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IAI RETIREMENT FUNDS, INC.
May 1, 1996
Prospectus
[LOGO]
Mutual Funds
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[ART]
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Prospectus
May 1, 1996
IAI RETIREMENT FUNDS, INC.
3700 First Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
Telephone 1-612-376-2700
1-800-945-3863
IAI Retirement Funds, Inc. (the "Fund"), is a diversified, open-
end management investment company offering insurance companies a
selection of investment vehicles for variable annuity contracts
and variable life insurance policies. This Prospectus describes
the three portfolios currently offered by the Fund (the
"Portfolios"). Each Portfolio has its own distinct investment
objective. There can be no assurance that any Portfolio will
achieve its investment objective.
IAI Regional Portfolio ("Regional Portfolio") 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.
IAI Balanced Portfolio's ("Balanced Portfolio") investment
objective is to maximize total return to investors. IAI Balanced
Portfolio pursues its objective by investing in a broadly
diversified portfolio of stocks, bonds and short-term
instruments.
IAI Reserve Portfolio's ("Reserve Portfolio") investment
objectives are to provide its shareholders with high levels of
capital stability and liquidity and, to the extent consistent
with these primary objectives, a high level of current income.
IAI Reserve Portfolio pursues its investment objectives by
investing primarily in a diversified portfolio of investment
grade bonds and other debt securities of similar quality. IAI
Reserve Portfolio's dollar weighted average maturity will not
exceed twenty-five (25) months.
This Prospectus sets forth concisely the information which a
prospective investor should know about the Portfolios before
investing and it should be retained for future reference. A
"Statement of Additional Information" dated May 1, 1996, which
provides a further discussion of certain areas in this Prospectus
and other matters which may be of interest to some investors, has
been filed with the Securities and Exchange Commission and is
incorporated herein by reference. For a free copy, call or write
the Fund at the address or telephone number shown below.
Shares of each Portfolio may be purchased only by the separate
accounts of insurance companies for the purpose of funding
variable annuity and/or variable life insurance contracts.
Particular Portfolios may not be available in your state due to
various insurance regulations. Please check with your insurance
company. Inclusion of a Portfolio in this Prospectus is not to
be considered a solicitation if such Portfolio is not available
in your state. This Prospectus should be read in conjunction
with the prospectus of the separate account of the specific
insurance product which accompanies this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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TABLE OF CONTENTS
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FINANCIAL HIGHLIGHTS 3
INVESTMENT PERFORMANCE 6
INVESTMENT OBJECTIVES AND POLICIES 6
Regional Portfolio 6
Balanced Portfolio 7
Reserve Portfolio 7
Other Portfolio Investment Techniques 8
Portfolio Risk Factors 10
MANAGEMENT 12
COMPUTATION OF NET ASSET VALUE AND PRICING 14
PURCHASE OF SHARES 14
REDEMPTION OF SHARES 15
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS 15
DESCRIPTION OF COMMON STOCK 15
COUNSEL AND AUDITORS 16
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT 16
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2 IAI MUTUAL FUNDS
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FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat Marwick
LLP, independent auditors, whose report is included in the
Portfolio's Annual Report. The financial statements in the
Annual Report are incorporated by reference in (and are a part
of) the Statement of Additional Information. Such Annual Report
may be obtained by shareholders on request from the Fund at no
charge.
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REGIONAL PORTFOLIO
Period From
Year Ended January 31, 1994(1) to
December 31, 1995 December 31, 1994
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NET ASSET VALUE
Beginning of period $ 10.62 $ 10.00
OPERATIONS
Net investment income 0.06 0.03
Net realized and unrealized
gains 3.50 0.59
Total from operations 3.56 0.62
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.02) ---
Total distributions (0.02) ---
NET ASSET VALUE
End of Period $ 14.16 $ 10.62
Total investment return * 33.51% 6.20%
Net assets at end of
period (000's omitted) $5,105 $ 865
RATIOS:
Expenses to average daily
net assets *** 1.37% 1.13%**
Expenses to average daily
net assets (net of expenses
paid indirectly) 1.25% N/A
Net investment income to
average daily net assets*** 1.12% 0.81% **
Portfolio turnover rate
(excluding short-term
securities) 156.0% 127.6%
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(1) Commencement of operations
* Total investment return is based on the change in net asset
value of a share during the period and assumes reinvestment
of all distributions at net asset value.
