Prospectus Dated May 1, 1998
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 May
1, 1998, 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.
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.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND
INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PORTFOLIO EXPENSE INFORMATION............................................................................3
INVESTMENT OBJECTIVES AND POLICIES.......................................................................8
PRINCIPAL PORTFOLIO RISK FACTORS........................................................................10
DESCRIPTION OF UNDERLYING FUNDS.........................................................................13
MANAGEMENT..............................................................................................18
DISTRIBUTION OF PORTFOLIO SHARES........................................................................19
COMPUTATION OF NET ASSET VALUE AND PRICING..............................................................20
PURCHASE OF SHARES......................................................................................20
RIGHT OF ACCUMULATION...................................................................................22
SYSTEMATIC INVESTMENT PLAN..............................................................................22
GROUP SYSTEMATIC INVESTMENT PLAN........................................................................23
GROUP PURCHASES.........................................................................................23
AUTOMATIC INVESTMENT PLAN...............................................................................24
REDEMPTION OF SHARES....................................................................................24
EXCHANGE PRIVILEGE......................................................................................26
AUTHORIZED TELEPHONE TRADING............................................................................27
SYSTEMATIC CASH WITHDRAWAL PLAN.........................................................................28
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS.................................................................28
INVESTMENT PERFORMANCE..................................................................................29
RETIREMENT PLANS........................................................................................30
DESCRIPTION OF COMMON STOCK.............................................................................30
COUNSEL AND AUDITORS....................................................................................31
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT.................................................31
ADDITIONAL INFORMATION..................................................................................31
APPENDIX...............................................................................................A-1
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO EXPENSE INFORMATION
<S> <C> <C> <C> <C> <C> <C>
Aggressive Current Principal
Shareholder Transaction Expenses Growth Growth Global Balanced Income Preservation
- ---------------------------------------- ------------- ---------- --------- ------------- --------------- ----------------
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
- ----------------------------------------
* Each Portfolio charges a $10.00 fee
for the payment of redemption proceeds by wire.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Annual Fund Operating Expenses
(as a percentage of Aggressive Current Principal
average daily net assets) Growth Growth Global Balanced Income Preservation
- ---------------------------------------- ------------- ---------- --------- ------------ ----------------- ---------------
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** 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total Fund Operating Expenses*** 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
- --------------------------------
* After fee waiver
** After expense reimbursement
*** After 12b-1 fee waiver and expense reimbursement
</TABLE>
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, 1999. 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%) is designated for
the provision of shareholder services while the remainder is designated for the
provision of distribution services. See the section "Distribution of Portfolio
Shares" for more information.
LifeUSA Securities, Inc. has also agreed to reimburse all Portfolio "Other
Expenses" until May 1, 1999. Set forth are the Portfolios' "Other Expenses" and
"Total Fund Operating Expenses" as a percentage of average daily net assets,
that would have been paid if during the most recent fiscal yeazr LifeUSA
Securities, Inc. had not reimbursed "Other Expenses" and waived Rule 12b-1 fees
as discussed above.
<TABLE>
<CAPTION>
<S> <C> <C>
Portfolio Other Expenses Total Fund Operating Expenses
--------- ---------- -----------------------------
LifeUSA Aggressive Growth Portfolio 20.61% 21.36%
LifeUSA Growth Portfolio 36.55% 37.30%
LifeUSA Global Portfolio 29.65% 30.40%
LifeUSA Balanced Portfolio 33.24% 33.99%
LifeUSA Current Income Portfolio 75.45% 76.20%
LifeUSA Principal Preservation Portfolio 71.74% 72.49%
</TABLE>
3
<PAGE>
INDIRECT EXPENSES
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, 1997 and net of
voluntary fee waivers) of each of the Underlying Funds in which the Portfolios
may invest.
<TABLE>
<CAPTION>
<S> <C>
Underlying Fund Expense Ratio
----------------------------------- ------------------------
IAI Balanced Fund 1.25%
IAI Bond Fund 1.10%
IAI Capital Appreciation Fund 1.40%
IAI Developing Countries Fund 2.00%
IAI Emerging Growth Fund 1.25%
IAI Government Fund 1.10%
IAI Growth Fund 1.25%
IAI Growth and Income Fund 1.24%
IAI International Fund 1.67%
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>
Based on a weighted average of the expense ratios of the Underlying Funds
in which each Portfolio invests as of December 31, 1997, the approximate
indirect expense ratio for each Portfolio is expected to be as follows: LifeUSA
Aggressive Growth Portfolio 1.32%, LifeUSA Growth Portfolio 1.25%, LifeUSA
Global Portfolio 1.57%, LifeUSA Balanced Portfolio 1.28%, LifeUSA Current Income
Portfolio 1.08% and LifeUSA Principal Preservation Portfolio 0.60%.
COMBINED EXPENSES - EXAMPLE
Based upon the levels of Total Portfolio Operating Expenses listed on page
three combined with each Portfolio's 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>
<S> <C> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
LifeUSA Aggressive Growth Portfolio 75 111 150 259
LifeUSA Growth Portfolio 74 109 147 252
LifeUSA Global Portfolio 77 119 162 284
LifeUSA Balanced Portfolio 75 110 148 255
LifeUSA Current Income Portfolio 73 105 139 235
LifeUSA Principal Preservation Portfolio 68 90 115 184
</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
and indirectly. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.
4
<PAGE>
Long term investors may pay more than the economic equivalent of the
maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc. rules regarding investment companies.
Fund Directors
--------------
Madeline Betsch J. Peter Thompson
W. William Hodgson Charles H. Withers
George R. Long
5
<PAGE>
FINANCIAL HIGHLIGHTS
The following information has been audited by KMPG Peat Marwick LLP, independent
auditors, whose report is included in the Fund's Annual Report. The financial
statements in the Annual Report are incorporated by reference in (and are a part
of) the Statement of Additional Information. Such Annual Report may be obtained
by shareholders on request from the Fund at no charge.
<TABLE>
<CAPTION>
LIFEUSA FUNDS, INC.
<S> <C> <C> <C>
Period from February 3, 1997****
to December 31, 1997
---------------- ---------------- ----------------
Aggressive
Growth Growth Global
Portfolio Portfolio Portfolio
- --------------------------------------------------------- ----------------- -------------- ----------------
NET ASSET VALUE
Beginning of period $ 10.00 $ 10.00 $ 10.00
----------------- --------------- ---------------
OPERATIONS
Net investment income (loss) (0.01) (0.01) 0.10
Net realized and unrealized gains 1.81 1.11 0.08
----------------- --------------- ---------------
Total from operations 1.80 1.10 0.18
----------------- --------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.06) (0.10) (0.24)
Net realized gains (0.11) (0.31) (0.29)
----------------- --------------- ---------------
Total distributions (0.17) (0.41) (0.53)
----------------- --------------- ---------------
NET ASSET VALUE
End of period $ 11.63 $ 10.69 $ 9.65
================= =============== ===============
Total investment return (%)* 18.00 11.01 1.83
Net assets at end of period (000's omitted) $ 176 $ 105 $ 76
RATIOS:
Expenses to average net assets (%)*** 0.50** 0.50** 0.50**
Net investment income (loss) to
average net assets(%) *** (0.30)** (0.31)** 1.31**
Portfolio turnover rate (%) 4.5 32.4 28.7
- ---------------------------------------------------------
* Total investment return is based on the change in net asset value
during the period and assumes reinvestment of all distributions at net
asset value.
** Annualized
*** The Fund's distributor voluntarily waived $15,847, $15,760, and $15,783,
respectively, in expenses for the period ended December 31, 1997.
If the Portfolios had been charged these expenses, the ratios of
expenses to average daily net assets would have been 21.36%, 37.30%
and 30.40%, respectively, and the ratios of net investment income (loss)
to average daily net assets would have been (21.16%), (37.11%) and
(28.59%), respectively. These expenses will be voluntarily waived
through May 1, 1999. The expense ratios exclude the fees and expenses
of the Underlying Funds.
