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BALANCED FUND
IAI Balanced Fund
August 1, 1995
Includes Brochure and Prospectus
IAI
Mutual Funds
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[WORLD MAP ART]
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IAI Mutual Funds
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IAI Balanced Fund
Fund Information
Low Minimum Investment
You can open an account with IAI for only $5,000 ($2,000 for an IRA). The
minimum investment per Fund is $1,000. Subsequent investments can be made for
only $100 per Fund.
No-Load
With IAI, you pay no commissions to buy, sell, or exchange shares.
No-fee IRA
Unlike many others, IAI charges no annual fee for maintaining your IRA.
Family of Funds
Whatever your investment needs, IAI's diverse Mutual Fund family has the right
Fund for you. Call for a free Prospectus for the IAI Developing Countries Fund,
IAI International Fund, IAI Emerging Growth Fund, IAI Midcap Growth Fund, IAI
Regional Fund, IAI Growth Fund, IAI Value Fund, IAI Growth and Income Fund, IAI
Balanced Fund, IAI Bond Fund, IAI Minnesota Tax Free Fund, IAI Government Fund,
IAI Reserve Fund and IAI Money Market Fund. Read the Prospectus carefully before
investing or sending money.
Free Exchanges
Money can be exchanged between IAI Mutual Funds free of charge.
Automatic Investment Program
Regular monthly investments ($100 minimum) can be made automatically into the
Fund from your checking or savings account. IAI Shareholders in other Funds may
arrange to invest regularly through monthly exchanges into any of the IAI Mutual
Funds.
Liquidity
You can redeem part or all of your Fund shares at any time at the then current
share price (which may be more or less than your original cost). Special rules
apply to IRAs.
Retirement Programs
IAI offers a variety of retirement investment programs including Individual
Retirement Accounts (IRAs), Direct Rollovers for persons receiving distributions
from Qualified Retirement Plans, SEP (Simplified Employee Pension) Plans for
small business owners, and 401(k) and 403(b) retirement plans for companies and
non-profit organizations.
Toll-Free Telephone Transactions
IAI offers a convenient toll-free telephone service for investors to find out
more about IAI Mutual Funds and services and to carry out transactions such as
buying or selling shares or exchanging assets from one fund to another. The
toll-free number, 1-800-945-3863, is available from anywhere in the United
States, weekdays from 7:30 a.m. - 5:30 p.m. Central Time.
IAI Investor Library
The IAI Investor Library provides free practical and objective information on
investing and investment strategies to investors who call 1-800-945-3863 and
request the Adviser Special Reports.
Quarterly Newsletter
IAI's free quarterly newsletter keeps shareholders up to date on IAI Mutual
Funds' performance and economic conditions, and provides helpful tips on
investing.
IAI Preferred
IAI shareholders with balances in excess of $100,000 receive unique privileges,
including an exclusive toll-free telephone number, an individually assigned
account representative, an "Investing for Retirement" brochure and an IAI
Preferred portfolio organizer to conveniently house all IAI correspondence.
Easy-to-Read Statements
IAI provides complete, easy to read quarterly account statements which include
summaries of all transactions and portfolio allocations for all of your IAI
Mutual Fund holdings on one report.
Dividend Options
IAI shareholders may receive dividends in cash, have them electronically
directed to their personal bank account or arrange to automatically reinvest
them in additional IAI Mutual Fund shares.
Information and Assistance
Our knowledgeable investment representatives are available to help you--with no
sales pressure.
Not part of the prospectus
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IAI Mutual Funds
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IAI Balanced Fund
Fund Information
[Photo of Larry R. Hill, CFA]
Larry R. Hill, CFA
Fund Manager
[Photo of Mark L. Simenstad, CFA]
Mark L. Simenstad, CFA
Fund Manager
[Photo of John A. Twele, CFA]
John A. Twele, CFA
Fund Manager
Three Funds in One
The IAI Balanced Fund seeks to provide the total return benefits normally
associated with owning a combination of several funds--growth from a stock fund,
income from a bond fund, and balance from a short-term bond fund.
Stocks, Bonds and Short-term Instruments
The Fund invests in a diversified portfolio, primarily including stocks, bonds
and short-term instruments. The Fund may also make other investments that do not
fall within these classes.
A Diversified Portfolio
Asset Allocation Example
[CHART APPEARS HERE]
Stocks
Bonds 25-75%
Short-term Instruments
This chart does not represent actual asset allocation structure for the IAI
Balanced Fund.
The Fund's portfolio managers allocate the Fund's assets primarily among stocks,
bonds and short-term instruments according to market conditions. As the outlook
changes, the Fund's composition is shifted gradually. For instance, if stocks
are expected to outperform bonds, assets are shifted gradually to stocks.
Semi-Annual Dividends
Dividends are paid twice a year. You may take your dividends in cash or
automatically reinvest them in additional shares.
Professional Management
The IAI Balanced Fund is a member of the IAI Mutual Fund family. Founded in
1947, IAI manages over $15 billion for thousands of individual investors, as
well as FORTUNE 500/(R)/ companies, leading colleges, universities, and
religious organizations.
It's Easy to Start
To open an account, simply complete the enclosed application and return it in
the postage-paid envelope with a check payable to "IAI Mutual Funds." If you are
a current shareholder in any IAI Mutual Fund, the minimum investment is $1,000.
If not, the minimum investment is $5,000 (this can be allocated among our Mutual
Funds, with $1,000 minimum per Fund).
call 1-800-945-3863
Not part of the prospectus
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The Benefits of Diversification...
Diversification is a proven investment technique that has a place in virtually
all portfolios. Diversification means spreading your assets across several
different types of investments, such as stocks, bonds and short-term
instruments.
Growth, Income and Balance
With a diversified portfolio, you get a mixture of potential benefits of each
type of investment:
. Growth potential from stocks
. Steady income from bonds
. Balance from short-term instruments
Reduced Volatility
By mixing different investments together, the volatility of the overall
portfolio can be reduced because each of the investments follows its own cycle.
Each responds differently to changes in the economy and the investment
marketplace. As a result, if one investment is down temporarily, the others may
be stable or increasing in value, as shown in the following chart. The total
returns for stocks, bonds and short-term instruments are shown for three
different years--1975, 1981 and 1984. Note that in each of the years, a
different investment performed the best. Thus a diversified portfolio can
provide increased balance without giving up the potential for significant
capital appreciation.
Investment Returns Fluctuate
<TABLE>
<CAPTION>
Short-term
Annual Returns Bonds Instruments
<S> <C> <C> <C>
1975... 37.2 9.2 5.8
1981... (4.9) 1.9 14.7
1984... 6.3 15.5 9.9
</TABLE>
Source: Ibbotson Associates. Stocks reflect the S&P 500 Stock Index, an
unmanaged index of securities. This index is not available for direct
investment. Past performance is no guarantee of future results. Bonds reflect
long-term U.S. Government bonds. Short-term instruments reflect U.S. Treasury
bills.
The Convenience of One Investment
Managing a portfolio of individual stocks, bonds and short-term instruments by
yourself can be a daunting task. Even managing a group of mutual funds which
invest in stocks, bonds and short-term instruments is challenging, particularly
if you want to maximize returns by varying the weighting of each asset class as
market conditions change. With the IAI Balanced Fund, you get the benefits of
diversification, asset allocation, and convenience, all in one fund.
"A fund that has it all...stocks, bonds and short-term instruments."
Not part of the prospectus
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<TABLE>
<S> <C>
Fund Expense Information ................... 2
Fund Directors ............................. 2
Financial Highlights ....................... 3
Investment Performance ..................... 4
Investment Objective and Policies .......... 4
Portfolio Securities and
Other Fund Investment Techniques ........... 6
Fund Risk Factors .......................... 8
Management ................................. 10
Plan of Distribution ....................... 12
Computation of Net Asset
Value and Pricing .......................... 13
Purchase of Shares ......................... 14
Retirement Plans ........................... 15
Automatic Investment Plan .................. 15
Redemption of Shares ....................... 15
Exchange Privilege ......................... 16
Automatic Exchange Plan .................... 17
Authorized Telephone Trading ............... 17
Systematic Cash Withdrawal Plan ............ 18
Dividends, Distributions and
Tax Status ................................. 18
Description of Common Stock ................ 20
Counsel and Auditors ....................... 20
Custodian, Transfer Agent and
Dividend Disbursing Agent .................. 20
Additional Information ..................... 21
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IAI Balanced Fund
Prospectus Dated August 1, 1995
IAI Balanced Fund's investment objective is to maximize total return to
investors. The Fund pursues its objective by investing in a broadly diversified
portfolio of stocks, bonds, and short-term instruments.
This Prospectus sets forth concisely the information which a prospective
investor should know about the Fund before investing and it should be retained
for future reference. A "Statement of Additional Information" dated August 1,
1995, which provides a further discussion of certain areas in this Prospectus
and other matters which may be of interest to some investors, has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference. For a free copy, call or write the Fund at the address or telephone
number shown on the inside back cover of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Fund Expense Information
Shareholder Transaction Expenses
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IAI Balanced Fund
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Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Redemption Fees None
Exchange Fees None
Annual Fund Operating Expenses* (Net of Reimbursements)
IAI Balanced Fund
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Management Fee .75%
Rule 12b-1 Fee .11%
Other Expenses .39%
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Total Fund Operating Expenses 1.25%
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*as a percentage of average month-end net assets
Example: Based upon the levels of total fund operating expenses listed above,
you would pay the following expenses on a $1,000 investment, assuming a five
percent annual return and redemption at the end of each period:
IAI Balanced Fund
1 Year 3 Year 5 Year 10 Year
------ ------ ------ -------
$13 $40 $69 $151
Fund Directors
Madeline Betsch
W. William Hodgson
George R. Long
Noel P. Rahn
Richard E. Struthers
J. Peter Thompson
Charles H. Withers
The purpose of the above table is to assist you in understanding the various
costs and expenses that an investor in the Fund will bear directly or
indirectly. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The
fees set forth in the table reflect expected fees and expenses of the Fund for
its fiscal year ending March 31, 1995. Because the Fund's Rule 12b-1 fee is
based on a percentage of the Fund's net assets, long-term shareholders may pay
more than the economic equivalent of the maximum front-end sales charges
permitted by Section 26 of the National Association of Securities Dealers' Rules
of Fair Practice.
The Total Fund Operating Expenses are subject to a contractual expense
limitation of 1.25% of the Fund's average month-end net assets, as further
described in the section "Management." Projected Total Fund Operating Expenses
set forth above are the same as the actual Total Fund Operating Expenses for the
fiscal year ended March 31, 1995. Absent such expense limitation, the Fund would
pay .25% of its average month-end net assets in Rule 12b-1 Fees. Further
information concerning fees paid by the Fund is set forth in the Statement of
Additional Information.
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Financial Highlights
The following information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report is included in the Fund's Annual Report. The Financial
Highlights section of the Annual Report is incorporated by reference in (and is
a part of) the Statement of Additional Information. Such Annual Report may be
obtained by shareholders on request from the Fund at no charge.
<TABLE>
<CAPTION>
Years Ended March 31, Period from
------------------------------- April 10, 1992* to
1995 1994 March 31, 1993
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<S> <C> <C> <C>
Net Asset Value:
Beginning of period $ 10.36 $ 10.89 $ 10.00
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Operations:
Net investment income .29 .27 .18
Net realized gains .62 (.34) .84
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Total from operations .91 (.07) 1.02
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Distributions to shareholders from:
Net investment income (.32) (.26) (.13)
Net realized and unrealized gains (losses) (.38) (.20) -
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Total distributions (.70) (.46) (.13)
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Net Asset Value:
End of period $ 10.57 $ 10.36 $ 10.89
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Total investment return** 9.44% (.77%) 10.18%
Net assets at end of period
(000's omitted) $41,419 $52,369 $ 70,068
Ratios:
Expenses to average net assets 1.25% 1.25% 1.25%***
Net investment income
to average net assets 2.68% 2.35% 2.18%***
Portfolio turnover rate
(excluding short-term securities) 256.9% 211.9% 83.4%
</TABLE>
* Commencement of operations
** Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of distributions at net asset
value.
*** Annualized
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Investment Performance
From time to time the Fund may advertise performance data including monthly,
quarterly, yearly or cumulative total return, average annual total return and
yield figures. All such figures are based on historical earnings and performance
and are not intended to be indicative of future performance. The investment
return on and principal value of an investment in the Fund will fluctuate, so
that an investor's shares, when redeemed, may be worth more or less than their
original cost.
Total return is the change in value of an investment in the Fund over a given
period, assuming reinvestment of any dividends and capital gains. A cumulative
total return reflects actual performance over a stated period of time. An
average annual total return is a hypothetical rate of return that, if achieved
annually, would have produced the same cumulative total return if performance
had been constant over the entire period.
Yield refers to the income generated by an investment in the Fund over a given
period of time, expressed as an annual percentage rate. Yields are calculated
according to a standard that is required for all funds. Because this differs
from other accounting methods, the quoted yield may not equal the income
actually paid to shareholders.
For additional information regarding the calculation of such total return and
yield figures, see "Investment Performance" in the Statement of Additional
Information. Further information about the performance of the Fund is contained
in the Fund's Annual Report to shareholders which may be obtained without charge
from the Fund.
Comparative performance information may be used from time to time in advertising
or marketing the Fund's shares, including data on the performance of other
mutual funds, indexes or averages of other mutual funds, indexes of related
financial assets or data, and other competing investment and deposit products
available from or through other financial institutions. The composition of these
indexes, averages or products differs from that of the Fund. The comparison of
the Fund to an alternative investment should be made with consideration of
differences in features and expected performance. The Fund may also note its
mention in newspapers, magazines, or other media from time to time. The Fund
assumes no responsibility for the accuracy of such data. For additional
information on the types of indexes, averages and periodicals that might be
utilized by the Fund in advertising and sales literature, see the section
"Investment Performance" in the Statement of Additional Information.
Investment Objective and Policies
The investment objective of the Fund is to maximize total return. The Fund will
seek to achieve its objective by investing in a broadly diversified portfolio of
stocks, bonds and short-term instruments. The Fund's investment
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objective is a fundamental policy and may not be changed without shareholder
approval. There can be no assurance that the Fund will achieve its investment
objective.
In seeking to achieve its investment objective, Investment Advisers, Inc. (IAI),
the Fund's investment adviser and manager, allocates the Fund's assets among the
three classes of assets set forth above. Under normal market conditions, the
Fund holds between 25% and 75% of its assets in stocks and other equity
securities, between 25% and 75% of its assets in bonds and other fixed income
securities, and up to 50% of its assets in short-term instruments. The Fund may
also make other investments that do not fall within these classes.
The stock class includes equity securities of all types and consists primarily
of common stocks, securities convertible into common stocks, and non-convertible
preferred stocks. The bond class includes all varieties of fixed-income
instruments with maturities of more than one year and consists primarily of
investment grade bonds and other comparable fixed income securities. Investment
grade securities are those securities rated within the four highest grades
assigned by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
Corporation ("S&P"). Although the Fund may also invest in below investment grade
securities, it currently intends to limit such investments to 5% of its total
assets and not to invest in securities rated lower than B by Moody's or S&P.
Securities rated in the medium to lower rating categories of nationally
recognized statistical rating organizations and unrated securities of comparable
quality are predominately speculative with respect to the capacity to pay
interest and repay principal in accordance with the terms of the security and
generally involve a greater volatility of price than securities in higher rating
categories. See "Investment Objectives and Policies" in and Appendix A to the
Statement of Additional Information for additional information regarding ratings
of debt securities. In purchasing such securities, the Fund will rely on IAI's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer of such securities. IAI will take into consideration, among other things,
the issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management and
regulatory matters.
The short-term class includes all types of short-term instruments with remaining
maturities of one year or less and consists primarily of commercial paper, bank
certificates of deposit, bankers' acceptances, government securities, repurchase
agreements and other similar short-term instruments. Short-term securities are
only purchased if given one of the top two ratings by a major ratings service
or, if unrated, are of comparable quality as determined by IAI. Within each of
these classes, the Fund may invest in both domestic and foreign securities.
