1933 Act Registration No. 33-16905
1940 Act Registration No. 811-5309
As filed with the Securities and Exchange Commission on May 23, 1997
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
Pre-Effective Amendment No. __ [ ]
Post-Effective Amendment No. 28 [x]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 [x]
Amendment No. 29
FIRST AMERICAN INVESTMENT FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
OAKS, PENNSYLVANIA 19456
(Address of Principal Executive Offices) (Zip Code)
(610) 254-1924
(Registrant's Telephone Number, including Area Code)
DAVID LEE
C/O SEI CORPORATION, OAKS, PENNSYLVANIA 19456
(Name and Address of Agent for Service)
COPIES TO:
Kathryn Stanton, Esq. Michael J. Radmer, Esq.
SEI Corporation James D. Alt, Esq.
Oaks, Pennsylvania 19456 Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
It is proposed that this filing shall become effective (check
appropriate box):
[ ] immediately upon filing pursuant to paragraph (b) of rule 485
[ ] on (date) pursuant to paragraph (b) of rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[x] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
Registrant has registered an indefinite number or amount of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940. A Rule 24f-2 Notice was filed with the Securities and Exchange
Commission on November 25, 1996.
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FIRST AMERICAN INVESTMENT FUNDS, INC.
POST-EFFECTIVE AMENDMENT NO. 28
CROSS REFERENCE SHEET FOR ITEMS REQUIRED BY FORM N-1A
NOTE: PART A of this Registration Statement consists of two Prospectuses, as
follows:
1. Retail Class Prospectus relating to Class A Shares of
California Intermediate Tax Free Fund and Micro Cap Value
Fund, and Class B Shares of Micro Cap Value Fund.
2. Institutional Class Prospectus relating to Class C Shares of
Oregon Intermediate Tax Free Fund, California Intermediate Tax
Free Fund, and Micro Cap Value Fund.
PART B of this Registration Statement consists of one Statement of
Additional Information, which relates to both of the Prospectuses listed above.
CROSS REFERENCE SHEET
ITEM NUMBER OF FORM N-1A
PART A CAPTION IN PROSPECTUS
RETAIL CLASSES PROSPECTUS
1 Cover Page
2 Summary; Fees and Expenses
3 Not Applicable
4 The Funds; Investment Objectives and Policies; Special Investment
Methods
5 Management; Distributor
5A Not Applicable
6 Fund Shares; Investing in the Funds; Income Taxes
7 Distributor; Investing in the Funds; Determining the Price of Shares
8 Redeeming Shares
9 Not Applicable
INSTITUTIONAL CLASS PROSPECTUS
1 Cover Page
2 Summary; Fees and Expenses
3 Not Applicable
4 The Funds; Investment Objectives and Policies; Special Investment
Methods
5 Management; Distributor
5A Not Applicable
6 Fund Shares; Purchases and Redemptions of Shares; Income Taxes
7 Distributor; Purchases and Redemptions of Shares
8 Purchases and Redemptions of Shares
9 Not Applicable
CAPTION IN STATEMENT
PART B OF ADDITIONAL INFORMATION
10 Cover Page
11 Table of Contents
12 General Information
13 Additional Information Concerning Fund Investments; Investment
Restrictions
14 Directors and Executive Officers
15 Capital Stock
16 Investment Advisory and Other Services
17 Portfolio Transactions and Allocation of Brokerage
18 Not Applicable
19 Net Asset Value and Public Offering Price
20 Taxation
21 Investment Advisory and Other Services
22 Fund Performance
23 Not applicable
FIRST AMERICAN IVESTMENT FUNDS, INC.
RETAIL CLASSES
CALIFORNIA INTERMEDIATE TAX
FREE FUND
MICRO CAP VALUE FUND
PROSPECTUS
, 1997
SUBJECT TO COMPLETION - MAY 23, 1997
[LOGO]
FIRST AMERICAN FUNDS
THE POWER OF DISCIPLINED INVESTING
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
TABLE OF CONTENTS
PAGE
SUMMARY 4
FEES AND EXPENSES 7
Class A Share Fees and Expenses 7
Class B Share Fees and Expenses 8
Information Concerning Fees and
Expenses 9
THE FUNDS 10
INVESTMENT OBJECTIVES AND POLICIES 10
California Intermediate Tax Free Fund 11
Micro Cap Value Fund 12
Risks to Consider 13
MANAGEMENT 16
Investment Adviser 16
Portfolio Managers 17
Custodian 18
Administrator 18
Transfer Agent 19
DISTRIBUTOR 19
INVESTING IN THE FUNDS 21
Share Purchases 21
Minimum Investment Required 22
Alternative Sales Charge
Options 22
Systematic Exchange Program 27
Systematic Investment Program 28
Exchanging Securities for
Fund Shares 28
Certificates and Confirmations 28
Dividends and Distributions 28
Exchange Privilege 29
REDEEMING SHARES 31
By Telephone 31
By Mail 32
By Systematic Withdrawal Program 33
Redemption Before Purchase
Instruments Clear 33
Accounts with Low Balances 33
DETERMINING THE PRICE OF SHARES 33
Determining Net Asset Value 34
INCOME TAXES 35
Federal Income Taxation 35
California Income Taxation 37
Other State and Local Taxation 37
CALIFORNIA INTERMEDIATE TAX FREE
FUND: TAX-EXEMPT VS. TAXABLE INCOME 37
FUND SHARES 38
CALCULATION OF PERFORMANCE DATA 38
PERFORMANCE INFORMATION FOR
SUCCESSORS TO COMMON TRUST FUNDS 40
SPECIAL INVESTMENT METHODS 41
Municipal Bonds and Other Municipal
Obligations 41
Temporary Taxable Investments 43
Repurchase Agreements 44
Inverse Floating Rate Obligations 44
When-Issued and Delayed-Delivery
Transactions 44
Lending of Portfolio Securities 45
Options Transactions 45
Cash Items 48
Fixed Income Securities 48
Foreign Securities 49
Portfolio Transactions 50
Portfolio Turnover 50
Investment Restrictions 51
Information Concerning Compensation
Paid to First Trust National
Association and its Affiliates 52
FIRST AMERICAN INVESTMENT FUNDS, INC.
Oaks, Pennsylvania 19456
RETAIL CLASSES PROSPECTUS
The shares described in this Prospectus represent interests in First
American Investment Funds, Inc., which consists of mutual funds with
several different investment portfolios and objectives. This Prospectus
relates to the Class A Shares of the following funds (the "Funds"):
* CALIFORNIA INTERMEDIATE TAX FREE FUND
* MICRO CAP VALUE FUND
This Prospectus also relates to the Class B Shares of Micro Cap Value Fund.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING FIRST BANK NATIONAL ASSOCIATION AND ANY OF
ITS AFFILIATES, NOR ARE THEY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. AN INVESTMENT
IN THE FUNDS INVOLVES INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF
PRINCIPAL, DUE TO FLUCTUATIONS IN EACH FUND'S NET ASSET VALUE.
This Prospectus concisely sets forth information about the Funds that a
prospective investor should know before investing. It should be read and
retained for future reference.
A Statement of Additional Information dated , 1997 for the Funds has been
filed with the Securities and Exchange Commission and is incorporated in
its entirety by reference in this Prospectus. To obtain copies of the
Statement of Additional Information at no charge, or to obtain other
information or make inquiries about the Funds, call (800) 637-2548 or write
SEI Investments Distribution Co., Oaks, Pennsylvania 19456.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE- SENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus is , 1997.
SUMMARY
First American Investment Funds, Inc. ("FAIF") is an open-end investment
company which offers shares in several different mutual funds. This
Prospectus provides information with respect to the Class A Shares and, in
the case of the last-named fund, the Class B Shares, of the following funds
(the "Funds"):
CALIFORNIA INTERMEDIATE TAX FREE FUND has an objective of providing current
income which is exempt from both federal income tax and California state
income tax to the extent consistent with preservation of capital. Under
normal market conditions, this Fund invests at least 80% of its net assets
in municipal obligations, the interest on which is exempt from federal and
California income tax. No more than 20% of the securities owned by this
Fund will generate income that is subject to the federal alternative
minimum tax. Under normal market conditions, the weighted average maturity
of the securities held by this Fund will range from 3 to 10 years.
MICRO CAP VALUE FUND has an objective of capital appreciation. Under normal
market conditions, the Fund invests at least 65% of its total assets in
equity securities of very small-capitalization companies (those with market
capitalizations of less than $500 million). In selecting equity securities,
the Fund's adviser utilizes a value-based selection discipline, investing
in equity securities it believes are undervalued relative to other
securities at the time of purchase.
INVESTMENT ADVISER First Bank National Association (the "Adviser") serves
as investment adviser to each of the Funds. See "Management."
DISTRIBUTOR; ADMINISTRATOR SEI Investments Distribution Co. (the
"Distributor") serves as the distributor of the Funds' shares. SEI
Financial Management Corporation (the "Administrator") serves as the
administrator of the Funds. See "Management" and "Distributor."
OFFERING PRICES Class A Shares of the Funds are sold at net asset value
plus a maximum sales charge of 3.00% in the case of California Intermediate
Tax Free Fund and 4.50% in the case of Micro Cap Value Fund. These sales
charges are reduced on purchases of $50,000 or more. Purchases of $1
million or more of Class A Shares are not subject to an initial sales
charge, but a contingent deferred sales charge of 1.00% will be imposed on
such purchases in the event of redemption within 24 months following the
purchase. Class A Shares of the Funds otherwise are redeemed at net asset
value without any additional charge. Class A Shares of each Fund are
subject to a shareholder servicing fee computed at an annual rate of 0.25%
of the average daily net assets of that class. See "Investing in the Funds
-- Alternative Sales Charge Options."
Class B Shares of Micro Cap Value Fund are sold at net asset value without
an initial sales charge. Class B Shares of such Fund are subject to Rule
12b-1 distribution and shareholder servicing fees computed at an annual
rate totaling 1.00% of the average daily net assets of that class. If Class
B Shares are redeemed within six years after purchase, they are subject to
a contingent deferred sales charge declining from 5.00% in the first year
to zero after six years. Class B Shares automatically convert into Class A
Shares approximately eight years after purchase. California Intermediate
Tax Free Fund does not offer Class B Shares. See "Investing in the Funds --
Alternative Sales Charge Options."
MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS The minimum initial investment
is $1,000 ($250 for IRAs) for each Fund. Subsequent investments must be
$100 or more. Regular investment in the Funds is simplified through the
Systematic Investment Program through which monthly purchases of $100 or
more are possible. See "Investing in the Funds -- Minimum Investment
Required" and "-- Systematic Investment Program."
EXCHANGES Shares of either Fund may be exchanged for the same class of
shares of other funds in the First American family at the shares'
respective net asset values with no additional charge. See "Investing in
the Funds -- Exchange Privilege."
REDEMPTIONS Shares of each Fund may be redeemed at any time at their net
asset value next determined after receipt of a redemption request by the
Funds' transfer agent, less any applicable contingent deferred sales
charge. Each Fund may, upon 60 days written notice, redeem an account if
the account's net asset value falls below $500. See "Investing in the
Funds" and "Redeeming Shares."
RISKS TO CONSIDER California Intermediate Tax Free Fund is subject to (i)
interest rate risk (the risk that increases in market interest rates will
cause declines in the value of debt securities held by a Fund); (ii) credit
risk (the risk that the issuers of debt securities held by a Fund default
in making required payments); and (iii) call or prepayment risk (the risk
that a borrower may exercise the right to prepay a debt obligation before
its stated maturity, requiring a Fund to reinvest the prepayment at a lower
interest rate).
In addition, the value of municipal obligations held by California
Intermediate Tax Free Fund may be adversely affected by local political and
economic conditions and developments in the state and political
subdivisions which issue the obligations. Investors should note in this
regard that California Intermediate Tax Free Fund invests primarily in
municipal obligations of issuers located in California. California
Intermediate Tax Free Fund also may, in order to attempt to reduce risk,
invest in exchange traded put and call options on interest rate futures
contracts and on interest rate indices. See "Investment Objectives and
Policies -- Risks to Consider -- California Intermediate Tax Free Fund" and
"Special Investment Methods."
Micro Cap Value Fund is subject to the risk of generally adverse equity
markets. Investors also should recognize that market prices of equity
securities generally, and of particular companies' equity securities,
frequently are subject to greater volatility than prices of fixed income
securities.
Because Micro Cap Value Fund is actively managed, its performance will
reflect in part the ability of the Adviser to select securities which are
suited to achieving its investment objectives. Due to its active
management, this Fund could underperform other mutual funds with similar
investment objectives or the market generally.
In addition, (i) Micro Cap Value Fund is subject to risks associated with
investing in very small-capitalization companies; and (ii) this Fund may
invest a specified portion of its assets in securities of foreign issuers
which are listed on a United States stock exchange or represented by
American Depositary Receipts. See "Investment Objectives and Policies --
Risks to Consider -- Micro Cap Value Fund" and "Special Investment
Methods."
SHAREHOLDER INQUIRIES Any questions or communications regarding the Funds
or a shareholder account should be directed to the Distributor by calling
(800) 637-2548, or to the financial institution which holds shares on an
investor's behalf.
FEES AND EXPENSES
CLASS A SHARE FEES AND EXPENSES
CALIFORNIA
INTERMEDIATE MICRO CAP
TAX FREE FUND VALUE FUND
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases
(as a percentage of offering price)(1) 3.00% 4.50%
Maximum sales load imposed on reinvested
dividends None None
Deferred sales load None None
Redemption fees None None
Exchange fees None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees
(after voluntary fee waivers(2) 0.00% 0.63%
Rule 12b-1 fees (after voluntary fee
waivers)(2) None 0.25%
Other expenses (after reimbursements)(2) 0.70% 0.27%
Total fund operating expenses
(after voluntary fee waivers and
reimbursements)(2) 0.70% 1.15%
EXAMPLE(3)
You would pay the following expenses on a $1,000 investment, assuming (i) the
maximum applicable sales charge for all funds; (ii) a 5% annual return; and
(iii) redemption at the end of each time period:
1 year $ 37 $ 56
3 years $ 52 $ 80
(1) The rules of the Securities and Exchange Commission require that the
maximum sales charge be reflected in the above table. However, certain
investors may qualify for reduced sales charges. Purchases of $1 million or
more of Class A Shares are not subject to an initial sales charge, but a
contingent deferred sales charge of 1.00% will be imposed on such purchases
in the event of redemption within 24 months following the purchase. See
"Investing in the Funds -- Alternative Sales Charge Options."
(2) The Adviser and the Distributor intend to waive a portion of their fees
and/or reimburse expenses on a voluntary basis, and the amounts shown
reflect these waivers and reimbursements as of the date of this Prospectus.
Each of these persons intends to maintain such waivers and reimbursements
in effect through September 30, 1998, but reserves the right to discontinue
such waivers and reimbursements at any time in their sole discretion.
Absent any fee waivers, investment advisory fees for each Fund as an
annualized percentage of average daily net assets would be 0.70%; Rule
12b-1 fees calculated on such basis would be 0.25%; and total fund
operating expenses calculated on such basis would be 1.66% for California
Intermediate Tax Free Fund and 1.22% for Micro Cap Value Fund. "Other
expenses" includes an administration fee and is based on estimated amounts
for the current fiscal year.
(3) Absent the fee waivers and reimbursements referred to in (1) above, the
dollar amounts for the 1- and 3-year periods would be as follows:
California Intermediate Tax Free Fund, $46 and $81; and Micro Cap Value
Fund, $57 and $82.
CLASS B SHARE FEES AND EXPENSES
MICRO CAP
VALUE FUND
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases (as a
percentage of offering price) None
Maximum sales load imposed on reinvested dividends None
Maximum contingent deferred sales charge (as a
percentage of original purchase price or redemption
proceeds, as applicable) 5.00%
Redemption fees None
Exchange fees None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees
(after voluntary fee waivers)(1) 0.63%
Rule 12b-1 fees 1.00%(2)
Other expenses(1) 0.27%
Total fund operating expenses
(after voluntary fee waivers)(1) 1.90%
EXAMPLE
ASSUMING REDEMPTION(3)
You would pay the following expenses on a $1,000 investment, assuming (i) a 5%
annual return; (ii) redemption at the end of each time period; and (iii) payment
of the maximum applicable contingent deferred sales charge of 5% in year 1 and
4% in year 3:
1 year $ 69
3 years $ 100
ASSUMING NO REDEMPTION(4)
You would pay the following expenses on the same investment, assuming no
redemption:
1 year $ 19
3 years $ 60
(1) The Adviser intends to waive a portion of its fees on a voluntary basis,
and the amounts shown reflect these waivers as of the date of this
Prospectus. The Adviser intends to maintain such waivers in effect through
September 30, 1998 but reserves the right to discontinue such waivers at
any time in its sole discretion. Absent any fee waivers, investment
advisory fees as an annualized percentage of average daily net assets would
be 0.70%: and total fund operating expenses would be 1.97%. "Other
expenses" includes an administration fee and is based on estimated amounts
for the current fiscal year.
(2) Of this amount, 0.25% is designated as a shareholder servicing fee and
0.75% as a distribution fee.
(3) Absent the fee waivers and reimbursements referred to in (1) above, the
dollar amounts for the 1 and 3-year periods would be $70 and $102,
respectively.
(4) Absent the fee waivers and reimbursements referred to in (1) above, the
dollar amounts for the 1 and 3-year periods would be $20 and $62,
respectively.
INFORMATION CONCERNING FEES AND EXPENSES
The purpose of the preceding tables is to assist the investor in
understanding the various costs and expenses that an investor in a Fund may
bear directly or indirectly. THE EXAMPLES CONTAINED IN THE TABLES SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The information set forth
in the foregoing tables and examples relates only to the Class A Shares of
the Funds and the Class B Shares of Micro Cap Value Fund. The Funds also
offer Class C Shares which are subject to the same expenses except that
they bear no sales loads or shareholder servicing fees.
The examples in the above tables are based on projected annual Fund
operating expenses after voluntary fee waivers and expense reimbursements
by the Adviser and the Distributor. Although these persons intend to
maintain such waivers in effect through September 30, 1998, any such
waivers are voluntary and may be discontinued at any time. Prior to fee
waivers, investment advisory fees accrue at the annual rate as a percentage
of average daily net assets of 0.70% for each of the Funds.
The Class A Shares of each Fund pay shareholder servicing fees to the
Distributor in an amount equaling 0.25% per year of each such class's
average daily net assets (which fees currently are being waived), and the
Class B Shares of Micro Cap Value Fund bear distribution and shareholder
servicing fees totaling 1.00% per year of such class's average daily net
assets. The Distributor also receives the sales charge for distributing the
Funds' Class A Shares. Due to the distribution and shareholder servicing
fees paid by the Class B Shares, long-term shareholders may pay more than
the equivalent of the maximum front-end sales charges otherwise permitted
by NASD rules. For additional information, see "Distributor."
Other expenses include fees paid by each Fund to the Administrator for
providing various services necessary to operate the Funds. These include
shareholder servicing and certain accounting and other services. The
Administrator provides these services for a fee calculated at an annual
rate of 0.12% of average daily net assets of each Fund subject to a minimum
of $50,000 per Fund per fiscal year; provided, that to the extent that the
aggregate net assets of all First American funds exceed $8 billion, the
percentage stated above is reduced to 0.105%. Other expenses of the Funds
also includes the cost of maintaining shareholder records, furnishing
shareholder statements and reports, and other services. Investment advisory
fees, administrative fees and other expenses are reflected in the Funds'
daily dividends and are not charged to individual shareholder accounts.
THE FUNDS
FAIF is an open-end management investment company which offers shares in
several different mutual funds (collectively, the "FAIF Funds"), each of
which evidences an interest in a separate and distinct investment
portfolio. Shareholders may purchase shares in each FAIF Fund through
several separate classes which provide for variations in distribution
costs, shareholder servicing fees, voting rights and dividends. Except for
these differences among classes, each share of each FAIF Fund represents an
undivided proportionate interest in that fund. FAIF is incorporated under
the laws of the State of Maryland, and its principal offices are located at
Oaks, Pennsylvania 19456.
This Prospectus relates only to the Class A and, in the case of Micro Cap
Value Fund, the Class B Shares of the Funds named on the cover hereof.
Information regarding the Class C Shares of these Funds and regarding the
Class A, Class B and Class C Shares of the other FAIF Funds is contained in
separate prospectuses that may be obtained from FAIF's Distributor, SEI
Financial Services Company, Oaks, Pennsylvania 19456, or by calling (800)
637-2548. The Board of Directors of FAIF may authorize additional series or
classes of common stock in the future.
INVESTMENT OBJECTIVES AND POLICIES
This section describes the investment objectives and policies of the Funds.
There is no assurance that any of these objectives will be achieved. The
Funds' investment objectives are not fundamental and therefore may be
changed without a vote of shareholders. Such changes could result in a Fund
having investment objectives different from those which shareholders
considered appropriate at the time of their investment in a Fund.
Shareholders will receive written notification at least 30 days prior to
any change in a Fund's investment objectives. Micro Cap Value Fund is a
diversified investment company, as defined in the Investment Company Act of
1940 (the "1940 Act"). California Intermediate Tax Free Fund is a
nondiversified investment company under the 1940 Act.
If a percentage limitation on investments by a Fund stated below or in the
Statement of Additional Information is adhered to at the time of an
investment, a later increase or decrease in percentage resulting from
changes in asset values will not be deemed to violate the limitation except
in the case of the limitation on illiquid investments. A Fund which is
limited to investing in securities with specified ratings is not required
to sell a security if its rating is reduced or discontinued after purchase,
but the Fund may consider doing so. However, in no event will more than 5%
of any Fund's net assets be invested in non-investment grade securities.
Descriptions of the rating categories of Standard & Poor's Corporation
("Standard & Poor's") and Moody's Investors Service, Inc. ("Moody's") are
contained in the Statement of Additional Information.
When the term "equity securities" is used in this Prospectus, it refers to
common stock and securities which are convertible into or exchangeable for,
or which carry warrants or other rights to acquire, common stock.
This section also contains information concerning certain investment risks
borne by Fund shareholders under the heading "-- Risks to Consider."
Further information concerning the securities in which the Funds may invest
and related matters is set forth under "Special Investment Methods."
CALIFORNIA INTERMEDIATE TAX FREE FUND
OBJECTIVE. California Intermediate Tax Free Fund has an objective of
providing current income which is exempt from both federal income tax and
California state income tax to the extent consistent with preservation of
capital.
INVESTMENT POLICIES. Under normal market conditions, California
Intermediate Tax Free Fund invests at least 80% of its net assets in
municipal bonds and other municipal obligations of the state referred to in
its title, the interest on which is, in the opinion of bond counsel to the
issuer, exempt from federal income tax and that state's income tax. No more
than 20% of the securities owned by this Fund will generate income that is
an item of tax preference for the purpose of the federal alternative
minimum tax. Municipal obligations generating income subject to taxation
under the federal alternative minimum tax rules will not be counted as tax
exempt obligations for purposes of the 80% test. See "Income Taxes." The
types of municipal bonds and other municipal obligations in which this Fund
may invest are described under "Special Investment Methods -- Municipal
Bonds and Other Municipal Obligations."
Under normal market conditions, the weighted average maturity of the
securities held by California Intermediate Tax Free Fund will range from 3
to 10 years.
California Intermediate Tax Free Fund may purchase obligations which are
rated (without regard to insurance) no lower than BBB by Standard & Poor's
or Baa by Moody's, or which have been assigned an equivalent rating by
another nationally recognized statistical rating organization, or which are
of comparable quality in the judgment of the Adviser. This Fund also may
purchase municipal notes which are rated no lower than SP-1 by Standard &
Poor's or MIG/VMIG-1 by Moody's or which have been assigned an equivalent
rating by another nationally recognized statistical rating organization.
Unrated securities will not exceed 10% in the aggregate of the value of the
total assets of either of these Funds.
While the assets of California Intermediate Tax Free Fund ordinarily will
be invested in municipal obligations, on occasion this Fund may temporarily
hold short-term securities, other than municipal obligations, the income
from which is taxable. Temporary taxable investments would be held solely
for the purpose of managing exceptional in-flows and out-flows of cash or
for temporary defensive purposes to preserve existing portfolio values.
Under normal circumstances, this Fund may not invest more than 20% of its
assets in investments other than municipal obligations. However, in periods
of adverse markets when a temporary defensive position to protect capital
is deemed advisable and practicable, this Fund may have more than 20% of
its assets in temporary taxable investments or cash. The types of
investments which are permitted for these purposes are described under
"Special Investment Methods -- Temporary Taxable Investments."
California Intermediate Tax Free Fund also may temporarily invest in shares
of investment companies which invest primarily in short-term municipal
obligations with maturities not exceeding 13 months. Investments of these
types are also subject to the advisory fee. Such investments may include
tax free money market funds advised by the Adviser. Income from these
investments is normally exempt from federal income tax but may not be
exempt from the applicable state tax. Where the income from these
investments is exempt from both federal income tax and the applicable state
tax, the investments will be counted as tax exempt obligations for purposes
of the 80% test described above.
California Intermediate Tax Free Fund also may (i) in order to attempt to
reduce risk, invest in exchange traded put and call options on interest
rate futures contracts and on interest rate indices; (ii) purchase
securities on a when-issued or delayed-delivery basis; (iii) engage in the
lending of portfolio securities; and (iv) invest up to 5% of its net assets
in inverse floating rate municipal obligations. For information about these
investment methods, restrictions on their use, and certain associated
risks, see the related headings under "Special Investment Methods."
MICRO CAP VALUE FUND
OBJECTIVE. Micro Cap Value Fund has an objective of capital appreciation.
INVESTMENT POLICIES. Under normal market conditions, Micro Cap Value Fund
invests at least 65% of its total assets in equity securities of very
small- capitalization companies. For these purposes, very
small-capitalization companies are deemed those with market capitalizations
of less than $500 million. In selecting equity securities, the Adviser
utilizes a value-based selection discipline, investing in equity securities
it believes are undervalued relative to other securities at the time of
purchase. In assessing relative value, the Adviser will consider such
factors as ratios of market price to book value, market price to earnings,
and market price to assets; estimated earnings growth rate; cash flow; and
liquidation value.
The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of $500 million
or more and in fixed income securities of the kinds described under
"Special Investment Methods -- Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed
on a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
associated risks, see "Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund; (iv) purchase
securities on a when-issued or delayed-delivery basis; and (v) engage in
the lending of portfolio securities. For information about these investment
methods, restrictions on their use, and certain associated risks, see the
related headings under "Special Investment Methods."
For temporary defensive purposes during times of unusual market conditions,
the Fund may without limitation hold cash or invest in cash items of the
kinds described under "Special Investment Methods -- Cash Items." The Fund
also may invest not more than 35% of its total assets in cash and cash
items in order to utilize assets awaiting normal investment.
RISKS TO CONSIDER
CALIFORNIA INTERMEDIATE TAX FREE FUND. An investment in California
Intermediate Tax Free Fund involves certain risks. These include the
following:
INTEREST RATE RISK. Interest rate risk is the risk that the value of a
fixed-rate debt security will decline due to changes in market interest
rates. Because California Intermediate Tax Free Fund invests in fixed-rate
debt securities, it is subject to interest rate risk. In general, when
interest rates rise, the value of a fixed-rate debt security declines.
Conversely, when interest rates decline, the value of a fixed-rate debt
security generally increases. Thus, shareholders in this Fund bear the risk
that increases in market interest rates will cause the value of the Fund's
portfolio investments to decline.
In general, the value of fixed-rate debt securities with longer maturities
is more sensitive to changes in market interest rates than the value of
such securities with shorter maturities. Thus, the net asset value of a
Fund which invests in securities with longer weighted average maturities
should be expected to have greater volatility in periods of changing market
interest rates than that of a Fund which invests in securities with shorter
weighted average maturities.
Although the Adviser may engage in transactions intended to hedge the value
of the Fund's portfolios against changes in market interest rates, there is
no assurance that such hedging transactions will be undertaken or will
fulfill their purpose. See "Special Investment Methods -- Options
Transactions."
CREDIT RISK. Credit risk is the risk that the issuer of a debt security
will fail to make payments on the security when due. Because California
Intermediate Tax Free Fund invests in debt securities, it is subject to
credit risk.
As described under "Special Investment Methods -- Municipal Bonds and Other
Municipal Obligations," the revenue bonds and municipal lease obligations
in which the Fund invest may entail greater credit risk than the general
obligation bonds in which they invest. This is the case because revenue
bonds and municipal lease obligations generally are not backed by the
faith, credit or general taxing power of the issuing governmental entity.
In addition, as described under that section, municipal lease obligations
also are subject to nonappropriation risk, which is a type of nonpayment
risk. Investors also should note that even general obligation bonds of the
states and their political subdivisions are not free from the risk of
default.
The ratings and certain other requirements which apply to this Fund's
permitted investments, as described elsewhere in this Prospectus, are
intended to limit the amount of credit risk undertaken by the Fund.
Nevertheless, shareholders in the Fund bear the risk that payment defaults
could cause the value of the Fund's portfolio investments to decline.
Investors also should note that the Fund can invest in municipal
obligations rated as low as BBB by Standard & Poor's or Baa by Moody's, or
which have been assigned an equivalent rating by another nationally
recognized statistical rating organization, or which are of comparable
quality in the judgment of the Adviser. Although these rating categories
are investment grade, obligations with these ratings are viewed as having
speculative characteristics and carry a somewhat higher risk of default
than obligations rated in the higher investment grade categories.
CALL RISK. Many municipal bonds may be redeemed at the option of the issuer
("called") at a specified price prior to their stated maturity date. In
general, it is advantageous for an issuer to call its bonds if they can be
refinanced through the issuance of new bonds which bear a lower interest
rate than that of the called bonds. Call risk is the risk that bonds will
be called during a period of declining market interest rates so that such
refinancings may take place.
If a bond held by California Intermediate Tax Free Fund is called during a
period of declining interest rates, the Fund probably will have to reinvest
the proceeds received by it at a lower interest rate than that borne by the
called bond, thus resulting in a decrease in the Fund's income. To the
extent that the Fund invests in callable bonds, Fund shareholders bear the
risk that reductions in income will result from the call of bonds.
STATE AND LOCAL POLITICAL AND ECONOMIC CONDITIONS. The value of municipal
obligations owned by California Intermediate Tax Free Fund may be adversely
affected by local political and economic conditions and developments.
Adverse conditions in an industry significant to a local economy could have
a correspondingly adverse effect on the financial condition of local
issuers. Other factors that could affect tax-exempt obligations include a
change in the local, state or national economy, demographic factors,
ecological or environmental concerns, statutory limitations on the issuer's
ability to increase taxes and other developments generally affecting the
revenues of issuers (for example, legislation or court decisions reducing
state aid to local governments or mandating additional services).
California Intermediate Tax Free Fund will invest primarily in municipal
obligations issued by the state of California and its political
subdivisions. For this reason, the municipal obligations held by this Fund
will be particularly affected by local conditions in that state. A more
detailed description of the factors affecting California issuers of
municipal obligations is set forth in the Statement of Additional
Information.
OTHER. Investors also should review "Special Investment Methods" for
information concerning risks associated with certain investment techniques
which may be utilized by California Intermediate Tax Free Fund.
MICRO CAP VALUE FUND. An investment in Micro Cap Value Fund involves
certain risks. These include the following:
EQUITY SECURITIES GENERALLY. Market prices of equity securities generally,
and of particular companies' equity securities, frequently are subject to
greater volatility than prices of fixed income securities. Market prices of
equity securities as a group have dropped dramatically in a short period of
time on several occasions in the past, and they may do so again in the
future. Micro Cap Value Fund is subject to the risk of generally adverse
equity markets.
VERY SMALL-CAPITALIZATION COMPANIES. Micro Cap Value Fund emphasizes
investments in companies with very small market capitalizations. The equity
securities of such companies frequently have experienced greater price
volatility in the past than those of larger-capitalization companies, and
they may be expected to do so in the future. In addition, such companies
may be at an earlier stage of their development and followed by fewer
investors than small-, mid- or large-capitalization companies, thus
increasing the potential for volatility in their market prices.
ACTIVE MANAGEMENT. Micro Cap Value Fund is actively managed by the Adviser.
The performance of this Fund therefore will reflect in part the ability of
the Adviser to select securities which are suited to achieving the Fund's
investment objective. Due to its active management, this Fund could
underperform other mutual funds with similar investment objectives or the
market generally.
OTHER. Investors also should review "Special Investment Methods" for
information concerning risks associated with certain investment techniques
which may be utilized by Micro Cap Value Fund.
MANAGEMENT
The Board of Directors of FAIF has the primary responsibility for
overseeing the overall management and electing the officers of FAIF.
Subject to the overall direction and supervision of the Board of Directors,
the Adviser acts as investment adviser for and manages the investment
portfolios of FAIF.
INVESTMENT ADVISER
First Bank National Association, 601 Second Avenue South, Minneapolis,
Minnesota 55480, acts as the Funds' investment adviser through its First
Asset Management group. The Adviser has acted as an investment adviser to
FAIF since its inception in 1987 and has acted as investment adviser to
First American Funds, Inc. since 1982 and to First American Strategy Funds,
Inc. since 1996. As of December 31, 1996, the Adviser was managing accounts
with an aggregate value of approximately $35 billion, including mutual fund
assets in excess of $12 billion. First Bank System, Inc., 601 Second Avenue
South, Minneapolis, Minnesota 55480, is the holding company for the
Adviser.
Each of the Funds has agreed to pay the Adviser monthly fees calculated on
an annual basis equal to 0.70% of its average daily net assets. The Adviser
may, at its option, waive any or all of its fees, or reimburse expenses,
with respect to any Fund from time to time. Any such waiver or
reimbursement is voluntary and may be discontinued at any time. The Adviser
also may absorb or reimburse expenses of the Funds from time to time, in
its discretion, while retaining the ability to be reimbursed by the Funds
for such amounts prior to the end of the fiscal year. This practice would
have the effect of lowering a Fund's overall expense ratio and of
increasing yield to investors, or the converse, at the time such amounts
are absorbed or reimbursed, as the case may be.
The Glass-Steagall Act generally prohibits banks from engaging in the
business of underwriting, selling or distributing securities and from being
affiliated with companies principally engaged in those activities. In
addition, administrative and judicial interpretations of the Glass-Steagall
Act prohibit bank holding companies and their bank and nonbank subsidiaries
from organizing, sponsoring or controlling registered open-end investment
companies that are continuously engaged in distributing their shares. Bank
holding companies and their bank and nonbank subsidiaries may serve,
however, as investment advisers to registered investment companies, subject
to a number of terms and conditions.
Although the scope of the prohibitions and limitations imposed by the
Glass-Steagall Act has not been fully defined by the courts or the
appropriate regulatory agencies, the Funds have received an opinion from
their counsel that the Adviser is not prohibited from performing the
investment advisory services described above, and that FBS Investment
Services, Inc. ("ISI"), a wholly owned broker-dealer subsidiary of the
Adviser, is not prohibited from serving as a Participating Institution as
described herein. In the event of changes in federal or state statutes or
regulations or judicial and administrative interpretations or decisions
pertaining to permissible activities of bank holding companies and their
bank and nonbank subsidiaries, the Adviser and ISI might be prohibited from
continuing these arrangements. In that event, it is expected that the Board
of Directors would make other arrangements and that shareholders would not
suffer adverse financial consequences.
PORTFOLIO MANAGERS
CHRISTOPHER L. DRAHN is portfolio co-manager for California Intermediate
Tax Free Fund. Chris joined the fixed income department of the Adviser in
1985, having previously served in its securities lending and corporate
trust areas. He received his master's degree in business administration
from the University of Minnesota and is a Chartered Financial Analyst.
RICHARD W. STANLEY is portfolio co-manager for California Intermediate Tax
Free Fund. Dick entered the investment business via sales with Smith Barney
& Co. in 1958. He then moved to Heritage Investment Advisers as head of
fixed income investment in 1973. He joined the Adviser in early 1986 as
Vice President and Manager of Fixed Income/Personal Trust. Dick received
his master's degree in business administration from Cornell University in
1958 and received his Chartered Financial Analyst certification in 1977.
DALE E. BENSON is portfolio co-manager for Micro Cap Value Fund. Dale, who
has 24 years of investment management experience, joined the Adviser in
July 1997, when the parent company of Qualivest Capital Management, Inc.
and U.S. Bank, by whom he was employed since 1973, was acquired by the
parent company of the Adviser. He received his bachelor's degree from
Pacific Lutheran University and his doctorate degree in history from the
University of Maine. He is a Chartered Financial Analyst.
MARK D. COOPER is portfolio co-manager for Micro Cap Value Fund. Mark
joined the Adviser in July 1997, when the parent company of Qualivest
Capital Management, Inc. and U.S. Bank, by whom he was employed since 1996,
was acquired by the parent company of the Adviser. Prior to 1996, Mark was
an associate at Bankers Trust Company in New York and Los Angeles. He
received his bachelor's degree from the University of California at Los
Angeles and his master's degree in business administration from the Wharton
School of Business.
CUSTODIAN
The custodian of the Funds' assets is First Trust National Association (the
"Custodian"), First Trust Center, 180 East Fifth Street, St. Paul,
Minnesota 55101. The Custodian is a subsidiary of First Bank System, Inc.,
which also controls the Adviser.
As compensation for its services to the Funds, the Custodian is paid
monthly fees calculated on an annual basis equal to 0.03% of the applicable
Fund's average daily net assets. In addition, the Custodian is reimbursed
for its out-of-pocket expenses incurred while providing its services to the
Funds.
