<PAGE>
As filed with the Securities and Exchange Commission on January 31, 1996
1933 Act Registration No. 2-84589
1940 Act Registration No. 811-3767
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. 21 X
---
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 ___
Amendment No. 21 X
---
IAI INVESTMENT FUNDS VIII, INC.
(Exact Name of Registrant as Specified in Charter)
3700 First Bank Place, P.O. Box 357
Minneapolis, Minnesota 55440
(Address of Principal Executive Offices) (Zip Code)
(612) 376-2700
(Registrant's Telephone Number, including Area Code)
Christopher J. Smith, Esq. Copy to:
3700 First Bank Place Michael J. Radmer, Esq.
P.O. Box 357 Dorsey & Whitney
Minneapolis, Minnesota 55440 220 South Sixth Street
(Name and Address of Agent for Service) Minneapolis, Minnesota 55402
It is proposed that this filing will become effective (check appropriate box)
X immediately upon filing pursuant to paragraph (b)
---
___ on (date) pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(1)
___ on (date) pursuant to paragraph (a)(1)
___ 75 days after filing pursuant to paragraph (a)(2)
___ on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
___ this post-effective amendment designates a new effective date for
a previously filed post-effective amendment
Registrant has registered an indefinite number of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940, as amended. Rule 24f-2 Notices were last filed with the Commission on
May 23, 1995
<PAGE>
IAI INVESTMENT FUNDS VIII, INC.
FORM N-1A
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
Item Number Caption Prospectus Caption
- ----------- ------- ------------------
<C> <S> <C>
1 Cover Page...................................... Cover Page of Prospectus
2 Synopsis........................................ Fund Expense Information
3 Condensed Financial Information................. Financial Highlights; Investment Performance
4 General Description of Registrant............... Investment Objectives and Policies; Description of Common
Stock; Additional Information
5 Management of the Fund.......................... Fund Expense Information; Management; Additional
Information; Custodian, Transfer Agent and Dividend
Disbursing Agent
5A Management's Discussion of Fund Performance..... Information is Contained in the Annual Report
6 Capital Stock and Other Securities.............. Dividends, Distributions and Tax Status; Description of
Common Stock; Additional Information
7 Purchase of Securities Being Offered............ Plan of Distribution; Computation of Net Asset Value and
Pricing; Purchase of Shares; Automatic Investment Plan;
Exchange Privilege; Automatic Exchange Plan; Retirement
Plans
8 Redemption or Repurchase........................ Systematic Cash Withdrawal Plan; Redemption of Shares;
Authorized Telephone Trading
9 Pending Legal Proceedings....................... Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Item Number Caption Statement of Additional Information Caption
- ----------- ------- -------------------------------------------
<C> <S> <C>
10 Cover Page...................................... Cover Page of Statement of Additional Information
11 Table of Contents............................... Table of Contents
12 General Information and History................. History
13 Investment Objectives and Policies.............. Investment Objectives and Policies; Investment Restrictions
14 Management of the Fund.......................... Management
15 Control Persons and Principal
Holders of Securities......................... Management; Capital Stock
16 Investment Advisory and Other Services.......... Management; Plan of Distribution; Counsel and Auditors;
Custodian, Transfer Agent and Dividend Disbursing Agent
17 Brokerage Allocation............................ Portfolio Transactions and Allocation of Brokerage
18 Capital Stock and Other Securities.............. Capital Stock
19 Purchase, Redemption and Pricing
of Securities Being Offered..................... Net Asset Value and Public Offering Price
20 Tax Status...................................... Tax Status
21 Underwriters.................................... Plan of Distribution
22 Calculation of Performance Data................. Investment Performance
23 Financial Statements............................ Financial Statements
</TABLE>
<PAGE>
PROSPECTUS DATED AUGUST 1, 1995
AS SUPPLEMENTED JANUARY 31, 1996
--------------------------------
IAI CAPITAL APPRECIATION FUND
IAI EMERGING GROWTH FUND
IAI GROWTH FUND
IAI GROWTH AND INCOME FUND
IAI MIDCAP GROWTH FUND
IAI REGIONAL FUND
IAI VALUE FUND
3700 FIRST BANK PLACE
P.O. BOX 357
MINNEAPOLIS, MINNESOTA 55440
TELEPHONE 1-612-376-2700
1-800-945-3863
IAI Capital Appreciation Fund's investment objective is long-term capital
appreciation. Capital Appreciation Fund pursues its investment objective by
investing primarily in equity securities of U.S. companies that have above-
average prospects for growth.
IAI Emerging Growth Fund pursues its objective of long-term capital appreciation
by investing primarily in equity securities of small and medium sized companies
that are in the early stages of their life cycles and which have demonstrated or
have the potential for above average capital growth.
IAI Growth Fund's investment objective is long-term capital appreciation.
Growth Fund pursues its objective by investing primarily in equity securities of
established companies that are expected to increase earnings at an above average
rate.
IAI Growth and Income Fund's primary investment objective is capital
appreciation, with income being its secondary objective. Growth and Income Fund
pursues its objectives by investing primarily in equity securities which offer
the potential for capital appreciation and secondarily by investing in income-
producing equity securities.
IAI Midcap Growth Fund's investment objective is long-term capital appreciation.
Midcap Growth Fund pursues its investment objective by investing primarily in
equity securities of medium-sized U.S. companies that have above-average
prospects for growth.
IAI Regional Fund pursues its objective of capital appreciation by investing at
least 80% of its equity investments in companies which have their headquarters
in Minnesota, Wisconsin, Iowa, Illinois, Nebraska, Montana, North Dakota or
South Dakota.
IAI Value Fund pursues its investment objective of long-term capital
appreciation primarily by investing in securities believed by management to be
undervalued and which are considered to offer unusual opportunities for capital
growth.
<PAGE>
This Prospectus sets forth concisely the information which a prospective
investor should know about each Fund before investing and it should be retained
for future reference. A "Statement of Additional Information" dated August 1,
1995, as supplemented January 31, 1996, which provides a further discussion of
certain areas in this Prospectus and other matters which may be of interest to
some investors, has been filed with the Securities and Exchange Commission and
is incorporated herein by reference. For a free copy, call or write the Funds
at the address or telephone number shown on the inside back cover of this
Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
FUND EXPENSE INFORMATION................................... 4
FUND DIRECTORS............................................. 5
FINANCIAL HIGHLIGHTS....................................... 6
INVESTMENT PERFORMANCE..................................... 12
INVESTMENT OBJECTIVES AND POLICIES......................... 12
CAPITAL APPRECIATION FUND............................. 12
EMERGING GROWTH FUND.................................. 13
GROWTH FUND........................................... 13
GROWTH AND INCOME FUND................................ 14
MIDCAP GROWTH FUND.................................... 14
REGIONAL FUND......................................... 15
VALUE FUND............................................ 15
PORTFOLIO SECURITIES AND OTHER FUND INVESTMENT TECHNIQUES.. 16
FUND RISK FACTORS.......................................... 18
Investment Restrictions............................... 20
MANAGEMENT................................................. 20
ALL FUNDS OTHER THAN CAPITAL APPRECIATION FUND........ 20
CAPITAL APPRECIATION FUND............................. 22
PLAN OF DISTRIBUTION....................................... 22
COMPUTATION OF NET ASSET VALUE AND PRICING................. 23
PURCHASE OF SHARES......................................... 23
RETIREMENT PLANS........................................... 24
AUTOMATIC INVESTMENT PLAN.................................. 25
REDEMPTION OF SHARES....................................... 25
EXCHANGE PRIVILEGE......................................... 25
AUTOMATIC EXCHANGE PLAN.................................... 26
AUTHORIZED TELEPHONE TRADING............................... 26
SYSTEMATIC CASH WITHDRAWAL PLAN............................ 27
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS.................... 27
DESCRIPTION OF COMMON STOCK................................ 28
COUNSEL AND AUDITORS....................................... 28
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT.... 28
ADDITIONAL INFORMATION..................................... 29
</TABLE>
3
<PAGE>
FUND EXPENSE INFORMATION
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- ----------------------------------------------------------------------------------------------------------------------------------
IAI
Emerging IAI
IAI Capital Growth IAI Growth and IAI Midcap IAI IAI
Appreciation Fund Fund Growth Fund Income Fund Growth Fund Regional Fund Value Fund
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales Load Imposed on
Purchases None None None None None None None
Sales Load Imposed on
Reinvested Dividends None None None None None None None
Redemption Fees None None None None None None None
Exchange Fees None None None None None None None
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
(NET OF REIMBURSEMENTS)
- ----------------------
IAI IAI
IAI Capital Emerging IAI Growth and IAI Midcap IAI IAI
Appreciation Growth Growth Income Growth Regional Value
Fund* Fund** Fund** Fund** Fund** Fund** Fund**
- ----------------------------------------------------------------------------------------------------------------------------------
Management Fee 1.25%*** .74% .75% .74% .75% .71% .75%
Rule 12b-1 Fee None .25% .02% .25% .18% .25% .12%
Other Expenses None .26% .48% .26% .32% .27% .38%
----- ---- ---- ---- ---- ---- ----
Total Fund Operating 1.25%*** 1.25% 1.25% 1.25% 1.25% 1.23% 1.25%
Expenses ---- ---- ---- ---- ---- ---- ----
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* as a percentage of average daily net assets
** as a percentage of average month-end net assets; net of reimbursements
*** after fee waiver
EXAMPLE:
Based upon the levels of Total Fund Operating Expenses listed above, you would
pay the following expenses on a $1,000 investment, assuming a five percent
annual return and redemption at the end of each period:
4
<PAGE>
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
IAI Capital Appreciation Fund $13 $40 -- --
IAI Emerging Growth Fund $13 $40 $69 $151
IAI Growth Fund $13 $40 $69 $151
IAI Growth and Income Fund $13 $40 $69 $151
IAI Midcap Growth Fund $13 $40 $69 $151
IAI Regional Fund $13 $39 $68 $149
IAI Value Fund $13 $40 $69 $151
</TABLE>
The purpose of the above table is to assist you in understanding the
various costs and expenses that an investor in a Fund will bear directly or
indirectly. For all Funds except Capital Appreciation Fund, the information in
the table is based upon actual expenses the Funds incurred for the fiscal year
or period ended March 31, 1995. For Capital Appreciation Fund, the fees set
forth in the table reflect estimated fees and expenses of the Fund for its
fiscal period ending March 31, 1996. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
For all Funds except Capital Appreciation Fund, each of such Fund's
Total Fund Operating Expenses are subject to a contractual expense limitation of
1.25% of the Fund's average month-end net assets, as further described in the
section "Management." Absent such expense limitations, each of Growth Fund,
Midcap Growth Fund and Value Fund would pay .25% of its average month-end net
assets in Rule 12b-1 Fees. For such Funds, projected Total Fund Operating
Expenses set forth above are the same as the actual Total Fund Operating
Expenses for the fiscal year or period ended March 31, 1995. Because each
Fund's Rule 12b-1 Fee is based on a percentage of such Fund's net assets, long-
term shareholders may pay more than the economic equivalent of the maximum
front-end sales charges permitted by Section 26 of the National Association of
Securities Dealers' Rules of Fair Practice.
With respect to Capital Appreciation Fund, the Fund's investment
adviser has voluntarily agreed to waive the Management Fee in excess of 1.25% of
the Fund's average daily net assets until March 31, 1997. Absent such voluntary
waiver, the Fund would pay 1.40% of its average daily net assets as the
Management Fee.
Further information concerning fees paid by each Fund is set forth in
the section "Management" below and in the Statement of Additional Information.
FUND DIRECTORS
Madeline Betsch Richard E. Struthers
W. William Hodgson J. Peter Thompson
George R. Long Charles H. Withers
Noel P. Rahn
5
<PAGE>
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report is included in the Fund's Annual Report. The Financial
Highlights section of the Annual Report is incorporated by reference in (and is
a part of) the Statement of Additional Information. Such Annual Report may be
obtained by shareholders on request from the Fund at no charge.
<TABLE>
<CAPTION>
EMERGING GROWTH FUND
PERIOD FROM
YEARS ENDED MARCH 31, AUGUST 5, 1991*
-------------------------------- TO
1995 1994 1993 MARCH 31, 1992
-------- -------- -------- ---------------
<S> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period $ 15.20 $ 13.47 $ 11.91 $ 10.00
-------- -------- -------- ---------
Operations:
Net investment income (loss) (.07) (.10) (.05) .01
Net realized and unrealized gains 1.42 2.18 2.37 1.91
-------- -------- -------- ---------
Total from operations 1.35 2.08 2.32 1.92
-------- -------- -------- ---------
Distributions to shareholders from:
Net investment income -- -- -- (.01)
Net realized gains (.72) (.35) (.76) --
-------- -------- -------- ---------
Total distributions (.72) (.35) (.76) (.01)
-------- -------- -------- ---------
NET ASSET VALUE:
End of period $ 15.83 $ 15.20 $ 13.47 $ 11.91
======== ======== ======== =========
Total investment return ** 10.23% 15.43% 21.90% 19.23%
Net assets at end of period (000's omitted) $342,874 $225,510 $131,514 $ 38,110
RATIOS:
Expenses to average net assets 1.25% 1.25% 1.25% 1.25%***
Net investment income (loss)
to average net assets (.54%) (.77%) (.72%) .14%***
Portfolio turnover rate
(excluding short-term securities) 58.1% 76.3% 96.1% 126.6%
- -----------------------
</TABLE>
* Commencement of operations
** Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value.
*** Annualized
6
<PAGE>
GROWTH FUND
The following information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report is included in the Fund's Annual Report. The Financial
Highlights section of the Annual Report is incorporated by reference in (and is
a part of) the Statement of Additional Information. Such Annual Report may be
obtained by shareholders on request from the Fund at no charge.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
AUGUST 1, 1994 AUGUST 6, 1993***
TO MARCH 31, 1995**** TO JULY 31, 1994
--------------------- ----------------
<S> <C> <C>
NET ASSET VALUE:
Beginning of period $9.87 $10.00
----- ------
OPERATIONS:
Net investment income .04 .01
Net realized and unrealized gains (losses) 1.07 (.13)
----- ------
Total from operations 1.11 (.12)
----- ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.03) (.01)
---- ----
Total distributions (.03) (.01)
---- ----
NET ASSET VALUE:
End of period $10.95 $9.87
====== =====
Total investment return* 11.24% (1.21%)
Net assets at end of period (000's omitted) $26,794 $14,408
RATIOS:
Expenses to average net assets** 1.25% 1.25%
Net investment income to average net
assets** 0.61% 0.16%
Portfolio turnover rate (excluding short-
term securities) 68.7% 105.4%
</TABLE>
- ----------------
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value.
** Annualized
*** Commencement of operations
**** Reflects fiscal year-end change from July 31 to March 31.
7
<PAGE>
GROWTH AND INCOME FUND
The following information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report is included in the Fund's Annual Report. The Financial
Highlights section of the Annual Report is incorporated by reference in (and is
a part of) the Statement of Additional Information. Such Annual Report may be
obtained by shareholders on request from the Fund at no charge.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-------- -------- -------- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period $ 13.91 $ 15.19 $ 14.73 $ 14.48 $ 15.47 $ 16.01 $ 14.80 $ 17.32 $ 16.09 $ 13.25
------------------------------------------------------------------------------------------------------
Operations:
Net investment income .12 .09 .07 .13 .29 .39 .31 .28 .33 .42
Net realized and
unrealized
gains (losses) 1.04 .38 1.17 1.20 .72 2.26 2.23 (1.09) 3.07 3.36
------------------------------------------------------------------------------------------------------
Total from operations 1.16 .47 1.24 1.33 1.01 2.65 2.54 (.81) 3.40 3.78
------------------------------------------------------------------------------------------------------
Distributions to
shareholders from:
Net investment income (.10) (.06) (.07) (.14) (.30) (.43) (.23) (.37) (.37) (.48)
Net realized gains (.65) (1.69) (.71) (.94) (1.70) (2.76) (1.10) (1.34) (1.80) (.46)
------------------------------------------------------------------------------------------------------
Total distributions (.75) (1.75) (.78) (1.08) (2.00) (3.19) (1.33) (1.71) (2.17) (.94)
------------------------------------------------------------------------------------------------------
NET ASSET VALUE:
End of period $ 14.32 $ 13.91 $ 15.19 $ 14.73 $ 14.48 $ 15.47 $ 16.01 $ 14.80 $ 17.32 $ 16.09
======================================================================================================
Total investment return * 8.92% 3.07% 9.04% 9.56% 7.42% 16.77% 18.06% (4.89%) 24.25% 30.62%
Net assets at end of period
(000's omitted) $101,256 $119,102 $134,308 $113,324 $90,590 $76,484 $76,901 $83,290 $83,691 $69,126
RATIOS:
Expenses to average
net assets 1.25% 1.25% 1.25% 1.25% 1.05% 1.00% .90% .80% .80% .70%
Net investment income to
average net assets 0.80% 0.60% 0.61% 1.03% 2.19% 2.10% 1.80% 1.70% 2.10% 2.90%
Portfolio turnover rate
(excluding short-term
securities) 79.1% 205.6% 175.6% 210.1% 68.5% 66.2% 48.3% 35.8% 67.5% 50.0%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of distributions at net asset
value.
8
<PAGE>
MIDCAP GROWTH FUND
The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report is included in the Fund's Annual Report.
The Financial Highlights section of the Annual Report is incorporated by
reference in (and is a part of) the Statement of Additional Information. Such
Annual Report may be obtained by shareholders on request from the Fund at no
charge.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, PERIOD FROM
-------------------- APRIL 10, 1992** TO
1995 1994 MARCH 31, 1993
-------- ------- --------------------
<S> <C> <C>
NET ASSET VALUE:
Beginning of period $ 13.67 $ 11.88 $ 10.00
------- ------- -------
Operations:
Net investment income (loss) (.04) (.04) .02
Net realized and unrealized gains 2.35 1.99 1.89
------- ------- -------
Total from operations 2.31 1.95 1.91
------- ------- -------
Distributions to shareholders from:
Net investment income -- -- (.03)
Net realized gains (.63) (.16) --
------- ------- -------
Total distributions (.63) (.16) (.03)
------- ------- -------
Net Asset Value:
End of period $ 15.35 $ 13.67 $ 11.88
======= ======= =======
Total investment return*** 17.63% 16.40% 19.09%
Net assets at end of period (000's 88,075 $56,618 $22,070
omitted)
RATIOS:
Expenses to average net assets 1.25% 1.25% 1.25%*
Net investment income to average net (.33%) (.45%) .24%*
assets
Portfolio turnover rate (excluding 51.3% 49.7% 57.6%
short-term securities)
______________________________
</TABLE>
* Annualized
** Commencement of operations
*** Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value.
9
<PAGE>
REGIONAL FUND
The following information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report is included in the Fund's Annual Report. The Financial
Highlights section of the Annual Report is incorporated by reference in (and is
a part of) the Statement of Additional Information. Such Annual Report may be
obtained by shareholders on request from the Fund at no charge.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
NET ASSET VALUE:
Beginning of period $ 20.94 $ 22.23 $ 21.29 $ 21.03 $ 18.95
----------------------------------------------------
Operations:
Net investment income .17 .21 .21 .20 .35
Net realized and
unrealized
gains (losses) 1.84 .51 1.48 2.38 2.88
----------------------------------------------------
Total from operations 2.01 .72 1.69 2.58 3.23
----------------------------------------------------
Distributions to
shareholders from:
Net investment income (.20) (.18) (.23) (.24) (.33)
Net realized gains (1.19) (1.83) (.52) (2.08) (.82)
----------------------------------------------------
Total distributions (1.39) (2.01) (.75) (2.32) (1.15)
----------------------------------------------------
NET ASSET VALUE:
End of period $ 21.56 $ 20.94 $ 22.23 $ 21.29 $ 21.03
====================================================
Total investment return * 10.35% 3.26% 8.31% 12.77% 18.01%
Net assets at end of period
(000's omitted) $523,364 $596,572 $659,904 $528,763 $284,054
RATIOS:
Expenses to average net
assets 1.23% 1.25% 1.25% 1.25% 1.01%
Net investment income to
average net assets .74% .94% 1.09% 1.20% 2.27%
Portfolio turnover rate
(excluding short-term
securities) 150.0% 163.0% 139.7% 140.6% 168.7%
- ---------------------------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
1990 1989 1988 1987 1986
-------- -------- ------- -------- -------
NET ASSET VALUE:
Beginning of period $ 19.38 $ 17.11 $ 21.19 $ 23.44 $ 17.29
---------------------------------------------------
Operations:
Net investment income .46 .36 .33 .36 .41
Net realized and
unrealized
gains (losses) 3.59 2.76 (.80) 4.26 6.57
---------------------------------------------------
Total from operations 4.05 3.12 (.47) 4.62 6.98
---------------------------------------------------
Distributions to
shareholders from:
Net investment income (.51) (.28) (.40) (.42) (.43)
Net realized gains (3.97) (.57) (3.21) (6.45) (.40)
---------------------------------------------------
Total distributions (4.48) (.85) (3.61) (6.87) (.83)
---------------------------------------------------
NET ASSET VALUE:
End of period $ 18.95 $ 19.38 $ 17.11 $ 21.19 $ 23.44
===================================================
Total investment return * 21.66% 18.63% (1.40%) 25.57% 42.20%
Net assets at end of period
(000's omitted) $138,270 $102,425 $85,666 $101,949 $77,743
RATIOS:
Expenses to average net
assets .99% 1.00% .80% .80% .80%
Net investment income to
average net assets 2.31% 2.00% 1.60% 1.80% 2.10%
Portfolio turnover rate
(excluding short-term
securities) 116.2% 93.7% 85.3% 132.5% 112.0%
- ---------------------------
</TABLE>
*Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of distributions at net asset value.
