privately-held companies and investment partnerships, since 1993. Mr. Spreng is
a Senior Vice President and has served IAI in several capacities since 1989.
Larry Hill, Scott Bettin and Livingston Douglas have responsibility for the
management of IAI Bond Fund. Mr. Hill is IAI's Chief Fixed Income Officer and a
member of its Board of Directors. Mr. Hill has managed IAI Bond Fund since
joining IAI in 1984. Mr. Bettin is a Senior Vice President of IAI and has
managed IAI Bond Fund since joining IAI as a fixed income portfolio manager in
1987. Mr. Douglas is a Vice President of IAI and has managed IAI Bond Fund since
joining IAI as a fixed income portfolio manager in 1993. Prior to joining IAI,
Mr. Douglas served as a fixed income portfolio manager for Mackey-Shields
Financial Corporation.
Scott Bettin and Stephen Coleman have responsibility for the management of
IAI Government Fund. Mr. Bettin has managed IAI Government Fund since its
inception. Mr. Coleman is a Senior Vice President of IAI and has served as a
fixed income portfolio manager since joining IAI in 1991. Mr. Coleman commenced
managing IAI Government Fund in January 1995.
Roy Gillson, Nigel Hart and Sookyong Kwak have responsibility for the
management of IAI Developing Countries Fund. Mr. Gillson is IAI International's
Chief Investment Officer and a member of its Board of Directors. Mr. Gillson
joined IAI International in 1983 and has managed IAI Developing Countries Fund
since its inception in February 1995. Mr. Hart is a Fund Manager and has managed
IAI Developing Countries Fund since June 1996. Mr. Hart joined IAI International
in 1991 as an equity investment analyst. Prior thereto, he served as an equity
investment analyst with Commercial Union Asset Management since 1989. Ms. Kwak
is a Senior Fund Manager with IAI International and has managed the Fund since
June 1996. Ms. Kwak joined IAI International in 1995. From 1989 to 1990, she
served as a research analyst with Neuberger & Berman, and from 1990 to 1992 she
was employed by Brown Brothers Harriman in a similar capacity. In 1992, Ms. Kwak
joined the International Finance Corporation, a private sector of the World
Bank, where she served as a research analyst until 1995.
Nigel Hart has responsibility for the management of IAI Latin America Fund.
Mr. Hart is a Fund Manager with IAI International and has managed the Fund since
inception. Mr. Hart joined IAI International in 1991 as an equity investment
analyst.
Mr. Gillson has responsibility for the management of the IAI International
Fund and has managed the Fund since 1990.
The day-to-day management of IAI Money Market Fund is the responsibility of
an investment committee.
-32-
<PAGE>
Tim Palmer and Livingston Douglas have responsibility for the management of
IAI Reserve Fund. Mr. Palmer is a Senior Vice President and has served as
portfolio manager of IAI since 1990 and as a manager of IAI Reserve Fund since
1991. Prior to joining IAI, Mr. Palmer was employed by the First Bank Systems
Capital Markets Group. Mr. Douglas is a Vice President of IAI and has co-managed
IAI Reserve Fund since joining IAI as a fixed income portfolio manager in 1993.
Prior to joining IAI, Mr. Douglas served as a fixed income portfolio manager for
Mackey-Shields Financial Corporation since 1987.
PLAN OF DISTRIBUTION
The Fund on behalf of each Portfolio has adopted a Plan of Distribution
relating to the payment of certain expenses pursuant to Rule 12b-1 under the
1940 Act ("Rule 12b-1 Fees"). The Plan was last approved by the Board of
Directors at a meeting on November 6, 1996.
The Plan provides that the Fund, out of the assets of each Portfolio, is
obligated to pay the Fund's principal underwriter (the "Underwriter") an annual
fee of .75% of each Portfolio's average daily net assets in connection with the
provision of distribution and shareholder services. One-third of that fee (.25%)
is designated for the provision of shareholder services while the remainder is
for the provision of distribution services. The Plan also provides that it will
continue in effect only so long as such continuance is specifically approved at
least annually (i) by the Board of Directors of the Fund, or with respect to a
particular Portfolio by the vote of the holders of a majority of the outstanding
voting securities of such Portfolio, and (ii) by a majority of the directors who
are not interested persons of the Underwriter or of the Fund, cast in person at
a meeting called for the purpose of voting on such approval; provided that, if a
majority of the outstanding voting securities of any of the Portfolios approves
the Plan, the Plan shall continue in effect with respect to such approving
Portfolio whether or not the shareholders of any other Portfolio of the Fund
approve this Plan.
The Plan also states that it may be terminated at any time without the
payment of any penalty by the vote of the Board of Directors of the Fund or by
the Underwriter, upon sixty (60) days' written notice to the other party and
that it may be terminated with respect to a particular Portfolio at any time
without the payment of any penalty by the vote of the holders of a majority of
the outstanding voting securities of such Portfolio, upon sixty (60) days'
written notice to the Underwriter. The Plan may not be amended with respect to a
Portfolio to increase materially the amount of the fees payable unless the
amendment is approved by a vote of at least a majority of the outstanding voting
securities of such Portfolio, and all material amendments to the Plan must also
be approved by the Fund's Board of Directors.
Also, in each year during which the Plan remains in effect, the Underwriter
and any person authorized to direct the disposition of monies paid or payable by
a Portfolio pursuant to the Plan or any related agreement will prepare and
furnish to the Fund's Board of Directors, and the Board will review, at least
quarterly, written reports, complying with the requirements of Rule 12b-1, which
set out the amounts expended under the Plan and the purpose for which those
expenditures were made.
As authorized by the Plan, the Fund has retained LifeUSA Securities, Inc.
("LSI") to distribute Portfolio shares on a continuous basis as principal
underwriter. The Fund, on behalf of each Portfolio, has entered into an
Underwriting and Distribution Agreement with LSI pursuant to which each
Portfolio will pay LSI an annual fee of 0.75% of such Portfolio's average daily
net assets for the servicing of shareholder accounts and the distribution of
Portfolio shares. Until May 1, 1998, LSI has voluntarily agreed to waive this
fee in excess of 0.50% of a Portfolio's average daily net assets. The Rule 12b-1
Fee payable by a Portfolio to LSI may be used by LSI to pay advertising and
promotional expenses including, without limitation, costs of printing and
providing Prospectuses, Statements of Additional Information, annual reports and
semiannual reports to prospective shareholders, expenses of preparing and
providing sales literature advertising of any type, and compensation and
benefits paid to and expenses incurred by personnel, including supervisory
personnel, involved in direct mail and advertising activities and activities
relating to the direct marketing of shares of the Portfolio to the public and
compensation Authorized Dealers who have entered into Dealer Sales Agreements
with LSI for their sale of Portfolio shares. The Rule 12b-1 Fee may also be used
to compensate LSI for the provision of certain services to Portfolio
shareholders and Authorized Dealers. Such services
-33-
<PAGE>
may include answering shareholder questions, providing reports and other
information and other services designed to maintain shareholder accounts. LSI
may use the Rule 12b-1 Fee to make payments to Authorized Dealers that provide
such shareholder services.
CUSTODIAN, COUNSEL, AND ACCOUNTANTS
Each Portfolio self-custodies its assets pursuant to Rule 17f-2 under the
1940 Act and the Gardner Fund SEC No-Action Letter (February 5, 1988), subject
to certain internal controls and verification procedures to be approved by the
Fund's Board of Directors and reviewed annually.
Dorsey & Whitney LLP, 200 South Sixth Street, Minneapolis, MN 55402, is
independent legal counsel for the Portfolios. Dorsey & Whitney LLP also serves
as independent legal counsel for the Underlying Funds.
KPMG Peat Marwick LLP, 90 South Seventh Street, Minneapolis, MN 55402, acts
as the Portfolios' independent auditors. KPMG Peat Marwick LLP also acts as the
Underlying Funds' independent auditors.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Most of each Underlying Fund's portfolio transactions are effected with
dealers without the payment of brokerage commissions but at a net price which
usually includes a spread or markup. In effecting such portfolio transactions on
behalf of an Underlying Fund, the Adviser seeks the most favorable net price
consistent with the best execution.
Generally, however, an Underlying Fund must deal with brokers. The Adviser
selects and (where applicable) negotiates commissions with the brokers who
execute the transactions for such Underlying Fund. The primary criteria for the
selection of a broker is the ability of the broker, in the opinion of the
Adviser, to secure prompt execution of the transactions on favorable terms,
including the reasonableness of the commission and considering the state of the
market at the time. In selecting a broker, the Adviser may consider whether such
broker provides brokerage and research services (as defined in the Securities
Exchange Act of 1934). The Adviser may direct Underlying Fund transactions to
brokers who furnish research services to the Adviser. Such research services
include advice, both directly and in writing, as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities, as well as
analyses and reports concerning issues, industries, securities, economic factors
and trends, portfolio strategy, and the performance of accounts. By allocating
brokerage business in order to obtain research services for the Adviser, an
Underlying Fund enables the Adviser to supplement its own investment research
activities and allows the Adviser to obtain the views and information of
individuals and research staffs of many different securities research firms
prior to making investment decisions for an Underlying Fund. To the extent such
commissions are directed to brokers who furnish research services to the
Adviser, the Adviser receives a benefit, not capable of evaluation in dollar
amounts, without providing any direct monetary benefit to an Underlying Fund
from these commissions. Generally an Underlying Fund pays higher than the lowest
commission rates available.
The Adviser believes that most research services obtained by it generally
benefit one or more of the investment companies or other accounts which it
manages. Normally research services obtained through commissions paid by the
managed fund investing in common stocks and managed accounts investing in common
stocks would primarily benefit the Underlying Fund and accounts.
There is no formula for the allocation by the Adviser of each Underlying
Fund's brokerage business to any broker-dealers for brokerage and research
services. However, the Adviser will authorize an Underlying Fund to pay an
amount of commission for effecting a securities transaction in excess of the
amount of commission another broker would have charged only if the Adviser
determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker viewed in terms of either that particular transaction or the Adviser's
overall responsibilities with respect to the accounts as to which it exercises
investment discretion.
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<PAGE>
Although investment decisions for an Underlying Fund are made independently
from other accounts as to which the Adviser gives investment advice, it may
occasionally develop that the same security is suitable for more than one
account. If and when more than one account simultaneously purchase or sell the
same security, the transactions will be averaged as to price and allocated as to
amount in accordance with arrangements equitable to each Underlying Fund and
such accounts. The simultaneous purchase or sale of the same securities by an
Underlying Fund and other accounts may have detrimental effects on an Underlying
Fund, as they may affect the price paid or received by an Underlying Fund or the
size of the position obtainable by an Underlying Fund.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to the policies set forth in the preceding
paragraphs and such other policies as the Board of Directors of the Underlying
Fund may determine, the Adviser may consider sales of shares of an Underlying
Fund as a factor in the selection of broker-dealers to execute the Underlying
Fund's securities transactions.
CAPITAL STOCK
As of _________ , the directors and officers of LifeUSA Funds, Inc. as a
group owned less than one percent of each Portfolio's outstanding shares. As of
that date, the Portfolios were aware that the following persons owned of record
five percent or more of the outstanding shares of each class of stock of the
Portfolios.
<TABLE>
<CAPTION>
Percentage of Shares Owned
--------------------------
<S> <C>
LIFEUSA AGGRESSIVE GROWTH PORTFOLIO 100%
Life USA Securities, Inc.
300 South Highway 169
Minneapolis, MN 55426
LIFEUSA GROWTH PORTFOLIO 100%
LifeUSA Securities, Inc.
300 South Highway 169
Minneapolis, MN 55426
LIFEUSA GLOBAL PORTFOLIO 100%
LifeUSA Securities, Inc.
300 South Highway 169
Minneapolis, MN 55426
LIFEUSA BALANCED PORTFOLIO 100%
LifeUSA Securities, Inc.
300 South Highway 169
Minneapolis, MN 55426
LIFEUSA CURRENT INCOME PORTFOLIO 100%
LifeUSA Securities, Inc.
300 South Highway 169
Minneapolis, MN 55426
LIFEUSA PRINCIPAL PRESERVATION PORTFOLIO 100%
LifeUSA Securities, Inc.