** Annualized.
*** The Portfolio's adviser voluntarily waived $6,737 and $7,455
in expenses for the year ended December 31, 1995, and the
period ended December 31, 1994, respectively. If the
Portfolio had been charged for these expenses, the ratio of
expenses to average daily net assets would have been 1.64%
and 3.90%, respectively, and the ratio of net investment
income to average daily net assets would have been .85% and
(1.96%), respectively. For fiscal 1995, the ratio of
expenses to average daily net assets includes expenses paid
indirectly by the Portfolio. Prior period expense ratios
have not been adjusted.
IAI MUTUAL FUNDS 3
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BALANCED PORTFOLIO
Period From
Year Ended February 3, 1994(1) to
December 31,1995 December 31, 1994
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NET ASSET VALUE
Beginning of period $ 10.22 $ 10.00
OPERATIONS
Net investment income 0.09 0.10
Net realized and unrealized
gains 1.56 0.12
Total from operations 1.65 0.22
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.09) ---
Total distributions (0.09) ---
NET ASSET VALUE
End of Period $ 11.78 $ 10.22
Total investment return * 16.21% 2.20%
Net assets at end of period
(000's omitted) $ 764 $ 206
RATIOS:
Expenses to average daily
net assets *** 1.70% 1.25%**
Expenses to average daily
net assets (net of expenses
paid indirectly) 1.25% N/A
Net investment income to
average daily net assets*** 2.34% 2.28% **
Portfolio turnover rate
(excluding short-term securities) 56.0% 21.6%
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(1) Commencement of operations
* Total investment return is based on the change in net asset
value of a share during the period and assumes reinvestment
of all distributions at net asset value.
** Annualized.
*** The Portfolio's adviser voluntarily waived $13,428 and
$7,756 in expenses for the year ended December 31, 1995, and
the period ended December 31, 1994, respectively. If the
Portfolio had been charged for these expenses, the ratio of
expenses to average daily net assets would have been 5.29%
and 10.33%, respectively, and the ratio of net investment
income to average daily net assets would have been (1.25%)
and (6.80%), respectively. For fiscal 1995, the ratio of
expenses to average daily net assets includes expenses paid
indirectly by the Portfolio. Prior period expense ratios
have not been adjusted.
4 IAI MUTUAL FUNDS
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RESERVE PORTFOLIO
Period From
Year Ended April 7, 1994(1) to
December 31,1995 December 31, 1994
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NET ASSET VALUE
Beginning of period $ 10.03 $ 10.00
OPERATIONS
Net investment income 0.48 0.20
Net realized and
unrealized gains 0.02 0.02
Total from operations 0.50 0.22
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.48) (0.19)
Total distributions (0.48) (0.19)
NET ASSET VALUE
End of Period $ 10.05 $ 10.03
Total investment return * 5.09% 2.25%
Net assets at end of period
(000's omitted) $ 844 $ 544
RATIOS:
Expenses to average daily
net assets *** 1.03% 0.85%**
Expenses to average daily
net assets (net of expenses
paid indirectly) 0.85% N/A
Net investment income to
average daily net assets*** 4.84% 3.56%**
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(1) Commencement of operations
* Total investment return is based on the change in net asset
value of a share during the period and assumes reinvestment
of all distributions at net asset value.
** Annualized.
*** The Portfolio's adviser voluntarily waived $11,528 and
$6,930 in expenses for the year ended December 31, 1995, and
the period ended December 31, 1994, respectively. If the
Portfolio had been charged for these expenses, the ratio of
expenses to average daily net assets would have been 2.62%
and 4.62%, respectively, and the ratio of net investment
income to average daily net assets would have been 3.25% and
(.21%), respectively. For fiscal 1995, the ratio of
expenses to average daily net assets includes expenses paid
indirectly by the Portfolio. Prior period expense ratios
have not been adjusted.