IAI regularly reviews its allocation of the Fund's assets among the three
classes and gradually varies them over time to favor asset classes that, in
IAI's judgment, provide the most favorable total return outlook. Because the
Fund seeks to maximize total return over the long-term, it will not try to
pinpoint the precise moment when major reallocations are warranted. Rather, such
reallocations among
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asset classes will be made gradually over time and, under normal conditions, a
single reallocation decision will not involve more than 10% of the Fund's total
assets.
Portfolio Securities and Other Fund Investment Techniques
Repurchase Agreements
The Fund may invest in repurchase agreements relating to the securities in which
it may invest. In a repurchase agreement, the Fund buys a security at one price
and simultaneously agrees to sell it back at a higher price. Delays or losses
could result if the other party to the agreement defaults or becomes bankrupt.
Borrowing
The Fund may borrow from banks for temporary or emergency purposes or through
reverse repurchase agreements. If the Fund borrows money, its share price may be
subject to greater fluctuation until the borrowing is paid off. If the Fund
makes additional investments while borrowings are outstanding, this may be
considered a form of leverage.
Illiquid Securities
The Fund may invest up to 15% of its total assets in securities that are
considered illiquid because of the absence of a readily available market or due
to legal or contractual restrictions. However, certain restricted securities
that are not registered for sale to the general public but that can be resold to
institutional investors may be considered liquid pursuant to guidelines adopted
by the Board of Directors. The institutional trading market is relatively new,
and the liquidity of the Fund's investments could be impaired if trading does
not develop or declines.
Foreign Securities
The Fund may invest in securities of foreign issuers in accordance with its
investment objective and policies. In considering whether to purchase securities
of foreign issuers, IAI will consider the political and economic conditions in a
country, the prospect for changes in the value of its currency and the liquidity
of the investment in that country's securities markets. The Fund currently
intends to limit its investment in foreign securities denominated in foreign
currency and not publicly traded in the United States to no more than 10% of its
total assets.
Venture Capital
The Fund may invest in venture capital limited partnerships and funds which, in
turn, invest principally in securities of early stage, developing companies.
Investments in venture capital limited partnerships and funds present a number
of risks not found in investing in established enterprises including the fact
that such a partnership's portfolio will be composed almost entirely of early-
stage companies which may lack depth of management and sufficient resources, may
be marketing a new product for which there is no established market, and may be
subject to intense competition from larger companies. Any investment in a
venture capital fund will lack liquidity, will be difficult to value, and the
Fund will have almost no control over the manage-
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ment of the partnership. If for any reason the services of the general partners
of a venture capital limited partnership were to become unavailable, such
limited partnership could be adversely affected.
In addition to investing in venture capital limited partnerships and funds, the
Fund may directly invest in early-stage, developing companies. The risks
associated with investing in these securities are substantially similar to the
risks set forth above. The Fund will typically purchase equity securities in
these early stage, developing companies; however from time to time, the Fund may
purchase non-investment grade debt securities in the form of convertible notes.
Leveraged Buyouts
The Fund may invest in leveraged buyout limited partnerships and funds which, in
turn, invest in leveraged buyout transactions (LBOs). An LBO, generally, is an
acquisition of an existing business by a newly formed corporation financed
largely with debt assumed by such newly formed corporation to be later repaid
with funds generated from the acquired company. Since most LBOs are by nature
highly leveraged (typically with debt to equity ratios of approximately 9 to 1),
equity investments in LBOs may appreciate substantially in value given only
modest growth in the earnings or cash flow of the acquired business. Investments
in LBOs, however, present a number of risks. Investments in LBO limited
partnerships and funds will normally lack liquidity and may be subject to
intense competition from other LBO limited partnerships and funds. Additionally,
if the cash flow of the acquired company is insufficient to service the debt
assumed in the LBO, the LBO limited partnership or fund could lose all or part
of its investment in such acquired company.
When-Issued/Delayed Delivery Securities
The Fund may purchase portfolio securities on a when-issued or delayed-delivery
basis. When-issued and delayed-delivery transactions are trading practices
wherein payment for and delivery of the securities take place at a future date.
The market value of a security could change during this period, which could
affect the market value of the Fund's assets.
Zero Coupon Obligations
The Fund may also invest in zero coupon obligations of the U.S. Government or
its agencies, tax exempt issuers and corporate issuers, including rights to
stripped coupon and principal payments ("strips"). Zero coupon bonds do not make
regular interest payments; rather, they are sold at a discount from face value.
Principal and accreted discount (representing interest accrued but not paid) are
paid at maturity. Strips are debt securities that are stripped of their interest
after the securities are issued, but otherwise are comparable to zero coupon
bonds. The market value of strips and zero coupon bonds generally fluctuates in
response to changes in interest rates to a greater degree than do interest-
paying securities of comparable term and quality.
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Adjusting Investment Exposure
The Fund can use various techniques to increase or decrease its exposure to
changing security prices, interest rates, currency exchange rates, commodity
prices, or other factors that affect security values. These techniques include
buying and selling options and futures contracts, entering into currency
exchange contracts or swap agreements, purchasing indexed securities, and
selling securities short. Because some Fund assets may be invested in restricted
securities and thus may not be associated with short-term movements in the
financial markets, that portion of the Fund's assets may not be able to
participate in market movements. The Fund may invest in futures contracts in
amounts corresponding to its investments in such restricted securities in order
to participate fully in market movements.
Temporary Defensive Position
In unusual market conditions, when IAI believes a temporary defensive position
is warranted, the Fund may invest without limitation in investment-grade fixed
income securities, that is, securities rated within the four highest grades
assigned by Moody's or S&P, or money market securities (including repurchase
agreements). Money market securities will only be purchased if they have been
given one of the two top ratings by a major ratings service or, if unrated, are
of comparable quality as determined by IAI. If the Fund maintains a temporary
defensive position, investment income may increase and may constitute a large
portion of the Fund's return.
Portfolio Turnover
The Fund will dispose of securities without regard to the time they have been
held when such action appears advisable to management either as a result of
securities having reached a price objective, or by reason of developments not
foreseen at the time of the investment decision. Since investment changes
usually will be made without reference to the length of time a security has been
held, a significant number of short-term transactions may result. Accordingly,
the Fund's annual portfolio turnover rate cannot be anticipated and may be
relatively high. High turnover rates increase transaction costs, and may
increase taxable capital gains. The Fund's historical portfolio turnover rates
are set forth in the section "Financial Highlights."
Further information regarding these and other securities and investment
techniques is contained in the Statement of Additional Information.
Fund Risk Factors
Duration
In managing the Fund, IAI will adjust the duration of the fixed income
securities in the Fund's investment portfolio in response to economic and market
conditions. Duration is a measure of the expected change in value of a fixed
income security (or portfolio) for a given change in interest rates. For
example, if interest rates rise by one percent, the market value of a security
(or portfolio) having a
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duration of two generally will fall by approximately two percent. Duration is
generally considered a better measure of interest rate risk than is maturity. In
some situations, the standard duration calculation does not properly reflect the
interest rate risk of a security. In such situations, IAI will use more
sophisticated analytical techniques, such as modeling principal and interest
payments based upon historical experience or expected volatility, to arrive at
an effective duration that incorporates the additional variables into the
determination of interest rate risk. These techniques may involve estimates of
future economic parameters which may vary from actual future outcomes.
Risks of Lower-rated Debt Securities
The Fund may invest in debt securities commonly known as "junk" bonds. Such
securities are subject to higher risks and greater market fluctuations than are
lower-yielding, higher-rated securities. The price of junk bonds has been found
to be less sensitive to changes in prevailing interest rates than higher-rated
investments, but is likely to be more sensitive to adverse economic changes or
individual corporate developments. During an economic downturn or substantial
period of rising interest rates, highly leveraged issuers may experience
financial stress which would adversely affect their ability to service their
principal and interest payment obligations, to meet their projected business
goals or to obtain additional financing. If the issuers of a fixed-income
security owned by the Fund were to default, the Fund might incur additional
expenses to seek recovery. The risk of loss due to default by issuers of junk
bonds is significantly greater than that associated with higher-rated securities
because such securities generally are unsecured and frequently are subordinated
to the prior payment of senior indebtedness. In addition, periods of economic
uncertainty and change can be expected to result in an increased volatility of
market prices of junk bonds and a concomitant volatility in the net asset value
of a share of the Fund.
The secondary market for junk bonds is less liquid than the markets for higher
quality securities and, as such, may have an adverse effect on the market prices
of certain securities. The limited liquidity of the market may also adversely
affect the ability of the Fund to arrive at a fair value for certain junk bonds
at certain times and could make it difficult for the Fund to sell certain
securities. For a description of Moody's and S&P ratings, see Appendix A to the
Statement of Additional Information.
Foreign Investment Risk Factors
Investments in foreign securities involve risks that are different in some
respects from investments in securities of U.S. issuers, such as the risk of
fluctuations in the value of the currencies in which they are denominated, the
risk of adverse political and economic developments and, with respect to certain
countries, the possibility of expropriation, nationalization or confiscatory
taxation or limitations on the removal of funds or other assets of the Fund.
Securities of some foreign companies are less liquid and more volatile than
securities of comparable domestic com-
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panies. There also may be less publicly available information about foreign
issuers than domestic issuers, and foreign issuers generally are not subject to
the uniform accounting, auditing and financial reporting standards, practices
and requirements applicable to domestic issuers. Because the Fund can invest in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates may affect the value of securities in
the portfolio. Foreign currency exchange rates are determined by forces of
supply and demand in the foreign exchange markets and other economic and
financial conditions affecting the world economy. A decline in the value of any
particular currency against the U.S. dollar will cause a decline in the U.S.
dollar value of the Fund's holdings of securities denominated in such currency
and, therefore, will cause an overall decline in the Fund's net asset value and
net investment income and capital gains, if any, to be distributed in U.S.
dollars to shareholders by the Fund. Delays may be encountered in settling
securities transactions in certain foreign markets, and the Fund will incur
costs in converting foreign currencies into U.S dollars. Custody charges are
generally higher for foreign securities.
Risks of Transactions in Derivatives
IAI may use futures, options, swap and currency exchange agreements as well as
short sales to adjust the risk and return characteristics of the Fund's
portfolio of investments. If IAI judges market conditions incorrectly or employs
a strategy that does not correlate well with the Fund's investments, use of
these techniques could result in a loss, regardless of whether the intent was to
reduce risk or increase return. Use of these techniques may increase the
volatility of the Fund and may involve a small investment of cash relative to
the magnitude of risk assumed. In addition, these techniques could result in a
loss if the counterparty to the transaction is unable to perform as promised.
Moreover, a liquid secondary market for any futures or options contract may not
be available when a futures or options position is sought to be closed. Please
refer to the Statement of Additional Information which further describes these
risks.
Investment Restrictions
The Fund is subject to certain other investment policies and restrictions
described in the Statement of Additional Information, some of which are
fundamental and may not be changed without the approval of the shareholders of
the Fund. The Fund is a diversified investment company and has a fundamental
policy that, with respect to 75% of its total assets, it may not invest more
than 5% of its total assets in any one issuer. The Fund, also as fundamental
policies, may not invest more than 25% of its assets in any one industry and may
borrow only for temporary or emergency purposes in an amount not exceeding one-
third of its total assets.
Please refer to the Statement of Additional Information for a further discussion
of the Fund's investment risks and investment restrictions.
Management
Under Minnesota law, the Fund's Board of Directors is generally responsible for
the overall operation and management of the
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IAI Mutual Funds
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IAI Balanced Fund
Fund. IAI serves as the investment adviser and manager of the Fund pursuant to a
written advisory agreement (the "Advisory Agreement"). IAI also furnishes
investment advice to other concerns including other investment companies,
pension and profit sharing plans, portfolios of foundations, religious,
educational and charitable institutions, trusts, municipalities and individuals,
having total assets in excess of $14 billion. IAI is an affiliate of Hill Samuel
Group ("Hill Samuel"), an international merchant banking and financial services
group based in London, England. Hill Samuel, in turn, is owned by TSB Group plc,
a publicly-held financial services organization headquartered in London,
England. TSB Group plc is one of the largest personal and corporate financial
services groups in the United Kingdom and is engaged in a wide range of
activities including banking, unit linked life assurance, unit trust management,
investment management, credit card and finance house business. The address of
IAI is that of the Fund.
Under the Advisory Agreement, IAI provides the Fund with investment advice,
statistical and research facilities, and certain equipment and services,
including, but not limited to, office space and necessary office facilities,
equipment, and the services of required personnel. Under the Advisory Agreement,
IAI has the sole authority and responsibility to make and execute investment
decisions for the Fund within the framework of the Fund's investment policies,
subject to review by the Board of Directors. As compensation for these services,
the Fund has agreed to pay IAI a monthly advisory fee at the initial annual rate
of .75% of the Fund's average month-end net assets, which fee declines to .65%
of the Fund's average month-end net assets as the amount of assets in the Fund
grows. For its fiscal year ended March 31, 1995, the Fund paid IAI an advisory
fee of .75% of its average month-end net assets.
The Fund is managed by a team of IAI investment professionals which is
responsible for making the day-to-day investment decisions for the Fund.
Larry Hill, John Twele and Mark Simenstad have responsibility for the management
of the Fund. Mr. Hill, IAI's Chief Investment Officer, has general
responsibility for the Fund's investment activities. Mr. Hill is an Executive
Vice President and Director of IAI and has served as its Chief Fixed Income
Officer since 1984. Mr. Twele has managed the Fund's equity securities since
April 1994, when he joined IAI as a Vice President and equity portfolio manager.
Before joining IAI, Mr. Twele had been a Senior Equity Analyst with IDS
Financial Services since 1987. Mr. Simenstad has managed the Fund's fixed income
securities since 1993. Mr. Simenstad is a Vice President of IAI and has served
as a fixed income portfolio manager since joining IAI in 1993. Before joining
IAI, Mr. Simenstad served as a fixed income portfolio manager for Lutheran
Brotherhood from 1983 to 1993.
R. David Spreng has been responsible for Fund investments in restricted
securities,
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<PAGE>
IAI Mutual Funds
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IAI Balanced Fund
including equity and limited partnership interests in privately-held companies
and investment partnerships, since 1993. Mr. Spreng is a Senior Vice President
of IAI and has served IAI in several capacities since 1989.
Pursuant to the terms of an Administrative Agreement, IAI also provides all
required administrative, stock transfer, redemption, dividend disbursing and
accounting services, including, for example, the maintenance of the Fund's
accounts, books and records, the daily calculation of the Fund's net asset
value, daily and periodic reports, all information necessary to complete tax
returns, questionnaires and other reports requested by the Fund, the maintenance
of stock registry records, the processing of requested account registration
changes and redemption requests, and the administration of payments of dividends
and distributions declared by the Fund. As compensation for these services, the
Fund paid IAI an administrative fee of .20% of the Fund's average net assets for
its fiscal year ended March 31, 1995. IAI may use all or a portion of this
administrative fee to pay certain institutions which have contracted with IAI to
provide certain administrative services to their customers who invest in the
Fund. Such services include, but are not limited to, shareholder assistance and
communication, transaction processing and settlement, account set-up and
maintenance, tax reporting, and accounting.
In addition to the advisory fee and the administrative fee paid to IAI, the Fund
pays all its other costs and expenses, including, for example, costs incurred in
the purchase and sale of assets, interest, taxes, charges of the custodian of
the Fund's assets, costs of reports and proxy materials sent to Fund
shareholders, fees paid for independent accounting and legal services, costs of
printing prospectuses for Fund shareholders and registering the Fund's shares,
postage, fees to disinterested directors, insurance premiums and costs of
attending investment conferences.
The Advisory Agreement provides that IAI shall reimburse the Fund for operating
expenses (other than interest and, in certain circumstances, taxes and
extraordinary expenses) which, for any year, exceed 1.25% of the Fund's average
month-end net assets. IAI shall not be liable for any loss suffered by the Fund
in the absence of willful misfeasance, bad faith or gross negligence in the
performance of its duties and obligations.
