<PAGE>
As filed with the Securities and Exchange Commission on June 1, 1995
1933 Act Registration No. 33-1361
1940 Act Registration No. 811-4463
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. 17 X
-------
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 -------
Amendment No. 17 X
-------
IAI INVESTMENT FUNDS V, 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)
X on June 1, 1995 pursuant to paragraph (b)
-------
------- 60 days after filing pursuant to paragraph (a)(1)
------- on (date) pursuant to paragraph (a)(1)
------- 75 days after filing pursuant to paragraph (a)(2)
------- on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
____ this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Registrant has registered an indefinite number of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940, as amended. Rule 24f-2 Notices were last filed with the Commission on
March 23, 1995.
<PAGE>
IAI INVESTMENT FUNDS V, INC.
FORM N-1A
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
Item Number Caption Prospectus Caption
- ----------- ------- ------------------
<S> <C> <C>
1 Cover Page................................... Cover Page of Prospectus
2 Synopsis..................................... Fund Expense Information
3 Condensed Financial Information.............. Financial Highlights; Investment Performance
4 General Description of Registrant............ Investment 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......... Distribution of Fund Shares; 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; Check Writing Privilege;
Redemption of Shares
9 Pending Legal Proceedings.................... Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Item Number Caption Prospectus Caption
- ----------- ------- ------------------
<S> <C> <C>
10 Cover Page................................... Cover Page of Statement of Additional Information
11 Table of Contents............................ Table of Contents
12 General Information and History.............. History
13 Investment Objectives and Policies........... Investment Objectives and Policies;
Investment Restrictions
14 Management of the Fund....................... Management
15 Control Persons and Principal
Holders of Securities...................... Management
16 Investment Advisory and Other Services....... Investment Advisory and Administrative Services
17 Brokerage Allocation......................... Portfolio Transactions and Allocation of Brokerage
18 Capital Stock and Other Securities........... Capital Stock
19 Purchase, Redemption and Pricing
of Securities Being Offered................ Net Asset Value and Public Offering Price
20 Tax Status................................... Tax Status
21 Underwriters................................. Plan of Distribution
22 Calculation of Performance Data.............. Investment Performance
23 Financial Statements......................... Financial Statements
</TABLE>
<PAGE>
PROSPECTUS DATED JUNE 1, 1995
IAI MONEY MARKET FUND
IAI RESERVE FUND
3700 FIRST BANK PLACE
P.O. BOX 357
MINNEAPOLIS, MINNESOTA 55440
TELEPHONE 1-612-376-2700
1-800-945-3863
IAI Money Market Fund ("Money Market Fund") is a separate portfolio of IAI
Investment Funds VI, Inc., a registered investment company authorized to issue
its shares of common stock in more than one series. The investment objective of
the Fund is to provide shareholders with a high level of current income
consistent with the preservation of capital and liquidity.
AN INVESTMENT IN MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT MONEY MARKET FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1 PER SHARE.
IAI Reserve Fund ("Reserve Fund") is a separate portfolio of IAI Investment
Funds V, Inc., a registered investment company authorized to issue its shares of
common stock in more than one series. Reserve Fund's investment objectives are
to provide its shareholders with high levels of capital stability and liquidity
and, to the extent consistent with these primary objectives, a high level of
current income. Reserve Fund pursues its investment objectives by investing
primarily in a diversified portfolio of investment grade bonds and other debt
securities of similar quality. The dollar weighted average maturity of Reserve
Fund's portfolio will not exceed twenty-five (25) months.
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 June 1,
1995, which provides a further discussion of certain areas in this Prospectus
and other matters which may be of interest to some investors, has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference. For a free copy, call or write the Funds at the address or telephone
number shown on the inside back cover of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
FUND EXPENSE INFORMATION................................... 3
FUND DIRECTORS............................................. 4
FINANCIAL HIGHLIGHTS....................................... 5
INVESTMENT PERFORMANCE..................................... 7
INVESTMENT OBJECTIVE AND POLICIES.......................... 7
MONEY MARKET FUND.......................................... 7
RESERVE FUND............................................... 8
PORTFOLIO SECURITIES AND OTHER FUND INVESTMENT TECHNIQUES.. 9
FUND RISK FACTORS.......................................... 10
MANAGEMENT................................................. 12
COMPUTATION OF NET ASSET VALUE AND PRICING................. 14
PURCHASE OF SHARES......................................... 14
RETIREMENT PLANS........................................... 15
AUTOMATIC INVESTMENT PLAN.................................. 15
REDEMPTION OF SHARES....................................... 15
EXCHANGE PRIVILEGE......................................... 16
AUTOMATIC EXCHANGE PLAN.................................... 16
AUTHORIZED TELEPHONE TRADING............................... 16
SYSTEMATIC CASH WITHDRAWAL PLAN............................ 17
CHECK WRITING PRIVILEGE.................................... 17
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS.................... 17
DESCRIPTION OF COMMON STOCK................................ 18
COUNSEL AND AUDITORS....................................... 19
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT.... 19
ADDITIONAL INFORMATION..................................... 19
</TABLE>
2
<PAGE>
FUND EXPENSE INFORMATION
MONEY MARKET RESERVE
SHAREHOLDER TRANSACTION EXPENSES FUND FUND
- -------------------------------- ------------ -------
Sales Load Imposed on Purchases........... None None
Sales Load Imposed on Reinvested Dividends.. None None
Redemption Fees............................. None None
Exchange Fees............................... None None
MONEY MARKET RESERVE
ANNUAL FUND OPERATING EXPENSES FUND* FUND**
- -------------------------------- ------------ -------
(NET OF REIMBURSEMENTS AND WAIVERS)
Management Fee.............................. -- .50%
Rule 12b-1 Distribution Fee................. -- .06%
Other Expenses.............................. .50% .29%
---- ----
Total Fund Operating Expenses............... .50% .85%
==== ====
_______________
* as a percentage of average daily net assets
** as a percentage of average month-end net assets
EXAMPLE:
Based upon the levels of Total Fund Operating Expenses listed above, you would
pay the following expenses on a $1,000 investment, assuming a five percent
annual return and redemption at the end of each period:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Fund $5 $16 $28 $ 63
Reserve Fund $9 $27 $47 $105
</TABLE>
The purpose of the above table is to assist you in understanding the
various costs and expenses that an investor in the Funds will bear directly or
indirectly. The information in the table is based upon actual expenses incurred
by the Funds during their fiscal period ending January 31, 1995. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. Because Reserve Fund's Rule
12b-1 Distribution Fee is based on a percentage of the Fund's net assets, long-
term shareholders may pay more than the economic equivalent of the maximum
front-end sales charges permitted by Section 26 of the National Association of
Securities Dealers' Rules of Fair Practice.
With respect to Money Market Fund, Investment Advisers, Inc. ("IAI"),
the Fund's investment adviser and manager, has voluntarily agreed to reimburse
Fund expenses which exceed .50% of the Fund's average daily net assets on an
annual basis. Absent such reimbursement, the Management Fee set forth above
would be .30% and Total Fund Operating Expenses would be .88% of the Fund's
average daily net assets on an annual basis.
With respect to Reserve Fund, Total Fund Operating Expenses are
subject to a contractual expense limitation of .85% of the Fund's average month-
end net assets. Absent such expense limitation, Reserve Fund would have paid
.10% of its average month-end net assets in Rule 12b-1 distribution fees.
For additional information regarding such fees and expenses, see the
section "Management". Further information concerning fees paid by the Funds is
set forth in the Statement of Additional Information.
3
<PAGE>
FUND DIRECTORS
Madeline Betsch Richard E. Struthers
W. William Hodgson J. Peter Thompson
George R. Long Charles H. Withers
Noel P. Rahn
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report is included in each Fund's Annual Report.
The Annual Report is incorporated by reference in (and is a part of) the
Statement of Additional Information. Such Annual Report may be obtained by
shareholders on request from the Fund at no charge.
MONEY MARKET FUND
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
APRIL 1, 1994 YEAR ENDED JANUARY 5, 1993**
JANUARY 31, 1995+ MARCH 31, 1994 TO MARCH 31, 1993
------------------ -------------- ------------------
<S> <C> <C> <C>
NET ASSET VALUE:
Beginning of period $ 1.00 $ 1.00 $ 1.00
------- ------- -------
OPERATIONS:
Net investment income .03 .03 .01
------- ------- -------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.03) (.03) (.01)
------- ------- -------
NET ASSET VALUE:
End of period $ 1.00 $ 1.00 $ 1.00
======= ======= =======
Total investment return *** 3.47% 2.88% 2.85%*
Net assets at end of period (000's omitted) $33,175 $29,788 $25,877
RATIOS:****
Expenses to average daily net assets**** .50%* .45% .29%*
Net investment income to average daily net assets 4.12%* 2.73% 2.96%*
</TABLE>
- ----------------------
* Annualized
** Commencement of operations
*** Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value.
**** The Fund's adviser voluntarily waived $81,895, $147,924 and $18,494 in
expenses for the ten months ended January 31, 1995, the year ended March
31, 1994 and the three months ended March 31, 1993, respectively. If the
Fund had been charged for these expenses, the ratio of expenses to average
daily net assets would have been .88%, .88% and .69%, respectively, and
the ratio of net investment income to average daily net assets would have
been 3.74%, 2.30% and 2.56%, respectively.
+ Reflects fiscal year-end change from March 31 to January 31.
5
<PAGE>
RESERVE FUND
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------------------------------------------------
1995**** 1994 1993 1992 1991 1990 1989 1988 1987 1986*
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period $9.98 $10.10 $10.16 $10.17 $10.08 $10.03 $10.08 $10.19 $10.10 $10.00
--------------------------------------------------------------------------------------
Operations:
Net investment income .40 .39 .36 .57 .72 .80 .74 .58 .54 .06
Net realized and unrealized
gains (losses) (.08) (.13) .02 .08 .10 .03 (.05) .02 .02 .04
--------------------------------------------------------------------------------------
Total from operations .32 .26 .38 .65 .82 .83 .69 .60 .56 .10
--------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (.41) (.37) (.36) (.58) (.73) (.78) (.74) (.71) (.47) --
Net realized gains -- (.01) (.08) (.08) -- -- -- -- -- --
--------------------------------------------------------------------------------------
Total distributions (.41) (.38) (.44) (.66) (.73) (.78) (.74) (.71) (.47) --
--------------------------------------------------------------------------------------
NET ASSET VALUE:
End of period $9.89 $9.98 $10.10 $10.16 $10.17 $10.08 $10.03 $10.08 $10.19 $10.10
======================================================================================
Total investment return*** 3.21% 2.60% 3.81% 6.54% 8.49% 8.54% 6.95% 6.17% 5.55% 1.00%
Net assets at end of period
(000's omitted) $77,273 $98,813 $82,085 $108,373 $104,300 $76,163 66,098 $67,543 $35,011 $25,497
RATIOS:
Expenses to average net
assets .85%** .85% .85% .85% .85% .85% .85% .80% .80% .90%**
Net investment income to
average net assets 4.77%** 3.95% 3.49% 5.63% 7.09% 7.95% 7.20% 5.90% 5.60% 4.90%**
Portfolio turnover rate
(excluding short-term
securities) 170.0% 235.0% 538.7% 218.1% 87.0% 63.1% 64.3% 0% 30.1% 0%
</TABLE>
- -------------------
* Period from January 31, 1986 (commencement of operations) to March 31,
1986
** Annualized
*** Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value.
**** Period from April 1, 1994 to January 31, 1995. Reflects fiscal year-end
change from March 31 to January 31.
6
<PAGE>
INVESTMENT PERFORMANCE
From time to time the Funds may advertise performance data.
Performance data may include yield and effective yield and, for Reserve Fund,
may also include monthly, quarterly, yearly, cumulative total return and average
annual return. All such figures are based on historical earnings and
performance and are not intended to be indicative of future performance. It can
be expected that such figures will fluctuate substantially over time.
Yield refers to the income generated by an investment in a Fund over a
given period of time, expressed as an annual percentage rate. With respect to
Money Market Fund, the yield of the Fund refers to the income generated by an
investment in the Fund over a 7-day period (which period will be stated in the
advertisement). Reserve Fund's yield refers to the income generated by an
investment in the Fund over a 30-day period. Yields are calculated according to
standards established by law. Because this differs from other accounting
methods, the quoted yield may not equal the income actually paid to
shareholders. The effective yield is calculated similarly, but, when
annualized, the income earned by an investment in a Fund is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment. Each Fund's yield and
effective yield may reflect absorbed expenses pursuant to any undertaking that
may be in effect. See "Management" below.
Total return refers to the change in value of an investment in a Fund over
a given period, assuming reinvestment of any dividends and capital gains. A
cumulative total return reflects actual performance over a stated period of
time. An average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period. The principal value of an
investment in Reserve Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
For additional information regarding the calculation of such total return
and yield figures, see "Investment Performance" in the Statement of Additional
Information. Further information about the performance of each Fund is
contained in the Fund's Annual Report to shareholders which may be obtained
without charge from the Fund.
Comparative performance information may be used from time to time in
advertising or marketing a Fund's shares, including data on the performance of
other mutual funds, indexes or averages of other mutual funds, indexes of
related financial assets or data, and other competing investment and deposit
products available from or through other financial institutions. The
composition of these indexes, averages or products differs from that of the
Funds. The comparison of a Fund to an alternative investment should be made
with consideration of differences in features and expected performance. A Fund
may also note its mention in newspapers, magazines, or other media from time to
time. The Funds assume no responsibility for the accuracy of such data. For
additional information on the types of indexes, averages and periodicals that
might be utilized by the Funds in advertising and sales literature, see the
section "Investment Performance" in the Statement of Additional Information.
INVESTMENT OBJECTIVE AND POLICIES
MONEY MARKET FUND
Money Market Fund's investment objective is to provide shareholders with a
high level of current income consistent with the preservation of capital and
liquidity. The Fund is designed for investors who seek maximum stability of
principal. Money Market Fund's investment objective may not be changed without
shareholder approval. There can be no assurance that the Fund will achieve its
investment objective.
7
<PAGE>
RULE 2A-7
Money Market Fund is subject to the investment restrictions of Rule 2a-7 under
the Investment Company Act of 1940 in addition to its other policies and
restrictions discussed below. Rule 2a-7 requires that the Fund invest
exclusively in securities that mature within 397 days and that it maintain an
average dollar weighted maturity of not more than 90 days. Rule 2a-7 also
requires that all investments by the Fund be limited to United States dollar-
denominated investments that: (1) present "minimal credit risks," and (2) are
at the time of acquisition "Eligible Securities." Eligible Securities include,
among others, securities that are rated by two Nationally Recognized Statistical
Rating Organizations ("NRSROs") in one of the two highest categories for short-
term debt obligations, such as A-1 or A-2 by Standard & Poor's Corporation
("S&P") or P-1 or P-2 by Moody's Investors Service, Inc. ("Moody's"). It is the
responsibility of IAI to determine that Money Market Fund's investments present
only "minimal credit risks" and are Eligible Securities. The Fund's Board of
Directors has established written guidelines and procedures for IAI and oversees
IAI's determination that the Fund's portfolio securities present only "minimal
credit risks" and are Eligible Securities.
Rule 2a-7 also requires that (1) 95% of the assets of Money Market Fund be
invested in Eligible Securities that are deemed First Tier Securities, which
include, among others, securities rated by two NRSROs in the highest category
(such as A-1 and P-1), (2) the Fund may not invest more than 5% of its total
assets in Second Tier Securities (i.e., Eligible Securities that are not First
Tier Securities) and (3) the Fund's investment in Second Tier Securities of a
single issuer may not exceed the greater of 1% of the Fund's total assets or
$1,000,000.
INVESTMENT POLICIES
In pursuing its investment objective, Money Market Fund's assets will be
invested in short-term money market obligations, including securities issued, or
guaranteed by, the United States Government, its agencies or instrumentalities;
bank obligations, including time deposits, certificates of deposit, and bankers'
acceptances issued by domestic banks or their foreign branches or by foreign
banks; domestic and foreign commercial paper; repurchase agreements; U.S.
dollar-denominated obligations issued or guaranteed by one or more foreign
governments, or any of their political subdivisions, agencies or
instrumentalities, including obligations of supranational entities; and other
short-term corporate obligations, including those with floating or variable
rates of interest. The Fund may also invest in loan participation interests and
other participation interests in securities in which the Fund may invest,
subject to the Fund's quality and diversification requirements.
Money Market Fund's investments are subject to price variations resulting from
rising or falling interest rates and are subject to the ability of the issuers
of such investments to make payments at maturity. However, because the Fund
will invest only in securities that present minimal credit risks and are highly
liquid, fluctuations in principal are expected to be minimal. Money Market Fund
may also hold cash, which may not earn interest, to facilitate stabilizing its
net asset value per share and for liquidity purposes.
For additional information regarding the types of securities and investment
techniques that may be utilized by the Fund, see "Portfolio Securities and Other
Fund Investment Techniques."
RESERVE FUND
Reserve Fund's investment objectives are to provide its shareholders with
high levels of capital stability and liquidity and, to the extent consistent
with these primary objectives, a high level of current income. Such objectives
may not be changed without shareholder approval. There can be no assurance that
Reserve Fund's investment objectives will be attained.
Reserve Fund pursues its objectives primarily through investment in a
diversified portfolio of investment grade bonds and other debt securities of
similar quality. Investment grade securities are those securities rated within
the four highest grades assigned by Moody's Investors Service, Inc. ("Moody's")
or Standard and Poor's Corporation ("S&P"). The Fund will maintain a dollar
weighted average maturity of its investment portfolio of
8
<PAGE>
twenty-five (25) months or less. For purposes of such determination, securities
that provide for optional maturity dates, at the holder's option, shall be
deemed by the Fund to have been issued with the shorter optional maturity dates.
Other debt securities in which Reserve Fund may invest include securities
of, or guaranteed by, the U.S. Government, its agencies or instrumentalities,
corporate debt obligations, debt securities of foreign issuers, mortgage-related
securities, commercial paper rated at least Prime-2 by Moody's or A-2 by S&P or
otherwise issued by companies having an outstanding unsecured debt issue
currently rated A or better by Moody's or S&P, bank certificates of deposit and
other short-term instruments and repurchase agreements relating to such
securities. U.S. Government securities are issued or guaranteed by the U.S.
Treasury or by an agency or instrumentality of the U.S. Government. Not all
U.S. Government securities are backed by the full faith and credit of the United
States. Some are supported only by the credit of the agency that issued them.
For additional information regarding the types of securities and investment
techniques that may be utilized by the Fund, see "Portfolio Securities and Other
Fund Investment Techniques" below. For additional information regarding the
risks of investing in the Fund, see "Fund Risk Factors" below.
PORTFOLIO SECURITIES AND OTHER FUND INVESTMENT TECHNIQUES
U.S. GOVERNMENT SECURITIES
Each Fund may invest in securities issued or guaranteed as to principal or
interest by the United States Government, or agencies or instrumentalities of
the United States Government. The types of securities in which a Fund may
invest include direct obligations of the United States Treasury, such as United
States Treasury bonds, notes and bills. In addition, the Funds may invest in
obligations issued by instrumentalities which have been established or sponsored
by the United States Government. Some obligations issued or guaranteed by
agencies or instrumentalities are fully guaranteed by the United States
Government. Others rely on the assets and credit of the instrumentality, along
with rights to borrow from the United States Treasury and may involve more risk.
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements relating to the securities in
which it may invest. In a repurchase agreement, the Fund buys a security at one
price and simultaneously agrees to sell it back at a higher price. Delays or
losses could result if the other party to the agreement defaults or becomes
bankrupt.
