<PAGE>
As filed with the Securities and Exchange Commission on April 1, 1996
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
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Pre-Effective Amendment No.
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Post-Effective Amendment No. 18 X
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and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
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Amendment No. 18 X
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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)
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on (date) pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)(1)
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X on June 1, 1996 pursuant to paragraph (a)(1)
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75 days after filing pursuant to paragraph (a)(2)
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on (date) pursuant to paragraph (a)(2) of Rule 485
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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 26, 1996.
<PAGE>
IAI INVESTMENT FUNDS V, INC.
FORM N-1A
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
Item Number Caption Prospectus Caption
- ----------- ------- ------------------
<C> <C> <S>
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 Statement of Additional Information Caption
- ----------- ------- -------------------------------------------
<C> <C> <S>
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, 1996
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,
1996, which provides a further discussion of certain areas in this Prospectus
and other matters which may be of interest to some investors, has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference. For a free copy, call or write the Funds at the address or telephone
number shown on the inside back cover of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
FUND EXPENSE INFORMATION .................................................. 3
FUND DIRECTORS ............................................................ 3
FINANCIAL HIGHLIGHTS ...................................................... 4
INVESTMENT PERFORMANCE .................................................... 6
INVESTMENT OBJECTIVE AND POLICIES ......................................... 6
OTHER FUND INVESTMENT TECHNIQUES .......................................... 8
FUND RISK FACTORS ......................................................... 10
MANAGEMENT ................................................................ 12
COMPUTATION OF NET ASSET VALUE AND PRICING ................................ 13
PURCHASE OF SHARES ........................................................ 13
RETIREMENT PLANS .......................................................... 14
AUTOMATIC INVESTMENT PLAN ................................................. 14
REDEMPTION OF SHARES ...................................................... 14
EXCHANGE PRIVILEGE ........................................................ 15
AUTOMATIC EXCHANGE PLAN ................................................... 15
AUTHORIZED TELEPHONE TRADING .............................................. 16
SYSTEMATIC CASH WITHDRAWAL PLAN ........................................... 16
CHECK WRITING PRIVILEGE ................................................... 16
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS ................................... 17
DESCRIPTION OF COMMON STOCK ............................................... 18
COUNSEL AND AUDITORS ...................................................... 18
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT ................... 18
ADDITIONAL INFORMATION .................................................... 18
2
<PAGE>
FUND EXPENSE INFORMATION
<TABLE>
<CAPTION>
MONEY MARKET RESERVE
SHAREHOLDER TRANSACTION EXPENSES FUND FUND
- -------------------------------- ------------ -------
<S> <C> <C>
Sales Load Imposed on Purchases .................. None None
Sales Load Imposed on Reinvested Dividends ....... None None
Redemption Fees .................................. None None
Exchange Fees .................................... None None
ANNUAL FUND OPERATING EXPENSES
- ------------------------------ MONEY MARKET RESERVE
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS) FUND FUND
- --------------------------------------------- ------------ -------
Management Fee ................................... .60% .85%
Rule 12b-1 Distribution Fee ...................... None None
Other Expenses ................................... None None
---- ----
Total Fund Operating Expenses .................... .60% .85%
==== ====
</TABLE>
EXAMPLE:
Based upon the levels of Total Fund Operating Expenses listed above, you would
pay the following expenses on a $1,000 investment, assuming a five percent
annual return and redemption at the end of each period:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Fund $6 $19 $33 $ 75
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. Because of a change in each Fund's fee structure effective April 1,
1996, the information in the table has been restated to reflect each Fund's
current fees. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. For
the period from April 1, 1996 through June 30, 1996, IAI has voluntarily agreed
to waive its Management Fee in excess of .50% of Money Market Fund's average
daily net assets.
FUND DIRECTORS
Madeline Betsch Richard E. Struthers
W. William Hodgson J. Peter Thompson
George R. Long Charles H. Withers
Noel P. Rahn
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report is included in each Fund's Annual Report.
The financial statements in the Annual Report are incorporated by reference in
(and are a part of) the Statement of Additional Information. Such Annual Report
may be obtained by shareholders on request from the Fund at no charge.
<TABLE>
<CAPTION>
MONEY MARKET FUND
PERIOD
FROM PERIOD
4/1/94 FROM
YEAR ENDED TO YEAR ENDED 1/5/93(1)
1/31/96 1/31/95(2) 3/31/94 TO 3/31/93
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- -------
OPERATIONS:
Net investment income 0.05 0.03 0.03 0.01
------- ------- ------- -------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.05) (0.03) (0.03) (0.01)
------- ------- ------- -------
NET ASSET VALUE:
End of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= =======
Total investment return* 5.46% 3.47% 2.88% 2.85%**
Net assets at end of period (000's
omitted) $27,395 $33,175 $29,788 $25,877
RATIOS:
Expenses to average daily net assets*** .50% .50%** .45% .29%**
Net investment income to average daily
net assets*** 5.34% 4.12%** 2.73% 2.96%**
</TABLE>
- ----------------------
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions at
net asset value.
** Annualized
*** The Fund's adviser voluntarily waived $76,386, $81,895, $147,924 and
$18,494 in expenses for the year ended January 31, 1996, 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
.74%, .88%, .88% and .69%, respectively, and the ratio of net investment
income to average daily net assets would have been 5.10%, 3.74%, 2.30% and
2.56%, respectively.
(1) Commencement of operations.
(2) Reflects fiscal year-end change from March 31 to January 31.
4
<PAGE>
<TABLE>
<CAPTION>
RESERVE FUND
YEAR
ENDED YEARS ENDED MARCH 31,
======= =====================================================================================
1/31/96 1995 (2) 1994 1993 1992 1991 1990 1989 1988 1987 1986 (1)
-------- --------- ----- ----- ----- ----- ----- ----- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period $ 9.89 $9.98 $10.10 $10.16 $10.17 $10.08 $10.03 $10.08 $10.19 $10.10 $10.00
---------------------------------------------------------------------------------------------------
Operations:
Net investment income 0.56 .40 .39 .36 .57 .72 .80 .74 .58 .54 .06
Net realized and
unrealized gains
(losses) 0.09 (.08) (.13) .02 .08 .10 .03 (.05) .02 .02 .04
---------------------------------------------------------------------------------------------------
Total from operations 0.65 .32 .26 .38 .65 .82 .83 .69 .60 .56 .10
---------------------------------------------------------------------------------------------------
Distributions to
shareholders from:
Net investment income (0.54) (.41) (.37) (.36) (.58) (.73) (.78) (.74) (.71) (.47) --
Net realized gains -- -- (.01) (.08) (.08) -- -- -- -- -- --
---------------------------------------------------------------------------------------------------
Total distributions (0.54) (.41) (.38) (.44) (.66) (.73) (.78) (.74) (.71) (.47) --
---------------------------------------------------------------------------------------------------
NET ASSET VALUE:
End of period $ 10.00 $9.89 $ 9.98 $10.10 $10.16 $10.17 $10.08 $10.03 $10.08 $10.19 $10.10
===================================================================================================
Total investment return* 6.76% 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
RATIOS:
Expenses to average net
assets .85% 85%** .85% .85% .85% .85% .85% .85% .80% .80% .90%**
Net investment income to
average net assets 5.48% 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) 261.1% 170.0% 235.0% 538.7% 218.1% 87.0% 63.1% 64.3% 0% 30.1% 0%
</TABLE>
- ---------------------------
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value.
** Annualized
(1) Period from January 31, 1986 (commencement of operations) to March 31,
1986.
(2) Period from April 1, 1994 to January 31, 1995. Reflects fiscal year-end
change from March 31 to January 31.
5
<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
a standard that is required for all bond funds. Because this differs from other
accounting methods, the quoted yield may not equal the income actually paid to
shareholders. The 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 is the change in value of an investment in a Fund over a given
period, assuming reinvestment of any dividends and capital gains. A cumulative
total return reflects actual performance over a stated period of time. An
average annual total return is a hypothetical rate of return that, if achieved
annually, would have produced the same cumulative total return if performance
had been constant over the entire period. 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 the Funds is
contained in the Funds' Annual Report to shareholders which may be obtained
without charge from the Funds.
Comparative performance information may be used from time to time in
advertising or marketing a Fund's shares, including data on the performance of
other mutual funds, indexes or averages of other mutual funds, indexes of
related financial assets or data, and other competing investment and deposit
products available from or through other financial institutions. The
composition of these indexes, averages or products differs from that of the
Funds. The comparison of a Fund to an alternative investment should be made
with consideration of differences in features and expected performance. A Fund
may also note its mention in newspapers, magazines, or other media from time to
time. The Funds assume no responsibility for the accuracy of such data. For
additional information on the types of indexes, averages and periodicals that
might be utilized by the Funds in advertising and sales literature, see the
section "Investment Performance" in the Statement of Additional Information.
INVESTMENT OBJECTIVE AND POLICIES
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.
6
<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 "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
7
<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.
Reserve Fund may also invest in below investment grade securities. Such
securities are commonly referred to as junk bonds. Reserve Fund currently
intends to limit such investments to less than 10% of its total assets and not
to invest in junk bonds rated lower than B by Moody's or S&P.
Securities rated in the medium to lower rating categories of nationally
recognized statistical rating organizations and unrated securities of comparable
quality are predominately speculative with respect to the capacity to pay
interest and repay principal in accordance with the terms of the security and
generally involve a greater volatility of price than securities in higher rating
categories. See "Investment Objectives and Policies" in and Appendix A to the
Statement of Additional Information for additional information regarding ratings
of debt securities. In purchasing such securities, Reserve Fund will rely on
IAI's judgment, analysis and experience in evaluating the creditworthiness of an
issuer of such securities. IAI will take into consideration, among other
things, the issuer's financial resources, its sensitivity to economic conditions
and trends, its operating history, the quality of the issuer's management and
regulatory matters.
For additional information regarding the types of securities and investment
techniques that may be utilized by the Fund, see "Other Fund Investment
Techniques" below. For additional information regarding the risks of investing
in the Fund, see "Fund Risk Factors" below.
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
8
<PAGE>
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.
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.
ILLIQUID SECURITIES
The Money Market Fund may invest up to 10% of its net assets, while the
Reserve Fund may invest up to 15% of its net assets, in securities that are
considered illiquid. This illiquidity may be due to the absence of a readily
available market or due to legal or contractual restrictions. However, certain
restricted securities that are not registered for sale to the general public but
that can be resold to institutional investors may be considered liquid pursuant
to guidelines adopted by the Board of Directors. The institutional trading
market is relatively new, and the liquidity of the Fund's investments could be
impaired if trading does not develop or declines.