**** Commencement of operations.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Period from February 3, 1997****
to December 31, 1997
--------------- ----------------- ---------------
Current Principal
Balanced Income Preservation
Portfolio Portfolio Portfolio
- --------------------------------------------------------- ---------------- ---------------- ----------------
NET ASSET VALUE
Beginning of period $ 10.00 $ 10.00 $ 10.00
---------------- ----------------- ---------------
OPERATIONS
Net investment income 0.18 0.46 0.41
Net realized and unrealized gains 0.65 0.33 --
---------------- ----------------- ---------------
Total from operations 0.83 0.79 0.41
---------------- ----------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.29) (0.86) (0.77)
Net realized gains (0.13) --- ---
---------------- ----------------- ---------------
Total distributions (0.42) (0.83) (0.77)
---------------- ----------------- ---------------
NET ASSET VALUE
End of period $ 10.41 $ 9.96 $ 9.64
================ ================= ===============
Total investment return (%)* 8.30 7.90 4.13
Net assets at end of period (000's omitted) $ 97 $ 29 $ 28
RATIOS:
Expenses to average net assets (%)*** 0.50** 0.50** 0.50**
Net investment income to
average net assets (%)*** 3.26** 5.57** 4.48**
Portfolio turnover rate (%) 21.9 13.1 11.0
- ---------------------------------------------------------
* Total investment return is based on the change in net asset value
during the period and assumes reinvestment of all distributions at net
asset value.
** Annualized
*** The Fund's distributor voluntarily waived $15,770, $15,700, and
$15,739, respectively, in expenses for the period ended December 31, 1997.
If the Portfolios had been charged these expenses, the ratios of expenses
to average daily net assets would have been 33.99%, 76.20% and 72.49%,
respectively, and the ratios of net investment income (loss) to average
daily net assets would have been (30.23%), (70.13%) and (67.51%), respectively.
These expenses will be voluntarily waived through May 1, 1999. The expense
ratios exclude the fees and expenses of the Underlying Funds.
**** Commencement of operations.
</TABLE>
7
<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, in 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.
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>
<S> <C>
Investment Range
(Percent of the Aggressive
Underlying Funds Growth Portfolio's Assets)
---------------- --------------------------
IAI Capital Appreciation Fund 0 - 80%
IAI Value Fund 0 - 80%
IAI Regional Fund 0 - 80%
IAI Emerging Growth Fund 0 - 80%
</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:
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Investment Range
(Percent of the
Underlying Funds Growth Portfolio's Assets)
---------------- --------------------------
IAI Growth Fund 20 - 60%
IAI Growth and Income Fund 20 - 60%
IAI Midcap Growth Fund 0 - 60%
IAI Regional Fund 0 - 60%
</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:
<TABLE>
<CAPTION>
<S> <C>
Investment Range
(Percent of the
Underlying Funds Global Portfolio's Assets)
---------------- --------------------------
IAI International Fund 10 - 70%
IAI Developing Countries Fund 0 - 70%
IAI Growth Fund 10 - 70%
IAI Growth and Income Fund 10 - 70%
IAI Capital Appreciation Fund 0 - 70%
IAI Value Fund 0 - 70%
</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>
<S> <C>
Investment Range
(Percent of the
Underlying Funds Balanced Portfolio's Assets)
---------------- ----------------------------
IAI Bond Fund 10 - 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 - 50%
IAI Growth and Income Fund 0 - 50%
IAI International Fund 0 - 30%
IAI Value Fund 0 - 30%
IAI Money Market Fund 0 - 40%
IAI Balanced Fund 0 - 50%
</TABLE>
9
<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>
<S> <C>
Investment Range
(Percent of the Current
Underlying Funds Income Portfolio's Assets)
---------------- --------------------------
IAI Bond Fund 0 - 100%
IAI Government Fund 0 - 100%
IAI Reserve Fund 0 - 100%
</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. The Principal Preservation Portfolio, although
investing in the IAI Money Market Fund, is not itself a "money market fund" and
is not governed by the applicable money market fund regulations.
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 "Primary 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".
PRIMARY 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 1996, as measured by the Standard & Poor's 500
Composite Stock Price Index:
10
<PAGE>
<TABLE>
<CAPTION>
Average Annual U.S. Stock Market Returns (1926-1996)
Over Various Time Horizons (%)
------------------------------
<S> <C> <C> <C> <C>
1 Year 5 Years 10 Years 20 Years
------ ------- -------- --------
Best + 53.9 + 23.9 + 20.1 + 16.9
Worst - 43.3 - 12.5 - 0.9 + 3.1
Average + 12.7 + 10.4 + 10.8 + 10.8
</TABLE>
As shown, common stocks have provided annual total returns (capital
appreciation plus dividend income) averaging +10.8% for all 10-year periods from
1926 to 1996. The return in individual years has varied from a low of -43.3% to
a high of +53.9%, reflecting the short-term volatility of stock prices. 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). And if you were invested in stocks during the Great Crash of 1929,
it would have taken an average of eight years for your investment to return to
its original value.
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.
INFLATION RISK
Like market risk, inflation represents a significant threat to even a
well-diversified portfolio because inflation erodes the real return of an
investment in stocks, bonds or reserves. Historically, inflation has averaged
3.1%, offsetting most of the return from reserves and bonds, but less than half
of the return from stocks. For this reason, stocks are referred to as an
"inflation hedge," a way to protect your money against inflation.
11
<PAGE>
CREDIT RISK
Credit Risk is the possibility that a bond issuer will fail to make timely
payments of interest or principal to a Portfolio. The credit risk of a Portfolio
is a function of the credit quality of its underlying securities.
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.
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 50% annually. A
portfolio turnover rate of 50% for a Portfolio would occur if one-half 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.
12
<PAGE>
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.
IAI BALANCED FUND
The investment objective of Balanced Fund is to maximize total return.
Balanced Fund will seek to achieve its objective by investing in a broadly
diversified portfolio of stocks, bonds and short-term instruments. Balanced
Fund's investment objective is a fundamental policy and may not be changed
without shareholder approval. There can be no assurance that Balanced Fund will
achieve its investment objective.
In seeking to achieve its investment objective, the Adviser, Balanced
Fund's investment adviser and manager, allocates Balanced Fund's assets among
the three classes of assets set forth above. Under normal market conditions,
Balanced Fund holds between 25% and 75% of its assets in stocks and other equity
securities, between 25% and 75% of its assets in bonds and other fixed income
securities, and up to 50% of its assets in short-term instruments. Balanced Fund
may also make other investments that do not fall within these classes.
The stock class includes equity securities of all types and consists
primarily of common stocks, securities convertible into common stocks, and
non-convertible preferred stocks. The bond class includes all varieties of
fixed-income instruments with maturities of more than one year and consists
primarily of investment grade bonds. Investment grade securities are those
securities rated within the four highest grades assigned by Moody's or S&P.
Balanced Fund may also purchase U.S. Treasury inflation-protection securities.
The value of such inflation-protection securities is adjusted for inflation and
periodic interest payments are in amounts equal to a fixed percentage of the
inflation-adjusted value of the principal. Although Balanced Fund may also
invest in below investment grade securities (junk bonds), Balanced Fund
currently intends to limit such investments to less than 10% of its total assets
and not to invest in junk bonds rated lower than B by Moody's or S&P.
The short-term class includes all types of short-term instruments with
remaining maturities of one year or less and consists primarily of commercial
paper, bank certificates of deposit, bankers' acceptances, government
securities, repurchase agreements and other similar short-term instruments.
Short-term securities are only purchased if given one of the top two ratings by
a major ratings service or, if unrated, are of comparable quality as determined
by the Adviser. Within each of these classes, Balanced Fund may invest in both
domestic and foreign securities. Currently, Balanced Fund intends to limit its
investment in foreign securities denominated in foreign currency and not
publicly traded in the United States to no more than 25% of its total assets.
