1933 Act Registration No. 33-69012
1940 Act Registration No. 811-8032
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ___
Post-Effective Amendment No. _8_
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. _8_
(Check appropriate box or boxes)
IAI RETIREMENT FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
3700 U.S. Bank Place
601 Second Avenue South
Minneapolis, Minnesota 55402
(Address of Principal Executive Offices, Zip Code)
(612) 376-2700
(Registrant's Telephone Number, including Area Code)
Steven G. Lentz, Esq.
3700 U.S. Bank Place
601 Second Avenue South
Minneapolis, Minnesota 55402
(Name and Address of Agent for Service)
COPY TO:
Kathleen L. Prudhomme, Esq.
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402-1498
It is proposed that this filing will become effective (check appropriate box):
___ immediately upon filing pursuant to paragraph (b) of Rule 485
_X_ on May 1, 1999 pursuant to paragraph (b) of Rule 485
___ 75 days after filing pursuant to paragraph (a) of Rule 485
___ on (specify date) pursuant to paragraph (a) of Rule 485
___ 60 days after filing pursuant to paragraph (a) of Rule 485
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IAI RETIREMENT FUNDS, INC.
IAI REGIONAL PORTFOLIO
IAI BALANCED PORTFOLIO
IAI RESERVE PORTFOLIO
PROSPECTUS May 1, 1999
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of the Portfolios, or determined if the
information in this prospectus is accurate or complete. Any statement to the
contrary is a criminal offense.
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P.O. BOX 357
MINNEAPOLIS, MINNESOTA 55440
TELEPHONE 1-612-376-2700
1-800-945-3863
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TABLE OF CONTENTS
Page
Portfolio Summaries.......................................................... 3
IAI Regional Portfolio................................................. 3
IAI Balanced Portfolio................................................. 5
IAI Reserve Portfolio.................................................. 8
Pricing of Portfolio Shares.................................................. 10
Taxes ....................................................................... 10
Fund Management.............................................................. 11
Investment Adviser..................................................... 11
Portfolio Managers..................................................... 11
More Information on Investment Strategies and Risks.......................... 11
Investment Strategies.................................................. 11
Temporary Defensive Investments........................................ 11
Portfolio Turnover..................................................... 11
Effective Duration..................................................... 12
Principal Risks........................................................ 12
Financial Highlights......................................................... 16
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PORTFOLIO SUMMARIES
This section briefly describes the objectives, principal investment strategies
and principal risks of IAI Regional Portfolio ("Regional Portfolio"), IAI
Balanced Portfolio ("Balanced Portfolio") and IAI Reserve Portfolio ("Reserve
Portfolio"). It also provides you with information on how each Portfolio has
performed. For further information on the Portfolios, please read the section
entitled "More Information on Investment Strategies and Risks."
Shares of the Portfolios may be purchased only by the separate accounts of
insurance companies for the purpose of funding variable annuity contracts and/or
variable life insurance policies. You should read this Prospectus along with the
prospectus issued by your insurance company for its variable annuity contracts
or variable life insurance policies.
An investment in a Portfolio is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
IAI REGIONAL PORTFOLIO
OBJECTIVE
Regional Portfolio has an objective of capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Regional Portfolio invests primarily in common stocks of companies headquartered
in Minnesota, Wisconsin, Iowa, Illinois, Nebraska, Montana, North Dakota or
South Dakota. Regional Portfolio invests in both nationally recognized companies
and in less well known companies that are newer or have smaller capitalizations,
but that appear to have the potential for capital appreciation.
In selecting securities, the Portfolio's investment adviser 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.
Regional Portfolio may write (i.e., sell) put or call options on securities. The
principal reason for writing these options is to obtain, through the receipt of
premiums, a greater current return than the Portfolio would realize on the
underlying securities alone.
PRINCIPAL RISKS
You cold lose money by investing in Regional Portfolio. The principal risks that
could adversely affect the value of the Portfolio's shares and the total return
on your investment include:
* RISKS OF COMMON STOCKS. Common stocks may decline significantly in price
over short or extended periods of time. Price changes may occur in the
market as a whole or they may occur in only a particular company, industry
or sector of the market.
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* RISKS OF INVESTING IN SMALL COMPANIES. Investing in small companies
involves greater risk than is customarily associated with investments in
larger, more established companies. Small companies are more likely than
larger companies to have limited product lines, markets or financial
resources, or to depend on a small, inexperienced management group. 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.
* RISKS OF GEOGRAPHIC CONCENTRATION. The Portfolio's policy of
concentrating its investments in a certain geographic region means that it
will be subject to adverse economic, political or other developments in
that region. Moreover, because of this geographic limitation, the Portfolio
may be less diversified by industry and company than other funds with a
similar investment objective and no such geographic limitation.
* RISKS OF WRITING PUT AND CALL OPTIONS. By writing a call option on
securities, the Portfolio becomes obligated during the term of the option
to deliver the securities upon payment of the exercise price. The Portfolio
therefore runs the risk of losing the potential for gain on the underlying
security. By writing a put option, the Fund becomes obligated during the
term of the option to purchase the securities underlying the option at the
exercise price. The Portfolio therefore runs the risk of becoming obligated
to purchase the underlying security for more than its current market price
upon exercise.
PORTFOLIO PERFORMANCE
The bar chart and table on the right provide you with information on Regional
Portfolio's volatility and performance. The bar chart shows you how performance
of the Portfolio's shares has varied from year to year. The table compares the
Portfolio's performance over different time periods to that of a broad measure
of market performance. Both the chart and the table assume that all dividends
and distributions have been reinvested. Separate account fees are not taken into
account in calculating the Portfolio's returns. If they had been, returns would
have been lower. Remember, how the Portfolio has performed in the past is not
necessarily an indication of how it will perform in the future.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR*
[BAR CHART]
1995 33.51%
1996 11.88%
1997 13.45%
1998 1.56%
* The Portfolio's total return for the period from January 1, 1999 through March
31, 1999 was (2.55%).
BEST QUARTER: Quarter ended December 31, 1998 15.21%
WORST QUARTER: Quarter ended September 30, 1998 (15.99%)
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
ONE YEAR SINCE INCEPTION
(1/31/94)
REGIONAL PORTFOLIO 1.56% 13.05%
STANDARD & POOR'S 500
COMPOSITE INDEX* 28.57% 23.67%
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* An unmanaged index of 500 common stocks chosen to reflect the industries of
the U.S. economy.
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IAI BALANCED PORTFOLIO
OBJECTIVE
The objective of Balanced Portfolio is to maximize total return.
PRINCIPAL INVESTMENT STRATEGIES
Balanced Portfolio invests in a broadly diversified portfolio of stocks and debt
instruments. The mix of securities will change based on existing and anticipated
market conditions.
Balanced Portfolio's investments in common stocks are primarily in larger
capitalization companies (market capitalizations of at least $1 billion at the
time of purchase) that cover a broad range of industries. The Portfolio's
investment adviser focuses on companies that it believes have solid competitive
advantages and extremely high financial quality at attractive fundamental
valuations.
Balanced Portfolio may invest in all types of debt securities, including:
* corporate debt obligations;
* securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities;
* mortgage-backed securities issued by government and non-government
entities;
* asset-backed securities;
* zero coupon securities, which do not pay interest currently;
* payment-in-kind bonds, where interest is paid in other securities
rather than in cash; and
* short-term debt securities, including bank certificates of deposit,
bankers' acceptances and commercial paper.
The Portfolio's adviser employs a "top-down" approach in selecting debt
securities for the Fund. First, the adviser determines its economic outlook and
the direction in which it expects interest rates to move. Based on these
factors, the adviser adjusts the maturities of securities held by the Portfolio
and determines the Portfolio's sector allocation. Selections of individual
securities that fall within the appropriate parameters are based on the
adviser's analysis of the individual security and its relative value compared to
other securities in the marketplace. The Portfolio's adviser anticipates that
the average effective duration for the debt portion of the Portfolio will range
from 3 1/2 to 7 1/2 years. This range may change, however, due to market
conditions and other economic factors. The longer the Portfolio's effective
duration, the more its net asset value can be expected to change in response to
interest rate changes. See "Principal Risks - Interest Rate Risk."
When investing in debt securities the Portfolio will invest primarily in
securities rated investment grade at the time of purchase (or in unrated
securities judged by the Portfolio's investment adviser to be of comparable
quality). Investment grade securities are rated within the four highest grades
assigned by Moody's Investors Services, Inc. ("Moody's") or Standard & Poor's
Corporation ("S&P"). The Portfolio may invest up to 10% of its total assets in
securities rated lower than investment grade, or "junk bonds." The Portfolio
will not invest in securities rated lower than B at the time of investment by
Moody's or S&P or, if unrated, judged to be of comparable quality by the
Portfolio's adviser. Commercial paper in which the Portfolio invests must, at
the time of purchase, be rated at least Prime-2 by Moody's or A-2 by S&P or be
issued by companies having an outstanding unsecured debt issue rated A or better
by Moody's or S&P.
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The Portfolio may invest in both domestic and foreign equity and debt
securities. The Portfolio limits its investment in foreign securities
denominated in foreign currencies and not publicly traded in the United States
to 25% of total assets.
The Portfolio may enter into futures contracts and options on those contracts,
may invest in options on securities and financial indexes, and may enter into
foreign currency transactions such as currency forward contracts. The Portfolio
intends to use these derivative instruments primarily to hedge the value of its
portfolio against potential adverse movements in securities prices, foreign
currency markets or interest rates. To a limited extent, the Portfolio may also
use derivative instruments for non-hedging purposes such as seeking to increase
the Portfolio's income or otherwise seeking to enhance return.
To generate additional income, the Portfolio may invest up to 10% of its net
assets in mortgage dollar roll transactions.
The Portfolio's adviser regularly reviews the allocation of Portfolio assets
among stocks and long and short-term debt instruments. Because Balanced
Portfolio seeks to maximize total return over the long term, the adviser will
not try to pinpoint the precise moment when major reallocations are warranted.
Rather, reallocations among asset classes will be made gradually over time to
favor asset classes that, in the adviser's judgment, provide the most favorable
total return outlook. Normally, a single reallocation decision will not involve
more than 10% of the Portfolio's total assets.
PRINCIPAL RISKS
You may lose money by investing in Balanced Portfolio. The principal risks that
could adversely affect the value of the Portfolio's shares and the total return
on your investment include:
* RISKS OF COMMON STOCKS. Common stocks may decline significantly in price
over short or extended periods of time. Price changes may occur in the
market as a whole or they may occur in only a particular company, industry
or sector of the market.
* INTEREST RATE RISK. Prices of the Portfolio's debt securities will
generally fall when interest rates rise. One measure of interest rate risk
is effective duration, explained under "More Information on Investment
Strategies and Risks -- Effective Duration." The longer the Portfolio's
effective duration, the greater its interest rate risk.
* INCOME RISK. The Portfolio's income could decline due to falling market
interest rates.
* CREDIT RISK. The Portfolio is subject to the risk that the issuers of
debt securities it holds will not make timely payments of interest or
principal on the securities. Securities rated the lowest investment grade
have speculative characteristics. In adverse economic or other
circumstances, issuers of these lower rated securities are more likely to
have difficulty making principal and interest payments that issuers of
higher rated securities. Non-investment grade securities are subject to
additional risk. See "Risks of Non-Investment Grade Securities" below.
* RISKS OF NON-INVESTMENT GRADE SECURITIES. Non-investment grade
securities, or "junk bonds," generally have more volatile prices and carry
more risk to principal than investment grade securities.
* CALL RISK. The Portfolio is subject to the risk that, during periods of
falling interest rates, an issuer of debt securities will "call" -- or
repay -- its high-yielding bonds before their maturity date. The Portfolio
would then be forced to invest the unanticipated proceeds at lower interest
rates, resulting in a decline in the Portfolio's income.
* RISKS OF MORTGAGE AND ASSET-BACKED SECURITIES. Falling interest rates
could cause faster than expected prepayments of the obligations underlying
the Portfolio's mortgage and asset-backed securities. These prepayments
pass through to the Portfolio, which must reinvest them at a time when
interest rates on new investments are falling, reducing the Portfolio's
income. On the other hand, rising interest rates could cause
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prepayments of the obligations to slow, which would lengthen the duration
of the Portfolio's mortgage and asset-backed securities and cause their
prices to decline.
* RISKS OF FOREIGN SECURITIES. Investing in foreign securities typically
involves risks not associated with U.S. investing. Risks of foreign
investing include the risk that the Portfolio may experience a decline in
net asset value resulting from changes in exchange rates between the U.S.
dollar and foreign currencies, the risk of adverse political and economic
developments, and the possibility of expropriation, nationalization or
confiscatory taxation or limitations on the removal of Portfolio assets.
* RISKS OF DERIVATIVE INSTRUMENTS. The use of derivative instruments
exposes the Portfolio to additional risks and transaction costs. Successful
use of these instruments depends on the adviser's ability to correctly
forecast the direction of market movements. The Portfolio's performance
could be worse than if the Portfolio had not used these instruments if the
adviser's judgment proves incorrect. In addition, even if the adviser's
forecast is correct, there may be an imperfect correlation between the
price of derivative instruments and movements in the prices of the
securities, interest rates or currencies being hedged.
* RISKS OF DOLLAR ROLL TRANSACTIONS. The use of mortgage dollar rolls could
increase the volatility of the Portfolio's share price. It could also
diminish the Portfolio's investment performance if the adviser does not
predict mortgage prepayments and interest rates correctly.
PORTFOLIO PERFORMANCE
The bar chart and table on the left provide you with information on Balanced
Portfolio's volatility and performance. The bar chart shows you how performance
of the Portfolio's shares has varied from year to year. The table compares the
Portfolio's performance over different time periods to that of a broad measure
of market performance. Both the chart and the table assume that all dividends
and distributions have been reinvested. Separate account fees are not taken into
account in calculating the Portfolio's returns. If they had been, returns would
have been lower. Remember, how the Portfolio has performed in the past is not
necessarily an indication of how it will perform in the future.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR*
[BAR CHART]
1995 16.21%
1996 9.80%
1997 16.60%
1998 12.11%
* The Portfolio's total return for the period from January 1, 1999 through March
31, 1999 was (2.69%).
BEST QUARTER: Quarter ended June 30, 1997 10.63%
WORST QUARTER: Quarter ended September 30, 1998 (4.54%)
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AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
ONE YEAR SINCE INCEPTION
(2/3/94)
BALANCED PORTFOLIO 12.11% 11.48%
STANDARD & POOR'S 500
COMPOSITE INDEX* 28.57% 23.67%+
LEHMAN
GOVERNMENT/CORPORATE BOND
INDEX** 9.47% 7.11%+
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* An unmanaged index of 500 common stocks chosen to reflect the industries of
the U.S. economy.
** An unmanaged index of Treasury securities, other securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities, and
investment grade corporate obligations.
+ Since 2/1/94
IAI RESERVE PORTFOLIO
OBJECTIVES
Reserve Portfolio's objectives are to provide high levels of capital stability
and liquidity and, to the extent consistent with these primary objectives, a
high level of current income.
PRINCIPAL INVESTMENT STRATEGIES
Reserve Portfolio invests primarily in a diversified portfolio of investment
grade debt securities. In order to achieve its objectives of capital stability
and liquidity, the Portfolio maintains a dollar weighted average maturity of its
investment portfolio of 25 months or less.
Debt securities in which Reserve Portfolio may invest include:
* corporate debt obligations;
* securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities;
* mortgage-backed securities issued by government and non-government
entities;
* asset-backed securities;
* zero coupon securities, which do not pay interest currently;
* payment-in-kind bonds, where interest is paid in other securities
rather than in cash; and
* short-term debt securities, including bank certificates of deposit,
bankers' acceptances and commercial paper.
The Portfolio's adviser employs a "top-down" approach in selecting debt
securities for the Fund. First, the adviser determines its economic outlook and
the direction in which it expects interest rates to move. Based on these
factors, the adviser adjusts the maturities of the securities held by the
Portfolio and determines the Portfolio's sector allocation. Selections of
individual securities that fall within the appropriate parameters are based on
the adviser's analysis of the individual security and its relative value
compared to other securities in the marketplace. The Portfolio's adviser
anticipates that the average effective duration for the Portfolio will not
exceed 1 3/4 years.
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This range may change, however, due to market conditions and other economic
factors. The longer the Portfolio's effective duration, the more its net asset
value can be expected to change in response to interest rate changes. See
"Principal Risks - Interest Rate Risk."
The Portfolio invests only in securities rated investment grade at the time or
purchase (or in unrated securities judged by the Portfolio's investment adviser
to be of comparable quality). Investment grade securities are rated within the
four highest grades assigned by Moody's or S&P. Commercial paper in which the
Portfolio invests must, at the time of purchase, be rated at least Prime-2 by
Moody's or A-2 by S&P or be issued by companies having an outstanding unsecured
debt issue rated A or better by Moody's or S&P.
PRINCIPAL RISKS
You could lose money by investing in Reserve Portfolio. The principal risks that
could adversely affect the value of the Portfolio's shares and the total return
on your investment include:
* INTEREST RATE RISK. Prices of the Portfolio's debt securities will
generally fall when interest rates rise. One measure of interest rate risk
is effective duration, explained under "More Information on Investment
Strategies and Risks -- Effective Duration." The longer the Portfolio's
effective duration, the greater its interest rate risk.
* INCOME RISK. The Portfolio's income could decline due to falling market
interest rates.
* CREDIT RISK. The Portfolio is subject to the risk that the issuers of
debt securities it holds will not make timely payments of interest or
principal on the securities. Securities rated the lowest investment grade
have speculative characteristics. In adverse economic or other
circumstances, issuers of these lower rated securities are more likely to
have difficulty making principal and interest payments that issuers of
higher rated securities. Non-investment grade securities are subject to
additional risk.
* CALL RISK. The Portfolio is subject to the risk that, during periods of
falling interest rates, an issuer of debt securities will "call" -- or
repay -- its high-yielding bonds before their maturity date. The Portfolio
would then be forced to invest the unanticipated proceeds at lower interest
rates, resulting in a decline in the Portfolio's income.
* RISKS OF MORTGAGE AND ASSET-BACKED SECURITIES. Falling interest rates
could cause faster than expected prepayments of the obligations underlying
the Portfolio's mortgage and asset-backed securities. These prepayments
pass through to the Portfolio, which must reinvest them at a time when
interest rates on new investments are falling, reducing the Portfolio's
income. On the other hand, rising interest rates could cause prepayments of
the obligations to slow, which would lengthen the duration of the
Portfolio's mortgage and asset-backed securities and cause their prices to
decline.
PORTFOLIO PERFORMANCE
The bar chart and table that follows provide you with information on Reserve
Portfolio's volatility and performance. The bar chart shows you how performance
of the Portfolio's shares has varied from year to year. The table compares the
Portfolio's performance over different time periods to that of a broad measure
of market performance. Both the chart and the table assume that all dividends
and distributions have been reinvested. Separate account fees are not taken into
account in calculating the Portfolio's returns. If they had been, returns would
have been lower. Remember, how the Portfolio has performed in the past is not
necessarily an indication of how it will perform in the future.
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ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR*
[BAR CHART]
1995 5.09%
1996 4.93%
1997 4.62%
1998 5.46%
* The Portfolio's total return for the period from January 1, 1999 through March
31, 1999 was 0.70%.
BEST QUARTER: Quarter ended September 30, 1998 2.21%
WORST QUARTER: Quarter ended June 30, 1994 0.44%
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
ONE YEAR SINCE INCEPTION
(4/7/94)
RESERVE PORTFOLIO 5.46% 4.72%
SALOMON BROTHERS ONE
YEAR TREASURY BILL
INDEX* 5.90% 5.90%+
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* An unmanaged index of one-year constant maturity Treasury bills.
+ Since 2/1/94.
PRICING OF PORTFOLIO SHARES
Investments in and redemptions from the Portfolios may be made only by separate
accounts established and maintained by insurance companies for the purpose of
funding variable annuity contracts or variable life insurance policies. The
purchase or redemption price will be equal to the Portfolio's net asset value
("NAV") per share next calculated after an insurance company's order is
accepted. Each Portfolio's NAV per share is generally calculated as of the close
of regular trading on the New York Stock Exchange (usually 3 p.m. Central time)
every day the exchange is open.
A Portfolio's NAV per share is computed by adding up the value of the
Portfolio's investments, cash and other assets, subtracting its liabilities, and
then dividing the result by the number of shares outstanding. Each Portfolio
values investments for which market quotations are readily available at market
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. Each Portfolio values short-term
investments maturing within 60 days at amortized cost, which approximates market
value. The Portfolios value all other investments and assets at their fair
value.
TAXES
Each Portfolio pays distributions from its net investment income and any net
capital gains that it has realized. Under current tax law, these distributions
are not currently taxable to contract or policy owners when left to accumulate
within a variable annuity contract or variable life insurance policy.
For a discussion of the tax status of your variable contract or policy, see the
prospectus of your insurance company's separate account.
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FUND MANAGEMENT
INVESTMENT ADVISER
Investment Advisers, Inc. ("IAI") is the Portfolios' investment adviser. IAI,
which has been in the investment advisory business since 1947, 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.
IAI is located at 601 2nd Avenue South, Suite 3600, Minneapolis, Minnesota
55402.
The Portfolios have entered into an Advisory Agreement with IAI under which IAI
provides the Portfolios with investment advice, statistical and research
facilities, and certain equipment and services such as office space and
necessary office facilities, equipment, and the services of required personnel.
During their most recent fiscal year, Regional, Balanced and Reserve Portfolios
paid IAI advisory fees at the annual rates of .65%, .65% and .45%, respectively,
of each Portfolio's average daily net assets.
IAI also provides all required administrative, stock transfer, redemption,
dividend disbursing and accounting services to the Portfolios under an
Administrative Agreement. During their last fiscal year, each Portfolio paid IAI
an administrative fee at the annual rate of .10% of the Portfolio's average
daily net assets.
PORTFOLIO MANAGERS
Mark Hoonsbeen has primary responsibility for the management of Regional
Portfolio. Mr. Hoonsbeen is a Vice President of IAI and has managed Regional
Portfolio since he joined IAI in 1994.
Larry Hill has primary responsibility for the management of Reserve Portfolio.
Mr. Hill is IAI's Chief Fixed Income Officer and has managed Reserve Portfolio
since March 1998.
Balanced Portfolio is managed by an investment committee comprised of several
IAI equity and fixed income portfolio managers.
MORE INFORMATION ON
INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES
The principal investment strategies of the Portfolios are described above under
"Portfolio Summaries." These are the strategies that IAI believes are most
likely to be important in trying to achieve the Portfolios' objectives. Of
course, there is no guarantee that any Portfolio will achieve its objectives.
Although not considered principal investment strategies, you should be aware
that the Portfolios may also use strategies and invest in securities that are
not described in this Prospectus, but that are described in the Statement of
Additional Information.
TEMPORARY DEFENSIVE INVESTMENTS
In an attempt to respond to adverse market, economic, political or other
conditions, each Portfolio may temporarily invest without limit in cash or cash
equivalents (in U.S. dollars or foreign currencies) and short-term securities,
including money market securities. Being invested in these securities may
prevent a Portfolio from achieving its investment objectives.
PORTFOLIO TURNOVER
Each Portfolio may dispose of securities whenever it appears advisable, without
regard to the length of time they have been held. As a result, a Portfolio may,
from time to time, have an annual portfolio turnover rate of over
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100%. Active trading may increase the amount of commissions or mark-ups to
broker-dealers that a Portfolio pays when it buys and sells securities. The
"Financial Highlights" section of this prospectus shows each Portfolio's
historical portfolio turnover rate.
EFFECTIVE DURATION
Balanced Portfolio anticipates that the average effective duration for the debt
portion of its portfolio will range from 3 1/2 to 7 1/2 years. Reserve Portfolio
anticipates that its average effective duration will not exceed 1 3/4 years.
Effective duration, one measure of interest rate risk, measures how much the
value of a security is expected to change with a given change in interest rates.
The longer a security's effective duration, the more sensitive its price to
changes in interest rates. For example, if interest rates were to increase by
one percentage point, the market value of a bond with an effective duration of
five years would decrease by 5%, with all other factors being constant.
Effective duration is based on assumptions and subject to a number of
limitations. It is most useful when interest rate changes are small, rapid and
occur equally in short-term and long-term securities. In addition, it is
difficult to calculate precisely for bonds with prepayment options, such as
mortgage-backed securities, because the calculation requires assumptions about
prepayment rates.
PRINCIPAL RISKS
The principal risks of investing in the Portfolios are described above under
"Portfolio Summaries." More information about risks is presented below.
* RISKS OF COMMON STOCKS. Regional Portfolio and the equity portion of Balanced
Portfolio are subject to the risks of investing in common stocks. These risks
include the following:
MARKET RISK. The value of a company's stock may be affected by changes in
financial markets that are relatively unrelated to the company itself, such
as changes in interest rates, changes in general economic conditions,
changes in investor perceptions of the market, or the outlook for overall
corporate profitability.
SECTOR RISK. The stocks of companies within a certain industry or sector of
the economy can perform differently from the overall stock market. This
could be due to such factors as increased production costs or changes in
the regulatory or competitive environment.
COMPANY RISK. The value of a company's stock may fall as a result of
factors directly relating to that company, such as changes in corporate
profitability due to the success or failure of specific products or
management strategies.
* INTEREST RATE RISK. Reserve Portfolio and Balanced Portfolio are subject to
interest rate risk as a result of their investments in debt securities. Debt
securities will fluctuate in value with changes in interest rates. In general,
debt securities will increase in value when interest rates fall and decrease in
value when interest rates rise. Longer-term debt securities are generally more
sensitive to interest rate changes. Securities which do not pay interest on a
current basis, such as zero coupon securities, may be highly volatile as
interest rates rise or fall. Payment-in-kind bonds, which pay interest in other
securities rather than in cash, also may be highly volatile.
* INCOME RISK. The income of Reserve Portfolio or Balanced Portfolio could
decline due to falling market interest rates. This is because, in a falling
interest rate environment, a Portfolio generally will have to invest the
proceeds from sales of Portfolio shares, as well as the proceeds from maturing
portfolio securities (or portfolio securities that have been called, see "Call
Risk," or prepaid, see "Prepayment Risk") in lower-yielding securities.
* CREDIT RISK. Reserve Portfolio and Balanced Portfolio are subject to the risk
that the issuers of debt securities they hold will not make payments of
principal or interest on the securities. There is also the risk that an issuer
could suffer adverse changes in financial condition that could lower the credit
quality of a security. This could lead to greater volatility in the price of the
security and the shares of the Portfolio. Also, a change in the credit quality
rating of a bond can affect the bond's liquidity and make it more difficult for
a Portfolio to sell. Securities rated the lowest investment grade have
speculative characteristics. In adverse economic or other circumstances, issuers
12
<PAGE>
of these lower rated securities are more likely to have difficulty making
principal and interest payments than issuers of higher rated securities.