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 (or through reverse repurchase
agreements) for temporary or emergency purposes. If the Fund borrows money, its
share price may be subject to greater fluctuation until the borrowing is paid
off. If 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
9
<PAGE>
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, as the rate was for Reserve Fund last
fiscal year. High turnover rates (100% or more) generally result in higher
brokerage and other costs for a Fund, 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
INTEREST RATE RISK
As a mutual fund investing in fixed-income securities, Reserve Fund is
subject to interest rate risk. Interest rate risk is the potential for a
decline in bond prices due to rising interest rates. In general, bond prices
vary inversely with interest rates. When interest rates rise, bond prices
generally fall. Conversely, when interest rates fall, bond prices generally
rise. The change in price depends on several factors, including the bond's
maturity date. In general, bonds with longer maturities are more sensitive to
changes in interest rates than bonds with shorter maturities. In managing
Reserve Fund, IAI will adjust the duration of the investment portfolio in
response to economic and market conditions. Duration is generally considered a
better measure of interest rate risk than is maturity. Duration is a measure of
the expected change in value of a fixed income security (or portfolio) for a
given change in interest rates. For example, if interest rates rise by one
percent, the market value of a security (or portfolio) having a duration of two
generally will fall by approximately two percent. In some situations, the
standard duration calculation does not properly reflect the interest rate risk
of a security. In such situations, IAI will use more sophisticated analytical
techniques, such as modeling principal and interest payments based upon
historical experience or expected volatility, to arrive at an effective duration
that incorporates the additional variables into the determination of interest
rate risk. These techniques may involve estimates of future economic parameters
which may vary from actual future outcomes. IAI anticipates the duration range
for the Reserve Fund to be .25 - 1.75 years. This range is merely an
expectation as of the date of this Prospectus, and may change due to market
conditions and other economic factors. Therefore, the expected duration range
does not limit IAI in how it manages the Fund. These principals of interest
rate risk also apply to U.S. Treasury and U.S. Government agency securities.
As with other bond investments, U.S. Government securities will rise and fall in
value as interest rates change. A security backed by the U.S. Treasury or the
full faith and credit of the United States is guaranteed only as to the timely
payment of interest and principal when held to maturity. The current market
prices for such securities are not guaranteed and will fluctuate.
Money Market Fund is subject to interest rate risk, however, IAI endeavors
to manage the Fund in such a way to minimize such risk and maintain a net asset
value of $1.00 per share. There can be no assurance that Money Market Fund will
be able to maintain a stable net asset value of $1.00 per share.
CREDIT RISK
Each Fund is also subject to credit risk. Credit risk, also known as
default risk, is the possibility that a bond issuer will fail to make timely
payments of interest or principal to a Fund. The credit risk of each Fund
depends on the quality of its investments. Reflecting their higher risks,
lower-quality bonds generally offer higher yields (all other factors being
equal).
CALL RISK
Reserve Fund is also subject to call risk. Call risk is the possibility
that corporate bonds held by Reserve Fund will be repaid prior to maturity.
Call provisions, common in many corporate bonds held by Reserve Fund, allow bond
issuers to redeem bonds prior to maturity (at a specified price). When interest
rates are falling, bond issuers often exercise these call provisions, paying off
bonds that carry high stated interest rates and often issuing
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new bonds at lower rates. For Reserve Fund, the result would be that
bonds with high interest rates are "called" and must be replaced with lower-
yielding instruments. In these circumstances, the income of Reserve Fund would
decline.
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.
MANAGER RISK
IAI manages each Fund according to the traditional methods of "active"
investment management, which involve the buying and selling of securities based
upon economic, financial and market analysis and investment judgment. Manager
risk refers to the possibility that IAI may fail to execute each Fund's
investment strategy effectively. As a result, each Fund may fail to achieve its
stated objective.
RISKS OF LOWER-RATED DEBT SECURITIES
Reserve Fund may invest in debt securities commonly known as "junk" bonds.
Such securities are subject to higher risks and greater market fluctuations than
are lower-yielding, higher-rated securities. The price of junk bonds has been
found to be less sensitive to changes in prevailing interest rates than higher-
rated investments, but is likely to be more sensitive to adverse economic
changes or individual corporate developments. During an economic downturn or
substantial period of rising interest rates, highly leveraged issuers may
experience financial stress which would adversely affect their ability to
service their principal and interest payment obligations, to meet their
projected business goals or to obtain additional financing. If the issuers
of a
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fixed-income security owned by Reserve Fund were to default, Reserve Fund might
incur additional expenses to seek recovery. The risk of loss due to default by
issuers of junk bonds is significantly greater than that associated with higher-
rated securities because such securities generally are unsecured and frequently
are subordinated to the prior payment of senior indebtedness. In addition,
periods of economic uncertainty and change can be expected to result in an
increased volatility of market prices of junk bonds and a concomitant volatility
in the net asset value of a share of Reserve Fund.
The secondary market for junk bonds is less liquid than the markets for
higher quality securities and, as such, may have an adverse effect on the market
prices of certain securities. The limited liquidity of the market may also
adversely affect the ability of Reserve Fund to arrive at a fair value for
certain junk bonds at certain times and could make it difficult for Reserve Fund
to sell certain securities. 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 invest more than 5% of its total assets in any one issuer.
Each Fund may not invest 25%or more 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
Money Market Fund was created on January 5, 1993, as a separate portfolio
represented by a separate class of common stock of IAI Investment Funds VI,
Inc., a Minnesota corporation, created on April 30, 1991. Reserve Fund was
created on January 31, 1986 as a separate portfolio represented by a separate
class of common stock of IAI Investment Funds V, Inc., a Minnesota corporation
created on October 18, 1985. Under Minnesota law, each Fund's Board of
Directors is generally responsible for the overall operation and management of
each Fund. IAI serves as the investment adviser of each Fund. 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 and has total assets under management in excess of $15 billion.
IAI's ultimate corporate parent is Lloyds TSB Group plc, a publicly-held
financial services organization headquartered in London, England. Lloyds TSB
Group plc is one of the largest personal and corporate financial services groups
in the United Kingdom and is engaged in a wide range of activities including
commercial and retail banking. The address of IAI is that of the Funds.
Pursuant to a written agreement with each Fund (the "Management
Agreement"), IAI provides each Fund with investment advisory services and is
responsible for the overall management of each Fund's business affairs subject
to the authority of the Board of Directors. The Management Agreement also
provides that, except for brokerage commissions and other expenditures in
connection with the purchase and sale of portfolio securities, interest and, in
certain circumstances, taxes and extraordinary expenses, IAI shall pay all of a
Fund's operating expenses. As compensation under the Management Agreement,
Money Market Fund will pay IAI .60% of the Fund's average daily net assets and
Reserve Fund will pay IAI .85% of its average daily net assets. Because IAI is
paying Fund operating expenses, these fees represent each Fund's total expenses.
Until June 30, 1996, IAI has agreed to waive the fee due under the Management
Agreement in excess of .50% of Money Market Fund's average daily net assets.
With respect to certain of the services for which it is responsible under the
Management Agreement, IAI may also pay qualifying broker-dealers, financial
institutions and other entities for providing such services to Fund
shareholders. IAI shall not be liable for any loss suffered by a Fund in the
absence of willful misfeasance, bad faith or negligence in the performance of
its duties and obligations.
Each Fund is managed by a team of IAI investment professionals which is
responsible for making the day-to-day investment decisions for such Fund. The
teams managing the Funds are as follows.
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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
co-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.
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 a retail account with the IAI
Family of Funds is $5,000. Such initial investment may be allocated among a
Fund and other funds in the IAI Family of Funds as desired, provided that no
less than $1,000 is allocated to any one fund. The minimum initial investment
for IRA accounts is $2,000, provided that the minimum amount that may be
allocated to any one fund is $1,000. Once the account minimum has been met,
subsequent purchases can be made in a Fund for $100 or more. Such minimums may
be waived for participants in the IAI Investment Club.
Investors may satisfy the minimum investment requirement by participating
in the STAR Program. Participation in the STAR Program requires an initial
investment of $1,000 per Fund and a commitment to invest
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an aggregate of $5,000 within 24 months. If a STAR Program participant does not
invest an aggregate of $5,000 in the IAI Family of Funds within 24 months, IAI
may, at its option, redeem such shareholder's interest. Investors wishing to
participate in the STAR Program should contact a Fund to obtain a STAR Program
application.
To purchase shares, forward the completed application and a check payable
to "IAI Funds" to a Fund. Upon receipt, your account will be credited with the
number of full and fractional shares which can be purchased at the net asset
value next determined after receipt of the purchase order by a Fund.
Purchases of shares are subject to acceptance or rejection by a Fund on the
same day the purchase order is received and are not binding until so accepted.
It is the policy of the Funds and the Underwriter to keep confidential
information contained in the application and regarding the account of an
investor or potential investor in the 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 Money Market and Reserve 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 30 days preceding the day on which the change or termination is to take
place. Investors interested in participating in the Automatic Investment Plan
should complete the Automatic Investment Plan application and return it to a
Fund.
REDEMPTION OF SHARES
Registered holders of Fund shares may at any time require a Fund to redeem
their shares upon their written request. 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
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proceeds until checks (including certified checks or cashiers checks) received
for the shares purchased have cleared.
The redemption proceeds received by the investor are based on the net asset
value next determined after redemption instructions in good order are received
by a Fund. Since the value of shares redeemed is based upon the value of a Fund
investment at the time of redemption, it may be more or less than the price
originally paid for the shares.
Payment for shares redeemed will ordinarily be made within seven days after
a request for redemption has been made. Normally a Fund will mail payment for
shares redeemed on the business day following receipt of the redemption request.
Following a redemption or transfer request, if the value of a shareholder's
interest in a Fund falls below $500, such Fund reserves the right to redeem such
shareholder's entire interest and remit such amount. Such a redemption will
only be effected following: (a) a redemption or transfer by a shareholder which
causes the value of such shareholder's interest in such Fund to fall below $500;
(b) the mailing by such Fund to such shareholder of a notice of intention to
redeem; and (c) the passage of at least six months from the date of such
mailing, during which time the investor will have the opportunity to make an
additional investment in such Fund to increase the value of such investor's
account to at least $500.
EXCHANGE PRIVILEGE
The Exchange Privilege enables shareholders to purchase, in exchange for
shares of a Fund, shares of 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 reserve the right to do so in the future.
Because excessive trading can hurt Fund performance and shareholders, there
is a limit of four exchanges out of each Fund per calendar year per account.
Accounts under common ownership or control, including accounts with the same
taxpayer identification number, will be counted together for purposes of the
four exchange limit. Each Fund reserves the right to temporarily or permanently
terminate the Exchange Privilege of any investor who exceeds this limit. The
limit may be modified for certain retirement plan accounts, as required by the
applicable plan document and/or relevant Department of Labor regulations, and
for Automatic Exchange Plan participants. Each Fund also reserves the right to
refuse or limit exchange purchases by any investor if, in IAI's judgment, such
Fund would be unable to invest the money effectively in accordance with its
investment objectives and policies, or would otherwise potentially be adversely
affected.
