<PAGE>
As filed with the Securities and Exchange Commission on January 31, 1996
1933 Act Registration No. 2-59115
1940 Act Registration No. 811-2747
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -----
Pre-Effective Amendment No._____ -----
Post-Effective Amendment No. 36 X
-----
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 -----
Amendment No. 36 X
-----
IAI INVESTMENT FUNDS I, INC.
(Exact Name of Registrant as Specified in Charter)
3700 First Bank Place, P.O. Box 357
Minneapolis, Minnesota 55440
(Address of Principal Executive Offices) (Zip Code)
(612) 376-2700
(Registrant's Telephone Number, including Area Code)
Christopher J. Smith, Esq. Copy to:
3700 First Bank Place Michael J. Radmer, Esq.
P.O. Box 357 Dorsey & Whitney
Minneapolis, Minnesota 55440 220 South Sixth Street
(Name and Address of Agent for Service) Minneapolis, Minnesota 55402
It is proposed that this filing will become effective (check appropriate
box)
--- immediately upon filing pursuant to paragraph (b)
--- on (date) pursuant to paragraph (b)
X
--- 60 days after filing pursuant to paragraph (a)(1)
--- March 30, 1995 pursuant to paragraph (a)(1)
--- 75 days after filing pursuant to paragraph (a)(2)
--- on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
--- this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
Registrant has registered an indefinite number of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940, as amended. Rule 24f-2 Notices were last filed with the Commission on
January 22, 1996.
<PAGE>
IAI INVESTMENT FUNDS I, INC.
FORM N-1A
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
Item Number Caption Prospectus Caption
- ----------- ------- ------------------
<S> <C> <C>
1 Cover Page................................. Cover Page of Prospectus
2 Synopsis................................... Fund Expense Information
3 Condensed Financial Information............ Financial Highlights; Investment Performance
4 General Description of Registrant.......... Investment Objective and Policies;
Description of Common Stock; Additional
Information
5 Management of the Fund..................... Fund Expense Information; Management;
Additional Information; Custodian, Transfer
Agent and Dividend Disbursing Agent
5A Management's Discussion of Fund Performance Information is Contained in the Annual
Report
6 Capital Stock and Other Securities......... Dividends, Distributions and Tax Status;
Description of Common Stock; Additional
Information
7 Purchase of Securities Being Offered....... Computation of Net Asset Value and Pricing;
Purchase of Shares; Automatic Investment
Plan; Exchange Privilege; Automatic
Exchange Plan (Bond Fund only); Retirement
Plans; Authorized Telephone Trading
8 Redemption or Repurchase................... Systematic Cash Withdrawal Plan (Bond
Fund only); Redemption of Shares;
Authorized Telephone Trading
9 Pending Legal Proceedings.................. Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Item Number Caption Statement of Additional Information Caption
- ----------- ---------------------------------------- -------------------------------------------
<S> <C> <C>
10 Cover Page.............................. Cover Page of Statement of Additional
Information
11 Table of Contents....................... Table of Contents
12 General Information and History......... Management
13 Investment Objectives and Policies...... Investment Objective and Policies;
Investment Restrictions
14 Management of the Fund.................. Management; Capital Stock
15 Control Persons and Principal
Holders of Securities................. Management
16 Investment Advisory and Other Services.. Management
17 Brokerage Allocation.................... Portfolio Transactions and Allocation of
Brokerage
18 Capital Stock and Other Securities...... Capital Stock
19 Purchase, Redemption and Pricing
of Securities Being Offered........... Purchases and Redemptions In Kind;
Net Asset Value and Public Offering Price
20 Tax Status.............................. Tax Status
21 Underwriters............................ Not Applicable
22 Calculation of Performance Data......... Investment Performance
23 Financial Statements.................... Financial Statements
</TABLE>
<PAGE>
PROSPECTUS DATED APRIL 1, 1996
IAI INSTITUTIONAL BOND FUND
3700 FIRST BANK PLACE
P.O. BOX 357
MINNEAPOLIS, MINNESOTA 55440
TELEPHONE 1-612-376-2700
1-800-945-3863
IAI Institutional Bond Fund (the "Fund") is a separate portfolio of IAI
Investment Funds I, Inc., a registered investment company authorized to issue
its shares of common stock in more than one series. The Fund's investment
objective is to provide shareholders with a high level of total return derived
from a combination of capital appreciation and current income. The Fund pursues
its objective by investing primarily in a diversified portfolio of investment
grade bonds and other debt securities of similar quality.
This Prospectus sets forth concisely the information which a prospective
investor should know about the Fund before investing and it should be retained
for future reference. A "Statement of Additional Information" dated April 1,
1996 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
on the back inside cover of this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
FUND EXPENSE INFORMATION.......................................... 3
FUND DIRECTORS.................................................... 3
FINANCIAL HIGHLIGHTS.............................................. 4
INVESTMENT PERFORMANCE............................................ 5
INVESTMENT OBJECTIVE AND POLICIES................................. 5
RISK FACTORS............................................ 8
MANAGEMENT........................................................ 10
COMPUTATION OF NET ASSET VALUE AND PRICING........................ 10
PURCHASE OF SHARES................................................ 11
RETIREMENT PLANS.................................................. 11
REDEMPTION OF SHARES.............................................. 11
AUTHORIZED TELEPHONE TRADING...................................... 12
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS........................... 12
DESCRIPTION OF COMMON STOCK....................................... 13
COUNSEL AND AUDITORS.............................................. 13
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT........... 13
ADDITIONAL INFORMATION............................................ 14
</TABLE>
2
<PAGE>
FUND EXPENSE INFORMATION
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------
Sales Load Imposed on Purchases.................................. None
Sales Load Imposed on Reinvested Dividends....................... None
Redemption Fees.................................................. None
Exchange Fees.................................................... None
ANNUAL FUND OPERATING EXPENSES
- -------------------------------
(as a percentage of average daily net assets)
Management Fee................................................... .50%
Other Expenses................................................... --
---
Total Fund Operating Expenses................................... .50%
===
EXAMPLE:
Based upon the levels of Total Fund Operating Expenses listed above, you would
pay the following expenses on a $1,000 investment, assuming a five percent
annual return and redemption at the end of each period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$5 $16 $28 $63
</TABLE>
The purpose of the above table is to assist you in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. The information in the table is based upon actual expenses by the
Fund incurred for the fiscal year ended November 30, 1995. THE EXAMPLE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN. Under the Fund's Investment Advisory
and Administrative Services Agreement, the Fund's investment manager has agreed
to bear all the Fund's operating expenses (other than interest and, in certain
circumstances, taxes and extraordinary expenses). Additional information on such
agreement is set forth in the section "Management."
FUND DIRECTORS
Madeline Betsch Richard E. Struthers
W. William Hodgson J. Peter Thompson
George R. Long Charles H. Withers
Noel P. Rahn
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG 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>
PERIOD FROM PERIOD FROM
4/1/94+ 11/1/93***
YEAR ENDED TO TO
11/30/95 11/30/94 3/31/94
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE: $ 8.85 $ 9.36 $ 10.00
Beginning of period --------- ------- -------
OPERATIONS:
Net investment income .62 .38 .22
Net realized and unrealized gains
(losses) .66 (.51) (.65)
--------- ------- -------
Total from operations 1.28 (.13) (.43)
--------- ------- -------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.63) (.38) (.21)
--------- ------- -------
Total distributions (.63) (.38) (.21)
--------- ------- -------
NET ASSET VALUE:
End of period $ 9.50 $ 8.85 $ 9.36
========= ========= =======
Total investment return* 14.95% (1.44%) (4.35%)
Net assets at end of period (000's
omitted) $ 101,429 $ 73,724 $31,478
RATIOS:
Expenses to average daily net assets .50% .50%** .50%**
Net investment income to average
daily net assets 6.76% 6.42%** 5.84%**
Portfolio turnover rate
(excluding short-term securities) 358.8% 235.1% 127.1%
- --------------------------
</TABLE>
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value.
** Annualized.
*** Commencement of operations.
+ Reflects fiscal year-end change from March 31 to November 30.
4
<PAGE>
INVESTMENT PERFORMANCE
From time to time the Fund 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 Fund 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 the Fund over
a given period, assuming reinvestment of any dividends and capital gains. A
cumulative total return reflects actual performance over a stated period of
time. An average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period.
Yield refers to the income generated by an investment in the Fund over
a given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all stock and bond
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 Fund
is contained in the Fund's Annual Report to shareholders which may be obtained
without charge from the Fund.
Comparative performance information may be used from time to time in
advertising or marketing the Fund'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 the
Fund. The comparison of the Fund to an alternative investment should be made
with consideration of differences in features and expected performance. The
Fund may also note its mention in newspapers, magazines, or other media from
time to time. The Fund 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 the Fund in advertising and sales literature, see the
section "Investment Performance" in the Statement of Additional Information.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide shareholders with a high
level of total return derived from a combination of capital appreciation and
current income. Such objective may not be changed without shareholder approval.
There can be no assurance that the Fund's investment objective will be attained.
The 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").
The Fund may also invest in below investment grade securities. Such
securities are commonly referred to as junk bonds. The Fund currently intends
to limit such investments to 15% of its total assets and not to invest in junk
bonds rated lower than B by Moody's or S & P. 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
"Investment Objective and Policies" in the Statement of Additional Information
for additional information regarding ratings of debt securities. In purchasing
such securities, the Fund will rely on IAI's
5
<PAGE>
judgment, analysis and experience in evaluating the creditworthiness of an
issuer of such securities. IAI will take into consideration, among other things,
the issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management and
regulatory matters.
Other debt securities in which the Fund may invest include securities
of, or guaranteed by, the United States Government, its agencies or
instrumentalities, debt securities of foreign issuers, commercial paper, asset-
backed securities, mortgage-backed securities, and below investment grade
securities. Under normal market conditions, at least 65% of the Fund's total
assets will be invested in bonds and other debt securities with maturities at
the time of acquisition of one year or more.
Although the Fund generally will not make direct purchases of common
stock, the Fund may purchase preferred stock and debt securities that are
convertible into or exchangeable for or which carry warrants to purchase common
stock or other equity interests.
See "Investment Objective and Policies" in the Statement of Additional
Information for further information on certain of the Fund's portfolio
securities.
OTHER INVESTMENT TECHNIQUES
The Fund's ability to utilize certain of the investment techniques
discussed below may be subject to limitations and may subject the Fund to
additional risks. Please refer to the section "Risk Factors" below and the
Statement of Additional Information for more information regarding such
risks.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements relating to the
securities in which it may invest. In a repurchase agreement, the Fund buys a
security at one price and simultaneously agrees to sell it back at a higher
price. Delays or losses could result if the other party to the agreement
defaults or becomes bankrupt.
WHEN-ISSUED/DELAYED DELIVERY TRANSACTIONS
The Fund may purchase securities on a "when-issued" or delayed
delivery basis and purchase or sell securities on a "forward commitment" basis.
When such transactions are negotiated, the price is fixed at the time the
commitment is made, but delivery and payment for the securities take place at a
later date. Normally, the settlement date occurs within two months after the
transaction, but delayed settlements beyond two months may be negotiated. At
the time the Fund enters into a transaction on a when-issued or forward
commitment basis, a segregated account consisting of cash, government securities
or liquid high-grade debt securities equal to the value of the when-issued or
forward commitment securities will be established and maintained with the
custodian and will be marked to the market daily. During the period between a
commitment and settlement, no payment is made for the securities and, thus, no
interest accrues to the purchaser from the transaction. If the Fund disposes of
the right to acquire a when-issued security prior to its acquisition or disposes
of its right to deliver or receive against a forward commitment, it can incur a
gain or loss due to market fluctuation. The use of when-issued transactions and
forward commitments enables the Fund to hedge against anticipated changes in
interest rates and prices. The Fund may also enter into such transactions to
generate incremental income. In some instances, the third-party seller of when-
issued or forward commitment securities may determine prior to the settlement
date that it will be unable or unwilling to meet its existing transaction
commitments without borrowing securities. If advantageous from a yield
perspective, the Fund may, in that event, agree to resell its purchase
commitment to the third-party seller at the current market price on the date of
sale and concurrently enter into another purchase commitment for such securities
at a later date. As an inducement for the Fund to "roll over" its purchase
commitment, the Fund may receive a negotiated fee. No more than 20% of the
Fund's net assets may be invested in when-issued, delayed delivery or forward
commitment transactions, and of such 20%, no more than one-half (i.e., 10% of
its net assets) may be invested in when-issued, delayed delivery or forward
commitment transactions without the intention of actually acquiring securities
(i.e., dollar rolls or "roll"
6
<PAGE>
transactions). For additional information on roll transactions, see "Investment
Objectives and Policies -- Dollar Rolls" in the Statement of Additional
Information.
ZERO COUPON OBLIGATIONS
The Fund may also invest in zero coupon obligations of the U.S.
Government or its 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 the components of 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.
FOREIGN SECURITIES
The 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 Investment Advisers, Inc. ("IAI"), the Fund's investment adviser
and manager, to be of comparable quality to the other obligations in which the
Fund may invest.
LENDING
In order to generate additional income, the Fund may lend portfolio
securities up to one-third of the value of its total assets to broker-dealers,
banks or other financial borrowers of securities. This practice could cause the
Fund to experience a loss or a delay in recovering its securities.
ADJUSTING INVESTMENT EXPOSURE
The Fund can use various techniques to increase or decrease its
exposure to changing security prices, interest rates, currency exchange rates,
commodity prices, or other factors that affect security values. These techniques
include buying and selling options and futures contracts, entering into currency
exchange contracts or swap agreements, purchasing indexed securities, and
selling securities short.
BORROWING
The Fund may borrow from banks for temporary or emergency purposes or
through reverse repurchase agreements. If the Fund borrows money, its share
price may be subject to greater fluctuation until the borrowing is paid off. If
the Fund makes additional investments while borrowings are outstanding, this may
be considered a form of leverage.
PORTFOLIO TURNOVER
The Fund will dispose of securities without regard to the time they
have been held when such action appears advisable to management either as a
result of securities having reached a price objective, or by reason of
developments not foreseen at the time of the investment decision. Since
investment changes usually will be made without reference to the length of time
a security has been held, a significant number of short-term transactions may
result. Accordingly, the Fund's annual portfolio turnover rate cannot be
anticipated and may be relatively high. High turnover rates increase transaction
costs, and may increase taxable capital gains. The Fund's historical portfolio
turnover rates are set forth in the section "Financial Highlights."
7
<PAGE>
RISK FACTORS
INTEREST RATE RISK
As a mutual fund investing in fixed-income securities, the Fund is
subject to interest rate and credit 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 the
Fund, IAI 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, IAI 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.
CREDIT RISK
The Fund is 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 the 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 Fund is also subject to call risk. Call risk is the possibility
that corporate bonds held by the Fund will be repaid prior to maturity. Call
provisions, common in many corporate bonds held by the 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 the 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 the Fund would decline.
LOWER-RATED DEBT SECURITIES
The Fund 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 the Fund were to default, the 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 the Fund.
8
<PAGE>
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 the Fund to arrive at a fair value for
certain junk bonds at certain times and could make it difficult for the Fund to
sell certain securities. For a description of Moody's and S&P ratings, see
Appendix A to the Statement of Additional Information.
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
the Fund. Securities of some foreign companies are less liquid and more volatile
than securities of comparable domestic companies. There also may be less
publicly available information about foreign issuers than domestic issuers, and
foreign issuers generally are not subject to the uniform accounting, auditing
and financial reporting standards, practices and requirements applicable to
domestic issuers. Because the 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 the Fund's holdings
of securities denominated in such currency and, therefore, will cause an overall
decline in the Fund's net asset value and net investment income and capital
gains, if any, to be distributed in U.S. dollars to shareholders by the 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.
RISKS OF TRANSACTIONS IN DERIVATIVES
The Fund will spread investment risk by limiting its holdings in any
one company or industry. IAI may use futures, options, swap and currency
exchange agreements as well as short sales to adjust the risk and return
characteristics of the Fund's portfolio of investments. If IAI judges market
conditions incorrectly or employs a strategy that does not correlate well with
the Fund's investments, use of these techniques could result in a loss,
regardless of whether the intent was to reduce risk or increase return. Use of
these techniques may increase the volatility of the Fund and may involve a small
investment of cash relative to the magnitude of risk assumed. In addition, these
techniques could result in a loss if the counterparty to the transaction is
unable to perform as promised. Moreover, a liquid secondary market for any
futures or options contract may not be available when a futures or options
position is sought to be closed. Please refer to the Statement of Additional
Information which further describes these risks.
MANAGER RISK
IAI manages the Fund 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 IAI may fail to execute the Fund's
investment strategy effectively. As a result, the Fund may fail to achieve its
stated objective.
INVESTMENT RESTRICTIONS
The Fund 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 the Fund. Please refer to the Statement of Additional Information for a
further discussion of these policies and restrictions.
9
<PAGE>
MANAGEMENT
The Fund was created on November 1, 1993, as a separate portfolio
represented by a separate class of common stock of IAI Investment Funds I, Inc.,
a Minnesota corporation. Under Minnesota law, the Fund's Board of Directors is
generally responsible for the overall management and operation of the Fund. IAI
serves as the investment adviser and manager of the Fund pursuant to a written
agreement (the "Management Agreement"). IAI'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 address of IAI is that of the Fund. IAI also furnishes investment advice to
other concerns including other investment companies, pension and profit sharing
plans, foundations, religious, educational and charitable institutions, trusts,
municipalities and individuals, having total assets in excess of $14
billion.
Under the Management Agreement, IAI provides the 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. IAI also provides all
required administrative, stock transfer, redemption, dividend disbursing and
accounting services, including, for example, the maintenance of the Fund's
accounts, books and records, the daily calculation of the Fund's net asset
value, daily and periodic reports, all information necessary to complete tax
returns, questionnaires and other reports requested by the Fund, the maintenance
of stock registry records, the processing of requested account registration
changes and redemption requests, and the administration of payments of dividends
and distributions declared by the Fund. In addition, the Management Agreement
provides that, except for interest and, in certain circumstances, taxes and
extraordinary expenses, IAI shall bear the Fund's operating expenses. As
compensation for these services, the Fund paid IAI a fee of .50% of the Fund's
average daily net assets for the fiscal year ended November 30, 1995. IAI shall
not be liable for any loss suffered by the Fund in the absence of willful
misfeasance, bad faith or gross negligence in the performance of its duties and
obligations.
The Fund is managed by a team of IAI investment professionals which is
responsible for making day-to-day investment decisions for the Fund. Larry Hill,
Timothy Palmer and Mark Simenstad have been responsible for the management of
the Fund since its inception. Mr. Hill is IAI's Chief Fixed Income Officer and a
member of its Board of Directors, and has served as a fixed income portfolio
manager since joining IAI in 1984. Mr. Palmer is a Senior Vice President of IAI
and has served as a fixed income portfolio manager since joining IAI in 1990.
Mr. Simenstad is a Vice President of IAI and has served as a fixed income
portfolio manager since joining IAI in 1993. Prior to joining IAI, Mr. Simenstad
served as a fixed income portfolio manager for Lutheran Brotherhood.
COMPUTATION OF NET ASSET VALUE AND PRICING
The Fund is open for business each day the New York Stock Exchange
("NYSE") is open. IAI normally calculates the Fund's net asset value ("NAV") as
of the close of business of the NYSE, normally 3 p.m. Central time.
The Fund's NAV is the value of a single share. The NAV is computed by
adding up the value of the Fund's investments, cash, and other assets,
subtracting its liabilities, and then dividing the result by the number of
shares outstanding.
The Fund's investments with remaining maturities of 60 days or less
may be valued on the basis of amortized cost. This method minimizes the effect
of changes in a security's market value. Other portfolio securities and assets
are valued primarily on the basis of market quotations or, if quotations are not
readily available, by a method that the Board of Directors believes accurately
reflects fair value. Foreign securities are valued on the basis of quotations
from the primary market in which they are traded, and are translated from the
local currency into U.S. dollars using current exchange rates.
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The offering price (price to buy one share) and redemption price
(price to sell one share) are the Fund's NAV next computed after receipt by the
Fund of a purchase or redemption order.
PURCHASE OF SHARES
The Fund offers its shares continually to the public at the net asset
value of such shares. Shares may be purchased directly from the Fund or through
certain security dealers who have responsibility to promptly transmit orders and
may charge a processing fee. No sales load or commission is charged in
connection with the purchase of Fund shares. The Fund's shares are distributed
by IAI Securities, Inc. (the "Underwriter"), which is an affiliate of IAI and
whose offices are the same as that of the Fund. The Underwriter receives no
compensation for its sale of Fund shares.
The minimum initial investment in the Fund is $2 million. The minimum
investment requirement may be waived or lowered for investments effected on a
group basis by certain entities and their employees, such as pursuant to a
payroll deduction plan.
Shares may be purchased for cash or in exchange for securities which
are permissible investments of the Fund, subject to IAI's discretion and its
determination that the securities are acceptable. Securities accepted in
exchange will be valued on the basis of market quotations or, if market
quotations are not available, by a method that IAI believes accurately reflects
fair value. In addition, securities accepted in exchange are required to be
liquid securities that are not restricted as to transfer.
Purchases of shares are subject to acceptance or rejection by the Fund
on the same day the purchase order is received and are not binding until so
accepted. It is the policy of the Fund to keep confidential information
contained in the application and regarding the account of an investor or
potential investor in the Fund. All funds will be invested in full and
fractional shares of the Fund. Share certificates will not be issued.
All correspondence relating to the purchase of shares should be
directed to the office of the Fund, P.O. Box 357, Minneapolis, Minnesota 55440
or, if using overnight delivery, to 3700 First Bank Place, 601 2nd Avenue South,
Minneapolis, Minnesota 55402. For assistance in completing the application
please contact IAI Mutual Fund Shareholder Services at 1-800-945-3863.
RETIREMENT PLANS
Shares of the Fund may be an appropriate investment medium for various
Retirement Plans. Persons desiring information about establishing an Individual
Retirement Account (IRA) (for employed persons and their spouses) or other
Retirement Plans should contact the Fund at 1-800-945-3863. 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.
REDEMPTION OF SHARES
Registered holders of Fund shares may at any time require the Fund to
redeem their shares upon their written request that the Fund redeem such shares.
Shareholders may redeem shares by phone (subject to a limit of $50,000) provided
such shareholders have authorized the Fund to accept telephone instructions.
Redemption instructions must be made by the person(s) in whose name
the shares are registered. If the redemption proceeds are to be paid or mailed
to any person other than the shareholder of record or if redemption proceeds are
in excess of $50,000, the Fund will require that the signature on the written
instructions be guaranteed by a participant in a signature guarantee program,
which may include certain national banks or trust
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companies or certain member firms of national securities exchanges.
(Notarization by a Notary Public is NOT ACCEPTED.) If the shares are held of
record in the name of a corporation, partnership, trust or fiduciary, the Fund
may require additional evidence of authority prior to accepting a request for
redemption. The Fund will not send redemption proceeds until checks (including
certified checks or cashiers checks) received in payment for shares have
cleared.
The redemption proceeds received by the investor are based on the net
asset value next determined after redemption instructions in good order are
received by the Fund. Since the value of shares redeemed is based upon the value
of the Fund investment at the time of redemption, it may be more or less than
the price originally paid for the shares.
Payment for shares redeemed will ordinarily be made within seven days
after a request for redemption has been made. Normally the Fund will mail
payment for shares redeemed on the business day following receipt of the
redemption request.
Following a redemption or transfer request, if the value of a
shareholder's interest in the Fund falls below $2 million, the Fund 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 the Fund to
fall below $2 million; (b) the mailing by the Fund to such shareholder of a
notice of intention to redeem; and (c) the passage of at least sixty days from
the date of such mailing, during which time the investor will have the
opportunity to make an additional investment in the Fund to increase the value
of such investor's account to at least $2 million.
AUTHORIZED TELEPHONE TRADING
Investors can transact account exchanges and redemptions via the
telephone by completing the Authorized Telephone Trading section of the IAI
Mutual Fund application and returning it to the Fund. Investors requesting
telephone trading privileges will be provided with a personal identification
number ("PIN") that must accompany any instructions by phone. Shares will be
redeemed or exchanged at the next determined net asset value. All proceeds must
be made payable to the owner(s) of record and delivered to the address of
record.
In order to confirm that telephone instructions for redemptions and
exchanges are genuine, the Fund has established reasonable procedures including
the requirement that a personal identification number accompany telephone
instructions. If the Fund or the transfer agent fail to follow these procedures,
the Fund may be liable for losses due to unauthorized or fraudulent
instructions. To the extent the reasonable procedures are followed, none of the
Fund, its transfer agent, IAI or its principal underwriter will be liable for
any loss, injury, damage or expense for acting upon telephone instructions
believed to be genuine and will otherwise not be responsible for the
authenticity of any telephone instructions and, accordingly, the investor bears
the risk of loss resulting from telephone instructions. All telephone
redemptions and exchange requests will be tape recorded.
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
The policy of the Fund is to pay dividends from net investment income
monthly and to 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 the Fund. When you open an account, you should specify on your
application how you want to receive your distributions. Normally, all dividend
and capital gain distributions are automatically reinvested in additional shares
of the Fund.
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The Fund intends to qualify for tax purposes as a regulated investment
company under the Internal Revenue Code during the current taxable year. If so
qualified, the Fund will not be subject to federal income tax on income that it
distributes to its shareholders.
Generally, dividends and capital gain distributions with respect to
shares held by a tax-deferred or qualified pension plan, such as an IRA, Section
403(b)(7) retirement plan or corporate pension or profit sharing plan, will not
be taxable to the plan. Distributions from such plans will be taxable to
individual participants under applicable tax rules without regard to the
character of the income earned by the qualified plan. If you participate in such
a plan, consult your plan administrator, your plan's Summary Plan Description,
or a professional tax advisor regarding the tax consequences of your
participation in the plan, and of any plan contributions or withdrawals.
DESCRIPTION OF COMMON STOCK
All shares of the Fund 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 the Fund 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 IAI Investment Funds I,
Inc., vote together as one series. On an issue affecting only a particular
series, such as voting on an investment advisory agreement, only the approval of
a particular 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 the Fund may demand a regular meeting of shareholders of the
Fund by written notice of demand given to the chief executive officer or the
chief financial officer of the Fund. Within thirty days after receipt of the
demand by one of those officers, the Board of Directors shall cause a regular
meeting of shareholders to be called and held no later than ninety days after
receipt of the demand, all at the expense of the Fund. An annual meeting will be
held on the removal of a director or directors of the Fund if requested in
writing by holders of not less than 10% of the outstanding shares of the Fund.
COUNSEL AND AUDITORS
The firm of Dorsey & Whitney P.L.L.P., 220 South Sixth Street,
Minneapolis, Minnesota 55402, provides legal counsel to the Fund. KPMG Peat
Marwick LLP, 4200 Norwest Center, Minneapolis, Minnesota 55402, serves as the
independent auditors for the Fund.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
The Custodian for the Fund is Norwest Bank Minnesota, N.A., Norwest
Center, Sixth and Marquette, Minneapolis, Minnesota 55479. Norwest employs
foreign subcustodians and depositories, which were approved by the Fund's Board
of Directors in accordance with the rules and regulations of the Securities and
Exchange Commission, for the purpose of providing custodial services for the
Fund's assets held outside the United States. For a listing of the subcustodians
and depositories currently employed by the Fund, see the Statement of Additional
Information. IAI acts as the Fund's transfer agent, dividend disbursing agent
and IRA Custodian, at P.O. Box 357, Minneapolis, Minnesota 55440.
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ADDITIONAL INFORMATION
The Fund sends to its shareholders a six-month unaudited and an annual
audited financial report, each of which includes a list of investment securities
held.
Shareholder inquiries should be directed to the Fund at the telephone
number or mailing address listed on the inside back cover of this Prospectus.
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IAI INSTITUTIONAL BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED APRIL 1, 1996
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. THIS
STATEMENT OF ADDITIONAL INFORMATION RELATES TO A PROSPECTUS DATED APRIL 1, 1996
AND SHOULD BE READ IN CONJUNCTION THEREWITH. A COPY OF THE PROSPECTUS MAY BE
OBTAINED FROM THE FUND, 3700 FIRST BANK PLACE, P.O. BOX 357, MINNEAPOLIS,
MINNESOTA 55440 (TELEPHONE: 1-612-376-2700 OR 1-800-945-3863).
