As filed with the Securities and Exchange Commission on May 7, 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. 22 X
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 22 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)
X immediately upon filing pursuant to paragraph (b)
---
--- on (date) pursuant to paragraph (b)
--- 60 days after filing pursuant to paragraph (a)(1)
--- on (date) pursuant to paragraph (a)(1)
--- 75 days after filing pursuant to paragraph (a)(2)
--- on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
--- this post-effective amendment designates a new effective date
for a previously filed post-effective amendment
Registrant has registered an indefinite number of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940, as amended. Rule 24f-2 Notices were last filed with the Commission on
March 26, 1997.
<PAGE>
IAI INVESTMENT FUNDS III, INC.
FORM N-1A
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
<S> <C> <C>
Item Number Caption Prospectus Caption
- ----------- ------- ------------------
1 Cover Page.................................... Cover Page of Prospectus
2 Synopsis...................................... Fund Expense Information
3 Condensed Financial Information............... 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>
Registration Statement on Form N-1A
of
IAI Investment Funds III, Inc.
(File No. 33-10207)
Part A
The Prospectus dated December 4, 1996 of IAI Investment Funds III, Inc.
relating to IAI Latin America Fund is incorporated by reference to said
Prospectus as filed with the commission pursuant to Rule 497(c) on or about
December 13, 1996.
<PAGE>
Registration Statement on Form N-1A
of
IAI Investment Funds III, Inc.
(File No. 33-10207)
Part B
The Statement of Additional Information dated December 4, 1996 of IAI
Investment Funds III, Inc. relating to IAI Latin America Fund is incorporated by
reference to said Prospectus as filed with the commission pursuant to Rule
497(c) on or about December 13, 1996.
<PAGE>
PART C
Item 24. Financial Statements and Exhibits
- ------------------------------------------
(a) Financial Statements (Series A and B) (1)
Financial Statements (Series C)
(b) Exhibits
(1A) Articles of Incorporation (2)
(1B) Certificate of Designation (Series B) (2)
(1C) Certificate of Designation (Series C) (2)
(2) Bylaws (2)
(5A) Management Agreement (Series A) (2)
(5B) Management Agreement (Series B) (2)
(5C) Management Agreement (Series C) (2)
(5D) Subadvisory Agreement (Series A) (2)
(5E) Subadvisory Agreement (Series B) (2)
(5F) Subadvisory Agreement (Series C) (2)
(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)
- --------------------
(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.
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant.
- -----------------------------------------------------------------------
See the sections of the Prospectus entitled "Management" and "Description
of Common Stock" and the section of the Statement of Additional Information
entitled "Management," filed as part of this Registration Statement.
Item 26. Number of Holders Securities.
- --------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Number of Record Holders
Portfolio Title of Class as of March 31, 1997
- --------- -------------- --------------------
IAI International Fund Common Stock (Series A) 2,835
IAI Developing Countries Fund Common Stock (Series B) 804
IAI Latin America Fund Common Stock (Series C) 231
</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 Director
Stephen C. Coleman Senior Vice President
Larry Ray Hill Executive Vice President
Richard A. Holway Senior Vice President
Irving Philip Knelman President/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
Richard E. Struthers Executive Vice President
</TABLE>
<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 and remains General Manager of Corporate Banking
of Lloyds Bank 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 are
wholly-owned subsidiaries of Hill Samuel Group BV, a London-based merchant
banking and financial services firm which, in turn, is owned by Lloyds TSB Group
plc, a publicly-held financial services organization based in London, England.
The senior officers and directors of IAI International and their titles are as
follows:
<TABLE>
<CAPTION>
<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
Thomas S. Smith Supervisor of Trust Services
Steven G. Lentz Secretary
</TABLE>
<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 furnish each person to whom a prospectus is
delivered with a copy of its latest annual report to shareholders, upon request
and without charge.
<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(b) under the Securities Act of 1933 and has duly caused this Post-Effective
Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Minneapolis, and State of
Minnesota, on the 25th day of April, 1997.
IAI INVESTMENT FUNDS III, INC.
