1933 Act Registration No.
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 8, 1997
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ___ [ ]
Post-Effective Amendment No. ___ [ ]
(Check appropriate box or boxes)
Exact name of Registrant as Specified in Charter:
FIRST AMERICAN INVESTMENT FUNDS, INC.
Area Code and Telephone Number:
(610) 254-1924
Address of Principal Executive Offices:
Oaks, Pennsylvania 19456
Name and Address of Agent for Service:
David G. Lee
c/o SEI Investments Company
Oaks, Pennsylvania 19456
COPIES TO:
Kathryn L. Stanton, Esq. Kathleen L. Prudhomme, Esq.
SEI Investments Company Dorsey & Whitney LLP
Oaks, Pennsylvania 19456 220 South Sixth Street
Minneapolis, Minnesota 55402
It is proposed that this filing become effective on September 7, 1997
(30 days after filing) pursuant to Rule 488.
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No filing fee is required because an indefinite number of shares have previously
been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940.
Registrant is filing as an exhibit to this Registration Statement a copy of its
earlier declaration under Rule 24f-2. Registrant filed its Rule 24f-2 Notice on
November 25, 1996 for its fiscal year ended September 30, 1996.
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FIRST AMERICAN INVESTMENT FUNDS, INC.
REGISTRATION STATEMENT ON FORM N-14
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 481(a))
PART A OF FORM N-14 PROSPECTUS/PROXY STATEMENT CAPTION
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1. Beginning of Registration Statement
and Outside Front Cover Page of Prospectus ........... Cross Reference Sheet and Cover Page
2. Beginning and Outside Back Cover Page
of Prospectus......................................... Table of Contents
3. Fee Table, Synopsis Information and
Risk Factors ......................................... Summary; Principal Risk Factors; Appendix V; Appendix VII
4. Information about the Transaction..................... Summary; Information Relating to the Interim Advisory Agreement;
Information Relating to the Proposed Reorganization; Comparison of
FAIF and Qualivest
5. Information about the Registrant...................... Inside Front Cover (Incorporation by Reference); Comparison of FAIF
and Qualivest; Additional Information about FAIF; Appendix IV;
Appendix VIII; Appendix IX
6. Information about the Company Being
Acquired.............................................. Inside Front Cover (Incorporation by Reference); Comparison of FAIF
and Qualivest Additional Information about Qualivest; Appendix IV
7. Voting Information.................................... Summary; Information about the Reorganization; Information Relating
to Voting Matters
8. Interest of Certain Persons and Experts............... Information Relating to Voting Matters
9. Additional Information................................ Not Applicable
PART B OF FORM N-14 STATEMENT OF ADDITIONAL INFORMATION CAPTION
10. Cover Page............................................ Cover Page
11. Table of Contents..................................... Not Applicable
12. Additional Information about the Registrant........... Cover Page (Incorporation by Reference); Appendix A to Statement of
Additional Information
13. Additional Information about the Company
Being Acquired........................................ Cover Page (Incorporation by Reference)
14. Financial Statements.................................. Cover Page (Incorporation by Reference); Pro Forma Financal Statements
PART C OF FORM N-14
Information required to be included in Part C is set forth under the appropriate
item in Part C of this Registration Statement.
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FIRST AMERICAN INVESTMENT FUNDS, INC.
REGISTRATION STATEMENT ON FORM N-14
PART A
PRESIDENT'S LETTER
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
PROSPECTUS/PROXY STATEMENT
<PAGE>
QUALIVEST FUNDS
3435 STELZER ROAD
COLUMBUS, OHIO 43219-3035
__________, 1997
Dear Qualivest Shareholder:
On behalf of the Board of Trustees of Qualivest Funds ("Qualivest"), we are
pleased to invite you to a special meeting of shareholders on _______, 1997
(the "Meeting"), that has been called to consider matters that are important to
you. At the Meeting, you will be asked to consider (1) the approval of an
interim advisory agreement with First Bank National Association ("FBNA"), which
became effective on August 1, 1997 (when U.S. Bancorp merged with First Bank
System, Inc., as discussed below), and (2) a proposed reorganization of six
funds of Qualivest (the "Qualivest Portfolios") into six corresponding funds of
First American Investment Funds, Inc. ("FAIF") (the "FAIF Funds"). FBNA
currently acts as the investment adviser to the FAIF Funds.
As a result of the merger of U.S. Bancorp and First Bank System, Inc.,
representatives of U.S. Bancorp and First Bank System, Inc. recommended to the
Board of Trustees of Qualivest that the Trustees consider and approve combining
the Qualivest Portfolios with the FAIF Funds. This recommendation was made
because the representatives of the two banking institutions believed that
combining the Qualivest Portfolios and FAIF Funds would offer a number of
potential benefits to the shareholders of the two mutual fund groups.
QUALIVEST'S BOARD OF TRUSTEES RECOMMENDS THAT YOU VOTE TO APPROVE BOTH THE
INTERIM ADVISORY AGREEMENT AND THE PROPOSED REORGANIZATION.
BACKGROUND. On August 1, 1997, U.S. Bancorp, the ultimate parent company of
Qualivest Capital Management, Inc. ("Qualivest Capital"), merged with First Bank
System, Inc. ("FBS"), the parent company of FBNA, and the name of FBS was
changed to U.S. Bancorp. By law, this merger resulted in the automatic
termination of the Qualivest Portfolios' then current investment advisory
agreement with Qualivest Capital. Because a number of portfolio managers for the
Qualivest Portfolios were expected to leave the employ of Qualivest Capital as a
result of the merger, Qualivest's Board of Trustees approved the interim
investment advisory agreement with FBNA, effective August 1, 1997, in order to
provide, to the extent practicable, continuity of management and to avoid harm
to the Qualivest Portfolios. At the upcoming meeting, you will be asked to
ratify and approve this interim advisory agreement, including the receipt of
investment advisory fees by FBNA for the period from August 1, 1997 forward.
In addition, at the upcoming meeting, you will be asked to approve a
reorganization of your Qualivest Portfolio into a corresponding FAIF Fund. Each
FAIF Fund is a series of FAIF, an open-end investment company advised by FBNA.
If required approvals are obtained, the Qualivest Portfolios are expected to be
reorganized into the corresponding FAIF Funds on or about November 28, 1997,
when your Qualivest Portfolio shares will be exchanged for shares of the
corresponding FAIF Fund of equal value. Shareholders of the seven other
investment portfolios of Qualivest (U.S. Treasury Money Market Fund, Money
Market Fund, Tax-Free Money Market Fund, Allocated Conservative Fund, Allocated
Balanced Fund, Allocated Growth Fund and Allocated Aggressive Fund), are being
asked to approve the reorganizations of such portfolios into investment
portfolios of First American Funds, Inc. or First American Strategy Funds, Inc.
These proposed reorganizations are covered by two additional sets of proxy
materials. The reorganization that you are being asked to approve should benefit
shareholders by:
* facilitating investment management, administration and marketing by
combining the Qualivest Portfolios and the FAIF Funds;
* improving efficiency, including the potential for economies of scale;
* eliminating duplicative shareholder costs; and
* making available to shareholders a greater number of investment
portfolio options.
In considering these matters, you should note:
* IDENTICAL TERMS AND FEES
The terms of the interim advisory agreement with FBNA are
substantially identical to the terms of the Qualivest Portfolios'
previous advisory agreement with Qualivest Capital. The fee rates are
unchanged.
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* SIMILAR OBJECTIVES AND POLICIES
Two of the six Qualivest Portfolios will merge into new FAIF Funds
that have been created for purposes of the merger, and the remaining
four Qualivest Portfolios will merge into operating FAIF Funds. The
objectives and policies of each FAIF Fund are generally similar to
those of its corresponding Qualivest Portfolio. There are some
differences, however, which are discussed in the enclosed Combined
Proxy Statement/Prospectus, and you should consider these differences
carefully.
* SIMILAR ACCESS ARRANGEMENTS
You will enjoy access to the FAIF Funds through distribution,
transaction and shareholder servicing arrangements that are
substantially similar to the Qualivest Portfolios' current
arrangements.
* SAME VALUE OF SHARES
The total value of the FAIF Fund shares that you receive in the
reorganization will be the same as the total value of the Qualivest
Portfolio shares that you hold immediately before the reorganization.
* LOWER OPERATING EXPENSE RATIOS
The annual fund operating expense ratio (after waivers) for the
corresponding FAIF Fund after the reorganization is expected to be
less than the annual fund operating expense ratio of your Qualivest
Portfolio through at least September 30, 1998, except for Class A and
Class Y shares of Diversified Bond Fund.
The formal Notice of Special Meeting, a Combined Proxy Statement/Prospectus and
a Proxy Ballot are enclosed. If you own shares in more than one Qualivest
Portfolio, more than one Proxy Ballot accompanies these proxy materials. You
will receive additional proxy materials if you are a shareholder of one or more
of the seven other investment portfolios of Qualivest.
YOUR VOTE IS VERY IMPORTANT TO US. WHETHER OR NOT YOU PLAN TO ATTEND THE
SPECIAL MEETING, PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY BALLOT
PROMPTLY, USING THE ENCLOSED POSTAGE-PAID ENVELOPE.
The interim investment advisory arrangements with FBNA, the proposed
reorganization and the reasons for the Qualivest Board of Trustees'
recommendation are discussed in detail in the enclosed materials, which you
should read carefully. If you have any questions about the new investment
advisory arrangements or the reorganization, please do not hesitate to call
________________ toll free at 1-800-___-_____.
Very truly yours,
Irimga McKay
President
<PAGE>
QUALIVEST FUNDS
3435 STELZER ROAD
COLUMBUS, OHIO 43219-3035
NOTICE OF SPECIAL SHAREHOLDERS MEETING
TO BE HELD ON ___________, 1997
NOTICE IS HEREBY GIVEN THAT a Special Meeting of the Shareholders of Small
Companies Value Fund, Large Companies Value Fund, Optimized Stock Fund,
Intermediate Bond Fund, Diversified Bond Fund and International Opportunities
Fund (each a "Qualivest Portfolio"), series of QUALIVEST FUNDS ("Qualivest"),
will be held at the offices of ____________ on ____________ , 1997, at ______
A.M.
Time for the purpose of considering and voting upon:
1. A proposal to ratify and approve an interim investment advisory agreement
between Qualivest, on behalf of each Qualivest Portfolio, and First Bank
National Association ("FBNA"), and the receipt of investment advisory fees by
FBNA for the period from August 1, 1997 forward.
2. A proposal to approve an Agreement and Plan of Reorganization providing for
the transfer of the assets and liabilities of each Qualivest Portfolio to a
corresponding fund of First American Investment Funds, Inc. ("FAIF") in exchange
for shares of designated classes of the corresponding FAIF fund.
3. Such other business as may properly come before the Special Meeting or any
adjournment(s).
The proposals are described in the attached Combined Proxy
Statement/Prospectus. YOUR TRUSTEES RECOMMEND THAT YOU VOTE IN FAVOR OF EACH
OF THESE PROPOSALS.
Shareholders of record as of the close of business on _____________ , 1997 are
entitled to notice of, and to vote at, the Special Meeting or any adjournment(s)
thereof.
SHAREHOLDERS ARE REQUESTED TO MARK, DATE, SIGN AND RETURN PROMPTLY IN THE
ENCLOSED ENVELOPE THE ACCOMPANYING PROXY CARD, WHICH IS BEING SOLICITED BY THE
QUALIVEST BOARD OF TRUSTEES. THIS IS IMPORTANT TO ENSURE A QUORUM AT THE
MEETING. PROXIES MAY BE REVOKED AT ANY TIME BEFORE THEY ARE EXERCISED BY
SUBMITTING TO QUALIVEST A WRITTEN NOTICE OF REVOCATION OR A SUBSEQUENTLY
EXECUTED PROXY OR BY ATTENDING THE MEETING AND VOTING IN PERSON. HOWEVER,
ATTENDANCE AT THE MEETING WILL NOT BY ITSELF SERVE TO REVOKE A PROXY.
Gregory T. Maddox
Secretary
_________, 1997
<PAGE>
COMBINED PROXY STATEMENT/PROSPECTUS
DATED ____________, 1997
QUALIVEST FUNDS
3435 STELZER ROAD
COLUMBUS, OHIO 43219-3035
1-800-743-8637
FIRST AMERICAN INVESTMENT FUNDS, INC.
OAKS, PENNSYLVANIA 19456
1-800-637-2548
This Combined Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by the Board of Trustees of Qualivest Funds
("Qualivest") in connection with a Special Meeting of Shareholders of Small
Companies Value Fund, Large Companies Value Fund, Optimized Stock Fund,
Intermediate Bond Fund, Diversified Bond Fund and International Opportunities
Fund (the "Qualivest Portfolios" or the Portfolios") to be held at ______ A.M.
Time on __________, 1997 at the offices of __________________. At the meeting,
shareholders will be asked (i) to ratify and approve an interim investment
advisory agreement with First Bank National Association ("FBNA") and the receipt
of investment advisory fees by FBNA for the period from August 1, 1997 forward,
and (ii) to approve a proposed Agreement and Plan of Reorganization dated
_______________, 1997 (the "Reorganization Agreement") between Qualivest and
First American Investment Funds, Inc. ("FAIF"). Copies of the interim investment
advisory agreement and the Reorganization Agreement are attached as Appendices I
and III, respectively.
Qualivest and FAIF are open-end management investment companies (mutual funds)
that offer their shares in a number of different investment portfolios, or
"funds." The Reorganization Agreement provides for the transfer of the assets
and liabilities of the six Qualivest Portfolios to corresponding investment
portfolios of FAIF (the "FAIF Funds" or the "Funds") in exchange for shares of
designated classes of the FAIF Funds having an equal aggregate value (the
"Reorganization"). As a result of the Reorganization, shareholders of the
Qualivest Portfolios will become shareholders of the FAIF Funds. Table I, under
"Information Relating to the Proposed Reorganization -- Description of the
Reorganization Agreement," shows each class of each Qualivest Portfolio and the
corresponding class of each corresponding FAIF Fund. It also has been proposed
that the seven other investment portfolios of Qualivest (U.S. Treasury Money
Market Fund, Money Market Fund, Tax-Free Money Market Fund, Allocated
Conservative Fund, Allocated Balanced Fund, Allocated Growth Fund and Allocated
Aggressive Fund) be reorganized into investment portfolios of First American
Funds, Inc. or First American Strategy Funds, Inc. These proposed
reorganizations are not covered by this Combined Proxy Statement/Prospectus.
This Combined Proxy Statement/Prospectus sets forth concisely the information
that a Qualivest Portfolio shareholder should know before voting, and should be
retained for future reference. For shareholders of the Qualivest Portfolios that
will be reorganized into the FAIF Stock Fund, Equity Index Fund, Intermediate
Term Income Fund and Fixed Income Fund (the "Existing FAIF Funds"), this
Combined Proxy Statement/Prospectus is accompanied by the following additional
documents: (i) the 1996 Annual Report(s) and the 1996 Semi-Annual Report(s) for
the Existing FAIF Funds and (ii) the current Prospectus(es) for the Existing
FAIF Funds, each dated January 31, 1997, as supplemented through the date
hereof. There are no Annual or Semi-Annual Reports or Prospectuses for the other
two FAIF Funds (the "New FAIF Funds"), which have been created for purposes of
the reorganization and have not yet commenced operations. However, information
regarding the New FAIF Funds is set forth in the preliminary prospectuses for
the Class A and Class B shares and for the Institutional Class shares, which are
attached hereto as Appendix VIII and Appendix IX, respectively. Additional
information relating to this Combined Proxy Statement/Prospectus is set forth in
the Statement of Additional Information, dated the date hereof, which is
incorporated herein by reference, and in the Prospectuses dated December 1,
1996, as supplemented through the date hereof, for the Qualivest Portfolios.
Each of these documents is on file with the Securities and Exchange Commission
(the "SEC"), and is available without charge by calling or writing Qualivest or
FAIF at the respective telephone numbers or addresses stated above. The
information contained in the Existing FAIF Fund Prospectuses and the
Prospectuses for the Qualivest Portfolios is incorporated by reference into this
Combined Proxy Statement/Prospectus.
This Combined Proxy Statement/Prospectus is expected to be first sent to
shareholders on or about ____________ , 1997.
THE SECURITIES OF THE FAIF FUNDS OFFERED HEREBY 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 COMBINED
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS COMBINED PROXY
STATEMENT/PROSPECTUS AND IN THE MATERIALS EXPRESSLY INCORPORATED HEREIN BY
REFERENCE AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY QUALIVEST, FAIF OR THEIR
RESPECTIVE ADVISERS AND DISTRIBUTORS.
SHARES OF QUALIVEST AND FAIF ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, FIRST BANK NATIONAL ASSOCIATION, UNITED STATES NATIONAL BANK OF
OREGON OR ANY OTHER BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. MUTUAL
FUND SHARES INVOLVE CERTAIN INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
<PAGE>
TABLE OF CONTENTS
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SUMMARY ........................................................................ 5
Interim Advisory Agreement ................................................... 5
Qualivest Board Considerations ............................................... 6
Proposed Reorganization ...................................................... 6
Overview of FAIF and Qualivest ............................................... 6
Qualivest and FAIF Board Considerations ...................................... 8
Voting Information ........................................................... 8
PRINCIPAL RISK FACTORS ......................................................... 8
Common Risks ................................................................. 8
Differing Risks of Certain Qualivest Portfolios and FAIF Funds ............... 10
INFORMATION RELATING TO THE INTERIM ADVISORY AGREEMENT ......................... 11
The Merger of U.S. Bancorp into First Bank System, Inc. ...................... 11
The Interim Advisory Agreement ............................................... 11
Information About FBNA ....................................................... 13
Payments to FBNA Affiliates .................................................. 13
Affiliated Broker Commissions ................................................ 14
Section 15(f) of the 1940 Act ................................................ 14
Approval of Qualivest's Board of Trustees .................................... 14
INFORMATION RELATING TO THE PROPOSED REORGANIZATION ............................ 15
Description of the Reorganization Agreement .................................. 15
Table I -- Portfolios and Corresponding Funds ................................ 16
Qualivest Board Considerations ............................................... 17
Capitalization ............................................................... 18
Table II -- Pro Forma Capitalization Table (as of June 30, 1997) ............. 19
Federal Income Tax Treatment ................................................. 21
COMPARISON OF FAIF AND QUALIVEST ............................................... 21
Investment Objectives and Policies ........................................... 21
Investment Advisory Fees and Total Expense Ratios ............................ 21
Table III -- Investment Advisory and Total Expense Information ............... 22
FAIF Funds' Investment Advisory Agreement .................................... 23
Information About FBNA and Other Service Providers ........................... 23
Share Structure .............................................................. 23
Distribution Plans ........................................................... 24
Shareholder Transactions and Services ........................................ 25
INFORMATION RELATING TO VOTING MATTERS ......................................... 26
General Information .......................................................... 26
Shareholder and Board Approvals .............................................. 27
Table IV(A) -- Qualivest Portfolios -- 5% Ownership as of , 1997 .. 28
Table IV(B) -- FAIF Funds -- 5% Ownership as of , 1997 ............ 28
Quorum ....................................................................... 28
Annual Meetings .............................................................. 28
Interests of Certain Persons ................................................. 29
ADDITIONAL INFORMATION ABOUT FAIF .............................................. 29
ADDITIONAL INFORMATION ABOUT QUALIVEST ......................................... 29
FINANCIAL STATEMENTS ........................................................... 29
OTHER BUSINESS ................................................................. 30
SHAREHOLDER INQUIRIES .......................................................... 30
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<PAGE>
APPENDICES I -- INTERIM FIRST BANK NATIONAL ASSOCIATION INVESTMENT
ADVISORY AGREEMENT
II -- PRINCIPAL EXECUTIVE OFFICER AND DIRECTORS OF FIRST BANK
NATIONAL ASSOCIATION
III -- AGREEMENT AND PLAN OF REORGANIZATION
IV -- COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND
RESTRICTIONS
V -- EXPENSE SUMMARIES
VI -- COMPARISON OF QUALIVEST AND FAIF ADVISORY AGREEMENTS
VII -- SHAREHOLDER TRANSACTIONS AND SERVICES
VIII -- PRELIMINARY PROSPECTUS OF NEW FAIF FUNDS -- RETAIL CLASS
SHARES
IX -- PRELIMINARY PROSPECTUS OF NEW FAIF FUNDS -- INSTITUTIONAL
CLASS SHARES
<PAGE>
SUMMARY
The following is a summary of certain information relating to the interim
investment advisory agreement and the proposed Reorganization, and is qualified
by reference to the more complete information contained elsewhere in this
Combined Proxy Statement/Prospectus, the Prospectuses and Statements of
Additional Information of the Qualivest Portfolios and the FAIF Funds, and the
Appendices attached hereto.
INTERIM ADVISORY AGREEMENT. On August 1, 1997, pursuant to an Agreement and
Plan of Merger, U.S. Bancorp merged with and into First Bank System, Inc.
("FBS") and the name of FBS was changed to U.S. Bancorp ("New U.S. Bancorp")
(the "Holding Company Merger"). As a result of the Holding Company Merger,
Qualivest Capital Management, Inc. ("Qualivest Capital"), the investment
adviser to the Qualivest Portfolios at that time, became an indirect
wholly-owned subsidiary of New U.S. Bancorp. In accordance with the terms of
the then current investment advisory agreement between Qualivest Capital and
Qualivest, on behalf of the Qualivest Portfolios (the "Old Advisory
Agreement"), and consistent with the requirements of the Investment Company
Act of 1940, as amended (the "1940 Act"), this change in control of Qualivest
Capital resulted in the automatic and immediate termination of the Old
Advisory Agreement.
To better ensure that the Holding Company Merger and this automatic termination
would not disrupt the investment advisory services provided to the Qualivest
Portfolios, Qualivest, Qualivest Capital and FBNA obtained an exemptive order
from the SEC (the "Order") permitting FBNA to act as investment adviser to the
Qualivest Portfolios after the termination of the Old Advisory Agreement, but
prior to obtaining shareholder approval, under a new, interim investment
advisory agreement with Qualivest on behalf of the Portfolios (the "Interim
Advisory Agreement"). In accordance with the Order, the Interim Advisory
Agreement is subject to ratification and approval by the shareholders of the
Qualivest Portfolios at a meeting to be held within 120 days after August 1,
1997 (the "Interim Period").
The Trustees of Qualivest now are proposing that the shareholders of each
Qualivest Portfolio ratify and approve the Interim Advisory Agreement. The
Interim Advisory Agreement became effective on August 1, 1997, the effective
date of the Holding Company Merger. Pending the ratification and approval of the
Interim Advisory Agreement, all fees payable under the Agreement are being held
in escrow. Any escrowed fees relating to a Qualivest Portfolio will be received
by FBNA only if the Interim Advisory Agreement is ratified and approved by the
shareholders of such Qualivest Portfolio.
The terms of the Interim Advisory Agreement are substantially identical to the
terms of the Old Advisory Agreement, except for (i) the change in the investment
adviser, (ii) the effective date, (iii) the termination date, and (iv) inclusion
of a provision requiring that all fees payable by each Qualivest Portfolio under
the Interim Advisory Agreement be held in escrow until the Agreement is approved
by such Portfolio's shareholders. The advisory fee rates payable under the
Interim Advisory Agreement are identical to those previously payable under the
Old Advisory Agreement. A description of FBNA, the Interim Advisory Agreement
and the services provided by FBNA thereunder is set forth below under the
heading "Information Relating to the Interim Advisory Agreement." A copy of the
Interim Advisory Agreement is attached to this Combined Proxy
Statement/Prospectus as Appendix I. The description of the Interim Advisory
Agreement is qualified in its entirety by reference to the copy of the Interim
Advisory Agreement attached hereto.
If ratified and approved, the Interim Advisory Agreement will continue in effect
with respect to the Qualivest Portfolios either (i) for successive one year
terms, subject to certain annual approval requirements, or (ii) until the
Reorganization is completed (which, subject to various conditions described
herein, is expected to occur on or about November 21, 1997) (the "Closing"),
whichever occurs earlier. It is expected that after the Closing, FBNA will serve
as investment adviser to each of the FAIF Funds. In the event that the Interim
Advisory Agreement is not ratified and approved with respect to a Qualivest
Portfolio, the fees held in escrow with respect to that Portfolio will be
returned to the Portfolio, and Qualivest's Board of Trustees will consider what
actions should be taken with respect to management of the assets of the
Qualivest Portfolio until a new investment advisory agreement is approved by the
shareholders of the Portfolio or the Reorganization occurs.
<PAGE>
QUALIVEST BOARD CONSIDERATIONS. In approving the Interim Advisory Agreement and
recommending its ratification and approval to the shareholders of the Qualivest
Portfolios, Qualivest's Board of Trustees reviewed the qualifications of FBNA to
serve as investment adviser to the Qualivest Portfolios and considered that a
number of portfolio managers for the Qualivest Portfolios were expected to leave
the employ of Qualivest Capital as a result of the Holding Company Merger. In
light of this fact, the board determined that doubt existed as to whether the
remaining personnel of Qualivest Capital, acting alone, would be able to provide
an appropriate scope and quality of advisory services to the Qualivest
Portfolios following the Holding Company Merger. It was proposed that the
remaining Qualivest portfolio managers employed by Qualivest Capital would
become employees of
FBNA at the effective date of the Holding Company Merger and that FBNA would
then assume management of the Qualivest Portfolios pursuant to the Interim
Advisory Agreement. The Board of Trustees determined that this arrangement would
serve Qualivest shareholders better than any available alternatives. The Board
also considered, among other things, that the provisions of the Interim Advisory
Agreement were substantially similar, and advisory fee rates were exactly the
same, as those of the Old Advisory Agreement. See "Information Relating to the
Interim Advisory Agreement -- Approval of Qualivest's Board of Trustees."
QUALIVEST'S BOARD OF TRUSTEES RECOMMENDS THAT QUALIVEST SHAREHOLDERS RATIFY AND
APPROVE THE INTERIM ADVISORY AGREEMENT AND THE RECEIPT OF INVESTMENT ADVISORY
FEES BY FBNA FOR THE PERIOD FROM August 1, 1997 FORWARD.
PROPOSED REORGANIZATION. The Reorganization Agreement provides for: (i) the
transfer of all of the assets and liabilities of each of the six Qualivest
Portfolios to FAIF in exchange for shares of designated classes of the
corresponding FAIF Funds; and (ii) the distribution of these FAIF Fund shares to
the shareholders of the Qualivest Portfolios in liquidation of the Qualivest
Portfolios. The Reorganization is subject to a number of conditions with respect
to each Qualivest Portfolio, including the shareholder approvals described
below. Following the Reorganization (and the reorganization of the seven other
investment portfolios of Qualivest into investment portfolios of First American
Funds, Inc. or First American Strategy Funds, Inc.), it is contemplated that
there will be a winding up of Qualivest's affairs, including the deregistration
of Qualivest as an investment company under the 1940 Act.
As a result of the proposed Reorganization, each shareholder of a Qualivest
Portfolio will become a shareholder of the corresponding FAIF Fund and will
hold, immediately after the Closing, shares of the designated class of the
corresponding FAIF Fund having a total value equal to the total value of the
shares of the Qualivest Portfolio the shareholder holds immediately before the
Closing. Table I, under "Information Relating to the Proposed Reorganization --
Description of the Reorganization Agreement," shows each class of each Qualivest
Portfolio and the corresponding class of each corresponding FAIF Fund.
The Reorganization Agreement provides that the Reorganization may be abandoned
at any time prior to the Closing upon the mutual consent of both Qualivest and
FAIF, among other reasons. For further information, see "Information Relating to
the Proposed Reorganization."
OVERVIEW OF FAIF AND QUALIVEST. The investment objectives, policies and
restrictions of the Qualivest Portfolios are, in general, similar to those of
their corresponding FAIF Funds. There are, however, differences. For example,
the Qualivest Diversified Bond Fund invests in securities and instruments that
are generally similar in type to those purchased by the FAIF Fixed Income Fund.
However, securities purchased by the Qualivest Diversified Bond Fund have a
weighted average maturity of seven to eleven years under normal market
conditions, whereas the weighted average maturity of securities purchased by the
FAIF Fixed Income Fund will not exceed 15 years under normal market conditions.
In general, the values of fixed-rate debt securities with longer maturities are
more sensitive to changes in market interest rates than the values of such
securities with shorter maturities.
The Qualivest Large Companies Value Fund has an objective of long-term capital
appreciation and invests primarily in common stocks and securities convertible
into common stocks of companies with capitalizations of $1 billion or more at
the time of purchase. In selecting portfolio securities for the Qualivest Large
Companies Value Fund, consideration may be given to income and payment of
dividends. FAIF Stock Fund has a slightly different objective -- capital
appreciation with a secondary
<PAGE>
objective of current income -- and invests primarily in common stocks of
companies with market capitalizations of at least $500 million. Thus, the
average market capitalization of the FAIF Stock Fund could be smaller than that
of the Qualivest Large Companies Value Fund.
The Qualivest Optimized Stock Fund seeks capital appreciation by investing
primarily in common stocks and securities convertible into common stocks of
companies whose securities are listed on the Standard & Poor's 500 Composite
Stock Price Index (the "S&P 500"). The FAIF Equity Index Fund also invests
substantially in common stocks included in the S&P 500. However, the FAIF Fund
seeks to provide investment results that correspond to the performance of the
S&P 500 while the Qualivest Portfolio seeks to outperform the S&P 500 over time.
The FAIF Fund is managed by a computer program that identifies which stocks
should be purchased or sold in order to replicate, as closely as possible, the
composition of the S&P 500. By contrast, the Qualivest Portfolio seeks to
optimize its investment in S&P 500 companies and outperform the S&P 500 over
time by investing in securities that, on the basis of computerized modeling and
performance optimization strategies, demonstrate attributes that indicate
performance superior to that of the S&P 500 as a whole.
The investment objective of each Qualivest Portfolio is fundamental, which means
that it cannot be changed without the vote of a majority of the outstanding
shares (as defined in the 1940 Act) of such Portfolio. Each FAIF Fund's
investment objective is non-fundamental, which means that it can be changed
without a vote of shareholders. Shareholders will receive written notification
at least 30 days prior to any change in an FAIF Fund's investment objective.
Additional information is provided below under "Comparison of FAIF and Qualivest
- -- Investment Objectives and Policies" and in Appendix IV to this Combined Proxy
Statement/Prospectus, which sets forth the investment objectives and certain
significant investment policies and limitations of the FAIF Funds and the
Qualivest Portfolios.
As discussed under "Comparison of FAIF and Qualivest -- Investment Advisory Fees
and Total Expense Ratios," FBNA currently serves as the investment adviser to
each Existing FAIF Fund, and will serve as the investment adviser to each of the
New FAIF Funds. Table III thereunder shows the investment advisory fees paid by
the Qualivest Portfolios during their latest fiscal year and the investment
advisory fees that would be paid after consummation of the Reorganization. Table
III also shows that in all cases, except with respect to the Class A and Class Y
shares of Diversified Bond Fund, the overall expense ratios of the FAIF Funds,
after waivers, are expected to be less than the overall expense ratios of the
corresponding Qualivest Portfolios. In addition, in this regard, FBNA has agreed
that for the period commencing on the Closing and continuing until September 30,
1998, FBNA will waive fees and reimburse expenses to the FAIF Funds to the
extent necessary to maintain overall total Fund operating expense ratios at the
pro forma expense levels provided in Table III. The Qualivest Portfolios and
FAIF Funds have different administrators, distributors, transfer agents,
independent auditors and trustees/directors, as discussed under "Comparison of
FAIF and Qualivest -- Information About FBNA and Other Service Providers."
Appendix V to this Combined Proxy Statement/Prospectus provides additional
information about the fees and expenses for each of the FAIF Funds and
corresponding Qualivest Portfolios.
As discussed under "Comparison of FAIF and Qualivest -- Share Structure," the
FAIF Funds will issue Class A shares and Institutional Class shares in
connection with the Reorganization. The FAIF Funds also offer Class B shares.
Class A and Class B shares of the FAIF Funds are sold to the general public as
well as to retail customers of banks and other institutions. Class A shares are
sold with a front-end sales charge. Class B shares are sold at net asset value,
but are subject to a contingent deferred sales charge if sold during the first
six years after purchase. In addition, Class B shares are subject to higher Rule
12b-1 fees than Class A shares. Institutional Class 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. Such
shares are offered at net asset value without any front-end or contingent
deferred sales charge and are not subject to any Rule 12b-1 fees. Each of the
Qualivest Portfolios offers Class A, Class C and Class Y Shares. Class A and
Class Y Shares of the Qualivest Portfolios are similarly structured to Class A
and Institutional Class Shares, respectively, of the FAIF Funds. Class C Shares
of the Qualivest Portfolios are offered at net asset value, but are subject to a
<PAGE>
contingent deferred sales charge if shares are redeemed less than one year after
purchase. In addition, Class C Shares are subject to higher Rule 12b-1 fees than
the other Qualivest Portfolio share classes.
With certain exceptions, the purchase, redemption, dividend and other policies
and procedures of the FAIF Funds and the Qualivest Portfolios are generally
similar. Additional information concerning these policies and procedures for the
Qualivest Portfolios and the FAIF Funds is discussed further under "Comparison
of FAIF and Qualivest -- Shareholder Transactions and Services" and in Appendix
VII to this Combined Proxy Statement/Prospectus. There are certain differences
with respect to the front-end sales charge structures. For purchases of less
than $50,000, the front-end sales charge applicable to new purchases of Class A
shares of the equity FAIF Funds is the same as the front-end sales charge
currently applicable to Class A shares of the equity Qualivest Portfolios. For
purchases of $50,000 or more, the front-end sales charge is greater for the FAIF
Funds. For funds investing primarily in debt securities, the front-end sales
charge applicable to Class A shares is generally greater for the FAIF Funds. NO
FRONT-END OR CONTINGENT DEFERRED SALES CHARGE WILL BE IMPOSED ON ANY OF THE FAIF
FUND SHARES THAT ARE ISSUED TO QUALIVEST SHAREHOLDERS IN CONNECTION WITH THE
REORGANIZATION.
