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PRINCIPLE PROTECTION FUNDS
IAI Money Market Fund
IAI Reserve Fund
June 1, 1996
Includes Brochure & Prospectus
[LOGO]
Mutual Funds
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[ART]
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IAI Mutual Funds
IAI Money Market Fund, IAI Reserve 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 Capital Appreciation 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
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.
CHECKWRITING
IAI investors in the IAI Money Market Fund or the IAI Reserve Fund receive
free checkwriting privileges, for checks written for $500 or more, with no check
printing fees.
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.
This text is not part of the prospectus. Additional information, including
management fees and expenses, is included in the attached prospectus. Please
read it carefully before investing or sending money.
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IAI Mutual Funds
IAI Reserve Fund
FUND INFORMATION
CURRENT INCOME
Your investment in the IAI Reserve Fund earns monthly income from a
portfolio of high quality bonds with a short average maturity.
STABILITY
The Fund intends to maintain stability of share value in three ways:
1. Short maturity -- The Fund maintains an average bond maturity of 25
months or less.
2. High quality -- The Fund's portfolio is primarily investment grade bonds
and other debt securities of similar quality.
3. Diversification -- The portfolio is fully diversified to minimize risk.
Please see the Fund's prospectus, which accompanies this material, for more
information on the Fund's investment policies and techniques, as well as the
risks associated with investing in the Fund.
MONTHLY DIVIDENDS
The Fund pays dividends monthly and capital gains, if any, annually. You
may take dividends in cash or automatically reinvest them in additional shares
which compounds your returns.
PROFESSIONAL MANAGEMENT
The IAI Reserve Fund is a member of the IAI Mutual Fund family. Founded in
1947, IAI manages nearly $15 billion for thousands of individual investors, as
well as Fortune 500 companies, leading colleges, universities, and religious
organizations. IAI's fixed income experts monitor the market daily and select
the best issues available for the Fund's portfolio.
IT'S EASY TO START
To open an account, simply complete the enclosed application and return it
in the enclosed 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 IAI Funds, with $1,000 minimum per Fund).
call 1-800-945-3863
[PHOTO OF}
Timothy A. Palmer, CFA
Fund Manager
[PHOTO OF]
Livingston G. Douglas, CFA
Fund Manager
This text is not part of the prospectus. Additional information, including
management fees and expenses, is included in the attached prospectus. Please
read it carefully before investing or sending money.
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IAI Mutual Funds
IAI Reserve Fund
HIGHER YIELD
Because short-term bonds have longer maturities than money market
securities, short-term bonds typically have higher yields. That's why the IAI
Reserve Fund invests in short-term bonds with a dollar-weighted average maturity
of about two years. Money market funds must maintain an dollar-weighted average
maturity of not more than 90 days.
In late 1995, yields on two-year securities were actually lower than money
market fund yields, because investors expected the Federal Reserve Board to
lower interest rates. By early 1996, the normal relationship resumed, and
investors again were compensated for the greater risk they must take for owning
bonds for a longer period of time.
Normal Yield Curve
[graph]
Source: IAI
IAI Reserve Fund Share Price
[graph]
Past performance is not a guarantee of future results. The Fund's
investment return, yield and principal may fluctuate, so that when redeemed,
shares may be worth more or less than original cost.
The normal relationship between yield and maturity is shown in the chart,
Normal Yield Curve." Note that yield typically increases from 3 months (money
market) to 2 years (short-term bonds).
RELATIVE STABILITY
While short-term bonds usually carry yields higher than money market
securities, they are also somewhat less stable in price, because changes in
interest rates have a greater impact on the prices of longer-maturity bonds.
Historically, however, prices of short-term bonds have been generally less
volatile than the prices of long-term bonds. Note the modest share price
fluctuation of the IAI Reserve Fund over the past eight years.
The combination of higher yield and a reasonably stable price has made
short-term bonds an attractive alternative to money market funds for those
investors who can tolerate modest share price fluctuation. "Current income,
stability and liquidity from a short-term bond fund."
This text is not part of the prospectus. Additional information, including
management fees and expenses, is included in the attached prospectus. Please
read it carefully before investing or sending money.
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IAI Mutual Funds
IAI Money Market Fund
FUND INFORMATION
THE IAI MONEY MARKET FUND IS MANAGED BY AN INVESTMENT COMMMITTEE COMPRISED
OF FIXED INCOME PORTFOLIO MANAGERS.
CURRENT INCOME
Your investment in the IAI Money Market Fund earns monthly income from a
portfolio of high quality money market instruments.
STABILITY OF PRINCIPAL
The Fund is managed to maintain a stable share price of $1.00. Money market
funds are one of the safest mutual fund investments available, with an excellent
record of protecting principal.
DIVERSIFIED PORTFOLIO
The Fund's portfolio is fully diversified and its holdings are spread
across a wide range of securities and issuers.
MONTHLY DIVIDENDS
Your dividends accrue daily and are paid monthly. You may receive your
dividends in cash, or you can automatically reinvest them in additional shares
and compound your returns.
PROFESSIONAL MANAGEMENT
The IAI Money Market Fund is a member of the IAI Mutual Fund family.
Founded in 1947, IAI manages nearly $15 billion for thousands of individual
investors, as well as Fortune 500 companies, leading colleges, universities,
and religious organizations. IAI's money market experts monitor the market daily
and select the best issues available for the Fund's portfolio.
IT'S EASY TO START
To open an account, simply complete the enclosed application and return it
in the enclosed 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 IAI Funds, with $1,000 minimum per Fund).
call 1-800-945-3863
This text is not part of the prospectus. Additional information, including
management fees and expenses, is included in the attached prospectus. Please
read it carefully before investing or sending money.
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IAI Mutual Funds
IAI Money Market Fund
MONEY MARKET SECURITIES
The "money market" is the financial marketplace where banks, large
corporations, mutual funds, and other institutions invest cash for short time
periods. Typical money market securities, also known as "cash equivalents" and
"short-term instruments," include the following:
Treasury bills issued by the U.S. Government
Short-term notes issued by agencies of the U.S. Government
CDs issued by large banks
Commercial paper issued by large corporations
Money market yields tend to track the federal funds rate --
the rate banks are charged for overnight loans -- which is determined
by Federal Reserve Board Policy.
Please see the Fund's prospectus, which accompanies this material, for more
information on the Fund's investment policies and techniques, as well as the
risks associated with investing in the Fund.
SAFETY OF MONEY MARKET
SECURITIES
Money market securities maintain stable value primarily because they have
very short maturities. The shorter the maturity of a fixed income security, the
less volatile is its price in response to interest rate changes. The IAI Money
Market Fund is subject to a maximum average maturity of not more than 90 days.
Money market securities such as those in the IAI Money Market Fund's
portfolio are stable also because they are issued by high quality institutions
and have very little default risk. The IAI Money Market Fund will invest only in
securities that present minimal credit risk and are highly liquid.
WHY PUT MONEY IN THE IAI
MONEY MARKET FUND INSTEAD
OF A BANK?
Money market funds have two key advantages over banks:
Higher Yield -- Historically, money market funds have usually paid higher
yields than bank money market accounts. Of course, this
yield cannot be guaranteed.
Greater Liquidity -- Unlike CDs, where your money is locked in for the
term of the CD, you can redeem IAI Money Market Fund
shares at any time with no penalty. Also, the yield
is not fixed like a CD, so when interest rates rise
it will fluctuate upward.
The IAI Money Market Fund is managed to maintain a stable share value of
$1.00 and historically has always achieved this objective. But, unlike bank
deposits and CDs, money market funds are not insured or guaranteed, and there
can be no assurance that a stable share value of $1.00 will be maintained.
"Current income with stable share price and liquidity."
This text is not part of the prospectus. Additional information, including
management fees and expenses, is included in the attached prospectus. Please
read it carefully before investing or sending money.
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<CAPTION>
IAI Mutual Funds
IAI Money Market Fund, IAI Reserve Fund
TABLE OF CONTENTS
Page
<S> <C>
FUND EXPENSE INFORMATION...................................................2
FUND DIRECTORS.............................................................2
FINANCIAL HIGHLIGHTS.............. ........................................3
INVESTMENT PERFORMANCE.....................................................5
INVESTMENT OBJECTIVE AND POLICIES..........................................6
IAI Money Market Fund ...................................................6
IAI Reserve Fund ....................................................... 7
OTHER FUND INVESTMENT TECHNIQUES...........................................8
FUND RISK FACTORS..........................................................11
MANAGEMENT.................................................................14
COMPUTATION OF NET ASSET VALUE AND PRICING.................................15
PURCHASE OF SHARES.........................................................16
RETIREMENT PLANS...........................................................17
AUTOMATIC INVESTMENT PLAN..................................................17
REDEMPTION OF SHARES.......................................................18
EXCHANGE PRIVILEGE............................... .........................19
AUTOMATIC EXCHANGE PLAN....................................................19
AUTHORIZED TELEPHONE TRADING...............................................20
SYSTEMATIC CASH WITHDRAWAL PLAN............................................20
CHECK WRITING PRIVILEGE....................................................21
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS....................................21
DESCRIPTION OF COMMON STOCK................................................23
COUNSEL AND AUDITORS.......................................................23
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT....................23
ADDITIONAL INFORMATION.....................................................24
</TABLE>
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IAI Mutual Funds
IAI Money Market Fund, IAI Reserve Fund
PROSPECTUS DATED JUNE 1, 1996
IAI Money Market Fund ("Money Market Fund") is a separate portfolio of IAI
Investment Funds VI, Inc., a registered investment company authorized to issue
its shares of common stock in more than one series. The investment objective of
the Fund is to provide shareholders with a high level of current income
consistent with the preservation of capital and liquidity.
An investment in Money Market Fund is neither insured nor guaranteed by the U.S.
Government. There can be no assurance that Money Market Fund will be able to
maintain a stable net asset value of $1 per share.
IAI Reserve Fund ("Reserve Fund") is a separate portfolio of IAI Investment
Funds V, Inc., a registered investment company authorized to issue its shares of
common stock in more than one series. Reserve Fund's investment objectives are
to provide its shareholders with high levels of capital stability and liquidity
and, to the extent consistent with these primary objectives, a high level of
current income. Reserve Fund pursues its investment objectives by investing
primarily in a diversified portfolio of investment grade bonds and other debt
securities of similar quality. The dollar weighted average maturity of Reserve
Fund's portfolio will not exceed twenty-five (25) months.
This Prospectus sets forth concisely the information which a prospective
investor should know about each Fund before investing and it should be retained
for future reference. A "Statement of Additional Information" dated June 1,
1996, which provides a further discussion of certain areas in this Prospectus
and other matters which may be of interest to some investors, has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference. For a free copy, call or write the Funds at the address or telephone
number shown on the inside back cover of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
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IAI Mutual Funds
IAI Money Market Fund, IAI Reserve Fund
FUND EXPENSE INFORMATION
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
- -------------------------------------------------------------------------------------------------
IAI Money Market Fund IAI Reserve Fund
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<S> <C> <C>
Sales Load Imposed on Purchases.................. None None
Sales Load Imposed on Reinvested Dividends....... None None
Redemption Fees. ................................ None None
Exchange Fees.................................... None None
</TABLE>
<TABLE>
<CAPTION>
Annual Fund Operating Expenses
(as a percentage of average daily net assets)
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IAI Money Market Fund IAI Reserve Fund
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<S> <C> <C>
Management Fee.................................. .60% .85%
Rule 12b-1 Fee.................................. None None
Other Expenses.................................. None None
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Total Fund Operating Expenses................... .60% .85%
</TABLE>
Example:
Based upon the levels of Total Fund Operating Expenses listed above, you would
pay the following expenses on a $1,000 investment, assuming a five percent
annual return and redemption at the end of each period:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Fund $ 6 $ 19 $ 33 $ 75
Reserve Fund $ 9 $ 27 $ 47 $ 105
</TABLE>
The purpose of the above table is to assist you in understanding the various
costs and expenses that an investor in the Funds will bear directly or
indirectly. Because of a change in each Fund's fee structure effective April 1,
1996, the information in the table has been restated to reflect each Fund's
current fees. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. For
the period from April 1, 1996 through June 30, 1996, IAI has voluntarily agreed
to waive its Management Fee in excess of .50% of Money Market Fund's average
daily net assets.
FUND DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
Noel P. Rahn
Richard E. Struthers
J. Peter Thompson
Charles H. Withers
2
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IAI Mutual Funds
IAI Money Market Fund, IAI Reserve Fund
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report is included in each Fund's Annual Report. The financial
statements in the Annual Report are incorporated by reference in (and are a part
of) the Statement of Additional Information. Such Annual Report may be obtained
by shareholders on request from the Fund at no charge.
MONEY MARKET FUND
<TABLE>
<CAPTION>
Period Period
from Year Ended from
Year Ended 4/1/94 3/31/94 1/5/93(1)
1/31/96 to 1/31/95(2) to 3/31/93
--------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Net Asset Value:
Beginning of period $1.00 $1.00 $1.00 $1.00
------------------------------------------------------
Operations:
Net investment income 0.05 0.03 0.03 0.01
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Distributions to Shareholders From:
Net investment income (0.05) (0.03) (0.03) (0.01)
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Net Asset Value:
End of period $1.00 $1.00 $1.00 $1.00
=======================================================
Total investment return * 5.46% 3.47% 2.88% 2.85%**
Net assets at end of period (000's omitted) $27,395 $33,175 $29,788 $25,877
Ratios:
Expenses to average daily net assets*** .50% .50%** .45% .29%**
Net investment income to average daily
net assets*** 5.34% 4.12%** 2.73% 2.96%**
</TABLE>
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* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions at
net asset value.
** Annualized
*** The Fund's adviser voluntarily waived $76,386, $81,895, $147,924 and
$18,494 in expenses for the year ended January 31, 1996, the ten months
ended January 31, 1995, the year ended March 31, 1994 and the three months
ended March 31, 1993, respectively. If the Fund had been charged for these
expenses, the ratio of expenses to average daily net assets would have
been .74%, .88%, .88% and .69%, respectively, and the ratio of net
investment income to average daily net assets would have been 5.10%,
3.74%, 2.30% and 2.56%, respectively.
(1) Commencement of operations.
(2) Reflects fiscal year-end change from March 31 to January 31.
3
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IAI Mutual Funds
IAI Money Market Fund, IAI Reserve Fund
RESERVE FUND
<TABLE>
<CAPTION>
Year ended Years ended March 31,
---------- --------------------------------------------------------------------------------
1/31/96 1995(2) 1994 1993 1992 1991 1990 1989 1988 1987 1986(1)
---------- ------- ------ ------- -------- -------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period $9.89 $9.98 $10.10 $10.16 $10.17 $10.08 $10.03 $10.08 $10.19 $10.10 $10.00
---------- --------- ------- -------- --------- --------- -------- -------- ------- -------- ---------
OPERATIONS:
Net investment income 0.56 .40 .39 .36 .57 .72 .80 .74 .58 .54 .06
Net realized and unrealized
gains (losses) 0.09 (.08) (.13) .02 .08 .10 .03 (.05) .02 .02 .04
---------- --------- ------- -------- --------- --------- -------- -------- ------- -------- ---------
Total from operations 0.65 .32 .26 .38 .65 .82 .83 .69 .60 .56 .10
---------- --------- ------- -------- --------- --------- -------- -------- ------- -------- ---------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.54) (.41) (.37) (.36) (.58) (.73) (.78) (.74) (.71) (.47) --
Net realized gains -- -- (.01) (.08) (.08) -- -- -- -- -- --
----- --------- ------- -------- --------- --------- -------- -------- ------- -------- --------
Total distributions (0.54) (.41) (.38) (.44) (.66) (.73) (.78) (.74) (.71) (.47) --
---------- --------- ------- -------- --------- --------- -------- -------- ------- -------- --------
NET ASSET VALUE:
End of period $10.00 $9.89 $9.98 $10.10 $10.16 $10.17 $10.08 $10.03 $10.08 $10.19 $10.10
========== ========= ======= ======== ========= ========= ======== ======== ======= ======== ========
Total investment return* 6.76% 3.21% 2.60% 3.81% 6.54% 8.49% 8.54% 6.95% 6.17% 5.55% 1.00%**
RATIOS:
Expenses to average net
assets .85% .85%** .85% .85% .85% .85% .85% .85% .80% .80% .90%**
Net investment income to
average net assets 5.48% 4.77%** 3.95% 3.49% 5.63% 7.09% 7.95% 7.20% 5.90% 5.60% 4.90%**
Portfolio turnover rate
(excluding short-term 261.1% 170.0% 235.0% 538.7% 218.1% 87.0% 63.1% 64.3% 0% 30.1% 0%
securities)
</TABLE>
- ----------------------------
* Total investment return is based on the change in net asset value
of a share during the period and assumes reinvestment of
distributions at net asset value.
** Annualized
(1) Period from January 31, 1986 (commencement of operations)to March 31,1986.
(2) Period from April 1, 1994 to January 31, 1995. Reflects fiscal year-end
change from March 31 to January 31.
4
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IAI Mutual Funds
IAI Money Market Fund, IAI Reserve Fund
INVESTMENT PERFORMANCE
From time to time the Funds may advertise performance data. Performance data may
include yield and effective yield and, for Reserve Fund, may also include
monthly, quarterly, yearly, cumulative total return and average annual return.
All such figures are based on historical earnings and performance and are not
intended to be indicative of future performance. It can be expected that such
figures will fluctuate substantially over time.
Yield refers to the income generated by an investment in a Fund over a given
period of time, expressed as an annual percentage rate. With respect to Money
Market Fund, the yield of the Fund refers to the income generated by an
investment in the Fund over a 7-day period (which period will be stated in the
advertisement). Reserve Fund's yield refers to the income generated by an
investment in the Fund over a 30-day period. Yields are calculated according to
a standard that is required for all bond funds. Because this differs from other
accounting methods, the quoted yield may not equal the income actually paid to
shareholders. The effective yield is calculated similarly, but, when annualized,
the income earned by an investment in a Fund is assumed to be reinvested. The
effective yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment. Each Fund's yield and effective
yield may reflect absorbed expenses pursuant to any undertaking that may be in
effect. See the section "Management" below.
Total return is the change in value of an investment in a Fund over a given
period, assuming reinvestment of any dividends and capital gains. A cumulative
total return reflects actual performance over a stated period of time. An
average annual total return is a hypothetical rate of return that, if achieved
annually, would have produced the same cumulative total return if performance
had been constant over the entire period. The principal value of an investment
in Reserve Fund will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their original cost.