10
<PAGE>
VALUE FUND
The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report is included in the Fund's Annual Report.
The Financial Highlights section of the Annual Report is incorporated by
reference in (and is a part of) the Statement of Additional Information. Such
Annual Report may be obtained by shareholders on request from the Fund at no
charge.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
NET ASSET VALUE:
Beginning of period $ 11.63 $ 11.63 $ 11.06 $ 10.46 $ 12.29
------------------------------------------------
Operations:
Net investment income .03 .05 .11 .12 .22
Net realized and unrealized
gains (losses) .38 1.45 .56 1.08 .36
------------------------------------------------
Total from operations .41 1.50 .67 1.20 .58
------------------------------------------------
Distributions to shareholders from:
Net investment income (.03) (.13) -- (.15) (.17)
Net realized gains (.84) (1.37) (.10) (.45) (2.24)
------------------------------------------------
Total distributions (.87) (1.50) (.10) (.60) (2.41)
------------------------------------------------
NET ASSET VALUE:
End of period $ 11.17 $ 11.63 $ 11.63 $ 11.06 $ 10.46
================================================
Total investment return* 3.88% 12.70% 6.20% 12.21% 6.19%
Net assets at end of period
(000's omitted) $40,601 $35,282 $24,643 $32,246 $22,145
RATIOS:
Expenses to average net
assets 1.25% 1.25% 1.25% 1.25% 1.10%
Net investment income to
average net assets 0.31% 0.35% 0.68% 1.24% 2.00%
Portfolio turnover rate
(excluding short-term
securities) 102.1% 191.9% 118.3% 125.4% 57.0%
- -------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
1990 1989 1988 1987 1986
------- ------- ------- ------- -------
NET ASSET VALUE:
Beginning of period $ 13.14 $ 10.75 $ 12.51 $ 11.46 $ 10.07
------------------------------------------------
Operations:
Net investment income .19 .12 .12 .15 .20
Net realized and unrealized
gains (losses) 1.11 2.46 (.04) 1.42 1.59
------------------------------------------------
Total from operations 1.30 2.58 .08 1.57 1.79
------------------------------------------------
Distributions to shareholders from:
Net investment income (.18) (.10) (.17) (.18) (.20)
Net realized gains (1.97) (.09) (1.67) (.34) (.20)
------------------------------------------------
Total distributions (2.15) (.19) (1.84) (.52) (.40)
------------------------------------------------
NET ASSET VALUE:
End of period $ 12.29 $ 13.14 $ 10.75 $ 12.51 $ 11.46
================================================
Total investment return* 9.90% 24.18% 1.12% 14.22% 18.69%
Net assets at end of period
(000's omitted) $25,913 $27,980 $20,464 $22,310 $24,736
RATIOS:
Expenses to average net
assets 1.00% 1.00% 1.00% 1.00% 1.00%
Net investment income to
average net assets 1.34% 1.00% 1.00% 1.30% 2.10%
Portfolio turnover rate
(excluding short-term
securities) 70.3% 52.7% 62.5% 85.7% 85.4%
- -------------------------------------
</TABLE>
*Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of distributions at net asset value.
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INVESTMENT PERFORMANCE
From time to time the Funds may advertise performance data including
monthly, quarterly, yearly or cumulative total return and average annual total
return figures. All such figures are based on historical earnings and
performance and are not intended to be indicative of future performance. The
investment return on and principal value of an investment in a Fund will
fluctuate, so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
Total return is the change in value of an investment in a Fund over a
given period, assuming reinvestment of any dividends and capital gains. A
cumulative total return reflects actual performance over a stated period of
time. An average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period.
For additional information regarding the calculation of such total
return figures, see "Investment Performance" in the Statement of Additional
Information. Further information about the performance of each Fund is
contained in each Fund's Annual Report to shareholders which may be obtained
without charge from each Fund.
Comparative performance information may be used from time to time in
advertising or marketing a Fund's shares, including data on the performance of
other mutual funds, indexes or averages of other mutual funds, indexes of
related financial assets or data, and other competing investment and deposit
products available from or through other financial institutions. The
composition of these indexes, averages or products differs from that of the
Funds. The comparison of a Fund to an alternative investment should be made
with consideration of differences in features and expected performance. A Fund
may also note its mention in newspapers, magazines, or other media from time to
time. The Funds assume no responsibility for the accuracy of such data. For
additional information on the types of indexes, averages and periodicals that
might be utilized by the Funds in advertising and sales literature, see the
section "Investment Performance" in the Statement of Additional Information.
INVESTMENT OBJECTIVES AND POLICIES
CAPITAL APPRECIATION FUND
The investment objective of Capital Appreciation Fund is long-term
capital appreciation. Capital Appreciation Fund is designed for investors
seeking the opportunity for substantial long-term growth who can accept above
average stock market risk and little or no current income. Capital Appreciation
Fund will pursue its objective by investing primarily in equity securities of
U.S. companies that Investment Advisers, Inc. (IAI), the Fund's investment
adviser and manager, believes have above-average prospects for growth. Capital
Appreciation Fund's investment objective is a fundamental policy and may not be
changed without shareholder approval. There can be no assurance that Capital
Appreciation Fund will achieve its investment objective.
In general, Capital Appreciation Fund will concentrate on companies
that have superior performance records, solid market positions, strong balance
sheets and a management team capable of sustaining growth. Although IAI expects
Capital Appreciation Fund will invest primarily in the common stocks of smaller
emerging and mid-sized companies, generally companies that have a market
capitalization less than $5 billion, it may invest in the securities of
companies of any size that offer strong earnings growth potential. In addition
to common stocks, Capital Appreciation Fund may also invest in securities
convertible into common stocks, nonconvertible preferred stocks and
nonconvertible debt securities when IAI believes that these securities offer
opportunities for capital appreciation. Current income will not be a
substantial factor in the selection of securities.
Capital Appreciation Fund may invest in other securities and may
employ certain other investment techniques, as described in the section
"Portfolio Securities and Other Fund Investment Techniques." Please see
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<PAGE>
the Prospectus section "Fund Risk Factors" and the Statement of Additional
Information section "Investment Objectives and Policies" for a discussion of the
risks associated with investing in Capital Appreciation Fund.
EMERGING GROWTH FUND
Emerging Growth Fund will close to new investors on February 1, 1996.
Emerging Growth Fund's current shareholders and certain others may continue to
add to an existing account. Emerging Growth Fund may resume sales to new
investors at some future date, but it has no present intention to do so. See
the section "Purchase of Shares" for more information on who can purchase shares
of Emerging Growth Fund.
The investment objective of Emerging Growth Fund is long-term capital
appreciation. The Emerging Growth Fund is designed for investors seeking the
opportunity for substantial long-term growth who can accept above average stock
market risk and little or no current income. Emerging Growth Fund will pursue
its objective by investing primarily in equity securities of small and medium
sized companies that are in the early stages of their life cycles and which have
demonstrated or have the potential for above average capital growth. Emerging
Growth Fund's investment objective is a fundamental policy and may not be
changed without shareholder approval. There can be no assurance that Emerging
Growth Fund will achieve its investment objective.
Emerging Growth Fund's policy is to invest in equity securities,
including convertible securities, of companies that IAI, Emerging Growth Fund's
investment adviser and manager, believes are in the early stages of their life
cycles and have demonstrated or have the potential to experience rapid growth in
earnings and/or revenues ("emerging growth companies"). Under normal market
conditions, Emerging Growth Fund will invest at least 65% of the value of its
total assets in emerging growth companies that are of small to medium size
(market capitalization of $1 billion or less). Emerging growth companies are
generally expected to show earnings growth over time that is well above the
growth rate of the overall economy and the rate of inflation, and have products,
management and market opportunities which are usually necessary to become more
widely recognized as growth companies. Emerging Growth Fund may also invest in
more established companies that may receive greater market recognition or
otherwise offer strong capital appreciation potential due to their relative
market position, the strength of their balance sheet, changes in management or
other similar opportunities.
Although Emerging Growth Fund's portfolio generally consists primarily
of common stocks, Emerging Growth Fund may invest in securities convertible into
common stocks, nonconvertible preferred stocks and nonconvertible debt
securities.
Emerging Growth Fund may invest in other securities and may employ
certain other investment techniques, as described in the section "Portfolio
Securities and Other Fund Investment Techniques." Please see the Prospectus
section "Fund Risk Factors" and the Statement of Additional Information section
"Investment Objectives and Policies" for a discussion of the risks associated
with investing in Emerging Growth Fund.
GROWTH FUND
The investment objective of Growth Fund is long-term capital appreciation.
Growth Fund is designed for investors seeking the opportunity for significant
long term growth who can accept above average market risk with little or no
current income. Growth Fund pursues its objective by investing primarily in
equity securities of established companies that are expected to increase
earnings at an above average rate. Growth Fund's investment objective is a
fundamental policy and may not be changed without shareholder approval. There
can be no assurance that Growth Fund will achieve its investment objective.
In general, Growth Fund concentrates on companies that have strong
management, leading market positions, strong balance sheets, and a well defined
strategy for future growth. In selecting investments for Growth Fund, IAI,
Growth Fund's investment adviser and manager, utilizes several valuation
techniques to
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<PAGE>
determine which stocks offer the best combination of intrinsic value and
earnings growth potential. The goal is to have an acceptable balance of risk and
reward in the portfolio.
Under normal circumstances, at least 65% of Growth Fund's assets will
be invested in growth-type securities. Growth Fund may also invest in
government securities, investment-grade corporate bonds and debentures, high-
grade commercial paper, preferred stocks, certificates of deposit or other
securities of U.S. and foreign issuers when IAI perceives an opportunity for
capital growth from such securities or so that Growth Fund may receive a return
on its idle cash. Growth Fund currently intends to limit its investments in
debt securities to securities of U.S. companies, the U.S. Government and foreign
governments and governmental entities. When IAI invests in such debt
securities, investment income will increase and may constitute a large portion
of the return on Growth Fund, and Growth Fund probably will not participate in
market advances or declines to the extent that it would if it were fully
invested in equity securities. In addition, Growth Fund may increase its cash
position on a temporary basis when IAI is unable to locate investment
opportunities with desirable risk/reward characteristics or to meet redemption
requests or pay Fund expenses.
In considering whether to purchase securities of foreign issuers, IAI
considers the political and economic conditions in a country, the prospect for
changes in the value of its currency and the liquidity of the investment in that
country's securities markets. If appropriate, IAI may purchase foreign
securities through dollar-denominated American Depository Receipts ("ADRs")
which are issued by domestic banks and publicly traded in the United States.
Such investments do not involve the same currency and liquidity risks as
securities denominated in foreign currency.
Growth Fund may invest in other securities and may employ certain
other investment techniques, as described in the section "Portfolio Securities
and Other Fund Investment Techniques." Please see the Prospectus section "Fund
Risk Factors" and the Statement of Additional Information section "Investment
Objectives and Policies" for a discussion of the risks associated with investing
in Growth Fund.
GROWTH AND INCOME FUND
The primary investment objective of Growth and Income Fund is capital
appreciation, with income being its secondary objective. Growth and Income Fund
pursues its objectives by investing primarily in equity securities which offer
the potential for capital appreciation and secondarily by investing in income-
producing equity securities. Growth and Income Fund's investment objectives are
fundamental policies and may not be changed without shareholder approval. There
can be no assurance that Growth and Income Fund will achieve its investment
objectives.
Growth and Income Fund invests primarily in common stocks and may
invest in securities convertible into common stocks, nonconvertible preferred
stocks and nonconvertible debt securities. In selecting investments, Growth and
Income Fund considers a number of factors, such as product development and
demand, operating ratios, utilization of earnings for expansion, management
abilities, analyses of intrinsic values, market action and overall economic and
political conditions. Dividend income is a consideration secondary to Growth
and Income Fund's primary objective of capital appreciation.
Growth and Income Fund may invest in other securities and may employ
certain other investment techniques, as described in the section "Portfolio
Securities and Other Fund Investment Techniques." Please see the Prospectus
section "Fund Risk Factors" and the Statement of Additional Information section
"Investment Objectives and Policies" for a discussion of the risks associated
with investing in Growth and Income Fund.
MIDCAP GROWTH FUND
The investment objective of Midcap Growth Fund is long-term capital
appreciation. Midcap Growth Fund is designed for investors seeking the
opportunity for substantial long-term growth who can accept above average stock
market risk and little or no current income. Midcap Growth Fund will pursue its
objective by investing in equity securities of medium-sized U.S. companies that
IAI, Midcap Growth Fund's investment adviser
14
<PAGE>
and manager, believes have above-average prospects for growth. Midcap Growth
Fund's investment objective is a fundamental policy and may not be changed
without shareholder approval. There can be no assurance that Midcap Growth Fund
will achieve its investment objective.
Midcap Growth Fund will invest at least 65% of the value of its total
assets in medium-sized companies that have a market capitalization between $500
million and $5 billion. Under normal market conditions, the weighted average
capitalization of Midcap Growth Fund's investment portfolio will range from $1
billion to $3 billion. In general, Midcap Growth Fund concentrates on companies
that have superior performance records, solid market positions, strong balance
sheets and a management team capable of sustaining growth. Investments in such
companies are generally considered to be less volatile than less capitalized
emerging companies. However, such companies may not generate the dividend
income of larger, more capitalized companies. Dividend income, if any, is a
consideration incidental to Midcap Growth Fund's objective of capital
appreciation.
Midcap Growth Fund invests primarily in common stocks. However, it may
invest in securities convertible into common stocks, nonconvertible preferred
stocks and nonconvertible debt securities when IAI believes that these
securities offer opportunities for capital appreciation. Current income will not
be a substantial factor in the selection of securities.
Midcap Growth Fund may invest in other securities and may employ certain
other investment techniques, as described in the section "Portfolio Securities
and Other Fund Investment Techniques." Please see the Prospectus section "Fund
Risk Factors" and the Statement of Additional Information section "Investment
Objectives and Policies" for a discussion of the risks associated with investing
in Midcap Growth Fund.
REGIONAL FUND
The investment objective of Regional Fund is capital appreciation. Regional
Fund does not expect to provide significant current income to investors.
Regional Fund pursues its objective by investing at least 80% of its equity
investments in companies which have their headquarters in Minnesota, Wisconsin,
Iowa, Illinois, Nebraska, Montana, North Dakota or South Dakota (the "Eight
State Region"). Regional Fund's investment objective is a fundamental policy and
may not be changed without shareholder approval. There can be no assurance that
Regional Fund will achieve its investment objective.
Regional Fund invests primarily in common stocks but may also invest
in securities convertible into common stocks, nonconvertible preferred stocks,
and nonconvertible debt securities. In selecting investments for Regional Fund,
IAI, Regional Fund's investment adviser and manager, considers a number of
factors, such as product development and demand, operating ratios, utilization
of earnings for expansion, management abilities, analyses of intrinsic values,
market action and overall economic and political conditions. Along with
investments in nationally recognized companies, Regional Fund invests in
companies which are not as well known because they are newer or have a small
capitalization, but which offer the potential for capital appreciation. The
prices of stocks of such companies are more volatile than prices of stocks of
mature companies. All investments are subject to the market risks inherent in
any investment in equity securities.
Regional Fund may invest in other securities and may employ certain
other investment techniques, as described in the section "Portfolio Securities
and Other Fund Investment Techniques." Please see the Prospectus section "Fund
Risk Factors" and the Statement of Additional Information section "Investment
Objectives and Policies" for a discussion of the risks associated with investing
in Regional Fund.
VALUE FUND
The investment objective of Value Fund is long-term capital appreciation.
Value Fund does not expect to provide significant current income to investors.
Value Fund pursues its objective primarily by investing in securities believed
by management to be undervalued and which are considered to offer unusual
opportunities for capital growth. Value Fund's investment objective is a
fundamental policy and may not be changed without shareholder approval. There
can be no assurance that Value Fund will achieve its investment objective.
15
<PAGE>
The following are typical, but not exclusive, example of investments that
are considered for Value Fund:
1. Equity securities of companies which have been unpopular for some time
but where, in the opinion of IAI, Value Fund's investment adviser and
manager, recent developments such as those listed below suggest the
possibility of improved operating results:
(a) a sale or termination of an unprofitable part of the company's
business;
(b) a change in the company's management or in management's
philosophy;
(c) a basic change in the industry in which the company operates;
(d) the introduction of new products; or
(e) the prospect of an acquisition or merger.
2. Equity securities of companies which have experienced recent market
popularity but which, in the opinion of IAI, have temporarily fallen out
of favor for reasons that are considered nonrecurring or short-term.
3. Equity securities of companies which appear undervalued in relation
to popular securities of other companies in the same industry.
Although there is no formula as to the percentage of assets that may be
invested in any one type of security, Value Fund generally is primarily invested
in common stocks. Value Fund may also acquire preferred stocks, fixed income
securities, and securities convertible into or which carry warrants to purchase
common stocks, or other equity interests.
IAI is responsible for the management of Value Fund's portfolio and makes
portfolio decisions based on its own research analysis supplemented by research
information provided by other sources. The basic orientation of Value Fund's
investment policies is such that many of the portfolio securities may not be
recommended by most research analysts.
Value Fund may invest in other securities and may employ certain other
investment techniques, as described in the section "Portfolio Securities and
Other Fund Investment Techniques." Please see the Prospectus section "Fund Risk
Factors" and the Statement of Additional Information section "Investment
Objectives and Policies" for a discussion of the risks associated with investing
in Value Fund.
PORTFOLIO SECURITIES AND OTHER FUND INVESTMENT TECHNIQUES
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements relating to the securities in
which it may invest. In a repurchase agreement, a Fund buys a security at one
price and simultaneously agrees to sell it back at a higher price. Delays or
losses could result if the other party to the agreement defaults or becomes
bankrupt.
BORROWING
Each Fund may borrow from banks for temporary or emergency purposes or
through reverse repurchase agreements. If a Fund borrows money, its share price
may be subject to greater fluctuation until the borrowing is paid off. If a
Fund makes additional investments while borrowings are outstanding, this may be
considered a form of leverage.
16
<PAGE>
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in securities that are
considered illiquid because of the absence of a readily available market or due
to legal or contractual restrictions. However, certain restricted securities
that are not registered for sale to the general public but that can be resold to
institutional investors may be considered liquid pursuant to guidelines adopted
by the Board of Directors. The institutional trading market is relatively new,
and the liquidity of the Fund's investments could be impaired if trading does
not develop or declines.
FOREIGN SECURITIES
Each Fund may invest in securities of foreign issuers in accordance with
its investment objective and policies. In considering whether to purchase
securities of foreign issuers, IAI will consider the political and economic
conditions in a country, the prospect for changes in the value of its currency
and the liquidity of the investment in that country's securities markets. Each
of Growth and Income, Emerging Growth, Midcap Growth, Regional and Value Funds
currently intends to limit its investment in foreign securities denominated in
foreign currency and not publicly traded in the United States to no more than
10% of the value of its total assets. Each of Capital Appreciation Fund and
Growth Fund intends to limit its investment in such securities to no more than
15% of the value of its total assets.
VENTURE CAPITAL
Each Fund may invest in venture capital limited partnerships and venture
capital funds which, in turn, invest principally in securities of early stage,
developing companies. Investments in venture capital limited partnerships and
venture capital funds present a number of risks not found in investing in
established enterprises including the facts that such a partnership's or fund's
portfolio will be composed almost entirely of early-stage companies which may
lack depth of management and sufficient resources, which may be marketing a new
product for which there is no established market, and which may be subject to
intense competition from larger companies. Any investment in a venture capital
limited partnership or venture capital fund will lack liquidity, will be
difficult to value, and a Fund will not be entitled to participate in the
management of the partnership or fund. If for any reason the services of the
general partners of a venture capital limited partnership were to become
unavailable, such limited partnership could be adversely affected.
In addition to investing in venture capital limited partnerships and
venture capital funds, a Fund may directly invest in early-stage, developing
companies. The risks associated with investing in these securities are
substantially similar to the risks set forth above. A Fund will typically
purchase equity securities in these early-stage, developing companies; however
from time to time, a Fund may purchase non-investment grade debt securities in
the form of convertible notes. Capital Appreciation Fund currently intends to
limit its investments in securities described in this section to no more than 5%
of its net assets.
LEVERAGED BUYOUTS
Each Fund may invest in leveraged buyout limited partnerships and funds
which, in turn, invest in leveraged buyout transactions ("LBOs"). An LBO,
generally, is an acquisition of an existing business by a newly formed
corporation financed largely with debt assumed by such newly formed corporation
to be later repaid with funds generated from the acquired company. Since most
LBOs are by nature highly leveraged (typically with debt to equity ratios of
approximately 9 to 1), equity investments in LBOs may appreciate substantially
in value given only modest growth in the earnings or cash flow of the acquired
business. Investments in LBO partnerships and funds, however, present a number
of risks. Investments in LBO limited partnerships and funds will normally lack
liquidity and may be subject to intense competition from other LBO limited
partnerships and funds. Additionally, if the cash flow of the acquired company
is insufficient to service the debt assumed in the LBO, the LBO limited
partnership or fund could lose all or part of its investment in such acquired
company.