SECURITIES OF FOREIGN ISSUERS
Each Fund may invest in obligations issued or guaranteed by one or more
foreign governments or any of their political subdivisions, agencies or
instrumentalities that are determined by IAI to be of comparable quality to the
other obligations in which the Fund may invest. Such securities also include
debt obligations of supranational entities. Supranational entities include
international organizations designated or supported by governmental entities to
promote economic reconstruction or development and international banking
institutions and related government agencies. Examples include the
International Bank for Reconstruction and Development (the "World Bank"), the
European Coal and Steel Community, the Asian Development Bank and the
InterAmerican Development Bank. The percentage of each Fund's assets invested
in securities issued by foreign governments will vary depending upon the
relative yields of such securities, the economic and financial markets of the
countries in which the investments are made, and the interest rate climate of
such countries. Money Market Fund will limit its investments in foreign issuers
to those which are dominated in U.S. dollars. Reserve Fund currently intends to
invest no more than 15% of the value of its total assets in non-dollar
denominated securities of foreign issuers.
9
<PAGE>
WHEN-ISSUED/DELAYED DELIVERY TRANSACTIONS
Each Fund may purchase portfolio securities on a when-issued or delayed-
delivery basis. When-issued and delayed-delivery transactions are trading
practices wherein payment for and delivery of the securities take place at a
future date. The market value of a security could change during this period,
which could affect the market value of the Fund's assets.
ZERO COUPON OBLIGATIONS
Each Fund may also invest in zero coupon obligations of the U.S. Government
or its agencies, tax exempt issuers and corporate issuers, including rights to
stripped coupon and principal payments ("strips"). Zero coupon bonds do not
make regular interest payments; rather, they are sold at a discount from face
value. Principal and accreted discount (representing interest accrued but not
paid) are paid at maturity. Strips are debt securities that are stripped of
their interest after the securities are issued, but otherwise are comparable to
zero coupon bonds. The market values of strips and zero coupon bonds generally
fluctuate in response to changes in interest rates to a greater degree than do
interest-paying securities of comparable term and quality.
ADJUSTING INVESTMENT EXPOSURE
Reserve Fund can use various techniques to increase or decrease its
exposure to changing security prices, interest rates, currency exchange rates,
commodity prices, or other factors that affect security values. These
techniques include buying and selling options and futures contracts, entering
into currency exchange contracts or swap agreements, purchasing indexed
securities, and selling securities short.
BORROWING
Reserve Fund may borrow from banks for temporary or emergency purposes or
through reverse repurchase agreements. If the Fund borrows money, its share
price may be subject to greater fluctuation until the borrowing is paid off. If
Reserve Fund makes additional investments while borrowings are outstanding, this
may be considered a form of leverage.
PORTFOLIO TURNOVER
Each Fund will dispose of securities without regard to the time they have
been held when such action appears advisable to management either as a result of
securities having reached a price objective, or by reason of developments not
foreseen at the time of the investment decision. Since investment changes
usually will be made without reference to the length of time a security has been
held, a significant number of short-term transactions may result. Accordingly,
a Fund's annual portfolio turnover rate cannot be anticipated and may be
relatively high. High turnover rates increase transaction costs, and may
increase taxable capital gains. Reserve Fund's historical portfolio turnover
rates are set forth in the section "Financial Highlights."
Further information regarding these and other techniques is contained in
the Statement of Additional Information.
FUND RISK FACTORS
DURATION
In managing Reserve Fund, IAI will adjust the duration of the investment
portfolio in response to economic and market conditions. Duration is a measure
of the expected change in value of a fixed income security (or portfolio) for a
given change in interest rates. For example, if interest rates rise by one
percent, the market value of a security (or portfolio) having a duration of two
generally will fall by approximately two percent. Duration is generally
considered a better measure of interest rate risk than is maturity. In some
situations, the
10
<PAGE>
standard duration calculation does not properly reflect the interest rate risk
of a security. In such situations, IAI will use more sophisticated analytical
techniques, such as modeling principals and interest payments based upon
historical experience or expected volatility, to arrive at an effective duration
that incorporates the additional variables into the determination of interest
rate risk. These techniques may involve estimates of future economic parameters
which may vary from actual future outcomes.
FOREIGN INVESTMENT RISK FACTORS
Each Fund may be subject to additional investment risks with respect to its
investment in securities of foreign issuers that are different in some respects
from those incurred by a fund which invests only in debt obligations of U.S.
domestic issuers. These include risks of adverse political and economic
developments (including possible governmental seizure or nationalization of
assets), the possible imposition of exchange controls or other governmental
restrictions, including less uniformity in accounting and reporting
requirements, and the possibility that there will be less information on such
securities and their issuers available to the public. Foreign securities may
also be subject to foreign taxes, which reduce yield, and may be less marketable
than comparable United States securities.
With respect to Reserve Fund which can invest in securities denominated or
quoted in currencies other than the U.S. dollar, changes in foreign currency
exchange rates may affect the value of securities in the portfolio. Foreign
currency exchange rates are determined by forces of supply and demand in the
foreign exchange markets and other economic and financial conditions affecting
the world economy. A decline in the value of any particular currency against
the U.S. dollar will cause a decline in the U.S. dollar value of Reserve Fund's
holdings of securities denominated in such currency and, therefore, will cause
an overall decline in the Fund's net asset value and net investment income and
capital gains, if any, to be distributed in U.S. dollars to shareholders by the
Fund. Delays may be encountered in settling securities transactions in certain
foreign markets, and Reserve Fund will incur costs in converting foreign
currencies into U.S. dollars. Custody charges are generally higher for foreign
securities.
RISKS OF TRANSACTIONS IN DERIVATIVES
IAI may use futures, options, swap and currency exchange agreements as well
as short sales to adjust the risk and return characteristics of Reserve Fund's
portfolio of investments. If IAI judges market conditions incorrectly or
employs a strategy that does not correlate well with the Fund's investments, use
of these techniques could result in a loss, regardless of whether the intent was
to reduce risk or increase return. Use of these techniques may increase the
volatility of Reserve Fund and may involve a small investment of cash relative
to the magnitude of risk assumed. In addition, these techniques could result in
a loss if the counterparty to the transaction is unable to perform as promised.
Moreover, a liquid secondary market for any futures or options contract may not
be available when a futures or options position is sought to be closed. Please
refer to the Statement of Additional Information which further describes these
risks.
RISKS OF LOWER-RATED DEBT SECURITIES
Bonds rated Baa or BBB (the lowest investment grade available) involve some
speculative elements, and changes in economic conditions or other circumstances
are more likely to lead to a weakened capacity to make principal and interest
payments than is the case with higher rated bonds. Although Reserve Fund may
also invest in below investment grade securities, it currently has no intention
of doing so. For a description of Moody's and S&P ratings, see Appendix A to
the Statement of Additional Information.
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. As a fundamental policy, with respect to 75% of its total assets,
each Fund may not
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invest more than 5% of its total assets in any one issuer. Each Fund may not
invest more than 25% of its assets in any one industry. Each Fund 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
Under Minnesota law, each Fund's Board of Directors is generally
responsible for the overall operation and management of the Fund. IAI serves as
the investment adviser and manager of the Funds pursuant to written advisory
agreements (the "Advisory Agreements"). IAI also furnishes investment advice to
other concerns including other investment companies, pension and profit sharing
plans, portfolios of foundations, religious, educational and charitable
institutions, trusts, municipalities and individuals having total assets in
excess of $14 billion. IAI is an affiliate of Hill Samuel Group ("Hill
Samuel"), an international merchant banking and financial services group based
in London, England. Hill Samuel, in turn, is owned by TSB Group plc, a
publicly-held financial services organization headquartered in London, England.
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 banking, unit linked life assurance, unit trust management, investment
management, credit card and finance house business. The address of IAI is that
of the Fund.
Under the Advisory Agreements, IAI provides the Funds with investment
advice, statistical and research facilities, and certain equipment and services,
including, but not limited to, office space and necessary office facilities,
equipment, and the services of required personnel. IAI has the sole authority
and responsibility to make and execute investment decisions for each Fund within
the framework of each Fund's investment policies, subject to review by the Board
of Directors. As compensation for these services, Money Market Fund has agreed
to pay IAI a monthly advisory fee at the annual rate of .30% of the Fund's
average daily net assets, and Reserve Fund has agreed to pay IAI a monthly
advisory fee at an annual rate of .50% of the Fund's average month-end net
assets.
Larry Hill, Chief Investment Officer of IAI, has general supervisory
responsibility with respect to all mutual funds managed by IAI. Mr. Hill is an
Executive Vice President and Director of IAI and has served as its Chief Fixed
Income Officer since 1984. The day-to-day management of Money Market Fund is
the responsibility of an investment committee. Tim Palmer and Livingston
Douglas have responsibility for the management of Reserve Fund. Mr. Palmer is a
Senior Vice President and has served as portfolio manager of IAI since 1990 and
as a manager of Reserve Fund since 1991. Prior to joining IAI, Mr. Palmer was
employed by the First Bank Systems Capital Markets Group. Mr. Douglas is a Vice
President of IAI and has managed Reserve Fund since joining IAI as a fixed
income portfolio manager in 1993. Prior to joining IAI, Mr. Douglas served as a
fixed income portfolio manager for Mackey-Shields Financial Corporation.
Pursuant to the terms of Administrative Agreements, IAI also provides all
required administrative, stock transfer, redemption, dividend disbursing and
accounting services to the Funds, including, for example, the maintenance of a
Fund's accounts, books and records, the daily calculation of a Fund's net asset
value, daily and periodic reports, all information necessary to complete tax
returns, questionnaires and other reports requested by a Fund, the maintenance
of stock registry records, the processing of requested account registration
changes and redemption requests, and the administration of payments of dividends
and distributions declared by a Fund. As compensation for these services, Money
Market Fund has agreed to pay IAI a monthly administrative fee at the annual
rate of .20% of the Fund's average daily net assets and Reserve Fund has agreed
to pay IAI a monthly fee at the annual rate of .20% of the Fund's average month-
end net assets. IAI may use all or a portion of this administrative fee to pay
certain institutions which have contracted with IAI to provide certain
administrative services to their customers who invest in a Fund. Such services
include, but are not limited to, shareholder assistance and communication,
transaction processing and settlement, account set-up and maintenance, tax
reporting, and accounting.
In addition to the advisory fee and the administrative fee paid to IAI,
each Fund pays all its other costs and expenses, including, for example, costs
incurred in the purchase and sale of assets, interest, taxes, charges of the
custodian of each Fund's assets, costs of reports and proxy materials sent to
Fund shareholders, fees paid for
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independent accounting and legal services, costs of printing prospectuses for
Fund shareholders and registering the Funds' shares, postage, fees to
disinterested directors, insurance premiums and costs of attending investment
conferences.
In order to increase the yield or return to investors, IAI may from time to
time waive or reduce its management and/or administrative fee or otherwise
reimburse Fund expenses. IAI has voluntarily agreed to reimburse Money Market
Fund expenses which exceed .50% of the Fund's average daily net assets on an
annual basis. For the fiscal period ended January 31, 1995, IAI waived all of
its advisory fees and such administrative fees as to result in the Fund's
payment to IAI of .12% of the Fund's average daily net assets in administrative
fees. IAI reserves the right to rescind such waiver at any time upon notice to
shareholders. With respect to Reserve Fund, the Advisory Agreement provides
that IAI shall reimburse the Reserve Fund for operating expenses (other than
interest and, in certain circumstances, taxes and extraordinary expenses) which,
for any year, exceed .85% of the Reserve Fund's average month-end net assets.
IAI shall not be liable for any loss suffered by the Funds in the absence of
willful misfeasance, bad faith or gross negligence in the performance of its
duties and obligations.
Reserve Fund has adopted a written plan of distribution (the "Plan") in
accordance with Rule 12b-1 under the 1940 Act pursuant to which it pays a fee as
described below. Under the Plan, Reserve Fund has entered into a Distribution
and Shareholders Services Agreement with IAI Securities, Inc. (the
"Underwriter"), pursuant to which Reserve Fund may pay the Underwriter a fee for
servicing Fund shareholder accounts and for distributing Fund shares (the "Rule
12b-1 Fee"). Subject to the expense limitations described above, Reserve Fund
has agreed to pay the Underwriter a Rule 12b-1 Fee at an annual rate of .10% of
the Fund's average month-end net assets (which amount will be paid to the
Underwriter regardless of amounts spent by the Underwriter in servicing fund
shareholders and distributing Reserve Fund's shares).
The Rule 12b-1 Fee may be used by Reserve Fund to compensate the
Underwriter for the provision of certain services to Fund shareholders. The
services provided may include personal services provided to shareholders, such
as answering shareholder inquiries regarding Reserve Fund and providing reports
and other information, and services related to the maintenance of shareholder
accounts. The Underwriter may use the Rule 12b-1 Fee to make payments to
qualifying broker-dealers and financial institutions that provide such services.
The Rule 12b-1 Fee may also be used by the Underwriter for the purposes of
financing any activity which is primarily intended to result in the sale of
shares of Reserve Fund. The expenses of such activities include, by way of
example but not by way of limitation, costs of prospectuses, semiannual reports,
costs of quarterly reports and monthly letters to prospective shareholders,
expenses associated with the preparation and distribution of sales literature
and advertising of any type, compensation and benefits paid to and expenses
incurred by personnel, including supervisory personnel, involved in direct mail
and advertising activities and activities relating to the direct marketing of
Fund shares to the public, and compensation to other broker-dealers for selling
Fund shares.
The Rule 12b-1 Fee payable by Reserve Fund is subject to the limitations on
Fund operating expenses set forth in the Advisory Agreements described above.
Additionally, the Underwriter, in its sole and absolute discretion, may from
time to time, out of its own assets, pay for certain additional costs associated
with shareholder servicing or distributing the Fund's shares. For the fiscal
period ended January 31, 1995, Reserve Fund paid the Underwriter annualized Rule
12b-1 Fees of .06% of its average month-end net assets. The Underwriter is an
affiliate of IAI and its offices are the same as those of the Funds.
Money Market Fund shares are sold by the Underwriter which receives no
compensation for its sale of Money Market Fund shares. 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.
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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 ("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.
For purposes of calculating net asset value per share for Money Market
Fund, securities are valued at acquisition cost as adjusted for amortization of
premium or accretion of discount ("Amortized Cost Method"), rather than at their
value based on current market factors. While this method provides certainty in
valuation, it may result in periods during which the value of any security, as
determined by amortized cost, is higher or lower than the price Money Market
Fund would receive if it sold the instrument.
Reserve Fund's investments with remaining maturities of 60 days or less may
be valued on the basis of amortized cost. This method minimizes the effect of
changes in a security's market value. Other portfolio securities and assets are
valued primarily on the basis of market quotations or, if quotations are not
readily available, by a method that the Board of Directors believes accurately
reflects fair value. Foreign securities are valued on the basis of quotations
from the primary market in which they are traded, and are translated from the
local currency into U.S. dollars using current exchange rates.
The offering price (price to buy one share) and redemption price (price to
sell one share) are a Fund's NAV.
PURCHASE OF SHARES
Each Fund offers its shares continually to the public at the net asset
value of such shares. Shares may be purchased directly from a Fund or through
certain security dealers who have responsibility to promptly transmit orders and
may charge a processing fee, provided that the Fund whose shares are being
purchased is duly registered in the state of the purchaser's residence, if
required, and the purchaser otherwise satisfies the Fund's purchase
requirements. No sales load or commission is charged investors in connection
with the purchase of Fund shares.
The minimum initial investment to establish an account with the IAI Family
of Funds is $5,000. Such initial investment may be allocated among a Fund and
other funds in the IAI Family of Funds as desired, provided that no less than
$1,000 is allocated to any one fund. The minimum initial investment for IRA
accounts is $2,000, provided that the minimum amount that may be allocated to
any one fund is $1,000. Once the account minimum has been met, subsequent
purchases can be made in a Fund for $100 or more.
Investors may satisfy the minimum investment requirement by participating
in the STAR Program. Participation in the STAR Program requires an initial
investment of $1,000 per Fund and a commitment to invest an aggregate of $5,000
within 24 months. If a STAR Program participant does not invest an aggregate of
$5,000 in the IAI Family of Funds within 24 months, IAI may, at its option,
redeem such shareholder's interest. Investors wishing to participate in the
STAR Program should contact a Fund to obtain a STAR Program application.
To purchase shares, forward the completed application and a check payable
to "IAI Funds" to a Fund. Upon receipt, your account will be credited with the
number of full and fractional shares which can be purchased at the net asset
value next determined.
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
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confidential information contained in the application and regarding the account
of an investor or potential investor in the Fund. Share certificates will only
be issued for Reserve Fund upon written request.
All correspondence relating to the purchase of shares should be directed to
the office of the Fund, P.O. Box 357, Minneapolis, Minnesota 55440 or, if using
overnight delivery, to 3700 First Bank Place, 601 Second Avenue South,
Minneapolis, Minnesota 55402. For assistance in completing the application
please contact IAI Mutual Fund Shareholder Services at 1-800-945-3863.
RETIREMENT PLANS
Shares of the Funds may be an appropriate investment medium for various
retirement plans. Persons desiring information about establishing an Individual
Retirement Account (IRA) (for employed persons and their spouses) or other
retirement plans should contact the Funds at 1-800-945-3863. All retirement
plans involve a long-term commitment of assets and are subject to various legal
requirements and restrictions. The legal and tax implications may vary
according to the circumstances of the individual investor. Therefore, you are
urged to consult with an attorney or tax advisor prior to the establishment of
such a plan.
AUTOMATIC INVESTMENT PLAN
Investors may arrange to make regular investments of $100 or more per fund
on a monthly basis, effective as of the 18th day of each month (or the next
business day), through automatic deductions from their checking or savings
accounts. Such investors may, of course, terminate their participation in the
Automatic Investment Plan at any time upon written notice to a Fund. Any
changes or instructions to terminate existing Automatic Investment Plans must be
received by the last business day of the preceding month in which the change or
termination is to take place. Investors interested in participating in the
Automatic Investment Plan should complete the Automatic Investment Plan
application and return it to the Fund.
REDEMPTION OF SHARES
Registered holders of Fund shares may at any time require a Fund to redeem
their shares upon their written request. Shareholders may redeem shares by
phone subject to a limit of $50,000 provided such shareholders have authorized
the Funds to accept telephone instructions.
Reserve Fund shareholders who redeem shares by presenting stock
certificates must endorse on the back of the certificate with the signature of
the person whose name appears on the certificate.
Redemption instructions must be signed by the person(s) in whose name the
shares are registered. If the redemption proceeds are to be paid or mailed to
any person other than the shareholder of record or if redemption proceeds are in
excess of $50,000, a Fund will require that the signature on the written
instructions be guaranteed by a participant in a signature guarantee program,
which may include certain national banks or trust companies or certain member
firms of national securities exchanges. (Notarization by a Notary Public is NOT
ACCEPTED.) If the shares are held of record in the name of a corporation,
partnership, trust or fiduciary, a Fund may require additional evidence of
authority prior to accepting a request for redemption. A Fund will not send
redemption proceeds until checks (including certified checks or cashiers checks)
received for the shares purchased have cleared.
The redemption proceeds received by the investor are based on the net asset
value next determined after redemption instructions in good order are received
by a Fund. Since the value of shares redeemed is based upon the value of a Fund
investment at the time of redemption, it may be more or less than the price
originally paid for the shares.