QUALIVEST AND FAIF BOARD CONSIDERATIONS. In reviewing the proposed
Reorganization, the Boards of Qualivest and FAIF considered, among other
things, (i) the terms and conditions of the Reorganization Agreement,
including provisions intended to avoid the dilution of shareholder interests;
(ii) the investment management capabilities of FBNA; (iii) the systems
capabilities of FBNA to provide shareholder servicing, reporting and systems
integration with related bank programs for Qualivest Portfolio shareholders;
(iv) the similarity of the distribution channels used by the FAIF Funds and
the Qualivest Portfolios; (v) the investment objectives, policies and
limitations of the Portfolios and the Funds; (vi) the historical investment
performance of the Portfolios and the Funds; (vii) the historical and
projected operating expenses of the Portfolios and the Funds; and (viii) the
anticipated tax treatment of the Reorganization. See "Information Relating to
the Proposed Reorganization -- Board Considerations."
Based upon their evaluations of the information presented to them, and in light
of their fiduciary duties under Federal and state law, the Board of Trustees of
Qualivest and the Board of Directors of FAIF, including all of the members of
each Board who are not interested persons, as that term is defined in the 1940
Act, of Qualivest or FAIF, have determined that the proposed Reorganization is
in the best interests of the shareholders of each Qualivest Portfolio and each
FAIF Fund, respectively, and that the interests of the shareholders of the
respective Portfolios and Funds will not be diluted as a result of the
Reorganization. QUALIVEST'S BOARD OF TRUSTEES RECOMMENDS THAT THE QUALIVEST
SHAREHOLDERS APPROVE THE REORGANIZATION AGREEMENT.
VOTING INFORMATION This Combined Proxy Statement/Prospectus is being furnished
in connection with the solicitation of proxies by Qualivest's Board of Trustees
for a Special Meeting of Shareholders to be held at the offices of on ________ ,
1997 at _______ A.M. _________ Time. (This special meeting and any
adjournment(s) thereof are referred to as the "Meeting.") Only shareholders of
record at the close of business on ________ , 1997 will be entitled to vote at
the Meeting. Shares are entitled to one vote for each dollar of value invested
and a proportionate fractional vote for any fraction of a dollar invested.
Shares represented by a properly executed proxy will be voted in accordance with
the instructions thereon or, if no specification is made, the persons named as
proxies will vote in favor of each proposal set forth in the Notice of Meeting.
Proxies may be revoked at any time before they are exercised by submitting to
Qualivest a written notice of revocation or a subsequently executed proxy or by
attending the Meeting and voting in person. However, attendance at the Meeting
will not by itself serve to revoke a proxy. For additional information,
including a description of the shareholder votes required for approval of the
Interim Advisory Agreements and the Reorganization Agreement, see "Information
Relating to Voting Matters."
PRINCIPAL RISK FACTORS
COMMON RISKS. Because of the similarities of the investment objectives, policies
and restrictions of the Qualivest Portfolios and their corresponding FAIF Funds,
management believes that an
<PAGE>
investment in an FAIF Fund involves risks that are generally similar to those of
the corresponding Qualivest Portfolio. These investment risks, in general, are
those typically associated with investing in a portfolio of government or
investment grade bonds in the case of funds investing primarily in debt
securities; and common stocks and securities convertible into common stocks in
the case of funds investing primarily in equity securities. Such risks include
the following:
INTEREST RATE RISK. The Qualivest Portfolios and the FAIF Funds that invest in
fixed-rate debt securities are subject to interest rate risk, which is the risk
that the value of a fixed-rate debt security will decline due to changes in
market interest rates. 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 and Portfolios bear the risk that increases in market interest rates
will cause the value of the Portfolio's or Fund's portfolio investments to
decline.
CREDIT RISK. The Qualivest Portfolios and the FAIF Funds that invest in debt
securities also are subject to credit risk. Credit risk is the risk that the
issuer of a debt security will fail to make payments on the security when due.
Securities issued or guaranteed by the U.S. Government generally are viewed as
carrying minimal credit risk. Securities issued by governmental entities but not
backed by the full faith and credit of the U.S. government, and securities
issued by private entities, are subject to higher levels of credit risk. The
Qualivest Intermediate Bond Fund and Diversified Bond Fund and the FAIF
Intermediate Term Income Fund and Fixed Income Fund can each invest in debt
securities rated as low as BBB by Standard & Poor's Corporation or Baa by
Moody's Investors Service, Inc., or which have been assigned an equivalent
rating by another nationally recognized statistical rating organization or are
of comparable quality in the judgment of the investment 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 corporate 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 a corporate 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 corporate 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 Fund or Portfolio is called during a period of declining
interest rates, the Fund or Portfolio 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 or the Portfolio's income. To
the extent that the Funds or Portfolios invest in callable corporate bonds,
shareholders bear the risk that reductions in income will result from the call
of bonds. Most U.S. government securities are not callable before their stated
maturity, although U.S. agency securities often are.
MORTGAGE-BACKED SECURITIES. Because residential mortgage loans generally can be
prepaid in whole or in part by the borrowers at any time without any prepayment
penalty, the holder of a mortgage-backed security which represents an interest
in a pool of such mortgage loans is subject to a form of call risk which is
generally called "prepayment risk." In addition, it is more difficult to predict
the effect of changes in market interest rates on the return on mortgaged-backed
securities than to predict the effect of such changes on the return of a
conventional fixed-rate debt instrument and the magnitude of such effects may be
greater in some cases. For these reasons, a Fund's or a Portfolio's investments
in mortgage-backed securities may involve greater risks than investments in
governmental or corporate bonds.
RISKS OF 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. Each of the Funds and Portfolios investing in equity securities is
subject to the risk of generally adverse equity markets.
SMALL-CAPITALIZATION COMPANIES. Qualivest Small Companies Value Fund and FAIF
Small Cap Value Fund emphasize investments in companies with relatively small
market capitalizations. The equity securities of such companies frequently have
experienced greater price volatility in the past than those
<PAGE>
of larger-capitalization companies, and they may be expected to do so in the
future. The other Portfolios and Funds that invest primarily in equity
securities may invest lesser proportions of their assets in such issues.
FOREIGN SECURITIES. Qualivest International Opportunities Fund and FAIF
International Index Fund invest primarily in equity securities which trade in
markets other than the United States. The other Funds and Portfolios (other than
Qualivest Optimized Stock Fund and FAIF Equity Index Fund) may invest lesser
proportions of their assets in foreign securities. 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 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.
OTHER. The Portfolios and Funds may engage in certain investment techniques to
the extent set forth in their respective prospectuses. These techniques include
entering into repurchase agreements, reverse repurchase agreements (the
Qualivest Portfolios only) and dollar roll agreements (the Qualivest Portfolios
only), purchasing and selling put and call options, entering into futures
contracts, purchasing securities on a when-issued or delayed-delivery basis and
lending portfolio securities. These techniques involve certain risks, as
described in the prospectuses for the Existing FAIF Funds and the Qualivest
Portfolios which are incorporated by reference in this Combined Proxy
Statement/Prospectus, and in the preliminary prospectuses for the Class A and
Class B shares and for the Institutional Class shares of the New FAIF Funds,
which are attached to this Combined Proxy Statement/Prospectus as Appendix VIII
and Appendix IX, respectively.
DIFFERING RISKS OF CERTAIN QUALIVEST PORTFOLIOS AND FAIF FUNDS. As discussed
above, securities purchased by the Qualivest Diversified Bond Fund have a
weighted average maturity of seven to eleven years under normal market
conditions, whereas the weighted average maturity of securities purchased by the
FAIF Fixed Income Fund will not exceed 15 years under normal market conditions.
In general, the values of fixed-rate debt securities with longer maturities are
more sensitive to changes in market interest rates than the values of such
securities with shorter maturities. Thus, to the extent the weighted average
maturity of the FAIF Fixed Income Fund is longer than that of the Qualivest
Diversified Bond Fund, the FAIF Fund should be expected to have greater
volatility in periods of changing market interest rates. The weighted average
maturities of the Qualivest Diversified Bond Fund and the FAIF Fixed Income Fund
were 12.08 years and 8.04 years, respectively, as of June 30, 1997.
The Qualivest Large Companies Value Fund invests primarily in common stocks and
securities convertible into common stocks of companies with capitalizations of
$1 billion or more at the time of purchase. The FAIF Stock Fund invests
primarily in common stocks of companies with market capitalizations of at least
$500 million. The shares of FAIF Stock Fund may be subject to greater price
volatility than the shares of Qualivest Large Companies Value Fund to the extent
the FAIF Fund invests a greater portion of its assets in companies with smaller
market capitalizations. However, such companies may offer the potential for
greater long-term growth.
<PAGE>
Each of FAIF Intermediate Term Income Fund and FAIF Fixed Income Fund may invest
up to 10% of its total assets, in the aggregate, in interest-only,
principal-only and inverse floating rate mortgage-backed securities. These
securities are particularly sensitive to changes in interest rates and in the
rate at which the mortgage loans underlying the securities are prepaid by
borrowers, and they can be highly volatile. Neither FAIF Fund currently holds
any such securities. The corresponding Qualivest Portfolios, Qualivest
Intermediate Bond Fund and Qualivest Diversified Bond Fund, do not invest in
such securities.
INFORMATION RELATING TO THE INTERIM ADVISORY AGREEMENT
THE MERGER OF U.S. BANCORP INTO FIRST BANK SYSTEM, INC. On August 1, 1997,
pursuant to an Agreement and Plan of Merger, U.S. Bancorp merged with and into
FBS and the name of FBS was changed to U.S. Bancorp ("New U.S. Bancorp"). As a
result of this Holding Company Merger, Qualivest Capital, the investment adviser
to the Qualivest Portfolios, became an indirect wholly-owned subsidiary of New
U.S. Bancorp. In accordance with the terms of the Old Advisory Agreement and
consistent with the requirements of the 1940 Act, this change in control of
Qualivest Capital resulted in the automatic and immediate termination of the Old
Advisory Agreement. The Old Advisory Agreement was dated July 29, 1994, was
adopted by the sole shareholder of each Qualivest Portfolio prior to
commencement of operations, and was last approved by the Qualivest Board of
Trustees on June 17, 1997. Table III, under "Comparison of FAIF and Qualivest --
Investment Advisory Fees and Total Expense Ratios," shows for their latest
fiscal year the advisory fees actually paid to Qualivest Capital by the
Qualivest Portfolios after waivers, the effective rate of such payments and the
contractual rate that Qualivest Capital was entitled to receive.
To better ensure that this automatic termination would not disrupt the
investment advisory services provided to the Qualivest Portfolios, Qualivest,
Qualivest Capital and FBNA filed an exemptive application with the SEC on May
12, 1997 and an amendment on June 12, 1997. This application requested that the
SEC permit FBNA to act as investment adviser to the Qualivest Portfolios after
the termination of the Old Advisory Agreement, but prior to obtaining the
approval of the shareholders of the Qualivest Portfolios of the Interim Advisory
Agreement. In this connection, this application also requested that the SEC
permit FBNA to receive fees during the Interim Period from each Qualivest
Portfolio, under the Interim Advisory Agreement, subject to approval by
Qualivest's shareholders at a meeting to be held no later than November 28,
1997. In connection with this application, FBNA agreed to take steps to ensure
that the scope and quality of the investment advisory services will be the same
during the Interim Period as previously provided to Qualivest by Qualivest
Capital. The requested Order was granted by the SEC on July 29, 1997.
THE INTERIM ADVISORY AGREEMENT. As a result of the automatic termination of the
Old Advisory Agreement as described above, the Trustees are proposing that the
shareholders of the Qualivest Portfolios ratify and approve the Interim Advisory
Agreement. The Interim Advisory Agreement became effective on August 1, 1997,
the effective time of the Holding Company Merger. Pending such ratification and
approval, in accordance with the conditions of the Order, all fees payable by
the Qualivest Portfolios under the Interim Advisory Agreement are being held in
escrow. Such escrowed fees attributable to a Qualivest Portfolio will be
received by FBNA only if the Interim Advisory Agreement is ratified and approved
by the shareholders of such Portfolio. If ratified and approved, the Interim
Advisory Agreement will continue in effect for successive one year terms,
subject to certain annual approval requirements, or until the Closing (which,
subject to various conditions described herein, is expected to occur on or about
November 21, 1997), whichever occurs earlier. In the event the Interim Advisory
Agreement is not ratified and approved with respect to a Qualivest Portfolio, in
accordance with the conditions of the Order, the escrowed fees payable by that
Portfolio will be returned to the Portfolio and Qualivest's Board of Trustees
will consider what actions should be taken with respect to management of the
assets of the Qualivest Portfolio until a new investment advisory agreement is
approved by the shareholders of the Portfolio or the Reorganization occurs.
As more fully described below, the terms of the Interim Advisory Agreement are
substantially identical to the terms of the Old Advisory Agreement, except for
(i) the change in the investment
<PAGE>
adviser, (ii) the effective date, (iii) the termination date and (iv) inclusion
of a provision requiring that all fees payable by each Qualivest Portfolio under
the Interim Advisory Agreement be held in escrow until the Agreement is approved
by such Portfolio's shareholders. The advisory fee rates payable under the
Interim Advisory Agreement are identical to those payable under the Old Advisory
Agreement. A copy of the Interim Advisory Agreement is attached to this Combined
Proxy Statement/Prospectus as Appendix I.
Pursuant to the Interim Advisory Agreement, FBNA agrees to provide, subject to
the supervision of Qualivest's Board of Trustees, a continuous investment
program for the Qualivest Portfolios, including investment research and
management with respect to all securities and investments and cash equivalents
in the Portfolios. FBNA will determine from time to time what securities and
other investments will be purchased, retained or sold by Qualivest with respect
to the Portfolios, and will provide the services under the Interim Advisory
Agreement in accordance with each Portfolio's investment objectives, policies
and restrictions. Responsibilities under the Interim Advisory Agreement also
include placing or causing to be placed orders for the Portfolios, either
directly with the issuer or with any broker or dealer; maintaining books and
records with respect to each Qualivest Portfolio's securities transactions;
providing to Qualivest's Board of Trustees such periodic and special reports as
the Board may request; and using its best efforts to obtain and provide to
Qualivest's fund accountant price information with respect to any security held
by a Portfolio, when requested to do so by Qualivest's accountant. The Interim
Advisory Agreement provides that FBNA will pay its own expenses incurred in
connection with its activities under the Interim Advisory Agreement other than
the cost of securities (including brokerage commissions, if any) purchased for
the Portfolios.
Pursuant to the Interim Advisory Agreement, FBNA agrees that in placing orders
with brokers and dealers it will attempt to obtain prompt execution of orders in
an effective manner at the most favorable price. The Interim Advisory Agreement
authorizes FBNA, consistent with such obligation and to the extent permitted by
the 1940 Act, to purchase and sell portfolio securities to and from brokers and
dealers who provide FBNA with research advice and other services when the
execution and price offered by two or more brokers or dealers are comparable.
Such research advice might consist of reports and statistics on specific
companies or industries, general summaries of groups of stocks or bonds and
their comparative earnings and yields, or broad overviews of the securities
markets and the economy.
Supplementary research information so received is in addition to, and not in
lieu of, services required to be performed by FBNA and does not reduce the
advisory fees payable to FBNA by the Qualivest Portfolios. It is possible that
certain of the supplementary research or other services received will primarily
benefit one or more other investment companies or other accounts for which FBNA
exercises investment discretion. Conversely, a Qualivest Portfolio may be the
primary beneficiary of the research or services received as a result of
portfolio transactions effected for such other investment company or account.
Portfolio securities will not be purchased from or sold to FBNA, Qualivest's
distributor or any affiliated person (as defined in the 1940 Act) of the
foregoing companies except to the extent permitted by an SEC exemptive order or
by applicable law. FBNA may, however, cause the Qualivest Portfolios to pay
brokerage commissions to an affiliate of FBNA or of Qualivest's distributor on
securities acquired by the Qualivest Portfolios.
The Interim Advisory Agreement provides that FBNA will not be liable for any
error of judgment or mistake of law or for any loss suffered by Qualivest in
connection with the performance of the Interim Advisory Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on FBNA's part in the performance of its duties or
from reckless disregard by FBNA of its obligations and duties under the Interim
Advisory Agreement. Qualivest agrees in the Interim Advisory Agreement to
indemnify FBNA to the full extent permitted by Qualivest's Declaration of Trust.
The Interim Advisory Agreement provides that, unless sooner terminated, it will
continue in effect with respect to the Qualivest Portfolios for an initial
period of 120 days and thereafter for successive annual terms, provided that
such successive terms are specifically approved at least annually (a) by a vote
of a majority of those members of Qualivest's Board of Trustees who are not
parties to the
<PAGE>
Agreement or "interested persons" (as defined in the 1940 Act) of any party to
the Agreement, cast in person at a meeting called for the purpose of voting on
such approval, and (b) by the vote of a majority of the Board of Trustees of
Qualivest or, with respect to a particular Qualivest Portfolio, a vote of a
majority of the outstanding shares of such Portfolio.
The Interim Advisory Agreement provides that it will terminate immediately in
the event of its assignment and that it is terminable with respect to a
Qualivest Portfolio at any time without penalty by Qualivest (either by vote of
the Trustees or by vote of a majority of the outstanding shares of such
Portfolio), or by FBNA, on 60 days' written notice. To the extent required by
the 1940 Act, the Interim Advisory Agreement may not be amended as to a
Qualivest Portfolio without the approval of the shareholders of such Portfolio.
INFORMATION ABOUT FBNA. FBNA 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. FBNA
acts as the investment adviser to the Qualivest Portfolios through its First
Asset Management group. FBNA is a subsidiary of New U.S. Bancorp, 601 Second
Avenue South, Minneapolis, Minnesota 55480, which is a regional, multi-state
bank holding company headquartered in Minneapolis, Minnesota.
In addition to serving as the investment adviser to the Qualivest Portfolios,
FBNA acts as the investment advisor to a number of other mutual funds, including
the following series of FAIF that have investment objectives similar to those of
one or more of the Qualivest Portfolios. FBNA is entitled to receive advisory
fees from such series as follows:
<TABLE>
<CAPTION>
CURRENT
CONTRACTUAL ADVISORY
NET ASSETS AS OF ADVISORY FEE RATE
NAME OF FAIF SERIES JUNE 30, 1997 FEE RATE AFTER WAIVERS
<S> <C> <C> <C>
Stock Fund $1,065,554,369 0.70% 0.62%
Equity Index Fund $ 527,681,689 0.70% 0.16%
Diversified Growth Fund $ 592,029,154 0.70% 0.57%
Emerging Growth Fund $ 129,945,121 0.70% 0.63%
Regional Equity Fund $ 357,727,906 0.70% 0.68%
Special Equity Fund $ 515,319,003 0.70% 0.70%
Technology Fund $ 137,227,632 0.70% 0.59%
Health Sciences Fund $ 38,523,406 0.70% 0.00%
Real Estate Securities Fund $ 36,697,851 0.70% 0.00%
International Fund $ 209,421,079 1.25% 1.25%
Limited Term Income Fund $ 107,139,577 0.70% 0.46%
Intermediate Term Income Fund $ 153,588,480 0.70% 0.52%
Fixed Income Fund $ 660,337,231 0.70% 0.53%
Intermediate Government Bond Fund $ 179,490,927 0.70% 0.52%
</TABLE>
As of June 30, 1997, FBNA was managing accounts with an aggregate value of
approximately $42 billion, including mutual fund assets in excess of $14
billion. FBNA's main offices are located at 601 Second Avenue South,
Minneapolis, Minnesota 55480. Appendix II identifies the principal executive
officer and the directors of FBNA.
No officer or Trustee of Qualivest is an officer, employee, director, general
partner or shareholder of FBNA or any of its affiliates. In addition, no Trustee
of Qualivest has any material interest in any material transaction in which FBNA
or its affiliates is a party.
PAYMENTS TO FBNA AFFILIATES. Entities which, as a result of the Holding Company
Merger, are affiliates of FBNA have served as custodian for all Qualivest
Portfolios other than Qualivest International Opportunities Fund during the
fiscal year ended July 31, 1996 and have received fees pursuant to certain
distribution and shareholder service plans that have been in effect during such
year. The table below sets forth the amounts of the payments made to such
affiliates by the Qualivest Portfolios.
<PAGE>
DISTRIBUTION AND SHAREHOLDER
QUALIVEST PORTFOLIO CUSTODY FEES SERVICE PLAN FEES
Small Companies Value Fund $79,495 $22,396
Large Companies Value Fund $32,059 $11,220
Optimized Stock Fund $57,416 $ 1,620
Intermediate Bond Fund $44,896 $ 2,588
Diversified Bond Fund $41,389 $ 305
International Opportunities Fund $ 0 $ 5,025
It is expected that affiliates of FBNA will continue to receive custody,
distribution and shareholder servicing fees from the Qualivest Portfolios until
the Reorganization.
AFFILIATED BROKER COMMISSIONS. During the fiscal year ended July 31, 1996, the
Qualivest Portfolios paid no brokerage commissions in connection with purchases
and sales of portfolio securities to any parties that would be treated as an
affiliated broker as defined in Item 22(a)(1)(ii) of Schedule 14A under the
Securities Exchange Act of 1934, as amended.
SECTION 15(f) OF THE 1940 ACT. FBNA has agreed to use its best efforts to meet
the requirements for the statutory exemption offered by Section 15(f) of the
1940 Act to an investment adviser that receives "any amount or benefit" in
connection with the sale of interests that constitute a "change in control" of
the adviser. The statutory exemption under Section 15(f) is available provided
two conditions are satisfied: (1) for a three-year period following the
transaction, Qualivest or its successor (which, assuming the Reorganization is
consummated, may include FAIF) maintains a Board of Trustees or Directors at
least 75% of whose members are not "interested persons," as that term is defined
in the 1940 Act, of the predecessor or successor investment adviser, and (2) no
"unfair burden" is imposed on Qualivest as a result of the transaction. As
defined in the 1940 Act, an "unfair burden" includes any arrangement during the
two-year period after the change in control whereby the investment adviser (or
predecessor or successor adviser), or any interested person of such adviser,
receives or is entitled to receive any compensation directly or indirectly, from
the investment company or its security holders (other than fees for bona fide
investment advisory or other services), or from any person in connection with
the purchase or sale of securities or other property to, from, or on behalf of,
the investment company (other than fees for bona fide principal underwriting
services provided to the investment company). No such prohibited compensation
arrangements are contemplated in connection with either the Holding Company
Merger or the Reorganization.
APPROVAL OF QUALIVEST'S BOARD OF TRUSTEES. As described above, the Old Advisory
Agreement that was previously in effect for the Qualivest Portfolios
automatically terminated on August 1, 1997 as a result of the Holding Company
Merger. In anticipation of this termination, and in order to minimize any
potential disruption of the advisory services provided to the Qualivest
Portfolios, on May 8, 1997 the Qualivest Board of Trustees authorized the filing
of the exemptive application described above with the SEC in order to permit
FBNA to act as investment adviser to the Qualivest Portfolios on and after
August 1, 1997 but prior to obtaining shareholder approval. At such meeting the
Board concluded that retaining FBNA would be the most appropriate means for the
Qualivest Portfolios to receive after the Holding Company Merger advisory
services of comparable scope and quality to the services they received before
such Merger. In addition, at such meeting, Qualivest's Board of Trustees,
including all of the Trustees who are not interested persons (as that term is
defined in the 1940 Act) of Qualivest or FBNA (the "Non-Interested Trustees"),
approved the Interim Advisory Agreement with FBNA that became effective upon the
consummation of the Holding Company Merger on August 1, 1997. If approved by
shareholders at the Meeting, this agreement will continue in effect for the
remainder of the Interim Period and terminate, with respect to the Qualivest
Portfolios, upon the consummation of the Reorganization, at which point it will
no longer be needed since all Qualivest Portfolios will have been combined with
FAIF Funds.
In considering whether to approve the Interim Advisory Agreement and submit it
to shareholders for their approval, the Board of Trustees considered that a
number of the portfolio managers for the Qualivest Portfolios were expected to
leave the employ of Qualivest Capital by or shortly after the effective date of
the Holding Company Merger. In light of this, the Board of Trustees determined
that doubt existed whether the remaining personnel of Qualivest Capital, acting
alone, would be able to
<PAGE>
provide an appropriate scope and quality of advisory services to the Qualivest
Portfolios after the Holding Company Merger. Accordingly, it was necessary for
the Board to consider arrangements that would best avoid the harm to the
Portfolios that would result if Qualivest Capital's services proved to be
inadequate following the Holding Company Merger. In order to provide, to the
extent practicable, continuity of portfolio management and to avoid harm to the
Portfolios, FBNA proposed that the remaining portfolio managers for the
Qualivest Portfolios employed by Qualivest Capital become employees of FBNA at
the effective date of the Holding Company Merger. These individuals, together
with the large and experienced group of investment professionals already
employed by FBNA, then would assume management of the Portfolios at the
effective date of the Holding Company Merger pursuant to the Interim Advisory
Agreement.
The Board of Trustees determined that entering into the Interim Advisory
Agreement with FBNA would serve Portfolio shareholders better than any available
alternatives, in that it would (i) provide that the Portfolios would, to the
extent possible under the circumstances, continue to be managed by the same
individuals who managed them prior to the Holding Company Merger; (ii) ensure
that, to the extent portfolio managers of the Qualivest Portfolios departed
Qualivest Capital, the affected Portfolios would be managed after the Holding
Company Merger by a group of investment professionals which the Board had
determined could provide the appropriate scope and quality of advisory services;
and (iii) avoid the need for the Board to consider on an emergency, AD HOC basis
how to proceed if and to the extent additional portfolio managers decided to
leave Qualivest Capital.
The Board of Trustees also considered the following factors: (i) FBNA's
representations that it would provide investment advisory and other services to
the Qualivest Portfolios of a scope and quality comparable, in the Board's
judgment, to the scope and quality of services previously provided to the
Portfolios by Qualivest Capital; (ii) the substantially similar terms and
conditions contained in the Interim Advisory Agreement as compared to the Old
Advisory Agreement; and (iii) FBNA's representation that in the event of any
material change in personnel providing services under the Interim Advisory
Agreement during the Interim Period, the Board of Trustees of Qualivest would be
consulted for the purpose of assuring themselves that the services provided
would not be diminished in scope or quality.
Based on the foregoing factors, the Trustees concluded that approval of the
Interim Advisory Agreement was in the best interests of the Qualivest Portfolios
and their shareholders. The Board of Trustees further concluded that entering
into the Interim Advisory Agreement would be appropriate and fair considering
that (i) the fees to be paid, and the services to be provided therefor, would be
unchanged from the Old Advisory Agreement; (ii) the fees would be maintained in
an interest-bearing escrow account until payment was approved or disapproved by
shareholders of the Qualivest Portfolios; (iii) because of the relatively short
period for the consummation of the Holding Company Merger, there was
insufficient time to seek prior shareholder approval of the Interim Advisory
Agreement; and (iv) the non-payment of investment advisory fees during the
Interim Period would be an unduly harsh result to FBNA in view of the services
provided by FBNA to the Qualivest Portfolios, and the expenses incurred in
connection with such services, under the Interim Advisory Agreement.
Each Qualivest Portfolio will vote separately on a portfolio-by-portfolio basis
with respect to the approval of the Interim Advisory Agreement. QUALIVEST'S
BOARD OF TRUSTEES RECOMMENDS THAT QUALIVEST SHAREHOLDERS RATIFY AND APPROVE THE
INTERIM ADVISORY AGREEMENT AND THE RECEIPT OF INVESTMENT ADVISORY FEES BY FBNA
FOR THE PERIOD FROM AUGUST 1, 1997 FORWARD.
INFORMATION RELATING TO THE PROPOSED REORGANIZATION
The terms and conditions of the Reorganization are set forth in the
Reorganization Agreement. Significant provisions of the Reorganization Agreement
are summarized below; however, this summary is qualified in its entirety by
reference to the Reorganization Agreement, a copy of which is attached as
Appendix III to this Combined Proxy Statement/Prospectus.
DESCRIPTION OF THE REORGANIZATION AGREEMENT. The Reorganization Agreement
provides that at the Closing the assets and liabilities of the Qualivest
Portfolios will be transferred to corresponding FAIF Funds in exchange for full
and fractional shares of the FAIF Funds as shown in the following table.
<PAGE>
TABLE I
PORTFOLIOS AND CORRESPONDING FUNDS
QUALIVEST PORTFOLIO/SHARE CLASS CORRESPONDING FAIF FUND/SHARE CLASS
Small Companies Value Fund -- Small Cap Value Fund --
Class A Shares Class A Shares
Class C Shares Class A Shares
Class Y Shares Institutional Class Shares
Large Companies Value Fund -- Stock Fund --
Class A Shares Class A Shares
Class C Shares Class A Shares
Class Y Shares Institutional Class Shares
Optimized Stock Fund -- Equity Index Fund --
Class A Shares Class A Shares
Class C Shares Class A Shares
Class Y Shares Institutional Class Shares
Intermediate Bond Fund -- Intermediate Term Income Fund --
Class A Shares Class A Shares
Class C Shares Class A Shares
Class Y Shares Institutional Class Shares
Diversified Bond Fund -- Fixed Income Fund --
Class A Shares Class A Shares
Class C Shares Class A Shares
Class Y Shares Institutional Class Shares
International Opportunities -- Fund International Index Fund --
Class A Shares Class A Shares
Class C Shares Class A Shares
Class Y Shares Institutional Class Shares
The shares issued by each FAIF Fund in the Reorganization will have an aggregate
value equal to the aggregate value of the shares of the respective Qualivest
Portfolio that are outstanding immediately before the Closing. Immediately after
the Closing, the Qualivest Portfolios will distribute the shares of the FAIF
Funds received in the Reorganization to their shareholders in liquidation of the
Qualivest Portfolios. Each shareholder owning shares of a particular Qualivest
Portfolio at the Closing will receive shares of the designated class of the
corresponding FAIF Fund (as specified in the foregoing table) of equal value,
and will receive any unpaid dividends or distributions that were declared before
the Closing on their Qualivest Portfolio shares. FAIF will establish an account
for each former shareholder of the Qualivest Portfolios reflecting the
appropriate number of FAIF Fund shares distributed to the shareholder. These
accounts will be identical to the accounts currently maintained by Qualivest for
each shareholder. Shares of the FAIF Funds are in uncertificated form.
Upon completion of the Reorganization, all outstanding shares of the Qualivest
Portfolios will be redeemed and canceled in exchange for shares of the FAIF
Funds distributed. Thereafter, assuming that the seven investment portfolios of
Qualivest that are not parties to the Reorganization have been reorganized into
investment portfolios of First American Funds, Inc. or First American Strategy
Funds, Inc., Qualivest will wind up its affairs and be deregistered as an
investment company under the 1940 Act. The stock transfer books of the Qualivest
Portfolios will be permanently closed as of the Closing. Exchange or redemption
requests received thereafter will be deemed to be exchange or redemption
requests for shares of the FAIF Funds distributed to the former shareholders of
the Qualivest Portfolios.
The Reorganization is subject to a number of conditions, including approval of
the Reorganization Agreement by Qualivest Portfolio shareholders; the receipt of
certain legal opinions described in the Reorganization Agreement (which include
an opinion of counsel to FAIF that the FAIF Fund shares issued in the
Reorganization will be validly issued, fully paid and non-assessable); the
receipt of certain certificates from the parties concerning the continuing
accuracy of the representations and warranties in
<PAGE>
the Reorganization Agreement; and the parties' performance in all material
respects of their respective agreements and undertakings in the Reorganization
Agreement. Assuming satisfaction of the conditions in the Reorganization
Agreement, the Closing will be effective on November 21, 1997 or such other date
as agreed to by the parties.
FBNA has undertaken to bear any Reorganization expenses incurred by the
Qualivest Portfolios and FAIF Funds, including the costs associated with this
Combined Proxy Statement/Prospectus and the Meeting, but not including share
registration expenses.
The Reorganization may be abandoned at any time prior to the Closing upon the
mutual consent of both Qualivest and FAIF, or by either Qualivest or FAIF if
determined by the Board of Trustees or Directors that proceeding with the
Reorganization is inadvisable. The Reorganization Agreement provides further
that at any time before or (to the extent permitted by law) after approval of
the agreement by the shareholders of Qualivest (i) the parties may, by written
agreement authorized by their respective Boards of Trustees/Directors and with
or without the approval of their shareholders, amend any of the provisions of
the Reorganization Agreement and (ii) either party may waive any default by the
other party or the failure to satisfy any of the conditions to its obligations
(the waiver to be in writing and authorized by the Board of Trustees/Directors
of the waiving party with or without the approval of such party's shareholders).
QUALIVEST BOARD CONSIDERATIONS. At its May 8, 1997 meeting at which the Interim
Advisory Agreement described above was approved, the Qualivest Board of Trustees
was advised that FBNA was also considering the possibility of consolidating the
Qualivest Portfolios with the FAIF Funds following the Holding Company Merger.
Following that meeting, FBNA provided information requested by the Board
relating to the possible consolidation of the two fund groups. This information
was reviewed in detail by the independent trustees of Qualivest at a meeting
held on June 16, 1997 and by the full Qualivest Board of Trustees at a meeting
held June 17, 1997, at which the proposal that the Qualivest Portfolios be
reorganized into the FAIF Funds, as set forth in the Reorganization Agreement,
was approved by the Board of Trustees of Qualivest.
During its deliberations, Qualivest's Board of Trustees (with the advice and
assistance of independent counsel) reviewed, among other things: (i) the
potential effect of the Reorganization on the shareholders of the Qualivest
Portfolios; (ii) the investment management capabilities of FBNA; (iii) the
systems capabilities of FBNA to provide shareholder servicing, reporting and
systems integration with related bank programs for Qualivest Portfolio
shareholders; (iv) the similarity of the distribution channels used by the FAIF
Funds and the Qualivest Portfolios; (v) the investment advisory and other fees
paid by the FAIF Funds, and the historical and projected expense ratios of the
FAIF Funds as compared to those of the Qualivest Portfolios; (vi) the potential
economies of scale that may result from the Reorganization given the fact that
each of the Existing FAIF Funds is larger than its corresponding Qualivest
Portfolio; (vii) the expected cost-savings for certain of the Qualivest
Portfolios as a result of the Reorganization; (viii) the investment objectives,
policies and limitations of the FAIF Funds and their relative compatibility with
those of the Qualivest Portfolios as discussed further in this Combined Proxy
Statement/Prospectus; (ix) the historical investment performance records of the
Qualivest Portfolios and the Existing FAIF Funds; (x) the terms and conditions
of the Reorganization Agreement, including those provisions that were intended
to avoid dilution of the interests of Qualivest's shareholders; (xi) the sales
load structure applicable to the FAIF Funds as compared to the sales loads
applicable to the Qualivest Portfolios; (xii) the greater number of investment
portfolio options that would be available to shareholders after the
Reorganization; and (xiii) the anticipated tax treatment of the Reorganization
for the respective Qualivest Portfolios and their shareholders.
