As filed with the Securities and Exchange Commission on May 30, 1997
1933 Act Registration No. 2-39560
1940 Act Registration No. 811-2147
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. 51 X
---
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 51 X
---
IAI INVESTMENT FUNDS VII, INC.
(Exact Name of Registrant as Specified in Charter)
3700 First Bank Place, P.O. Box 357
Minneapolis, Minnesota 55440
(Address of Principal Executive Offices) (Zip Code)
(612) 376-2700
(Registrant's Telephone Number, including Area Code)
Christopher J. Smith, Esq. Copy to:
3700 First Bank Place Michael J. Radmer, Esq.
P.O. Box 357 Dorsey & Whitney
Minneapolis, Minnesota 55440 220 South Sixth Street
(Name and Address of Agent for Service) Minneapolis, Minnesota 55402
It is proposed that this filing will become effective (check appropriate box)
_____ immediately upon filing pursuant to paragraph (b)
_____ on (date) pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
X on August 1, 1997 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 28, 1997.
<PAGE>
IAI INVESTMENT FUNDS VII, INC.
FORM N-1A
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
<S> <C> <C>
Item Number Caption Prospectus Caption
- ----------- ------- ------------------
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.......... Computation of Net Asset Value and Pricing;
Purchase of Shares; Automatic Investment
Plan; Exchange Privilege; Automatic Exchange
Plan; Retirement Plans; Authorized
Telephone Trading
8 Redemption or Repurchase...................... Systematic Cash Withdrawal Plan; Redemption
of Shares; Authorized Telephone Trading
9 Pending Legal Proceedings..................... Not Applicable
<PAGE>
Item Number Caption Statement of Additional Information Caption
- ----------- ------- -------------------------------------------
10 Cover Page.................................... Cover Page of Statement of Additional
Information
11 Table of Contents............................. Table of Contents
12 General Information and History............... Management
13 Investment Objectives and Policies............ Investment Objectives and Policies;
Investment Restrictions
14 Management of the Fund........................ Management
15 Control Persons and Principal
Holders of Securities....................... Management; Capital Stock
16 Investment Advisory and Other Services..... Management; Prior Agreements; 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 Purchases and Redemptions In Kind;
of Securities Being Offered................... Net Asset Value and Public Offering Price
20 Tax Status.................................... Tax Status
21 Underwriters.................................. Prior Agreements
22 Calculation of Performance Data............... Investment Performance
23 Financial Statements.......................... Financial Statements
</TABLE>
<PAGE>
Prospectus Dated August 1, 1997
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 ("Capital Appreciation Fund"), IAI Emerging Growth
Fund ("Emerging Growth Fund"), and IAI Midcap Growth Fund ("Midcap Growth Fund")
are separate portfolios of IAI Investment Funds VI, Inc. IAI Growth Fund
("Growth Fund") is a separate portfolio of IAI Investment Funds II, Inc., IAI
Regional Fund ("Regional Fund") is a separate portfolio of IAI Investment Funds
IV, Inc., IAI Growth and Income Fund ("Growth and Income Fund") is a separate
portfolio of IAI Investment Funds VII, Inc., and IAI Value Fund ("Value Fund")
is a separate portfolio of IAI Investment Funds VIII, Inc. Each of these
companies is an open-end diversified management investment company authorized to
issue its share of common stock in more than one series. Investment Advisers,
Inc. ("IAI") serves as each Fund's investment adviser and manager.
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.
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.
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.
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.
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.
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.
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,
1997, which provides a further discussion of certain areas in this Prospectus
and other matters which may be of interest to some investors, has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference. For a free copy, call or write the 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.
TABLE OF CONTENTS
Page
<TABLE>
<CAPTION>
<S> <C>
FUND EXPENSE INFORMATION......................................................3
FUND DIRECTORS................................................................3
FINANCIAL HIGHLIGHTS..........................................................4
INVESTMENT OBJECTIVES AND POLICIES...........................................11
CAPITAL APPRECIATION FUND...........................................11
EMERGING GROWTH FUND................................................11
GROWTH FUND.........................................................12
GROWTH AND INCOME FUND..............................................12
MIDCAP GROWTH FUND..................................................13
REGIONAL FUND.......................................................13
VALUE FUND..........................................................14
PORTFOLIO SECURITIES AND OTHER FUND INVESTMENT TECHNIQUES....................15
FUND RISK FACTORS............................................................17
MANAGEMENT...................................................................19
INVESTMENT PERFORMANCE.......................................................21
COMPUTATION OF NET ASSET VALUE AND PRICING...................................22
PURCHASE OF SHARES...........................................................22
RETIREMENT PLANS.............................................................24
AUTOMATIC INVESTMENT PLAN....................................................24
REDEMPTION OF SHARES.........................................................24
EXCHANGE PRIVILEGE...........................................................25
AUTOMATIC EXCHANGE PLAN......................................................25
AUTHORIZED TELEPHONE TRADING.................................................26
SYSTEMATIC CASH WITHDRAWAL PLAN..............................................26
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS......................................26
DESCRIPTION OF COMMON STOCK..................................................27
COUNSEL AND AUDITORS.........................................................28
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT......................28
ADDITIONAL INFORMATION.......................................................28
</TABLE>
-2-
<PAGE>
FUND EXPENSE INFORMATION
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
_____________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
IAI IAI
Capital Emerging IAI IAI IAI IAI IAI
Appreciation Growth Growth Growth and Midcap Regional Value
Fund Fund Fund Income Fund Growth Fund Fund Fund
- -------------------------------------- --------------- ------------ ---------- -------------- -------------- ----------- --------
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
- --------------------------------------
</TABLE>
* Each Fund charges a $10.00 fee for the payment of redemption proceeds by
wire.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses
- ------------------------------
(as a percentage of average daily net assets)
- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
IAI IAI
Capital Emerging IAI IAI IAI IAI IAI
Appreciation Growth Growth Growth and Midcap Regional Value
Fund Fund Fund Income Fund Growth Fund Fund Fund
- -------------------------------------- --------------- ------------ ---------- -------------- -------------- ---------- ---------
Management Fee 1.40% 1.19% 1.25% 1.25% 1.25% 1.21% 1.25%
Rule 12b-1 Fee None None None None None None None
Other Expenses None None None% None None None 0.01%
------ ----- ----- ------ ----- ----- ------
Total Fund Operating Expenses 1.40% 1.19% 1.25% 1.25% 1.25% 1.21% 1.25%
------ ----- ----- ----- ----- ----- -----
Example:
Based upon the levels of Total Fund Operating Expenses listed above, you would
pay the following expenses on a $1,000 investment, assuming a five percent
annual return and redemption at the end of each period:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
------ ------ ------- --------
IAI Capital Appreciation Fund $ 14 $ 44 $ 77 $ 168
IAI Emerging Growth Fund $ 12 $ 38 $ 65 $ 144
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 $ 12 $ 38 $ 66 $ 147
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 Capital Appreciation Fund, the above information has been
restated to reflect the elimination, as of the end of the Fund's last fiscal
year, of IAI's voluntary waiver of Management Fees in excess of 1.25% of the
Fund's average daily net assets. Absent such waiver, Capital Appreciation Fund
would have paid 1.40% of its average daily net assets as the Management Fee. The
example should not be considered a representation of past or future expenses.
Actual expenses may be greater or less than those shown.
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 Noel P. Rahn
W. William Hodgson J. Peter Thompson
George R. Long Charles H. Withers
-3-
<PAGE>
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report is included in the Funds' Annual Reports. The Financial
Highlights section of each Annual Report is incorporated by reference in (and is
a part of) the Statement of Additional Information. Such Annual Reports may be
obtained by shareholders on request from the Fund at no charge.
CAPITAL APPRECIATION FUND
<TABLE>
<CAPTION>
<S> <C> <C>
Period from
Year Ended February 1, 1996(1) to
March 31, 1997 March 31, 1996
-------------- --------------
NET ASSET VALUE
Beginning of period $11.24 $10.00
OPERATIONS
Net investment income (loss) (0.09) --
Net realized and unrealized gains 2.79 1.24
------------------------------------------------
Total from operations 2.70 1.24
------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gains (0.41) --
Tax return of capital (0.04) --
-----------------------------------------------
Total distributions (0.45) --
-----------------------------------------------
NET ASSET VALUE
End of period $13.49 $11.24
===============================================
Total investment return* 23.68% 12.40%
Net assets at end of period (000's omitted) $44,230 $9,411
RATIOS
Expenses to average daily net assets ** 1.25% 1.25%***
Net investment income to average net assets ** (0.80%) 0.23%***
Average brokerage commission rate *** $0.0576 N/A
Portfolio turnover rate (excluding short-term securities) 132.5% 1.2%
- ------------------------------------------------------------
<FN>
* Total investment return is based on the change in net asset value
of a share during the period and assumes reinvestment of all
distributions at net asset value.
** The Fund's adviser voluntarily waived $54,841 and $827, in expenses
for the year-ended March 31, 1997 and the period ended March 31, 1996,
respectively. If the Fund had been charged these expenses,
the ratio of expenses to average daily net assets would have been
1.40% and 1.40%,respectively, and the ratio of net investment income
to average daily net assets would have been (0.95%) and 0.087%,
respectively.
*** Annualized
*** Beginning in fiscal 1997, the Fund is required to disclose an average
brokerage commission rate.