300 South Highway 169
Minneapolis, MN 55426
</TABLE>
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<PAGE>
As a result of its owning more than 25% of the shares of each Portfolio,
LifeUSA Securities, Inc. may be deemed to control each Portfolio. LifeUSA
Securities, Inc. is organized under the laws of the State of Minnesota and is a
wholly-owned subsidiary of LifeUSA Holding, Inc.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The portfolio securities in which each Portfolio invests fluctuate in
value, and hence, for each Portfolio, the net asset value per share also
fluctuates.
The net asset value per share of a Portfolio is determined once daily
normally as of the close of trading on the New York Stock Exchange, normally
3:00 p.m. Central time, on each business day on which the New York Stock
Exchange is open for trading, and may be determined on additional days as
required by the Rules of the Securities and Exchange Commission. The New York
Stock Exchange is closed, and the net asset value per share of a Portfolio is
not determined, on the following national holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day.
TAX STATUS
The tax status of the Portfolios and the distributions of the Portfolios
are summarized in the Prospectus under "Dividends, Distributions and Tax
Status." Each Portfolio intends to fulfill the requirements of Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), as a regulated
investment company. If so qualified, each Portfolio will not be liable for
federal income taxes to the extent it distributes its taxable income to its
shareholders.
To qualify under Subchapter M for tax treatment as a regulated investment
company, each Portfolio must, among other things: (1) derive at least 90% of its
gross income from dividends, interest, and certain other types of payments
related to its investment in stock or securities; (2) distribute to its
shareholders at least 90% of its investment company taxable income (as that term
is defined in the Code determined without regard to the deduction for dividends
paid) and 90% of its net tax-exempt income; (3) derive less than 30% of its
annual gross income from the sale or other disposition of stock, securities,
options, futures, or forward contracts held for less than three months; and (4)
diversify its holdings so that, at the end of each fiscal quarter of the
Portfolio, (a) at least 50% of the market value of the Portfolio's assets is
represented by cash, cash items, U.S. Government securities and securities of
other regulated investment companies, and other securities, with these other
securities limited, with respect to any one issuer, to an amount no greater than
5% of the Portfolio's total assets and no greater than 10% of the outstanding
voting securities of such issuer, and (b) not more than 25% of the market value
of the Portfolio's total assets is invested in the securities of any one issuer
(other than U.S. Government securities or securities of other regulated
investment companies).
Each Portfolio is subject to a nondeductible excise tax equal to 4% of the
excess, if any, of the amount required to be distributed for each calendar year
over the amount actually distributed. For this purpose, any amount on which the
Portfolio is subject to corporate-level income tax is considered to have been
distributed. In order to avoid the imposition of this excise tax, each Portfolio
must declare and pay dividends representing 98% of its net investment income for
that calendar year and 98% of its capital gains (both long-term and short-term)
for the twelve-month period ending December 31 of the calendar year.
Any loss on the sale or exchange of shares of a Portfolio generally will be
disallowed to the extent that a shareholder acquires or contracts to acquire
shares of the same Portfolio within 30 days before or after such sale or
exchange. Furthermore, if Portfolio shares with respect to which a long-term
capital gain distribution has been made are held for less than six months, any
loss on the sale or exchange of such shares will be treated as a long-term
capital loss to the extent of such long-term capital gain distribution.
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<PAGE>
For federal tax purposes, if a shareholder exchanges shares of a Portfolio
for shares of any other Portfolio pursuant to the exchange privilege (see
"Exchange Privilege" in the Prospectus), such exchange will be considered a
taxable sale of the shares being exchanged.
Dividends generally are taxable to shareholders at the time they are paid.
However, dividends declared in October, November and December, made payable to
shareholders of record in such a month and actually paid in January of the
following year are treated as paid and are thereby taxable to shareholders as of
December 31.
Pursuant to the Code, distributions of net investment income by a Portfolio
to a shareholder who, as to the United States, is a nonresident alien
individual, nonresident alien fiduciary of a trust or estate, foreign
corporation, or foreign partnership (a "foreign shareholder") will be subject to
U.S. withholding tax (at a rate of 30% or lower treaty rate). Withholding will
not apply if a dividend paid by a Portfolio to a foreign shareholder is
"effectively connected" with a U.S. trade or business of such shareholder, in
which case the reporting and withholding requirements applicable to U.S.
citizens or domestic corporations will apply. Distributions of net long-term
capital gains are not subject to tax withholding but, in the case of a foreign
shareholder who is a nonresident alien individual, such distributions ordinarily
will be subject to U.S. income tax at a rate of 30% if the individual is
physically present in the U.S. for more than 182 days during the taxable year.
Each Portfolio will report annually to its shareholders the amount of any
withholding.
The foregoing relates only to federal income taxation and is a general
summary of the federal tax law in effect as of the date of this Statement of
Additional Information.
LIMITATION OF DIRECTOR LIABILITY
Under Minnesota law, each Portfolio's Board of Directors owes certain
fiduciary duties to the Portfolio and to its shareholders. Minnesota law
provides that a director "shall discharge the duties of the position of director
in good faith, in a manner the director reasonably believes to be in the best
interest of the corporation, and with the care an ordinarily prudent person in a
like position would exercise under similar circumstances." Fiduciary duties of a
director of a Minnesota corporation include, therefore, both a duty of "loyalty"
(to act in good faith and act in a manner reasonably believed to be in the best
interests of the corporation) and a duty of "care" (to act with the care an
ordinarily prudent person in a like position would exercise under similar
circumstances). Minnesota law authorizes corporations to eliminate or limit the
personal liability of a director to the corporation or its shareholders for
monetary damages for breach of the fiduciary duty of "care." Minnesota law does
not, however, permit a corporation to eliminate or limit the liability of a
director (i) for any breach of the director's duty of "loyalty" to the
corporation or its shareholders, (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) for
authorizing a dividend, stock repurchase or redemption or other distribution in
violation of Minnesota law or for violation of certain provisions of Minnesota
securities laws, or (iv) for any transaction from which the director derived an
improper personal benefit. The Articles of Incorporation of LifeUSA Funds, Inc.
limit the liability of directors to the fullest extent permitted by Minnesota
statutes, except to the extent that such liability cannot be limited as provided
in the Investment Company Act of 1940 (which Act prohibits any provisions which
purport to limit the liability of directors arising from such directors' willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of their role as directors).
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" of the corporation for breach of their
duties as officers (including the liability of directors who serve as officers
for breach of their duties as officers.) Minnesota law does not permit
elimination or limitation of the availability of equitable relief, such as
injunctive or rescissionary relief. Further, Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act of
1933 or the Securities Exchange Act of 1934, and it is uncertain whether and to
what extent the elimination of monetary liability would extend to violations of
duties imposed on directors by the Investment Company Act of 1940 and the rules
and regulations adopted under such Act.
-37-
<PAGE>
FINANCIAL STATEMENTS
The Fund's audited balance sheet is attached hereto.
-38-
<PAGE>
[Letterhead of KPMG Peat Marwick LLP]
KPMG Peat Marwick LLP
4200 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Independent Auditors' Report
The Board of Directors and Shareholder
LifeUSA Funds, Inc.
We have audited the accompanying statements of assets and liabilities of the
LifeUSA Aggressive Growth Portfolio, LifeUSA Growth Portfolio, LifeUSA Global
Portfolio, LifeUSA Balanced Portfolio, LifeUSA Current Income Portfolio and
LifeUSA Principal Preservation Portfolio (portfolios within LifeUSA Funds, Inc.)
as of December 19, 1996. These financial statements are the responsibility of
the portfolios' management. Our responsibility is to express an opinion on these
financial statements 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 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 include
confirmation of cash in bank by correspondence with the custodian. 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 statements of assets and liabilities referred to above
present fairly, in all material respects, the financial position of the LifeUSA
Aggressive Growth Portfolio, LifeUSA Growth Portfolio, LifeUSA Global Portfolio,
LifeUSA Balanced Portfolio, LifeUSA Current Income Portfolio and LifeUSA
Principal Preservation Portfolio at December 19, 1996 in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
December 20, 1996
-38-
<PAGE>
LifeUSA Funds, Inc.
Statements of Assets and Liabilities
December 19, 1996
<TABLE>
<CAPTION>
Aggressive Current Principal
Growth Growth Global Balanced Income Preservation
------ ------ ------ -------- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash in bank on demand deposit $18,334 $18,334 $18,333 $18,333 $18,333 $18,333
Organization costs (note 4) 5,500 5,500 5,500 5,500 5,500 5,500
----- ----- ----- ----- ----- -----
Total assets 23,834 23,834 23,833 23,833 23,833 23,833
Liabilities
Accrued expenses (note 4) 5,500 5,500 5,500 5,500 5,500 5,500
----- ----- ----- ----- ----- -----
Net assets applicable to outstanding
capital stock $18,334 $18,334 $18,333 $18,333 $18,333 $18,333
======= ======= ======= ======= ======= =======
Represented by:
Capital stock $ 18 $ 18 $ 18 $ 18 $ 18 $ 18
Additional paid-in capital 18,316 18,316 18,315 18,315 18,315 18,315
------ ------ ------ ------ ------ ------
Total - representing net assets applicable
to outstanding capital stock $18,334 $18,334 $18,333 $18,333 $18,333 $18,333
======= ======= ======= ======= ======= =======
Shares of capital stock outstanding;
authorized 10 billion shares each of
$0.01 par value stock 1,833 1,833 1,833 1,833 1,833 1,833
-----------------------------------------------------------------
Net asset value per share of outstanding
capital stock $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
-----------------------------------------------------------------
</TABLE>
See accompanying Notes to Statement of Assets and Liabilities
-39-
<PAGE>
LifeUSA Funds, Inc.
Notes to Statements of Assets and Liabilities
December 19, 1996
(1) ORGANIZATION
LifeUSA Funds, Inc. (the Company) was incorporated on April 26, 1996,
and is registered under the Investment Company Act of 1940 (as amended)
as an open-end management investment company consisting of the
following six separate diversified investment portfolios: Life USA
Aggressive Growth Portfolio (Aggressive Growth Portfolio), LifeUSA
Growth Portfolio (Growth Portfolio), LifeUSA Global Portfolio (Global
Portfolio), LifeUSA Balanced Portfolio (Balanced Portfolio), LifeUSA
Current Income Portfolio (Current Income Portfolio) and LifeUSA
Principal Preservation Portfolio (Principal Preservation Portfolio)
(collectively, the Portfolios). Each of the Portfolios was created as a
separate portfolio represented by a separate class of common stock of
LifeUSA Funds, Inc. and offer a means of investing in shares of certain
IAI mutual funds (the Underlying Funds) within certain predetermined
percentage ranges. The Company's articles of incorporation permit the
Board of Directors to create additional portfolios in the future and
each Portfolio is permitted to issue separate classes of stock. This
report covers only the Aggressive Growth Portfolio, Growth Portfolio,
Global Portfolio, Balanced Portfolio, Current Income Portfolio and
Principal Preservation Portfolio, currently the only portfolios of the
Company.
The only transaction since the Company's inception was the sale of
1,833 shares of each Portfolio's capital stock to LifeUSA Securities,
Inc. on December 19, 1996, totaling $110,000.
(2) FEDERAL TAXES
The Company intends to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute taxable income to the shareholders of the Portfolios in
amounts that will avoid or minimize federal income or excise taxes for
the Portfolios.
(3) FEES AND EXPENSES
The Company has entered into an investment advisory and administrative
services agreement with Investment Advisers, Inc. (Adviser) who is also
the adviser to the Underlying Funds. Pursuant to the agreement, Adviser
provides the Portfolios with investment advisory services and is
responsible for the overall management of the Portfolios' business
affairs subject to the authority of the Board of Directors. Because the
Underlying Funds pay Adviser a management fee, no compensation is paid
to Adviser under the Agreement. The Agreement also provides that each
Portfolio shall pay the fees and expenses of outside legal counsel,
independent public accountants, and custodians as well as certain
expenses incurred in connection with the registration of Portfolio
shares for sale to the public, interest and, in certain circumstances,
taxes and extraordinary expenses.