Plan of Distribution
The Fund has adopted a written plan of distribution (the "Plan") in accordance
with Rule 12b-1 under the 1940 Act pursuant to which it pays a fee as described
below. Under the Plan, the Fund has entered into a Distribution and Shareholders
Services Agreement with IAI Securities, Inc. ("IAIS"), pursuant to which the
Fund may pay IAIS a fee for servicing Fund shareholder accounts and for
distributing Fund shares (the "Rule 12b-1 Fee"). Subject to the expense
limitations described above, the Fund has agreed to pay IAIS a Rule 12b-1 Fee at
an annual rate of .25% of the Fund's average month-end net assets (which amount
will be paid to IAIS regardless of amounts spent by IAIS in
12
<PAGE>
IAI Mutual Funds
----------------
IAI Balanced Fund
servicing fund shareholders and distributing the Fund's shares).
The Rule 12b-1 Fee may be used by the Fund to compensate IAIS for the provision
of certain services to Fund shareholders. The services provided may include
personal services provided to shareholders, such as answering shareholder
inquiries regarding the Fund and providing reports and other information, and
services related to the maintenance of shareholder accounts. IAIS may use the
Rule 12b-1 Fee to make payments to qualifying broker-dealers and financial
institutions that provide such services.
The Rule 12b-1 Fee may also be used by IAIS for the purposes of financing any
activity which is primarily intended to result in the sale of shares of the
Fund. The expenses of such activities include, by way of example but not by way
of limitation, costs of prospectuses, semiannual reports, costs of quarterly
reports and monthly letters to prospective shareholders, expenses associated
with the preparation and distribution of sales literature and advertising of any
type, compensation and benefits paid to and expenses incurred by personnel,
including supervisory personnel, involved in direct mail and advertising
activities and activities relating to the direct marketing of Fund shares to the
public, and compensation to other broker-dealers for selling Fund shares.
The Rule 12b-1 Fee payable by the Fund is subject to the limitations on Fund
operating expenses set forth in the Advisory Agreement described above.
Additionally, IAIS, in its sole and absolute discretion, may from time to time,
out of its own assets, pay for certain additional costs associated with
shareholder servicing or distributing the Fund's shares. For the fiscal year
ended March 31, 1995, the Fund paid IAIS annualized Rule 12b-1 Fees of .11% of
its average month-end net assets. IAIS is an affiliate of IAI and its offices
are the same as those of the Fund.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., IAI may consider sales of shares of the Fund as a
factor in the selection of broker-dealers to execute the Fund's securities
transactions.
Computation of Net Asset Value and Pricing
The Fund is open for business each day the New York Stock Exchange (NYSE) is
open. IAI normally calculates the Fund's net asset value (NAV) as of the close
of business of the NYSE, normally 3 p.m. Central time.
The Fund's NAV is the value of a single share. The NAV is computed by adding up
the value of the Fund's investments, cash, and other assets, subtracting its
liabilities, and then
13
<PAGE>
IAI Mutual Funds
----------------
IAI Balanced Fund
dividing the result by the number of shares outstanding.
The Fund's investments with remaining maturities of 60 days or less may be
valued on the basis of amortized cost. This method minimizes the effect of
changes in a security's market value. Other portfolio securities and assets are
valued primarily on the basis of market quotations or, if quotations are not
readily available, by a method that the Board of Directors believes accurately
reflects fair value. Foreign securities are valued on the basis of quotations
from the primary market in which they are traded, and are translated from the
local currency into U.S. dollars using current exchange rates.
The offering price (price to buy one share) and redemption price (price to sell
one share) are the Fund's NAV.
Purchase of Shares
The Fund offers its shares continually to the public at the net asset value of
such shares. Shares may be purchased directly from the Fund or through certain
security dealers who have responsibility to promptly transmit orders and may
charge a processing fee, provided that the Fund is duly registered in the state
of the purchaser's residence, if required, and the purchaser otherwise satisfies
the Fund's purchase requirements. No sales load or commission is charged in
connection with the purchase of Fund shares.
Shares may be purchased for cash or in exchange for securities which are
permissible investments of the Fund, subject to IAI's discretion and its
determination that the securities are acceptable. Securities accepted in
exchange will be valued on the basis of market quotations or, if market
quotations are not available, by a method that IAI believes accurately reflects
fair value. In addition, securities accepted in exchange are required to be
liquid securities that are not restricted as to transfer.
The minimum initial investment to establish an account with the IAI Mutual Funds
is $5,000. Such initial investment may be allocated among the Fund and other IAI
Mutual Funds as desired, provided that no less than $1,000 is allocated to any
one fund. The minimum initial investment for IRA accounts is $2,000, provided
that the minimum amount that may be allocated to any one fund is $1,000. Once
the account minimum has been met, subsequent purchases can be made in the Fund
for $100 or more.
Investors may satisfy the minimum investment requirement by participating in the
STAR Program. Participation in the STAR Program requires an initial investment
of $1,000 per Fund and a commitment to invest an aggregate of $5,000 within 24
months. If a STAR Program participant does not invest an aggregate of $5,000 in
the IAI Mutual Funds within 24 months, IAI may, at its option, redeem such
shareholder's interest and remit such amount to the shareholder. Investors
wishing to participate in the STAR Program should contact the Fund to obtain a
STAR Program application.
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IAI Mutual Funds
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IAI Balanced Fund
To purchase shares, forward the completed application and a check payable to
"IAI Funds" to the Fund. Upon receipt, your account will be credited with the
number of full and fractional shares which can be purchased at the net asset
value next determined.
Purchases of shares are subject to acceptance or rejection by the Fund on the
same day the purchase order is received and are not binding until so accepted.
It is the policy of the Fund and IAIS to keep confidential information contained
in the application and regarding the account of an investor or potential
investor in the Fund.
All correspondence relating to the purchase of shares should be directed to the
office of the Fund, P.O. Box 357, Minneapolis, Minnesota 55440 or, if using
overnight delivery, to 3700 First Bank Place, 601 Second Avenue South,
Minneapolis, Minnesota 55402. For assistance in completing the application
please contact IAI Mutual Funds Shareholder Services at 1-800-945-3863.
Retirement Plans
Shares of the Fund may be an appropriate investment medium for various
retirement plans. Persons desiring information about establishing an Individual
Retirement Account (IRA) (for employed persons and their spouses) or other
retirement plans should contact IAI Mutual Funds Shareholder Services at 1-800-
945-3863. All retirement plans involve a long-term commitment of assets and are
subject to various legal requirements and restrictions. The legal and tax
implications may vary according to the circumstances of the individual investor.
Therefore, you are urged to consult with an attorney or tax advisor prior to the
establishment of such a plan.
Automatic Investment Plan
Investors may arrange to make regular investments of $100 or more per Fund on a
monthly or twice a month basis, effective as of the 4th and/or the 18th day of
each month (or the next business day), through automatic deductions from their
checking or savings accounts. Such investors may, of course, terminate their
participation in the Automatic Investment Plan at any time upon written notice
to the Fund. Any changes or instructions to terminate existing Automatic
Investment Plans must be received at least two weeks before the date on which
the change or termination is to take place. Investors interested in
participating in the Automatic Investment Plan should complete the Automatic
Investment Plan application and return it to the Fund.
Redemption of Shares
Registered holders of Fund shares may at any time require the Fund to redeem
their shares upon their written request. Shareholders may redeem shares by
phone, subject to a limit of $50,000, provided such shareholders have authorized
the Fund to accept telephone instructions.
Fund shareholders who redeem shares by presenting stock certificates must
endorse the back of the certificate with the signature of the person whose name
appears on the certificate.
Redemption instructions must be signed by the person(s) in whose name the shares
are
15
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IAI Mutual Funds
----------------
IAI Balanced Fund
registered. If the redemption proceeds are to be paid or mailed to any person
other than the shareholder of record or if redemption proceeds are in excess of
$50,000, the Fund will require that the signature on the written instructions be
guaranteed by a participant in a signature guarantee program, which may include
certain national banks or trust companies or certain member firms of national
securities exchanges. (Notarization by a Notary Public is NOT ACCEPTED.) If the
shares are held of record in the name of a corporation, partnership, trust or
fiduciary, the Fund may require additional evidence of authority prior to
accepting a request for redemption. The Fund will not send redemption proceeds
until checks (including certified checks or cashiers checks) received for the
shares purchased have cleared.
The redemption proceeds received by the investor are based on the net asset
value next determined after redemption instructions in good order are received
by the Fund. Since the value of shares redeemed is based upon the value of the
Fund investment at the time of redemption, it may be more or less than the price
originally paid for the shares.
Payment for shares redeemed will ordinarily be made within seven days after a
request for redemption has been made. Normally the Fund will mail payment for
shares redeemed on the business day following receipt of the redemption request.
Following a redemption or transfer request, if the value of a shareholder's
interest in the Fund falls below $500, the Fund reserves the right to redeem
such shareholder's entire interest and remit such amount. Such a redemption will
only be effected following: (a) a redemption or transfer by a shareholder which
causes the value of such shareholder's interest in the Fund to fall below $500;
(b) the mailing by the Fund to such shareholder of a notice of intention to
redeem; and (c) the passage of at least six months from the date of such
mailing, during which time the investor will have the opportunity to make an
additional investment in the Fund to increase the value of such investor's
account to at least $500.
Exchange Privilege
The Exchange Privilege enables shareholders to purchase, in exchange for shares
of the Fund, shares of other IAI Mutual Funds. These funds have different
investment objectives from the Fund. Shareholders may exchange shares of the
Fund for shares of another fund managed by IAI, provided that the fund whose
shares will be acquired is duly registered in the state of the shareholder's
residence and the shareholder otherwise satisfies the fund's purchase
requirements. Although the Fund does not currently charge a fee for use of the
Exchange Privilege, it reserves the right to do so in the future.
Because excessive trading can hurt Fund performance and shareholders, there is a
limit of four exchanges out of each IAI Mutual Fund per calendar year per
account. Accounts under common ownership or control, including accounts with the
same taxpayer identification number, will be counted together for purposes of
the four exchange limit. The Fund reserves the right to temporarily or
permanently terminate the Exchange Privilege
16
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IAI Mutual Funds
----------------
IAI Balanced Fund
of any investor who exceeds this limit. The limit may be modified for certain
retirement plan accounts, as required by the applicable plan document and/or
relevant Department of Labor regulations, and for Automatic Exchange Plan
participants. The Fund also reserves the right to refuse or limit exchange
purchases by any investor if, in IAI's judgment, the Fund would be unable to
invest the money effectively in accordance with its investment objectives and
policies, or would otherwise potentially be adversely affected.
Fund shareholders wishing to exercise the Exchange Privilege should notify the
Fund in writing or, provided such shareholders have authorized the Fund to
accept telephone instructions, by telephone. At the time of the exchange, if the
net asset value of the shares redeemed in connection with the exchange is
greater than the investor's cost, a taxable capital gain will be realized. A
capital loss will be realized if at the time of the exchange the net asset value
of the shares redeemed in the exchange is less than the investor's cost. The
Fund reserves the right to terminate or modify the Exchange Privilege in the
future.
Automatic Exchange Plan
Investors may arrange to make regular exchanges of $100 or more between any of
the IAI Mutual Funds on a monthly basis. Exchanges will take place at the
closing price of the fifth day of each month (or the next business day).
Shareholders are responsible for making sure sufficient shares exist in the Fund
account from which the exchange takes place. If there are not sufficient funds
in the Fund account to meet the requested exchange amount, the Automatic
Exchange Plan will be suspended. Shareholders may not close Fund accounts
through the Automatic Exchange Plan. Investors interested in participating in
the Automatic Exchange Plan should complete the Automatic Exchange Plan portion
of their application. For assistance in completing the application contact IAI
Mutual Fund Shareholder Services at 1-800-945-3863.
Authorized Telephone Trading
Investors can transact account exchanges and redemptions via the telephone by
completing the Authorized Telephone Trading section of the application and
returning it to the Fund. Investors requesting telephone trading privileges will
be provided with a personal identification number ("PIN") that must accompany
any instructions by phone. Shares will be redeemed or exchanged at the next
determined net asset value. All proceeds must be made payable to the owner(s) of
record and delivered to the address of record.
In order to confirm that telephone instructions for redemptions and exchanges
are genuine, the Fund has established reasonable procedures, including the
requirement that a personal identification number accompany telephone
instructions. If the Fund or the transfer agent fail to follow these procedures,
17
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IAI Mutual Funds
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IAI Balanced Fund
the Fund may be liable for losses due to unauthorized or fraudulent
instructions. None of the Fund, its transfer agent, IAI, or IAIS will be liable
for any loss, injury, damage, or expense for acting upon telephone instructions
believed to be genuine, and will otherwise not be responsible for the
authenticity of any telephone instructions, and, accordingly, the investor bears
the risk of loss resulting from telephone instructions. All telephone
redemptions and exchange requests will be tape recorded. Telephone redemptions
are not permitted for IRA or Simplified Employee Pension ("SEP") accounts. For
redemptions from these accounts, please contact IAI Mutual Fund Shareholder
Services at 1-800-945-3863 for instructions.
Systematic Cash Withdrawal Plan
The Fund has available a Systematic Cash Withdrawal Plan for any investor
desiring to follow a program of systematically withdrawing a fixed amount of
money from an investment in shares of the Fund. An investment of $10,000 is
required to establish the plan. Payments under the plan will be made monthly or
quarterly in amounts of $100 or more. Shares will be sold with the closing price
of the 15th of the applicable month (or the next business day). To provide funds
for payment, the Fund will redeem as many full and fractional shares as
necessary at the redemption price, which is net asset value.
Payments under this plan, unless pursuant to a retirement plan, should not be
considered income. Withdrawal payments may exceed dividends and distributions
and, to this extent, there will be a reduction in the investor's equity. An
investor should also understand that this plan cannot insure profit, nor does it
protect against any loss in a declining market. Careful consideration should be
given to the amount withdrawn each month. Excessive withdrawals could lead to a
serious depletion of equity, especially during periods of declining market
values. Fund management will be available for consultation in this matter.
Plan application forms are available through the Fund. If you would like
assistance in completing the application contact IAI Mutual Fund Shareholder
Services at 1-800-945-3863.
Dividends, Distributions and Tax Status
The policy of the Fund is to pay dividends from net investment income
semiannually and to make distributions of realized capital gains, if any,
annually. However, provisions in the Internal Revenue Code of 1986, as amended
(the "Code"), may result in additional net investment income and capital gains
distributions by the Fund. When you open an account, you should specify on your
application how you want to receive your distributions. The Fund offers three
options: Full Reinvestment-your dividend and capi-
18
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IAI Mutual Funds
----------------
IAI Balanced Fund
tal gain distributions will be automatically reinvested in additional shares of
the Fund; Capital Gains Reinvestment--your capital gain distributions will be
automatically reinvested, but your income dividend distributions will be paid in
cash; and Cash--your income dividends and capital gain distributions will be
paid in cash. Distributions taken in cash can be sent via check or transferred
directly to your account at any bank, savings and loan or credit union that is a
member of the Automated Clearing House (ACH) network. Unless directed otherwise
by the shareholder, the Fund will automatically reinvest all such distributions
into full and fractional shares at net asset value.
The Fund's Directed Dividend service allows you to invest your dividends and/or
capital gain distributions directly into another IAI Mutual Fund. Contact IAI
Mutual Fund Shareholder Services at 1-800-945-3863 for details.
The Fund intends to qualify for tax purposes as a regulated investment company
under Subchapter M of the Internal Revenue Code during the current taxable year.
If so qualified, the Fund will not be subject to federal income tax on income
that it distributes to its shareholders.
Distributions are subject to federal income tax, and may also be subject to
state or local taxes. If you live outside the United States, your distributions
could also be taxed by the country in which you reside. Your distributions are
taxable when they are paid, whether you take them in cash or reinvest them in
additional shares.
For federal income tax purposes, the Fund's income and short-term capital gain
distributions are taxed as dividends; long-term capital gain distributions
designated as capital gain dividends are taxed as long-term capital gains,
regardless of the length of time the shareholder has held the shares. Annually,
IAI will send you and the IRS a statement showing the amount of each taxable
distribution you received in the previous year.
Upon redemption of shares of the Fund the shareholder will generally recognize a
capital gain or loss equal to the difference between the amount realized on the
redemption and the shareholder's adjusted basis in such shares. Such gain or
loss will be long-term if the shares have been held for more than one year.
Under the Code, the deductibility of capital losses is subject to certain
limitations.