For additional information regarding the calculation of such total return and
yield figures, see "Investment Performance" in the Statement of Additional
Information. Further information about the performance of the Funds is contained
in the Funds' Annual Report to shareholders which may be obtained without charge
from the Funds.
Comparative performance information may be used from time to time in advertising
or marketing a Fund's shares, including data on the performance of other mutual
funds, indexes or averages of other mutual funds, indexes of related financial
assets or data, and other competing investment and deposit products available
from or through other financial institutions. The composition of these indexes,
averages or products differs from that of the Funds. The comparison
5
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IAI Mutual Funds
IAI Money Market Fund, IAI Reserve Fund
of a Fund to an alternative investment should be made with consideration of
differences in features and expected performance. A Fund may also note its
mention in newspapers, magazines, or other media from time to time. The Funds
assume no responsibility for the accuracy of such data. For additional
information on the types of indexes, averages and periodicals that might be
utilized by the Funds in advertising and sales literature, see the section
"Investment Performance" in the Statement of Additional Information.
INVESTMENT OBJECTIVE AND POLICIES
MONEY MARKET FUND
Money Market Fund's investment objective is to provide shareholders with a high
level of current income consistent with the preservation of capital and
liquidity. The Fund is designed for investors who seek maximum stability of
principal. Money Market Fund's investment objective may not be changed without
shareholder approval. There can be no assurance that the Fund will achieve its
investment objective.
RULE 2A-7
Money Market Fund is subject to the investment restrictions of Rule 2a-7 under
the Investment Company Act of 1940 in addition to its other policies and
restrictions discussed below. Rule 2a-7 requires that the Fund invest
exclusively in securities that mature within 397 days and that it maintain an
average dollar weighted maturity of not more than 90 days. Rule 2a-7 also
requires that all investments by the Fund be limited to United States
dollar-denominated investments that: (1) present "minimal credit risks," and (2)
are at the time of acquisition "Eligible Securities." Eligible Securities
include, among others, securities that are rated by two Nationally Recognized
Statistical Rating Organizations ("NRSROs") in one of the two highest categories
for short-term debt obligations, such as A-1 or A-2 by Standard & Poor's
Corporation ("S&P") or P-1 or P-2 by Moody's Investors Service, Inc.
("Moody's"). It is the responsibility of IAI to determine that Money Market
Fund's investments present only "minimal credit risks" and are Eligible
Securities. The Fund's Board of Directors has established written guidelines and
procedures for IAI and oversees IAI's determination that the Fund's portfolio
securities present only "minimal credit risks" and are Eligible Securities.
Rule 2a-7 also requires that (1) 95% of the assets of Money Market Fund be
invested in Eligible Securities that are deemed First Tier Securities, which
include, among others, securities rated by two NRSROs in the highest category
(such as A-1 and P-1), (2) the Fund may not invest more than 5% of its total
assets in Second Tier Securities (i.e., Eligible Securities that are not First
Tier Securities) and (3) the Fund's investment in Second Tier Securities of a
single issuer may not exceed the
6
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IAI Mutual Funds
IAI Money Market Fund, IAI Reserve Fund
greater of 1% of the Fund's total assets or $1,000,000.
INVESTMENT POLICIES
In pursuing its investment objective, Money Market Fund's assets will be
invested in short-term money market obligations, including securities issued, or
guaranteed by, the United States Government, its agencies or instrumentalities;
bank obligations, including time deposits, certificates of deposit, and bankers'
acceptances issued by domestic banks or their foreign branches or by foreign
banks; domestic and foreign commercial paper; repurchase agreements; U.S.
dollar-denominated obligations issued or guaranteed by one or more foreign
governments, or any of their political subdivisions, agencies or
instrumentalities, including obligations of supranational entities; and other
short-term corporate obligations, including those with floating or variable
rates of interest. The Fund may also invest in loan participation interests and
other participation interests in securities in which the Fund may invest,
subject to the Fund's quality and diversification requirements.
Money Market Fund's investments are subject to price variations resulting from
rising or falling interest rates and are subject to the ability of the issuers
of such investments to make payments at maturity. However, because the Fund will
invest only in securities that present minimal credit risks and are highly
liquid, fluctuations in principal are expected to be minimal. Money Market Fund
may also hold cash, which may not earn interest, to facilitate stabilizing its
net asset value per share and for liquidity purposes.
For additional information regarding the types of securities and investment
techniques that may be utilized by the Fund, see "Other Fund Investment
Techniques."
RESERVE FUND
Reserve Fund's investment objectives are to provide its shareholders with high
levels of capital stability and liquidity and, to the extent consistent with
these primary objectives, a high level of current income. Such objectives may
not be changed without shareholder approval. There can be no assurance that
Reserve Fund's investment objectives will be attained.
Reserve Fund pursues its objectives primarily through investment in a
diversified portfolio of investment grade bonds and other debt securities of
similar quality. Investment grade securities are those securities rated within
the four highest grades assigned by Moody's Investors Service, Inc. ("Moody's")
or Standard and Poor's Corporation ("S&P"). The Fund will maintain a dollar
weighted average maturity of its investment portfolio of twenty-five (25) months
or less. For purposes of such determination, securities that provide for
optional maturity dates, at the holder's option, shall be deemed by the Fund to
have been issued with the shorter optional maturity dates.
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Other debt securities in which Reserve Fund may invest include securities of, or
guaranteed by, the U.S. Government, its agencies or instrumentalities, corporate
debt obligations, debt securities of foreign issuers, mortgage-related
securities, commercial paper rated at least Prime-2 by Moody's or A-2 by S&P or
otherwise issued by companies having an outstanding unsecured debt issue
currently rated A or better by Moody's or S&P, bank certificates of deposit and
other short-term instruments and repurchase agreements relating to such
securities. U.S. Government securities are issued or guaranteed by the U.S.
Treasury or by an agency or instrumentality of the U.S. Government. Not all U.S.
Government securities are backed by the full faith and credit of the United
States. Some are supported only by the credit of the agency that issued them.
RESERVE FUND MAY ALSO INVEST IN BELOW INVESTMENT GRADE SECURITIES. SUCH
SECURITIES ARE COMMONLY REFERRED TO AS JUNK BONDS. RESERVE FUND CURRENTLY
INTENDS TO LIMIT SUCH INVESTMENTS TO LESS THAN 10% OF ITS TOTAL ASSETS AND NOT
TO INVEST IN JUNK BONDS RATED LOWER THAN B BY MOODY'S OR S&P.
SECURITIES RATED IN THE MEDIUM TO LOWER RATING CATEGORIES OF NATIONALLY
RECOGNIZED STATISTICAL RATING ORGANIZATIONS AND UNRATED SECURITIES OF COMPARABLE
QUALITY ARE PREDOMINATELY SPECULATIVE WITH RESPECT TO THE CAPACITY TO PAY
INTEREST AND REPAY PRINCIPAL IN ACCORDANCE WITH THE TERMS OF THE SECURITY AND
GENERALLY INVOLVE A GREATER VOLATILITY OF PRICE THAN SECURITIES IN HIGHER RATING
CATEGORIES. See "Investment Objectives and Policies" in the Statement of
Additional Information for additional information regarding ratings of debt
securities. In purchasing such securities, Reserve Fund will rely on IAI's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer of such securities. IAI will take into consideration, among other things,
the issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management and
regulatory matters.
For additional information regarding the types of securities and investment
techniques that may be utilized by the Fund, see "Other Fund Investment
Techniques". For additional information regarding the risks of investing in the
Fund, see "Fund Risk Factors".
OTHER FUND INVESTMENT TECHNIQUES
U.S. GOVERNMENT SECURITIES
Each Fund may invest in securities issued or guaranteed as to principal or
interest by the United States Government, or agencies or instrumentalities of
the United States Government. The types of securities in which a Fund may invest
include direct obligations of the United States Treasury, such as United States
Treasury bonds, notes and bills. In addition, the Funds may invest in
obligations issued by instrumentalities which have been established or sponsored
by the United
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IAI Mutual Funds
IAI Money Market Fund, IAI Reserve Fund
States Government. Some obligations issued or guaranteed by agencies or
instrumentalities are fully guaranteed by the United States Government. Others
rely on the assets and credit of the instrumentality, along with rights to
borrow from the United States Treasury and may involve more risk.
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements relating to the securities in
which it may invest. In a repurchase agreement, the Fund buys a security at one
price and simultaneously agrees to sell it back at a higher price. Delays or
losses could result if the other party to the agreement defaults or becomes
bankrupt.
SECURITIES OF FOREIGN ISSUERS
Each Fund may invest in obligations issued or guaranteed by one or more foreign
governments or any of their political subdivisions, agencies or
instrumentalities that are determined by IAI to be of comparable quality to the
other obligations in which the Fund may invest. Such securities also include
debt obligations of supranational entities. Supranational entities include
international organizations designated or supported by governmental entities to
promote economic reconstruction or development and international banking
institutions and related government agencies. Examples include the International
Bank for Reconstruction and Development (the "World Bank"), the European Coal
and Steel Community, the Asian Development Bank and the InterAmerican
Development Bank. The percentage of each Fund's assets invested in securities
issued by foreign governments will vary depending upon the relative yields of
such securities, the economic and financial markets of the countries in which
the investments are made, and the interest rate climate of such countries. Money
Market Fund will limit its investments in foreign issuers to those which are
dominated in U.S. dollars. Reserve Fund currently intends to invest no more than
15% of the value of its total assets in non-dollar denominated securities of
foreign issuers.
WHEN-ISSUED/DELAYED DELIVERY TRANSACTIONS
Each Fund may purchase portfolio securities on a when-issued or delayed-delivery
basis. When-issued and delayed-delivery transactions are trading practices
wherein payment for and delivery of the securities take place at a future date.
The market value of a security could change during this period, which could
affect the market value of the Fund's assets.
ILLIQUID SECURITIES
The Money Market Fund may invest up to 10% of its net assets, while the Reserve
Fund may invest up to 15% of its net assets, in securities that are considered
illiquid. This illiquidity may be due to the absence of a readily available
market or due to legal or contractual
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restrictions. However, certain restricted securities that are not registered for
sale to the general public but that can be resold to institutional investors may
be considered liquid pursuant to guidelines adopted by the Board of Directors.
The institutional trading market is relatively new, and the liquidity of the
Fund's investments could be impaired if trading does not develop or declines.
ZERO COUPON OBLIGATIONS
Each Fund may also invest in zero coupon obligations of the U.S. Government or
its agencies, tax exempt issuers and corporate issuers, including rights to
stripped coupon and principal payments ("STRIPS"). Zero coupon bonds do not make
regular interest payments; rather, they are sold at a discount from face value.
Principal and accreted discount (representing interest accrued but not paid) are
paid at maturity. STRIPS are debt securities that are stripped of their interest
after the securities are issued, but otherwise are comparable to zero coupon
bonds. The market values of STRIPS and zero coupon bonds generally fluctuate in
response to changes in interest rates to a greater degree than do
interest-paying securities of comparable term and quality.
ADJUSTING INVESTMENT EXPOSURE
Reserve Fund can use various techniques to increase or decrease its exposure to
changing security prices, interest rates, currency exchange rates, commodity
prices, or other factors that affect security values. These techniques include
buying and selling options and futures contracts, entering into currency
exchange contracts or swap agreements, purchasing indexed securities, and
selling securities short.
BORROWING
Reserve Fund may borrow from banks (or through reverse repurchase agreements)
for temporary or emergency purposes. If the Fund borrows money, its share price
may be subject to greater fluctuation until the borrowing is paid off. If
Reserve Fund makes additional investments while borrowings are outstanding, this
may be considered a form of leverage.
PORTFOLIO TURNOVER
Each Fund will dispose of securities without regard to the time they have been
held when such action appears advisable to management either as a result of
securities having reached a price objective, or by reason of developments not
foreseen at the time of the investment decision. Since investment changes
usually will be made without reference to the length of time a security has been
held, a significant number of short-term transactions may result. Accordingly, a
Fund's annual portfolio turnover rate cannot be anticipated and may be
relatively high, as the rate was for Reserve Fund last fiscal year. High
turnover rates (100% or more) generally result in higher brokerage and other
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IAI Mutual Funds
IAI Money Market Fund, IAI Reserve Fund
costs for a Fund, and may increase taxable capital gains. Reserve Fund's
historical portfolio turnover rates are set forth in the section "Financial
Highlights."
Further information regarding these and other techniques is contained in the
Statement of Additional Information.
FUND RISK FACTORS
INTEREST RATE RISK
As a mutual fund investing in fixed-income securities, Reserve Fund is subject
to interest rate risk. Interest rate risk is the potential for a decline in bond
prices due to rising interest rates. In general, bond prices vary inversely with
interest rates. When interest rates rise, bond prices generally fall.
Conversely, when interest rates fall, bond prices generally rise. The change in
price depends on several factors, including the bond's maturity date. In
general, bonds with longer maturities are more sensitive to changes in interest
rates than bonds with shorter maturities. In managing Reserve Fund, IAI will
adjust the duration of the investment portfolio in response to economic and
market conditions. Duration is generally considered a better measure of interest
rate risk than is maturity. Duration is a measure of the expected change in
value of a fixed income security (or portfolio) for a given change in interest
rates. For example, if interest rates rise by one percent, the market value of a
security (or portfolio) having a duration of two generally will fall by
approximately two percent. In some situations, the standard duration calculation
does not properly reflect the interest rate risk of a security. In such
situations, IAI will use more sophisticated analytical techniques, such as
modeling principal and interest payments based upon historical experience or
expected volatility, to arrive at an effective duration that incorporates the
additional variables into the determination of interest rate risk. These
techniques may involve estimates of future economic parameters which may vary
from actual future outcomes. IAI anticipates the duration range for the Reserve
Fund to be .25 to 1.75 years. This range is merely an expectation as of the date
of this Prospectus, and may change due to market conditions and other economic
factors. Therefore, the expected duration range does not limit IAI in how it
manages the Fund. These principals of interest rate risk also apply to U.S.
Treasury and U.S. Government agency securities. As with other bond investments,
U.S. Government securities will rise and fall in value as interest rates change.
A security backed by the U.S. Treasury or the full faith and credit of the
United States is guaranteed only as to the timely payment of interest and
principal when held to maturity. The current market prices for such securities
are not guaranteed and will fluctuate.
Money Market Fund is subject to interest rate risk, however, IAI endeavors to
manage the Fund in such a way to minimize
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IAI Money Market Fund, IAI Reserve Fund
such risk and maintain a net asset value of $1.00 per share. There can be no
assurance that Money Market Fund will be able to maintain a stable net asset
value of $1.00 per share.
CREDIT RISK
Each Fund is also subject to credit risk. Credit risk, also known as default
risk, is the possibility that a bond issuer will fail to make timely payments of
interest or principal to a Fund. The credit risk of each Fund depends on the
quality of its investments. Reflecting their higher risks, lower-quality bonds
generally offer higher yields (all other factors being equal).
CALL RISK
Reserve Fund is also subject to call risk. Call risk is the possibility that
corporate bonds held by Reserve Fund will be repaid prior to maturity. Call
provisions, common in many corporate bonds held by Reserve Fund, allow bond
issuers to redeem bonds prior to maturity (at a specified price). When interest
rates are falling, bond issuers often exercise these call provisions, paying off
bonds that carry high stated interest rates and often issuing new bonds at lower
rates. For Reserve Fund, the result would be that bonds with high interest rates
are "called" and must be replaced with lower-yielding instruments. In these
circumstances, the income of Reserve Fund would decline.
FOREIGN INVESTMENT RISK FACTORS
Each Fund may be subject to additional investment risks with respect to its
investment in securities of foreign issuers that are different in some respects
from those incurred by a fund which invests only in debt obligations of U.S.
domestic issuers. These include risks of adverse political and economic
developments (including possible governmental seizure or nationalization of
assets), the possible imposition of exchange controls or other governmental
restrictions, including less uniformity in accounting and reporting
requirements, and the possibility that there will be less information on such
securities and their issuers available to the public. Foreign securities may
also be subject to foreign taxes, which reduce yield, and may be less marketable
than comparable United States securities.
With respect to Reserve Fund which can invest in securities denominated or
quoted in currencies other than the U.S. dollar, changes in foreign currency
exchange rates may affect the value of securities in the portfolio. Foreign
currency exchange rates are determined by forces of supply and demand in the
foreign exchange markets and other economic and financial conditions affecting
the world economy. A decline in the value of any particular currency against the
U.S. dollar will cause a decline in the U.S. dollar value of Reserve Fund's
holdings of securities denominated in such currency and, therefore, will cause
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IAI Mutual Funds
IAI Money Market Fund, IAI Reserve Fund
an overall decline in the Fund's net asset value and net investment income and
capital gains, if any, to be distributed in U.S. dollars to shareholders by the
Fund. Delays may be encountered in settling securities transactions in certain
foreign markets, and Reserve Fund will incur costs in converting foreign
currencies into U.S. dollars. Custody charges are generally higher for foreign
securities.
RISKS OF TRANSACTIONS IN DERIVATIVES
IAI may use futures, options, swap and currency exchange agreements as well as
short sales to adjust the risk and return characteristics of Reserve Fund's
portfolio of investments. If IAI judges market conditions incorrectly or employs
a strategy that does not correlate well with the Fund's investments, use of
these techniques could result in a loss, regardless of whether the intent was to
reduce risk or increase return. Use of these techniques may increase the
volatility of Reserve Fund and may involve a small investment of cash relative
to the magnitude of risk assumed. In addition, these techniques could result in
a loss if the counterparty to the transaction is unable to perform as promised.
Moreover, a liquid secondary market for any futures or options contract may not
be available when a futures or options position is sought to be closed. Please
refer to the Statement of Additional Information which further describes these
risks.
MANAGER RISK
IAI manages each Fund according to the traditional methods of "active"
investment management, which involve the buying and selling of securities based
upon economic, financial and market analysis and investment judgment. Manager
risk refers to the possibility that IAI may fail to execute each Fund's
investment strategy effectively. As a result, each Fund may fail to achieve its
stated objective.