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
INVESTMENT OBJECTIVE AND POLICIES...................................3
Repurchase Agreements.....................................3
Reverse Repurchase Agreements.............................3
Securities of Foreign Issuers.............................3
Lending Portfolio Securities..............................4
Illiquid Securities.......................................4
Variable or Floating Rate Instruments.....................4
Delayed-Delivery Transactions.............................4
Dollar Rolls..............................................5
Mortgage-Backed Securities................................5
Stripped Mortgage Backed Securities.......................6
Asset-Backed Securities...................................6
Zero Coupon Bonds.........................................6
Lower-Rated Debt Securities...............................6
Swap Agreements...........................................7
Indexed Securities........................................7
Loans and Other Direct Debt Instruments...................8
Foreign Currency Transactions.............................9
Limitations on Futures and Options Transactions..........10
Futures Contracts........................................10
Futures Margin Payments..................................10
Purchasing Put and Call Options..........................10
Writing Put and Call Options.............................11
Combined Positions.......................................11
Correlation of Price Changes.............................11
Liquidity of Options and Futures Contracts...............12
OTC Options..............................................12
Options and Futures Relating to Foreign Currencies.......12
Asset Coverage for Futures and Options Positions.........13
INVESTMENT RESTRICTIONS............................................13
Portfolio Turnover.......................................14
INVESTMENT PERFORMANCE.............................................15
MANAGEMENT.........................................................17
Management Agreement.....................................19
CUSTODIAL SERVICE..................................................20
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE.................24
CAPITAL STOCK......................................................25
NET ASSET VALUE AND PUBLIC OFFERING PRICE..........................26
TAX STATUS.........................................................26
LIMITATION OF DIRECTOR LIABILITY...................................27
FINANCIAL STATEMENTS...............................................28
Appendix A--Ratings of Debt Securities............................A-1
</TABLE>
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of IAI Institutional Bond Fund
(the "Fund") are summarized on the front page of the Prospectus and in the text
of the Prospectus under "Investment Objective and Policies." Investors should
understand that all investments have a risk factor. There can be no guarantee
against loss resulting from an investment in the Fund, and there can be no
assurance that the Fund's investment policies will be successful, or that its
investment objective will be attained. Certain of the investment practices of
the Fund are further explained below.
REPURCHASE AGREEMENTS
The 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.
The Fund's custodian will have custody of, and will hold in a segregated
account, securities acquired by the 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 the 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, the 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, the 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, the Fund could suffer a loss.
REVERSE REPURCHASE AGREEMENTS
In a reverse repurchase agreement, a 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, the Fund will comply with guidelines
established by the Securities and Exchange Commission regarding the segregation
of assets. The Fund will enter into reverse repurchase agreements only with
parties whose creditworthiness has been found satisfactory by Investment
Advisers, Inc. ("IAI"), the Fund's investment adviser and manager. Such
transactions may increase fluctuations in the market value of the Fund's assets
and may be viewed as a form of leverage.
SECURITIES OF FOREIGN ISSUERS
The Fund may invest in securities of foreign issuers in accordance
with its investment objectives and policies. 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 and auditing and financial reporting standards, practices and
requirements comparable to those applicable to United States companies.
Furthermore, 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. There is generally less government supervision and regulation of
foreign bond markets, brokers and 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
the 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.
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<PAGE>
The Fund is not aware at this time of the existence of any investment
or exchange control regulations which might substantially impair the operations
of the 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 the Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to the Fund's shareholders.
The expense ratio of the Fund should not be materially affected by the Fund's
investment in foreign securities.
LENDING PORTFOLIO SECURITIES
In order to generate additional income, the 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, the Fund will only enter into loan arrangements with
broker-dealers, banks or other institutions which IAI has determined are
creditworthy under guidelines established by the Fund's Board of Directors. The
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, the 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 the Fund an amount
equivalent to any dividends or interest paid on the securities and the 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 the Fund may be reduced by finders' fees paid to broker-dealers and related
expenses.
ILLIQUID SECURITIES
The Fund may also 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. 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. It is not possible to predict
with assurance the maintenance of an institutional trading market for such
securities and the liquidity of the Fund's investments could be impaired if
trading declines.
VARIABLE OR FLOATING RATE INSTRUMENTS
Such instruments (including notes purchased directly from issuers)
bear variable or floating interest rates and may 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
The Fund may buy and sell securities on a delayed-delivery or when-
issued basis. These transactions involve a commitment by the 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. The Fund may receive
fees for entering into delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, the Fund
assumes the rights and risks of ownership, including the risk of price and yield
fluctuations. Because the Fund is not required to pay for securities
4
<PAGE>
until the delivery date, these risks are in addition to the risks associated
with the Fund's other investments. If the 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, the Fund will comply with guidelines established by
the Securities and Exchange Commission regarding the segregation of assets. When
the Fund has sold a security on a delayed-delivery basis, the 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, the Fund could miss a favorable price or yield opportunity, or could
suffer a loss.
The 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, the Fund may enter into "dollar rolls" in which the
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. The Fund
gives up the right to receive principal and interest paid on the securities
sold. However, the Fund would benefit to the extent of any difference between
the price received for the securities sold and lower forward price for the
futures purchase 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 the Fund compared with what such performance would
have been without the use of dollar rolls. The Fund will hold and maintain in a
segregated account until the settlement date cash, government securities, or
liquid high-grade debt securities in an amount equal to the value of the when-
issued or forward commitment securities. The benefits derived from the use of
dollar rolls may depend, among other things, upon IAI'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 the Fund while
remaining substantially fully invested increases the amount of the Fund's assets
that are subject to market risk to an amount that is greater than the Fund's net
asset value, which could result in increased volatility of the price of the
Fund's shares.
MORTGAGE-BACKED SECURITIES
The 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 the Fund
may invest in them if IAI determines they are consistent with the 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.
5
<PAGE>
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
Asset-backed securities represent interests in pools of consumer loans
(generally unrelated to mortgage loans) and 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
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, the 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.
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 the Fund. If a
call were exercised by the issuer during a period of declining interest rates,
the Fund likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends to
shareholders.
6
<PAGE>
The 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 the Fund's ability to
dispose of particular issues when necessary to meet the 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 the
Fund's net asset value. In addition, the 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.
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
the 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.
The Fund is not limited to any particular form of swap agreement if IAI
determines it is consistent with the Fund's investment objectives and policies.
Swap agreements will tend to shift the Fund's investment exposure from
one type of investment to another. For example, if the Fund agrees to exchange
payments in dollars for payments in foreign currency, the swap agreement would
tend to decrease the 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 the
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 the Fund. If a swap agreement
calls for payments by the Fund, the Fund must be prepared to make such payments
when due. In addition, if the counterparty's creditworthiness declined, the
value of a swap agreement would be likely to decline, potentially resulting in
losses. The 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 similarly creditworthy party.
While a swap agreement is outstanding, the Fund will comply with guidelines
established by the Securities and Exchange Commission regarding the segregation
of assets.
INDEXED SECURITIES
The 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-term 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.
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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. IAI 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 the Fund's investment policies, depending
on the individual characteristics of the securities. Indexed securities may be
more volatile than the underlying instruments.
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 the
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 the Fund does not receive scheduled interest or principal
payments on such indebtedness, the Fund's share price and yield could be
adversely affected. Loans that are fully secured offer the 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
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
the Fund. For example, if a loan is foreclosed, the 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, the 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 Fund in the
event of fraud or misrepresentation. In the absence of definitive regulatory
guidance, the Fund relies on IAI's research in an attempt to avoid situations
where fraud or misrepresentation could adversely affect the 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, the 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 the Fund were
determined to be subject to the claims of the agent's general creditors, the
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.
The Fund limits the amount of the assets that it invests in any one
issuer or in issuers within the same industry. For purposes of these
limitations, the Fund generally will treat the borrower as the "issuer" of
indebtedness held by the Fund. In the case of loan participations where a bank
or other lending institution serves as financial intermediary between the Fund
and the borrower, if the participation does not shift to the Fund the direct
debtor/creditor relationship with the borrower, SEC interpretations require the
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 the Fund has invested more than 5% of its total assets in a single
issuer. Treating a financial intermediary as an issuer of indebtedness may
restrict the Fund's ability to invest in indebtedness
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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.
FOREIGN CURRENCY TRANSACTIONS
The Fund 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.
The Fund 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 Fund.
In connection with purchases and sales of securities denominated in
foreign currencies, the 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." IAI expects to enter into settlement hedges in the normal
course of managing the Fund's foreign investments. The 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 IAI.
The Fund may also use forward contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. For example,
if the 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. The 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, the Fund will
segregate assets to cover currency forward contracts, if any, whose purpose is
essentially speculative. The 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 IAI's
skill in analyzing and predicting currency values. Forward contracts may
substantially change the Fund's investment exposure to changes in currency
exchange rates, and could result in losses to the Fund if currencies do not
perform as IAI anticipates. For example, if a currency's value rose at a time
when IAI had hedged the Fund by selling that currency in exchange for dollars,
the Fund would be unable to participate in the currency's appreciation. If IAI
hedges currency exposure through proxy hedges, the 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 IAI increases the Fund's
exposure to a foreign currency, and that currency's value declines, the Fund
will realize a loss. There is no assurance that IAI's use of forward currency
contracts will be advantageous to the Fund or that it will hedge at an
appropriate time. The policies described in this section are non-fundamental
policies of the Fund.
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LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS
The 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. The Fund intends to comply
with Section 4.5 of the regulations under the Commodity Exchange Act, which
limits the extent to which the Fund can commit assets to initial margin deposits
and option premiums.
The above limitations on the Fund's investments in futures contracts
and options, and the Fund's policies regarding futures contracts and options
discussed elsewhere in this Statement of Additional Information may be changed
as regulatory agencies permit.
FUTURES CONTRACTS
When the Fund purchases a futures contract, it agrees to purchase a
specified underlying instrument at a specified future date. When the 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 the 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 the Fund's exposure to positive and
negative price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When the 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 the Fund's investment limitations. In the
event of the bankruptcy of an FCM that holds margin on behalf of the Fund, the
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
the Fund.
PURCHASING PUT AND CALL OPTIONS
By purchasing a put option, the 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, the 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. The 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, the Fund will lose the entire premium it paid. If the
Fund exercises the option, it completes the sale of the underlying instrument at
the strike price. The 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.
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<PAGE>
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 the 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,
the 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 the Fund would be required to make
margin payments to an FCM as described above for futures contracts. The 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 the Fund has written, however,
the 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 the 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 falls. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
COMBINED POSITIONS
The 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, the 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 the Fund's current or anticipated investments exactly. The 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 the Fund's other investments.
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<PAGE>
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the 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. The 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 the 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 the 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 the Fund to continue to hold a position until delivery
or expiration regardless of changes in its value. As a result, the 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 the Fund greater flexibility to tailor an
option to its needs, OTC options generally involve greater credit risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.
OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES
Currency futures contracts are similar to forward currency exchange
contracts, except that they are traded on exchanges (and have margin
requirements) and are standardized as to contract size and delivery date. Most
currency futures contracts call for payment or delivery in U.S. dollars. The
underlying instrument of a currency option may be a foreign currency, which
generally is purchased or delivered in exchange for U.S. dollars, or may be a
futures contract. The purchaser of a currency call obtains the right to
purchase the underlying currency, and the purchaser of a currency put obtains
the right to sell the underlying currency.
The uses and risks of currency options and futures are similar to
options and futures relating to securities or indexes, as discussed above. The
Fund may purchase and sell currency futures and may purchase and write currency
options to increase or decrease its exposure to different foreign currencies.
The 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 the Fund's investments. A
currency hedge, for example, should protect a yen-denominated security from a
decline in the yen, but will not protect the Fund against a price decline
resulting from deterioration in the issuer's creditworthiness. Because the
value of the 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 the Fund's investments exactly over
time.
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ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS
The 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 the Fund's assets could impede portfolio management or the Fund's
ability to meet redemption requests or other current obligations.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, the 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 the 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 the 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 the Fund and may be changed by the Board of Directors without
shareholder approval.
The Fund may not:
1. Purchase the securities of any issuer if such purchase would
cause the Fund to fail to meet the requirements of a "diversified company" as
defined under the Investment Company Act of 1940, as amended (the "1940 Act").
As currently defined in the 1940 Act, "diversified company" means a
management company which meets the following requirements: at least 75% of the
value of its total assets is represented by cash and cash items (including
receivables), Government securities, securities of other investment companies
and other securities for the purposes of this calculation limited in respect of
any one issuer to an amount not greater in value than 5% of the value of the
total assets of such management company and not more than 10% of the outstanding
voting securities of such issuer.
2. Purchase the securities of any issuer (other than "Government
securities" as defined under the 1940 Act) if, as a result, more than 25% of the
value of the Fund's total assets would be invested in the securities of
companies whose principal business activities are in the same industry.
3. Issue any senior securities, except as permitted by the 1940 Act
or the Rules and Regulations of the Securities and Exchange Commission.
4. Borrow money, except from banks for temporary or emergency
purposes provided that such borrowings may not exceed 33-1/3% of the value of
the 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 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. To the extent the 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
Fund may be deemed to be an underwriter under applicable laws.
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6. Purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments. This restriction shall not prevent the 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 Fund from purchasing or selling options, futures, swaps and forward
contracts or from investing in securities or other instruments backed by
commodities.
8. Make loans to other persons except to the extent not inconsistent with
the 1940 Act or the Rules and Regulations of the Securities and Exchange
Commission. This limitation does not apply to purchases of commercial paper,
debt securities or repurchase agreements, or to the lending of portfolio
securities.
9. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases or sales
of securities and provided that margin payments in connection with transactions
in options, futures, swaps and forward contracts shall not be deemed to
constitute purchasing securities on margin.
10. Sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options, swaps and forward futures contracts are
not deemed to constitute selling securities short.
11. Except as part of a merger, consolidation, acquisition, or
reorganization, invest more than 5% of the value of its total assets in the
securities of any one investment company or more than 10% of the value of its
total assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting securities of
any one investment company.
12. Mortgage, pledge or hypothecate its assets except to the extent
necessary to secure permitted borrowings. This limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed in
a segregated account in connection with such contracts.
13. Participate on a joint or a joint and several basis in any
securities trading account.
14. Invest more than 15% of its net assets in illiquid investments.
15. Invest directly in interests (including partnership interests) in
oil, gas or other mineral exploration or development leases or programs, except
the Fund may purchase or sell securities issued by corporations engaging in oil,
gas or other mineral exploration or development business.
Any of the Fund'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 there from. With respect to Restriction 14, the 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
Fund's liquid securities.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by the
monthly average of the value of portfolio securities owned by the Fund during
the same fiscal year. "Portfolio securities" for purposes of this calculation
do not include securities with a maturity date of less than twelve (12) months
from the date of investment. A 100% portfolio turnover rate would occur, for
example, if the lesser of the value of purchases or sales of portfolio
securities for a particular year were
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equal to the average monthly value of the portfolio securities owned during such
year. The Fund's portfolio turnover rate is set forth in the Prospectus section
"Financial Highlights".
INVESTMENT PERFORMANCE
Advertisements and other sales literature for the Fund 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 are computed in the same manner as
cumulative total return, as set forth below.
Cumulative total return is computed by finding the cumulative rate of
return over the period indicated in the advertisement that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
CTR = (ERV-P) 100
-----
P
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the period
of a hypothetical $1,000 payment made at the
beginning of such period; and
P = initial payment of $1,000
Average annual total return is computed by finding the average annual
compounded rates of return over the periods indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)/n/ = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period
of a hypothetical $1,000 payment made at the
beginning of such period.
The Fund may quote yield figures from time to time. The "yield" is
computed by dividing the net investment income per share earned during a 30-day
period (using the average number of shares entitled to receive dividends) by the
net asset value per share on the last day of the period. The yield formula
provides for semiannual compounding which assumes that net investment income is
earned and reinvested at a constant rate and annualized at the end of a six-
month period.
The yield formula is as follows:
YIELD = 2[(a-b + 1)/6/ -1]
---
cd
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Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the net asset value of the Fund at the end of the
period.
The average annual total returns of the Fund for the year ended
November 30, 1995 and for the period from the Fund's inception (November 1,
1993) through November 30, 1995 were 14.95% and 3.94%, respectively. For the
thirty-day period ended November 30, 1995, the Fund's yield was 6.39%.
In advertising and sales literature, the Fund 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 indexes, averages or products differs
from that of the Fund. The comparison of the Fund 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 Fund believes to be generally
accurate. The Fund may also note its mention in newspapers, magazines, or other
media from time to time. However, the Fund assumes no responsibility for the
accuracy of such data.
For example, (1) the Fund's performance or P/E ratio may be compared
to any one or a combination of the following: (i) 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; (ii) the Salomon Brothers Broad Investment Grade Index; (iii) the
Shearson Lehman Brothers Government/Corporate Bond Index; and (iv) the
performance of U.S. government and corporate bonds, notes and bills. (The
purpose of these comparisons would be to illustrate historical trends in
different market sectors so as to allow potential investors to compare different
investment strategies.); (2) the Consumer Price Index (measure for inflation)
may be used to assess the real rate of return from an investment in the Fund;
(3) other U.S. 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 the Fund or the
general economic business, investment, or financial environment in which the
Fund operates; (4) the effect of tax-deferred compounding on the Fund'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 the Fund (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
instruments in which the Fund invests may be compared to relevant indices or
surveys in order to evaluate the Fund's historical performance or current or
potential value with respect to the particular instruments.
16
<PAGE>
MANAGEMENT
The names, addresses, positions and principal occupations of the directors
and executive officers of the Fund are given below.
<TABLE>
<CAPTION>
Principal Occupation(s)
Name and Address Age Position During Past 5 Years
- ---------------- --- -------- -------------------------
<S> <C> <C> <C>
Noel P. Rahn* 53 Chairman of the Noel P. Rahn has been
3700 First Bank Place Board Chief Executive Officer
P.O. Box 357 and a Director of IAI
Minneapolis, Minnesota since 1974. Mr. Rahn is
55440 also Chairman of the
other IAI Mutual Funds
as well as IAI
Securities, Inc., the
Fund's principal
underwriter.
Richard E. Struthers* 43 President, Director Richard E. Struthers is
3700 First Bank Place Executive Vice President
P.O. Box 357 and a Director of IAI
Minneapolis, Minnesota and has served IAI in
55440 many capacities since
1979. Mr. Struthers is
also President of the
other IAI Mutual Funds
as well as President and
Director of IAI
Securities, Inc., the
Fund's principal
underwriter.
Madeline Betsch 53 Director Madeline Betsch, until
19 South 1st Street April 1994, was
Minneapolis, Minnesota Executive Vice
55401 President, Director of
Client Services, of
CME-KHBB Advertising
since May 1985, and
prior thereto was a Vice
President with
Campbell-Mithun, Inc.
(an advertising agency)
since February 1977.
Ms. Betsch currently is
President of ESMA Corp.,
a start-up business in
the beauty and wellness
field.
W. William Hodgson 71 Director W. William Hodgson
1698 Dodd Road served as information
Mendota Heights, Minnesota manager for the North
55118 Central Home Office of
the Prudential Insurance
Company of America from
1961 until 1984; he is
currently retired.
George R. Long 65 Director George R. Long has been
29 Las Brisas Way Chairman of Mayfield
Naples, Florida 33963 Corp. (financial
consultants and venture
capitalists) since 1973.
J. Peter Thompson 64 Director J. Peter Thompson has
Route 1 been a grain farmer in
Mountain Lake, Minnesota southwestern Minnesota
56159 since 1974. Prior to
that, Mr. Thompson was
employed by Paine
Webber, Jackson &
Curtis, Incorporated, (a
diversified financial
services concern), most
recently as Senior Vice
President and General
Partner.
Charles H. Withers 68 Director Charles H. Withers was
Rochester Post Bulletin Editor of the Rochester
P.O. Box 6118 Post-Bulletin,
Rochester, Minnesota 55903 Rochester, Minnesota
from 1960 through
March 31, 1980; he is
currently retired.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Principal
Occupation(s)
During Past 5
Name and Address Age Position Years
- ---------------- --- -------- -----------------
<S> <C> <C> <C>
Archie C. Black, III 33 Treasurer Archie C. Black
3700 First Bank Place is a Senior Vice
P.O. Box 357 President and
Minneapolis, Minnesota Chief Financial
55440 Officer of IAI
and has served
IAI in several
capacities since
1987. Mr. Black
is also
Treasurer of the
other IAI Mutual
Funds.
William C. Joas 33 Secretary William C. Joas
3700 First Bank Place is a Vice
P.O. Box 357 President of IAI
Minneapolis, Minnesota and has served
55440 as an attorney
for IAI since
1990. Mr. Joas
is also
Secretary of the
other IAI Mutual
Funds and Chief
Compliance
Officer of IAI
Securities,
Inc., the Fund's
principal
underwriter.
Larry R. Hill 43 Vice President, Larry R. Hill is
3700 First Bank Place Investments an Executive
P.O. Box 357 Vice President
Minneapolis, Minnesota and a Director
55440 of IAI and has
served IAI in
various
capacities since
1984.
Timothy Palmer 33 Vice President, Timothy Palmer
3700 First Bank Place Investments is a Senior Vice
P.O. Box 357 President of IAI
Minneapolis, Minnesota and has served
55440 IAI as a fixed
income portfolio
manager since
1990.
Mark Simenstad 37 Vice Mark Simenstad
3700 First Bank Place President, is a Vice
P.O. Box 357 Investments President of IAI
Minneapolis, Minnesota and has served
55440 as a fixed
income portfolio
manager since
joining IAI in
1993. Prior to
joining IAI, Mr.
Simenstad served
as a fixed
income portfolio
manager for
Lutheran
Brotherhood
(diversified
financial
services
concern).
Kirk Gove 33 Vice President, Kirk Gove is a
3700 First Bank Place Marketing Vice President
P.O. Box 357 of IAI. Prior
Minneapolis, Minnesota to joining IAI
55440 in 1992, Mr.
Gove served as
an Associate
Vice President
of Dain
Bosworth,
Incorporated
(diversified
financial
services
concern). Mr.
Gove is also
Vice President,
Marketing of the
other IAI Mutual
Funds.
Susan J. Haedt 34 Vice President, Susan J. Haedt
3700 First Bank Place Director of is a Vice
P.O. Box 357 Fund Operations President of IAI
Minneapolis, Minnesota and Director of
55440 Fund Operations.
Prior to
joining IAI in
1992, Ms. Haedt
served as a
Senior Manager
at KPMG Peat
Marwick, (an
international
tax, accounting
and consulting
firm.) Ms.
Haedt is also
Vice President,
Director of Fund
Operations of
the other IAI
Mutual Funds.
</TABLE>
- -----------
* Directors of the Fund who are interested persons (as that term is defined by
the Investment Company Act of 1940) of IAI and the Fund.
18
<PAGE>
The Fund has agreed to reduced initial subscription requirements for
employees and directors of the Fund or IAI, their spouses, children and
grandchildren. With respect to such persons, the minimum initial investment in
one or more of the IAI Family of Funds is $500; provided that the minimum amount
that can be allocated to any one of the Funds is $250. Subsequent subscriptions
are limited to a minimum of $100 for each of the Funds.
No compensation is paid by the Fund to any of its officers. As of January
31, 1996, directors who are not affiliated with IAI receive from the 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. The Fund will pay its pro rata
share of these fees based on its net assets. Such unaffiliated directors also
are reimbursed for expenses incurred in connection with attending meetings.
<TABLE>
<CAPTION>
Aggregate Aggregate Compensation Projected Aggregate
Compensation from the Compensation from the
Name of Person, Position from the Fund* 18 IAI Mutual Funds** 19 IAI Mutual Funds***
- --------------------------- ---------------------- ---------------------- ---------------------------
<S> <C> <C> <C>
Betsch, Madeline - $1,950 $28,725 $32,200
Director
Hodgson, W. William - $1,950 $28,725 $32,200
Director
Long, George R. - $1,550 $27,725 $32,200
Director
Thompson, J. Peter - $1,950 $28,725 $32,200
Director
Withers, Charles H. - $1,550 $27,725 $32,200
Director
- -------------------------
</TABLE>
* For the fiscal year ended November 30, 1995.
** For all Funds for the calendar year ended December 31, 1995.
*** For the calendar year ending December 31, 1996 and includes the new IAI
Capital Appreciation Fund; provided that a director misses no meetings;
excludes expenses incurred in connection with attending meetings.
IAI, the Fund's investment adviser, is an affiliate of the Hill Samuel
Group ("Hill Samuel"). Hill Samuel is an international merchant banking and
financial services firm headquartered in London, England. In addition to its
ownership of IAI, Hill Samuel owns controlling interests in over seventy
insurance, merchant banking and financial services subsidiaries located in
Western Europe, Asia, the United States, Australia, New Zealand and Great
Britain. The principal offices of Hill Samuel are located at 100 Wood Street,
London EC2 P2AJ.
Hill Samuel, in turn, is owned by Lloyds TSB Group, plc ("Lloyds TSB"), a
publicly-held financial services organization headquartered in London, England.
Lloyds TSB is one of the largest personal and corporate financial services
groups in the United Kingdom, engaged in a wide range of activities including
commercial and retail banking. The principal offices of Lloyds TSB are located
at St. George's House, 6 - 8 Eastcheap, London, EC3M 1LL.
MANAGEMENT AGREEMENT
Pursuant to an Investment Advisory and Administrative Services Agreement
between the Fund and IAI (the "Management Agreement"), IAI has agreed to provide
the 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, IAI has the sole authority and responsibility to
make and execute investment decisions for the Fund within the framework of the
Fund's investment policies, subject to review by the directors of the Fund. In
addition, IAI has agreed to provide to the Fund all required administrative,
stock transfer, redemption, dividend disbursing and accounting services
including, without limitation, the following: (1) the maintenance of the Fund's
accounts, books and records; (2) the calculations of the daily net asset value
in accordance with the Fund's current Prospectus and Statement of
19
<PAGE>
Additional Information; (3) daily and periodic reports; (4) all information
necessary to complete tax returns, questionnaires and other reports requested by
the Fund; (5) the maintenance of stock registry records; (6) the processing of
requested account registration changes, stock certificate issuances and
redemption requests; and (7) the administration of payments of dividends and
distributions declared by the Fund. In return for such services, the Fund has
agreed to pay IAI a fee of .50% per year of the Fund's average daily net assets.
As of November 30, 1995, the Fund had net assets of $101,428,912. For
the period from November 1, 1993 (commencement of operations) through March 31,
1994, for the fiscal period ended November 30, 1994, and for the fiscal year
ended November 30, 1995, the Fund paid IAI $48,292, $242,947, and $446,744,
respectively, pursuant to the Management Agreement.
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
the Fund, taxes and extraordinary expenses, IAI has agreed to pay all of the
Fund's other costs and expenses, including, for example, costs incurred in the
purchase and sale of assets, taxes, charges of the custodian of the Fund's
assets, costs of reports and proxy material sent to Fund shareholders, fees paid
for independent accounting and legal services, costs of printing Prospectuses
for Fund shareholders and registering the Fund's shares, postage, fees to
directors who are not "interested persons" of the Fund, insurance premiums, and
costs of attending investment conferences. IAI is not liable for any loss
suffered by the Fund in the absence of willful misfeasance, bad faith or gross
negligence in the performance of its duties and obligations.
The Management Agreement will terminate automatically in the event of
its assignment. In addition, the Agreement is terminable at any time without
penalty by the Board of Directors of the Fund or by vote of a majority of the
Fund's outstanding voting securities on not more than 60 days' written notice to
IAI, and by IAI on 60 days' notice to the Fund. The 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 the 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.
Although investment decisions for the Fund are made independently from
those of the other funds and accounts as to which IAI gives investment advice,
it may occasionally develop that the same security is suitable for more than one
fund and/or other account. If and when more than one fund or other 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 such funds and accounts. The simultaneous purchase or sale of the
same securities by more than one fund or by any fund and other accounts may have
detrimental effects on the Fund, as they may affect the price paid or received
by a fund or the size of the position obtainable by a fund.
CUSTODIAL SERVICE
The custodian for the fund is Norwest Bank Minnesota, N.A. Norwest
Center, Sixth and Marquette, Minneapolis, MN 55479. Norwest has entered into an
agreement with Morgan Stanley Trust Company, 1 Pierrepont Plaza, Brooklyn, New
York ("Morgan Stanley") which enables the Fund to utilize the subcustodian and
depository network of Morgan Stanley. Such agreements, subcustodians and
depositories were approved by the Fund's Board of Directors in accordance with
the rules and regulations of the Securities and Exchange Commission, for the
purpose of providing custodial services for the Fund's assets held outside the
United States. The directors of the Fund monitor the activities of its custodian
and subcustodians as well as the economic conditions and applicable laws of the
foreign countries in which such Fund's assets are held.
The following is a listing of the subcustodians and depositories
currently approved by the Fund's directors and the countries in which such
subcustodians and depositories are located:
20
<PAGE>
BRANCHES OF THE CUSTODIAN
AND SUBCUSTODIAN BANKS
----------------------
Argentina Citibank, N.A., Buenos Aires Branch
Australia Australia & New Zealand Banking Group, Ltd.
