As filed with the Securities and Exchange Commission on September 26, 1997
1933 Act Registration No. 33-10207
1940 Act Registration No. 811-4904
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ----
Post-Effective Amendment No. 24 X
----
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 24 X
----
IAI INVESTMENT FUNDS III, INC.
(Exact Name of Registrant as Specified in Charter)
3700 First Bank Place, P.O. Box 357
Minneapolis, Minnesota 55440
(Address of Principal Executive Offices) (Zip Code)
(612) 376-2700
(Registrant's Telephone Number, including Area Code)
Christopher J. Smith, Esq. Copy to:
3700 First Bank Place Michael J. Radmer, Esq.
P.O. Box 357 Dorsey & Whitney
Minneapolis, Minnesota 55440 220 South Sixth Street
(Name and Address of Agent for Service) Minneapolis, Minnesota 55402
It is proposed that this filing will become effective (check appropriate box)
____ immediately upon filing pursuant to paragraph (b)
____ on (date) pursuant to paragraph (b)
____ 60 days after filing pursuant to paragraph (a)(1)
____ on (date)pursuant to paragraph (a)(1)
____ 75 days after filing pursuant to paragraph (a)(2)
__X__ on December 15, 1997 pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
____ this post-effective amendment designates a new effective date
for a previously filed post-effective amendment
Registrant has registered an indefinite number of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940, as amended. Rule 24f-2 Notices were last filed with the Commission on
March 26, 1997.
<PAGE>
IAI INVESTMENT FUNDS III, INC.
FORM N-1A
CROSS-REFERENCE SHEET
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Item Number Caption Prospectus Caption
- ----------- ------- ------------------
1 Cover Page.................................... Cover Page of Prospectus
2 Synopsis...................................... Fund Expense Information
3 Condensed Financial Information............... Investment Performance
4 General Description of Registrant ............ Investment Objective 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................................... Information is contained in the Annual Report
6 Capital Stock and Other Securities............ Dividends, Distributions and Tax Status;
Description of Common Stock; Additional
Information
7 Purchase of Securities Being Offered.......... Computation of Net Asset Value and Pricing;
Purchase of Shares; Automatic Investment
Plan; Exchange Privilege; Automatic Exchange
Plan; Retirement Plans; Authorized Telephone
Trading
8 Redemption or Repurchase...................... Systematic Cash Withdrawal Plan; Redemption
of Shares; Authorized Telephone Trading
9 Pending Legal Proceedings..................... Not Applicable
<PAGE>
Item Number Caption Statement of
- ----------- ------- ------------
Additional Information Caption
10 Cover Page.................................... Cover Page of Statement of Additional
Information
11 Table of Contents............................. Table of Contents
12 General Information and History............... Management
13 Investment Objectives and Policies............ Investment Objectives and Policies;
Investment Restrictions
14 Management of the Fund........................ Management
15 Control Persons and Principal
Holders of Securities......................... Management; Capital Stock
16 Investment Advisory and Other Services........ Management; Counsel and Auditors; Custodian;
Transfer Agent and Dividend Disbursing Agent
17 Brokerage Allocation.......................... Portfolio Transactions and Allocation of
Brokerage
18 Capital Stock and Other Securities............ Capital Stock
19 Purchase, Redemption and Pricing
of Securities Being Offered................... Purchase and Redemptions In Kind; Net Asset
Value and Public Offering Price
20 Tax Status.................................... Tax Status
21 Underwriters.................................. Not Applicable
22 Calculation of Performance Data............... Investment Performance
23 Financial Statements.......................... Financial Statements
</TABLE>
<PAGE>
Prospectus Dated December 15, 1997
IAI PACIFIC BASIN FUND
3700 First Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
Telephone 1-612-376-2700
1-800-945-3863
IAI Pacific Basin Fund ("the Fund") is a separate portfolio of IAI Investment
Funds III, Inc., an open-end diversified management investment company
authorized to issue its shares of common stock in more than one series. The
investment objective of the Fund is to provide long-term capital appreciation.
The Fund seeks to achieve its objective by investing primarily in the securities
of Pacific Basin issuers. There can be no assurance that the Fund's investment
objective will be achieved.
Investing in the Fund involves significant risks and considerations not normally
associated with a mutual fund which invests primarily in securities of U.S.
issuers and may be considered speculative. Shares of the Fund are not designed
to be a complete investment program. See "Fund Risk Factors" on page 9.
This Prospectus sets forth concisely the information which a prospective
investor should know about the Fund before investing and it should be retained
for future reference. A "Statement of Additional Information" dated December 15,
1997, which provides a further discussion of certain areas in this Prospectus
and other matters which may be of interest to some investors, has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference. For a free copy, call or write the Fund at the address or telephone
number shown above.
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
-----------------
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FUND EXPENSE INFORMATION.............................................................................3
FUND DIRECTORS.......................................................................................3
INVESTMENT OBJECTIVE AND POLICIES....................................................................4
PORTFOLIO SECURITIES AND OTHER INVESTMENT TECHNIQUES.................................................5
FUND RISK FACTORS....................................................................................9
MANAGEMENT...........................................................................................13
INVESTMENT PERFORMANCE...............................................................................14
COMPUTATION OF NET ASSET VALUE AND PRICING...........................................................14
PURCHASE OF SHARES...................................................................................15
RETIREMENT PLANS.....................................................................................16
AUTOMATIC INVESTMENT PLAN............................................................................16
REDEMPTION OF SHARES.................................................................................17
EXCHANGE PRIVILEGE...................................................................................18
AUTOMATIC EXCHANGE PLAN..............................................................................18
AUTHORIZED TELEPHONE TRADING.........................................................................18
SYSTEMATIC CASH WITHDRAWAL PLAN......................................................................19
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS..............................................................19
DESCRIPTION OF COMMON STOCK..........................................................................20
COUNSEL AND AUDITORS.................................................................................21
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT..............................................21
ADDITIONAL INFORMATION...............................................................................21
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2
<PAGE>
FUND EXPENSE INFORMATION
------------------------
Shareholder Transaction Expenses
- --------------------------------
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<CAPTION>
<S> <C>
Sales Load Imposed on Purchases........................................... None
Sales Load Imposed on Reinvested Dividends................................ None
Redemption Fees (as a percentage of amount redeemed)...................... 2.00%*
Exchange Fees............................................................. None
</TABLE>
Annual Fund Operating Expenses
- ------------------------------
(as a percentage of average daily net assets)
- ---------------------------------------------
<TABLE>
<CAPTION>
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Management Fee**.......................................................... 2.00%
Rule 12b-1 Distribution Fee............................................... None
Other Expenses............................................................ None
-----
Total Fund Operating Expenses** 2.00%
-----------------------------------
</TABLE>
* On shares purchased and held for less than one year. For additional
information, see "Redemption of Shares". The Fund charges a $10.00 fee for
the payment of redemption proceeds by wire.
** After voluntary fee waiver.
Example:
Based upon the levels of Total Fund Operating Expenses listed above, you would
pay the following expenses on a $1,000 investment, assuming a five percent
annual return and redemption at the end of each period:
1 Year 3 Years
------ -------
$ 20 $ 63
The purpose of the above table is to assist you in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown. The
Fund's investment adviser has voluntarily agreed to waive the Management Fee in
excess of 2.00% of the Fund's average daily net assets until March 1, 1999.
Absent such voluntary waiver, the Management Fee would be 2.50% of the Fund's
average daily net assets, as would Total Fund Operating Expenses. Further
information concerning fees paid by the Fund is set forth in the section
"Management" below and in the Statement of Additional Information.
FUND DIRECTORS
--------------
Madeline Betsch Noel P. Rahn
W. William Hodgson J. Peter Thompson
George R. Long Charles H. Withers
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is long-term capital appreciation. The
Fund seeks to achieve its objective by investing primarily in the securities of
Pacific Basin issuers. Such objective may not be changed without shareholder
approval. There can be no assurance that the Fund will achieve its investment
objective.
Under normal conditions, at least 65% of the Fund's total assets will be
invested in securities of Pacific Basin issuers and at least 50% of the Fund's
total assets will be invested in Pacific Basin equity securities. For purposes
of this Prospectus, Pacific Basin excludes Japan and is defined as Hong Kong,
China, Taiwan, Malaysia, Singapore, Indonesia, Thailand, South Korea,
Philippines, India, Pakistan, Bangladesh, Sri Lanka, Australia and New Zealand.
The Fund defines securities of Pacific Basin issuers as follows: (a) securities
of companies organized under the laws of an Pacific Basin country or for which
the principal trading market is located in the Pacific Basin region; or (b)
securities that are issued or guaranteed by the government of a Pacific Basin
country, its agencies or instrumentalities, political subdivisions, or the
country's central bank; or (c) securities of Pacific Basin countries, as
previously defined, in the form of depository shares; or (d) companies outside
the defined region which have a significant business exposure to the region.
Determinations as to eligibility will be based on publicly available information
and inquiries made to the companies. Such investments may include companies
("small companies") with market capitalizations less than one billion dollars.
The Fund intends to allocate investments among at least four countries at all
times and does not expect to concentrate investments in any particular industry.
The Fund may also invest in certain Pacific Basin countries not currently open
to outside investment and intends to limit exposure to 5% of the net assets of
the Fund.
The Fund's equity investments consist of common stock, preferred stock
(either convertible or non-convertible), sponsored or unsponsored depository
receipts (including American Depository Receipts, American Depository Shares and
Global Depository Shares) and warrants. These may be restricted securities and
may also be purchased through rights. Securities may be listed on the securities
exchanges, traded over-the-counter, or have no organized market.
Although the Fund focuses on equity securities, it may also invest in debt
securities. These include debt securities issued by governmental units of
Pacific Basin countries ("Sovereign Debt"). Generally, the Fund will invest in
debt securities when Investment Advisers, Inc. ("IAI"), the Fund's investment
adviser and manager, believes that the potential for capital appreciation is
likely to equal or exceed that of equity securities. Capital appreciation in
debt securities may arise from a favorable change in relative foreign exchange
rates, in interest rate levels, or in the creditworthiness of issuers. The Fund
has established no minimum rating criteria for the debt securities in which it
may invest, and such securities may not be rated for creditworthiness at all.
Securities rated in the medium to lower rating categories of nationally
recognized statistical rating organizations and unrated securities of comparable
quality are predominantly 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. Such securities are commonly referred to as junk bonds. The Fund
does not currently intend to invest more than 10% of its net assets in junk
bonds. See "Investment Objective and Policies" in the Statement of Additional
Information for additional information regarding ratings of debt securities. In
purchasing such securities, the 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. The Fund
does not intend to purchase debt securities that are in default or which IAI
believes will be in default.
The allocation between equity and debt, and among various Pacific Basin
countries, varies based on a number of factors, including: expected rates of
economic and corporate profit growth; past performance and current and
comparative valuations in Pacific Basin capital markets; the level and
anticipated direction of interest rates; changes or anticipated changes in
Pacific Basin government policy; and the condition of the balance of payments
and changes in the terms of trade. The Fund, in seeking undervalued markets or
individual securities, also considers the effects of past economic crises or
ongoing financial and political uncertainties.
4
<PAGE>
PORTFOLIO SECURITIES AND OTHER INVESTMENT TECHNIQUES
The ability of the Fund to utilize certain of the investment techniques
discussed below may be subject to limitations and may subject the Fund to
additional risks. Please refer to the section "Fund Risk Factors" and the
Statement of Additional Information for further information regarding such
limitations and risks. Unless otherwise indicated herein, elsewhere in this
Prospectus, or in the Statement of Additional Information, the Fund may invest
up to 100% of its assets in the securities listed below.
DEPOSITARY RECEIPTS
The Fund may invest in securities of Pacific Basin issuers in the form
of both sponsored and unsponsored American Depository Receipts ("ADRs") or other
similar securities, such as American Depository Shares and Global Depository
shares, convertible into securities of foreign issuers. These securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. ADRs are receipts typically issued by a United States
bank or trust company evidencing ownership of the underlying securities.
Unsponsored programs are organized independently and without the cooperation of
the issuer of the underlying securities. As a result, available information
concerning the issuer may not be as current as for sponsored depositary
instruments and their prices may be more volatile than if they were sponsored by
the issuers of the underlying securities. Generally, ADRs, in sponsored form,
are designed for use in United States securities markets. As a result of the
absence of established securities markets and publicly-owned corporations in
certain Pacific Basin countries, as well as restrictions on direct investment by
foreign entities, the Fund may be able to invest in such countries solely or
primarily through ADRs or similar securities and government approved investment
vehicles.
FOREIGN INDEX LINKED INSTRUMENTS
The Fund may invest in instruments issued by the U.S. or a foreign
government or by private issuers that return principal and/or pay interest to
investors in amounts which are linked to the level of a particular foreign index
("Foreign Index Linked Instruments"). Foreign Index Linked Instruments may offer
higher yields than comparable securities linked to purely domestic indexes but
also may be more volatile. Foreign Index Linked Instruments are relatively
recent innovations for which the market has not yet been fully developed and,
accordingly, they typically are less liquid than comparable securities linked to
purely domestic indexes. In addition, the value of Foreign Index Linked
Instruments will be affected by fluctuations in foreign exchange rates or in
foreign interest rates. Foreign currency gains and losses with respect to
Foreign Index Linked Instruments may affect the amount and timing of income
recognized by the Fund.
BRADY BONDS
The Fund may invest in Brady Bonds and other sovereign debt securities of
countries that have restructured or are in the process of restructuring
sovereign debt pursuant to the Brady Plan. Brady Bonds are debt securities
issued under the framework of the Brady Plan, a mechanism for debtor nations to
restructure their outstanding external indebtedness. Brady Bonds have been
issued only recently and, accordingly, do not have a long payment history.
ZERO COUPON SECURITIES
The 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.
5
<PAGE>
FOREIGN CURRENCY TRANSACTIONS
The value of the assets of the Fund as measured in United States dollars or
a foreign currency or currencies may be affected favorably or unfavorably by
changes in foreign currency exchange rates and exchange control regulations, and
the Fund may incur costs in connection with conversions between various
currencies. The Fund will conduct its foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through forward contracts to purchase or sell
foreign currencies. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
directly between currency traders (usually large commercial banks) and their
customers.
The Fund may enter into foreign currency transactions for hedging purposes
only and may not speculate on the fluctuations of foreign currency exchange
rates. The Fund may hedge against adverse changes in foreign currency exchange
rates between the trade and settlement dates with respect to foreign securities
it is purchasing or during the holding period with respect to foreign securities
in its portfolio. With respect to foreign securities in its portfolio, the Fund
may hedge a maximum of 50% of the value of its investment portfolio by
establishing the value of such securities in U.S. dollars. Additionally, the
Fund may hedge a maximum of 25% of the value of its investment portfolio by
establishing the value of such securities in another foreign currency or
currencies which IAI believes to be more stable than the currencies in which
such securities are denominated.
When the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to establish the cost or
proceeds in U.S. dollars or another foreign currency. By entering into a forward
contract in such currency for the purchase or sale of the amount of foreign
currency involved in an underlying security investment, the Fund is able to
protect itself against a possible loss between trade and settlement dates of a
transaction or during the period of an investment in a foreign security
resulting from an adverse change in the relationship between such two
currencies. However, this tends to limit potential gains which might result from
a positive change in such currency relationships. The Fund may also hedge its
foreign currency exchange rate risk by engaging in currency financial futures
and options and forward foreign currency transactions.
When IAI believes that the currency of a particular foreign country may
suffer a substantial decline against the U.S. dollar or another foreign
currency, it may enter into a forward contract to sell an amount of foreign
currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency. The forecasting of short-term
currency market movement is difficult and the successful execution of a
short-term hedging strategy is uncertain.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a contract. Accordingly, it may be
necessary for the Fund to purchase additional currency on the spot market (and
bear the expense of such purchase) if the market value of the security is less
than the amount of foreign currency the Fund is obligated to deliver when a
decision is made to sell the security and make delivery of the foreign currency
in settlement of a forward contract. Conversely, it may be necessary to sell on
the spot market some of the foreign currency received upon the sale of the
portfolio security if its market value exceeds the amount of foreign currency
the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of foreign currency and the date it enters into an offsetting contract for
the purchase of the foreign currency, the Fund would realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
would suffer a loss to the extent the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell. Although such
6
<PAGE>
contracts tend to minimize the risk of loss due to a decline in the value of the
hedged currency, they also tend to limit any potential gain which might result
should the value of such currency increase. The Fund will have to convert its
holdings of foreign currencies into U.S. dollars from time to time. Although
foreign exchange dealers do not charge a fee for conversion, they do realize a
profit based on the difference (the "spread") between the prices at which they
are buying and selling various currencies.
PRIVATIZATIONS
The governments of some Pacific Basin countries have been engaged in
programs of selling part or all of their stakes in government owned or
controlled enterprises ("privatizations"). IAI believes that privatizations may
offer opportunities for significant capital appreciation, and intends to invest
assets of the Fund in privatizations in appropriate circumstances. In certain
Pacific Basin countries, the ability of foreign entities such as the Fund to
participate in privatizations may be limited by local law and/or the terms on
which the Fund may be permitted to participate may be less advantageous than
those afforded local investors. There can be no assurance that Pacific Basin
governments will continue to sell companies currently owned or controlled by
them or that privatization programs will be successful.
CONVERTIBLE SECURITIES
A convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. Convertible securities rank senior to
common stocks in a corporation's capital structure and, therefore, entail less
risk than the corporation's common stock. The value of a convertible security is
a function of its "investment value" (its value as if it did not have a
conversion privilege), and its "conversion value" (the security's worth if it
were to be exchanged for the underlying security, at market value, pursuant to
its conversion privilege).
TEMPORARY INVESTMENTS
The Fund reserves the right, as a temporary defensive measure, such as
during periods of adverse market conditions or when equity or debt securities
are deemed overvalued, to hold up to 100% of its total assets in cash or cash
equivalents (in U.S. dollars or foreign currencies) and short-term securities,
including money market securities.
ADJUSTING INVESTMENT EXPOSURE
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as currency
exchange rates and broad or specific market movements), or to enhance potential
gain. These strategies may be executed through the use of derivative contracts.
Such strategies are generally accepted as a part of modern portfolio management
and are regularly utilized by many mutual funds and other institutional
investors. Techniques and instruments may change over time as new instruments
and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, purchase and sell financial futures contracts and options thereon,
and enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures.
There is no limit on the amount of Fund assets that can be used for hedging
purposes, i.e., to attempt to protect against possible changes in the market
value of securities held in or to be purchased for the Fund's portfolio
resulting from securities markets or currency exchange rate fluctuations, to
protect the Fund's unrealized gains in the value of its portfolio securities, to
facilitate the sale of such securities for investment purposes, or to establish
a position in the derivatives markets as a temporary substitute for purchasing
or selling particular securities. Some may also be used to enhance potential
gain although no more than 5% of the Fund's net assets will be committed to
techniques and instruments entered into for non-hedging purposes. Any or all of
7
<PAGE>
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any technique or instruments is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
techniques and instruments successfully will depend on IAI's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Such techniques and instruments involving financial
futures and options thereon will be purchased, sold or entered into only for
bona fide hedging, risk management or portfolio management purposes and not for
speculative purposes.
BORROWING
The 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 the
Fund makes additional investments while borrowings are outstanding, this may be
considered a form of leverage. The Fund does not intend its borrowings to exceed
5% of its total assets.
CLOSED-END INVESTMENT COMPANIES
Because of the absence of securities markets and publicly-owned
corporations, and because of restrictions on direct investment by foreign
entities in certain Pacific Basin countries, the Fund may invest up to 10% of
its total assets in securities of closed-end investment companies. Shares of
certain closed-end investment companies may at times be acquired only at market
prices representing premiums to their net asset values. In the event that shares
acquired at a premium subsequently decline in price relative to their net asset
value or the value of portfolio investments held by such closed-end companies
declines, the Fund and its shareholders may experience a loss. If the Fund
acquires shares of closed-end investment companies, Fund shareholders would bear
both their proportionate share of expenses in the Fund (including management and
advisory fees) and, indirectly, the expenses of such closed-end investment
companies.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in securities that are
considered illiquid because of the absence of a readily available market or due
to legal or contractual restrictions. However, certain restricted securities
that are not registered for sale to the general public but that can be resold to
institutional investors may be considered liquid pursuant to guidelines adopted
by the Board of Directors. The institutional trading market is relatively new,
and the liquidity of the Fund's investments could be impaired if trading does
not develop or declines.
PORTFOLIO TURNOVER
The Fund will dispose of securities without regard to the time they have
been held when such action appears advisable to management either as a result of
securities having reached a price objective, or by reason of developments not
foreseen at the time of the investment decision. Since investment changes
usually will be made without reference to the length of time a security has been
held, a significant number of short-term transactions may result. Accordingly,
the Fund's annual portfolio turnover rate cannot be anticipated and may be
relatively high. High turnover rates (100% or more) increase transaction costs
and may increase taxable capital gains.
Further information regarding these and other techniques is contained in
the Statement of Additional Information.
8
<PAGE>
FUND RISK FACTORS
RISK FACTORS ASSOCIATED WITH INVESTING IN THE PACIFIC BASIN
The Fund is designed for aggressive investors interested in the investment
opportunities offered in the Pacific Basin. While IAI believes that investing in
the Pacific Basin presents the possibility for significant growth over the
long-term, it also entails significant risks. Many investments in the Pacific
Basin can be considered speculative, and the price of securities and value of
currencies can be much more volatile than in the more developed markets. This
difference reflects the greater uncertainties of investing in less established
markets and economies.
Investing in foreign securities typically involves additional risks than
investing in securities of U.S. issuers. These risks are often heightened for
investments in the Pacific Basin and include, but are not limited to, the risk
of fluctuations in the value of the currencies in which they are denominated,
including the devaluation of the currencies of such countries relative to the
U.S. dollar, the risk of adverse political and economic developments and the
possibility of expropriation, nationalization or confiscatory taxation or
limitations on the removal of funds or other assets of the Fund. Additionally,
the economies of many Pacific Basin countries continue to experience significant
problems, including high inflation rates, high interest rates, large external
debt and continuing trade deficits and are characterized by extreme poverty,
high unemployment and a significant dependence on limited industries. Because
the Fund will 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 the 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. In many Pacific
Basin countries, there is less government supervision and regulation of business
and industry practices, stock exchanges, brokers and listed companies than in
the United States. In addition, there also may be less publicly available
information about foreign issuers than domestic issuers, and foreign issuers
generally are not subject to the uniform accounting, auditing and financial
reporting standards, practices and requirements applicable to domestic issuers.
The foreign securities markets of many of the countries in which the Fund may
invest may also be smaller, less liquid and subject to greater price volatility
than those in the United States. As an open-end investment company, the Fund is
limited in the extent to which it may invest in illiquid securities. Further,
the Fund may encounter difficulties or be unable to pursue legal remedies and
obtain judgments in foreign courts. These factors could make foreign
investments, especially those in the Pacific Basin, more volatile.
Brokerage commissions, custodial services, and other costs relating to
investment in the Pacific Basin are generally more expensive than in the United
States. Such markets have different clearance and settlement procedures and in
certain markets there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. The inability of the Fund to make intended security purchases
due to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.
Several Pacific Basin countries restrict, to varying degrees, foreign
investments in their securities markets. Government and private restrictions
take a variety of forms, including (a) limitations on the amount of funds that
may be introduced into or repatriated from the country (including limitations on
repatriation of investment income and capital gains); (b) prohibitions or
substantial restrictions on foreign investment in certain industries or market
sectors, such as defense, energy and transportation; (c) restrictions (whether
contained in the charter of an individual company or mandated by the government)
on the percentage of securities of a single issuer which may be owned by a
foreign investor; (d) limitations on the types of securities and their relative
rights and preferences which a foreign investor may purchase; and (e)
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restrictions on a foreign investor's right to invest in companies whose
securities are not publicly traded. In some circumstances, these restrictions
may limit or preclude investment in certain countries or may increase the cost
of investing in securities of particular companies.
The Fund's interest and dividend income from Pacific Basin issuers may be
subject to non-U.S. withholding taxes. The Fund also may be subject to taxes on
trading profits or on transfers of securities in some Pacific Basin countries.
The imposition of these taxes will increase the cost to the Fund of investing in
any country imposing such taxes. For U.S. tax purposes, U.S. shareholders may be
entitled to a credit or deduction to the extent of any foreign income taxes paid
by the Fund. See "Dividends, Distributions and Tax Status."
Many of the currencies of Pacific Basin countries have experienced steady
devaluations relative to the U.S. dollar, and major devaluations have
historically occurred in certain countries. Devaluations in the currencies in
which the Fund's portfolio securities are denominated may have a detrimental
impact on the Fund. Some Pacific Basin countries also may have managed
currencies which are not free floating against the U.S. dollar. In addition,
there is a risk that certain Pacific Basin countries may restrict the free
conversion of their currencies into other currencies. Further, the currencies of
certain Pacific Basin countries may not be internally traded.
Many Pacific Basin countries have experienced substantial, and in some
periods extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of certain Pacific Basin
countries. The governments of many Pacific Basin countries have exercised and
continue to exercise a significant influence over many aspects of the private
sector. Government actions concerning the economy could have a significant
effect on market conditions and prices and/or yields of securities in which the
Fund invests.
RISKS ASSOCIATED WITH ADJUSTING INVESTMENT EXPOSURE
The techniques and instruments described in the section "Adjusting
Investment Exposure", including derivative contracts, have risks associated with
them including possible default by the other party to the transaction,
illiquidity and, to the extent IAI's view as to certain market movements is
incorrect, the risk that the use of such techniques and instruments could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options), current market values,
limit the amount of appreciation the Fund can realize on its investments or
cause the Fund to hold a security it might otherwise sell. The use of currency
transactions can result in the Fund incurring losses as a result of a number of
factors including the imposition of exchange controls, suspension of settlements
or the inability to deliver or receive a specified currency. The use of options
and futures transactions entails certain other risks. In particular, the
variable degree of correlation between price movements of futures contracts and
price movements in the related portfolio position of the Fund creates the
possibility that losses on the hedging instrument may be greater than gains in
the value of the Fund's position. In addition, futures and options markets may
not be liquid in all circumstances and certain over-the-counter options may not
have markets. As a result, in certain markets, the Fund might not be able to
close out a transaction without incurring substantial losses, if at all.