In connection with the foregoing, Qualivest's Board of Trustees noted that FAIF
had undertaken to create the two New FAIF Funds that have investment objectives
and policies similar to those of their corresponding Qualivest Portfolios.
Qualivest's Board of Trustees also noted FBNA's offer to pay the expenses
incurred by Qualivest and FAIF in connection with the Reorganization and to
continue, at FBNA's expense, the Board of Trustees' liability coverage currently
carried by Qualivest. In addition, Qualivest's Board of Trustees considered
FBNA's written commitment that it would waive fees and reimburse expenses to the
extent
<PAGE>
necessary so that after the Closing and until September 30, 1998, the total fund
operating expense ratios of the FAIF Funds (excluding interest, taxes, brokerage
commissions, litigation expenses and extraordinary expenses) do not exceed the
pro forma expense ratios set forth in Appendix V to this Combined Proxy
Statement/Prospectus. These ordinary operating expense ratios are lower than
those currently applicable to the respective Qualivest Portfolios, other than
the Class A and Class Y shares of Qualivest Diversified Bond Fund. FBNA has also
committed that, from October 1, 1998 through September 30, 1999, it will waive
fees and reimburse expenses to the extent necessary so that no FAIF Fund will
have total fund operating expense ratios in excess of those currently applicable
to its corresponding Qualivest Portfolio (other than Qualivest Diversified Bond
Fund), as set forth in Appendix V. With respect to the Qualivest Diversified
Bond Fund, FBNA has committed to maintain the total fund operating expense ratio
of the Class A and Institutional Class shares of the corresponding FAIF Fixed
Income Fund at 0.95% and 0.70% (annualized), respectively, through September 30,
1999. The current total operating expense ratios of the Class A, Class C and
Class Y shares of the Qualivest Diversified Bond Fund are 0.85%, 1.58% and
0.61%, respectively. In considering this commitment, Qualivest's Board of
Trustees noted that a portion of the investment advisory fee for the Qualivest
Diversified Bond Fund was currently being waived; that without this waiver the
annualized total fund operating expense ratio of the Qualivest Bond Fund would
be approximately 1.15%, 1.88% and 0.91% for Class A, Class C and Class Y shares,
respectively; and that, in the absence of the Reorganization, this waiver could
be terminated at any time after July 31, 1997. The Board of Trustees also noted
the better historical investment performance of the FAIF Fixed Income Fund as
compared to the Qualivest Diversified Bond Fund.
After consideration of all of the factors described above, the Qualivest Board
of Trustees determined that the Reorganization Agreement was in the best
interests of the shareholders of each Qualivest Portfolio, and that the
interests of the shareholders of the respective Portfolios would not be diluted
as a result of the Reorganization.
BISYS Fund Services has asserted that consummation of the Reorganization would
cause certain amounts to become payable to it under its administration and fund
accounting agreements with Qualivest. The Qualivest Board of Trustees' approval
of the Reorganization is conditioned upon FBNA and BISYS Fund Services reaching
agreement as to the amount, if any, which is so payable and FBNA's payment of
such amount. Discussions between BISYS Fund Services and FBNA regarding this
matter are under way.
CAPITALIZATION. Four of the Qualivest Portfolios will be reorganized into the
four Existing FAIF Funds, and two of the Qualivest Portfolios will be
reorganized into two Funds that are being created by FAIF and that will have
nominal assets and liabilities at the Closing. The following table sets forth,
as of June 30, 1997, (i) the capitalization of each of the four Qualivest
Portfolios that will be reorganized into Existing FAIF Funds; (ii) the
capitalization of each of the corresponding Existing FAIF Funds involved; and
(iii) the pro forma capitalization of each of the Existing FAIF Funds as
adjusted to give effect to the Reorganization of the foregoing Portfolios. The
capitalization of each Qualivest Portfolio and Existing FAIF Fund is likely to
be different at the Closing as a result of daily share purchase and redemption
activity in the Portfolios and the Funds as well as the effects of the
Portfolios' and the Funds' other ongoing operations. Because the other two
Qualivest Portfolios are to be reorganized into the New FAIF Funds, which will
have nominal assets and liabilities before the Reorganization, information on
the capitalization of these other Portfolios and Funds is not presented.
<PAGE>
TABLE II
PRO FORMA CAPITALIZATION (AS OF JUNE 30, 1997)
(IN THOUSANDS, EXCEPT PER SHARE VALUES)
QUALIVEST LARGE COMPANIES VALUE FUND/FAIF STOCK FUND
QUALIVEST
PORTFOLIO FAIF FUND PRO FORMA
Class A Shares
Net assets $ 7,456 $ 37,067 $ 45,612
Net asset value per share $ 14.89 $ 26.45 $ 26.45
Shares outstanding 501 1,402 1,725
Class B Shares(1)
Net assets -- $ 44,732 $ 44,732
Net asset value per share -- $ 26.28 $ 26.28
Shares outstanding -- 1,702 1,702
Class C (Level Load)
Shares(2)
Net assets $ 1,089 -- --
Net asset value per share $ 14.65 -- --
Shares outstanding 74 -- --
Institutional Class Shares(3)
Net assets $170,601 $ 983,755 $1,154,356
Net asset value per share $ 14.98 $ 26.45 $ 26.45
Shares outstanding 11,392 37,189 43,641
Total Net Assets $179,146 $1,065,554 $1,244,700
(1) Not offered by Qualivest.
(2) Not offered by FAIF.
(3) Class Y shares of Qualivest, Class C shares of FAIF.
QUALIVEST OPTIMIZED STOCK FUND/FAIF EQUITY INDEX FUND
QUALIVEST
PORTFOLIO FAIF FUND PRO FORMA
Class A Shares
Net assets $ 4,966 $ 12,938 $ 18,375
Net asset value per share $ 15.90 $ 19.41 $ 19.41
Shares outstanding 312 666 946
Class B Shares(1)
Net assets -- $ 17,485 $ 17,485
Net asset value per share -- $ 19.33 $ 19.33
Shares outstanding -- 904 904
Class C (Level Load)
Shares(2)
Net assets $ 471 -- --
Net asset value per share $ 15.82 -- --
Shares outstanding 30 -- --
Institutional Class Shares(3)
Net assets $321,290 $497,256 $818,546
Net asset value per share $ 15.93 $ 19.40 $ 19.40
Shares outstanding 20,173 25,632 42,197
Total Net Assets $326,727 $527,679 $854,406
(1) Not offered by Qualivest.
(2) Not offered by FAIF.
(3) Class Y shares of Qualivest, Class C shares of FAIF.
<PAGE>
QUALIVEST INTERMEDIATE BOND FUND/FAIF INTERMEDIATE TERM INCOME FUND
QUALIVEST
PORTFOLIO FAIF FUND PRO FORMA
Class A Shares
Net assets $ 729 $ 2,675 $ 3,454
Net asset value per share $ 9.94 $ 9.88 $ 9.88
Shares outstanding 73 271 349
Class B Shares(1)
Net assets -- $ 0 $ 0
Net asset value per share -- $ 0 $ 0
Shares outstanding -- 0 0
Class C (Level Load)
Shares(2)
Net assets $ 50 -- --
Net asset value per share $ 9.87 -- --
Shares outstanding 5 -- --
Institutional Class Shares(3)
Net assets $184,010 $150,914 $334,924
Net asset value per share $ 10.04 $ 9.88 $ 9.88
Shares outstanding 18,324 15,268 33,889
Total Net Assets $184,789 $153,589 $338,378
(1) Not offered by Qualivest.
(2) Not offered by FAIF.
(3) Class Y shares of Qualivest, Class C shares of FAIF.
QUALIVEST DIVERSIFIED BOND FUND/FAIF FIXED INCOME FUND
QUALIVEST
PORTFOLIO FAIF FUND PRO FORMA
Class A Shares
Net assets $ 416 $ 7,922 $ 8,360
Net asset value per share $ 9.91 $ 10.78 $ 10.78
Shares outstanding 42 735 776
Class B Shares(1)
Net assets -- $ 15,163 $ 15,163
Net asset value per share -- $ 10.72 $ 10.72
Shares outstanding -- 1,414 1,414
Class C (Level Load)
Shares(2)
Net assets $ 22 -- --
Net asset value per share $ 9.48 -- --
Shares outstanding 2 -- --
Institutional Class Shares(3)
Net assets $250,526 $637,252 $887,778
Net asset value per share $ 10.13 $ 10.77 $ 10.77
Shares outstanding 24,740 59,155 82,425
Total Net Assets $250,964 $660,337 $911,301
(1) Not offered by Qualivest.
(2) Not offered by FAIF.
(3) Class Y shares of Qualivest, Class C shares of FAIF.
<PAGE>
FEDERAL INCOME TAX TREATMENT. Consummation of the Reorganization with respect to
each Qualivest Portfolio is subject to the condition that Qualivest and FAIF
receive an opinion from Dorsey & Whitney LLP, counsel to FAIF, to the effect
that, for federal income tax purposes: (i) the transfer of all of the assets and
liabilities of each Qualivest Portfolio to its corresponding FAIF Fund in
exchange for shares of the FAIF Fund and the distribution of these FAIF shares
to shareholders of the Qualivest Portfolio, as described in the Reorganization
Agreement, will constitute a reorganization within the meaning of Section
368(a)(1)(C), Section 368(a)(1)(D) or Section 368(a)(1)(F) of the Internal
Revenue Code of 1986, as amended (the "Code"); (ii) no income, gain or loss will
be recognized by the Qualivest Portfolios as a result of these transactions;
(iii) no income, gain or loss will be recognized by the FAIF Funds as a result
of these transactions; (iv) no income, gain or loss will be recognized by the
shareholders of each Qualivest Portfolio on the distribution to them of shares
of the corresponding FAIF Fund in exchange for their shares of the Qualivest
Portfolio (but shareholders of a Qualivest Portfolio subject to taxation will
recognize income upon receipt of any net investment income or net capital gains
of such Qualivest Portfolio which are distributed by such Qualivest Portfolio
prior to the Closing); (v) the tax basis of FAIF Fund shares received by a
shareholder of a Qualivest Portfolio will be the same as the tax basis of the
shareholder's Qualivest Portfolio shares immediately before the Reorganization;
(vi) the tax basis to each FAIF Fund of the assets of the corresponding
Qualivest Portfolio received pursuant to the Reorganization will be the same as
the tax basis of the assets in the hands of the Qualivest Portfolio immediately
before the Reorganization; (vii) a shareholder's holding period for FAIF Fund
shares will be determined by including the period for which the shareholder held
the Qualivest Portfolio shares exchanged therefor, provided the shareholder held
the Qualivest Portfolio shares as a capital asset; (viii) each FAIF Fund's
holding period with respect to the assets received in the Reorganization will
include the period for which the assets were held by the corresponding Qualivest
Portfolio, provided that each corresponding Qualivest Portfolio held such
Portfolio assets as capital assets; and (ix) each FAIF Fund will succeed to and
take into account the earnings and profits, or deficit in earnings and profits,
of the corresponding Qualivest Portfolio immediately before the Reorganization.
FAIF and Qualivest have not sought, and do not intend to seek, a ruling from the
Internal Revenue Service ("IRS") concerning the tax treatment of the
Reorganization. The opinion of counsel is not binding on the IRS and does not
preclude the IRS from adopting a contrary position. Shareholders may wish to
consult their own tax advisors concerning the potential tax consequences of the
Reorganization to them, including state and local income tax consequences.
COMPARISON OF FAIF AND QUALIVEST
INVESTMENT OBJECTIVES AND POLICIES. The investment objectives, policies and
restrictions of the FAIF Funds are, in general, similar to those of the
Qualivest Portfolios. There are, however, certain differences, as noted above
under "Summary -- Overview of FAIF and Qualivest." Other differences in the
investment objectives, and in certain significant investment policies and
restrictions, are discussed in Appendix IV to this Combined Proxy
Statement/Prospectus.
Additional information with respect to the investment policies and restrictions
of the four Existing FAIF Funds and of the Qualivest Portfolios is included in
their respective Prospectuses, which have been incorporated herein by reference.
Additional information with respect to the investment policies and restrictions
of the New FAIF Funds is included in the preliminary prospectuses for the Class
A and Class B shares and for the Institutional Class shares of such Funds,
attached as Appendix VIII and Appendix IX, respectively, to this Combined Proxy
Statement/Prospectus.
INVESTMENT ADVISORY FEES AND TOTAL EXPENSE RATIOS. Currently, FBNA serves as the
investment adviser for each of the Existing FAIF Funds, and, after the
Reorganization, FBNA will serve as the investment adviser to each of the New
FAIF Funds, at the fee rates stated in Table III below. FBNA is also providing
investment advisory services to the Qualivest Portfolios under the Interim
Advisory Agreement.
Table III shows (i) the advisory fees in dollars actually paid by the Qualivest
Portfolios for their latest fiscal year after waivers, (ii) the effective rate
of advisory fees for the Qualivest Portfolios for their latest fiscal year after
waivers, (iii) the current contractual advisory fee rates payable with respect
to the
<PAGE>
Qualivest Portfolios, (iv) the post-Reorganization contractual advisory fees
payable with respect to the corresponding FAIF Funds, (v) the current total
expense ratio of the Qualivest Portfolios after waivers and (vi) the pro forma
total expense ratio of the corresponding FAIF Funds based upon the fee
arrangements, including waivers and reimbursements, that will be in place upon
consummation of the Reorganization. All fee rates are annualized, and are
computed daily and payable monthly based on a Portfolio's or Fund's average
daily net assets. Table III shows that while in several cases the contractual
investment advisory fee rates of the FAIF Funds are higher than the contractual
rates for the corresponding Qualivest Portfolios, in all cases except with
respect to the Class A and Class Y shares of Qualivest Diversified Bond Fund,
the total expense ratios of the FAIF Funds, after waivers, are expected to be
less than the total expense ratios of the corresponding Qualivest Portfolios. In
this regard, FBNA has agreed that for the period commencing on the Closing and
continuing until September 30, 1998 (September 30, 1999 with respect to FAIF
Fixed Income Fund), FBNA will waive fees and reimburse expenses to the FAIF
Funds to the extent necessary to maintain the total expense ratios at the pro
forma expense levels provided in Table III. In addition, FBNA has agreed that,
from October 1, 1998 through September 30, 1999, it will waive fees and
reimburse expenses to the extent necessary so that no FAIF Fund (other than FAIF
Fixed Income Fund) will have ordinary expense ratios in excess of those
currently applicable to its corresponding Qualivest Portfolio as set forth in
Appendix V. Detailed pro forma expense information for each proposed
reorganization is included in Appendix V to this Combined Proxy
Statement/Prospectus.
TABLE III
INVESTMENT ADVISORY AND TOTAL EXPENSE INFORMATION
<TABLE>
<CAPTION>
EFFECTIVE RATE POST-
ADVISORY FEES OF ADVISORY CURRENT REORGANIZATION CURRENT TOTAL
FOR FISCAL YEAR FEES FOR FISCAL YEAR CONTRACTUAL CONTRACTUAL FUND OPERATING
ENDED 7/31/96 ENDED 7/31/96 ADVISORY ADVISORY EXPENSES
NAME OF QUALIVEST PORTFOLIO (AFTER WAIVERS) (AFTER WAIVERS) FEE RATE FEE RATE (AFTER WAIVERS)
<S> <C> <C> <C> <C> <C>
Qualivest Small $2,121,590 0.80% 0.80% 0.70% 1.33%
Companies Value (Class A)
Fund 2.08%
(Class C)
1.08%
(Class Y)
Qualivest Large $ 801,854 0.60% 0.75% 0.70% 1.18%
Companies Value (Class A)
Fund 1.93%
(Class C)
0.93%
(Class Y)
Qualivest Optimized $ 957,926 0.30% 0.50% 0.70% 0.84%
Stock Fund (Class A)
1.59%
(Class C)
0.60%
(Class Y)
Qualivest $ 898,208 0.45% 0.60% 0.70% 1.01%
Intermediate Bond (Class A)
Fund 1.76%
(Class C)
0.76%
(Class Y)
Qualivest Diversified $ 829,165 0.30% 0.60% 0.70% 0.85%
Bond Fund (Class A)
1.58%
(Class C)
0.61%
(Class Y)
Qualivest $ 653,161 0.30% 0.60% 0.70% 1.06%
International (Class A)
Opportunities Fund 1.78%
(Class C)
0.81%
(Class Y)
</TABLE>
(WIDE TABLE CONTINUED FROM ABOVE)
PRO FORMA
TOTAL
FUND OPERATING
EXPENSES
(AFTER WAIVERS)
NAME OF QUALIVEST PORTFOLIO
Qualivest Small 1.15%
Companies Value (Class A)
Fund 1.15%
(Class A)
0.90%
(Institutional Class)
Qualivest Large 1.05%
Companies Value (Class A)
Fund 1.05%
(Class A)
0.80%
(Institutional Class)
Qualivest Optimized 0.60%
Stock Fund (Class A)
0.60%
(Class A)
0.35%
(Institutional Class)
Qualivest 0.70%
Intermediate Bond (Class A)
Fund 0.70%
(Class A)
0.70%
(Institutional Class)
Qualivest Diversified 0.95%
Bond Fund (Class A)
0.95%
(Class A)
0.70%
(Institutional Class)
Qualivest 1.00%
International (Class A)
Opportunities Fund 1.00%
(Class A)
0.75%
(Institutional Class)
<PAGE>
FAIF FUNDS' INVESTMENT ADVISORY AGREEMENT. After the Closing, FBNA will serve as
the investment adviser for each investment portfolio of FAIF, including the New
FAIF Funds, pursuant to the FAIF Funds' Investment Advisory Agreement. As set
forth in Table III, the contractual fee rates of the FAIF Funds differ from
those of the corresponding Qualivest Portfolios. In addition, there are certain
differences between the Interim Advisory Agreement and the FAIF Funds'
Investment Advisory Agreement. The significant differences between these
Agreements are summarized and compared in Appendix VI to this Combined Proxy
Statement/Prospectus.
INFORMATION ABOUT FBNA AND OTHER SERVICE PROVIDERS. FBNA acts as the
investment adviser to the FAIF Funds through its First Asset Management
group. FBNA 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. Additional
information about FBNA is set forth above under "Information Relating to the
Interim Advisory Agreement -- Information About FBNA."
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, FAIF has received an opinion from its counsel that FBNA and
its affiliates are not prohibited from performing the services contemplated by
the FAIF Funds' Investment Advisory Agreement and the prospectuses for the FAIF
Funds. 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, FBNA and its affiliates 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.
The other service providers for the Qualivest Portfolios and the FAIF Funds are
different, as set forth in the following table.
OTHER SERVICE PROVIDERS
FOR QUALIVEST PORTFOLIOS AND FAIF FUNDS
<TABLE>
<CAPTION>
QUALIVEST PORTFOLIOS FAIF FUNDS
<S> <C> <C>
Distributor BISYS Fund Services SEI Investments Distribution Co.
Administrator BISYS Fund Services SEI Investments Management Corporation
Transfer Agent BISYS Fund Services Ohio, Inc. DST Systems, Inc.
Custodian United States National Bank First Trust National Association
of Oregon
Independent Auditors Deloitte & Touche LLP KPMG Peat Marwick LLP
</TABLE>
BISYS Fund Services, a division of BISYS Group, Inc., maintains offices at 3435
Stelzer Road, Columbus, Ohio 43219-3035. SEI Investments Distribution Co. and
SEI Investments Management Corporation, wholly owned subsidiaries of SEI
Investments Company, are located at Oaks, Pennsylvania 19456.
SHARE STRUCTURE. Both Qualivest and FAIF are registered as open-end
management investment companies under the 1940 Act. Each offers its shares in
a number of separate investment portfolios, or "funds."
Qualivest is organized as a Massachusetts business trust and is subject to the
provisions of its Declaration of Trust and By-Laws. Qualivest is authorized to
issue an unlimited number of units of
<PAGE>
beneficial interest (referred to herein as shares), without par value, which may
be divided into separate portfolios and separate classes of shares. FAIF is
organized as a corporation under the laws of the State of Maryland and is
subject to the provisions of its Amended and Restated Articles of Incorporation,
as amended and supplemented, and Bylaws. FAIF is authorized to issue 120 billion
shares, par value $.0001 per share, which may be divided into separate funds and
separate classes of shares. Although the rights of shareholders of a Maryland
corporation vary in certain respects from the rights of shareholders of a
Massachusetts business trust, the attributes of a share of common stock in FAIF
are comparable to those of a share of beneficial interest in Qualivest, except
that there are differences with respect to voting rights. Shares of the FAIF
Funds are entitled to one vote for each share held and fractional votes for
fractional shares held. Shares of the Qualivest Portfolios are entitled to one
vote for each dollar of value invested and a proportionate fractional vote for
any fraction of a dollar invested. Shareholders of both the Qualivest Portfolios
and the FAIF Funds will vote in the aggregate and not by portfolio or class
except as otherwise required by law or when portfolio or class voting is
permitted by their Board of Trustees/Directors. Shares of both the Qualivest
Portfolios and the FAIF Fund have noncumulative voting rights. In addition,
shares of the FAIF Funds have no pre-exemptive rights and shares of the
Qualivest Portfolios and the FAIF Funds have only such conversion and exchange
rights and, with respect to the Qualivest Portfolios, preemptive rights, as the
Board of Trustees of Qualivest or the Board of Directors of FAIF, respectively,
may grant in their discretion. When issued for payment or in accordance with
their dividend reinvestment plans, as described in their respective
prospectuses, FAIF Fund shares and Qualivest Portfolio shares are fully paid and
non-assessable except, with respect to the Qualivest Portfolios, as required
under Massachusetts law.
Under Maryland law, FAIF Fund shareholders have no personal liability for FAIF's
acts or obligations. Under Massachusetts law, shareholders of Qualivest could,
under certain circumstances, be held personally liable for the obligations of
Qualivest. However, Qualivest's Declaration of Trust provides that shareholders
shall not be subject to any personal liability for the obligations of Qualivest.
The Declaration of Trust also provides for indemnification out of the property
of a Qualivest Portfolio of any shareholder held personally liable by reason of
being or having been a shareholder of the Portfolio. Thus, the risk of a
shareholder incurring a financial loss on account of shareholder liability is
limited to circumstances in which a Qualivest Portfolio itself would be unable
to meet its obligations.
The FAIF Funds offer separate share classes in order to allocate certain
expenses, such as distribution payments, shareholder servicing fees and other
"class" expenses, to the different shareholder groups for which the fees and
expenses are incurred. In this regard, FAIF's Board of Directors has authorized
the issuance of three classes of shares in each of the FAIF Funds (Class A,
Class B and Institutional Class shares). No Qualivest Portfolio shareholders
will receive Class B shares in the Reorganization. Each share of a class of an
FAIF Fund represents an equal proportionate interest in the Fund with other
shares of the same class and is entitled to cash dividends and distributions
earned on such shares as are declared in the discretion of the FAIF Board of
Directors.
Shares of each class of an FAIF Fund bear a pro rata portion of all operating
expenses paid by the Fund except for distribution payments and shareholder
servicing fees paid on Class A or Class B shares and other "class" expenses that
are allocated to a particular share class. Institutional Class shares do not
have a distribution or shareholder servicing plan.
Additional information concerning the attributes of the shares issued by
Qualivest and the Existing FAIF Funds is included in their respective
Prospectuses, as supplemented to the date hereof, which are incorporated herein
by reference. Additional information concerning the attributes of the shares
issued by the New FAIF Funds is included in the preliminary prospectuses of the
Class A and Class B shares and of the Institutional Class shares attached as
Appendix VIII and Appendix IX, respectively, to this Combined Proxy
Statement/Prospectus. Shareholders may obtain copies of FAIF's Amended and
Restated Articles of Incorporation and Bylaws and Qualivest's Declaration of
Trust and By-Laws from FAIF upon written request at its principal office.
DISTRIBUTION PLANS. FAIF and Qualivest have adopted distribution plans pursuant
to Rule 12b-1 under the 1940 Act. The FAIF Funds maintain a Distribution Plan
for their Class A shares. There is no Distribution Plan for the Institutional
Class shares of the FAIF Funds. Pursuant to the Distribution Plan
<PAGE>
adopted for the Class A shares, each FAIF Fund pays the distributor of the
Fund's shares a shareholder servicing fee monthly at an annual rate of 0.25% of
the average daily net assets of the Fund's Class A shares. 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
servicing provided by "one-stop" mutual fund networks through which the FAIF
Funds are made available. The FAIF Funds also maintain a Distribution Plan for
their Class B shares, which are not being issued in the Reorganization.
Qualivest has adopted Distribution and Shareholder Service Plans with respect to
the Class A shares (the "Class A Plans") and the Class C shares (the "Class C
Plans") of each Qualivest Portfolio. The Class Y shares of the Qualivest
Portfolios are not subject to a Distribution and Shareholder Service Plan.
However, each Portfolio has adopted, but not implemented, a plan under which up
to 0.25% of its average daily net assets attributable to Class Y shares may be
expended to procure shareholder services.
Pursuant to Qualivest's Class A Plans, each Portfolio is authorized to pay or
reimburse the distributor of the Class A shares for certain expenses incurred in
connection with shareholder servicing and distribution services. Payments under
the Class A Plans are calculated daily and paid monthly at an annual rate not to
exceed 0.25 % of the average daily net assets of the Class A shares of the
Portfolio.
Pursuant to Qualivest's Class C Plans, each Qualivest Portfolio is authorized to
pay or reimburse the distributor of the Class C shares (i) a distribution fee in
an amount not to exceed on an annual basis 0.75% of the average daily net assets
of the Class C shares of a Portfolio, and (ii) a service fee in an amount not to
exceed on an annual basis 0.25% of the average daily net assets of the Class C
shares of a Portfolio. Payments under the plan are calculated daily and paid
monthly. Actual distribution expenses for Class C shares at any given time may
exceed the Rule 12b-1 fees paid under a Class C Plan and payments received
pursuant to contingent deferred sales charges ("CDSCs") on Class C shares. These
unrecovered amounts plus interest thereon will be carried forward and paid from
future Rule 12b-1 fees and CDSCs. No unrecovered amounts will be carried forward
beyond the date of the Reorganization.
Payments to the distributor of Qualivest Portfolio shares pursuant to
Qualivest's Class A and Class C Plans are used (i) to compensate banks,
broker-dealers and other institutions for providing distribution assistance
relating to Qualivest Portfolio shares, (ii) for promotional activities intended
to result in the sales of Qualivest Portfolio shares, such as to pay for the
preparation, printing and distribution of prospectuses to other than current
Qualivest Portfolio shareholders, and (iii) to compensate banks, broker-dealers
and other institutions for providing shareholder services with respect to their
customers who are, from time to time, beneficial and record holders of shares of
the Portfolios.
SHAREHOLDER TRANSACTIONS AND SERVICES. The respective purchase, redemption,
exchange, dividend and other policies and procedures of the FAIF Funds and the
corresponding Qualivest Portfolios are generally similar. These policies and
procedures are more fully set forth in Appendix VII to this Combined Proxy
Statement/Prospectus.
Qualivest Portfolios' Class A and Class C shareholders will receive Class A
shares of the FAIF Funds in connection with the Reorganization. As shown in
Appendix VII, there are differences in the sales charge structures applicable to
these shares. The Class A shares of the Qualivest Portfolios and the FAIF Funds
are sold with a front-end sales charge. For purchases of less than $50,000, the
front-end sales charge applicable to new purchases of Class A shares of the
equity FAIF Funds is the same as the front-end sales charge applicable to Class
A shares of the equity Qualivest Portfolios. However, for purchases of $50,000
or more, the front-end sales charge is greater for the FAIF Funds. For funds
investing primarily in debt securities, the front-end sales charge applicable to
Class A shares is generally greater for the FAIF Funds. Qualivest Portfolios'
Class C shares are not subject to a front-end sales charge, but are subject to a
CDSC if shares are redeemed less than one year after purchase. In addition, as
discussed above, Class C shares are subject to higher Rule 12b-1 fees than the
Class A shares of either the Qualivest Portfolios or the FAIF Funds. NO
FRONT-END OR CONTINGENT DEFERRED SALES CHARGE WILL BE IMPOSED ON ANY OF THE FAIF
FUND SHARES THAT ARE ISSUED TO QUALIVEST SHAREHOLDERS IN CONNECTION WITH THE
REORGA-
<PAGE>
NIZATION. Qualivest Portfolios' Class Y shareholders will receive Institutional
Class shares of the FAIF Funds in connection with the Reorganization. The
Qualivest Class Y shares and the FAIF Institutional Class shares are sold at net
asset value without any front-end sales charge or CDSC.
Purchase, redemption and exchange procedures for the Qualivest Portfolios are
generally similar to those for the FAIF Funds. However, the minimum purchase
amount is lower for the Class A and Class C shares of the Qualivest Portfolios
than for the Class A shares of the FAIF Funds. The minimum purchase required to
open an account generally is $500 for the Class A and Class C shares of the
Qualivest Portfolios and $1,000 for the Class A shares of the FAIF Funds.
Subsequent purchases generally require a minimum payment of $100 in both
instances.
There are also some differences in the dividend policies of the Qualivest
Portfolios and the FAIF Funds. For Qualivest Intermediate Bond Fund and
Qualivest Diversified Bond Fund, and for their corresponding FAIF Funds, net
income dividends are declared and paid monthly. For the other Qualivest
Portfolios, which invest primarily in equity securities, net income dividends
are declared and paid quarterly. For FAIF Stock Fund and Equity Index Fund,
however, dividends are declared and paid monthly. The other FAIF Funds that
invest primarily in equity securities declare and pay dividends quarterly. For
all Funds and Portfolios, distributions of any net realized long-term capital
gains are made at least once annually.
INFORMATION RELATING TO VOTING MATTERS
GENERAL INFORMATION. This Combined Proxy Statement/Prospectus is being furnished
in connection with the solicitation of proxies for the Meeting by the Board of
Trustees of Qualivest. It is expected that the solicitation of proxies will be
primarily by mail. Officers and service contractors of Qualivest and FAIF also
may solicit proxies by telephone, telegraph or personal interview. In this
connection, Qualivest has retained _______ to assist in the solicitation of
proxies for the Reorganization. The cost of solicitation is estimated to be
_______ and will be borne by FBNA. Shareholders may vote by marking, signing,
dating and returning the enclosed Proxy Ballot in the enclosed postage-paid
envelope. Any shareholder giving a proxy may revoke it at any time before it is
exercised by submitting to Qualivest a written notice of revocation or a
subsequently executed proxy or by attending the Meeting and voting in person.
Only shareholders of record at the close of business on , 1997 will be
entitled to vote at the Meeting. On that date, the following shares of the
Qualivest Portfolios were outstanding and entitled to be voted:
NAME OF PORTFOLIO AND CLASS SHARES ENTITLED TO VOTE
Small Companies Value Fund --
Class A Shares
Class C Shares
Class Y Shares
Large Companies Value Fund --
Class A Shares
Class C Shares
Class Y Shares
Optimized Stock Fund --
Class A Shares
Class C Shares
Class Y Shares
Intermediate Bond Fund --
Class A Shares
Class C Shares
Class Y Shares
<PAGE>
Diversified Bond Fund --
Class A Shares
Class C Shares
Class Y Shares
International Opportunities Fund --
Class A Shares
Class C Shares
Class Y Shares
Shares are entitled to one vote for each dollar of value invested and a
proportionate fractional vote for any fraction of a dollar invested.
If the accompanying proxy is executed and returned in time for the Meeting, the
shares covered thereby will be voted in accordance with the proxy on all matters
that may properly come before the Meeting.
SHAREHOLDER AND BOARD APPROVALS. Pursuant to the Application, and the conditions
under which the Order was granted by the SEC, the Interim Advisory Agreement is
being submitted for the ratification and approval of the shareholders of each of
the Qualivest Portfolios. The Interim Advisory Agreement must be ratified and
approved by a majority of the outstanding shares of a Qualivest Portfolio in
order to remain effective with respect to such Portfolio. In the event the
Interim Advisory Agreement is not ratified and approved with respect to a
Qualivest Portfolio, the Interim Advisory Agreement will terminate, the
investment advisory fees accrued under such Agreement and held in escrow with
respect to that Portfolio will be returned to the Portfolio, and Qualivest's
Board of Trustees will consider what actions should be taken with respect to
management of the assets of the Qualivest Portfolio until a new investment
advisory agreement is approved by the shareholders of that Portfolio or the
Reorganization occurs.
The Reorganization Agreement is being submitted for approval at the Meeting by
the shareholders of each of the Qualivest Portfolios pursuant to the provisions
of Qualivest's Declaration of Trust. The Reorganization Agreement must be
approved by a majority of the outstanding shares of the Qualivest Portfolios
voting separately on a portfolio-by-portfolio basis. The Reorganization
Agreement provides that in the event the Reorganization Agreement is approved
with respect to some but not all of the Qualivest Portfolios, the Board of
Directors of FAIF and the Board of Trustees of Qualivest may, in the exercise of
their reasonable business judgment, either abandon the Reorganization Agreement
with respect to all of the Qualivest Portfolios or direct that the
Reorganization and the other transactions described in the Reorganization
Agreement be consummated to the extent they deem advisable.
The term "majority of the outstanding shares" of a particular Qualivest
Portfolio means the lesser of (i) 67% of the shares of the Portfolio present at
the Meeting if the holders of more than 50% of the outstanding shares of such
Portfolio are present or (ii) more than 50% of the outstanding shares of the
Portfolio, as applicable. The vote of the shareholders of the FAIF Funds is not
being solicited, since their approval or consent is not necessary for the
Reorganization.
The approval of the Reorganization Agreement by the Board of Trustees of
Qualivest is discussed above under "Information Relating to the Proposed
Reorganization -- Board Considerations." The Reorganization Agreement was
unanimously approved by the Board of Directors of FAIF at a meeting held on
[August 14], 1997.