(1) Commencement of operations
</FN>
</TABLE>
-4-
EMERGING GROWTH FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Years ended March 31, Period from
August 5, 1991(1)
------------------------------------------------------------- to
1997 1996 1995 1994 1993 March 31, 1992
---- ---- ---- ---- ----- --------------
NET ASSET VALUE
Beginning of period $24.08 $15.83 $15.20 $13.47 $11.91 $10.00
------ ------ ------ ------ ------ ------
OPERATIONS
Net investment income (loss) (0.20) (0.09) (0.07) (0.10) (0.05) 0.01
Net realized and unrealized gains (4.52) 8.77 1.42 2.18 2.37 1.91
(losses) ------ ----- ---- ---- ---- -----
Total from operations (4.72) 8.68 1.35 2.08 2.32 1.92
------ ---- ---- ---- ---- ----
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income --- --- --- --- --- (0.01)
Net realized gains (3.51) (0.43) (0.72) (0.35) (0.76) ---
------- ------ ------ ------ ------ ------
Total distributions (3.51) (0.43) (0.72) (0.35) (0.76) (0.01)
------ ------ ------ ------ ------ ------
NET ASSET VALUE
End of period $15.85 $24.08 $15.83 $15.20 $13.47 $11.91
====== ====== ====== ====== ======= =======
Total investment return* (22.97%) 55.20% 10.23% 15.43% 21.90% 19.23%
Net assets at end of period $387,105 $653,888 $342,874 $225,510 $131,514 $38,110
(OOO's omitted)
RATIOS
Expenses to average net assets 1.19% 1.24% 1.25% 1.25% 1.25% 1.25%**
Net investment income (loss)
to average net assets (0.75%) (0.52%) (0.54%) (0.77%) (0.72%) 0.14%**
Average brokerage commission rate*** $0.0571 N/A N/A N/A N/A
Portfolio turnover rate
(excluding short-term securities) 49.5% 62.8% 58.1% 76.3% 96.1% 126.6%
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
* Total investment return is based on the change in net asset value of
a share during the period and assumes reinvestment of all distributions
at net asset value.
** Annualized
*** Beginning in fiscal 1997, the Fund is required to disclose an average
brokerage commission rate.
(1) Commencement of operations
</FN>
</TABLE>
-5-
<PAGE>
GROWTH FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Year ended March 31, Period from Period from
------------------------------ August 1, 1994 to August 6, 1993(2) to
1997 1996 March 31, 1995(1) July 31, 1994
-------------- ------------- -------------------- --------------------
NET ASSET VALUE
Beginning of period $11.89 $10.95 $9.87 $10.00
------ ------ ----- ------
OPERATIONS
Net investment income (0.03) --- 0.04 0.01
Net realized and unrealized gains 1.02 1.93 1.07 (0.13)
(losses) -------------- ------------- -------------------- --------------------
Total from operations 0.99 1.93 1.11 (0.12)
-------------- ------------- -------------------- --------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income --- (0.03) (0.03) (0.01)
Net realized gains (2.96) (0.96) --- ---
-------------- ------------- ------------------- --------------------
Total distributions (2.96) (0.99) (0.03) (0.01)
-------------- ------------- -------------------- --------------------
NET ASSET VALUE
End of period $9.92 $11.89 $10.95 $9.87
============== ============= ==================== ====================
Total investment return* 8.42% 18.01% 11.24% (1.21%)
Net assets at end of period $11,747 $17,079 $26,794 $14,408
(OOO's omitted)
RATIOS
Expenses to average net assets 1.25% 1.25% 1.25%** 1.25%**
Net investment income (loss) to
average net assets (0.25%) (0.04%) 0.61%** 0.16%**
Average brokerage commission rate*** $0.0588 N/A N/A N/A
Portfolio turnover rate (excluding
short-term securities) 134.2% 92.8% 68.7% 105.4%
- -----------------------------------------------------------------------------
<FN>
* Total investment return is based on the change in net asset
value of a share during the period and assumes reinvestment of all
distributions at net asset value.
** Annualized
*** Beginning in fiscal 1997, the Fund is required to disclose an average
brokerage commission rate.
(1) Reflects fiscal year end change from July 31 to March 31.
(2) Commencement of operations
</FN>
</TABLE>
-6-
<PAGE>
GROWTH AND INCOME FUND
Years ended March 31,
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
NET ASSET VALUE
Beginning of period $15.30 $14.32 $13.91 $15.19 $14.73 $14.48 $15.47 $16.01 $14.80 $17.32
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
OPERATIONS
Net investment income 0.10 0.10 0.12 0.03 0.07 0.13 0.29 0.39 0.31 0.28
Net realized and
unrealized gains 1.88 2.86 1.04 0.38 1.17 1.20 0.72 2.26 2.23 (1.09)
(losses)
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
Total from operations 1.98 2.96 1.16 0.47 1.24 1.33 1.01 2.65 2.54 (0.81)
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment (0.10) (0.13) (0.10) (0.06) (0.07) (0.14) (0.30) (0.43) (0.23) (0.37)
income
Excess distribution
from net investment
income (0.10) -- -- -- -- -- -- -- -- --
Net realized gains (2.25) (1.85) (0.65) (1.69) (0.71) (0.94) (1.70) (2.76) (1.10) (1.34)
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
Total distributions (2.45) (1.98) (0.75) (1.75) (0.78) (1.08) (2.00) (3.19) (1.33) (1.71)
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
NET ASSET VALUE
End of period $14.83 $15.30 $14.32 $13.91 $15.19 $14.73 $14.48 $15.47 $16.01 $14.80
========== ========= ========= ======== ======== ======== ======== ========= ======== ========
Total investment 13.34% 21.51% 8.92 3.07% 9.04% 9.56% 7.42% 16.77% 18.06% (4.89%)
return*
Net assets at end of
period $90,741 $84,662 $101,256 $119,102 $134,308 $113,324 $90,590 $76,484 $76,901 $83,290
(000's omitted)
RATIOS
Expenses to average
net assets 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.05% 1.00% 0.90% 0.80%
Net investment income
to average net 0.51% 0.62% 0.80% 0.60% 0.61% 1.03% 2.19% 2.10% 1.80% 1.70%
assets
Average brokerage
commission rate** $0.0623 N/A N/A N/A N/A N/A N/A N/A N/A N/A
Portfolio turnover
rate (excluding
short-term securities) 51.2% 89.1% 79.1% 205.6% 175.6% 210.1% 68.5% 66.2% 48.3% 35.8%
- -----------------------------------------------------------------------------------------------------------------------
<FN>
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions
at net asset value.
** Beginning in fiscal 1997, the Fund is required to disclose an
average brokerage commission rate.
</FN>
</TABLE>
-7-
<PAGE>
MIDCAP GROWTH FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Period from
Years ended March 31, April 10, 1992(1)
------------------------------------------------- to
1997 1996 1995 1994 March 31, 1993
---- ---- ---- ---- ------------
NET ASSET VALUE
Beginning of period $17.70 $15.35 $13.67 $11.88 $10.00
------ ------ ------ ------ ------
OPERATIONS
Net investment income (loss) (0.08) (0.05) (0.04) (0.04) 0.02
Net realized and unrealized gains 0.68 3.50 2.35 1.99 1.89
---- ----- ---- ---- -----
Total from operations 0.60 3.45 2.31 1.95 1.91
====== ====== ====== ===== =====
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income --- --- --- --- (0.03)
Net realized gains (1.62) (1.10) (0.63) (0.16) ---
------- ------ ------ ------- -----
Total distributions (1.62) (1.10) (0.63) (0.16) (0.03)
------ ------ ------ ------ -----
NET ASSET VALUE
End of period $16.68 $17.70 $15.35 $13.67 $11.88
====== ====== ====== ====== =======
Total investment return* 3.12% 23.51% 17.63% 16.40% 19.09%
Net assets at end of period (000's $128,259 $122,375 $88,075 $56,618 $22,070
omitted)
Ratios
Expenses to average net assets 1.25% 1.25% 1.25% 1.25% 1.25%**
Net investment income (loss)
to average net assets (0.47%) (0.36%) (0.33%) (0.45%) 0.24%**
Average brokerage commission rate*** $0.593 N/A N/A N/A N/A
Portfolio turnover rate
(excluding short-term securities) 72.4% 29.8% 51.3% 49.7% 57.6%
- ----------------------------------------------------------------------------------------------------------------
<FN>
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions
at net asset value.
** Annualized
*** Beginning in fiscal 1997, the Fund is required to disclose an
average brokerage commission rate.
(1) Commencement of operations
</FN>
</TABLE>
-8-
<PAGE>
REGIONAL FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Years ended March 31,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
NET ASSET VALUE
Beginning of period $24.57 $21.56 $20.94 $22.23 $21.29 $21.03 $18.95 $19.38 $17.11 $21.19
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
OPERATIONS
Net investment income 0.03 0.14 0.17 0.21 0.21 0.20 0.35 0.46 0.36 0.33
Net realized and
unrealized gains
(losses) 2.08 5.77 1.84 0.51 1.48 2.38 2.88 3.59 2.76 (0.80)
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
Total from operations 2.11 5.91 2.01 0.72 1.69 2.58 3.23 4.05 3.12 (0.47)
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (0.04) (0.18) (0.20) (0.18) (0.23) (0.24) (0.33) (0.51) (0.28) (0.40)
Excess distribution
from net investment
income (0.06) (0.02) -- -- -- -- -- -- -- --
Net realized gains (3.99) (2.70) (1.19) (1.83) (0.52) (2.08) (0.82) (3.97) (0.57) (3.21)
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
Total distributions (4.09) (2.90) (1.39) (2.01) (0.75) (2.32) (1.15) (4.48) (0.85) (3.61)
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
NET ASSET VALUE
End of period $22.59 $24.57 $21.56 $20.94 $22.23 $21.29 $21.03 $18.95 $19.38 $17.11
========== ========= ========= ======== ======== ======== ======== ========= ======== ========
Total investment 8.65% 28.62% 10.35% 3.26% 8.31% 12.77% 18.01% 21.66% 18.63% (1.40%
return*
Net assets at end of
period (000's $498,178 $575,156 $523,364 $596,572 $659,904 $528,763 $284,054 $138,270 $102,245 $85,666
omitted)
RATIOS
Expenses to average
net assets 1.21% 1.25% 1.23% 1.25% 1.25% 1.25% 1.01% 0.99% 1.00% 0.80%
Net investment income
to average net 0.14% 0.58% 0.74% 0.94% 1.09% 1.20% 2.27% 2.31% 2.00% 1.60%
assets
Average brokerage
commission rate** $0.0581** N/A N/A N/A N/A N/A N/A N/A N/A N/A
Portfolio turnover
rate (excluding
short-term securities) 61.1% 89.7% 150.0% 163.0% 139.7% 140.6% 168.7% 116.2% 93.7% 85.3%
- ----------------------------------------------------------------------------------------------------------------------
<FN>
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions
at net asset value.