ADMINISTRATOR
The administrator for the Funds is SEI Financial Management Corporation,
Oaks, Pennsylvania 19456. The Administrator, a wholly-owned subsidiary of
SEI Investments Company, provides the Funds with certain administrative
services necessary to operate the Funds. These services include shareholder
servicing and certain accounting and other services. The Administrator
provides these services for a fee calculated at an annual rate of 0.12% of
each Fund's average daily net assets, subject to a minimum administrative
fee during each fiscal year of $50,000 per Fund; provided, that to the
extent that the aggregate net assets of all First American funds exceed $8
billion, the percentage stated above is reduced to 0.105%. From time to
time, the Administrator may voluntarily waive its fees or reimburse
expenses with respect to any of the Funds. Any such waivers or
reimbursements may be made at the Administrator's discretion and may be
terminated at any time.
TRANSFER AGENT
DST Systems, Inc. (the "Transfer Agent") serves as the transfer agent and
dividend disbursing agent for the Funds. The address of the Transfer Agent
is 1004 Baltimore, Kansas City, Missouri 64105. The Transfer Agent is not
affiliated with the Distributor, the Administrator or the Adviser.
DISTRIBUTOR
SEI Investments Distribution Co. is the principal distributor for shares of
the Funds and of the other FAIF Funds. The Distributor is a Pennsylvania
corporation and is the principal distributor for a number of investment
companies. The Distributor is a wholly-owned subsidiary of SEI Investments
Company, and is located at Oaks, Pennsylvania 19456. The Distributor is not
affiliated with the Adviser, First Bank System, Inc., the Custodian or
their respective affiliates.
Shares of the Funds are distributed through the Distributor and securities
firms, financial institutions (including, without limitation, banks) and
other industry professionals (the "Participating Institutions") which enter
into sales agreements with the Distributor to perform share distribution or
shareholder support services.
FAIF has adopted a Plan of Distribution for the Class A Shares pursuant to
Rule 12b-1 under the 1940 Act (the "Class A Distribution Plan"). The Class
A Distribution Plan authorizes the Distributor to retain the sales charge
paid upon purchase of Class A Shares, except that portion which is
reallowed to Participating Institutions. See "Investing in the Funds --
Class A Share Price and Sales Charge." Each Fund also pays the Distributor
a shareholder servicing fee monthly at an annual rate of 0.25% of the
Fund's Class A Shares' average daily net assets. The shareholder servicing
fee is intended to compensate the Distributor for ongoing servicing and/or
maintenance of shareholder accounts and may be used by the Distributor to
provide compensation to institutions through which shareholders hold their
shares for ongoing servicing and/or maintenance of shareholder accounts.
The shareholder servicing fee may be used to provide compensation for
shareholder services provided by "one-stop" mutual fund networks through
which the Funds are made available. In addition, the Distributor and the
Adviser and its affiliates may provide compensation for services provided
by such networks from their own resources. From time to time, the
Distributor may voluntarily waive its fees with respect to the Class A
Shares of either of the Funds. Any such waivers may be made at the
Distributor's discretion and may be terminated at any time.
Under another distribution plan (the "Class B Distribution Plan") adopted
in accordance with Rule 12b-1 under the 1940 Act, Micro Cap Value Fund may
pay to the Distributor a sales support fee at an annual rate of up to 0.75%
of the average daily net assets of the Class B Shares of the Fund, which
fee may be used by the Distributor to provide compensation for sales
support and distribution activities with respect to Class B Shares of the
Fund. This fee is calculated and paid each month based on the average daily
net assets for that month. In addition to this fee, the Distributor is paid
a shareholder servicing fee of 0.25% of the average daily net assets of the
Class B Shares pursuant to a service plan (the "Class B Service Plan"),
which fee may be used by the Distributor to provide compensation for
ongoing servicing and/or maintenance of shareholder accounts with respect
to Class B Shares of the Fund. Although Class B Shares are sold without an
initial sales charge, the Distributor pays a total of 4.25% of the amount
invested (including a prepaid service fee of 0.25% of the amount invested)
to dealers who sell Class B Shares (excluding exchanges from other Class B
Shares in the First American family). The service fee payable under the
Class B Service Plan is prepaid for the first year as described above.
The Class A and Class B Distribution Plans recognize that the Adviser, the
Administrator, the Distributor, and any Participating Institution may in
their discretion use their own assets to pay for certain additional costs
of distributing Fund shares. Any arrangement to pay such additional costs
may be commenced or discontinued by any of these persons at any time. In
addition, while there is no sales charge on purchases of Class A Shares of
$1 million and more, the Adviser may pay amounts to broker-dealers from its
own assets with respect to such sales. ISI, a subsidiary of the Adviser, is
a Participating Institution.
INVESTING IN THE FUNDS
SHARE PURCHASES
Shares of the Funds are sold at their net asset value, next determined
after an order is received, plus any applicable sales charge, on days on
which the New York Stock Exchange is open for business. Shares may be
purchased as described below. The Funds reserve the right to reject any
purchase request.
THROUGH A FINANCIAL INSTITUTION. Shares may be purchased through a
financial institution which has a sales agreement with the Distributor. An
investor may call his or her financial institution to place an order.
Purchase orders must be received by the financial institution by the time
specified by the institution to be assured same day processing, and
purchase orders must be transmitted to and received by the Funds by 3:00
p.m. Central time in order for shares to be purchased at that day's price.
It is the financial institution's responsibility to transmit orders
promptly.
BY MAIL. An investor may place an order to purchase shares of the Funds
directly through the Transfer Agent. Orders by mail will be executed upon
receipt of payment by the Transfer Agent. If an investor's check does not
clear, the purchase will be cancelled and the investor could be liable for
any losses or fees incurred. Third-party checks, credit cards, credit card
checks and cash will not be accepted. When purchases are made by check, the
proceeds of redemptions of the shares purchased are not available until the
Transfer Agent is reasonably certain that the purchase payment has cleared,
which could take up to ten calendar days from the purchase date. In order
to purchase shares by mail, an investor must:
* complete and sign the new account form;
* enclose a check made payable to (Fund name); and
* mail both to DST Systems, Inc., P.O. Box 419382, Kansas City,
Missouri 64141-6382.
After an account is established, an investor can purchase shares by mail by
enclosing a check and mailing it to DST Systems, Inc. at the above address.
BY WIRE. To purchase shares of a Fund by wire, call (800) 637-2548 before
3:00 p.m. Central time. All information needed will be taken over the
telephone, and the order will be considered placed when the Custodian
receives payment by wire. If the Custodian does not receive the wire by
3:00 p.m. Central time, the order will be executed the next business day.
Federal funds should be wired as follows: First Bank National Association,
Minneapolis, Minnesota, ABA Number 091000022; For Credit to: DST Systems,
Account Number 160234580266; For Further Credit To: (Investor Name and Fund
Name). Shares cannot be purchased by Federal Reserve wire on days on which
the New York Stock Exchange is closed and on federal holidays upon which
wire transfers are restricted.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment for each Fund is $1,000 unless the
investment is in a retirement plan, in which case the minimum investment is
$250. The minimum subsequent investment is $100. The Funds reserve the
right to waive the minimum investment requirement for employees of First
Bank National Association, First Trust National Association and First Bank
System, Inc. and their respective affiliates.
ALTERNATIVE SALES CHARGE OPTIONS
THE TWO ALTERNATIVES: OVERVIEW. An investor may purchase shares of a Fund
at a price equal to its net asset value plus a sales charge. In the case of
Micro Cap Value Fund, this sales charge may be imposed, at the investor's
election, either (i) at the time of the purchase (the Class A "initial
sales charge alternative"), or (ii) on a contingent deferred basis (the
Class B "deferred sales charge alternative"). In the case of California
Intermediate Tax Free Fund, only the Class A initial sales charge
alternative is available. Each of Class A and Class B represents a Fund's
interest in its portfolio of investments. The classes have the same rights
and are identical in all respects except that (i) Class B Shares bear the
expenses of the contingent deferred sales charge arrangement and
distribution and service fees resulting from such sales arrangement, while
Class A Shares bear only shareholder servicing fees; (ii) each class has
exclusive voting rights with respect to approvals of any Rule 12b-1
distribution plan related to that specific class (although Class B
shareholders may vote on any distribution fees imposed on Class A Shares as
long as Class B Shares convert into Class A Shares); (iii) only Class B
Shares carry a conversion feature; and (iv) each class has different
exchange privileges. Sales personnel of financial institutions distributing
the Funds' shares, and other persons entitled to receive compensation for
selling shares, may receive differing compensation for selling Class A and
Class B Shares.
These alternative purchase arrangements permit an investor in Micro Cap
Value Fund to choose the method of purchasing shares that is more
beneficial to that investor. The amount of a purchase, the length of time
an investor expects to hold the shares, and whether the investor wishes to
receive dividends in cash or in additional shares, will all be factors in
determining which sales charge option is best for a particular investor. An
investor should consider whether, over the time he or she expects to
maintain the investment, the accumulated sales charges on Class B Shares
prior to conversion would be less than the initial sales charge on Class A
Shares, and to what extent the differential may be offset by the expected
higher yield of Class A Shares. Class A Shares will normally be more
beneficial to an investor if he or she qualifies for reduced sales charges
as described below. Accordingly, orders for Class B Shares of Micro Cap
Value Fund for $250,000 or more ordinarily will be treated as orders for
Class A Shares or declined.
The Directors of FAIF have determined that no conflict of interest
currently exists between the Class A and Class B Shares. On an ongoing
basis, the Directors, pursuant to their fiduciary duties under the 1940 Act
and state laws, will seek to ensure that no such conflict arises.
CLASS A SHARES.
WHAT CLASS A SHARES COST. Class A Shares of each Fund are offered on a
continuous basis at their next determined offering price, which is net
asset value, plus a sales charge as set forth below:
CALIFORNIA INTERMEDIATE TAX FREE FUND
<TABLE>
<CAPTION>
MAXIMUM AMOUNT
OF SALES CHARGE
SALES CHARGE AS SALES CHARGE AS REALLOWED TO
PERCENTAGE OF PERCENTAGE OF PARTICIPATING
OFFERING PRICE NET ASSET VALUE INSTITUTIONS
<S> <C> <C> <C>
Less than $50,000 3.00% 3.09% 2.70%
$50,000 but less than $100,000 2.50% 2.56% 2.25%
$100,000 but less than $250,000 2.00% 2.04% 1.80%
$250,000 but less than $500,000 1.50% 1.52% 1.35%
$500,000 but less than $1,000,000 1.00% 1.01% 0.80%
$1,000,000 and over 0.00% 0.00% 0.00%
</TABLE>
MICRO CAP VALUE FUND
<TABLE>
<CAPTION>
MAXIMUM AMOUNT
OF SALES CHARGE
SALES CHARGE AS SALES CHARGE AS REALLOWED TO
PERCENTAGE OF PERCENTAGE OF PARTICIPATING
OFFERING PRICE NET ASSET VALUE INSTITUTIONS
<S> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.05%
$50,000 but less than $100,000 4.00% 4.17% 3.60%
$100,000 but less than $250,000 3.50% 3.63% 3.15%
$250,000 but less than $500,000 2.75% 2.83% 2.47%
$500,000 but less than $1,000,000 2.00% 2.04% 1.80%
$1,000,000 and over 0.00% 0.00% 0.00%
</TABLE>
There is no initial sales charge on purchases of Class A Shares of $1
million or more. However, Participating Institutions will receive a
commission of 1.00% on such sales. Redemptions of Class A Shares purchased
at net asset value within 24 months of purchase will be subject to a
contingent deferred sales charge of 1.00% (unless a Participating
Institution waived its commission on the initial purchase). Class A Shares
that are redeemed will not be subject to this contingent deferred sales
charge to the extent that the value of the shares represents capital
appreciation of Fund assets or reinvestment of dividends or capital gain
distributions.
Net asset value is determined at 3:00 p.m. Central time Monday through
Friday except on (i) days on which there are not sufficient changes in the
value of a Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; and (iii) on the
following federal holidays: New Year's Day, Presidents' Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. In
addition, net asset value will not be calculated on Good Friday.
DEALER CONCESSION. A dealer will normally receive up to 90% of the
applicable sales charge. Any portion of the sales charge which is not paid
to a dealer will be retained by the Distributor. In addition, the
Distributor may, from time to time in its sole discretion, institute one or
more promotional incentive programs which will be paid by the Distributor
from the sales charge it receives or from any other source available to it.
Under any such program, the Distributor will provide promotional
incentives, in the form of cash or other compensation including
merchandise, airline vouchers, trips and vacation packages, to all dealers
selling shares of the Funds. Promotional incentives of these kinds will be
offered uniformly to all dealers and predicated upon the amount of shares
of the Funds sold by the dealer. Whenever 90% or more of a sales charge is
paid to a dealer, that dealer may be deemed to be an underwriter as defined
in the Securities Act of 1933.
The sales charge for shares sold other than through registered
broker/dealers will be retained by the Distributor. The Distributor may pay
fees to financial institutions out of the sales charge in exchange for
sales and/or administrative services performed on behalf of the
institution's customers in connection with the initiation of customer
accounts and purchases of Fund shares.
REDUCING THE CLASS A SALES CHARGE. The sales charge can be reduced on the
purchase of Class A Shares through (i) quantity discounts and accumulated
purchases, or (ii) signing a 13-month letter of intent:
* QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES: As shown in the
table above, larger purchases of Class A Shares reduce the
percentage sales charge paid. Each Fund will combine purchases
made on the same day by an investor, the investor's spouse, and
the investor's children under age 21 when it calculates the sales
charge. In addition, the sales charge, if applicable, is reduced
for purchases made at one time by a trustee or fiduciary for a
single trust estate or a single fiduciary account.
The sales charge discount applies to the total current market
value of any Fund, plus the current market value of any other
FAIF Fund and any other mutual funds having a sales charge and
distributed as part of the First American family of funds. Prior
purchases and concurrent purchases of Class A Shares of any FAIF
Fund will be considered in determining the sales charge
reduction. In order for an investor to receive the sales charge
reduction on Class A Shares, the Transfer Agent must be notified
by the investor in writing or by his or her financial institution
at the time the purchase is made that Fund shares are already
owned or that purchases are being combined.
* LETTER OF INTENT: If an investor intends to purchase at least
$50,000 of Class A Shares in a Fund and other FAIF Funds over the
next 13 months, the sales charge may be reduced by signing a
letter of intent to that effect. This letter of intent includes a
provision for a sales charge adjustment depending on the amount
actually purchased within the 13-month period and a provision for
the Custodian to hold a percentage equal to the particular FAIF
Fund's maximum sales charge rate of the total amount intended to
be purchased in escrow (in shares) for all FAIF Funds until the
purchase is completed.
The amount held in escrow for all FAIF Funds will be applied to
the investor's account at the end of the 13-month period after
deduction of the sales load applicable to the dollar value of
shares actually purchased. In this event, an appropriate number
of escrowed shares may be redeemed in order to realize the
difference in the sales charge.
A letter of intent will not obligate the investor to purchase
shares, but if he or she does, each purchase during the period
will be at the sales charge applicable to the total amount
intended to be purchased. This letter may be dated as of a prior
date to include any purchases made within the past 90 days.
SALES OF CLASS A SHARES AT NET ASSET VALUE. Purchases of a Fund's Class A
Shares by the Adviser or any of its affiliates, or any of their or FAIF's
officers, directors, employees, retirees, sales representatives and
partners, registered representatives of any broker/dealer authorized to
sell Fund shares, and full-time employees of FAIF's general counsel, and
members of their immediate families (i.e., parent, child, spouse, sibling,
step or adopted relationships, and UTMA accounts naming qualifying
persons), may be made at net asset value without a sales charge. A Fund's
Class A Shares also may be purchased at net asset value without a sales
charge by fee-based registered investment advisers, financial planners and
registered broker/dealers who are purchasing shares on behalf of their
customers and by purchasers through "one-stop" mutual fund networks through
which the Funds are made available. In addition, Class A Shares may be
purchased at net asset value without a sales charge by qualified defined
contribution plans participating in the First American 401(k) Plan Program.
If Class A Shares of a Fund have been redeemed, the shareholder has a
one-time right, within 30 days, to reinvest the redemption proceeds in
Class A Shares of any FAIF fund at the next-determined net asset value
without any sales charge. The Transfer Agent must be notified by the
shareholder in writing or by his or her financial institution of the
reinvestment in order to eliminate a sales charge. If the shareholder
redeems his or her shares of a Fund, there may be tax consequences.
In addition, purchases of Class A Shares of a Fund that are funded by
proceeds received upon the redemption (within 60 days of the purchase of
Fund shares) of shares of any unrelated open-end investment company that
charges a sales load and rollovers from retirement plans that utilize the
Funds as investment options may be made at net asset value. To make such a
purchase at net asset value, an investor or the investor's broker must, at
the time of purchase, submit a written request to the Transfer Agent that
the purchase be processed at net asset value pursuant to this privilege,
accompanied by a photocopy of the confirmation (or similar evidence)
showing the redemption from the unrelated fund. The redemption of the
shares of the non-related fund is, for federal income tax purposes, a sale
upon which a gain or loss may be realized.
CLASS B SHARES OF MICRO CAP VALUE FUND.
CONTINGENT DEFERRED SALES CHARGE. Class B Shares of Micro Cap Value Fund
are sold at net asset value without any initial sales charge. If an
investor redeems Class B Shares within eight years of purchase, he or she
will pay a contingent deferred sales charge at the rates set forth below.
This charge is assessed on an amount equal to the lesser of the
then-current market value or the cost of the shares being redeemed.
Accordingly, no sales charge is imposed on increases in net asset value
above the initial purchase price or on shares derived from reinvestment of
dividends or capital gain distributions.
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF DOLLAR
AMOUNT SUBJECT TO
YEAR SINCE PURCHASE CHARGE
First 5.00%
Second 5.00%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh None
Eighth None
In determining whether a particular redemption is subject to a contingent
deferred sales charge, it is assumed that the redemption is first of any
Class A Shares in the shareholder's Fund account; second, of any Class B
Shares held for more than eight years and Class B Shares acquired pursuant
to reinvestment of dividends or other distributions; and third, of Class B
Shares held longest during the eight-year period. This method should result
in the lowest possible sales charge.
The contingent deferred sales charge is waived on redemption of Class B
Shares (i) within one year following the death or disability (as defined in
the Internal Revenue Code) of a shareholder, and (ii) to the extent that
the redemption represents a minimum required distribution from an
individual retirement account or other retirement plan to a shareholder who
has attained the age of 70 1/2 . A shareholder or his or her representative
must notify the Transfer Agent prior to the time of redemption if such
circumstances exist and the shareholder is elegible for this waiver.
CONVERSION FEATURE. At the end of the period ending eight years after the
beginning of the month in which the shares were issued, Class B Shares of
Micro Cap Value Fund will automatically convert to Class A Shares and will
no longer be subject to the Class B distribution and service fees. This
conversion will be on the basis of the relative net asset values of the two
classes.
SYSTEMATIC EXCHANGE PROGRAM
Shares of a Fund may also be purchased through automatic monthly deductions
from a shareholder's account in the same class of shares of Prime
Obligations Fund of First American Funds, Inc. Under a systematic exchange
program, a shareholder enters an agreement to purchase a specified class of
shares of one or more Funds over a specified period of time, and initially
purchases Prime Obligations Fund shares of the same class in an amount
equal to the total amount of the investment. On a monthly basis a specified
dollar amount of shares of Prime Obligations Fund is exchanged for shares
of the same class of the Funds specified. The systematic exchange program
of investing a fixed dollar amount at regular intervals over time has the
effect of reducing the average cost per share of the Funds. This effect
also can be achieved through the systematic investment program described
below. Because purchases of Class A Shares are subject to an initial sales
charge, it may be beneficial for an investor to execute a Letter of Intent
in connection with the systematic exchange program. A shareholder may apply
for participation in this program through his or her financial institution
or by calling (800) 637-2548.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their
investment on a regular basis in a minimum amount of $100. Under this
program, funds may be automatically withdrawn periodically from the
shareholder's checking account and invested in Fund shares at the net asset
value next determined after an order is received, plus any applicable sales
charge. A shareholder may apply for participation in this program through
his or her financial institution or call (800) 637-2548.
EXCHANGING SECURITIES FOR FUND SHARES
A Fund may accept securities in exchange for Fund shares. A Fund will allow
such exchanges only upon the prior approval by the Fund and a determination
by the Fund and the Adviser that the securities to be exchanged are
acceptable. Securities accepted by a Fund will be valued in the same manner
that a Fund values its assets. The basis of the exchange will depend upon
the net asset value of Fund shares on the day the securities are valued.
CERTIFICATES AND CONFIRMATIONS
The Transfer Agent maintains a share account for each shareholder. Share
certificates will not be issued by the Funds.
Confirmations of each purchase and redemption are sent to each shareholder.
In addition, monthly confirmations are sent to report all transactions and
dividends paid during that month for the Funds.
DIVIDENDS AND DISTRIBUTIONS
Dividends with respect to California Intermediate Tax Free Fund are
declared and paid monthly to all shareholders of record on the record date.
Dividends with respect to Micro Cap Value Fund are declared and paid
quarterly to all shareholders of record on the record date. Distributions
of any net realized long-term capital gains will be made at least once
every 12 months. Dividends and distributions are automatically reinvested
in additional shares of the Fund paying the dividend on payment dates at
the ex-dividend date net asset value without a sales charge, unless
shareholders request cash payments on the new account form or by writing to
the Fund.
All shareholders on the record date are entitled to the dividend. If shares
are purchased before a record date for a dividend or a distribution of
capital gains, a shareholder will pay the full price for the shares and
will receive some portion of the purchase price back as a taxable dividend
or distribution (to the extent, if any, that the dividend or distribution
is otherwise taxable to holders of Fund shares). If shares are redeemed or
exchanged before the record date for a dividend or distribution or are
purchased after the record date, those shares are not entitled to the
dividend or distribution.
The amount of dividends payable on Class A and Class B Shares generally
will be less than the dividends payable on Class C Shares because of the
distribution and/or shareholder servicing expenses charged to Class A and
Class B Shares. The amount of dividends payable on Class A Shares generally
will be more than the dividends payable on the Class B Shares because of
the higher distribution and shareholder servicing fees paid by the Class B
shares.
EXCHANGE PRIVILEGE
Shareholders may exchange Class A Shares of a Fund or, in the case of Micro
Cap Value Fund, Class B Shares for currently available Class A or Class B
Shares, respectively, of the other FAIF Funds or of other funds in the
First American family. Class A Shares of the Funds, whether acquired by
direct purchase, reinvestment of dividends on such shares, or otherwise,
may be exchanged for Class A Shares of other funds without the payment of
any sales charge (i.e., at net asset value). Exchanges of shares among the
First American family of funds must meet any applicable minimum investment
of the fund for which shares are being exchanged.
With respect to Micro Cap Value Fund, for purposes of calculating the Class
B Shares' eight-year conversion period or contingent deferred sales charges
payable upon redemption, the holding period of Class B Shares of the "old"
fund and the holding period of Class B Shares of the "new" fund are
aggregated.
The ability to exchange shares of the Funds does not constitute an offering
or recommendation of shares of one fund by another fund. This privilege is
available to shareholders resident in any state in which the fund shares
being acquired may be sold. An investor who is considering acquiring shares
in another First American fund pursuant to the exchange privilege should
obtain and carefully read a prospectus of the fund to be acquired.
Exchanges may be accomplished by a written request, or by telephone if a
preauthorized exchange authorization is on file with the Transfer Agent,
shareholder servicing agent, or financial institution.
Written exchange requests must be signed exactly as shown on the
authorization form, and the signatures may be required to be guaranteed as
for a redemption of shares by an entity described below under "Redeeming
Shares -- Directly From the Funds -- Signatures." Neither the Funds, the
Distributor, the Transfer Agent, any shareholder servicing agent, or any
financial institution will be responsible for further verification of the
authenticity of the exchange instructions.
Telephone exchange instructions made by an investor may be carried out only
if a telephone authorization form completed by the investor is on file with
the Transfer Agent, shareholder servicing agent, or financial institution.
Shares may be exchanged between two First American funds by telephone only
if both funds have identical shareholder registrations.
Telephone exchange instructions may be recorded and will be binding upon
the shareholder. Telephone instructions must be received by the Transfer
Agent before 3:00 p.m. Central time, or by a shareholder's shareholder
servicing agent or financial institution by the time specified by it, in
order for shares to be exchanged the same day. Neither the Transfer Agent
nor any Fund will be responsible for the authenticity of exchange
instructions received by telephone if it reasonably believes those
instructions to be genuine. The Funds and the Transfer Agent will each
employ reasonable procedures to confirm that telephone instructions are
genuine, and they may be liable for losses resulting from unauthorized or
fraudulent telephone instructions if they do not employ these procedures.
Shareholders of the Funds may have difficulty in making exchanges by
telephone through brokers and other financial institutions during times of
drastic economic or market changes. If a shareholder cannot contact his or
her broker or financial institution by telephone, it is recommended that an
exchange request be made in writing and sent by overnight mail to DST
Systems, Inc., 1004 Baltimore, Kansas City, Missouri 64105.
Shareholders who become eligible to purchase Class C Shares may exchange
Class A Shares for Class C Shares. An example of such an exchange would be
a situation in which an individual holder of Class A Shares subsequently
opens a custody or agency account with a financial institution which
invests in Class C Shares.
The terms of any exchange privilege may be modified or terminated by the
Funds at any time. There are currently no additional fees or charges for
the exchange service. The Funds do not contemplate establishing such fees
or charges, but they reserve the right to do so. Shareholders will be
notified of any modification or termination of the exchange privilege and
of the imposition of any additional fees or changes.
REDEEMING SHARES
Each Fund redeems shares at their net asset value next determined after the
Transfer Agent receives the redemption request, reduced by any applicable
contingent deferred sales charge. Redemptions will be made on days on which
the Fund computes its net asset value. Redemption requests can be made as
described below and must be received in proper form.
BY TELEPHONE
A shareholder may redeem shares of a Fund, if he or she elects the
privilege on the initial shareholder application, by calling his or her
financial institution to request the redemption. Shares will be redeemed at
the net asset value next determined after the Fund receives the redemption
request from the financial institution. Redemption requests must be
received by the financial institution by the time specified by the
institution in order for shares to be redeemed at that day's net asset
value, and redemption requests must be transmitted to and received by the
Funds by 3:00 p.m. Central time in order for shares to be redeemed at that
day's net asset value. Pursuant to instructions received from the financial
institution, redemptions will be made by check or by wire transfer. It is
the financial institution's responsibility to transmit redemption requests
promptly.
Shareholders who did not purchase their shares of a Fund through a
financial institution may redeem their shares by telephoning (800)
637-2548. At the shareholder's request, redemption proceeds will be paid by
check mailed to the shareholder's address of record or wire transferred to
the shareholder's account at a domestic commercial bank that is a member of
the Federal Reserve System, normally within one business day, but in no
event more than seven days after the request. Wire instructions must be
previously established on the account or provided in writing. The minimum
amount for a wire transfer is $1,000. If at any time the Funds determine it
necessary to terminate or modify this method of redemption, shareholders
will be promptly notified.
In the event of drastic economic or market changes, a shareholder may
experience difficulty in redeeming shares by telephone. If this should
occur, another method of redemption should be considered. Neither the
Transfer Agent nor any Fund will be responsible for any loss, liability,
cost or expense for acting upon wire transfer instructions or telephone
instructions that it reasonably believes to be genuine. These procedures
may include taping of telephone conversations. To ensure authenticity of
redemption or exchange instructions received by telephone, the Transfer
Agent examines each shareholder request by verifying the account number
and/or taxpayer identification number at the time such request is made. The
Transfer Agent subsequently sends confirmations of both exchange sales and
exchange purchases to the shareholder for verification. If reasonable
procedures are not employed, the Transfer Agent and the Funds may be liable
for any losses due to unauthorized or fraudulent telephone transactions.
BY MAIL
Any shareholder may redeem Fund shares by sending a written request to the
Transfer Agent, shareholder servicing agent, or financial institution. The
written request should include the shareholder's name, the Fund name, the
account number, and the share or dollar amount requested to be redeemed,
and should be signed exactly as the shares are registered. Shareholders
should call the Fund, shareholder servicing agent or financial institution
for assistance in redeeming by mail. A check for redemption proceeds
normally is mailed within one business day, but in no event more than seven
days, after receipt of a proper written redemption request.
Shareholders requesting a redemption of $5,000 or more, a redemption of any
amount to be sent to an address other than that on record with the Fund, or
a redemption payable other than to the shareholder of record, must have
signatures on written redemption requests guaranteed by:
* a trust company or commercial bank the deposits of which are
insured by the Bank Insurance Fund, which is administered by the
Federal Deposit Insurance Corporation ("FDIC");
* a member firm of the New York, American, Boston, Midwest, or
Pacific Stock Exchanges or of the National Association of
Securities Dealers;
* a savings bank or savings and loan association the deposits of
which are insured by the Savings Association Insurance Fund,
which is administered by the FDIC; or
* any other "eligible guarantor institution," as defined in the
Securities Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public.
The Funds and the Transfer Agent have adopted standards for accepting
signature guarantees from the above institutions. The Funds may elect in
the future to limit eligible signature guarantees to institutions that are
members of a signature guarantee program. The Funds and the Transfer Agent
reserve the right to amend these standards at any time without notice.
BY SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders whose account value is at least $5,000 may elect to
participate in the Systematic Withdrawal Program. Under this program, Fund
shares are redeemed to provide for periodic withdrawal payments in an
amount directed by the shareholder. A shareholder may apply to participate
in this program through his or her financial institution. It is generally
not in a shareholder's best interest to participate in the Systematic
Withdrawal Program at the same time that the shareholder is purchasing
additional shares if a sales charge must be paid in connection with such
purchases.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When shares are purchased by check or with funds transmitted through the
Automated Clearing House, the proceeds of redemptions of those shares are
not available until the Transfer Agent is reasonably certain that the
purchase payment has cleared, which could take up to ten calendar days from
the purchase date.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, a Fund may
redeem shares in any account, except retirement plans, and pay the
proceeds, less any applicable contingent deferred sales charge, to the
shareholder if the account balance falls below the required minimum value
of $500. Shares will not be redeemed in this manner, however, if the
balance falls below $500 because of changes in a Fund's net asset value.
Before shares are redeemed to close an account, the shareholder will be
notified in writing and allowed 60 days to purchase additional shares to
meet the minimum account requirement.
DETERMINING THE PRICE OF SHARES
Class A Shares of the Funds are sold at net asset value plus a sales
charge, while Class B Shares of Micro Cap Value Fund are sold without a
front-end sales charge. Shares are redeemed at net asset value less any
applicable contingent deferred sales charge. See "Investing in the Funds --
Alternative Sales Charge Options."
The net asset value per share is determined as of the earlier of the close
of the New York Stock Exchange or 3:00 p.m. Central time on each day the
New York Stock Exchange is open for business, provided that net asset value
need not be determined on days when no Fund shares are tendered for
redemption and no order for that Fund's shares is received and on days on
which changes in the value of portfolio securities will not materially
affect the current net asset value of the Fund's shares. The price per
share for purchases or redemptions is such value next computed after the
Transfer Agent receives the purchase order or redemption request.
It is the responsibility of Participating Institutions promptly to forward
purchase and redemption orders to the Transfer Agent. In the case of
redemptions and repurchases of shares owned by corporations, trusts or
estates, the Transfer Agent or Fund may require additional documents to
evidence appropriate authority in order to effect the redemption, and the
applicable price will be that next determined following the receipt of the
required documentation.
DETERMINING NET ASSET VALUE
The net asset value per share for each of the Funds is determined by
dividing the value of the securities owned by the Fund plus any cash and
other assets (including interest accrued and dividends declared but not
collected), less all liabilities, by the number of Fund shares outstanding.
For the purpose of determining the aggregate net assets of the Funds, cash
and receivables will be valued at their face amounts. Interest will be
recorded as accrued and dividends will be recorded on the ex-dividend date.
Investments in equity securities which are traded on a national securities
exchange (or reported on the NASDAQ national market system) are stated at
the last quoted sales price if readily available for such equity securities
on each business day; other equity securities traded in the
over-the-counter market and listed equity securities for which no sale was
reported on that date are stated at the last quoted bid price. Debt
obligations exceeding 60 days to maturity which are actively traded are
valued by an independent pricing service at the most recently quoted bid
price. Debt obligations with 60 days or less remaining until maturity may
be valued at their amortized cost. When market quotations are not readily
available, securities are valued at fair value as determined in good faith
by procedures established and approved by the Board of Directors.
Portfolio securities underlying actively traded options are valued at their
market price as determined above. The current market value of any exchange
traded option held or written by a Fund is its last sales price on the
exchange prior to the time when assets are valued, unless the bid price is
higher or the asked price is lower, in which event the bid or asked price
is used. In the absence of any sales that day, options will be valued at
the current closing bid price.
INCOME TAXES
FEDERAL INCOME TAXATION
Each Fund is treated as a different entity for federal income tax purposes.
Each of the Funds qualified during its last fiscal year as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"), and each of the Funds intends to so qualify in the future. If so
qualified and provided certain distribution requirements are met, a Fund
will not be liable for federal income taxes to the extent it distributes
its income to its shareholders.
Distributions of net interest income from tax-exempt obligations that are
designated by California Intermediate Tax Free Fund as exempt-interest
dividends are excludable from the gross income of the Fund's shareholders.
A portion of such dividends may, however, be subject to the alternative
minimum tax, as discussed below.
Distributions paid from other interest income of California Intermediate
Tax Free Fund, from the net investment income of Micro Cap Value Fund, and
from any net realized short-term capital gains of either Fund, will be
taxable to shareholders as ordinary income, whether received in cash or in
additional shares. Since none of the income of California Intermediate Tax
Free Fund will consist of dividends from domestic corporations, the
dividends-received deduction for corporations will not be applicable to
taxable distributions by that Fund. Distributions paid by each Fund from
long-term capital gains (and designated as such) will be taxable as
long-term capital gains for federal income tax purposes, whether received
in cash or shares, regardless of how long a shareholder has held the shares
in a Fund. Long-term capital gains of individuals are currently taxed at a
maximum rate of 28%.
Gain or loss realized on the sale or exchange of shares in a Fund will be
treated as capital gain or loss, provided that (as is usually the case) the
shares represented a capital asset in the hands of the shareholder. Such
gain or loss will be long-term gain or loss if the shares were held for
more than one year.
For federal income tax purposes, an alternative minimum tax ("AMT") is
imposed on taxpayers to the extent that such tax, if any, exceeds a
taxpayer's regular income tax liability (with certain adjustments).
Liability for AMT will depend on each shareholder's tax situation.
Exempt-interest dividends attributable to interest income on certain
tax-exempt obligations issued after August 7, 1986, to finance certain
private activities will be treated as an item of tax preference that is
included in alternative minimum taxable income for purposes of computing
the federal AMT for all taxpayers and the federal environmental tax on
corporations. California Intermediate Tax Free Fund may invest up to 20% of
its total assets in obligations the interest on which is treated as an item
of tax preference for federal income tax purposes. Also, a portion of all
other tax-exempt interest received by a corporation, including
exempt-interest dividends, will be included in adjusted current earnings
and in earnings and profits for purposes of determining the federal
corporate alternative minimum tax, the environmental tax imposed on
corporations under Section 59A of the Code, and the branch profits tax
imposed on foreign corporations under Section 884 of the Code. Each
shareholder is advised to consult his or her tax adviser with respect to
the possible effects of such tax preference items.
The Tax Reform Act of 1986 imposed new requirements on certain tax-exempt
bonds which, if not satisfied, could result in loss of tax exemption for
interest on such bonds, even retroactively to the date of issuance of the
bonds. Proposals may be introduced before Congress in the future, the
purpose of which will be to further restrict or eliminate the federal
income tax exemption for tax-exempt bonds held by California Intermediate
Tax Free Fund. This Fund will avoid investment in bonds which, in the
opinion of the Adviser, pose a material risk of the loss of tax exemption.
Further, if a bond in this Fund's portfolio lost its exempt status, the
Fund would make every effort to dispose of that investment on terms that
are not detrimental to the Fund.
In certain instances, the portion of Social Security benefits received by a
shareholder that is subject to federal income tax may be affected by the
amount of exempt-interest dividends received by the shareholder from
California Intermediate Tax Free Fund.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of California Intermediate Tax Free Fund will not be deductible for
federal income purposes.
A Fund may be required to "back-up" withhold 31% of any dividend,
distribution, or redemption payment made to a shareholder who fails to
furnish the Fund with the shareholder's Social Security number or other
taxpayer identification number or to certify that he or she is not subject
to back-up withholding.
Information concerning distributions will be mailed to shareholders
annually. Shareholders are required for information purposes to report
exempt-interest dividends and other tax-exempt interest on their tax
returns.
CALIFORNIA INCOME TAXATION
Individual shareholders of California Intermediate Tax Free Fund who are
subject to California personal income taxation will not be required to
include in their California gross income that portion of their federally
tax exempt dividends which the Fund clearly identifies as directly
attributable to interest earned on California state or municipal
obligations, and dividends which the Fund clearly identifies as directly
attributable to interest earned on obligations of the United States, the
interest on which is exempt from California personal income tax pursuant to
federal law, provided that at least 50% of the value of the Fund's total
assets consists of obligations the interest on which is exempt from
California personal income taxation pursuant to federal or California law.
Distributions to individual shareholders derived from interest on state or
municipal obligations issued by governmental authorities in states other
than California, short-term capital gains and other taxable income will be
taxed as dividends for purposes of California personal income taxation. The
Fund's long-term capital gains for federal income tax purposes will be
taxed as long-term capital gains to individual shareholders of the Fund for
purposes of California personal income taxation. Gain or loss, if any,
resulting from an exchange or redemption of shares will be recognized in
the year of the exchange or redemption.