RISKS OF LOWER-RATED DEBT SECURITIES
Reserve Fund may invest in debt securities commonly known as "junk" bonds. Such
securities are subject to higher risks and greater market fluctuations than are
lower-yielding, higher-rated securities. The price of junk bonds has been found
to be less sensitive to changes in prevailing interest rates than higher-rated
investments, but is likely to be more sensitive to adverse economic changes or
individual corporate developments. During an economic downturn or substantial
period of rising interest rates, highly leveraged issuers may experience
financial stress which would adversely affect their ability to service their
principal and interest payment obligations, to meet their projected business
goals or to obtain additional financing. If the issuers of a fixed-income
security owned by Reserve Fund were to default, Reserve Fund might incur
additional expenses to seek recovery. The risk of loss due to default
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IAI Mutual Funds
IAI Money Market Fund, IAI Reserve Fund
by issuers of junk bonds is significantly greater than that associated with
higher-rated securities because such securities generally are unsecured and
frequently are subordinated to the prior payment of senior indebtedness. In
addition, periods of economic uncertainty and change can be expected to result
in an increased volatility of market prices of junk bonds and a concomitant
volatility in the net asset value of a share of Reserve Fund.
The secondary market for junk bonds is less liquid than the markets for higher
quality securities and, as such, may have an adverse effect on the market prices
of certain securities. The limited liquidity of the market may also adversely
affect the ability of Reserve Fund to arrive at a fair value for certain junk
bonds at certain times and could make it difficult for Reserve Fund to sell
certain securities. For a description of Moody's and S&P ratings see Appendix A
to the Statement of Additional Information.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain other investment policies and restrictions
described in the Statement of Additional Information, some of which are
fundamental and may not be changed without the approval of the shareholders of
the Fund. As a fundamental policy, with respect to 75% of its total assets, each
Fund may not invest more than 5% of its total assets in any one issuer. Each
Fund may not invest 25%or more of its assets in any one industry. Each Fund may
borrow only for temporary or emergency purposes in an amount not exceeding
one-third of its total assets. Please refer to the Statement of Additional
Information for a further discussion of each Fund's investment restrictions.
MANAGEMENT
Money Market Fund was created on January 5, 1993, as a separate portfolio
represented by a separate class of common stock of IAI Investment Funds VI,
Inc., a Minnesota corporation, created on April 30, 1991. Reserve Fund was
created on January 31, 1986 as a separate portfolio represented by a separate
class of common stock of IAI Investment Funds V, Inc., a Minnesota corporation
created on October 18, 1985. Under Minnesota law, each Fund's Board of Directors
is generally responsible for the overall operation and management of each Fund.
IAI serves as the investment adviser of each Fund. IAI also furnishes investment
advice to other concerns including other investment companies, pension and
profit sharing plans, portfolios of foundations, religious, educational and
charitable institutions, trusts, municipalities and individuals and has total
assets under management in excess of $15 billion. IAI's ultimate corporate
parent is Lloyds TSB Group plc, a publicly-held financial services organization
headquartered in London, England. Lloyds TSB Group plc is one of the largest
personal and corporate financial services groups in the United Kingdom and is
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IAI Mutual Funds
IAI Money Market Fund, IAI Reserve Fund
engaged in a wide range of activities including commercial and retail banking.
The address of IAI is that of the Funds.
Pursuant to a written agreement with each Fund (the "Management Agreement"), IAI
provides each Fund with investment advisory services and is responsible for the
overall management of each Fund's business affairs subject to the authority of
the Board of Directors. The Management Agreement also provides that, except for
brokerage commissions and other expenditures in connection with the purchase and
sale of portfolio securities, interest and, in certain circumstances, taxes and
extraordinary expenses, IAI shall pay all of a Fund's operating expenses. As
compensation under the Management Agreement, Money Market Fund will pay IAI .60%
of the Fund's average daily net assets and Reserve Fund will pay IAI .85% of its
average daily net assets. Because IAI is paying Fund operating expenses, these
fees represent each Fund's total expenses. Until June 30, 1996, IAI has agreed
to waive the fee due under the Management Agreement in excess of .50% of Money
Market Fund's average daily net assets. With respect to certain of the services
for which it is responsible under the Management Agreement, IAI may also pay
qualifying broker-dealers, financial institutions and other entities for
providing such services to Fund shareholders. IAI shall not be liable for any
loss suffered by a Fund in the absence of willful misfeasance, bad faith or
negligence in the performance of its duties and obligations.
Each Fund is managed by a team of IAI investment professionals which is
responsible for making the day-to-day investment decisions for such Fund. The
teams managing the Funds are as follows.
The day-to-day management of Money Market Fund is the responsibility of an
investment committee. Tim Palmer and Livingston Douglas have responsibility for
the management of Reserve Fund. Mr. Palmer is a Senior Vice President and has
served as portfolio manager of IAI since 1990 and as a manager of Reserve Fund
since 1991. Prior to joining IAI, Mr. Palmer was employed by the First Bank
Systems Capital Markets Group. Mr. Douglas is a Vice President of IAI and has
co-managed Reserve Fund since joining IAI as a fixed income portfolio manager in
1993. Prior to joining IAI, Mr. Douglas served as a fixed income portfolio
manager for Mackey-Shields Financial Corporation since 1987.
COMPUTATION OF NET ASSET VALUE AND PRICING
Each Fund is open for business each day the New York Stock Exchange ("NYSE") is
open. IAI normally calculates a Fund's net asset value ("NAV") as of the close
of business of the NYSE, normally 3 p.m. Central time.
A Fund's NAV is the value of a single share. The NAV is computed by adding
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IAI Mutual Funds
IAI Money Market Fund, IAI Reserve Fund
up the value of a Fund's investments, cash and other assets, subtracting its
liabilities and then dividing the result by the number of shares outstanding.
For purposes of calculating net asset value per share for Money Market Fund,
securities are valued at acquisition cost as adjusted for amortization of
premium or accretion of discount ("Amortized Cost Method"), rather than at their
value based on current market factors. While this method provides certainty in
valuation, it may result in periods during which the value of any security, as
determined by amortized cost, is higher or lower than the price Money Market
Fund would receive if it sold the instrument.
Reserve Fund's investments with remaining maturities of 60 days or less may be
valued on the basis of amortized cost. This method minimizes the effect of
changes in a security's market value. Other portfolio securities and assets are
valued primarily on the basis of market quotations or, if quotations are not
readily available, by a method that the Board of Directors believes accurately
reflects fair value. Foreign securities are valued on the basis of quotations
from the primary market in which they are traded, and are translated from the
local currency into U.S. dollars using current exchange rates.
The offering price (price to buy one share) and redemption price (price to sell
one share) are a Fund's NAV.
PURCHASE OF SHARES
Each Fund offers its shares continually to the public at the net asset value of
such shares. Shares may be purchased directly from a Fund or through certain
security dealers who have responsibility to promptly transmit orders and may
charge a processing fee, provided that the Fund whose shares are being purchased
is duly registered in the state of the purchaser's residence, if required, and
the purchaser otherwise satisfies the Fund's purchase requirements. No sales
load or commission is charged investors in connection with the purchase of Fund
shares.
The minimum initial investment to establish a retail account with the IAI Family
of Funds is $5,000. Such initial investment may be allocated among a Fund and
other funds in the IAI Family of Funds as desired, provided that no less than
$1,000 is allocated to any one fund. The minimum initial investment for IRA
accounts is $2,000, provided that the minimum amount that may be allocated to
any one fund is $1,000. Once the account minimum has been met, subsequent
purchases can be made in a Fund for $100 or more. Such minimums may be waived
for participants in the IAI Investment Club.
Investors may satisfy the minimum investment requirement by participating in the
STAR Program. Participation in the STAR Program requires an initial investment
of $1,000 per Fund and a
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IAI Mutual Funds
IAI Money Market Fund, IAI Reserve Fund
commitment to invest an aggregate of $5,000 within 24 months. If a STAR Program
participant does not invest an aggregate of $5,000 in the IAI Family of Funds
within 24 months, IAI may, at its option, redeem such shareholder's interest.
Investors wishing to participate in the STAR Program should contact a Fund to
obtain a STAR Program application.
To purchase shares, forward the completed application and a check payable to
"IAI Funds" to a Fund. Upon receipt, your account will be credited with the
number of full and fractional shares which can be purchased at the net asset
value next determined after receipt of the purchase order by a Fund.
Purchases of shares are subject to acceptance or rejection by a Fund on the same
day the purchase order is received and are not binding until so accepted. It is
the policy of the Funds and the Underwriter to keep confidential information
contained in the application and regarding the account of an investor or
potential investor in the Fund. Share certificates will only be issued for
Reserve Fund upon written request.
All correspondence relating to the purchase of shares should be directed to the
office of the Fund, P.O. Box 357, Minneapolis, Minnesota 55440 or, if using
overnight delivery, to 3700 First Bank Place, 601 Second Avenue South,
Minneapolis, Minnesota 55402. For assistance in completing the application
please contact IAI Mutual Fund Shareholder Services at 1-800-945-3863.
RETIREMENT PLANS
Shares of Money Market and Reserve Funds may be an appropriate investment medium
for various retirement plans. Persons desiring information about establishing an
Individual Retirement Account (IRA) (for employed persons and their spouses) or
other retirement plans should contact the Funds at 1-800-945-3863. All
retirement plans involve a long-term commitment of assets and are subject to
various legal requirements and restrictions. The legal and tax implications may
vary according to the circumstances of the individual investor. Therefore, you
are urged to consult with an attorney or tax advisor prior to the establishment
of such a plan.
AUTOMATIC INVESTMENT PLAN
Investors may arrange to make regular investments of $100 or more per fund on a
monthly basis, effective as of the 18th day of each month (or the next business
day), through automatic deductions from their checking or savings accounts. Such
investors may, of course, terminate their participation in the Automatic
Investment Plan at any time upon written notice to a Fund. Any changes or
instructions to terminate existing Automatic Investment Plans must be received
30 days preceding the day on which the change or termination is to take place.
Investors interested in participating in the Automatic Investment Plan should
complete the Automatic Investment Plan application and return it to a Fund.
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IAI Money Market Fund, IAI Reserve Fund
REDEMPTION OF SHARES
Registered holders of Fund shares may at any time require a Fund to redeem their
shares upon their written request. Shareholders may redeem shares by phone
subject to a limit of $50,000 provided such shareholders have authorized the
Funds to accept telephone instructions.
Reserve Fund shareholders who redeem shares by presenting stock certificates
must endorse on the back of the certificate with the signature of the person
whose name appears on the certificate.
Redemption instructions must be signed by the person(s) in whose name the shares
are registered. If the redemption proceeds are to be paid or mailed to any
person other than the shareholder of record or if redemption proceeds are in
excess of $50,000, a Fund will require that the signature on the written
instructions be guaranteed by a participant in a signature guarantee program,
which may include certain national banks or trust companies or certain member
firms of national securities exchanges. (Notarization by a Notary Public is NOT
ACCEPTED.) If the shares are held of record in the name of a corporation,
partnership, trust or fiduciary, a Fund may require additional evidence of
authority prior to accepting a request for redemption. A Fund will not send
redemption proceeds until checks (including certified checks or cashiers checks)
received for the shares purchased have cleared.
The redemption proceeds received by the investor are based on the net asset
value next determined after redemption instructions in good order are received
by a Fund. Since the value of shares redeemed is based upon the value of a Fund
investment at the time of redemption, it may be more or less than the price
originally paid for the shares.
Payment for shares redeemed will ordinarily be made within seven days after a
request for redemption has been made. Normally a Fund will mail payment for
shares redeemed on the business day following receipt of the redemption request.
Following a redemption or transfer request, if the value of a shareholder's
interest in a Fund falls below $500, such Fund reserves the right to redeem such
shareholder's entire interest and remit such amount. Such a redemption will only
be effected following: (a) a redemption or transfer by a shareholder which
causes the value of such shareholder's interest in such Fund to fall below $500;
(b) the mailing by such Fund to such shareholder of a notice of intention to
redeem; and (c) the passage of at least six months from the date of such
mailing, during which time the investor will have the opportunity to make an
additional investment in such Fund to increase the value of such investor's
account to at least $500.
EXCHANGE PRIVILEGE
The Exchange Privilege enables shareholders to purchase, in exchange for shares
of a Fund, shares of certain other
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IAI Mutual Funds
IAI Money Market Fund, IAI Reserve Fund
funds managed by IAI. These funds have different investment objectives from the
Funds. Shareholders may exchange shares of a Fund for shares of another fund
managed by IAI, provided that the fund whose shares will be acquired is duly
registered in the state of the shareholder's residence and the shareholder
otherwise satisfies the fund's purchase requirements. Although the Funds do not
currently charge a fee for use of the Exchange Privilege, they reserve the right
to do so in the future.
Because excessive trading can hurt Fund performance and shareholders, there is a
limit of four exchanges out of each Fund per calendar year per account. Accounts
under common ownership or control, including accounts with the same taxpayer
identification number, will be counted together for purposes of the four
exchange limit. Each Fund reserves the right to temporarily or permanently
terminate the Exchange Privilege of any investor who exceeds this limit. The
limit may be modified for certain retirement plan accounts, as required by the
applicable plan document and/or relevant Department of Labor regulations, and
for Automatic Exchange Plan participants. Each Fund also reserves the right to
refuse or limit exchange purchases by any investor if, in IAI's judgment, such
Fund would be unable to invest the money effectively in accordance with its
investment objectives and policies, or would otherwise potentially be adversely
affected.
Fund shareholders wishing to exercise the Exchange Privilege should notify the
Fund in writing or, provided such shareholders have authorized a Fund to accept
telephone instructions, by telephone. At the time of the exchange, if the net
asset value of the shares redeemed in connection with the exchange is greater
than the investor's cost, a taxable capital gain will be realized. A capital
loss will be realized if at the time of the exchange the net asset value of the
shares redeemed in the exchange is less than the investor's cost. Each Fund
reserves the right to terminate or modify the Exchange Privilege in the future.
AUTOMATIC EXCHANGE PLAN
Investors may arrange to make regular investments of $100 or more between any of
the funds in the IAI Mutual Fund Family on a monthly basis. Exchanges will take
place at the closing price on the fifth day of each month (or the next business
day). Shareholders are responsible for making sure sufficient shares exist in
the Fund account from which the exchange takes place. If there are not
sufficient funds in a Fund account to meet the requested exchange amount, the
Automatic Exchange Plan will be suspended. Shareholders may not close Fund
accounts through the Automatic Exchange Plan. Investors interested in
participating in the Automatic Exchange Plan should complete the Automatic
Exchange Plan application portion of their application.
19
<PAGE>
IAI Mutual Funds
IAI Money Market Fund, IAI Reserve Fund
For assistance in completing the application, contact IAI Mutual Fund
Shareholder Services at 1-800-945-3863.
AUTHORIZED TELEPHONE TRADING
Investors can transact account exchanges and redemptions via the telephone by
completing the Authorized Telephone Trading section of the IAI Mutual Fund
application and returning it to a Fund. Investors requesting telephone trading
privileges will be provided with a personal identification number ("PIN") that
must accompany any instructions by phone. Shares will be redeemed or exchanged
at the next determined net asset value. All proceeds must be made payable to the
owner(s) of record and delivered to the address of record.
In order to confirm that telephone instructions for redemptions and exchanges
are genuine, the Fund has established reasonable procedures, including the
requirement that a personal identification number accompany telephone
instructions. If a Fund or the transfer agent fails to follow these procedures,
such Fund may be liable for losses due to unauthorized or fraudulent
instructions. To the extent the reasonable procedures are followed, none of the
Funds, their transfer agent, IAI, or any affiliated broker-dealer will be liable
for any loss, injury, damage, or expense for acting upon telephone instructions
believed to be genuine, and will otherwise not be responsible for the
authenticity of any telephone instructions, and, accordingly, the investor bears
the risk of loss resulting from telephone instructions. All telephone
redemptions and exchanges will be tape recorded. Telephone redemptions are not
permitted on IRA or Simplified Employee Pension ("SEP") accounts. Please call
the Fund for a distribution form.
SYSTEMATIC CASH WITHDRAWAL PLAN
Each Fund has available a Systematic Cash Withdrawal Plan for any investor
desiring to follow a program of systematically withdrawing a fixed amount of
money from an investment in shares of a Fund. An investment of $10,000 is
required to establish the plan. Payments under the plan will be made monthly or
quarterly in amounts of $100 or more. Shares will be sold with the closing price
of the 15th of the applicable month (or the next business day). To provide funds
for payment, such Fund will redeem as many full and fractional shares as
necessary at the redemption price, which is net asset value. The holder of a
Systematic Cash Withdrawal Plan must have income dividends and any capital gains
distributions reinvested in full and fractional shares at net asset value.
Payments under this plan, unless pursuant to a retirement plan, should not be
considered income. Withdrawal payments may exceed dividends and distributions
and, to this extent, there will be a reduction in the investor's equity. An
investor should also understand that this plan cannot insure profit, nor does it
20
<PAGE>
IAI Mutual Funds
IAI Money Market Fund, IAI Reserve Fund
protect against any loss in a declining market. Careful consideration should be
given to the amount withdrawn each month. Excessive withdrawals could lead to a
serious depletion of equity, especially during periods of declining market
values. Fund management will be available for consultation in this matter.
Plan application forms are available through the Funds. If you would like
assistance in completing the application contact IAI Mutual Fund Shareholder
Services at 1-800-945-3863.
CHECK WRITING PRIVILEGE
Upon receipt of a completed Check Writing Application, the Funds will provide
its shareholders with redemption drafts drawn on such Fund's account. Such
checks may be payable to the order of anyone in any amount not less than $500.
It is each shareholder's responsibility to ensure that there is a sufficient
balance in such shareholder's Fund account to cover any checks drawn on such
account. The Funds will return checks which cannot be honored due to an
insufficient Fund account balance or which are written for amounts less than
$500. Fund shares held under IRAs, SEP IRAs, and Keogh Plans may not be redeemed
by check. The Funds reserve the right to modify or terminate the Check Writing
Privilege at any time upon written notice to shareholders.
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
The policy of Money Market Fund is to declare daily and to pay monthly dividends
from net investment income and to make distributions of net realized capital
gains, if any, annually. The policy of Reserve Fund is to declare and pay
dividends from net investment income monthly and make distributions of net
realized capital gains, if any, annually. However, provisions in the Internal
Revenue Code of 1986, as amended (the "Code"), may result in additional net
investment income and capital gains distributions by each Fund. When you open an
account, you should specify on your application how you want to receive your
distributions. The Funds offer three options: Full Reinvestment--your dividend
and capital gain distributions will be automatically reinvested in additional
shares of such Fund; Capital Gains Reinvestment--your capital gain distributions
will be automatically reinvested, but your income dividend distribution will be
paid in cash; and Cash--your income dividends and capital gain distributions
will be paid in cash. Distributions taken in cash can be sent via check or
transferred directly to your account at any bank, savings and loan or credit
union that is a member of the Automated Clearing House (ACH) network. UNLESS
INDICATED OTHERWISE BY THE SHAREHOLDER, EACH FUND WILL AUTOMATICALLY REINVEST
ALL SUCH DISTRIBUTIONS INTO FULL AND FRACTIONAL SHARES AT NET ASSET VALUE.
