1933 Act Registration No. 002-59115
1940 Act Registration No. 811-02747
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 1, 1999
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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. _40_
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. _40_
(Check appropriate box or boxes)
IAI INVESTMENT FUNDS I, INC.
(Exact Name of Registrant as Specified in Charter)
3700 U.S. 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)
Steven G. Lentz, Esq.
3700 U.S. Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
(Name and Address of Agent for Service)
COPY TO:
Kathleen L. Prudhomme, Esq.
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402-1498
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on April 1, 1999 pursuant to paragraph (b) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a) of Rule 485
[ ] on (specify date) pursuant to paragraph (a) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a) of Rule 485
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IAI MUTUAL FUNDS
IAI BOND FUND
PROSPECTUS April 1, 1999
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of this Fund, or determined if the
information in this prospectus is accurate or complete. Any statement to the
contrary is a criminal offense.
P.O. BOX 357
MINNEAPOLIS, MINNESOTA 55440-0357
TELEPHONE 1-612-376-2700
1-800-945-3863
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TABLE OF CONTENTS
Page
Fund Summary............................................................. 3
Objective.......................................................... 3
Principal Investment Strategies.................................... 3
Principal Risks.................................................... 3
Fund Performance................................................... 4
Fees and Expenses.................................................. 5
Buying and Selling Shares................................................ 6
How to Buy Shares.................................................. 6
How to Sell Shares................................................. 8
Exchange Privilege................................................. 10
Authorized Telephone Trading....................................... 11
Statements and Confirmations....................................... 11
Shareholder Reports................................................ 11
Dividend and Capital Gains Distributions................................. 11
Taxes ................................................................... 12
Taxes on Distributions............................................. 12
Taxes on Transactions.............................................. 12
Fund Management.......................................................... 13
Investment Adviser................................................. 13
Portfolio Managers................................................. 13
More Information on Investment Strategies and Risks...................... 13
Investment Strategies.............................................. 13
Effective Duration................................................. 15
Temporary Defensive Investments.................................... 15
Portfolio Turnover................................................. 15
Principal Risks.................................................... 15
Financial Highlights..................................................... 19
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FUND SUMMARY
This section briefly describes the objective, principal investment strategies
and principal risks of IAI Bond Fund ("the Fund"). It also provides you with
information on the Fund's performance and expenses. For further information on
the Fund, please read the section entitled "More Information on Investment
Strategies and Risks."
OBJECTIVE
The Fund's investment objective is to provide shareholders with a high level of
current income consistent with preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests primarily in bonds and other debt securities that are rated
investment grade at the time of purchase or that are unrated and judged to be of
comparable quality by the Fund's adviser. At least 65% of the Fund's total
assets will be invested in debt securities. Although the Fund generally does not
purchase common stocks directly, it may invest up to 10% of its net assets in
convertible securities and preferred stock. The Fund's investments may include
foreign securities. However, the Fund does not expect to invest more than 25% of
its total assets in foreign securities, or more than 15% of its total assets in
non-dollar denominated foreign securities.
Although the Fund invests primarily in investment grade securities, it also may
invest up to 15% of its total assets in non-investment grade securities, or
"junk bonds." However, the Fund will not invest in junk bonds rated lower than B
by Moody's Investors Service, Inc. or Standard & Poor's Corporation or, if
unrated, judged to be of comparable quality by the Fund's adviser.
The Fund may enter into futures contracts, options on futures contracts and
currency forward contracts. The Fund intends to use these derivative instruments
primarily for hedging purposes, although it may use them for non-hedging
purposes to a limited extent. To generate additional income, the Fund may invest
up to 10% of its net assets in mortgage dollar roll transactions.
The Fund's adviser employs a "top-down" approach in selecting securities for the
Fund. First, the adviser determines its economic outlook and the direction in
which it expects interest rates to move. Based on these factors, the adviser
makes duration and yield curve decisions and determines the Fund's sector
allocation. Selections of individual securities that fall within the appropriate
parameters are based on the adviser's analysis of the individual security and
its relative value compared to other securities in the marketplace. The Fund's
adviser anticipates that the average effective duration for the Fund's portfolio
securities will range from 3 1/2 to 7 1/2 years. This range may change, however,
due to market conditions and other economic factors.
PRINCIPAL RISKS
The principal risks that could adversely affect the Fund's share price and yield
include:
o INTEREST RATE RISK. Prices of the Fund's debt securities will generally
fall when interest rates rise. One measure of interest rate risk is
effective duration, explained under "More Information on Investment
Strategies and Risks -- Investment Strategies." The longer the Fund's
effective duration, the greater its interest rate risk.
o INCOME RISK. The Fund's income could decline due to falling market interest
rates.
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o CREDIT RISK. The Fund is subject to the risk that the issuers of debt
securities it holds will not make timely payments of interest or principal
on the securities. Securities rated the lowest investment grade have
speculative characteristics. In adverse economic or other circumstances,
issuers of these lower rated securities are more likely to have difficulty
making principal and interest payments than issuers of higher rated
securities. Non-investment grade securities are subject to additional risk.
See "Risks of Non-Investment Grade Securities" below.
o RISKS OF NON-INVESTMENT GRADE SECURITIES. Non-investment grade securities,
or "junk bonds," generally have more volatile prices and carry more risk to
principal than investment grade securities.
o CALL RISK. The Fund is subject to the risk that, during periods of falling
interest rates, an issuer of debt securities will "call" -- or repay -- its
high-yielding bonds before their maturity date. The Fund would then be
forced to invest the unanticipated proceeds at lower interest rates,
resulting in a decline in the Fund's income.
o RISKS OF MORTGAGE- AND ASSET-BACKED SECURITIES. Falling interest rates
could cause faster than expected prepayments of the obligations underlying
the Fund's mortgage- and asset-backed securities. These prepayments pass
through to the Fund, which must reinvest them at a time when interest rates
on new investments are falling, reducing the Fund's income. On the other
hand, rising interest rates could cause prepayments of the obligations to
slow, which would lengthen the duration of the Fund's mortgage- and
asset-backed securities and cause their prices to decline.
o RISKS OF FOREIGN SECURITIES. Investing in foreign securities typically
involves risks not associated with U.S. investing. Risks of foreign
investing include the risk that the Fund may experience a decline in net
asset value resulting from changes in exchange rates between the U.S.
dollar and foreign currencies, the risk of adverse political and economic
developments, and the possibility of expropriation, nationalization or
confiscatory taxation or limitations on the removal of Fund assets.
o RISKS OF PREFERRED STOCKS AND CONVERTIBLE SECURITIES. The risks associated
with investing in preferred stocks and convertible securities are similar
to the risks of investing in equity securities, including the risk that the
prices of the securities will decline in response to the activities of the
issuing company or in response to general market and/or economic
conditions.
o RISKS OF DERIVATIVE INSTRUMENTS. The use of derivative instruments exposes
the Fund to additional risks and transaction costs. Successful use of these
instruments depends on the adviser's ability to correctly forecast the
direction of market movements. The Fund's performance could be worse than
if the Fund had not used these instruments if the adviser's judgment proves
incorrect. In addition, even if the adviser's forecast is correct, there
may be an imperfect correlation between the price of derivative instruments
and movements in the prices of the securities, interest rates or currencies
being hedged.
o RISKS OF DOLLAR ROLL TRANSACTIONS. The use of mortgage dollar rolls could
increase the volatility of the Fund's share price. It could also diminish
the Fund's investment performance if the adviser does not predict mortgage
prepayments and interest rates correctly.
You can lose money by investing in the Fund. An investment in the Fund is not a
deposit of any bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
FUND PERFORMANCE
The bar chart and table on the left provide you with information on the Fund's
volatility and performance. The bar chart shows how the Fund's performance has
varied from year to year. This information provides some indication of the risks
of investing in the Fund by showing changes in performance from year to year.
The table compares the
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Fund's average annual returns for 1, 5 and 10 years to that of a broad measure
of market performance. The Fund's past performance is not necessarily an
indication of how it will perform in the future.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR
[BAR CHART]
1989 15.91%
1990 7.07%
1991 17.32%
1992 6.80%
1993 12.32%
1994 (4.92%)
1995 16.25%
1996 4.12%
1997 10.85%
1998 5.58%
Best Quarter: Quarter ended June 30, 1989 9.84%
Worst Quarter: Quarter ended March 31, 1992 (3.68)%
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
1 YEAR 5 YEARS 10 YEARS
BOND FUND 5.58% 6.14% 8.93%
LEHMAN BROTHERS 8.69% 7.27% 9.26%
AGGREGATE BOND INDEX *
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* Includes U.S. Treasury and government agency securities, mortgage-backed
obligations and corporate bonds rated investment grade or higher. All issues
must have at least one year left to maturity and an outstanding par value of at
least $100 million.
FEES AND EXPENSES
As an investor, you pay certain fees and expenses if you buy and hold shares of
the Fund. Shareholder fees are fees you pay directly when buying or selling
shares. Annual fund operating expenses are deducted from Fund assets. The
figures below are based on expenses during the fiscal year ended November 30,
1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) None
Imposed on Purchases
Maximum Deferred Sales Charge (Load) None
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM FUND ASSETS) (as a % of average net assets)
Management Fees 1.10%
Distribution and Service (12b-1) Fees None
Other Expenses None
Total Annual Fund Operating Expenses 1.10%
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EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. It assumes that you invest
$10,000 in the Fund for the time periods indicated, that your investment has a
5% return each year and that the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 year $ 112
3 years $ 350
5 years $ 606
10 years $1,340
BUYING AND SELLING SHARES
HOW TO BUY SHARES
You may purchase Fund shares either directly through the Fund or through certain
securities dealers. These dealers have the responsibility to promptly transmit
orders and may charge a processing fee.
MINIMUM INVESTMENTS
The Fund is a member of the IAI Family of Funds, a family of mutual funds
advised by Investment Advisers, Inc. ("IAI"). The minimum initial investment to
establish an account with the IAI Family of Funds is $5,000 for a retail account
and $2,000 for an IRA account. In each case, your initial investment may be
allocated in any way you wish among the Fund and other funds in the IAI Family
of Funds, so long as no less than $1,000 is allocated to any one fund.
Once you have met the account minimum, subsequent purchases can be made for as
little as $100.
You may satisfy the minimum investment requirement for retail accounts by
participating in the STAR Program. This requires an initial investment of $1,000
in any one fund in the IAI Family of Funds and a commitment to invest an
aggregate of $5,000 within 24 months. If you do not keep this commitment, IAI
has the right to redeem your shares. Contact the Fund if you would like a STAR
Program application.
DETERMINING YOUR PURCHASE PRICE
Your purchase price will be equal to the Fund's net asset value ("NAV") per
share next calculated after you place your order in proper form. To make sure
that your order is in proper form, please follow the directions for purchasing
shares given below. No sales load or commission is charged when you purchase
shares. NAV is determined as of the close of regular trading on the New York
Stock Exchange each day the exchange is open.
The Fund's NAV per share 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 values
investments for which market quotations are readily available at market value.
It values short-term investments maturing within 60 days at amortized cost,
which approximates market value. It values all other investments and assets at
their fair value.
The Fund translates prices for its investments quoted in foreign currencies into
U.S. dollars at current exchange rates. As a result, changes in the value of
those currencies in relation to the U.S. dollar will affect the Fund's NAV.
Because foreign markets may be open at different times than the New York Stock
Exchange, the value of the Fund's shares may change on days when shareholders
are not able to buy or sell them. If events materially affecting the values of
the Fund's foreign investments occur between the close of foreign markets and
the close of regular trading on the New York Stock Exchange, these investments
will be valued at their fair value by the Fund's Board of Directors or its
delegates.
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INVESTING BY MAIL
To invest by mail, send a completed, signed application and a check payable to
"IAI Funds" to the following address:
IAI Mutual Funds
P.O. Box 357
Minneapolis, Minnesota 55440-0357
Third party checks will not be accepted for initial account investments. After
the Fund receives your completed purchase order, your account will be credited
with the number of full and fractional shares that can be purchased at the next
determined net asset value.
For assistance in completing the application, please contact IAI Shareholder
Services at 1-800-945-3863.
INVESTING BY WIRE
If you have an account with a commercial bank that is a member of the Federal
Reserve System, you may purchase shares by requesting your bank to wire funds
to:
Norwest Bank Minnesota
ABA Number: 091000019
IAI Mutual Funds Account Number: 6355002264
For further credit to: (name of shareholder)
IAI Account Number: (your account number)
NOTE: PLEASE SPECIFY THE FUND'S NAME
If you are purchasing by wire for a new account, you must do the following
before you wire funds:
o call IAI Shareholder Services at 1-800-945-3863 to advise them of your
investment;
o obtain an account number, instructions and an application form; and
o complete the application and send it to the Fund.
Your completed application must be received by the Fund before your wire is
sent.
Before initiating any subsequent wires, please call IAI Shareholder Services and
advise them of your name, account number and the name of the bank transmitting
the federal funds.
Wire orders will be accepted only on days when your bank, the Fund, the Fund's
transfer agent and Norwest Bank Minnesota are open for business. A wired
purchase will be considered made when the wired amount is received and the
purchase is accepted by the Fund. The Fund must receive payment before the close
of business for the purchase to be credited to your account on that day.
Otherwise, your purchase will be processed the next business day. The Fund may
reject your wire order if it does not contain the required information stated
above. If the Fund rejects your wire order, your money will be returned
promptly, less any costs incurred by the Fund or its transfer agent in rejecting
the order. You must pay any charges assessed by your bank for the wire service.
Any delays that may occur in wiring federal funds, including delays in
processing by the banks, are not the responsibility of the Fund or the Fund's
transfer agent.
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RETIREMENT PLANS
Shares of the Fund may be an appropriate investment for various retirement
plans. If you would like information about establishing an Individual Retirement
Account or other retirement plan, please call IAI Shareholder Services at
1-800-945-3863.
All retirement plans involve a long-term commitment of assets and are subject to
various legal requirements and restrictions. You are urged to consult an
attorney or tax adviser before establishing such a plan.
AUTOMATIC INVESTMENT PLAN
You may arrange to make regular investments of $100 or more each month through
automatic deductions from your checking or savings account. To participate in
this program, simply complete the Automatic Investment Plan portion of your
application and return it to the Fund. You will receive quarterly confirmations
of all transactions and dividends under the Plan.
If you wish to change or terminate your participation in the Automatic
Investment Plan you must provide the Fund with written notice. Your instructions
must be received by 10 days prior to the date the change or termination is to
take place.
HOW TO SELL SHARES
You may redeem your shares on any day the New York Stock Exchange is open. Your
redemption price will be the net asset value of your shares next determined
after your redemption request is received in proper form by the Fund. To make
sure that your request is in proper form, please follow the directions for
selling shares given below.
BY MAIL
If you redeem by mail, your redemption price will be equal to the Fund's net
asset value per share next determined following receipt by the Fund of your
written redemption request in the form shown below (and a properly endorsed
stock certificate if one has been issued).
To redeem by mail, send a written request to the Fund at the following address:
IAI Mutual Funds
P.O. Box 357
Minneapolis, Minnesota 55440-0357
Your request should include the following information:
o name of the Fund,
o account number,
o dollar amount or number of shares to be redeemed,
o name on the account, and,
o signatures of all registered account owners.
If you hold certificates for your shares, they must be included with your
request. They must be endorsed on the back with the signature of the person
whose name appears on the certificate and must be signature guaranteed.
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Signatures on your written request must be guaranteed if :
o you would like the proceeds from the sale to be paid to someone other than
the shareholder of record, or
o you have changed your address over the telephone within the last 15
calendar days.
A signature guarantee assures that a signature is genuine and protects
shareholders from unauthorized account transfers. Banks, savings and loan
associations, trust companies, credit unions, broker-dealers and member firms of
a national securities exchange may guarantee signatures (notarization by a
notary public is not accepted).
If Fund 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 redemption request.
To redeem money from your IRA account, an IRA Distribution Form must be
completed and returned to IAI. To receive a copy of the form, please call IAI
Shareholder Services at 1-800-945-3863.
BY PHONE
You may redeem shares by phone, subject to the following conditions:
o You must have completed the Authorized Telephone Trading section of the
account application.
o Your telephone instructions must be accompanied by your personal
identification number.
o Telephonic redemptions are limited to $50,000.
o Redemption proceeds must be made payable to the owner(s) of record and
delivered to the address of record.
o Telephone redemptions are not permitted for IRAs.
For assistance, please contact IAI Shareholder Services at 1-800-945-3863.
PAYMENT OF REDEMPTION PROCEEDS
BY WIRE. When you redeem by telephone, you may have the proceeds wired to your
bank account if you provided the required information at the time you opened
your account. Wire redemption requests will only be processed on days your bank,
the Fund, the Fund's transfer agent and Norwest Bank Minnesota are open for
business. If you choose to have your redemption proceeds wired to your bank,
please note the following:
o A minimum amount of $1,000 is required to wire redemption proceeds.
o Proceeds will be wired on the next business day after your redemption
request.
o Your account will be charged a fee of $10 each time redemption proceeds are
wired to your bank. Your bank may also charge you a fee for receiving a
wire.
To add the ability to receive proceeds by wire to your account, or to change
existing bank account information, please submit a letter of instruction,
including your bank information and a signature guarantee, to:
IAI Shareholder Services
P.O. Box 357
Minneapolis, Minnesota 55440-0357
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BY CHECK. Normally the Fund will mail payment for shares redeemed on the
business day following the receipt of your redemption request, although payment
may be made as late as seven days after your request. However, the Fund will not
send redemption proceeds until checks (including certified checks, cashiers
checks or automatic investment credits) received in payment for shares have
cleared. This may take up to 15 days from the date of purchase.
INVOLUNTARY REDEMPTIONS
If your account balance falls below $500 as a result of selling or exchanging
shares, the Fund has the right to redeem your shares and send you the proceeds.
Before redeeming your account, the Fund will mail you a notice of its intention
to redeem, which will give you an opportunity to make an additional investment.
If you do not increase the value of your account to at least $500 within six
months of the date the notice was mailed, the Fund may redeem your account.
SYSTEMATIC CASH WITHDRAWAL PLAN
The Fund has a Systematic Cash Withdrawal Plan under which you may automatically
redeem a fixed dollar amount of Fund shares on either a monthly or quarterly
basis. Under the Systematic Cash Withdrawal Plan:
o Automatic redemptions must be for $100 or more.
o Shares will be redeemed at the net asset value determined on the 15th day
of the applicable month (or the next business day).
o All income dividends and capital gains distributions must be reinvested in
Fund shares.
o Confirmations of all transactions and distributions will be sent to you
quarterly.
Plan application forms are available through the Funds. If you would like
assistance in completing the application, contact IAI Shareholder Services at
1-800-945-3863.
EXCHANGE PRIVILEGE
You may exchange your Fund shares for shares of another fund in the IAI Family
of Funds if you satisfy that fund's purchase requirements. There currently is no
fee to exchange shares.
The Fund generally limits exchanges to four per year. This limit may be modified
for certain retirement plan accounts and for those participating in the
Automatic Exchange Plan described below. The Fund may change or cancel its
exchange privilege at any time.
When you exchange your Fund shares for shares of another fund in the IAI Family
of Funds the exchange is considered a sale of your Fund shares for federal
income tax purposes, and you may have a taxable capital gain or loss.
You may exchange shares by notifying the Fund in writing or, if you have
authorized the Fund to accept telephone instructions, by telephone. See "How to
Sell Shares -- By Telephone."
AUTOMATIC EXCHANGE PLAN
You may arrange to make regular exchanges of $100 or more between any of the
funds in the IAI Family of Funds on a monthly basis. Please note the following
about automatic exchanges:
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o If you wish to participate in the Plan, you must complete the Automatic
Exchange Plan portion of your IAI Mutual Fund application.
o Exchanges will take place at the net asset value determined on the fifth
day of each month (or the next business day).
o If you participate in the Automatic Exchange Plan you will receive
quarterly confirmations of all transactions and dividends.
o You may not close an account through the Automatic Exchange Plan.
AUTHORIZED TELEPHONE TRADING
As discussed above, you may exchange and redeem shares by telephone if you have
completed the Authorized Telephone Trading section of the IAI Mutual Fund
application. You will be provided with a personal identification number ("PIN")
that must accompany any instructions by phone. Telephone redemptions are not
permitted for IRAs.
Address changes may also be made over the telephone, provided the request is
accompanied by your PIN. During the 15 calendar days following an address change
by telephone, you may only redeem shares in your account with a signature
guaranteed letter of instruction.
The Fund and its agents will not be responsible for any losses that may result
from acting on telephone instructions that they reasonably believe to be
genuine. The Fund will follow reasonable procedures to confirm that instructions
received by telephone are genuine. These procedures include tape recording all
redemption and exchange requests and requiring that they be accompanied by your
PIN.
STATEMENTS AND CONFIRMATIONS
Whenever you buy or sell shares of the Fund, IAI will send you a confirmation
statement showing how many shares you bought or sold and at what price. You will
also receive an account statement quarterly and a consolidated transaction
statement annually. Please review carefully all of the information relating to
transactions on your statements and confirmations to ensure that your
instructions were acted on properly. Please notify the Fund immediately in
writing if there is an error. If you do not provide the Fund with notice of an
error within 60 days of non-automatic transactions, or within 60 days of the
date of your consolidated quarterly statement in the case of automatic
transactions, you will be deemed to have ratified the transaction.
SHAREHOLDER REPORTS
Shareholder reports will be sent to you semi-annually. These reports contain
financial information about the Fund, including a list of investment securities
held. To reduce the volume of mail you receive, only one copy of Fund reports
may be mailed to your household (same surname and address).
Please call IAI Shareholder Services at 1-800-945-3863 if you wish to receive
additional shareholder reports.
DIVIDEND AND CAPITAL GAINS DISTRIBUTIONS
The Fund pays dividends from net investment income monthly and distributes
realized capital gains, if any, annually.
When you open an account, you should specify on your application how you want to
receive your distributions. The Fund offers three options:
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o full reinvestment-- your dividend and capital gain distributions are
automatically reinvested in additional shares of the Fund;
o capital gains reinvestment-- your capital gain distributions will be
automatically reinvested, but your income dividend distributions will be
paid in cash; or
o cash-- your income dividends and capital gain distributions will be paid in
cash.
If you elect to receive distributions in cash, they can be sent to you by 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.
If you do not select an option when you open your account, the Fund will
automatically reinvest all distributions in additional Fund shares.
The Fund also has a Directed Dividend service which allows you to invest your
dividends and/or capital gain distributions into another IAI Mutual Fund.
Contact IAI Shareholder Services at 1-800-945-3863 for details.
Prior to purchasing shares of the Fund, you should consider the impact of
dividend or capital gains distributions which are expected to be announced, or
which have been announced but not paid. If you purchase shares shortly before
the record date for such a distribution, you will pay the full price for the
shares and then receive a portion of that price back shortly thereafter as a
taxable distribution.
TAXES
Some of the common tax consequences of investing in the Fund are discussed
below. More information about taxes is in the Statement of Additional
Information. Because everyone's tax situation is unique, be sure to consult with
your tax adviser.
TAXES ON DISTRIBUTIONS
The Fund pays its shareholders distributions from its net investment income and
any net capital gains that it has realized. For most investors, these
distributions will be taxable, whether paid in cash or reinvested (unless your
investment is in an IRA or other tax advantaged account).
Distributions paid from the Fund's net investment income and short-term capital
gains are taxable as ordinary income. Distributions paid from the Fund's
long-term capital gains are taxable as long-term gains, regardless of how long
you have held your shares. The Fund's distributions are expected to consist
primarily of ordinary income.
TAXES ON TRANSACTIONS
The sale or exchange of Fund shares will be a taxable event for you and may
result in a capital gain or loss. The gain or loss will be considered long-term
if you have held your shares for more than one year. A gain or loss on shares
held for one year or less is considered short-term and is taxed at the same
rates as ordinary income.
Information about the tax status of each year's distributions will be mailed
annually.
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FUND MANAGEMENT
INVESTMENT ADVISER
Investment Advisers, Inc. ("IAI") is the Fund's investment adviser. IAI, which
has been in the investment advisory business since 1947, also furnishes
investment advice to other concerns including other investment companies,
pension and profit sharing plans, portfolios of foundations, religious,
educational and charitable institutions, trusts, municipalities and individuals.
IAI is located at 601 Second Avenue South, Suite 3600, Minneapolis, Minnesota
55402.
The Fund has entered into a Management Agreement with IAI under which IAI
provides the Fund with investment advisory services and is responsible for
managing the Fund's business affairs, subject to the authority of the Board of
Directors. IAI also is responsible under the Management Agreement for providing
or arranging for the provision of all required administrative, stock transfer,
redemption, dividend disbursing, accounting and shareholder services. IAI may
directly or indirectly pay qualifying broker-dealers, financial institutions and
other entities for providing some of these services to Fund shareholders. The
Management Agreement requires IAI to pay all of the Fund's operating expenses,
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. The Fund pays IAI an annual fee
under the Management Agreement. During its most recent fiscal year, the Fund
paid IAI a management fee equal to 1.10% of the Fund's average daily net assets.
Because IAI is paying the Fund's operating expenses, this fee represents the
Fund's total expenses for the fiscal year.
PORTFOLIO MANAGERS
Larry Hill and Stephen Coleman are responsible for the Fund's day-to-day
investment decisions. Mr. Hill is IAI's Chief Fixed Income Officer and has
managed the Fund since joining IAI in 1984. 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 has been involved in the Fund's management
since mid-1996.
MORE INFORMATION ON INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES
The principal investment strategies of the Fund, which are summarized above
under "Fund Summary," are described in more detail below. These are the
strategies that IAI believes are most likely to be important in trying the
achieve the Fund's objective. Of course, there is no guarantee that the Fund
will achieve its objective. Although not considered principal strategies, you
should be aware that the Fund may also use strategies and invest in securities
that are not described in this prospectus, but that are described in the
statement of additional information.
The Fund invests primarily in bonds and other debt securities that are rated
investment grade at the time of purchase or that are unrated and judged by IAI
to be of comparable quality. Investment grade securities are rated within the
four highest grades assigned by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P"). Commercial paper in which the Fund
invests must be rated at lease Prime-2 by Moody's or A-2 by S&P or be issued by
companies having an outstanding unsecured debt issue currently rated A or better
by Moody's or S&P.
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<PAGE>
Debt securities in which the Fund invests may include:
CORPORATE DEBT OBLIGATIONS. These are debt securities such as bonds,
debentures and notes issued by corporations for the purpose of raising
capital by borrowing. These securities generally represent a promise by
the corporation to make periodic payments of interest and to repay
principal on a specified date.
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. Treasury
securities, and in other securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities.
MORTGAGE-BACKED SECURITIES. The Fund may invest in mortgage-backed
securities issued by government and non-government entities. These
securities are secured by and payable from pools of mortgage loans. The
Fund's investments in mortgage-backed securities may include
collateralized mortgage obligations (CMOs). These are derivative
mortgage securities secured by pools of mortgage loans or other
mortgage-backed securities.
ASSET-BACKED SECURITIES. Asset-backed securities are bonds or notes
backed by loan paper (such as automobile loans or home equity loans) or
accounts receivable originated by banks, credit card companies or other
providers of credit.
ZERO COUPON SECURITIES. These securities do not pay interest currently.
They are issued at deep discounts from their face value and mature at
their face value.
PAYMENT-IN-KIND BONDS. These securities pay interest through the
issuance of additional securities, rather than paying cash.
SHORT-TERM DEBT SECURITIES. These investments may include bank
certificates of deposit, bankers' acceptances and commercial paper.
Although the Fund invests primarily in investment grade securities, it also may
invest up to 15% of its total assets in non-investment grade securities, or
"junk bonds." However, the Fund will not invest in junk bonds rated lower than B
by Moody's or S&P or, if unrated, judged to be of comparable quality by IAI. If
a security is downgraded to a rating below B or, if unrated, is no longer of a
quality comparable to a security rated B, as determined by IAI, the Fund may
retain the security if IAI believes it to be in the Fund's best interest.
The Fund may invest in securities issued by foreign governments, supranational
entities and other foreign issuers, consistent with the rating requirements
discussed above. The Fund does not expect to invest more than 25% of its total
assets in foreign securities, or more than 15% of its total assets in non-dollar
denominated foreign securities.
The Fund may enter into futures contracts on securities, financial indexes and
foreign currencies and options on those contracts, and it may enter into
currency forward contracts. The Fund intends to use these derivative instruments
primarily to hedge the value of its portfolio against potential adverse
movements in securities prices, foreign currency markets or interest rates.
However, the Fund may also use derivative instruments for non-hedging
14
<PAGE>
purposes such as seeking to increase the Fund's income or otherwise seeking to
enhance return, provided that no more than 5% of the Fund's assets will be
committed to initial margin deposits and option premiums on futures and options
contracts entered into for non-hedging purposes (not including any options that
are in-the-money).
To generate additional income, the Fund may invest up to 10% of its net assets
in mortgage dollar roll transactions. In this type of transaction, the Fund
sells mortgage-backed securities for delivery in the current month while
contracting with the same party to repurchase similar securities at a future
date.
EFFECTIVE DURATION
The Fund anticipates that the average effective duration for its portfolio
securities will range from 3 1/2 to 7 1/2 years. Effective duration, one measure
of interest rate risk, measures how much the value of a security is expected to
change with a given change in interest rates. The longer a security's effective
duration, the more sensitive its price to changes in interest rates. For
example, if interest rates were to increase by one percentage point, the market
value of a bond with an effective duration of five years would decrease by 5%,
with all other factors being constant. Effective duration is based on
assumptions and subject to a number of limitations. It is most useful when
interest rate changes are small, rapid and occur equally in short-term and
long-term securities. In addition, it is difficult to calculate precisely for
bonds with prepayment options, such as mortgage-backed securities, because the
calculation requires assumptions about prepayment rates.
TEMPORARY DEFENSIVE INVESTMENTS
In an attempt to respond to adverse market, economic, political or other
conditions, the Fund, as a temporary defensive measure, may hold up to 100% of
its total assets in cash or cash equivalents and short-term securities,
including money market securities. These investments may result in a lower yield
than would be available from longer-term investments and may prevent the Fund
from achieving its investment objective.
PORTFOLIO TURNOVER
Fund managers actively trade portfolio securities, resulting in very high
portfolio turnover rates. Trading of securities may produce capital gains, which
are taxable to shareholders when distributed. Active trading may also increase
the amount of commissions or mark-ups to broker-dealers that the Fund pays when
it buys and sells securities, which could decrease Fund performance. The
"Financial Highlights" section of this prospectus shows the Fund's historical
portfolio turnover rate.
PRINCIPAL RISKS
The principal risks of investing in the Fund are summarized above under "Fund
Summary." More information about Fund risks is presented below.
INTEREST RATE RISK
Debt securities in the Fund's portfolio will fluctuate in value with changes in
interest rates. In general, debt securities will increase in value when interest
rates fall and decrease in value when interest rates rise. Longer-term debt
securities are generally more sensitive to interest rate changes. Securities
which do not pay interest on a current basis, such as zero coupon securities,
may be highly volatile as interest rates rise or fall. Payment-in-kind bonds,
which pay interest in other securities rather than in cash, also may be highly
volatile.
INCOME RISK
The Fund's income could decline due to falling market interest rates. This is
because, in a falling interest rate environment, the Fund generally will have to
invest the proceeds from sales of Fund shares, as well as the proceeds from
maturing portfolio securities (or portfolio securities that have been called,
see "Call Risk," or prepaid, see "Prepayment Risk") in lower-yielding
securities.
15
<PAGE>
CREDIT RISK
The Fund is subject to the risk that the issuers of debt securities it holds
will not make payments on the securities or that the other party to a contract
will default on its obligations. There is also the risk that an issuer could
suffer adverse changes in financial condition that could lower the credit
quality of a security. This could lead to greater volatility in the price of the
security and the shares of the Fund. Also, a change in the credit quality rating
of a bond can affect the bond's liquidity and make it more difficult for the
Fund to sell. Securities rated the lowest investment grade have speculative
characteristics. In adverse economic or other circumstances, issuers of these
lower rated securities are more likely to have difficulty making principal and
interest payments than issuers of higher rated securities. Non-investment grade
securities are subject to additional risk. See "Risks of Non-Investment Grade
Securities" below. When the Fund purchases unrated securities, it will depend on
IAI's analysis of credit risk more heavily than usual.
RISKS OF NON-INVESTMENT GRADE SECURITIES
The Fund may invest in non-investment grade debt securities, which are commonly
known as "junk bonds." Although these securities usually offer higher yields
than investment grade securities, they also involve more risk. Junk bonds
generally have more volatile prices and carry more risk to principal than
investment grade securities. Junk bonds may be more susceptible to real or
perceived adverse economic changes (for instance, an economic downturn or
prolonged period of rising interest rates), political changes or adverse
developments specific to the issuer. In addition, the secondary trading market
may be less liquid than the market for investment grade securities. Adverse
publicity and investor perceptions as well as new or proposed laws also may have
a greater negative impact on the market for junk bonds.
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, 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. If bonds in the Fund's portfolio were called, the Fund
would most likely be forced to invest the unanticipated proceeds in lower
yielding securities, resulting in a decline in the Fund's income.
PREPAYMENT RISK
Mortgage-backed securities are secured by and payable from pools of mortgage
loans. Similarly, asset-backed securities are supported by obligations such as
automobile loans or home equity loans. These mortgages and other obligations
generally can be prepaid at any time without penalty. As a result, mortgage- and
asset-backed securities are subject to prepayment risk, which is the risk that
falling interest rates could cause prepayments of the securities to occur more
quickly than expected. This occurs because, as interest rates fall, more
homeowners refinance the mortgages underlying mortgage-backed securities or
prepay the debt obligations underlying asset-backed securities. The Fund must
reinvest the prepayments at a time when interest rates on new investments are
falling, reducing the income of the Fund. In addition, when interest rates fall,
prices on mortgage- and asset-backed securities may not rise as much as for
other types of comparable debt securities because investors may anticipate an
increase in prepayments.
EXTENSION RISK
Mortgage- and asset-backed securities also are subject to extension risk, which
is the risk that rising interest rates could cause mortgages and other
obligations underlying the securities to be prepaid more slowly than expected,
resulting in slower prepayments of the securities. This would, in effect,
convert a short or medium duration mortgage- or asset-backed security into a
longer duration security, increasing its sensitivity to interest rate changes
and causing its price to decline.
16
<PAGE>
RISKS OF FOREIGN SECURITIES
Investments in foreign securities involve risks that are different in some
respects from investments in securities of U.S. 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 Fund's 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 that currency and, therefore, will cause an overall decline in
the Fund's net asset value and net investment income and capital gains, if any.