The Adviser regularly reviews its allocation of Balanced Fund's assets
among the three classes and gradually varies them over time to favor asset
classes that, in the Adviser's judgment, provide the most favorable total return
outlook. Because Balanced Fund seeks to maximize total return over the
long-term, it will not try to pinpoint the precise moment when major
reallocations are warranted. Rather, such reallocations among asset classes will
be made gradually over time and, under normal conditions, a single reallocation
decision will not involve more than 10% of Balanced Fund's total assets.
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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 Countries 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.
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IAI EMERGING GROWTH FUND
The investment objective of IAI Emerging Growth Fund is long-term capital
appreciation. IAI Emerging Growth Fund is designed for investors seeking the
opportunity for substantial long-term growth who can accept above average stock
market risk and little or no current income. IAI Emerging Growth Fund will
pursue its objective by investing primarily in equity securities of small- and
medium-sized companies that are in the early stages of their life cycles and
which have demonstrated or have the potential for above average capital growth.
IAI Emerging Growth Fund's investment objective is a fundamental policy and may
not be changed without shareholder approval. There can be no assurance that IAI
Emerging Growth Fund will achieve its investment objective.
IAI Emerging Growth Fund's policy is to invest in equity securities,
including convertible securities, of companies that IAI believes are in the
early stages of their life cycles and have demonstrated or have the potential to
experience rapid growth in earnings and/or revenues ("emerging growth
companies"). Under normal market conditions, IAI Emerging Growth Fund will
invest at least 65% of the value of its total assets in emerging growth
companies that are of small to medium size (revenue of $500 million or less at
the time of acquisition). Emerging growth companies are generally expected to
show earnings growth over time that is well above the growth rate of the overall
economy and the rate of inflation, and have products, management and market
opportunities which are usually necessary to become more widely recognized as
growth companies. IAI Emerging Growth Fund may also invest in more established
companies that may receive greater market recognition or otherwise offer strong
capital appreciation potential due to their relative market position, the
strength of their balance sheet, changes in management or other similar
opportunities.
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.
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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.
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
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 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 $1 billion and $8 billion. Under normal market
conditions, the weighted average capitalization of IAI Midcap Growth Fund's
investment portfolio will range from $3 billion to $6 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.
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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 Market 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.
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
17
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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.
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 $11 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.
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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, 1999, LifeUSA Securities, Inc. has
agreed to reimburse and 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 an investment committee.
The Portfolios and IAI have adopted a Code of Ethics, which restricts
personal investing practices by employees of IAI and its affiliates. Among other
provisions, the Code of Ethics requires that employees with access to
information about the purchase or sale of securities in the Portfolios obtain
preclearance before executing personal trades. With respect to portfolio
managers and other investment personnel, the Code of Ethics prohibits
acquisition of securities in an initial public offering, as well as profit
derived from the purchase and sale of the same security within 60 calendar days.
These provisions are designed to ensure that the interests of Portfolio
shareholders come before the interests of the people who manage the Portfolios.
Consistent with the Rules of Conduct of the National Association of
Securities Dealers, Inc., IAI may consider sales of shares of the IAI Mutual
Funds as a factor in the selection of broker-dealers to execute an Underlying
Fund's securities transactions.
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 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, 1999. 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.
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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, 1999, LSI has 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.
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",
"Systematic 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.
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<TABLE>
<CAPTION>
<S> <C> <C> <C>
Sales Charge as % Portion of Offering
Sales Charge as % of of Net Amount Price Retained by
Amount of Purchase Offering Price Invested Dealer
- ------------------ -------------- -------- ------
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.
WAIVERS FOR CERTAIN INVESTORS
The following investors may purchase shares of the Portfolios at the NAV
without the imposition of a sales charge:
- Directors of LifeUSA Securities, Inc. or any of its affiliated
companies, their full-time and part-time employees, sales representatives
and retirees, and the spouses and siblings, direct ancestors or direct
descendants of such persons;
- Full-time and part-time employees of sales representatives employed
in offices maintained by such sales representatives, and certain accounts
sold by registered investment advisors who charge clients a fee for their
services; and
- Registered representatives of broker dealers who have a selling
agreement with LifeUSA for the sale of LifeUSA FUNDS.
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
1-888-446-5872 (this is a toll-free call).
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
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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. It should state the following:
"Credit LifeUSA Funds Account #6355036296 for further 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 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.
RIGHTS OF ACCUMULATION
Rights of accumulation allow shareholders to combine current LifeUSA Funds'
investments with previous purchases of LifeUSA Funds' shares to obtain a reduced
sales charge for a shareholder, a shareholder's spouse, or a shareholder's
children under the age of 21.
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 total 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.
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.
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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. Investors participating in a Systematic Investment Plan will
receive quarterly confirmations of all transactions and dividends. 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. Investors participating in a Group Systematic Investment Plan will
receive quarterly confirmations of all transactions and dividends. 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".
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
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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 by the last
business day of the preceding month in which the change or termination is to
take place. Investors participating in an Automatic Investment Plan will receive
quarterly confirmations of all transactions and dividends. 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".
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:
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- 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.
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.
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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 registered 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.
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.
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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.
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. Telephone redemption proceeds are subject to a
$50,000 limit and 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
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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. Investors participating in a Systemtatic Cash Withdrawal Plan will
receive quarterly confirmations of all transactions and dividends.
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".
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
The policy of LifeUSA Principal Preservation Portfolio is to pay dividends
from net investment income monthly, while LifeUSA Aggressive Growth Portfolio,
LifeUSA Growth Portfolio, LifeUSA Gloval Portfolio, LifeUSA Balanced Portfolio,
and LifeUSA Current Income Portfolio pay divdends from net investment income
semi-annually. The Portfolios make distributions of realized capital gains, if
any, annually. 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. Each Portfolio
offers three options: Full Reinvestment--your dividend and capital gain
distributions will be automatically reinvested in additional shares of such
Portfolio; Capital Gains Reinvestment--your capital gain distributions will be
automatically reinvested, but your income dividend distribution 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 indicated otherwise
by the shareholder, the Portfolio will automatically reinvest all such
distributions into full and fractional shares at net asset value.
The Portfolios' Directed Dividend service allows you to invest your
dividends and/or capital gain distributions directly into another Portfolio.
Contact LifeUSA Funds Shareholder Services at the address or phone number listed
under "Additional Information".
Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the 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.
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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 for which the shares have been
held. In the case of shareholders who are individuals, estates, or trusts, each
Portfolio will designate the portion of each capital gain dividend that must be
treated as mid-term capital gain ("28% gain") and the portion that must be
treated as long-term capital gain ("20% gain"). 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. For corporate shareholders, such
gain or loss will be long-term gain or loss if the shares were held more than
one year. For shareholders who are individuals, estates, or trusts, the gain or
loss will be considered long-term (20% gain) if the shareholder has held the
shares for more than 18 months and mid-term (28% gain) if the shareholder has
held the shares for more than one year but not more than 18 months.
On or before January 31 of each year, the Fund will send you and the IRS a
statement showing the amount of each taxable distribution you received in the
previous year. Whenever you sell shares of a Portfolio, the Fund will send you a
confirmation statement showing how many shares you sold and at what price.
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 regular account statements; the information they contain will be
essential in calculating the amount of your capital gains.
Unless you are investing in a tax-deferred retirement account (such as an
IRA), it is not to your advantage to buy shares of a Portfolio shortly before it
makes a distribution, because part of your investment will come back to you as a
taxable distribution. This is known as "buying a dividend." For example: on
December 15, you invest $5,000, buying 250 shares for $20 each. If a Portfolio
pays a distribution of $1 per share on December 16, its share price would drop
to $19 (not counting market change). You would still have only $5,000 (250
shares x $19 = $4,750 in share value, plus 250 shares x $1 = $250 in
distributions), but you would owe tax on the $250 distribution you received,
even if you had reinvested the dividends in more shares. To avoid "buying a
dividend," check a Portfolio's distribution schedule before you invest.
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 the Portfolios, see "Tax Status" in
the Statement of Additional Information.
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.