OTHER STATE AND LOCAL TAXATION
Except to the extent described above under "-- California Income Taxation,"
distributions by both Funds may be subject to state and local taxation even
if they are exempt from federal income taxes. Shareholders are urged to
consult their own tax advisers regarding state and local taxation.
CALIFORNIA INTERMEDIATE TAX FREE FUND: TAX-EXEMPT VS. TAXABLE INCOME
The table below shows the approximate yields that taxable securities must
earn to equal yields that are exempt from both federal and California
income taxes, under selected income tax brackets scheduled to be in effect
in 1997. The effective combined rates reflect the deduction of state income
taxes from federal income. The 34.8%, 37.4%, 42.0% and 45.2% combined
federal/California rates assume that the investor is subject to a 9.3%
marginal California income tax rate and a marginal federal income tax rate
of 28%, 31%, 36% and 39.6%, respectively. The combined rates do not reflect
federal rules concerning the phase-out of personal exemptions and
limitations on the allowance of itemized deductions for certain high-income
taxpayers. The tables are based upon yields that are derived solely from
tax-exempt income. To the extent that California Intermediate Tax Free
Fund's yield is derived from taxable income, the Fund's tax equivalent
yield will be less than set forth in the tables. The tax-free yields used
in these tables should not be considered as representations of any
particular rates of return and are for purposes of illustration only.
TAX-EQUIVALENT YIELDS
COMBINED FEDERAL AND
CALIFORNIA TAX BRACKETS
TAX-FREE
YIELDS 34.8% 37.4% 42.0% 45.2%
3.0% 4.60% 4.79% 5.17% 5.47%
3.5% 5.37% 5.59% 6.03% 6.39%
4.0% 6.13% 6.39% 6.90% 7.30%
4.5% 6.90% 7.19% 7.76% 8.21%
5.0% 7.67% 7.99% 8.62% 9.12%
5.5% 8.44% 8.79% 9.48% 10.03%
6.0% 9.20% 9.58% 10.34% 10.95%
6.5% 9.97% 10.38% 11.21% 11.86%
FUND SHARES
Each share of a Fund is fully paid, nonassessable, and transferable. Shares
may be issued as either full or fractional shares. Fractional shares have
pro rata the same rights and privileges as full shares. Shares of the Funds
have no preemptive or conversion rights.
Each share of a Fund has one vote. On some issues, such as the election of
directors, all shares of all FAIF Funds vote together as one series. The
shares do not have cumulative voting rights. Consequently, the holders of
more than 50% of the shares voting for the election of directors are able
to elect all of the directors if they choose to do so. On issues affecting
only a particular Fund or Class, the shares of that Fund or Class will vote
as a separate series. Examples of such issues would be proposals to alter a
fundamental investment restriction pertaining to a Fund or to approve,
disapprove or alter a distribution plan pertaining to a Class.
Under the laws of the State of Maryland and FAIF's Articles of
Incorporation, FAIF is not required to hold shareholder meetings unless
they (i) are required by the 1940 Act, or (ii) are requested in writing by
the holders of 25% or more of the outstanding shares of FAIF.
CALCULATION OF PERFORMANCE DATA
From time to time, either of the Funds may advertise information regarding
its performance. Each Fund may publish its "yield," its "cumulative total
return," its "average annual total return," and its "distribution rate." In
addition, California Intermediate Tax Free Fund may publish its "tax
equivalent yield" and its "tax equivalent distribution rate." Distribution
rates and tax equivalent distribution rates may only be used in connection
with sales literature and shareholder communications preceded or
accompanied by a Prospectus. Each of these performance figures is based
upon historical results and is not intended to indicate future performance,
and, except for "distribution rate" and "tax equivalent distribution rate,"
is standardized in accordance with Securities and Exchange Commission
("SEC") regulations.
"Yield" for the Funds is computed by dividing the net investment income per
share (as defined in applicable SEC regulations) earned during a 30-day
period (which period will be stated in the advertisement) by the maximum
offering price per share on the last day of the period. Yield is an
annualized figure, in that it assumes that the same level of net investment
income is generated over a one year period. The yield formula annualizes
net investment income by providing for semi-annual compounding.
"Tax equivalent yield" is that yield which a taxable investment must
generate in order to equal a Fund's yield for an investor in a stated
federal or combined federal/state income tax bracket (normally assumed to
be the maximum tax rate or combined rate). Tax equivalent yield is computed
by dividing that portion of the yield which is tax-exempt by one minus the
stated income tax rate, and adding the resulting amount to that portion, if
any, of the yield which is not tax-exempt.
"Total return" is based on the overall dollar or percentage change in value
of a hypothetical investment in a Fund assuming reinvestment of dividend
distributions and deduction of all charges and expenses, including the
maximum sales charge imposed on Class A Shares. "Cumulative total return"
reflects a Fund's performance over a stated period of time. "Average annual
total return" reflects the hypothetical annually compounded rate that would
have produced the same cumulative total return if performance had been
constant over the entire period. Because average annual returns tend to
smooth out variations in a Fund's performance, they are not the same as
actual year-by-year results. As a supplement to total return computations,
a Fund may also publish "total investment return" computations which do not
assume deduction of the maximum sales charge imposed on Class A Shares or
the contingent deferred sales charge imposed on Class B Shares.
"Distribution rate" is determined by dividing the income dividends per
share for a stated period by the maximum offering price per share on the
last day of the period. "Tax equivalent distribution rate" is computed by
dividing the portion of the distribution rate (determined as described
above) which is tax-exempt by one minus the stated federal or combined
federal/state income tax rate, and adding to the resulting amount that
portion, if any, of the distribution rate which is not tax-exempt. All
distribution rates published for the Funds are measures of the level of
income dividends distributed during a specified period. Thus, these rates
differ from yield (which measures income actually earned by a Fund) and
total return (which measures actual income, plus realized and unrealized
gains or losses of a Fund's investments). Consequently, distribution rates
alone should not be considered complete measures of performance.
The performance of the Class A and Class B Shares of a Fund will normally
be lower than for the Class C Shares because Class C Shares are not subject
to the sales charges and distribution and/or shareholder servicing expenses
applicable to Class A and Class B Shares. In addition, the performance of
Class A and Class B Shares of a Fund will differ because of the different
sales charge structures of the classes and because of the differing
distribution and shareholder servicing fees charged to Class B Shares.
In reports or other communications to shareholders and in advertising
material, the performance of each Fund may be compared to recognized
unmanaged indices or averages of the performance of similar securities and
to composites of such indices and averages. Also, the performance of each
Fund may be compared to that of other funds of similar size and objectives
as listed in the rankings prepared by Lipper Analytical Services, Inc. or
similar independent mutual fund rating services, and each Fund may include
in such reports, communications and advertising material evaluations
published by nationally recognized independent ranking services and
publications. For further information regarding the Funds' performance, see
"Fund Performance" in the Statement of Additional Information.
PERFORMANCE INFORMATION FOR SUCCESSORS TO COMMON TRUST FUNDS
Each of California Intermediate Tax Free Fund and Micro Cap Value Fund
commenced operations when substantially all of the assets of certain common
trust funds which were exempt from registration under the 1940 Act were
transferred to these Funds. One predecessor common trust fund was managed
by the Adviser, while the other was managed by Qualivest Capital
Management, Inc. prior to the acquisition of its parent company by the
Adviser's parent company. The personnel who managed that common trust fund
on behalf of Qualivest Capital Management became employees of the Adviser,
and assumed management of the applicable Fund, at the time the assets were
transferred from the common trust fund to the Fund.
Certain performance data for these Funds and their predecessor common trust
funds is set forth below. This data is deemed relevant because the common
trust funds were managed using investment obejctives, policies, and
restrictions very similar to those of their corresponding Funds. However,
the predecessor common trust funds were not subject to certain investment
restrictions that are imposed by the 1940 Act. Accordingly, if the common
trust funds had been registered under the 1940 Act, their performance could
have been adversely affected by virtue of such investment restrictions.
The predecessor common trust funds did not incur the same expenses as the
Funds. The performance information set forth below has been adjusted, for
periods prior to the transfer of the common trust funds' assets to the
Funds, to apply the total expense ratios for the corresponding Funds as
disclosed in the Funds' prospectuses at the time they commenced operations
(after voluntary fee waivers reflected in such total expense ratios). These
adjustments had the effect of reducing the reported performance of the
respective common trust funds.
The average annual total returns for the Funds' predecessor common trust
funds for the periods set forth below, adjusted as described above, were as
follows:
FROM INCEPTION
(5/1/92)
1 YEAR ENDED THROUGH
4/30/97 4/30/97
California Intermediate
Tax Free Fund, Class A
predecessor 0.77% 4.69%
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
4/30/97 4/30/97 4/30/97
Micro Cap Value Fund,
Class A predecessor 3.87% 17.93% 14.84%
Micro Cap Value Fund,
Class B predecessor 2.94% 17.85% 14.56%
SPECIAL INVESTMENT METHODS
This section provides additional information concerning the securities in
which the Funds may invest and related topics. Further information
concerning these matters is contained in the Statement of Additional
Information.
MUNICIPAL BONDS AND OTHER MUNICIPAL OBLIGATIONS
As described under "Investment Objectives and Policies," California
Intermediate Tax Free Fund invests principally in municipal bonds and other
municipal obligations. These bonds and other obligations are issued by the
states and by their local and special-purpose political subdivisions. The
term "municipal bond" as used in this Prospectus includes short-term
municipal notes issued by the states and their political subdivisions.
MUNICIPAL BONDS. The two general classifications of municipal bonds are
"general obligation" bonds and "revenue" bonds. General obligation bonds
are secured by the governmental issuer's pledge of its faith, credit and
taxing power for the payment of principal and interest. They are usually
paid from general revenues of the issuing governmental entity. Revenue
bonds, on the other hand, are usually payable only out of a specific
revenue source rather than from general revenues. Revenue bonds ordinarily
are not backed by the faith, credit or general taxing power of the issuing
governmental entity.
The principal and interest on revenue bonds for private facilities are
typically paid out of rents or other specified payments made to the issuing
governmental entity by a private company which uses or operates the
facilities. Examples of these types of obligations are industrial revenue
bonds and pollution control revenue bonds. Industrial revenue bonds are
issued by governmental entities to provide financing aid to community
facilities such as hospitals, hotels, business or residential complexes,
convention halls and sport complexes. Pollution control revenue bonds are
issued to finance air, water and solids pollution control systems for
privately operated industrial or commercial facilities.
Revenue bonds for private facilities usually do not represent a pledge of
the credit, general revenues or taxing powers of the issuing governmental
entity. Instead, the private company operating the facility is the sole
source of payment of the obligation. Sometimes, the funds for payment of
revenue bonds come solely from revenue generated by operation of the
facility. Revenue bonds which are not backed by the credit of the issuing
governmental entity frequently provide a higher rate of return than other
municipal obligations, but they entail greater risk than obligations which
are guaranteed by a governmental unit with taxing power. Federal income tax
laws place substantial limitations on industrial revenue bonds, and
particularly certain specified private activity bonds issued after August
7, 1986. In the future, legislation could be introduced in Congress which
could further restrict or eliminate the income tax exemption for interest
on debt obligations in which the Fund may invest.
MUNICIPAL LEASES. California Intermediate Tax Free Fund also may purchase
participation interests in municipal leases. Participation interests in
municipal leases are undivided interests in a lease, installment purchase
contract or conditional sale contract entered into by a state or local
governmental unit to acquire equipment or facilities. Municipal leases
frequently have special risks which generally are not associated with
general obligation bonds or revenue bonds.
Municipal leases and installment purchase or conditional sale contracts
(which usually provide for title to the leased asset to pass to the
governmental issuer upon payment of all amounts due under the contract)
have evolved as a means for governmental issuers to acquire property and
equipment without meeting the constitutional and statutory requirements for
the issuance of municipal debt. The debt-issuance limitations are deemed to
be inapplicable because of the inclusion in many leases and contracts of
"non-appropriation" clauses that provide that the governmental issuer has
no obligation to make future payments under the lease or contract unless
money is appropriated for this purpose by the appropriate legislative body
on a yearly or other periodic basis. Although these kinds of obligations
are secured by the leased equipment or facilities, the disposition of the
pledged property in the event of non-appropriation or foreclosure might, in
some cases, prove difficult and time-consuming. In addition, disposition
upon non-appropriation or foreclosure might not result in recovery by the
Fund of the full principal amount represented by an obligation.
In light of these concerns, the Fund has adopted and follows procedures for
determining whether municipal lease obligations purchased by the Fund are
liquid and for monitoring the liquidity of municipal lease securities held
in the Fund's portfolio. These procedures require that a number of factors
be used in evaluating the liquidity of a municipal lease security,
including the frequency of trades and quotes for the security, the number
of dealers willing to purchase or sell the security and the number of other
potential purchasers, the willingness of dealers to undertake to make a
market in the security, the nature of the marketplace in which the security
trades, and other factors which the Adviser may deem relevant. As described
below under "-- Investment Restrictions," California Intermediate Tax Free
Fund is subject to limitations on the percentage of illiquid securities it
can hold.
TEMPORARY TAXABLE INVESTMENTS
California Intermediate Tax Free Fund may make temporary taxable
investments as described under "Investment Objectives and Policies."
Temporary taxable investments will include only the following types of
obligations maturing within 13 months from the date of purchase: (i)
obligations of the United States Government, its agencies and
instrumentalities; (ii) commercial paper rated not less than A-1 by
Standard & Poor's or P-1 by Moody's or which has been assigned an
equivalent rating by another nationally recognized statistical rating
organization; (iii) other short-term debt securities issued or guaranteed
by corporations having outstanding debt rated not less than BBB by Standard
& Poor's or Baa by Moody's or which have been assigned an equivalent rating
by another nationally recognized statistical rating organization; (iv)
certificates of deposit of domestic commercial banks subject to regulation
by the United States Government or any of its agencies or
instrumentalities, with assets of $500 million or more based on the most
recent published reports; and (v) repurchase agreements with domestic banks
or securities dealers involving any of the securities which the Fund is
permitted to hold. See "-- Repurchase Agreements" below.
REPURCHASE AGREEMENTS
The temporary taxable investments which California Intermediate Tax Free
Fund may make include repurchase agreements, and Micro Cap Value Fund also
is permitted to enter into such agreements. A repurchase agreement involves
the purchase by a Fund of securities with the agreement that after a stated
period of time, the original seller will buy back the same securities
("collateral") at a predetermined price or yield. Repurchase agreements
involve certain risks not associated with direct investments in securities.
If the original seller defaults on its obligation to repurchase as a result
of its bankruptcy or otherwise, the purchasing Fund will seek to sell the
collateral, which could involve costs or delays. Although collateral (which
may consist of any fixed income security which is an eligible investment
for the Fund entering into the repurchase agreement) will at all times be
maintained in an amount equal to the repurchase price under the agreement
(including accrued interest), a Fund would suffer a loss if the proceeds
from the sale of the collateral were less than the agreed-upon repurchase
price. The Adviser will monitor the creditworthiness of the firms with
which the Funds enter into repurchase agreements.
INVERSE FLOATING RATE OBLIGATIONS
California Intermediate Tax Free Fund may invest up to 5% of its net assets
in inverse floating rate municipal obligations. An inverse floating rate
obligation entitles the holder to receive interest at a rate which changes
in the opposite direction from, and in the same magnitude as or in a
multiple of, changes in a specified index rate. Although an inverse
floating rate municipal obligation would tend to increase portfolio income
during a period of generally decreasing market interest rates, its income
and value would tend to decline during a period of generally increasing
market interest rates. In addition, its decline in value may be greater
than for a fixed-rate municipal obligation, particularly if the interest
rate borne by the floating rate municipal obligation is adjusted by a
multiple of changes in the specified index rate. For these reasons, inverse
floating rate municipal obligations have more risk than more conventional
fixed-rate and floating rate municipal obligations.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS
Each of the Funds may purchase securities on a when-issued or
delayed-delivery basis. When such a transaction is negotiated, the purchase
price is fixed at the time the purchase commitment is entered, but delivery
of and payment for the securities take place at a later date. A Fund will
not accrue income with respect to securities purchased on a when-issued or
delayed-delivery basis prior to their stated delivery date. Pending
delivery of the securities, each Fund will maintain in a segregated account
cash or liquid high-grade securities in an amount sufficient to meet its
purchase commitments.
The purchase of securities on a when-issued or delayed-delivery basis
exposes a Fund to risk because the securities may decrease in value prior
to delivery. In addition, a Fund's purchase of securities on a when-issued
or delayed-delivery basis while remaining substantially fully invested
could increase the amount of the Fund's total assets that are subject to
market risk, resulting in increased sensitivity of net asset value to
changes in market prices. However, the Funds will engage in when-issued and
delayed-delivery transactions only for the purpose of acquiring portfolio
securities consistent with their investment objectives, and not for the
purpose of investment leverage. A seller's failure to deliver securities to
a Fund could prevent the Fund from realizing a price or yield considered to
be advantageous.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, each of the Funds may lend
portfolio securities representing up to one-third of the value of its total
assets to broker-dealers, banks or other institutional borrowers of
securities. If the Funds engage in securities lending, distributions paid
to shareholders from the resulting income will not be excludable from
shareholders' gross income for income tax purposes. As with other
extensions of credit, there may be risks of delay in recovery of the
securities or even loss of rights in the collateral should the borrower of
the securities fail financially. However, the Funds will only enter into
loan arrangements with broker-dealers, banks, or other institutions which
the Adviser has determined are creditworthy under guidelines established by
the Board of Directors. In these loan arrangements, the Funds will receive
collateral in the form of cash, United States Government securities or
other high-grade debt obligations equal to at least 100% of the value of
the securities loaned. Collateral is marked to market daily. The Funds will
pay a portion of the income earned on the lending transaction to the
placing broker and may pay administrative and custodial fees (including
fees to an affiliate of the Adviser) in connection with these loans.
OPTIONS TRANSACTIONS
CALIFORNIA INTERMEDIATE TAX FREE FUND. California Intermediate Tax Free
Fund may, in order to reduce risk, invest in exchange traded put and call
options on interest rate futures contracts and on interest rate indices.
Such investments will be made solely as a hedge against adverse changes
resulting from market conditions in the values of securities held by the
Fund or which it intends to purchase and where the transactions are deemed
appropriate to reduce risks inherent in the Fund's portfolio or
contemplated investments.
California Intermediate Tax Free Fund will not invest more than 5% of the
value of its total assets in purchased options, provided that options which
are "in the money" at the time of purchase may be excluded from this 5%
limitation. A call option is "in the money" if the exercise price is lower
than the current market price of the underlying contract or index, and a
put option is "in the money" if the exercise price is higher than the
current market price. A Fund's loss exposure in purchasing an option is
limited to the sum of the premium paid (purchase price of the option) and
the commission or other transaction expenses associated with acquiring the
option.
An interest rate futures contract provides for the future sale by one party
and purchase by the other party of a certain amount of a specific financial
instrument (debt security) at a specified price, date, time and place. An
option on an interest rate futures contract, as contrasted with the direct
investment in such a contract, gives the purchaser the right, in return for
the premium paid, to purchase (in the case of a call option) or sell (in
the case of a put option) an interest rate futures contract at a specified
exercise price at any time prior to the expiration date of the option. In
order to hedge its portfolio against anticipated changes in interest rates,
a Fund might purchase a put option on an interest rate futures contract if
interest rates were expected to rise, or might purchase a call option on an
interest rate futures contract if rates were expected to decline.
Options on interest rate indices are similar to options on interest rate
futures contracts except that, rather than the right to take or make
delivery of a specific financial instrument at a specified price, an option
on an interest rate index gives the holder the right to receive, upon
exercise of the option, a defined amount of cash if the closing value of
the interest rate index upon which the option is based is greater than, in
the case of a call, or less than, in the case of a put, the exercise price
of the option. Put and call options on interest rate indices thus may be
used in a fashion similar to that of options on interest rate futures
contracts to hedge the value of a portfolio of debt securities against
anticipated changes in interest rates.
The use of options on interest rate futures contracts and on interest rate
indices involves certain risks. These include the risk that changes in
interest rates on the hedged instruments may not correlate to changes in
interest rates on the instrument or index upon which the hedge is based,
and the risk of limited liquidity in the event that a Fund seeks to close
out an options position before expiration by entering into an offsetting
transaction.
MICRO CAP VALUE FUND.
PURCHASES OF PUT AND CALL OPTIONS. Micro Cap Value Fund may purchase put
and call options on equity securities and on stock indices. These
transactions will be undertaken only for the purpose of reducing risk to
the Fund; that is, for "hedging" purposes.
A put option on a security gives the purchaser of the option the right (but
not the obligation) to sell, and the writer of the option the obligation to
buy, the underlying security at a stated price (the "exercise price") at
any time before the option expires. A call option on a security gives the
purchaser the right (but not the obligation) to buy, and the writer the
obligation to sell, the underlying security at the exercise price at any
time before the option expires. The purchase price for a put or call option
is the "premium" paid by the purchaser for the right to sell or buy.
Options on indices are similar to options on securities except that, rather
than the right to take or make delivery of a specific security at a stated
price, an option on an index gives the holder the right to receive, upon
exercise of the option, a defined amount of cash if the closing value of
the index upon which the option is based is greater than, in the case of a
call, or less than, in the case of a put, the exercise price of the option.
Micro Cap Value Fund will not invest more than 5% of the value of its total
assets in purchased options, provided that options which are "in the money"
at the time of purchase may be excluded from this 5% limitation. A call
option is "in the money" if the exercise price is lower than the current
market price of the underlying security or index, and a put option is "in
the money" if the exercise price is higher than the current market price.
The Fund's loss exposure in purchasing an option is limited to the sum of
the premium paid and the commission or other transaction expenses
associated with acquiring the option.
The use of purchased put and call options involves certain risks. These
include the risk of an imperfect correlation between market prices of
securities held by the Fund and the prices of options, and the risk of
limited liquidity in the event that the Fund seeks to close out an options
position before expiration by entering into an offsetting transaction.
WRITING OF CALL OPTIONS. Micro Cap Value Fund may write (sell) covered call
options on equity securities which it owns or has the right to acquire to
the extent specified under "Investment Objectives and Policies -- Micro Cap
Value Fund." These transactions would be undertaken primarily to produce
additional income.
When a Fund sells a covered call option, it is paid a premium by the
purchaser. If the market price of the security covered by the option does
not increase above the exercise price before the option expires, the option
generally will expire without being exercised, and the Fund will retain
both the premium paid for the option and the security. If the market price
of the security covered by the option does increase above the exercise
price before the option expires, however, the option is likely to be
exercised by the purchaser. In that case the Fund will be required to sell
the security at the exercise price, and it will not realize the benefits of
increases in the market price of the security above the exercise price of
the option.
Micro Cap Value Fund also may write call options on stock indices the
movements of which generally correlate with those of the Fund's portfolio
holdings. These transactions, which would be undertaken principally to
produce additional income, entail the risk of an imperfect correlation
between movements of the index covered by the option and movements in the
price of the Fund's portfolio securities.
CASH ITEMS
The "cash items" in which Micro Cap Value Fund may invest, as described
under "Investment Objectives and Policies -- Micro Cap Value Fund," include
short-term obligations such as commercial paper and variable amount master
demand notes; United States dollar-denominated time and savings deposits
(including certificates of deposit); bankers acceptances; obligations of
the United States Government or its agencies or instrumentalities;
repurchase agreements collateralized by eligible investments of the Fund;
securities of other mutual funds which invest primarily in debt obligations
with remaining maturities of 13 months or less (which investments are
subject to the advisory fee); and other similar high-quality short-term
United States dollar-denominated obligations. The other mutual funds in
which Micro Cap Value Fund may so invest include money market funds advised
by the Adviser, subject to certain restrictions contained in an exemptive
order issued by the Securities and Exchange Commission with respect
thereto.
FIXED INCOME SECURITIES
The fixed income securities in which Micro Cap Value Fund may invest
include securities issued or guaranteed by the United States Government or
its agencies or instrumentalities, nonconvertible preferred stocks,
nonconvertible corporate debt securities, and short-term obligations of the
kinds described above under "-- Cash Items." Investments in nonconvertible
preferred stocks and nonconvertible corporate debt obligations will be
limited to securities which are rated at the time of purchase not less than
BBB by Standard & Poor's or Baa by Moody's (or equivalent short-term
ratings), or which have been assigned an equivalent rating by another
nationally recognized statistical rating organization, or which are of
comparable quality in the judgment of the Adviser. Obligations rated BBB,
Baa or their equivalent, although investment grade, have speculative
characteristics and carry a somewhat higher risk of default than
obligations rated in the higher investment grade categories. In addition,
Micro Cap Value Fund may invest up to 5% of its net assets in less than
investment grade convertible debt obligations.
The fixed income securities specified above are subject to interest rate
risk, credit risk, and call or prepayment risk. The nature of these risks
is discussed above under "Investment Objectives and Policies -- Risks to
Consider -- California Intermediate Tax Free Fund."
FOREIGN SECURITIES
GENERAL. As described under "Investment Objective and Policies -- Micro Cap
Value Fund," Micro Cap Value Fund may invest up to 25% of its total assets
in securities of foreign issuers which are either listed on a United States
securities exchange or represented by American Depositary Receipts.
Investment in foreign securities is subject to special investment risks
that differ in some respects from those related to investments in
securities of United States domestic issuers. These risks include
political, social or economic instability in the country of the issuer, the
difficulty of predicting international trade patterns, the possibility of
the imposition of exchange controls, expropriation, limits on removal of
currency or other assets, nationalization of assets, foreign withholding
and income taxation, and foreign trading practices (including higher
trading commissions, custodial charges and delayed settlements). Foreign
securities also may be subject to greater fluctuations in price than
securities issued by United States corporations. The principal markets on
which these securities trade may have less volume and liquidity, and may be
more volatile, than securities markets in the United States.
In addition, there may be less publicly available information about a
foreign company than about a United States domiciled company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to United
States domestic companies. There is also generally less government
regulation of securities exchanges, brokers and listed companies abroad
than in the United States. Confiscatory taxation or diplomatic developments
could also affect investment in those countries. In addition, foreign
branches of United States banks, foreign banks and foreign issuers may be
subject to less stringent reserve requirements and to different accounting,
auditing, reporting, and recordkeeping standards than those applicable to
domestic branches of United States banks and United States domestic
issuers.
AMERICAN DEPOSITARY RECEIPTS. For many foreign securities, United States
dollar-denominated American Depositary Receipts, which are traded in the
United States on exchanges or over-the-counter, are issued by domestic
banks. American Depositary Receipts represent the right to receive
securities of foreign issuers deposited in a domestic bank or a
correspondent bank. American Depositary Receipts do not eliminate all the
risk inherent in investing in the securities of foreign issuers. However,
by investing in American Depositary Receipts rather than directly in
foreign issuers' stock, the Fund can avoid currency risks during the
settlement period for either purchases or sales. In general, there is a
large, liquid market in the United States for many American Depositary
Receipts. The information available for American Depositary Receipts is
subject to the accounting, auditing and financial reporting standards of
the domestic market or exchange on which they are traded, which standards
are more uniform and more exacting than those to which many foreign issuers
may be subject.
Certain American Depositary Receipts, typically those denominated as
unsponsored, require the holders thereof to bear most of the costs of the
facilities while issuers of sponsored facilities normally pay more of the
costs thereof. The depository of an unsponsored facility frequently is
under no obligation to distribute shareholder communications received from
the issuer of the deposited securities or to pass through the voting rights
to facility holders in respect to the deposited securities, whereas the
depository of a sponsored facility typically distributes shareholder
communications and passes through voting rights.
PORTFOLIO TRANSACTIONS
Portfolio transactions in the over-the-counter market will be effected with
market makers or issuers, unless better overall price and execution are
available through a brokerage transaction. It is anticipated that most
portfolio transactions involving debt securities will be executed on a
principal basis. Also, with respect to the placement of portfolio
transactions with securities firms, subject to the overall policy to seek
to place portfolio transactions as efficiently as possible and at the best
price, research services and placement of orders by securities firms for a
Fund's shares may be taken into account as a factor in placing portfolio
transactions for the Fund.
PORTFOLIO TURNOVER
Although the Funds do not intend generally to trade for short-term profits,
they may dispose of a security without regard to the time it has been held
when such action appears advisable to the Adviser. The portfolio turnover
rate for a Fund may vary from year to year and may be affected by cash
requirements for redemptions of shares. High portfolio turnover rates
generally would result in higher transaction costs and could result in
additional tax consequences to a Fund's shareholders.
INVESTMENT RESTRICTIONS
The fundamental and nonfundamental investment restrictions of the Funds are
set forth in full in the Statement of Additional Information. The
fundamental restrictions include the following:
* Neither of the Funds will borrow money, except from banks for
temporary or emergency purposes. The amount of such borrowing may
not exceed 10% of the borrowing Fund's total assets. Neither of
the Funds will borrow money for leverage purposes. For the
purpose of this investment restriction, the use of options and
futures transactions and the purchase of securities on a
when-issued or delayed-delivery basis shall not be deemed the
borrowing of money. If a Fund engages in borrowing, its share
price may be subject to greater fluctuation, and the interest
expense associated with the borrowing may reduce the Fund's net
income.
* Neither of the Funds will mortgage, pledge or hypothecate its
assets, except in an amount not exceeding 15% of the value of its
total assets to secure temporary or emergency borrowing.
* Neither of the Funds will make short sales of securities.
* Neither of the Funds will purchase any securities on margin
except to obtain such short-term credits as may be necessary for
the clearance of transactions.
* California Intermediate Tax Free Fund will not invest 25% or more
of the value of its total assets in revenue bonds or notes,
payment for which comes from revenues from any one type of
activity (for this purpose, the term "type of activity" shall
include without limitation (i) sewage treatment and disposal;
(ii) gas provision; (iii) electric power provision; (iv) water
provision; (v) mass transportation systems; (vi) housing; (vii)
hospitals; (viii) nursing homes; (ix) street development and
repair; (x) toll roads; (xi) airport facilities; and (xii)
educational facilities), except that, in circumstances in which
other appropriate available investments may be in limited supply,
such Funds may invest without limitation in gas provision,
electric power provision, water provision, housing and hospital
obligations. This restriction does not apply to general
obligation bonds or notes. This restriction does not apply to
securities of the United States Government or its agencies and
instrumentalities or repurchase agreements relating thereto.
A fundamental policy or restriction, including those stated above, cannot
be changed without an affirmative vote of the holders of a "majority" of
the outstanding shares of the applicable Fund, as defined in the 1940 Act.
As a nonfundamental policy, neither of the Funds will invest more than 15%
of its net assets in all forms of illiquid investments, as determined
pursuant to applicable Securities and Exchange Commission rules and
interpretations. Section 4(2) commercial paper and Rule 144A securities may
be determined to be "liquid" under guidelines adopted by the Board of
Directors. Investing in Rule 144A securities could have the effect of
increasing the level of illiquidity in a Fund to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.
INFORMATION CONCERNING COMPENSATION PAID TO FIRST TRUST NATIONAL
ASSOCIATION AND ITS AFFILIATES
First Trust National Association ("First Trust") may act as fiduciary with
respect to plans subject to the Employee Retirement Income Security Act of
1974 ("ERISA") which invest in the Funds. This section sets forth
information concerning compensation that First Trust and its affiliates may
receive from the Funds.
First Trust, as custodian for the assets of the Funds, receives the
custodian fees specified herein under the caption "Management--Custodian."
First Bank National Association, which is under common control with First
Trust, acts as investment adviser to the Funds and receives the advisory
fees specified herein under the caption "Management--Investment Adviser."
First Trust and its affiliates may receive shareholder servicing fees in
the amounts specified herein under the caption "Distributor." First Trust
also may act as securities lending agent in connection with the Funds'
securities lending transactions and receive as compensation for such
services, fees equal to 40% of the Funds' income from such securities
lending transactions.
FIRST AMERICAN INVESTMENT FUNDS, INC.
Oaks, Pennsylvania 19456
INVESTMENT ADVISER
FIRST BANK NATIONAL ASSOCIATION
601 Second Avenue South
Minneapolis, Minnesota 55402
CUSTODIAN
FIRST TRUST NATIONAL ASSOCIATION
180 East Fifth Street
St. Paul, Minnesota 55101
DISTRIBUTOR
SEI INVESTMENTS DISTRIBUTION CO.
Oaks, Pennsylvania 19456
ADMINISTRATOR
SEI FINANCIAL MANAGEMENT
CORPORATION
Oaks, Pennsylvania 19456
TRANSFER AGENT
DST SYSTEMS, INC.
1004 Baltimore
Kansas City, Missouri 64105
INDEPENDENT AUDITORS
KPMG PEAT MARWICK LLP
90 South Seventh Street
Minneapolis, Minnesota 55402
COUNSEL
DORSEY & WHITNEY LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
FIRST AMERICAN INVESTMENT FUNDS, INC.
INSTITUTIONAL CLASS
OREGON INTERMEDIATE TAX CALIFORNIA INTERMEDIATE TAX
FREE FUND FREE FUND
MICRO CAP VALUE FUND
PROSPECTUS
, 1997
SUBJECT TO COMPLETION - MAY 23, 1997
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FIRST AMERICAN FUNDS
THE POWER OF DISCIPLINED INVESTING
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
TABLE OF CONTENTS
PAGE
SUMMARY 4
FEES AND EXPENSES 6
Class C Share Fees and Expenses 6
Information Concerning Fees and
Expenses 7
THE FUNDS 8
INVESTMENT OBJECTIVES AND POLICIES 8
Oregon Intermediate Tax Free Fund and
California Intermediate Tax Free Fund 9
Micro Cap Value Fund 10
Risks to Consider 11
MANAGEMENT 14
Investment Adviser 14
Portfolio Managers 15
Custodian 16
Administrator 16
Transfer Agent 17
DISTRIBUTOR 17
PURCHASES AND REDEMPTIONS OF SHARES 17
Share Purchases and Redemptions 17
What Shares Cost 18
Exchanging Securities for Fund Shares 19
Certificates and Confirmations 19
Dividends and Distributions 19
Exchange Privilege 20
INCOME TAXES 21
TAX FREE FUNDS: TAX-EXEMPT
VS. TAXABLE INCOME 23
FUND SHARES 24
CALCULATION OF PERFORMANCE DATA 25
PERFORMANCE INFORMATION FOR SUCCESSORS
TO COMMON TRUST FUNDS 26
SPECIAL INVESTMENT METHODS 27
Municipal Bonds and Other Municipal
Obligations 27
Temporary Taxable Investments 29
Repurchase Agreements 29
Inverse Floating Rate Obligations 30
When-Issued and Delayed-Delivery
Transactions 30
Lending of Portfolio Securities 31
Options Transactions 31
Cash Items 34
Fixed Income Securities 34
Foreign Securities 35
Portfolio Transactions 36
Portfolio Turnover 36
Investment Restrictions 36
Information Concerning Compensation
Paid to First Trust National
Association and its Affiliates 37
FIRST AMERICAN INVESTMENT FUNDS, INC.
Oaks, Pennsylvania 19456
INSTITUTIONAL CLASS PROSPECTUS
The shares described in this Prospectus represent interests in First
American Investment Funds, Inc., which consists of mutual funds with
several different investment portfolios and objectives. This Prospectus
relates to the Class C Shares of the following funds (the "Funds"):
* OREGON INTERMEDIATE TAX FREE FUND * CALIFORNIA INTERMEDIATE TAX FREE FUND
* MICRO CAP VALUE FUND
Class C Shares of the Funds are offered through banks and certain other
institutions for the investment of their own funds and funds for which they
act in a fiduciary, agency or custodial capacity.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING FIRST BANK NATIONAL ASSOCIATION AND ANY OF
ITS AFFILIATES, NOR ARE THEY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. AN INVESTMENT
IN THE FUNDS INVOLVES INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF
PRINCIPAL, DUE TO FLUCTUATIONS IN EACH FUND'S NET ASSET VALUE.
This Prospectus concisely sets forth information about the Funds that a
prospective investor should know before investing. It should be read and
retained for future reference.
A Statement of Additional Information dated , 1997 for the Funds has
been filed with the Securities and Exchange Commission and is incorporated
in its entirety by reference in this Prospectus. To obtain copies of the
Statement of Additional Information at no charge, or to obtain other
information or make inquiries about the Funds, call (800) 637-2548 or write
SEI Investments Distribution Co., Oaks, Pennsylvania 19456.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is , 1997.
SUMMARY
First American Investment Funds, Inc. ("FAIF") is an open-end investment
company which offers shares in several different mutual funds. This
Prospectus provides information with respect to the Class C Shares of the
following funds (the "Funds"):
OREGON INTERMEDIATE TAX FREE FUND has an objective of providing current
income which is exempt from both federal income tax and Oregon state income
tax to the extent consistent with preservation of capital. Under normal
market conditions, this Fund invests at least 80% of its net assets in
municipal obligations, the interest on which is exempt from federal and
Oregon income tax. No more than 20% of the securities owned by this Fund
will generate income that is subject to the federal alternative minimum
tax. Under normal market conditions, the weighted average maturity of the
securities held by this Fund will range from 3 to 10 years.
CALIFORNIA INTERMEDIATE TAX FREE FUND has an objective of providing current
income which is exempt from both federal income tax and California state
income tax to the extent consistent with preservation of capital. Under
normal market conditions, this Fund invests at least 80% of its net assets
in municipal obligations, the interest on which is exempt from federal and
California income tax. No more than 20% of the securities owned by this
Fund will generate income that is subject to the federal alternative
minimum tax. Under normal market conditions, the weighted average maturity
of the securities held by this Fund will range from 3 to 10 years.