Non-investment grade securities are subject to additional risk. See "Risks of
Non-Investment Grade Securities" below. When a Portfolio purchases unrated
securities, it will depend on IAI's analysis of credit risk more heavily than
usual.
* RISKS OF NON-INVESTMENT GRADE SECURITIES. Balanced Portfolio may invest in
non-investment grade debt securities, which are commonly known as "junk bonds."
Although these securities usually offer higher yields than investment grade
securities, they also involve more risk. Junk bonds generally have more volatile
prices and carry more risk to principal than investment grade securities. Junk
bonds may be more susceptible to real or perceived adverse economic changes (for
instance, an economic downturn or prolonged period of rising interest rates),
political changes or adverse developments specific to the issuer. In addition,
the secondary trading market may be less liquid than the market for investment
grade securities. Adverse publicity and investor perceptions as well as new or
proposed laws also may have a greater negative impact on the market for junk
bonds.
* CALL RISK. Call risk is the possibility that corporate bonds held by Reserve
Portfolio or Balanced Portfolio will be repaid prior to maturity. Call
provisions, common in many corporate bonds, 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. If bonds held
by a Portfolio were called, the Portfolio would most likely be forced to invest
the unanticipated proceeds in lower-yielding securities, resulting in a decline
in the Portfolio's income.
* PREPAYMENT RISK. Mortgage-backed securities are secured by and payable from
pools of mortgage loans. Similarly, asset-backed securities are supported by
obligations such as automobile loans or home equity loans. These mortgages and
other obligations generally can be prepaid at any time without penalty. As a
result, mortgage and asset-backed securities are subject to prepayment risk,
which is the risk that falling interest rates could cause prepayments of the
securities to occur more quickly than expected. This occurs because, as interest
rates fall, more homeowners refinance the mortgages underlying mortgage backed
securities or prepay the debt obligations underlying asset-backed securities. A
Portfolio holding these securities must reinvest the prepayments at a time when
interest rates are falling, reducing the income of the Portfolio. In addition,
when interest rates fall, prices on mortgage and asset-backed securities may not
rise as much as for other types of comparable debt securities because investors
may anticipate an increase in prepayments.
* EXTENSION RISK. Mortgage and asset-backed securities also are subject to
extension risk, which is the risk that rising interest rates could cause
mortgages and other obligations underlying the securities to be prepaid more
slowly than expected, resulting in slower prepayments of the securities. This
would, in effect, convert a short or medium duration mortgage or asset-backed
security into a longer duration security, increasing its sensitivity to interest
rate changes and causing its price to decline.
* INFLATION RISK. Even if the principal value of your investment in a Portfolio,
or you income from that investment, remains constant or increases, their value
may be less in the future because of inflation. Thus, as inflation occurs, the
purchasing power of you Portfolio shares and distributions may decline, even if
their value in dollars increases.
* RISKS OF FOREIGN SECURITIES. Balanced Portfolio may invest in foreign
securities. Investments in foreign securities involve risks that are different
in some respects from investments in securities of U.S. issuers. Because the
Portfolio 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 held by 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 Balanced Portfolio's holdings of securities
denominated in that currency and, therefore, will cause an overall decline in
the Portfolio's net asset value and net investment income and capital gains, if
any. Other risks include 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 Portfolio. Securities of some foreign companies are less
liquid and more volatile than securities of comparable domestic companies. There
also may be less publicly
13
<PAGE>
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. Delays may be encountered in settling securities transactions in
certain foreign markets, and the Portfolio will incur costs in converting
foreign currencies into U.S. dollars. Custody charges are generally higher for
foreign securities.
* RISKS OF DOLLAR ROLL TRANSACTIONS. Balanced Portfolio may enter into dollar
roll transactions. In a dollar roll transaction, the Portfolio sells
mortgage-backed securities for delivery in the current month while contracting
with the same party to repurchase similar securities at a future date. Because
the Portfolio gives up the right to receive principal and interest paid on the
securities sold, a mortgage dollar roll transaction will diminish the investment
performance of the Portfolio unless the difference between the price received
for the securities sold and the price to be paid for the securities to be
purchased in the future, plus any fee income received, exceeds any income,
principal payments and appreciation on the securities sold as part of the
mortgage dollar roll. Whether mortgage dollar rolls will benefit Balanced
Portfolio will depend upon IAI's ability to predict mortgage prepayments and
interest rates. In addition, the use of mortgage dollar rolls by Balanced
Portfolio increases the amount of the Portfolio's assets that are subject to
market risk, which could increase the volatility of the Portfolio's share price.
* RISKS OF DERIVATIVE INSTRUMENTS. The use of derivative instruments exposes
Balanced Portfolio to additional investment risks and transaction costs. Risks
inherent in the use of derivative instruments include:
- the risk that interest rates, securities prices and currency markets
will not move in the direction that IAI anticipates;
- an imperfect correlation between the price of derivative instruments
and movements in the prices of the securities, interest rates or
currencies being hedged;
- the inability to close out certain hedged positions to avoid adverse
tax consequences;
- the possible absence of a liquid secondary market for any particular
instrument and possible exchange imposed price fluctuation limits,
either of which may make it difficult or impossible to close out a
position when desired;
- leverage risk, which is the risk that adverse price movements in an
instrument can result in a loss substantially greater than the
Portfolio's initial investment in that instrument; and
- particularly in the case of privately negotiated instruments, the risk
that the counterparty will fail to perform its obligations, which
could leave the Portfolio worse off than if it had not entered into
the position.
If Balanced Portfolio uses derivative instruments and if IAI's judgment proves
incorrect, the Portfolio's performance could be worse than if it had not used
these instruments.
* MANAGER RISK. IAI manages the Portfolios 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
Portfolio's investment strategy effectively. As a result, the Portfolio may fail
to achieve its stated objectives.
* YEAR 2000 ISSUES. The investment advisory, transfer agency and administrative
services provided to the Portfolios by IAI depend on the smooth functioning of
IAI's computer systems. Many computer software systems in use today cannot
distinguish the year 2000 from the year 1900 because of the way dates are
encoded and calculated. That failure could have a negative impact on handling
securities trades, pricing and account services. IAI has been actively working
on necessary changes to its computer systems to deal with the year 2000 and
expects that its systems will be adapted in time for that event, although there
cannot be assurance of success.
14
<PAGE>
IAI is working with third parties to assess the adequacy of their compliance
efforts and is developing contingency plans intended to assure that third-party
noncompliance will not materially affect IAI's operations. Companies,
organizations, governmental entities and markets in which the Portfolios invest
will be affected by the year 2000 issue, but at this time the Portfolios cannot
predict the degree of impact. To the extent the effect is negative, the
Portfolios' returns could be adversely affected.
15
<PAGE>
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about the Portfolios.
This information is intended to help you understand each Portfolio's financial
performance since it commenced operations. Some of this information reflects
financial results for a single Portfolio share. The total returns in the table
represent the rate that you would have earned or lost on an investment in the
Portfolio, assuming you reinvested all of your dividends and distributions. This
information has been audited by KPMG Peat Marwick LLP, independent auditors,
whose report, along with the Portfolios' financial statements, is included in
the Portfolios' annual report, which is available upon request.
REGIONAL PORTFOLIO
<TABLE>
<CAPTION>
Period from
January 31, ***
Years ended December 31, to December 31,
1998 1997 1996 1995 1994
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 16.31 $ 15.02 $ 14.16 $ 10.62 $ 10.00
------------------------------------------------------------------------
OPERATIONS
Net investment income 0.08 0.08 0.05 0.06 0.03
Net realized and unrealized gains 0.18 1.90 1.60 3.50 0.59
------------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.26 1.98 1.65 3.56 0.62
------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.09) (0.07) (0.05) (0.02) --
Net realized gains (0.80) (0.62) (0.74) -- --
------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.89) (0.69) (0.79) (0.02) --
------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 15.68 $ 16.31 $ 15.02 $ 14.16 $ 10.62
========================================================================
Total investment return* 1.56% 13.45% 11.88% 33.51% 6.20%
Net assets at end of period (000's omitted) $ 15,738 $ 17,085 $ 11,831 $ 5,105 $ 865
RATIOS
Expenses to average daily net assets** 0.94% 0.90% 1.03% 1.37% 1.13%+
Net investment income to average daily net assets** 0.50% 0.65% 0.77% 1.12% 0.81%+
Portfolio turnover rate (excluding short-term
securities) 74.3% 62.1% 78.4% 156.0% 127.6%
</TABLE>
- --------------------
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions at
net asset value.
** The Portfolio's adviser voluntarily waived $6,737 and $7,455 in expenses
for the year ended December 31, 1995 and for 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 (loss) to
average daily net assets would have been .85% and (1.96%), respectively.
*** Commencement of operations.
+ Annualized.
16
<PAGE>
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
Period from
February 3, *** to
Years ended December 31, December 31
1998 1997 1996 1995 1994
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 14.29 $ 12.71 $ 11.78 $ 10.22 $ 10.00
---------------------------------------------------------------------
OPERATIONS
Net investment income 0.31 0.27 0.22 0.09 0.10
Net realized and unrealized gains 1.40 1.81 0.92 1.56 0.12
---------------------------------------------------------------------
TOTAL FROM OPERATIONS 1.71 2.08 1.14 1.65 0.22
---------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.26) (0.24) (0.10) (0.09) --
Net realized gains (0.14) (0.26) (0.11) -- --
---------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.40) (0.50) (0.21) (0.09) --
---------------------------------------------------------------------
NET ASSET VALUE
End of period $ 15.60 $ 14.29 $ 12.71 $ 11.78 $ 10.22
=====================================================================
Total investment return* 12.11% 16.60% 9.80% 16.21% 2.20%
Net assets at end of period (000's omitted) $ 3,509 $ 2,446 $ 1,534 $ 764 $ 206
RATIOS
Expenses to average daily net assets** 1.02% 1.25% 1.25% 1.70% 1.25%+
Net investment income to average daily net assets** 2.69% 2.63% 2.84% 2.34% 2.28%+
Portfolio turnover rate (excluding short-term
securities) 40.9% 38.8% 67.4% 56.0% 21.6%
</TABLE>
- --------------------
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions at
net asset value.
** The Portfolio's adviser voluntarily waived $10,627, $1,753, $8,031, $13,428
and $7,756 in expenses for the years ended December 31, 1998, 1997, 1996,
1995, and for 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 1.37%, 1.34%, 1.96%, 5.29% and
10.33%, respectively, and the ratio of net investment income (loss) to
average daily net assets would have been 2.34%, 2.54%, 2.13%, (1.25%) and
(6.80%), respectively.
*** Commencement of operations.
+ Annualized.
17
<PAGE>
RESERVE PORTFOLIO
<TABLE>
<CAPTION>
Period from
April 7, *** to
Years ended December 31, December 31
1998 1997 1996 1995 1994
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 10.00 $ 10.03 $ 10.05 $ 10.03 $ 10.00
-------------------------------------------------------------------
OPERATIONS
Net investment income 0.47 0.43 0.49 0.48 0.20
Net realized and unrealized gains (losses) 0.06 0.02 (0.01) 0.02 0.02
-------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.53 0.45 0.48 0.50 0.22
-------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.45) (0.46) (0.50) (0.48) (0.19)
Net realized gains -- (0.02) -- -- --
-------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.45) (0.48) (0.50) (0.48) (0.19)
-------------------------------------------------------------------
NET ASSET VALUE
End of period $ 10.08 $ 10.00 $ 10.03 $ 10.05 $ 10.03
===================================================================
Total investment return* 5.46% 4.62% 4.93% 5.09% 2.25%
Net assets at end of period (000's omitted) $ 634 $ 1,021 $ 528 $ 844 $ 544
RATIOS
Expenses to average daily net assets** 0.68% 0.85% 0.85% 1.03% 0.85%+
Net investment income to average daily net assets** 4.57% 4.57% 4.54% 4.84% 3.56%+
Portfolio turnover rate (excluding short-term
securities) 129.0% 0.0% 185.3% 0.0% 0.0%
</TABLE>
- --------------------
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions at
net asset value.
** The Portfolio's adviser voluntarily waived $7,960, $8479, $9,034, $11,528
and $6,930 in expenses for the years ended December 31, 1998, 1997, 1996,
1995, and for 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 1.69%, 2.25%, 1.81%, 2.62%, and
4.62%, respectively, and the ratio of net investment income (loss) to
average daily net assets would have been 3.56%, 3.17%, 3.58%, 3.25% , and
(0.21%), respectively.
*** Commencement of operations.
+ Annualized.
18
<PAGE>
FOR MORE INFORMATION ABOUT:
IAI REGIONAL PORTFOLIO
IAI BALANCED PORTFOLIO
IAI RESERVE PORTFOLIO
The Portfolios' statement of additional information ("SAI") and annual and
semi-annual reports to shareholders include additional information about the
Portfolios. The SAI provides more details about each Portfolio and its policies.
A current SAI is on file with the Securities and Exchange Commission (SEC) and
is incorporated into this prospectus by reference (which means that it is
legally considered part of this prospectus). Additional information about each
Portfolio's investments is available in the Portfolios' annual and semiannual
reports to shareholders. In the Portfolios' annual report, you will find a
discussion of the market conditions and investment strategies that significantly
affected each Portfolio's performance during its last fiscal year. You may get
free copies of these materials by calling the Portfolios toll-free a
1-800-945-3863.
You may also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. For more information, call
1-800-SEC-0330.
Information about the Portfolios is also available on the Internet. Text-only
versions of fund documents can be viewed online or downloaded from the SEC's
Internet site at http://www.sec.gov.
SEC file number: 811-8032
19
<PAGE>
IAI REGIONAL PORTFOLIO
IAI BALANCED PORTFOLIO
IAI RESERVE PORTFOLIO
SERIES OF
IAI RETIREMENT FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 1999
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. THIS
STATEMENT OF ADDITIONAL INFORMATION RELATES TO A PROSPECTUS FOR IAI REGIONAL
PORTFOLIO, IAI BALANCED PORTFOLIO AND IAI RESERVE PORTFOLIO (THE "PORTFOLIOS")
DATED MAY 1, 1999 AND SHOULD BE READ IN CONJUNCTION THEREWITH. THE FINANCIAL
STATEMENTS INCLUDED AS PART OF THE PORTFOLIOS' ANNUAL REPORT TO SHAREHOLDERS FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1998 ARE INCORPORATED BY REFERENCE INTO THIS
STATEMENT OF ADDITIONAL INFORMATION. COPIES OF THE PORTFOLIO'S PROSPECTUS AND/OR
ANNUAL REPORT ARE AVAILABLE, WITHOUT CHARGE, BY WRITING OR CALLING THE
PORTFOLIOS, P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440 (TELEPHONE:
1-612-376-2700 OR 1-800-945-3863).
<PAGE>
TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVES AND STRATEGIES.................................... 1
INVESTMENT RESTRICTIONS................................................. 16
INVESTMENT PERFORMANCE.................................................. 18
MANAGEMENT.............................................................. 19
CUSTODIAN............................................................... 23
LEGAL COUNSEL........................................................... 23
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE...................... 23
CAPITAL STOCK........................................................... 24
CONTROL PERSONS AND PRINCIPAL SECURITY HOLDERS.......................... 24
NET ASSET VALUE AND PUBLIC OFFERING PRICE............................... 26
TAX STATUS.............................................................. 26
LIMITATION OF DIRECTOR LIABILITY........................................ 26
SHAREHOLDER MEETINGS.................................................... 27
FINANCIAL STATEMENTS.................................................... 27
APPENDIX A -- Ratings of Debt Securities................................ A-1
<PAGE>
INVESTMENT OBJECTIVES AND STRATEGIES
IAI Retirement Funds, Inc. (the "Fund") is an open-end management
investment company designed to provide investment vehicles for variable annuity
contracts and/or variable life insurance policies of various insurance
companies. IAI Reserve Portfolio ("Reserve Portfolio"), IAI Balanced Portfolio
("Balanced Portfolio") and IAI Regional Portfolio ("Regional Portfolio")
(individually, "Portfolio" and collectively, the "Portfolios") are diversified
series of the Fund.
The investment objectives and principal investment strategies of the
Portfolios are discussed in the Prospectus under "Portfolio Summaries" and "More
Information of Investment Strategies." The Portfolios' investment objectives may
not be changed without shareholder approval. Investors should understand that
all investments are subject to various risks. There can be no guarantee against
loss resulting from an investment in any Portfolio, and there can be no
assurance that a Portfolio's investment strategies will be successful, or that
its investment objectives will be attained. Certain of the Portfolios' principal
investment strategies are discussed in more detail below. In addition, the
Portfolios may also use strategies and invest in securities that are not
principal investment strategies and are not described in the Prospectus. These
strategies and securities are described below.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Each Portfolio may engage in repurchase agreements relating to the
securities in which it may invest. A repurchase agreement, which is functionally
equivalent to a loan by a Portfolio, involves the purchase of securities by a
Portfolio with the condition that, after a stated period of time, the original
seller will buy back the securities at a predetermined price or yield. Each
Portfolio's custodian will have custody of, and will hold in a segregated
account, securities acquired by the Portfolio 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 Portfolio'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 Portfolio 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
Portfolio'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 Portfolio could suffer a loss.
Each Portfolio may engage in reverse repurchase agreements as a form
of borrowing. In a reverse repurchase agreement, a Portfolio sells an 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, each Portfolio will comply with guidelines
established by the Securities and Exchange Commission regarding the segregation
of assets. Each Portfolio will enter into reverse repurchase agreements only
with parties whose creditworthiness has been found satisfactory by Investment
Advisers, Inc. ("IAI"), the Portfolios' investment adviser and manager. Such
transactions may increase fluctuations in the market value of the Portfolios'
assets and may be viewed as a form of leverage. Each Portfolio does not
currently intend to invest more than 5% of its net assets in reverse repurchase
agreements.
BORROWING
Each Portfolio may borrow from banks (or through reverse repurchase
agreements) for temporary or emergency purposes. If a Portfolio borrows money,
its share price may be subject to greater fluctuation until the borrowing is
paid off. If a Portfolio makes additional investments while borrowings are
outstanding, this may be considered a form of leverage. Each Portfolio currently
has a line of credit with a bank at the prime interest rate. To the extent funds
are drawn against the line of credit, securities are held in a segregated
account. No compensating balances or commitment fees are required under the
lines of credit. Each Portfolio does not intend its borrowing to exceed 5% of
its net assets.
1
<PAGE>
SECURITIES OF FOREIGN ISSUERS
Each Portfolio may invest in securities of foreign issuers. However,
only Balanced Portfolio currently intends to invest in such securities, and it
does not intend to invest more than 25% of its total assets in foreign
securities denominated in foreign currencies and not publicly traded in the
United States. Investing in foreign securities may result in greater risk than
that incurred by investing in domestic securities. There is generally less
publicly available information about foreign issuers comparable to reports and
ratings that are published about companies in the United States. Also, foreign
issuers are not subject to uniform accounting and auditing and financial
reporting standards, practices and requirements comparable to those applicable
to United States companies. Furthermore, volume and liquidity in most foreign
bond markets in less than in the United States and at times volatility of price
can be greater than in the United States. There is generally less government
supervision of foreign bond markets, brokers and companies than in the United
States.
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 each Portfolio 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 Portfolio, 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.
The Portfolios are not aware at this time of the existence of any
investment or exchange control regulations which might substantially impair the
operations of the Portfolios 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 Portfolios'
foreign securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to the Portfolios'
shareholders. The expense ratio of each Portfolio should not be materially
affected by such Portfolio's investment in foreign securities.
U.S. GOVERNMENT SECURITIES
Reserve Portfolio and Balanced Portfolio may invest in securities
of, or guaranteed by, the United States Government, its agencies or
instrumentalities. These securities include:
1. United States Treasury obligations, such as Treasury
Bills (which have original maturities of one year or less), Treasury
Notes (which have original maturities of one to ten years) and
Treasury Bonds (which have original maturities generally greater
than ten years);
2. obligations of United States government agencies and
instrumentalities which are secured by the full faith and credit of
the United States Treasury, such as Government National Mortgage
Association ("Ginnie Mae") modified pass-through certificates;
2
<PAGE>
3. obligations which are secured by the right of the
issuer to borrow from the United States Treasury, such as securities
issued by the Federal Financing Bank or the United States Postal
Service; and
4. obligations which are supported by the credit of the
government agency or instrumentality itself (but are not backed by
the full faith and credit of the United States Government) such as
securities of the Federal Home Loan Mortgage Corporation ("Freddie
Mac") or the Federal National Mortgage Association ("Fannie Mae"),
including pass-through securities and participation certificates
thereof.
Guarantees as to the timely payment of principal and interest do not
extend to the value or yield of such securities nor do they extend to the value
of the Portfolios' shares. In the case of securities in which the Portfolios
invest that are not backed by the "full faith and credit" of the United States
government, the investor must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States government itself in the event the agency or
instrumentality does not meet its commitment.
The Portfolios' investments in U.S. government securities may
include U.S. Treasury inflation-protection securities. Inflation-protection
securities are a 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 are auctioned and
issued on a quarterly basis on the 15th of January, April, July, and October.
They have been issued as 10-year notes, with other maturities added thereafter.
The index used to measure inflation is the non-seasonally adjusted U.S. City
Average All Items Consumer Price Index for All Urban Consumers ("CPI-U").
The value of the principal is adjusted for inflation, and every six
months the security will pay interest, which is 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 is 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.
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 based 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
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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 the 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.
LENDING PORTFOLIO SECURITIES
In order to generate additional income, each Portfolio 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 Portfolios will only enter into loan
arrangements with broker-dealers, banks or other institutions which IAI has
determined are creditworthy under guidelines established by the Portfolios'
Board of Directors. The Portfolios 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 Portfolios 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 Portfolio an amount equivalent to any dividends or
interest paid on the securities and a Portfolio 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 Portfolio may be
reduced by finders' fees paid to broker-dealers and related expenses.
EXTENDIBLE NOTES
Reserve Portfolio is permitted to invest up to 25% of the value of
its total assets in extendible notes. An extendible note is a debt arrangement
under which the holder, at its option, may require the issuer to repurchase the
note for a predetermined fixed price at one or more times prior to the ultimate
maturity date of the note. Typically, an extendible note is issued at an
interest rate that can be adjusted at fixed times throughout its term. At the
same time as the interest rate is adjusted by the issuer, the holder of the note
is typically given the option to "put" the note back to the issuer at a
predetermined price (e.g., at 100% of the outstanding principal amount plus
unpaid accrued interest) if the extended interest rate is undesirable to the
holder. This option to put the note back to the issuer (i.e., to require the
issuer to repurchase the note) provides the holder with an optional maturity
date that is shorter than the actual maturity date of the note.
Extendible notes may be issued with maturity dates in excess of ten
years from the date of issuance. However, if such extendible notes provide for
an optional maturity date of ten years or less, then such notes are deemed by
the Portfolio to have been issued for the shorter optional maturity date.
Investment in extendible notes is not expected to have a material impact on the
effective portfolio maturity of the Portfolio.
An investment in an extendible note is liquid, and the note may be
resold to another investor prior to its optional maturity date at its market
value. The market value of an extendible note with a given optional maturity
date is determined and fluctuates in a similar manner as the market value of a
fixed maturity note with a maturity equivalent to the optional maturity of the
extendible note. Compared to fixed term notes of the same issuer, however,
extendible notes with equivalent optional maturities generally yield higher
returns without a material increase in risk to the Portfolio.
The creditworthiness of the issuers of extendible notes is monitored
and rated by Moody's and by S&P, and investments by the Reserve Portfolio in
such extendible notes are restricted to notes with the same investment ratings
as are acceptable to the Portfolio with respect to other forms of investment.
The creditworthiness of such issuers is also monitored by IAI.
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VARIABLE OR FLOATING RATE INSTRUMENTS
Balanced and Reserve Portfolios may purchase instruments with
variable or floating rates. 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.
WHEN-ISSUED/DELAYED-DELIVERY TRANSACTIONS
Reserve and Balanced Portfolios may buy and sell securities on a
delayed-delivery or when-issued basis. These transactions involve a commitment
by a Portfolio to purchase or sell specific securities at a predetermined price
or yield, with payment and delivery taking place after the customary settlement
period for that type of security (and more than seven days in the future).
Typically, no interest accrues to the purchaser until the security is delivered.
Each Portfolio may receive fees for entering into delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, a Portfolio
assumes the rights and risks of ownership, including the risk of price and yield
fluctuations. Because a Portfolio is not required to pay for securities until
the delivery date, these risks are in addition to the risks associated with such
Portfolio's other investments. If a Portfolio remains substantially fully
invested at a time when delayed delivery purchases are outstanding,
delayed-delivery purchases may result in a form of leverage. When
delayed-delivery purchases are outstanding, a Portfolio will set aside
appropriate liquid assets in a segregated custodial account to cover its
purchase obligations. When a Portfolio has sold a security on a delayed-delivery
basis, such Portfolio does not participate in further gains or losses with
respect to the security. If the other party to a delayed-delivery transaction
fails to deliver or pay for the securities, a Portfolio could miss a favorable
price or yield opportunity, or could suffer a loss.
Such Portfolios 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.
No more than 20% of a Portfolio's net assets may be invested in
when-issued, delayed delivery or forward commitments, and in the case of
Balanced Portfolio, of such 20%, no more than one-half (i.e., 10% of net assets)
may be invested in dollar rolls.
DOLLAR ROLLS
In connection with its ability to purchase securities on a
when-issued or forward commitment basis, Balanced Portfolio may enter into
"dollar rolls" in which the Portfolio 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 Portfolio gives up the right to receive
principal and interest paid on the securities sold. However, the Portfolio would
benefit to the extent of any difference between the price received for the
securities sold and lower forward price for the future 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
Portfolio compared with what such performance would have been without the use of
dollar rolls. 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 Portfolio while remaining substantially
fully invested increases the amount of the Portfolio's assets that are subject
to market risk to an amount that is greater than the Portfolio's net asset
value, which could result in increased volatility of the price of the
Portfolio's shares. No more than 10% of Balanced Portfolio's net assets may be
invested in dollar rolls.
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MORTGAGE-BACKED SECURITIES
Reserve Portfolio and Balanced Portfolio may invest in
mortgage-backed securities that are Agency Pass-Through Certificates, Private
Pass-Throughs or collateralized mortgage obligations ("CMOs"), as defined and
described below.
Agency Pass-Through Certificates are mortgage pass-through
certificates representing undivided interests in pools of residential mortgage
loans. Distribution of principal and interest on the mortgage loans underlying
an Agency Pass-Through Certificate is an obligation of or guaranteed by GNMA,
FNMA or FHLMC. GNMA is a wholly-owned corporate instrumentality of the United
States within the Department of Housing and Urban Development. The guarantee of
GNMA with respect to GNMA certificates is backed by the full faith and credit of
the United States, and GNMA is authorized to borrow from the United States
Treasury in an amount which is at any time sufficient to enable GNMA, with no
limitation as to amount, to perform its guarantee.
FNMA is a federally chartered and privately owned corporation
organized and existing under federal law. Although the Secretary of the Treasury
of the United States has discretionary authority to lend funds to FNMA, neither
the United States nor any agency thereof is obligated to finance FNMA's
operations or to assist FNMA in any other manner.