** Beginning in fiscal 1997, the Fund is required to disclose an average
brokerage commission rate.
</FN>
</TABLE>
-9-
<PAGE>
VALUE FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Years ended March 31,
--------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
NET ASSET VALUE
Beginning of period $12.42 $11.17 $11.63 $11.63 $11.06 $10.46 $12.29 $13.14 $10.75 $12.51
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
OPERATIONS
Net investment income 0.09 0.08 0.03 0.05 0.11 0.12 0.22 0.19 0.12 0.12
Net realized and
unrealized gains
(losses) 0.68 2.19 0.38 1.45 0.56 1.20 0.36 0.11 2.46 (0.04)
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
Total from operations 0.77 2.27 0.41 1.50 0.67 1.33 0.58 1.30 2.58 0.08
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (0.12) (0.01) (0.03) (0.13) --- (0.15) (0.17) (0.18) (0.10) (0.17)
Net realized gains (1.41) (1.01) (0.84) (1.37) (0.10) (0.45) (2.24) (1.97) (0.09) (1.67)
--------- -------- --------- ------- -------- -------- ------- ------- ------- -------
Total distributions (1.53) (1.02) (0.87) (1.50) (0.10) (0.60) (2.41) (2.15) (0.19) (1.84)
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
NET ASSET VALUE
End of period $11.66 $12.42 $11.17 $11.63 $11.63 $11.06 $10.46 $12.29 $13.14 $10.75
========== ========= ========= ======== ======== ======== ======== ====== ======= ========
Total investment 5.85% 21.07% 3.88% 12.70% 6.20% 12.21% 6.91% 9.90% 24.18% 1.12%
return*
Net assets at end of
period
000's omitted) $29,439 $42,009 $40,601 $35,282 $24,643 $32,246 $22,145 $25,913 $27,980 $20,464
RATIOS
Expenses to average
net assets 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.10% 1.00% 1.00% 1.00%
Net investment income
to average net 0.61% 0.65% 0.31% 0.35% 0.68% 1.24% 2.00% 1.34% 1.00% 1.00%
assets
Average brokerage
commission rate** $0.0600 N/A N/A N/A N/A N/A N/A N/A N/A N/A
Portfolio turnover
rate (excluding
short-term securities) 61.3% 73.4% 102.1% 191.9% 118.3% 125.4% 57.0% 70.3% 52.7% 62.5%
- ------------------------------------------------------------------------------------------------------------------------
<FN>
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions
at net asset value.
** Beginning in fiscal 1997, the Fund is required to disclose an average
brokerage commission rate.
</FN>
</TABLE>
-10-
<PAGE>
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 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 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 CLOSED TO NEW INVESTORS ON FEBRUARY 1, 1996. 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 (revenue of $500
million or less at the time of acquisition). Emerging growth companies are
generally expected to show earnings growth over time that is well above the
growth rate of the overall economy and the rate of inflation, and have products,
management and market opportunities which are usually necessary to become more
widely recognized as growth companies. 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.
-11-
<PAGE>
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 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 net 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.
-12-
<PAGE>
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 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.
Under normal circumstances, 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.
-13-
<PAGE>
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 total
assets 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.
The following are typical, but not exclusive, examples 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 suggest the possibility of improved operating results.
2. Equity securities of companies which IAI believes have temporarily
fallen out of favor for non-recurring or short-term reasons.
3. Equity securities of companies which appear undervalued in relation to
securities of other companies in the same industry.
In selecting these securities, Value Fund focuses on companies with strong
competitive positions, high levels of discretionary cash flow, solid financial
characteristics and market capitalizations of typically less than $1 billion
(also known as "small cap" stocks).
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.
-14-
<PAGE>
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 is permitted to invest in repurchase agreements. A repurchase
agreement is a contract by which a Fund acquires the security ("collateral")
subject to the obligation of the seller to repurchase the security at a fixed
price and date (within seven days). A repurchase agreement may be construed as a
loan under relevant law. The Funds may enter into repurchase agreements with
respect to any securities which they may acquire consistent with their
investment policies and restrictions. The Funds' custodian will hold the
securities underlying any repurchase agreement in a segregated account. In
investing in repurchase agreements, the Funds' risk is limited to the ability of
the seller to pay the agreed-upon price at the maturity of the repurchase
agreement. In the opinion of IAI, such risk is not material, since in the event
of default, barring extraordinary circumstances, the Funds would be entitled to
sell the underlying securities or otherwise receive adequate protection under
federal bankruptcy laws for their interest in such securities. However, to the
extent that proceeds from any sale upon a default are less than the repurchase
price, the Funds could suffer a loss. In addition, the Funds may incur certain
delays in obtaining direct ownership of the collateral.
BORROWING
Each Fund may borrow from banks (or through reverse repurchase agreements)
for temporary or emergency purposes. If a Fund borrows money, its share price
may be subject to greater fluctuation until the borrowing is paid off. If a Fund
makes additional investments while borrowings are outstanding, this may be
considered a form of leverage. Each Fund does not intend its borrowings to
exceed 5% of its net assets.
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.
-15-
<PAGE>
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.
ADJUSTING INVESTMENT EXPOSURE
Each Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as currency
exchange rates and broad or specific fixed-income market movements), or to
enhance potential gain. These strategies may be executed through the use of
derivative contracts. Such strategies are generally accepted as a part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, a Fund may purchase
and sell exchange-listed and over-the-counter put and call options on
securities, purchase and sell financial futures contracts and options thereon,
and enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures.
-16-
<PAGE>
Such techniques and instruments may be used without limit to attempt to
protect against possible changes in the market value of securities held in or to
be purchased for a Fund's portfolio resulting from securities markets or
currency exchange rate fluctuations, to protect a Fund's unrealized gains in the
value of its portfolio securities, to facilitate the sale of such securities for
investment purposes, or to establish a position in the derivatives markets as a
temporary substitute for purchasing or selling particular securities. Some may
also be used to enhance potential gain although no more than 5% of a Fund's
assets will be committed to techniques and instruments entered into for
non-hedging purposes. Any or all of these investment techniques may be used at
any time and in any combination, and there is no particular strategy that
dictates the use of one technique rather than another, as use of any technique
or instruments is a function of numerous variables including market conditions.
The ability of a Fund to utilize these techniques and instruments successfully
will depend on IAI's ability to predict pertinent market movements, which cannot
be assured. Each Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Such techniques and
instruments involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes and not for speculative purposes.
TEMPORARY DEFENSIVE 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. High turnover rates (100% or more, as Capital Appreciation Fund
and Growth Fund experienced in their most recent fiscal year, increase
transaction costs and may increase taxable capital gains. 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
-17-
<PAGE>
exchange rates are determined by forces of supply and demand in the foreign
exchange markets and other economic and financial conditions affecting the world
economy. A decline in the value of any particular currency against the U.S.
dollar will cause a decline in the U.S. dollar value of a Fund's holdings of
securities denominated in such currency and, therefore, will cause an overall
decline in a Fund's net asset value and net investment income and capital gains,
if any, to be distributed in U.S. dollars to shareholders by a Fund. Delays may
be encountered in settling securities transactions in certain foreign markets,
and a Fund will incur costs in converting foreign currencies into U.S. dollars.
Custody charges are generally higher for foreign securities.
RISKS ASSOCIATED WITH ADJUSTING INVESTMENT EXPOSURE
The techniques and instruments described in the section "Adjusting
Investment Exposure", including derivative contracts, have risks associated with
them including possible default by the other party to the transaction,
illiquidity and, to the extent IAI's view as to certain market movements is
incorrect, the risk that the use of such techniques and instruments could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to a Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options), current market values,
limit the amount of appreciation a Fund can realize on its investments or cause
a Fund to hold a security it might otherwise sell. The use of currency
transactions can result in a Fund incurring losses as a result of a number of
factors including the imposition of exchange controls, suspension of settlements
or the inability to deliver or receive a specified currency. The use of options
and futures transactions entails certain other risks. In particular, the
variable degree of correlation between price movements of futures contracts and
price movements in the related portfolio position of a Fund creates the
possibility that losses on the hedging instrument may be greater than gains in
the value of a Fund's position. In addition, futures and options markets may not
be liquid in all circumstances and certain over-the-counter options may not have
markets. As a result, in certain markets, a Fund might not be able to close out
a transaction without incurring substantial losses, if at all. Although the use
of futures contracts and options transactions for hedging should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of these
techniques would reduce net asset value, and possibly income, and such losses
can be greater than if the techniques and instruments had not been utilized.
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 companies or the market averages in general. Therefore, shares
of Capital Appreciation, Emerging Growth, and Value Funds are subject to greater
fluctuation in value than shares of a conservative equity fund or of a fund
which invests entirely in more established stocks. Each of Capital Appreciation,
Emerging Growth, and Value Fund will attempt to reduce the volatility of its
share price by diversifying its investments among many companies and different
industries.
SPECIAL RISK FACTORS ASSOCIATED WITH INVESTING IN REGIONAL FUND
The objective of capital appreciation along with the policy of
concentrating equity investments in the Eight State Region means that the assets
of 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.
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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.
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.
MANAGER RISK
IAI manages each Fund according to the traditional methods of "active"
investment management, which involve the buying and selling of securities based
upon economic, financial and market analysis and investment judgment. Manager
risk refers to the possibility that IAI may fail to execute a Fund's investment
strategy effectively. As a result, a Fund may fail to achieve its stated
objective.
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
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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 $16 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.