21
<PAGE>
IAI Mutual Funds
IAI Money Market Fund, IAI Reserve Fund
The Funds' Directed Dividend service allows you to invest your dividends and/or
capital gain distributions directly into another IAI Mutual Fund. Contact IAI
Mutual Fund Shareholder Services at 1-800-945-3863 for details.
Each Fund intends to qualify for tax purposes as a regulated investment company
under the Code during the current taxable year. If so qualified, each Fund will
not be subject to federal income tax on income that it distributes to its
shareholders.
Distributions are subject to federal income tax, and may also be subject to
state or local taxes. If you live outside the United States, your distributions
could also be taxed by the country in which you reside. Your distributions are
taxable when they are paid, whether you take them in cash or reinvest them in
additional shares.
For federal income tax purposes, each Fund's income and short-term capital gain
distributions are taxed as ordinary income. Money Market Fund does not expect to
make any distributions of long-term capital gains. With respect to Reserve Fund,
long-term capital gain distributions designated as capital gain dividends are
taxed as long-term capital gains, regardless of the length of time the
shareholder has held the shares. Annually, IAI will send you and the IRS a
statement showing the amount of each taxable distribution you received in the
previous year.
Upon redemption of shares of the Funds, the shareholder will generally recognize
a capital gain or loss equal to the difference between the amount realized on
the redemption and the shareholder's adjusted basis in such shares. However,
since the Money Market Fund seeks to maintain a constant $1.00 share price for
both purchases and redemptions, shareholders of Money Market Fund are not
expected to realize a capital gain or loss upon redemption. Any gain or loss on
the redemption of Reserve Fund shares will be long-term if the shares have been
held for more than one year. Under the Code, the deductibility of capital losses
is subject to certain limitations.
Whenever you sell shares of the Funds, IAI will send you a confirmation
statement showing how many shares you sold and at what price. You will also
receive an account statement quarterly and a consolidated transaction statement
annually. However, it is up to you or your tax preparer to determine whether the
sale resulted in a capital gain and, if so, the amount of tax to be paid. Be
sure to keep your regular account statements; the information they contain will
be essential in calculating the amount of your capital gains.
The foregoing relates to federal income taxation as in effect as of the date of
this Prospectus. For a more detailed discussion of the federal income tax
consequences of investing in shares of the Fund, see "Tax Status" in the
Statement of Additional Information.
22
<PAGE>
IAI Mutual Funds
IAI Money Market Fund, IAI Reserve Fund
DESCRIPTION OF COMMON STOCK
All shares of each Fund have equal rights as to redemption, dividends and
liquidation, and will be fully paid and nonassessable when issued and will have
no preemptive or conversion rights.
The shares of each Fund have noncumulative voting rights, which means that the
holders of more than 50% of the shares voting for the election of directors can
elect 100% of the directors if they choose to do so. On some issues, such as the
election of directors, all shares of each corporation vote together as one
series. On an issue affecting only a particular series, such as voting on the
Management Agreement, only the approval of a particular series is required to
make the agreement effective with respect to such series.
Annual or periodically scheduled regular meetings of shareholders will not be
held except as required by law. Minnesota corporation law does not require an
annual meeting; instead, it provides for the Board of Directors to convene
shareholder meetings when it deems appropriate. In addition, if a regular
meeting of shareholders has not been held during the immediately preceding
fifteen months, shareholders holding three percent or more of the voting shares
of the Fund may demand a regular meeting of shareholders of the Fund by written
notice of demand given to the chief executive officer or the chief financial
officer of the Fund. Within thirty days after receipt of the demand by one of
those officers, the Board of Directors shall cause a regular meeting of
shareholders to be called and held no later than ninety days after receipt of
the demand, all at the expense of such Fund. An annual meeting will be held on
the removal of a director or directors of a Fund if requested in writing by
holders of not less than 10% of the outstanding shares of a Fund.
The shares of Reserve Fund are transferable by endorsement of the certificate if
held by the shareholders, or if the certificate is held by Reserve Fund, by
delivery to such Fund of transfer instructions. Transfer instructions on
certificates should be delivered to the office of the Fund. The Fund is not
bound to recognize any transfer until it is recorded on the stock transfer books
maintainted by the Fund.
COUNSEL AND AUDITORS
The firm of Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402, provides legal counsel for the Funds. KPMG Peat Marwick LLP, 4200 Norwest
Center, Minneapolis, Minnesota 55402, serves as the independent auditors for the
Funds.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
The Custodian for each Fund is Norwest Bank Minnesota, N.A., Norwest Center,
Sixth and Marquette, Minneapolis, Minnesota 55479. With respect to Reserve Fund,
Norwest
23
<PAGE>
IAI Mutual Funds
IAI Money Market Fund, IAI Reserve Fund
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 such Fund's assets held outside the United States. The directors of
the Reserve Fund monitor the activities of the Custodian and subcustodians, as
well as the economic conditions and applicable laws of the foreign countries in
which the Fund's assets are held. For a listing of the subcustodians and
depositories currently employed by the Fund, see the Statement of Additional
Information. IAI acts as each Fund's transfer agent, dividend disbursing agent
and IRA Custodian, at P.O. Box 357, Minneapolis, Minnesota 55440.
ADDITIONAL INFORMATION
Each Fund sends to its shareholders a six-month unaudited and an annual audited
financial report, each of which includes a list of investment securities held.
To reduce the volume of mail you receive, only one copy of most Fund reports,
such as the Fund's Annual Report, may be mailed to your household (same surname,
same address). Please call IAI Mutual Fund Shareholder Services at
1-800-945-3863 if you wish to receive additional shareholder reports.
In the opinion of the staff of the Securities and Exchange Commission, the use
of this combined prospectus may possibly subject all Funds to a certain amount
of liability for any losses arising out of any statement or omission in this
Prospectus regarding a particular Fund. In the opinion of the Funds' management,
however, the risk of such liability is not materially increased by use of a
combined prospectus.
Shareholder inquiries should be directed to the Funds at the telephone number or
mailing address listed on the inside back cover page of this Prospectus.
<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>
[LOGO]
Mutual Funds
Investment Advisers, Inc.
3700 First Bank Place, P.O. Box 357, Minneapolis, Minnesota 55440-0357
USA fax 612.376.2737
800.945.3863
612.376.2700
<PAGE>
IAI MONEY MARKET FUND
IAI RESERVE FUND
Statement of Additional Information
dated June 1, 1996
This Statement of Additional Information is not a Prospectus. This
Statement of Additional Information relates to a Prospectus dated June 1, 1996,
and should be read in conjunction therewith. A copy of the Prospectus may be
obtained from the Fund at 3700 First Bank Place, P.O. Box 357, Minneapolis,
Minnesota 55440 (telephone: 1-612-376-2700 or 1-800-945-3863).
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
INVESTMENT OBJECTIVE AND POLICIES..........................................3
Repurchase Agreements...............................................3
Extendible Notes....................................................3
Lending Portfolio Securities........................................4
Delayed-Delivery Transactions.......................................4
Maturity Restrictions...............................................4
Loans and Other Direct Debt Instruments.............................5
Reverse Repurchase Agreements.......................................6
Securities of Foreign Issuers.......................................6
Participation Interests.............................................7
Illiquid Securities.................................................7
Variable or Floating Rate Instruments...............................7
Mortgage-Backed Securities..........................................7
Asset-Backed Securities.............................................8
Zero Coupon Bonds...................................................8
Lower-Rated Debt Securities.........................................8
Indexed Securities..................................................9
Foreign Currency Transactions.......................................9
Limitations on Futures and Options Transactions.....................10
Futures Contracts...................................................11
Futures Margin Payments.............................................11
Purchasing Put and Call Options.....................................11
Writing Put and Call Options........................................12
Combined Positions..................................................12
Correlation of Price Changes........................................12
Liquidity of Options and Futures Contracts..........................13
OTC Options.........................................................13
Options and Futures Relating to Foreign Currencies..................13
Asset Coverage for Futures and Options Positions....................14
INVESTMENT RESTRICTIONS....................................................14
Portfolio Turnover..................................................16
INVESTMENT PERFORMANCE.....................................................16
MANAGEMENT.................................................................18
History.............................................................21
Management Agreement................................................21
Allocation of Expenses..............................................23
Duration of Agreements..............................................23
CUSTODIAL SERVICE..........................................................24
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE.........................28
CAPITAL STOCK..............................................................28
NET ASSET VALUE AND PUBLIC OFFERING PRICE..................................29
TAX STATUS.................................................................31
LIMITATION OF DIRECTOR LIABILITY...........................................32
FINANCIAL STATEMENTS.......................................................32
APPENDIX A -- RATINGS OF DEBT SECURITIES...................................A-1
</TABLE>
2
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of IAI Money Market Fund ("Money
Market Fund") and IAI Reserve Fund ("Reserve Fund"), are summarized on the front
page of the Prospectus and in the text of the Prospectus under "Investment
Objective and Policies." Investors should understand that all investments have a
risk factor. There can be no guarantee against loss resulting from an investment
in the Funds, and there can be no assurance that a Fund's investment policies
will be successful, or that its investment objective will be attained. Certain
of the investment practices of the Funds are further explained below.
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements relating to the securities in
which it may invest. A repurchase agreement involves the purchase of securities
with the condition that, after a stated period of time, the original seller will
buy back the securities at a predetermined price or yield. A Fund's custodian
will have custody of, and will hold in a segregated account, securities acquired
by such Fund under a repurchase agreement or other securities as collateral. In
the case of a security registered on a book entry system, the book entry will be
maintained in a Fund's name or that of its custodian. Repurchase agreements
involve certain risks not associated with direct investments in securities. For
example, if the seller of the agreement defaults on its obligation to repurchase
the underlying securities at a time when the value of the securities has
declined, the Fund may incur a loss upon disposition of such securities. In the
event that bankruptcy proceedings are commenced with respect to the seller of
the agreement, a Fund's ability to dispose of the collateral to recover its
investment may be restricted or delayed. While collateral will at all times be
maintained in an amount equal to the repurchase price under the agreement
(including accrued interest due thereunder), to the extent proceeds from the
sale of collateral were less than the repurchase price, a Fund could suffer a
loss.
EXTENDIBLE NOTES
Each Fund may invest in extendible notes in accordance with its investment
objectives and policies. With respect to Reserve Fund, the Fund is permitted to
invest up to 25% of the value of its total assets in extendible notes. An
extendible note is a debt arrangement under which the holder, at its option, may
require the issuer to repurchase the note for a predetermined fixed price at one
or more times prior to the ultimate maturity date of the note. Typically, an
extendible note is issued at an interest rate that can be adjusted at fixed
times throughout its term. At the same times as the interest rate is adjusted by
the issuer, the holder of the note is typically given the option to "put" the
note back to the issuer at a predetermined price (e.g., at 100% of the
outstanding principal amount plus unpaid accrued interest) if the extended
interest rate is undesirable to the holder. This option to put the note back to
the issuer (i.e., to require the issuer to repurchase the note) provides the
holder with an optional maturity date that is shorter than the actual maturity
date of the note.
Extendible notes are typically issued with maturity dates in excess of 397
days from the date of issuance. However, with respect to investments in
extendible notes by Money Market Fund, if such extendible notes provide for an
optional maturity date of 397 days or less, then such notes are deemed by the
Fund to have been issued for the shorter optional maturity date. Accordingly,
investment in such extendible notes would not be in contravention of the
fundamental investment policy of Money Market Fund not to invest in securities
having a maturity date in excess of 397 days from the date of acquisition.
Similarly, with respect to the investment in extendible notes by Reserve Fund,
if such extendible notes provide for an optional maturity date, then such notes
are deemed by Reserve Fund to have been issued for the shorter optional maturity
date, for purposes of complying with the Fund's policy on maturity of portfolio
instruments. Investment in extendible notes is not expected to have a material
impact on the effective portfolio maturity of Reserve Fund.
An investment in an extendible note is liquid, and the note may be resold
to another investor prior to its optional maturity date at its market value. The
market value of an extendible note with a given optional maturity date is
determined and fluctuates in a similar manner as the market value of a fixed
maturity note with a maturity equivalent to the optional maturity of the
extendible note. Compared to fixed term notes of the same issuer, however,
3
<PAGE>
extendible notes with equivalent optional maturities generally yield higher
returns without a material increase in risk to a Fund.
The creditworthiness of the issuers of extendible notes is monitored and
rated by independent rating organizations and investments by a Fund in such
extendible notes are restricted to notes with the same investment ratings as are
acceptable with respect to other forms of investment. The creditworthiness of
such issuers is also monitored by IAI.
LENDING PORTFOLIO SECURITIES
In order to generate additional income, each Fund may lend portfolio
securities to broker-dealers, banks or other financial borrowers of securities.
As with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, a Fund will only enter into loan arrangements with
broker-dealers, banks or other institutions which IAI has determined are
creditworthy under guidelines established by the Fund's Board of Directors. Each
Fund may also experience a loss if, upon the failure of a borrower to return
loaned securities, the collateral is not sufficient in value or liquidity to
cover the value of such loaned securities (including accrued interest thereon).
However, a Fund will receive collateral in the form of cash, United States
Government securities, certificates of deposit or other high-grade, short-term
obligations or interest-bearing cash equivalents equal to at least 102% of the
value of the securities loaned. The value of the collateral and of the
securities loaned will be marked to market on a daily basis. During the time
portfolio securities are on loan, the borrower pays a Fund an amount equivalent
to any dividends or interest paid on the securities and a Fund may invest the
cash collateral and earn additional income or may receive an agreed upon amount
of interest income from the borrower. However, the amounts received by a Fund
may be reduced by finders' fees paid to broker-dealers and related expenses.
Presently, the Funds do not intend to lend more than 5% of its net assets to
broker-dealers, banks, or other financial borrowers of securities.
DELAYED-DELIVERY TRANSACTIONS
Each Fund may buy and sell securities on a delayed-delivery or when-issued
basis. These transactions involve a commitment by a Fund to purchase or sell
specific securities at a predetermined price or yield, with payment and delivery
taking place after the customary settlement period for that type of security
(and more than seven days in the future). Typically, no interest accrues to the
purchaser until the security is delivered. Each Fund may receive fees for
entering into delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, each Fund assumes
the rights and risks of ownership, including the risk of price and yield
fluctuations. Because a Fund is not required to pay for securities until the
delivery date, these risks are in addition to the risks associated with such
Fund's other investments. If a Fund remains substantially fully invested at a
time when delayed delivery purchases are outstanding, the delayed-delivery
purchases may result in a form of leverage. When delayed-delivery purchases are
outstanding, a Fund will set aside appropriate liquid assets in a segregated
custodial account to cover its purchase obligations. When a Fund has sold a
security on a delayed-delivery basis, such Fund does not participate in further
gains or losses with respect to the security. If the other party to a
delayed-delivery transaction fails to deliver or pay for the securities, a Fund
could miss a favorable price or yield opportunity, or could suffer a loss.
Each Fund may renegotiate delayed-delivery transactions after they are
entered into, and may sell underlying securities before they are delivered,
which may result in capital gains or losses.
MATURITY RESTRICTIONS
Money Market Fund is subject to certain maturity restrictions pursuant to
Rule 2a-7 under the Investment Company Act of 1940. Accordingly, Money Market
Fund will maintain a dollar weighted average portfolio maturity of 90 days or
less, and will purchase securities with a remaining maturity of no more than 397
calendar days. For purposes of calculating the maturity of portfolio
instruments, Money Market Fund will follow the requirements of Rule 2a-7.
4
<PAGE>
Rule 2a-7 provides that the maturity of portfolio instruments shall be
deemed to be the period remaining (calculated from the trade date or such other
date on which Money Market Fund's interest in the instrument is subject to
market action) until the date noted on the face of the instrument as the date on
which the principal amount must be paid, or in the case of an instrument called
for redemption, the date on which the redemption payment must be made, except
that:
1. An instrument that is issued or guaranteed by the United States
Government or any agency thereof which has a variable rate of interest
readjusted no less frequently than every 762 days shall be deemed to have a
maturity equal to the period remaining until the next readjustment of the
interest rate;
2. A variable rate instrument, as defined in Rule 2a-7, the principal
amount of which is scheduled on the face of the instrument to be paid in 397
calendar days or less shall be deemed to have a maturity equal to the period
remaining until the next readjustment of the interest rate;
3. A variable rate instrument, as defined in Rule 2a-7, that is subject to
a demand feature shall be deemed to have a maturity equal to the longer of the
period remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand;
4. A floating rate instrument, as defined in Rule 2a-7, that is subject to
a demand feature shall be deemed to have a maturity equal to the period
remaining until the principal amount can be recovered through demand;
5. A repurchase agreement shall be deemed to have a maturity equal to the
period remaining until the date on which the loaned securities are scheduled to
be returned, or where no date is specified, but the agreement is subject to a
demand, the notice period applicable to a demand for the repurchase of the
securities; and
6. A portfolio lending agreement shall be treated as having a maturity
equal to the period remaining until the date on which the loaned securities are
scheduled to be returned, or where no date is specified, but the agreement is
subject to demand, the notice period applicable to a demand for the return of
the loaned securities.
LOANS AND OTHER DIRECT DEBT INSTRUMENTs
Each Fund may invest in other direct debt instruments. Direct debt
instruments are interests in amounts owed by a corporate, governmental, or other
borrower to lenders or lending syndicates (loans and loan participations), to
suppliers of goods or services (trade claims or other receivable), or to other
parties. Direct debt instruments are subject to a Fund's policies regarding the
quality of debt securities.
Purchasers of loans and other forms of direct indebtedness depend primarily
upon the creditworthiness of the borrower for payment of principal and interest.
Direct debt instruments may not be rated by any nationally recognized rating
service. If a Fund does not receive scheduled interest or principal payments on
such indebtedness, a Fund's share price and yield could be adversely affected.
Loans that are fully secured offer a Fund more protection than an unsecured loan
in the event of non-payment of scheduled interest or principal. However, there
is no assurance that the liquidation of collateral from a secured loan would
satisfy the borrower's obligation, or that the collateral can be liquidated.