FHLMC is a federally chartered corporation organized and existing
under federal law, the common stock of which is owned by the Federal Home Loan
Banks. Neither the United States nor any agency thereof is obligated to finance
FHLMC's operations or to assist FHLMC in any other manner.
The mortgage loans underlying GNMA certificates are partially or
fully guaranteed by the Federal Housing Administration or the Veterans
Administration, while the mortgage loans underlying FNMA certificates and FHLMC
certificates are conventional mortgage loans which are, in some cases, insured
by private mortgage insurance companies. Agency Pass-Through Certificates may be
issued in a single class with respect to a given pool of mortgage loans or in
multiple classes.
The residential mortgage loans evidenced by Agency Pass-Through
Certificates and upon which CMOs are based generally are secured by first
mortgages on one- to four-family residential dwellings. Such mortgage loans
generally have final maturities ranging from 15 to 30 years and provide for
monthly payments in amounts sufficient to amortize their original principal
amounts by the maturity dates. Each monthly payment on such mortgage loans
generally includes both an interest component and a principal component, so that
the holder of the mortgage loans receives both interest and a partial return of
principal in each monthly payment. In general, such mortgage loans can be
prepaid by the borrowers at any time without any prepayment penalty. In
addition, many such mortgage loans contain a "due-on-sale" clause requiring the
loans to be repaid in full upon the sale of the property securing the loans.
Because residential mortgage loans generally provide for monthly amortization
and may be prepaid in full at any time, the weighted average maturity of a pool
of residential mortgage loans is likely to be substantially shorter than its
stated final maturity date. The rate at which a pool of residential mortgage
loans is prepaid may be influenced by many factors and is not predictable with
precision.
Private mortgage pass-through securities ("Private Pass-Throughs")
are structured similarly to GNMA, FNMA and FHLMC mortgage pass-through
securities and are issued by originators of and investors in mortgage loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. These
securities usually are backed by a pool of conventional fixed rate or adjustable
loans. Since Private Pass-Throughs typically are not guaranteed by an entity
having the credit status of GNMA, FNMA or FHLMC, such securities generally are
structured with one or more types of credit enhancement. Such credit support
falls into two categories: (i) liquidity protection and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provisions of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches.
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The Portfolios will not pay any additional fees for such credit support,
although the existence of credit support may increase the price of a security.
The ratings of securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued creditworthiness of the enhancement
provider. The ratings of such securities could be subject to reduction in the
event of deterioration in the creditworthiness of the credit enhancement
provider even in cases where the delinquency and loss experience on the
underlying pool of assets is better than expected.
Balanced Portfolio and Reserve Portfolio may invest in 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.
CMOs are debt obligations typically issued by a private
special-purpose entity and collateralized by residential or commercial mortgage
loans or Agency Pass-Through Certificates. Because CMOs are debt obligations of
private entities, payments on CMOs generally are not obligations of or
guaranteed by any governmental entity, and their ratings and creditworthiness
typically depend, among other factors, on the legal insulation of the issuer and
transaction from the consequences of a sponsoring entity's bankruptcy.
CMOs generally are issued in multiple classes, with holders of each
class entitled to receive specified portions of the principal payments and
prepayments and/or of the interest payments on the underlying mortgage loans.
These entitlements can be specified in a wide variety of ways, so that the
payment characteristics of various classes may differ greatly from one another.
For instance, holders may hold interests in CMO tranches called Z-tranches which
defer interest and principal payments until one or other classes of the CMO have
been paid in full. In addition, for example:
* In a sequential-pay CMO structure, one class is entitled
to receive all principal payments and prepayments on the
underlying mortgage loans (and interest on unpaid
principal) until the principal of the class is repaid in
full, while the remaining classes receive only interest;
when the first class is repaid in full, a second class
becomes entitled to receive all principal payments and
prepayments on the underlying mortgage loans until the
class is repaid in full, and so forth.
* A planned amortization class ("PAC") of CMOs is entitled
to receive principal on a stated schedule to the extent
that it is available from the underlying mortgage loans,
thus providing a greater (but not absolute) degree of
certainty as to the schedule upon which principal will
be repaid.
* An accrual class of CMOs provides for interest to accrue
and be added to principal (but not be paid currently)
until specified payments have been made on prior
classes, at which time the principal of the accrual
class (including the accrued interest which was added to
principal) and interest thereon begins to be paid from
payments on the underlying mortgage loans.
* As discussed above with respect to pass-through
mortgage-backed securities, an interest-only class of
CMOs entitles the holder to receive all of the interest
and none of the principal on the underlying mortgage
loans, while a principal-only class of CMOs entitles the
holder to receive all of the principal payments and
prepayments and none of the interest on the underlying
mortgage loans.
* A floating rate class of CMOs entitles the holder to
receive interest at a rate which changes in the same
direction and magnitude as changes in a specified index
rate. An inverse floating rate class of CMOs entitles
the holder to receive interest at a rate which changes
in the opposite direction
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from, and in the same magnitude as or in a multiple of,
changes in a specified index rate. Floating rate and
inverse floating rate classes also may be subject to
"caps" and "floors" on adjustments to the interest rates
which they bear.
* A subordinated class of CMOs is subordinated in right of
payment to one or more other classes. Such a
subordinated class provides some or all of the credit
support for the classes that are senior to it by
absorbing losses on the underlying mortgage loans before
the senior classes absorb any losses. A subordinated
class which is subordinated to one or more classes but
senior to one or more other classes is sometimes
referred to as a "mezzanine" class. A subordinated class
generally carries a lower rating than the classes that
are senior to it, but may still carry an investment
grade rating.
It generally is more difficult to predict the effect of changes in
market interest rates on the return on mortgage-backed securities than to
predict the effect of such changes on the return of a conventional fixed-rate
debt instrument, and the magnitude of such effects may be greater in some cases.
The return on interest-only and principal-only mortgage-backed securities is
particularly sensitive to changes in interest rates and prepayment speeds. When
interest rates decline and prepayment speeds increase, the holder of an
interest-only mortgage-backed security may not even recover its initial
investment. Similarly, the return on an inverse floating rate CMO is likely to
decline more sharply in periods of increasing interest rates than that of a
fixed-rate security. For these reasons, interest-only, principal-only and
inverse floating rate mortgage-backed securities generally have greater risk
than more conventional classes of mortgage-backed securities.
ASSET-BACKED SECURITIES
Reserve Portfolio and Balanced Portfolio may invest in types of
asset-backed securities which represent forms of consumer credit such as
automobile and credit card receivables, manufactured (mobile) home loans, home
improvement loans and home equity loans. Asset-backed securities are generally
privately issued and pass through cash flows to investors. Interest and
principal payments 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.
Generally, asset-backed securities include many of the risks
associated with mortgage-related securities. In general, however, the collateral
supporting asset-backed securities is of shorter maturity than mortgage loans
and is less likely to experience substantial prepayments. Asset-backed
securities involve certain risks that are not posed by mortgage-backed
securities, resulting mainly from the fact that asset-backed securities do not
usually contain the complete benefit of a security interest in the related
collateral. For example, credit card receivables generally are unsecured and the
debtors are entitled to the protection of a number of state and federal consumer
credit laws, including the bankruptcy laws, some of which may reduce the ability
to obtain full payment. In the case of automobile receivables, due to various
legal and economic factors, proceeds for repossessed collateral may not always
be sufficient to support payments on these securities.
ZERO COUPON BONDS
Reserve Portfolio and Balanced Portfolio may invest in zero coupon
bonds. Zero coupon bonds do not make interest payments; instead, they are sold
at a deep discount from their face value and are redeemed at face value when
they mature. Because zero coupon bonds do not pay current income, their prices
can be very volatile when interest rates change. In calculating its dividends, a
Portfolio 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.
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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.
PAYMENT-IN-KIND BONDS
Reserve Portfolio and Balanced Portfolio may invest in bonds the
interest on which may be paid in other securities rather than cash (PIKs).
Typically, during a specified term prior to the bond's maturity, the issuer of a
PIK may provide for the option or the obligation to make interest payments in
bonds, common stock or other instruments (i.e., "in kind" rather than in cash).
The type of instrument in which interest may or will be paid would be known by
the Portfolio at the time of investment. While PIKs generate income for purposes
of generally accepted accounting standards, they do not generate cash flow and
thus could cause a Portfolio to be forced to liquidate securities at an
inopportune time in order to distribute cash, as required by the Internal
Revenue Code.
LOWER-RATED DEBT SECURITIES
Reserve and Balanced Portfolios may invest in lower-rated debt
securities, although Reserve Portfolio currently does not intend to invest in
such securities. Issuers of high yield securities may be highly leveraged and
may not have available to them more traditional methods of financing. Therefore,
the risks associated with acquiring the securities of such issuers generally are
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, issuers of
high yield securities may be more likely to experience financial stress,
especially if such issuers are highly leveraged. During such periods, such
issuers may not have sufficient revenues to meet their interest payment
obligations. The issuer's ability to service its debt obligations also may be
adversely affected by specific issuer developments or the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing. The risk of loss due to default by the issuer is significantly
greater for the holders of high yield securities because such securities may be
unsecured and may be subordinated to other creditors of the issuer.
High yield securities frequently have call or redemption features
which would permit an issuer to repurchase the security from a Portfolio. If a
call were exercised by the issuer during a period of declining interest rates, a
Portfolio likely would have to replace such called security with a lower
yielding security, thus decreasing the net investment income to a Portfolio and
dividends to shareholders.
A Portfolio 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 a Portfolio's ability
to dispose of particular issues when necessary to meet such Portfolio'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 a
Portfolio's net asset value. In addition, a Portfolio 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.
ILLIQUID SECURITIES
Each Portfolio 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 but
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:
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(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 Portfolio'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.
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 Portfolios have valued the instrument
for purposes of calculating a Portfolio's net asset value. In making this
determination, IAI will consider such factors as may be relevant to a
Portfolio'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
Portfolio's investments could be impaired if trading declines.
SWAP AGREEMENTS
Regional and Balanced Portfolios may engage in swap agreements,
although Regional Portfolio currently does not intend to do so and Balanced
Portfolio does not intend to do so as a principal investment strategy. 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 Portfolio'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. Each Portfolio is not limited to any
particular form of swap agreement if IAI determines it is consistent with such
Portfolio's investment objectives and policies.
Swap agreements will tend to shift a Portfolio's investment exposure
from one type of investment to another. For example, if a Portfolio agrees to
exchange payments in dollars for payments in foreign currency, the swap
agreement would tend to decrease such Portfolio'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 Portfolio'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 a Portfolio. If a swap
agreement calls for payments by a Portfolio, such Portfolio 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. Each Portfolio 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.
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Each Portfolio will maintain appropriate liquid assets in a
segregated custodial account to cover its current obligations under swap
agreements. If a Portfolio 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
such Portfolio's accrued obligations under the swap agreement over the accrued
amount the Portfolio is entitled to receive under the agreement. If a Portfolio
enters into a swap agreement on other than a net basis, it will segregate assets
with a value equal to the full amount of a Portfolio's accrued obligations under
the agreement.
INDEXED SECURITIES
Each Portfolio 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. However, Regional Portfolio
and Reserve Portfolio currently have no intention of doing so. 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 each Portfolio's investment policies,
depending on the individual characteristics of the securities. Indexed
securities may be more volatile than the underlying instruments.
FOREIGN CURRENCY TRANSACTIONS
Each Portfolio has the may enter into foreign currency transactions
as described in this section. However, Regional Portfolio and Reserve Portfolio
currently have no intention of doing so.
Each Portfolio 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.
Each Portfolio 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 Portfolios.
In connection with purchases and sales of securities denominated in
foreign currencies, the Portfolios 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 Portfolio's foreign investments. The Portfolios
could also enter into forward contracts to purchase or sell a foreign currency
in anticipation of future
11
<PAGE>
purchases or sales of securities denominated in foreign currency, even if the
specific investments have not yet been selected by IAI.
Each Portfolio may also use forward contracts to hedge against a
decline in the value of existing investments denominated in foreign currency.
For example, if a Portfolio 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 Portfolio 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 European Currency Units
in return for U.S. dollars. This type of hedge, sometimes referred to as a
"proxy hedge," could offer advantages in terms of cost, yield, or efficiency,
but generally would not hedge currency exposure as effectively as a simple hedge
into U.S. dollars. Proxy hedges may result in losses if the currency used to
hedge does not perform similarly to the currency in which the hedged securities
are denominated.
Under certain conditions, SEC guidelines require mutual funds to set
aside appropriate liquid assets in a segregated custodial account to cover
currency forward contracts. As required by SEC guidelines, the Portfolios will
segregate assets to cover currency forward contracts, if any, whose purpose is
essentially speculative. The Portfolios 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 Portfolio's investment exposure to changes in currency
exchange rates, and could result in losses to the Portfolio if currencies do not
perform as IAI anticipates. For example, if a currency's value rose at a time
when IAI had hedged a Portfolio by selling that currency in exchange for
dollars, the Portfolio would be unable to participate in the currency's
appreciation. If IAI hedges currency exposure through proxy hedges, a Portfolio
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 Portfolio's exposure to a foreign currency, and that currency's
value declines, the Portfolio will realize a loss. There is no assurance that
IAI's use of forward currency contracts will be advantageous to a Portfolio or
that it will hedge at an appropriate time. The policies described in this
section are non-fundamental policies of the Portfolios.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS
Each Portfolio may enter into futures contracts and options on
futures contracts. However, Regional Portfolio and Reserve Portfolio currently
have no intention of doing so. A Portfolio will file 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
Portfolios intend to comply with Section 4.5 of the regulations under the
Commodity Exchange Act, which limits the extent to which the Portfolios can
commit assets to initial margin deposits and option premiums.
The above limitations on the Portfolios' investments in futures
contracts and options, and the Portfolios' 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 a 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.
12
<PAGE>
FUTURES CONTRACTS
When a Portfolio purchases a futures contract, it agrees to purchase
a specified underlying instrument at a specified future date. When a Portfolio
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 Portfolio 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 Portfolio's exposure to positive and
negative price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When a Portfolio 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 Portfolio's investment limitations. In
the event of the bankruptcy of an FCM that holds margin on behalf of a
Portfolio, the Portfolio may be entitled to return of margin owed to it only in
proportion to the amount received by the FCM's other customers, potentially
resulting in losses to the Portfolio.
PURCHASING PUT AND CALL OPTIONS
Each Portfolio may purchase put and call options. However, Regional
Portfolio and Reserve Portfolio currently have no intention of doing so. By
purchasing a put option, a Portfolio 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 Portfolio 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 Portfolio 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 Portfolio will lose the entire premium it paid. If a
Portfolio exercises the option, it completes the sale of the underlying
instrument at the strike price. A Portfolio 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.
13
<PAGE>
WRITING PUT AND CALL OPTIONS
Each Portfolio may write (i.e., sell) put and call options. However,
Reserve Portfolio currently has no intention of doing so. When a Portfolio
writes a put option, it takes the opposite side of the transaction from the
option's purchaser. In return for receipt of the premium, a Portfolio 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 Portfolio would be required to make margin payments to an
FCM as described above for futures contracts. A Portfolio 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 Portfolio has written, however, such Portfolio 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 Portfolio 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
Each Portfolio 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. However, Regional
Portfolio and Reserve Portfolio currently have no intention of doing so. For
example, each Portfolio 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 Portfolio's current or anticipated investments
exactly. Each Portfolio 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 Portfolio's other
investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match a Portfolio'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. Each Portfolio 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 Portfolio's options or futures
positions are poorly correlated with its other
14
<PAGE>
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 a Portfolio 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 Portfolio to continue to hold a position until
delivery or expiration regardless of changes in its value. As a result, a
Portfolio'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 Portfolio 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. Each
Portfolio may purchase and sell currency futures and may purchase and write
currency options to increase or decrease its exposure to different foreign
currencies. Each Portfolio may also purchase and write currency options in
conjunction with each other or with currency futures or forward contracts.
Because Regional Portfolio and Reserve Portfolio do not currently invest in
foreign securities, however, they do not currently intend to enter into such
transactions. 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 Portfolio's investments. A currency hedge, for example, should protect a
Yen-denominated security from a decline in the Yen, but will not protect a
Portfolio against a price decline resulting from deterioration in the issuer's
creditworthiness. Because the value of a Portfolio'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 Portfolio's investments exactly over time.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS
Each Portfolio 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
segregate appropriate liquid assets in the amount prescribed. These assets will
be marked to market daily to assure that asset coverage requirements are met.
Securities which have been segregated 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
Portfolio's assets could impede portfolio management or the Portfolio's ability
to meet redemption requests or other current obligations.
15
<PAGE>
INVESTMENT RESTRICTIONS
The investment objectives and certain investment policies and
restrictions of each Portfolio 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 Portfolio,
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 Portfolio are present
or represented by proxy. Limitations 1 through 8 below are deemed fundamental
limitations for each Portfolio. The remaining limitations set forth below serve
as operating policies of each Portfolio and may be changed by the Board of
Directors without shareholder approval.
Each Portfolio may not:
1. Purchase the securities of any issuer if such purchase would
cause the Portfolio 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 to
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 Portfolio'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, each Portfolio will not
purchase securities, as defined above, such that 25% or more of the value of the
Portfolio'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 a
Portfolio'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 a Portfolio 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
Portfolio 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 Portfolio from investing in securities or other instruments backed by real
estate or securities of companies engaged in the real estate business.
16
<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 Portfolio 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 Portfolio 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, each Portfolio 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 a Portfolio may purchase or sell securities issued by corporations
engaging in oil, gas or other mineral exploration or development business.
Any of the investment policies set forth 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.
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 each Portfolio
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 increase in the
portfolio turnover rate for Reserve Portfolio for the last fiscal year was due
to increased volatility of interest rates. Each Portfolio's historical portfolio
turnover rates are set forth in the Prospectus section "Financial Highlights".
17
<PAGE>
INVESTMENT PERFORMANCE
Advertisements and other sales literature may refer to monthly,
quarterly, yearly, cumulative and average annual total returns. 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.
Reserve and Balanced Portfolios 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 monthly 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.
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<PAGE>
d = the net asset value of the Portfolio at the end
of the period.
The table below shows the yearly return for each Portfolio for the
periods ended:
<TABLE>
<CAPTION>
Regional Portfolio Balanced Portfolio Reserve Portfolio
Period Ended 12/31 Total Return Total Return Total Return
- ---------------------- ---------------------- ---------------------- --------------------
<S> <C> <C> <C>
1994* 6.20% 2.20% 2.25%
1995 33.51% 16.21% 5.09%
1996 11.88% 9.80% 4.93%
1997 13.45% 16.60% 4.62%
1998 1.56% 12.11% 5.46%
</TABLE>
- ------------------
* For the period commencing January 31, 1994 (Regional), February 3, 1994
(Balanced) and April 7, 1994 (Reserve).
The average annual total return of Regional Portfolio for the year
ended December 31, 1998 and from inception of the Regional Portfolio through
December 31, 1998 was 1.56% and 13.05%, respectively.
The average annual total return of Balanced Portfolio for the year
ended December 31, 1998 and from inception of the Balanced Portfolio through
December 31, 1998 was 12.11% and 11.48%, respectively. Balanced Portfolio's
yield for the thirty-day period ended December 31, 1998 was 4.32%.
The average annual total return of Reserve Portfolio for the year
ended December 31, 1998 and from inception of the Reserve Portfolio through
December 31, 1998 was 5.46% and 4.72%, respectively. Reserve Portfolio's yield
for the thirty-day period ended December 31, 1998 was 6.04%.
In advertising and sales literature, a Portfolio's performance may
be compared with that of other mutual funds, indexes or averages of other mutual
funds, indexes of related financial assets or data, and other competing
investment and deposit products available from or through other financial
institutions. The composition of these indexes, averages or products differs
from that of a Portfolio. The comparison of a Portfolio to an alternative
investment should be made with consideration of differences in features and
expected performance.
Yields and total returns quoted for a Portfolio include the effect
of deducting the Portfolio's expenses, but may not include charges and expenses
attributable to any particular insurance product. Since shares of the Fund may
only be purchased through a variable annuity contract or variable life insurance
policy, 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.
MANAGEMENT
Under Minnesota law, the Board of Directors of the Fund is generally
responsible for the overall operation and management of the Portfolios.
The names, addresses, positions and principal occupations of the
directors and executive officers of the Portfolios are given below.
<TABLE>
<CAPTION>
Name and Address Age Position Principal Occupation(s) During Past 5 Years
- -------------------------- ----- ---------- --------------------------------------------
<S> <C> <C> <C>
Madeline Betsch 56 Director Currently retired; until April 1994, was
19 South 1st Street Executive Vice President, Director of Client
Minneapolis, MN 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.
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C> <C>
W. William Hodgson 74 Director Currently retired; served as information
1698 Dodd Road manager for the North Central Home Office of
Mendota Heights, MN 55118 the Prudential Insurance Company of America
from 1961 until 1984.
J. Peter Thompson 67 Director Grain farmer in southwestern Minnesota since
Route 1 1974. Prior to that, Mr. Thompson was
Mountain Lake, MN 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 72 Director Currently retired; was Editor of the
Rochester Post Bulletin Rochester Post-Bulletin, Rochester,
P.O. Box 6118 Minnesota from 1960 through March 31, 1980.
Rochester, MN 55903
John A. Alexander 42 President Chief Operating Officer of IAI since 1998.
601 Second Avenue South Prior to that time, Mr. Alexander served in
P.O Box 357 various senior management capacities with
Minneapolis, MN 55440 Lloyds Bank plc since 1984.
David Koehler 61 Vice Independent training and marketing
601 Second Avenue South President consultant since 1993. Prior to that time,
P.O. Box 357 Mr. Koehler was a partner at IAI Venture
Minneapolis, MN 55440 Capital Group.
Paul H. Perseke 33 Treasurer Vice President of IAI. Prior to joining IAI
601 Second Avenue South in 1996, Mr. Perseke served as Vice
P.O. Box 357 President and Manager of Finance and
Minneapolis, MN 55440 Planning at Dain Rauscher Corporation from
1991 to 1996.
Michael J. Radmer 54 Secretary Partner of Dorsey & Whitney LLP, a Minnesota
220 South Sixth Street based law firm which acts as General Counsel
Minneapolis, MN 55402 to the Portfolios.
</TABLE>
Each of the directors and executive officers of the Portfolios,
other than Mr. Koehler, also serves in the same capacity for each of the other
12 mutual funds for which IAI serves as investment adviser (together with the
Portfolios, the "IAI Mutual Funds").
No compensation is paid by the Portfolios to any of their officers.
Directors who are not affiliated with IAI receive from the IAI Mutual Funds a
$15,000 annual retainer, $2,500 for each Board meeting attended, $3,600 for each
Audit Committee meeting attended (as applicable) and $1,800 for each Securities
Valuation Committee meeting attended. Each Portfolio will pay its pro rata share
of these fees based on its net assets. Such unaffiliated directors als o are
reimbursed for expenses incurred in connection with attending meetings.
20
<PAGE>
<TABLE>
<CAPTION>
Compensation From
------------------------------------------------------- Aggregate
Name of Person, Regional Balanced Reserve Compensation From
Position Portfolio Portfolio Portfolio 15 IAI Mutual Funds*
- -------------------------------- --------------- --------------- --------------- --------------------
<S> <C> <C> <C> <C>
Betsch, Madeline -- Director $ 577 $ 90 $ 43 $ 37,200
Hodgson, W. William -- Director $ 577 $ 90 $ 43 $ 37,200
Long, George R. -- Director $ 582 $ 87 $ 49 $ 37,200
Thompson, J. Peter -- Director $ 577 $ 90 $ 43 $ 37,200
Withers, Charles H. -- Director $ 582 $ 87 $ 49 $ 37,200
Koehler, David -- Vice President $ 430 $ 55 $ 45 $ 26,250
Total $ 3,325 $ 499 $ 272 $ 212,250
</TABLE>
- ------------------
* For the calendar year ended December 31, 1998; excludes expenses incurred in
connection with attending meetings.
Effective February 1998, the directors have agreed that the position
of Board Chair shall rotate from director to director on a quarterly basis.
The Board of Directors 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 would implement blackout periods for certain securities, as well as a ban
on short-term trading profits. Additional policies prohibit the receipt of gifts
in certain instances. Procedures have been implemented to monitor employee
trading. Each access person of the Adviser is 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 and changes,
identifying material violations and recommending any changes needed.
INVESTMENT ADVISORY AGREEMENT
Pursuant to an Investment Advisory Agreement between the Fund and
IAI (the "Advisory Agreement") dated November 3, 1993, IAI has agreed to provide
each Portfolio with investment advice, statistical and research facilities, and
certain equipment and services, including, but not limited to, office space and
necessary office facilities, equipment, and the services of required personnel.
In return, each Portfolio pays IAI a monthly fee. Under the Advisory Agreement,
IAI has the sole authority and responsibility to make and execute investment
decisions for the Portfolios within the framework of each Portfolio's investment
policies, subject to review by the directors of the Fund.
Regional Portfolio, Balanced Portfolio and Reserve Portfolio have
agreed to pay advisory fees equal to an annual rate of .65%, .65% and .45%,
respectively, of a Portfolio's average daily net assets. Pursuant to the
Advisory Agreement, during the past three fiscal years the Portfolios have paid
IAI advisory fees, net of waivers, as follows:
<TABLE>
<CAPTION>
Regional Balanced Reserve
Portfolio Portfolio Portfolio
--------------- --------------- ---------------
<S> <C> <C> <C>
Fiscal Year Ended December 31, 1996 $ 57,843 $ 0 $ 0
Fiscal Year Ended December 31, 1997 $ 95,467 $ 10,836 $ 0
Fiscal Year Ended December 31, 1998 $ 108,792 $ 8,892 $ 0
</TABLE>
21
<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.
ADMINISTRATIVE AGREEMENT
The Fund has engaged IAI to serve as the Portfolios' administrative,
dividend disbursing, redemption, accounting services and transfer agent pursuant
to an Administrative Agreement. Under the Administrative Agreement, IAI has
agreed to provide to the Portfolios 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 Portfolios' 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
Portfolios; (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 Administrative
Agreement, the Portfolios have paid the following administrative fees to IAI
(net of waivers) during the past three fiscal years:
<TABLE>
<CAPTION>
Regional Balanced Reserve
Portfolio Portfolio Portfolio
--------------- --------------- ---------------
<S> <C> <C> <C>
Fiscal Year Ended December 31, 1996 $ 7,977 $ 430 $ 0
Fiscal Year Ended December 31, 1997 $ 14,687 $ 1,937 $ 0
Fiscal Year Ended December 31, 1998 $ 16,737 $ 3,003 $ 0
</TABLE>
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. IAI, in its discretion, may from time to time waive or reduce its
management and/or administrative fee or otherwise reimburse Portfolio 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, 1998, IAI
voluntarily reimbursed total Portfolio operating expenses (net of expenses paid
indirectly) which exceeded 1.25% and .85% of the average daily net assets of
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.