Each Fund has entered into a written agreement with IAI (the "Management
Agreement"), under which IAI provides each Fund with investment advisory
services and is responsible for the overall management of each Fund's business
affairs subject to the authority of the Board of Directors. The Management
Agreement also provides that, except for brokerage commissions and other
expenditures in connection with the purchase and sale of portfolio securities,
interest and, in certain circumstances, taxes and extraordinary expenses, IAI
shall pay all of a Fund's operating expenses. The Management Agreement further
provides that IAI will either reimburse a Fund for the fees and expenses it pays
to directors who are not "interested persons" of a Fund or reduce its fee by the
equivalent amount.
Pursuant to the Management Agreement, each Fund paid the following
Management Fee for the fiscal year ended March 31, 1997.
<TABLE>
<CAPTION>
<S> <C>
Capital Appreciation Fund 1.25%*
Emerging Growth Fund 1.19%
Growth Fund 1.25%
Growth and Income Fund 1.25%
Midcap Growth Fund 1.25%
Regional Fund 1.21%
Value Fund 1.25%
--------------------------------------------
*Pursuant to IAI's voluntary waiver of Management
Fees in excess 1.25% of the Fund's average daily
net assets.
</TABLE>
Because IAI is paying each Fund's operating expenses, these fees represent
each Fund's total expenses. With respect to certain of the services for which it
is responsible under the Management Agreements, IAI may also pay qualifying
broker-dealers, financial institutions and other entities for providing such
services to Fund shareholders.
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
team leads for each Fund are as follows:
Martin Calihan has responsibility for the management of Capital
Appreciation Fund. 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 and Company from 1991 to 1992, and with State Street
Research management from 1990 to 1991. Mr. Calihan has managed Capital
Appreciation Fund since its inception.
David Himebrook has responsibility for the management of Emerging Growth
Fund. Mr. Himebrook, an IAI Vice-President and equity portfolio manager, has
been involved in the management of the Fund since November 1994. Prior to that
time Mr. Himebrook had been employed as an equity portfolio manager by Lutheran
Brotherhood since 1987.
Mark Hoonsbeen has responsibility for the management of Regional Fund and
Midcap Growth Fund. Mr. Hoonsbeen is a Vice President and has managed Regional
Fund since he joined IAI in 1994 and Midcap Growth Fund since February 1997.
Before joining IAI, Mr. Hoonsbeen served as an equity portfolio manager for the
St. Paul Companies Inc. from 1986 to 1994.
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Mr. Hoonsbeen and David McDonald have responsibility for the management of
Growth Fund. 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. Mr. Hoonsbeen has managed Growth Fund since February 1997.
Donald Hoelting has responsibility for the management of Growth and Income
Fund and Value Fund. Mr. Hoelting has managed each Fund since August 1996. Mr.
Hoelting is a Vice President and has served as an equity portfolio manager of
IAI since joining IAI in April 1996. Prior to joining IAI, Mr. Hoelting was
Chief Investment Officer and Portfolio Manager for Jefferson National Bank and
Trust from 1986 to 1996.
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.
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.
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 from ordinary income or 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.
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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 per share
("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 at the
initial purchase date 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 whose shares are being
purchased is duly registered in the state of the purchaser's residence, if
required, and the purchaser otherwise satisfies the Fund's purchase
requirements. No sales load or commission is charged in connection with the
purchase of Fund shares.
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 a retail 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. Third party checks will not be accepted for initial
account investments. Upon receipt, your account will be credited with the number
of full and fractional shares which can be purchased at the net asset value next
determined after receipt of the purchase order by a Fund.
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Purchases of shares are subject to acceptance or rejection by a Fund on the
same day the purchase order is received and are not binding until so accepted.
It is the policy of the Funds and the Underwriter to keep confidential
information contained in the application and regarding the account of an
investor or potential investor in a Fund.
Emerging Growth Fund closed 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 (1) that offer the Emerging Growth Fund
as an investment option as of the closing date or (2) whose trustee has an
existing account as of the closing date. 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. Additionally, in the Fund's discretion, mutual funds that
invest solely in other mutual funds may also purchase shres for new and existing
accounts. Emerging Growth Fund may resume sles 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 IAI Mutual 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.
BANK WIRE PURCHASES
Shares may be purchased by having your bank wire federal funds (funds of
the Federal Reserve System) to a Norwest Bank, Minnesota.
Wire orders will be accepted only on days your bank, the transfer agent, a
Fund and Norwest Bank Minnesota are open for business. The payment must be
received by a Fund before the close of business to be credited to your account
that day. Otherwise, it will be processed the next business day. The wire
purchase will not be considered made until the wired amount is received and the
purchase is accepted by such Fund. If the wire order does not contain the
information stated below, such Fund may reject it. Any delays that may occur in
wiring federal funds, including delays in processing by the banks, are not the
responsibility of such Fund or the transfer agent.
You must pay any charges assessed by your bank for the wire service. If a
wire order is rejected, all money received by the Fund, less any costs incurred
by the Fund or the transfer agent in rejecting it, will be returned promptly.
If the wire order is for a new account, you should call IAI Shareholder
Services at 1-800-945-3863 to advise them of the investment and to obtain an
account number and instructions. The wire should be sent to: Norwest Bank
Minnesota, Routing Number 091000019, Minneapolis, Minnesota, Credit to: IAI
Mutual Funds Account Number 6355002264. It should state the following:
"For further credit to personal account # ______________ (your account number)
for ________________________ (your name) and __________________ (Fund name)."
A completed application must be sent to and received by the Fund before the
wire is sent.
If the wire order is an addition to an existing account, the wire must
include the information required above for the new accounts. As soon as the wire
is sent, you should call IAI Shareholder Services, as described above, and
advise them of your name, your account number and the name of the bank
transmitting the federal funds.
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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.
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 30 days preceding the day 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. All correspondence relating to the
redemption of shares should be directed to the office of IAI Mutual Funds, P.O.
Box 357, Minneapolis, Minnesota 55440. Shareholders may redeem shares by phone,
subject to a limit of $50,000, provided such shareholders have authorized such
Fund to accept telephone instructions. For assistance in redeeming shares by
phone, please contact the IAI Mutual Funds Shareholder Services at
1-800-945-3863.
Certificates presented for redemption must be endorsed on the back with the
signature of the person whose name appears on the certificate and must be
signature guaranteed. If no certificate has been issued, redemption instructions
must be signed by the person(s) in whose name the shares are registered. If the
redemption proceeds are to be paid or mailed to any person other than the
shareholder of record or if redemption proceeds are in excess of $50,000, a Fund
will require that the signature on the written instructions be guaranteed by a
participant in a signature guarantee program, which may include certain national
banks or trust companies or certain member firms of national securities
exchanges. (Notarization by a Notary Public is NOT ACCEPTED.) If the shares are
held of record in the name of a corporation, partnership, trust or fiduciary, a
Fund may require additional evidence of authority prior to accepting a request
for redemption.
For shareholders who established receiving proceeds by Federal Funds Wire
at the time they opened their account, telephone instructions will be accepted
for redemption of amounts up to $50,000 ($1,000 Minimum) and proceeds will be
wired on the next business day to a pre-designated bank account. Wire redemption
requests will only be processed on days your bank, the transfer agent, the
Portfolios and Norwest Bank Minnesota are open for business.
In order to add this feature to an existing account or to change existing
bank account information, please submit a letter of instructions including your
bank information to IAI Shareholder Services at the address listed in the
section "Additional Information." The letter must be signed by all registered
owners, and their signatures must be guaranteed.
Your account will be charged a fee of $10 each time redemption proceeds are
wired to your bank. Your bank may also charge you a fee for receiving a Federal
Funds Wire.
Neither the transfer agent nor any of the Funds can be responsible for the
efficiency of the Federal Funds wire system or the shareholder's bank.
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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.
A Fund will not send redemption proceeds until checks (including certified
checks or cashiers checks) received in payment for shares have cleared, which
may take up to ten days or more.
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 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.
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AUTHORIZED TELEPHONE TRADING
Investors can transact account exchanges and redemptions via the telephone
by completing the Authorized Telephone Trading section of the IAI Mutual Fund
application and returning it to a Fund. Investors requesting telephone trading
privileges will be provided with a personal identification number ("PIN") that
must accompany any instructions by phone. Shares will be redeemed or exchanged
at the next determined net asset value. Telephone redemption proceeds are
subject to a $50,000 limit and must be made payable to the owner(s) of record
and delivered to the address of record.
In order to confirm that telephone instructions for redemptions and
exchanges are genuine, the Funds have established reasonable procedures,
including the requirement that a personal identification number accompany
telephone instructions. If a Fund or the transfer agent fails to follow these
procedures, such Fund may be liable for losses due to unauthorized or fraudulent
instructions. To the extent 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.
SYSTEMATIC CASH WITHDRAWAL PLAN
Each Fund has available a Systematic Cash Withdrawal Plan for any investor
desiring to follow a program of systematically withdrawing a fixed amount of
money from an investment in shares of a Fund. Payments under the plan will be
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. The
holder of a Systematic Cash Withdrawal Plan must have income dividends and any
capital gains distributions reinvested in full and fractional shares at net
asset value.
Payments under this plan, unless pursuant to a retirement plan, should not
be considered income. Withdrawal payments may exceed dividends and distributions
and, to this extent, there will be a reduction in the investor's equity. An
investor should also understand that this plan cannot insure profit, nor does it
protect against any loss in a declining market. Careful consideration should be
given to the amount withdrawn each month. Excessive withdrawals could lead to a
serious depletion of equity, especially during periods of declining market
values. Fund management will be available for consultation in this matter.
Plan application forms are available through the Funds. If you would like
assistance in completing the application contact IAI Mutual Fund Shareholder
Services at 1-800-945-3863.
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
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.
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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.
Upon redemption of shares of a Fund, the shareholder will generally
recognize a capital gain or loss equal to the difference between the amount
realized on the redemption and the shareholder's adjusted basis in such shares.
Such gain or loss will be long-term if the shares have been held for more than
one year. Under the Code, the deductibility of capital losses is subject to
certain limitations.