MICRO CAP VALUE FUND has an objective of capital appreciation. Under normal
market conditions, the Fund invests at least 65% of its total assets in
equity securities of very small-capitalization companies (those with market
capitalizations of less than $500 million). In selecting equity securities,
the Fund's adviser utilizes a value-based selection discipline, investing
in equity securities it believes are undervalued relative to other
securities at the time of purchase.
INVESTMENT ADVISER First Bank National Association (the "Adviser") serves
as investment adviser to each of the Funds. See "Management."
DISTRIBUTOR; ADMINISTRATOR SEI Investments Distribution Co. (the
"Distributor") serves as the distributor of the Funds' shares. SEI
Financial Management Corporation (the "Administrator") serves as the
administrator of the Funds. See "Management" and "Distributor."
ELIGIBLE INVESTORS; OFFERING PRICES Class C Shares are offered through
banks and certain other institutions for the investment of their own funds
and funds for which they act in a fiduciary, agency or custodial capacity.
Class C Shares are sold at net asset value without any front-end or
deferred sales charges. See "Purchases and Redemptions of Shares."
EXCHANGES Class C Shares of any Fund may be exchanged for Class C Shares
of other funds in the First American family at the shares' respective net
asset values with no additional charge. See "Purchases and Redemptions of
Shares -- Exchange Privilege."
REDEMPTIONS Shares of each Fund may be redeemed at any time at their net
asset value next determined after receipt of a redemption request by the
Funds' transfer agent, with no additional charge. See "Purchases and
Redemptions of Shares."
RISKS TO CONSIDER Each of Oregon Intermediate Tax Free Fund and California
Intermediate Tax Free Fund (collectively, the "Tax Free Funds") is subject
to (i) interest rate risk (the risk that increases in market interest rates
will cause declines in the value of debt securities held by a Fund); (ii)
credit risk (the risk that the issuers of debt securities held by a Fund
default in making required payments); and (iii) call or prepayment risk
(the risk that a borrower may exercise the right to prepay a debt
obligation before its stated maturity, requiring a Fund to reinvest the
prepayment at a lower interest rate).
In addition, the value of municipal obligations held by the Tax Free Funds
may be adversely affected by local political and economic conditions and
developments in the states and political subdivisions which issue the
obligations. Investors should note in this regard that Oregon Intermediate
Tax Free Fund and California Intermediate Tax Free Fund invest primarily in
municipal obligations of issuers located in Oregon and California,
respectively. The Tax Free Funds also may, in order to attempt to reduce
risk, invest in exchange traded put and call options on interest rate
futures contracts and on interest rate indices. See "Investment Objectives
and Policies -- Risks to Consider -- Tax Free Funds" and "Special
Investment Methods."
Micro Cap Value Fund is subject to the risk of generally adverse equity
markets. Investors also should recognize that market prices of equity
securities generally, and of particular companies' equity securities,
frequently are subject to greater volatility than prices of fixed income
securities.
Because Micro Cap Value Fund is actively managed, its performance will
reflect in part the ability of the Adviser to select securities which are
suited to achieving its investment objectives. Due to its active
management, this Fund could underperform other mutual funds with similar
investment objectives or the market generally.
In addition, (i) Micro Cap Value Fund is subject to risks associated with
investing in very small-capitalization companies; and (ii) this Fund may
invest a specified portion of its assets in securities of foreign issuers
which are listed on a United States stock exchange or represented by
American Depositary Receipts. See "Investment Objectives and Policies --
Risks to Consider -- Micro Cap Value Fund" and "Special Investment
Methods."
SHAREHOLDER INQUIRIES Any questions or communications regarding the Funds
or a shareholder account should be directed to the Distributor by calling
(800) 637-2548, or to the financial institution which holds shares on an
investor's behalf.
FEES AND EXPENSES
CLASS C SHARE FEES AND EXPENSES
<TABLE>
<CAPTION>
OREGON CALIFORNIA
INTERMEDIATE INTERMEDIATE MICRO CAP
TAX FREE FUND TAX FREE FUND VALUE FUND
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on
purchases None None None
Maximum sales load imposed on
reinvested dividends None None None
Deferred sales load None None None
Redemption fees None None None
Exchange fees None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees
(after voluntary fee waivers(1) 0.43% 0.00% 0.63%
Rule 12b-1 fees None None None
Other expenses (after reimbursements)(1) 0.27% 0.70% 0.27%
Total fund operating expenses
(after voluntary fee waivers and
reimbursements)(1) 0.70% 0.70% 0.90%
EXAMPLE(2)
You would pay the following expenses on a $1,000 investment, assuming (i) a 5%
annual return, and (ii) redemption at the end of each time period:
1 year $ 7 $ 7 $ 9
3 years $ 22 $ 22 $ 29
</TABLE>
(1) The Adviser intends to waive a portion of its fees and/or reimburse
expenses on a voluntary basis, and the amounts shown reflect these waivers
and reimbursements as of the date of this Prospectus. The Adviser intends
to maintain such waivers and reimbursements in effect though September 30,
1998 but reserves the right to discontinue such waivers and reimbursements
at any time in its sole discretion. Absent any fee waivers, investment
advisory fees for each Fund as an annualized percentage of average daily
net assets would be 0.70%; and total fund operating expenses calculated on
such basis would be 0.97% for Oregon Intermediate Tax Free Fund, 1.41% for
California Intermediate Tax Free Fund and 0.97% for Micro Cap Value Fund.
"Other expenses" includes an administration fee and is based on estimated
amounts for the current fiscal year.
(2) Absent the fee waivers and reimbursements referred to in (1) above, the
dollar amounts for the 1- and 3-year periods would be as follows: Oregon
Intermediate Tax Free Fund, $10 and $31; California Intermediate Tax Free
Fund, $14 and $45; and Micro Cap Value Fund, $10 and $31.
INFORMATION CONCERNING FEES AND EXPENSES
The purpose of the preceding tables is to assist the investor in
understanding the various costs and expenses that an investor in a Fund may
bear directly or indirectly. THE EXAMPLES CONTAINED IN THE TABLES SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The information set forth
in the foregoing tables and examples relates only to the Class C Shares of
the Funds. The Funds also expect to offer Class A and, in the case of Micro
Cap Value Fund, Class B Shares which are subject to the same expenses and,
in addition, to a front-end or contingent deferred sales load and certain
shareholder servicing expenses.
The examples in the above tables are based on projected annual Fund
operating expenses after voluntary fee waivers and expense reimbursements
by the Adviser. Although the Adviser intends to maintain such waivers in
effect through September 30, 1998, any such waivers are voluntary and may
be discontinued at any time. Prior to fee waivers, investment advisory fees
accrue at the annual rate as a percentage of average daily net assets of
0.70% for each of the Funds.
Other expenses include fees paid by each Fund to the Administrator for
providing various services necessary to operate the Funds. These include
shareholder servicing and certain accounting and other services. The
Administrator provides these services for a fee calculated at an annual
rate of 0.12% of average daily net assets of each Fund subject to a minimum
of $50,000 per Fund per fiscal year; provided, that to the extent that the
aggregate net assets of all First American funds exceed $8 billion, the
percentage stated above is reduced to 0.105%. Other expenses of the Funds
also includes the cost of maintaining shareholder records, furnishing
shareholder statements and reports, and other services. Investment advisory
fees, administrative fees and other expenses are reflected in the Funds'
daily dividends and are not charged to individual shareholder accounts.
THE FUNDS
FAIF is an open-end management investment company which offers shares in
several different mutual funds (collectively, the "FAIF Funds"), each of
which evidences an interest in a separate and distinct investment
portfolio. Shareholders may purchase shares in each FAIF Fund through
several separate classes which provide for variations in distribution
costs, shareholder servicing fees, voting rights and dividends. Except for
these differences among classes, each share of each FAIF Fund represents an
undivided proportionate interest in that fund. FAIF is incorporated under
the laws of the State of Maryland, and its principal offices are located at
Oaks, Pennsylvania 19456.
This Prospectus relates only to the Class C Shares of the Funds named on
the cover hereof. Information regarding the Class A and, in the case of
Micro Cap Value Fund, Class B Shares of these Funds and regarding the Class
A, Class B and Class C Shares of the other FAIF Funds is contained in
separate prospectuses that may be obtained from FAIF's Distributor, SEI
Financial Services Company, Oaks, Pennsylvania, 19456, or by calling (800)
637-2548. The Board of Directors of FAIF may authorize additional series or
classes of common stock in the future.
INVESTMENT OBJECTIVES AND POLICIES
This section describes the investment objectives and policies of the Funds.
There is no assurance that any of these objectives will be achieved. The
Funds' investment objectives are not fundamental and therefore may be
changed without a vote of shareholders. Such changes could result in a Fund
having investment objectives different from those which shareholders
considered appropriate at the time of their investment in a Fund.
Shareholders will receive written notification at least 30 days prior to
any change in a Fund's investment objectives. Micro Cap Value Fund is a
diversified investment company, as defined in the Investment Company Act of
1940 (the "1940 Act"). Oregon Intermediate Tax Free Fund and California
Intermediate Tax Free Fund are nondiversified investment companies under
the 1940 Act.
If a percentage limitation on investments by a Fund stated below or in the
Statement of Additional Information is adhered to at the time of an
investment, a later increase or decrease in percentage resulting from
changes in asset values will not be deemed to violate the limitation except
in the case of the limitation on illiquid investments. A Fund which is
limited to investing in securities with specified ratings is not required
to sell a security if its rating is reduced or discontinued after purchase,
but the Fund may consider doing so. However, in no event will more than 5%
of any Fund's net assets be invested in non-investment grade securities.
Descriptions of the rating categories of Standard & Poor's Corporation
("Standard & Poor's") and Moody's Investors Service, Inc. ("Moody's") are
contained in the Statement of Additional Information.
When the term "equity securities" is used in this Prospectus, it refers to
common stock and securities which are convertible into or exchangeable for,
or which carry warrants or other rights to acquire, common stock.
This section also contains information concerning certain investment risks
borne by Fund shareholders under the heading "-- Risks to Consider."
Further information concerning the securities in which the Funds may invest
and related matters is set forth under "Special Investment Methods."
OREGON INTERMEDIATE TAX FREE FUND AND
CALIFORNIA INTERMEDIATE TAX FREE FUND
OBJECTIVES. Oregon Intermediate Tax Free Fund has an objective of providing
current income which is exempt from both federal income tax and Oregon
state income tax to the extent consistent with preservation of capital.
California Intermediate Tax Free Fund has an objective of providing current
income which is exempt from both federal income tax and California state
income tax to the extent consistent with preservation of capital.
INVESTMENT POLICIES. Under normal market conditions, each of these Funds
invests at least 80% of its net assets in municipal bonds and other
municipal obligations of the state referred to in its title, the interest
on which is, in the opinion of bond counsel to the issuer, exempt from
federal income tax and that state's income tax. No more than 20% of the
securities owned by either of these Funds will generate income that is an
item of tax preference for the purpose of the federal alternative minimum
tax. Municipal obligations generating income subject to taxation under the
federal alternative minimum tax rules will not be counted as tax exempt
obligations for purposes of the 80% test. See "Income Taxes." The types of
municipal bonds and other municipal obligations in which these Funds may
invest are described under "Special Investment Methods -- Municipal Bonds
and Other Municipal Obligations."
Under normal market conditions, the weighted average maturity of the
securities held by each of these Funds will range from 3 to 10 years.
Each of these Funds may purchase obligations which are rated (without
regard to insurance) no lower than BBB by Standard & Poor's or Baa by
Moody's, or which have been assigned an equivalent rating by another
nationally recognized statistical rating organization, or which are of
comparable quality in the judgment of the Adviser. Each of these Funds also
may purchase municipal notes which are rated no lower than SP-1 by Standard
& Poor's or MIG/VMIG-1 by Moody's or which have been assigned an equivalent
rating by another nationally recognized statistical rating organization.
Unrated securities will not exceed 10% in the aggregate of the value of the
total assets of either of these Funds.
While the assets of each of these Funds ordinarily will be invested in
municipal obligations, on occasion either Fund may temporarily hold
short-term securities, other than municipal obligations, the income from
which is taxable. Temporary taxable investments would be held solely for
the purpose of managing exceptional in-flows and out-flows of cash or for
temporary defensive purposes to preserve existing portfolio values. Under
normal circumstances, a Fund may not invest more than 20% of its assets in
investments other than municipal obligations. However, in periods of
adverse markets when a temporary defensive position to protect capital is
deemed advisable and practicable, a Fund may have more than 20% of its
assets in temporary taxable investments or cash. The types of investments
which are permitted for these purposes are described under "Special
Investment Methods -- Temporary Taxable Investments."
Each of these Funds also may temporarily invest in shares of investment
companies which invest primarily in short-term municipal obligations with
maturities not exceeding 13 months. Investments of these types are also
subject to the advisory fee. Such investments may include tax free money
market funds advised by the Adviser. Income from these investments is
normally exempt from federal income tax but may not be exempt from the
applicable state tax. Where the income from these investments is exempt
from both federal income tax and the applicable state tax, the investments
will be counted as tax exempt obligations for purposes of the 80% test
described above.
Each of these Funds also may (i) in order to attempt to reduce risk, invest
in exchange traded put and call options on interest rate futures contracts
and on interest rate indices; (ii) purchase securities on a when-issued or
delayed-delivery basis; (iii) engage in the lending of portfolio
securities; and (iv) invest up to 5% of its net assets in inverse floating
rate municipal obligations. For information about these investment methods,
restrictions on their use, and certain associated risks, see the related
headings under "Special Investment Methods."
MICRO CAP VALUE FUND
OBJECTIVES. Micro Cap Value Fund has an objective of capital appreciation.
INVESTMENT POLICIES. Under normal market conditions, Micro Cap Value Fund
invests at least 65% of its total assets in equity securities of very
small- capitalization companies. For these purposes, very
small-capitalization companies are deemed those with market capitalizations
of less than $500 million. In selecting equity securities, the Adviser
utilizes a value-based selection descipline, investing in equity securities
it believes are undervalued relative to other securities at the time of
purchase. In assessing relative value, the Adviser will consider such
factors as ratios of market price to book value, market price to earnings,
and market price to assets; estimated earnings growth rate; cash flow; and
liquidation value.
The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of $500 million
or more and in fixed income securities of the kinds described under
"Special Investment Methods -- Foreign Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed
on a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
associated risks, see "Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund; (iv) purchase
securities on a when-issued or delayed-delivery basis; and (v) engage in
the lending of portfolio securities. For information about these investment
methods, restrictions on their use, and certain associated risks, see the
related headings under "Special Investment Methods."
For temporary defensive purposes during times of unusual market conditions,
the Fund may without limitation hold cash or invest in cash items of the
kinds described under "Special Investment Methods -- Cash Items." The Fund
also may invest not more than 35% of its total assets in cash and cash
items in order to utilize assets awaiting normal investment.
RISKS TO CONSIDER
TAX FREE FUNDS. An investment in either of the Tax Free Funds involves
certain risks. These include the following:
INTEREST RATE RISK. Interest rate risk is the risk that the value of a
fixed-rate debt security will decline due to changes in market interest
rates. Because the Tax Free Funds invest in fixed-rate debt securities,
they are subject to interest rate risk. In general, when interest rates
rise, the value of a fixed-rate debt security declines. Conversely, when
interest rates decline, the value of a fixed-rate debt security generally
increases. Thus, shareholders in these Funds bear the risk that increases
in market interest rates will cause the value of their Fund's portfolio
investments to decline.
In general, the value of fixed-rate debt securities with longer maturities
is more sensitive to changes in market interest rates than the value of
such securities with shorter maturities. Thus, the net asset value of a
Fund which invests in securities with longer weighted average maturities
should be expected to have greater volatility in periods of changing market
interest rates than that of a Fund which invests in securities with shorter
weighted average maturities.
Although the Adviser may engage in transactions intended to hedge the value
of the Funds' portfolios against changes in market interest rates, there is
no assurance that such hedging transactions will be undertaken or will
fulfill their purpose. See "Special Investment Methods -- Options
Transactions."
CREDIT RISK. Credit risk is the risk that the issuer of a debt security
will fail to make payments on the security when due. Because the Tax Free
Funds invest in debt securities, they are subject to credit risk.
As described under "Special Investment Methods -- Municipal Bonds and Other
Municipal Obligations," the revenue bonds and municipal lease obligations
in which these Funds invest may entail greater credit risk than the general
obligation bonds in which they invest. This is the case because revenue
bonds and municipal lease obligations generally are not backed by the
faith, credit or general taxing power of the issuing governmental entity.
In addition, as described under that section, municipal lease obligations
also are subject to nonappropriation risk, which is a type of nonpayment
risk. Investors also should note that even general obligation bonds of the
states and their political subdivisions are not free from the risk of
default.
The ratings and certain other requirements which apply to the Tax Free
Funds' permitted investments, as described elsewhere in this Prospectus,
are intended to limit the amount of credit risk undertaken by these Funds.
Nevertheless, shareholders in the Funds bear the risk that payment defaults
could cause the value of their Fund's portfolio investments to decline.
Investors also should note that the Funds can invest in municipal
obligations rated as low as BBB by Standard & Poor's or Baa by Moody's, or
which have been assigned an equivalent rating by another nationally
recognized statistical rating organization, or which are of comparable
quality in the judgment of the Adviser. Although these rating categories
are investment grade, obligations with these ratings are viewed as having
speculative characteristics and carry a somewhat higher risk of default
than obligations rated in the higher investment grade categories.
CALL RISK. Many municipal bonds may be redeemed at the option of the issuer
("called") at a specified price prior to their stated maturity date. In
general, it is advantageous for an issuer to call its bonds if they can be
refinanced through the issuance of new bonds which bear a lower interest
rate than that of the called bonds. Call risk is the risk that bonds will
be called during a period of declining market interest rates so that such
refinancings may take place.
If a bond held by a Tax Free Fund is called during a period of declining
interest rates, the Fund probably will have to reinvest the proceeds
received by it at a lower interest rate than that borne by the called bond,
thus resulting in a decrease in the Fund's income. To the extent that these
Funds invest in callable bonds, Fund shareholders bear the risk that
reductions in income will result from the call of bonds.
STATE AND LOCAL POLITICAL AND ECONOMIC CONDITIONS. The value of municipal
obligations owned by the Tax Free Funds may be adversely affected by local
political and economic conditions and developments. Adverse conditions in
an industry significant to a local economy could have a correspondingly
adverse effect on the financial condition of local issuers. Other factors
that could affect tax-exempt obligations include a change in the local,
state or national economy, demographic factors, ecological or environmental
concerns, statutory limitations on the issuer's ability to increase taxes
and other developments generally affecting the revenues of issuers (for
example, legislation or court decisions reducing state aid to local
governments or mandating additional services).
Oregon Intermediate Tax Free Fund and California Intermediate Tax Free Fund
each will invest primarily in municipal obligations issued by the state and
its political subdivisions named in its title. For this reason, the
municipal obligations held by these Funds will be particularly affected by
local conditions in those states. A more detailed description of the
factors affecting Oregon and California issuers of municipal obligations is
set forth in the Statement of Additional Information.
OTHER. Investors also should review "Special Investment Methods" for
information concerning risks associated with certain investment techniques
which may be utilized by the Tax Free Funds.
MICRO CAP VALUE FUND. An investment in Micro Cap Value Fund involves
certain risks. These include the following:
EQUITY SECURITIES GENERALLY. Market prices of equity securities generally,
and of particular companies' equity securities, frequently are subject to
greater volatility than prices of fixed income securities. Market prices of
equity securities as a group have dropped dramatically in a short period of
time on several occasions in the past, and they may do so again in the
future. Micro Cap Value Fund is subject to the risk of generally adverse
equity markets.
VERY SMALL-CAPITALIZATION COMPANIES. Micro Cap Value Fund emphasizes
investments in companies with very small market capitalizations. The equity
securities of such companies frequently have experienced greater price
volatility in the past than those of larger-capitalization companies, and
they may be expected to do so in the future. In addition, such companies
may be at an earlier stage of their development and followed by fewer
investors than small-, mid- or large-capitalization companies, thus
increasing the potential for volatility in their market prices.
ACTIVE MANAGEMENT. Micro Cap Value Fund is actively managed by the Adviser.
The performance of this Fund therefore will reflect in part the ability of
the Adviser to select securities which are suited to achieving the Fund's
investment objective. Due to its active management, this Fund could
underperform other mutual funds with similar investment objectives or the
market generally.
OTHER. Investors also should review "Special Investment Methods" for
information concerning risks associated with certain investment techniques
which may be utilized by Micro Cap Value Fund.
MANAGEMENT
The Board of Directors of FAIF has the primary responsibility for
overseeing the overall management and electing the officers of FAIF.
Subject to the overall direction and supervision of the Board of Directors,
the Adviser acts as investment adviser for and manages the investment
portfolios of FAIF.
INVESTMENT ADVISER
First Bank National Association, 601 Second Avenue South, Minneapolis,
Minnesota 55480, acts as the Funds' investment adviser through its First
Asset Management group. The Adviser has acted as an investment adviser to
FAIF since its inception in 1987 and has acted as investment adviser to
First American Funds, Inc. since 1982 and to First American Strategy Funds,
Inc. since 1996. As of December 31, 1996, the Adviser was managing accounts
with an aggregate value of approximately $35 billion, including mutual fund
assets in excess of $12 billion. First Bank System, Inc., 601 Second Avenue
South, Minneapolis, Minnesota 55480, is the holding company for the
Adviser.
Each of the Funds has agreed to pay the Adviser monthly fees calculated on
an annual basis equal to 0.70% of its average daily net assets. The Adviser
may, at its option, waive any or all of its fees, or reimburse expenses,
with respect to any Fund from time to time. Any such waiver or
reimbursement is voluntary and may be discontinued at any time. The Adviser
also may absorb or reimburse expenses of the Funds from time to time, in
its discretion, while retaining the ability to be reimbursed by the Funds
for such amounts prior to the end of the fiscal year. This practice would
have the effect of lowering a Fund's overall expense ratio and of
increasing yield to investors, or the converse, at the time such amounts
are absorbed or reimbursed, as the case may be.
The Glass-Steagall Act generally prohibits banks from engaging in the
business of underwriting, selling or distributing securities and from being
affiliated with companies principally engaged in those activities. In
addition, administrative and judicial interpretations of the Glass-Steagall
Act prohibit bank holding companies and their bank and nonbank subsidiaries
from organizing, sponsoring or controlling registered open-end investment
companies that are continuously engaged in distributing their shares. Bank
holding companies and their bank and nonbank subsidiaries may serve,
however, as investment advisers to registered investment companies, subject
to a number of terms and conditions.
Although the scope of the prohibitions and limitations imposed by the
Glass-Steagall Act has not been fully defined by the courts or the
appropriate regulatory agencies, the Funds have received an opinion from
their counsel that the Adviser is not prohibited from performing the
investment advisory services described above. In the event of changes in
federal or state statutes or regulations or judicial and administrative
interpretations or decisions pertaining to permissible activities of bank
holding companies and their bank and nonbank subsidiaries, the Adviser
might be prohibited from continuing these arrangements. In that event, it
is expected that the Board of Directors would make other arrangements and
that shareholders would not suffer adverse financial consequences.
PORTFOLIO MANAGERS
MICHAEL HAMILTON is portfolio co-manager for Oregon Intermediate Tax Free
Fund. He joined the Adviser in July 1997, when the parent company of
Qualivest Capital Management, Inc. and U.S. Bank, by whom he was employed
since 1989, was acquired by the parent company of the Adviser. He received
his bachelor's degree from the College of Idaho and his master's degree in
business administration from Western Washington University.
CHRISTOPHER L. DRAHN is portfolio co-manager for California Intermediate
Tax Free Fund. Chris joined the fixed income department of the Adviser in
1985, having previously served in its securities lending and corporate
trust areas. He received his master's degree in business administration
from the University of Minnesota and is a Chartered Financial Analyst.
RICHARD W. STANLEY is portfolio co-manager for Oregon Intermediate Tax Free
Fund and California Intermediate Tax Free Fund. Dick entered the investment
business via sales with Smith Barney & Co. in 1958. He then moved to
Heritage Investment Advisers as head of fixed income investment in 1973. He
joined the Adviser in early 1986 as Vice President and Manager of Fixed
Income/Personal Trust. Dick received his master's degree in business
administration from Cornell University in 1958 and received his Chartered
Financial Analyst certification in 1977.
DALE E. BENSON is portfolio co-manager for Micro Cap Value Fund. Dale, who
has 24 years of investment management experience, joined the Adviser in
July 1997, when the parent company of Qualivest Capital Management, Inc.
and U.S. Bank, by whom he was employed since 1973, was acquired by the
parent company of the Adviser. He received his bachelor's degree from
Pacific Lutheran University and his doctorate degree in history from the
University of Maine. He is a Chartered Financial Analyst.
MARK D. COOPER is portfolio co-manager for Micro Cap Value Fund. Mark
joined the Adviser in July 1997, when the parent company of Qualivest
Capital Management, Inc. and U.S. Bank, by whom he was employed since 1996,
was acquired by the parent company of the Adviser. Prior to 1996, Mark was
an associate at Bankers Trust Company in New York and Los Angeles. He
received his bachelor's degree from the University of California at Los
Angeles and his master's in business administration from the Wharton School
of Business.
CUSTODIAN
The custodian of the Funds' assets is First Trust National Association (the
"Custodian"), First Trust Center, 180 East Fifth Street, St. Paul,
Minnesota 55101. The Custodian is a subsidiary of First Bank System, Inc.,
which also controls the Adviser.
As compensation for its services to the Funds, the Custodian is paid
monthly fees calculated on an annual basis equal to 0.03% of the applicable
Fund's average daily net assets. In addition, the Custodian is reimbursed
for its out-of-pocket expenses incurred while providing its services to the
Funds.
ADMINISTRATOR
The administrator for the Funds is SEI Financial Management Corporation,
Oaks, Pennsylvania 19456. The Administrator, a wholly-owned subsidiary of
SEI Investments Company, provides the Funds with certain administrative
services necessary to operate the Funds. These services include shareholder
servicing and certain accounting and other services. The Administrator
provides these services for a fee calculated at an annual rate of 0.12% of
each Fund's average daily net assets, subject to a minimum administrative
fee during each fiscal year of $50,000 per Fund; provided, that to the
extent that the aggregate net assets of all First American funds exceed $8
billion, the percentage stated above is reduced to 0.105%. From time to
time, the Administrator may voluntarily waive its fees or reimburse
expenses with respect to any of the Funds. Any such waivers or
reimbursements may be made at the Administrator's discretion and may be
terminated at any time.
TRANSFER AGENT
DST Systems, Inc. (the "Transfer Agent") serves as the transfer agent and
dividend disbursing agent for the Funds. The address of the Transfer Agent
is 1004 Baltimore, Kansas City, Missouri 64105. The Transfer Agent is not
affiliated with the Distributor, the Administrator or the Adviser.
DISTRIBUTOR
SEI Investments Distribution Co. is the principal distributor for shares of
the Funds and of the other FAIF Funds. The Distributor is a Pennsylvania
corporation and is the principal distributor for a number of investment
companies. The Distributor is a wholly-owned subsidiary of SEI Investments
Company and is located at Oaks, Pennsylvania, 19456. The Distributor is not
affiliated with the Adviser, First Bank System, Inc., the Custodian or
their respective affiliates.
The Distributor, the Administrator and the Adviser may in their discretion
use their own assets to pay for certain costs of distributing Fund shares.
They also may discontinue any payment of such costs at any time. In
addition, the Distributor and the Adviser and its affiliates may provide
compensation from their own resources for shareholder services provided by
third parties, including "one-stop" mutual fund networks through which the
Funds are made available.
PURCHASES AND REDEMPTIONS OF SHARES
SHARE PURCHASES AND REDEMPTIONS
Shares of the Funds are sold and redeemed on days on which the New York
Stock Exchange is open for business ("Business Days").
Payment for shares can be made only by wire transfer. Wire transfers of
federal funds for share purchases should be sent to First Bank National
Association, Minneapolis, Minnesota, ABA Number 091000022; For Credit to:
DST Systems: Account Number 160234580266; For Further Credit To: (Investor
Name and Fund Name). Shares cannot be purchased by Federal Reserve wire on
days on which the New York Stock Exchange is closed and on Federal holidays
upon which wire transfers are restricted. Purchase orders will be effective
and eligible to receive dividends declared the same day if the Transfer
Agent receives an order before 3:00 p.m. Central time and the Custodian
receives Federal funds before the close of business that day. Otherwise,
the purchase order will be effective the next Business Day. The net asset
value per share is calculated as of 3:00 p.m. Central time each Business
Day. The Funds reserve the right to reject a purchase order.
The Funds are required to redeem for cash all full and fractional shares of
the Funds. Redemption orders may be made any time before 3:00 p.m. Central
time in order to receive that day's redemption price. For redemption orders
received before 3:00 p.m. Central time, payment will ordinarily be made the
next business day by transfer of Federal funds, but payment may be made up
to 7 days later.
WHAT SHARES COST
Class C Shares of the Funds are sold and redeemed at net asset value. The
net asset value per share is determined as of the earlier of the close of
the New York Stock Exchange or 3:00 p.m. Central time on each day the New
York Stock Exchange is open for business, provided that net asset value
need not be determined on days when no Fund shares are tendered for
redemption and no order for that Fund's shares is received and on days on
which changes in the value of portfolio securities will not materially
affect the current net asset value of the Fund's shares. The price per
share for purchases or redemptions is such value next computed after the
Transfer Agent receives the purchase order or redemption request. In the
case of redemptions and repurchases of shares owned by corporations, trusts
or estates, the Transfer Agent may require additional documents to evidence
appropriate authority in order to effect the redemption, and the applicable
price will be that next determined following the receipt of the required
documentation.
DETERMINING NET ASSET VALUE. The net asset value per share for each of the
Funds is determined by dividing the value of the securities owned by the
Fund plus any cash and other assets (including interest accrued and
dividends declared but not collected), less all liabilities, by the number
of Fund shares outstanding. For the purpose of determining the aggregate
net assets of the Funds, cash and receivables will be valued at their face
amounts. Interest will be recorded as accrued and dividends will be
recorded on the ex-dividend date. Investments in equity securities which
are traded on a national securities exchange (or reported on the NASDAQ
national market system) are stated at the last quoted sales price if
readily available for such equity securities on each business day; other
equity securities traded in the over-the-counter market and listed equity
securities for which no sale was reported on that date are stated at the
last quoted bid price. Debt obligations exceeding 60 days to maturity which
are actively traded are valued by an independent pricing service at the
most recently quoted bid price. Debt obligations with 60 days or less
remaining until maturity may be valued at their amortized cost. When market
quotations are not readily available, securities are valued at fair value
as determined in good faith by procedures established and approved by the
Board of Directors.
Portfolio securities underlying actively traded options are valued at their
market price as determined above. The current market value of any exchange
traded option held or written by a Fund is its last sales price on the
exchange prior to the time when assets are valued, unless the bid price is
higher or the asked price is lower, in which event the bid or asked price
is used. In the absence of any sales that day, options will be valued at
the current closing bid price.
Although the methodology and procedures for determining net asset value are
identical for all classes of shares, the net asset value per share of
different classes of shares of the same Fund may differ because of the
distribution and/or shareholder servicing expenses charged to Class A and
Class B Shares.
EXCHANGING SECURITIES FOR FUND SHARES
A Fund may accept securities in exchange for Fund shares. A Fund will allow
such exchanges only upon the prior approval by the Fund and a determination
by the Fund and the Adviser that the securities to be exchanged are
acceptable. Securities accepted by a Fund will be valued in the same manner
that a Fund values its assets. The basis of the exchange will depend upon
the net asset value of Fund shares on the day the securities are valued.
CERTIFICATES AND CONFIRMATIONS
The Transfer Agent maintains a share account for each shareholder. Share
certificates will not be issued by the Funds.
Confirmations of each purchase and redemption are sent to each shareholder.
In addition, monthly confirmations are sent to report all transactions and
dividends paid during that month for the Funds.
DIVIDENDS AND DISTRIBUTIONS
Dividends with respect to Oregon Intermediate Tax Free Fund and California
Intermediate Tax Free Fund are declared and paid monthly to all
shareholders of record on the record date. Dividends with respect to Micro
Cap Value Fund are declared and paid quarterly to all shareholders of
record on the record date. Distributions of any net realized long-term
capital gains will be made at least once every 12 months. Dividends and
distributions are automatically reinvested in additional shares of the Fund
paying the dividend on payment dates at the ex-dividend date net asset
value without a sales charge, unless shareholders request cash payments on
the new account form or by writing to the Fund.
All shareholders on the record date are entitled to the dividend. If shares
are purchased before a record date for a dividend or a distribution of
capital gains, a shareholder will pay the full price for the shares and
will receive some portion of the purchase price back as a taxable dividend
or distribution (to the extent, if any, that the dividend or distribution
is otherwise taxable to holders of Fund shares). If shares are redeemed or
exchanged before the record date for a dividend or distribution or are
purchased after the record date, those shares are not entitled to the
dividend or distribution.
The amount of dividends payable on Class C Shares generally will be more
than the dividends payable on Class A or Class B Shares because of the
distribution and/or shareholder servicing expenses charged to Class A and
Class B Shares.
EXCHANGE PRIVILEGE
Shareholders may exchange Class C Shares of a Fund for currently available
Class C Shares of the other FAIF Funds or of other funds in the First
American family at net asset value. Exchanges of shares among the First
American family of funds must meet any applicable minimum investment of the
fund for which shares are being exchanged.
The ability to exchange shares of the Funds does not constitute an offering
or recommendation of shares of one fund by another fund. This privilege is
available to shareholders resident in any state in which the fund shares
being acquired may be sold. An investor who is considering acquiring shares
in another First American fund pursuant to the exchange privilege should
obtain and carefully read a prospectus of the fund to be acquired.
Exchanges may be accomplished by a written request, or by telephone if a
preauthorized exchange authorization is on file with the Transfer Agent,
shareholder servicing agent, or financial institution. Neither the Transfer
Agent nor any Fund will be responsible for the authenticity of exchange
instructions received by telephone if it reasonably believes those
instructions to be genuine. The Funds and the Transfer Agent will each
employ reasonable procedures to confirm that telephone instructions are
genuine, and they may be liable for losses resulting from unauthorized or
fraudulent telephone instructions if they do not employ these procedures.
These procedures may include taping of telephone conversations.
Shares of a class in which an investor is no longer eligible to participate
may be exchanged for shares of a class in which that investor is eligible
to participate. An example of this kind of exchange would be a situation in
which Class C Shares of a Fund held by a financial institution in a trust
or agency capacity for one or more individual beneficiaries are exchanged
for Class A Shares of that Fund and distributed to the individual
beneficiaries.
INCOME TAXES
FEDERAL INCOME TAXATION
Each Fund is treated as a different entity for federal income tax purposes.
Each of the Funds qualified during its last fiscal year as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"), and each of the Funds intends to so qualify in the future. If so
qualified and provided certain distribution requirements are met, a Fund
will not be liable for federal income taxes to the extent it distributes
its income to its shareholders.
Distributions of net interest income from tax-exempt obligations that are
designated by each Tax Free Fund as exempt-interest dividends are
excludable from the gross income of the Fund's shareholders. A portion of
such dividends may, however, be subject to the alternative minimum tax, as
discussed below.
Distributions paid from other interest income of the Tax Free Funds, from
the net investment income of Micro Cap Value Fund, and from any net
realized short-term capital gains of each Fund will be taxable to
shareholders as ordinary income, whether received in cash or in additional
shares. Since none of the Tax Free Funds' income will consist of dividends
from domestic corporations, the dividends-received deduction for
corporations will not be applicable to taxable distributions by those
Funds. Distributions paid by each Fund from long-term capital gains (and
designated as such) will be taxable as long-term capital gains for federal
income tax purposes, whether received in cash or shares, regardless of how
long a shareholder has held the shares in a Fund. Shareholders not subject
to federal income taxation will not be taxed on distributions by a Fund.
Gain or loss realized on the sale or exchange of shares in a Fund will be
treated as capital gain or loss, provided that (as is usually the case) the
shares represented a capital asset in the hands of the shareholder. Such
gain or loss will be long-term gain or loss if the shares were held for
more than one year.
For federal income tax purposes, an alternative minimum tax ("AMT") is
imposed on taxpayers to the extent that such tax, if any, exceeds a
taxpayer's regular income tax liability (with certain adjustments).
Liability for AMT will depend on each shareholder's tax situation.
Exempt-interest dividends attributable to interest income on certain
tax-exempt obligations issued after August 7, 1986, to finance certain
private activities will be treated as an item of tax preference that is
included in alternative minimum taxable income for purposes of computing
the federal AMT for all taxpayers and the federal environmental tax on
corporations. Each Tax Free Fund may invest up to 20% of its total assets
in obligations the interest on which is treated as an item of tax
preference for federal income tax purposes. Also, a portion of all other
tax-exempt interest received by a corporation, including exempt-interest
dividends, will be included in adjusted current earnings and in earnings
and profits for purposes of determining the federal corporate alternative
minimum tax, the environmental tax imposed on corporations under Section
59A of the Code, and the branch profits tax imposed on foreign corporations
under Section 884 of the Code.
The Tax Reform Act of 1986 imposed new requirements on certain tax-exempt
bonds which, if not satisfied, could result in loss of tax exemption for
interest on such bonds, even retroactively to the date of issuance of the
bonds. Proposals may be introduced before Congress in the future, the
purpose of which will be to further restrict or eliminate the federal
income tax exemption for tax-exempt bonds held by the Tax Free Funds. The
Tax Free Funds will avoid investment in bonds which, in the opinion of the
Adviser, pose a material risk of the loss of tax exemption. Further, if a
bond in a Tax Free Fund's portfolio lost its exempt status, the Fund would
make every effort to dispose of that investment on terms that are not
detrimental to the Fund.