(Registrant)
By /s/ Richard E. Struthers, President
Richard E. Struthers, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated:
/s/ Richard E. Struthers President (principal April 25, 1997
Richard E. Struthers executive officer) & Director
/s/ Archie C. Black III Treasurer (principal April 25, 1997
Archie C. Black III financial and accounting
officer)
Noel P. Rahn (1)
Director
Madeline Betsch (1)
Director
W. William Hodgson (1)
Director
George R. Long (1)
Director
J. Peter Thompson (1)
Director
Charles H. Withers (1)
Director
/s/ William C. Joas April 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
-------------
Exhibit No. Exhibit Description Sequential Page No.
- ----------- ------------------- -------------------
8 Custodian Agreement (Series C)
99B Financial Statements (Series C)
CUSTODIAN CONTRACT
between
IAI Latin America Fund Series of
IAI INVESTMENT FUNDS III, INC.
and
NORWEST BANK MINNESOTA, N.A.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<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
<PAGE>
12. Opinion of Company's Independent Accountant...........................................10
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 November 27, 1996, 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.
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
-3-
<PAGE>
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.
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.
-4-
<PAGE>
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
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
-5-
<PAGE>
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").
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;
-6-
<PAGE>
(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.
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.
-7-
<PAGE>
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).
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
-8-
<PAGE>
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.
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.
-9-
<PAGE>
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.
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.
-10-
<PAGE>
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.
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)
-11-
<PAGE>
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.
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/ Richard E. Struthers By /s/Denize V. Zapzalka
ATTEST ATTEST
By /s/ William C. Joas By /s/Kim Devnich
FUND PORTFOLIO
--------------
IAI LATIN AMERICA FUND
March 31, 1997
(percentage figures indicate percentage of total net assets)
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
COMMON STOCKS - 62.3%
Market
Quantity Value(a)
- -------------------------------------------------------------------------------------------------------
ARGENTINA - 8.4%
CIA International Bebidas Y Alimentos (Consumer Non-Durables) 17,265 $ 35,742
Telefonica de Argentina ADR (Utilities) 2,794 82,074
Transportadora de Gas del Sur ADR (Utilities) 9,650 124,244
YPF Sociedad Anonima ADR (Energy Minerals) 4,521 119,806
-------
361,866
- ------------------------------------------------------------------------------------------------------
BRAZIL - 9.9%
Telebras (Electronic Technology) 1,430,000 143,634
Telecomunicacoes Brasileiras ADR (Utilities) 1,501 153,477
Usinas Siderurgicas de Minas Gerais ADR (Non-Energy Minerals) 10,917 125,546
-------
422,657
- ------------------------------------------------------------------------------------------------------
CHILE - 6.3%
CIA Telecom Chile ADR (Technology Services) 2,246 64,580
Enersis ADR (Utilities) 3,690 117,157
Vina Concha Y Toro ADR (Consumer Non-Durables) 3,074 87,609
------
269,346
- -------------------------------------------------------------------------------------------------------
MEXICO - 28.8%
ALFA Class A (Financial) 22,000 123,579
Corporacion GEO Series B (Financial) (b) 28,000 134,157
DESC Series B (Financial) (b) 21,000 140,335
Fomento Economico Mexicano Class B (Commercial Services) 31,000 137,000
Grupo Carso Series Class A-1 (Financial) 16,000 93,708
Grupo Corvi (Commercial Services) 135,000 71,151
Grupo Financiero Bancomer Class B (Financial) (b) 224,000 79,365
Grupo Industrial Maseca Series B (Producer Manufacturing) 116,000 119,934
Panamerican Beverages ADR (Consumer Non-Durables) 2,310 123,874
Telefonos de Mexico ADR (Utilities) 2,000 77,000
Tubos de Acero de Mexico (Non-Energy Minerals) (b) 8,000 136,780
-------
1,236,883
- -------------------------------------------------------------------------------------------------------
PERU - 5.3%
Credicorp ADR (Financial) 6,100 142,587
Telefonica de Peru ADR (Utilities) 3,931 87,465
------
230,052
- --------------------------------------------------------------------------------------------------------
UNITED KINGDOM - 1.8%
Five Arrows Chile Investment Trust (Financial) 26,267 79,852