22
<PAGE>
CUSTODIAN
The custodian for the Fund is Firstar Bank Milwaukee, N.A., P.O. Box
510, Milwaukee, Wisconsin 53201-0510. The Custodian maintains records of all
cash transactions of the Portfolios. All other books and records of the
Portfolios, including books and records of the Portfolio's investment
portfolios, are maintained by IAI.
LEGAL COUNSEL
Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402, act as General Counsel to the Portfolios.
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 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 the Portfolios. IAI believes
that most research services obtained by it generally benefit one or more of the
mutual funds or other accounts which it manages. Research services obtained from
transactions in fixed income securities would primarily benefit the funds and
accounts investing in fixed income securities. Similarly, research services
obtained from the transactions in equity securities would primarily benefit the
funds and accounts investing in equity securities. Generally, the Portfolios pay
higher than the lowest commission rates available.
Although investment decisions for each Portfolio are made
independently from those of the other Portfolios, funds and accounts as to which
IAI gives investment advice, it may occasionally develop that the same security
is suitable for more than one Portfolio, fund and/or other account. If and when
more than one Portfolio,
23
<PAGE>
fund or other 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 such Portfolios, funds and accounts.
The simultaneous purchase or sale of the same securities by more than one
Portfolio or by any Portfolio and other accounts may have detrimental effects on
each Portfolio, as they may affect the price paid or received by a Portfolio or
the size of the position obtainable by a Portfolio.
Consistent with the Rules of Conduct 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 each Portfolio, or any IAI Mutual
Fund, as a factor in the selection of broker-dealers to execute the Portfolios'
securities transactions.
The following table sets forth brokerage commissions paid by
Regional and Balanced Portfolios for the indicated fiscal years ended December
31. Reserve Portfolio did not pay any brokerage commissions during such fiscal
year. The table also sets forth the amount and percentage of commissions paid by
Regional and Balanced Portfolios during their last fiscal year to brokerage
firms that provided research services to IAI. The provision of such services was
not necessarily a factor in the placement of all such business with such firms.
<TABLE>
<CAPTION>
Amount of Commissions to Percentage of Commissions
Brokers Providing to Brokers Providing
Amount of Commissions Research Research
----------------------------------------------------- ------------------------ -------------------------
Portfolio 1998 1997 1996 1998 1998
- ---------- -------------- -------------- -------------- ------------------------ -------------------------
<S> <C> <C> <C> <C> <C>
Regional $ 23,545 $ 24,932 $ 14,014 $ 768 3%
Balanced $ 994 $ 1,244 $ 1,896 $ 84 8%
</TABLE>
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.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of April 14, 1999, no person was a record holder or, to the
knowledge of the Fund, a beneficial owner of more than 5% of the outstanding
shares of a Portfolio, except as set forth in the following tables:
24
<PAGE>
REGIONAL PORTFOLIO
Name and Address Percent of
of Shareholder Number of Shares* Outstanding Shares
--------------------------------------------------------------------------
Lincoln Benefit Life Company 728,398 81.7%
Annuity Products
P.O. Box 82532
Lincoln, Nebraska 68501
Lincoln Benefit Life Company 162,631 18.3%
Life Products
P.O. Box 82532
Lincoln, Nebraska 68501
BALANCED PORTFOLIO
Name and Address Percent of
of Shareholder Number of Shares* Outstanding Shares
------------------------------------------------- ------------------
Lincoln Benefit Life Company 179,938 78.1%
Annuity Products
P.O. Box 82532
Lincoln, Nebraska 68501
Lincoln Benefit Life Company 50,403 21.9%
Life Products
P.O. Box 82532
Lincoln, Nebraska 68501
RESERVE PORTFOLIO
Name and Address Percent of
of Shareholder Number of Shares* Outstanding Shares
------------------------------------------------- ------------------
Lincoln Benefit Life Company 54,290 76.9%
Annuity Products
P.O. Box 82532
Lincoln, Nebraska 68501
Lincoln Benefit Life Company 16,273 23.1%
Life Products
P.O. Box 82532
Lincoln, Nebraska 68501
* All shares are owned both of record and beneficially.
In addition, as of April 14, 1999, 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.
25
<PAGE>
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The portfolio securities in which the Portfolios invest 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, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
On December 31, 1998, the net asset value and public offering price
per share of each Portfolio was calculated as follows:
REGIONAL PORTFOLIO
NAV = Net Assets ($15,738,097) = $ 15.68
------------------------
Shares Outstanding (1,003,688)
BALANCED PORTFOLIO
NAV = Net Assets ($3,509,423) = $ 15.60
-----------------------
Shares Outstanding (224,966)
RESERVE PORTFOLIO
NAV = Net Assets ($634,276) = $ 10.08
---------------------
Shares Outstanding (62,944)
TAX STATUS
Each Portfolio has qualified in the past, and each Portfolio intends
to continue to qualify, as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"). If so qualified,
each Portfolio is not subject to income tax to the extent it distributes its
income to the insurance company separate accounts that are its shareholders.
The Board of Directors intends that each of the Portfolios will also
comply with the diversification requirements imposed by section 817(h) of the
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
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
26
<PAGE>
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 recessionary 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.
SHAREHOLDER MEETINGS
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 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.
FINANCIAL STATEMENTS
The financial statements, included as a part of the Fund's 1998
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.
27
<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
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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
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PART C
IAI Regional Portfolio,
IAI Balanced Portfolio
and
IAI Reserve Portfolio
series of
IAI Retirement Funds Inc.
OTHER INFORMATION
Item 23. Exhibits
THE FUND IS FILING OR INCORPORATING BY REFERENCE THE FOLLOWING
EXHIBITS:
(a) Articles of Incorporation dated 9/16/93 *
(b) Bylaws *
(c) Instruments Defining Rights of Security Holders - not applicable
(d) Investment Advisory Agreement dated 11/3/93 *
(e) Underwriting Agreement - not applicable
(f) Bonus or Profit Sharing Contracts - not applicable
(g) Custody Agreement dated 11/3/93 *
(h) Administrative Agreement dated 11/3/93 *
(i) Legal Opinion - not applicable
(j) Consent of KPMG Peat Marwick LLP *
(k) Omitted Financial Statements - not applicable
(l) Initial Capital Agreements - not applicable
(m) Rule 12b-1 Plan - not applicable
(n) Financial Data Schedule - not applicable
(o) Rule 18f-3 Plan - not applicable
* Filed herewith.
Item 24. Persons Controlled by or Under Common Control with the Fund
THE FOLLOWING IS A LIST OF ALL PERSONS DIRECTLY OR INDIRECTLY
CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND:
See the section of the Prospectus entitled "Fund Management" and the
section of the Statement of Additional Information entitled "Management" filed
as part of this Registration Statement.
Item 25. Indemnification
STATE THE GENERAL EFFECT OF ANY CONTRACT, ARRANGEMENTS OR STATUTE UNDER
WHICH ANY DIRECTOR, OFFICER, UNDERWRITER OR AFFILIATED PERSON OF THE FUND IS
INSURED OR INDEMNIFIED AGAINST ANY LIABILITY INCURRED IN THEIR OFFICIAL
CAPACITY, OTHER THAN INSURANCE PROVIDED BY ANY DIRECTOR, OFFICER, AFFILIATED
PERSON, OR UNDERWRITER FOR THEIR OWN PROTECTION.
Incorporated by reference to Post-Effective Amendment to Registrant's
Registration Statement on Form N-1A filed on February 28, 1997.
1
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Item 26. Business and Other Connections of the Investment Adviser
DESCRIBE ANY OTHER BUSINESS, PROFESSION, VOCATION OR EMPLOYMENT OF A
SUBSTANTIAL NATURE THAT EACH INVESTMENT ADVISER, AND EACH DIRECTOR, OFFICER OR
PARTNER OF THE ADVISER, IS OR HAS BEEN ENGAGED WITHIN THE LAST TWO FISCAL YEARS
FOR HIS OR HER OWN ACCOUNT OR IN THE CAPACITY OF DIRECTOR, OFFICER, EMPLOYEE,
PARTNER OR TRUSTEE.
Information on the business of Investment Advisers, Inc. ("IAI") is
described in the Prospectus section "Management" and in Part B of this
Registration Statement in the section "Management."
The following senior officers and directors of IAI are not listed in
the Statement of Additional Information:
Other Business/Employment
Name Position with Adviser During Past Two Years
- ---- --------------------- ---------------------
Iain D. Cheyne Chairman/Director None
E. Keith Wirtz President/Director Managing Director/Chief
Investment Officer-Equities,
TradeStreet Investment
Associates, Charlotte,
NC 1996 - 1999.
Stephen C. Coleman Senior Vice President None
Larry Ray Hill Executive Vice President None
Kevin McKendry Director None
Peter Phillips Director None
John Caravello Director Senior Vice President, Lloyds
Bank, New York, NY since 1980.
Certain of the officers and directors of IAI also serve as officers and
directors of IAI International Ltd. The address of IAI International is 10 Fleet
Place, London, EC4M 7RH, England. Both IAI and IAI International's ultimate
corporate parent is Lloyds TSB Group plc, a publicly-held financial services
organization based in London, England. The senior officers and directors of IAI
International and their titles are as follows:
Name Title
- ---- -----
John A. Alexander Deputy Chief Investment Officer
Iain D. Cheyne Director
Certain of the officers and directors of IAI also serve as officers and
directors of IAI Trust Company, a wholly-owned subsidiary of IAI. The address of
IAI Trust Company is 3600 U.S. Bank Place, Minneapolis, Minnesota 55402. John A.
Alexander is the President and a Director of IAI Trust Company.
2
<PAGE>
Item 27. Principal Underwriters
(a) STATE THE NAME OF EACH INVESTMENT COMPANY (OTHER THAN THE FUND) FOR WHICH
EACH PRINCIPAL UNDERWRITER CURRENTLY DISTRIBUTING THE FUND'S SECURITIES ALSO
ACTS AS A PRINCIPAL UNDERWRITER, DEPOSITOR, OR INVESTMENT ADVISER.
Not applicable.
(b) PROVIDE THE INFORMATION REQUIRED BY THE FOLLOWING TABLE FOR EACH DIRECTOR,
OFFICER, OR PARTNER OF EACH PRINCIPAL UNDERWRITER NAMED IN RESPONSE TO ITEM 20.
Not applicable.
(c) PROVIDE THE INFORMATION REQUIRED BY THE FOLLOWING TABLE FOR ALL COMMISSIONS
AND OTHER COMPENSATION RECEIVED, DIRECTLY OR INDIRECTLY, FROM THE FUND DURING
THE LAST FISCAL YEAR BY EACH PRINCIPAL UNDERWRITER WHO IS NOT AN AFFILIATED
PERSON OF THE FUND OR ANY AFFILIATED PERSON OF AN AFFILIATED person.
Not applicable.
Item 28. Location of Accounts and Records
STATE THE NAME AND ADDRESS OF EACH PERSON MAINTAINING PHYSICAL
POSSESSION OF EACH ACCOUNT, BOOK, OR OTHER DOCUMENT REQUIRED TO BE MAINTAINED BY
SECTION 31(a) AND THE RULES UNDER THAT SECTION.
The custodian for Registrant is Firstar Bank Milwaukee, N.A., P.O. Box
510, Milwaukee, Wisconsin 53201-0510. The Custodian maintains records of all
cash transactions of the Portfolios. Firstar Mutual Fund Services, LLC acts as
the Registrant's transfer agent, dividend disbursing agent and IRA Custodian, at
P.O. Box 701, Milwaukee, Wisconsin 53201-0701. All other books and records of
Registrant's investment portfolios are maintained by IAI.
Item 29. Management Services
PROVIDE A SUMMARY OF THE SUBSTANTIVE PROVISIONS OF ANY
MANAGEMENT-RELATED SERVICE CONTRACT NOT DISCUSSED IN PART A OR B, DISCLOSING THE
PARTIES TO THE CONTRACT AND THE TOTAL AMOUNT PAID AND BY WHOM FOR THE FUND FOR
THE LAST THREE FISCAL YEARS.
Not applicable.
Item 30. Undertakings
(a) IN INITIAL REGISTRATION STATEMENTS FILED UNDER THE SECURITIES ACT,
PROVIDE AN UNDERTAKING TO FILE AN AMENDMENT TO THE REGISTRATION
STATEMENT WITH CERTIFIED FINANCIAL STATEMENTS SHOWING THE INITIAL
CAPITAL RECEIVED BEFORE ACCEPTING SUBSCRIPTIONS FROM MORE THAN 25
PERSONS IF THE FUND INTENDS TO RAISE ITS INITIAL CAPITAL UNDER SECTION
14(a)(3).
Not applicable.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement on Form N-1A
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Minneapolis and State of Minnesota on
the 30th day of April 1999.
IAI RETIREMENT FUNDS, INC.
(Registrant)
By /s/ John A. Alexander
-------------------------------
John A. Alexander, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
/s/ John A. Alexander President (principal April 30, 1999
- --------------------------- executive officer)
John A. Alexander
/s/ Paul H. Perseke Treasurer (principal financial April 30, 1999
- --------------------------- and accounting officer)
Paul H. Perseke
Madeline Betsch * Director
W. William Hodgson * Director
George R. Long * Director
J. Peter Thompson * Director
Charles H. Withers * Director
*By /s/ William C. Joas April 30, 1999
----------------------------------
William C. Joas, Attorney-in-Fact
* Registrant's directors executing Powers of Attorney dated August 18, 1993,
filed with the Commission on June 28, 1994.
EXHIBIT (a)
ARTICLES OF INCORPORATION
OF
IAI RETIREMENT FUNDS, INC.
For the purpose of forming a corporation pursuant to the provisions
of Minnesota Statutes, Chapter 302A, the following Articles of Incorporation are
adopted:
1. The name of this corporation is IAI Retirement Funds, Inc.
2. This Corporation shall have general business purposes and shall
have unlimited power to engage in and do any lawful act concerning any and all
lawful businesses for which corporations may be organized under the Minnesota
Statutes, Chapter 302A. Without limiting the generality of the foregoing, this
corporation shall have specific power:
(a) To conduct, operate and carry on the business of a
so-called "open-end" management investment company pursuant to
applicable state and federal regulatory statutes, and exercise all
the powers necessary and appropriate to the conduct of such
operations.
(b) To purchase, subscribe for, invest in or otherwise
acquire, and to own, hold, pledge, mortgage, hypothecate, sell,
possess, transfer or otherwise dispose of, or turn to account or
realize upon, and generally deal in, all forms of securities of
every kind, nature, character, type and form, and other financial
instruments which may not be deemed to be securities, including but
not limited to futures contracts and options thereon. Such
securities and other financial instruments may include but are not
limited to shares, stocks, bonds, debentures, notes, scrip,
participation certificates, rights to subscribe, warrants, options,
certificates of deposit, bankers' acceptances, repurchase
agreements, commercial paper, chooses in action, evidence of
indebtedness, certificates of indebtedness and certificates of
interest of any and every kind and nature whatsoever, secured and
unsecured, issued or to be issued, by any corporation, company,
partnership (limited or general), association, trust, entity or
person, public or private, whether organized under the laws of the
United States, or any state, commonwealth, territory or possession
thereof, or organized under the laws of any foreign country, or any
state, province, territory or possession thereof, or issued or to be
issued by the United States government or any agency or
instrumentality thereof or by a foreign government or any agency or
instrumentality thereof, financial futures contracts (including
securities index and interest rate futures contracts) and options
thereon, forward foreign currency contracts and options thereon, and
obligations of supernational agencies (e.g., the World Bank).
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<PAGE>
(c) In the above provisions of this Article 2, purposes
shall also be construed as powers and powers shall also be construed
as purposes, and the enumeration of specific purposes or powers
shall not be construed to limit other statements of purposes or to
limit purposes or powers which the corporation may otherwise have
under applicable law, all of the same being separate and cumulative,
and all of the same may be carried on, promoted and pursued,
transacted or exercised in any place whatsoever.
3. This corporation shall have perpetual existence.
4. The location and post office address of the registered office in
Minnesota is 3700 First Bank Place, P.O. Box 357, Minneapolis, Minnesota
55440-0357.
5. The total authorized number of shares of this corporation is 10
trillion (10,000,000,000,000), all of which shall be common shares of the par
value of $.01 each. The corporation may issue and sell any of its shares in
fractional denominations to the same extent as its whole shares, and shares and
fractional denominations shall have, in proportion to the relative fractions
represented thereby, all the rights of whole shares, including, without
limitation, the right to vote, the right to receive dividends and distributions,
and the right to participate upon liquidation of the corporation.
(a) Of said common shares, 10 billion (10,000,000,000)
shares may be issued in the series of common shares hereby
designated Series A Common Shares, 10 billion (10,000,000,000)
shares may be issued in the series of common shares hereby
designated Series B Common Shares, 10 billion (10,000,000,000)
shares may be issued in the series of common shares hereby
designated Series C Common Shares. The balance of 9,970,000,000,000
shares may be issued in such series with such designations,
preferences and relative, participating, optional or other special
rights, or qualifications, limitations or restrictions thereof, as
shall be stated or expressed in a resolution or resolutions
providing for the issue of any series of common shares as may be
adopted from time to time by the Board of Directors of this
corporation pursuant to the authority hereby vested in the Board of
Directors. The Series A, B and C Common Shares evidence, and each
other series of common shares which the Board of Directors may
establish, as provided herein, may evidence, if the Board of
Directors shall so determine by resolution, an interest in a
separate and distinct portion of the corporation's assets, which
shall take the form of a separate portfolio of investment
securities, cash and other assets. Authority to establish such
separate portfolios is hereby vested in the Board of Directors of
this corporation, and such separate portfolios may be established by
the Board of Directors without the authorization or approval of the
holders of any series of shares of this corporation. Such investment
portfolios in which shares of the series represent interests are
also hereinafter referred to as "series."
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<PAGE>
(b) The shares of each series may be classified by the
Board of Directors in one or more classes with such relative rights
and preferences as shall be stated or expressed in a resolution or
resolutions providing for the issue of any such class or classes as
may be adopted from time to time by the Board of Directors of the
corporation pursuant to the authority hereby vested in the Board of
Directors and Minnesota Statutes, Section 302A.401, Subd. 3, or any
successor provision. The shares of each class within a series may be
subject to such charges and expenses (including by way of example,
but not by way of limitation, front-end and deferred sales charges,
expenses under Rule 12b-1 plans, administration plans, service
plans, or other plans or arrangements, however designated) adopted
from time to time by the Board of Directors in accordance, to the
extent applicable, with the Investment Company Act of 1940, as
amended (together with the rules and regulations promulgated
thereunder, the "1940 Act"), which charges and expenses may differ
from those applicable to another class within such series, and all
of the charges and expenses to which a class is subject shall be
borne by such class and shall be appropriately reflected (in the
manner determined by the Board of Directors in the resolution or
resolutions providing for the issue of such class) in determining
the net asset value and the amounts payable with respect to
dividends and distributions on and redemptions or liquidations of,
such class. Subject to compliance with the requirements of the 1940
Act, the Board of Directors shall have the authority to provide that
shares of any class shall be convertible (automatically, optionally
or otherwise) into shares of one or more other classes in accordance
with such requirements and procedures as may be established by the
Board of Directors.
6. The shareholders of each series of common shares (or class
thereof) of this corporation:
(a) shall not have the right to cumulate votes for the
election of directors; and
(b) shall have no preemptive right to subscribe to any
issue of shares of any series (or class thereof) of this corporation
now or hereafter created, designated or classified.
7. A description of the relative rights and preferences of all
series of shares (and classes thereof) is as follows, unless otherwise set forth
in one or more amendments to these Articles of Incorporation or in the
resolution providing for the issue of such series (and classes thereof):
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<PAGE>
(a) On any matter submitted to a vote of shareholders of
this corporation, all common shares of this corporation then issued
and outstanding and entitled to vote, irrespective of series or
class, shall be voted in the aggregate and not by series or class,
except: (i) when otherwise required by Minnesota Statutes, Chapter
302A, in which case shares will be voted by individual series or
class, as applicable; (ii) when otherwise required by the 1940 Act
or the rules adopted thereunder, in which case shares shall be voted
by individual series or class, as applicable; and (iii) when the
matter does not affect the interests of a particular series or class
thereof, in which case only shareholders of the series or class
thereof affected shall be entitled to vote thereon and shall vote by
individual series or class, as applicable.
(b) All consideration received by this corporation for
the issue or sale of shares of any series, together with all assets,
income, earnings, profits and proceeds derived therefrom (including
all proceeds derived from the sale, exchange or liquidation thereof
and, if applicable, any assets derived from any reinvestment of such
proceeds in whatever form the same may be) shall become part of the
assets of the portfolio to which the shares of that series relate,
for all purposes, subject only to the rights of creditors, and shall
be so treated upon the books of account of this corporation. Such
assets, income, earnings, profits and proceeds (including any
proceeds derived from the sale, exchange or liquidation thereof and,
if applicable, any assets derived from any reinvestment of such
proceeds in whatever form the same may be) are herein referred to as
"assets belonging to" a series of the common shares of this
corporation.
(c) Assets of this corporation not belonging to any
particular series are referred to herein as "General Assets."
General Assets shall be allocated to each series in proportion to
the respective net assets belonging to such series. The
determination of the Board of Directors shall be conclusive as to
the amount of assets, as to the characterization of assets as those
belonging to a series or as General Assets, and as to the allocation
of General Assets.
(d) The assets belonging to a particular series of
common shares shall be charged with the liabilities incurred
specifically on behalf of such series of common shares ("Special
Liabilities"). Such assets shall also be charged with a share of the
general liabilities of this corporation ("General Liabilities") in
proportion to the respective net assets belonging to such series of
common shares. The determination of the Board of Directors shall be
conclusive as to the amount of liabilities, including accrued
expenses and reserves, as to the characterization of any liability
as a Special Liability or General Liability, and as to the
allocation of General Liabilities among series.
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<PAGE>
(e) The Board of Directors may, to the extent permitted
by Minnesota Statutes, Chapter 302A or any successor provision
thereto, declare and pay dividends or distributions in shares, cash
or other property on any or all series (or classes thereof) of
common shares, the amount of such dividends and the payment thereof
being wholly in the discretion of the Board of Directors.
(f) In the event of the liquidation or dissolution of
this corporation, holders of the shares of any series shall have
priority over the holders of any other series with respect to, and
shall be entitled to receive, out of the assets of this corporation
available for distribution to holders of shares, the assets
belonging to such series of common shares and the General Assets
allocated to such series of common shares, and the assets so
distributable to the holders of the shares of any series shall be
distributed among such holders in proportion to the number of shares
of such series held by them and recorded on the books of this
corporation, except that, in the case of a series with more than one
class of shares, such distributions shall be adjusted to
appropriately reflect any charges and expenses home by each
individual class.
(g) With the approval of a majority of the shareholders
of each of the affected series of common shares present in person or
by proxy at a meeting called for the following purpose (provided
that at least 10% of the issued and outstanding shares of the
affected series is present at such meeting in person or by proxy),
the Board of Directors may transfer the assets of any series to any
other series. Upon such a transfer, the corporation shall issue
common shares representing interests in the series to which the
assets were transferred in exchange for all common shares
representing interests in the series from which the assets were
transferred. Such shares shall be exchanged at their respective net
asset values.
8. The following additional provisions, when consistent with law,
are hereby established for the management of the business, for the conduct of
the affairs of the corporation, and for the purpose of describing certain
specific powers of the corporation and of its directors and shareholders.
(a) In furtherance and not in limitation of the powers
conferred by statute and pursuant to these Articles of
Incorporation, the Board of Directors is expressly authorized to do
the following:
(1) to make, adopt, alter, amend and repeal
Bylaws of the corporation unless reserved to the
shareholders by the Bylaws or by the laws of the State
of Minnesota, subject to the power of the shareholders
to change or repeal such Bylaws;
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<PAGE>
(2) to distribute, in its discretion, for
any fiscal year (in the year or in the next fiscal year)
as ordinary dividends and as capital gains
distributions, respectively, amounts sufficient to
enable the corporation (and each series thereof) to
qualify under the Internal Revenue Code as a regulated
investment company to avoid any liability for federal
income tax in respect of such year. Any distribution or
dividend paid to shareholders from any capital source
shall be accompanied by a written statement showing the
source or sources of such payment;
(3) to authorize, subject to such vote,
consent, or approval of shareholders and other
conditions, if any, as may be required by any applicable
statute, rule or regulation, the execution and
performance by the corporation of any agreement or
agreements with any person, corporation, association,
company, trust, partnership (limited or general) or
other organization whereby, subject to the supervision
and control of the Board of Directors, any such other
person, corporation, association, company, trust,
partnership (limited or general), or other organization
shall render managerial, investment advisory,
distribution, transfer agent, accounting and/or other
services to the corporation (including, if deemed
advisable, the management or supervision of the
investment portfolios of the corporation) upon such
terms and conditions as may be provided in such
agreement or agreements;
(4) to authorize any agreement of the
character described in subparagraph 3 of this paragraph
(a) with any person, corporation, association, company,
trust, partnership (limited or general) or other
organization, although one or more of the members of the
Board of Directors or officers of the corporation may be
the other party to any such agreement or an officer,
director, employee, shareholder, or member of such other
party, and no such agreement shall be invalidated or
rendered voidable by reason of the existence of any such
relationship;
(5) to allot and authorize the issuance of
the authorized but unissued shares of any series, or
class thereof, of this corporation;
(6) to accept or reject subscriptions for
shares of any series, or class thereof, made after
incorporation;
(7) to fix the terms, conditions and
provisions of and authorize the issuance of options to
purchase or subscribe for shares of any series, or class
thereof, including the option price or prices at which
shares may be purchased or subscribed for,
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<PAGE>
(8) to take any action which might be taken
at a meeting of the Board of Directors, or any duly
constituted committee thereof, without a meeting
pursuant to a writing signed by that number of directors
or committee members that would be required to take the
same action at a meeting of the Board of Directors or
committee thereof at which all directors or committee
members were present; provided, however, that, if such
action also requires shareholder approval, such writing
must be signed by all of the directors or committee
members entitled to vote on such matter; and
(9) to determine what constitutes net
income, total assets and the net asset value of the
shares of each series (or class thereof) of the
corporation. Any such determination made in good faith
shall be final and conclusive, and shall be binding upon
the corporation, and all holders (past, present and
future) of shares of each series and class thereof.
(b) Except as provided in the next sentence of this
paragraph (b), shares of any series, or class thereof, hereafter
issued which are redeemed, exchanged, or otherwise acquired by the
corporation shall return to the status of authorized and unissued
shares of such series or class. Upon the redemption, exchange, or
other acquisition by the corporation of all outstanding shares of
any series (or class thereof), hereafter issued, such shares shall
return to the status of authorized and unissued shares without
designation as to series (if no shares of the series remain
outstanding) or with the same designation as to series, but no
destination as to class within such series (if shares of such series
remain outstanding, but no shares of such class thereof remain
outstanding), and all provisions of these articles of incorporation
relating to such series, or class thereof (including, without
limitation, any statement establishing or fixing the rights and
preferences of such series, or class thereof), shall cease to be of
further effect and shall cease to be a part of these articles. Upon
the occurrence of such events, the Board of Directors of the
corporation shall have the power, pursuant to Minnesota Statutes
Section 302A.135, Subdivision 5 or any successor provision and
without shareholder action, to cause restated articles of
incorporation of the corporation to be prepared and filed with the
Secretary of State of the State of Minnesota which reflect such
removal from these articles of all such provisions relating to such
series, or class thereof.