Annually, IAI will send you and the IRS a statement showing the amount of
each taxable distribution you received in the previous year. Whenever you sell
shares of a Fund, IAI will send you a confirmation statement showing how many
shares you sold and at what price. You will also receive an account statement
quarterly and a consolidated transaction statement annually. However, it is up
to you or your tax preparer to determine whether this sale resulted in a capital
gain and, if so, the amount of tax to be paid. Be sure to keep your 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
management 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
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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 LLP, 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. 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, 1997
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to a Prospectus dated August 1,
1997, 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).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Page
INVESTMENT OBJECTIVES AND POLICIES...........................................2
INVESTMENT RESTRICTIONS......................................................9
INVESTMENT PERFORMANCE.......................................................12
MANAGEMENT...................................................................14
CUSTODIAL SERVICE............................................................22
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE...........................22
CAPITAL STOCK................................................................23
NET ASSET VALUE AND PUBLIC OFFERING PRICE....................................27
PURCHASES AND REDEMPTIONS IN KIND............................................28
TAX STATUS...................................................................28
LIMITATION OF DIRECTOR LIABILITY.............................................29
FINANCIAL STATEMENTS.........................................................30
</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 as a form of
borrowing. 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. Presently, the Funds do not intend to invest more than 5% of its
net assets in reverse repurchase agreements.
SECURITIES OF FOREIGN ISSUERS
Investing in foreign securities may result in greater risk than that
incurred by investing in domestic securities. There is generally less publicly
available information about foreign issuers comparable to reports and ratings
that are published about companies in the United States. Also, foreign issuers
are not subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to United
States companies.
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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 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. In the case of a Rule 144A Security, such security is
deemed to be liquid if:
(1) IAI reasonably expects to be able to resell the security to a qualified
institutional buyer, as defined in paragraph (a)(1) of Rule 144A, who is aware
of the Fund's reliance upon Rule 144A in selling the security without
registration, as required by paragraph (d)(2) of Rule 144A;
(2) the Rule 144A Security is not (a) of the same class as securities
listed on any national securities exchange or quoted in NASDAQ as determined
under paragraph (d)(3)(i) of Rule 144A, or (b) a security of a registered
investment company (other than a closed-end investment company); and
(3) the issuer (a) is a foreign government eligible to register securities
under Schedule B of the Securities Act of 1933, (b) is a company that files
periodic reports under the Securities Act of 1934 on Forms 8-K, 10-Q, 10-K or
20-F or provides information under Rule 12g3-2(b) thereunder, or (c) has agreed
in writing to provide the holder and any prospective purchaser of the Rule 144A
Security with reasonably current financial information as required under
paragraph (d)(4)(i) of Rule 144A.
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Other securities are deemed to be liquid if IAI determines that the
security can be disposed of within seven days in the ordinary course of business
at approximately the amount at which the Funds have valued the instrument for
purposes of calculating a Fund's net asset value. In making this determination,
IAI will consider such factors as may be relevant to a Fund's ability to dispose
of the security, including but not limited to, the following factors (none of
which, standing alone, would necessarily be determinative):
1. the frequency of trades and quotes for the security;
2. the number of dealers willing to purchase or sell the security and the
number of potential purchasers;
3. dealer undertakings to make a market in the security; and
4. the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of transfer).
It is not possible to predict with assurance the maintenance of an
institutional trading market for such securities and the liquidity of 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.
Presently, the Funds do not intend to lend more than 5% of its net assets to
broker-dealers, banks, or other financial borrowers of securities.
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.
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.
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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. Presently, the Funds do not intend to
invest more than 5% of its net assets in Indexed Securities.
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 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.
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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.
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. With respect to positions in commodity futures or
commodity option contracts which do not come within the meaning and intent of
bona fide hedging in the CFTC rules, the aggregate initial margin and premiums
required to establish such positions will not exceed five percent of the
liquidation value of the qualifying entity's portfolio, after taking into
account unrealized profits and unrealized losses on any such contracts it has
entered into; and, provided further, that in the case of an option that is
in-the-money amount may be excluded in computing such 5 percent.
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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
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.
-8-
<PAGE>
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.
-9-
<PAGE>
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.
For purposes of applying this restriction, a Fund will not purchase
securities, as defined above, such that 25% or more of the value of the Fund's
total assets are invested in the securities of companies whose principal
business activities are in the same industry.
3. Issue any senior securities, except as permitted by the 1940 Act or the
Rules and Regulations of the Securities and Exchange Commission.
4. Borrow money, except from banks for temporary or emergency purposes
provided that such borrowings may not exceed 33-1/3% of the value of the 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.
-10-
<PAGE>
7. Purchase or sell commodities other than foreign currencies unless
acquired as a result of ownership of securities. This limitation shall not
prevent the Fund from purchasing or selling options, futures, swaps and forward
contracts or from investing in securities or other instruments backed by
commodities.
For purposes of applying this restriction, "commodities" shall be deemed to
include commodity contracts.
8. Make loans to other persons except to the extent not inconsistent with
the 1940 Act or the Rules and Regulations of the Securities and Exchange
Commission. This limitation does not apply to purchases of commercial paper,
debt securities or repurchase agreements, or to the lending of portfolio
securities.
9. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases or sales
of securities and provided that margin payments in connection with transactions
in options, futures, swaps and forward contracts shall not be deemed to
constitute purchasing securities on margin.
10. Sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options, swaps and forward futures contracts are
not deemed to constitute selling securities short.
For purposes of applying this restriction, a Fund will not sell securities
short except to the extent that it contemporaneously owns or has the right to
obtain, at no added cost, securities identical to those sold short.
11. Except as part of a merger, consolidation, acquisition, or
reorganization, invest more than 5% of the value of its total assets in the
securities of any one investment company or more than 10% of the value of its
total assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting securities of
any one investment company.
12. Mortgage, pledge or hypothecate its assets except to the extent
necessary to secure permitted borrowings. This limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed in
a segregated account in connection with such contracts.
13. Participate on a joint or a joint and several basis in any securities
trading account.
14. Invest more than 15% of its net assets in illiquid investments.
15. Invest directly in interests (including partnership interests) in oil,
gas or other mineral exploration or development leases or programs, except the
Fund may purchase or sell securities issued by corporations engaging in oil, gas
or other mineral exploration or development business.
Any of 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 (other than Restriction 4) shall not be considered to be violated unless
an excess over the percentage occurs immediately after an acquisition of
securities or utilization of assets and results therefrom. 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.
-11-
<PAGE>
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by the
monthly average of the value of portfolio securities owned by 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. Each Fund's historical portfolio turnover
rates are set forth in the Prospectus section "Financial Highlights".
INVESTMENT PERFORMANCE
Advertisements and other sales literature for each Fund may refer to
monthly, quarterly, yearly, cumulative and average annual total return. Each
such calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts. Each of
monthly, quarterly and yearly total return is computed in the same manner as
cumulative total return, as set forth below.
Cumulative total return is computed by finding the cumulative rate of
return over the period indicated in the advertisement that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
CTR = (ERV-P) 100
-----
P
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the period of
a hypothetical $1,000 payment made at the beginning
of such period; and
P = initial payment of $1,000
Average annual total return is computed by finding the average annual
compounded rates of return over the periods indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period of
a hypothetical $1,000 payment made at the beginning
of such period.
-12-
<PAGE>
The table below shows the yearly total return for the Funds for the periods
indicated:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Total Return
-----------------------------------------------------------------------------------------------------
Capital Emerging
Year Ended Appreciation Growth Growth Growth & Midcap Regional Value
12/31 Fund* Fund** Fund*** Income Fund Growth Fund**** Fund Fund*****
----- ----- ------ ------- ----------- --------------- ---- ---------
1986 -- -- -- 13.10% -- 24.60% 1.90%
1987 -- -- -- 15.50% -- 5.30% 14.10%
1988 -- -- -- 8.50% -- 18.60% 24.30%
1989 -- -- -- 29.80% -- 31.30% 22.60%
1990 -- -- -- -6.70% -- -0.30% -11.50%
1991 -- 23.60% -- 26.70% -- 35.40% 19.80%
1992 -- 22.40% -- 4.00% 15.00% 3.50% 11.90%
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%
1995 -- 49.55% 23.17% 27.14% 26.09% 32.64% 24.39%
1996 -- 6.95% 15.35% 20.21% 16.58% 15.72% 21.87%
- ----------------------------------------------
<FN>
* Commenced operations on February 1, 1996
** Commenced operations on August 5, 1991
*** Commenced operations on August 6, 1993
**** Commenced operations on April 10, 1992
***** Commenced operations on October 12, 1983
</FN>
</TABLE>
The average annual total returns of Capital Appreciation Fund for the
fiscal year ended March 31, 1997 and from inception through March 31, 1997 were
23.68% and 32.78%, respectively.
The average annual total returns of Emerging Growth Fund for the one and
five year periods ended March 31, 1997 and from inception through March 31, 1997
were (22.97%), 13.14% and 15.05%, respectively.
The average annual total returns of Growth Fund for the fiscal year ended
March 31, 1997 and from inception through March 31, 1997 were 8.42% and 9.78%,
respectively.
The average annual total returns of Growth and Income Fund for the one,
five and ten year periods ended March 31, 1997 were 13.34%, 11.01%, and 10.03%,
respectively.
The average annual total returns of Midcap Growth Fund for the fiscal year
ended March 31, 1997 and from inception through March 31, 1997 were 3.12% and
15.82%, respectively.
The average annual total returns of Regional Fund for the one, five and ten
year periods ended March 31, 1997 were 8.65%, 11.52% and 12.57%, respectively.
The average annual total returns of Value Fund for the one, five and ten
year periods ended March 31, 1997 were 5.85%, 9.76% and 10.11%, 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 indices, 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.
-13-
<PAGE>
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.
MANAGEMENT
The names, addresses, positions and principal occupations of the directors and
executive officers of the Fund are given below.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name and Address Age Position Principal Occupation(s) During Past 5 Years
- ---------------- --- -------- -------------------------------------------
Noel P. Rahn* 58 Chairman of the Chief Executive Officer and a Director of IAI
3700 First Bank Place Board, President since 1974. Mr. Rahn is also Chairman and
P.O. Box 357 President of the other IAI Mutual Funds and of
Minneapolis, Minnesota 55440 LifeUSA Funds, Inc.