As of ______ , 1997, the officers and Trustees of Qualivest as a group owned
less than 1% of each Qualivest Portfolio. As of ______ , 1997, the officers and
Directors of FAIF as a group owned less than 1% of each FAIF Fund. Table IV(A)
shows the name, address and share ownership of each person known to Qualivest to
have beneficial or record ownership with respect to 5% or more of a class of a
Portfolio as of ______ , 1997. Table IV(B) shows the name, address and share
ownership of each person known to FAIF to have beneficial or record ownership
with respect to 5% or more of a class of a Fund as of _____________ , 1997.
<PAGE>
TABLE IV(A)
QUALIVEST PORTFOLIOS -- 5% OWNERSHIP AS OF , 1997
<TABLE>
<CAPTION>
CLASS AND AMOUNT OF PERCENTAGE
NAME AND SHARES OWNED AND PERCENTAGE PERCENTAGE OF PORTFOLIO
QUALIVEST PORTFOLIO ADDRESS TYPE OF OWNERSHIP OF CLASS OF PORTFOLIO POST-CLOSING
<S> <C> <C> <C> <C> <C>
</TABLE>
TABLE IV(B)
FAIF FUNDS -- 5% OWNERSHIP AS OF , 1997
<TABLE>
<CAPTION>
CLASS AND AMOUNT OF PERCENTAGE
NAME AND SHARES OWNED AND PERCENTAGE PERCENTAGE OF PORTFOLIO
FAIF FUND ADDRESS TYPE OF OWNERSHIP OF CLASS OF PORTFOLIO POST-CLOSING
<S> <C> <C> <C> <C> <C>
</TABLE>
For purposes of the 1940 Act, any person who owns directly or through one or
more controlled companies more than 25% of the voting securities of a company is
presumed to "control" such company. Under this definition, _____________ and its
affiliates may be deemed to be controlling persons of each of the FAIF Funds and
Qualivest Portfolios.
QUORUM. In the event that a quorum is not present at the Meeting, or in the
event that a quorum is present at the Meeting but sufficient votes to approve
the Interim Advisory Agreement or the Reorganization Agreement are not received
with respect to one or more of the Qualivest Portfolios, the persons named as
proxies may propose one or more adjournments of the Meeting to permit further
solicitation of proxies. Any such adjournment(s) will require the affirmative
vote of a majority of those shares affected by the adjournment(s) that are
represented at the Meeting in person or by proxy. If a quorum is present, the
persons named as proxies will vote those proxies which they are entitled to vote
FOR the particular proposal for which a quorum exists in favor of such
adjournment(s), and will vote those proxies required to be voted AGAINST such
proposal against any adjournment(s). A shareholder vote may be taken with
respect to one or more Qualivest Portfolios (but not the other Qualivest
Portfolios) on some or all matters before any such adjournment(s) if sufficient
votes have been received for approval. A quorum is constituted with respect to a
Qualivest Portfolio by the presence in person or by proxy of the holders of more
than 50% of the outstanding shares of the Portfolio entitled to vote at the
Meeting. For purposes of determining the presence of a quorum for transacting
business at the Meeting, abstentions will be treated as shares that are present
at the Meeting but which have not been voted. Abstentions will have the effect
of a "no" vote for purposes of obtaining the requisite approvals. Broker
"non-votes" (that is, proxies from brokers or nominees indicating that such
persons have not received instructions from the beneficial owners or other
persons entitled to vote shares on a particular matter with respect to which the
brokers or nominees do not have discretionary power) will not be treated as
shares that are present at the Meeting and, accordingly, could make it more
difficult to obtain the requisite approvals.
ANNUAL MEETINGS. Shareholder meetings are not required by Qualivest's
Declaration of Trust or other authority except, under certain circumstances, to
elect Trustees, amend the Declaration of Trust, approve an investment advisory
agreement and to satisfy certain other requirements. Qualivest will call a
special shareholder meeting for purposes of considering the removal of one or
more Trustees upon the written request of shareholders holding not less than 10%
of the outstanding votes of Qualivest. Similarly, under the laws of the State of
Maryland and FAIF's Amended and Restated 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.
<PAGE>
INTERESTS OF CERTAIN PERSONS. The following receive payments from the FAIF Funds
for services rendered pursuant to contractual arrangements with the Funds: FBNA,
as the adviser of each Fund, receives payments for its investment advisory and
management services; SEI Investments Distribution Co., as the distributor for
each Fund, receives payments for providing distribution services; SEI
Investments Management Corporation, in its capacity as the administrator for
each Fund, receives payments for providing shareholder servicing, legal and
accounting and other administrative personnel and services; DST Systems, Inc.,
in its capacity as transfer and dividend disbursing agent for each Fund,
receives payments for providing transfer agency and dividend disbursing
services; and First Trust National Association, a subsidiary of New U.S.
Bancorp, receives payments for providing custodial services for each Fund, and
may also act as securities lending agent in connection with the Funds'
securities lending transactions and receive, as compensation for such securities
lending services, fees based on a percentage of the Funds' income from such
securities lending transactions.
ADDITIONAL INFORMATION ABOUT FAIF
Additional information about the Existing FAIF Funds is included in Prospectuses
and Statement of Additional Information dated January 31, 1997, as supplemented
through the date hereof, copies of which, to the extent not included herewith,
may be obtained without charge by writing to FAIF, c/o SEI Investments
Distribution Co., Oaks, Pennsylvania 19456, or by calling 1-800-637-2548. FAIF
is subject to the informational requirements of the Securities Exchange Act of
1934, as amended, and the 1940 Act, and in accordance therewith it files
reports, proxy materials and other information with the SEC. Reports and other
information filed by FAIF can be inspected and copied at the Public Reference
Facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, these materials can be inspected and copied at the SEC's
Regional Offices at 7 World Trade Center, Suite 1300, New York, New York 10048,
and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials also can be obtained from the Public
Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington, D.C. 20549, at prescribed rates.
Information included in this Combined Proxy Statement/Prospectus concerning FAIF
was provided by FAIF.
ADDITIONAL INFORMATION ABOUT QUALIVEST
Additional information about the Qualivest Portfolios is included in the
Prospectuses, dated December 1, 1996, as supplemented through the date hereof,
which have been filed with the SEC. Copies of these Prospectuses and the related
Statement of Additional Information may be obtained without charge by writing to
Qualivest Funds, c/o BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio
43219-3035 or by calling 1-800-743-8637. Reports and other information filed by
Qualivest can be inspected and copied at the Public Reference Facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the offices of Qualivest Funds listed above. In addition, these materials can be
inspected and copied at the SEC's Regional Offices at 7 World Trade Center,
Suite 1300, New York, New York 10048, and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
also can be obtained from the Public Reference Branch, Office of Consumer
Affairs and Information Services, Securities and Exchange Commission,
Washington, D.C. 20549, at prescribed rates.
Information included in this Combined Proxy Statement/Prospectus concerning
Qualivest was provided by Qualivest.
FINANCIAL STATEMENTS
The audited statements of assets and liabilities, including the schedules of
investments in securities, of the Qualivest Portfolios as of July 31, 1996, and
of the Existing FAIF Funds as of September 30, 1996, and the related statements
of operations for the respective years then ended, the statements of changes
<PAGE>
in net assets for each of the periods indicated therein, and the financial
highlights for the periods indicated therein, as included in the July 31, 1996
Annual Report of Qualivest and the September 30, 1996 Annual Report of FAIF,
have been incorporated by reference into this Combined Proxy
Statement/Prospectus in reliance on the respective reports of Deloitte & Touche
LLP, independent auditors for Qualivest, and KPMG Peat Marwick LLP, independent
auditors for FAIF, given on the authority of such firms as experts in accounting
and auditing. In addition, the unaudited January 31, 1997 financial statements
of Qualivest Portfolios and the unaudited March 31, 1997 financial statements of
the Existing FAIF Funds, as included in the January 31, 1997 Semi-Annual Report
of Qualivest and the March 31, 1997 Semi-Annual Report of FAIF, are incorporated
herein by reference.
OTHER BUSINESS
Qualivest's Board of Trustees knows of no other business to be brought before
the Meeting. However, if any other matters come before the Meeting, it is the
intention that proxies which do not contain specific restrictions to the
contrary will be voted on such matters in accordance with the judgment of the
persons named in the enclosed form of proxy.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to Qualivest Funds or to First American
Investment Funds, Inc. in writing at the appropriate addresses on the cover page
of this Combined Proxy Statement/Prospectus or by telephoning Qualivest at
1-800-743-8637 or FAIF at 1-800-637-2548.
* * *
SHAREHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE MEETING ARE REQUESTED TO
MARK, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE.
NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. SHAREHOLDERS ALSO MAY
RETURN PROXIES BY TELEFAX OR VOTE BY TELEPHONE.
QUALIVEST FUNDS WILL FURNISH, WITHOUT CHARGE, COPIES OF ITS JULY 31, 1996 ANNUAL
SHAREHOLDERS REPORT AND ITS JANUARY 31, 1997 SEMI-ANNUAL SHAREHOLDERS REPORT TO
ANY SHAREHOLDER UPON REQUEST ADDRESSED TO 3435 STELZER ROAD, COLUMBUS, OHIO
43219 OR BY TELEPHONE AT 1-800-743-8637.
<PAGE>
APPENDIX I
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 1st day of August, 1997, between QUALIVEST FUNDS (the
"Trust"), a Massachusetts business trust having its principal place of business
at 3435 Stelzer Road, Columbus, Ohio 43219-3035, and FIRST BANK NATIONAL
ASSOCIATION (the "Investment Adviser"), a national banking association, having
its principal place of business at First Bank Place, 601 Second Avenue South,
Minneapolis, Minnesota 55402.
WHEREAS, the Trust is registered as an open-end, management investment company
under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Trust desires to retain the Investment Adviser to furnish
investment advisory and administrative services to newly created investment
portfolios of the Trust and may retain the Investment Adviser to serve in such
capacity with respect to certain additional investment portfolios of the Trust,
all as now or hereafter may be identified in Schedule A hereto as such Schedule
may be amended from time to time (individually referred to herein as a "Fund"
and collectively referred to herein as the "Funds") and the Investment Adviser
represents that it is willing and possesses legal authority to so furnish such
services without violation of applicable laws and regulations;
NOW, THEREFORE, in consideration of the premises and mutual covenants herein
contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Trust hereby appoints the Investment Adviser to act as
investment adviser to the Funds for the period and on the terms set forth in
this Agreement. The Investment Adviser accepts such appointment and agrees to
furnish the services herein set forth for the compensation herein provided.
Additional investment portfolios may from time to time be added to those covered
by this Agreement by the parties executing a new Schedule A which shall become
effective upon its execution and shall supersede any Schedule A having an
earlier date.
2. DELIVERY OF DOCUMENTS. The Trust has furnished the Investment Adviser with
copies properly certified or authenticated of each of the following:
(a) the Trust's Agreement and Declaration of Trust, dated as of May 19,
1994, and any and all amendments thereto or restatements thereof (such
Declaration, as presently in effect and as it shall from time to time
be amended or restated, is herein called the "Declaration of Trust");
(b) the Trust's By-Laws and any amendments thereto;
(c) resolutions of the Trust's Board of Trustees authorizing the
appointment of the Investment Adviser and approving this Agreement;
(d) the Trust's Notification of Registration on Form N-8A under the 1940
Act as filed with the Securities and Exchange Commission (the
"Commission") on May 20, 1994, and all amendments thereto;
(e) the Trust's Registration Statement on Form N-1A under the Securities
Act of 1933, as amended (the "1933 Act"), and under the 1940 Act as
filed with the Commission and all amendments thereto (the
"Registration Statement"); and
(f) the most recent Prospectus and Statement of Additional Information of
each of the Funds (such Prospectus and Statement of Additional
Information, as presently in effect, and all amendments and
supplements thereto, are herein collectively called the "Prospectus").
The Trust will furnish the Investment Adviser from time to time with copies of
all amendments of or supplements to the foregoing.
3. MANAGEMENT. Subject to the supervision of the Trust's Board of Trustees, the
Investment Adviser will provide a continuous investment program for the Funds,
including investment research and management with respect to all securities and
investments and cash equivalents in the Funds. The Investment Adviser will
determine from time to time what securities and other investments will be
<PAGE>
purchased, retained or sold by the Trust with respect to the Funds. The
Investment Adviser will provide the services under this Agreement in accordance
with each of the Fund's investment objectives, policies, and restrictions as
stated in the Prospectus and resolutions of the Trust's Board of Trustees. The
Investment Adviser further agrees that it:
(a) will use the same skill and care in providing such services as it uses
in providing services to fiduciary accounts for which it has
investment responsibilities;
(b) will conform with all applicable Rules and Regulations of the
Commission under the 1940 Act and in addition will conduct its
activities under this Agreement in accordance with any applicable
regulations of any governmental authority pertaining to the investment
advisory activities of the Investment Adviser;
(c) will not make loans to any person to purchase or carry units of
beneficial interest ("shares") in the Trust or make loans to the
Trust;
(d) will place or cause to be placed orders for the Funds either directly
with the issuer or with any broker or dealer. In placing orders with
brokers and dealers, the Investment Adviser will attempt to obtain
prompt execution of orders in an effective manner at the most
favorable price. Consistent with this obligation and to the extent
permitted by the 1940 Act, when the execution and price offered by two
or more brokers or dealers are comparable, the Investment Adviser may,
in its discretion, purchase and sell portfolio securities to and from
brokers and dealers who provide the Investment Adviser with research
advice and other services. In no instance will portfolio securities be
purchased from or sold to BISYS Fund Services, the Investment Adviser,
or any affiliated person of the Trust, BISYS Fund Services or the
Investment Adviser, except to the extent permitted by the 1940 Act and
the Commission;
(e) will maintain all books and records with respect to the securities
transactions of the Funds and will furnish the Trust's Board of
Trustees with such periodic and special reports as the Board may
request;
(f) will treat confidentially and as proprietary information of the Trust
all records and other information relative to the Trust and the Funds
and prior, present or potential shareholders, and will not use such
records and information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior notification
to and approval in writing by the Trust, which approval shall not be
unreasonably withheld and may not be withheld where the Investment
Adviser may be exposed to civil or criminal contempt proceedings for
failure to comply, when requested to divulge such information by duly
constituted authorities, or when so requested by the Trust;
(g) will maintain its policy and practice of conducting its fiduciary
functions independently. In making investment recommendations for the
Funds, the Investment Adviser's personnel will not inquire or take
into consideration whether the issuers of securities proposed for
purchase or sale for the Trust's account are customers of the
Investment Adviser or of its parent or its subsidiaries or affiliates.
In dealing with such customers, the Investment Adviser and its parent,
subsidiaries, and affiliates will not inquire or take into
consideration whether securities of those customers are held by the
Trust;
(h) will promptly review all (1) current security reports, (2) summary
reports of transactions and (3) current cash position reports upon
receipt thereof from the Trust and will report any errors or
discrepancies in such reports to the Trust or its designee within
three (3) business days; and
(i) will use its best efforts to obtain and provide to the Trust's fund
accountant (1) dealer quotations, (2) prices from a pricing service,
(3) matrix prices, or (4) any other price information believed to be
reliable by the Investment Adviser with respect to any security held
by a Fund, when requested to do so by the Trust's fund accountant.
4. SERVICES NOT EXCLUSIVE. The investment management services furnished by the
Investment Adviser hereunder are not to be deemed exclusive, and the Investment
Adviser shall be free to furnish similar services to others so long as its
services under this Agreement are not impaired thereby.
5. BOOKS AND RECORDS. In compliance with the requirements of Rule 31a-3 under
the 1940 Act, the Investment Adviser hereby agrees that all records which it
maintains for the Funds are the property of the Trust and further agrees to
surrender promptly to the Trust any of such records upon the Trust's
<PAGE>
request. The Investment Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act the following records: (a) completed
trade tickets for all portfolio transactions, (b) broker confirmations for
individual and block trades, (c) credit files relating to (i) money market
securities and their issuers, (ii) repurchase agreement counterparties and (iii)
letter of credit providers, (d) transaction records indicating the method of
allocation with respect to the selection of brokers, and (e) such other records
that may be deemed necessary and appropriate by the parties to this Agreement.
6. EXPENSES. During the term of this Agreement, the Investment Adviser will
pay all expenses incurred by it in connection with its activities under this
Agreement other than the cost of securities (including brokerage commissions,
if any) purchased for the Funds.
7. COMPENSATION. For the services provided and the expenses assumed pursuant to
this Agreement, each of the Funds will pay the Investment Adviser and the
Investment Adviser will accept as full compensation therefor a fee as set forth
on Schedule A hereto. The obligation of each Fund to pay the above-described fee
to the Adviser will begin as of the date of the initial public sale of shares in
such Fund. The fee attributable to each Fund shall be the obligation of that
Fund and not of any other Fund.
Pursuant to the terms of an order of exemption granted by the Commission in
QUALIVEST FUNDS, ET AL., Investment Company Act Rel. No. 22771 (July 29, 1997),
all fees payable under this Agreement by any Fund shall be payable to an
independent escrow agent to be maintained in an interest-bearing escrow account
until this Agreement is approved by shareholders in accordance with the
provisions of Section 9 of this Agreement. If shareholders of any Fund fail to
approve this Agreement, the escrow agent will pay to the Fund the applicable
escrow amounts (including interest earned). The escrow agent will release the
escrow funds only upon receipt of a certificate from officers of the Trust
stating whether the escrowed funds are to be delivered to the Investment Adviser
or to the Fund.
If in any fiscal year the aggregate expenses of any of the Funds (as defined
under the securities regulations of any state having jurisdiction over the
Trust) exceed the expense limitations of any such state, the Investment Adviser
will reimburse the Fund for a portion of such excess expenses equal to such
excess times the ratio of the fees otherwise payable by the Fund to the
Investment Adviser hereunder to the aggregate fees otherwise payable by the Fund
to the Investment Adviser hereunder and to BISYS Fund Services under the
Management and Administration Agreement between BISYS Fund Services and the
Trust. The obligation of the Investment Adviser to reimburse the Funds hereunder
is limited in any fiscal year to the amount of its fee hereunder for such fiscal
year, provided, however, that notwithstanding the foregoing, the Investment
Adviser shall reimburse the Funds for such proportion of such excess expenses
regardless of the amount of fees paid to it during such fiscal year to the
extent that the securities regulations of any state having jurisdiction over the
Trust so require. Such expense reimbursement, if any, will be estimated daily
and reconciled and paid on a monthly basis.
8. LIMITATION OF LIABILITY. The Investment Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Funds in
connection with the performance of this Agreement, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Investment Adviser in the performance of its
duties or from reckless disregard by it of its obligations and duties under this
Agreement. It is further agreed that the Investment Adviser shall have no
responsibility or liability for the accuracy or completeness of the Trust's
Registration Statement under the 1940 Act and the 1933 Act, except for
information supplied by the Investment Adviser for inclusion therein or
information known by the Investment Adviser to be false or misleading. The Trust
agrees to indemnify the Investment Adviser to the full extent permitted by the
Trust's Declaration of Trust.
9. DURATION AND TERMINATION. This Agreement will become effective with respect
to each Fund listed on Schedule A as of the date first written above (or, if a
particular Fund is not in existence on that date, on the date a registration
statement relating to that Fund becomes effective with the Commission) and,
unless sooner terminated as provided herein, shall continue in effect for an
initial period of 120 days, provided that this Agreement is approved by a
majority of the outstanding voting securities of the applicable Fund.
Thereafter, if not terminated, this Agreement shall continue in effect as to a
particular Fund for successive one-year terms, only so long as such continuance
is specifically approved at least
<PAGE>
annually (a) by the vote of a majority of those members of the Trust's Board of
Trustees who are not parties to this Agreement or interested persons of any
party to this Agreement, cast in person at a meeting called for the purpose of
voting on such approval, and (b) by the vote of a majority of the Trust's Board
of Trustees or by the vote of a majority of all votes attributable to the
outstanding shares of such Fund. Notwithstanding the foregoing, this Agreement
may be terminated as to a particular Fund at any time on sixty days' written
notice, without the payment of any penalty, by the Trust (by vote of the Trust's
Board of Trustees or by vote of a majority of the outstanding voting securities
of such Fund) or by the Investment Adviser. This Agreement will immediately
terminate in the event of its assignment. (As used in this Agreement, the terms
"majority of the outstanding voting securities", "interested persons" and
"assignment" shall have the same meanings as ascribed to such terms in the 1940
Act.)
10. INVESTMENT ADVISER'S REPRESENTATIONS. The Investment Adviser hereby
represents and warrants that it is willing and possesses all requisite legal
authority to provide the services contemplated by this Agreement without
violation of applicable laws and regulations.
11. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument
in writing signed by the party against which enforcement of the change,
waiver, discharge or termination is sought.
12. GOVERNING LAW. This Agreement shall be governed by and its provisions
shall be construed in accordance with the laws of the Commonwealth of
Massachusetts.
13. MISCELLANEOUS. It is expressly agreed that the obligations of the Trust
hereunder shall not be binding upon any of the Trustees, shareholders, nominees,
officers, agents or employees of the Trust personally, but shall bind only the
trust property of the Trust. The execution and delivery of this Agreement have
been authorized by the Trustees, and this Agreement has been signed and
delivered by an authorized officer of the Trust, acting as such, and neither
such authorization by the Trustees nor such execution and delivery by such
officer shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the trust
property of the Trust as provided in the Trust's Agreement and Declaration of
Trust.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
[SEAL] QUALIVEST FUNDS
By: /s/ Irimga McKay
Title: Chairman
[SEAL] FIRST BANK NATIONAL ASSOCIATION
By: /s/ Jeffrey M. Wilson
Title: Vice President
<PAGE>
Dated: August 1, 1997
SCHEDULE A
TO THE INVESTMENT ADVISORY AGREEMENT
BETWEEN QUALIVEST FUNDS AND
FIRST BANK NATIONAL ASSOCIATION
<TABLE>
<CAPTION>
NAME OF FUND COMPENSATION
<S> <C>
QualivestU.S. Treasury Money Market Fund Annual rate of thirty five one-hundredths of one percent (.35%)
of the average daily net assets of such Fund.
Qualivest Money Market Fund Annual rate of thirty five one-hundredths of one percent (.35%)
of the average daily net assets of such Fund.
Qualivest Tax-Free Money Market Fund Annual rate of thirty five one-hundredths of one percent (.35%)
of the average daily net assets of such Fund.
Qualivest Intermediate Bond Fund Annual rate of sixty one-hundredths of one percent (.60%)
of the average daily net assets of such Fund.
Qualivest Diversified Bond Fund Annual rate of sixty one-hundredths of one percent (.60%)
of the average daily net assets of such Fund.
Qualivest Tax-Free National Bond Fund Annual rate of fifty one-hundredths of one percent (.50%)
of the average daily net assets of such Fund.
Qualivest Large Companies Growth Fund Annual rate of one percent (1.00%) of the average daily net
assets of such Fund.
Qualivest MicroCap Value Fund Annual rate of one percent (1.00%) of the average daily net
assets of such Fund.
Qualivest Small Companies Value Fund Annual rate of eighty one-hundredths of one percent (.80%)
of the average daily net assets of such Fund.
Qualivest Large Companies Value Fund Annual rate of seventy five one-hundredths of one percent (.75%)
of the average daily net assets of such Fund.
Qualivest Income Equity Value Fund Annual rate of sixty one-hundredths of one percent (.60%)
of the average daily net assets of such Fund.
Qualivest International Opportunities Fund Annual rate of sixty one-hundredths of one percent (.60%)
of the average daily net assets of such Fund.
Qualivest Optimized Stock Fund Annual rate of fifty one-hundredths of one percent (.50%)
of the average daily net assets of such Fund.
Qualivest Allocated Conservative Fund Annual rate of five one-hundredths of one percent (.05%) of
the average daily net assets of such Fund.
Qualivest Allocated Balanced Fund Annual rate of five one-hundredths of one percent (.05%) of
the average daily net assets of such Fund.
<PAGE>
NAME OF FUND COMPENSATION
Qualivest Allocated Growth Fund Annual rate of five one-hundredths of one percent (.05%) of
the average daily net assets of such Fund.
Qualivest Allocated Aggressive Fund Annual rate of five one-hundredths of one percent (.05%) of
the average daily net assets of such Fund.
</TABLE>
All fees are computed daily and paid monthly.
QUALIVEST FUNDS
By: /s/ Irimga McKay
Name: Irimga McKay
Title: Senior Vice President
FIRST BANK NATIONAL ASSOCIATION
By: /s/ Jeffrey M. Wilson
Name: Jeffrey M. Wilson
Title: Vice President
<PAGE>
APPENDIX II
PRINCIPAL EXECUTIVE OFFICER AND DIRECTORS OF
FIRST BANK NATIONAL ASSOCIATION
The directors and the principal executive officer of FBNA are listed below,
together with their addresses and principal occupations.
<TABLE>
<CAPTION>
OTHER POSITIONS AND OFFICES
NAME POSITIONS AND OFFICES WITH FBNA AND PRINCIPAL BUSINESS ADDRESS
<S> <C> <C>
John F. Grundhofer Chairman, President and Chief Executive Chairman, President and Chief
Officer Executive Officer of U.S. Bancorp*
Richard A. Zona Director and Vice Chairman--Finance Vice Chairman--Finance of U.S. Bancorp*
Philip G. Heasley Director and Vice Chairman Vice Chairman and Group Head of the
Retail Product Group of U.S. Bancorp*
Daniel C. Rohr Director and Executive Vice President Executive Vice President, Commercial
Banking Group of U.S. Bancorp*
J. Robert Hoffman Director, Executive Vice President and Executive Vice President and Chief
Chief Credit Officer Credit Officer of U.S. Bancorp*
Lee R. Mitau Director, Executive Vice President, Executive Vice President, General
General Counsel and Secretary Counsel and Secretary of U.S. Bancorp*
Susan E. Lester Director, Executive Vice President and Executive Vice President and Chief
Chief Financial Officer Financial Officer of U.S. Bancorp*
Robert D. Sznewajs Director and Vice Chairman Vice Chairman of U.S. Bancorp*
Gary T. Duim Director and Vice Chairman Vice Chairman of U.S. Bancorp*
</TABLE>
* Address: 601 Second Avenue South, Minneapolis, Minnesota
55402.
<PAGE>
APPENDIX III
AGREEMENT AND PLAN OF REORGANIZATION
BY AND BETWEEN
FIRST AMERICAN INVESTMENT FUNDS, INC.
AND
QUALIVEST FUNDS
DATED: AS OF , 1997
TABLE OF CONTENTS
SECTION PAGE
1. CONVEYANCE OF ASSETS OF QUALIVEST FUNDS ............................ 2
2. LIQUIDATION OF QUALIVEST FUNDS ..................................... 4
3. EFFECTIVE TIME OF THE REORGANIZATION ............................... 4
4. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF
QUALIVEST ......................................................... 5
5. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF FAIF ......... 7
6. SHAREHOLDER ACTION ................................................. 9
7. REGULATORY FILINGS ................................................. 9
8. FAIF CONDITIONS .................................................... 9
9. QUALIVEST CONDITIONS ...............................................12
10. FURTHER ASSURANCES .................................................13
11. INDEMNIFICATION ....................................................13
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES .........................13
13. TERMINATION OF AGREEMENT ...........................................13
14. AMENDMENT AND WAIVER ...............................................13
15. GOVERNING LAW ......................................................14
16. SUCCESSORS AND ASSIGNS .............................................14
17. BENEFICIARIES ......................................................14
18. BROKERAGE FEES AND EXPENSES ........................................14
19. QUALIVEST LIABILITY ................................................14
20. NOTICES ............................................................14
21. ANNOUNCEMENTS ......................................................15
22. ENTIRE AGREEMENT ...................................................15
23. COUNTERPARTS .......................................................15
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of this
day of _______ , 1997 by and between Qualivest Funds ("Qualivest"), a
Massachusetts business trust consisting of multiple investment portfolios
including, among others, Small Companies Value Fund, Large Companies Value Fund,
Optimized Stock Fund, Intermediate Bond Fund, Diversified Bond Fund and
International Opportunities Fund (the "Qualivest Funds") and First American
Investment Funds, Inc. ("FAIF"), a Maryland corporation consisting of multiple
investment portfolios including, among others, Small Cap Value Fund, Stock Fund,
Equity Index Fund, Intermediate Term Income Fund, Fixed Income Fund and
International Index Fund (the "FAIF Funds").
WHEREAS, each of Qualivest and FAIF is an open-end management investment company
registered with the Securities and Exchange Commission (the "SEC") under the
Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the parties desire that the assets and liabilities of each Qualivest
Fund be conveyed to, and be acquired and assumed by, the respective FAIF Fund
corresponding thereto, as stated herein, in exchange for shares of specified
classes of the corresponding FAIF Fund which shall thereafter promptly
<PAGE>
be distributed by Qualivest to the shareholders of the corresponding classes of
the Qualivest Fund in connection with its liquidation as described in this
Agreement (the "Reorganization");
WHEREAS, the parties intend that the following FAIF Funds -- Small Cap Value
Fund and International Index Fund -- shall have nominal assets and liabilities
before the Reorganization and shall continue the investment operations of the
corresponding Qualivest Funds thereafter, and that in this regard certain
actions shall be taken as described in this Agreement;
WHEREAS, FAIF also maintains sixteen additional investment portfolios --
Balanced Fund, Asset Allocation Fund, Equity Income Fund, Diversified Growth
Fund, Emerging Growth Fund, Regional Equity Fund, Special Equity Fund,
Technology Fund, Health Sciences Fund, Real Estate Securities Fund,
International Fund, Limited Term Income Fund, Intermediate Government Bond Fund,
Intermediate Tax Free Fund, Minnesota Insured Intermediate Tax Free Fund and
Colorado Intermediate Tax Free Fund -- that are not parties to the
Reorganization; and
WHEREAS, Qualivest also maintains seven additional investment portfolios that
have commenced operations -- U.S. Treasury Money Market Fund, Money Market Fund,
Tax-Free Money Market Fund, Allocated Conservative Fund, Allocated Balanced
Fund, Allocated Growth Fund and Allocated Aggressive Fund -- that are not
parties to the Reorganization but that are being reorganized into series of
First American Funds, Inc. or First American Strategy Funds, Inc.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth and subject to the terms and conditions hereof, the
parties hereto, intending to be legally bound, agree as follows:
1. CONVEYANCE OF ASSETS OF QUALIVEST FUNDS. (a) At the Effective Time of the
Reorganization, as defined in Section 3, all assets of every kind, and all
interests, rights, privileges and powers of each of the Qualivest Funds, subject
to all liabilities of such Portfolios, whether accrued, absolute, contingent or
otherwise existing as of the Effective Time of the Reorganization, which
liabilities shall include any obligation of the Qualivest Funds to indemnify
Qualivest's trustees and officers acting in their capacities as such to the
fullest extent permitted by law and Qualivest's Declaration of Trust as in
effect on the date hereof (such assets subject to such liabilities are herein
referred to as the "Fund Assets"), shall be transferred and conveyed by each
Qualivest Fund to the corresponding FAIF Fund (as set forth below) and shall be
accepted and assumed by such FAIF Fund as more particularly set forth in this
Agreement, such that at and after the Effective Time of the Reorganization: (i)
all assets of the Qualivest Funds shall become and be the assets of the
respective corresponding FAIF Funds; and (ii) all liabilities of the Qualivest
Funds shall attach to the respective corresponding FAIF Funds as aforesaid and
may thenceforth be enforced against the respective FAIF Funds to the same extent
as if incurred by them.
(b) Without limiting the generality of the foregoing, it is understood that the
Fund Assets shall include all property and assets of any nature whatsoever,
including, without limitation, all cash, cash equivalents, securities, claims
(whether absolute or contingent, known or unknown, accrued or unaccrued) and
receivables (including dividend and interest receivables) owned by each
Qualivest Fund, and any deferred or prepaid expenses shown as an asset on each
Qualivest Fund's books, at the Effective Time of the Reorganization, and all
goodwill, all other intangible property and all books and records belonging to
the Qualivest Funds. Notwithstanding anything herein to the contrary, FAIF shall
not be deemed to have assumed any liability of Qualivest to FAIF that arises as
a result of the breach of any of the representations, warranties and agreements
of Qualivest set forth in Section 4, hereof.
<PAGE>
(c) In particular, the Fund Assets of each Qualivest Fund shall be transferred
and conveyed to the corresponding FAIF Fund, as set forth below:
QUALIVEST FUND CORRESPONDING FAIF FUND
Small Companies Value Fund Small Cap Value Fund*
Large Companies Value Fund Stock Fund
Optimized Stock Fund Equity Index Fund
Intermediate Bond Fund Intermediate Term Income
Fund Diversified Bond Fund Fixed Income Fund
International Opportunities Fund International Index Fund*
* These FAIF Funds shall be new investment portfolios with nominal assets and
liabilities prior to the Effective Time of the Reorganization.
(d) In exchange for the transfer of the Fund Assets, each FAIF Fund shall
simultaneously issue to each corresponding Qualivest Fund at the Effective Time
of the Reorganization full and fractional shares of common stock in the FAIF
Fund of the classes set forth in the table below having an aggregate net asset
value equal to the net value of the Fund Assets so conveyed, all determined and
adjusted as provided in this Section 1. In particular, each FAIF Fund shall
deliver to the corresponding Qualivest Fund the number of shares of each of its
share classes set forth in the table, including fractional shares, determined by
dividing the value of the Fund Assets of the corresponding Qualivest Fund that
are so conveyed and are attributable to each of the FAIF Fund's respective share
classes set forth in the table, computed in the manner and as of the time and
date set forth in this Section, by the net asset value of one FAIF Fund share of
the particular share class that is to be delivered with respect thereto,
computed in the manner and as of the time and date set forth in this Section.