Payment for shares redeemed will ordinarily be made within seven days after
a request for redemption has been made. Normally a Fund will mail payment for
shares redeemed on the business day following receipt of the redemption request.
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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 certain other funds managed by IAI. These funds
have different investment objectives from the Funds. Shareholders may exchange
shares of a Fund for shares of another fund managed by IAI, provided that the
fund whose shares will be acquired is duly registered in the state of the
shareholder's residence and the shareholder otherwise satisfies the fund's
purchase requirements. Although the Funds do not currently charge a fee for use
of the Exchange Privilege, they reserves the right to do so in the future.
Because excessive trading can hurt Fund performance and shareholders, there
is a limit of four exchanges out of each Fund per calendar year per account.
Accounts under common ownership or control, including accounts with the same
taxpayer identification number, will be counted together for purposes of the
four exchange limit. Each Fund reserves the right to temporarily or permanently
terminate the Exchange Privilege of any investor who exceeds this limit. The
limit may be modified for certain retirement plan accounts, as required by the
applicable plan document and/or relevant Department of Labor regulations, and
for Automatic Exchange Plan participants. Each Fund also reserves the right to
refuse or limit exchange purchases by any investor if, in IAI's judgment, such
Fund would be unable to invest the money effectively in accordance with its
investment objectives and policies, or would otherwise potentially be adversely
affected.
Fund shareholders wishing to exercise the Exchange Privilege should notify
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 funds in the IAI Mutual Fund Family on a monthly basis. Exchanges will
take place at the closing price of the fifth day of each month (or the next
business day). Shareholders are responsible for making sure sufficient shares
exist in the Fund account from which the exchange takes place. If there are not
sufficient funds in a Fund account to meet the requested exchange amount, the
Automatic Exchange Plan will be suspended. Shareholders may not close Fund
accounts through the Automatic Exchange Plan. Investors interested in
participating in the Automatic Exchange Plan should complete the Automatic
Exchange Plan portion of their application. For assistance in completing the
application contact IAI Mutual Fund Shareholder Services at 1-800-945-3863.
AUTHORIZED TELEPHONE TRADING
Investors can transact account exchanges and redemptions via the telephone
by completing the Authorized Telephone Trading section of the IAI Mutual Fund
application and returning it to a Fund. Investors requesting telephone trading
privileges will be provided with a personal identification number ("PIN") that
must accompany any instructions by phone. Shares will be redeemed or exchanged
at the next determined net asset value. All proceeds must be made payable to
the owner(s) of record and delivered to the address of record.
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In order to confirm that telephone instructions for redemptions and
exchanges are genuine, the Fund has established reasonable procedures, including
the requirement that a personal identification number accompany telephone
instructions. If the Fund or the transfer agent fails to follow these
procedures, such Fund may be liable for losses due to unauthorized or fraudulent
instructions. None of the Funds, their transfer agent, IAI, or its principal
Underwriter will be liable for any loss, injury, damage, or expense for acting
upon telephone instructions believed to be genuine, and will otherwise not be
responsible for the authenticity of any telephone instructions, and,
accordingly, the investor bears the risk of loss resulting from telephone
instructions. All telephone redemptions and exchanges will be tape recorded.
Telephone redemptions are not permitted on IRA or Simplified Employee Pension
("SEP") accounts. Please call the Fund for a distribution form.
SYSTEMATIC CASH WITHDRAWAL PLAN
Each Fund has available a Systematic Cash Withdrawal Plan for any investor
desiring to follow a program of systematically withdrawing a fixed amount of
money from an investment in shares of a Fund. An investment of $10,000 is
required to establish the plan. Payments under the plan will be made monthly or
quarterly in amounts of $100 or more. Shares will be sold with the closing
price of the 15th of the applicable month (or the next business day). To
provide funds for payment, 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.
CHECK WRITING PRIVILEGE
Upon receipt of a completed Check Writing Application, the Funds will
provide its shareholders with redemption drafts drawn on such Fund's account.
Such checks may be payable to the order of anyone in any amount not less than
$500. It is each shareholder's responsibility to ensure that there is a
sufficient balance in such shareholder's Fund account to cover any checks drawn
on such account. The Funds will return checks which cannot be honored due to an
insufficient Fund account balance or which are written for amounts less than
$500. Fund shares held under IRAs, SEP IRAs, and Keogh Plans may not be
redeemed by check. The Funds reserve the right to modify or terminate the Check
Writing Privilege at any time upon written notice to shareholders.
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
The policy of Money Market Fund is to declare daily and to pay monthly
dividends from net investment income and to make distributions of net realized
capital gains, if any, annually. The policy of Reserve Fund is to declare and
pay dividends from net investment income monthly and make distributions of net
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 each Fund. When you open
an account, you should specify on your application how you want to receive your
distributions. The Funds offers three options: Full Reinvestment--your
dividend and capital gain distributions will be automatically reinvested in
additional shares of such Fund; Capital Gains Reinvestment--your capital gain
distributions will be automatically
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reinvested, but your income dividend distribution will be paid in cash; and
Cash--your income dividends and capital gain distributions will be paid in cash.
Distributions taken in cash can be sent via check or transferred directly to
your account at any bank, savings and loan or credit union that is a member of
the Automated Clearing House (ACH) network. UNLESS INDICATED OTHERWISE BY THE
SHAREHOLDER, SUCH FUND WILL AUTOMATICALLY REINVEST ALL SUCH DISTRIBUTIONS INTO
FULL AND FRACTIONAL SHARES AT NET ASSET VALUE.
The Funds' Directed Dividend service allows you to invest your dividends
and/or capital gain distributions directly into another IAI Mutual Fund.
Contact IAI Mutual Fund Shareholder Services at 1-800-945-3863 for details.
Each Fund intends to qualify for tax purposes as a regulated investment
company under 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 ordinary income. Money Market Fund does not
expect to make any distributions of long-term capital gains. With respect to
Reserve Fund, long-term capital gain distributions designated as capital gain
dividends are taxed as long-term capital gains, regardless of the length of time
the shareholder has held the shares. Annually, IAI will send you and the IRS a
statement showing the amount of each taxable distribution you received in the
previous year.
Upon redemption of shares of the Funds, 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.
However, since the Money Market Fund seeks to maintain a constant $1.00 share
price for both purchases and redemptions, shareholders of Money Market Fund are
not expected to realize a capital gain or loss upon redemption. Any gain or
loss on the redemption of Reserve Fund shares will be long-term if the shares
have been held for more than one year. Under the Code, the deductibility of
capital losses is subject to certain limitations.
Whenever you sell shares of the Funds, 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
the sale resulted in a capital gain and, if so, the amount of tax to be paid.
Be sure to keep your regular account statements; the information they contain
will be essential in calculating the amount of your capital gains.
The foregoing relates to federal income taxation as in effect as of the
date of this Prospectus. For a more detailed discussion of the federal income
tax consequences of investing in shares of the Fund, see "Tax Status" in the
Statement of Additional Information.
DESCRIPTION OF COMMON STOCK
Money Market Fund is a separate portfolio represented by a separate class
of common stock of IAI Investment Funds VI, Inc., a Minnesota corporation.
Reserve Fund is a separate portfolio represented by a separate class of common
stock of IAI Investment Funds V, Inc., also a Minnesota corporation. 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
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some issues, such as the election of directors, all shares of each corporation
vote together as one series. On an issue affecting only a particular series,
such as voting on the Advisory Agreement, only the approval of a particular
series is required to make the agreement effective with respect to such
series.
Annual or periodically scheduled regular meetings of shareholders will not
be held except as required by law. Minnesota corporation law does not require
an annual meeting; instead, it provides for the Board of Directors to convene
shareholder meetings when it deems appropriate. In addition, if a regular
meeting of shareholders has not been held during the immediately preceding
fifteen months, shareholders holding three percent or more of the voting shares
of the Fund may demand a regular meeting of shareholders of the Fund by written
notice of demand given to the chief executive officer or the chief financial
officer of the Fund. Within thirty days after receipt of the demand by one of
those officers, the Board of Directors shall cause a regular meeting of
shareholders to be called and held no later than ninety days after receipt of
the demand, all at the expense of such Fund. An annual meeting will be held on
the removal of a director or directors of a Fund if requested in writing by
holders of not less than 10% of the outstanding shares of a Fund.
The shares of Reserve Fund are transferable by endorsement of the
certificate if held by the shareholders, or if the certificate is held by
Reserve Fund, by delivery to such Fund of transfer instructions. Transfer
instructions on certificates should be delivered to the office of the Fund. The
Fund is not bound to recognize any transfer until it is recorded on the stock
transfer books maintainted by the Fund.
COUNSEL AND AUDITORS
The firm of Dorsey & Whitney P.L.L.P., 220 South Sixth Street, Minneapolis,
Minnesota 55402, provides legal counsel for the Funds. KPMG Peat Marwick LLP,
4200 Norwest Center, Minneapolis, Minnesota 55402, serves as the independent
auditors for the Funds.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
The Custodian for each Fund is Norwest Bank Minnesota, N.A., Norwest
Center, Sixth and Marquette, Minneapolis, Minnesota 55479. With respect to
Reserve Fund, Norwest employees foreign subcustodians and depositories, which
were approved by the Fund's Board of Directors in accordance with the rules and
regulations of the Securities and Exchange Commission, for the purpose of
providing custodial services for such Fund's assets held outside the United
States. The directors of the Reserve Fund monitor the activities of the
Custodian and subcustodians, as well as the economic conditions and applicable
laws of the foreign countries in which the Fund's assets are held. For a
listing of the subcustodians and depositories currently employed by the Fund,
see the Statement of Additional Information. IAI acts as each Fund's transfer
agent, dividend disbursing agent and IRA Custodian, at P.O. Box 357,
Minneapolis, Minnesota 55440.
ADDITIONAL INFORMATION
Each Fund sends to its shareholders a six-month unaudited and an annual
audited financial report, each of which includes a list of investment securities
held.
In the opinion of the staff of the Securities and Exchange Commission, the
use of this combined prospectus may possibly subject all Funds to a certain
amount of liability for any losses arising out of any statement or omission in
this Prospectus regarding a particular Fund. In the opinion of the Funds'
management, however, the risk of such liability is not materially increased by
use of a combined prospectus.
Shareholder inquiries should be directed to the Funds at the telephone
number or mailing address listed on the inside cover page of this
Prospectus.
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IAI MONEY MARKET FUND
IAI RESERVE FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED JUNE 1, 1995
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. THIS
STATEMENT OF ADDITIONAL INFORMATION RELATES TO A PROSPECTUS DATED JUNE 1, 1995,
AND SHOULD BE READ IN CONJUNCTION THEREWITH. A COPY OF THE PROSPECTUS MAY BE
OBTAINED FROM THE FUNDS AT 3700 FIRST BANK PLACE, P.O. BOX 357, MINNEAPOLIS,
MINNESOTA 55440 (TELEPHONE: 1-612-376-2700 OR 1-800-945-3863).
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
INVESTMENT OBJECTIVE AND POLICIES.............................................3
Repurchase Agreements.........................................................3
Extendible Notes..............................................................3
Lending Portfolio Securities..................................................4
Delayed-Delivery Transactions.................................................4
Maturity Restrictions.........................................................4
Loans and Other Direct Debt Instruments.......................................5
Reverse Repurchase Agreements.................................................6
Securities of Foreign Issuers.................................................6
Participation Interests.......................................................7
Illiquid Securities...........................................................7
Variable or Floating Rate Instruments.........................................7
Mortgage-Backed Securities....................................................7
Asset-Backed Securities.......................................................8
Zero Coupon Bonds.............................................................8
Lower-Rated Debt Securities...................................................8
Indexed Securities............................................................9
Foreign Currency Transactions.................................................9
Limitations on Futures and Options Transactions..............................10
Futures Contracts............................................................11
Futures Margin Payments......................................................11
Purchasing Put and Call Options..............................................11
Writing Put and Call Options.................................................12
Combined Positions...........................................................12
Correlation of Price Changes.................................................12
Liquidity of Options and Futures Contracts...................................13
OTC Options..................................................................13
Options and Futures Relating to Foreign Currencies...........................13
Asset Coverage for Futures and Options Positions.............................14
INVESTMENT RESTRICTIONS......................................................14
Portfolio Turnover...........................................................15
INVESTMENT PERFORMANCE.......................................................16
MANAGEMENT...................................................................18
History......................................................................21
Investment Advisory Agreement................................................22
Administrative Agreement.....................................................22
Allocation of Expenses.......................................................23
Duration of Agreements.......................................................23
PLAN OF DISTRIBUTION.........................................................23
CUSTODIAL SERVICE............................................................25
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE...........................28
CAPITAL STOCK................................................................28
NET ASSET VALUE AND PUBLIC OFFERING PRICE....................................29
TAX STATUS...................................................................31
LIMITATION OF DIRECTOR LIABILITY.............................................32
FINANCIAL STATEMENTS.........................................................32
RATINGS OF DEBT SECURITIES..................................................A-1
</TABLE>
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of IAI Money Market Fund ("Money
Market Fund") and IAI Reserve Fund ("Reserve Fund"), are summarized on the front
page of the Prospectus and in the text of the Prospectus under "Investment
Objective and Policies." Investors should understand that all investments have
a risk factor. There can be no guarantee against loss resulting from an
investment in the Funds, and there can be no assurance that a Fund's investment
policies will be successful, or that its investment objective will be attained.
Certain of the investment practices of the Funds are further explained
below.
REPURCHASE AGREEMENTS
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, the Fund may incur a loss upon
disposition of such securities. In the event that bankruptcy proceedings are
commenced with respect to the seller of the agreement, 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.
EXTENDIBLE NOTES
Each Fund may invest in extendible notes in accordance with its
investment objectives and policies. With respect to Reserve Fund, the Fund is
permitted to invest up to 25% of the value of its total assets in extendible
notes. An extendible note is a debt arrangement under which the holder, at its
option, may require the issuer to repurchase the note for a predetermined fixed
price at one or more times prior to the ultimate maturity date of the note.
Typically, an extendible note is issued at an interest rate that can be adjusted
at fixed times throughout its term. At the same times as the interest rate is
adjusted by the issuer, the holder of the note is typically given the option to
"put" the note back to the issuer at a predetermined price (e.g., at 100% of the
outstanding principal amount plus unpaid accrued interest) if the extended
interest rate is undesirable to the holder. This option to put the note back to
the issuer (i.e., to require the issuer to repurchase the note) provides the
holder with an optional maturity date that is shorter than the actual maturity
date of the note.
Extendible notes are typically issued with maturity dates in excess of
397 days from the date of issuance. However, with respect to investments in
extendible notes by Money Market Fund, if such extendible notes provide for an
optional maturity date of 397 days or less, then such notes are deemed by the
Fund to have been issued for the shorter optional maturity date. Accordingly,
investment in such extendible notes would not be in contravention of the
fundamental investment policy of Money Market Fund not to invest in securities
having a maturity date in excess of 397 days from the date of acquisition.
Similarly, with respect to the investment in extendible notes by Reserve Fund,
if such extendible notes provide for an optional maturity date, then such notes
are deemed by Reserve Fund to have been issued for the shorter optional maturity
date, for purposes of complying with the Fund's policy on maturity of portfolio
instruments. Investment in extendible notes is not expected to have a material
impact on the effective portfolio maturity of Reserve Fund.
An investment in an extendible note is liquid, and the note may be
resold to another investor prior to its optional maturity date at its market
value. The market value of an extendible note with a given optional maturity
date is determined and fluctuates in a similar manner as the market value of a
fixed maturity note with a maturity equivalent to the optional maturity of the
extendible note. Compared to fixed term notes of the same issuer,
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however, extendible notes with equivalent optional maturities generally yield
higher returns without a material increase in risk to a Fund.
The creditworthiness of the issuers of extendible notes is monitored
and rated by independent rating organizations and investments by a Fund in such
extendible notes are restricted to notes with the same investment ratings as are
acceptable with respect to other forms of investment. The creditworthiness of
such issuers is also monitored by IAI.
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.
DELAYED-DELIVERY TRANSACTIONS
Each Fund may buy and sell securities on a delayed-delivery or when-
issued basis. These transactions involve a commitment by a Fund to purchase or
sell specific securities at a predetermined price or yield, with payment and
delivery taking place after the customary settlement period for that type of
security (and more than seven days in the future). Typically, no interest
accrues to the purchaser until the security is delivered. Each Fund may receive
fees for entering into delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, each Fund
assumes the rights and risks of ownership, including the risk of price and yield
fluctuations. Because a Fund is not required to pay for securities until the
delivery date, these risks are in addition to the risks associated with such
Fund's other investments. If a Fund remains substantially fully invested at a
time when delayed delivery purchases are outstanding, the delayed-delivery
purchases may result in a form of leverage. When delayed-delivery purchases are
outstanding, a Fund will set aside appropriate liquid assets in a segregated
custodial account to cover its purchase obligations. When a Fund has sold a
security on a delayed-delivery basis, such Fund does not participate in further
gains or losses with respect to the security. If the other party to a delayed-
delivery transaction fails to deliver or pay for the securities, a Fund could
miss a favorable price or yield opportunity, or could suffer a loss.
Each Fund may renegotiate delayed-delivery transactions after they are
entered into, and may sell underlying securities before they are delivered,
which may result in capital gains or losses.
MATURITY RESTRICTIONS
Money Market Fund is subject to certain maturity restrictions pursuant
to Rule 2a-7 under the Investment Company Act of 1940. Accordingly, Money Market
Fund will maintain a dollar weighted average portfolio maturity of 90 days or
less, and will purchase securities with a remaining maturity of no more than 397
calendar days. For purposes of calculating the maturity of portfolio
instruments, Money Market Fund will follow the requirements of Rule 2a-7.
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Rule 2a-7 provides that the maturity of portfolio instruments shall be
deemed to be the period remaining (calculated from the trade date or such other
date on which Money Market Fund's interest in the instrument is subject to
market action) until the date noted on the face of the instrument as the date on
which the principal amount must be paid, or in the case of an instrument called
for redemption, the date on which the redemption payment must be made, except
that:
1. An instrument that is issued or guaranteed by the United States
Government or any agency thereof which has a variable rate of interest
readjusted no less frequently than every 762 days shall be deemed to have a
maturity equal to the period remaining until the next readjustment of the
interest rate;
2. A variable rate instrument, as defined in Rule 2a-7, the principal
amount of which is scheduled on the face of the instrument to be paid in 397
calendar days or less shall be deemed to have a maturity equal to the period
remaining until the next readjustment of the interest rate;
3. A variable rate instrument, as defined in Rule 2a-7, that is
subject to a demand feature shall be deemed to have a maturity equal to the
longer of the period remaining until the next readjustment of the interest rate
or the period remaining until the principal amount can be recovered through
demand;
4. A floating rate instrument, as defined in Rule 2a-7, that is
subject to a demand feature shall be deemed to have a maturity equal to the
period remaining until the principal amount can be recovered through
demand;
5. A repurchase agreement shall be deemed to have a maturity equal to
the period remaining until the date on which the loaned securities are scheduled
to be returned, or where no date is specified, but the agreement is subject to a
demand, the notice period applicable to a demand for the repurchase of the
securities; and
6. A portfolio lending agreement shall be treated as having a
maturity equal to the period remaining until the date on which the loaned
securities are scheduled to be returned, or where no date is specified, but the
agreement is subject to demand, the notice period applicable to a demand for the
return of the loaned securities.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS
Each Fund may invest in other direct debt instruments. Direct debt
instruments are interests in amounts owed by a corporate, governmental, or other
borrower to lenders or lending syndicates (loans and loan participations), to
suppliers of goods or services (trade claims or other receivable), or to other
parties. Direct debt instruments are subject to a Fund's policies regarding the
quality of debt securities.