Madeline Betsch 54 Director Currently retired; until April 1994, was
19 South 1st Street Executive Vice President, Director of Client
Minneapolis, Minnesota 55401 Services, of CME-KHBB Advertising since May
1985, and prior thereto was a Vice President
with Campbell-Mithun, Inc. (advertising
agency) since February 1977.
-14-
<PAGE>
Name and Address Age Position Principal Occupation(s) During Past 5 Years
- ---------------- --- -------- -------------------------------------------
W. William Hodgson 72 Director Currently retired; served as information
1698 Dodd Road manager for the North Central Home Office of
Mendota Heights, Minnesota 55118 the Prudential Insurance Company of America
from 1961 until 1984.
George R. Long 67 Director Chairman of Mayfield Corp. (financial
29 Las Brisas Way consultants and venture capitalists) since
Naples, Florida 33963 1973.
J. Peter Thompson 66 Director Grain farmer in southwestern Minnesota since
Route 1 1974. Prior to that, Mr. Thompson was
Mountain Lake, Minnesota 56159 employed by Paine Webber, Jackson & Curtis,
Incorporated, (a diversified financial services
concern), most recently as Senior Vice President
and General Partner.
Charles H. Withers 70 Director Currently retired; was Editor of the Rochester
Rochester Post Bulletin Post-Bulletin, Rochester, Minnesota from 1960
P.O. Box 6118 through March 31, 1980.
Rochester, Minnesota 55903
Archie C. Black, III 35 Treasurer Senior Vice President and Chief Financial
3700 First Bank Place Officer of IAI and has served IAI in several
P.O. Box 357 capacities since 1987. Mr. Black is also
Minneapolis, Minnesota 55440 Treasurer of the other IAI Mutual Funds and of
LifeUSA Funds, Inc.
William C. Joas 34 Secretary Vice President of IAI and has served as an
3700 First Bank Place attorney for IAI since 1990. Mr. Joas is also
P.O. Box 357 Secretary of the other IAI Mutual Funds and of
Minneapolis, Minnesota 55440 LifeUSA Funds, Inc.
David Himebrook 42 Vice President, Vice President of IAI. Prior to joining IAI
3700 First Bank Place Investments in 1994, Mr. Himebrook served as an equity
P.O. Box 357 (Emerging Growth portfolio manager for Lutheran Brotherhood
Minneapolis, Minnesota 55440 Fund) since 1987.
-15-
<PAGE>
Name and Address Age Position Principal Occupation(s) During Past 5 Years
- ---------------- --- -------- -------------------------------------------
David McDonald 37 Vice President, Vice President of IAI. Prior to joining IAI
3700 First Bank Place Investments in 1994, Mr. McDonald had been a Managing
P.O. Box 357 (Growth Fund) Director of Wessels Arnold & Henderson (a
Minneapolis, Minnesota 55440 brokerage firm) since 1989 and an Associate
Portfolio Manager with IDS Financial Services (a
diversified financial services concern) from 1986
to 1989.
Donald Hoelting 36 Vice President, Vice President of IAI. Prior to joining IAI
3700 First Bank Place Investments in April 1996, Mr. Hoelting was Chief
P.O. Box 357 (Value, Growth and Investment Officer and Portfolio Manager for
Minneapolis, Minnesota 55440 Income Fund) Jefferson National Bank and Trust from 1986 to
1996.
Martin J. Calihan 33 Vice President, Vice President of IAI. Prior to joining IAI
3700 First Bank Place Investments in 1992, Mr. Calihan served as an equity
P.O. Box 357 (Capital analyst for Morgan Stanley Co. (a diversified
Minneapolis, Minnesota 55440 Appreciation Fund) financial services concern) and State Street
Research Management.
Mark Hoonsbeen 36 Vice President, Vice President of IAI. Prior to joining IAI
3700 First Bank Place Investments in 1994, Mr. Hoonsbeen served as an equity
P.O. Box 357 (Regional Fund, portfolio manager for The St. Paul Companies,
Minneapolis, Minnesota 55440 Midcap Growth Inc. (a diversified financial services
Fund, and Growth concern) from 1986 to 1994. Mr. Hoonsbeen is
Fund) also a Vice President, Investments of the
Regional Portfolio of IAI Retirement Funds,
Inc.
Susan J. Haedt 35 Vice President, Vice President of IAI and Director of Fund
3700 First Bank Place Director of Operations. Prior to joining IAI in 1992, Ms.
P.O. Box 357 Operations Haedt served as a Senior Manager at KPMG Peat
Minneapolis, Minnesota 55440 Marwick LLP (an international tax, accounting
and consulting firm). Ms. Haedt is also Vice
President, Director of Operations of the other
IAI Mutual Funds and of LifeUSA Funds, Inc.
</TABLE>
* Director who is an interested person (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.
-16-
<PAGE>
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 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. Set forth below is
further information concerning compensation paid to Fund directors.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Director Compensation for the Fiscal Year Ended March 31, 1997
-------------------------------------------------------------------------------
Growth
Capital Emerging and Midcap
Appreciation Growth Growth Income Growth Regional Value
Name of Person, Position Fund Fund Fund Fund Fund Fund Fund
------------------------ ---- ---- ---- ---- ---- ---- ----
Betsch, Madeline - Director $ 659 $ 11,357 $ 277 $ 1,490 $ 2,398 $ 9,565 $ 638
Hodgson, W. William - Director $ 659 $ 11,357 $ 277 $ 1,490 $ 2,398 $ 9,565 $ 638
Long, George R. - Director $ 633 $ 11,450 $ 276 $ 1,475 $ 2,372 $ 9,556 $ 633
Thompson, J. Peter - Director $ 659 $ 11,357 $ 277 $ 1,490 $ 2,398 $ 9,565 $ 638
Withers, Charles W. -Director $ 633 $ 11,450 $ 276 $ 1,475 $ 2,372 $ 9,556 $ 633
- ---------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Aggregate Compensation
from the
Name of Person, Position 19 IAI Mutual Funds*
------------------------ -------------------
Betsch, Madeline - Director $34,700
Hodgson, W. William - Director $34,700
Long, George R. - Director $34,700
Thompson, J. Peter - Director $34,700
Withers, Charles H. - Director $34,700
-------------------------
<FN>
* From all Funds for the calendar year ended December 31, 1996;
excludes expenses incurred in connection with attending meetings.
</FN>
</TABLE>
The Board of Directors for each of the Funds has approved a Code of Ethics.
The Code permits access persons to engage in personal securities transactions
subject to certain policies and procedures. Such procedures prohibit the
acquiring of any securities in an initial public offering. In addition, all
securities acquired through private placement must be pre-cleared. Procedures
have been adopted which implement blackout periods for certain securities
transactions, as well as a ban on short-term trading profits. Additional
policies prohibit the receipt of gifts in certain instances. Procedures have
been implemented to monitor employee trading. Access persons of the Adviser are
required to certify annually that they have read and understood the Code of
Ethics. An annual report is provided to the Funds' Board of Directors
summarizing existing procedures, identifying material violations and
recommending any changes needed.
-17-
<PAGE>
IAI's ultimate corporate parent is Lloyds TSB Group plc ("Lloyds TSB"), a
publicly-held financial services organization headquartered in London, England.
Lloyds TSB is one of the largest personal and corporate financial services
groups in the United Kingdom, engaged in a wide range of activities including
commercial and retail banking. The principal offices of Lloyds TSB are located
at St. George's House, 6 - 8 Eastcheap, London, EC3M 1LL.
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 seven series (Series A through G). 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 seven series (Series A through G). 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."
-18-
<PAGE>
MANAGEMENT AGREEMENT
Effective April 1, 1996 (February 1, 1996 for Capital Appreciation Fund),
each Fund entered into a new written agreement with IAI (the "Management
Agreement"). Pursuant to the Management Agreement, IAI provides each Fund with
investment advice, statistical and research facilities, and certain equipment
and services, including, but not limited to, office space and necessary office
facilities, equipment, and the services of required personnel and, in connection
therewith, IAI has the sole authority and responsibility to make and execute
investment decisions for a Fund within the framework of such Fund's investment
policies, subject to review by the directors of the Funds. In addition, IAI has
agreed to provide or arrange for the provision of all required administrative,
stock transfer, redemption, dividend disbursing, accounting, and shareholder
services including, without limitation, the following: (1) the maintenance of a
Fund's accounts, books and records; (2) the calculations of the daily net asset
value in accordance with a Fund's current Prospectus and Statement of Additional
Information; (3) daily and periodic reports; (4) all information necessary to
complete tax returns, questionnaires and other reports requested by a Fund; (5)
the maintenance of stock registry records; (6) the processing of requested
account registration changes, stock certificate issuances and redemption
requests; (7) the administration of payments and dividends and distributions
declared by a Fund; (8) answering shareholder questions; (9) providing reports
and other information; and (10) other services designed to maintain shareholder
accounts. IAI may also pay qualifying broker-dealers, financial institutions and
other entities that provide such services. In return for such services, each
Fund has agreed to pay IAI an annual fee as a percentage of such Fund's average
daily net assets as set forth below:
CAPITAL APPRECIATION FUND
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%
GROWTH FUND AND GROWTH AND INCOME FUND
Daily Net Assets Fee IAI Receives Annually
---------------- -------------------------
For the first $100 million 1.25%
For the next $150 million 1.15%
For the next $250 million 1.05%
Above $500 million 1.00%
EMERGING GROWTH FUND, MIDCAP GROWTH FUND, VALUE FUND, REGIONAL FUND
Daily Net Assets Fee IAI Receives Annually
---------------- -------------------------
For the first $250 million 1.25%
For the next $250 million 1.20%
Above $500 million 1.10%
-19-
<PAGE>
Under the Management Agreement, except for brokerage commissions and other
expenditures in connection with the purchase and sale of portfolio securities,
interest expense, and, subject to the specific approval of a majority of the
disinterested directors of a Fund, taxes and extraordinary expenses, IAI has
agreed to pay all of a Fund's other costs and expenses, including, for example,
costs incurred in the purchase and sale of assets, taxes, charges of the
custodian of a Fund's assets, costs of reports and proxy material sent to Fund
shareholders, fees paid for independent accounting and legal services, costs of
printing Prospectuses for Fund shareholders and registering a Fund's shares,
postage, insurance premiums, and costs of attending investment conferences. The
Management Agreement further provides that IAI will either reimburse a Fund for
the fees and expenses it pays to directors who are not "interested persons" of
such Fund or reduce its fee by an equivalent amount. IAI is not liable for any
loss suffered by a Fund in the absence of willful misfeasance, bad faith or
negligence in the performance of its duties and obligations.