Whenever you sell shares of the Fund, IAI will send you a confirmation statement
showing how many shares you sold and at what price. You will also receive an
account statement quarterly and a consolidated transaction statement annually.
However, it is up to you or your tax preparer to determine whether this sale
resulted in a capital gain and, if so, the amount of tax to be paid. Be sure to
keep your account statements; the information they contain will be essential in
calculating the amount of your capital gains.
The foregoing relates to federal income taxation as in effect as of the date of
this Prospectus. For a more detailed discussion of the federal income tax
consequences of investing in shares of the Fund, see "Tax Status" in the
Statement of Additional Information.
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IAI Balanced Fund
Description of Common Stock
The Fund is a separate portfolio represented by a separate class of common stock
of IAI Investment Funds VI, Inc., a Minnesota corporation authorized to issue
its shares of common stock in more than one series. All shares of the Fund have
equal rights as to redemption, dividends and liquidation, and will be fully paid
and nonassessable when issued and will have no preemptive or conversion rights.
The shares of the Fund have noncumulative voting rights, which means that the
holders of more than 50% of the shares voting for the election of directors can
elect 100% of the directors if they choose to do so. On some issues, such as the
election of directors, all shares of IAI Investment Funds VI, Inc., vote
together as one series. On an issue affecting only a particular series, such as
voting on the Advisory Agreement, only the approval of a particular series is
required to make the agreement effective with respect to such series.
Annual or periodically scheduled regular meetings of shareholders will not be
held except as required by law. Minnesota corporation law does not require an
annual meeting; instead, it provides for the Board of Directors to convene
shareholder meetings when it deems appropriate. In addition, if a regular
meeting of shareholders has not been held during the immediately preceding
fifteen months, shareholders holding three percent or more of the voting shares
of the Fund may demand a regular meeting of shareholders of the Fund by written
notice of demand given to the chief executive officer or the chief financial
officer of the Fund. Within thirty days after receipt of the demand by one of
those officers, the Board of Directors shall cause a regular meeting of
shareholders to be called and held no later than ninety days after receipt of
the demand, all at the expense of the Fund. An annual meeting will be held on
the removal of a director or directors of the Fund if requested in writing by
holders of not less than 10% of the outstanding shares of the Fund.
The shares of the Fund are transferable by endorsement of the certificate if
held by the shareholder, or if the certificate is held by the Fund, by delivery
to such Fund of transfer instructions. Transfer instructions or certificates
should be delivered to the office of the Fund. The Fund is not bound to
recognize any transfer until it is recorded on the stock transfer books
maintained by the Fund.
Counsel and Auditors
The firm of Dorsey & Whitney P.L.L.P., 220 South Sixth Street, Minneapolis,
Minnesota 55402, provides legal counsel for the Fund. KPMG Peat Marwick LLP,
4200 Norwest Center, Minneapolis, Minnesota 55402, serves as the independent
auditors for the Fund.
Custodian, Transfer Agent and Dividend Disbursing Agent
The Custodian for the Fund is Norwest Bank Minnesota, N.A., Norwest Center,
Sixth and Marquette, Minneapolis, Minnesota 55479. Norwest employs foreign
subcustodians and depositories, which were approved by the Fund's Board of
Directors in accordance with the rules and regulations of the Securities and
Exchange Commission, for the purpose of providing custodial services for the
Fund's
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IAI Mutual Funds
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IAI Balanced Fund
assets held outside the United States. For a listing of the subcustodians and
depositories currently employed by the Fund, see the Statement of Additional
Information. IAI acts as the Fund's transfer agent, dividend disbursing agent
and IRA Custodian, at P.O. Box 357, Minneapolis, Minnesota 55440.
Additional Information
The Fund sends to its shareholders a six-month unaudited and an annual audited
financial report, each of which includes a list of investment securities held.
To reduce the volume of mail you receive, only one copy of most Fund reports,
such as the Fund's Annual Report, may be mailed to your household (same surname,
same address). Please call IAI Mutual Fund Shareholder Services at 1-800-945-
3863 if you wish to receive additional shareholder reports.
Shareholder inquiries should be directed to the Fund at the telephone number or
mailing address listed on the inside back cover of this Prospectus.
21
<PAGE>
To Open an
Account
1.800.945.3863
612.376.2700
IAI
P.O. Box 357
Minneapolis, MN 55440
Overnight
Delivery Address
IAI
3700 First Bank Place
601 Second Avenue South
Minneapolis, MN 55402
Distributed by IAI Securities, Inc.
<PAGE>
[IAI LETTERHEAD APPEARS HERE]
<PAGE>
IAI BALANCED FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED AUGUST 1, 1995
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to a Prospectus dated August 1,
1995, and should be read in conjunction therewith. A copy of the Prospectus may
be obtained from the Fund, 3700 First Bank Place, P.O. Box 357, Minneapolis,
Minnesota 55440 (telephone: 1-612-376-2700 or 1-800-945-3863).
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
INVESTMENT OBJECTIVE AND POLICIES........................ 3
Repurchase Agreements............................... 3
Reverse Repurchase Agreements....................... 3
Securities of Foreign Issuers....................... 3
Illiquid Securities................................. 4
Lending Portfolio Securities........................ 4
Variable or Floating Rate Instruments............... 4
Delayed-Delivery Transactions....................... 5
Mortgage-Backed Securities.......................... 5
Stripped Mortgage Backed Securities................. 5
Asset-Backed Securities............................. 5
Zero Coupon Bonds................................... 6
Lower-Rated Debt Securities......................... 6
Swap Agreements..................................... 6
Indexed Securities.................................. 7
Loans and Other Direct Debt Instruments............. 8
Foreign Currency Transactions....................... 8
Limitations on Futures and Options Transactions..... 9
Futures Contracts................................... 10
Futures Margin Payments............................. 10
Purchasing Put and Call Options..................... 10
Writing Put and Call Options........................ 11
Combined Positions.................................. 11
Correlation of Price Changes........................ 11
Liquidity of Options and Futures Contracts.......... 12
OTC Options......................................... 12
Options and Futures Relating to Foreign Currencies.. 12
Asset Coverage for Futures and Options Positions.... 12
INVESTMENT RESTRICTIONS.................................. 13
Portfolio Turnover.................................. 14
INVESTMENT PERFORMANCE................................... 14
MANAGEMENT............................................... 16
History............................................. 19
Investment Advisory Agreement....................... 19
Administrative Agreement............................ 20
Allocation of Expenses.............................. 20
Duration of Agreements.............................. 21
PLAN OF DISTRIBUTION..................................... 21
CUSTODIAL SERVICE........................................ 22
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE....... 26
CAPITAL STOCK............................................ 27
NET ASSET VALUE AND PUBLIC OFFERING PRICE................ 27
TAX STATUS............................................... 28
LIMITATION OF DIRECTOR LIABILITY......................... 29
FINANCIAL STATEMENTS..................................... 29
Appendix A--Ratings Of Debt Securities.................. A-I
</TABLE>
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of IAI Balanced Fund (the
"Fund") are summarized on the front page of the Prospectus and in the text of
the Prospectus under "Investment Objectives and Policies." Investors should
understand that all investments have risks. There can be no guarantee against
loss resulting from an investment in the Fund, and there can be no assurance
that the Fund's investment policies will be successful, or that its investment
objective will be attained. Certain of the Fund's investment practices are
further explained below.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements relating to the
securities in which it may invest. A repurchase agreement involves the purchase
of securities with the condition that, after a stated period of time, the
original seller will buy back the securities at a predetermined price or yield.
The Fund's custodian will have custody of, and will hold in a segregated
account, securities acquired by the Fund under a repurchase agreement or other
securities as collateral. In the case of a security registered on a book entry
system, the book entry will be maintained in the Fund's name or that of its
custodian. Repurchase agreements involve certain risks not associated with
direct investments in securities. For example, if the seller of the agreement
defaults on its obligation to repurchase the underlying securities at a time
when the value of the securities has declined, the Fund may incur a loss upon
disposition of such securities. In the event that bankruptcy proceedings are
commenced with respect to the seller of the agreement, the Fund's ability to
dispose of the collateral to recover its investment may be restricted or
delayed. While collateral will at all times be maintained in an amount equal to
the repurchase price under the agreement (including accrued interest due
thereunder), to the extent proceeds from the sale of collateral were less than
the repurchase price, the Fund could suffer a loss.
REVERSE REPURCHASE AGREEMENTS
The Fund may invest in reverse repurchase agreements. In a reverse
repurchase agreement, a fund sells a portfolio instrument to another party, such
as a bank or broker-dealer, in return for cash and agrees to repurchase the
instrument at a particular price and time. While a reverse repurchase agreement
is outstanding, the Fund will maintain appropriate liquid assets in a segregated
custodial account to cover its obligation under the agreement. The Fund will
enter into reverse repurchase agreements only with parties whose
creditworthiness has been found satisfactory by IAI, the Fund's investment
adviser and manager. As a result, such transactions may increase fluctuations
in the market value of the Fund's assets and may be viewed as a form of
leverage.
SECURITIES OF FOREIGN ISSUERS
The Fund may invest in securities of foreign issuers in accordance
with its investment objectives and policies. Investing in foreign securities
may result in greater risk than that incurred by investing in domestic
securities. There is generally less publicly available information about
foreign issuers comparable to reports and ratings that are published about
companies in the United States. Also, foreign issuers are not subject to
uniform accounting and auditing and financial reporting standards, practices and
requirements comparable to those applicable to United States companies.
It is contemplated that most foreign equity securities will be
purchased in over-the-counter markets or on stock exchanges located in the
countries in which the respective principal offices of the issuers of the
various securities are located, if that is the best available market. Foreign
stock markets are generally not as developed or efficient as those in the United
States. While growing in volume, they usually have substantially less volume
than the New York Stock Exchange, and securities of some foreign companies are
less liquid and more volatile than securities of comparable United States
companies. Similarly, volume and liquidity in most foreign bond markets is less
than in the United States and at times volatility of price can be greater than
in the United States. Commissions on foreign stock exchanges are generally
higher than commissions on United States exchanges, although the Fund will
endeavor to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
foreign stock exchanges, brokers and listed companies than in the United States.
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With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of
the Fund, political or social instability, or diplomatic developments which
could affect United States investments in those countries. Moreover, individual
foreign economies may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
IAI is not aware at this time of the existence of any investment or
exchange control regulations which might substantially impair the operations of
the Fund as described in the Prospectus and this Statement of Additional
Information. It should be noted, however, that this situation could change at
any time.
The dividends and interest payable on certain of the Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to such Fund's shareholders.
The expense ratio of the Fund should not be materially affected by the Fund's
investment in foreign securities.
ILLIQUID SECURITIES
The Fund may also invest up to 15% of its total assets in securities
that are considered illiquid because of the absence of a readily available
market or due to legal or contractual restrictions. However, certain restricted
securities that are not registered for sale to the general public that can be
resold to institutional investors may be considered liquid pursuant to
guidelines adopted by the Board of Directors. It is not possible to predict
with assurance the maintenance of an institutional trading market for such
securities and the liquidity of the Fund's investments could be impaired if
trading declines.
LENDING PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio
securities to broker-dealers, banks or other financial borrowers of securities.
As with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, the Fund will only enter into loan arrangements with
broker-dealers, banks or other institutions which IAI has determined are
creditworthy under guidelines established by the Fund's Board of Directors. The
Fund may also experience a loss if, upon the failure of a borrower to return
loaned securities, the collateral is not sufficient in value or liquidity to
cover the value of such loaned securities (including accrued interest thereon).
However, the Fund will receive collateral in the form of cash, United States
Government securities, certificates of deposit or other high-grade, short-term
obligations or interest-bearing cash equivalents equal to at least 102% of the
value of the securities loaned. The value of the collateral and of the
securities loaned will be marked to market on a daily basis. During the time
portfolio securities are on loan, the borrower pays the Fund an amount
equivalent to any dividends or interest paid on the securities and the Fund may
invest the cash collateral and earn additional income or may receive an agreed
upon amount of interest income from the borrower. However, the amounts received
by the Fund may be reduced by finders' fees paid to broker-dealers and related
expenses.
VARIABLE OR FLOATING RATE INSTRUMENTS
Such instruments (including notes purchased directly from issuers)
bear variable or floating interest rates and carry rights that permit holders to
demand payment of the unpaid principal balance plus accrued interest from the
issuers or certain financial intermediaries. Floating rate securities have
interest rates that change whenever there is a change in a designated base rate
while variable rate instruments provide for a specified periodic adjustment in
the interest rate. These formulas are designed to result in a market value for
the instrument that approximates its par value.
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<PAGE>
DELAYED-DELIVERY TRANSACTIONS
The Fund may buy and sell securities on a delayed-delivery or when-
issued basis. These transactions involve a commitment by the Fund to purchase or
sell specific securities at a predetermined price or yield, with payment and
delivery taking place after the customary settlement period for that type of
security (and more than seven days in the future). Typically, no interest
accrues to the purchaser until the security is delivered. The Fund may receive
fees for entering into delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, the Fund
assumes the rights and risks of ownership, including the risk of price and yield
fluctuations. Because the Fund is not required to pay for securities until the
delivery date, these risks are in addition to the risks associated with the
Fund's other investments. If the Fund remains substantially fully invested at a
time when delayed delivery purchases are outstanding, the delayed-delivery
purchases may result in a form of leverage. When delayed-delivery purchases are
outstanding, the Fund will set aside appropriate liquid assets in a segregated
custodial account to cover its purchase obligations. When the Fund has sold a
security on a delayed-delivery basis, the Fund does not participate in further
gains or losses with respect to the security. If the other party to a delayed-
delivery transaction fails to deliver or pay for the securities, the Fund could
miss a favorable price or yield opportunity, or could suffer a loss.
The Fund may renegotiate delayed-delivery transactions after they are
entered into, and may sell underlying securities before they are delivered,
which may result in capital gains or losses.
MORTGAGE-BACKED SECURITIES
The Fund may purchase mortgage-backed securities issued by government
and non-government entities such as banks, mortgage lenders, or other financial
institutions. A mortgage-backed security may be an obligation of the issuer
backed by a mortgage or pool of mortgages or a direct interest in an underlying
pool of mortgages. Some mortgage-backed securities, such as collateralized
mortgage obligations or CMOs, make payments of both principal and interest at a
variety of intervals; others make semiannual interest payments at a
predetermined rate and repay principal at maturity (like a typical bond).
Mortgage-backed securities are based on different types of mortgages including
those on commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and the Fund
may invest in them if IAI determines they are consistent with the Fund's
investment objective and policies.
The value of mortgage-backed securities may change due to shifts in
the market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Non-government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these securities
and may lower their total returns.
STRIPPED MORTGAGE BACKED SECURITIES
Such securities are created when a U.S. government agency or a
financial institution separates the interest and principal components of a
mortgage-backed security and sells them as individual securities. The holder of
the "principal-only" security (PO) receives the principal payments made by the
underlying mortgage-backed security, while the holder of the "interest-only"
security (IO) receives interest payments from the same underlying security. The
prices of stripped mortgage-backed securities may be particularly affected by
changes in interest rates. As interest rates fall, prepayment rates tend to
increase, which tends to reduce prices of IOs and increase prices of POs.
Rising interest rates can have the opposite effect.
ASSET-BACKED SECURITIES
Asset-backed securities represent interests in pools of consumer loans
(generally unrelated to mortgage loans) and most often are structured as pass-
through securities. Interest and principal payments alternately depend upon
payment of the underlying loans by individuals, although the securities may be
supported by letters of credit
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or other credit enhancements. The value of asset-backed securities may also
depend on the creditworthiness of the servicing agent for the loan pool, the
originator of the loans, or the financial institution providing the credit
enhancement.
ZERO COUPON BONDS
Zero coupon bonds do not make interest payments; instead, they are
sold at a deep discount from their face value and are redeemed at face value
when they mature. Because zero coupon bonds do not pay current income, their
prices can be very volatile when interest rates change. In calculating its
dividends, the Fund takes into account as income a portion of the difference
between a zero coupon bond's purchase price and its face value.