IAI MUTUAL FUNDS 5
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INVESTMENT PERFORMANCE
Each Portfolio's performance may be quoted in advertising in
terms of yield and total return. 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 Portfolio 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
Portfolio 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 a
Portfolio over a given period of time, expressed as an annual
percentage rate. Yields are calculated according to a standard
that is required for all stock and bond funds. Because this
differs from other accounting methods, the quoted yield may not
equal the income actually paid to shareholders.
Total returns and yields include the effect of deducting a
Portfolio's expenses, but may not include charges and expenses
attributable to any particular insurance product. Since shares
of the Portfolios may be purchased only through a variable
annuity or variable life contract, you should carefully review
the prospectus of the insurance product you have chosen for
information on relevant charges and expenses. Excluding these
charges from quotations of a Portfolio's performance has the
effect of increasing the performance quoted. You should bear in
mind the effect of these charges when comparing a Portfolio's
performance to that of other mutual funds.
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 each Portfolio is contained in the
Fund's Annual Report to shareholders which may be obtained
without charge from the Fund.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of each of the
Portfolios are listed below. There is no assurance that any
Portfolio will achieve its investment objective(s). The value of
shares when redeemed may be higher or lower than when purchased.
Regional Portfolio
The investment objective of Regional Portfolio is capital
appreciation. Regional Portfolio does not expect to provide
significant current income to investors. Regional Portfolio
pursues its objective 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 (the "Eight State Region"). Regional
Portfolio's investment objective may not be changed without
shareholder approval. There can be no assurance that Regional
Portfolio will achieve its investment objective.
Regional Portfolio 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 Portfolio,
Investment Advisers, Inc. ("IAI"), Regional Portfolio's
investment adviser and manager, 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 Portfolio 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 Portfolio may employ certain other investment
techniques, as described in the section "Other Portfolio
Investment Techniques". Please see the Prospectus section
"Portfolio Risk Factors" as well as the Statement of Additional
Information section "Investment Objectives and Policies" for a
discussion of the risks associated with investing in Regional
Portfolio.
6 IAI MUTUAL FUNDS
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Balanced Portfolio
The investment objective of Balanced Portfolio is to
maximize total return. Balanced Portfolio will seek to achieve
its objective by investing in a broadly diversified portfolio of
stocks, bonds and short-term instruments. Balanced Portfolio's
investment objective may not be changed without shareholder
approval. There can be no assurance that Balanced Portfolio will
achieve its investment objective.
In seeking to achieve its investment objective, IAI,
Balanced Portfolio's investment adviser and manager, will
allocate Balanced Portfolio's assets among the three classes of
assets set forth above. Under normal market conditions, Balanced
Portfolio will hold 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. Balanced Portfolio may also
make other investments that do not fall within these classes.
The stock class includes equity securities of all types and
will consist 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 will consist primarily
of investment grade bonds and other comparable fixed income
securities.
The short-term class includes all types of short-term
instruments with remaining maturities of one year or less and
will consist primarily of commercial paper, bank certificates of
deposit, bankers' acceptances, government securities, repurchase
agreements and other similar short-term instruments. Short-term
securities will only be purchased if given one of the top two
ratings by a major rating service or, if unrated, are of
comparable quality as determined by IAI. Within each of these
classes, Balanced Portfolio may invest in both domestic and
foreign securities.
Although Balanced Portfolio may invest in below investment
grade securities, Balanced Portfolio currently intends to limit
such investments to 5% of its total net assets and not to invest
in securities rated lower than B by Moody's or by S&P.