The Portfolios have adopted a plan of distribution with LifeUSA
Securities, Inc. (Distributor), the Portfolios' distributor. Under the
Plan, the Portfolios pay Distributor a fee for the servicing of
shareholder accounts and the distribution of Portfolio shares. The fee
is computed monthly based on average daily net assets for each
Portfolio at an annual rate of 0.75% (0.50% payable as distribution fee
and 0.25% as a shareholder servicing fee). Until May 1, 1998,
Distributor has voluntarily agreed to waive that portion of the fee in
excess of 0.50% of each Portfolio's average daily net assets.
-40-
<PAGE>
(4) ORGANIZATION COSTS
The Company expects to incur organization costs in connection with the
start-up and initial registration of the Portfolios. These costs will
be amortized over sixty months on a straight-line basis beginning with
the commencement of operations. In the event LifeUSA Securities, Inc.
redeems any or all of its shares representing initial capital in the
Portfolios prior to the date such costs are fully amortized, it will
bear such portion of the unamortized organization costs as the number
of shares redeemed bears to the initial purchase of shares.
(5) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the Statement of Assets and Liabilities. Actual amounts could
differ from those estimates.
-41-
<PAGE>
APPENDIX A - RATINGS OF DEBT SECURITIES
A rating of a rating service represents that service's opinion as to
the credit quality of the rated security. However, such ratings are general and
cannot be considered absolute standards of quality or guarantees as to the
creditworthiness of an issuer. A rating is not a recommendation to purchase,
sell or hold a security, because it does not take into account market value or
suitability for a particular investor. Markets values of debt securities may
change as a result of a variety of factors unrelated to credit quality,
including changes in market interest rates.
When a security has been rated by more than one service, the ratings
may not coincide, and each rating should be evaluated independently. Ratings are
based on current information furnished by the issuer or obtained by the rating
services from other sources which they consider reliable. Ratings may be
changed, suspended or withdrawn as a result of changes in or unavailability of
such information, or for other reasons. In general, the Underlying Funds are not
required to dispose of a security if its rating declines after it is purchased,
although they may consider doing so.
RATINGS BY MOODY'S
- -------------------
CORPORATE BONDS
Aaa. Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa. Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A. Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa. Bonds rated Baa are considered medium grade obligations; i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds rated B generally lack characteristics of the desirable
investment. Assurances of interest and principal payment or maintenance of other
terms of the contract over any long period of time may be small.
Caa. Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca. Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
A-1
<PAGE>
C. Bonds rated C are the lowest-rated class of bonds and issued so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Conditional Ratings. The designation "Con." followed by a rating indicates
bonds for which the security depends upon the completion of some act or the
fulfillment of some condition. These are bonds secured by (a) earnings of
projects under construction, (b) earnings or projects unseasoned in operating
experience, (c) rentals which begin when facilities are completed, or (d)
payments to which some other limiting condition attaches. Parenthetical rating
denotes probable credit stature upon completion of construction or elimination
of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in the Aa and A
classifications of its corporate bond rating system. The modifier 1 indicates
that the security ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category. With respect to
municipal securities, those bonds in the Aa, A, Baa, Ba, and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols Aa1, A1, Baa1, Ba1, and B1.
COMMERCIAL PAPER
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime - 1 Superior ability for repayment of senior short-term debt
obligations
Prime - 2 Strong ability for repayment of senior short-term debt
obligations
Prime - 3 Acceptable ability for repayment of senior short-term debt
obligations
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, Moody's, in assigning
ratings to such issuers, evaluates the financial strength of the indicated
affiliated corporations, commercial banks, insurance companies, foreign
governments, or other entities, but only as one factor in the total rating
assessment.
RATINGS BY S&P
- --------------
CORPORATE BONDS
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
A-2
<PAGE>
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB. Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B. Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB-rating.
CCC. Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
CC. Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C. The rating C typically applied to debt subordinated to senior debt which
assigned an actual or implied CCC-debt rating. The C rating may be used to cover
a situation where a bankruptcy petition has been filed but debt service payments
are continued.
C1. The rating C1 is reserved for income bonds on which no interest is
being paid.
D. Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. The D rating will be used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
In order to provide more detailed indications of credit quality, S&P's bond
letter ratings described above (except for the AAA category) may be modified by
the addition of a plus or a minus sign to show relative standing within the
rating category.
COMMERCIAL PAPER
A. This highest rating category indicates the greatest capacity for timely
payment. Issues in this category are further defined with the designations 1, 2,
and 3 to indicate the relative degree to safety.
A-1. This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are designed A-1+.
A-2. Capacity for timely payments on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designed A-1.
A-3. Issues carrying this designation have adequate capacity for timely
repayment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
A-3
<PAGE>
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements (2)
(b) Exhibits
(1) Articles of Incorporation (1)
(1A) Certificate of Designation (1)
(2) Bylaws (1)
(5) Investment Advisory and Administrative Services
Agreement
(6A) Underwriting and Distribution Agreement
(6B) Dealer Sales Agreement
(10) Opinion and Consent of Counsel
(11) Consent of Independent Auditors
(13) Letter of Investment Intent
(15) Plan of Distribution
(1) Incorporated by reference to the Registrant's Registration
Statement on Form N-1A filed on October 16, 1996.
(2) Financial Statements are included in Part B to the Registration
Statement.
Item 25. Persons Controlled by or Under Common Control with Registrant.
See the sections of the Prospectus entitled "Management" and
"Description of Common Stock" and the section of the Statement of Additional
Information entitled "Management," filed as part of this Registration Statement.
III-1
<PAGE>
Item 26. Number of Holders Securities.
<TABLE>
<CAPTION>
Number of Record Holders
Portfolio Title of Class as of December 31, 1996
- --------- -------------- -----------------------
<S> <C> <C>
LifeUSA Funds, Inc. Common Stock (Series A) 1
Common Stock (Series B) 1
Common Stock (Series C) 1
Common Stock (Series D) 1
Common Stock (Series E) 1
Common Stock (Series F) 1
</TABLE>
Item 27. Indemnification.
Incorporated by reference to the Registrant's Registration Statement on
Form N-1A filed on October 16, 1996.
III-2
<PAGE>
Item 28. Business and Other Connections of Investment Adviser.
Information on the business of Investment Advisers, Inc. ("IAI") is
described in the Prospectus section "Management" and in Part B of this
Registration Statement in the section "Management."
The senior officers and directors of IAI and their titles are as follows:
Name Title
---- -----
Jeffrey R. Applebaum Senior Vice President
Scott Allen Bettin Senior Vice President
Archie Campbell Black, III Senior Vice President/Treasurer
Iain D. Cheyne Director
Stephen C. Coleman Senior Vice President
Larry Ray Hill Executive Vice President
Richard A. Holway Senior Vice President
Irving Philip Knelman Executive Vice President/Director
Rick D. Leggott Senior Vice President
Kevin McKendry Director
Timothy A. Palmer Senior Vice President
Peter Phillips Director
Douglas Rugh Platt Senior Vice President
Noel Paul Rahn Chief Executive Officer/Director
James S. Sorenson Senior Vice President
R. David Spreng Senior Vice President
Christopher John Smith Senior Vice President/Secretary
Richard Edward Struthers Executive Vice President
Suzanne F. Zak Senior Vice President
All of such persons have been affiliated with IAI for more than two years
except Messrs. Cheyne, McKendry and Phillips. Prior to being appointed to the
Board in 1996, Mr. Cheyne was and remains General Manager of Corporate Banking
of Lloyds Bank plc, St. George's House, 6-8 Eastcheap, London, England EC3M 1LL
since 1972. Prior to being appointed to the Board in 1996, Mr. McKendry was and
remains Bank Counsel to Lloyds Bank Plc, P.O. Box 2008, One Seaport Plaza, 199
Water Street, New York, NY 10038, since 1979. Prior to being appointed to the
Board in 1996, Mr. Phillips was and remains Executive Vice President and General
Manager of Lloyds Bank Plc, P.O. Box 2008, One Seaport Plaza, 199 Water Street,
New York, NY 10038, since 1993.
Certain directors and officers of IAI are directors and/or officers of the
Registrant, as described in the section of the Statement of Additional
Information entitled "Management," filed as a part of this Registration
Statement.
The address of the officers and directors of IAI is that of IAI, which is
3700 First Bank Place, P. O. Box 357, Minneapolis, Minnesota 55440.
Certain of the officers and directors of IAI also serve as officers and
directors of IAI International Ltd. Both IAI and IAI International are
wholly-owned subsidiaries of Hill Samuel Group BV, a London-based merchant
banking and financial services firm which, in turn, is owned by Lloyds TSB Group
plc, a publicly-held financial services organization based in London, England.
The senior officers and directors of IAI International and their titles are as
follows:
III-3
<PAGE>
Name Title
- ---- -----
Noel Paul Rahn Chairman of the Board of Directors
Roy C. Gillson Chief Investment Officer/Director
Iain D. Cheyne Director
Irving Philip Knelman Director
Hilary Fane Deputy Chief Investment Officer/Director
Feidhlim O'Broin Associate Director
Certain of the officers and directors of IAI also serve as officers and
directors of IAI Trust Company, a wholly-owned subsidiary of IAI. The principal
officers and directors of IAI Trust Company and their titles are as follows:
Name Title
- ---- -----
Richard E. Struthers Chairman of the Board
Archie C. Black Director/President/Treasurer
Christopher J. Smith Director/Vice President
Susan J. Haedt Director/Vice President
Steven G. Lentz Director/Secretary
Thomas S. Smith Supervisor of Trust Services
Item 29. Principal Underwriters
(a) None
(b) LifeUSA Securities, Inc. is the Portfolio's principal
underwriter. Its offices and directors are as follows:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
Robert McDonald Director None
300 South Highway 169
Minneapolis, MN 55426
Mark Zesbaugh President, CEO, CFO, None
300 South Highway 169 Secretary, Treasurer
Minneapolis, MN 55426
Margery Hughes Director None
300 South Highway 169
Minneapolis, MN 55426
Philip Rosenbaum Financial Operations Officer None
300 South Highway 169
Minneapolis, MN 55426
Bardea Huppert Senior Vice President, COO None
300 South Highway 169
Minneapolis, MN 55426
(c) None
</TABLE>
III-4
<PAGE>
Item 30. Location of Accounts and Records.
All accounts, books and records of Registrant, including books and records
of Registrant's investment portfolios, are maintained by IAI. IAI also acts as
Registrant's transfer agent and dividend disbursing agent, at 3700 First Bank
Place, Minneapolis, Minnesota 55402.
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
(a) Not applicable.
(b) Registrant undertakes to file a post-effective amendment, using
financial statements which need not be certified, within four to six months from
the effective date of the Registrant's 1933 Act Registration Statement.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered a copy of its latest annual report to shareholders, upon request and
without charge.
III-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis, and State of Minnesota on the 3rd day of
January, 1997.
LifeUSA FUNDS, INC.
(Registrant)
By /s/ Richard E. Struthers
Richard E. Struthers, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
/s/ Richard E.Struthers President (principal January 3, 1997
Richard E. Struthers executive officer) & Director
/s/ Archie C. Black III Treasurer (principal January 3, 1997
Archie C. Black III financial and accounting
officer)
</TABLE>
Noel P. Rahn (1) Director
Madeline Betsch (1) Director
W. William Hodgson (1) Director
George R. Long (1) Director
J. Peter Thompson (1) Director
Charles H. Withers (1) Director
/s/ William C. Joas January 3, 1997
William C. Joas
Attorney-in-Fact
(1) Registrant's directors executing Powers of Attorney dated October 14,
1996.
<PAGE>
EXHIBITS
(5) Investment Advisory and Administrative Services Agreement
(6A) Underwriting and Distribution Agreement
(6B) Dealer Sales Agreement
(10) Opinion and Consent of Counsel
(11) Consent of Independent Auditors
(13) Letter of Investment Intent
(15) Plan of Distribution
INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES AGREEMENT
THIS AGREEMENT, made as of this 6th of November, 1996 by and between
LifeUSA Funds, Inc., a Minnesota corporation (the "Fund"), on behalf of each
portfolio represented by a series of shares of common stock of the Fund that
adopts this Agreement (the "Portfolios") (the Portfolios, together with the date
each Portfolio adopts this Agreement, are set forth in Exhibit A hereto, which
shall be updated from time to time to reflect additions, deletions or other
changes thereto), and Investment Advisers, Inc., a corporation organized and
existing under the laws of the State of Delaware (the "Adviser").