A broker-dealer creates a derivative zero by separating the interest
and principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of
Registered Interest and Principal of Securities) by separating the interest and
principal components of an outstanding U.S. Treasury bond and selling them as
individual securities. Bonds issued by the Resolution Funding Corporation
(REFCORP) and the Financing Corporation (FICO) can also be separated in this
fashion. Original issue zeroes are zero coupon securities originally issued by
the U.S. government, a government agency, or a corporation in zero coupon form.
LOWER-RATED DEBT SECURITIES
While the market for high yield corporate debt securities has been in
existence for many years and has weathered previous economic downturns, the
1980s brought a dramatic increase in the use of such securities to fund highly
leveraged corporate acquisitions and restructuring. Past experience may not
provide an accurate indication of the future performance of the high-yield bond
market, especially during periods of economic recession. In fact, from 1989 to
1991, the percentage of lower-rated debt securities that defaulted rose
significantly above prior levels.
The market for lower-rated securities may be thinner and less active
than that for higher-rated debt securities, which can adversely affect the
prices at which the former are sold. If market quotations are not available,
lower-rated debt securities will be valued in accordance with procedures
established by the Board of Directors, including the use of outside pricing
services. Judgment plays a greater role in valuing high-yield corporate debt
securities than is the case for securities for which more external sources for
quotations and last-sale information are available. Adverse publicity and
changing investor perceptions may affect the ability of outside pricing services
to value lower-rated debt securities, and the Fund's ability to dispose of these
securities.
Since the risk of default is higher for lower-rated debt securities,
IAI's research and credit analysis are an especially important part of managing
securities of this type held by the Fund. In considering investments for the
fund, IAI will attempt to identify those issuers of high-yielding debt
securities whose financial condition is adequate to meet future obligations, has
improved, or is expected to improve in the future. IAI's analysis focuses on
relative values based on such factors as interest or dividend coverage, asset
coverage, earnings prospects, and the experience and managerial strength of the
issuer.
The Fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise to exercise its rights as a security holder to
seek to protect the interest of security holders if it determines this to be in
the best interest of the Fund's shareholders.
SWAP AGREEMENTS
Swap agreements can be individually negotiated and structured to
include exposure to a variety of different types of investments or market
factors. Depending on their structure, swap agreements may increase or decrease
the Fund's exposure to long- or short-term interest rates (in the U.S. or
abroad), foreign currency values,
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<PAGE>
mortgage securities, corporate borrowing rates, or other factors such as
security prices or inflation rates. Swap agreements can take many different
forms and are known by a variety of names. The Fund is not limited to any
particular form of swap agreement if IAI determines it is consistent with the
Fund's investment objectives and policies.
Swap agreements will tend to shift the Fund's investment exposure from
one type of investment to another. For example, if the Fund agrees to exchange
payments in dollars for payments in foreign currency, the swap agreement would
tend to decrease the Fund's exposure to U.S. interest rates and increase its
exposure to foreign currency and interest rates. Depending on how they are
used, swap agreements may increase or decrease the overall volatility of the
Fund's investments and its share price.
The most significant factor in the performance of swap agreements is
the change in the specific interest rate, currency, or other factors that
determine the amounts of payments due to and from the Fund. If a swap agreement
calls for payments by the Fund, the Fund must be prepared to make such payments
when due. In addition, if the counterparty's creditworthiness declined, the
value of a swap agreement would be likely to decline, potentially resulting in
losses. The Fund expects to be able to eliminate its exposure under swap
agreements either by assignment or other disposition, or by entering into an
offsetting swap agreement with the same party or a similarly creditworthy party.
The Fund will maintain appropriate liquid assets in a segregated
custodial account to cover its current obligations under swap agreements. If
the Fund enters into a swap agreement on a net basis, it will segregate assets
with a daily value at least equal to the excess, if any, of the Fund's accrued
obligations under the swap agreement over the accrued amount the Fund is
entitled to receive under the agreement. If the Fund enters into a swap
agreement on other than a net basis, it will segregate assets with a value equal
to the full amount of the Fund's accrued obligations under the agreement.
INDEXED SECURITIES
The Fund may purchase securities whose prices are indexed to the
prices of other securities, securities indexes, currencies, precious metals or
other commodities, or other financial indicators. Indexed securities typically,
but not always, are debt securities or deposits whose value at maturity or
coupon rate is determined by reference to a specific instrument or statistic.
Gold-indexed securities, for example, typically provide for a maturity value
that depends on the price of gold, resulting in a security whose price tends to
rise and fall together with gold prices. Currency-indexed securities typically
are short-term to intermediate-term debt securities whose maturity values or
interest rates are determined by reference to the values of one or more
specified foreign currencies, and may offer higher yields than U.S. dollar-
denominated securities of equivalent issuers. Currency-indexed securities may be
positively or negatively indexed; that is, their maturity value may increase
when the specified currency value increases, resulting in a security that
performs similarly to a foreign-denominated instrument, or their maturity value
may decline when foreign currencies increase, resulting in a security whose
price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies. IAI will use its judgment in determining whether indexed
securities should be treated as short-term instruments, bonds, stocks, or as a
separate asset class for purposes of the Fund's investment allocations,
depending on the individual characteristics of the securities. Indexed
securities may be more volatile than the underlying instruments.
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<PAGE>
LOANS AND OTHER DIRECT DEBT INSTRUMENTS
Direct debt instruments are interests in amounts owed by a corporate,
governmental, or other borrower to lenders or lending syndicates (loans and loan
participations), to suppliers of goods or services (trade claims or other
receivables), or to other parties. Direct debt instruments are subject to the
Fund's policies regarding the quality of debt securities.
Purchasers of loans and other forms of direct indebtedness depend
primarily upon the creditworthiness of the borrower for payment of principal and
interest. Direct debt instruments may not be rated by any nationally recognized
rating service. If the Fund does not receive scheduled interest or principal
payments on such indebtedness, the Fund's share price and yield could be
adversely affected. Loans that are fully secured offer the Fund more protection
than an unsecured loan in the event of non-payment of scheduled interest or
principal. However, there is no assurance that the liquidation of collateral
from a secured loan would satisfy the borrower's obligation, or that the
collateral can be liquidated. Indebtedness of borrowers whose creditworthiness
is poor involves substantially greater risks, and may be highly speculative.
Borrowers that are in bankruptcy or restructuring may never pay off their
indebtedness, or may pay only a small fraction of the amount owed. Direct
indebtedness of developing countries will also involve a risk that the
governmental entities responsible for the repayment of the debt may be unable,
or unwilling, to pay interest and repay principal when due.
Investments in loans through direct assignment of a financial
institution's interests with respect to a loan may involve additional risks to
the Fund. For example, if a loan is foreclosed, the Fund could become part owner
of any collateral, and would bear the costs and liabilities associated with
owning and disposing of the collateral. In addition, it is conceivable that
under emerging legal theories of lender liability, the Fund could be held liable
as a co-lender. Direct debt instruments may also involve a risk of insolvency
of the lending bank or other intermediaries. Direct debt instruments that are
not in the form of securities may offer less legal protection to the Fund in the
event of fraud or misrepresentation. In the absence of definitive regulatory
guidance, the Fund relies on IAI's research in an attempt to avoid situations
where fraud or misrepresentation could adversely affect the Fund.
A loan is often administered by a bank or other financial institution
that acts as agent for all holders. The agent administers the terms of the
loan, as specified in the loan agreement. Unless, under the terms of the loan
or other indebtedness, the Fund has direct recourse against the borrower, it may
have to rely on the agent to apply appropriate credit remedies against a
borrower. If assets held by the agent for the benefit of the Fund were
determined to be subject to the claims of the agent's general creditors, the
Fund might incur certain costs and delays in rendering payment on the loan or
loan participation and could suffer a loss of principal or interest.
The Fund limits the amount of the assets that it invests in any one
issuer or in issuers within the same industry. For purposes of these
limitations, the Fund generally will treat the borrower as the "issuer" of
indebtedness held by the Fund. In the case of loan participations where a bank
or other lending institution serves as financial intermediary between the Fund
and the borrower, if the participation does not shift to the Fund the direct
debtor/creditor relationship with the borrower, SEC interpretations require the
Fund, in appropriate circumstances, to treat both the lending bank or other
lending institution and the borrower as "issuers" for the purpose of determining
whether the Fund has invested more than 5% of its total assets in a single
issuer. Treating a financial intermediary as an issuer of indebtedness may
restrict the Fund's ability to invest in indebtedness related to a single
financial intermediary, or a group of intermediaries engaged in the same
industry, even if the underlying borrowers represent many different companies
and industries.
FOREIGN CURRENCY TRANSACTIONS
The Fund may hold foreign currency deposits from time to time and may
convert dollars and foreign currencies in the foreign exchange markets.
Currency conversion involves dealer spreads and other costs, although
commissions usually are not charged. Currencies may be exchanged on a spot
(i.e., cash) basis, or by entering into forward contracts to purchase or sell
foreign currencies at a future date and price. Forward contracts generally are
traded in an interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. The parties to a forward
contract may agree to offset or terminate the
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contract before its maturity, or may hold the contract to maturity and complete
the contemplated currency exchange.
The Fund may use currency forward contracts to manage currency risks
and to facilitate transactions in foreign securities. The following discussion
summarizes the principal currency management strategies involving forward
contracts that could be used by the Fund.
In connection with purchases and sales of securities denominated in
foreign currencies, the Fund may enter into currency forward contracts to fix a
definite price for the purchase or sale in advance of the trade's settlement
date. This technique is sometimes referred to as a "settlement hedge" or
"transaction hedge." IAI expects to enter into settlement hedges in the normal
course of managing the Fund's foreign investments. The Fund could also enter
into forward contracts to purchase or sell a foreign currency in anticipation of
future purchases or sales of securities denominated in foreign currency, even if
the specific investments have not yet been selected by IAI.
The Fund may also use forward contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. For example,
if the Fund owned securities denominated in pounds sterling, it could enter into
a forward contract to sell pounds sterling in return for U.S. dollars to hedge
against possible declines in the pound's value. Such a hedge, sometimes
referred to as a "position hedge," would tend to offset both positive and
negative currency fluctuations but would not offset changes in security values
caused by other factors. The Fund could also hedge the position by selling
another currency expected to perform similarly to the pound sterling -- for
example, by entering into a forward contract to sell Deutschemarks or European
Currency Units in return for U.S. dollars. This type of hedge, sometimes
referred to as a "proxy hedge," could offer advantages in terms of cost, yield,
or efficiency, but generally would not hedge currency exposure as effectively as
a simple hedge into U.S. dollars. Proxy hedges may result in losses if the
currency used to hedge does not perform similarly to the currency in which the
hedged securities are denominated.
Under certain conditions, SEC guidelines require mutual funds to set
aside appropriate liquid assets in a segregated custodial account to cover
currency forward contracts. As required by SEC guidelines, the Fund will
segregate assets to cover currency forward contracts, if any, whose purpose is
essentially speculative. The Fund will not segregate assets to cover forward
contracts entered into for hedging purposes, including settlement hedges,
position hedges, and proxy hedges.
Successful use of forward currency contracts will depend on IAI's
skill in analyzing and predicting currency values. Forward contracts may
substantially change the Fund's investment exposure to changes in currency
exchange rates, and could result in losses to the Fund if currencies do not
perform as IAI anticipates. For example, if a currency's value rose at a time
when IAI had hedged the Fund by selling that currency in exchange for dollars,
the Fund would be unable to participate in the currency's appreciation. If IAI
hedges currency exposure through proxy hedges, the Fund could realize currency
losses from the hedge and the security position at the same time if the two
currencies do not move in tandem. Similarly, if IAI increases the Fund's
exposure to a foreign currency, and that currency's value declines, the Fund
will realize a loss. There is no assurance that IAI's use of forward currency
contracts will be advantageous to the Fund or that it will hedge at an
appropriate time. The policies described in this section are non-fundamental
policies of the Fund.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS
The Fund has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the Commodity Futures
Trading Commission (CFTC) and the National Futures Association, which regulate
trading in the futures markets, before engaging in any purchases or sales of
futures contracts or options on futures contracts. The Fund intends to comply
with Section 4.5 of the regulations under the Commodity Exchange Act, which
limits the extent to which the Fund can commit assets to initial margin deposits
and option premiums.
The above limitation on the Fund's investments in futures contracts
and options, and the Fund's policies regarding futures contracts and options
discussed elsewhere in this Statement of Additional Information may be changed
as regulatory agencies permit.
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FUTURES CONTRACTS
When the Fund purchases a futures contract, it agrees to purchase a
specified underlying instrument at a specified future date. When the Fund sells
a futures contract, it agrees to sell the underlying instrument at a specified
future date. The price at which the purchase and sale will take place is fixed
when the Fund enters into the contract. Some currently available futures
contracts are based on specific securities, such as U.S. Treasury bonds or
notes, and some are based on indexes of securities prices, such as the Standard
& Poor's 500 Composite Stock Price Index (S&P 500). Futures can be held until
their delivery dates, or can be closed out before then if a liquid secondary
market is available.
The value of a futures contract tends to increase and decrease in
tandem with the value of its underlying instrument. Therefore, purchasing
futures contracts will tend to increase the Fund's exposure to positive and
negative price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When the Fund sells a futures
contract, by contrast, the value of its futures position will tend to move in a
direction contrary to the market. Selling futures contracts, therefore, will
tend to offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
FUTURES MARGIN PAYMENTS
The purchaser or seller of a futures contract is not required to
deliver or pay for the underlying instrument unless the contract is held until
the delivery date. However, both the purchaser and seller are required to
deposit "initial margin" with a futures broker, known as a futures commission
merchant (FCM), when the contract is entered into. Initial margin deposits are
typically equal to a percentage of the contract's value. If the value of either
party's position declines, that party will be required to make additional
"variation margin" payments to settle the change in value on a daily basis. The
party that has a gain may be entitled to receive all or a portion of this
amount. Initial and variation margin payments do not constitute purchasing
securities on margin for purposes of the Fund's investment limitations. In the
event of the bankruptcy of an FCM that holds margin on behalf of the Fund, the
Fund may be entitled to return of margin owed to it only in proportion to the
amount received by the FMC's other customers, potentially resulting in losses to
the Fund.
PURCHASING PUT AND CALL OPTIONS
By purchasing a put option, the Fund obtains the right (but not the
obligation) to sell the option's underlying instrument at a fixed strike price.
In return for this right, the Fund pays the current market price for the option
(known as the option premium). Options have various types of underlying
instruments, including specific securities, indexes of securities prices, and
futures contracts. The Fund may terminate its position in a put option it has
purchased by allowing it to expire or by exercising the option. If the option
is allowed to expire, the Fund will lose the entire premium it paid. If the
Fund exercises the option, it completes the sale of the underlying instrument at
the strike price. The Fund may also terminate a put option position by closing
it out in the secondary market at its current price, if a liquid secondary
market exists.
The buyer of a typical put option can expect to realize a gain if
security prices fall substantially. However, if the underlying instrument's
price does not fall enough to offset the cost of purchasing the option, a put
buyer can expect to suffer a loss (limited to the amount of the premium paid,
plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost of
the option.
10
<PAGE>
WRITING PUT AND CALL OPTIONS
When the Fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
the Fund assumes the obligation to pay the strike price for the option's
underlying instrument if the other party to the option chooses to exercise it.
When writing an option on a futures contract the Fund would be required to make
margin payments to an FCM as described above for futures contracts. The Fund
may seek to terminate its position in a put option it writes before exercise by
closing out the option in the secondary market at its current price. If the
secondary market is not liquid for a put option the Fund has written, however,
the Fund must continue to be prepared to pay the strike price while the option
is outstanding, regardless of price changes, and must continue to set aside
assets to cover its position. If security prices rise, a put writer would
generally expect to profit, although its gain would be limited to the amount of
the premium it received.
If security prices remain the same over time, it is likely that the
writer will also profit, because it should be able to close out the option at a
lower price. If security prices fall, the put writer would expect to suffer a
loss. This loss should be less than the loss from purchasing the underlying
instrument directly, however, because the premium received for writing the
option should mitigate the effects of the decline.