Other risks include 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. 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 PREFERRED STOCKS AND CONVERTIBLE SECURITIES
Preferred stocks are securities that represent an ownership interest in a
corporation and that give the owner a prior claim over common stock on the
company's earnings or assets. Convertible securities are debt obligations of
corporations that are convertible into or exchangeable for equity securities or
debt obligations that carry the right to acquire equity securities. The risks
associated with investing in preferred stocks and convertible securities are
different from those traditionally associated with investing in debt securities.
These risks are similar instead to the risks associated with investing in equity
securities, including the risk that the prices of the securities will decline in
response to the activities of the issuing company or in response to general
market and/or economic conditions.
RISKS OF DOLLAR ROLL TRANSACTIONS
In a dollar roll transaction, the Fund sells mortgage-backed securities for
delivery in the current month while contracting with the same party to
repurchase similar securities at a future date. Because the Fund gives up the
right to receive principal and interest paid on the securities sold, a mortgage
dollar roll transaction will diminish the investment performance of the Fund
unless the difference between the price received for the securities sold and the
price to be paid for the securities to be purchased in the future, plus any fee
income received, exceeds any income, principal payments and appreciation on the
securities sold as part of the mortgage dollar roll. Whether mortgage dollar
rolls will benefit the Fund will depend upon IAI's ability to predict mortgage
prepayments and interest rates. In addition, the use of mortgage dollar rolls by
the Fund increases the amount of the Fund's assets that are subject to market
risk, which could increase the volatility of the Fund's share price.
RISKS OF DERIVATIVE INSTRUMENTS
The use of derivative instruments exposes the Fund to additional investment
risks and transaction costs. Risks inherent in the use of derivative instruments
include:
o the risk that interest rates, securities prices and currency markets
will not move in the direction that IAI anticipates;
o an imperfect correlation between the price of derivative instruments
and movements in the prices of the securities, interest rates or
currencies being hedged;
o the inability to close out certain hedged positions to avoid adverse
tax consequences;
17
<PAGE>
o the possible absence of a liquid secondary market for any particular
instrument and possible exchange-imposed price fluctuation limits,
either of which may make it difficult or impossible to close out a
position when desired;
o leverage risk, which is the risk that adverse price movements in an
instrument can result in a loss substantially greater than the Fund's
initial investment in that instrument; and
o particularly in the case of privately negotiated instruments, the risk
that the counterparty will fail to perform its obligations, which could
leave the Fund worse off than if it had not entered into the position.
If the Fund uses derivative instruments and if IAI's judgment proves incorrect,
the Fund's performance could be worse than if it had not used these instruments.
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.
YEAR 2000 ISSUES
The investment advisory, transfer agency and administrative services provided to
the Fund by IAI depend on the smooth functioning of IAI's computer systems. Many
computer software systems in use today cannot distinguish the year 2000 from the
year 1900 because of the way dates are encoded and calculated. That failure
could have a negative impact on handling securities trades, pricing and account
services. IAI has been actively working on necessary changes to its computer
systems to deal with the year 2000 and expects that its systems will be adapted
in time for that event, although there cannot be assurance of success. IAI is
working with third parties to assess the adequacy of their compliance efforts
and is developing contingency plans intended to assure that third-party
noncompliance will not materially affect IAI's operations. Companies,
organizations, governmental entities and markets in which the Fund invests will
be affected by the Year 2000 issue, but at this time the Fund cannot predict the
degree of impact. To the extent the effect is negative, the Fund's returns could
be adversely affected.
18
<PAGE>
FINANCIAL HIGHLIGHTS
The table that follows presents performance information about the Fund. This
information is intended to help you understand the Fund's financial performance
for the past five years. Some of this information reflects financial results for
a single Fund share. The total returns in the table represent the rate that you
would have earned or lost on an investment in the Fund, assuming you reinvested
all of your dividends and distributions. This information has been audited by
KPMG Peat Marwick LLP, independent auditors, whose report, along with the Fund's
financial statements, is included in the Fund's annual report, which is
available upon request.
BOND FUND
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30, YEAR ENDED MARCH 31,
1998 1997 1996 1995 1994*** 1994
------------------------------------------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 9.49 $ 9.32 $ 9.34 $ 8.65 $ 9.32 $ 10.42
OPERATIONS
Net investment income .58 .54 .56 .58 .36 .62
Net realized and unrealized gains (losses) .04 .19 .04 .72 (.55) (.25)
---------------------------------------------------------------------------
TOTAL FROM OPERATIONS .62 .73 .60 1.30 (.19) .37
---------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.58) (.56) (.62) (.61) (.35) (.66)
Net realized gains --- --- --- --- (.13) (.81)
---------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.58) (.56) (.62) (.61) (.48) (1.47)
---------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 9.53 $ 9.49 $ 9.32 $9.34 $ 8.65 $ 9.32
===========================================================================
Total investment return* 6.68% 8.15% 6.85% 15.46% (2.10%) 3.16%
Net assets at end of period (000's omitted) $ 51,359 $ 68,620 $ 86,803 $ 77,526 $ 80,622 $ 97,139
RATIOS
Expenses to average daily net assets 1.10% 1.10% 1.10% 1.09% 1.10%** 1.09%
Net investment income to average net daily assets 5.85% 5.74% 6.20% 6.32% 6.03%** 5.63%
Portfolio turnover rate (excluding short-term
securities) 280.3% 482.2% 342.4% 424.7% 226.7% 333.1%
</TABLE>
- -----------------------
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions
at net asset value.
** Annualized
*** Period from April 1, 1994 to November 30, 1994. Reflects fiscal
year-end change from March 31 to November 30.
19
<PAGE>
FOR MORE INFORMATION ABOUT IAI BOND FUND
The Fund's statement of additional information ("SAI") and annual and
semi-annual reports to shareholders include additional information about the
Fund. The SAI provides more details about the Fund and its policies. A current
SAI is on file with the Securities and Exchange Commission (SEC) and is
incorporated into this prospectus by reference (which means that it is legally
considered part of this prospectus). Additional information about the Fund's
investments is available in the Fund's annual and semiannual reports to
shareholders. In the Fund's annual report, you will find a discussion of the
market conditions and investment strategies that significantly affected the
Fund's performance during its last fiscal year. You may obtain free copies of
these materials by calling the Fund toll free at 1-800-945-3863.
You may also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. For more information, call
1/800-SEC-0330.
Information about the Fund is also available on the Internet. Text only versions
of Fund documents can be viewed online or downloaded from the SEC's Internet
site at http://www.sec.gov.
SEC file number: 811 - 2747
20
<PAGE>
IAI BOND FUND
A SERIES OF
IAI INVESTMENT FUNDS I, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED APRIL 1, 1999
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. THIS
STATEMENT OF ADDITIONAL INFORMATION RELATES TO A PROSPECTUS FOR IAI BOND FUND
(THE "FUND") DATED APRIL 1, 1999, AND SHOULD BE READ IN CONJUNCTION THEREWITH.
THE FINANCIAL STATEMENTS INCLUDED AS PART OF THE FUND'S ANNUAL REPORT TO
SHAREHOLDERS FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1998 ARE INCORPORATED BY
REFERENCE INTO THIS STATEMENT OF ADDITIONAL INFORMATION. COPIES OF THE FUND'S
PROSPECTUS AND/OR ANNUAL REPORT ARE AVAILABLE, WITHOUT CHARGE, BY WRITING OR
CALLING THE FUND, P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440 (TELEPHONE:
1-612-376-2700 OR 1-800-945-3863).
TABLE OF CONTENTS
Page
----
INVESTMENT OBJECTIVE AND STRATEGIES................................... 2
INVESTMENT RESTRICTIONS............................................... 17
INVESTMENT PERFORMANCE................................................ 19
MANAGEMENT............................................................ 20
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT............... 23
LEGAL COUNSEL......................................................... 23
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE.................... 24
CAPITAL STOCK......................................................... 25
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES................... 25
NET ASSET VALUE AND PUBLIC OFFERING PRICE............................. 25
PURCHASES AND REDEMPTIONS OF SHARES................................... 26
TAX STATUS............................................................ 26
LIMITATION OF DIRECTOR LIABILITY...................................... 27
SHAREHOLDER MEETINGS.................................................. 28
FINANCIAL STATEMENTS.................................................. 28
APPENDIX A - RATINGS OF DEBT SECURITIES............................... A-1
<PAGE>
INVESTMENT OBJECTIVE AND STRATEGIES
IAI Bond Fund (the "Fund") is a diversified series of an open-end,
management investment company. The investment objective and principal investment
strategies of the Fund are discussed in the Prospectus under "Fund Summary" and
"More Information on Investment Strategies and Risks." The Fund's investment
objective may not be changed without shareholder approval.
Investors should understand that all investments are subject to
various risks. 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
strategies will be successful, or that its investment objective will be
attained. Certain of the Fund's principal investment strategies are discussed in
more detail below. In addition, the Fund may also use strategies and invest in
securities that are not described in the Prospectus, but that are described
below.
REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreements relating to the
securities in which it may invest. A repurchase agreement, which is functionally
equivalent to a loan by the Fund, involves the purchase of securities by the
Fund 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
The Fund may engage in reverse repurchase agreements as a form of
borrowing. In a reverse repurchase agreement, the 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 segregate appropriate
liquid assets to cover its obligation under the agreement. 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.
The Fund does not currently intend to invest more than 5% of its net assets in
reverse repurchase agreements.
BANK BORROWING
The Fund may borrow from banks for temporary or emergency purposes.
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. The Fund
currently has a line of credit with a bank at the prime interest rate. To the
extent funds are drawn against the line of credit, securities are held in a
segregated account. No compensating balances or commitment fees are required
under the line of credit. The Fund does not currently intend to borrow (either
from banks or through reverse repurchase agreements) an amount exceeding 5% of
its net assets.
SECURITIES OF FOREIGN ISSUERS
The Fund may invest in securities of foreign issuers. However, the
Fund does not intend to invest more than 25% of the value of its total assets in
non-dollar denominated securities of foreign issuers. Investing in foreign
securities may result in greater risk than that incurred by investing in
domestic securities. There is generally less publicly available
2
<PAGE>
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.
The Fund is not aware at this time of the existence of any
investment or exchange control regulations which might substantially impair its
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 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.
U.S. GOVERNMENT SECURITIES
The Fund may invest in securities of, or guaranteed by, the United
States Government, its agencies or instrumentalities. These securities include:
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 the Fund's shares. In the case of securities in which the Fund invests that
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.
The Fund's investments in U.S. government securities may include
U.S. Treasury inflation-protection securities. Inflation-protection securities
are a type of marketable book-entry security issued by the United States
Department of Treasury ("Treasury") with a nominal return linked to the
inflation rate in prices. Inflation-protection securities are auctioned and
issued on a quarterly basis on the 15th of January, April, July, and October.
They have been issued as 10-year notes, with other maturities added thereafter.
The index used to measure inflation is the non-seasonally adjusted U.S.
City Average All Items Consumer Price Index for All Urban Consumers ("CPI-U").
3
<PAGE>
The value of the principal is adjusted for inflation, and every six
months the security will pay interest, which is an amount equal to a fixed
percentage of the inflation-adjusted value of the principal. The final payment
of principal of the security will not be less than the original par amount of
the security at issuance.
The principal of the inflation-protection security is indexed to the
non-seasonally adjusted CPI-U. To calculate the inflation-adjusted principal
value for a particular valuation date, the value of the principal at issuance is
multiplied by the index ratio applicable to that valuation date. The index ratio
for any date is the ratio of the reference CPI applicable to such date to the
reference CPI applicable to the original issue date. Semiannual coupon interest
is determined by multiplying the inflation-adjusted principal amount by one-half
of the stated rate of interest on each interest payment date.
Inflation-adjusted principal or the original par amount, whichever
is larger, will be paid on the maturity date as specified in the applicable
offering announcement. If at maturity the inflation-adjusted principal is less
than the original principal value of the security an additional amount will be
paid at maturity so that the additional amount plus the inflation-adjusted
principal equals the original principal amount. Some inflation-protection
securities may be stripped into principal and interest components. In the case
of a stripped security, the holder of the stripped principal would receive this
additional amount. The final interest payment, however, will be based on the
final inflation-adjusted principal value, not the original par amount.
The reference CPI for the first day of any calendar month is the
CPI-U for the third preceding calendar month. (For example, the reference CPI
for December 1 is the CPI-U reported for September of the same year, which is
released in October.) The reference CPI for any other day of the month is
calculated by a linear interpolation between the reference CPI applicable to the
first day of the month and the reference CPI applicable to the first day of the
following month.
Any revisions the Bureau of Labor Statistics (or successor agency)
makes to any CPI-U number that has been previously released will not be used in
calculations of the value of outstanding inflation-protection securities. In the
case that the CPI-U for a particular month is not reported by the last day of
the following month, the Treasury will announce an index number based on the
last year-over-year CPI-U inflation rate available. Any calculations of the
Treasury's payment obligations on the inflation-protection security that need
that month's CPI-U number will be based on the index number that the Treasury
has announced. If the CPI-U is based to a different year, the Treasury will
continue to use the CPI-U series based on the base reference period in effect
when the security was first issued as long as that series continues to be
published. If the CPI-U is discontinued during the period the
inflation-protection security is outstanding, the Treasury will, in consultation
with the Bureau of Labor Statistics (or successor agency), determine an
appropriate substitute index and methodology for linking the discontinued series
with the new price index series. Determinations of the Secretary of the Treasury
in this regard are final.
Inflation-protection securities will be held and transferred in
either of two book-entry systems: the commercial book-entry system (TRADES) and
TREASURY DIRECT. The securities will be maintained and transferred at their
original par amount, i.e., not at their inflation-adjusted value. STRIPS
components will be maintained and transferred in TRADES at their value based on
the original par amount of the fully constituted security.
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
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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 that can be
resold to institutional investors may be considered liquid pursuant to
guidelines adopted by the Board of Directors. In the case of a Rule 144A
Security, such security is deemed to be liquid if:
(1) IAI reasonably expects to be able to resell the security to a
qualified institutional buyer, as defined in paragraph (a)(1) of Rule 144A, who
is aware of the Fund's reliance upon Rule 144A in selling the security without
registration, as required by paragraph (d)(2) of Rule 144A;
(2) the Rule 144A Security is not (a) of the same class as
securities listed on any national securities exchange or quoted in NASDAQ as
determined under paragraph (d)(3)(i) of Rule 144A, or (b) a security of a
registered investment company (other than a closed-end investment company); and
(3) the issuer (a) is a foreign government eligible to register
securities under Schedule B of the Securities Act of 1933, (b) is a company that
files periodic reports under the Securities Act of 1934 on Forms 8-K, 10-Q, 10-K
or 20-F or provides information under Rule 12g3-2(b) thereunder, or (c) has
agreed in writing to provide the holder and any prospective purchaser of the
Rule 144A Security with reasonably current financial information as required
under paragraph (d)(4)(i) of Rule 144A.
Other securities are deemed to be liquid if IAI determines that the
security can be disposed of within seven days in the ordinary course of business
at approximately the amount at which the Fund has valued the instrument for
purposes of calculating the Fund's net asset value. In making this
determination, IAI will consider such factors as may be relevant to the Fund's
ability to dispose of the security, including but not limited to, the following
factors (none of which, standing alone, would necessarily be determinative):
1. the frequency of trades and quotes for the security;
2. the number of dealers willing to purchase or sell the security
and the number of potential purchasers;
3. dealer undertakings to make a market in the security; and
4. the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer).
It is not possible to predict with assurance the maintenance of an
institutional trading market for such securities and the liquidity of the Fund's
investments could be impaired if trading declines.
VARIABLE OR FLOATING RATE INSTRUMENTS
The 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.
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WHEN-ISSUED/DELAYED-DELIVERY TRANSACTIONS
The Fund may purchase securities on a delayed-delivery or
when-issued basis and purchase or sell securities on a "forward commitment"
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 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 set aside appropriate liquid assets in a segregated
custodial account to cover its purchase obligations. When the 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, 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.
No more than 20% of the Fund's net assets may be invested in
when-issued, delayed delivery or forward commitment transactions. Of such 20%,
no more than one-half (i.e., 10% of net assets) may be invested in when-issued,
delayed delivery or forward commitment transactions without the intention of
actually acquiring securities (i.e., dollar roll transactions).
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 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. 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 appropriate
liquid assets in an amount equal to the value of the when-issued or forward
commitment securities. The benefits derived from the use of dollar rolls may
depend, among other things, upon 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 invest in mortgage-backed securities that are Agency
Pass-Through Certificates, Private Pass-Throughs or collateralized mortgage
obligations ("CMOs") as defined and described below.
Agency Pass-Through Certificates are mortgage pass-through
certificates representing undivided interests in pools of residential mortgage
loans. Distribution of principal and interest on the mortgage loans underlying
an Agency Pass-Through Certificate is an obligation of or guaranteed by GNMA,
FNMA or FHLMC. GNMA is a wholly-owned corporate instrumentality of the United
States within the Department of Housing and Urban Development. The guarantee of
GNMA with respect to GNMA certificates is backed by the full faith and credit of
the United States, and
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GNMA is authorized to borrow from the United States Treasury in an amount which
is at any time sufficient to enable GNMA, with no limitation as to amount, to
perform its guarantee.
FNMA is a federally chartered and privately owned corporation
organized and existing under federal law. Although the Secretary of the Treasury
of the United States has discretionary authority to lend funds to FNMA, neither
the United States nor any agency thereof is obligated to finance FNMA's
operations or to assist FNMA in any other manner.
FHLMC is a federally chartered corporation organized and existing
under federal law, the common stock of which is owned by the Federal Home Loan
Banks. Neither the United States nor any agency thereof is obligated to finance
FHLMC's operations or to assist FHLMC in any other manner.
The mortgage loans underlying GNMA certificates are partially or
fully guaranteed by the Federal Housing Administration or the Veterans
Administration, while the mortgage loans underlying FNMA certificates and FHLMC
certificates are conventional mortgage loans which are, in some cases, insured
by private mortgage insurance companies. Agency Pass-Through Certificates may be
issued in a single class with respect to a given pool of mortgage loans or in
multiple classes.
The residential mortgage loans evidenced by Agency Pass-Through
Certificates and upon which CMOs are based generally are secured by first
mortgages on one- to four-family residential dwellings. Such mortgage loans
generally have final maturities ranging from 15 to 30 years and provide for
monthly payments in amounts sufficient to amortize their original principal
amounts by the maturity dates. Each monthly payment on such mortgage loans
generally includes both an interest component and a principal component, so that
the holder of the mortgage loans receives both interest and a partial return of
principal in each monthly payment. In general, such mortgage loans can be
prepaid by the borrowers at any time without any prepayment penalty. In
addition, many such mortgage loans contain a "due-on-sale" clause requiring the
loans to be repaid in full upon the sale of the property securing the loans.
Because residential mortgage loans generally provide for monthly amortization
and may be prepaid in full at any time, the weighted average maturity of a pool
of residential mortgage loans is likely to be substantially shorter than its
stated final maturity date. The rate at which a pool of residential mortgage
loans is prepaid may be influenced by many factors and is not predictable with
precision.
Private mortgage pass-through securities ("Private Pass-Throughs")
are structured similarly to GNMA, FNMA and FHLMC mortgage pass-through
securities and are issued by originators of and investors in mortgage loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. These
securities usually are backed by a pool of conventional fixed rate or adjustable
loans. Since Private Pass-Throughs typically are not guaranteed by an entity
having the credit status of GNMA, FNMA or FHLMC, such securities generally are
structured with one or more types of credit enhancement. Such credit support
falls into two categories: (i) liquidity protection and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provisions of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches. The Fund will not pay any additional fees for such credit support,
although the existence of credit support may increase the price of a security.
The ratings of securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued creditworthiness of the enhancement
provider. The ratings of such securities could be subject to reduction in the
event of deterioration in the creditworthiness of the credit enhancement
provider even in cases where the delinquency and loss experience on the
underlying pool of assets is better than expected.
The Fund 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
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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.
CMOs are debt obligations typically issued by a private
special-purpose entity and collateralized by residential or commercial mortgage
loans or Agency Pass-Through Certificates. Because CMOs are debt obligations of
private entities, payments on CMOs generally are not obligations of or
guaranteed by any governmental entity, and their ratings and creditworthiness
typically depend, among other factors, on the legal insulation of the issuer and
transaction from the consequences of a sponsoring entity's bankruptcy.
CMOs generally are issued in multiple classes, with holders of each
class entitled to receive specified portions of the principal payments and
prepayments and/or of the interest payments on the underlying mortgage loans.
These entitlements can be specified in a wide variety of ways, so that the
payment characteristics of various classes may differ greatly from one another.
For instance, holders may hold interests in CMO tranches called Z-tranches which
defer interest and principal payments until one or other classes of the CMO have
been paid in full. In addition, for example:
o In a sequential-pay CMO structure, one class is entitled to
receive all principal payments and prepayments on the
underlying mortgage loans (and interest on unpaid principal)
until the principal of the class is repaid in full, while the
remaining classes receive only interest; when the first class
is repaid in full, a second class becomes entitled to receive
all principal payments and prepayments on the underlying
mortgage loans until the class is repaid in full, and so
forth.
o A planned amortization class ("PAC") of CMOs is entitled to
receive principal on a stated schedule to the extent that it
is available from the underlying mortgage loans, thus
providing a greater (but not absolute) degree of certainty as
to the schedule upon which principal will be repaid.
o An accrual class of CMOs provides for interest to accrue and
be added to principal (but not be paid currently) until
specified payments have been made on prior classes, at which
time the principal of the accrual class (including the accrued
interest which was added to principal) and interest thereon
begins to be paid from payments on the underlying mortgage
loans.
o As discussed above with respect to pass-through
mortgage-backed securities, an interest-only class of CMOs
entitles the holder to receive all of the interest and none of
the principal on the underlying mortgage loans, while a
principal-only class of CMOs entitles the holder to receive
all of the principal payments and prepayments and none of the
interest on the underlying mortgage loans.
o A floating rate class of CMOs entitles the holder to receive
interest at a rate which changes in the same direction and
magnitude as changes in a specified index rate. An inverse
floating rate class of CMOs entitles the holder to receive
interest at a rate which changes in the opposite direction
from, and in the same magnitude as or in a multiple of,
changes in a specified index rate. Floating rate and inverse
floating rate classes also may be subject to "caps" and
"floors" on adjustments to the interest rates which they bear.
o A subordinated class of CMOs is subordinated in right of
payment to one or more other classes. Such a subordinated
class provides some or all of the credit support for the
classes that are senior to it by absorbing losses on the
underlying mortgage loans before the senior classes absorb any
losses. A subordinated class which is subordinated to one or
more classes but senior to one or more other classes is
sometimes referred to as a "mezzanine" class. A subordinated
class generally carries a lower rating than the classes that
are senior to it, but may still carry an investment grade
rating.
It generally is more difficult to predict the effect of changes in
market interest rates on the return on mortgage-backed securities than to
predict the effect of such changes on the return of a conventional fixed-rate
debt instrument, and the magnitude of such effects may be greater in some cases.
The return on interest-only and principal-only mortgage-backed securities is
particularly sensitive to changes in interest rates and prepayment speeds. When
interest
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rates decline and prepayment speeds increase, the holder of an interest-only
mortgage-backed security may not even recover its initial investment. Similarly,
the return on an inverse floating rate CMO is likely to decline more sharply in
periods of increasing interest rates than that of a fixed-rate security. For
these reasons, interest-only, principal-only and inverse floating rate
mortgage-backed securities generally have greater risk than more conventional
classes of mortgage-backed securities.
ASSET-BACKED SECURITIES
The Fund may invest in types of asset-backed securities which
represent forms of consumer credit such as automobile and credit card
receivables, manufactured (mobile) home loans, home improvement loans and home
equity loans. Asset-backed securities are generally privately issued and pass
through cash flows to investors. Interest and principal payments 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.
Generally, asset-backed securities include many of the risks
associated with mortgage-related securities. In general, however, the collateral
supporting asset-backed securities is of shorter maturity than mortgage loans
and is less likely to experience substantial prepayments. Asset-backed
securities involve certain risks that are not posed by mortgage-backed
securities, resulting mainly from the fact that asset-backed securities do not
usually contain the complete benefit of a security interest in the related
collateral. For example, credit card receivables generally are unsecured and the
debtors are entitled to the protection of a number of state and federal consumer
credit laws, including the bankruptcy laws, some of which may reduce the ability
to obtain full payment. In the case of automobile receivables, due to various
legal and economic factors, proceeds for repossessed collateral may not always
be sufficient to support payments on these securities.
ZERO COUPON BONDS
The 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, 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.
PAYMENT-IN-KIND BONDS
The Fund may invest in bonds the interest on which may be paid in
other securities rather than cash (PIKs). Typically, during a specified term
prior to the bond's maturity, the issuer of a PIK may provide for the option or
the obligation to make interest payments in bonds, common stock or other
instruments (i.e., "in kind" rather than in cash). The type of instrument in
which interest may or will be paid would be known by the Fund at the time of
investment. While PIKs generate income for purposes of generally accepted
accounting principles, they do not generate cash flow and thus could cause the
Fund to be forced to liquidate securities at an inopportune time in order to
distribute cash, as required by the Internal Revenue Code.
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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.
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 such 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.
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.
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.
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LOANS AND OTHER DIRECT DEBT INSTRUMENTS
The Fund 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 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 the financial intermediary as an issuer of indebtedness may
restrict the 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.
MUNICIPAL OBLIGATIONS
The Fund may invest in municipal bonds and other municipal
obligations when these securities appear to offer more attractive returns than
taxable securities. These bonds and other obligations are issued by the states
and by their local and special-purpose political subdivisions. The term
"municipal bond" includes short-term municipal notes issued by the states and
their political subdivision.
The two general classifications of municipal bonds are "general
obligation" bonds and "revenue" bonds. General obligation bonds are secured by
the governmental issuer's pledge of its faith, credit and taxing power for the
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payment of principal and interest. They are usually paid from general revenues
of the issuing governmental entity. Revenue bonds, on the other hand, are
usually payable only out of a specific a 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 bond 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 sport complexes. Pollution control
revenue bonds are issued to finance air, water and solids pollution control
systems for privately operated industrial or commercial facilities.
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 which are guaranteed
by a governmental unit with taxing power. Federal income tax laws place
substantial limitations on industrial revenue bonds, and particularly certain
specified private activity bonds issued after August 1986. In the future,
legislation could be introduced in Congress which could further restrict or
eliminate the income tax exemption for interest on municipal obligations in
which the Funds may invest.
ADJUSTING INVESTMENT EXPOSURE
Each Fund may, but is not required to, utilize various other
investment strategies as described below to hedge various market risks (such as
interest rates, currency exchange rates, and broad or specific fixed-income
market movements), to manage the effective maturity or duration of the Fund's
portfolio or to enhance potential gain. These strategies may be executed through
the use of derivative contracts. Such strategies are generally accepted as a
part of modern portfolio management and are regularly utilized by many mutual
funds and other institutional investors. Techniques and instruments may change
over time as new instruments and strategies are developed or regulatory changes
occur.
In the course of pursuing these investment strategies, the Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps and enter into various currency
transactions such as currency forward contracts, currency futures contracts,
currency swaps or options on currencies or currency futures.
Such techniques and instruments may be used without limit to attempt
to protect against possible changes in the market value of securities held in or
to be purchased for the Fund's portfolio resulting from securities markets or
currency exchange rate fluctuations, to protect the Fund's unrealized gains in
the value of its portfolio securities, to facilitate the sale of such securities
for investment purposes, to manage the effective maturity or duration of the
Fund's portfolio, or to establish a position in the derivatives markets as a
temporary substitute for purchasing or selling particular securities. Some may
also be used to enhance potential gain, consistent with any limitations imposed
by the Commodity Futures Trading Commission. See "Limitations on Futures and
Options Transactions" below. Any or all of these investment techniques may be
used at any time and in any combination, and there is no particular strategy
that dictates the use of one technique rather than another, as use of any
technique or instruments is a function of numerous variables including market
conditions. The ability of the Fund to utilize these techniques and instruments
successfully will depend on IAI's ability to predict pertinent market movements,
which cannot be assured. The Fund will comply with applicable regulatory
requirements when implementing these strategies, techniques and instruments.
Such techniques and instruments involving financial futures and options thereon
will be purchased, sold or entered into only for bona fide hedging, risk
management or portfolio management purposes.
SWAP AGREEMENTS. The 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 the Fund's exposure to
long- or short-term interest rates (in
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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 objective 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.
The Fund will segregate appropriate liquid assets to cover its
current obligations under swap agreements. If the 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 the Fund's accrued obligations under the swap
agreement over the accrued amount the Fund is entitled to receive under the
agreement. If the 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 the Fund's
accrued obligations under the agreement.
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 a 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 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.
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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.
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 a return of margin owed to it
only in proportion to the amount received by the FCM'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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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 (i.e., sells) 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 fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
COMBINED POSITIONS. 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.
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
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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. Although the Fund
intends to purchase and sell options and futures only on exchanges or boards of
trade where there appears to be an active secondary market, 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. The Fund 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 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. The Fund 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. 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.
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 segregate appropriate liquid assets in the
amount prescribed. These securities will be marked to market daily to assure
that coverage requirements are met. 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.
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. The
Fund intends to comply with
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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. With respect to positions in commodity futures or
commodity option contracts which do not come within the meaning and intent of
bona fide hedging in the CFTC rules, the aggregate initial margin and premiums
required to establish such positions will not exceed five percent of the
liquidation value of the Fund's portfolio, after taking into account unrealized
profits and unrealized losses on any such contracts it has entered into; and,
provided further, that in the case of an option that is in-the-money, such
amount may be excluded in computing such five percent.
INVESTMENT RESTRICTIONS
The Fund is subject to certain policies and restrictions which, along with the
Fund's investment objective, 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.
For purposes of applying this restriction, the Fund will not
purchase securities, as defined above, such that 25% or more of the value of the
Fund's total assets are invested in the securities of companies whose principal
business activities are in the same industry.
3. Issue any senior securities, except as permitted by the 1940 Act
or the Rules and Regulations of the Securities and Exchange Commission.
4. Borrow money, except from banks for temporary or emergency
purposes provided that such borrowings may not exceed 33-1/3% of the value of
the 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.
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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.
For purposes of applying this restriction, "commodities" shall be
deemed to include commodity contracts.
8. Make loans to other persons except to the extent not inconsistent
with the 1940 Act or the Rules and Regulations of the Securities and Exchange
Commission. This limitation does not apply to purchases of commercial paper,
debt securities or repurchase agreements, or to the lending of portfolio
securities.
9. Purchase securities on margin, except that the 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.
For purposes of applying this restriction, the Fund will not sell
securities short except to the extent that it contemporaneously owns or has the
right to obtain at no added cost securities identical to those sold short.
11. Except as part of a merger, consolidation, acquisition, or
reorganization, invest more than 5% of the value of its total assets in the
securities of any one investment company or more than 10% of the value of its
total assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting securities of
any one investment company.
12. Mortgage, pledge or hypothecate its assets except to the extent
necessary to secure permitted borrowings. This limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed in
a segregated account in connection with such contracts.
13. Participate on a joint or a joint and several basis in any
securities trading account.
14. Invest more than 15% of its net assets in illiquid investments.
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 strategies set forth in the Prospectus,
or any restriction set forth above under "Investment Restrictions" which
involves a maximum percentage of securities or assets (other than Restriction 4)
shall not be considered to be violated unless an excess over the percentage
occurs immediately after an acquisition of securities or utilization of assets
and results therefrom.
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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. The Fund's historical portfolio turnover
rates are 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 returns. 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. Monthly,
quarterly and yearly total returns 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
The Fund's cumulative total return from the Fund's inception on
August 18, 1977 through November 30, 1998 was 548.66%.
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 average annual total returns of the Fund for the one, five and
ten year periods ended November 30, 1998 were 6.68%, 6.23% and 8.91%,
respectively.
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.
19
<PAGE>
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 Fund's yield for the thirty-day period ended November 30, 1998
was 6.51%.
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.
MANAGEMENT
Under Minnesota law, the Fund's Board of Directors is generally
responsible for the overall operation and management of the Fund.
The names, addresses, positions and principal occupations of the
directors and executive officers of the Fund are given below.
20
<PAGE>
<TABLE>
<CAPTION>
Name and Address Age Position Principal Occupation(s) During Past 5 Years
- ---------------- --- -------- -------------------------------------------
<S> <C> <C> <C>
Madeline Betsch 56 Director Currently retired; until April 1994, was Executive Vice President,
19 South 1st Street Director of Client Services, of CME-KHBB Advertising since May 1985,
Minneapolis, Minnesota 55401 and prior thereto was a Vice President with Campbell-Mithun, Inc.
(advertising agency) since February 1977.
W. William Hodgson 74 Director Currently retired; served as information manager for the North Central
1698 Dodd Road Home Office of the Prudential Insurance Company of America from 1961
Mendota Heights, Minnesota 55118 until 1984.
George R. Long 69 Director Chairman of Mayfield Corp. (financial consultants and venture
29 Las Brisas Way capitalists) since 1973.
Naples, Florida 33963
J. Peter Thompson 67 Director Grain farmer in southwestern Minnesota since 1974. Prior to that, Mr.
Route 1 Thompson was employed by Paine Webber, Jackson & Curtis, Incorporated,
Mountain Lake, Minnesota 56159 (a diversified financial services concern), most recently as Senior
Vice President and General Partner.
Charles H. Withers 72 Director Currently retired; was Editor of the Rochester Post-Bulletin,
Rochester Post Bulletin Rochester, Minnesota from 1960 through March 31, 1980.
P.O. Box 6118
Rochester, Minnesota 55903
John A. Alexander 42 President Chief Operating Officer of IAI since 1998. Prior to that time, Mr.
601 Second Avenue South Alexander served in various senior management capacities of Lloyds
Suite 3600 Bank plc since 1984.
Minneapolis, Minnesota 55402
David Koehler 61 Vice President Independent training and marketing consultant from 1993 to current.
601 Second Avenue South Prior to that time, Mr. Koehler was a partner at IAI Venture Capital
Suite 3600 Group.
Minneapolis, Minnesota 55402
Paul H. Perseke 33 Treasurer Vice President of IAI. Prior to joining IAI in 1996, Mr. Perseke
601 Second Avenue South served as a Vice President and Manager of Finance and Planning at Dain
Suite 3600 Rauscher Corporation from 1991 to 1996.
Minneapolis, Minnesota 55402
Michael J. Radmer 53 Secretary Partner of Dorsey & Whitney LLP, a Minnesota based law firm which acts
220 South Sixth Street as General Counsel to the Fund.
Minneapolis, Minnesota 55402
</TABLE>
21
<PAGE>
Each of the directors and executive officers of the Fund, other than
Mr. Koehler, also serves in the same capacity for each of the 14 other mutual
funds for which IAI serves as investment adviser (the "IAI Mutual Funds").