(e) The net asset value of shares to be delivered by the FAIF Funds, and the net
value of the Fund Assets to be conveyed by the Qualivest Funds, shall, in each
case, be determined as of the Effective Time of the Reorganization. The net
asset value of shares of the FAIF Funds shall be computed in the manner set
forth in the FAIF Funds' then current prospectuses under the Securities Act of
1933, as amended (the "1933 Act"). The net value of the Fund Assets to be
transferred by the Qualivest Funds shall be computed by Qualivest and shall be
subject to adjustment by the amount, if any, agreed to by FAIF and the
respective Qualivest Funds. In determining the value of the securities
transferred by the Qualivest Funds to the FAIF Funds, each security shall be
priced in accordance with the pricing policies and procedures of FAIF as
described in its then current prospectuses. For such purposes, price quotations
and the security characteristics relating to establishing such quotations shall
be determined by Qualivest, provided that such determination shall be subject to
the approval of FAIF. Qualivest and FAIF agree to use all commercially
reasonable efforts to resolve any material pricing differences between the
prices of portfolio securities determined in accordance with the pricing
policies and procedures of Qualivest and those determined in accordance with the
pricing policies and procedures of FAIF prior to the Effective Time of the
Reorganization.
<PAGE>
(f) The shares of each FAIF Fund that will be delivered in the Reorganization
are as follows:
QUALIVEST CORRESPONDING FAIF
PORTFOLIO/SHARE CLASS FUND/SHARE CLASS
Small Companies Value Fund -- Small Cap Value Fund --
Class A Shares Class A Shares
Class C Shares Class A Shares
Class Y Shares Institutional Class Shares
Large Companies Value Fund -- Stock Fund --
Class A Shares Class A Shares
Class C Shares Class A Shares
Class Y Shares Institutional Class Shares
Optimized Stock Fund -- Equity Index Fund --
Class A Shares Class A Shares
Class C Shares Class A Shares
Class Y Shares Institutional Class Shares
Intermediate Bond Fund -- Intermediate Term Income Fund --
Class A Shares Class A Shares
Class C Shares Class A Shares
Class Y Shares Institutional Class Shares
Diversified Bond Fund -- Fixed Income Fund --
Class A Shares Class A Shares
Class C Shares Class A Shares
Class Y Shares Institutional Class Shares
International Opportunities Fund -- International Index Fund --
Class A Shares Class A Shares
Class C Shares Class A Shares
Class Y Shares Institutional Class Shares
2. LIQUIDATION OF QUALIVEST FUNDS. At the Effective Time of the Reorganization,
each of the Qualivest Funds shall make a liquidating distribution to its
shareholders as follows. Shareholders of record of each Qualivest Fund shall be
credited with full and fractional shares of the class of common stock that is
issued by the corresponding FAIF Fund in connection with the Reorganization with
respect to the shares that are held of record by the shareholder. In addition,
each shareholder of record of a Qualivest Fund shall have the right to receive
any unpaid dividends or other distributions which were declared before the
Effective Time of the Reorganization with respect to the shares of such
Qualivest Fund that are held by the shareholder at the Effective Time of the
Reorganization. In accordance with instructions it receives from Qualivest, FAIF
shall record on its books the ownership of the respective FAIF Fund shares by
the shareholders of record of the Qualivest Funds. All of the issued and
outstanding shares of the Qualivest Funds at the Effective Time of the
Reorganization shall be redeemed and canceled on the books of Qualivest at such
time. After the Effective Time of the Reorganization, Qualivest shall wind up
the affairs of the Qualivest Funds and shall file any final regulatory reports,
including but not limited to any Form N-SAR and Rule 24f-2 filings with respect
to the Qualivest Funds and, assuming the seven other investment portfolios of
Qualivest have been reorganized into series of First American Funds, Inc. or
First American Strategy Funds, Inc., an application pursuant to Section 8(f) of
the 1940 Act for an order declaring that Qualivest has ceased to be an
investment company.
3. EFFECTIVE TIME OF THE REORGANIZATION. (a) Delivery of the Fund Assets and the
shares of the FAIF Funds to be issued pursuant to Section 1 and the liquidation
of the Qualivest Funds pursuant to Section 2 (the "Closing") shall occur as of
the close of normal trading on the New York Stock Exchange (the "Exchange")
(currently, 4:00 p.m. Eastern time), and after the declaration of any dividends
or distributions on such date, on November 28, 1997, or at such time on such
later date as provided herein or as the parties otherwise may agree in writing.
(The date and time at which such actions are taken are referred to herein as the
"Effective Time of the Reorganization.") To the extent any Fund Assets are, for
<PAGE>
any reason, not transferred at the Effective Time of the Reorganization,
Qualivest shall cause such Fund Assets to be transferred in accordance with this
Agreement at the earliest practicable date thereafter. All acts taking place at
the Closing shall be deemed to take place simultaneously as of the Effective
Time of the Reorganization unless otherwise agreed to by the parties. The
Closing shall be held at the offices of Dorsey & Whitney LLP, 220 South Sixth
Street, Minneapolis, Minnesota 55402, or at such other place as the parties may
agree.
(b) In the event the Effective Time of the Reorganization occurs on a day on
which (i) the Exchange or another primary trading market for portfolio
securities of the FAIF Funds or the Qualivest Funds shall be closed to trading
or trading thereon shall be restricted, or (ii) trading or the reporting of
trading on the Exchange or elsewhere shall be disrupted so that accurate
appraisal of the value of the net assets of the FAIF Funds or the Qualivest
Funds is impracticable, the Effective Time of the Reorganization shall be
postponed until the close of normal trading on the Exchange on the first
business day when trading shall have been fully resumed and reporting shall have
been restored.
4. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF QUALIVEST. Qualivest,
on behalf of itself and the Qualivest Funds, represents and warrants to, and
agrees with, FAIF as follows, such representations, warranties and agreements
being made on behalf of each Qualivest Fund on a several (and not joint, or
joint and several) basis:
(a) It is a Massachusetts business trust duly created pursuant to its
Declaration of Trust for the purpose of acting as a management investment
company under the 1940 Act, and is validly existing under the laws of the
Commonwealth of Massachusetts. It is registered as an open-end management
investment company under the 1940 Act, and its registration with the SEC as
an investment company is in full force and effect.
(b) It has the power to own all of its properties and assets and, subject
to the approvals of shareholders referred to in Section 6, to carry out and
consummate the transactions contemplated herein, and has all necessary
federal, state and local authorizations to carry on its business as now
being conducted and, except as stated in Section 4(j), below, to consummate
the transactions contemplated by this Agreement.
(c) This Agreement has been duly authorized, executed and delivered by
it, and represents a valid and binding contract, enforceable in accordance
with its terms, subject as to enforcement to bankruptcy, insolvency,
reorganization, moratorium or other similar laws of general application
relating to or affecting creditors' rights and to the application of general
principles of equity. The execution and delivery of this Agreement does not,
and, subject to the approval of shareholders referred to in Section 6, the
consummation of the transactions contemplated by this Agreement will not,
violate Qualivest's Declaration of Trust or By-Laws or any agreement or
arrangement to which it is a party or by which it is bound.
(d) Each Qualivest Fund has elected to qualify and has qualified as a
regulated investment company under Part I of Subchapter M of Subtitle A,
Chapter 1, of the Internal Revenue Code of 1986, as amended (the "Code"), as
of and since its first taxable year; has been a regulated investment company
under such Part of the Code at all times since the end of its first taxable
year when it so qualified; and qualifies and shall continue to qualify as a
regulated investment company for its taxable year ending upon its
liquidation.
(e) The audited financial statements for its fiscal year ended July 31,
1996, and the unaudited financial statements for the period ended January
31, 1997, copies of which have been previously furnished to FAIF, present
fairly the financial position of the Qualivest Funds as of such dates and
the results of their operations and changes in their net assets for the
periods indicated, in conformity with generally accepted accounting
principles applied on a consistent basis. To the best of Qualivest's
knowledge, there are no liabilities of a material amount of any Qualivest
Fund, whether accrued, absolute, contingent or otherwise existing, other
than: (i) as of January 31, 1997, liabilities disclosed or provided for in
the unaudited financial statements for the period ended January 31, 1997 and
liabilities incurred in the ordinary course of business subsequent to
January 31, 1997 and (ii) as of the Effective Time of the Reorganization,
liabilities disclosed or provided for in the
<PAGE>
statement of assets and liabilities of each Qualivest Fund that is delivered
to FAIF pursuant to Section 8(b) of this Agreement and liabilities incurred
in the ordinary course of business.
(f) Since the end of its most recently concluded fiscal year, there have
been no material changes by any Qualivest Fund in accounting methods,
principles or practices, including those required by generally accepted
accounting principles, except as disclosed in writing to FAIF.
(g) It has valued, and will continue to value, its portfolio securities
and other assets in accordance with applicable legal requirements.
(h) There are no material legal, administrative or other proceedings
pending or, to its knowledge, threatened, against it or the Qualivest Funds
which could result in liability on the part of Qualivest or the Qualivest
Funds and Qualivest knows of no facts that might form the basis of a legal,
administrative or other proceeding which, if adversely determined, would
materially and adversely affect any Qualivest Fund's financial condition or
the conduct of its business and Qualivest is not a party to or subject to
the provisions of any order, decree or judgment of any court or governmental
body that materially and adversely affects, or is reasonably likely to
materially and adversely affect, its business or its ability to consummate
the transactions contemplated herein.
(i) At the Effective Time of the Reorganization, all federal and other
tax returns and reports of each Qualivest Fund required by law to have been
filed by such time shall have been filed, and all federal and other taxes
shall have been paid so far as due, or provision shall have been made for
the payment thereof and, to the best of Qualivest's knowledge, no such
return or report shall be currently under audit and no assessment shall have
been asserted with respect to such returns or reports.
(j) Subject to the approvals of shareholders referred to in Section 6, at
the Effective Time of the Reorganization, it shall have full right, power
and authority to sell, assign, transfer and deliver the Fund Assets and,
upon delivery and payment for the Fund Assets as contemplated herein, the
FAIF Funds shall acquire good and marketable title thereto, subject to no
restrictions on the ownership or transfer thereof, except as imposed by
federal or state securities laws or as disclosed to FAIF in writing prior to
the Effective Time of the Reorganization.
(k) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by it of the
transactions contemplated by this Agreement, except such as may be required
under the 1933 Act, the Securities Exchange Act of 1934, as amended (the
"1934 Act"), the 1940 Act, the rules and regulations under those Acts, or
state securities laws, all of which shall have been received prior to the
Effective Time of the Reorganization, except for such consents, approvals,
authorizations or orders as may be required subsequent to the Effective Time
of the Reorganization.
(l) Insofar as the following relate to it, (i) the registration statement
filed by FAIF on Form N-14 relating to the shares of the FAIF Funds that
will be registered with the SEC pursuant to this Agreement, which shall
include or incorporate by reference the proxy statement of the Qualivest
Funds and prospectuses of the FAIF Funds with respect to the transactions
contemplated by this Agreement, and any supplement or amendment thereto or
to the documents contained or incorporated therein by reference (the "N-14
Registration Statement"), and (ii) the proxy materials of Qualivest included
in the N-14 Registration Statement and filed with the SEC pursuant to
Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act with respect
to the transactions contemplated by this Agreement, and any supplement or
amendment thereto or the documents appended thereto (the "Reorganization
Proxy Materials"), from their respective effective and clearance dates with
the SEC, through the time of the shareholders meeting referred to in Section
6 and at the Effective Time of the Reorganization: (i) shall comply in all
material respects with the provisions of the 1933 Act, 1934 Act and the 1940
Act, and the rules and regulations thereunder, and (ii) shall not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading; provided, that the representations and warranties made by it
in this subsection shall not apply to statements in or omissions from the
N-14 Registration Statement or the Reorganization Proxy Materials made in
reliance upon and in conformity with information furnished by or on behalf
of FAIF for use therein
<PAGE>
as provided in Section 7. For these purposes, information shall be
considered to have been provided "on behalf" of FAIF if furnished by its
investment adviser, administrator, custodian or transfer agent, acting in
their capacity as such.
(m) All of the issued and outstanding shares of each of the Qualivest
Funds have been validly issued and are fully paid and non-assessable
(recognizing that, under Massachusetts law, shareholders of the Qualivest
Funds could, under certain circumstances, be held personally liable for
obligations of Qualivest), and were offered for sale and sold in conformity
with the registration requirements of all applicable federal and state
securities laws.
(n) It shall not sell or otherwise dispose of any shares of the FAIF
Funds to be received in the transactions contemplated herein, except in
distribution to its shareholders as contemplated herein.
(o) It shall operate its business in the ordinary course between the date
hereof and the Effective Time of the Reorganization. It is understood that
such ordinary course of business will include the declaration and payment of
customary dividends and distributions and any other dividends and
distributions deemed advisable.
(p) Any reporting responsibility of a Qualivest Fund is and shall remain
the responsibility of the Qualivest Fund for all periods before and
including the Effective Time of the Reorganization and such later date on
which the Qualivest Fund is terminated.
(q) Except for agreements or other arrangements relating to the purchase
and sale of portfolio securities, it has furnished FAIF with copies or
descriptions of all contracts to which it is a party.
(r) Each Qualivest Fund shall provide a list of all portfolio securities
held by it to FAIF at least fifteen days before the Effective Time of the
Reorganization and shall immediately notify FAIF's investment adviser of any
portfolio security thereafter acquired or sold by the Qualivest Fund. At the
Effective Time of the Reorganization, no Qualivest Fund shall hold any
portfolio security that is impermissible under the investment policies,
objectives and limitations of the corresponding FAIF Fund.
5. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF FAIF. FAIF, on behalf
of the FAIF Funds, represents and warrants to, and agrees with, Qualivest as
follows, such representations, warranties and agreements being made on behalf of
each FAIF Fund on a several (and not joint, or joint and several) basis:
(a) It is a Maryland corporation duly created pursuant to its Articles of
Incorporation for the purpose of acting as a management investment company
under the 1940 Act, and is validly existing under the laws of the State of
Maryland. It is registered as an open-end management investment company
under the 1940 Act and its registration with the SEC as an investment
company is in full force and effect.
(b) It has the power to own all of its properties and assets and to
consummate the transactions contemplated herein, and has all necessary
federal, state and local authorizations to carry on its business as now
being conducted and, except as stated in Section 5(j) below, to consummate
the transactions contemplated by this Agreement.
(c) This Agreement has been duly authorized, executed and delivered by
it, and represents a valid and binding contract, enforceable in accordance
with its terms, subject as to enforcement to bankruptcy, insolvency,
reorganization, moratorium or other similar laws of general application
relating to or affecting creditors' rights and to the application of general
principles of equity. The execution and delivery of this Agreement does not,
and the consummation of the transactions contemplated by this Agreement will
not, violate FAIF's Articles of Incorporation or By-Laws or any agreement or
arrangement to which it is a party or by which it is bound.
(d) Each FAIF Fund intends to qualify as a regulated investment company
under Part I of Subchapter M of the Code, and with respect to each FAIF Fund
that has conducted operations prior to the Effective Time of the
Reorganization, has elected to qualify and has qualified as a regulated
investment company under Part I of Subchapter M of Subtitle A, Chapter 1, of
the Code, as of and since its first taxable year; has been a regulated
investment company under such Part of the Code
<PAGE>
at all times since the end of its first taxable year when it so
qualified; and qualifies and shall continue to qualify as a regulated
investment company for its current taxable year.
(e) The audited financial statements for its fiscal year ended September
30, 1996, and the unaudited financial statements for the period ended March
31, 1997, copies of which have been previously furnished to Qualivest,
present fairly the financial position of the FAIF Funds as of such dates and
the results of their operations for the periods indicated, in conformity
with generally accepted accounting principles applied on a consistent basis.
To the best of FAIF's knowledge, there are no liabilities of a material
amount of any FAIF Fund, whether accrued, absolute, contingent or otherwise
existing, other than, as of March 31, 1997, liabilities disclosed or
provided for in the unaudited financial statements for the period ended
March 31, 1997, and liabilities incurred in the ordinary course of business
subsequent to March 31, 1997 .
(f) It has valued, and will continue to value, its portfolio securities
and other assets in accordance with applicable legal requirements.
(g) There are no material contracts outstanding with respect to the FAIF
Funds that have not been disclosed in FAIF's current registration statement
and which under applicable law are required to be disclosed therein.
(h) At the Effective Time of the Reorganization, all federal and other
tax returns and reports of each FAIF Fund required by law to have been filed
by such time shall have been filed, and all federal and other taxes shall
have been paid so far as due, or provisions shall have been made for the
payment thereof and, to the best knowledge of each FAIF Fund, no such return
or report shall be currently under audit and no assessment shall have been
asserted with respect to such returns or reports.
(i) There are no material legal, administrative or other proceedings
pending or, to its knowledge threatened, against it or the FAIF Funds
which could result in liability on the part of FAIF or the FAIF Funds and
FAIF knows of no facts that might form the basis of a legal, administrative
or other proceeding which, if adversely determined, would materially and
adversely affect any FAIF Fund's financial condition or the conduct of its
business and FAIF is not a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body that materially
and adversely affects, or is reasonably likely to materially and adversely
affect, its business or its ability to consummate the transactions
contemplated herein.
(j) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by FAIF of the
transactions contemplated by this Agreement, except such as may be required
under the 1933 Act, the 1934 Act, the 1940 Act, the rules and regulations
under those Acts, or state securities laws, all of which shall have been
received prior to the Effective Time of the Reorganization, except for such
consents, approvals, authorizations or orders as may be required subsequent
to the Effective Time of the Reorganization.
(k) The N-14 Registration Statement and the Reorganization Proxy
Materials, from their respective effective and clearance dates with the SEC,
through the time of the shareholders meeting referred to in Section 6 and at
the Effective Time of the Reorganization, insofar as they relate to FAIF (i)
shall comply in all material respects with the provisions of the 1933 Act,
the 1934 Act and the 1940 Act, and the rules and regulations thereunder, and
(ii) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements made therein not misleading; provided, that the representations
and warranties in this subsection shall not apply to statements in or
omissions from the N-14 Registration Statement or the Reorganization Proxy
Materials made in reliance upon and in conformity with information furnished
by or on behalf of Qualivest for use therein as provided in Section 7. For
those purposes, information shall be considered to have been provided "on
behalf" of Qualivest if furnished by its investment adviser, administrator,
custodian or transfer agent, acting in their capacity as such.
(l) The shares of the FAIF Funds to be issued and delivered to the
Qualivest Funds for the account of the shareholders of the Qualivest Funds,
pursuant to the terms hereof, shall have been
<PAGE>
duly authorized as of the Effective Time of the Reorganization and, when
so issued and delivered, shall be duly and validly issued, fully paid and
non-assessable, and no shareholder of FAIF shall have any preemptive right
of subscription or purchase in respect thereto.
(m) All of the issued and outstanding shares of each of the FAIF Funds
have been validly issued and are fully paid and non-assessable, and were
offered for sale and sold in conformity with the registration requirements
of all applicable federal and state securities laws.
(n) It shall operate its business in the ordinary course between the date
hereof and the Effective Time of the Reorganization. It is understood that
such ordinary course of business will include the declaration and payment of
customary dividends and distributions and any other dividends and
distributions deemed advisable.
6. SHAREHOLDER ACTION. As soon as practicable after the effective date of the
N-14 Registration Statement and SEC clearance of the proxy solicitation
materials referred to in Section 7, but in any event prior to the Effective Time
of the Reorganization and as a condition thereto, the Board of Trustees of
Qualivest shall call, and Qualivest shall hold, a meeting of the shareholders of
all of its investment portfolios for the purpose of considering and voting upon:
(a) in the case of all Qualivest Funds, a proposal, in connection with
the merger between U.S. Bancorp and First Bank System, Inc., to ratify and
approve investment advisory agreements, on behalf of each Qualivest Fund,
between Qualivest and First Bank National Association;
(b) in the case of all Qualivest Funds, approval of this Agreement and
the transactions contemplated hereby; and
(c) such other matters as may be determined by the Board of Trustees of
Qualivest and the Board of Directors of FAIF.
7. REGULATORY FILINGS. FAIF shall file a post-effective amendment (the "N-1A
Post-Effective Amendment") to its registration statement on Form N-1A (File Nos.
33-16905; 811-5309) with the SEC as promptly as practicable so that all FAIF
Funds and their shares are registered under the 1933 Act and 1940 Act and shall
take all required actions to qualify such shares for sale in the appropriate
states. In addition, FAIF shall file an N-14 Registration Statement, which shall
include the Reorganization Proxy Materials of Qualivest, with the SEC, and with
the appropriate state securities commissions, relating to the matters described
in Section 6 as promptly as practicable. FAIF and Qualivest have cooperated and
shall continue to cooperate with each other, and have furnished and shall
continue to furnish each other with the information relating to itself that is
required by the 1933 Act, the 1934 Act, the 1940 Act, and the rules and
regulations under each of those Acts, to be included in the N-1A Post-Effective
Amendment, the N-14 Registration Statement and the Reorganization Proxy
Materials.
8. FAIF CONDITIONS. The obligations of FAIF hereunder shall be subject to the
following conditions precedent:
(a) This Agreement and the transactions contemplated by this Agreement
(which shall not be deemed to include, for these purposes, the matters
described in Section 6(a)) shall have been approved by the Board of Trustees
of Qualivest and by the shareholders of the Qualivest Funds in the manner
required by law and this Agreement.
(b) Qualivest shall have delivered to FAIF a statement of assets and
liabilities of each Qualivest Fund, together with a list of the portfolio
securities of the Qualivest Fund showing the tax costs of such securities by
lot and the holding periods of such securities, as of the Effective Time of
the Reorganization, certified by the Treasurer or Assistant Treasurer of
Qualivest as having been prepared in accordance with generally accepted
accounting principles consistently applied.
(c) Qualivest shall have duly executed and delivered to FAIF such bills
of sale, assignments, certificates and other instruments of transfer
("Transfer Documents") as FAIF may deem necessary or desirable to transfer
all of each Qualivest Fund's right, title and interest in and to the Fund
Assets. Such Fund Assets shall be accompanied by all necessary state stock
transfer stamps or cash for the appropriate purchase price therefor.
<PAGE>
(d) All representations and warranties of Qualivest made in this
Agreement shall be true and correct in all material respects as if made at
and as of the Effective Time of the Reorganization.
(e) Qualivest shall have delivered to FAIF a certificate executed in its
name by its President or Vice President and its Treasurer or Assistant
Treasurer, in a form reasonably satisfactory to FAIF and dated as of the
Effective Time of the Reorganization, to the effect that the representations
and warranties of the Qualivest Funds made in this Agreement are true and
correct at and as of the Effective Time of the Reorganization, except as
they may be affected by the transactions contemplated by this Agreement.
(f) Qualivest shall have delivered to FAIF Qualivest's written
instructions to the custodian for the Qualivest Funds, acknowledged and
agreed to in writing by such custodian, irrevocably instructing such
custodian to transfer to each FAIF Fund all of the corresponding Qualivest
Fund's portfolio securities, cash and any other assets to be acquired by
such FAIF Fund pursuant to this Agreement.
(g) Qualivest shall have delivered to FAIF a certificate of Qualivest's
transfer agent stating that the records maintained by the transfer agent
(which shall be made available to FAIF) contain the names and addresses of
the shareholders of each Qualivest Fund and the numbers and classes of the
outstanding shares of such Qualivest Fund owned by each such shareholder as
of the Effective Time of the Reorganization.
(h) At or prior to the Effective Time of the Reorganization, the expenses
incurred by each Qualivest Fund (or accrued up to the Effective Time of the
Reorganization) shall have been maintained by Qualivest Funds' investment
adviser or otherwise so as not to exceed any contractual expense limitations
or any expense limitations set forth in such Qualivest Fund's then current
prospectus.
(i) At or prior to the Effective Time of the Reorganization, appropriate
action shall have been taken by Qualivest Funds' investment adviser or
otherwise such that no unamortized organizational expenses shall be
reflected in any Qualivest Fund's statement of assets and liabilities
delivered pursuant to Section 8(b).
(j) FAIF shall have received an opinion of Dechert Price & Rhoads,
counsel to Qualivest, in form reasonably satisfactory to FAIF and dated the
Effective Time of the Reorganization, substantially to the effect that (i)
Qualivest is a Massachusetts business trust duly established and validly
existing under the laws of the Commonwealth of Massachusetts; (ii) this
Agreement and the Transfer Documents have been duly authorized, executed and
delivered by Qualivest and represent legal, valid and binding contracts,
enforceable in accordance with their terms, subject as to enforcement to
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance
and other similar laws of general application relating to or affecting
creditors' rights and to the application of general principles of equity;
(iii) the execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated by this Agreement will not,
violate the Declaration of Trust or By-Laws of Qualivest or any material
contract known to such counsel to which Qualivest is a party or by which it
is bound; (iv) the only Qualivest shareholder approvals required with
respect to the consummation of the transactions contemplated by this
Agreement are the approval of a majority of the shareholders of each
Qualivest Fund voting separately on a portfolio-by-portfolio basis; and (v)
no consent, approval, authorization or order of any court or governmental
authority is required for the consummation by Qualivest of the transactions
contemplated by this Agreement, except such as have been obtained under the
1933 Act, the 1934 Act, the 1940 Act, the rules and regulations under those
Acts and such as may be required under the state securities laws or such as
may be required subsequent to the Effective Time of the Reorganization. Such
opinion may rely on the opinion of other counsel to the extent set forth in
such opinion, provided such other counsel is reasonably acceptable to FAIF.
(k) FAIF shall have received an opinion of Dorsey & Whitney LLP addressed
to FAIF and Qualivest in form reasonably satisfactory to them, and dated the
Effective Time of the Reorganization, substantially to the effect that, for
federal income tax purposes (i) the transfer by each Qualivest Fund of all
of its Fund Assets to the corresponding FAIF Fund in exchange for shares of
<PAGE>
the corresponding FAIF Fund, and the distribution of such shares to the
shareholders of the Qualivest Fund, as provided in this Agreement, will
constitute a reorganization within the meaning of Section 368(a)(1)(C), (D)
or (F) of the Code; (ii) no income, gain or loss will be recognized by the
Qualivest Funds as a result of such transactions; (iii) no income, gain or
loss will be recognized by the FAIF Funds as a result of such transactions;
(iv) no income, gain or loss will be recognized by the shareholders of the
Qualivest Funds on the distribution to them by the Qualivest Funds of shares
of the corresponding FAIF Funds in exchange for their shares of the
Qualivest Funds (but shareholders of a Qualivest Fund subject to taxation
will recognize income upon receipt of any net investment income or net
capital gains of such Qualivest Fund which are distributed by such Qualivest
Fund prior to the Effective Time of the Reorganization); (v) the tax basis
of the FAIF Fund shares received by each shareholder of a Qualivest Fund
will be the same as the tax basis of the shareholder's Qualivest Fund shares
exchanged therefor; (vi) the tax basis of the Fund Assets received by each
FAIF Fund will be the same as the basis of such Fund Assets in the hands of
the corresponding Qualivest Fund immediately prior to the transactions;
(vii) a shareholder's holding period for FAIF Fund shares will be determined
by including the period for which the shareholder held the shares of the
Qualivest Fund exchanged therefor, provided that the shareholder held such
shares of the Qualivest Fund as a capital asset at the Effective Time of the
Reorganization; (viii) the holding period of each FAIF Fund with respect to
the Fund Assets will include the period for which such Fund Assets were held
by the corresponding Qualivest Fund provided that the Qualivest Fund held
such assets as capital assets; and (ix) each FAIF Fund will succeed to and
take into account the earnings and profits, or deficit in earnings and
profits, of the corresponding Qualivest Fund as of the Effective Time of the
Reorganization.
(l) The Fund Assets to be transferred to an FAIF Fund under this
Agreement shall include no assets which such FAIF Fund may not properly
acquire pursuant to its investment limitations or objectives or may not
otherwise lawfully acquire.
(m) The N-1A Post-Effective Amendment and the N-14 Registration Statement
shall have become effective under the 1933 Act and no stop order suspending
such effectiveness shall have been instituted or, to the knowledge of FAIF,
contemplated by the SEC and the parties shall have received all permits and
other authorizations necessary under state securities laws to consummate the
transactions contemplated by this Agreement.
(n) No action, suit or other proceeding shall be threatened or pending
before any court or governmental agency in which it is sought to restrain or
prohibit or obtain damages or other relief in connection with this Agreement
or the transactions contemplated herein.
(o) The SEC shall not have issued any unfavorable advisory report under
Section 25(b) of the 1940 Act nor instituted any proceeding seeking to
enjoin consummation of the transactions contemplated by this Agreement under
Section 25(c) of the 1940 Act.
(p) Prior to the Effective Time of the Reorganization, each Qualivest
Fund shall have declared a dividend or dividends, with a record date and
ex-dividend date prior to the Effective Time of the Reorganization, which,
together with all previous dividends, shall have the effect of distributing
to its shareholders all of its net investment company taxable income, if
any, for the taxable years ending July 31, 1997 and for the taxable periods
from said date to and including the Effective Time of the Reorganization
(computed without regard to any deduction for dividends paid), and all of
its net capital gain, if any, realized in taxable years ending July 31,
1997, and in the taxable periods from said date to and including the
Effective Time of Reorganization; provided, however, that Qualivest Small
Companies Value Fund and Qualivest International Opportunities Fund shall
not be required to distribute net investment company taxable income for, and
net capital gain realized in, the period from July 31, 1997 to and including
the Effective Time of the Reorganization.
(q) Qualivest shall have performed and complied in all material respects
with each of its agreements and covenants required by this Agreement to be
performed or complied with by it prior to or at the Effective Time of the
Reorganization.
(r) FAIF shall have been furnished at the Effective Time of the
Reorganization with a certificate signed by an appropriate officer of BISYS
Group, Inc. ("BISYS") dated as of such date
<PAGE>
stating that all statistical and research data, clerical, accounting and
bookkeeping records, periodic reports to the SEC and any state securities
agencies, tax returns and other tax filings, shareholder lists and other
material shareholder data, complaint files and all other information, books,
records and documents maintained by BISYS (or any affiliate of BISYS) and
belonging to the Qualivest Funds, including those required to be maintained
by Section 31(a) of the 1940 Act and Rules 31a-1 to 31a-3 thereunder, have
been delivered to FAIF.
9. QUALIVEST CONDITIONS. The obligations of Qualivest hereunder shall be
subject to the following conditions precedent:
(a) This Agreement and the transactions contemplated by this Agreement
(which shall not be deemed, for these purposes, to include the matter
described in Section 6(a)) shall have been approved by the Board of
Directors of FAIF and by the shareholders of the Qualivest Funds in the
manner required by law and this Agreement.
(b) All representations and warranties of FAIF made in this Agreement
shall be true and correct in all material respects as if made at and as of
the Effective Time of the Reorganization.
(c) FAIF shall have delivered to Qualivest a certificate executed in its
name by its President or Vice President and its Treasurer or Assistant
Treasurer, in a form reasonably satisfactory to Qualivest and dated as of
the Effective Time of the Reorganization, to the effect that the
representations and warranties of the FAIF Funds made in this Agreement are
true and correct at and as of the Effective Time of the Reorganization,
except as they may be affected by the transactions contemplated by this
Agreement and that, to its best knowledge, the Fund Assets to be transferred
to an FAIF Fund under this Agreement as set forth in Subsection 8(b) include
only assets which such FAIF Fund may properly acquire under its investment
policies, limitations and objectives and may otherwise be lawfully acquired
by such FAIF Fund.
(d) Qualivest shall have received an opinion of Dorsey & Whitney LLP in
form reasonably satisfactory to Qualivest and dated the Effective Time of
the Reorganization, substantially to the effect that (i) FAIF is a Maryland
corporation duly established and validly existing under the laws of the
State of Maryland; (ii) the shares of the FAIF Funds to be delivered to the
Qualivest Funds as provided for by this Agreement are duly authorized and
upon delivery will be validly issued, fully paid and non-assessable by FAIF;
(iii) this Agreement has been duly authorized, executed and delivered by
FAIF, and represents a legal, valid and binding contract, enforceable in
accordance with its terms, subject as to enforcement to bankruptcy,
insolvency, reorganization, moratorium or other similar laws of general
application relating to or affecting creditors' rights generally and to the
application of general principles of equity; (iv) the execution and delivery
of this Agreement did not, and the consummation of the transactions
contemplated by this Agreement will not, violate the Articles of
Incorporation or By-Laws of FAIF or any material contract known to such
counsel to which FAIF is a party or by which it is bound; and (v) no
consent, approval, authorization or order of any court or governmental
authority is required for the consummation by FAIF of the transactions
contemplated by this Agreement, except such as have been obtained under the
1933 Act, the 1934 Act, the 1940 Act, the rules and regulations under those
Acts and such as may be required by state securities laws or such as may be
required subsequent to the Effective Time of the Reorganization. Such
opinion may rely on the opinion of other counsel to the extent set forth in
such opinion, provided such other counsel is reasonably acceptable to
Qualivest.
(e) Qualivest shall have received an opinion of Dorsey & Whitney LLP
addressed to FAIF and Qualivest in form reasonably satisfactory to them, and
dated the Effective Time of Reorganization, with respect to the matters
specified in Subsection 8(k).
(f) The N-1A Post-Effective Amendment and the N-14 Registration Statement
shall have become effective under the 1933 Act and no stop order suspending
the effectiveness shall have been instituted, or to the knowledge of FAIF,
contemplated by the SEC and the parties shall have received all permits and
other authorizations necessary under state securities laws to consummate the
transactions contemplated herein.
<PAGE>
(g) No action, suit or other proceeding shall be threatened or pending
before any court or governmental agency in which it is sought to restrain
or prohibit, or obtain damages or other relief in connection with, this
Agreement or the transactions contemplated herein.
(h) The SEC shall not have issued any unfavorable advisory report under
Section 25(b) of the 1940 Act nor instituted any proceeding seeking to
enjoin consummation of the transactions contemplated by this Agreement under
Section 25(c) of the 1940 Act.
(i) FAIF shall have performed and complied in all material respects with
each of its agreements and covenants required by this Agreement to be
performed or complied with by it prior to or at the Effective Time of the
Reorganization.
(j) Qualivest shall have received from FAIF a duly executed instrument
whereby each FAIF Fund assumes all of the liabilities of its corresponding
Qualivest Fund.