Purchasers of loans and other forms of direct indebtedness depend
primarily upon the creditworthiness of the borrower for payment of principal and
interest. Direct debt instruments may not be rated by any nationally recognized
rating service. If a Fund does not receive scheduled interest or principal
payments on such indebtedness, a Fund's share price and yield could be adversely
affected. Loans that are fully secured offer a Fund more protection than an
unsecured loan in the event of non-payment of scheduled interest or principal.
However, there is no assurance that the liquidation of collateral from a secured
loan would satisfy the borrower's obligation, or that the collateral can be
liquidated. Indebtedness of borrowers whose creditworthiness is poor involves
substantially greater risks, and may be highly speculative. Borrowers that are
in bankruptcy or restructuring may never pay off their indebtedness, or may pay
only a small fraction of the amount owed. Direct indebtedness of developing
countries will also involve a risk that the governmental entities responsible
for the repayment of the debt may be unable, or unwilling, to pay interest and
repay principal when due.
Investments in loans through direct assignment of a financial
institution's interests with respect to a loan may involve additional risks to a
Fund. For example, if a loan is foreclosed, a Fund could become part owner of
any collateral, and would bear the costs and liabilities associated with owning
and disposing of the collateral. In
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addition, it is conceivable that under emerging legal theories of lender
liability, a Fund could be held liable as a co-lender. Direct debt instruments
may also involve a risk of insolvency of the lending bank or other
intermediaries. Direct debt instruments that are not in the form of securities
may offer less legal protection to the Fund in the event of fraud or
misrepresentation. In the absence of definitive regulatory guidance, a Fund
relies on IAI's research in an attempt to avoid situations where fraud or
misrepresentation could adversely affect such Fund.
A loan is often administered by a bank or other financial institution
that acts as agent for all holders. The agent administers the terms of the
loan, as specified in the loan agreement. Unless, under the terms of the loan
or other indebtedness, a Fund has direct recourse against the borrower, it may
have to rely on the agent to apply appropriate credit remedies against a
borrower. If assets held by the agent for the benefit of a Fund were determined
to be subject to the claims of the agent's general creditors, such Fund might
incur certain costs and delays in rendering payment on the loan or loan
participation and could suffer a loss of principal or interest.
Money Market and Reserve Funds limit the amount of the assets that
they will invest in any one issuer or in issuers within the same industry. For
purposes of these limitations, the Fund generally will treat the borrower as the
"issuer" of indebtedness held by such Fund. In the case of loan participations
where a bank or other lending institution serves as financial intermediary
between a Fund and the borrower, if the participation does not shift to such
Fund the direct debtor creditor relationship with the borrower, SEC
interpretations require such Fund, in appropriate circumstances, to treat both
the lending bank or other lending institution and the borrower as "issuers" for
the purpose of determining whether such Fund has invested more than 5% of its
total assets in a single issuer. Treating a financial intermediary as an issuer
of indebtedness may restrict a Fund's ability to invest in indebtedness related
to a single financial intermediary, or a group of intermediaries engaged in the
same industry, even if the underlying borrowers represent many different
companies and industries.
REVERSE REPURCHASE AGREEMENTS
Reserve Fund may invest in reverse repurchase agreements. In a
reverse repurchase agreement, a fund sells a portfolio instrument to another
party, such as a bank or broker-dealer, in return for cash and agrees to
repurchase the instrument at a particular price and time. While a reverse
repurchase agreement is outstanding, Reserve Fund will maintain appropriate
liquid assets in a segregated custodial account to cover its obligation under
the agreement. Reserve Fund will enter into reverse repurchase agreements only
with parties whose creditworthiness has been found satisfactory by Investment
Advisers, Inc. ("IAI"), Reserve Fund's investment adviser and manager. As a
result, such transactions may increase fluctuations in the market value of
Reserve Fund's assets and may be viewed as a form of leverage.
SECURITIES OF FOREIGN ISSUERS
Each Fund may invest in securities of foreign issuers in accordance
with its investment objectives and policies. Investing in foreign securities
may result in greater risk than that incurred by investing in domestic
securities. There is generally less publicly available information about
foreign issuers comparable to reports and ratings that are published about
companies in the United States. Also, foreign issuers are not subject to
uniform accounting and auditing and financial reporting standards, practices and
requirements comparable to those applicable to United States companies.
Furthermore, volume and liquidity in most foreign bond markets is less than in
the United States and at times volatility of price can be greater than in the
United States. There is generally less government supervision and regulation of
foreign bond markets, brokers and companies than in the United States.
With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of
Reserve Fund, political or social instability, or diplomatic developments which
could affect United States investments in those countries. Moreover, individual
foreign economies may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
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Reserve Fund is not aware at this time of the existence of any
investment or exchange control regulations which might substantially impair the
operations of Reserve 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 interest payable on certain of Reserve Fund's foreign portfolio
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to the Fund's shareholders. The
expense ratio of Reserve Fund should not be materially affected by the Fund's
investment in foreign securities.
PARTICIPATION INTERESTS
Each Fund may purchase from financial institutions participation
interests in loans and other securities in which the Fund may invest. A
participation interest gives the Fund an undivided interest in the security in
the proportion that the Fund's participation interest bears to the total
principal amount of the security. These instruments may have fixed, floating or
variable rates of interest, with remaining maturities of one year or less. For
certain participation interests, each Fund will have the right to demand
payment, on not more than seven days' notice, for all or any part of the Fund's
participation interest in the security, plus accrued interest. As to these
instruments, the Fund intends to exercise its right to demand payment only upon
a default under the terms of the security as needed to provide liquidity to meet
redemptions or to maintain or improve the quality of its investment
portfolio.
ILLIQUID SECURITIES
Reserve Fund may invest up to 15% of its total assets in securities
that are considered illiquid because of the absence of a readily available
market or due to legal or contractual restrictions. Money Market Fund may
invest up to 10% of its total assets in such securities. However, certain
restricted securities that are not registered for sale to the general public but
that can be resold to institutional investors may be considered liquid pursuant
to guidelines adopted by the Board of Directors. It is not possible to predict
with assurance the maintenance of an institutional trading market for such
securities and the liquidity of a Fund's investments could be impaired if
trading declines.
VARIABLE OR FLOATING RATE INSTRUMENTS
Each Fund may invest in variable or floating rate instruments. Such
instruments (including notes purchased directly from issuers) bear variable or
floating interest rates and carry rights that permit holders to demand payment
of the unpaid principal balance plus accrued interest from the issuers or
certain financial intermediaries. Floating rate securities have interest rates
that change whenever there is a change in a designated base rate while variable
rate instruments provide for a specified periodic adjustment in the interest
rate. These formulas are designed to result in a market value for the instrument
that approximates its par value.
MORTGAGE-BACKED SECURITIES
Reserve Fund may purchase mortgage-backed securities issued by
government and non-government entities such as banks, mortgage lenders, or other
financial institutions. A mortgage-backed security may be an obligation of the
issuer backed by a mortgage or pool of mortgages or a direct interest in an
underlying pool of mortgages. Some mortgage-backed securities, such as
collateralized mortgage obligations or CMOs, make payments of both principal and
interest at a variety of intervals; others make semiannual interest payments at
a predetermined rate and repay principal at maturity (like a typical bond).
Mortgage-backed securities are based on different types of mortgages including
those on commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and Reserve
Fund may invest in them if IAI determines they are consistent with Reserve
Fund's investment objective and policies.
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The value of mortgage-backed securities may change due to shifts in
the market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Non-government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these securities
and may lower their total returns.
ASSET-BACKED SECURITIES
Each Fund may invest in asset-backed securities. Asset-backed
securities represent interests in pools of consumer loans (generally unrelated
to mortgage loans) and most often are structured as pass-through securities.
Interest and principal payments alternately depend upon payment of the
underlying loans by individuals, although the securities may be supported by
letters of credit or other credit enhancements. The value of asset-backed
securities may also depend on the creditworthiness of the servicing agent for
the loan pool, the originator of the loans, or the financial institution
providing the credit enhancement.
ZERO COUPON BONDS
Each Fund may invest in zero coupon bonds. Zero coupon bonds do not
make interest payments; instead, they are sold at a deep discount from their
face value and are redeemed at face value when they mature. Because zero coupon
bonds do not pay current income, their prices can be very volatile when interest
rates change. In calculating its dividends, Reserve Fund takes into account as
income a portion of the difference between a zero coupon bond's purchase price
and its face value.
A broker-dealer creates a derivative zero by separating the interest
and principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of
Registered Interest and Principal of Securities) by separating the interest and
principal components of an outstanding U.S. Treasury bond and selling them as
individual securities. Bonds issued by the Resolution Funding Corporation
(REFCORP) and the Financing Corporation (FICO) can also be separated in this
fashion. Original issue zeroes are zero coupon securities originally issued by
the U.S. government, a government agency, or a corporation in zero coupon form.
LOWER-RATED DEBT SECURITIES
Bonds rated Baa or BBB (the lowest investment grade available) involve
some speculative elements, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher rated bonds. Although
Reserve Fund may also invest in below investment grade securities, it currently
has no intention of doing so. For a description of Moody's and S&P ratings, see
Appendix A.
While the market for high yield corporate debt securities has been in
existence for many years and has weathered previous economic downturns, the
1980s brought a dramatic increase in the use of such securities to fund highly
leveraged corporate acquisitions and restructuring. Past experience may not
provide an accurate indication of the future performance of the high-yield bond
market, especially during periods of economic recession. In fact, from 1989 to
1991, the percentage of lower-rated debt securities that defaulted rose
significantly above prior levels.
The market for lower-rated securities may be thinner and less active
than that for higher-rated debt securities, which can adversely affect the
prices at which the former are sold. If market quotations are not available,
lower-rated debt securities will be valued in accordance with procedures
established by the Board of Directors, including the use of outside pricing
services. Judgment plays a greater role in valuing high-yield
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corporate debt securities than is the case for securities for which more
external sources for quotations and last-sale information are available. Adverse
publicity and changing investor perceptions may affect the ability of outside
pricing services to value lower-rated debt securities, and Reserve Fund's
ability to dispose of these securities.
Since the risk of default is higher for lower-rated debt securities,
IAI's research and credit analysis are an especially important part of managing
securities of this type held by Reserve Fund. In considering investments for
the fund, IAI will attempt to identify those issuers of high-yielding debt
securities whose financial condition is adequate to meet future obligations, has
improved, or is expected to improve in the future. IAI's analysis focuses on
relative values based on such factors as interest or dividend coverage, asset
coverage, earnings prospects, and the experience and managerial strength of the
issuer.
Reserve Fund may choose, at its expense or in conjunction with others,
to pursue litigation or otherwise to exercise its rights as a security holder to
seek to protect the interest of security holders if it determines this to be in
the best interest of Reserve Fund's shareholders.
INDEXED SECURITIES
Reserve Fund may purchase securities whose prices are indexed to the
prices of other securities, securities indexes, currencies, precious metals or
other commodities, or other financial indicators. Indexed securities typically,
but not always, are debt securities or deposits whose value at maturity or
coupon rate is determined by reference to a specific instrument or statistic.
Gold-indexed securities, for example, typically provide for a maturity value
that depends on the price of gold, resulting in a security whose price tends to
rise and fall together with gold prices. Currency-indexed securities typically
are short-term to intermediate-term debt securities whose maturity values or
interest rates are determined by reference to the values of one or more
specified foreign currencies, and may offer higher yields than U.S. dollar-
denominated securities of equivalent issuers. Currency-indexed securities may be
positively or negatively indexed; that is, their maturity value may increase
when the specified currency value increases, resulting in a security that
performs similarly to a foreign-denominated instrument, or their maturity value
may decline when foreign currencies increase, resulting in a security whose
price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies. IAI will use its judgment in determining whether indexed
securities should be treated as short-term instruments, bonds, stocks, or as a
separate asset class for purposes of Reserve Fund's investment policies,
depending on the individual characteristics of the securities. Indexed
securities may be more volatile than the underlying instruments.
FOREIGN CURRENCY TRANSACTIONS
Reserve 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.
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Reserve Fund may use currency forward contracts to manage currency
risks and to facilitate transactions in foreign securities. The following
discussion summarizes the principal currency management strategies involving
forward contracts that could be used by Reserve Fund.
In connection with purchases and sales of securities denominated in
foreign currencies, Reserve 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 Reserve Fund's foreign investments. Reserve 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.
Reserve Fund may also use forward contracts to hedge against a decline
in the value of existing investments denominated in foreign currency. For
example, if Reserve 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. Reserve 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, Reserve Fund will
segregate assets to cover currency forward contracts, if any, whose purpose is
essentially speculative. Reserve 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 Reserve Fund's investment exposure to changes in currency
exchange rates, and could result in losses to Reserve Fund if currencies do not
perform as IAI anticipates. For example, if a currency's value rose at a time
when IAI had hedged Reserve Fund by selling that currency in exchange for
dollars, Reserve Fund would be unable to participate in the currency's
appreciation. If IAI hedges currency exposure through proxy hedges, the Fund
could realize currency losses from the hedge and the security position at the
same time if the two currencies do not move in tandem. Similarly, if IAI
increases Reserve Fund's exposure to a foreign currency, and that currency's
value declines, Reserve Fund will realize a loss. There is no assurance that
IAI's use of forward currency contracts will be advantageous to Reserve Fund or
that it will hedge at an appropriate time. The policies described in this
section are non-fundamental policies of Reserve Fund.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS
Reserve 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. Reserve Fund intends to
comply with Section 4.5 of the regulations under the Commodity Exchange Act,
which limits the extent to which Reserve Fund can commit assets to initial
margin deposits and option premiums.
In addition, Reserve Fund will not: (a) sell futures contracts,
purchase put options, or write call options if, as a result, more than 25% of
Reserve Fund's total assets would be hedged with futures and options under
normal conditions; (b) purchase futures contracts or write put options if, as a
result, Reserve Fund's total
10
<PAGE>
obligations upon settlement or exercise of purchased futures contracts and
written put options would exceed 25% of its total assets; or (c) purchase call
options if, as a result, the current value of option premiums for call options
purchased by Reserve Fund would exceed 5% of Reserve Fund's total assets. These
limitations do not apply to options attached to or acquired or traded together
with their underlying securities, and do not apply to securities that
incorporate features similar to options.
The above limitations on Reserve Fund's investments in futures
contracts and options, and Reserve Fund's policies regarding futures contracts
and options discussed elsewhere in this Statement of Additional Information may
be changed as regulatory agencies permit.
FUTURES CONTRACTS
When Reserve Fund purchases a futures contract, it agrees to purchase
a specified underlying instrument at a specified future date. When Reserve 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 Reserve 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 Reserve Fund's exposure to positive and
negative price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When Reserve Fund sells a futures
contract, by contrast, the value of its futures position will tend to move in a
direction contrary to the market. Selling futures contracts, therefore, will
tend to offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
FUTURES MARGIN PAYMENTS
The purchaser or seller of a futures contract is not required to
deliver or pay for the underlying instrument unless the contract is held until
the delivery date. However, both the purchaser and seller are required to
deposit "initial margin" with a futures broker, known as a futures commission
merchant (FCM), when the contract is entered into. Initial margin deposits are
typically equal to a percentage of the contract's value. If the value of either
party's position declines, that party will be required to make additional
"variation margin" payments to settle the change in value on a daily basis. The
party that has a gain may be entitled to receive all or a portion of this
amount. Initial and variation margin payments do not constitute purchasing
securities on margin for purposes of the Fund's investment limitations. In the
event of the bankruptcy of an FCM that holds margin on behalf of Reserve Fund,
the Fund may be entitled to return of margin owed to it only in proportion to
the amount received by the FMC's other customers, potentially resulting in
losses to Reserve Fund.
PURCHASING PUT AND CALL OPTIONS
By purchasing a put option, Reserve 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, Reserve 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. Reserve 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, Reserve Fund will lose the entire premium it
paid. If Reserve Fund exercises the option, it completes the sale of the
underlying instrument at the strike price. Reserve 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).
11
<PAGE>
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost of
the option.
WRITING PUT AND CALL OPTIONS
When Reserve 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, Reserve 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 Reserve Fund would be
required to make margin payments to an FCM as described above for futures
contracts. Reserve 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 Reserve
Fund has written, however, Reserve 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 Reserve 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
Reserve 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, Reserve 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 Reserve Fund's current or anticipated investments exactly.
Reserve 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 Reserve Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match Reserve 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
12
<PAGE>
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. Reserve 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 Reserve Fund's options or futures positions are
poorly correlated with its other investments, the positions may fail to produce
anticipated gains or result in losses that are not offset by gains in other
investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS
There is no assurance a liquid secondary market will exist for any
particular options or futures contract at any particular time. Options may have
relatively low trading volume and liquidity if their strike prices are not close
to the underlying instrument's current price. In addition, exchanges may
establish daily price fluctuation limits for options and futures contracts, and
may halt trading if a contract's price moves upward or downward more than the
limit in a given day. On volatile trading days when the price fluctuation limit
is reached or a trading halt is imposed, it may be impossible for Reserve 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 Reserve Fund to continue to hold a position until
delivery or expiration regardless of changes in its value. As a result, Reserve
Fund's access to other assets held to cover its options or futures positions
could also be impaired.
OTC OPTIONS
Reserve Fund may engage in OTC options transactions. Unlike exchange-
traded options, which are standardized with respect to the underlying
instrument, expiration date, contract size, and strike price, the terms of over-
the-counter options (options not traded on exchanges) generally are established
through negotiation with the other party to the option contract. While this
type of arrangement allows Reserve 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
Reserve Fund may engage in options and futures transactions relating
to foreign currencies. Currency futures contracts are similar to forward
currency exchange contracts, except that they are traded on exchanges (and have
margin requirements) and are standardized as to contract size and delivery date.
Most currency futures contracts call for payment or delivery in U.S. dollars.
The underlying instrument of a currency option may be a foreign currency, which
generally is purchased or delivered in exchange for U.S. dollars, or may be a
futures contract. The purchaser of a currency call obtains the right to
purchase the underlying currency, and the purchaser of a currency put obtains
the right to sell the underlying currency.
The uses and risks of currency options and futures are similar to
options and futures relating to securities or indexes, as discussed above.
Reserve Fund may purchase and sell currency futures and may purchase and write
currency options to increase or decrease its exposure to different foreign
currencies. Reserve 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 Reserve Fund's
investments. A currency hedge, for example, should protect a yen-denominated
security from a decline in the yen, but will not protect Reserve Fund against a
price decline resulting from deterioration in the issuer's creditworthiness.
Because the value of Reserve 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 Reserve Fund's
investments exactly over time.
13
<PAGE>
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS
Reserve 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 Reserve Fund's assets could impede portfolio management or
Reserve Fund's ability to meet redemption requests or other current obligations.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, each Fund is subject to certain
policies and restrictions which are "fundamental" and may not be changed without
shareholder approval. Shareholder approval consists of the approval of the
lesser of (i) more than 50% of the outstanding voting securities of a Fund, or
(ii) 67% or more of the voting securities present at a meeting if the holders of
more than 50% of the outstanding voting securities of the Fund are present or
represented by proxy. Limitations 1 through 8 below are deemed fundamental
limitations. The remaining limitations set forth below serve as operating
policies of the 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 per
centum 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 per centum of
the value of the total assets of such management company and not more than 10
per centum of the outstanding voting securities of such issuer.