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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 PLAN
Shares of the Portfolios may be an appropriate investment medium for
retirement plans, including Individual Retirement Accounts ("IRAs") and Simple
IRAs. Persons desiring information about establishing an IRA or Simple IRA
should contact LifeUSA Shareholder Services at the address or phone number
listed under "Additional Information". The minimum initial investment to
establish such an 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.
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
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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 Fund's 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
1-888-446-5872 (this is a toll-free call).
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. You will also receive an account statement quarterly and a
consolidated transaction statement and updated prospectus annually. Please read
these materials carefully as they will help you understand each Portfolio and
your account. 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.
Carefully review all the information relating to transactions on your
statements and confirmations to ensure that your instructions were acted on
properly. Please notify us immediately in writing if there is an error. If you
fail to provide notification of an error with reasonable promptness, i.e.,
within 30 days of non-automatic transactions or within 30 days of the date of
your consolidated quarterly statement, in the case of automatic transactions, we
will deem you to have ratified the transaction.
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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The investment advisory, transfer agency and administrative services
provided to each Portfolio by the Adviser depend on the smooth functioning of
its computer systems. Many computer software systems in use today cannot
distinguish the year 2000 from the year 1900 because of the way dates are
encoded and calculated. That failure could have a negative impact on handling
securities trades, pricing and account services. The Adviser has been actively
working on necessary changes to its computer systems to deal with the year 2000
and expects that its systems will be adapted in time for that event, although
there cannot be assurance of success.
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APPENDIX
PORTFOLIO SECURITIES AND OTHER INVESTMENT TECHNIQUES
OF UNDERLYING FUNDS
REPURCHASE AGREEMENTS
Each Fund is permitted to invest in repurchase agreements. A repurchase
agreement is a contract by which a Fund acquires the security ("collateral")
subject to the obligation of the seller to repurchase the security at a fixed
price and date. A repurchase agreement may be construed as a loan under relevant
law. Each Fund may enter into repurchase agreements with respect to any
securities which they may acquire consistent with their investment policies and
restrictions. Each Fund's custodian will hold the securities underlying any
repurchase agreement in a segregated account. In investing in repurchase
agreements, each Fund's risk is limited to the ability of the seller to pay the
agreed-upon price at the maturity of the repurchase agreement. In the opinion of
the Adviser, such risk is not material, since in the event of default, barring
extraordinary circumstances, each Fund would be entitled to sell the underlying
securities or otherwise receive adequate protection under federal bankruptcy
laws for its interest in such securities. However, to the extent that proceeds
from any sale upon a default are less than the repurchase price, each Fund could
suffer a loss. In addition, each Fund may incur certain delays in obtaining
direct ownership of the collateral.
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. Each Fund currently has a line of credit with a
bank at the prime interest rate. To the extent funds are drawn against the line
of credit, securities are held in a segregated account. No compensating balances
or commitment fees are required under the lines of credit.
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.
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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.
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 (LBOs)
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.
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ADJUSTING INVESTMENT EXPOSURE
Each Fund, other than the IAI Money Market Fund, may, but is not required
to, utilize various other investment strategies as described below to hedge
various market risks (such as currency exchange rates and broad or specific
market movements), or to enhance potential gain. These strategies may be
executed through the use of derivative contracts. Such strategies are generally
accepted as a part of modern portfolio management and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing these investment strategies, each Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, purchase and sell financial futures contracts and options thereon,
and enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures.
There is no limit on the amount on Fund assets that can be used for hedging
purposes, i.e., to attempt to protect against possible changes in the market
value of securities held in or to be purchase for each Fund's portfolio
resulting from securities markets or currency exchange rate fluctuations, to
protect each Fund's unrealized gains in the value of its portfolio securities,
to facilitate the sale of such securities for investment purposes, or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. Some may also be used to enhance
potential gain although no more than 5% of each Fund's net assets will be
committed to techniques and instruments entered into for non-hedging purposes.
Any or all of these investment techniques may be used at any time and in any
combination, and there is no particular strategy that dictates the use of one
technique rather than another, as use of any technique or instruments is a
function of numerous variables including market conditions. The ability of the
Fund to utilize these techniques and instruments successfully will depend upon
the Adviser's ability to predict pertinent market movements, which cannot be
assured. Each Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Such techniques and
instruments involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes and not for speculative purposes.
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 and
IAI Developing Countries 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.
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FOREIGN INDEX LINKED INSTRUMENTS
IAI International and IAI Developing Countries 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 and IAI Developing Countries 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.
ZERO COUPON SECURITIES
Each Fund may also invest in zero coupon obligations of the U.S. Government
or it agencies, tax exempt issuers and corporate issuers, including rights to
stripped coupon and principal payments ("STRIPS"). Zero coupon bonds do not make
regular interest payments; rather, they are sold at a discount from face value.
Principal and accreted discount (representing interest accrued but not paid) are
paid at maturity. STRIPS are debt securities that are stripped of their interest
after the securities are issued, but otherwise are comparable to zero coupon
bonds. The market values of STRIPS and zero coupon bonds generally fluctuate in
response to changes in interest rates to a greater degree than do
interest-paying securities of comparable term and quality.
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. Each of IAI International and IAI Developing Countries Fund 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.
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INFLATION-PROTECTED SECURITIES
Each fixed income fund, and the fixed income component of the IAI Balanced
Fund, may purchase U.S. Treasury inflation-protection securities. The value of
such securities is adjusted for inflation and periodic interest payments are in
amounts equal to a fixed percentage of the inflation-adjusted value of the
principal.
BELOW INVESTMENT GRADE SECURITIES
IAI Balanced, 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, IAI Reserve, and IAI Balanced Funds
currently intends to limit such investments to 15%, 10%, 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 Developing Countries Funds does not currently intend to
invest more than 5% of its 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.
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.
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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
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 and the fixed income component of IAI Balanced Fund
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
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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 and the fixed income component of IAI Balanced Fund
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 and the fixed income component of IAI Balanced Fund
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.
RISKS OF LOWER-RATED DEBT SECURITIES
IAI Balanced, 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
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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
IAI Developing Countries Fund is 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.
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
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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.
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.
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<PAGE>
RISKS ASSOCIATED WITH ADJUSTING INVESTMENT EXPOSURE
The techniques and instruments described in the section "Adjusting
Investment Exposure", including derivative contracts, have risks associated with
them including possible default by the other party to the transaction,
illiquidity and, to the extent the Adviser's view as to certain market movements
is incorrect, the risk that the use of such techniques and instruments could
result in losses greater than if they had not been used. Use of put and call
options may result in losses to each Fund, force the sale or purchase of
portfolio securities at inopportune times or for prices higher than (in the case
of put options) or lower than (in the case of call options), current market
values, limit the amount of appreciation each Fund can realize on its
investments or cause each Fund to hold a security it might otherwise sell. The
use of currency transactions can result in each Fund incurring losses as a
result of a number of factors including the imposition of exchange controls,
suspension of settlements or the inability to deliver or receive a specified
currency. The use of options and futures transactions entails certain other
risks. In particular, the variable degree of correlation between price movements
of futures contracts and price movements in the related portfolio position of
each Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of each Fund's position. In addition, futures
and options markets may not be liquid in all circumstances and certain
over-the-counter options may not have markets. As a result, in certain markets,
each Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures contracts and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of these techniques would reduce net asset value,
and possibly income, and such losses can be greater than if the techniques and
instruments had not been utilized.
PREPAYMENT RISKS
To the extent they invest in mortgage-backed securities, IAI Bond Fund, IAI
Reserve Fund, IAI Balanced Fund and 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 mortgage-backed securities held by
the Fund is "prepaid" earlier than expected. Each Fund must then reinvest the
unanticipated principal in new mortgage-backed securities, just at a time when
interest rates on new mortgage investments are falling.
Prepayment risk has two important effects on a Fund:
- When interest rates fall and additional mortgage prepayments must be
reinvested at lower interest rates, the income of a Fund will be reduced.
- When interest rates fall, prices on mortgage-backed 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,
A-10
<PAGE>
shares of IAI Emerging Growth Fund and IAI 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. IAI
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 IAI 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 IAI 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
(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 an 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.
