DOMESTIC EQUITY FUNDS
PROSPECTUS
IAI CAPITAL APPRECIATION FUND
IAI EMERGING GROWTH FUND, IAI GROWTH FUND
IAI GROWTH AND INCOME FUND, IAI MIDCAP GROWTH FUND
IAI REGIONAL FUND, IAI VALUE FUND
AUGUST 1, 1997
[LOGO]
MUTUAL FUNDS
<PAGE>
<PAGE>
IAI MUTUAL FUNDS
---------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
Page
<TABLE>
<CAPTION>
<S> <C>
FUND EXPENSE INFORMATION......................................................4
FUND DIRECTORS................................................................5
FINANCIAL HIGHLIGHTS..........................................................6
INVESTMENT OBJECTIVES AND POLICIES...........................................13
CAPITAL APPRECIATION FUND...........................................13
EMERGING GROWTH FUND................................................13
GROWTH FUND.........................................................14
GROWTH AND INCOME FUND..............................................15
MIDCAP GROWTH FUND..................................................16
REGIONAL FUND.......................................................16
VALUE FUND..........................................................17
PORTFOLIO SECURITIES AND
OTHER FUND INVESTMENT TECHNIQUES.............................................18
FUND RISK FACTORS............................................................21
MANAGEMENT...................................................................24
INVESTMENT PERFORMANCE.......................................................26
COMPUTATION OF NET ASSET
VALUE AND PRICING............................................................27
PURCHASE OF SHARES...........................................................28
RETIREMENT PLANS.............................................................29
AUTOMATIC INVESTMENT PLAN....................................................30
REDEMPTION OF SHARES.........................................................30
EXCHANGE PRIVILEGE...........................................................31
AUTOMATIC EXCHANGE PLAN......................................................32
AUTHORIZED TELEPHONE TRADING.................................................32
SYSTEMATIC CASH WITHDRAWAL PLAN..............................................33
DIVIDENDS, DISTRIBUTIONS AND
TAX STATUS...................................................................33
DESCRIPTION OF COMMON STOCK..................................................35
COUNSEL AND AUDITORS.........................................................36
CUSTODIAN, TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT....................................................36
ADDITIONAL INFORMATION.......................................................36
</TABLE>
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
PROSPECTUS DATED AUGUST 1, 1997
IAI Capital Appreciation Fund ("Capital Appreciation Fund"), IAI Emerging Growth
Fund ("Emerging Growth Fund"), and IAI Midcap Growth Fund ("Midcap Growth Fund")
are separate portfolios of IAI Investment Funds VI, Inc. IAI Growth Fund
("Growth Fund") is a separate portfolio of IAI Investment Funds II, Inc. IAI
Regional Fund ("Regional Fund") is a separate portfolio of IAI Investment Funds
IV, Inc. IAI Growth and Income Fund ("Growth and Income Fund") is a separate
portfolio of IAI Investment Funds VII, Inc., and IAI Value Fund ("Value Fund")
is a separate portfolio of IAI Investment Funds VIII, Inc. Each of these
companies is an open-end diversified management investment company authorized to
issue its share of common stock in more than one series. Investment Advisers,
Inc. ("IAI") serves as each Fund's investment adviser and manager.
Capital Appreciation Fund's investment objective is long-term capital
appreciation. Capital Appreciation Fund pursues its investment objective by
investing primarily in equity securities of U.S. companies that have
above-average prospects for growth.
Emerging Growth Fund pursues its objective of long-term capital appreciation by
investing primarily in equity securities of small- and medium-sized companies
that are in the early stages of their life cycles and which have demonstrated or
have the potential for above-average capital growth.
Growth Fund's investment objective is long-term capital appreciation. Growth
Fund pursues its objective by investing primarily in equity securities of
established companies that are expected to increase earnings at an above-average
rate.
Growth and Income Fund's primary investment objective is capital appreciation,
with income being its secondary objective. Growth and Income Fund pursues its
objectives by investing primarily in equity securities which offer the potential
for capital appreciation and secondarily by investing in income-producing equity
securities.
Midcap Growth Fund's investment objective is long-term capital appreciation.
Midcap Growth Fund pursues its investment objective by investing primarily in
equity securities of medium-sized U.S. companies that have above-average
prospects for growth.
Regional Fund pursues its objective of capital appreciation by investing at
least 80% of its equity investments in companies which have their headquarters
in Minnesota, Wisconsin, Iowa, Illinois, Nebraska, Montana, North Dakota or
South Dakota.
Value Fund pursues its investment objective of long-term capital appreciation
primarily by investing in securities believed by management to be undervalued
and which are considered to offer unusual opportunities for capital growth.
2
<PAGE>
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 August 1,
1997, which provides a further discussion of certain areas in this Prospectus
and other matters which may be of interest to some investors, has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference. For a free copy, call or write the 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.
3
<PAGE>
IAI MUTUAL FUNDS
---------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
FUND EXPENSE INFORMATION
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
_____________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
IAI IAI
Capital Emerging IAI IAI IAI IAI IAI
Appreciation Growth Growth Growth and Midcap Regional Value
Fund Fund Fund Income Fund Growth Fund Fund Fund
- -------------------------------------- --------------- ------------ ---------- -------------- -------------- ----------- --------
Sales Load Imposed on Purchases None None None None None None None
Sales Load Imposed on Reinvested
Dividends None None None None None None None
Redemption Fees* None None None None None None None
Exchange Fees None None None None None None None
- --------------------------------------
</TABLE>
* Each Fund charges a $10.00 fee for the payment of redemption proceeds by
wire.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses
- ------------------------------
(as a percentage of average daily net assets)
- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
IAI IAI
Capital Emerging IAI IAI IAI IAI IAI
Appreciation Growth Growth Growth and Midcap Regional Value
Fund Fund Fund Income Fund Growth Fund Fund Fund
- -------------------------------------- --------------- ------------ ---------- -------------- -------------- ---------- ---------
Management Fee 1.40% 1.19% 1.25% 1.25% 1.25% 1.21% 1.25%
Rule 12b-1 Fee None None None None None None None
Other Expenses None None None% None None None 0.01%
------ ----- ----- ------ ----- ----- ------
Total Fund Operating Expenses 1.40% 1.19% 1.25% 1.25% 1.25% 1.21% 1.25%
------ ----- ----- ----- ----- ----- -----
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>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
------ ------ ------- --------
IAI Capital Appreciation Fund $ 14 $ 44 $ 77 $ 168
IAI Emerging Growth Fund $ 12 $ 38 $ 65 $ 144
IAI Growth Fund $ 13 $ 40 $ 69 $ 151
IAI Growth and Income Fund $ 13 $ 40 $ 69 $ 151
IAI Midcap Growth Fund $ 13 $ 40 $ 69 $ 151
IAI Regional Fund $ 12 $ 38 $ 66 $ 147
IAI Value Fund $ 13 $ 40 $ 69 $ 151
</TABLE>
4
<PAGE>
IAI MUTUAL FUNDS
---------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
FUND EXPENSE INFORMATION (CONT.)
The purpose of the above table is to assist you in understanding the various
costs and expenses that an investor in a Fund will bear directly or indirectly.
For Capital Appreciation Fund, the above information has been restated to
reflect the elimination, as of the end of the Fund's last fiscal year, of IAI's
voluntary waiver of Management Fees in excess of 1.25% of the Fund's average
daily net assets. Absent such waiver, Capital Appreciation Fund would have paid
1.40% of its average daily net assets as the Management Fee. The example should
not be considered a representation of past or future expenses. Actual expenses
may be greater or less than those shown.
Further information concerning fees paid by each Fund is set forth in the
section "Management" and in the Statement of Additional Information.
FUND DIRECTORS
Madeline Betsch Noel P. Rahn
W. William Hodgson J. Peter Thompson
George R. Long Charles H. Withers
5
<PAGE>
IAI MUTUAL FUNDS
---------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report is included in the Funds' Annual Reports. The Financial
Highlights section of each Annual Report is incorporated by reference in (and is
a part of) the Statement of Additional Information. Such Annual Reports may be
obtained by shareholders on request from the Funds at no charge.
CAPITAL APPRECIATION FUND
<TABLE>
<CAPTION>
<S> <C> <C>
Period from
Year Ended February 1, 1996(1) to
March 31, 1997 March 31, 1996
-------------- --------------
NET ASSET VALUE
Beginning of period $11.24 $10.00
OPERATIONS
Net investment income (loss) (0.09) --
Net realized and unrealized gains 2.79 1.24
------------------------------------------------
Total from operations 2.70 1.24
------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gains (0.41) --
Tax return of capital (0.04) --
-----------------------------------------------
Total distributions (0.45) --
-----------------------------------------------
NET ASSET VALUE
End of period $13.49 $11.24
===============================================
Total investment return* 23.68% 12.40%
Net assets at end of period (000's omitted) $44,230 $9,411
RATIOS
Expenses to average daily net assets ** 1.25% 1.25%***
Net investment income to average net assets (loss)** (0.80%) 0.23%***
Average brokerage commission rate *** $0.0576 N/A
Portfolio turnover rate (excluding short-term securities) 132.5% 1.2%
- ------------------------------------------------------------
<FN>
* Total investment return is based on the change in net asset value
of a share during the period and assumes reinvestment of all
distributions at net asset value.
** The Fund's adviser voluntarily waived $54,841 and $827, in expenses
for the year-ended March 31, 1997 and the period ended March 31, 1996,
respectively. If the Fund had been charged these expenses,
the ratio of expenses to average daily net assets would have been
1.40% and 1.40%,respectively, and the ratio of net investment income
to average daily net assets would have been (0.95%) and 0.087%,
respectively.
*** Annualized
*** Beginning in fiscal 1997, the Fund is required to disclose an average
brokerage commission rate.
(1) Commencement of operations
</FN>
</TABLE>
6
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
EMERGING GROWTH FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Years ended March 31, Period from
August 5, 1991(1)
------------------------------------------------------------- to
1997 1996 1995 1994 1993 March 31, 1992
---- ---- ---- ---- ----- --------------
NET ASSET VALUE
Beginning of period $24.08 $15.83 $15.20 $13.47 $11.91 $10.00
------ ------ ------ ------ ------ ------
OPERATIONS
Net investment income (loss) (0.20) (0.09) (0.07) (0.10) (0.05) 0.01
Net realized and unrealized gains (4.52) 8.77 1.42 2.18 2.37 1.91
(losses) ------ ----- ---- ---- ---- -----
Total from operations (4.72) 8.68 1.35 2.08 2.32 1.92
------ ---- ---- ---- ---- ----
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income --- --- --- --- --- (0.01)
Net realized gains (3.51) (0.43) (0.72) (0.35) (0.76) ---
------- ------ ------ ------ ------ ------
Total distributions (3.51) (0.43) (0.72) (0.35) (0.76) (0.01)
------ ------ ------ ------ ------ ------
NET ASSET VALUE
End of period $15.85 $24.08 $15.83 $15.20 $13.47 $11.91
====== ====== ====== ====== ======= =======
Total investment return* (22.97%) 55.20% 10.23% 15.43% 21.90% 19.23%
Net assets at end of period $387,105 $653,888 $342,874 $225,510 $131,514 $38,110
(OOO's omitted)
RATIOS
Expenses to average net assets 1.19% 1.24% 1.25% 1.25% 1.25% 1.25%**
Net investment income (loss)
to average net assets (0.75%) (0.52%) (0.54%) (0.77%) (0.72%) 0.14%**
Average brokerage commission rate*** $0.0571 N/A N/A N/A N/A
Portfolio turnover rate
(excluding short-term securities) 49.5% 62.8% 58.1% 76.3% 96.1% 126.6%
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
* 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
*** Beginning in fiscal 1997, the Fund is required to disclose an average
brokerage commission rate.
(1) Commencement of operations
</FN>
</TABLE>
7
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
GROWTH FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Year ended March 31, Period from Period from
------------------------------ August 1, 1994 to August 6, 1993(2) to
1997 1996 March 31, 1995(1) July 31, 1994
-------------- ------------- -------------------- --------------------
NET ASSET VALUE
Beginning of period $11.89 $10.95 $9.87 $10.00
------ ------ ----- ------
OPERATIONS
Net investment income (loss) (0.03) --- 0.04 0.01
Net realized and unrealized gains 1.02 1.93 1.07 (0.13)
(losses) -------------- ------------- -------------------- --------------------
Total from operations 0.99 1.93 1.11 (0.12)
-------------- ------------- -------------------- --------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income --- (0.03) (0.03) (0.01)
Net realized gains (2.96) (0.96) --- ---
-------------- ------------- ------------------- --------------------
Total distributions (2.96) (0.99) (0.03) (0.01)
-------------- ------------- -------------------- --------------------
NET ASSET VALUE
End of period $9.92 $11.89 $10.95 $9.87
============== ============= ==================== ====================
Total investment return* 8.42% 18.01% 11.24% (1.21%)
Net assets at end of period $11,747 $17,079 $26,794 $14,408
(OOO's omitted)
RATIOS
Expenses to average net assets 1.25% 1.25% 1.25%** 1.25%**
Net investment income (loss) to
average net assets (0.25%) (0.04%) 0.61%** 0.16%**
Average brokerage commission rate*** $0.0588 N/A N/A N/A
Portfolio turnover rate (excluding
short-term securities) 134.2% 92.8% 68.7% 105.4%
- -----------------------------------------------------------------------------
<FN>
* 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
*** Beginning in fiscal 1997, the Fund is required to disclose an average
brokerage commission rate.
(1) Reflects fiscal year end change from July 31 to March 31.
(2) Commencement of operations
</FN>
</TABLE>
8
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
GROWTH AND INCOME FUND
Years ended March 31,
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
NET ASSET VALUE
Beginning of period $15.30 $14.32 $13.91 $15.19 $14.73 $14.48 $15.47 $16.01 $14.80 $17.32
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
OPERATIONS
Net investment income 0.10 0.10 0.12 0.03 0.07 0.13 0.29 0.39 0.31 0.28
Net realized and
unrealized gains 1.88 2.86 1.04 0.38 1.17 1.20 0.72 2.26 2.23 (1.09)
(losses)
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
Total from operations 1.98 2.96 1.16 0.47 1.24 1.33 1.01 2.65 2.54 (0.81)
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment (0.10) (0.13) (0.10) (0.06) (0.07) (0.14) (0.30) (0.43) (0.23) (0.37)
income
Excess distribution
from net investment
income (0.10) -- -- -- -- -- -- -- -- --
Net realized gains (2.25) (1.85) (0.65) (1.69) (0.71) (0.94) (1.70) (2.76) (1.10) (1.34)
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
Total distributions (2.45) (1.98) (0.75) (1.75) (0.78) (1.08) (2.00) (3.19) (1.33) (1.71)
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
NET ASSET VALUE
End of period $14.83 $15.30 $14.32 $13.91 $15.19 $14.73 $14.48 $15.47 $16.01 $14.80
========== ========= ========= ======== ======== ======== ======== ========= ======== ========
Total investment 13.34% 21.51% 8.92 3.07% 9.04% 9.56% 7.42% 16.77% 18.06% (4.89%)
return*
Net assets at end of
period $90,741 $84,662 $101,256 $119,102 $134,308 $113,324 $90,590 $76,484 $76,901 $83,290
(000's omitted)
RATIOS
Expenses to average
net assets 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.05% 1.00% 0.90% 0.80%
Net investment income
to average net 0.51% 0.62% 0.80% 0.60% 0.61% 1.03% 2.19% 2.10% 1.80% 1.70%
assets
Average brokerage
commission rate** $0.0623 N/A N/A N/A N/A N/A N/A N/A N/A N/A
Portfolio turnover
rate (excluding
short-term securities) 51.2% 89.1% 79.1% 205.6% 175.6% 210.1% 68.5% 66.2% 48.3% 35.8%
- -----------------------------------------------------------------------------------------------------------------------
<FN>
* 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.
** Beginning in fiscal 1997, the Fund is required to disclose an
average brokerage commission rate.
</FN>
</TABLE>
9
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
MIDCAP GROWTH FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Period from
Years ended March 31, April 10, 1992(1)
------------------------------------------------- to
1997 1996 1995 1994 March 31, 1993
---- ---- ---- ---- ------------
NET ASSET VALUE
Beginning of period $17.70 $15.35 $13.67 $11.88 $10.00
------ ------ ------ ------ ------
OPERATIONS
Net investment income (loss) (0.08) (0.05) (0.04) (0.04) 0.02
Net realized and unrealized gains 0.68 3.50 2.35 1.99 1.89
---- ----- ---- ---- -----
Total from operations 0.60 3.45 2.31 1.95 1.91
====== ====== ====== ===== =====
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income --- --- --- --- (0.03)
Net realized gains (1.62) (1.10) (0.63) (0.16) ---
------- ------ ------ ------- -----
Total distributions (1.62) (1.10) (0.63) (0.16) (0.03)
------ ------ ------ ------ -----
NET ASSET VALUE
End of period $16.68 $17.70 $15.35 $13.67 $11.88
====== ====== ====== ====== =======
Total investment return* 3.12% 23.51% 17.63% 16.40% 19.09%
Net assets at end of period (000's $128,259 $122,375 $88,075 $56,618 $22,070
omitted)
Ratios
Expenses to average net assets 1.25% 1.25% 1.25% 1.25% 1.25%**
Net investment income (loss)
to average net assets (0.47%) (0.36%) (0.33%) (0.45%) 0.24%**
Average brokerage commission rate*** $0.593 N/A N/A N/A N/A
Portfolio turnover rate
(excluding short-term securities) 72.4% 29.8% 51.3% 49.7% 57.6%
- ----------------------------------------------------------------------------------------------------------------
<FN>
* 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
*** Beginning in fiscal 1997, the Fund is required to disclose an
average brokerage commission rate.
(1) Commencement of operations
</FN>
</TABLE>
10
<PAGE>
IAI MUTUAL FUNDS
---------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
REGIONAL FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Years ended March 31,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
NET ASSET VALUE
Beginning of period $24.57 $21.56 $20.94 $22.23 $21.29 $21.03 $18.95 $19.38 $17.11 $21.19
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
OPERATIONS
Net investment income 0.03 0.14 0.17 0.21 0.21 0.20 0.35 0.46 0.36 0.33
Net realized and
unrealized gains
(losses) 2.08 5.77 1.84 0.51 1.48 2.38 2.88 3.59 2.76 (0.80)
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
Total from operations 2.11 5.91 2.01 0.72 1.69 2.58 3.23 4.05 3.12 (0.47)
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (0.04) (0.18) (0.20) (0.18) (0.23) (0.24) (0.33) (0.51) (0.28) (0.40)
Excess distribution
from net investment
income (0.06) (0.02) -- -- -- -- -- -- -- --
Net realized gains (3.99) (2.70) (1.19) (1.83) (0.52) (2.08) (0.82) (3.97) (0.57) (3.21)
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
Total distributions (4.09) (2.90) (1.39) (2.01) (0.75) (2.32) (1.15) (4.48) (0.85) (3.61)
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
NET ASSET VALUE
End of period $22.59 $24.57 $21.56 $20.94 $22.23 $21.29 $21.03 $18.95 $19.38 $17.11
========== ========= ========= ======== ======== ======== ======== ========= ======== ========
Total investment 8.65% 28.62% 10.35% 3.26% 8.31% 12.77% 18.01% 21.66% 18.63% (1.40%
return*
Net assets at end of
period (000's $498,178 $575,156 $523,364 $596,572 $659,904 $528,763 $284,054 $138,270 $102,245 $85,666
omitted)
RATIOS
Expenses to average
net assets 1.21% 1.25% 1.23% 1.25% 1.25% 1.25% 1.01% 0.99% 1.00% 0.80%
Net investment income
to average net 0.14% 0.58% 0.74% 0.94% 1.09% 1.20% 2.27% 2.31% 2.00% 1.60%
assets
Average brokerage
commission rate** $0.0581** N/A N/A N/A N/A N/A N/A N/A N/A N/A
Portfolio turnover
rate (excluding
short-term securities) 61.1% 89.7% 150.0% 163.0% 139.7% 140.6% 168.7% 116.2% 93.7% 85.3%
- ----------------------------------------------------------------------------------------------------------------------
<FN>
* 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.
** Beginning in fiscal 1997, the Fund is required to disclose an average
brokerage commission rate.
</FN>
</TABLE>
11
<PAGE>
IAI MUTUAL FUNDS
---------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
VALUE FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Years ended March 31,
--------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
NET ASSET VALUE
Beginning of period $12.42 $11.17 $11.63 $11.63 $11.06 $10.46 $12.29 $13.14 $10.75 $12.51
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
OPERATIONS
Net investment income 0.09 0.08 0.03 0.05 0.11 0.12 0.22 0.19 0.12 0.12
Net realized and
unrealized gains
(losses) 0.68 2.19 0.38 1.45 0.56 1.20 0.36 0.11 2.46 (0.04)
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
Total from operations 0.77 2.27 0.41 1.50 0.67 1.33 0.58 1.30 2.58 0.08
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (0.12) (0.01) (0.03) (0.13) --- (0.15) (0.17) (0.18) (0.10) (0.17)
Net realized gains (1.41) (1.01) (0.84) (1.37) (0.10) (0.45) (2.24) (1.97) (0.09) (1.67)
--------- -------- --------- ------- -------- -------- ------- ------- ------- -------
Total distributions (1.53) (1.02) (0.87) (1.50) (0.10) (0.60) (2.41) (2.15) (0.19) (1.84)
---------- --------- --------- -------- -------- -------- -------- --------- -------- --------
NET ASSET VALUE
End of period $11.66 $12.42 $11.17 $11.63 $11.63 $11.06 $10.46 $12.29 $13.14 $10.75
========== ========= ========= ======== ======== ======== ======== ====== ======= ========
Total investment 5.85% 21.07% 3.88% 12.70% 6.20% 12.21% 6.91% 9.90% 24.18% 1.12%
return*
Net assets at end of
period
000's omitted) $29,439 $42,009 $40,601 $35,282 $24,643 $32,246 $22,145 $25,913 $27,980 $20,464
RATIOS
Expenses to average
net assets 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.10% 1.00% 1.00% 1.00%
Net investment income
to average net 0.61% 0.65% 0.31% 0.35% 0.68% 1.24% 2.00% 1.34% 1.00% 1.00%
assets
Average brokerage
commission rate** $0.0600 N/A N/A N/A N/A N/A N/A N/A N/A N/A
Portfolio turnover
rate (excluding
short-term securities) 61.3% 73.4% 102.1% 191.9% 118.3% 125.4% 57.0% 70.3% 52.7% 62.5%
- ------------------------------------------------------------------------------------------------------------------------
<FN>
* 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.
** Beginning in fiscal 1997, the Fund is required to disclose an average
brokerage commission rate.
</FN>
</TABLE>
12
<PAGE>
IAI MUTUAL FUNDS
---------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
INVESTMENT OBJECTIVES AND POLICIES
CAPITAL APPRECIATION
FUND
The investment objective of Capital Appreciation Fund is long-term capital
appreciation. Capital Appreciation Fund is designed for investors seeking the
opportunity for substantial long-term growth who can accept above average stock
market risk and little or no current income. Capital Appreciation Fund will
pursue its objective by investing primarily in equity securities of U.S.
companies that IAI, believes have above-average prospects for growth. Capital
Appreciation Fund's investment objective is a fundamental policy and may not be
changed without shareholder approval. There can be no assurance that Capital
Appreciation Fund will achieve its investment objective.
In general, Capital Appreciation Fund will concentrate on companies that have
superior performance records, solid market positions, strong balance sheets and
a management team capable of sustaining growth. Although IAI expects Capital
Appreciation Fund will invest primarily in the common stocks of smaller emerging
and mid-sized companies, generally companies that have a market capitalization
less than $5 billion, it may invest in the securities of companies of any size
that offer strong earnings growth potential. In addition to common stocks,
Capital Appreciation Fund may also invest in securities convertible into common
stocks, nonconvertible preferred stocks and nonconvertible debt securities when
IAI believes that these securities offer opportunities for capital appreciation.
Current income will not be a substantial factor in the selection of securities.
Capital Appreciation Fund may invest in other securities and may employ certain
other investment techniques, as described in the section "Portfolio Securities
and Other Fund Investment Techniques." Please see the Prospectus section "Fund
Risk Factors" and the Statement of Additional Information section "Investment
Objectives and Policies" for a discussion of the risks associated with investing
in Capital Appreciation Fund.
EMERGING GROWTH FUND
The investment objective of Emerging Growth Fund is long-term capital
appreciation. Emerging Growth Fund is designed for investors seeking the
opportunity for substantial long-term growth who can accept above average stock
market risk and little or no current income. Emerging Growth Fund will pursue
its objective by investing primarily in equity securities of small- and
medium-sized companies that are in the early stages of their life cycles and
which have demonstrated or have the potential for above average capital growth.
Emerging Growth Fund's investment objective is a fundamental policy and may not
be changed without shareholder approval. There can be no assurance that Emerging
Growth Fund will achieve its investment objective.
Emerging Growth Fund's policy is to invest in equity securities, including
convertible securities, of companies that IAI believes are in the early stages
of their life cycles and
13
<PAGE>
IAI MUTUAL FUNDS
---------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
have demonstrated or have the potential to experience rapid growth in earnings
and/or revenues ("emerging growth companies"). Under normal market conditions,
Emerging Growth Fund will invest at least 65% of the value of its total assets
in emerging growth companies that are of small to medium size (revenue of $500
million or less at the time of acquisition). Emerging growth companies are
generally expected to show earnings growth over time that is well above the
growth rate of the overall economy and the rate of inflation, and have products,
management and market opportunities which are usually necessary to become more
widely recognized as growth companies. Emerging Growth Fund may also invest in
more established companies that may receive greater market recognition or
otherwise offer strong capital appreciation potential due to their relative
market position, the strength of their balance sheet, changes in management or
other similar opportunities.
Although Emerging Growth Fund's portfolio generally consists primarily of common
stocks, Emerging Growth Fund may invest in securities convertible into common
stocks, nonconvertible preferred stocks and nonconvertible debt securities.
Emerging Growth Fund may invest in other securities and may employ certain other
investment techniques, as described in the section "Portfolio Securities and
Other Fund Investment Techniques." Please see the Prospectus section "Fund Risk
Factors" and the Statement of Additional Information section "Investment
Objectives and Policies" for a discussion of the risks associated with investing
in Emerging Growth Fund.
GROWTH FUND
The investment objective of Growth Fund is long-term capital appreciation.
Growth Fund is designed for investors seeking the opportunity for significant
long-term growth who can accept above average market risk with little or no
current income. Growth Fund pursues its objective by investing primarily in
equity securities of established companies that are expected to increase
earnings at an above average rate. Growth Fund's investment objective is a
fundamental policy and may not be changed without shareholder approval. There
can be no assurance that Growth Fund will achieve its investment objective.
In general, Growth Fund concentrates on companies that have strong management,
leading market positions, strong balance sheets, and a well defined strategy for
future growth. In selecting investments for Growth Fund, IAI utilizes several
valuation techniques to determine which stocks offer the best combination of
intrinsic value and earnings growth potential. The goal is to have an acceptable
balance of risk and reward in the portfolio.
Under normal circumstances, at least 65% of Growth Fund's net assets will be
invested in growth-type securities. Growth Fund may also invest in government
securities, investment-grade corporate bonds and debentures, high-grade
commercial paper, preferred stocks, certificates of deposit or other securities
of U.S. and foreign issuers when IAI perceives an opportunity for capital growth
from such securities or so that Growth Fund may receive a return on its idle
cash. Growth Fund currently intends to limit its investments
14
<PAGE>
IAI MUTUAL FUNDS
-----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
in debt securities to securities of U.S. companies, the U.S. Government and
foreign governments and governmental entities. When IAI invests in such debt
securities, investment income will increase and may constitute a large portion
of the return on Growth Fund, and Growth Fund probably will not participate in
market advances or declines to the extent that it would if it were fully
invested in equity securities. In addition, Growth Fund may increase its cash
position on a temporary basis when IAI is unable to locate investment
opportunities with desirable risk/reward characteristics or to meet redemption
requests or pay Fund expenses.
In considering whether to purchase securities of foreign issuers, IAI considers
the political and economic conditions in a country, the prospect for changes in
the value of its currency and the liquidity of the investment in that country's
securities markets. If appropriate, IAI may purchase foreign securities through
dollar-denominated American Depository Receipts ("ADRs") which are issued by
domestic banks and publicly traded in the United States. Such investments do not
involve the same currency and liquidity risks as securities denominated in
foreign currency.
Growth Fund may invest in other securities and may employ certain other
investment techniques, as described in the section "Portfolio Securities and
Other Fund Investment Techniques." Please see the Prospectus section "Fund Risk
Factors" and the Statement of Additional Information section "Investment
Objectives and Policies" for a discussion of the risks associated with investing
in Growth Fund.
GROWTH AND
INCOME FUND
The primary investment objective of Growth and Income Fund is capital
appreciation, with income being its secondary objective. Growth and Income Fund
pursues its objectives by investing primarily in equity securities which offer
the potential for capital appreciation and secondarily by investing in
income-producing equity securities. Growth and Income Fund's investment
objectives are fundamental policies and may not be changed without shareholder
approval. There can be no assurance that Growth and Income Fund will achieve its
investment objectives.
Growth and Income Fund invests primarily in common stocks and may invest in
securities convertible into common stocks, nonconvertible preferred stocks and
nonconvertible debt securities. In selecting investments, Growth and Income Fund
considers a number of factors, such as product development and demand, operating
ratios, utilization of earnings for expansion, management abilities, analyses of
intrinsic values, market action and overall economic and political conditions.