Writing a call option obligates the Fund to sell or deliver the
option's underlying instrument, in return for the strike price, upon exercise of
the option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or falls. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
COMBINED POSITIONS
The Fund may purchase and write options in combination with each
other, or in combination with futures or forward contracts, to adjust the risk
and return characteristics of the overall position. For example, the Fund may
purchase a put option and write a call option on the same underlying instrument,
in order to construct a combined position whose risk and return characteristics
are similar to selling a futures contract. Another possible combined position
would involve writing a call option at one strike price and buying a call option
at a lower price, in order to reduce the risk of the written call option in the
event of a substantial price increase. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
CORRELATION OF PRICE CHANGES
Because there are a limited number of types of exchange-traded options
and futures contracts, it is likely that the standardized contracts available
will not match the Fund's current or anticipated investments exactly. The Fund
may invest in options and futures contracts based on securities with different
issuers, maturities, or other characteristics from the securities in which it
typically invests, which involves a risk that the options or futures position
will not track the performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. The Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in the Fund's options or futures
positions are poorly correlated with its
11
<PAGE>
other investments, the positions may fail to produce anticipated gains or result
in losses that are not offset by gains in other investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS
There is no assurance a liquid secondary market will exist for any
particular options or futures contract at any particular time. Options may have
relatively low trading volume and liquidity if their strike prices are not close
to the underlying instrument's current price. In addition, exchanges may
establish daily price fluctuation limits for options and futures contracts, and
may halt trading if a contract's price moves upward or downward more than the
limit in a given day. On volatile trading days when the price fluctuation limit
is reached or a trading halt is imposed, it may be impossible for the Fund to
enter into new positions or close out existing positions. If the secondary
market for a contract is not liquid because of price fluctuation limits or
otherwise, it could prevent prompt liquidation of unfavorable positions, and
potentially could require the Fund to continue to hold a position until delivery
or expiration regardless of changes in its value. As a result, the Fund's
access to other assets held to cover its options or futures positions could also
be impaired.
OTC OPTIONS
Unlike exchange-traded options, which are standardized with respect to
the underlying instrument, expiration date, contract size, and strike price, the
terms of over-the-counter options (options not traded on exchanges) generally
are established through negotiation with the other party to the option contract.
While this type of arrangement allows the Fund greater flexibility to tailor an
option to its needs, OTC options generally involve greater credit risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.
OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES
Currency futures contracts are similar to forward currency exchange
contracts, except that they are traded on exchanges (and have margin
requirements) and are standardized as to contract size and delivery date. Most
currency futures contracts call for payment or delivery in U.S. dollars. The
underlying instrument of a currency option may be a foreign currency, which
generally is purchased or delivered in exchange for U.S. dollars, or may be a
futures contract. The purchaser of a currency call obtains the right to
purchase the underlying currency, and the purchaser of a currency put obtains
the right to sell the underlying currency.
The uses and risks of currency options and futures are similar to
options and futures relating to securities or indexes, as discussed above. The
Fund may purchase and sell currency futures and may purchase and write currency
options to increase or decrease its exposure to different foreign currencies.
The Fund may also purchase and write currency options in conjunction with each
other or with currency futures or forward contracts. Currency futures and
options values can be expected to correlate with exchange rates, but may not
reflect other factors that affect the value of the Fund's investments. A
currency hedge, for example, should protect a yen-denominated security from a
decline in the yen, but will not protect the Fund against a price decline
resulting from deterioration in the issuer's creditworthiness. Because the
value of the Fund's foreign-denominated investments changes in response to many
factors other than exchange rates, it may not be possible to match the amount of
currency options and futures to the value of the Fund's investments exactly over
time.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS
The Fund will comply with guidelines established by the Securities and
Exchange Commission with respect to coverage of options and futures strategies
by mutual funds, and if the guidelines so require will set aside appropriate
liquid assets in a segregated custodial account in the amount prescribed.
Securities held in a segregated account cannot be sold while the futures or
option strategy is outstanding, unless they are replaced with other suitable
assets. As a result, there is a possibility that segregation of a large
percentage of the Fund's assets could impede portfolio management or the Fund's
ability to meet redemption requests or other current obligations.
12
<PAGE>
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, the Fund is subject to certain
policies and restrictions which are "fundamental" and may not be changed without
shareholder approval. Shareholder approval consists of the approval of the
lesser of (i) more than 50% of the outstanding voting securities of the Fund, or
(ii) 67% or more of the voting securities present at a meeting if the holders of
more than 50% of the outstanding voting securities of the Fund are present or
represented by proxy. Limitations 1 through 8 below are deemed fundamental
limitations. The remaining limitations set forth below serve as operating
policies of the Fund and may be changed by the Board of Directors without
shareholder approval.
The Fund may not:
1. Purchase the securities of any issuer if such purchase would cause the
Fund to fail to meet the requirements of a "diversified company" as defined
under the Investment Company Act of 1940, as amended (the "1940 Act").
As currently defined in the 1940 Act, "diversified company" means a
management company which meets the following requirements: at least 75% of the
value of its total assets is represented by cash and cash items (including
receivables), Government securities, securities of other investment companies
and other securities for the purposes of this calculation limited in respect of
any one issuer to an amount not greater in value than 5% of the value of the
total assets of such management company and not more than 10% of the outstanding
voting securities of such issuer.
2. Purchase the securities of any issuer (other than "Government
securities" as defined under the 1940 Act) if, as a result, more than 25% of the
value of the Fund's total assets would be invested in the securities of
companies whose principal business activities are in the same industry.
3. Issue any senior securities, except as permitted by the 1940 Act or
the Rules and Regulations of the Securities and Exchange Commission.
4. Borrow money, except from banks for temporary or emergency purposes
provided that such borrowings may not exceed 33-1/3% of the value of the Fund's
net assets (including the amount borrowed). Any borrowings that come to exceed
this amount will be reduced within three days (not including Sundays and
holidays) to the extent necessary to comply with the 33-1/3% limitation. This
limitation shall not prohibit the Fund from engaging in reverse repurchase
agreements, making deposits of assets to margin or guarantee positions in
futures, options, swaps or forward contracts, or segregating assets in
connection with such agreements or contracts.
5. Act as an underwriter of securities of other issuers, except to the
extent that in connection with the disposition of portfolio securities the Fund
may be deemed to be an underwriter under applicable laws.
6. Purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments. This restriction shall not prevent the Fund
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business.
7. Purchase or sell commodities other than foreign currencies unless
acquired as a result of ownership of securities. This limitation shall not
prevent the Fund from purchasing or selling options, futures, swaps and forward
contracts or from investing in securities or other instruments backed by
commodities.
8. Make loans to other persons except to the extent not inconsistent with
the 1940 Act or the Rules and Regulations of the Securities and Exchange
Commission. This limitation does not apply to purchases of commercial paper,
debt securities or repurchase agreements, or to the lending of portfolio
securities.
9. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases or sales
of securities and provided that margin payments in connection
13
<PAGE>
with transactions in options, futures, swaps and forward contracts shall not be
deemed to constitute purchasing securities on margin.
10. Sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options, swaps and forward futures contracts are
not deemed to constitute selling securities short.
11. Except as part of a merger, consolidation, acquisition, or
reorganization, invest more than 5% of the value of its total assets in the
securities of any one investment company or more than 10% of the value of its
total assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting securities of
any one investment company.
12. Mortgage, pledge or hypothecate its assets except to the extent
necessary to secure permitted borrowings. This limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed in
a segregated account in connection with such contracts.
13. Participate on a joint or a joint and several basis in any
securities trading account.
14. Invest more than 15% of its net assets in illiquid investments.
15. Invest directly in interests (including partnership interests) in
oil, gas or other mineral exploration or development leases or programs, except
the Fund may purchase or sell securities issued by corporations engaging in oil,
gas or other mineral exploration or development business.
Any of the Fund's investment policies set forth under "Investment Objective
and Policies" in the Prospectus, or any restriction set forth above under
"Investment Restrictions" which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after an acquisition of securities or utilization
of assets and results there from.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by the
monthly average of the value of portfolio securities owned by the Fund during
the same fiscal year. "Portfolio securities" for purposes of this calculation
do not include securities with a maturity date of less than twelve (12) months
from the date of investment. A 100% portfolio turnover rate would occur, for
example, if the lesser of the value of purchases or sales of portfolio
securities for a particular year were equal to the average monthly value of the
portfolio securities owned during such year.
INVESTMENT PERFORMANCE
Advertisements and other sales literature for the Fund may refer to
monthly, quarterly, yearly, cumulative and average annual total return. Each
such calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts. Each of
monthly, quarterly and yearly total return is computed in the same manner as
cumulative total return, as set forth below.
Cumulative total return is computed by finding the cumulative rate of
return over the period indicated in the advertisement that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
14
<PAGE>
CTR = (ERV-P) 100
-------
P
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the
period of a hypothetical $1,000 payment made
at the beginning of such period; and
P = initial payment of $1,000
Average annual total return is computed by finding the average annual
compounded rates of return over the periods indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)/n/ = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the
period of a hypothetical $1,000 payment made
at the beginning of such period.
The Fund may quote yield figures from time to time. The "yield" is
computed by dividing the net investment income per share earned during a 30-day
period (using the average number of shares entitled to receive dividends) by the
net asset value per share on the last day of the period. The yield formula
provides for semiannual compounding which assumes that net investment income is
earned and reinvested at a constant rate and annualized at the end of a
six-month period.
The yield formula is as follows:
YIELD=2[(a-b + 1)/6/ -1]
----
cd
Where: a=dividends and interest earned during the period.
b=expenses accrued for the period (net of reimbursements).
c=the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d=the net asset value of the Fund at the end of the period.
For the period from April 10, 1992 (commencement of operations) through
December 31, 1992, and for the years ending December 31, 1993 and December 31,
1994, the total return of the Fund was 8.9%, 4.99%, and (1.45), respectively.
The average annual total returns of the Fund from inception of the Fund through
March 31, 1995 and for the fiscal year ended March 31, 1995, were 6.22% and
9.44%, respectively. For the thirty-day period ended March 31, 1995, the Fund's
yield was 2.50%.
In advertising and sales literature, the Fund may compare its performance
with that of other mutual funds, indexes or averages of other mutual funds,
indexes of related financial assets or data, and other competing investment and
deposit products available from or through other financial institutions. The
composition of these
15
<PAGE>
indexes, averages or products differs from that of the Fund. The comparison of
the Fund to an alternative investment should be made with consideration of
differences in features and expected performance.
The indexes and averages noted below will be obtained from the indicated
sources or reporting services, which the Fund believes to be generally accurate.
The Fund may also note its mention in newspapers, magazines, or other media from
time to time. However, the Fund assumes no responsibility for the accuracy of
such data.
For example, (1) the Fund's performance or P/E ratio may be compared to any
one or a combination of the following: (i) the Standard & Poor's 500 Stock Index
and Dow Jones Industrial Average so that you may compare the Fund's results with
those of a group of unmanaged securities widely regarded by investors as
representative of the U.S. stock market in general; (ii) other groups of mutual
funds, including the IAI Funds, tracked by: (A) Lipper Analytical Services,
Inc., a widely used independent research firm which ranks mutual funds by
overall performance, investment objectives, and assets; (B) Morningstar, Inc.,
another widely used independent research firm which rates mutual funds; or (C)
other financial or business publications, which may include, but are not limited
to, Business Week, Money Magazine, Forbes and Barron's, which provide similar
information; and (iii) The Lehman Government/Corporate Bond Index; (2) the
Consumer Price Index (measure for inflation) may be used to assess the real rate
of return from an investment in the Fund; (3) other U.S. or foreign government
statistics such as GNP, and net import and export figures derived from
governmental publications, e.g., The Survey of Current Business, may be used to
illustrate investment attributes of the Fund or the general economic business,
investment, or financial environment in which the Fund operates; (4) the effect
of tax-deferred compounding on the Fund's investment returns, or on returns in
general, may be illustrated by graphs, charts, etc. where such graphs or charts
would compare, at various points in time, the return from an investment in the
Fund (or returns in general) on a tax-deferred basis (assuming reinvestment of
capital gains and dividends and assuming one or more tax rates) with the return
on a taxable basis; and (5) the sectors or industries in which the Fund invests
may be compared to relevant indices or surveys (e.g., S&P Industry Surveys) in
order to evaluate the Fund's historical performance or current or potential
value with respect to the particular industry or sector.
MANAGEMENT
The names, addresses and positions of the directors and executive officers
of the Fund are given below.
<TABLE>
<CAPTION>
Aggregate Compensation Aggregate Compensation
Name and Address Position from the Fund* from IAI Mutual Funds**
- ---------------- -------- ---------------------- -----------------------
<S> <C> <C> <C>
Noel P. Rahn*** Chairman of the Board N/A N/A
3700 First Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
Richard E. Struthers*** President, Director N/A N/A
3700 First Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
Madeline Betsch Director $1,700 $26,350
19 South First Street
Minneapolis, Minnesota 55401
W. William Hodgson Director $1,700 $26,350
1698 Dodd Road
Mendota Heights, Minnesota 55118
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C> <C>
George R. Long Director $2,100 $24,950
29 Las Brisas Way
Naples, Florida 33963
J. Peter Thompson Director $1,700 $26,350
Route 1
Mountain Lake, Minnesota 56159
Charles H. Withers Director $2,100 $24,950
Rochester Post-Bulletin
P.O. Box 6118
Rochester, Minnesota 55903
Archie C. Black III Treasurer N/A N/A
3700 First Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
William C. Joas Secretary N/A N/A
3700 First Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
Kirk Gove Vice President, Marketing N/A N/A
3700 First Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
Larry Hill Vice President, Investments N/A N/A
3700 First Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
John Twele Vice President, Investments N/A N/A
3700 First Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
Mark Simenstad Vice President, Investments N/A N/A
3700 First Bank Place
P.O.Box 357
Minneapolis, Minnesota 55440
Susan Schelpf Vice President, Operations N/A N/A
3700 First Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
Susan J. Haedt Vice President, N/A N/A
3700 First Bank Place Controller
P.O. Box 357
Minneapolis, Minnesota 55440
</TABLE>
17
<PAGE>
* For the fiscal year ended March 31, 1995.
** For the calendar year ended December 31, 1994. There are currently eighteen
portfolios within the IAI Mutual Funds.
*** Directors of each Fund who are interested persons (as that term is defined
by the Investment Company Act of 1940) of IAI and each Fund.
Noel P. Rahn has been Chief Executive Officer and a Director of IAI since
1974.
Richard E. Struthers is Executive Vice President and a Director of IAI and
has served IAI in many capacities since 1979.
Madeline Betsch, until April 1994, was Executive Vice President, Director of
Client Services, of CME-KHBB Advertising since May 1985, and prior thereto was a
Vice President with Campbell-Mithun, Inc. since February 1977. Ms. Betsch is
currently President of ESMA Corp., a start-up business in the beauty and
wellness field.
W. William Hodgson served as information manager for the North Central Home
Office of the Prudential Insurance Company of America from 1961 until 1984; he
is currently retired.
George R. Long has been Chairman of Mayfield Corp. (financial consultants
and venture capitalists) since 1973.
J. Peter Thompson has been a grain farmer in southwestern Minnesota since
1974. Prior to that, Mr. Thompson was employed by Paine Webber, Jackson &
Curtis, Incorporated, most recently as Senior Vice President and General
Partner.
Charles H. Withers was Editor of the Rochester Post-Bulletin, Rochester,
Minnesota from 1960 through March 31, 1980; he is currently retired.
Archie C. Black is a Senior Vice President and Chief Financial Officer of
IAI and has served IAI in several capacities since 1987.
William C. Joas is a Vice President of IAI. Prior to joining IAI in 1990,
Mr. Joas served in the legal administration department of Tricord Systems,
Incorporated.
Kirk Gove is a Vice President of IAI. Prior to joining IAI in 1991, Mr.
Gove served as an Assistant Vice President of Dain Bosworth, Incorporated.
Larry Hill is Chief Investment Officer and an Executive Vice President and
Director of IAI. Mr. Hill has also served as IAI's Chief Fixed Income Officer
since 1984.
John Twele is a Vice President of IAI. Prior to joining IAI in 1994, Mr.
Twele had been a Senior Equity Analyst with IDS Financial Services since 1987.
Mark Simenstad is a Vice President of IAI. Prior to joining IAI in 1993, Mr.
Simenstad served as a fixed income portfolio manager for Lutheran Brotherhood
from 1983 to 1993.