- --------------------------------------------------------------------------------------------------------
VENEZUELA - 1.8%
Siderurgica Venezolana Sivensa ADR (Producer Manufacturing) 26,362 77,850
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS
(Cost: $2,417,140) $ 2,678,506
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Fund Portfolio on page 3
1
<PAGE>
FUND PORTFOLIO
--------------
IAI LATIN AMERICA FUND
March 31, 1997
(percentage figures indicate percentage of total net assets)
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
NON-CONVERTIBLE PREFERRED STOCKS - 26.8%
Market
Quantity Value(a)
- --------------------------------------------------------------------------------------------------------------
BRAZIL - 24.6%
Centrais Electricas de Santa Catarina Series B (Utilities) (b) 64,000 $ 73,036
CIA Tecidos Norte de Minas (Process Industries) 44,000 137,561
Companhia Energetica de Minas Gerais (Producer Manufacturing) (b) 2,700,000 110,771
Eletricidade Sao Paulo Series B (Producer Manufacturing) (b) 622,000 121,725
Globex Utilidades PFD (Consumer Durables) 6,900 130,152
Multicanal Participacoes ADR (Consumer Services) (b) 9,430 130,841
Petroleo Brasileiro (Energy Minerals) 630,000 125,667
Telepar (Electronic Technology) 180,000 115,607
Vale Do Rio Doce (Non-Energy Minerals) 5,000 113,647
-------
1,059,007
- --------------------------------------------------------------------------------------------------------------
COLOMBIA - 2.2%
Banco Ganadero ADR (Financial) 3,699 93,862
- --------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NON-CONVERTIBLE PREFERRED STOCKS
(Cost:$945,844) $ 1,152,869
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(Cost: $3,362,984) $ 3,831,375
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SHORT-TERM SECURITIES - 2.3%
Principal Market
Rate Maturity Amount Value(a)
- ----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS - 2.3%
U.S. Treasury Bill 5.15% 07/24/97 $ 100,000 $ 98,331
- -----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(Cost:$98,426) $ 98,331
- ------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(Cost: $3,461,410) (c) $ 3,929,706
- -------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) - 8.6 %
$ 370,405
- -------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS
$ 4,300,111
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Fund Portfolio on page 3
2
<PAGE>
NOTES TO FUND PORTFOLIO
-----------------------
IAI LATIN AMERICA FUND
March 31, 1997
(unaudited)
(a)
Market values of securities are stated in U.S. dollars and are determined
as described in Note 1 to the financial statements, under "Security Valuation."
(b)
Currently non-income producing security.
(c)
At March 31, 1997, the cost of securities for federal income tax purposes
and the aggregate gross unrealized appreciation and depreciation
based on that cost were as follows:
<TABLE>
<CAPTION>
<S> <C>
IAI Latin America Fund
- ------------------------------------------------------ -----------------------------------
Cost for federal tax purposes $ 3,461,410
===========
Gross unrealized appreciation $ 536,771
Gross unrealized depreciation (68,475)
------------
Net unrealized appreciation $ 468,296
============
</TABLE>
3
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
IAI LATIN AMERICA FUND
March 31, 1997
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investment in securities, at market
(Cost: $3,461,410 (see Fund Portfolio) $ 3,929,706
Cash in bank on demand deposit 354,118
Dividends and accrued interest receivable 16,287
---------------
Total assets 4,300,111
----------------
LIABILITIES
Total liabilities --
----------------
Net assets applicable to outstanding capital stock $ 4,300,111
=================
REPRESENTED BY:
Capital stock $ 3,647
Additional paid-in capital 3,746,109
Undistributed net investment income 12,941
Accumulated net realized gains (losses) on investments 69,135
Unrealized appreciation (depreciation) on:
Investment securities $ 468,296
Other assets & liabilities denominated in foreign currency (17)
-----------
468,279
-----------------
Total - representing net assets applicable to
outstanding capital stock $ 4,300,111
==================
Shares of capital stock outstanding; authorized 10 billion shares
of $0.01 par value stock 364,660
==================
Net asset value per share of outstanding capital stock $ 11.79
===================
</TABLE>
See accompanying Notes to Fund Portfolio on page 8
4
<PAGE>
STATEMENT OF OPERATIONS
IAI LATIN AMERICA FUND
Period from December 12, 1996* to March 31, 1997
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
NET INVESTMENT INCOME
Income
Dividends (net of foreign income taxes withheld of $266) $ 28,363
Interest 7,108
-------------
Total income 35,471
-------------
Expenses
Management fees 33,795
Compensation of Directors 86
-------------
Total expenses 33,881
Less fees waived or reimbursed by Advisers (11,351)
-------------
Net expenses 22,530