2. Purchase the securities of any issuer (other than "Government
securities" as defined under the 1940 Act) if, as a result, more than 25% of the
value of the Fund's total assets would be invested in the securities of
companies whose principal business activities are in the same industry.
3. Issue any senior securities, except as permitted by the 1940 Act or
the Rules and Regulations of the Securities and Exchange Commission.
4. Borrow money, except from banks for temporary or emergency purposes
provided that such borrowings may not exceed 33-1/3% of the value of the Fund's
net assets (including the amount borrowed). Any borrowings that come to exceed
this amount will be reduced within three days (not including Sundays and
holidays) to the extent necessary to comply with the 33-1/3% limitation. This
limitation shall not prohibit the Fund from engaging in reverse repurchase
agreements, making deposits of assets to margin or guaranteeing positions in
futures, options, swaps or forward contracts, or segregating assets in
connection with such agreements or contracts.
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.
14
<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.
8. Make loans to other persons except to the extent not inconsistent with
the 1940 Act or the Rules and Regulations of the Securities and Exchange
Commission. This limitation does not apply to purchases of commercial paper,
debt securities or repurchase agreements, or to the lending of portfolio
securities.
9. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases or sales
of securities and provided that margin payments in connection with transactions
in options, futures, swaps and forward contracts shall not be deemed to
constitute purchasing securities on margin.
10. Sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options, swaps and forward futures contracts are
not deemed to constitute selling securities short.
11. Except as part of a merger, consolidation, acquisition, or
reorganization, invest more than 5% of the value of its total assets in the
securities of any one investment company or more than 10% of the value of its
total assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting securities of
any one investment company.
12. Mortgage, pledge or hypothecate its assets except to the extent
necessary to secure permitted borrowings. This limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed in
a segregated account in connection with such contracts.
13. Participate on a joint or a joint and several basis in any
securities trading account.
14. Money Market Fund may not invest more than 10% of its net assets in
illiquid investments. Reserve Fund may not invest more than 15% of its net
assets in illiquid investments.
15. Invest directly in interests (including partnership interests) in
oil, gas or other mineral exploration or development leases or programs, except
the Fund may purchase or sell securities issued by corporations engaging in oil,
gas or other mineral exploration or development business.
Any of a Fund's investment policies set forth under "Investment Objective
and Policies" in the Prospectus, or any restriction set forth above under
"Investment Restrictions" which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after an acquisition of securities or utilization
of assets and results there from.
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 Reserve 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. Reserve Fund's
historical portfolio turnover rates are set forth in the prospectus section
"Financial Highlights". The variation in portfolio turnover rate resulted from
a change in trading patterns and the effect of Reserve Fund's large number of
holdings of securities which mature in less than a year.
15
<PAGE>
INVESTMENT PERFORMANCE
Advertisements and other sales literature for each Fund may refer to its
yield and effective yield and, with respect to Reserve Fund, its 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.
Reserve Fund's "yield" is computed by dividing the net investment income
per share earned during a 30-day period (using the average number of shares
entitled to receive dividends) by the net asset value per share on the last day
of the period. The yield formula provides for semiannual compounding which
assumes that net investment income is earned and reinvested at a constant rate
and annualized at the end of a six-month period.
The yield formula is as follows:
YIELD = 2[(a-b + 1)/6/ -1]
---
cd
16
<PAGE>
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the net asset value of Reserve Fund.
The table below shows the yearly total return for Reserve Fund for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended 12/31 Total Return
- ----------------- ------------
<S> <C>
1986......................... 5.2%*
1987......................... 5.9%
1988......................... 6.7%
1989......................... 8.7%
1990......................... 8.4%
1991......................... 7.9%
1992......................... 3.3%
1993......................... 3.36
1994......................... 2.71%
</TABLE>
- --------------
*Commenced operations on January 31, 1986
Reserve Fund's average annual rates of return for its one and five year
periods ending January 31, 1995 and from January 31, 1986 (inception) to January
31, 1995 were 2.95%, 5.13% and 5.85%, respectively. Reserve Fund's yield for
the thirty-day period ended January 31, 1995 was 5.74%.
With respect to Money Market Fund, the Fund's current yield quotation is
based on a seven-day period and is computed by determining the net change in
value, exclusive of capital changes, of a hypothetical account having a balance
of one share. This number is then divided by the price per share at the
beginning of the period ("base period return"), and then the base period return
is multiplied by (365/7).
The effective yield for Money Market Fund is computed by taking the base
period return as calculated above and calculating the effect of assumed
compounding.
The formula for the effective yield is as follows:
Effective yield = [(Base period return + 1)365/7]-1
For the 7-day period ended January 31, 1995, the Money Market Fund's
current yield was 5.13% and its effective yield was 5.26%.
In advertising and sales literature, each Fund may compare its
performance with that of other mutual funds, indexes or averages of other mutual
funds, indexes of related financial assets or data, and other competing
investment and deposit products available from or through other financial
institutions. The composition of these indexes, averages or products differs
from that of a Fund. The comparison of a Fund to an alternative investment
should be made with consideration of differences in features and expected
performance.
17
<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 Financial Times (a London
based international financial newspaper)-Actuaries World Indices, including
Europe and sub indices comprising this Index (a wide range of comprehensive
measures of stock price performance for the major stock markets, as well as for
regional areas, broad economic sectors and industry groups); (iv) Morgan Stanley
Capital International Indices, including the EAFE Index; (v) Baring
International Investment Management Limited (an international securities
trading, research, and investment management firm), as a source for market
capitalization, GDP and GNP; (vi) the International Finance Corporation (an
affiliate of the World Bank established to encourage economic development in
less developed countries), World Bank, OECD (Organization for Economic Co-
Operation and Development) and IMF (International Monetary Fund) as a source of
economic statistics; and (ix) the performance of U.S. government and corporate
bonds, notes and bills. (The purpose of these comparisons would be to
illustrate historical trends in different market sectors so as to allow
potential investors to compare different investment strategies.); (2) the
Consumer Price Index (measure for inflation) may be used to assess the real rate
of return from an investment in a Fund; (3) other U.S. 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 and positions of the directors and executive
officers of the Funds are given below.
<TABLE>
<CAPTION>
Aggregate Compensation Aggregate Compensation
Name and Address Position from Each Fund* from IAI Mutual Funds**
- ---------------------------- --------------------- ---------------------- -----------------------
<S> <C> <C> <C>
Noel P. Rahn*** Chairman of the Board N/A N/A
3700 First Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
Richard E. Struthers*** President, Director N/A N/A
3700 First Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Aggregate Compensation Aggregate Compensation
Name and Address Position from Each Fund* from IAI Mutual Funds**
- ---------------------------- --------------------- ---------------------- -----------------------
<S> <C> <C> <C>
Madeline Betsch Director $1,175 $26,350
19 South First Street
Minneapolis, Minnesota 55401
W. William Hodgson Director $1,175 $26,350
1698 Dodd Road
Mendota Heights, Minnesota 55118
George R. Long Director $ 975 $24,950
29 Las Brisas Way
Naples, Florida 33963
J. Peter Thompson Director $1,175 $26,350
Route 1
Mountain Lake, Minnesota 56159
Charles H. Withers Director $ 975 $24,950
Rochester Post-Bulletin
P.O. Box 6118
Rochester, Minnesota 55903
Archie C. Black III Treasurer N/A N/A
3700 First Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
William C. Joas Secretary N/A N/A
3700 First Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
Timothy A. Palmer Vice President, Investments N/A N/A
3700 First Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
Livingston Douglas Vice President, Investments N/A N/A
3700 First Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
Kirk Gove Vice President, Marketing N/A N/A
3700 First Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
Susan Schelpf Vice President, Operations N/A N/A
3700 First Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Aggregate Compensation Aggregate Compensation
Name and Address Position from Each Fund* from IAI Mutual Funds**
- ---------------------------- --------------------- ---------------------- -----------------------
<S> <C> <C> <C>
Susan J. Haedt Vice President, N/A N/A
3700 First Bank Place Controller
P.O. Box 357
Minneapolis, Minnesota 55440
</TABLE>
- ----------------------
* For the fiscal period April 1, 1994 through January 31, 1995.
** For the calendar year ended December 31, 1995. There are currently eighteen
portfolios within the IAI Mutual Funds.
*** Directors of each Fund who are interested persons (as that term is defined
by the Investment Company Act of 1940) of IAI and each Fund.
Noel P. Rahn has been Chief Executive Officer and a Director of IAI since
1974.
Richard E. Struthers is Executive Vice President and a Director of IAI and
has served IAI in many capacities since 1979.
Madeline Betsch, until April 1994, was Executive Vice President, Director of
Client Services, of CME-KHBB Advertising since May 1985, and prior thereto was a
Vice President with Campbell-Mithun, Inc. since February 1977. Ms. Betsch is
currently President of ESMA Corp., a start-up business in the beauty and
wellness field.
W. William Hodgson served as information manager for the North Central Home
Office of the Prudential Insurance Company of America from 1961 until 1984; he
is currently retired.
George R. Long has been Chairman of Mayfield Corp. (financial consultants
and venture capitalists) since 1973.
J. Peter Thompson has been a grain farmer in southwestern Minnesota since
1974. Prior to that, Mr. Thompson was employed by Paine Webber, Jackson &
Curtis, Incorporated, most recently as Senior Vice President and General
Partner.
Charles H. Withers was Editor of the Rochester Post-Bulletin, Rochester,
Minnesota from 1960 through March 31, 1980; he is currently retired.
Archie C. Black is a Senior Vice President and Chief Financial Officer of
IAI and has served IAI in several capacities since 1987.
William C. Joas is an Associate Vice President of IAI. Prior to joining IAI
in 1990, Mr. Joas served in the legal administration department of Tricord
Systems, Inc.
Timothy A. Palmer is a Senior Vice President of IAI. Prior to joining IAI
in 1990, Mr. Palmer was employed at First Bank System Capital Markets Group
since 1987 and was most recently Assistant Vice President, Short Term Finance.
Livingston Douglas is a Vice President of IAI. Prior to joining IAI in
1993, Mr. Douglas served as a fixed income portfolio manager for Mackey-Shields
Financial Corporation.
Kirk Gove is a Vice President of IAI. Prior to joining IAI in 1994, Mr.
Gove served as an Assistant Vice President of Dain Bosworth, Incorporated.
Susan Schelpf is a Vice President of IAI and Director of Mutual Fund
Operations. Prior to joining IAI in 1993, Ms. Schelpf served as a Vice
President at SEI Corporation.
20
<PAGE>
Susan J. Haedt is a Vice President of IAI and Funds Controller. Prior to
joining IAI in 1992, Ms. Haedt served as a Senior Manager at KPMG Peat Marwick
LLP.
Each Fund has agreed to reduced initial subscription requirements for
employees and directors of a Fund or IAI, their spouses, children and
grandchildren. With respect to such persons, the minimum initial investment in
one or more of the IAI Family of Funds is $500; provided that the minimum amount
that can be allocated to any one of the Funds is $250. Subsequent subscriptions
are limited to a minimum of $100 for each of the Funds.
No compensation is paid by either Fund to any of its officers. Directors
who are not affiliated with IAI receive $300 annually and $250 for each Board
meeting attended. Such unaffiliated directors also are reimbursed for expenses
incurred in connection with attending meetings. Since each Fund's inception,
such unaffiliated directors voluntarily waived their fees through June 30, 1993.
The Board of Directors for each of the Funds, at a meeting held May 10,
1995, approved a new Code of Ethics. The Code permits access persons to engage
in personal securities transactions subject to certain policies and procedures.
Such procedures prohibit the acquiring of any securities in an initial public
offering. In addition, all securities acquired through private placement must
be pre-cleared. Procedures have been adopted which would implement blackout
periods for certain securities, as well as a ban on short-term trading profits.
Additional policies prohibit the receipt of gifts in certain instances.
Procedures have been implemented to monitor employee trading. Each access
person of the Adviser is required to certify annually that they have read and
understood the Code of Ethics. An annual report is provided to the Funds' Board
of Directors summarizing existing procedures and changes, identifying material
violations and recommending any changes needed.
IAI, the Fund's investment adviser, is an affiliate of the Hill Samuel Group
("Hill Samuel"). Hill Samuel is an international merchant banking and financial
services firm headquartered in London, England. Hill Samuel owns controlling
interests in over seventy insurance, merchant banking, financial services and
shipping services subsidiaries located in Western Europe, Asia, the United
States, Australia, New Zealand and Great Britain. The principal offices of Hill
Samuel are located at 100 Wood Street, London EC2 P2AJ.
Hill Samuel is owned by TSB Group, plc ("TSB"), a publicly-held financial
services organization headquartered in London, England. TSB is one of the
largest personal and corporate financial services groups in the United Kingdom,
engaged in a wide range of activities including banking, unit linked life
assurance, unit trust management, investment management, credit card and finance
house business. The principal offices of TSB are located at 25 Milk Street,
London EC2 V8LU.
HISTORY
Money Market Fund is a separate portfolio of IAI Investment Funds VI, Inc.,
a Minnesota corporation whose shares of common stock are currently issued in six
series (Series A through F). On June 25, 1993, the Fund's shareholders approved
amended and restated Articles of Incorporation, which provided that the
registered investment company whose corporate name had been IAI Series Fund,
Inc., be renamed IAI Investment Funds VI, Inc. The investment portfolio
represented by Series F common shares is referred to as "IAI Money Market Fund."
Reserve Fund is a separate portfolio of IAI Investment Funds V, Inc., a
Minnesota corporation whose shares of common stock are currently issued in one
series (Series D). On June 25, 1993, the Fund's shareholders approved and
amended and restated Articles of Incorporation which provided that the
registered investment company whose corporation name had been IAI Reserve Fund,
Inc., be renamed IAI Investment Funds V, Inc. The investment portfolio
represented by Series A common shares is referred to as "IAI Reserve Fund".
21
<PAGE>
INVESTMENT ADVISORY AGREEMENT
Pursuant to an Investment Advisory Agreement between each Fund and IAI
(the "Advisory Agreements"), IAI has agreed to provide each Fund with investment
advice, statistical and research facilities, and certain equipment and services,
including, but not limited to, office space and necessary office facilities,
equipment, and the services of required personnel. Under the Advisory
Agreements, IAI has the sole authority and responsibility to make and execute
investment decisions for each Fund within the framework of each Fund's
investment policies, subject to review by the directors of each Fund.
As compensation for these services, Money Market Fund has agreed to pay IAI
a monthly fee equivalent to an annual rate of .30% of its average daily net
assets. As of January 31, 1995, Money Market Fund had net assets of
$33,174,783. However, since January 5, 1993 (commencement of operations) IAI
has voluntarily waived its entire advisory fee.
Reserve Fund has agreed to pay IAI a monthly fee equivalent on an annual
basis, to .50% of its average month-end net assets. As of January 31, 1995,
Reserve Fund had net assets of $77,273,129. For the fiscal years ended March
31, 1993, 1994 and the fiscal period ending January 31, 1995, Reserve Fund paid
IAI $539,843, $343,955 and $348,495, respectively, in advisory fees.
Reserve Fund's monthly payment of the advisory fee is suspended or reduced
(and reimbursement made by IAI, if necessary) when it appears that the amount of
expenses may exceed Reserve Fund's applicable expense limit (and after the
monthly payment of the distribution fee has been reduced to zero), as set forth
in the section "Allocation of Expenses," below. For the period from April 1,
1994 to January 31, 1995, IAI was not obligated to reimburse any advisory fees
pursuant to the expense limit. For the fiscal years ended March 31, 1993 and
1994, IAI reimbursed the Fund $33,998 and $97,655, respectively, in advisory
fees pursuant to the expense limit.
Although investment decisions for each Fund are made independently from
those of the other funds and accounts as to which IAI gives investment advice,
it may occasionally develop that the same security is suitable for more than one
fund and/or other account. If and when more than one fund or other account
simultaneously purchase or sell the same security, the transactions will be
averaged as to price and allocated as to amount in accordance with arrangements
equitable to such funds and accounts. The simultaneous purchase or sale of the
same securities by more than one fund or by any fund and other accounts may have
detrimental effects on such Fund, as they may affect the price paid or received
by a fund or the size of the position obtainable by a fund.
ADMINISTRATIVE AGREEMENT
Each Fund has engaged IAI to serve as such Fund's administrative, dividend
disbursing, redemption, accounting services and transfer agent pursuant to an
Administrative Agreement. Under the Administrative Agreement, IAI has agreed to
provide to each Fund all required administrative, stock transfer, redemption,
dividend disbursing and accounting services including, without limitation, the
following: (1) the maintenance of the Fund's accounts, books and records; (2)
the calculations of the daily net asset value in accordance with the Fund's
current Prospectus and Statement of Additional Information; (3) daily and
periodic reports; (4) all information necessary to complete tax returns,
questionnaires and other reports requested by the Fund; (5) the maintenance of
stock registry records; (6) the processing of requested account registration
changes, stock certificate issuances and redemption requests; and (7) the
administration of payments of dividends and distributions declared by the Fund.
As compensation for these services, Money Market Fund has agreed to pay IAI a
monthly fee at the annual rate of .20% of Money Market Fund's average daily net
assets. From January 5, 1993 through June 30, 1993, IAI waived a minimum of
one-half of its administrative fee. Beginning July 1, 1993, IAI voluntarily
agreed to waive all expenses in excess of .50% of Money Market Fund's average
daily net assets. For the period from April 1, 1994 to January 31, 1995, Money
Market Fund paid IAI $25,631 pursuant to the Administrative Agreement and IAI
waived $17,379 in administrative fees. Reserve Fund has agreed to pay IAI a
monthly administrative fee equal to .01667% of the value of the Fund's month-end
net assets, which is equivalent on an annual basis to .20% of the Fund's average
month-end net assets. For the period from April 1, 1994 to January 31, 1995,
Reserve Fund paid IAI $139,398 pursuant to the Administrative Agreement.
22
<PAGE>
ALLOCATION OF EXPENSES
In addition to the advisory and administrative fees paid to IAI, each Fund
pays all its other costs and expenses, including, for example, costs incurred in
the purchase and sale of assets, interest, taxes, charges of the custodian of a
Fund's assets, costs of reports and proxy material sent to Fund shareholders,
fees paid for independent accounting and legal services, costs of printing
Prospectuses for Fund shareholders and registering a Fund's shares, postage,
fees to directors who are not "interested persons" of a Fund, insurance
premiums, costs of attending investment conferences and such other costs which
may be designated as extraordinary. In addition, the Reserve Fund may incur
expenses in conjunction with distribution expenses pursuant to Reserve Fund's
Rule 12b-1 plan. IAI has agreed to reimburse Reserve Fund for expenses (other
than brokerage commissions and other expenditures in connection with the
purchase and sale of portfolio securities, interest expense, and, subject to the
specific approval of a majority of the disinterested directors of the Fund,
taxes and extraordinary expenses) which exceed .85% per year of the average
annual month-end net assets of Reserve 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 gross negligence in
the performance of its duties and obligations.
DURATION OF AGREEMENTS
The Advisory Agreements and the Administrative Agreements will terminate
automatically in the event of their assignment. In addition, each Agreement is
terminable at any time without penalty by the Board of Directors of a Fund or by
vote of a majority of a Fund's outstanding voting securities on not more than 60
days' written notice to IAI, and by IAI on 60 days' notice to a Fund. Each
Agreement shall continue in effect from year to year only so long as such
continuance is specifically approved at least annually by either the Board of
Directors of the Fund or by vote of a majority of the outstanding voting
securities, provided that in either event such continuance is also approved by
the vote of a majority of directors who are not parties to the Agreement or
interested persons of such parties cast in person at a meeting called for the
purpose of voting on such approval.