17
<PAGE>
ADJUSTING INVESTMENT EXPOSURE
Each Fund can use various techniques to increase or decrease its exposure
to changing security prices, interest rates, currency exchange rates, commodity
prices, or other factors that affect security values. These techniques include
buying and selling options and futures contracts, entering into currency
exchange contracts or swap agreements, purchasing indexed securities, and
selling securities short. Because some Fund assets may be invested in
restricted securities and thus may not be associated with short-term movement in
the financial markets, that portion of a Fund's assets may not be able to
participate in market movements. Each Fund may invest in futures contracts in
amounts corresponding to its investments in such restricted securities in order
to participate fully in market movements.
TEMPORARY DEFENSIVE POSITION
In unusual market conditions, when IAI believes a temporary defensive
position is warranted, each Fund may invest without limitation in investment-
grade fixed income securities, that is, securities rated within the four highest
grades assigned by Moody's Investors Service, Inc. or Standard & Poor's
Corporation, or money market securities (including repurchase agreements).
Money market securities will only be purchased if they have been given one of
the two top ratings by a major ratings service or, if unrated, are of comparable
quality as determined by IAI. Midcap Growth and Emerging Growth Funds, for
temporary defensive purposes, may also invest without limitation in common
stocks of larger, more established companies. If a Fund maintains a temporary
defensive position, investment income may increase and may constitute a large
portion of a Fund's return.
PORTFOLIO TURNOVER
The Funds will dispose of securities without regard to the time they have
been held when such action appears advisable to management either as a result of
securities having reached a price objective, or by reason of developments not
foreseen at the time of the investment decision. Since investment changes
usually will be made without reference to the length of time a security has been
held, a significant number of short-term transactions may result. Accordingly,
a Fund's annual portfolio turnover rate cannot be anticipated and may be
relatively high. A higher turnover rate generally results in higher brokerage
and other costs for a Fund. The Funds' historical portfolio turnover rates are
set forth in the section "Financial Highlights."
Further information regarding these and other securities and techniques is
contained in the Statement of Additional Information.
FUND RISK FACTORS
FOREIGN INVESTMENT RISK FACTORS
Investments in foreign securities involve risks that are different in some
respects from investments in securities of U.S. issuers, such as the risk of
fluctuations in the value of the currencies in which they are denominated, the
risk of adverse political and economic developments and, with respect to certain
countries, the possibility of expropriation, nationalization or confiscatory
taxation or limitations on the removal of funds or other assets of a Fund.
Securities of some foreign companies are less liquid and more volatile than
securities of comparable domestic companies. There also may be less publicly
available information about foreign issuers than domestic issuers, and foreign
issuers generally are not subject to the uniform accounting, auditing and
financial reporting standards, practices and requirements applicable to domestic
issuers. Because a Fund can invest in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates may affect the value of securities in the portfolio. Foreign currency
exchange rates are determined by forces of supply and demand in the foreign
exchange markets and other economic and financial conditions affecting the world
economy. A decline in the value of any particular currency against the U.S.
dollar will cause a decline in the U.S. dollar value of a Fund's holdings of
securities denominated in such currency and, therefore, will cause an overall
decline in a Fund's net asset value and net investment income and capital gains,
if any, to be distributed in U.S. dollars to shareholders by a Fund. Delays may
be encountered in settling securities transactions in certain
18
<PAGE>
foreign markets, and a Fund will incur costs in converting foreign currencies
into U.S. dollars. Custody charges are generally higher for foreign securities.
RISKS OF TRANSACTIONS IN DERIVATIVES
IAI may use futures, options, swap and currency exchange agreements as well
as short sales to adjust the risk and return characteristics of each Fund's
portfolio of investments. If IAI judges market conditions incorrectly or
employs a strategy that does not correlate well with a Fund's investments, use
of these techniques could result in a loss, regardless of whether the intent was
to reduce risk or increase return. Use of these techniques may increase the
volatility of a Fund and may involve a small investment of cash relative to the
magnitude of risk assumed. In addition, these techniques could result in a loss
if the counterparty to the transaction is unable to perform as promised.
Moreover, a liquid secondary market for any futures or options contract may not
be available when a futures or options position is sought to be closed. Please
refer to the Statement of Additional Information which further describes these
risks.
SPECIAL RISK FACTORS ASSOCIATED WITH INVESTING IN SMALL COMPANIES
Investing in small companies involves greater risk than is customarily
associated with investments in larger, more established companies due to the
greater business risks of small size, limited markets and financial resources,
narrow product lines and the frequent lack of depth of management. The
securities of small companies are often traded over-the-counter and may not be
traded in volumes typical on a national securities exchange. Consequently, the
securities of small companies may have limited market stability and may be
subject to more abrupt or erratic market movements than securities of larger,
more established growth companies or the market averages in general. Therefore,
shares of Capital Appreciation and Emerging Growth Funds are subject to greater
fluctuation in value than shares of a conservative equity fund or of a growth
fund which invests entirely in more established growth stocks. Each of Capital
Appreciation and Emerging Growth Funds will attempt to reduce the volatility of
its share price by diversifying its investments among many companies and
different industries.
SPECIAL RISK FACTORS ASSOCIATED WITH INVESTING IN REGIONAL FUND
The objective of capital appreciation along with the policy of
concentrating equity investments in the Eight State Region means that the assets
of Regional Fund will generally be subject to greater risk than may be involved
in investing in securities which do not have appreciation potential or which
have more geographic diversity. For example, Regional Fund's net asset value
could be adversely affected by economic, political, or other developments having
an unfavorable impact upon the Eight State Region; moreover, because of
geographic limitation, Regional Fund may be less diversified by industry and
company than other funds with a similar investment objective and no such
geographic limitation.
SPECIAL RISK FACTORS ASSOCIATED WITH INVESTING IN VALUE FUND
In selecting securities judged to be undervalued, IAI will be exercising
opinions and judgments which may be contrary to those of the majority of
investors. In certain instances, such opinions and judgments will involve the
risks of either:
(a) a correct judgment by the majority, in which case losses may be
incurred or profits may be limited; or
(b) a long delay before majority recognition of the accuracy of IAI's
judgment, in which case capital invested by Value Fund in an individual
security or group of securities may be nonproductive for an extended
period. Generally, it is expected that if a Value Fund investment is
"nonproductive" for more than two to three years, it will be sold.
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<PAGE>
In many instances, the selection of undervalued securities for purchase
by Value Fund may involve limited risk of capital loss because such lack of
investor recognition is already reflected in the price of the securities at the
time of purchase.
It is anticipated that some of the portfolio securities of Value Fund may
not be widely traded, and that Value Fund's position in such securities may be
substantial in relation to the market for the securities. Accordingly, it would
under certain circumstances be difficult for Value Fund to dispose of such
portfolio securities at prevailing market prices in order to meet redemptions.
Value Fund may, when management deems it appropriate, maintain a reserve in
liquid assets which it considers adequate to meet anticipated redemptions.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain other investment policies and
restrictions described in the Statement of Additional Information, some of which
are fundamental and may not be changed without the approval of the shareholders
of the Fund. Each Fund is a diversified investment company and has a
fundamental policy that, with respect to 75% of its total assets, it may not
invest more than 5% of its total assets in any one issuer. Each Fund, also as
fundamental policies, may not invest 25% or more of its assets in any one
industry and may borrow only for temporary or emergency purposes in an amount
not exceeding one-third of its total assets. Please refer to the Statement of
Additional Information for a further discussion of each Fund's investment
restrictions.
MANAGEMENT
Capital Appreciation Fund (created November 8, 1995), Emerging Growth
Fund (created April 30, 1991) and Midcap Growth Fund (created February 7, 1992)
are separate portfolios represented by separate classes of common stock of IAI
Investment Funds VI, Inc. Growth Fund (created February 10, 1993) is a separate
portfolio represented by a separate class of common stock of IAI Investment
Funds II, Inc. Growth and Income Fund (created December 2, 1970) is a separate
portfolio represented by a separate class of common stock of IAI Investment
Funds VII, Inc. Regional Fund (created February 1, 1980) is a separate
portfolio represented by a separate class of common stock of IAI Investment
Funds IV, Inc. Value Fund (created August 7, 1987) is a separate portfolio
represented by a separate class of common stock of IAI Investment Funds VIII,
Inc. Each of these companies is a Minnesota corporation authorized to issue its
shares of common stock in more than one series. Under Minnesota law, each
Fund's Board of Directors is generally responsible for the overall operation and
management of such Fund. IAI serves as the investment adviser and manager of
the Funds. IAI 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, having total assets in excess of $14 billion.
IAI's ultimate corporate parent is Lloyds TSB Group plc, a publicly-held
financial services organization headquartered in London, England. Lloyds TSB
Group plc is one of the largest personal and corporate financial services groups
in the United Kingdom and is engaged in a wide range of activities including
commercial and retail banking. The address of IAI is that of the Funds.
ALL FUNDS OTHER THAN CAPITAL APPRECIATION FUND
Under written agreements with the Funds ("the Advisory Agreements"), IAI
provides the Funds with investment advice, statistical and research facilities,
and certain equipment and services, including, but not limited to, office space
and necessary office facilities, equipment, and the services of required
personnel. IAI has the sole authority and responsibility to make and execute
investment decisions for each Fund within the framework of each Fund's
investment policies, subject to review by the Board of Directors. As
compensation for these services, each Fund has agreed to pay a monthly advisory
fee at the initial annual rate of .75% of such Fund's average month-end net
assets, which fee, except for Growth Fund and Growth and Income Fund, declines
to .65% of such Fund's average month-end net assets as the amount of assets in
each Fund grows. Each of Growth Fund's and Growth and Income Fund's advisory
fee declines to .55% of such Fund's average month-end net assets. For the
fiscal year or period ended March 31, 1995, each Fund paid IAI advisory fees as
a percentage of such Fund's average month-end net assets as follows: Emerging
Growth Fund: .74%; Growth Fund: .75%; Growth and Income Fund: .74%; Midcap
Growth Fund: .75%; Regional Fund: .71%; and Value Fund: .75%.
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Each Fund is managed by a team of IAI investment professionals which is
responsible for making the day-to-day investment decisions for such Fund. The
teams managing the Funds are as follows:
Rick Leggott has responsibility for the management of Emerging Growth
Fund. Mr. Leggott is a Senior Vice President and has served as an equity
portfolio manager of IAI since 1987. Mr. Leggott has managed Emerging Growth
Fund since its inception.
John Twele and David McDonald have responsibility for the management of
Growth Fund. Mr. Twele has managed Growth Fund since April 1994, when he joined
IAI as a Vice President and equity portfolio manager. Before joining IAI, Mr.
Twele was a Senior Equity Analyst with IDS Financial Services from 1987 to 1994.
Mr. McDonald has managed Growth Fund since September 1994, when he joined IAI as
a Vice President and equity portfolio manager. Before joining IAI, Mr. McDonald
was a Managing Director of Wessels Arnold & Henderson from 1989 to 1994 and an
Associate Portfolio Manager with IDS Financial Services from 1986 to 1989.
Todd McCallister has responsibility for the management of Growth and
Income Fund. Mr. McCallister is a Vice President and has served as a portfolio
manager of IAI since 1993. Before joining IAI in 1992, Mr. McCallister was an
Investment Analyst with ANB Investment Management from 1987 to 1992. Mr.
McCallister has managed Growth and Income Fund since 1994.
Suzanne Zak has responsibility for the management of Midcap Growth Fund.
Ms. Zak is a Senior Vice President and has served as an equity portfolio manager
since joining IAI in 1992. Before joining IAI, Ms. Zak had been a Managing
Director of J & W Seligman from 1985 to 1992. Ms. Zak has managed Midcap Growth
Fund since 1993.
Mark Hoonsbeen has responsibility for the management of Regional Fund.
Mr. Hoonsbeen is a Vice President and has managed Regional Fund since he joined
IAI in 1994. Before joining IAI, Mr. Hoonsbeen served as an equity portfolio
manager for The St. Paul Companies Inc. from 1986 to 1994.
Douglas Platt has been responsible for the management of Value Fund since
1991. Mr. Platt is a Senior Vice President and has served as a portfolio
manager of IAI since 1967.
R. David Spreng has been responsible for Fund investments in restricted
securities, including equity and limited partnership interests in privately-held
companies and investment partnerships, since 1993. Mr. Spreng is a Senior Vice
President and has served IAI in several capacities since 1989.
Pursuant to the terms of Administrative Agreements, IAI also provides all
required administrative, stock transfer, redemption, dividend disbursing and
accounting services to the Funds, including, for example, the maintenance of a
Fund's accounts, books and records, the daily calculation of the Fund's net
asset value, daily and periodic reports, all information necessary to complete
tax returns, questionnaires and other reports requested by a Fund, the
maintenance of stock registry records, the processing of requested account
registration changes and redemption requests, and the administration of payments
of dividends and distributions declared by a Fund. As compensation for these
services, each Fund paid IAI an administrative fee of .20% of the Fund's average
month-end net assets for the fiscal year or period ended March 31, 1995. IAI
may use all or a portion of this administrative fee to pay certain institutions
which have contracted with IAI to provide certain administrative services to
their customers who invest in a Fund. Such services include, but are not
limited to, shareholder assistance and communication, transaction processing and
settlement, account set-up and maintenance, shareholder tax reporting, and
accounting.
In addition to the advisory fee and the administrative fee paid to IAI,
each Fund pays all its other costs and expenses, including, for example, costs
incurred in the purchase and sale of assets, interest, taxes, charges of the
custodian of each Fund's assets, costs of reports and proxy materials sent to
Fund shareholders, fees paid for independent auditing and legal services, costs
of printing prospectuses for Fund shareholders and registering the
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Funds' shares, postage, fees to disinterested directors, insurance premiums and
costs of attending investment conferences.
The Advisory Agreements provide that IAI shall reimburse a Fund for
operating expenses (other than interest and, in certain circumstances, taxes and
extraordinary expenses) which, for any year, exceed 1.25% of a Fund's average
month-end net assets. IAI shall not be liable for any loss suffered by a Fund
in the absence of willful misfeasance, bad faith or gross negligence in the
performance of its duties and obligations.
CAPITAL APPRECIATION FUND
Under a written agreement with the Fund (the "Management Agreement"), IAI
provides the Fund with investment advice, statistical and research facilities,
and certain equipment and services, including, but not limited to, office space
and necessary office facilities, equipment, and the services of required
personnel. IAI also provides all required administrative, shareholder, stock
transfer, redemption, dividend disbursing and accounting services, including,
for example, the maintenance of the Fund's accounts, books and records, the
daily calculation of the Fund's net asset value, daily and periodic reports, all
information necessary to complete tax returns, questionnaires and other reports
requested by the Fund, the maintenance of stock registry records, the processing
of requested account registration changes and redemption requests, and the
administration of payments of dividends and distributions declared by the Fund.
IAI may also pay qualifying broker-dealers, financial institutions and other
entities that provide such services. In addition, the Management Agreement
provides that, except for brokerage commissions and other expenditures in
connection with the purchase and sale of portfolio securities, interest and, in
certain circumstances, taxes and extraordinary expenses, IAI shall pay all of
the Fund's operating expenses. As compensation for these services, the
Management Agreement provides that the Fund will pay IAI an annual fee of 1.40%
of the Fund's first $250 million of average daily net assets, 1.35% of the
Fund's next $250 million of average daily net assets, and 1.30% of the Fund's
average daily net assets in excess of $500 million, less any fees and expenses
the Fund pays to its disinterested directors. Until March 31, 1997, IAI has
voluntarily agreed to waive the fee due under the Management Agreement in excess
of 1.25% of the Fund's average daily net assets.
Capital Appreciation Fund is managed by a team of IAI investment
professionals. Suzanne Zak and Martin Calihan have responsibility for making
day-to-day management decisions for the Fund. Ms. Zak is a Senior Vice
President and has served as an equity portfolio manager of IAI since joining IAI
in 1992. Before joining IAI, Ms. Zak had been a Managing Director of J&W
Seligman from 1985 to 1992. Mr. Calihan is a Vice President and has served as
an equity analyst for IAI since 1992. Before joining IAI, Mr. Calihan was an
equity analyst with Morgan Stanley & Co. from 1991 to 1992 and with State Street
Research Management from 1990 to 1991. Ms. Zak and Mr. Calihan have managed the
Fund since inception. R. David Spreng is responsible for Fund investments in
equity and limited partnership interests in privately-held companies and
investment partnerships. Mr. Spreng is a Senior Vice President of IAI and has
served IAI in several capacities since 1989.
PLAN OF DISTRIBUTION
Each Fund, other than Capital Appreciation Fund, has adopted a written
plan of distribution (the "Plan") in accordance with Rule 12b-1 under the 1940
Act pursuant to which it pays a fee as described below. Under the Plan, each
Fund has entered into a Distribution and Shareholders Services Agreement with
IAI Securities, Inc. ("IAIS"), pursuant to which a Fund may pay IAIS a fee for
servicing Fund shareholder accounts and for distributing Fund shares (the "Rule
12b-1 Fee"). Subject to the expense limitations described above, each Fund has
agreed to pay IAIS a Rule 12b-1 Fee at an annual rate of .25% of a Fund's
average month-end net assets (which amount will be paid to IAIS regardless of
amounts spent by IAIS in servicing Fund shareholders and distributing a Fund's
shares).
The Rule 12b-1 Fee may be used by each Fund to compensate IAIS for the
provision of certain services to Fund shareholders. The services provided may
include personal services provided to shareholders, such as
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answering shareholder inquiries regarding a Fund and providing reports and other
information, and services related to the maintenance of shareholder accounts.
IAIS may use the Rule 12b-1 Fee to make payments to qualifying broker-dealers
and financial institutions that provide such services.
The Rule 12b-1 Fee may also be used by IAIS for the purposes of financing
any activity which is primarily intended to result in the sale of shares of a
Fund. The expenses of such activities include, by way of example but not by way
of limitation, costs of prospectuses, semiannual reports, costs of quarterly
reports and monthly letters to prospective shareholders, expenses associated
with the preparation and distribution of sales literature and advertising of any
type, compensation and benefits paid to and expenses incurred by personnel,
including supervisory personnel, involved in direct mail and advertising
activities and activities relating to the direct marketing of Fund shares to the
public, and compensation to other broker-dealers for selling Fund shares.
The Rule 12b-1 Fee payable by a Fund is subject to the limitations on
Fund operating expenses set forth in the Advisory Agreements described above.
Additionally, IAIS, in its sole and absolute discretion, may from time to time,
out of its own assets, pay for certain additional costs associated with
shareholder servicing or distributing a Fund's shares. For the fiscal year or
period ended March 31, 1995, each Fund paid IAIS annualized Rule 12b-1 Fees as a
percentage of such Fund's average month-end net assets as follows: Emerging
Growth Fund: .25%; Growth Fund: .02%; Growth and Income Fund: .25%; Midcap
Growth Fund: .18%; Regional Fund: .25%; and Value Fund: .12%. IAIS is an
affiliate of IAI and its offices are the same as those of the Funds.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., IAI may consider sales of shares of a Fund as a factor
in the selection of broker-dealers to execute a Fund's securities transactions.
COMPUTATION OF NET ASSET VALUE AND PRICING
Each Fund is open for business each day the New York Stock Exchange
("NYSE") is open. IAI normally calculates a Fund's net asset value ("NAV") as
of the close of business of the NYSE, normally 3 p.m. Central time.
A Fund's NAV is the value of a single share. The NAV is computed by
adding up the value of a Fund's investments, cash, and other assets, subtracting
its liabilities, and then dividing the result by the number of shares
outstanding.
A Fund's investments with remaining maturities of 60 days or less may be
valued on the basis of amortized cost. This method minimizes the effect of
changes in a security's market value. Other portfolio securities and assets are
valued primarily on the basis of market quotations or, if quotations are not
readily available, by a method that the Board of Directors believes accurately
reflects fair value. Foreign securities are valued on the basis of quotations
from the primary market in which they are traded, and are translated from the
local currency into U.S. dollars using current exchange rates.
The offering price (price to buy one share) and redemption price (price
to sell one share) are a Fund's NAV.
PURCHASE OF SHARES
Each Fund offers its shares continually to the public at the net asset
value of such shares. Shares may be purchased directly from a Fund or through
certain security dealers who have responsibility to promptly transmit orders and
may charge a processing fee, provided that the Fund is duly registered in the
state of the purchaser's residence, if required, and the purchaser otherwise
satisfies the Fund's purchase requirements. No sales load or commission is
charged in connection with the purchase of Fund shares.
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Shares may be purchased for cash or in exchange for securities which are
permissible investments of a Fund, subject to IAI's discretion and its
determination that the securities are acceptable. Securities accepted in
exchange will be valued on the basis of market quotations or, if market
quotations are not available, by a method that IAI believes accurately reflects
fair value. In addition, securities accepted in exchange are required to be
liquid securities that are not restricted as to transfer.
The minimum initial investment to establish an account with the IAI
Mutual Funds is $5,000. Such initial investment may be allocated among a Fund
and other IAI Mutual Funds as desired, provided that no less than $1,000 is
allocated to any one fund. The minimum initial investment for IRA accounts is
$2,000, provided that the minimum amount that may be allocated to one fund is
$1,000. Once the account minimum has been met, subsequent purchases can be made
in a Fund for $100 or more. Such minimums may be waived for participants in the
IAI Investment Club.