Indebtedness of borrowers whose creditworthiness is poor involves substantially
greater risks, and may be highly speculative. Borrowers that are in bankruptcy
or restructuring may never pay off their indebtedness, or may pay only a small
fraction of the amount owed. Direct indebtedness of developing countries will
also involve a risk that the governmental entities responsible for the repayment
of the debt may be unable, or unwilling, to pay interest and repay principal
when due.
Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks to a Fund. For
example, if a loan is foreclosed, a Fund could become part owner of any
5
<PAGE>
collateral, and would bear the costs and liabilities associated with owning and
disposing of the collateral. In addition, it is conceivable that under emerging
legal theories of lender liability, a Fund could be held liable as a co-lender.
Direct debt instruments may also involve a risk of insolvency of the lending
bank or other intermediaries. Direct debt instruments that are not in the form
of securities may offer less legal protection to the Fund in the event of fraud
or misrepresentation. In the absence of definitive regulatory guidance, a Fund
relies on IAI's research in an attempt to avoid situations where fraud or
misrepresentation could adversely affect such Fund.
A loan is often administered by a bank or other financial institution that
acts as agent for all holders. The agent administers the terms of the loan, as
specified in the loan agreement. Unless, under the terms of the loan or other
indebtedness, a Fund has direct recourse against the borrower, it may have to
rely on the agent to apply appropriate credit remedies against a borrower. If
assets held by the agent for the benefit of a Fund were determined to be subject
to the claims of the agent's general creditors, such Fund might incur certain
costs and delays in rendering payment on the loan or loan participation and
could suffer a loss of principal or interest.
Money Market and Reserve Funds limit the amount of the assets that they
will invest in any one issuer or in issuers within the same industry. For
purposes of these limitations, the Fund generally will treat the borrower as the
"issuer" of indebtedness held by such Fund. In the case of loan participations
where a bank or other lending institution serves as financial intermediary
between a Fund and the borrower, if the participation does not shift to such
Fund the direct debtor creditor relationship with the borrower, SEC
interpretations require such Fund, in appropriate circumstances, to treat both
the lending bank or other lending institution and the borrower as "issuers" for
the purpose of determining whether such Fund has invested more than 5% of its
total assets in a single issuer. Treating a financial intermediary as an issuer
of indebtedness may restrict a Fund's ability to invest in indebtedness related
to a single financial intermediary, or a group of intermediaries engaged in the
same industry, even if the underlying borrowers represent many different
companies and industries.
REVERSE REPURCHASE AGREEMENTS
Reserve Fund may invest in reverse repurchase agreements. In a reverse
repurchase agreement, a fund sells a portfolio instrument to another party, such
as a bank or broker-dealer, in return for cash and agrees to repurchase the
instrument at a particular price and time. While a reverse repurchase agreement
is outstanding, Reserve Fund will maintain appropriate liquid assets in a
segregated custodial account to cover its obligation under the agreement.
Reserve Fund will enter into reverse repurchase agreements only with parties
whose creditworthiness has been found satisfactory by Investment Advisers, Inc.
("IAI"), Reserve Fund's investment adviser and manager. As a result, such
transactions may increase fluctuations in the market value of Reserve Fund's
assets and may be viewed as a form of leverage.
SECURITIES OF FOREIGN ISSUERS
Each Fund may invest in securities of foreign issuers in accordance with
its investment objectives and policies. Investing in foreign securities may
result in greater risk than that incurred by investing in domestic securities.
There is generally less publicly available information about foreign issuers
comparable to reports and ratings that are published about companies in the
United States. Also, foreign issuers are not subject to uniform accounting and
auditing and financial reporting standards, practices and requirements
comparable to those applicable to United States companies. Furthermore, volume
and liquidity in most foreign bond markets is less than in the United States and
at times volatility of price can be greater than in the United States. There is
generally less government supervision and regulation of foreign bond markets,
brokers and companies than in the United States.
With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of
Reserve Fund, political or social instability, or diplomatic developments which
could affect United States investments in those countries. Moreover, individual
foreign economies may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
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Reserve Fund is not aware at this time of the existence of any investment
or exchange control regulations which might substantially impair the operations
of Reserve Fund as described in the Prospectus and this Statement of Additional
Information. It should be noted, however, that this situation could change at
any time.
The interest payable on certain of Reserve Fund's foreign portfolio
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to the Fund's shareholders. The
expense ratio of Reserve Fund should not be materially affected by the Fund's
investment in foreign securities.
PARTICIPATION INTERESTS
Each Fund may purchase from financial institutions participation interests
in loans and other securities in which the Fund may invest. A participation
interest gives the Fund an undivided interest in the security in the proportion
that the Fund's participation interest bears to the total principal amount of
the security. These instruments may have fixed, floating or variable rates of
interest, with remaining maturities of one year or less. For certain
participation interests, each Fund will have the right to demand payment, on not
more than seven days' notice, for all or any part of the Fund's participation
interest in the security, plus accrued interest. As to these instruments, the
Fund intends to exercise its right to demand payment only upon a default under
the terms of the security as needed to provide liquidity to meet redemptions or
to maintain or improve the quality of its investment portfolio.
ILLIQUID SECURITIES
Reserve Fund may invest up to 15% of its net assets in securities that are
considered illiquid because of the absence of a readily available market or due
to legal or contractual restrictions. Money Market Fund may invest up to 10% of
its net assets in such securities. However, certain restricted securities that
are not registered for sale to the general public but that can be resold to
institutional investors may be considered liquid pursuant to guidelines adopted
by the Board of Directors. It is not possible to predict with assurance the
maintenance of an institutional trading market for such securities and the
liquidity of a Fund's investments could be impaired if trading declines.
VARIABLE OR FLOATING RATE INSTRUMENTS
Each Fund may invest in variable or floating rate instruments. Such
instruments (including notes purchased directly from issuers) bear variable or
floating interest rates and carry rights that permit holders to demand payment
of the unpaid principal balance plus accrued interest from the issuers or
certain financial intermediaries. Floating rate securities have interest rates
that change whenever there is a change in a designated base rate while variable
rate instruments provide for a specified periodic adjustment in the interest
rate. These formulas are designed to result in a market value for the instrument
that approximates its par value.
MORTGAGE-BACKED SECURITIES
Reserve Fund may purchase mortgage-backed securities issued by government
and non-government entities such as banks, mortgage lenders, or other financial
institutions. A mortgage-backed security may be an obligation of the issuer
backed by a mortgage or pool of mortgages or a direct interest in an underlying
pool of mortgages. Some mortgage-backed securities, such as collateralized
mortgage obligations or CMOs, make payments of both principal and interest at a
variety of intervals; others make semiannual interest payments at a
predetermined rate and repay principal at maturity (like a typical bond).
Mortgage-backed securities are based on different types of mortgages including
those on commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and Reserve
Fund may invest in them if IAI determines they are consistent with Reserve
Fund's investment objective and policies.
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The value of mortgage-backed securities may change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Non-government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these securities
and may lower their total returns.
ASSET-BACKED SECURITIES
Each Fund may invest in asset-backed securities. Asset-backed securities
represent interests in pools of consumer loans (generally unrelated to mortgage
loans) and most often are structured as pass-through securities. Interest and
principal payments alternately depend upon payment of the underlying loans by
individuals, although the securities may be supported by letters of credit or
other credit enhancements. The value of asset-backed securities may also depend
on the creditworthiness of the servicing agent for the loan pool, the originator
of the loans, or the financial institution providing the credit enhancement.
ZERO COUPON BONDS
Each Fund may invest in zero coupon bonds. Zero coupon bonds do not make
interest payments; instead, they are sold at a deep discount from their face
value and are redeemed at face value when they mature. Because zero coupon bonds
do not pay current income, their prices can be very volatile when interest rates
change. In calculating its dividends, Reserve Fund takes into account as income
a portion of the difference between a zero coupon bond's purchase price and its
face value.
A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury bond and selling them as individual
securities. Bonds issued by the Resolution Funding Corporation (REFCORP) and the
Financing Corporation (FICO) can also be separated in this fashion. Original
issue zeroes are zero coupon securities originally issued by the U.S.
government, a government agency, or a corporation in zero coupon form.
LOWER-RATED DEBT SECURITIES
Reserve Fund may invest in lower-rated debt securities. Issuers of high
yield securities may be highly leveraged and may not have available to them more
traditional methods of financing. Therefore, the risks associated with acquiring
the securities of such issuers generally are greater than is the case with
higher rated securities. For example, during an economic downturn or a sustained
period of rising interest rates, issuers of high yield securities may be more
likely to experience financial stress, especially if such issuers are highly
leveraged. During such periods, such issuers may not have sufficient revenues to
meet their interest payment obligations. The issuer's ability to service its
debt obligations also may be adversely affected by specific issuer developments
or the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of high yield securities because
such securities may be unsecured and may be subordinated to other creditors of
the issuer.
High yield securities frequently have call or redemption features which
would permit an issuer to repurchase the security from Reserve Fund. If a call
were exercised by the issuer during a period of declining interest rates, a Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends to
shareholders.
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Reserve Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. The secondary
trading market for high yield securities is generally not as liquid as the
secondary market for higher rated securities. Reduced secondary market liquidity
may have an adverse impact on market price and the Fund's ability to dispose of
particular issues when necessary to meet such Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to adversely affect the
Fund's net asset value. In addition, the Fund may incur additional expenses to
the extent it is required to seek recovery upon a default on a portfolio holding
or participate in the restructuring of the obligation.
INDEXED SECURITIES
Reserve Fund may purchase securities whose prices are indexed to the prices
of other securities, securities indexes, currencies, precious metals or other
commodities, or other financial indicators. Indexed securities typically, but
not always, are debt securities or deposits whose value at maturity or coupon
rate is determined by reference to a specific instrument or statistic.
Gold-indexed securities, for example, typically provide for a maturity value
that depends on the price of gold, resulting in a security whose price tends to
rise and fall together with gold prices. Currency-indexed securities typically
are short-term to intermediate-term debt securities whose maturity values or
interest rates are determined by reference to the values of one or more
specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies. IAI will use its judgment in determining whether indexed
securities should be treated as short-term instruments, bonds, stocks, or as a
separate asset class for purposes of Reserve Fund's investment policies,
depending on the individual characteristics of the securities. Indexed
securities may be more volatile than the underlying instruments.
FOREIGN CURRENCY TRANSACTIONS
Reserve Fund may hold foreign currency deposits from time to time and may
convert dollars and foreign currencies in the foreign exchange markets. Currency
conversion involves dealer spreads and other costs, although commissions usually
are not charged. Currencies may be exchanged on a spot (i.e., cash) basis, or by
entering into forward contracts to purchase or sell foreign currencies at a
future date and price. Forward contracts generally are traded in an interbank
market conducted directly between currency traders (usually large commercial
banks) and their customers. The parties to a forward contract may agree to
offset or terminate the contract before its maturity, or may hold the contract
to maturity and complete the contemplated currency exchange.
Reserve Fund may use currency forward contracts to manage currency risks
and to facilitate transactions in foreign securities. The following discussion
summarizes the principal currency management strategies involving forward
contracts that could be used by Reserve Fund.
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In connection with purchases and sales of securities denominated in foreign
currencies, Reserve Fund may enter into currency forward contracts to fix a
definite price for the purchase or sale in advance of the trade's settlement
date. This technique is sometimes referred to as a "settlement hedge" or
"transaction hedge." IAI expects to enter into settlement hedges in the normal
course of managing Reserve Fund's foreign investments. Reserve Fund could also
enter into forward contracts to purchase or sell a foreign currency in
anticipation of future purchases or sales of securities denominated in foreign
currency, even if the specific investments have not yet been selected by IAI.
Reserve Fund may also use forward contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. For example,
if Reserve Fund owned securities denominated in pounds sterling, it could enter
into a forward contract to sell pounds sterling in return for U.S. dollars to
hedge against possible declines in the pound's value. Such a hedge, sometimes
referred to as a "position hedge," would tend to offset both positive and
negative currency fluctuations but would not offset changes in security values
caused by other factors. Reserve Fund could also hedge the position by selling
another currency expected to perform similarly to the pound sterling -- for
example, by entering into a forward contract to sell Deutschemarks or European
Currency Units in return for U.S. dollars. This type of hedge, sometimes
referred to as a "proxy hedge," could offer advantages in terms of cost, yield,
or efficiency, but generally would not hedge currency exposure as effectively as
a simple hedge into U.S. dollars. Proxy hedges may result in losses if the
currency used to hedge does not perform similarly to the currency in which the
hedged securities are denominated.
Under certain conditions, SEC guidelines require mutual funds to set aside
appropriate liquid assets in a segregated custodial account to cover currency
forward contracts. As required by SEC guidelines, Reserve Fund will segregate
assets to cover currency forward contracts, if any, whose purpose is essentially
speculative. Reserve Fund will not segregate assets to cover forward contracts
entered into for hedging purposes, including settlement hedges, position hedges,
and proxy hedges.
Successful use of forward currency contracts will depend on IAI's skill in
analyzing and predicting currency values. Forward contracts may substantially
change Reserve Fund's investment exposure to changes in currency exchange rates,
and could result in losses to Reserve Fund if currencies do not perform as IAI
anticipates. For example, if a currency's value rose at a time when IAI had
hedged Reserve Fund by selling that currency in exchange for dollars, Reserve
Fund would be unable to participate in the currency's appreciation. If IAI
hedges currency exposure through proxy hedges, the Fund could realize currency
losses from the hedge and the security position at the same time if the two
currencies do not move in tandem. Similarly, if IAI increases Reserve Fund's
exposure to a foreign currency, and that currency's value declines, Reserve Fund
will realize a loss. There is no assurance that IAI's use of forward currency
contracts will be advantageous to Reserve Fund or that it will hedge at an
appropriate time. The policies described in this section are non-fundamental
policies of Reserve Fund.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS
Reserve Fund has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the Commodity Futures
Trading Commission (CFTC) and the National Futures Association, which regulate
trading in the futures markets, before engaging in any purchases or sales of
futures contracts or options on futures contracts. Reserve Fund intends to
comply with Section 4.5 of the regulations under the Commodity Exchange Act,
which limits the extent to which Reserve Fund can commit assets to initial
margin deposits and option premiums.
In addition, Reserve Fund will not: (a) sell futures contracts, purchase
put options, or write call options if, as a result, more than 25% of Reserve
Fund's total assets would be hedged with futures and options under normal
conditions; (b) purchase futures contracts or write put options if, as a result,
Reserve Fund's total obligations upon settlement or exercise of purchased
futures contracts and written put options would exceed 25% of its total assets;
or (c) purchase call options if, as a result, the current value of option
premiums for call options purchased by Reserve Fund would exceed 5% of Reserve
Fund's total assets. These limitations do not apply to options attached to or
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acquired or traded together with their underlying securities, and do not apply
to securities that incorporate features similar to options.
The above limitations on Reserve Fund's investments in futures contracts
and options, and Reserve Fund's policies regarding futures contracts and options
discussed elsewhere in this Statement of Additional Information may be changed
as regulatory agencies permit.
FUTURES CONTRACTS
When Reserve Fund purchases a futures contract, it agrees to purchase a
specified underlying instrument at a specified future date. When Reserve Fund
sells a futures contract, it agrees to sell the underlying instrument at a
specified future date. The price at which the purchase and sale will take place
is fixed when Reserve Fund enters into the contract. Some currently available
futures contracts are based on specific securities, such as U.S. Treasury bonds
or notes, and some are based on indexes of securities prices, such as the
Standard & Poor's 500 Composite Stock Price Index (S&P 500). Futures can be held
until their delivery dates, or can be closed out before then if a liquid
secondary market is available.
The value of a futures contract tends to increase and decrease in tandem
with the value of its underlying instrument. Therefore, purchasing futures
contracts will tend to increase Reserve Fund's exposure to positive and negative
price fluctuations in the underlying instrument, much as if it had purchased the
underlying instrument directly. When Reserve Fund sells a futures contract, by
contrast, the value of its futures position will tend to move in a direction
contrary to the market. Selling futures contracts, therefore, will tend to
offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
FUTURES MARGIN PAYMENTS
The purchaser or seller of a futures contract is not required to deliver or
pay for the underlying instrument unless the contract is held until the delivery
date. However, both the purchaser and seller are required to deposit "initial
margin" with a futures broker, known as a futures commission merchant (FCM),
when the contract is entered into. Initial margin deposits are typically equal
to a percentage of the contract's value. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments to settle the change in value on a daily basis. The party that has a
gain may be entitled to receive all or a portion of this amount. Initial and
variation margin payments do not constitute purchasing securities on margin for
purposes of the Fund's investment limitations. In the event of the bankruptcy of
an FCM that holds margin on behalf of Reserve Fund, the Fund may be entitled to
return of margin owed to it only in proportion to the amount received by the
FMC's other customers, potentially resulting in losses to Reserve Fund.
PURCHASING PUT AND CALL OPTIONS
By purchasing a put option, Reserve Fund obtains the right (but not the
obligation) to sell the option's underlying instrument at a fixed strike price.
In return for this right, Reserve Fund pays the current market price for the
option (known as the option premium). Options have various types of underlying
instruments, including specific securities, indexes of securities prices, and
futures contracts. Reserve Fund may terminate its position in a put option it
has purchased by allowing it to expire or by exercising the option. If the
option is allowed to expire, Reserve Fund will lose the entire premium it paid.
If Reserve Fund exercises the option, it completes the sale of the underlying
instrument at the strike price. Reserve Fund may also terminate a put option
position by closing it out in the secondary market at its current price, if a
liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium paid, plus related
transaction costs).
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
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price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to suffer
a loss if security prices do not rise sufficiently to offset the cost of the
option.
WRITING PUT AND CALL OPTIONS
When Reserve Fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
Reserve Fund assumes the obligation to pay the strike price for the option's
underlying instrument if the other party to the option chooses to exercise it.
When writing an option on a futures contract Reserve Fund would be required to
make margin payments to an FCM as described above for futures contracts. Reserve
Fund may seek to terminate its position in a put option it writes before
exercise by closing out the option in the secondary market at its current price.
If the secondary market is not liquid for a put option Reserve Fund has written,
however, Reserve Fund must continue to be prepared to pay the strike price while
the option is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position. If security prices rise, a put writer would
generally expect to profit, although its gain would be limited to the amount of
the premium it received.
If security prices remain the same over time, it is likely that the writer
will also profit, because it should be able to close out the option at a lower
price. If security prices fall, the put writer would expect to suffer a loss.
This loss should be less than the loss from purchasing the underlying instrument
directly, however, because the premium received for writing the option should
mitigate the effects of the decline.