A-11
<PAGE>
LIFEUSA FUNDS, INC.
Statement of Additional Information
dated May 1, 1998
LifeUSA Aggressive Growth Portfolio LifeUSA Balanced Portfo
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 May
1, 1998. 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 1-888-446-5872 this is a toll-free call). Please
retain this Statement of Additional Information for future reference.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
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<S> <C>
INVESTMENT OBJECTIVES AND POLICIES...................................................................2
INVESTMENT RESTRICTIONS..............................................................................19
PORTFOLIO TURNOVER...................................................................................23
INVESTMENT PERFORMANCE...............................................................................24
MANAGEMENT...........................................................................................27
PLAN OF DISTRIBUTION.................................................................................31
CUSTODIAN, COUNSEL AND AUDITORS......................................................................33
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE...................................................33
CAPITAL STOCK........................................................................................34
NET ASSET VALUE AND PUBLIC OFFERING PRICE............................................................39
TAX STATUS...........................................................................................40
LIMITATION OF DIRECTOR LIABILITY.....................................................................41
FINANCIAL STATEMENTS.................................................................................42
APPENDIX A...........................................................................................A-1
</TABLE>
<PAGE>
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
<PAGE>
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 IAI
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 IAI 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 IAI 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. IAI 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
<PAGE>
VARIABLE OR FLOATING RATE INSTRUMENTS
Each Underlying Fund (or fixed income component thereof) 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 (or fixed income component thereof) 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 (or fixed income
component thereof) 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 appropriate liquid assets 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
<PAGE>
U.S. TREASURY INFLATION PROTECTION SECURITIES
Each fixed income Underlying Fund (or fixed income component thereof) may
purchase securities issued by the United States Government, which include U.S.
Treasury inflation-protection securities.
Inflation-protection securities are a type of marketable book-entry
security issued by the United States Department of Treasury ("Treasury") with a
nominal return linked to the inflation rate in prices. Inflation-protection
securities are auctioned and issued on a quarterly basis on the 15th of January,
April, July, and October. They have been issued as 10-year notes, with other
maturities added thereafter. The index used to measure inflation is the
non-seasonally adjusted U.S. City Average All items Consumer Price Index for All
Urban Consumers ("CPI-U").
The value of the principal is adjusted for inflation, and every six months
the security will pay interest, which is an amount equal to the fixed percentage
of the inflation-adjusted value of the principal. The final payment of principal
of the security will not be less than the original par amount of the security at
issuance.
The principal of the inflation-protection security is indexed to the
non-seasonally adjusted CPI-U. To calculate the inflation-adjusted principal
value for a particular valuation date, the value of the principal at issuance is
multiplied by the index ratio applicable to that valuation date. The index ratio
for any date is the ratio of the reference CPI applicable to such date to the
reference CPI applicable to the original issue date. Semiannual coupon interest
is determined by multiplying the inflation-adjusted principal amount by one-half
of the stated rate of interest on each interest payment date.
Inflation-adjusted principal or the original par amount, whichever is
larger, will be paid on the maturity date as specified in the applicable
offering announcement. If at maturity the inflation-adjusted principal is less
than the original principal value of the security an additional amount will be
paid at maturity so that the additional amount plus the inflation-adjusted
principal equals the original principal amount. Some inflation-protection
securities may be stripped into principal and interest components. In the case
of a stripped security, the holder of the stripped principal would receive this
additional amount. The final interest payment, however, will be based on the
final inflation-adjusted principal value, not the original par amount.
The reference CPI for the first day of any calendar month is the CPI-U for
the third preceding calendar month. (For example, the reference CPI for December
1 is the CPI-U reported for September of the same year, which is released in
October.) The reference CPI for any other day of the month is calculated by a
linear interpolation between the reference CPI applicable to the first day of
the month and the reference CPI applicable to the first day of the following
month.
Any revisions the Bureau of Labor Statistics (or successor agency) makes to
any CPI-U number that has been previously released will not be used in
calculations of the value of outstanding inflation-protection securities. In the
case that the CPI-U for a particular month is not reported by the last day of
the following month, the Treasury will announce an index number based on the
last year-over-year CPI-U inflation rate available. Any calculations of the
Treasury's payment obligations on the inflation-protection security that need
that month's CPI-U number will be based on the index number that the Treasury
has announced. If the CPI-U is based to a different year, the Treasury will
continue to use the CPI-U series based on the base reference period in effect
when the security was first issued as long as that series continues to be
published. If the CPI-U is discontinued during the period the
inflation-protection security is outstanding, the Treasury will, in consultation
with the Bureau of Labor Statistics (or successor agency), determine an
appropriate substitute index and methodology for linking the discontinued series
with the new price index series. Determinations of the Secretary of the Treasury
in this regard are final.
Inflation-protection securities will be held and transferred in either of
two book-entry systems: the commercial book-entry system (TRADES) and TREASURY
DIRECT. The securities will be maintained and transferred at their original par
amount, i.e., not at their inflation-adjusted value. STRIPS components will be
maintained and transferred in TRADES at their value based on the original par
amount of the fully constituted security.
6
<PAGE>
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 Balanced, IAI Government and IAI 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 Balanced, 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.
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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 Balanced, 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
their indebtedness, or may pay only a small fraction of the amount owed. Direct
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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 Balanced, 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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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.
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
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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 THE UNITED KINGDOM, GERMANY AND JAPAN
International Fund may from time to time concentrate more than 25% of its
total assets in the economies of the United Kingdom, Germany and Japan.
UNITED KINGDOM. The United Kingdom is a constitutional monarchy and
consists of England, Scotland, Wales and Northern Ireland. The population of the
United Kingdom is approximately 57 million. Industry in the United Kingdom is
predominantly owned in the private sector except for certain state owned
entities in the transportation and energy industries.
The financial center of the United Kingdom is London, which is also the
location of the London Stock Exchange. In October of 1986, stock exchange
commission rates were deregulated and stock exchange membership was opened up to
limited companies and to non-residents of the United Kingdom. Additionally, the
Financial Services Act (the "FSA") substantially restructured the U.K.
securities laws and deregulated the London Stock Exchange's own rules. FSA
created a new regulatory body known as the Securities and Investments Board (the
"SIB"), which has the power to delegate certain of its functions to various
self-regulatory organizations, of which the London Stock Exchange is one. Under
the FSA structure, the London Stock Exchange will continue to be largely
self-regulating with fundamentally the same types of self-regulatory rules in
effect prior to FSA.
Stock prices are continuously quoted during business hours on the London
Stock Exchange, and are negotiable, but have formalized for institutions.
Trading commissions in the U.K. are negotiable.
Securities in the United Kingdom are denominated and quoted in "pounds
sterling". Pounds sterling are fully convertible and transferable based on
floating exchange rates into all currencies, without administrative or legal
restrictions, for both non-residents and residents of the United Kingdom.
GERMANY. 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.
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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 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.
JAPAN. Japan is politically organized as a democratic, parliamentary
republic and has a population of approximately 122 million. The Japanese economy
is heavily industrial and export-oriented. Although Japan is dependent upon
foreign economies for raw materials, Japan's balance of payments in recent years
has been strong and positive.
Japan has eight stock exchanges located throughout the country, but over
80% of all trading is conducted on the Tokyo Stock Exchange.
Prices of stocks listed on the Japanese stock exchange are quoted
continuously during regular business hours. Trading commissions are at fixed
scale rates which vary by the type and the value of the transaction, but can be
negotiable for large transactions.
Securities in Japan are denominated and quoted in yen. Yen are fully
convertible and transferable based on floating exchange rates into all
currencies, without administrative or legal restrictions, for both nonresidents
and residents of Japan.
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. 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. In the past, markets of
developing countries have been more volatile than the markets of developed
countries. Such markets, however, often have provided investors with higher
returns on their investments. International Fund will limit its investments in
developing countries not included in the EAFE Index to not more than 15% of its
total assets. For purposes of determining the country of an issuer for
percentage limitation purposes, the Fund considers where an issuer is domiciled
or otherwise has substantial operations.