-------------
Net investment income 12,941
-------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on :
Investment securities $ 75,917
Foreign currency transactions (6,782)
------------
69,135
Net change in unrealized appreciation or depreciation on:
Investment securities $ 468,296
Other assets and liabilities denominated in
foreign currency (17)
-------------
468,279
----------
Net gain on investments 537,414
-----------
Net increase in net assets resulting from operations $ 550,355
=============
</TABLE>
* Commencement of operations
See accompanying Notes to Fund Portfolio on page 8
5
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
IAI LATIN AMERICA FUND
Period from December 12, 1996* to March 31, 1997
(unaudited)
<TABLE>
<CAPTION>
<S> <C>
OPERATIONS
Net investment income $ 12,941
Net realized gains (losses) 69,135
Net change in unrealized appreciation or depreciation 468,279
-------------------
Net increase in net assets resulting from operations 550,355
-------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -
Net realized gains -
------------------
Total distributions -
-------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 389,962 shares 4,041,736
Cost of 25,301 shares redeemed (291,980)
-------------------
Increase in net assets from capital share transactions 3,749,756
-------------------
Total increase in net assets 4,300,111
-------------------
Net assets at beginning of period -
Net assets at end of period $ 4,300,111
===================
including undistributed net investment income of: $ 12,941
===================
</TABLE>
* Commencement of operations
See accompanying Notes to Fund Portfolio on page 8
6
<PAGE>
FINANCIAL HIGHLIGHTS
IAI LATIN AMERICA FUND
Per share data for a share of capital stock outstanding throughout each
period and selected information for each period indicated are as follows:
<TABLE>
<CAPTION>
<S> <C>
Period from
December 12, 1996****
to March 31, 1997
- -------------------------------------------------------------------------------
NET ASSET VALUE (unaudited)
Beginning of period $ 10.00
--------------------
OPERATIONS
Net investment income 0.04
Net realized and unrealized gains (losses) 1.75
--------------------
Total from operations 1.79
-----------------
DISTRIBUTIONS TO SHAREHOLDERS FROM :
Net investment income -
Net realized gains -
--------------------
Total distributions -
-----------------
NET ASSET VALUE
End of period $ 11.79
=====================
Total investment return* 17.90%
Net assets at end of period (000's omitted) $ 4,300
RATIOS
Expenses to average daily net assets** 2.00%
Net investment income to average daily net assets** 1.15%
Average brokerage commission rate*** $ 0.0013
Portfolio turnover rate
(excluding short-term securities) 9.8%
</TABLE>
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions at net
asset value.
** The Fund's adviser voluntarily waived $11,265 for the period ended March
31, 1997. If the Fund had been charged these expenses, the ratio of expenses to
average daily net assets would have been 3.00% and the ratio of net investment
income to average daily net assets would have been 0.15%. Expenses in excess of
2.00% of average daily net assets will be voluntarily waived through March 1,
1998. The ratios for the period ended March 31, 1997 are annualized.
*** The fund is required to disclose an average brokerage commission rate.
The comparability of rates between domestic and foreign equities may be affected
by the fact that commission rates per share can vary significantly among foreign
countries.
**** Commencement of operations
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI LATIN AMERICA FUND
March 31, 1997
(unaudited)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --- ------------------------------------------
IAI Investment Funds III, Inc. is registered under the Investment Company
Act of 1940 (as amended) as a diversified, open-end management investment
company. IAI Latin America Fund (the Fund) is a separate portfolio of IAI
Investment Funds III, Inc. The Fund commenced operations on December 12, 1996.
The Fund has a primary objective of long-term capital appreciation through
investing primarily in the securities of Latin American issuers.
Significant accounting policies followed by the Fund are summarized below:
SECURITY VALUATION
Investments in securities traded on national or international securities
exchanges are valued at the last reported sales price at the close of each
business day. Securities traded on the over-the-counter market are valued at the
last reported sales price or if the last sales price is not available, the last
reported bid price is used. Such valuations are obtained from pricing services
or are supplied by dealers.
Securities for which quotations are not readily available are valued at
their fair value as determined in good faith using consistently applied
procedures under the general supervision of the Board of Directors.