Dividend income is a consideration secondary to Growth and Income Fund's primary
objective of capital appreciation.
Growth and Income Fund may invest in other securities and may employ certain
other investment techniques, as described in the section "Portfolio Securities
and Other Fund Investment Techniques." Please see the Prospectus section "Fund
Risk Factors" and the Statement of Additional Information section "Investment
Objectives and Policies" for a discussion of
15
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
the risks associated with investing in Growth and Income Fund.
MIDCAP GROWTH FUND
The investment objective of Midcap Growth Fund is long-term capital
appreciation. Midcap Growth Fund is designed for investors seeking the
opportunity for substantial long-term growth who can accept above average stock
market risk and little or no current income. Midcap Growth Fund will pursue its
objective by investing in equity securities of medium-sized U.S. companies that
IAI believes have above-average prospects for growth. Midcap Growth Fund's
investment objective is a fundamental policy and may not be changed without
shareholder approval. There can be no assurance that Midcap Growth Fund will
achieve its investment objective.
Under normal circumstances, Midcap Growth Fund will invest at least 65% of the
value of its total assets in medium-sized companies that have a market
capitalization between $500 million and $5 billion. Under normal market
conditions, the weighted average capitalization of Midcap Growth Fund's
investment portfolio will range from $1 billion to $3 billion. In general,
Midcap Growth Fund concentrates on companies that have superior performance
records, solid market positions, strong balance sheets and a management team
capable of sustaining growth. Investments in such companies are generally
considered to be less volatile than less capitalized emerging companies.
However, such companies may not generate the dividend income of larger, more
capitalized companies. Dividend income, if any, is a consideration incidental to
Midcap Growth Fund's objective of capital appreciation.
Midcap Growth Fund invests primarily in common stocks. However, it may invest in
securities convertible into common stocks, nonconvertible preferred stocks and
nonconvertible debt securities when IAI believes that these securities offer
opportunities for capital appreciation. Current income will not be a substantial
factor in the selection of securities.
Midcap Growth Fund may invest in other securities and may employ certain other
investment techniques, as described in the section "Portfolio Securities and
Other Fund Investment Techniques." Please see the Prospectus section "Fund Risk
Factors" and the Statement of Additional Information section "Investment
Objectives and Policies" for a discussion of the risks associated with investing
in Midcap Growth Fund.
REGIONAL FUND
The investment objective of Regional Fund is capital appreciation. Regional Fund
does not expect to provide significant current income to investors. Regional
Fund pursues its objective by investing at least 80% of its total assets in
companies which have their headquarters in Minnesota, Wisconsin, Iowa, Illinois,
Nebraska, Montana, North Dakota or South Dakota (the "Eight State Region").
Regional Fund's investment objective is a fundamental policy and may not be
changed without shareholder approval. There can be no assurance that Regional
Fund will achieve its investment objective.
16
<PAGE>
IAI MUTUAL FUNDS
-----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
Regional Fund invests primarily in common stocks but may also invest in
securities convertible into common stocks, nonconvertible preferred stocks, and
nonconvertible debt securities. In selecting investments for Regional Fund, IAI
considers a number of factors, such as product development and demand, operating
ratios, utilization of earnings for expansion, management abilities, analyses of
intrinsic values, market action and overall economic and political conditions.
Along with investments in nationally recognized companies, Regional Fund invests
in companies which are not as well known because they are newer or have a small
capitalization, but which offer the potential for capital appreciation. The
prices of stocks of such companies are more volatile than prices of stocks of
mature companies. All investments are subject to the market risks inherent in
any investment in equity securities.
Regional Fund may invest in other securities and may employ certain other
investment techniques, as described in the section "Portfolio Securities and
Other Fund Investment Techniques." Please see the Prospectus section "Fund Risk
Factors" and the Statement of Additional Information section "Investment
Objectives and Policies" for a discussion of the risks associated with investing
in Regional Fund.
VALUE FUND
The investment objective of Value Fund is long-term capital appreciation. Value
Fund does not expect to provide significant current income to investors. Value
Fund pursues its objective primarily by investing in securities believed by
management to be undervalued and which are considered to offer unusual
opportunities for capital growth. Value Fund's investment objective is a
fundamental policy and may not be changed without shareholder approval. There
can be no assurance that Value Fund will achieve its investment objective.
The following are typical, but not exclusive, examples of investments that are
considered for Value Fund:
1. Equity securities of companies which have been unpopular for some time but
where, in the opinion of IAI recent developments suggest the possibility of
improved operating results.
2. Equity securities of companies which IAI believes have temporarily fallen out
of favor for non-recurring or short-term reasons.
3. Equity securities of companies which appear undervalued in relation to
securities of other companies in the same industry.
In selecting these securities, Value Fund focuses on companies with strong
competitive positions, high levels of discretionary cash flow, solid financial
characteristics and market capitalizations of typically less than $1 billion
(also known as "small cap" stocks).
Although there is no formula as to the percentage of assets that may be invested
in any one type of security, Value Fund generally is primarily invested in
common stocks. Value Fund may also acquire preferred stocks, fixed income
securities, and
17
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
securities convertible into or which carry warrants to purchase common stocks,
or other equity interests.
IAI makes portfolio decisions based on its own research analysis supplemented by
research information provided by other sources. The basic orientation of Value
Fund's investment policies is such that many of the portfolio securities may not
be recommended by most research analysts.
Value Fund may invest in other securities and may employ certain other
investment techniques, as described in the section "Portfolio Securities and
Other Fund Investment Techniques." Please see the Prospectus section "Fund Risk
Factors" and the Statement of Additional Information section "Investment
Objectives and Policies" for a discussion of the risks associated with investing
in Value Fund.
PORTFOLIO SECURITIES
AND OTHER FUND
INVESTMENT TECHNIQUES
REPURCHASE AGREEMENTS
Each Fund is permitted to invest in repurchase agreements. A repurchase
agreement is a contract by which a Fund acquires the security ("collateral")
subject to the obligation of the seller to repurchase the security at a fixed
price and date (within seven days). A repurchase agreement may be construed as a
loan under relevant law. The Funds may enter into repurchase agreements with
respect to any securities which they may acquire consistent with their
investment policies and restrictions. The Funds' custodian will hold the
securities underlying any repurchase agreement in a segregated account. In
investing in repurchase agreements, the Funds' risk is limited to the ability of
the seller to pay the agreed-upon price at the maturity of the repurchase
agreement. In the opinion of IAI, such risk is not material, since in the event
of default, barring extraordinary circumstances, the Funds would be entitled to
sell the underlying securities or otherwise receive adequate protection under
federal bankruptcy laws for their interest in such securities. However, to the
extent that proceeds from any sale upon a default are less than the repurchase
price, the Funds could suffer a loss. In addition, the Funds may incur certain
delays in obtaining direct ownership of the collateral.
BORROWING
Each Fund may borrow from banks (or through reverse repurchase agreements) for
temporary or emergency purposes. If a Fund borrows money, its share price may be
subject to greater fluctuation until the borrowing is paid off. If a Fund makes
additional investments while borrowings are outstanding, this may be considered
a form of leverage. Each Fund does not intend its borrowings to exceed 5% of its
net assets.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in securities that are
considered illiquid because of the absence of a readily available market or due
to legal or contractual restrictions. However, certain restricted securities
that are not registered for sale to the general public but that can be resold to
institutional investors may be considered liquid pursuant to guidelines
18
<PAGE>
IAI MUTUAL FUNDS
-----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
adopted by the Board of Directors. The institutional trading market is
relatively new, and the liquidity of the Fund's investments could be impaired if
trading does not develop or declines.
FOREIGN SECURITIES
Each Fund may invest in securities of foreign issuers in accordance with its
investment objective and policies. In considering whether to purchase securities
of foreign issuers, IAI will consider the political and economic conditions in a
country, the prospect for changes in the value of its currency and the liquidity
of the investment in that country's securities markets. Each of Growth and
Income, Emerging Growth, Midcap Growth, Regional and Value Funds currently
intends to limit its investment in foreign securities denominated in foreign
currency and not publicly traded in the United States to no more than 10% of the
value of its total assets. Each of Capital Appreciation Fund and Growth Fund
intends to limit its investment in such securities to no more than 15% of the
value of its total assets.
VENTURE CAPITAL
Each Fund may invest in venture capital limited partnerships and venture capital
funds which, in turn, invest principally in securities of early stage,
developing companies. Investments in venture capital limited partnerships and
venture capital funds present a number of risks not found in investing in
established enterprises including the facts that such a partnership's or fund's
portfolio will be composed almost entirely of early-stage companies which may
lack depth of management and sufficient resources, which may be marketing a new
product for which there is no established market, and which may be subject to
intense competition from larger companies. Any investment in a venture capital
limited partnership or venture capital fund will lack liquidity, will be
difficult to value, and a Fund will not be entitled to participate in the
management of the partnership or fund. If for any reason the services of the
general partners of a venture capital limited partnership were to become
unavailable, such limited partnership could be adversely affected.
In addition to investing in venture capital limited partnerships and venture
capital funds, a Fund may directly invest in early-stage, developing companies.
The risks associated with investing in these securities are substantially
similar to the risks set forth above. A Fund will typically purchase equity
securities in these early-stage, developing companies; however from time to
time, a Fund may purchase non-investment grade debt securities in the form of
convertible notes. Capital Appreciation Fund currently intends to limit its
investments in securities described in this section to no more than 5% of its
net assets.
LEVERAGED BUYOUTS
Each Fund may invest in leveraged buyout limited partnerships and funds which,
in turn, invest in leveraged buyout transactions ("LBOs"). An LBO, generally, is
an acquisition of an existing business by a newly formed corporation financed
largely with debt assumed by such newly formed corporation to be later repaid
with funds generated from the acquired company. Since most LBOs are by nature
highly leveraged (typically with debt to equity
19
<PAGE>
IAI MUTUAL FUNDS
---------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
ratios of approximately 9 to 1), equity investments in LBOs may appreciate
substantially in value given only modest growth in the earnings or cash flow of
the acquired business. Investments in LBO partnerships and funds, however,
present a number of risks. Investments in LBO limited partnerships and funds
will normally lack liquidity and may be subject to intense competition from
other LBO limited partnerships and funds. Additionally, if the cash flow of the
acquired company is insufficient to service the debt assumed in the LBO, the LBO
limited partnership or fund could lose all or part of its investment in such
acquired company.
ADJUSTING INVESTMENT
EXPOSURE
Each Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as currency
exchange rates and broad or specific fixed-income market movements), or to
enhance potential gain. These strategies may be executed through the use of
derivative contracts. Such strategies are generally accepted as a part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, a Fund may purchase and
sell exchange-listed and over-the-counter put and call options on securities,
purchase and sell financial futures contracts and options thereon, and enter
into various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures.
There is no limit on Fund assets that can be used for hedging purposes, i.e., to
attempt to protect against possible changes in the market value of securities
held in or to be purchased for a Fund's portfolio resulting from securities
markets or currency exchange rate fluctuations, to protect a Fund's unrealized
gains in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Some may also be used to enhance potential gain although
no more than 5% of a Fund's net assets will be committed to techniques and
instruments entered into for non-hedging purposes. Any or all of these
investment techniques may be used at any time and in any combination, and there
is no particular strategy that dictates the use of one technique rather than
another, as use of any technique or instruments is a function of numerous
variables including market conditions. The ability of a Fund to utilize these
techniques and instruments successfully will depend on IAI's ability to predict
pertinent market movements, which cannot be assured. Each Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Such techniques and instruments involving financial
futures and options thereon will be purchased, sold or entered into only for
bona fide hedging, risk management or portfolio management purposes and not for
speculative purposes.
20
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
TEMPORARY DEFENSIVE POSITION
In unusual market conditions, when IAI believes a temporary defensive position
is warranted, each Fund may invest without limitation in investment-grade fixed
income securities, that is, securities rated within the four highest grades
assigned by Moody's Investors Service, Inc. or Standard & Poor's Corporation, or
money market securities (including repurchase agreements). Money market
securities will only be purchased if they have been given one of the two top
ratings by a major ratings service or, if unrated, are of comparable quality as
determined by IAI. Midcap Growth and Emerging Growth Funds, for temporary
defensive purposes, may also invest without limitation in common stocks of
larger, more established companies. If a Fund maintains a temporary defensive
position, investment income may increase and may constitute a large portion of a
Fund's return.
PORTFOLIO TURNOVER
The Funds 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. High turnover rates (100% or more), such as Capital
Appreciation Fund and Growth Fund experienced in their most recent fiscal years,
increase transaction costs and may increase taxable capital gains. The Funds'
historical portfolio turnover rates are set forth in the section "Financial
Highlights."
Further information regarding these and other securities and techniques is
contained in the Statement of Additional Information.
FUND RISK FACTORS
FOREIGN INVESTMENT
RISK FACTORS
Investments in foreign securities involve risks that are different in some
respects from investments in securities of U.S. issuers, such as the risk of
fluctuations in the value of the currencies in which they are denominated, the
risk of adverse political and economic developments and, with respect to certain
countries, the possibility of expropriation, nationalization or confiscatory
taxation or limitations on the removal of funds or other assets of a Fund.
Securities of some foreign companies are less liquid and more volatile than
securities of comparable domestic companies. There also may be less publicly
available information about foreign issuers than domestic issuers, and foreign
issuers generally are not subject to the uniform accounting, auditing and
financial reporting standards, practices and requirements applicable to domestic
issuers. Because a Fund can invest in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates may affect the value of securities in the portfolio. Foreign currency
xchange rates are determined by
21
<PAGE>
IAI MUTUAL FUNDS
-----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
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 a Fund's holdings of securities denominated in such currency
and, therefore, will cause an overall decline in a Fund's net asset value and
net investment income and capital gains, if any, to be distributed in U.S.
dollars to shareholders by a Fund. Delays may be encountered in settling
securities transactions in certain foreign markets, and a Fund will incur costs
in converting foreign currencies into U.S. dollars. Custody charges are
generally higher for foreign securities.
RISKS ASSOCIATED WITH
ADJUSTING INVESTMENT
EXPOSURE
The techniques and instruments described in the section "Adjusting Investment
Exposure", including derivative contracts, have risks associated with them
including possible default by the other party to the transaction, illiquidity
and, to the extent IAI's view as to certain market movements is incorrect, the
risk that the use of such techniques and instruments could result in losses
greater than if they had not been used. Use of put and call options may result
in losses to a Fund, force the sale or purchase of portfolio securities at
inopportune times or for prices higher than (in the case of put options) or
lower than (in the case of call options), current market values, limit the
amount of appreciation a Fund can realize on its investments or cause a Fund to
hold a security it might otherwise sell. The use of currency transactions can
result in a Fund incurring losses as a result of a number of factors including
the imposition of exchange controls, suspension of settlements or the inability
to deliver or receive a specified currency. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of a Fund creates the possibility that losses on
the hedging instrument may be greater than gains in the value of a Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may not have markets. As a
result, in certain markets, a Fund might not be able to close out a transaction
without incurring substantial losses, if at all. Although the use of futures
contracts and options transactions for hedging should tend to minimize the risk
of loss due to a decline in the value of the hedged position, at the same time
they tend to limit any potential gain which might result from an increase in
value of such position. Finally, the daily variation margin requirements for
futures contracts would create a greater ongoing potential financial risk than
would purchases of options, where the exposure is limited to the cost of the
initial premium. Losses resulting from the use of these techniques would reduce
net asset value, and possibly income, and such losses can be greater than if the
techniques and instruments had not been utilized.
22
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
SPECIAL RISK FACTORS
ASSOCIATED WITH INVESTING
IN SMALL COMPANIES
Investing in small companies involves greater risk than is customarily
associated with investments in larger, more established companies due to the
greater business risks of small size, limited markets and financial resources,
narrow product lines and the frequent lack of depth of management. The
securities of small companies are often traded over-the-counter and may not be
traded in volumes typical on a national securities exchange. Consequently, the
securities of small companies may have limited market stability and may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or the market averages in general. Therefore, shares
of Capital Appreciation, Emerging Growth, and Value Funds are subject to greater
fluctuation in value than shares of a conservative equity fund or of a fund
which invests entirely in more established stocks. Capital Appreciation Fund
Emerging Growth Fund and Value Fund will each attempt to reduce the volatility
of its share price by diversifying its investments among many companies and
different industries.
SPECIAL RISK FACTORS
ASSOCIATED WITH INVESTING
IN REGIONAL FUND
The objective of capital appreciation along with the policy of concentrating
equity investments in the Eight State Region means that the assets of Regional
Fund will generally be subject to greater risk than may be involved in investing
in securities which do not have appreciation potential or which have more
geographic diversity. For example, Regional Fund's net asset value could be
adversely affected by economic, political, or other developments having an
unfavorable impact upon the Eight State Region; moreover, because of geographic
limitation, Regional Fund may be less diversified by industry and company than
other funds with a similar investment objective and no such geographic
limitation.
SPECIAL RISK FACTORS
ASSOCIATED WITH INVESTING
IN VALUE FUND
In selecting securities judged to be undervalued, IAI will be exercising
opinions and judgments which may be contrary to those of the majority of
investors. In certain instances, such opinions and judgments will involve the
risks of either:
(a) a correct judgment by the majority, in which case losses may be incurred or
profits may be limited; or
(b) a long delay before majority recognition of the accuracy of IAI's judgment,
in which case capital invested by Value Fund in an individual security or group
of securities may be nonproductive for an extended period. Generally, it is
expected that if a Value Fund investment is "nonproductive" for more than two to
three years, it will be sold.
In many instances, the selection of undervalued securities for purchase by Value
Fund may involve limited risk of capital loss because such lack of investor
recognition is already reflected in the price of the securities at the time of
purchase.
23
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
It is anticipated that some of the portfolio securities of Value Fund may not be
widely traded, and that Value Fund's position in such securities may be
substantial in relation to the market for the securities. Accordingly, it would
under certain circumstances be difficult for Value Fund to dispose of such
portfolio securities at prevailing market prices in order to meet redemptions.
Value Fund may, when management deems it appropriate, maintain a reserve in
liquid assets which it considers adequate to meet anticipated redemptions.
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 a Fund's investment
strategy effectively. As a result, a Fund may fail to achieve its stated
objective.
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. Each Fund is a diversified investment company and has a fundamental
policy that, with respect to 75% of its total assets, it may not invest more
than 5% of its total assets in any one issuer. Each Fund, also as fundamental
policies, may not invest 25% or more of its assets in any one industry and may
borrow only for temporary or emergency purposes in an amount not exceeding
one-third of its total assets. Please refer to the Statement of Additional
Information for a further discussion of each Fund's investment restrictions.
MANAGEMENT
Capital Appreciation Fund (created November 8, 1995), Emerging Growth Fund
(created April 30, 1991) and Midcap Growth Fund (created February 7, 1992) are
separate portfolios represented by separate classes of common stock of IAI
Investment Funds VI, Inc. Growth Fund (created February 10, 1993) is a separate
portfolio represented by a separate class of common stock of IAI Investment
Funds II, Inc. Growth and Income Fund (created December 2, 1970) is a separate
portfolio represented by a separate class of common stock of IAI Investment
Funds VII, Inc. Regional Fund (created February 1, 1980) is a separate portfolio
represented by a separate class of common stock of IAI Investment Funds IV, Inc.
Value Fund (created August 7, 1987) is a separate portfolio represented by a
separate class of common stock of IAI Investment Funds VIII, Inc. Each of these
companies is a Minnesota corporation authorized to issue its shares of common
stock in more than one series. Under Minnesota law, each Fund's Board of
Directors is generally responsible for the overall operation and management of
such Fund. IAI serves as the investment adviser and manager of the Funds. 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
24
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
and individuals, having total assets in excess of $16 billion. IAI's ultimate
corporate parent is Lloyds TSB Group plc, a publicly-held financial services
organization headquartered in London, England. Lloyds TSB Group plc is one of
the largest personal and corporate financial services groups in the United
Kingdom and is engaged in a wide range of activities including commercial and
retail banking. The address of IAI is that of the Funds.
Each Fund has entered into a written agreement with IAI (the "Management
Agreement"), under which 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. 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 the
equivalent amount.
Pursuant to the Management Agreement, each Fund paid the following Management
Fee for the fiscal year ended March 31, 1997.
<TABLE>
<CAPTION>
<S> <C>
Capital Appreciation Fund 1.25%*
Emerging Growth Fund 1.19%
Growth Fund 1.25%
Growth and Income Fund 1.25%
Midcap Growth Fund 1.25%
Regional Fund 1.21%
Value Fund 1.25%
--------------------------------------------
*Pursuant to IAI's voluntary waiver of Management
Fees in excess 1.25% of the Fund's average daily
net assets.
</TABLE>
Because IAI is paying each Fund's operating expenses, these fees represent each
Fund's total expenses. With respect to certain of the services for which it is
responsible under the Management Agreements, IAI may also pay qualifying
broker-dealers, financial institutions and other entities for providing such
services to Fund shareholders.
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
team leads for each Fund are as follows:
Martin Calihan has responsibility for the management of Capital Appreciation
Fund. Mr. Calihan is a Vice President and has served as an equity analyst for
IAI since 1992. Before joining IAI, Mr. Calihan was an equity analyst with
Morgan Stanley and Company from 1991 to 1992, and with State Street Research
management from 1990 to 1991. Mr. Calihan has managed Capital Appreciation Fund
since its inception.
25
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
David Himebrook has responsibility for the management of Emerging Growth Fund.
Mr. Himebrook, an IAI Vice President and equity portfolio manager, has been
involved in the management of the Fund since November 1994. Prior to that time
Mr. Himebrook had been employed as an equity portfolio manager by Lutheran
Brotherhood since 1987.
Mark Hoonsbeen has responsibility for the management of Regional Fund and Midcap
Growth Fund. Mr. Hoonsbeen is a Vice President and has managed Regional Fund
since he joined IAI in 1994 and Midcap Growth Fund since February 1997. Before
joining IAI, Mr. Hoonsbeen served as an equity portfolio manager for the St.
Paul Companies Inc. from 1986 to 1994.
Mr. Hoonsbeen and David McDonald have responsibility for the management of
Growth Fund. Mr. McDonald has managed Growth Fund since September 1994, when he
joined IAI as a Vice President and equity portfolio manager. Before joining IAI,
Mr. McDonald was a Managing Director of Wessels Arnold & Henderson from 1989 to
1994 and an Associate Portfolio Manager with IDS Financial Services from 1986 to
1989. Mr. Hoonsbeen has managed Growth Fund since February 1997.
Donald Hoelting has responsibility for the management of Growth and Income Fund
and Value Fund. Mr. Hoelting has managed each Fund since August 1996. Mr.
Hoelting is a Vice President and has served as an equity portfolio manager of
IAI since joining IAI in April 1996. Prior to joining IAI, Mr. Hoelting was
Chief Investment Officer and Portfolio Manager for Jefferson National Bank and
Trust from 1986 to 1996.
R. David Spreng has been responsible for Fund investments in restricted
securities, including equity and limited partnership interests in privately-held
companies and investment partnerships, since 1993. Mr. Spreng is a Senior Vice
President and has served IAI in several capacities since 1989.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., IAI may consider sales of shares of a Fund as a factor
in the selection of broker-dealers to execute a Fund's securities transactions.
INVESTMENT
PERFORMANCE
From time to time the Funds may advertise performance data including monthly,
quarterly, yearly or cumulative total return and average annual total return
figures. All such figures are based on historical earnings and performance and
are not intended to be indicative of future performance. The investment return
on and principal value of an investment in a Fund will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
Total return is the change in value of an investment in a Fund over a given
period, assuming reinvestment of any dividends from ordinary income or 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.
26
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
For additional information regarding the calculation of such total return
figures, see "Investment Performance" in the Statement of Additional
Information. Further information about the performance of each Fund is contained
in each Fund's Annual Report to shareholders which may be obtained without
charge from each Fund.
Comparative performance information may be used from time to time in advertising
or marketing a Fund's shares, including data on the performance of other mutual
funds, indexes or averages of other mutual funds, indexes of related financial
assets or data, and other competing investment and deposit products available
from or through other financial institutions. The composition of these indexes,
averages or products differs from that of the Funds. The comparison of a Fund to
an alternative investment should be made with consideration of differences in
features and expected performance. A Fund may also note its mention in
newspapers, magazines, or other media from time to time. The Funds assume no
responsibility for the accuracy of such data. For additional information on the
types of indexes, averages and periodicals that might be utilized by the Funds
in advertising and sales literature, see the section "Investment Performance" in
the Statement of Additional Information.
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 per share ("NAV") as of
the close of business of the NYSE, normally 3 p.m. Central time.
A Fund's NAV is the value of a single share. The NAV is computed by adding up
the value of a Fund's investments, cash, and other assets, subtracting its
liabilities, and then dividing the result by the number of shares outstanding.
A Fund's investments with remaining maturities of 60 days or less at the initial
purchase date 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.
27
<PAGE>
IAI MUTUAL FUNDS
---------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
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 in connection with the purchase of Fund shares.
Shares may be purchased for cash or in exchange for securities which are
permissible investments of a Fund, subject to IAI's discretion and its
determination that the securities are acceptable. Securities accepted in
exchange will be valued on the basis of market quotations or, if market
quotations are not available, by a method that IAI believes accurately reflects
fair value. In addition, securities accepted in exchange are required to be
liquid securities that are not restricted as to transfer.
The minimum initial investment to establish a retail account with the IAI Mutual
Funds is $5,000. Such initial investment may be allocated among a Fund and other
IAI Mutual Funds as desired, provided that no less than $1,000 is allocated to
any one fund. The minimum initial investment for IRA accounts is $2,000,
provided that the minimum amount that may be allocated to one fund is $1,000.
Once the account minimum has been met, subsequent purchases can be made in a
Fund for $100 or more. Such minimums may be waived for participants in the IAI
Investment Club.
Investors may satisfy the minimum investment requirement by participating in the
STAR Program. Participation in the STAR Program requires an initial investment
of $1,000 per Fund and a commitment to invest an aggregate of $5,000 within 24
months. If a STAR Program participant does not invest an aggregate of $5,000 in
the IAI Mutual Funds within 24 months, IAI may, at its option, redeem such
shareholder's interest and remit such amount to the shareholders. Investors
wishing to participate in the STAR Program should contact the Fund to obtain a
STAR Program application.
To purchase shares, forward the completed application and a check payable to
"IAI Funds" to a Fund. Third party checks will not be accepted for initial
account investments. Upon receipt, your account will be credited with the number
of full and fractional shares which can be purchased at the net asset value next
determined after receipt of the purchase order by 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 a Fund.
All correspondence relating to purchase of shares should be directed to the
office of the IAI Mutual Funds, P.O. Box 357, Minneapolis, Minnesota 55440, or,
if using overnight delivery, to 3700 First Bank
28
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
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.
BANK WIRE PURCHASES
Shares may be purchased by having your bank wire federal funds (funds of the
Federal Reserve System) to Norwest Bank Minnesota.
Wire orders will be accepted only on days your bank, the transfer agent, a Fund
and Norwest Bank Minnesota are open for business. The payment must be received
by a Fund before the close of business to be credited to your account that day.
Otherwise, it will be processed the next business day. The wire purchase will
not be considered made until the wired amount is received and the purchase is
accepted by such Fund. If the wire order does not contain the information stated
below, such Fund may reject it. Any delays that may occur in wiring federal
funds, including delays in processing by the banks, are not the responsibility
of such Fund or the transfer agent.
You must pay any charges assessed by your bank for the wire service. If a wire
order is rejected, all money received by the Fund, less any costs incurred by
the Fund or the transfer agent in rejecting it, will be returned promptly.
If the wire order is for a new account, you should call IAI Shareholder Services
at 1-800-945-3863 to advise them of the investment and to obtain an account
number and instructions. The wire should be sent to: Norwest Bank Minnesota,
Routing Number 091000019, Minneapolis, Minnesota, Credit to: IAI Mutual Funds
Account Number 6355002264. It should state the following:
"For further credit to personal account # ______________ (your account number)
for ________________________ (your name) and __________________ (Fund name)."
A completed application must be sent to and received by the Fund before the wire
is sent.
If the wire order is an addition to an existing account, the wire must include
the information required above for the new accounts. As soon as the wire is
sent, you should call IAI Shareholder Services, as described above, and advise
them of your name, your account number and the name of the bank transmitting the
federal funds.
RETIREMENT PLANS
Shares of the 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 IAI Mutual Fund Shareholder Services at
1-800-945-3863. All retirement plans involve a long-term commitment of assets
and are subject to various legal requirements and restrictions. The legal and
tax implications may vary according to the circumstances of the individual
investor. Therefore, you are urged to consult with an attorney or tax advisor
prior to the establishment of such a plan.
29
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
AUTOMATIC
INVESTMENT PLAN
Investors may arrange to make regular investments of $100 or more per Fund on a
monthly or twice a month basis, effective as of the 4th and/or the 18th day of
each month (or the next business day), through automatic deductions from their
checking or savings accounts. Such investors may, of course, terminate their
participation in the Automatic Investment Plans at any time upon written notice
to a Fund. Any changes or instructions to terminate existing Automatic
Investment Plan must be received 30 days preceding the day on which the change
or termination is to take place. Investors interested in participating in the
Automatic Investment Plan should complete the Automatic Investment Plan
application and return it to the Funds.
REDEMPTION OF SHARES
Registered holders of Fund shares may at any time require a Fund to redeem their
shares upon their written request. All correspondence relating to the redemption
of shares should be directed to the office of IAI Mutual Funds, P.O. Box 357,
Minneapolis, Minnesota 55440. Shareholders may redeem shares by phone, subject
to a limit of $50,000, provided such shareholders have authorized such Fund to
accept telephone instructions. For assistance in redeeming shares by phone,
please contact the IAI Mutual Funds Shareholder Services at 1-800-945-3863.