10. FURTHER ASSURANCES. Subject to the terms and conditions herein provided,
each of the parties hereto shall use its best efforts to take, or cause to be
taken, such action, to execute and deliver, or cause to be executed and
delivered, such additional documents and instruments and to do, or cause to be
done, all things necessary, proper or advisable under the provisions of this
Agreement and under applicable law to consummate and make effective the
transactions contemplated by this Agreement, including without limitation,
delivering and/or causing to be delivered to the other party hereto each of the
items required under this Agreement as a condition to such party's obligations
hereunder. In addition, Qualivest shall deliver or cause to be delivered to
FAIF, each account, book, record or other document of the Qualivest Funds
required to be maintained by Section 31(a) of the 1940 Act and Rules 31a-1 to
31a-3 thereunder (regardless of whose possession they are in).
11. INDEMNIFICATION. (a) FAIF agrees to indemnify and hold harmless Qualivest
and each of Qualivest's trustees and officers from and against any and all
losses, claims, damages, liabilities or expenses (including, without limitation,
the payment of reasonable legal fees and reasonable costs of investigation) to
which, jointly or severally, Qualivest or any of its trustees or officers may
become subject, insofar as any such loss, claim, damage, liability or expense
(or actions with respect thereto) arises out of or is based on any breach by
FAIF of any of its representations, warranties, covenants or agreements set
forth in this Agreement.
(b) Qualivest agrees to indemnify and hold harmless FAIF and each of FAIF's
directors and officers from and against any and all losses, claims, damages,
liabilities or expenses (including, without limitation, the payment of
reasonable legal fees and reasonable costs of investigation) to which, jointly
or severally, FAIF or any of its directors or officers may become subject,
insofar as any such loss, claim, damage, liability or expense (or actions with
respect thereto) arises out of or is based on any breach by Qualivest of any of
its representation, warranties, covenants or agreements set forth in this
Agreement.
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the parties set forth in this Agreement shall survive the
delivery of the Fund Assets to the FAIF Funds and the issuance of the shares
of the FAIF Funds at the Effective Time of the Reorganization.
13. TERMINATION OF AGREEMENT. This Agreement may be terminated by a party at
or, in the case of Subsections 13(c) or (d), below, at any time prior to, the
Effective Time of the Reorganization by a vote of a majority of its Board of
Directors/Trustees as provided below:
(a) by FAIF if the conditions set forth in Section 8 are not satisfied
as specified in said Section;
(b) by Qualivest if the conditions set forth in Section 9 are not
satisfied as specified in said Section;
(c) by mutual consent of both parties; and
(d) by Qualivest or FAIF if determined by its Board of Trustees or
Directors that proceeding with the transactions contemplated herein is
inadvisable.
14. AMENDMENT AND WAIVER. At any time prior to or (to the fullest extent
permitted by law) after approval of this Agreement by the shareholders of
Qualivest (a) the parties hereto may, by written agreement authorized by their
respective Boards of Directors/Trustees and with or without the further
<PAGE>
approval of their shareholders, amend any of the provisions of this Agreement,
and (b) either party may waive any breach by the other party or the failure to
satisfy any of the conditions to its obligations (such waiver to be in writing
and authorized by the Board of Directors/Trustees of the waiving party with or
without the approval of such party's shareholders). Without limiting the
foregoing, in the event shareholder approval of the matters specified in Section
6 is obtained with respect to certain Qualivest Funds but not with respect to
the other Qualivest Funds, with the result that the transactions contemplated by
this Agreement may be consummated with respect to some but not all the Qualivest
Funds, the Board of Directors of FAIF and the Board of Trustees of Qualivest
may, in the exercise of their reasonable business judgment, either abandon this
Agreement with respect to all of the Qualivest Funds or direct that the
Reorganization and other transactions described herein be consummated to the
degree the Boards deem advisable.
15. GOVERNING LAW. This Agreement and the transactions contemplated hereby
shall be governed, construed and enforced in accordance with the laws of the
State of Minnesota.
16. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
respective successors and permitted assigns of the parties hereto. This
Agreement and the rights, obligations and liabilities hereunder may not be
assigned by either party without the consent of the other party.
17. BENEFICIARIES. Nothing contained in this Agreement shall be deemed to
create rights in persons not parties hereto, other than the successors and
permitted assigns of the parties.
18. BROKERAGE FEES AND EXPENSES. FAIF and Qualivest each represents and
warrants to the other that there are no brokers or finders entitled to
receive any payments in connection with the transactions provided for herein.
19. QUALIVEST LIABILITY. The Declaration of Trust for Qualivest, filed on May
19, 1994, a copy of which, together with all amendments thereto, is on file in
the Office of the Secretary of the Commonwealth of Massachusetts, provides (i)
that the name "Qualivest Funds" refers to the trustees under the Declaration of
Trust collectively as trustees and not as individuals or personally, (ii) that
no shareholder shall be subject to any personal liability whatsoever to any
person in connection with trust property or the acts, obligations or affairs of
the trust, and (iii) that no trustee, officer, employee or agent of the trust
shall be subject to any personal liability whatsoever to any person, other than
to the trust or its shareholders, in connection with trust property or the
affairs of the trust, save only that arising from bad faith, willful
misfeasance, gross negligence or reckless disregard of his duties with respect
to such person; and all such persons shall look solely to the trust property for
satisfaction of claims of any nature arising in connection with the affairs of
the trust.
20. NOTICES. All notices required or permitted herein shall be in writing and
shall be deemed to be properly given when delivered personally or by
telefacsimile to the party entitled to receive the notice or when sent by
certified or registered mail, postage prepaid, or delivered to an
internationally recognized overnight courier service, in each case properly
addressed to the party entitled to receive such notice at the address or telefax
number stated below or to such other address or telefax number as may hereafter
be furnished in writing by notice similarly given by one party to the other
party hereto:
If to FAIF: First American Investment Funds, Inc.
Oaks, Pennsylvania 19456
With copies to: Michael J. Radmer
Dorsey & Whitney LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402
Telefax Number: (612) 340-8738
If to Qualivest: Qualivest Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
<PAGE>
With copies to: Marie J. Lilly, Esq.
Law Division
U.S. Bancorp
111 S.W. Fifth Avenue, Suite T-2
Portland, Oregon 97204
Telefax Number: (503) 275-5000
Jeffrey L. Steele, Esq.
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005
Telefax Number: (202) 626-3334
21. ANNOUNCEMENTS. Any announcement or similar publicity with respect to this
Agreement or the transactions contemplated herein shall be made only at such
time and in such manner as the parties shall agree; provided that nothing herein
shall prevent either party upon notice to the other party from making such
public announcements as such party's counsel may consider advisable in order to
satisfy the party's legal and contractual obligations in such regard.
22. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding of the parties hereto and supersedes any and all prior
agreements, arrangements and understandings relating to matters provided for
herein.
23. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed to be
an original, but all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized officers designated below as of the date first
written above.
QUALIVEST FUNDS
ATTEST:
__________________________ _________________________________
Gregory T. Maddox Irimga McKay
TREASURER AND SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
FIRST AMERICAN INVESTMENT
FUNDS, INC.
ATTEST:
__________________________ _________________________________
Michael J. Radmer David Lee
SECRETARY PRESIDENT
<PAGE>
APPENDIX IV
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
This Appendix compares the investment objectives and certain investment policies
and restrictions of the FAIF Funds and their corresponding Qualivest Portfolios.
The following is qualified in its entirety by the more detailed information
included in the prospectuses for the Existing FAIF Funds and the Qualivest
Portfolios which are incorporated by reference in this Combined Proxy
Statement/Prospectus, and to the preliminary prospectuses for the Class A and
Class B shares and for the Institutional Class shares of the New FAIF Funds,
which are attached to this Combined Proxy Statement/Prospectus as Appendix VIII
and Appendix IX, respectively.
The investment objective of each Qualivest Portfolio is fundamental, which means
that it may not be changed without a vote of the holders of a majority, as that
term is defined in the 1940 Act, of the outstanding shares of that Portfolio.
The investment objectives of the FAIF Funds are not fundamental and therefore
may be changed without a vote of shareholders. Such changes could result in an
FAIF Fund having investment objectives different from those which shareholders
considered appropriate at the time of approving the Reorganization. Shareholders
will receive written notification at least 30 days prior to any change in an
FAIF Fund's investment objectives.
QUALIVEST LARGE COMPANIES VALUE FUND/FAIF STOCK FUND
INVESTMENT OBJECTIVES
Qualivest Large Companies Value Fund ("Qualivest Large Companies Fund") has an
objective of seeking long-term capital appreciation.
FAIF Stock Fund has a primary objective of capital appreciation. A secondary
objective of the Fund is to provide current income.
INVESTMENT POLICIES AND RESTRICTIONS
PRINCIPAL INVESTMENTS
Under normal market conditions, Qualivest Large Companies Fund invests at least
65% of its total assets in common stocks and securities convertible into common
stocks of companies with market capitalizations of at least $1 billion at the
time of purchase. The Fund's investments in securities convertible into common
stocks may be made without regard to any ratings of such securities.
FAIF Stock Fund invests at least 65% of its total assets under normal market
conditions in common stocks diversified among a broad range of industries and
among companies that have market capitalizations of at least $500 million. FAIF
Stock Fund's investments in securities convertible into common stocks are not
considered common stocks for purposes of this 65% requirement. The Fund may not
invest more than 5% of its net assets in convertible securities rated below
investment grade.
As a result of the above differences in the Funds' principal investments,
Qualivest Large Companies Fund may have a larger average capitalization, and may
have more convertible securities rated below investment grade, than FAIF Stock
Fund.
Qualivest Large Companies Fund seeks to achieve its objective by emphasizing
investment in companies that are, in the investment adviser's opinion,
undervalued relative to other securities. In selecting portfolio securities for
Qualivest Large Companies Fund, consideration may be given to income and payment
of dividends. The Fund will invest primarily in common stocks and securities
convertible into common stocks of companies believed by the adviser to be
characterized by sound management and the potential for long-term capital
appreciation. Similarly, the adviser for FAIF Stock Fund employs a value-based
discipline and invests in securities of companies that are selling at less than
fair value and offer the potential for appreciation.
OTHER INVESTMENTS
Qualivest Large Companies Fund may invest up to 35% of the value of its total
assets in preferred stocks, corporate bonds, notes, units of real estate
investment trusts, asset-backed and mortgage-related
<PAGE>
securities, warrants, and short-term obligations (with maturities of 12 months
or less) consisting of commercial paper (including variable amount master demand
notes), bankers' acceptances, certificates of deposit, repurchase agreements,
obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities, and demand and time deposits of domestic and foreign banks
and savings and loan associations. The Fund may also hold securities of other
investment companies and depositary or custodial receipts representing
beneficial interests in any of the foregoing securities. Corporate debt
securities must be rated at the time of purchase within the four highest rating
groups assigned by a nationally recognized statistical rating organization
("NRSRO") (E.G., in the case of Moody's Investors Service, Inc. ("Moody's"),
Aaa, Aa, A and Baa, and in the case of Standard & Poor's Corporation ("S&P"),
AAA, AA, A and BBB), which are considered to be investment grade, or, if
unrated, such securities must be of comparable quality as determined by the
investment 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.
FAIF Stock Fund may invest up to 35% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of less than $500
million and in the following types of fixed income securities: securities issued
or guaranteed by the U.S. government or its agencies or instrumentalities ("U.S.
government securities"), nonconvertible preferred stocks, nonconvertible
corporate debt securities and short-term obligations such as rated commercial
paper and variable amount master demand notes; U.S. dollar-denominated time and
savings deposits (including certificates of deposit); bankers' acceptances;
short-term U.S. government securities; repurchase agreements; securities of
other mutual funds which invest primarily in debt obligations with remaining
maturities of 13 months or less; and other similar high-quality short-term U.S.
dollar-denominated obligations. Investments in nonconvertible preferred stocks
and nonconvertible corporate debt securities are limited to investment grade
securities or non-rated securities judged to be of comparable quality by the
investment adviser.
Each Fund may invest up to 25% of its total assets in securities of foreign
issuers. With respect to FAIF Stock Fund, however, such securities must be
either listed on a U.S stock exchange or represented by American Depositary
Receipts. As a result, FAIF Stock Fund's investments in foreign securities are
not subject to currency risks during the settlement period for purchases or
sales. Qualivest Large Companies Fund may invest in foreign securities either
directly or through the purchase of American Depositary Receipts. Direct
investments in foreign securities are subject to currency risk as well as other
risks associated with investments in securities of foreign issuers.
Each of Qualivest Large Companies Fund and FAIF Stock Fund may invest in high
quality short-term securities without limitation for temporary defensive
purposes.
INVESTMENT TECHNIQUES
Qualivest Large Companies Fund and FAIF Stock Fund may engage in the following
investment techniques to the extent indicated.
REPURCHASE AGREEMENTS. Both Funds may invest in repurchase agreements.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS. Qualivest Large
Companies Fund may borrow funds by entering into reverse repurchase agreements
and dollar roll agreements. FAIF Stock Fund may not enter into such agreements.
PUT AND CALL OPTIONS. Each Fund may purchase put and call options on securities
and securities indexes, may write covered call options on securities and may
write call options on indexes. FAIF Stock Fund may write covered call options
covering up to 25% of the equity securities owned by the Fund. Similarly, for
Qualivest Large Companies Fund it is not expected that the underlying value of
securities subject to such options will exceed 25% of total assets. Qualivest
Large Companies Fund may also purchase put and call options and write covered
call options on foreign currencies for the purposes of hedging against adverse
movements in exchange rates between currencies. FAIF Stock Fund does not engage
in foreign currency options transactions.
FOREIGN CURRENCY TRANSACTIONS. Qualivest Large Companies Fund may enter into
forward currency contracts in order to hedge against adverse movements in
exchange rates between currencies. FAIF Stock Fund does not enter into such
contracts.
<PAGE>
FUTURES CONTRACTS. Qualivest Large Companies Fund may enter into contracts for
the future delivery of securities or foreign currencies and futures contracts
based on a specific security, class of securities, foreign currency or an index,
purchase or sell options on any such futures contracts and engage in related
closing transactions. FAIF Stock Fund may not enter into futures contracts or
purchase or sell options thereon.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS. Each Fund may purchase securities
on a when-issued or delayed-delivery basis.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, each
Fund 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.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions which are set forth in
full in such Fund's Statement of Additional Information. Among those
restrictions are the following:
BORROWING. Qualivest Large Companies Fund may borrow from banks or brokers in
amounts up to 10% of the value of its total assets at the time of such
borrowing. Qualivest Large Companies Fund will not purchase securities while its
borrowings exceed 5% of its total assets. FAIF Stock Fund may borrow money from
banks for temporary or emergency purposes only, in an amount not to exceed 10%
of its total assets.
ILLIQUID SECURITIES. Each Fund may invest up to 15% of its net assets in
illiquid securities.
QUALIVEST OPTIMIZED STOCK FUND/FAIF EQUITY INDEX FUND
INVESTMENT OBJECTIVES
Qualivest Optimized Stock Fund ("Qualivest Optimized Fund") has an objective of
seeking capital appreciation and current income.
FAIF Equity Index Fund ("FAIF Index Fund") has an objective of providing
investment results that correspond to the performance of the Standard & Poor's
500 Composite Stock Price Index (the "S&P 500").
INVESTMENT POLICIES AND RESTRICTIONS
PRINCIPAL INVESTMENTS
Under normal market conditions, at least 80% of Qualivest Optimized Fund's total
assets will be invested in common stocks and securities convertible into common
stocks of companies whose securities are listed on the S&P 500 Index. While it
is anticipated that substantially all of the assets will be so invested, the
Fund may invest up to 20% of its total assets as described below. Unlike FAIF
Index Fund, Qualivest Optimized Fund does not intend to mirror the performance
of the S&P 500; rather, it seeks to optimize its investments in S&P 500
companies and outperform the S&P 500 over time by investing in securities that,
on the basis of computerized modeling and performance optimization strategies
implemented by the adviser, demonstrate attributes that indicate performance
superior to that of the S&P 500 as a whole.
FAIF Index Fund invests substantially (at least 65% of total assets) in common
stocks included in the S&P 500. The Fund is managed by utilizing a computer
program that identifies which stocks should be purchased or sold in order to
replicate, as closely as possible, the composition of the S&P 500. The Fund
includes a stock in its investment portfolio in the order of the stock's
weighting in the S&P 500, starting with the most heavily weighted stock. Thus,
the proportion of Fund assets invested in a stock or industry closely
approximates the percentage of the S&P 500 represented by that stock or
industry.
For both the Qualivest Optimized Fund and the FAIF Index Fund, portfolio
turnover is expected to be below that of actively managed mutual funds.
OTHER INVESTMENTS
Qualivest Optimized Fund may invest up to 20% of the value of its total assets
in short-term obligations (with maturities of 12 months or less) consisting of
commercial paper (including variable
<PAGE>
amount master demand notes), bankers' acceptances, certificates of deposit,
repurchase agreements, obligations issued or guaranteed by the U.S. government
or its agencies or instrumentalities, and demand and time deposits of domestic
and foreign banks and savings and loan associations. The Fund may also hold
securities of other investment companies and depositary or custodial receipts
representing beneficial interests in any of the foregoing securities.
FAIF Index Fund may invest up to 20% of its total assets in the aggregate in
stock index futures contracts, options on stock indices, options on stock index
futures, and index participation contracts based on the S&P 500. The Fund will
not invest in these types of contracts and options for speculative purposes, but
rather to maintain sufficient liquidity to meet redemption requests; to increase
the level of Fund assets devoted to replicating the composition of the S&P 500;
and to reduce transaction costs. In order to maintain liquidity during times of
unusual market conditions, the Fund also may invest temporarily in cash and high
quality short-term securities.
INVESTMENT TECHNIQUES
Qualivest Optimized Fund and FAIF Index Fund may engage in the following
investment techniques to the extent indicated.
REPURCHASE AGREEMENTS. Both Funds may invest in repurchase agreements.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS. Qualivest Optimized
Fund may borrow funds by entering into reverse repurchase agreements and dollar
roll agreements. FAIF Index Fund may not enter into such agreements.
PUT AND CALL OPTIONS. Qualivest Optimized Fund may purchase put and call options
on securities and securities indexes, may write covered call options on
securities and may write call options on indexes. FAIF Index Fund may purchase
put and call options on securities indexes and write call options on indexes.
For Qualivest Optimized Fund it is not expected that the underlying value of
securities subject to call options will exceed 25% of total assets.
FUTURES CONTRACTS. Qualivest Optimized Fund may enter into contracts for the
future delivery of securities and futures contracts based on a specific
security, class of securities, foreign currency or an index, purchase or sell
options on any such futures contracts and engage in related closing
transactions. FAIF Index Fund may purchase stock index futures and options on
stock index futures.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS. Qualivest Optimized Fund may
purchase securities on a when-issued or delayed-delivery basis. FAIF Index Fund
may not engage in such transactions.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, each
Fund 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.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions which are set forth in
full in such Fund's Statement of Additional Information. Among those
restrictions are the following:
BORROWING. Qualivest Optimized Fund may borrow from banks or brokers in amounts
up to 10% of the value of its total assets at the time of such borrowing.
Qualivest Optimized Fund will not purchase securities while its borrowings
exceed 5% of its total assets. FAIF Index Fund may borrow money from banks for
temporary or emergency purposes only, in an amount not to exceed 10% of its
total assets.
ILLIQUID SECURITIES. Each Fund may invest up to 15% of its net assets in
illiquid securities.
QUALIVEST INTERMEDIATE BOND FUND/FAIF INTERMEDIATE TERM INCOME FUND
QUALIVEST DIVERSIFIED BOND FUND/FAIF FIXED INCOME FUND
INVESTMENT OBJECTIVES
Qualivest Intermediate Bond Fund ("Qualivest Intermediate Fund") and Qualivest
Diversified Bond Fund ("Qualivest Diversified Fund") each has an objective of
seeking current income consistent with preservation of capital.
<PAGE>
FAIF Intermediate Term Income Fund ("FAIF Intermediate Fund") has an objective
of providing current income to the extent consistent with preservation of
capital. FAIF Fixed Income Fund ("FAIF Income Fund") has an objective of
providing a high level of current income consistent with limited risk to
capital.
INVESTMENT POLICIES AND RESTRICTIONS
PRINCIPAL INVESTMENTS
Under normal market conditions, each of Qualivest Intermediate Fund and
Qualivest Diversified Fund will invest at least 65% of its total assets in
bonds, which can have maturities of up to 30 years or more. These bonds include
corporate debt obligations, mortgage-related securities and asset-backed
securities rated investment grade or, if unrated, of comparable quality, and
mortgage-related securities and other obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities. For each Qualivest Fund,
investments in debt securities within the fourth highest rating group assigned
by an NRSRO and in comparable unrated securities are limited to 10% of total
assets. Qualivest Intermediate Fund will maintain a dollar-weighted average
maturity of three to seven years under ordinary market conditions. Qualivest
Diversified Fund's dollar-weighted average maturity under ordinary market
conditions will be seven to eleven years.
FAIF Intermediate Fund and FAIF Income Fund each invests in investment grade
debt securities, at least 65% of which are U.S. government obligations and
corporate debt obligations and mortgage-backed and asset-backed securities rated
at least A by S&P or Moody's or assigned an equivalent rating by another NRSRO.
Under normal market conditions, the weighted average maturity of FAIF
Intermediate Fund will range from two to seven years, similar to the range for
Qualivest Intermediate Fund. The weighted average maturity for FAIF Income Fund
under normal market conditions will not exceed 15 years. Thus, FAIF Income
Fund's average weighted maturity may be slightly longer than that of Qualivest
Diversified Fund, which ranges from seven to eleven years under ordinary market
conditions.
Investments for each of Qualivest Intermediate Fund and Qualivest Diversified
Fund may include the following: corporate debt securities and convertible debt
securities rated investment grade at the time of purchase by an NRSRO or, if
unrated, determined to be of comparable quality by the adviser; U.S. Treasury
obligations, including stripped U.S. Treasury obligations representing either
future interest or principal payments; mortgage-related securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities,
including collateralized mortgage obligations; privately issued mortgage-related
securities which are rated investment grade at the time of purchase by an NRSRO
or, if unrated, deemed to be of comparable quality by the adviser, including
collateralized mortgage obligations; and asset-backed securities meeting the
same ratings requirements. Qualivest Intermediate Fund and Qualivest Diversified
Fund may also invest in obligations of the Export-Import Bank of the United
States, in U.S. dollar denominated international bonds for which the primary
trading market is in the U.S. ("Yankee Bonds"), or for which the primary trading
market is abroad ("Eurodollar Bonds"), and in Canadian Bonds and bonds issued by
institutions, such as the World Bank and the European Economic Community,
organized for a specific purpose by two or more sovereign governments
("Supranational Agency Bonds"). In addition, Qualivest Intermediate Fund and
Qualivest Diversified Fund may hold short-term obligations (with maturities of
12 months or less) consisting of domestic and foreign commercial paper rated at
the time of purchase within the top two categories by an NRSRO or, if unrated,
of comparable quality as determined by the Funds' adviser. Such securities
include variable amount master demand notes, bankers' acceptances, certificates
of deposit and time deposits of domestic and foreign branches of U.S. banks and
foreign banks, and repurchase agreements. Each Qualivest Fund may also invest in
securities of other investment companies (up to 10% of its total assets) and in
guaranteed investment contracts.
Permitted investments for FAIF Intermediate Fund and FAIF Income Fund include
notes, bonds and discount notes of U.S. government agencies or
instrumentalities; domestic issues of corporate debt obligations having floating
or fixed rates of interest and rated at least BBB by S&P or Moody's, assigned an
equivalent rating by another NRSRO, or, if unrated, judged to be of comparable
quality in the judgment of the adviser; other fixed income securities, including
mortgage-backed securities and asset-backed securities, which are rated in one
of the four highest categories by an NRSRO or judged to
<PAGE>
be of comparable quality by the adviser; and commercial paper rated A-1 by S&P,
P-1 by Moody's, or assigned an equivalent rating by another NRSRO. Neither FAIF
Fund will invest more than 10% of its total assets, in the aggregate, in
interest-only, principal-only and inverse floating rate mortgage-backed
securities. In addition, neither FAIF Fund will invest more than 10% of its
total assets in unrated securities. Each FAIF Fund also may invest up to 15% of
its total assets in foreign securities payable in U.S. dollars.
OTHER INVESTMENTS
Each of Qualivest Intermediate Fund and Qualivest Diversified Fund may invest up
to 35% of its total assets in high quality money market instruments such as
commercial paper (including variable amount master demand notes), certificates
of deposit and bankers' acceptances, variable and floating rate notes and
asset-backed securities.
FAIF Intermediate Fund and FAIF Income Fund each may invest up to 35% of its
total assets in cash and cash items in order to utilize assets awaiting normal
investment. Cash items may include short-term obligations such as rated
commercial paper and variable amount master demand notes; U.S.
dollar-denominated time and savings deposits (including certificates of
deposit); bankers' acceptances; U.S. government securities; repurchase
agreements; and securities of other mutual funds which invest primarily in debt
obligations with remaining maturities of 13 months or less. Each FAIF Fund may
hold cash or invest in cash items without limitation for temporary defensive
purposes during times of unusual market conditions.
INVESTMENT TECHNIQUES
Qualivest Intermediate Fund and Qualivest Diversified Fund (the "Qualivest
Funds") and FAIF Intermediate Fund and FAIF Income Fund (the "FAIF Funds")
may engage in the following investment techniques to the extent indicated.
REPURCHASE AGREEMENTS. Both the Qualivest Funds and the FAIF Funds may invest
in repurchase agreements.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS. The Qualivest Funds
may borrow funds by entering into reverse repurchase agreements and dollar roll
agreements. The FAIF Funds may not enter into such agreements.
PUT AND CALL OPTIONS. The Qualivest Funds may purchase put and call options on
securities and securities indexes, may write covered call options on securities
and may write call options on indexes. It is not expected that the underlying
value of securities subject to such options will exceed 25% of a Fund's total
assets. The FAIF Funds may invest in exchange traded put and call options on
interest rate indices.
FUTURES CONTRACTS. The Qualivest Funds may enter into contracts for the future
delivery of securities or foreign currencies and futures contracts based on a
specific security, class of securities, foreign currency or an index, purchase
or sell options on any such futures contracts and engage in related closing
transactions. The FAIF Funds may invest in exchange traded put and call options
on interest rate futures contracts.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS. Both the Qualivest Funds and the
FAIF Funds may purchase securities on a when-issued or delayed-delivery basis.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, each
Qualivest Fund and each FAIF Fund 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.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions which are set forth in
full in such Fund's Statement of Additional Information. Among those
restrictions are the following:
BORROWING. Each Qualivest Fund may borrow from banks or brokers in amounts up to
10% of the value of its total assets at the time of such borrowing. Neither
Qualivest Fund will purchase securities
<PAGE>
while its borrowings exceed 5% of its total assets. The FAIF Funds may borrow
money from banks for temporary or emergency purposes only, in an amount not to
exceed 10% of a Fund's total assets.
ILLIQUID SECURITIES. Each Qualivest Fund and each FAIF Fund may invest up to
15% of its net assets in illiquid securities.
QUALIVEST SMALL COMPANIES VALUE FUND/FAIF SMALL CAP VALUE FUND
INVESTMENT OBJECTIVES
Qualivest Small Companies Value Fund ("Qualivest Small Companies Fund") has an
objective of seeking capital appreciation.
FAIF Small Cap Value Fund ("FAIF Small Cap Fund") has an objective of capital
appreciation.
INVESTMENT POLICIES AND RESTRICTIONS
PRINCIPAL INVESTMENTS
Under normal market conditions, Qualivest Small Companies Fund invests at least
65% of its total assets in commons stocks and securities convertible into common
stocks of companies with market capitalizations of less than $1 billion at the
time of purchase.
Similarly, under normal market conditions, FAIF Small Cap Fund invests at least
65% of its total assets in equity securities of small-capitalization companies
(those with market capitalizations of less than $1 billion at the time of
purchase). Equity securities include common stocks and securities which are
convertible into or exchangeable for, or which carry warrants or other rights to
acquire, common stock.
Qualivest Small Companies Fund's investments in securities convertible into
common stocks may be made without regard to any ratings of such securities,
whereas FAIF Small Cap Fund may not invest more than 5% of its net assets in
convertible securities rated below investment grade.
Qualivest Small Companies Fund seeks to achieve its objective by emphasizing
investment in companies that are, in the investment adviser's opinion,
undervalued relative to other securities. The Fund will invest primarily in
common stocks and securities convertible into common stocks of companies
believed by the adviser to be characterized by sound management and the
potential for long-term capital appreciation. Similarly, the adviser for FAIF
Stock Fund utilizes a value-based discipline, investing in equity securities it
believes are undervalued relative to other securities at the time of purchase.
OTHER INVESTMENTS
Qualivest Small Companies Fund may invest up to 35% of the value of its total
assets in preferred stocks, corporate bonds, notes, units of real estate
investment trusts, asset-backed and mortgage-related securities, warrants, and
short-term obligations (with maturities of 12 months or less) consisting of
commercial paper (including variable amount master demand notes), bankers'
acceptances, certificates of deposit, repurchase agreements, obligations issued
or guaranteed by the U.S. government or its agencies or instrumentalities, and
demand and time deposits of domestic and foreign banks and savings and loan
associations. The Fund may also hold securities of other investment companies
and depositary or custodial receipts representing beneficial interests in any of
the foregoing securities. Corporate debt securities must be rated at the time of
purchase within the four highest rating groups assigned by an NRSRO (E.G., in
the case of Moody's, Aaa, Aa, A and Baa, and in the case of S&P, AAA, AA, A and
BBB), which are considered to be investment grade, or, if unrated, such
securities must be of comparable quality as determined by the investment
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.
FAIF Small Cap Fund may invest up to 35% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of $1 billion or more
and in the following types of fixed income securities: securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities ("U.S.
government securities"), nonconvertible preferred stocks, nonconvertible
corporate debt securities
<PAGE>
and short-term obligations such as rated commercial paper and variable amount
master demand notes; U.S. dollar-denominated time and savings deposits
(including certificates of deposit); bankers' acceptances; short-term U.S.
government securities; repurchase agreements; securities of other mutual funds
which invest primarily in debt obligations with remaining maturities of 13
months or less; and other similar high-quality short-term U.S.
dollar-denominated obligations. Investments in nonconvertible preferred stocks
and nonconvertible corporate debt securities are limited to investment grade
securities or non-rated securities judged to be of comparable quality by the
investment adviser.
Each Fund may invest up to 25% of its total assets in securities of foreign
issuers. With respect to FAIF Small Cap Fund, however, such securities must be
either listed on a U.S stock exchange or represented by American Depositary
Receipts. As a result, FAIF Stock Fund's investments in foreign securities are
not subject to currency risks during the settlement period for purchases or
sales. Qualivest Small Companies Fund may invest in foreign securities either
directly or through the purchase of American Depositary Receipts. Direct
investments in foreign securities are subject to currency risk as well as other
risks associated with investments in securities of foreign issuers.
Each of Qualivest Small Companies Fund and FAIF Small Cap Fund may invest in
high quality short-term securities without limitation for temporary defensive
purposes.
INVESTMENT TECHNIQUES
Qualivest Small Companies Fund and FAIF Small Cap Fund may engage in the
following investment techniques to the extent indicated.
REPURCHASE AGREEMENTS. Both Funds may invest in repurchase agreements.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS. Qualivest Small
Companies Fund may borrow funds by entering into reverse repurchase agreements
and dollar roll agreements. FAIF Small Cap Fund may not enter into such
agreements.
PUT AND CALL OPTIONS. Each Fund may purchase put and call options on securities
and securities indexes, may write covered call options on securities and may
write call options on indexes. FAIF Small Cap Fund may write covered call
options covering up to 25% of the equity securities owned by the Fund.
Similarly, for Qualivest Small Companies Fund it is not expected that the
underlying value of securities subject to such options will exceed 25% of total
assets. Qualivest Small Companies Fund may also purchase put and call options
and write covered call options on foreign currencies for the purposes of hedging
against adverse movements in exchange rates between currencies. FAIF Small Cap
Fund does not engage in foreign currency options transactions.
FOREIGN CURRENCY TRANSACTIONS. Qualivest Small Companies Fund may enter into
forward currency contracts in order to hedge against adverse movements in
exchange rates between currencies. FAIF Small Cap Fund does not enter into such
contracts.
FUTURES CONTRACTS. Qualivest Small Companies Fund may enter into contracts for
the future delivery of securities or foreign currencies and futures contracts
based on a specific security, class of securities, foreign currency or an index,
purchase or sell options on any such futures contracts and engage in related
closing transactions. FAIF Small Cap Fund may not enter into futures contracts
or purchase or sell options thereon.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS. Each Fund may purchase securities
on a when-issued or delayed-delivery basis.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, each
Fund 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.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions which are set forth in
full in such Fund's Statement of Additional Information. Among those
restrictions are the following:
BORROWING. Qualivest Small Companies Fund may borrow from banks or brokers in
amounts up to 10% of the value of its total assets at the time of such
borrowing. Qualivest Small Companies Fund
<PAGE>
will not purchase securities while its borrowings exceed 5% of its total assets.
FAIF Small Cap Fund may borrow money from banks for temporary or emergency
purposes only, in an amount not to exceed 10% of its total assets.
ILLIQUID SECURITIES. Each Fund may invest up to 15% of its net assets in
illiquid securities.
QUALIVEST INTERNATIONAL OPPORTUNITIES FUND/FAIF INTERNATIONAL INDEX FUND
INVESTMENT OBJECTIVES
Qualivest International Opportunities Fund ("Qualivest International Fund") has
an objective of seeking capital appreciation. It seeks to achieve this objective
by investing primarily in common stocks and securities convertible into common
stocks of companies whose securities are listed on the Morgan Stanley Capital
International (Europe, Australasia, Far East) Index (the "EAFE Index").
FAIF International Index Fund ("FAIF International Fund") has an objective of
providing investment results that correspond to the performance of the EAFE
Index.
INVESTMENT POLICIES AND RESTRICTIONS
PRINCIPAL INVESTMENTS
Under normal market conditions, at least 80% of Qualivest International Fund's
total assets will be invested in common stocks and securities convertible into
common stocks (without regard to NRSRO rating) of foreign companies whose
securities are listed on the EAFE Index. While it is anticipated that
substantially all of its assets will be so invested, the Fund may invest up to
20% of its total assets in common stocks and securities convertible into common
stocks of large capitalization U.S. companies that the investment adviser deems
to present attractive investment opportunities due to such companies' foreign
business operations.