Although the use of futures contracts and options transactions for hedging
should tend to minimize the risk of loss due to a decline in the value of the
hedged position, at the same time they tend to limit any potential gain which
might result from an increase in value of such position. Finally, the daily
variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of these techniques would reduce net asset value, and possibly income,
and such losses can be greater than if the techniques and instruments had not
been utilized.
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RISKS OF DEBT SECURITIES GENERALLY
The value of the debt securities held by the Funds generally will vary
inversely with market rates. If interest rates in a market fall, the Fund debt
securities issued by governments or companies in that market ordinarily will
increase in value. If market interest rates increase, however, the debt
securities owned by the Funds in that market will likely decrease in value.
Debt rated Baa by Moody's is considered by Moody's to have speculative
characteristics. Debt rated BB, B, CCC, CC or C by S&P and debt rated Ba, B,
Caa, Ca or C by Moody's is regarded, on balance, as predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. For S&P, BB indicates the lowest
degree of speculation for such lower quality debt and C the highest degree of
speculation. For Moody's, Baa indicates the lowest degree of speculation for
such lower quality debt and C the highest degree to speculation. While such
lower quality debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions. Debt rated B by Moody's or S&P is the lowest rated debt that is not
in default as to principal or interest and such issues so rated can be regarded
as having extremely poor prospects of ever attaining any real investment
standing. Lower quality debt securities are also generally considered to be
subject to greater risk than securities with higher ratings with regard to a
deterioration of general economic conditions. These foreign debt securities are
the equivalent of high yield, high risk bonds, commonly known as "junk bonds."
More information on the ratings of debt securities is contained in the Appendix
to the Statement of Additional Information.
Ratings of debt securities represent the rating agency's opinion regarding
their quality and are not a guarantee to quality. Rating agencies attempt to
evaluate the safety or principal and interest payments do not evaluate the risks
of fluctuations in market value. Also, rating agencies may fail to make timely
changes in credit ratings in response to subsequent events, so that an issuer's
current financial condition may be better or worse than a rating indicates.
The market values of lower quality debt securities tend to reflect
individual developments of the issuer to a greater extent than do higher quality
securities, which react primarily to fluctuations in the general level of
interest rates. In addition, lower quality debt securities tend to be more
sensitive to economic conditions and generally have more volatile prices than
higher quality securities. Issuers of lower quality securities are often highly
leveraged and may not have available to them more traditional methods of
financing. For example, during an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower quality securities may
experience financial stress. 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 may also be adversely affected by
specific developments affecting the issuer, such as the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing. Similarly, certain Pacific Basin governments that issue lower quality
debt securities are among the largest debtors to commercial banks, foreign
governments and supranational organizations such as the World Bank and may not
be able or willing to make principal and/or interests repayments as they come
due. The risk of loss due to default by the issuer is significantly greater for
the holders of lower quality securities because such securities are generally
unsecured and may be subordinated to the claims of other creditors of the
issuer.
Lower quality debt securities frequently have call or buy-back features
which would permit an issuer to call or repurchase the security from the Fund.
In addition, the Fund may have difficulty disposing of lower quality securities
because they may have a thin trading market. There may be no established retail
secondary market for many of these securities, and the Fund anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. The lack of a liquid secondary market also may have an
adverse impact on market prices of such instruments and may make it more
difficult for the Fund to obtain accurate market quotations for purposes of
valuing the Fund portfolios. The Fund may also acquire lower quality debt
securities during an initial underwriting or which are sold without registration
under applicable securities laws. Such securities involve special considerations
and risks.
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In addition to the foregoing, factors that could have an adverse effect on
the market value of lower quality debt securities in which the Fund may invest
include: (i) potential adverse publicity; (ii) heightened sensitivity to general
economic or political conditions; and (iii) the likely adverse impact of a major
economic recession.
IAI attempts to minimize the speculative risks associated with investments
in lower quality securities through credit analysis and by carefully monitoring
current trends in interest rates, political developments and other factors.
Nonetheless, investors should carefully review the investment objective and
policies of the Fund and consider their ability to assume the investment risks
involved before making an investment.
RISKS ASSOCIATED WITH SOVEREIGN DEBT
Investment in Sovereign Debt, including Brady Bonds, involves a high degree
of risk. The governmental entity that controls the repayment of Sovereign Debt
may not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A governmental entity's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the governmental entity's policy towards the International Monetary Fund and the
political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce principal
and interest arrearages on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be conditioned
in a governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to governmental entity, which may further
impair such debtor's ability or willingness to timely service its debts.
Consequently, governmental entities may default on their Sovereign Debt.
Holders of Sovereign Debt, including the Fund, may be requested to
participate in the rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceeding by which Sovereign Debt
on which a governmental entity has defaulted may be collected in whole or in
part.
The Sovereign Debt instruments in which the Fund may invest involve great
risk and are deemed to be the equivalent in terms of quality to high yield/high
risk securities discussed above and are subject to many of the same risks as
such securities. Similarly, the Fund may have difficulty disposing of certain
Sovereign Debt obligations because there may be a thin trading market for such
securities. The Fund will not invest in Sovereign Debt which is in default.
RISK FACTORS ASSOCIATED WITH INVESTING IN SMALL COMPANIES
Investing in small companies involves greater risk than is customarily
associated with investments in larger, more established companies due to the
greater business risks of small size, limited markets and financial resources,
narrow product lines and the frequent lack of depth of management. The
securities of small companies are often traded over-the-counter and may not be
traded in volumes typical on a national securities exchange. Consequently, the
securities of small companies may have limited market stability and may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or the market averages in general. Therefore, to the
extent the Fund invests in small companies, its shares may be subject to greater
fluctuation in value than shares of a conservative equity fund or of a growth
fund which invests entirely in more established stocks.
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MANAGER RISK
IAI manages the Fund according to the traditional methods of "active"
investment management, which involve the buying and selling of securities based
upon economic, financial and market analysis and investment judgment. Manager
risk refers to the possibility that IAI may fail to execute the Fund's
investment strategy effectively. As a result, the Fund may fail to achieve its
stated objective.
INVESTMENT RESTRICTIONS
The 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. The Fund is a diversified investment company and has a fundamental
policy that, with respect to 75% of its total assets, the Fund may not invest
more than 5% of its total assets in any one issuer. The Fund, also as a
fundamental policy, may not invest 25% or more of its assets in any one industry
and may borrow only for temporary or emergency purposes in an amount not
exceeding one-third of its total assets. Please refer to the Statement of
Additional Information for a further discussion of the Fund's investment
restrictions.
MANAGEMENT
The Fund was created on September 2, 1997 as a separate portfolio
represented by a separate class of common stock of IAI Investment Funds III,
Inc., a Minnesota company incorporated on September 16, 1986. Under Minnesota
law, the Fund's Board of Directors is generally responsible for the overall
operation and management of the Fund. IAI serves as the investment adviser to
the Fund. IAI has delegated to IAI International Limited ("IAI International")
certain of its responsibilities and obligations as the Fund's investment adviser
pursuant to a written agreement (the "Subadvisory Agreement"). IAI International
is based in London and maintains a United States representative office with the
same address as IAI. 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 $16 billion. The ultimate corporate parent of IAI and IAI
International 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 Fund.
Pursuant to a written agreement with the Fund (the "Management Agreement"),
IAI provides the Fund with investment advisory services and is responsible for
the overall management of the 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 the Fund's operating expenses.
As compensation under the Management Agreement, the Fund has agreed to pay IAI
an annual management fee of 2.50% of the Fund's first $100 million of average
daily net assets, 2.45% of the Fund's next $150 million of average daily net
assets, 2.30% of the Fund's next $250 million of average daily net assets, and
2.00% of the Fund's average daily net assets in excess of $500 million, less any
fees and expenses the Fund pays to its disinterested directors. Until March 1,
1999, IAI has voluntarily agreed to waive its fee in excess of 2.00% of the
Fund's average daily net assets. Under the Subadvisory Agreement, IAI pays IAI
International .8125% of the Fund's first $100 million of average daily net
assets, .750% of the Fund's next $150 million of average daily net assets,
.6250% of the Fund's next $250 million of average daily net assets, and .4375%
of the Fund's average daily net assets in excess of $500 million. Until March 1,
1999, IAI International has voluntarily agreed to waive its fee in excess of
.625% of the Fund's average daily net assets. The Management Agreement further
provides that IAI will either reimburse the Fund for the fees and expenses it
pays to directors who are not "interested persons" of the Fund or reduce its fee
by an equivalent amount. With respect to certain of the services for which it is
responsible under the Management Agreement, IAI may also pay qualifying
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broker-dealers, financial institutions and other entities for providing such
services to Fund shareholders. IAI shall not be liable for any loss suffered by
the Fund in the absence of willful misfeasance, bad faith or negligence in the
performance of its duties and obligations.
An investment committee, headed by Roy Gillson, has managed the Fund since
inception. Mr. Gillson is IAI International's Chief Investment Officer and a
member of its Board of Directors. Mr. Gillson has served as a portfolio manager
since joining IAI International in 1983.
INVESTMENT PERFORMANCE
From time to time the Fund may advertise performance data including
monthly, quarterly, yearly or cumulative total return and average annual total
return figures. All such figures are based on historical earnings and
performance and are not intended to be indicative of future performance. The
investment return on and principal value of an investment in the Fund will
fluctuate, so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
Total return is the change in value of an investment in the Fund over a
given period, assuming reinvestment of any dividends and capital gains. A
cumulative total return reflects actual performance over a stated period of
time. An average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period.
For additional information regarding the calculation of such total return
figures, see "Investment Performance" in the Statement of Additional
Information. Further information about the performance of the Fund is contained
in the Fund's Annual Report to shareholders which, when available, may be
obtained without charge from the Fund.
Comparative performance information may be used from time to time in
advertising or marketing the 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 Fund. The
comparison of the Fund to an alternative investment should be made with
consideration of differences in features and expected performance. The Fund may
also note its mention in newspapers, magazines, or other media from time to
time. The Fund assumes 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 Fund in advertising and sales literature, see the
section "Investment Performance" in the Statement of Additional Information.
COMPUTATION OF NET ASSET VALUE AND PRICING
The Fund is open for business each day the New York Stock Exchange ("NYSE")
is open. IAI normally calculates the Fund's net asset value ("NAV") as of the
close of business of the NYSE, normally 3 p.m. Central time.
The Fund's NAV is the value of a single share. The NAV is computed by
adding up the value of the Fund's investments, cash, and other assets,
subtracting its liabilities, and then dividing the result by the number of
shares outstanding.
The Fund'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.
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Because of the Fund's need to obtain prices as of the close of trading on
various exchanges throughout the world, the calculation of net asset value does
not take place contemporaneously with the determination of the prices of the
Fund's portfolio securities. For purposes of determining the Fund's net asset
value, all assets and liabilities initially expressed in foreign currency values
will be converted into U.S. dollar values using current exchange rates. If an
event were to occur after the value of the Fund instrument was so established
but before the net asset value per share is determined which was likely to
materially change the net asset value, such instrument shall be valued using
fair value considerations by the Board of Directors or its delegates.
The offering price (price to buy one share) and redemption price (price to
sell one share) are referred to as the Fund's NAV.
PURCHASE OF SHARES
The Fund offers its shares continually to the public at the net asset value
of such shares. Shares may be purchased directly from the 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. No sales load or commission is charged 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 the
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 the Fund for $100 or more. Such minimums may
be waived for participants in the IAI Investment Club.
Investors may satisfy the minimum investment requirement by participating
in the STAR Program. Participation in the STAR Program requires an initial
investment of $1,000 per Fund and a commitment to invest an aggregate of $5,000
within 24 months. If a STAR Program participant does not invest an aggregate of
$5,000 in the IAI 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 the Fund to obtain a STAR Program application.
To purchase shares, forward the completed application and a check payable
to "IAI Funds" to the Fund. Third party checks will not be accepted for initial
account investments. Upon receipt, your account will be credited with the number
of full and fractional shares which can be purchased at the net asset value next
determined after receipt of the purchase order by the Fund.
Purchases of shares are subject to acceptance or rejection by the Fund on
the same day the purchase order is received and are not binding until so
accepted. It is the policy of the Fund and the Underwriter to keep confidential
information contained in the application and regarding the account of an
investor or potential investor in the Fund.
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 601 2nd Avenue South, Minneapolis, Minnesota 55402. For
assistance in completing the application please contact IAI Mutual Fund
Shareholder Services at 1-800-945-3863.
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BANK WIRE PURCHASES
Shares may be purchased by having your bank wire federal funds (funds of
the Federal Reserve System) to Norwest Bank Minnesota.
Wire orders will be accepted only on days your bank, the transfer agent,
the Fund and Norwest Bank Minnesota are open for business. The payment must be
received by the Fund before the close of business to be credited to your account
that day. Otherwise, it will be processed the next business day. The wire
purchase will not be considered made until the wired amount is received and the
purchase is accepted by such Fund. If the wire order does not contain the
information stated below, such Fund may reject it. Any delays that may occur in
wiring federal funds, including delays in processing by the banks, are not the
responsibility of such Fund or the transfer agent.
You must pay any charges assessed by your bank for the wire service. If a
wire order is rejected, all money received by the Fund, less any costs incurred
by the Fund or the transfer agent in rejecting it, will be returned promptly.
If the wire order is for a new account, you should call IAI Shareholder
Services at 1-800-945-3863 to advise them of the investment and to obtain an
account number and instructions. The wire should be sent to: Norwest Bank
Minnesota, Routing Number 091000019, Minneapolis, Minnesota, Credit to: IAI
Mutual Funds Account Number 6355002264. It should state the following:
"For further credit to personal account # _____________ (your
account number) for ______________(your name) and
__________________ (Fund name)."
A completed application must be sent to and received by the Fund before the
wire is sent.
If the wire order is for an addition to an existing account, the wire must
include the information required above for the new accounts. As soon as the wire
is sent, you should call IAI Shareholder Services, as described above, and
advise them of your name, your account number and the name of the bank
transmitting the federal funds.
RETIREMENT PLANS
Shares of the Fund 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 Fund 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 adviser 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 4th or 18th day of each month (or the
next business day), through automatic deductions from their checking or savings
account. Such investors may, of course, terminate their participation in the
Automatic Investment Plan at anytime upon written notice to the 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 the
Fund.
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REDEMPTION OF SHARES
Registered holders of Fund shares may at any time require the Fund to
redeem their shares upon their written request. All correspondence relating to
the redemption of shares should be directed to the office of IAI Mutual Funds,
P.O. Box 357, Minneapolis, Minnesota 55440. Shareholders may redeem shares by
phone, subject to a limit of $50,000, provided such shareholders have authorized
such Fund to accept telephone instructions. For assistance in redeeming shares
by phone, please contact the IAI Mutual Funds Shareholder Services at
1-800-945-3863.
Certificates presented for redemption must be endorsed on the back with the
signature of the person whose name appears on the certificate and must be
signature guaranteed. If no certificate has been issued, redemption instructions
must be signed by the person(s) in whose name the shares are registered. If the
redemption proceeds are to be paid or mailed to any person other than the
shareholder of record, the 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, the Fund may require additional evidence of
authority prior to accepting a request for redemption.
For shareholders who established receiving proceeds by Federal Funds Wire
at the time they opened their account, telephone instructions will be accepted
for redemption of amounts up to $50,000 ($1,000 Minimum) and proceeds will be
wired on the next business day to a predesignated bank account. Wire redemption
requests will only be processed on days your bank, the transfer agent, the Funds
and Norwest Bank Minnesota are open for business.
In order to add this feature to an existing account or to change existing
bank account information, please submit a letter of instruction including your
bank information to IAI Shareholder Services at the address listed in the
section "Additional Information." The letter must be signed by all registered
owners, and their signatures must be guaranteed.
Your account will be charged a fee of $10 each time redemption proceeds are
wired to your bank. Your bank may also charge you a fee for receiving a Federal
Funds Wire.
Neither the transfer agent nor any of the Funds can be responsible for the
efficiency of the Federal Funds wire system or the shareholder's bank.
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 the Fund. Since the value of shares redeemed is based upon the value of the
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 the Fund will mail payment for
shares redeemed on the business day following receipt of the redemption request.
The Fund will not send redemption proceeds until checks (including certified
checks or cashiers checks) received in payment for shares have cleared, which
may take up to ten days or more.
Following a redemption or transfer request, if the value of a shareholder's
interest in the 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.
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EXCHANGE PRIVILEGE
The Exchange Privilege enables shareholders to purchase, in exchange for
shares of the Fund, shares of certain other funds managed by IAI. These funds
have different investment objectives from the Fund. Shareholders may exchange
shares of the 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 Fund does not currently charge a fee for use
of the Exchange Privilege, it reserves the right to do so in the future.
Because excessive trading can hurt Fund performance and shareholders, there
is a limit of four exchanges out of the 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. The 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. The Fund also reserves the right to
refuse or limit exchange purchases by any investor if, in IAI's judgment, the
Fund would be unable to invest the money effectively in accordance with its
investment objectives and policies, or would otherwise potentially be adversely
affected. Please see "Redemption of Shares" for information concerning fees
imposed on redemptions, including redemptions through the Exchange Privilege.
Fund shareholders wishing to exercise the Exchange Privilege should notify
the Fund in writing or, provided such shareholders have authorized the 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. The
Fund reserves the right to terminate or modify the Exchange Privilege in the
future.
AUTOMATIC EXCHANGE PLAN
Investors may arrange to make regular exchanges of $100 or more between any
of the funds in the IAI Mutual Fund Family on a monthly basis. Exchanges will
take place at the closing price of the fifth day of each month (or the next
business day). Shareholders are responsible for making sure sufficient shares
exist in the Fund account from which the exchange takes place. If there are not
sufficient funds in the Fund account to meet the requested exchange amount, the
Automatic Exchange Plan will be suspended. Shareholders may not close Fund
accounts through the Automatic Exchange Plan. Investors interested in
participating in the Automatic Exchange Plan should complete the Automatic
Exchange Plan portion of their application. For assistance in completing the
application contact IAI Mutual Fund Shareholder Services at 1-800-945-3863.
Please see "Redemption of Shares" for information concerning fees imposed on
redemptions, including redemptions through the Automatic Exchange Plan.
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 the Fund. Investors requesting telephone trading
privileges will be provided with a personal identification number ("PIN") that
must accompany any instructions by phone. Shares will be redeemed or exchanged
at the next determined net asset value. Telephone redemption proceeds are
subject to a $50,000 limit and must be made payable to the owner(s) of record
and delivered to the address of record.
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In order to confirm that telephone instructions for redemptions and
exchanges are genuine, the Fund has established reasonable procedures, including
the requirement that a personal identification number accompany telephone
instructions. If the Fund or transfer agent fails to follow these procedures,
the Fund may be liable for losses due to unauthorized or fraudulent
instructions. To the extent these reasonable procedures are followed, none of
the Fund, its transfer agent, IAI, or any affiliated broker-dealer will be
liable for any loss, injury, damage, or expense for acting upon telephone
instructions believed to be genuine, and will otherwise not be responsible for
the authenticity of any telephone instructions, and, accordingly, the investor
bears the risk of loss resulting from telephone instructions. All telephone
redemptions and exchange requests will be tape recorded. Telephone redemptions
are not permitted on certain retirement accounts. Please call the Fund for a
distribution form.
SYSTEMATIC CASH WITHDRAWAL PLAN
The 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 the Fund. To establish the plan, an
account must have at least $10,000 and be at least one year old. 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, the Fund will redeem as many
full and fractional shares as necessary at the redemption price, which is net
asset value.
Payments under this plan, unless pursuant to a retirement plan, should not
be considered income. Withdrawal payments may exceed dividends and distributions
and, to this extent, there will be a reduction in the investor's equity. An
investor should also understand that this plan cannot insure profit, nor does it
protect against any loss in a declining market. Careful consideration should be
given to the amount withdrawn each month. Excessive withdrawals could lead to a
serious depletion of equity, especially during periods of declining market
values. Fund management will be available for consultation in this matter.
Plan application forms are available through the Fund. If you would like
assistance in completing the application contact IAI Mutual Fund Shareholder
Services at 1-800-945-3863. Please see "Redemption of Shares" for information
concerning fees imposed on redemptions, including redemptions through the
Automatic Exchange Plan.
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
The policy of the Fund is to pay dividends from net investment income and
to make distributions of realized capital gains, if any, annually. However,
provisions in the Internal Revenue Code of 1986, as amended (the "Code"), may
result in additional net investment income and capital gains distributions by
the Fund. When you open an account, you should specify on your application how
you want to receive your distributions. The Fund offers three options: Full
Reinvestment--your dividend and capital gain distributions will be automatically
reinvested in additional shares of the Fund; Capital Gains Reinvestment--your
capital gain distributions will be automatically reinvested, but your income
dividend 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, THE FUND WILL
AUTOMATICALLY REINVEST ALL SUCH DISTRIBUTIONS INTO FULL AND FRACTIONAL SHARES AT
NET ASSET VALUE.
The Fund's 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.
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Code during its current taxable year. If so qualified, the
Fund will not be subject to federal income tax on income that it distributes to
its shareholders.
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Distributions by the Fund to shareholders, except distributions to
shareholders not subject to federal income taxation, are generally taxable to
the shareholders, whether received in cash or additional Fund shares.
Distributions paid out of the Fund's net investment income and net short-term
capital gains are taxable to shareholders as ordinary income. Distributions paid
out of the Fund's' net long-term capital gains and designated as such are
taxable to shareholders as long-term capital gains, regardless of the length of
time that they have held their shares in the Fund. For individuals, the Taxpayer
Relief Act of 1997 (the "Act") has enacted new "mid-term capital gain" rates
that apply to the sale of capital assets held more than one year but not more
than 18 months. Although the Act has not expressly addressed this issue, it is
expected that IRS regulations issued pursuant to the Act will provide that a
regulated investment company such as the Fund must notify shareholders who are
individuals as to whether they must treat capital gain distributions that they
receive as mid-term or long-term capital gains.
The Fund may be required to pay withholding and other taxes imposed by
foreign countries, generally at rates from 10% to 40%, which would reduce the
Fund's investment income. Tax conventions between certain countries and the
United States may reduce or eliminate such taxes. If the Fund has more than 50%
of its assets invested in the stock or securities of foreign corporations at the
end of the Fund's taxable year, the Fund may make an election to allow
shareholders either to claim U.S. foreign tax credits with respect to foreign
taxes paid by the Fund or to deduct such amounts as an itemized deduction on
their tax return. In the event such an election is made, shareholders would have
to increase their taxable income by the amount of such taxes and the Fund would
not be able to deduct such taxes in computing its taxable income.
Alternatively, if the amount of foreign taxes paid by the Fund is not large
enough to warrant its making the election described above, the Fund may claim
the amount of foreign taxes paid as a deduction against its own gross income. In
that case, shareholders would not be required to include any amount of foreign
taxes paid by the Fund in their income and would not be permitted either to
deduct any portion of foreign taxes from their own income or to claim any amount
of foreign tax credit for taxes paid by the Fund.
Information about the tax status of dividends and distributions from the
Fund will be mailed to the Fund's shareholders annually.
Gain or loss upon the sale of shares of the Fund will be treated as capital
gain or loss, provided that the shares represented a capital asset in the hands
of the shareholder. In most cases, gain or loss will be long-term gain or loss
if the shares were held more than one year. However, for shareholders who are
individuals, the gain or loss will be considered long-term if the shareholder
has held the shares for more than 18 months and mid-term if the shareholder has
held the shares for more than one year but not more than 18 months.
The foregoing relates to federal income taxation as in effect as of the
date of the Prospectus. Distributions from net investment income and from net
realized capital gains may also be subject to state and local taxes. For a more
detailed discussion of the federal income tax consequences of investing in
shares of the Fund, see "Tax Status" in the Statement of Additional Information.
DESCRIPTION OF COMMON STOCK
All shares of the 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 the 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 IAI Investment Funds III, Inc. 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.
20
<PAGE>
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 the Fund. An annual meeting will be held on
the removal of a director or directors of the Fund if requested in writing by
holders of not less than 10% of the outstanding shares of the Fund.
The shares of the Fund are transferable by delivery to the Fund of transfer
instructions. Transfer instructions 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 maintained by the Fund. Certificates representing Fund
shares will not be issued.
COUNSEL AND AUDITORS
The firm of Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis,
Minnesota 55402, provides legal counsel to the Fund. KPMG Peat Marwick LLP, 4200
Norwest Center, Minneapolis, Minnesota 55402, serves as independent auditors for
the Fund.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
The Custodian for the Fund is Norwest Bank Minnesota, N.A., Norwest Center,
Sixth and Marquette, Minneapolis, Minnesota 55479. Norwest employs foreign
subcustodians and depositories, which were approved by the 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 the
Fund's assets held outside the United States. For a listing of the subcustodians
and depositories currently employed by the Fund, see the Statement of Additional
Information. IAI acts as the Fund's' transfer agent, dividend disbursing agent
and IRA Custodian, at P.O. Box 357, Minneapolis, Minnesota 55440.
ADDITIONAL INFORMATION
The 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.
Shareholder inquiries should be directed to the Fund at the telephone
number or mailing address listed on the cover page of this Prospectus.
21
<PAGE>
IAI PACIFIC BASIN FUND
Statement of Additional Information
dated December 15, 1997
This Statement of Additional Information is not a Prospectus. This
Statement of Additional Information relates to a Prospectus dated December 15,
1997, and should be read in conjunction therewith. A copy of the Prospectus may
be obtained from the Fund, 3700 First Bank Place, P.O. Box 357, Minneapolis,
Minnesota 55440 (telephone: 1-612-376-2700 or 1-800-945-3863).