In certain instances, the portion of Social Security benefits received by a
shareholder that is subject to federal income tax may be affected by the
amount of exempt-interest dividends received by the shareholder from the
Tax Free Funds.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Tax Free Funds will not be deductible for federal income
purposes.
Information concerning distributions will be mailed to shareholders
annually. Shareholders who are subject to federal income tax are required
for information purposes to report exempt-interest dividends and other
tax-exempt interest on their tax returns.
OREGON INCOME TAXATION
The portion of exempt-interest dividends paid by Oregon Intermediate Tax
Free Fund that is derived from interest on tax-exempt obligations issued by
the state of Oregon, its political subdivisions and instrumentalities, is
excluded from the taxable income of individuals, trusts and estates. All
remaining dividends (except for dividends, if any, derived from interest
paid on obligations of the United States, its territories and possessions),
including dividends derived from capital gains, will be includable in the
taxable income of individuals, trusts and estates. Furthermore, all
dividends, including exempt-interest dividends, will be includable in the
taxable income of corporations subject to the Oregon corporation excise
tax. Dividends qualifying for federal income tax purposes as capital gain
dividends are to be treated by shareholders as long-term capital gains.
Oregon taxes long-term capital gains at the same rates as ordinary income,
while restricting the deductibility of capital losses.
CALIFORNIA INCOME TAXATION
Individual shareholders of California Intermediate Tax Free Fund who are
subject to California personal income taxation will not be required to
include in their California gross income that portion of their federally
tax exempt dividends which the Fund clearly identifies as directly
attributable to interest earned on California state or municipal
obligations, and dividends which the Fund clearly identifies as directly
attributable to interest earned on obligations of the United States, the
interest on which is exempt from California personal income tax pursuant to
federal law, provided that at least 50% of the value of the Fund's total
assets consists of obligations the interest on which is exempt from
California personal income taxation pursuant to federal or California law.
Distributions to individual shareholders derived from interest on state or
municipal obligations issued by governmental authorities in states other
than California, short-term capital gains and other taxable income will be
taxed as dividends for purposes of California personal income taxation. The
Fund's long-term capital gains for federal income tax purposes will be
taxed as long-term capital gains to individual shareholders of the Fund for
purposes of California personal income taxation. Gain or loss, if any,
resulting from an exchange or redemption of shares will be recognized in
the year of the exchange or redemption.
OTHER STATE AND LOCAL TAXATION
Except to the extent described above under "-- Oregon Income Taxation" and
"-- California Income Taxation," distributions by all the Funds may be
subject to state and local taxation even if they are exempt from federal
income taxes. Shareholders are urged to consult their own tax advisers
regarding state and local taxation.
TAX FREE FUNDS: TAX-EXEMPT VS. TAXABLE INCOME
The tables below show the approximate yields that taxable securities must
earn to equal yields that are (i) exempt from both federal and Oregon
income taxes; and (ii) exempt from both federal and California income
taxes, under selected income tax brackets scheduled to be in effect in
1997. The effective combined rates reflect the deduction of state income
taxes from federal income. The 34.5%, 37.2%, 41.8% and 45.0% combined
federal/Oregon rates assume that the investor is subject to a 9% marginal
Oregon income tax rate and a marginal federal income tax rate of 28%, 31%,
36% and 39.6%, respectively. The 34.8%, 37.4%, 42.0% and 45.2% combined
federal/California rates assume that the investor is subject to a 9.3%
marginal California income tax rate and a marginal federal income tax rate
of 28%, 31%, 36% and 39.6%, respectively. The combined rates do not reflect
federal rules concerning the phase-out of personal exemptions and
limitations on the allowance of itemized deductions for certain high-income
taxpayers. The tables are based upon yields that are derived solely from
tax-exempt income. To the extent that a Tax Free Fund's yield is derived
from taxable income, the Fund's tax equivalent yield will be less than set
forth in the tables. The tax-free yields used in these tables should not be
considered as representations of any particular rates of return and are for
purposes of illustration only.
<TABLE>
<CAPTION>
TAX-EQUIVALENT YIELDS
COMBINED FEDERAL AND COMBINED FEDERAL AND
OREGON TAX BRACKETS CALIFORNIA TAX BRACKETS
TAX-FREE
YIELDS 34.5% 37.2% 41.8% 45.0% 34.8% 37.4% 42.0% 45.2%
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3.0% 4.58% 4.78% 5.15% 5.45% 4.60% 4.79% 5.17% 5.47%
3.5% 5.34% 5.57% 6.01% 6.36% 5.37% 5.59% 6.03% 6.39%
4.0% 6.11% 6.37% 6.87% 7.27% 6.13% 6.39% 6.90% 7.30%
4.5% 6.87% 7.17% 7.73% 8.18% 6.90% 7.19% 7.76% 8.21%
5.0% 7.63% 7.96% 8.59% 9.09% 7.67% 7.99% 8.62% 9.12%
5.5% 8.40% 8.76% 9.45% 10.00% 8.44% 8.79% 9.48% 10.03%
6.0% 9.16% 9.55% 10.31% 10.91% 9.20% 9.58% 10.34% 10.95%
6.5% 9.92% 10.35% 11.17% 11.82% 9.97% 10.38% 11.21% 11.86%
</TABLE>
FUND SHARES
Each share of a Fund is fully paid, nonassessable, and transferable. Shares
may be issued as either full or fractional shares. Fractional shares have
pro rata the same rights and privileges as full shares. Shares of the Funds
have no preemptive or conversion rights.
Each share of a Fund has one vote. On some issues, such as the election of
directors, all shares of all FAIF Funds vote together as one series. The
shares do not have cumulative voting rights. Consequently, the holders of
more than 50% of the shares voting for the election of directors are able
to elect all of the directors if they choose to do so. On issues affecting
only a particular Fund or Class, the shares of that Fund or Class will vote
as a separate series. Examples of such issues would be proposals to alter a
fundamental investment restriction pertaining to a Fund or to approve,
disapprove or alter a distribution plan pertaining to a Class.
Under the laws of the State of Maryland and FAIF's Articles of
Incorporation, FAIF is not required to hold shareholder meetings unless
they (i) are required by the 1940 Act, or (ii) are requested in writing by
the holders of 25% or more of the outstanding shares of FAIF.
CALCULATION OF PERFORMANCE DATA
From time to time, any of the Funds may advertise information regarding its
performance. Each Fund may publish its "yield," its "cumulative total
return," its "average annual total return," and its "distribution rate." In
addition, each Tax Free Fund may publish its "tax equivalent yield" and its
"tax equivalent distribution rate." Distribution rates and tax equivalent
distribution rates may only be used in connection with sales literature and
shareholder communications preceded or accompanied by a Prospectus. Each of
these performance figures is based upon historical results and is not
intended to indicate future performance, and, except for "distribution
rate" and "tax equivalent distribution rate," is standardized in accordance
with Securities and Exchange Commission ("SEC") regulations.
"Yield" for the Funds is computed by dividing the net investment income per
share (as defined in applicable SEC regulations) earned during a 30-day
period (which period will be stated in the advertisement) by the maximum
offering price per share on the last day of the period. Yield is an
annualized figure, in that it assumes that the same level of net investment
income is generated over a one year period. The yield formula annualizes
net investment income by providing for semi-annual compounding.
"Tax equivalent yield" is that yield which a taxable investment must
generate in order to equal a Fund's yield for an investor in a stated
federal or combined federal/state income tax bracket (normally assumed to
be the maximum tax rate or combined rate). Tax equivalent yield is computed
by dividing that portion of the yield which is tax-exempt by one minus the
stated income tax rate, and adding the resulting amount to that portion, if
any, of the yield which is not tax-exempt.
"Total return" is based on the overall dollar or percentage change in value
of a hypothetical investment in a Fund assuming reinvestment of dividend
distributions and deduction of all charges and expenses, including the
maximum sales charge imposed on Class A Shares or the contingent deferred
sales charge imposed on Class B Shares. "Cumulative total return" reflects
a Fund's performance over a stated period of time. "Average annual total
return" reflects the hypothetical annually compounded rate that would have
produced the same cumulative total return if performance had been constant
over the entire period. Because average annual returns tend to smooth out
variations in a Fund's performance, they are not the same as actual
year-by-year results. As a supplement to total return computations, a Fund
may also publish "total investment return" computations which do not assume
deduction of the maximum sales charge imposed on Class A Shares or the
contingent deferred sales charge imposed on Class B Shares.
"Distribution rate" is determined by dividing the income dividends per
share for a stated period by the maximum offering price per share on the
last day of the period. "Tax equivalent distribution rate" is computed by
dividing the portion of the distribution rate (determined as described
above) which is tax-exempt by one minus the stated federal or combined
federal/state income tax rate, and adding to the resulting amount that
portion, if any, of the distribution rate which is not tax-exempt. All
distribution rates published for the Funds are measures of the level of
income dividends distributed during a specified period. Thus, these rates
differ from yield (which measures income actually earned by a Fund) and
total return (which measures actual income, plus realized and unrealized
gains or losses of a Fund's investments). Consequently, distribution rates
alone should not be considered complete measures of performance.
The performance of the Class C Shares of a Fund will normally be higher
than for the Class A and Class B Shares because Class C Shares are not
subject to the sales charges and distribution and/or shareholder servicing
expenses applicable to Class A and Class B Shares.
In reports or other communications to shareholders and in advertising
material, the performance of each Fund may be compared to recognized
unmanaged indices or averages of the performance of similar securities and
to composites of such indices and averages. Also, the performance of each
Fund may be compared to that of other funds of similar size and objectives
as listed in the rankings prepared by Lipper Analytical Services, Inc. or
similar independent mutual fund rating services, and each Fund may include
in such reports, communications and advertising material evaluations
published by nationally recognized independent ranking services and
publications. For further information regarding the Funds' performance, see
"Fund Performance" in the Statement of Additional Information.
PERFORMANCE INFORMATION FOR SUCCESSORS TO COMMON TRUST FUNDS
Each of Oregon Intermediate Tax Free Fund, California Intermediate Tax Free
Fund, and Micro Cap Value Fund commenced operations when substantially all
of the assets of certain common trust funds which were exempt from
registration under the 1940 Act were transferred to these Funds. One
predecessor common trust fund was managed by the Adviser, while the others
were managed by Qualivest Capital Management, Inc. prior to the acquisition
of its parent company by the Adviser's parent company. The personnel who
managed those common trust funds on behalf of Qualivest Capital Management
became employees of the Adviser, and assumed management of the applicable
Funds, at the time the assets were transferred from the common trust funds
to the Funds.
Certain performance data for these Funds and their predecessor common trust
funds is set forth below. This data is deemed relevant because the common
trust funds were managed using investment obejctives, policies, and
restrictions very similar to those of their corresponding Funds. However,
the predecessor common trust funds were not subject to certain investment
restrictions that are imposed by the 1940 Act. Accordingly, if the common
trust funds had been registered under the 1940 Act, their performance could
have been adversely affected by virtue of such investment restrictions.
The predecessor common trust funds did not incur the same expenses as the
Funds. The performance information set forth below has been adjusted, for
periods prior to the transfer of the common trust funds' assets to the
Funds, to apply the total expense ratios for the corresponding Funds as
disclosed in the Funds' prospectuses at the time they commenced operations
(after voluntary fee waivers reflected in such total expense ratios). These
adjustments had the effect of reducing the reported performance of the
respective common trust funds.
The average annual total returns for the Funds' predecessor common trust
funds for the periods set forth below, adjusted as described above, were as
follows:
FROM INCEPTION
(5/1/92)
1 YEAR ENDED THROUGH
4/30/97 4/30/97
California Intermediate
Tax Free Fund, Class C
predecessor 3.89% 5.33%
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
4/30/97 4/30/97 4/30/97
Oregon Intermediate
Tax Free Fund, Class C
predecessor 3.76% 5.01% 6.27%
Micro Cap Value Fund,
Class C predecessor 9.04% 19.34% 15.69%
SPECIAL INVESTMENT METHODS
This section provides additional information concerning the securities in
which the Funds may invest and related topics. Further information
concerning these matters is contained in the Statement of Additional
Information.
MUNICIPAL BONDS AND OTHER MUNICIPAL OBLIGATIONS
As described under "Investment Objectives and Policies," each of the Tax
Free Funds invests principally in municipal bonds and other municipal
obligations. These bonds and other obligations are issued by the states and
by their local and special-purpose political subdivisions. The term
"municipal bond" as used in this Prospectus includes short-term municipal
notes issued by the states and their political subdivisions.
MUNICIPAL BONDS. The two general classifications of municipal bonds are
"general obligation" bonds and "revenue" bonds. General obligation bonds
are secured by the governmental issuer's pledge of its faith, credit and
taxing power for the payment of principal and interest. They are usually
paid from general revenues of the issuing governmental entity. Revenue
bonds, on the other hand, are usually payable only out of a specific
revenue source rather than from general revenues. Revenue bonds ordinarily
are not backed by the faith, credit or general taxing power of the issuing
governmental entity. The principal and interest on revenue bonds for
private facilities are typically paid out of rents or other specified
payments made to the issuing governmental entity by a private company which
uses or operates the facilities. Examples of these types of obligations are
industrial revenue bonds and pollution control revenue bonds. Industrial
revenue bonds are issued by governmental entities to provide financing aid
to community facilities such as hospitals, hotels, business or residential
complexes, convention halls and sport complexes. Pollution control revenue
bonds are issued to finance air, water and solids pollution control systems
for privately operated industrial or commercial facilities.
Revenue bonds for private facilities usually do not represent a pledge of
the credit, general revenues or taxing powers of the issuing governmental
entity. Instead, the private company operating the facility is the sole
source of payment of the obligation. Sometimes, the funds for payment of
revenue bonds come solely from revenue generated by operation of the
facility. Revenue bonds which are not backed by the credit of the issuing
governmental entity frequently provide a higher rate of return than other
municipal obligations, but they entail greater risk than obligations which
are guaranteed by a governmental unit with taxing power. Federal income tax
laws place substantial limitations on industrial revenue bonds, and
particularly certain specified private activity bonds issued after August
7, 1986. In the future, legislation could be introduced in Congress which
could further restrict or eliminate the income tax exemption for interest
on debt obligations in which the Funds may invest.
MUNICIPAL LEASES. Each Tax Free Fund also may purchase participation
interests in municipal leases. Participation interests in municipal leases
are undivided interests in a lease, installment purchase contract or
conditional sale contract entered into by a state or local governmental
unit to acquire equipment or facilities. Municipal leases frequently have
special risks which generally are not associated with general obligation
bonds or revenue bonds.
Municipal leases and installment purchase or conditional sale contracts
(which usually provide for title to the leased asset to pass to the
governmental issuer upon payment of all amounts due under the contract)
have evolved as a means for governmental issuers to acquire property and
equipment without meeting the constitutional and statutory requirements for
the issuance of municipal debt. The debt-issuance limitations are deemed to
be inapplicable because of the inclusion in many leases and contracts of
"non-appropriation" clauses that provide that the governmental issuer has
no obligation to make future payments under the lease or contract unless
money is appropriated for this purpose by the appropriate legislative body
on a yearly or other periodic basis. Although these kinds of obligations
are secured by the leased equipment or facilities, the disposition of the
pledged property in the event of non-appropriation or foreclosure might, in
some cases, prove difficult and time-consuming. In addition, disposition
upon non-appropriation or foreclosure might not result in recovery by a Tax
Free Fund of the full principal amount represented by an obligation.
In light of these concerns, each Tax Free Fund has adopted and follows
procedures for determining whether municipal lease obligations purchased by
the Fund are liquid and for monitoring the liquidity of municipal lease
securities held in the Fund's portfolio. These procedures require that a
number of factors be used in evaluating the liquidity of a municipal lease
security, including the frequency of trades and quotes for the security,
the number of dealers willing to purchase or sell the security and the
number of other potential purchasers, the willingness of dealers to
undertake to make a market in the security, the nature of the marketplace
in which the security trades, and other factors which the Adviser may deem
relevant. As described below under "-- Investment Restrictions," each Tax
Free Fund is subject to limitations on the percentage of illiquid
securities it can hold.
TEMPORARY TAXABLE INVESTMENTS
Each of the Tax Free Funds may make temporary taxable investments as
described under "Investment Objectives and Policies." Temporary taxable
investments will include only the following types of obligations maturing
within 13 months from the date of purchase: (i) obligations of the United
States Government, its agencies and instrumentalities; (ii) commercial
paper rated not less than A-1 by Standard & Poor's or P-1 by Moody's or
which has been assigned an equivalent rating by another nationally
recognized statistical rating organization; (iii) other short-term debt
securities issued or guaranteed by corporations having outstanding debt
rated not less than BBB by Standard & Poor's or Baa by Moody's or which
have been assigned an equivalent rating by another nationally recognized
statistical rating organization; (iv) certificates of deposit of domestic
commercial banks subject to regulation by the United States Government or
any of its agencies or instrumentalities, with assets of $500 million or
more based on the most recent published reports; and (v) repurchase
agreements with domestic banks or securities dealers involving any of the
securities which the Fund is permitted to hold. See "-- Repurchase
Agreements" below.
REPURCHASE AGREEMENTS
The temporary taxable investments which each Tax Free Fund may make include
repurchase agreements, and Micro Cap Value Fund also is permitted to enter
into such agreements. A repurchase agreement involves the purchase by a
Fund of securities with the agreement that after a stated period of time,
the original seller will buy back the same securities ("collateral") at a
predetermined price or yield. Repurchase agreements involve certain risks
not associated with direct investments in securities. If the original
seller defaults on its obligation to repurchase as a result of its
bankruptcy or otherwise, the purchasing Fund will seek to sell the
collateral, which could involve costs or delays. Although collateral (which
may consist of any fixed income security which is an eligible investment
for the Fund entering into the repurchase agreement) will at all times be
maintained in an amount equal to the repurchase price under the agreement
(including accrued interest), a Fund would suffer a loss if the proceeds
from the sale of the collateral were less than the agreed-upon repurchase
price. The Adviser will monitor the creditworthiness of the firms with
which the Funds enter into repurchase agreements.
INVERSE FLOATING RATE OBLIGATIONS
Each of the Tax Free Funds may invest up to 5% of its net assets in inverse
floating rate municipal obligations. An inverse floating rate obligation
entitles the holder to receive interest at a rate which changes in the
opposite direction from, and in the same magnitude as or in a multiple of,
changes in a specified index rate. Although an inverse floating rate
municipal obligation would tend to increase portfolio income during a
period of generally decreasing market interest rates, its income and value
would tend to decline during a period of generally increasing market
interest rates. In addition, its decline in value may be greater than for a
fixed-rate municipal obligation, particularly if the interest rate borne by
the floating rate municipal obligation is adjusted by a multiple of changes
in the specified index rate. For these reasons, inverse floating rate
municipal obligations have more risk than more conventional fixed-rate and
floating rate municipal obligations.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS
Each of the Funds may purchase securities on a when-issued or
delayed-delivery basis. When such a transaction is negotiated, the purchase
price is fixed at the time the purchase commitment is entered, but delivery
of and payment for the securities take place at a later date. A Fund will
not accrue income with respect to securities purchased on a when-issued or
delayed-delivery basis prior to their stated delivery date. Pending
delivery of the securities, each Fund will maintain in a segregated account
cash or liquid high-grade securities in an amount sufficient to meet its
purchase commitments.
The purchase of securities on a when-issued or delayed-delivery basis
exposes a Fund to risk because the securities may decrease in value prior
to delivery. In addition, a Fund's purchase of securities on a when-issued
or delayed-delivery basis while remaining substantially fully invested
could increase the amount of the Fund's total assets that are subject to
market risk, resulting in increased sensitivity of net asset value to
changes in market prices. However, the Funds will engage in when-issued and
delayed-delivery transactions only for the purpose of acquiring portfolio
securities consistent with their investment objectives, and not for the
purpose of investment leverage. A seller's failure to deliver securities to
a Fund could prevent the Fund from realizing a price or yield considered to
be advantageous.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, each of the Funds may lend
portfolio securities representing up to one-third of the value of its total
assets to broker-dealers, banks or other institutional borrowers of
securities. If the Funds engage in securities lending, distributions paid
to shareholders from the resulting income will not be excludable from
shareholders' gross income for income tax purposes. As with other
extensions of credit, there may be risks of delay in recovery of the
securities or even loss of rights in the collateral should the borrower of
the securities fail financially. However, the Funds will only enter into
loan arrangements with broker-dealers, banks, or other institutions which
the Adviser has determined are creditworthy under guidelines established by
the Board of Directors. In these loan arrangements, the Funds will receive
collateral in the form of cash, United States Government securities or
other high-grade debt obligations equal to at least 100% of the value of
the securities loaned. Collateral is marked to market daily. The Funds will
pay a portion of the income earned on the lending transaction to the
placing broker and may pay administrative and custodial fees (including
fees to an affiliate of the Adviser) in connection with these loans.
OPTIONS TRANSACTIONS
TAX FREE FUNDS. Each of the Tax Free Funds may, in order to reduce risk,
invest in exchange traded put and call options on interest rate futures
contracts and on interest rate indices. Such investments will be made
solely as a hedge against adverse changes resulting from market conditions
in the values of securities held by the Funds or which they intend to
purchase and where the transactions are deemed appropriate to reduce risks
inherent in the Funds' portfolios or contemplated investments.
Neither of the Tax Free Funds will invest more than 5% of the value of its
total assets in purchased options, provided that options which are "in the
money" at the time of purchase may be excluded from this 5% limitation. A
call option is "in the money" if the exercise price is lower than the
current market price of the underlying contract or index, and a put option
is "in the money" if the exercise price is higher than the current market
price. A Fund's loss exposure in purchasing an option is limited to the sum
of the premium paid (purchase price of the option) and the commission or
other transaction expenses associated with acquiring the option.
An interest rate futures contract provides for the future sale by one party
and purchase by the other party of a certain amount of a specific financial
instrument (debt security) at a specified price, date, time and place. An
option on an interest rate futures contract, as contrasted with the direct
investment in such a contract, gives the purchaser the right, in return for
the premium paid, to purchase (in the case of a call option) or sell (in
the case of a put option) an interest rate futures contract at a specified
exercise price at any time prior to the expiration date of the option. In
order to hedge its portfolio against anticipated changes in interest rates,
a Fund might purchase a put option on an interest rate futures contract if
interest rates were expected to rise, or might purchase a call option on an
interest rate futures contract if rates were expected to decline.
Options on interest rate indices are similar to options on interest rate
futures contracts except that, rather than the right to take or make
delivery of a specific financial instrument at a specified price, an option
on an interest rate index gives the holder the right to receive, upon
exercise of the option, a defined amount of cash if the closing value of
the interest rate index upon which the option is based is greater than, in
the case of a call, or less than, in the case of a put, the exercise price
of the option. Put and call options on interest rate indices thus may be
used in a fashion similar to that of options on interest rate futures
contracts to hedge the value of a portfolio of debt securities against
anticipated changes in interest rates.
The use of options on interest rate futures contracts and on interest rate
indices involves certain risks. These include the risk that changes in
interest rates on the hedged instruments may not correlate to changes in
interest rates on the instrument or index upon which the hedge is based,
and the risk of limited liquidity in the event that a Fund seeks to close
out an options position before expiration by entering into an offsetting
transaction.
MICRO CAP VALUE FUND.
PURCHASES OF PUT AND CALL OPTIONS. Micro Cap Value Fund may purchase put
and call options on equity securities and on stock indices. These
transactions will be undertaken only for the purpose of reducing risk to
the Fund; that is, for "hedging" purposes.
A put option on a security gives the purchaser of the option the right (but
not the obligation) to sell, and the writer of the option the obligation to
buy, the underlying security at a stated price (the "exercise price") at
any time before the option expires. A call option on a security give the
purchaser the right (but not the obligation) to buy, and the writer the
obligation to sell, the underlying security at the exercise price at any
time before the option expires. The purchase price for a put or call option
is the "premium" paid by the purchaser for the right to sell or buy.
Options on indices are similar to options on securities except that, rather
than the right to take or make delivery of a specific security at a stated
price, an option on an index gives the holder the right to receive, upon
exercise of the option, a defined amount of cash if the closing value of
the index upon which the option is based is greater than, in the case of a
call, or less than, in the case of a put, the exercise price of the option.
Micro Cap Value Fund will not invest more than 5% of the value of its total
assets in purchased options, provided that options which are "in the money"
at the time of purchase may be excluded from this 5% limitation. A call
option is "in the money" if the exercise price is lower than the current
market price of the underlying security or index, and a put option is "in
the money" if the exercise price is higher than the current market price.
The Fund's loss exposure in purchasing an option is limited to the sum of
the premium paid and the commission or other transaction expenses
associated with acquiring the option.
The use of purchased put and call options involves certain risks. These
include the risk of an imperfect correlation between market prices of
securities held by the Fund and the prices of options, and the risk of
limited liquidity in the event that the Fund seeks to close out an options
position before expiration by entering into an offsetting transaction.
WRITING OF CALL OPTIONS. Micro Cap Value Fund may write (sell) covered call
options on equity securities which it owns or has the right to acquire to
the extent specified under "Investment Objectives and Policies -- Micro Cap
Value Fund." These transactions would be undertaken primarily to produce
additional income.
When a Fund sells a covered call option, it is paid a premium by the
purchaser. If the market price of the security covered by the option does
not increase above the exercise price before the option expires, the option
generally will expire without being exercised, and the Fund will retain
both the premium paid for the option and the security. If the market price
of the security covered by the option does increase above the exercise
price before the option expires, however, the option is likely to be
exercised by the purchaser. In that case the Fund will be required to sell
the security at the exercise price, and it will not realize the benefits of
increases in the market price of the security above the exercise price of
the option.
Micro Cap Value Fund also may write call options on stock indices the
movements of which generally correlate with those of the Fund's portfolio
holdings. These transactions, which would be undertaken principally to
produce additional income, entail the risk of an imperfect correlation
between movements of the index covered by the option and movements in the
price of the Fund's portfolio securities.
CASH ITEMS
The "cash items" in which Micro Cap Value Fund may invest, as described
under "Investment Objectives and Policies -- Micro Cap Value Fund," include
short-term obligations such as commercial paper and variable amount master
demand notes; United States dollar-denominated time and savings deposits
(including certificates of deposit); bankers acceptances; obligations of
the United States Government or its agencies or instrumentalities;
repurchase agreements collateralized by eligible investments of the Fund;
securities of other mutual funds which invest primarily in debt obligations
with remaining maturities of 13 months or less (which investments are
subject to the advisory fee); and other similar high-quality short-term
United States dollar-denominated obligations. The other mutual funds in
which Micro Cap Value Fund may so invest include money market funds advised
by the Adviser, subject to certain restrictions contained in an exemptive
order issued by the Securities and Exchange Commission with respect
thereto.
FIXED INCOME SECURITIES
The fixed income securities in which Micro Cap Value Fund may invest
include securities issued or guaranteed by the United States Government or
its agencies or instrumentalities, nonconvertible preferred stocks,
nonconvertible corporate debt securities, and short-term obligations of the
kinds described above under "-- Cash Items." Investments in nonconvertible
preferred stocks and nonconvertible corporate debt obligations will be
limited to securities which are rated at the time of purchase not less than
BBB by Standard & Poor's or Baa by Moody's (or equivalent short-term
ratings), or which have been assigned an equivalent rating by another
nationally recognized statistical rating organization, or which are of
comparable quality in the judgment of the Adviser. Obligations rated BBB,
Baa or their equivalent, although investment grade, have speculative
characteristics and carry a somewhat higher risk of default than
obligations rated in the higher investment grade categories. In addition,
Micro Cap Value Fund may invest up to 5% of its net assets in less than
investment grade convertible debt obligations.
The fixed income securities specified above are subject to interest rate
risk, credit risk, and call or prepayment risk. The nature of these risks
is discussed above under "Investment Objectives and Policies -- Risks to
Consider -- Tax Free Funds."
FOREIGN SECURITIES
GENERAL. As described under "Investment Objective and Policies -- Micro Cap
Value Fund," Micro Cap Value Fund may invest up to 25% of its total assets
in securities of foreign issuers which are either listed on a United States
securities exchange or represented by American Depositary Receipts.
Investment in foreign securities is subject to special investment risks
that differ in some respects from those related to investments in
securities of United States domestic issuers. These risks include
political, social or economic instability in the country of the issuer, the
difficulty of predicting international trade patterns, the possibility of
the imposition of exchange controls, expropriation, limits on removal of
currency or other assets, nationalization of assets, foreign withholding
and income taxation, and foreign trading practices (including higher
trading commissions, custodial charges and delayed settlements). Foreign
securities also may be subject to greater fluctuations in price than
securities issued by United States corporations. The principal markets on
which these securities trade may have less volume and liquidity, and may be
more volatile, than securities markets in the United States.
In addition, there may be less publicly available information about a
foreign company than about a United States domiciled company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to United
States domestic companies. There is also generally less government
regulation of securities exchanges, brokers and listed companies abroad
than in the United States. Confiscatory taxation or diplomatic developments
could also affect investment in those countries. In addition, foreign
branches of United States banks, foreign banks and foreign issuers may be
subject to less stringent reserve requirements and to different accounting,
auditing, reporting, and recordkeeping standards than those applicable to
domestic branches of United States banks and United States domestic
issuers.
AMERICAN DEPOSITARY RECEIPTS. For many foreign securities, United States
dollar-denominated American Depositary Receipts, which are traded in the
United States on exchanges or over-the-counter, are issued by domestic
banks. American Depositary Receipts represent the right to receive
securities of foreign issuers deposited in a domestic bank or a
correspondent bank. American Depositary Receipts do not eliminate all the
risk inherent in investing in the securities of foreign issuers. However,
by investing in American Depositary Receipts rather than directly in
foreign issuers' stock, the Fund can avoid currency risks during the
settlement period for either purchases or sales. In general, there is a
large, liquid market in the United States for many American Depositary
Receipts. The information available for American Depositary Receipts is
subject to the accounting, auditing and financial reporting standards of
the domestic market or exchange on which they are traded, which standards
are more uniform and more exacting than those to which many foreign issuers
may be subject.
Certain American Depositary Receipts, typically those denominated as
unsponsored, require the holders thereof to bear most of the costs of the
facilities while issuers of sponsored facilities normally pay more of the
costs thereof. The depository of an unsponsored facility frequently is
under no obligation to distribute shareholder communications received from
the issuer of the deposited securities or to pass through the voting rights
to facility holders in respect to the deposited securities, whereas the
depository of a sponsored facility typically distributes shareholder
communications and passes through voting rights.
PORTFOLIO TRANSACTIONS
Portfolio transactions in the over-the-counter market will be effected with
market makers or issuers, unless better overall price and execution are
available through a brokerage transaction. It is anticipated that most
portfolio transactions involving debt securities will be executed on a
principal basis. Also, with respect to the placement of portfolio
transactions with securities firms, subject to the overall policy to seek
to place portfolio transactions as efficiently as possible and at the best
price, research services and placement of orders by securities firms for a
Fund's shares may be taken into account as a factor in placing portfolio
transactions for the Fund.
PORTFOLIO TURNOVER
Although the Funds do not intend generally to trade for short-term profits,
they may dispose of a security without regard to the time it has been held
when such action appears advisable to the Adviser. The portfolio turnover
rate for a Fund may vary from year to year and may be affected by cash
requirements for redemptions of shares. High portfolio turnover rates
generally would result in higher transaction costs and could result in
additional tax consequences to a Fund's shareholders.
INVESTMENT RESTRICTIONS
The fundamental and nonfundamental investment restrictions of the Funds are
set forth in full in the Statement of Additional Information. The
fundamental restrictions include the following:
* None of the Funds will borrow money, except from banks for
temporary or emergency purposes. The amount of such borrowing may
not exceed 10% of the borrowing Fund's total assets. None of the
Funds will borrow money for leverage purposes. For the purpose of
this investment restriction, the use of options and futures
transactions and the purchase of securities on a when-issued or
delayed-delivery basis shall not be deemed the borrowing of
money. If a Fund engages in borrowing, its share price may be
subject to greater fluctuation, and the interest expense
associated with the borrowing may reduce the Fund's net income.
* None of the Funds will mortgage, pledge or hypothecate its
assets, except in an amount not exceeding 15% of the value of its
total assets to secure temporary or emergency borrowing.
* None of the Funds will make short sales of securities.
* None of the Funds will purchase any securities on margin except
to obtain such short-term credits as may be necessary for the
clearance of transactions.
* Neither of the Tax Free Funds will invest 25% or more of the
value of its total assets in revenue bonds or notes, payment for
which comes from revenues from any one type of activity (for this
purpose, the term "type of activity" shall include without
limitation (i) sewage treatment and disposal; (ii) gas provision;
(iii) electric power provision; (iv) water provision; (v) mass
transportation systems; (vi) housing; (vii) hospitals; (viii)
nursing homes; (ix) street development and repair; (x) toll
roads; (xi) airport facilities; and (xii) educational
facilities), except that, in circumstances in which other
appropriate available investments may be in limited supply, such
Funds may invest without limitation in gas provision, electric
power provision, water provision, housing and hospital
obligations. This restriction does not apply to general
obligation bonds or notes. This restriction does not apply to
securities of the United States Government or its agencies and
instrumentalities or repurchase agreements relating thereto.
A fundamental policy or restriction, including those stated above, cannot
be changed without an affirmative vote of the holders of a "majority" of
the outstanding shares of the applicable Fund, as defined in the 1940 Act.
As a nonfundamental policy, none of the Funds will invest more than 15% of
its net assets in all forms of illiquid investments, as determined pursuant
to applicable Securities and Exchange Commission rules and interpretations.
Section 4(2) commercial paper and Rule 144A securities may be determined to
be "liquid" under guidelines adopted by the Board of Directors. Investing
in Rule 144A securities could have the effect of increasing the level of
illiquidity in a Fund to the extent that qualified institutional buyers
become, for a time, uninterested in purchasing these securities.
INFORMATION CONCERNING COMPENSATION PAID TO FIRST TRUST NATIONAL
ASSOCIATION AND ITS AFFILIATES
First Trust National Association ("First Trust") may act as fiduciary with
respect to plans subject to the Employee Retirement Income Security Act of
1974 ("ERISA") which invest in the Funds. This section sets forth
information concerning compensation that First Trust and its affiliates may
receive from the Funds.
First Trust, as custodian for the assets of the Funds, receives the
custodian fees specified herein under the caption "Management --
Custodian."
First Bank National Association, which is under common control with First
Trust, acts as investment adviser to the Funds and receives the advisory
fees specified herein under the caption "Management -- Investment Adviser."
First Trust and its affiliates may receive shareholder servicing fees in
the amounts specified herein under the caption "Distributor." First Trust
also may act as securities lending agent in connection with the Funds'
securities lending transactions and receive as compensation for such
services, fees equal to 40% of the Funds' income from such securities
lending transactions.
DISTRIBUTOR
SEI INVESTMENTS DISTRIBUTION CO.
Oaks, Pennsylvania 19456
ADMINISTRATOR
SEI FINANCIAL MANAGEMENT
CORPORATION
Oaks, Pennsylvania 19456
TRANSFER AGENT
DST SYSTEMS, INC.
1004 Baltimore
Kansas City, Missouri 64105
INDEPENDENT AUDITORS
KPMG PEAT MARWICK LLP
90 South Seventh Street
Minneapolis, Minnesota 55402
COUNSEL
DORSEY & WHITNEY LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
FIRST AMERICAN INVESTMENT FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED ________, 1997
OREGON INTERMEDIATE TAX FREE FUND
CALIFORNIA INTERMEDIATE TAX FREE FUND
MICRO CAP VALUE FUND
This Statement of Additional Information relates to the Class A Shares
of California Intermediate Tax Free Fund and Micro Cap Value Fund, the Class B
Shares of Micro Cap Value Fund, and the Class C Shares of each of the funds
named above (the "Funds"), each of which is a series of First American
Investment Funds, Inc. ("FAIF"). This Statement of Additional Information is not
a prospectus, but should be read in conjunction with the Funds' current
Prospectuses dated ___________, 1997. This Statement of Additional Information
is incorporated into the Funds' Prospectuses by reference. To obtain copies of a
Prospectus, write or call the Funds' distributor SEI Investments Distribution
Co., Oaks, Pennsylvania 19456, telephone: (800) 637-2548. Please retain this
Statement of Additional Information for future reference.
TABLE OF CONTENTS
PAGE
GENERAL INFORMATION........................... 2
ADDITIONAL INFORMATION CONCERNING
FUND INVESTMENTS............................. 3
Short-Term Investments..................... 3
Repurchase Agreements...................... 3
When-Issued and Delayed-Delivery
Transactions............................ 3
Lending of Portfolio Securities............ 4
Options Transactions....................... 4
Debt Obligations Rated Less Than
Investment Grade........................ 5
Special Factors Affecting Oregon
Intermediate Tax Free Fund.............. 6
Special Factors Affecting California
Intermediate Tax Free Fund.............. 9
CFTC Information........................... 14
INVESTMENT RESTRICTIONS....................... 14
DIRECTORS AND EXECUTIVE OFFICERS.............. 17
Directors.................................. 17
Executive Officers......................... 17
Compensation............................... 19
INVESTMENT ADVISORY AND OTHER
SERVICES.................................... 20
Investment Advisory Agreement.............. 20
Administration Agreement................... 20
Distributor and Distribution Plans......... 20
Custodian; Transfer Agent; Counsel;
Accountants............................. 22
PORTFOLIO TRANSACTIONS AND ALLOCATION
OF BROKERAGE............................... 22
CAPITAL STOCK................................. 24
NET ASSET VALUE AND PUBLIC OFFERI
PRICE...................................... 24
FUND PERFORMANCE.............................. 24
SEC Standardized Performance Figures....... 24
Non-Standard Distribution Rates............ 25
Certain Performance Comparisons............ 26
TAXATION...................................... 26
RATINGS....................................... 29
GENERAL INFORMATION
First American Investment Funds, Inc. ("FAIF") was incorporated in the
State of Maryland on August 20, 1987 under the name "SECURAL Mutual Funds, Inc."