PLAN OF DISTRIBUTION
Reserve Fund has adopted a Plan of Distribution relating to the payment of
certain distribution expenses pursuant to Rule 12b-1 under the 1940 Act. The
Plan was last approved by the Board of Directors at a meeting on August 10,
1994, and by the shareholders of Reserve Fund at a meeting on October 18, 1990.
Rule 12b-1(b) provides that any payments made by a fund in connection with
the distribution of its shares may only be made pursuant to a written plan
describing all material aspects of the proposed financing of distribution and
also requires that all agreements with any person relating to implementation of
the plan must be in writing. In addition, Rule 12b-1(b)(1) requires that such
plan be approved by a vote of at least a majority of the fund's outstanding
shares, and Rule 12b-1(b)(2) requires that such plan, together with any related
agreements, be approved by a vote of the board of directors of the company and
the directors of the company who are not interested persons of the company and
have no direct or indirect financial interest in the operation of the plan or in
any agreements related to the plan, cast in person at a meeting called for the
purpose of voting on such plan or agreements. Rule 12b-1(b)(3) requires that
the plan or agreement provide, in substance: (1) that it shall continue in
effect for a period of more than one year from the date of its execution or
adoption only so long as such continuance is specifically approved at least
annually in the manner described in paragraph (b)(2) of Rule 12b-1; (2) that any
person authorized to direct the disposition of monies paid or payable by a fund
pursuant to its plan or any related agreement shall provide to a fund's board of
directors, and the directors shall review, at least quarterly, a written report
of the amount so expended and the purposes for which such expenditures were
made; and (3) in the case of a plan, that it may be terminated at any time by
vote of a majority of the members of the board of directors of a fund who are
not interested persons of the fund and have no direct or indirect financial
interest in the
23
<PAGE>
operation of the plan or in any agreements related to the plan or by vote of a
majority of the outstanding voting securities of a fund.
Rule 12b-1(b)(4) requires that such plans may not be amended to increase
materially the amount to be spent for distribution without shareholder approval
and that all material amendments of the plan must be approved in the manner
described in paragraph (b)(2) of Rule 12b-1. Rule 12b-1(c) provides that a fund
may rely upon Rule 12b-1(1) only if selection and nomination of its
disinterested directors are committed to the discretion of such disinterested
directors. Rule 12b-1(e) provides that a fund may implement or continue a plan
pursuant to Rule 12b-1(b) only if the directors who vote to approve such
implementation or continuation conclude, in the exercise of reasonable business
judgment and in light of their fiduciary duties under state law, and under
Section 36(a) and (b) of the 1940 Act, that there is a reasonable likelihood
that the plan will benefit the fund and its shareholders. At the meeting of the
Board of Directors on August 10, 1994, the directors so concluded with respect
to the Fund's Plan of Distribution.
Pursuant to the Plan of Distribution, Reserve Fund has entered into a
Distribution and Shareholder Services Agreement pursuant to which Reserve Fund
will make payments to IAI Securities, Inc. (the "Underwriter") at an annual rate
of 0.10% of Reserve Fund's average month-end net assets to cover expenses
incurred by the Underwriter in connection with the distribution of Reserve
Fund's shares (which amount is paid to the Underwriter regardless of amounts
spent by the Underwriter in distributing the Fund's shares). The distribution
fee payable by Reserve Fund to the Underwriter may be used by the Underwriter to
pay advertising and promotional expenses including, without limitation, costs of
printing and providing Prospectuses, Statements of Additional Information,
annual reports and semiannual reports to prospective shareholders, expenses of
preparing and providing sales literature advertising of any type, and
compensation and benefits paid to and expenses incurred by personnel, including
supervisory personnel, involved in direct mail and advertising activities and
activities relating to the direct marketing of shares of Reserve Fund to the
public. In addition, the distribution fee may be used to pay institutions that
provide shareholder service to shareholder accounts. Services provided under
these arrangements include, but are not limited to, maintenance of shareholder
accounts, responding to customer inquiries and providing information with
respect to a shareholder's investments.
The distribution fee payable by Reserve Fund is subject to the expense
limitations set forth in the Advisory Agreement as described above.
Additionally, the Underwriter, in its sole and absolute discretion, may from
time to time out of its own assets pay for certain additional costs of
distributing Reserve Fund's shares. The Underwriter is an affiliate of IAI.
The net distribution fee paid by each Fund pursuant to its Plans of
Distribution during the fiscal period ended January 31, 1995 was $38,474. All
such distribution fees were paid to, and retained by, the Underwriter pursuant
to the Underwriting and Distribution Agreements discussed above. During the
fiscal period ended January 31, 1995, such distribution fees (along with amounts
paid out of the Underwriter's own assets) were paid by the Underwriter in
connection with the distribution of the Funds' shares as follows:
<TABLE>
<S> <C>
Advertising............................. $16,044
Printing and mailing of prospectuses to
other than current shareholders........ $ 8,387
Payments to brokers or dealers.......... $ 5,848
Direct payments to sales personnel...... $ 5,579
Other................................... $ 2,616
</TABLE>
24
<PAGE>
CUSTODIAL SERVICE
The custodian for the Funds is Norwest Bank Minnesota, N.A. Norwest Center,
Sixth and Marquette, Minneapolis, MN 55479. With respect to Reserve Fund's
ability to invest up to 10% of Fund assets in international securities, Norwest
has entered into an agreement with Morgan Stanley Trust Company, 1 Pierrepont
Plaza, Brooklyn, New York ("Morgan Stanley") which enables Reserve Fund to
utilize the subcustodian and depository network of Morgan Stanley. Such
agreements, subcustodians and depositories were approved by the Fund's Board of
Directors in accordance with the rules and regulations of the Securities and
Exchange Commission, for the purpose of providing custodial services for Reserve
Fund's assets held outside the United States. The directors of Reserve Fund
monitor the activities of its custodian and subcustodians as well as the
economic conditions and applicable laws of the foreign countries in which such
Fund's assets are held.
The following is a listing of the subcustodians and depositories currently
approved by Reserve Fund's directors and the countries in which such
subcustodians and depositories are located:
BRANCHES OF THE CUSTODIAN
AND SUBCUSTODIAN BANKS
----------------------
Argentina Citibank, N.A., Buenos Aires Branch
Australia Australia & New Zealand Banking Group, Ltd.
Belgium Banque Bruxelles Lambert (BBL)
Brazil Banco de Boston
Canada Toronto Dominion Bank
Chile Citibank, N.A., Santiago Branch
France Banque Indosuez
Germany Berliner Handels-und-Frankfurter Bank
Greece Citibank, N.A., Athens Branch
Hong Kong Hong Kong & Shanghai Banking Corporation Ltd.
India Hong Kong & Shanghai Banking Corporation Ltd.
Indonesia Hong Kong & Shanghai Banking Corporation Ltd.
Ireland Allied Irish Bank
Italy Barclays Bank PLC
Japan The Mitsubishi Bank Limited
Korea Standard Chartered Bank
Malaysia Oversea Chinese Banking Corporation
Mexico Citibank, N.A., Mexico City Branch
25
<PAGE>
Netherlands ABN Amro Bank
New Zealand Bank of New Zealand
Philippines Hong Kong & Shanghai Banking Corporation Ltd.
Portugal Banco Comercial Portugues
Singapore Oversea Chinese Banking Corporation
Spain Banco Santader
Switzerland Morgan Guaranty Trust Company of New York,
Zurich Branch
Taiwan Hong Kong & Shanghai Banking Corporation Ltd.
Thailand Standard Chartered Bank
Turkey Citibank, N.A., Istanbul Branch
United Kingdom Barclays Bank PLC
Uruguay Citibank, N.A., Montevideo Branch
Venezuela Citibank, N.A. Caracas Branch
DEPOSITORIES
------------
Argentina Caja de Valores
Australia Clearing House Electronic Subregister System
Austria Euroclear Clearance System
Wertpapiersammelbank
Belgium C.I.K. (Caisse Interprofessionelle de Depot et de
Virements de Titres S.A.)
Brazil Bolsa de Valores de Sao Paulo
Bolsa de Valores de Rio de Janeiro
Canada CDS (The Canadian Depository
for Securities Ltd.)
Denmark Euroclear Clearance System
Vaerdipapircentralen
Finland Euroclear Clearance System
26
<PAGE>
France SICOVAM (Societe Interprofessionelle la
Compensacion des Valuers Mobilieres)
Societe de Compensacion des Marches
Conditionnels
Chambre de Compensacion des Instruments
Financiers de Paris
Germany Kassenverein (Deutscher Kassenverein AG)
Greece Central Clearing Office of Athens Stock Exchange
Hong Kong Hong Kong Securities Clearing Company
Ireland Stock Exchange Talisman System
Italy Monte Titoli, S.p.A
Japan Japan Securities Depository Center
Korea The Korean Central Depository
Malaysia The Malaysian Central Depository
Mexico Instituto para el Deposito de Valores
Netherlands NECIGEF (Netherlands Centraal Instit
voor Giraal Effectenverkeer B.V.
New Zealand Austraclear New Zealand System
Norway Euroclear Clearance System
Verdipapirsentralen
Portugal Lisbon Stock Exchange
Oporto Stock Exchange
Singapore Central Depository Pte Ltd.
Spain Servicio de Compensacion y Liquidacion de
Valores
Sweden Vardepapperscentralen VPC AB
Switzerland SEGA (Schweizerische Effekten Giro A.G.)
Taiwan Taiwan Securities Depository Co.
Thailand Share Depository Center
United Kingdom Stock Exchange Talisman System
27
<PAGE>
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Most of each Fund's portfolio transactions are effected with dealers
without the payment of brokerage commissions but at a net price which usually
includes a spread or markup. In effecting such portfolio transactions on behalf
of a Fund, IAI seeks the most favorable net price consistent with the best
execution. However, frequently IAI selects a dealer to effect a particular
transaction without contacting all dealers who might be able to effect such
transaction because of the volatility of the bond market and the desire of IAI
to accept a particular price for a security because the price offered by the
dealer meets its guidelines for profit, yield or both.
So long as IAI believes that it is obtaining the best net price
(including the spread or markup) consistent with the best execution, as
described above, it gives consideration in placing portfolio transactions to
dealers furnishing research, statistical information, or other services to IAI.
This allows IAI to supplement its own investment research activities and enables
IAI to obtain the views and information of individuals and research staffs of
many different securities firms prior to making investment decisions for a Fund.
To the extent portfolio transactions are effected with dealers who furnish
research services to it, IAI receives a benefit which is not capable of
evaluation in dollar amounts.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to the policies set forth in the preceding
paragraphs and such other policies as the Board of Directors of the Fund may
determine, Advisers may consider sales of shares of the Fund as a factor in the
selection of broker-dealers to execute the Fund's securities transactions.
IAI believes that most research services obtained by it generally benefit
one or more of the investment companies or other accounts which it manages.
Research services obtained from transactions in fixed income securities would
primarily benefit the managed funds investing such fixed income securities and
managed accounts investing in fixed income securities.
CAPITAL STOCK
MONEY MARKET
Money Market Fund is a separate portfolio of IAI Investment Funds VI, Inc.,
a Minnesota corporation whose shares of common stock are currently issued in six
series (Series A through F). Each share of a series is entitled to participate
pro rata in any dividends and other distributions of such series and all shares
of a series have equal 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 F common shares. The investment portfolio represented by such shares is
referred to as IAI Money Market Fund. As of January 31, 1995, Money Market Fund
had 33,176,693 shares outstanding.
As of May 12, 1995, no person held of record or, to the knowledge of Money
Market Fund, beneficially owned more than 5% of the outstanding shares of Money
Market Fund except as set forth in the following table:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Name and Address Number of Percent of
of Shareholder Shares Class
- ---------------------------------------------------------------------------
<S> <C> <C>
Norwest Bank Minneapolis TTEE 1,963,041 7.28
Minnehaha Academy
733 Marquette Avenue
Minneapolis, MN 55479
</TABLE>
28
<PAGE>
In addition, as of May 15, 1995, Money Market Fund's officers and
directors as a group owned approximately 1,691,792 shares, representing
approximately 6.27% of Money Market Fund's outstanding shares.
RESERVE FUND
Reserve Fund is a separate portfolio of IAI Investment Funds V, 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 V, 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 V, 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 Reserve Fund. As of January 31, 1995, Reserve Fund had 7,812,318
shares outstanding.
As of May 12, 1995, no person held of record or, to the knowledge of Reserve
Fund, beneficially owned more than 5% of the outstanding shares of the Fund,
except as set forth in the following table:
<TABLE>
<CAPTION>
Name and Address Number of Percent of
of Shareholder Shares Class
- ---------------------------------------------------------------------------
<S> <C> <C>
Massachusetts Bay Transportation 506,240 6.54
Authority Retirement Fund
99 Summer Street, Suite 1700
Boston, MA 02110
Charles Schwab & Co., Inc. 431,413 5.57
101 Montgomery Street
San Francisco, CA 94104
Asbestos Workers Local 34 Pension Fund 730,173 9.43
10405 6th Avenue North, Suite 170
Plymouth, MN 55441
IAI Corporate Cash Account 1,858,420 24.0
3700 First Bank Place
P.O. Box 357
Minneapolis, MN 55440
</TABLE>
In addition, as of May 15, 1995, Reserve Fund's officers and directors as a
group owned approximately 4,441 shares, representing approximately 0.06% of
Reserve Fund's outstanding shares.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The net asset value per share of each Fund is determined once daily as of
the close of trading on the New York Stock Exchange on each business day on
which the New York Stock Exchange is open for trading, and may be determined on
additional days as required by the Rules of the Securities and Exchange
Commission. The New York Stock Exchange is closed, and the net asset value per
share of a Fund is not determined, on the following national holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.
29
<PAGE>
MONEY MARKET FUND
For the purpose of calculating Money Market Fund's net asset value per
share, securities are valued by the "amortized cost" method of valuation, which
does not take into account unrealized gains or losses. This involves valuing an
instrument at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instruments. While this method
provides certainty in valuation, it may result in periods during which a
security's value, as determined by amortized cost, is higher or lower than the
price the Fund would receive if it sold the instrument.
The use of amortized cost and the maintenance of Money Market Fund's per
share net asset value at $1.00 is based on its election to operate under the
provision of Rule 2a-7 under the Investment Company Act of 1940. As a
condition of operating under that rule, Money Market Fund must maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of 397 days or less, and invest only in
United States dollar-denominated securities that are determined by the Board of
Directors to present minimal credit risks and that are at the time of
acquisition "Eligible Securities."
The Board of Directors has also established procedures reasonably designed,
taking into account current market conditions, to stabilize the net asset value
per share as computed for the purpose of sales and redemptions at $1.00. These
procedures include periodic review, as the Board deems appropriate and at such
intervals as are reasonable in light of current market conditions, of the
relationship between the amortized cost value per share and a net asset value
per share based upon available indications of market value. In such a review,
investments for which market quotations are readily available are valued at the
most recent bid price or quoted yield equivalent for such securities or for
securities of comparable maturity, quality and type as obtained from one or more
of the major market makers for the securities to be valued. Other investments
and assets are valued at fair value, as determined in good faith by the Board.
In the event of a deviation that may result in material dilution or that is
otherwise unfair to existing shareholders between Money Market Fund's net asset
value based upon available market quotations or market equivalents and $1.00 per
share based on amortized cost, the Board of Directors will promptly consider
what action, if any, should be taken. Such action may include redeeming shares
in kind, selling instruments prior to maturity to realize capital gains or
losses or to shorten average maturity, withholding dividends, paying
distributions from capital or capital gains, or utilizing a net asset value per
share based upon available market quotations.
On January 31, 1995, the net asset value and public offering price per share
of Money Market Fund was calculated as follows:
NAV = Net Assets ($33,174,783) = $1.00
------------------------
Shares Outstanding (33,176,693)
RESERVE FUND
The portfolio securities in which Reserve Fund invests fluctuate in value,
and hence, for Reserve Fund, the net asset value per share also fluctuates.
On January 31, 1995, the net asset value and public offering price per share
of Reserve Fund was calculated as follows:
NAV = Net Assets ($77,273,129) = $9.89
--------------------------
Shares Outstanding (7,812,318)
30
<PAGE>
TAX STATUS
The tax status of the Funds and the distributions of the Funds are
summarized in the Prospectus under "Dividends, Distributions and Tax Status."
IN GENERAL
It is expected that none of the distributions of the Funds' net investment
income will qualify for the dividends received deduction available to
corporations under the Internal Revenue Code of 1986, as amended (the "Code").
Ordinarily, distributions and redemption proceeds earned by Fund
shareholders are not subject to withholding of federal income tax. However,
each Fund is required to withhold 31% of a shareholder's distributions and
redemption proceeds upon the occurrence of certain events specified in Section
3406 of the Code and regulations promulgated thereunder. These events include
the failure of a Fund shareholder to supply the Fund with such shareholder's
taxpayer identification number, and the failure of a Fund shareholder who is
otherwise exempt from withholding to properly document such shareholder's status
as an exempt recipient. Additionally, distributions may be subject to state and
local income taxes, and the treatment thereunder may differ from the federal
income tax consequences discussed above.
Under the Code, each Fund will be subject to a non-deductible excise tax
equal to 4% of the excess, if any, of the amount of investment income and
capital gains required to be distributed pursuant to the Code for each calendar
year over the amount actually distributed. In order to avoid this excise tax,
each Fund generally must declare dividends by the end of each calendar year
representing 98% of the Fund's ordinary income for such calendar year and 98% of
its capital gain net income, if any, for the twelve-month period ending October
31 of the same calendar year. The excise tax is not imposed, however, an
undistributed income that is already subject to corporate income tax.
RESERVE FUND
If Reserve 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
Reserve Fund shareholder if, as is usually the case, Reserve Fund shares are a
capital asset in the hands of a Reserve Fund shareholder at that time. However,
under a special provision in the Code, if Reserve 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.
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 Reserve Fund's assets to be
invested in various countries is not known. Any amount of taxes paid by Reserve
Fund to foreign countries will reduce the amount of income available to Reserve
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 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.
31
<PAGE>
LIMITATION OF DIRECTOR LIABILITY
Under Minnesota law, each Fund's Board of Directors owes certain fiduciary
duties to the Fund and to its shareholders. Minnesota law provides that a
director "shall discharge the duties of the position of director in good faith,
in a manner the director reasonably believes to be in the best interest of the
corporation, and with the care an ordinarily prudent person in a like position
would exercise under similar circumstances." Fiduciary duties of a director of
a Minnesota corporation include, therefore, both a duty of "loyalty" (to act in
good faith and act in a manner reasonably believed to be in the best interests
of the corporation) and a duty of "care" (to act with the care an ordinarily
prudent person in a like position would exercise under similar circumstances).
Minnesota law authorizes corporations to eliminate or limit the personal
liability of a director to the corporation or its shareholders for monetary
damages for breach of the fiduciary duty of "care." Minnesota law does not,
however, permit a corporation to eliminate or limit the liability of a director
(i) for any breach of the director's duty of "loyalty" to the corporation or its
shareholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for authorizing a
dividend, stock repurchase or redemption or other distribution in violation of
Minnesota law or for violation of certain provisions of Minnesota securities
laws, or (iv) for any transaction from which the director derived an improper
personal benefit. The Articles of Incorporation of IAI Investment Funds V,
Inc., and IAI Investment Fund VI, Inc. limit the liability of directors to the
fullest extent permitted by Minnesota statutes, except to the extent that such
liability cannot be limited as provided in the Investment Company Act of 1940
(which Act prohibits any provisions which purport to limit the liability of
directors arising from such directors' willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of their
role as directors).