TABLE OF CONTENTS
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<TABLE>
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<S> <C>
Page
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INVESTMENT OBJECTIVE AND POLICIES.............................................2
INVESTMENT RESTRICTIONS......................................................13
INVESTMENT PERFORMANCE.......................................................15
MANAGEMENT...................................................................16
CUSTODIAL SERVICE............................................................19
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE...........................19
CAPITAL STOCK................................................................21
NET ASSET VALUE AND PUBLIC OFFERING PRICE....................................21
SPECIAL REDEMPTION AND EXCHANGE INFORMATION..................................21
PURCHASES AND REDEMPTIONS IN KIND............................................21
TAX STATUS...................................................................22
LIMITATION OF DIRECTOR LIABILITY.............................................24
APPENDIX A - RATINGS OF DEBT SECURITIES.....................................A-1
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of IAI Pacific Basin Fund ("the
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 are subject to various risks. There can be no
guarantee against loss resulting from an investment in the Fund, and there can
be no assurance that the Fund's investment policies will be successful, or that
its investment objective will be attained. Certain of the investment practices
of the Fund are further explained below.
REPURCHASE AGREEMENTS
The 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. The 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 the Fund's name or that of its custodian. Repurchase agreements
involve certain risks not associated with direct investments in securities. For
example, if the seller of the agreement defaults on its obligation to repurchase
the underlying securities at a time when the value of the securities has
declined, the Fund may incur a loss upon disposition of such securities. In the
event that bankruptcy proceedings are commenced with respect to the seller of
the agreement, the Fund's ability to dispose of the collateral to recover its
investment may be restricted or delayed. While collateral will at all times be
maintained in an amount equal to the repurchase price under the agreement
(including accrued interest due thereunder), to the extent proceeds from the
sale of collateral were less than the repurchase price, the Fund could suffer a
loss.
REVERSE REPURCHASE AGREEMENTS
The Fund may invest in reverse repurchase agreements. In a reverse
repurchase agreement, the Fund sells a portfolio instrument to another party,
such as a bank or broker-dealer, in return for cash and agrees to repurchase the
instrument at a particular price and time. While a reverse repurchase agreement
is outstanding, the Fund will maintain appropriate liquid assets in a segregated
custodial account to cover its obligation under the agreement. Such transactions
may increase fluctuations in the market value of the Fund's assets and may be
viewed as a form of leverage. The Fund will enter into reverse repurchase
agreements only with parties whose creditworthiness has been found satisfactory
by Investment Advisers, Inc. ("IAI"), the Fund's investment adviser and manager
or IAI International Limited (hereinafter references to IAI shall include IAI
International Limited where appropriate), the subadviser to the Fund. Presently,
the Fund does not intend to invest more than 5% of its net assets in reverse
repurchase agreements.
SECURITIES OF FOREIGN ISSUERS
Investing in foreign securities may result in greater risk than that
incurred by investing in domestic securities. There is generally less publicly
available information about foreign issuers comparable to reports and ratings
that are published about companies in the United States. Also, foreign issuers
are not subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to United
States companies.
It is contemplated that most foreign securities will be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign companies are less liquid and
more volatile than securities of comparable United States companies. Similarly,
volume and liquidity in most foreign bond markets are less than in the United
States and at times volatility of price can be greater than in the United
States. Commissions on foreign stock exchanges are generally higher than
commissions on United States exchanges, although the Fund will endeavor to
2
<PAGE>
achieve the most favorable net results on its portfolio transactions. There is
generally less government supervision and regulation of foreign stock exchanges,
brokers and listed companies than in the United States.
With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of
the Fund, political or social instability, or diplomatic developments which
could affect United States investments in those countries. Moreover, individual
foreign economies may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
The dividends and interest payable on certain of the Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to such Fund's shareholders.
ILLIQUID SECURITIES
The Fund may also invest up to 15% of its net assets in securities that are
considered illiquid because of the absence of a readily available market or due
to legal or contractual restrictions. However, certain restricted securities
that are not registered for sale to the general public that can be resold to
institutional investors may be considered liquid pursuant to guidelines adopted
by the Board of Directors. In the case of a Rule 144A Security, such security is
deemed to be liquid if:
(1) IAI reasonably expects to be able to resell the security to a qualified
institutional buyer, as defined in paragraph (a)(1) of Rule 144A, who is aware
of the Fund's reliance upon Rule 144A in selling the security without
registration, as required by paragraph (d)(2) of Rule 144A;
(2) the Rule 144A Security is not (a) of the same class as securities
listed on any national securities exchange or quoted in NASDAQ as determined
under paragraph (d)(3)(i) of Rule 144A, or (b) a security of a registered
investment company (other than a closed-end investment company); and
(3) the issuer (a) is a foreign government eligible to register securities
under Schedule B of the Securities Act of 1933, (b) is a company that files
periodic reports under the Securities Act of 1934 on Forms 8-K, 10-Q, 10-K or
20-F or provides information under Rule 12g3-2(b) thereunder, or (c) has agreed
in writing to provide the holder and any prospective purchaser of the Rule 144A
Security with reasonably current financial information as required under
paragraph (d)(4)(i) of Rule 144A.
Other securities are deemed to be liquid if IAI determines that the
security can be disposed of within seven days in the ordinary course of business
at approximately the amount at which the Fund has valued the instrument for
purposes of calculating the Fund's net asset value. In making this
determination, IAI will consider such factors as may be relevant to the Fund's
ability to dispose of the security, including but not limited to, the following
factors (none of which, standing alone, would necessarily be determinative):
1. the frequency of trades and quotes for the security;
2. the number of dealers willing to purchase or sell the security and the
number of potential purchasers;
3. dealer undertakings to make a market in the security; and
4. the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of transfer).
It is not possible to predict with assurance the maintenance of an
institutional trading market for such securities and the liquidity of the Fund's
investments could be impaired if trading declines.
3
<PAGE>
LENDING PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio
securities to broker-dealers, banks or other financial borrowers of securities.
As with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, the Fund will only enter into loan arrangements with
broker-dealers, banks or other institutions which IAI or IAI International has
determined are creditworthy under guidelines established by the Fund's Board of
Directors. The Fund may also experience a loss if, upon the failure of a
borrower to return loaned securities, the collateral is not sufficient in value
or liquidity to cover the value of such loaned securities (including accrued
interest thereon). However, the Fund will receive collateral in the form of
cash, United States Government securities, certificates of deposit or other
high-grade, short-term obligations or interest-bearing cash equivalents equal to
at least 102% of the value of the securities loaned. The value of the collateral
and of the securities loaned will be marked to market on a daily basis. During
the time portfolio securities are on loan, the borrower pays the Fund an amount
equivalent to any dividends or interest paid on the securities and the Fund may
invest the cash collateral and earn additional income or may receive an agreed
upon amount of interest income from the borrower. However, the amounts received
by the Fund may be reduced by finders' fees paid to broker-dealers and related
expenses. Presently, the Fund does not intend to lend more than 5% of its net
assets to broker-dealers, banks, or other financial borrowers of securities.
SWAP AGREEMENTS
Swap agreements can be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
Fund's exposure to long- or short-term interest rates (in the U.S. or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as security prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names. The Fund is not
limited to any particular form of swap agreement if IAI determines it is
consistent with such Fund's investment objectives and policies.
Swap agreements will tend to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agrees to exchange
payments in dollars for payments in foreign currency, the swap agreement would
tend to decrease the Fund's exposure to U.S. interest rates and increase its
exposure to foreign currency and interest rates. Depending on how they are used,
swap agreements may increase or decrease the overall volatility of the Fund's
investments and its share price.
The most significant factor in the performance of swap agreements is the
change in the specific interest rate, currency, or other factors that determine
the amounts of payments due to and from the Fund. If a swap agreement calls for
payments by the Fund, such Fund must be prepared to make such payments when due.
In addition, if the counterparty's creditworthiness declined, the value of a
swap agreement would be likely to decline, potentially resulting in losses. The
Fund expects to be able to eliminate its exposure under swap agreements either
by assignment or other disposition, or by entering into an offsetting swap
agreement with the same party or a similarly creditworthy party.
The Fund will maintain appropriate liquid assets in a segregated custodial
account to cover its current obligations under swap agreements. If the Fund
enters into a swap agreement on a net basis, it will segregate assets with a
daily value at least equal to the excess, if any, of the Fund's accrued
obligations under the swap agreement over the accrued amount such Fund is
entitled to receive under the agreement. If the Fund enters into a swap
agreement on other than a net basis, it will segregate assets with a value equal
to the full amount of such Fund's accrued obligations under the agreement.
Presently, the Fund does not intend to invest more than 5% of its net assets in
Swap Agreements.
4
<PAGE>
INDEXED SECURITIES
The Fund may purchase securities whose prices are indexed to the prices of
other securities, securities indexes, currencies, precious metals or other
commodities, or other financial indicators. Indexed securities typically, but
not always, are debt securities or deposits whose value at maturity or coupon
rate is determined by reference to a specific instrument or statistic.
Gold-indexed securities, for example, typically provide for a maturity value
that depends on the price of gold, resulting in a security whose price tends to
rise and fall together with gold prices. Currency-indexed securities typically
are short-term to intermediate-term debt securities whose maturity values or
interest rates are determined by reference to the values of one or more
specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies. IAI will use its judgment in determining whether indexed
securities should be treated as short-term instruments, bonds, stocks, or as a
separate asset class for purposes of the Fund's investment policies, depending
on the individual characteristics of the securities. Indexed securities may be
more volatile than the underlying instruments. Presently, the Fund does not
intend to invest more than 5% of its net assets in indexed securities.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS
The Fund has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the Commodity Futures
Trading Commission (CFTC) and the National Futures Association, which regulate
trading in the futures markets, before engaging in any purchases or sales of
futures contracts or options on futures contracts. The Fund intends to comply
with Section 4.5 of the regulations under the Commodity Exchange Act, which
limits the extent to which the Fund can commit assets to initial margin deposits
and option premiums.
In addition, the Fund will not: (a) sell futures contracts, purchase put
options, or write call options if, as a result, more than 25% of the 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, the 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 the Fund would exceed 5% of the 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 the Fund's investments in futures contracts and
options, and such Fund's policies regarding futures contracts and options
discussed elsewhere in this Statement of Additional Information may be changed
as regulatory agencies permit. With respect to positions in commodity futures or
commodity option contracts which do not come within the meaning and intent of a
bona fide hedging in the CFTC rules, the aggregate initial margin and premiums
required to establish such positions will not exceed five percent of the
liquidation value of the qualifying entity's portfolio, after taking into
account unrealized profits and unrealized losses on any such contracts it has
entered into; and, providing further, that in the case of an option that is
in-the-money, the in-the-money amount may be excluded in computing such five
percent.
5
<PAGE>
FUTURES CONTRACTS
When the Fund purchases a futures contract, it agrees to purchase a
specified underlying instrument at a specified future date. When the Fund sells
a futures contract, it agrees to sell the underlying instrument at a specified
future date. The price at which the purchase and sale will take place is fixed
when the Fund enters into the contract. Some currently available futures
contracts are based on specific securities, such as U.S. Treasury bonds or
notes, and some are based on indexes of securities prices, such as the Standard
& Poor's 500 Composite Stock Price Index (S&P 500). Futures can be held until
their delivery dates, or can be closed out before then if a liquid secondary
market is available.
The value of a futures contract tends to increase and decrease in tandem
with the value of its underlying instrument. Therefore, purchasing futures
contracts will tend to increase the Fund's exposure to positive and negative
price fluctuations in the underlying instrument, much as if it had purchased the
underlying instrument directly. When the Fund sells a futures contract, by
contrast, the value of its futures position will tend to move in a direction
contrary to the market. Selling futures contracts, therefore, will tend to
offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
FUTURES MARGIN PAYMENTS
The purchaser or seller of a futures contract is not required to deliver or
pay for the underlying instrument unless the contract is held until the delivery
date. However, both the purchaser and seller are required to deposit "initial
margin" with a futures broker, known as a futures commission merchant (FCM),
when the contract is entered into. Initial margin deposits are typically equal
to a percentage of the contract's value. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments to settle the change in value on a daily basis. The party that has a
gain may be entitled to receive all or a portion of this amount. Initial and
variation margin payments do not constitute purchasing securities on margin for
purposes of the Fund's investment limitations. In the event of the bankruptcy of
an FCM that holds margin on behalf of the Fund, such Fund may be entitled to
return of margin owed to it only in proportion to the amount received by the
FMC's other customers, potentially resulting in losses to the Fund.
PURCHASING PUT AND CALL OPTIONS
By purchasing a put option, the Fund obtains the right (but not the
obligation) to sell the option's underlying instrument at a fixed strike price.
In return for this right, the Fund pays the current market price for the option
(known as the option premium). Options have various types of underlying
instruments, including specific securities, indexes of securities prices, and
futures contracts. The Fund may terminate its position in a put option it has
purchased by allowing it to expire or by exercising the option. If the option is
allowed to expire, the Fund will lose the entire premium it paid. If the Fund
exercises the option, it completes the sale of the underlying instrument at the
strike price. The Fund may also terminate a put option position by closing it
out in the secondary market at its current price, if a liquid secondary market
exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium paid, plus related
transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to suffer
a loss if security prices do not rise sufficiently to offset the cost of the
option.
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WRITING PUT AND CALL OPTIONS
When the Fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
such Fund assumes the obligation to pay the strike price for the option's
underlying instrument if the other party to the option chooses to exercise it.
When writing an option on a futures contract the Fund would be required to make
margin payments to an FCM as described above for futures contracts. The Fund may
seek to terminate its position in a put option it writes before exercise by
closing out the option in the secondary market at its current price. If the
secondary market is not liquid for a put option the Fund has written, however,
such Fund must continue to be prepared to pay the strike price while the option
is outstanding, regardless of price changes, and must continue to set aside
assets to cover its position. If security prices rise, a put writer would
generally expect to profit, although its gain would be limited to the amount of
the premium it received.
If security prices remain the same over time, it is likely that the writer
will also profit, because it should be able to close out the option at a lower
price. If security prices fall, the put writer would expect to suffer a loss.
This loss should be less than the loss from purchasing the underlying instrument
directly, however, because the premium received for writing the option should
mitigate the effects of the decline.
Writing a call option obligates the Fund to sell or deliver the option's
underlying instrument, in return for the strike price, upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
COMBINED POSITIONS
The Fund may purchase and write options in combination with each other,
or in combination with futures or forward contracts, to adjust the risk and
return characteristics of the overall position. For example, the Fund may
purchase a put option and write a call option on the same underlying instrument,
in order to construct a combined position whose risk and return characteristics
are similar to selling a futures contract. Another possible combined position
would involve writing a call option at one strike price and buying a call option
at a lower price, in order to reduce the risk of the written call option in the
event of a substantial price increase. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
CORRELATION OF PRICE CHANGES
Because there are a limited number of types of exchange-traded options and
futures contracts, it is likely that the standardized contracts available will
not match the Fund's current or anticipated investments exactly. The Fund may
invest in options and futures contracts based on securities with different
issuers, maturities, or other characteristics from the securities in which it
typically invests, which involves a risk that the options or futures position
will not track the performance of such Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. The Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in the Fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
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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 the Fund to
enter into new positions or close out existing positions. If the secondary
market for a contract is not liquid because of price fluctuation limits or
otherwise, it could prevent prompt liquidation of unfavorable positions, and
potentially could require the Fund to continue to hold a position until delivery
or expiration regardless of changes in its value. As a result, the Fund's access
to other assets held to cover its options or futures positions could also be
impaired.
OTC OPTIONS
Unlike exchange-traded options, which are standardized with respect to the
underlying instrument, expiration date, contract size, and strike price, the
terms of over-the-counter options (options not traded on exchanges) generally
are established through negotiation with the other party to the option contract.
While this type of arrangement allows the Fund greater flexibility to tailor an
option to its needs, OTC options generally involve greater credit risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS
The Fund will comply with guidelines established by the Securities and
Exchange Commission with respect to coverage of options and futures strategies
by mutual funds, and if the guidelines so require will 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 the Fund's assets could impede portfolio management or the Fund's
ability to meet redemption requests or other current obligations.
NO RATING CRITERIA FOR DEBT SECURITIES
The Fund has established no rating criteria for the debt securities in
which it may invest. Therefore, the Fund may invest in debt securities either
(a) which are rated in one of the top four rating categories by a nationally
recognized rating organization or which possess similar credit characteristics
("investment grade securities") or (b) which are rated below the top four rating
categories or which possess similar credit characteristics ("high yield
securities"). Ratings are one of several factors utilized in performing a credit
analysis of issuers.
Issuers of high yield securities may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments or the issuer's inability to meet specific
projected business forecasts or the unavailability of additional financing. The
risk of loss due to default by the issuer is significantly greater for the
holders of high yield securities because such securities may be unsecured and
may be subordinated to other creditors of the issuer.
High yield securities frequently have call or redemption features which
would permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends to
shareholders.
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The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. The secondary
trading market for high yield securities is generally not as liquid as the
secondary market for higher rated securities. Reduced secondary market liquidity
may have an adverse impact on market price and the Fund's ability to dispose of
particular issues when necessary to meet the 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.
SPECIAL CONSIDERATIONS AFFECTING THE PACIFIC BASIN
Many of the markets in the Pacific Basin fall into the category of emerging
markets. It should be noted that investing in the equity and fixed income
markets of developing countries involves exposure to economies that are
generally less diverse and less mature. Political and financial risk are some of
the categories of risk that encompass much of the Pacific Basin region.
While the political regimes in most countries are stable, it should be
noted that political upheavals in the Pacific Basin have occurred from time to
time in the recent past, and that in some countries, the political outlook
should be considered a risk factor for the economies and stock markets.
The developing countries of the Pacific Basin have in recent years been
benefiting from substantial inflows of foreign capital in the form of direct
investment, equity investment and lending. While the bulk of this has gone into
plant, infrastructure and other productive assets, certain parts of the region
have seen excessive levels of property speculation, leading to a glut in several
major centers.
ECONOMIES OF PACIFIC BASIN COUNTRIES
HONG KONG. Hong Kong has recently reverted to Chinese sovereignty having
been a British colony for many years. Chinese authorities have agreed to allow
Hong Kong's economic, legal and political structures in place for 50 years,
during which time Hong Kong will remain as the Special Administrative Region. As
the major hub between the outside world and China, the local economy is highly
dependent upon China's world trade. Manufacturing has declined in importance to
the local economy as Hong Kong-based manufacturers have relocated to China in
search of lower labor costs. In recent years, this flow has been matched by the
inflow of mainland capital into the local market and the growing influence of
mainland interest in Hong Kong. Real estate and finance are also important to
the local economy and stock market. Since the early 1980's, Hong Kong has
adopted a currency board system which formally ties the Hong Kong dollar to the
U.S. dollar.
CHINA. China is well into the process of transition from a communist
command economy to a more market-oriented economy, a process which started in
the early-1980's and which continues to gain momentum. China faces severe
structural problems, notably the burden of dismantling the state sector with
excessive unemployment and creating a strong and well-regulated financial
system. With a population of 1.2 billion, China has become the lowest cost
producer of many goods. Foreign direct investment has flooded this country.
Economic reforms have not been accompanied by political reforms.
TAIWAN. Until mid-century, Taiwan was part of the Chinese Empire except for
a brief interlude under Japanese rule. Following the Chinese revolution, China
split into two parties, and eventually the Kuomintang Party, led by Chian
Kai-shek, was forced to flee to Taiwan where it set-up a power base in 1949.
Taiwan was recognized as the power seat of China for many years. However, in the
early 1970's, Beijing had taken over the mantle, and relations between the two
parties have remained acrimonious. Considering the fact that Taiwan has poor
natural resources, a diverse economy has been built aided by the riches such as
textiles, shoes and electronic components brought by the mainland. Today, Taiwan
still struggles for an its identity in the international arena, but enjoys the
benefit of a strong and vibrant manufacturing base.
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MALAYSIA. Malaysia has seen several years of high, steady growth since the
late 1980's. The economy has moved from a dependence on exports of soft
commodities to those of higher-valued added goods, notably electronics. The
country has successfully attracted multi-national high-technology companies, and
at the same time, has been building up its own companies in certain strategic
areas, such as autos and telecommunications.
SINGAPORE. Singapore was a British colony until 1959 when it was
established as an independent republic. Singapore merged with Malaysia in 1963,
but was expelled again in 1965. Singapore remained a largely overseas-Chinese
state. Post-war economic development followed the capitalist route with the
state taking a major planning role. Light manufacturing, shipping and ports were
the early mainstays of the economy, followed later by petrochemicals and then by
electronics. Per capita income is presently among the highest in the world. As
Singapore's economy matures, it is evolving into a banking and service center
for the southeast Asian region, and especially for its neighbor, Malaysia.
Electronics is Singapore's other key industry, while shipping and petrochemicals
are of significant, but diminishing mportance.
INDONESIA. With an aggregate population of more than 190 million, Indonesia
is the most populous nation in southeast Asia. Its modern history began in 1949
with the transfer of sovereignty from the Dutch to the nationalist government of
president Sukarno. Sukarno's regime became increasingly undemocratic and
military dominated, until in 1967 when Sukarno was replaced by the current
president, General Suharto. Indonesia has expanded over time to incorporate
Irian Jaya and East Timor along with other territories. Economically, it is rich
in natural resources, including oil, gas, forestry and minerals. This endowment
has resulted in a slower development of manufacturing, although textiles,
footwear, and other lower value added light industries have become significant.
THAILAND. Thailand is a democracy with a monarch which has small
constitutional powers and significant personal influence. It has a population of
over 60 million and a volatile political history, with the most recent upheaval
being a short-lived military coup in 1992. In recent years, the Thai economy has
been the recipient of substantial foreign direct investment and is attempting to
move from agriculture, textiles and footwear into heavy industry and
electronics. One of Thailand's goals is to become the auto assembly center in
southeast Asia.
SOUTH KOREA. At the turn of the century, South Korea was under Japanese
rule but South Korea gained independence in 1948. South Korea's economy and
corporate structure continue to have Japanese influence. After the civil war in
the early-1950's, the South Korean economy grew at a rapid pace and is now one
of the world's largest producers of ships, semi-conductors and electronic
consumer products. It has benefited from the relatively lower labor costs as
compared to Japan, and a complex set of tariffs and taxes to minimize
competition. After years of rapid expansion, economic growth is slowing down
and, with aspirations to join the Organization for Economic Cooperative
Development (the "OECD"), a process of deregulation and liberalization is under
way. Its relationship with North Korea is fragile at the best of times.
PHILIPPINES. The Philippines gained independence in 1946. The 1970's were
dominated by economic development. The distribution of power and wealth was
tightly concentrated. President Marcos was overthrown in 1986, and a period of
political and economic confusion followed. Reforms and greater stability came
with the election of Fidel Ramos as president in 1992. Ramos has tried with
limited success to liberalize the economy and improve the accountability of
government. Agriculture is important to the Philippine economy and wages are
among the lowest in southeast Asia. With the assistance of direct investment
from Japan and elsewhere, light manufacturing has developed rapidly. Electronics
and electrical equipment have become a driving force in export growth. The
Philippines has lagged the rest of southeast Asia and is now well into the
process of catch-up.
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INDIA. India is the world's largest pluralistic democracy with a population
of over 900 million. For most of the post-war period, India followed
isolationist and state-socialist economic policies. These hampered development
and kept the country largely closed to foreign investment. The economy is still
mainly agricultural, although governments have encouraged the development of
heavy industries. Reforms were started by Prime Minister Narasimha Rao in 1991
and continued by successive governments. These attempted to reduce the impact of
bureaucracy and free-up the private sector. Many prices and investment decisions
have now been freed from government control, but tariffs, duties and other
regulations are still significant, and the exchange rate is not yet fully
convertible. India has a large number of listed companies, several regional
stock exchanges, and an established mutual fund and institutional investment
sector.
PAKISTAN. Pakistan has the world's ninth largest population of
approximately 140 million. The country is rich in certain natural resources,
such as natural gas and a variety of minerals. Pakistan is also one of the
world's leading cotton producers. Agriculture comprises about 25% of Pakistan's
economy, which has grown at a rate of approximately 5% in real terms throughout
the current decade. Since 1991, the government has been privatizing state assets
as part of a wider program of deregulation.
BANGLADESH. Bangladesh has a population of 120 million and was formed in
1971 after East Pakistan broke away from West Pakistan. The economy is
agricultural with some light textiles. The country continues to rely heavily on
foreign aid.
SRI LANKA. Sri Lanka was a British colony until 1974. In recent years, the
island has suffered from internal conflicts arising from ethnic and religious
differences. The economy is mostly dominated by agriculture, with tea and rubber
being the principal products.
AUSTRALIA. A relatively developed and mature economy, Australia is governed
from Canberra under a federal system. It benefits from very rich natural
resources and has developed expertise in their extraction. Over the past two
decades, Australia has been undertaking an internationalization process which
included the floating of the exchange rate in 1983, the removal of most controls
on capital flows, the deregulation of the financial sector, accelerated
reduction of tariffs and the implementation of labor practice reforms. This has
enabled Australia to compete in the fast-growing Asian Pacific regions. Most of
the manufacturing capability in Australia is of a higher value added nature, but
agriculture and minerals remain important components of the economy. Its
reliance on Europe and North America as trading partners is decreasing with the
increasing affluence of the Pacific Basin.
NEW ZEALAND. New Zealand consists of two main islands and has a population
of 3.5 million. In 1984, it undertook major economic reform with the passing of
The Reserve Bank Act which gave the central bank complete independence from the
government and the treasury. Its primary objective is to maintain an inflation
rate below 3%. It is politically stable with a low crime rate. The economy is
primarily dependent upon agricultural experts with the dairy industry making up
approximately 50% of their export income. Its neighbor, Australia, is the most
important export market for its manufactured goods.