Investors may satisfy the minimum investment requirement by participating
in the STAR Program. Participation in the STAR Program requires an initial
investment of $1,000 per Fund and a commitment to invest an aggregate of $5,000
within 24 months. If a STAR Program participant does not invest an aggregate of
$5,000 in the IAI Mutual Funds within 24 months, IAI may, at its option, redeem
such shareholder's interest and remit such amount to the shareholders.
Investors wishing to participate in the STAR Program should contact the Fund to
obtain a STAR Program application.
To purchase shares, forward the completed application and a check payable
to "IAI Funds" to a Fund. Upon receipt, your account will be credited with the
number of full and fractional shares which can be purchased at the net asset
value next determined after receipt of the purchase order by a Fund.
Purchases of shares are subject to acceptance or rejection by a Fund on
the same day the purchase order is received and are not binding until so
accepted. It is the policy of the Funds and IAIS to keep confidential
information contained in the application and regarding the account of an
investor or potential investor in a Fund. Share certificates generally are not
issued for a Fund.
Emerging Growth Fund will close to new investors on February 1, 1996.
Shareholders of Emerging Growth Fund as of such closing date may continue to add
to an account through the reinvestment of dividends and cash distributions on
any Emerging Growth Fund shares owned, through the purchase of additional Fund
shares, and through exchanges from other IAI Mutual Fund accounts. Shares of
Emerging Growth Fund may continue to be purchased by current and future
participants in certain retirement plans that offer the Emerging Growth Fund as
an investment option as of the closing date. Additionally, all current and
future employees of IAI, Emerging Growth Fund's investment adviser and manager,
as well as their immediate family members, may purchase shares of Emerging
Growth Fund for new and existing accounts. Emerging Growth Fund may resume
sales to new investors at some future date, but it has no present intention to
do so.
All correspondence relating to purchase of shares should be directed to
the office of the Funds, P.O. Box 357, Minneapolis, Minnesota 55440, or, if
using overnight delivery, to 3700 First Bank Place, 601 Second Avenue South,
Minneapolis, Minnesota 55402. For assistance in completing the application
please contact IAI Mutual Fund Shareholder Services at 1-800-945-3863.
RETIREMENT PLANS
Shares of the Funds may be an appropriate investment medium for various
retirement plans. Persons desiring information about establishing an Individual
Retirement Account (IRA) (for employed persons and their spouses) or other
retirement plans should contact IAI Mutual Fund 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. The legal and tax
implications may vary according to the circumstances of the individual investor.
Therefore, you are urged to consult with an attorney or tax advisor prior to the
establishment of such a plan.
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AUTOMATIC INVESTMENT PLAN
Investors may arrange to make regular investments of $100 or more per
Fund on a monthly or twice a month basis, effective as of the 4th and/or the
18th day of each month (or the next business day), through automatic deductions
from their checking or savings accounts. Such investors may, of course,
terminate their participation in the Automatic Investment Plans at any time upon
written notice to a Fund. Any changes or instructions to terminate existing
Automatic Investment Plan must be received at least two weeks before the date on
which the change or termination is to take place. Investors interested in
participating in the Automatic Investment Plan should complete the Automatic
Investment Plan application and return it to the Funds.
REDEMPTION OF SHARES
Registered holders of Fund shares may at any time require a Fund to
redeem their shares upon their written request. Shareholders may redeem shares
by phone, subject to a limit of $50,000, provided such shareholders have
authorized the Funds to accept telephone instructions.
Fund shareholders who redeem shares by presenting stock certificates must
endorse the back of the certificate with the signature of the person whose name
appears on the certificate.
Redemption instructions must be signed by the person(s) in whose name the
shares are registered. If the redemption proceeds are to be paid or mailed to
any person other than the shareholder of record or if redemption proceeds are in
excess of $50,000, a Fund will require that the signature on the written
instructions be guaranteed by a participant in a signature guarantee program,
which may include certain national banks or trust companies or certain member
firms of national securities exchanges. (Notarization by a Notary Public is NOT
ACCEPTED.) If the shares are held of record in the name of a corporation,
partnership, trust or fiduciary, a Fund may require additional evidence of
authority prior to accepting a request for redemption. A Fund will not send
redemption proceeds until checks (including certified checks or cashiers checks)
received for the shares purchased have cleared.
The redemption proceeds received by the investor are based on the net
asset value next determined after redemption instructions in good order are
received by a Fund. Since the value of shares redeemed is based upon the value
of a Fund investment at the time of redemption, it may be more or less than the
price originally paid for the shares.
Payment for shares redeemed will ordinarily be made within seven days
after a request for redemption has been made. Normally a Fund will mail payment
for shares redeemed on the business day following receipt of the redemption
request.
Following a redemption or transfer request, if the value of a
shareholder's interest in a Fund falls below $500, such Fund reserves the right
to redeem such shareholder's entire interest and remit such amount. Such a
redemption will only be effected following: (a) a redemption or transfer by a
shareholder which causes the value of such shareholder's interest in such Fund
to fall below $500; (b) the mailing by such Fund to such shareholder of a notice
of intention to redeem; and (c) the passage of at least six months from the date
of such mailing, during which time the investor will have the opportunity to
make an additional investment in such Fund to increase the value of such
investor's account to at least $500.
EXCHANGE PRIVILEGE
The Exchange Privilege enables shareholders to purchase, in exchange for
shares of a Fund, shares of other IAI Mutual Funds. These funds have different
investment objectives from the Funds. Shareholders may exchange shares of a
Fund for shares of another fund managed by IAI provided that the fund whose
shares will be acquired is duly registered in the state of the shareholder's
residence and the shareholder otherwise satisfies the
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fund's purchase requirements. Although the IAI Mutual Funds do not currently
charge a fee for use of the Exchange Privilege, they reserve the right to do so
in the future.
Because excessive trading can hurt Fund performance and shareholders,
there is a limit of four exchanges out of each IAI Mutual Fund per calendar year
per account. Accounts under common ownership or control, including accounts
with the same taxpayer identification number, will be counted together for
purposes of the four exchange limit. Each Fund reserves the right to
temporarily or permanently terminate the Exchange Privilege of any investor who
exceeds this limit. The limit may be modified for certain retirement plan
accounts, as required by the applicable plan document and/or relevant Department
of Labor regulations, and for Automatic Exchange Plan participants. Each Fund
also reserves the right to refuse or limit exchange purchases by any investor
if, in IAI's judgment, such Fund would be unable to invest the money effectively
in accordance with its investment objectives and policies, or would otherwise
potentially be adversely affected.
Fund shareholders wishing to exercise the Exchange Privilege should
notify the Fund in writing or, provided such shareholders have authorized a Fund
to accept telephone instructions, by telephone. At the time of the exchange, if
the net asset value of the shares redeemed in connection with the exchange is
greater than the investor's cost, a taxable capital gain will be realized. A
capital loss will be realized if at the time of the exchange the net asset value
of the shares redeemed in the exchange is less than the investor's cost. Each
Fund reserves the right to terminate or modify the Exchange Privilege in the
future.
AUTOMATIC EXCHANGE PLAN
Investors may arrange to make regular exchanges of $100 or more between
any of the IAI Mutual Funds on a monthly basis. Exchanges will take place at
the closing price of the fifth day of each month (or the next business day).
Shareholders are responsible for making sure sufficient shares exist in the Fund
account from which the exchange takes place. If there are not sufficient funds
in the Fund account to meet the requested exchange amount, the Automatic
Exchange Plan will be suspended. Shareholders may not close Fund accounts
through the Automatic Exchange Plan. Investors interested in participating in
the Automatic Exchange Plan should complete the Automatic Exchange Plan portion
of their application. For assistance in completing the application contact IAI
Mutual Fund Shareholder Services at 1-800-945-3863.
AUTHORIZED TELEPHONE TRADING
Investors can transact account exchanges and redemptions via the
telephone by completing the Authorized Telephone Trading section of the
application and returning it to a Fund. Investors requesting telephone trading
privileges will be provided with a personal identification number ("PIN") that
must accompany any instructions by phone. Shares will be redeemed or exchanged
at the next determined net asset value. All proceeds must be made payable to
the owner(s) of record and delivered to the address of record.
In order to confirm that telephone instructions for redemptions and
exchanges are genuine, the Funds have established reasonable procedures,
including the requirement that a personal identification number accompany
telephone instructions. If a Fund or the transfer agent fails to follow these
procedures, such Fund may be liable for losses due to unauthorized or fraudulent
instructions. To the extent these reasonable procedures are followed, none of
the Funds, their transfer agent, IAI, or any affiliated broker/dealer will be
liable for any loss, injury, damage, or expense for acting upon telephone
instructions believed to be genuine, and will otherwise not be responsible for
the authenticity of any telephone instructions, and, accordingly, the investor
bears the risk of loss resulting from telephone instructions. All telephone
redemptions and exchange requests will be tape recorded. Telephone redemptions
are not permitted for IRA or Simplified Employee Pension ("SEP") accounts. For
redemptions from these accounts, please contact IAI Mutual Fund Shareholder
Services at 1-800-945-3863 for instructions.
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SYSTEMATIC CASH WITHDRAWAL PLAN
Each Fund has available a Systematic Cash Withdrawal Plan for any
investor desiring to follow a program of systematically withdrawing a fixed
amount of money from an investment in shares of a Fund. An investment of
$10,000 is required to establish the plan. Payments under the plan will be
monthly or quarterly in amounts of $100 or more. Shares will be sold with the
closing price of the 15th of the applicable month (or the next business day).
To provide funds for payment, such Fund will redeem as many full and fractional
shares as necessary at the redemption price, which is net asset value.
Payments under this plan, unless pursuant to a retirement plan, should
not be considered income. Withdrawal payments may exceed dividends and
distributions and, to this extent, there will be a reduction in the investor's
equity. An investor should also understand that this plan cannot insure profit,
nor does it protect against any loss in a declining market. Careful
consideration should be given to the amount withdrawn each month. Excessive
withdrawals could lead to a serious depletion of equity, especially during
periods of declining market values. Fund management will be available for
consultation in this matter.
Plan application forms are available through the Funds. If you would
like assistance in completing the application contact IAI Mutual Fund
Shareholder Services at 1-800-945-3863.
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
The policy of the Funds is to pay dividends from net investment income
semiannually and to make distributions of realized capital gains, if any,
annually. However, provisions in the Internal Revenue Code of 1986, as amended
(the "Code"), may result in additional net investment income and capital gains
distributions by a Fund. When you open an account, you should specify on your
application how you want to receive your distributions. The Funds offer three
options: Full Reinvestment--your dividend and capital gain distributions will
be automatically reinvested in additional shares of the Fund; Capital Gains
Reinvestment--your capital gain distributions will be automatically reinvested,
but your income dividend distributions will be paid in cash; and Cash--your
income dividends and capital gain distributions will be paid in cash.
Distributions taken in cash can be sent via check or transferred directly to
your account at any bank, savings and loan or credit union that is a member of
the Automated Clearing House (ACH) network. UNLESS DIRECTED OTHERWISE BY THE
SHAREHOLDER, EACH FUND WILL AUTOMATICALLY REINVEST ALL SUCH DISTRIBUTIONS INTO
FULL AND FRACTIONAL SHARES AT NET ASSET VALUE.
The Funds' Directed Dividend service allows you to invest your dividends
and/or capital gain distributions directly into another IAI Mutual Fund.
Contact IAI Mutual Fund Shareholder Services at 1-800-945-3863 for details.
Each Fund intends to qualify for tax purposes as a regulated investment
company under Subchapter M of the Internal Revenue Code during the current
taxable year. If so qualified, each Fund will not be subject to federal income
tax on income that it distributes to its shareholders.
Distributions are subject to federal income tax, and may also be subject
to state or local taxes. If you live outside the United States, your
distributions could also be taxed by the country in which you reside. Your
distributions are taxable when they are paid, whether you take them in cash or
reinvest them in additional shares.
For federal income tax purposes, each Fund's income and short-term
capital gain distributions are taxed as dividends; long-term capital gain
distributions designated as capital gain dividends are taxed as long-term
capital gains regardless of the length of time the shareholder has held the
shares. Annually, IAI will send you and the IRS a statement showing the amount
of each taxable distribution you received in the previous year.
Upon redemption of shares of a Fund, the shareholder will generally
recognize a capital gain or loss equal to the difference between the amount
realized on the redemption and the shareholder's adjusted basis in such
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shares. Such gain or loss will be long-term if the shares have been held for
more than one year. Under the Code, the deductibility of capital losses is
subject to certain limitations.
Whenever you sell shares of a Fund, IAI will send you a confirmation
statement showing how many shares you sold and at what price. You will also
receive an account statement quarterly and a consolidated transaction statement
annually. However, it is up to you or your tax preparer to determine whether
this sale resulted in a capital gain and, if so, the amount of tax to be paid.
Be sure to keep your account statements; the information they contain will be
essential in calculating the amount of your capital gains.
The foregoing relates to federal income taxation as in effect as of the
date of this Prospectus. For a more detailed discussion of the federal income
tax consequences of investing in shares of a Fund, see "Tax Status" in the
Statement of Additional Information.
DESCRIPTION OF COMMON STOCK
All shares of each Fund have equal rights as to redemption, dividends and
liquidation, and will be fully paid and nonassessable when issued and will have
no preemptive or conversion rights.
The shares of each Fund have noncumulative voting rights, which means
that the holders of more than 50% of the shares voting for the election of
directors can elect 100% of the directors if they choose to do so. On some
issues, such as the election of directors, all shares of each corporation vote
together as one series. On an issue affecting only a particular series, such as
voting on the advisory agreement, only the approval of the series is required to
make the agreement effective with respect to such series.
Annual or periodically scheduled regular meetings of shareholders will
not be held except as required by law. Minnesota corporation law does not
require an annual meeting; instead, it provides for the Board of Directors to
convene shareholder meetings when it deems appropriate. In addition, if a
regular meeting of shareholders has not been held during the immediately
preceding fifteen months, shareholders holding three percent or more of the
voting shares of a Fund may demand a regular meeting of shareholders of such
Fund by written notice of demand given to the chief executive officer or the
chief financial officer of such Fund. Within thirty days after receipt of the
demand by one of those officers, the Board of Directors shall cause a regular
meeting of shareholders to be called and held no later than ninety days after
receipt of the demand, all at the expense of such Fund. An annual meeting will
be held on the removal of a director or directors of such Fund if requested in
writing by holders of not less than 10% of the outstanding shares of such Fund.
The shares of each Fund are transferable by endorsement of the
certificate if held by the shareholder, or if the certificate is held by a Fund,
by delivery to such Fund of transfer instructions. Transfer instructions or
certificates should be delivered to the office of a Fund. Each Fund is not
bound to recognize any transfer until it is recorded on the stock transfer books
maintained by such Fund.
COUNSEL AND AUDITORS
The firm of Dorsey & Whitney P.L.L.P., 220 South Sixth Street,
Minneapolis, Minnesota 55402, provides legal counsel for the Funds. KPMG Peat
Marwick LLP, 4200 Norwest Center, Minneapolis, Minnesota 55402, serves as
independent auditors for the Funds.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
The Custodian for each Fund is Norwest Bank Minnesota, N.A., Norwest
Center, Sixth and Marquette, Minneapolis, Minnesota 55479. Norwest employs
foreign subcustodians and depositories, which were approved by the Funds' Board
of Directors in accordance with the rules and regulations of the Securities and
Exchange Commission, for the purpose of providing custodial services for a
Fund's assets held outside of the United States.
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For a listing of the subcustodians and depositories currently employed by the
Funds, see the Statement of Additional Information. IAI acts as each Fund's
transfer agent, dividend disbursing agent and IRA Custodian, at P.O. Box 357,
Minneapolis, Minnesota.
ADDITIONAL INFORMATION
Each Fund sends to its shareholders a six-month unaudited and an annual
audited financial report, each of which includes a list of investment securities
held. To reduce the volume of mail you receive, only one copy of most Fund
reports, such as the Fund's Annual Report, may be mailed to your household (same
surname, same address). Please call IAI Mutual Fund Shareholder Services at 1-
800-945-3863 if you wish to receive additional shareholder reports.
In the opinion of the staff of the Securities and Exchange Commission,
the use of this combined prospectus may possibly subject all Funds to a certain
amount of liability for any losses arising out of any statement or omission in
this Prospectus regarding a particular Fund. In the opinion of the Funds'
management, however, the risk of such liability is not materially increased by
use of a combined prospectus.
Shareholder inquiries should be directed to a Fund at the telephone
number or mailing address listed on the inside back cover of this Prospectus.
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IAI CAPITAL APPRECIATION FUND
IAI EMERGING GROWTH FUND
IAI GROWTH FUND
IAI GROWTH AND INCOME FUND
IAI MIDCAP GROWTH FUND
IAI REGIONAL FUND
IAI VALUE FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED AUGUST 1, 1995
AS SUPPLEMENTED JANUARY 31, 1996
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. THIS
STATEMENT OF ADDITIONAL INFORMATION RELATES TO A PROSPECTUS DATED AUGUST 1,
1995, AS SUPPLEMENTED JANUARY 31, 1996, AND SHOULD BE READ IN CONJUNCTION
THEREWITH. A COPY OF THE PROSPECTUS MAY BE OBTAINED FROM THE FUND AT 3700 FIRST
BANK PLACE, P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440 (TELEPHONE: 1-612-376-
2700 OR 1-800-945-3863).
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES.................................................... 3
Repurchase Agreements............................................................ 3
Reverse Repurchase Agreements.................................................... 3
Securities of Foreign Issuers.................................................... 3
Illiquid Securities.............................................................. 4
Lending Portfolio Securities..................................................... 4
Swap Agreements.................................................................. 4
Indexed Securities............................................................... 5
Foreign Currency Transactions.................................................... 5
Limitations on Futures and Options Transactions.................................. 6
Futures Contracts................................................................ 7
Futures Margin Payments.......................................................... 7
Purchasing Put and Call Options.................................................. 7
Writing Put and Call Options..................................................... 8
Combined Positions............................................................... 8
Correlation of Price Changes..................................................... 8
Liquidity of Options and Futures Contracts....................................... 9
OTC Options...................................................................... 9
Options and Futures Relating to Foreign Currencies............................... 9
Asset Coverage for Futures and Options Positions................................. 9
INVESTMENT RESTRICTIONS............................................................... 10
Portfolio Turnover............................................................... 11
INVESTMENT PERFORMANCE................................................................ 11
MANAGEMENT............................................................................ 14
History.......................................................................... 17
Investment Advisory Agreements - All Funds Other Than Capital Appreciation Fund.. 18
Administrative Agreement - All Funds Other Than Capital Appreciation Fund........ 20
Allocation of Expenses - All Funds Other Than Capital Appreciation Fund.......... 20
Management Agreement - Capital Appreciation Fund................................. 21
Duration of Agreements - All Funds............................................... 21
PLAN OF DISTRIBUTION.................................................................. 22
CUSTODIAL SERVICE..................................................................... 23
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE.................................... 27
CAPITAL STOCK......................................................................... 28
NET ASSET VALUE AND PUBLIC OFFERING PRICE............................................. 32
PURCHASES AND REDEMPTIONS IN KIND..................................................... 33
TAX STATUS............................................................................ 33
LIMITATION OF DIRECTOR LIABILITY...................................................... 34
FINANCIAL STATEMENTS.................................................................. 35
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of IAI Capital Appreciation Fund,
IAI Emerging Growth Fund, IAI Growth Fund, IAI Growth and Income Fund, IAI
Midcap Growth Fund, IAI Regional Fund and IAI Value Fund (the "Funds"), are
summarized on the front page of the Prospectus and in the text of the Prospectus
under "Investment Objectives and Policies." Investors should understand that all
investments have risks. There can be no guarantee against loss resulting from an
investment in the Funds, and there can be no assurance that the Fund's
investment policies will be successful, or that its investment objective will be
attained. Certain of the investment practices of the Funds are further explained
below.
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements relating to the securities in
which it may invest. A repurchase agreement involves the purchase of securities
with the condition that, after a stated period of time, the original seller will
buy back the securities at a predetermined price or yield. A Fund's custodian
will have custody of, and will hold in a segregated account, securities acquired
by such Fund under a repurchase agreement or other securities as collateral. In
the case of a security registered on a book entry system, the book entry will be
maintained in a Fund's name or that of its custodian. Repurchase agreements
involve certain risks not associated with direct investments in securities. For
example, if the seller of the agreement defaults on its obligation to repurchase
the underlying securities at a time when the value of the securities has
declined, a Fund may incur a loss upon disposition of such securities. In the
event that bankruptcy proceedings are commenced with respect to the seller of
the agreement, a Fund's ability to dispose of the collateral to recover its
investment may be restricted or delayed. While collateral will at all times be
maintained in an amount equal to the repurchase price under the agreement
(including accrued interest due thereunder), to the extent proceeds from the
sale of collateral were less than the repurchase price, a Fund could suffer a
loss.
REVERSE REPURCHASE AGREEMENTS
Each Fund may invest in reverse repurchase agreements. In a reverse
repurchase agreement, a Fund sells a portfolio instrument to another party, such
as a bank or broker-dealer, in return for cash and agrees to repurchase the
instrument at a particular price and time. While a reverse repurchase agreement
is outstanding, a Fund will maintain appropriate liquid assets in a segregated
custodial account to cover its obligation under the agreement. A Fund will
enter into reverse repurchase agreements only with parties whose
creditworthiness has been found satisfactory by IAI, the Fund's investment
adviser and manager. As a result, such transactions may increase fluctuations
in the market value of a Fund's assets and may be viewed as a form of leverage.