IAI has also voluntarily undertaken to pay all expenses of promoting the
sale of Fund shares and may make payments to selected broker-dealer firms or
institutions which were instrumental in the acquisition of Fund shareholders
and/or which perform services for shareholder accounts.
The following table contains relevant information concerning fees each Fund
paid under the Management Agreement for the fiscal year ended March 31, 1996.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FUND NET ASSETS* MANAGEMENT FEE WAIVER**
---- ----------- -------------- --------
Capital Appreciation $ 44,230,390 $ 453,870 $ 58,119
Emerging Growth $ 387,105,076 $ 7,780,390 $ 57,662
Growth $ 11,746,813 $ 197,192 $ 1,400
Growth and Income $ 90,740,615 $ 1,087,833 $ 7,506
Midcap Growth $ 128,258,989 $ 1,719,193 $ 12,079
Regional $ 498,178,473 $ 6,793,110 $ 48,381
Value $ 29,438,781 $ 460,082 $ 3,220
--------------------------
* As of March 31, 1997
** Resulting from IAI's reduction of its Management Fee in the
amount representing each Fund's pro rata payment of director's
fees and expenses. For Capital Appreciation Fund, $3,278 of the
total represents such director's fees; the remaining $54,835
represents IAI's voluntary waiver of its Management Fee in
excess of 1.25% of the Fund's average net assets.
</TABLE>
For the fiscal period from February 1, 1996 (commencement of operations)
through March 31, 1996, Capital Appreciation Fund paid IAI $6,898 under the
Management Agreement and IAI waived $828 pursuant to the fee waiver mentioned
above.
PRIOR AGREEMENTS
Effective March 31, 1996, the Investment Advisory Agreement and
Administrative Agreement between each Fund (excluding Capital Appreciation Fund,
which commenced operations February 1, 1996) and IAI were terminated and
replaced by the Management Agreement described above. The services provided by
IAI under each of these agreements are substantially similar in nature as those
provided under the new Management Agreement.
Under the Investment Advisory Agreements, Emerging Growth Fund, Midcap
Growth Fund, Regional Fund, and Value Fund each paid IAI a monthly advisory fee
calculated at an annual rate of .75% of the first $200 million of a Fund's
average month-end net assets, .70% for the next $300,000,000 in net assets, and
.65% for net assets above $500,000,000. Growth Fund and Growth and Income Fund
had agreed to pay IAI a monthly advisory fee calculated at an annual rate of
.75% of the first $100 million in average daily net assets, .65% for the next
$100,000,000 in net assets, and .55% for net assets above $200,000,000.
-20-
<PAGE>
Advisory fees were paid by each Fund for the fiscal years (or periods) as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Fiscal Year Ended March 31,
-------------------------------------
Fund 1995 1996
---- ---- ----
Emerging Growth Fund $ 2,049,484 $ 3,570,424
Growth Fund $ 119,142* $ 154,947**
Growth and Income Fund $ 827,288 $ 667,378
Midcap Growth Fund $ 543,698 $ 774,726
Regional Fund $ 3,866,797 $ 3,945,330
Value Fund $ 276,714 $ 316,540
-----------------------------
<FN>
* For the period from August 1, 1994 (commencement of
operations) through March 31, 1995.
** Pursuant to the expense limit discussed below, IAI reimbursed
$1,108 in advisory fees to Growth Fund.
</FN>
</TABLE>
Each Fund's monthly payment of the advisory fee was suspended or reduced
(and reimbursement made by IAI, if necessary) when it appeared that the amount
of expenses would exceed such Fund's applicable expense limit (and after the
monthly payment of the distribution fee has been reduced to zero), as set forth
below.
ALLOCATION OF EXPENSES
Prior to the termination of the Advisory and Administrative Agreements on
March 31, 1996 (with the exception of Capital Appreciation Fund) as discussed
above, each Fund paid 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. Under the prior agreements, IAI reimbursed
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
exceeded 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 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 negligence in the performance of its duties and obligations.
DURATION OF AGREEMENTS
Each Management Agreement will terminate automatically in the event of its
assignment. In addition, each Agreement is terminable at any time without
penalty by the Board of Directors of a Fund or by vote of a majority of a Fund's
outstanding voting securities on not more than 60 days' written notice to IAI,
and by IAI on 60 days' notice to a Fund. Each Agreement shall continue in effect
from year to year only so long as such continuance is specifically approved at
least annually by either the Board of Directors of 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>
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.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
In effecting portfolio transactions on behalf of a Fund, IAI seeks the most
favorable net price consistent with the best execution. Generally, 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 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.
-22-
<PAGE>
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
years (or periods) ended March 31. During these periods, 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>
<S> <C> <C> <C> <C>
Percentage of
Commissions to Brokers
Fund Amount of Commissions Providing Research
- ---- --------------------- ------------------
1997 1996 1995 1997
---- ---- ---- ----
Capital Appreciation $ 450,843 $ 12,833 N/A 42.82%
Emerging Growth $ 1,475,305 $ 213,296 $ 844,250 59.55%
Growth $ 71,142 $ 63,748 $ 93,542 21.38%
Growth and Income $ 131,490 $ 279,469 $ 297,072 21.55%
Midcap Growth $ 361,584 $ 108,321 $ 160,255 46.38%
Regional $ 1,684,845 $1,116,117 $2,639,390 57.44%
Value $ 195,811 $ 107,946 $ 245,263 41.20%
</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. As of March 31, 1997, Capital Appreciation Fund had 3,279,382 shares
outstanding.
As of May 19, 1997, no person held of record or, to the knowledge of
Capital Appreciation Fund beneficially owned more than 5% of the outstanding
shares of Capital Appreciation Fund, except as set forth in the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
==============================================================================
Name and Address Number of Percent of
of Shareholder Shares Class
==============================================================================
Charles Schwab & Co. Inc. 809,885.865 24.16%
SPL Custody A/C for Excl Benefit
of Cust
Attn: Mutual Funds Dept - Cap App Reim
101 Montgomery Street
San Francisco, CA 94104
</TABLE>
In addition, as of May 19, 1997, Capital Appreciation Fund's officers and
directors as a group owned less than 1% of Capital Appreciation Fund's
outstanding shares.
-23-
<PAGE>
EMERGING GROWTH FUND
IAI EMERGING GROWTH FUND CLOSED TO NEW INVESTORS ON FEBRUARY 1, 1996. IAI
EMERGING GROWTH FUND'S CURRENT SHAREHOLDERS MAY ADD TO AN EXISTING ACCOUNT AND
CERTAIN OTEHRS MAY MAKE AN INITIAL INVESTMENT IN THE FUND. IAI EMERGING GROWTH
FUND MAY RESUME SALES TO NEW INVESTORS AT SOME FUTURE DATE, BUT IT HAS NO
PRESENT PLANS TO DO SO.
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, 1997,
Emerging Growth Fund had 24,427,636 shares outstanding.
As of May 19, 1997, 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>
<S> <C> <C>
==============================================================================
Name and Address Number of Percent of
of Shareholder Shares Class
=============================================================================
Thomson Consumer Electronics, Inc. 2,275,568.412 10.14%
SAV Pl Salaried Employees 1-1-88
State Street Bank & Trust
Attn: D. Leydom One Enterprise Dr
P.O. Box 1992
Quincy, MA 02171
Charles Schwab & Co., Inc. 1,350,144.245 6.02%
SPL Custody A/C for Excl Bnft of Cust.
Attn: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94101
Nissan Retirement Savings Plan 1,423,427.493 6.35%
State Street Bank & Trust
Master Trust
PO Box 1992
Boston, MA 02105
</TABLE>
In addition, as of May 19, 1997, Emerging Growth Fund's officers and
directors as a group owned less than 1% of Emerging Growth Fund's outstanding
shares.
-24-
<PAGE>
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, 1997, the Fund had 1,184,290
shares outstanding.
As of May 19, 1997, 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>
<S> <C> <C>
==============================================================================
Name and Address Number of Percent of
of Shareholder Shares Class
==============================================================================
IAI Trust Company 64,885.917 5.22%
Aggressive Growth Portfolio
3500 First Bank Place
P.O. Box 357
Minneapolis, MN 55402
</TABLE>
In addition, as of May 1, 1997, 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 $.10 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, 1997, the
Fund had 6,117,295 shares outstanding.
As of May 19, 1997, 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>
<S> <C> <C>
=============================================================================
Name and Address Number of Percent of
of Shareholder Shares Class
=============================================================================
Pentair, Inc. Retirement Savings & Stock 997,735.440 16.67%
401(k) Plan
1500 County Road B2 West
St. Paul, MN 55113-3105
</TABLE>
In addition, as ofMay 19, 1997, Growth and Income Fund's officers and
directors as a group owned approximately 170,649.706 shares, representing 2.58%
of Growth and Income Fund's outstanding shares.
-25-
<PAGE>
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, 1997, Midcap
Growth Fund had 7,688,117 shares outstanding.