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" of the corporation for breach of their
duties as officers (including the liability of directors who serve as officers
for breach of their duties as officers.) Minnesota law does not permit
elimination or limitation of the availability of equitable relief, such as
injunctive or rescissionary relief. Further, Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act of
1933 or the Securities Exchange Act of 1934, and it is uncertain whether and to
what extent the elimination of monetary liability would extend to violations of
duties imposed on directors by the Investment Company Act of 1940 and the rules
and regulations adopted under such Act.
FINANCIAL STATEMENTS
The financial statements, included as part of the Funds' 1995 Annual Report
to shareholders, are incorporated herein by reference. Such Annual Report may
be obtained by shareholders on request from the Funds at no additional charge.
32
<PAGE>
APPENDIX A
RATINGS OF DEBT SECURITIES
--------------------------
RATINGS BY MOODY'S
- ------------------
CORPORATE BONDS
Aaa. Bonds rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa. Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A. Bonds rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa. Bonds rated Baa are considered medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate, and thereby
not well safeguarded during other good and bad times over the future.
Uncertainty of position characteristizes bonds in this class.
B. Bonds rated B generally lack characteristics of the desirable
investment. Assurances of interest and principal payment or maintenance of other
terms of the contract over any long period of time may be small.
Caa. Bonds rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca. Bonds rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C. Bonds rated C are the lowest-rated class of bonds and issued so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Conditional Ratings. The designation "Con." followed by a rating
indicates bonds for which the security depends upon the completion of some act
or the fulfillment of some condition. These are bonds secured by (a) earnings
of projects under construction, (b) earnings or projects unseasoned in operating
experience, (c) rentals which begin when facilities are completed, or (d)
payments to which
A-1
<PAGE>
some other limiting condition attaches. Parenthetical rating
denotes probable credit stature upon completion of construction or elimination
of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in the Aa and A
classifications of its corporate bond rating system. The modifier 1 indicates
that the security ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category. With respect to
municipal securities, those bonds in the Aa, A, Baa, Ba, and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols Aa1, A1, Baa1, Ba1, and B1.
COMMERCIAL PAPER
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime - 1 Superior ability for repayment of senior short-term
debt obligations
Prime - 2 Strong ability for repayment of senior short-term
debt obligations
Prime - 3 Acceptable ability for repayment of senior short-
term debt obligations
If an issuer represents to Moody's that its Commercial Paper
obligations are supported by the credit of another entity or entities, Moody's,
in assigning ratings to such issuers, evaluates the financial strength of the
indicated affiliated corporations, commercial banks, insurance companies,
foreign governments, or other entities, but only as one factor in the total
rating assessment.
RATINGS BY S&P
- --------------
CORPORATE BONDS
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB. Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
A-2
<PAGE>
B. Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB-rating.
CCC. Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal.
CC. Debt rated CC is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC debt rating.
C. The rating C typically applied to debt subordinated to
senior debt which assigned an actual or implied CCC-debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been filed but
debt service payments are continued.
C1. The rating C1 is reserved for income bonds on which no
interest is being paid.
D. Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S & P believes that
such payments will be made during such grace period. The D rating will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
In order to provide more detailed indications of credit quality, S&P's
bond letter ratings described above (except for the AAA category) may be
modified by the addition of a plus or a minus sign to show relative standing
within the rating category.
COMMERCIAL PAPER
A. This highest rating category indicates the greatest capacity for
timely payment. Issues in this category are further defined with the
designations 1, 2, and 3 to indicate the relative degree to safety.
A-1. This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are designed A-1+.
A-2. Capacity for timely payments on issues with this
designation is satisfactory. However, the relative degree of safety is not as
high as for issues designed A-1.
A-3. Issues carrying this designation have adequate capacity for
timely repayment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
RATINGS BY FITCH INVESTORS SERVICE, INC.
- ----------------------------------------
CORPORATE BONDS
AAA. Bonds of this rating are regarded as strictly high grade,
broadly marketable, suitable for investment by trustees and
fiduciary institutions, and liable to only slight market
fluctuation other than through changes in the money rate. The
factor last named is of importance varying with the length of
maturity. Such bonds are mainly senior issues of strong
companies, and are most numerous in
A-3
<PAGE>
the railway and public utility fields, though some industrial
obligations have this rating. The prime feature of an AAA bond
is a showing of earnings several times or many times interest
requirements with such stability of applicable earnings that
safety is beyond reasonable question whatever changes occur in
conditions. Other features may exist, such as a wide margin of
protection through collateral security or direct lien on
specific property as in the case of high-class equipment
certificates or bonds that are first mortgages on valuable real
estate. Sinking funds or voluntary reduction of the debt, by
call or purchase, are often factors, while guarantee or
assumption by parties other than the original debtor may
influence the rating.
AA. Bonds in this group are of safety virtually beyond question, and
as a class are readily saleable while many are highly active.
Their merits are not greatly unlike those of the AAA class, but
a bond so rated may be of junior though strong lien, in many
cases directly following an AAA bond, or the margin of safety is
strikingly broad. The issue may be the obligation of a small
company, strongly secured but influenced as to rating by the
lesser financial power of the enterprise and more local type of
market.
COMMERCIAL PAPER
Fitch-1. (Highest Grade) Issues assigned this rating are regarded as
having the strongest degree of assurance for timely payment.
Fitch-2. (Very Good Grade) Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than
the strongest issues.
RATINGS BY DUFF & PHELPS, INC.
- ------------------------------
CORPORATE BONDS
Duff 1. Highest credit quality. The risk factors are negligible, being
only slightly more than for risk free U.S. Treasury debt.
Duff 2. High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of
economic conditions.
COMMERCIAL PAPER
Duff 1. High certainty of timely payment. Liquidity factors are
excellent and supported by strong fundamental protection
factors. Risk factors are minor.
Duff 2. Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets
is good. Risk factors are small.
RATINGS BY THOMSON BANKWATCH (TBW)
- ----------------------------------
SHORT-TERM RATINGS
TBW-1. The highest category; indicates a very high degree of likelihood
that principal and interest will be paid on a timely basis.
A-4
<PAGE>
TBW-2. The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong,
the relative degree of safety is not as high as for issues rated
"TBW-1".
A-5
<PAGE>
PART C
Item 24. Financial Statements and Exhibits
- ------- ---------------------------------
(a) Financial Statements (1)
(b) Exhibits
(1) Articles of Incorporation (4)
(2) Bylaws (4)
(5) Investment Advisory Agreement (4)
(6A) Distribution and Shareholder Services Agreement
(6B) Dealer Sales Agreement
(6C) Shareholder Services Agreement
(8) Custodian Agreement (4)
(9) Administrative Agreement (2)
(11) Consent of Independent Auditors
(15) Plan of Distribution
(16) Calculations of Performance Data (2)
(99) Annual Report (5)
_______________
(1) Incorporated by reference in Part B of the Registration Statement.
(2) Incorporated by reference to Post-Effective Amendment Registrant's
Registration Statement on Form N-1A filed on May 31, 1989.
(3) Incorporated by reference to Post-Effective Amendment to Registrant's
Registration Statement on Form N-1A filed on May 31, 1988.
(4) Incorporated by reference to Post-Effective Amendment No. 15 to
Registrant's Registration Statement on Form N-1A filed on June 3, 1993.
(5) Incorporated by reference to the Annual Report filed electronically on Form
N-30D on June 1, 1995.
III-1
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant.
- ------- -------------------------------------------------------------
See the sections of the Prospectus entitled "Management" and
"Description of Common Stock" and the section of the Statement of Additional
Information entitled "Management," filed as part of this Registration Statement.
Item 26. Number of Holders Securities.
- ------- ----------------------------
<TABLE>
<CAPTION>
Number of Record Holders
Portfolio Title of Class as of April 30, 1995
- --------- -------------- --------------------
<S> <C> <C>
IAI Reserve Fund Common Stock (Series A) 1,897
</TABLE>
Item 27. Indemnification.
- ------- ---------------
No change from information supplied in Post-Effective Amendment, filed
in July 1986.
Item 28. Business and Other Connections of Investment Adviser.
- ------- ----------------------------------------------------
Information on the business of Investment Advisers, Inc. ("IAI") is
described in the Prospectus section "Management" and in Part B of this
Registration Statement in the section "Management."
The senior officers and directors of IAI and their titles are as
follows:
<TABLE>
<CAPTION>
Name Title
---- -----
<S> <C>
Jeffrey R. Applebaum Senior Vice President
Charles P. Barrington Director
Scott Allen Bettin Senior Vice President
Richard Oliver Bernays Director
Archie Campbell Black, III Senior Vice President/Treasurer
Julian Peavey Carlin Senior Vice President
Stephen C. Coleman Senior Vice President
Hugh Freedberg Chairman
Larry Ray Hill Executive Vice President/Director
Anne Florence Holloran Senior Vice President
Richard A. Holway Senior Vice President
Irving Philip Knelman Executive Vice President/Director
Rick D. Leggott Senior Vice President
Timothy A. Palmer Senior Vice President
Douglas Rugh Platt Senior Vice President
Andrew Scott Plummer Director
Noel Paul Rahn Chief Executive Officer/Director
R. David Spreng Senior Vice President
Christopher John Smith Senior Vice President/Secretary
Eric St. C. Stobart Director
Richard Edward Struthers Executive Vice President/Director
Suzanne F. Zak Senior Vice President
</TABLE>
All of such persons have been affiliated with IAI for more than two
years except Messrs. Barrington, Bernays, Freedberg, Plummer and Stobart. Prior
to being appointed to the Board of IAI in 1993, Mr. Bernays was and remains
Chief Executive Officer of Hill Samuel Investment Management Group Ltd., 10
Fleet Place, Limeburner Lane, London, England EC4M 7RH, since 1992. Prior to
being appointed to the Board in 1994, Mr. Barrington was and remains Managing
Director of Hill Samuel Bank, 100 Wood Street, London, England EC2P 2AJ, since
1991. Prior to being appointed to the Board in 1994, Mr. Freedberg was and
remains Chief Executive
III-2
<PAGE>
of TSB Group plc, Hill Samuel Division, 100 Wood Street, London, England EC2P
2AJ, since 1991. Prior to being appointed to the Board in 1994, Mr. Plummer was
and remains Legal Adviser to TSB Group plc, 60 Lombard Street, London, England
EC3V 9DN, since 1988. Prior to being appointed to the Board in 1994, Mr. Stobart
was and remains Director of Hill Samuel Bank, 100 Wood Street, London, England
EC2P 2AJ, since 1977.
Certain directors and officers of IAI are directors and/or officers of
the Registrant, as described in the section of the Statement of Additional
Information entitled "Management," filed as a part of this Registration
Statement.
The address of the officers and directors of IAI is that of IAI, which
is 3700 First Bank Place, P. O. Box 357, Minneapolis, Minnesota 55440.
Certain of the officers and directors of IAI also serve as officers
and directors of IAI International Ltd. Both IAI and IAI International are
wholly-owned subsidiaries of Hill Samuel Group BV, a London-based merchant
banking and financial services firm which, in turn, is owned by 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:
<TABLE>
<CAPTION>
Name Title
- ---- -----
<S> <C>
Noel Paul Rahn Chairman of the Board of Directors
Richard Bernays Director
Roy C. Gillson Chief Investment Officer/Director
Anne F. Holloran Senior Vice President/Director
Irving Philip Knelman Director
Hilary Fane Deputy Chief Investment Officer/Director
Feidhlim O'Broin Associate Director
Robert Swift Associate Director
Elizabeth Gold 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>
Name Title
- ---- -----
<S> <C>
Richard E. Struthers Chairman of the Board
John G. Flesch Director/President
Christopher J. Smith Director/Secretary
Archie C. Black Director/Treasurer
Christie Haagensen Director of Client Services
</TABLE>
III-3
<PAGE>
Item 29. Principal Underwriters
- ------- ----------------------
(a) IAI Securities is also the principal underwriter for IAI
Investment Funds I, Inc., IAI Investment Funds II, Inc., IAI Investment Funds
III, Inc., IAI Investment Funds IV, Inc., IAI Investment Funds V, Inc., IAI
Investment Funds VII, Inc., and IAI Investment Funds VIII, Inc.
(b) The officers and directors of IAI Securities and the positions, if
any, such officers and directors hold with the Registrant are set forth below.
The business address of such persons is 3700 First Bank Place, Minneapolis,
Minnesota 55402.
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
- ---------------- ---------------- ---------------
<S> <C> <C>
Noel P. Rahn Chairman of the Board Chairman of the Board
Richard E. Struthers President/Director President/Director
Douglas R. Platt Vice President/Director None
R. David Spreng Vice President/Director None
Christopher J. Smith Secretary None
Archie C. Black, III CFO/Treasurer Treasurer
William C. Joas Chief Compliance Officer Secretary
</TABLE>
Item 30. Location of Accounts and Records.
- ------- --------------------------------
The Custodian for Registrant is Norwest Bank Minnesota, N.A., Norwest
Center, Sixth & Marquette, Minneapolis, Minnesota 55479. The Custodian
maintains records of all cash transactions of Registrant. All other books and
records of Registrant, including books and records of Registrant's investment
portfolios, are maintained by IAI. IAI also acts as Registrant's transfer agent
and dividend disbursing agent, at 3700 First Bank Place, Minneapolis, Minnesota
55402.
Item 31. Management Services.
- ------- -------------------
Not applicable.
Item 32. Undertakings.
- ------- ------------
(a) Not applicable.
(b) Not applicable.
(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 .
III-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Registrant certifies that it meets all of the
requirements for effectiveness of its Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Minneapolis, and State of Minnesota, on the 30th day of May, 1995.
IAI INVESTMENT FUNDS V, INC.
(Registrant)
By /s/ Richard E. Struthers
-----------------------------------
Richard E. Struthers, President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated:
/s/ Richard E. Struthers President (principal May 30, 1995
- ------------------------ executive officer) & Director
Richard E. Struthers
/s/ Archie C. Black III Treasurer (principal May 30, 1995
- ----------------------- financial and accounting
Archie C. Black III officer)
Noel P. Rahn (1)
Director
Madeline Betsch (1)
Director
W. William Hodgson (1)
Director
George R. Long (1)
Director
J. Peter Thompson (1)
Director
Charles H. Withers (1)
Director
/s/ William C. Joas May 30, 1995
- -------------------
William C. Joas,
Attorney-in-fact
(1) Registrant's directors executing Powers of Attorney dated August 18, 1993,
and filed with the Commission on June 28, 1994.
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Exhibit Description Sequential Page No.
- ----------- ------------------- -------------------
6A Distribution and Shareholder Services Agreement
6B Dealer Sales Agreement
6C Shareholder Services Agreement
11 Consent of Independent Auditors
15 Plan of Distribution
27 Financial Data Schedule
99 Annual Report
<PAGE>
EXHIBIT 6A
AS AMENDED 5/10/95
DISTRIBUTION AND SHAREHOLDER SERVICES AGREEMENT
THIS AGREEMENT is made this 10 day of May, 1995, by and between IAI
Investment Funds V, Inc., a Minnesota corporation (the "Corporation"), on behalf
of each portfolio represented by a series of shares of common stock of the
Corporation (the "Portfolios") set forth in Exhibit A hereto, as supplemented
from time to time, and IAI Securities, Inc., a Minnesota corporation
("Securities").
1. DISTRIBUTION AND SHAREHOLDER SERVICES.
--------------------------------------
The Corporation hereby engages Securities, and Securities hereby agrees
to act, as principal underwriter for the Corporation in connection with the sale
and distribution of Portfolio shares to the public. Securities agrees to offer
such shares for sale at all times when such shares are available for sale and
may lawfully be offered for sale and sold. Securities, or others retained by it,
may also provide shareholder services, as described in the Corporation's Plan of
Distribution.
2. SALE OF PORTFOLIO SHARES.
-------------------------
Portfolio shares are to be sold only on the following terms:
(a) All subscriptions, offers or sales shall be subject to acceptance
or rejection by the Corporation. Any offer or sale shall be conclusively
presumed to have been accepted by the Corporation if the Corporation shall fail
to notify Securities of the rejection of such offer or sale prior to the
computation of the net asset value of the respective Portfolio's shares next
following receipt by the Corporation of notice of such offer or sale.
(b) Portfolio shares shall not be sold by Securities for an amount less
than the net asset value of such shares. No such shares shall be sold by
Securities for any consideration other than cash or, pursuant to an exchange
privilege provided for by the currently effective Prospectus of the respective
Portfolio, shares of any other investment company for which Securities act as
principal underwriter.
3. REGISTRATION OF SHARES.
-----------------------
The Corporation agrees to make prompt and reasonable efforts to effect
and keep in effect, at its own expense, the registration or qualification of the
shares of each Portfolio for sale in such jurisdiction as the Corporation may
designate.
4. INFORMATION TO BE FURNISHED TO SECURITIES.
------------------------------------------
The Corporation agrees that it will furnish Securities with such
information with respect to the affairs and accounts of the Corporation and the
Portfolios as Securities may from time to time reasonably require and further
agrees that Securities, at all reasonable times, shall be permitted to inspect
the books and records of the Corporation.
5. ALLOCATION OF EXPENSES.
-----------------------
During the period of this contract, the Corporation, on behalf of each
Portfolio shall pay or cause to be paid all expenses, costs and fees which are
not assumed by Securities or Investment Advisers, Inc. ("Advisers"). Securities
shall pay all promotional expenses in connection with the distribution of
Portfolio shares including paying for prospectuses and shareholder reports for
new shareholders and the costs of sales literature. Securities shall pay all
expenses which it incurs in connection with providing shareholder services.
Advisers, rather than Securities, may bear the expenses referred to in the above
two sentences, but Securities shall be primarily liable for such expenses until
paid.
<PAGE>
6. COMPENSATION TO SECURITIES.
---------------------------
As compensation for all of its services and its costs assumed under
this contract, the Corporation, on behalf of each Portfolio, shall pay
Securities a monthly fee based upon the average net assets of the Portfolios as
set forth in Exhibit A hereto, as supplemented from time to time.
Securities hereby agrees to waive a portion or all of the monthly fee
with respect to each Portfolio to the extent that the expenses for such
Portfolio exceeds its expense limitation referenced in Part Three of the
Investment Advisory Agreement between the Corporation and Advisers.
The monthly distribution fee paid by each Portfolio shall be used by
Securities for the purposes of financing any activity which is primarily
intended to result in the sale of such Portfolio's shares as set forth in a
written plan and in any related agreements which shall comply with Rule 12b-1
under the Investment Company Act of 1940, as such rule may be periodically
amended.
7. LIMITATION OF SECURITIES' AUTHORITY.
------------------------------------
Securities shall be deemed to be an independent contractor and, except
as specifically provided or authorized herein, shall have no authority to act
for or represent the Corporation or any Portfolio. In connection with its role
as underwriter of Portfolio shares, Securities shall at all times be deemed an
agent of the Corporation and shall sell such shares to purchasers thereof as
agent and not as principal.
8. SUBSCRIPTION FOR SHARES--REFUND FOR CANCELED ORDERS.
----------------------------------------------------
Securities shall effect the subscription of Portfolio shares as agent
for the Corporation. In the event that an order for the purchase of Portfolio
shares is placed with Securities by a customer and subsequently canceled,
Securities, on behalf of such customer or dealer, shall forthwith cancel the
subscription for such shares entered on the books of the Corporation, and if
Securities has paid the Corporation for such shares, shall be entitled to
receive from the Corporation in refund of such payment the lesser of:
(a) the consideration received by the Corporation for said shares; and
(b) the net asset value of such shares at the time of cancellation by
Securities.