Austria Credit Austalt Bankverein
Bangladesh Standard Chartered Bank
Belgium Banque Bruxelles Lambert (BBL)
Botswana Barclays Bank of Botswana
Brazil Banco de Boston
Canada Toronto Dominion Bank
Chile Citibank, N.A., Santiago Branch
China Hong Kong & Shanghai Banking, Corp. Ltd.
Columbia Cititrust
Cyprus Barclays Bank PLC
Czech Republic ING Bank
Denmark Den Danske Banke
Finland Merita Bank
France Banque Indosuez
Germany Berliner Handels-und-Frankfurter Bank
Ghana Barclays Bank of Ghana
Greece Citibank, N.A., Athens Branch
Hong Kong Hong Kong & Shanghai Banking Corp. Ltd.
Hungary Citibank, N.A., Budapest Branch
India Standard Chartered Bank
Indonesia Hong Kong & Shanghai Banking Corp. Ltd.
Ireland Allied Irish Bank
Israel Bank Leumi
Italy Barclays Bank PLC
21
<PAGE>
Japan The Mitsubishi Bank Limited
Jordan Arab Bank plc
Kenya Barclays Bank Kenya
Korea Standard Chartered Bank
Luxembourg Banque Bruxelles Lambert
Malaysia Oversea Chinese Banking Corporation
Mauritius Hong Kong and Shanghai Bank Corporation
Mexico Citibank, N.A., Mexico City Branch
Morocco Banque Commerciale du Maroc
Netherlands ABN Amro Bank
New Zealand Bank of New Zealand
Norway Den Norske Bank
Pakistan Standard Chartered Bank
Papua New Guinea Australia and New Zealand Bank
Peru Citibank N.A., Lima Branch
Philippines Hong Kong & Shanghai Banking Corp. Ltd.
Poland Citibank, S.A.
Portugal Banco Commercial Portugues
Singapore Oversea Chinese Banking Corporation
South Africa First National Bank of Southern Africa
Spain Banco Santader
Sri Lanka Hong Kong & Shanghai Banking, Corp. Ltd.
Swaziland Barclays Bank of Swaziland
Sweden Svenska Handelsbanken
Switzerland Morgan Guaranty Trust Company of New
York, Zurich Branch
Taiwan Hong Kong & Shanghai Banking Corp. Ltd.
22
<PAGE>
Thailand Standard Chartered Bank
Turkey Citibank, N.A., Istanbul Branch
United Kingdom Barclays Bank PLC
Uruguay Citibank, N.A., Montevideo Branch
Venezuela Citibank, N.A., Caracas Branch
Zambia Barclays Bank of Zambia
Zimbabwe Barclays Bank of Zimbabwe
DEPOSITORIES
------------
Argentina Caja de Valores
Australia Clearing House Electronic Subregister
System
Austria Euroclear Clearance System
OsterreicheKontrollbank
Belgium C.I.K. (Caisse Interprofessionelle de Depot
et de Virements de Titres S.A.)
Brazil Sao Paulo Stock Exchange
Canada CDS (The Canadian Depository
for Securities Ltd.)
Czech Republic Center for Securities (SCP)
Denmark Euroclear Clearance System
Vaerdipapircentralen
Finland Euroclear Clearance System
France SICOVAM (Societe Interprofessionelle la
Compensacion des Valuers Mobilieres)
Germany Kassenverein (Deutscher Kassenverein AG)
Hong Kong Central Clearing and Settlement System
Hungary Euroclear Clearance System
OsterreicheKontrollbank
Italy Monte Titoli, S.p.A
Japan Japan Securities Depository Center
23
<PAGE>
Korea The Korean Central Depository
Malaysia The Malaysian Central Depository
Mexico Instituto para el Deposito de Valores
Netherlands NECIGEF (Netherlands Centraal Instit
voor Giraal Effectenverkeer B.V.
Norway Euroclear Clearance System
Verdipapirsentralen
Singapore Central Depository Pte Ltd.
Spain Servicio de Compensacion y Liquidacion de
Valores
Sweden Euroclear Clearance System
Vardepapperscentralen VPC AB
Switzerland SEGA (Schweizerische Effekten Giro A.G.)
Taiwan Taiwan Securities Depository Co.
Thailand Share Depository Center
United Kingdom Stock Exchange Talisman System
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Most of the Fund's portfolio transactions are effected with dealers
without the payment of brokerage commissions but at a net price which usually
includes a spread or markup. In effecting such portfolio transactions on behalf
of the Fund, IAI seeks the most favorable net price consistent with the best
execution. However, frequently IAI selects a dealer to effect a particular
transaction without contacting all dealers who might be able to effect such
transaction because of the volatility of the bond market and the desire of IAI
to accept a particular price for a security because the price offered by the
dealer meets its guidelines for profit, yield or both.
So long as IAI believes that it is obtaining the best net price
(including the spread or markup) consistent with the best execution, as
described above, it gives consideration in placing portfolio transactions to
dealers furnishing research, statistical information, or other services to IAI.
This allows IAI to supplement its own investment research activities and enables
IAI to obtain the views and information of individuals and research staffs of
many different securities firms prior to making investment decisions for the
Fund. To the extent portfolio transactions are effected with dealers who
furnish research services to it, IAI receives a benefit which is not capable of
evaluation in dollar amounts.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to the policies set forth in the
preceding paragraphs and such other policies as the Board of Directors of the
Fund may determine, IAI may consider sales of shares of the Fund as a factor in
the selection of broker-dealers to execute the Fund's securities transactions.
IAI believes that most research services obtained by it generally
benefit one or more of the investment companies or other accounts which it
manages. Research services obtained from transactions in fixed income
24
<PAGE>
securities would primarily benefit the managed funds investing such fixed income
securities and managed accounts investing in fixed income securities.
CAPITAL STOCK
The Fund is a separate portfolio of IAI Investment Funds I, Inc., a
corporation organized on April 22, 1977, pursuant to the laws of the State of
Minnesota, whose shares of common stock are currently issued in two series
(Series A and B). 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 IAI Investment Funds I, Inc., is empowered under the Articles of
Incorporation of such company to issue other series of the company's common
stock without shareholder approval. IAI Investment Funds I, 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 IAI Institutional Bond Fund. As of November 30, 1995, the Fund
had 10,676,597 shares outstanding.
As of March __, 1996, no person held of record or, to the knowledge of
the Fund, beneficially owned more than 5% of the Fund's outstanding shares,
except as set forth in the following table:
- --------------------------------------------------------------------------------
Name and Address Number of Percent of
of Shareholder Shares Class
- --------------------------------------------------------------------------------
Bank of America TTEE FBO
Tracor Inc. and Affiliates
P.O. Box 98622
Las Vegas, NV 89193
Kansas Health Foundation
309 East Douglas
Wichita, KS 67207
Bank of America TTEE FBO
Littlefuse Inc. Retirement Plan
Attn: Susan Coyle
P.O. Box 98622
Las Vegas, NV 89193
The Baptist Medical Centers
3500 Blue Lake Drive, Suite 105
Birmingham, AL 35243
- --------------------------------------------------------------------------------
Name and Address Number of Percent of
of Shareholder Shares Class
- --------------------------------------------------------------------------------
Greater Miami Jewish Federation
Attn: Steve Schwartz CFO
4200 Biscayne Blvd
Miami, FL 33137-3279
Campbell Mithun Esty Advertising PST
222 South 9th Street
Piper Jaffray Tower
Minneapolis, MN 55402
25
<PAGE>
In addition, as of March 1, 1996, the Fund's officers and directors as
a group owned less than 1% of the Fund's outstanding shares.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The portfolio securities in which the Fund invests fluctuate in value,
and hence, for the Fund, the net asset value per share also fluctuates.
The net asset value per share of the Fund is determined once daily as
of the close of trading on the New York Stock Exchange 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 the Fund is not determined, on the following national holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.
On November 30, 1994, the net asset value and public offering price
per share of the Fund was calculated as follows:
NAV = Net Assets ($101,428,912) = $9.50
-------------------------
Shares Outstanding (10,676,597)
TAX STATUS
The tax status of the Fund and the distributions of the Fund are
summarized in the Prospectus under "Dividends, Distributions and Tax Status."
Under the Internal Revenue Code of 1986, as amended (the "Code"),
individual shareholders may not exclude any amount of distributions from Fund
gross income that is derived from dividends; corporate shareholders, however,
are permitted to deduct 70% of qualifying dividend distributions from domestic
corporations. Such a deduction by a corporate shareholder will depend upon the
portion of the Fund's gross income which is derived from dividends received from
domestic corporations. Since it is anticipated that a portion of the net
investment income of the Fund may derive from sources other than dividends from
domestic corporations, a portion of the Fund's dividends may not qualify for
this exclusion. Distributions designated as long-term capital gain distributions
will be taxable to the shareholder as long-term capital gains regardless of how
long the shareholder has held the shares. Such distributions will not be
eligible for the dividends received deduction referred to above.
If Fund shares are sold or otherwise disposed of more than one year
from the date of acquisition, the difference between the price paid for the
shares and the sales price will result in long-term capital gain or loss to the
Fund shareholder if, as is usually the case, the Fund shares are a capital asset
in the hands of the Fund shareholder at that time. However, under a special
provision in the Code, if Fund shares with respect to which a long-term capital
gain distribution has been, or will be, made are held for six months or less,
any loss on the sale or other disposition of such shares will be long-term
capital loss to the extent of such distribution.
Ordinarily, distributions and redemption proceeds earned by Fund
shareholders are not subject to withholding of federal income tax. However, the
Fund is required to withhold 31% of a shareholder's distributions and redemption
proceeds upon the occurrence of certain events specified in Section 3406 of the
Code and regulations promulgated thereunder. These events include the failure of
a Fund shareholder to supply the Fund with such shareholder's taxpayer
identification number, and the failure of a Fund shareholder who is otherwise
exempt from withholding to properly document such shareholder's status as an
exempt recipient. Additionally,
26
<PAGE>
distributions may be subject to state and local income taxes, and the treatment
thereunder may differ from the federal income tax consequences discussed above.
Under the Code, the Fund will be subject to a non-deductible excise
tax equal to 4% of the excess, if any, of the amount of investment income and
capital gains required to be distributed pursuant to the Code for each calendar
year over the amount actually distributed. In order to avoid this excise tax,
the Fund generally must declare dividends by the end of each calendar year
representing 98% of the Fund's ordinary income for such calendar year and 98% of
its capital gain net income (both long-term and short-term) for the twelve-month
period ending October 31 of the same calendar year. The excise tax is not
imposed, however, on undistributed income that is already subject to corporate
income tax. It is the Fund's policy not to distribute capital gains until
capital loss carryovers, if any, either are utilized or expire.
Income received from sources within foreign countries may be subject
to withholding and other taxes imposed by such countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes. It is impossible to determine the effective rate of foreign tax
applicable to such income in advance since the precise amount of a Fund's assets
to be invested in various countries is not known. Any amount of taxes paid by
the Fund to foreign countries will reduce the amount of income available to the
Fund for distributions to shareholders.
The foregoing is a general and abbreviated summary of the Code and
Treasury regulations in effect as of the date of the Fund's Prospectus and this
Statement of Additional Information. The foregoing relates solely to federal
income tax law applicable to "U.S. persons," i.e., U.S. citizens and residents
and U.S. domestic corporations, partnerships, trusts and estates. Shareholders
who are not U.S. persons are encouraged to consult a tax adviser regarding the
income tax consequences of acquiring shares of the Fund.
LIMITATION OF DIRECTOR LIABILITY
Under Minnesota law, the Fund's Board of Directors owes certain
fiduciary duties to the Fund 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 IAI Investment Funds
I, Inc., limit the liability of directors to the fullest extent permitted by
Minnesota statutes, except to the extent that such liability cannot be limited
as provided in the Investment Company Act of 1940 (which Act prohibits any
provisions which purport to limit the liability of directors arising from such
directors' willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their role as directors).
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" of the corporation for breach of their
duties as officers (including the liability of directors who serve as officers
for breach of their duties as officers.) Minnesota law does not permit
elimination or limitation of the availability of equitable relief, such as
injunctive or rescissionary relief. Further, Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act
27
<PAGE>
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 Fund's 1995 Annual
Report to shareholders, are incorporated herein by reference. Such Annual Report
may be obtained by shareholders on request from the Fund at no additional
charge.
28
<PAGE>
APPENDIX A
RATINGS OF DEBT SECURITIES
RATINGS BY MOODY'S
- ------------------
CORPORATE BONDS
Aaa. Bonds rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa. Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A. Bonds rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa. Bonds rated Baa are considered medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B. Bonds rated B generally lack characteristics of the desirable
investment. Assurances of interest and principal payment or maintenance of other
terms of the contract over any long period of time may be small.
Caa. Bonds rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca. Bonds rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
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
<PAGE>
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in the Aa and A
classifications of its corporate bond rating system. The modifier 1 indicates
that the security ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category. With respect to
municipal securities, those bonds in the Aa, A, Baa, Ba, and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols Aa1, A1, Baa1, Ba1, and B1.
COMMERCIAL PAPER
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime - 1 Superior ability for repayment of senior short-term
debt obligations
Prime - 2 Strong ability for repayment of senior short-term debt
obligations
Prime - 3 Acceptable ability for repayment of senior short-term
debt obligations
If an issuer represents to Moody's that its Commercial Paper
obligations are supported by the credit of another entity or entities, Moody's,
in assigning ratings to such issuers, evaluates the financial strength of the
indicated affiliated corporations, commercial banks, insurance companies,
foreign governments, or other entities, but only as one factor in the total
rating assessment.
RATINGS BY S&P
- --------------
CORPORATE BONDS
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
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.
<PAGE>
B. Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB-rating.
CCC. Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal.
CC. Debt rated CC is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC debt rating.
C. The rating C typically applied to debt subordinated to senior debt
which assigned an actual or implied CCC-debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.
C1. The rating C1 is reserved for income bonds on which no interest
is being paid.
D. Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. The D rating will be used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
In order to provide more detailed indications of credit quality, S&P's
bond letter ratings described above (except for the AAA category) may be
modified by the addition of a plus or a minus sign to show relative standing
within the rating category.
COMMERCIAL PAPER
A. This highest rating category indicates the greatest capacity for
timely payment. Issues in this category are further defined with the
designations 1, 2, and 3 to indicate the relative degree to safety.
A-1. This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are designed A-1+.
A-2. Capacity for timely payments on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designed A-1.
A-3. Issues carrying this designation have adequate capacity for
timely repayment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
<PAGE>
PROSPECTUS DATED APRIL 1, 1996
IAI BOND FUND
IAI GOVERNMENT FUND
IAI MINNESOTA TAX FREE FUND
3700 FIRST BANK PLACE
P.O. BOX 357
MINNEAPOLIS, MINNESOTA 55440
TELEPHONE 1-612-376-2700
1-800-945-3863
IAI Bond Fund ("Bond Fund") is a separate portfolio of IAI Investment Funds I,
Inc. IAI Government Fund ("Government Fund") and IAI Minnesota Tax Free Fund
("Minnesota Tax Free Fund") are separate portfolios of IAI Investment Funds VI,
Inc. Each of IAI Investment Funds I, Inc. and IAI Investment Funds VI, Inc. is
a registered investment company authorized to issue its shares of common stock
in more than one series. Investment Advisers, Inc. ("IAI") serves as each
Fund's investment adviser and manager.
Bond Fund's investment objective is to provide shareholders with a high level of
current income consistent with preservation of capital. Bond Fund pursues its
objective by investing primarily in a diversified portfolio of investment grade
bonds and other debt securities of similar quality.
Government Fund's investment objectives are to provide shareholders with a high
level of current income and with preservation of capital. Government Fund
pursues its objectives by investing 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.
Minnesota Tax Free Fund's investment objective is to provide shareholders with
as high a level of current income exempt from federal income tax as is
consistent with preservation of capital. Minnesota Tax Free Fund pursues its
objective by investing at least 70% of its net assets in investment grade
Minnesota Obligations.
This Prospectus sets forth concisely the information which a prospective
investor should know about each Fund before investing and it should be retained
for future reference. A "Statement of Additional Information" dated April 1,
1996, 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 Funds at the address or telephone
number shown on the inside back cover of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
FUND EXPENSE INFORMATION................................. 3
FUND DIRECTORS........................................... 3
BOND FUND................................................ 4
GOVERNMENT FUND.......................................... 5
MINNESOTA TAX FREE FUND.................................. 6
INVESTMENT PERFORMANCE................................... 7
INVESTMENT OBJECTIVE AND POLICIES........................ 7
MANAGEMENT............................................... 16
COMPUTATION OF NET ASSET VALUE AND PRICING............... 17
PURCHASE OF SHARES....................................... 18
RETIREMENT PLANS......................................... 18
AUTOMATIC INVESTMENT PLAN................................ 19
REDEMPTION OF SHARES..................................... 19
EXCHANGE PRIVILEGE....................................... 20
AUTOMATIC EXCHANGE PLAN.................................. 20
AUTHORIZED TELEPHONE TRADING............................. 20
SYSTEMATIC CASH WITHDRAWAL PLAN.......................... 21
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS.................. 21
DESCRIPTION OF COMMON STOCK.............................. 23
COUNSEL AND AUDITORS..................................... 24
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT.. 24
ADDITIONAL INFORMATION................................... 25
</TABLE>
2
<PAGE>
FUND EXPENSE INFORMATION
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES BOND GOVERNMENT MINNESOTA TAX
- -------------------------------------------- FUND FUND FREE FUND
---- ---------- -------------
<S> <C> <C> <C>
Sales Load Imposed on Purchases............. None None None
Sales Load Imposed on Reinvested Dividends.. None None None
Redemption Fees............................. None None None
Exchange Fees............................... None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES BOND GOVERNMENT MINNESOTA TAX
- -------------------------------------------- FUND FUND FREE FUND
(as a percentage of average daily net assets) ---- ---------- -------------
<S> <C> <C> <C>
Management Fee.............................. 1.10% 1.10% .95%
Rule 12b-1 Fee.............................. None None None
Other Expenses.............................. None None None
---- ---- ----
Total Fund Operating Expenses 1.10% 1.10% .95%
==== ==== ====
</TABLE>
EXAMPLE:
Based upon the levels of Total Fund Operating Expenses listed above, you would
pay the following expenses on a $1,000 investment, assuming a five percent
annual return and redemption at the end of each period:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Bond Fund $ 11 $ 35 $ 61 $134
Government Fund $ 11 $ 35 $ 61 $134
Minnesota Tax Free Fund $ 10 $ 30 $ 53 $117
</TABLE>
The purpose of the above table is to assist you in understanding the
various costs and expenses that an investor in the Funds will bear directly or
indirectly. Because of a change in each Fund's fee structure effective April 1,
1996, the information in the table has been restated to reflect each Fund's
current fees. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. For
the period from April 1, 1996 through June 30, 1996, IAI has agreed to waive its
Management Fee in excess of .25% of Minnesota Tax Free Fund's average daily net
assets.
Further information concerning fees paid by the Funds is set forth in
the Statement of Additional Information.
FUND DIRECTORS
Madeline Betsch Richard E. Struthers
W. William Hodgson J. Peter Thompson
George R. Long Charles H. Withers
Noel P. Rahn
3
<PAGE>
BOND FUND
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>
YEARS ENDED MARCH 31,
-------------------------------------------------------------------------------------------
YEAR 1994*** 1994 1993 1992 1991 1990 1989 1988 1987
ENDED -------- ---- ---- ---- ---- ---- ---- ---- ----
11/30/95
---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period $ 8.65 $ 9.32 $ 10.42 $ 10.25 $ 10.02 $ 9.66 $ 9.31 $ 9.63 $ 10.29 $ 10.72
--------------------------------------------------------------------------------------------------------
Operations:
Net investment income .58 .36 .62 .64 .73 .73 .73 .72 .76 .85
Net realized and
unrealized
gains (losses) .72 (.55) (.25) .93 .34 .43 .32 (.32) (.37) (.11)
--------------------------------------------------------------------------------------------------------
Total from operations 1.30 (.19) .37 1.57 1.07 1.16 1.05 .40 .39 .74
---------------------------------------------------------------------------------------------------------
Distributions to
shareholders from:
Net investment income (.61) (.35) (.66) (.64) (.74) (.80) (.67) (.72) (.95) (.89)
Net realized gains -- (.13) (.81) (.76) (.10) -- (.03) -- (.10) (.28)
---------------------------------------------------------------------------------------------------------
Total distributions (.61) (.48) (1.47) (1.40) (.84) (.80) (.70) (.72) (1.05) (1.17)
---------------------------------------------------------------------------------------------------------
NET ASSET VALUE:
End of period $ 9.34 $ 8.65 $ 9.32 $ 10.42 $ 10.25 $ 10.02 $ 9.66 $ 9.31 $ 9.63 $ 10.29
========================================================================================================
Total investment return* 15.46% (2.10%) 3.16% 16.44% 10.80% 12.62% 11.18% 4.29% 4.19% 7.39%
Net assets at end of period
(000's omitted) $ 77,526 $ 80,622 $97,139 $119,371 $107,634 $108,589 $79,982 $50,187 $41,080 $46,089
RATIOS:
Expenses to average
net assets 1.09% 1.10%** 1.09% 1.10% 1.10% .88% .89% .90% .80% .70%
Net investment income to
average net assets 6.32% 6.03%** 5.63% 6.03% 7.43% 7.56% 7.50% 7.70% 7.70% 8.50%
Portfolio turnover rate
(excluding short-term
securities) 424.7% 226.7% 333.1% 160.8% 126.2% 43.0% 78.3% 115.3% 20.2% 35.4%
- ---------------------------
</TABLE>
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at
net asset value.
** Annualized
*** Period from April 1, 1994 to November 30, 1994. Reflects fiscal year-
end change from March 31 to November 30.
4
<PAGE>
GOVERNMENT FUND
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>
YEARS ENDED MARCH 31,
---------------------------------------------------
YEAR
ENDED
11/30/95 1994**** 1994 1993 1992*
--------- -------- ---- ---- -----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period $ 9.62 $ 9.98 $ 10.46 $ 10.22 $ 10.00
------- --------- ------- ------- -------
Operations:
Net investment income .60 .33 .47 .57 .30
Net realized and unrealized
gains (losses) .43 (.34) (.24) .59 .24
------- --------- ------- ------- -------
Total from operations 1.03 (.01) .23 1.16 .54
------- --------- ------- ------- -------
Distributions to shareholders from:
Net investment income (.59) (.32) (.49) (.58) (.30)
Net realized gains -- (.03) (.22) (.34) (.02)
------- --------- ------- ------- -------
Total distributions (.59) (.35) (.71) (.92) (.32)
------- --------- ------- ------- -------
NET ASSET VALUE:
End of period $ 10.06 $ 9.62 $ 9.98 $ 10.46 $ 10.22
=========================================================================
Total investment return *** 10.99% (0.09%) 2.02% 11.70% 5.51%
Net assets at end of period
(000's omitted) $48,121 $ 38,438 $41,027 $43,704 $ 30,707
RATIOS:
Expenses to average net
assets 1.10% 1.10%** 1.10% 1.10% 1.10%**
Net investment income to
average net assets 5.97% 5.12%** 4.40% 5.40% 5.16%**
Portfolio turnover rate
(excluding short-term
securities) 284.1% 121.5% 641.0% 236.3% 169.6%
- -------------------------------------
</TABLE>
* Period from August 8, 1991 (commencement of operations) to March 31,
1992
** Annualized
*** Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at
net asset value.
**** Period from April 1, 1994 to November 30, 1994. Reflects fiscal year-
end change from March 31 to November 30.
5
<PAGE>
MINNESOTA TAX FREE FUND*
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG 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>
PERIOD
YEAR YEAR FROM
ENDED PERIOD FROM ENDED 4/6/92***
11/30/95 4/1/94+ TO 11/30/94 3/31/94 TO 3/31/93
--------- ------------------- -------- ----------
<S> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period $ 9.53 $10.27 $10.67 $10.00
------ ------ ------ ------
Operations:
Net investment income .52 .39 .58 .41
Net realized and unrealized gains
(losses) .71 (.69) (.35) .67
------ ------ ------ ------
Total from operations 1.23 (.30) .23 1.08
------ ------ ------ ------
Distribution to shareholders from:
Net investment income (.52) (.39) (.56) (.41)
Net realized gains -- (.05) (.07) --
------ ------ ------ ------
Total distributions (.52) (.44) (.63) (.41)
------ ------ ------ ------
NET ASSET VALUE:
End of period $10.24 $ 9.53 $10.27 $10.67
====== ====== ====== ======
Total investment return* 13.17% (3.10%) 1.89% 11.00%
Net assets at end of period (000's
omitted) $6,630 $6,942 $7,738 $5,045
RATIOS:
Expenses to average net assets***** .25% .25%** .25% .95%**
Net investment income to average
net assets***** 5.15% 5.76%** 5.28% 4.36%**
Portfolio turnover rate
(excluding short-term securities) 94.0% 57.8% 16.0% 4.8%
</TABLE>
- --------------------
* IAI Tax Free Fund was converted to IAI Minnesota Tax Free Fund on
December 15, 1994. The information presented here may not provide a
basis for evaluating the past investment results of the Fund.
** Annualized
*** Commencement of operations
**** Total investment return is based on the change in net asset value of a
share and assumes reinvestment of distributions at net asset value.
***** The Fund's adviser voluntarily waived $49,686, $35,252 and $53,108 in
expenses for the year ended November 30, 1995, the period ended
November 30, 1994 and the year ended March 31, 1994, respectively. If
the Fund had been charged for these expenses, the ratio of expenses to
average net assets would have been .95% for each of the periods stated
above and the ratio of net investment income to average net assets
would have been 4.45%, 5.06% and 4.58%, respectively.
+ Reflects fiscal year-end change from March 31 to November 30.
6
<PAGE>
INVESTMENT PERFORMANCE
From time to time the Funds 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. On
December 15, 1994, IAI Tax Free Fund was converted to IAI Minnesota Tax Free
Fund, so performance figures prior to that time may not provide a basis for
evaluating the past investment results of such Fund. The investment return on
and principal value of an investment in a Fund 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 Fund over a
given period, assuming reinvestment of any dividends and capital gains. A
cumulative total return reflects actual performance over a stated period of
time. An average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period.
Yield refers to the income generated by an investment in a Fund over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all bond funds. Because
this differs from other accounting methods, the quoted yield may not equal the
income actually paid to shareholders. The tax equivalent yield is computed by
dividing the portion of the yield that is tax-exempt by one minus a stated
income tax rate and adding the product to that portion, if any, of the yield
that is not tax-exempt.
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 Funds
is contained in the Funds' Annual Report to shareholders which may be obtained
without charge from the Funds.
Comparative performance information may be used from time to time in
advertising or marketing a Fund'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 the
Funds. The comparison of a Fund to an alternative investment should be made
with consideration of differences in features and expected performance. A Fund
may also note its mention in newspapers, magazines, or other media from time to
time. The Funds assume no responsibility for the accuracy of such data. For
additional information on the types of indexes, averages and periodicals that
might be utilized by the Funds in advertising and sales literature, see the
section "Investment Performance" in the Statement of Additional Information.
INVESTMENT OBJECTIVE AND POLICIES
BOND FUND
Bond Fund's investment objective is to provide a high level of current
income consistent with preservation of capital. Such objective may not be
changed without shareholder approval. There can be no assurance that Bond
Fund's investment objective will be attained.
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"). Although Bond Fund may also invest in
below investment grade securities, it currently intends to limit such
investments to 5% of its total assets and not to invest in securities rated
lower than Ba by Moody's or BB by S&P.
7
<PAGE>
Securities rated in the medium to lower rating 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 "Investment Objectives and Policies" in the Statement of
Additional Information for additional information regarding ratings of debt
securities. In purchasing such securities, Bond Fund will rely on IAI's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer of such securities. IAI will take into consideration, among other
things, the issuer's financial resources, its sensitivity to economic conditions
and trends, its operating history , the quality of the issuer's management and
regulatory matters.
Other debt securities in which 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 Bond Fund's total assets
will be invested in corporate debt obligations and government securities with
maturities at the time of acquisition of one year or more.
Although Bond Fund generally will not make direct purchases of common
stock, Bond Fund may purchase preferred stock and debt securities that are
convertible into or exchangeable for or which carry warrants to purchase common
stock or other equity interests. Bond Fund will limit its investments in such
securities to a maximum of 10% of its net assets.
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 IAI to be of comparable quality to the other obligations in which
Bond Fund may invest. 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.
Bond Fund may employ certain other investment techniques, as described
in the section "Other Fund Investment Techniques." Please see the Prospectus
section "Fund Risk Factors" and the Statement of Additional Information section
"Investment Objectives and Policies" for a discussion of the risks associated
with investing in Bond Fund.