ADDITIONAL RISK CONSIDERATIONS
Investors should consider carefully the substantial risks involved with
respect to investing in securities of companies and governments of foreign
nations, which are in addition to the usual risks inherent in domestic
investments. Such risks are heightened with respect to investments in Pacific
Basin countries. There may be less publicly available information about foreign
companies comparable to the reports and ratings published about companies in the
United States. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards, and auditing practices
and requirements may not be comparable to those applicable to United States
companies. Foreign markets typically have substantially less volume than the New
York Stock Exchange and securities of some foreign companies are less liquid and
more volatile than securities of comparable United States companies. Commission
rates in foreign countries, which are generally fixed rather than subject to
negotiation as in the United States, are likely to be higher. In many foreign
countries there is less government supervision and regulation of stock
exchanges, brokers and listed companies than in the United States.
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Investments in Pacific Basin countries may be subject to potentially higher
risks than investments in developed countries. These risks include (i) less
social, political and economic stability; (ii) the small current size of the
markets for such securities and the currently low or nonexistent volume of
trading, which may result in a lack of liquidity and in greater price
volatility; (iii) certain national policies which may restrict the Fund's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the limited
development and recent emergence, in certain countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in certain countries may be slowed or reversed
by unanticipated political or social events in such countries.
Certain countries, which do not have market economies, are characterized by
an absence of developed legal structures governing private and foreign
investments and private property. Certain countries require governmental
approval prior to investments by foreign persons, or limit the amount of
investment by foreign persons in a particular company, or limit the investment
of foreign persons to only a specific class of securities of a company that may
have less advantageous terms than securities of the company available for
purchase by nationals.
Authoritarian governments in certain countries may require that a
governmental or quasi-governmental authority to act as custodian of the Fund's
assets invested in such country. To the extent such governmental or
quasi-governmental authorities do not satisfy the requirements of the 1940 Act
to act as foreign custodians of the Fund's cash and securities, the Fund's
investment in such countries may be limited or may be required to be effected
through intermediaries. The risk of loss through governmental confiscation may
be increased in such countries.
The Fund endeavors to buy and sell foreign currencies on as favorable a
basis as practicable. Some price spread on currency exchange (to cover service
charges) may be incurred, particularly when the Fund changes investments from
one country to another or when proceeds from the sale of shares in U.S. dollars
are used for the purchase of securities in foreign countries. Also, some
countries may adopt policies which would prevent the Fund from transferring cash
out of the country, withhold portions of interest and dividends at the source,
or impose other taxes, with respect to the Fund's investments in securities of
issuers of that country. Although the Fund invests only in foreign nations which
it considers as having relatively stable and friendly governments, there is the
possibility of expropriation, nationalization, confiscatory or other taxation,
foreign exchange controls (which may include suspension of the ability to
transfer currency from a given country), default in foreign government
securities, political or social instability or diplomatic developments that
could affect investments in securities of issuers in those nations.
The Fund may be affected either unfavorably or favorably by fluctuations in
the relative rates of exchange between the currencies of different nations, by
exchange control regulations and by indigenous economic and political
developments. Through the Fund's flexible policy, management endeavors to avoid
unfavorable consequences and to take advantage of favorable developments in
particular nations where from time to time it places the Fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses. However, in the absence of willful misfeasance, bad faith or gross
negligence on the part of the investment manager, any losses resulting from the
holding of the Fund's portfolio securities in foreign countries and/or with
securities depositories will be at the risk of the shareholders.
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The Fund's ability to reduce or eliminate its futures and related options
positions will depend upon the liquidity of the secondary markets for such
futures and options. The Fund intends to purchase or sell futures and related
options only on exchanges or boards of trade where there appears to be an active
secondary market, but there is no assurance that a liquid secondary market will
exist for any particular contract or at any particular time. Use of stock index
futures and related options for hedging may involve risks because of imperfect
correlations between movements in the prices of the futures or related options
and movements in the prices of the securities being hedged. Successful use of
futures and related options by the Fund for hedging purposes also depends upon
the investment manager's ability to predict correctly movements in the direction
of the market, as to which no assurance can be given.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, the 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 the Fund, or (ii) 67% or
more of the voting securities present at a meeting if the holders of more than
50% of the outstanding voting securities of the Fund are present or represented
by proxy. Limitations 1 through 8 below are deemed fundamental limitations. The
remaining limitations set forth below serve as operating policies of the Fund
and may be changed by the Board of Directors without shareholder approval.
The Fund may not:
1. Purchase the securities of any issuer if such purchase would cause the
Fund to fail to meet the requirements of a "diversified company" as defined
under the Investment Company Act of 1940, as amended (the "1940 Act").
As 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.
For purposes of applying this restriction, the Fund will not purchase
securities, as defined above, such that 25% or more of the value of the Fund's
total assets are invested in the securities of companies whose principal
business activities are in the same industry.
3. Issue any senior securities, except as permitted by the 1940 Act or the
Rules and Regulations of the Securities and Exchange Commission.
4. Borrow money, except from banks for temporary or emergency purposes
provided that such borrowings may not exceed 33-1/3% of the value of the Fund's
net assets (including the amount borrowed). Any borrowings that come to exceed
this amount will be reduced within three days (not including Sundays and
holidays) to the extent necessary to comply with the 33-1/3% limitation. This
limitation shall not prohibit the Fund from engaging in reverse repurchase
agreements, making deposits of assets to margin or guarantee positions in
futures, options, swaps or forward contracts, or segregating assets in
connection with such agreements or contracts.
To the extent the Fund engages in reverse repurchase agreements, because
such transactions are considered borrowing, reverse repurchase agreements are
included in the 33-1/3% limitation.
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5. Act as an underwriter of securities of other issuers, except to the
extent that in connection with the disposition of portfolio securities the Fund
may be deemed to be an underwriter under applicable laws.
6. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments. This restriction shall not prevent the Fund
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business.
7. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Fund from purchasing or selling options and future contracts or from investing
in securities or other instruments backed by physical commodities).
For purposes of applying this restriction, "commodities" shall be deemed to
include commodity contracts.
8. Make loans to other persons except to the extent not inconsistent with
the 1940 Act or the Rules and Regulations of the Securities and Exchange
Commission. This limitation does not apply to purchases of commercial paper,
debt securities or repurchase agreements, or to the lending of portfolio
securities.
9. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases or sales
of securities and provided that margin payments in connection with transactions
in options, futures, swaps and forward contracts shall not be deemed to
constitute purchasing securities on margin.
10. Sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options, swaps and forward futures contracts are
not deemed to constitute selling securities short.
For purposes of applying this restriction, the Fund will not sell
securities short except to the extent that it contemporaneously owns or has the
right to obtain, at no added cost, securities identical to those sold short.
11. Except as part of a merger, consolidation, acquisition, or
reorganization, invest more than 5% of the value of its total assets in the
securities of any one investment company or more than 10% of the value of its
total assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting securities of
any one investment company.
12. Mortgage, pledge or hypothecate its assets except to the extent
necessary to secure permitted borrowings. This limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed in
a segregated account in connection with such contracts.
13. Participate on a joint or a joint and several basis in any securities
trading account.
14. The Fund may not invest more than 15% of its net assets in illiquid
investments.
15. Invest directly in interests (including partnership interests) in oil,
gas or other mineral exploration or development leases or programs, except the
Fund may purchase or sell securities issued by corporations engaging in oil, gas
or other mineral exploration or development business.
Any of the 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, the 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.
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PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by the
monthly average of the value of portfolio securities owned by the Fund during
the same fiscal year. "Portfolio securities" for purposes of this calculation do
not include securities with a maturity date of less than twelve (12) months from
the date of investment. A 100% portfolio turnover rate would occur, for example,
if the lesser of the value of purchases or sales of portfolio securities for a
particular year were equal to the average monthly value of the portfolio
securities owned during such year.
INVESTMENT PERFORMANCE
Advertisements and other sales literature for the Fund may refer to
monthly, quarterly, yearly, cumulative and average annual total return. Each
such calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts. Each of
monthly, quarterly and yearly total return is computed in the same manner as
cumulative total return, as set forth below.
Cumulative total return is computed by finding the cumulative rate of
return over the period indicated in the advertisement that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
CTR = (ERV-P) 100 P
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of
such period; and
P = initial payment of $1,000
Average annual total return is computed by finding the average annual
compounded rates of return over the periods indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made a the beginning of
such period.
In advertising and sales literature, the Fund may compare its performance
with that of other mutual funds, indexes or averages of other mutual funds,
indexes of related financial assets or data, and other competing investment and
deposit products available from or through other financial institutions. The
composition of these indexes, averages or products differs from that of the
Fund. The comparison of the Fund to an alternative investment should be made
with consideration of differences in features and expected performance. The Fund
may also note its mention in newspapers, magazines, or other media from time to
time. However, the Fund assumes no responsibility for the accuracy of such data.
15
<PAGE>
For example, (1) the 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; (vii) the IFC Investable
Pacific Basin Index (an unmanaged index of Pacific Basin equity securities based
on market capitalization) and (viii) the performance of U.S. government and
corporate bonds, notes and bills. (The purpose of these comparisons would be to
illustrate historical trends in different market sectors so as to allow
potential investors to compare different investment strategies.); (2) the
Consumer Price Index (measure for inflation) may be used to assess the real rate
of return from an investment in the Fund; (3) other U.S. 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 the Fund or the general economic business,
investment, or financial environment in which the Fund operates; (4) the effect
of tax-deferred compounding on the Fund's investment returns, or on returns in
general, may be illustrated by graphs, charts, etc. where such graphs or charts
would compare, at various points in time, the return from an investment in the
Fund (or returns in general) on a tax-deferred basis (assuming reinvestment of
capital gains and dividends and assuming one or more tax rates) with the return
on a taxable basis; and (5) the sectors or industries in which the Fund invests
may be compared to relevant indices or surveys (e.g., S&P Industry Surveys) in
order to evaluate the Fund's historical performance or current or potential
value with respect to the particular industry or sector.
MANAGEMENT
The names, addresses, positions and principal occupations of the directors
and executive officers of the Fund are given below.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name and Address Age Position Principal Occupation(s) During Past 5 Years
- ---------------- --- -------- -------------------------------------------
Noel P. Rahn* 58 Chairman of the Chief Executive Officer and a Director of IAI
3700 First Bank Place Board, President since 1974. Mr. Rahn is also Chairman and
P.O. Box 357 President of the other IAI Mutual Funds and of
Minneapolis, Minnesota 55440 LifeUSA Funds, Inc.
Madeline Betsch 54 Director Currently retired; until April 1994, was
19 South 1st Street Executive Vice President, Director of Client
Minneapolis, Minnesota 55401 Services, of CME-KHBB Advertising since May
1985, and prior thereto was a Vice President
with Campbell-Mithun, Inc. (advertising
agency) since February 1977.
W. William Hodgson 72 Director Currently retired; served as information
1698 Dodd Road manager for the North Central Home Office of
Mendota Heights, Minnesota 55118 the Prudential Insurance Company of America
from 1961 until 1984.
16
<PAGE>
George R. Long 67 Director Chairman of Mayfield Corp. (financial
29 Las Brisas Way consultants and venture capitalists) since
Naples, Florida 33963 1973.
J. Peter Thompson 66 Director Grain farmer in southwestern Minnesota since
Route 1 1974. Prior to that, Mr. Thompson was
Mountain Lake, Minnesota 56159 employed by Paine Webber, Jackson & Curtis,
Incorporated, (a diversified financial services
concern), most recently as Senior Vice President
and General Partner.
Charles H. Withers 70 Director Currently retired; was Editor of the Rochester
Rochester Post Bulletin Post-Bulletin, Rochester, Minnesota from 1960
P.O. Box 6118 through March 31, 1980.
Rochester, Minnesota 55903
Archie C. Black, III 35 Treasurer Senior Vice President and Chief Financial
3700 First Bank Place Officer of IAI and has served IAI in several
P.O. Box 357 capacities since 1987. Mr. Black is also
Minneapolis, Minnesota 55440 Treasurer of the other IAI Mutual Funds and of
LifeUSA Funds, Inc.
William C. Joas 34 Secretary Vice President of IAI and has served as an
3700 First Bank Place attorney for IAI since 1990. Mr. Joas is also
P.O. Box 357 Secretary of the other IAI Mutual Funds and of
Minneapolis, Minnesota 55440 LifeUSA Funds, Inc.
</TABLE>
- -------------------------------
* Directors of the Fund who are interested persons (as that term is defined
by the Investment Company Act of 1940) of IAI and the Fund.
The Fund has agreed to reduced initial subscription requirements for
employees and directors of the Fund or IAI, their spouses, children and
grandchildren. With respect to such persons, the minimum initial investment in
one or more of the IAI Family of Funds is $500; provided that the minimum amount
that can be allocated to any one of the Funds is $250. Subsequent subscriptions
are limited to a minimum of $100 for each of the Funds.
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. The Fund will pay its pro rata
share of these fees based on its net assets. Such unaffiliated directors also
are reimbursed for expenses incurred in connection with attending meetings.
<TABLE>
<CAPTION>
<S> <C>
Aggregate Compensation
Name of Person, Position from the 20 IAI Mutual Funds*
------------------------ ----------------------------
Betsch, Madeline - Director $34,700
Hodgson, W. William - Director $34,700
Long, George R. - Director $34,700
Thompson, J. Peter - Director $34,700
Withers, Charles H. - Director $34,700
</TABLE>
-------------------------
17
<PAGE>
* From all Funds for the calendar year ended December 31, 1996;
excludes expenses incurred in connection with attending
meetings.
The Board of Directors for the Fund has approved a Code of Ethics. The Code
permits access persons to engage in personal securities transactions subject to
certain policies and procedures. Such procedures prohibit 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 Fund's Board of Directors summarizing existing procedures and
changes, identifying material violations and recommending any changes needed.
IAI's ultimate corporate parent is Lloyds TSB Group, plc ("Lloyds TSB"), a
publicly-held financial services organization headquartered in London, England.
Lloyds TSB is one of the largest personal and corporate financial services
groups in the United Kingdom, engaged in a wide range of activities including
commercial and retail banking. The principal offices of Lloyds TSB are located
at St. George's House, 6 - 8 Eastcheap, London, EC3M 1LL.
HISTORY
The Fund is a separate portfolio of IAI Investment Funds III, Inc., a
Minnesota corporation whose shares of common stock are currently issued in four
series (Series A through D). 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 International
Fund, Inc. be renamed IAI Investment Funds III, Inc. The investment portfolio
represented by Series D common shares is referred to as "IAI Pacific Basin
Fund."
MANAGEMENT AGREEMENT
Pursuant to a Management Agreement between the Fund and IAI, IAI has agreed
to provide the Fund with investment advice, statistical and research facilities,
and certain equipment and services, including, but not limited to, office space
and necessary office facilities, equipment, and the services of required
personnel and, in connection therewith, IAI has the sole authority and
responsibility to make and execute investment decisions for the Fund within the
framework of the Fund's investment policies, subject to review by the directors
of the Fund. In addition, IAI has agreed to provide or arrange for the provision
of all required administrative, stock transfer, redemption, dividend disbursing,
accounting, and shareholder services including, without limitation, the
following: (1) the maintenance of the Fund's accounts, books and records; (2)
the calculations of the daily net asset value in accordance with the Fund's
current Prospectus and Statement of Additional Information; (3) daily and
periodic reports; (4) all information necessary to complete tax returns,
questionnaires and other reports requested by the Fund; (5) the maintenance of
stock registry records; (6) the processing of requested account registration
changes, stock certificate issuances and redemption requests; (7) the
administration of payments and dividends and distributions declared by the Fund;
(8) answering shareholder questions, (9) providing reports and other information
and (10) other services designed to maintain shareholder accounts. IAI may also
pay qualifying broker-dealers, financial institutions and other entities that
provide such services. In return for these services, the Fund has agreed to pay
IAI an annual fee as a percentage of the Fund's average daily net assets as set
forth below:
<TABLE>
<CAPTION>
<S> <C>
Daily Net Assets Fee IAI Receives Annually
---------------- -------------------------
For the first $100 million 2.50%
For the next $100 - $250 million 2.45%
For the next $250 - $500 million 2.30%
Above $500 million 2.00%
</TABLE>
Until March 1, 1999, IAI has voluntarily agreed to waive its fee in excess of
2.00% of the Fund's average daily net assets.
18
<PAGE>
Under the Management Agreement, except for brokerage commissions and other
expenditures in connection with the purchase and sale of portfolio securities,
interest expense, and, subject to the specific approval of a majority of the
disinterested directors of the Fund, taxes and extraordinary expenses, IAI has
agreed to pay all of the Fund's other costs and expenses, including, for
example, costs incurred in the purchase and sale of assets, taxes, charges of
the custodian of the Fund's assets, costs of reports and proxy material sent to
Fund shareholders, fees paid for independent accounting and legal services,
costs of printing Prospectuses for Fund shareholders and registering the Fund's
shares, postage, insurance premiums, and costs of attending investment
conferences. The Management Agreement further provides that IAI will either
reimburse the Fund for the fees and expenses it pays to directors who are not
"interested persons" of the Fund or reduce its fee by an equivalent amount. IAI
is not liable for any loss suffered by the Fund in the absence of willful
misfeasance, bad faith or negligence in the performance of its duties and
obligations.
Under the Subadvisory Agreement between IAI International Ltd. and IAI, IAI
has delegated to IAI International Ltd. the sole authority and responsibility to
make and execute investment decisions for the Fund within the framework of the
Fund's investment policies, subject to review by IAI and the directors of the
Fund. Under the Subadvisory Agreement, IAI has agreed to pay IAI International
Ltd. an annual fee as a percentage of the Fund's average daily net assets as set
forth below:
<TABLE>
<CAPTION>
<S> <C>
Daily Net Assets Fee IAI Int'l Receives Annually
---------------- -------------------------------
For the first $100 million .8125%
For the next $100 - $250 million .7500%
For the next $250 - $500 million .6250%
Above $500 million .4375%
</TABLE>
Until March 1, 1999, IAI International has voluntarily agreed to waive its fee
in excess of .625% of the Fund's average daily net assets.
DURATION OF AGREEMENTS
Each of the Management Agreement and the Subadvisory 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
the Fund or by vote of a majority of the Fund's outstanding voting securities on
not more than 60 days' written notice, and by IAI (or IAI International) on 60
days' notice to the counterparty. 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 Fund is Norwest Bank Minnesota, N.A. Norwest Center,
Sixth and Marquette, Minneapolis, MN 55479. Norwest has entered into an
agreement with Morgan Stanley Trust Company, 1 Pierrepont Plaza, Brooklyn, New
York ("Morgan Stanley") which enables the Fund and International Fund to utilize
the subcustodian and depository network of Morgan Stanley.
19
<PAGE>
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
In effecting such portfolio transactions on behalf of the Fund, IAI seeks
the most favorable net price consistent with the best execution. However, the
Fund must deal with brokers. IAI selects and (where applicable) negotiates
commissions with the brokers who execute the transactions for such Fund. The
primary criteria for the selection of a broker is the ability of the broker, in
the opinion of IAI, to secure prompt execution of the transactions on favorable
terms, including the reasonableness of the commission and considering the state
of the market at the time. In selecting a broker, IAI may consider whether such
broker provides brokerage and research services (as defined in the Securities
Exchange Act of 1934). IAI may direct Fund transactions to brokers who furnish
research services to IAI. Such research services include advice, both directly
and in writing, as to the value of securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities, as well as analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio strategy,
and the performance of accounts. By allocating brokerage business in order to
obtain research services for IAI, the Fund enables IAI to supplement its own
investment research activities and allows IAI to obtain the views and
information of individuals and research staffs of many different securities
research firms prior to making investment decisions for the Fund. To the extent
such commissions are directed to brokers who furnish research services to IAI,
IAI receives a benefit, not capable of evaluation in dollar amounts, without
providing any direct monetary benefit to the Fund from these commissions.
Generally the Fund pays higher than the lowest commission rates available. Some
investment companies enter into arrangements under which a broker-dealer agrees
to pay the cost of certain products or services (not including research
services) in exchange for fund brokerage ("brokerage/service arrangements").
Under a typical brokerage/service arrangement, a broker agrees to pay a fund's
custodian fees or transfer agent fees and, in exchange, the fund agrees to
direct a minimum amount of brokerage to the broker. IAI does not intend to enter
into such brokerage/service arrangements on behalf of the Fund. Some investment
companies enter into agreements that provide for specified or reasonably
ascertainable fee reductions in exchange for the use of fund assets ("expense
offset agreements"). Under such expense offset agreements, expenses are reduced
by foregoing income rather than by re-characterizing them as capital items. For
example, a fund may have a "compensating balance" agreement with its custodian
under which the custodian reduces its fees if the fund maintains cash or
deposits with the custodian in non-interest bearing accounts. IAI does not
intend to enter into expense offset agreements involving assets of the Fund.
IAI believes that most research services obtained by it generally benefit
one or more of the investment companies or other accounts which it manages.
Normally research services obtained through commissions paid by the managed fund
investing in common stocks and managed accounts investing in common stocks would
primarily benefit the fund and accounts.
There is no formula for the allocation by IAI of the Fund's brokerage
business to any broker-dealers for brokerage and research services. However, IAI
will authorize the Fund to pay an amount of commission for effecting a
securities transaction in excess of the amount of commission another broker
would have charged only if IAI determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker viewed in terms of either that particular
transaction or IAI's overall responsibilities with respect to the accounts as to
which it exercises investment discretion.
Although investment decisions for the Fund are made independently from
other accounts as to which IAI gives investment advice, it may occasionally
develop that the same security is suitable for more than one account. If and
when more than one account simultaneously purchase or sell the same security,
the transactions will be averaged as to price and allocated as to amount in
accordance with arrangements equitable to the Fund and such accounts. The
simultaneous purchase or sale of the same securities by the Fund and other
accounts may have detrimental effects on the Fund, as they may affect the price
paid or received by the Fund or the size of the position obtainable by the Fund.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to the policies set forth in the preceding
paragraphs and such other policies as the Board of Directors of the Fund may
determine, IAI may consider sales of shares of the Fund as a factor in the
selection of broker-dealers to execute the Fund's securities transactions.
20
<PAGE>
CAPITAL STOCK
The Fund is a separate portfolio of IAI Investment Funds III, Inc., a
Minnesota corporation whose shares of common stock are currently issued in four
series (Series A through D). 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 III, 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 III, Inc., has
authorized 10,000,000,000 shares of $.01 par value common stock to be issued as
Series D common shares. The investment portfolio represented by such shares is
referred to as IAI Pacific Basin Fund.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The portfolio securities in which the Fund invests fluctuate in value, and
hence, for the Fund, the net asset value per share also fluctuates.
The net asset value per share of the Fund is determined once daily as of
the close of trading on the New York Stock Exchange on each business day on
which the New York Stock Exchange is open for trading, and may be determined on
additional days as required by the Rules of the Securities and Exchange
Commission. The New York Stock Exchange is closed, and the net asset value per
share of the Fund is not determined, on the following national holidays: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
SPECIAL REDEMPTION AND EXCHANGE INFORMATION
In general, shares of the Fund may be exchanged or redeemed at net asset
value. However, shares of the Fund held for less than one year are redeemable at
a price equal to 98% of the then current net asset value per share or such
higher percentage of current net asset value per share that represents the then
current net asset value minus an amount equal to 2% of the cost of the shares.
This 2% discount, referred to in the Prospectus and this Statement of Additional
Information as a redemption fee, directly affects the amount a shareholder who
is subject to the discount receives upon exchange or redemption. It is intended
to encourage long-term investment in the Fund, to avoid transaction and other
expenses caused by early redemptions and to facilitate portfolio management. The
fee is not a deferred sales charge, is not a commission paid to IAI or it
subsidiaries, and does not directly benefit IAI. The Fund reserves the right to
modify the terms of or terminate this fee at any time.
The redemption fee will not be applied to (a) a redemption of shares
resulting from an investment decision by IAI for an investment advisory client;
(b) a redemption of shares held in certain retirement plans, including 401(k)
plans and 403(b) plans (however, this fee waiver does not apply to IRA and
SEP-IRA accounts), (c) a redemption of any shares of the Fund outstanding for
one year or more, (d) a redemption of reinvestment shares (i.e., shares
purchased through the reinvestment of dividends or capital gains distributions
paid by the Fund), or (e) a redemption of shares by the Fund upon exercise of
its right to liquidate accounts (i) falling below the minimum account size by
reason of shareholder redemptions or (ii) when the shareholder has failed to
provide tax identification information. For this purpose and without regard to
the shares actually redeemed, shares will be redeemed as follows: first,
reinvestment shares; second, purchased shares held one year or more; and third,
purchased shares held for less than one year.
21
<PAGE>
PURCHASES AND REDEMPTIONS IN KIND
In extraordinary circumstances, Fund shares may be purchased for cash or in
exchange for securities which are permissible investments of the Fund, subject
to IAI's discretion and its determination that the securities are acceptable.
Securities accepted in exchange will be valued on the basis of market
quotations, or if market quotations are not available, by a method that IAI
believes accurately reflects fair value. In addition, securities accepted in
exchange are required to be liquid securities that are not restricted as to
transfer. Also in extraordinary circumstances, if a shareholder so desires, and
IAI so agrees, Fund shares may be redeemed in exchange for securities held by a
Fund. Securities redeemed in exchange will be valued on the basis of market
quotations, or if market quotations are not available, by a method that IAI
believes accurately reflects fair value.
TAX STATUS
The tax status of the Fund and the distributions of the Fund is summarized
in the Prospectus under "Dividends, Distributions and Tax Status."
Because it is expected that no portion of the net investment income of the
Fund will derive from dividends from domestic corporations, it is probable that
no portion of the dividends paid by the Fund will qualify for the 70% deduction
for dividends received available to corporations under the provisions of
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, the
Fund is required to withhold 31% of a shareholder's distributions and redemption
proceeds upon the occurrence of certain events specified in Section 3406 of the
Code and regulations promulgated thereunder. These events include the failure of
the Fund shareholder to supply the Fund with such shareholder's taxpayer
identification number, and the failure of the Fund shareholder who is otherwise
exempt from withholding to properly document such shareholder's status as an
exempt recipient. Additionally, distributions may be subject to state and local
income taxes, and the treatment thereunder may differ from the federal income
tax consequences discussed above.