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 comapnies in the United States. Also, foreign issuers
are not subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to United
States coampnies.
It is contemplated that most foreign securities will be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign companies are less liquid and
more volatile than securities of comparable United States companies. Similarly,
volume and liquidity in most foreign bond markets is less than in the United
States and at times volatility of price can be greater than in the United
States. Commissions on foreign stock exchanges are generally higher than
commissions on United States exchanges, although the Fund will endeavor to
achieve the most favorable net results on its portfolio transactions. There is
generally less
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government supervision and regulation of foreign stock exchanges, brokers and
listed companies than in the United States.
With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of a
Fund, political or social instability, or diplomatic developments which could
affect United States investments in those countries. Moreover, individual
foreign economies may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
IAI is not aware at this time of the existence of any investment or
exchange control regulations which might substantially impair the operations of
a Fund as described in the Prospectus and this Statement of Additional
Information. It should be noted, however, that this situation could change at
any time.
The dividends and interest payable on certain of a Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to a Fund's shareholders.
The expense ratio of a Fund should not be materially affected by such Fund's
investment in such foreign securities.
ILLIQUID SECURITIES
Each Fund may also invest up to 15% of its net assets in securities
that are considered illiquid because of the absence of a readily available
market or due to legal or contractual restrictions. However, certain restricted
securities that are not registered for sale to the general public that can be
resold to institutional investors may be considered liquid pursuant to
guidelines adopted by the Board of Directors. It is not possible to predict
with assurance the maintenance of an institutional trading market for such
securities and the liquidity of a Fund's investments could be impaired if
trading declines.
LENDING PORTFOLIO SECURITIES
In order to generate additional income, each 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, a Fund will only enter into loan arrangements with
broker-dealers, banks or other institutions which IAI has determined are
creditworthy under guidelines established by the Fund's Board of Directors.
Each 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, a Fund will receive collateral in the form of cash, United
States Government securities, certificates of deposit or other high-grade,
short-term obligations or interest-bearing cash equivalents equal to at least
102% of the value of the securities loaned. The value of the collateral and of
the securities loaned will be marked to market on a daily basis. During the
time portfolio securities are on loan, the borrower pays a Fund an amount
equivalent to any dividends or interest paid on the securities and a Fund may
invest the cash collateral and earn additional income or may receive an agreed
upon amount of interest income from the borrower. However, the amounts received
by a Fund may be reduced by finders' fees paid to broker-dealers and related
expenses.
SWAP AGREEMENTS
Swap agreements can be individually negotiated and structured to
include exposure to a variety of different types of investments or market
factors. Depending on their structure, swap agreements may increase or decrease
a Fund's exposure to long- or short-term interest rates (in the U.S. or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as security prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names. A Fund is not
limited to any particular form of swap agreement if IAI determines it is
consistent with such Fund's investment objective and policies.
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<PAGE>
Swap agreements will tend to shift a Fund's investment exposure from
one type of investment to another. For example, if a Fund agrees to exchange
payments in dollars for payments in foreign currency, the swap agreement would
tend to decrease a Fund's exposure to U.S. interest rates and increase its
exposure to foreign currency and interest rates. Depending on how they are
used, swap agreements may increase or decrease the overall volatility of a
Fund's investments and its share price.
The most significant factor in the performance of swap agreements is
the change in the specific interest rate, currency, or other factors that
determine the amounts of payments due to and from a Fund. If a swap agreement
calls for payments by a Fund, such Fund must be prepared to make such payments
when due. In addition, if the counterparty's creditworthiness declines, the
value of a swap agreement would be likely to decline, potentially resulting in
losses. A Fund expects to be able to eliminate its exposure under swap
agreements either by assignment or other disposition, or by entering into an
offsetting swap agreement with the same party or a similar creditworthy party.
Each Fund will maintain appropriate liquid assets in a segregated
custodial account to cover its current obligations under swap agreements. If a
Fund enters into a swap agreement on a net basis, it will segregate assets with
a daily value at least equal to the excess, if any, of a Fund's accrued
obligations under the swap agreement over the accrued amount such Fund is
entitled to receive under the agreement. If a Fund enters into a swap agreement
on other than a net basis, it will segregate assets with a value equal to the
full amount of such Fund's accrued obligation under the agreement.
INDEXED SECURITIES
Each Fund may purchase securities whose prices are indexed to the
prices of other securities, securities indexes, currencies, precious metals or
other commodities, or other financial indicators. Indexed securities typically,
but not always, are debt securities or deposits whose value at maturity or
coupon rate is determined by reference to a specific instrument or statistic.
Gold-indexed securities, for example, typically provide for a maturity value
that depends on the price of gold, resulting in a security whose price tends to
rise and fall together with gold prices. Currency-indexed securities typically
are short to intermediate-term debt securities whose maturity values or interest
rates are determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency. Currency-
indexed securities may also have prices that depend on the values of a number of
different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies. IAI will use its judgment in determining whether indexed
securities should be treated as short-term instruments, bonds, stocks, or as a
separate asset class for purposes of a Fund's investment policies, depending on
the individual characteristics of the securities. Indexed securities may be
more volatile than the underlying instruments.
FOREIGN CURRENCY TRANSACTIONS
Each 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
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commercial banks) and their customers. The parties to a forward contract may
agree to offset or terminate the contract before its maturity, or may hold the
contract to maturity and complete the contemplated currency exchange.
Such Funds may use currency forward contracts to manage currency risks
and to facilitate transactions in foreign securities. The following discussion
summarizes the principal currency management strategies involving forward
contracts that could be used by the Funds.
In connection with purchases and sales of securities denominated in
foreign currencies, a Fund may enter into currency forward contracts to fix a
definite price for the purchase or sale in advance of the trade's settlement
date. This technique is sometimes referred to as a "settlement hedge" or
"transaction hedge." IAI expects to enter into settlement hedges in the normal
course of managing a Fund's foreign investments. A Fund could also enter into
forward contracts to purchase or sell a foreign currency in anticipation of
future purchases or sales of securities denominated in foreign currency, even if
the specific investments have not yet been selected by IAI.
Each Fund may also use forward contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. For example,
if a Fund owned securities denominated in pounds sterling, it could enter into a
forward contract to sell pounds sterling in return for U.S. dollars to hedge
against possible declines in the pound's value. Such a hedge, sometimes
referred to as a "position hedge," would tend to offset both positive and
negative currency fluctuations but would not offset changes in security values
caused by other factors. A Fund could also hedge the position by selling
another currency expected to perform similarly to the pound sterling -- for
example, by entering into a forward contract to sell Deutschemarks or European
Currency Units in return for U.S. dollars. This type of hedge, sometimes
referred to as a "proxy hedge," could offer advantages in terms of cost, yield,
or efficiency, but generally would not hedge currency exposure as effectively as
a simple hedge into U.S. dollars. Proxy hedges may result in losses if the
currency used to hedge does not perform similarly to the currency in which the
hedged securities are denominated.
Under certain conditions, SEC guidelines require mutual funds to set
aside appropriate liquid assets in a segregated custodial account to cover
currency forward contracts. As required by SEC guidelines, each Fund will
segregate assets to cover currency forward contracts, if any, whose purpose is
essentially speculative. Each Fund will not segregate assets to cover forward
contracts entered into for hedging purposes, including settlement hedges,
position hedges, and proxy hedges.
Successful use of forward currency contracts will depend on IAI's
skill in analyzing and predicting currency values. Forward contracts may
substantially change a Fund's investment exposure to changes in currency
exchange rates, and could result in losses to a Fund if currencies do not
perform as IAI anticipates. For example, if a currency's value rose at a time
when IAI had hedged a Fund by selling that currency in exchange for dollars,
such Fund would be unable to participate in the currency's appreciation. If IAI
hedges currency exposure through proxy hedges, a Fund could realize currency
losses from the hedge and the security position at the same time if the two
currencies do not move in tandem. Similarly, if IAI increases a Fund's exposure
to a foreign currency, and that currency's value declines, such Fund will
realize a loss. There is no assurance that IAI's use of forward currency
contracts will be advantageous to a Fund or that it will hedge at an appropriate
time. The policies described in this section are non-fundamental policies of
the Funds.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS
Each Fund has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the Commodity Futures
Trading Commission (CFTC) and the National Futures Association, which regulate
trading in the futures markets, before engaging in any purchases or sales of
futures contracts or options on futures contracts. Each Fund intends to comply
with Section 4.5 of the regulations under the Commodity Exchange Act, which
limits the extent to which a Fund can commit assets to initial margin deposits
and option premiums.
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The above limitation on a Fund's investments in futures contracts and
options, and such Fund's policies regarding futures contracts and options
discussed elsewhere in this Statement of Additional Information may be changed
as regulatory agencies permit.
FUTURES CONTRACTS
When a Fund purchases a futures contract, it agrees to purchase a
specified underlying instrument at a specified future date. When a Fund sells a
futures contract, it agrees to sell the underlying instrument at a specified
future date. The price at which the purchase and sale will take place is fixed
when a Fund enters into the contract. Some currently available futures
contracts are based on specific securities, such as U.S. Treasury bonds or
notes, and some are based on indexes of securities prices, such as the Standard
& Poor's 500 Composite Stock Price Index (S&P 500). Futures can be held until
their delivery dates, or can be closed out before then if a liquid secondary
market is available.
The value of a futures contract tends to increase and decrease in
tandem with the value of its underlying instrument. Therefore, purchasing
futures contracts will tend to increase a Fund's exposure to positive and
negative price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When a Fund sells a futures
contract, by contrast, the value of its futures position will tend to move in a
direction contrary to the market. Selling futures contracts, therefore, will
tend to offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
FUTURES MARGIN PAYMENTS
The purchaser or seller of a futures contract is not required to deliver or
pay for the underlying instrument unless the contract is held until the delivery
date. However, both the purchaser and seller are required to deposit "initial
margin" with a futures broker, known as a futures commission merchant (FCM),
when the contract is entered into. Initial margin deposits are typically equal
to a percentage of the contract's value. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments to settle the change in value on a daily basis. The party that has a
gain may be entitled to receive all or a portion of this amount. Initial and
variation margin payments do not constitute purchasing securities on margin for
purposes of a Fund's investment limitations. In the event of the bankruptcy of
an FCM that holds margin on behalf of a Fund, such Fund may be entitled to
return of margin owed to it only in proportion to the amount received by the
FMC's other customers, potentially resulting in losses to such Fund.
PURCHASING PUT AND CALL OPTIONS
By purchasing a put option, a Fund obtains the right (but not the
obligation) to sell the option's underlying instrument at a fixed strike price.
In return for this right, a Fund pays the current market price for the option
(known as the option premium). Options have various types of underlying
instruments, including specific securities, indexes of securities prices, and
futures contracts. A Fund may terminate its position in a put option it has
purchased by allowing it to expire or by exercising the option. If the option
is allowed to expire, a Fund will lose the entire premium it paid. If a Fund
exercises the option, it completes the sale of the underlying instrument at the
strike price. A Fund may also terminate a put option position by closing it out
in the secondary market at its current price, if a liquid secondary market
exists.
The buyer of a typical put option can expect to realize a gain if
security prices fall substantially. However, if the underlying instrument's
price does not fall enough to offset the cost of purchasing the option, a put
buyer can expect to suffer a loss (limited to the amount of the premium paid,
plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost of
the option.
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WRITING PUT AND CALL OPTIONS
When a Fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
such Fund assumes the obligation to pay the strike price for the option's
underlying instrument if the other party to the option chooses to exercise it.
When writing an option on a futures contract a Fund would be required to make
margin payments to an FCM as described above for futures contracts. A Fund may
seek to terminate its position in a put option it writes before exercise by
closing out the option in the secondary market at its current price. If the
secondary market is not liquid for a put option a Fund has written, however,
such Fund must continue to be prepared to pay the strike price while the option
is outstanding, regardless of price changes, and must continue to set aside
assets to cover its position. If security prices rise, a put writer would
generally expect to profit, although its gain would be limited to the amount of
the premium it received.
If security prices remain the same over time, it is likely that the
writer will also profit, because it should be able to close out the option at a
lower price. If security prices fall, the put writer would expect to suffer a
loss. This loss should be less than the loss from purchasing the underlying
instrument directly, however, because the premium received for writing the
option should mitigate the effects of the decline.
Writing a call option obligates a Fund to sell or deliver the option's
underlying instrument, in return for the strike price, upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or 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
A Fund may purchase and write options in combination with each other,
or in combination with futures or forward contracts, to adjust the risk and
return characteristics of the overall position. For example, a Fund may
purchase a put option and write a call option on the same underlying instrument,
in order to construct a combined position whose risk and return characteristics
are similar to selling a futures contract. Another possible combined position
would involve writing a call option at one strike price and buying a call option
at a lower price, in order to reduce the risk of the written call option in the
event of a substantial price increase. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
CORRELATION OF PRICE CHANGES
Because there are a limited number of types of exchange-traded options
and futures contracts, it is likely that the standardized contracts available
will not match a Fund's current or anticipated investments exactly. A Fund may
invest in options and futures contracts based on securities with different
issuers, maturities, or other characteristics from the securities in which it
typically invests, which involves a risk that the options or futures position
will not track the performance of such Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match a Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. A Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
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successful in all cases. If price changes in a Fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS
There is no assurance a liquid secondary market will exist for any
particular options or futures contract at any particular time. Options may have
relatively low trading volume and liquidity if their strike prices are not close
to the underlying instrument's current price. In addition, exchanges may
establish daily price fluctuation limits for options and futures contracts, and
may halt trading if a contract's price moves upward or downward more than the
limit in a given day. On volatile trading days when the price fluctuation limit
is reached or a trading halt is imposed, it may be impossible for a Fund to
enter into new positions or close out existing positions. If the secondary
market for a contract is not liquid because of price fluctuation limits or
otherwise, it could prevent prompt liquidation of unfavorable positions, and
potentially could require a Fund to continue to hold a position until delivery
or expiration regardless of changes in its value. As a result, a Fund's access
to other assets held to cover its options or futures positions could also be
impaired.
OTC OPTIONS
Unlike exchange-traded options, which are standardized with respect to
the underlying instrument, expiration date, contract size, and strike price, the
terms of over-the-counter options (options not traded on exchanges) generally
are established through negotiation with the other party to the option contract.
While this type of arrangement allows a Fund greater flexibility to tailor an
option to its needs, OTC options generally involve greater credit risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.
OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES
Currency futures contracts are similar to forward currency exchange
contracts, except that they are traded on exchanges (and have margin
requirements) and are standardized as to contract size and delivery date. Most
currency futures contracts call for payment or delivery in U.S. dollars. The
underlying instrument of a currency option may be a foreign currency, which
generally is purchased or delivered in exchange for U.S. dollars, or may be a
futures contract. The purchaser of a currency call obtains the right to
purchase the underlying currency, and the purchaser of a currency put obtains
the right to sell the underlying currency.
The uses and risks of currency options and futures are similar to
options and futures relating to securities or indexes, as discussed above. A
Fund may purchase and sell currency futures and may purchase and write currency
options to increase or decrease its exposure to different foreign currencies. A
Fund may also purchase and write currency options in conjunction with each other
or with currency futures or forward contracts. Currency futures and options
values can be expected to correlate with exchange rates, but may not reflect
other factors that affect the value of a Fund's investments. A currency hedge,
for example, should protect a yen-denominated security from a decline in the
yen, but will not protect a Fund against a price decline resulting from
deterioration in the issuer's creditworthiness. Because the value of a Fund's
foreign-denominated investments changes in response to many factors other than
exchange rates, it may not be possible to match the amount of currency options
and futures to the value of a Fund's investments exactly over time.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS
Each Fund will comply with guidelines established by the Securities and
Exchange Commission with respect to coverage of options and futures strategies
by mutual funds, and if the guidelines so require will set aside appropriate
liquid assets in a segregated custodial account in the amount prescribed.
Securities held in a segregated account cannot be sold while the futures or
option strategy is outstanding, unless they are replaced with other suitable
assets. As a result, there is a possibility that segregation of a large
percentage of a Fund's assets could impede portfolio management or a Fund's
ability to meet redemption requests or other current obligations.
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INVESTMENT RESTRICTIONS
As indicated in the Prospectus, each Fund is subject to certain
policies and restrictions which are "fundamental" and may not be changed without
shareholder approval. Shareholder approval consists of the approval of the
lesser of (i) more than 50% of the outstanding voting securities of a Fund, or
(ii) 67% or more of the voting securities present at a meeting if the holders of
more than 50% of the outstanding voting securities of a Fund are present or
represented by proxy. Limitations 1 through 8 below are deemed fundamental
limitations. The remaining limitations set forth below serve as operating
policies of each Fund and may be changed by the Board of Directors without
shareholder approval.
Each Fund may not:
1. Purchase the securities of any issuer if such purchase would cause the
Fund to fail to meet the requirements of a "diversified company" as defined
under the Investment Company Act of 1940, as amended (the "1940 Act").
As currently defined in the 1940 Act, "diversified company" means a
management company which meets the following requirements: at least 75% of the
value of its total assets is represented by cash and cash items (including
receivables), Government securities, securities of other investment companies
and other securities for the purposes of this calculation limited in respect of
any one issuer to an amount not greater in value than 5% of the value of the
total assets of such management company and not more than 10% of the outstanding
voting securities of such issuer.
2. Purchase the securities of any issuer (other than "Government
securities" as defined under the 1940 Act) if, as a result, more than 25% of the
value of the Fund's total assets would be invested in the securities of
companies whose principal business activities are in the same industry.
3. Issue any senior securities, except as permitted by the 1940 Act or
the Rules and Regulations of the Securities and Exchange Commission.
4. Borrow money, except from banks for temporary or emergency purposes
provided that such borrowings may not exceed 33-1/3% of the value of the Fund's
net assets (including the amount borrowed). Any borrowings that come to exceed
this amount will be reduced within three days (not including Sundays and
holidays) to the extent necessary to comply with the 33-1/3% limitation. This
limitation shall not prohibit the Fund from engaging in reverse repurchase
agreements, making deposits of assets to margin or guarantee positions in
futures, options, swaps or forward contracts, or segregating assets in
connection with such agreements or contracts.
To the extent the Fund engages in reverse repurchase agreements, because
such transactions are considered borrowing, reverse repurchase agreements are
included in the 33-1/3% limitation.
5. Act as an underwriter of securities of other issuers, except to the
extent that in connection with the disposition of portfolio securities the Fund
may be deemed to be an underwriter under applicable laws.
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.
10
<PAGE>
8. Make loans to other persons except to the extent not inconsistent with
the 1940 Act or the Rules and Regulations of the Securities and Exchange
Commission. This limitation does not apply to purchases of commercial paper,
debt securities or repurchase agreements, or to the lending of portfolio
securities.
9. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases or sales
of securities and provided that margin payments in connection with transactions
in options, futures, swaps and forward contracts shall not be deemed to
constitute purchasing securities on margin.
10. Sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options, swaps and forward futures contracts are
not deemed to constitute selling securities short.
11. Except as part of a merger, consolidation, acquisition, or
reorganization, invest more than 5% of the value of its total assets in the
securities of any one investment company or more than 10% of the value of its
total assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting securities of
any one investment company.
12. Mortgage, pledge or hypothecate its assets except to the extent
necessary to secure permitted borrowings. This limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed in
a segregated account in connection with such contracts.
13. Participate on a joint or a joint and several basis in any
securities trading account.
14. Invest more than 15% of its net assets in illiquid investments.
15. Invest directly in interests (including partnership interests) in
oil, gas or other mineral exploration or development leases or programs, except
the Fund may purchase or sell securities issued by corporations engaging in oil,
gas or other mineral exploration or development business.
Any of a Fund's investment policies set forth under "Investment Objective
and Policies" in the Prospectus, or any restriction set forth above under
"Investment Restrictions" which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after an acquisition of securities or utilization
of assets and results therefrom. With respect to Restriction 14, a Fund is
under a continuing obligation to ensure that it does not violate the maximum
percentage either by acquisition or by virtue of a decrease in the value of the
Fund's liquid assets.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by the
monthly average of the value of portfolio securities owned by a 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.
INVESTMENT PERFORMANCE
Advertisements and other sales literature for each Fund may refer to
monthly, quarterly, yearly, cumulative and average annual total return. Each
such calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts. Each of
monthly, quarterly and yearly total return is computed in the same manner as
cumulative total return, as set forth below.
11
<PAGE>
Cumulative total return is computed by finding the cumulative rate of
return over the period indicated in the advertisement that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
CTR = (ERV-P) 100
-----
P
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period; and
P = initial payment of $1,000
Average annual total return is computed by finding the average annual
compounded rates of return over the periods indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)/n/ = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period
of a hypothetical $1,000 payment made at the
beginning of such period.