No compensation is paid by the Fund to any officer other than David
Koehler. 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 Compensation Aggregate Compensation from the
Name of Person, Position from Bond Fund* 15 IAI Mutual Funds**
------------------------ --------------- -------------------
<S> <C> <C>
Koehler, David - Vice President $1,470 $26,250
Betsch, Madeline - Director $2,056 $37,200
Hodgson, W. William - Director $2,056 $37,200
Long, George R. - Director $2,066 $37,200
Thompson, J. Peter - Director $2,056 $37,200
Withers, Charles H. - Director $2,066 $37,200
</TABLE>
- -------------------------
* For the fiscal year ended November 30, 1998.
** For the calendar year ended December 31, 1998; excludes expenses incurred
in connection with attending meetings.
Effective February 1998, the directors have agreed that the position
of Board Chair shall rotate from director to director.
The Board of Directors of the Fund has approved a Code of Ethics.
The Code permits access persons to engage in personal securities transactions
subject to certain policies and procedures. Such procedures prohibit the
acquiring of any securities in an initial public offering. In addition, all
securities acquired through private placement must be pre-cleared. Procedures
have been adopted which would implement blackout periods for certain securities,
as well as a ban on short-term trading profits. Additional policies prohibit the
receipt of gifts in certain instances. Procedures have been implemented to
monitor employee trading. Each access person of the Adviser is required to
certify annually that they have read and understood the Code of Ethics. An
annual report is provided to the Fund's Board of Directors summarizing existing
procedures and changes, identifying material violations and recommending any
changes needed.
MANAGEMENT AGREEMENT
Effective April 1, 1996, pursuant to a Management Agreement between
the Fund and IAI, 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 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 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 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 and dividends and distributions
declared by the 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, the
Fund has agreed to pay IAI an annual fee as a percentage of the Fund's average
daily net assets as set forth below:
22
<PAGE>
Daily Net Assets Fee IAI Receives Annually
---------------- -------------------------
For the first $100 million 1.10%
For the next $150 million 1.05%
Above $250 million 1.00%
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 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, insurance premiums, and costs of
attending investment conferences. The Management Agreement further provides that
IAI will either reimburse the Fund for the fees and expenses it pays to
directors who are not "interested persons" of the Fund or reduce its fee by an
equivalent amount. IAI is not liable for any loss suffered by the Fund in the
absence of willful misfeasance, bad faith or negligence in the performance of
its duties and obligations.
For the fiscal years ended November 30, 1996, 1997, and 1998, the
Fund paid IAI $570,078, $812,134, and $651,900, respectively, under the
Management Agreement.
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.
IAI's ultimate corporate parent is Lloyds TSB Group, plc ("Lloyds
TSB"), a publicly held financial services organization headquartered in London,
England. Lloyds TSB is one of the largest personal and corporate financial
services groups in the United Kingdom, engaged in a wide range of activities
including commercial and retail banking. The principal offices of Lloyds TSB are
located at St. George's House, 6-8 Eastcheap, London, EC3M 1LL.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
The custodian for the Fund is Norwest Bank Minnesota, N.A. Norwest
Center, Sixth and Marquette, Minneapolis, MN 55479.
IAI acts as the Fund's transfer agent, dividend disbursing agent and
IRA Custodian, at P.O. Box 357, Minneapolis, Minnesota 55402.
LEGAL COUNSEL
Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402, acts as General Counsel to the Fund.
23
<PAGE>
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
IAI selects and (where applicable) negotiates commissions with the
brokers who execute the transactions for the Fund. The primary criteria for the
selection of a broker is the ability of the broker, in the opinion of IAI, to
secure prompt execution of the transactions on favorable terms, including the
reasonableness of the commission and considering the state of the market at the
time. In selecting a broker, IAI may consider whether such broker provides
brokerage and research services (as defined in the Securities Exchange Act of
1934). IAI may direct Fund transactions to brokers who furnish research services
to IAI. Such research services include advice, both directly and in writing, as
to the value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or purchasers or sellers
of securities, as well as analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts. By allocating brokerage business in order to obtain research
services for IAI, the Fund enables IAI to supplement its own investment research
activities and allows IAI to obtain the views and information of individuals and
research staffs of many different securities research firms prior to making
investment decisions for the Fund. To the extent such commissions are directed
to brokers who furnish research services to IAI, IAI receives a benefit, not
capable of evaluation in dollar amounts, without providing any direct monetary
benefit to the Fund from these commissions. Generally the Fund pays higher than
the lowest commission rates available.
IAI believes that most research services obtained by it generally
benefit one or more of the investment companies or other accounts which it
manages. Normally research services obtained through commissions paid by a
managed fund or managed account investing in debt securities would primarily
benefit managed funds and accounts investing in debt securities.
There is no formula for the allocation by IAI of the Fund's
brokerage business to any broker-dealers for brokerage and research services.
However, IAI will authorize the Fund to pay an amount of commission for
effecting a securities transaction in excess of the amount of commission another
broker would have charged only if IAI determines in good faith that such amount
of commission is reasonable in relation to the value of the brokerage and
research services provided by such broker viewed in terms of either that
particular transaction or IAI's overall responsibilities with respect to the
accounts as to which it exercises investment discretion.
Although investment decisions for the Fund are made independently
from other accounts as to which IAI gives investment advice, it may occasionally
develop that the same security is suitable for more than one account. If and
when more than one account simultaneously purchase or sell the same security,
the transactions will be averaged as to price and allocated as to amount in
accordance with arrangements equitable to the Fund and such accounts. The
simultaneous purchase or sale of the same securities by the Fund and other
accounts may have detrimental effects on the Fund, as they may affect the price
paid or received by the Fund or the size of the position obtainable by the Fund.
Consistent with the Rules of Fair Conduct of the National
Association of Securities Dealers, Inc. and subject to the policies set forth in
the preceding paragraphs and such other policies as the Board of Directors of
the 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.
The following table shows brokerage commissions paid by the Fund
during the indicated periods. During the Fund's most recent fiscal year, no
commissions were paid to brokerage firms that provided research services to IAI.
Amount of Commissions
---------------------------------------------------------------------
Year Ended Year Ended Year Ended
November 30, November 30, November 30,
1998 1997 1996
---- ---- ----
$ 3,075 $ 4,350 $ 12,085
24
<PAGE>
CAPITAL STOCK
The Fund, which was created on August 18, 1977, is a separate
portfolio of IAI Investment Funds I, Inc., a Minnesota corporation organized on
April 22, 1977, whose shares of common stock are currently issued in two series
(Series A and B). The investment portfolio represented by Series A common shares
is referred to as "IAI Bond Fund." 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.
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.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of March 18, 1999, no person was a record holder or, to the
knowledge of Bond Fund, beneficial owner of more than 5% of the outstanding
shares of Bond Fund, except as set forth in the following table.
Name and Address Number Percent
of Shareholder of Shares* of Outstanding Shares
-------------- ---------- ---------------------
Charles Schwab & Co., Inc. 543,798 14.17%
SPL Custody A/C for Excl. Bnft. of Cust.
Attn: Mutual Funds Dept. - Bon Rein.
101 Montgomery Street
San Francisco, CA 94104
- -------------------------
* All shares are owned both of record and beneficially.
As of March 18, 1999, 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, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
On November 30, 1998, the net asset value and public offering price
per share of the Fund was calculated as follows:
NAV = Net Assets ($51,358,687) = $9.53
------------------------------
Shares Outstanding (5,388,261)
25
<PAGE>
PURCHASES AND REDEMPTIONS OF SHARES
The Fund has authorized one or more brokers to accept on its behalf
purchase and redemption orders and such brokers are authorized to designate
other intermediaries to accept purchase and redemption orders on the Fund's
behalf. The Fund will be deemed to have received a purchase or redemption order
when an authorized broker or, if applicable, a broker's authorized designee,
accepts the order. In such circumstances, customer orders will be priced at the
Fund's NAV next computed after they are accepted by an authorized broker or the
broker's authorized designee.
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.
PURCHASES AND REDEMPTIONS IN KIND
In extraordinary circumstances, Fund shares may be purchased 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. Also in extraordinary circumstances, Fund shares may be redeemed in
exchange for readily marketable securities held by the 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 Fund qualified during its last taxable year, and intends to
qualify during its current taxable year, as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). If
the Fund so qualifies, it will not be subject to federal income tax on income
that it distributes to shareholders.
It is not expected that distributions from the Fund 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 generally 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. If Fund shares are
sold or otherwise disposed of one year or less after the date of acquisition,
the gain or loss will be short-term. Short-term capital gain is taxed at the
same rates as ordinary income.
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, 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
26
<PAGE>
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 the 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
for distributions to shareholders.
If the Fund invests in zero coupon obligations upon their issuance,
such obligations will have original issue discount in the hands of the Fund.
Generally, the original issue discount equals the difference between the "stated
redemption price at maturity" of the obligation and its "issue price" as those
terms are defined in the Code. If the Fund acquires an already issued zero
coupon bond from another holder, the bond will have original issue discount in
the Fund's hands, equal to the difference between the "adjusted issue price" of
the bond at the time the Fund acquires it (that is, the original issue price of
the bond plus the amount of original issue discount accrued to date) and its
stated redemption price at maturity. In each case, the Fund is required to
accrue as ordinary interest income a portion of such original issue discount
even though it receives no cash currently as interest payment on the obligation.
If the Fund invests in U.S. Treasury inflation-protection securities, it will be
required to treat as original issue discount any increase in the principal
amount of the securities that occurs during the course of its taxable year. If
the Fund purchases such inflation-protection securities that are issued in
stripped form either as stripped bonds or coupons, it will be treated as if it
had purchased a newly issued debt instrument having original issue discount.
Because the Fund is required to distribute substantially all of its
net investment income in order to be taxed as a regulated investment company, it
may be required to distribute an amount greater than the total cash income the
Fund actually receives. Accordingly, in order to make the required distribution,
the Fund may be required to borrow or to liquidate securities.
Some of the investment practices that may be employed by the Fund
will be subject to special provisions that, among other things, may defer the
use of certain losses of the Fund, affect the holding period of the securities
held by the Fund and affect the character of the gains or losses realized. These
provisions may also require the Fund to mark-to-market some of the positions in
its portfolio (i.e., treat them as closed out) or to accrue original discount,
both of which may cause such Fund to recognize income without receiving cash
with which to make distributions in amounts necessary to satisfy the
distribution requirements for qualification as a regulated investment company
and for avoiding income and excise taxes. Accordingly, in order to make the
required distributions, the Fund may be required to borrow or liquidate
securities. The Fund will monitor its transactions and may make certain
elections in order to mitigate the effect of these rules and prevent
disqualification of the Fund as a regulated investment company.
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 as applicable to the Fund and its
shareholders. 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
27
<PAGE>
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 Fund 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 recessionary 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.
SHAREHOLDER MEETINGS
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 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.
FINANCIAL STATEMENTS
The financial statements included as part of the Fund's Annual
Report to Shareholders for the fiscal year ended November 30, 1998, 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 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.
A-1
<PAGE>
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 of projects unseasoned in operating
experience, (c) rentals which begin when facilities are completed, or (d)
payments to which some other limiting condition attaches. Parenthetical rating
denotes probable credit stature upon completion of construction or elimination
of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in the Aa and A
classifications of its corporate bond rating system. The modifier 1 indicates
that the security ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category. With respect to
municipal securities, those bonds in the Aa, A, Baa, Ba, and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols Aa1, A1, Baa1, Ba1, and B1.
COMMERCIAL PAPER
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime - 1 Superior ability for repayment of senior short-term
debt obligations
Prime - 2 Strong ability for repayment of senior short-term
debt obligations
Prime - 3 Acceptable ability for repayment of senior short-term
debt obligations
If an issuer represents to Moody's that its Commercial Paper
obligations are supported by the credit of another entity or entities, Moody's,
in assigning ratings to such issuers, evaluates the financial strength of the
indicated affiliated corporations, commercial banks, insurance companies,
foreign governments, or other entities, but only as one factor in the total
rating assessment.
RATINGS BY S&P
- --------------
CORPORATE BONDS
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
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.
A-2
<PAGE>
BB. Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
B. Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB-rating.
CCC. Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal.
CC. Debt rated CC is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC debt rating.
C. The rating C typically applied to debt subordinated to senior
debt which assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed but debt
service payments are continued.
C1. The rating C1 is reserved for income bonds on which no interest
is being paid.
D. Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. The D rating will be used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
In order to provide more detailed indications of credit quality,
S&P's bond letter ratings described above (except for the AAA category) may be
modified by the addition of a plus or a minus sign to show relative standing
within the rating category.
COMMERCIAL PAPER
A. This highest rating category indicates the greatest capacity for
timely payment. Issues in this category are further defined with the
designations 1, 2, and 3 to indicate the relative degree to safety.
A-1. This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are designed A-1+.
A-2. Capacity for timely payments on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designed A-1.
A-3. Issues carrying this designation have adequate capacity for
timely repayment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
A-3
<PAGE>
IAI MUTUAL FUNDS
IAI INSTITUTIONAL BOND FUND
PROSPECTUS April 1, 1999
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of this Fund, or determined if the
information in this prospectus is accurate or complete. Any statement to the
contrary is a criminal offense.
P.O. BOX 357
MINNEAPOLIS, MINNESOTA 55440-0357
TELEPHONE 1-612-376-2700
1-800-945-3863
<PAGE>
TABLE OF CONTENTS
Page
----
Fund Summary...................................................... 3
Objective................................................... 3
Principal Investment Strategies............................. 3
Principal Risks............................................. 3
Fund Performance............................................ 5
Fees and Expenses........................................... 6
Buying and Selling Shares......................................... 6
How to Buy Shares........................................... 6
How to Sell Shares.......................................... 8
Exchange Privilege.......................................... 10
Authorized Telephone Trading................................ 10
Statements and Confirmations................................ 11
Shareholder Reports......................................... 11
Dividend and Capital Gains Distributions.......................... 11
Taxes ............................................................ 12
Taxes on Distributions...................................... 12
Taxes on Transactions....................................... 12
Fund Management................................................... 12
Investment Adviser.......................................... 12
Portfolio Managers.......................................... 13
More Information on Investment Strategies and Risks............... 13
Investment Strategies....................................... 13
Effective Duration.......................................... 14
Temporary Defensive Investments............................. 14
Portfolio Turnover.......................................... 15
Principal Risks............................................. 15
Financial Highlights.............................................. 18
<PAGE>
FUND SUMMARY
This section briefly describes the objective, principal investment strategies
and principal risks of IAI Institutional Bond Fund (the "Fund"). It also
provides you with information on the Fund's performance and expenses. For
further information on the Fund, please read the section entitled "More
Information on Investment Strategies and Risks."
OBJECTIVE
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.
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests primarily in bonds and other debt securities that are rated
investment grade at the time of purchase or that are unrated and judged to be of
comparable quality by the Fund's adviser. At least 65% of the Fund's total
assets will be invested in debt securities. Although the Fund generally does not
purchase common stocks directly, it may invest up to 10% of its net assets in
convertible securities and preferred stock. The Fund's investments may include
foreign securities. However, the Fund does not expect to invest more than 25% of
its total assets in foreign securities, or more than 15% of its total assets in
non-dollar denominated foreign securities.
Although the Fund invests primarily in investment grade securities, it also may
invest up to 15% of its total assets in non-investment grade securities, or
"junk bonds." However, the Fund will not invest in junk bonds rated lower than B
by Moody's Investors Service, Inc. or Standard & Poor's Corporation or, if
unrated, judged to be of comparable quality by the Fund's adviser.
The Fund may enter into futures contracts, options on futures contracts and
currency forward contracts. The Fund intends to use these derivative instruments
primarily for hedging purposes, although it may use them for non-hedging
purposes to a limited extent. To generate additional income, the Fund may invest
up to 10% of its net assets in mortgage dollar roll transactions.
The Fund's adviser employs a "top-down" approach in selecting securities for the
Fund. First, the adviser determines its economic outlook and the direction in
which it expects interest rates to move. Based on these factors, the adviser
makes duration and yield curve decisions and determines the Fund's sector
allocation. Selections of individual securities that fall within the appropriate
parameters are based on the adviser's analysis of the individual security and
its relative value compared to other securities in the marketplace. The Fund's
adviser anticipates that the average effective duration for the Fund's portfolio
securities will range from 3 1/2 to 7 1/2 years. This range may change, however,
due to market conditions and other economic factors.
PRINCIPAL RISKS
The principal risks that could adversely affect the Fund's share price and yield
include:
o INTEREST RATE RISK. Prices of the Fund's debt securities will generally
fall when interest rates rise. One measure of interest rate risk is
effective duration, explained under "More Information on Investment
Strategies and Risks -- Investment Strategies." The longer the Fund's
effective duration, the greater its interest rate risk.
o INCOME RISK. The Fund's income could decline due to falling market
interest rates.
3
<PAGE>
o CREDIT RISK. The Fund is subject to the risk that the issuers of debt
securities it holds will not make timely payments of interest or principal
on the securities. Securities rated the lowest investment grade have
speculative characteristics. In adverse economic or other circumstances,
issuers of these lower rated securities are more likely to have difficulty
making principal and interest payments than issuers of higher rated
securities. Non-investment grade securities are subject to additional
risk. See "Risks of Non-Investment Grade Securities" below.
o RISKS OF NON-INVESTMENT GRADE SECURITIES. Non-investment grade securities,
or "junk bonds," generally have more volatile prices and carry more risk
to principal than investment grade securities.
o CALL RISK. The Fund is subject to the risk that, during periods of falling
interest rates, an issuer of debt securities will "call" -- or repay --
its high-yielding bonds before their maturity date. The Fund would then be
forced to invest the unanticipated proceeds at lower interest rates,
resulting in a decline in the Fund's income.
o RISKS OF MORTGAGE- AND ASSET-BACKED SECURITIES. Falling interest rates
could cause faster than expected prepayments of the obligations underlying
the Fund's mortgage- and asset-backed securities. These prepayments pass
through to the Fund, which must reinvest them at a time when interest
rates on new investments are falling, reducing the Fund's income. On the
other hand, rising interest rates could cause prepayments of the
obligations to slow, which would lengthen the duration of the Fund's
mortgage- and asset-backed securities and cause their prices to decline.
o RISKS OF FOREIGN SECURITIES. Investing in foreign securities typically
involves risks not associated with U.S. investing. Risks of foreign
investing include the risk that the Fund may experience a decline in net
asset value resulting from changes in exchange rates between the U.S.
dollar and foreign currencies, the risk of adverse political and economic
developments, and the possibility of expropriation, nationalization or
confiscatory taxation or limitations on the removal of Fund assets.
o RISKS OF PREFERRED STOCKS AND CONVERTIBLE SECURITIES. The risks associated
with investing in preferred stocks and convertible securities are similar
to the risks of investing in equity securities, including the risk that
the prices of the securities will decline in response to the activities of
the issuing company or in response to general market and/or economic
conditions.
o RISKS OF DERIVATIVE INSTRUMENTS. The use of derivative instruments exposes
the Fund to additional risks and transaction costs. Successful use of
these instruments depends on the adviser's ability to correctly forecast
the direction of market movements. The Fund's performance could be worse
than if the Fund had not used these instruments if the adviser's judgment
proves incorrect. In addition, even if the adviser's forecast is correct,
there may be an imperfect correlation between the price of derivative
instruments and movements in the prices of the securities, interest rates
or currencies being hedged.
o RISKS OF DOLLAR ROLL TRANSACTIONS. The use of mortgage dollar rolls could
increase the volatility of the Fund's share price. It could also diminish
the Fund's investment performance if the adviser does not predict mortgage
prepayments and interest rates correctly.
You can lose money by investing in the Fund. An investment in the Fund is not a
deposit of any bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
4
<PAGE>
FUND PERFORMANCE
The bar chart and table on the left provide you with information on the Fund's
volatility and performance. The bar chart shows how the Fund's performance has
varied from year to year. This information provides some indication of the risks
of investing in the Fund by showing changes in performance from year to year.
The table compares the Fund's average annual returns for the one-year, five-year
and since-inception periods to that of a broad measure of market performance.
The Fund's past performance is not necessarily an indication of how it will
perform in the future.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR
[BAR CHART]
1994 (4.24%)
1995 15.69%
1996 4.62%
1997 8.49%
1998 7.27%
Best Quarter: Quarter ended March 31, 1995 5.42%
Worst Quarter: Quarter ended March 31, 1994 (3.53)%
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
1 YEAR 5 YEARS SINCE INCEPTION (11/1/93)
INSTITUTIONAL BOND FUND 7.27% 6.17% 5.79%
LEHMAN BROTHERS AGGREGATE 8.69% 7.27% 6.97%
BOND INDEX*
- -----------------------
* Includes U.S. Treasury and government agency securities, mortgage-backed
obligations and corporate bonds rated investment grade or higher. All issues
must have at least one year left to maturity and an outstanding par value of at
least $100 million.
5
<PAGE>
FEES AND EXPENSES
As an investor, you pay certain fees and expenses if you buy and hold shares of
the Fund. Shareholder fees are fees you pay directly when buying or selling
shares. Annual fund operating expenses are deducted from Fund assets. The
figures below are based on expenses during the fiscal year ended November 30,
1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) None
Imposed on Purchases
Maximum Deferred Sales Charge None
(Load)
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM FUND ASSETS)(as a % of average net assets)
Management Fees 0.50%
Distribution and Service (12b-1) Fees None
Other Expenses None
Total Annual Fund Operating Expenses 0.50%
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. It assumes that you invest
$10,000 in the Fund for the time periods indicated, that your investment has a
5% return each year and that the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 year $ 51
3 years $160
5 years $280
10 years $628
BUYING AND SELLING SHARES
HOW TO BUY SHARES
The Fund is a member of the IAI Family of Funds, a family of mutual funds
advised by Investment Advisers, Inc. ("IAI"). You may purchase Fund shares
either directly through the Fund or through certain securities dealers. These
dealers have the responsibility to promptly transmit orders and may charge a
processing fee.
MINIMUM INVESTMENTS
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.
DETERMINING YOUR PURCHASE PRICE
Your purchase price will be equal to the Fund's net asset value ("NAV") per
share next calculated after you place your order in proper form. To make sure
that your order is in proper form, please follow the directions for purchasing
shares given below. No sales load or commission is charged when you purchase
shares. NAV is determined as of the close of regular trading on the New York
Stock Exchange each day the exchange is open.
6
<PAGE>
The Fund's NAV per share 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 values
investments for which market quotations are readily available at market value.
It values short-term investments maturing within 60 days at amortized cost,
which approximates market value. It values all other investments and assets at
their fair value.
The Fund translates prices for its investments quoted in foreign currencies into
U.S. dollars at current exchange rates. As a result, changes in the value of
those currencies in relation to the U.S. dollar will affect the Fund's NAV.
Because foreign markets may be open at different times than the New York Stock
Exchange, the value of the Fund's shares may change on days when shareholders
are not able to buy or sell them. If events materially affecting the values of
the Fund's foreign investments occur between the close of foreign markets and
the close of regular trading on the New York Stock Exchange, these investments
will be valued at their fair value by the Fund's Board of Directors or its
delegates.
INVESTING BY WIRE
If you have an account with a commercial bank that is a member of the Federal
Reserve System, you may purchase shares by requesting your bank to wire funds
to:
Norwest Bank Minnesota
ABA Number: 091000019
IAI Mutual Funds Account Number: 6355002264
For further credit to: (name of shareholder)
IAI Account Number: (your account number)
NOTE: PLEASE SPECIFY THE FUND'S NAME
If you are purchasing by wire for a new account, you must do the following
before you wire funds:
o call IAI Shareholder Services at 1-800-945-3863 to advise them of your
investment;
o obtain an account number, instructions and an application form; and
o complete the application and send it to the Fund.
Your completed application must be received by the Fund before your wire is
sent.
Before initiating any subsequent wires, please call IAI Shareholder Services and
advise them of your name, account number and the name of the bank transmitting
the federal funds.
Wire orders will be accepted only on days when your bank, the Fund, the Fund's
transfer agent and Norwest Bank Minnesota are open for business. A wired
purchase will be considered made when the wired amount is received and the
purchase is accepted by the Fund. The Fund must receive payment before the close
of business for the purchase to be credited to your account on that day.
Otherwise, your purchase will be processed the next business day. The Fund may
reject your wire order if it does not contain the required information stated
above. If the Fund rejects your wire order, your money will be returned
promptly, less any costs incurred by the Fund or its transfer agent in rejecting
the order. You must pay any charges assessed by your bank for the wire service.
Any delays that may occur in wiring federal funds, including delays in
processing by the banks, are not the responsibility of the Fund or the Fund's
transfer agent.
7
<PAGE>
RETIREMENT PLANS
Shares of the Fund may be an appropriate investment for various retirement
plans. If you would like information about establishing an Individual Retirement
Account or other retirement plan, please call IAI Shareholder Services at
1-800-945-3863.
All retirement plans involve a long-term commitment of assets and are subject to
various legal requirements and restrictions. You are urged to consult an
attorney or tax adviser before establishing such a plan.
HOW TO SELL SHARES
You may redeem your shares on any day the New York Stock Exchange is open. Your
redemption price will be the net asset value of your shares next determined
after your redemption request is received in proper form by the Fund. To make
sure that your request is in proper form, please follow the directions for
selling shares given below.
BY MAIL
If you redeem by mail, your redemption price will be equal to the Fund's net
asset value per share next determined following receipt by the Fund of your
written redemption request in the form shown below (and a properly endorsed
stock certificate if one has been issued).
To redeem by mail, send a written request to the Fund at the following address:
IAI Mutual Funds
P.O. Box 357
Minneapolis, Minnesota 55440-0357
Your request should include the following information:
o name of the Fund,
o account number,
o dollar amount or number of shares to be redeemed,
o name on the account, and
o signatures of all registered account owners.
If you hold certificates for your shares, they must be included with your
request. They must be endorsed on the back with the signature of the person
whose name appears on the certificate and must be signature guaranteed.
Signatures on your written request must be guaranteed if :
o you would like the proceeds from the sale to be paid to someone other than
the shareholder of record, or
o you have changed your address over the telephone within the last 15
calendar days.
A signature guarantee assures that a signature is genuine and protects
shareholders from unauthorized account transfers. Banks, savings and loan
associations, trust companies, credit unions, broker-dealers and member firms of
a national securities exchange may guarantee signatures. NOTARIZATION BY A
NOTARY PUBLIC IS NOT ACCEPTED.
8
<PAGE>
If Fund 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 redemption request.
To redeem money from your IRA account, an IRA Distribution Form must be
completed and returned to IAI. To receive a copy of the form, please call IAI
Shareholder Services at 1-800-945-3863.
BY PHONE
You may redeem shares by phone, subject to the following conditions:
o You must have completed the Authorized Telephone Trading section of the
account application.
o Your telephone instructions must be accompanied by your personal
identification number.
o Telephonic redemptions are limited to $50,000.
o Redemption proceeds must be made payable to the owner(s) of record and
delivered to the address of record.
o Telephone redemptions are not permitted for IRAs.
For assistance, please contact IAI Shareholder Services at 1-800-945-3863.
PAYMENT OF REDEMPTION PROCEEDS
BY WIRE. When you redeem by telephone, you may have the proceeds wired to your
bank account if you provided the required information at the time you opened
your account. Wire redemption requests will only be processed on days your bank,
the Fund, the Fund's transfer agent and Norwest Bank Minnesota are open for
business. If you choose to have your redemption proceeds wired to your bank,
please note the following:
o A minimum amount of $1,000 is required to wire redemption proceeds.
o Proceeds will be wired on the next business day after your redemption
request.
o Your account will be charged a fee of $10 each time redemption proceeds
are wired to your bank. Your bank may also charge you a fee for receiving
a wire.
To add the ability to receive proceeds by wire to your account, or to change
existing bank account information, please submit a letter of instruction,
including your bank information and a signature guarantee, to:
IAI Shareholder Services
P.O. Box 357
Minneapolis, Minnesota 55440-0357
BY CHECK. Normally the Fund will mail payment for shares redeemed on the
business day following the receipt of your redemption request, although payment
may be made as late as seven days after your request. However, the Fund will not
send redemption proceeds until checks (including certified checks, cashiers
checks or automatic investment credits) received in payment for shares have
cleared. This may take up to 15 days from the date of purchase.
INVOLUNTARY REDEMPTIONS
If your account balance falls below $2 million as a result of selling or
exchanging shares, the Fund has the right to redeem your shares and send you the
proceeds. Before redeeming your account, the Fund will mail you a notice of its
intention to redeem, which will give you an opportunity to make an additional
investment. If you do not
9
<PAGE>
increase the value of your account to at least $2 million within 60 days of the
date the notice was mailed, the Fund may redeem your account.
EXCHANGE PRIVILEGE
You may exchange your Fund shares for shares of another fund in the IAI Family
of Funds if you satisfy that fund's purchase requirements. There currently is no
fee to exchange shares.
The Fund generally limits exchanges to four per year. This limit may be modified
for certain retirement plan accounts and for those participating in the
Automatic Exchange Plan described below. The Fund may change or cancel its
exchange privilege at any time.
When you exchange your Fund shares for shares of another fund in the IAI Family
of Funds the exchange is considered a sale of your Fund shares for federal
income tax purposes, and you may have a taxable capital gain or loss.
You may exchange shares by notifying the Fund in writing or, if you have
authorized the Fund to accept telephone instructions, by telephone. See "How to
Sell Shares -- By Telephone."
AUTOMATIC EXCHANGE PLAN
You may arrange to make regular exchanges of $100 or more between any of the
funds in the IAI Family of Funds on a monthly basis. Please note the following
about automatic exchanges:
o If you wish to participate in the Plan, you must complete the Automatic
Exchange Plan portion of your IAI Mutual Fund application.
o Exchanges will take place at the net asset value determined on the fifth
day of each month (or the next business day).
o If you participate in the Automatic Exchange Plan you will receive
quarterly confirmations of all transactions and dividends.
o You may not close an account through the Automatic Exchange Plan.
AUTHORIZED TELEPHONE TRADING
As discussed above, you may exchange and redeem shares by telephone if you have
completed the Authorized Telephone Trading section of the IAI Mutual Fund
application. You will be provided with a personal identification number ("PIN")
that must accompany any instructions by phone. Telephone redemptions are not
permitted for IRAs.
Address changes may also be made over the telephone, provided the request is
accompanied by your PIN. During the 15 calendar days following an address change
by telephone, you may only redeem shares in your account with a signature
guaranteed letter of instruction.
The Fund and its agents will not be responsible for any losses that may result
from acting on telephone instructions that they reasonably believe to be
genuine. The Fund will follow reasonable procedures to confirm that instructions
received by telephone are genuine. These procedures include tape recording all
redemption and exchange requests and requiring that they be accompanied by your
PIN.
10
<PAGE>
STATEMENTS AND CONFIRMATIONS
Whenever you buy or sell shares of the Fund, IAI will send you a confirmation
statement showing how many shares you bought or sold and at what price. You will
also receive an account statement quarterly and a consolidated transaction
statement annually. Please review carefully all of the information relating to
transactions on your statements and confirmations to ensure that your
instructions were acted on properly. Please notify the Fund immediately in
writing if there is an error. If you do not provide the Fund with notice of an
error within 60 days of non-automatic transactions, or within 60 days of the
date of your consolidated quarterly statement in the case of automatic
transactions, you will be deemed to have ratified the transaction.
SHAREHOLDER REPORTS
Shareholder reports will be sent to you semi-annually. These reports contain
financial information about the Fund, including a list of investment securities
held. To reduce the volume of mail you receive, only one copy of Fund reports
may be mailed to your household (same surname and address). Please call IAI
Shareholder Services at 1-800-945-3863 if you wish to receive additional
shareholder reports.
DIVIDEND AND CAPITAL GAINS DISTRIBUTIONS
The Fund pays dividends from net investment income monthly and distributes
realized capital gains, if any, annually.
When you open an account, you should specify on your application how you want to
receive your distributions. The Fund offers three options:
o full reinvestment-- your dividend and capital gain distributions are
automatically reinvested in additional shares of the Fund;
o capital gains reinvestment-- your capital gain distributions will be
automatically reinvested, but your income dividend distributions will be
paid in cash; or
o cash-- your income dividends and capital gain distributions will be paid
in cash.
If you elect to receive distributions in cash, they can be sent to you by 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.
If you do not select an option when you open your account, the Fund will
automatically reinvest all distributions in additional Fund shares.
The Fund also has a Directed Dividend service which allows you to invest your
dividends and/or capital gain distributions into another IAI Mutual Fund.
Contact IAI Shareholder Services at 1-800-945-3863 for details.
Prior to purchasing shares of the Fund, you should consider the impact of
dividend or capital gains distributions which are expected to be announced, or
which have been announced but not paid. If you purchase shares shortly before
the record date for such a distribution, you will pay the full price for the
shares and then receive a portion of that price back shortly thereafter as a
taxable distribution.
11
<PAGE>
TAXES
Some of the common tax consequences of investing in the Fund are discussed
below. More information about taxes is in the Statement of Additional
Information. Because everyone's tax situation is unique, be sure to consult with
your tax adviser.
TAXES ON DISTRIBUTIONS
The Fund pays its shareholders distributions from its net investment income and
any net capital gains that it has realized. For most investors, these
distributions will be taxable, whether paid in cash or reinvested (unless your
investment is in an IRA or other tax-advantaged account).
Distributions paid from the Fund's net investment income and short-term capital
gains are taxable as ordinary income. Distributions paid from the Fund's
long-term capital gains are taxable as long-term gains, regardless of how long
you have held your shares. The Fund's distributions are expected to consist
primarily of ordinary income.
TAXES ON TRANSACTIONS
The sale or exchange of Fund shares will be a taxable event for you and may
result in a capital gain or loss. The gain or loss will be considered long-term
if you have held your shares for more than one year. A gain or loss on shares
held for one year or less is considered short-term and is taxed at the same
rates as ordinary income.
Information about the tax status of each year's distributions will be mailed
annually.
FUND MANAGEMENT
INVESTMENT ADVISER
Investment Advisers, Inc. ("IAI") is the Fund's investment adviser. IAI, which
has been in the investment advisory business since 1947, also furnishes
investment advice to other concerns including other investment companies,
pension and profit sharing plans, portfolios of foundations, religious,
educational and charitable institutions, trusts, municipalities and individuals.
IAI is located at 601 Second Avenue South, Suite 3600, Minneapolis, Minnesota
55402.
The Fund has entered into a Management Agreement with IAI under which IAI
provides the Fund with investment advisory services and is responsible for
managing the Fund's business affairs, subject to the authority of the Board of
Directors. IAI also is responsible under the Management Agreement for providing
or arranging for the provision of all required administrative, stock transfer,
redemption, dividend disbursing, accounting and shareholder services. IAI may
directly or indirectly pay qualifying broker-dealers, financial institutions and
other entities for providing some of these services to Fund shareholders. The
Management Agreement requires IAI to pay all of the Fund's operating expenses,
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. The Fund pays IAI an annual fee
under the Management Agreement. During its most recent fiscal year, the Fund
paid IAI a management fee equal to 0.50% of the Fund's average daily net assets.