Under the Code, the Fund will be subject to a non-deductible excise tax
equal to 4% of the excess, if any, of the amount of investment income and
capital gains required to be distributed pursuant to the Code for each calendar
year over the amount actually distributed. In order to avoid this excise tax,
the Fund generally must declare dividends by the end of each calendar year
representing 98% of the Fund's ordinary income for such calendar year and 98% of
its capital gain net income (both long-term and short-term) for the twelve-month
period ending October 31 of the same calendar year. The excise tax is not
imposed, however, on undistributed income that is already subject to corporate
income tax. It is the Fund's policy not to distribute capital gains until
capital loss carryovers, if any, either are utilized or expire.
The amount of any gain or loss realized by the Fund on closing out a
futures contract may result in a capital gain or loss for federal income tax
purposes. Generally, futures contracts held by the Fund at the close of the
Fund's taxable year will be treated for federal income tax purposes as sold for
their fair market value on the last business day of such year. Forty percent of
any gain or loss resulting from such constructive sale will be treated as
short-term capital gain or loss, and 60% of such gain or loss will be treated as
long-term capital gain or loss. The amount of any capital gain or loss actually
realized by the Fund in a subsequent sale or other disposition of these futures
contracts will be adjusted to reflect any capital gain or loss taken into
account by the Fund in a prior year as a result of the constructive sale of the
contract. Notwithstanding the rules described above, with respect to certain
futures contracts, the Fund may make an election which will have the effect of
exempting all or a part of those identified futures contracts from being treated
for federal income tax purposes as sold on the last business day of the Fund's
taxable year. All or part of any loss realized by the Fund on any closing of a
futures contract may be deferred until all of the Fund's offsetting positions
with respect to the futures contract are closed.
22
<PAGE>
Generally, in order to qualify as a regulated investment company under
Subchapter M of the Code, the Fund must derive at least 90% of its gross income
from dividends, interest, and gains from the sale or other disposition of stock
or securities. Under the Code, the Fund may include income from options, futures
and forward contracts and other gains derived from the Fund's business of
investing in stock, securities or currencies in determining qualifying income
for purposes of the 90% test. Treasury regulations may exclude foreign currency
gains not directly related to the Fund's principal business of investing in
stocks or securities (or options and futures with respect to stock or
securities). It is impossible to predict what amount of such gains, if any,
future Treasury regulations will exclude from qualifying income.
Under the Code, dividends of net investment income received from the Fund
by a shareholder who, as to the United States, is a nonresident alien
individual, nonresident fiduciary of a foreign trust or estate, foreign
corporation or foreign partnership ("foreign shareholder") are subject to a
withholding tax of 30% (or such lower rate as is prescribed by the income tax
convention, if any, in force between the U.S. and the foreign shareholder's
country) without regard to the amount of gross income that the Fund derives from
sources within the United States. Distributions of net long-term capital gains
to a foreign shareholder will not be subject to U.S. tax unless the foreign
shareholder is engaged in a U.S. trade or business to which the distributions
are attributable, the gains are attributable to the disposition of a United
States real property interest, or, in the case of a foreign shareholder who is a
nonresident alien individual, such foreign shareholder is physically present in
the United States for more than 182 days during the taxable year.
A disposition of shares in the Fund by a foreign shareholder resulting in
alternative minimum taxable income or net United States real property gain to
the foreign shareholder may be subject to U.S. tax and withholding if the shares
constitute United States real property interests under the Code. It is not
expected that the shares of the Fund will constitute such interests, and the
Fund will furnish affidavits to such effect if necessary and appropriate to
avoid application of U.S. tax or withholding on a disposition of shares.
Income received from sources within foreign countries may be subject to
withholding and other taxes imposed by such countries. Tax conventions between
certain countries and the United States may reduce or eliminate such taxes. It
is impossible to determine the effective rate of foreign tax applicable to such
income in advance since the precise amount of the Fund's assets to be invested
in various countries is not known. Any amount of taxes paid by the Fund to
foreign countries will reduce the amount of income available to the Fund for
distributions to shareholders.
If the Fund is liable for foreign taxes, such Fund expects to meet the
requirements of the Code for passing through to its shareholders foreign taxes
paid, but there can be no assurance that the Fund will be able to do so. Under
the Code, if more than 50% of the value of the Fund's total assets at the close
of its taxable year consist of stock or securities of foreign corporations, the
Fund may file an election with the Internal Revenue Service to pass through to
the Fund's shareholders the amount of foreign taxes paid by the Fund. Pursuant
to this election, shareholders will be required to: (i) include in gross income
their pro rata share of the foreign taxes paid by the Fund; (ii) treat their pro
rata share of foreign taxes as paid by them; and (iii) either deduct their pro
rata share of foreign taxes in computing their taxable income or use their share
as a foreign tax credit against U.S. income taxes. No deduction for foreign
taxes may be claimed by a shareholder who does not itemize deductions. Each
shareholder will be notified within 60 days after the close of the Fund's
taxable year whether the foreign taxes paid by the Fund will pass through for
that year.
Under the Code, the amount of foreign taxes for which a shareholder may
claim a foreign tax credit is subject to limitation based on certain categories
applicable to the income subjected to foreign tax. Specifically, the available
foreign tax credit must be determined separately with respect to nine categories
of income. The Fund may have foreign source income allocable to the four
following categories: (i) passive income; (ii) high withholding tax interest;
(iii) dividends from a non-controlled foreign corporation pursuant to Section
902 of the Code; and (iv) other income not specifically categorized. Of these
categories, a substantial part of the Fund income is likely to constitute
passive income. However, in the absence of specific regulatory guidance on the
application of the income categories, such Fund cannot assure shareholders of
the correctness of any allocation made. For taxable years beginning on or after
January 1998, certain individual shareholders may claim the foreign tax credit
without regard to these categories of income. Individuals will no longer be
subject to the limitations by category of income if (a) they do not claim a
23
<PAGE>
total amount of foreign tax credit in excess of $300 in the case of a separate
return or $600 in the case of a joint return, and (b) their entire income from
foreign sources consists of "qualified passive income" as defined in the Code.
It is expected that all of the Fund's income with respect to which the foreign
tax credit is earned will constitute "qualified passive income."
The foregoing is a general and abbreviated summary of the Code and Treasury
regulations in effect as of the date of the Fund's Prospectus and this Statement
of Additional Information.
LIMITATION OF DIRECTOR LIABILITY
Under Minnesota law, the Fund's Board of Directors owes certain fiduciary
duties to the Fund and to its shareholders. Minnesota law provides that a
director "shall discharge the duties of the position of director in good faith,
in a manner the director reasonably believes to be in the best interest of the
corporation, and with the care an ordinarily prudent person in a like position
would exercise under similar circumstances." Fiduciary duties of a director of a
Minnesota corporation include, therefore, both a duty of "loyalty" (to act in
good faith and act in a manner reasonably believed to be in the best interests
of the corporation) and a duty of "care" (to act with the care an ordinarily
prudent person in a like position would exercise under similar circumstances).
Minnesota law authorizes corporations to eliminate or limit the personal
liability of a director to the corporation or its shareholders for monetary
damages for breach of the fiduciary duty of "care." Minnesota law does not,
however, permit a corporation to eliminate or limit the liability of a director
(i) for any breach of the director's duty of "loyalty" to the corporation or its
shareholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for authorizing a
dividend, stock repurchase or redemption or other distribution in violation of
Minnesota law or for violation of certain provisions of Minnesota securities
laws, or (iv) for any transaction from which the director derived an improper
personal benefit. The Articles of Incorporation of IAI Investment Funds III,
Inc., limit the liability of directors to the fullest extent permitted by
Minnesota statutes, except to the extent that such liability cannot be limited
as provided in the Investment Company Act of 1940 (which Act prohibits any
provisions which purport to limit the liability of directors arising from such
directors' willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their role as directors).
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" of the corporation for breach of their
duties as officers (including the liability of directors who serve as officers
for breach of their duties as officers.) Minnesota law does not permit
elimination or limitation of the availability of equitable relief, such as
injunctive or rescissionary relief. Further, Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act of
1933 or the Securities Exchange Act of 1934, and it is uncertain whether and to
what extent the elimination of monetary liability would extend to violations of
duties imposed on directors by the Investment Company Act of 1940 and the rules
and regulations adopted under such Act.
FINANCIAL STATEMENTS
The Fund has no financial statements at this time. Such financial
statements will be included in the Fund's 1998 Annual Report to shareholders.
Such Annual Report, when available, may be obtained by shareholders on request
from the Fund at no charge.
24
<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
characterizes bonds in this class.
B. Bonds rated B generally lack characteristics of the desirable
investment. Assurances of interest and principal payment or maintenance of other
terms of the contract over any long period of time may be small.
Caa. Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca. Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C. Bonds rated C are the lowest-rated class of bonds and issued so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
A-1
<PAGE>
Conditional Ratings. The designation "Con." followed by a rating indicates
bonds for which the security depends upon the completion of some act or the
fulfillment of some condition. These are bonds secured by (a) earnings of
projects under construction, (b) earnings 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.
Note: Moody's applies numerical modifiers 1, 2, and 3 in the Aa and A
classifications of its corporate bond rating system. The modifier 1 indicates
that the security ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category. With respect to
municipal securities, those bonds in the Aa, A, Baa, Ba, and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols Aa1, A1, Baa1, Ba1, and B1.
COMMERCIAL PAPER
- ----------------
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime - 1 Superior ability for repayment of senior short-term debt
obligations
Prime - 2 Strong ability for repayment of senior short-term debt
obligations
Prime - 3 Acceptable ability for repayment of senior short-term debt
obligations
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, Moody's, in assigning
ratings to such issuers, evaluates the financial strength of the indicated
affiliated corporations, commercial banks, insurance companies, foreign
governments, or other entities, but only as one factor in the total rating
assessment.
RATINGS BY S&P
- --------------
CORPORATE BONDS
- ---------------
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
A-2
<PAGE>
BB. Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B. Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB-rating.
CCC. Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
CC. Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C. The rating C typically applied to debt subordinated to senior debt which
assigned an actual or implied CCC-debt rating. The C rating may be used to cover
a situation where a bankruptcy petition has been filed but debt service payments
are continued.
C1. The rating C1 is reserved for income bonds on which no interest is
being paid.
D. Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. The D rating will be used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
In order to provide more detailed indications of credit quality, S&P's bond
letter ratings described above (except for the AAA category) may be modified by
the addition of a plus or a minus sign to show relative standing within the
rating category.
COMMERCIAL PAPER
- ----------------
A. This highest rating category indicates the greatest capacity for timely
payment. Issues in this category are further defined with the designations 1, 2,
and 3 to indicate the relative degree to safety.
A-1. This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are designed A-1+.
A-2. Capacity for timely payments on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designed A-1.
A-3. Issues carrying this designation have adequate capacity for timely
repayment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
A-3
<PAGE>
PART C
------
Item 24. Financial Statements and Exhibits
- ------------------------------------------
(a) Financial Statements (Series A and B) (1)
Financial Statements (Series C) (3)
(b) Exhibits
(1A) Articles of Incorporation (2)
(1B) Certificate of Designation (Series B) (2)
(1C) Certificate of Designation (Series C) (2)
(1D) Certificate of Designation (Series D)
(2) Bylaws
(5A) Management Agreement (Series A) (2)
(5B) Management Agreement (Series B) (2)
(5C) Management Agreement (Series C) (2)
(5D) Management Agreement (Series D)
(5E) Subadvisory Agreement (Series A) (2)
(5F) Subadvisory Agreement (Series B) (2)
(5G) Subadvisory Agreement (Series C) (2)
(5H) Subadvisory Agreement (Series D)
(6A) Dealer Sales Agreement (Series A and B) (1)
(6B) Dealer Sales Agreement (Series C) (2)
(6C) Shareholder Services Agreement (2)
(8A) Custodian Agreement (Series A) (2)
(8B) Custodian Agreement (Series B) (2)
(8C) Custodian Agreement (Series C) (3)
(8D) Custodian Agreement (Series D)
(11) Consent of Independent Auditors
(99) Annual Report (4)
- --------------------
(1) Incorporated by reference to Post-Effective Amendment No. 19 to
Registrant's Registration Statement on Form N-1A filed on April 1, 1996.
(2) Incorporated by reference to Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A filed on September 20, 1996.
(3) Incorporated by reference to Post-Effective Amendment No. 22 to
Registrant's Registration Statement on Form N-1A filed on May 7, 1997.
C-1
<PAGE>
(4) Incorporated by reference to the Annual Report filed electronically on
Form N-30D on March 31, 1997.
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>
<S> <C> <C>
Number of Record Holders
Portfolio Title of Class as of September 15, 1997
- --------- -------------- -------------------------
IAI International Fund Common Stock (Series A) 2,664
IAI Developing Countries Fund Common Stock (Series B) 715
IAI Latin America Fund Common Stock (Series C) 224
IAI Pacific Basin Fund Common Stock (Series D) N/A
</TABLE>
Item 27. Indemnification.
- -------------------------
Incorporated by reference to Post-Effective Amendment to Registrant's
Registration Statement on Form N-1A filed on May 22, 1996.
Item 28. Business and Other Connections of Investment Adviser.
- --------------------------------------------------------------
Information on the business of Investment Advisers, Inc. ("IAI") is
described in the Prospectus section "Management" and in Part B of this
Registration Statement in the section "Management."
The senior officers and directors of IAI and their titles are as follows:
<TABLE>
<CAPTION>
<S> <C>
Name Title
---- -----
Jeffrey R. Applebaum Senior Vice President
Scott Allen Bettin Senior Vice President
Archie Campbell Black, III Senior Vice President/Treasurer
Iain D. Cheyne Chairman/Director
Stephen C. Coleman Senior Vice President
Larry Ray Hill Executive Vice President
Richard A. Holway Senior Vice President
Irving Philip Knelman President/Chief Operating Officer/Director
Kevin McKendry Director
Timothy A. Palmer Senior Vice President
Peter Phillips Director
Noel Paul Rahn Chief Executive Officer/Director
James S. Sorenson Senior Vice President
R. David Spreng Senior Vice President
Christopher John Smith Senior Vice President/Secretary
</TABLE>
C-2
<PAGE>
All of such persons have been affiliated with IAI for more than two years
except Messrs. Cheyne, McKendry and Phillips. Prior to being appointed to the
Board in 1996, Mr. Cheyne was General Manager of Corporate Banking of Lloyds
Bank plc, and currently is Managing Director, International Banking, Lloyds TSB
Group plc, St. George's House, 6-8 Eastcheap, London, England EC3M 1LL since
1972. Prior to being appointed to the Board in 1996, Mr. McKendry was and
remains Bank Counsel to Lloyds Bank Plc, P.O. Box 2008, One Seaport Plaza, 199
Water Street, New York, NY 10038, since 1979. Prior to being appointed to the
Board in 1996, Mr. Phillips was and remains Executive Vice President and General
Manager of Lloyds Bank Plc, P.O. Box 2008, One Seaport Plaza, 199 Water Street,
New York, NY 10038, since 1993.
Certain directors and officers of IAI are directors and/or officers of the
Registrant, as described in the section of the Statement of Additional
Information entitled "Management," filed as a part of this Registration
Statement.
The address of the officers and directors of IAI is that of IAI, which is
3700 First Bank Place, P. O. Box 357, Minneapolis, Minnesota 55440.
Certain of the officers and directors of IAI also serve as officers and
directors of IAI International Ltd. Both IAI and IAI International's ultimate
corporate parent is Lloyds TSB Group plc, a publicly-held financial services
organization based in London, England. The senior officers and directors of IAI
International and their titles are as follows:
<TABLE>
<CAPTION>
<S> <C>
Name Title
- ---- -----
Noel Paul Rahn Chairman of the Board of Directors
Roy C. Gillson Chief Investment Officer/Director
Iain D. Cheyne Director
Irving Philip Knelman Director
Hilary Fane Deputy Chief Investment Officer/Director
Feidhlim O'Broin Associate Director
</TABLE>
Certain of the officers and directors of IAI also serve as officers and
directors of IAI Trust Company, a wholly-owned subsidiary of IAI. The officers
and directors of IAI Trust Company and their titles are as follows:
<TABLE>
<CAPTION>
<S> <C>
Name Title
- ---- -----
Archie C. Black Chairman of the Board/President/Treasurer
Christopher J. Smith Director/Vice President
Susan J. Haedt Vice President/Director
Darcy Kent Supervisor of Trust Services
Steven G. Lentz Secretary/Director
</TABLE>
C-3
<PAGE>
Item 29. Principal Underwriters
- -------- ----------------------
(a) Not applicable
(b) Not applicable.
Item 30. Location of Accounts and Records.
- -------- ---------------------------------
The Custodian for Registrant is Norwest Bank Minnesota, N.A., Norwest
Center, Sixth & Marquette, Minneapolis, Minnesota 55479. The Custodian maintains
records of all cash transactions of Registrant. All other books and records of
Registrant, including books and records of Registrant's investment portfolios,
are maintained by IAI. IAI also acts as Registrant's transfer agent and dividend
disbursing agent, at 3700 First Bank Place, Minneapolis, Minnesota 55402.
Item 31. Management Services.
- -----------------------------
Not applicable.
Item 32. Undertakings.
- ----------------------
(a) Not applicable.
(b) Registrant undertakes to file a post-effective amendment, using
financial statements which need not be certified, within four to six months from
the effective date of the registration of Registrant's Series D Common Stock.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of its latest annual report to shareholders, upon request
and without charge.
C-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 this 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 25th day of September, 1997.
IAI INVESTMENT FUNDS III, INC.
(Registrant)
By /s/ Noel P. Rahn, President
Noel P. Rahn, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Noel P. Rahn President (principal September 25, 1997
- --------------------------------- executive officer) & Director
Noel P. Rahn
/s/ Archie C. Black III Treasurer (principal September 25, 1997
- --------------------------------- financial and accounting
Archie C. Black III officer)
</TABLE>
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 September 25, 1997
- ---------------------------------
William C. Joas
Attorney-in-fact
(1) Registrant's directors executing Powers of Attorney dated August 18,
1993, and filed with the Commission on June 28, 1994.
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit No. Exhibit Description Sequential Page No.
- ----------- ------------------- -------------------
1D Certificate of Designation (Series D)
2 Bylaws of Investment Funds III, Inc.
5D Management Agreement (Series D)
5H Subadvisory Agreement (Series D)
8D Custodian Agreement (Series D)
11 Consent of Independent Auditors
</TABLE>
<PAGE>
CERTIFICATE OF DESIGNATION
OF SERIES OF COMMON SHARES
The undersigned, Secretary of IAI Investment Funds III, Inc., a Minnesota
corporation (the "Corporation"), hereby certifies that the following is a true,
complete and correct copy of resolutions duly adopted by a majority of the
directors of the Board of Directors through a written action taken without a
meeting in accordance with Minnesota Statues, Section 302A.239.
DESIGNATION OF SERIES D COMMON SHARES
WHEREAS, the shareholders of IAI Investment Funds III, Inc. (the
"Corporation") have authorized 10,000,000,000,000 shares of common stock, $.01
par value per share, of which 10,000,000,000 are designated Series A Common
Shares, 10,000,000,000 are designated Series B Common Shares, and 10,000,000,000
are designated Series C Common Shares, as set forth in the Articles of
Incorporation of the Corporation; and
WHEREAS, said Articles of Incorporation set forth that the balance of the
authorized but unissued shares of common stock may be issued in such series with
such designations, preferences and relative, participating, optional or other
special rights, or qualifications, limitations or restrictions thereof, as shall
be stated or expressed in a resolution or resolutions providing for the issue of
any series of common shares as may be adopted from time to time by the Board of
Directors of the Corporation.
NOW, THEREFORE, BE IT RESOLVED, that 10,000,000,000 of the remaining
authorized but unissued common shares of the Corporation be, and they hereby
are, designated as Series D Common Shares, and said Series D Common Shares shall
represent interests in a separate and distinct portion of the Corporation's
assets which shall take the form of a separate portfolio of investment
securities, cash and other assets.
FURTHER RESOLVED, that Articles 6, 7 and 8 of the Articles of Incorporation
of the Corporation setting forth the preferences and relative, participating,
optional or other special rights, and qualifications, limitations and
restrictions thereof, of and among each series of common shares be, and they
hereby are, adopted as the preferences and relative, participating, optional and
other rights, and the qualifications, limitations and restrictions thereof, of
and among the Series D Common Shares designated hereby and in relation to the
Series A, Series B, and Series C Common Shares of the Corporation designated
prior hereto.
BE IT FURTHER RESOLVED, that the officers of the Corporation are hereby
authorized and directed to the file with the office of the Secretary of
Minnesota, a Certificate of Designation setting forth the relative rights and
preferences of the Series D Common Shares, as required by Subd. 3(b) of Section
401 of the Minnesota Business Corporation Act.
IN WITNESS WHEREOF, the undersigned has signed this Certificate of
Designation on behalf of IAI Investment Funds III, Inc. this 2nd day of
September, 1997.
/s/William C. Joas
William C. Joas, Secretary
As Amended September 2, 1997
BYLAWS
OF
IAI INVESTMENT FUNDS III, INC.
ARTICLE I
OFFICES, CORPORATE SEAL
Section 1.01. NAME. The name of the corporation is IAI Investment Funds
III, Inc. The name of the series represented by Series A Common Shares shall be
"IAI International Fund." The name of the Series B Common Shares shall be "IAI
Developing Countries Fund." The name of the Series C Common Shares shall be "IAI
Latin America Fund." The name of the Series D Common Shares shall be "IAI
Pacific Basin Fund."
Section 1.02. REGISTERED OFFICE. The registered office of the corporation
in Minnesota shall be that set forth in the Articles of Incorporation or in the
most recent amendment of the Articles of Incorporation or resolution of the
directors filed with the Secretary of State of Minnesota changing the registered
office.
Section 1.03. OTHER OFFICES. The corporation may have such other offices
and places of businesses, within or without the State of Minnesota, as the
directors shall, from time to time, determine.
Section 1.04. CORPORATE SEAL. The corporate seal shall be circular in form
and shall have inscribed thereon the name of the corporation and the word
"Minnesota" and the words "Corporate Seal." The form of the seal shall be
subject to alteration by the Board of Directors and the seal may be used by
causing it or a facsimile to be impressed or affixed or printed or otherwise
reproduced. Any officer or director of the corporation shall have authority to
affix the corporate seal of the corporation to any document requiring the same.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 2.01. PLACE AND TIME OF MEETINGS. Except as provided otherwise by
Minnesota Statutes Chapter 302A, meetings of the shareholders may be held at any
place, within or without the State of Minnesota, designated by the directors
and, in the absence of such designation, shall be held at the registered office
of the corporation in the State of Minnesota. The directors shall designate the
time of day for each meeting and, in the absence of such designation, every
meeting of shareholders shall be held at ten o'clock a.m.
Section 2.02. REGULAR MEETINGS. Annual meetings of shareholders are not
required by these Bylaws. Regular meetings shall be held only with such
frequency and at such times and places as provided in and required by law.
Section 2.03. SPECIAL MEETINGS. Special meetings of the shareholders may be
held at any time and for any purpose and may be called by the Chairman of the
Board, the President, and two or more directors, or by one or more shareholders
holding ten percent (10%) or more of the shares entitled to vote on the matters
to be presented to the meeting, except that a special meeting for the purpose of
considering any action directly or indirectly to facilitate or effect a business
combination, including any action to change or otherwise affect the composition
of the Board of Directors for that purpose, must be called by 25% of the voting
power of all shares entitled to vote.
Section 2.04. QUORUM; ADJOURNED MEETINGS. The holders of ten percent (10%)
of the shares outstanding and entitled to vote at the meeting shall constitute a
quorum for the transaction of business at any regular or special shareholders'
meeting. In case a quorum shall not be present at a meeting, those present in
person or by proxy shall adjourn the meeting to such day as they shall, by
majority vote, agree upon without further notice other than by announcement at
the meeting at which such adjournment is taken. If a quorum is present, a
meeting may be adjourned from time to time without notice other than
announcement at the meeting. At adjourned meetings at which a quorum is present,
any business may be transacted which might have been transacted at the meeting
as originally noticed. If a quorum is present, the shareholders may continue to
transact business until adjournment notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
2
<PAGE>
Section 2.05. VOTING. At each meeting of the shareholders, every
shareholder shall have the right to vote in person or by proxy. Each
shareholder, unless the Articles of Incorporation or applicable laws provide
otherwise, shall have one vote for each share having voting power registered in
his name on the books of the corporation. Upon the demand of any shareholder,
the vote upon any question before the meeting shall be by written ballot. Except
as otherwise specifically provided by these Bylaws or as required by provisions
of the Investment Company Act of l940 or other applicable laws, all questions
shall be decided by a majority vote of the number of shares entitled to vote and
represented at the meeting at the time of the vote. If the matter(s) to be
presented at a regular or special meeting relates only to an individual series
or class thereof of the corporation, then only the shareholders of the series or
class thereof are entitled to vote on such matter(s).
Section 2.06. VOTING PROXIES. The right to vote by proxy shall exist only
if the instrument authorizing such proxy to act shall have been executed in
writing by the shareholder himself or by his attorney thereunto duly authorized
in writing. No proxy shall be voted after eleven (11) months from its date
unless it provides for a longer period.
Section 2.07. CLOSING OF BOOKS. The Board of Directors may fix a time, not
exceeding sixty (60) days preceding the date of any meeting of shareholders, as
a record date for the determination of the shareholders entitled to notice of,
and to vote at, such meeting, notwithstanding any transfer of shares on the
books of the corporation after any record date so fixed. If the Board of
Directors fails to fix a record date for determination of the shareholders
entitled to notice of, and to vote at, any meeting of shareholders, the record
date shall be the thirtieth (30th) day preceding the date of such meeting.