FAIF International Fund invests substantially (at least 65% of total assets) in
common stocks included in the EAFE Index. FAIF International Fund's adviser
believes that the Fund's objective can best be achieved by investing in the
common stocks of approximately 50% to 100% of the issues included in the EAFE
Index, depending on the size of the Fund. The Fund is managed by utilizing a
computer program that identifies which stocks should be purchased or sold in
order to replicate, as closely as possible, the composition of the EAFE Index.
The Fund includes a stock in its investment portfolio in the order of the
stock's weighting in the EAFE Index, starting with the most heavily weighted
stock. Thus, the proportion of Fund assets invested in a stock, industry or
country closely approximates the percentage of the EAFE Index represented by
that stock, industry or country.
For both the Qualivest International Fund and the FAIF International Fund,
portfolio turnover is expected to be below that of actively managed mutual
funds.
OTHER INVESTMENTS
Qualivest International Fund may invest up to 20% of the value of its total
assets in short-term obligations (with maturities of 12 months or less)
consisting of commercial paper (including variable amount master demand notes),
bankers' acceptances, certificates of deposit, repurchase agreements,
obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities, and demand and time deposits of domestic and foreign banks
and savings and loan associations. The Fund may also hold securities of other
investment companies and depositary or custodial receipts representing
beneficial interests in any of the foregoing securities.
FAIF International Fund may invest up to 20% of its total assets in the
aggregate in stock index futures contracts, options on stock indexes and options
on stock index futures, and index participation contracts based on the EAFE
Index. The Fund will not invest in these types of contracts and options for
speculative purposes, but rather to maintain sufficient liquidity to meet
redemption requests; to increase the level of Fund assets devoted to replicating
the composition of the EAFE Index; and to reduce transaction costs. In order to
maintain liquidity during times of unusual market conditions, the Fund also may
invest temporarily in cash and short-term obligations such as rated commercial
paper and variable amount master demand notes; U.S. dollar-denominated time and
savings deposits (including certificates of deposit); bankers' acceptances;
obligations of the U.S. government or its agencies or instrumentalities;
<PAGE>
repurchase agreements; securities of other mutual funds which invest primarily
in debt obligations with remaining maturities of 13 months or less; and other
similar high-quality short-term U.S. dollar-denominated obligations.
INVESTMENT TECHNIQUES
Qualivest International Fund and FAIF International Fund may engage in the
following investment techniques to the extent indicated.
REPURCHASE AGREEMENTS. Both Funds may invest in repurchase agreements.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS. Qualivest
International Fund may borrow funds by entering into reverse repurchase
agreements and dollar roll agreements. FAIF International Fund may not enter
into such agreements.
PUT AND CALL OPTIONS. Qualivest International Fund may purchase put and call
options on securities and securities indexes, may write covered call options on
securities and may write call options on indexes. FAIF International Fund may
purchase put and call options and write call options on securities indexes. For
Qualivest International Fund it is not expected that the underlying value of
securities subject to call options will exceed 25% of total assets.
FUTURES CONTRACTS. Qualivest International Fund may enter into contracts for the
future delivery of securities and futures contracts based on a specific
security, class of securities, foreign currency or an index, purchase or sell
options on any such futures contracts and engage in related closing
transactions. FAIF International Fund may purchase stock index futures and
options on stock index futures.
FOREIGN CURRENCY TRANSACTIONS. Qualivest International Fund may engage in
foreign currency transactions. The Fund may conduct its foreign currency
exchange transactions either on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market, or through forward contracts
to purchase or sell foreign currencies. Qualivest International Fund also may
hedge its foreign currency exchange rate risk by engaging in currency financial
futures and options transactions. FAIF International Fund may not engage in
foreign currency transactions.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS. Qualivest International Fund may
purchase securities on a when-issued or delayed-delivery basis. FAIF
International Fund may not engage in such transactions.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, each
Fund 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.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions which are set forth in
full in such Fund's Statement of Additional Information. Among those
restrictions are the following:
BORROWING. Qualivest International Fund may borrow from banks or brokers in
amounts up to 10% of the value of its total assets at the time of such
borrowing. Qualivest International Fund will not purchase securities while its
borrowings exceed 5% of its total assets. FAIF International Fund may borrow
money from banks for temporary or emergency purposes only, in an amount not to
exceed 10% of its total assets.
ILLIQUID SECURITIES. Each Fund may invest up to 15% of its net assets in
illiquid securities.
<PAGE>
APPENDIX V
FEES AND EXPENSES OF THE QUALIVEST PORTFOLIOS
AND CORRESPONDING FAIF FUNDS
The following tables compare the current fees and expenses for each Qualivest
Portfolio and its corresponding FAIF Fund. FBNA has agreed that, for the period
commencing on the Closing and continuing until September 30, 1998, it will waive
fees and reimburse expenses to the FAIF Funds to the extent necessary to
maintain FAIF Fund total operating expenses at the levels provided in the
tables. The purpose of these tables is to assist shareholders in understanding
the various costs and expenses that investors in these portfolios will bear as
shareholders. THE EXAMPLES CONTAINED IN THE TABLES SHOULD NOT BE CONSIDERED
REPRESENTATIONS OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
QUALIVEST SMALL COMPANIES VALUE FUND/FAIF SMALL CAP VALUE FUND
<TABLE>
<CAPTION>
QUALIVEST SMALL FAIF SMALL
COMPANIES VALUE FUND CAP VALUE FUND
INSTITUTIONAL
CLASS A CLASS C CLASS Y CLASS A CLASS
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.50% None None 4.50% None
Maximum Sales Charge Imposed on Reinvested
Dividends None None None None None
Deferred Sales Charge (as a percentage of
redemption proceeds)1 None 1.00% None None None
Redemption Fees None None None None None
Exchange Fees None None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fees 0.80% 0.80% 0.80% 0.70% 0.70%
Rule 12b-1 Fees2 0.25% 1.00% None 0.25% None
Other Expenses3 0.28% 0.28% 0.28% 0.20% 0.20%
Total Fund Operating Expenses 1.33% 2.08% 1.08% 1.15% 0.90%
</TABLE>
1 For Class A shares of both the Qualivest Portfolio and the FAIF Fund, a 1%
contingent deferred sales charge ("CDSC") is imposed on purchases of $1
million or more that were not subject to an initial sales charge. Such CDSC is
imposed in the event of a redemption within 24 months of purchase for the FAIF
Fund and 12 months of purchase for the Qualivest Portfolio. The Qualivest
Portfolio Class C share CDSC is imposed on shares redeemed within 12 months of
purchase.
2 As a result of the payment of Rule 12b-1 fees, long-term shareholders of the
Qualivest Portfolio's Class C shares may pay more than the economic equivalent
of the maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc.
3 The Qualivest Portfolio has adopted, but not implemented, a plan under which
up to 0.25% of average daily net assets attributable to Class Y shares may be
expended to procure shareholder services.
<PAGE>
Example:
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return, and (2) redemption at the end of each time period:
QUALIVEST SMALL FAIF SMALL
COMPANIES VALUE FUND CAP VALUE FUND
INSTITUTIONAL
CLASS A CLASS C CLASS Y CLASS A CLASS
1 year $ 58 $ 21 $ 11 $ 56 $ 9
3 years $ 85 $ 65 $ 34 $ 80 $ 29
5 years $115 $112 $ 60 $105 $ 50
10 years $198 $241 $132 $178 $111
QUALIVEST LARGE COMPANIES VALUE FUND/FAIF STOCK FUND
<TABLE>
<CAPTION>
QUALIVEST LARGE FAIF
COMPANIES VALUE FUND STOCK FUND
INSTITUTIONAL
CLASS A CLASS C CLASS Y CLASS A CLASS
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.50% None None 4.50% None
Maximum Sales Charge Imposed on Reinvested
Dividends None None None None None
Deferred Sales Charge (as a percentage of
redemption proceeds)1 None 1.00% None None None
Redemption Fees None None None None None
Exchange Fees None None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fees (after waivers)2 0.60% 0.60% 0.60% 0.62% 0.62%
Rule 12b-1 Fees3 0.25% 1.00% None 0.25% None
Other Expenses4 0.33% 0.33% 0.33% 0.18% 0.18%
Total Fund Operating Expenses (after waivers)5 1.18% 1.93% 0.93% 1.05% 0.80%
</TABLE>
1 For Class A shares of both the Qualivest Portfolio and the FAIF Fund, a 1%
contingent deferred sales charge ("CDSC") is imposed on purchases of $1
million or more that were not subject to an initial sales charge. Such CDSC is
imposed in the event of a redemption within 24 months of purchase for the FAIF
Fund and 12 months of purchase for the Qualivest Portfolio. The Qualivest
Portfolio Class C share CDSC is imposed on shares redeemed within 12 months of
purchase.
2 Investment advisory fees for the Qualivest Portfolio and the FAIF Fund reflect
voluntary fee waivers by the investment adviser. Absent voluntary waivers,
current investment advisory fees for the Qualivest Portfolio and the FAIF Fund
would be 0.75% and 0.70%, respectively, of average daily net assets.
3 As a result of the payment of Rule 12b-1 fees, long-term shareholders of the
Qualivest Portfolio's Class C shares may pay more than the economic equivalent
of the maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc.
4 The Qualivest Portfolio has adopted, but not implemented, a plan under which
up to 0.25% of average daily net assets attributable to Class Y shares may be
expended to procure shareholder services.
5 Absent any voluntary fee waivers, total fund operating expenses would be
1.33%, 2.09% and 1.08%, respectively, of average daily net assets for the
Class A, Class C and Class Y shares of the Qualivest Portfolio, and 1.13% and
0.88%, respectively, of average daily net assets for the Class A and Class C
shares of the FAIF Fund.
<PAGE>
Example:
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return, and (2) redemption at the end of each time period:
QUALIVEST LARGE FAIF
COMPANIES VALUE FUND STOCK FUND
INSTITUTIONAL
CLASS A CLASS C CLASSY CLASS A CLASS
1 year $ 56 $ 20 $ 9 $ 55 $ 8
3 years $ 81 $ 61 $ 30 $ 77 $26
5 years $107 $104 $ 51 $100 $44
10 years $182 $225 $114 $167 $99
QUALIVEST OPTIMIZED STOCK FUND/FAIF EQUITY INDEX FUND
<TABLE>
<CAPTION>
QUALIVEST FAIF EQUITY
OPTIMIZED STOCK FUND INDEX FUND
INSTITUTIONAL
CLASS A CLASS C CLASS Y CLASS A CLASS
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.50% None None 4.50% None
Maximum Sales Charge Imposed on Reinvested Dividends None None None None None
Deferred Sales Charge (as a percentage of
redemption proceeds)1 None 1.00% None None None
Redemption Fees None None None None None
Exchange Fees None None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fees (after waivers)2 0.30% 0.30% 0.30% 0.16% 0.16%
Rule 12b-1 Fees3 0.25% 1.00% None 0.25% None
Other Expenses (after waivers)4 0.29% 0.29% 0.30% 0.19% 0.19%
Total Fund Operating Expenses (after waivers)4 0.84% 1.59% 0.60% 0.60% 0.35%
</TABLE>
1 For Class A shares of both the Qualivest Portfolio and the FAIF Fund, a 1%
contingent deferred sales charge ("CDSC") is imposed on purchases of $1
million or more that were not subject to an initial sales charge. Such CDSC is
imposed in the event of a redemption within 24 months of purchase for the FAIF
Fund and 12 months of purchase for the Qualivest Portfolio. The Qualivest
Portfolio Class C share CDSC is imposed on shares redeemed within 12 months of
purchase.
2 Investment advisory fees for the Qualivest Portfolio and the FAIF Fund reflect
voluntary fee waivers by the investment adviser. Absent voluntary waivers,
current investment advisory fees for the Qualivest Portfolio and the FAIF Fund
would be 0.50% and 0.70%, respectively, of average daily net assets.
3 As a result of the payment of Rule 12b-1 fees, long-term shareholders of the
Qualivest Portfolio's Class C shares may pay more than the economic equivalent
of the maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc.
4 The Qualivest Portfolio has adopted, but not implemented, a plan under which
up to 0.25% of average daily net assets attributable to Class Y shares may be
expended to procure shareholder services.
5 Absent any voluntary fee waivers, total fund operating expenses would be
1.04%, 1.79% and 0.80%, respectively, of average daily net assets for the
Class A, Class C and Class Y shares of the Qualivest Portfolio, and 1.15% and
0.90%, respectively, of average daily net assets for the Class A and Class C
shares of the FAIF Fund.
<PAGE>
Example:
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return, and (2) redemption at the end of each time period:
QUALIVEST FAIF EQUITY
OPTIMIZED STOCK FUND INDEX FUND
INSTITUTIONAL
CLASS A CLASS C CLASS Y CLASS A CLASS
1 year $ 53 $ 16 $ 6 $ 51 $ 4
3 years $ 71 $ 50 $19 $ 63 $11
5 years $ 89 $ 87 $33 $ 77 $20
10 years $144 $189 $75 $117 $44
QUALIVEST INTERMEDIATE BOND FUND/FAIF INTERMEDIATE TERM INCOME FUND
<TABLE>
<CAPTION>
QUALIVEST FAIF INTERMEDIATE
INTERMEDIATE BOND FUND TERM INCOME FUND
INSTITUTIONAL
CLASS A CLASS C CLASS Y CLASS A CLASS
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 3.50% None None 3.75% None
Maximum Sales Charge Imposed on Reinvested
Dividends None None None None None
Deferred Sales Charge (as a percentage of
redemption proceeds)1 None 1.00% None None None
Redemption Fees None None None None None
Exchange Fees None None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fees (after waivers)2 0.45% 0.45% 0.45% 0.52% 0.52%
Rule 12b-1 Fees (after waivers)3 0.25% 1.00% None 0% None
Other Expenses4 0.31% 0.31% 0.31% 0.18% 0.18%
Total Fund Operating Expenses (after waivers)5 1.01% 1.76% 0.76% 0.70% 0.70%
</TABLE>
1 For Class A shares of both the Qualivest Portfolio and the FAIF Fund, a 1%
contingent deferred sales charge ("CDSC") is imposed on purchases of $1
million or more that were not subject to an initial sales charge. Such CDSC is
imposed in the event of a redemption within 24 months of purchase for the FAIF
Fund and 12 months of purchase for the Qualivest Portfolio. The Qualivest
Portfolio Class C share CDSC is imposed on shares redeemed within 12 months of
purchase.
2 Investment advisory fees for the Qualivest Portfolio and the FAIF Fund reflect
voluntary fee waivers by the investment adviser. Absent voluntary waivers,
current investment advisory fees for the Qualivest Portfolio and the FAIF Fund
would be 0.60% and 0.70%, respectively, of average daily net assets.
3 Absent voluntary waivers by the Fund's distributor, Rule 12b-1 fees for the
FAIF Fund's Class A shares would be 0.25% of the average daily net assets
attributable to such shares. As a result of the payment of Rule 12b-1 fees,
long-term shareholders of the Qualivest Portfolio's Class C shares may pay
more than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
4 The Qualivest Portfolio has adopted, but not implemented, a plan under which
up to 0.25% of average daily net assets attributable to Class Y shares may be
expended to procure shareholder services.
5 Absent any voluntary fee waivers, total fund operating expenses would be
1.16%, 1.91% and 0.91%, respectively, of average daily net assets for the
Class A, Class C and Class Y shares of the Qualivest Portfolio, and 1.13% and
0.88%, respectively, of average daily assets for the Class A and Class C
shares of the FAIF Fund.
<PAGE>
Example:
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return, and (2) redemption at the end of each time period:
QUALIVEST FAIF INTERMEDIATE
INTERMEDIATE BOND FUND TERM INCOME FUND
INSTITUTIONAL
CLASS A CLASS C CLASS Y CLASS A CLASS
1 year $ 45 $ 18 $ 8 $ 44 $ 7
3 years $ 66 $ 55 $24 $ 59 $22
5 years $ 89 $ 95 $42 $ 75 $39
10 years $154 $207 $94 $121 $87
QUALIVEST DIVERSIFIED BOND FUND/FAIF FIXED INCOME FUND
<TABLE>
<CAPTION>
QUALIVEST FAIF FIXED
DIVERSIFIED BOND FUND INCOME FUND
INSTITUTIONAL
CLASS A CLASS C CLASS Y CLASS A CLASS
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 3.50% None None 3.75% None
Maximum Sales Charge Imposed on Reinvested
Dividends None None None None None
Deferred Sales Charge (as a percentage of
redemption proceeds)1 None 1.00% None None None
Redemption Fees None None None None None
Exchange Fees None None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fees (after waivers)2 0.30% 0.30% 0.30% 0.53% 0.53%
Rule 12b-1 Fees3 0.25% 1.00% None 0.25% None
Other Expenses4 0.30% 0.28% 0.31% 0.17% 0.17%
Total Fund Operating Expenses (after waivers)5 0.85% 1.58% 0.61% 0.95% 0.70%
</TABLE>
1 For Class A shares of both the Qualivest Portfolio and the FAIF Fund, a 1%
contingent deferred sales charge ("CDSC") is imposed on purchases of $1
million or more that were not subject to an initial sales charge. Such CDSC is
imposed in the event of a redemption within 24 months of purchase for the FAIF
Fund and 12 months of purchase for the Qualivest Portfolio. The Qualivest
Portfolio Class C share CDSC is imposed on shares redeemed within 12 months of
purchase.
2 Investment advisory fees for the Qualivest Portfolio and the FAIF Fund reflect
voluntary fee waivers by the investment adviser. Absent voluntary waivers,
current investment advisory fees for the Qualivest Portfolio and the FAIF Fund
would be 0.60% and 0.70%, respectively, of average daily net assets.
3 As a result of the payment of Rule 12b-1 fees, long-term shareholders of the
Qualivest Portfolio's Class C shares may pay more than the economic equivalent
of the maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc.
4 The Qualivest Portfolio has adopted, but not implemented, a plan under which
up to 0.25% of average daily net assets attributable to Class Y shares may be
expended to procure shareholder services.
5 Absent any voluntary fee waivers, total fund operating expenses would be
1.15%, 1.88% and 0.91%, respectively, of average daily net assets for the
Class A, Class C and Class Y shares of the Qualivest Portfolio, and 1.12% and
0.87%, respectively, of the Class A and Class C shares of the FAIF Fund.
<PAGE>
Example:
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return, and (2) redemption at the end of each time period:
QUALIVEST FAIF FIXED
DIVERSIFIED BOND FUND INCOME FUND
INSTITUTIONAL
CLASS A CLASS C CLASS Y CLASS A CLASS
1 year $ 43 $ 16 $ 6 $ 47 $ 7
3 years $ 61 $ 50 $20 $ 67 $22
5 years $ 80 $ 86 $34 $ 88 $39
10 years $136 $188 $76 $150 $87
QUALIVEST INTERNATIONAL OPPORTUNITIES FUND/FAIF INTERNATIONAL INDEX FUND
<TABLE>
<CAPTION>
QUALIVEST INTERNATIONAL FAIF INTERNATIONAL
OPPORTUNITIES FUND INDEX FUND
INSTITUTIONAL
CLASS A CLASS C CLASS Y CLASS A CLASS
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.50% None None 4.50% None
Maximum Sales Charge Imposed on Reinvested Dividends None None None None None
Deferred Sales Charge (as a percentage of redemption
proceeds)1 None 1.00% None None None
Redemption Fees None None None None None
Exchange Fees None None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fees (after waivers)2 0.30% 0.30% 0.30% 0.46% 0.46%
Rule 12b-1 Fees3 0.25% 1.00% None 0.25% None
Other Expenses4 0.51% 0.48% 0.51% 0.29% 0.29%
Total Fund Operating Expenses (after waivers and
reimbursements)5 1.06% 1.78% 0.81% 1.00% 0.75%
</TABLE>
1 For Class A shares of both the Qualivest Portfolio and the FAIF Fund, a 1%
contingent deferred sales charge ("CDSC") is imposed on purchases of $1
million or more that were not subject to an initial sales charge. Such CDSC is
imposed in the event of a redemption within 24 months of purchase for the FAIF
Fund and 12 months of purchase for the Qualivest Portfolio. The Qualivest
Portfolio Class C share CDSC is imposed on shares redeemed within 12 months of
purchase.
2 Investment advisory fees for the Qualivest Portfolio and the FAIF Fund reflect
voluntary fee waivers by the investment adviser. Absent voluntary waivers,
current investment advisory fees for the Qualivest Portfolio and the FAIF Fund
would be 0.60% and 0.70%, respectively, of average daily net assets.
3 As a result of the payment of Rule 12b-1 fees, long-term shareholders of the
Qualivest Portfolio's Class C shares may pay more than the economic equivalent
of the maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc.
4 The Qualivest Portfolio has adopted, but not implemented, a plan under which
up to 0.25% of average daily net assets attributable to Class Y shares may be
expended to procure shareholder services.
5 Absent any voluntary fee waivers or expense reimbursements, total fund
operating expenses would be 1.36%, 2.08% and 1.08%, respectively, of average
daily net assets for the Class A, Class C and Class Y shares of the Qualivest
Portfolio, and 1.24% and 0.99%, respectively, of average daily net assets for
the Class A and Class C shares of the FAIF Fund.
<PAGE>
Example:
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return, and (2) redemption at the end of each time period:
QUALIVEST INTERNATIONAL FAIF INTERNATIONAL
OPPORTUNITIES FUND INDEX FUND
INSTITUTIONAL
CLASS A CLASS C CLASS Y CLASS A CLASS
1 year $ 55 $ 18 $ 8 $ 55 $ 8
3 years $ 77 $ 56 $ 26 $ 75 $24
5 years $101 $ 96 $ 45 $ 98 $42
10 years $169 $209 $100 $162 $93
<PAGE>
APPENDIX VI
COMPARISON OF INTERIM ADVISORY AGREEMENT AND
FAIF INVESTMENT ADVISORY AGREEMENT
This Appendix summarizes and compares certain significant provisions of the
Interim Advisory Agreement (the "Interim Agreement") against corresponding
provisions of the FAIF Investment Advisory Agreement (the "FAIF Agreement").
Fees payable under the Agreements are set forth in Table III in the Combined
Proxy Statement/Prospectus.
ADVISORY SERVICES. The Interim Agreement provides that the adviser will provide
a continuous investment program for the Qualivest Portfolios, including
investment research and management with respect to all securities and
investments and cash equivalents in the Portfolios. The Interim Agreement
provides that the adviser will pay all expenses incurred by it in connection
with its activities under the Agreement other than the cost of securities
(including brokerage commissions, if any) purchased by the portfolios.
Similarly, the FAIF Agreement provides that the adviser agrees to act as the
investment adviser for, and to manage the investment of the assets of, the FAIF
Funds. Under the FAIF Agreement the adviser is required, at its own expense, to
provide the FAIF Funds with all necessary office space, personnel and facilities
necessary and incident to the performance of the adviser's services under the
Agreement. In addition, under the FAIF Agreement, the adviser is required to pay
or be responsible for the payment of all compensation to personnel of the FAIF
Funds and the officers and directors of the FAIF Funds who are affiliated with
the adviser or any entity which controls, is controlled by or is under common
control with the adviser.
FEE AND EXPENSE LIMITATIONS. Each Agreement requires that if, in any fiscal
year, the aggregate expenses of any Fund or Portfolio exceed the expense
limitations imposed under the securities regulations of a state, the adviser
will reimburse the Fund or Portfolio. A portion of such reimbursement will be
paid by the administrator in the case of the Interim Agreement. Such
reimbursement shall not exceed the advisory fees paid to the adviser during the
year, unless otherwise required by the state and, in the case of the FAIF
Agreement, unless the adviser agrees to be bound by such state requirement.
Under federal law, states may no longer impose expense limitations on mutual
funds.
STANDARD OF CARE. The Interim Agreement provides that the adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Portfolios in connection with the performance of the Interim Agreement,
except a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the adviser in the
performance of its duties or from reckless disregard by it of its obligations
and duties under the Interim Agreement.
The FAIF Agreement provides that the adviser shall be liable to the Funds and
their shareholders or former shareholders for any negligence or willful
misconduct on the part of the adviser or any of its directors, officers,
employees, representatives or agents in connection with the responsibilities
assumed by it under the FAIF Agreement, provided that the adviser shall not be
liable for any investments made by the adviser in accordance with the explicit
or implicit direction of the Board of Directors of FAIF or the investment
objectives and policies of a Fund, and provided further that any liability of
the adviser resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services shall be limited to the period and amount
set forth in Section 36(b)(3) of the 1940 Act. In addition, the adviser agrees
in the FAIF agreement to indemnify FAIF and each Fund with respect to any loss,
liability, judgment, cost or penalty which FAIF or any Fund may directly or
indirectly suffer or incur in any way arising out of or in connection with any
breach of the FAIF Agreement by the adviser.
PORTFOLIO TRANSACTIONS. The Interim Agreement provides that the adviser will
place or cause to be placed orders for the purchase or sale of securities for
the Portfolios either directly with the issuer or with any broker or dealer. The
Interim Agreement requires that, in placing orders with brokers and dealers, the
adviser will attempt to obtain prompt execution of orders in an effective manner
at the most favorable price. To the extent permitted by the 1940 Act, when the
execution and price offered by two
<PAGE>
or more brokers or dealers are comparable, the adviser may purchase and sell
portfolio securities to and from brokers and dealers who provide the adviser
with research advice and other services. The Interim Agreement provides that
portfolio securities will not be purchased from or sold to the administrator,
the adviser, or any affiliated person of the administrator, the adviser or
Qualivest, except to the extent permitted by the 1940 Act.
The FAIF Agreement does not address the issue of the adviser placing Fund
portfolio transactions with brokers and dealers who provide research advice and
other services to the adviser. Such a practice is permitted, however, under the
current prospectuses for the FAIF Funds. The FAIF Agreement specifically
provides that the adviser may utilize the Funds' distributor or an affiliate of
the adviser as a broker in accordance with the 1940 Act and the Funds'
registration statement. The FAIF Agreement also provides that allocation of
portfolio transactions shall be subject to such policies and supervision as
FAIF's Board of Directors or any committee thereof deems appropriate and any
brokerage policy set forth in the then current registration statement of the
Funds.
<PAGE>
APPENDIX VII
SHAREHOLDER TRANSACTIONS AND SERVICES
This Appendix compares the shareholder transactions and services of the
Qualivest Portfolios and the corresponding FAIF Funds. The following is
qualified in its entirety by the more detailed information included in the
prospectuses for the Qualivest Portfolios and the Existing FAIF Funds which are
incorporated by reference in this Combined Proxy Statement/Prospectus and by the
preliminary prospectuses for the Class A and Class B shares and for the
Institutional Class shares of the New FAIF Funds, which are attached to this
Combined Proxy Statement/Prospectus as Appendix VIII and Appendix IX,
respectively.
PURCHASE, EXCHANGE AND REDEMPTION PROCEDURES
PURCHASES OF QUALIVEST AND FAIF CLASS A SHARES AND QUALIVEST CLASS C SHARES.
Class A shares of both the Qualivest Portfolios and the FAIF Funds may be
purchased at a public offering price equal to their net asset value per share
plus a sales charge. Front-end sales charges for the Qualivest Portfolios and
the FAIF Funds investing primarily in equity securities are the same for
purchases of less than $50,000. For purchases of $50,000 or more, the front-end
sales charge is greater for the FAIF Funds. For funds investing primarily in
debt securities, the front-end sales charge applicable to Class A shares is
generally greater for the FAIF Funds. A comparison of front-end sales charges is
set forth in the following tables.
SALES CHARGES FOR EQUITY FUNDS*
<TABLE>
<CAPTION>
FAIF FUNDS QUALIVEST PORTFOLIO
SALES CHARGE AS SALES CHARGE AS
% OF % OF NET % OF % OF NET
SIZE OF TRANSACTION AT OFFERING PRICE OFFERING PRICE ASSET VALUE OFFERING PRICE ASSET VALUE
<S> <C> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.50% 4.71%
$50,000 but less than $100,000 4.00% 4.17% 3.75% 3.90%
$100,000 but less than $250,000 3.50% 3.63% 2.50% 2.56%
$250,000 but less than $500,000 2.75% 2.83% 2.00% 2.04%
$500,000 but less than $1,000,000 2.00% 2.04% 1.50% 1.52%
$1,000,000 and over** 0.00% 0.00% 0.00% 0.00%
</TABLE>
* FAIF Small Cap Value Fund, Stock Fund, Equity Index Fund and International
Index Fund; Qualivest Small Companies Value Fund, Large Companies Value Fund,
Optimized Stock Fund and International Opportunities Fund.
** No initial sales charge applies to purchases of Class A shares of $1,000,000
or more. However, a 1.00% contingent deferred sales charge will be imposed if
those shares are redeemed within 24 months of purchase, in the case of the
FAIF Funds, and 12 months of purchase in the case of the Qualivest
Portfolios.
<PAGE>
SALES CHARGES FOR DEBT FUNDS*
<TABLE>
<CAPTION>
FAIF FUNDS QUALIVEST PORTFOLIO
SALES CHARGE AS SALES CHARGE AS
% OF % OF NET % OF % OF NET
SIZE OF TRANSACTION AT OFFERING PRICE OFFERING PRICE ASSET VALUE OFFERING PRICE ASSET VALUE
<S> <C> <C> <C> <C>
Less than $50,000 3.75% 3.90% 3.50% 3.63%
$50,000 but less than $100,000 3.25% 3.36% 2.75% 2.83%
$100,000 but less than $250,000 2.75% 2.83% 2.00% 2.04%
$250,000 but less than $500,000 2.00% 2.04% 1.50% 1.52%
$500,000 but less than $1,000,000 1.00% 1.01% 1.25% 1.27%
$1,000,000 and over** 0.00% 0.00% 0.00% 0.00%
</TABLE>
* FAIF Intermediate Term Income Fund and Fixed Income Fund; Qualivest
Intermediate Bond Fund and Diversified Bond Fund.
** No initial sales charge applies to purchases of Class A shares of $1,000,000
or more. However, a 1.00% contingent deferred sales charge will be imposed if
those shares are redeemed within 24 months of purchase, in the case of the
FAIF Funds, and 12 months of purchase in the case of the Qualivest
Portfolios.
Class C shares of the Qualivest Portfolios may be purchased at net asset value
without an initial sales charge. Investors may be subject to a contingent
deferred sales charge of 1.00% when Class C shares are redeemed less than one
year after purchase.
The minimum initial investment for Qualivest Portfolios Class A and Class C
shares generally is $500, with a $100 minimum for subsequent purchases. The
minimum initial investment for FAIF Funds Class A shares generally is $1,000,
with a minimum of $100 for subsequent purchases.
Class A and Class C Qualivest Portfolio shares may be purchased directly from
the Portfolios' distributor or through a broker-dealer who has established a
dealer agreement with the distributor. Such purchases may be made by mail, by
telephone or by wire. Class A FAIF Fund shares may be purchased through a
financial institution which has a sales agreement with the Funds' distributor,
by mail directly through the Funds' transfer agent, or by wire.
Both the FAIF Funds and the Qualivest Portfolios have automatic investment
programs which allow shareholders to make regular purchases of shares through
automatic deduction from their bank accounts and, in the case of the FAIF Funds,
from the Prime Obligations Fund, a series of First American Funds, Inc.
PURCHASES AT REDUCED OR NO SALES CHARGE. For the Class A shares of the Qualivest
Portfolios and the FAIF Funds, various persons, entities and groups may qualify
for reduced sales charges, or for purchases at net asset value without a sales
charge. Ways in which the sales charge may be reduced or waived are set forth in
the prospectuses for the Existing FAIF Funds and the Qualivest Portfolios
incorporated herein by reference and in the preliminary prospectus for the Class
A and Class B shares of the New FAIF Funds attached as Appendix VIII to this
combined Proxy Statement/Prospectus.
PURCHASES OF QUALIVEST PORTFOLIO CLASS Y SHARES AND FAIF FUND INSTITUTIONAL
CLASS SHARES. The Class Y shares of the Qualivest Portfolios and the
Institutional Class shares of the FAIF Funds are offered at net asset value
without any initial or contingent deferred sales charges. Class Y shares of the
Qualivest Portfolios are offered only to certain institutional investors and
bank trust departments purchasing shares on behalf of fiduciary, advisory,
agency, custody or other similar accounts maintained by or on behalf of their
customers. Such shares may be purchased through a broker-dealer, bank or trust
company that has established a dealer agreement with the Portfolios' distributor
and also may be purchased directly by mail, by telephone or by wire.
Institutional Class shares of the FAIF 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. Such shares may be
purchased by wire, or the Fund may accept securities in exchange for Fund
shares.
EXCHANGES. Shares of a Qualivest Portfolio may be exchanged for shares of the
same class of any other Qualivest mutual fund. Similarly, shares of an FAIF Fund
may be exchanged for shares of the same class of the other FAIF Funds or of
other funds in the First American family.
<PAGE>
REDEMPTIONS. Shares of the Qualivest Portfolios and Class A shares of the FAIF
Funds may be redeemed by written request or by telephone. In addition, Class A
and Class C Qualivest Portfolio shareholders with an account balance of at least
$500 and Class A FAIF Fund shareholders with an account balance of at least
$5,000 may elect to participate in a systematic withdrawal program under which
shares are redeemed to provide for periodic withdrawal payments in an amount
directed by the shareholder. Payments for redeemed Institutional Class shares of
the FAIF Funds can be made only by wire transfer.
DIVIDENDS AND DISTRIBUTIONS. There are differences in the dividend and
distribution policies of the Qualivest Portfolios and the FAIF Funds. For
Qualivest Intermediate Bond Fund and Qualivest Diversified Bond Fund, and for
their corresponding FAIF Funds, net income dividends are declared and paid
monthly. For the other Qualivest Portfolios, which invest primarily in equity
securities, net income dividends are declared and paid quarterly. For FAIF Stock
Fund and Equity Index Fund, however, dividends are declared and paid monthly.
The other FAIF Funds that invest primarily in equity securities declare and pay
dividends quarterly. For all Funds and Portfolios distributions of any net
realized long-term capital gains are made at least once annually. For both the
FAIF Funds and the Qualivest Portfolios, all dividends and distributions are
automatically reinvested in shares of the Fund or Portfolio at net asset value
unless the shareholders elects to receive dividends or distributions in cash or,
in the case of the Class A and Class C shares of the Qualivest Portfolios, in
the same class of another Qualivest mutual fund.