Fund shareholders wishing to exercise the Exchange Privilege should notify
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 investments 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 on 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 Investment
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Plan should complete the Automatic Investment Plan application 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.
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 a Fund or the transfer agent fails to follow these procedures,
such Fund may be liable for losses due to unauthorized or fraudulent
instructions. To the extent the reasonable procedures are followed, none of the
Funds, their transfer agent, IAI, or any affiliated broker-dealer will be liable
for any loss, injury, damage, or expense for acting upon telephone instructions
believed to be genuine, and will otherwise not be responsible for the
authenticity of any telephone instructions, and, accordingly, the investor bears
the risk of loss resulting from telephone instructions. All telephone
redemptions and 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.
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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 offer three options: Full Reinvestment--your dividend
and capital gain distributions will be automatically reinvested in additional
shares of such Fund; Capital Gains Reinvestment--your capital gain distributions
will be automatically reinvested, but your income dividend distribution will be
paid in cash; and Cash--your income dividends and capital gain distributions
will be paid in cash. Distributions taken in cash can be sent via check or
transferred directly to your account at any bank, savings and loan or credit
union that is a member of the Automated Clearing House (ACH) network. UNLESS
INDICATED OTHERWISE BY THE SHAREHOLDER, EACH FUND WILL AUTOMATICALLY REINVEST
ALL SUCH DISTRIBUTIONS INTO FULL AND FRACTIONAL SHARES AT NET ASSET VALUE.
The Funds' Directed Dividend service allows you to invest your dividends
and/or capital gain distributions directly into another IAI Mutual Fund.
Contact IAI Mutual Fund Shareholder Services at 1-800-945-3863 for details.
Each Fund intends to qualify for tax purposes as a regulated investment
company under the 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.
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DESCRIPTION OF COMMON STOCK
All shares of each Fund have equal rights as to redemption, dividends and
liquidation, and will be fully paid and nonassessable when issued and will have
no preemptive or conversion rights.
The shares of each Fund have noncumulative voting rights, which means that
the holders of more than 50% of the shares voting for the election of directors
can elect 100% of the directors if they choose to do so. On some issues, such
as the election of directors, all shares of each corporation vote together as
one series. On an issue affecting only a particular series, such as voting on
the Management Agreement, only the approval of 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 LLP, 220 South Sixth Street, Minneapolis,
Minnesota 55402, provides legal counsel for the Funds. KPMG Peat Marwick LLP,
4200 Norwest Center, Minneapolis, Minnesota 55402, serves as 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. To reduce the volume of mail you receive, only one copy of most Fund
reports, such as the Fund's Annual Report, may be mailed to your household (same
surname, same address). Please call IAI Mutual Fund Shareholder Services at
1-800-945-3863 if you wish to receive additional shareholder reports.
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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 back cover page of this
Prospectus.
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IAI MONEY MARKET FUND
IAI RESERVE FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED JUNE 1, 1996
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. THIS
STATEMENT OF ADDITIONAL INFORMATION RELATES TO A PROSPECTUS DATED JUNE 1, 1996,
AND SHOULD BE READ IN CONJUNCTION THEREWITH. A COPY OF THE PROSPECTUS MAY BE
OBTAINED FROM THE FUND AT 3700 FIRST BANK PLACE, P.O. BOX 357, MINNEAPOLIS,
MINNESOTA 55440 (TELEPHONE: 1-612-376-2700 OR 1-800-945-3863).
<PAGE>
TABLE 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.................................... 5
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............................... 8
Asset-Backed Securities.................................. 8
Zero Coupon Bonds........................................ 8
Lower-Rated Debt Securities.............................. 8
Indexed Securities....................................... 9
Foreign Currency Transactions............................ 10
Limitations on Futures and Options Transactions.......... 11
Futures Contracts........................................ 11
Futures Margin Payments.................................. 11
Purchasing Put and Call Options.......................... 12
Writing Put and Call Options............................. 12
Combined Positions....................................... 12
Correlation of Price Changes............................. 13
Liquidity of Options and Futures Contracts............... 13
OTC Options.............................................. 13
Options and Futures Relating to Foreign Currencies....... 13
Asset Coverage for Futures and Options Positions......... 14
INVESTMENT RESTRICTIONS.................................. 14
Portfolio Turnover....................................... 16
INVESTMENT PERFORMANCE................................... 16
MANAGEMENT............................................... 19
History.................................................. 21
Management Agreement..................................... 22
Allocation of Expenses................................... 24
Duration of Agreements................................... 24
CUSTODIAL SERVICE........................................ 24
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE....... 28
CAPITAL STOCK............................................ 29
NET ASSET VALUE AND PUBLIC OFFERING PRICE................ 30
TAX STATUS............................................... 31
LIMITATION OF DIRECTOR LIABILITY......................... 32
FINANCIAL STATEMENTS..................................... 33
</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.
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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.
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
5
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substantially greater risks, and may be highly speculative. Borrowers that are
in bankruptcy or restructuring may never pay off their indebtedness, or may pay
only a small fraction of the amount owed. Direct indebtedness of developing
countries will also involve a risk that the governmental entities responsible
for the repayment of the debt may be unable, or unwilling, to pay interest and
repay principal when due.
Investments in loans through direct assignment of a financial
institution's interests with respect to a loan may involve additional risks to a
Fund. For example, if a loan is foreclosed, a Fund could become part owner of
any collateral, and would bear the costs and liabilities associated with owning
and disposing of the collateral. In addition, it is conceivable that under
emerging legal theories of lender liability, a Fund could be held liable as a
co-lender. Direct debt instruments may also involve a risk of insolvency of the
lending bank or other intermediaries. Direct debt instruments that are not in
the form of securities may offer less legal protection to the Fund in the event
of fraud or misrepresentation. In the absence of definitive regulatory guidance,
a Fund relies on IAI's research in an attempt to avoid situations where fraud or
misrepresentation could adversely affect such Fund.
A loan is often administered by a bank or other financial institution
that acts as agent for all holders. The agent administers the terms of the
loan, as specified in the loan agreement. Unless, under the terms of the loan
or other indebtedness, a Fund has direct recourse against the borrower, it may
have to rely on the agent to apply appropriate credit remedies against a
borrower. If assets held by the agent for the benefit of a Fund were determined
to be subject to the claims of the agent's general creditors, such Fund might
incur certain costs and delays in rendering payment on the loan or loan
participation and could suffer a loss of principal or interest.
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.
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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.
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 net 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 net 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.
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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.
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
Reserve Fund may invest in lower-rated debt securities. Issuers of
high yield securities may be highly leveraged and may not have available to them
more traditional methods of financing. Therefore, the risks associated with
acquiring the securities of such issuers generally are greater than is the case
with higher rated securities. For example, during an economic downturn or a
sustained period of rising interest rates, issuers of high yield securities may
be more likely to experience financial stress, especially if such issuers are
highly leveraged.
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During such periods, such issuers may not have sufficient revenues to meet their
interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments or
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of high yield securities because
such securities may be unsecured and may be subordinated to other creditors of
the issuer.
High yield securities frequently have call or redemption features
which would permit an issuer to repurchase the security from Reserve Fund. If a
call were exercised by the issuer during a period of declining interest rates, a
Fund likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends to
shareholders.
Reserve Fund may have difficulty disposing of certain high yield
securities because there may be a thin trading market for such securities. The
secondary trading market for high yield securities is generally not as liquid as
the secondary market for higher rated securities. Reduced secondary market
liquidity may have an adverse impact on market price and the Fund's ability to
dispose of particular issues when necessary to meet such Fund's liquidity needs
or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to adversely affect the
Fund's net asset value. In addition, the Fund may incur additional expenses to
the extent it is required to seek recovery upon a default on a portfolio holding
or participate in the restructuring of the obligation.
INDEXED SECURITIES
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.
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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.
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.
10
<PAGE>
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 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.
11
<PAGE>
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).
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
12
<PAGE>
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 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
13
<PAGE>
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.
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.
14
<PAGE>
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.
To the extent a Fund engages in reverse repurchase agreements, because
such transactions are considered borrowing, reverse repurchase agreements are
included in the 33-1/3% limitation.
5. Act as an underwriter of securities of other issuers, except to the
extent that in connection with the disposition of portfolio securities the Fund
may be deemed to be an underwriter under applicable laws.
6. Purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments. This restriction shall not prevent
the Fund from investing in securities or other instruments backed by real estate
or securities of companies engaged in the real estate business.
7. Purchase or sell commodities other than foreign currencies unless
acquired as a result of ownership of securities. This limitation shall not
prevent the Fund from purchasing or selling options, futures, swaps and forward
contracts or from investing in securities or other instruments backed by
commodities.
8. Make loans to other persons except to the extent not inconsistent
with the 1940 Act or the Rules and Regulations of the Securities and Exchange
Commission. This limitation does not apply to purchases of commercial paper,
debt securities or repurchase agreements, or to the lending of portfolio
securities.
9. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases or sales
of securities and provided that margin payments in connection with transactions
in options, futures, swaps and forward contracts shall not be deemed to
constitute purchasing securities on margin.
10. Sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options, swaps and forward futures contracts are
not deemed to constitute selling securities short.
11. Except as part of a merger, consolidation, acquisition, or
reorganization, invest more than 5% of the value of its total assets in the
securities of any one investment company or more than 10% of the value of its
total assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting securities of
any one investment company.
12. Mortgage, pledge or hypothecate its assets except to the extent
necessary to secure permitted borrowings. This limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to 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.
15
<PAGE>
Any of a Fund's investment policies set forth under "Investment
Objective and Policies" in the Prospectus, or any restriction set forth above
under "Investment Restrictions" which involves a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after an acquisition of securities or
utilization of assets and results therefrom. With respect to Restriction 14, a
Fund is under a continuing obligation to ensure that it does not violate the
maximum percentage either by acquisition or by virtue of a decrease in the value
of the Fund's liquid assets.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by the
monthly average of the value of portfolio securities owned by 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.
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 of a
hypothetical period $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:
16
<PAGE>
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
$1,000 payment made at the beginning of such of
a hypothetical 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
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.
Year Ended 12/31 Total Return
----------------- ------------
1986 ................................................. 5.2%*
1987 ................................................. 5.9%
1988 ................................................. 6.7%
1989 ................................................. 8.7%
1990 ................................................. 8.4%
1991 ................................................. 7.9%
1992 ................................................. 3.3%
1993 ................................................. 3.4%
1994 ................................................. 2.7%
1995 ................................................. 6.9%
- -----------
*Commenced operations on January 31, 1986
Reserve Fund's average annual rates of return for its one, five and ten
year periods ending January 31, 1996 were 6.76%, 4.78% and 5.94%, respectively.