Because IAI is paying the Fund's operating expenses, this fee represents the
Fund's total expenses for the fiscal year.
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<PAGE>
PORTFOLIO MANAGERS
Larry Hill and Stephen Coleman are responsible for the Fund's day-to-day
investment decisions. Mr. Hill is IAI's Chief Fixed Income Officer and has
managed the Fund since it commenced operations in November 1993. 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 has been involved in the Fund's
management since mid-1996.
MORE INFORMATION ON INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES
The principal investment strategies of the Fund, which are summarized above
under "Fund Summary," are described in more detail below. These are the
strategies that IAI believes are most likely to be important in trying the
achieve the Fund's objective. Of course, there is no guarantee that the Fund
will achieve its objective. Although not considered principal strategies, you
should be aware that the Fund may also use strategies and invest in securities
that are not described in this prospectus, but that are described in the
statement of additional information.
The Fund invests primarily in bonds and other debt securities that are rated
investment grade at the time of purchase or that are unrated and judged by IAI
to be of comparable quality. Investment grade securities are rated within the
four highest grades assigned by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P"). Commercial paper in which the Fund
invests must be rated at lease Prime-2 by Moody's or A-2 by S&P or be issued by
companies having an outstanding unsecured debt issue currently rated A or better
by Moody's or S&P.
Debt securities in which the Fund invests may include:
CORPORATE DEBT OBLIGATIONS. These are debt securities such as bonds,
debentures and notes issued by corporations for the purpose of raising
capital by borrowing. These securities generally represent a promise by
the corporation to make periodic payments of interest and to repay
principal on a specified date.
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. Treasury
securities, and in other securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities.
MORTGAGE-BACKED SECURITIES. The Fund may invest in mortgage-backed
securities issued by government and non-government entities. These
securities are secured by and payable from pools of mortgage loans. The
Fund's investments in mortgage-backed securities may include
collateralized mortgage obligations (CMOs). These are derivative mortgage
securities secured by pools of mortgage loans or other mortgage-backed
securities.
ASSET-BACKED SECURITIES. Asset-backed securities are bonds or notes backed
by loan paper (such as automobile loans or home equity loans) or accounts
receivable originated by banks, credit card companies or other providers
of credit.
ZERO COUPON SECURITIES. These securities do not pay interest currently.
They are issued at deep discounts from their face value and mature at
their face value.
PAYMENT-IN-KIND BONDS. These securities pay interest through the issuance
of additional securities, rather than paying cash.
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<PAGE>
SHORT-TERM DEBT SECURITIES. These investments may include bank
certificates of deposit, bankers' acceptances and commercial paper.
Although the Fund invests primarily in investment grade securities, it also may
invest up to 15% of its total assets in non-investment grade securities, or
"junk bonds." However, the Fund will not invest in junk bonds rated lower than B
by Moody's or S&P or, if unrated, judged to be of comparable quality by IAI. If
a security is downgraded to a rating below B or, if unrated, is no longer of a
quality comparable to a security rated B, as determined by IAI, the Fund may
retain the security if IAI believes it to be in the Fund's best interest.
The Fund may invest in securities issued by foreign governments, supranational
entities and other foreign issuers, consistent with the rating requirements
discussed above. The Fund does not expect to invest more than 25% of its total
assets in foreign securities, or more than 15% of its total assets in non-dollar
denominated foreign securities.
The Fund may enter into futures contracts on securities, financial indexes and
foreign currencies and options on those contracts, and it may enter into
currency forward contracts. The Fund intends to use these derivative instruments
primarily to hedge the value of its portfolio against potential adverse
movements in securities prices, foreign currency markets or interest rates.
However, the Fund may also use derivative instruments for non-hedging purposes
such as seeking to increase the Fund's income or otherwise seeking to enhance
return, provided that no more than 5% of the Fund's assets will be committed to
initial margin deposits and option premiums on futures and options contracts
entered into for non-hedging purposes (not including any options that are
in-the-money).
To generate additional income, the Fund may invest up to 10% of its net assets
in mortgage dollar roll transactions. In this type of transaction, the Fund
sells mortgage-backed securities for delivery in the current month while
contracting with the same party to repurchase similar securities at a future
date.
EFFECTIVE DURATION
The Fund anticipates that the average effective duration for its portfolio
securities will range from 3 1/2 to 7 1/2 years. Effective duration, one measure
of interest rate risk, measures how much the value of a security is expected to
change with a given change in interest rates. The longer a security's effective
duration, the more sensitive its price to changes in interest rates. For
example, if interest rates were to increase by one percentage point, the market
value of a bond with an effective duration of five years would decrease by 5%,
with all other factors being constant. Effective duration is based on
assumptions and subject to a number of limitations. It is most useful when
interest rate changes are small, rapid and occur equally in short-term and
long-term securities. In addition, it is difficult to calculate precisely for
bonds with prepayment options, such as mortgage-backed securities, because the
calculation requires assumptions about prepayment rates.
TEMPORARY DEFENSIVE INVESTMENTS
In an attempt to respond to adverse market, economic, political or other
conditions, the Fund, as a temporary defensive measure, may hold up to 100% of
its total assets in cash or cash equivalents and short-term securities,
including money market securities. These investments may result in a lower yield
than would be available from longer-term investments and may prevent the Fund
from achieving its investment objective.
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<PAGE>
PORTFOLIO TURNOVER
Fund managers actively trade portfolio securities, resulting in very high
portfolio turnover rates. Trading of securities may produce capital gains, which
are taxable to shareholders when distributed. Active trading may also increase
the amount of commissions or mark-ups to broker-dealers that the Fund pays when
it buys and sells securities, which could decrease Fund performance. The
"Financial Highlights" section of this prospectus shows the Fund's historical
portfolio turnover rate.
PRINCIPAL RISKS
The principal risks of investing in the Fund are summarized above under "Fund
Summary." More information about Fund risks is presented below.
INTEREST RATE RISK
Debt securities in the Fund's portfolio will fluctuate in value with changes in
interest rates. In general, debt securities will increase in value when interest
rates fall and decrease in value when interest rates rise. Longer-term debt
securities are generally more sensitive to interest rate changes. Securities
which do not pay interest on a current basis, such as zero coupon securities,
may be highly volatile as interest rates rise or fall. Payment-in-kind bonds,
which pay interest in other securities rather than in cash, also may be highly
volatile.
INCOME RISK
The Fund's income could decline due to falling market interest rates. This is
because, in a falling interest rate environment, the Fund generally will have to
invest the proceeds from sales of Fund shares, as well as the proceeds from
maturing portfolio securities (or portfolio securities that have been called,
see "Call Risk," or prepaid, see "Prepayment Risk") in lower-yielding
securities.
CREDIT RISK
The Fund is subject to the risk that the issuers of debt securities it holds
will not make payments on the securities or that the other party to a contract
will default on its obligations. There is also the risk that an issuer could
suffer adverse changes in financial condition that could lower the credit
quality of a security. This could lead to greater volatility in the price of the
security and the shares of the Fund. Also, a change in the credit quality rating
of a bond can affect the bond's liquidity and make it more difficult for the
Fund to sell. Securities rated the lowest investment grade have speculative
characteristics. In adverse economic or other circumstances, issuers of these
lower rated securities are more likely to have difficulty making principal and
interest payments than issuers of higher rated securities. Non-investment grade
securities are subject to additional risk. See "Risks of Non-Investment Grade
Securities" below. When the Fund purchases unrated securities, it will depend on
IAI's analysis of credit risk more heavily than usual.
RISKS OF NON-INVESTMENT GRADE SECURITIES
The Fund may invest in non-investment grade debt securities, which are commonly
known as "junk bonds." Although these securities usually offer higher yields
than investment grade securities, they also involve more risk. Junk bonds
generally have more volatile prices and carry more risk to principal than
investment grade securities. Junk bonds may be more susceptible to real or
perceived adverse economic changes (for instance, an economic downturn or
prolonged period of rising interest rates), political changes or adverse
developments specific to the issuer. In addition, the secondary trading market
may be less liquid than the market for investment grade securities. Adverse
publicity and investor perceptions as well as new or proposed laws also may have
a greater negative impact on the market for junk bonds.
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<PAGE>
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, 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. If bonds in the Fund's portfolio were called, the Fund
would most likely be forced to invest the unanticipated proceeds in lower
yielding securities, resulting in a decline in the Fund's income.
PREPAYMENT RISK
Mortgage-backed securities are secured by and payable from pools of mortgage
loans. Similarly, asset-backed securities are supported by obligations such as
automobile loans or home equity loans. These mortgages and other obligations
generally can be prepaid at any time without penalty. As a result, mortgage- and
asset-backed securities are subject to prepayment risk, which is the risk that
falling interest rates could cause prepayments of the securities to occur more
quickly than expected. This occurs because, as interest rates fall, more
homeowners refinance the mortgages underlying mortgage-backed securities or
prepay the debt obligations underlying asset-backed securities. The Fund must
reinvest the prepayments at a time when interest rates on new investments are
falling, reducing the income of the Fund. In addition, when interest rates fall,
prices on mortgage- and asset-backed securities may not rise as much as for
other types of comparable debt securities because investors may anticipate an
increase in prepayments.
EXTENSION RISK
Mortgage- and asset-backed securities also are subject to extension risk, which
is the risk that rising interest rates could cause mortgages and other
obligations underlying the securities to be prepaid more slowly than expected,
resulting in slower prepayments of the securities. This would, in effect,
convert a short or medium duration mortgage- or asset-backed security into a
longer duration security, increasing its sensitivity to interest rate changes
and causing its price to decline.
RISKS OF FOREIGN SECURITIES
Investments in foreign securities involve risks that are different in some
respects from investments in securities of U.S. 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 Fund's 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 that currency and, therefore, will cause an overall decline in
the Fund's net asset value and net investment income and capital gains, if any.
Other risks include 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. 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 PREFERRED STOCKS AND CONVERTIBLE SECURITIES
Preferred stocks are securities that represent an ownership interest in a
corporation and that give the owner a prior claim over common stock on the
company's earnings or assets. Convertible securities are debt obligations of
corporations that are convertible into or exchangeable for equity securities or
debt obligations that carry the right to
16
<PAGE>
acquire equity securities. The risks associated with investing in preferred
stocks and convertible securities are different from those traditionally
associated with investing in debt securities. These risks are similar instead to
the risks associated with investing in equity securities, including the risk
that the prices of the securities will decline in response to the activities of
the issuing company or in response to general market and/or economic conditions.
RISKS OF DOLLAR ROLL TRANSACTIONS
In a dollar roll transaction, the Fund sells mortgage-backed securities for
delivery in the current month while contracting with the same party to
repurchase similar securities at a future date. Because the Fund gives up the
right to receive principal and interest paid on the securities sold, a mortgage
dollar roll transaction will diminish the investment performance of the Fund
unless the difference between the price received for the securities sold and the
price to be paid for the securities to be purchased in the future, plus any fee
income received, exceeds any income, principal payments and appreciation on the
securities sold as part of the mortgage dollar roll. Whether mortgage dollar
rolls will benefit the Fund will depend upon IAI's ability to predict mortgage
prepayments and interest rates. In addition, the use of mortgage dollar rolls by
the Fund increases the amount of the Fund's assets that are subject to market
risk, which could increase the volatility of the Fund's share price.
RISKS OF DERIVATIVE INSTRUMENTS
The use of derivative instruments exposes the Fund to additional investment
risks and transaction costs. Risks inherent in the use of derivative instruments
include:
o the risk that interest rates, securities prices and currency markets will
not move in the direction that IAI anticipates;
o an imperfect correlation between the price of derivative instruments and
movements in the prices of the securities, interest rates or currencies
being hedged;
o the inability to close out certain hedged positions to avoid adverse tax
consequences;
o the possible absence of a liquid secondary market for any particular
instrument and possible exchange-imposed price fluctuation limits, either
of which may make it difficult or impossible to close out a position when
desired;
o leverage risk, which is the risk that adverse price movements in an
instrument can result in a loss substantially greater than the Fund's
initial investment in that instrument; and
o particularly in the case of privately negotiated instruments, the risk
that the counterparty will fail to perform its obligations, which could
leave the Fund worse off than if it had not entered into the position.
If the Fund uses derivative instruments and if IAI's judgment proves incorrect,
the Fund's performance could be worse than if it had not used these instruments.
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.
17
<PAGE>
YEAR 2000 ISSUES
The investment advisory, transfer agency and administrative services provided to
the Fund by IAI depend on the smooth functioning of IAI's computer systems. Many
computer software systems in use today cannot distinguish the year 2000 from the
year 1900 because of the way dates are encoded and calculated. That failure
could have a negative impact on handling securities trades, pricing and account
services. IAI has been actively working on necessary changes to its computer
systems to deal with the year 2000 and expects that its systems will be adapted
in time for that event, although there cannot be assurance of success. IAI is
working with third parties to assess the adequacy of their compliance efforts
and is developing contingency plans intended to assure that third-party
noncompliance will not materially affect IAI's operations. Companies,
organizations, governmental entities and markets in which the Fund invests will
be affected by the Year 2000 issue, but at this time the Fund cannot predict the
degree of impact. To the extent the effect is negative, the Fund's returns could
be adversely affected.
FINANCIAL HIGHLIGHTS
The table that follows presents performance information about the Fund. This
information is intended to help you understand the Fund's financial performance
for the past five years. Some of this information reflects financial results for
a single Fund share. The total returns in the table represent the rate that you
would have earned or lost on an investment in the Fund, assuming you reinvested
all of your dividends and distributions. This information has been audited by
KPMG Peat Marwick LLP, independent auditors, whose report, along with the Fund's
financial statements, is included in the Fund's annual report, which is
available upon request.
INSTITUTIONAL BOND FUND
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM 4/1/84 11/1/93 ***
YEARS ENDED NOVEMBER 30, TO 11/30/94+ TO 3/31/94
----------------------------------------------
1998 1997 1996 1995
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 9.49 $ 9.54 $ 9.50 $ 8.85 $ 9.36 $ 10.00
OPERATIONS
Net investment income .64 .58 .63 .62 .38 .22
Net realized and unrealized gains (losses) .09 (.04) .04 .66 (.51) (.65)
----------------------------------------------------------------------------------
TOTAL FROM OPERATIONS .73 .54 .67 1.28 (.13) (.43)
----------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.61) (.59) (.63) (.63) (.38) (.21)
----------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.61) (.59) (.63) (.63) (.38) (.21)
----------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 9.61 $ 9.49 $ 9.54 $ 9.50 $ 8.85 $ 9.36
==================================================================================
Total investment return* 7.92% 5.97% 7.44% 14.95% (1.44)% (4.35)%
Net assets at end of period (000's omitted) $ 49,296 $108,367 $ 97,085 $101,429 $ 73,724 $ 31,478
RATIOS
Expenses to average daily net assets 0.50% 0.50% 0.50% 0.50% 0.50%** 0.50%**
Net investment income to average daily
net assets 6.24% 6.19% 6.75% 6.76% 6.42%** 5.84%**
Portfolio turnover rate (excluding
short-term securities) 333.3% 511.0% 323.0% 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 all distributions at
net asset value.
** Annualized.
*** Commencement of operations.
+ Reflects fiscal year-end change from March 31 to November 30.
18
<PAGE>
FOR MORE INFORMATION ABOUT IAI INSTITUTIONAL BOND FUND
The Fund's statement of additional information ("SAI") and annual and
semi-annual reports to shareholders include additional information about the
Fund. The SAI provides more details about the Fund and its policies. A current
SAI is on file with the Securities and Exchange Commission (SEC) and is
incorporated into this prospectus by reference (which means that it is legally
considered part of this prospectus). Additional information about the Fund's
investments is available in the Fund's annual and semiannual reports to
shareholders. In the Fund's annual report, you will find a discussion of the
market conditions and investment strategies that significantly affected the
Fund's performance during its last fiscal year. You may obtain free copies of
these materials by calling the Fund toll-free at 1-800-945-3863.
You may also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. For more information, call
1-800-SEC-0330.
Information about the Fund is also available on the Internet. Text-only versions
of Fund documents can be viewed online or downloaded from the SEC's Internet
site at http://www.sec.gov.
SEC file number: 811-2747
19
<PAGE>
IAI INSTITUTIONAL BOND FUND
A SERIES OF
IAI INVESTMENT FUNDS I, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED APRIL 1, 1999
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. THIS
STATEMENT OF ADDITIONAL INFORMATION RELATES TO A PROSPECTUS FOR IAI
INSTITUTIONAL BOND FUND (THE "FUND") DATED APRIL 1, 1999, AND SHOULD BE READ IN
CONJUNCTION THEREWITH. THE FINANCIAL STATEMENTS INCLUDED AS PART OF THE FUND'S
ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1998 ARE
INCORPORATED BY REFERENCE INTO THIS STATEMENT OF ADDITIONAL INFORMATION. COPIES
OF THE FUND'S PROSPECTUS AND/OR ANNUAL REPORT ARE AVAILABLE, WITHOUT CHARGE, BY
WRITING OR CALLING THE FUND, P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440
(TELEPHONE: 1-612-376-2700 OR 1-800-945-3863).
TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVE AND STRATEGIES............................... 2
INVESTMENT RESTRICTIONS........................................... 18
INVESTMENT PERFORMANCE............................................ 20
MANAGEMENT........................................................ 21
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT........... 24
LEGAL COUNSEL..................................................... 24
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE................ 24
CAPITAL STOCK..................................................... 25
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES............... 26
NET ASSET VALUE AND PUBLIC OFFERING PRICE......................... 26
PURCHASES AND REDEMPTIONS OF SHARES............................... 27
TAX STATUS........................................................ 27
LIMITATION OF DIRECTOR LIABILITY.................................. 29
SHAREHOLDER MEETINGS............................................. 29
FINANCIAL STATEMENTS.............................................. 29
APPENDIX A - RATINGS OF DEBT SECURITIES........................... A-1
<PAGE>
INVESTMENT OBJECTIVE AND STRATEGIES
IAI Institutional Bond Fund (the "Fund") is a diversified series of
an open-end, management investment company. The investment objective and
principal investment strategies of the Fund are discussed in the Prospectus
under "Fund Summary" and "More Information on Investment Strategies and Risks."
The Fund's investment objective may not be changed without shareholder approval.
Investors should understand that all investments are subject to
various risks. 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
strategies will be successful, or that its investment objective will be
attained. Certain of the Fund's principal investment strategies are discussed in
more detail below. In addition, the Fund may also use strategies and invest in
securities that are not described in the Prospectus, but that are described
below.
REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreements relating to the
securities in which it may invest. A repurchase agreement, which is functionally
equivalent to a loan by the Fund, involves the purchase of securities by the
Fund 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
The Fund may engage in reverse repurchase agreements as a form of
borrowing. In a reverse repurchase agreement, the 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 segregate appropriate
liquid assets to cover its obligation under the agreement. 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.
The Fund does not currently intend to invest more than 5% of its net assets in
reverse repurchase agreements.
BANK BORROWING
The Fund may borrow from banks for temporary or emergency purposes.
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. The Fund
currently has a line of credit with a bank at the prime interest rate. To the
extent funds are drawn against the line of credit, securities are held in a
segregated account. No compensating balances or commitment fees are required
under the line of credit. The Fund does not currently intend to borrow (either
from banks or through reverse repurchase agreements) an amount exceeding 5% of
its net assets.
2
<PAGE>
SECURITIES OF FOREIGN ISSUERS
The Fund may invest in securities of foreign issuers. However, the
Fund does not intend to invest more than 25% of the value of its total assets in
non-dollar denominated securities of foreign issuers. Investing in foreign
securities may result in greater risk than that incurred by investing in
domestic securities. There is generally less publicly available information
about foreign issuers comparable to reports and ratings that are published about
companies in the United States. Also, foreign issuers are not subject to uniform
accounting 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.
The Fund is not aware at this time of the existence of any
investment or exchange control regulations which might substantially impair its
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 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.
U.S. GOVERNMENT SECURITIES
The Fund may invest in securities of, or guaranteed by, the United
States Government, its agencies or instrumentalities. These securities include:
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 the Fund's shares. In the case of securities in which the Fund invests that
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
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assert a claim against the United States government itself in the event the
agency or instrumentality does not meet its commitment.
The Fund's investments in U.S. government securities may include
U.S. Treasury inflation-protection securities. Inflation-protection securities
are a type of marketable book-entry security issued by the United States
Department of Treasury ("Treasury") with a nominal return linked to the
inflation rate in prices. Inflation-protection securities are auctioned and
issued on a quarterly basis on the 15th of January, April, July, and October.
They have been issued as 10-year notes, with other maturities added thereafter.
The index used to measure inflation is the non-seasonally adjusted U.S. City
Average All Items Consumer Price Index for All Urban Consumers ("CPI-U").
The value of the principal is adjusted for inflation, and every six
months the security will pay interest, which is an amount equal to a fixed
percentage of the inflation-adjusted value of the principal. The final payment
of principal of the security will not be less than the original par amount of
the security at issuance.
The principal of the inflation-protection security is indexed to the
non-seasonally adjusted CPI-U. To calculate the inflation-adjusted principal
value for a particular valuation date, the value of the principal at issuance is
multiplied by the index ratio applicable to that valuation date. The index ratio
for any date is the ratio of the reference CPI applicable to such date to the
reference CPI applicable to the original issue date. Semiannual coupon interest
is determined by multiplying the inflation-adjusted principal amount by one-half
of the stated rate of interest on each interest payment date.
Inflation-adjusted principal or the original par amount, whichever
is larger, will be paid on the maturity date as specified in the applicable
offering announcement. If at maturity the inflation-adjusted principal is less
than the original principal value of the security an additional amount will be
paid at maturity so that the additional amount plus the inflation-adjusted
principal equals the original principal amount. Some inflation-protection
securities may be stripped into principal and interest components. In the case
of a stripped security, the holder of the stripped principal would receive this
additional amount. The final interest payment, however, will be based on the
final inflation-adjusted principal value, not the original par amount.
The reference CPI for the first day of any calendar month is the
CPI-U for the third preceding calendar month. (For example, the reference CPI
for December 1 is the CPI-U reported for September of the same year, which is
released in October.) The reference CPI for any other day of the month is
calculated by a linear interpolation between the reference CPI applicable to the
first day of the month and the reference CPI applicable to the first day of the
following month.
Any revisions the Bureau of Labor Statistics (or successor agency)
makes to any CPI-U number that has been previously released will not be used in
calculations of the value of outstanding inflation-protection securities. In the
case that the CPI-U for a particular month is not reported by the last day of
the following month, the Treasury will announce an index number based on the
last year-over-year CPI-U inflation rate available. Any calculations of the
Treasury's payment obligations on the inflation-protection security that need
that month's CPI-U number will be based on the index number that the Treasury
has announced. If the CPI-U is based to a different year, the Treasury will
continue to use the CPI-U series based on the base reference period in effect
when the security was first issued as long as that series continues to be
published. If the CPI-U is discontinued during the period the
inflation-protection security is outstanding, the Treasury will, in consultation
with the Bureau of Labor Statistics (or successor agency), determine an
appropriate substitute index and methodology for linking the discontinued series
with the new price index series. Determinations of the Secretary of the Treasury
in this regard are final.
Inflation-protection securities will be held and transferred in
either of two book-entry systems: the commercial book-entry system (TRADES) and
TREASURY DIRECT. The securities will be maintained and transferred at their
original par amount, i.e., not at their inflation-adjusted value. STRIPS
components will be maintained and transferred in TRADES at their value based on
the original par amount of the fully constituted security.
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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 that can be
resold to institutional investors may be considered liquid pursuant to
guidelines adopted by the Board of Directors. In the case of a Rule 144A
Security, such security is deemed to be liquid if:
(1) IAI reasonably expects to be able to resell the security to a
qualified institutional buyer, as defined in paragraph (a)(1) of Rule 144A, who
is aware of the Fund's reliance upon Rule 144A in selling the security without
registration, as required by paragraph (d)(2) of Rule 144A;
(2) the Rule 144A Security is not (a) of the same class as
securities listed on any national securities exchange or quoted in NASDAQ as
determined under paragraph (d)(3)(i) of Rule 144A, or (b) a security of a
registered investment company (other than a closed-end investment company); and
(3) the issuer (a) is a foreign government eligible to register
securities under Schedule B of the Securities Act of 1933, (b) is a company that
files periodic reports under the Securities Act of 1934 on Forms 8-K, 10-Q, 10-K
or 20-F or provides information under Rule 12g3-2(b) thereunder, or (c) has
agreed in writing to provide the holder and any prospective purchaser of the
Rule 144A Security with reasonably current financial information as required
under paragraph (d)(4)(i) of Rule 144A.
Other securities are deemed to be liquid if IAI determines that the
security can be disposed of within seven days in the ordinary course of business
at approximately the amount at which the Fund has valued the instrument for
purposes of calculating the Fund's net asset value. In making this
determination, IAI will consider such factors as may be relevant to the Fund's
ability to dispose of the security, including but not limited to, the following
factors (none of which, standing alone, would necessarily be determinative):
1. the frequency of trades and quotes for the security;
2. the number of dealers willing to purchase or sell the security
and the number of potential purchasers;
3. dealer undertakings to make a market in the security; and
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4. the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer).
It is not possible to predict with assurance the maintenance of an
institutional trading market for such securities and the liquidity of the Fund's
investments could be impaired if trading declines.
VARIABLE OR FLOATING RATE INSTRUMENTS
The 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.
WHEN-ISSUED/DELAYED-DELIVERY TRANSACTIONS
The Fund may purchase securities on a delayed-delivery or
when-issued basis and purchase or sell securities on a "forward commitment"
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 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 set aside appropriate liquid assets in a segregated
custodial account to cover its purchase obligations. When the 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, 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.
No more than 20% of the Fund's net assets may be invested in
when-issued, delayed delivery or forward commitment transactions. Of such 20%,
no more than one-half (i.e., 10% of net assets) may be invested in when-issued,
delayed delivery or forward commitment transactions without the intention of
actually acquiring securities (i.e., dollar roll transactions).
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 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. 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 appropriate
liquid assets in an amount equal to the value of the
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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 invest in mortgage-backed securities that are Agency
Pass-Through Certificates, Private Pass-Throughs or collateralized mortgage
obligations ("CMOs"), as defined and described below.
Agency Pass-Through Certificates are mortgage pass-through
certificates representing undivided interests in pools of residential mortgage
loans. Distribution of principal and interest on the mortgage loans underlying
an Agency Pass-Through Certificate is an obligation of or guaranteed by GNMA,
FNMA or FHLMC. GNMA is a wholly-owned corporate instrumentality of the United
States within the Department of Housing and Urban Development. The guarantee of
GNMA with respect to GNMA certificates is backed by the full faith and credit of
the United States, and GNMA is authorized to borrow from the United States
Treasury in an amount which is at any time sufficient to enable GNMA, with no
limitation as to amount, to perform its guarantee.
FNMA is a federally chartered and privately owned corporation
organized and existing under federal law. Although the Secretary of the Treasury
of the United States has discretionary authority to lend funds to FNMA, neither
the United States nor any agency thereof is obligated to finance FNMA's
operations or to assist FNMA in any other manner.
FHLMC is a federally chartered corporation organized and existing
under federal law, the common stock of which is owned by the Federal Home Loan
Banks. Neither the United States nor any agency thereof is obligated to finance
FHLMC's operations or to assist FHLMC in any other manner.
The mortgage loans underlying GNMA certificates are partially or
fully guaranteed by the Federal Housing Administration or the Veterans
Administration, while the mortgage loans underlying FNMA certificates and FHLMC
certificates are conventional mortgage loans which are, in some cases, insured
by private mortgage insurance companies. Agency Pass-Through Certificates may be
issued in a single class with respect to a given pool of mortgage loans or in
multiple classes.
The residential mortgage loans evidenced by Agency Pass-Through
Certificates and upon which CMOs are based generally are secured by first
mortgages on one- to four-family residential dwellings. Such mortgage loans
generally have final maturities ranging from 15 to 30 years and provide for
monthly payments in amounts sufficient to amortize their original principal
amounts by the maturity dates. Each monthly payment on such mortgage loans
generally includes both an interest component and a principal component, so that
the holder of the mortgage loans receives both interest and a partial return of
principal in each monthly payment. In general, such mortgage loans can be
prepaid by the borrowers at any time without any prepayment penalty. In
addition, many such mortgage loans contain a "due-on-sale" clause requiring the
loans to be repaid in full upon the sale of the property securing the loans.
Because residential mortgage loans generally provide for monthly amortization
and may be prepaid in full at any time, the weighted average maturity of a pool
of residential mortgage loans is likely to be substantially shorter than its
stated final maturity date. The rate at which a pool of residential mortgage
loans is prepaid may be influenced by many factors and is not predictable with
precision.
Private mortgage pass-through securities ("Private Pass-Throughs")
are structured similarly to GNMA, FNMA and FHLMC mortgage pass-through
securities and are issued by originators of and investors in mortgage loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. These
securities usually are backed by a pool of conventional fixed rate or adjustable
loans. Since Private Pass-Throughs typically are not guaranteed by an entity
having the credit status of GNMA, FNMA or FHLMC, such securities generally are
structured with one or more types of credit enhancement. Such credit support
falls into two categories: (i) liquidity protection and (ii) protection against
losses resulting from
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ultimate default by an obligor on the underlying assets. Liquidity protection
refers to the provisions of advances, generally by the entity administering the
pool of assets, to ensure that the pass-through of payments due on the
underlying pool occurs in a timely fashion. Protection against losses resulting
from ultimate default enhances the likelihood of ultimate payment of the
obligations on at least a portion of the assets in the pool. Such protection may
be provided through guarantees, insurance policies or letters of credit obtained
by the issuer or sponsor from third parties, through various means of
structuring the transaction or through a combination of such approaches. The
Fund will not pay any additional fees for such credit support, although the
existence of credit support may increase the price of a security.
The ratings of securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued creditworthiness of the enhancement
provider. The ratings of such securities could be subject to reduction in the
event of deterioration in the creditworthiness of the credit enhancement
provider even in cases where the delinquency and loss experience on the
underlying pool of assets is better than expected.
The Fund may invest in stripped mortgage-backed securities. Such
securities are created when a U.S. government agency or a financial institution
separates the interest and principal components of a mortgage-backed security
and sells them as individual securities. The holder of the "principal-only"
security (PO) receives the principal payments made by the underlying
mortgage-backed security, while the holder of the "interest-only" security (IO)
receives interest payments from the same underlying security. The prices of
stripped mortgage-backed securities may be particularly affected by changes in
interest rates. As interest rates fall, prepayment rates tend to increase, which
tends to reduce prices of IOs and increase prices of POs. Rising interest rates
can have the opposite effect.
CMOs are debt obligations typically issued by a private
special-purpose entity and collateralized by residential or commercial mortgage
loans or Agency Pass-Through Certificates. Because CMOs are debt obligations of
private entities, payments on CMOs generally are not obligations of or
guaranteed by any governmental entity, and their ratings and creditworthiness
typically depend, among other factors, on the legal insulation of the issuer and
transaction from the consequences of a sponsoring entity's bankruptcy.
CMOs generally are issued in multiple classes, with holders of each
class entitled to receive specified portions of the principal payments and
prepayments and/or of the interest payments on the underlying mortgage loans.
These entitlements can be specified in a wide variety of ways, so that the
payment characteristics of various classes may differ greatly from one another.
For instance, holders may hold interests in CMO tranches called Z-tranches which
defer interest and principal payments until one or other classes of the CMO have
been paid in full. In addition, for example:
o In a sequential-pay CMO structure, one class is entitled to
receive all principal payments and prepayments on the
underlying mortgage loans (and interest on unpaid principal)
until the principal of the class is repaid in full, while the
remaining classes receive only interest; when the first class
is repaid in full, a second class becomes entitled to receive
all principal payments and prepayments on the underlying
mortgage loans until the class is repaid in full, and so
forth.
o A planned amortization class ("PAC") of CMOs is entitled to
receive principal on a stated schedule to the extent that it
is available from the underlying mortgage loans, thus
providing a greater (but not absolute) degree of certainty as
to the schedule upon which principal will be repaid.
o An accrual class of CMOs provides for interest to accrue and
be added to principal (but not be paid currently) until
specified payments have been made on prior classes, at which
time the principal of the accrual class (including the accrued
interest which was added to principal) and interest thereon
begins to be paid from payments on the underlying mortgage
loans.
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o As discussed above with respect to pass-through
mortgage-backed securities, an interest-only class of CMOs
entitles the holder to receive all of the interest and none of
the principal on the underlying mortgage loans, while a
principal-only class of CMOs entitles the holder to receive
all of the principal payments and prepayments and none of the
interest on the underlying mortgage loans.
o A floating rate class of CMOs entitles the holder to receive
interest at a rate which changes in the same direction and
magnitude as changes in a specified index rate. An inverse
floating rate class of CMOs entitles the holder to receive
interest at a rate which changes in the opposite direction
from, and in the same magnitude as or in a multiple of,
changes in a specified index rate. Floating rate and inverse
floating rate classes also may be subject to "caps" and
"floors" on adjustments to the interest rates which they bear.
o A subordinated class of CMOs is subordinated in right of
payment to one or more other classes. Such a subordinated
class provides some or all of the credit support for the
classes that are senior to it by absorbing losses on the
underlying mortgage loans before the senior classes absorb any
losses. A subordinated class which is subordinated to one or
more classes but senior to one or more other classes is
sometimes referred to as a "mezzanine" class. A subordinated
class generally carries a lower rating than the classes that
are senior to it, but may still carry an investment grade
rating.
It generally is more difficult to predict the effect of changes in
market interest rates on the return on mortgage-backed securities than to
predict the effect of such changes on the return of a conventional fixed-rate
debt instrument, and the magnitude of such effects may be greater in some cases.
The return on interest-only and principal-only mortgage-backed securities is
particularly sensitive to changes in interest rates and prepayment speeds. When
interest rates decline and prepayment speeds increase, the holder of an
interest-only mortgage-backed security may not even recover its initial
investment. Similarly, the return on an inverse floating rate CMO is likely to
decline more sharply in periods of increasing interest rates than that of a
fixed-rate security. For these reasons, interest-only, principal-only and
inverse floating rate mortgage-backed securities generally have greater risk
than more conventional classes of mortgage-backed securities.
ASSET-BACKED SECURITIES
The Fund may invest in types of asset-backed securities which
represent forms of consumer credit such as automobile and credit card
receivables, manufactured (mobile) home loans, home improvement loans and home
equity loans. Asset-backed securities are generally privately issued and pass
through cash flows to investors. Interest and principal payments 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.