Short-term securities with maturities of 60 days or less from the date of
initial acquisition are valued at amortized cost. Those securities with
maturities greater than 60 days from the date of initial acquisition are
marked-to-market on a daily basis.
FOREIGN CURRENCY TRANSLATIONS AND FORWARD FOREIGN CURRENCY CONTRACTS
The Fund invests in foreign securities. The market value of securities and
other assets and liabilities denominated in foreign currencies is translated
daily into U.S. dollars at the closing rate of exchange. Purchases and sales of
securities, income and expenses are translated at the exchange rate on the
transaction date and are recorded in realized and unrealized appreciation
(depreciation) on foreign currency transactions. Exchange gains (losses) may
also be realized between the trade and settlement dates on security and forward
currency contract transactions.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss from
investments.
The Fund may enter into forward foreign currency exchange contracts for
operational purposes and to hedge against adverse exchange rate fluctuations.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Fund and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Fund is subject to the credit risk that the
other party will not complete the obligations of the contract.
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI LATIN AMERICA FUND
March 31, 1997
(unaudited)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
FEDERAL TAXES
Since it is the Fund's policy to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to its shareholders, no provision for income taxes is
required. In order to avoid the payment of any federal excise taxes, the Fund is
required to distribute substantially all of its net investment income and net
realized gains on a calendar year basis.
Net investment income and net realized gains (losses) may differ for
financial statement and tax purposes primarily due to differing treatments for
foreign currency transactions, passive foreign investments companies (PFICs),
and losses deferred due to "wash sales." The character of distributions made
during the year for net investment income or net realized gains may also differ
from it's ultimate characterization for tax purposes.
The Fund may be subject to foreign taxes on income, gains on investments,
or currency repatriation. The Fund accrues such taxes as applicable.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
The Fund records security transactions on trade date, the date the
securities are purchased or sold. Dividend income is recorded on the ex-dividend
date or upon receipt of ex-dividend notification in the case of certain foreign
securities.
Security gains and losses are determined on the basis of identified cost,
which is the same basis used for federal income tax purposes. Investment income
is recorded net of foreign taxes withheld where recovery of such taxes is
uncertain.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the ex-dividend date.
Distributions from net investment income are paid semi-annually. Capital gains,
if any, are primarily distributed as of the end of the calendar year. Additional
capital gains distributions as needed to comply with federal tax regulations are
distributed during the year.
CONCENTRATION OF RISK
Investments in countries with limited or developing capital markets may
involve greater risks than investments in more developed markets and the prices
of such investments may be volatile. The consequences of political, social or
economic changes in these markets may have disruptive effects on the market
prices of the Fund's investments and the income it generates, as well as the
Fund's ability to repatriate such amounts.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI LATIN AMERICA FUND
March 31, 1997
(unaudited)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported results of operations during the reporting period.
Actual results could differ from those estimates.
[2] COMMITMENTS AND CONTINGENCIES
For purposes of obtaining certain types of insurance coverage for the Fund
and its officers and directors, the Fund is a policyholder in an
industry-sponsored mutual insurance company (the Company). In connection with
its obligations as a policyholder, the Fund is committed to make future capital
contributions, if requested by the Company.
The Latin America Fund has an available line of credit of $ 250,000 with a
bank at the prime interest rate. To the extent funds are drawn against the line,
securities are held in a segregated account. No compensating balances or
commitment fees are required under the line of credit. There were no borrowings
outstanding at March 31, 1997.
[3] FEES AND EXPENSES
Under terms of the Fund's Management Agreement, Investment Advisers, Inc.
(Advisers) is required to pay for all expenses of the Fund, except certain costs
(primarily those incurred in the purchase and sale of assets, taxes and interest
and extraordinary expenses) in return for the Fund paying an all inclusive
management fee (unified fee) to Advisers. 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. The management fee is paid monthly and is calculated
based on average daily net assets at an annual rate of 3.00% for the first $100
million in net assets, 2.95% for the next $150 million in net assets, 2.75% for
the next $250 million in net assets and 2.65% for net assets above $500 million.
Until March 1, 1998, IAI has voluntarily agreed to waive its fee in excess of
2.00% of the Fund's average daily net assets.
[4] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the period ended March 31, 1997, purchases of securities and sales
proceeds, other than investments in short-term securities, for the Fund
aggregated $3,628,796 and $342,255, respectively.
10