1. (a) The Fund on behalf of the Portfolios hereby retains the Adviser, and
the Adviser hereby agrees to act, as investment adviser for, and to manage the
investment of the assets of, the Portfolios as set forth herein and as further
requested by the Board of Directors of the Fund. In acting hereunder the Adviser
shall be an independent contractor and, unless otherwise expressly provided or
authorized hereunder or by the Board of Directors of the Fund, shall have no
authority to act for or represent the Fund or any Portfolio in any way or
otherwise be an agent of the Fund or any Portfolio. The Adviser covenants and
agrees that, in effecting acquisitions and dispositions of specific investments
on behalf of the Portfolios, it shall at all times be governed by a Portfolio's
investment objectives, restrictions and policies as delineated and limited by
the disclosures contained in the various documents filed with the Securities and
Exchange Commission, as such documents may from time to time be amended or
supplemented. The Adviser shall report to the Fund's Board of Directors
regularly at such times and in such detail as the Board may from time to time
determine appropriate, in order to permit the Board to determine its adherence
to the Portfolios' investment objectives, policies and limitations.
(b) The Fund on behalf of the Portfolios hereby engages the Adviser, and
the Adviser hereby agrees, to provide the Portfolios with all dividend
disbursing, accounting, administrative and transfer agency services required by
the Portfolios, including, without limitation, the following services:
(1) The calculation of net asset value per share at such times and in such
manner as specified in the Portfolios' current Prospectus and Statement of
Additional Information and at such other times upon which the parties hereto may
from time to time agree. The pricing services or other sources from which daily
price quotations on portfolio securities are to be obtained for purposes of
calculating a Portfolio's daily net asset value shall be paid for by the Adviser
and approved by the Fund;
(2) Upon the receipt of funds for the purchase of Portfolio shares or the
receipt of redemption requests with respect to Portfolio shares outstanding, the
calculation of the number of shares to be purchased or redeemed, respectively;
(3) Upon a Portfolio's distribution of dividends, (i) the calculation of
the amount of such dividends to be received per Portfolio share, (ii) the
calculation of the number of additional Portfolio shares to be received by each
Portfolio shareholder, other than any shareholder who has elected to receive
such dividends in cash, and (iii) the mailing of payments with respect to such
dividends to shareholders who have elected to receive such dividends in cash;
(4) The provision of transfer agency services as described below:
(i) The Adviser shall make original issues of shares of a Portfolio in
accordance with a Portfolio's current Prospectus and Statement of Additional
Information and with instructions from the Fund;
<PAGE>
(ii) Prior to the daily determination of net asset value of the Portfolio,
the Adviser shall process all purchase orders received since the last
determination of a Portfolio's net asset value;
(iii) Transfers of shares shall be registered;
(iv) The Adviser will maintain stock registry records in the usual form in
which it will note the issuance, transfer and redemption of Portfolio shares,
and is also authorized to maintain an account in which it will record a
Portfolio's shares and fractions issued and outstanding from time to time for
which issuance of a Portfolio share certificate is deferred; and
(v) The Adviser will, in addition to the aforementioned duties and
functions, perform the usual duties and functions of a stock transfer agent for
a registered investment company;
(5) The creation and maintenance of such records relating to the business
of a Portfolio as the Fund may from time to time reasonably request;
(6) The preparation of tax forms, reports, notices, proxy statements,
proxies and other Portfolio shareholder communications, and the mailing thereof
to Portfolio shareholders;
(7) The provision of such other dividend disbursing, accounting,
administrative, accounting and transfer agency services upon which the parties
hereto may from time to time agree;
(8) The provision of shareholder services not otherwise the subject of the
preceding paragraphs or of any agreement with the Fund's principal underwriter;
and
(9) The Portfolios hereby authorize the Adviser to contract with qualified
entities for the provision of any of the services to be performed pursuant to
this Section 1(b).
2. The Adviser, at its own expense, shall file all documents with all
relevant regulatory agencies and governmental authorities on the Fund's behalf,
and shall provide the Fund with all necessary office space, personnel and
facilities necessary and incident to the performance of the Adviser's services
hereunder. The Adviser shall pay or be responsible for the payment of all
compensation to personnel of the Fund and the officers and directors of the Fund
who are otherwise affiliated with the Adviser.
3. The Adviser shall be responsible only for those expenses expressly
stated in paragraph 2 to be the responsibility of the Adviser and shall not be
responsible for any other expenses of the Fund or any Portfolio including, as
illustrative and without limitation, fees and charges of any custodian
(including charges as custodian and for keeping books and records and similar
services to the Fund and the Portfolios); fees and expenses of directors, other
than directors described in paragraph 2; fees and expenses of independent
auditors, legal counsel; brokers' commissions; interest charges; taxes and
corporate fees payable to any government or governmental body or agency
(including certain of those incurred on account of the registration or
qualification of securities issued by the Fund); shareholder meetings and
related solicitation costs.
-2-
<PAGE>
4. The Adviser may utilize the Fund's distributor or an affiliate of the
Adviser as a broker, including as a principal broker, provided that the
brokerage transactions and procedures are in accordance with Rule 17e-1 under
the Investment Company Act of 1940, as amended (the "Act"), and the then
effective Registration Statement of the Fund under the Securities Act of 1933,
as amended. All allocation of portfolio transactions shall be subject to such
policies and supervision as the Fund's Board of Directors or any committee
thereof deem appropriate and any brokerage policy set forth in the then current
Registration Statement of the Fund.
5. The Adviser shall see that there are rendered to the Board of Directors
of the Fund such periodic and special reports as the Board of Directors may
reasonably request, including any reports in respect to placement of security
transactions for the Portfolios.
6. The Portfolio pays no compensation to the Adviser under this Agreement.
This does not limit the Adviser's ability, however, to seek reimbursement for
its payment of Portfolio expenses. Anything to the contrary notwithstanding, the
Adviser, in its discretion, may at any time and from time to time voluntarily
reimburse Portfolio expenses.
7. Services of the Adviser herein provided are not to be deemed exclusive,
and the Adviser shall be free to render similar services or other services to
others so long as its services hereunder shall not be impaired thereby.
8. The Adviser, in carrying out and performing the terms and conditions of
this Agreement, shall incur no liability for its status hereunder or for any
actions taken or omitted in good faith and without negligence. Without
limitation of the foregoing:
(1) The Adviser may rely upon, and shall not be liable to any person or
party for any actions taken or omitted to be taken in good faith in reliance
upon, the advice of the Fund, or of counsel, who may be counsel for the Fund or
counsel for the Adviser, and upon statements of accountants, brokers and other
persons believed by IAI in good faith to be expert in the matters upon which
they are consulted; and
(2) The Adviser may rely upon, and shall not be liable to any person or
party for any actions taken or omitted to be taken in good faith in reliance
upon, any signature, instruction, request, letter of transmittal, certificate,
opinion of counsel, statement, instrument, report, notice, consent, order or
other paper or document that the Adviser in good faith believes to be genuine
and to have been signed, presented or authorized by the purchaser, Fund or other
proper party or parties.
9. It is understood that the officers, directors, agents and shareholders
of the Fund are or may be interested in the Adviser or the distributor of the
Fund as officers, directors, agents or shareholders and that the officers,
directors, shareholders and agents of the Adviser may be interested in the Fund
otherwise than as shareholders.
10. The effective date of this Agreement with respect to each Portfolio
shall be the date set forth on Exhibit A hereto, which date shall not precede
the date that this Agreement is approved by the vote of the holders of at least
a majority of the outstanding shares of such Portfolio and the vote of the Board
of Directors of the Fund, including the vote of a majority of the directors who
are not parties to this Agreement or "interested persons" (as defined in the
Act) of the Adviser or of the Fund, cast in person at a meeting called for the
purpose of voting on such approval.
-3-
<PAGE>
Unless sooner terminated as hereinafter provided, this Agreement shall
continue in effect with respect to each Portfolio for a period of more than two
years from the date of its execution but only as long as such continuance is
specifically approved at least annually by (a) the Board of Directors of the
Fund or by the vote of a majority of the outstanding shares of the applicable
Portfolio and (b) the vote of a majority of the directors, who are not parties
to this Agreement or "interested persons" (as defined in the Act) of the Adviser
or of the Fund, cast in person at a meeting called for the purpose of voting on
such approval.
11. This Agreement may be terminated with respect to any Portfolio at any
time, without the payment of any penalty, by the Board of Directors of the Fund
or by the vote of a majority of the outstanding shares of such Portfolio, or by
the Adviser, upon 60 days' written notice to the other party.
This Agreement shall automatically terminate in the event of its
"assignment" (as defined in the Act), provided, however, that such automatic
termination shall be prevented in a particular case by an order of exemption
from the Securities and Exchange Commission or a no-action letter of the staff
of the Commission to the effect that such assignment does not require
termination as a statutory or regulatory matter.
12. This Agreement may be modified by mutual consent, such consent as to
any Portfolio only to be authorized by a majority of the directors who are not
parties to this Agreement or "interested persons" (as defined in the Act) of the
Adviser or of the Fund and, only with respect to the investment advisory
services to be performed hereunder, the vote of a majority of the outstanding
shares of such Portfolio.
13. Wherever referred to in this Agreement, the vote or approval of the
holders of a majority of the outstanding shares of a Portfolio shall mean the
lesser of (a) the vote of 67% or more of the shares of such Portfolio
represented at a meeting where more than 50% of the outstanding shares are
present in person or by proxy, or (b) the vote of more than 50% of the
outstanding shares of such Portfolio.
14. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder shall not be thereby
affected.
15. Any notice under this Agreement shall be in writing, addressed,
delivered or mailed, postage prepaid, to the other party at such address as such
other party may designate in writing for receipt of such notice.
16. The internal law, and not the law of conflicts, of the State of
Minnesota will govern all questions concerning the construction, validity and
interpretation of this Agreement and the performance of the obligations imposed
by this Agreement.
17. This Agreement, including its exhibits, constitutes the entire
agreement between the parties concerning its subject matter and supersedes all
prior and contemporaneous agreements, representations and understandings of the
parties.
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<PAGE>
IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to
be executed by their duly authorized officers as of the day and year first above
written.
LIFEUSA FUNDS, INC.
By /s/ Richard E. Struthers
Its President
INVESTMENT ADVISERS, INC.
By /s/ Richard E. Struthers
Its Executive Vice President
By /s/ Christopher J. Smith
Its Senior Vice President and
General Counsel
<PAGE>
LIFEUSA FUNDS, INC.
EXHIBIT A
TO
INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES AGREEMENT
EFFECTIVE DATES:
Portfolio Effective Date
--------- --------------
LifeUSA Aggressive Growth Portfolio January 1, 1997
LifeUSA Growth Portfolio January 1, 1997
LifeUSA Global Portfolio January 1, 1997
LifeUSA Balanced Portfolio January 1, 1997
LifeUSA Current Income Portfolio January 1, 1997
LifeUSA Principal Preservation Portfolio January 1, 1997
UNDERWRITING AND DISTRIBUTION AGREEMENT
THIS AGREEMENT, made this 6th of November, 1996, by and between LifeUSA
Funds, Inc., a Minnesota corporation (the "Fund"), for and on behalf of each
series of the Fund's shares (each such series is referred to hereinafter as a
"Portfolio" or "Portfolios", as appropriate) and LifeUSA Securities, Inc., a
Minnesota corporation ("LSI").
WITNESSETH:
1. UNDERWRITING SERVICES.
The Fund on behalf of each Portfolio hereby engages LSI, and LSI hereby
agrees to act, as principal underwriter for each Portfolio in connection with
the sale and distribution of the shares of each Portfolio of the Fund to the
public, either through dealers or otherwise. LSI agrees to offer such shares for
sale at all times when such shares are available for sale and may lawfully be
offered for sale and sold. The Fund and its Portfolios will include the surname
"LifeUSA" in their names and will have the right to use such name for so long as
LSI serves as principal underwriter.
As used herein, "Portfolios" of the Fund is defined as the Series A,
Series B, Series C, Series D, Series E and Series F Common Shares of the Fund
and any other series which may hereinafter be created by the Fund's Board of
Directors.