(c) The determination as to any of the following matters
made by or pursuant to the direction of the Board of Directors
consistent with these Articles of Incorporation and in the absence
of willful misfeasance, bad faith, gross negligence or reckless
disregard of duties, shall be final and conclusive and shall be
binding upon the corporation and every holder of shares of its
capital stock: namely, the amount of the assets, obligations,
liabilities and expenses of each series (or class thereof) of the
corporation; the amount of the net income of each series (or class
thereof) of the corporation from dividends and interest for any
period and the amount of assets at any time legally available for
the
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<PAGE>
payment of dividends in each series (or class thereof); the amount
of paid-in surplus, other surplus, annual or other net profits, or
net assets in excess of capital, undivided profits, or excess of
profits over losses on sales of securities of each series (or class
thereof); the amount, purpose, time of creation, increase or
decrease, alteration or cancellation of any reserves or charges and
the propriety thereof (whether or not any obligation or liability
for which such reserves or charges shall have been created shall
have been paid or discharged); the market value, or any sale, bid or
asked price to be applied in determining the market value, of any
security owned or held by or in each series of the corporation; the
fair value of any other asset owned by or in each series of the
corporation; the number of shares of each series of the corporation
issued or assumable; any matter relating to the acquisition, holding
and disposition of securities and other assets by each portfolio of
the corporation; and any question as to whether any transaction
constitutes a purchase of securities on margin, a short sale of
securities, or an underwriting of the sale of, or participation in
any underwriting or selling group in connection with the public
distribution of any securities.
(d) The Board of Directors or the shareholders of the
corporation may adopt, amend, affirm or reject investment policies
and restrictions upon investment or the use of assets of each series
of the corporation and may designate some such policies as
fundamental and not subject to change other than by a vote of a
majority of the outstanding voting securities, as such phrase is
defined in the 1940 Act, of the affected series of the corporation.
9. The corporation shall indemnify such persons for such expenses
and liabilities, in such manner, under such circumstances, and to the full
extent permitted by Section 302A.521 of the Minnesota Statutes, as now enacted
or hereafter amended, provided, however, that no such indemnification may be
made if it would be in violation of Section 17(h) of the 1940 Act, as now
enacted or hereafter amended.
10. To the fullest extent permitted by the Minnesota Statutes,
Chapter 302A, as the same exists or may hereafter be amended (except as
prohibited by the 1940 Act, as the same exists or may hereafter be amended), a
director of this corporation shall not be liable to the corporation or its
shareholders for monetary damages for breach of fiduciary duty as a director.
11. The names and post office addresses of the first directors, who
shall serve until the first regular meeting of shareholders or until their
successors are elected and qualified, are:
Madeline Betsch 19 South 1st Street
Apt. B2501
Minneapolis, Minnesota 55401
W. William Hodgson 1658 Dodd Road
Mendota Heights, Minnesota 55118
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George R. Long 29 Las Brisas
Naples, Florida 33963
Noel P. Rahn 3700 First Bank Place
P. O. Box 357
Minneapolis, Minnesota 55440
J. Peter Thompson Route 1
Mountain Lake, Minnesota 56159
Richard E. Struthers 3700 First Bank Place
P. O. Box 357
Minneapolis, Minnesota 55440
Charles H. Withers Rochester Post-Bulletin
Rochester, Minnesota 55901
12. The name and post office address of the incorporator, who is a
natural person of full age, is:
Steven G. Lentz 3700 First Bank Place
P. O. Box 357
Minneapolis, Minnesota 55440
IN WITNESS WHEREOF, the undersigned sole incorporator has executed
these Articles of Incorporation on September 16, 1993.
/s/ Steven G. Lentz
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Steven G. Lentz, Secretary
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EXHIBIT (b)
BYLAWS
OF
IAI RETIREMENT FUNDS, INC.
ARTICLE I
OFFICES, CORPORATE SEAL
Section 1.01. Name. The name of the corporation is IAI Retirement
Funds, Inc. The name of the series represented by Series A Common Shares shall
be "IAI Regional Portfolio." The name of the series represented by Series B
Common Shares shall be "IAI Balanced Portfolio." The name of the series
represented by Series C Common Shares shall be "IAI Reserve Portfolio."
Section 1.02. Registered Office. The registered office of the
corporation in Minnesota shall be that set forth in the Articles of
Incorporation or in the most recent amendment of the Articles of Incorporation
or resolution of the directors filed with the Secretary of State of Minnesota
changing the registered office.
Section 1.03. Other Offices. The corporation may have such other
offices and places of businesses, within or without the State of Minnesota, as
the directors shall, from time to time, determine.
Section 1.04. Corporate Seal. The corporate seal shall be circular
in form and shall have inscribed thereon the name of the corporation and the
word "Minnesota" and the words "Corporate Seal." The form of the seal shall be
subject to alteration by the Board of Directors and the seal may be used by
causing it or a facsimile to be impressed or affixed or printed or otherwise
reproduced. Any officer or director of the corporation shall have authority to
affix the corporate seal of the corporation to any document requiring the same.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 2.01. Place and Time of Meetings. Except as provided
otherwise by Minnesota Statutes Chapter 302A, meetings of the shareholders may
be held at any place, within or without the State of Minnesota, designated by
the directors and, in the absence of such designation, shall be held at the
registered office of the corporation in the State of Minnesota. The directors
shall designate the time of day for each meeting and, in the absence of such
designation, every meeting of shareholders shall be held at ten o'clock a.m.
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Section 2.02. Regular Meetings. Annual meetings of shareholders are
not required by these Bylaws. Regular meetings shall be held only with such
frequency and at such times and places as provided in and required by law.
Section 2.03. Special Meetings. Special meetings of the shareholders
may be held at any time and for any purpose and may be called by the Chairman of
the Board, the President, and two or more directors, or by one or more
shareholders holding ten percent (10%) or more of the shares entitled to vote on
the matters to be presented to the meeting, except that a special meeting for
the purpose of considering any action directly or indirectly to facilitate or
effect a business combination, including any action to change or otherwise
affect the composition of the Board of Directors for that purpose, must be
called by 25% of the voting power of all shares entitled to vote.
Section 2.04. Quorum; Adjourned Meetings. The holders of ten percent
(10%) of the shares outstanding and entitled to vote at the meeting shall
constitute a quorum for the transaction of business at any regular or special
shareholders' meeting. In case a quorum shall not be present at a meeting, those
present in person or by proxy shall adjourn the meeting to such day as they
shall, by majority vote, agree upon without further notice other than by
announcement at the meeting at which such adjournment is taken. If a quorum is
present, a meeting may be adjourned from time to time without notice other than
announcement at the meeting. At adjourned meetings at which a quorum is present,
any business may be transacted which might have been transacted at the meeting
as originally noticed. If a quorum is present, the shareholders may continue to
transact business until adjournment notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
Section 2.05. Voting. At each meeting of the shareholders, every
shareholder shall have the right to vote in person or by proxy. Each
shareholder, unless the Articles of Incorporation or applicable laws provide
otherwise, shall have one vote for each share having voting power registered in
his name on the books of the corporation. Upon the demand of any shareholder,
the vote upon any question before the meeting shall be by written ballot. Except
as otherwise specifically provided by these Bylaws or as required by provisions
of the Investment Company Act of 1940 or other applicable laws, all questions
shall be decided by a majority vote of the number of shares entitled to vote and
represented at the meeting at the time of the vote. If the matter(s) to be
presented at a regular or special meeting relates only to an individual series
or class thereof of the corporation, then only the shareholders of the series or
class thereof are entitled to vote on such matter(s).
Section 2.06. Voting Proxies. The right to vote by proxy shall exist
only if the instrument authorizing such proxy to act shall have been executed in
writing by the shareholder himself or by his attorney thereunto duly authorized
in writing. No proxy shall be voted after eleven (11) months from its date
unless it provides for a longer period.
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Section 2.07. Closing of Books. The Board of Directors may fix a
time, not exceeding sixty (60) days preceding the date of any meeting of
shareholders, as a record date for the determination of the shareholders
entitled to notice of, and to vote at, such meeting, notwithstanding any
transfer of shares on the books of the corporation after any record date so
fixed. If the Board of Directors fails to fix a record date for determination of
the shareholders entitled to notice of, and to vote at, any meeting of
shareholders, the record date shall be the thirtieth (30th) day preceding the
date of such meeting.
Section 2.08. Notice of Meetings. The Secretary or an Assistant
Secretary shall mail to each shareholder shown by the books of the corporation
to be a holder of record of voting shares, at his address as shown by the books
of the corporation, a notice setting out the time and date and place of each
regular meeting and each special meeting, which notice shall be mailed at least
ten (10) days prior thereto; except that notice of a meeting at which an
agreement of merger or consolidation is to be considered shall be mailed to all
shareholders of record, whether entitled to vote or not, at least two (2) weeks
prior thereto; and except that notice of a meeting at which a proposal to
dispose of all, or substantially all, of the property and assets of the
corporation is to be considered shall be mailed to all shareholders of record,
whether entitled to vote or not, at least ten (10) days prior thereto; and
except that notice of a meeting at which a proposal to dissolve the corporation
or to amend the Articles of Incorporation is to be considered shall be mailed to
all shareholders of record, whether entitled to vote or not, at least ten (10)
days prior thereto. Every notice of any special meeting shall state the purpose
or purposes for which the meeting has been called, pursuant to Section 2.03, and
the business transacted at all special meetings shall be confined to the purpose
stated in the call.
Section 2.09. Waiver of Notice. Notice of any regular or special
meeting may be waived either before, at or after such meeting orally or in
writing signed by each shareholder or representative thereof entitled to vote
the shares so represented. A shareholder, by his attendance at any meeting of
shareholders, shall be deemed to have waived notice of such meeting, except
where the shareholder objects at the beginning of the meeting to the transaction
of business because the meeting is not lawfully called or convened, or objects
before a vote on an item of business because the item may not lawfully be
considered at that meeting and does not participate in the consideration of the
item at that meeting.
Section 2.10. Written Action. Any action which might be taken at a
meeting of the shareholders may be taken without a meeting if done in writing
and signed by a majority of the shareholders entitled to vote on that action. If
the action to be taken relates to an individual series or class thereof of the
corporation, then only shareholders of the series or class thereof are entitled
to vote on such action.
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ARTICLE III
DIRECTORS
Section 3.01. Number, Qualifications and Term of Office. Until the
first meeting of shareholders, or until the directors increase their number by
resolution, the number of directors shall be the number named in the Articles of
Incorporation. Thereafter, the number of directors shall be established by
resolution of the shareholders (subject to the authority of the Board of
Directors to increase the number of directors as permitted by law). In the
absence of such resolution, the number of directors shall be the number last
fixed by the shareholders, the Board of Directors or the Articles of
Incorporation. Directors may but need not be shareholders. Each of the directors
shall hold office until the regular meeting of shareholders next held after his
election and until his successor shall have been elected and shall qualify, or
until he shall resign, or shall have been removed as hereinafter provided.
Section 3.02. Election of Directors. Except as otherwise provided in
Section 3.12 and 3.13 hereof the directors shall be elected at all regular
shareholders' meeting. Directors may be elected at a special shareholders'
meeting, provided that the notice of the meeting shall contain mention of such
purpose. At each shareholders' meeting for the election of directors, the
directors shall be elected by a plurality of the votes validly cast at such
election. The shareholders of each series or class thereof of stock of the
corporation shall be entitled to vote for directors and shall have equal voting
power.
Section 3.03. General Powers.
(a) The property, affairs and business of the corporation shall
be managed by the Board of Directors, which may exercise all the powers of the
corporation except those powers vested solely in the shareholders of the
corporation by statute, the Articles of Incorporation or these Bylaws, as
amended.
(b) All acts done by any meeting of the directors or by any
person acting as a director, so long as his successor shall not have been duly
elected or appointed, shall, notwithstanding that it be afterwards discovered
that there was some defect in the election of the directors or such person
acting as aforesaid or that they or any of them were disqualified, be as valid
as if the directors or such other person, as the case may be, had been duly
elected and were or was qualified to be directors or a director of the
corporation.
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Section 3.04. Power to Declare Dividends.
(a) The Board of Directors, from time to time as they may deem
advisable, may declare and pay dividends in cash or other property of the
corporation, out of any source available for dividends, to the shareholders of
each series (or class thereof) of stock of the corporation according to their
respective rights and interests in the investment portfolio of the corporation
issuing such series (or class thereof) of stock.
(b) The Board of Directors shall cause to be accompanied by a
written statement any dividend payment wholly or partly from any source other
than
(i) each investment portfolio's accumulated and accrued
undistributed net income (determined in accordance with
generally accepted accounting practice and the rules and
regulations of the Securities and Exchange Commission then
in effect) and not including profits or losses realized
upon the sale of securities or other properties; or
(ii) each investment portfolio's net income so determined
for the current or preceding fiscal year.
Such statement shall adequately disclose the source or sources of such payment
and the basis of calculation, and shall be in such form as the Commission may
prescribe.
(c) Notwithstanding the above provisions of this Section 3.04,
the Board of Directors may at any time declare and distribute pro rata among the
shareholders of each series (or class thereof) of stock a "stock dividend" out
of each portfolio's authorized but unissued shares of stock, including any
shares previously purchased by a portfolio of the corporation.
Section 3.05. Annual Meeting. The Board of Directors shall meet
annually at the registered office of the corporation, or at such other place
within or without the State of Minnesota as may be designated by the Board of
Directors, for the purpose of electing the officers of the corporation and for
the transaction of such other business as shall come before the meeting.
Section 3.06. Board Meetings. Meetings of the Board of Directors
shall be hold from time to time at such time and place within or without the
State of Minnesota as may be fixed by resolution adopted by a majority of the
whole Board of Directors.
Section 3.07. Meeting; Notice. A director may call a meeting by
giving five (5) days' notice to all directors of the date, time, and place of
the meeting; provided that if the date, time and place of a board meeting have
been announced at a previous meeting of the board, no notice is required.
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Section 3.08. Waiver of Notice. Notice of any meeting of the Board
of Directors may be waived either before, at, or after such meeting orally or in
writing signed by such director. A director, by his attendance and participation
in the action taken at any meeting of the Board of Directors, shall be deemed to
have waived notice of such meeting.
Section 3.09. Quorum. A majority of the directors then holding
office shall constitute a quorum for the transaction of business at such
meeting; provided, however, notwithstanding the above, if the Board of Directors
is taking action pursuant to the Investment Company Act of 1940, as now enacted
or hereafter amended, a majority of the directors who are not "interested
persons" (as defined by the Investment Company Act of 1940, as now enacted or
hereafter amended) of the corporation shall constitute a quorum for taking such
action.
Section 3.10. Advance Consent or Opposition. A director may give
advance written consent or opposition to a proposal to be acted on at a meeting
of the Board of Directors. If such director is not present at the meeting,
consent or opposition to a proposal does not constitute presence for purposes of
determining the existence of a quorum, but consent or opposition shall be
counted as a vote in favor of or against the proposal and shall be entered in
the minutes or other record of action at the meeting, if the proposal acted on
at the meeting is substantially the same or has substantially the same effect as
the proposal to which the director has consented or objected.
Section 3.11. Conference Communications. Directors may participate
in any meeting of the Board of Directors, or of any duly constituted committee
thereof, by means of a conference telephone conversation or other comparable
communication technique whereby all persons participating in the meeting can
hear and communicate to each other. For the purposes of establishing a quorum
and taking any action at the meeting, such directors participating pursuant to
this Section 3.11 shall be deemed present in person at the meeting, and the
place of the meeting shall be the place or origination of the conference
telephone conversation or other comparable communication technique.
Section 3.12. Vacancies; Newly Created Directorships. Vacancies in
the Board of Directors of the corporation occurring by reason of death,
resignation, removal or disqualification shall be filled for the unexpired term
by a majority of the remaining directors of the Board although less than a
quorum; newly created directorships resulting from an increase in the authorized
number of directors by action of the Board of Directors as permitted by Section
3.01 may be filled by a two-thirds (2/3) vote of the directors serving at the
time of such increase; and each person so elected shall be a director until his
successor is elected by the shareholders, who may make such election at their
next regular meeting or at any meeting duly called for that purpose; provided,
however, that no vacancy can be filled as provided above if prohibited by the
provisions of the Investment Company Act of 1940.
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Section 3.13. Removal. The entire Board of Directors or any
individual director may be removed from office, with or without cause, by a vote
of the shareholders holding a majority of the shares entitled to vote at an
election of directors. In the event that the entire Board or any one or more
directors be so removed, new directors shall be elected at the same meeting, or
the remaining directors may, to the extent vacancies are not filled at such
meeting, fill any vacancy or vacancies created by such removal. A director named
by the Board of Directors to fill a vacancy may be removed from office at any
time, with or without cause, by the affirmative vote of the remaining directors
if the shareholders have not elected directors in the interim between the time
of the appointment to fill such vacancy and the time of removal.
Section 3.14. Committees. A resolution approved by the affirmative
vote of a majority of the Board of Directors may establish committees having the
authority of the board in the management of the business of the corporation to
the extent provided in the resolution. A committee shall consist of one or more
persons, who need not be directors, appointed by affirmative vote of a majority
of the directors present. Committees are subject to the direction and control
of, and vacancies in the membership thereof shall be filled by, the Board of
Directors, except as provided by Minnesota Statutes Section 302A.243.
A majority of the members of the committee present at a meeting is a
quorum for the transaction of business, unless a larger or smaller proportion or
number is provided in a resolution approved by the affirmative vote of a
majority of the directors present.
Section 3.15. Written Action. Any action which might be taken at a
meeting of the Board of Directors, or any duly constituted committee thereof,
may be taken without a meeting if done in writing and signed by a majority of
the directors or committee members.
Section 3.16. Compensation. Directors who are not salaried officers
of this corporation or affiliated with its investment adviser shall receive such
fixed sum per meeting attended or such fixed annual sum as shall be determined,
from time to time, by resolution of the Board of Directors. All directors may
receive their expenses, if any, of attendance at meetings of the Board of
Directors or any committee thereof. Nothing herein contained shall be construed
to preclude any director from serving this corporation in any other capacity and
receiving proper compensation therefor.
Section 3.17. Resignation. A director may resign by giving written
notice to the corporation, and the resignation is effective without acceptance
when given, unless a later effective time is specified in the notice.
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ARTICLE IV
OFFICERS
Section 4.01. Number. The officers of the corporation shall consist
of a Chairman of the Board (if one is elected by the Board), the President, a
Treasurer and a Secretary, and, if desired by the Board, one or more Vice
Presidents, Assistant Secretaries, and Assistant Treasurers, and such other
officers and agents as may, from time to time, be elected by the Board of
Directors. Any number of offices may be held by the same person.
Section 4.02. Election, Term of Office and Qualifications. The Board
of Directors shall elect, from within or without their number, the President,
the Secretary, the Treasurer and such other officers as may be deemed advisable.
The President and all other officers who may be directors shall continue to hold
office until the election and qualification of their successors, notwithstanding
an earlier termination of their directorship.
Section 4.03. Resignation. Any officer may resign his office at any
time by delivering a written resignation to the Board of Directors, the
President, the Secretary, or any Assistant Secretary. Unless otherwise specified
therein, such resignation shall take effect upon delivery.
Section 4.04. Removal and Vacancies. Any officer may be removed from
his office by a majority of the whole Board of Directors, with or without cause.
Such removal, however, shall be without prejudice to the contract rights of the
person so removed. If there be a vacancy among the officers of the corporation
by reason of death, resignation or otherwise, such vacancy shall be filled for
the unexpired term by the Board of Directors.
Section 4.05. Chairman of the Board. The Chairman of the Board, if
one is elected, shall preside at all meetings of the shareholders and directors
and shall have such other duties as may be prescribed, from time to time, by the
Board of Directors.
Section 4.06. President. The President shall have general active
management of the business of the corporation. In the absence of the Chairman of
the Board, he shall preside at all meetings of the shareholders and directors.
He shall be the chief executive officer of the corporation and shall see that
all orders and resolutions of the Board of Directors are carried into effect. He
shall be ex officio a member of all standing committees. He may execute and
deliver, in the name of the corporation, any deeds, mortgages, bonds, contracts
or other instruments pertaining to the business of the corporation and, in
general, shall perform all duties usually incident to the office of President.
He shall have such other duties as may, from time to time, be prescribed by the
Board of Directors.
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Section 4.07. Vice President. Each Vice President shall have such
powers and shall perform such duties as may be specified in the Bylaws or
prescribed by the Board of Directors or by the President. In the event of
absence or disability of the President, Vice Presidents shall succeed to his
power and duties in the order designated by the Board of Directors.
Section 4.08. Secretary. The Secretary shall be secretary of, and
shall attend all, meetings of the shareholders and Board of Directors and shall
record all proceedings of such meetings in the minute book of the corporation.
He shall give proper notice of meetings of shareholders and directors. He shall
keep the seal of the corporation and shall affix the same to any instrument
requiring it and may, when necessary, attest the seal by his signature. He shall
perform such other duties as may, from time to time, be prescribed by the Board
of Directors or by the President.
Section 4.09. Treasurer. The Treasurer shall keep accurate accounts
of all moneys of the corporation received or disbursed. He shall deposit all
moneys, drafts and checks in the name of, and to the credit of, the corporation
in such banks and depositories as a majority of the whole Board of Directors
shall, from time to time, designate. He shall have power to endorse, for
deposit, all notes, checks and drafts received by the corporation. He shall
disburse the funds of the corporation, as ordered by the Board of Directors,
making proper vouchers therefor. He shall render to the President and the
directors, whenever required, an account of all his transactions as Treasurer
and of the financial condition of the corporation, and shall perform such other
duties as may, from time to time, be prescribed by the Board of Directors or by
the President.
Section 4.10. Assistant Secretaries. At the request of the
Secretary, or in his absence or disability, any Assistant Secretary shall have
power to perform all the duties of the Secretary and, when so acting, shall have
all the powers of, and be subject to all restrictions upon, the Secretary. The
Assistant Secretaries shall perform such other duties as from time to time may
be assigned to them by the Board of Directors or the President.
Section 4.11. Assistant Treasurer. At the request of the Treasurer,
or in his absence or disability, any Assistant Treasurer shall have power to
perform all the duties of the Treasurer, and when so acting, shall have all the
powers of, and be subject to all the restrictions upon, the Treasurer. The
Assistant Treasurers shall perform such other duties as from time to time may be
assigned to them by the Board of Directors or the President.
Section 4.12. Compensation. The officers of this corporation shall
receive such compensation for their services as may be determined, from time to
time, by resolution of the Board of Directors.
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Section 4.13. Surety Bonds. The Board of Directors may require any
officer or agent of the corporation to execute a bond (including, without
limitation, any bond required by the Investment Company Act of 1940 and the
rules and regulations of the Securities and Exchange Commission) to the
corporation in such sum and with such surety or sureties as the Board of
Directors may determine, conditioned upon the faithful performance of his duties
to the corporation, including responsibility for negligence and for the
accounting of any of the corporation's property, funds or securities that may
come into his hands. In any such case, a new bond of like character shall be
given at least every six years, so that the date of the new bond shall not be
more than six years subsequent to the date of the bond immediately preceding.
ARTICLE V
SHARES AND THEIR TRANSFER AND REDEMPTION
Section 5.01. Certificates for Shares.
(a) The corporation may have certificated or uncertificated
shares, or both, as designated by resolution of the Board of Directors. Every
owner of certificated shares of the corporation shall be entitled to a
certificate, to be in such form as shall be prescribed by the Board of
Directors, certifying the number of shares of the corporation owned by him.
Within a reasonable time after the issuance or transfer of uncertificated
shares, the corporation shall send to the new shareholder the information
required to be stated on certificates. Certificated shares shall be numbered in
the order in which they shall be issued and shall be signed, in the name of the
corporation, by the President or a Vice President and by the Treasurer, or by
such officers as the Board of Directors may designate. Such signatures may be
facsimile if authorized by the Board of Directors. Every certificate surrendered
to the corporation for exchange or transfer shall be canceled, and no new
certificate or certificates shall be issued in exchange for any existing
certificate until such existing certificate shall have been so canceled, except
in cases provided for in Section 5.08.
(b) In case any officer, transfer agent or registrar who shall
have signed any such certificate, or whose facsimile signature has been placed
thereon, shall cease to be such an officer (because of death, resignation or
otherwise) before such certificate is issued, such certificate may be issued and
delivered by the corporation with the same effect as if he were such officer,
transfer agent or registrar at the date of issue.
Section 5.02. Issuance of Shares. The Board of Directors is
authorized to cause to be issued shares of the corporation up to the full amount
authorized by the Articles of Incorporation in such series and classes thereof
and in such amounts as may be determined by the Board of Directors and as may be
permitted by law. No shares shall be allotted except in consideration of cash or
of an amount transferred from surplus to stated capital upon a share dividend.
At the time of such allotment of shares, the Board of Directors making such
allotments shall state, by resolution, their determination of the fair value to
the corporation in monetary terms of any
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consideration other than cash for which shares are adopted. The amount of
consideration to be received in cash, or otherwise, shall not be less than the
par value of the shares so allotted. No shares of stock issued by the
corporation shall be issued, sold, or exchanged by or on behalf of the
corporation for any amount less than the net asset value per share of the shares
outstanding as determined pursuant to Article XI hereunder.
Section 5.03. Redemption of Shares. Upon the demand of any
shareholder this corporation shall redeem any share of stock issued by it held
and owned by such shareholder at the net asset value thereof as determined
pursuant to Article XI hereunder. The Board of Directors may suspend the right
of redemption or postpone the date of payment during any period when: (a)
trading on the New York Stock Exchange is restricted or such Exchange is closed
for other than weekends or holidays; (b) the Securities and Exchange Commission
has by order permitted such suspension, or (c) an emergency as defined by rules
of the Securities and Exchange Commission exists, making disposal of portfolio
securities or valuation of net assets of the corporation not reasonably
practicable.
Section 5.04. Transfer of Shares. Transfer of share on the books of
the corporation may be authorized only by the shareholder named in the
certificate or the shareholder's legal representative, or the shareholder's duly
authorized attorney-in-fact, and upon surrender of the certificate or the
certificates for such shares or a duly executed assignment covering shares held
in unissued form. The corporation may treat, as the absolute owner of shares of
the corporation, the person or persons in whose name shares are registered on
the books of the corporation.
Section 5.05. Registered Shareholders. The corporation shall be
entitled to treat the holder of record of any share or shares of stock as the
holder in fact thereof and accordingly shall not be bound to recognize any
equitable or other claim to or interest in such share on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise expressly provided by the laws of Minnesota.