Reserve Fund's yield for the thirty-day period ended January 31, 1996 was 5.24%.
17
<PAGE>
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, 1996, the Money Market Fund's
current yield was 5.06% and its effective yield was 5.18%.
In advertising and sales literature, each Fund may compare its
performance with that of other mutual funds, indexes or averages of other mutual
funds, indexes of related financial assets or data, and other competing
investment and deposit products available from or through other financial
institutions. The composition of these indexes, averages or products differs
from that of a Fund. The comparison of a Fund to an alternative investment
should be made with consideration of differences in features and expected
performance.
The indexes and averages noted below will be obtained from the indicated
sources or reporting services, which the Fund believes to be generally accurate.
Each Fund may also note its mention in newspapers, magazines, or other media
from time to time. However, such Fund assumes no responsibility for the
accuracy of such data.
For example, (1) a Fund's performance or P/E ratio may be compared to
any one or a combination of the following: (i) the Standard & Poor's 500 Stock
Index and Dow Jones Industrial Average so that you may compare the Fund's
results with those of a group of unmanaged securities widely regarded by
investors as representative of the U.S. stock market in general; (ii) other
groups of mutual funds, including the IAI Funds, tracked by: (A) Lipper
Analytical Services, Inc., a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets; (B)
Morningstar, Inc., another widely used independent research firm which rates
mutual funds; or (C) other financial or business publications, which may
include, but are not limited to, Business Week, Money Magazine, Forbes and
Barron's, which provide similar information; (iii) The 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.
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<PAGE>
MANAGEMENT
The names, addresses, positions and principal occupations of the directors and
executive officers of the Fund are given below.
<TABLE>
<CAPTION>
Principal Occupation(s)
Name and Address Age Position During Past 5 Years
- ---------------- --- --------------------- ----------------------------------------
<S> <C> <C> <C>
Noel P. Rahn* 57 Chairman of the Board Chief Executive Officer and a Director
3700 First Bank Place of IAI since 1974. Mr. Rahn is also
P.O. Box 357 Chairman of the other IAI Mutual Funds.
Minneapolis, Minnesota 55440
Richard E. Struthers* 43 President, Director Executive Vice President and a Director
3700 First Bank Place of IAI and has served IAI in many
P.O. Box 357 capacities since 1979. Mr. Struthers is
Minneapolis, Minnesota 55440 also President of the other IAI Mutual
Funds.
Madeline Betsch 53 Director Currently retired; until April 1994, was
19 South 1st Street Executive Vice President, Director of
Minneapolis, Minnesota 55401 Client Services, of CME-KHBB Advertising
since May 1985, and prior thereto was a
Vice President with Campbell-Mithun,
Inc. (advertising agency) since February
1977.
W. William Hodgson 71 Director Currently retired; served as information
1698 Dodd Road manager for the North Central Home
Mendota Heights, Minnesota 55118 Office of the Prudential Insurance
Company of America from 1961 until 1984.
George R. Long 66 Director Chairman of Mayfield Corp. (financial
29 Las Brisas Way consultants and venture capitalists)
Naples, Florida 33963 since 1973.
J. Peter Thompson 64 Director Grain farmer in southwestern Minnesota
Route 1 since 1974. Prior to that, Mr. Thompson
Mountain Lake, Minnesota 56159 was employed by Paine Webber, Jackson &
Curtis, Incorporated, (a diversified
financial services concern), most
recently as Senior Vice President and
General Partner.
Charles H. Withers 69 Director Currently retired; was Editor of the
Rochester Post Bulletin Rochester Post-Bulletin, Rochester,
P.O. Box 6118 Minnesota from 1960 through March 31,
Rochester, Minnesota 55903 1980.
Archie C. Black, III 33 Treasurer Senior Vice President and Chief
3700 First Bank Place Financial Officer of IAI and has served
P.O. Box 357 IAI in several capacities since 1987.
Minneapolis, Minnesota 55440 Mr. Black is also Treasurer of the other
IAI Mutual Funds.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation(s)
Name and Address Age Position During Past 5 Years
- ---------------- --- --------------------- ----------------------------------------
<S> <C> <C> <C>
William C. Joas 33 Secretary Vice President of IAI and has served as
3700 First Bank Place an attorney for IAI since 1990. Mr. Joas
P.O. Box 357 is also Secretary of the other IAI
Minneapolis, Minnesota 55440 Mutual Funds.
Timothy A. Palmer 33 Vice President, Senior Vice President and has served as
3700 First Bank Place Investments a fixed income portfolio manager of IAI
P.O. Box 357 (Reserve Portfolio) since 1990. Mr. Palmer is also Vice
Minneapolis, Minnesota 55440 President, Investments of IAI Reserve
Fund and IAI Institutional Bond Fund.
Livingston Douglas 35 Vice President, Vice President of IAI. Prior to joining
3700 First Bank Place Investments IAI in 1993, Mr. Douglas served as a
P.O. Box 357 (Reserve Portfolio) portfolio manager for Mackey-Shields
Minneapolis, Minnesota 55440 Financial Corp. from 1987 to 1993. Mr.
Douglas is also Vice President,
Investments of IAI Bond Fund, IAI
Reserve Fund and IAI Minnesota Tax Free
Fund.
Kirk Gove 33 Vice President, Vice President of IAI. Prior to joining
3700 First Bank Place Marketing IAI in 1992, Mr. Gove served as an
P.O. Box 357 Associate Vice President of Dain
Minneapolis, Minnesota 55440 Bosworth, Incorporated (a diversified
financial services concern). Mr. Gove
is also Vice President, Marketing of the
other IAI Mutual Funds.
Susan J. Haedt 33 Vice President, Vice President of IAI and Director of
3700 First Bank Place Director of Fund Operations. Prior to joining IAI
P.O. Box 357 Operations in 1992, Ms. Haedt served as a Senior
Minneapolis, Minnesota 55440 Manager at KPMG Peat Marwick LLP (an
international tax, accounting and
consulting firm). Ms. Haedt is also
Vice President, Director of Operations
of the other IAI Mutual Funds.
</TABLE>
- -------------
* Directors of the Funds who are interested persons (as that term is defined
by the Investment Company Act of 1940) of IAI and the Funds.
Each Fund has agreed to reduced initial subscription requirements for
employees and directors of a Fund or IAI, their spouses, children and
grandchildren. With respect to such persons, the minimum initial investment in
one or more of the IAI Family of Funds is $500; provided that the minimum amount
that can be allocated to any one of the Funds is $250. Subsequent subscriptions
are limited to a minimum of $100 for each of the Funds.
No compensation is paid by the Fund to any of its officers. As of January
1, 1996, directors who are not affiliated with IAI receive from the IAI Mutual
Funds a $15,000 annual retainer, $2,500 for each Board meeting attended, $3,600
for each Audit Committee meeting attended (as applicable) and $1,800 for each
Securities Valuation Committee meeting attended. Each Fund will pay its pro
rata share of these fees based on its net assets. Such unaffiliated directors
also are reimbursed for expenses incurred in connection with attending meetings.
20
<PAGE>
<TABLE>
<CAPTION>
Aggregate Aggregate Compensation Projected Aggregate
Compensation from the 18 IAI Compensation from the
Name of Person, Position from each Fund* Mutual Funds** 19 IAI Mutual Funds***
- ------------------------------- --------------- ---------------------- ----------------------
<S> <C> <C> <C>
Betsch, Madeline -- Director $1,950 $28,725 $32,200
Hodgson, W. William -- Director $1,950 $28,725 $32,200
Long, George R. -- Director $1,550 $27,725 $32,200
Thompson, J. Peter -- Director $1,950 $28,725 $32,200
Withers, Charles H. -- Director $1,550 $27,725 $32,200
</TABLE>
- -------------------------
* For the fiscal year ended January 31, 1996.
** For the calendar year ended December 31, 1995.
*** For the calendar year ended December 31, 1996 and includes the new IAI
Capital Appreciation Fund; provided that a director misses no meetings;
excludes expenses incurred in connection with attending meetings.
The Board of Directors for each of the Funds has approved a Code of Ethics.
The Code permits access persons to engage in personal securities transactions
subject to certain policies and procedures. Such procedures prohibit certain
persons from acquiring of any securities in an initial public offering. In
addition, 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 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. In addition to its
ownership of IAI, Hill Samuel owns controlling interests in over seventy
insurance, merchant banking and financial services subsidiaries located in
Western Europe, Asia, the United States, Australia, New Zealand and Great
Britain. The principal offices of Hill Samuel are located at 100 Wood Street,
London EC2 P2AJ.
Hill Samuel, in turn, is owned by Lloyds TSB Group, plc ("Lloyds TSB"), a
publicly-held financial services organization headquartered in London, England.
Lloyds TSB is one of the largest personal and corporate financial services
groups in the United Kingdom, engaged in a wide range of activities including
commercial and retail banking. The principal offices of Lloyds TSB are located
at St. George's House, 6 - 8 Eastcheap, London, EC3M 1LL.
HISTORY
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
seven series (Series A through G). On June 25, 1993, the Fund's shareholders
approved amended and restated Articles of Incorporation, which provided that the
registered investment company whose corporate name had been IAI Series Fund,
Inc., be renamed IAI Investment Funds VI, Inc. The investment portfolio
represented by Series 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 A). On June 25, 1993, the Fund's shareholders
21
<PAGE>
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".
MANAGEMENT AGREEMENT
Effective March 31, 1996, pursuant to a Management Agreement between each
Fund and IAI, IAI has agreed to provide each Fund with investment advice,
statistical and research facilities, and certain equipment and services,
including, but not limited to, office space and necessary office facilities,
equipment, and the services of required personnel and, in connection therewith,
IAI has the sole authority and responsibility to make and execute investment
decisions for each Fund within the framework of a Fund's investment policies,
subject to review by the directors of a Fund. In addition, IAI has agreed to
provide or arrange for the provision of all required administrative, stock
transfer, redemption, dividend disbursing, accounting, and shareholder services
including, without limitation, the following: (1) the maintenance of a Fund's
accounts, books and records; (2) the calculations of the daily net asset value
in accordance with a Fund's current Prospectus and Statement of Additional
Information; (3) daily and periodic reports; (4) all information necessary to
complete tax returns, questionnaires and other reports requested by a Fund; (5)
the maintenance of stock registry records; (6) the processing of requested
account registration changes, stock certificate issuances and redemption
requests; (7) the administration of payments and dividends and distributions
declared by a Fund; (8) answering shareholder questions, (9) providing reports
and other information and (10) other services designed to maintain shareholder
accounts. IAI may also pay qualifying broker-dealers, financial institutions
and other entities that provide such services. In return for these services,
each Fund has agreed to pay IAI an annual fee as a percentage of the Fund's
average daily net assets as follows. Reserve Fund has agreed to pay an annual
fee at the rate of .85%. With respect to Money Market Fund, the annual fee is
set forth in the table below:
MONEY MARKET FUND
Daily Net Assets Fee IAI Receives Annually
-------------------------- -------------------------
For the first $250 million 0.60%
For the next $250 million 0.55%
Above $500 million 0.50%
Under the Management Agreement, except for brokerage commissions and other
expenditures in connection with the purchase and sale of portfolio securities,
interest expense, and, subject to the specific approval of a majority of the
disinterested directors of a Fund, taxes and extraordinary expenses, IAI has
agreed to pay all of a Fund's other costs and expenses, including, for example,
costs incurred in the purchase and sale of assets, taxes, charges of the
custodian of a Fund's assets, costs of reports and proxy material sent to Fund
shareholders, fees paid for independent accounting and legal services, costs of
printing Prospectuses for Fund shareholders and registering a Fund's shares,
postage, insurance premiums, and costs of attending investment conferences. The
Management Agreement further provides that IAI will either reimburse a Fund for
the fees and expenses it pays to directors who are not "interested persons" of a
Fund or reduce its fee by an equivalent amount. IAI is not liable for any loss
suffered by a Fund in the absence of willful misfeasance, bad faith or
negligence in the performance of its duties and obligations.