GOVERNMENT FUND
The investment objectives of Government Fund are to provide
shareholders with a high level of current income and with preservation of
capital. In seeking to achieve its objectives, 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. IAI anticipates that
each of Government Fund's objectives will be given approximately equal
consideration in the selection of Fund investments. Government Fund's investment
objectives may not be changed without shareholder approval. There can be no
assurance that Government Fund's investment objectives will be attained.
Under normal market conditions, Government Fund will invest at least
65% of its 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), including:
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1. United States Treasury obligations, such as Treasury Bills
(which have original maturities of one year or less), Treasury
Notes (which have original maturities of one to ten years) and
Treasury Bonds (which have original maturities generally greater
than ten years);
2. Obligations of United States Government agencies and
instrumentalities which are secured by the full faith and credit
of the United States Treasury, such as Government National
Mortgage Association ("Ginnie Mae") modified pass-through
certificates;
3. Obligations which are secured by the right of the issuer to
borrow from the United States Treasury, such as securities issued
by the Federal Financing Bank or the United States Postal
Service; and
4. Obligations which are supported by the credit of the
government agency or instrumentality itself (but are not backed
by the full faith and credit of the United States Government)
such as securities of the Federal Home Loan Mortgage Corporation
("Freddie Mac") or the Federal National Mortgage Association
("Fannie Mae"), including pass-through securities and
participation certificates thereof.
Guarantees as to the timely payment of principal and interest do not
extend to the value or yield of such securities nor do they extend to the value
of Government Fund's shares. In the case of securities invested in by
Government Fund which are not backed by the "full faith and credit" of the
United States Government, the investor must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment and may not be
able to assert a claim against the United States Government itself in the event
the agency or instrumentality does not meet its commitment. Except as
specifically set forth below, there are no percentage limitations with regard to
the purchase of any of Government Fund's investments.
The dollar-weighted average maturity of Government Fund's portfolio
will generally not exceed, and may be substantially less than, seven years. As
discussed below, mortgage-related securities generally have an average life less
than their maturity. Because of variations in prepayment rights, it is not
possible to accurately predict the life of a particular mortgage-related
investment. For purposes of determining the dollar-weighted average maturity of
Government Fund's portfolio, IAI will consider the statistical average remaining
life of mortgage-related securities.
The mortgage-related securities in which Government Fund may invest
include pass-through securities. Mortgage pass-through securities are issued by
government agencies such as Ginnie Mae, Freddie Mac and Fannie Mae. Such
securities are formed when mortgages are pooled together and undivided interests
in the pool are sold to investors (such as Government Fund) by various
governmental and government-related organizations. The cash flow from the
underlying mortgages is "passed through" to the holders of the securities in the
form of monthly payments of interest, principal and prepayments. Timely payment
of the principal and interest on such securities is guaranteed either by the
full faith and credit of the United States Government (as in the case of Ginnie
Mae securities) or by the agency itself (as in the case of Freddie Mac and
Fannie Mae securities). In addition, 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"). CMOs of
private issuers, even though collateralized by Government securities, are not
guaranteed by the U.S. Government or any agency or instrumentality of the U.S.
Government. Government Fund will invest in privately issued CMOs only if rated
at the time of investment Aaa by Moody's Investors Service, Inc. ("Moody's"), or
AAA by Standard & Poor's Corporation ("S&P"). CMOs are more fully described in
the Statement of Additional Information under "Investment Objectives and
Policies--Mortgage-Backed Securities."
The average life of such mortgage pools varies with the maturities of
the underlying mortgage instruments. In addition, a pool's term may be
shortened by unscheduled or early payments of principal and interest on the
underlying mortgages. The occurrence of mortgage prepayment is affected by
factors including
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the level of interest rates, general economic conditions, the location and age
of the mortgage and other social and demographic conditions. Accordingly, the
life of an individual mortgage-related security is likely to be substantially
shorter than the stated maturity of the mortgages in the underlying pool. Yields
on mortgage-related securities are typically quoted based on the maturity of the
underlying instruments and the associated average life assumption. Actual
prepayment experience may cause the yield to differ from the assumed average
life yield. See the Statement of Additional Information for more information
about the characteristics of these instruments.
Instrumentalities of the United States Government which issue or
guarantee securities in which Government Fund may invest include, but are not
limited to, the Federal Farm Credit System, the Student Loan Marketing
Association, Federal Home Loan Banks, Federal Land Banks, Freddie Mac and Fannie
Mae. Since the United States Treasury is not obligated by law to provide
support to all United States Government instrumentalities and agencies,
Government Fund will invest in securities issued by such instrumentalities and
agencies only when IAI determines that the credit risk with respect to the
instrumentality or agency does not make its securities unsuitable investments
for Government Fund.
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 IAI to be of comparable quality. For a description of Moody's and
S&P ratings, see Appendix A to the Statement of Additional Information.
Government Fund may employ certain other investment techniques, as
described in the section "Other Fund Investment Techniques." Please see the
Prospectus section "Fund Risk Factors" and the Statement of Additional
Information section "Investment Objectives and Policies" for a discussion of the
risks associated with investing in Government Fund.
MINNESOTA TAX FREE FUND
The investment objective of Minnesota Tax Free Fund is to provide
shareholders with as high a level of current income exempt from federal income
tax as is consistent with preservation of capital. Minnesota Tax Free Fund will
seek to achieve its objective by investing primarily in investment grade
municipal bonds issued by the State of Minnesota and its political or
governmental subdivisions, municipalities, governmental agencies or
instrumentalities (collectively, "Minnesota Obligations"). Minnesota Tax Free
Fund's investment objective may not be changed without shareholder approval.
There can be no assurance that Minnesota Tax Free Fund's objective will be met.
Under normal market conditions, Minnesota Tax Free Fund expects to
invest at least 80% of its total assets in Minnesota Obligations that produce
income that is exempt from Minnesota and federal personal income tax. If an
unusual disparity between after-tax income on taxable and municipal securities
makes it advisable, up to 20% of Minnesota Tax Free Fund's assets may be held in
cash or invested in tax-exempt securities subject to the alternative minimum tax
or short-term taxable investments including U.S. Government obligations and
money market instruments. Minnesota Tax Free Fund may temporarily invest up to
50% of its assets in cash, high-quality tax exempt securities subject to the
alternative minimum tax or high-quality taxable securities during periods which,
in IAI's opinion, require a defensive position. To the extent that Minnesota
Tax Free Fund invests in taxable securities, a portion of the Fund's income may
be subject to federal, and state income taxes.
Minnesota Tax Free Fund will invest primarily in municipal securities
the interest on which is exempt from Minnesota and federal personal income tax.
The two principal classifications of municipal securities are general obligation
and revenue bonds. General obligation bonds are secured by the governmental
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. They are usually paid from the general revenues of the
issuing governmental entity. Revenue bonds, on the other hand, are usually
payable
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only out of a specific revenue source rather than from general revenues. Revenue
bonds ordinarily are not backed by the faith, credit or general taxing power of
the issuing governmental entity.
The principal and interest on revenue bonds for private facilities are
typically paid out of rents or other specified payments made to the issuing
governmental entity by a private company which uses or operates the facilities.
Examples of these types of obligations are industrial revenue bonds and
pollution control revenue bonds. Industrial revenue bonds are issued by
governmental entities to provide financing aid to community facilities such as
hospitals, hotels, business or residential complexes, convention halls and
sports complexes. Pollution control revenue bonds are issued to finance air,
water and solid waste pollution control systems for privately operated
industrial or commercial facilities.
There are, in addition, a variety of hybrid and special types of
municipal securities, including variable rate securities and municipal notes.
Variable rate securities bear rates of interest that are adjusted periodically
according to formulae intended to minimize fluctuation in values of the
instruments. Municipal notes include tax, revenue and bond anticipation notes
of short maturity, generally less than three years, which are issued to obtain
temporary funds for various public purposes. Some municipal securities may not
be backed by the faith, credit, and taxing power of the issuer. Other municipal
securities in which Minnesota Tax Free Fund may invest include municipal lease
obligations, resource recovery bonds, zero coupon and asset-backed securities,
tax, revenue or bond anticipation notes and tax exempt commercial paper. For
additional information regarding certain of such municipal securities, see
"Investment Objectives and Policies" in the Statement of Additional Information.
Minnesota Tax Free Fund will invest at least 70% of its net assets in
municipal securities that are of investment grade or of equivalent quality as
determined by IAI. Investment grade securities are those rated within the four
highest grades assigned by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P"). Minnesota Tax Free Fund also may invest
in short-term municipal obligations which are rated in the two highest rating
categories by Moody's or S&P. Up to 30% of Minnesota Tax Free Fund's net assets
may be invested in securities rated below investment grade. Minnesota Tax Free
Fund does not, however, currently intend to invest in securities rated lower
than B by Moody's or S&P.
Securities rated in the medium to lower rating 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 "Investment Objectives and Policies" in the Statement of
Additional Information for additional information regarding ratings of debt
securities. In purchasing such securities, Minnesota Tax Free Fund will rely on
IAI's judgment, analysis and experience in evaluating the creditworthiness of an
issuer of such securities. IAI will take into consideration, among other
things, the issuer's financial resources, its sensitivity to economic conditions
and trends, its operating history, the quality of the issuer's management and
regulatory matters.
Minnesota Tax Free Fund may also invest in state or municipal leases
and participation interests therein. Municipal leases are obligations issued by
state and local governments or authorities to finance the acquisition of
equipment and facilities such as fire, sanitation or police vehicles or
telecommunications equipment, buildings or other capital assets.
Although Minnesota Tax Free Fund may invest in securities of any
maturity, the dollar-weighted average maturity of Minnesota Tax Free Fund's
investment portfolio is expected to be approximately 20 years.
Minnesota Tax Free Fund may employ certain other investment
techniques, as described in the section "Other Fund Investment Techniques."
Please see the Prospectus sections "Fund Risk Factors" and "Special Risk Factors
Associated with Minnesota Tax Free Fund" as well as the Statement of Additional
Information section "Investment Objectives and Policies" for a discussion of the
risks associated with investing in Minnesota Tax Free Fund.
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OTHER FUND INVESTMENT TECHNIQUES
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements relating to the
securities in which it may invest. In a repurchase agreement, a Fund buys a
security at one price and simultaneously agrees to sell it back at a higher
price. Delays or losses could result if the other party to the agreement
defaults or becomes bankrupt.
WHEN-ISSUED/DELAYED DELIVERY TRANSACTIONS
Each Fund may purchase securities on a "when-issued" or delayed
delivery basis and purchase or sell securities on a "forward commitment" basis.
When such transactions are negotiated, the price is fixed at the time the
commitment is made, but delivery and payment for the securities take place at a
later date. Normally, the settlement date occurs within two months after the
transaction, but delayed settlements beyond two months may be negotiated. At the
time a Fund enters into a transaction on a when-issued or forward commitment
basis, a segregated account consisting of cash, government securities or liquid
high-grade debt securities equal to the value of the when-issued or forward
commitment securities will be established and maintained with the custodian and
will be marked to the market daily. During the period between a commitment and
settlement, no payment is made for the securities and, thus, no interest accrues
to the purchaser from the transaction. If a Fund disposes of the right to
acquire a when-issued security prior to its acquisition or disposes of its right
to deliver or receive against a forward commitment, it can incur a gain or loss
due to market fluctuation. The use of when-issued transactions and forward
commitments enables a Fund to hedge against anticipated changes in interest
rates and prices. A Fund may also enter into such transactions to generate
incremental income. In some instances, the third-party seller of when-issued or
forward commitment securities may determine prior to the settlement date that it
will be unable or unwilling to meet its existing transaction commitments without
borrowing securities. If advantageous from a yield perspective, a Fund may, in
that event, agree to resell its purchase commitment to the third-party seller at
the current market price on the date of sale and concurrently enter into another
purchase commitment for such securities at a later date. As an inducement for a
Fund to "roll over" its purchase commitment, a Fund may receive a negotiated
fee. As to each Fund, no more than 20% of its net assets may be invested in
when-issued, delayed delivery or forward commitment transactions, and of such
20%, no more than one-half (i.e., 10% of its net assets) may be invested in
when-issued, delayed delivery or forward commitment transactions without the
intention of actually acquiring securities (i.e., dollar rolls or "roll"
transactions). For additional information on roll transactions, see
"Investment Objectives and Policies -- Dollar Rolls" in the Statement of
Additional Information.
ZERO COUPON OBLIGATIONS
Each Fund may also invest in zero coupon obligations of the U.S.
Government or its 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.
LENDING
In order to generate additional income, each Fund may lend portfolio
securities up to one-third of the value of its total assets to broker-dealers,
banks or other financial borrowers of securities. This practice could cause a
Fund to experience a loss or a delay in recovering of its securities.
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ADJUSTING INVESTMENT EXPOSURE
Each Fund can use various techniques to increase or decrease its
exposure to changing security prices, interest rates, currency exchange rates,
commodity prices, or other factors that affect security values. These techniques
include buying and selling options and futures contracts, entering into currency
exchange contracts or swap agreements, purchasing indexed securities, and
selling securities short.
BORROWING
Each Fund may borrow from banks for temporary or emergency purposes or
through reverse repurchase agreements. 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.
PORTFOLIO TURNOVER
Each Fund will dispose of securities without regard to the time they
have been held when such action appears advisable to management either as a
result of securities having reached a price objective, or by reason of
developments not foreseen at the time of the investment decision. Since
investment changes usually will be made without reference to the length of time
a security has been held, a significant number of short-term transactions may
result. Accordingly, a Fund's annual portfolio turnover rate cannot be
anticipated and may be relatively high. A higher turnover rate generally results
in higher brokerage and other costs for a Fund, and may increase taxable capital
gains. Each Funds historical portfolio turnover rates are set forth in the
section "Financial Highlights.
Further information regarding these and other techniques is contained
in the Statement of Additional Information.
FUND RISK FACTORS
INTEREST RATE RISK
As a mutual fund investing in fixed-income securities, each Fund is
subject to interest rate and credit 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 a
Fund, IAI 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, IAI will use more sophisticated analytical
techniques, such as modeling principal and interest payments based upon
historical experience or expected volatility, to arrive at an effective duration
that incorporates the additional variables into the determination of interest
rate risk. These techniques may involve estimates of future economic parameters
which may vary from actual future outcomes. These principals of interest rate
risk also apply to U.S. Treasury and U.S. Government agency securities. As with
other bond investments, U.S. Government securities will rise and fall in value
as interest rates change. A security backed by the U.S. Treasury or the full
faith and credit of the United States is guaranteed only as to the timely
payment of interest and principal when held to maturity. The current market
prices for such securities are not guaranteed and will fluctuate.
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CREDIT RISK
Each Fund is 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 the 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
Each Fund is 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.
FOREIGN INVESTMENT RISK FACTORS
Investments in foreign securities involve risks that are different in
some respects from investments in securities of U.S. issuers, such as the risk
of fluctuations in the value of the currencies in which they are denominated,
the risk of adverse political and economic developments and, with respect to
certain countries, the possibility of expropriation, nationalization or
confiscatory taxation or limitations on the removal of funds or other assets of
a Fund. Securities of some foreign companies are less liquid and more volatile
than securities of comparable domestic companies. There also may be less
publicly available information about foreign issuers than domestic issuers, and
foreign issuers generally are not subject to the uniform accounting, auditing
and financial reporting standards, practices and requirements applicable to
domestic issuers. Because a Fund can invest in securities denominated or quoted
in currencies other than the U.S. dollar, changes in foreign currency exchange
rates may affect the value of securities in the portfolio. Foreign currency
exchange rates are determined by forces of supply and demand in the foreign
exchange markets and other economic and financial conditions affecting the world
economy. A decline in the value of any particular currency against the U.S.
dollar will cause a decline in the U.S. dollar value of a Fund's holdings of
securities denominated in such currency and, therefore, will cause an overall
decline in a Fund's net asset value and net investment income and capital gains,
if any, to be distributed in U.S. dollars to shareholders by a Fund. Delays may
be encountered in settling securities transactions in certain foreign markets,
and a Fund will incur costs in converting foreign currencies into U.S. dollars.
Custody charges are generally higher for foreign securities.
RISKS OF TRANSACTIONS IN DERIVATIVES
Each Fund will spread investment risk by limiting its holdings in any
one company or industry. IAI may use futures, options, swap and currency
exchange agreements as well as short sales to adjust the risk and return
characteristics of a Fund's portfolio of investments. If IAI judges market
conditions incorrectly or employs a strategy that does not correlate well with a
Fund's investments, use of these techniques could result in a loss, regardless
of whether the intent was to reduce risk or increase return. Use of these
techniques may increase the volatility of a Fund and may involve a small
investment of cash relative to the magnitude of risk assumed. In addition, these
techniques could result in a loss if the counterparty to the transaction is
unable to perform as promised. Moreover, a liquid secondary market for any
futures or options contract may not be available when a futures or options
position is sought to be closed. Please refer to the Statement of Additional
Information which further describes these risks.
MANAGER RISK
IAI manages each Fund 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
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investment judgment. Manager risk refers to the possibility that IAI may fail to
execute each Fund's investment strategy effectively. As a result, each Fund may
fail to achieve its stated objective.
PREPAYMENT RISKS
Government Fund is subject to prepayment risk. Prepayment risk is the
possibility that, as interest rates fall, homeowners are more likely to
refinance their home mortgages. When home mortgages are refinanced, the
principal on GNMA certificates held by the Fund is "prepaid" earlier than
expected. Government Fund must then reinvest the unanticipated principal in new
GNMA certificates, just at a time when interest rates on new mortgage
investments are falling.
Prepayment risk has two important effects on Government Fund:
. When interest rates fall and additional mortgage prepayments must
be reinvested at lower interest rates, the income of Government
Fund will be reduced.
. When interest rates fall, prices on GNMA securities will not rise
as much as comparable Treasury bonds, as bond market investors
anticipate an increase in mortgage prepayments and a likely decline
in income.
RISKS OF LOWER-RATED DEBT SECURITIES
Bond and Minnesota Tax-Free 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, such 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.
SPECIAL RISK FACTORS ASSOCIATED WITH MINNESOTA TAX FREE FUND
To the extent Minnesota Tax Free Fund's investments are primarily
concentrated in issuers located in Minnesota, the value of Minnesota Tax Free
Fund's shares may be especially affected by factors pertaining to Minnesota's
economy and other factors specifically affecting the ability of Minnesota
issuers to meet their obligations. As a result, the value of Minnesota Tax Free
Fund's assets may fluctuate more widely than the value of shares of a portfolio
investing in securities relating to a number of different states. The ability of
state, county or local governments and quasi-government agencies to meet their
obligations will depend primarily on the availability of tax and other revenues
to those governments and on their fiscal conditions generally. The amounts of
tax and other revenues available to governmental issuers may be affected from
time to time by
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economic, political and demographic conditions within Minnesota. The
availability of federal, state and local aid to governmental issuers may also
affect their ability to meet obligations. Further information relating to
investments in Minnesota tax-exempt obligations is contained in the Statement of
Additional Information.
As mentioned above, revenue bonds for private facilities usually do
not represent a pledge of the credit, general revenues or taxing powers of the
issuing governmental entity. Instead, the private company operating the facility
is the sole source of payment of the obligation. Sometimes, the funds for
payment of revenue bonds come solely from revenue generated by operation of the
facility. Revenue bonds which are not backed by the credit of the issuing
governmental entity frequently provide a higher rate of return than other
municipal obligations, but they entail greater risk than obligations that are
guaranteed by a governmental unit with taxing power. Federal income tax laws
place substantial limitations on industrial revenue bonds, and particularly
certain private activity bonds issued after August 7, 1986. In the future,
legislation could be enacted which could further restrict or eliminate the
income tax exemption for interest on debt obligations in which Minnesota Tax
Free Fund may invest.
As described above, the revenue bonds in which Minnesota Tax Free Fund
invests may entail greater credit risk than the general obligation bonds in
which it invests. This is because revenue bonds generally are not backed by the
faith, credit or general taxing power of the issuing governmental entity.
Investors should also note that even general obligation bonds are not free from
the risk of default. The ratings and certain other requirements which apply to
Minnesota Tax Free Fund's permitted investments, as described elsewhere in this
prospectus, are intended to limit the amount of credit risk undertaken by
Minnesota Tax Free Fund. Nevertheless, shareholders in Minnesota Tax Free Fund
bear the risk that payment defaults could cause the value of Minnesota Tax Free
Fund's investment portfolio to decline.
From time to time Minnesota Tax Free Fund may invest more than 25% of
its assets in municipal securities which are related in such a way that an
economic, business, or political development or change affecting one such
security could also affect the other securities; for example, securities the
interest upon which is paid from revenues of similar types of projects. As a
result, Minnesota Tax Free Fund may be subject to greater risk as compared to a
fund that does not follow this practice.
The 1995 Minnesota Legislature enacted a statement of legislative
intent specifying certain circumstances under which interest on the Minnesota
municipal obligations held by Minnesota Tax Free Fund might become taxable for
Minnesota state income tax purposes. See "Dividends, Distributions and Tax
Status -Minnesota Income Taxation: Minnesota Tax Free Fund" below.
INVESTMENT RESTRICTIONS
Each Fund 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 Fund. Each Fund is a diversified investment company and has a fundamental
policy that, with respect to 75% of its total assets, it may not invest more
than 5% of its total assets in any one issuer. Each Fund, also as fundamental
policies, may not invest 25% or more of its assets in any one industry and 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 Fund's investment
restrictions.
MANAGEMENT
Bond Fund was created on August 18, 1977, as a separate portfolio
represented by a separate class of common stock of IAI Investment Funds I, Inc.,
a Minnesota corporation. Government and Minnesota Tax Free Funds were created on
April 6, 1992 and August 8, 1991, respectively, as separate portfolios
represented by separate classes of common stock of IAI Investment Funds VI,
Inc., also a Minnesota corporation. Under Minnesota law, each Fund's Board of
Directors is generally responsible for the overall management and operation of
each Fund. IAI serves as the investment adviser of each Fund. IAI also furnishes
investment
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advice to other concerns including other investment companies, pension and
profit sharing plans, foundations, religious, educational and charitable
institutions, trusts, municipalities and individuals, having total assets in
excess of $14 billion. IAI'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 address of IAI is
that of the Funds.
Pursuant to a written agreement with each Fund (the "Management
Agreement"), IAI provides each Fund with investment advisory services and is
responsible for the overall management of each Fund's business affairs subject
to the authority of the Board of Directors. The Management Agreement also
provides that, except for brokerage commissions and other expenditures in
connection with the purchase and sale of portfolio securities, interest and, in
certain circumstances, taxes and extraordinary expenses, IAI shall pay all of a
Fund's operating expenses. As compensation under the Management Agreement, each
of Bond Fund and Government Fund will pay IAI 1.10% of its average daily net
assets and Minnesota Tax Free Fund will pay .95% of its average daily net
assets. Because IAI is paying Fund operating expenses, these fees represent each
Fund's total expenses. Until June 30, 1996, IAI has voluntarily agreed to waive
the fee due under the Management Agreement in excess of .25% of Minnesota Tax
Free Fund's average daily net assets. With respect to certain of the services
for which it is responsible under the Management Agreement, IAI may also pay
qualifying broker-dealers, financial institutions and other entities for
providing such services to Fund shareholders. IAI shall not be liable for any
loss suffered by a Fund in the absence of willful misfeasance, bad faith or
negligence in the performance of its duties and obligations.
Each Fund is managed by a team of IAI investment professionals which
is responsible for making the day-to-day investment decisions for such Fund. The
teams managing the Funds are as follows.
Larry Hill, Scott Bettin and Livingston Douglas have responsibility
for the management of Bond Fund. Mr. Hill is IAI's Chief Fixed Income Officer
and a member of its Board of Directors. Mr. Hill has managed Bond Fund since
joining IAI in 1984. Mr. Bettin is a Senior Vice President of IAI and has
managed Bond Fund since joining IAI as a fixed income portfolio manager in 1987.
Mr. Douglas is a Vice President of IAI and has managed Bond Fund since joining
IAI as a fixed income portfolio manager in 1993. Prior to joining IAI, Mr.
Douglas served as a fixed income portfolio manager for Mackey-Shields Financial
Corporation.
Scott Bettin and Stephen Coleman have responsibility for the
management of Government Fund. Mr. Bettin has managed Government Fund since its
inception. Mr. Coleman is a Senior Vice President of IAI and has served as a
fixed income portfolio manager since joining IAI in 1991. Mr. Coleman commenced
managing Government Fund in January 1995.
Stephen Coleman and Livingston Douglas have responsibility for the
management of Minnesota Tax Free Fund. Mr. Coleman has managed Minnesota Tax
Free Fund since inception. Mr. Douglas commenced managing Minnesota Tax Free
Fund in January 1995.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc., IAI may consider sales of shares of a Funds as a
factor in the selection of broker-dealers to execute a Funds' securities
transactions.
COMPUTATION OF NET ASSET VALUE AND PRICING
Each Fund is open for business each day the New York Stock Exchange
("NYSE") is open. IAI normally calculates a Fund's net asset value ("NAV") as of
the close of business of the NYSE, normally 3 p.m. Central time.
A Fund's NAV is the value of a single share. The NAV is computed by
adding up the value of a Fund's investments, cash, and other assets, subtracting
its liabilities, and then dividing the result by the number of shares
outstanding.
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A Fund's investments with remaining maturities of 60 days or less may
be valued on the basis of amortized cost. This method minimizes the effect of
changes in a security's market value. Other portfolio securities and assets are
valued primarily on the basis of market quotations or, if quotations are not
readily available, by a method that the Board of Directors believes accurately
reflects fair value. Foreign securities are valued on the basis of quotations
from the primary market in which they are traded, and are translated from the
local currency into U.S. dollars using current exchange rates.
The offering price (price to buy one share) and redemption price
(price to sell one share) are referred to as a Fund's NAV.
PURCHASE OF SHARES
Each Fund offers its shares continually to the public at the net asset
value of such shares. Shares may be purchased directly from a Fund or through
certain security dealers who have responsibility to promptly transmit orders and
may charge a processing fee, provided that the Fund whose shares are being
purchased is duly registered in the state of the purchaser's residence, if
required, and the purchaser otherwise satisfies the Fund's purchase
requirements. No sales load or commission is charged investors in connection
with the purchase of Fund shares.
The minimum initial investment to establish an account with the IAI
Family of Funds is $5,000. Such initial investment may be allocated among a Fund
and other funds in the IAI Family of Funds as desired, provided that no less
than $1,000 is allocated to any one fund. The minimum initial investment for IRA
accounts is $2,000, provided that the minimum amount that may be allocated to
any one fund is $1,000. Once the account minimum has been met, subsequent
purchases can be made in a Fund for $100 or more. Such minimums may be waived
for participants in the IAI Investment Club.
Investors may satisfy the minimum investment requirement by
participating in the STAR Program. Participation in the STAR Program requires an
initial investment of $1,000 per Fund and a commitment to invest an aggregate of
$5,000 within 24 months. If a STAR Program participant does not invest an
aggregate of $5,000 in the IAI Family of Funds within 24 months, IAI may, at its
option, redeem such shareholder's interest. Investors wishing to participate in
the STAR Program should contact a Fund to obtain a STAR Program application.
To purchase shares, forward the completed application and a check
payable to "IAI Funds" to a Fund. Upon receipt, your account will be credited
with the number of full and fractional shares which can be purchased at the net
asset value next determined after receipt of the purchase order by a Fund.
Purchases of shares are subject to acceptance or rejection by a Fund
on the same day the purchase order is received and are not binding until so
accepted. It is the policy of the Funds and the Underwriter to keep confidential
information contained in the application and regarding the account of an
investor or potential investor in the Funds.
All correspondence relating to the purchase of shares should be
directed to the office of the Funds, P.O. Box 357, Minneapolis, Minnesota 55440
or, if using overnight delivery, to 3700 First Bank Place, 601 Second Ave.
South, Minneapolis, Minnesota 55402. For assistance in completing the
application please contact IAI Mutual Fund Shareholder Services at 1-800-945-
3863.
RETIREMENT PLANS
Shares of Bond and Government Funds may be an appropriate investment
medium for various Retirement Plans. Persons desiring information about
establishing an Individual Retirement Account (IRA) (for
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employed persons and their spouses) or other Retirement Plans should contact the
Fund at 1-800-945-3863. 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.
AUTOMATIC INVESTMENT PLAN
Investors may arrange to make regular investments of $100 or more per
fund on a monthly basis, effective as of the 4th and/or 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 Plan at any time upon written notice to a Fund. Any
changes or instructions to terminate existing Automatic Investment Plans must be
received by the last business day of the preceding month in which the change or
termination is to take place. Investors interested in participating in the
Automatic Investment Plan should complete the Automatic Investment Plan
application and return it to a Fund.