Writing a call option obligates Reserve Fund to sell or deliver the
option's underlying instrument, in return for the strike price, upon exercise of
the option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
COMBINED POSITIONS
Reserve Fund may purchase and write options in combination with each other,
or in combination with futures or forward contracts, to adjust the risk and
return characteristics of the overall position. For example, Reserve Fund may
purchase a put option and write a call option on the same underlying instrument,
in order to construct a combined position whose risk and return characteristics
are similar to selling a futures contract. Another possible combined position
would involve writing a call option at one strike price and buying a call option
at a lower price, in order to reduce the risk of the written call option in the
event of a substantial price increase. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
CORRELATION OF PRICE CHANGES
Because there are a limited number of types of exchange-traded options and
futures contracts, it is likely that the standardized contracts available will
not match Reserve Fund's current or anticipated investments exactly. Reserve
Fund may invest in options and futures contracts based on securities with
different issuers, maturities, or other characteristics from the securities in
which it typically invests, which involves a risk that the options or futures
position will not track the performance of Reserve Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match Reserve Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and 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
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limits or trading halts. Reserve Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in Reserve Fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS
There is no assurance a liquid secondary market will exist for any
particular options or futures contract at any particular time. Options may have
relatively low trading volume and liquidity if their strike prices are not close
to the underlying instrument's current price. In addition, exchanges may
establish daily price fluctuation limits for options and futures contracts, and
may halt trading if a contract's price moves upward or downward more than the
limit in a given day. On volatile trading days when the price fluctuation limit
is reached or a trading halt is imposed, it may be impossible for Reserve Fund
to enter into new positions or close out existing positions. If the secondary
market for a contract is not liquid because of price fluctuation limits or
otherwise, it could prevent prompt liquidation of unfavorable positions, and
potentially could require Reserve Fund to continue to hold a position until
delivery or expiration regardless of changes in its value. As a result, Reserve
Fund's access to other assets held to cover its options or futures positions
could also be impaired.
OTC OPTIONS
Reserve Fund may engage in OTC options transactions. Unlike exchange-traded
options, which are standardized with respect to the underlying instrument,
expiration date, contract size, and strike price, the terms of over-the-counter
options (options not traded on exchanges) generally are established through
negotiation with the other party to the option contract. While this type of
arrangement allows Reserve Fund greater flexibility to tailor an option to its
needs, OTC options generally involve greater credit risk than exchange-traded
options, which are guaranteed by the clearing organization of the exchanges
where they are traded.
OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES
Reserve Fund may engage in options and futures transactions relating to
foreign currencies. Currency futures contracts are similar to forward currency
exchange contracts, except that they are traded on exchanges (and have margin
requirements) and are standardized as to contract size and delivery date. Most
currency futures contracts call for payment or delivery in U.S. dollars. The
underlying instrument of a currency option may be a foreign currency, which
generally is purchased or delivered in exchange for U.S. dollars, or may be a
futures contract. The purchaser of a currency call obtains the right to purchase
the underlying currency, and the purchaser of a currency put obtains the right
to sell the underlying currency. The uses and risks of currency options and
futures are similar to options and futures relating to securities or indexes, as
discussed above. Reserve Fund may purchase and sell currency futures and may
purchase and write currency options to increase or decrease its exposure to
different foreign currencies. Reserve Fund may also purchase and write currency
options in conjunction with each other or with currency futures or forward
contracts. Currency futures and options values can be expected to correlate with
exchange rates, but may not reflect other factors that affect the value of
Reserve Fund's investments. A currency hedge, for example, should protect a
yen-denominated security from a decline in the yen, but will not protect Reserve
Fund against a price decline resulting from deterioration in the issuer's
creditworthiness. Because the value of Reserve Fund's foreign-denominated
investments changes in response to many factors other than exchange rates, it
may not be possible to match the amount of currency options and futures to the
value of Reserve Fund's investments exactly over time.
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ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS
Reserve Fund will comply with guidelines established by the Securities and
Exchange Commission with respect to coverage of options and futures strategies
by mutual funds, and if the guidelines so require will set aside appropriate
liquid assets in a segregated custodial account in the amount prescribed.
Securities held in a segregated account cannot be sold while the futures or
option strategy is outstanding, unless they are replaced with other suitable
assets. As a result, there is a possibility that segregation of a large
percentage of Reserve Fund's assets could impede portfolio management or Reserve
Fund's ability to meet redemption requests or other current obligations.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, each Fund is subject to certain
policies and restrictions which are "fundamental" and may not be changed without
shareholder approval. Shareholder approval consists of the approval of the
lesser of (i) more than 50% of the outstanding voting securities of a Fund, or
(ii) 67% or more of the voting securities present at a meeting if the holders of
more than 50% of the outstanding voting securities of the Fund are present or
represented by proxy. Limitations 1 through 8 below are deemed fundamental
limitations. The remaining limitations set forth below serve as operating
policies of the Fund and may be changed by the Board of Directors without
shareholder approval.
Each Fund may not:
1. Purchase the securities of any issuer if such purchase would cause the
Fund to fail to meet the requirements of a "diversified company" as defined
under the Investment Company Act of 1940, as amended (the "1940 Act").
As currently defined in the 1940 Act, "diversified company" means a
management company which meets the following requirements: at least 75 per
centum of the value of its total assets is represented by cash and cash items
(including receivables), Government securities, securities of other investment
companies and other securities for the purposes of this calculation limited in
respect of any one issuer to an amount not greater in value than 5 per centum of
the value of the total assets of such management company and not more than 10
per centum of the outstanding voting securities of such issuer.
2. Purchase the securities of any issuer (other than "Government
securities" as defined under the 1940 Act) if, as a result, more than 25% of the
value of the Fund's total assets would be invested in the securities of
companies whose principal business activities are in the same industry.
For purposes of applying this restriction, a Fund will not purchase
securities, as defined above, such that 25% or more of the value of the Fund's
total assets are invested in the securities of companies whose principal
business activities are in the same industry.
3. Issue any senior securities, except as permitted by the 1940 Act or the
Rules and Regulations of the Securities and Exchange Commission.
4. Borrow money, except from banks for temporary or emergency purposes
provided that such borrowings may not exceed 33-1/3% of the value of the Fund's
net assets (including the amount borrowed). Any borrowings that come to exceed
this amount will be reduced within three days (not including Sundays and
holidays) to the extent necessary to comply with the 33-1/3% limitation. This
limitation shall not prohibit the Fund from engaging in reverse repurchase
agreements, making deposits of assets to margin or guaranteeing positions in
futures, options, swaps or forward contracts, or segregating assets in
connection with such agreements or contracts.
To the extent a Fund engages in reverse repurchase agreements, because such
transactions are considered borrowing, reverse repurchase agreements are
included in the 33-1/3% limitation.
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5. Act as an underwriter of securities of other issuers, except to the
extent that in connection with the disposition of portfolio securities the Fund
may be deemed to be an underwriter under applicable laws.
6. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments. This restriction shall not prevent the Fund
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business.
7. Purchase or sell commodities other than foreign currencies unless
acquired as a result of ownership of securities. This limitation shall not
prevent the Fund from purchasing or selling options, futures, swaps and forward
contracts or from investing in securities or other instruments backed by
commodities.
8. Make loans to other persons except to the extent not inconsistent with
the 1940 Act or the Rules and Regulations of the Securities and Exchange
Commission. This limitation does not apply to purchases of commercial paper,
debt securities or repurchase agreements, or to the lending of portfolio
securities.
9. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases or sales
of securities and provided that margin payments in connection with transactions
in options, futures, swaps and forward contracts shall not be deemed to
constitute purchasing securities on margin.
10. Sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options, swaps and forward futures contracts are
not deemed to constitute selling securities short.
For purposes of applying this restriction, a Fund will not sell securities
short except to the extent that it contemporaneously owns or has the right to
obtain, at no added cost, securities identical to those sold short.
11. Except as part of a merger, consolidation, acquisition, or
reorganization, invest more than 5% of the value of its total assets in the
securities of any one investment company or more than 10% of the value of its
total assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting securities of
any one investment company.
12. Mortgage, pledge or hypothecate its assets except to the extent
necessary to secure permitted borrowings. This limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed in
a segregated account in connection with such contracts.
13. Participate on a joint or a joint and several basis in any securities
trading account.
14. Money Market Fund may not invest more than 10% of its net assets in
illiquid investments. Reserve Fund may not invest more than 15% of its net
assets in illiquid investments.
15. Invest directly in interests (including partnership interests) in oil,
gas or other mineral exploration or development leases or programs, except the
Fund may purchase or sell securities issued by corporations engaging in oil, gas
or other mineral exploration or development business.
Any of a Fund's investment policies set forth under "Investment Objective
and Policies" in the Prospectus, or any restriction set forth above under
"Investment Restrictions" which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after an acquisition of securities or utilization
of assets and results therefrom. With respect to Restriction 14, a Fund is under
a continuing obligation to ensure that it does not violate the maximum
percentage either by acquisition or by virtue of a decrease in the value of the
Fund's liquid assets.
15
<PAGE>
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by the
monthly average of the value of portfolio securities owned by Reserve Fund
during the same fiscal year. "Portfolio securities" for purposes of this
calculation do not include securities with a maturity date of less than twelve
(12) months from the date of investment. A 100% portfolio turnover rate would
occur, for example, if the lesser of the value of purchases or sales of
portfolio securities for a particular year were equal to the average monthly
value of the portfolio securities owned during such year. Reserve Fund's
historical portfolio turnover rates are set forth in the prospectus section
"Financial Highlights". The variation in portfolio turnover rate resulted from a
change in trading patterns and the effect of Reserve Fund's large number of
holdings of securities which mature in less than a year.
INVESTMENT PERFORMANCE
Advertisements and other sales literature for each Fund may refer to its
yield and effective yield and, with respect to Reserve Fund, its monthly,
quarterly, yearly, cumulative and average annual total return. Each such
calculation assumes all dividends and capital gain distributions are reinvested
at net asset value on the appropriate reinvestment dates as described in the
Prospectus, and includes all recurring fees, such as investment advisory and
management fees, charged as expenses to all shareholder accounts. Each of
monthly, quarterly and yearly total return is computed in the same manner as
cumulative total return, as set forth below.
Cumulative total return is computed by finding the cumulative rate of
return over the period indicated in the advertisement that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
CTR = (ERV-P) 100
---------
P
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the 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.
16
<PAGE>
Reserve Fund's "yield" is computed by dividing the net investment income
per share earned during a 30-day period (using the average number of shares
entitled to receive dividends) by the net asset value per share on the last day
of the period. The yield formula provides for semiannual compounding which
assumes that net investment income is earned and reinvested at a constant rate
and annualized at the end of a six-month period.
The yield formula is as follows:
YIELD = 2[(a-b + 1)6 -1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the net asset value of Reserve Fund.
The table below shows the yearly total return for Reserve Fund for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended 12/31 Total Return
------------------ ------------
<S> <C>
1986 ................. 5.2%*
1987 ................. 5.9%
1988 ................. 6.7%
1989 ................. 8.7%
1990 ................. 8.4%
1991 ................. 7.9%
1992 ................. 3.3%
1993 ................. 3.4%
1994 ................. 2.7%
1995 ................. 6.9%
</TABLE>
*Commenced operations on January 31, 1986
Reserve Fund's average annual rates of return for its one, five and ten
year periods ending January 31, 1996 were 6.76%, 4.78% and 5.94%, respectively.
Reserve Fund's yield for the thirty-day period ended January 31, 1996 was 5.24%.
With respect to Money Market Fund, the Fund's current yield quotation is
based on a seven-day period and is computed by determining the net change in
value, exclusive of capital changes, of a hypothetical account having a balance
of one share. This number is then divided by the price per share at the
beginning of the period ("base period return"), and then the base period return
is multiplied by (365/7).
The effective yield for Money Market Fund is computed by taking the base
period return as calculated above and calculating the effect of assumed
compounding.
The formula for the effective yield is as follows:
Effective yield = [(Base period return + 1)365/7]-1
17
<PAGE>
For the 7-day period ended January 31, 1996, the Money Market Fund's
current yield was 5.06% and its effective yield was 5.18%.
In advertising and sales literature, each Fund may compare its performance
with that of other mutual funds, indexes or averages of other mutual funds,
indexes of related financial assets or data, and other competing investment and
deposit products available from or through other financial institutions. The
composition of these indexes, averages or products differs from that of a Fund.
The comparison of a Fund to an alternative investment should be made with
consideration of differences in features and expected performance.
The indexes and averages noted below will be obtained from the indicated
sources or reporting services, which the Fund believes to be generally accurate.
Each Fund may also note its mention in newspapers, magazines, or other media
from time to time. However, such Fund assumes no responsibility for the accuracy
of such data.
For example, (1) a Fund's performance or P/E ratio may be compared to any
one or a combination of the following: (i) the Standard & Poor's 500 Stock Index
and Dow Jones Industrial Average so that you may compare the Fund's results with
those of a group of unmanaged securities widely regarded by investors as
representative of the U.S. stock market in general; (ii) other groups of mutual
funds, including the IAI Funds, tracked by: (A) Lipper Analytical Services,
Inc., a widely used independent research firm which ranks mutual funds by
overall performance, investment objectives, and assets; (B) Morningstar, Inc.,
another widely used independent research firm which rates mutual funds; or (C)
other financial or business publications, which may include, but are not limited
to, Business Week, Money Magazine, Forbes and Barron's, which provide similar
information; (iii) The Financial Times (a London based international financial
newspaper)-Actuaries World Indices, including Europe and sub indices comprising
this Index (a wide range of comprehensive measures of stock price performance
for the major stock markets, as well as for regional areas, broad economic
sectors and industry groups); (iv) Morgan Stanley Capital International Indices,
including the EAFE Index; (v) Baring International Investment Management Limited
(an international securities trading, research, and investment management firm),
as a source for market capitalization, GDP and GNP; (vi) the International
Finance Corporation (an affiliate of the World Bank established to encourage
economic development in less developed countries), World Bank, OECD
(Organization for Economic Co-Operation and Development) and IMF (International
Monetary Fund) as a source of economic statistics; and (ix) the performance of
U.S. government and corporate bonds, notes and bills. (The purpose of these
comparisons would be to illustrate historical trends in different market sectors
so as to allow potential investors to compare different investment strategies.);
(2) the Consumer Price Index (measure for inflation) may be used to assess the
real rate of return from an investment in a Fund; (3) other U.S. or foreign
government statistics such as GNP, and net import and export figures derived
from governmental publications, e.g., The Survey of Current Business, may be
used to illustrate investment attributes of a Fund or the general economic
business, investment, or financial environment in which such Fund operates; (4)
the effect of tax-deferred compounding on a Fund's investment returns, or on
returns in general, may be illustrated by graphs, charts, etc. where such graphs
or charts would compare, at various points in time, the return from an
investment in such Fund (or returns in general) on a tax-deferred basis
(assuming reinvestment of capital gains and dividends and assuming one or more
tax rates) with the return on a taxable basis; and (5) the sectors or industries
in which a Fund invests may be compared to relevant indices or surveys (e.g.,
S&P Industry Surveys) in order to evaluate a Fund's historical performance or
current or potential value with respect to the particular industry or sector.
MANAGEMENT
The names, addresses, positions and principal occupations of the directors and
executive officers of the Fund are given below.
<TABLE>
<CAPTION>
Name and Address Age Position Principal Occupation(s) During Past 5 Years
- ---------------- --- -------- -------------------------------------------
<S> <C> <C> <C>
Noel P. Rahn* 57 Chairman of the Chief Executive Officer and a Director of IAI
3700 First Bank Place Board since 1974. Mr. Rahn is also Chairman of the
P.O. Box 357 other IAI Mutual Funds.
Minneapolis, Minnesota 55440
18
<PAGE>
Name and Address Age Position Principal Occupation(s) During Past 5 Years
- ---------------- --- -------- -------------------------------------------
Richard E. Struthers* 43 President, Director Executive Vice President and a Director of IAI
3700 First Bank Place and has served IAI in many capacities since
P.O. Box 357 1979. Mr. Struthers is also President of the
Minneapolis, Minnesota 55440 other IAI Mutual Funds.
Madeline Betsch 53 Director Currently retired; until April 1994, was
19 South 1st Street Executive Vice President, Director of Client
Minneapolis, Minnesota 55401 Services, of CME-KHBB Advertising since May
1985, and prior thereto was a Vice President
with Campbell-Mithun, Inc. (advertising
agency) since February 1977.
W. William Hodgson 71 Director Currently retired; served as information
1698 Dodd Road manager for the North Central Home Office of
Mendota Heights, Minnesota 55118 the Prudential Insurance Company of America
from 1961 until 1984.
George R. Long 66 Director Chairman of Mayfield Corp. (financial
29 Las Brisas Way consultants and venture capitalists) since
Naples, Florida 33963 1973.
J. Peter Thompson 64 Director Grain farmer in southwestern Minnesota since
Route 1 1974. Prior to that, Mr. Thompson was
Mountain Lake, Minnesota 56159 employed by Paine Webber, Jackson & Curtis,
Incorporated, (a diversified financial services
concern), most recently as Senior Vice President
and General Partner.
Charles H. Withers 69 Director Currently retired; was Editor of the Rochester
Rochester Post Bulletin Post-Bulletin, Rochester, Minnesota from 1960
P.O. Box 6118 through March 31, 1980.
Rochester, Minnesota 55903
Archie C. Black, III 33 Treasurer Senior Vice President and Chief Financial
3700 First Bank Place Officer of IAI and has served IAI in several
P.O. Box 357 capacities since 1987. Mr. Black is also
Minneapolis, Minnesota 55440 Treasurer of the other IAI Mutual Funds.
William C. Joas 33 Secretary Vice President of IAI and has served as an
3700 First Bank Place attorney for IAI since 1990. Mr. Joas is also
P.O. Box 357 Secretary of the other IAI Mutual Funds.
Minneapolis, Minnesota 55440
Timothy A. Palmer 33 Vice President, Senior Vice President and has served as a
3700 First Bank Place Investments fixed income portfolio manager of IAI since
P.O. Box 357 (Reserve 1990. Mr. Palmer is also Vice President,
Minneapolis, Minnesota 55440 Portfolio) Investments of IAI Reserve Fund and IAI
Institutional Bond Fund.
19
<PAGE>
Name and Address Age Position Principal Occupation(s) During Past 5 Years
- ---------------- --- -------- -------------------------------------------
Livingston Douglas 35 Vice President, Vice President of IAI. Prior to joining IAI
3700 First Bank Place Investments in 1993, Mr. Douglas served as a portfolio
P.O. Box 357 (Reserve manager for Mackey-Shields Financial Corp.