Securities rated in the medium to lower rating categories of
nationally recognized statistical rating organizations and
unrated securities of comparable quality are predominately
speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the security and
generally involve a greater volatility of price than securities
in higher rating categories. See "Investment Objectives and
Policies" in the Statement of Additional Information for
additional information regarding ratings of debt securities. In
purchasing such securities, Balanced Portfolio 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.
IAI will regularly review its allocation of Balanced
Portfolio's assets among the three classes and will gradually
vary them over time to favor asset classes that, in IAI's
judgment, provide the most favorable total return outlook.
Because Balanced Portfolio 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 Balanced Portfolio's total
assets.
Balanced Portfolio may employ certain other investment
techniques, as described in the section "Other Portfolio
Investment Techniques". Please see the Prospectus section
"Portfolio Risk Factors" as well as the Statement of Additional
Information section "Investment Objectives and Policies" for a
discussion of the risks associated with investing in Balanced
Portfolio.
Reserve Portfolio
Reserve Portfolio's investment objectives are to provide its
shareholders with high levels of capital stability and liquidity
and, to the extent consistent with these primary objectives, a
high level of current income. Such objectives may not be changed
without shareholder approval. There can be no assurance that
Reserve Portfolio's investment objectives will be attained.
Reserve Portfolio pursues its objectives primarily through
investment in a diversified portfolio of investment grade bonds
and other debt securities of similar quality.
IAI MUTUAL FUNDS 7
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Investment grade securities are those securities rated within the
four highest grades assigned by Moody's or S&P. Although Reserve
Portfolio may invest in below investment grade securities, it
currently has no intention of doing so. Reserve Portfolio will
maintain a dollar weighted average maturity of its investment
portfolio of twenty-five (25) months or less. For purposes
of such determination, securities that provide for optional maturity
dates, at rative
Agreement. Under the Administrative Agreement, IAI has agreed to
provide to the Fund all required administrative, stock transfer,
redemption, dividend disbursing and accounting services
including, without limitation, the following: (1) the maintenance
of the Portfolios' accounts, books and records; (2) the
calculations of the daily net asset value in accordance with the
Fund's current Prospectus and Statement of Additional
Information; (3) daily and periodic reports; (4) all information
necessary to complete tax returns, questionnaires and other
reports requested by the Fund; (5) the maintenance of stock
registry records; (6) the processing of requested account
registration changes, stock certificate issuances and redemption
requests; and (7) the administration of payments of dividends and
distributions declared by each Portfolio. As compensation for
these services, each Portfolio has agreed to pay IAI a fee equal
to an annual rate of .10% of such Portfolio's average daily net
assets. Pursuant to the Administration Agreement, for the fiscal
year ended December 31, 1995, Regional, Balanced and Reserve
Portfolios paid IAI administrative fees of $2,448, $373, and
$726, respectively.
Allocation of Expenses
In addition to the advisory and administrative fees paid to
IAI, each Portfolio pays all its other costs and expenses,
including, for example, costs incurred in the purchase and sale
of assets, interest, taxes, charges of the custodian of the
Portfolio's assets, costs of reports and proxy material sent to
Portfolio shareholders, fees paid for independent accounting and
legal services, costs of printing Prospectuses for Portfolio
shareholders and registering the Portfolios' shares, postage,
fees to directors who are not "interested persons" of each
Portfolio, insurance premiums, costs of attending investment
conferences and such other costs which may be designated as
extraordinary. Certain state securities commissions may impose
limitations on certain of each Portfolio's expenses, and IAI may
be required by such state commissions to reimburse each Portfolio
for expenses in excess of any limitations as a requirement to
selling shares of such Portfolio in those states. IAI, in its
discretion, may from time to time waive or reduce its management
and/or administrative fee or otherwise reimburse Fund operating
expenses. IAI is not liable for any loss suffered by a Portfolio
in the absence of willful misfeasance, bad faith or gross
negligence in the performance of its duties and obligations. For
the fiscal year ended December 31, 1995, IAI voluntarily
reimbursed total Portfolio operating expenses (net of expenses
paid indirectly) which exceeded 1.25%, 1.25%, and .85% of the
average daily net assets of Regional, Balanced and Reserve
Portfolios, respectively.