Section 5.06 Transfer Agents and Registrars. The Board of Directors
may from time to time appoint or remove transfer agents and/or registrars of
transfers of shares of stock of the corporation, and it may appoint the same
person as both transfer agent and registrar. Upon any such appointment being
made all certificates representing shares of capital stock thereafter issued
shall be countersigned by one of such transfer agents or by one of such
registrars of transfers or by both and shall not be valid unless so
countersigned. If the same person shall be both transfer agent and registrar,
only one countersignature by such person shall be required.
Section 5.07. Transfer Regulations. The shares of stock of the
corporation may be freely transferred, and the Board of Directors may from time
to time adopt rules and regulations with reference to the method of transfer of
the share of stock of the corporation.
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Section 5.08. Lost, Stolen, Destroyed and Mutilated Certificates.
The holder of any stock of the corporation shall immediately notify the
corporation of any loss, theft destruction or mutilation of any certificate
therefor, and the Board of Directors may, in its discretion, cause to be issued
to him a new certificate or certificate of stock upon the surrender of the
mutilated certificate or in case of loss, theft or destruction of the
certificate, upon satisfactory proof of such loss, theft or destruction, after
the owner of the lost, stolen or destroyed certificate, or his legal
representatives, gives to the corporation and to such registrar or transfer
agent as may be authorized or required to countersign such new certificate or
certificates a bond, in such sum as they may direct, and with such surety or
sureties as they may direct, as indemnity against any claim that may be made
against them or any of them on account of or in connection with the alleged
loss, theft, or destruction of any such certificate.
ARTICLE VI
DIVIDENDS, SURPLUS, ETC.
Section 6.01. The corporation's net investment income will be
determined, and its dividends shall be declared and made payable at such time(s)
as the Board of Directors shall determine; dividends shall be payable to
shareholders of record as of the date of declaration.
It shall be the policy of the corporation to qualify for and elect
the tax treatment applicable to regulated investment companies under the
Internal Revenue Code, so that the corporation will not be subjected to Federal
income tax on such part of its income or capital gains as it distributes to its
shareholders.
ARTICLE VII
BOOKS AND RECORDS, AUDIT, FISCAL YEAR
Section 7.01. Books and Records. The Board of Directors of the
corporation shall cause to be kept such books and records, at such places, as
may be required by law.
Section 7.02. Audit, Accountant.
(a) The Board of Directors shall cause the records and books of
account of the corporation to be audited at least once in each fiscal year and
at such other times as it may deem necessary or appropriate.
(b) The corporation shall employ an independent certified
public accountant or firm of independent certified public accountants as its
Accountant to examine the accounts of the corporation and to sign and certify
financial statements filed by the corporation. The Accountant's certificates and
reports shall be addressed both to the Board of Directors and to the
shareholders.
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(c) A majority of the members of the Board of Directors shall
select the Accountant at any meeting held before the first regular meeting of
shareholders, and thereafter shall select the Accountant annually at a meeting
held within thirty (30) days before or after the beginning of the fiscal year of
the corporation. Such selection shall be submitted for ratification or rejection
at the next succeeding regular shareholders' meeting. If such meeting shall
reject such selection, the Accountant shall be selected by majority vote, either
at the meeting at which the rejection occurred or at a subsequent meeting of
shareholders called for such purpose.
(d) Any vacancy occurring between regular meetings, due to the
death, resignation or otherwise of the Accountant, may be filled by the Board of
Directors.
Section 7.03. Fiscal Year. The fiscal year of the corporation shall
be determined by the Board of Directors.
ARTICLE VIII
INSPECTION OF BOOKS
Section 8.01. Every shareholder of the corporation and every holder
of a voting trust certificate shall have a right to examine, in person or by
agent or attorney, at any reasonable time or times, for any proper purpose, and
at the place or places where usually kept, the share register, books of account
and records of the proceedings of the shareholders and directors and to make
extracts therefrom.
ARTICLE IX
LOANS TO OFFICERS, DIRECTORS, SHAREHOLDERS
Section 9.01. The corporation shall not lend any of its assets to
any officer or director of the corporation, nor shall it lend any of its assets
to shareholders upon the security of its shares. If any such loan be made, the
officers and directors who make such loan, or assent thereto, shall be jointly
and severally liable for repayment or return thereof.
ARTICLE X
VOTING OF STOCK HELD
Section 10.01. Unless otherwise provided by resolution of the Board
of Directors, the President, any Vice President, the Secretary or the Treasurer,
may from time to time appoint an attorney or attorneys or agent or agents of the
corporation, in the name and on behalf of the corporation, to cast the votes
which the corporation may be entitled to cast as a stockholder or otherwise in
any other corporation or association, any of whose stock or securities may be
held by the corporation, at meetings of the holders of the stock or other
securities of any such other corporation or association, or to consent in
writing to any action by any such other corporation or association, and may
instruct the person or persons so appointed as to the manner of casting such
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votes or giving such consent, and way execute or cause to be executed on behalf
of the corporation and under its corporate seal, or otherwise, such written
proxies, consents, waivers, or other instruments as it may deem necessary or
proper in the circumstances; or any of such officers may themselves attend any
meeting of the holders of stock or other securities of any such corporation or
association and thereat vote or exercise any or all other powers of the
corporation as the holder of such stock or other securities of such other
corporation or association, or consent in writing to any action by any such
other corporation or association.
ARTICLE XI
VALUATION OF NET ASSET VALUE
Section 11.01. The net asset value per share of each series of stock
issued by the portfolios of the corporation shall be determined in good faith by
or under supervision of the officers of the corporation as authorized by the
Board of Directors as often and on such days and at such time(s) as the Board of
Directors shall determine.
ARTICLE XII
CUSTODY OF ASSETS
Section 12.01. All securities and cash owned by this corporation
shall, as hereinafter provided, be held by or deposited with a bank or trust
company having (according to its last published report) not less than two
million dollars ($2,000,000) aggregate capital, surplus and undivided profits
(the "Custodian").
This corporation shall enter into a written contract with the
Custodian regarding the powers, duties and compensation of the Custodian with
respect to the cash and securities of this corporation held by the Custodian.
Said contract and all amendments thereto shall be approved by the Board of
Directors of this corporation. In the event of the Custodian's resignation or
termination, the corporation shall use its best efforts promptly to obtain a
successor Custodian and shall require that the cash and securities owned by this
corporation held by the Custodian be delivered directly to such successor
Custodian.
ARTICLE XIII
AMENDMENTS
Section 13.01. These Bylaws may be amended or altered by a vote of
the majority of the whole Board of Directors at any meeting provided that notice
of such proposed amendment shall have been given in the notice given the
directors of such meeting. Such authority in the Board of Directors is subject
to the power of the shareholders to change or repeal such Bylaws by a majority
vote of the shareholders present or represented at any regular or special
meeting of shareholders called for such purpose. The Board of Directors shall
not make or alter any Bylaws fixing their qualifications, classifications, term
of office, or number, except that the Board of Directors may make or alter any
Bylaws to increase their number.
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ARTICLE XIV
MISCELLANEOUS
Section 14.01. Interpretation. When the context in which words are
used in these Bylaws indicates that such is the intent, singular words will
include the plural and vice verse, and masculine words will include the feminine
and neuter genders and vice versa.
Section 14.02. Article and Section Titles. The titles of Sections
and Articles in these Bylaws are for descriptive purpose only and will not
control or alter the meaning of any of these Bylaws as set forth in the text.
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EXHIBIT (d)
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT, made this 3rd day of November 1993, by and between
IAI Retirement Funds, Inc., a Minnesota corporation (the "Corporation"), on
behalf of each portfolio represented by a series of shares of common stock of
the Corporation (the "Portfolios") set forth in Exhibit A hereto, as
supplemented from time to time, and Investment Advisers, Inc. ("Advisers"), a
Delaware corporation.
PART ONE: Investment Advice and Other Services
(1) The Corporation hereby retains Advisers, and Advisers hereby
agrees, for the "period of this Agreement" (which hereinafter means the term of
this Agreement and any renewal or extension thereof or until any prior
termination thereof) and under the terms and conditions hereinafter set forth,
to act as investment adviser for, and to manage the affairs, business and the
investment of assets of, and to supervise the purchase and sale and the
acquisition and disposition of specific securities on behalf of the Portfolios.
Advisers shall perform such other services as are reasonably incidental to the
foregoing duties.
In addition, Advisers shall furnish such office space and
facilities, including, without limitation, stenographic, telephone, telegraphic,
mailing and other facilities as may be required to discharge its
responsibilities and duties hereunder. It is the intent of this Agreement that
Advisers shall supply such services as are necessary or desirable and proper for
the continuous operations of the Portfolios. However, Advisers shall not be
required hereunder to perform those services customarily performed by the
administrative agent, accounting services agent, dividend disbursing agent,
redemption agent, transfer agent, custodian, independent accountants, brokers,
dealers or independent legal counsel.
(2) Advisers shall arrange, if requested by the Corporation, for
officers and directors of Advisers to serve without compensation from the
Corporation as directors, officers or employees of the Corporation if duly
elected to such positions by the shareholders or directors of the Corporation.
(3) Advisers covenants and agrees that, in making purchases and
sales and acquisitions and dispositions of specific securities on behalf of the
Portfolios, it shall at all times be governed by the investment objectives,
limitations and policies as delineated and limited by the statements contained
in the various documents filed with the Securities and Exchange Commission, as
such documents may from time to time be amended. The Corporation agrees to
supply Advisers wit copies of all documents filed with the Securities and
Exchange Commission, together with any amendments thereto.
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(4) Advisers hereby covenants and agrees that it will make no
separate charge to any shareholder or his individual account for any service
rendered to said shareholder or the Corporation by Advisers unless such charge
for special services is specifically approved by the Board including a majority
of the directors who are not "interested persons" of Advisers, as such term is
defined in the Investment Company Act of 1940 (the "1940 Act").
No special charge will be levied retroactively or without appropriate notice to
affected shareholders.
(5) Advisers hereby acknowledges that all records necessary in the
operation of the Corporation, including records pertaining to its shareholders
and investments, are the sole and exclusive property of the Corporation, and in
the event that a transfer of management or investment advisory services to
someone other than Advisers should ever occur, Advisers will promptly, and at
its own cost, take all steps necessary to segregate such records and deliver
them to the Corporation.
PART TWO: Compensation to Investment Adviser
(1) The Corporation covenants and agrees to pay to Advisers, and
Advisers covenants and agrees to accept from the Corporation in full
compensation for all investment advice, material and other services furnished
hereunder, and for all facilities and equipment, and for all expenses paid or
reimbursed by Advisers hereunder, a monthly fee for each Portfolio equal to the
percentage of the value of the Portfolio's average daily net assets, as set
forth in Exhibit A hereto, as supplemented from time to time. The fee shall be
prorated for any fraction of a month at the commencement or termination of this
Agreement with respect to a Portfolio.
(2) Net asset value for purposes of computing the fee will be
determined as of the close of trading on the last business day in each month on
which the New York Stock Exchange is open, and will be computed pursuant to the
provisions of the Corporation's Bylaws and any currently effective Prospectus
and Statement of Additional Information of the Corporation and the respective
Portfolio.
(3) The fee provided for hereunder shall be paid in cash by the
Corporation to Advisers within ten (10) business days after the last day of each
month, and such fee shall be adjusted, if necessary, at the time of the payment
due in the twelfth (12th) month. Any overpayment of the fee shall promptly be
refunded to the Corporation.
PART THREE: Allocation of Expenses
In addition to the fee described in Part Two hereof, each Portfolio
shall pay all its expenses which are not expressly assumed by Advisers, pursuant
to the terms of this Agreement, or by any other organization with which the
Corporation shall have entered into an agreement on behalf of the Portfolio for
the performance of services.
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PART FOUR: Miscellaneous
(1) Advisers shall be deemed to be an independent contractor and,
except as expressly provided or authorized in this Agreement, as amended, shall
have no authority to act for or represent the Corporation or the Portfolios.
(2) The Corporation recognizes that Advisers now renders and may
continue to render investment advice and other services to other investment
companies and other persons or companies which may or may not have investment
policies and investments similar to those of the Portfolios. Advisers shall be
free to render such investment advice and other services, and the Corporation
hereby consents thereto.
(3) Neither this Agreement nor any transaction effected pursuant
thereto shall be invalidated or in any way affected by the fact that directors,
officers, agents and/or shareholders of the Corporation are or may be interested
in Advisers, or any successor or assignee thereof, as directors, officers,
shareholders or otherwise; that directors, officers, shareholders or agents of
Advisers are or may be interested in the Corporation as directors, officers,
shareholders or otherwise; or that Advisers, or any successor or assignee, is or
may be interested in the Corporation as shareholders or otherwise; provided,
however, that neither Advisers nor any officer or director of Advisers or of the
Corporation shall sell to or buy from the Corporation any property or security
other than a security issued by the Corporation, except in accordance with an
applicable order of the Securities and Exchange Commission.
(4) Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed postpaid, to the party to this Agreement
entitled to receive such at such address as such other party may designate in
writing mailed for receipt of such notice.
(5) Advisers agrees that, except as herein otherwise expressly
provided, neither it nor any of its officers or directors shall at any time
during the period of this Agreement make, accept or receive, directly or
indirectly, any fees, profits or emoluments of any character in connection with
the purchase or sale of securities (except securities issued by the Corporation)
or other assets by or for the Corporation.
PART FIVE: Renewal and Termination
(1) This Agreement shall become effective with respect to each
Portfolio on the date set forth on Exhibit A hereto, as supplemented from time
to time, and shall continue in force from year to year, subject to prior
termination as provided herein, but only so long as its continuance shall be
specifically approved at least annually (1) by the Board of Directors of the
Corporation or by a vote of the majority of the outstanding voting securities of
the applicable Portfolio (which shall herein mean the vote at a shareholders'
regular or special meeting of sixty-seven percent (76%) or more of such
Portfolio's shares present at such meeting if the holders of
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more than fifty percent (50%) of the outstanding voting securities of such
Portfolio are present or represented by proxy, or more than 50% of the
outstanding voting securities of such Portfolio, whichever is less), and (2) by
the vote of a majority of the directors who are not parties to this Agreement or
"interested persons" (as defined in the 1940 Act) of any such party, cast in
person oat a meeting called for the purpose of voting on such approval.
(2) This Agreement may be terminated with respect to any Portfolio
at any time by either the Board of Directors of the Corporation or by the vote
of a majority of the outstanding voting securities of such Portfolio or by
Advisers, by giving the other party at least sixty (60) days' previous written
notice of such intention to terminate; provided that any such termination shall
be made without the payment of any penalty.
(3) This Agreement shall terminate in the event of its assignment,
the term "assignment" for this purpose having the same meaning as set forth in
the 1940 Act.
(4) This Agreement shall be subject to all applicable provisions of
law, including, without limitation, the applicable provisions of the 1940 Act.
To the extent that any provisions herein contained conflict with any such
applicable provisions of law, the latter shall control.
(5) This Agreement is executed and delivered in Minneapolis,
Minnesota, and the laws of the State of Minnesota shall be controlling and shall
govern the construction, validity, and effect of this contract.
IN WITNESS WHEREOF, the parties hereto have executed the
foregoing Agreement on the day and year first above written.
IAI RETIREMENT FUNDS, INC.
By: /s/ Richard E. Struthers
-------------------------------
Richard E. Struthers
President
INVESTMENT ADVISERS, INC.
By: /s/ Noel P. Rahn
-------------------------------
Noel P. Rahn
Chief Executive Officer
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EXHIBIT (g)
CUSTODIAN CONTRACT
This AGREEMENT made as of November 3, 1993, by and between IAI
Retirement Funds, Inc., a Minnesota corporation having its principal office and
place of business at 3700 First Bank Place, Minneapolis, Minnesota, (the
"Company"), and Norwest Bank Minnesota, N.A., a National Banking Association
having its principal office and place of business at Sixth and Marquette,
Minnesota, MN 55479 (the "Custodian").
WHEREAS, the Company is a mutual fund whose shares are currently
offered in the following series (which, together with each future series of the
Company that adopts this contract are hereafter referred to individually as a
"Fund" and collectively as the "Funds"): Series A - IAI Regional Portfolio,
Series B - Balanced Portfolio and Series C - IAI Reserve Portfolio.
WHEREAS, the Company desires to appoint the Bank as the custodian
for each Fund, and the Bank desires to accept such appointment;
WITNESSETH, that in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It. The Company hereby
employs the Custodian as the custodian of the assets of each Fund, including
securities the Company desires to be held in places within the United States
("domestic securities") and securities the Company desires to be held outside of
the United States ("foreign securities"). The Company agrees to deliver to the
Custodian all securities and cash owned by each Fund, and all payments of
income, payments of principal or capital distributions received by the Fund with
respect to all securities owned by the Fund from time to time, and the cash
consideration received by the Fund for such new or treasury shares of capital
stock ("Shares") of the Fund as may be issued or sold from time to time. The
Custodian shall not be responsible for any property of a Fund held or received
by the Fund and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article
6), the Custodian shall from time to time employ one or more sub-custodians, but
only in accordance with any necessary approvals by the Board of Directors of the
Company, and provided that the appointment by the Custodian of any
sub-custodians shall not relieve the Custodian of any of its responsibilities or
liabilities hereunder.
2. Duties of the Custodian with Respect to Fund Property held by the Custodian
in the United States.
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2.1 Holding Securities. The Custodian shall hold and physically segregate for
the account of each of the Funds all non-cash property, including all securities
owned by the Funds, other than (a) securities which are maintained pursuant to
Section 2.12 in a clearing agency which acts as a securities depository or in a
Federal Reserve Bank, as Custodian may select, and to permit such deposited
Assets to be registered in the name of Custodian or Custodian's agent or nominee
on the records of such Federal Reserve Bank or such registered clearing agency
or the nominee of either, and to employ and use securities depositories,
clearing agencies, clearance systems, sub-custodians or agents located outside
the United States in connection with transactions involving foreign securities,
collectively referred to herein as a "Securities System".
2.2 Delivery of Securities. The Custodian shall release and deliver securities
owned by the Company for the account of a Fund held by the Custodian or in a
Securities System account of the Custodian only upon receipt of Proper
Instructions, which may be continuing instructions when deemed appropriate by
the parties, and only in the following:
1) Upon sale of such securities for the account of a Fund
and receipt of payment therefor;
2) Upon the receipt of payment in connection with any
repurchase agreement related to such securities entered
into by the Company on behalf of a Fund;
3) In the case of a sale effected through a Securities
System, in accordance with the provisions of Section
2.12 hereof;
4) To the depository agent in connection with tender or
other similar offers for portfolio securities of a Fund;
5) To the issuer thereof or its agent when such securities
are called, redeemed, retired or otherwise become
payable; provided that, in any such case, the cash or
other consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into
the name of the Company for the-account of a Fund or
into the name of any nominee or nominees of the
Custodian or into the name or nominee name of any agent
appointed pursuant to Section 2.11 or into the name or
nominee name of any sub-custodian appointed pursuant to
Article 1; or for exchange for a different number of
bonds, certificates or other evidence representing the
same aggregate face amount or number of units; provided
that, in any such case, the new securities are to be
delivered to the Custodian;
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7) Upon the sale of such securities for the account of a
Fund, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street
delivery" custom; provided that in any such case, the
Custodian shall have no responsibility or liability for
any loss arising from the delivery of such securities
prior to receiving payment for such securities except as
may arise from the Custodian's own negligence or willful
misconduct;
8) For exchange or conversion pursuant to any plan or
merger, consolidation, recapitalization, reorganization
or readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion
contained in such securities, or pursuant to any deposit
agreement; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the
Custodian;
9) In the case of warrants, rights or similar securities,
the surrender thereof in the exercise of such warrants,
rights or similar securities or the surrender of interim
receipts of temporary securities for definitive
securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the
Custodian;
10) For delivery in connection with any loans of securities
made by the Company on behalf of a Fund, but only
against receipt of adequate collateral as agreed upon
from time to time by the Custodian and the Company,
which may be in the form of cash or obligations issued
by the United States government, its agencies or
instrumentalities, except that in connection with any
loans for which collateral is to be credited to the
Custodian's account in the book-entry system authorized
by the U.S. Department of the Treasury, the Custodian
will not be held liable or responsible for the delivery
of securities owned by a Fund prior to the receipt of
such collateral;
11) For delivery as security in connection with any
borrowings by the Company on behalf of a Fund requiring
a pledge of assets by the Company on behalf of such
Fund, but only against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Company on behalf of a Fund, the
Custodian and a broker-dealer registered under the
Securities Exchange Act of 1934 (the "Exchange Act") and
a member of the National Association of Securities
Dealers, Inc. (`NASD"), relating to the compliance with
the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any
similar organization or organizations, regarding escrow
or other arrangements in connection with transactions by
the Company;
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13) For delivery in accordance with the provisions of any
agreement among the Company on behalf of a Fund, the
Custodian, and a Futures Commission Merchant registered
under the Commodity Exchange Act, relating to compliance
with the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or any similar
organization or organizations, regarding account
deposits in connection with transactions by the Company
on behalf of a Fund;
14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the applicable Fund, for delivery
to such Transfer Agent or to the holders of shares in
connection with distributions in kind, as may be
described from time to time in the Fund's currently
effective prospectus and statement of additional
information ("prospectus"), in satisfaction of requests
by holders of Shares for repurchase or redemptions; and
15) For any other proper corporate purpose, but only upon
receipt of, in addition to Proper Instructions, a
certified copy of a resolution of the Board of Directors
of the Company signed by an officer of the Company and
certified by the Secretary or an Assistant Secretary,
specifying the securities to be delivered, setting forth
the purpose for which such delivery is to be made,
declaring such purpose to be a proper corporate purpose,
and naming the person or persons to whom delivery of
such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian (other
than bearer securities) shall be registered in the name of the Company for the
account of the applicable Fund(s) or in the name of any nominee of the Company
or of any nominee of the Custodian which nominee shall be assigned exclusively
to the Company's, unless the Company has authorized in writing the appointment
of a nominee to be used in common with other registered investment companies
having the same investment adviser as the applicable Fund(s), or in the name or
nominee name of any agent appointed pursuant to Section 2.11 or in the name or
nominee name of any sub-custodian appointed pursuant to Article 1. All
securities accepted by the Custodian on behalf of the Company under the terms of
this Contract shall be in "street name" or other good delivery form.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank account
or accounts in the name of each Fund, subject only to draft or order by the
Custodian acting pursuant to the terms of this Contract, and shall hold in such
account or accounts, subject to the provisions hereof, all cash received by it
from or for the account of each applicable Fund, other than cash maintained by
the applicable Fund in a bank account established and used in accordance with
Rule 17f-3 under the Investment Company Act of 1940. Cash held by the Custodian
for each Fund may be deposited by it to its credit as Custodian in the Banking
Department of the Custodian or in such other banks or trust companies as it may
in its discretion deem necessary or desirable; provided, however, that every
such bank or trust company shall be qualified to act as a
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custodian under the Investment Company Act of 1940 and that each such bank or
trust company and the cash to be deposited with each such bank or trust company
shall be approved by vote of a majority of the Board of Directors of the
Company. Such cash shall be deposited by the Custodian in its capacity as
Custodian and shall be withdrawable by the Custodian only in that capacity.
2.5 Payments for Shares. The Custodian shall receive from the distributor for
each Fund Shares or from the Transfer Agent of each Fund and deposit into the
Fund account such payments as are received for Shares of the Fund issued or sold
from time to time by the Fund. The Custodian will provide timely notification to
the Fund and the Transfer Agent of any receipt by it of payments for Shares of
the Funds.
2.6 Availability of Federal Funds. Upon mutual agreement between the Company and
the Custodian, the Custodian shall, upon the receipt of Proper Instructions,
make federal funds available to the Funds as of specified times agreed upon from
time to time by the Company and the Custodian in the amount of checks received
in payment for Shares of the Funds which are deposited into the Funds' accounts.
2.7 Collection of Income. The Custodian shall, or shall cause its agent or
sub-custodian to, collect on a timely basis all income and other payments with
respect to registered securities held hereunder to which each Fund shall be
entitled either by law or pursuant to custom in the securities business, and
shall collect on a timely basis all income and other payments with respect to
bearer securities if, on the date of payment by the issuer, such securities are
held by the Custodian or its agent or sub-custodian and shall credit such
income, as collected, to the applicable Fund's custodian account. Without
limiting the generality of the foregoing, the Custodian shall detach and present
for payment all coupons and other income items requiring presentation as and
when they become due and shall collect interest when due on securities held
hereunder. Unless the Custodian is the lending agent in connection with
securities loaned by the Fund, income due each Fund on securities loaned
pursuant to the provisions of Section 2.2(10) shall be the responsibility of the
Company. The Custodian will have no duty or responsibility in connection
therewith, other than to provide the Company with such information or daft as
may be necessary to assist the Company in arranging for the timely delivery to
the Custodian of the income to which each Fund is properly entitled.
2.8 Payment of Company Monies. Upon receipt of Proper Instructions, which may be
continuing instructions when deemed appropriate by the parties, the Custodian
shall pay out monies of each Fund in the following cases only:
1) Upon the purchase of domestic securities, options,
futures contracts or options on futures contracts for
the account of each Fund but only (a) against the
delivery of such securities or evidence of title to such
options, futures contracts or options on futures
contracts, to the Custodian (or any bank, banking firm
or trust company doing business in the United States or
abroad which is qualified under the
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Investment Company Act of 1940 to act as a custodian and
has been designated by the Custodian as its agent for
this purpose) registered in the name of the Company for
the account of a Fund or in the name of a nominee of the
Custodian referred to in Section 2.3 hereof or in proper
form for transfer; (b) in the case of a purchase
effected through a Securities System, in accordance with
the conditions set forth in Section 2.12 hereof or (c)
in the case of the repurchase agreements entered into
between the Company and the Custodian, or another bank,
or a broker-dealer which is a member of NASD, (i)
against delivery of the securities either in certificate
form or through an entry crediting the Custodian's
account at the Federal Reserve Bank with such securities
or (ii) against delivery of the receipt evidencing
purchase by the Company for the account of a Fund of
securities owned by the Custodian along with written
evidence of the agreement by the Custodian to repurchase
such securities from a Fund;
2) In connection with conversion, exchange or surrender of
securities owned by a Fund as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by a
Fund as set forth in Section 2.10 hereof;
4) For the payment of any expense or liability incurred by
a Fund, including but not limited to the following
payments for the account of such Fund: interest, taxes,
management, accounting, transfer agent and legal fees,
and operating expenses of the Fund whether or not such
expenses am to be in whole or part capitalized or
treated as deferred expenses;
5) For the payment of any dividends declared pursuant to
the governing documents of the Company and the
applicable Fund;
6) For payment of the amount of dividends received in
respect of securities sold short; or
7) For any other proper purpose, but only upon receipt of,
in addition to Proper Instructions, a certified copy of
a resolution of the Board of Directors of the Company
signed by an officer of the Company and certified by its
Secretary or an Assistant Secretary, specifying the
amount of such payment, setting forth the purpose for
which such payment is to be made, declaring such purpose
to be a proper purpose, and naming the person or persons
to whom such payment is to be made.