NO RATING CRITERIA FOR DEBT SECURITIES -
IAI DEVELOPING COUNTRIES FUND
IAI Developing Countries Fund has established no rating criteria for the
debt securities in which it may invest. Therefore, the Underlying Fund 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
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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 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.
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
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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
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.
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FOREIGN CURRENCY TRANSACTIONS
Each Underlying Fund, other than IAI Money Market Fund whose foreign
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.
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.
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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.
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.
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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.
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.
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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,
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.
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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.
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").
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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.
For purposes of applying this restriction, each Portfolio will not purchase
securities, as defined above, such that 25% or more of the value of the
Portfolio'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
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.
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.
For purposes of applying this restriction, "commodities" shall be deemed to
include commodity contracts.
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.
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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.
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").
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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.
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.
For purposes of applying this restriction, "commodities" shall be deemed to
include commodity contracts.
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.
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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, the Underlying Funds 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. 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.
PORTFOLIO TURNOVER
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 32.1% to 482.2%
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.
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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.
Yield is computed by dividing the net investment income per share (as
defined under Securities and Exchange Commission rules and regulations) earned
during the compensation period by the maximum offering price per share on the
last day of the period, according to the following formula. The result will then
be annualized using a formula that provides for semi-annual compounding of
income.
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; and
d = the maximum offering price per share on the last
day of the period.
For the thirty-day period ended December 31, 1997, Current Income
Portfolio's yield was 7.88% and Principal Preservation Portfolio's yield was
5.18%.
Average annual total return is the average annual compounded rate of return
on a hypothetical $1,000 investment made at the beginning of the advertised
period. Average annual return figures are computed 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.
This calculation deducts the maximum sales charge from the initial
hypothetical $1,000 investment, assumes all dividends and capital gains
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 to all shareholder accounts.
Average annual total return quotations may be accompanied by quotations which do
not reflect the reduction in value of the initial investment due to the sales
charge, and which thus will be higher.
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Because each Portfolio does not have a full year of performance, average
annual total return figures have not been calculated.
Cumulative total return is computed by finding the cumulative compounded
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
This 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 to all shareholder accounts.
The following table sets forth the cumulative total returns for each
Portfolio for the period from inception (February 3, 1997) through December 31,
1997.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Aggressive Growth Growth Global Balanced Current Income Principal Preservation
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- --------- ---------
11.21% 4.63% (4.03%) 2.07% 1.69% 4.13%
</TABLE>
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
25
<PAGE>
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
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
26
<PAGE>
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.
MANAGEMENT
The names, addresses, positions and principal occupations of the directors and
executive officers of the Portfolios are given below.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name and Address Age Position Principal Occupation(s) During Past 5 Years
- ---------------- --- -------- -------------------------------------------
Madeline Betsch 55 Director Currently retired; 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.
W. William Hodgson 73 Director Currently retired; 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.
George R. Long 68 Director Chairman of Mayfield Corp. (financial
29 Las Brisas Way consultants and venture capitalists) since
Naples, Florida 33963 1973.
J. Peter Thompson 66 Director Grain farmer in southwestern Minnesota since
Route 1 1974. Prior to that, Mr. Thompson was
Mountain Lake, Minnesota 56159 employed by Paine Webber, Jackson & Curtis,
Incorporated, (a diversified financial services
concern), most recently as Senior Vice President
and General Partner.
Charles H. Withers 71 Director Currently retired; was Editor of the Rochester
Rochester Post Bulletin Post-Bulletin, Rochester, Minnesota from 1960
P.O. Box 6118 through March 31, 1980.
Rochester, Minnesota 55903
Noel P. Rahn 59 President Chief Executive Officer and a Director of IAI
3700 First Bank Place since 1974. Mr. Rahn is also President of the
P.O. Box 357 IAI Mutual Funds.
Minneapolis, Minnesota 55440
William C. Joas 35 Secretary Vice President of IAI and has served as an
3700 First Bank Place attorney for IAI since 1990. Mr. Joas is also
P.O. Box 357 Secretary of the IAI Mutual Funds.
Minneapolis, Minnesota 55440
27
<PAGE>
Name and Address Age Position Principal Occupation(s) During Past 5 Years
- ---------------- --- -------- -------------------------------------------
Susan J. Haedt 36 Treasurer Vice President of the Adviser and Director of
3700 First Bank Place Fund Operations. Prior to joining the Adviser
P.O. Box 357 in 1992, Ms. Haedt served as a Senior Manager
Minneapolis, Minnesota 55440 at KPMG Peat Marwick LLP, (an international
tax, accounting and consulting firm). Ms. Haedt
is also Treasurer of the IAI Mutual Funds.
</TABLE>
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 Portfolios 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.
<TABLE>
<CAPTION>
<S> <C> <C>
Aggregate Compensation
Aggregate Compensation from the
from each Portfolio* 19 IAI Mutual Funds and
Name of Person, Position 6 LifeUSA Portfolios*
------------------------ --------------------- ------------------------
Betsch, Madeline - Director $0 $37,200
Hodgson, W. William - Director $0 $37,200
Long, George R. - Director $0 $37,200
Thompson, J. Peter - Director $0 $37,200
Withers, Charles H. - Director $0 $37,200
----------------------------------------
* For the calendar year ended December 31, 1997.
The Directors waived all such LifeUSA fees for fiscal 1997.
</TABLE>
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.
28
<PAGE>
Effective February 1998, the directors have agreed that the position of
Board Chair shall rotate from director to director on a quarterly basis.
IAI's ultimate corporate parent is 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, which was last
approved by the Board on November 4, 1997. 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
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 Investment
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), ), 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, which was last approved by the Board on
November 4, 1997, 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
29
<PAGE>
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 IAI Reserve Fund which has agreed to pay an annual fee at the rate
of .85%.
<TABLE>
<CAPTION>
<S> <C> <C>
IAI Capital IAI Balanced Fund, Midcap Growth,
Daily Net Assets Appreciation Fund Emerging Growth, Value and Regional Funds
- ---------------- ----------------- -----------------------------------------
For the first $250 million 1.40% 1.25%
For the next $250 million 1.35% 1.20%
Above $500 million 1.30% 1.10%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
IAI Bond and IAI Money
Daily Net Assets Government Funds Market Fund
- ---------------- ---------------- -----------
For the first $100 million 1.10% 0.60%
For the next $150 million 1.05% 0.55%
Above $250 million 1.00% 0.50%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
IAI Growth
IAI and
IAI Developing International IAI Growth and Income
Daily Net Assets Countries Fund Fund Funds
- ---------------- -------------- ---- -----
For the first $100 million 2.00% 1.70% 1.25%
For the next $100 - $250 million 1.95% 1.45% 1.15%
For the next $250 - $500 million 1.75% 1.30% 1.05%
Above $500 million 1.65% 1.30% 1.00%
</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 disclosed in the
Portfolios' prospectus.
SUBADVISORY AGREEMENTS FOR IAI INTERNATIONAL FUND AND
IAI DEVELOPING COUNTRIES FUND
Under the Subadvisory Agreements between IAI International Ltd. and the
Adviser, which was last approved by the Board on November 4, 1997, the Adviser
has delegated to IAI International Ltd. the sole authority and responsibility to
make and execute investment decisions for IAI International and IAI Developing
Countries 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:
30
<PAGE>
<TABLE>
<CAPTION>
IAI Developing Countries Fund
-----------------------------
<S> <C>
Fee IAI International
Daily Net Assets Receives Annually
---------------- -----------------
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>
<TABLE>
<CAPTION>
IAI International Fund
----------------------
<S> <C>
Fee IAI International
Daily Net Assets Receives Annually
---------------- -----------------
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.
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 4, 1997.
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.
31
<PAGE>
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, 1999, 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 to 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 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.