Duration of Agreements
The Advisory Agreement and the Administrative Agreement will
terminate automatically in the event of their assignment. In
addition, each Agreement is terminable at any time with respect
to a Portfolio without penalty by the Board of Directors of the
Fund or by vote of a majority of the Portfolio's outstanding
voting securities on not more than 60 days' written notice to
IAI, and by IAI on 60 days' notice to the Fund. Each Agreement
shall continue in effect from year to year only so long as such
continuance is specifically approved at least annually by either
the Board of Directors of the Fund or by vote of a majority of
the outstanding voting securities of the affected Portfolio,
provided that in either event such continuance is also approved
by the vote of a majority of directors who are not parties to the
Agreement or interested persons of such parties cast in person at
a meeting called for the purpose of voting on such approval.
CUSTODIAL SERVICE
The custodian for the Fund is Norwest Bank Minnesota, N.A.
Norwest Center, Sixth and Marquette, Minneapolis, MN 55479.
Norwest has entered into an agreement with Morgan Stanley Trust
Company, 1 Pierrepont Plaza, Brooklyn, New York ("Morgan
Stanley") which enables the Fund 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.
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The following is a listing of the subcustodians and
depositories currently approved by the Fund's directors and the
countries in which such subcustodians and depositories are
located:
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BRANCHES OF THE CUSTODIAN
AND SUBCUSTODIAN BANKS
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Argentina Citibank, N.A., Buenos Aires Branch
Australia Australia & New Zealand Banking Group, Ltd.
Austria Credit Austalt Bankverein
Bangladesh Standard Chartered Bank
Belgium Banque Bruxelles Lambert (BBL)
Botswana Barclays Bank of Botswana
Brazil Banco de Boston
Canada Toronto Dominion Bank
Chile Citibank, N.A., Santiago Branch
China Hong Kong & Shanghai Banking, Corp. Ltd.
Columbia Cititrust
Cyprus Barclays Bank PLC
Czech Republic ING Bank
Denmark Den Danske Banke
Finland Merita Bank
France Banque Indosuez
Germany Berliner Handels-und-Frankfurter Bank
Ghana Barclays Bank of Ghana
Greece Citibank, N.A., Athens Branch
Hong Kong Hong Kong & Shanghai Banking Corp. Ltd.
Hungary Citibank, N.A., Budapest, Branch
India Standard Chartered Bank
Indonesia Hong Kong & Shanghai Banking Corp. Ltd.
Ireland Allied Irish Bank
Israel Bank Leumi
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Italy Barclays Bank PLC
Japan The Mitsubishi Bank Limited
Jordan Arab Bank plc
Kenya Barclays Bank Kenya
Korea Standard Chartered Bank
Luxembourg Banque Bruxelles Lambert
Malaysia Oversea Chinese Banking Corporation
Mauritius Hong Kong and Shanghai Bank Corporation
Mexico Citibank, N.A., Mexico City Branch
Morocco Banque Commerciale du Maroc
Netherlands ABN Amro Bank
New Zealand Bank of New Zealand
Norway Den Norske Bank
Pakistan Standard Chartered Bank
Papua New Guinea Australia and New Zealand Bank
Peru Citibank N.A., Lima Branch
Philippines Hong Kong & Shanghai Banking Corp. Ltd.
Poland Citibank, S.A.
Portugal Banco Commercial Portugues
Singapore Oversea Chinese Banking Corporation
South Africa First National Bank of Southern Africa
Spain Banco Santader
Sri Lanka Hong Kong & Shanghai Banking, Corp. Ltd.
Swaziland Barclays Bank of Swaziland
Sweden Svenska Handelsbanken
Switzerland Morgan Guaranty Trust Company of New York,
Zurich Branch
Taiwan Hong Kong & Shanghai Banking Corp. Ltd.