The table below shows the yearly total return for the Funds for the periods
indicated:
<TABLE>
<CAPTION>
Total Return
----------------------------------------------------------------------------
Year Ended Emerging Growth Growth & Midcap Regional Value
12/31 Growth Fund* Fund** Income Fund Growth Fund*** Fund Fund****
---------- ----------- ------- ----------- -------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1981 -- -- -1.0% -- -3.2% --
1982 -- -- 33.4% -- 41.4% --
1983 -- -- 19.4% -- 13.2% 5.9%
1984 -- -- 2.9% -- -2.4% -5.6%
1985 -- -- 23.7% -- 38.8% 12.9%
1986 -- -- 13.1% -- 24.6% 1.9%
1987 -- -- 15.5% -- 5.3% 14.1%
1988 -- -- 8.5% -- 18.6% 24.3%
1989 -- -- 29.8% -- 31.3% 22.6%
1990 -- -- -6.7% -- -0.3% -11.5%
1991 23.6% -- 26.7% -- 35.4% 19.8%
1992 22.4% -- 4.0% 15.0% 3.5% 11.9%
1993 14.76% 0.99% 9.98% 22.85% 8.96% 22.08%
1994 0.19% 0.66% -4.77% 5.65% 0.68% -9.08%
</TABLE>
- ------------------------------------------------
* Commenced operations on August 5, 1991
** Commenced operations on August 6, 1993
*** Commenced operations on April 10, 1992
**** Commenced operations on October 12, 1983
12
<PAGE>
The average annual total returns of Emerging Growth Fund for the fiscal
year ending March 31, 1995 and from inception through March 31, 1995 were 10.23%
and 18.32%, respectively.
The average annual total returns of Growth Fund for the twelve-month period
ending March 31, 1995 and from inception through March 31, 1995 were 13.31% and
5.89%, respectively.
The average annual total returns of Growth and Income Fund for the one,
five and ten year periods ended March 31, 1995 were 8.92%, 7.58%, and 11.85%,
respectively.
The average annual total returns of Midcap Growth Fund for the fiscal year
ending March 31, 1995 and from inception through March 31, 1995 were 17.63% and
17.88%, respectively.
The average annual total returns of Regional Fund for the one, five and ten
year periods ended March 31, 1995 were 10.35%, 10.43% and 15.36%, respectively.
The average annual total returns of Value Fund for the one, five and ten
year periods ended March 31, 1995 were 3.88%, 8.18% and 10.73%, respectively.
In advertising and sales literature, each Fund may compare its performance
with that of other mutual funds, indexes or averages of other mutual funds,
indexes of related financial assets or data, and other competing investment and
deposit products available from or through other financial institutions. The
composition of these indexes, averages or products differs from that of a Fund.
The comparison of a Fund to an alternative investment should be made with
consideration of differences in features and expected performance.
The indexes and averages noted below will be obtained from the indicated
sources or reporting services, which the Fund believes to be generally accurate.
Each Fund may also note its mention in newspapers, magazines, or other media
from time to time. However, such Fund assumes no responsibility for the
accuracy of such data.
For example, (1) a Fund's performance or P/E ratio may be compared to any
one or a combination of the following: (i) the Standard & Poor's 500 Stock
Index and Dow Jones Industrial Average so that you may compare the Fund's
results with those of a group of unmanaged securities widely regarded by
investors as representative of the U.S. stock market in general; (ii) 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; (iii) the Value Line Index and the
Standard & Poor's Value Index; (iv) the Callan Midcap Index, the Russell Midcap
Index and the Standard & Poor's Midcap Index; (v) the Russell 2500 Index, the
Russell 2000 Growth Index and the Russell 1000 Growth Index; (vi) the Standard &
Poor's Growth Index; and (vii) the performance of U.S. government and corporate
bonds, notes and bills; (viii) IAI Regional Index, an unmanaged index of the
stocks of the 300 largest companies (by market capitalization) located in the
Eight State Region (as defined in the Prospectus). (The purpose of these
comparisons would be to illustrate historical trends in different market sectors
so as to allow potential investors to compare different investment strategies.);
(2) the Consumer Price Index (measure for inflation) may be used to assess the
real rate of return from an investment in a Fund; (3) other U.S. or foreign
government statistics such as GNP, and net import and export figures derived
from governmental publications, e.g., The Survey of Current Business, may be
used to illustrate investment attributes of a Fund or the general economic
business, investment, or financial environment in which such Fund operates; (4)
the effect of tax-deferred compounding on a Fund's investment returns, or on
returns in general, may be illustrated by graphs, charts, etc. where such graphs
or charts would compare, at various points in time, the return from an
investment in such 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 sectors or industries
in which a Fund invests may be compared to relevant indices or surveys (e.g.,
S&P Industry Surveys) in order to evaluate a Fund's historical performance or
current or potential value with respect to the particular industry or
sector.
13
<PAGE>
MANAGEMENT
The names, addresses, positions and principal occupations of the directors and
executive officers of the Fund are given below.
<TABLE>
<CAPTION>
Principal Occupation(s)
Name and Address Age Position During Past 5 Years
- ------------------------- --- ------------------- ------------------------
<S> <C> <C> <C>
Noel P. Rahn* 53 Chairman of the Noel P. Rahn has been
3700 First Bank Place Board Chief Executive Officer
P.O. Box 357 and a Director of IAI
Minneapolis, Minnesota since 1974. Mr. Rahn is
55440 also Chairman of the
other IAI Mutual Funds
as well as IAI
Securities, Inc., the
Fund's principal
underwriter.
Richard E. Struthers* 43 President, Director Richard E. Struthers is
3700 First Bank Place Executive Vice President
P.O. Box 357 and a Director of IAI
Minneapolis, Minnesota and has served IAI in
55440 many capacities since
1979. Mr. Struthers is
also President of the
other IAI Mutual Funds
as well as President and
Director of IAI
Securities, Inc., the
Fund's principal
underwriter.
Madeline Betsch 53 Director Madeline Betsch, until
19 South 1st Street April 1994, was
Minneapolis, Minnesota Executive Vice
55401 President, Director of
Client Services, of
CME-KHBB Advertising
since May 1985, and
prior thereto was a Vice
President with
Campbell-Mithun, Inc.
(advertising agency)
since February 1977.
Ms. Betsch currently is
President of ESMA Corp.,
a start-up business in
the beauty and wellness
field.
W. William Hodgson 71 Director W. William Hodgson
1698 Dodd Road served as information
Mendota Heights, Minnesota manager for the North
55118 Central Home Office of
the Prudential Insurance
Company of America from
1961 until 1984; he is
currently retired.
George R. Long 65 Director George R. Long has been
29 Las Brisas Way Chairman of Mayfield
Naples, Florida 33963 Corp. (financial
consultants and venture
capitalists) since 1973.
J. Peter Thompson 64 Director J. Peter Thompson has
Route 1 been a grain farmer in
Mountain Lake, Minnesota southwestern Minnesota
56159 since 1974. Prior to
that, Mr. Thompson was
employed by Paine
Webber, Jackson &
Curtis, Incorporated, (a
diversified financial
services concern), most
recently as Senior Vice
President and General
Partner.
Charles H. Withers 68 Director Charles H. Withers was
Rochester Post Bulletin Editor of the Rochester
P.O. Box 6118 Post-Bulletin,
Rochester, Minnesota 55903 Rochester, Minnesota
from 1960 through March
31, 1980; he is
currently retired.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Principal
Occupation(s) During
Name and Address Age Position Past 5 Years
- --------------------------- --- ---------------------- --------------------
<S> <C> <C> <C>
Archie C. Black, III 33 Treasurer Archie C. Black is a
3700 First Bank Place Senior Vice President
P.O. Box 357 and Chief Financial
Minneapolis, Minnesota Officer of IAI and
55440 has served IAI in
several capacities
since 1987. Mr.
Black is also
Treasurer of the
other IAI Mutual
Funds.
William C. Joas 33 Secretary William C. Joas is a
3700 First Bank Place Vice President of IAI
P.O. Box 357 and has served as an
Minneapolis, Minnesota attorney for IAI
55440 since 1990. Mr. Joas
is also Secretary of
the other IAI Mutual
Funds and Chief
Compliance Officer of
IAI Securities, Inc.,
the Fund's principal
underwriter.
Kirk Gove 33 Vice President, Kirk Gove is a Vice
3700 First Bank Place Marketing President of IAI.
P.O. Box 357 Prior to joining IAI
Minneapolis, Minnesota in 1992, Mr. Gove
55440 served as an
Associate Vice
President of Dain
Bosworth,
Incorporated (a
diversified financial
services concern).
Mr. Gove is also Vice
President, Marketing
of the other IAI
Mutual Funds.
Rick D. Leggott 37 Vice President, Rick Leggott is a
3700 First Bank Place Investments Senior Vice President
P.O. Box 357 (Emerging Growth of IAI and has served
Minneapolis, Minnesota Fund) as a portfolio
55440 manager with IAI
since 1987.
John Twele 37 Vice President, John Twele is a Vice
3700 First Bank Place Investments President of IAI.
P.O. Box 357 (Growth Fund) Prior to joining IAI
Minneapolis, Minnesota in 1994, Mr. Twele
55440 had been a Senior
Equity Analyst with
IDS Financial
Services (a
diversified financial
services concern)
since 1987. Mr.
Twele is also a Vice
President,
Investments of the
Balanced Portfolio of
IAI Retirement Funds,
Inc.
David McDonald 35 Vice President, David McDonald is a
3700 First Bank Place Investments Vice President of
P.O. Box 357 (Growth Fund) IAI. Prior to
Minneapolis, Minnesota joining IAI in 1994,
55440 Mr. McDonald had been
a Managing Director
of Wessels Arnold &
Henderson (a
brokerage firm) since
1989 and an Associate
Portfolio Manager
with IDS Financial
Services (a
diversified financial
services concern)
from 1986 to 1989.
Todd McCallister 36 Vice President, Todd McCallister is a
3700 First Bank Place Investments Vice President of
P.O. Box 357 (Growth and Income IAI. Prior to
Minneapolis, Minnesota Fund) joining IAI in 1992,
55440 Mr. McCallister was
an Investment Analyst
with ANB Investment
Management from 1987
to 1992.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Name and Address Age Position Principal
- --------------------------- --- --------------------- Occupation(s) During
Past 5 Years
----------------------
<S> <C> <C> <C>
Suzanne F. Zak 36 Vice President, Suzanne F. Zak is a
3700 First Bank Place Investments Senior Vice President
P.O. Box 357 (Midcap Growth Fund of IAI. Prior to
Minneapolis, Minnesota and Capital joining IAI in 1992,
55440 Appreciation Fund) Ms. Zak served as a
Managing Director of
J&W Seligman (a
diversified financial
services concern).
Ms. Zak is also Vice
President,
Investments of the
IAI Midcap Growth
Fund.
Martin J. Calihan 31 Vice President, Martin Calihan is a
3700 First Bank Place Investments (Capital Vice President of
P.O. Box 357 Appreciation Fund) IAI. Prior to
Minneapolis, Minnesota joining IAI in 1992,
55440 Mr. Calihan served as
an equity analyst for
Morgan Stanley Co. (a
diversified financial
services concern) and
State Street Research
Management.
Mark Hoonsbeen 34 Vice President, Mark Hoonsbeen is a
3700 First Bank Place Investments Vice President of
P.O. Box 357 (Regional Fund) IAI. Prior to
Minneapolis, Minnesota joining IAI in 1994,
55440 Mr. Hoonsbeen served
as an equity
portfolio manager for
The St. Paul
Companies, Inc. (a
diversified financial
services concern)
from 1986 to 1994.
Mr. Hoonsbeen is also
a Vice President,
Investments of the
Regional Portfolio of
IAI Retirement Funds,
Inc.
Douglas R. Platt 54 Vice President, Douglas Platt is a
3700 First Bank Place Investments Senior Vice President
P.O. Box 357 (Value Fund) of IAI and has served
Minneapolis, Minnesota in various capacities
55440 since 1967.
Susan J. Haedt 33 Vice President, Susan J. Haedt is a
3700 First Bank Place Director of Vice President of IAI
P.O. Box 357 Operations and Director of Fund
Minneapolis, Minnesota Operations. Prior
55440 to joining IAI in
1992, Ms. Haedt
served as a Senior
Manager at KPMG Peat
Marwick, (an
international tax,
accounting and
consulting firm).
Ms. Haedt is also
Vice President,
Director of
Operations of the
other IAI Mutual
Funds.
</TABLE>
- ----------
* Directors of the Funds who are interested persons (as that term is defined
by the Investment Company Act of 1940) of IAI and the Funds.
Each Fund has agreed to reduced initial subscription requirements for
employees and directors of the Fund or IAI, their spouses, children and
grandchildren. With respect to such persons, the minimum initial investment in
one or more of the IAI Family of Funds is $500; provided that the minimum amount
that can be allocated to any one of the Funds is $250. Subsequent subscriptions
are limited to a minimum of $100 for each of the Funds.
No compensation is paid by a Fund to any of its officers. As of January 1,
1996, directors who are not affiliated with IAI receive from the IAI Mutual
Funds a $15,000 annual retainer, $2,500 for each Board meeting attended, $3,600
for each Audit Committee meeting attended (as applicable) and $1,800 for each
Securities Valuation Committee meeting attended (as applicable). Each Fund will
pay, on a quarterly basis, its pro rata
16
<PAGE>
share of these fees based on its net assets. Such unaffiliated directors also
are reimbursed by the Funds for expenses incurred in connection with attending
meetings.
<TABLE>
<CAPTION>
Aggregate Aggregate Compensation Projected Aggregate
Compensation from the Compensation from the
Name of Person, Position from each Fund* 18 IAI Mutual Funds** 19 IAI Mutual Funds***
- --------------------------- -------------------- ---------------------- ------------------------
<S> <C> <C> <C>
Betsch, Madeline - $1,700 $26,350 $32,200
Director (Growth Fund $1,375)
Hodgson, W. William - $1,700 $26,350 $32,200
Director (Growth Fund $1,375)
Long, George R. - $2,100 $24,950 $32,200
Director (Growth Fund $975)
Thompson, J. Peter - $1,700 $26,350 $32,200
Director (Growth Fund $1,375)
Withers, Charles H. - $2,100 $24,950 $32,200
Director (Growth Fund $975)
- -------------------------
</TABLE>
* From each Fund except Capital Appreciation Fund, for the fiscal year or
period ended March 31, 1995. Aggregate compensation from Growth Fund reflects
fiscal period from August 1, 1994 through March 31, 1995.
** From all Funds except Capital Appreciation Fund for the calendar year ended
December 31, 1994.
*** As of December 31, 1996 and includes Capital Appreciation Fund; provided
that a director misses no meetings; excludes expenses incurred in connection
with attending meetings.
The Board of Directors for each of the Funds, at a meeting held May 10,
1995, and on November 8, 1995 for Capital Appreciation Fund, approved a new Code
of Ethics. The Code permits access persons to engage in personal securities
transactions subject to certain policies and procedures. Such procedures
prohibit the acquiring of any securities in an initial public offering. In
addition, all securities acquired through private placement must be pre-cleared.
Procedures have been adopted which implement blackout periods for certain
securities transactions, as well as a ban on short-term trading profits.
Additional policies prohibit the receipt of gifts in certain instances.
Procedures have been implemented to monitor employee trading. Access persons of
the Adviser are required to certify annually that they have read and understood
the Code of Ethics. An annual report is provided to the Funds' Board of
Directors summarizing existing procedures, identifying material violations and
recommending any changes needed.
IAI, the Fund's investment adviser, is an affiliate of the Hill Samuel Group
("Hill Samuel"). Hill Samuel is an international merchant banking and financial
services firm headquartered in London, England. Hill Samuel owns controlling
interests in over seventy insurance, merchant banking, financial services and
shipping services subsidiaries located in Western Europe, Asia, the United
States, Australia, New Zealand and Great Britain. The principal offices of Hill
Samuel are located at 100 Wood Street, London EC2 P2AJ.
Hill Samuel is owned by Lloyds TSB Group plc ("Lloyds TSB"), a publicly-held
financial services organization headquartered in London, England. Lloyds TSB is
one of the largest personal and corporate financial services groups in the
United Kingdom, engaged in a wide range of activities including commercial and
retail banking. The principal offices of Lloyds TSB are located at St. George's
House, 6 - 8 Eastcheap, London, EC3M 1LL.
17
<PAGE>
HISTORY
Capital Appreciation Fund is a separate portfolio of IAI Investment Funds
VI, Inc., a Minnesota corporation whose shares of common stock are currently
issued in seven series (Series A through G). On June 25, 1993, the
corporation's shareholders approved amended and restated Articles of
Incorporation, which provided that the registered investment company whose
corporate name had been IAI Series Fund, Inc., be renamed IAI Investment Funds
VI, Inc. The investment portfolio represented by Series G common shares is
referred to as "IAI Capital Appreciation Fund."
Emerging Growth Fund is a separate portfolio of IAI Investment Funds VI,
Inc., a Minnesota corporation whose shares of common stock are currently issued
in six series (Series A through F). On June 25, 1993, the Fund's shareholders
approved amended and restated Articles of Incorporation, which provided that the
registered investment company whose corporate name had been IAI Series Fund,
Inc. be renamed IAI Investment Funds VI, Inc. The investment portfolio
represented by Series A common shares is referred to as "IAI Emerging Growth
Fund."
Growth and Income Fund is a separate portfolio of IAI Investment Funds VII,
Inc., a Minnesota corporation whose shares of common stock are currently issued
in one series (Series A). On June 25, 1993, the Fund's shareholders approved
amended and restated Articles of Incorporation, which provided that the
registered investment company whose corporate name has been IAI Stock Fund,
Inc., be renamed IAI Investment Funds VII, Inc. The investment portfolio
represented by Series A common shares is referred to as "IAI Growth and Income
Fund", which name better reflects the investment objectives of the investment
portfolio.
Midcap Growth Fund is a separate portfolio of IAI Investment Funds VI, Inc.,
a Minnesota corporation whose shares of common stock are currently issued in six
series (Series A through F). On June 25, 1993, the Fund's shareholders approved
amended and restated Articles of Incorporation, which provided that the
registered investment company whose corporate name had been IAI Series Fund,
Inc., be renamed IAI Investment Funds VI, Inc. The investment portfolio
represented by Series C common shares is referred to as "IAI Midcap Growth
Fund."
Regional Fund is a separate portfolio of IAI Investment Funds IV, Inc., a
Minnesota corporation whose shares of common stock are currently issued in one
series (Series A). On June 28, 1993, the Fund's shareholders approved amended
and restated Articles of Incorporation, which provided that the registered
investment company whose corporate name had been IAI Regional Fund, Inc., be
renamed IAI Investment Funds IV, Inc. The investment portfolio represented by
Series A common shares is referred to as "IAI Regional Fund."
Value Fund is a separate portfolio of IAI Investment Funds VIII, Inc., a
Minnesota corporation whose shares of common stock are currently issued in one
series (Series A). On June 25, 1993, the Fund's shareholders approved amended
and restated Articles of Incorporation, which provided that the registered
investment company whose corporate name had been IAI Value Fund, Inc., be
renamed IAI Investment Funds VIII, Inc. The investment portfolio represented by
Series A common shares is referred to as "IAI Value Fund."
INVESTMENT ADVISORY AGREEMENTS - ALL FUNDS OTHER THAN CAPITAL APPRECIATION FUND
Pursuant to an Investment Advisory Agreement between each Fund and IAI
(the "Advisory Agreement"), IAI has agreed to provide each Fund with investment
advice, statistical and research facilities, and certain equipment and services,
including, but not limited to, office space and necessary office facilities,
equipment, and the services of required personnel. Under the Advisory
Agreements, IAI has the sole authority and responsibility to make and execute
investment decisions for each Fund within the framework of the Fund's investment
policies, subject to review by the directors of each Fund.
As compensation for these services, each Fund has agreed to pay IAI a
monthly fee equivalent on an annual basis to .75% of its average month-end net
assets. This percentage fee declines as a Fund's asset size
18
<PAGE>
increases. The following table sets forth the fees which IAI receives from each
Fund, as a percentage of average month-end net assets.
GROWTH FUND
GROWTH AND INCOME FUND
----------------------
<TABLE>
<CAPTION>
Monthly Fee Approximate Fee
Received by IAI Receives
Month End Net Asset Value IAI Annually
- ------------------------- ------------ ----------------
<S> <C> <C>
For the first $100,000,000.. .0625% .75%
For the next $100,000,000... .0542% .65%
Above $200,000,000.......... .0458% .55%
</TABLE>
EMERGING GROWTH FUND
MIDCAP GROWTH FUND
REGIONAL FUND
VALUE FUND
----------
<TABLE>
<CAPTION>
Monthly Fee Approximate Fee
Received by IAI Receives
Month End Net Asset Value IAI Annually
- ------------------------- --------------- ---------------
<S> <C> <C>
For the first $200,000,000.............. .0625% .75%
For the next $300,000,000............... .0583% .70%
Above $500,000,000...................... .0542% .65%
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 1995, the net assets of each Fund were as follows:
<S> <C>
Emerging Growth Fund $342,873,905
Growth Fund $ 26,793,763
Growth and Income Fund $101,255,839
Midcap Growth Fund $ 88,075,447
Regional Fund $523,364,230
Value Fund $ 40,600,954
</TABLE>
Advisory fees were paid by each Fund for the fiscal years (or periods) as
follows:
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
----------------------------------------
Fund 1993 1994 1995
- ---- ---------- ---------- ----------
<S> <C> <C> <C>
Emerging Growth $ 476,714 $1,456,386 $2,049,484
Growth -- $ 55,580* $ 119,142**
Growth and Income $ 787,570 $ 918,636 $ 827,288
Midcap Growth $ 69,961*** $ 246,371 $ 543,698
Regional $3,607,824 $4,427,159 $3,866,797
Value $ 177,788 $ 171,561 $ 276,714
- ------------------
</TABLE>
* For the period from August 6, 1993 (commencement of operations) through July
31, 1994.
** For the period from August 1, 1994 through March 31, 1995.
*** For the period from April 6, 1992 (commencement of operations) through March
31, 1993.