PRIOR AGREEMENTS
Effective March 31, 1996, the Investment Advisory Agreement and
Administrative Agreement between each Fund and IAI were terminated and replaced
by the Management Agreement described above. The services provided by IAI under
each of these agreements are substantially similar in nature as those provided
under the new Management Agreement.
22
<PAGE>
Pursuant to the Investment Advisory Agreement, Money Market Fund had agreed
to pay IAI a monthly fee equivalent to an annual rate of .30% of its average
daily net assets. As of January 31, 1996, Money Market Fund had net assets of
$27,395,033. For the year ended March 31, 1994 and the fiscal period ended
January 31, 1995, IAI voluntarily waived its entire advisory fee. For the
fiscal year ended January 31, 1996, Money Market Fund paid IAI $19,493 in
advisory fees.
Pursuant to the Investment Advisory Agreement, Reserve Fund had 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, 1996, Reserve Fund had net assets of
$54,974,417. For the fiscal year ended March 31, 1994, the fiscal period ending
January 31, 1995, and the fiscal year ended January 31, 1996, Reserve Fund paid
IAI $343,955, $348,495 and $377,386, respectively, in advisory fees. Reserve
Fund's monthly payment of the advisory fee was suspended or reduced ( and
reimbursement made by IAI if necessary) when it appeared that the amount of
expenses would exceed Reserve Fund's applicable expense limit (and after the
monthly payment of the distribution fee has been reduced to zero), as set forth
below. For the fiscal year ended March 31, 1994, IAI reimbursed the Fund
$97,655 in advisory fees pursuant to the expense limit. For the fiscal period
from April 1, 1994 to January 31, 1995, and the fiscal year ended January 31,
1996, IAI was not obligated to reimburse any advisory fees pursuant to the
expense limit.
With respect to the Administrative Agreement, Money Market Fund 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 year ended January 31, 1996, Money
Market Fund paid IAI $63,919 pursuant to the Administrative Agreement. Reserve
Fund had agreed to pay IAI a monthly administrative fee equal to .01677% 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 year ended January
31, 1996, Reserve Fund paid IAI $150,954 pursuant to the Administrative
Agreement.
Effective March 31, 1996, Reserve Fund's Plan of Distribution (the "Plan")
terminated. Prior to termination, the Fund had entered into a Distribution and
Shareholder Services Agreement (the "Agreement") with IAI Securities, Inc.
("IAIS"). Pursuant to such Plan and Agreement, Reserve Fund paid IAIS .25% of
the Fund's average month-end net assets to cover expenses incurred by IAIS in
connection with the servicing of shareholder accounts and the distribution of
such Fund's shares, subject to the contractual expense limitations discussed
above. The net distribution fee paid by Reserve Fund during its fiscal year
ended January 31, 1996 was $17,573. Such distribution fees (along with amounts
paid out of IAIS' own assets) were utilized in connection with the distribution
of Reserve Fund's shares as follows:
<TABLE>
<S> <C>
Advertising ..................................... $2,987
Printing and mailing of prospectuses to other
than current shareholders ..................... $2,109
Payments to brokers or dealers .................. $3,339
Direct payments to sales personnel .............. $7,556
Other ........................................... $1,582
</TABLE>
23
<PAGE>
ALLOCATION OF EXPENSES
Prior to the termination of the Advisory and Administrative Agreements
on March 31, 1996 as discussed above, each Fund paid all its other costs and
expenses, including, for example, costs incurred in the purchase and sale of
assets, interest, taxes, charges of the custodian of a Fund's assets, costs of
reports and proxy material sent to Fund shareholders, fees paid for independent
accounting and legal services, costs of printing Prospectuses for Fund
shareholders and registering a Fund's shares, postage, fees to directors who are
not "interested persons" of a Fund, insurance premiums, costs of attending
investment conferences and such other costs which may be designated as
extraordinary. In addition, the Reserve Fund may have incurred expenses in
conjunction with distribution expenses pursuant to Reserve Fund's Rule 12b-1
plan. Under the prior Agreements, IAI 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").
DURATION OF AGREEMENTS
Each Management Agreement will terminate automatically in the event of
its assignment. In addition, each Agreement is terminable at any time without
penalty by the Board of Directors of a Fund or by vote of a majority of a Fund's
outstanding voting securities on not more than 60 days' written notice to IAI,
and by IAI on 60 days' notice to a Fund. Each Agreement shall continue in effect
from year to year only so long as such continuance is specifically approved at
least annually by either the Board of Directors of the Fund or by vote of a
majority of the outstanding voting securities, provided that in either event
such continuance is also approved by the vote of a majority of directors who are
not parties to the Agreement or interested persons of such parties cast in
person at a meeting called for the purpose of voting on such approval.
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.
Austria Credit Austalt Bankverein
Bangladesh Standard Chartered Bank
Belgium Banque Bruxelles Lambert (BBL)
24
<PAGE>
Botswana Barclays Bank of Botswana
Brazil Banco de Boston
Canada Toronto Dominion Bank
Chile Citibank, N.A., Santiago Branch
China Hong Kong & Shanghai Banking, Corp. Ltd.
Columbia Citibank, N.A./Cititrust Columbia S.A.
Cyprus Barclays Bank PLC
Czech Republic ING Bank
Denmark Den Danske Banke
Finland Merita Bank
France Banque Indosuez
Germany Dresdner Bank, A.G.
Ghana Barclays Bank of Ghana
Greece Citibank, N.A., Athens Branch
Hong Kong Hong Kong & Shanghai Banking Corp. Ltd.
Hungary Citibank, N.A., Budapest Branch
India Standard Chartered Bank
Indonesia Hong Kong & Shanghai Banking Corp. Ltd.
Ireland Allied Irish Bank
Israel Bank Leumi
Italy Barclays Bank PLC
Japan The Mitsubishi Bank Limited
Jordan Arab Bank plc
Kenya Barclays Bank Kenya
Korea Standard Chartered Bank
Luxembourg Banque Bruxelles Lambert
Malaysia Oversea Chinese Banking Corporation
25
<PAGE>
Mauritius Hong Kong and Shanghai Bank Corporation
Mexico Citibank, N.A., Mexico City Branch
Morocco Banque Commerciale du Maroc
Netherlands ABN Amro Bank
New Zealand Bank of New Zealand
Norway Den Norske Bank
Pakistan Standard Chartered Bank
Papua New Guinea Australia and New Zealand Banking Group
Peru Citibank N.A., Lima Branch
Philippines Hong Kong & Shanghai Banking Corp. Ltd.
Poland Citibank Poland, S.A.
Portugal Banco Commercial Portugues
Singapore Oversea Chinese Banking Corporation
South Africa First National Bank of Southern Africa
Spain Banco Santader
Sri Lanka Hong Kong & Shanghai Banking, Corp. Ltd.
Swaziland Barclays Bank of Swaziland
Sweden Svenska Handelsbanken
Switzerland Bank Leu Ltd.
Taiwan Hong Kong & Shanghai Banking Corp. Ltd.
Thailand Standard Chartered Bank
Turkey Citibank, N.A., Istanbul Branch
United Kingdom Barclays Bank PLC
Uruguay Citibank, N.A., Montevideo Branch
Venezuela Citibank, N.A., Caracas Branch
Zambia Barclays Bank of Zambia
Zimbabwe Barclays Bank of Zimbabwe
26
<PAGE>
DEPOSITORIES
------------
Argentina Caja de Valores
Australia Clearing House Electronic Subregister
System
Austria Wertpapiersammelbank
Belgium Caisse Interprofessionelle de Depot et de
Titres
Botswana Stock Exchange Talisman System
Brazil Bolsa de Valores de Sao Paulo
Bolsa de Valores de Rio de Janeiro
Canada The Canadian Depository for Securities
China Shangai Stock Exchange
Czech Republic Center for Securities (SCP)
Denmark Vaerdipapircentralen
France SICOVAM (Societe Interprofessionelle la
Compensacion des Valuers Mobilieres)
Societe de Compensacion des Marches
Conditionnels
Chambre de Compensation des Instruments
Financiers de Paris
Germany Deutscher Kassenverein AG
Greece Central Clearing Office of Athens Stock
Exchange
Hong Kong Hong Kong Securities Clearing Company
Ireland Stock Exchange Talisman System
Israel SECH
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
Morocco Casablanca Stock Exchange
27
<PAGE>
Netherlands NECIGEF (Nederlands Centraal Institut
voor Giraal Effectenverkeer B.V.
New Zealand Austraclear New Zealand System
Norway Verdipapirsentralen
Pakistan The Karachi Stock Exchange Clearinghouse
Papua New Guinea Clearing House Electronic Subregister
System
Poland National Depository of Securities
Portugal Lisbon Stock Exchange (SICOB system)
Oporto Stock Exchange (CAMBIUM system)
Singapore Central Depository Pte Ltd.
South Africa Central Depository (Pty) Ltd.
Spain Servicio de Compensacion y Liquidacion de
Valores
Sri Lanka Central Depository System Piri Ltd.
Sweden Vardepapperscentralen
Switzerland SEGA (Schweizerische Effekten Giro A.G.)
Taiwan Taiwan Securities Depository Co.
Thailand Share Depository Center
United Kingdom Stock Exchange Talisman System
Zimbabwe Stock Exchange Talisman System
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Most of each Fund's portfolio transactions are effected with dealers
without the payment of brokerage commissions but at a net price which usually
includes a spread or markup. In effecting such portfolio transactions on behalf
of a Fund, IAI seeks the most favorable net price consistent with the best
execution. However, frequently IAI selects a dealer to effect a particular
transaction without contacting all dealers who might be able to effect such
transaction because of the volatility of the bond market and the desire of IAI
to accept a particular price for a security because the price offered by the
dealer meets its guidelines for profit, yield or both.