Certificates presented for redemption must be endorsed on the back with the
signature of the person whose name appears on the certificate and must be
signature guaranteed. If no certificate has been issued, redemption instructions
must be signed by the person(s) in whose name the shares are registered. If the
redemption proceeds are to be paid or mailed to any person other than the
shareholder of record 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.
For shareholders who established receiving proceeds by Federal Funds Wire at the
time they opened their account, telephone instructions will be accepted for
redemption of amounts up to $50,000 ($1,000 Minimum) and proceeds will be wired
on the next business day to a pre-designated bank account. Wire redemption
requests will only be processed on days your bank, the transfer agent, the
Portfolios and Norwest Bank Minnesota are open for business.
In order to add this feature to an existing account or to change existing bank
account information, please submit a letter of instructions including your bank
information to IAI Shareholder Services at the address listed in the section
"Additional Information." The letter must be signed by all registered owners,
and their signatures must be guaranteed.
30
<PAGE>
IAI MUTUAL FUNDS
---------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
Your account will be charged a fee of $10 each time redemption proceeds are
wired to your bank. Your bank may also charge you a fee for receiving a Federal
Funds Wire.
Neither the transfer agent nor any of the Funds can be responsible for the
efficiency of the Federal Funds wire system or the shareholder's bank.
The redemption proceeds received by the investor are based on the net asset
value next determined after redemption instructions in good order are received
by 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.
A Fund will not send redemption proceeds until checks (including certified
checks or cashiers checks) received in payment for shares have cleared, which
may take up to ten days or more.
Following a redemption or transfer request, if the value of a shareholder's
interest in 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 other IAI Mutual Funds. 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 IAI Mutual 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 IAI Mutual Fund per calendar year per
account. Accounts under common ownership or control, including accounts with the
same taxpayer identification number, will be counted together for purposes of
the four exchange limit. 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
31
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
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 exchanges of $100 or more between any of
the IAI Mutual Funds on a monthly basis. Exchanges will take place at the
closing price of the fifth day of each month (or the next business day).
Shareholders are responsible for making sure sufficient shares exist in the Fund
account from which the exchange takes place. If there are not sufficient funds
in the Fund account to meet the requested exchange amount, the Automatic
Exchange Plan will be suspended. Shareholders may not close Fund accounts
through the Automatic Exchange Plan. Investors interested in participating in
the Automatic Exchange Plan should complete the Automatic Exchange Plan portion
of their application. For assistance in completing the application contact IAI
Mutual Fund Shareholder Services at 1-800-945-3863.
AUTHORIZED TELEPHONE
TRADING
Investors can transact account exchanges and redemptions via the telephone by
completing the Authorized Telephone Trading section of the 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. Telephone redemption proceeds are
subject to a $50,000 limit and must be made payable to the owner(s) of record
and delivered to the address of record.
In order to confirm that telephone instructions for redemptions and exchanges
are genuine, the Funds have 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 these reasonable procedures are followed, none of
the Funds, their transfer agent, IAI, or any
32
<PAGE>
IAI MUTUAL FUNDS
-----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
affiliated broker/dealer will be liable for any loss, injury, damage, or expense
for acting upon telephone instructions believed to be genuine, and will
otherwise not be responsible for the authenticity of any telephone instructions,
and, accordingly, the investor bears the risk of loss resulting from telephone
instructions. All telephone redemptions and exchange requests will be tape
recorded. Telephone redemptions are not permitted for IRA or Simplified Employee
Pension ("SEP") accounts. For redemptions from these accounts, please contact
IAI Mutual Fund Shareholder Services at 1-800-945-3863 for instructions.
SYSTEMATIC CASH
WITHDRAWAL PLAN
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. Payments under the plan will be
monthly or quarterly in amounts of $100 or more. Shares will be sold with the
closing price of the 15th of the applicable month (or the next business day). To
provide funds for payment, such Fund will redeem as many full and fractional
shares as necessary at the redemption price, which is net asset value. The
holder of a Systematic Cash Withdrawal Plan must have income dividends and any
capital gains distributions reinvested in full and fractional shares at net
asset value.
Payments under this plan, unless pursuant to a retirement plan, should not be
considered income. Withdrawal payments may exceed dividends and distributions
and, to this extent, there will be a reduction in the investor's equity. An
investor should also understand that this plan cannot insure profit, nor does it
protect against any loss in a declining market. Careful consideration should be
given to the amount withdrawn each month. Excessive withdrawals could lead to a
serious depletion of equity, especially during periods of declining market
values. Fund management will be available for consultation in this matter.
Plan application forms are available through the Funds. If you would like
assistance in completing the application contact IAI Mutual Fund Shareholder
Services at 1-800-945-3863.
DIVIDENDS, DISTRIBUTIONS
AND TAX STATUS
The policy of the Funds is to pay dividends from net investment income
semiannually and to make distributions of realized capital gains, if any,
annually. However, provisions in the Internal Revenue Code of 1986, as amended
(the "Code"), may result in additional net investment income and capital gains
distributions by a 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 the Fund; Capital Gains
Reinvestment--your capital gain distributions will be automatically reinvested,
but your income dividend distributions will be paid in cash; and Cash--your
33
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value Fund
income dividends and capital gain distributions will be paid in cash.
Distributions taken in cash can be sent via check or transferred directly to
your account at any bank, savings and loan or credit union that is a member of
the Automated Clearing House (ACH) network. UNLESS DIRECTED OTHERWISE BY THE
SHAREHOLDER, EACH FUND WILL AUTOMATICALLY REINVEST ALL SUCH DISTRIBUTIONS INTO
FULL AND FRACTIONAL SHARES AT NET ASSET VALUE.
The Funds' Directed Dividend service allows you to invest your dividends and/or
capital gain distributions directly into another IAI Mutual Fund. Contact IAI
Mutual Fund Shareholder Services at 1-800-945-3863 for details.
Each Fund intends to qualify for tax purposes as a regulated investment company
under Subchapter M of the Internal Revenue 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 dividends; long-term capital gain distributions
designated as capital gain dividends are taxed as long-term capital gains.
Upon redemption of shares of a Fund, the shareholder will generally recognize a
capital gain or loss equal to the difference between the amount realized on the
redemption and the shareholder's adjusted basis in such shares. Such gain or
loss will be long-term if the shares have been held for more than one year.
Under the Code, the deductibility of capital losses is subject to certain
limitations.
Annually, IAI will send you and the IRS a statement showing the amount of each
taxable distribution you received in the previous year. Whenever you sell shares
of a Fund, IAI will send you a confirmation statement showing how many shares
you sold and at what price. You will also receive an account statement quarterly
and a consolidated transaction statement annually. However, it is up to you or
your tax preparer to determine whether this sale resulted in a capital gain and,
if so, the amount of tax to be paid. Be sure to keep your account statements;
the information they contain will be essential in calculating the amount of your
capital gains.
The foregoing relates to federal income taxation as in effect as of the date of
this Prospectus. For a more detailed discussion of the federal income tax
consequences of investing in shares of a Fund, see "Tax Status" in the Statement
of Additional Information.
34
<PAGE>
IAI MUTUAL FUNDS
---------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value 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 the 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 a Fund may demand a regular meeting of shareholders of such Fund by written
notice of demand given to the chief executive officer or the chief financial
officer of such 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 such Fund if requested in writing by
holders of not less than 10% of the outstanding shares of such Fund.
The shares of each Fund are transferable by endorsement of the certificate if
held by the shareholder, or if the certificate is held by a Fund, by delivery to
such Fund of transfer instructions. Transfer instructions or certificates should
be delivered to the office of a Fund. Each Fund is not bound to recognize any
transfer until it is recorded on the stock transfer books maintained by such
Fund.
35
<PAGE>
IAI MUTUAL FUNDS
-----------------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Growth and Income Fund, IAI Midcap Growth Fund, IAI Regional Fund,
IAI Value 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 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. Norwest employs foreign
subcustodians and depositories, which were approved by the Funds' Board of
Directors in accordance with the rules and regulations of the Securities and
Exchange Commission, for the purpose of providing custodial services for a
Fund's assets held outside of the United States. IAI acts as each Fund's
transfer agent, dividend disbursing agent and IRA Custodian, at P.O. Box 357,
Minneapolis, Minnesota.
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 a Fund at the telephone number or
mailing address listed on the inside back cover of this Prospectus.
36
<PAGE>
TO OPEN
AN ACCOUNT
1.800.945.3863
612.376.2700
P.O. Box 357
Minneapolis, MN 555440
OVERNIGHT
DELIVERY
ADDRESS
3700 First Bank Place
601 Second Avenue South
Minneapolis, MN 55402
<PAGE>
[LOGO]
MUTUAL FUNDS
INVESTMENT ADVISERS, INC.
3700 FIRST BANK PLACE, P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440-0357
612.376.2737
800.945.3863
612.376.2700
<PAGE>
[LOGO]
IAI MUTUAL FUNDS
IAI CAPITAL APPRECIATION FUND
IAI EMERGING GROWTH FUND
IAI GROWTH FUND
IAI GROWTH AND INCOME FUND
IAI MIDCAP GROWTH FUND
IAI REGIONAL FUND
IAI VALUE FUND
Statement of Additional Information
dated August 1, 1997
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to a Prospectus dated August 1,
1997, 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).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Page
INVESTMENT OBJECTIVES AND POLICIES...........................................2
INVESTMENT RESTRICTIONS......................................................9
INVESTMENT PERFORMANCE.......................................................12
MANAGEMENT...................................................................14
CUSTODIAL SERVICE............................................................22
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE...........................22
CAPITAL STOCK................................................................23
NET ASSET VALUE AND PUBLIC OFFERING PRICE....................................27
PURCHASES AND REDEMPTIONS IN KIND............................................28
TAX STATUS...................................................................28
LIMITATION OF DIRECTOR LIABILITY.............................................29
FINANCIAL STATEMENTS.........................................................30
</TABLE>
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>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of IAI Capital Appreciation Fund,
IAI Emerging Growth Fund, IAI Growth Fund, IAI Growth and Income Fund, IAI
Midcap Growth Fund, IAI Regional Fund and IAI Value Fund (the "Funds"), are
summarized on the front page of the Prospectus and in the text of the Prospectus
under "Investment Objectives and Policies." Investors should understand that all
investments have risks. There can be no guarantee against loss resulting from an
investment in the Funds, and there can be no assurance that the Fund's
investment policies will be successful, or that its investment objective will be
attained. Certain of the investment practices of the 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, a 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.
REVERSE REPURCHASE AGREEMENTS
Each Fund may invest in reverse repurchase agreements as a form of
borrowing. 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, a Fund will maintain appropriate
liquid assets in a segregated custodial account to cover its obligation under
the agreement. A Fund will enter into reverse repurchase agreements only with
parties whose creditworthiness has been found satisfactory by IAI, the Fund's
investment adviser and manager. As a result, such transactions may increase
fluctuations in the market value of a Fund's assets and may be viewed as a form
of leverage. Presently, the Funds do not intend to invest more than 5% of its
net assets in reverse repurchase agreements.
SECURITIES OF FOREIGN ISSUERS
Investing in foreign securities may result in greater risk than that
incurred by investing in domestic securities. There is generally less publicly
available information about foreign issuers comparable to reports and ratings
that are published about companies in the United States. Also, foreign issuers
are not subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to United
States companies.
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<PAGE>
It is contemplated that most foreign securities will be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign companies are less liquid and
more volatile than securities of comparable United States companies. Similarly,
volume and liquidity in most foreign bond markets is less than in the United
States and at times volatility of price can be greater than in the United
States. Commissions on foreign stock exchanges are generally higher than
commissions on United States exchanges, although the Fund will endeavor to
achieve the most favorable net results on its portfolio transactions. There is
generally less government supervision and regulation of foreign stock exchanges,
brokers and listed companies than in the United States.
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 a
Fund, political or social instability, or diplomatic developments which could
affect United States investments in those countries. Moreover, individual
foreign economies may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
IAI is not aware at this time of the existence of any investment or
exchange control regulations which might substantially impair the operations of
a Fund as described in the Prospectus and this Statement of Additional
Information. It should be noted, however, that this situation could change at
any time.
The dividends and interest payable on certain of a Fund's foreign portfolio
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to a Fund's shareholders. The
expense ratio of a Fund should not be materially affected by such Fund's
investment in such foreign securities.
ILLIQUID SECURITIES
Each Fund may also invest up to 15% of its net assets in securities that
are considered illiquid because of the absence of a readily available market or
due to legal or contractual restrictions. However, certain restricted securities
that are not registered for sale to the general public that can be resold to
institutional investors may be considered liquid pursuant to guidelines adopted
by the Board of Directors. In the case of a Rule 144A Security, such security is
deemed to be liquid if:
(1) IAI reasonably expects to be able to resell the security to a qualified
institutional buyer, as defined in paragraph (a)(1) of Rule 144A, who is aware
of the Fund's reliance upon Rule 144A in selling the security without
registration, as required by paragraph (d)(2) of Rule 144A;
(2) the Rule 144A Security is not (a) of the same class as securities
listed on any national securities exchange or quoted in NASDAQ as determined
under paragraph (d)(3)(i) of Rule 144A, or (b) a security of a registered
investment company (other than a closed-end investment company); and
(3) the issuer (a) is a foreign government eligible to register securities
under Schedule B of the Securities Act of 1933, (b) is a company that files
periodic reports under the Securities Act of 1934 on Forms 8-K, 10-Q, 10-K or
20-F or provides information under Rule 12g3-2(b) thereunder, or (c) has agreed
in writing to provide the holder and any prospective purchaser of the Rule 144A
Security with reasonably current financial information as required under
paragraph (d)(4)(i) of Rule 144A.
-3-
<PAGE>
Other securities are deemed to be liquid if IAI determines that the
security can be disposed of within seven days in the ordinary course of business
at approximately the amount at which the Funds have valued the instrument for
purposes of calculating a Fund's net asset value. In making this determination,
IAI will consider such factors as may be relevant to a Fund's ability to dispose
of the security, including but not limited to, the following factors (none of
which, standing alone, would necessarily be determinative):
1. the frequency of trades and quotes for the security;
2. the number of dealers willing to purchase or sell the security and the
number of potential purchasers;
3. dealer undertakings to make a market in the security; and
4. the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of transfer).
It is not possible to predict with assurance the maintenance of an
institutional trading market for such securities and the liquidity of a Fund's
investments could be impaired if trading declines.
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.
SWAP AGREEMENTS
Swap agreements can be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease a Fund's
exposure to long- or short-term interest rates (in the U.S. or abroad), foreign
currency values, mortgage securities, corporate borrowing rates, or other
factors such as security prices or inflation rates. Swap agreements can take
many different forms and are known by a variety of names. A Fund is not limited
to any particular form of swap agreement if IAI determines it is consistent with
such Fund's investment objective and policies.
Swap agreements will tend to shift a Fund's investment exposure from one
type of investment to another. For example, if a Fund agrees to exchange
payments in dollars for payments in foreign currency, the swap agreement would
tend to decrease a Fund's exposure to U.S. interest rates and increase its
exposure to foreign currency and interest rates. Depending on how they are used,
swap agreements may increase or decrease the overall volatility of a Fund's
investments and its share price.
-4-
<PAGE>
The most significant factor in the performance of swap agreements is the
change in the specific interest rate, currency, or other factors that determine
the amounts of payments due to and from a Fund. If a swap agreement calls for
payments by a Fund, such Fund must be prepared to make such payments when due.
In addition, if the counterparty's creditworthiness declines, the value of a
swap agreement would be likely to decline, potentially resulting in losses. A
Fund expects to be able to eliminate its exposure under swap agreements either
by assignment or other disposition, or by entering into an offsetting swap
agreement with the same party or a similar creditworthy party.
Each Fund will maintain appropriate liquid assets in a segregated custodial
account to cover its current obligations under swap agreements. If a Fund enters
into a swap agreement on a net basis, it will segregate assets with a daily
value at least equal to the excess, if any, of a Fund's accrued obligations
under the swap agreement over the accrued amount such Fund is entitled to
receive under the agreement. If a Fund enters into a swap agreement on other
than a net basis, it will segregate assets with a value equal to the full amount
of such Fund's accrued obligation under the agreement.
INDEXED SECURITIES
Each 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 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 a Fund's investment policies, depending on
the individual characteristics of the securities. Indexed securities may be more
volatile than the underlying instruments. Presently, the Funds do not intend to
invest more than 5% of its net assets in Indexed Securities.
FOREIGN CURRENCY TRANSACTIONS
Each 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.
Such Funds may use currency forward contracts to manage currency risks and
to facilitate transactions in foreign securities. The following discussion
summarizes the principal currency management strategies involving forward
contracts that could be used by the Funds.
-5-
<PAGE>
In connection with purchases and sales of securities denominated in foreign
currencies, a 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 a Fund's foreign investments. A 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.
Each Fund may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For example, if a
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. A 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, each Fund will segregate
assets to cover currency forward contracts, if any, whose purpose is essentially
speculative. Each 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 a Fund's investment exposure to changes in currency exchange rates, and
could result in losses to a Fund if currencies do not perform as IAI
anticipates. For example, if a currency's value rose at a time when IAI had
hedged a Fund by selling that currency in exchange for dollars, such Fund would
be unable to participate in the currency's appreciation. If IAI hedges currency
exposure through proxy hedges, a 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 a Fund's exposure to a foreign
currency, and that currency's value declines, such Fund will realize a loss.
There is no assurance that IAI's use of forward currency contracts will be
advantageous to a Fund or that it will hedge at an appropriate time. The
policies described in this section are non-fundamental policies of the Funds.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS
Each 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. Each Fund intends to comply
with Section 4.5 of the regulations under the Commodity Exchange Act, which
limits the extent to which a Fund can commit assets to initial margin deposits
and option premiums.
The above limitation on a Fund's investments in futures contracts and
options, and such Fund's policies regarding futures contracts and options
discussed elsewhere in this Statement of Additional Information may be changed
as regulatory agencies permit. With respect to positions in commodity futures or
commodity option contracts which do not come within the meaning and intent of
bona fide hedging in the CFTC rules, the aggregate initial margin and premiums
required to establish such positions will not exceed five percent of the
liquidation value of the qualifying entity's portfolio, after taking into
account unrealized profits and unrealized losses on any such contracts it has
entered into; and, provided further, that in the case of an option that is
in-the-money amount may be excluded in computing such 5 percent.
-6-
<PAGE>
FUTURES CONTRACTS
When a Fund purchases a futures contract, it agrees to purchase a specified
underlying instrument at a specified future date. When a 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 a
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 a Fund's exposure to positive and negative price
fluctuations in the underlying instrument, much as if it had purchased the
underlying instrument directly. When a 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 a Fund's investment limitations. In the event of the bankruptcy of
an FCM that holds margin on behalf of a Fund, such Fund may be entitled to
return of margin owed to it only in proportion to the amount received by the
FMC's other customers, potentially resulting in losses to such Fund.
PURCHASING PUT AND CALL OPTIONS
By purchasing a put option, a 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, a 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. A 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, a Fund will lose the entire premium it paid. If a Fund
exercises the option, it completes the sale of the underlying instrument at the
strike price. A Fund may also terminate a put option position by closing it out
in the secondary market at its current price, if a liquid secondary market
exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium paid, plus related
transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to suffer
a loss if security prices do not rise sufficiently to offset the cost of the
option.
-7-
<PAGE>
WRITING PUT AND CALL OPTIONS
When a Fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
such Fund assumes the obligation to pay the strike price for the option's
underlying instrument if the other party to the option chooses to exercise it.
When writing an option on a futures contract a Fund would be required to make
margin payments to an FCM as described above for futures contracts. A 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 a Fund has written, however,
such Fund must continue to be prepared to pay the strike price while the option
is outstanding, regardless of price changes, and must continue to set aside
assets to cover its position. If security prices rise, a put writer would
generally expect to profit, although its gain would be limited to the amount of
the premium it received.
If security prices remain the same over time, it is likely that the writer
will also profit, because it should be able to close out the option at a lower
price. If security prices fall, the put writer would expect to suffer a loss.
This loss should be less than the loss from purchasing the underlying instrument
directly, however, because the premium received for writing the option should
mitigate the effects of the decline.
Writing a call option obligates a 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
A 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, a 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 a Fund's current or anticipated investments exactly. A Fund may invest
in options and futures contracts based on securities with different issuers,
maturities, or other characteristics from the securities in which it typically
invests, which involves a risk that the options or futures position will not
track the performance of such Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match a Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. A 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 a 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.
-8-
<PAGE>
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 a 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 a Fund to continue to hold a position until delivery
or expiration regardless of changes in its value. As a result, a Fund's access
to other assets held to cover its options or futures positions could also be
impaired.
OTC OPTIONS
Unlike exchange-traded options, which are standardized with respect to the
underlying instrument, expiration date, contract size, and strike price, the
terms of over-the-counter options (options not traded on exchanges) generally
are established through negotiation with the other party to the option contract.
While this type of arrangement allows a Fund greater flexibility to tailor an
option to its needs, OTC options generally involve greater credit risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.
OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES
Currency futures contracts are similar to forward currency exchange
contracts, except that they are traded on exchanges (and have margin
requirements) and are standardized as to contract size and delivery date. Most
currency futures contracts call for payment or delivery in U.S. dollars. The
underlying instrument of a currency option may be a foreign currency, which
generally is purchased or delivered in exchange for U.S. dollars, or may be a
futures contract. The purchaser of a currency call obtains the right to purchase
the underlying currency, and the purchaser of a currency put obtains the right
to sell the underlying currency.
The uses and risks of currency options and futures are similar to options
and futures relating to securities or indexes, as discussed above. A Fund may
purchase and sell currency futures and may purchase and write currency options
to increase or decrease its exposure to different foreign currencies. A 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 a Fund's investments. A currency hedge, for example,
should protect a yen-denominated security from a decline in the yen, but will
not protect a Fund against a price decline resulting from deterioration in the
issuer's creditworthiness. Because the value of a 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 a Fund's investments exactly over time.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS
Each 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 a Fund's assets could impede portfolio management or a Fund's
ability to meet redemption requests or other current obligations.
-9-
<PAGE>
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 a 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 each 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% of the
value of its total assets is represented by cash and cash items (including
receivables), Government securities, securities of other investment companies
and other securities for the purposes of this calculation limited in respect of
any one issuer to an amount not greater in value than 5% of the value of the
total assets of such management company and not more than 10% of the outstanding
voting securities of such issuer.
2. Purchase the securities of any issuer (other than "Government
securities" as defined under the 1940 Act) if, as a result, more than 25% of the
value of the Fund's total assets would be invested in the securities of
companies whose principal business activities are in the same industry.
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 guarantee positions in
futures, options, swaps or forward contracts, or segregating assets in
connection with such agreements or contracts.
To the extent the Fund engages in reverse repurchase agreements, because
such transactions are considered borrowing, reverse repurchase agreements are
included in the 33-1/3% limitation.
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.
-10-
<PAGE>
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.
For purposes of applying this restriction, "commodities" shall be deemed to
include commodity contracts.
8. Make loans to other persons except to the extent not inconsistent with
the 1940 Act or the Rules and Regulations of the Securities and Exchange
Commission. This limitation does not apply to purchases of commercial paper,
debt securities or repurchase agreements, or to the lending of portfolio
securities.
9. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases or sales
of securities and provided that margin payments in connection with transactions
in options, futures, swaps and forward contracts shall not be deemed to
constitute purchasing securities on margin.
10. Sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options, swaps and forward futures contracts are
not deemed to constitute selling securities short.
For purposes of applying this restriction, 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. 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 (other than Restriction 4) 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.
-11-
<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 a 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. Each Fund's historical portfolio turnover
rates are set forth in the Prospectus section "Financial Highlights".
INVESTMENT PERFORMANCE
Advertisements and other sales literature for each Fund may refer to
monthly, quarterly, yearly, cumulative and average annual total return. Each
such calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts. Each of
monthly, quarterly and yearly total return is computed in the same manner as
cumulative total return, as set forth below.
Cumulative total return is computed by finding the cumulative rate of
return over the period indicated in the advertisement that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
CTR = (ERV-P) 100
-----
P
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the period of
a hypothetical $1,000 payment made at the beginning
of such period; and
P = initial payment of $1,000
Average annual total return is computed by finding the average annual
compounded rates of return over the periods indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period of
a hypothetical $1,000 payment made at the beginning
of such period.
-12-
<PAGE>
The table below shows the yearly total return for the Funds for the periods
indicated:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Total Return
-----------------------------------------------------------------------------------------------------
Capital Emerging
Year Ended Appreciation Growth Growth Growth & Midcap Regional Value
12/31 Fund* Fund** Fund*** Income Fund Growth Fund**** Fund Fund
----- ----- ------ ------- ----------- --------------- ---- ---------
1986 -- -- -- 13.10% -- 24.60% 1.90%
1987 -- -- -- 15.50% -- 5.30% 14.10%
1988 -- -- -- 8.50% -- 18.60% 24.30%
1989 -- -- -- 29.80% -- 31.30% 22.60%
1990 -- -- -- -6.70% -- -0.30% -11.50%
1991 -- 23.60% -- 26.70% -- 35.40% 19.80%
1992 -- 22.40% -- 4.00% 15.00% 3.50% 11.90%
1993 -- 14.76% 0.99% 9.98% 22.85% 8.96% 22.08%
1994 -- 0.19% 0.66% -4.77% 5.65% 0.68% -9.08%
1995 -- 49.55% 23.17% 27.14% 26.09% 32.64% 24.39%
1996 -- 6.95% 15.35% 20.21% 16.58% 15.72% 21.87%
- ----------------------------------------------
<FN>
* Commenced operations on February 1, 1996
** Commenced operations on August 5, 1991
*** Commenced operations on August 6, 1993
**** Commenced operations on April 10, 1992
</FN>
</TABLE>
The average annual total returns of Capital Appreciation Fund for the
fiscal year ended March 31, 1997 and from inception through March 31, 1997 were
23.68% and 32.78%, respectively.
The average annual total returns of Emerging Growth Fund for the one and
five year periods ended March 31, 1997 and from inception through March 31, 1997
were (22.97%), 13.14% and 15.05%, respectively.
The average annual total returns of Growth Fund for the fiscal year ended
March 31, 1997 and from inception through March 31, 1997 were 8.42% and 9.78%,
respectively.
The average annual total returns of Growth and Income Fund for the one,
five and ten year periods ended March 31, 1997 were 13.34%, 11.01%, and 10.03%,
respectively.
The average annual total returns of Midcap Growth Fund for the fiscal year
ended March 31, 1997 and from inception through March 31, 1997 were 3.12% and
15.82%, respectively.
The average annual total returns of Regional Fund for the one, five and ten
year periods ended March 31, 1997 were 8.65%, 11.52% and 12.57%, respectively.
The average annual total returns of Value Fund for the one, five and ten
year periods ended March 31, 1997 were 5.85%, 9.76% and 10.11%, respectively.
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 indices, 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.
-13-
<PAGE>
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 Value Line Index and the Standard & Poor's Value Index;
(iv) the Callan Midcap Index, the Russell Midcap Index and the Standard & Poor's
Midcap Index; (v) the Russell 2500 Index, the Russell 2000 Growth Index and the
Russell 1000 Growth Index; (vi) the Standard & Poor's Growth Index; and (vii)
the performance of U.S. government and corporate bonds, notes and bills; (viii)
IAI Regional Index, an unmanaged index of the stocks of the 300 largest
companies (by market capitalization) located in the Eight State Region (as
defined in the Prospectus). (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>
<S> <C> <C> <C>
Name and Address Age Position Principal Occupation(s) During Past 5 Years
- ---------------- --- -------- -------------------------------------------
Noel P. Rahn* 58 Chairman of the Chief Executive Officer and a Director of IAI
3700 First Bank Place Board, President since 1974. Mr. Rahn is also Chairman and
P.O. Box 357 President of the other IAI Mutual Funds and of
Minneapolis, Minnesota 55440 LifeUSA Funds, Inc.
Madeline Betsch 54 Director Currently retired; until April 1994, was
19 South 1st Street Executive Vice President, Director of Client
Minneapolis, Minnesota 55401 Services, of CME-KHBB Advertising since May
1985, and prior thereto was a Vice President
with Campbell-Mithun, Inc. (advertising
agency) since February 1977.
-14-
<PAGE>
Name and Address Age Position Principal Occupation(s) During Past 5 Years
- ---------------- --- -------- -------------------------------------------
W. William Hodgson 72 Director Currently retired; served as information
1698 Dodd Road manager for the North Central Home Office of
Mendota Heights, Minnesota 55118 the Prudential Insurance Company of America
from 1961 until 1984.
George R. Long 67 Director Chairman of Mayfield Corp. (financial
29 Las Brisas Way consultants and venture capitalists) since
Naples, Florida 33963 1973.
J. Peter Thompson 66 Director Grain farmer in southwestern Minnesota since
Route 1 1974. Prior to that, Mr. Thompson was
Mountain Lake, Minnesota 56159 employed by Paine Webber, Jackson & Curtis,
Incorporated, (a diversified financial services
concern), most recently as Senior Vice President
and General Partner.
Charles H. Withers 70 Director Currently retired; was Editor of the Rochester
Rochester Post Bulletin Post-Bulletin, Rochester, Minnesota from 1960
P.O. Box 6118 through March 31, 1980.