Minneapolis, Minnesota 55440 Portfolio) from 1987 to 1993. Mr. Douglas is also Vice
President, Investments of IAI Bond Fund, IAI
Reserve Fund and IAI Minnesota Tax Free Fund.
Kirk Gove 33 Vice President, Vice President of IAI. Prior to joining IAI
3700 First Bank Place Marketing in 1992, Mr. Gove served as an Associate Vice
P.O. Box 357 President of Dain Bosworth, Incorporated (a
Minneapolis, Minnesota 55440 diversified financial services concern). Mr.
Gove is also Vice President, Marketing of the
other IAI Mutual Funds.
Susan J. Haedt 33 Vice President, Vice President of IAI and Director of Fund
3700 First Bank Place Director of Operations. Prior to joining IAI in 1992, Ms.
P.O. Box 357 Operations Haedt served as a Senior Manager at KPMG Peat
Minneapolis, Minnesota 55440 Marwick LLP (an international tax, accounting
and consulting firm). Ms. Haedt is also Vice
President, Director of Operations of the other
IAI Mutual Funds.
</TABLE>
* Directors of the Funds who are interested persons (as that term is defined by
the Investment Company Act of 1940) of IAI and the Funds.
Each Fund has agreed to reduced initial subscription requirements for
employees and directors of a Fund or IAI, their spouses, children and
grandchildren. With respect to such persons, the minimum initial investment in
one or more of the IAI Family of Funds is $500; provided that the minimum amount
that can be allocated to any one of the Funds is $250. Subsequent subscriptions
are limited to a minimum of $100 for each of the Funds.
No compensation is paid by the Fund to any of its officers. As of January
1, 1996, directors who are not affiliated with IAI receive from the IAI Mutual
Funds a $15,000 annual retainer, $2,500 for each Board meeting attended, $3,600
for each Audit Committee meeting attended (as applicable) and $1,800 for each
Securities Valuation Committee meeting attended. Each Fund will pay its pro rata
share of these fees based on its net assets. Such unaffiliated directors also
are reimbursed for expenses incurred in connection with attending meetings.
<TABLE>
<CAPTION>
Aggregate Compensation Aggregate Compensation Projected Aggregate
from each Fund* from the Compensation from the 19
Name of Person, Position 18 IAI Mutual Funds** IAI Mutual Funds***
------------------------ ------------------- ---------------- ------------------------
<S> <C> <C> <C>
Betsch, Madeline - Director $1,950 $28,725 $32,200
Hodgson, W. William - Director $1,950 $28,725 $32,200
Long, George R. - Director $1,550 $27,725 $32,200
Thompson, J. Peter - Director $1,950 $28,725 $32,200
Withers, Charles H. - Director $1,550 $27,725 $32,200
</TABLE>
- -------------------------
20
<PAGE>
* For the fiscal year ended January 31, 1996.
** For the calendar year ended December 31, 1995.
*** For the calendar year ended December 31, 1996 and includes
the new IAI Capital Appreciation Fund; provided that a director misses
no meetings; excludes expenses incurred in connection with attending
meetings.
The Board of Directors for each of the Funds has approved a Code of Ethics.
The Code permits access persons to engage in personal securities transactions
subject to certain policies and procedures. Such procedures prohibit certain
persons from acquiring of any securities in an initial public offering. In
addition, securities acquired through private placement must be pre-cleared.
Procedures have been adopted which would implement blackout periods for certain
securities, as well as a ban on short-term trading profits. Additional policies
prohibit the receipt of gifts in certain instances. Procedures have been
implemented to monitor employee trading. Each access person is required to
certify annually that they have read and understood the Code of Ethics. An
annual report is provided to the Funds' Board of Directors summarizing existing
procedures and changes, identifying material violations and recommending any
changes needed.
IAI, the Fund's investment adviser, is an affiliate of the Hill Samuel
Group ("Hill Samuel"). Hill Samuel is an international merchant banking and
financial services firm headquartered in London, England. In addition to its
ownership of IAI, Hill Samuel owns controlling interests in over seventy
insurance, merchant banking and financial services subsidiaries located in
Western Europe, Asia, the United States, Australia, New Zealand and Great
Britain. The principal offices of Hill Samuel are located at 100 Wood Street,
London EC2 P2AJ.
Hill Samuel, in turn, is owned by Lloyds TSB Group, plc ("Lloyds TSB"), a
publicly-held financial services organization headquartered in London, England.
Lloyds TSB is one of the largest personal and corporate financial services
groups in the United Kingdom, engaged in a wide range of activities including
commercial and retail banking. The principal offices of Lloyds TSB are located
at St. George's House, 6 - 8 Eastcheap, London, EC3M 1LL.
HISTORY
Money Market Fund is a separate portfolio of IAI Investment Funds VI, Inc.,
a Minnesota corporation whose shares of common stock are currently issued in
seven series (Series A through G). On June 25, 1993, the Fund's shareholders
approved amended and restated Articles of Incorporation, which provided that the
registered investment company whose corporate name had been IAI Series Fund,
Inc., be renamed IAI Investment Funds VI, Inc. The investment portfolio
represented by Series F common shares is referred to as "IAI Money Market Fund."
Reserve Fund is a separate portfolio of IAI Investment Funds V, Inc., a
Minnesota corporation whose shares of common stock are currently issued in one
series (Series A). On June 25, 1993, the Fund's shareholders approved and
amended and restated Articles of Incorporation which provided that the
registered investment company whose corporation name had been IAI Reserve Fund,
Inc., be renamed IAI Investment Funds V, Inc. The investment portfolio
represented by Series A common shares is referred to as "IAI Reserve Fund".
MANAGEMENT AGREEMENT
Effective April 1, 1996, pursuant to a Management Agreement between each
Fund and IAI, IAI has agreed to provide each Fund with investment advice,
statistical and research facilities, and certain equipment and services,
including, but not limited to, office space and necessary office facilities,
equipment, and the services of required personnel and, in connection therewith,
IAI has the sole authority and responsibility to make and execute investment
decisions for each Fund within the framework of a Fund's investment policies,
subject to review by the directors of a Fund. In addition, IAI has agreed to
provide or arrange for the provision of all required administrative, stock
transfer, redemption, dividend disbursing, accounting, and shareholder services
including, without limitation, the following: (1) the maintenance of a Fund's
accounts, books and records; (2) the calculations of the daily net asset value
in accordance with a Fund's current Prospectus and Statement of Additional
21
<PAGE>
Information; (3) daily and periodic reports; (4) all information necessary to
complete tax returns, questionnaires and other reports requested by a Fund; (5)
the maintenance of stock registry records; (6) the processing of requested
account registration changes, stock certificate issuances and redemption
requests; (7) the administration of payments and dividends and distributions
declared by a Fund; (8) answering shareholder questions, (9) providing reports
and other information and (10) other services designed to maintain shareholder
accounts. IAI may also pay qualifying broker-dealers, financial institutions and
other entities that provide such services. In return for these services, each
Fund has agreed to pay IAI an annual fee as a percentage of the Fund's average
daily net assets as follows. Reserve Fund has agreed to pay an annual fee at the
rate of .85%. With respect to Money Market Fund, the annual fee is set forth in
the table below:
<TABLE>
<CAPTION>
Money Market Fund
-------------------
Daily Net Assets Fee IAI Receives Annually
---------------- --------------------------
<S> <C>
For the first $250 million 0.60%
For the next $250 million 0.55%
Above $500 million 0.50%
</TABLE>
Under the Management Agreement, except for brokerage commissions and other
expenditures in connection with the purchase and sale of portfolio securities,
interest expense, and, subject to the specific approval of a majority of the
disinterested directors of a Fund, taxes and extraordinary expenses, IAI has
agreed to pay all of a Fund's other costs and expenses, including, for example,
costs incurred in the purchase and sale of assets, taxes, charges of the
custodian of a Fund's assets, costs of reports and proxy material sent to Fund
shareholders, fees paid for independent accounting and legal services, costs of
printing Prospectuses for Fund shareholders and registering a Fund's shares,
postage, insurance premiums, and costs of attending investment conferences. The
Management Agreement further provides that IAI will either reimburse a Fund for
the fees and expenses it pays to directors who are not "interested persons" of a
Fund or reduce its fee by an equivalent amount. IAI is not liable for any loss
suffered by a Fund in the absence of willful misfeasance, bad faith or
negligence in the performance of its duties and obligations. For the period from
April 1, 1996 through June 30, 1996, IAI has voluntarily agreed to waive its
Management Fee in excess of .50% of Money Market Fund's average daily net
assets.
PRIOR AGREEMENTS
Effective March 31, 1996, the Investment Advisory Agreement and
Administrative Agreement between each Fund and IAI were terminated and replaced
by the Management Agreement described above. The services provided by IAI under
each of these agreements are substantially similar in nature as those provided
under the new Management Agreement.
Pursuant to the Investment Advisory Agreement, Money Market Fund had agreed
to pay IAI a monthly fee equivalent to an annual rate of .30% of its average
daily net assets. As of January 31, 1996, Money Market Fund had net assets of
$27,395,033. For the year ended March 31, 1994 and the fiscal period ended
January 31, 1995, IAI voluntarily waived its entire advisory fee. For the fiscal
year ended January 31, 1996, Money Market Fund paid IAI $19,493 in advisory
fees.
Pursuant to the Investment Advisory Agreement, Reserve Fund had agreed to
pay IAI a monthly fee equivalent on an annual basis, to .50% of its average
month-end net assets. As of January 31, 1996, Reserve Fund had net assets of
$54,974,417. For the fiscal year ended March 31, 1994, the fiscal period ending
January 31, 1995, and the fiscal year ended January 31, 1996, Reserve Fund paid
IAI $343,955, $348,495 and $377,386, respectively, in advisory fees. Reserve
Fund's monthly payment of the advisory fee was suspended or reduced ( and
reimbursement made by IAI if necessary) when it appeared that the amount of
expenses would exceed Reserve Fund's applicable expense limit (and after the
monthly payment of the distribution fee has been reduced to zero), as set forth
below. For the fiscal year ended March 31, 1994, IAI reimbursed the Fund $97,655
in advisory fees pursuant to the expense limit. For the fiscal period from April
1, 1994 to January 31, 1995, and the fiscal year ended January 31, 1996, IAI was
not obligated to reimburse any advisory fees pursuant to the expense limit.
22
<PAGE>
With respect to the Administrative Agreement, Money Market Fund agreed to
pay IAI a monthly fee at the annual rate of .20% of Money Market Fund's average
daily net assets. From January 5, 1993 through June 30, 1993, IAI waived a
minimum of one-half of its administrative fee. Beginning July 1, 1993, IAI
voluntarily agreed to waive all expenses in excess of .50% of Money Market
Fund's average daily net assets. For the year ended January 31, 1996, Money
Market Fund paid IAI $63,919 pursuant to the Administrative Agreement. Reserve
Fund had agreed to pay IAI a monthly administrative fee equal to .01677% of the
value of the Fund's month-end net assets, which is equivalent on an annual basis
to .20% of the Fund's average month-end net assets. For the year ended January
31, 1996, Reserve Fund paid IAI $150,954 pursuant to the Administrative
Agreement.
Effective March 31, 1996, Reserve Fund's Plan of Distribution (the "Plan")
terminated. Prior to termination, the Fund had entered into a Distribution and
Shareholder Services Agreement (the "Agreement") with IAI Securities, Inc.
("IAIS"). Pursuant to such Plan and Agreement, Reserve Fund paid IAIS .25% of
the Fund's average month-end net assets to cover expenses incurred by IAIS in
connection with the servicing of shareholder accounts and the distribution of
such Fund's shares, subject to the contractual expense limitations discussed
above. The net distribution fee paid by Reserve Fund during its fiscal year
ended January 31, 1996 was $17,573. Such distribution fees (along with amounts
paid out of IAIS' own assets) were utilized in connection with the distribution
of Reserve Fund's shares as follows:
Advertising.................................................. $2,987
Printing and mailing of prospectuses to other
than current shareholders.................................... $2,109
Payments to brokers or dealers............................... $3,339
Direct payments to sales personnel........................... $7,556
Other........................................................ $1,582
ALLOCATION OF EXPENSES
Prior to the termination of the Advisory and Administrative Agreements on
March 31, 1996 as discussed above, each Fund paid all its other costs and
expenses, including, for example, costs incurred in the purchase and sale of
assets, interest, taxes, charges of the custodian of a Fund's assets, costs of
reports and proxy material sent to Fund shareholders, fees paid for independent
accounting and legal services, costs of printing Prospectuses for Fund
shareholders and registering a Fund's shares, postage, fees to directors who are
not "interested persons" of a Fund, insurance premiums, costs of attending
investment conferences and such other costs which may be designated as
extraordinary. In addition, the Reserve Fund may have incurred expenses in
conjunction with distribution expenses pursuant to Reserve Fund's Rule 12b-1
plan. Under the prior Agreements, IAI agreed to reimburse Reserve Fund for
expenses (other than brokerage commissions and other expenditures in connection
with the purchase and sale of portfolio securities, interest expense, and,
subject to the specific approval of a majority of the disinterested directors of
the Fund, taxes and extraordinary expenses) which exceed .85% per year of the
average annual month-end net assets of Reserve Fund (the "expense limit").
DURATION OF AGREEMENTS
Each Management Agreement will terminate automatically in the event of its
assignment. In addition, each Agreement is terminable at any time without
penalty by the Board of Directors of a Fund or by vote of a majority of a Fund's
outstanding voting securities on not more than 60 days' written notice to IAI,
and by IAI on 60 days' notice to a Fund. Each Agreement shall continue in effect
from year to year only so long as such continuance is specifically approved at
least annually by either the Board of Directors of the Fund or by vote of a
23
<PAGE>
majority of the outstanding voting securities, provided that in either event
such continuance is also approved by the vote of a majority of directors who are
not parties to the Agreement or interested persons of such parties cast in
person at a meeting called for the purpose of voting on such approval.
CUSTODIAL SERVICE
The custodian for the Funds is Norwest Bank Minnesota, N.A. Norwest Center,
Sixth and Marquette, Minneapolis, MN 55479. With respect to Reserve Fund's
ability to invest up to 10% of Fund assets in international securities, Norwest
has entered into an agreement with Morgan Stanley Trust Company, 1 Pierrepont
Plaza, Brooklyn, New York ("Morgan Stanley") which enables Reserve Fund to
utilize the subcustodian and depository network of Morgan Stanley. Such
agreements, subcustodians and depositories were approved by the Fund's Board of
Directors in accordance with the rules and regulations of the Securities and
Exchange Commission, for the purpose of providing custodial services for Reserve
Fund's assets held outside the United States. The directors of Reserve Fund
monitor the activities of its custodian and subcustodians as well as the
economic conditions and applicable laws of the foreign countries in which such
Fund's assets are held.
The following is a listing of the subcustodians and depositories currently
approved by Reserve Fund's directors and the countries in which such
subcustodians and depositories are located:
<TABLE>
<CAPTION>
BRANCHES OF THE CUSTODIAN
AND SUBCUSTODIAN BANKS
<S> <C>
Argentina Citibank, N.A., Buenos Aires Branch
Australia Australia & New Zealand Banking Group, Ltd.
Austria Credit Austalt Bankverein
Bangladesh Standard Chartered Bank
Belgium Banque Bruxelles Lambert (BBL)
Botswana Barclays Bank of Botswana
Brazil Banco de Boston
Canada Toronto Dominion Bank
Chile Citibank, N.A., Santiago Branch
China Hong Kong & Shanghai Banking, Corp. Ltd.
Columbia Citibank, N.A./Cititrust Columbia S.A.
Cyprus Barclays Bank PLC
Czech Republic ING Bank
Denmark Den Danske Banke
Finland Merita Bank
24
<PAGE>
France Banque Indosuez
Germany Dresdner Bank, A.G.
Ghana Barclays Bank of Ghana
Greece Citibank, N.A., Athens Branch
Hong Kong Hong Kong & Shanghai Banking Corp. Ltd.
Hungary Citibank, N.A., Budapest Branch
India Standard Chartered Bank
Indonesia Hong Kong & Shanghai Banking Corp. Ltd.
Ireland Allied Irish Bank
Israel Bank Leumi
Italy Barclays Bank PLC
Japan The Mitsubishi Bank Limited
Jordan Arab Bank plc
Kenya Barclays Bank Kenya
Korea Standard Chartered Bank
Luxembourg Banque Bruxelles Lambert
Malaysia Oversea Chinese Banking Corporation
Mauritius Hong Kong and Shanghai Bank Corporation
Mexico Citibank, N.A., Mexico City Branch
Morocco Banque Commerciale du Maroc
Netherlands ABN Amro Bank
New Zealand Bank of New Zealand
Norway Den Norske Bank
Pakistan Standard Chartered Bank
Papua New Guinea Australia and New Zealand Banking Group
Peru Citibank N.A., Lima Branch
Philippines Hong Kong & Shanghai Banking Corp. Ltd.
Poland Citibank Poland, S.A.
25
<PAGE>
Portugal Banco Commercial Portugues
Singapore Oversea Chinese Banking Corporation
South Africa First National Bank of Southern Africa
Spain Banco Santader
Sri Lanka Hong Kong & Shanghai Banking, Corp. Ltd.
Swaziland Barclays Bank of Swaziland
Sweden Svenska Handelsbanken
Switzerland Bank Leu Ltd.
Taiwan Hong Kong & Shanghai Banking Corp. Ltd.
Thailand Standard Chartered Bank
Turkey Citibank, N.A., Istanbul Branch
United Kingdom Barclays Bank PLC
Uruguay Citibank, N.A., Montevideo Branch
Venezuela Citibank, N.A., Caracas Branch
Zambia Barclays Bank of Zambia
Zimbabwe Barclays Bank of Zimbabwe
</TABLE>
<TABLE>
<CAPTION>
DEPOSITORIES
<S> <C>
Argentina Caja de Valores
Australia Clearing House Electronic Subregister System
Austria Wertpapiersammelbank
Belgium Caisse Interprofessionelle de Depot et de Titres
Botswana Stock Exchange Talisman System
Brazil Bolsa de Valores de Sao Paulo
Bolsa de Valores de Rio de Janeiro
Canada The Canadian Depository for Securities
China Shangai Stock Exchange
Czech Republic Center for Securities (SCP)
Denmark Vaerdipapircentralen
<PAGE>
France SICOVAM (Societe Interprofessionelle la
Compensacion des Valuers Mobilieres)
Societe de Compensacion des Marches
Conditionnels
Chambre de Compensation des Instruments
Financiers de Paris
Germany Deutscher Kassenverein AG
Greece Central Clearing Office of Athens Stock Exchange
Hong Kong Hong Kong Securities Clearing Company
Ireland Stock Exchange Talisman System
Israel SECH
Italy Monte Titoli, S.p.A
Japan Japan Securities Depository Center
Korea The Korean Central Depository
Malaysia The Malaysian Central Depository
Mexico Instituto para el Deposito de Valores
Morocco Casablanca Stock Exchange
Netherlands NECIGEF (Nederlands Centraal Institut
voor Giraal Effectenverkeer B.V.