So long as IAI believes that it is obtaining the best net price
(including the spread or markup) consistent with the best execution, as
described above, it gives consideration in placing portfolio transactions to
dealers furnishing research, statistical information, or other services to IAI.
This allows IAI to supplement its own investment research activities and enables
IAI to obtain the views and information of individuals and research staffs of
many different securities firms prior to making investment decisions for a Fund.
To the extent portfolio transactions are effected with dealers who furnish
research services to it, IAI receives a benefit which is not capable of
evaluation in dollar amounts.
28
<PAGE>
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to the policies set forth in the
preceding paragraphs and such other policies as the Board of Directors of the
Fund may determine, 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
seven series (Series A through G). Each share of a series is entitled to
participate pro rata in any dividends and other distributions of such series and
all shares of a series have equal rights in the event of liquidation of that
series. The Board of Directors of IAI Investment Funds VI, Inc. is empowered
under the Articles of Incorporation of such company to issue other series of the
company's common stock without shareholder approval. IAI Investment Funds VI,
Inc., has authorized 10,000,000,000 shares of $.01 par value common stock to be
issued as Series F common shares. The investment portfolio represented by such
shares is referred to as IAI Money Market Fund. As of January 31, 1996, Money
Market Fund had 27,394,991 shares outstanding.
As of May ____, 1996, 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:
===========================================================================
Name and Address Number of Percent of
of Shareholder Shares Class
===========================================================================
Norwest Bank Minneapolis TTEE
Minnehaha Academy
733 Marquette Avenue
Minneapolis, MN 55479
In addition, as of May ___, 1996, Money Market Fund's officers and
directors as a group owned approximately _________ shares, representing
approximately ___% 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, 1996, Reserve Fund had
5,494,782 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:
29
<PAGE>
Name and Address Number of Percent of
of Shareholder Shares Class
===============================================================================
Massachusetts Bay Transportation
Authority Retirement Fund
99 Summer Street, Suite 1700
Boston, MA 02110
Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, CA 94104
Asbestos Workers Local 34 Pension Fund
10405 6th Avenue North, Suite 170
Plymouth, MN 55441
IAI Corporate Cash Account
3700 First Bank Place
P.O. Box 357
Minneapolis, MN 55440
In addition, as of May _____, 1996, Reserve Fund's officers and
directors as a group owned approximately ______ shares, representing
approximately 0.___ % 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.
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
30
<PAGE>
$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, 1996, the net asset value and public offering price per
share of Money Market Fund was calculated as follows:
NAV = Net Assets ($27,395,033) = $1.00
------------------------
Shares Outstanding (27,394,991)
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, 1996, the net asset value and public offering price per
share of Reserve Fund was calculated as follows:
NAV = Net Assets ($54,974,417) = $10.00
--------------------------------
Shares Outstanding (5,494,782)
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.
31
<PAGE>
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.
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).
32
<PAGE>
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" of the corporation for breach of their
duties as officers (including the liability of directors who serve as officers
for breach of their duties as officers.) Minnesota law does not permit
elimination or limitation of the availability of equitable relief, such as
injunctive or rescissionary relief. Further, Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act of
1933 or the Securities Exchange Act of 1934, and it is uncertain whether and to
what extent the elimination of monetary liability would extend to violations of
duties imposed on directors by the Investment Company Act of 1940 and the rules
and regulations adopted under such Act.
FINANCIAL STATEMENTS
The financial statements, included as part of the Funds' 1996 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.
33
<PAGE>
APPENDIX A
RATINGS OF DEBT SECURITIES
RATINGS BY MOODY'S
- ------------------
CORPORATE BONDS
Aaa. Bonds rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa. Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A. Bonds rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa. Bonds rated Baa are considered medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate, and thereby
not well safeguarded during other good and bad times over the future.
Uncertainty of position characteristizes bonds in this class.
B. Bonds rated B generally lack characteristics of the desirable
investment. Assurances of interest and principal payment or maintenance of
other terms of the contract over any long period of time may be small.
Caa. Bonds rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca. Bonds rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C. Bonds rated C are the lowest-rated class of bonds and issued
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Conditional Ratings. The designation "Con." followed by a rating
indicates bonds for which the security depends upon the completion of some act
or the fulfillment of some condition. These are bonds secured by (a) earnings
of projects under construction, (b) earnings or projects unseasoned in operating
experience, (c) rentals which begin when facilities are completed, or (d)
payments to which some other limiting condition attaches. Parenthetical rating
denotes probable credit stature upon completion of construction or elimination
of basis of condition.
<PAGE>
Note: Moody's applies numerical modifiers 1, 2, and 3 in the Aa and A
classifications of its corporate bond rating system. The modifier 1 indicates
that the security ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category. With respect to
municipal securities, those bonds in the Aa, A, Baa, Ba, and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols Aa1, A1, Baa1, Ba1, and B1.
COMMERCIAL PAPER
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime - 1 Superior ability for repayment of senior short-term
debt obligations
Prime - 2 Strong ability for repayment of senior short-term debt
obligations
Prime - 3 Acceptable ability for repayment of senior short-term
debt obligations
If an issuer represents to Moody's that its Commercial Paper
obligations are supported by the credit of another entity or entities, Moody's,
in assigning ratings to such issuers, evaluates the financial strength of the
indicated affiliated corporations, commercial banks, insurance companies,
foreign governments, or other entities, but only as one factor in the total
rating assessment.
RATINGS BY S&P
- --------------
CORPORATE BONDS
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB. Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
B. Debt rated B has a greater vulnerability to default but currently
has the capacity to meet 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.
<PAGE>
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 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
<PAGE>
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.
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".
<PAGE>
Item 24. Financial Statements and Exhibits
(a) Financial Statements (1)
(b) Exhibits
(1) Articles of Incorporation (4)
(2) Bylaws (4)
(5A) Investment Advisory Agreement (4)
(5B) Management Agreement
(6A) Dealer Sales Agreement
(6B) Shareholder Services Agreement
(8) Custodian Agreement (4)
(9) Administrative Agreement (2)
(11) Consent of Independent Auditors
(15) Plan of Distribution (5)
(16) Calculations of Performance Data (2)
(99) Annual Report (6)
____________________
(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 Post-Effective Amendment No. 17 to
Registrant's Registration Statement on Form N-1A filed on May 31, 1995.
(6) Incorporated by reference to the Annual Report filed electronically on Form
N-30D on March 29, 1996.
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 February 29, 1996
- --------- -------------- -----------------------
<S> <C> <C>
IAI Reserve Fund Common Stock (Series A) 1,729
</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
Archie Campbell Black, III Senior Vice President/Treasurer
Stephen C. Coleman Senior Vice President
Hugh Freedberg Chairman
Larry Ray Hill Executive Vice President/Director
Richard A. Holway Senior Vice President
Irving Philip Knelman Executive Vice President/Director
Rick D. Leggott Senior Vice President
Timothy A. Palmer Senior Vice President
Douglas Rugh Platt Senior Vice President
Andrew Scott Plummer Director
Noel Paul Rahn Chief Executive Officer/Director
James S. Sorenson Senior Vice President
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, Freedberg, Plummer and Stobart. Prior to being
appointed to the Board in 1994, Mr. Barrington was and remains Managing Director
of Hill Samuel Bank, 100 Wood Street, London, England EC2P 2AJ, since 1991.
Prior to being appointed to the Board in 1994, Mr. Freedberg was and remains
Chief Executive Officer of Hill Samuel Bank, 100 Wood Street, London, England
EC2P 2AJ, since 1991. Prior to being appointed to the Board in 1994, Mr.
Plummer was and remains Legal Adviser to Lloyds TSB Group plc, 60 Lombard
Street, London, England EC3V 9DN, since 1988. Prior to being appointed to the
Board in 1994, Mr. Stobart was and remains Director of Hill Samuel Bank, 100
Wood Street, London, England EC2P 2AJ, since 1977.
2
<PAGE>
Certain directors and officers of IAI are directors and/or officers of
the Registrant, as described in the section of the Statement of Additional
Information entitled "Management," filed as a part of this Registration
Statement.
The address of the officers and directors of IAI is that of IAI, which
is 3700 First Bank Place, P. O. Box 357, Minneapolis, Minnesota 55440.
Certain of the officers and directors of IAI also serve as officers
and directors of IAI International Ltd. Both IAI and IAI International are
wholly-owned subsidiaries of Hill Samuel Group BV, a London-based merchant
banking and financial services firm which, in turn, is owned by Lloyds TSB Group
plc, a publicly-held financial services organization based in London, England.
The senior officers and directors of IAI International and their titles are as
follows:
<TABLE>
<CAPTION>
Name Title
- ---- -----
<S> <C>
Noel Paul Rahn Chairman of the Board of Directors
Roy C. Gillson Chief Investment Officer/Director
Irving Philip Knelman Director
Hilary Fane Deputy Chief Investment Officer/Director
Feidhlim O'Broin Associate Director
</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
Christopher J. Smith Director/Secretary
Archie C. Black Director/Treasurer
Christie Haagensen Director of Trust Services
</TABLE>
3
<PAGE>
Item 29. Principal Underwriters
(a) Not applicable
(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.
4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Registrant certifies that it meets all of the
requirements for effectiveness of its Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(a) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Minneapolis, and State of Minnesota, on the 29th day of March, 1996.
IAI INVESTMENT FUNDS V, INC.
(Registrant)
By /s/ Richard E. Struthers, President
-----------------------------------
Richard E. Struthers, President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated:
/s/ Richard E. Struthers President (principal March 29, 1996
- ------------------------ executive officer) & Director
Richard E. Struthers
/s/ Archie C. Black III Treasurer (principal March 29, 1996
- ------------------------ financial and accounting
Archie C. Black III officer)
Noel P. Rahn (1)
Director
Madeline Betsch (1)
Director
W. William Hodgson (1)
Director
George R. Long (1)
Director
J. Peter Thompson (1)
Director
Charles H. Withers (1)
Director
/s/ William C. Joas March 29, 1996
- ------------------------
William C. Joas,
Attorney-in-fact
(1) Registrant's directors executing Powers of Attorney dated August 18, 1993,
and filed with the Commission on June 28, 1994.
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Description Sequential Page No.
- ----------- ------------------- -------------------
5B Management Agreement
6A Dealer Sales Agreement
6B Shareholder Services Agreement
11 Consent of Independent Auditors
<PAGE>
EXHIBIT 5B
MANAGEMENT AGREEMENT
<PAGE>
MANAGEMENT AGREEMENT
This Agreement is made and entered into as of _____________ , 1996 by
and between Investment Advisers, Inc., a Delaware corporation ("IAI"), and IAI
Investment Funds V Inc., a Minnesota corporation (the "Company"), on behalf of
IAI Reserve Fund, the portfolio represented by the Company's Series A Common
Shares (the "Fund").