The Board of Directors and shareholders, at meetings held January 10, 1991, and
April 2, 1991, respectively, approved amendments to the Articles of
Incorporation providing that the name "SECURAL Mutual Funds, Inc." be changed to
"First American Investment Funds, Inc."
FAIF is organized as a series fund and currently issues its shares in
23 series. Each series of shares represents a separate investment portfolio with
its own investment objective and policies (in essence, a separate mutual fund).
The series of FAIF to which this Statement of Additional Information relates are
named on the cover hereof. These series are referred to in this Statement of
Additional Information as the "Funds." Oregon Intermediate Tax Free Fund and
California Intermediate Tax Free Fund are referred to as the "Tax Free Funds."
Shareholders may purchase shares of Oregon Intermediate Tax Free Fund
through Class C Shares, of California Intermediate Tax Free Fund through Class A
and Class C Shares, and of Micro Cap Value Fund through Class A, Class B, and
Class C Shares. The different classes provide for variations in distribution
costs, shareholder servicing fees, voting rights and dividends. To the extent
permitted by the Investment Company Act of 1940, the Funds may also provide for
variations in other costs among the classes although they have no present
intention to do so. In addition, a sales load is imposed on the sale of Class A
and Class B Shares of the Funds. Except for differences among the classes
pertaining to distribution costs and shareholder servicing fees, each share of
each Fund represents an equal proportionate interest in that Fund. Class A and
Class B Shares sometimes are referred to together as the "Retail Class Shares,"
and Class C Shares sometimes are referred to as the "Institutional Class
Shares."
FAIF has prepared and will provide a Prospectus relating to the Retail
Class Shares and a Prospectus relating to the Institutional Class Shares of the
Funds. These Prospectuses can be obtained by calling or writing SEI Investments
Distribution Co. at the address and telephone number set forth on the cover of
this Statement of Additional Information. This Statement of Additional
Information relates both to the Retail Class Prospectus and to the Institutional
Class Prospectus for the Funds. It should be read in conjunction with the
applicable Prospectus. Separate prospectuses and statements of additional
information relate to the other funds offered by FAIF.
The Articles of Incorporation and Bylaws of FAIF provide that meetings
of shareholders be held as determined by the Board of Directors and as required
by the 1940 Act. Maryland corporation law requires a meeting of shareholders to
be held upon the written request of shareholders holding 10% or more of the
voting shares of FAIF, with the cost of preparing and mailing the notice of such
meeting payable by the requesting shareholders. The 1940 Act requires a
shareholder vote for all amendments to fundamental investment policies and
restrictions, for approval of all investment advisory contracts and amendments
thereto, and for all amendments to Rule 12b-1 distribution plans.
ADDITIONAL INFORMATION CONCERNING FUND INVESTMENTS
The investment objectives, policies and restrictions of the Funds are
set forth in their respective Prospectuses. Additional information concerning
the investments which may be made by the Funds is set forth under this caption.
Additional information concerning the Funds' investment restrictions is set
forth below under the caption "Investment Restrictions."
SHORT-TERM INVESTMENTS
The Funds can invest in a variety of short-term instruments which are
specified, with respect to the respective Funds, in their Prospectuses.
Short-term investments and repurchase agreements may be entered into on a joint
basis by the Funds and other funds advised by the Adviser to the extent
permitted by Securities and Exchange Commission exemptive order relief obtained
by them. A brief description of certain kinds of short-term instruments follows:
COMMERCIAL PAPER. Commercial paper consists of unsecured promissory
notes issued by corporations. Issues of commercial paper normally have
maturities of less than nine months and fixed rates of return. Subject to the
limitations described in the Prospectuses, the Funds may purchase commercial
paper consisting of issues rated at the time of purchase within the two highest
rating categories by Standard & Poor's Corporation ("Standard & Poor's") or
Moody's Investors Service, Inc. ("Moody's"), or which have been assigned an
equivalent rating by another nationally recognized statistical rating
organization. The Funds also may invest in commercial paper that is not rated
but that is determined by the Adviser to be of comparable quality to instruments
that are so rated. For a description of the rating categories of Standard &
Poor's and Moody's, see "Ratings" herein.
BANKERS ACCEPTANCES. Bankers acceptances are credit instruments
evidencing the obligation of a bank to pay a draft drawn on it by a customer.
These instruments reflect the obligation both of the bank and of the drawer to
pay the full amount of the instrument upon maturity.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand
notes are unsecured demand notes that permit the indebtedness thereunder to vary
and provide for periodic adjustments in the interest rate according to the terms
of the instrument. Because master demand notes are direct lending arrangements
between a Fund and the issuer, they are not normally traded. Although there is
no secondary market in the notes, a Fund may demand payment of principal and
accrued interest at any time. While the notes are not typically rated by credit
rating agencies, issuers of variable amount master demand notes (which are
normally manufacturing, retail, financial, and other business concerns) must
satisfy the same criteria as set forth above for commercial paper. The Adviser
or Sub-Adviser will consider the earning power, cash flow, and other liquidity
ratios of the issuers of such notes and will continuously monitor their
financial status and ability to meet payment on demand.
REPURCHASE AGREEMENTS
The Funds may invest in repurchase agreements to the extent specified
in their Prospectuses. The Funds' custodian will hold the securities underlying
any repurchase agreement, or the securities will be part of the Federal
Reserve/Treasury Book Entry System. The market value of the collateral
underlying the repurchase agreement will be determined on each business day. If
at any time the market value of the collateral falls below the repurchase price
under the repurchase agreement (including any accrued interest), the appropriate
Fund will promptly receive additional collateral (so the total collateral is an
amount at least equal to the repurchase price plus accrued interest).
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS
When a Fund agrees to purchase securities on a when-issued or
delayed-delivery basis, the Custodian will set aside cash or liquid securities
equal to the amount of the commitment in a separate account. Normally, the
Custodian will set aside securities to satisfy the purchase commitment, and in
that case, a Fund may be required subsequently to place additional assets in the
separate account in order to assure that the value of the account remains equal
to the amount of the Fund's commitments. It may be expected that a Fund's net
assets will fluctuate to a greater degree when it sets aside securities to cover
such purchase commitments than when it sets aside cash. In addition, because a
Fund will set aside cash or liquid securities to satisfy its purchase
commitments in the manner described above, its liquidity and the ability of the
Adviser to manage it might be affected in the event its commitments to purchase
when-issued or delayed-delivery securities ever exceeded 25% of the value of its
assets. Under normal market conditions, however, a Fund's commitments to
purchase when-issued or delayed-delivery securities will not exceed 25% of the
value of its assets.
LENDING OF PORTFOLIO SECURITIES
When a Fund lends portfolio securities, it must receive 100% collateral
as described in the Prospectuses. This collateral must be valued daily by the
Adviser and, if the market value of the loaned securities increases, the
borrower must furnish additional collateral to the lending Fund. During the time
portfolio securities are on loan, the borrower pays the lending Fund any
dividends or interest paid on the securities. Loans are subject to termination
by the lending Fund or the borrower at any time. While a Fund does not have the
right to vote securities on loan, it would terminate the loan and regain the
right to vote if that were considered important with respect to the investment.
First Trust National Association, the Funds' custodian and an affiliate
of their Adviser, may act as securities lending agent for the Funds and receive
separate compensation for such services, subject to compliance with conditions
contained in a Securities and Exchange Commission exemptive order permitting
First Trust to provide such services and receive such compensation.
OPTIONS TRANSACTIONS
OPTIONS ON SECURITIES. To the extent specified in the Prospectuses,
Funds may purchase put and call options on securities and may write covered call
options on securities which they own or have the right to acquire. A Fund may
purchase put options to hedge against a decline in the value of its portfolio.
By using put options in this way, a Fund would reduce any profit it might
otherwise have realized in the underlying security by the amount of the premium
paid for the put option and by transaction costs. In similar fashion, Fund may
purchase call options to hedge against an increase in the price of securities
that the Fund anticipates purchasing in the future. The premium paid for the
call option plus any transaction costs will reduce the benefit, if any, realized
by the Fund upon exercise of the option, and, unless the price of the underlying
security rises sufficiently, the option may expire unexercised.
The writer (seller) of a call option has no control over when the
underlying securities must be sold; the writer may be assigned an exercise
notice at any time prior to the termination of the option. If a call option is
exercised, the writer experiences a profit or loss from the sale of the
underlying security. The writer of a call option that wishes to terminate its
obligation may effect a "closing purchase transaction." This is accomplished by
buying an option on the same security as the option previously written. If a
Fund was unable to effect a closing purchase transaction in a secondary market,
it would not be able to sell the underlying security until the option expires or
it delivers the underlying security upon exercise.
OPTIONS ON STOCK INDICES. Options on stock indices are similar to
options on individual stocks except that, rather than the right to take or make
delivery of stock at a specified price, an option on a stock index gives the
holder the right to receive, upon exercise of the option, an amount of cash if
the closing value of the stock index upon which the option is based is greater
than, in the case of a call, or lesser than, in the case of a put, the exercise
price of the option. This amount of cash is equal to the difference between the
closing price of the index and the exercise price of the option expressed in
dollars times a specified multiple (the "multiplier"). The writer of the option
is obligated, in return for the premium received, to make delivery of this
amount. Unlike stock options, all settlements for stock index options are in
cash, and gain or loss depends on price movements in the stock market generally
(or in a particular industry or segment of the market) rather than price
movements in individual stocks. The multiplier for an index option performs a
function similar to the unit of trading for a stock option. It determines the
total dollar value per contract of each point in the difference between the
underlying stock index. A multiplier of 100 means that a one-point difference
will yield $100. Options on different stock indices may have different
multipliers.
OPTIONS ON INTEREST RATE INDICES. An option on an interest rate index
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing value of the interest rate index upon which the option is
based is greater than, in the case of a call, or lesser than, in the case of a
put, the exercise price of the option. This amount of cash is equal to the
difference between the closing price of the index and the exercise price of the
option expressed in dollars times a specified multiple (the "multiplier"). The
writer of the option is obligated, for the premium received, to make delivery of
this amount. Unlike interest rate futures options contracts, settlements for
interest rate index options are always in cash. Gain or loss depends on price
movements in the interest rate movements with respect to specific financial
instruments. As with stock index options, the multiplier for interest rate index
options determines the total dollar value per contract of each point in the
difference between the exercise price of an option and the current value of the
underlying interest rate index. Options on different interest rate indices may
have different multipliers.
DEBT OBLIGATIONS RATED LESS THAN INVESTMENT GRADE
As described in the Prospectuses, the "equity securities" in which
Micro Cap Value Fund may invest include corporate debt obligations which are
convertible into common stock. These convertible debt obligations may include
obligations rated as low as CCC by Standard & Poor's or Caa by Moody's or which
have been assigned an equivalent rating by another nationally recognized
statistical rating organization. Debt obligations rated BB, B or CCC by Standard
& Poor's or Ba, B or Caa by Moody's are considered to be less than "investment
grade" and are sometimes referred to as "junk bonds." The limitations on
investments by this Fund in less than investment grade convertible debt
obligations are set forth in the applicable Prospectuses.
Purchases of less than investment grade corporate debt obligations
generally involve greater risks than purchases of higher rated obligations. Less
than investment grade debt obligations are especially subject to adverse changes
in general economic conditions and to changes in the financial condition of
their issuers. During periods of economic downturn or rising interest rates,
issuers of such obligations may experience financial stress that could adversely
affect their ability to make payments of principal and interest and increase the
possibility of default.
Yields on less than investment grade debt obligations will fluctuate
over time. The prices of such obligations have been found to be less sensitive
to interest rate changes than higher rated obligations, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or period of rising interest rates, highly leveraged issuers
may experience financial stress which could adversely affect their ability to
service principal and interest payment obligations, to meet projected business
goals, and to obtain additional financing. In addition, periods of economic
uncertainty and changes can be expected to result in increased volatility of
market prices of less than investment grade debt obligations.
In addition, the secondary trading market for less than investment
grade debt obligations may be less developed than the market for investment
grade obligations. This may make it more difficult for Micro Cap Value Fund to
value and dispose of such obligations. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of less than investment grade obligations, especially in a
thin secondary trading market.
Certain risks also are associated with the use of credit ratings as a
method for evaluating less than investment grade debt obligations. For example,
credit ratings evaluate the safety of principal and interest payments, not the
market value risk of such obligations. In addition, credit rating agencies may
not timely change credit ratings to reflect current events. Thus, the success of
Micro Cap Value Fund's use of less than investment grade convertible debt
obligations may be more dependent on the Adviser's own credit analysis than is
the case with investment grade obligations.]
SPECIAL FACTORS AFFECTING OREGON INTERMEDIATE TAX FREE FUND
As described in the Prospectuses, except during temporary defensive
periods, Oregon Intermediate Tax Free Fund will invest most of its total assets
in Oregon municipal obligations. This Fund therefore is susceptible to
political, economic and regulatory factors affecting issuers of Oregon municipal
obligations. The following information provides only a brief summary of the
complex factors affecting the financial situation in Oregon. This information is
derived from sources that are generally available to investors and is based in
part on information obtained from various state and local agencies in Oregon. It
should be noted that the creditworthiness of obligations issued by local Oregon
issuers may be unrelated to the creditworthiness of obligations issued by the
State of Oregon, and that there is no obligation on the part of Oregon to make
payment on such local obligations in the event of default.
GENERAL ECONOMIC CONDITIONS. Similar to the nation as a whole, economic
growth in Oregon is likely to be restricted to its long-term trend rate by near
capacity labor markets and rising costs. Oregon's jobless rate is unlikely to
fall below its current 5.0% for any sustained period. The labor force is
expected to increase sufficiently to keep Oregon's employment growth well above
the national average but not enough to match the job growth rates of the 1994 to
1996 period. Overall, manufacturing employment is forecast to increase 0.3% in
1997 after averaging 3.0% growth for the 1994-1996 period. Construction
employment, which increased 11.4% from 1995 to 1996, is expected to show less
growth in 1997, yet at high levels. The state's service-producing sectors are
expected to continue growing but they too are likely to be constrained by labor
availability. The state's tight labor markets and expanding high technology
industries should continue to push Oregon's wages and per capita income up
toward the national average.
The rest of the state will benefit from a generally healthy agriculture
section (with the exception of the cattle industry), a stabilizing timber
harvest and increasing cost advantages relative to the Willamette Valley and
Portland metropolitan area. The statewide timber harvest is expected to be 4.2
billion board feet in 1997, matching the estimate for 1996. In the agricultural
industry, cash commodities include farm forest products, cattle and calves,
nursery crops, dairy, wheat, potatoes, alfalfa hay, and perennial rye grass
seed.
Non-farm employment is expected to grow 2.9% in 1997, a significant
decrease from the preliminary 4.1% pace recorded in 1996, yet more than double
the 1997 projected national rate of job growth. Job growth is expected to slow
further to 2.3% in 1998 as the high technology manufacturing sector winds down
and a shortage of available labor limits net job creation.
BUDGETARY PROCESS. The Oregon budget is approved on a biennial basis by
separate appropriation measures. a biennium begins July 1 and ends June 30 of
odd-numbered years. Measures are passed for the approaching biennium during each
regular Legislative session, held beginning in January of odd-numbered years.
Because the Oregon Legislative Assembly meets in regular session for
approximately six months of each biennium, provision is made for interim funding
through the Legislative Emergency Board. The Emergency Board is authorized to
make allocations of General Fund monies to State agencies from the State
Emergency Fund. The Emergency Board may also authorize increases in expenditure
limitations from Other or Federal Funds (dedicated or continuously appropriated
funds), and may take other actions to meet emergency needs when the Legislative
Assembly is not in session. The most significant feature of the budgeting
process in Oregon is the constitutional requirement that the budget be in
balance at the end of each biennium. Because of this provision, Oregon may not
budget a deficit and is required to alleviate any revenue shortfalls within each
biennium.
REVENUE AND EXPENDITURES. The Oregon Biennial budget is a two-year
fiscal plan balancing proposed spending against expected revenues. The total
budget consists of three segments distinguished by source of revenues: program
supported by General Fund revenues; programs supported by Other Funds (dedicated
fund) revenues, including lottery funds; and, Federal Funds. In its 1995 Regular
Session, the Oregon Legislative Assembly approved General Fund appropriations
totaling $7,372.6 million for the 1995- 1997 biennium. This was a 15.2% increase
compared to estimated 1993-1995 expenditures.
General Fund revenue totaled $6,536.1 million for the 1993-1995
biennium. Revenue exceeded the May estimate by $16.7 million in the 1993 Close
of Session (COS) estimate by $330.6 million or 5.3%. Expenditures were $6,410.1
million for the biennium.
The December forecast for the 1995-97 General Fund revenue is $7,399.3
million, a 13.2% increase from the 1993-95 biennium. The 1995-97 estimate is
also an increase of $106.3 million from the September 1996 estimate and $437.8
million or 6.3% from the 1995 Close of Legislative Session (COS) forecast. The
beginning balance is estimated to be $496.3 million, leaving total General Fund
resources available for the 1995-97 biennium of $7,895.6 million. The General
Fund resources estimate is $450.9 million higher than the COS estimate.
General Fund revenue is projected to be $8,145.7 million for the
1997-99 biennium. The beginning balance is estimated to be $536.3 million for a
total General Fund resource estimate of $8,682 million. The December 1997-99
General Fund revenue estimate is $115.1 million higher than the September
forecast despite the anticipation of a larger 2% surplus kicker refund. The
overall General Fund resource projection is $243.8 million more than the
September forecast.
The State is involved in certain legal proceedings that, if decided
against the State, may require the State to make significant future expenditures
or may impair future revenue sources. Because of the prospective nature of these
legal proceedings, no provision for these potential liabilities has been
recorded in the publicly disclosed financial statements. Additionally, 1,229
notices of tort claims filed against the State. Of those claims, 544 also have
been filed as court actions, and are pending against the State. These cases are
pending in State courts and are subject to the liability limitations stated in
the Tort Claims Act of $500,000 per occurrence, $200,000 per individual for
physical injuries, and $50,000 per occurrence for property damage. The
likelihood of an unfavorable outcome in these cases ranges from probable to
remote, but it is certain that these cases do not involve real exposure of $25
million in the aggregate.
In the November 1994 general election, Oregonians approved a ballot
measure, introduced through the initiative process, that will have, or may have,
a material financial impact on the State. "Measure 11" amends Oregon statutes to
require mandated minimum sentences for certain felonies, effective April 1,
1995. "Measure 11" creates a need for an estimated 6,085 new prison beds by the
year 2001 and calls for State correction facility construction costs of
approximately $462 million in the next five years. The State also estimates
increases in State expenditures for correctional operations, beginning with an
increase of $3.2 million in fiscal year 1996, with accelerating costs that
should peak at an annual increase of up to $101.6 million by fiscal year 2001.
Because these demands will be made by on the State General Fund, they will
reduce amounts that otherwise would be available in the future for the Oregon
Legislative Assembly to appropriate for other purposes.
In November of 1996, voters approved Ballot Measure 47, the property
tax cut and cap. It will reduce revenues to schools, cities and counties by as
much as $1 billion and put pressure on the General Fund to make up some or all
of the difference.
DEBT ADMINISTRATION AND LIMITATION. Oregon statutes give the State
Treasurer authority to review and approve the terms and conditions of sale for
State agency bonds. The Governor, by statute, seeks the advice of the State
Treasurer when recommending the total biennial bonding level for State programs.
Agencies may not request that the Treasurer issue bonds or certificates of
requirements for state agencies on proposed and outstanding debt. Statutes
contain management and reporting requirements for state agencies on proposed and
outstanding debt.
A variety of general obligation and revenue bond programs have been
approved in Oregon to finance public purpose programs and projects. General
obligation bond authority requires voter approval or a constitutional amendment,
while revenue bonds may be issued under statutory authority. However, under the
Oregon Constitution the state may issue up to $50,000 of general obligation debt
without specific voter approval. The State Legislative Assembly has the right to
place limits on general obligation bond programs which are more restrictive than
those approved by the voters. General obligation authorizations are normally
expressed as a percentage of statewide True Cash Value (TCV) of taxable
property. Revenue bonds usually are limited by the Legislative Assembly to a
specific dollar amount.
The State's constitution authorizes the issuance of general obligation
bonds for financing community colleges, highway construction, and pollution
control facilities. Higher education institutions and activities and community
colleges are financed through an appropriation from the General Fund. Facilities
acquired under the pollution control program are required to conservatively
appear to be at least 70% self-supporting and self-liquidating from revenues,
gifts, federal government grants, user charges, assessments, and other fees.
Additionally, the State's constitution authorizes the issuance of
general obligation bonds to make farm and home loans to veterans, provide loans
for state residents to construct water development projects, provide credit for
multi-family housing for elderly and disabled persons, and for small scale local
energy projects. These bonds are self-supporting and are accounted for as
enterprise funds. Certain provisions of the Water Resources general obligation
bond indenture conflict with State statutes. Upon the advice of the Attorney
General, the method of handling investment interest is in compliance with the
statutes rather than the bond indenture. Currently there is litigation pending
against the State concerning this treatment of the investment interest.
The State's constitution further authorizes the issuance of general
obligation bonds for financing higher education building projects, facilities,
institutions, and activities. For the year ending June 30, 1996, the total
balance of general obligation bonds was $3.7 billion. The debt service
requirements for general obligation bonds, including interest of approximately
$2.75 billion, as of September 1, 1996, was $6.4 billion.
In addition to general obligation and direct revenue bonds, the State
of Oregon issues industrial development revenue bonds ("IDBs"), Oregon Mass
Transportation Financing Authority revenue bonds and Health, Housing,
Educational and Cultural Facilities Authority ("HHECFA") revenue bonds. The IDBs
are issued to finance the expansion, enhancement or relocation of private
industry in the State. Before such bonds are issued, the project application
must be reviewed and approved by both the Oregon State Treasury and the Oregon
Economic Development Commission. Strict guidelines for eligibility have been
developed to ensure that the program meets clearly defined development
objective. IDBs issued by the State are secured solely by payments from the
private company and there is no obligation, either actual or implied, to provide
state funds to secure the bonds. The Oregon Mass Transportation Financing
Authority ("OMTFA") reviews financing request from local mass transit districts
and my authorize issuance of revenue bonds to finance eligible projects. The
State has no financial obligation for these bonds, which are secured solely by
payments from local transit districts.
The State is statutorily authorized to enter into financing agreements
through the issuance of certificates of participation. Certificates of
participation have been used for the acquisition of computer systems by the
Department of Transportation, Department of Administrative Services, and the
Department of Higher Education. Also, certificates of participation have been
used for the acquisition or construction of buildings by the Department of
Administrative Services, Department of Fish and Wildlife, Department of
Corrections, State Police, and Department of Higher Education. Further,
certificates of participation were used in the acquisition of telecommunication
system by the Department of Administrative Services and the Adult & Family
Services Division. For the year ending June 30, 1996, the certificates of
participation debt totaled $443.4 million. The debt service requirements for
certificates of participation for 1995-1997 is estimated at $70.1 million.
HHECFA is a public corporation created in 1989, and modified in 1991,
to assist with the assembling and financing of lands for health care, housing,
educational and cultural uses and for the construction and financing of
facilities for such uses. The Authority reviews proposed projects and makes
recommendations to the State Treasurer as to the issuance of bonds to finance
proposed projects. The State has no financial obligation for these bonds, which
are secured solely by payments from the entities for which the projects were
financed.
The Treasurer on behalf of the State may also issue federally taxable
bonds in those situations where securing a federal tax exemption is unlikely or
undesirable; regulate "current" as well as "advance" refunding bonds; enter into
financing agreements, including lease purchase agreements, installment sales
agreements and loan agreements to finance real or personal property and approve
certificates of participation with respect to the financing agreements. Amounts
payable by the State under a financing agreement are limited to funds
appropriated or otherwise made available by the Legislative Assembly for such
payment. The principal amount of such financing agreements are treated as bonds
subject to maximum annual bonding levels established by the Legislative Assembly
under Oregon statute.
Each of Fitch Investors Service, Moody's Investors Service and Standard
& Poor's Ratings Group has assigned their municipal bond ratings of "AA," "Aa,"
and "AA" respectively.
SPECIAL FACTORS AFFECTING CALIFORNIA INTERMEDIATE TAX FREE FUND
As described in the Prospectuses, except during temporary defensive
periods, California Intermediate Tax Free Fund will invest most of its total
assets in California municipal obligations. This Fund therefore is susceptible
to political, economic and regulatory factors affecting issuers of California
municipal obligations. The following information provides only a brief summary
of the complex factors affecting the financial situation in California. This
information is derived from sources that are generally available to investors
and is based in part on information obtained from various state and local
agencies in California. It should be noted that the creditworthiness of
obligations issued by local California issuers may be unrelated to the
creditworthiness of obligations issued by the State of California, and that
there is no obligation on the part of California to make payment on such local
obligations in the event of default.
GENERAL ECONOMIC CONDITIONS. California's economy is the largest among
the 50 states and one of the largest in the world. This diversified economy has
major components in agriculture, manufacturing, high-technology, trade,
entertainment, tourism, construction and services. Total State gross domestic
product of $1 trillion in 1997 will be larger than all but seven nations in the
world and California will become the first state to produce over one trillion
dollars worth of goods and services in a single year.
After suffering through a severe recession, California's economy has
been on a steady recovery since the start of 1994. In 1996, California had eight
consecutive months of record high employment levels. Employment grew over
330,000 non-farm jobs in 1996, and is expected to add another 330,000 jobs in
1997. The strongest growth has been in high technology and export-related
industries, including computer software, business services, electronics,
entertainment and tourism, all of which have offset the recession- related
losses which were heaviest in aerospace and defense-related industries (which
accounted for two-thirds of the job losses), and finance and insurance.
Residential housing construction, with new permits rising from 94,000 units in
1996 to 110,000 in 1997, is weaker than in previous recoveries, but has been
growing slowly since 1993.
The State's July 1, 1994 population of 32.1 million represented over
12% of the total United States population. California's population is
concentrated in metropolitan areas. As of July 1, 1994, the 5-county Los Angeles
area accounted for 48% of the State's population, with 15.6 million residents,
and the 10-county San Francisco Bay Area represented 21% with a population of
6.7 million. The June 1996 population projection forecasts 33.9 million
California residents in July 1998.
California enjoys a large and diverse labor force. For the year 1996,
the total civilian labor force was 15,496,000 with 14,372,000 individuals
employed and 1,124,000, or 7.3%, unemployed. In comparison, the unemployment
rate for the United States during the same time was 5.4%.
BUDGETARY PROCESS. The State's fiscal year begins on July 1 and ends on
June 30. The annual budget is proposed by the Governor by January 10 of each
year for the next fiscal year (the "Governor's Budget"). Under State law, the
annual proposed Governor's Budget cannot provide for projected expenditures in
excess of projected revenues and balances available from prior fiscal years.
Under the State Constitution, money may be drawn from the Treasury only through
an appropriation made by law. The primary source of the annual expenditure
authorizations is the Budget Act as approved by the Legislature and signed by
the Governor. The Budget Act must be approved by a two-thirds majority vote of
each House of the Legislature. The Governor may reduce or eliminate specific
line items in the Budget Act or any other appropriations bill without vetoing
the entire bill. Such individual line-item vetoes are subject to override by a
two-thirds majority vote of each House of the Legislature.
Appropriations also may be included in legislation other than the
Budget Act. Bills containing appropriations (except K-14 education) must be
approved by a two-thirds majority vote in each House of the Legislature and be
signed by the Governor. Bills containing K-14 education appropriations only
require a simple majority vote. Continuing appropriations, available without
regard to fiscal year, may also be provided by statute or the State
Constitution. Funds necessary to meet an appropriation need not be in the State
Treasury at the time such appropriation is enacted; revenues may be appropriated
in anticipation of their receipt.
REVENUES AND EXPENDITURES. The moneys of the State are segregated into
the General Fund and approximately 600 Special Funds. The General Fund consists
of revenues received by the State Treasury and not required by law to be
credited to any other fund, as well as earnings from the investment of State
moneys not allocable to another fund. The General Fund is the principal
operating fund for the majority of governmental activities and is the depository
of most of the major revenue sources of the State. The General Fund may be
expended as a consequence of appropriation measures enacted by the Legislature
and approved by the Governor, as well as appropriations pursuant to various
constitutional authorizations and initiative statutes.
Moneys on deposit in the State's Centralized Treasury System are
invested by the Treasurer in the Pooled Money Investment Account ("PMIA"). As of
January 31, 1996, the PMIA held approximately $17.31 billion of State moneys,
and $10.60 billion of moneys invested for 2,366 local governmental entities
through the Local Agency Investment Fund ("LAIF"). The total assets of the PMIA
as of January 31, 1996 were $27,912,100,000. The Treasurer does not invest in
leveraged products or inverse floating rate securities. The investment policy
permits the use of reverse repurchase agreements subject to limits of no more
than 10% of PMIA. All reverse repurchase agreements are cash matched either to
the maturity of the reinvestment or an adequately positive cash flow date which
is approximate to the maturity date. The average life of the investment
portfolio of the PMIA as of January 31, 1996 was 233 days.
SPECIAL FUND FOR ECONOMIC UNCERTAINTIES. The Special Fund for Economic
Uncertainties ("SFEU") is funded with General Fund revenues and was established
to protect the State from unforeseen revenue reductions and/or unanticipated
expenditure increases. Amounts in the SFEU may be transferred by the State
Controller as necessary to meet cash needs of the General Fund. The State
Controller is required to return moneys so transferred without payment of
interest as soon as there are sufficient moneys in the General Fund. For
budgeting and accounting purposes, any appropriation made from the SFEU is
deemed an appropriation from the General Fund. For year-end reporting purposes,
the State Controller is required to add the balance in the SFEU to the balance
in the General Fund so as to show the total moneys then available for General
Fund purposes. Inter-fund borrowing has been used for many years to meet
temporary imbalances of receipts and disbursements in the General Fund. As of
June 30, 1995, the General Fund did not have any outstanding loans from Special
Funds (but did have $4 billion of external loans represented by the 1994 Revenue
Anticipation Warrant, Series C and D which matured on April 25, 1996). As of
June 30, 1996, the General Fund Reserve for Economic Uncertainties was $234.6
million.
PROPOSITION 13. The primary units of local government in California are
the counties. Counties are responsible for the provision of many basic services,
including indigent health care, welfare, courts, jails and public safety in
unincorporated areas. There are also about 480 unincorporated cities, and
thousands of other special districts formed for education, utility and other
services. The fiscal condition of local governments has been constrained since
the enactment of "Proposition 13" in 1978, which reduced and limited the future
growth of property taxes, and limited the ability of local governments to impose
"special taxes" (those devoted to a specific purpose) without two-thirds voter
approval. A recent California Supreme Court decision has upheld the
constitutionality of an initiative statute, previously held invalid by lower
courts, which requires voter approval for "general" as well as "special" taxes
at the local level. Counties, in particular, have had fewer options to raise
revenues than many other local government entities, yet have been required to
maintain many services.
In the aftermath of Proposition 13, the State provided aid from the
General Fund to make up some of the loss of property tax moneys, including
taking over the principal responsibility for funding local K-12 schools and
community colleges. Under the pressure of the recent recession, the Legislature
has eliminated the remnants of this post-Proposition 13 aid to entities other
than K-14 education districts, although it has also provided additional funding
sources (such as sales taxes) and reduced mandates for local services. Many
counties continue to be under severe fiscal stress. While such stress has in
recent years most often been experienced by smaller, rural counties, larger
urban counties, such as Los Angeles, have also been affected.
STATE APPROPRIATIONS LIMIT. The State is subject to an annual
appropriations limit imposed by Article XIII B of the State Constitution (the
"Appropriations Limit"). The Appropriations Limit does not restrict
appropriations to pay debt service on voter-authorized bonds. Article XIII B
prohibits the State from spending "appropriations subject to limitation" in
excess of the Appropriations Limit. "Appropriations subject to limitation," with
respect to the State, are authorizations to spend "proceeds of taxes," which
consist of tax revenues, and certain other funds, including proceeds from
regulatory licenses, user charges or other fees to the extent that such proceeds
exceed "the cost reasonably borne by that entity in providing the regulation,
product or service," but "proceeds of taxes" exclude most state subventions to
local governments, tax refunds and some benefit payments such as unemployment
insurance. No limit is imposed on appropriations of funds which are not
"proceeds of taxes," such as reasonable user charges or fees and certain other
non-tax funds.
Not included in the Appropriations Limit are appropriations for the
debt service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government, appropriations for qualified
capital outlay projects, appropriations of revenues derived from any increase in
gasoline taxes and motor vehicle weight fees above January 1, 1990 levels, and
appropriation of certain special taxes imposed by initiative (e.g., cigarette
and tobacco taxes). The Appropriations Limit may also be exceeded in cases of
emergency.
ORANGE COUNTY, CA. On December 6, 1994, Orange County, together with
its pooled investment funds (the "Pools") filed for protection under Chapter 9
of the federal Bankruptcy Code, after reports that the Pools had suffered
significant market losses in their investments, causing a liquidity crisis for
the Pools and Orange County. More than 200 other public entities, most of which,
but not all, are located in Orange County, were also depositors in the Pools.
Orange County has reported the Pools' loss at about $1.69 billion, or about 23%
of their initial deposits of approximately $7.5 billion. Many of the entities
which deposited moneys in the Pools, including Orange County, faced interim
and/or extended cash flow difficulties because of the bankruptcy filing and may
be required to reduce programs or capital projects. Orange County has embarked
on a fiscal recovery plan based on sharp reductions in services and personnel,
and rescheduling of outstanding short term debt using certain new revenues
transferred to Orange County from other local governments pursuant to special
legislation enacted in October, 1995. The State has no existing obligation with
respect to any outstanding obligations or securities of Orange County or any of
the other participating entities.
LITIGATION GENERALLY. The State is a party to numerous legal
proceedings, many of which normally occur in governmental operations. In the
consolidated state case of Malibu Video Systems, et al. v. Kathleen Brown and
Abramovitz, et al., a stipulated judgment has been entered requiring return of
$119 million plus interest to specified special funds over a period of up to
five years beginning in fiscal year 1996-1997. The lawsuit challenges the
transfer of monies from special fund accounts within the State Treasury to the
State's General Fund pursuant to the Budget Acts of 1991, 1992, 1993, and 1994.
Plaintiffs allege that the monetary transfers violated various statutes and
provisions of the State Constitution.
FISCAL YEAR 1996-1997. On January 10, 1996, the Governor released his
proposed budget for the fiscal year 1996-97. The Governor requested total
General Fund appropriations of about $45.2 billion, based on projected revenues
and transfers of about $45.6 billion, which would leave a budget reserve in the
SFEU at June 30, 1997 of about $400 million. The Governor renewed a proposal,
which had been rejected by the Legislature in 1995, for a 15% phased cut in
individual and corporate tax rates over three years (the budget proposal assumes
this will be enacted, reducing revenues in 1996-97 by about $600 million). There
was also a proposal to restructure trial court funding in a way which would
result in a $300 million decrease in General Fund revenues. The Governor
requested legislation to make permanent a moratorium on cost of living increases
for welfare payments, and suspension of a renters tax credit, which otherwise
would go back into effect in the 1996-97 fiscal year. The Governor further
proposed additional cuts in certain health and welfare programs, and assumed
that cuts previously approved by the Legislature will receive federal approval.
Other proposals included an increase in funding for K-12 schools under
Proposition 98, for state higher education systems (with a second year of no
student fee increases), and for corrections. The Governor's Budget projected
external cash flow borrowing of up to $3.2 billion, to mature by June 30, 1997.
Revised estimates were published in the Governor's Budget Summary for fiscal
year 1997-98. These estimates and projections are based upon various assumptions
which may be affected by numerous factors, including future economic conditions
in the State and the nation, and there can be no assurance that the estimates
will be achieved.
Preliminary General Fund revenues and transfers for fiscal year 1996-97
are $48.4 billion, a 4.56% increase from the prior year. Expenditures are
estimated at $48.4 billion, a 6.6% increase. The Governor's Budget Summary for
fiscal year 1997-98 projects a positive balance of $197 million in the budget
reserve, the SFEU, at June 30, 1997. Special Fund revenues are estimated at
$13.54 billion and appropriated Special Fund expenditures at $13.59 billion. As
of June 30, 1996, the General Fund balance was $685.4 million. The estimate for
June 30, 1997 is $648 million.
Overall, General Fund revenues and transfers represent about 78% of
total revenues. The remaining 22% are special funds, dedicated to specific
programs. The three largest revenue sources (personal income, sales, and bank
and corporation) account for about 73% of total revenues.
Several important tax changes were enacted in 1996. The bank and
corporation tax was reduced by 5%, and a number of targeted business tax
incentives were put into place.
1997-98 FISCAL YEAR. The Governor's proposed budget for fiscal year
1997-98 keeps General Fund spending below revenues. The budget provides for
General Fund revenues and transfers of $50.7 billion, a 4.65% increase from
1996-97, and expenditures of $50.3 billion, a 4% increase. The budget provides
for a General Fund Reserve for Economic Uncertainties of $553 million. The
balance in the General Fund at the end of fiscal year 1998 is forecast at $1,004
million. Special Fund revenues are estimated to be $14 billion and appropriated
Special Fund expenditures are projected at $14.3 billion.