REDEMPTION OF SHARES
Registered holders of Fund shares may at any time require a Fund to
redeem their shares upon their written request accompanied by surrender of the
stock certificates in proper form for transfer or, if the certificates are held
by such Fund, through written instructions requesting that such Fund redeem such
shares. Shareholders may redeem shares by phone (subject to a limit of $50,000)
provided such shareholders have authorized such Fund to accept telephone
instructions.
Certificates presented for redemption must be endorsed on the back
with the signature of the person whose name appears on the certificate. If no
certificate has been issued, redemption instructions must be signed by the
person(s) in whose name the shares are registered. If the redemption proceeds
are to be paid or mailed to any person other than the shareholder of record or
if redemption proceeds are in excess of $50,000, a Fund will require that the
signature on the written instructions be guaranteed by a participant in a
signature guarantee program, which may include certain national banks or trust
companies or certain member firms of national securities exchanges.
(Notarization by a Notary Public is NOT ACCEPTED.) If the shares are held of
record in the name of a corporation, partnership, trust or fiduciary, a Fund may
require additional evidence of authority prior to accepting a request for
redemption. A Fund will not send redemption proceeds until checks (including
certified checks or cashiers checks) received in payment for shares have
cleared.
The redemption proceeds received by the investor are based on the net
asset value next determined after redemption instructions in good order are
received by a Fund. Since the value of shares redeemed is based upon the value
of a Fund investment at the time of redemption, it may be more or less than the
price originally paid for the shares.
Payment for shares redeemed will ordinarily be made within seven days
after a request for redemption has been made. Normally a Fund will mail payment
for shares redeemed on the business day following receipt of the redemption
request.
Following a redemption or transfer request, if the value of a
shareholder's interest in a Fund falls below $500, such Fund 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 Fund
to fall below $500; (b) the mailing by such Fund 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 Fund to increase the value of such
investor's account to at least $500.
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EXCHANGE PRIVILEGE
The Exchange Privilege enables shareholders to purchase, in exchange for
shares of a Fund, shares of certain other funds managed by IAI. These funds
have different investment objectives from the Funds. Shareholders may exchange
shares of a Fund for shares of another fund managed by IAI, provided that the
fund whose shares will be acquired is duly registered in the state of the
shareholder's residence, if required, and the shareholder otherwise satisfies
the fund's purchase requirements. Although the Funds do not currently charge a
fee for use of the Exchange Privilege, they reserve the right to do so in the
future.
Because excessive trading can hurt Fund performance and shareholders, there
is a limit of four exchanges out of each Fund 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 Fund 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, and
for Automatic Exchange Plan participants. Each Fund also reserves the right to
refuse or limit exchange purchases by any investor if, in IAI's judgment, such
Fund would be unable to invest the money effectively in accordance with its
investment objectives and policies, or would otherwise potentially be adversely
affected.
Fund shareholders wishing to exercise the Exchange Privilege should notify
a Fund in writing or, provided such shareholders have authorized a Fund 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. Each
Fund reserves the right to terminate or modify the Exchange Privilege in the
future.
AUTOMATIC EXCHANGE PLAN
Investors may arrange to make regular exchanges of $100 or more between any
of the funds in the IAI Mutual Fund Family on a monthly basis. Exchanges will
take place at the closing price of the fifth day of each month (or the next
business day). Shareholders are responsible for making sure sufficient shares
exist in the Fund account from which the exchange takes place. If there are not
sufficient funds in a Fund account to meet the requested exchange amount, the
Automatic Exchange Plan will be suspended. Shareholders may not close Fund
accounts through the Automatic Exchange Plan. Investors interested in
participating in the Automatic Exchange Plan should complete the Automatic
Exchange Plan portion of their application. For assistance in completing the
application contact IAI Mutual Fund Shareholder Services at 1-800-945-3863.
AUTHORIZED TELEPHONE TRADING
Investors can transact account exchanges and redemptions via the telephone
by completing the Authorized Telephone Trading section of the IAI Mutual Fund
application and returning it to a Fund. 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 Funds have established reasonable procedures,
including the requirement that a personal identification number accompany
telephone instructions. If a Fund or the transfer agent fails to follow these
procedures, such Fund may be liable for losses due to unauthorized or fraudulent
instructions. To the extent the reasonable procedures are followed, none of the
Funds, their transfer agent, IAI, or their principal Underwriter 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
20
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bears the risk of loss resulting from telephone instructions. All telephone
redemptions and exchange requests will be tape recorded.
SYSTEMATIC CASH WITHDRAWAL PLAN
Each Fund 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 Fund. Payments under the plan
will be made monthly or quarterly in amounts of $100 or more. Shares will be
sold with the closing price of the 15th of the applicable month (or the next
business day). To provide funds for payment, a Fund will redeem as many full and
fractional shares as necessary at the redemption price, which is Net Asset
Value. The holder of a Systematic Cash Withdrawal Plan must have income
dividends and any capital gains distributions reinvested in full and fractional
shares at net asset value.
Payments under this plan, unless pursuant to a retirement plan, should
not be considered income. Withdrawal payments may exceed dividends and
distributions and, to this extent, there will be a reduction in the investor's
equity. An investor should also understand that this plan cannot insure profit,
nor does it protect against any loss in a declining market. Careful
consideration should be given to the amount withdrawn each month. Excessive
withdrawals could lead to a serious depletion of equity, especially during
periods of declining market values. Fund management will be available for
consultation in this matter.
Plan application forms are available through the Funds. If you would
like assistance in completing the application contact IAI Mutual Fund
Shareholder Services at 1-800-945-3863.
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
DIVIDENDS
The policy of each Fund is to pay dividends from net investment income
monthly and to 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 Fund. When you open an account, you should specify on your
application how you want to receive your distributions. Each Fund offers three
options: Full Reinvestment--your dividend and capital gain distributions will be
automatically reinvested in additional shares of such Fund; 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 FUND WILL AUTOMATICALLY REINVEST ALL SUCH DISTRIBUTIONS INTO
FULL AND FRACTIONAL SHARES AT NET ASSET VALUE.
The Funds' Directed Dividend service allows you to invest your
dividends and/or capital gain distributions directly into another IAI Mutual
Fund. Contact IAI Mutual Fund Shareholder Services at 1-800-945-3863 for
details.
TAX STATUS OF THE FUNDS
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code during the current taxable year. If so
qualified, each Fund will not be subject to federal income tax on income that it
distributes to its shareholders.
FEDERAL INCOME TAXATION: BOND AND GOVERNMENT FUNDS
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
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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 Fund'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.
Upon redemption of shares of a Fund the shareholder will generally
recognize a capital gain or loss equal to the difference between the amount
realized on the redemption and the shareholder's adjusted basis in such shares.
Such gain or loss will be long-term if the shares have been held for more than
one year. Under the Code, the deductibility of capital losses is subject to
certain limitations.
FEDERAL INCOME TAXATION: MINNESOTA TAX FREE FUND
The Fund anticipates that substantially all dividends from net
investment income paid by the Fund will be designated as "exempt-interest
dividends" and therefore will not be subject to federal income tax. Dividends
derived from taxable investments, together with distributions from any net
realized short-term gains, will be taxable as ordinary income whether or not
reinvested. Distributions from net realized long-term gains that are designated
as capital gain dividends generally will be taxable as long-term capital gains
for federal income tax purposes, regardless of the length of time for which the
shareholder has held the shares. The Fund will advise shareholders of the
percentage, if any, of the dividends not exempt from federal income tax, and the
percentage, if any, subject to the alternative minimum tax imposed on
individuals, estates and trusts.
For federal income tax purposes, an alternative minimum tax ("AMT") is
imposed on taxpayers to the extent that such tax exceeds a taxpayer's regular
income tax liability (with certain adjustments). Exempt-interest dividends
attributable to interest income on certain tax-exempt obligations issued after
August 7, 1986, to finance certain private activities are treated as an item of
tax preference that is included in alternative minimum taxable income for
purposes of computing the federal AMT for all taxpayers. The Fund may invest in
securities that generate interest that is treated as an item of tax preference.
In addition, all other tax-exempt interest received by a corporation, including
exempt-interest dividends, will be included in adjusted current earnings for
purposes of determining the federal corporate AMT.
Because liability for the AMT will depend upon the regular tax
liability and tax preference items of a specific taxpayer, the extent, if any,
to which any tax preference items resulting from investment in the Fund would be
subject to the tax will depend upon each shareholder's individual situation.
Each shareholder is advised to consult his or her tax advisor with respect to
the possible effects of such tax preference items.
MINNESOTA INCOME TAXATION: MINNESOTA TAX FREE FUND
The portion of exempt-interest dividends that is derived by the Fund
from interest on Minnesota tax exempt obligations is excluded from the Minnesota
taxable net income of individuals, estates, and trusts, provided that the
portion of the exempt-interest dividends from such Minnesota sources paid to all
shareholders represents 95% or more of the exempt-interest dividends the Fund
pays. The remaining portion of such dividends, and dividends that are not
exempt-interest dividends or capital gain dividends, is included in the
Minnesota taxable net income of individuals, estates and trusts, except for
dividends directly attributable to interest on obligations of the U.S.
government or its possessions or territories. Exempt-interest dividends are not
excluded from the Minnesota taxable income of corporations and financial
institutions. Dividends qualifying for federal income tax purposes as capital
gain dividends are to be treated by shareholders as long-term capital gains for
Minnesota income tax purposes. Minnesota has repealed the favorable treatment of
long-term capital gains, while retaining restrictions on the deductibility of
capital losses.
Exempt-interest dividends attributable to interest on certain private
activity bonds issued after August 7, 1986, will be included in the Minnesota
alternative minimum taxable income of individuals, estates and trusts
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for purposes of computing Minnesota's alternative minimum tax. Dividends
generally will not qualify for the dividends-received deduction for corporations
and financial institutions.
The 1995 Minnesota Legislature enacted a statement of intent that
interest on obligations of Minnesota governmental units and Indian tribes be
included in net income of individuals, estates and trusts for Minnesota income
tax purposes if a court determines that Minnesota's exemption of such interest
unlawfully discriminates against interstate commerce because interest on
obligations of governmental issuers located in other states is so included. This
provision applies to taxable years that begin during or after the calendar year
in which any such court decision becomes final, irrespective of the date on
which the obligations were issued. Minnesota Tax Free Fund is not aware of any
decision in which a court has held that a state's exemption of interest on its
own bonds or those of its political subdivisions or Indian tribes, but not of
interest on the bonds of other states or their political subdivisions or Indian
tribes, unlawfully discriminates against interstate commerce or otherwise
contravenes the United States Constitution. Nevertheless, Minnesota Tax Free
Fund cannot predict the likelihood that interest on the Minnesota bonds held by
the Fund would become taxable under this Minnesota statutory provision.
MISCELLANEOUS
Annually, IAI 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 Fund, IAI will send you a confirmation statement showing how
many shares you sold and at what price. You will also receive an account
statement quarterly and a consolidated transaction statement annually. However,
it is up to you or your tax preparer to determine whether this sale resulted in
a capital gain and, if so, the amount of tax to be paid. Be sure to keep your
regular account statements; the information they contain will be essential in
calculating the amount of your capital gains.
The foregoing relates to federal and Minnesota 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 Funds, see "Tax
Status" in the Statement of Additional Information.
DESCRIPTION OF COMMON STOCK
All shares of each Fund 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 Fund 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 a particular 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 each Fund may demand a regular meeting of shareholders of such
Fund by written notice of demand given to the Chief Executive Officer or the
Chief Financial Officer of such Fund. Within thirty days after receipt of the
demand by one of those officers, the Board of Directors shall cause a regular
meeting of shareholders to be called and held no later than ninety days after
receipt of the demand, all at the expense of such Fund. An annual meeting will
be held on the removal of a director or directors of a Fund if requested in
writing by holders of not less than 10% of the outstanding shares of a Fund.
The shares of each Fund are transferable by endorsement of the
certificate if held by the shareholders, or if the certificate is held by such
Fund, by delivery to such Fund of transfer instructions. Transfer instructions
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or certificates should be delivered to the office of such Fund. A Fund is not
bound to recognize any transfer until it is recorded on the stock transfer books
maintained by such Fund.
COUNSEL AND AUDITORS
The firm of Dorsey & Whitney P.L.L.P., 220 South Sixth Street,
Minneapolis, Minnesota 55402, provides legal counsel for the Funds. KPMG Peat
Marwick LLP, 4200 Norwest Center, Minneapolis, Minnesota 55402, serves as the
independent auditors for the Funds.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
The Custodian for each Fund is Norwest Bank Minnesota, N.A., Norwest
Center, Sixth and Marquette, Minneapolis, Minnesota 55479. With respect to the
Bond and Government Funds, Norwest employs foreign subcustodians and
depositories, which were approved by such Fund's Board of Directors in
accordance with the rules and regulations of the Securities and Exchange
Commission, for the purpose of providing custodial services for such Funds'
assets held outside the United States. For a listing of the subcustodians and
depositories currently employed by such Funds, see the Statement of Additional
Information. IAI acts as each Fund's transfer agent, dividend disbursing agent
and IRA Custodian (if applicable), at P.O. Box 357, Minneapolis, Minnesota
55440.
TAX-EXEMPT VS. TAXABLE INCOME
The table below shows the approximate yields that taxable securities
must earn to equal yields that are exempt from both federal and Minnesota income
taxes under selected combined federal/Minnesota income tax brackets, which
reflect effective combined rates after deducting Minnesota taxes from federal
income. The 33.8% combined federal/Minnesota bracket assumes that the investor
is subject to a 28% marginal federal income tax rate and an 8% marginal
Minnesota income tax rate. The 36.9% combined federal/Minnesota bracket assumes
that the investor is subject to a 31% marginal federal income tax bracket and an
8.5% marginal Minnesota income tax rate. The 41.4% combined federal/Minnesota
bracket assumes that the investor is subject to a 36% marginal federal income
tax rate and an 8.5% marginal Minnesota income tax rate. The 44.7% combined
federal/Minnesota bracket assumes that the investor is subject to a 39.6%
marginal federal income tax rate and an 8.5% marginal Minnesota income tax rate.
The 39.6% federal rate and 8.5% Minnesota rate are the highest rates currently
in effect.
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TAXABLE EQUIVALENT YIELDS
-------------------------------------------
COMBINED FEDERAL AND MINNESOTA TAX BRACKETS
-------------------------------------------
TAX-FREE YIELDS 33.8% 36.9% 41.4% 44.7%
--------------- ----- ----- ----- -----
4.0% 6.04% 6.34% 6.83% 7.23%
4.5% 6.80% 7.13% 7.68% 8.14%
5.0% 7.55% 7.92% 8.53% 9.04%
5.5% 8.31% 8.72% 9.39% 9.95%
6.0% 9.06% 9.51% 10.24% 10.85%
6.5% 9.82% 10.30% 11.09% 11.75%
7.0% 10.57% 11.09% 11.95% 12.66%
7.5% 11.33% 11.89% 12.80% 13.56%
8.0% 12.08% 12.68% 13.65% 14.47%
This table does not take into consideration any federal or Minnesota
alternative minimum tax. In addition, the table is based upon yields that are
derived solely from tax-exempt income. To the extent the Minnesota Tax Free
Fund's actual yield is derived from taxable income, such Fund's equivalent
taxable yield will be less than set forth in the table. The tax-free yields used
in the table should not be considered as representations of any particular rates
of return and are for purposes of illustration only.
ADDITIONAL INFORMATION
Each Fund sends to its shareholders a six-month unaudited and an
annual audited financial report, each of which includes a list of investment
securities held.
In the opinion of the staff of the Securities and Exchange Commission,
the use of this combined Prospectus may possibly subject all Funds to a certain
amount of liability for any losses arising out of any statement or omission in
this Prospectus regarding a particular Fund. In the opinion of the Funds'
management, however, the risk of such liability is not materially increased by
the use of a combined Prospectus.
Shareholder inquiries should be directed to the Funds at the telephone
number or mailing address listed on the back inside cover of this Prospectus.
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IAI BOND FUND
IAI GOVERNMENT FUND
IAI MINNESOTA TAX FREE FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED APRIL 1, 1996
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. THIS
STATEMENT OF ADDITIONAL INFORMATION RELATES TO A PROSPECTUS DATED APRIL 1, 1996,
AND SHOULD BE READ IN CONJUNCTION THEREWITH. A COPY OF THE PROSPECTUS MAY BE
OBTAINED FROM THE FUND, 3700 FIRST BANK PLACE, P.O. BOX 357, MINNEAPOLIS,
MINNESOTA 55440 (TELEPHONE: 1-612-376-2700 OR 1-800-945-3863).
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
INVESTMENT OBJECTIVE AND POLICIES........................ 3
Repurchase Agreements.......................... 3
Reverse Repurchase Agreements....................... 3
Securities of Foreign Issuers....................... 3
Lending Portfolio Securities........................ 4
Illiquid Securities................................. 4
Variable or Floating Rate Instruments............... 4
Delayed-Delivery Transactions....................... 4
Dollar Rolls........................................ 5
Mortgage-Backed Securities.......................... 5
Stripped Mortgage-Backed Securities................. 5
Asset-Backed Securities............................. 6
Zero Coupon Bonds................................... 6
Lower-Rated Debt Securities......................... 6
Swap Agreements..................................... 7
Indexed Securities.................................. 7
Loans and Other Direct Debt Instruments............. 8
State or Municipal Lease Obligations................ 9
Foreign Currency Transactions....................... 10
Limitations on Futures and Options Transactions..... 11
Futures Contracts................................... 11
Futures Margin Payments............................. 11
Purchasing Put and Call Options..................... 11
Writing Put and Call Options........................ 12
Combined Positions.................................. 12
Correlation of Price Changes........................ 13
Liquidity of Options and Futures Contracts.......... 13
OTC Options......................................... 13
Options and Futures Relating to Foreign Currencies.. 13
Asset Coverage for Futures and Options Positions.... 14
SPECIAL CONSIDERATIONS REGARDING INVESTMENT.............. 14
IN MINNESOTA TAX-EXEMPT OBLIGATIONS...................... 14
INVESTMENT RESTRICTIONS.................................. 15
Portfolio Turnover............................. 17
INVESTMENT PERFORMANCE................................... 17
MANAGEMENT............................................... 20
History........................................ 22
Investment Advisory Agreement....................... 23
Administrative Agreement............................ 25
Allocation of Expenses.............................. 25
Duration of Agreements.............................. 25
PLAN OF DISTRIBUTION..................................... 25
CUSTODIAL SERVICE........................................ 27
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE....... 31
CAPITAL STOCK............................................ 31
NET ASSET VALUE AND PUBLIC OFFERING PRICE................ 33
PURCHASES AND REDEMPTIONS IN KIND........................ 33
TAX STATUS............................................... 33
LIMITATION OF DIRECTOR LIABILITY......................... 34
FINANCIAL STATEMENTS..................................... 35
Appendix A-- Ratings of Debt Securities................. A-1
</TABLE>
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of IAI Bond Fund (the "Bond
Fund"), IAI Government Fund ("Government Fund"), and IAI Minnesota Tax Free Fund
("Minnesota Tax Free Fund") are summarized on the front page of the Prospectus
and in the text of the Prospectus under "Investment Objectives and Policies."
Investors should understand that all investments have a risk factor. There can
be no guarantee against loss resulting from an investment in the Funds, and
there can be no assurance that a Fund's investment policies will be successful,
or that its investment objective will be attained. Certain of the investment
practices of the Funds are further explained below.
REPURCHASE AGREEMENTS
The Funds 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.
A Fund's custodian will have custody of, and will hold in a segregated account,
securities acquired by such 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 a 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, a 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, a 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, a Fund could suffer a loss.
REVERSE REPURCHASE AGREEMENTS
The Funds may invest in reverse repurchase agreements. In a reverse
repurchase agreement, a 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, a Fund will maintain appropriate liquid assets in a segregated
custodial account to cover its obligation under the agreement. The Funds will
enter into reverse repurchase agreements only with parties whose
creditworthiness has been found satisfactory by Investment Advisers, Inc.
("IAI"), the Funds' investment adviser and manager. As a result, such
transactions may increase fluctuations in the market value of the Fund's assets
and may be viewed as a form of leverage.
SECURITIES OF FOREIGN ISSUERS
Each of Bond and Government Funds may invest in securities of foreign
issuers in accordance with its investment objectives and policies. 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 and auditing and financial reporting standards, practices and
requirements comparable to those applicable to United States companies.
Furthermore, 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. There is generally less government supervision and regulation of
foreign bond markets, brokers and 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 a
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.
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Bond and Government Funds are not aware at this time of the existence
of any investment or exchange control regulations which might substantially
impair their operations 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 a Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to such Fund's shareholders.
The expense ratio of a Fund should not be materially affected by such Fund's
investment in foreign securities.
LENDING PORTFOLIO SECURITIES
In order to generate additional income, the Funds 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, a Fund will only enter into loan arrangements with
broker-dealers, banks or other institutions which IAI has determined are
creditworthy under guidelines established by the Funds' Board of Directors. The
Funds 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, a 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 a Fund an amount equivalent
to any dividends or interest paid on the securities and a 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 a Fund
may be reduced by finders' fees paid to broker-dealers and related expenses.
ILLIQUID SECURITIES
Each Fund may also 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. 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. It is not possible to predict
with assurance the maintenance of an institutional trading market for such
securities and the liquidity of a Fund's investments could be impaired if
trading declines.
VARIABLE OR FLOATING RATE INSTRUMENTS
Each Fund may invest in variable or floating rate instruments. Such
instruments (including notes purchased directly from issuers) bear variable or
floating interest rates and carry rights that permit holders to demand payment
of the unpaid principal balance plus accrued interest from the issuers or
certain financial intermediaries. Floating rate securities have interest rates
that change whenever there is a change in a designated base rate while variable
rate instruments provide for a specified periodic adjustment in the interest
rate. These formulas are designed to result in a market value for the instrument
that approximates its par value.
DELAYED-DELIVERY TRANSACTIONS
Each Fund may buy and sell securities on a delayed-delivery or when-
issued basis. These transactions involve a commitment by a 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 Fund may receive
fees for entering into delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, each Fund
assumes the rights and risks of ownership, including the risk of price and yield
fluctuations. Because a Fund is not required to pay for securities until the
delivery date, these risks are in addition to the risks associated with such
Fund's other investments. If a Fund remains substantially fully invested at a
time when delayed delivery purchases are outstanding, the
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delayed-delivery purchases may result in a form of leverage. When delayed-
delivery purchases are outstanding, a Fund will set aside appropriate liquid
assets in a segregated custodial account to cover its purchase obligations. When
a Fund has sold a security on a delayed-delivery basis, such 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, a Fund could miss a favorable price or yield opportunity, or could
suffer a loss.
Each 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 Fund may enter into "dollar rolls" in which such
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. A Fund
gives up the right to receive principal and interest paid on the securities
sold. However, a Fund would benefit to the extent of any difference between the
price received for the securities sold and lower forward price for the futures
purchase 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 a Fund compared with what such performance would have been
without the use of dollar rolls. Each Fund will hold and maintain in a
segregated account until the settlement date cash, government securities, or
liquid high-grade debt securities in an amount equal to the value of the when-
issued or forward commitment securities. The benefits derived from the use of
dollar rolls may depend, among other things, upon IAI'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 a Fund while
remaining substantially fully invested increases the amount of a Fund's assets
that are subject to market risk to an amount that is greater than such Fund's
net asset value, which could result in increased volatility of the price of such
Fund's shares.
MORTGAGE-BACKED SECURITIES
Each 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 a Fund
may invest in them if IAI determines they are consistent with such 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
Government and Bond Funds may invest in stripped mortgage-backed
securities. Such securities are created when a U.S. government agency or a
financial institution separates the interest and principal components of a
mortgage-backed security and sells them as individual securities. The holder of
the "principal-only" security (PO) receives the principal payments made by the
underlying mortgage-backed security, while the holder of the "interest-only"
security (IO) receives interest payments from the same underlying security. The
prices of stripped
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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
Government and Bond Funds may invest in stripped 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 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, a 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.
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 a Fund. If a call
were exercised by the issuer during a period of declining interest rates, a Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to a Fund and dividends to
shareholders.
A 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 a Fund's ability to
dispose of particular issues when necessary to meet such Fund's liquidity needs
or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer.
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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 a
Fund's net asset value. In addition, a 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.
SWAP AGREEMENTS
Each Fund may enter into 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 a 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. A Fund is not limited to any particular form of swap
agreement if IAI determines it is consistent with such Fund's investment
objectives and policies.
Swap agreements will tend to shift a Fund's investment exposure from
one type of investment to another. For example, if a Fund agrees to exchange
payments in dollars for payments in foreign currency, the swap agreement would
tend to decrease a 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 a
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 a Fund. If a swap agreement
calls for payments by a Fund, such Fund must be prepared to make such payments
when due. In addition, if the counterparty's creditworthiness declined, the
value of a swap agreement would be likely to decline, potentially resulting in
losses. Each 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 similarly creditworthy party.
Each Fund will maintain appropriate liquid assets in a segregated
custodial account to cover its current obligations under swap agreements. If a
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 such Fund's accrued
obligations under the swap agreement over the accrued amount such Fund is
entitled to receive under the agreement. If a 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 Fund's accrued obligations under the agreement.
INDEXED SECURITIES
Bond and Government Funds 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-term 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
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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. IAI 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 a Fund's investment policies, depending on the individual characteristics of
the securities. Indexed securities may be more volatile than the underlying
instruments.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS
Bond and 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 a 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 a Fund does not receive scheduled interest or principal
payments on such indebtedness, a Fund's share price and yield could be adversely
affected. Loans that are fully secured offer a 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 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 a
Fund. For example, if a loan is foreclosed, a 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, a 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 Fund in the event
of fraud or misrepresentation. In the absence of definitive regulatory guidance,
a Fund relies on IAI's research in an attempt to avoid situations where fraud or
misrepresentation could adversely affect such 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, a 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 a Fund were determined
to be subject to the claims of the agent's general creditors, such 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.
Bond and 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, a Fund generally will treat the borrower as the "issuer"
of indebtedness held by such Fund. In the case of loan participations where a
bank or other lending institution serves as financial intermediary between a
Fund and the borrower, if the participation does not shift to such Fund the
direct debtor/creditor relationship with the borrower, SEC interpretations
require such 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 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 a 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.
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EXTENDIBLE NOTES
Government Fund is permitted to invest in extendible notes in
accordance with its investment objectives and policies. An extendible note is a
debt arrangement under which the holder, at its option, may require the issuer
to repurchase the note for a predetermined fixed price at one or more times
prior to the ultimate maturity date of the note. Typically, an extendible note
is issued at an interest rate that can be adjusted at fixed times throughout its
term. At the same times as the interest rate is adjusted by the issuer, the
holder of the note is typically given the option to "put" the note back to the
issuer at a predetermined price (e.g., at 100% of the outstanding principal
amount plus unpaid accrued interest) if the extended interest rate is
undesirable to the holder. This option to put the note back to the issuer
(i.e., to require the issuer to repurchase the note) provides the holder with an
optional maturity date that is shorter than the actual maturity date of the
note.
Extendible notes may be issued with maturity dates in excess of seven
years from the date of issuance. However, if such extendible notes provide for
an optional maturity date of seven years or less, then such notes are deemed by
Government Fund to have been issued for the shorter optional maturity date.
Accordingly, investment in such extendible notes would not be in contravention
of the fundamental investment policy not to invest in securities having a
maturity date in excess of seven years from the date of acquisition. Investment
in extendible notes is not expected to have a material impact on the effective
portfolio maturity of Government Fund.
An investment in an extendible note is liquid, and the note may be
resold to another investor prior to its optional maturity date at its market
value. The market value of an extendible note with a given optional maturity
date is determined and fluctuates in a similar manner as the market value of a
fixed maturity note with a maturity equivalent to the optional maturity of the
extendible note. Compared to fixed term notes of the same issuer, however,
extendible notes with equivalent optional maturities generally yield higher
returns without a material increase in risk to Government Fund.
The creditworthiness of the issuers of extendible notes is monitored
and rated by Moody's and by S&P. The creditworthiness of such issuers is also
monitored by 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.
STATE OR MUNICIPAL LEASE OBLIGATIONS
Municipal leases may take the form of a lease, an installment purchase
contract, a conditional sales contract or a participation certificate in any of
the above. In determining leases in which Minnesota Tax Free Fund will invest,
IAI will carefully evaluate the outstanding credit rating of the issuer (and the
probable secondary market acceptance of such credit rating). Additionally, IAI
may require that certain municipal lease obligations be issued or backed by a
letter of credit or put arrangement with an independent financial institution.
Municipal leases frequently have special risks not normally associated
with general obligation or revenue bonds. The constitutions and statutes of all
states contain requirements that the state or a municipality must meet to incur
debt. These often include voter referendum, interest rate limits and public sale
requirements. Leases and installment purchase or conditional sale contracts
(which normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to acquire
property and equipment without meeting the constitutional and statutory
requirements for the issuance of debt. The debt-issuance limitations are deemed
to be inapplicable because of the inclusion in many leases or contracts of
"nonappropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly or
other periodic basis.