Section 2.08. NOTICE OF MEETINGS. The Secretary or an Assistant Secretary
shall mail to each shareholder shown by the books of the corporation to be a
holder of record of voting shares, at his address as shown by the books of the
corporation, a notice setting out the time and date and place of each regular
meeting and each special meeting, which notice shall be mailed at least ten (10)
days prior thereto; except that notice of a meeting at which an agreement of
merger or consolidation is to be considered shall be mailed to all shareholders
of record, whether entitled to vote or not, at least two (2) weeks prior
thereto; and except that notice of a meeting at which a proposal to dispose of
all, or substantially all, of the property and assets of the corporation is to
be considered shall be mailed to all shareholders of record, whether entitled to
vote or not, at least ten (10) days prior thereto; and except that notice of a
meeting at which a proposal to dissolve the corporation or to amend the Articles
of Incorporation is to be considered shall be mailed to all shareholders of
record, whether entitled to vote or not, at least ten (10) days prior thereto.
Every notice of any special meeting shall state the purpose or purposes for
which the meeting has been called, pursuant to Section 2.03, and the business
transacted at all special meetings shall be confined to the purpose stated in
the call.
Section 2.09. WAIVER OF NOTICE. Notice of any regular or special meeting
may be waived either before, at or after such meeting orally or in writing
signed by each shareholder or representative thereof entitled to vote the shares
so represented. A shareholder, by his attendance at any meeting of shareholders,
shall be deemed to have waived notice of such meeting, except where the
shareholder objects at the beginning of the meeting to the transaction of
business because the meeting is not lawfully called or convened, or objects
before a vote on an item of business because the item may not lawfully be
considered at that meeting and does not participate in the consideration of the
item at that meeting.
Section 2.10. WRITTEN ACTION. Any action which might be taken at a meeting
of the shareholders may be taken without a meeting if done in writing and signed
by a majority of the shareholders entitled to vote on that action. If the action
to be taken relates to an individual series or class thereof of the corporation,
then only shareholders of the series or class thereof are entitled to vote on
such action.
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ARTICLE III
DIRECTORS
Section 3.01. NUMBER QUALIFICATIONS AND TERM OF OFFICE. Until the first
meeting of shareholders, or until the directors increase their number by
resolution, the number of directors shall be the number named in the Articles of
Incorporation. Thereafter, the number of directors shall be established by
resolution of the shareholders (subject to the authority of the Board of
Directors to increase the number of directors as permitted by law). In the
absence of such resolution, the number of directors shall be the number last
fixed by the shareholders, the Board of Directors or the Articles of
Incorporation. Directors may but need not be shareholders. Each of the directors
shall hold office until the regular meeting of shareholders next held after his
election and until his successor shall have been elected and shall qualify, or
until he shall resign, or shall have been removed as hereinafter provided.
Section 3.02. ELECTION OF DIRECTORS. Except as otherwise provided in
Section 3.12 and 3.13 hereof the directors shall be elected at all regular
shareholders' meeting. Directors may be elected at a special shareholders'
meeting, provided that the notice of such meeting shall contain mention of such
purpose. At each shareholders' meeting for the election of directors, the
directors shall be elected by a plurality of the votes validly cast at such
election. The shareholders of each series or class thereof of stock of the
corporation shall be entitled to vote for directors and shall have equal voting
power.
Section 3.03. GENERAL POWERS.
(a) The property, affairs and business of the corporation shall be managed
by the Board of Directors, which may exercise all the powers of the corporation
except those powers vested solely in the shareholders of the corporation by
statute, the Articles of Incorporation or these Bylaws, as amended.
(b) All acts done by any meeting of the directors or by any person acting
as a director, so long as his successor shall not have been duly elected or
appointed, shall, notwithstanding that it be afterwards discovered that there
was some defect in the election of the directors or such person acting as
aforesaid or that they or any of them were disqualified, be as valid as if the
directors or such other person, as the case may be, had been duly elected and
were or was qualified to be directors or a director of the corporation.
Section 3.04. POWER TO DECLARE DIVIDENDS.
(a) The Board of Directors, from time to time as they may deem advisable,
may declare and pay dividends in cash or other property of the corporation, out
of any source available for dividends, to the shareholders of each series (or
class thereof) of stock of the corporation according to their respective rights
and interests in the investment portfolio of the corporation issuing such series
(or class thereof) of stock.
(b) The Board of Directors shall cause to be accompanied by a written
statement any dividend payment wholly or partly from any source other than
(i) each investment portfolio's accumulated and accrued undistributed net
income (determined in accordance with generally accepted accounting practice and
the rules and regulations of the Securities and Exchange Commission then in
effect) and not including profits or losses realized upon the sale of securities
or other properties; or
(ii) each investment portfolio's net income so determined for the current
or preceding fiscal year.
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Such statement shall adequately disclose the source or sources of such
payment and the basis of calculation, and shall be in such form as the
Commission may prescribe.
(c) Notwithstanding the above provisions of this Section 3.04, the Board of
Directors may at any time declare and distribute pro rata among the shareholders
of each series (or class thereof) of stock a "stock dividend" out of each
portfolio's authorized but unissued shares of stock, including any shares
previously purchased by a portfolio of the corporation.
Section 3.05. ANNUAL MEETING. The Board of Directors shall meet annually at
the registered office of the corporation, or at such other place within or
without the State of Minnesota as may be designated by the Board of Directors,
for the purpose of electing the officers of the corporation and for the
transaction of such other business as shall come before the meeting.
Section 3.06. BOARD MEETINGS. Meetings of the Board of Directors shall be
held from time to time at such time and place within or without the State of
Minnesota as may be fixed by resolution adopted by a majority of the whole Board
of Directors.
Section 3.07. MEETING; NOTICE. A director may call a meeting by giving five
(5) days' notice to all directors of the date, time, and place of the meeting;
provided that if the date, time and place of a board meeting have been announced
at a previous meeting of the board, no notice is required.
Section 3.08. WAIVER OF NOTICE. Notice of any meeting of the Board of
Directors may be waived either before, at, or after such meeting orally or in
writing signed by such director. A director, by his attendance and participation
in the action taken at any meeting of the Board of Directors, shall be deemed to
have waived notice of such meeting.
Section 3.09. QUORUM. A majority of the directors then holding office shall
constitute a quorum for the transaction of business at such meeting; provided,
however, notwithstanding the above, if the Board of Directors is taking action
pursuant to the Investment Company Act of 1940, as now enacted or hereafter
amended, a majority of the directors who are not "interested persons" (as
defined by the Investment Company Act of 1940, as now enacted or hereafter
amended) of the corporation shall constitute a quorum for taking such action.
Section 3.10. ADVANCE CONSENT OR OPPOSITION. A director may give advance
written consent or opposition to a proposal to be acted on at a meeting of the
Board of Directors. If such director is not present at the meeting, consent or
opposition to a proposal does not constitute presence for purposes of
determining the existence of a quorum, but consent or opposition shall be
counted as a vote in favor of or against the proposal and shall be entered in
the minutes or other record of action at the meeting, if the proposal acted on
at the meeting is substantially the same or has substantially the same effect as
the proposal to which the director has consented or objected.
Section 3.11. CONFERENCE COMMUNICATIONS. Directors may participate in any
meeting of the Board of Directors, or of any duly constituted committee thereof,
by means of a conference telephone conversation or other comparable
communication technique whereby all persons participating in the meeting can
hear and communicate to each other. For the purposes of establishing a quorum
and taking any action at the meeting, such directors participating pursuant to
this Section 3.11 shall be deemed present in person at the meeting, and the
place of the meeting shall be the place or origination of the conference
telephone conversation or other comparable communication technique.
Section 3.12. VACANCIES; NEWLY CREATED DIRECTORSHIPS. Vacancies in the
Board of Directors of the corporation occurring by reason of death, resignation,
removal or disqualification shall be filled for the unexpired term by a majority
of the remaining directors of the Board although less than a quorum; newly
created directorships resulting from an increase in the authorized number of
directors by action of the Board of Directors as permitted by Section 3.01 may
be filled by a two-thirds (2/3) vote of the directors serving at the time of
such increase; and each person so elected shall be a director until his
successor is elected by the shareholders, who may make such election at their
next regular meeting or at any meeting duly called for that purpose; provided,
however, that no vacancy can be filled as provided above if prohibited by the
provisions of the Investment Company Act of 1940.
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Section 3.13. REMOVAL. The entire Board of Directors or any individual
director may be removed from office, with or without cause, by a vote of the
shareholders holding a majority of the shares entitled to vote at an election of
directors. In the event that the entire Board or any one or more directors be so
removed, new directors shall be elected at the same meeting, or the remaining
directors may, to the extent vacancies are not filled at such meeting, fill any
vacancy or vacancies created by such removal. A director named by the Board of
Directors to fill a vacancy may be removed from office at any time, with or
without cause, by the affirmative vote of the remaining directors if the
shareholders have not elected directors in the interim between the time of the
appointment to fill such vacancy and the time of removal.
Section 3.14. COMMITTEES. A resolution approved by the affirmative vote of
a majority of the Board of Directors may establish committees having the
authority of the board in the management of the business of the corporation to
the extent provided in the resolution. A committee shall consist of one or more
persons, who need not be directors, appointed by affirmative vote of a majority
of the directors present. Committees are subject to the direction and control
of, and vacancies in the membership thereof shall be filled by, the Board of
Directors, except as provided by Minnesota Statutes Section 302A.243.
A majority of the members of the committee present at a meeting is a quorum
for the transaction of business, unless a larger or smaller proportion or number
is provided in a resolution approved by the affirmative vote of a majority of
the directors present.
Section 3.15. WRITTEN ACTION. Any action which might be taken at a meeting
of the Board of Directors, or any duly constituted committee thereof, may be
taken without a meeting if done in writing and signed by a majority of the
directors or committee members.
Section 3.16. COMPENSATION. Directors who are not salaried officers of this
corporation or affiliated with its investment adviser shall receive such fixed
sum per meeting attended or such fixed annual sum as shall be determined, from
time to time, by resolution of the Board of Directors. All directors may receive
their expenses, if any, of attendance at meetings of the Board of Directors or
any committee thereof. Nothing herein contained shall be construed to preclude
any director from serving this corporation in any other capacity and receiving
proper compensation therefor.
Section 3.17. RESIGNATION. A director may resign by giving written notice
to the corporation, and the resignation is effective without acceptance when
given, unless a later effective time is specified in the notice.
ARTICLE IV
OFFICERS
Section 4.01. NUMBER. The officers of the corporation shall consist of a
Chairman of the Board (if one is elected by the Board), the President, a
Treasurer and a Secretary, and, if desired by the Board, one or more Vice
Presidents, Assistant Secretaries, and Assistant Treasurers, and such other
officers and agents as may, from time to time, be elected by the Board of
Directors. Any number of offices may be held by the same person.
Section 4.02. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The Board of
Directors shall elect, from within or without their number, the President, the
Secretary, the Treasurer and such other officers as may be deemed advisable. The
President and all other officers who may be directors shall continue to hold
office until the election and qualification of their successors, notwithstanding
an earlier termination of their directorship.
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Section 4.03. RESIGNATION. Any officer may resign his office at any time by
delivering a written resignation to the Board of Directors, the President, the
Secretary, or any Assistant Secretary. Unless otherwise specified therein, such
resignation shall take effect upon delivery.
Section 4.04. REMOVAL AND VACANCIES. Any officer may be removed from his
office by a majority of the whole Board of Directors, with or without cause.
Such removal, however, shall be without prejudice to the contract rights of the
person so removed. If there be a vacancy among the officers of the corporation
by reason of death, resignation or otherwise, such vacancy shall be filled for
the unexpired term by the Board of Directors.
Section 4.05. CHAIRMAN OF THE BOARD. The Chairman of the Board, if one is
elected, shall preside at all meetings of the shareholders and directors and
shall have such other duties as may be prescribed, from time to time, by the
Board of Directors.
Section 4.06. PRESIDENT. The President shall have general active management
of the business of the corporation. In the absence of the Chairman of the Board,
he shall preside at all meetings of the shareholders and directors. He shall be
the chief executive officer of the corporation and shall see that all orders and
resolutions of the Board of Directors are carried into effect. He shall be ex
officio a member of all standing committees. He may execute and deliver, in the
name of the corporation, any deeds, mortgages, bonds, contracts or other
instruments pertaining to the business of the corporation and, in general, shall
perform all duties usually incident to the office of President. He shall have
such other duties as may, from time to time, be prescribed by the Board of
Directors.
Section 4.07. VICE PRESIDENT. Each Vice President shall have such powers
and shall perform such duties as may be specified in the Bylaws or prescribed by
the Board of Directors or by the President. In the event of absence or
disability of the President, Vice Presidents shall succeed to his power and
duties in the order designated by the Board of Directors.
Section 4.08. SECRETARY. The Secretary shall be secretary of, and shall
attend all, meetings of the shareholders and Board of Directors and shall record
all proceedings of such meetings in the minute book of the corporation. He shall
give proper notice of meetings of shareholders and directors. He shall keep the
seal of the corporation and shall affix the same to any instrument requiring it
and may, when necessary, attest the seal by his signature. He shall perform such
other duties as may, from time to time, be prescribed by the Board of Directors
or by the President.
Section 4.09. TREASURER. The Treasurer shall keep accurate accounts of all
moneys of the corporation received or disbursed. He shall deposit all moneys,
drafts and checks in the name of, and to the credit of, the corporation in such
banks and depositories as a majority of the whole Board of Directors shall, from
time to time, designate. He shall have power to endorse, for deposit, all notes,
checks and drafts received by the corporation. He shall disburse the funds of
the corporation, as ordered by the Board of Directors, making proper vouchers
therefor. He shall render to the President and the directors, whenever required,
an account of all his transactions as Treasurer and of the financial condition
of the corporation, and shall perform such other duties as may, from time to
time, be prescribed by the Board of Directors or by the President.
Section 4.10. ASSISTANT SECRETARIES. At the request of the Secretary, or in
his absence or disability, any Assistant Secretary shall have power to perform
all the duties of the Secretary and, when so acting, shall have all the powers
of, and be subject to all restrictions upon, the Secretary. The Assistant
Secretaries shall perform such other duties as from time to time may be assigned
to them by the Board of Directors or the President.
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Section 4.11. ASSISTANT TREASURER. At the request of the Treasurer, or in
his absence or disability, any Assistant Treasurer shall have power to perform
all the duties of the Treasurer, and when so acting, shall have all the powers
of, and be subject to all the restrictions upon, the Treasurer. The Assistant
Treasurers shall perform such other duties as from time to time may be assigned
to them by the Board of Directors or the President.
Section 4.12. COMPENSATION. The officers of this corporation shall receive
such compensation for their services as may be determined, from time to time, by
resolution of the Board of Directors.
Section 4.13. SURETY BONDS. The Board of Directors may require any officer
or agent of the corporation to execute a bond (including, without limitation,
any bond required by the Investment Company Act of 1940 and the rules and
regulations of the Securities and Exchange Commission) to the corporation in
such sum and with such surety or sureties as the Board of Directors may
determine, conditioned upon the faithful performance of his duties to the
corporation, including responsibility for negligence and for the accounting of
any of the corporation's property, funds or securities that may come into his
hands. In any such case, a new bond of like character shall be given at least
every six years, so that the date of the new bond shall not be more than six
years subsequent to the date of the bond immediately preceding.
ARTICLE V
SHARES AND THEIR TRANSFER AND REDEMPTION
Section 5.01. CERTIFICATES FOR SHARES.
(a) The corporation may have certificated or uncertificated shares, or
both, as designated by resolution of the Board of Directors. Every owner of
certificated shares of the corporation shall be entitled to a certificate, to be
in such form as shall be prescribed by the Board of Directors, certifying the
number of shares of the corporation owned by him. Within a reasonable time after
the issuance or transfer of uncertificated shares, the corporation shall send to
the new shareholder the information required to be stated on certificates.
Certificated shares shall be numbered in the order in which they shall be issued
and shall be signed, in the name of the corporation, by the President or a Vice
President and by the Treasurer, or by such officers as the Board of Directors
may designate. Such signatures may be facsimile if authorized by the Board of
Directors. Every certificate surrendered to the corporation for exchange or
transfer shall be canceled, and no new certificate or certificates shall be
issued in exchange for any existing certificate until such existing certificate
shall have been so canceled, except in cases provided for in Section 5.08
(b) In case any officer, transfer agent or registrar who shall have signed
any such certificate, or whose facsimile signature has been placed thereon,
shall cease to be such an officer (because of death, resignation or otherwise)
before such certificate is issued, such certificate may be issued and delivered
by the corporation with the same effect as if he were such officer, transfer
agent or registrar at the date of issue.
Section 5.02. ISSUANCE OF SHARES. The Board of Directors is authorized to
cause to be issued shares of the corporation up to the full amount authorized by
the Articles of Incorporation in such series and classes thereof and in such
amounts as may be determined by the Board of Directors and as may be permitted
by law. No shares shall be allotted except in consideration of cash or of an
amount transferred from surplus to stated capital upon a share dividend. At the
time of such allotment of shares, the Board of Directors making such allotments
shall state, by resolution, their determination of the fair value to the
corporation in monetary terms of any consideration other than cash for which
shares are adopted. The amount of consideration to be received in cash, or
otherwise, shall not be less than the par value of the shares so allotted. No
shares of stock issued by the corporation shall be issued, sold, or exchanged by
or on behalf of the corporation for any amount less than the net asset value per
share of the shares outstanding as determined pursuant to Article XI hereunder.
Section 5.03. REDEMPTION OF SHARES. Upon the demand of any shareholder this
corporation shall redeem any share of stock issued by it held and owned by such
shareholder at the net asset value thereof as determined pursuant to Article XI
hereunder. The Board of Directors may suspend the right of redemption or
postpone the date of payment during any period when: (a) trading on the New York
Stock Exchange is restricted or such Exchange is closed for other than weekends
or holidays; (b) the Securities and Exchange Commission has by order permitted
such suspension; or (c) an emergency as defined by rules of the Securities and
Exchange Commission exists, making disposal of portfolio securities or valuation
of net assets of the corporation not reasonably practicable.
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If the value of a shareholder's investments in the corporation becomes less
than $500 (or such other amount as may be determined from time to time by the
Board of Directors) as a result of a redemption or transfer of shares, the
corporation's officers are authorized, in their discretion, on behalf of the
corporation, to redeem such shareholder's entire interest and remit such amount,
provided that such a redemption will only be effected by the corporation
following (a) the mailing by the corporation to such shareholder of a "notice of
intention to redeem," and (b) the passage of such time period as may be
determined by the Board of Directors, during which time the shareholder will
have the opportunity to make an additional investment in the corporation to
increase the value of such shareholder's account to at least such minimum
amount.
Section 5.04. TRANSFER OF SHARES. Transfer of shares on the books of the
corporation may be authorized only by the shareholder named in the certificate,
or the shareholder's legal representative, or the shareholder's duly authorized
attorney-in-fact, and upon surrender of the certificate or the certificates for
such shares or a duly executed assignment covering shares held in unissued form.
The corporation may treat, as the absolute owner of shares of the corporation,
the person or persons in whose name shares are registered on the books of the
corporation.
Section 5.05. REGISTERED SHAREHOLDERS. The corporation shall be entitled to
treat the holder of record of any share or shares of stock as the holder in fact
thereof and accordingly shall not be bound to recognize any equitable or other
claim to or interest in such share on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise expressly
provided by the laws of Minnesota.
Section 5.06 TRANSFER AGENTS AND REGISTRARS. The Board of Directors may
from time to time appoint or remove transfer agents and/or registrars of
transfers of shares of stock of the corporation, and it may appoint the same
person as both transfer agent and registrar. Upon any such appointment being
made all certificates representing shares of capital stock thereafter issued
shall be countersigned by one of such transfer agents or by one of such
registrars of transfers or by both and shall not be valid unless so
countersigned. If the same person shall be both transfer agent and registrar,
only one countersignature by such person shall be required.
Section 5.07. TRANSFER REGULATIONS. The shares of stock of the corporation
may be freely transferred, and the Board of Directors may from time to time
adopt rules and regulations with reference to the method of transfer of the
shares of stock of the corporation.
Section 5.08. LOST, STOLEN, DESTROYED, AND MUTILATED CERTIFICATES. The
holder of any stock of the corporation shall immediately notify the corporation
of any loss, theft destruction or mutilation of any certificate therefor, and
the Board of Directors may, in its discretion, cause to be issued to him a new
certificate or certificate of stock upon the surrender of the mutilated
certificate or in case of loss, theft or destruction of the certificate, upon
satisfactory proof of such loss, theft or destruction, after the owner of the
lost, stolen or destroyed certificate, or his legal representatives, gives to
the corporation and to such registrar or transfer agent as may be authorized or
required to countersign such new certificate or certificates a bond, in such sum
as they may direct, and with such surety or sureties, as they may direct, as
indemnity against any claim that may be made against them or any of them on
account of or in connection with the alleged loss, theft, or destruction of any
such certificate.
ARTICLE VI
DIVIDENDS, SURPLUS, ETC.
Section 6.01. The corporation's net investment income will be determined,
and its dividends shall be declared and made payable at such time(s) as the
Board of Directors shall determine; dividends shall be payable to shareholders
of record as of the date of declaration.
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It shall be the policy of the corporation to qualify for and elect the tax
treatment applicable to regulated investment companies under the Internal
Revenue Code, so that the corporation will not be subjected to Federal income
tax on such part of its income or capital gains as it distributes to
shareholders.
ARTICLE VII
BOOKS AND RECORDS, AUDIT, FISCAL YEAR
Section 7.01. BOOKS AND RECORDS. The Board of Directors of the corporation
shall cause to be kept such books and records, at such places, as may be
required by law.
Section 7.02. AUDIT, ACCOUNTANT.
(a) The Board of Directors shall cause the records and books of account of
the corporation to be audited at least once in each fiscal year and at such
other times as it may deem necessary or appropriate.
(b) The corporation shall employ an independent certified public accountant
or firm of independent certified public accountants as its Accountant to examine
the accounts of the corporation and to sign and certify financial statements
filed by the corporation. The Accountant's certificates and reports shall be
addressed both to the Board of Directors and to the shareholders.
(c) A majority of the members of the Board of Directors shall select the
Accountant at any meeting held before the first regular meeting of shareholders,
and thereafter shall select the Accountant annually at a meeting held within
thirty (30) days before or after the beginning of the fiscal year of the
corporation. Such selection shall be submitted for ratification or rejection at
the next succeeding regular shareholders' meeting. If such meeting shall reject
such selection, the Accountant shall be selected by majority vote, either at the
meeting at which the rejection occurred or at a subsequent meeting of
shareholders called for such purpose.
(d) Any vacancy occurring between regular meetings, due to the death,
resignation or otherwise of the Accountant, may be filled by the Board of
Directors.
Section 7.03. FISCAL YEAR. The fiscal year of the corporation shall be
determined by the Board of Directors.
ARTICLE VIII
INSPECTION OF BOOKS
Section 8.01. Every shareholder of the corporation and every holder of a
voting trust certificate shall have a right to examine, in person or by agent or
attorney, at any reasonable time or times, for any proper purpose, and at the
place or places where usually kept, the share register, books of account and
records of the proceedings of the shareholders and directors and to make
extracts therefrom.
ARTICLE IX
LOANS TO OFFICERS, DIRECTORS, SHAREHOLDERS
Section 9.01. The corporation shall not lend any of its assets to any
officer or director of the corporation, nor shall it lend any of its assets to
shareholders upon the security of its shares. If any such loan be made, the
officers and directors who make such loan, or assent thereto, shall be jointly
and severally liable for repayment or return thereof.
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ARTICLE X
VOTING OF STOCK HELD
Section 10.01. Unless otherwise provided by resolution of the Board of
Directors, the President, any Vice President, the Secretary or the Treasurer,
may from time to time appoint an attorney or attorneys or agent or agents of the
corporation, in the name and on behalf of the corporation, to cast the votes
which the corporation may be entitled to cast as a stockholder or otherwise in
any other corporation or association, any of whose stock or securities may be
held by the corporation, at meetings of the holders of the stock or other
securities of any such other corporation or association, or to consent in
writing to any action by any such other corporation or association, and may
instruct the person or persons so appointed as to the manner of casting such
votes or giving such consent, and may execute or cause to be executed on behalf
of the corporation and under its corporate seal, or otherwise, such written
proxies, consents, waivers, or other instruments as it may deem necessary or
proper in the circumstances; or any of such officers may themselves attend any
meeting of the holders of stock or other securities of any such corporation or
association and thereat vote or exercise any or all other powers of the
corporation as the holder of such stock or other securities of such other
corporation or association, or consent in writing to any action by any such
other corporation or association.
ARTICLE XI
VALUATION OF NET ASSET VALUE
Section 11.01. The net asset value per share of each series of stock issued
by the portfolios of the corporation shall be determined in good faith by or
under supervision of the officers of the corporation as authorized by the Board
of Directors as often and on such days and at such time(s) as the Board of
Directors shall determine.
ARTICLE XII
CUSTODY OF ASSETS
Section 12.01. All securities and cash owned by this corporation shall, as
hereinafter provided, be held by or deposited with a bank or trust company
having (according to its last published report) not less than two million
dollars ($2,000,000) aggregate capital, surplus and undivided profits (the
"Custodian").
This corporation shall enter into a written contract with the Custodian
regarding the powers, duties and compensation of the Custodian with respect to
the cash and securities of this corporation held by the Custodian. Said contract
and all amendments thereto shall be approved by the Board of Directors of this
corporation. In the event of the Custodian's resignation or termination, the
corporation shall use its best efforts promptly to obtain a successor Custodian
and shall require that the cash and securities owned by this corporation held by
the Custodian be delivered directly to such successor Custodian.
ARTICLE XIII
AMENDMENTS
Section 13.01. These Bylaws may be amended or altered by a vote of the
majority of the whole Board of Directors at any meeting provided that notice of
such proposed amendment shall have been given in the notice given the directors
of such meeting. Such authority in the Board of Directors is subject to the
power of the shareholders to change or repeal such Bylaws by a majority vote of
the shareholders present or represented at any regular or special meeting of
shareholders called for such purpose. The Board of Directors shall not make or
alter any Bylaws fixing their qualifications, classifications, term of office,
or number, except that the Board of Directors may make or alter any Bylaws to
increase their number.