The net distribution fee paid by each Portfolio and the amount waived
during its fiscal year ended December 31, 1997 are listed below:
<TABLE>
<CAPTION>
<S> <C> <C>
Portfolio Net 12b-1 Fee 12b-1 Fee Waived by LSI*
- --------- ------------- ------------------------
Aggressive Growth Portfolio $ 380 $ 190
Growth Portfolio $ 214 $ 107
Global Portfolio $ 264 $ 132
Balanced Portfolio $ 235 $ 118
Current Income Portfolio $ 104 $ 52
Principal Preservation Portfolio $ 110 $ 55
- ---------------------------------------
* Pursuant to the above-mentioned expense limitation.
</TABLE>
32
<PAGE>
Such distribution fees were utilized in connection with the distribution of
each Portfolio's shares as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Printing and
mailing of Direct
prospectuses to Payments to payments to
other than current brokers or sales
Portfolio Advertising shareholders dealers personnel Other
- --------- ----------- ------------ ------- --------- -----
Aggressive Growth Portfolio $0 $380 $0 $0 $0
Growth Portfolio $0 $214 $0 $0 $0
Global Portfolio $0 $264 $0 $0 $0
Balanced Portfolio $0 $235 $0 $0 $0
Current Income Portfolio $0 $104 $0 $0 $0
Principal Preservation Portfolio $0 $110 $0 $0 $0
</TABLE>
CUSTODIAN, COUNSEL AND AUDITORS
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
Because the Portfolios invest only in the Underlying Funds, Portfolio
transactions are effected without commissions.
Generally, 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.
33
<PAGE>
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.
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 Conduct 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 the IAI Mutual
Funds as a factor in the selection of broker-dealers to execute the Underlying
Fund's securities transactions.
CAPITAL STOCK
AGGRESSIVE GROWTH PORTFOLIO
LifeUSA Aggressive Growth Portfolio is a separate portfolio of LifeUSA
Funds, Inc., a Minnesota corporation whose shares of common stock are currently
issued in six series (Series A - F). Each share of a series is entitled to
participate pro rata in any dividends and other distributions of such series and
all shares of a series have equal rights in the event of liquidation of that
series. The Board of Directors of LifeUSA Funds, Inc. is empowered under the
Articles of Incorporation of such company to issue other series of the company's
common stock without shareholder approval. LifeUSA Funds, Inc. has authorized
10,000,000,000 shares of $.01 par value common stock to be issued as Series A
common shares. The investment portfolio represented by such shares is referred
to as LifeUSA Aggressive Growth Portfolio. As of December 31, 1997, LifeUSA
Aggressive Growth Portfolio had 15,181 shares outstanding.
As of March 31, 1998, no person held of record or, to the knowledge of
LifeUSA Aggressive Growth Portfolio beneficially owned more than 5% of the
outstanding shares of LifeUSA Aggressive Growth Portfolio, except as set forth
in the following table:
34
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
======================================= ====================================== ======================================
Name and Address of Shareholder Number of Shares Percent of Class
======================================= ====================================== ======================================
LifeUSA Securities, Inc. 1860.125 11.06%
Attn: Bardi Huppert
PO Box 59177
Minneapolis, MN 55459
Ralph Strangis 2460.176 14.63%
5500 Norwest Center
Minneapolis, MN 55402
</TABLE>
In addition, as of March 31, 1998, LifeUSA Aggressive Growth Portfolio's
officers and directors as a group owned less than 1% of LifeUSA Aggressive
Growth Portfolio's outstanding shares.
GROWTH PORTFOLIO
LifeUSA Growth Portfolio is a separate portfolio of LifeUSA Funds, Inc., a
Minnesota corporation whose shares of common stock are currently issued in six
series (Series A - F). Each share of a series is entitled to participate pro
rata in any dividends and other distributions of such series and all shares of a
series have equal rights in the event of liquidation of that series. The Board
of Directors of LifeUSA Funds, Inc. is empowered under the Articles of
Incorporation of such company to issue other series of the company's common
stock without shareholder approval. LifeUSA Funds, Inc. has authorized
10,000,000,000 shares of $.01 par value common stock to be issued as Series B
common shares. The investment portfolio represented by such shares is referred
to as LifeUSA Growth Portfolio. As of December 31, 1997, LifeUSA Growth
Portfolio had 9,832 shares outstanding.
As of March 31, 1998, no person held of record or, to the knowledge of
LifeUSA Growth Portfolio beneficially owned more than 5% of the outstanding
shares of LifeUSA Growth Portfolio, except as set forth in the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
========================================== ===================================== ====================================
Name and Address of Shareholder Number of Shares Percent of Class
========================================== ===================================== ====================================
LifeUSA Securities, Inc. 1903.945 16.37%
Attn: Bardi Huppert
PO Box 59177
Minneapolis, MN 55459
Alexander & Crabtree PC 401(k) PSP 628.312 5.40%
fbo Hugh Alexander DTD 1/1/97
Hugh Alexander, Trustee
216 - 16th St., Ste 1300
Denver, CO 80202
Alexander & Crabtree PC 401(k) PSP 682.341 5.87%
fbo Scott Crabtree DTD 1/1/97
Hugh Alexander, Trustee
216 - 16th St., Ste 1300
Denver, CO 80202
35
<PAGE>
========================================== ===================================== ====================================
Name and Address of Shareholder Number of Shares Percent of Class
========================================== ===================================== ====================================
C. Scott Crabtree 1484.392 12.76%
Investment Advisers, Inc. Custodian
IRA Qualified Plan Rollover
3363 W. 109th Circle
Westminster, CO 80030
Joann Rothstein 613.024 5.27%
Investment Advisers, Inc. Custodian
Individual Retirement Account
216 Jay Ave. SE
Box 462
Richmond, MN 56368
</TABLE>
In addition, as of March 31, 1998, LifeUSA Growth Portfolio's officers and
directors as a group owned less than 1% of LifeUSA Growth Portfolio's
outstanding shares.
GLOBAL PORTFOLIO
LifeUSA Global Portfolio is a separate portfolio of LifeUSA Funds, Inc., a
Minnesota corporation whose shares of common stock are currently issued in six
series (Series A - F). Each share of a series is entitled to participate pro
rata in any dividends and other distributions of such series and all shares of a
series have equal rights in the event of liquidation of that series. The Board
of Directors of LifeUSA Funds, Inc. is empowered under the Articles of
Incorporation of such company to issue other series of the company's common
stock without shareholder approval. LifeUSA Funds, Inc. has authorized
10,000,000,000 shares of $.01 par value common stock to be issued as Series C
common shares. The investment portfolio represented by such shares is referred
to as LifeUSA Global Portfolio. As of December 31, 1997, LifeUSA Global
Portfolio had 7,836 shares outstanding.
As of March 31, 1998, no person held of record or, to the knowledge of
LifeUSA Global Portfolio beneficially owned more than 5% of the outstanding
shares of LifeUSA Global Portfolio, except as set forth in the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
========================================== ===================================== ====================================
Name and Address of Shareholder Number of Shares Percent of Class
========================================== ===================================== ====================================
LifeUSA Securities, Inc. 1934.626 28.68%
Attn: Bardi Huppert
PO Box 59177
Minneapolis, MN 55459
Mark A. Zesbaugh and Jodie M. Zesbaugh 1541.289 22.85%
JTWROS
3973 Trotters Court
Eagan, MN 55122
Robert W. MacDonald 1029.532 15.26%
422 Lafayette Avenue
Excelsior, MN 55331
36
<PAGE>
========================================== ===================================== ====================================
Name and Address of Shareholder Number of Shares Percent of Class
========================================== ===================================== ====================================
Bonnie L. Sadergaski 481.858 7.14%
7849 Upper 145th Court West
Apple Valley, MN 55124
</TABLE>
In addition, as of March 31, 1998, LifeUSA Global Portfolio's officers and
directors as a group owned less than 1% of LifeUSA Global Portfolio's
outstanding shares.