Susan Schelpf is a Vice President of IAI and Director of Mutual Fund
Operations. Prior to joining IAI in 1993, Ms. Schelpf served as a Vice
President at SEI Corporation.
Susan J. Haedt is a Vice President of IAI and Funds Controller. Prior to
joining IAI in 1992, Ms. Haedt served as a Senior Manager at KPMG Peat Marwick
LLP.
18
<PAGE>
Each Fund has agreed to reduced initial subscription requirements for
employees and directors of a Fund or IAI, their spouses, children and
grandchildren. With respect to such persons, the minimum initial investment in
one or more of the IAI Family of Funds is $500; provided that the minimum amount
that can be allocated to any one of the Funds is $250. Subsequent subscriptions
are limited to a minimum of $100 for each of the Funds.
No compensation is paid by either Fund to any of its officers. Directors who
are not affiliated with IAI receive from each Fund $300 annually, $250 for each
Board meeting attended, $200 for each Restricted Securities Committee meeting
attended (if applicable) and $200 for each Audit Committee meeting attended.
Such unaffiliated directors also are reimbursed for expenses incurred in
connection with attending meetings.
The Board of Directors for each of the Funds, at a meeting held May 10,
1995, approved a new Code of Ethics. The Code permits access persons to engage
in personal securities transactions subject to certain policies and procedures.
Such procedures prohibit the acquiring of any securities in an initial public
offering. In addition, all securities acquired through private placement must
be pre-cleared. Procedures have been adopted which would implement blackout
periods for certain securities transactions, as well as a ban on short-term
trading profits. Additional policies prohibit the receipt of gifts in certain
instances. Procedures have been implemented to monitor employee trading.
Access persons of the Adviser are required to certify annually that they have
read and understood the Code of Ethics. An annual report is provided to the
Funds' Board of Directors summarizing existing procedures, identifying material
violations and recommending any changes needed.
IAI, the Fund's investment adviser, is an affiliate of the Hill Samuel Group
("Hill Samuel"). Hill Samuel is an international merchant banking and financial
services firm headquartered in London, England. Hill Samuel owns controlling
interests in over seventy insurance, merchant banking, financial services and
shipping services subsidiaries located in Western Europe, Asia, the United
States, Australia, New Zealand and Great Britain. The principal offices of Hill
Samuel are located at 100 Wood Street, London EC2 P2AJ.
Hill Samuel is owned by TSB Group, plc ("TSB"), a publicly-held financial
services organization headquartered in London, England. TSB is one of the
largest personal and corporate financial services groups in the United Kingdom,
engaged in a wide range of activities including banking, unit linked life
assurance, unit trust management, investment management, credit card and finance
house business. The principal offices of TSB are located at 25 Milk Street,
London EC2 V8LU.
HISTORY
The Fund is a separate portfolio of IAI Investment Funds VI, Inc., a
Minnesota corporation whose shares of common stock are currently issued in six
series (Series A through F). On June 25, 1993, the Fund's shareholders approved
amended and restated Articles of Incorporation, which provided that the
registered investment company whose corporate name had been IAI Series Fund,
Inc., be renamed IAI Investment Funds VI, Inc. The investment portfolio
represented by Series E common shares is referred to as "IAI Balanced Fund."
INVESTMENT ADVISORY AGREEMENT
Pursuant to an Investment Advisory Agreement between the Fund and IAI (the
"Advisory Agreement"), IAI has agreed to provide the Fund with investment
advice, statistical and research facilities, and certain equipment and services,
including, but not limited to, office space and necessary office facilities,
equipment, and the services of required personnel. In return, the Fund has
agreed to pay IAI a monthly fee. Under the Advisory Agreement, IAI has the sole
authority and responsibility to make and execute investment decisions for the
Fund within the framework of the Fund's investment policies, subject to review
by the directors of the Fund.
The Fund has agreed to pay a monthly fee which currently approximates .75%
per year of the Fund's average month-end net assets. This percentage fee
declines as the Fund's asset size increases. The following table sets forth the
fee which IAI receives from the Fund, expressed on a monthly basis as well as
the annual equivalent:
19
<PAGE>
<TABLE>
<CAPTION>
Monthly Fee Fee IAI
Received by Receives
Month End Net Asset Value IAI Annually
- ------------------------- --- --------
<S> <C> <C>
For the first $200,000,000.. .0625% .75%
For the next $300,000,000... .0583% .70%
Above $500,000,000.......... .0542% .65%
</TABLE>
As of March 31, 1995, the Fund had net assets of $41,418,790. For the
period from April 10, 1992 (commencement of operations) through March 31, 1993,
and for the fiscal years ending March 31, 1994 and 1995, the Fund paid IAI
$309,145, $489,813 and $327,630, respectively, in advisory fees.
The Fund's monthly payment of the advisory fee is suspended or reduced
(and reimbursement made by IAI, if necessary) when it appears that the amount of
expenses may exceed the Fund's applicable expense limit (and after the monthly
payment of the distribution fee has been reduced to zero), as set forth in the
section "Allocation of Expenses," below. For the period from April 10, 1992
(commencement of operations) through March 31, 1993, and for the fiscal years
ended March 31, 1994 and 1995, IAI was not required to reimburse advisory fees
pursuant to the expense limit.
ADMINISTRATIVE AGREEMENT
The Fund has engaged IAI to serve as the Fund's administrative,
dividend disbursing, redemption, accounting services and transfer agent pursuant
to an Administrative Agreement. Under the Administrative Agreement, IAI has
agreed to provide to the Fund all required administrative, stock transfer,
redemption, dividend disbursing and accounting services including, without
limitation, the following: (1) the maintenance of the Fund's accounts, books and
records; (2) the calculations of the daily net asset value in accordance with
the Fund's current Prospectus and Statement of Additional Information; (3) daily
and periodic reports; (4) all information necessary to complete tax returns,
questionnaires and other reports requested by the Fund; (5) the maintenance of
stock registry records; (6) the processing of requested account registration
changes, stock certificate issuances and redemption requests; and (7) the
administration of payments of dividends and distributions declared by the Fund.
As compensation for these services, the Fund has agreed to pay IAI a monthly fee
equal to .01667% of the value of the Fund's net assets on the last day of the
month, which is equivalent on an annual basis to .20% of the Fund's average
month-end net assets. For the fiscal year ended March 31, 1995, the Fund paid
IAI $87,368 pursuant to the Administrative Agreement.
ALLOCATION OF EXPENSES
In addition to the advisory and administrative fees paid to IAI, the
Fund pays all its other costs and expenses, including, for example, costs
incurred in the purchase and sale of assets, interest, taxes, charges of the
custodian of the Fund's assets, costs of reports and proxy material sent to Fund
shareholders, fees paid for independent accounting and legal services, costs of
printing Prospectuses for Fund shareholders and registering the Fund's shares,
postage, fees to directors who are not "interested persons" of the Fund,
distribution expenses pursuant to the Fund's Rule 12b-1 plan, insurance
premiums, costs of attending investment conferences and such other costs which
may be designated as extraordinary. IAI has agreed to reimburse the Fund for
expenses (other than brokerage commissions and other expenditures in connection
with the purchase and sale of portfolio securities, interest expense, and,
subject to the specific approval of a majority of the disinterested directors of
the Fund, taxes and extraordinary expenses) which exceed 1.25% per year of the
average annual month-end net assets of the Fund (the "expense limit"). Certain
state securities commissions may impose additional limitations on certain of the
Fund's expenses, and IAI may be required by such state commissions to reimburse
the Fund for expenses in excess of any limitations as a requirement to selling
shares of the Fund in those states. IAI is not liable for any loss suffered by
the Fund in the absence of willful misfeasance, bad faith or gross negligence in
the performance of its duties and obligations.
20
<PAGE>
DURATION OF AGREEMENTS
The Advisory Agreement and the Administrative Agreement will terminate
automatically in the event of their assignment. In addition, each Agreement is
terminable at any time without penalty by the Board of Directors of the Fund or
by vote of a majority of the Fund's outstanding voting securities on not more
than 60 days' written notice to IAI, and by IAI on 60 days' notice to the Fund.
Each Agreement shall continue in effect from year to year only so long as such
continuance is specifically approved at least annually by either the Board of
Directors of the Fund or by vote of a majority of the outstanding voting
securities, provided that in either event such continuance is also approved by
the vote of a majority of directors who are not parties to the Agreement or
interested persons of such parties cast in person at a meeting called for the
purpose of voting on such approval.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution relating to the payment of
certain distribution expenses pursuant to Rule 12b-1 under the 1940 Act ("Rule
12b-1 Fees"). The Plan was last approved by the Board of Directors at a meeting
on May 10, 1995, and by the shareholders of the Fund at a meeting on June 25,
1993.
Rule 12b-1(b) provides that any payments made by a fund in connection
with the distribution of its shares may only be made pursuant to a written plan
describing all material aspects of the proposed financing of distribution and
also requires that all agreements with any person relating to implementation of
the plan must be in writing. In addition, Rule 12b-1(b)(1) requires that such
plan be approved by a vote of at least a majority of the fund's outstanding
shares, and Rule 12b-1(b)(2) requires that such plan, together with any related
agreements, be approved by a vote of the board of directors of the company and
the directors of the company who are not interested persons of the company and
have no direct or indirect financial interest in the operation of the plan or in
any agreements related to the plan, cast in person at a meeting called for the
purpose of voting on such plan or agreements. Rule 12b-1(b)(3) requires that
the plan or agreement provide, in substance: (1) that it shall continue in
effect for a period of more than one year from the date of its execution or
adoption only so long as such continuance is specifically approved at least
annually in the manner described in paragraph (b)(2) of Rule 12b-1; (2) that any
person authorized to direct the disposition of monies paid or payable by a fund
pursuant to its plan or any related agreement shall provide to a fund's board of
directors, and the directors shall review, at least quarterly, a written report
of the amount so expended and the purposes for which such expenditures were
made; and (3) in the case of a plan, that it may be terminated at any time by
vote of a majority of the members of the board of directors of a fund who are
not interested persons of the fund and have no direct or indirect financial
interest in the operation of the plan or in any agreements related to the plan
or by vote of a majority of the outstanding voting securities of a fund.
Rule 12b-1(b)(4) requires that such plans may not be amended to
increase materially the amount to be spent for distribution without shareholder
approval and that all material amendments of the plan must be approved in the
manner described in paragraph (b)(2) of Rule 12b-1. Rule 12b-1(c) provides that
a fund may rely upon Rule 12b-1(1) only if selection and nomination of its
disinterested directors are committed to the discretion of such disinterested
directors. Rule 12b-1(e) provides that a fund may implement or continue a plan
pursuant to Rule 12b-1(b) only if the directors who vote to approve such
implementation or continuation conclude, in the exercise of reasonable business
judgment and in light of their fiduciary duties under state law, and under
Section 36(a) and (b) of the 1940 Act, that there is a reasonable likelihood
that the plan will benefit the fund and its shareholders. At the meeting of the
Board of Directors on May 10, 1995, the directors so concluded with respect to
the Fund's Plan of Distribution.
Pursuant to the Plan of Distribution, the Fund has entered into a
Distribution and Shareholder Services Agreement pursuant to which the Fund will
make payments to IAI Securities, Inc. ("IAIS") at an annual rate of 0.25% of the
Fund's average month-end net assets to cover expenses incurred by IAIS in
connection with the servicing of shareholder accounts and the distribution of
the Fund's shares (which amount is paid to IAIS regardless of amounts spent by
IAIS). The 12b-1 Fee payable by the Fund to IAIS may be used by IAIS to pay
advertising and promotional expenses including, without limitation, costs of
printing and providing Prospectuses, Statements of Additional Information,
annual reports and semiannual reports to prospective shareholders,
21
<PAGE>
expenses of preparing and providing sales literature advertising of any type,
and compensation and benefits paid to and expenses incurred by personnel,
including supervisory personnel, involved in direct mail and advertising
activities and activities relating to the direct marketing of shares of the Fund
to the public and compensation to other broker-dealers for their sale of Fund
shares. The Rule 12b-1 Fee may also be used to compensate the Underwriter for
the provision of certain services to Fund shareholders. Such services may
include answering shareholder questions, providing reports and other information
and other services designed to maintain shareholder accounts. IAIS may use the
Rule 12b-1 Fee to make payments to qualifying broker-dealers and financial
institutions that provide such shareholder services.
The Rule 12b-1 Fee payable by the Fund is subject to the expense
limitations set forth in the Advisory Agreement as described above.
Additionally, IAIS, in its sole and absolute discretion, may from time to time
out of its own assets pay for certain additional costs of servicing shareholder
accounts and distributing the Fund's shares. IAIS is an affiliate of IAI.
The net Rule 12b-1 Fee paid by the Fund pursuant to its Plan of
Distribution during the fiscal year ended March 31, 1995 was $50,064. All such
fees were paid to, and retained by, IAIS pursuant to the Distribution and
Shareholder Services Agreement discussed above. During the fiscal year ended
March 31, 1995, such fees (along with amounts paid out of IAIS' own assets) were
paid by IAIS in connection with the servicing of shareholder accounts and the
distribution of the Fund shares as follows:
<TABLE>
<CAPTION>
<S> <C>
Advertising.............................. $15,520
Printing and mailing of prospectuses to
other than current shareholders......... $ 6,508
Payments to brokers or dealers........... $ 7,009
Direct payments to sales personnel....... $15,019
Other.................................... $ 6,008
</TABLE>
Pursuant to the above mentioned expense limitation, IAI reimbursed the Fund
$59,146 in Rule 12b-1 Fees for the fiscal year ended March 31, 1995.
CUSTODIAL SERVICE
The custodian for the fund is Norwest Bank Minnesota, N.A. Norwest
Center, Sixth and Marquette, Minneapolis, MN 55479. Norwest has entered into an
agreement with Morgan Stanley Trust Company, 1 Pierrepont Plaza, Brooklyn, New
York ("Morgan Stanley") which enables the Fund to utilize the subcustodian and
depository network of Morgan Stanley. Such agreements, subcustodians and
depositories were approved by the Fund's Board of Directors in accordance with
the rules and regulations of the Securities and Exchange Commission, for the
purpose of providing custodial services for the Fund's assets held outside the
United States.
The following is a listing of the subcustodians and depositories
currently approved by the Fund's directors and the countries in which such
subcustodians and depositories are located:
BRANCHES OF THE CUSTODIAN
AND SUBCUSTODIAN BANKS
----------------------
Argentina Citibank, N.A., Buenos Aires Branch
Australia Australia & New Zealand Banking Group, Ltd.
22
<PAGE>
Belgium Banque Bruxelles Lambert (BBL)
Botswana Barclays Bank of Botswana
Brazil Banco de Boston
Canada Toronto Dominion Bank
Chile Citibank, N.A., Santiago Branch
China Hong Kong & Shanghai Banking, Corp. Ltd.
Columbia Cititrust
Czech Republic ING Bank
France Banque Indosuez
Germany Berliner Handels-und-Frankfurter Bank
Ghana Barclays Bank of Ghana
Greece Citibank, N.A., Athens Branch
Hong Kong Hong Kong & Shanghai Banking Corp. Ltd.
Hungary Citibank, N.A., Budapest Branch
India Standard Chartered Bank
Indonesia Hong Kong & Shanghai Banking Corp. Ltd.
Ireland Allied Irish Bank
Israel Bank Leumi
Italy Barclays Bank PLC
Japan The Mitsubishi Bank Limited
Jordan Arab Bank plc
Korea Standard Chartered Bank
Luxembourg Banque Bruxelles Lambert
Malaysia Oversea Chinese Banking Corporation
Mexico Citibank, N.A., Mexico City Branch
Morocco Banque Commerciale du Maroc
Netherlands ABN Amro Bank
New Zealand Bank of New Zealand
23
<PAGE>
Pakistan Standard Chartered Bank
Papua New Guinea Australia and New Zealand Bank
Peru Citibank N.A., Lima Branch
Philippines Hong Kong & Shanghai Banking Corp. Ltd.
Poland Citibank, S.A.
Portugal Banco Commercial Portugues
Singapore Oversea Chinese Banking Corporation
South Africa First National Bank of Southern Africa
Spain Banco Santader
Sri Lanka Hong Kong & Shanghai Banking, Corp. Ltd.