Thailand Standard Chartered Bank
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Turkey Citibank, N.A., Istanbul Branch
United Kingdom Barclays Bank PLC
Uruguay Citibank, N.A., Montevideo Branch
Venezuela Citibank, N.A., Caracas Branch
Zambia Barclays Bank of Zambia
Zimbabwe Barclays Bank of Zimbabwe
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DEPOSITORIES
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Argentina Caja de Valores
Australia Clearing House Electronic Subregister System
Austria Euroclear Clearance System
OsterreicheKontrollbank
Belgium C.I.K. (Caisse Interprofessionelle
de Depot et de Virements de Titres S.A.)
Brazil Sao Paulo Stock Exchange
Canada CDS (The Canadian Depository for Securities Ltd.)
Czech Republic Center for Securities (SCP)
Denmark Euroclear Clearance System
Vaerdipapircentralen
Finland Euroclear Clearance System
France SICOVAM (Societen Interprofessionelle la
Compensacion des Valuers Mobilieres)
Germany Kassenverein (Deutscher Kassenverein AG)
Hong Kong Central Clearing and Settlement System
Hungary Euroclear Clearance System
OsterreicheKontrollbank
Italy Monte Titoli, S.p.A
Japan Japan Securities Depository Center
Korea The Korean Central Depository
Malaysia The Malaysian Central Depository
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Mexico Instituto para el Deposito de Valores
Netherlands NECIGEF (Netherlands Centraal Instit
voor Giraal Effectenverkeer B.V.)
Norway Euroclear Clearance System
Verdipapirsentralen
Singapore Central Depository Pte Ltd.
Spain Servicio de Compensacion y Liquidacion de Valores
Sweden Euroclear Clearance System
Vardepapperscentralen VPC AB
Switzerland SEGA (Schweizerische Effekten Giro A.G.)
Taiwan Taiwan Securities Depository Co.
Thailand Share Depository Center
United Kingdom Stock Exchange Talisman System
</TABLE>
The Custodian maintains records of all cash transactions of
the Fund. All other books and records of the Fund, including
books and records of the Fund's investment portfolios, are
maintained by IAI.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Fixed income and non-listed equity transactions of the
Portfolios are generally effected with dealers without the
payment of brokerage commissions but at a net price which usually
includes a spread or markup. In effecting such portfolio
transactions on behalf of the Portfolios, IAI seeks the most
favorable net price consistent with the best execution. However,
frequently IAI selects a dealer to effect a particular
transaction without contacting all dealers who might be able to
effect such transaction because of the volatility of the market
and the desire of IAI to accept a particular price for a security
because the price offered by the dealer meets its guidelines for
profit, yield or both.
So long as IAI believes that it is obtaining the best net
price (including the spread or markup) consistent with the best
execution, as described above, it gives consideration in placing
portfolio transactions to dealers furnishing research,
statistical information, or other services to IAI. This allows
IAI to supplement its own investment research activities and
enables IAI to obtain the views and information of individuals
and research staffs of many different securities firms prior to
making investment decisions for the Portfolios. To the extent
portfolio transactions are effected with dealers who furnish
research services to it, IAI receives a benefit which is not
capable of evaluation in dollar amounts.
Generally, Regional Portfolio and Balanced Portfolio must
deal with brokers. IAI selects and (where applicable) negotiates
commissions with the brokers who execute the transactions for
each Portfolio. 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 Portfolio 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
24
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brokerage business in order to obtain research services for IAI,
each Portfolio 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 each Portfolio. 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 each Portfolio from
these commissions. Generally, the Portfolios pay higher than the
lowest commission rates available.
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 each Portfolio may
determine, IAI may consider sales of shares of each Portfolio as
a factor in the selection of broker-dealers to execute the Fund's
securities transactions.
IAI believes that most research services obtained by it
generally benefit one or more of the investment companies or
other accounts which it manages. Research services obtained from
transactions in fixed income securities would primarily benefit
the managed funds investing such fixed income securities and
managed accounts investing in fixed income securities.