BALANCED PORTFOLIO
LifeUSA Balanced Portfolio is a separate portfolio of LifeUSA Funds, Inc.,
a Minnesota corporation whose shares of common stock are currently issued in six
series (Series A - F). Each share of a series is entitled to participate pro
rata in any dividends and other distributions of such series and all shares of a
series have equal rights in the event of liquidation of that series. The Board
of Directors of LifeUSA Funds, Inc. is empowered under the Articles of
Incorporation of such company to issue other series of the company's common
stock without shareholder approval. LifeUSA Funds, Inc. has authorized
10,000,000,000 shares of $.01 par value common stock to be issued as Series D
common shares. The investment portfolio represented by such shares is referred
to as LifeUSA Balanced Portfolio. As of December 31, 1997, LifeUSA Balanced
Portfolio had 9,321 shares outstanding.
As of March 31, 1998, no person held of record or, to the knowledge of
LifeUSA Balanced Portfolio beneficially owned more than 5% of the outstanding
shares of LifeUSA Balanced Portfolio, except as set forth in the following
table:
<TABLE>
<CAPTION>
<S> <C> <C>
========================================== ===================================== ====================================
Name and Address of Shareholder Number of Shares Percent of Class
========================================== ===================================== ====================================
LifeUSA Securities, Inc. 1907.232 18.24%
Attn: Bardi Huppert
PO Box 59177
Minneapolis, MN 55459
Daniel K. Rourke & Donna G. Rourke JTWROS 533.501 5.10%
21421 N. 142nd Dr.
Sun City West, AZ 85375-5965
Richard P. Lapcinski and Mary K. 1141.127 10.91%
Lapcinski JTWROS
6920 Lombardy Lane
Crystal, MN 55428
Alexander & Crabtree PC 401(k) PSP 637.195 6.09%
fbo Hugh Alexander DTD 1/1/97
Hugh Alexander, Trustee
216 - 16th St., Ste 1300
Denver, CO 80202
Alexander & Crabtree PC 401(k) PSP 692.143 6.62%
fbo Scott Crabtree DTD 1/1/97
Hugh Alexander, Trustee
216 - 16th St., Ste 1300
Denver, CO 80202
37
<PAGE>
========================================== ===================================== ====================================
Name and Address of Shareholder Number of Shares Percent of Class
========================================== ===================================== ====================================
C. Scott Crabtree 1177.495 11.26%
Investment Advisers, Inc. Custodian
IRA Qualified Plan Rollover
3363 W. 109th Circle
Westminster, CO 80030
</TABLE>
In addition, as of March 31, 1998, LifeUSA Balanced Portfolio's officers
and directors as a group owned less than 1% of LifeUSA Balanced Portfolio's
outstanding shares.
CURRENT INCOME PORTFOLIO
LifeUSA Current Income Portfolio is a separate portfolio of LifeUSA Funds,
Inc., a Minnesota corporation whose shares of common stock are currently issued
in six series (Series A - F). Each share of a series is entitled to participate
pro rata in any dividends and other distributions of such series and all shares
of a series have equal rights in the event of liquidation of that series. The
Board of Directors of LifeUSA Funds, Inc. is empowered under the Articles of
Incorporation of such company to issue other series of the company's common
stock without shareholder approval. LifeUSA Funds, Inc. has authorized
10,000,000,000 shares of $.01 par value common stock to be issued as Series E
common shares. The investment portfolio represented by such shares is referred
to as LifeUSA Current Income Portfolio. As of December 31, 1997, LifeUSA Current
Income Portfolio had 2,894 shares outstanding.
As of March 31, 1998, no person held of record or, to the knowledge of
LifeUSA Current Income Portfolio beneficially owned more than 5% of the
outstanding shares of LifeUSA Current Income Portfolio, except as set forth in
the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
========================================== ===================================== ====================================
Name and Address of Shareholder Number of Shares Percent of Class
========================================== ===================================== ====================================
LifeUSA Securities, Inc. 1986.013 66.83%
Attn: Bardi Huppert
PO Box 59177
Minneapolis, MN 55459
Richard P. Lapcinski and Mary K. 722.200 24.30%
Lapcinski JTWROS
6920 Lombardy Lane
Crystal, MN 55428
</TABLE>
In addition, as of March 31, 1998, LifeUSA Current Income Portfolio's
officers and directors as a group owned less than 1% of LifeUSA Current Income
Portfolio's outstanding shares.
PRINCIPAL PRESERVATION PORTFOLIO
LifeUSA Principal Preservation Portfolio is a separate portfolio of LifeUSA
Funds, Inc., a Minnesota corporation whose shares of common stock are currently
issued in six series (Series A - F). Each share of a series is entitled to
participate pro rata in any dividends and other distributions of such series and
all shares of a series have equal rights in the event of liquidation of that
series. The Board of Directors of LifeUSA Funds, Inc. is empowered under the
Articles of Incorporation of such company to issue other series of the company's
common stock without shareholder approval. LifeUSA Funds, Inc. has authorized
10,000,000,000 shares of $.01 par value common stock to be issued as Series F
common shares. The investment portfolio represented by such shares is referred
to as LifeUSA Principal Preservation Portfolio. As of December 31, 1997, LifeUSA
Principal Preservation Portfolio had 2,914 shares outstanding.
38
<PAGE>
As of March 31, 1998, no person held of record or, to the knowledge of
LifeUSA Principal Preservation Portfolio beneficially owned more than 5% of the
outstanding shares of LifeUSA Principal Preservation Portfolio, except as set
forth in the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
========================================== ===================================== ====================================
Name and Address of Shareholder Number of Shares Percent of Class
========================================== ===================================== ====================================
LifeUSA Securities, Inc. 2003.101 65.45%
Attn: Bardi Huppert
PO Box 59177
Minneapolis, MN 55459
Alexis Hughes 272.486 8.90%
10 Willow Woods Drive
Tonka Bay, MN 55331
Bonnie L. Sadergaski 586.713 13.17%
7849 Upper 145th Court West
Apple Valley, MN 55124
</TABLE>
In addition, as of March 31, 1998, LifeUSA Principal Preservation
Portfolio's officers and directors as a group owned less than 1% of LifeUSA
Principal Preservations Portfolio's outstanding shares.
As a result of its owning more than 25% of the shares of each of Global
Portfolio, Current Income Portfolio and Principal Preservation Portfolio,
LifeUSA Securities, Inc. may be deemed to control each such 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, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day.
On December 31, 1997, the net asset value and public offering price per
share of each Portfolio were calculated as follows:
AGGRESSIVE GROWTH PORTFOLIO
NAV = Net Assets ($176,496) = $11.63
-----------------------------------
Shares Outstanding (15,181)
GROWTH PORTFOLIO
NAV = Net Assets ($105,079) = $10.69
-----------------------------------
Shares Outstanding (9,832)
39
<PAGE>
GLOBAL PORTFOLIO
NAV = Net Assets ($75,595) = $9.65
-----------------------------------
Shares Outstanding (7,836)
BALANCED PORTFOLIO
NAV = Net Assets ($97,076) = $10.41
-----------------------------------
Shares Outstanding (9,321)
CURRENT INCOME PORTFOLIO
NAV = Net Assets ($28,827) = $9.96
-----------------------------------
Shares Outstanding (2,894)
PRINCIPAL PRESERVATION PORTFOLIO
NAV = Net Assets ($28,083) = $9.64
-----------------------------------
Shares Outstanding (2,914)
Each Portfolio has authorized one or more brokers to accept on its behalf
purchase and redemption orders and such brokers are authorized to designate
other intermediaries to accept purchase and redemption orders on a Portfolio's
behalf. Each Portfolio will be deemed to have received a purchase or redemption
order when an authorized broker or, if applicable, a broker's authorized
designee, accepts the order. In such circumstances, customer orders will be
priced at a Portfolio's NAV next computed after they are accepted by an
authorized broker or the broker's authorized designee.
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).
40
<PAGE>
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 (long-term, mid-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.
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
41
<PAGE>
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.
FINANCIAL STATEMENTS
The financial statements, included as part of the Portfolios' 1997 Annual
Report to shareholders, are incorporated herein by reference. Such Annual Report
may be obtained by shareholders on request from the Funds at no additional
charge.
42
<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.
A-1
<PAGE>
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.
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.
A-2
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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.
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.
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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-4