In addition to the "nonappropriation" risk municipal leases have
additional risk because they represent a relatively new type of financing that
has not yet developed the depth of marketability associated with conventional
bonds; moreover, although the obligations will be secured by the leased
equipment, the disposition of the equipment in the event of non-appropriation or
foreclosure might, in some cases, prove difficult. In addition, in certain
instances the tax-exempt status of the obligations will not be subject to the
legal opinion of a nationally recognized "bond counsel," as is customarily
required in larger issues of municipal securities.
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RESOURCE RECOVERY BONDS
Resource recovery bonds are a type of revenue bond issued to build
facilities such as solid waste incinerators or waste-to-energy plants.
Typically, a private corporation will be involved, at least during the
construction phase. The revenue stream typically is secured by fees or rents
paid by municipalities for use of the facilities. The viability of a resource
recovery project, environmental protection regulations, and project operator tax
incentives may affect the value and credit quality of resource recovery bonds.
TAX AND REVENUE ANTICIPATION NOTES
Tax and revenue anticipation notes are issued by municipalities in
expectation of future tax or other revenues, and are payable from those specific
taxes or revenues. Bond anticipation notes normally provide interim financing
in advance of an issue of bonds or notes, which provide the money to repay the
notes. Tax-exempt commercial paper is issued by municipalities to help finance
short-term capital or operating needs.
FOREIGN CURRENCY TRANSACTIONS
Bond and Government Funds 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 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 Funds.
In connection with purchases and sales of securities denominated in
foreign currencies, a 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." IAI expects to enter into settlement hedges in the normal
course of managing a Fund's foreign investments. A 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 IAI.
Each Fund may also use forward contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. For example,
if a 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. A 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 Fund will
segregate assets to cover currency forward contracts, if any, whose purpose is
essentially speculative. Each Fund will not segregate assets to cover forward
contracts entered into for hedging purposes, including settlement hedges,
position hedges, and proxy hedges.
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Successful use of forward currency contracts will depend on IAI's
skill in analyzing and predicting currency values. Forward contracts may
substantially change a Fund's investment exposure to changes in currency
exchange rates, and could result in losses to a Fund if currencies do not
perform as IAI anticipates. For example, if a currency's value rose at a time
when IAI had hedged a Fund by selling that currency in exchange for dollars,
such Fund would be unable to participate in the currency's appreciation. If IAI
hedges currency exposure through proxy hedges, a 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 IAI increases a Fund's exposure
to a foreign currency, and that currency's value declines, such Fund will
realize a loss. There is no assurance that IAI's use of forward currency
contracts will be advantageous to a Fund or that it will hedge at an appropriate
time. The policies described in this section are non-fundamental policies of
the Funds.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS
Each 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 Fund intends to comply
with Section 4.5 of the regulations under the Commodity Exchange Act, which
limits the extent to which a Fund can commit assets to initial margin deposits
and option premiums.
The above limitations on a Fund's investments in futures contracts and
options, and such Fund's policies regarding futures contracts and options
discussed elsewhere in this Statement of Additional Information may be changed
as regulatory agencies permit.
FUTURES CONTRACTS
When a Fund purchases a futures contract, it agrees to purchase a
specified underlying instrument at a specified future date. When a 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 a 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 a Fund's exposure to positive and
negative price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When a 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 a Fund's investment limitations. In the
event of the bankruptcy of an FCM that holds margin on behalf of a Fund, such
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 Fund.
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PURCHASING PUT AND CALL OPTIONS
By purchasing a put option, a 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, a 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. A 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, a Fund will lose the entire premium it paid. If a Fund
exercises the option, it completes the sale of the underlying instrument at the
strike price. A 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 a 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 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 a Fund would be required to make
margin payments to an FCM as described above for futures contracts. A 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 a Fund has written, however,
such 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 a 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 falls. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
COMBINED POSITIONS
Each 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, a 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.
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<PAGE>
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 a Fund's current or anticipated investments exactly. Each 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 Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match a 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. A 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 a 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 a 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 a Fund to continue to hold a position until delivery
or expiration regardless of changes in its value. As a result, a Fund's access
to other assets held to cover its options or futures positions could also be
impaired.
OTC OPTIONS
Bond and Government Funds may engage in OTC options transactions.
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 a Fund greater flexibility to tailor an
option to its needs, OTC options generally involve greater credit risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.
OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES
Bond and Government Funds may engage in options and futures
transactions 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. A
Fund may purchase and sell currency futures and may purchase and write currency
options to increase or decrease its exposure to different foreign currencies. A
Fund may also purchase
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<PAGE>
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 a Fund's investments. A currency hedge, for example,
should protect a yen-denominated security from a decline in the yen, but will
not protect a Fund against a price decline resulting from deterioration in the
issuer's creditworthiness. Because the value of a 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 a Fund's investments exactly over time.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS
Each 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 a Fund's assets could impede portfolio management or a
Fund's ability to meet redemption requests or other current obligations.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT
IN MINNESOTA TAX-EXEMPT OBLIGATIONS
RISK FACTORS RELATING TO MINNESOTA TAX-EXEMPT OBLIGATIONS
The State relies heavily on a progressive individual income tax and a
retail sales tax for revenue, which results in a fiscal system that is sensitive
to economic conditions. Frequently in recent years, legislation has been
required to eliminate projected budget deficits by raising additional revenue,
reducing expenditures, including aids to political subdivisions and higher
education, reducing the State's budget reserve, imposing a sales tax on
purchases by local governmental units, and making other budgetary adjustments.
The Minnesota Department of Finance November 1995 Forecast has projected that,
under current laws, the State will complete its current biennium June 30, 1997
with a $15 million surplus, plus a $350 million cash flow account balance, plus
a $220 million budget reserve. Total General Fund expenditures and transfers
for the biennium are projected to be $18.7 billion. State expenditures for
education finance (K-12), post-secondary education, and human services in the
biennium ending June 30, 1997 are not anticipated to be sufficient to maintain
program levels of the previous biennium. Although it is not possible to
anticipate economic performance four years into the future, planning estimates
(extrapolations) for the biennium ending June 30, 1999 show a General Fund
deficit of $28 million, after funding a $350 million cash flow account plus a
$220 million budget reserve, if current law is not changed. Accordingly, there
may be additional revenue increases or spending cuts relative to current law.
The State is party to a variety of civil actions that could adversely
affect the State's General Fund, and the State's fiscal condition is affected by
federal tax and expenditure policies. In addition, substantial portions of
State and local revenues are derived from federal expenditures, and reductions
in federal aid to the State and its political subdivisions and other federal
spending cuts may have substantial adverse effects on the economic and fiscal
condition of the State and its local governmental units. The November 1995
Forecast states that pending federal legislation could reduce federal aid to
Minnesota's state and local governments by a total of $3.2 billion over several
years. Risks are inherent in making revenue and expenditure forecasts.
Economic or fiscal conditions less favorable than those reflected in State
budget forecasts and planning estimates may create additional budgetary
pressures.
State grants and aids represent a large percentage of the total
revenues of cities, towns, counties and school districts in Minnesota. Even
with respect to revenue obligations, no assurance can be given that economic or
other fiscal difficulties and the resultant impact on State and local government
finances will not adversely affect the market value of Minnesota tax-exempt
obligations held by Minnesota Tax Free Fund and the ability of the respective
obligors to make timely payment of the principal and interest on such
obligations.
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MINNESOTA ECONOMY
Diversity and a significant natural resource base are two important
characteristics of the Minnesota economy. Generally, the structure of the
State's economy parallels the structure of the United States economy as a whole.
There are, however, employment concentrations in durable goods and non-durable
goods manufacturing, particularly industrial machinery, instruments and
miscellaneous, food, paper and related industries, and printing and publishing.
During the period from 1980 to 1990, overall employment growth in Minnesota
lagged behind national employment growth, in large part due to declining
agricultural employment. The rate of employment growth in Minnesota exceeded
the rate of national growth, however, in the period of 1990 to 1994. Since
1980, Minnesota per capita income generally has remained above the national
average, but tightness in local labor markets may reduce the rate of personal
income growth below that of the national average for 1995 and subsequent years.
Minnesota personal income growth in 1993 was slowed by a decline in farm income
as a result of cool, wet weather. During 1993, 1994 and 1995, the State's
monthly unemployment rate was generally less than the national unemployment
rate.
DIVERSIFICATION
Minnesota Tax Free Fund intends to conduct its operations so that it
will comply with diversification requirements and qualify under the Internal
Revenue Code of 1986 as a "regulated investment company". In order to qualify
as a regulated investment company, Minnesota Tax Free Fund must limit its
investments so that, at the close of each quarter of the taxable year, with
respect to at least 50% of its total assets, not more than 5% of its total
assets will be invested in securities of a single issuer. In addition, the Code
requires that not more than 25% in value of Minnesota Tax Free Fund's total
assets may be invested in the securities of a single issuer at the close of each
quarter of the taxable year.
For purposes of such diversification, the identification of the issuer
of municipal securities depends on the terms and conditions of the security. If
Minnesota or a political subdivision thereof pledges its full faith and credit
to payment of a security, Minnesota or the political subdivision, respectively,
is deemed the sole issuer of the security. If the assets and revenues of an
agency, authority or instrumentality of Minnesota or a political subdivision
thereof are separate from those of Minnesota or political subdivision and the
security is based only by the assets and revenues of the agency, authority or
instrumentality, such agency, authority or instrumentality is deemed to be the
sole issuer. Moreover, if the security is backed only by revenues of an
enterprise or specific projects of Minnesota, a political subdivision or agency,
authority or instrumentality, such as utility revenue bonds, and the full faith
and credit of the governmental unit is not pledged to the payment thereof, such
enterprise or specific project is deemed the sole issuer. Similarly, in the
case of an industrial development bond, if that bond is backed only by certain
revenues to be received from the non-governmental user of the project financed
by the bond, then such non-governmental user is deemed to be the sole issuer.
If, however, in any of the above cases, Minnesota, its political subdivisions or
some other entity guarantees a security and the value of all securities issued
or guaranteed by the guarantor and owned by Minnesota Tax Free Fund exceeds 10%
of the value of such Fund's total assets, the guarantee is considered a separate
security and is treated as an issue of the guarantor. Investments in municipal
obligations refunded with escrowed U.S. Government securities will be treated as
investments in U.S. Government securities for purposes of determining a Fund's
compliance with the 1940 Act diversification requirements.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, each 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 a 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 the 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.
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Each Fund may not:
1. Purchase the securities of any issuer if such purchase would cause the
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").
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 Fund's total assets would be invested in the securities of
companies whose principal business activities are in the same industry.
3. Issue any senior securities, except as permitted by the 1940 Act or
the Rules and Regulations of the Securities and Exchange Commission.
4. Borrow money, except from banks for temporary or emergency purposes
provided that such borrowings may not exceed 33-1/3% of the value of the 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 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.
To the extent a 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 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 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 Fund from purchasing or selling options, futures, swaps and forward
contracts or from investing in securities or other instruments backed by
commodities.
8. Make loans to other persons except to the extent not inconsistent with
the 1940 Act or the Rules and Regulations of the Securities and Exchange
Commission. This limitation does not apply to purchases of commercial paper,
debt securities or repurchase agreements, or to the lending of portfolio
securities.
9. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases or sales
of securities and provided that margin payments in connection with transactions
in options, futures, swaps and forward contracts shall not be deemed to
constitute purchasing securities on margin.
10. Sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options, swaps and forward futures contracts are
not deemed to constitute selling securities short.
11. Except as part of a merger, consolidation, acquisition, or
reorganization, invest more than 5% of the value of its total assets in the
securities of any one investment company or more than 10% of the value of its
total assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting securities of
any one investment company.
12. Mortgage, pledge or hypothecate its assets except to the extent
necessary to secure permitted borrowings. This limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to
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<PAGE>
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.
15. Invest directly in interests (including partnership interests) in
oil, gas or other mineral exploration or development leases or programs, except
the Fund may purchase or sell securities issued by corporations engaging in oil,
gas or other mineral exploration or development business.
Any of a Fund'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 there from. With respect to Restriction 14, each 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 a
Fund's liquid assets.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by the
monthly average of the value of portfolio securities owned by the Fund during
the same fiscal year. "Portfolio securities" for purposes of this calculation
do not include securities with a maturity date of less than twelve (12) months
from the date of investment. A 100% portfolio turnover rate would occur, for
example, if the lesser of the value of purchases or sales of portfolio
securities for a particular year were equal to the average monthly value of the
portfolio securities owned during such year. Each Fund's historical portfolio
turnover rates are set forth in the Prospectus section "Financial Highlights".
INVESTMENT PERFORMANCE
Advertisements and other sales literature for each Fund 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 are computed in the same manner as
cumulative total return, as set forth below.
Cumulative total return is computed by finding the cumulative rate of
return over the period indicated in the advertisement that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
CTR = (ERV-P) 100
-----
P
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the period $1,000
payment made at the beginning of such of a hypothetical
period; and
P = initial payment of $1,000
Average annual total return is computed by finding the average annual
compounded rates of return over the periods indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
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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.
The Fund may quote yield figures from time to time. The "yield" is
computed by dividing the net investment income per share earned during a 30-day
period (using the average number of shares entitled to receive dividends) by the
net asset value per share on the last day of the period. The yield formula
provides for semiannual compounding which assumes that net investment income is
earned and reinvested at a constant rate and annualized at the end of a six-
month period. A "tax-equivalent yield" is computed by dividing the portion of
the yield that is tax-exempt by one minus a stated income tax rate and adding
the product to that portion, if any, of the yield that is not tax-exempt.
The yield formula is as follows:
YIELD = 2[(a-b + 1)/6/ -1]
---
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the net asset value of the Fund.
The table below shows the yearly total return for the Funds for the
periods indicated.
Bond Fund Government Fund Minnesota Tax Free Fund
Year Yearly Yearly Yearly
Ended 12/31 Total Return Total Return Total Return
----------- ------------ ------------ ------------
1981......... 3.0%
1982......... 32.6%
1983......... 8.0%
1984......... 15.9%
1985......... 20.2%
1986......... 12.2%
1987......... 2.0%
1988......... 6.4%
1989......... 15.9%
1990......... 7.1%
1991......... 17.3%..............7.7%*
1992......... 6.8%..............5.7%....................6.9%**
1993......... 12.32%.............8.54%..................13.62%
1994......... (4.92%)...........(2.27%).................(8.29%)
1995......... 16.25%............11.54% .................12.18%
* For the period commencing August 8, 1991.
** For the period commencing April 1, 1992.
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The average annual total returns of Bond Fund for the one, five and
ten year periods ended November 30, 1995 were 15.46%, 9.36% and 9.05%,
respectively. Bond Fund's yield for the thirty-day period ended November 30,
1995 was 5.71%.
The average annual total returns of Government Fund for the year ended
November 30, 1995 and from inception of the Government Fund through November 30,
1995, were 10.99% and 6.89%, respectively. Government Fund's yield for the
thirty-day period ended November 30, 1995 was 5.36%.
Minnesota Tax Free Fund's average annual total returns for the one-
year period ended November 30, 1995, and from inception through November 30,
1995, were 13.17% and 6.07%, respectively. For the 30-day period ended November
30, 1995, Minnesota Tax Free Fund's yield and its tax equivalent yield, using a
31% tax rate, were 4.51% and 6.54%, respectively; (at a 39.6% tax rate such tax
equivalent yield would be 7.15%). On December 15, 1994, Minnesota Tax Free Fund
was converted from IAI Tax Free Fund to IAI Minnesota Tax Free Fund. Because of
this, past performance data may not provide a basis for evaluating the
investment results of the Fund.
In advertising and sales literature, each Fund 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 indexes, averages or products differs
from that of a Fund. The comparison of a Fund 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 Fund believes to be generally
accurate. Each Fund may also note its mention in newspapers, magazines, or other
media from time to time. However, each Fund assumes no responsibility for the
accuracy of such data.
For example, (1) a Fund's performance or P/E ratio may be compared to
any one or a combination of the following: (i) 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; (ii) the Salomon Brothers Broad Investment Grade Index; (iii) the
Shearson Lehman Brothers Government/Corporate Bond Index; and (iv) the
performance of U.S. government and corporate bonds, notes and bills. (The
purpose of these comparisons would be to illustrate historical trends in
different market sectors so as to allow potential investors to compare different
investment strategies.); (2) the Consumer Price Index (measure for inflation)
may be used to assess the real rate of return from an investment in a Fund; (3)
other U.S. 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 Fund or the general
economic business, investment, or financial environment in which a Fund
operates; (4) the effect of tax-deferred compounding on a Fund'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 a Fund (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 instruments in which
a Fund invests may be compared to relevant indices or surveys in order to
evaluate a Fund's historical performance or current or potential value with
respect to the particular instruments.
19
<PAGE>
MANAGEMENT
The names, addresses, positions and principal occupations of the
directors and executive officers of the Funds are given below.
Principal Occupation(s)
Name and Address Age Position During Past 5 Years
- ---------------- --- -------- -------------------
Noel P. Rahn* 53 Chairman of the Noel P. Rahn has been
3700 First Bank Place Board Chief Executive Officer
P.O. Box 357 and a Director of IAI
Minneapolis, Minnesota since 1974. Mr. Rahn is
55440 also Chairman of the
other IAI Mutual Funds as
well as IAI Securities,
Inc., the Fund's principal
underwriter.
Richard E. Struthers* 43 President, Richard E. Struthers is
3700 First Bank Place Director Executive Vice President
P.O. Box 357 and a Director of IAI
Minneapolis, Minnesota and has served IAI in many
55440 capacities since 1979.
Mr. Struthers is also
President of the other IAI
Mutual Funds as well as
President and Director of
IAI Securities, Inc., the
Fund's principal
underwriter.
Madeline Betsch 53 Director Madeline Betsch, until
19 South 1st Street April 1994, was Executive
Minneapolis, Minnesota Vice President, Director
55401 of Client Services, of
CME-KHBB Advertising since
May 1985, and prior
thereto was a Vice
President with Campbell-
Mithun, Inc. (advertising
agency) since February
1977. Ms. Betsch currently
is President of ESMA
Corp., a start-up business
in the beauty and wellness
field.
W. William Hodgson 71 Director W. William Hodgson served
1698 Dodd Road as information manager
Mendota Heights, Minnesota for the North Central Home
55118 Office of the Prudential
Insurance Company of
America from 1961 until
1984; he is currently
retired.
George R. Long 65 Director George R. Long has been
29 Las Brisas Way Chairman of Mayfield
Naples, Florida 33963 Corp. (financial
consultants and venture
capitalists) since 1973.
J. Peter Thompson 64 Director J. Peter Thompson has
Route 1 been a grain farmer in
Mountain Lake, Minnesota southwestern Minnesota
56159 since 1974. Prior to that,
Mr. Thompson was employed
by Paine Webber, Jackson &
Curtis, Incorporated, (a
diversified financial
services concern), most
recently as Senior Vice
President and General
Partner.
Charles H. Withers 68 Director Charles H. Withers was
Rochester Post Bulletin Editor of the Rochester
P.O. Box 6118 Post-Bulletin, Rochester,
Rochester, Minnesota 55903 Minnesota from 1960
through March 31, 1980; he
is currently retired.
20
<PAGE>
Principal Occupation(s)
Name and Address Age Position During Past 5 Years
- ---------------- --- -------- -------------------
Archie C. Black, III 33 Treasurer Archie C. Black is a
3700 First Bank Place Senior Vice President and
P.O. Box 357 Chief Financial Officer
Minneapolis, Minnesota of IAI and has served
55440 IAI in several capacities
since 1987. Mr. Black is
also Treasurer of the
other IAI Mutual Funds.
William C. Joas 33 Secretary William C. Joas is a
3700 First Bank Place Vice President of IAI and
P.O. Box 357 has served as an attorney
Minneapolis, Minnesota for IAI since 1990.
55440 Mr. Joas is also Secretary
of the other IAI Mutual
Funds and Chief Compliance
Officer of IAI Securities,
Inc., the Fund's principal
underwriter.
Larry R. Hill 43 Vice President, Larry R. Hill is an
3700 First Bank Place Investments Executive Vice President
P.O. Box 357 and a Director of IAI
Minneapolis, Minnesota and has served IAI in
55440 in various capacities
since 1984.
Scott Bettin 41 Vice President, Scott Bettin is a Senior
3700 First Bank Place Investments Vice President of IAI
P.O. Box 357 and has served IAI in
Minneapolis, Minnesota various capacities since
55440 1987.
Stephen Coleman 48 Vice President, Stephen Coleman is a
3700 First Bank Place Investments Senior Vice President of
P.O. Box 357 IAI and has served IAI
Minneapolis, Minnesota in various capacities
55440 since 1991.
Livingston Douglas 35 Vice President, Livingston Douglas is a
3700 First Bank Place Investments Vice President of IAI.
P.O. Box 357 Prior to joining IAI in
Minneapolis, Minnesota 1993, Mr. Douglas served
55440 as a fixed income
portfolio manager for
Mackay-Shields Financial
Corporation.
Kirk Gove 33 Vice President, Kirk Gove is a Vice
3700 First Bank Place Marketing President of IAI. Prior
P.O. Box 357 to joining IAI in 1992,
Minneapolis, Minnesota Mr. Gove served as an
55440 Associate Vice President
of Dain Bosworth,
Incorporated (diversified
financial services
concern). Mr. Gove is also
Vice President, Marketing
of the other IAI Mutual
Funds.
Susan J. Haedt 34 Vice President, Susan J. Haedt is a Vice
3700 First Bank Place Director of President of IAI and
P.O. Box 357 Fund Operations Director of Fund
Minneapolis, Minnesota Operations. Prior to
55440 joining IAI in 1992,
Ms. Haedt served as a
Senior Manager at KPMG
Peat Marwick, (an
international tax,
accounting and consulting
firm.) Ms. Haedt is also
Vice President, Director
of Fund Operations of the
other IAI Mutual Funds.
- --------------------
* Directors of each Fund who are interested persons (as that term is defined by
the Investment Company Act of 1940) of IAI and each Fund.
21
<PAGE>
Each Fund has agreed to reduced initial subscription requirements for
employees and directors of a Fund or IAI, their spouses, children and
grandchildren. With respect to such persons, the minimum initial investment in
one or more of the IAI Family of Funds is $500; provided that the minimum amount
that can be allocated to any one of the Funds is $250. Subsequent subscriptions
are limited to a minimum of $100 for each of the Funds.
No compensation is paid by the Fund to any of its officers. As of
January 1, 1996, directors who are not affiliated with IAI receive from the 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. The Fund will pay its pro
rata share of these fees based on its net assets. Such unaffiliated directors
also are reimbursed for expenses incurred in connection with attending meetings.
<TABLE>
<CAPTION>
Aggregate Aggregate Compensation Projected Aggregate
Compensation from the Compensation from the
Name of Person, Position from each Fund* 18 IAI Mutual Funds** 19 IAI Mutual Funds***
------------------------ -------------- ------------------- -------------------
<S> <C> <C> <C>
Betsch, Madeline - Director $1,950 $28,725 $32,200
Hodgson, W. William - Director $1,950 $28,725 $32,200
Long, George R. - Director $1,550 $27,725 $32,200
Thompson, J. Peter - Director $1,950 $28,725 $32,200
Withers, Charles H. - Director $1,550 $27,725 $32,200
</TABLE>
- -------------------------
* For the fiscal year ended November 30, 1995.
** For the calendar year ended December 31, 1995.
*** For the calendar year ended December 31, 1996 and includes the new IAI
Capital Appreciation Fund; provided that a director misses no meetings;
excludes expenses incurred in connection with attending meetings.
IAI, the Fund's investment adviser, is an affiliate of the Hill Samuel
Group ("Hill Samuel"). Hill Samuel is an international merchant banking and
financial services firm headquartered in London, England. In addition to its
ownership of IAI, Hill Samuel owns controlling interests in over seventy
insurance, merchant banking and financial services subsidiaries located in
Western Europe, Asia, the United States, Australia, New Zealand and Great
Britain. The principal offices of Hill Samuel are located at 100 Wood Street,
London EC2 P2AJ.
Hill Samuel, in turn, is owned by Lloyds TSB Group, plc ("Lloyds
TSB"), a publicly-held financial services organization headquartered in London,
England. Lloyds TSB is one of the largest personal and corporate financial
services groups in the United Kingdom, engaged in a wide range of activities
including commercial and retail banking. The principal offices of Lloyds TSB are
located at St. George's House, 6 - 8 Eastcheap, London, EC3M 1LL.
HISTORY
Bond Fund is a separate portfolio of IAI Investment Funds I, Inc., a
Minnesota corporation whose shares of common stock are currently issued in one
series (Series A). On June 25, 1993, Bond Fund's shareholders approved amended
and restated Articles of Incorporation, which provided that the registered
investment company whose corporate name had been IAI Bond Fund, Inc., be renamed
IAI Investment Funds I, Inc. The investment portfolio represented by Series A
common shares is referred to as "IAI Bond Fund."
Government Fund is a separate portfolio of IAI Investment Funds VI,
Inc., a Minnesota corporation whose shares of common stock are currently issued
in six series (Series A through F). On June 25, 1993, Government Fund's
shareholders approved amended and restated Articles of Incorporation, which
provided that the registered
22
<PAGE>
investment company whose corporate name had been IAI Series Fund, Inc., be
renamed IAI Investment Funds VI, Inc. The investment portfolio represented by
Series B common shares is referred to as "IAI Government Fund."
Minnesota Tax Free Fund is a separate portfolio of IAI Investment Funds
VI, Inc., a Minnesota corporation whose shares of common stock are currently
issued in six series (Series A through F). On June 25, 1993, Minnesota Tax Free
Fund's shareholders approved amended and restated Articles of Incorporation,
which provided that the registered investment company whose corporate name had
been IAI Series Fund, Inc., be renamed IAI Investment Funds VI, Inc. Until
November 9, 1994, the investment portfolio represented by Series D common shares
was referred to as "IAI Tax Free Fund." On November 9, 1994, the Fund's Board of
Directors approved changing the Fund's name to "IAI Minnesota Tax Free Fund."
MANAGEMENT AGREEMENT
Effective April 1, 1996, pursuant to a Management Agreement between
each Fund and IAI, IAI has agreed to provide each 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,
IAI has the sole authority and responsibility to make and execute investment
decisions for each Fund within the framework of a Fund's investment policies,
subject to review by the directors of a Fund. In addition, IAI 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 a Fund's
accounts, books and records; (2) the calculations of the daily net asset value
in accordance with a 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 a Fund; (5)
the maintenance of stock registry records; (6) the processing of requested
account registration changes, stock certificate issuances and redemption
requests; and (7) the administration of payments and dividends and distributions
declared by a Fund; (8) answering shareholder questions, (9) providing reports
and other information and (10) other services designed to maintain shareholder
accounts. IAI may also pay qualifying broker-dealers, financial institutions and
other entities that provide such services. In return for these services, each
Fund has agreed to pay IAI an annual fee as a percentage of the Fund's average
daily net assets as set forth below:
BOND FUND AND GOVERNMENT FUND
Daily Net Assets Fee IAI Receives Annually
---------------- -------------------------
For the first $250 million 1.10%
For the next $250 million 1.05%
Above $500 million 1.00%
MINNESOTA TAX FREE FUND
Daily Net Assets Fee IAI Receives Annually
---------------- -------------------------
For the first $250 million .95%
For the next $250 million .90%
Above $500 million .85%
Under the Management Agreement, 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 a Fund, taxes and extraordinary
expenses, IAI has agreed to pay all of a Fund's other costs and expenses,
including, for example, costs incurred in the purchase and sale of assets,
taxes, charges of the custodian of a Fund's assets, costs of reports and proxy
material sent to Fund shareholders, fees paid for independent accounting and
legal services, costs of printing Prospectuses for Fund shareholders and
registering a Fund's shares, postage, insurance premiums, and costs of attending
investment conferences. The Management Agreement further provides that IAI will
either reimburse a Fund for the fees and expenses it pays to
23
<PAGE>
directors who are not "interested persons" of a Fund or reduce its fee by an
equivalent amount. IAI is not liable for any loss suffered by a Fund in the
absence of willful misfeasance, bad faith or negligence in the performance of
its duties and obligations.
INVESTMENT ADVISORY AGREEMENT
Effective March 31, 1996, the Investment Advisory Agreement between
each Fund and IAI (the "Advisory Agreements") terminated and was replaced by the
Management Agreement described above. The following material is applicable only
through March 31, 1996.
Under the Advisory Agreements IAI has agreed to provide each 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. In return, each
Fund has agreed to pay IAI a monthly fee. Under the Advisory Agreements, IAI has
the sole authority and responsibility to make and execute investment decisions
for each Fund within the framework of each Fund's investment policies, subject
to review by the directors of each Fund.