Generally, asset-backed securities include many of the risks
associated with mortgage-related securities. In general, however, the collateral
supporting asset-backed securities is of shorter maturity than mortgage loans
and is less likely to experience substantial prepayments. Asset-backed
securities involve certain risks that are not posed by mortgage-backed
securities, resulting mainly from the fact that asset-backed securities do not
usually contain the complete benefit of a security interest in the related
collateral. For example, credit card receivables generally are unsecured and the
debtors are entitled to the protection of a number of state and federal consumer
credit laws, including the bankruptcy laws, some of which may reduce the ability
to obtain full payment. In the case of automobile receivables, due to various
legal and economic factors, proceeds for repossessed collateral may not always
be sufficient to support payments on these securities.
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ZERO COUPON BONDS
The 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, 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.
PAYMENT-IN-KIND BONDS
The Fund may invest in bonds the interest on which may be paid in
other securities rather than cash (PIKs). Typically, during a specified term
prior to the bond's maturity, the issuer of a PIK may provide for the option or
the obligation to make interest payments in bonds, common stock or other
instruments (i.e., "in kind" rather than in cash). The type of instrument in
which interest may or will be paid would be known by the Fund at the time of
investment. While PIKs generate income for purposes of generally accepted
accounting principles, they do not generate cash flow and thus could cause the
Fund to be forced to liquidate securities at an inopportune time in order to
distribute cash, as required by the Internal Revenue Code.
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.
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 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 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.
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.
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
The Fund 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 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
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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 the financial intermediary as an issuer of indebtedness may
restrict the 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.
MUNICIPAL OBLIGATIONS
The Fund may invest in municipal bonds and other municipal
obligations when these securities appear to offer more attractive returns. These
bonds and other obligations are issued by the states and by their local and
special-purpose political subdivisions. The term "municipal bond" includes
short-term municipal notes issued by the states and their political subdivision.
The two general classifications of municipal bonds are "general
obligation" bonds 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 general revenues
of the issuing governmental entity. Revenue bonds, on the other hand, are
usually payable only out of a specific a 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 bond 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 sport complexes. Pollution control
revenue bonds are issued to finance air, water and solids pollution control
systems for privately operated industrial or commercial facilities.
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 which are guaranteed
by a governmental unit with taxing power. Federal income tax laws place
substantial limitations on industrial revenue bonds, and particularly certain
specified private activity bonds issued after August 1986. In the future,
legislation could be introduced in Congress which could further restrict or
eliminate the income tax exemption for interest on municipal obligations in
which the Funds may invest.
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ADJUSTING INVESTMENT EXPOSURE
Each Fund may, but is not required to, utilize various other
investment strategies as described below to hedge various market risks (such as
interest rates, currency exchange rates, and broad or specific fixed-income
market movements), to manage the effective maturity or duration of the Fund's
portfolio or to enhance potential gain. These strategies may be executed through
the use of derivative contracts. Such strategies are generally accepted as a
part of modern portfolio management and are regularly utilized by many mutual
funds and other institutional investors. Techniques and instruments may change
over time as new instruments and strategies are developed or regulatory changes
occur.
In the course of pursuing these investment strategies, the Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps and enter into various currency
transactions such as currency forward contracts, currency futures contracts,
currency swaps or options on currencies or currency futures.
Such techniques and instruments may be used without limit to attempt
to protect against possible changes in the market value of securities held in or
to be purchased for the Fund's portfolio resulting from securities markets or
currency exchange rate fluctuations, to protect the Fund's unrealized gains in
the value of its portfolio securities, to facilitate the sale of such securities
for investment purposes, to manage the effective maturity or duration of the
Fund's portfolio, or to establish a position in the derivatives markets as a
temporary substitute for purchasing or selling particular securities. Some may
also be used to enhance potential gain, consistent with any limitations imposed
by the Commodity Futures Trading Commission. See "Limitations on Futures and
Options Transactions" below. Any or all of these investment techniques may be
used at any time and in any combination, and there is no particular strategy
that dictates the use of one technique rather than another, as use of any
technique or instruments is a function of numerous variables including market
conditions. The ability of the Fund to utilize these techniques and instruments
successfully will depend on IAI's ability to predict pertinent market movements,
which cannot be assured. The Fund will comply with applicable regulatory
requirements when implementing these strategies, techniques and instruments.
Such techniques and instruments involving financial futures and options thereon
will be purchased, sold or entered into only for bona fide hedging, risk
management or portfolio management purposes.
SWAP AGREEMENTS. The 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 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 objective 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
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by assignment or other disposition, or by entering into an offsetting swap
agreement with the same party or a similarly creditworthy party.
The Fund will segregate appropriate liquid assets to cover its
current obligations under swap agreements. If the 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 the Fund's accrued obligations under the swap
agreement over the accrued amount the Fund is entitled to receive under the
agreement. If the 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 the Fund's
accrued obligations under the agreement.
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 a 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 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
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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.
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 a return of margin owed to it
only in proportion to the amount received by the FCM'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.
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 (i.e., sells) 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
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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 fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
COMBINED POSITIONS. 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.
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. Although the Fund
intends to purchase and sell options and futures only on exchanges or boards of
trade where there appears to be an active secondary market, 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
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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. The Fund 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 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. The Fund 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. 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.
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 segregate appropriate liquid assets in the
amount prescribed. These securities will be marked to market daily to assure
that coverage requirements are met. 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.
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. 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. With respect to positions in commodity futures or
commodity option
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contracts which do not come within the meaning and intent of bona fide hedging
in the CFTC rules, the aggregate initial margin and premiums required to
establish such positions will not exceed five percent of the liquidation value
of the Fund's portfolio, after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into; and, provided
further, that in the case of an option that is in-the-money, such amount may be
excluded in computing such five percent.
INVESTMENT RESTRICTIONS
The Fund is subject to certain policies and restrictions which,
along with the Fund's investment objective, 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.
For purposes of applying this restriction, the Fund will not
purchase securities, as defined above, such that 25% or more of the value of the
Fund's total assets are invested in the securities of companies whose principal
business activities are in the same industry.
3. Issue any senior securities, except as permitted by the 1940 Act
or the Rules and Regulations of the Securities and Exchange Commission.
4. Borrow money, except from banks for temporary or emergency
purposes provided that such borrowings may not exceed 33-1/3% of the value of
the 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.
For purposes of applying this restriction, "commodities" shall be
deemed to include commodity contracts.
8. Make loans to other persons except to the extent not inconsistent
with the 1940 Act or the Rules and Regulations of the Securities and Exchange
Commission. This limitation does not apply to purchases of commercial paper,
debt securities or repurchase agreements, or to the lending of portfolio
securities.
9. Purchase securities on margin, except that the 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.
For purposes of applying this restriction, the Fund will not sell
securities short except to the extent that it contemporaneously owns or has the
right to obtain at no added cost securities identical to those sold short.
11. Except as part of a merger, consolidation, acquisition, or
reorganization, invest more than 5% of the value of its total assets in the
securities of any one investment company or more than 10% of the value of its
total assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting securities of
any one investment company.
12. Mortgage, pledge or hypothecate its assets except to the extent
necessary to secure permitted borrowings. This limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed in
a segregated account in connection with such contracts.
13. Participate on a joint or a joint and several basis in any
securities trading account.
14. Invest more than 15% of its net assets in illiquid investments.
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 strategies set forth in the Prospectus,
or any restriction set forth above under "Investment Restrictions" which
involves a maximum percentage of securities or assets (other than Restriction 4)
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.
19
<PAGE>
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. 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 returns. 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. Monthly,
quarterly and yearly total returns 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
The Fund's cumulative total return from the Fund's inception on
November 1, 1993 through November 30, 1998 was 33.16%.
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 average annual total returns of the Fund for the one year, five
year and since inception periods ended November 30, 1998 were 7.92%, 6.22% and
5.80%, respectively.
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
20
<PAGE>
dividends) by the net asset value per share on the last day of the period. The
yield formula provides for semiannual compounding which assumes that net
investment income is earned and reinvested at a constant rate and annualized at
the end of a six-month period.
The yield formula is as follows:
YIELD = 2[(a-b + 1)(6) -1]
---
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to
receive dividends.
d = the net asset value of the Fund at the end
of the period.
The Fund's yield for the thirty-day period ended November 30, 1998
was 6.87%.
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.
MANAGEMENT
Under Minnesota law, the Fund's Board of Directors is generally
responsible for the overall operation and management of the Fund.
The names, addresses, positions and principal occupations of the
directors and executive officers of the Fund are given below.
21
<PAGE>
<TABLE>
<CAPTION>
Name and Address Age Position Principal Occupation(s) During Past 5 Years
- ---------------- --- -------- -------------------------------------------
<S> <C> <C> <C>
Madeline Betsch 56 Director Currently retired; until April 1994, was Executive Vice President,
19 South 1st Street Director of Client Services, of CME-KHBB Advertising since May 1985,
Minneapolis, Minnesota 55401 and prior thereto was a Vice President with Campbell-Mithun, Inc.
(advertising agency) since February 1977.
W. William Hodgson 74 Director Currently retired; served as information manager for the North
1698 Dodd Road Central Home Office of the Prudential Insurance Company of America
Mendota Heights, Minnesota 55118 from 1961 until 1984.
George R. Long 68 Director Chairman of Mayfield Corp. (financial consultants and venture
29 Las Brisas Way capitalists) since 1973.
Naples, Florida 33963
J. Peter Thompson 67 Director Grain farmer in southwestern Minnesota since 1974. Prior to that,
Route 1 Mr. Thompson was employed by Paine Webber, Jackson & Curtis,
Mountain Lake, Minnesota 56159 Incorporated, (a diversified financial services concern), most
recently as Senior Vice President and General Partner.
Charles H. Withers 72 Director Currently retired; was Editor of the Rochester Post-Bulletin,
Rochester Post Bulletin Rochester, Minnesota from 1960 through March 31, 1980.
P.O. Box 6118
Rochester, Minnesota 55903
John A. Alexander 42 President Chief Operating Officer of IAI since 1998. Prior to that time, Mr.
601 Second Avenue South Alexander served in various senior management capacities of Lloyds
Suite 3600 Bank plc since 1984.
Minneapolis, Minnesota 55402
David Koehler 61 Vice President Independent training and marketing consultant from 1993 to current.
601 Second Avenue South Prior to that time, Mr. Koehler was a partner at IAI Venture Capital
Suite 3600 Group.
Minneapolis, Minnesota 55402
Paul H. Perseke 33 Treasurer Vice President of IAI. Prior to joining IAI in 1996, Mr. Perseke
601 Second Avenue South served as a Vice President and Manager of Finance and Planning at
Suite 3600 Dain Rauscher Corporation from 1991 to 1996.
Minneapolis, Minnesota 55402
Michael J. Radmer 53 Secretary Partner of Dorsey & Whitney LLP, a Minnesota based law firm which
220 South Sixth Street acts as General Counsel to the Fund.
Minneapolis, Minnesota 55402
</TABLE>
22
<PAGE>
Each of the directors and executive officers of the Fund, other than
Mr. Koehler, also serves in the same capacity for each of the 14 other mutual
funds for which IAI serves as investment adviser (the "IAI Mutual Funds").
Effective February 1998, the directors have agreed that the position of Board
Chair shall rotate from director to director on a quarterly basis.
No compensation is paid by the Fund to any officer other than David
Koehler. 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 Compensation Aggregate Compensation from the
Name of Person, Position from Bond Fund* 15 IAI Mutual Funds**
------------------------ --------------- ------------------------------
<S> <C> <C>
Koehler, David - Vice President $1,716 $26,250
Betsch, Madeline - Director $2,473 $37,200
Hodgson, W. William - Director $2,473 $37,200
Long, George R. - Director $2,458 $37,200
Thompson, J. Peter - Director $2,473 $37,200
Withers, Charles H. - Director $2,458 $37,200
</TABLE>
- -------------------------
* For the fiscal year ended November 30, 1998.
** For the calendar year ended December 31, 1998; excludes expenses incurred
in connection with attending meetings.
Effective February 1998, the directors have agreed that the position of
Board Chair shall rotate from director to director.
The Board of Directors of the Fund has approved a Code of Ethics. The
Code permits access persons to engage in personal securities transactions
subject to certain policies and procedures. Such procedures prohibit the
acquiring of any securities in an initial public offering. In addition, all
securities acquired through private placement must be pre-cleared. Procedures
have been adopted which would implement blackout periods for certain securities,
as well as a ban on short-term trading profits. Additional policies prohibit the
receipt of gifts in certain instances. Procedures have been implemented to
monitor employee trading. Each access person of the Adviser is required to
certify annually that they have read and understood the Code of Ethics. An
annual report is provided to the Fund's Board of Directors summarizing existing
procedures and changes, identifying material violations and recommending any
changes needed.
INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to the Investment Advisory and Administrative Services
Agreement between the Fund and IAI, 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 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%
23
<PAGE>
per year of the Fund's average daily net assets.
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.
For the fiscal years ended November 30, 1996, 1997, and 1998, the
Fund paid IAI $489,868, $437,589 and $403,313, respectively, pursuant to the
Investment Advisory and Administrative Services Agreement.
The Investment Advisory and Administrative Services 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.
IAI's ultimate corporate parent is Lloyds TSB Group, plc ("Lloyds
TSB"), a publicly-held financial services organization headquartered in London,
England. Lloyds TSB is one of the largest personal and corporate financial
services groups in the United Kingdom, engaged in a wide range of activities
including commercial and retail banking. The principal offices of Lloyds TSB are
located at St. George's House, 6 - 8 Eastcheap, London, EC3M 1LL.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
The custodian for the Fund is Norwest Bank Minnesota, N.A. Norwest
Center, Sixth and Marquette, Minneapolis, MN 55479.
IAI acts as the Fund's transfer agent, dividend disbursing agent and
IRA Custodian, at P.O. Box 357, Minneapolis, Minnesota 55402.
LEGAL COUNSEL
Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402, acts as General Counsel to the Fund.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
IAI selects and (where applicable) negotiates commissions with the
brokers who execute the transactions for the Fund. The primary criteria for the
selection of a broker is the ability of the broker, in the opinion of IAI, to
secure prompt execution of the transactions on favorable terms, including the
reasonableness of the commission and considering the state of the market at the
time. In selecting a broker, IAI may consider whether such broker provides
brokerage and research services (as defined in the Securities Exchange Act of
1934). IAI may direct Fund transactions to brokers who furnish research services
to IAI. Such research services include advice, both directly and in writing, as
to the value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or purchasers or sellers
of securities, as well as analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts. By
24
<PAGE>
allocating brokerage business in order to obtain research services for IAI, the
Fund enables IAI to supplement its own investment research activities and allows
IAI to obtain the views and information of individuals and research staffs of
many different securities research firms prior to making investment decisions
for the Fund. To the extent such commissions are directed to brokers who furnish
research services to IAI, IAI receives a benefit, not capable of evaluation in
dollar amounts, without providing any direct monetary benefit to the Fund from
these commissions. Generally the Fund pays higher than the lowest commission
rates available.
IAI believes that most research services obtained by it generally
benefit one or more of the investment companies or other accounts which it
manages. Normally research services obtained through commissions paid by a
managed fund or managed account investing in debt securities would primarily
benefit managed funds and accounts investing in debt securities.
There is no formula for the allocation by IAI of the Fund's
brokerage business to any broker-dealers for brokerage and research services.
However, IAI will authorize the Fund to pay an amount of commission for
effecting a securities transaction in excess of the amount of commission another
broker would have charged only if IAI determines in good faith that such amount
of commission is reasonable in relation to the value of the brokerage and
research services provided by such broker viewed in terms of either that
particular transaction or IAI's overall responsibilities with respect to the
accounts as to which it exercises investment discretion.
Although investment decisions for the Fund are made independently
from other accounts as to which IAI gives investment advice, it may occasionally
develop that the same security is suitable for more than one account. If and
when more than one account simultaneously purchase or sell the same security,
the transactions will be averaged as to price and allocated as to amount in
accordance with arrangements equitable to the Fund and such accounts. The
simultaneous purchase or sale of the same securities by the Fund and other
accounts may have detrimental effects on the Fund, as they may affect the price
paid or received by the Fund or the size of the position obtainable by the Fund.
Consistent with the Rules of Fair Conduct of the National
Association of Securities Dealers, Inc. and subject to the policies set forth in
the preceding paragraphs and such other policies as the Board of Directors of
the 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.
The following table shows brokerage commissions paid by the Fund
during the indicated periods. During the Fund's most recent fiscal year, no
commissions were paid to brokerage firms that provided research services to IAI.
Amount of Commissions
----------------------------------------------------------------------
Year Ended Year Ended Year Ended
November 30, November 30, November 30,
1998 1997 1996
---- ---- ----
$ 13,505 $ 36,039 $ 20,011
CAPITAL STOCK
The Fund, which was created on September 27, 1993, is a separate
portfolio of IAI Investment Funds I, Inc., a Minnesota corporation organized on
April 22, 1977, whose shares of common stock are currently issued in two series
(Series A and B). The investment portfolio represented by Series B common shares
is referred to as "IAI Institutional Bond Fund." On June 25, 1993, the Articles
of Incorporation of the corporation were amended and restated to provide that
the registered investment company whose corporate name had been IAI Bond Fund,
Inc., be renamed IAI Investment Funds I, Inc.
25
<PAGE>
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.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of March 18, 1999, no person was a record holder or, to the
knowledge of the Fund, beneficial owner of more than 5% of the Fund's
outstanding shares, except as set forth in the following table:
Name and Address Number Percent
of Shareholder of Shares* of Outstanding Shares
- ----------------- ---------- ---------------------
Freedom Forge Corporation Master Trust 1,243,683 22.81%
CitiBank NA, Trustee
Attn: Joseph Wapner
500 North Walnut Street
Burnham, PA 17009
C.P. Rail System Funded Pension Plan 1,925,488 35.32%
Attn: James A. Lee
C.P. Rail Company, Suite 925
P.O. Box 530
Minneapolis, MN 55480
Norwest Bank MN NA 1,199,597 22.00%
FBO Blandin Paper Co. Defined Benefit
Pension Plan #12224603
P.O. Box 1533
Minneapolis, MN 55480
Wells Fargo Bank of Texas NA TTEE 298,824 5.48%
The M/A/R/C, Inc. Pen 05-0173-00
Trust and Investment Svcs.
P.O. Box 9800 MAC 9139-027
Calabasas, CA 91302-9800
- -------------------------
* All shares are owned both of record and beneficially.
In addition, as of March 18, 1999, 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
26
<PAGE>
national holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
On November 30, 1998, the net asset value and public offering price
per share of the Fund was calculated as follows:
NAV = Net Assets ($49,295,597) = $9.61
--------------------------------
Shares Outstanding (5,130,298)
PURCHASES AND REDEMPTIONS OF SHARES
The Fund has authorized one or more brokers to accept on its behalf
purchase and redemption orders and such brokers are authorized to designate
other intermediaries to accept purchase and redemption orders on the Fund's
behalf. The Fund will be deemed to have received a purchase or redemption order
when an authorized broker or, if applicable, a broker's authorized designee,
accepts the order. In such circumstances, customer orders will be priced at the
Fund's NAV next computed after they are accepted by an authorized broker or the
broker's authorized designee.
PURCHASES AND REDEMPTIONS IN KIND
In extraordinary circumstances, Fund shares may be purchased 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. Also in extraordinary circumstances, Fund shares may be redeemed in
exchange for readily marketable securities held by the 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 Fund qualified during its last taxable year, and intends to
qualify during its current taxable year, as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). If
the Fund so qualifies, it will not be subject to federal income tax on income
that it distributes to shareholders.
It is not expected that distributions from the Fund 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 generally 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. If Fund shares are
sold or otherwise disposed of one year or less after the date of acquisition,
the gain or loss will be short-term. Short-term capital gain is taxed at the
same rates as ordinary income.
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
27
<PAGE>
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, 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 the 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
for distributions to shareholders.
If the Fund invests in zero coupon obligations upon their issuance,
such obligations will have original issue discount in the hands of the Fund.
Generally, the original issue discount equals the difference between the "stated
redemption price at maturity" of the obligation and its "issue price" as those
terms are defined in the Code. If the Fund acquires an already issued zero
coupon bond from another holder, the bond will have original issue discount in
the Fund's hands, equal to the difference between the "adjusted issue price" of
the bond at the time the Fund acquires it (that is, the original issue price of
the bond plus the amount of original issue discount accrued to date) and its
stated redemption price at maturity. In each case, the Fund is required to
accrue as ordinary interest income a portion of such original issue discount
even though it receives no cash currently as interest payment on the obligation.
If the Fund invests in U.S. Treasury inflation-protection securities, it will be
required to treat as original issue discount any increase in the principal
amount of the securities that occurs during the course of its taxable year. If
the Fund purchases such inflation-protection securities that are issued in
stripped form either as stripped bonds or coupons, it will be treated as if it
had purchased a newly issued debt instrument having original issue discount.
Because the Fund is required to distribute substantially all of its
net investment income in order to be taxed as a regulated investment company, it
may be required to distribute an amount greater than the total cash income the
Fund actually receives. Accordingly, in order to make the required distribution,
the Fund may be required to borrow or to liquidate securities.
Some of the investment practices that may be employed by the Fund
will be subject to special provisions that, among other things, may defer the
use of certain losses of the Fund, affect the holding period of the securities
held by the Fund and affect the character of the gains or losses realized. These
provisions may also require the Fund to mark-to-market some of the positions in
its portfolio (i.e., treat them as closed out) or to accrue original discount,
both of which may cause such Fund to recognize income without receiving cash
with which to make distributions in amounts necessary to satisfy the
distribution requirements for qualification as a regulated investment company
and for avoiding income and excise taxes. Accordingly, in order to make the
required distributions, the Fund may be required to borrow or liquidate
securities. The Fund will monitor its transactions and may make certain
elections in order to mitigate the effect of these rules and prevent
disqualification of the Fund as a regulated investment company.
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 as applicable to the Fund and its
shareholders. 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
28
<PAGE>
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 rescessionary 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.
SHAREHOLDER MEETINGS
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 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.
FINANCIAL STATEMENTS
The financial statements included as part of the Fund's Annual
Report to Shareholders for the fiscal year ended November 30, 1998, are
incorporated herein by reference. Such Annual Report may be obtained by
shareholders on request from the Fund at no additional charge.
29
<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 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 some other limiting condition attaches. Parenthetical rating
denotes probable credit stature upon completion of construction or elimination
of basis of condition.
A-1
<PAGE>
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.
B. Debt rated B has a greater vulnerability to default but currently
has the capacity to meet
A-2
<PAGE>
interest payments and principal repayments. Adverse business, financial, or
economic conditions will likely impair capacity or willingness to pay interest
and repay principal. The B rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BB-rating.
CCC. Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal.
CC. Debt rated CC is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC debt rating.
C. The rating C typically applied to debt subordinated to senior
debt which assigned an actual or implied CCC-debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed but debt
service payments are continued.
C1. The rating C1 is reserved for income bonds on which no interest
is being paid.
D. Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. The D rating will be used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
In order to provide more detailed indications of credit quality,
S&P's bond letter ratings described above (except for the AAA category) may be
modified by the addition of a plus or a minus sign to show relative standing
within the rating category.
COMMERCIAL PAPER
A. This highest rating category indicates the greatest capacity for
timely payment. Issues in this category are further defined with the
designations 1, 2, and 3 to indicate the relative degree to safety.
A-1. This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are designed A-1+.
A-2. Capacity for timely payments on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designed A-1.
A-3. Issues carrying this designation have adequate capacity for
timely repayment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
A-3
<PAGE>
PART C
IAI Bond Fund
and
IAI Institutional Bond Fund
series of
IAI Investment Funds I, Inc.
OTHER INFORMATION
Item 23. Exhibits
THE FUNDS ARE FILING OR INCORPORATING BY REFERENCE THE FOLLOWING
EXHIBITS:
(a).1 Amended and Restated Articles of Incorporation dated 7/23/93 *
(a).2 Certificate of Designation of Series B dated 9/16/93 *
(b) Bylaws *
(c) Instruments Defining Rights of Security Holders - not
applicable
(d).1 Management Agreement (Series A) dated 4/1/96 *
(d).2 Investment Advisory and Administrative Services Agreement
(Series B) dated 8/18/93 *
(e).1 Underwriting and Distribution Agreement - not applicable
(e).2 Dealer Sales Agreement (1)
(e).3 Shareholder Services Agreement (1)
(f) Bonus or Profit Sharing Contracts - not applicable
(g) Custody Agreement dated 8/18/93 *
(h) Other Material Contracts - not applicable
(i) Legal Opinion - not applicable
(j) Consent of KPMG Peat Marwick LLP *
(k) Omitted Financial Statements - not applicable
(l) Initial Capital Agreements - not applicable
(m) Rule 12b-1 Plan - not applicable
(n) Financial Data Schedule - not applicable
(o) Rule 18f-3 Plan - not applicable
- ---------------------
(1) Incorporated by reference to Post-Effective Amendment No. 36 to the
Registrant's Registration Statement on Form N-1A filed with the
Commission on January 31, 1996.
* Filed herewith.
Item 24. Persons Controlled by or Under Common Control with the Fund
THE FOLLOWING IS A LIST OF ALL PERSONS DIRECTLY OR INDIRECTLY
CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND:
See the section of the Prospectus entitled "Fund Management" and the
section of the Statement of Additional Information entitled "Management" filed
as part of this Registration Statement.
1
<PAGE>
Item 25. Indemnification
STATE THE GENERAL EFFECT OF ANY CONTRACT, ARRANGEMENTS OR STATUTE UNDER
WHICH ANY DIRECTOR, OFFICER, UNDERWRITER OR AFFILIATED PERSON OF THE FUND IS
INSURED OR INDEMNIFIED AGAINST ANY LIABILITY INCURRED IN THEIR OFFICIAL
CAPACITY, OTHER THAN INSURANCE PROVIDED BY ANY DIRECTOR, OFFICER, AFFILIATED
PERSON, OR UNDERWRITER FOR THEIR OWN PROTECTION.
Incorporated by reference to Post-Effective Amendment to Registrant's
Registration Statement on Form N-1A filed on January 31, 1997.
Item 26. Business and Other Connections of the Investment Adviser
DESCRIBE ANY OTHER BUSINESS, PROFESSION, VOCATION OR EMPLOYMENT OF A
SUBSTANTIAL NATURE THAT EACH INVESTMENT ADVISER, AND EACH DIRECTOR, OFFICER OR
PARTNER OF THE ADVISER, IS OR HAS BEEN ENGAGED WITHIN THE LAST TWO FISCAL YEARS
FOR HIS OR HER OWN ACCOUNT OR IN THE CAPACITY OF DIRECTOR, OFFICER, EMPLOYEE,
PARTNER OR TRUSTEE.
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 following senior officers and directors of IAI are not listed in the
Statement of Additional Information:
<TABLE>
<CAPTION>
Other Business/Employment
Name Position with Adviser During Past Two Years
- ---- --------------------- ---------------------
<S> <C> <C>
Iain D. Cheyne Chairman/Director None
E. Keith Wirtz President/Director Managing Director/Chief Investment
Officer - Equities, TradeStreet
Investment Associates, Charlotte,
NC, 1996-1999.
Stephen C. Coleman Senior Vice President None
Larry Ray Hill Executive Vice President None
Kevin McKendry Director None
Peter Phillips Director None
John Caravello Director Senior Vice President, Lloyds
Bank, New York, NY since 1980.
</TABLE>
Certain of the officers and directors of IAI also serve as officers and
directors of IAI International Ltd. The address of IAI International is 10 Fleet
Place, London, EC4M 7RH, England. Both IAI and IAI International's ultimate
corporate parent is Lloyds TSB Group plc, a publicly-held financial services
organization based in London, England. The senior officers and directors of IAI
International are John A. Alexander, Deputy Chief Investment Officer and Iain D.
Cheyne, 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 address of
IAI Trust Company is 3600 U.S. Bank Place, Minneapolis, Minnesota 55402. John A.
Alexander is the President and a Director of IAI Trust Company.
2
<PAGE>
Item 27. Principal Underwriters
(a) STATE THE NAME OF EACH INVESTMENT COMPANY (OTHER THAN THE FUND) FOR
WHICH EACH PRINCIPAL UNDERWRITER CURRENTLY DISTRIBUTING THE FUND'S
SECURITIES ALSO ACTS AS A PRINCIPAL UNDERWRITER, DEPOSITOR, OR
INVESTMENT ADVISER.
Not applicable.
(b) PROVIDE THE INFORMATION REQUIRED BY THE FOLLOWING TABLE FOR EACH
DIRECTOR, OFFICER, OR PARTNER OF EACH PRINCIPAL UNDERWRITER NAMED IN
RESPONSE TO ITEM 20.
Not applicable.
(c) PROVIDE THE INFORMATION REQUIRED BY THE FOLLOWING TABLE FOR ALL
COMMISSIONS AND OTHER COMPENSATION RECEIVED, DIRECTLY OR INDIRECTLY,
FROM THE FUND DURING THE LAST FISCAL YEAR BY EACH PRINCIPAL UNDERWRITER
WHO IS NOT AN AFFILIATED PERSON OF THE FUND OR ANY AFFILIATED PERSON OF
AN AFFILIATED person.
Not applicable.
Item 28. Location of Accounts and Records
STATE THE NAME AND ADDRESS OF EACH PERSON MAINTAINING PHYSICAL
POSSESSION OF EACH ACCOUNT, BOOK, OR OTHER DOCUMENT REQUIRED TO BE MAINTAINED BY
SECTION 31(a) AND THE RULES UNDER THAT SECTION.
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's investment portfolios are maintained by IAI. IAI also acts as
Registrant's transfer agent and dividend disbursing agent, at 601 Second Avenue
South, P.O. Box 357, Minneapolis, Minnesota 55402.
Item 29. Management Services
PROVIDE A SUMMARY OF THE SUBSTANTIVE PROVISIONS OF ANY
MANAGEMENT-RELATED SERVICE CONTRACT NOT DISCUSSED IN PART A OR B, DISCLOSING THE
PARTIES TO THE CONTRACT AND THE TOTAL AMOUNT PAID AND BY WHOM FOR THE FUND FOR
THE LAST THREE FISCAL YEARS.
Not applicable.
Item 30. Undertakings
(a) IN INITIAL REGISTRATION STATEMENTS FILED UNDER THE SECURITIES ACT,
PROVIDE AN UNDERTAKING TO FILE AN AMENDMENT TO THE REGISTRATION
STATEMENT WITH CERTIFIED FINANCIAL STATEMENTS SHOWING THE INITIAL
CAPITAL RECEIVED BEFORE ACCEPTING SUBSCRIPTIONS FROM MORE THAN 25
PERSONS IF THE FUND INTENDS TO RAISE ITS INITIAL CAPITAL UNDER SECTION
14(a)(3).
Not applicable.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement on Form N-1A
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Minneapolis and State of Minnesota on
the 1st day of April 1999.
IAI INVESTMENT FUNDS I, INC.
(Registrant)
By /s/ John A. Alexander
---------------------------------
John A. Alexander, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
/s/ Roy C. Gillson President (principal April 1, 1999
- ---------------------------- executive officer)
John A. Alexander
/s/ Paul H. Perseke Treasurer (principal financial April 1, 1999
- ---------------------------- and accounting officer)
Paul H. Perseke
Madeline Betsch * Director
W. William Hodgson * Director
George R. Long * Director
J. Peter Thompson * Director
Charles H. Withers * Director
*By /s/ William C. Joas April 1, 1999
------------------------------------
William C. Joas, Attorney-in-Fact
* Registrant's directors executing Powers of Attorney dated August 18, 1993,
filed with the Commission on June 28, 1994.
EXHIBIT (a).1
CERTIFICATE OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
IAI BOND FUND, INC.
I, William C. Joas, Secretary of IAI Bond Fund, Inc., (the
"Corporation") a Minnesota corporation, hereby certify as follows:
1. The name of the Corporation is IAI Bond Fund, Inc.
2. At meetings duly called and held (pursuant to the requirements
of the Minnesota Statutes Chapter 302A) on February 10, 1993 and
June 25, 1993, the Corporation's Board of Directors and
shareholders, respectively, adopted and approved the following
Amended and Restated Articles of Incorporation of the
Corporation to replace the Corporation's existing Articles of
Incorporation (as amended) in their entirety, and directed that
the officers of the Corporation file the following Amended and
Restated Articles in the office of the Minnesota Secretary of
State.
3. Pursuant to this Certificate of Amendment, the name of the
Corporation is being changed to IAI Investment Funds I, Inc.
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
IAI INVESTMENT FUNDS I, INC.
For the purpose of forming a corporation pursuant to the provisions of
Minnesota Statutes, Chapter 302A, the following Restated Articles of
Incorporation are adopted:
1. The name of the corporation (the "Corporation") is IAI Investment
Funds I, Inc.
2. The Corporation shall have general business purposes and shall have
unlimited power to engage in and do any lawful act concerning any and all lawful
businesses for which corporations may be organized under the Minnesota Statutes,
Chapter 302A. Without limiting the generality of the foregoing, the Corporation
shall have specific power:
(a) To conduct, operate and carry on the business of a so-called
"open-end" management investment company pursuant to applicable state
and federal regulatory statutes, and exercise all the powers necessary
and appropriate to the conduct of such operations.
-1-
<PAGE>
(b) To purchase, subscribe for, invest in or otherwise acquire,
and to own, hold, pledge, mortgage, hypothecate, sell, possess, transfer
or otherwise dispose of, or turn to account or realize upon, and
generally deal in, all forms of securities of every kind, nature,
character, type and form, and other financial instruments which may not
be deemed to be securities, including but not limited to futures
contracts and options thereon. Such securities and other financial
instruments may include but are not limited to shares, stocks, bonds,
debentures, notes, scrip, participation certificates, rights to
subscribe, warrants, options, certificates of deposit, bankers'
acceptances, repurchase agreements, commercial paper, choses in action,
evidence of indebtedness, certificates of indebtedness and certificates
of interest of any and every kind and nature whatsoever, secured and
unsecured, issued or to be issued, by any corporation, company,
partnership (limited or general), association, trust, entity or person,
public or private, whether organized under the laws of the United
States, or any state, commonwealth, territory or possession thereof, or
organized under the laws of any foreign country, or any state, province,
territory or possession thereof, or issued or to be issued by the United
States government or any agency or instrumentality thereof, options on
stock indexes, stock index and interest rate futures contracts and
options thereon, and other futures contracts and options thereon.
(c) In the above provisions of this Article 2, purposes shall
also be construed as powers and powers shall also be construed as
purposes, and the enumeration of specific purposes or powers shall not
be construed to limit other statements of purposes or to limit purposes
or powers which the Corporation may otherwise have under applicable law,
all of the same being separate and cumulative, and all of the same may
be carried on, promoted and pursued, transacted or exercised in any
place whatsoever.
3. The Corporation shall have perpetual existence.
4. The location and post office address of the registered office in
Minnesota is 3700 First Bank Place, P.O. Box 357, Minneapolis, Minnesota
55440-0357.