Rochester, Minnesota 55903
Archie C. Black, III 35 Treasurer Senior Vice President and Chief Financial
3700 First Bank Place Officer of IAI and has served IAI in several
P.O. Box 357 capacities since 1987. Mr. Black is also
Minneapolis, Minnesota 55440 Treasurer of the other IAI Mutual Funds and of
LifeUSA Funds, Inc.
William C. Joas 34 Secretary Vice President of IAI and has served as an
3700 First Bank Place attorney for IAI since 1990. Mr. Joas is also
P.O. Box 357 Secretary of the other IAI Mutual Funds and of
Minneapolis, Minnesota 55440 LifeUSA Funds, Inc.
David Himebrook 42 Vice President, Vice President of IAI. Prior to joining IAI
3700 First Bank Place Investments in 1994, Mr. Himebrook served as an equity
P.O. Box 357 (Emerging Growth portfolio manager for Lutheran Brotherhood
Minneapolis, Minnesota 55440 Fund) since 1987.
-15-
<PAGE>
Name and Address Age Position Principal Occupation(s) During Past 5 Years
- ---------------- --- -------- -------------------------------------------
David McDonald 37 Vice President, Vice President of IAI. Prior to joining IAI
3700 First Bank Place Investments in 1994, Mr. McDonald had been a Managing
P.O. Box 357 (Growth Fund) Director of Wessels Arnold & Henderson (a
Minneapolis, Minnesota 55440 brokerage firm) since 1989 and an Associate
Portfolio Manager with IDS Financial Services (a
diversified financial services concern) from 1986
to 1989.
Donald Hoelting 36 Vice President, Vice President of IAI. Prior to joining IAI
3700 First Bank Place Investments in April 1996, Mr. Hoelting was Chief
P.O. Box 357 (Value, Growth and Investment Officer and Portfolio Manager for
Minneapolis, Minnesota 55440 Income Fund) Jefferson National Bank and Trust from 1986 to
1996.
Martin J. Calihan 33 Vice President, Vice President of IAI. Prior to joining IAI
3700 First Bank Place Investments in 1992, Mr. Calihan served as an equity
P.O. Box 357 (Capital analyst for Morgan Stanley Co. (a diversified
Minneapolis, Minnesota 55440 Appreciation Fund) financial services concern) and State Street
Research Management.
Mark Hoonsbeen 36 Vice President, Vice President of IAI. Prior to joining IAI
3700 First Bank Place Investments in 1994, Mr. Hoonsbeen served as an equity
P.O. Box 357 (Regional Fund, portfolio manager for The St. Paul Companies,
Minneapolis, Minnesota 55440 Midcap Growth Inc. (a diversified financial services
Fund, and Growth concern) from 1986 to 1994. Mr. Hoonsbeen is
Fund) also a Vice President, Investments of the
Regional Portfolio of IAI Retirement Funds,
Inc.
Susan J. Haedt 35 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 and of LifeUSA Funds, Inc.
</TABLE>
* Director who is an interested person (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 the Fund or IAI, their spouses, children and
grandchildren. With respect to such persons, the minimum initial investment in
one or more of the IAI Family of Funds is $500; provided that the minimum amount
that can be allocated to any one of the Funds is $250. Subsequent subscriptions
are limited to a minimum of $100 for each of the Funds.
-16-
<PAGE>
No compensation is paid by a 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 (as applicable). Each Fund will
pay, on a quarterly basis, its pro rata share of these fees based on its net
assets. Such unaffiliated directors also are reimbursed by the Funds for
expenses incurred in connection with attending meetings. Set forth below is
further information concerning compensation paid to Fund directors.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Director Compensation for the Fiscal Year Ended March 31, 1997
-------------------------------------------------------------------------------
Growth
Capital Emerging and Midcap
Appreciation Growth Growth Income Growth Regional Value
Name of Person, Position Fund Fund Fund Fund Fund Fund Fund
------------------------ ---- ---- ---- ---- ---- ---- ----
Betsch, Madeline - Director $ 659 $ 11,357 $ 277 $ 1,490 $ 2,398 $ 9,565 $ 638
Hodgson, W. William - Director $ 659 $ 11,357 $ 277 $ 1,490 $ 2,398 $ 9,565 $ 638
Long, George R. - Director $ 633 $ 11,450 $ 276 $ 1,475 $ 2,372 $ 9,556 $ 633
Thompson, J. Peter - Director $ 659 $ 11,357 $ 277 $ 1,490 $ 2,398 $ 9,565 $ 638
Withers, Charles W. -Director $ 633 $ 11,450 $ 276 $ 1,475 $ 2,372 $ 9,556 $ 633
- ---------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Aggregate Compensation
from the
Name of Person, Position 19 IAI Mutual Funds*
------------------------ -------------------
Betsch, Madeline - Director $34,700
Hodgson, W. William - Director $34,700
Long, George R. - Director $34,700
Thompson, J. Peter - Director $34,700
Withers, Charles H. - Director $34,700
-------------------------
<FN>
* From all Funds for the calendar year ended December 31, 1996;
excludes expenses incurred in connection with attending meetings.
</FN>
</TABLE>
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 the
acquiring of any securities in an initial public offering. In addition, all
securities acquired through private placement must be pre-cleared. Procedures
have been adopted which implement blackout periods for certain securities
transactions, as well as a ban on short-term trading profits. Additional
policies prohibit the receipt of gifts in certain instances. Procedures have
been implemented to monitor employee trading. Access persons of the Adviser are
required to certify annually that they have read and understood the Code of
Ethics. An annual report is provided to the Funds' Board of Directors
summarizing existing procedures, identifying material violations and
recommending any changes needed.
-17-
<PAGE>
IAI's ultimate corporate parent is Lloyds TSB Group plc ("Lloyds TSB"), a
publicly-held financial services organization headquartered in London, England.
Lloyds TSB is one of the largest personal and corporate financial services
groups in the United Kingdom, engaged in a wide range of activities including
commercial and retail banking. The principal offices of Lloyds TSB are located
at St. George's House, 6 - 8 Eastcheap, London, EC3M 1LL.
HISTORY
Capital Appreciation 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 corporation'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 G common shares is referred to as "IAI Capital
Appreciation Fund."
Emerging Growth 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 A common shares is referred to as "IAI Emerging Growth
Fund."
Growth and Income Fund is a separate portfolio of IAI Investment Funds VII,
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
amended and restated Articles of Incorporation, which provided that the
registered investment company whose corporate name has been IAI Stock Fund,
Inc., be renamed IAI Investment Funds VII, Inc. The investment portfolio
represented by Series A common shares is referred to as "IAI Growth and Income
Fund", which name better reflects the investment objectives of the investment
portfolio.
Midcap Growth 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 C common shares is referred to as "IAI Midcap Growth
Fund."
Regional Fund is a separate portfolio of IAI Investment Funds IV, Inc., a
Minnesota corporation whose shares of common stock are currently issued in one
series (Series A). On June 28, 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 Regional Fund, Inc., be
renamed IAI Investment Funds IV, Inc. The investment portfolio represented by
Series A common shares is referred to as "IAI Regional Fund."
Value Fund is a separate portfolio of IAI Investment Funds VIII, 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 amended
and restated Articles of Incorporation, which provided that the registered
investment company whose corporate name had been IAI Value Fund, Inc., be
renamed IAI Investment Funds VIII, Inc. The investment portfolio represented by
Series A common shares is referred to as "IAI Value Fund."
-18-
<PAGE>
MANAGEMENT AGREEMENT
Effective April 1, 1996 (February 1, 1996 for Capital Appreciation Fund),
each Fund entered into a new written agreement with IAI (the "Management
Agreement"). Pursuant to the Management Agreement, IAI provides 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 a Fund within the framework of such Fund's investment
policies, subject to review by the directors of the Funds. In addition, IAI has
agreed to provide or arrange for the provision of all required administrative,
stock transfer, redemption, dividend disbursing, accounting, and shareholder
services including, without limitation, the following: (1) the maintenance of a
Fund's accounts, books and records; (2) the calculations of the daily net asset
value in accordance with a Fund's current Prospectus and Statement of Additional
Information; (3) daily and periodic reports; (4) all information necessary to
complete tax returns, questionnaires and other reports requested by a Fund; (5)
the maintenance of stock registry records; (6) the processing of requested
account registration changes, stock certificate issuances and redemption
requests; (7) the administration of payments and dividends and distributions
declared by a Fund; (8) answering shareholder questions; (9) providing reports
and other information; and (10) other services designed to maintain shareholder
accounts. IAI may also pay qualifying broker-dealers, financial institutions and
other entities that provide such services. In return for such services, each
Fund has agreed to pay IAI an annual fee as a percentage of such Fund's average
daily net assets as set forth below:
CAPITAL APPRECIATION FUND
Daily Net Assets Fee IAI Receives Annually
---------------- -------------------------
For the first $250 million 1.40%
For the next $250 million 1.35%
Above $500 million 1.30%
GROWTH FUND AND GROWTH AND INCOME FUND
Daily Net Assets Fee IAI Receives Annually
---------------- -------------------------
For the first $100 million 1.25%
For the next $150 million 1.15%
For the next $250 million 1.05%
Above $500 million 1.00%
EMERGING GROWTH FUND, MIDCAP GROWTH FUND, VALUE FUND, REGIONAL FUND
Daily Net Assets Fee IAI Receives Annually
---------------- -------------------------
For the first $250 million 1.25%
For the next $250 million 1.20%
Above $500 million 1.10%
-19-
<PAGE>
Under the Management Agreement, except for brokerage commissions and other
expenditures in connection with the purchase and sale of portfolio securities,
interest expense, and, subject to the specific approval of a majority of the
disinterested directors of 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
such 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.
IAI has also voluntarily undertaken to pay all expenses of promoting the
sale of Fund shares and may make payments to selected broker-dealer firms or
institutions which were instrumental in the acquisition of Fund shareholders
and/or which perform services for shareholder accounts.
The following table contains relevant information concerning fees each Fund
paid under the Management Agreement for the fiscal year ended March 31, 1996.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FUND NET ASSETS* MANAGEMENT FEE WAIVER**
---- ----------- -------------- --------
Capital Appreciation $ 44,230,390 $ 457,148 $ 58,119
Emerging Growth $ 387,105,076 $ 7,838,052 $ 57,662
Growth $ 11,746,813 $ 198,592 $ 1,400
Growth and Income $ 90,740,615 $ 1,095,339 $ 7,506
Midcap Growth $ 128,258,989 $ 1,731,272 $ 12,079
Regional $ 498,178,473 $ 6,841,491 $ 48,381
Value $ 29,438,781 $ 463,302 $ 3,220
--------------------------
* As of March 31, 1997
** Resulting from IAI's reduction of its Management Fee in the
amount representing each Fund's pro rata payment of director's
fees and expenses. For Capital Appreciation Fund, $3,278 of the
total represents such director's fees; the remaining $54,841
represents IAI's voluntary waiver of its Management Fee in
excess of 1.25% of the Fund's average net assets.
</TABLE>
For the fiscal period from February 1, 1996 (commencement of operations)
through March 31, 1996, Capital Appreciation Fund paid IAI $6,898 under the
Management Agreement and IAI waived $828 pursuant to the fee waiver mentioned
above.
PRIOR AGREEMENTS
Effective March 31, 1996, the Investment Advisory Agreement and
Administrative Agreement between each Fund (excluding Capital Appreciation Fund,
which commenced operations February 1, 1996) 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.
Under the Investment Advisory Agreements, Emerging Growth Fund, Midcap
Growth Fund, Regional Fund, and Value Fund each paid IAI a monthly advisory fee
calculated at an annual rate of .75% of the first $200 million of a Fund's
average month-end net assets, .70% for the next $300,000,000 in net assets, and
.65% for net assets above $500,000,000. Growth Fund and Growth and Income Fund
had agreed to pay IAI a monthly advisory fee calculated at an annual rate of
.75% of the first $100 million in average daily net assets, .65% for the next
$100,000,000 in net assets, and .55% for net assets above $200,000,000.
-20-
<PAGE>
Advisory fees were paid by each Fund for the fiscal years (or periods) as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Fiscal Year Ended March 31,
-------------------------------------
Fund 1995 1996
---- ---- ----
Emerging Growth Fund $ 2,049,484 $ 3,570,424
Growth Fund $ 119,142* $ 154,947**
Growth and Income Fund $ 827,288 $ 667,378
Midcap Growth Fund $ 543,698 $ 774,726
Regional Fund $ 3,866,797 $ 3,945,330
Value Fund $ 276,714 $ 316,540
-----------------------------
<FN>
* For the period from August 1, 1994 (commencement of
operations) through March 31, 1995.
** Pursuant to the expense limit discussed below, IAI reimbursed
$1,108 in advisory fees to Growth Fund.
</FN>
</TABLE>
Each 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 such Fund's applicable expense limit (and after the
monthly payment of the distribution fee has been reduced to zero), as set forth
below.
ALLOCATION OF EXPENSES
Prior to the termination of the Advisory and Administrative Agreements on
March 31, 1996 (with the exception of Capital Appreciation Fund) 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,
distribution expenses pursuant to the Fund's Rule 12b-1 plan, insurance
premiums, costs of attending investment conferences and such other costs which
may be designated as extraordinary. Under the prior agreements, IAI reimbursed
each 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 a Fund, taxes and extraordinary expenses) which
exceeded 1.25% per year of the average month-end net assets of a Fund (the
"expense limit"). Certain state securities commissions may impose additional
limitations on certain of a Fund's expenses, and IAI may be required by such
state commissions to reimburse a Fund for expenses in excess of any limitations
as a requirement to selling shares of such Fund in those states. 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.
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 a Fund or by vote of a
majority of the outstanding voting securities, provided that in either event
such continuance is also approved by the vote of a majority of directors who are
not parties to the Agreement or interested persons of such parties cast in
person at a meeting called for the purpose of voting on such approval.
-21-
<PAGE>
CUSTODIAL SERVICE
The custodian for the Funds is Norwest Bank Minnesota, N.A. Norwest
Center, Sixth and Marquette, Minneapolis, MN 55479. Norwest has entered into an
agreement with Morgan Stanley Trust Company, 1 Pierrepont Plaza, Brooklyn, New
York ("Morgan Stanley") which enables the Funds 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 a Fund's assets held outside the
United States.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
In effecting portfolio transactions on behalf of a Fund, IAI seeks the most
favorable net price consistent with the best execution. Generally, a Fund must
deal with brokers. IAI selects and (where applicable) negotiates commissions
with the brokers who execute the transactions for such Fund. The primary
criteria for the selection of a broker is the ability of the broker, in the
opinion of IAI, to secure prompt execution of the transactions on favorable
terms, including the reasonableness of the commission and considering the state
of the market at the time. In selecting a broker, IAI may consider whether such
broker provides brokerage and research services (as defined in the Securities
Exchange Act of 1934). IAI may direct Fund transactions to brokers who furnish
research services to IAI. Such research services include advice, both directly
and in writing, as to the value of securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities, as well as analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio strategy,
and the performance of accounts. By allocating brokerage business in order to
obtain research services for IAI, a Fund enables IAI to supplement its own
investment research activities and allows IAI to obtain the views and
information of individuals and research staffs of many different securities
research firms prior to making investment decisions for a Fund. To the extent
such commissions are directed to brokers who furnish research services to IAI,
IAI receives a benefit, not capable of evaluation in dollar amounts, without
providing any direct monetary benefit to a Fund from these commissions.
Generally a Fund pays higher than the lowest commission rates available.
IAI believes that most research services obtained by it generally benefit
one or more of the investment companies or other accounts which it manages.
Normally research services obtained through commissions paid by the managed fund
investing in common stocks and managed accounts investing in common stocks would
primarily benefit the fund and accounts.
There is no formula for the allocation by IAI of each Fund's brokerage
business to any broker-dealers for brokerage and research services. However, IAI
will authorize a Fund to pay an amount of commission for effecting a securities
transaction in excess of the amount of commission another broker would have
charged only if IAI determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker viewed in terms of either that particular transaction or
IAI's overall responsibilities with respect to the accounts as to which it
exercises investment discretion.
Although investment decisions for a Fund are made independently from other
accounts as to which IAI gives investment advice, it may occasionally develop
that the same security is suitable for more than one account. If and when more
than one account simultaneously purchase or sell the same security, the
transactions will be averaged as to price and allocated as to amount in
accordance with arrangements equitable to each Fund and such accounts. The
simultaneous purchase or sale of the same securities by a Fund and other
accounts may have detrimental effects on a Fund, as they may affect the price
paid or received by a Fund or the size of the position obtainable by a Fund.
-22-
<PAGE>
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to the policies set forth in the preceding
paragraphs and such other policies as the Board of Directors of the Fund may
determine, IAI may consider sales of shares of a Fund as a factor in the
selection of broker-dealers to execute the Fund's securities transactions.
Brokerage commissions, listed below, were paid by each Fund for the fiscal
years (or periods) ended March 31. During these periods, a percentage of
commissions were paid to brokerage firms that provided research services to IAI,
although the provision of such services was not necessarily a factor in the
placement of all such business with such firms.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Percentage of
Commissions to Brokers
Fund Amount of Commissions Providing Research
- ---- --------------------- ------------------
1997 1996 1995 1997
---- ---- ---- ----
Capital Appreciation $ 450,843 $ 12,833 N/A 42.82%
Emerging Growth $ 1,475,305 $ 213,296 $ 844,250 59.55%
Growth $ 71,142 $ 63,748 $ 93,542 21.38%
Growth and Income $ 131,490 $ 279,469 $ 297,072 21.55%
Midcap Growth $ 361,584 $ 108,321 $ 160,255 46.38%
Regional $ 1,684,845 $1,116,117 $2,639,390 57.44%
Value $ 195,811 $ 107,946 $ 245,263 41.20%
</TABLE>
CAPITAL STOCK
CAPITAL APPRECIATION FUND
IAI Capital Appreciation 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 G common shares. The investment
portfolio represented by such shares is referred to as IAI Capital Appreciation
Fund. As of March 31, 1997, Capital Appreciation Fund had 3,279,382 shares
outstanding.
As of May 19, 1997, no person held of record or, to the knowledge of
Capital Appreciation Fund beneficially owned more than 5% of the outstanding
shares of Capital Appreciation Fund, except as set forth in the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
==============================================================================
Name and Address Number of Percent of
of Shareholder Shares Class
==============================================================================
Charles Schwab & Co. Inc. 809,885.865 24.16%
SPL Custody A/C for Excl Benefit
of Cust
Attn: Mutual Funds Dept - Cap App Reim
101 Montgomery Street
San Francisco, CA 94104
</TABLE>
In addition, as of May 19, 1997, Capital Appreciation Fund's officers and
directors as a group owned less than 1% of Capital Appreciation Fund's
outstanding shares.
-23-
<PAGE>
EMERGING GROWTH FUND
IAI EMERGING GROWTH FUND CLOSED TO NEW INVESTORS ON FEBRUARY 1, 1996. IAI
EMERGING GROWTH FUND'S CURRENT SHAREHOLDERS MAY ADD TO AN EXISTING ACCOUNT AND
CERTAIN OTEHRS MAY MAKE AN INITIAL INVESTMENT IN THE FUND. IAI EMERGING GROWTH
FUND MAY RESUME SALES TO NEW INVESTORS AT SOME FUTURE DATE, BUT IT HAS NO
PRESENT PLANS TO DO SO.
IAI Emerging Growth 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 A common shares, the investment portfolio represented by such
shares is referred to as IAI Emerging Growth Fund. As of March 31, 1997,
Emerging Growth Fund had 24,427,636 shares outstanding.
As of May 19, 1997, no person held of record or, to the knowledge of
Emerging Growth Fund beneficially owned more than 5% of the outstanding shares
of Emerging Growth Fund, except as set forth in the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
==============================================================================
Name and Address Number of Percent of
of Shareholder Shares Class
=============================================================================
Thomson Consumer Electronics, Inc. 2,275,568.412 10.14%
SAV Pl Salaried Employees 1-1-88
State Street Bank & Trust
Attn: D. Leydom One Enterprise Dr
P.O. Box 1992
Quincy, MA 02171
Charles Schwab & Co., Inc. 1,350,144.245 6.02%
SPL Custody A/C for Excl Bnft of Cust.
Attn: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94101
Nissan Retirement Savings Plan 1,423,427.493 6.35%
State Street Bank & Trust
Master Trust
PO Box 1992
Boston, MA 02105
</TABLE>
In addition, as of May 19, 1997, Emerging Growth Fund's officers and
directors as a group owned less than 1% of Emerging Growth Fund's outstanding
shares.
-24-
<PAGE>
GROWTH FUND
IAI Growth Fund is a separate portfolio of IAI Investment Funds II, 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 II, 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 II, 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 Growth Fund. As of March 31, 1997, the Fund had 1,184,290
shares outstanding.
As of May 19, 1997, no person held of record or, to the knowledge of Growth
Fund, beneficially owned more than 5% of the outstanding shares of Growth Fund,
except as set forth in the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
==============================================================================
Name and Address Number of Percent of
of Shareholder Shares Class
==============================================================================
IAI Trust Company 64,885.917 5.22%
Aggressive Growth Portfolio
3500 First Bank Place
P.O. Box 357
Minneapolis, MN 55402
</TABLE>
In addition, as of May 1, 1997, Growth Fund's officers and directors as
a group owned less than 1% of Growth Fund's outstanding shares.
GROWTH AND INCOME FUND
IAI Growth and Income Fund is a separate portfolio of IAI Investment Funds
VII, 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 VII, 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 VII,
Inc., has authorized 10,000,000,000 shares of $.10 par value common stock to be
issued as Series A common shares. The investment portfolio represented by such
shares is referred to as IAI Growth and Income Fund. As of March 31, 1997, the
Fund had 6,117,295 shares outstanding.
As of May 19, 1997, no person held of record or, to the knowledge of Growth
and Income Fund, beneficially owned more than 5% of the outstanding shares of
Growth and Income Fund, except as set forth in the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
=============================================================================
Name and Address Number of Percent of
of Shareholder Shares Class
=============================================================================
Pentair, Inc. Retirement Savings & Stock 997,735.440 16.67%
401(k) Plan
1500 County Road B2 West
St. Paul, MN 55113-3105
</TABLE>
In addition, as ofMay 19, 1997, Growth and Income Fund's officers and
directors as a group owned approximately 170,649.706 shares, representing 2.58%
of Growth and Income Fund's outstanding shares.
-25-
<PAGE>
MIDCAP GROWTH FUND
IAI Midcap Growth 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 C common shares, the investment portfolio represented by such
shares is referred to as IAI Midcap Growth Fund. As of March 31, 1997, Midcap
Growth Fund had 7,688,117 shares outstanding.
As of May 19, 1997, no person held of record or, to the knowledge of Midcap
Growth Fund beneficially owned more than 5% of the outstanding shares of Midcap
Growth Fund, except as set forth in the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
==============================================================================
Name and Address Number of Percent of
of Shareholder Shares Class
==============================================================================
Charles Schwab & Co., Inc. 1,504,969.640 22.02%
SPL Custody A/C for Excl Bnft of Cust
Attn: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104
Olcoba Company 418,339.809 6.12%
Attn: Trust Mutual Fun Specialist
PO Box 1000
Minneapolis, MN 55480
</TABLE>
In addition, as of May 19, 1997, Midcap Growth Fund's officers and
directors as a group owned less than 1% of Midcap Growth Fund's outstanding
shares.
REGIONAL FUND
IAI Regional Fund is a separate portfolio of IAI Investment Funds IV, 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 IV, 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 IV, 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 Regional Fund. As of March 31, 1997, Regional Fund had
22,051,268 shares outstanding.
As of May 19, 1997, no person held of record or, to the knowledge of
Regional Fund, beneficially owned more than 5% of the outstanding shares of
Regional Fund, except as set forth in the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
==============================================================================
Name and Address Number of Percent of
of Shareholder Shares Class
==============================================================================
Charles Schwab & Co., Inc. 1,610,311.277 7.51%
SPL Custody A/C for Excl Bnft of Cust.
Attn: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104
</TABLE>
-26-
<PAGE>
As of May 19, 1997, Regional Fund's officers and directors as a group owned
less than 1% of Regional Fund's outstanding shares.
VALUE FUND
IAI Value Fund is a separate portfolio of IAI Investment Funds VIII, 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 VIII, 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 VIII, 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 Value Fund. As of March 31, 1997, Value Fund had 2,524,279
shares outstanding.
As of May 19, 1997, no person held of record or, to the knowledge of Value
Fund, beneficially owned more than 5% of the outstanding shares of Value Fund,
except as set forth in the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
===============================================================================
Name and Address Number of Percent of
of Shareholder Shares Class
==============================================================================
Charles Schwab & Co., Inc. 240,793.945 10.40%
SPL Custody A?C for Excl Bnft of Cust.
Attn: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104
</TABLE>
As of May 19, 1997, Value Fund's officers and directors as a group owned
approximately 35,913.004 shares, representing approximately 1.55% of Value
Fund's outstanding shares.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The portfolio securities in which each Fund invests fluctuate in value, and
hence, for each Fund, the net asset value per share also fluctuates.
The net asset value per share of a Fund is determined once daily normally
as of the close of trading on the New York Stock Exchange, normally 3:00 p.m.
Central time, on each business day on which the New York Stock Exchange is open
for trading, and may be determined on additional days as required by the Rules
of the Securities and Exchange Commission. The New York Stock Exchange is
closed, and the net asset value per share of the Fund is not determined, on the
following national holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
On March 31, 1997, each Fund's net asset value and public offering price
per share were calculated as follows:
CAPITAL APPRECIATION FUND
NAV = Net Assets ($44,230,390) = $13.49
--------------------------
Shares Outstanding (3,279,382)
EMERGING GROWTH FUND
NAV = Net Assets ($387,105,076) = $15.85
--------------------------
Shares Outstanding (24,427,636)
-27-
<PAGE>
GROWTH FUND
NAV = Net Assets ($11,746,813) = $9.92
----------------------------
Shares Outstanding (1,184,290)
GROWTH AND INCOME FUND
NAV = Net Assets ($90,740,615) = $14.83
--------------------------
Shares Outstanding (6,117,295)
MIDCAP GROWTH FUND
NAV = Net Assets ($128,258,989) = $16.68
-------------------------
Shares Outstanding (7,688,117)
REGIONAL FUND
NAV = Net Assets ($498,178,473) = $22.59
---------------------------
Shares Outstanding (22,051,268)
VALUE FUND
NAV = Net Assets ($29,438,781) = $11.66
--------------------------
Shares Outstanding (2,524,279)
PURCHASES AND REDEMPTIONS IN KIND
In extraordinary circumstances, Fund shares may be purchased for cash or in
exchange for securities which are permissible investments of a Fund, subject to
IAI's discretion and its determination that the securities are acceptable.
Securities accepted in exchange will be valued on the basis of market
quotations, or if the market quotations are not available, by a method that IAI
believes accurately reflects fair value. In addition, securities accepted in
exchange are required to be liquid securities that are not restricted as to
transfer. Also in extraordinary circumstances, if a shareholder so desires, and
IAI so agrees, Fund shares may be redeemed in exchange for securities held by a
Fund. Securities redeemed in exchange will be valued on the basis of market
quotations, or if market quotations are not available, by a method that IAI
believes accurately reflects fair value.
TAX STATUS
The tax status of the Funds and distributions of the Funds are summarized
in the Prospectus under "Dividends, Distributions and Tax Status."
Under the Internal Revenue Code of 1986, as amended (the "Code"),
individual shareholders may not exclude any amount of distributions from a
Fund's gross income that is derived from dividends; corporate shareholders,
however, are permitted to deduct 70% of qualifying dividend distributions from
domestic corporations. Such a deduction by a corporate shareholder will depend
upon the portion of a Fund's gross income that is derived from dividends
received from domestic corporations. Since it is anticipated that a portion of
the net investment income of each Fund may derive from sources other than
dividends from domestic corporations, a portion of each Fund's dividends may not
qualify for this exclusion. Distributions designated as long-term capital gain
distributions will be taxable to the shareholder as long-term capital gains
regardless of how long the shareholder has held the shares. Such distributions
will not be eligible for the dividends received exclusion referred to above.
-28-
<PAGE>
Ordinarily, distributions and redemption proceeds earned by Fund
shareholders are not subject to withholding of federal income tax. However, each
Fund is required to withhold 31% of a shareholder's distributions and redemption
proceeds upon the occurrence of certain events specified in Section 3406 of the
Code and regulations promulgated thereunder. These events include the failure of
a Fund shareholder to supply the Fund with such shareholder's taxpayer
identification number, and the failure of a Fund shareholder who is otherwise
exempt from withholding to properly document such shareholder's status as an
exempt recipient. Additionally, distributions may be subject to state and local
income taxes, and the treatment thereunder may differ from the federal income
tax consequences discussed above.
If Fund shares are sold or otherwise disposed of more than one year from
the date of acquisition, the difference between the price paid for the shares
and the sales price will result in long-term capital gain or loss to a Fund
shareholder if, as is usually the case, Fund shares are a capital asset in the
hands of a Fund shareholder at that time. However, under a special provision in
the Code, if Fund shares with respect to which a long-term capital gain
distribution has been, or will be, made are held for six months or less, any
loss on the sale or other disposition of such shares will be long-term capital
loss to the extent of such distribution.