2. SALE OF PORTFOLIO SHARES.
The shares of each Portfolio are to be sold only on the following terms:
(a) All subscriptions, offers or sales shall be subject to acceptance or
rejection by the Fund. Any offer or sale shall be conclusively presumed to have
been accepted by the Fund if the Fund shall fail to notify LSI of the rejection
of such offer or sale prior to the computation of the net asset value of the
applicable Portfolio's shares next following receipt by the Fund of notice of
such offer or sale.
(b) No share of a Portfolio shall be sold by LSI (i) for any amount less
than the net asset value of such share, computed as provided in the Bylaws of
the Fund, or (ii) for any consideration other than cash, or, pursuant to any
exchange privilege provided for by such Portfolio's currently effective
Prospectus or Statement of Additional Information, shares of any other
investment company for which LSI acts as an underwriter. In addition, except as
provided below or in the Portfolio's currently effective Prospectus or Statement
of Additional Information, all Portfolio shares that are sold by LSI shall be
sold at the applicable public offering price, as hereinafter defined, provided
that, in the case of sales of such shares to or through bona fide dealers in
securities, LSI may allow, or sell at, a discount from said public offering
<PAGE>
price to such dealers, which discount shall be no greater than the "sales load"
hereinafter referred to.
(c) The public offering price of Portfolio shares shall be the current net
asset value thereof (computed as provided in the Bylaws of the Fund) plus the
applicable "sales load" or loading charge, if any, which shall be such
percentage of the public offering price, computed to the nearest cent, as may be
agreed upon by the Fund and LSI and specifically approved by the Board of
Directors of the Fund, provided that no schedule of sales loads shall be
effective until set forth in a Portfolio's prospectus meeting the requirements
of the Securities Act of 1933. Said sales loads may be graduated on a scale
based on the dollar amount of shares sold.
(d) The front-end sales charge, if any, for any Portfolio may, at the
discretion of the Fund and LSI, be increased, reduced or eliminated as permitted
by the Investment Company Act of 1940, and the rules and regulations thereunder,
as they may be amended from time to time, or as set forth elsewhere in this
Agreement, provided that, if necessary, such increase, reduction or elimination
shall be set forth in the Prospectus for such Portfolio, and provided that a
Portfolio shall in no event receive for any shares sold an amount less than the
net asset value thereof.
3. INVESTMENT OF DIVIDEND AND DISTRIBUTIONS.
The Fund may extend to its shareholders the right to purchase shares issued
by each Portfolio of the Fund at the net asset value thereof with the proceeds
of any dividend or capital gain distribution paid or payable by a Portfolio (or
any other fund for which LSI serves as underwriter) to its shareholders.
4. REGISTRATION OF SHARES.
The Fund agrees to make prompt and reasonable efforts to effect and keep in
effect, at its own expense, the registration or qualification of each
Portfolio's shares for sale in such jurisdictions as the Fund may designate. LSI
agrees to provide the Fund with any information the Fund may request to satisfy
the registration or qualification requirements needed to offer Portfolio shares
for sale in each jurisdiction where LSI or any of its agents offers such shares
for sale.
5. INFORMATION TO BE FURNISHED TO LSI.
The Fund agrees that it will furnish LSI with such information with respect
to the affairs and accounts of the Fund (and each Portfolio thereof) as LSI may
from time to time reasonably require, and further agrees that LSI, at all
reasonable times, shall be permitted to inspect the books and records of the
Fund.
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<PAGE>
6. ALLOCATION OF EXPENSES.
During the period of this contract, the Fund shall pay or cause to be paid
all expenses, costs and fees incurred by the Fund which are not assumed by LSI
or Investment Advisers, Inc. ("Advisers"). LSI agrees to provide, and shall pay
costs which it incurs in connection with providing personal services to
shareholders (such costs are referred to as "Shareholder Servicing Costs").
Shareholder Servicing Costs include all expenses of LSI incurred in connection
with providing administrative or accounting services to shareholders of each
Portfolio not otherwise provided by Advisers, including, but not limited to, an
allocation of LSI's overhead and payments made to persons, including employees
of LSI, who respond to inquiries of shareholders regarding their ownership of
Portfolio shares, or who provide other administrative or accounting services.
Notwithstanding the foregoing, if the National Association of Securities
Dealers, Inc. ("NASD") adopts a definition of "service fee" for purposes of the
NASD Conduct Rules that differs from the definition of Shareholder Servicing
Costs in this paragraph, or if the NASD adopts a related definition intended to
define the same concept, the definition of Shareholder Servicing Costs in this
paragraph shall be automatically amended, without further action of the parties,
to conform to such NASD definition. LSI shall also pay all costs of distributing
the shares of each Portfolio ("Distribution Expenses"). Distribution Expenses
include, but are not limited to, initial and ongoing sales compensation (in
addition to sales loads) paid to registered representatives of LSI and to other
broker-dealers and participating financial institutions; expenses incurred in
the printing of prospectuses, statements of additional information and reports
used for sales purposes; expenses of preparation and distribution of sales
literature, expenses of advertising of any type; an allocation of LSI's
overhead; payments to and expenses of persons who provide support services in
connection with the distribution of Fund shares; and other distribution-related
expenses. Advisers, rather than LSI, may bear certain of the expenses referred
to in this paragraph, but LSI shall be primarily liable for such expenses until
paid.
7. COMPENSATION TO LSI.
As compensation for all of its services and its costs assumed under this
contract, LSI shall receive the following forms of and amounts of compensation:
(a) LSI shall be entitled to receive and retain the front-end sales charge
(if any) imposed in connection with the sale of Portfolio shares, as set forth
in the applicable Portfolio's current Prospectus. Up to the entire amount of the
front-end sales charge (if any) with respect to each applicable Portfolio may be
reallowed by LSI to broker-dealers and participating financial institutions in
connection with their sale of Portfolio shares. The amount of the front-end
sales charge (if any) may be retained or deducted by LSI from any sums received
by it in payment for shares so sold. If such amount is not deducted by LSI from
such payments, such amount shall be paid to LSI by a Portfolio within a
reasonable time period after the close of any month during which any such sales
were made by LSI and payment therefor received by a Portfolio.
-3-
<PAGE>
(b) LSI shall be entitled to receive the following 12b-1 fees, payable
under the Plan of Distribution adopted by each Portfolio in accordance with Rule
12b-1 under the Investment Company Act of 1940 (the "Plan"):
(i) The Portfolios: Each Portfolio is obligated to pay LSI a total fee in
connection with the distribution-related services and servicing of shareholder
accounts. The total fee paid by each Portfolio shall be calculated and payable
monthly, at an annual rate of .75% of the value of the respective Portfolio's
average daily net assets. All or any portion of such total fee may be payable as
a Distribution Fee, and all or any portion of such total fee may be payable as a
Shareholder Servicing Fee, as determined from time to time by the Fund's Board
of Directors. Until further action by the Board, .50 of 1.00% shall be
designated and payable as a Distribution Fee and .25 of 1.00% shall be
designated and payable as a Shareholder Servicing Fee.
(ii) Future Portfolios: Upon the creation of any new series of shares for
the Fund, the respective levels of sales charges and 12b-1 fees shall be
determined by the Board of Directors of the Fund, subject to any necessary
shareholder approval and only in accordance with any applicable rule or rules
promulgated by the Securities and Exchange Commission and/or the National
Association of Securities Dealers, Inc. All or any portion of the 12b-1 fees
referred to in this paragraph may be payable as a Distribution Fee, and all or
any portion of such 12b-1 fees may be payable as a Shareholder Servicing Fee, as
determined from time to time by the Fund's Board of Directors.
(iii) Other Information: Average daily net assets shall be computed in
accordance with the Prospectus of each applicable Portfolio. Amounts payable to
LSI under the Plan may exceed or be less than LSI's actual distribution expenses
and shareholder servicing costs. In the event such distribution expenses and/or
shareholder servicing expenses exceed amounts payable to LSI under the Plan, LSI
shall not be entitled to reimbursement from a Portfolio.
(c) In each year during which this contract remains in effect, LSI will
prepare and furnish to the Board of Directors of the Fund, and the Board will
review, on a quarterly basis written reports complying with the requirements of
Rule 12b-1 under the Investment Company Act of 1940 (the "1940 Act") that set
forth the amounts expended under this contract and the Plan and the purposes for
which those expenditures were made.
8. LIMITATION OF LSI'S AUTHORITY.
LSI shall be deemed to be an independent contractor and, except as
specifically provided or authorized herein, shall have no authority to act for
or represent the Fund. In connection with its role as underwriter of Portfolio
shares, LSI shall at all times be deemed an agent of the Fund and shall sell
Portfolio shares to purchasers thereof as agent and not as principal.
-4-
<PAGE>
9. SUBSCRIPTION FOR SHARES - REFUND FOR CANCELED ORDERS.
LSI shall effect the subscription of Portfolio shares as agent for the
Fund. In the event that an order for the purchase of shares of the Portfolio is
placed with LSI by a customer or dealer and subsequently fails or is canceled,
LSI, on behalf of such customer or dealer, shall forthwith cancel the
subscription for such shares entered on the books of the Fund, and, if LSI has
paid the Fund for such shares, shall be entitled to receive from the Fund in
refund of such payment the lesser of:
(a) the consideration received by the Fund for said shares; or
(b) the net asset value of such shares at the time of
cancellation by LSI.
If payment for any purchase order is not received in accordance with the
terms of the then current Prospectus or if an order for purchase, redemption,
transfer or registration of shares is changed or altered, each Portfolio
reserves the right, without notice, to cancel the sale, redemption, transfer or
registration and to hold LSI responsible for any loss sustained as a result
thereof.
10. LSI'S UNDERTAKINGS.
No person is authorized to make any representations concerning Portfolio
shares except those contained in the then current Prospectus (and/or Statement
of Additional Information). LSI shall not sell Portfolio shares pursuant to this
Agreement unless the then current Prospectus is furnished to the purchaser prior
to the offer and sale. In offering and selling Portfolio shares, LSI shall rely
solely on the representations contained in the then current Prospectus (and/or
Statement of Additional Information). In offering and selling Portfolio shares
and in preparing any supplemental sales literature, LSI shall comply with all
applicable state and federal laws and regulations and all applicable rules of
the NASD. In the event of the suspension, revocation, cancellation or other
impairment of LSI's membership in the NASD or LSI's registration, license, or
qualification to sell Portfolio shares under any applicable state or federal law
or regulation, LSI shall give the Fund prompt notice of such suspension,
revocation, cancellation or other impairment, and LSI's authority shall
thereupon terminate as provided in paragraph 16.
11. REPRESENTATIONS AND AGREEMENTS OF LSI.
By accepting this Agreement, LSI represents that it: (i) is registered as a
broker-dealer under the Securities Exchange Act of 1934, as amended; (ii) is
qualified to act as a dealer in each jurisdiction in which it will offer
Portfolio shares; (iii) is a member in good standing of the NASD; (iv) will
maintain such registrations, qualifications and memberships throughout the term
of this Agreement.
-5-
<PAGE>
12. LSI'S EMPLOYEES.
By accepting this Agreement, LSI assumes full responsibility for the
actions and course of conduct of its registered representatives in the
solicitation of purchases of Portfolio shares. LSI shall provide thorough and
prior training to its registered representatives concerning the selling methods
to be used in connection with the offer and sale of Portfolio shares, giving
special emphasis to the principles of full and fair disclosure to prospective
investors.
13. FIDELITY BOND AND INDEMNIFICATION BY LSI.
LSI represents that all directors, officers, partners, employees or
registered representatives of LSI who are authorized pursuant to this Agreement
to sell Portfolio shares or who have access to monies belonging to the
Portfolios are and shall be covered by a blanket fidelity bond, including
coverage for larceny and embezzlement, issued by a reputable bonding company.
The bond shall be maintained by LSI at its own expense. Such bond shall be at
least of the form, type and amount required under the NASD Conduct Rules. The
Fund may require evidence, satisfactory to it, that such coverage is in force.