Each Fund has agreed to pay a monthly fee equivalent, on an annual
basis, to .55% of its respective average month-end net assets. As of November
30, 1995, Bond, Government and Minnesota Tax Free Funds had net assets of
$77,525,666, $48,121,472 and $6,629,676, respectively.
Pursuant to the Advisory Agreements, the Funds paid IAI advisory fees
as follows:
<TABLE>
<CAPTION>
Bond Fund Government Fund Minnesota Tax Free Fund
--------- --------------- -----------------------
<S> <C> <C> <C>
Fiscal Year Ended
March 31, 1994 $659,524 $228,242 0 *
Fiscal Period Ended
November 30, 1994 $327,730 $144,953 0 *
Fiscal Year Ended
November 30, 1995 $441,516 $238,633 0 *
</TABLE>
* Pursuant to expense limitation described below and to IAI's voluntary
agreement to absorb Fund expenses in excess of .25% of average month-
end net assets.
Each Fund's monthly payment of the advisory fee is suspended or
reduced (and reimbursement made by IAI, if necessary) when it appears that the
amount of expenses may exceed the Fund's applicable expense limit (and after the
monthly payment of the distribution fee has been reduced to zero), as set forth
in the section "Allocation of Expenses," below. For the fiscal years ended March
31, 1994, for the fiscal period ended November 30, 1994, and for the fiscal year
ended November 30, 1995, IAI was not obligated to reimburse any advisory fees
pursuant to the expense limit to either Bond or Government Funds. For the fiscal
year ended March 31, 1994, for the fiscal period ended November 30, 1994, and
for the fiscal year ended November 30, 1995, IAI waived $41,726, $27,698, and
$39,038, respectively, in advisory fees pursuant to the expense limit and
voluntary waiver for Minnesota Tax Free Fund.
Although investment decisions for each Fund are made independently
from those of the other funds and accounts as to which IAI gives investment
advice, it may occasionally develop that the same security is suitable for more
than one fund and/or other account. If and when more than one fund or other
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 such funds and accounts. The simultaneous purchase or
sale of the same securities by more than one fund or by any fund and other
accounts may have detrimental effects on the Fund, as they may affect the price
paid or received by a fund or the size of the position obtainable by a fund.
24
<PAGE>
ADMINISTRATIVE AGREEMENT
Effective March 31, 1996, the Administrative Agreement between each
Fund and IAI (the "Administrative Agreements") terminated and was replaced by
the Management Agreement described above. The following material is applicable
only through March 31, 1996.
Each Fund has engaged IAI to serve as such Fund's administrative,
dividend disbursing, redemption, accounting services and transfer agent pursuant
to an Administrative Agreement. Under the Administrative Agreements, IAI has
agreed to provide to each Fund all required administrative, stock transfer,
redemption, dividend disbursing and accounting services including, without
limitation, the following: (1) the maintenance of accounts, books and records;
(2) the calculations of the daily net asset value in accordance with the 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 a Fund; (5) the maintenance of
stock registry records; (6) the processing of requested account registration
changes, stock certificate issuances and redemption requests; and (7) the
administration of payments of dividends and distributions declared by each Fund.
As compensation for these services, each Fund has agreed to pay IAI a monthly
fee equal to .01667% of the value of the Fund's net assets on the last day of
the month, which is equivalent on an annual basis to .20% of each Fund's average
month-end net assets. For the fiscal year ended November 30, 1995, Bond and
Government Funds paid IAI $160,551, and $86,776, respectively, pursuant to the
Administrative Agreements. For Minnesota Tax Free Fund, for the fiscal year
ended November 30, 1995, IAI waived $14,196 in administrative fees pursuant to
the expense limitation and/or the voluntary agreement to absorb expenses
described elsewhere.
ALLOCATION OF EXPENSES
In light of the Management Agreement's fee structure as described
above and the termination of the Advisory and Administrative Agreements, the
following material is applicable only through March 31, 1996.
In addition to the advisory and administrative fees paid to IAI, each
Fund pays all its other costs and expenses, including, for example, costs
incurred in the purchase and sale of assets, interest, taxes, charges of the
custodian of a Fund's assets, costs of reports and proxy material sent to Fund
shareholders, fees paid for independent accounting and legal services, costs of
printing Prospectuses for Fund shareholders and registering Fund shares,
postage, fees to directors who are not "interested persons" of a Fund,
distribution expenses pursuant to each Fund's Rule 12b-1 plan, insurance
premiums, costs of attending investment conferences and such other costs which
may be designated as extraordinary. IAI has agreed to reimburse each Fund for
expenses (other than 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
the Fund, taxes and extraordinary expenses) which exceed 1.10% per year of the
average month-end net assets of Bond and Government Funds, and .95% per year of
the average month-end net assets of Minnesota Tax Free Fund (the "expense
limit"). Certain state securities commissions may impose additional limitations
on certain of a Fund's expenses, and IAI may be required by such state
commissions to reimburse a Fund for expenses in excess of any limitations as a
requirement to selling shares of a Fund in those states. IAI is not liable for
any loss suffered by a Fund in the absence of willful misfeasance, bad faith or
gross negligence in the performance of its duties and obligations.
DURATION OF AGREEMENTS
Each Management 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 a Fund or by vote of a majority of a Fund's
outstanding voting securities on not more than 60 days' written notice to IAI,
and by IAI on 60 days' notice to a 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 the 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.
25
<PAGE>
PLAN OF DISTRIBUTION
Effective March 31, 1996, each Fund's Plan of Distribution terminated.
The following material is relevant only through March 31, 1996.
Each Fund 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 Plans were last approved by the Board of Directors at a meeting on
November 8, 1995, by the shareholders of Bond and Government Funds at a meeting
on June 25, 1993, and by the shareholders of Minnesota Tax Free Fund at a
meeting on October 30, 1992.
Rule 12b-1(b) provides that any payments made by a fund in connection
with the distribution of its shares may only be made pursuant to a written plan
describing all material aspects of the proposed financing of distribution and
also requires that all agreements with any person relating to implementation of
the plan must be in writing. In addition, Rule 12b-1(b)(1) requires that such
plan be approved by a vote of at least a majority of the fund's outstanding
shares, and Rule 12b-1(b)(2) requires that such plan, together with any related
agreements, be approved by a vote of the board of directors of the company and
the directors of the company who are not interested persons of the company and
have no direct or indirect financial interest in the operation of the plan or in
any agreements related to the plan, cast in person at a meeting called for the
purpose of voting on such plan or agreements. Rule 12b-1(b)(3) requires that the
plan or agreement provide, in substance: (1) that it shall continue in effect
for a period of more than one year from the date of its execution or adoption
only so long as such continuance is specifically approved at least annually in
the manner described in paragraph (b)(2) of Rule 12b-1; (2) that any person
authorized to direct the disposition of monies paid or payable by a fund
pursuant to its plan or any related agreement shall provide to a fund's board of
directors, and the directors shall review, at least quarterly, a written report
of the amount so expended and the purposes for which such expenditures were
made; and (3) in the case of a plan, that it may be terminated at any time by
vote of a majority of the members of the board of directors of a fund who are
not interested persons of the fund and have no direct or indirect financial
interest in the operation of the plan or in any agreements related to the plan
or by vote of a majority of the outstanding voting securities of a fund.
Rule 12b-1(b)(4) requires that such plans may not be amended to
increase materially the amount to be spent for distribution without shareholder
approval and that all material amendments of the plan must be approved in the
manner described in paragraph (b)(2) of Rule 12b-1. Rule 12b-1(c) provides that
a fund may rely upon Rule 12b-1(1) only if selection and nomination of its
disinterested directors are committed to the discretion of such disinterested
directors. Rule 12b-1(e) provides that a fund may implement or continue a plan
pursuant to Rule 12b-1(b) only if the directors who vote to approve such
implementation or continuation conclude, in the exercise of reasonable business
judgment and in light of their fiduciary duties under state law, and under
Section 36(a) and (b) of the 1940 Act, that there is a reasonable likelihood
that the plan will benefit the fund and its shareholders. At the meeting of the
Board of Directors on November 8, 1995, the directors so concluded with respect
to each Fund's Plan of Distribution.
Pursuant to the Plan of Distribution, each Fund has entered into a
Distribution and Shareholder Services Agreement pursuant to which a Fund will
make payments to IAI Securities, Inc. ("IAIS") at an annual rate of 0.25% of a
Fund's average month-end net assets to cover expenses incurred by IAIS in
connection with the servicing of shareholder accounts and the distribution of
such Fund's shares (which amount is paid to IAIS regardless of amounts spent by
IAIS). The 12b-1 Fee payable by a Fund to IAIS may be used by IAIS 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 Fund to the public
and compensation to other broker-dealers for their sale of Fund shares. The Rule
12b-1 Fee may also be used to compensate the Underwriter for the provision of
certain services to Fund shareholders. Such services may include answering
shareholder questions, providing reports and other information and other
services designed to maintain shareholder accounts. IAIS may use the Rule 12b-1
Fee to make payments to qualifying broker-dealers and financial institutions
that provide such shareholder services.
26
<PAGE>
The Rule 12b-1 Fee payable by each Fund is subject to the expense
limitations set forth in the Advisory Agreements as described above.
Additionally, IAIS, in its sole and absolute discretion, may from time to time
out of its own assets pay for certain additional costs of servicing shareholder
accounts and distributing a Fund's shares. IAIS is an affiliate of IAI.
The net distribution fees paid by Bond and Government Funds pursuant
to their Plans of Distribution during the fiscal year ended November 30, 1995
were $200,689 and $95,435, respectively. All such distribution fees were paid
to, and retained by, IAIS pursuant to the Distribution and Shareholder Services
Agreements discussed above. During the fiscal year ended November 30, 1995, such
distribution fees (along with amounts paid out of IAIS' own assets) were paid by
IAIS in connection with the distribution of the Funds' shares as follows:
Bond Fund Government Fund
--------- ---------------
Advertising $ $
Printing and mailing of prospectuses to
other than current shareholders $ $
Payments to brokers or dealers $ $
Direct payments to sales personnel 0 0
Other $ $
For Minnesota Tax Free Fund, for the fiscal year ended November 30,
1995, all such distribution fees were absorbed by IAIS pursuant to the
aforementioned expense limitation.
CUSTODIAL SERVICE
The custodian for the Funds is Norwest Bank Minnesota, N.A. Norwest
Center, Sixth and Marquette, Minneapolis, MN 55479. Norwest has entered into an
agreement with Morgan Stanley Trust Company, 1 Pierrepont Plaza, Brooklyn, New
York ("Morgan Stanley") which enables Bond and Government Funds to utilize the
subcustodian and depository network of Morgan Stanley. Such agreements,
subcustodians and depositories were approved by the Funds' Board of Directors in
accordance with the rules and regulations of the Securities and Exchange
Commission, for the purpose of providing custodial services for the Funds'
assets held outside the United States.
The following is a listing of the subcustodians and depositories
currently approved by Bond and Government Funds' directors and the countries in
which such subcustodians and depositories are located:
BRANCHES OF THE CUSTODIAN
AND SUBCUSTODIAN BANKS
----------------------
Argentina Citibank, N.A., Buenos Aires Branch
Australia Australia & New Zealand Banking Group, Ltd.
Austria Credit Austalt Bankverein
Bangladesh Standard Chartered Bank
Belgium Banque Bruxelles Lambert (BBL)
Botswana Barclays Bank of Botswana
27
<PAGE>
Brazil Banco de Boston
Canada Toronto Dominion Bank
Chile Citibank, N.A., Santiago Branch
China Hong Kong & Shanghai Banking, Corp. Ltd.
Columbia Cititrust
Cyprus Barclays Bank PLC
Czech Republic ING Bank
Denmark Den Danske Banke
Finland Merita Bank
France Banque Indosuez
Germany Berliner Handels-und-Frankfurter Bank
Ghana Barclays Bank of Ghana
Greece Citibank, N.A., Athens Branch
Hong Kong Hong Kong & Shanghai Banking Corp. Ltd.
Hungary Citibank, N.A., Budapest Branch
India Standard Chartered Bank
Indonesia Hong Kong & Shanghai Banking Corp. Ltd.
Ireland Allied Irish Bank
Israel Bank Leumi
Italy Barclays Bank PLC
Japan The Mitsubishi Bank Limited
Jordan Arab Bank plc
Kenya Barclays Bank Kenya
Korea Standard Chartered Bank
Luxembourg Banque Bruxelles Lambert
Malaysia Oversea Chinese Banking Corporation
Mauritius Hong Kong and Shanghai Bank Corporation
Mexico Citibank, N.A., Mexico City Branch
28
<PAGE>
Morocco Banque Commerciale du Maroc
Netherlands ABN Amro Bank
New Zealand Bank of New Zealand
Norway Den Norske Bank
Pakistan Standard Chartered Bank
Papua New Guinea Australia and New Zealand Bank
Peru Citibank N.A., Lima Branch
Philippines Hong Kong & Shanghai Banking Corp. Ltd.
Poland Citibank, S.A.
Portugal Banco Commercial Portugues
Singapore Oversea Chinese Banking Corporation
South Africa First National Bank of Southern Africa
Spain Banco Santader
Sri Lanka Hong Kong & Shanghai Banking, Corp. Ltd.
Swaziland Barclays Bank of Swaziland
Sweden Svenska Handelsbanken
Switzerland Morgan Guaranty Trust Company of New
York, Zurich Branch
Taiwan Hong Kong & Shanghai Banking Corp. Ltd.
Thailand Standard Chartered Bank
Turkey Citibank, N.A., Istanbul Branch
United Kingdom Barclays Bank PLC
Uruguay Citibank, N.A., Montevideo Branch
Venezuela Citibank, N.A., Caracas Branch
Zambia Barclays Bank of Zambia
Zimbabwe Barclays Bank of Zimbabwe
DEPOSITORIES
------------
Argentina Caja de Valores
Australia Clearing House Electronic Subregister
System
29
<PAGE>
Austria Euroclear Clearance System
OsterreicheKontrollbank
Belgium C.I.K. (Caisse Interprofessionelle de Depot
et de Virements de Titres S.A.)
Brazil Sao Paulo Stock Exchange
Canada CDS (The Canadian Depository
for Securities Ltd.)
Czech Republic Center for Securities (SCP)
Denmark Euroclear Clearance System
Vaerdipapircentralen
Finland Euroclear Clearance System
France SICOVAM (Societe Interprofessionelle la
Compensacion des Valuers Mobilieres)
Germany Kassenverein (Deutscher Kassenverein AG)
Hong Kong Central Clearing and Settlement System
Hungary Euroclear Clearance System
OsterreicheKontrollbank
Italy Monte Titoli, S.p.A
Japan Japan Securities Depository Center
Korea The Korean Central Depository
Malaysia The Malaysian Central Depository
Mexico Instituto para el Deposito de Valores
Netherlands NECIGEF (Netherlands Centraal Instit
voor Giraal Effectenverkeer B.V.
Norway Euroclear Clearance System
Verdipapirsentralen
Singapore Central Depository Pte Ltd.
Spain Servicio de Compensacion y Liquidacion de
Valores
Sweden Euroclear Clearance System
Vardepapperscentralen VPC AB
Switzerland SEGA (Schweizerische Effekten Giro A.G.)
30
<PAGE>
Taiwan Taiwan Securities Depository Co.
Thailand Share Depository Center
United Kingdom Stock Exchange Talisman System
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Most of each Fund's portfolio transactions are effected with dealers
without the payment of brokerage commissions but at a net price which usually
includes a spread or markup. In effecting such portfolio transactions on behalf
of a Fund, IAI seeks the most favorable net price consistent with the best
execution. However, frequently IAI selects a dealer to effect a particular
transaction without contacting all dealers who might be able to effect such
transaction because of the volatility of the bond market and the desire of IAI
to accept a particular price for a security because the price offered by the
dealer meets its guidelines for profit, yield or both.
So long as IAI believes that it is obtaining the best net price
(including the spread or markup) consistent with the best execution, as
described above, it gives consideration in placing portfolio transactions to
dealers furnishing research, statistical information, or other services to IAI.
This allows IAI to supplement its own investment research activities and enables
IAI to obtain the views and information of individuals and research staffs of
many different securities firms prior to making investment decisions for a Fund.
To the extent portfolio transactions are effected with dealers who furnish
research services to it, IAI receives a benefit which is not capable of
evaluation in dollar amounts.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to the policies set forth in the
preceding paragraphs and such other policies as the Board of Directors of the
Fund may determine, IAI may consider sales of shares of a Fund as a factor in
the selection of broker-dealers to execute the Fund's securities transactions.
IAI believes that most research services obtained by it generally
benefit one or more of the investment companies or other accounts which it
manages. Research services obtained from transactions in fixed income
securities would primarily benefit the managed funds investing such fixed income
securities and managed accounts investing in fixed income securities.
CAPITAL STOCK
BOND FUND
Bond Fund is a separate portfolio of IAI Investment Funds I, Inc., a
Minnesota corporation whose shares of common stock are currently issued in one
series (Series A). 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 IAI Investment Funds I, Inc., is empowered under the Articles of
Incorporation of such company to issue other series of the company's common
stock without shareholder approval. IAI Investment Funds I, 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 IAI Bond Fund. As of November 30, 1995, Bond Fund had 8,302,499 shares
outstanding.
As of _______________, no person held of record or, to the knowledge
of Bond Fund, beneficially owned more than 5% of the outstanding shares of Bond
Fund. As of ___________, the Fund's officers and directors as a group owned less
than 1% of the Fund's outstanding shares.
GOVERNMENT FUND
Government Fund is a separate portfolio of IAI Investment Funds VI,
Inc., a Minnesota corporation whose shares of common stock are currently issued
in six series (Series A through 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
31
<PAGE>
rights in the event of liquidation of that series. The Board of Directors of IAI
Investment Funds VI, Inc., is empowered under the Articles of Incorporation of
such company to issue other series of the company's common stock without
shareholder approval. IAI Investment Funds VI, 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 IAI Government Fund. As of November 30, 1995, the Fund had 4,783,448
shares outstanding.
As of _____________, no person held of record or, to the knowledge of
Government Fund, beneficially owned more than 5% of the outstanding shares of
the Fund. As of March 1, 1995, Government Fund's officers and directors as a
group owned less than 1% of the Fund's outstanding shares.
MINNESOTA TAX FREE FUND
Minnesota Tax Free Fund is a separate portfolio of IAI Investment
Funds VI, a Minnesota corporation whose shares of common stock are currently
issued in six series (Series A through 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 IAI Investment Funds VI, Inc., is empowered
under the Articles of Incorporation of such company to issue other series of the
company's common stock without shareholder approval. IAI Investment Funds VI,
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 IAI Tax Free Fund. As of November 30, 1995, Minnesota
Tax Free Fund had 647,266 shares outstanding.
As of__________, no person held of record or, to the knowledge of
Minnesota Tax Free Fund, beneficially owned more than 5% of the outstanding
shares of Minnesota Tax Free Fund, except as set forth in the following table:
- --------------------------------------------------------------------------------
Name and Address Number of Percent of
of Shareholder Shares Class
============== ========= ==========
Noel Rahn
3700 First Bank Place
P.O. Box 357
Minneapolis, MN 55440
Investment Advisers, Inc.
ATTN: Nick Heyer
3700 First Bank Place
P.O. Box 357
Minneapolis, MN 55440-0357
Edward Cammack
C/O Doug Platt
3700 First Bank Place
P.O. Box 357
Minneapolis, MN 55440-0357
Robert D. Watson
4900 IDS Center
Minneapolis, MN 55402
As of ___________, Minnesota Tax Free Fund's officers and directors,
including Mr. Rahn, as a group owned approximately _______ shares of Minnesota
Tax Free Fund, representing approximately ______% of Minnesota Tax Free Fund's
outstanding shares.
32
<PAGE>
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The portfolio securities in which each Fund invests fluctuate in value, and
hence, for each Fund, the net asset value per share also fluctuates.
The net asset value per share of a Fund is determined once daily as of the
close of trading on the New York Stock Exchange 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 Fund is not determined, on the following national holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.
On November 30, 1995, the net asset value and public offering price per
share of each Fund was calculated as follows:
BOND FUND
NAV = Net Assets ($77,525,666) = $ 9.34
-------------------------------
Shares Outstanding (8,302,499)
GOVERNMENT FUND
NAV = Net Assets ($48,121,472) = $10.06
-------------------------------
Shares Outstanding ($4,783,448)
MINNESOTA TAX FREE FUND
NAV = Net Assets ($6,629,676) = $10.24
-------------------------------
Shares Outstanding ($647,266)
PURCHASES AND REDEMPTIONS IN KIND
In extraordinary circumstances, Fund shares may be purchased for cash or in
exchange for securities which are permissible investments of a Fund, subject to
IAI's discretion and its determination that the securities are acceptable.
Securities accepted in exchange will be valued on the basis of market
quotations, or if market quotations are not available, by a method that IAI
believes accurately reflects fair value. In addition, securities accepted in
exchange are required to be liquid securities that are not restricted as to
transfer. Also in extraordinary circumstances, if a shareholder so desires, and
IAI so agrees, Fund shares may be redeemed in exchange for securities held by a
Fund. Securities redeemed in exchange will be valued on the basis of market
quotations, or if market quotations are not available, by a method that IAI
believes accurately reflects fair value.
TAX STATUS
The tax status of the Funds and the distributions of the Funds are
summarized in the Prospectus under "Dividends, Distributions and Tax Status."
It is not expected that distributions from any of the Funds will qualify
for the dividends received deduction in the case of corporate shareholders since
the distributions will not be derived from dividends paid by domestic
corporations
If Fund shares are sold or otherwise disposed of more than one year from
the date of acquisition, the difference between the price paid for the shares
and the sales price will result in long-term capital gain or loss to the Fund
shareholder if, as is usually the case, the Fund shares are a capital asset in
the hands of the Fund shareholder at that time. However, under a special
provision in the Internal Revenue Code of 1986, as amended
33
<PAGE>
(the "Code"), if Fund shares with respect to which a long-term capital gain
distribution has been, or will be, made are held for six months or less, any
loss on the sale or other disposition of such shares will be long-term capital
loss to the extent of such distribution. Moreover, any loss on the sale or
exchange of Minnesota Tax Free Fund shares held for six months or less will be
disallowed for federal income tax purposes to the extent of the amount of any
exempt-interest dividend received with respect to such shares. Similar rules
apply in the case of individuals, trusts, and estates under Minnesota law.
Ordinarily, distributions and redemption proceeds earned by Fund
shareholders are not subject to withholding of federal income tax. However,
each Fund is required to withhold 31% of a shareholder's distributions and
redemption proceeds upon the occurrence of certain events specified in Section
3406 of the Code and regulations promulgated thereunder. These events include
the failure of a Fund shareholder to supply the Fund with such shareholder's
taxpayer identification number, and the failure of a Fund shareholder who is
otherwise exempt from withholding to properly document such shareholder's status
as an exempt recipient. Additionally, distributions may be subject to state and
local income taxes, and the treatment thereunder may differ from the federal
income tax consequences discussed above.
Under the Code, each Fund will be subject to a non-deductible excise tax
equal to 4% of the excess, if any, of the amount of investment income and
capital gains required to be distributed pursuant to the Code for each calendar
year over the amount actually distributed. In order to avoid this excise tax,
each Fund generally must declare dividends by the end of each calendar year
representing 98% of each Fund's ordinary income for such calendar year and 98%
of its capital gain net income (both long-term and short-term) for the twelve-
month period ending October 31 of the same calendar year. The excise tax is not
imposed, however, on undistributed income that is already subject to corporate
income tax. It is each Fund's policy not to distribute capital gains until
capital loss carryovers, if any, either are utilized or expire.
In the case of Bond and Government Funds, income received from sources
within foreign countries may be subject to withholding and other taxes imposed
by such countries. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. It is impossible to determine the
effective rate of foreign tax applicable to such income in advance since the
precise amount of a Fund's assets to be invested in various countries is not
known. Any amount of taxes paid by Bond or Government Fund to foreign countries
will reduce the amount of income available to such Fund for distributions to
shareholders.
Under the Code, interest in indebtedness incurred or continued to purchase
or carry shares of an investment company paying tax-exempt dividends, such as
Minnesota Tax Free Fund, will not be deductible by the investor in proportion to
the amount of such Fund's distributions from investment income and short-term
capital gains that is exempt from federal income tax. Minnesota law also
restricts the deductibility of interest on indebtedness incurred or continued to
purchase or carry shares of Minnesota Tax Free Fund. Indebtedness may be
allocated to shares of the Fund even though not strictly traceable to the
purchase of such shares.
Under a special provision of the Revenue Reconciliation Act of 1993, if
Minnesota Tax Free Fund disposes of a municipal obligation that it acquired
after April 30, 1993 at a market discount, it must recognize any gain it
realizes on the disposition as ordinary income (and not as capital gain) to the
extent of the accrued market discount.
The foregoing is a general and abbreviated summary of the Code and Treasury
regulations in effect as of the date of the Funds' Prospectus and this Statement
of Additional Information. The foregoing relates solely to federal income tax
law applicable to "U.S. persons," i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates. Shareholders who are
not U.S. persons are encouraged to consult a tax adviser regarding the income
tax consequences of acquiring shares of a Fund.
LIMITATION OF DIRECTOR LIABILITY
Under Minnesota law, each Fund's Board of Directors owes certain fiduciary
duties to the Fund 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
34
<PAGE>
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 IAI Investment Funds
I, Inc., and IAI Investment Fund VI, Inc. limit the liability of directors to
the fullest extent permitted by Minnesota statutes, except to the extent that
such liability cannot be limited as provided in the Investment Company Act of
1940 (which Act prohibits any provisions which purport to limit the liability of
directors arising from such directors' willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of their
role as directors).
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" of the corporation for breach of their
duties as officers (including the liability of directors who serve as officers
for breach of their duties as officers.) Minnesota law does not permit
elimination or limitation of the availability of equitable relief, such as
injunctive or rescissionary relief. Further, Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act of
1933 or the Securities Exchange Act of 1934, and it is uncertain whether and to
what extent the elimination of monetary liability would extend to violations of
duties imposed on directors by the Investment Company Act of 1940 and the rules
and regulations adopted under such Act.
FINANCIAL STATEMENTS
The financial statements, included as part of the Funds' 1995 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.
35
<PAGE>
APPENDIX A
RATINGS OF DEBT SECURITIES
RATINGS BY MOODY'S
- ------------------
CORPORATE AND MUNICIPAL 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 characteristizes bonds in this class.
B. Bonds rated B generally lack characteristics of the desirable
investment. Assurances of interest and principal payment or maintenance of other
terms of the contract over any long period of time may be small.
Caa. Bonds rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca. Bonds rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
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
<PAGE>
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.
MUNICIPAL NOTES
Moody's may assign a separate rating to the demand feature of a
variable rate demand security. Such ratings will be designated as VMIG, SG
(speculative quality) or, if the demand feature is not rated, as NR.
MIG1/VMIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG2/VMIG 2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG3/VMIG 3. This designation denotes favorable quality. All
security elements are accounted for but there is lacking the undeniable strength
of the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
RATINGS BY S&P
- --------------
CORPORATE AND MUNICIPAL BONDS
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
<PAGE>
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.
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+.
<PAGE>
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.
MUNICIPAL NOTES
SP-1. Notes rated SP-1 have very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics are designated as SP-1+.
SP-2. Notes rated SP-2 have satisfactory capacity to pay principal and
interest.
SP-3. Notes rated SP-3 have a speculative capacity to pay principal
and interest.
Notes due in three years or less normally receive a note rating.
Notes maturing beyond three years normally receive a bond rating, although the
following criteria are used in making that assessment:
- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely the issue will be rated as a note).
- Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be rated as a note).
TAX-EXEMPT DUAL RATINGS
S&P assigns dual ratings to all municipal debt issues that have a
demand or double feature as part of their provisions. The first rating
addresses the likelihood of repayment of principal and interest as due, and the
second rating addresses only the demand feature. The long-term debt rating
symbols are used for bonds to denote the long-term maturity and the commercial
paper rating symbols are used to denote the put (demand) option (for example,
AAA/A-1+). With short-term demand debt, S&P's note rating symbols are used with
one commercial paper symbol (for example, SP-1+/A-1+).
A-1. This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3. Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
<PAGE>
PART C
Item 24. Financial Statements and Exhibits
- ------- ---------------------------------
(a) Financial Statements (1)
(b) Exhibits
(1) Articles of Incorporation (3)
(1A) Certificate of Designation (Series B) (4)
(2) Bylaws (4)
(5) Management Agreement (Series A)
(5A) Investment Advisory and Administrative Services Agreement
(Series B) (4)
(6A) Dealer Sales Agreement
(6B) Shareholder Services Agreement
(8) Custodian Agreement (4)
(11) Consent of Independent Auditors
(16) Calculation of Total Returns (2)
(99) Annual Report (5)
___________________
(1) Incorporated by reference in Part B of the Registration Statement.