Under the Code, each Fund will be subject to a non-deductible excise tax
equal to 4% of the excess, if any, of the amount of investment income and
capital gains required to be distributed pursuant to the Code for each calendar
year over the amount actually distributed. In order to avoid this excise tax,
each Fund generally must declare dividends by the end of each calendar year
representing 98% of the Fund's ordinary income for such calendar year and 98% of
its capital gain net income, if any, for the twelve-month period ending October
31 of the same calendar year. The excise tax is not imposed, however, on
undistributed income that is already subject to corporate income tax. It is each
Fund's policy not to distribute capital gains until capital loss carryovers, if
any, either are utilized or expire.
Income received from sources within foreign countries may be subject to
withholding and other taxes imposed by such countries. Tax conventions between
certain countries and the United States may reduce or eliminate such taxes. It
is impossible to determine the effective rate of foreign tax applicable to such
income in advance since the precise amount of a Fund's assets to be invested in
various countries is not known. Any amount of taxes paid by a Fund to foreign
countries will reduce the amount of income available to a Fund for distributions
to shareholders.
The foregoing is a general and abbreviated summary of the Code and Treasury
regulations in effect as of the date of each Fund's Prospectus and this
Statement of Additional Information. The foregoing relates solely to the federal
income tax law applicable to "U.S. persons," i.e., U.S. citizens and residents
and U.S. domestic corporations, partnerships, trusts and estates. Shareholders
who are not U.S. persons are encouraged to consult a tax adviser regarding the
income tax consequences of acquiring shares of a Fund.
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
-29-
<PAGE>
laws, or (iv) for any transaction from which the director derived an improper
personal benefit. The Articles of Incorporation of IAI Investment Funds II,
Inc., IAI Investment Funds IV, Inc., IAI Investment Funds VI, Inc., IAI
Investment Funds VII, Inc., and IAI Investment Funds VIII, 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 audited financial statements, included as part of the Funds' 1997
Annual Report to shareholders, are incorporated herein by reference. Such Annual
Report may be obtained by shareholders on request from the Funds at no charge.
<PAGE>
BALANCED FUND
PROSPECTUS
IAI Balanced Fund
August 1, 1997
[LOGO]
MUTUAL FUNDS
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI BALANCED FUND
<TABLE>
<CAPTION>
<S> <C>
FUND EXPENSE INFORMATION..................................................3
FUND DIRECTORS............................................................3
FINANCIAL HIGHLIGHTS......................................................4
INVESTMENT OBJECTIVE AND POLICIES.........................................5
PORTFOLIO SECURITIES AND
OTHER INVESTMENT TECHNIQUES...............................................6
FUND RISK FACTORS.........................................................10
MANAGEMENT................................................................14
INVESTMENT PERFORMANCE....................................................15
COMPUTATION OF NET ASSET
VALUE AND PRICING.........................................................16
PURCHASE OF SHARES........................................................16
RETIREMENT PLANS..........................................................18
AUTOMATIC INVESTMENT PLAN.................................................18
REDEMPTION OF SHARES......................................................19
EXCHANGE PRIVILEGE........................................................20
AUTOMATIC EXCHANGE PLAN...................................................21
AUTHORIZED TELEPHONE TRADING..............................................21
SYSTEMATIC CASH WITHDRAWAL PLAN...........................................22
DIVIDENDS, DISTRIBUTIONS
AND TAX STATUS............................................................22
DESCRIPTION OF COMMON STOCK...............................................23
COUNSEL AND AUDITORS......................................................24
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT...................24
ADDITIONAL INFORMATION....................................................25
</TABLE>
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI BALANCED FUND
PROSPECTUS DATED AUGUST 1, 1997
IAI Balanced Fund ("the Fund") is a separate portfolio of IAI Investment
Funds VI, Inc. IAI Investment Funds VI, Inc. is a open-end diversified
management investment company authorized to issue its shares of common stock in
more than one series. Investment Advisers, Inc. ("IAI") serves as the Fund's
investment adviser and manager.
The Fund's investment objective is to maximize total return to investors. The
Fund pursues its objective by investing in a broadly diversified portfolio of
stocks, bonds and short-term instruments.
This Prospectus sets forth concisely the information which a prospective
investor should know about the Fund before investing and it should be retained
for future reference. A "Statement of Additional Information" dated August 1,
1997, which provides a further discussion of certain areas in this Prospectus
and other matters which may be of interest to some investors, has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference. For a free copy, call or write the Fund at the address or telephone
number shown 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.
2
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI BALANCED FUND
FUND EXPENSE INFORMATION
Shareholder Transaction Expenses
- ---------------------------------------------------------------------------
Sales Load Imposed on Purchases...................................... None
Sales Load Imposed on Reinvested Dividends........................... None
Redemption Fees*..................................................... None
Exchange Fees........................................................ None
- ----------------------------------
* The Fund charges a $10.00 fee for the
payment of redemption proceeds by wire.
Annual Fund Operating Expenses
- ----------------------------------------------------------------------------
(as a percentage of average daily net assets)
Management Fee........................................................ 1.25%
Rule 12b-1 Fee....................................................... None
Other Expenses....................................................... None
Total Fund Operating Expenses...................................... 1.25%
====
Example:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Based upon the levels of Total Fund Operating
Expenses listed above, you would pay the following 1 Year 3 Years 5 Years 10 Years
expenses on a $1,000 investment, assuming a five percent ------ ------- ------- --------
annual return and redemption at the end of each period: $ 13 $ 40 $69 $151
</TABLE>
The purpose of the above table is to assist you in understanding the various
costs and expenses that an investor in the Fund will bear directly or
indirectly. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.
FUND DIRECTORS
Madeline Betsch Noel P. Rahn
W. William Hodgson J. Peter Thompson
George R. Long Charles H. Withers
3
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI BALANCED FUND
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report is included in the Fund's Annual Report. The Financial
Statements included in the Annual Report are incorporated by reference in (and
is a part of) the Statement of Additional Information. Such Annual Report may be
obtained by shareholders on request from the Fund at no charge.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Period from
April 10, 1992(1)
Years ended March 31, to
-------------------------------------------------
1997 1996 1995 1994 March 31, 1993
---- ---- ---- ---- ---------------
NET ASSET VALUE
Beginning of period $11.53 $10.57 $10.36 $10.89 $10.00
------ ------ ------ ------ ------
OPERATIONS
Net investment income (loss) 0.37 0.29 0.29 0.27 0.18
Net realized and unrealized gains 1.60 0.97 0.62 0.34 0.84
---- ----- ---- ---- ----
Total from operations 1.97 1.26 0.91 0.07 1.02
---- ---- ---- ---- ----
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.49) (0.30) (0.32) (0.26) (0.13)
Net realized gains (1.97) ---- (0.38) (0.20) ----
------- ----- ------ ---- ------
Total distributions (2.46) (0.30) (0.70) (0.46) (0.13)
------ ------- ------ ------ ------
NET ASSET VALUE
End of period $11.04 $11.53 $10.57 $10.36 $10.89
====== ======= ====== ====== =======
Total investment return* 18.55% 12.09% 9.44% (0.77)% 10.18%
Net assets at end of period $32,822 $38,799 $41,419 $52,369 $70,068
(000's omitted)
RATIOS
Expenses to average net assets 1.25% 1.25% 1.25% 1.25% 1.25%**
Net investment income (loss)
to average net assets 2.92% 2.48% 2.68% 2.35% 2.18%**
Average brokerage commission rate*** $0.0468 N/A N/A N/A N/A
Portfolio turnover rate
(excluding short-term securities) 190.6% 193.8% 256.9% 211.9% 83.4%
------------------------------------
<FN>
* 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
*** Beginning in fiscal 1997, the Fund is required to disclose an
average brokerage commission rate. The comparability of rates between
domestic and foreign equities may be affected by the fact that commission
rates per share can vary significantly among foreign countries.
(1) Commencement of operations
</FN>
</TABLE>
4
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI BALANCED FUND
INVESTMENT OBJECTIVE
AND POLICIES
The investment objective of the Fund is to maximize total return. The Fund will
seek to achieve its objective by investing in a broadly diversified portfolio of
stocks, bonds and short-term instruments. The Fund's investment objective is a
fundamental policy and may not be changed without shareholder approval. There
can be no assurance that the Fund will achieve its investment objective.
In seeking to achieve its investment objective, IAI, the Fund's investment
adviser and manager, allocates the Fund's assets among the three classes of
assets set forth above. Under normal market conditions, the Fund holds between
25% and 75% of its assets in stocks and other equity securities, between 25% and
75% of its assets in bonds and other fixed income securities, and up to 50% of
its assets in short-term instruments. The Fund may also make other investments
that do not fall within these classes.
The stock class includes equity securities of all types and consists primarily
of common stocks, securities convertible into common stocks, and non-convertible
preferred stocks. The bond class includes all varieties of fixed-income
instruments with maturities of more than one year and consists primarily of
investment grade bonds. Investment grade securities are those securities rated
within the four highest grades assigned by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P"). The Fund may also purchase
U.S. Treasury inflation-protection securities. The value of such
inflation-protection securities is adjusted for inflation and periodic interest
payments are in amounts equal to a fixed percentage of the inflation-adjusted
value of the principal. Although the Fund may also invest in below investment
grade securities (junk bonds), the Fund currently intends to limit such
investments to less than 10% of its total assets and not to invest in junk bonds
rated lower than B by Moody's or S&P.
Securities rated in the medium to lower rating categories of nationally
recognized statistical rating organizations and unrated securities of comparable
quality are predominately speculative with respect to the capacity to pay
interest and repay principal in accordance with the terms of the security and
generally involve a greater volatility of price than securities in higher rating
categories. See "Investment Objectives and Policies" in and Appendix A to the
Statement of Additional Information for additional information regarding ratings
of debt securities. In purchasing such securities, the Fund will rely on IAI's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer of such securities. IAI will take into consideration, among other things,
the issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management and
regulatory matters.
The short-term class includes all types of short-term instruments with remaining
maturities of one year or less and consists primarily of commercial paper, bank
certificates of deposit, bankers' acceptances, government securities, repurchase
agreements
5
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI BALANCED FUND
and other similar short-term instruments. Short-term securities are only
purchased if given one of the top two ratings by a major ratings service or, if
unrated, are of comparable quality as determined by IAI. Within each of these
classes, the Fund may invest in both domestic and foreign securities. Currently,
the Fund intends to limit its investment in foreign securities denominated in
foreign currency and not publicly traded in the United States to no more than
25% of its total assets.
IAI regularly reviews its allocation of the Fund's assets among the three
classes and gradually varies them over time to favor asset classes that, in
IAI's judgment, provide the most favorable total return outlook. Because the
Fund seeks to maximize total return over the long-term, it will not try to
pinpoint the precise moment when major reallocations are warranted. Rather, such
reallocations among asset classes will be made gradually over time and, under
normal conditions, a single reallocation decision will not involve more than 10%
of the Fund's total assets.
PORTFOLIO SECURITIES
AND OTHER INVESTMENT
TECHNIQUES
REPURCHASE AGREEMENTS
The Fund is permitted to invest in repurchase agreements. A repurchase agreement
is a contract by which the Fund acquires the security ("collateral") subject to
the obligation of the seller to repurchase the security at a fixed price and
date (within seven days). A repurchase agreement may be construed as a loan
under relevant law. The Fund may enter into repurchase agreements with respect
to any securities which it may acquire consistent with its investment policies
and restrictions. The Fund's custodian will hold the securities underlying any
repurchase agreement in a segregated account. In investing in repurchase
agreements, the Fund's risk is limited to the ability of the seller to pay the
agreed-upon price at the maturity of the repurchase agreement. In the opinion of
IAI, such risk is not material, since in the event of default, barring
extraordinary circumstances, the Fund would be entitled to sell the underlying
securities or otherwise receive adequate protection under federal bankruptcy
laws for its interest in such securities. However, to the extent that proceeds
from any sale upon a default are less than the repurchase price, the Fund could
suffer a loss. In addition, the Fund may incur certain delays in obtaining
direct ownership of the collateral.
BORROWING
The Fund may borrow from banks (or through reverse repurchase agreements) for
temporary or emergency purposes. If the Fund borrows money, its share price may
be subject to greater fluctuation until the borrowing is paid off. If the Fund
makes additional investments while borrowings are outstanding, this may be
considered a form of leverage. The Fund does not intend its borrowings to exceed
5% of its net assets.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in securities that are
considered illiquid because of the absence of a readily available market or due
to legal or contractual
6
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI BALANCED FUND
restrictions. However, certain restricted securities that are not registered for
sale to the general public but that can be resold to institutional investors may
be considered liquid pursuant to guidelines adopted by the Board of Directors.
The institutional trading market is relatively new, and the liquidity of the
Fund's investments could be impaired if trading does not develop or declines.
FOREIGN SECURITIES
The Fund may invest in securities of foreign issuers in accordance with its
investment objective and policies. In considering whether to purchase securities
of foreign issuers, IAI will consider the political and economic conditions in a
country, the prospect for changes in the value of its currency and the liquidity
of the investment in that country's securities markets. The Fund currently
intends to limit its investment in foreign securities denominated in foreign
currency and not publicly traded in the United States to no more than 25% of its
total assets.
VENTURE CAPITAL
The Fund may invest in venture capital limited partnerships and funds which, in
turn, invest principally in securities of early stage, developing companies.
Investments in venture capital limited partnerships and funds present a number
of risks not found in investing in established enterprises including the fact
that such a partnership's portfolio will be composed almost entirely of
early-stage companies which may lack depth of management and sufficient
resources, may be marketing a new product for which there is no established
market, and may be subject to intense competition from larger companies. Any
investment in a venture capital fund will lack liquidity, will be difficult to
value, and the Fund will have almost no control over the management of the
partnership. If for any reason the services of the general partners of a venture
capital limited partnership were to become unavailable, such limited partnership
could be adversely affected.
In addition to investing in venture capital limited partnerships and funds, the
Fund may directly invest in early-stage, developing companies. The risks
associated with investing in these securities are substantially similar to the
risks set forth above. The Fund will typically purchase equity securities in
these early-stage, developing companies; however from time to time, the Fund may
purchase non-investment grade debt securities in the form of convertible notes.
LEVERAGED BUYOUTS
The Fund may invest in leveraged buyout limited partnerships and funds which, in
turn, invest in leveraged buyout transactions (LBOs). An LBO, generally, is an
acquisition of an existing business by a newly formed corporation financed
largely with debt assumed by such newly formed corporation to be later repaid
with funds generated from the acquired company. Since most LBOs are by nature
highly leveraged (typically with debt to equity ratios of approximately 9 to 1),
equity investments in LBOs may appreciate substantially in value given only
modest growth in the earnings or cash flow of the acquired business. Investments
in LBOs, however, present a number of risks.
7
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI BALANCED FUND
Investments in LBO limited partnerships and funds will normally lack liquidity
and may be subject to intense competition from other LBO limited partnerships
and funds. Additionally, if the cash flow of the acquired company is
insufficient to service the debt assumed in the LBO, the LBO limited partnership
or fund could lose all or part of its investment in such acquired company.
WHEN-ISSUED/DELAYED
DELIVERY SECURITIES
The Fund may purchase securities on a "when-issued" or delayed delivery basis
and purchase or sell securities on a "forward commitment" basis. When such
transactions are negotiated, the price is fixed at the time the commitment is
made, but delivery and payment for the securities take place at a later date.
Normally, the settlement date occurs within two months after the transaction,
but delayed settlements beyond two months may be negotiated. At the time the
Fund enters into a transaction on a when-issued or forward commitment basis, a
segregated account consisting of cash, government securities or liquid
high-grade debt securities equal to the value of the when-issued or forward
commitment securities will be established and maintained with the custodian and
will be marked to the market daily. During the period between a commitment and
settlement, no payment is made for the securities and, thus, no interest accrues
to the purchaser from the transaction. If the Fund disposes of the right to
acquire a when-issued security prior to its acquisition or disposes of its right
to deliver or receive against a forward commitment, it can incur a gain or loss
due to market fluctuation. The use of when-issued transactions and forward
commitments enables the Fund to hedge against anticipated changes in interest
rates and prices. The Fund may also enter into such transactions to generate
incremental income. In some instances, the third-party seller of when-issued or
forward commitment securities may determine prior to the settlement date that it
will be unable or unwilling to meet its existing transaction commitments without
borrowing securities. If advantageous from a yield perspective, the Fund may, in
that event, agree to resell its purchase commitment to the third-party seller at
the current market price on the date of sale and concurrently enter into another
purchase commitment for such securities at a later date. As an inducement for
the Fund to "roll over" its purchase commitment, the Fund may receive a
negotiated fee. No more than 20% of the Fund's net assets may be invested in
when-issued, delayed delivery or forward commitment transactions, and of such
20%, no more than one-half (i.e., 10% of its net assets) may be invested in
when-issued, delayed delivery or forward commitment transactions without the
intention of actually acquiring securities (i.e., dollar rolls or "roll"
transactions). For additional information on roll transactions, see "Investment
Objectives and Policies -- Dollar Rolls" in the Statement of Additional
Information.
ZERO COUPON OBLIGATIONS
The Fund may also invest in zero coupon obligations of the U.S. Government or
its agencies, tax exempt issuers and corporate issuers, including rights to
stripped coupon
8
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI BALANCED FUND
and principal payments ("STRIPS"). Zero coupon bonds do not make regular
interest payments; rather, they are sold at a discount from face value.
Principal and accreted discount (representing interest accrued but not paid) are
paid at maturity. STRIPS are debt securities that are stripped of their interest
after the securities are issued, but otherwise are comparable to zero coupon
bonds. The market value of STRIPS and zero coupon bonds generally fluctuates in
response to changes in interest rates to a greater degree than do
interest-paying securities of comparable term and quality.
ADJUSTING INVESTMENT
EXPOSURE
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific fixed-income market
movements), to manage the effective maturity or duration of the Fund's portfolio
or to enhance potential gain. These strategies may be executed through the use
of derivative contracts. Such strategies are generally accepted as a part of
modern portfolio management and are regularly utilized by many mutual funds and
other institutional investors. Techniques and instruments may change over time
as new instruments and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may purchase and
sell exchange-listed and over-the-counter put and call options on securities,
fixed-income indices and other financial instruments, purchase and sell
financial futures contracts and options thereon, enter into various interest
rate transactions such as swaps and enter into various currency transactions
such as currency forward contracts, currency futures contracts, currency swaps
or options on currencies or currency futures.
There is no limit on Fund assets that can be used for hedging purposes, i.e., to
attempt to protect against possible changes in the market value of securities
held in or to be purchased for the Fund's portfolio resulting from securities
markets or currency exchange rate fluctuations, to protect the Fund's unrealized
gains in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to manage the effective maturity or duration
of the Fund's portfolio, or to establish a position in the derivatives markets
as a temporary substitute for purchasing or selling particular securities. Some
may also be used to enhance potential gain although no more than 5% of the
Fund's net assets will be committed to techniques and instruments entered into
for non-hedging purposes. Any or all of these investment techniques may be used
at any time and in any combination, and there is no particular strategy that
dictates the use of one technique rather than another, as use of any technique
or instruments is a function of numerous variables including market conditions.
The ability of the Fund to utilize these techniques and instruments successfully
will depend on IAI's ability to predict pertinent market movements, which cannot
be assured. The Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Such techniques and
instruments involving financial futures and options thereon will be purchased,
sold or
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entered into only for bona fide hedging, risk management or portfolio management
purposes and not for speculative purposes.
TEMPORARY DEFENSIVE
POSITION
In unusual market conditions, when IAI believes a temporary defensive position
is warranted, the Fund may invest without limitation in investment-grade fixed
income securities, that is, securities rated within the four highest grades
assigned by Moody's or S&P, or money market securities (including repurchase
agreements). Money market securities will only be purchased if they have been
given one of the two top ratings by a major ratings service or, if unrated, are
of comparable quality as determined by IAI. If the Fund maintains a temporary
defensive position, investment income may increase and may constitute a large
portion of the Fund's return.
PORTFOLIO TURNOVER
The Fund will dispose of securities without regard to the time they have been
held when such action appears advisable to management either as a result of
securities having reached a price objective, or by reason of developments not
foreseen at the time of the investment decision. Since investment changes
usually will be made without reference to the length of time a security has been
held, a significant number of short-term transactions may result. Accordingly,
the Fund's annual portfolio turnover rate cannot be anticipated and may be
relatively high. High turnover rates (100% or more) as the Fund experienced in
its most recent fiscal year, increase transaction costs, and may increase
taxable capital gains. The Fund's historical portfolio turnover rates are set
forth in the section " Financial Highlights."
Further information regarding these and other securities and investment
techniques is contained in the Statement of Additional Information.
FUND RISK FACTORS
INTEREST RATE RISK
As a mutual fund investing in fixed-income securities, the 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 the 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
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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 of the fixed income portion of the Fund to be 3.5 to 7 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.
CREDIT RISK
The fixed income portion of the 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 the Fund. The credit
risk of the Fund depends on the quality of its investments. Reflecting their
higher risks, lower-quality bonds generally offer higher yields (all other
factors being equal).
RISKS ASSOCIATED WITH
ADJUSTING INVESTMENT
EXPOSURE
The techniques and instruments described in the section "Adjusting Investment
Exposure", including derivative contracts, have risks associated with them
including possible default by the other party to the transaction, illiquidity
and, to the extent IAI's view as to certain market movements is incorrect, the
risk that the use of such techniques and instruments could result in losses
greater than if they had not been used. Use of put and call options may result
in losses to the Fund, force the sale or purchase of portfolio securities at
inopportune times or for prices higher than (in the case of put options) or
lower than (in the case of call options), current market values, limit the
amount of appreciation the Fund can realize on its investments or cause the Fund
to hold a security it might otherwise sell. The use of currency transactions can
result in the Fund incurring losses as a result of a number of factors including
the imposition of exchange controls, suspension of settlements or the inability
to deliver or receive a specified currency. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may not have
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markets. As a result, in certain markets, the Fund might not be able to close
out a transaction without incurring substantial losses, if at all. Although the
use of futures contracts and options transactions for hedging should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of these
techniques would reduce net asset value, and possibly income, and such losses
can be greater than if the techniques and instruments had not been utilized.
CALL RISK
The fixed income portion of the Fund is also subject to call risk. Call risk is
the possibility that corporate bonds held by the Fund will be repaid prior to
maturity. Call provisions, common in many corporate bonds held by the 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 the 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 the Fund would decline.
RISKS OF LOWER-RATED
DEBT SECURITIES
The Fund may invest in debt securities commonly known as "junk" bonds. Such
securities are subject to higher risks and greater market fluctuations than are
lower-yielding, higher-rated securities. The price of junk bonds has been found
to be less sensitive to changes in prevailing interest rates than higher-rated
investments, but is likely to be more sensitive to adverse economic changes or
individual corporate developments. During an economic downturn or substantial
period of rising interest rates, highly leveraged issuers may experience
financial stress which would adversely affect their ability to service their
principal and interest payment obligations, to meet their projected business
goals or to obtain additional financing. If the issuers of a fixed-income
security owned by the Fund were to default, the Fund might incur additional
expenses to seek recovery. The risk of loss due to default by issuers of junk
bonds is significantly greater than that associated with higher-rated securities
because such securities generally are unsecured and frequently are subordinated
to the prior payment of senior indebtedness. In addition, periods of economic
uncertainty and change can be expected to result in an increased volatility of
market prices of junk bonds and a concomitant volatility in the net asset value
of a share of the Fund.
The secondary market for junk bonds is less liquid than the markets for higher
quality securities and, as such, may have an adverse effect on the market prices
of certain securities. The limited liquidity of the
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market may also adversely affect the ability of the Fund to arrive at a fair
value for certain junk bonds at certain times and could make it difficult for
the Fund to sell certain securities. For a description of Moody's and S&P
ratings, see Appendix A to the Statement of Additional Information.
FOREIGN INVESTMENT RISK
FACTORS
Investments in foreign securities involve risks that are different in some
respects from investments in securities of U.S. issuers, such as the risk of
fluctuations in the value of the currencies in which they are denominated, the
risk of adverse political and economic developments and, with respect to certain
countries, the possibility of expropriation, nationalization or confiscatory
taxation or limitations on the removal of funds or other assets of the Fund.
Securities of some foreign companies are less liquid and more volatile than
securities of comparable domestic companies. There also may be less publicly
available information about foreign issuers than domestic issuers, and foreign
issuers generally are not subject to the uniform accounting, auditing and
financial reporting standards, practices and requirements applicable to domestic
issuers. Because the Fund can invest in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates may affect the value of securities in the portfolio. Foreign currency
exchange rates are determined by forces of supply and demand in the foreign
exchange markets and other economic and financial conditions affecting the world
economy. A decline in the value of any particular currency against the U.S.
dollar will cause a decline in the U.S. dollar value of the Fund's holdings of
securities denominated in such currency and, therefore, will cause an overall
decline in the Fund's net asset value and net investment income and capital
gains, if any, to be distributed in U.S. dollars to shareholders by the Fund.
Delays may be encountered in settling securities transactions in certain foreign
markets, and the Fund will incur costs in converting foreign currencies into U.S
dollars. Custody charges are generally higher for foreign securities.
MANAGER RISK
IAI manages the Fund according to the traditional methods of "active" investment
management, which involve the buying and selling of securities based upon
economic, financial and market analysis and investment judgment. Manager risk
refers to the possibility that IAI may fail to execute the Fund's investment
strategy effectively. As a result, the Fund may fail to achieve its stated
objective.
INVESTMENT RESTRICTIONS
The Fund is subject to certain other investment policies and restrictions
described in the Statement of Additional Information, some of which are
fundamental and may not be changed without the approval of the shareholders of
the Fund. The Fund is a diversified investment company and has a fundamental
policy that, with respect to 75% of its total assets, it may not invest more
than 5% of its total assets in any one issuer. The Fund, also as fundamental
policies, may not invest more than 25% or more of its assets in any one industry
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and may borrow only for temporary or emergency purposes in an amount not
exceeding one-third of its total assets.
Please refer to the Statement of Additional Information for a further discussion
of the Fund's investment risks and investment restrictions.
MANAGEMENT
Balanced Fund was created on April 10, 1992, 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. Under Minnesota law, the
Fund's Board of Directors is generally responsible for the overall operation and
management of the Fund. IAI serves as the investment adviser and manager of the
Fund pursuant to a written advisory agreement (the "Advisory Agreement"). IAI
also furnishes investment advice to other concerns including other investment
companies, pension and profit sharing plans, portfolios of foundations,
religious, educational and charitable institutions, trusts, municipalities and
individuals, having total assets in excess of $16 billion. IAI's ultimate
corporate parent is Lloyds TSB Group plc, a publicly-held financial services
organization headquartered in London, England. Lloyds TSB Group plc is one of
the largest personal and corporate financial services groups in the United
Kingdom, and is engaged in a wide range of activities including commercial and
retail banking. The address of IAI is that of the Fund.
Pursuant to a written agreement with the Fund (the "Management Agreement"), IAI
provides the Fund with investment advisory services and is responsible for the
overall management of the Fund's business affairs subject to the authority of
the Board of Directors. The Management Agreement also provides that, except for
brokerage commissions and other expenditures in connection with the purchase and
sale of portfolio securities, interest and, in certain circumstances, taxes and
extraordinary expenses, IAI shall pay all of the Fund's operating expenses. As
compensation under the Management Agreement, the Fund paid IAI 1.25% of the
Fund's average daily net assets during the last fiscal year . The Management
Agreement further provides that IAI will either reimburse the Fund for the fees
and expenses it pays to directors who are not "interested persons" of the Fund
or reduce its fee by an equivalent amount. Because IAI is paying Fund operating
expenses, these fees represent the Fund's total expenses. 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 the Fund in the absence of willful
misfeasance, bad faith or negligence in the performance of its duties and
obligations.
The Fund is managed by a team of IAI investment professionals which is
responsible for making the day-to-day investment decisions for the Fund. The
team leads are Larry Hill and Donald Hoelting. Mr. Hill is IAI's Chief Fixed
Income Officer and a member of the Board of Directors, and has served as a fixed
income portfolio manager since joining IAI in 1984. Mr. Hoelting
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joined IAI in April 1996 as Vice President and equity portfolio manager. Before
joining IAI, Mr. Hoelting was Chief Investment Officer and Portfolio Manager for
Jefferson National Bank and Trust from 1989 to 1996.
R. David Spreng has been responsible for Fund investments in restricted
securities, including equity and limited partnership interests in privately-held
companies and investment partnerships, since 1993. Mr. Spreng is a Senior Vice
President of IAI and has served IAI in several capacities since 1989.
Pursuant to a Subadvisory Agreement, IAI has delegated its investment management
responsibilities with respect to the Fund's investments in securities of foreign
issuers to its affiliate, IAI International Ltd. Roy Gillson has responsibility
for the Fund's investments in securities of foreign issuers. Mr. Gillson is IAI
International's Chief Investment Officer and a member of its Board of Directors.
Mr. Gillson has served as a portfolio manager since joining IAI International in
1983. As an affiliate of IAI, IAI International receives no compensation under
the Subadvisory Agreement.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., IAI may consider sales of shares of a Fund as a factor
in the selection of broker-dealers to execute the Funds securities transactions.
INVESTMENT
PERFORMANCE
From time to time the Fund may advertise performance data including monthly,
quarterly, yearly or cumulative total return, average annual total return and
yield figures. All such figures are based on historical earnings and performance
and are not intended to be indicative of future performance. The investment
return on and principal value of an investment in the Fund will fluctuate, so
that an investor's shares, when redeemed, may be worth more or less than their
original cost.
Total return is the change in value of an investment in the Fund over a given
period, assuming reinvestment of any dividends and capital gains. A cumulative
total return reflects actual performance over a stated period of time. An
average annual total return is a hypothetical rate of return that, if achieved
annually, would have produced the same cumulative total return if performance
had been constant over the entire period.