LSI shall give prompt written notice to the Fund to the extent of the Fund's
loss due to activities covered by the bond. If there is any deficiency amount,
whether due to a deductible or otherwise, LSI shall promptly pay to the Fund
such amount on demand, and LSI hereby indemnifies and holds harmless the Fund
from any such deficiency and from the costs of collection thereof, including
reasonable attorneys fees.
LSI also agrees to indemnify and hold harmless the Fund, the Portfolios,
and their officers, directors and employees and each person who controls them
within the meaning of Section 15 of the Securities Act of 1933 (hereinafter in
this paragraph referred to as Defendants) against any and all losses, claims,
damages or liabilities, including reasonable attorneys fees, to which they may
become subject under the Securities Act of 1933, the Securities Exchange Act of
1934, or other federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon: (i) any oral or written
misrepresentations, any unauthorized action or statement, or any other willful,
reckless or negligent violation of any law, regulation, contract or other
arrangement by LSI or its officers, directors, employees or agents, or (ii) the
failure of LSI or its officers, directors, employees or agents to comply with
any applicable provisions of this Agreement provided that this indemnity
agreement is subject to the condition that notice be given as provided below.
Upon the presentation in writing of any claim or the commencement of any suit
against any Defendant in respect of which indemnification may be sought from LSI
on account of its agreement contained in the preceding sentence, such Defendant
shall with reasonable promptness give notice in writing of such suit to LSI, but
failure to so give such notice shall not relieve LSI from any liability that it
may have to the Defendants otherwise than on account of this indemnity
agreement. LSI shall be entitled to participate at its own expense in the
defense, or if it so elects, to assume the defense of any such claim or suit
with counsel chosen by it and satisfactory to the Defendants who are parties to
-6-
<PAGE>
such suit or against whom such claim is presented. If the Defendant elects to
assume the defense and retain such counsel as herein provided, such Defendant
shall bear the fees and expenses subsequently incurred of any additional counsel
retained by them, except the reasonable costs of investigation and such other
costs as are approved by LSI; provided, that if counsel for an indemnified
Defendant determines in good faith that there is a conflict which requires
separate representation for the indemnified Defendant, the indemnified Defendant
shall be entitled to indemnification for the reasonable expenses of one
additional counsel and local counsel to the extent provided above. Such counsel
shall, to the fullest extent consistent with its professional responsibilities,
cooperate with LSI and its counsel. LSI's obligations under this paragraph shall
survive the termination of this Agreement.
14. FIRST CLAIM ON EARNINGS AND LEGAL PROCEEDINGS.
In order to secure the full and prompt payment by LSI of any and all
indebtedness due from LSI to the Fund, the Fund will have a first security
interest in and lien on any compensation due at any time to LSI from the Fund
under this Agreement. This means that the Fund, as and when it elects, may
withhold payment to LSI of all or any part of LSI's compensation, and such
withheld amounts will be applied to the reduction of any debt owed by LSI to the
Fund. Release of any part of LSI's compensation while a debt is owed by LSI to
the Fund will not constitute a waiver of the Fund's first security interest in
LSI's compensation. The Fund's claim to LSI's compensation takes precedence over
claims of LSI's other creditors to the full extent permitted by applicable law.
LSI has no right to commence any legal proceedings on behalf of or in the name
of the Fund.
15. FREEDOM TO DEAL WITH THIRD PARTIES.
LSI shall be free to render to others services of a nature either similar
to or different from those rendered under this contract, except such as may
impair its performance of the services and duties to be rendered by it
hereunder.
16. EFFECTIVE DATE, DURATION AND TERMINATION OF AGREEMENT.
(a) This Agreement shall be effective as to the Fund and each Portfolio
thereof on November 6, 1996. Unless sooner terminated as hereinafter provided,
this Agreement shall continue in effect only so long as such continuance is
specifically approved at least annually (a) by the Board of Directors of the
Fund, or with respect to a particular Portfolio by the vote of the holders of a
majority of the outstanding voting securities of such Portfolio, and (b) by a
majority of the directors who are not interested persons of LSI or of the Fund,
cast in person at a meeting called for the purpose of voting on such approval;
provided that, if a majority of the outstanding voting securities of any of the
Portfolios approves this Agreement, this Agreement shall continue in effect with
respect to such approving Portfolio whether or not the shareholders of any other
Portfolio of the Fund approve this Agreement.
-7-
<PAGE>
(b) This Agreement may be terminated at any time without the payment of any
penalty by the vote of the Board of Directors of the Fund or by LSI, upon sixty
(60) days' written notice to the other party. This Agreement may be terminated
with respect to a particular Portfolio at any time without the payment of any
penalty by the vote of the holders of a majority of the outstanding voting
securities of such Portfolio, upon sixty (60) days' written notice to LSI.
(c) This Agreement shall automatically terminate in the event of its
"assignment" (as defined by the provisions of the 1940 Act).
(d) This Agreement shall automatically terminate in the event of the
suspension, revocation, cancellation, or other impairment of LSI's membership in
the NASD or LSI's registration, license or qualification to sell shares of the
Portfolios under any applicable state or federal law or regulation.
(e) Wherever referred to in this Agreement, the vote or approval of the
holders of a majority of the outstanding voting securities of a Portfolio or the
Fund shall mean the vote of 67% or more of such securities if the holders of
more than 50% of such securities are present in person or by proxy or the vote
of more than 50% of such securities, whichever is less.
17. AMENDMENTS TO AGREEMENT.
No material amendment to this Agreement shall be effective until approved
by a vote of the Board of Directors of the Fund, including a majority of the
Directors who are not interested persons of the Fund and who have no direct or
indirect financial interest in this Agreement, cast in person at a meeting
called for the purpose of voting on such amendment. Additionally, no amendment
to this Agreement that materially increases the distribution fee and/or
shareholder servicing fee payable by any Portfolio hereunder shall be effective
until any necessary amendment to the applicable Rule 12b-1 Plan has been
approved by a vote of the holders of a majority of the outstanding voting
securities of the applicable Portfolio and approved by the Fund's Board of
Directors as required under Rule 12b-1 under the Investment Company Act of 1940.
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<PAGE>
18. NOTICES.
Any notice under this Agreement shall be in writing, addressed, delivered
or mailed, postage prepaid to the other party at such address as such other
party may designate in writing for receipt of such notice.
IN WITNESS WHEREOF, the Fund and LSI have caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written.
LIFEUSA FUNDS, INC. LIFEUSA SECURITIES, INC.
By: /s/ Richard E. Struthers By: /s/Bardea C. Huppert
Its President Its: Sr. Vice President
Chief Operating Officer
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LIFEUSA FUNDS
DEALER SALES AGREEMENT
THIS AGREEMENT, made this ___ day of _______ , 19 ___ , by and between
LifeUSA Securities, Inc. (LUSI) a Minnesota corporation (the "Underwriter"),
having its principal office at 300 South Highway 169, Minneapolis, MN
55426-1191, and ____________________ (the "Dealer") having its principal office
at ___________________________________________________________ .
WHEREAS, the Underwriter has entered into Distribution Agreements with
certain registered management investment companies (the "Funds"), as listed on
Schedule A hereto and made a part hereof, which Schedule A may be amended
without notice from time to time by the Underwriter, under which the Underwriter
has been engaged and agreed to act as principal underwriter for the Funds in the
sale and distribution of shares of the Funds to the public, either through
dealers or otherwise; and
WHEREAS, the parties hereto desire that the Dealer be a member of a selling
group to sell and distribute shares of the Funds to the public;
NOW, THEREFORE, the Dealer hereby offers to become a member in a selling
group to sell and distribute shares of the Funds to the public subject to the
following terms and conditions.
1. Acceptance of Subscriptions; Registration Statement; Prospectus.
Subscriptions solicited by the Dealer will be accepted only in the amounts and
on the terms which are set forth in then current Prospectus (and/or Statement of
Additional Information, in any) for the Funds. Underwriter represents and
warrants that the Prospectus (and/or Statement of Additional Information, if
any) for the Funds shown on Schedule A are or will be filed with the Securities
and Exchange Commission ("SEC"), that such filings conform in all material
respects with requirements of the SEC and that, except as Underwriter has given
written notice to Dealer, there is an effective Registration Statement relating
to such Funds. Underwriter shall given written notice to Dealer either (i) of
specified states or jurisdiction in which the Funds may be offered and sold by
the Dealer or (ii) of all states or jurisdiction where the Funds may not be
offered or sold, but Underwriter does not assume any responsibility as to the
Dealer's right to sell the Funds in any state or jurisdiction. Underwriter,
during the term of this Agreement, shall (i) notify Dealer in writing of the
issuance by the SEC, of any stop order with respect to a Registration Statement
or the initiation of any proceedings for such purpose or any other purpose
relating to the registration and/or offering of the Funds, (ii) of any other
action or circumstance known to them that may prevent the lawful sale of the
Funds in any state or jurisdiction, and (iii) advise the Dealer in writing of
any amendment to the Registration Statement or supplement to any Prospectus. The
Underwriter shall make available to Dealer such number of copies of the
Prospectus (as amended or supplemented) (and/or Statement of Additional
Information, if any) or any supplemental sales literature created by the
Underwriter as the Dealer may reasonably request. The Dealer shall provide the
Underwriter and/or the Funds with any information the Underwriter or the Funds
may request to satisfy the registration and/or qualification requirements needed
to offer Fund shares in each jurisdiction where the Dealer offers such shares
for sale.
<PAGE>
2. Dealer Discount and Other Compensation. The Dealer shall receive, for
sales of shares of the Funds' common stock, the applicable Dealer Discount or
other compensation as set forth in Schedule A attached hereto and made a part
thereof. Additionally, with respect to certain of the Funds, the Dealer may be
entitled to receive additional compensation from the Underwriter upon such terms
and conditions and in such amounts as set forth in Schedule A hereto to
providing to Fund shareholders certain personal and account maintenance services
(including, but not limited to, responding to shareholder inquiries and
providing information on their investments) not otherwise required to be
provided by the applicable Funds' investment adviser or transfer agent ("Service
Fees") or (in addition to the aforementioned Dealer Discount) for sales of
shares of the applicable Fund's common stock ("Distribution Fees"). Schedule A
may be amended in whole or in part without notice from time to time by the
Underwriter.
3. Orders. Orders to purchase shares of the Funds shall be placed as
described in the then current Prospectus (and/or Statement of Additional
Information, if any) of the Funds and as instructed form time to time by the
Underwriter. Orders shall be placed promptly upon receipt, and there shall be no
postponement of orders received so as to profit the Dealer by reason of such
postponement. Each order shall be confirmed by the Fund to the Dealer in writing
on the day such order was placed.
All monies or other settlements received by the Dealer for or on behalf of
the Fund shall be received by the Dealer in fiduciary capacity in trust for such
Fund and shall be immediately transmitted to the Fund, and, in no event, shall
the Dealer commingle such monies with other funds. The Dealer shall keep correct
accounts and records of all business transacted and monies collected by him for
a Fund to the extent required by a Fund, which accounts and records shall be
open at all times to inspection and examination by a Fund's authorized
representative. All accounts, records and any supplies furnished to the Dealer
by a Fund shall remain the property of a Fund and shall be returned to a Fund
upon demand.
4. Failure of Order. The Funds reserve the right at any time to refuse to
accept and approve any application for the purchase of shares of the Funds
obtained by the Dealer, and also reserve the right to settle any claims against
the Funds arising from the sale of shares of the Funds by the Dealer and to
refund to the investor payments made by him on his shares, without the Dealer's
consent. In the event any order for the purchase of shares of the Funds is
rejected by the Funds, such order is canceled or otherwise altered, or any
payment received for the purchase of shares of the Funds cannot be collected or
otherwise proves insufficient or worthless, any compensation paid to the Dealer
hereunder shall, promptly upon notice to the Dealer, be returned by the Dealer
to the Underwriter either in cash or as a charge against the Dealer's account
with the Underwriter, as the Underwriter may elect, and the Dealer hereby agrees
that until the Underwriter receives full reimbursement in cash, for any
payments, losses or expenses associated with such order, the amount of
compensation due and owing the Underwriter shall constitute a debt to the
Underwriter which the Underwriter may collect by any lawful means, with interest
thereon at the maximum rate possible.