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ARTICLE XIV
MISCELLANEOUS
Section 14.01. Interpretation. When the context in which words are used in
these Bylaws indicates that such is the intent, singular words will include the
plural and vice verse, and masculine words will include the feminine and neuter
genders and vice versa.
Section 14.02. Article and Section Titles. The titles of Sections and
Articles in these Bylaws are for descriptive purpose only and will not control
or alter the meaning of any of these Bylaws as set forth in the text.
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MANAGEMENT AGREEMENT
--------------------
This Agreement is made and entered into as of October 1, 1997 by and
between Investment Advisers, Inc., a Delaware corporation ("IAI"), and IAI
Investment Funds III, Inc., a Minnesota corporation (the "Company"), on behalf
of IAI Pacific Basin Fund, the portfolio represented by the Company's Series D
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;
<PAGE>
(4) The provision of transfer agency services as described below:
(i) IAI shall make original issues of shares of the Fund in accordance with
the Fund's current Prospectus and Statement of Additional Information and with
instructions from the Company;
(ii) Prior to the daily determination of net asset value of the Fund, IAI
shall process all purchase orders received since the last determination of the
Fund's net asset value;
(iii) Transfers of shares shall be registered;
(iv) IAI will maintain stock registry records in the usual form in which it
will note the issuance, transfer and redemption of Fund shares, and is also
authorized to maintain an account in which it will record the Fund shares and
fractions issued and outstanding from time to time for which issuance of Fund
share certificates is deferred; and
(v) IAI will, in addition to the aforementioned duties and functions,
perform the usual duties and functions of a stock transfer agent for a
registered investment company;
(5) The creation and maintenance of such records relating to the business
of the Fund as the Company may from time to time reasonably request;
(6) The preparation of tax forms, reports, notices, proxy statements,
proxies and other Fund shareholder communications, and the mailing thereof to
Fund shareholders; and
(7) The provision of such other dividend disbursing, accounting,
administrative, accounting and transfer agency services upon which the parties
hereto may from time to time agree.
(8) The Fund hereby authorizes IAI to contract with qualified entities for
the provision of any of the services to be performed pursuant to this Section
1(b).
(c) Shareholder Services. The Company on behalf of the Fund hereby engages,
and IAI hereby agrees, to provide the Fund with all services to shareholders not
otherwise the subject 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.
2
<PAGE>
(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.
3
<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.
4
<PAGE>
(e) Wherever referred to in this Agreement, the vote or approval of the
holders of a majority of the outstanding voting securities or shares of the Fund
shall mean the lesser of (i) the vote of 67% or more of the voting securities of
the Fund present at a regular or special meeting of shareholders duly called, if
more than 50% of the Fund's outstanding voting securities are present or
represented by proxy, or (ii) the vote of more than 50% of the outstanding
voting securities of the Fund.
(f) To the extent the provisions of this Section 4 are based on legislative
or regulatory requirements in effect at the time of this Agreement's initial
approval by the Fund's Board of Directors and/or shareholders and any such
legislative or regulatory requirements change, the relevant provision of this
Section 4 will be deemed to have been so amended without further action by the
Fund's Board of Directors or its shareholders.
5. NOTICES.
Any notice under this Agreement shall be in writing, addressed, delivered
or mailed, postage prepaid, to the other party at such address as such other
party may designate in writing for receipt of such notice.
6. REPRESENTATION.
IAI hereby represents that it will maintain registrations with and/or
approvals by all relevant governmental authorities necessary for the provision
of services pursuant to this Agreement.
7. INTERPRETATION; GOVERNING LAW.
This Agreement shall be subject to and interpreted in accordance with all
applicable provisions of law including, but not limited to, the 1940 Act. To the
extent that the provisions herein contained conflict with any such applicable
provisions of law, the latter shall control. The 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 III, INC.
By /s/Noel P. Rahn
Noel P. Rahn, President
INVESTMENT ADVISERS, INC.
By /s/Christopher J. Smith
Christopher J. Smith, Secretary
5
<PAGE>
EXHIBIT A
IAI PACIFIC BASIN FUND
FEE AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS
-----------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Daily Net Assets Fee IAI Receives Annually
---------------- -------------------------
For the first $100 million 2.50%
For the next $100 - $250 million 2.45%
For the next $250 - $500 million 2.30%
Above $500 million 2.00%
</TABLE>
SUBADVISORY AGREEMENT
---------------------
This Subadvisory Agreement made this 1st day of October 1997, by and
between Investment Advisers, Inc., a Delaware corporation ("Advisers"), and IAI
International Limited, a United Kingdom corporation (the "Subadviser").
WITNESSETH THAT:
WHEREAS, IAI Investment Funds III, Inc., a corporation operating as an
open-end investment company duly organized under the laws of the State of
Minnesota, has appointed Advisers its investment adviser with respect to the
assets of its separate portfolio represented by its Series D shares of common
stock, which portfolio is commonly referred to as IAI Pacific Basin Fund (the
"Fund") pursuant to the terms of an Investment Advisory Agreement dated as of
the date hereof (the "Agreement"); and
WHEREAS, Advisers desires to appoint the Subadviser as its subadviser, and
the Subadviser is willing to act in such capacity upon the terms herein set
forth.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto, intending to be legally bound,
hereby agree as follows:
SECTION 1. The Subadviser agrees to act as investment adviser for the Fund,
and to manage the investment of the assets of the Fund, and assume the
responsibilities and obligations Advisers assumed pursuant to the Agreement, a
copy of which is attached hereto; provided, however, that all investment
decisions made by the Subadviser will be subject to approval or ratification by
Advisers.
SECTION 2. In payment for the services to be rendered by the Subadviser
hereunder, Advisers shall pay the Subadviser an annual fee based on the average
daily net assets of the Fund, which fee shall be paid to the Subadviser within
ten (10) business days after the last day of the month in which said services
were rendered, in the amount set forth below.
<TABLE>
<CAPTION>
<S> <C>
Daily Net Assets Fee IAI International Receives Annually
---------------- ---------------------------------------
For the first $100 million .8125
For the next $100 - $250 million .7500
For the next $250 - $500 million .6250
Above $500 million .4375
</TABLE>
<PAGE>
SECTION 3. The Subadviser shall be free to render services to others
similar to those rendered under this Subadvisory 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.
SECTION 4. The effective date of this Subadvisory Agreement shall be the
date upon which this Subadvisory Agreement is approved by a vote of the holders
of at least a majority of the outstanding shares of the Fund. Wherever referred
to in this Subadvisory Agreement, the vote or approval of the holders of a
majority of the outstanding voting shares of the Fund shall mean the vote of (a)
67% of the shares of the Fund at a meeting where more than 50% of the
outstanding shares are present in person or by proxy or (b) more than 50% of the
outstanding shares of the Fund, whichever is the lesser.
Unless sooner terminated as hereinafter provided, this Subadvisory
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 the Board of Directors of the Fund, including the
specific approval of a majority of the directors who are not interested persons
of the Subadviser, Advisers, or of the Fund cast in person at a meeting called
for the purpose of voting on such approval, or by the vote of the holders of the
outstanding voting securities of the Fund.
This Subadvisory Agreement may be terminated at any time without the
payment of any penalty by the vote of the Board of Directors of the Fund or by
the vote of the holders of a majority of the outstanding voting securities of
the Fund, or by Advisers or the Subadviser upon 60 days' written notice to the
other party.
This Subadvisory Agreement shall automatically terminate in the event of
its assignment as such term is defined by the Investment Company Act of 1940.
SECTION 5. Any notice under this Subadvisory 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.
2
<PAGE>
IN WITNESS WHEREOF, Advisers and the Subadviser have caused this
Subadvisory Agreement to be executed by their duly authorized officers as of the
day and year first above written.
INVESTMENT ADVISERS, INC.
ATTEST:
/s/Kristen C. Ballum By /s/Noel P. Rahn
Its Chief Executive Officer
IAI INTERNATIONAL LIMITED
ATTEST:
/s/Kristen C. Ballum By /s/Irving P. Knelman
Its Director
IAI INVESTMENT FUNDS III, Inc.
with respect to IAI Pacific Basin Fund
ATTEST:
/s/Kristen C. Ballum By /s/Noel P. Rahn
Its President
CUSTODIAN CONTRACT
between
IAI Pacific Basin Series of
IAI INVESTMENT FUNDS III, INC.
and
NORWEST BANK MINNESOTA, N.A.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
<S> <C> <C>
Page
----
1. Employment of Custodian and Property to be Held by It..................................................1
2. Duties of the Custodian with Respect to Property of the Fund Held by
the Custodian in the United States.....................................................................1
2.1 Holding Securities.............................................................................1
2.2 Delivery of Securities.........................................................................1
2.3 Registration of Securities.....................................................................3
2.4 Bank Accounts..................................................................................3
2.5 Payments for Shares............................................................................3
2.6 Availability of Federal Funds..................................................................3
2.7 Collection of Income...........................................................................3
2.8 Payment of Company Monies......................................................................3
2.9 Liability for Payment in Advance of Receipt of Securities Purchased............................4
2.10 Payments for Repurchases or Redemptions of Shares of a Fund....................................4
2.11 Appointment of Agents..........................................................................4
2.12 Deposit of Fund Assets in Securities System....................................................4
2.13 Segregated Account.............................................................................5
2.14 Ownership Certificates for Tax Purposes........................................................6
3. Duties of Custodian with Respect to Fund Property Held Outside of the United States....................6
3.1 Appointment of Foreign Sub-Custodians..........................................................6
3.2 Assets to be Held..............................................................................6
3.3 Segregation of Securities......................................................................6
3.4 Agreement with Foreign Banking Institution.....................................................6
3.5 Access of Independent Accountants of the Company...............................................7
3.6 Reports by Custodian...........................................................................7
3.7 Foreign Securities Transactions................................................................7
3.8 Foreign Securities Lending.....................................................................8
3.9 Liability of Foreign Sub-Custodians............................................................8
3.10 Monitoring Responsibilities....................................................................8
3.11 Branches of United States Banks................................................................8
3.12 Expropriation Insurance........................................................................8
4. Proxies ...............................................................................................9
5. Communications Relating to Fund Portfolio Securities...................................................9
6. Proper Instructions....................................................................................9
7. Actions Permitted Without Express Authority............................................................9
8. Evidence of Authority..................................................................................9
9. Class Actions..........................................................................................10
10. Duties of Custodian With Respect to the Books of Account and Calculation of Net
Asset Value and Net Income.............................................................................10
11. Records................................................................................................10
12. Opinion of Company's Independent Accountant............................................................10
<PAGE>
13. Reports to Company by Independent Public Accountant....................................................10
14. Compensation of Custodian..............................................................................11
15. Responsibility of Custodian............................................................................11
16. Effective Period, Termination and Amendment............................................................11
17. Successor Custodian....................................................................................12
18. Interpretive and Additional Provisions.................................................................12
19. Minnesota Law to Apply.................................................................................12
20. Prior Contracts........................................................................................12
21. General................................................................................................13
</TABLE>
<PAGE>
CUSTODIAN CONTRACT
------------------
This AGREEMENT made as of October 15, 1997, by and between IAI Investment
Funds III, Inc., a Minnesota corporation having its principal office and place
of business at 3700 First Bank Place, Minneapolis, Minnesota, (the "Company"),
and Norwest Bank Minnesota, N.A., a National Banking Association having its
principal office and place of business at Sixth and Marquette, Minnesota, MN
55479 (the "Custodian").
WHEREAS, the Company is a mutual fund whose shares are currently offered in
the following series (which, together with each future series of the Company
that adopts this contract are hereafter referred to individually as a "Fund" and
collectively as the "Funds") as set forth in Exhibit D.
WHEREAS, the Company desires to appoint the Bank as the custodian for each
Fund, and the Bank desires to accept such appointment;
WITNESSETH, that in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It.
------------------------------------------------------
The Company hereby employs the Custodian as the custodian of the assets of
each Fund, including securities the Company desires to be held in places within
the United States ("domestic securities") and securities the Company desires to
be held outside of the United States ("foreign securities"). The Company agrees
to deliver to the Custodian all securities and cash owned by each Fund, and all
payments of income, payments of principal or capital distributions received by
the Fund with respect to all securities owned by the Fund from time to time, and
the cash consideration received by the Fund for such new or treasury shares of
capital stock ("Shares") of the Fund as may be issued or sold from time to time.
The Custodian shall not be responsible for any property of a Fund held or
received by the Fund and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 6),
the Custodian shall from time to time employ one or more sub-custodians, but
only in accordance with any necessary approvals by the Board of Directors of the
Company, and provided that the appointment by the Custodian of any
sub-custodians shall not relieve the Custodian of any of its responsibilities or
liabilities hereunder.
2. Duties of the Custodian with Respect to Fund Property held by the
Custodian in the United States
-----------------------------------------------------------------------
2.1 Holding Securities.
-------------------
The Custodian shall hold and physically segregate for the account of each
of the Funds all non-cash property, including all securities owned by the Funds,
other than (a) securities which are maintained pursuant to Section 2.12 in a
clearing agency which acts as a securities depository or in a Federal Reserve
Bank, as Custodian may select, and to permit such deposited Assets to be
registered in the name of Custodian or Custodian's agent or nominee on the
records of such Federal reserve Bank or such registered clearing agency or the
nominee of either, and to employ and use securities depositories, clearing
agencies, clearance systems, sub-custodians or agents located outside the United
States in connection with transactions involving foreign securities,
collectively referred to herein as a "Securities System".
2.2 Delivery of Securities.
-----------------------
The Custodian shall release and deliver securities owned by the Company for
the account of a Fund held by the Custodian or in a Securities System account of
the Custodian only upon receipt of Proper Instructions, which may be continuing
instructions when deemed appropriate by the parties, and only in the following
cases:
1) Upon sale of such securities for the account of a Fund and receipt of
payment therefor;
2) Upon the receipt of payment in connection with any repurchase agreement
related to such securities entered into by the Company on behalf of a Fund;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.12 hereof;
4) To the depository agent in connection with tender or other similar
offers for portfolio securities of a Fund;
-1-
<PAGE>
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any such case,
the cash or other consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of the
Company for the account of a Fund or into the name of any nominee or nominees of
the Custodian or into the name or nominee name of any agent appointed pursuant
to Section 2.11 or into the name or nominee name of any sub-custodian appointed
pursuant to Article 1; or for exchange for a different number of bonds,
certificates or other evidence representing the same aggregate face amount or
number of units; provided that, in any such case, the new securities are to be
delivered to the Custodian;
7) Upon the sale of such securities for the account of a Fund, to the
broker or its clearing agent, against a receipt, for examination in accordance
with "street delivery" custom; provided that in any such case, the Custodian
shall have no responsibility or liability for any loss arising from the delivery
of such securities prior to receiving payment for such securities except as may
arise from the Custodian's own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan or merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions for
conversion contained in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar securities or the
surrender of interim receipts of temporary securities for definitive securities;
provided that, in any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
10) For delivery in connection with any loans of securities made by the
Company on behalf of a Fund, but only against receipt of adequate collateral as
agreed upon from time to time by the Custodian and the Company, which may be in
the form of cash or obligations issued by the United States government, its
agencies or instrumentalities, except that in connection with any loans for
which collateral is to be credited to the Custodian's account in the book-entry
system authorized by the U.S. Department of the Treasury, the Custodian will not
be held liable or responsible for the delivery of securities owned by a Fund
prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by the
Company on behalf of a Fund requiring a pledge of assets by the Company on
behalf of such Fund, but only against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any agreement among
the Company on behalf of a Fund, the Custodian and a broker-dealer registered
under the Securities Exchange Act of 1934 (the "Exchange Act") and a member of
the National Association of Securities Dealers, Inc. ("NASD"), relating to the
compliance with the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar organization or
organizations, regarding escrow or other arrangements in connection with
transactions by the Company;
13) For delivery in accordance with the provisions of any agreement among
the Company on behalf of a Fund, the Custodian, and a Futures Commission
Merchant registered under the Commodity Exchange Act, relating to compliance
with the rules of the Commodity Futures Trading Commission and/or any Contract
Market, or any similar organization or organizations, regarding account deposits
in connection with transactions by the Company on behalf of a Fund;
14) Upon receipt of instructions from the transfer agent ("Transfer Agent")
for the applicable Fund, for delivery to such Transfer Agent or to the holders
of shares in connection with distributions in kind, as may be described from
time to time in the Fund's currently effective prospectus and statement of
additional information ("prospectus"), in satisfaction of requests by holders of
Shares for repurchase or redemptions; and
15) For any other proper corporate purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution of the Board
of Directors of the Company signed by an officer of the Company and certified by
the Secretary or an Assistant Secretary, specifying the securities to be
delivered, setting forth the purpose for which such delivery is to be made,
declaring such purpose to be a proper corporate purpose, and naming the person
or persons to whom delivery of such securities shall be made.
-2-
<PAGE>
2.3 Registration of Securities.
---------------------------
Domestic securities held by the Custodian (other than bearer securities)
shall be registered in the name of the Company for the account of the applicable
Fund(s) or in the name of any nominee of the Company or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Company's, unless
the Company has authorized in writing the appointment of a nominee to be used in
common with other registered investment companies having the same investment
adviser as the applicable Fund(s), or in the name of nominee name of any agent
appointed pursuant to Section 2.11 or in the name or nominee name of any
sub-custodian appointed pursuant to Article 1. All securities accepted by the
Custodian on behalf of the Company under the terms of this Contract shall be in
"street name" or other good delivery form.
2.4 Bank Accounts.
--------------
The Custodian shall open and maintain a separate bank account or accounts
in the name of each Fund, subject only to draft or order by the Custodian acting
pursuant to the terms of this Contract, and shall hold in such account or
accounts, subject to the provisions hereof, all cash received by it from or for
the account of each applicable Fund, other than cash maintained by the
applicable Fund in a bank account established and used in accordance with Rule
17f-3 under the Investment Company Act of 1940. Cash held by the Custodian for
each Fund may be deposited by it to its credit as Custodian in the Banking
Department of the Custodian or in such other banks or trust companies as it may
in its discretion deem necessary or desirable; provided, however, that every
such bank or trust company shall be qualified to act as a custodian under the
Investment Company Act of 1940 and that each such bank or trust company and the
cash to be deposited with each such bank or trust company shall be approved by
vote of a majority of the Board of Directors of the Company. Such cash shall be
deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
2.5 Payments for Shares.
--------------------
The Custodian shall receive from the distributor for each Fund Shares or
from the Transfer Agent of each Fund and deposit into the Fund account such
payments as are received for Shares of the Fund issued or sold from time to time
by the Fund. The Custodian will provide timely notification to the Fund and the
Transfer Agent of any receipt by it of payments for Shares of the Funds.
2.6 Availability of Federal Funds.
------------------------------
Upon mutual agreement between the Company and the Custodian, the Custodian
shall, upon the receipt of Proper Instructions, make federal funds available to
the Funds as of specified times agreed upon from time to time by the Company and
the Custodian in the amount of checks received in payment for Shares of the
Funds which are deposited into the Funds' accounts.
2.7 Collection of Income.
---------------------
The Custodian shall, or shall cause its agent or sub-custodian to, collect
on a timely basis all income and other payments with respect to registered
securities held hereunder to which each Fund shall be entitled either by law or
pursuant to custom in the securities business, and shall collect on a timely
basis all income and other payments with respect to bearer securities if, on the
date of payment by the issuer, such securities are held by the Custodian or its
agent or sub-custodian and shall credit such income, as collected, to the
applicable Fund's custodian account. Without limiting the generality of the
foregoing, the Custodian shall detach and present for payment all coupons and
other income items requiring presentation as and when they become due and shall
collect interest when due on securities held hereunder. Unless the Custodian is
the lending agent in connection with securities loaned by the Fund, income due
each Fund on securities loaned pursuant to the provisions of Section 2.2 (10)
shall be the responsibility of the Company. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the Company with
such information or data as may be necessary to assist the Company in arranging
for the timely delivery to the Custodian of the income to which each Fund is
properly entitled.
-3-
<PAGE>
2.8 Payment of Company Monies.
--------------------------
Upon receipt of Proper Instructions, which may be continuing instructions
when deemed appropriate by the parties, the Custodian shall pay out monies of
each Fund in the following cases only:
1) Upon the purchase of domestic securities, options, futures contracts or
options on futures contracts for the account of each Fund but only (a) against
the delivery of such securities or evidence of title to such options, futures
contracts or options on futures contracts, to the Custodian (or any bank,
banking firm or trust company doing business in the United States or abroad
which is qualified under the Investment Company Act of 1940 to act as a
custodian and has been designated by the Custodian as its agent for this
purpose) registered in the name of the Company for the account of a Fund or in
the name of a nominee of the Custodian referred to in Section 2.3 hereof or in
proper form for transfer; (b) in the case of a purchase effected through a
Securities System, in accordance with the conditions set forth in Section 2.12
hereof or (c) in the case of the repurchase agreements entered into between the
Company and the Custodian, or another bank, or a broker-dealer which is a member
of NASD, (i) against delivery of the securities either in certificate form or
through an entry crediting the Custodian's account at the Federal Reserve Bank
with such securities or (ii) against delivery of the receipt evidencing purchase
by the Company for the account of a Fund of securities owned by the Custodian
along with written evidence of the agreement by the Custodian to repurchase such
securities from a Fund;
2) In connection with conversion, exchange or surrender of securities owned
by a Fund as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by a Fund as set forth
in Section 2.10 hereof;
4) For the payment of any expense or liability incurred by a Fund,
including but not limited to the following payments for the account of such
Fund: interest, taxes, management, accounting, transfer agent and legal fees,
and operating expenses of the Fund whether or not such expenses are to be in
whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends declared pursuant to the governing
documents of the Company and the applicable Fund;
6) For payment of the amount of dividends received in respect of securities
sold short; or
7) For any other proper purpose, but only upon receipt of, in addition to
Proper Instructions, a certified copy of a resolution of the Board of Directors
of the Company signed by an officer of the Company and certified by its
Secretary or an Assistant Secretary, specifying the amount of such payment,
setting forth the purpose for which such payment is to be made, declaring such
purpose to be a proper purpose, and naming the person or persons to whom such
payment is to be made.
2.9 Liability for Payment in Advance of Receipt of Securities Purchased.
--------------------------------------------------------------------
The Custodian shall not make payment for the purchase of domestic
securities for the account of a Fund in advance of receipt of the securities
purchased in the absence of specific written instructions from the Company to so
pay in advance. In any and every case where payment for purchase of domestic
securities for the account of a Fund is made by the Custodian in advance of
receipt of the securities purchased in the absence of specific written
instructions from the Company to so pay in advance, the Custodian shall be
absolutely liable to the Company (for the account of the Fund) for such
securities to the same extent as if the securities had been received by the
Custodian.
2.10 Payments for Repurchases or Redemptions of Shares of a Fund.
------------------------------------------------------------
From such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation or Bylaws and any applicable votes
of the Board of Directors of the Company, the Custodian shall, upon receipt of
instructions from the Transfer Agent, make funds available for payment to
holders of Shares who have delivered to the Transfer Agent a request for
redemption or repurchase of their Shares. In connection with the redemption or
repurchase of Shares of a Fund, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the redemption
or repurchase of Shares of a Fund, the Custodian shall honor checks drawn on the
Custodian by a holder of Shares, which checks have been furnished by the Company
to the holder of Shares, when presented to the Custodian in accordance with such
procedures and controls as are mutually agreed upon from time to time between
the Company and the Custodian.
-4-
<PAGE>
2.11 Appointment of Agents.
----------------------
The Custodian may at any time or times in its discretion appoint (and may
at any time remove) any other bank or trust company which is itself qualified
under the Investment Company Act of 1940 to act as a custodian, as its agent to
carry out such of the provisions of this Article 2 as the Custodian may from
time to time direct; provided, however, that the appointment of any agent shall
not relieve the Custodian of any of its responsibilities or liabilities
hereunder.
2.12 Deposit of Fund Assets in Securities Systems.
----------------------------------------------
The Custodian may deposit and/or maintain domestic securities owned by any
Fund in a clearing agency registered with the Securities and Exchange commission
under Section 17A of the Exchange Act, which acts as a securities depository, or
in a Federal Reserve Bank, as Custodian may select, and to permit such deposited
Assets to be registered in the name of Custodian or Custodian's agent or nominee
on the records of such Federal reserve Bank or such registered clearing agency
or the nominee of either (collectively referred to herein as "Securities
System") in accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the following
provisions:
1) The Custodian may keep domestic securities of a Fund in a Securities
System provided that such securities are represented in an account ("Account")
of the Custodian in the Securities System which shall not include any assets of
the Custodian other than assets held as a fiduciary, custodian or otherwise for
customers;
2) The records of the Custodian with respect to domestic securities of a
Fund which are maintained in a Securities System shall identify by book-entry
those securities belonging to such Fund;
3) The Custodian shall pay for domestic securities purchased for the
account of a Fund upon (i) the simultaneous receipt of advice from the
Securities System that such securities have been transferred to the Account, and
(ii) the making of an entry on the records of the Custodian to reflect such
payment and transfer for the account of the Fund. The Custodian shall transfer
domestic securities sold for the account of a Fund upon (i) the simultaneous
receipt of advice from the Securities System that payment for such securities
has been transferred to the Account, and (ii) the making of an entry on the
records of the Custodian to reflect such transfer and payment for the account of
the Fund. Copies of all advises from the Securities System of transfers of
securities for the account of a Fund shall identify the Fund, be maintained for
the Fund by the Custodian and be provided to the Company at its request. Upon
request, the Custodian shall furnish the Company confirmation of each transfer
to or from the account of a Fund in the form of a written advice or notice and
shall furnish to the Company copies of daily transaction sheets reflecting each
day's transactions in the Securities System for the account of each Fund.