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2.9 Liability for Payment in Advance of Receipt of Securities Purchased. The
Custodian shall not make payment for the purchase of domestic securities for the
account of a Fund in advance of receipt of the securities purchased in the
absence of specific written instructions from the Company to so pay in advance.
In any and every case where payment for purchase of domestic securities far the
account of a Fund is made by the Custodian in advance of receipt of the
securities purchased in the absence of specific written instructions from the
Company to so pay in advance, the Custodian shall be absolutely liable to the
Company (for the account of the Fund) for such securities to the same extent as
if the securities had been received by the Custodian.
2.10 Payments for Repurchases or Redemptions of Shares of a Fund. From such
funds as may be available for the purpose but subject to the limitations of the
Articles of Incorporation or Bylaws and any applicable votes of the Board of
Directors of the Company, the Custodian shall, upon receipt of instructions from
the Transfer Agent, make funds available for payment to holders of Shares who
have delivered to the Transfer Agent a request for redemption or repurchase of
their Shares. In connection with the redemption or repurchase of Shares of a
Fund, the Custodian is authorized upon receipt of instructions from the Transfer
Agent to wire funds to or through a commercial bank designated by the redeeming
shareholders. In connection with the redemption or repurchase of Shares of a
Fund, the Custodian shall honor checks drawn on the Custodian by a holder of
Shares, which checks have been furnished by the Company to the holder of Shares,
when presented to the Custodian in accordance with such procedures and controls
as are mutually agreed upon from time to time between the Company and the
Custodian.
2.11 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust company
which is itself qualified under the Investment Company Act of 1940 to act as a
custodian as its agent to carry out such of the provisions of this Article 2 as
the Custodian may from time to time direct; provided, however, that the
appointment of any agent shall not relieve the Custodian of any of its
responsibilities or liabilities hereunder.
2.12 Deposit of Fund Assets in Securities System. The Custodian may deposit
and/or maintain domestic securities owned by any Fund in a clearing agency
registered with the Securities and Exchange Commission under Section 17A of the
Exchange Act, which acts as a securities depository, or in a Federal Reserve
Bank, as Custodian may select, and to permit such deposited Assets to be
registered in the name of Custodian or Custodian's agent or nominee on the
records of such Federal Reserve Bank or such registered clearing agency or the
nominee of either (collectively referred to herein as "Securities System") in
accordance with applicable Federal Reserve Board and Securities and Exchange
Commission rules and regulations, if any, and subject to the following
provisions:
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<PAGE>
1) The Custodian may keep domestic securities of a Fund in
a Securities System provided that such securities are
represented in an account ("Account") of the Custodian
in the Securities System which shall not include any
assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
2) The records of the Custodian with respect to domestic
securities of a Fund which are maintained in a
Securities System shall identify by book-entry those
securities belonging to such Fund;
3) The Custodian shall pay for domestic securities
purchased for the account of a Fund upon (i) the
simultaneous receipt of advice from the Securities
System that such securities have been transferred to the
Account, and (ii) the making of an entry on the records
of the Custodian to reflect such payment and transfer
for the account of the Fund. The Custodian shall
transfer domestic securities sold for the account of a
Fund upon (i) the simultaneous receipt of advice from
the Securities System that payment for such securities
has been transferred to the Account, and (ii) the making
of an entry on the records of the Custodian to reflect
such transfer and payment for the account of the Fund.
Copies of all advises from the Securities System of
transfers of securities for the account of a Fund shall
identify the Fund, be maintained for the Fund by the
Custodian and be provided to the Company at its request.
Upon request, the Custodian shall furnish the Company
confirmation of each transfer to or from the account of
a Fund in the form of a written advice or notice and
shall furnish to the Company copies of daily transaction
sheets reflecting each day's transactions in the
Securities System for the account of each Fund.
4) The Custodian shall provide the Company with any report
obtained by the Custodian on the Securities System's
accounting system, internal accounting control and
procedures for safeguarding securities deposited in the
Securities System;
5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 16
hereof;
6) Anything to the contrary in this Contract
notwithstanding, the Custodian shall be liable to the
Company (for the account of each Fund) for any loss or
damage to the applicable Fund(s) resulting from use of
the Securities System by reason of any negligence,
misfeasance or misconduct of the Custodian or any of its
agents or of any of its or their employees or from
failure of the Custodian or any such agent or employee
to enforce effectively such rights as it may have
against the Securities System; at the election of the
Company, it shall be entitled to be subrogated to the
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<PAGE>
rights of the Custodian with respect to any claim
against the Securities System or any other person which
the Custodian may have as a consequence of any such loss
or damage if and to the extent that the applicable Funds
have not been made whole for any such loss or damage.
2.13 Segregated Account. The Custodian shall upon receipt of Proper Instructions
establish and maintain a segregated account or accounts for and on behalf of
each Fund, into which account or accounts may be transferred cash and/or
securities, including securities maintained in an account by the Custodian
pursuant to Section 2.12 hereof, (i) in accordance with the provisions of any
agreement among the Company, the Custodian and a broker-dealer registered under
the Exchange Act and a member of NASD (or any futures commission merchant
registered under the Commodity Exchange Act), relating to compliance with the
rules of The Options Clearing Corporation and of any registered national
securities exchange (or the Commodity Futures Trading Commission or any
registered contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by the
Company for the account of any Fund, (ii) for the purpose of segregating cash or
government securities in connection with options purchased, sold or written by
the Company for the account of any Fund or commodity futures contracts or
options thereon purchased or sold by the Company for the amount of any Fund,
(iii) for the purpose of compliance by the Company with the procedures required
by Investment Company Act Release No. 10666, or any subsequent release or
releases of the Securities and Exchange Commission relating to the maintenance
of segregated accounts by registered investment companies and (iv) for other
proper corporate purposes, but only, in the case of the clause (iv), upon
receipt of, in addition to Proper instructions, a certified copy of a resolution
of the Board of Directors of the Company signed by an officer of the Company and
certified by the Secretary or in Assistant Secretary, setting forth the purpose
or purposes of such segregated account and declaring such purposes to be proper
corporate purposes.
2.14 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state tax
purposes in connection with receipt of income or other payments with respect to
domestic securities of each Fund held by it and in connection with transfers of
securities.
3. Duties of the Custodian with Respect to Fund Property Held Outside of the
United States.
3.1 Appointment of Foreign Sub-Custodians. The Custodian is authorize and
instructed, either directly or indirectly (through one or more sub-custodian
U.S. banks), to employed as sub-custodians for any Fund's securities and other
assets maintained outside of the United States the foreign banking institutions,
foreign securities depositories and foreign clearing agencies designated on
Exhibit A hereto ("foreign sub-custodians"); provided, however, that
notwithstanding the contents of Exhibit A hereto, the Custodian (including any
of its agents and sub-custodians) is authorized to directly or indirectly employ
or retain any sub-custodian, depository or clearing agency only if said employed
or retained institution qualifies as either (a) an
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<PAGE>
"eligible foreign custodian", as defined in Rule 17f-5 under the Investment
Company Act of 1940, or (b) a "bank", as defined in Section 2(a)(5) of the
Investment Company Act of 1940, that in turn qualifies as an eligible domestic
custodian under Section 17(f) of the Investment Company Act of 1940; and
provided further that the Custodian shall be liable to the Company for any loss
of any Fund assets custodied with any institution directly or indirectly
employed or retained by the Custodian (or any of its agents or sub-custodians)
that does not meet the qualifications of either clause (a) of (b) of the
preceding proviso.
Upon receipt of Proper Instructions, together with a certified
resolution of the Company's Board of Directors, the Custodian and the Company
may agree to amend Schedule A hereto from time to time to designate additional
or alternative foreign banking institutions, foreign securities depositories and
foreign clearing agencies to act as sub-custodians. Each foreign banking
institution shall be authorized to deposit securities in foreign securities
depositories and foreign clearing agencies authorized pursuant to Rule 17f-5
under the Investment Company Act of 1940. Upon receipt of Proper Instructions
from the Company the Custodian shall promptly cease the employment of any one or
more of such sub-custodians for maintaining custody of the assets of the
applicable Fund(s).
3.2 Assets to be Held. The Custodian shall limit the securities and other assets
maintained in the custody of the foreign sub-custodian to: (a) "foreign
securities", as defined in paragraph (c)(1) of Rule 17f-5 under the Investment
Company Act of 1940, and (b) cash and cash equivalents in such amounts as the
Custodian or the Company may determine to be reasonably necessary to effect the
foreign securities transactions of the applicable Fund(s).
3.3 Segregation of Securities. The Custodian shall identify on its books as
belonging to the Company for the account of one or more of the Fund(s), the
foreign securities of each such Fund held by each foreign sub-custodian. Each
agreement pursuant to which the Custodian or its duly appointed U.S.
sub-custodian employs a foreign banking institution shall require that such
institution establish a custody account for the Custodian (or its U.S.
sub-custodian, as the case may be) on behalf of its customers and physically
segregate in that account securities and other assets of the Custodian's
customers, and, in the event that such institution deposits a Fund's securities
in a foreign securities depository, the sub-custodian shall identify on its
books as belonging to the Custodian (or its U.S. sub-custodian, as the case may
be), as agent for the Custodian's customers, the securities so deposited (all
collectively referred to as the "Account").
3.4 Agreement with Foreign Banking Institution. Each agreement with a foreign
banking institution shall provide that: (a) each Fund's assets will not be
subject to any right, charge, security interest, lien or claim or any kind in
favor of the foreign banking institution or its creditors, except a claim of
payment for their safe custody or administration; (b) beneficial ownership for
each Fund's assets will be freely transferable without the payment of money or
value other sum for custody or administration, which may include payment of
stamp duties or government taxes; (c) adequate records will be maintained
identifying the assets as belonging to the customers of Custodian; (d) officers
of or auditors employed by, or other representatives of
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<PAGE>
the Custodian, including independent public accountants for each Fund, will be
given access to the books and records of the foreign banking institution
relating to its actions given under its agreement with the Custodian or shall be
given confirmation of the contents of such books and records; and (e) assets of
each Fund held by the foreign sub-custodian will be subject only to the
instructions of the Company, the Custodian or their agents.
3.5 Access of Independent Accountants of the Company. Upon request of the
Company, the Custodian will use its best efforts to arrange for the independent
accountants of the Company to be afforded access to the books ad records of any
foreign banking institution employed as a foreign sub-custodian insofar as such
books and records relate to the performance of such foreign banking institutions
under its agreement with the Custodian (or its U.S. sub-custodian, as the case
may be).
3.6 Reports by Custodian. The Custodian will supply to the Company from time to
time, as mutually agreed upon, statements in respect of the securities and other
assets of each Fund held by foreign sub-custodians, including but not limited to
an identification of entities having possession of each applicable Fund's
securities and other assets and advices or notifications of any transfers of
securities to or from each custodial account maintained by a foreign
sub-custodian for the Custodian on behalf of each applicable Fund indicating, as
to securities acquired for the Fund, the identity of the entity having physical
possession of such securities.
3.7 Foreign Securities Transactions.
1) Upon receipt of Proper Instruction, which may be
continuing instructions when deemed appropriate by the
parties, the Custodian shall make or cause its foreign
sub-custodian to transfer, exchange or deliver foreign
securities owned by the Company for the account of a
Fund, but except to the extent explicitly provided
herein only in any of the cases specified in Section
2.2.
2) Upon receipt of Proper Instructions, which may be
continuing instructions when deemed appropriate by the
parties, the Custodian shall pay out or cause its
foreign sub-custodian to pay out monies of a Fund, but
except to the extent explicitly provided herein only in
any of the cases specified in Section 2.8.
3) Settlement and payment for securities received for the
account of a Fund and delivery of securities maintained
for the account of a Fund may, upon receipt of Proper
Instructions, be effected in accordance with the
customary or established securities trading or
securities processing practices and procedures in the
jurisdiction or market in which the transaction occurs,
including, without limitation, delivering securities to
the purchaser thereof or to a dealer therefor (or an
agent for such purchaser or dealer) against a receipt
with the expectation of receiving later payment for such
securities from such purchaser or dealer.
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<PAGE>
4) With respect to any transaction involving foreign
securities, the Custodian or any sub-custodian in its
discretion may case a Fund's account to be credited on
either the contractual settlement date or the actual
settlement date with the proceeds of any sale or
exchange of foreign securities from the account of the
applicable Fund and to be debited on either the
contractual settlement date or the actual settlement
date for the cost of foreign securities purchased or
acquired for such Fund according to Custodian's then
current internal policies and procedures pertaining to
securities settlement, which policies and procedures may
change from time to time. Custodian shall advise the
Company of any changes to such policies and procedures.
The Custodian may reverse any such credit or debit made
on the contractual settlement date if the transaction
with respect to which such credit or debit was made
fails to settle within a reasonable period, determined
by Custodian in its reasonable discretion, after the
contractual settlement date except that if any foreign
securities delivered pursuant to this section are
returned by the recipient thereof, the Custodian may
cause any such credits and debits to be reversed at any
time.
5) Securities maintained in the custody of a foreign
sub-custodian may be maintained in the name of such
entity's nominee to the same extent as set forth in
Section 2.3 of this Contract and the Fund agrees to hold
any such nominee harmless from any liability as a holder
of record of such securities.
6) Until the Custodian receives written instructions to the
contrary the Custodian shall, or shall cause the
sub-custodian to collect all interest and dividends paid
on securities held in each applicable Fund's account,
unless such payment is in default. Unless otherwise
instructed, the Custodian shall convert interest,
dividends and principal received with respect to
securities in a Fund's account into United States
dollars and the Custodian shall perform foreign exchange
contracts for the conversion of United States dollars to
foreign currencies for the settlement of trades whenever
it is practicable to do so through customary banking
channels. Customary banking channels may vary based upon
industry practice in each jurisdiction, and shall
include the banking facilities of the Custodian's
affiliates, in accordance with such affiliate's then
prevailing internal policy on funds repatriation. All
risk and expense incident to such foreign collection and
conversions is the responsibility of each applicable
Fund's account, and Custodian shall have no
responsibility for fluctuation in exchange rates
affecting collections or conversions.
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<PAGE>
3.8 Foreign Securities Lending. Notwithstanding any other provisions contained
in this Contract, the Custodian and any sub-custodian shall deliver and receive
securities loaned or returned in connection with securities lending transactions
only upon and in accordance with Proper Instructions; provided, if the Custodian
is not the lending agent in connection with such securities lending, then
neither the Custodian or any sub-custodian shall undertake or otherwise be
responsible for:
(i) marking to market values for such loaned securities.
(ii) collection of dividends, interest or other disbursements
or distributions made with respect to such loaned
securities
(iii) receipt of corporate action notices, communications,
proxies or instruments with respect to such loaned
securities, and
(iv) custody, safekeeping, valuation or any other actions or
services with respect to any collateral securing any
such securities lending transactions.
In the event that the Custodian is the applicable Fund's lending
agent in connection with a specific securities loan, the Custodian shall
undertake to perform all of the above duties with regard to such loan, except
that the Company shall not receive, nor be enabled to vote, proxies in
connection with such loaned security.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the
Custodian (or its U.S. sub-custodian bank, as applicable) employs a foreign
banking institution as a foreign sub-custodian shall require the institution to
exercise reasonable care in the performance of its duties and to indemnify, and
hold harmless, the Custodian and Custodian's customers from and against any
loss, damage, cost, expense, liability or claim arising out of such
sub-custodian's negligence, fraud, bad faith, willful misconduct or reckless
disregard of its duties. At the election of the Company, it shall be entitled to
be subrogated to the right of the Custodian with respect to any claims against
the Custodian's U.S. sub-custodian bank (if any) or a foreign banking
institution as a consequence of any such loss, damage, cost, expense, liability
or claim if and to the extent that the Company has not been made whole for any
such loss, damage, cost, expense, liability or claim.
3.10 Monitoring Responsibilities. The Custodian shall furnish annually to the
Company information concerning the foreign sub-custodians employed by the
Custodian (or its U.S. sub-custodian bank, as applicable). Such information
shall be similar in kind and scope to that furnished to the Company in
connection with the initial approval of this Contract (and any contracts with
U.S. and foreign sub-custodians entered into pursuant hereto). In addition, the
Custodian will promptly inform the Company in the event that the Custodian
learns of a material adverse change in the financial condition of a foreign
sub-custodian or is notified by the Custodian's U.S. sub-custodian bank (if any)
or a foreign banking institution employed as foreign
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<PAGE>
sub-custodian that there appears to be a substantial likelihood that its
shareholders' equity will decline below $200 million (United States dollars or
the equivalent thereof) or that its shareholders' equity has declined below $200
million (in each case computed in accordance with generally accepted United
States accounting principles).
3.11 Branches of United States Banks. Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of any Fund's
assets maintained in a foreign branch of a banking institution which is a "bank"
as defined by Section 2(a)(5) of the Investment Company Act of 1940 which meets
the qualification set forth in Section 26(a) of said Act. The appointment of any
such branch as a sub-custodian shall be governed by Article 1 of this Contract.
3.12 Expropriation Insurance. The Custodian represents that it does not intend
to obtain any insurance for the benefit of the Company or any Fund which
protects the imposition of exchange control restrictions or the transfer from
any foreign jurisdiction of the of sale of any securities or against
confiscation, expropriation or nationalization of any securities or the assets,
of the issuer of such securities is organized or in which securities am held for
safekeeping either by Custodian or any sub custodians in such country. The
Custodian represents that its understanding of the position of the Staff of the
Securities and Exchange Commission is that any investment company investing in
securities of foreign issuers his the responsibility for reviewing the
possibility of the imposition of exchange control restrictions which would
affect the liquidity of such investment company's assets and the possibility of
exposure to: political risk, including the appropriateness of insuring against
such risk.
4. Proxies. The Custodian shall, with respect to the securities held hereunder,
cause to be promptly executed by the registered holder of such securities, if
the securities are registered otherwise than in the name of the Company or a
nominee of the Company, all proxies, without indication of the manner in which
such proxies are to be voted, and shall promptly deliver to the Company such
proxies, all proxy soliciting materials and all notices relating to such
securities.
5. Communications Relating to Fund Portfolio Securities. The Custodian shall
transmit promptly to the Company all written information (including, without
limitation, dependency of calls and maturities of securities and expirations of
rights in connection therewith and notices of exercise of call and put options
written by the Fund and the maturity of futures contracts purchased or sold by
the Company) received by the Custodian from issuers of the securities being held
for each Fund. With respect to tender or exchange offers, the Custodian shall
transmit promptly to the Company all written information received by the
Custodian from issuers of the securities whose tender or exchange is sought and
from the party (or his agents) making the tender or exchange offer. If the
Company desires to take action with respect to any tender offer, exchange offer
or any other similar transaction, the Company shall notify the Custodian at
least three business days prior to the date on which the Custodian is to take
such action.
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<PAGE>
6. Proper Instructions. Proper Instructions as used in this Contract mean a
writing signed or initiated by one or move person or persons as the Board of
Directors of the Company shall have from time to time authorized. Each such
writing shall set forth the specific transaction or type of transaction
involved, including a specific statement of the purpose for which such action is
requested. Oral instructions will be considered Proper Instructions if the
Custodian reasonably believes them to have been given by a person authorized to
give such instructions with respect to the transaction involved. The Company
shall cause all oral instructions to be confirmed in writing. Upon receipt of a
certificate of the Secretary or Assistant Secretary as to the authorization by
the Board of Directors of the Company accompanied by a detailed description of
procedures approved by the Board of Directors, Proper Instructions may include
communications effected directly between election-mechanical or electronic
devices provided that the Board of Directors and the Custodian are satisfied
that such procedures afford adequate safeguards for each Fund's assets.
7. Actions Permitted Without Express Authority. The Custodian may in its
discretion, without express authority from the Company:
1) Make payments to itself or others for minor expenses of
handling securities provided that all such payments
shall be accounted for to the Company;
2) Surrender securities in temporary form for securities in
definitive form;
3) Endorse for collection, in the names of the applicable
Fund, checks, drafts and other negotiable instruments;
and
4) In general, attend to all non-discretionary details in
connection with the sale, exchange, substitution,
purchase, transfer and other dealings with the
securities and property of the Company except as
otherwise directed by the Board of Directors of the
Company.
8. Evidence of Authority. The Custodian shall be protected in acting upon any
instructions, notice, request, consent, certificate or other instrument of paper
believed by it to be genuine and to have been properly executed by or on behalf
of the Company. The Custodian may, receive and accept a certified copy of a vote
of the Board of Directors of the Company as conclusive evidence (a) of the
authority of any person to act in accordance with such vote or (b) or any
determination or of any action duly made or taken by the Board of Directors as
described in such vote, and such vote may be considered as in full force and
effect until receipt by the Custodian of written notice to the contrary.
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<PAGE>
9. Class Actions. The Custodian shall transmit promptly to the Company all
notices or other communications received by it in connection with any class
action lawsuit relating to securities currently or previously held for one or
more of the Funds. Upon being directed by the Company to do so, the Custodian
shall furnish to the Company any and all written materials which establish the
holding/ownership, amount held/owned, and period of holding/ownership of the
securities in question.
10. Records. The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Company and each Fund under the Investment Company Act of
1940, with particular attention to Section 31 thereof and Rule 3la-1 and 31a-2
thereunder. The Custodian shall also maintain records as directed by the Company
in connection with applicable federal and state tax laws and any other law or
administrative rules or procedures which may be applicable to the Company and
the Funds. With respect to securities and cash deposited with a Securities
System, a sub-custodian or an agent of the Custodian, the Custodian shall
identify on its books all such securities and cash as belonging to the Company
for the account of the applicable Fund(s). All such records shall be the
property of the Company and shall at all times during the regular business hours
of the Custodian be open for inspection by duly authority officers, employees or
agents of the Company. Such records shall be made available to the Company for
review by employees and agents of the Securities and Exchange Commission. The
Custodian shall furnish to the Company, and its agents as directed by the
Company, as of the close of business on the last day of each month a statement
showing all transactions and entries for the account of the Company during that
month, and all holdings as of month-end.
All records so maintained in connection with the performance of its
duties under this Agreement shall remain the property of the Company and, in the
event of termination of this Agreement, shall be delivered to the Company.
Subsequent to such delivery, and surviving the termination of this Agreement,
the Company shall provide the Custodian access to examine and photocopy such
records as the Custodian, in its discretion, deems necessary, for so long as
such records are retained by the Company.
11. Opinion of Company's Independent Accountant. The Custodian shall take all
reasonable action, as the Company may from time to time request, to obtain from
year to year favorable opinions from the Company's independent accountants with
respect to its activities hereunder in connection with the preparation of the
Company's Form N-lA and Form N-SAR or other reports to the Securities and
Exchange Commission and with respect to any other requirements of such
Commission.
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<PAGE>
12. Reports to Company by Independent Public Accountants. The Custodian shall
provide the Company, at such times as the Company may reasonably require, with
reports by independent public accountants on the accounting system, internal
accounting control and procedures for safeguarding securities, futures contracts
and options on futures contracts, including securities deposited and/or
maintained in a Securities System, relating to the services provided by the
Custodian under this Contract; such reports shall be of sufficient scope, and in
sufficient detail, as may reasonably be required by the Company to provide
reasonable assurance that any material inadequacies would be disclosed by such
examination, and, if them are no such inadequacies, the reports shall so state.
13. Compensation of Custodian. For performance by the Custodian pursuant to this
Agreement, the Company, out of the assets of each applicable Fund, agrees to pay
the Custodian annual asset fees and supplemental charges as set out in Exhibit
B. Fees and supplemental charges may be changed from time to time subject to
mutual written agreement between the Company and the Custodian.
14. Responsibility of Custodian. So long as and to the extent that it is in the
exercise of reasonable care, the Custodian shall not be responsible for the
title, validity or genuineness of any property or evidence of title thereto
received by it or delivered by it pursuant to this Contract and shall be held
harmless in acting upon any notice, request, consent, certificate or other
instrument reasonably believed by it to be genuine and to be signed by the
proper party or parties. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Contract, but shall be
kept indemnified by and shall be without liability to the Company or any Fund
for any action taken or omitted by it in good faith and without negligence. It
shall be entitled to rely on and may act upon advice of counsel of, or
reasonably acceptable to, the Company on all matters, and shall be without
liability for any action reasonably taken or omitted pursuant to such advice.
Notwithstanding the foregoing, the responsibility of the Custodian with respect
to redemptions effected by check shall be in accordance with a separate
Agreement entered into between the Custodian and the Company.
If the Company requires the Custodian to take any action with
respect to securities, which action involves the payment of money or which
action may, in the reasonable opinion of the Custodian, result in the Custodian
or its nominee assigned to the Company being liable for the payment of money or
incurring liability of some other form, the Company, as a prerequisite to
requiring the Custodian to take such action, shall provide indemnity to the
Custodian in the amount and form reasonably satisfactory to it.
If the Company requires the Custodian to advance cash or securities
for any purpose or in the event that the Custodian or its nominee shall incur or
be assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of a Fund shall be
security
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therefor and should the Company fail to repay the Custodian promptly with
respect to any Fund, the Custodian shall be entitled to utilize available cash
and to dispose of assets to the extent necessary to obtain reimbursement.
The Custodian shall not be liable for any loss or damage to the
Company or any Fund resulting from participation in a securities depository
unless such loss or damage arises by reason of any negligence, misfeasance, or
willful misconduct of officers or employees of the Custodian, or from its
failure to enforce effectively such rights as it may have against any securities
depository or from use of a sub-custodian or agent. Anything in this Contract to
the contrary notwithstanding, the Custodian shall exercise, in the performance
of its obligations undertaken or reasonably assumed with respect to this
Agreement, reasonable care, for which the Custodian shall be responsible to the
same extent as if it were performing such duties directly. The Custodian shall
be responsible for the securities and cash held by or deposited with any
sub-custodian or agent to the same extent as if such securities and cash were
directly held by or deposited with the Custodian. The Custodian hereby agrees
that it shall indemnify and hold the Company and each applicable Fund harmless
from and against any loss which shall occur as a result of the failure of a
foreign sub-custodian holding the securities and cash to provide a level of
safeguards for maintaining any Fund's securities and cash not materially
different from that provided by a United States custodian holding such
securities and cash in the United States.
The Custodian agrees to indemnify and hold the Company and each of
the Funds harmless for any and all loss, liability and expense, including
reasonable legal fees and expenses, arising out of the Custodian's own
negligence or willful misconduct or that of its officers, agents, sub-custodians
or employees in the performance of the Custodian's duties and obligations under
this Contract.