(2) Incorporated by reference to Post-Effective Amendment to Registrant's
Registration Statement on Form N-1A filed on May 31, 1988.
(3) Incorporated by reference to Post-Effective Amendment to Registrant's
Registration Statement on Form N-1A filed on June 3, 1993.
(4) Incorporated by reference to Post-Effective Amendment to Registrant's
Registration Statement on Form N-1A filed on September 3, 1993.
(5) Incorporated by reference to the Annual Report filed electronically on Form
N-30D on January 29, 1996.
IIII-1
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant.
- ------- -------------------------------------------------------------
See the sections of the Prospectus entitled "Management" and
"Description of Common Stock" and the section of the Statement of Additional
Information entitled "Management," filed as part of this Registration Statement.
Item 26. Number of Holders Securities.
- ------- ----------------------------
Number of Record Holders
Portfolio Title of Class as of December 31, 1995
- ----------------------------- ----------------------- -----------------------
IAI Bond Fund Common Stock (Series A) 1,975
IAI Institutional Bond Fund Common Stock (Series B) 26
Item 27. Indemnification.
- ------- ---------------
Incorporated by reference to Post-Effective Amendment to Registrant's
Registration Statement on Form N-1A file in July 1986.
Item 28. Business and Other Connections of Investment Adviser.
- ------- ----------------------------------------------------
Information on the business of Investment Advisers, Inc. ("IAI") is
described in the Prospectus section "Management" and in Part B of this
Registration Statement in the section "Management."
The senior officers and directors of IAI and their titles are as follows:
Name Title
---- -----
Jeffrey R. Applebaum Senior Vice President
Charles P. Barrington Director
Scott Allen Bettin Senior Vice President
Archie Campbell Black, III Senior Vice President/Treasurer
Stephen C. Coleman Senior Vice President
Hugh Freedberg Chairman
Larry Ray Hill Executive Vice President/Director
Richard A. Holway Senior Vice President
Irving Philip Knelman Executive Vice President/Director
Rick D. Leggott Senior Vice President
Timothy A. Palmer Senior Vice President
Douglas Rugh Platt Senior Vice President
Andrew Scott Plummer Director
Noel Paul Rahn Chief Executive Officer/Director
R. David Spreng Senior Vice President
Christopher John Smith Senior Vice President/Secretary
Eric St. C. Stobart Director
Richard Edward Struthers Executive Vice President/Director
Suzanne F. Zak Senior Vice President
IIII-2
<PAGE>
All of such persons have been affiliated with IAI for more than two
years except Messrs. Barrington, Freedberg, Plummer and Stobart. Prior to being
appointed to the Board in 1994, Mr. Barrington was and remains Managing Director
of Hill Samuel Bank, 100 Wood Street, London, England EC2P 2AJ, since 1991.
Prior to being appointed to the Board in 1994, Mr. Freedberg was and remains
Chief Executive Officer of Hill Samuel Bank, 100 Wood Street, London, England
EC2P 2AJ, since 1991. Prior to being appointed to the Board in 1994, Mr.
Plummer was and remains Legal Adviser to Lloyds TSB Group plc, 60 Lombard
Street, London, England EC3V 9DN, since 1988. Prior to being appointed to the
Board in 1994, Mr. Stobart was and remains Director of Hill Samuel Bank, 100
Wood Street, London, England EC2P 2AJ, since 1977.
Certain directors and officers of IAI are directors and/or officers of
the Registrant, as described in the section of the Statement of Additional
Information entitled "Management," filed as a part of this Registration
Statement.
The address of the officers and directors of IAI is that of IAI, which
is 3700 First Bank Place, P. O. Box 357, Minneapolis, Minnesota 55440.
Certain of the officers and directors of IAI also serve as officers
and directors of IAI International Ltd. Both IAI and IAI International are
wholly-owned subsidiaries of Hill Samuel Group BV, a London-based merchant
banking and financial services firm which, in turn, is owned by Lloyds TSB Group
plc, a publicly-held financial services organization based in London, England.
The senior officers and directors of IAI International and their titles are as
follows:
Name Title
- ---- -----
Noel Paul Rahn Chairman of the Board of Directors
Roy C. Gillson Chief Investment Officer/Director
Irving Philip Knelman Director
Hilary Fane Deputy Chief Investment Officer/Director
Feidhlim O'Broin Associate Director
Certain of the officers and directors of IAI also serve as officers
and directors of IAI Trust Company, a wholly-owned subsidiary of IAI. The
principal officers and directors of IAI Trust Company and their titles are as
follows:
Name Title
- ---- -----
Richard E. Struthers Chairman of the Board
John G. Flesch Director/President
Christopher J. Smith Director/Secretary
Archie C. Black Director/Treasurer
Christie Haagensen Director of Trust Services
Item 29. Principal Underwriters
- ------- ----------------------
(a) Not Applicable.
IIII-3
<PAGE>
(b) The officers and directors of IAI Securities and the positions, if
any, such officers and directors hold with the Registrant are set forth below.
The business address of such persons is 3700 First Bank Place, Minneapolis,
Minnesota 55402.
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
- ---------------------- ------------------------ ---------------------
Noel P. Rahn Chairman of the Board Chairman of the Board
Richard E. Struthers President/Director President/Director
Douglas R. Platt Vice President/Director None
R. David Spreng Vice President/Director None
Christopher J. Smith Secretary None
Archie C. Black, III CFO/Treasurer Treasurer
William C. Joas Chief Compliance Officer Secretary
Item 30. Location of Accounts and Records.
- ------- --------------------------------
The Custodian for Registrant is Norwest Bank Minnesota, N.A., Norwest
Center, Sixth & Marquette, Minneapolis, Minnesota 55479. The Custodian
maintains records of all cash transactions of Registrant. All other books and
records of Registrant, including books and records of Registrant's investment
portfolios, are maintained by IAI. IAI also acts as Registrant's transfer agent
and dividend disbursing agent, at 3700 First Bank Place, Minneapolis, Minnesota
55402.
Item 31. Management Services.
- ------- -------------------
Not applicable.
Item 32. Undertakings.
- ------- ------------
(a) Not applicable.
(b) Registrant undertakes to furnish each person to whom a prospectus is
delivered a copy of its latest annual report to shareholders, upon request and
without change.
IIII-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Registrant certifies that it meets all of the
requirements for effectiveness of its Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(a) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Minneapolis, and State of Minnesota, on the 31st day of January, 1996.
IAI INVESTMENT FUNDS I, INC.
(Registrant)
By /s/ Richard E. Struthers, President
-----------------------------------
Richard E. Struthers, President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated:
/s/ Richard E. Struthers President (principal January 31, 1996
- -------------------------- executive officer) & Director
Richard E. Struthers
/s/ Archie C. Black III Treasurer (principal January 31, 1996
- ------------------------- financial and accounting
Archie C. Black III officer)
Noel P. Rahn (1)
Director
Madeline Betsch (1)
Director
W. William Hodgson (1)
Director
George R. Long (1)
Director
J. Peter Thompson (1)
Director
Charles H. Withers (1)
Director
/s/ William C. Joas January 31, 1996
- ---------------------
William C. Joas,
Attorney-in-fact
(1) Registrant's directors executing Powers of Attorney dated August 18, 1993,
and filed with the Commission on September 3, 1993.
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Exhibit Description Sequential Page No.
- ----------- ------------------- -------------------
5 Management Agreement
6A Dealer Sales Agreement
6B Shareholder Services Agreement
11 Consent of Independent Auditors
<PAGE>
EXHIBIT 5
MANAGEMENT AGREEMENT
This Agreement is made and entered into as of _____________ , 1996 by
and between Investment Advisers, Inc., a Delaware corporation ("IAI"), and IAI
Investment Funds __, Inc., a Minnesota corporation (the "Company"), on behalf
of IAI ___________________ Fund, the portfolio represented by the Company's
Series __ Common Shares (the "Fund").
1. ENGAGEMENT OF IAI; SERVICES.
----------------------------
(a) Investment Advisory Services. The Company hereby engages IAI on
behalf of the Fund, and IAI hereby agrees, pursuant to the terms and conditions
hereinafter set forth, to furnish the Fund continuously with investment
planning, to provide investment advice with regard to the Fund's portfolio, to
prepare and make available to the Fund necessary research and statistical data
in connection therewith, to supervise the acquisition and disposition of
specific securities by the Fund and to perform such other services as are
reasonably incidental to the foregoing duties as investment adviser for, and to
manage the investment of the assets of, the Fund. IAI covenants and agrees that,
in effecting acquisitions and dispositions of specific investments on behalf of
the Fund, IAI shall at all times be governed by the Fund's investment
objectives, restrictions and policies as delineated and limited by the
disclosures contained in the various documents filed with the Securities and
Exchange Commission on behalf of the Fund, as such documents may from time to
time be amended or supplemented. IAI shall report to the Company's Board of
Directors regularly at such times and in such detail as the Board may from time
to time determine appropriate, in order to permit the Board to determine the
adherence of IAI to the Fund's investment objectives, policies and limitations.
(b) Dividend Disbursing, Accounting, Administrative and Transfer
Agency Services. The Company on behalf of the Fund hereby engages IAI, and IAI
hereby agrees, to provide to the Fund with all dividend disbursing, accounting,
administrative and transfer agency services required by the Fund, including,
without limitation, the following services:
(1) The calculation of net asset value per share at such times
and in such manner as specified in the Fund's current Prospectus and
Statement of Additional Information and at such other times upon which
the parties hereto may from time to time agree. The pricing services
or other sources from which daily price quotations on portfolio
securities are to be obtained for purposes of calculating the Fund's
daily net asset value shall be paid for by IAI and approved by the
Company;
(2) Upon the receipt of funds for the purchase of Fund shares or
the receipt of redemption requests with respect to Fund shares
outstanding, the calculation of the number of shares to be purchased
or redeemed, respectively;
(3) Upon the Fund's distribution of dividends, (i) the
calculation of the amount of such dividends to be received per Fund
share, (ii) the calculation of the number of additional Fund shares to
be received by each Fund shareholder, other than any shareholder who
has elected to receive such dividends in cash, and (iii) the mailing
of payments with respect to such dividends to shareholders who have
elected to receive such dividends in cash;
(4) The provision of transfer agency services as described below:
(i) IAI shall make original issues of shares of the Fund in
accordance with the Fund's current Prospectus and Statement of
Additional Information and with instructions from the Company;
(ii) Prior to the daily determination of net asset value of
the Fund, IAI shall process all purchase orders received since
the last determination of the Fund's net asset value;
(iii) Transfers of shares shall be registered;
(iv) IAI will maintain stock registry records in the usual
form in which it will note the issuance, transfer and redemption
of Fund shares, and is also authorized to maintain an account in
which it will record the Fund shares and fractions issued and
outstanding from time to time for which issuance of Fund share
certificates is deferred; and
1
<PAGE>
(v) IAI will, in addition to the aforementioned duties and
functions, perform the usual duties and functions of a stock
transfer agent for a registered investment company;
(5) The creation and maintenance of such records relating to the
business of the Fund as the Company may from time to time reasonably
request;
(6) The preparation of tax forms, reports, notices, proxy
statements, proxies and other Fund shareholder communications, and the
mailing thereof to Fund shareholders; and
(7) The provision of such other dividend disbursing, accounting,
administrative, accounting and transfer agency services upon which the
parties hereto may from time to time agree.
(8) The Fund hereby authorizes IAI to contract with qualified
entities for the provision of any of the services to be performed
pursuant to this Section 1(b).
(c) Shareholder Services. The Company on behalf of the Fund hereby
engages, and IAI hereby agrees, to provide the Fund with all services to
shareholders not otherwise the subject of Section 1(b) above. These shareholder
services may include personal services provided to shareholders, such as
answering shareholder inquiries regarding a Fund and providing reports and other
information and services related to the maintenance of shareholder accounts. The
Fund hereby also authorizes IAI to contract with qualifying broker-dealers,
financial institutions and other such entities for the provision of such
services to Fund shareholders.
(d) Filings, Office Facilities, Equipment and Personnel. IAI shall, at
its own expense, file all documents with all relevant regulatory agencies and
governmental authorities on the Company's behalf, furnish the Company and the
Fund with all office facilities, equipment and personnel necessary to discharge
its responsibilities and duties hereunder. IAI shall arrange, if requested by
the Company, for officers or employees of IAI to serve without compensation from
the Company as directors, officers, or employees of the Company if duly elected
to such positions by the shareholders or directors of the Company.
(e) Other Services. IAI shall, at its own expense, provide or arrange
for the provision of all services required by the Company on behalf of the Fund
not otherwise addressed in this Agreement.
(f) Books and Records. IAI hereby acknowledges that all records
pertaining to the services rendered hereunder are the sole and exclusive
property of the Company, and in the event that a transfer of any of the services
currently rendered hereunder to someone other than IAI should ever occur, IAI
will promptly, and at its own cost, take all steps necessary to segregate such
records and deliver them to the Company.
(g) No Separate Charges to Shareholders. IAI hereby covenants and
agrees that it will make no separate charge to any Fund shareholder or his
individual account for any services rendered to said shareholder, the Fund or
the Company unless such charge for special services is specifically approved by
the Board including a majority of the directors who are not "interested persons"
(as such term is defined in the Investment Company Act of 1940, as amended,
which act, as amended and together with all rules and regulations promulgated
thereunder, is hereinafter referred to as the "1940 Act") of IAI. No special
charge will be levied retroactively or without appropriate notice to affected
shareholders.
(h) Limitation of Liability. IAI, in carrying out and performing the
terms and conditions of this Agreement, shall incur no liability for its status
hereunder or for any actions taken or omitted in good faith and without
negligence. Without limitation of the foregoing:
(1) IAI may rely upon, and shall not be liable to any person or
party for any actions taken or omitted to be taken in good faith in
reliance upon, the advice of the Company, or of counsel, who may be
counsel for the Company or counsel for IAI, and upon statements of
accountants, brokers and other persons believed by IAI in good faith
to be expert in the matters upon which they are consulted; and
(2) IAI may rely upon, and shall not be liable to any person or
party for any actions taken or omitted to be taken in good faith in
reliance upon, any signature, instruction, request, letter of
transmittal, certificate, opinion of counsel, statement, instrument,
report, notice, consent, order or other paper or document that IAI in
good faith believes to be genuine and to have been signed, presented
or authorized by the purchaser, Company or other proper party or
parties.
2
<PAGE>
2. COMPENSATION FOR SERVICES; ALLOCATION OF EXPENSES
-------------------------------------------------
(a) In payment for the services to be provided or arranged by IAI
hereunder, the Company (on behalf of the Fund) shall pay to IAI a fee based on
the Fund's average daily net assets (as determined in accordance with the
Company's Bylaws and with the Fund's Prospectus and Statement of Additional
Information, as the same may from time to time be amended or supplemented) as
set forth in Exhibit A attached hereto. This fee shall be paid to IAI on a
monthly basis not later than the tenth business day of the month following the
month in which the services were rendered and shall be prorated for any fraction
of a month at the commencement or termination of this Agreement.
(b) 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 directors of the
Company who are not "interested persons" (as defined in the 1940 Act) of IAI or
the Company, taxes and extraordinary expenses, IAI shall bear all of the Fund's
expenses; provided however, that IAI will either pay the fees and the ordinary
and reasonable expenses of the Fund's disinterested directors or reduce the fee
due under this Agreement by an equivalent amount paid by the Fund to such
directors.
3. FREEDOM TO DEAL WITH THIRD PARTIES.
-----------------------------------
IAI shall be free to render services to others similar to those
rendered under this Agreement or of a different nature except as such services
may conflict with the services to be rendered or the duties to be assumed
hereunder.
4. EFFECTIVE DATE, DURATION, AMENDMENT AND TERMINATION OF AGREEMENT.
----------------------------------------------------------------
(a) Unless sooner terminated as hereinafter provided, this Agreement
shall continue in effect for a period more than two years from the date of its
execution but only as long as such continuance is specifically approved at least
annually by (i) the Board of Directors of the Company or by the vote of a
majority of the outstanding voting securities of the Fund, and (ii) by the vote
of a majority of the directors of the Company who are not parties to this
Agreement or "interested persons" (as defined in the 1940 Act) of IAI or of the
Company cast in person at a meeting called for the purpose of voting on such
approval.
(b) This Agreement may be terminated at any time, without the payment
of any penalty, by the Board of Directors of the Company or by the vote of a
majority of the outstanding voting securities of the Fund, or by IAI, upon 60
days' written notice to the other party.
(c) This Agreement shall automatically terminate in the event of its
"assignment" (as defined in the Investment Company Act of 1940, as amended).
(d) No amendment to this Agreement shall be effective until approved
by the vote of: (i) a majority of the directors of the Company who are not
parties to this Agreement or "interested persons" (as defined in the 1940 Act)
of IAI or of the Company cast in person at a meeting called for the purpose of
voting on such approval; and (ii) a majority of the outstanding voting
securities of the Fund.
(e) Wherever referred to in this Agreement, the vote or approval of
the holders of a majority of the outstanding voting securities or shares of the
Fund shall mean the lesser of (i) the vote of 67% or more of the voting
securities of the Fund present at a regular or special meeting of shareholders
duly called, if more than 50% of the Fund's outstanding voting securities are
present or represented by proxy, or (ii) the vote of more than 50% of the
outstanding voting securities of the Fund.
(f) To the extent the provisions of this Section 4 are based on
legislative or regulatory requirements in effect at the time of this Agreement's
initial approval by the Fund's Board of Directors and/or shareholders and any
such legislative or regulatory requirements change, the relevant provision of
this Section 4 will be deemed to have been so amended without further action by
the Fund's Board of Directors or its shareholders.
5. NOTICES.
-------
Any notice under this Agreement shall be in writing, addressed,
delivered or mailed, postage prepaid, to the other party at such address as such
other party may designate in writing for receipt of such notice.
6. REPRESENTATION.
---------------
3
<PAGE>
IAI hereby represents that it will maintain registrations with and/or
approvals by all relevant governmental authorities necessary for the provision
of services pursuant to this Agreement.
7. INTERPRETATION; GOVERNING LAW.
-----------------------------
This Agreement shall be subject to and interpreted in accordance with
all applicable provisions of law including, but not limited to, the 1940 Act. To
the extent that the provisions herein contained conflict with any such
applicable provisions of law, the latter shall control. The laws of the State of
Minnesota shall otherwise govern the construction, validity and effect of this
Agreement.
IN WITNESS WHEREOF, the Company and IAI have caused this Agreement to
be executed by their duly authorized officers as of the day and year first above
written.
IAI INVESTMENT FUNDS __, INC.
By_________________________________
Richard E. Struthers, President
INVESTMENT ADVISERS, INC.
By_________________________________
Noel P. Rahn, Chief Executive Officer
4
<PAGE>
EXHIBIT 6A
DEALER SALES AGREEMENT
----------------------
Ladies and Gentlemen:
We invite you to join a selling group for the distribution of shares of those
mutual funds available to the public for which we serve as the investment
adviser (the "Funds"). Upon execution of this Agreement, you agree to
participate in the distribution of the Funds to the public subject to the terms
set forth herein.
1. In all sales of the Funds to the public, you shall act as dealer of your
own account and shall not be authorized to act as agent for the Funds, for any
other dealer, or for us.
2. All orders will be accepted only at the price, in the amount and subject to
the terms set forth in the then current Prospectuses and Statements of
Additional Information of the Funds. The procedure relating to the handling of
orders shall be subject to instructions which we shall forward to you from time
to time. Certificates representing shares of the Funds will not be issued.
3. You agree to provide distribution and marketing services in the marketing
of shares of the Funds and services to your customers who are Fund shareholders.
Such shareholder services may include personal services provided to
shareholders, such as answering shareholder inquiries regarding a Fund and
providing reports and other information, and services related to the maintenance
of shareholder accounts. For all services, we will pay you a fee, as
established by us from time to time. Such fee will be based upon the following
percentages of the average month-end or daily net assets of each Fund
represented by shares of the Fund owned, during the quarter for which payment is
being made, by customers for which you maintain a servicing relationship as
evidenced by their execution of such agreements as we may from time to time
require. We specifically reserve the right to discontinue paying fees with
respect to those assets for which such customer authorizations which we may
require are not provided.
<PAGE>
Fund Annual Fee*
------------------------------------- -----------
Reserve Fund 0
Money Market Fund 0
Minnesota Tax Free Fund .10%
Bond Fund .15%
Government Fund .15%
Growth and Income Fund .25%
Regional Fund .25%
Value Fund .25%
Developing Countries Fund .25%
International Fund .25%
Midcap Growth Fund .25%
Balanced Fund .25%
Growth Fund .25%
Emerging Growth Fund .25%
Capital Appreciation Fund .25%
______________________________
* as a % of average daily net assets or average month-end net assets as set
forth in a Fund's then-current prospectus.
Such fee will be paid on a quarterly basis and, subject to the last
sentence of this section 3, will be paid so long as the accounts of your clients
remain in the Funds and this Agreement and such other agreements as we may
require have not been terminated. Upon such termination, any such obligation to
pay such fee shall cease. You agree to furnish us or the Funds with such
information as may be reasonably requested with respect to such fees paid to you
pursuant to this Agreement.
4. If any Fund shares sold under the terms of this Agreement are repurchased
by the Funds or are tendered for redemption within seven business days after
confirmation of the original purchase, it is agreed that you shall forfeit the
right to receive the fees hereunder with respect to such shares.
5. No person is authorized to make any representations concerning the Funds
except those contained in the then current Prospectuses and in such printed
information as may be furnished for use as information supplemental to the
Prospectuses. Additional copies of the Prospectuses and any printed information
supplementing the Prospectuses will be supplied in reasonable quantities upon
request.
6. You acknowledge and agree that the Funds reserve the right, in their sole
discretion and without notice, to suspend sales or withdraw the offering of
shares of the Funds.
2
<PAGE>
7. This Agreement may be terminated by either party at any time upon seven
days' notice to the other party with or without cause. We reserve the right to
amend this Agreement at any time upon written notice.
8. You represent that you are a member in good standing of the National
Association of Securities Dealers, Inc. and agree that termination or suspension
of such membership shall automatically terminate this Agreement. You further
agree that you will immediately advise us of any such termination or suspension.
You also represent that you are authorized under relevant federal and state laws
and regulations to receive the fees payable hereunder and that you will
immediately advise us of any termination or suspension of such authorization.
9. You agree to indemnify and hold harmless the Funds and us from and
against any and all claims, liability, expense (including attorneys' fees) or
loss in the event that you, or any of your employees or agents, should violate
any law, rule or regulation or any provisions of this Agreement, including,
without limitation, any representations, verbal or otherwise, of any untrue or
alleged untrue statements of a material fact relating to the offer and sale of
the Funds. In the event we determine to refund any amounts paid by any investor
by reason of any such violation on your part, you shall return to us any fees
previously paid by us to you in connection with the transaction for which the
refund is made.
10. All communications to us should be sent to us at 3700 First Bank Place,
P.O. Box 357, Minneapolis, MN 55440. Any notice to you shall be duly given if
mailed or telegraphed to you at the address specified by you below. This
Agreement shall be governed by and construed in accordance with the laws of the
State of Minnesota.
The undersigned hereby accepts
the offer set forth herein:
DEALER INVESTMENT ADVISERS, INC.
By___-________________________ By______________________________
Its___________________________ Its_____________________________
Address_______________________ Date of Acceptance_______, 19___
________________________
________________________
3
<PAGE>
SHAREHOLDER SERVICE AGREEMENT
Ladies and Gentlemen:
We invite you to enter into an agreement with us for the servicing of
shareholders of, and the maintenance of shareholder accounts for those mutual
funds available to the public for which Investment Advisers, Inc., our
affiliate, serves as the investment adviser (the "Funds") and the shares of
which are offered to the public at net asset value, as described in the Funds'
Prospectuses. Subject to your acceptance of this Agreement, the terms and
conditions of this Agreement shall be as follows:
1. You shall provide shareholder services for certain shareholders of the
Funds who purchase shares of the Funds as a result of their relationship to
you. Such shareholder services may include personal services provided to
shareholders, such as answering shareholder inquiries regarding a Fund and
providing reports and other information, and services related to the
maintenance of shareholder accounts, to the extent you are permitted by
applicable statue, rule or regulation to provide such information or
services.
2. If shares of the Funds are to be purchased or held by you on behalf of your
clients:
(i) Such shares will be registered in your name or in the name of your
nominee. The client will be the beneficial owner of the shares of the
Funds purchased and held by you in accordance with the client's
instructions and the client may exercise all rights of a shareholder
of the Funds. You agree to transmit to the Funds' transfer agent
(Investment Advisers, Inc.), in a timely manner, all purchase orders
and redemption requests of your clients and to forward to each client
all proxy statements, periodic shareholder reports and other
communications received from the Funds by you on behalf of your
clients. The Funds have agreed to pay all reasonable out-of-pocket
expenses actually incurred by you in connection with the transfer by
you of such proxy statements and reports to your clients.
(ii) You agree to transfer to the Funds' transfer agent, on the date such
purchase orders are effective, federal funds in an amount equal to the
amount of all purchase orders placed by you on behalf of your clients
and accepted by the Funds. In the event that the Funds fail to
receive such federal funds on such date (other than through fault of
the Funds or their transfer agent), you shall indemnify the Funds
against any expense (including overdraft charges) incurred by the
Funds as a result of their failure to receive such federal funds.
<PAGE>
(iii) You agree to make available to the Funds, upon the Funds' request,
such information relating to your clients who are beneficial owners
of shares of the Funds and their transactions in shares of the Funds,
as may be required by applicable laws and regulations or as may be
reasonably requested by the Funds.
(iv) You agree to transfer record ownership of a client's shares of the
Funds to the client promptly upon the request of a client. In
addition, record ownership will be promptly transferred to the client
in the event that the person or entity ceases to be your client.
3. You shall provide to us copies of the lists of members of your organization
and identify to us any publications and other facilities of your
organization for the placement of advertisements or promotional materials
and for sending information regarding the Funds to enable us to solicit for
sale and to sell shares to your members.
4. Neither you nor any of your employees or agents are authorized to make any
representation concerning the shares of the Funds except those contained in
the then current Prospectuses of the Funds, copies of which will be
supplied to you; and you shall have no authority to act as agent for the
Funds or for us. You agree to indemnify and hold harmless the Funds, us,
and Investment Advisers, Inc. from and against any and all claims,
liability, expense (including attorneys' fees) and loss in the event that
you, or any of your employees or agents, should violate any law, rule, or
regulation, or any provisions of this Agreement and, in the event we
determine to refund any amounts paid by any investor by reason of any such
violation on your part, you shall return to us any fees previously paid by
us to you in connection with the transaction for which the refund is made.
5. In consideration for the services described herein, you shall be entitled
to receive from us such fees as established by us from time to time as set
forth on Exhibit A. Such fee will be based upon assets of each Fund
represented by shares of the Fund owned, during the quarter for which
payment is being made, by shareholders for which you maintain a servicing
relationship as evidenced by their execution of such agreements as we may
from time to time require. We specifically reserve the right to
discontinue paying fees with respect to those assets for which such
customer authorization which we may require is not provided.
Such fee will be paid on a quarterly basis and, subject to the last
sentence of this section, will be paid so long as the accounts for your
clients and this Agreement and such other agreements as we may require have
not been terminated. Upon such termination any such obligation to pay such
fee shall cease. You agree to furnish us and the Funds with any such
information as may be reasonably requested with respect to such fees paid
to you pursuant to this Agreement.
<PAGE>
6. You acknowledge and agree that the Funds reserve the right, in their sole
discretion and without notice, to suspend the sale of shares or withdraw
the sale of shares of the Funds.
7. This Agreement may be terminated by either party at any time upon seven
days notice to the other party with or without cause. We reserve the right
to amend this Agreement at any time upon written notice.
8. All communications to us should be sent to us at 3700 First Bank Place,
P.O. Box 357, Minneapolis, MN 55440. Any notice to you shall be duly given
if mailed or telegraphed to you at the address specified by you below.
This Agreement shall be governed by and construed under the laws of the
State of Minnesota.
The undersigned hereby accepts IAI Securities, Inc.
the offer set forth herein
______________________________ By _____________________________
Firm
By____________________________ Its ____________________________
Its __________________________ Date of Acceptance______________
Address_______________________
________________________
________________________
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
Independent Auditors' Consent
The Board of Directors
IAI Investment Funds I, Inc.
IAI Investment Funds VI, Inc.:
We consent to the use of our report incorporated herein by reference and to the
references to our Firm under the headings "FINANCIAL HIGHLIGHTS" and "COUNSEL
AND AUDITORS" in Part A of the Registration Statement.
/s/ KPMG Peat Marwick LLP
--------------------------
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 30, 1996