4) The Custodian shall provide the Company with any report obtained by the
Custodian on the Securities System's accounting system, internal accounting
control and procedures for safeguarding securities deposited in the Securities
System;
5) The Custodian shall have received the initial or annual certificate, as
the case may be, required by Article 16 hereof;
6) Anything to the contrary in this Contract notwithstanding, the Custodian
shall be liable to the Company (for the account of each Fund) for any loss or
damage to the applicable Fund(s) resulting from use of the Securities System by
reason of any negligence, misfeasance or misconduct of the Custodian or any of
its agents or of any of its or their employees or from failure of the Custodian
or any such agent or employee to enforce effectively such rights as it may have
against the Securities System; at the election of the Company, it shall be
entitled to be subrogated to the rights of the Custodian with respect to any
claim against the Securities System or any other person which the Custodian may
have as a consequence of any such loss or damage if and to the extent that the
applicable Funds have not been made whole for any such loss or damage.
2.13 Segregated Account.
-------------------
The Custodian shall upon receipt of Proper Instructions establish and
maintain a segregated account or accounts for and on behalf of each Fund, into
which account or accounts may be transferred cash and/or securities, including
securities maintained in an account by the Custodian pursuant to Section 2.12
hereof, (i) in accordance with the provisions of any agreement among the
Company, the Custodian and a broker-dealer registered under the Exchange Act and
a member of NASD (or any futures commission merchant registered under the
Commodity Exchange Act), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities exchange (or the
Commodity Futures Trading Commission or any registered contract market), or of
-5-
<PAGE>
any similar organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Company for the account of
any Fund, (ii) for the purpose of segregating cash or government securities in
connection with options purchased, sold or written by the Company for the
account of any Fund or commodity futures contracts or options thereon purchased
or sold by the Company for the account of any Fund, (iii) for the purpose of
compliance by the Company with the procedures required by Investment Company Act
Release No. 10666, or any subsequent release or releases of the Securities and
Exchange Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper corporate purposes,
but only, in the case of the clause (iv), upon receipt of, in addition to Proper
Instructions, a certified copy of a resolution of the Board of Directors of the
Company signed by an officer of the Company and certified by the Secretary or an
Assistant Secretary, setting forth the purpose or purposes of such segregated
account and declaring such purposes to be proper corporate purposes.
2.14 Ownership Certificates for Tax Purposes.
----------------------------------------
The Custodian shall execute ownership and other certificates and affidavits
for all federal and state tax purposes in connection with receipt of income or
other payments with respect to domestic securities of each Fund held by it and
in connection with transfers of securities.
3. Duties of the Custodian with Respect to Fund Property Held Outside
of the United States.
-------------------------------------------------------------------
3.1 Appointment of Foreign Sub-Custodians.
--------------------------------------
The Custodian is authorized and instructed, either directly or indirectly
(through one or more sub-custodian U.S. banks), to employed as sub-custodians
for any Fund's securities and other assets maintained outside of the United
States the foreign banking institutions, foreign securities depositories and
foreign clearing agencies designated on Exhibit A hereto ("foreign
sub-custodians"); provided, however, that, notwithstanding the contents of
Exhibit A hereto, the Custodian (including any of its agents and subcustodians)
is authorized to directly or indirectly employ or retain any sub-custodian,
depository or clearing agency only if said employed or retained institution
qualifies as either (a) an "eligible foreign custodian", as defined in Rule
17f-5 under the Investment Company Act of 1940, or (b) a "bank", as defined in
Section 2(a)(5) of the Investment Company Act of 1940, that in turn qualifies as
an eligible domestic custodian under Section 17(f) of the Investment Company Act
of 1940; and provided further that the Custodian shall be liable to the Company
for any loss of any Fund assets custodied with any institution directly or
indirectly employed or retained by the Custodian (or any of its agents or
sub-custodians) that does not meet the qualifications of either clause (a) of
(b) of the preceding proviso.
Upon receipt of Proper Instructions, together with a certified resolution
of the Company's Board of Directors, the Custodian and the Company may agree to
amend Schedule A hereto from time to time to designate additional or alternative
foreign banking institutions, foreign securities depositories and foreign
clearing agencies to act as sub-custodians. Each foreign banking institution
shall be authorized to deposit securities in foreign securities depositories and
foreign clearing agencies authorized pursuant to Rule 17f-5 under the Investment
Company Act of 1940. Upon receipt of Proper Instructions from the Company the
Custodian shall promptly cease the employment of any one or more of such
sub-custodians for maintaining custody of the assets of the applicable Fund(s).
3.2 Assets to be Held.
-------------------
The Custodian shall limit the securities and other assets maintained in the
custody of the foreign sub-custodian to: (a) "foreign securities", as defined in
paragraph (c) (1) of Rule 17f-5 under the Investment Company Act of 1940, and
(b) cash and cash equivalents in such amounts as the Custodian or the Company
may determine to be reasonably necessary to effect the foreign securities
transactions of the applicable Fund(s).
3.3 Segregation of Securities.
--------------------------
The Custodian shall identify on its books as belonging to the Company for
the account of one or more of the Fund(s), the foreign securities of each such
Fund held by each foreign sub-custodian. Each agreement pursuant to which the
Custodian or its duly appointed U.S. sub-custodian employs a foreign banking
institution shall require that such institution establish a custody account for
the Custodian (or its U.S. sub-custodian, as the case may be) on behalf of its
customers and physically segregate in that account securities and other assets
of the Custodian's customers, and, in the event that such institution deposits a
Fund's securities in a foreign securities depository, the sub-custodian shall
identify on its books as belonging to the Custodian (or its U.S. sub-custodian,
as the case may be), as agent for the Custodian's customers, the securities so
deposited (all collectively referred to as the "Account").
-6-
<PAGE>
3.4 Agreement with Foreign Banking Institution.
--------------------------------------------
Each agreement with a foreign banking institution shall provide that: (a)
each Fund's assets will not be subject to any right, charge, security interest,
lien or claim or any kind in favor of the foreign banking institution or its
creditors, except a claim of payment for their safe custody or administration;
(b) beneficial ownership for each Fund's assets will be freely transferable
without the payment of money or value other than for custody or administration,
which may include payment of stamp duties or government taxes; (c) adequate
records will be maintained identifying the assets as belonging to the customers
of Custodian; (d) officers of or auditors employed by, or other representatives
of the Custodian, including independent public accountants for each Fund, will
be given access to the books and records of the foreign banking institution
relating to its actions given under its agreement with the Custodian or shall be
given confirmation of the contents of such books and records; and (e) assets of
each Fund held by the foreign sub-custodian will be subject only to the
instructions of the Company, the Custodian or their agents.
3.5 Access of Independent Accountants of the Company.
--------------------------------------------------
Upon request of the Company, the Custodian will use its best efforts to
arrange for the independent accountants of the Company to be afforded access to
the books and records of any foreign banking institution employed as a foreign
sub-custodian insofar as such books and records relate to the performance of
such foreign banking institutions under its agreement with the Custodian (or its
U.S. sub-custodian, as the case may be).
3.6 Reports by Custodian.
---------------------
The Custodian will supply to the Company from time to time, as mutually
agreed upon, statements in respect of the securities and other assets of each
Fund held by foreign sub-custodians, including but not limited to an
identification of entities having possession of each applicable Fund's
securities and other assets and advice or notifications of any transfers of
securities to or from each custodial account maintained by a foreign
sub-custodian for the Custodian on behalf of each applicable Fund indicating, as
to securities acquired for the Fund, the identity of the entity having physical
possession of such securities.
3.7 Foreign Securities Transactions.
-------------------------------
1) Upon receipt of Proper Instruction, which may be continuing instructions
when deemed appropriate by the parties, the Custodian shall make or cause its
foreign sub-custodian to transfer, exchange or deliver foreign securities owned
by the Company for the account of a Fund, but except to the extent explicitly
provided herein only in any of the cases specified in Section 2.2.
2) Upon receipt of Proper Instructions, which may be continuing
instructions when deemed appropriate by the parties, the Custodian shall pay out
or cause its foreign sub-custodian to pay out monies of a Fund, but except to
the extent explicitly provided herein only in any of the cases specified in
Section 2.8.
3) Settlement and payment for securities received for the account of a Fund
and delivery of securities maintained for the account of a Fund may, upon
receipt of Proper Instructions, be effected in accordance with the customary or
established securities trading or securities processing practices and procedures
in the jurisdiction or market in which the transaction occurs, including,
without limitation, delivering securities to the purchaser thereof or to a
dealer therefor (or an agent for such purchaser or dealer) against a receipt
with the expectation of receiving later payment for such securities from such
purchaser or dealer.
4) With respect to any transaction involving foreign securities, the
Custodian or any sub-custodian in its discretion may case a Fund's account to be
credited on either the contractual settlement date or the actual settlement date
with the proceeds of any sale or exchange of foreign securities from the account
of the applicable Fund and to be debited on either the contractual settlement
date or the actual settlement date for the cost of foreign securities purchased
or acquired for such Fund according to Custodian's then current internal
policies and procedures pertaining to securities settlement, which policies and
procedures may change from time to time. Custodian shall advise the Company of
any changes to such policies and procedures. The Custodian may reverse any such
credit or debit made on the contractual settlement date if the transaction with
respect to which such credit or debit was made fails to settle within a
reasonable period, determined by Custodian in its reasonable discretion, after
the contractual settlement date except that if any foreign securities delivered
pursuant to this section are returned by the recipient thereof, the Custodian
may cause any such credits and debits to be reversed at any time.
-7-
<PAGE>
5) Securities maintained in the custody of a foreign sub-custodian may be
maintained in the name of such entity's nominee to the same extent as set forth
in Section 2.3 of this Contract and the Fund agrees to hold any such nominee
harmless from any liability as a holder of record of such securities.
6) Until the Custodian receives written instructions to the contrary the
Custodian shall, or shall cause the sub-custodian to collect all interest and
dividends paid on securities held in each applicable Fund's account, unless such
payment is in default. Unless otherwise instructed, the Custodian shall convert
interest, dividends and principal received with respect to securities in a
Fund's account into United States dollars, and the Custodian shall perform
foreign exchange contracts for the conversion of United States dollars to
foreign currencies for the settlement of trades whenever it is practicable to do
so through customary banking channels. Customary banking channels may vary based
upon industry practice in each jurisdiction, and shall include the banking
facilities of the Custodian's affiliates, in accordance with such affiliate's
then prevailing internal policy on funds repatriation. All risk and expense
incident to such foreign collection and conversions is the responsibility of
each applicable Fund's account, and Custodian shall have no responsibility for
fluctuation in exchange rates affecting collections or conversions.
3.8 Foreign Securities Lending.
--------------------------
Notwithstanding any other provisions contained in this Contract, the
Custodian and any sub-custodian shall deliver and receive securities loaned or
returned in connection with securities lending transactions only upon and in
accordance with Proper Instructions; provided, if the Custodian is not the
lending agent in connection with such securities lending, then neither the
Custodian or any sub-custodian shall undertake, or otherwise be responsible for,
(i) marking to market values for such loaned securities.
(ii) collection of dividends, interest or other disbursements or
distributions made with respect to such loaned securities
(iii) receipt of corporate action notices, communications, proxies or
instruments with respect to such loaned securities, and
(iv) custody, safekeeping, valuation or any other actions or services with
respect to any collateral securing any such securities lending transactions.
In the event that the Custodian is the applicable Fund's lending agent in
connection with a specific securities loan, the Custodian shall undertake to
perform all of the above duties with regard to such loan, except that the
Company shall not receive, nor be enabled to vote, proxies in connection with
such loaned security.
3.9 Liability of Foreign Sub-Custodians.
------------------------------------
Each agreement pursuant to which the Custodian (or its U.S. sub-custodian
bank, as applicable) employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the Custodian and
Custodian's customers from and against any loss, damage, cost, expense,
liability or claim arising out of such sub-custodian's negligence, fraud, bad
faith, willful misconduct or reckless disregard of its duties. At the election
of the Company, it shall be entitled to be subrogated to the right of the
Custodian with respect to any claims against the Custodian's U.S. sub-custodian
bank (if any) or a foreign banking institution as a consequence of any such
loss, damage, cost, expense, liability or claim if and to the extent that the
Company has not been made whole for any such loss, damage, cost, expense,
liability or claim.
3.10 Monitoring Responsibilities.
---------------------------
The Custodian shall furnish annually to the Company information concerning
the foreign sub-custodians employed by the Custodian (or its U.S. sub-custodian
bank, as applicable). Such information shall be similar in kind and scope to
that furnished to the Company in connection with the initial approval of this
Contract (and any contracts with U.S. and foreign sub-custodians entered into
pursuant hereto). In addition, the Custodian will promptly inform the Company in
the event that the Custodian learns of a material adverse change in the
financial condition of a foreign sub-custodian or is notified by the Custodian's
U.S. sub-custodian bank (if any) or a foreign banking institution employed as
foreign sub-custodian that there appears to be a substantial likelihood that its
shareholders' equity will decline below $200 million (United States dollars or
the equivalent thereof) or that its shareholders' equity has declined below $200
million (in each case computed in accordance with generally accepted United
States accounting principles).
-8-
<PAGE>
3.11 Branches of United States Banks.
--------------------------------
Except as otherwise set forth in this Contract, the provisions hereof shall
not apply where the custody of any Fund's assets maintained in a foreign branch
of a banking institution which is a "bank" as defined by Section 2(a) (5) of the
Investment Company Act of 1940 which meets the qualification set forth in
Section 26(a) of said Act. The appointment of any such branch as a sub-custodian
shall be governed by Article 1 of this Contract.
3.12 Expropriation Insurance.
------------------------
The Custodian represents that it does not intend to obtain any insurance
for the benefit of the Company or any Fund which protects against the imposition
of exchange control restrictions or the transfer from any foreign jurisdiction
of the proceeds of sale of any securities or against confiscation, expropriation
or nationalization of any securities or the assets of the issuer of such
securities is organized or in which securities are held for safekeeping either
by Custodian or any sub custodians in such country. The Custodian represents
that its understanding of the position of the Staff of the Securities and
Exchange Commission is that any investment company investing in securities of
foreign issuers has the responsibility for reviewing the possibility of the
imposition of exchange control restrictions which would affect the liquidity of
such investment company's assets and the possibility of exposure to political
risk, including the appropriateness of insuring against such risk.
4. Proxies.
-------
The Custodian shall, with respect to the securities held hereunder, cause
to be promptly executed by the registered holder of such securities, if the
securities are registered otherwise than in the name of the Company or a nominee
of the Company, all proxies, without indication of the manner in which such
proxies are to be voted, and shall promptly deliver to the Company such proxies,
all proxy soliciting materials and all notices relating to such securities.
5. Communications Relating to Fund Portfolio Securities.
----------------------------------------------------
The Custodian shall transmit promptly to the Company all written
information (including, without limitation, dependency of calls and maturities
of securities and expirations of rights in connection therewith and notices of
exercise of call and put options written by the Fund and the maturity of futures
contracts purchased or sold by the Company) received by the Custodian from
issuers of the securities being held for each Fund. With respect to tender or
exchange offers, the Custodian shall transmit promptly to the Company all
written information received by the Custodian from issuers of the securities
whose tender or exchange is sought and from the party (or his agents) making the
tender or exchange offer. If the Company desires to take action with respect to
any tender offer, exchange offer or any other similar transaction, the Company
shall notify the Custodian at least three business days prior to the date on
which the Custodian is to take such action.
6. Proper Instructions.
---------------------
Proper Instructions as used in this Contract means a writing signed or
initialed by one or more person or persons as the Board of Directors of the
Company shall have from time to time authorized. Each such writing shall set
forth the specific transaction or type of transaction involved, including a
specific statement of the purpose for which such action is requested. Oral
instructions will be considered Proper Instructions if the Custodian reasonably
believes them to have been given by a person authorized to give such
instructions with respect to the transaction involved. The Company shall cause
all oral instructions to be confirmed in writing. Upon receipt of a certificate
of the Secretary or an Assistant Secretary as to the authorization by the Board
of Directors of the Company accompanied by a detailed description of procedures
approved by the Board of Directors, Proper Instructions may include
communications effected directly between election-mechanical or electronic
devices provided that the Board of Directors and the Custodian are satisfied
that such procedures afford adequate safeguards for each Fund's assets.
-9-
<PAGE>
7. Actions Permitted Without Express Authority.
-------------------------------------------
The Custodian may in its discretion, without express authority from the
Company:
1) Make payments to itself or others for minor expenses of handling
securities provided that all such payments shall be accounted for to the
Company;
2) Surrender securities in temporary form for securities in definitive
form;
3) Endorse for collection, in the names of the applicable Fund, checks,
drafts and other negotiable instruments; and
4) In general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other dealings with the
securities and property of the Company except as otherwise directed by the Board
of Directors of the Company.
8. Evidence of Authority.
---------------------
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument of paper believed by it to be
genuine and to have been properly executed by or on behalf of the Company. The
Custodian may receive and accept a certified copy of a vote of the Board of
Directors of the Company as conclusive evidence (a) of the authority of any
person to act in accordance with such vote or (b) or any determination or of any
action duly made or taken by the Board of Directors as described in such vote,
and such vote may be considered as in full force and effect until receipt by the
Custodian of written notice to the contrary.
9. Class Actions.
---------------
The Custodian shall transmit promptly to the Company all notices or other
communications received by it in connection with any class action lawsuit
relating to securities currently or previously held for one or more of the
Funds. Upon being directed by the Company to do so, the Custodian shall furnish
to the Company any and all written materials which establish the
holding/ownership, amount held/owned, and period of holding/ownership of the
securities in question.
10. Records.
-------
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Company and each Fund under the Investment Company Act of
1940, with particular attention to Section 31 thereof and Rule 31a-1 and 31a-2
thereunder. The Custodian shall also maintain records as directed by the Company
in connection with applicable federal and state tax laws and any other law or
administrative rules or procedures which may be applicable to the Company and
the Funds. With respect to securities and cash deposited with a Securities
System, a sub-custodian or an agent of the Custodian, the Custodian shall
identify on its books all such securities and cash as belonging to the Company
for the account of the applicable Fund(s). All such records shall be the
property of the Company and shall at all times during the regular business hours
of the Custodian be open for inspection by duly authority officers, employees or
agents of the Company. Such records shall be made available to the Company for
review by employees and agents of the Securities and Exchange Commission. The
Custodian shall furnish to the Company, and its agents as directed by the
Company, as of the close of business on the last day of each month a statement
showing all transactions and entries for the account of the Company during that
month, and all holdings as of month-end.
All records so maintained in connection with the performance of its duties
under this Agreement shall remain the property of the Company and, in the event
of termination of this Agreement, shall be delivered to the Company. Subsequent
to such delivery, and surviving the termination of this Agreement, the Company
shall provide the Custodian access to examine and photocopy such records as the
Custodian, in its discretion, deems necessary, for so long as such records are
retained by the Company.
11. Opinion of Company's Independent Accountant.
-------------------------------------------
The Custodian shall take all reasonable action, as the Company may from
time to time request, to obtain from year to year favorable opinions from the
Company's independent accountants with respect to its activities hereunder in
connection with the preparation of the Company's Form N-1A and Form N-SAR or
other reports to the Securities and Exchange Commission and with respect to any
other requirements of such Commission.
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<PAGE>
12. Reports to Company by Independent Public Accountants.
----------------------------------------------------
The Custodian shall provide the Company, at such times as the Company may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for safeguarding
securities, futures contracts and options on futures contracts, including
securities deposited and/or maintained in a Securities System, relating to the
services provided by the Custodian under this Contract; such reports shall be of
sufficient scope, and in sufficient detail, as may reasonably be required by the
Company to provide reasonable assurance that any material inadequacies would be
disclosed by such examination, and, if there are no such inadequacies, the
reports shall so state.
13. Compensation of Custodian.
-------------------------
For performance by the Custodian pursuant to this Agreement, the Company,
out of the assets of each applicable Fund, agrees to pay the Custodian annual
asset fees and supplemental charges as set out in Exhibit B. Fees and
supplemental charges may be changed from time to time subject to mutual written
agreement between the Company and the Custodian.
14. Responsibility of Custodian.
---------------------------
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties. The Custodian shall
be held to the exercise of reasonable care in carrying out the provisions of
this Contract, but shall be kept indemnified by and shall be without liability
to the Company or any Fund for any action taken or omitted by it in good faith
and without negligence. It shall be entitled to rely on and may act upon advice
of counsel of, or reasonably acceptable to, the Company on all matters, and
shall be without liability for any action reasonably taken or omitted pursuant
to such advice. Notwithstanding the foregoing, the responsibility of the
Custodian with respect to redemptions effected by check shall be in accordance
with a separate Agreement entered into between the Custodian and the Company.
If the Company requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the reasonable opinion of the Custodian, result in the Custodian or its nominee
assigned to the Company being liable for the payment of money or incurring
liability of some other form, the Company, as a prerequisite to requiring the
Custodian to take such action, shall provide indemnity to the Custodian in an
amount and form reasonably satisfactory to it.
If the Company requires the Custodian to advance cash or securities for any
purpose or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of a Fund shall be
security therefor and should the Company fail to repay the Custodian promptly
with respect to any Fund, the Custodian shall be entitled to utilize available
cash and to dispose of assets to the extent necessary to obtain reimbursement.
The Custodian shall not be liable for any loss or damage to the Company or
any Fund resulting from participation in a securities depository unless such
loss or damage arises by reason of any negligence, misfeasance, or willful
misconduct of officers or employees of the Custodian, or from its failure to
enforce effectively such rights as it may have against any securities depository
or from use of a sub-custodian or agent. Anything in this Contract to the
contrary notwithstanding, the Custodian shall exercise, in the performance of
its obligations undertaken or reasonably assumed with respect to this Agreement,
reasonable care, for which the Custodian shall be responsible to the same extent
as if it were performing such duties directly. The Custodian shall be
responsible for the securities and cash held by or deposited with any
sub-custodian or agent to the same extent as if such securities and cash were
directly held by or deposited with the Custodian. The Custodian hereby agrees
that it shall indemnify and hold the Company and each applicable Fund harmless
from and against any loss which shall occur as a result of the failure of a
foreign sub-custodian holding the securities and cash to provide a level of
safeguards for maintaining any Fund's securities and cash not materially
different from that provided by a United States custodian holding such
securities and cash in the United States.
The Custodian agrees to indemnify and hold the Company and each of the
Funds harmless for any and all loss, liability and expense, including reasonable
legal fees and expenses, arising out of the Custodian's own negligence or
willful misconduct or that of its officers, agents, sub-custodians or employees
in the performance of the Custodian's duties and obligations under this
Contract.
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<PAGE>
15. Effective Period, Termination and Amendment.
-------------------------------------------
The Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than sixty (60) days
after the date of such delivery or mailing; provided, however, that the
Custodian shall not act under Section 2.12 hereof in the absence of receipt of
an initial certificate of the Secretary or an Assistant Secretary that the Board
of Directors of the Company has approved the initial use of a particular
Securities System and the receipt of an annual certificate of the Secretary or
an Assistant Secretary that the Board of Directors has reviewed the use by each
Fund of such Securities System, as required in each case by Rule 17f-4 under the
Investment Company Act of 1940, provided further, however, that the Company
shall not amend or terminate this Contract in contravention of any applicable
federal or state regulations, or any provision of its Articles of Incorporation,
and further provided, that the Company may at any time by action of its Board of
Directors, with respect to any Fund (i) substitute another bank or trust company
for the Custodian by giving notice as described above to the Custodian, or (ii)
immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the Currency or
upon the happening of a like event at the direction of an appropriate regulatory
agency or court of competent jurisdiction.
Upon termination of the Contract, the Company on behalf of each Fund shall
pay to the Custodian such compensation as may be due as of the date of such
termination and shall likewise reimburse the Custodian for its costs, expenses
and disbursements.
16. Successor Custodian.
-------------------
If a successor custodian shall be appointed by the Board of Directors of
the Company, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer to an account of the successor custodian each of the Fund's securities
held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of
Directors of the Company, deliver at the office of the Custodian and transfer
such securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940, of
its own selection, having an aggregate capital, surplus, and undivided profits,
as shown by its last published report, of not less than $100,000,000, all
securities, funds and other properties held by the Custodian and all instruments
held by the Custodian relative thereto and all other property held by it under
this Contract and to transfer to an account of such successor custodian all of
each Fund's securities held in any Securities System. Thereafter, such bank or
trust company shall be the successor of the Custodian under and pursuant to this
Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Company to procure the certified copy of the vote referred to or
of the Board of Directors to appoint a successor custodian, the Custodian shall
be entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
17. Interpretive and Additional Provisions.
--------------------------------------
In connection with the operation of this Contract, the Custodian and the
Company may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation or Bylaws of the Company. No interpretive or
additional provisions made as provided in the preceding sentence shall be deemed
to be an amendment of this Contract.
18. Minnesota Law to Apply.
----------------------
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of the State of Minnesota.
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<PAGE>
19. Prior Contracts.
----------------
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Company and the Custodian relating to the custody of each
Fund's assets. This Contract shall not be assignable by any party hereto;
provided however, that any entity into which the Company or the Custodian, as
the case may be, may be merged or converted or with which it may be
consolidated, or any entity succeeding to all or substantially all of the
business of the Company or the custody business of the Custodian, shall succeed
to the respective rights and shall assume the respective duties of the Company
or the Custodian, as the case may be, hereunder.
20. General.
-------
Nothing expressed or mentioned in or to be implied from any provision of
this Contract is intended to, or shall be construed to give any person or
corporation other than the parties hereto, any legal or equitable right, remedy
or claim under or in respect to this Contract, or any covenant, condition and
provision herein contained, this Contract and all of the covenants, conditions
and provisions hereof being intended to be and being the sole and exclusive
benefit of the parties hereto and their respective successors and assigns.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized officers as of the day
and year first above written.
IAI Investment Funds III, Inc. Norwest Bank Minnesota, N.A.
By /s/ Noel P. Rahn By /s/Denise V. Zapzalka
ATTEST ATTEST
By /s/William C. Joas By /s/Kim Devnich
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
4200 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402
Telephone: 612.305.5000
Telefax 612.305.5039
INDEPENDENT AUDITORS' CONSENT
- -----------------------------
The Board of Directors
IAI Investment Funds III, Inc.:
We consent to the reference to our Firm under the heading "COUNSEL AND
AUDITORS" in Part A of the Registration Statement.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
September 25, 1997