19
<PAGE>
Each Fund's monthly payment of the advisory fee is suspended or reduced (and
reimbursement made by IAI, if necessary) when it appears that the amount of
expenses may exceed such Fund's applicable expense limit (and after the monthly
payment of the distribution fee has been reduced to zero), as set forth in the
section "Allocation of Expenses," below.
Pursuant to the expense limits, IAI has reimbursed advisory fees to the
following Funds for the fiscal years or periods noted: Growth Fund, for the
fiscal period August 6, 1993 to July 31, 1994 -- $29,939; Midcap Growth Fund,
for the fiscal period April 6, 1992 through March 31, 1993 -- $3,893, and for
the fiscal year ended March 31, 1994 -- $11,397; and Value Fund, for the fiscal
year ended March 31, 1994 -- $38,260.
ADMINISTRATIVE AGREEMENT - ALL FUNDS OTHER THAN CAPITAL APPRECIATION FUND
Each Fund has engaged IAI to serve as the Fund's administrative, dividend
disbursing, redemption, accounting services and transfer agent pursuant to an
Administrative Agreement. Under the Administrative Agreement, IAI has agreed to
provide to each Fund all required administrative, stock transfer, redemption,
dividend disbursing and accounting services including, without limitation, the
following: (1) the maintenance of accounts, books and records; (2) the
calculations of the daily net asset value in accordance with a Fund's current
Prospectus and Statement of Additional Information; (3) daily and periodic
reports; (4) all information necessary to complete tax returns, questionnaires
and other reports requested by a Fund; (5) the maintenance of stock registry
records; (6) the processing of requested account registration changes, stock
certificate issuances and redemption requests; and (7) the administration of
payments of dividends and distributions declared by a Fund. As compensation for
these services, each Fund has agreed to pay IAI a monthly fee equal to .01667%
of the value of such Fund's net assets on the last day of the month, which is
equivalent on an annual basis to .20% of a Fund's average month-end net assets.
Pursuant to the Administrative Agreements for the fiscal year (or period)
ended March 31, 1995, each Fund paid IAI the following fees:
<TABLE>
<CAPTION>
Fund Amount
---- ------
<S> <C>
Emerging Growth $ 556,995
Growth $ 31,771*
Growth and Income $ 223,782
Midcap Growth $ 144,986
Regional $1,082,091
Value $ 73,790
----------
</TABLE>
* For the period August 1, 1994 to March 31, 1995.
ALLOCATION OF EXPENSES - ALL FUNDS OTHER THAN CAPITAL APPRECIATION FUND
In addition to the advisory and administrative fees paid to IAI, each Fund
pays all its other costs and expenses, including, for example, costs incurred in
the purchase and sale of assets, interest, taxes, charges of the custodian of a
Fund's assets, costs of reports and proxy material sent to Fund shareholders,
fees paid for independent accounting and legal services, costs of printing
Prospectuses for Fund shareholders and registering a Fund's shares, postage,
fees to directors who are not "interested persons" of a Fund, distribution
expenses pursuant to the Fund's Rule 12b-1 plan, insurance premiums, costs of
attending investment conferences and such other costs which may be designated as
extraordinary. IAI has agreed to reimburse each Fund for expenses (other than
brokerage commissions and other expenditures in connection with the purchase and
sale of portfolio securities, interest expense, and, subject to the specific
approval of a majority of the disinterested directors of a Fund, taxes and
extraordinary expenses) which exceed 1.25% per year of the average month-end net
assets of a Fund (the "expense limit"). Certain state securities commissions
may impose additional limitations on certain of a Fund's expenses, and IAI may
be required by such state commissions to reimburse a Fund for expenses in excess
20
<PAGE>
of any limitations as a requirement to selling shares of such Fund in those
states. IAI is not liable for any loss suffered by a Fund in the absence of
willful misfeasance, bad faith or gross negligence in the performance of its
duties and obligations.
MANAGEMENT AGREEMENT - CAPITAL APPRECIATION FUND
Pursuant to a Management Agreement between Capital Appreciation 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 such 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:
Daily Net Assets Fee IAI Receives Annually
---------------- -------------------------
For the first $250 million 1.40%
For the next $250 million 1.35%
Above $500 million 1.30%
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.
DURATION OF AGREEMENTS - ALL FUNDS
The Advisory Agreements, Administrative Agreements and Management Agreement
will terminate automatically in the event of their assignment. In addition,
each Agreement is terminable at any time without penalty by the Board of
Directors of a Fund or by vote of a majority of a Fund's outstanding voting
securities on not more than 60 days' written notice to IAI, and by IAI on 60
days' notice to a Fund. Each Agreement shall continue in effect from year to
year only so long as such continuance is specifically approved at least annually
by either the Board of Directors of a 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.
21
<PAGE>
PLAN OF DISTRIBUTION
All Funds other than Capital Appreciation Fund have adopted a Plan of
Distribution relating to the payment of certain distribution expenses pursuant
to Rule 12b-1 under the 1940 Act ("Rule 12b-1 Fees"). Such Plans were last
approved by the Funds' Board of Directors at a meeting on May 10, 1995. The
shareholders of Emerging Growth, Growth and Income, Midcap Growth and Value
Funds last approved the Plans on June 25, 1993. The shareholders of Regional
Fund last approved the Plan on June 28, 1993.
Rule 12b-1(b) provides that any payments made by a fund in connection with
the distribution of its shares may only be made pursuant to a written plan
describing all material aspects of the proposed financing of distribution and
also requires that all agreements with any person relating to implementation of
the plan must be in writing. In addition, Rule 12b-1(b)(1) requires that such
plan be approved by a vote of at least a majority of the fund's outstanding
shares, and Rule 12b-1(b)(2) requires that such plan, together with any related
agreements, be approved by a vote of the board of directors of the company and
the directors of the company who are not interested persons of the company and
have no direct or indirect financial interest in the operation of the plan or in
any agreements related to the plan, cast in person at a meeting called for the
purpose of voting on such plan or agreements. Rule 12b-1(b)(3) requires that
the plan or agreement provide, in substance: (1) that it shall continue in
effect for a period of more than one year from the date of its execution or
adoption only so long as such continuance is specifically approved at least
annually in the manner described in paragraph (b)(2) of Rule 12b-1; (2) that any
person authorized to direct the disposition of monies paid or payable by a fund
pursuant to its plan or any related agreement shall provide to a fund's board of
directors, and the directors shall review, at least quarterly, a written report
of the amount so expended and the purposes for which such expenditures were
made; and (3) in the case of a plan, that it may be terminated at any time by
vote of a majority of the members of the board of directors of a fund who are
not interested persons of the fund and have no direct or indirect financial
interest in the operation of the plan or in any agreements related to the plan
or by vote of a majority of the outstanding voting securities of a fund.
Rule 12b-1(b)(4) requires that such plans may not be amended to increase
materially the amount to be spent for distribution without shareholder approval
and that all material amendments of the plan must be approved in the manner
described in paragraph (b)(2) of Rule 12b-1. Rule 12b-1(c) provides that a fund
may rely upon Rule 12b-1(1) only if selection and nomination of its
disinterested directors are committed to the discretion of such disinterested
directors. Rule 12b-1(e) provides that a fund may implement or continue a plan
pursuant to Rule 12b-1(b) only if the directors who vote to approve such
implementation or continuation conclude, in the exercise of reasonable business
judgment and in light of their fiduciary duties under state law, and under
Section 36(a) and (b) of the 1940 Act, that there is a reasonable likelihood
that the plan will benefit the fund and its shareholders. At the meeting of the
Board of Directors on May 10, 1995, the directors so concluded with respect to
each Fund's Plan of Distribution.
Pursuant to the Plan of Distribution, each Fund has entered into a
Distribution and Shareholder Services Agreement pursuant to which a Fund will
make payments to IAI Securities, Inc. ("IAIS") at an annual rate of 0.25% of a
Fund's average month-end net assets to cover expenses incurred by IAIS in
connection with the servicing of shareholder accounts and the distribution of
such Fund's shares (which amount is paid to IAIS regardless of amounts spent by
IAIS). The 12b-1 Fee payable by a Fund to IAIS may be used by IAIS to pay
advertising and promotional expenses including, without limitation, costs of
printing and providing Prospectuses, Statements of Additional Information,
annual reports and semiannual reports to prospective shareholders, expenses of
preparing and providing sales literature advertising of any type, and
compensation and benefits paid to and expenses incurred by personnel, including
supervisory personnel, involved in direct mail and advertising activities and
activities relating to the direct marketing of shares of the Fund to the public
and compensation to other broker-dealers for their sale of Fund shares. The
Rule 12b-1 Fee may also be used to compensate the Underwriter for the provision
of certain services to Fund shareholders. Such services may include answering
shareholder questions, providing reports and other information and other
services designed to maintain shareholder accounts. IAIS may use the Rule 12b-1
Fee to make payments to qualifying broker-dealers and financial institutions
that provide such shareholder services.
22
<PAGE>
The Rule 12b-1 Fee payable by each Fund is subject to the expense
limitations set forth in the Advisory Agreements as described above.
Additionally, IAIS, in its sole and absolute discretion, may from time to time
out of its own assets pay for certain additional costs of servicing shareholder
accounts and distributing a Fund's shares. IAIS is an affiliate of IAI.
The net Rule 12b-1 Fee paid by each Fund pursuant to its Plan of
Distribution during the fiscal year (or period) ended March 31, 1995 follows:
<TABLE>
<CAPTION>
Fund Net 12b-1 Fee Fees Reimbursed by IAI**
---- ------------- ------------------------
<S> <C> <C>
Emerging Growth $ 694,592 $ 1,652
Growth* $ 3,091 $36,623
Growth and Income $ 273,792 $ 5,934
Midcap Growth $ 133,487 $47,746
Regional $1,352,614 N/A
Value $ 43,432 $48,806
- ------------------
</TABLE>
* For the period from August 1, 1994 to March 31, 1995.
** Pursuant to the above-mentioned expense limitation.
The Rule 12b-1 Fees were paid to, and retained by, IAIS pursuant to the
Distribution and Shareholder Services Agreements discussed above. During the
fiscal year or period ended March 31, 1995, such fees (along with amounts paid
out of IAIS' own assets) were paid by IAIS in connection with the servicing of
shareholder accounts and the distribution of a Fund's shares as follows:
<TABLE>
<CAPTION>
Printing and mailing of
prospectuses to Payments to
other than current brokers or Direct payments to
Fund Advertising shareholders dealers sales personnel Other
- ---- ----------- ----------------------- ----------- ------------------ --------
<S> <C> <C> <C> <C> <C>
Emerging Growth $215,324 $ 90,297 $ 97,243 $208,378 $ 83,350
Growth $ 958 $ 402 $ 433 $ 927 $ 371
Growth and Income $ 84,876 $ 35,593 $ 38,330 $ 82,138 $ 32,855
Midcap Growth $ 41,382 $ 17,353 $ 18,688 $ 40,046 $ 16,018
Regional $419,310 $175,840 $189,366 $405,784 $162,314
Value $ 13,464 $ 5,646 $ 6,080 $ 13,030 $ 5,212
</TABLE>
CUSTODIAL SERVICE
The custodian for the Funds is Norwest Bank Minnesota, N.A. Norwest Center,
Sixth and Marquette, Minneapolis, MN 55479. Norwest has entered into an
agreement with Morgan Stanley Trust Company, 1 Pierrepont Plaza, Brooklyn, New
York ("Morgan Stanley") which enables the Funds to utilize the subcustodian and
depository network of Morgan Stanley. Such agreements, subcustodians and
depositories were approved by the Fund's Board of Directors in accordance with
the rules and regulations of the Securities and Exchange Commission, for the
purpose of providing custodial services for a Fund's assets held outside the
United States.
The following is a listing of the subcustodians and depositories currently
approved by each Fund's directors and the countries in which such subcustodians
and depositories are located:
23
<PAGE>
BRANCHES OF THE CUSTODIAN
AND SUBCUSTODIAN BANKS
----------------------
Argentina Citibank, N.A., Buenos Aires Branch
Australia Australia & New Zealand Banking Group, Ltd.
Austria Credit Austalt Bankverein
Bangladesh Standard Chartered Bank
Belgium Banque Bruxelles Lambert (BBL)
Botswana Barclays Bank of Botswana
Brazil Banco de Boston
Canada Toronto Dominion Bank
Chile Citibank, N.A., Santiago Branch
China Hong Kong & Shanghai Banking, Corp. Ltd.
Columbia Cititrust
Cyprus Barclays Bank PLC
Czech Republic ING Bank
Denmark Den Danske Banke
Finland Merita Bank
France Banque Indosuez
Germany Berliner Handels-und-Frankfurter Bank
Ghana Barclays Bank of Ghana
Greece Citibank, N.A., Athens Branch
Hong Kong Hong Kong & Shanghai Banking Corp. Ltd.
Hungary Citibank, N.A., Budapest Branch
India Standard Chartered Bank
Indonesia Hong Kong & Shanghai Banking Corp. Ltd.
Ireland Allied Irish Bank
Israel Bank Leumi
Italy Barclays Bank PLC
24
<PAGE>
Japan The Mitsubishi Bank Limited
Jordan Arab Bank plc
Kenya Barclays Bank Kenya
Korea Standard Chartered Bank
Luxembourg Banque Bruxelles Lambert
Malaysia Oversea Chinese Banking Corporation
Mauritius Hong Kong and Shanghai Bank Corporation
Mexico Citibank, N.A., Mexico City Branch
Morocco Banque Commerciale du Maroc
Netherlands ABN Amro Bank
New Zealand Bank of New Zealand
Norway Den Norske Bank
Pakistan Standard Chartered Bank
Papua New Guinea Australia and New Zealand Bank
Peru Citibank N.A., Lima Branch
Philippines Hong Kong & Shanghai Banking Corp. Ltd.
Poland Citibank, S.A.
Portugal Banco Commercial Portugues
Singapore Oversea Chinese Banking Corporation
South Africa First National Bank of Southern Africa
Spain Banco Santader
Sri Lanka Hong Kong & Shanghai Banking, Corp. Ltd.
Swaziland Barclays Bank of Swaziland
Sweden Svenska Handelsbanken
Switzerland Morgan Guaranty Trust Company of New
York, Zurich Branch
Taiwan Hong Kong & Shanghai Banking Corp. Ltd.
25
<PAGE>
Thailand Standard Chartered Bank
Turkey Citibank, N.A., Istanbul Branch
United Kingdom Barclays Bank PLC
Uruguay Citibank, N.A., Montevideo Branch
Venezuela Citibank, N.A., Caracas Branch
Zambia Barclays Bank of Zambia
Zimbabwe Barclays Bank of Zimbabwe
DEPOSITORIES
------------
Argentina Caja de Valores
Australia Clearing House Electronic Subregister
System
Austria Euroclear Clearance System
OsterreicheKontrollbank
Belgium C.I.K. (Caisse Interprofessionelle de Depot
et de Virements de Titres S.A.)
Brazil Sao Paulo Stock Exchange
Canada CDS (The Canadian Depository
for Securities Ltd.)
Czech Republic Center for Securities (SCP)
Denmark Euroclear Clearance System
Vaerdipapircentralen
Finland Euroclear Clearance System
France SICOVAM (Societe Interprofessionelle la
Compensacion des Valuers Mobilieres)
Germany Kassenverein (Deutscher Kassenverein AG)
Hong Kong Central Clearing and Settlement System
Hungary Euroclear Clearance System
OsterreicheKontrollbank
Italy Monte Titoli, S.p.A
Japan Japan Securities Depository Center
26
<PAGE>
Korea The Korean Central Depository
Malaysia The Malaysian Central Depository
Mexico Instituto para el Deposito de Valores
Netherlands NECIGEF (Netherlands Centraal Instit
voor Giraal Effectenverkeer B.V.
Norway Euroclear Clearance System
Verdipapirsentralen
Singapore Central Depository Pte Ltd.
Spain Servicio de Compensacion y Liquidacion de
Valores
Sweden Euroclear Clearance System
Vardepapperscentralen VPC AB
Switzerland SEGA (Schweizerische Effekten Giro A.G.)
Taiwan Taiwan Securities Depository Co.
Thailand Share Depository Center
United Kingdom Stock Exchange Talisman System
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Most of a Fund's portfolio transactions are effected with dealers without
the payment of brokerage commissions but at a net price which usually includes a
spread or markup. In effecting such portfolio transactions on behalf of a Fund,
IAI seeks the most favorable net price consistent with the best execution.
Generally, however, a Fund must deal with brokers. IAI selects and (where
applicable) negotiates commissions with the brokers who execute the
transactions for such 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, a 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 a 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 a Fund from these commissions. Generally a 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
27
<PAGE>
by the managed fund investing in common stocks and managed accounts investing in
common stocks would primarily benefit the fund and accounts.
There is no formula for the allocation by IAI of each Fund's brokerage
business to any broker-dealers for brokerage and research services. However,
IAI will authorize a 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 a 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 each Fund and such accounts. The
simultaneous purchase or sale of the same securities by a Fund and other
accounts may have detrimental effects on a Fund, as they may affect the price
paid or received by a Fund or the size of the position obtainable by a Fund.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to the policies set forth in the
preceding paragraphs and such other policies as the Board of Directors of the
Fund may determine, IAI may consider sales of shares of a Fund as a factor in
the selection of broker-dealers to execute the Fund's securities transactions.
Brokerage commissions, listed below, were paid by each Fund for the fiscal
year (or period) ended March 31, 1995. During that period, a percentage of
commissions were paid to brokerage firms that provided research services to IAI,
although the provision of such services was not necessarily a factor in the
placement of all such business with such firms.
<TABLE>
<CAPTION>
Percentage of
Commission to Brokers
Fund Amount of Commissions Providing Research
---- --------------------- ---------------------
<S> <C> <C>
Emerging Growth $ 844,250 67%
Growth $ 93,542 61%
Growth and Income $ 297,072 51%
Midcap Growth $ 160,255 62%
Regional $2,639,390 70%
Value $ 245,263 60%
</TABLE>
CAPITAL STOCK
CAPITAL APPRECIATION FUND
IAI Capital Appreciation Fund is a separate portfolio of IAI Investment
Funds VI, Inc., a Minnesota corporation whose shares of common stock are
currently issued in seven series (Series A through G). Each share of a series
is entitled to participate pro rata in any dividends and other distributions of
such series and all shares of a series have equal rights in the event of
liquidation of that series. The Board of Directors of IAI Investment Funds VI,
Inc. is empowered under the Articles of Incorporation of such company to issue
other series of the company's common stock without shareholder approval. IAI
Investment Funds VI, Inc., has authorized 10,000,000,000 shares of $.01 par
value common stock to be issued as Series G common shares. The investment
portfolio represented by such shares is referred to as IAI Capital Appreciation
Fund.
28
<PAGE>
EMERGING GROWTH FUND
IAI Emerging Growth Fund will close to new investors on February 1, 1996.
IAI Emerging Growth Fund's current shareholders and certain others may continue
to add to an existing account. IAI Emerging Growth Fund may resume sales to new
investors at some future date, but it has no present plans to do so. See the
Prospectus section "Purchase of Shares" for more information on who can purchase
shares of IAI Emerging Growth Fund.
IAI Emerging Growth Fund is a separate portfolio of IAI Investment Funds
VI, Inc., a Minnesota corporation whose shares of common stock are currently
issued in seven series (Series A through G). Each share of a series is entitled
to participate pro rata in any dividends and other distributions of such series
and all shares of a series have equal rights in the event of liquidation of that
series. The Board of Directors of IAI Investment Funds VI, Inc., is empowered
under the Articles of Incorporation of such company to issue other series of the
company's common stock without shareholder approval. IAI Investment Funds VI,
Inc., has authorized 10,000,000,000 shares of $.01 par value common stock to be
issued as Series A common shares, the investment portfolio represented by such
shares is referred to as IAI Emerging Growth Fund. As of March 31, 1995,
Emerging Growth Fund had 21,654,161 shares outstanding.
As of July 11, 1995, no person held of record or, to the knowledge of
Emerging Growth Fund beneficially owned more than 5% of the outstanding shares
of Emerging Growth Fund, except as set forth in the following table:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Name and Address Number of Percent of
of Shareholder Shares Class
- --------------------------------------------------------------------
<S> <C> <C>
Charles Schwab & Co., Inc. 2,125,260.852 9.26
Attn: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94101
Strafe & Co. 1,537,315.394 6.70
FAO In Thomson Consumer Electronics SAL
Attn: Mutual Funds
235 West Schrock Road
Westerville, Ohio 43081
</TABLE>
In addition, as of July 11, 1995, Emerging Growth Fund's officers and
directors as a group owned less than 1% of Emerging Growth Fund's outstanding
shares.
GROWTH FUND
IAI Growth Fund is a separate portfolio of IAI Investment Funds II, Inc., a
Minnesota corporation whose shares of common stock are currently issued in one
series (Series A). Each share of a series is entitled to participate pro rata
in any dividends and other distributions of such series and all shares of a
series have equal rights in the event of liquidation of that series. The Board
of Directors of IAI Investment Funds II, 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 II, Inc., has
authorized 10,000,000,000 shares of $.01 par value common stock to be issued as
Series A common shares. The investment portfolio represented by such shares is
referred to as IAI Growth Fund. As of March 31, 1995, the Fund had 2,447,689
shares outstanding.