5. The total authorized number of shares of the Corporation is 10
trillion (10,000,000,000,000), all of which shall be common shares of the par
value of $.01 per share (individually, a "Share" and collectively, the
"Shares"). The Corporation may issue and sell any of its Shares in fractional
denominations to the same extent as its whole Shares, and Shares and fractional
denominations shall have, in proportion to the relative fractions represented
thereby, all the rights of whole Shares, including, without limitation, the
right to vote, the right to receive dividends and distributions, and the right
to participate upon liquidation of the Corporation.
(a) Ten billion (10,000,000,000) of the Shares may be issued by
the Corporation in a series designated "Series A Common Shares," and the
remaining 9,990,000,000,000 Shares authorized by this Article 5 shall
initially be undesignated Shares (the "Undesignated Shares"). Any series
of the Shares shall be referred to herein individually as a "Series" and
collectively herein, together with any further series from
-2-
<PAGE>
time to time created by the Board of Directors, as "Series." The
Undesignated Shares may be issued in such Series with such designations,
preferences and relative, participating, optional or other special
rights, or qualifications, limitations or restrictions thereof, as shall
be stated or expressed in a resolution or resolutions providing for the
issue of any Series as may be adopted from time to time by the Board of
Directors of the Corporation pursuant to the authority hereby vested in
the Board of Directors. Each Series of Shares which the Board of
Directors may establish, as provided herein, may evidence, if the Board
of Directors shall so determine by resolution, an interest in a separate
and distinct portion of the Corporation's assets, which shall take the
form of a separate portfolio of investment securities, cash and other
assets. Authority to establish such separate portfolios is hereby vested
in the Board of Directors of the Corporation, and such separate
portfolios may be established by the Board of Directors without the
authorization or approval of the holders of any Series of Shares of the
Corporation. Such investment portfolios in which Shares of the Series
represent interests are also hereinafter referred to as "Series."
(b) The Shares of each Series may be classified by the Board of
Directors in one or more classes (individually, a "Class" and,
collectively, together with any other class or classes within any
Series, the "Classes") with such relative rights and preferences as
shall be stated or expressed in a resolution or resolutions providing
for the issue of any such Class or Classes as may be adopted from time
to time by the Board of Directors of the Corporation pursuant to the
authority hereby vested in the Board of Directors and Minnesota
Statutes, Section 302A.401, Subd. 3, or any successor provision. The
Shares of each Class within a Series may be subject to such charges and
expenses (including by way of example, but not by way of limitation,
front-end and deferred sales charges, expenses under Rule 12b-1 plans,
administration plans, service plans, or other plans or arrangements,
however designated) adopted from time to time by the Board of Directors
in accordance, to the extent applicable, with the Investment Company Act
of 1940, as amended (together with the rules and regulations promulgated
thereunder, the "1940 Act"), which charges and expenses may differ from
those applicable to another Class within such Series, and all of the
charges and expenses to which a Class is subject shall be borne by such
Class and shall be appropriately reflected (in the manner determined by
the Board of Directors in the resolution or resolutions providing for
the issue of such Class) in determining the net asset value and the
amounts payable with respect to dividends and distributions on and
redemptions or liquidations of, such Class. Subject to compliance with
the requirements of the 1940 Act, the Board of Directors shall have the
authority to provide that Shares of any Class shall be convertible
(automatically, optionally or otherwise) into Shares of one or more
other Classes in accordance with such requirements and procedures as may
be established by the Board of Directors.
6. The shareholders of each Series (or Class thereof) of common shares
of the Corporation:
(a) shall not have the right to cumulate votes for the election
of directors; and
-3-
<PAGE>
(b) shall have no preemptive right to subscribe to any issue of
shares of any Series (or Class thereof) of the Corporation now or
hereafter created, designated or classified.
7. A description of the relative rights and preferences of all Series of
Shares (and Classes thereof) is as follows, unless otherwise set forth in one or
more amendments to these Articles of Incorporation or in the resolution
providing for the issue of such Series (and Classes thereof):
(a) On any matter submitted to a vote of shareholders of the
Corporation, all Shares of the Corporation then issued and outstanding
and entitled to vote, irrespective of Series or Class, shall be voted in
the aggregate and not by Series or Class, except: (i) when otherwise
required by Minnesota Statutes, Chapter 302A, in which case shares will
be voted by individual Series or Class, as applicable; (ii) when
otherwise required by the 1940 Act or the rules adopted thereunder, in
which case shares shall be voted by individual Series or Class, as
applicable; and (iii) when the matter does not affect the interests of a
particular Series or Class thereof, in which case only shareholders of
the Series or Class thereof affected shall be entitled to vote thereon
and shall vote by individual Series or Class, as applicable.
(b) All consideration received by the Corporation for the issue
or sale of Shares of any Series, together with all assets, income,
earnings, profits and proceeds derived therefrom (including all proceeds
derived from the sale, exchange or liquidation thereof and, if
applicable, any assets derived from any reinvestment of such proceeds in
whatever form the same may be) shall become part of the assets of the
portfolio to which the Shares of that Series relate, for all purposes,
subject only to the rights of creditors, and shall be so treated upon
the books of account of the Corporation. Such assets, income, earnings,
profits and proceeds (including any proceeds derived from the sale,
exchange or liquidation thereof and, if applicable, any assets derived
from any reinvestment of such proceeds in whatever form the same may be)
are herein referred to as "assets belonging to" such Series of Shares of
the Corporation.
(c) Assets of the Corporation not belonging to any particular
Series are referred to herein as "General Assets." General Assets shall
be allocated to each Series in proportion to the respective net assets
belonging to such Series. The determination of the Board of Directors
shall be conclusive as to the amount of assets, as to the
characterization of assets as those belonging to a Series or as General
Assets, and as to the allocation of General Assets.
(d) The assets belonging to a particular Series of Shares shall
be charged with the liabilities incurred specifically on behalf of such
Series of Shares ("Special Liabilities"). Such assets shall also be
charged with a share of the general liabilities of the Corporation
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("General Liabilities") in proportion to the respective net assets
belonging to such Series of common shares. The determination of the
Board of Directors shall be conclusive as to the amount of liabilities,
including accrued expenses and reserves, as to the characterization of
any liability as a Special Liability or General Liability, and as to the
allocation of General Liabilities among Series.
(e) The Board of Directors may, to the extent permitted by
Minnesota Statutes, Chapter 302A or any successor provision thereto,
declare and pay dividends or distributions in Shares, cash or other
property on any or all Series (or Classes thereof) of Shares, the amount
of such dividends and the payment thereof being wholly in the discretion
of the Board of Directors.
(f) In the event of the liquidation or dissolution of the
Corporation, holders of the Shares of any Series shall have priority
over the holders of any other Series with respect to, and shall be
entitled to receive, out of the assets of the Corporation available for
distribution to holders of shares, the assets belonging to such Series
of Shares and the General Assets allocated to such Series of Shares, and
the assets so distributable to the holders of the Shares of any Series
shall be distributed among such holders in proportion to the number of
Shares of such Series held by each such shareholder and recorded on the
books of the Corporation, except that, in the case of a Series with more
than one Class of Shares, such distributions shall be adjusted to
appropriately reflect any charges and expenses home by each individual
Class.
(g) With the approval of a majority of the shareholders of each
of the affected Series of Shares present in person or by proxy at a
meeting called for the following purpose (provided that at least 10% of
the issued and outstanding Shares of the affected Series is present at
such meeting in person or by proxy), the Board of Directors may transfer
the assets of any Series to any other Series. Upon such a transfer, the
Corporation shall issue Shares representing interests in the Series to
which the assets were transferred in exchange for all Shares
representing interests in the Series from which the assets were
transferred. Such Shares shall be exchanged at their respective net
asset values.
8. The following additional provisions, when consistent with law, are
hereby established for the management of the business, for the conduct of the
affairs of the Corporation, and for the purpose of describing certain specific
powers of the Corporation and of its directors and shareholders.
(a) In furtherance and not in limitation of the powers conferred
by statute and pursuant to these Articles of Incorporation, the Board of
Directors is expressly authorized to do the following:
(i) to make, adopt, alter, amend and repeal Bylaws of
the Corporation
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unless reserved to the shareholders by the Bylaws or by the laws
of the State of Minnesota, subject to the power of the
shareholders to change or repeal such Bylaws;
(ii) to distribute, in its discretion, for any fiscal
year (in the year or in the next fiscal year) as ordinary
dividends and as capital gains distributions, respectively,
amounts sufficient to enable each Series to qualify under the
Internal Revenue Code as a regulated investment company to avoid
any liability for federal income tax in respect of such year.
Any distribution or dividend paid to shareholders from any
capital source shall be accompanied by a written statement
showing the source or sources of such payment;
(iii) to authorize, subject to such vote, consent, or
approval of shareholders and other conditions, if any, as may be
required by any applicable statute, rule or regulation, the
execution and performance by the Corporation of any agreement or
agreements with any person, corporation, association, company,
trust, partnership (limited or general) or other organization
whereby, subject to the supervision and control of the Board of
Directors, any such other person, corporation, association,
company, trust, partnership (limited or general), or other
organization shall render managerial, investment advisory,
distribution, transfer agent, accounting and/or other services
to the Corporation (including, if deemed advisable, the
management or supervision of the investment portfolios of the
Corporation) upon such terms and conditions as may be provided
in such agreement or agreements;
(iv) to authorize any agreement of the character
described in subparagraph 3 of this paragraph (a) with any
person, corporation, association, company, trust, partnership
(limited or general) or other organization, although one or more
of the members of the Board of Directors or officers of the
Corporation may be the other party to any such agreement or an
officer, director, employee, shareholder, or member of such
other party, and no such agreement shall be invalidated or
rendered voidable by reason of the existence of any such
relationship;
(v) to allot and authorize the issuance of the
authorized but unissued Shares of any Series, or Class thereof,
of the Corporation;
(vi) to accept or reject subscriptions for Shares of any
Series, or Class thereof, made after incorporation;
(vii) to fix the terms, conditions and provisions of and
authorize the issuance of options to purchase or subscribe for
Shares of any Series, or Class thereof, including the option
price or prices at which Shares may be purchased or
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<PAGE>
subscribed for,
(viii) to take any action which might be taken at a
meeting of the Board of Directors, or any duly constituted
committee thereof, without a meeting pursuant to a writing
signed by that number of directors or committee members that
would be required to taken the same action at a meeting of the
Board of Directors or committee thereof at which all directors
or committee members were present; provided, however, that, if
such action also requires shareholder approval, such writing
must be signed by all of the directors or committee members
entitled to vote on such matter; and
(ix) to determine what constitutes net income, total
assets and the net asset value of the Shares of each Series (or
Class thereof) of the Corporation. Any such determination made
in good faith shall be final and conclusive, and shall be
binding upon the Corporation, and all holders (past, present and
future) of Shares of each Series and Class thereof.
(b) Except as provided in the next sentence of this paragraph
(b), Shares of any Series, or Class thereof, hereafter issued which are
redeemed, exchanged, or otherwise acquired by the Corporation shall
return to the status of authorized and unissued Shares of such Series or
Class. Upon the redemption, exchange, or other acquisition by the
Corporation of all outstanding Shares of any Series (or Class thereof),
hereafter issued, such Shares shall return to the status of authorized
and unissued Shares without designation as to series (if no Shares of
the Series remain outstanding) or with the same designation as to
Series, but no destination as to class within such Series (if Shares of
such Series remain outstanding, but no Shares of such Class thereof
remain outstanding), and all provisions of these articles of
incorporation relating to such Series, or Class thereof (including,
without limitation, any statement establishing or fixing the rights and
preferences of such Series, or Class thereof, shall cease to be of
further effect and shall cease to be a part of these articles. Upon the
occurrence of such events, the Board of Directors of the Corporation
shall have the power, pursuant to Minnesota Statutes Section 302A.135,
Subdivision 5 or any successor provision and without shareholder action,
to cause restated articles of incorporation of the Corporation to be
prepared and filed with the Secretary of State of the State of Minnesota
which reflect such removal from these articles of all such provisions
relating to such Series, or Class thereof.
(c) The determination as to any of the following matters made by
or pursuant to the direction of the Board of Directors consistent with
these Articles of Incorporation and in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of
duties, shall be final and conclusive and shall be binding upon the
Corporation and every holder of shares of its capital stock: namely, the
amount of the assets, obligations, liabilities and expenses of each
Series (or Class thereof) of the Corporation; the amount of the net
income of each Series (or Class thereof) of the Corporation from
dividends and
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interest for any period and the amount of assets at any time legally
available for the payment of dividends in each Series (or Class
thereof); the amount of paid-in surplus, other surplus, annual or other
net profits, or net assets in excess of capital, undivided profits, or
excess of profits over losses on sales of securities of each Series (or
Class thereof); the amount, purpose, time of creation, increase or
decrease, alteration or cancellation of any reserves or charges and the
propriety thereof (whether or not any obligation or liability for which
such reserves or charges shall have been created shall have been paid or
discharged); the market value, or any sale, bid or asked price to be
applied in determining the market value, of any security owned or held
by or in each Series of the Corporation; the fair value of any other
asset owned by or in each Series of the Corporation; the number of
Shares of each Series (or Class thereof) of the Corporation issued or
issuable; any matter relating to the acquisition, holding and
disposition of securities and other assets by each Series of the
Corporation; and any question as to whether any transaction constitutes
a purchase of securities on margin, a short sale of securities, or an
underwriting of the sale of, or participation in any underwriting or
selling group in connection with the public distribution of any
securities.
(d) The Board of Directors or the shareholders of the
Corporation may adopt, amend, affirm or reject investment policies and
restrictions upon investment or the use of assets of each Series of the
Corporation and may designate some such policies as fundamental and not
subject to change other than by a vote of a majority of the outstanding
voting securities, as such phrase is defined in the 1940 Act, of the
affected Series of the Corporation.
9. The Corporation shall indemnify such persons for such expenses and
liabilities, in such manner, under such circumstances, and to the full extent
permitted by Section 302A.521 of the Minnesota Statutes, as now enacted or
hereafter amended, provided, however, that no such indemnification may be made
if it would be in violation of Section 17(h) of the 1940 Act, as now enacted or
hereafter amended.
10. To the fullest extent permitted by the Minnesota Statutes, Chapter
302A, as the same exists or may hereafter be amended (except as prohibited by
the 1940 Act, as the same exists or may hereafter be amended), a director of the
Corporation shall not be liable to the Corporation or its shareholders for
monetary damages for breach of fiduciary duty as a director.
IN WITNESS WHEREOF, the undersigned duly elected Secretary of the
Corporation has executed this Certificate of Amendment to the Articles of
Incorporation on July 23, 1993.
/s/ William C. Joas
- ----------------------------- William C. Joas, Secretary
-8-
EXHIBIT (a).2
CERTIFICATE OF DESIGNATION
OF
SERIES OF COMMON SHARES
The undersigned, Secretary of IAI Investment Funds I, Inc., a Minnesota
corporation (the "Corporation"), hereby certifies that the following is a true,
complete and correct copy of resolutions duly adopted by a majority of the
directors of the Board of Directors of the Corporation on August 18, 1993.
DESIGNATION OF SERIES B COMMON SHARES
WHEREAS, the shareholders of IAI Investment Funds I, Inc. (The
"Corporation") have authorized 10,000,000,000,000 shares of common stock, $.01
par value per share, of which 10,000,000,000 shares are designated Series A
Common Shares, as set forth in the Articles of Incorporation of the Corporation;
and
WHEREAS, said Articles of Incorporation set forth that the balance of
authorized but unissued shares of common stock may be issued in such series and
with such designations, preferences and relative, participating, optional or
other special rights, or qualifications, limitations or restrictions thereof, as
shall be stated or expressed in a resolution or resolutions providing for the
issue of any series of common shares as may be adopted from time to time by the
Board of Directors of the Corporation.
NOW, THEREFORE, BE IT RESOLVED, that 10,000,000,000 of the remaining
authorized but unissued common shares of the Corporation be, and they hereby
are, designated as Series B Common Shares, and said Series B Common Shares shall
represent interests in a separate and distinct portion of the Corporation's
assets which shall take the form of a separate portfolio of investment
securities, cash and other assets (referred to herein as "IAI Institutional Bond
Fund").
FURTHER RESOLVED, that Articles 6, 7 and 8 of the Articles of
Incorporation of the Corporation setting forth the preferences and relative,
participating, optional or other special rights, and qualifications, limitations
and restrictions thereof, of an among each series of common shares be, and they
hereby are, adopted as the preferences and relative, participating, optional and
other rights, and qualifications, limitations and restrictions thereof, of and
among the Series B Common Shares designated hereby and in relation to the Series
A Common Shares of the Corporation designated prior hereto.
BE IT FURTHER RESOLVED, that the officers of the Corporation are hereby
authorized and directed to file with the office of the Secretary of Minnesota, a
Certificate of Designation setting forth the relative rights and preferences of
the Series B Common Shares, as required by Subd. 3(b) of Section 401 of the
Minnesota Business Corporation Act.
IN WITNESS WHEREOF, the undersigned has signed this Certificate of
Designation on behalf of IAI Investment Funds I, Inc. this 16th day of September
1993.
/s/ William C. Joas
William C. Joas, Secretary ------------------------------
EXHIBIT (b)
BYLAWS
OF
IAI INVESTMENT FUNDS I, INC.
ARTICLE I
OFFICES, CORPORATE SEAL
Section 1.01. NAME. The name of the corporation is IAI Investment Funds
I, Inc. The name of the series represented by Series A Common Shares shall be
"IAI Bond Fund."
Section 1.02. REGISTERED OFFICE. The registered office of the
corporation in Minnesota shall be that set forth in the Articles of
Incorporation or in the most recent amendment of the Articles of Incorporation
or resolution of the directors filed with the Secretary of State of Minnesota
changing the registered office.
Section 1.03. OTHER OFFICES. The corporation may have such other offices
and places of businesses, within or without the State of Minnesota, as the
directors shall, from time to time, determine.
Section 1.04. CORPORATE SEAL. The corporate seal shall be circular in
form and shall have inscribed thereon the name of the corporation and the word
"Minnesota" and the words "Corporate Seal." The form of the seal shall be
subject to alteration by the Board of Directors and the seal may be used by
causing it or a facsimile to be impressed or affixed or printed or otherwise
reproduced. Any officer or director of the corporation shall have authority to
affix the corporate seal of the corporation to any document requiring the same.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 2.01. PLACE AND TIME OF MEETINGS. Except as provided otherwise
by Minnesota Statutes Chapter 302A, meetings of the shareholders may be held at
any place, within or without the State of Minnesota, designated by the directors
and, in the absence of such designation, shall be held at the registered office
of the corporation in the State of Minnesota. The directors shall designate the
time of day for each meeting and, in the absence of such designation, every
meeting of shareholders shall be held at ten o'clock a.m.
Section 2.02. REGULAR MEETINGS. Annual meetings of shareholders are not
required by these Bylaws. Regular meetings shall be held only with such
frequency and at such times and places as provided in and required by law.
Section 2.03. SPECIAL MEETINGS. Special meetings of the shareholders may
be held at any time and for any purpose and may be called by the Chairman of the
Board, the President, and two or more directors, or by one or more shareholders
holding ten percent (10%) or more of the
<PAGE>
shares entitled to vote on the matters to be presented to the meeting, except
that a special meeting for the purpose of considering any action directly or
indirectly to facilitate or effect a business combination, including any action
to change or otherwise affect the composition of the Board of Directors for that
purpose, must be called by 25% of the voting power of all shares entitled to
vote.
Section 2.04. QUORUM; ADJOURNED MEETINGS. The holders of ten percent
(10%) of the shares outstanding and entitled to vote at the meeting shall
constitute a quorum for the transaction of business at any regular or special
shareholders' meeting. In case a quorum shall not be present at a meeting, those
present in person or by proxy shall adjourn the meeting to such day as they
shall, by majority vote, agree upon without further notice other than by
announcement at the meeting at which such adjournment is taken. If a quorum is
present, a meeting may be adjourned from time to time without notice other than
announcement at the meeting. At adjourned meetings at which a quorum is present,
any business may be transacted which might have been transacted at the meeting
as originally noticed. If a quorum is present, the shareholders may continue to
transact business until adjournment notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
Section 2.05. VOTING. At each meeting of the shareholders, every
shareholder shall have the right to vote in person or by proxy. Each
shareholder, unless the Articles of Incorporation or applicable laws provide
otherwise, shall have one vote for each share having voting power registered in
his name on the books of the corporation. Upon the demand of any shareholder,
the vote upon any question before the meeting shall be by written ballot. Except
as otherwise specifically provided by these Bylaws or as required by provisions
of the Investment Company Act of 1940 or other applicable laws, all questions
shall be decided by a majority vote of the number of shares entitled to vote and
represented at the meeting at the time of the vote. If the matter(s) to be
presented at a regular or special meeting relates only to an individual series
or class thereof of the corporation, then only the shareholders of the series or
class thereof are entitled to vote on such matter(s).
Section 2.06. VOTING PROXIES. The right to vote by proxy shall exist
only if the instrument authorizing such proxy to act shall have been executed in
writing by the shareholder himself or by his attorney thereunto duly authorized
in writing. No proxy shall be voted after eleven (11) months from its date
unless it provides for a longer period.
Section 2.07. CLOSING OF BOOKS. The Board of Directors may fix a time,
not exceeding sixty (60) days preceding the date of any meeting of shareholders,
as a record date for the determination of the shareholders entitled to notice
of, and to vote at, such meeting, notwithstanding any transfer of shares on the
books of the corporation after any record date so fixed. If the Board of
Directors fails to fix a record date for determination of the shareholders
entitled to notice of, and to vote at, any meeting of shareholders, the record
date shall be the thirtieth (30th) day preceding the date of such meeting.
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Section 2.08. NOTICE OF MEETINGS. The Secretary or an Assistant
Secretary shall mail to each shareholder shown by the books of the corporation
to be a holder of record of voting shares, at his address as shown by the books
of the corporation, a notice setting out the time and date and place of each
regular meeting and each special meeting, which notice shall be mailed at least
ten (10) days prior thereto; except that notice of a meeting at which an
agreement of merger or consolidation is to be considered shall be mailed to all
shareholders of record, whether entitled to vote or not, at least two (2) weeks
prior thereto; and except that notice of a meeting at which a proposal to
dispose of all, or substantially all, of the property and assets of the
corporation is to be considered shall be mailed to all shareholders of record,
whether entitled to vote or not, at least ten (10) days prior thereto; and
except that notice of a meeting at which a proposal to dissolve the corporation
or to amend the Articles of Incorporation is to be considered shall be mailed to
all shareholders of record, whether entitled to vote or not, at least ten (10)
days prior thereto. Every notice of any special meeting shall state the purpose
or purposes for which the meeting has been called, pursuant to Section 2.03, and
the business transacted at all special meetings shall be confined to the purpose
stated in the call.
Section 2.09. WAIVER OF NOTICE. Notice of any regular or special meeting
may be waived either before, at or after such meeting orally or in writing
signed by each shareholder or representative thereof entitled to vote the shares
so represented. A shareholder, by his attendance at any meeting of shareholders,
shall be deemed to have waived notice of such meeting, except where the
shareholder objects at the beginning of the meeting to the transaction of
business because the meeting is not lawfully called or convened, or objects
before a vote on an item of business because the item may not lawfully be
considered at that meeting and does not participate in the consideration of the
item at that meeting.
Section 2.10. WRITTEN ACTION. Any action which might be taken at a
meeting of the shareholders may be taken without a meeting if done in writing
and signed by a majority of the shareholders entitled to vote on that action. If
the action to be taken relates to an individual series or class thereof of the
corporation, then only shareholders of the series or class thereof are entitled
to vote on such action.
ARTICLE III
DIRECTORS
Section 3.01. NUMBER, QUALIFICATIONS AND TERM OF OFFICE. Until the first
meeting of shareholders, or until the directors increase their number by
resolution, the number of directors shall be the number named in the Articles of
Incorporation. Thereafter, the number of directors shall be established by
resolution of the shareholders (subject to the authority of the Board of
Directors to increase the number of directors as permitted by law). In the
absence of such resolution, the number of directors shall be the number last
fixed by the shareholders, the Board of Directors or the Articles of
Incorporation. Directors may but need not be shareholders. Each of the directors
shall hold office until the regular meeting of shareholders next held after his
election and until his successor shall have been elected and shall qualify, or
until he shall resign, or
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shall have been removed as hereinafter provided.
Section 3.02. ELECTION OF DIRECTORS. Except as otherwise provided in
Section 3.12 and 3.13 hereof the directors shall be elected at all regular
shareholders' meeting. Directors may be elected at a special shareholders'
meeting, provided that the notice of the meeting shall contain mention of such
purpose. At each shareholders' meeting for the election of directors, the
directors shall be elected by a plurality of the votes validly cast at such
election. The shareholders of each series or class thereof of stock of the
corporation shall be entitled to vote for directors and shall have equal voting
power.
Section 3.03. GENERAL POWERS.
(a) The property, affairs and business of the corporation shall be
managed by the Board of Directors, which may exercise all the powers of the
corporation except those powers vested solely in the shareholders of the
corporation by statute, the Articles of Incorporation or these Bylaws, as
amended.
(b) All acts done by any meeting of the directors or by any person
acting as a director, so long as his successor shall not have been duly elected
or appointed, shall, notwithstanding that it be afterwards discovered that there
was some defect in the election of the directors or such person acting as
aforesaid or that they or any of them were disqualified, be as valid as if the
directors or such other person, as the case may be, had been duly elected and
were or was qualified to be directors or a director of the corporation.
Section 3.04. POWER TO DECLARE DIVIDENDS.
(a) The Board of Directors, from time to time as they may deem
advisable, may declare and pay dividends in cash or other property of the
corporation, out of any source available for dividends, to the shareholders of
each series (or class thereof) of stock of the corporation according to their
respective rights and interests in the investment portfolio of the corporation
issuing such series (or class thereof) of stock.
(b) The Board of Directors shall cause to be accompanied by a written
statement any dividend payment wholly or partly from any source other than
(i) each investment portfolio's accumulated and accrued undistributed
net income (determined in accordance with generally accepted accounting
practice and the rules and regulations of the Securities and Exchange
Commission then in effect) and not including profits or losses realized
upon the sale of securities or other properties; or
(ii) each investment portfolio's net income so determined for the
current or preceding fiscal year.
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Such statement shall adequately disclose the source or sources of such payment
and the basis of calculation, and shall be in such form as the Commission may
prescribe.
(c) Notwithstanding the above provisions of this Section 3.04, the Board
of Directors may at any time declare and distribute pro rata among the
shareholders of each series (or class thereof) of stock a "stock dividend" out
of each portfolio's authorized but unissued shares of stock, including any
shares previously purchased by a portfolio of the corporation.
Section 3.05. ANNUAL MEETING. The Board of Directors shall meet annually
at the registered office of the corporation, or at such other place within or
without the State of Minnesota as may be designated by the Board of Directors,
for the purpose of electing the officers of the corporation and for the
transaction of such other business as shall come before the meeting.
Section 3.06. BOARD MEETINGS. Meetings of the Board of Directors shall
be hold from time to time at such time and place within or without the State of
Minnesota as may be fixed by resolution adopted by a majority of the whole Board
of Directors.
Section 3.07. MEETING; NOTICE. A director may call a meeting by giving
five (5) days' notice to all directors of the date, time, and place of the
meeting; provided that if the date, time and place of a board meeting have been
announced at a previous meeting of the board, no notice is required.
Section 3.08. WAIVER OF NOTICE. Notice of any meeting of the Board of
Directors may be waived either before, at, or after such meeting orally or in
writing signed by such director. A director, by his attendance and participation
in the action taken at any meeting of the Board of Directors, shall be deemed to
have waived notice of such meeting.
Section 3.09. QUORUM. A majority of the directors then holding office
shall constitute a quorum for the transaction of business at such meeting;
provided, however, notwithstanding the above, if the Board of Directors is
taking action pursuant to the Investment Company Act of 1940, as now enacted or
hereafter amended, a majority of the directors who are not "interested persons"
(as defined by the Investment Company Act of 1940, as now enacted or hereafter
amended) of the corporation shall constitute a quorum for taking such action.
Section 3.10. ADVANCE CONSENT OR OPPOSITION. A director may give advance
written consent or opposition to a proposal to be acted on at a meeting of the
Board of Directors. If such director is not present at the meeting, consent or
opposition to a proposal does not constitute presence for purposes of
determining the existence of a quorum, but consent or opposition shall be
counted as a vote in favor of or against the proposal and shall be entered in
the minutes or other record of action at the meeting, if the proposal acted on
at the meeting is substantially the same or has substantially the same effect as
the proposal to which the director has consented or objected.
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Section 3.11. CONFERENCE COMMUNICATIONS. Directors may participate in
any meeting of the Board of Directors, or of any duly constituted committee
thereof, by means of a conference telephone conversation or other comparable
communication technique whereby all persons participating in the meeting can
hear and communicate to each other. For the purposes of establishing a quorum
and taking any action at the meeting, such directors participating pursuant to
this Section 3.11 shall be deemed present in person at the meeting, and the
place of the meeting shall be the place or origination of the conference
telephone conversation or other comparable communication technique.
Section 3.12. VACANCIES; NEWLY CREATED DIRECTORSHIPS. Vacancies in the
Board of Directors of the corporation occurring by reason of death, resignation,
removal or disqualification shall be filled for the unexpired term by a majority
of the remaining directors of the Board although less than a quorum; newly
created directorships resulting from an increase in the authorized number of
directors by action of the Board of Directors as permitted by Section 3.01 may
be filled by a two-thirds (2/3) vote of the directors serving at the time of
such increase; and each person so elected shall be a director until his
successor is elected by the shareholders, who may make such election at their
next regular meeting or at any meeting duly called for that purpose; provided,
however, that no vacancy can be filled as provided above if prohibited by the
provisions of the Investment Company Act of 1940.
Section 3.13. REMOVAL. The entire Board of Directors or any individual
director may be removed from office, with or without cause, by a vote of the
shareholders holding a majority of the shares entitled to vote at an election of
directors. In the event that the entire Board or any one or more directors be so
removed, new directors shall be elected at the same meeting, or the remaining
directors may, to the extent vacancies are not filled at such meeting, fill any
vacancy or vacancies created by such removal. A director named by the Board of
Directors to fill a vacancy may be removed from office at any time, with or
without cause, by the affirmative vote of the remaining directors if the
shareholders have not elected directors in the interim between the time of the
appointment to fill such vacancy and the time of removal.
Section 3.14. COMMITTEES. A resolution approved by the affirmative vote
of a majority of the Board of Directors may establish committees having the
authority of the board in the management of the business of the corporation to
the extent provided in the resolution. A committee shall consist of one or more
persons, who need not be directors, appointed by affirmative vote of a majority
of the directors present. Committees are subject to the direction and control
of, and vacancies in the membership thereof shall be filled by, the Board of
Directors, except as provided by Minnesota Statutes Section 302A.243.
A majority of the members of the committee present at a meeting is a
quorum for the transaction of business, unless a larger or smaller proportion or
number is provided in a resolution approved by the affirmative vote of a
majority of the directors present.
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Section 3.15. WRITTEN ACTION. Any action which might be taken at a
meeting of the Board of Directors, or any duly constituted committee thereof,
may be taken without a meeting if done in writing and signed by a majority of
the directors or committee members.
Section 3.16. COMPENSATION. Directors who are not salaried officers of
this corporation or affiliated with its investment adviser shall receive such
fixed sum per meeting attended or such fixed annual sum as shall be determined,
from time to time, by resolution of the Board of Directors. All directors may
receive their expenses, if any, of attendance at meetings of the Board of
Directors or any committee thereof. Nothing herein contained shall be construed
to preclude any director from serving this corporation in any other capacity and
receiving proper compensation therefor.
Section 3.17. RESIGNATION. A director may resign by giving written
notice to the corporation, and the resignation is effective without acceptance
when given, unless a later effective time is specified in the notice.
ARTICLE IV
OFFICERS
Section 4.01. NUMBER. The officers of the corporation shall consist of a
Chairman of the Board (if one is elected by the Board), the President, a
Treasurer and a Secretary, and, if desired by the Board, one or more Vice
Presidents, Assistant Secretaries, and Assistant Treasurers, and such other
officers and agents as may, from time to time, be elected by the Board of
Directors. Any number of offices may be held by the same person.
Section 4.02. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The Board of
Directors shall elect, from within or without their number, the President, the
Secretary, the Treasurer and such other officers as may be deemed advisable. The
President and all other officers who may be directors shall continue to hold
office until the election and qualification of their successors, notwithstanding
an earlier termination of their directorship.
Section 4.03. RESIGNATION. Any officer may resign his office at any time
by delivering a written resignation to the Board of Directors, the President,
the Secretary, or any Assistant Secretary. Unless otherwise specified therein,
such resignation shall take effect upon delivery.
Section 4.04. REMOVAL AND VACANCIES. Any officer may be removed from his
office by a majority of the whole Board of Directors, with or without cause.
Such removal, however, shall be without prejudice to the contract rights of the
person so removed. If there be a vacancy among the officers of the corporation
by reason of death, resignation or otherwise, such vacancy shall be filled for
the unexpired term by the Board of Directors.
Section 4.05. CHAIRMAN OF THE BOARD. The Chairman of the Board, if one
is elected, shall preside at all meetings of the shareholders and directors and
shall have such other duties as
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may be prescribed, from time to time, by the Board of Directors.
Section 4.06. PRESIDENT. The President shall have general active
management of the business of the corporation. In the absence of the Chairman of
the Board, he shall preside at all meetings of the shareholders and directors.
He shall be the chief executive officer of the corporation and shall see that
all orders and resolutions of the Board of Directors are carried into effect. He
shall be ex officio a member of all standing committees. He may execute and
deliver, in the name of the corporation, any deeds, mortgages, bonds, contracts
or other instruments pertaining to the business of the corporation and, in
general, shall perform all duties usually incident to the office of President.
He shall have such other duties as may, from time to time, be prescribed by the
Board of Directors.
Section 4.07. VICE PRESIDENT. Each Vice President shall have such powers
and shall perform such duties as may be specified in the Bylaws or prescribed by
the Board of Directors or by the President. In the event of absence or
disability of the President, Vice Presidents shall succeed to his power and
duties in the order designated by the Board of Directors.
Section 4.08. SECRETARY. The Secretary shall be secretary of, and shall
attend all, meetings of the shareholders and Board of Directors and shall record
all proceedings of such meetings in the minute book of the corporation. He shall
give proper notice of meetings of shareholders and directors. He shall keep the
seal of the corporation and shall affix the same to any instrument requiring it
and may, when necessary, attest the seal by his signature. He shall perform such
other duties as may, from time to time, be prescribed by the Board of Directors
or by the President.