CAPITAL STOCK
Each Portfolio is a separate portfolio of IAI Retirement
Funds, Inc., a corporation organized on September 28, 1993,
pursuant to the laws of the State of Minnesota whose shares of
common stock are currently issued in three series (Series A, B
and C). 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
Retirement Funds, 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
Retirement Funds, Inc., has authorized 10,000,000,000 shares of
$.01 par value common stock to be issued as Series A common
shares, 10,000,000,000 shares of $.01 par value common stock to
be issued as Series B common shares, and 10,000,000,000 shares of
$.01 par value common stock to be issued as Series C common
shares. The investment portfolio represented by Series A common
shares is referred to as IAI Regional Portfolio, by Series B
common shares as IAI Balanced Portfolio, and by Series C common
shares as IAI Reserve Portfolio. As of December 31, 1995, IAI
Regional Portfolio had 360,396 shares outstanding, IAI Balanced
Portfolio had 64,875 shares outstanding, and IAI Reserve
Portfolio had 83,958 shares outstanding.
As of February 22, 1996, no person held of record, or to the
knowledge of the Fund, beneficially owned more than 5% of a
Portfolio, except as set forth in the following tables:
<TABLE>
<CAPTION>
Regional Portfolio
_________________________________________________________________
Name and Address Number of Percent of
of Shareholder Shares Class
- -----------------------------------------------------------------
<S> <C> <C>
Lincoln Benefit Life Company 334,645.282 86.04
Annuity Products
P.O. Box 82532
Lincoln, Nebraska 68501
Lincoln Benefit Life Company 54,309.206 13.96
Life Products
P.O. Box 82532
Lincoln, Nebraska 68501
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Balanced Portfolio
_________________________________________________________________
Name and Address Number of Percent of
of Shareholder Shares Class
- -----------------------------------------------------------------
<S> <C> <C>
Lincoln Benefit Life Company 61,715.338 85.61
Annuity Products
P.O. Box 82532
Lincoln, Nebraska 68501
Lincoln Benefit Life Company 10,370.229 14.39
Life Products
P.O. Box 82532
Lincoln, Nebraska 68501
Reserve Portfolio
_________________________________________________________________
Name and Address Number of Percent of
of Shareholder Shares Class
- ------------------------------------------------------------------
Lincoln Benefit Life Company 62,475.676 82.36
Annuity Products
P.O. Box 82532
Lincoln, Nebraska 68501
Lincoln Benefit Life Company 13,380.828 17.64
Life Products
P.O. Box 82532
Lincoln, Nebraska 68501
</TABLE>
In addition, as of February 1, 1996, none of Regional,
Balanced and Reserve Portfolios' officers and directors owned any
of the outstanding shares of the Portfolios.
Due to its ownership of more than 25% of the outstanding
shares of each of the Portfolios through its Life and Annuity
Products, Lincoln Benefit Life Company may be said to control
each of such Portfolios. Lincoln Benefit Life Company is an
insurance company organized under the laws of Nebraska. Lincoln
Benefit Life Company is a wholly-owned subsidiary of Allstate
Life Insurance Company, which in turn is wholly-owned by Allstate
Insurance Company. Allstate Insurance Company is a wholly-owned
subsidiary of The Allstate Corporation.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The portfolio securities in which the Fund invests fluctuate
in value, and hence, for each Portfolio, the net asset value per
share also fluctuates.