1. ENGAGEMENT OF IAI; SERVICES.
(a) Investment Advisory Services. The Company hereby engages IAI
on behalf of the Fund, and IAI hereby agrees, pursuant to the terms and
conditions hereinafter set forth, to furnish the Fund continuously with
investment planning, to provide investment advice with regard to the Fund's
portfolio, to prepare and make available to the Fund necessary research and
statistical data in connection therewith, to supervise the acquisition and
disposition of specific securities by the Fund and to perform such other
services as are reasonably incidental to the foregoing duties as investment
adviser for, and to manage the investment of the assets of, the Fund. IAI
covenants and agrees that, in effecting acquisitions and dispositions of
specific investments on behalf of the Fund, IAI shall at all times be governed
by the Fund's investment objectives, restrictions and policies as delineated and
limited by the disclosures contained in the various documents filed with the
Securities and Exchange Commission on behalf of the Fund, as such documents may
from time to time be amended or supplemented. IAI shall report to the Company's
Board of Directors regularly at such times and in such detail as the Board may
from time to time determine appropriate, in order to permit the Board to
determine the adherence of IAI to the Fund's investment objectives, policies and
limitations.
(b) Dividend Disbursing, Accounting, Administrative and Transfer
Agency Services. The Company on behalf of the Fund hereby engages IAI, and IAI
hereby agrees, to provide to the Fund with all dividend disbursing, accounting,
administrative and transfer agency services required by the Fund, including,
without limitation, the following services:
(1) The calculation of net asset value per share at such times and in
such manner as specified in the Fund's current Prospectus and Statement of
Additional Information and at such other times upon which the parties
hereto may from time to time agree. The pricing services or other sources
from which daily price quotations on portfolio securities are to be
obtained for purposes of calculating the Fund's daily net asset value shall
be paid for by IAI and approved by the Company;
(2) Upon the receipt of funds for the purchase of Fund shares or the
receipt of redemption requests with respect to Fund shares outstanding, the
calculation of the number of shares to be purchased or redeemed,
respectively;
(3) Upon the Fund's distribution of dividends, (i) the calculation of
the amount of such dividends to be received per Fund share, (ii) the
calculation of the number of additional Fund shares to be received by each
Fund shareholder, other than any shareholder who has elected to receive
such dividends in cash, and (iii) the mailing of payments with respect to
such dividends to shareholders who have elected to receive such dividends
in cash;
(4) The provision of transfer agency services as described below:
(i) IAI shall make original issues of shares of the Fund in
accordance with the Fund's current Prospectus and Statement of
Additional Information and with instructions from the Company;
(ii) Prior to the daily determination of net asset value of the
Fund, IAI shall process all purchase orders received since the last
determination of the Fund's net asset value;
(iii) Transfers of shares shall be registered;
(iv) IAI will maintain stock registry records in the usual form in
which it will note the issuance, transfer and redemption of Fund
shares, and is also authorized to maintain an account in which it will
record the Fund shares and fractions issued and outstanding from time
to time for which issuance of Fund share certificates is deferred; and
1
<PAGE>
(v) IAI will, in addition to the aforementioned duties and
functions, perform the usual duties and functions of a stock transfer
agent for a registered investment company;
(5) The creation and maintenance of such records relating to the
business of the Fund as the Company may from time to time reasonably
request;
(6) The preparation of tax forms, reports, notices, proxy statements,
proxies and other Fund shareholder communications, and the mailing thereof
to Fund shareholders; and
(7) The provision of such other dividend disbursing, accounting,
administrative, accounting and transfer agency services upon which the
parties hereto may from time to time agree.
(8) The Fund hereby authorizes IAI to contract with qualified entities
for the provision of any of the services to be performed pursuant to this
Section 1(b).
(c) Shareholder Services. The Company on behalf of the Fund hereby
engages, and IAI hereby agrees, to provide the Fund with all services to
shareholders not otherwise the subject of Section 1(b) above. These shareholder
services may include personal services provided to shareholders, such as
answering shareholder inquiries regarding a Fund and providing reports and other
information and services related to the maintenance of shareholder accounts.
The Fund hereby also authorizes IAI to contract with qualifying broker-dealers,
financial institutions and other such entities for the provision of such
services to Fund shareholders.
(d) Filings, Office Facilities, Equipment and Personnel. IAI shall, at
its own expense, file all documents with all relevant regulatory agencies and
governmental authorities on the Company's behalf, furnish the Company and the
Fund with all office facilities, equipment and personnel necessary to discharge
its responsibilities and duties hereunder. IAI shall arrange, if requested by
the Company, for officers or employees of IAI to serve without compensation from
the Company as directors, officers, or employees of the Company if duly elected
to such positions by the shareholders or directors of the Company.
(e) Other Services. IAI shall, at its own expense, provide or arrange for
the provision of all services required by the Company on behalf of the Fund not
otherwise addressed in this Agreement.
(f) Books and Records. IAI hereby acknowledges that all records
pertaining to the services rendered hereunder are the sole and exclusive
property of the Company, and in the event that a transfer of any of the services
currently rendered hereunder to someone other than IAI should ever occur, IAI
will promptly, and at its own cost, take all steps necessary to segregate such
records and deliver them to the Company.
(g) No Separate Charges to Shareholders. IAI hereby covenants and agrees
that it will make no separate charge to any Fund shareholder or his individual
account for any services rendered to said shareholder, the Fund or the Company
unless such charge for special services is specifically approved by the Board
including a majority of the directors who are not "interested persons" (as such
term is defined in the Investment Company Act of 1940, as amended, which act, as
amended and together with all rules and regulations promulgated thereunder, is
hereinafter referred to as the "1940 Act") of IAI. No special charge will be
levied retroactively or without appropriate notice to affected shareholders.
(h) Limitation of Liability. IAI, in carrying out and performing the terms
and conditions of this Agreement, shall incur no liability for its status
hereunder or for any actions taken or omitted in good faith and without
negligence. Without limitation of the foregoing:
(1) IAI may rely upon, and shall not be liable to any person or party
for any actions taken or omitted to be taken in good faith in reliance
upon, the advice of the Company, or of counsel, who may be counsel for the
Company or counsel for IAI, and upon statements of accountants, brokers and
other persons believed by IAI in good faith to be expert in the matters
upon which they are consulted; and
(2) IAI may rely upon, and shall not be liable to any person or party
for any actions taken or omitted to be taken in good faith in reliance
upon, any signature, instruction, request, letter of transmittal,
certificate, opinion of counsel, statement, instrument, report, notice,
consent, order or other paper or document that IAI in good faith believes
to be genuine and to have been signed, presented or authorized by the
purchaser, Company or other proper party or parties.
2
<PAGE>
2. COMPENSATION FOR SERVICES; ALLOCATION OF EXPENSES
(a) In payment for the services to be provided or arranged by IAI
hereunder, the Company (on behalf of the Fund) shall pay to IAI a fee based on
the Fund's average daily net assets (as determined in accordance with the
Company's Bylaws and with the Fund's Prospectus and Statement of Additional
Information, as the same may from time to time be amended or supplemented) as
set forth in Exhibit A attached hereto. This fee shall be paid to IAI on a
monthly basis not later than the tenth business day of the month following the
month in which the services were rendered and shall be prorated for any fraction
of a month at the commencement or termination of this Agreement.
(b) Except for brokerage commissions and other expenditures in connection
with the purchase and sale of portfolio securities, interest expense and,
subject to the specific approval of a majority of the directors of the Company
who are not "interested persons" (as defined in the 1940 Act) of IAI or the
Company, taxes and extraordinary expenses, IAI shall bear all of the Fund's
expenses; provided however, that IAI will either pay the fees and the ordinary
and reasonable expenses of the Fund's disinterested directors or reduce the fee
due under this Agreement by an equivalent amount paid by the Fund to such
directors.
3. FREEDOM TO DEAL WITH THIRD PARTIES.
IAI shall be free to render services to others similar to those rendered
under this Agreement or of a different nature except as such services may
conflict with the services to be rendered or the duties to be assumed hereunder.
4. EFFECTIVE DATE, DURATION, AMENDMENT AND TERMINATION OF AGREEMENT.
(a) Unless sooner terminated as hereinafter provided, this Agreement shall
continue in effect for a period more than two years from the date of its
execution but only as long as such continuance is specifically approved at least
annually by (i) the Board of Directors of the Company or by the vote of a
majority of the outstanding voting securities of the Fund, and (ii) by the vote
of a majority of the directors of the Company who are not parties to this
Agreement or "interested persons" (as defined in the 1940 Act) of IAI or of the
Company cast in person at a meeting called for the purpose of voting on such
approval.
(b) This Agreement may be terminated at any time, without the payment of
any penalty, by the Board of Directors of the Company or by the vote of a
majority of the outstanding voting securities of the Fund, or by IAI, upon 60
days' written notice to the other party.
(c) This Agreement shall automatically terminate in the event of its
"assignment" (as defined in the Investment Company Act of 1940, as amended).
(d) No amendment to this Agreement shall be effective until approved by the
vote of: (i) a majority of the directors of the Company who are not parties to
this Agreement or "interested persons" (as defined in the 1940 Act) of IAI or of
the Company cast in person at a meeting called for the purpose of voting on such
approval; and (ii) a majority of the outstanding voting securities of the Fund.
(e) Wherever referred to in this Agreement, the vote or approval of the
holders of a majority of the outstanding voting securities or shares of the Fund
shall mean the lesser of (i) the vote of 67% or more of the voting securities of
the Fund present at a regular or special meeting of shareholders duly called, if
more than 50% of the Fund's outstanding voting securities are present or
represented by proxy, or (ii) the vote of more than 50% of the outstanding
voting securities of the Fund.
(f) To the extent the provisions of this Section 4 are based on legislative
or regulatory requirements in effect at the time of this Agreement's initial
approval by the Fund's Board of Directors and/or shareholders and any such
legislative or regulatory requirements change, the relevant provision of this
Section 4 will be deemed to have been so amended without further action by the
Fund's Board of Directors or its shareholders.
5. NOTICES.
Any notice under this Agreement shall be in writing, addressed, delivered
or mailed, postage prepaid, to the other party at such address as such other
party may designate in writing for receipt of such notice.
3
<PAGE>
6. REPRESENTATION.
IAI hereby represents that it will maintain registrations with and/or
approvals by all relevant governmental authorities necessary for the provision
of services pursuant to this Agreement.