K-12 education remains the state's top funding priority -- nearly 42
cents of every General Fund dollar is spent on K-12 education. Education, public
safety, and health and welfare expenditures constitute nearly 93% of all state
General Fund expenditures. General Fund expenditures for 1997-98 are proposed in
the following amounts and programs: $20.9 billion or 41.6% for K-12 education,
$14.6 billion or 28.9% for health and welfare, $6.5 billion or 12.9% for higher
education, and $4.3 billion, or 8.5% for youth and correctional programs. The
remaining expenditures are in areas such as business, transportation, housing,
and environmental protection.
The following are principal features of the Governor's 1997-98 budget
proposal:
For fiscal year 1997-98, the Governor's budget proposes a further 10%
reduction in the bank and corporation tax rate phased in over a two-year period
beginning with the 1998 tax year. This would implement the balance of the
Governor's proposal last year for a 15% bank and corporation tax reduction. In
addition, the Governor's Budget proposes that the State conform with recent
federal changes in the allowable number of Subchapter S shareholders. Combined,
these tax reduction proposals are estimated to reduce taxes by $93 million
during 1997-98, and $336 million during 1998-1999.
The Governor has proposed a $200 million bond to capitalize an
Infrastructure Bank to help finance infrastructure projects related to business
development. The budget also proposes $939,000 to create three new offices --
two in Asia and one in South America -- to provide California companies with
representation and assistance in these emerging markets.
Building on the 1996 class-size reduction initiative, the Budget
proposes $304 million to reduce class size in an additional grade, and funding
is provided to meet facilities-related costs of class size reduction in 1996-97.
An additional $57 million is proposed for improved reading instruction in grades
four through eight.
The Budget includes the second year of the Citizens' Option for Public
Safety Program, through which $100 million will be provided to local governments
to increase frontline law enforcement.
The Budget provides a $35 million Infant Health Protection Initiative,
designed to protect children from abuse or neglect from substance-abusing
parents. The budget also provides $15.3 million to increase immunizations for
low-income children.
DEBT ADMINISTRATION AND LIMITATION. The State Treasurer is responsible
for the sale of debt obligations of the State and its various authorities and
agencies. The State Constitution prohibits the creation of indebtedness of the
State unless a bond law is approved by a majority of the electorate voting at a
general election or a direct primary. General obligation bond acts provide that
debt service on general obligation bonds shall be appropriated annually from the
General Fund and all debt service on general obligation bonds is paid from the
General Fund. Under the State Constitution, debt service on general obligation
bonds is the second charge to the General Fund after the application of moneys
in the General Fund to the support of the public school system and public
institutions of higher education. Certain general obligation bond programs
receive revenues from sources other than the sale of bonds or the investment of
bond proceeds. The State had $17,913,271,000 aggregate principal amount of
general obligation bonds outstanding, and $8,383,864,000 authorized and
unissued, as of December 31, 1996. Outstanding lease revenue bonds totaled
$5.845 billion as of June 30, 1996, and are estimated to total $6.398 billion as
of June 30, 1997.
From July 1, 1995 to December 15, 1995, the State issued approximately
$461 million in general obligation bonds and $44 million in revenue bonds.
Refunding bonds, which are used to refinance existing debt, accounted for $81
million of the general obligation bonds and the entire $44 million of the
revenue bonds. The Legislature placed two general obligation bond measures
totaling $5 billion on the March, 1996 statewide ballot. Additional bond
measures may be placed on the November 1996 ballot.
General Fund general obligation debt service expenditures for fiscal
year 1995-96 were $1.911 billion, and are estimated at $1.953 billion and $1.979
billion for fiscal years 1996-97 and 1997-98, respectively.
The State's general obligation bonds have received ratings of "A1" by
Moody's Investors Service, "A" by Standard & Poor's Ratings Group and "A+" by
Fitch Investors Service, Inc.
CFTC INFORMATION
The Commodity Futures Trading Commission (the "CFTC"), a federal
agency, regulates trading activity pursuant to the Commodity Exchange Act, as
amended. The CFTC requires the registration of "commodity pool operators," which
are defined as any person engaged in a business which is of the nature of an
investment trust, syndicate or a similar form of enterprise, and who, in
connection therewith, solicits, accepts or receives from others funds,
securities or property for the purpose of trading in any commodity for future
delivery on or subject to the rules of any contract market. The CFTC has adopted
Rule 4.5, which provides an exclusion from the definition of commodity pool
operator for any registered investment company which (i) will use commodity
futures or commodity options contracts solely for bona fide hedging purposes
(provided, however, that in the alternative, with respect to each long position
in a commodity future or commodity option contract, an investment company may
meet certain other tests set forth in Rule 4.5); (ii) will not enter into
commodity futures and commodity options contracts for which the aggregate
initial margin and premiums exceed 5% of its assets; (iii) will not be marketed
to the public as a commodity pool or as a vehicle for investing in commodity
interests; (iv) will disclose to its investors the purposes of and limitations
on its commodity interest trading; and (v) will submit to special calls of the
CFTC for information. Any investment company desiring to claim this exclusion
must file a notice of eligibility with both the CFTC and the National Futures
Association. FAIF has made such notice filings with respect to those Funds which
may invest in commodity futures or commodity options contracts.
INVESTMENT RESTRICTIONS
In addition to the investment objectives and policies set forth in the
Prospectuses and under the caption "Additional Information Concerning Fund
Investments" above, each of the Funds is subject to the investment restrictions
set forth below. The investment restrictions set forth in paragraphs 1 through
10 below are fundamental and cannot be changed with respect to a Fund without
approval by the holders of a majority of the outstanding shares of that Fund as
defined in the Investment Company Act of 1940, as amended (the "1940 Act"),
i.e., by the lesser of the vote of (a) 67% of the shares of the Fund present at
a meeting where more than 50% of the outstanding shares are present in person or
by proxy, or (b) more than 50% of the outstanding shares of the Fund.
None of the Funds will:
1. Except for Oregon Intermediate Tax Free Fund and California
Intermediate Tax Free Fund (collectively, the "Tax Free Funds"),
invest in any securities if, as a result, 25% or more of the value of
its total assets would be invested in the securities of issuers
conducting their principal business activities in any one industry.
Neither of the Tax Free Funds will invest 25% or more of the value of
its total assets in revenue bonds or notes, payment for which comes
from revenues from any one type of activity (for this purpose, the
term "type of activity" shall include without limitation (i) sewage
treatment and disposal; (ii) gas provision; (iii) electric power
provision; (iv) water provision; (v) mass transportation systems; (vi)
housing; (vii) hospitals; (viii) nursing homes; (ix) street
development and repair; (x) toll roads; (xi) airport facilities; and
(xii) educational facilities), except that, in circumstances in which
other appropriate available investments may be in limited supply, such
Funds may invest without limitation in gas provision, electric power
provision, water provision, housing and hospital obligations. This
restriction does not apply to general obligation bonds or notes. This
restriction does not apply to securities of the United States
Government or its agencies and instrumentalities or repurchase
agreements relating thereto.
2. Issue any senior securities (as defined in the 1940 Act), other than
as set forth in restriction number 3 below and except to the extent
that using options or purchasing securities on a when-issued basis may
be deemed to constitute issuing a senior security.
3. Borrow money, except from banks for temporary or emergency purposes.
The amount of such borrowing may not exceed 10% of the borrowing
Fund's total assets. None of the Funds will borrow money for leverage
purposes. For the purpose of this investment restriction, the use of
options and futures transactions and the purchase of securities on a
when-issued or delayed- delivery basis shall not be deemed the
borrowing of money. (As a non-fundamental policy, no Fund will make
additional investments while its borrowings exceed 5% of total
assets.)
4. Mortgage, pledge or hypothecate its assets, except in an amount not
exceeding 15% of the value of its total assets to secure temporary or
emergency borrowing.
5. Make short sales of securities.
6. Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions.
7. Purchase or sell physical commodities (including, by way of example
and not by way of limitation, grains, oilseeds, livestock, meat, food,
fiber, metals, petroleum, petroleum-based products or natural gas) or
futures or options contracts with respect to physical commodities.
This restriction shall not restrict any Fund from purchasing or
selling any financial contracts or instruments which may be deemed
commodities (including, by way of example and not by way of
limitation, options, futures and options on futures with respect, in
each case, to interest rates, currencies, stock indices, bond indices
or interest rate indices) or any security which is collateralized or
otherwise backed by physical commodities.
8. Purchase or sell real estate or real estate mortgage loans, except
that the Funds may invest in securities secured by real estate or
interests therein or issued by companies that invest in or hold real
estate or interests therein, and except that Micro Cap Value Fund may
invest in mortgage-backed securities.
9. Act as an underwriter of securities of other issuers, except to the
extent a Fund may be deemed to be an underwriter, under Federal
securities laws, in connection with the disposition of portfolio
securities.
10. Lend any of their assets, except portfolio securities representing up
to one-third of the value of their total assets.
The following restrictions are non-fundamental and may be changed by
FAIF's Board of Directors without shareholder vote. None of the Funds will:
11. Invest more than 15% of its net assets in all forms of illiquid
investments, as determined pursuant to applicable Securities and
Exchange Commission rules and interpretations.
12. Invest in any securities, if as a result more than 5% of the value of
its total assets is invested in the securities of any issuers which,
with their predecessors, have a record of less than three years
continuous operation. (Securities of any of such issuers will not be
deemed to fall within this limitation if they are guraranteed by an
entity which has been in continuous operation for more than three
years.)
13. Invest for the purpose of exercising control or management.
14. Purchase or sell real estate limited partnership interests, or oil,
gas or other mineral leases, rights or royalty contracts, except that
the Funds may purchase or sell securities of companies which invest in
or hold the foregoing.
15. Purchase securities of any other registered investment company (as
defined in the 1940 Act), except, subject to 1940 Act limitations, (a)
the Tax Free Funds may purchase shares of open-end investment
companies investing primarily in municipal obligations with remaining
maturities of 13 months or less; (b) Micro Cap Value Fund may, as part
of its investment in cash items, invest in securities of other mutual
funds which invest primarily in debt obligations with remaining
maturities of 13 months or less; and (c) all Funds may purchase
securities as part of a merger, consolidation, reorganization or
acquisition of assets.
16. Invest in foreign securities, except that Micro Cap Value Fund may
invest may invest up to 25% of its total assets in securities of
foreign issuers which are either listed on a United States stock
exchange or represented by American Depositary Receipts.
17. Invest in warrants; provided, that Micro Cap Value Fund may invest in
warrants in an amount not exceeding 5% of the Fund's net assets. No
more than 2% of this 5% may be warrants which are not listed on the
New York Stock Exchange.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of FAIF are listed below, together
with their business addresses and their principal occupations during the past
five years. Directors who are "interested persons" (as that term is defined in
the 1940 Act) of FAIF are identified with an asterisk.
DIRECTORS
Robert J. Dayton, 5140 Norwest Center, Minneapolis, Minnesota 55402:
Director of FAIF since September 1994 and of First American Funds, Inc. ("FAF")
since December 1994 and of First American Strategy Funds, Inc. ("FASF") since
June 1996; Chairman (1989-1993) and Chief Executive Officer (1993- present),
Okabena Company (private family investment office). Age: 54.
Andrew M. Hunter III, 537 Harrington Road, Wayzata, Minnesota 55391:
Director of FAIF, FAF and FASF since January 1997; Chairman of Hunter, Keith
Industries, a diversified manufacturing and services management company, since
1975. Age: 49.
Leonard W. Kedrowski, 16 Dellwood Avenue, Dellwood, Minnesota 55110:
Director of FAIF and FAF since November 1993 and of FASF since June 1996;
President and owner of Executive Management Consulting, Inc., a management
consulting firm; Vice President, Chief Financial Officer, Treasurer, Secretary
and Director of Anderson Corporation, a large privately-held manufacturer of
wood windows, from 1983 to October 1992. Age: 55.
* Robert L. Spies, 4715 Twin Lakes Avenue, Brooklyn Center, Minnesota
55429: Director of FAIF, FAF and FASF since January 31, 1997; employed by First
Bank System, Inc. and subsidiaries from 1957 to January 31, 1997, most recently
as Vice President, First Bank National Association. Since his retirement from
First Bank National Association, Mr. Spies has continued to provide consulting
services to the Bank. Age: 62.
Joseph D. Strauss, 8617 Edenbrook Crossing, # 443, Brooklyn Park,
Minnesota 55443: Director of FAF since 1984 and of FAIF since April 1991 and of
FASF since June 1996; Chairman of FAF's and FAIF's Boards since 1993 and of
FASF's Board since 1996; President of FAF and FAIF from June 1989 to November
1989; Owner and President, Strauss Management Company, since 1993; Owner and
President, Community Resource Partnerships, Inc., a community business retention
survey company, since 1992; attorney-at-law. Age: 56.
Virginia L. Stringer, 712 Linwood Avenue, St. Paul, Minnesota 55105:
Director of FAIF since August 1987 and of FAF since April 1991 and of FASF since
June 1996; Owner and President, Strategic Management Resources, Inc. since 1993;
formerly President and Director of The Inventure Group, a management consulting
and training company, President of Scott's, Inc., a transportation company, and
Vice President of Human Resources of The Pillsbury Company. Age: 52.
Gae B. Veit, P.O. Box 6, Loretto, Minnesota 55357: Director of FAIF and
FAF since December 1993 and of FASF since June 1996; owner and CEO of Shingobee
Builders, Inc., a general contractor. Age: 53.
EXECUTIVE OFFICERS
David Lee, SEI Investments Company, Oaks, Pennsylvania 19456: President
of FAIF and FAF since April 1994 and of FASF since June 1996; Senior Vice
President and Assistant Secretary of FAF and FAIF beginning June 1, 1993; Senior
Vice President of SEI Financial Services Company (the "Distributor") since 1991;
President, GW Sierra Trust Funds prior to 1991. Age: 44.
Carmen V. Romeo, SEI Investments Company, Oaks, Pennsylvania 19456:
Treasurer and Assistant Secretary of FAIF and FAF since November 1992 and of
FASF since June 1996; Director, Executive Vice President, Chief Financial
Officer and Treasurer of SEI Corporation ("SEI"), SEI Financial Management
Corporation (the "Administrator") and the Distributor since 1981. Age: 52.
Kevin P. Robins, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF and FAF since April 1994 and of
FASF since June 1996; Vice President, Assistant Secretary and General Counsel of
the Administrator and the Distributor. Age: 36.
Kathryn Stanton, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF and FAF since April 1994 and of
FASF since June 1996; Vice President and Assistant Secretary of the
Administrator and the Distributor since April 1994; Associate, Morgan, Lewis &
Bockius, from 1989 to 1994. Age: 37.
Sandra K. Orlow, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF and FAF since 1992 and of FASF
since June 1996; Vice President and Assistant Secretary of SEI, the
Administrator and the Distributor since 1983. Age: 40.
Marc Cahn, SEI Investments Company, Oaks, Pennsylvania 19456: Vice
President and Assistant Secretary of FAIF. FAF and FASF since June 1996; Vice
President and Assistant Secretary of the Administrator and Distributor since May
1996; Associate General Counsel, Barclays Bank PLC, from 1994 to 1996; ERISA
Counsel, First Fidelity Bancorporation, prior to 1994. Age: 39.
Barbara A. Nugent, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF, FAF and FASF since June 1996;
Vice President and Assistant Secretary of the Administrator and Distributor
since April 1996; Associate, Drinker, Biddle & Reath, from 1994 to 1996;
Assistant Vice President/Administration (1992 to 1993) and Operations (1988 to
1992), Delaware Service Company, Inc. Age: 39.
Stephen G. Meyer, SEI Investments Company, Oaks, Pennsylvania 19456:
Controller of FAIF and FAF since March 1995 and of FASF since June 1996;
Director of Internal Audit and Risk Management of SEI from 1992 to 1995; Senior
Associate, Coopers & Lybrand, from 1990 to 1992. Age: 31.
Michael J. Radmer, 220 South Sixth Street, Minneapolis, Minnesota
55402: Secretary of FAIF since April 1991 and of FAF since 1981 and of FASF
since June 1996; Partner, Dorsey & Whitney LLP, a Minneapolis-based law firm and
general counsel of FAIF and FAF. Age: 52.
COMPENSATION
The First American Family of Funds, which includes FAIF, FAF and FASF,
currently pays only to directors of the funds who are not paid employees or
affiliates of the funds a fee of $15,000 per year ($22,500 in the case of the
Chair) plus $2,500 ($3,750 in the case of the Chair) per meeting of the Board
attended and $800 per committee meeting attended ($1,600 in the case of a
committee chair) and reimburses travel expenses of directors and officers to
attend Board meetings. Legal fees and expenses are also paid to Dorsey & Whitney
LLP, the law firm of which Michael J. Radmer, secretary of FAIF, FAF and FASF,
is a partner. The following table sets forth information concerning aggregate
compensation paid to each director of FAIF (i) by FAIF (column 2), and (ii) by
FAIF, FAF and FASF collectively (column 5) during the fiscal year ended
September 30, 1996. No executive officer or affiliated person of FAIF had
aggregate compensation from FAIF in excess of $60,000 during such fiscal year:
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Total Compensation
Aggregate Pension or Retirement Estimated From Registrant and
Name of Compensation Benefits Accrued as Annual Benefits Fund Complex
Person, Position From Registrant Part of Fund Expenses Upon Retirement Paid to Directors
---------------- --------------- --------------------- --------------- -----------------
<S> <C> <C> <C> <C>
Robert J. Dayton, Director $11,729 -0- -0- $32,850
Andrew M. Hunter III, Director* -0- -0- -0- -0-
Leonard W. Kedrowski, Director $12,176 -0- -0- $34,150
Robert L. Spies, Director* -0- -0- -0- -0-
Joseph D. Strauss, Director $20,082 -0- -0- $56,375
Virginia L. Stringer, Director $12,620 -0- -0- $35,350
Gae B. Veit, Director $12,466 -0- -0- $34,950
</TABLE>
- ----------------------------
* Not a director during the fiscal year ended September 30, 1996.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
First Bank National Association (the "Adviser"), 601 Second Avenue
South, Minneapolis, Minnesota 55480, serves as the investment adviser and
manager of the Funds through its First Asset Management group. The Adviser is a
national banking association that has professionally managed accounts for
individuals, insurance companies, foundations, commingled accounts, trust funds,
and others for over 75 years. The Adviser is a subsidiary of First Bank System,
Inc. ("FBS"), 601 Second Avenue South, Minneapolis, Minnesota 55480, which is a
regional, multi-state bank holding company headquartered in Minneapolis,
Minnesota. FBS is comprised of 13 banks and several trust and nonbank
subsidiaries, with 362 banking locations and 18 nonbank offices primarily in
Minnesota, Colorado, Illinois, Iowa, Kansas, Montana, Nebraska, North Dakota,
South Dakota, Wisconsin and Wyoming. Through its subsidiaries, FBS provides
consumer banking, commercial lending, financing of import/export trade, foreign
exchange and investment services as well as mortgage banking, trust, commercial
and agricultural finance, data processing, leasing and brokerage services.
Pursuant to an Investment Advisory Agreement dated April 2, 1991 (the
"Advisory Agreement"), the Funds engage the Adviser to act as investment adviser
for and to manage the investment of the assets of the Funds. Each Fund pays the
Adviser monthly fees calculated on an annual basis equal to 0.70% of of its
average daily net assets.
In addition to the investment advisory fee, each Fund pays all its
expenses that are not expressly assumed by the Adviser or any other organization
with which the Fund may enter into an agreement for the performance of services.
Each Fund is liable for such nonrecurring expenses as may arise, including
litigation to which the Fund may be a party, and it may have an obligation to
indemnify its directors and officers with respect to such litigation.
The Funds had not commenced operations as of September 30, 1996, the
end of FAIF's most recent fiscal year. They therefore paid no advisory fees to
the Adviser during such year.
ADMINISTRATION AGREEMENT
SEI Financial Management Corporation (the "Administrator") serves as
administrator for the Funds pursuant to an Administration Agreement between it
and the Funds. The Administrator is a wholly-owned subsidiary of SEI Investments
Company, which also owns the Funds' distributor. See "-- Distributor and
Distribution Plans" below. Under the Administration Agreement, the Administrator
provides administrative personnel and services to the Funds for a fee as
described in the Funds' Prospectuses. These services include, among others,
regulatory reporting, fund and portfolio accounting, shareholder reporting
services, and compliance monitering services.
The Funds had not commenced operations as of September 30, 1996, the
end of FAIF's most recent fiscal year. They therefore paid no fees to the
Administrator during such year.
DISTRIBUTOR AND DISTRIBUTION PLANS
SEI Investments Distribution Co. (the "Distributor") serves as the
distributor for the Class A, Class B and Class C Shares of the Funds. The
Distributor is a wholly-owned subsidiary of SEI Investments Company, which also
owns the Funds' Administrator. See "-- Administration Agreement" above.
The Distributor serves as distributor for the Class A and Class C
Shares pursuant to a Distribution Agreement dated February 10, 1994 (the "Class
A/Class C Distribution Agreement") between itself and the Funds, and as
distributor for the Class B Shares pursuant to a Distribution and Service
Agreement dated August 1, 1994, as amended September 14, 1994 (the "Class B
Distribution and Service Agreement") between itself and the Funds. These
agreements are referred to collectively as the "Distribution Agreements."
Under the Distribution Agreements, the Distributor has agreed to
perform all distribution services and functions of the Funds to the extent such
services and functions are not provided to the Funds pursuant to another
agreement. The Distribution Agreements provide that shares of the Funds are
distributed through the Distributor and, with respect to Class A and Class B
Shares, through securities firms, financial institutions (including, without
limitation, banks) and other industry professionals (the "Participating
Institutions") which enter into sales agreements with the Distributor to perform
share distribution or shareholder support services.
The Distributor receives no compensation for distribution of the Class
C Shares. With respect to the Class A Shares, the Distributor receives all of
the front-end sales charges paid upon purchase of the Funds' shares except for a
portion (as disclosed in the Prospectuses) which may be re-allowed to
Participating Institutions. The Class A Shares of each Fund also pay a
shareholder servicing fee to the Distributor monthly at the annual rate of 0.25%
of each Fund's Class A average daily net assets, which fee may be used by the
Distributor to provide compensation for shareholder servicing activities with
respect to the Class A Shares of the kinds described in the Retail Class
Prospectuses.
The Class B Shares of Micro Cap Value Fund (the only Fund to offer
Class B Shares) pay to the Distributor a sales support fee at an annual rate of
0.75% of the average daily net assets of the Class B Shares of such Fund, which
fee may be used by the Distributor to provide compensation for sales support and
distribution activities with respect to the Class B Shares. This fee is
calculated and paid each month based on average daily net assets of Class B of
each Fund for that month. In addition to this fee, the Distributor is paid a
shareholder servicing fee at an annual rate of 0.25% of the average daily net
assets of each Fund's Class B Shares pursuant to a service plan (the "Class B
Service Plan"), which fee may be used by the Distributor to provide compensation
for shareholder servicing activities with respect to the Class B Shares of a
Fund of the kinds described in the Retail Class Prospectuses. Although Class B
Shares are sold without a front-end sales charge, the Distributor pays a total
of 4.25% of the amount invested (including a pre-paid service fee of 0.25% of
the amount invested) to dealers who sell Class B Shares (excluding exchanges
from other Class B Shares in the First American family). The servicing fee
payable under the Class B Service Plan is prepaid as described above.
The Distribution Agreements provide that they will continue in effect
for a period of more than one year from the date of their execution only so long
as such continuance is specifically approved at least annually by the vote of a
majority of the Board members of FAIF and by the vote of the majority of those
Board members of FAIF who are not interested persons of FAIF and who have no
direct or indirect financial interest in the operation of FAIF's Rule 12b-1
Plans of Distribution or in any agreement related to such Plans.
FAIF has adopted Plans of Distribution with respect to the Class A and
Class B Shares of the Funds, respectively, pursuant to Rule 12b-1 under the 1940
Act (collectively, the "Plans"). Rule 12b-1 provides in substance that a mutual
fund may not engage directly or indirectly in financing any activity which is
primarily intended to result in the sale of shares, except pursuant to a plan
adopted under the Rule. The Plans authorize the Distributor to retain the sales
charges paid upon purchase of Class A and Class B Shares. Each of the Plans is a
"compensation-type" plan under which the Distributor is entitled to receive the
distribution fee regardless of whether its actual distribution expenses are more
or less than the amount of the fee. The Class B Plan authorizes the Distributor
to retain the contingent deferred sales charge applied on redemptions of Class B
Shares, except that portion which is reallowed to Participating Institutions.
The Plans recognize that the Distributor, any Participating Institution, the
Administrator, and the Adviser, in their discretion, may from time to time use
their own assets to pay for certain additional costs of distributing Class A and
Class B Shares. Any such arrangements to pay such additional costs may be
commenced or discontinued by the Distributor, any Participating Institution, the
Administrator, or the Adviser at any time.
The Funds had not commenced operations as of September 30, 1996, the
end of FAIF's most recent fiscal year. They therefore paid no distribution or
shareholder servicing fees during such year.
CUSTODIAN; TRANSFER AGENT; COUNSEL; ACCOUNTANTS
The custodian of the Funds' assets is First Trust National Association
(the "Custodian"), First Trust Center, 180 East Fifth Street, St. Paul,
Minnesota 55101. The Custodian is a subsidiary of First Bank System, Inc., which
also owns the Adviser.
The Custodian takes no part in determining the investment policies of
the Funds or in deciding which securities are purchased or sold by the Funds.
All of the instruments representing the investments of the Funds and all cash is
held by the Custodian or, as described in the Prospectuses for International
Fund, by a sub-custodian with respect to such Fund. The Custodian or such
sub-custodian delivers securities against payment upon sale and pays for
securities against delivery upon purchase. The Custodian also remits Fund assets
in payment of Fund expenses, pursuant to instructions of FAIF's officers or
resolutions of the Board of Directors.
As compensation for its services to the Funds, the Custodian is paid a
monthly fee calculated on an annual basis equal to 0.03% of such Fund's average
daily net assets. In addition, the Custodian is reimbursed for its out-of-pocket
expenses incurred while providing its services to the Funds. The Custodian
continues to serve so long as its appointment is approved at least annually by
the Board of Directors including a majority of the directors who are not
interested persons (as defined under the 1940 Act) of FAIF.
DST Systems, Inc., 1004 Baltimore, Kansas City, Missouri 64105, is
transfer agent and dividend disbursing agent for the shares of the Funds.
Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402, is independent General Counsel for the Funds.
KPMG Peat Marwick LLP, 90 South Seventh Street, Minneapolis, Minnesota
55402, acts as the Funds' independent auditors, providing audit services
including audits of the annual financial statements and assistance and
consultation in connection with SEC filings.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Decisions with respect to placement of the Funds' portfolio
transactions are made by the Adviser or, in the case of International Fund, the
Sub-Adviser. The Funds' policy is to seek to place portfolio transactions with
brokers or dealers who will execute transactions as efficiently as possible and
at the most favorable price. The Adviser or Sub-Adviser may, however, select a
broker or dealer to effect a particular transaction without communicating with
all brokers or dealers who might be able to effect such transaction because of
the volatility of the market and the desire of the Adviser or Sub-Adviser to
accept a particular price for a security because the price offered by the broker
or dealer meets guidelines for profit, yield or both. Many of the portfolio
transactions involve payment of a brokerage commission by the appropriate Fund.
In some cases, transactions are with dealers or issuers who act as principal for
their own accounts and not as brokers. Transactions effected on a principal
basis are made without the payment of brokerage commissions but at net prices,
which usually include a spread or markup. In effecting transactions in
over-the-counter securities, the Funds deal with market makers unless it appears
that better price and execution are available elsewhere.
While the Adviser does not deem it practicable and in the Funds' best
interest to solicit competitive bids for commission rates on each transaction,
consideration will regularly be given by the Adviser to posted commission rates
as well as to other information concerning the level of commissions charged on
comparable transactions by other qualified brokers. The Funds had not commenced
operations as of September 30, 1996, the end of FAIF's most recent fiscal year.
They therefore paid no commissions during such year.
Subject to the policy of seeking favorable price and execution for the
transaction size and risk involved, in selecting brokers and dealers other than
the Distributor and determining commissions paid to them, the Adviser may
consider ability to provide supplemental performance, statistical and other
research information as well as computer hardware and software for research
purpose for consideration, analysis and evaluation by the staff of the Adviser.
In accordance with this policy, the Funds do not execute brokerage transactions
solely on the basis of the lowest commission rate available for a particular
transaction. Subject to the requirements of favorable price and efficient
execution, placement of orders by securities firms for the purchase of shares of
the Funds may be taken into account as a factor in the allocation of portfolio
transactions.
Research services that may be received by the Adviser would 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 issuers, industries, securities, economic
factors and trends, portfolio strategy, and the performance of accounts. The
research services may allow the Adviser to supplement its own investment
research activities and enable the Adviser to obtain the views and information
of individuals and research staffs of many different securities firms prior to
making investment decisions for the Funds. To the extent portfolio transactions
are effected with brokers and dealers who furnish research services, the Adviser
would receive a benefit, which is not capable of evaluation in dollar amounts,
without providing any direct monetary benefit to the Funds from these
transactions. Research services furnished by brokers and dealers used by the
Funds for portfolio transactions may be utilized by the Adviser in connection
with investment services for other accounts and, likewise, research services
provided by brokers and dealers used for transactions of other accounts may be
utilized by the Adviser in performing services for the Funds. The Adviser
determine the reasonableness of the commissions paid in relation to their view
of the value of the brokerage and research services provided, considered in
terms of the particular transactions and their overall responsibilities with
respect to all accounts as to which they exercise investment discretion.
The Adviser have not entered into any formal or informal agreements
with any broker or dealer, and do not maintain any "formula" that must be
followed in connection with the placement of Fund portfolio transactions in
exchange for research services provided to the Adviser, except as noted below.
The Adviser may, from time to time, maintain an informal list of brokers and
dealers that will be used as a general guide in the placement of Fund business
in order to encourage certain brokers and dealers to provide the Adviser with
research services, which the Adviser anticipates will be useful to it. Any list,
if maintained, would be merely a general guide, which would be used only after
the primary criteria for the selection of brokers and dealers (discussed above)
had been met, and, accordingly, substantial deviations from the list could
occur. The Adviser would authorize the Funds to pay an amount of commission for
effecting a securities transaction in excess of the amount of commission another
broker or dealer would have charged only if the Adviser determined in good faith
that the amount of such commission was reasonable in relation to the value of
the brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the overall responsibilities of
the Adviser with respect to the Funds.
The Funds do not effect any brokerage transactions in their portfolio
securities with any broker or dealer affiliated directly or indirectly with the
Adviser or the Distributor unless such transactions, including the frequency
thereof, the receipt of commissions payable in connection therewith, and the
selection of the affiliated broker or dealer effecting such transactions are not
unfair or unreasonable to the shareholders of the Funds, as determined by the
Board of Directors. Any transactions with an affiliated broker or dealer must be
on terms that are both at least as favorable to the Funds as the Funds can
obtain elsewhere and at least as favorable as such affiliated broker or dealer
normally gives to others.
When two or more clients of the Adviser are simultaneously engaged in
the purchase or sale of the same security, the prices and amounts are allocated
in accordance with a formula considered by the Adviser to be equitable to each
client. In some cases, this system could have a detrimental effect on the price
or volume of the security as far as each client is concerned. In other cases,
however, the ability of the clients to participate in volume transactions may
produce better executions for each client.
CAPITAL STOCK
As of May 23, 1997, no shares of the Funds were outstanding.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of the shares of a
Fund is summarized in the Retail Class Prospectus under the captions "Investing
in the Funds" and "Determining the Price of Shares" and in the Institutional
Class Prospectus under the caption "Purchases and Redemptions of Shares." The
net asset value of each Fund's shares is determined on each day during which the
New York Stock Exchange (the "NYSE") is open for business. The NYSE is not open
for business on the following holidays (or on the nearest Monday or Friday if
the holiday falls on a weekend): New Year's Day, Washington's Birthday
(observed), Good Friday, Memorial Day (observed), Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Each year the NYSE may designate different
dates for the observance of these holidays as well as designate other holidays
for closing in the future. To the extent that the securities of a Fund are
traded on days that the Fund is not open for business, such Fund's net asset
value per share may be affected on days when investors may not purchase or
redeem shares. This may occur, for example, where a Fund holds securities which
are traded in foreign markets.
FUND PERFORMANCE
SEC STANDARDIZED PERFORMANCE FIGURES
YIELD FOR THE FUNDS. Yield for the Funds is a measure of the net
investment income per share (as defined) earned over a 30-day period expressed
as a percentage of the maximum offering price of a Fund's shares at the end of
the period. Such yield figures are determined by dividing the net investment
income per share earned during the specified 30-day period by the maximum
offering price per share on the last day of the period, according to the
following formula:
Yield = 2 [((a - b) / cd) + 1)6 - 1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of
reimbursements)
c = average daily number of shares outstanding during the
period that were entitled to receive dividends
d = maximum offering price per share on the last day of
the period
TAX EQUIVALENT YIELD FOR TAX FREE FUNDS. Tax equivalent yield is the
yield that a taxable investment must generate in order to equal a Fund's yield
for an investor in a stated federal or combined federal/state income tax
bracket. The tax equivalent yield for each Tax Free Fund is computed by dividing
that portion of such Fund's yield (computed as described above) that is tax
exempt by one minus the stated federal or combined federal/state income tax
rate, and adding the resulting number to that portion, if any, of such Fund's
yield that is not tax exempt. These yields are based upon the maximum federal
income tax rate of 39.6% and the combined maximum federal/state tax rates of
45.0% for Oregon and 45.2% for California.
TOTAL RETURN. Total return measures both the net investment income
generated by, and the effect of any realized or unrealized appreciation or
depreciation of, the underlying investments in a Fund's portfolio. The Funds'
average annual and cumulative total return figures are computed in accordance
with the standardized methods prescribed by the Securities and Exchange
Commission.
AVERAGE ANNUAL TOTAL RETURN. Average annual total return figures are
computed by determining the average annual compounded rates of return over the
periods indicated in the advertisement, sales literature or shareholders'
report, 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
ERV = ending redeemable value at the end of the period of
a hypothetical $1,000 payment made at the beginning
of such period
This calculation (i) assumes all dividends and distributions are reinvested at
net asset value on the appropriate reinvestment dates as described in the
Prospectuses, and (ii) deducts (a) the maximum sales charge from the
hypothetical initial $1,000 investment (if applicable), and (b) all recurring
fees, such as advisory fees, charged as expenses to all shareholder accounts.
CUMULATIVE TOTAL RETURN. Cumulative total return is computed by finding
the cumulative compounded 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) / P ) 10
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
This calculation (i) assumes all dividends and distributions are reinvested at
net asset value on the appropriate reinvestment dates as described in the
Prospectuses, and (ii) deducts (a) the maximum sales charge from the
hypothetical initial $1,000 investment (if applicable), and (b) all recurring
fees, such as advisory fees, charged as expenses to all shareholder accounts.
NON-STANDARD DISTRIBUTION RATES
HISTORICAL DISTRIBUTION RATES. The Funds' historical annualized
distribution rates are computed by dividing the income dividends of a Fund for a
stated period by the maximum offering price on the last day of such period.
ANNUALIZED CURRENT DISTRIBUTION RATES. The Funds' annualized current
distribution rates are computed by dividing a Fund's income dividends for a
specified month (or three-month period, in the case of an equity Fund) by the
number of days in that month (or three-month period, in the case of an equity
Fund) and multiplying by 365, and dividing the resulting figure by the maximum
offering price on the last day of the specified period.
TAX EQUIVALENT DISTRIBUTION RATES. The tax equivalent distribution rate
for the Tax Free Funds is computed by dividing that portion of such a Fund's
annualized current distribution rate (computed as described above) which is
tax-exempt by one minus the stated federal or combined federal/state income tax
rate, and adding the resulting figure to that portion, if any, of the annualized
current distribution rate which is not tax-exempt.
CERTAIN PERFORMANCE COMPARISONS
The Funds may compare their performance to that of certain published or
otherwise widely disseminated indices or averages compiled by third parties. The
Funds, and the indices and averages to which they may compare their performance,
are as follows, among others:
OREGON INTERMEDIATE TAX FREE FUND may compare its performance to the
LEHMAN 7-YEAR G.O. INDEX, which is an unmanaged index comprised of state and
local general obligation issues with maturities between 6 and 8 years which were
issued as part of a transaction of at least $50 million and which have a minimum
credit rating of at least Baa. Oregon Intermediate Tax Free Fund also may
compare its performance to the LIPPER INTERMEDIATE MUNICIPAL DEBT AVERAGE, which
is an average of funds which invest in municipal debt issues with
dollar-weighted average maturities of five to ten years.
CALIFORNIA INTERMEDIATE TAX FREE FUND may compare its performance to
the LEHMAN 7-YEAR G.O. INDEX and the LIPPER INTERMEDIATE MUNICIPAL DEBT AVERAGE,
each of which is described above.
MICRO CAP VALUE FUND may compare its performance to the RUSSELL 2000
INDEX, which is a broadly diversified index consisting of approximately 2,000
small capitalization common stocks that can be used to compare to the total
returns of funds whose portfolios are invested primarily in small capitalization
common stocks. Micro Cap Value Fund also may compare its performance to the
LIPPER MICRO CAP AVERAGE, which is an average of funds which invest primarily in
companies with market capitalizations of less than $300 million at the time of
purchase.
Each of the Funds also may compare its performance to the CONSUMER
PRICE INDEX, which is a measure of the average change in prices over time in a
fixed market basket of goods and services.
TAXATION
The tax status of the Funds and the distributions that the Funds will
make to shareholders are summarized in the Prospectuses in the sections entitled
"Income Taxes". Each Fund intends to fulfill the requirements of Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), as a regulated
investment company. If so qualified, each Fund will not be liable for federal
income taxes to the extent it distributes its taxable income to its
shareholders.