5. General. In soliciting purchases of shares of the Funds, the Dealer
shall act as an independent contractor and not on behalf or subject to the
control of the Underwriter. Nothing herein shall constitute the Dealer as a
partner of the Underwriter, any other broker-dealer, any registered
representative of the Underwriter or the Funds, or render any such entity liable
for obligations of the Dealer. The Dealer understands that Dealer has no
authority to incur any expenses or obligations in the name of the Underwriter,
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<PAGE>
and Dealer agrees to indemnify and save the Underwriter harmless from any and
all expenses, or obligations incurred by Dealer in the name of the Underwriter
for which Dealer is responsible. Dealer agrees to pay all expenses incurred by
Dealer in connection with Dealer's work. The Dealer's participation in the sale
and distribution of shares of the Funds as contemplated by this Agreement is not
exclusive and the Underwriter may engage other broker-dealers and/or its
registered representatives to participate in the sale and distribution of shares
of the Funds on terms and conditions which may differ from the terms and
conditions of this Agreement.
6. Dealer's Undertakings. No person is authorized to make any
representations concerning shares of the Funds except those contained in the
then current Prospectus (and/or Statement of Additional Information, if any).
The Dealer shall not sell shares of the Funds pursuant to this Agreement unless
the then current Prospectus is furnished to the purchaser prior to the offer and
sale. The Dealer shall not use any supplemental sales literature of any kind
without prior written approval of the Underwriter unless it is furnished by the
Underwriter for such purpose. In offering and selling shares of the Funds, the
Dealer shall rely solely on the representations contained in the then current
Prospectus (and/or Statement of Additional Information, if any). In offering and
selling shares of the Funds, the Dealer shall comply with all applicable state
and federal laws and regulation sand all applicable rules of the National
Association of Securities Dealers, Inc. (the "NASD"). In the event of the
suspension, revocation, cancellation or other impairment of the Dealer's
membership in the NASD or the Dealer's registration, license or qualification to
sell shares of the Funds under any applicable state or federal law or
regulation, the Dealer shall give the Underwriter prompt notice of such
suspension, revocation, cancellation or other impairment, and the Dealer's
authority under this Agreement shall thereupon terminate as provided in
paragraph 12.
7. Representations and Agreements of the Dealer. By accepting this
Agreement, the Dealer represents that it (i) is registered as a broker-dealer
under the Securities Exchange Act of 1934, as amended; (ii) is qualified to act
as a dealer in each jurisdiction in which it will offer shares of the Funds;
(iii) is a member in good standing of the NASD; and (iv) will maintain such
registrations, qualifications and memberships throughout the term of this
Agreement.
8. Dealer's Associates. By accepting this Agreement, the Dealer assumes
full responsibility for the actions and course of conduct of its registered
representatives in the solicitation of purchases of shares of the Funds. The
Dealer shall provide thorough and prior training to its registered
representatives concerning the selling methods to be used in connection with the
offer and sale of shares of the Funds, giving special emphasis to the principles
of full and fair disclosure to prospective investors. The Dealer may solicit
sales of shares of the Funds only through properly licensed registered
representatives of the Dealer.
9. Indemnification by Underwriter. The Underwriter hereby agrees to
indemnify and to hold harmless the Dealer and each person, if any, who controls
the Dealer within the meaning of Section 15 of the Securities Act of 1933 (the
"Act") and their respective successors and assigns (hereinafter in this
paragraph separately and collectively referred to as the "Defendants") from and
against any and all losses, claims, demands or liabilities (or actions in
respect thereof), joint or several, to which the Defendants may become subject
under the Act, at common law or otherwise (including any legal or other expenses
reasonably incurred in connection therewith,) insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue or alleged omission to state therein a material fact that is
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; provided
that this indemnity agreement is subject to the condition that notice be given
-3-
<PAGE>
as provided below. Upon the presentation in writing of any claim or the
commencement of any suit against any defendant in respect of which
indemnification may be sought from the Underwriter on account of its agreement
contained in the preceding sentence, such Defendant shall with reasonable
promptness give notice in writing of such suit to the Underwriter, but failure
so to give such notice shall not relieve the Underwriter from any liability that
it may have to the Defendants otherwise than on account of said indemnity
agreement. The Underwriter shall be entitled to participate at its own expense
in the defense, or, if it so elects, to assume the defense of any such claim or
suit, but if the Underwriter elects to assume the defense, such defense shall be
conducted by counsel chosen by it and satisfactory to the Defendants who are
parties to such suit or against whom such claim is presented. If the Underwriter
elects to assume the defense and retain such counsel as herein provided, such
Defendant shall bear the fees and expenses subsequently incurred of any
additional counsel retained by them, except the reasonable costs of
investigation and such other costs as are approved by the Underwriter, provided,
that if counsel for an indemnified Defendant determines in good faith that there
is a conflict which requires separate representation for the indemnified
Defendant, the indemnified Defendant shall be entitled to indemnification for
the reasonable expenses of one additional counsel and local counsel to the
extent provided above. Such counsel shall, to the fullest extent consistent with
its professional responsibilities, cooperate with the Underwriter and its
counsel. The Underwriter agrees to notify the Dealer promptly, as soon as it has
knowledge thereof, of the commencement of any litigation or proceedings against
the Underwriter or the Funds or any of their directors or officers, in
connection with the offer or sale of shares of the Funds to the public. The
Underwriter's obligation under this paragraph shall survive the termination of
this Agreement.
10. Fidelity Bond of Dealer and Indemnification by Dealer. Dealer
represents that all directors, officers, partners, employees or registered
representatives of Dealer who are authorized pursuant to this Agreement to sell
shares of the Funds or who have access to monies belonging to the Underwriter,
including but not limited to monies submitted with applications for purchase of
shares of the Funds or monies being returned to investors, are and shall be
covered by a blanket fidelity bond, including coverage for larceny and
embezzlement, issued by a reputable bonding company. The bond shall be
maintained by Dealer at Dealer's expense. Such bond shall be at least of the
form, type and amount required under the NASD Rules of Fair Practice. The
Underwriter may require evidence, satisfactory to it, that such coverage is in
force. Dealer shall give prompt written notice to the Underwriter to the extent
of the Underwriter's loss due to activities covered by the bond. If there is any
deficiency amount, whether due to a deductible or otherwise, Dealer shall
promptly pay to the Underwriter such amount on demand, and Dealer hereby
indemnifies and holds harmless the Underwriter from any such deficiency and from
the costs of collection thereof, including reasonable attorneys fees.
Dealer also agrees to indemnify and hold harmless the Underwriter and its
officers, directors, and employees and each person who controls them within the
meaning of Section 15 of the Securities Act of 1933 (hereinafter in this
paragraph referred to as Defendants) against any and all losses, claims, damages
or liabilities, including reasonable attorneys fees, to which they may become
subject under the Securities Act of 1933, the Securities Exchange Act of 1934,
or other federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon: (i) any oral or written
-4-
<PAGE>
misrepresentations, any unauthorized action or statement, or any other willful,
reckless or negligent violation of any law, regulation, contract or other
arrangement by Dealer or its officers, directors, employees or agents, or (ii)
the failure of Dealer or its officers, directors, employees or agents to comply
with any applicable provisions of this Agreement; provided, that this indemnity
agreement is subject to the condition that notice be given as provided below.
Upon the presentation in writing of any claim or the commencement of any suit
against any Defendant in respect of which indemnification may be sought from the
Dealer on account of its agreement contained in the preceding sentence, such
Defendant shall with reasonable promptness give notice in writing of such suit
to the Dealer, but failure to so give such notice shall not relieve the Dealer
from any liability that it may have to the Defendants otherwise than on account
of this indemnity agreement. The Dealer shall be entitled to participate at its
own expense in the defense, or, if it so elects, to assume the defense of any
such claim or suit with counsel chosen by it and satisfactory to the defendants
who are parties to such suit or against whom such claim is presented. If the
Dealer elects to assume the defense and retain such counsel as herein provided,
such Defendant shall bear the fees and expenses subsequently incurred of any
additional counsel retained by them, except the reasonable costs of
investigation and such other costs as are approved by the Dealer; provided, that
if counsel for an indemnified Defendant determines in good faith that there is a
conflict which requires separate representation for the indemnified Defendant,
the indemnified Defendant shall be entitled to indemnification for the
reasonable expenses of one additional counsel and local counsel to the extent
provided above. Such counsel shall, to the fullest extent consistent with its
professional responsibilities, cooperate with the Dealer and its counsel. The
Dealer's obligations under this paragraph shall survive the termination of this
Agreement.
12. Termination. Either party may terminate this Agreement at any time upon
giving written notice to the other party hereto. This Agreement shall terminate
automatically in the event of the suspension revocation cancellation, or other
impairment of the Dealer's membership in the NASD or the Dealer's registration,
license or qualification to sell shares of the Funds under any applicable state
or federal law or regulation.
13. First Claim on Earnings and Legal Proceedings. In order to secure the
full and prompt payment by Dealer of any and all indebtedness due from the
Dealer to Underwriter, Underwriter will have a first security interest in and
lien on any compensation due at any time to Dealer from Underwriter under this
Agreement. This means that Underwriter, as and when it elects, may withhold
payment to Dealer of all or any part of Dealer's compensation, and such withheld
amounts will be applied to the reduction of any debt owed by Dealer to
Underwriter. Release of any part of Dealer's compensation while a debt is owed
by Dealer to Underwriter will not constitute a waiver of Underwriter's first
security interest in Dealer's compensation. Underwriter's claim to Dealer's
compensation takes precedence over claims of Dealer's other creditors to the
full extent permitted by applicable law. Dealer has no right to commence any
legal proceedings on behalf of or in the name of Underwriter.
14. Notice. Any notice to be given to a party hereto pursuant to this
Agreement shall be in writing, addressed to such party at the address of such
party set forth in the preamble hereof, or such other address as such other
party may from time to time designate in writing to the party hereto giving
notice. Any notice delivered by the mails, postage fully prepaid, shall be
deemed to have been given five (5) days after mailing or, if earlier, upon
receipt.
-5-
<PAGE>
15. Waiver. No failure, neglect or forbearance on the part of the
Underwriter to require strict performance of this Agreement shall be construed
as a waiver of the rights or remedies of the Underwriter hereunder.
16. Suspending sales, amending or canceling this Agreement. The Underwriter
may, at any time, without notice, suspend sales or withdraw any offering of
shares entirely. The Underwriter reserves the right to amend or cancel this
Agreement upon notice to Dealer. The Dealer agrees that any order to purchase
shares of the Funds placed after notice of any amendment to this Agreement has
been sent to the Dealer shall constitute the Dealer's agreement to any such
amendment.
17. Governing Law. This Agreement shall be construed in accordance with the
laws of the State of Minnesota.
-6-
<PAGE>
DEALER:
- ------------------------------- --------------------------------------
(Name) (NSCC Clearing Number)
- -------------------------------- --------------------------------------
(Tax Identification Number) (NSCC Executing Broker Symbol)
- -------------------------------- --------------------------------------
(Street Address) (Telephone Number)
- ------------------------------------
(City) (State) (Zip)
Date of offer: ________________ , 19 ___
By: ________________________________________________________________________
(Signature)
Please Print Name __________________________________________________________
Its:__________________________________________________________________________
(Title)
Accepted by:
Date of acceptance: ________________________ , 19 ___
By: ________________________________________________________________________
(Signature)
Its: ________________________________________________________________________
(Title)
-7-
<PAGE>
SCHEDULE A
Dealer Compensation Schedule
Effective February 1, 1997
I. LifeUSA Aggressive Growth Portfolio
LifeUSA Growth Portfolio
LifeUSA Global Portfolio
LifeUSA Balanced Portfolio
LifeUSA Current Income Portfolio
LifeUSA Principal Preservation Portfolio
A. Dealer Commissions
------------------
Amount of Sale
--------------
Less than $100,000 5.00%
$100,000 but less
than $250,000 3.50%
$250,000 but less
than $500,000 2.25%
$500,000 but less
than $1,000,000 1.50%
$1,000,000 and over .25%
B. Distribution Fees
-----------------
In addition to the Dealer Commissions, the Dealer shall receive
quarterly Distribution Fees, equal to a percentage of average daily net assets
attributable to Shares held in accounts by customers for whom the Dealer is the
holder or agent or record in the amount of 1/4 of .25%.