9. INDEMNIFICATION OF THE CORPORATION.
-----------------------------------
Securities agrees to indemnify the Corporation against any and all
litigation and other legal proceedings of any kind or nature and against any
liability, judgment, cost or penalty imposed as a result of such litigation or
proceedings in any way arising out of or in connection with the sale or
distribution of Portfolio shares by Securities. In the event of the threat or
institution of any such litigation or legal proceedings against the Corporation,
Securities shall defend such action on behalf of the Corporation at its own
expense, and shall pay any such liability, judgment, cost or penalty resulting
therefrom whether imposed by legal authority or agreed upon by way of compromise
and settlement; provided, however, Securities shall not be required to pay or
reimburse the Corporation for any liability, judgment, cost or penalty incurred
as a result of information supplied by, or as the result of the omission to
supply information by, the Corporation to Securities, or to Securities by a
director, officer, or employee of the Corporation who is not an interested
person of Securities, unless the information so supplied or omitted was
available to Securities or Advisers without recourse to the Corporation or any
such interested person of the Corporation.
10. FREEDOM TO DEAL WITH THIRD PARTIES.
-----------------------------------
Securities shall be free to render to others services of a nature
either similar to or different from those rendered under this contract, except
such as may impair its performance of the service and duties to be rendered by
it hereunder.
<PAGE>
11. EFFECTIVE DATE, DURATION AND TERMINATION OF AGREEMENT.
------------------------------------------------------
This Agreement shall become effective with respect to each Portfolio on
the date set forth on Exhibit A hereto, as supplemented from time to time.
Unless sooner terminated as hereinafter provided, this Agreement shall
continue in effect only so long as such continuance is specifically approved at
least annually (a) by the Board of Directors of the Corporation, or by the vote
of the holders of a majority of the outstanding voting securities of the
applicable Portfolio, and (b) by a majority of the directors who are not
interested persons of Securities or of the Corporation cast in person at a
meeting called for the purpose of voting on such approval. Whenever referred to
in this Agreement, the vote or approval of the holders of a majority of the
outstanding voting securities of a Portfolio shall mean the vote of 67% or more
of such securities if the holders of more than 50% of such securities are
present in person or by proxy or the vote of more than 50% of such securities,
whichever is less.
This Agreement may be terminated with respect to any Portfolio at any
time without the payment of any penalty by the vote of the Board of Directors of
the Corporation or by the vote of the holders of majority of the outstanding
voting securities of such Portfolio, or by Securities, upon sixty (60) days'
written notice to the other party. This Agreement shall automatically terminate
in the event of its assignment.
12. AMENDMENTS TO AGREEMENT.
------------------------
No material amendment to this Agreement shall be effective until
approved by a vote of the Board of Directors of the Corporation, including a
majority of the directors who are not interested persons of the Corporation and
who have no direct or indirect financial interest in this Agreement, case in
person at a meeting called for the purpose of voting on such amendment.
Additionally, no amendment to this Agreement that materially increases the fee
payable by a Portfolio hereunder shall be effective until approved by a vote of
the holders of a majority of the outstanding voting securities of such
Portfolio.
13. NOTICES.
--------
Any notice under this Agreement shall be in writing addressed,
delivered or mailed, postage prepaid to the other party at such address as such
other party may designate in writing for receipt of such notice.
IN WITNESS WHEREOF, the Corporation and Securities have caused this
Agreement to be executed by their duly authorized officers as of the day and
year first above written.
IAI INVESTMENT FUNDS V, INC.
By: ______________________________
Noel P. Rahn, Chairman
IAI SECURITIES, INC.
By: ________________________________
Richard E. Struthers, President
<PAGE>
EXHIBIT 6B
DEALER SALES AGREEMENT
----------------------
Ladies and Gentlemen:
We invite you to join a selling group for the distribution of shares of those
mutual funds available to the public for which we serve as principal underwriter
(the "Funds"). Upon execution of this Agreement, you agree to participate in
the distribution of the Funds to the public subject to the terms set forth
herein.
1. In all sales of the Funds to the public, you shall act as dealer of your
own account and shall not be authorized to act as agent for the Funds, for us or
for any other dealer.
2. All orders will be accepted by us only at the price, in the amount and
subject to the terms set forth in the then current Prospectuses and Statements
of Additional Information of the Funds. The procedure relating to the handling
of orders shall be subject to instructions which we shall forward to you from
time to time. Certificates representing shares of the Funds will not be issued.
3. You agree to provide distribution and marketing services in the marketing
of shares of the Funds and assistance to your customers who own shares of the
Funds including, but not limited to, answering inquiries regarding the status of
customers' accounts, assisting in changing dividend options, account
designations and addresses, and providing information to customers relating to
maintaining their investments in the Funds. For such services, we will pay you
a fee, as established by us from time to time and as permitted by each Fund's
respective Plan of Distribution established under Rule 12b-1 of the Investment
Company Act of 1940. Such fee will be based upon the following percentages of
the average month-end net assets of each Fund represented by shares of the Fund
owned, during the quarter for which payment is being made, by customers for
which you maintain a servicing relationship as evidenced by their execution of
such agreements as we may from time to time require. We specifically reserve
the right to discontinue paying fees with respect to those assets for which such
customer authorizations which we may require are not provided.
<PAGE>
Annual Fee (as a % of
Fund average month-end net assets)
----------------------- -----------------------------
Reserve Fund 0
Money Market Fund 0
Tax Free Fund .10%
Bond Fund .15%
Government Fund .15%
Growth and Income Fund .25%
Regional Fund .25%
Value Fund .25%
Developing Countries Fund .25%
International Fund .25%
Midcap Growth Fund .25%
Balanced Fund .25%
Growth Fund .25%
Such fee will be paid on a quarterly basis and, subject to the last sentence of
this section 3, will be paid so long as the accounts of your clients remain in
the Funds and this Agreement and such other agreements as we may require have
not been terminated. Each Fund reserves the right to terminate or suspend its
Plan of Distribution at any time as specified therein. You agree to furnish us
or the Funds with such information as may be reasonably requested with respect
to such fees paid to you pursuant to this Agreement.
4. If any Fund shares sold under the terms of this Agreement are repurchased
by the Funds or are tendered for redemption within seven business days after
confirmation of the original purchase, it is agreed that you shall forfeit the
right to receive the fees hereunder with respect to such shares.
5. No person is authorized to make any representations concerning the Funds
except those contained in the then current Prospectuses and in such printed
information as may be furnished by us for use as information supplemental to the
Prospectuses. Additional copies of the Prospectuses and any printed information
supplementing the Prospectuses will be supplied by us in reasonable quantities
upon request.
2
<PAGE>
6. We reserve the right in our sole discretion, without notice, to suspend
sales or withdraw the offering of shares of the Funds. This Agreement may be
terminated by either party at any time upon seven days' notice to the other
party. We reserve the right to amend this Agreement at any time upon written
notice.
7. You represent that you are a member in good standing of the National
Association of Securities Dealers, Inc. and agree that termination or suspension
of such membership shall automatically terminate this Agreement. You further
agree that you will immediately advise us of any such termination or suspension.
You also represent that you are authorized under relevant federal and state laws
and regulations to receive the fees payable hereunder and that you will
immediately advise us of any termination or suspension of such authorization.
8. You agree to indemnify and hold harmless the Funds and IAI Securities, Inc.
from and against any and all claims, liability, expense or loss in any way
connected with your violation of this Agreement or arising out of or in any way
connected with your willful, reckless or negligent conduct in the performance of
your duties and obligations hereunder including, without limitation, any
representations, verbal or otherwise, of any untrue or alleged untrue statements
of a material fact relating to the offer and sale of the Funds made by you, your
agents or employees.
9. All communications to us should be sent to the above address. Any notice
to you shall be duly given if mailed or telegraphed to you at the address
specified by you below. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota.
The undersigned hereby accepts
the offer set forth herein:
DEALER IAI SECURITIES, INC.
By____________________________ By______________________________
Its___________________________ Its_____________________________
Date of Acceptance_______, 19___
3
<PAGE>
EXHIBIT 6C
SHAREHOLDER SERVICE AGREEMENT
Ladies and Gentlemen:
We invite you to enter into an agreement with us for the servicing of
shareholders of, and the maintenance of shareholder accounts for which we serve
as principal underwriter (the "Funds") and the shares of which are offered to
the public at net asset value, as described in the Funds' Prospectuses. Subject
to your acceptance of this Agreement, the terms and conditions of this Agreement
shall be as follows:
1. You shall provide shareholder and account maintenance services for certain
shareholders of the Funds who purchase shares of the Funds as a result of
their relationship to you. Such services may include, shareholder liaison
services, such as responding to customer inquiries and providing
information on their investments, and such other information and services
as we reasonably may request, to the extent you are permitted by applicable
statue, rule or regulation to provide such information or services.
2. If shares of the Funds are to be purchased or held by you on behalf of your
clients:
(i) Such shares will be registered in your name or in the name of your
nominee. The client will be the beneficial owner of the shares of the
Funds purchased and held by you in accordance with the client's
instructions and the client may exercise all rights of a shareholder
of the Funds. You agree to transmit to the Funds' transfer agent
(Investment Advisers, Inc.), in a timely manner, all purchase orders
and redemption requests of your clients and to forward to each client
all proxy statements, periodic shareholder reports and other
communications received from the Funds by you on behalf of your
clients. The Funds have agreed to pay all reasonable out-of-pocket
expenses actually incurred by you in connection with the transfer by
you of such proxy statements and reports to your clients.
(ii) You agree to transfer to the Funds' transfer agent, on the date such
purchase orders are effective, federal funds in an amount equal to
the amount of all purchase orders placed by you on behalf of your
clients and accepted by the Funds. In the event that the Funds fail
to receive such federal funds on such date (other than through fault
of the Funds or their transfer agent), you shall indemnify the Funds
against any expense (including overdraft charges) incurred by the
Funds as a result of their failure to receive such federal funds.
(iii) You agree to make available to the Funds, upon the Funds' request,
such information relating to your clients who are beneficial owners
of shares of
<PAGE>
the Funds and their transactions in shares of the Funds, as may be
required by applicable laws and regulations or as may be reasonably
requested by the Funds.
(iv) You agree to transfer record ownership of a client's shares of the
Funds to the client promptly upon the request of a client. In
addition, record ownership will be promptly transferred to the client
in the event that the person or entity ceases to be your client.
3. You shall provide to us copies of the lists of members of your organization
and make available to us any publications and other facilities of your
organization for the placement of advertisements or promotional materials
and sending information regarding the Funds, to enable us to solicit for
sale and to sell shares to your members.
4. Neither you nor any of your employees or agents are authorized to make any
representation concerning the shares of the Funds except those contained in
the then current Prospectuses of the Funds, copies of which will be
supplied by us to you; and you shall have no authority to act as agent for
the Funds or for us. You agree to hold the Funds harmless and indemnify us
in the event that you, or any of your employees or agents, should violate
any law, rule, or regulation, or any provisions of this Agreement, which
violation may result in liability to us, and in the event we determine to
refund any amounts paid by any investor by reason of any such violation on
your part, you shall return to us any fees previously paid by us to you in
connection with the transaction for which the refund is made.
5. In consideration for the services described herein, you shall be entitled
to receive from us such fees as established by us from time to time and as
permitted by each Funds' respective Plan of Distribution established under
Rule 12b-1 of the Investment Company Act of 1940 as set forth on Exhibit A.
Such fee will be based upon assets of each Fund represented by shares of
the Fund owned, during the quarter for which payment is being made, by
shareholders for which you maintain a servicing relationship as evidenced
by their execution of such agreements as we may from time to time require.
We specifically reserve the right to discontinue paying fees with respect
to those assets for which such customer authorization which we may require
is not provided.
Such fee will be paid on a quarterly basis and, subject to the last
sentence of this section, will be paid so long as the accounts for your
clients and this Agreement and such other agreements as we may require have
not been terminated. Each Fund reserves the right to terminate or suspend
its Plan of Distribution or terminate this Agreement at any time, and upon
such termination any such obligation to pay such fee shall cease. You
agree to furnish us and the Funds with any such information as may be
reasonably requested with respect to such fees paid to you pursuant to this
Agreement.
<PAGE>
6. We reserve the right, at our discretion and without notice, to suspend the
sale of shares or withdraw the sale of shares of the Funds.
7. This Agreement may be terminated by either party at any time upon seven
days notice to the other party with or without cause. We reserve the right
to amend this Agreement at any time upon written notice.
8. All communications to us should be sent to us at 3700 First Bank Place,
P.O. Box 357, Minneapolis, MN 55440. Any notice to you shall be duly given
if mailed or telegraphed to you at the address specified by you below.
This Agreement shall be governed by and construed under the laws of the
State of Minnesota.
The undersigned hereby accepts IAI Securities, Inc.
the offer set forth herein
_____________________________ By __________________________
Firm
By___________________________ Its ___________________________
Its ___________________________ Date of Acceptance______________
Address_______________________
_____________________________
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
Independent Auditors' Consent
-----------------------------
The Board of Directors
IAI Investment Funds V, Inc.
IAI Investment Funds VI, Inc.:
We consent to the use of our report incorporated herein by reference and to the
references to our Firm under the headings "FINANCIAL HIGHLIGHTS" AND "COUNSEL
AND AUDITORS" in Part A of the Registration Statement.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
May 19, 1995
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
<PAGE>
EXHIBIT 15
AS AMENDED 5/10/95
IAI INVESTMENT FUNDS V, INC.
PLAN OF DISTRIBUTION
WHEREAS, Rule 12b-1 under the Investment Company Act of 1940 (the "Rule"),
provides that a registered open-end management investment company may act as a
distributor of securities of which it is the issuer, provided that any payments
made by such company in connection with such distribution are made pursuant to a
written plan describing all material aspects of the proposed financing of
distribution; and
WHEREAS, it is intended that IAI Investment Funds V, Inc. (the
"Corporation"), will enter into an Underwriting and Distribution Agreement (the
"Agreement") with IAI Securities, Inc. ("Securities"), pursuant to which shares
of each series of common stock of the Corporation set forth in Exhibit A hereto,
as supplemented from time to time (the "Portfolios"), will be sold to the
public.
NOW THEREFORE, the following shall constitute the written plan pursuant to
which such distribution shall be made.
The Agreement between the Corporation, on behalf of each Portfolio, and
Securities provides that Securities will receive, as compensation for services
it renders under the Agreement, a monthly fee from each Portfolio as set forth
in Exhibit A hereto.
Securities shall waive a portion or all of the monthly fee so that the
Corporation does not exceed the expense limitation referenced in Part Three (3)
of the Investment Advisory Agreement between the Corporation and Investment
Advisers, Inc. The Corporation's investment adviser and Securities may at their
option and in their sole discretion, make payments from their own resources to
cover the costs of additional distribution and shareholder servicing activities.
The monthly fee paid by each Portfolio shall be used by Securities for the
purposes of financing any activity which is primarily intended to result in the
sale of such Portfolio's shares, or as otherwise provided herein.
The fee may be used to pay advertising and promotional expenses in
connection with the distribution of shares of the Portfolios. These advertising
and promotional expenses include, by way of example but not by way of
limitation:
- costs of prospectuses, annual reports and semi-annual reports for other
than current shareholders
- costs of quarterly reports and monthly letters to shareholders and
prospective shareholders
- preparation and distribution of sales literature and advertising of any
type
- compensation and benefits paid to and expenses incurred by:
- personnel involved in the preparation and execution of all direct mail
and advertising activity
- personnel involved in the direct marketing of shares to the public
- personnel with the responsibility of supporting the activities mentioned
above
<PAGE>
- compensation to other broker-dealers for their sale of the
Corporation's shares, including the implementation of various
incentive programs with respect to broker-dealers, banks and other
financial institutions.
The fee may also be used to pay shareholder servicing fees, which includes
payments for personal service and/or the maintenance of shareholder accounts.
These shareholder servicing fees may be paid to those who provide shareholder
liaison services, such as responding to customer inquiries and providing
information on their investments.
This Plan shall become effective with respect to each Portfolio on the date
set forth on Exhibit A hereto, as supplemented from time to time.
This Plan shall continue in effect for a period of more than one year from
the date of its adoption with respect to a Portfolio only so long as such Plan,
together with any related agreements, has been approved by a vote of the Board
of Directors of the Corporation, and the directors who are not interested
persons of the Corporation and have no direct or indirect financial interest in
the operation of the Plan or in any agreements related to the Plan, cast in
person at a meeting called for the purpose of voting on such Plan or agreements.
The President of Securities, or such other persons as he may designate,
shall provide to the Board of Directors of the Corporation, and the directors
shall review, at least quarterly, a written report of the amounts received by
Securities pursuant to the Plan, the expenditures made by Securities out of such
proceeds, and the purpose for which such expenditures were made.
This Plan may be terminated with respect to a Portfolio at any time by vote
a majority of the members of the Board of Directors of the Corporation who are
not interested persons of the Corporation and have no direct or indirect
financial interest in the operation of the Plan or in any agreements related to
the Plan, or by vote of a majority of the outstanding voting securities of such
Portfolio.
This Plan may not be amended to increase materially the amount to be spent
by a Portfolio as set forth in Exhibit A without shareholder approval.
All material amendments to the Plan, together with any related agreements,
must be approved by a vote of the Board of Directors of the Corporation, and of
the directors who are not interested persons of the Corporation and who have no
direct or indirect financial interest in the operation of the Plan or in any
agreements related to the Plan, cast in person at a meeting called for the
purpose of voting such Plan or agreements.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 0
<NAME> IAI RESERVE FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-START> APR-01-1994
<PERIOD-END> JAN-31-1995
<INVESTMENTS-AT-COST> 77,397
<INVESTMENTS-AT-VALUE> 76,723
<RECEIVABLES> 512
<ASSETS-OTHER> 127
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 77,362
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 89
<TOTAL-LIABILITIES> 89
<SENIOR-EQUITY> 78
<PAID-IN-CAPITAL-COMMON> 79,187
<SHARES-COMMON-STOCK> 7,812
<SHARES-COMMON-PRIOR> 9,897
<ACCUMULATED-NII-CURRENT> 33
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 1,304
<ACCUM-APPREC-OR-DEPREC> (721)
<NET-ASSETS> 77,273
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,926
<OTHER-INCOME> 0
<EXPENSES-NET> 592
<NET-INVESTMENT-INCOME> 3,334
<REALIZED-GAINS-CURRENT> (571)
<APPREC-INCREASE-CURRENT> (124)
<NET-CHANGE-FROM-OPS> (695)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,407
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12,213
<NUMBER-OF-SHARES-REDEEMED> 14,637
<SHARES-REINVESTED> 339
<NET-CHANGE-IN-ASSETS> (21,540)
<ACCUMULATED-NII-PRIOR> 107
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 734
<GROSS-ADVISORY-FEES> 348
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 624
<AVERAGE-NET-ASSETS> 83,410
<PER-SHARE-NAV-BEGIN> 9.98
<PER-SHARE-NII> .40
<PER-SHARE-GAIN-APPREC> (.08)
<PER-SHARE-DIVIDEND> .41
<PER-SHARE-DISTRIBUTIONS> .0
<RETURNS-OF-CAPITAL> .0
<PER-SHARE-NAV-END> 9.89
<EXPENSE-RATIO> .85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