New Zealand Austraclear New Zealand System
Norway Verdipapirsentralen
Pakistan The Karachi Stock Exchange Clearinghouse
Papua New Guinea Clearing House Electronic Subregister System
Poland National Depository of Securities
Portugal Lisbon Stock Exchange (SICOB system)
Oporto Stock Exchange (CAMBIUM system)
Singapore Central Depository Pte Ltd.
South Africa Central Depository (Pty) Ltd.
Spain Servicio de Compensacion y Liquidacion de
Valores
Sri Lanka Central Depository System Piri Ltd.
27
<PAGE>
Sweden Vardepapperscentralen
Switzerland SEGA (Schweizerische Effekten Giro A.G.)
Taiwan Taiwan Securities Depository Co.
Thailand Share Depository Center
United Kingdom Stock Exchange Talisman System
Zimbabwe Stock Exchange Talisman System
</TABLE>
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Most of each Fund's portfolio transactions are effected with dealers
without the payment of brokerage commissions but at a net price which usually
includes a spread or markup. In effecting such portfolio transactions on behalf
of a Fund, IAI seeks the most favorable net price consistent with the best
execution. However, frequently IAI selects a dealer to effect a particular
transaction without contacting all dealers who might be able to effect such
transaction because of the volatility of the bond market and the desire of IAI
to accept a particular price for a security because the price offered by the
dealer meets its guidelines for profit, yield or both.
So long as IAI believes that it is obtaining the best net price (including
the spread or markup) consistent with the best execution, as described above, it
gives consideration in placing portfolio transactions to dealers furnishing
research, statistical information, or other services to IAI. This allows IAI to
supplement its own investment research activities and enables IAI to obtain the
views and information of individuals and research staffs of many different
securities firms prior to making investment decisions for a Fund. To the extent
portfolio transactions are effected with dealers who furnish research services
to it, IAI receives a benefit which is not capable of evaluation in dollar
amounts.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to the policies set forth in the preceding
paragraphs and such other policies as the Board of Directors of the Fund may
determine, Advisers may consider sales of shares of the Fund as a factor in the
selection of broker-dealers to execute the Fund's securities transactions.
IAI believes that most research services obtained by it generally benefit
one or more of the investment companies or other accounts which it manages.
Research services obtained from transactions in fixed income securities would
primarily benefit the managed funds investing such fixed income securities and
managed accounts investing in fixed income securities.
CAPITAL STOCK
MONEY MARKET
Money Market Fund is a separate portfolio of IAI Investment Funds VI, Inc.,
a Minnesota corporation whose shares of common stock are currently issued in
seven series (Series A through G). Each share of a series is entitled to
participate pro rata in any dividends and other distributions of such series and
all shares of a series have equal rights in the event of liquidation of that
series. The Board of Directors of IAI Investment Funds VI, Inc. is empowered
under the Articles of Incorporation of such company to issue other series of the
company's common stock without shareholder approval. IAI Investment Funds VI,
Inc., has authorized 10,000,000,000 shares of $.01 par value common stock to be
issued as Series F common shares. The investment portfolio represented by such
shares is referred to as IAI Money Market Fund. As of January 31, 1996, Money
Market Fund had 27,394,991 shares outstanding.
28
<PAGE>
As of May 21, 1996, no person held of record or, to the knowledge of Money
Market Fund, beneficially owned more than 5% of the outstanding shares of Money
Market Fund.
In addition, as of May 21, 1996, Money Market Fund's officers and directors
as a group owned approximately 33,783,510.920 shares, representing approximately
6.63% of Money Market Fund's outstanding shares.
RESERVE FUND
Reserve Fund is a separate portfolio of IAI Investment Funds V, Inc., a
Minnesota corporation whose shares of common stock are currently issued in one
series (Series A). Each share of a series is entitled to participate pro rata in
any dividends and other distributions of such series and all shares of a series
have equal rights in the event of liquidation of that series. The Board of
Directors of IAI Investment Funds V, Inc., is empowered under the Articles of
Incorporation of such company to issue other series of the company's common
stock without shareholder approval. IAI Investment Funds V, Inc., has authorized
10,000,000,000 shares of $.01 par value common stock to be issued as Series A
common shares. The investment portfolio represented by such shares is referred
to as IAI Reserve Fund. As of January 31, 1996, Reserve Fund had 5,494,782
shares outstanding.
As of May 21, 1996, no person held of record or, to the knowledge of
Reserve Fund, beneficially owned more than 5% of the outstanding shares of the
Fund, except as set forth in the following table:
<TABLE>
<CAPTION>
===============================================================================
Name and Address Number of Percent of
of Shareholder Shares Class
===============================================================================
<S> <C> <C>
IAI Corporate Cash Account 1,556,008.092 22.57
3700 First Bank Place
P.O. Box 357
Minneapolis, MN 55440
Bost & Co. 499,178.505 7.24
MHFF2528002
AIM #153-3002
P.O. Box 3198
3 Mellon Bank
Pittsburgh, PA 15230-3198
Charles Schwab & Co. Inc. 422,263.369 6.12
SPL Custody A/C For Excl Bnft of Cust.
Attn: Mutual Funds Dept. - RSV REIN
101 Montgomery Street
San Francisco, CA 94104
</TABLE>
In addition, as of May 21, 1996, Reserve Fund's officers and directors as a
group owned less than 1% of Reserve Fund's outstanding shares.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The net asset value per share of each Fund is determined once daily as of
the close of trading on the New York Stock Exchange on each business day on
which the New York Stock Exchange is open for trading, and may be determined on
additional days as required by the Rules of the Securities and Exchange
29
<PAGE>
Commission. The New York Stock Exchange is closed, and the net asset value per
share of a Fund is not determined, on the following national holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.
MONEY MARKET FUND
For the purpose of calculating Money Market Fund's net asset value per
share, securities are valued by the "amortized cost" method of valuation, which
does not take into account unrealized gains or losses. This involves valuing an
instrument at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instruments. While this method
provides certainty in valuation, it may result in periods during which a
security's value, as determined by amortized cost, is higher or lower than the
price the Fund would receive if it sold the instrument.
The use of amortized cost and the maintenance of Money Market Fund's per
share net asset value at $1.00 is based on its election to operate under the
provision of Rule 2a-7 under the Investment Company Act of 1940. As a condition
of operating under that rule, Money Market Fund must maintain a dollar-weighted
average portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of 397 days or less, and invest only in United States
dollar-denominated securities that are determined by the Board of Directors to
present minimal credit risks and that are at the time of acquisition "Eligible
Securities."
The Board of Directors has also established procedures reasonably designed,
taking into account current market conditions, to stabilize the net asset value
per share as computed for the purpose of sales and redemptions at $1.00. These
procedures include periodic review, as the Board deems appropriate and at such
intervals as are reasonable in light of current market conditions, of the
relationship between the amortized cost value per share and a net asset value
per share based upon available indications of market value. In such a review,
investments for which market quotations are readily available are valued at the
most recent bid price or quoted yield equivalent for such securities or for
securities of comparable maturity, quality and type as obtained from one or more
of the major market makers for the securities to be valued. Other investments
and assets are valued at fair value, as determined in good faith by the Board.
In the event of a deviation that may result in material dilution or that is
otherwise unfair to existing shareholders between Money Market Fund's net asset
value based upon available market quotations or market equivalents and $1.00 per
share based on amortized cost, the Board of Directors will promptly consider
what action, if any, should be taken. Such action may include redeeming shares
in kind, selling instruments prior to maturity to realize capital gains or
losses or to shorten average maturity, withholding dividends, paying
distributions from capital or capital gains, or utilizing a net asset value per
share based upon available market quotations.
On January 31, 1996, the net asset value and public offering price per
share of Money Market Fund was calculated as follows:
NAV = Net Assets ($27,395,033) = $1.00
--------------------------------
Shares Outstanding (27,394,991)
RESERVE FUND
The portfolio securities in which Reserve Fund invests fluctuate in value,
and hence, for Reserve Fund, the net asset value per share also fluctuates.
30
<PAGE>
On January 31, 1996, the net asset value and public offering price per
share of Reserve Fund was calculated as follows:
NAV = Net Assets ($54,974,417) = $10.00
------------------------------
Shares Outstanding (5,494,782)
TAX STATUS
The tax status of the Funds and the distributions of the Funds are
summarized in the Prospectus under "Dividends, Distributions and Tax Status."
IN GENERAL
It is expected that none of the distributions of the Funds' net investment
income will qualify for the dividends received deduction available to
corporations under the Internal Revenue Code of 1986, as amended (the "Code").
Ordinarily, distributions and redemption proceeds earned by Fund
shareholders are not subject to withholding of federal income tax. However, each
Fund is required to withhold 31% of a shareholder's distributions and redemption
proceeds upon the occurrence of certain events specified in Section 3406 of the
Code and regulations promulgated thereunder. These events include the failure of
a Fund shareholder to supply the Fund with such shareholder's taxpayer
identification number, and the failure of a Fund shareholder who is otherwise
exempt from withholding to properly document such shareholder's status as an
exempt recipient. Additionally, distributions may be subject to state and local
income taxes, and the treatment thereunder may differ from the federal income
tax consequences discussed above.
Under the Code, each Fund will be subject to a non-deductible excise tax
equal to 4% of the excess, if any, of the amount of investment income and
capital gains required to be distributed pursuant to the Code for each calendar
year over the amount actually distributed. In order to avoid this excise tax,
each Fund generally must declare dividends by the end of each calendar year
representing 98% of the Fund's ordinary income for such calendar year and 98% of
its capital gain net income, if any, for the twelve-month period ending October
31 of the same calendar year. The excise tax is not imposed, however, an
undistributed income that is already subject to corporate income tax.
RESERVE FUND
If Reserve Fund shares are sold or otherwise disposed of more than one year
from the date of acquisition, the difference between the price paid for the
shares and the sales price will result in long-term capital gain or loss to a
Reserve Fund shareholder if, as is usually the case, Reserve Fund shares are a
capital asset in the hands of a Reserve Fund shareholder at that time. However,
under a special provision in the Code, if Reserve Fund shares with respect to
which a long-term capital gain distribution has been, or will be, made are held
for six months or less, any loss on the sale or other disposition of such shares
will be long-term capital loss to the extent of such distribution.
Income received from sources within foreign countries may be subject to
withholding and other taxes imposed by such countries. Tax conventions between
certain countries and the United States may reduce or eliminate such taxes. It
is impossible to determine the effective rate of foreign tax applicable to such
income in advance since the precise amount of Reserve Fund's assets to be
invested in various countries is not known. Any amount of taxes paid by Reserve
Fund to foreign countries will reduce the amount of income available to Reserve
Fund for distributions to shareholders.
31
<PAGE>
The foregoing is a general and abbreviated summary of the Code and Treasury
regulations in effect as of the date of each Fund's Prospectus and this
Statement of Additional Information. The foregoing relates solely to federal
income tax law applicable to "U.S. persons," i.e., U.S. citizens and residents
and U.S. domestic corporations, partnerships, trusts and estates. Shareholders
who are not U.S. persons are encouraged to consult a tax adviser regarding the
income tax consequences of acquiring shares of a Fund.
LIMITATION OF DIRECTOR LIABILITY
Under Minnesota law, each Fund's Board of Directors owes certain fiduciary
duties to the Fund and to its shareholders. Minnesota law provides that a
director "shall discharge the duties of the position of director in good faith,
in a manner the director reasonably believes to be in the best interest of the
corporation, and with the care an ordinarily prudent person in a like position
would exercise under similar circumstances." Fiduciary duties of a director of a
Minnesota corporation include, therefore, both a duty of "loyalty" (to act in
good faith and act in a manner reasonably believed to be in the best interests
of the corporation) and a duty of "care" (to act with the care an ordinarily
prudent person in a like position would exercise under similar circumstances).
Minnesota law authorizes corporations to eliminate or limit the personal
liability of a director to the corporation or its shareholders for monetary
damages for breach of the fiduciary duty of "care." Minnesota law does not,
however, permit a corporation to eliminate or limit the liability of a director
(i) for any breach of the director's duty of "loyalty" to the corporation or its
shareholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for authorizing a
dividend, stock repurchase or redemption or other distribution in violation of
Minnesota law or for violation of certain provisions of Minnesota securities
laws, or (iv) for any transaction from which the director derived an improper
personal benefit. The Articles of Incorporation of IAI Investment Funds V, Inc.,
and IAI Investment Fund VI, Inc. limit the liability of directors to the fullest
extent permitted by Minnesota statutes, except to the extent that such liability
cannot be limited as provided in the Investment Company Act of 1940 (which Act
prohibits any provisions which purport to limit the liability of directors
arising from such directors' willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of their role as
directors).
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" of the corporation for breach of their
duties as officers (including the liability of directors who serve as officers
for breach of their duties as officers.) Minnesota law does not permit
elimination or limitation of the availability of equitable relief, such as
injunctive or rescissionary relief. Further, Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act of
1933 or the Securities Exchange Act of 1934, and it is uncertain whether and to
what extent the elimination of monetary liability would extend to violations of
duties imposed on directors by the Investment Company Act of 1940 and the rules
and regulations adopted under such Act.
FINANCIAL STATEMENTS
The financial statements, included as part of the Funds' 1996 Annual Report
to shareholders, are incorporated herein by reference. Such Annual Report may be
obtained by shareholders on request from the Funds at no additional charge.
32
<PAGE>
APPENDIX A -- RATINGS OF DEBT SECURITIES
RATINGS BY MOODY'S
Corporate Bonds
Aaa. Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa. Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A. Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa. Bonds rated Baa are considered medium grade obligations; i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characteristizes bonds in this class.
B. Bonds rated B generally lack characteristics of the desirable
investment. Assurances of interest and principal payment or maintenance of other
terms of the contract over any long period of time may be small.
Caa. Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca. Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C. Bonds rated C are the lowest-rated class of bonds and issued so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Conditional Ratings. The designation "Con." followed by a rating indicates
bonds for which the security depends upon the completion of some act or the
fulfillment of some condition. These are bonds secured by (a) earnings of
projects under construction, (b) earnings or projects unseasoned in operating
experience, (c) rentals which begin when facilities are completed, or (d)
payments to which 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
A-1
<PAGE>
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category. With respect to
municipal securities, those bonds in the Aa, A, Baa, Ba, and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols Aa1, A1, Baa1, Ba1, and B1.
Commercial Paper
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime - 1 Superior ability for repayment of senior short-term debt
obligations
Prime - 2 Strong ability for repayment of senior short-term debt
obligations
Prime - 3 Acceptable ability for repayment of senior short-term debt
obligations
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, Moody's, in assigning
ratings to such issuers, evaluates the financial strength of the indicated
affiliated corporations, commercial banks, insurance companies, foreign
governments, or other entities, but only as one factor in the total rating
assessment.
RATINGS BY S&P
Corporate Bonds
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB. Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B. Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB-rating.
A-2
<PAGE>
CCC. Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
CC. Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C. The rating C typically applied to debt subordinated to senior debt which
assigned an actual or implied CCC-debt rating. The C rating may be used to cover
a situation where a bankruptcy petition has been filed but debt service payments
are continued.
C1. The rating C1 is reserved for income bonds on which no interest is
being paid.
D. Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. The D rating will be used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
In order to provide more detailed indications of credit quality, S&P's bond
letter ratings described above (except for the AAA category) may be modified by
the addition of a plus or a minus sign to show relative standing within the
rating category.
Commercial Paper
A. This highest rating category indicates the greatest capacity for timely
payment. Issues in this category are further defined with the designations 1, 2,
and 3 to indicate the relative degree to safety.
A-1. This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are designed A-1+.
A-2. Capacity for timely payments on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designed A-1.
A-3. Issues carrying this designation have adequate capacity for timely
repayment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
RATINGS BY FITCH INVESTORS SERVICE, INC.
Corporate Bonds
AAA. Bonds of this rating are regarded as strictly high grade, broadly
marketable, suitable for investment by trustees and fiduciary institutions,
and liable to only slight market fluctuation other than through changes in the
money rate. The factor last named is of importance varying with the length of
maturity. Such bonds are mainly senior issues of strong companies, and are most
numerous in the railway and public utility fields, though some industrial
obligations have this rating. The prime feature of an AAA bond is a showing of
earnings several times or many times interest requirements with such stability
of applicable earnings that safety is beyond reasonable question whatever
changes occur in conditions. Other features may exist, such as a wide margin of
protection through collateral security or direct lien on specific property as in
the case of high-class equipment certificates or bonds that are first mortgages
on valuable real estate. Sinking funds or voluntary reduction of the debt, by
call or purchase, are often factors, while guarantee or assumption by parties
other than the original debtor may influence the rating.
A-3
<PAGE>
AA. Bonds in this group are of safety virtually beyond question, and as a
class are readily saleable while many are highly active. Their merits are not
greatly unlike those of the AAA class, but a bond so rated may be of junior
though strong lien, in many cases directly following an AAA bond, or the margin
of safety is strikingly broad. The issue may be the obligation of a small
company, strongly secured but influenced as to rating by the lesser financial
power of the enterprise and more local type of market.
Commercial Paper
Fitch-1. (Highest Grade) Issues assigned this rating are regarded as having
the strongest degree of assurance for timely payment.
Fitch-2. (Very Good Grade) Issues assigned this rating reflect an assurance
of timely payment only slightly less in degree than the strongest issues.
RATINGS BY DUFF & PHELPS, INC.
Corporate Bonds
Duff 1. Highest credit quality. The risk factors are negligible, being only
slightly more than for risk free U.S. Treasury debt.
Duff 2. High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
Commercial Paper
Duff 1. High certainty of timely payment. Liquidity factors are excellent
and supported by strong fundamental protection factors. Risk factors are minor.
Duff 2. Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
RATINGS BY THOMSON BANKWATCH (TBW)
Short-Term Ratings
TBW-1. The highest category; indicates a very high degree of likelihood
that principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1".
A-4