7. INTERPRETATION; GOVERNING LAW.
This Agreement shall be subject to and interpreted in accordance with all
applicable provisions of law including, but not limited to, the 1940 Act. To the
extent that the provisions herein contained conflict with any such applicable
provisions of law, the latter shall control. The laws of the State of Minnesota
shall otherwise govern the construction, validity and effect of this Agreement.
IN WITNESS WHEREOF, the Company and IAI have caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written.
IAI INVESTMENT FUNDS V, INC.
By_____________________________________
Richard E. Struthers, President
INVESTMENT ADVISERS, INC.
By_____________________________________
Noel P. Rahn, Chief Executive Officer
4
<PAGE>
EXHIBIT 6A
DEALER SALES AGREEMENT
<PAGE>
DEALER SALES AGREEMENT
Ladies and Gentlemen:
We invite you to join a selling group for the distribution of shares of those
mutual funds available to the public for which we serve as the investment
adviser (the "Funds"). Upon execution of this Agreement, you agree to
participate in the distribution of the Funds to the public subject to the terms
set forth herein.
1. In all sales of the Funds to the public, you shall act as dealer of your
own account and shall not be authorized to act as agent for the Funds, for any
other dealer, or for us.
2. All orders will be accepted only at the price, in the amount and subject
to the terms set forth in the then current Prospectuses and Statements of
Additional Information of the Funds. The procedure relating to the handling of
orders shall be subject to instructions which we shall forward to you from time
to time. Certificates representing shares of the Funds will not be issued.
3. You agree to provide distribution and marketing services in the
marketing of shares of the Funds and services to your customers who are Fund
shareholders. Such shareholder services may include personal services provided
to shareholders, such as answering shareholder inquiries regarding a Fund and
providing reports and other information, and services related to the maintenance
of shareholder accounts. For all services, we will pay you a fee, as established
by us from time to time. Such fee will be based upon the following percentages
of the average month-end or daily net assets of each Fund represented by shares
of the Fund owned, during the quarter for which payment is being made, by
customers for which you maintain a servicing relationship as evidenced by their
execution of such agreements as we may from time to time require. We
specifically reserve the right to discontinue paying fees with respect to those
assets for which such customer authorizations which we may require are not
provided.
<PAGE>
<TABLE>
<CAPTION>
Fund Annual Fee*
------------------------- -----------
<S> <C>
Reserve Fund 0
Money Market Fund 0
Minnesota Tax Free Fund .10%
Bond Fund .15%
Government Fund .15%
Growth and Income Fund .25%
Regional Fund .25%
Value Fund .25%
Developing Countries Fund .25%
International Fund .25%
Midcap Growth Fund .25%
Balanced Fund .25%
Growth Fund .25%
Emerging Growth Fund .25%
Capital Appreciation Fund .25%
</TABLE>
- ------------------------------
* as a % of average daily net assets or average month-end net assets as set
forth in a Fund's then-current prospectus.
Such fee will be paid on a quarterly basis and, subject to the last
sentence of this section 3, will be paid so long as the accounts of your clients
remain in the Funds and this Agreement and such other agreements as we may
require have not been terminated. Upon such termination, any such obligation to
pay such fee shall cease. You agree to furnish us or the Funds with such
information as may be reasonably requested with respect to such fees paid to you
pursuant to this Agreement.
4. If any Fund shares sold under the terms of this Agreement are
repurchased by the Funds or are tendered for redemption within seven business
days after confirmation of the original purchase, it is agreed that you shall
forfeit the right to receive the fees hereunder with respect to such shares.
5. No person is authorized to make any representations concerning the Funds
except those contained in the then current Prospectuses and in such printed
information as may be furnished for use as information supplemental to the
Prospectuses. Additional copies of the Prospectuses and any printed information
supplementing the Prospectuses will be supplied in reasonable quantities upon
request.
6. You acknowledge and agree that the Funds reserve the right, in their
sole discretion and without notice, to suspend sales or withdraw the offering of
shares of the Funds.
2
<PAGE>
7. This Agreement may be terminated by either party at any time upon seven
days' notice to the other party with or without cause. We reserve the right to
amend this Agreement at any time upon written notice.
8. You represent that you are a member in good standing of the National
Association of Securities Dealers, Inc. and agree that termination or suspension
of such membership shall automatically terminate this Agreement. You further
agree that you will immediately advise us of any such termination or suspension.
You also represent that you are authorized under relevant federal and state laws
and regulations to receive the fees payable hereunder and that you will
immediately advise us of any termination or suspension of such authorization.
9. You agree to indemnify and hold harmless the Funds and us from and
against any and all claims, liability, expense (including attorneys' fees) or
loss in the event that you, or any of your employees or agents, should violate
any law, rule or regulation or any provisions of this Agreement, including,
without limitation, any representations, verbal or otherwise, of any untrue or
alleged untrue statements of a material fact relating to the offer and sale of
the Funds. In the event we determine to refund any amounts paid by any investor
by reason of any such violation on your part, you shall return to us any fees
previously paid by us to you in connection with the transaction for which the
refund is made.
10. All communications to us should be sent to us at 3700 First Bank Place,
P.O. Box 357, Minneapolis, MN 55440. Any notice to you shall be duly given if
mailed or telegraphed to you at the address specified by you below. This
Agreement shall be governed by and construed in accordance with the laws of the
State of Minnesota.
The undersigned hereby accepts
the offer set forth herein:
DEALER INVESTMENT ADVISERS, INC.
By____________________________ By______________________________
Its___________________________ Its_____________________________
Address_______________________ Date of Acceptance_______, 19___
_______________________
_______________________
3
<PAGE>
EXHIBIT 6B
SHAREHOLDER SERVICES AGREEMENT
<PAGE>
SHAREHOLDER SERVICE AGREEMENT
Ladies and Gentlemen:
We invite you to enter into an agreement with us for the servicing of
shareholders of, and the maintenance of shareholder accounts for those mutual
funds available to the public for which Investment Advisers, Inc., our
affiliate, serves as the investment adviser (the "Funds") and the shares of
which are offered to the public at net asset value, as described in the Funds'
Prospectuses. Subject to your acceptance of this Agreement, the terms and
conditions of this Agreement shall be as follows:
1. You shall provide shareholder services for certain shareholders of the
Funds who purchase shares of the Funds as a result of their relationship to
you. Such shareholder services may include personal services provided to
shareholders, such as answering shareholder inquiries regarding a Fund and
providing reports and other information, and services related to the
maintenance of shareholder accounts, to the extent you are permitted by
applicable statue, rule or regulation to provide such information or
services.
2. If shares of the Funds are to be purchased or held by you on behalf of your
clients:
(i) Such shares will be registered in your name or in the name of your
nominee. The client will be the beneficial owner of the shares of the
Funds purchased and held by you in accordance with the client's
instructions and the client may exercise all rights of a shareholder
of the Funds. You agree to transmit to the Funds' transfer agent
(Investment Advisers, Inc.), in a timely manner, all purchase orders
and redemption requests of your clients and to forward to each client
all proxy statements, periodic shareholder reports and other
communications received from the Funds by you on behalf of your
clients. The Funds have agreed to pay all reasonable out-of-pocket
expenses actually incurred by you in connection with the transfer by
you of such proxy statements and reports to your clients.
(ii) You agree to transfer to the Funds' transfer agent, on the date such
purchase orders are effective, federal funds in an amount equal to the
amount of all purchase orders placed by you on behalf of your clients
and accepted by the Funds. In the event that the Funds fail to
receive such federal funds on such date (other than through fault of
the Funds or their transfer agent), you shall indemnify the Funds
against any expense (including overdraft charges) incurred by the
Funds as a result of their failure to receive such federal funds.
<PAGE>
(iii) You agree to make available to the Funds, upon the Funds' request,
such information relating to your clients who are beneficial owners of
shares of the Funds and their transactions in shares of the Funds, as
may be required by applicable laws and regulations or as may be
reasonably requested by the Funds.
(iv) You agree to transfer record ownership of a client's shares of the
Funds to the client promptly upon the request of a client. In
addition, record ownership will be promptly transferred to the client
in the event that the person or entity ceases to be your client.
3. You shall provide to us copies of the lists of members of your organization
and identify to us any publications and other facilities of your
organization for the placement of advertisements or promotional materials
and for sending information regarding the Funds to enable us to solicit for
sale and to sell shares to your members.
4. Neither you nor any of your employees or agents are authorized to make any
representation concerning the shares of the Funds except those contained in
the then current Prospectuses of the Funds, copies of which will be
supplied to you; and you shall have no authority to act as agent for the
Funds or for us. You agree to indemnify and hold harmless the Funds, us,
and Investment Advisers, Inc. from and against any and all claims,
liability, expense (including attorneys' fees) and loss in the event that
you, or any of your employees or agents, should violate any law, rule, or
regulation, or any provisions of this Agreement and, in the event we
determine to refund any amounts paid by any investor by reason of any such
violation on your part, you shall return to us any fees previously paid by
us to you in connection with the transaction for which the refund is made.
5. In consideration for the services described herein, you shall be entitled
to receive from us such fees as established by us from time to time as set
forth on Exhibit A. Such fee will be based upon assets of each Fund
represented by shares of the Fund owned, during the quarter for which
payment is being made, by shareholders for which you maintain a servicing
relationship as evidenced by their execution of such agreements as we may
from time to time require. We specifically reserve the right to
discontinue paying fees with respect to those assets for which such
customer authorization which we may require is not provided.
Such fee will be paid on a quarterly basis and, subject to the last
sentence of this section, will be paid so long as the accounts for your
clients and this Agreement and such other agreements as we may require have
not been terminated. Upon such termination any such obligation to pay such
fee shall cease. You agree to furnish us and the Funds with any such
information as may be reasonably requested with respect to such fees paid
to you pursuant to this Agreement.
<PAGE>
6. You acknowledge and agree that the Funds reserve the right, in their sole
discretion and without notice, to suspend the sale of shares or withdraw
the sale of shares of the Funds.
7. This Agreement may be terminated by either party at any time upon seven
days notice to the other party with or without cause. We reserve the right
to amend this Agreement at any time upon written notice.
8. All communications to us should be sent to us at 3700 First Bank Place,
P.O. Box 357, Minneapolis, MN 55440. Any notice to you shall be duly given
if mailed or telegraphed to you at the address specified by you below.
This Agreement shall be governed by and construed under the laws of the
State of Minnesota.
The undersigned hereby accepts IAI Securities, Inc.
the offer set forth herein
______________________________ By __________________________
Firm
By____________________________ Its ___________________________
Its __________________________ Date of Acceptance______________
Address_______________________
________________________
________________________
<PAGE>
EXHIBIT 11
CONSENT OF INDEPENDENT AUDITORS
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
Independent Auditors' Consent
-----------------------------
The Board of Directors
IAI Investment Funds V, Inc. and
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
March 28, 1996
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