29
<PAGE>
As of July 11, 1995, no person held of record or, to the knowledge of
Growth Fund, beneficially owned more than 5% of the outstanding shares of Growth
Fund, except as set forth in the following table:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Name and Address Number of Percent of
of Shareholder Shares Class
- -------------------------------------------------------------------
<S> <C> <C>
Brothers of the Christian Schools of the 140,351.114 7.99
St. Louis District "Fund A"
2101 Rue de la Salle
Glencoe, MO 63038
</TABLE>
In addition, as of July 11, 1995, Growth Fund's officers and directors as a
group owned less than 1% of Growth Fund's outstanding shares.
GROWTH AND INCOME FUND
IAI Growth and Income Fund is a separate portfolio of IAI Investment Funds
VII, Inc., a Minnesota corporation whose shares of common stock are currently
issued in one series (Series A). Each share of a series is entitled to
participate pro rata in any dividends and other distributions of such series and
all shares of a series have equal rights in the event of liquidation of that
series. The Board of Directors of IAI Investment Funds VII, 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 VII,
Inc., has authorized 10,000,000,000 shares of $.01 par value common stock to be
issued as Series A common shares. The investment portfolio represented by such
shares is referred to as IAI Growth and Income Fund. As of March 31, 1995, the
Fund had 7,072,342 shares outstanding.
As of July 11, 1995, no person held of record or, to the knowledge of
Growth and Income Fund, beneficially owned more than 5% of the outstanding
shares of Growth and Income Fund, except as set forth in the following table:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Name and Address Number of Percent of
of Shareholder Shares Class
- -------------------------------------------------------------------
<S> <C> <C>
Pentair, Inc. Retirement Savings & Stock 612,381.910 10.89
401(k) Plan
1500 County Road 32 W
St. Paul, MN 55113-3105
</TABLE>
In addition, as of July 11, 1995, Growth and Income Fund's officers and
directors as a group owned less than 1% of Growth and Income Fund's outstanding
shares.
MIDCAP GROWTH FUND
IAI Midcap Growth Fund is a separate portfolio of IAI Investment Funds VI,
Inc., a Minnesota corporation whose shares of common stock are currently issued
in seven series (Series A through G). Each share of a series is entitled to
participate pro rata in any dividends and other distributions of such series and
all shares of a series have equal rights in the event of liquidation of that
series. The Board of Directors of IAI Investment Funds VI, Inc., is empowered
under the Articles of Incorporation of such company to issue other series of the
company's common stock without shareholder approval. IAI Investment Funds VI,
Inc., has authorized 10,000,000,000 shares of $.01 par value common stock to be
issued as Series C common shares, the investment portfolio represented by such
shares is referred to as IAI Midcap Growth Fund. As of March 31, 1995, Midcap
Growth Fund had 5,736,230 shares outstanding.
30
<PAGE>
As of July 11, 1995, no person held of record or, to the knowledge of
Midcap Growth Fund beneficially owned more than 5% of the outstanding shares of
Midcap Growth Fund, except as set forth in the following table:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Name and Address Number of Percent of
of Shareholder Shares Class
- -----------------------------------------------------------------------------
<S> <C> <C>
Charles Schwab & Co., Inc. 886,036.026 14.82
Attn: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104
</TABLE>
In addition, as of July 11, 1995, Midcap Growth Fund's officers and
directors as a group owned less than 1% of Midcap Growth Fund's outstanding
shares.
REGIONAL FUND
IAI Regional Fund is a separate portfolio of IAI Investment Funds IV, Inc.,
a Minnesota corporation whose shares of common stock are currently issued in one
series (Series A). Each share of a series is entitled to participate pro rata
in any dividends and other distributions of such series and all shares of a
series have equal rights in the event of liquidation of that series. The Board
of Directors of IAI Investment Funds IV, 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 IV, Inc., has
authorized 10,000,000,000 shares of $.01 par value common stock to be issued as
Series A common shares. The investment portfolio represented by such shares is
referred to as IAI Regional Fund. As of March 31, 1995, Regional Fund had
24,272,468 shares outstanding.
As of July 11, 1995, no person held of record or, to the knowledge of
Regional Fund, beneficially owned more than 5% of the outstanding shares of
Regional Fund, except as set forth in the following table:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Name and Address Number of Percent of
of Shareholder Shares Class
- -----------------------------------------------------------------------------
<S> <C> <C>
Charles Schwab & Co., Inc. 1,475,388.859 6.24
Attn: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104
</TABLE>
As of July 11, 1995, Regional Fund's officers and directors as a group
owned less than 1% of Regional Fund's outstanding shares.
VALUE FUND
IAI Value Fund is a separate portfolio of IAI Investment Funds VIII, Inc. a
Minnesota corporation whose shares of common stock are currently issued in one
series (Series A). Each share of a series is entitled to participate pro rata in
any dividends and other distributions of such series and all shares of a series
have equal rights in the event of liquidation of that series. The Board of
Directors of IAI Investment Funds VIII, 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 VIII, Inc., has
authorized 10,000,000,000 shares of $.01 par value common stock to be issued as
Series A common shares. The investment portfolio represented by
31
<PAGE>
such shares is referred to as IAI Value Fund. As of March 31, 1995, Value Fund
had 3,636,130 shares outstanding.
As of July 11, 1995, no person held of record or, to the knowledge of Value
Fund, beneficially owned more than 5% of the outstanding shares of Value Fund,
except as set forth in the following table:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Name and Address Number of Percent of
of Shareholder Shares Class
- -----------------------------------------------------------------------------
<S> <C> <C>
First Trust, N.A. Trustee for
NSP Retirement Savings Trust 278,691.324 7.83
P.O. Box 64482
St. Paul, MN 55164-0482
Charles Schwab & Co., Inc. 437,609.570 12.30
Attn: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104
</TABLE>
As of July 11, 1995, Value Fund's officers and directors as a group
owned less than 1% of Value Fund's outstanding shares.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The portfolio securities in which each Fund invests fluctuate in value, and
hence, for each Fund, the net asset value per share also fluctuates.
The net asset value per share of a Fund is determined once daily normally as
of the close of trading on the New York Stock Exchange, normally 3:00 p.m.
Central time, on each business day on which the New York Stock Exchange is open
for trading, and may be determined on additional days as required by the Rules
of the Securities and Exchange Commission. The New York Stock Exchange is
closed, and the net asset value per share of the Fund is not determined, on the
following national holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
On March 31, 1995, each Fund's net asset value and public offering price per
share were calculated as follows:
Emerging Growth Fund
--------------------
NAV = Net Assets ($342,873,905) = $15.83
----------------------------------
Shares Outstanding (21,654,161)
Growth Fund
-----------
NAV = Net Assets ($26,793,763) = $10.95
----------------------------------
Shares Outstanding (2,447,689)
Growth and Income Fund
----------------------
NAV = Net Assets ($101,255,839) = $14.32
----------------------------------
Shares Outstanding (7,072,342)
32
<PAGE>
Midcap Growth Fund
------------------
NAV = Net Assets ($88,075,447) = $15.35
----------------------------------
Shares Outstanding (5,736,230)
Regional Fund
-------------
NAV = Net Assets ($523,364,230) = $21.56
----------------------------------
Shares Outstanding (24,272,468)
Value Fund
----------
NAV = Net Assets ($40,600,954) = $11.17
---------------------------------
Shares Outstanding (3,636,130)
PURCHASES AND REDEMPTIONS IN KIND
In extraordinary circumstances, Fund shares may be purchased for cash or in
exchange for securities which are permissible investments of a Fund, subject to
IAI's discretion and its determination that the securities are acceptable.
Securities accepted in exchange will be valued on the basis of market
quotations, or if the market quotations are not available, by a method that IAI
believes accurately reflects fair value. In addition, securities accepted in
exchange are required to be liquid securities that are not restricted as to
transfer. Also in extraordinary circumstances, if a shareholder so desires, and
IAI so agrees, Fund shares may be redeemed in exchange for securities held by a
Fund. Securities redeemed in exchange will be valued on the basis of market
quotations, or if market quotations are not available, by a method that IAI
believes accurately reflects fair value.
TAX STATUS
The tax status of the Funds and the distributions of the Fund are summarized
in the Prospectus under "Dividends, Distributions and Tax Status."
Under the Internal Revenue Code of 1986, as amended (the "Code"),
individual shareholders may not exclude any amount of distributions from Fund
gross income that is derived from dividends; corporate shareholders, however,
are permitted to deduct 70% of qualifying dividend distributions from domestic
corporations. Such a deduction by a corporate shareholder will depend upon the
portion of the Fund's gross income that is derived from dividends received from
domestic corporations. Since it is anticipated that a portion of the net
investment income of the Fund may derive from sources other than dividends from
domestic corporations, a portion of the Fund's dividends may not qualify for
this exclusion. Distributions designated as long-term capital gain
distributions will be taxable to the shareholder as long-term capital gains
regardless of how long the shareholder has held the shares. Such distributions
will not be eligible for the dividends received exclusion referred to above.
Ordinarily, distributions and redemption proceeds earned by Fund
shareholders are not subject to withholding of federal income tax. However,
each Fund is required to withhold 31% of a shareholder's distributions and
redemption proceeds upon the occurrence of certain events specified in Section
3406 of the Code and regulations promulgated thereunder. These events include
the failure of a Fund shareholder to supply the Fund with such shareholder's
taxpayer identification number, and the failure of a Fund shareholder who is
otherwise exempt from withholding to properly document such shareholder's status
as an exempt recipient. Additionally, distributions may be subject to state and
local income taxes, and the treatment thereunder may differ from the federal
income tax consequences discussed above.
33
<PAGE>
If Fund shares are sold or otherwise disposed of more than one year from
the date of acquisition, the difference between the price paid for the shares
and the sales price will result in long-term capital gain or loss to a Fund
shareholder if, as is usually the case, a Fund shares are a capital asset in the
hands of a 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.
Under the Code, each Fund will be subject to a non-deductible excise tax
equal to 4% of the excess, if any, of the amount of investment income and
capital gains required to be distributed pursuant to the Code for each calendar
year over the amount actually distributed. In order to avoid this excise tax,
each Fund generally must declare dividends by the end of each calendar year
representing 98% of the Fund's ordinary income for such calendar year and 98% of
its capital gain net income, if any, for the twelve-month period ending October
31 of the same calendar year. The excise tax is not imposed, however, an
undistributed income that is already subject to corporate income tax. It is
each Fund's policy not to distribute capital gains until capital loss
carryovers, if any, either are utilized or expire.
Income received from sources within foreign countries may be subject to
withholding and other taxes imposed by such countries. Tax conventions between
certain countries and the United States may reduce or eliminate such taxes. It
is impossible to determine the effective rate of foreign tax applicable to such
income in advance since the precise amount of a Fund's assets to be invested in
various countries is not known. Any amount of taxes paid by a Fund to foreign
countries will reduce the amount of income available to a Fund for distributions
to shareholders.
The foregoing is a general and abbreviated summary of the Code and Treasury
regulations in effect as of the date of each Fund's Prospectus and this
Statement of Additional Information. The foregoing relates solely to the
federal income tax law applicable to "U.S. persons," i.e., U.S. citizens and
residents and U.S. domestic corporations, partnerships, trusts and estates.
Shareholders who are not U.S. persons are encouraged to consult a tax adviser
regarding the income tax consequences of acquiring shares of a Fund.
LIMITATION OF DIRECTOR LIABILITY
Under Minnesota law, each Fund's Board of Directors owes certain fiduciary
duties to the Fund and to its shareholders. Minnesota law provides that a
director "shall discharge the duties of the position of director in good faith,
in a manner the director reasonably believes to be in the best interest of the
corporation, and with the care an ordinarily prudent person in a like position
would exercise under similar circumstances." Fiduciary duties of a 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 II,
Inc., IAI Investment Funds IV, Inc., IAI Investment Funds VI, Inc., IAI
Investment Funds VII, Inc., and IAI Investment Funds VIII, 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).
34
<PAGE>
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" of the corporation for breach of their
duties as officers (including the liability of directors who serve as officers
for breach of their duties as officers). Minnesota law does not permit
elimination or limitation of the availability of equitable relief, such as
injunctive or rescissionary relief. Further, Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act of
1933 or the Securities Exchange Act of 1934, and it is uncertain whether and to
what extent the elimination of monetary liability would extend to violations of
duties imposed on directors by the Investment Company Act of 1940 and the rules
and regulations adopted under such Act.
FINANCIAL STATEMENTS
For all Funds other than Capital Appreciation Fund, the financial
statements, included as part of the Funds' 1995 Annual Report to shareholders,
are incorporated herein by reference. Such Annual Report may be obtained by
shareholders on request from the Funds at no charge. Capital Appreciation Fund
has no financial statements at this time.
35
<PAGE>
PART C
Item 24. Financial Statements and Exhibits
- ------- ---------------------------------
(a) Financial Statements (1)
(b) Exhibits
(1) Articles of Incorporation (4)
(2) Bylaws (4)
(5) Investment Advisory Agreement (4)
(6A) Distribution and Shareholder Services Agreement (6)
(6B) Dealer Sales Agreement (6)
(6C) Shareholder Services Agreement (6)
(8) Custodian Agreement (4)
(9) Administrative Agreement (2)
(11) Consent of Independent Auditors
(15) Plan of Distribution (4)
(16) Calculations of Total Returns (3)
(99) Annual Report (5)
- ----------------------
(1) Incorporated by reference in Part B of the Registration Statement.
(2) Incorporated by reference to Post-Effective Amendment to Registrant's
Registration Statement on Form N-1A filed on May 31, 1989.
(3) Incorporated by reference to Post-Effective Amendment to Registrant's
Registration Statement on Form N-1A filed on May 31, 1988.
(4) Incorporated by reference to Post-Effective Amendment No. 18 to
Registrant's Registration Statement on Form N-1A filed on June 3, 1993.
(5) Incorporated by reference to the Annual Report filed electronically on Form
N-30D on May 26, 1995.
(6) Incorporated by reference to Post-Effective Amendment No. 20 to
Registrant's Registration Statement on Form N-1A filed on July 31, 1995.
III-1
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant.
- ------- -------------------------------------------------------------
See the sections of the Prospectus entitled "Management" and
"Description of Common Stock" and the section of the Statement of Additional
Information entitled "Management," filed as part of this Registration Statement.
Item 26. Number of Holders Securities.
- ------- ----------------------------
Number of Record Holders
Portfolio Title of Class as of December 31, 1995
- --------- -------------- -----------------------
IAI Value Fund Common Stock (Series A) 1,858
Item 27. Indemnification.
- ------- ---------------
Incorporated by reference to Registrant's Post-Effective Amendment filed on
July 31, 1986.
Item 28. Business and Other Connections of Investment Adviser.
- ------- ----------------------------------------------------
Information on the business of Investment Advisers, Inc. ("IAI") is
described in the Prospectus section "Management" and in Part B of this
Registration Statement in the section "Management."
The senior officers and directors of IAI and their titles are as follows:
Name Title
---- -----
Jeffrey R. Applebaum Senior Vice President
Charles P. Barrington Director
Scott Allen Bettin Senior Vice President
Richard Oliver Bernays Chairman of the Board
Archie Campbell Black, III Senior Vice President/Treasurer
Stephen C. Coleman Senior Vice President
Hugh Freedberg Chairman of the Board
Larry Ray Hill Executive Vice President/Director
Richard A. Holway Senior Vice President
Irving Philip Knelman Executive Vice President/Director
Rick D. Leggott Senior Vice President
Timothy A. Palmer Senior Vice President
Douglas Rugh Platt Senior Vice President
Andrew Scott Plummer Director
Noel Paul Rahn Chief Executive Officer/Director
R. David Spreng Senior Vice President
Christopher John Smith Senior Vice President/Secretary
Eric St. C. Stobart Director
Richard Edward Struthers Executive Vice President/Director
Suzanne F. Zak Senior Vice President
All of such persons have been affiliated with IAI for more than two
years except Messrs. Barrington, Plummer and Stobart. Prior to being appointed
to the Board in 1994, Mr. Barrington was and remains Managing Director of Hill
Samuel Bank, 100 Wood Street, London, England EC2P 2AJ, since 1991. Prior to
being appointed to the Board in 1994, Mr. Freedberg was and remains Chief
Executive Officer of Hill Samuel Bank, 100 Wood Street, London, England EC2P
2AJ, since 1991. Prior to being appointed to the Board in 1994, Mr.
III-2
<PAGE>
Plummer was and remains Legal Adviser to Lloyds TSB Group plc, 60 Lombard
Street, London, England EC3V 9DN, since 1988. Prior to being appointed to the
Board in 1994, Mr. Stobart was and remains Director of Hill Samuel Bank, 100
Wood Street, London, England EC2P 2AJ, since 1977.
Certain directors and officers of IAI are directors and/or officers of the
Registrant, as described in the section of the Statement of Additional
Information entitled "Management," filed as a part of this Registration
Statement.
The address of the officers and directors of IAI is that of IAI, which is
3700 First Bank Place, P. O. Box 357, Minneapolis, Minnesota 55440.
Certain of the officers and directors of IAI also serve as officers
and directors of IAI International Ltd. Both IAI and IAI International are
wholly-owned subsidiaries of Hill Samuel Group BV, a London-based merchant
banking and financial services firm which, in turn, is owned by Lloyds TSB Group
plc, a publicly-held financial services organization based in London, England.
The senior officers and directors of IAI International and their titles are as
follows:
Name Title
- ---- -----
Noel Paul Rahn Chairman of the Board of Directors
Richard Bernays Director
Roy C. Gillson Chief Investment Officer/Director
Irving Philip Knelman Director
Hilary Fane Deputy Chief Investment Officer/Director
Feidhlim O'Broin Associate Director
Certain of the officers and directors of IAI also serve as officers and
directors of IAI Trust Company, a wholly-owned subsidiary of IAI. The principal
officers and directors of IAI Trust Company and their titles are as follows:
Name Title
- ---- -----
Richard E. Struthers Chairman of the Board
John G. Flesch Director/President
Christopher J. Smith Director/Secretary
Archie C. Black Director/Treasurer
Christie Haagensen Director of Client Services
Item 29. Principal Underwriters
- ------- ----------------------
(a) IAI Securities is also the principal underwriter for IAI Investment
Funds I, Inc., IAI Investment Funds II, Inc., IAI Investment Funds III, Inc.,
IAI Investment Funds IV, Inc., IAI Investment Funds V, Inc., IAI Investment
Funds VI, Inc., and IAI Investment Funds VII, Inc.
(b) The officers and directors of IAI Securities and the positions, if
any, such officers and directors hold with the Registrant are set forth below.
The business address of such persons is 3700 First Bank Place, Minneapolis,
Minnesota 55402.
III-3
<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
- ---------------- ---------------- ---------------
Noel P. Rahn Chairman of the Board Chairman of the Board
Richard E. Struthers President/Director President/Director
Douglas R. Platt Vice President/Director Vice President Investments
R. David Spreng Vice President/Director None
Christopher J. Smith Secretary None
Archie C. Black, III CFO/Treasurer Treasurer
William C. Joas Chief Compliance Officer Secretary
Item 30. Location of Accounts and Records.
- ------- --------------------------------
The Custodian for Registrant is Norwest Bank Minnesota, N.A., Norwest
Center, Sixth & Marquette, Minneapolis, Minnesota 55479. The Custodian maintains
records of all cash transactions of Registrant. All other books and records of
Registrant, including books and records of Registrant's investment portfolios,
are maintained by IAI. IAI also acts as Registrant's transfer agent and dividend
disbursing agent, at 3700 First Bank Place, Minneapolis, Minnesota 55402.
Item 31. Management Services.
- ------- -------------------
Not applicable.
Item 32. Undertakings.
- ------- ------------
(a) Not applicable.
(b) Not applicable.
(c) IAI Investment Funds VIII, Inc., undertakes to furnish each
person to whom a prospectus is delivered a copy of its latest annual report to
shareholders, upon request and without change.
III-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Registrant certifies that it meets all of the
requirements for effectiveness of its Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Minneapolis, and State of Minnesota, on the 31st day of January, 1996.
IAI INVESTMENT FUNDS VIII, INC.
(Registrant)
By /s/ Richard E. Struthers
-------------------------------
Richard E. Struthers, President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated:
/s/ Richard E. Struthers President (principal January 31, 1996
- ------------------------ executive officer) & Director
Richard E. Struthers
/s/ Archie C. Black III Treasurer (principal January 31, 1996
- ----------------------- financial and accounting
Archie C. Black III officer)
Noel P. Rahn (1)
Director
Madeline Betsch (1)
Director
W. William Hodgson (1)
Director
George R. Long (1)
Director
J. Peter Thompson (1)
Director
Charles H. Withers (1)
Director
/s/ William C. Joas January 31, 1996
- -------------------
William C. Joas,
Attorney-in-fact
(1) Registrant's directors executing Powers of Attorney dated August 18, 1993.
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Exhibit Description Sequential Page No.
- ----------- ------------------- -------------------
11 Consent of Independent Auditors
<PAGE>
[Letterhead of KPMG Peat Marwick LLP]
Independent Auditors' Consent
-----------------------------
The Board of Directors
IAI Investment Funds II, Inc.
IAI Investment Funds IV, Inc.
IAI Investment Funds VI, Inc.
IAI Investment Funds VII, Inc.
IAI Investment Funds VIII, Inc.:
We consent to the use of our reports incorporated herein by reference and to the
references to our Firm under the headings "FINANCIAL HIGHLIGHTS" and "COUNSEL
AND AUDITORS" in Part A of the Registration Statement.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 29, 1996