Switzerland Morgan Guaranty Trust Company of New
York, Zurich Branch
Taiwan Hong Kong & Shanghai Banking Corp. Ltd.
Thailand Standard Chartered Bank
Turkey Citibank, N.A., Istanbul Branch
United Kingdom Barclays Bank PLC
Uruguay Citibank, N.A., Montevideo Branch
Venezuela Citibank, N.A., Caracas Branch
Zimbabwe Barclays Bank of Zimbabwe
DEPOSITORIES
------------
Argentina Caja de Valores
Australia Clearing House Electronic Subregister
System
Austria Euroclear Clearance System
OsterreicheKontrollbank
Belgium C.I.K. (Caisse Interprofessionelle de Depot
et de Virements de Titres S.A.)
Brazil Sao Paulo Stock Exchange
Canada CDS (The Canadian Depository
for Securities Ltd.)
24
<PAGE>
Czech Republic Center for Securities (SCP)
Denmark Euroclear Clearance System
Vaerdipapircentralen
Finland Euroclear Clearance System
France SICOVAM (Societe Interprofessionelle la
Compensacion des Valuers Mobilieres)
Germany Kassenverein (Deutscher Kassenverein AG)
Hong Kong Central Clearing and Settlement System
Hungary Euroclear Clearance System
OsterreicheKontrollbank
Italy Monte Titoli, S.p.A
Japan Japan Securities Depository Center
Korea The Korean Central Depository
Malaysia The Malaysian Central Depository
Mexico Instituto para el Deposito de Valores
Netherlands NECIGEF (Netherlands Centraal Instit
voor Giraal Effectenverkeer B.V.
Norway Euroclear Clearance System
Verdipapirsentralen
Singapore Central Depository Pte Ltd.
Spain Servicio de Compensacion y Liquidacion de
Valores
Sweden Euroclear Clearance System
Vardepapperscentralen VPC AB
Switzerland SEGA (Schweizerische Effekten Giro A.G.)
Taiwan Taiwan Securities Depository Co.
Thailand Share Depository Center
United Kingdom Stock Exchange Talisman System
25
<PAGE>
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Many of the Fund's portfolio transactions are effected with dealers
without the payment of brokerage commissions but at a net price which usually
includes a spread or markup. In effecting such portfolio transactions on behalf
of the Fund, IAI seeks the most favorable net price consistent with the best
execution.
Often, however, the Fund must deal with brokers. IAI selects and
(where applicable) negotiates commissions with the brokers who execute the
transactions for the Fund. The primary criteria for the selection of a broker
is the ability of the broker, in the opinion of IAI, to secure prompt execution
of the transactions on favorable terms, including the reasonableness of the
commission and considering the state of the market at the time. In selecting a
broker, IAI may consider whether such broker provides brokerage and research
services (as defined in the Securities Exchange Act of 1934). IAI may direct
Fund transactions to brokers who furnish research services to IAI. Such
research services include advice, both directly and in writing, as to the value
of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, as well as analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts. By allocating brokerage business in order to obtain research
services for IAI, the Fund enables IAI to supplement its own investment research
activities and allows IAI to obtain the views and information of individuals and
research staffs of many different securities research firms prior to making
investment decisions for the Fund. To the extent such commissions are directed
to brokers who furnish research services to IAI, IAI receives a benefit, not
capable of evaluation in dollar amounts, without providing any direct monetary
benefit to the Fund from these commissions. Generally the Fund pays higher than
the lowest commission rates available.
IAI believes that most research services obtained by it generally
benefit one or more of the investment companies or other accounts which it
manages. Normally research services obtained through commissions paid by the
managed fund investing in common stocks and managed accounts investing in common
stocks would primarily benefit the fund and accounts.
There is no formula for the allocation by IAI of the Fund's brokerage
business to any broker-dealers for brokerage and research services. However,
IAI will authorize the Fund to pay an amount of commission for effecting a
securities transaction in excess of the amount of commission another broker
would have charged only if IAI determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker viewed in terms of either that particular
transaction or IAI's overall responsibilities with respect to the accounts as to
which it exercises investment discretion.
Although investment decisions for the Fund are made independently from
other accounts as to which IAI gives investment advice, it may occasionally
develop that the same security is suitable for more than one account. If and
when more than one account simultaneously purchase or sell the same security,
the transactions will be averaged as to price and allocated as to amount in
accordance with arrangements equitable to the Fund and such accounts. The
simultaneous purchase or sale of the same securities by the Fund and other
accounts may have detrimental effects on the Fund, as they may affect the price
paid or received by the Fund or the size of the position obtainable by the Fund.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to the policies set forth in the
preceding paragraphs and such other policies as the Board of Directors of the
Fund may determine, IAI may consider sales of shares of the Fund as a factor in
the selection of broker-dealers to execute the Fund's securities transactions.
For the fiscal year ended March 31, 1995, the Fund paid $109,616 in
brokerage commissions, approximately 57% of which was paid to brokerage firms
that provided research services to IAI, although the provision of such services
was not necessarily a factor in the placement of all of such business with such
firms.
26
<PAGE>
CAPITAL STOCK
The Fund is a separate portfolio of IAI Investment Funds VI, Inc., a
Minnesota corporation whose shares of common stock are currently issued in six
series (Series A through F). Each share of a series is entitled to participate
pro rata in any dividends and other distributions of such series and all shares
of a series have equal rights in the event of liquidation of that series. The
Board of Directors of IAI Investment Funds VI, Inc. is empowered under the
Articles of Incorporation of such company to issue other series of the company's
common stock without shareholder approval. IAI Investment Funds VI, Inc. has
authorized 10,000,000,000 shares of $.01 par value common stock to be issued as
Series E common shares. The investment portfolio represented by such shares is
referred to as IAI Balanced Fund. As of March 31, 1995, the Fund had 3,917,391
shares outstanding.
As of July 11, 1995, no person held of record or, to the knowledge of the
Fund, beneficially owned more than 5% of the outstanding shares of the Fund,
except as set forth in the following table:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Name and Address Number of Percent of
of Shareholder Shares Class
- --------------------------------------------------------------------------------
<S> <C> <C>
Pentair, Inc. Retirement Savings & Stock 946,744.549 24.89
401(k) Plan
1500 County Road 32 W
St. Paul, MN 55113-3105
Professional Medical Associates, Ltd. 720,504.837 18.94
626 SW 7th Ave.
Cambridge, MN 55008
</TABLE>
In addition, as of July 11, 1995, the Fund's officers and directors as a
group owned less than 1% of the outstanding shares of the Fund.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The portfolio securities in which the Fund invests fluctuate in value, and
hence, for the Fund, the net asset value per share also fluctuates.
The net asset value per share of the Fund is determined once daily as of the
close of trading on the New York Stock Exchange on each business day on which
the New York Stock Exchange is open for trading, and may be determined on
additional days as required by the Rules of the Securities and Exchange
Commission. The New York Stock Exchange is closed, and the net asset value per
share of the Fund is not determined, on the following national holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.
On March 31, 1995, the net asset value and public offering price per share
of the Fund was calculated as follows:
NAV = Net Assets ($41,418,790) = $10.57
------------------------
Shares Outstanding (3,917,391)
27
<PAGE>
TAX STATUS
The tax status of the Fund and the distributions of the Fund are summarized
in the Prospectus under "Dividends, Distributions and Tax Status."
Under the Internal Revenue Code of 1986, as amended, (the "Code"),
individual shareholders may not exclude any amount of distributions from Fund
gross income that is derived from dividends; corporate shareholders, however,
are permitted to deduct 70% of qualifying dividend distributions from domestic
corporations. Such a deduction by a corporate shareholder will depend upon the
portion of the Fund's gross income that is derived from dividends received from
domestic corporations. Since it is anticipated that a portion of the net
investment income of the Fund may derive from sources other than dividends from
domestic corporations, a portion of the Fund's dividends may not qualify for
this exclusion. Distributions designated as long-term capital gain
distributions will be taxable to the shareholder as long-term capital gains
regardless of how long the shareholder has held the shares. Such distributions
will not be eligible for the dividends received exclusion referred to above.
Ordinarily, distributions and redemption proceeds earned by Fund
shareholders are not subject to withholding of federal income tax. However,
each Fund is required to withhold 31% of a shareholder's distributions and
redemption proceeds upon the occurrence of certain events specified in Section
3406 of the Code and regulations promulgated thereunder. These events include
the failure of a Fund shareholder to supply the Fund with such shareholder's
taxpayer identification number, and the failure of a Fund shareholder who is
otherwise exempt from withholding to properly document such shareholder's status
as an exempt recipient. Additionally, distributions may be subject to state and
local income taxes, and the treatment thereunder may differ from the federal
income tax consequences discussed above.
If Fund shares are sold or otherwise disposed of more than one year from
the date of acquisition, the difference between the price paid for the shares
and the sales price will result in long-term capital gain or loss to a Fund
shareholder if, as is usually the case, a Fund shares are a capital asset in the
hands of a Fund shareholder at that time. However, under a special provision in
the Code, if Fund shares with respect to which a long-term capital gain
distribution has been, or will be, made are held for six months or less, any
loss on the sale or other disposition of such shares will be long-term capital
loss to the extent of such distribution.
Under the Code, each Fund will be subject to a non-deductible excise tax
equal to 4% of the excess, if any, of the amount of investment income and
capital gains required to be distributed pursuant to the Code for each calendar
year over the amount actually distributed. In order to avoid this excise tax,
each Fund generally must declare dividends by the end of each calendar year
representing 98% of the Fund's ordinary income for such calendar year and 98% of
its capital gain net income, if any, for the twelve-month period ending October
31 of the same calendar year. The excise tax is not imposed, however, on
undistributed income that is already subject to corporate income tax. It is
each Fund's policy not to distribute capital gains until capital loss
carryovers, if any, either are utilized or expire.
Income received from sources within foreign countries may be subject to
withholding and other taxes imposed by such countries. Tax conventions between
certain countries and the United States may reduce or eliminate such taxes. It
is impossible to determine the effective rate of foreign tax applicable to such
income in advance since the precise amount of a Fund's assets to be invested in
various countries is not known. Any amount of taxes paid by a Fund to foreign
countries will reduce the amount of income available to a Fund for distributions
to shareholders.
The foregoing is a general and abbreviated summary of the Code and Treasury
regulations in effect as of the date of each Fund's Prospectus and this
Statement of Additional Information. The foregoing relates solely to the
federal income tax law applicable to "U.S. persons," i.e., U.S. citizens and
residents and U.S. domestic corporations, partnerships, trusts and estates.
Shareholders who are not U.S. persons are encouraged to consult a tax adviser
regarding the income tax consequences of acquiring shares of a Fund.
28
<PAGE>
LIMITATION OF DIRECTOR LIABILITY
Under Minnesota law, the Fund's Board of Directors owes certain fiduciary
duties to the Fund and to its shareholders. Minnesota law provides that a
director "shall discharge the duties of the position of director in good faith,
in a manner the director reasonably believes to be in the best interest of the
corporation, and with the care an ordinarily prudent person in a like position
would exercise under similar circumstances." Fiduciary duties of a director of a
Minnesota corporation include, therefore, both a duty of "loyalty" (to act in
good faith and act in a manner reasonably believed to be in the best interests
of the corporation) and a duty of "care" (to act with the care an ordinarily
prudent person in a like position would exercise under similar circumstances).
Minnesota law authorizes corporations to eliminate or limit the personal
liability of a director to the corporation or its shareholders for monetary
damages for breach of the fiduciary duty of "care." Minnesota law does not,
however, permit a corporation to eliminate or limit the liability of a director
(i) for any breach of the director's duty of "loyalty" to the corporation or its
shareholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for authorizing a
dividend, stock repurchase or redemption or other distribution in violation of
Minnesota law or for violation of certain provisions of Minnesota securities
laws, or (iv) for any transaction from which the director derived an improper
personal benefit. The Articles of Incorporation of IAI Investment Funds VI,
Inc., limit the liability of directors to the fullest extent permitted by
Minnesota statutes, except to the extent that such liability cannot be limited
as provided in the Investment Company Act of 1940 (which Act prohibits any
provisions which purport to limit the liability of directors arising from such
directors' willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their role as directors).
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" of the corporation for breach of their
duties as officers (including the liability of directors who serve as officers
for breach of their duties as officers). Minnesota law does not permit
elimination or limitation of the availability of equitable relief, such as
injunctive or rescissionary relief. Further, Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act of
1933 or the Securities Exchange Act of 1934, and it is uncertain whether and to
what extent the elimination of monetary liability would extend to violations of
duties imposed on directors by the Investment Company Act of 1940 and the rules
and regulations adopted under such Act.
FINANCIAL STATEMENTS
The financial statements, included as part of the Fund's 1995 Annual Report
to shareholders, are incorporated herein by reference. Such Annual Report may be
obtained by shareholders on request from the Fund at no charge.
29
<PAGE>
APPENDIX A
RATINGS OF DEBT SECURITIES
RATINGS BY MOODY'S
- ------------------
CORPORATE BONDS
Aaa. Bonds rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa. Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A. Bonds rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa. Bonds rated Baa are considered medium grade
obligations; i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate, and thereby
not well safeguarded during other good and bad times over the future.
Uncertainty of position characteristizes bonds in this class.
B. Bonds rated B generally lack characteristics of the
desirable investment. Assurances of interest and principal payment or
maintenance of other terms of the contract over any long period of time may be
small.
Caa. Bonds rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca. Bonds rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C. Bonds rated C are the lowest-rated class of bonds and
issued so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Conditional Ratings. The designation "Con." followed by a rating
indicates bonds for which the security depends upon the completion of some act
or the fulfillment of some condition. These are bonds secured by (a) earnings
of projects under construction, (b) earnings or projects unseasoned in operating
experience, (c) rentals which begin when facilities are completed, or (d)
payments to which
A-1
<PAGE>
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in the Aa and A
classifications of its corporate bond rating system. The modifier 1 indicates
that the security ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category. With respect to
municipal securities, those bonds in the Aa, A, Baa, Ba, and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols Aa1, A1, Baa1, Ba1, and B1.
COMMERCIAL PAPER
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime - 1 Superior ability for repayment of senior short-term
debt obligations
Prime - 2 Strong ability for repayment of senior short-term debt
obligations
Prime - 3 Acceptable ability for repayment of senior short-term
debt obligations
If an issuer represents to Moody's that its Commercial Paper
obligations are supported by the credit of another entity or entities, Moody's,
in assigning ratings to such issuers, evaluates the financial strength of the
indicated affiliated corporations, commercial banks, insurance companies,
foreign governments, or other entities, but only as one factor in the total
rating assessment.
RATINGS BY S&P
- --------------
CORPORATE BONDS
AAA. Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay
interest and repay principal and differs from the higher rated issues only in
small degree.
A. Debt rated A has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB. Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher-rated categories.
BB. Debt rated BB has less near-term vulnerability to
default than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments.
A-2
<PAGE>
B. Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB-rating.
CCC. Debt rated CCC has a currently identifiable
vulnerability to default, and is dependent upon favorable business, financial,
and economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic conditions,
it is not likely to have the capacity to pay interest and repay principal.
CC. Debt rated CC is typically applied to debt subordinated
to senior debt which is assigned an actual or implied CCC debt rating.
C. The rating C typically applied to debt subordinated to
senior debt which assigned an actual or implied CCC-debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been filed but
debt service payments are continued.
C1. The rating C1 is reserved for income bonds on which no
interest is being paid.
D. Debt rated D is in payment default. The D rating
category is used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired, unless S & P
believes that such payments will be made during such grace period. The D rating
will be used upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
In order to provide more detailed indications of credit quality, S&P's
bond letter ratings described above (except for the AAA category) may be
modified by the addition of a plus or a minus sign to show relative standing
within the rating category.
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A. This highest rating category indicates the greatest
capacity for timely payment. Issues in this category are further defined with
the designations 1, 2, and 3 to indicate the relative degree to safety.
A-1. This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are designed A-1+.
A-2. Capacity for timely payments on issues with this
designation is satisfactory. However, the relative degree of safety is not as
high as for issues designed A-1.
A-3. Issues carrying this designation have adequate capacity
for timely repayment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
A-3