As of May 19, 1997, 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>
<S> <C> <C>
==============================================================================
Name and Address Number of Percent of
of Shareholder Shares Class
==============================================================================
Charles Schwab & Co., Inc. 1,504,969.640 22.02%
SPL Custody A/C for Excl Bnft of Cust
Attn: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104
Olcoba Company 418,339.809 6.12%
Attn: Trust Mutual Fun Specialist
PO Box 1000
Minneapolis, MN 55480
</TABLE>
In addition, as of May 19, 1997, 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, 1997, Regional Fund had
22,051,268 shares outstanding.
As of May 19, 1997, 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>
<S> <C> <C>
==============================================================================
Name and Address Number of Percent of
of Shareholder Shares Class
==============================================================================
Charles Schwab & Co., Inc. 1,610,311.277 7.51%
SPL Custody A/C for Excl Bnft of Cust.
Attn: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104
</TABLE>
-26-
<PAGE>
As of May 19, 1997, 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 such shares is
referred to as IAI Value Fund. As of March 31, 1997, Value Fund had 2,524,279
shares outstanding.
As of May 19, 1997, 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>
<S> <C> <C>
===============================================================================
Name and Address Number of Percent of
of Shareholder Shares Class
==============================================================================
Charles Schwab & Co., Inc. 240,793.945 10.40%
SPL Custody A?C for Excl Bnft of Cust.
Attn: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104
</TABLE>
As of May 19, 1997, Value Fund's officers and directors as a group owned
approximately 35,913.004 shares, representing approximately 1.55% 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, 1997, each Fund's net asset value and public offering price
per share were calculated as follows:
CAPITAL APPRECIATION FUND
NAV = Net Assets ($44,230,390) = $13.49
--------------------------
Shares Outstanding (3,279,382)
EMERGING GROWTH FUND
NAV = Net Assets ($387,105,076) = $15.85
--------------------------
Shares Outstanding (24,427,636)
-27-
<PAGE>
GROWTH FUND
NAV = Net Assets ($11,746,813) = $9.92
----------------------------
Shares Outstanding (1,184,290)
GROWTH AND INCOME FUND
NAV = Net Assets ($90,740,615) = $14.83
--------------------------
Shares Outstanding (6,117,295)
MIDCAP GROWTH FUND
NAV = Net Assets ($128,258,989) = $16.68
-------------------------
Shares Outstanding (7,688,117)
REGIONAL FUND
NAV = Net Assets ($498,178,473) = $22.59
---------------------------
Shares Outstanding (22,051,268)
VALUE FUND
NAV = Net Assets ($29,438,781) = $11.66
--------------------------
Shares Outstanding (2,524,279)
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 distributions of the Funds 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 a
Fund's 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 a 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 each Fund may derive from sources other than
dividends from domestic corporations, a portion of each 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.
-28-
<PAGE>
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.
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, 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, on
undistributed income that is already subject to corporate income tax. It is each
Fund's policy not to distribute capital gains until capital loss carryovers, if
any, either are utilized or expire.
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
-29-
<PAGE>
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).
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" of the corporation for breach of their
duties as officers (including the liability of directors who serve as officers
for breach of their duties as officers.) Minnesota law does not permit
elimination or limitation of the availability of equitable relief, such as
injunctive or rescissionary relief. Further, Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act of
1933 or the Securities Exchange Act of 1934, and it is uncertain whether and to
what extent the elimination of monetary liability would extend to violations of
duties imposed on directors by the Investment Company Act of 1940 and the rules
and regulations adopted under such Act.
FINANCIAL STATEMENTS
The audited financial statements, included as part of the Funds' 1997
Annual Report to shareholders, are incorporated herein by reference. Such Annual
Report may be obtained by shareholders on request from the Funds at no charge.
-30-
<PAGE>
PART C
Item 24. Financial Statements and Exhibits
- ------------------------------------------
(a) Financial Statements (1)
(b) Exhibits
(1) Articles of Incorporation (4)
(2) Bylaws (4)
(5) Management Agreement (2)
(6A) Dealer Sales Agreement (2)
(6B) Shareholder Services Agreement (2)
(8) Custodian Agreement (4)
(11) Consent of Independent Auditors
(16) Calculations of Total Returns (4)
(99) Annual Report (3)
(1) Incorporated by reference in Part B of the Registration Statement.
(2) Incorporated by reference to Post-Effective Amendment No. 49 to
Registrant's Registration Statement on Form N-1A filed on May 30, 1996.
(3) Incorporated by reference to the Annual Report filed electronically on
Form N-30D on May 29, 1997.
(4) Incorporated by reference to Post-Effective Amendment No. 50 to
Registrant's Registration Statement on Form N-1A filed on July 25, 1996.
Item 25. Persons Controlled by or Under Common Control with Registrant.
- -----------------------------------------------------------------------
Not applicable.
Item 26. Number of Holders Securities.
- --------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Number of Record Holders
Portfolio Title of Class as of April 30, 1997
- --------- -------------- --------------------
IAI Growth & Income Fund Common Stock 2,958
</TABLE>
<PAGE>
Item 27. Indemnification.
- -------------------------
Incorporated by reference to Post-Effective Amendment to Registrant's
Registration Statement on Form N-A filed on May 30, 1996.
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:
<TABLE>
<CAPTION>
<S> <C>
Name Title
---- -----
Jeffrey R. Applebaum Senior Vice President
Scott Allen Bettin Senior Vice President
Archie Campbell Black, III Senior Vice President/Treasurer
Iain D. Cheyne Chairman/Director
Stephen C. Coleman Senior Vice President
Larry Ray Hill Executive Vice President
Richard A. Holway Senior Vice President
Irving Philip Knelman President/Chief Operating Officer/Director
Kevin McKendry Director
Timothy A. Palmer Senior Vice President
Peter Phillips Director
Noel Paul Rahn Chief Executive Officer/Director
James S. Sorenson Senior Vice President
R. David Spreng Senior Vice President
Christopher John Smith Senior Vice President/Secretary
</TABLE>
All of such persons have been affiliated with IAI for more than two years
except Messrs. Cheyne, McKendry and Phillips. Prior to being appointed to the
Board in 1996, Mr. Cheyne was General Manager of Corporate Banking of Lloyds
Bank plc, and currently is Managing Director, International Banking, Lloyds TSB
Group plc, St. George's House, 6-8 Eastcheap, London, England EC3M 1LL since
1972. Prior to being appointed to the Board in 1996, Mr. McKendry was and
remains Bank Counsel to Lloyds Bank Plc, P.O. Box 2008, One Seaport Plaza, 199
Water Street, New York, NY 10038, since 1979. Prior to being appointed to the
Board in 1996, Mr. Phillips was and remains Executive Vice President and General
Manager of Lloyds Bank Plc, P.O. Box 2008, One Seaport Plaza, 199 Water Street,
New York, NY 10038, since 1993.
Certain directors and officers of IAI are directors and/or officers of the
Registrant, as described in the section of the Statement of Additional
Information entitled "Management," filed as a part of this Registration
Statement.
The address of the officers and directors of IAI is that of IAI, which is
3700 First Bank Place, P. O. Box 357, Minneapolis, Minnesota 55440.
Certain of the officers and directors of IAI also serve as officers and
directors of IAI International Ltd. Both IAI and IAI International's ultimate
corporate parent is Lloyds TSB Group plc, a publicly-held financial services
organization based in London, England. The senior officers and directors of IAI
International and their titles are as follows:
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Name Title
- ---- -----
Noel Paul Rahn Chairman of the Board of Directors
Roy C. Gillson Chief Investment Officer/Director
Iain D. Cheyne Director
Irving Philip Knelman Director
Hilary Fane Deputy Chief Investment Officer/Director
Feidhlim O'Broin Associate Director
</TABLE>
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 officers
and directors of IAI Trust Company and their titles are as follows:
<TABLE>
<CAPTION>
<S> <C>
Name Title
- ---- -----
Archie C. Black Chairman of the Board/President//Treasurer
Christopher J. Smith Director/Vice President
Susan J. Haedt Vice President/Director
Darcy Kent Supervisor of Trust Services
Steven G. Lentz Secretary/Director
</TABLE>
Item 29. Principal Underwriters
- -------- ----------------------
(a) Not applicable.
(b) Not applicable.
Item 30. Location of Accounts and Records.
- -------- ---------------------------------
The Custodian for Registrant is Norwest Bank Minnesota, N.A., Norwest
Center, Sixth & Marquette, Minneapolis, Minnesota 55479. The Custodian maintains
records of all cash transactions of Registrant. All other books and records of
Registrant, including books and records of Registrant's investment portfolios,
are maintained by IAI. IAI also acts as Registrant's transfer agent and dividend
disbursing agent, at 3700 First Bank Place, Minneapolis, Minnesota 55402.
Item 31. Management Services.
- -----------------------------
Not applicable.
Item 32. Undertakings.
- ----------------------
(a) Not applicable.
(b) Registrant undertakes to furnish each person to whom a prospectus is
delivered a copy of its latest annual report to shareholders, upon request and
without change.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Registrant certifies that it meets all of the
requirements for effectiveness of its Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(a) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Minneapolis, and State of Minnesota, on the 20th day of May, 1997.
IAI INVESTMENT FUNDS VII, INC.
(Registrant)
By /s/Noel P. Rahn
Noel P. Rahn, 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/Noel P. Rahn President (principal May 20, 1997
Noel P. Rahn executive officer) & Director
/s/Archie C. Black Treasurer (principal May 20, 1997
Archie C. Black III financial and accounting
officer)
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 May 10, 1997
William C. Joas,
Attorney-in-fact
(1) Registrant's directors executing Powers of Attorney dated August 18,
1993, and filed with the Commission on February 7, 1994.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit No. Exhibit Description Sequential Page No.
- ----------- ------------------- -------------------
11 Consent of Independent Auditors
</TABLE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
4200 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402
Telephone: 612.305.5000
Telefax 612.305.5039
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 report incorporated herein by reference and to
the references to our Firm under the headings "FINANCIAL HIGHLIGHTS" and
"COUNSEL AND AUDITORS" in Part A of the Registration Statement.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
May 29, 1997