To qualify under Subchapter M for tax treatment as a regulated
investment company, each Fund must, among other things: (1) derive at least 90%
of its gross income from dividends, interest, and certain other types of
payments related to its investment in stock or securities; (2) distribute to its
shareholders at least 90% of its investment company taxable income (as that term
is defined in the Code determined without regard to the deduction for dividends
paid) and 90% of its net tax-exempt income; (3) derive less than 30% of its
annual gross income from the sale or other disposition of stock, securities,
options, futures, or forward contracts held for less than three months; and (4)
diversify its holdings so that, at the end of each fiscal quarter of the Fund,
(a) at least 50% of the market value of the Fund's assets is represented by
cash, cash items, U.S. Government securities and securities of other regulated
investment companies, and other securities, with these other securities limited,
with respect to any one issuer, to an amount no greater than 5% of the Fund's
total assets and no greater than 10% of the outstanding voting securities of
such issuer, and (b) not more than 25% of the market value of the Fund's total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or securities of other regulated investment companies).
Each Fund is subject to a nondeductible excise tax equal to 4% of the
excess, if any, of the amount required to be distributed for each calendar year
over the amount actually distributed. For this purpose, any amount on which the
Fund is subject to corporate-level income tax is considered to have been
distributed. In order to avoid the imposition of this excise tax, each Fund must
declare and pay dividends representing 98% of its net investment income for that
calendar year and 98% of its capital gains (both long-term and short-term) for
the twelve-month period ending October 31 of the calendar year.
Any loss on the sale or exchange of shares of a Fund generally will be
disallowed to the extent that a shareholder acquires or contracts to acquire
shares of the same Fund within 30 days before or after such sale or exchange.
Furthermore, if Fund shares with respect to which a long-term capital gain
distribution has been made are held for less than six months, any loss on the
sale or exchange of such shares will be treated as a long-term capital loss to
the extent of such long-term capital gain distribution. Furthermore, if a
shareholder of any of the Tax-Free Funds receives an exempt-interest dividend
from such fund and then disposes of his or her shares in such fund within six
months after acquiring them, any loss on the sale or exchange of such shares
will be disallowed to the extent of the exempt-interest dividend.
If one of the Tax Free Funds disposes of a municipal obligation that it
acquired after April 30, 1993 at a market discount, it must recognize any gain
it realizes on the disposition as ordinary income (and not as capital gain) to
the extent of the accrued market discount.
For federal tax purposes, if a shareholder exchanges shares of a Fund
for shares of any other FAIF Fund pursuant to the exchange privilege (see
"Investing in the Funds -- Exchange Privilege" in the Prospectus for Class A and
Class B Shares, and "Purchases and Redemptions of Shares -- Exchange Privilege"
in the Prospectus for Class C Shares), such exchange will be considered a
taxable sale of the shares being exchanged. Furthermore, if a shareholder of
Retail Class Shares carries out the exchange within 90 days of purchasing shares
in a fund on which he or she has incurred a sales charge, the sales charge
cannot be taken into account in determining the shareholder's gain or loss on
the sale of those shares to the extent that the sales charge that would have
been applicable to the purchase of the later-acquired shares in the other fund
is reduced because of the exchange privilege. However, the amount of any sales
charge that may not be taken into account in determining the shareholder's gain
or loss on the sale of the first-acquired shares may be taken into account in
determining gain or loss on the eventual sale or exchange of the later-acquired
shares.
Dividends generally are taxable to shareholders at the time they are
paid. However, dividends declared in October, November and December, made
payable to shareholders of record in such a month and actually paid in January
of the following year are treated as paid and are thereby taxable to
shareholders as of December 31.
If a Fund invests in U.S. Treasury inflation-protection securities, it
will be required to treat as original issue discount any increase in the
principal amount of the securities that occurs during the course of its taxable
year. If a Fund purchases such inflation-protection securities that are issued
in stripped form either as stripped bonds or coupons, it will be treated as if
it had purchased a newly issued debt instrument having original issue discount.
Generally, the original issue discount equals the difference between the "stated
redemption price at maturity" of the obligation and its "issue price" as those
terms are defined in the Code. A Fund holding an obligation with original issue
discount is required to accrue as ordinary income a portion of such original
issue discount even though it receives no cash currently as interest payment
corresponding to the amount of the original issue discount. Because each Fund is
required to distribute substantially all of its net investment income (including
accrued original issue discount) in order to be taxed as a regulated investment
company, it may be required to distribute an amount greater than the total cash
income it actually receives. Accordingly, in order to make the required
distributions, a Fund may be required to borrow or liquidate securities. The
extent to which a Fund may liquidate securities at a gain may be limited by the
requirement that less than 30% of the Fund's gross income (on an annual basis)
consists of gains from the sale of securities held for less than three months.
Under Code Section 1256, except for the transactions the Fund has
identified as hedging transactions, each Fund is required for federal income tax
purposes to recognize as income for each taxable year its net unrealized gains
and losses on futures contracts and options as of the end of the year as well as
those actually realized during the year. Except for transactions in futures
contracts or options that are classified as part of a "mixed straddle," gain or
loss recognized with respect to such contracts or options is considered to be
60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the contract. In the case of a
transaction classified as a "mixed straddle," the recognition of losses may be
deferred to a later taxable year.
As stated above, the Code requires a regulated investment company to
diversify its holdings. The Internal Revenue Service has not made its position
clear regarding the treatment of futures contracts and options for purposes of
the diversification test, and the extent to which a Fund can buy or sell futures
contracts and options may be limited by this requirement.
It is expected that any net gain realized from the closing out of
futures contracts or options will be considered gain from the sale of securities
or currencies and therefore qualifying income for purposes of the 90% of gross
income from qualified sources requirement, as discussed above. In order to avoid
realizing excessive gains on securities held less than three months, each Fund
may be required to defer the closing out of futures contracts or options beyond
the time when it would otherwise be advantageous to do so. It is expected that
unrealized gains on futures contracts or options, which have been open for less
than three months as of the end of a Fund's fiscal year and which are recognized
for tax purposes, will not be considered gains on securities held less than
three months for purposes of the 30% test, as discussed above.
Any realized gain or loss on closing out a futures contract or option
will generally result in a recognized capital gain or loss for tax purposes.
Each Fund will distribute to shareholders annually any net long-term
capital gains that have been recognized for federal income tax purposes
(including unrealized gains at the end of the Fund's fiscal year) on futures
contract or option contract transactions. Such distributions will be combined
with distributions of capital gains realized on the Fund's other investments.
Pursuant to the Code, distributions of net investment income by a Fund
to a shareholder who, as to the United States, is a nonresident alien
individual, nonresident alien fiduciary of a trust or estate, foreign
corporation, or foreign partnership (a "foreign shareholder") will be subject to
U.S. withholding tax (at a rate of 30% or lower treaty rate). Withholding will
not apply if a dividend paid by a Fund to a foreign shareholder is `'effectively
connected" with a U.S. trade or business of such shareholder, in which case the
reporting and withholding requirements applicable to U.S. citizens or domestic
corporations will apply. Distributions of net long-term capital gains are not
subject to tax withholding but, in the case of a foreign shareholder who is a
nonresident alien individual, such distributions ordinarily will be subject to
U.S. income tax at a rate of 30% if the individual is physically present in the
U.S. for more than 182 days during the taxable year. Each Fund will report
annually to its shareholders the amount of any withholding.
The foregoing relates only to federal income taxation and is a general
summary of the federal tax law in effect as of the date of this Statement of
Additional Information.
RATINGS
A rating of a rating service represents that service's opinion as to
the credit quality of the rated security. However, such ratings are general and
cannot be considered absolute standards of quality or guarantees as to the
creditworthiness of an issuer. A rating is not a recommendation to purchase,
sell or hold a security, because it does not take into account market value or
suitability for a particular investor. Markets values of debt securities may
change as a result of a variety of factors unrelated to credit quality,
including changes in market interest rates.
When a security has been rated by more than one service, the ratings
may not coincide, and each rating should be evaluated independently. Ratings are
based on current information furnished by the issuer or obtained by the rating
services from other sources which they consider reliable. Ratings may be
changed, suspended or withdrawn as a result of changes in or unavailability of
such information, or for other reasons. In general, the Funds are not required
to dispose of a security if its rating declines after it is purchased, although
they may consider doing so.
RATINGS OF CORPORATE DEBT OBLIGATIONS AND MUNICIPAL BONDS
STANDARD & POOR'S CORPORATION
AAA: Securities rated AAA have the highest rating assigned by Standard
& Poor's to a debt obligation. Capacity to pay interest and repay
principal is extremely strong.
AA: Securities rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only to a
small degree.
A: Securities rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to adverse
effects of changes in circumstances and economic conditions than bonds
in higher rated categories.
BBB: Securities rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Although such securities normally
exhibit adequate protection standards, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to pay interest and repay principal for securities in this category
than for those in higher rated categories.
Debt rated BB, B, CCC, CC, and C by Standard & Poor's is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
BB: Securities rated BB have less near-term vulnerability to default
than other speculative issues. However, they face 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. The BB rating category is also used
for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
B: Securities rated B have a greater vulnerability to default but
currently have 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 or BB- rating.
CCC: Securities rated CCC have a currently identifiable vulnerability
to default, and are 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, they are not likely to have the capacity to pay interest
and repay principal. The CCC rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied B or
B- rating.
The ratings from AA to CCC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Securities which are 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 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: Securities which are 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 securities. They are rated lower than the
best securities because margins of protection may not be as large as in
Aaa securities, or fluctuation of protective elements may be of greater
magnitude, or there may be other elements present which make the
long-term risks appear somewhat greater than in Aaa securities.
A: Securities which are 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
impair-ment sometime in the future.
Baa: Securities which are rated Baa are considered as medium grade
obligations, being 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
securities lack outstanding investment characteristics, and in fact
have some speculative characteristics.
Ba: An issue which is rated Ba is judged to have speculative elements;
its 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 both good and bad times over the future.
Uncertainty of position characterizes issues in this class.
B: An issue which is rated B generally lacks characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa: An issue which is rated Caa is of poor standing. Such an issue may
be in default or there may be present elements of danger with respect
to principal or interest.
Those securities in the Aa, A and Baa groups which Moody's believes possess the
strongest investment attributes are designated by the symbols Aa-1, A-1 and
Baa-1. Other Aa, A and Baa securities comprise the balance of their respective
groups. These rankings (1) designate the securities which offer the maximum in
security within their quality groups, (2) designate securities which can be
bought for possible upgrading in quality, and (3) additionally afford the
investor an opportunity to gauge more precisely the relative attractiveness of
offerings in the marketplace.
RATINGS OF PREFERRED STOCK
STANDARD & POOR'S CORPORATION. Standard & Poor's ratings for preferred
stock have the following definitions:
AAA: An issue rated "AAA" has the highest rating that may be assigned
by Standard & Poor's to a preferred stock issue and indicates an
extremely strong capacity to pay the preferred stock obligations.
AA: A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated "AAA."
A: An issue rated "A" is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more susceptible
to the adverse effects of changes in circumstances and economic
conditions.
BBB: An issue rated "BBB" is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the
category.
MOODY'S INVESTORS SERVICE, INC. Moody's ratings for preferred stock
include the following:
aaa: An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
aa: An issue which is rated "aa" is considered a high grade preferred
stock. This rating indicates that there is reasonable assurance that
earnings and asset protection will remain relatively well maintained in
the foreseeable future.
a: An issue which is rate "a" is considered to be an upper medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa: An issue which is rated "baa" is considered to be medium grade,
neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any
great length of time.
RATINGS OF MUNICIPAL NOTES
STANDARD & POOR'S CORPORATION
SP-1: Very strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are given a
plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest.
SP-3: Speculative capacity to pay principal and interest.
None of the Funds will purchase SP-3 municipal notes.
MOODY'S INVESTORS SERVICE, INC. Generally, Moody's ratings for state
and municipal short-term obligations are designated Moody's Investment Grade
("MIG"); however, where an issue has a demand feature which makes the issue a
variable rate demand obligation, the applicable Moody's rating is "VMIG."
MIG 1/VMIG 1: This designation denotes the best quality. There is
strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes high quality, with margins of
protection ample although not so large as available in the preceding
group.
MIG 3/VMIG 3: This designation denotes favorable quality, with all
security elements accounted for, but lacking the strength of the
preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
None of the Funds will purchase MIG 3/VMIG 3 municipal notes.
RATINGS OF COMMERCIAL PAPER
STANDARD & POOR'S CORPORATION. Commercial paper ratings are graded into
four categories, ranging from "A" for the highest quality obligations to "D" for
the lowest. Issues assigned the A rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designation 1, 2 and 3 to indicate the relative degree of safety. The "A-1"
designation indicates that the degree of safety regarding timely payment is very
strong. Those issues determined to possess overwhelming safety characteristics
will be denoted with a plus (+) symbol designation. None of the Funds will
purchase commercial paper rated A-3 or lower.
MOODY'S INVESTORS SERVICE, INC. Moody's commercial paper ratings are
opinions as to the ability of the issuers to timely repay promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representation that such obligations are exempt from registration under the
Securities Act of 1933, and it does not represent that any specific instrument
is a valid obligation of a rated issuer or issued in conformity with any
applicable law. 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 capacity for repayment.
PRIME-2: Strong capacity for repayment.
PRIME-3: Acceptable capacity for repayment.
None of the Funds will purchase Prime-3 commercial paper.
PART C -- OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Not applicable.
(b) Exhibits
(1) (a) Articles of Incorporation, as amended and supplemented
through January 1995. (Incorporated by reference to
Exhibit (1) to Post-Effective Amendment No. 21.)
(1) (b) Articles Supplementary filed June 16, 1995.
(Incorporated by reference to Exhibit (1)(b) to
Post-Effective Amendment No. 24.)
(2) Bylaws, as amended through March 6, 1995. (Incorporated by
reference to Exhibit (2) to Post-Effective Amendment No. 24.)
(3) Not applicable.
(4) Specimen form of Common Stock Certificate. (Incorporated by
reference to Exhibit (4) to Post-Effective Amendment No. 21.)
(5) (a) Investment Advisory Agreement dated April 2, 1991,
between Registrant and First Bank National Association,
as amended and supplemented through August 1994.
(Incorporated by reference to Exhibit (5)(a) to
Post-Effective Amendment No. 21.)
(5) (b) Amendment No. 5 to Exhibit A to Investment Advisory
Agreement. (Incorporated by reference to Exhibit (5)(b)
to Post-Effective Amendment No. 24.)
(5) (c) Sub-Advisory Agreement relating to International Fund
between First Bank National Association and Marvin &
Palmer Associates, Inc. (Incorporated by reference to
Exhibit (5)(b) to Post-Effective Amendment No. 21.)
(5) (d) Amendment No. 6 to Exhibit A to Investment Advisory
Agreement. (Incorporated by reference to Exhibit (5)(d)
to Post-Effective Amendment No. 27.)
(6) (a) Distribution Agreement [Class A and Class C] dated
February 10, 1994 between Registrant and SEI Financial
Services Company. (Incorporated by reference to Exhibit
(6)(a) to Post-Effective Amendment No. 21.)
(6) (b) Distribution and Service Agreement [Class B] dated
August 1, 1994, as amended September 14, 1994 between
Registrant and SEI Financial Services Company.
(Incorporated by reference to Exhibit (6)(b) to
Post-Effective Amendment No. 21.)
(6) (c) Form of Dealer Agreement. (Incorporated by reference to
Exhibit (6)(c) to Post-Effective Amendment No. 21.)
(7) Not applicable.
(8) (a) Custodian Agreement dated September 20, 1993, between
Registrant and First Trust National Association, as
supplemented through August 1994. (Incorporated by
reference to Exhibit (8) to Post-Effective Amendment
No. 18.)
(8) (b) Compensation Agreement dated as of June 1, 1995,
pursuant to Custodian Agreement. (Incorporated by
reference to Exhibit (8)(b) to Post-Effective Amendment
No. 24.)
(8) (c) Compensation Agreement dated as of January 1, 1997,
pursuant to Custodian Agreement. (Incorporated by
reference to Exhibit (8)(c) to Post-Effective Amendment
No. 27.)
(9) (a) Administration Agreement dated as of January 1, 1995
between Registrant and SEI Financial Management
Corporation. (Incorporated by reference to Exhibit
(9)(a) to Post-Effective Amendment No. 23.)
(9) (b) Transfer Agency Agreement dated as of March 31, 1994,
between Registrant and Supervised Service Company, Inc.
[superseded] (Incorporated by reference to Exhibit
(9)(b) to Post-Effective Amendment No. 21.)
(9) (c) Assignment of Transfer Agency Agreement to DST Systems,
Inc. [superseded] (Incorporated by reference to Exhibit
(9)(c) to Post-Effective Amendment No. 24.)
(9) (d) Form of Transfer Agency Agreement dated as of October
1, 1996, between Registrant and DST Systems, Inc.
(Incorporated by reference to Exhibit (9)(d) to
Post-Effective Amendment No. 27.)
(10) (a) Opinion and Consent of D'Ancona & Pflaum dated
November 10, 1987. (Incorporated by reference to
Exhibit (10)(a) to Post-Effective Amendment No. 21.)
(10) (b) Opinion and Consent of Dorsey & Whitney. (Incorporated
by reference to Exhibit (10)(a) to Post-Effective
Amendment No. 15.)
(11) (a) Not applicable.
(11) (b) Opinion and Consent of Dorsey & Whitney dated November
25, 1991. (Incorporated by reference to Exhibit (11)(b)
to Post-Effective Amendment No. 21.)
(12) Not applicable.
(13) Not applicable.
(14) (a) 401(k) Prototype Basic Plan Document # 02 (1989
Restatement), including Amendment Nos. 1, 2, and 3 and
sample Adoption Agreement. (Incorporated by reference
to Exhibit (14)(a) to Post-Effective Amendment No. 27.)
(14) (b) Defined Contribution Prototype Basic Plan Document # 01
(1989 Restatement), including Amendment Nos. 1 and 2
and sample Adoption Agreement. (Incorporated by
reference to Exhibit (14)(b) to Post-Effective
Amendment No. 27.)
(14) (c) IRA Applications and Documentation. (Incorporated by
reference to Exhibit (14)(c) to Post-Effective
Amendment No. 27.)
(15) (a) Form of Distribution Plan [Class A]. (Incorporated by
reference to Exhibit (15)(a) to Post-Effective
Amendment No. 21.)
(15) (b) Class B Distribution Plan. (Incorporated by reference
to Exhibit (15)(b) to Post-Effective Amendment No. 21.)
(15) (c) Service Plan [Class B]. (Incorporated by reference to
Exhibit (15)(c)) to Post-Effective Amendment No. 21.)
(16) Not applicable.
(17) Not applicable.
(18) Multiple Class Plan Pursuant to Rule 18f-3. (Incorporated by
reference to Exhibit (18) to Post-Effective Amendment No.
23.)
(19) (a) Powers of attorney of Directors Dayton, Kedrowski,
Strauss, Stringer and Veit. (Incorporated by reference
to Exhibit (19) to Post-Effective Amendment No. 26).
(19) (b) Power of attorney of Director Hunter. (Incorporated by
reference to Exhibit (19)(b) to Post-Effective
Amendment No. 27.)
(19) (c) Consent to being named and power of attorney of
director nominee Spies. (Incorporated by reference to
Exhibit (19)(c) to Post-Effective Amendment No. 27.)
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
The following table sets forth the number of holders of shares of each
series of Common Stock of the Registrant as of April 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF RECORD HOLDERS
-------------------------------------------
FUND CLASS A CLASS B CLASS C
---- ------- ------- -------
<S> <C> <C> <C>
Stock Fund................................... 2,682 4,471 130
Equity Index Fund............................ 728 1,340 22
Balanced Fund................................ 1,988 2,397 7
Asset Allocation Fund........................ 181 368 7
Equity Income Fund........................... 227 484 32
Diversified Growth Fund...................... 605 944 60
Emerging Growth Fund......................... 226 216 23
Regional Equity Fund......................... 3,162 4,579 38
Special Equity Fund.......................... 2,417 2,960 44
Technology Fund.............................. 742 1,184 22
International Fund........................... 284 320 27
Real Estate Securities Fund.................. 146 269 6
Health Sciences Fund......................... 98 131 6
Limited Term Income Fund..................... 150 0 7
Intermediate Term Income Fund................ 153 0 29
Fixed Income Fund............................ 525 844 105
Intermediate Government Bond Fund............ 180 0 17
Intermediate Tax Free Fund................... 66 0 12
Minnesota Insured Intermediate Tax
Free Fund.............................. 103 0 11
Colorado Intermediate Tax Free Fund.......... 125 0 10
Oregon Intermediate Tax Free Fund............ * * 0
California Intermediate Tax Free Fund........ 0 * 0
Micro Cap Value Fund......................... 0 0 0
--------------------------
* Not registered.
</TABLE>
ITEM 27. INDEMNIFICATION
The first four paragraphs of Item 27 of Part C of Pre-Effective
Amendment No. 1 to the Registrant's Registration Statement on Form N-1A, dated
November 27, 1987, are incorporated herein by reference.
On February 18, 1988 the indemnification provisions of the Maryland
General Corporation Law (the "Law") were amended to permit, among other things,
corporations to indemnify directors and officers unless it is proved that the
individual (1) acted in bad faith or with active and deliberate dishonesty, (2)
actually received an improper personal benefit in money, property or services,
or (3) in the case of a criminal proceeding, had reasonable cause to believe
that his act or omission was unlawful. The Law was also amended to permit
corporations to indemnify directors and officers for amounts paid in settlement
of stockholders' derivative suits.
The Registrant undertakes that no indemnification or advance will be
made unless it is consistent with Sections 17(h) or 17(i) of the Investment
Company Act of 1940, as now enacted or hereafter amended, and Securities and
Exchange Commission rules, regulations, and releases (including, without
limitation, Investment Company Act of 1940 Release No. 11330, September 2,
1980).
Insofar as the indemnification for liability arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in such Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any action,
suit, or proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Information on the business of the Registrant's investment adviser,
First Bank National Association (the "Adviser"), is described in the section of
the Registrant's Statement of Additional Information, filed as part of this
Registration Statement, entitled "Investment Advisory and Other Services." The
directors and officers of the Adviser are listed below, together with their
principal occupation or other positions of a substantial nature during the past
two fiscal years.
<TABLE>
<CAPTION>
OTHER POSITIONS AND OFFICES
NAME POSITIONS AND OFFICES WITH ADVISER AND PRINCIPAL BUSINESS ADDRESS
- ---- ---------------------------------- ------------------------------
<S> <C> <C>
John F. Grundhofer Chairman, President and Chief Chairman, President and Chief
Executive Officer Executive Officer of First Bank
System, Inc. ("FBS").*
Richard A. Zona Director and Vice Chairman--Finance Vice Chairman--Finance of FBS*
Philip G. Heasley Director and Vice Chairman Vice Chairman and Group Head of the
Retail Product Group of FBS.*
Daniel C. Rohr Director and Executive Vice President Executive Vice President, Commercial
Banking Group of FBS.*
J. Robert Hoffmann Director, Executive Vice President Executive Vice President and Chief
and Chief Credit Officer Credit Officer of FBS.*
Lee R. Mitau Director, Executive Vice President, Executive Vice President, General
General Counsel and Secretary Counsel and Secretary of FBS; prior to
October 1995 partner in Dorsey &
Whitney LLP*
Susan E. Lester Director, Executive Vice President and Executive Vice President and Chief
Chief Financial Officer Financial Officer of FBS; prior to
December 1995 executive vice president
and chief financial officer of Shawmut
National Corporation.*
Larry S. Crawford Executive Vice President and General --*
Manager, Retail Banking Group
Robert J. Anderson Executive Vice President --*
John M. Murphy, Jr. Executive Vice President Executive Vice President of FBS;
Chairman and Chief Investment
Officer, First Trust National
Association.*
Robert H. Sayre Executive Vice President Executive Vice President, Human
Resources of FBS.*
- ---------------------------
* Address: First Bank Place, 601 Second Avenue South, Minneapolis, Minnesota 55402.
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Furnish the name of each investment company (other than the
Registrant) for which each principal underwriter currently distributing
securities of the Registrant also acts as a principal underwriter, distributor
or investment adviser:
Registrant's distributor, SEI Investments Distribution Co. (the
"Distributor") acts as distributor for SEI Liquid Asset Trust, SEI Daily Income
Trust, SEI Tax Exempt Trust, SEI Index Funds, SEI Institutional Managed Trust,
SEI International Trust, Stepstone Funds, The Advisors' Inner Circle Fund,
Pillar Funds, CUFund, STI Classic Funds, CoreFunds, Inc., First American Funds,
Inc., The Arbor Fund, 1784 Funds, Marquis Funds, Morgan Grenfell Investment
Trust, The PBHG Funds, Inc., Inventor Funds, Inc., The Achievement Funds Trust,
Insurance Investment Products Trust, Bishop Street Funds, CrestFunds, Inc., STI
Classic Variable Trust, ARK Funds, Monitor Funds, FMB Funds, Inc., SEI Asset
Allocation Trust, Turner Funds, and First American Strategy Funds, Inc. pursuant
to distribution agreements dated November 29, 1982, July 15, 1982, December 3,
1982, July 10, 1985, January 22, 1987, August 30, 1988, January 30, 1991,
November 14, 1991, February 28, 1992, May 1, 1992, May 29, 1992, October 30,
1992, November 1, 1992, January 28, 1993, June 1, 1993, August 17, 1993, January
3, 1994, August 1, 1994, December 27, 1994, December 30, 1994, January 27, 1995,
March 1, 1995, August 18, 1995, November 1, 1995, January 11, 1996, March 1,
1996, April 1, 1996, April 29, 1996, and October 1, 1996, respectively.
The Distributor provides numerous financial services to investment
managers, pension plan sponsors, and bank trust departments. These services
include portfolio evaluation, performance measurement, and consulting services
("Funds Evaluation") and automated execution, clearing and settlement of
securities transactions ("MarketLink").
(b) Furnish the information required by the following table with
respect to each director, officer or partner of each principal underwriter named
in the answer to Item 21 of Part B. Unless otherwise noted, the business address
of each director or officer is One Freedom Valley Way, Oaks, Pennsylvania 19456.
<TABLE>
<CAPTION>
NAME POSITIONS AND OFFICES WITH UNDERWRITER POSITIONS AND OFFICES WITH REGISTRANT
- ---- -------------------------------------- -------------------------------------
<S> <C> <C>
Alfred P. West, Jr. Director, Chairman & Chief --
Executive Officer
Henry H. Greer Director, President & Chief --
Operating Officer
Carmen V. Romeo Director, Executive Treasurer, Assistant Secretary
Vice President & Treasurer
Gilbert L. Beebower Executive Vice President --
Richard B. Lieb Executive Vice President, President-Investment --
Services Division
Leo J. Dolan, Jr. Senior Vice President --
Carl A. Guarino Senior Vice President --
Jerome Hickey Senior Vice President --
Larry Hutchinson Senior Vice President --
David G. Lee Senior Vice President President
Jack May Senior Vice President --
A. Keith McDowell Senior Vice President --
Dennis J. McGonigle Senior Vice President --
Hartland J. McKeown Senior Vice President --
Barbara J. Moore Senior Vice President --
James V. Morris Senior Vice President --
Steven Onofrio Senior Vice President --
Kevin P. Robins Senior Vice President, General Counsel Vice President & Assistant Secretary
& Secretary
Robert Wagner Senior Vice President --
Patrick K. Walsh Senior Vice President --
Kenneth Zimmer Senior Vice President --
Robert Aller Vice President --
Marc H. Cahn Vice President & Assistant Secretary Vice President & Assistant Secretary
Gordon W. Carpenter Vice President --
Todd Cipperman Vice President & Assistant Secretary Vice President & Assistant Secretary
Robert Crudup Vice President & Managing Director --
Ed Daly Vice President --
Jeff Drennen Vice President --
Mick Duncan Vice President & Team Leader --
Vic Galef Vice President & Managing Director --
Kathy Heilig Vice President --
Michael Kantor Vice President --
Samuel King Vice President --
Kim Kirk Vice President & Managing Director --
Donald H. Korytowski Vice President --
John Krzeminski Vice President & Managing Director --
Robert S. Ludwig Vice President & Team Leader --
Vicki Malloy Vice President & Team Leader --
Carolyn McLaurin Vice President & Managing Director --
W. Kelso Morrill Vice President --
Barbara A. Nugent Vice President & Assistant Secretary Vice President & Assistant Secretary
Sandra K. Orlow Vice President & Assistant Secretary Vice President & Assistant Secretary
Donald Pepin Vice President & Managing Director --
Larry Pokora Vice President --
Kim Rainey Vice President --
Paul Sachs Vice President --
Mark Samuels Vice President & Managing Director --
Steve Smith Vice President --
Daniel Spaventa Vice President --
Kathryn L. Stanton Vice President & Assistant Secretary Vice President & Assistant Secretary
Wayne M. Withrow Vice President & Managing Director --
William Zawaski Vice President --
James Dougherty Director of Brokerage Services --
</TABLE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
<TABLE>
<CAPTION>
LOCATION
OF TYPE OF
REGULATION RECORD RECORD FUND
- ---------- ------ ----------------------------------------------------------- ----
<S> <C> <C> <C>
270.31a-1(a) 2 General Ledger B
2 Cash Transaction Statement D
2 Monthly Cash Summary Report M
2 Purchases Report D
2 Sales Report D
2 Realized Gain/Loss Report D
2 Securities Movement and Control List of Assets for Close of
Business B
270.31a-1(b)(1) 2 Daily Portfolio Transaction Detail D
2 Daily Settled Purchase and Sales Journal D
2 Money Market Monthly Transaction Journal M
2 Money Market General Ledger Activity Journal M
270.31a-1(b)2(i) 2 General Ledger B
2 Money Market General Ledger Activity Journal M
2 Open Trades/Secs. Out for Transfer Report D
2 Securities Movement and Control List of Assets for Close of
Business B
2 Federal Reserve 3E Safe-Keeping Acct. Listing of Securities held
by the Fund B
2 Div. Income Summary Report D
2 Div. and Interest Receivable Report D
2 Earned Income Report B
2 Money Market Daily Accrual Report M
2 Money Market Daily Amortization Report M
2 Statement of Condition B
270.31a-1(b)2(ii) 2 Fund Master Ledger D
2 Corporate Action Announcement Report D
2 Purchases Report D
2 Sales Report D
270.31a-1(b)2(iii) 2 Brokerage Alloc/Commission Detail Report D
270.31a-1(b)2(iv) 1 Shareholder Master File -- CRT B
1 Shareholder History File -- CRT B
270.31a-1(b)3 2 Fund Master Ledger D
270.31a-1(b)4 1 Articles of Incorporation B
1 Declaration of Trust B
1 By-Laws B
1 Minute Books B
270.31a-1(b)5 1 Trade Tickets B
2 Purchase Report D
2 Sales Report D
270.31a-1(b)5 1 Trade Tickets B
2 Purchase Report D
2 Sales Report D
270.31a-1(b)6 1 Trade Tickets B
270.31a-1(b)7 2 Fund Master Ledger D
270.31a-1(b)8 2 Statement of Condition B
2 General Ledger B
2 Money Market General Ledger Activity Journal M
270.31a-1(b)9 2 Brokerage Alloc./Commission Detail Report D
1 Brokerage Commission Report B
1 Reduction and Commission Report D
1 Quarterly Brokerage Log B
270.31a-1(b)10 1 Custodian Blanket Authorization B
1 Portfolio Manager Signoff B
270.31a-1(b)11 1 Portfolio Manager Signoff B
270.31a-1(b)12 2 All supporting documentation B
270.31a-1(c) Not applicable
270.31a-1(d) 1 Director Payments thru Fund Journal B
1 Exchange Purchase Journal B
1 Confirmed Payments Journal B
1 Fiduciary Contribution Journal B
1 Direct Payments Journal B
1 Direct Redemptions Journal B
2 General Ledger B
1 Shareholder Master File -- CRT B
1 Shareholder History File -- CRT B
1 Daily Div. Close-out Journal B
1 Asset Transfer/Rollover Journal B
1 Redemption Check Register B
1 Purchase Cancellations Journal B
1 Redemption Cancellation Journal B
1 Fail/Free Report B
1 Broker/Dealer Order Ticket B
1 Inv. Services Order Breakdowns B
1 EDGE Transaction Journal B
1 Shareholder Receipt -- Retail B
1 Account Application -- Retail B
1 Additional Deposit Slip -- Retail B
1 Trade Cancel Form B
1 Confirmation Statement B
1 Shareholder Statement B
1 Form U-4 B
1 Fingerprint Card B
1 Form U-4 Status Report B
1 Form U-4 Score Report B
1 Form U-5 B
270.31a-1(e) Not applicable
270.31a-1(f) 2 General Ledger B
1 Portfolio Manager Signoff B
1 Trade Tickets B
270.31a-2(a)(1) 2 Daily Portfolio Transaction Detail D
2 Daily Settled Pur. and Sales Journal D
2 Money Market Monthly Transaction Journal M
2 Money Market General Ledger Activity Journal M
2 Open Trades/Secs. Out for Transfer Report D
2 Securities Movement and Control List of Assets for Close of
Business B
2 Fed. Reserve 3E Safe-Keeping Acct. Listing of Securities held
by the Fund B
270.31a-2(a)(1) 2 Div. Income Summary Report D
2 Div. and Interest Receivable Report D
2 Earned Income Report B
2 Money Market Daily Accrual Report M
2 Money Market Daily Amortization Report M
2 Statement of Condition B
2 Fund Master Ledger D
2 Corporate Action Announcement Report D
2 Brokerage Alloc./Commission Detail Report D
1 Shareholder Master File -- CRT B
1 Shareholder History File -- CRT B
1 Declaration of Trust B
1 By-laws B
1 Minute Books B
270.31a-2(a)(2) 2 Purchases Report D
2 Sales Report D
2 General Ledger B
2 Money Market General Ledger Activity Journal M
2 Statement of Condition B
2 Fund Master Ledger D
2 Brokerage Alloc./Commission Detail Report D
1 Trade Tickets B
1 Brokerage Commission Report B
1 Reduction and Commission Report D
1 Quarterly Brokerage Log B
1 Custodian Blanket Authorization B
1 Portfolio Manager Signoff B
270.31a-2(a)(3) 1 Sales Literature File B
270.31a-2(b) Not applicable
270.31a-2(c) 1 Director Payments thru Fund Journal B
1 Exchange Purchase Journal B
1 Confirmed Payments Journal B
1 Fiduciary Contribution Journal B
1 Direct Payments Journal B
1 Direct Redemptions Journal B
2 General Ledger B
1 Shareholder Master File -- CRT B
1 Shareholder History File -- CRT B
1 Daily Div. Close-Out Journal B
1 Asset Transfer/Rollover Journal B
1 Redemption Check Register B
1 Purchase Cancellations Journal B
1 Redemption Cancellation Journal B
1 Fail/Free Report B
1 Broker/Dealer Order Ticket B
1 Inv. Services Order Breakdowns B
1 EDGE Transaction Journal B
1 Shareholder Receipt -- Retail B
1 Account Application -- Retail B
1 Additional Deposit Slip -- Retail B
1 Trade Cancel Form B
270.31a-2(c) 1 Confirmation Statement B
1 Shareholder Statement B
1 Form U-4 B
1 Fingerprint Card B
1 Form U-4 Status Report B
1 Form U-4 Score Report B
1 Form U-5 B
270.31a-2(d) Not applicable
270.31a-2(e) 2 General Ledger B
1 Portfolio Manager Signoff B
1 Trade Tickets B
270.31a-2(f)(1) 1 Microfilm B
270.31a-2(f)(2) 1 Retention Plan B
270.31a-2(f)(3) Not applicable
270.31a-3 1 Custodian Agreement B
</TABLE>
(1) SEI Financial Management Corporation and SEI Investments Distribution
Co. Oaks, Pennsylvania 19456
(2) First Trust National Association
180 East Fifth Street
St. Paul, Minnesota 55101
B = Both D = Debt Equity M = Money Market
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
Registrant undertakes to call a meeting of shareholders for the purpose
of voting upon the question of removal of a Director(s) when requested in
writing to do so by the holders of at least 10% of Registrant's outstanding
shares and in connection with such meetings to comply with the provisions of
Section 16(c) of the Investment Company Act of 1940 relating to shareholder
communications.
Registrant, on behalf of Oregon Intermediate Tax Free Fund, California
Intermediate Tax Free Fund and Micro Cap Value Fund, undertakes to file a
post-effective amendment, using financial statements which need not be
certified, within four to six months from the date such funds commence
operations.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Post-Effective Amendment to its Registration Statement No. 2-16905 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Oaks, Commonwealth of Pennsylvania, on the 23rd day of May, 1997.
FIRST AMERICAN INVESTMENT FUNDS, INC.
ATTEST: /s/ Stephen G. Meyer By /s/ Kathryn L. Stanton
--------------------------------- ----------------------------------
Stephen G. Meyer Kathryn L. Stanton, Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacity and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Stephen G. Meyer Controller (Principal **
- -------------------------------- Financial and Accounting
Stephen G. Meyer Officer)
* Director **
- --------------------------------
Robert J. Dayton
* Director **
- --------------------------------
Andrew M. Hunter III
* Director **
- --------------------------------
Leonard W. Kedrowski
* Director **
- --------------------------------
Joseph D. Strauss
* Director **
- --------------------------------
Virginia L. Stringer
* Director **
- --------------------------------
Gae B. Veit
* By: /s/ Kathryn L. Stanton
--------------------------------
Kathryn L. Stanton
Attorney in Fact
** May 23, 1997. FAIF PE 28
------------