II. LifeUSA Principal Preservation Portfolio
----------------------------------------
LUSI does not receive a sales load on sales of LUSA Principal
Preservation Portfolio. Shares of Principal Preservation Portfolio acquired in
an exchange from any of the other LUSA Funds may be exchanged at relative net
asset values for shares of any of the other LUSA Funds. Shares of LUSA Principal
Preservation Portfolio acquired in exchange from any of the other LUSA Funds may
be exchanged at relative net asset values plus applicable sales load for shares
of any of the other LUSA Funds. In the event Dealer's customer exchanges shares
of LUSA Principal Preservation Portfolio for shares of another LUSA Fund and
pays a sales load in connection with such exchange, the Dealer shall receive a
Dealer Discount as described above.
-8-
[Letterhead of Dorsey & Whitney LLP]
Dorsey & Whitney LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402-1498
December 18, 1996
LifeUSA Funds, Inc.
3700 First Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440-0357
Ladies and Gentlemen:
We have acted as counsel to LifeUSA Funds, Inc., a Minnesota corporation
(the "Company"), in rendering the opinions hereinafter set forth with respect to
the authorization of the Company's Series A, B, C, D, E and F Common Shares, par
value $.01 per share. The shares of the Company referred to above are referred
to herein collectively as the "Shares."
We understand that the Shares are being registered under the Securities Act
of 1933, as amended, and the Investment Company Act of 1940, as amended,
pursuant to the Company's Registration Statement on Form N-1A relating to such
shares (the "Registration Statement"). In rendering the opinions hereinafter
expressed, we have reviewed the corporate proceedings taken by the Company in
connection with the authorization and issuance of the Shares, and we have
reviewed such questions of law and examined copies of such corporate records of
the Company, certificates of public officials and of responsible officers of the
Company, and other documents as we have deemed necessary as a basis for such
opinions. As to the various matters of fact material to such opinions, we have,
when such facts were not independently established, relied to the extent we deem
proper on certificates of public officials and on certificates and/or
representations of responsible officers of the Company. In connection with such
review and examination, we have assumed that all copies of documents provided to
us conform to the originals and that all signatures are genuine.
<PAGE>
In addition, in rendering the opinions hereinafter expressed, we have
assumed, with the concurrence of the Company, that all of the Shares will be
issued and sold upon the terms and in the manner set forth in the Registration
Statement; that the Company will not issue Shares in excess of the numbers
authorized in the Company's Articles of Incorporation (and Certificate of
Designation for Series E and F) as in effect at the respective dates of
issuance; and that the Company will maintain its corporate existence and good
standing under the laws of the State of Minnesota in effect at all times after
the date of this opinion.
Based on the foregoing, it is our opinion that:
1. The Company is validly existing as a corporation in good standing under
the laws of the State of Minnesota.
2. The Shares issued from and after the date hereof, when
issued and delivered by the Company as described in the Registration Statement,
will be legally issued and fully paid and non-assessable; and the issuance of
such Shares is not subject to preemptive rights.
In rendering the foregoing opinions, we express no opinion as to the laws
of any jurisdiction other than the State of Minnesota. We hereby consent to the
reference to this firm under the caption "Counsel and Auditors" in the
Prospectus and to the filing of this opinion letter as an exhibit to the
Registration Statement.
Very truly yours,
/s/ Dorsey & Whitney LLP
DORSEY & WHITNEY LLP
MJR
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
Independent Auditors' Consent
-----------------------------
The Board of Directors
LifeUSA Funds, Inc.:
We consent to the reference to our Firm under the heading "COUNSEL AND
AUDITORS" in Part A of the Registration Statement.
/s/ KPMG Peat Marwick LLP
--------------------------
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 23, 1997
[Letterhead of LifeUSA Securities, Inc.]
LifeUSA Securities, Inc.
300 South Highway 169
P.O. Box 59060
Minneapolis, Minnesota 55459-0060
Letter of Investment Intent
December 18, 1996
LifeUSA Funds, Inc.
3700 First Bank Place
601-2nd Avenue South
Minneapolis, Minnesota 55402
Dear Sir or Madam,
In connection with the purchase by LifeUSA Securities, Inc. (the
"Purchaser") of 1,835 each of Series A - F Common Shares, par value $.01 per
share, of LifeUSA Funds, Inc. (the "Company") (collectively, said purchased
Series A - F Common Shares referred to hereinafter as the "Stock"), the
Purchaser hereby represents that it is acquiring the Stock for investment with
no intention of selling or otherwise disposing or transferring it or any
interest in it. The Purchaser hereby further agrees that any transfer of any of
the Stock or any interest in it shall be subject to the following conditions:
1. The Purchaser shall furnish you and counsel satisfactory to you prior to
the time of transfer, a written description of the proposed transfer specifying
its nature and consequence and giving the name of the proposed transferee.
2. You shall have obtained from your counsel a written opinion stating
whether in the opinion of such counsel the proposed transfer may be effected
without registration or qualification under the Securities Act of 1933 and
applicable state securities laws. If such opinion states that such transfer may
be so effected, the Purchaser shall then be entitled to transfer the Stock in
accordance with the terms specified in its description of the transaction to
you. If such opinion states that the proposed transfer may not be so effected,
the Purchaser will not be entitled to transfer the Stock unless the Stock is so
registered or qualified.
3. The Purchaser further agrees that the transfer agent for the Stock will
be notified of these restrictions.
<PAGE>
The Purchaser hereby authorizes you to take such other actions as you shall
reasonably deem appropriate to prevent any violation of the Securities Act of
1933 in connection with the transfer of the Stock, including the imposition of a
requirement that any transferee of the Stock sign a letter agreement similar to
this one.
Sincerely,
LIFEUSA SECURITIES, INC.
By: /s/ Bardea C. Huppert
Its: Senior Vice President
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LIFEUSA FUNDS, INC.
RULE 12b-1 PLAN OF DISTRIBUTION
This Plan of Distribution (the "Plan") is adopted pursuant to Rule
12b-1 (the "Rule") under the Investment Company Act of 1940 (as amended, the
"1940 Act") by LifeUSA Funds, Inc., a Minnesota corporation (the "Fund"), for
and on behalf of the Fund's shares of Series A, Series B, Series C, Series D,
Series E and Series F Common Shares (the "Portfolios", collectively, or a
"Portfolio", individually) on November 6, 1996.
1. Compensation.
The Fund, out of the assets of each Portfolio, is obligated to pay the
principal underwriter LifeUSA Securities, Inc. (the "Underwriter") a total fee
in connection with the servicing of Portfolio shareholder accounts and in
connection with distribution related services provided in respect of a
Portfolio, calculated and payable monthly, at the annual rate of .75% of the
value of each Portfolio's average daily net assets.
All or any portion of such total fee may be payable as a Shareholder
Servicing Fee, and all or any portion of such total fee may be payable as a
Distribution Fee, as determined from time to time by the Fund's Board of
Directors. Until further action by the Board of Directors, a portion of such
fee, equal to .25% per annum of the value of each Portfolio's average daily net
assets, shall be designated and payable as a Shareholder Servicing Fee, and the
balance of such fee, equal to .50% per annum of the value of each Portfolio's
average daily net assets, shall be designated and payable as a Distribution Fee.
2. Expenses Covered by the Plan.
(a) The Shareholder Servicing Fee may be used by the Underwriter to
provide compensation for ongoing servicing and/or maintenance of Portfolio
shareholder accounts. Compensation may be paid by the Underwriter to persons,
including employees of the Underwriter, and institutions who respond to
inquiries of shareholders of a Portfolio regarding their ownership of shares or
their accounts with a Portfolio or who provide other administrative or
accounting services not otherwise provided by a Portfolio's investment adviser,
transfer agent or other agent of a Portfolio or the Fund.
(b) The Distribution Fee may be used by the Underwriter to provide
initial and ongoing sales compensation to its investment executives and to other
broker-dealers in respect of sales of shares of each Portfolio and to pay for
other advertising and promotional expenses in connection with the distribution
of shares of each Portfolio. These advertising and promotional expenses include,
by way of example but not by way of limitation, costs of printing and mailing
prospectuses, statements of additional information and shareholder reports to
prospective investors; preparation and distribution of sales literature;
advertising of any type; an allocation of overhead and other expenses of the
Underwriter related to the distribution of Portfolio shares; and payments to,
and expenses of, officers, employees or representatives of the Underwriter, of
other broker-dealers, banks or other financial institutions, and of any other
persons who provide support services in connection with the distribution of
Portfolio shares, including travel, entertainment, and telephone expenses.
<PAGE>
(c) Payments under the Plan are not tied exclusively to the expenses
for shareholder servicing and distribution related activities actually incurred
by the Underwriter in connection with Portfolio shares, so that such payments
may exceed expenses actually incurred by the Underwriter. The Fund's Board of
Directors will evaluate the appropriateness of the Plan and its payment terms on
a continuing basis and in doing so will consider all relevant factors, including
expenses borne by the Underwriter and amounts it receives under the Plan.
3. Additional Payments by Adviser and the Underwriter.
The Portfolios' investment adviser and the Underwriter may, at their
option and in their sole discretion, make payments from their own resources to
cover the costs of additional distribution and shareholder servicing activities.
4. Approval by Directors.
Neither the Plan nor any related agreements will take effect until
approved by a majority vote of both (a) the full Board of Directors of the Fund
and (b) those Directors who are not interested persons of the Fund or the
Underwriter and who have no direct or indirect financial interest in the
operation of the Plan or in any agreements related to it (the "Independent
Directors"), cast in person at a meeting called for the purpose of voting on the
Plan and the related agreements.
5. Duration and Termination of Plan.
(a) Unless sooner terminated as hereinafter provided, this Plan shall
continue in effect only so long as such continuance is specifically approved at
least annually (i) by the Board of Directors of the Fund, or with respect to a
particular Portfolio by the vote of the holders of a majority of the outstanding
voting securities of such Portfolio, and (ii) by a majority of the directors who
are not interested persons of the Underwriter or of the Fund, cast in person at
a meeting called for the purpose of voting on such approval; provided that, if a
majority of the outstanding voting securities of any of the Portfolios approves
this Plan, this Plan shall continue in effect with respect to such approving
Portfolio whether or not the shareholders of any other Portfolio of the Fund
approve this Plan.
(b) This Plan may be terminated at any time without the payment of any
penalty by the vote of the Board of Directors of the Fund or by the Underwriter,
upon sixty (60) days' written notice to the other party. This Plan may be
terminated with respect to a particular Portfolio at any time without the
payment of any penalty by the vote of the holders of a majority of the
outstanding voting securities of such Portfolio, upon sixty (60) days' written
notice to the Underwriter.
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<PAGE>
6. Amendments.
The Plan may not be amended with respect to a Portfolio to increase
materially the amount of the fees payable pursuant to the Plan, as described in
Section 1 above, unless the amendment is approved by a vote of at least a
majority of the outstanding voting securities of such Portfolio, and all
material amendments to the Plan must also be approved by the Fund's Board of
Directors in the manner described in Section 4 above.
7. Selection of Certain Directors.
While the Plan is in effect, the selection and nomination of the Fund's
Directors who are not interested persons of the Fund or the Underwriter will be
committed to the discretion of the Directors then in office who are not
interested persons of the Fund or the Underwriter.
8. Written Reports.
In each year during which the Plan remains in effect, the Underwriter
and any person authorized to direct the disposition of monies paid or payable by
a Portfolio pursuant to the Plan or any related agreement will prepare and
furnish to the Fund's Board of Directors, and the Board will review, at least
quarterly, written reports, complying with the requirements of the Rule, which
set out the amounts expended under the Plan and the purpose for which those
expenditures were made.
9. Preservation of Materials.
The Fund will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 8 above, for a period of not
less than six years (the first two years in an easily accessible place) from the
date of the Plan, agreement or report.
10. Meaning of Certain Terms.
As used in the Plan, the terms "interested person" and "majority of the
outstanding voting securities" will be deemed to have the same meaning that
those terms have under the 1940 Act and the rules and regulations under the 1940
Act, subject to any exemption that may be granted to the Fund under the 1940 Act
by the Securities and Exchange Commission.
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