15. Effective Period, Termination and Amendment. The Contract shall become
effective as of its execution, shall continue in full force and effect until
terminated as hereinafter provided, may be amended at any time by mutual
agreement of the parties hereto and may be terminated by either party by an
instrument in writing delivered or mailed, postage prepaid to the other party,
such termination to take effect not sooner than sixty (60) days after the date
of such delivery or mailing; provided, however, that the Custodian shall not act
under Section 2.12 hereof in the absence of receipt of an initial certificate of
the Secretary or an Assistant Secretary that the Board of Directors of the
Company has approved the initial use of a particular Securities System and the
receipt of an annual certificate of the Secretary or an Assistant Secretary that
the Board of Directors has reviewed the use by each Fund of such Securities
System, as required in each case by Rule 17f-4 under the Investment Company Act
of 1940, provided further, however, that the Company shall not amend or
terminate this Contract in contravention of any applicable federal or state
regulations, or any provision of its Articles of Incorporation, and further
provided, that the Company may at any time by action of its Board of Directors,
with respect to any Fund (i) substitute another bank or trust company for the
Custodian by giving notice as described above to the Custodian, or (ii)
immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the Currency or
upon the
-18-
<PAGE>
happening of a like event at the direction of an appropriate regulatory agency
or court of competent jurisdiction.
Upon termination of the Contract, the Company on behalf of each Fund
shall pay to the Custodian such compensation as may be due as of the date of
such termination and shall likewise reimburse the Custodian for its costs,
expenses and disbursements.
16. Successor Custodian. If a successor custodian shall be appointed by the
Board of Directors of the Company, the Custodian shall, upon termination deliver
to such successor custodian at the office of the Custodian, duly endorsed and in
the form for transfer to an account of the successor custodian each of the
Fund's securities held in a Securities System.
If no such successor custodian shall be appointed, the Custodian
shall in like manner, upon receipt of a certified copy of a vote of the Board of
Directors of the Company, deliver at the office of the Custodian and transfer
such securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian
or certified copy of a vote of the Board of Directors shall have been delivered
to the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940, of
its own selection, having an aggregate capital, surplus, and undivided profits,
as shown by its list published, report, of not less than $100,000,000, all
securities, funds and other properties held by the Custodian and all instruments
held by the Custodian relative thereto and all other property held by it under
this Contract and to transfer to an account of such successor custodian all of
each Fund's securities held in any Securities System. Thereafter, such bank or
trust company shall be the successor of the Custodian under and pursuant to this
Contract.
In the event that securities, funds and other properties remain in
the possession of the Custodian after the date of termination hereof owing to
failure of the Company to procure the certified copy of the vote referred to or
of the Board of Directors to appoint a successor custodian, the Custodian shall
be entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
17. Interpretive and Additional Provision. In connection with the operation of
this Contract, the Custodian and the Company may from time to time agree on such
provisions interpretive of or in addition to the provisions of this Contract as
may in their joint opinion be consistent with the general tenor of this
Contract. Any such interpretive or additional provisions shall be in a writing
signed by both parties and shall be annexed hereto, provided that no such
interpretive or additional provisions shall contravene any applicable federal or
state regulations or any provision of the Articles of Incorporation or Bylaws of
the Company. No interpretive or additional
-19-
<PAGE>
provisions made as provided in the preceding sentence shall be deemed to be an
amendment of this Contract.
18. Minnesota Law to Apply. This Contract shall be construed and the provisions
thereof interpreted under and in accordance with laws of the State of Minnesota.
19. Prior Contracts. This Contract supersedes and terminates, as of the date
hereof, all prior contracts between the Company and the Custodian relating to
the custody of each Fund's assets. This Contract shall not be assignable by any
party hereto; provided however, that any entity into which the Company or the
Custodian, as the case may be, may be merged or converted or with which it may
be consolidated, or any entity succeeding to all or substantially all of the
business of the Company or the custody business of the Custodian, shall succeed
to the respective rights and shall assume the respective duties of the Company
or the Custodian, as the case may be, hereunder.
20. General. Nothing expressed or mentioned in or to be implied from any
provision of this Contract is intended to, or shall be construed to give any
person or corporation other than the parties hereto, any legal or equitable
right, remedy or claim under or in rasped to this Contract, or any covenant,
condition and provision herein contained, this Contract and all of the
covenants, conditions and provisions hereof being intended to be and being the
sole and exclusive benefit of the parties hereto and their respective successors
and assigns.
IN WITNESS WHEREOF, each of the parties has caused this instrument
to be executed in its name and behalf by its duly authorized officers as of the
day and year first above written.
IAI Retirement Funds, Inc. Norwest Bank Minnesota, N.A.
By /s/ Richard E. Struthers By /s/ Theresa G. Banks
------------------------------ ------------------------------
Richard E. Struthers Theresa G. Banks
ATTEST ATTEST
By /s/ William C. Joas By /s/ Susan J. Skonnord
------------------------------ ------------------------------
William C. Joas Susan J. Skonnord
-20-
<PAGE>
EXHIBIT A
IAI MUTUAL FUNDS
(Effective November 3, 1993)
MORGAN STANLEY TRUST COMPANY
GLOBAL CUSTODY NETWORK
<TABLE>
<CAPTION>
COUNTRY NAME OF BANK/DEPOSITORY RULE 17f-5
------- (date of sub-custodian agreement with Morgan Stanley) BASIS OF
----------------------------------------------------- ELIGIBILITY
-----------
<S> <C> <C>
Argentina Citibank, N.A. - Buenos Aires Branch (8/28/91, signed 4/9/92) (1)
Caja de Valores (5)
Australia Australia and New Zealand Banking Group Limited (10/23/90) (2)
Clearing House Electronic Subregister System (5)
Austria Euroclear Clearance System (n/a) Wertpapiersammelbank (4)
(5)
Belgium Banque Bruxelles Lambert (7/20/92) (2)
Caisse Interprofessionnelle de Depot et de Virements de Titres (5)
Brazil Banco de Boston (1/7/93) (2)
Bolsa de Valores de Sao Paulo (5)
Bolsa de Valores de Rio de Janeiro (5)
Canada Toronto Dominion Bank (1/29/91) (2)
The Canadian Depository for Securities (5)
Chile Citibank, N-A. - Santiago Branch (7/8/92) (1)
Denmark Euroclear Clearance System (n/a) (4)
Vaerdipapircentralen (5)
Finland Euroclear Clearance System (n/a) (4)
France Banque Indosuez (7/25/91) (2)
Societe Interprofessionelle la Compensacion des Valuer Mobilieres (5)
Societe de Compensacion des Marches Conclitionnels (5)
Chambre de Compensation des Instruments Financiers de Paris (5)
Germany Berliner Handels-und Frankfurter Bank (11/1/91) (2)
Deutscher Kassenverein AG (5)
Greece Citibank, N.A. - Athens Branch (4/9/92) (1)
Central Clearing Office of Athens Stock Exchange (5)
Hong Kong Hong Kong and Shanghai Banking Corporation Ltd.
(1/20/88, amended 5/26/93) (2)
Hong Kong Securities Clearing Company (5)
</TABLE>
A-1
<PAGE>
<TABLE>
<S> <C> <C>
India Hong Kong and Shanghai Banking Corporation Ltd.
(1 /20/88, amended 5/26/93) (2)
Indonesia Hong Kong and Shanghai Banking Corporation Ltd.
1/20/88, amended 5/26/93) (2)
Ireland Allied Irish Bank (7/4/91) (2)
Stock Exchange Talisman System (5)
Italy Barclays Bank PLC (4/18/91, supplemented 5/31/91) (2)
Monte Titoli S.p.A. (5)
Japan The Mitsubishi Bank Limited (5/25/88) (2)
Japan Securities Depository Center (5)
Korea Standard Chartered Bank (1/2/92) (2)
The Korean Central Depository (5)
Malaysia Oversea Chinese Banking Corporation (4/12/88,
supplemented 5/19/88 and 7/18/88) (2)
The Malaysian Central Depository (5)
Mexico Citibank, N.A. - Mexico City Branch (8/28/91, signed 4/9/92) (1)
Instituto para el Deposito de Valores (S.D. Indeval) (5)
Netherlands ABN Amro Bank (3/89) (2)
Nederlands Centraal Institut voor Giraal Effectenverkeer.B.V. (NECIGEF) (5)
New Zealand Bank of New Zealand (7/11/89) (2)
Austraclear New Zealand System (5)
Norway Euroclear Clearance System (n/a) (4)
Verdipapirsentralen (5)
Phillipines Hong Kong and Shanghai Banking Corporation Ltd.
(1/20/88, amended 5/26/93) (2)
Portugal Banco Comercial Portugues (10/l/89) (2)
Lisbon Stock Exchange (SICOB system) (5)
Oporto Stock Exchange (CAMBIUM system) (5)
Singapore Oversea Chinese Banking Corporation (4/12/88, supplemented 5/19/88 and 7/18/88) (2)
Central Depository Pte Ltd (5)
Spain Banco Santader (3/22/89) (2)
Servicio de Compensacion y Liquidacion de Valores (5)
Sweden Euroclear Clearance System (n/a) (4)
Vardepapperscentralen (5)
Switzerland Morgan Guaranty Trust Company of New York-Zurich Branch (10/16/91) (1)
Schweizerische Effekten Ciro A.G. (SEGA) (5)
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C> <C>
Taiwan Hong Kong and Shanghai Banking Corporation Ltd. (1/20/88, amended 5/26/93) (2)
Taiwan Securities Depository Co. (5)
Thailand Standard Chartered Bank (1/29/90) (2)
Share Depository Center (5)
Turkey Citibank, N.A- - Istanbul Branch (8/28/91, signed 4/9/92) (1)
United Kingdom Barclays Bank PLC (9/92) (2)
Stock Exchange Talisman System (5)
Uruguay Citibank, N.A. - Montevideo Branch (8/28/91, signed 4/9/92) (1)
Venezuela Citibank, N.A- - Caracas Branch (8/28/91, signed 4/9/92) (1)
</TABLE>
(1) Foreign branch of a United States bank, which qualifies as an
eligible domestic custodian under Section 17(f) of the Investment
Company Act of 1940.
(2) A bank or trust company that has shareholders' equity in excess of
$200 million (US) and is regulated as a bank or trust company by the
foreign country's government.
(3) A majority-owned direct or indirect subsidiary of a qualified U. S.
Bank or bank holding company that is incorporated or organized under
the laws of a country other than the United States and that has
shareholder equity in excess of $100 million (US).
(4) A securities depository or clearing agency which operates a
trans-national system for the central handling of securities or
equivalent book entries.
(5) A central securities depository or clearing agency which operates
the central system for the handling of securities or book-entries in
that country.
A-3
<PAGE>
Exhibit B
(as amended through August 18, 1993)
TO
CUSTODIAN AGREEMENT
BETWEEN
IAI Investment Funds I, Inc.
AND
NORWEST BANK MINNESOTA, N.A.
Compensation Schedule
---------------------
ANNUAL FEES Rate
Fee Per Global Market Value $0.0012
(DOMESTIC SECURITIES EXCLUDED)
Fee Per Issue Held $25.00
(GLOBAL SECURITIES EXCLUDED)
Fee Per Account $4,000.00
Norwest ACCESS (on-line cost $.50 billed to client) $3,600.00
FIRST YEAR WAIVED EXCLUDING COMMUNICATIONS COSTS
TRANSACTION FEES - DOMESTIC SECURITIES
DTC Purchase/Sale/Maturity $8.00
Fed Purchase/Sale/Maturity 10.00
New York Physical Purchase/Sale/Maturity 20.00
Commercial Paper Purchase/Maturity 20.00
Other Physical Purchase/Sale/Maturity 20.00
Options/Futures Purchase/Sale 20.00
Book Entry Deposit/Withdrawal $12.50
Book Entry Re-Registration 15.00
Physical Re-Registration 100.00
GNMA and Fed Agency Principal Payments $5.00
CMO & Private Placement Payments 15.00
Non-Trade Wire 10.00
Transfer to DDA/Check Issuance 0.00
Overnight Sweep Activity 0.00
TRANSACTION FEES - GLOBAL SECURITIES
Global Equity Transactions $50.00
Forward Currency Purchase/Sale 0.00
B-1
<PAGE>
Exhibit C
(as amended through August 18, 1993)
TO
CUSTODIAN AGREEMENT
BETWEEN
IAI Investment Funds I, Inc.
AND
NORWEST BANK MINNESOTA, NA.
SETTLEMENT AND INCOME PAYMENT POLICIES AND STANDARDS
----------------------------------------------------
SETTLEMENT POLICY
Norwest will:
1. Guarantee posting of all trades on contractual settlement date based
on the following standards:
a. Complete information for all 5-day settlements
(Depository Trust Company-DTC and physical settlements)
is received by Trade Date + 1.
b. Complete information for trades settling through
Participant Trust Company (PTC)is received by Trade Date
+ 1.
c. Complete information for FEDERAL BOOK ENTRY trades is
received by 11:00 am on Settlement Date for same day
settlement and by 4:00 pm on Trade Date for next day
settlement.
d. Complete information for International trades is
received by 11:00 am on Trade Date.
e. For physical trades settling same day or next day in New
York or Minneapolis, complete trade information is
received by:
1. 9:00 am on Settlement Date for sales
settling in Minneapolis.
2. 10:30 am on Settlement Date for sales
settling in New York.
3. 11:00 am on Settlement Date for all
purchases.
2. Process any trade information which is received AFTER the Norwest
standard on a BEST EFFORTS basis.
3. Make efforts to contact the party with investment authority to
obtain direction for all ID confirms not affirmed by Trade Date + 3.
C-1
<PAGE>
4. Guarantee posting on contractual settlement date for the sale of any
security which is on loan through Norwest's Securities Lending
Program if trade information is received BY.2:00 PM ON TRADE DATE.
5. Not be responsible for posting trades on Settlement Date if trade
information is incomplete, incorrect, or late.
6. Not be responsible for posting a sale on Settlement Date if the
security is not in good deliverable form on Trade Date. This may
include, but is not restricted to, the following types of
securities:
a. Restricted Stock
b. Private Placements
c. Limited Partnerships
d. Closely Held Issues
7. Make efforts to obtain written authorization for all trades which
are not directly affirmed to DTC by the client.
8. Retain the right to reverse the posting of any sale if the
underlying security was involved in a full or partial call and the
sale was contracted after the call publication date.
INCOME PAYMENT POLICY
Norwest will credit income in Fed funds and cash becomes available for
investment immediately.
<TABLE>
<CAPTION>
Principal
Security Type Dividends/Interest Maturities Payments
- ------------- ------------------ ---------- --------
<S> <C> <C> <C>
Bond Calls, Full and Partial Calls Receipt* Receipt
Equities, Common & Preferred Payable Date N/A N/A
Bonds, Corporate & Municipals Payable Date Payable Date Receipt
Treasuries Payable Date Payable Date Receipt
GNMA I & II Payable Date N/A Payable + 2**
Fed Agencies Payable Date Payable Date Receipt
Other Govt Agencies Payable Date Payable Date Receipt
Commercial Paper Payable Date Payable Date N/A
</TABLE>
C-2
<PAGE>
<TABLE>
<S> <C> <C> <C>
Repurchase Agreements Payable Date Payable Date N/A
Mutual Funds Receipt N/A N/A
Unit Investment Trusts (UITs) Receipt N/A Receipt
Global Securities Receipt Receipt N/A
Certificates of Deposit Receipt Payable Date N/A
Passbook, Time Deposits Receipt Payable Date N/A
</TABLE>
* After 8/1/93 with the implementation of the AMS trust system, bond
calls will be paid on Payable Date in Fed Funds credit.
** After 8/1/93 with the implementation of the AMS trust system, GNMA
principal payments will be paid on Payable Date + 1 in Fed Funds
credit.
C-3
EXHIBIT(h)
ADMINISTRATIVE AGREEMENT
THIS AGREEMENT, dated as of the 3rd day of November, 1993, by and
between IAI Retirement Funds, Inc., a Minnesota corporation (the "Corporation"),
on behalf of each portfolio represented by a series of shares of common stock of
the Corporation (the "Portfolios") set forth in Exhibit A hereto, as
supplemented from time to time, and Investment Advisers, Inc. ("Advisers"), a
Delaware corporation:
WITNESSETH THAT:
WHEREAS, the Corporation, on behalf of each Portfolio, desires to
engage Advisers, and Advisers has agreed to provide such administrative,
dividend disbursing, transfer, and accounting services as may be required by
each Portfolio pursuant to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein, the parties hereto, intending to be legally bound,
do hereby agree as follows:
Section 1. Appointment. The Corporation hereby appoints Advisers as
the administrative agent, dividend disbursing agent, transfer agent, redemption
agent and accounting services agent for each Portfolio, and Advisers hereby
accepts such appointments and agrees to act in such capacities upon the terms
and conditions set forth in this Agreement.
ACCOUNTING SERVICES
Section 2. Required Accounts and Records. Advisers shall maintain
and keep current such accounts and records relating to the business of the
Corporation and the Portfolios as are necessary or advisable for compliance with
applicable regulations, including, without limitation, Rules 3la-1 and 3la-2
under the Investment Company Act of 1940, as amended, in such form as may be
mutually agreed to between the Corporation and Advisers.
Section 3. Required Calculations. Advisers shall perform the
calculations necessary to calculate each Portfolio's net asset value daily on
each day the Corporation is required to calculate such net asset values and in
accordance with the current Prospectus and Statement of Additional Information
of the Corporation and the Portfolios. The pricing services or other sources
from which daily price quotations on portfolio securities are to be obtained for
purposes calculating such daily net asset value shall be paid for by Advisers
and approved by the Corporation.
-1-
<PAGE>
Section 4. Periodic Reports. Advisers shall supply to the
Corporation such daily and periodic reports with respect to the Portfolios as
the Corporation is required by law, rule or regulation to maintain and,
additionally, as requested by the Corporation and agreed upon by Advisers.
Section 5. Ownership of Accounts and Reports. The accounts and
records required hereunder, in the agreed upon format, maintained by Advisers,
shall be the property of the Corporation and shall be made available to the
Corporation within a reasonable period of time upon proper demand. Advisers
shall assist the Corporation's independent auditor, or upon approval of the
Corporation, or upon demand, any regulatory body, in any requested review of the
Corporation's accounts and records, but shall be reimbursed for all expenses and
employee time invested in any such review outside of routine and normal periodic
reviews. Upon receipt from the Corporation of the necessary information, issuers
shall supply the necessary data for the Corporation's (or the Corporation's
accountant's) completion of any necessary tax returns, questionnaires, periodic
reports to shareholders and such other reports and information requests as the
Corporation and Advisers Shall agree upon from time to time.
TRANSFER AGENCY
Section 6. Share Issuances. Advisers shall make original issues of
the shares of each Portfolio in accordance with this Agreement, with such
Portfolio's current Prospectus and Statement of Additional Information and with
the instructions from the Corporation.
Section 7. Processing of Purchase Orders. Prior to the daily
determination of net asset value in accordance with each Portfolio's current
Prospectus and Statement of Additional Information, Advisers shall process all
purchase orders received since the last determination of such Portfolio's net
asset value.
Section 8. Transfer of Shares. Transfers of shares shall be
registered and new share certificates shall be issued by Advisers upon surrender
of properly endorsed outstanding Portfolio share certificates with all necessary
signature guarantees and satisfactory evidence of compliance with all applicable
laws relating to the payment or collection of taxes.
Section 9. Issuance of Replacement Certificates. Advisers may issue
new Portfolio share certificates in place of Portfolio share certificates
represented to have been lost, destroyed or stolen, upon receiving indemnity
satisfactory to Advisers and may issue new Portfolio share certificates in
exchange for, and upon surrender of, mutilated Portfolio share certificates.
-2-
<PAGE>
Section 10. Maintenance of Stock Registry Records. Advisers will
maintain stock registry records in the usual form in which it will note the
issuance, transfer and redemption of Portfolio shares and the issuance and
transfer of Portfolio share certificates, and is also authorized to maintain an
account in which it will record the Portfolio shares and fractions issued and
outstanding from time to time for which issuance of portfolio share certificates
is deferred.
Section 11. Other Transfer Agency Duties of Advisers. Advisers will,
in addition to the duties and functions above-mentioned, perform the usual
duties and functions of a stock transfer agent for a registered investment
company.
REDEMPTIONS
Section 12. Processing of Redemption Requests. Prior to the daily
determination of net asset value in accordance with each Portfolio's current
Prospectus and Statement of Additional Information, Advisers shall process all
requests from shareholders to redeem such Portfolio's shares. The proceeds of
redemption shall be remitted by Advisers in accordance with the Portfolio's
current Prospectus and Statement of Additional Information by check mailed to
the shareholder at his registered address.
DIVIDENDS
Section 13. Notice. Upon the declaration of each dividend and each
capital gains distribution with respect to each Portfolio by the Board of
Directors of the Corporation, Advisers shall process such dividends and
distributions in accordance with instructions received from the Corporation and
in accordance with the Portfolio's current Prospectus and Statement of
Additional Information and with the applicable laws.
OTHER SERVICES
Section 14. Other Services Under This Agreement. In addition to the
services as administrative agent, dividend disbursing agent, transfer agent,
redemption agent and accounting services agent, as set forth above, Advisers
will perform, for no additional compensation, other related services for the
Corporation and each Portfolio as agreed from time to time, including but not
limited to, preparation of and mailing federal tax information forms, mailing
semi-annual reports of the Portfolios, preparation of an annual list of
Portfolio shareholders, and mailing notices of Portfolio shareholders' meetings,
proxies and proxy statements.
-3-
<PAGE>
COMPENSATION
Section 15. Compensation; Allocation of Expenses. In payment for the
services to be rendered by Advisers under this Agreement, the Corporation shall
pay Advisers a monthly fee for each Portfolio within ten (10) business days
after the last day of the month in which said services were rendered equal to
the percentage of the value of the Portfolio's net assets on the last day of the
month, as set forth in Exhibit A hereto, as supplemented from time to time. This
fee shall be prorated for any fraction of a month at the commencement or
termination of this Agreement with respect to a Portfolio.
In addition to the compensation provided in this Section, each
Portfolio shall pay all its other costs and expenses not expressly assumed by
Advisers, including, without limitation. 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 materials sent to existing Portfolio shareholders,
fees paid for independent accounting and legal services, costs of printing
prospectuses for existing Portfolio shareholders, costs of registering the
Portfolio's shares, postage and insurance premiums. Except as expressly provided
herein, Advisers shall pay for the costs and expenses incurred in connection
with the rendering of services under this Agreement, including the salaries and
benefits of all necessary personnel (including overhead), the costs and expenses
of all computer hardware and software and the costs of all pricing services used
in connection with the calculations of each Portfolio's not asset value.
INSTRUCTIONS
Section 16. Authorizing Resolutions. The Corporation shall from time
to time file with Advisers with respect to each Portfolio a certified copy of
each resolution of its Board of Directors authorizing the transmittal of
instructions and specifying the person or persons authorized to give
instructions in accordance with this Agreement.
GENERAL PROVISIONS
Section 17. Indemnification. Advisers, in carrying out and
performing the terms and conditions of this Agreement, shall incur no liability
for its status hereunder or for any actions taken or omitted in good faith and
without negligence, and the Corporation, on behalf of the Portfolios, hereby
agrees to indemnify and hold Advisers harmless from any and all loss, liability
and expense, including any legal expenses, arising out of Advisers' performance
or status or any act or omission of Advisers under this Agreement other than
that incurred by Advisers' negligence or lack of good faith. Without limitation
of the foregoing:
-4-
<PAGE>
(a) Advisers may rely upon the advice of the Corporation, or of
counsel, who may be counsel for the Corporation or counsel for Advisers
and upon statements of accountants, brokers and other persons believed by
it in good faith to be expert in the matters upon which they are consulted
and for any actions taken in good faith upon such statements, Advisers
shall not be liable to any person or party; and
(b) Advisers may rely and shall be protected in acting upon any
signature, instruction, request, letter of transmittal, certificate,
opinion of counsel, statement, instrument, report, notice, consent, order,
or other paper or document believed in good faith by it to be genuine and
to have been signed, presented or authorized by the purchaser,
Corporation, or other proper party or parties.
Section 18. Interpretation: Governing Law. This Agreement shall be
subject to and interpreted in accordance with all applicable provisions of law,
including, without limitation, the Investment Company Act of 1940, as amended,
and the rules and regulations promulgated thereunder. To the extent that the
provisions herein contained conflict with any such applicable provisions of law,
the latter shall control. The laws of the State of Minnesota shall otherwise
govern the construction, validity and effect of this Agreement.
Section 19. Effective Date; Duration; Termination. The effective
date of this Agreement with respect to each Portfolio shall be the date set
forth on Exhibit A hereto, as supplemented from time to time. Wherever referred
to in this Agreement, the vote or approval of the holders of a majority of the
outstanding voting securities of a Portfolio shall mean the vote of 67% or more
of the voting securities present at a regular or special meeting of shareholders
duly called, if more than 50% of the Portfolio's outstanding securities are
present in person or by proxy or the vote of more than 50% of the Portfolio's
outstanding voting securities, whichever is the lesser.
Unless sooner terminated as hereinafter provided, this Agreement
shall continue in effect from year to year with respect to a Portfolio but only
so long as such continuance is specifically approved at least annually (1) by
the Board of Directors of the Corporation or by the vote of the holders of a
majority of the outstanding voting securities of the Portfolio, and (2) by the
vote of a majority of the directors who are not parties to this Agreement or
"interested persons" of any such party (as defined in the Investment Company Act
of 1940, as amended), cast in person at a meeting called for the purpose of
voting on such approval.
-5-
<PAGE>
This Agreement may be terminated with respect to a Portfolio at any
time without the payment of any penalty by the vote of the Board of Directors of
the Corporation or by the vote of the holders of a majority of the outstanding
voting securities of the Portfolio, or by Advisers, upon sixty (60) days'
written notice to the other party. Upon the effective termination date, subject
to payment to Advisers of all amounts due to Advisers as of said date, Advisers
shall make available to the Portfolio or its designated record keeping successor
all of the records of the Portfolio maintained under this Agreement then in
Advisers' possession.
This Agreement shall automatically terminate in the event of its
assignment (as defined by the provisions of the Investment Company Act of 1940,
as amended).
Section 20. Amendments. No material amendment to this Agreement
shall be effective until approved by Advisers and by the vote of a majority of
the Board of Directors of the Corporation who are not interested persons of
Advisers.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed by their duly authorized officers as of the day and year first above
written.
IAI RETIREMENT FUNDS, INC.
By: /s/ Richard E. Struthers
--------------------------------------
Richard E. Struthers, President
INVESTMENT ADVISERS, INC.
By: /s/Noel P. Rahn
--------------------------------------
Noel P. Rahn, Chief Executive Officer
-6-
<PAGE>
EXHIBIT A
Monthly Administrative
Fee (as a % of average
Portfolio Effective Date daily net assets)
--------- -------------- -----------------
Series A - LAI Regional Portfolio November 3, 1993 .0083
Series B - IAI Balanced Portfolio November 3, 1993 .0083
Series C - IAI Reserve Portfolio November 3, 1993 .0083
-7-
EXHIBIT 99.j
Independent Auditors' Consent
The Board of Directors
IAI Retirement Funds, Inc.:
We consent to the use of our report incorporated herein by reference and to the
reference to our Firm under the heading "FINANCIAL HIGHLIGHTS" in Part A of the
Registration Statement.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
April 30, 1999