The net asset value per share of each Portfolio 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 values per share of each are 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 December 31, 1995, the net asset value and public offering
price per share of each Portfolio was calculated as follows:
26
<PAGE>
<TABLE>
<CAPTION>
Regional Portfolio
<S> <C> <C>
NAV = Net Assets ($5,104,611) = $14.16
Shares Outstanding (360,396)
Balanced Portfolio
NAV = Net Assets ($764,112) = $11.78
Shares Outstanding (64,875)
Reserve Portfolio
NAV = Net Assets ($844,104) = $10.05
Shares Outstanding (83,958)
</TABLE>
TAX STATUS
The Board of Directors intends that each of the Portfolios
will comply with the diversification requirements imposed by
section 817(h) of the Internal Revenue Code as a condition to
favorable tax treatment of variable annuity and variable life
insurance contracts. Under Internal Revenue Service Regulations,
such requirements are satisfied if, at the end of each calendar
quarter: (1) not more than 55% of the Portfolio's assets are
attributable to any one investment; not more than 70% of such
assets are attributable to any two investments; not more than 80%
of such assets are attributable to any three investments; and not
more than 90% of such assets are attributable to any four
investments. If a Portfolio fails to be adequately diversified
within the meaning of section 817(h) of the Internal Revenue
Code, the variable contracts funded by the Portfolio could lose
their favorable tax status. See the accompanying prospectus for
your separate account for more information.
LIMITATION OF DIRECTOR LIABILITY
Under Minnesota law, the Fund's Board of Directors owes
certain fiduciary duties to the Fund and to its shareholders.
Minnesota law provides that a director "shall discharge the
duties of the position of director in good faith, in a manner the
director reasonably believes to be in the best interest of the
corporation, and with the care an ordinarily prudent person in a
like position would exercise under similar circumstances."
Fiduciary duties of a director of a Minnesota corporation
include, therefore, both a duty of "loyalty" (to act in good
faith and act in a manner reasonably believed to be in the best
interests of the corporation) and a duty of "care" (to act with
the care an ordinarily prudent person in a like position would
exercise under similar circumstances). Minnesota law authorizes
corporations to eliminate or limit the personal liability of a
director to the corporation or its shareholders for monetary
damages for breach of the fiduciary duty of "care." Minnesota law
does not, however, permit a corporation to eliminate or limit the
liability of a director (i) for any breach of the director's duty
of "loyalty" to the corporation or its shareholders, (ii) for
acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, (iii) for authorizing a
dividend, stock repurchase or redemption or other distribution in
violation of Minnesota law or for violation of certain provisions
of Minnesota securities laws, or (iv) for any transaction from
which the director derived an improper personal benefit. The
Articles of Incorporation of IAI Retirement Funds, 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
27
<PAGE>
relief. Further, Minnesota law does not permit elimination or limitation
of a director's liability under the Securities Act of 1933 or the
Securities Exchange Act of 1934, and it is uncertain whether and
to what extent the elimination of monetary liability would extend
to violations of duties imposed on directors by the Investment
Company Act of 1940 and the rules and regulations adopted under
such Act.
FINANCIAL STATEMENTS
The financial statements, included as a part of the Fund's
1995 Annual Report to shareholders, are incorporated herein by
reference. Such Annual Report may be obtained by shareholders on
request from the Fund at no additional charge.
28
<PAGE>
APPENDIX A
RATINGS OF DEBT SECURITIES
RATINGS BY MOODY'S
Corporate Bonds
Aaa. Bonds rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa. Bonds rated Aa are judged to be of high quality by
all standards. Together with the Aaa group, they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger
than in Aaa securities.
A. Bonds rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa. Bonds rated Baa are considered medium grade
obligations; i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba. Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments
may be very moderate, and thereby not well safeguarded during
other good and bad times over the future. Uncertainty of
position characteristizes bonds in this class.
B. Bonds rated B generally lack characteristics of
the desirable investment. Assurances of interest and principal
payment or maintenance of other terms of the contract over any
long period of time may be small.
Caa. Bonds rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with
respect to principal or interest.
Ca. Bonds rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C. Bonds rated C are the lowest-rated class of bonds
and issued so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Conditional Ratings. The designation "Con." followed
by a rating indicates bonds for which the security depends upon
the completion of some act or the fulfillment of some condition.
These are bonds secured by (a) earnings of projects under
construction, (b) earnings or projects unseasoned in operating
experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature
upon completion of construction or elimination of basis of
condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in the
Aa and A classifications of its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue
ranks in the lower end of its
A-1
<PAGE>
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.
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.
A-2
<PAGE>
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