Section 4.09. TREASURER. The Treasurer shall keep accurate accounts of
all moneys of the corporation received or disbursed. He shall deposit all
moneys, drafts and checks in the name of, and to the credit of, the corporation
in such banks and depositories as a majority of the whole Board of Directors
shall, from time to time, designate. He shall have power to endorse, for
deposit, all notes, checks and drafts received by the corporation. He shall
disburse the funds of the corporation, as ordered by the Board of Directors,
making proper vouchers therefor. He shall render to the President and the
directors, whenever required, an account of all his transactions as Treasurer
and of the financial condition of the corporation, and shall perform such other
duties as may, from time to time, be prescribed by the Board of Directors or by
the President.
Section 4.10. ASSISTANT SECRETARIES. At the request of the Secretary, or
in his absence or disability, any Assistant Secretary shall have power to
perform all the duties of the Secretary and, when so acting, shall have all the
powers of, and be subject to all restrictions upon, the Secretary. The Assistant
Secretaries shall perform such other duties as from time to time may be assigned
to them by the Board of Directors or the President.
Section 4.11. ASSISTANT TREASURER. At the request of the Treasurer, or
in his absence or disability, any Assistant Treasurer shall have power to
perform all the duties of the Treasurer, and
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when so acting, shall have all the powers of, and be subject to all the
restrictions upon, the Treasurer. The Assistant Treasurers shall perform such
other duties as from time to time may be assigned to them by the Board of
Directors or the President.
Section 4.12. COMPENSATION. The officers of this corporation shall
receive such compensation for their services as may be determined, from time to
time, by resolution of the Board of Directors.
Section 4.13. SURETY BONDS. The Board of Directors may require any
officer or agent of the corporation to execute a bond (including, without
limitation, any bond required by the Investment Company Act of 1940 and the
rules and regulations of the Securities and Exchange Commission) to the
corporation in such sum and with such surety or sureties as the Board of
Directors may determine, conditioned upon the faithful performance of his duties
to the corporation, including responsibility for negligence and for the
accounting of any of the corporation's property, funds or securities that may
come into his hands. In any such case, a new bond of like character shall be
given at least every six years, so that the date of the new bond shall not be
more than six years subsequent to the date of the bond immediately preceding.
ARTICLE V
SHARES AND THEIR TRANSFER AND REDEMPTION
Section 5.01. Certificates for Shares.
(a) The corporation may have certificated or uncertificated shares, or
both, as designated by resolution of the Board of Directors. Every owner of
certificated shares of the corporation shall be entitled to a certificate, to be
in such form as shall be prescribed by the Board of Directors, certifying the
number of shares of the corporation owned by him. Within a reasonable time after
the issuance or transfer of uncertificated shares, the corporation shall send to
the new shareholder the information required to be stated on certificates.
Certificated shares shall be numbered in the order in which they shall be issued
and shall be signed, in the name of the corporation, by the President or a Vice
President and by the Treasurer, or by such officers as the Board of Directors
may designate. Such signatures may be facsimile if authorized by the Board of
Directors. Every certificate surrendered to the corporation for exchange or
transfer shall be canceled, and no new certificate or certificates shall be
issued in exchange for any existing certificate until such existing certificate
shall have been so canceled, except in cases provided for in Section 5.08.
(b) In case any officer, transfer agent or registrar who shall have
signed any such certificate, or whose facsimile signature has been placed
thereon, shall cease to be such an officer (because of death, resignation or
otherwise) before such certificate is issued, such certificate may be issued and
delivered by the corporation with the same effect as if he were such officer,
transfer agent or registrar at the date of issue.
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Section 5.02. ISSUANCE OF SHARES. The Board of Directors is authorized
to cause to be issued shares of the corporation up to the full amount authorized
by the Articles of Incorporation in such series and classes thereof and in such
amounts as may be determined by the Board of Directors and as may be permitted
by law. No shares shall be allotted except in consideration of cash or of an
amount transferred from surplus to stated capital upon a share dividend. At the
time of such allotment of shares, the Board of Directors making such allotments
shall state, by resolution, their determination of the fair value to the
corporation in monetary terms of any consideration other than cash for which
shares are adopted. The amount of consideration to be received in cash, or
otherwise, shall not be less than the par value of the shares so allotted. No
shares of stock issued by the corporation shall be issued, sold, or exchanged by
or on behalf of the corporation for any amount less than the net asset value per
share of the shares outstanding as determined pursuant to Article XI hereunder.
Section 5.03. REDEMPTION OF SHARES. Upon the demand of any shareholder
this corporation shall redeem any share of stock issued by it held and owned by
such shareholder at the net asset value thereof as determined pursuant to
Article XI hereunder. The Board of Directors may suspend the right of redemption
or postpone the date of payment during any period when: (a) trading on the New
York Stock Exchange is restricted or such Exchange is closed for other than
weekends or holidays; (b) the Securities and Exchange Commission has by order
permitted such suspension, or (c) an emergency as defined by rules of the
Securities and Exchange Commission exists, making disposal of portfolio
securities or valuation of net assets of the corporation not reasonably
practicable.
If the value of a shareholder's investments in the corporation becomes
less than $500 (or such other amount as may be determined from time to time by
the Board of Directors) as a result of a redemption or transfer of shares, the
corporation's officers are authorized, in their discretion, on behalf of the
corporation, to redeem such shareholder's entire interest and remit such amount,
provided that such a redemption will only be effected by the corporation
following (a) the mailing by the corporation to such shareholder of a "notice of
intention to redeem," and (b) the passage of such time period as may be
determined by the Board of Directors, during which time the shareholder will
have the opportunity to make an additional investment in the corporation to
increase the value of such shareholder's account to at least such minimum
amount.
Section 5.04. TRANSFER OF SHARES. Transfer of share on the books of the
corporation may be authorized only by the shareholder named in the certificate
or the shareholder's legal representative, or the shareholder's duly authorized
attorney-in-fact, and upon surrender of the certificate or the certificates for
such shares or a duly executed assignment covering shares held in unissued form.
The corporation may treat, as the absolute owner of shares of the corporation,
the person or persons in whose name shares are registered on the books of the
corporation.
Section 5.05. REGISTERED SHAREHOLDERS. The corporation shall be entitled
to treat the holder of record of any share or shares of stock as the holder in
fact thereof and accordingly shall not be bound to recognize any equitable or
other claim to or interest in such share on the part of
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any other person, whether or not it shall have express or other notice thereof,
except as otherwise expressly provided by the laws of Minnesota.
Section 5.06 TRANSFER AGENTS AND REGISTRARS. The Board of Directors may
from time to time appoint or remove transfer agents and/or registrars of
transfers of shares of stock of the corporation, and it may appoint the same
person as both transfer agent and registrar. Upon any such appointment being
made all certificates representing shares of capital stock thereafter issued
shall be countersigned by one of such transfer agents or by one of such
registrars of transfers or by both and shall not be valid unless so
countersigned. If the same person shall be both transfer agent and registrar,
only one countersignature by such person shall be required.
Section 5.07. TRANSFER REGULATIONS. The shares of stock of the
corporation may be freely transferred, and the Board of Directors may from time
to time adopt rules and regulations with reference to the method of transfer of
the share of stock of the corporation.
Section 5.08. LOST, STOLEN, DESTROYED AND MUTILATED CERTIFICATES. The
holder of any stock of the corporation shall immediately notify the corporation
of any loss, theft destruction or mutilation of any certificate therefor, and
the Board of Directors may, in its discretion, cause to be issued to him a new
certificate or certificate of stock upon the surrender of the mutilated
certificate or in case of loss, theft or destruction of the certificate, upon
satisfactory proof of such loss, theft or destruction, after the owner of the
lost, stolen or destroyed certificate, or his legal representatives, gives to
the corporation and to such registrar or transfer agent as may be authorized or
required to countersign such new certificate or certificates a bond, in such sum
as they may direct, and with such surety or sureties as they may direct, as
indemnity against any claim that may be made against them or any of them on
account of or in connection with the alleged loss, theft, or destruction of any
such certificate.
ARTICLE VI
DIVIDENDS, SURPLUS, ETC.
Section 6.01. The corporation's net investment income will be
determined, and its dividends shall be declared and made payable at such time(s)
as the Board of Directors shall determine; dividends shall be payable to
shareholders of record as of the date of declaration.
It shall be the policy of the corporation to qualify for and elect the
tax treatment applicable to regulated investment companies under the Internal
Revenue Code, so that the corporation will not be subjected to Federal income
tax on such part of its income or capital gains as it distributes to its
shareholders.
ARTICLE VII
BOOKS AND RECORDS, AUDIT, FISCAL YEAR
Section 7.01. Books and Records. The Board of Directors of the
corporation shall
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cause to be kept such books and records, at such places, as may be required by
law.
Section 7.02. AUDIT, ACCOUNTANT.
(a) The Board of Directors shall cause the records and books of account
of the corporation to be audited at least once in each fiscal year and at such
other times as it may deem necessary or appropriate.
(b) The corporation shall employ an independent certified public
accountant or firm of independent certified public accountants as its Accountant
to examine the accounts of the corporation and to sign and certify financial
statements filed by the corporation. The Accountant's certificates and reports
shall be addressed both to the Board of Directors and to the shareholders.
(c) A majority of the members of the Board of Directors shall select the
Accountant at any meeting held before the first regular meeting of shareholders,
and thereafter shall select the Accountant annually at a meeting held within
thirty (30) days before or after the beginning of the fiscal year of the
corporation. Such selection shall be submitted for ratification or rejection at
the next succeeding regular shareholders' meeting. If such meeting shall reject
such selection, the Accountant shall be selected by majority vote, either at the
meeting at which the rejection occurred or at a subsequent meeting of
shareholders called for such purpose.
(d) Any vacancy occurring between regular meetings, due to the death,
resignation or otherwise of the Accountant, may be filled by the Board of
Directors.
Section 7.03. FISCAL YEAR. The fiscal year of the corporation shall be
determined by the Board of Directors.
ARTICLE VIII
INSPECTION OF BOOKS
Section 8.01. Every shareholder of the corporation and every holder of a
voting trust certificate shall have a right to examine, in person or by agent or
attorney, at any reasonable time or times, for any proper purpose, and at the
place or places where usually kept, the share register, books of account and
records of the proceedings of the shareholders and directors and to make
extracts therefrom.
ARTICLE IX
LOANS TO OFFICERS, DIRECTORS, SHAREHOLDERS
Section 9.01. The corporation shall not lend any of its assets to any
officer or director of the corporation, nor shall it lend any of its assets to
shareholders upon the security of its shares. If any such loan be made, the
officers and directors who make such loan, or assent thereto, shall be jointly
and severally liable for repayment or return thereof.
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ARTICLE X
VOTING OF STOCK HELD
Section 10.01. Unless otherwise provided by resolution of the Board of
Directors, the President, any Vice President, the Secretary or the Treasurer,
may from time to time appoint an attorney or attorneys or agent or agents of the
corporation, in the name and on behalf of the corporation, to cast the votes
which the corporation may be entitled to cast as a stockholder or otherwise in
any other corporation or association, any of whose stock or securities may be
held by the corporation, at meetings of the holders of the stock or other
securities of any such other corporation or association, or to consent in
writing to any action by any such other corporation or association, and may
instruct the person or persons so appointed as to the manner of casting such
votes or giving such consent, and way execute or cause to be executed on behalf
of the corporation and under its corporate seal, or otherwise, such written
proxies, consents, waivers, or other instruments as it may deem necessary or
proper in the circumstances; or any of such officers may themselves attend any
meeting of the holders of stock or other securities of any such corporation or
association and thereat vote or exercise any or all other powers of the
corporation as the holder of such stock or other securities of such other
corporation or association, or consent in writing to any action by any such
other corporation or association.
ARTICLE XI
VALUATION OF NET ASSET VALUE
Section 11.01. The net asset value per share of each series of stock
issued by the portfolios of the corporation shall be determined in good faith by
or under supervision of the officers of the corporation as authorized by the
Board of Directors as often and on such days and at such time(s) as the Board of
Directors shall determine.
ARTICLE XII
CUSTODY OF ASSETS
Section 12.01. All securities and cash owned by this corporation shall,
as hereinafter provided, be held by or deposited with a bank or trust company
having (according to its last published report) not less than two million
dollars ($2,000,000) aggregate capital, surplus and undivided profits (the
"Custodian").
This corporation shall enter into a written contract with the Custodian
regarding the powers, duties and compensation of the Custodian with respect to
the cash and securities of this corporation held by the Custodian. Said contract
and all amendments thereto shall be approved by the Board of Directors of this
corporation. In the event of the Custodian's resignation or termination, the
corporation shall use its best efforts promptly to obtain a successor Custodian
and shall require that the cash and securities owned by this corporation held by
the Custodian be delivered directly to such successor Custodian.
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ARTICLE XIII
AMENDMENTS
Section 13.01. These Bylaws may be amended or altered by a vote of the
majority of the whole Board of Directors at any meeting provided that notice of
such proposed amendment shall have been given in the notice given the directors
of such meeting. Such authority in the Board of Directors is subject to the
power of the shareholders to change or repeal such Bylaws by a majority vote of
the shareholders present or represented at any regular or special meeting of
shareholders called for such purpose. The Board of Directors shall not make or
alter any Bylaws fixing their qualifications, classifications, term of office,
or number, except that the Board of Directors may make or alter any Bylaws to
increase their number.
ARTICLE XIV
MISCELLANEOUS
Section 14.01. INTERPRETATION. When the context in which words are used
in these Bylaws indicates that such is the intent, singular words will include
the plural and vice verse, and masculine words will include the feminine and
neuter genders and vice versa.
Section 14.02. ARTICLE AND SECTION TITLES. The titles of Sections and
Articles in these Bylaws are for descriptive purpose only and will not control
or alter the meaning of any of these Bylaws as set forth in the text.
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EXHIBIT (d).1
MANAGEMENT AGREEMENT
This Agreement is made and entered into as of April 1, 1996 by and
between Investment Advisers, Inc., a Delaware corporation ("IAI") and IAI
Investment Funds I, Inc., a Minnesota corporation (the "Company"), on behalf of
IAI Bond Fund, the portfolio represented by the Company's Series A 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 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 the 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
<PAGE>
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
(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
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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
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(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. 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.
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(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.
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
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<PAGE>
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 I, INC.
By /s/ Richard E. Struthers
--------------------------------
Richard E. Struthers, President
INVESTMENT ADVISERS, INC.
By /s/ Noel P. Rahn
--------------------------------
Noel P. Rahn, Chief Executive Officer
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<PAGE>
EXHIBIT A
IAI BOND FUND
FEE AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS
First $100 Million 1.10 %
$100 - $250 Million 1.05 %
Over $250 Million 1.00 %
A-1
EXHIBIT (d).2
INVESTMENT ADVISORY
AND
ADMINISTRATIVE SERVICES AGREEMENT
This Agreement is made and entered into as of August 18, 1993 by and
between Investment Advisers, Inc., a Delaware corporation ("IAI"), and IAI
Investment Funds I, Inc., a Minnesota corporation (the "Company"), on behalf of
IAI Institutional Bond Fund, the portfolio represented by the Company's Series B
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. The Company agrees to supply IAI with copies of
all applicable documents filed with the Securities and Exchange Commission,
together with all amendments and supplements thereto. 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
<PAGE>
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 and new
Fund share certificates shall be issued by IAI upon surrender of
properly endorsed outstanding Fund share certificates with all
necessary signature guarantees and satisfactory evidence of
compliance with all applicable laws relating to the payment or
collection of taxes;
(iv) IAI may issue new Fund share certificates in place
of Fund share certificates represented to have been lost,
destroyed or stolen, upon receiving indemnity satisfactory to
IAI and may issue new Fund share certificates in exchange for,
and upon surrender of, mutilated Fund share certificates;
(v) IAI will maintain stock registry records in the
usual form in which it will note the issuance, transfer and
redemption of Fund shares and the issuance and transfer of Fund
share certificates, 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
(vi) 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;
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<PAGE>
(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.
(c) OFFICE FACILITIES, EQUIPMENT AND PERSONNEL. IAI shall, at its own
expense, 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.
(d) 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.
(e) 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.
(f) 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 gross
negligence, and the Company does hereby agree to indemnify and hold IAI harmless
from any and all loss, liability and expense, including any legal expenses,
arising out of IAI's performance or status or any act or omission of IAI under
this Agreement other than that incurred by IAI's willful misfeasance, bad faith
or gross 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
-3-
<PAGE>
(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. COMPENSATION FOR SERVICES; ALLOCATION OF EXPENSES.
(a) In payment for the services to be rendered by IAI hereunder, the
Company (on behalf of the Fund) shall pay to IAI a fee at an annual rate of .50%
of 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). 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.
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 AGREEMENT.
(a) The effective date of this Agreement is August 18, 1993.
(b) 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 60 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.
-4-
<PAGE>
(c) 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.
(d) This Agreement shall automatically terminate in the event of its
"assignment" (as defined in the Investment Company Act of 1940, as amended).
(e) 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.
(f) 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.
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. 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.
-5-
<PAGE>
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 I, INC.
By /s/ Richard E. Struthers
----------------------------------------
Richard E. Struthers, President
INVESTMENT ADVISERS, INC.
By /s/ Noel P. Rahn
----------------------------------------
Noel P. Rahn, Chief Executive Officer
-6-
EXHIBIT (g)
CUSTODIAN CONTRACT
This AGREEMENT made as of August 18, 1993, by and between IAI Investment
Funds I, Inc., a Minnesota corporation having its principal office and place of
business at 3700 First Bank Place, Minneapolis, Minnesota, (the "Company"), and
Norwest Bank Minnesota, N.A., a National Banking Association having its
principal office and place of business at Sixth and Marquette, Minnesota, MN
55479 (the "Custodian").
WHEREAS, the Company is a mutual fund whose shares are currently offered
in the following series (which, together with each future series of the Company
that adopts this contract are hereafter referred to individually as a "Fund" and
collectively as the "Funds"): Series A - IAI Bond Fund and Series B - IAI
Institutional Bond Fund.
WHEREAS, the Company desires to appoint the Bank as the custodian for each Fund,
and the Bank desires to accept such appointment;
WITNESSETH, that in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. EMPLOYMENT OF CUSTODIAN AND PROPERTY TO BE HELD BY IT. The Company
hereby employs the Custodian as the custodian of the assets of each Fund,
including securities the Company desires to be held in places within the United
States ("domestic securities") and securities the Company desires to be held
outside of the United States ("foreign securities"). The Company agrees to
deliver to the Custodian all securities and cash owned by each Fund, and all
payments of income, payments of principal or capital distributions received by
the Fund with respect to all securities owned by the Fund from time to time, and
the cash consideration received by the Fund for such new or treasury shares of
capital stock ("Shares") of the Fund as may be issued or sold from time to time.
The Custodian shall not be responsible for any property of a Fund held or
received by the Fund and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 6),
the Custodian shall from time to time employ one or more sub-custodians, but
only in accordance with any necessary approvals by the Board of Directors of the
Company, and provided that the appointment by the Custodian of any
sub-custodians shall not relieve the Custodian of any of its responsibilities or
liabilities hereunder.
2. DUTIES OF THE CUSTODIAN WITH RESPECT TO FUND PROPERTY HELD BY THE
CUSTODIAN IN THE UNITED STATES.
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of each of the Funds all non-cash property, including all
securities owned by the Funds, other than (a) securities which are maintained
pursuant to Section 2.12 in a clearing agency which acts as a securities
depository or in a Federal Reserve Bank, as Custodian may select, and to permit
such
<PAGE>
deposited Assets to be registered in the name of Custodian or Custodian's agent
or nominee on the records of such Federal Reserve Bank or such registered
clearing agency or the nominee of either, and to employ and use securities
depositories, clearing agencies, clearance systems, sub-custodians or agents
located outside the United States in connection with transactions involving
foreign securities, collectively referred to herein as a "Securities System".
2.2 Delivery of Securities. The Custodian shall release and deliver
securities owned by the Company for the account of a Fund held by the Custodian
or in a Securities System account of the Custodian only upon receipt of Proper
Instructions, which may be continuing instructions when deemed appropriate by
the parties, and only in the following:
1) Upon sale of such securities for the account of a Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Company
on behalf of a Fund;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.12 hereof;
4) To the depository agent in connection with tender or other
similar offers for portfolio securities of a Fund;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable; provided
that, in any such case, the cash or other consideration is to be
delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the name
of the Company for the-account of a Fund or into the name of any
nominee or nominees of the Custodian or into the name or nominee
name of any agent appointed pursuant to Section 2.11 or into the
name or nominee name of any sub-custodian appointed pursuant to
Article 1; or for exchange for a different number of bonds,
certificates or other evidence representing the same aggregate
face amount or number of units; provided that, in any such case,
the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of a Fund, to
the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom;
provided that in any such case, the Custodian shall have no
responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for such
securities except as may arise from the Custodian's own
negligence or willful misconduct;
-2-
<PAGE>
8) For exchange or conversion pursuant to any plan or merger,
consolidation, recapitalization, reorganization or readjustment
of the securities of the issuer of such securities, or pursuant
to provisions for conversion contained in such securities, or
pursuant to any deposit agreement; provided that, in any such
case, the new securities and cash, if any, are to be delivered
to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts of
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
10) For delivery in connection with any loans of securities made by
the Company on behalf of a Fund, but only against receipt of
adequate collateral as agreed upon from time to time by the
Custodian and the Company, which may be in the form of cash or
obligations issued by the United States government, its agencies
or instrumentalities, except that in connection with any loans
for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S.
Department of the Treasury, the Custodian will not be held
liable or responsible for the delivery of securities owned by a
Fund prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by
the Company on behalf of a Fund requiring a pledge of assets by
the Company on behalf of such Fund, but only against receipt of
amounts borrowed;
12) For delivery in accordance with the provisions of any agreement
among the Company on behalf of a Fund, the Custodian and a
broker-dealer registered under the Securities Exchange Act of
1934 (the "Exchange Act") and a member of the National
Association of Securities Dealers, Inc. (`NASD"), relating to
the compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange,
or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by
the Company;
13) For delivery in accordance with the provisions of any agreement
among the Company on behalf of a Fund, the Custodian, and a
Futures Commission Merchant registered under the Commodity
Exchange Act, relating to compliance with the rules of the
Commodity Futures Trading Commission and/or any Contract Market,
or any similar organization or organizations, regarding account
deposits in connection with transactions by the Company on
behalf of a Fund;
14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the applicable Fund, for delivery to such Transfer
Agent or to the holders of shares in
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<PAGE>
connection with distributions in kind, as may be described from
time to time in the Fund's currently effective prospectus and
statement of additional information ("prospectus"), in
satisfaction of requests by holders of Shares for repurchase or
redemptions; and
15) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors of the Company signed by an
officer of the Company and certified by the Secretary or an
Assistant Secretary, specifying the securities to be delivered,
setting forth the purpose for which such delivery is to be made,
declaring such purpose to be a proper corporate purpose, and
naming the person or persons to whom delivery of such securities
shall be made.
2.3 REGISTRATION OF SECURITIES. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the Company
for the account of the applicable Fund(s) or in the name of any nominee of the
Company or of any nominee of the Custodian which nominee shall be assigned
exclusively to the Company's, unless the Company has authorized in writing the
appointment of a nominee to be used in common with other registered investment
companies having the same investment adviser as the applicable Fund(s), or in
the name or nominee name of any agent appointed pursuant to Section 2.11 or in
the name or nominee name of any sub-custodian appointed pursuant to Article 1.
All securities accepted by the Custodian on behalf of the Company under the
terms of this Contract shall be in "street name" or other good delivery form.
2.4 BANK ACCOUNTS. The Custodian shall open and maintain a separate bank
account or accounts in the name of each Fund, subject only to draft or order by
the Custodian acting pursuant to the terms of this Contract, and shall hold in
such account or accounts, subject to the provisions hereof, all cash received by
it from or for the account of each applicable Fund, other than cash maintained
by the applicable Fund in a bank account established and used in accordance with
Rule 17f-3 under the Investment Company Act of 1940. Cash held by the Custodian
for each Fund may be deposited by it to its credit as Custodian in the Banking
Department of the Custodian or in such other banks or trust companies as it may
in its discretion deem necessary or desirable; provided, however, that every
such bank or trust company shall be qualified to act as a custodian under the
Investment Company Act of 1940 and that each such bank or trust company and the
cash to be deposited with each such bank or trust company shall be approved by
vote of a majority of the Board of Directors of the Company. Such cash shall be
deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
2.5 PAYMENTS FOR SHARES. The Custodian shall receive from the distributor
for each Fund Shares or from the Transfer Agent of each Fund and deposit into
the Fund account such payments as are received for Shares of the Fund issued or
sold from time to time by the Fund. The Custodian will provide timely
notification to the Fund and the Transfer Agent of any receipt by it
-4-
<PAGE>
of payments for Shares of the Funds.
2.6 AVAILABILITY OF FEDERAL FUNDS. Upon mutual agreement between the Company
and the Custodian, the Custodian shall, upon the receipt of Proper Instructions,
make federal funds available to the Funds as of specified times agreed upon from
time to time by the Company and the Custodian in the amount of checks received
in payment for Shares of the Funds which are deposited into the Funds' accounts.
2.7 COLLECTION OF INCOME. The Custodian shall, or shall cause its agent or
sub-custodian to, collect on a timely basis all income and other payments with
respect to registered securities held hereunder to which each Fund shall be
entitled either by law or pursuant to custom in the securities business, and
shall collect on a timely basis all income and other payments with respect to
bearer securities if, on the date of payment by the issuer, such securities are
held by the Custodian or its agent or sub-custodian and shall credit such
income, as collected, to the applicable Fund's custodian account. Without
limiting the generality of the foregoing, the Custodian shall detach and present
for payment all coupons and other income items requiring presentation as and
when they become due and shall collect interest when due on securities held
hereunder. Unless the Custodian is the lending agent in connection with
securities loaned by the Fund, income due each Fund on securities loaned
pursuant to the provisions of Section 2.2(10) shall be the responsibility of the
Company. The Custodian will have no duty or responsibility in connection
therewith, other than to provide the Company with such information or daft as
may be necessary to assist the Company in arranging for the timely delivery to
the Custodian of the income to which each Fund is properly entitled.
2.8 PAYMENT OF COMPANY MONIES. Upon receipt of Proper Instructions, which
may be continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out monies of each Fund in the following cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of
each Fund but only (a) against the delivery of such securities
or evidence of title to such options, futures contracts or
options on futures contracts, to the Custodian (or any bank,
banking firm or trust company doing business in the United
States or abroad which is qualified under the Investment Company
Act of 1940 to act as a custodian and has been designated by the
Custodian as its agent for this purpose) registered in the name
of the Company for the account of a Fund or in the name of a
nominee of the Custodian referred to in Section 2.3 hereof or in
proper form for transfer; (b) in the case of a purchase effected
through a Securities System, in accordance with the conditions
set forth in Section 2.12 hereof or (c) in the case of the
repurchase agreements entered into between the Company and the
Custodian, or another bank, or a broker-dealer which is a member
of NASD, (i) against delivery of the securities either in
certificate form or through an entry crediting the Custodian's
account at the Federal Reserve Bank with such securities or (ii)
against delivery of the receipt
-5-
<PAGE>
evidencing purchase by the Company for the account of a Fund of
securities owned by the Custodian along with written evidence of
the agreement by the Custodian to repurchase such securities
from a Fund;
2) In connection with conversion, exchange or surrender of
securities owned by a Fund as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by a Fund as
set forth in Section 2.10 hereof;
4) For the payment of any expense or liability incurred by a Fund,
including but not limited to the following payments for the
account of such Fund: interest, taxes, management, accounting,
transfer agent and legal fees, and operating expenses of the
Fund whether or not such expenses am to be in whole or part
capitalized or treated as deferred expenses;
5) For the payment of any dividends declared pursuant to the
governing documents of the Company and the applicable Fund;
6) For payment of the amount of dividends received in respect of
securities sold short; or
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors of the Company signed by an
officer of the Company and certified by its Secretary or an
Assistant Secretary, specifying the amount of such payment,
setting forth the purpose for which such payment is to be made,
declaring such purpose to be a proper purpose, and naming the
person or persons to whom such payment is to be made.
2.9 LIABILITY FOR PAYMENT IN ADVANCE OF RECEIPT OF SECURITIES PURCHASED. The
Custodian shall not make payment for the purchase of domestic securities for the
account of a Fund in advance of receipt of the securities purchased in the
absence of specific written instructions from the Company to so pay in advance.
In any and every case where payment for purchase of domestic securities far the
account of a Fund is made by the Custodian in advance of receipt of the
securities purchased in the absence of specific written instructions from the
Company to so pay in advance, the Custodian shall be absolutely liable to the
Company (for the account of the Fund) for such securities to the same extent as
if the securities had been received by the Custodian.
2.10 PAYMENTS FOR REPURCHASES OR REDEMPTIONS OF SHARES OF A FUND. From such
funds as may be available for the purpose but subject to the limitations of the
Articles of Incorporation or Bylaws and any applicable votes of the Board of
Directors of the Company, the Custodian shall, upon receipt of instructions from
the Transfer Agent, make funds available for payment to holders
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<PAGE>
of Shares who have delivered to the Transfer Agent a request for redemption or
repurchase of their Shares. In connection with the redemption or repurchase of
Shares of a Fund, the Custodian is authorized upon receipt of instructions from
the Transfer Agent to wire funds to or through a commercial bank designated by
the redeeming shareholders. In connection with the redemption or repurchase of
Shares of a Fund, the Custodian shall honor checks drawn on the Custodian by a
holder of Shares, which checks have been furnished by the Company to the holder
of Shares, when presented to the Custodian in accordance with such procedures
and controls as are mutually agreed upon from time to time between the Company
and the Custodian.
2.11 APPOINTMENT OF AGENTS. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust company
which is itself qualified under the Investment Company Act of 1940 to act as a
custodian as its agent to carry out such of the provisions of this Article 2 as
the Custodian may from time to time direct; provided, however, that the
appointment of any agent shall not relieve the Custodian of any of its
responsibilities or liabilities hereunder.
2.12 DEPOSIT OF FUND ASSETS IN SECURITIES SYSTEM. The Custodian may deposit
and/or maintain domestic securities owned by any Fund in a clearing agency
registered with the Securities and Exchange Commission under Section 17A of the
Exchange Act, which acts as a securities depository, or in a Federal Reserve
Bank, as Custodian may select, and to permit such deposited Assets to be
registered in the name of Custodian or Custodian's agent or nominee on the
records of such Federal Reserve Bank or such registered clearing agency or the
nominee of either (collectively referred to herein as "Securities System") in
accordance with applicable Federal Reserve Board and Securities and Exchange
Commission rules and regulations, if any, and subject to the following
provisions:
1) The Custodian may keep domestic securities of a Fund in a
Securities System provided that such securities are represented
in an account ("Account") of the Custodian in the Securities
System which shall not include any assets of the Custodian other
than assets held as a fiduciary, custodian or otherwise for
customers;
2) The records of the Custodian with respect to domestic securities
of a Fund which are maintained in a Securities System shall
identify by book-entry those securities belonging to such Fund;
3) The Custodian shall pay for domestic securities purchased for
the account of a Fund upon (i) the simultaneous receipt of
advice from the Securities System that such securities have been
transferred to the Account, and (ii) the making of an entry on
the records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian shall
transfer domestic securities sold for the account of a Fund upon
(i) the simultaneous receipt of advice from the Securities
System that payment for such securities has been transferred to
the Account, and
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<PAGE>
(ii) the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of the Fund.
Copies of all advises from the Securities System of transfers of
securities for the account of a Fund shall identify the Fund, be
maintained for the Fund by the Custodian and be provided to the
Company at its request. Upon request, the Custodian shall
furnish the Company confirmation of each transfer to or from the
account of a Fund in the form of a written advice or notice and
shall furnish to the Company copies of daily transaction sheets
reflecting each day's transactions in the Securities System for
the account of each Fund.
4) The Custodian shall provide the Company with any report obtained
by the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
securities deposited in the Securities System;
5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 16 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Company (for the account of
each Fund) for any loss or damage to the applicable Fund(s)
resulting from use of the Securities System by reason of any
negligence, misfeasance or misconduct of the Custodian or any of
its agents or of any of its or their employees or from failure
of the Custodian or any such agent or employee to enforce
effectively such rights as it may have against the Securities
System; at the election of the Company, it shall be entitled to
be subrogated to the rights of the Custodian with respect to any
claim against the Securities System or any other person which
the Custodian may have as a consequence of any such loss or
damage if and to the extent that the applicable Funds have not
been made whole for any such loss or damage.
2.13 SEGREGATED ACCOUNT. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for and on
behalf of each Fund, into which account or accounts may be transferred cash
and/or securities, including securities maintained in an account by the
Custodian pursuant to Section 2.12 hereof, (i) in accordance with the provisions
of any agreement among the Company, the Custodian and a broker-dealer registered
under the Exchange Act and a member of NASD (or any futures commission merchant
registered under the Commodity Exchange Act), relating to compliance with the
rules of The Options Clearing Corporation and of any registered national
securities exchange (or the Commodity Futures Trading Commission or any
registered contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by the
Company for the account of any Fund, (ii) for the purpose of segregating cash or
government securities in connection with options purchased, sold or written by
the Company for the account of any Fund or commodity futures contracts or
options thereon purchased or sold by the
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<PAGE>
Company for the amount of any Fund, (iii) for the purpose of compliance by the
Company with the procedures required by Investment Company Act Release No.
10666, or any subsequent release or releases of the Securities and Exchange
Commission relating to the maintenance of segregated accounts by registered
investment companies and (iv) for other proper corporate purposes, but only, in
the case of the clause (iv), upon receipt of, in addition to Proper
instructions, a certified copy of a resolution of the Board of Directors of the
Company signed by an officer of the Company and certified by the Secretary or in
Assistant Secretary, setting forth the purpose or purposes of such segregated
account and declaring such purposes to be proper corporate purposes.
2.14 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state tax
purposes in connection with receipt of income or other payments with respect to
domestic securities of each Fund held by it and in connection with transfers of
securities.
3. DUTIES OF THE CUSTODIAN WITH RESPECT TO FUND PROPERTY HELD OUTSIDE OF
THE UNITED STATES.
3.1 APPOINTMENT OF FOREIGN SUB-CUSTODIANS. The Custodian is authorize and
instructed, either directly or indirectly (through one or more sub-custodian
U.S. banks), to employed as sub-custodians for any Fund's securities and other
assets maintained outside of the United States the foreign banking institutions,
foreign securities depositories and foreign clearing agencies designated on
Exhibit A hereto ("foreign sub-custodians"); provided, however, that
notwithstanding the contents of Exhibit A hereto, the Custodian (including any
of its agents and sub-custodians) is authorized to directly or indirectly employ
or retain any sub-custodian, depository or clearing agency only if said employed
or retained institution qualifies as either (a) an "eligible foreign custodian",
as defined in Rule 17f-5 under the Investment Company Act of 1940, or (b) a
"bank", as defined in Section 2(a)(5) of the Investment Company Act of 1940,
that in turn qualifies as an eligible domestic custodian under Section 17(f) of
the Investment Company Act of 1940; and provided further that the Custodian
shall be liable to the Company for any loss of any Fund assets custodied with
any institution directly or indirectly employed or retained by the Custodian (or
any of its agents or sub-custodians) that does not meet the qualifications of
either clause (a) of (b) of the preceding proviso.