Yield refers to the income generated by an investment in the Fund over a given
period of time, expressed as an annual percentage rate. Yields are calculated
according to a standard that is required for all funds. Because this differs
from other accounting methods, the quoted yield may not equal the income
actually paid to shareholders.
For additional information regarding the calculation of such total return and
yield figures, see "Investment Performance" in the Statement of Additional
Information. Further information about the performance of the Fund is contained
in the Fund's Annual Report to shareholders which may be obtained without charge
from the Fund.
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Comparative performance information may be used from time to time in advertising
or marketing the Fund's shares, including data on the performance of other
mutual funds, indexes or averages of other mutual funds, indexes of related
financial assets or data, and other competing investment and deposit products
available from or through other financial institutions. The composition of these
indexes, averages or products differs from that of the Fund. The comparison of
the Fund to an alternative investment should be made with consideration of
differences in features and expected performance. The Fund may also note its
mention in newspapers, magazines, or other media from time to time. The Fund
assumes no responsibility for the accuracy of such data. For additional
information on the types of indexes, averages and periodicals that might be
utilized by the Fund in advertising and sales literature, see the section
"Investment Performance" in the Statement of Additional Information.
COMPUTATION OF NET
ASSET VALUE AND
PRICING
The Fund is open for business each day the New York Stock Exchange (NYSE) is
open. IAI normally calculates the Fund's net asset value per share (NAV) as of
the close of business of the NYSE, normally 3 p.m. Central time.
The Fund's NAV is the value of a single share. The NAV is computed by adding up
the value of the Fund's investments, cash, and other assets, subtracting its
liabilities, and then dividing the result by the number of shares outstanding.
The Fund's investments with remaining maturities of 60 days or less at initial
purchase date may be valued on the basis of amortized cost. This method
minimizes the effect of changes in a security's market value. Other portfolio
securities and assets are valued primarily on the basis of market quotations or,
if quotations are not readily available, by a method that the Board of Directors
believes accurately reflects fair value. Foreign securities are valued on the
basis of quotations from the primary market in which they are traded, and are
translated from the local currency into U.S. dollars using current exchange
rates.
The offering price (price to buy one share) and redemption price (price to sell
one share) are the Fund's NAV.
PURCHASE OF SHARES
The Fund offers its shares continually to the public at the net asset value of
such shares. Shares may be purchased directly from the Fund or through certain
security dealers who have responsibility to promptly transmit orders and may
charge a processing fee, provided that the Fund 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 in connection with the purchase of Fund shares.
Shares may be purchased for cash or in exchange for securities which are
permissible
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investments of the Fund, subject to IAI's discretion and its determination that
the securities are acceptable. Securities accepted in exchange will be valued on
the basis of market quotations or, if market quotations are not available, by a
method that IAI believes accurately reflects fair value. In addition, securities
accepted in exchange are required to be liquid securities that are not
restricted as to transfer.
The minimum initial investment to establish a retail account with the IAI Mutual
Funds is $5,000. Such initial investment may be allocated among the Fund and
other IAI Mutual Funds as desired, provided that no less than $1,000 is
allocated to any one fund. The minimum initial investment for IRA accounts is
$2,000, provided that the minimum amount that may be allocated to any one fund
is $1,000. Once the account minimum has been met, subsequent purchases can be
made in the Fund for $100 or more. Such minimums may be waived for participants
in the IAI Investment Club.
Investors may satisfy the minimum investment requirement by participating in the
STAR Program. Participation in the STAR Program requires an initial investment
of $1,000 per Fund and a commitment to invest an aggregate of $5,000 within 24
months. If a STAR Program participant does not invest an aggregate of $5,000 in
the IAI Mutual Funds within 24 months, IAI may, at its option, redeem such
shareholder's interest and remit such amount to the shareholder. Investors
wishing to participate in the STAR Program should contact the Fund to obtain a
STAR Program application.
To purchase shares, forward the completed application and a check payable to
"IAI Funds" to the Fund. Third party checks will not be accepted for initial
account investments. Upon receipt, your account will be credited with the number
of full and fractional shares which can be purchased at the net asset value next
determined after receipt of the purchase order by the Fund.
Purchases of shares are subject to acceptance or rejection by the Fund on the
same day the purchase order is received and are not binding until so accepted.
It is the policy of the Fund and IAI Securities to keep confidential information
contained in the application and regarding the account of an investor or
potential investor in the Fund.
All correspondence relating to the purchase of shares should be directed to the
office of the Fund, P.O. Box 357, Minneapolis, Minnesota 55440 or, if using
overnight delivery, to 3700 First Bank Place, 601 Second Avenue South,
Minneapolis, Minnesota 55402. For assistance in completing the application
please contact IAI Mutual Funds Shareholder Services at 1-800-945-3863.
BANK WIRE PURCHASES
Shares may be purchased by having your bank wire federal funds (funds of the
Federal Reserve System) to Norwest Bank Minnesota.
Wire orders will be accepted only on days your bank, the transfer agent, the
Fund and Norwest Bank Minnesota are open for business. The payment must be
received by the Fund before the close of business to be credited to your account
that day. Otherwise, it will be processed the next business day.
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The wire purchase will not be considered made until the wired amount is received
and the purchase is accepted by such Fund. If the wire order does not contain
the information stated below, such Fund may reject it. Any delays that may occur
in wiring federal funds, including delays in processing by the banks, are not
the responsibility of such Fund or the transfer agent.
You must pay any charges assessed by your bank for the wire service. If a wire
order is rejected, all money received by the Fund, less any costs incurred by
the Fund or the transfer agent in rejecting it, will be returned promptly.
If the wire order is for a new account, you should call IAI Shareholder Services
at 1-800-945-3863 to advise them of the investment and to obtain an account
number and instructions. The wire should be sent to: Norwest Bank Minnesota,
Routing Number 091000019, Minneapolis, Minnesota, Credit to: IAI Mutual Funds
Account Number 6355002264. It should state the following:
"For further credit to personal account # ______________ (your account number)
for _______________________ (your name) and __________________ (Fund name)."
A completed application must be sent to and received by the Fund before the wire
is sent.
If the wire order is an addition to an existing account, the wire must include
the information required above for the new accounts. As soon as the wire is
sent, you should call IAI Shareholder Services, as described above, and advise
them of your name, your account number and the name of the bank transmitting the
federal funds.
RETIREMENT PLANS
Shares of the Fund may be an appropriate investment medium for various
retirement plans. Persons desiring information about establishing an Individual
Retirement Account (IRA) (for employed persons and their spouses) or other
retirement plans should contact IAI Mutual Funds Shareholder Services at
1-800-945-3863. All retirement plans involve a long-term commitment of assets
and are subject to various legal requirements and restrictions. The legal and
tax implications may vary according to the circumstances of the individual
investor. Therefore, you are urged to consult with an attorney or tax advisor
prior to the establishment of such a plan.
AUTOMATIC INVESTMENT PLAN
Investors may arrange to make regular investments of $100 or more per Fund on a
monthly or twice a month basis, effective as of the 4th and/or the 18th day of
each month (or the next business day), through automatic deductions from their
checking or savings accounts. Such investors may, of course, terminate their
participation in the Automatic Investment Plan at any time upon written notice
to the Fund. Any changes or instructions to terminate existing Automatic
Investment Plans must be received 30 days preceding the date on which the change
or termination is to take place. Investors interested in participating in the
Automatic Investment plan should
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complete the Automatic Investment Plan application and return it to the Fund.
REDEMPTION OF
SHARES
Registered holders of Fund shares may at any time require the Fund to redeem its
shares upon its written request. All correspondence relating to the redemption
of shares should be directed to the office of IAI Mutual Funds, P.O. Box 357,
Minneapolis, Minnesota 55440. Shareholders may redeem shares by phone, subject
to a limit of $50,000, provided such shareholders have authorized the Fund to
accept telephone instructions. For assistance in redeeming shares by phone,
please contact the IAI Mutual Funds Shareholder Services at 1-800-945-3863.
Certificates presented for redemption must be endorsed on the back with the
signature of the person whose name appears on the certificate and must be
signature guaranteed. If no certificate has been issued, redemption instructions
must be signed by the person(s) in whose name the shares are registered. If the
redemption proceeds are to be paid or mailed to any person other than the
shareholder of record or if redemption proceeds are in excess of $50,000, the
Fund will require that the signature on the written instructions be guaranteed
by a participant in a signature guarantee program, which may include certain
national banks or trust companies or certain member firms of national securities
exchanges. (Notarization by a Notary Public is NOT ACCEPTED.) If the shares are
held of record in the name of a corporation, partnership, trust or fiduciary,
the Fund may require additional evidence of authority prior to accepting a
request for redemption.
For shareholders who established receiving proceeds by Federal Funds Wire at the
time they opened their account, telephone instructions will be accepted for
redemption of amount up to $50,000 ($1,000 Minimum) and proceeds will be wired
on the next business day to a pre-designated bank account. Wire redemption
requests will only be processed on days your bank, the transfer agent, the
Portfolios and Norwest Bank Minnesota are open for business.
In order to add this feature to an existing account or to change existing bank
account information, please submit a letter of instructions including your bank
information to IAI Shareholder Services at the address listed in the section
"Additional Information." The letter must be signed by all registered owners,
and their signatures must be guaranteed.
Your account will be charged a fee of $10 each time redemption proceeds are
wired to your bank. Your bank may also charge you a fee for receiving a Federal
Funds Wire.
Neither the transfer agent nor the Fund can be responsible for the efficiency of
the Federal Funds wire system or the shareholder's bank.
The redemption proceeds received by the investor are based on the net asset
value next determined after redemption instructions in good order are received
by the Fund. Since the value of shares redeemed is based upon the value of the
Fund investment at the time of redemption, it
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may be more or less than the price originally paid for the shares.
Payment for shares redeemed will ordinarily be made within seven days after a
request for redemption has been made. Normally the Fund will mail payment for
shares redeemed on the business day following receipt of the redemption request.
The Fund will not send redemption proceeds until checks (including certified
checks or cashiers checks) received in payment for shares have cleared, which
may take up to ten days or more.
Following a redemption or transfer request, if the value of a shareholder's
interest in the Fund falls below $500, the Fund reserves the right to redeem
such shareholder's entire interest and remit such amount. Such a redemption will
only be effected following: (a) a redemption or transfer by a shareholder which
causes the value of such shareholder's interest in the Fund to fall below $500;
(b) the mailing by the Fund to such shareholder of a notice of intention to
redeem; and (c) the passage of at least six months from the date of such
mailing, during which time the investor will have the opportunity to make an
additional investment in the Fund to increase the value of such investor's
account to at least $500.
EXCHANGE PRIVILEGE
The Exchange Privilege enables shareholders to purchase, in exchange for shares
of the Fund, shares of other IAI Mutual Funds. These funds have different
investment objectives from the Fund. Shareholders may exchange shares of the
Fund for shares of another fund managed by IAI, provided that the fund whose
shares will be acquired is duly registered in the state of the shareholder's
residence and the shareholder otherwise satisfies the fund's purchase
requirements. Although the Fund does not currently charge a fee for use of the
Exchange Privilege, it reserves the right to do so in the future.
Because excessive trading can hurt Fund performance and shareholders, there is a
limit of four exchanges out of each IAI Mutual Fund per calendar year per
account. Accounts under common ownership or control, including accounts with the
same taxpayer identification number, will be counted together for purposes of
the four exchange limit. The Fund reserves the right to temporarily or
permanently terminate the Exchange Privilege of any investor who exceeds this
limit. The limit may be modified for certain retirement plan accounts, as
required by the applicable plan document and/or relevant Department of Labor
regulations, and for Automatic Exchange Plan participants. The Fund also
reserves the right to refuse or limit exchange purchases by any investor if, in
IAI's judgment, the Fund would be unable to invest the money effectively in
accordance with its investment objectives and policies, or would otherwise
potentially be adversely affected.
Fund shareholders wishing to exercise the Exchange Privilege should notify the
Fund in writing or, provided such shareholders have authorized the Fund to
accept telephone instructions, by telephone. At the time of the exchange, if the
net asset value of the shares redeemed in connection with the exchange is
greater
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than the investor's cost, a taxable capital gain will be realized. A capital
loss will be realized if at the time of the exchange the net asset value of the
shares redeemed in the exchange is less than the investor's cost. The Fund
reserves the right to terminate or modify the Exchange Privilege in the future.
AUTOMATIC EXCHANGE
PLAN
Investors may arrange to make regular exchanges of $100 or more between any of
the IAI Mutual Funds on a monthly basis. Exchanges will take place at the
closing price of the fifth day of each month (or the next business day).
Shareholders are responsible for making sure sufficient shares exist in the Fund
account from which the exchange takes place. If there are not sufficient funds
in the Fund account to meet the requested exchange amount, the Automatic
Exchange Plan will be suspended. Shareholders may not close Fund accounts
through the Automatic Exchange Plan. Investors interested in participating in
the Automatic Exchange Plan should complete the Automatic Exchange Plan portion
of their application. For assistance in completing the application contact IAI
Mutual Fund Shareholder Services at 1-800-945-3863.
AUTHORIZED
TELEPHONE TRADING
Investors can transact account exchanges and redemptions via the telephone by
completing the Authorized Telephone Trading section of the application and
returning it to the Fund. Investors requesting telephone trading privileges will
be provided with a personal identification number ("PIN") that must accompany
any instructions by phone. Shares will be redeemed or exchanged at the next
determined net asset value. Telephone redemption proceeds are subject to a
$50,000 limit and must be made payable to the owner(s) of record and delivered
to the address of record.
In order to confirm that telephone instructions for redemptions and exchanges
are genuine, the Fund has established reasonable procedures, including the
requirement that a personal identification number accompany telephone
instructions If the Fund or the transfer agent fail to follow these procedures,
the Fund may be liable for losses due to unauthorized or fraudulent
instructions. To the extent the reasonable procedures are followed, none of the
Fund, its transfer agent, IAI, or any affiliated broker dealer will be liable
for any loss, injury, damage, or expense for acting upon telephone instructions
believed to be genuine, and will otherwise not be responsible for the
authenticity of any telephone instructions, and, accordingly, the investor bears
the risk of loss resulting from telephone instructions. All telephone
redemptions and exchange requests will be tape recorded. Telephone redemptions
are not permitted for IRA or Simplified Employee Pension ("SEP") accounts. For
redemptions from these accounts, please contact IAI Mutual Fund Shareholder
Services at 1-800-945-3863 for instructions.
21
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IAI MUTUAL FUNDS
----------------------------------
IAI BALANCED FUND
SYSTEMATIC CASH
WITHDRAWAL PLAN
The Fund has available a Systematic Cash Withdrawal Plan for any investor
desiring to follow a program of systematically withdrawing a fixed amount of
money from an investment in shares of the Fund. An investment of $10,000 is
required to establish the plan. Payments under the plan will be made monthly or
quarterly in amounts of $100 or more. Shares will be sold with the closing price
of the 15th of the applicable month (or the next business day). To provide funds
for payment, the Fund will redeem as many full and fractional shares as
necessary at the redemption price, which is net asset value. The holder of a
Systematic Cash Withdrawal Plan must have income dividends and any capital gains
distributions reinvested in full and fractional shares at net asset value.
Payments under this plan, unless pursuant to a retirement plan, should not be
considered income. Withdrawal payments may exceed dividends and distributions
and, to this extent, there will be a reduction in the investor's equity. An
investor should also understand that this plan cannot insure profit, nor does it
protect against any loss in a declining market. Careful consideration should be
given to the amount withdrawn each month. Excessive withdrawals could lead to a
serious depletion of equity, especially during periods of declining market
values. Fund management will be available for consultation in this matter.
Plan application forms are available through the Fund. If you would like
assistance in completing the application contact IAI Mutual Fund Shareholder
Services at 1-800-945-3863.
DIVIDENDS,
DISTRIBUTIONS AND
TAX STATUS
The policy of the Fund is to pay dividends from net investment income
semiannually and to make distributions of realized capital gains, if any,
annually. However, provisions in the Internal Revenue Code of 1986, as amended
(the "Code"), may result in additional net investment income and capital gains
distributions by the Fund. When you open an account, you should specify on your
application how you want to receive your distributions. The Fund offers three
options: Full Reinvestment--your dividend and capital gain distributions will be
automatically reinvested in additional shares of the Fund; Capital Gains
Reinvestment--your capital gain distributions will be automatically reinvested,
but your income dividend distributions will be paid in cash; and Cash--your
income dividends and capital gain distributions will be paid in cash.
Distributions taken in cash can be sent via check or transferred directly to
your account at any bank, savings and loan or credit union that is a member of
the Automated Clearing House (ACH) network. UNLESS DIRECTED OTHERWISE BY THE
SHAREHOLDER, THE FUND WILL AUTOMATICALLY REINVEST ALL SUCH DISTRIBUTIONS INTO
FULL AND FRACTIONAL SHARES AT NET ASSET VALUE.
The Fund's Directed Dividend service allows you to invest your dividends and/or
capital gain distributions directly
22
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI BALANCED FUND
into another IAI Mutual Fund. Contact IAI Mutual Fund Shareholder Services at
1-800-945-3863 for details.
The Fund intends to qualify for tax purposes as a regulated investment company
under Subchapter M of the Internal Revenue Code during the current taxable year.
If so qualified, the Fund will not be subject to federal income tax on income
that it distributes to its shareholders.
Distributions are subject to federal income tax, and may also be subject to
state or local taxes. If you live outside the United States, your distributions
could also be taxed by the country in which you reside. Your distributions are
taxable when they are paid, whether you take them in cash or reinvest them in
additional shares.
For federal income tax purposes, the Fund's income and short-term capital gain
distributions are taxed as dividends; long-term capital gain distributions
designated as capital gain dividends are taxed as long-term capital gains,
regardless of the length of time the shareholder has held the shares.
Upon redemption of shares of the Fund the shareholder will generally recognize a
capital gain or loss equal to the difference between the amount realized on the
redemption and the shareholder's adjusted basis in such shares. Such gain or
loss will be long-term if the shares have been held for more than one year.
Under the Code, the deductibility of capital losses is subject to certain
limitations.
Annually, IAI will send you and the IRS a statement showing the amount of each
taxable distribution you received in the previous year. Whenever you sell shares
of the Fund, IAI will send you a confirmation statement showing how many shares
you sold and at what price. You will also receive an account statement quarterly
and a consolidated transaction statement annually. However, it is up to you or
your tax preparer to determine whether this sale resulted in a capital gain and,
if so, the amount of tax to be paid. Be sure to keep your account statements;
the information they contain will be essential in calculating the amount of your
capital gains.
The foregoing relates to federal income taxation as in effect as of the date of
this Prospectus. For a more detailed discussion of the federal income tax
consequences of investing in shares of the Fund, see "Tax Status" in the
Statement of Additional Information.
DESCRIPTION OF
COMMON STOCK
All shares of the Fund have equal rights as to redemption, dividends and
liquidation, and will be fully paid and nonassessable when issued and will have
no preemptive or conversion rights.
The shares of the Fund have noncumulative voting rights, which means that the
holders of more than 50% of the shares voting for the election of directors can
elect 100% of the directors if they choose to do so. On some issues, such as the
election of directors, all shares of IAI Investment Funds VI, Inc., vote
together as one series. On an issue affecting only a particular series, such as
voting on the Management Agreement, only the approval of a particular series is
required to make the agreement effective with respect to such series.
23
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI BALANCED FUND
Annual or periodically scheduled regular meetings of shareholders will not be
held except as required by law. Minnesota corporation law does not require an
annual meeting; instead, it provides for the Board of Directors to convene
shareholder meetings when it deems appropriate. In addition, if a regular
meeting of shareholders has not been held during the immediately preceding
fifteen months, shareholders holding three percent or more of the voting shares
of the Fund may demand a regular meeting of shareholders of the Fund by written
notice of demand given to the chief executive officer or the chief financial
officer of the Fund. Within thirty days after receipt of the demand by one of
those officers, the Board of Directors shall cause a regular meeting of
shareholders to be called and held no later than ninety days after receipt of
the demand, all at the expense of the Fund. An annual meeting will be held on
the removal of a director or directors of the Fund if requested in writing by
holders of not less than 10% of the outstanding shares of the Fund.
The shares of the Fund are transferable by endorsement of the certificate if
held by the shareholder, or if the certificate is held by the Fund, by delivery
to such Fund of transfer instructions. Transfer instructions or certificates
should be delivered to the office of the Fund. The Fund is not bound to
recognize any transfer until it is recorded on the stock transfer books
maintained by the Fund.
COUNSEL AND
AUDITORS
The firm of Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402, provides legal counsel for the Fund. KPMG Peat Marwick LLP, 4200 Norwest
Center, Minneapolis, Minnesota 55402, serves as the independent auditors for the
Fund.
CUSTODIAN, TRANSFER
AGENT AND DIVIDEND
DISBURSING AGENT
The Custodian for the Fund is Norwest Bank Minnesota, N.A., Norwest Center,
Sixth and Marquette, Minneapolis, Minnesota 55479. Norwest employs foreign
subcustodians and depositories, which were approved by the Fund's Board of
Directors in accordance with the rules and regulations of the Securities and
Exchange Commission, for the purpose of providing custodial services for the
Fund's assets held outside the United States. IAI acts as the Fund's transfer
agent, dividend disbursing agent and IRA Custodian, at P.O. Box 357,
Minneapolis, Minnesota 55440.
24
<PAGE>
IAI MUTUAL FUNDS
----------------------------------
IAI BALANCED FUND
ADDITIONAL INFORMATION
The Fund sends to its shareholders a six-month unaudited and an annual audited
financial report, each of which includes a list of investment securities held.
To reduce the volume of mail you receive, only one copy of most Fund reports,
such as the Fund's Annual Report, may be mailed to your household (same surname,
same address). Please call IAI Mutual Fund Shareholder Services at
1-800-945-3863 if you wish to receive additional shareholder reports.
Shareholder inquiries should be directed to the Fund at the telephone
number or mailing address listed on the inside back cover of this Prospectus.
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TO OPEN
AN ACCOUNT
1.800.945.3863
612.376.2700
P.O. Box 357
Minneapolis, MN 55440
OVERNIGHT
DELIVERY
ADDRESS
3700 First Bank Place
601 Second Avenue South
Minneapolis, MN 55402
<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>
[LOGO]
MUTUAL FUNDS
IAI BALANCED FUND
Statement of Additional Information
dated August 1, 1997
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to a Prospectus dated August 1,
1997, and should be read in conjunction therewith. A copy of the Prospectus may
be obtained from the Fund, 3700 First Bank Place, P.O. Box 357, Minneapolis,
Minnesota 55440 (telephone: 1-612-376-2700 or 1-800-945-3863).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
INVESTMENT OBJECTIVE AND POLICIES...........................................2
INVESTMENT RESTRICTIONS.....................................................14
INVESTMENT PERFORMANCE......................................................16
MANAGEMENT..................................................................18
CUSTODIAL SERVICE...........................................................22
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE..........................22
CAPITAL STOCK...............................................................24
NET ASSET VALUE AND PUBLIC OFFERING PRICE...................................24
TAX STATUS..................................................................25
LIMITATION OF DIRECTOR LIABILITY............................................26
FINANCIAL STATEMENTS........................................................27
Appendix A - Ratings Of Debt Securities.....................................A-1
</TABLE>
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>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of IAI Balanced Fund (the "Fund") are
summarized on the front page of the Prospectus and in the text of the Prospectus
under "Investment Objectives and Policies." Investors should understand that all
investments have risks. There can be no guarantee against loss resulting from an
investment in the Fund, and there can be no assurance that the Fund's investment
policies will be successful, or that its investment objective will be attained.
Certain of the Fund's investment practices are further explained below.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements relating to the securities in
which it may invest. A repurchase agreement involves the purchase of securities
with the condition that, after a stated period of time, the original seller will
buy back the securities at a predetermined price or yield. The Fund's custodian
will have custody of, and will hold in a segregated account, securities acquired
by the Fund under a repurchase agreement or other securities as collateral. In
the case of a security registered on a book entry system, the book entry will be
maintained in the Fund's name or that of its custodian. Repurchase agreements
involve certain risks not associated with direct investments in securities. For
example, if the seller of the agreement defaults on its obligation to repurchase
the underlying securities at a time when the value of the securities has
declined, the Fund may incur a loss upon disposition of such securities. In the
event that bankruptcy proceedings are commenced with respect to the seller of
the agreement, the Fund's ability to dispose of the collateral to recover its
investment may be restricted or delayed. While collateral will at all times be
maintained in an amount equal to the repurchase price under the agreement
(including accrued interest due thereunder), to the extent proceeds from the
sale of collateral were less than the repurchase price, the Fund could suffer a
loss.
REVERSE REPURCHASE AGREEMENTS
The Fund may invest in reverse repurchase agreements. In a reverse
repurchase agreement, a fund sells a portfolio instrument to another party, such
as a bank or broker-dealer, in return for cash and agrees to repurchase the
instrument at a particular price and time. While a reverse repurchase agreement
is outstanding, the Fund will maintain appropriate liquid assets in a segregated
custodial account to cover its obligation under the agreement. The Fund will
enter into reverse repurchase agreements only with parties whose
creditworthiness has been found satisfactory by IAI, the Fund's investment
adviser and manager. As a result, such transactions may increase fluctuations in
the market value of the Fund's assets and may be viewed as a form of leverage.
Presently, the Fund does not intend to invest more than 5% of its net assets in
reverse repurchase agreements.
SECURITIES OF FOREIGN ISSUERS
The Fund may invest in securities of foreign issuers in accordance with its
investment objectives and policies. Investing in foreign securities may result
in greater risk than that incurred by investing in domestic securities. There is
generally less publicly available information about foreign issuers comparable
to reports and ratings that are published about companies in the United States.
Also, foreign issuers are not subject to uniform accounting and auditing and
financial reporting standards, practices and requirements comparable to those
applicable to United States companies.
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It is contemplated that most foreign equity securities will be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign companies are less liquid and
more volatile than securities of comparable United States companies. Similarly,
volume and liquidity in most foreign bond markets is less than in the United
States and at times volatility of price can be greater than in the United
States. Commissions on foreign stock exchanges are generally higher than
commissions on United States exchanges, although the Fund will endeavor to
achieve the most favorable net results on its portfolio transactions. There is
generally less government supervision and regulation of foreign stock exchanges,
brokers and listed companies than in the United States.
With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of
the Fund, political or social instability, or diplomatic developments which
could affect United States investments in those countries. Moreover, individual
foreign economies may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
IAI is not aware at this time of the existence of any investment or
exchange control regulations which might substantially impair the operations of
the Fund as described in the Prospectus and this Statement of Additional
Information. It should be noted, however, that this situation could change at
any time.
The dividends and interest payable on certain of the Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to such Fund's shareholders.
The expense ratio of the Fund should not be materially affected by the Fund's
investment in foreign securities.
U.S. TREASURY INFLATION-PROTECTION SECURITIES
The Fund may purchase securities issued by the United States government,
which include U.S. Treasury inflation-protection securities.
Inflation-protection securities are a new type of marketable book-entry
security issued by the United States Department of Treasury ("Treasury") with a
nominal return linked to the inflation rate in prices. Inflation-protection
securities will be auctioned and issued on a quarterly basis on the 15th of
January, April, July, and October, beginning on January 15, 1997. Initially,
they will be issued as 10-year notes, with other maturities added thereafter.
The index used to measure inflation will be non-seasonally adjusted U.S. City
Average All Items Consumer Price Index for All Urban Consumers ("CPI-U").
The value of the principal will be adjusted for inflation, and every six
months the security will pay interest, which will be an amount equal to a fixed
percentage of the inflation-adjusted value of the principal. The final payment
of principal of the security will not be less than the original par amount of
the security at issuance.
The principal of the inflation-protection security will be indexed to the
non-seasonally adjusted CPI-U. To calculate the inflation-adjusted principal
value for a particular valuation date, the value of the principal at issuance is
multiplied by the index ratio applicable to that valuation date. The index ratio
for any date is the ratio of the reference CPI applicable to such date to the
reference CPI applicable to the original issue date. Semiannual coupon interest
is determined by multiplying the inflation-adjusted principal amount by one-half
of the stated rate of interest on each interest payment date.
-3-
<PAGE>
Inflation-adjusted principal or the original par amount, whichever is
larger, will be paid on the maturity date as specified in the applicable
offering announcement. If at maturity the inflation-adjusted principal is less
than the original principal value of the security, an additional amount will be
paid at maturity so that the additional amount plus the inflation-adjusted
principal equals the original principal amount. Some inflation-protection
securities may be stripped into principal and interest components. In the case
of a stripped security, the holder of the stripped principal would receive this
additional amount. The final interest payment, however, will be based on the
final inflation-adjusted principal value, not the original par amount.
The reference CPI for the first day of any calendar month is the CPI-U for
the third preceding calendar month. (For example, the reference CPI for December
1 is the CPI-U reported for September of the same year, which is released in
October.) The reference CPI for any other day of the month is calculated by a
linear interpolation between the reference CPI applicable to the first day of
the month and the reference CPI applicable to the first day of the following
month.