Upon receipt of Proper Instructions, together with a certified
resolution of the Company's Board of Directors, the Custodian and the Company
may agree to amend Schedule A hereto from time to time to designate additional
or alternative foreign banking institutions, foreign securities depositories and
foreign clearing agencies to act as sub-custodians. Each foreign banking
institution shall be authorized to deposit securities in foreign securities
depositories and foreign clearing agencies authorized pursuant to Rule 17f-5
under the Investment Company Act of 1940. Upon receipt of Proper Instructions
from the Company the Custodian shall promptly cease the employment of any one or
more of such sub-custodians for maintaining custody of the assets of the
applicable Fund(s).
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<PAGE>
3.2 ASSETS TO BE HELD. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodian to: (a) "foreign
securities", as defined in paragraph (c)(1) of Rule 17f-5 under the Investment
Company Act of 1940, and (b) cash and cash equivalents in such amounts as the
Custodian or the Company may determine to be reasonably necessary to effect the
foreign securities transactions of the applicable Fund(s).
3.3 SEGREGATION OF SECURITIES. The Custodian shall identify on its books as
belonging to the Company for the account of one or more of the Fund(s), the
foreign securities of each such Fund held by each foreign sub-custodian. Each
agreement pursuant to which the Custodian or its duly appointed U.S.
sub-custodian employs a foreign banking institution shall require that such
institution establish a custody account for the Custodian (or its U.S.
sub-custodian, as the case may be) on behalf of its customers and physically
segregate in that account securities and other assets of the Custodian's
customers, and, in the event that such institution deposits a Fund's securities
in a foreign securities depository, the sub-custodian shall identify on its
books as belonging to the Custodian (or its U.S. sub-custodian, as the case may
be), as agent for the Custodian's customers, the securities so deposited (all
collectively referred to as the "Account").
3.4 AGREEMENT WITH FOREIGN BANKING INSTITUTION. Each agreement with a
foreign banking institution shall provide that: (a) each Fund's assets will not
be subject to any right, charge, security interest, lien or claim or any kind in
favor of the foreign banking institution or its creditors, except a claim of
payment for their safe custody or administration; (b) beneficial ownership for
each Fund's assets will be freely transferable without the payment of money or
value other sum for custody or administration, which may include payment of
stamp duties or government taxes; (c) adequate records will be maintained
identifying the assets as belonging to the customers of Custodian; (d) officers
of or auditors employed by, or other representatives of the Custodian, including
independent public accountants for each Fund, will be given access to the books
and records of the foreign banking institution relating to its actions given
under its agreement with the Custodian or shall be given confirmation of the
contents of such books and records; and (e) assets of each Fund held by the
foreign sub-custodian will be subject only to the instructions of the Company,
the Custodian or their agents.
3.5 ACCESS OF INDEPENDENT ACCOUNTANTS OF THE COMPANY. Upon request of the
Company, the Custodian will use its best efforts to arrange for the independent
accountants of the Company to be afforded access to the books ad records of any
foreign banking institution employed as a foreign sub-custodian insofar as such
books and records relate to the performance of such foreign banking institutions
under its agreement with the Custodian (or its U.S. sub-custodian, as the case
may be).
3.6 REPORTS BY CUSTODIAN. The Custodian will supply to the Company from time
to time, as mutually agreed upon, statements in respect of the securities and
other assets of each Fund held by foreign sub-custodians, including but not
limited to an identification of entities having possession of each applicable
Fund's securities and other assets and advices or notifications of any
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<PAGE>
transfers of securities to or from each custodial account maintained by a
foreign sub-custodian for the Custodian on behalf of each applicable Fund
indicating, as to securities acquired for the Fund, the identity of the entity
having physical possession of such securities.
3.7 Foreign Securities Transactions.
1) Upon receipt of Proper Instruction, which may be continuing
instructions when deemed appropriate by the parties, the
Custodian shall make or cause its foreign sub-custodian to
transfer, exchange or deliver foreign securities owned by the
Company for the account of a Fund, but except to the extent
explicitly provided herein only in any of the cases specified in
Section 2.2.
2) Upon receipt of Proper Instructions, which may be continuing
instructions when deemed appropriate by the parties, the
Custodian shall pay out or cause its foreign sub-custodian to
pay out monies of a Fund, but except to the extent explicitly
provided herein only in any of the cases specified in Section
2.8.
3) Settlement and payment for securities received for the account
of a Fund and delivery of securities maintained for the account
of a Fund may, upon receipt of Proper Instructions, be effected
in accordance with the customary or established securities
trading or securities processing practices and procedures in the
jurisdiction or market in which the transaction occurs,
including, without limitation, delivering securities to the
purchaser thereof or to a dealer therefor (or an agent for such
purchaser or dealer) against a receipt with the expectation of
receiving later payment for such securities from such purchaser
or dealer.
4) With respect to any transaction involving foreign securities,
the Custodian or any sub-custodian in its discretion may case a
Fund's account to be credited on either the contractual
settlement date or the actual settlement date with the proceeds
of any sale or exchange of foreign securities from the account
of the applicable Fund and to be debited on either the
contractual settlement date or the actual settlement date for
the cost of foreign securities purchased or acquired for such
Fund according to Custodian's then current internal policies and
procedures pertaining to securities settlement, which policies
and procedures may change from time to time. Custodian shall
advise the Company of any changes to such policies and
procedures. The Custodian may reverse any such credit or debit
made on the contractual settlement date if the transaction with
respect to which such credit or debit was made fails to settle
within a reasonable period, determined by Custodian in its
reasonable discretion, after the contractual settlement date
except that if any foreign securities delivered pursuant to this
section are returned by the recipient thereof, the Custodian may
cause any such credits and debits to be reversed at any time.
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<PAGE>
5) Securities maintained in the custody of a foreign sub-custodian
may be maintained in the name of such entity's nominee to the
same extent as set forth in Section 2.3 of this Contract and the
Fund agrees to hold any such nominee harmless from any liability
as a holder of record of such securities.
6) Until the Custodian receives written instructions to the
contrary the Custodian shall, or shall cause the sub-custodian
to collect all interest and dividends paid on securities held in
each applicable Fund's account, unless such payment is in
default. Unless otherwise instructed, the Custodian shall
convert interest, dividends and principal received with respect
to securities in a Fund's account into United States dollars and
the Custodian shall perform foreign exchange contracts for the
conversion of United States dollars to foreign currencies for
the settlement of trades whenever it is practicable to do so
through customary banking channels. Customary banking channels
may vary based upon industry practice in each jurisdiction, and
shall include the banking facilities of the Custodian's
affiliates, in accordance with such affiliate's then prevailing
internal policy on funds repatriation. All risk and expense
incident to such foreign collection and conversions is the
responsibility of each applicable Fund's account, and Custodian
shall have no responsibility for fluctuation in exchange rates
affecting collections or conversions.
3.8 Foreign Securities Lending. Notwithstanding any other provisions
contained in this Contract, the Custodian and any sub-custodian shall deliver
and receive securities loaned or returned in connection with securities lending
transactions only upon and in accordance with Proper Instructions; provided, if
the Custodian is not the lending agent in connection with such securities
lending, then neither the Custodian or any sub-custodian shall undertake or
otherwise be responsible for:
(i) marking to market values for such loaned securities.
(ii) collection of dividends, interest or other disbursements or
distributions made with respect to such loaned securities
(iii) receipt of corporate action notices, communications, proxies or
instruments with respect to such loaned securities, and
(iv) custody, safekeeping, valuation or any other actions or services
with respect to any collateral securing any such securities
lending transactions.
In the event that the Custodian is the applicable Fund's lending agent
in connection with a specific securities loan, the Custodian shall undertake to
perform all of the above duties with regard to such loan, except that the
Company shall not receive, nor be enabled to vote, proxies in connection with
such loaned security.
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<PAGE>
3.9 LIABILITY OF FOREIGN SUB-CUSTODIANS. Each agreement pursuant to which
the Custodian (or its U.S. sub-custodian bank, as applicable) employs a foreign
banking institution as a foreign sub-custodian shall require the institution to
exercise reasonable care in the performance of its duties and to indemnify, and
hold harmless, the Custodian and Custodian's customers from and against any
loss, damage, cost, expense, liability or claim arising out of such
sub-custodian's negligence, fraud, bad faith, willful misconduct or reckless
disregard of its duties. At the election of the Company, it shall be entitled to
be subrogated to the right of the Custodian with respect to any claims against
the Custodian's U.S. sub-custodian bank (if any) or a foreign banking
institution as a consequence of any such loss, damage, cost, expense, liability
or claim if and to the extent that the Company has not been made whole for any
such loss, damage, cost, expense, liability or claim.
3.10 MONITORING RESPONSIBILITIES. The Custodian shall furnish annually to the
Company information concerning the foreign sub-custodians employed by the
Custodian (or its U.S. sub-custodian bank, as applicable). Such information
shall be similar in kind and scope to that furnished to the Company in
connection with the initial approval of this Contract (and any contracts with
U.S. and foreign sub-custodians entered into pursuant hereto). In addition, the
Custodian will promptly inform the Company in the event that the Custodian
learns of a material adverse change in the financial condition of a foreign
sub-custodian or is notified by the Custodian's U.S. sub-custodian bank (if any)
or a foreign banking institution employed as foreign sub-custodian that there
appears to be a substantial likelihood that its shareholders' equity will
decline below $200 million (United States dollars or the equivalent thereof) or
that its shareholders' equity has declined below $200 million (in each case
computed in accordance with generally accepted United States accounting
principles).
3.11 BRANCHES OF UNITED STATES BANKS. Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of any Fund's
assets maintained in a foreign branch of a banking institution which is a "bank"
as defined by Section 2(a)(5) of the Investment Company Act of 1940 which meets
the qualification set forth in Section 26(a) of said Act. The appointment of any
such branch as a sub-custodian shall be governed by Article 1 of this Contract.
3.12 EXPROPRIATION INSURANCE. The Custodian represents that it does not
intend to obtain any insurance for the benefit of the Company or any Fund which
protects the imposition of exchange control restrictions or the transfer from
any foreign jurisdiction of the of sale of any securities or against
confiscation, expropriation or nationalization of any securities or the assets,
of the issuer of such securities is organized or in which securities am held for
safekeeping either by Custodian or any sub custodians in such country. The
Custodian represents that its understanding of the position of the Staff of the
Securities and Exchange Commission is that any investment company investing in
securities of foreign issuers his the responsibility for reviewing the
possibility of the imposition of exchange control restrictions which would
affect the liquidity of such investment company's assets and the possibility of
exposure to: political risk, including the appropriateness of insuring against
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<PAGE>
such risk.
4. PROXIES. The Custodian shall, with respect to the securities held
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of the
Company or a nominee of the Company, all proxies, without indication of the
manner in which such proxies are to be voted, and shall promptly deliver to the
Company such proxies, all proxy soliciting materials and all notices relating to
such securities.
5. COMMUNICATIONS RELATING TO FUND PORTFOLIO SECURITIES. The Custodian
shall transmit promptly to the Company all written information (including,
without limitation, dependency of calls and maturities of securities and
expirations of rights in connection therewith and notices of exercise of call
and put options written by the Fund and the maturity of futures contracts
purchased or sold by the Company) received by the Custodian from issuers of the
securities being held for each Fund. With respect to tender or exchange offers,
the Custodian shall transmit promptly to the Company all written information
received by the Custodian from issuers of the securities whose tender or
exchange is sought and from the party (or his agents) making the tender or
exchange offer. If the Company desires to take action with respect to any tender
offer, exchange offer or any other similar transaction, the Company shall notify
the Custodian at least three business days prior to the date on which the
Custodian is to take such action.
6. PROPER INSTRUCTIONS. Proper Instructions as used in this Contract mean a
writing signed or initiated by one or move person or persons as the Board of
Directors of the Company shall have from time to time authorized. Each such
writing shall set forth the specific transaction or type of transaction
involved, including a specific statement of the purpose for which such action is
requested. Oral instructions will be considered Proper Instructions if the
Custodian reasonably believes them to have been given by a person authorized to
give such instructions with respect to the transaction involved. The Company
shall cause all oral instructions to be confirmed in writing. Upon receipt of a
certificate of the Secretary or Assistant Secretary as to the authorization by
the Board of Directors of the Company accompanied by a detailed description of
procedures approved by the Board of Directors, Proper Instructions may include
communications effected directly between election-mechanical or electronic
devices provided that the Board of Directors and the Custodian are satisfied
that such procedures afford adequate safeguards for each Fund's assets.
7. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY. The Custodian may in its
discretion, without express authority from the Company:
1) Make payments to itself or others for minor expenses of handling
securities provided that all such payments shall be accounted
for to the Company;
2) Surrender securities in temporary form for securities in
definitive form;
3) Endorse for collection, in the names of the applicable Fund,
checks, drafts and
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other negotiable instruments; and
4) In general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property of
the Company except as otherwise directed by the Board of
Directors of the Company.
8. EVIDENCE OF AUTHORITY. The Custodian shall be protected in acting upon
any instructions, notice, request, consent, certificate or other instrument of
paper believed by it to be genuine and to have been properly executed by or on
behalf of the Company. The Custodian may, receive and accept a certified copy of
a vote of the Board of Directors of the Company as conclusive evidence (a) of
the authority of any person to act in accordance with such vote or (b) or any
determination or of any action duly made or taken by the Board of Directors as
described in such vote, and such vote may be considered as in full force and
effect until receipt by the Custodian of written notice to the contrary.
9. CLASS ACTIONS. The Custodian shall transmit promptly to the Company all
notices or other communications received by it in connection with any class
action lawsuit relating to securities currently or previously held for one or
more of the Funds. Upon being directed by the Company to do so, the Custodian
shall furnish to the Company any and all written materials which establish the
holding/ownership, amount held/owned, and period of holding/ownership of the
securities in question.
10. RECORDS. The Custodian shall create and maintain all records relating to
its activities and obligations under this Contract in such manner as will meet
the obligations of the Company and each Fund under the Investment Company Act of
1940, with particular attention to Section 31 thereof and Rule 3la-1 and 31a-2
thereunder. The Custodian shall also maintain records as directed by the Company
in connection with applicable federal and state tax laws and any other law or
administrative rules or procedures which may be applicable to the Company and
the Funds. With respect to securities and cash deposited with a Securities
System, a sub-custodian or an agent of the Custodian, the Custodian shall
identify on its books all such securities and cash as belonging to the Company
for the account of the applicable Fund(s). All such records shall be the
property of the Company and shall at all times during the regular business hours
of the Custodian be open for inspection by duly authority officers, employees or
agents of the Company. Such records shall be made available to the Company for
review by employees and agents of the Securities and Exchange Commission. The
Custodian shall furnish to the Company, and its agents as directed by the
Company, as of the close of business on the last day of each month a statement
showing all transactions and entries for the account of the Company during that
month, and all holdings as of month-end.
All records so maintained in connection with the performance of its
duties under this Agreement shall remain the property of the Company and, in the
event of termination of this Agreement, shall be delivered to the Company.
Subsequent to such delivery, and surviving the
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termination of this Agreement, the Company shall provide the Custodian access to
examine and photocopy such records as the Custodian, in its discretion, deems
necessary, for so long as such records are retained by the Company.
11. OPINION OF COMPANY'S INDEPENDENT ACCOUNTANT. The Custodian shall take
all reasonable action, as the Company may from time to time request, to obtain
from year to year favorable opinions from the Company's independent accountants
with respect to its activities hereunder in connection with the preparation of
the Company's Form N-lA and Form N-SAR or other reports to the Securities and
Exchange Commission and with respect to any other requirements of such
Commission.
12. REPORTS TO COMPANY BY INDEPENDENT PUBLIC ACCOUNTANTS. The Custodian
shall provide the Company, at such times as the Company may reasonably require,
with reports by independent public accountants on the accounting system,
internal accounting control and procedures for safeguarding securities, futures
contracts and options on futures contracts, including securities deposited
and/or maintained in a Securities System, relating to the services provided by
the Custodian under this Contract; such reports shall be of sufficient scope,
and in sufficient detail, as may reasonably be required by the Company to
provide reasonable assurance that any material inadequacies would be disclosed
by such examination, and, if them are no such inadequacies, the reports shall so
state.
13. COMPENSATION OF CUSTODIAN. For performance by the Custodian pursuant to
this Agreement, the Company, out of the assets of each applicable Fund, agrees
to pay the Custodian annual asset fees and supplemental charges as set out in
Exhibit B. Fees and supplemental charges may be changed from time to time
subject to mutual written agreement between the Company and the Custodian.
14. RESPONSIBILITY OF CUSTODIAN. So long as and to the extent that it is in
the exercise of reasonable care, the Custodian shall not be responsible for the
title, validity or genuineness of any property or evidence of title thereto
received by it or delivered by it pursuant to this Contract and shall be held
harmless in acting upon any notice, request, consent, certificate or other
instrument reasonably believed by it to be genuine and to be signed by the
proper party or parties. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Contract, but shall be
kept indemnified by and shall be without liability to the Company or any Fund
for any action taken or omitted by it in good faith and without negligence. It
shall be entitled to rely on and may act upon advice of counsel of, or
reasonably acceptable to, the Company on all matters, and shall be without
liability for any action reasonably taken or omitted pursuant to such advice.
Notwithstanding the foregoing, the responsibility of the Custodian with respect
to redemptions effected by check shall be in accordance with a separate
Agreement entered into between the Custodian and the Company.
If the Company requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the reasonable opinion of the
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Custodian, result in the Custodian or its nominee assigned to the Company being
liable for the payment of money or incurring liability of some other form, the
Company, as a prerequisite to requiring the Custodian to take such action, shall
provide indemnity to the Custodian in the amount and form reasonably
satisfactory to it.
If the Company requires the Custodian to advance cash or securities for
any purpose or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of a Fund shall be
security therefor and should the Company fail to repay the Custodian promptly
with respect to any Fund, the Custodian shall be entitled to utilize available
cash and to dispose of assets to the extent necessary to obtain reimbursement.
The Custodian shall not be liable for any loss or damage to the Company
or any Fund resulting from participation in a securities depository unless such
loss or damage arises by reason of any negligence, misfeasance, or willful
misconduct of officers or employees of the Custodian, or from its failure to
enforce effectively such rights as it may have against any securities depository
or from use of a sub-custodian or agent. Anything in this Contract to the
contrary notwithstanding, the Custodian shall exercise, in the performance of
its obligations undertaken or reasonably assumed with respect to this Agreement,
reasonable care, for which the Custodian shall be responsible to the same extent
as if it were performing such duties directly. The Custodian shall be
responsible for the securities and cash held by or deposited with any
sub-custodian or agent to the same extent as if such securities and cash were
directly held by or deposited with the Custodian. The Custodian hereby agrees
that it shall indemnify and hold the Company and each applicable Fund harmless
from and against any loss which shall occur as a result of the failure of a
foreign sub-custodian holding the securities and cash to provide a level of
safeguards for maintaining any Fund's securities and cash not materially
different from that provided by a United States custodian holding such
securities and cash in the United States.
The Custodian agrees to indemnify and hold the Company and each of the
Funds harmless for any and all loss, liability and expense, including reasonable
legal fees and expenses, arising out of the Custodian's own negligence or
willful misconduct or that of its officers, agents, sub-custodians or employees
in the performance of the Custodian's duties and obligations under this
Contract.
15. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT. The Contract shall become
effective as of its execution, shall continue in full force and effect until
terminated as hereinafter provided, may be amended at any time by mutual
agreement of the parties hereto and may be terminated by either party by an
instrument in writing delivered or mailed, postage prepaid to the other party,
such termination to take effect not sooner than sixty (60) days after the date
of such delivery or mailing; provided, however, that the Custodian shall not act
under Section 2.12 hereof in the absence of receipt of an initial certificate of
the Secretary or an Assistant Secretary that the Board
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<PAGE>
of Directors of the Company has approved the initial use of a particular
Securities System and the receipt of an annual certificate of the Secretary or
an Assistant Secretary that the Board of Directors has reviewed the use by each
Fund of such Securities System, as required in each case by Rule 17f-4 under the
Investment Company Act of 1940, provided further, however, that the Company
shall not amend or terminate this Contract in contravention of any applicable
federal or state regulations, or any provision of its Articles of Incorporation,
and further provided, that the Company may at any time by action of its Board of
Directors, with respect to any Fund (i) substitute another bank or trust company
for the Custodian by giving notice as described above to the Custodian, or (ii)
immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the Currency or
upon the happening of a like event at the direction of an appropriate regulatory
agency or court of competent jurisdiction.
Upon termination of the Contract, the Company on behalf of each Fund
shall pay to the Custodian such compensation as may be due as of the date of
such termination and shall likewise reimburse the Custodian for its costs,
expenses and disbursements.
16. SUCCESSOR CUSTODIAN. If a successor custodian shall be appointed by the
Board of Directors of the Company, the Custodian shall, upon termination deliver
to such successor custodian at the office of the Custodian, duly endorsed and in
the form for transfer to an account of the successor custodian each of the
Fund's securities held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall
in like manner, upon receipt of a certified copy of a vote of the Board of
Directors of the Company, deliver at the office of the Custodian and transfer
such securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940, of
its own selection, having an aggregate capital, surplus, and undivided profits,
as shown by its list published, report, of not less than $100,000,000, all
securities, funds and other properties held by the Custodian and all instruments
held by the Custodian relative thereto and all other property held by it under
this Contract and to transfer to an account of such successor custodian all of
each Fund's securities held in any Securities System. Thereafter, such bank or
trust company shall be the successor of the Custodian under and pursuant to this
Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Company to procure the certified copy of the vote referred to or
of the Board of Directors to appoint a successor custodian, the Custodian shall
be entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the
-18-
<PAGE>
provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
17. INTERPRETIVE AND ADDITIONAL PROVISION. In connection with the operation
of this Contract, the Custodian and the Company may from time to time agree on
such provisions interpretive of or in addition to the provisions of this
Contract as may in their joint opinion be consistent with the general tenor of
this Contract. Any such interpretive or additional provisions shall be in a
writing signed by both parties and shall be annexed hereto, provided that no
such interpretive or additional provisions shall contravene any applicable
federal or state regulations or any provision of the Articles of Incorporation
or Bylaws of the Company. No interpretive or additional provisions made as
provided in the preceding sentence shall be deemed to be an amendment of this
Contract.
18. MINNESOTA LAW TO APPLY. This Contract shall be construed and the
provisions thereof interpreted under and in accordance with laws of the State of
Minnesota.
19. PRIOR CONTRACTS. This Contract supersedes and terminates, as of the date
hereof, all prior contracts between the Company and the Custodian relating to
the custody of each Fund's assets. This Contract shall not be assignable by any
party hereto; provided however, that any entity into which the Company or the
Custodian, as the case may be, may be merged or converted or with which it may
be consolidated, or any entity succeeding to all or substantially all of the
business of the Company or the custody business of the Custodian, shall succeed
to the respective rights and shall assume the respective duties of the Company
or the Custodian, as the case may be, hereunder.
20. GENERAL. Nothing expressed or mentioned in or to be implied from any
provision of this Contract is intended to, or shall be construed to give any
person or corporation other than the parties hereto, any legal or equitable
right, remedy or claim under or in rasped to this Contract, or any covenant,
condition and provision herein contained, this Contract and all of the
covenants, conditions and provisions hereof being intended to be and being the
sole and exclusive benefit of the parties hereto and their respective successors
and assigns.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized officers as of the day
and year first above written.
IAI Investment Funds I, Inc. Norwest Bank Minnesota, N.A.
By /s/ Richard E. Struthers By /s/ Theresa G. Banks
--------------------------- --------------------------
Richard E. Struthers Theresa G. Banks
ATTEST ATTEST
-19-
<PAGE>
By /s/ William C. Joas By /s/ Susan J. Skonnord
--------------------------- --------------------------
William C. Joas Susan J. Skonnord
-20-
<PAGE>
EXHIBIT A
IAI MUTUAL FUNDS
(Effective November 3, 1993)
MORGAN STANLEY TRUST COMPANY
GLOBAL CUSTODY NETWORK
<TABLE>
<CAPTION>
NAME OF BANK/DEPOSITORY RULE 17f-5
COUNTRY (date of sub-custodian agreement with Morgan Stanley) BASIS OF ELIGIBILITY
- ------- ----------------------------------------------------- --------------------
<S> <C> <C>
Argentina Citibank, N.A. - Buenos Aires Branch (8/28/91, signed 4/9/92) (1)
Caja de Valores (5)
Australia Australia and New Zealand Banking Group Limited (10/23/90) (2)
Clearing House Electronic Subregister System (5)
Austria Euroclear Clearance System (n/a) Wertpapiersammelbank (4)
(5)
Belgium Banque Bruxelles Lambert (7/20/92) (2)
Caisse Interprofessionnelle de Depot et de Virements de Titres (5)
Brazil Banco de Boston (1/7/93) (2)
Bolsa de Valores de Sao Paulo (5)
Bolsa de Valores de Rio de Janeiro (5)
Canada Toronto Dominion Bank (1/29/91) (2)
The Canadian Depository for Securities (5)
Chile Citibank, N-A. - Santiago Branch (7/8/92) (1)
Denmark Euroclear Clearance System (n/a) (4)
Vaerdipapircentralen (5)
Finland Euroclear Clearance System (n/a) (4)
France Banque Indosuez (7/25/91) (2)
Societe Interprofessionelle la Compensacion des Valuer Mobilieres (5)
Societe de Compensacion des Marches Conclitionnels (5)
Chambre de Compensation des Instruments Financiers de Paris (5)
Germany Berliner Handels-und Frankfurter Bank (11/1/91) (2)
Deutscher Kassenverein AG (5)
Greece Citibank, N.A. - Athens Branch (4/9/92) (1)
Central Clearing Office of Athens Stock Exchange (5)
Hong Kong Hong Kong and Shanghai Banking Corporation Ltd.
(1/20/88, amended 5/26/93) (2)
Hong Kong Securities Clearing Company (5)
</TABLE>
A-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
India Hong Kong and Shanghai Banking Corporation Ltd.
(1 /20/88, amended 5/26/93) (2)
Indonesia Hong Kong and Shanghai Banking Corporation Ltd.
1/20/88, amended 5/26/93) (2)
Ireland Allied Irish Bank (7/4/91) (2)
Stock Exchange Talisman System (5)
Italy Barclays Bank PLC (4/18/91, supplemented 5/31/91) (2)
Monte Titoli S.p.A. (5)
Japan The Mitsubishi Bank Limited (5/25/88) (2)
Japan Securities Depository Center (5)
Korea Standard Chartered Bank (1/2/92) (2)
The Korean Central Depository (5)
Malaysia Oversea Chinese Banking Corporation (4/12/88,
supplemented 5/19/88 and 7/18/88) (2)
The Malaysian Central Depository (5)
Mexico Citibank, N.A. - Mexico City Branch (8/28/91, signed 4/9/92) (1)
Instituto para el Deposito de Valores (S.D. Indeval) (5)
Netherlands ABN Amro Bank (3/89) (2)
Nederlands Centraal Institut voor Giraal Effectenverkeer.B.V. (NECIGEF) (5)
New Zealand Bank of New Zealand (7/11/89) (2)
Austraclear New Zealand System (5)
Norway Euroclear Clearance System (n/a) (4)
Verdipapirsentralen (5)
Phillipines Hong Kong and Shanghai Banking Corporation Ltd.
(1/20/88, amended 5/26/93) (2)
Portugal Banco Comercial Portugues (10/l/89) (2)
Lisbon Stock Exchange (SICOB system) (5)
Oporto Stock Exchange (CAMBIUM system) (5)
Singapore Oversea Chinese Banking Corporation (4/12/88, supplemented 5/19/88 and 7/18/88) (2)
Central Depository Pte Ltd (5)
Spain Banco Santader (3/22/89) (2)
Servicio de Compensacion y Liquidacion de Valores (5)
Sweden Euroclear Clearance System (n/a) (4)
Vardepapperscentralen (5)
Switzerland Morgan Guaranty Trust Company of New York-Zurich Branch (10/16/91) (1)
Schweizerische Effekten Ciro A.G. (SEGA) (5)
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Taiwan Hong Kong and Shanghai Banking Corporation Ltd. (1/20/88, amended 5/26/93) (2)
Taiwan Securities Depository Co. (5)
Thailand Standard Chartered Bank (1/29/90) (2)
Share Depository Center (5)
Turkey Citibank, N.A- - Istanbul Branch (8/28/91, signed 4/9/92) (1)
United Kingdom Barclays Bank PLC (9/92) (2)
Stock Exchange Talisman System (5)
Uruguay Citibank, N.A. - Montevideo Branch (8/28/91, signed 4/9/92) (1)
Venezuela Citibank, N.A- - Caracas Branch (8/28/91, signed 4/9/92) (1)
</TABLE>
(1) Foreign branch of a United States bank, which qualifies as an eligible
domestic custodian under Section 17(f) of the Investment Company Act of
1940.
(2) A bank or trust company that has shareholders' equity in excess of $200
million (US) and is regulated as a bank or trust company by the foreign
country's government.
(3) A majority-owned direct or indirect subsidiary of a qualified U. S. Bank
or bank holding company that is incorporated or organized under the laws
of a country other than the United States and that has shareholder
equity in excess of $100 million (US).
(4) A securities depository or clearing agency which operates a
trans-national system for the central handling of securities or
equivalent book entries.
(5) A central securities depository or clearing agency which operates the
central system for the handling of securities or book-entries in that
country.
A-3
<PAGE>
EXHIBIT B
(as amended through August 18, 1993)
TO
CUSTODIAN AGREEMENT
BETWEEN
IAI Investment Funds I, Inc.
AND
NORWEST BANK MINNESOTA, N.A.
Compensation Schedule
ANNUAL FEES Rate
Fee Per Global Market Value $0.0012
(DOMESTIC SECURITIES EXCLUDED)
Fee Per Issue Held $25.00
(GLOBAL SECURITIES EXCLUDED)
Fee Per Account $4,000.00
Norwest ACCESS (on-line cost $.50 billed to client) $3,600.00
FIRST YEAR WAIVED EXCLUDING COMMUNICATIONS COSTS
TRANSACTION FEES - DOMESTIC SECURITIES
DTC Purchase/Sale/Maturity $8.00
Fed Purchase/Sale/Maturity 10.00
New York Physical Purchase/Sale/Maturity 20.00
Commercial Paper Purchase/Maturity 20.00
Other Physical Purchase/Sale/Maturity 20.00
Options/Futures Purchase/Sale 20.00
Book Entry Deposit/Withdrawal $12.50
Book Entry Re-Registration 15.00
Physical Re-Registration 100.00
GNMA and Fed Agency Principal Payments $5.00
CMO & Private Placement Payments 15.00
Non-Trade Wire 10.00
Transfer to DDA/Check Issuance 0.00
Overnight Sweep Activity 0.00
TRANSACTION FEES - GLOBAL SECURITIES
Global Equity Transactions $50.00
Forward Currency Purchase/Sale 0.00
B-1
<PAGE>
EXHIBIT C
(as amended through August 18, 1993)
TO
CUSTODIAN AGREEMENT
BETWEEN
IAI Investment Funds I, Inc.
AND
NORWEST BANK MINNESOTA, NA.
SETTLEMENT AND INCOME PAYMENT POLICIES AND STANDARDS
SETTLEMENT POLICY
Norwest will:
1. Guarantee posting of all trades on contractual settlement date based on
the following standards:
a. Complete information for all 5-day settlements (Depository Trust
Company-DTC and physical settlements) is received by Trade Date
+ 1.
b. Complete information for trades settling through Participant
Trust Company (PTC)is received by Trade Date + 1.
c. Complete information for FEDERAL BOOK ENTRY trades is received
by 11:00 am on Settlement Date for same day settlement and by
4:00 pm on Trade Date for next day settlement.
d. Complete information for International trades is received by
11:00 am on Trade Date.
e. For physical trades settling same day or next day in New York or
Minneapolis, complete trade information is received by:
1. 9:00 am on Settlement Date for sales settling in
Minneapolis.
2. 10:30 am on Settlement Date for sales settling
in New York.
3. 11:00 am on Settlement Date for all purchases.
2. Process any trade information which is received AFTER the Norwest
standard on a BEST EFFORTS basis.
3. Make efforts to contact the party with investment authority to obtain
direction for all ID confirms not affirmed by Trade Date + 3.
C-1
<PAGE>
4. Guarantee posting on contractual settlement date for the sale of any
security which is on loan through Norwest's Securities Lending Program
if trade information is received BY.2:00 PM ON TRADE DATE.
5. Not be responsible for posting trades on Settlement Date if trade
information is incomplete, incorrect, or late.
6. Not be responsible for posting a sale on Settlement Date if the security
is not in good defiverable form on Trade Date. This may include, but is
not restricted to, the following types of securities:
a. Restricted Stock
b. Private Placements
c. Limited Partnerships
d. Closely Held Issues
7. Make efforts to obtain written authorization for all trades which are
not directly affirmed to DTC by the client.
8. Retain the right to reverse the posting of any sale if the underlying
security was involved in a full or partial call and the sale was
contracted after the call publication date.
INCOME PAYMENT POLICY
Norwest will credit income in Fed funds and cash becomes available for
investment immediately.
<TABLE>
<CAPTION>
Security Type Dividends/Interest Maturities Principal Payments
- ------------- ------------------ ---------- ------------------
<S> <C> <C> <C>
Bond Calls, Full and Partial Calls Receipt* Receipt
Equities, Common & Preferred Payable Date N/A N/A
Bonds, Corporate & Municipals Payable Date Payable Date Receipt
Treasuries Payable Date Payable Date Receipt
GNMA I & II Payable Date N/A Payable +2**
Fed Agencies Payable Date Payable Date Receipt
Other Govt Agencies Payable Date Payable Date Receipt
Commercial Paper Payable Date Payable Date N/A
Repurchase Agreements Payable Date Payable Date N/A
Mutual Funds Receipt N/A N/A
Unit Investment Trusts (UITs) Receipt N/A Receipt
Global Securities Receipt Receipt N/A
Certificates of Deposit Receipt Payable Date N/A
Passbook, Time Deposits Receipt Payable Date N/A
</TABLE>
* After 8/1/93 with the implementation of the AMS trust system, bond calls
will be paid on Payable Date in Fed Funds credit.
** After 8/1/93 with the implementation of the AMS trust system, GNMA
principal payments will be paid on Payable Date + 1 in Fed Funds credit.
C-2
EXHIBIT (j)
Independent Auditors' Consent
The Board of Directors
IAI Investment Funds I, Inc.:
We consent to the use of our report incorporated herein by reference and to the
reference to our Firm under the heading "FINANCIAL HIGHLIGHTS" in Part A of the
Registration Statement.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 26, 1999