Any revisions the Bureau of Labor Statistics (or successor agency) makes to
any CPI-U number that has been previously released will not be used in
calculations of the value of outstanding inflation-protection securities. In the
case that the CPI-U for a particular month is not reported by the last day of
the following month, the Treasury will announce an index number based on the
last year-over-year CPI-U inflation rate available. Any calculations of the
Treasury's payment obligations on the inflation-protection security that need
that month's CPI-U number will be based on the index number that the Treasury
has announced. If the CPI-U is rebased to a different year, the Treasury will
continue to use the CPI-U series based on the base reference period in effect
when the security was first issued as long as that series continues to be
published. If the CPI-U is discontinued during the period the
inflation-protection security is outstanding, the Treasury will, in consultation
with the Bureau of Labor Statistics (or successor agency), determine an
appropriate substitute index and methodology for linking the discontinued series
with the new price index series. Determinations of the Secretary of Treasury in
this regard are final.
Inflation-protection securities will be held and transferred in either of
two book-entry systems: the commercial book-entry system (TRADES) and TREASURY
DIRECT. The securities will be maintained and transferred at their original par
amount, i.e., not at their inflation-adjusted value. STRIPS components will be
maintained and transferred in TRADES at their value based on the original par
amount of the fully constituted security.
ILLIQUID SECURITIES
The Fund may also invest up to 15% of its net assets in securities that are
considered illiquid because of the absence of a readily available market or due
to legal or contractual restrictions. However, certain restricted securities
that are not registered for sale to the general public that can be resold to
institutional investors may be considered liquid pursuant to guidelines adopted
by the Board of Directors. In the case of a Rule 144A Security, such security is
deemed to be liquid if:
(1) IAI reasonably expects to be able to resell the security to a qualified
institutional buyer, as defined in paragraph (a)(1) of Rule 144A, who is aware
of the Fund's reliance upon Rule 144A in selling the security without
registration, as required by paragraph (d)(2) of Rule 144A;
(2) the Rule 144A Security is not (a) of the same class as securities
listed on any national securities exchange or quoted in NASDAQ as determined
under paragraph (d)(3)(i) of Rule 144A, or (b) a security of a registered
investment company (other than a closed-end investment company); and
(3) the issuer (a) is a foreign government eligible to register securities
under Schedule B of the Securities Act of 1933, (b) is a company that files
periodic reports under the Securities Act of 1934 on Forms 8-K, 10-Q, 10-K or
20-F or provides information under Rule 12g3-2(b) thereunder, or (c) has agreed
in writing to provide the holder and any prospective purchaser of the Rule 144A
Security with reasonably current financial information as required under
paragraph (d)(4)(i) of Rule 144A.
-4-
<PAGE>
Other securities are deemed to be liquid if IAI determines that the
security can be disposed of within seven days in the ordinary course of business
at approximately the amount at which the Fund has valued the instrument for
purposes of calculating the Fund's net asset value. In making this
determination, IAI will consider such factors as may be relevant to the Fund's
ability to dispose of the security, including but not limited to, the following
factors (none of which, standing alone, would necessarily be determinative):
1. the frequency of trades and quotes for the security;
2. the number of dealers willing to purchase or sell the security and the
number of potential purchasers;
3. dealer undertakings to make a market in the security; and
4. the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of transfer).
It is not possible to predict with assurance the maintenance of an
institutional trading market for such securities and the liquidity of the Fund's
investments could be impaired if trading declines.
LENDING PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio
securities to broker-dealers, banks or other financial borrowers of securities.
As with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, the Fund will only enter into loan arrangements with
broker-dealers, banks or other institutions which IAI has determined are
creditworthy under guidelines established by the Fund's Board of Directors. The
Fund may also experience a loss if, upon the failure of a borrower to return
loaned securities, the collateral is not sufficient in value or liquidity to
cover the value of such loaned securities (including accrued interest thereon).
However, the Fund will receive collateral in the form of cash, United States
Government securities, certificates of deposit or other high-grade, short-term
obligations or interest-bearing cash equivalents equal to at least 102% of the
value of the securities loaned. The value of the collateral and of the
securities loaned will be marked to market on a daily basis. During the time
portfolio securities are on loan, the borrower pays the Fund an amount
equivalent to any dividends or interest paid on the securities and the Fund may
invest the cash collateral and earn additional income or may receive an agreed
upon amount of interest income from the borrower. However, the amounts received
by the Fund may be reduced by finders' fees paid to broker-dealers and related
expenses. Presently, the Fund does not intend to lend more than 5% of its net
assets to broker-dealers, banks or other financial borrowers of securities.
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.
-5-
<PAGE>
WHEN-ISSUED/DELAYED-DELIVERY TRANSACTIONS
The Fund may buy and sell securities on a delayed-delivery or when-issued
basis. These transactions involve a commitment by the Fund to purchase or sell
specific securities at a predetermined price or yield, with payment and delivery
taking place after the customary settlement period for that type of security
(and more than seven days in the future). Typically, no interest accrues to the
purchaser until the security is delivered. The Fund may receive fees for
entering into delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, the Fund assumes
the rights and risks of ownership, including the risk of price and yield
fluctuations. Because the Fund is not required to pay for securities until the
delivery date, these risks are in addition to the risks associated with the
Fund's other investments. If the Fund remains substantially fully invested at a
time when delayed delivery purchases are outstanding, the delayed-delivery
purchases may result in a form of leverage. When delayed-delivery purchases are
outstanding, the Fund will set aside appropriate liquid assets in a segregated
custodial account to cover its purchase obligations. When the Fund has sold a
security on a delayed-delivery basis, the Fund does not participate in further
gains or losses with respect to the security. If the other party to a
delayed-delivery transaction fails to deliver or pay for the securities, the
Fund could miss a favorable price or yield opportunity, or could suffer a loss.
The Fund may renegotiate delayed-delivery transactions after they are
entered into, and may sell underlying securities before they are delivered,
which may result in capital gains or losses.
DOLLAR ROLLS
In connection with its ability to purchase securities on a when-issued or
forward commitment basis, the Fund may enter into "dollar rolls" in which the
Fund sells securities for delivery in the current month and simultaneously
contracts with the same counterparty to repurchase similar (same type, coupon
and maturity) but not identical securities on a specified future date. The Fund
gives up the right to receive principal and interest paid on the securities
sold. However, the Fund would benefit to the extent of any difference between
the price received for the securities sold and lwoer forward price for the
futures purchase plus any fee income received. Unless such benefits exceed the
income and capital appreciation that would have been realized on the securities
sold as part of the dollar roll, the use of this technique will diminish the
investment performance of the Fund compared with what such performance would
have been without the use of dollar rolls. The Fund will hold and maintain in a
segregated account until the settlement date cash, government securities, or
liquid high-grade debt securities in an amount equal to the value of the
when-issued or forward commitment securities. The benefits derived from the use
of dollar rolls may depend, among other things, upon IAI's ability to predict
interest rates correctly. There is no assurance that dollar rolls can be
successfully employed. In addition, the use of dollar rolls by the Fund whlie
remaining substantially fully invested increases the amount of the Fund's assets
that are subject to market risk to an amount that is greater than the Fund's net
asset value, which could result in increased volatility of the price the Fund's
shares.
MORTGAGE-BACKED SECURITIES
The Fund may purchase mortgage-backed securities issued by government and
non-government entities such as banks, mortgage lenders, or other financial
institutions. A mortgage-backed security may be an obligation of the issuer
backed by a mortgage or pool of mortgages or a direct interest in an underlying
pool of mortgages. Some mortgage-backed securities, such as collateralized
mortgage obligations or CMOs, make payments of both principal and interest at a
variety of intervals; others make semiannual interest payments at a
predetermined rate and repay principal at maturity (like a typical bond).
Mortgage-backed securities are based on different types of mortgages including
those on commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and the Fund
may invest in them if IAI determines they are consistent with the Fund's
investment objective and policies.
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<PAGE>
The value of mortgage-backed securities may change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Non-government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these securities
and may lower their total returns.
STRIPPED MORTGAGE BACKED SECURITIES
Such securities are created when a U.S. government agency or a financial
institution separates the interest and principal components of a mortgage-backed
security and sells them as individual securities. The holder of the
"principal-only" security (PO) receives the principal payments made by the
underlying mortgage-backed security, while the holder of the "interest-only"
security (IO) receives interest payments from the same underlying security. The
prices of stripped mortgage-backed securities may be particularly affected by
changes in interest rates. As interest rates fall, prepayment rates tend to
increase, which tends to reduce prices of IOs and increase prices of POs. Rising
interest rates can have the opposite effect.
ASSET-BACKED SECURITIES
Asset-backed securities represent interests in pools of consumer loans
(generally unrelated to mortgage loans) and most often are structured as
pass-through securities. Interest and principal payments alternately depend upon
payment of the underlying loans by individuals, although the securities may be
supported by letters of credit or other credit enhancements. The value of
asset-backed securities may also depend on the creditworthiness of the servicing
agent for the loan pool, the originator of the loans, or the financial
institution providing the credit enhancement.
ZERO COUPON BONDS
Zero coupon bonds do not make interest payments; instead, they are sold at
a deep discount from their face value and are redeemed at face value when they
mature. Because zero coupon bonds do not pay current income, their prices can be
very volatile when interest rates change. In calculating its dividends, the Fund
takes into account as income a portion of the difference between a zero coupon
bond's purchase price and its face value.
A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury bond and selling them as individual
securities. Bonds issued by the Resolution Funding Corporation (REFCORP) and the
Financing Corporation (FICO) can also be separated in this fashion. Original
issue zeroes are zero coupon securities originally issued by the U.S.
government, a government agency, or a corporation in zero coupon form.
LOWER-RATED DEBT SECURITIES
Balanced 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
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issuer is significantly greater for the holders of high yield securities because
such securities may be unsecured and may be subordinated to other creditors of
the issuer.
High yield securities frequently have call or redemption features which
would permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends to
shareholders.
The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. The secondary
trading market for high yield securities is generally not as liquid as the
secondary market for higher rated securities. Reduced secondary market liquidity
may have an adverse impact on market price and the Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to adversely affect the
Fund's net asset value. In addition, the Fund may incur additional expenses to
the extent it is required to seek recovery upon a default on a portfolio holding
or participate in the restructuring of the obligation.
SWAP AGREEMENTS
Swap agreements can be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
Fund's exposure to long- or short-term interest rates (in the U.S. or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as security prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names. The Fund is not
limited to any particular form of swap agreement if IAI determines it is
consistent with the Fund's investment objectives and policies.
Swap agreements will tend to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agrees to exchange
payments in dollars for payments in foreign currency, the swap agreement would
tend to decrease the Fund's exposure to U.S. interest rates and increase its
exposure to foreign currency and interest rates. Depending on how they are used,
swap agreements may increase or decrease the overall volatility of the Fund's
investments and its share price.
The most significant factor in the performance of swap agreements is the
change in the specific interest rate, currency, or other factors that determine
the amounts of payments due to and from the Fund. If a swap agreement calls for
payments by the Fund, the Fund must be prepared to make such payments when due.
In addition, if the counterparty's creditworthiness declined, the value of a
swap agreement would be likely to decline, potentially resulting in losses. The
Fund expects to be able to eliminate its exposure under swap agreements either
by assignment or other disposition, or by entering into an offsetting swap
agreement with the same party or a similarly creditworthy party.
The Fund will maintain appropriate liquid assets in a segregated custodial
account to cover its current obligations under swap agreements. If the Fund
enters into a swap agreement on a net basis, it will segregate assets with a
daily value at least equal to the excess, if any, of the Fund's accrued
obligations under the swap agreement over the accrued amount the Fund is
entitled to receive under the agreement. If the Fund enters into a swap
agreement on other than a net basis, it will segregate assets with a value equal
to the full amount of the Fund's accrued obligations under the agreement.
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INDEXED SECURITIES
The Fund may purchase securities whose prices are indexed to the prices of
other securities, securities indexes, currencies, precious metals or other
commodities, or other financial indicators. Indexed securities typically, but
not always, are debt securities or deposits whose value at maturity or coupon
rate is determined by reference to a specific instrument or statistic.
Gold-indexed securities, for example, typically provide for a maturity value
that depends on the price of gold, resulting in a security whose price tends to
rise and fall together with gold prices. Currency-indexed securities typically
are short-term to intermediate-term debt securities whose maturity values or
interest rates are determined by reference to the values of one or more
specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies. IAI will use its judgment in determining whether indexed
securities should be treated as short-term instruments, bonds, stocks, or as a
separate asset class for purposes of the Fund's investment allocations,
depending on the individual characteristics of the securities. Indexed
securities may be more volatile than the underlying instruments.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS
Direct debt instruments are interests in amounts owed by a corporate,
governmental, or other borrower to lenders or lending syndicates (loans and loan
participations), to suppliers of goods or services (trade claims or other
receivables), or to other parties. Direct debt instruments are subject to the
Fund's policies regarding the quality of debt securities.
Purchasers of loans and other forms of direct indebtedness depend primarily
upon the creditworthiness of the borrower for payment of principal and interest.
Direct debt instruments may not be rated by any nationally recognized rating
service. If the Fund does not receive scheduled interest or principal payments
on such indebtedness, the Fund's share price and yield could be adversely
affected. Loans that are fully secured offer the Fund more protection than an
unsecured loan in the event of non-payment of scheduled interest or principal.
However, there is no assurance that the liquidation of collateral from a secured
loan would satisfy the borrower's obligation, or that the collateral can be
liquidated. Indebtedness of borrowers whose creditworthiness is poor involves
substantially greater risks, and may be highly speculative. Borrowers that are
in bankruptcy or restructuring may never pay off their indebtedness, or may pay
only a small fraction of the amount owed. Direct indebtedness of developing
countries will also involve a risk that the governmental entities responsible
for the repayment of the debt may be unable, or unwilling, to pay interest and
repay principal when due.
Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks to the Fund. For
example, if a loan is foreclosed, the Fund could become part owner of any
collateral, and would bear the costs and liabilities associated with owning and
disposing of the collateral. In addition, it is conceivable that under emerging
legal theories of lender liability, the Fund could be held liable as a
co-lender. Direct debt instruments may also involve a risk of insolvency of the
lending bank or other intermediaries. Direct debt instruments that are not in
the form of securities may offer less legal protection to the Fund in the event
of fraud or misrepresentation. In the absence of definitive regulatory guidance,
the Fund relies on IAI's research in an attempt to avoid situations where fraud
or misrepresentation could adversely affect the Fund.
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A loan is often administered by a bank or other financial institution that
acts as agent for all holders. The agent administers the terms of the loan, as
specified in the loan agreement. Unless, under the terms of the loan or other
indebtedness, the Fund has direct recourse against the borrower, it may have to
rely on the agent to apply appropriate credit remedies against a borrower. If
assets held by the agent for the benefit of the Fund were determined to be
subject to the claims of the agent's general creditors, the Fund might incur
certain costs and delays in rendering payment on the loan or loan participation
and could suffer a loss of principal or interest.
The Fund limits the amount of the assets that it invests in any one issuer
or in issuers within the same industry. For purposes of these limitations, the
Fund generally will treat the borrower as the "issuer" of indebtedness held by
the Fund. In the case of loan participations where a bank or other lending
institution serves as financial intermediary between the Fund and the borrower,
if the participation does not shift to the Fund the direct debtor/creditor
relationship with the borrower, SEC interpretations require the Fund, in
appropriate circumstances, to treat both the lending bank or other lending
institution and the borrower as "issuers" for the purpose of determining whether
the Fund has invested more than 5% of its total assets in a single issuer.
Treating a financial intermediary as an issuer of indebtedness may restrict the
Fund's ability to invest in indebtedness related to a single financial
intermediary, or a group of intermediaries engaged in the same industry, even if
the underlying borrowers represent many different companies and industries.
FOREIGN CURRENCY TRANSACTIONS
The Fund may hold foreign currency deposits from time to time and may
convert dollars and foreign currencies in the foreign exchange markets. Currency
conversion involves dealer spreads and other costs, although commissions usually
are not charged. Currencies may be exchanged on a spot (i.e., cash) basis, or by
entering into forward contracts to purchase or sell foreign currencies at a
future date and price. Forward contracts generally are traded in an interbank
market conducted directly between currency traders (usually large commercial
banks) and their customers. The parties to a forward contract may agree to
offset or terminate the contract before its maturity, or may hold the contract
to maturity and complete the contemplated currency exchange.
The Fund may use currency forward contracts to manage currency risks and to
facilitate transactions in foreign securities. The following discussion
summarizes the principal currency management strategies involving forward
contracts that could be used by the Fund.
In connection with purchases and sales of securities denominated in foreign
currencies, the Fund may enter into currency forward contracts to fix a definite
price for the purchase or sale in advance of the trade's settlement date. This
technique is sometimes referred to as a "settlement hedge" or "transaction
hedge." IAI expects to enter into settlement hedges in the normal course of
managing the Fund's foreign investments. The Fund could also enter into forward
contracts to purchase or sell a foreign currency in anticipation of future
purchases or sales of securities denominated in foreign currency, even if the
specific investments have not yet been selected by IAI.
The Fund may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For example, if
the Fund owned securities denominated in pounds sterling, it could enter into a
forward contract to sell pounds sterling in return for U.S. dollars to hedge
against possible declines in the pound's value. Such a hedge, sometimes referred
to as a "position hedge," would tend to offset both positive and negative
currency fluctuations but would not offset changes in security values caused by
other factors. The Fund could also hedge the position by selling another
currency expected to perform similarly to the pound sterling -- for example, by
entering into a forward contract to sell Deutschemarks or European Currency
Units in return for U.S. dollars. This type of hedge, sometimes referred to as a
"proxy hedge," could offer advantages in terms of cost, yield, or efficiency,
but generally would not hedge currency exposure as effectively as a simple hedge
into U.S. dollars. Proxy hedges may result in losses if the currency used to
hedge does not perform similarly to the currency in which the hedged securities
are denominated.
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Under certain conditions, SEC guidelines require mutual funds to set aside
appropriate liquid assets in a segregated custodial account to cover currency
forward contracts. As required by SEC guidelines, the Fund will segregate assets
to cover currency forward contracts, if any, whose purpose is essentially
speculative. The Fund will not segregate assets to cover forward contracts
entered into for hedging purposes, including settlement hedges, position hedges,
and proxy hedges.
Successful use of forward currency contracts will depend on IAI's skill in
analyzing and predicting currency values. Forward contracts may substantially
change the Fund's investment exposure to changes in currency exchange rates, and
could result in losses to the Fund if currencies do not perform as IAI
anticipates. For example, if a currency's value rose at a time when IAI had
hedged the Fund by selling that currency in exchange for dollars, the Fund would
be unable to participate in the currency's appreciation. If IAI hedges currency
exposure through proxy hedges, the Fund could realize currency losses from the
hedge and the security position at the same time if the two currencies do not
move in tandem. Similarly, if IAI increases the Fund's exposure to a foreign
currency, and that currency's value declines, the Fund will realize a loss.
There is no assurance that IAI's use of forward currency contracts will be
advantageous to the Fund or that it will hedge at an appropriate time. The
policies described in this section are non-fundamental policies of the Fund.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS
The Fund has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the Commodity Futures
Trading Commission (CFTC) and the National Futures Association, which regulate
trading in the futures markets, before engaging in any purchases or sales of
futures contracts or options on futures contracts. The Fund intends to comply
with Section 4.5 of the regulations under the Commodity Exchange Act, which
limits the extent to which the Fund can commit assets to initial margin deposits
and option premiums.
The above limitations on the Fund's investments in futures contracts and
options, and the Fund's policies regarding futures contracts and options
discussed elsewhere in this Statement of Additional Information may be changed
as regulatory agencies permit. With respect to positions in commodity futures or
commodity option contracts which do not come within the meaning and intent of
bona fide hedging in the CFTC rules, the aggregate initial margin and premiums
required to establish such positions will not exceed five percent of the
liquidation value of the Fund's portfolio, after taking into account unrealized
profits and unrealized losses on any such contracts it has entered into; and,
provided further, that in the case of an option that is in-the-money, such
amount may be excluded in computing such five percent.
FUTURES CONTRACTS
When the Fund purchases a futures contract, it agrees to purchase a
specified underlying instrument at a specified future date. When the Fund sells
a futures contract, it agrees to sell the underlying instrument at a specified
future date. The price at which the purchase and sale will take place is fixed
when the Fund enters into the contract. Some currently available futures
contracts are based on specific securities, such as U.S. Treasury bonds or
notes, and some are based on indexes of securities prices, such as the Standard
& Poor's 500 Composite Stock Price Index (S&P 500). Futures can be held until
their delivery dates, or can be closed out before then if a liquid secondary
market is available.
The value of a futures contract tends to increase and decrease in tandem
with the value of its underlying instrument. Therefore, purchasing futures
contracts will tend to increase the Fund's exposure to positive and negative
price fluctuations in the underlying instrument, much as if it had purchased the
underlying instrument directly. When the Fund sells a futures contract, by
contrast, the value of its futures position will tend to move in a direction
contrary to the market. Selling futures contracts, therefore, will tend to
offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
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FUTURES MARGIN PAYMENTS
The purchaser or seller of a futures contract is not required to deliver or
pay for the underlying instrument unless the contract is held until the delivery
date. However, both the purchaser and seller are required to deposit "initial
margin" with a futures broker, known as a futures commission merchant (FCM),
when the contract is entered into. Initial margin deposits are typically equal
to a percentage of the contract's value. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments to settle the change in value on a daily basis. The party that has a
gain may be entitled to receive all or a portion of this amount. Initial and
variation margin payments do not constitute purchasing securities on margin for
purposes of the Fund's investment limitations. In the event of the bankruptcy of
an FCM that holds margin on behalf of the Fund, the Fund may be entitled to
return of margin owed to it only in proportion to the amount received by the
FMC's other customers, potentially resulting in losses to the Fund.
PURCHASING PUT AND CALL OPTIONS
By purchasing a put option, the Fund obtains the right (but not the
obligation) to sell the option's underlying instrument at a fixed strike price.
In return for this right, the Fund pays the current market price for the option
(known as the option premium). Options have various types of underlying
instruments, including specific securities, indexes of securities prices, and
futures contracts. The Fund may terminate its position in a put option it has
purchased by allowing it to expire or by exercising the option. If the option is
allowed to expire, the Fund will lose the entire premium it paid. If the Fund
exercises the option, it completes the sale of the underlying instrument at the
strike price. The Fund may also terminate a put option position by closing it
out in the secondary market at its current price, if a liquid secondary market
exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium paid, plus related
transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to suffer
a loss if security prices do not rise sufficiently to offset the cost of the
option.
WRITING PUT AND CALL OPTIONS
When the Fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
the Fund assumes the obligation to pay the strike price for the option's
underlying instrument if the other party to the option chooses to exercise it.
When writing an option on a futures contract the Fund would be required to make
margin payments to an FCM as described above for futures contracts. The Fund may
seek to terminate its position in a put option it writes before exercise by
closing out the option in the secondary market at its current price. If the
secondary market is not liquid for a put option the Fund has written, however,
the Fund must continue to be prepared to pay the strike price while the option
is outstanding, regardless of price changes, and must continue to set aside
assets to cover its position. If security prices rise, a put writer would
generally expect to profit, although its gain would be limited to the amount of
the premium it received.
If security prices remain the same over time, it is likely that the writer
will also profit, because it should be able to close out the option at a lower
price. If security prices fall, the put writer would expect to suffer a loss.
This loss should be less than the loss from purchasing the underlying instrument
directly, however, because the premium received for writing the option should
mitigate the effects of the decline.
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Writing a call option obligates the Fund to sell or deliver the option's
underlying instrument, in return for the strike price, upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or falls. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
COMBINED POSITIONS
The Fund may purchase and write options in combination with each other, or
in combination with futures or forward contracts, to adjust the risk and return
characteristics of the overall position. For example, the Fund may purchase a
put option and write a call option on the same underlying instrument, in order
to construct a combined position whose risk and return characteristics are
similar to selling a futures contract. Another possible combined position would
involve writing a call option at one strike price and buying a call option at a
lower price, in order to reduce the risk of the written call option in the event
of a substantial price increase. Because combined options positions involve
multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
CORRELATION OF PRICE CHANGES
Because there are a limited number of types of exchange-traded options and
futures contracts, it is likely that the standardized contracts available will
not match the Fund's current or anticipated investments exactly. The Fund may
invest in options and futures contracts based on securities with different
issuers, maturities, or other characteristics from the securities in which it
typically invests, which involves a risk that the options or futures position
will not track the performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. The Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in the Fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS
There is no assurance a liquid secondary market will exist for any
particular options or futures contract at any particular time. Options may have
relatively low trading volume and liquidity if their strike prices are not close
to the underlying instrument's current price. In addition, exchanges may
establish daily price fluctuation limits for options and futures contracts, and
may halt trading if a contract's price moves upward or downward more than the
limit in a given day. On volatile trading days when the price fluctuation limit
is reached or a trading halt is imposed, it may be impossible for the Fund to
enter into new positions or close out existing positions. If the secondary
market for a contract is not liquid because of price fluctuation limits or
otherwise, it could prevent prompt liquidation of unfavorable positions, and
potentially could require the Fund to continue to hold a position until delivery
or expiration regardless of changes in its value. As a result, the Fund's access
to other assets held to cover its options or futures positions could also be
impaired.
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OTC OPTIONS
Balanced 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 the Fund greater flexibility to tailor an
option to its needs, OTC options generally involve greater credit risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.
OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES
Balanced Fund may engage in options and futures transactions related to
foreign currencies. Currency futures contracts are similar to forward currency
exchange contracts, except that they are traded on exchanges (and have margin
requirements) and are standardized as to contract size and delivery date. Most
currency futures contracts call for payment or delivery in U.S. dollars. The
underlying instrument of a currency option may be a foreign currency, which
generally is purchased or delivered in exchange for U.S. dollars, or may be a
futures contract. The purchaser of a currency call obtains the right to purchase
the underlying currency, and the purchaser of a currency put obtains the right
to sell the underlying currency.
The uses and risks of currency options and futures are similar to options
and futures relating to securities or indexes, as discussed above. The Fund may
purchase and sell currency futures and may purchase and write currency options
to increase or decrease its exposure to different foreign currencies. The Fund
may also purchase and write currency options in conjunction with each other or
with currency futures or forward contracts. Currency futures and options values
can be expected to correlate with exchange rates, but may not reflect other
factors that affect the value of the Fund's investments. A currency hedge, for
example, should protect a yen-denominated security from a decline in the yen,
but will not protect the Fund against a price decline resulting from
deterioration in the issuer's creditworthiness. Because the value of the Fund's
foreign-denominated investments changes in response to many factors other than
exchange rates, it may not be possible to match the amount of currency options
and futures to the value of the Fund's investments exactly over time.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS
The Fund will comply with guidelines established by the Securities and
Exchange Commission with respect to coverage of options and futures strategies
by mutual funds, and if the guidelines so require will set aside appropriate
liquid assets in a segregated custodial account in the amount prescribed.
Securities held in a segregated account cannot be sold while the futures or
option strategy is outstanding, unless they are replaced with other suitable
assets. As a result, there is a possibility that segregation of a large
percentage of the Fund's assets could impede portfolio management or the Fund's
ability to meet redemption requests or other current obligations.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, the Fund is subject to certain policies and
restrictions which are "fundamental" and may not be changed without shareholder
approval. Shareholder approval consists of the approval of the lesser of (i)
more than 50% of the outstanding voting securities of the Fund, or (ii) 67% or
more of the voting securities present at a meeting if the holders of more than
50% of the outstanding voting securities of the Fund are present or represented
by proxy. Limitations 1 through 8 below are deemed fundamental limitations. The
remaining limitations set forth below serve as operating policies of the Fund
and may be changed by the Board of Directors without shareholder approval.
The Fund may not:
1. Purchase the securities of any issuer if such purchase would cause the
Fund to fail to meet the requirements of a "diversified company" as defined
under the Investment Company Act of 1940, as amended (the "1940 Act").
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As currently defined in the 1940 Act, "diversified company" means a
management company which meets the following requirements: at least 75% of the
value of its total assets is represented by cash and cash items (including
receivables), Government securities, securities of other investment companies
and other securities for the purposes of this calculation limited in respect of
any one issuer to an amount not greater in value than 5% of the value of the
total assets of such management company and not more than 10% of the outstanding
voting securities of such issuer.
2. Purchase the securities of any issuer (other than "Government
securities" as defined under the 1940 Act) if, as a result, more than 25% of the
value of the Fund's total assets would be invested in the securities of
companies whose principal business activities are in the same industry.
For purposes of applying this restriction, the Fund will not purchase
securities, as defined above, such that 25% or more of the value of the Fund's
total assets are invested in the securities of companies whose principal
business activities are in the same industry.
3. Issue any senior securities, except as permitted by the 1940 Act or the
Rules and Regulations of the Securities and Exchange Commission.
4. Borrow money, except from banks for temporary or emergency purposes
provided that such borrowings may not exceed 33-1/3% of the value of the Fund's
net assets (including the amount borrowed). Any borrowings that come to exceed
this amount will be reduced within three days (not including Sundays and
holidays) to the extent necessary to comply with the 33-1/3% limitation. This
limitation shall not prohibit the Fund from engaging in reverse repurchase
agreements, making deposits of assets to margin or guarantee positions in
futures, options, swaps or forward contracts, or segregating assets in
connection with such agreements or contracts.
To the extent the Fund engages in reverse repurchase agreements, because
such transactions are considered borrowing, reverse repurchase agreements are
included in the 33 1 /3% limitation.
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.
For purposes of applying this restriction, "commodities" shall be deemed to
include commodity contracts.
8. Make loans to other persons except to the extent not inconsistent with
the 1940 Act or the Rules and Regulations of the Securities and Exchange
Commission. This limitation does not apply to purchases of commercial paper,
debt securities or repurchase agreements, or to the lending of portfolio
securities.
9. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases or sales
of securities and provided that margin payments in connection with transactions
in options, futures, swaps and forward contracts shall not be deemed to
constitute purchasing securities on margin.
10. Sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options, swaps and forward futures contracts are
not deemed to constitute selling securities short.
-15-
<PAGE>
For purposes of applying this restriction, the Fund will not sell
securities short except to the extent that it contemporaneously owns or has the
right to obtain, at no added cost, securities identical to those sold short.
11. Except as part of a merger, consolidation, acquisition, or
reorganization, invest more than 5% of the value of its total assets in the
securities of any one investment company or more than 10% of the value of its
total assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting securities of
any one investment company.
12. Mortgage, pledge or hypothecate its assets except to the extent
necessary to secure permitted borrowings. This limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed in
a segregated account in connection with such contracts.
13. Participate on a joint or a joint and several basis in any securities
trading account.
14. Invest more than 15% of its net assets in illiquid investments.
15. Invest directly in interests (including partnership interests) in oil,
gas or other mineral exploration or development leases or programs, except the
Fund may purchase or sell securities issued by corporations engaging in oil, gas
or other mineral exploration or development business.
Any of the Fund's investment policies set forth under "Investment Objective
and Policies" in the Prospectus, or any restriction set forth above under
"Investment Restrictions" which involves a maximum percentage of securities or
assets (other than Restriction 4) shall not be considered to be violated unless
an excess over the percentage occurs immediately after an acquisition of
securities or utilization of assets and results therefrom. With respect to
Restriction 14, the Fund is under a continuing obligation to ensure that it does
not violate the maximum percentage either by acquisition or by virtue of a
decrease in the value of the Fund's liquid assets.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by the
monthly average of the value of portfolio securities owned by the Fund during
the same fiscal year. "Portfolio securities" for purposes of this calculation do
not include securities with a maturity date of less than twelve (12) months from
the date of investment. A 100% portfolio turnover rate would occur, for example,
if the lesser of the value of purchases or sales of portfolio securities for a
particular year were equal to the average monthly value of the portfolio
securities owned during such year. The Fund's historical portfolio turnover
rates are set forth in the Prospectus section "Financial Highlights".
INVESTMENT PERFORMANCE
Advertisements and other sales literature for the Fund may refer to
monthly, quarterly, yearly, cumulative and average annual total return. Each
such calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts. Each of
monthly, quarterly and yearly total return is computed in the same manner as
cumulative total return, as set forth below.
Cumulative total return is computed by finding the cumulative rate of
return over the period indicated in the advertisement that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
-16-
<PAGE>
CTR = (ERV-P) 100
-----
P
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end
of the period of a hypothetical
$1,000 payment made at the beginning
of such period; and
P = initial payment of $1,000
Average annual total return is computed by finding the average annual
compounded rates of return over the periods indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the
period of a hypothetical $1,000 payment
made at the beginning of such period.
The Fund may quote yield figures from time to time. The "yield" is computed
by dividing the net investment income per share earned during a 30-day period
(using the average number of shares entitled to receive dividends) by the net
asset value per share on the last day of the period. The yield formula provides
for semiannual compounding which assumes that net investment income is earned
and reinvested at a constant rate and annualized at the end of a six-month
period.
The yield formula is as follows:
YIELD = 2[(a-b + 1)6 -1]
---
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = the net asset value of the Fund at the end of the period.
For the period from April 10, 1992 (commencement of operations) through
December 31, 1992, and for the years ending December 31, 1993, 1994, 1995, and
1996, the total return of the Fund was 8.9%, 4.99%, (1.45%), 18.56%, and 14.75%,
respectively. The average annual total returns of the Fund from inception of the
Fund through March 31, 1997 and for the fiscal year ended March 31, 1997 were
9.77% and 18.55%, respectively. For the thirty-day period ended March 31, 1997,
the Fund's yield was 2.70%.
-17-
<PAGE>
In advertising and sales literature, the Fund may compare its performance
with that of other mutual funds, indexes or averages of other mutual funds,
indexes of related financial assets or data, and other competing investment and
deposit products available from or through other financial institutions. The
composition of these indexes, averages or products differs from that of the
Fund. The comparison of the Fund to an alternative investment should be made
with consideration of differences in features and expected performance.
The indexes and averages noted below will be obtained from the indicated
sources or reporting services, which the Fund believes to be generally accurate.
The Fund may also note its mention in newspapers, magazines, or other media from
time to time. However, the Fund assumes no responsibility for the accuracy of
such data.
For example, (1) 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 Value Line Index and the Standard & Poor's Value Index;
(iv) the Callan Midcap Index, the Russell Midcap Index and the Standard & Poor's
Midcap Index; (v) the Russell 2500 Index, the Russell 2000 Growth Index and the
Russell 1000 Growth Index; (vi) the Standard & Poor's Growth Index; and (vii)
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>
<S> <C> <C> <C>
Name and Address Age Position Principal Occupation(s) During Past 5 Years
- ---------------- --- -------- -------------------------------------------
Noel P. Rahn* 58 Chairman of the Chief Executive Officer and a Director of IAI
3700 First Bank Place Board, President since 1974. Mr. Rahn is also Chairman and President
P.O. Box 357 of the other IAI Mutual Funds and of LifeUSA Funds, Inc.
Minneapolis, Minnesota 55440
Madeline Betsch 54 Director Currently retired; until April 1994, was
19 South 1st Street Executive Vice President, Director of Client
Minneapolis, Minnesota 55401 Services, of CME-KHBB Advertising since May
1985, and prior thereto was a Vice President
with Campbell-Mithun, Inc. (advertising
agency) since February 1977.
-18-
<PAGE>
Name and Address Age Position Principal Occupation(s) During Past 5 Years
- ---------------- --- -------- -------------------------------------------
W. William Hodgson 72 Director Currently retired; served as information
1698 Dodd Road manager for the North Central Home Office of
Mendota Heights, Minnesota 55118 the Prudential Insurance Company of America
from 1961 until 1984.
George R. Long 67 Director Chairman of Mayfield Corp. (financial
29 Las Brisas Way consultants and venture capitalists) since
Naples, Florida 33963 1973.
J. Peter Thompson 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 70 Director Currently retired; was Editor of the Rochester
Rochester Post Bulletin Post-Bulletin, Rochester, Minnesota from 1960
P.O. Box 6118 through March 31, 1980.
Rochester, Minnesota 55903
Archie C. Black, III 35 Treasurer Senior Vice President and Chief Financial
3700 First Bank Place Officer of IAI and has served IAI in several
P.O. Box 357 capacities since 1987. Mr. Black is also
Minneapolis, Minnesota 55440 Treasurer of the other IAI Mutual Funds and of
LifeUSA Funds, Inc.
William C. Joas 34 Secretary Vice President of IAI and has served as an
3700 First Bank Place attorney for IAI since 1990. Mr. Joas is also
P.O. Box 357 Secretary of the other IAI Mutual Funds and of
Minneapolis, Minnesota 55440 LifeUSA Funds, Inc.
Larry R. Hill 44 Vice President, Executive Vice President and Chief Fixed Income
3700 First Bank Place Investments Officer of IAI and has served as a fixed income
P.O. Box 357 portfolio manager since 1984. Mr. Hill also serves
Minneapolis, Minnesota 55440 as a Vice President of IAI Bond and IAI Institutional
Bond Fund.
Donald Hoelting 36 Vice President, Vice President of IAI. Prior to joining IAI
3700 First Bank Place Investments in April 1996, Mr. Hoelting was Chief Investment
P.O. Box 357 Officer and Portfolio Manager for Jefferson National
Minneapolis, Minnesota 55440 Bank and Trust from 1986 to 1996.
Susan J. Haedt 35 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 and of LifeUSA Funds, Inc.
</TABLE>
-19-
<PAGE>
* Director who is an interested person (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 the Fund or IAI, their spouses, children and
grandchildren. With respect to such persons, the minimum initial investment in
one or more of the IAI Family of Funds is $500; provided that the minimum amount
that can be allocated to any one of the Funds is $250. Subsequent subscriptions
are limited to a minimum of $100 for each of the Funds.
No compensation is paid by a 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 (as applicable). Each Fund will
pay, on a quarterly basis, its pro rata share of these fees based on its net
assets. Such unaffiliated directors also are reimbursed by the Funds for
expenses incurred in connection with attending meetings. Certain information
regarding compensation paid to the directors is set forth below.
<TABLE>
<CAPTION>
<S> <C> <C>
Aggregate Compensation
Compensation from the
Name of Person, Position from Balanced Fund* 19 IAI Mutual Funds**
------------------------ ------------------- -------------------
Betsch, Madeline - Director $ 599 $34,700
Hodgson, W. William - Director $ 599 $34,700
Long, George R. - Director $ 597 $34,700
Thompson, J. Peter - Director $ 599 $34,700
Withers, Charles H. - Director $ 597 $34,700
- -------------------------
* For the fiscal year ended March 31, 1997.
** From all Funds for the calendar year ended December 31, 1996; excludes
expenses incurred in connection with attending meetings.
</TABLE>
The Board of Directors for the Fund has approved a Code of Ethics. The Code
permits access persons to engage in personal securities transactions subject to
certain policies and procedures. Such procedures prohibit the acquiring of any
securities in an initial public offering. In addition, all securities acquired
through private placement must be pre-cleared. Procedures have been adopted
which implement blackout periods for certain securities transactions, as well as
a ban on short-term trading profits. Additional policies prohibit the receipt of
gifts in certain instances. Procedures have been implemented to monitor employee
trading. Access persons of the Adviser are required to certify annually that
they have read and understood the Code of Ethics. An annual report is provided
to the Fund's Board of Directors summarizing existing procedures, identifying
material violations and recommending any changes needed.
IAI's ultimate corporate parent is Lloyds TSB Group, plc ("Lloyds TSB"), a
publicly-held financial services organization headquartered in London, England.
Lloyds TSB is one of the largest personal and corporate financial services
groups in the United Kingdom, engaged in a wide range of activities including
commercial and retail banking. The principal offices of Lloyds TSB are located
at St. George's House, 6 - 8 Eastcheap, London, EC3M 1LL.
-20-
<PAGE>
HISTORY
The Fund is a separate portfolio of IAI Investment Funds VI, Inc., a
Minnesota corporation whose shares of common stock are currently issued in 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 E common shares is referred to as "IAI Balanced Fund."
MANAGEMENT AGREEMENT
Effective April 1, 1996, the Fund entered into a new written agreement with
IAI (the "Management Agreement"). Pursuant to the Management Agreement, IAI
provides the Fund with investment advice, statistical and research facilities,
and certain equipment and services, including, but not limited to, office space
and necessary office facilities, equipment, and the services of required
personnel and, in connection therewith, IAI has the sole authority and
responsibility to make and execute investment decisions for the Fund within the
framework of such Fund's investment policies, subject to review by the directors
of the Fund. In addition, IAI has agreed to provide or arrange for the provision
of all required administrative, stock transfer, redemption, dividend disbursing,
accounting, and shareholder services including, without limitation, the
following: (1) the maintenance of the Fund's accounts, books and records; (2)
the calculations of the daily net asset value in accordance with the Fund's
current Prospectus and Statement of Additional Information; (3) daily and
periodic reports; (4) all information necessary to complete tax returns,
questionnaires and other reports requested by the Fund; (5) the maintenance of
stock registry records; (6) the processing of requested account registration
changes, stock certificate issuances and redemption requests; (7) the
administration of payments and dividends and distributions declared by the Fund;
(8) answering shareholder questions; (9) providing reports and other
information; and (10) other services designed to maintain shareholder accounts.
IAI may also pay qualifying broker-dealers, financial institutions and other
entities that provide such services. In return for such services, the Fund has
agreed to pay IAI an annual fee as a percentage of such Fund's average daily net
assets as set forth below:
<TABLE>
<CAPTION>
<S> <C>
Average Daily Net Assets Fee IAI Receives Annually
------------------------ -------------------------
For the first $250 million 1.25%
For the next $250 million 1.20%
Above $500 million 1.10%
</TABLE>
Except for brokerage commissions and other expenditures in connection with
the purchase and sale of portfolio securities, interest expense, and, subject to
the specific approval of a majority of the disinterested directors of the Fund,
taxes and extraordinary expenses, IAI has agreed to pay all of the Fund's other
costs and expenses, including, for example, costs incurred in the purchase and
sale of assets, taxes, charges of the custodian of the Fund's assets, costs of
reports and proxy material sent to Fund shareholders, fees paid for independent
accounting and legal services, costs of printing Prospectuses for Fund
shareholders and registering Fund shares, postage, insurance premiums, and costs
of attending investment conferences. The Management Agreement further provides
that IAI will either reimburse the Fund for the fees and expenses it pays to
directors who are not "interested persons" of such Fund or reduce its fee by an
equivalent amount. IAI is not liable for any loss suffered by the Fund in the
absence of willful misfeasance, bad faith or negligence in the performance of
its duties and obligations.
The Fund's net assets as of March 31, 1997 were $32,821,552. The Fund paid
IAI $443,596 in Management Fees for the year ended March 31, 1997. IAI waived
$3,028 in Management Fees, representing the Fund's pro rata payment of
directors's fees and expenses.
IAI has also voluntarily undertaken to pay all expenses of promoting the
sale of Fund shares and may make payments to selected broker-dealer firms or
institutions which were instrumental in the acquisition of Fund shareholders
and/or which perform services for shareholder accounts.
-21-
<PAGE>
PRIOR AGREEMENTS
Effective March 31, 1996, the Investment Advisory Agreement and
Administrative Agreement between the 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, Balanced Fund had agreed to
pay IAI a monthly advisory fee based upon average month-end net assets equal on
an annual basis to .75% of the first $200 million in net assets, .70% of the
next $300 million in net assets, and .65% of net assets in excess of $500
million. For the fiscal years ended March 31, 1995 and 1996, the Fund paid IAI
$327,630 and $307,370, respectively, in advisory fees. Balanced 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
Balanced 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
years ended March 31, 1995 and 1996, IAI was not required to reimburse advisory
fees pursuant to the expense limit.
ALLOCATION OF EXPENSES
Prior to the termination of the Advisory and Administrative Agreements on
March 31, 1996 as discussed above, the 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 the Fund's assets, costs of
reports and proxy material sent to Fund shareholders, fees paid for independent
accounting and legal services, costs of printing Prospectuses for Fund
shareholders and registering the Fund's shares, postage, fees to directors who
are not "interested persons" of the Fund, distribution expenses pursuant to the
Fund's Rule 12b-1 plan, insurance premiums, costs of attending investment
conferences and such other costs which may be designated as extraordinary. IAI
had agreed to reimburse the Fund for expenses (other than brokerage commissions
and other expenditures in connection with the purchase and sale of portfolio
securities, interest expense, and, subject to the specific approval of a
majority of the disinterested directors of the Fund, taxes and extraordinary
expenses) which exceed 1.25% per year of the average annual month-end net assets
of the Fund (the "expense limit"). Certain state securities commissions may
impose additional limitations on certain of the Fund's expenses, and IAI may be
required by such state commissions to reimburse the Fund for expenses in excess
of any limitations as a requirement to selling shares of the Fund in those
states.
DURATION OF AGREEMENTS
The Management Agreement will terminate automatically in the event of its
assignment. In addition, the Agreement is terminable at any time without penalty
by the Board of Directors of the Fund or by vote of a majority of the Fund's
outstanding voting securities on not more than 60 days' written notice to IAI,
and by IAI on 60 days' notice to the Fund. The Agreement shall continue in
effect from year to year only so long as such continuance is specifically
approved at least annually by either the Board of Directors of the Fund or by
vote of a majority of the outstanding voting securities, provided that in either
event such continuance is also approved by the vote of a majority of directors
who are not parties to the Agreement or interested persons of such parties cast
in person at a meeting called for the purpose of voting on such approval.
-22-
<PAGE>
CUSTODIAL SERVICE
The custodian for the Fund is Norwest Bank Minnesota, N.A. Norwest Center,
Sixth and Marquette, Minneapolis, MN 55479. Norwest has entered into an
agreement with Morgan Stanley Trust Company, 1 Pierrepont Plaza, Brooklyn, New
York ("Morgan Stanley") which enables the Fund to utilize the subcustodian and
depository network of Morgan Stanley. Such agreements, subcustodians and
depositories were approved by the Fund's Board of Directors in accordance with
the rules and regulations of the Securities and Exchange Commission, for the
purpose of providing custodial services for the Fund's assets held outside the
United States.
-22-
<PAGE>
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
In effecting portfolio transactions on behalf of the Fund, IAI seeks the
most favorable net price consistent with the best execution. Generally, the Fund
must deal with brokers. IAI selects and (where applicable) negotiates
commissions with the brokers who execute the transactions for the Fund. The
primary criteria for the selection of a broker is the ability of the broker, in
the opinion of IAI, to secure prompt execution of the transactions on favorable
terms, including the reasonableness of the commission and considering the state
of the market at the time. In selecting a broker, IAI may consider whether such
broker provides brokerage and research services (as defined in the Securities
Exchange Act of 1934). IAI may direct Fund transactions to brokers who furnish
research services to IAI. Such research services include advice, both directly
and in writing, as to the value of securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities, as well as analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio strategy,
and the performance of accounts. By allocating brokerage business in order to
obtain research services for IAI, the Fund enables IAI to supplement its own
investment research activities and allows IAI to obtain the views and
information of individuals and research staffs of many different securities
research firms prior to making investment decisions for the Fund. To the extent
such commissions are directed to brokers who furnish research services to IAI,
IAI receives a benefit, not capable of evaluation in dollar amounts, without
providing any direct monetary benefit to the Fund from these commissions.
Generally the Fund pays higher than the lowest commission rates available.
IAI believes that most research services obtained by it generally benefit
one or more of the investment companies or other accounts which it manages.
Normally research services obtained through commissions paid by the managed fund
investing in common stocks and managed accounts investing in common stocks would
primarily benefit the fund and accounts.
There is no formula for the allocation by IAI of the Fund's brokerage
business to any broker-dealers for brokerage and research services. However, IAI
will authorize the Fund to pay an amount of commission for effecting a
securities transaction in excess of the amount of commission another broker
would have charged only if IAI determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker viewed in terms of either that particular
transaction or IAI's overall responsibilities with respect to the accounts as to
which it exercises investment discretion.
Although investment decisions for the Fund are made independently from
other accounts as to which IAI gives investment advice, it may occasionally
develop that the same security is suitable for more than one account. If and
when more than one account simultaneously purchase or sell the same security,
the transactions will be averaged as to price and allocated as to amount in
accordance with arrangements equitable to the Fund and such accounts. The
simultaneous purchase or sale of the same securities by the Fund and other
accounts may have detrimental effects on the Fund, as they may affect the price
paid or received by the Fund or the size of the position obtainable by the Fund.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to the policies set forth in the preceding
paragraphs and such other policies as the Board of Directors of the Fund may
determine, IAI may consider sales of shares of the Fund as a factor in the
selection of broker-dealers to execute the Fund's securities transactions.
For the fiscal years ended March 31, 1995, 1996, and 1997 the Fund paid
$109,616, $63,619, and $113,626, respectively, in brokerage commissions.
Approximately 8.57% of 1997's commissions were paid to brokerage firms that
provided research services to IAI, although the provision of such services was
not necessarily a factor in the placement of all of such business with such
firms.
-23-
<PAGE>
CAPITAL STOCK
The Fund is a separate portfolio of IAI Investment Funds VI, Inc., a
Minnesota corporation whose shares of common stock are currently issued in 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 E common shares. The investment portfolio represented by such shares is
referred to as IAI Balanced Fund. As of March 31, 1997, the Fund had 2,973,845
shares outstanding.
As of May 19, 1997 no person held of record or, to the knowledge of the
Fund, beneficially owned more than 5% of the outstanding shares of the Fund,
except as set forth in the following table:
<TABLE>
<CAPTION>
==============================================================================
<S> <C> <C>
Name and Address Number of Percent of
of Shareholder Shares Class
==============================================================================
Pentair, Inc. Retirement Savings & Stock 1,204,845.548 38.34%
401(k) Plan
1500 County Road B2 West
St. Paul, MN 55113-3105
Charles Schwab & Co., Inc. 376,654.277 11.98%
Attn: Mutual Funds Dept.
101 Montgomery Street
San Francisco, CA 94104
</TABLE>
As a result of its ownership of more than 25% of the Fund's outstanding
shares, the Pentair, Inc. Retirement Savings and Stock 401(k) Plan may be deemed
to control the Fund.
In addition, as of May 19, 1997, the Fund's officers and directors as a
group owned less than 1% of the outstanding shares of the Fund.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The portfolio securities in which the Fund invests fluctuate in value, and
hence, for the Fund, the net asset value per share also fluctuates.
The net asset value per share of the Fund is determined once daily as of
the close of trading on the New York Stock Exchange on each business day on
which the New York Stock Exchange is open for trading, and may be determined on
additional days as required by the Rules of the Securities and Exchange
Commission. The New York Stock Exchange is closed, and the net asset value per
share of the Fund is not determined, on the following national holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.
On March 31, 1997, the net asset value and public offering price per share
of the Fund was calculated as follows:
NAV = Net Assets ($32,821,552) = $11.04
-----------------------------
Shares Outstanding (2,973,845)
-24-
<PAGE>
TAX STATUS
The tax status of the Fund and distributions of the Fund are summarized in
the Prospectus under "Dividends, Distributions and Tax Status."
Under the Internal Revenue Code of 1986, as amended (the "Code"),
individual shareholders may not exclude any amount of distributions from Fund
gross income that is derived from dividends; corporate shareholders, however,
are permitted to deduct 70% of qualifying dividend distributions from domestic
corporations. Such a deduction by a corporate shareholder will depend upon the
portion of the Fund's gross income that is derived from dividends received from
domestic corporations. Since it is anticipated that a portion of the net
investment income of the Fund may derive from sources other than dividends from
domestic corporations, a portion of the Fund's dividends may not qualify for
this exclusion. Distributions designated as long-term capital gain distributions
will be taxable to the shareholder as long-term capital gains regardless of how
long the shareholder has held the shares. Such distributions will not be
eligible for the dividends received exclusion referred to above.
Ordinarily, distributions and redemption proceeds earned by Fund
shareholders are not subject to withholding of federal income tax. However, the
Fund is required to withhold 31% of a shareholder's distributions and redemption
proceeds upon the occurrence of certain events specified in Section 3406 of the
Code and regulations promulgated thereunder. These events include the failure of
the Fund shareholder to supply the Fund with such shareholder's taxpayer
identification number, and the failure of the Fund shareholder who is otherwise
exempt from withholding to properly document such shareholder's status as an
exempt recipient. Additionally, distributions may be subject to state and local
income taxes, and the treatment thereunder may differ from the federal income
tax consequences discussed above.
If Fund shares are sold or otherwise disposed of more than one year from
the date of acquisition, the difference between the price paid for the shares
and the sales price will result in long-term capital gain or loss to the Fund
shareholder if, as is usually the case, Fund shares are a capital asset in the
hands of the Fund shareholder at that time. However, under a special provision
in the Code, if Fund shares with respect to which a long-term capital gain
distribution has been, or will be, made are held for six months or less, any
loss on the sale or other disposition of such shares will be long-term capital
loss to the extent of such distribution.
Under the Code, the Fund will be subject to a non-deductible excise tax
equal to 4% of the excess, if any, of the amount of investment income and
capital gains required to be distributed pursuant to the Code for each calendar
year over the amount actually distributed. In order to avoid this excise tax,
the Fund generally must declare dividends by the end of each calendar year
representing 98% of the Fund's ordinary income for such calendar year and 98% of
its capital gain net income, if any, for the twelve-month period ending October
31 of the same calendar year. The excise tax is not imposed, however, on
undistributed income that is already subject to corporate income tax. It is the
Fund's policy not to distribute capital gains until capital loss carryovers, if
any, either are utilized or expire.
If the Fund invests in zero coupon obligations upon their issuance, such
obligations will have original issue discount in the hands of the Fund.
Generally, the original issue discount equals the difference between the "stated
redemption price at maturity" of the obligation and its "issue price" as those
terms are defined in the Code. If the Fund acquires an already issued zero
coupon bond from another holder, the bond will have original issue discount in
the Fund's hands, equal to the difference between the "adjusted issue price" of
the bond at the time the Fund acquires it (that is, the original issue price of
the bond plus the amount of original issue discount accrued to date) and its
stated redemption price at maturity. In each case, the Fund is required to
accrue as ordinary interest income a portion of such original issue discount
even though it receives no cash currently as interest payment on the obligation.
If the Fund invests in U.S. Treasury inflation-protection securities, it will be
required to treat as original issue discount any increase in the principal
amount of the securities that occurs during the course of its taxable year. If
the Fund purchases such inflation-protection securities that are issued in
stripped form either as stripped bonds or coupons, it will be treated as if it
had purchased a newly issued debt instrument having original issue discount.
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<PAGE>
Because the Fund is required to distribute substantially all of its net
investment income in order to be taxed as a regulated investment company, it may
be required to distribute an amount greater than the total cash income the Fund
actually receives. Accordingly, in order to make the required distribution, the
Fund may be required to borrow or to liquidate securities. The extent to which
the Fund may liquidate securities at a gain may be limited by the requirement
that generally less than 30% of the Fund's gross income (on an annual basis)
consists of gains from the sale of securities held for less than three months.
Income received from sources within foreign countries may be subject to
withholding and other taxes imposed by such countries. Tax conventions between
certain countries and the United States may reduce or eliminate such taxes. It
is impossible to determine the effective rate of foreign tax applicable to such
income in advance since the precise amount of the Fund's assets to be invested
in various countries is not known. Any amount of taxes paid by the Fund to
foreign countries will reduce the amount of income available to the Fund for
distributions to shareholders.
The foregoing is a general and abbreviated summary of the Code and Treasury
regulations in effect as of the date of the Fund's Prospectus and this Statement
of Additional Information. The foregoing relates solely to the federal income
tax law applicable to "U.S. persons," i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates. Shareholders who are
not U.S. persons are encouraged to consult a tax adviser regarding the income
tax consequences of acquiring shares of the Fund.
LIMITATION OF DIRECTOR LIABILITY
Under Minnesota law, the Fund's Board of Directors owes certain fiduciary
duties to the Fund and to its shareholders. Minnesota law provides that a
director "shall discharge the duties of the position of director in good faith,
in a manner the director reasonably believes to be in the best interest of the
corporation, and with the care an ordinarily prudent person in a like position
would exercise under similar circumstances." Fiduciary duties of a director of a
Minnesota corporation include, therefore, both a duty of "loyalty" (to act in
good faith and act in a manner reasonably believed to be in the best interests
of the corporation) and a duty of "care" (to act with the care an ordinarily
prudent person in a like position would exercise under similar circumstances).
Minnesota law authorizes corporations to eliminate or limit the personal
liability of a director to the corporation or its shareholders for monetary
damages for breach of the fiduciary duty of "care." Minnesota law does not,
however, permit a corporation to eliminate or limit the liability of a director
(i) for any breach of the director's duty of "loyalty" to the corporation or its
shareholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for authorizing a
dividend, stock repurchase or redemption or other distribution in violation of
Minnesota law or for violation of certain provisions of Minnesota securities
laws, or (iv) for any transaction from which the director derived an improper
personal benefit. The Articles of Incorporation of IAI Investment Funds VI,
Inc., limit the liability of directors to the fullest extent permitted by
Minnesota statutes, except to the extent that such liability cannot be limited
as provided in the Investment Company Act of 1940 (which Act prohibits any
provisions which purport to limit the liability of directors arising from such
directors' willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their role as directors).
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" of the corporation for breach of their
duties as officers (including the liability of directors who serve as officers
for breach of their duties as officers.) Minnesota law does not permit
elimination or limitation of the availability of equitable relief, such as
injunctive or rescissionary relief. Further, Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act of
1933 or the Securities Exchange Act of 1934, and it is uncertain whether and to
what extent the elimination of monetary liability would extend to violations of
duties imposed on directors by the Investment Company Act of 1940 and the rules
and regulations adopted under such Act.
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<PAGE>
FINANCIAL STATEMENTS
The financial statements, included as part of the Fund's 1997 Annual Report
to shareholders, are incorporated herein by reference. Such Annual Report may be
obtained by shareholders on request from the Fund at no charge.
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<PAGE>
APPENDIX A
RATINGS OF DEBT SECURITIES
RATINGS BY MOODY'S
CORPORATE BONDS
Aaa. Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa. Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A. Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa. Bonds rated Baa are considered medium grade obligations; i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds rated B generally lack characteristics of the desirable
investment. Assurances of interest and principal payment or maintenance of other
terms of the contract over any long period of time may be small.
Caa. Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca. Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C. Bonds rated C are the lowest-rated class of bonds and issued so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
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.
A-1
<PAGE>
Note: Moody's applies numerical modifiers 1, 2, and 3 in the Aa and A
classifications of its corporate bond rating system. The modifier 1 indicates
that the security ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category. With respect to
municipal securities, those bonds in the Aa, A, Baa, Ba, and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols Aa1, A1, Baa1, Ba1, and B1.
COMMERCIAL PAPER
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime - 1 Superior ability for repayment of senior short-term debt
obligations
Prime - 2 Strong ability for repayment of senior short-term debt
obligations
Prime - 3 Acceptable ability for repayment of senior short-term debt
obligations
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, Moody's, in assigning
ratings to such issuers, evaluates the financial strength of the indicated
affiliated corporations, commercial banks, insurance companies, foreign
governments, or other entities, but only as one factor in the total rating
assessment.
RATINGS BY S&P
CORPORATE BONDS
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB. Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B. Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB-rating.
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.
A-3