<PAGE>
APPENDIX VIII
FIRST AMERICAN INVESTMENT FUNDS, INC.
RETAIL CLASSES
SMALL CAP VALUE FUND
INTERNATIONAL INDEX FUND
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 QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
________________, 1997
SUBJECT TO COMPLETION - July 21, 1997
[LOGO]
FIRST AMERICAN FUNDS
THE POWER OF DISCIPLINED INVESTING
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 and
Class B Shares of the following funds (the "Funds"):
* SMALL CAP VALUE FUND
* INTERNATIONAL INDEX 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 ("SEC") 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. The SEC maintains a
World Wide Web site that contains reports and information regarding issuers that
file electronically with the SEC. The address of such site is
"http://www.sec.gov."
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.
<PAGE>
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
Small Cap Value Fund 11
International Index Fund 12
Risks to Consider 13
MANAGEMENT 14
Investment Adviser 14
Portfolio Managers 16
Custodian 16
Administrator 17
Transfer Agent 17
DISTRIBUTOR 17
INVESTING IN THE FUNDS 19
Share Purchases 19
Minimum Investment Required 20
Alternative Sales Charge
Options 20
Class A Shares 22
Class B Shares 25
Systematic Exchange Program 26
Systematic Investment Program 26
Exchanging Securities for
Fund Shares 26
Certificates and Confirmations 27
Dividends and Distributions 27
Exchange Privilege 27
REDEEMING SHARES 29
By Telephone 29
By Mail 30
By Systematic Withdrawal Program 31
Redemption Before Purchase
Instruments Clear 31
Accounts with Low Balances 32
DETERMINING THE PRICE OF SHARES 32
Determining Net Asset Value 32
Foreign Securities 33
INCOME TAXES 34
Federal Income Taxation 34
FUND SHARES 35
CALCULATION OF PERFORMANCE DATA 36
SPECIAL INVESTMENT METHODS 37
Repurchase Agreements 37
When-Issued and Delayed-Delivery
Transactions 38
Lending of Portfolio Securities 38
Options Transactions 39
Cash Items 40
Futures and Options on Futures 40
Fixed Income Securities 41
Foreign Securities 42
Portfolio Transactions 43
Portfolio Turnover 44
Investment Restrictions 44
Information Concerning
Compensation Paid to First Trust
National Association and its
Affiliates 45
<PAGE>
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 Class B Shares of the
following funds (the "Funds"):
SMALL 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 small-capitalization companies (those with market capitalizations
of less than $1 billion at the time of purchase). 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.
INTERNATIONAL INDEX FUND has an objective of providing investment results that
correspond to the performance of the Morgan Stanley Europe, Australia, Far East
Composite Index (the "EAFE Index"). The Fund invests substantially (at least 65%
of total assets) in common stocks included in the EAFE Index. The Fund's adviser
believes that its objective can be best achieved by investing in common stocks
of approximately 50% to 100% of the issues included in the EAFE Index, depending
on the size of the Fund.
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 Investments 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 4.50%. 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 each Fund are sold at net asset value without an initial sales
charge. Class B Shares of each 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
<PAGE>
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. 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 Each of the Funds 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 Small 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) Small Cap Value Fund is subject to risks associated with
investing in small-capitalization companies; (ii) International Index Fund is
subject to risks associated with investing in foreign securities and to currency
risk; (iii) Small Cap Value 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; (iv) the Funds may invest (but
not for speculative purposes) in options on stock indices; and (v) International
Index Fund may invest (but not for speculative purposes) in stock index futures
contracts, options on stock index futures, and/or index participation contracts
based on the EAFE Index. See "Investment Objectives and Policies -- Risks to
Consider" and "Special Investment Methods."
<PAGE>
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.
<PAGE>
FEES AND EXPENSES
CLASS A SHARE FEES AND EXPENSES
<TABLE>
<CAPTION>
SMALL CAP INTERNATIONAL
VALUE FUND INDEX FUND
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases
(as a percentage of offering price)(1) 4.50% 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) 0.70% 0.46%
Rule 12b-1 fees (after voluntary fee
waivers)(2) 0.25% 0.25%
Other expenses (after
reimbursements)(2) 0.20% 0.29%
Total fund operating expenses
(after voluntary fee waivers and
reimbursements)(2) 1.15% 1.00%
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 $ 56 $ 55
3 years $ 80 $ 75
</TABLE>
(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 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. Each of
these persons intends to maintain such waivers and reimbursements in
effect through September 30, 1998. Absent any fee waivers or
reimbursements, 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 1.15% for Small Cap Value
Fund and 1.24% for International Index 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 (2) above, the
dollar amounts for the 1 and 3-year periods would be as follows: Small
Cap Value Fund, $56 and $80, and International Index Fund, $57 and $83.
<PAGE>
CLASS B SHARE FEES AND EXPENSES
<TABLE>
<CAPTION>
SMALL CAP INTERNATIONAL
VALUE FUND INDEX FUND
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases (as a
percentage of offering price) None None
Maximum sales load imposed on reinvested dividends None None
Maximum contingent deferred sales charge (as a
percentage of original purchase price or redemption
proceeds, as applicable) 5.00% 5.00%
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)(1) 0.70% 0.46%
Rule 12b-1 fees 1.00%(2) 1.00%(2)
Other expenses(1) 0.20% 0.29%
Total fund operating expenses
(after voluntary fee waivers)(1) 1.90% 1.75%
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 $68
3 years $100 $95
ASSUMING NO REDEMPTION(4)
You would pay the following expenses on the same investment, assuming
no redemption:
1 year $19 $18
3 years $60 $55
</TABLE>
(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. Absent any fee waivers or reimbursements,
investment advisory fees as an annualized percentage of average daily
net assets would be 0.70%; and total fund operating expenses would be
1.90% for Small Cap Value Fund and 1.99% for International Index Fund.
"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 as follows: Small
Cap Value Fund, $69 and $100, and International Index Fund, $70 and
$102.
(4) 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: Small
Cap Value Fund, $19 and $60, and International Index Fund, $20 and $62.
<PAGE>
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 and the Class B Shares of Small Cap
Value Fund and International Index 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 annual Fund operating expenses
after voluntary fee waivers and expense reimbursements by the Adviser. The
Adviser intends to maintain such waivers in effect through September 30, 1998.
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" in the tables are based on estimates.
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, and the Class B Shares of each 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 A and 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.
<PAGE>
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 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 Investments Distribution Co., 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. Each of the Funds is a diversified investment company, as defined in
the Investment Company Act of 1940 (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. Similarly, if a Fund is required or
permitted to invest a stated percentage of its assets in companies with no more
or no less than a stated market capitalization, deviations from the stated
percentages which result from changes in companies' market capitalizations after
the Fund purchases its shares will not be deemed to violate the
<PAGE>
limitation. 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 either 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."
SMALL CAP VALUE FUND
OBJECTIVE. Small Cap Value Fund has an objective of capital appreciation.
INVESTMENT POLICIES. Under normal market conditions, Small Cap Value Fund
invests at least 65% of its total assets in equity securities of small-
capitalization companies. For these purposes, small-capitalization companies are
deemed those with market capitalizations of less than $1 billion at the time of
purchase. 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 $1 billion 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
<PAGE>
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.
INTERNATIONAL INDEX FUND
OBJECTIVE. International Index Fund has an objective of providing investment
results that correspond to the performance of the Morgan Stanley Europe,
Australia, Far East Composite Index (the "EAFE Index").
INVESTMENT POLICIES. International Index Fund invests substantially (at least
65% of total assets) in common stocks included in the EAFE Index. The Adviser
believes that the Fund's objective can best be achieved by investing in the
common stocks of approximately 50% to 100% of the issues included in the EAFE
Index, depending on the size of the Fund. Normally, International Index Fund
will invest at least 65% of its total assets in securities traded in at least
three foreign countries.
Morgan Stanley designates the stocks included in the EAFE Index. A particular
stock's weighting in the EAFE Index is based on its total market value (that is,
its market price per share times the number of shares outstanding) relative to
that of all stocks included in the EAFE Index. From time to time, Morgan Stanley
may add or delete stocks to or from the EAFE Index. Inclusion of a particular
stock in the EAFE Index does not imply any opinion by Morgan Stanley as to its
merits as an investment, nor is Morgan Stanley a sponsor of or in any way
affiliated with the Fund.
The Fund is managed by utilizing a computer program that identifies which stocks
should be purchased or sold in order to replicate, as closely as possible, the
composition of the EAFE Index. The Fund includes a stock in its investment
portfolio in the order of the stock's weighting in the EAFE Index, starting with
the most heavily weighted stock. Thus, the proportion of Fund assets invested in
a stock, industry or country closely approximates the percentage of the EAFE
Index represented by that stock, industry or country. Portfolio turnover is
expected to be well below that of actively managed mutual funds.
<PAGE>
Although the Fund will not duplicate the EAFE Index performance precisely, it is
anticipated that there will be a close correlation between the Fund's
performance and that of the EAFE Index in both rising and falling markets. The
Fund will attempt to achieve a correlation between the performance of its
portfolio and that of the EAFE Index of at least 95%, without taking into
account expenses of the Fund. A perfect correlation would be indicated by a
figure of 100%, which would be achieved if the Fund's net asset value, including
the value of its dividends and capital gains distributions, increased or
decreased in exact proportion to changes in the EAFE Index. The Fund's ability
to replicate the performance of the EAFE Index may be affected by, among other
things, changes in securities markets, the manner in which Morgan Stanley
calculates the EAFE Index, administrative and other expenses incurred by the
Fund, taxes (including foreign withholding taxes, which will affect the Fund)
and the amount and timing of cash flows into and out of the Fund. Although cash
flows into and out of the Fund will affect the Fund's portfolio turnover rate
and its ability to replicate the EAFE Index's performance, investment
adjustments will be made, as practicably as possible, to account for these
circumstances.
The Fund also may invest up to 20% of its total assets in the aggregate in stock
index futures contracts, options on stock indices, options on stock index
futures and index participation contracts based on the EAFE Index. The Fund will
not invest in these types of contracts and options for speculative purposes, but
rather to maintain sufficient liquidity to meet redemption requests; to increase
the level of Fund assets devoted to replicating the composition of the EAFE
Index; and to reduce transaction costs. These types of contracts and options and
certain associated risks are described under "Special Investment Methods --
Options Transactions." In addition, the Fund may enter into repurchase
agreements and engage in securities lending as described under "Special
Investment Methods -- Repurchase Agreements" and "Special Investment Methods --
Lending of Portfolio Securities."
In order to maintain liquidity during times of unusual market conditions, the
Fund also may invest temporarily in cash and cash items of the kinds described
under "Special Investment Methods -- Cash Items."
RISKS TO CONSIDER
An investment in Small Cap Value Fund and International Index 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
<PAGE>
several occasions in the past, and they may do so again in the future. Each of
the Funds is subject to the risk of generally adverse equity markets.
SMALL-CAPITALIZATION COMPANIES. Small Cap Value Fund emphasizes investments in
companies with 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. To the extent that Small Cap Value Fund invests in
small-capitalization companies, they are subject to this risk of greater
volatility.
ACTIVE MANAGEMENT. Small 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.
FOREIGN SECURITIES. International Index Fund is subject to special risks
associated with investing in foreign securities and to declines in net asset
value resulting from changes in exchange rates between the United States dollar
and foreign currencies. These risks are discussed under "Special Investment
Methods -- Foreign Securities" elsewhere herein. Because of the special risks
associated with foreign investing the Fund may be subject to greater volatility
than most mutual funds which invest principally in domestic securities.
OTHER. Investors also should review "Special Investment Methods" for information
concerning risks associated with certain investment techniques which may be
utilized by the Funds.
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
<PAGE>
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.
Small Cap Value Fund and International Index Fund has each agreed to pay the
Adviser monthly fees calculated on an annual basis equal to 0.70% of their
respective average daily net assets. The Adviser may, at its option, waive any
or all of its fees, or reimburse expenses, with respect to either 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.
<PAGE>
PORTFOLIO MANAGERS
Small Cap Value Fund is managed by a committee composed of Albin S. Dubiak,
Roland P. Whitcomb and Jeff A. Johnson.
ALBIN S. DUBIAK began his investment career as a security trader with First
National Bank of Chicago in 1963 before joining the Adviser as an investment
analyst in 1969. Mr. Dubiak received his bachelor's degree from Indiana
University and his master's degree in business administration from the
University of Arizona. Mr. Dubiak also is portfolio co-manager for several other
First American equity funds and is a member of the committees which manage
several other First American equity funds.
ROLAND B. WHITCOMB joined the Adviser in 1986 after serving as an account
executive with Smith Barney & Co. since 1979. He received his bachelor's
degree from the University of Chicago and is a Chartered Financial Analyst.
Mr. Whitcomb also is portfolio co-manager for several other First American
equity funds and is a member of the committees which manage several other First
American equity funds.
JEFF A. JOHNSON has been employed by the Adviser in investment management
since 1991 and in commercial lending from 1985 to 1991. Mr. Johnson received
his master of fine arts degree from the University of Iowa. Mr. Johnson also
is portfolio co-manager for several other First American equity funds and is a
member of the committee which manages several other First American equity
funds.
International Index Fund is co-managed by James S. Rovner and Evan Lundquist.
JAMES S. ROVNER joined the Adviser in 1986 and has managed assets for
institutional and individual clients for over 15 years. Mr. Rovner received
his bachelor's degree and his master's degree in business administration from
the University of Wisconsin and is a Chartered Financial Analyst.
EVAN LUNDQUIST joined the Adviser in 1993 and received his bachelor's degree
from St. Mary's College.
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 receives monthly
fees calculated on an annual basis equal to, for Small Cap Value Fund, 0.03%
<PAGE>
of Small Cap Value Fund's average daily net assets, and, for International Index
Fund, 0.10% of International Index Fund's average daily net assets. In addition,
the Custodian is reimbursed by the Funds for its out-of-pocket expenses incurred
while providing its services to the Funds. Rules adopted under the 1940 Act
permit International Index Fund to maintain its securities and cash in the
custody of certain eligible foreign banks and depositories. International Index
Fund's portfolio of non-United States securities are held by sub-custodians
which are approved by the directors of FAIF in accordance with these rules. This
determination is made pursuant to these rules following a consideration of a
number of factors including, but not limited to, the reliability and financial
stability of the institution; the ability of the institution to perform
custodian services for International Index Fund; the reputation of the
institution in its national market; the political and economic stability of the
country in which the institution is located; and the risks of potential
nationalization or expropriation of International Index Fund's assets.
Sub-custodian fees with respect to International Index Fund are paid by the
Custodian out of the Custodian's fees.
ADMINISTRATOR
The administrator for the Funds is SEI Investments 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
<PAGE>
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 Shares." 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, each 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.
<PAGE>
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 Distribution Plan and Class B Distribution Plan 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.
Certain brokers assist their clients in the purchase or redemption of shares
and charge a fee for this service.
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
<PAGE>
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. 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"). 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
<PAGE>
(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 a 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 a 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.
<PAGE>
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:
EACH 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
<PAGE>
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.
<PAGE>
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 its 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 and
by retirement and deferred compensation plans and the trusts used to fund such
plans (including, but not limited to, those defined in section 401(a), 403(b)
and 457 of the Internal Revenue Code and "rabbi trusts"), which plans and trusts
purchase through "one-stop" mutual fund networks.
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
<PAGE>
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.
CONTINGENT DEFERRED SALES CHARGE. Class B Shares of each 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
<PAGE>
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 eligible 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 each
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
<PAGE>
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 each 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 or Class B Shares of a Fund 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
<PAGE>
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.
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." 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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
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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 the Funds 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
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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. Foreign securities are valued based upon quotation from the
primary market in which they are traded. 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.
FOREIGN SECURITIES
Any assets or liabilities of International Index Fund initially expressed in
terms of foreign currencies are translated into United States dollars using
current exchange rates. Trading in securities on foreign markets may be
completed before the close of business on each business day of International
Index Fund. Thus, the calculation of the Fund's net asset value may not take
place contemporaneously with the determination of the prices of foreign
securities held in the Fund's portfolios. If events materially affecting the
value of foreign securities occur between the time when their price is
determined and the time when the Fund's net asset value is calculated, such
securities will be valued at fair value as determined in good faith by or under
the direction of the Board of Directors. In addition, trading in securities on
foreign markets may not take place on all days on which the New York Stock
Exchange (the "Exchange") is open for business or may take place on days on
which the Exchange is not open for business. Therefore, the net asset value of
International Index Fund might be significantly affected on days when an
investor has no access to the Fund.
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INCOME TAXES
FEDERAL INCOME TAXATION
Each Fund is treated as a different entity for federal income tax purposes. Each
of the Funds intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"). 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 paid from the net investment income and from any net realized
short-term capital gains of a Fund, will be taxable to shareholders as ordinary
income, whether received in cash or in additional shares. Dividends paid by the
Funds attributable to investments in the securities of foreign issuers will not
be eligible for the 70% deduction for dividends received by corporations.
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.
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.
International Index Fund may be required to pay withholding and other taxes
imposed by foreign countries, generally at rates from 10% to 40%, which would
reduce the Fund's investment income. Tax conventions between certain countries
and the United States may reduce or eliminate such taxes.
If at the end of International Index Fund's taxable year more than 50% of its
total assets consist of securities of foreign corporations, it will be eligible
to file an election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to include their respective pro rata
portions of such foreign taxes in gross income, treat such amounts as foreign
taxes paid by them, and deduct such amounts in computing their taxable income
or, alternatively, use them as foreign tax credits against their federal
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income taxes. If such an election is filed for a year, International Index Fund
shareholders will be notified of the amounts which they may deduct as foreign
taxes paid or used as foreign tax credits.
Alternatively, if the amount of foreign taxes paid by International Index Fund
is not large enough in future years to warrant its making the election described
above, the Fund may claim the amount of foreign taxes paid as a deduction
against its own gross income. In that case, shareholders would not be required
to include any amount of foreign taxes paid by the Fund in their income and
would not be permitted either to deduct any portion of foreign taxes from their
own income or to claim any amount of foreign tax credit for taxes paid by the
Fund.
This is a general summary of the federal tax laws applicable to the Funds and
their shareholders as of the date of this Prospectus. See the Statement of
Additional Information for further details.
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.
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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." 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," 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.
"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 redeemed at the end of the specified period covered by
the total return figure. "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. 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
<PAGE>
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.
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.
REPURCHASE AGREEMENTS
Each Fund is permitted to enter into repurchase 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.
<PAGE>
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS
Small Cap Value Fund 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. The 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, the 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
the Fund to risk because the securities may decrease in value prior to delivery.
In addition, the 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 Fund 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 the 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.
<PAGE>
OPTIONS TRANSACTIONS
PURCHASES OF PUT AND CALL OPTIONS. Small Cap Value Fund may purchase put and
call options on equity securities, and both Funds may purchase put and call
options 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.
Neither Fund 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 security 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 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. Small 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." These transactions
would be undertaken primarily to produce additional income.
When the 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
<PAGE>
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.
OPTIONS ON STOCK INDICES. Each 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 each Fund may invest, as described under "Investment
Objectives and Policies," 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
each 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.
FUTURES AND OPTIONS ON FUTURES
International Index Fund may engage in futures transactions and purchase options
on futures to the extent specified under "Investment Objectives and Policies."
These transactions may include the purchase of stock index futures and options
on stock index futures.
A futures contract on an index obligates the seller to deliver, and entitles the
purchaser to receive, an amount of cash equal to a specific dollar amount times
the difference between the value of the index at the expiration date of the
contract and the index value specified in the contract. The acquisition of put
and call options on futures contracts will, respectively, give International
<PAGE>
Index Fund the right (but not the obligation), for a specified exercise price,
to sell or to purchase the underlying futures contract at any time during the
option period.
The Fund may use futures contracts and options on futures in an effort to hedge
against market risks. In addition, International Index Fund may use stock index
futures and options on futures to maintain sufficient liquidity to meet
redemption requests, to increase the level of Fund assets devoted to replicating
the composition of the EAFE Index and to reduce transaction costs.
Aggregate initial margin deposits for futures contracts, and premiums paid for
related options, may not exceed 5% of the Fund's total assets. Futures
transactions will be limited to the extent necessary to maintain the Fund's
qualification as a regulated investment company under the Internal Revenue Code
of 1986, as amended.
Where International Index Fund is permitted to purchase options on futures, its
potential loss is limited to the amount of the premiums paid for the options. As
stated above, this amount may not exceed 5% of the Fund's total assets. Where
International Index Fund is permitted to enter into futures contracts obligating
it to purchase an index in the future at a specified price, the Fund could lose
100% of its net assets in connection therewith if it engaged extensively in such
transactions and if the value of the subject index at the delivery or settlement
date fell to zero for all contracts into which the Fund was permitted to enter.
Futures transactions involve brokerage costs and require International Index
Fund to segregate assets to cover contracts that would require it to purchase an
index in the future at a specified date. The Fund may lose the expected benefit
of futures transactions if the index value or exchange rates moves in an
unanticipated manner. Such unanticipated changes may also result in poorer
overall performance than if the Fund had not entered into any futures
transactions. There is no assurance of liquidity in the secondary market for
purposes of closing out futures positions.
FIXED INCOME SECURITIES
The fixed income securities in which Small 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 &
<PAGE>
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, Small 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 (i) interest rate
risk, (the risk that increases in market interest rates will cause declines in
the value of debt securities held by the Fund), (ii) credit risk (the risk that
issuers of debt securities held by the 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 the Fund to reinvest the prepayment at a lower interest rate).
FOREIGN SECURITIES
GENERAL. Under normal market conditions, International Index Fund invests at
least 65% of its total assets in equity securities which trade in markets other
than the United States. In addition, Small 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.
<PAGE>
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 AND EUROPEAN 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. International Index Fund also may invest in
European Depositary Receipts, which are receipts evidencing an arrangement with
a European bank similar to that for American Depositary Receipts and which are
designed for use in the European securities markets. European Depositary
Receipts are not necessarily denominated in the currency of the underlying
security.
Certain American Depositary Receipts and European 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
<PAGE>
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.
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.
<PAGE>
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.
<PAGE>
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 INVESTMENTS 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
FAIF-1002 (7/97)R
<PAGE>
APPENDIX IX
FIRST AMERICAN INVESTMENT FUNDS, INC.
INSTITUTIONAL CLASS
SMALL CAP VALUE FUND
INTERNATIONAL INDEX FUND
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 QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
________________, 1997
SUBJECT TO COMPLETION - July 21, 1997
[LOGO]
FIRST AMERICAN FUNDS
THE POWER OF DISCIPLINED INVESTING
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"):
* SMALL CAP VALUE FUND
* INTERNATIONAL INDEX 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 ("SEC") 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. The SEC maintains a
World Wide Web site that contains reports and information regarding issuers that
file electronically with the SEC. The address of such site is
"http://www.sec.gov."
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.
<PAGE>
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
Small Cap Value Fund 9
International Index Fund 10
Risks to Consider 11
MANAGEMENT 12
Investment Adviser 12
Portfolio Managers 13
Custodian 14
Administrator 15
Transfer Agent 15
DISTRIBUTOR 15
PURCHASES AND REDEMPTIONS OF SHARES 16
Share Purchases and Redemptions 16
What Shares Cost 16
Foreign Securities 17
Exchanging Securities for Fund Shares 18
Certificates and Confirmations 18
Dividends and Distributions 18
Exchange Privilege 19
INCOME TAXES 19
Federal Income Taxation 19
FUND SHARES 21
CALCULATION OF PERFORMANCE DATA 21
SPECIAL INVESTMENT METHODS 23
Repurchase Agreements 23
When-Issued and Delayed-Delivery
Transactions 23
Lending of Portfolio Securities 24
Options Transactions 24
Cash Items 25
Futures and Options on Futures 26
Fixed Income Securities 27
Foreign Securities 27
Portfolio Transactions 29
Portfolio Turnover 29
Investment Restrictions 29
Information Concerning
Compensation Paid to First Trust
National Association and its
Affiliates 30
<PAGE>
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"):
SMALL 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 small-capitalization companies (those with market capitalizations
of less than $1 billion at the time of purchase). 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.
INTERNATIONAL INDEX FUND has an objective of providing investment results that
correspond to the performance of the Morgan Stanley Europe, Australia, Far East
Composite Index (the "EAFE Index"). The Fund invests substantially (at least 65%
of total assets) in common stocks included in the EAFE Index. The Fund's adviser
believes that its objective can be best achieved by investing in common stocks
of approximately 50% to 100% of the issues included in the EAFE Index, depending
on the size of the Fund.
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 Investments 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."
<PAGE>
RISKS TO CONSIDER Each of the Funds 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 Small 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) Small Cap Value Fund is subject to risks associated with
investing in small-capitalization companies; (ii) International Index Fund is
subject to risks associated with investing in foreign securities and to currency
risks; (iii) the Small Cap Value 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; (iv) the Funds
may invest (but not for speculative purposes) in options on stock indices; and
(v) International Index Fund may invest (but not for speculative purposes) in
stock index futures contracts, options on stock index futures, and/or index
participation contracts based on the EAFE Index. See "Investment Objectives and
Policies -- Risks to Consider" 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.
<PAGE>
FEES AND EXPENSES
CLASS C SHARE FEES AND EXPENSES
<TABLE>
<CAPTION>
SMALL CAP INTERNATIONAL
VALUE FUND INDEX FUND
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases None None
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)(1) 0.70% 0.46%
Rule 12b-1 fees None None
Other expenses
(after reimbursements)(1) 0.20% 0.29%
Total fund operating expenses
(after voluntary fee waivers and
reimbursements)(1) 0.90% 0.75%
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 $ 9 $ 8
3 years $ 29 $ 24
</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. Absent any fee waivers or reimbursements,
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 0.90% for Small Cap Value
Fund and 0.99% for International Index 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: Small
Cap Value Fund, $9 and $29, and International Index Fund, $10 and $32.
<PAGE>
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 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 annual Fund operating expenses
after voluntary fee waivers and expense reimbursements by the Adviser. The
Adviser intends to maintain such waivers in effect through September 30, 1998.
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" in the tables are based on estimates.
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.
<PAGE>
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 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 Investments Distribution Co., 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. Each of the Funds is a diversified investment company, as defined in
the Investment Company Act of 1940 (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. Similarly, if a Fund is required or
permitted to invest a stated percentage of its assets in companies with no more
or no less than a stated market capitalization, deviations from the stated
percentages which result from changes in companies' market capitalizations after
the Fund purchases its shares will not be deemed to violate the limitation. A
Fund which is limited to investing in securities with specified
<PAGE>
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 either 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."
SMALL CAP VALUE FUND
OBJECTIVES. Small Cap Value Fund has an objective of capital appreciation.
INVESTMENT POLICIES. Under normal market conditions, Small Cap Value Fund
invests at least 65% of its total assets in equity securities of small-
capitalization companies. For these purposes, small-capitalization companies are
deemed those with market capitalizations of less than $1 billion at the time of
purchase. 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 $1 billion 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
<PAGE>
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.
INTERNATIONAL INDEX FUND
OBJECTIVE. International Index Fund has an objective of providing investment
results that correspond to the performance of the Morgan Stanley Europe,
Australia, Far East Composite Index (the "EAFE Index").
INVESTMENT POLICIES. International Index Fund invests substantially (at least
65% of total assets) in common stocks included in the EAFE Index. The Adviser
believes that the Fund's objective can best be achieved by investing in the
common stocks of approximately 50% to 100% of the issues included in the EAFE
Index, depending on the size of the Fund. Normally, International Index Fund
will invest at least 65% of its total assets in securities traded in at least
three foreign countries.
Morgan Stanley designates the stocks included in the EAFE Index. A particular
stock's weighting in the EAFE Index is based on its total market value (that is,
its market price per share times the number of shares outstanding) relative to
that of all stocks included in the EAFE Index. From time to time, Morgan Stanley
may add or delete stocks to or from the EAFE Index. Inclusion of a particular
stock in the EAFE Index does not imply any opinion by Morgan Stanley as to its
merits as an investment, nor is Morgan Stanley a sponsor of or in any way
affiliated with the Fund.
The Fund is managed by utilizing a computer program that identifies which stocks
should be purchased or sold in order to replicate, as closely as possible, the
composition of the EAFE Index. The Fund includes a stock in its investment
portfolio in the order of the stock's weighting in the EAFE Index, starting with
the most heavily weighted stock. Thus, the proportion of Fund assets invested in
a stock, industry or country closely approximates the percentage of the EAFE
Index represented by that stock, industry or country. Portfolio turnover is
expected to be well below that of actively managed mutual funds.
Although the Fund will not duplicate the EAFE Index performance precisely, it is
anticipated that there will be a close correlation between the Fund's
performance and that of the EAFE Index in both rising and falling markets. The
Fund will attempt to achieve a correlation between the performance of its
<PAGE>
portfolio and that of the EAFE Index of at least 95%, without taking into
account expenses of the Fund. A perfect correlation would be indicated by a
figure of 100%, which would be achieved if the Fund's net asset value, including
the value of its dividends and capital gains distributions, increased or
decreased in exact proportion to changes in the EAFE Index. The Fund's ability
to replicate the performance of the EAFE Index may be affected by, among other
things, changes in securities markets, the manner in which Morgan Stanley
calculates the EAFE Index, administrative and other expenses incurred by the
Fund, taxes (including foreign withholding taxes, which will affect the Fund)
and the amount and timing of cash flows into and out of the Fund. Although cash
flows into and out of the Fund will affect the Fund's portfolio turnover rate
and its ability to replicate the EAFE Index's performance, investment
adjustments will be made, as practicably as possible, to account for these
circumstances.
The Fund also may invest up to 20% of its total assets in the aggregate in stock
index futures contracts, options on stock indices, options on stock index
futures and index participation contracts based on the EAFE Index. The Fund will
not invest in these types of contracts and options for speculative purposes, but
rather to maintain sufficient liquidity to meet redemption requests; to increase
the level of Fund assets devoted to replicating the composition of the EAFE
Index; and to reduce transaction costs. These types of contracts and options and
certian associated risks are described under "Special Investment Methods --
Options Transactions." In addition, the Fund may enter into repurchase
agreements and engage in securities lending as described under "Special
Investment Methods -- Repurchase Agreements" and "Special Investment Methods --
Lending of Portfolio Securities."
In order to maintain liquidity during times of unusual market conditions, the
Fund also may invest temporarily in cash and cash items of the kinds described
under "Special Investment Methods -- Cash Items."
RISKS TO CONSIDER
An investment in Small Cap Value Fund and International Index 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. Each of
the Funds is subject to the risk of generally adverse equity markets.
SMALL-CAPITALIZATION COMPANIES. Small Cap Value Fund emphasizes investments in
companies with small market capitalizations. The equity securities of such
companies frequently have experienced greater price
<PAGE>
volatility in the past than those of larger-capitalization companies, and they
may be expected to do so in the future. To the extent that Small Cap Value Fund
invests in small-capitalization companies, they are subject to this risk of
greater volatility.
ACTIVE MANAGEMENT. Small 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.
FOREIGN SECURITIES. International Index Fund is subject to special risks
associated with investing in foreign securities and to declines in net asset
value resulting from changes in exchange rates between the United States dollar
and foreign currencies. These risks are discussed under "Special Investment
Methods -- Foreign Securities" elsewhere herein. Because of the special risks
associated with foreign investing the Fund may be subject to greater volatility
than most mutual funds which invest principally in domestic securities.
OTHER. Investors also should review "Special Investment Methods" for information
concerning risks associated with certain investment techniques which may be
utilized by the Funds.
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.
<PAGE>
Small Cap Value Fund and International Index Fund has each agreed to pay the
Adviser monthly fees calculated on an annual basis equal to 0.70% of its
respective average daily net assets. The Adviser may, at its option, waive any
or all of its fees, or reimburse expenses, with respect to either 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
Small Cap Value Fund is managed by a committee composed of Albin S. Dubiak,
Roland P. Whitcomb and Jeff A. Johnson.
ALBIN S. DUBIAK began his investment career as a security trader with First
National Bank of Chicago in 1963 before joining the Adviser as an investment
analyst in 1969. Mr. Dubiak received his bachelor's degree from Indiana
University and his master's degree in business administration from the
University of Arizona. Mr. Dubiak also is portfolio co-manager for several other
First American equity funds and is a member of the committees which manage
several other First American equity funds.
<PAGE>
ROLAND B. WHITCOMB joined the Adviser in 1986 after serving as an account
executive with Smith Barney & Co. since 1979. He received his bachelor's
degree from the University of Chicago and is a Chartered Financial Analyst.
Mr. Whitcomb also is portfolio co-manager for several other First American
equity funds and is a member of the committees which manage several other First
American equity funds.
JEFF A. JOHNSON has been employed by the Adviser in investment management
since 1991 and in commercial lending from 1985 to 1991. Mr. Johnson received
his master of fine arts degree from the University of Iowa. Mr. Johnson also
is portfolio co-manager for several other First American equity funds and is a
member of the committee which manages several other First American equity
funds.
International Index Fund is co-managed by James S. Rovner and Evan Lundquist.
JAMES S. ROVNER joined the Adviser in 1986 and has managed assets for
institutional and individual clients for over 15 years. Mr. Rovner received
his bachelor's degree and his master's degree in business administration from
the University of Wisconsin and is a Chartered Financial Analyst.
EVAN LUNDQUIST joined the Adviser in 1993 and received his bachelor's degree
from St. Mary's College.
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 receives monthly
fees calculated on an annual basis equal to, for Small Cap Value Fund, 0.03% of
Small Cap Value Fund's average daily net assets, and for International Index
Fund, 0.10% of International Index Fund's average daily net assets. In addition,
the Custodian is reimbursed by the Funds for its out-of-pocket expenses incurred
while providing its services to the Funds. Rules adopted under the 1940 Act
permit International Index Fund to maintain its securities and cash in the
custody of certain eligible foreign banks and depositories. International Index
Fund's portfolio of non-United States securities are held by sub-custodians
which are approved by the directors of FAIF in accordance with these rules. This
determination is made pursuant to these rules following a consideration of a
number of factors including but not limited to, the reliability and financial
stability of the institution; the ability of the institution to perform
custodian services for International Index Fund; the reputation of the
institution in its national market; the political and economic stability of
<PAGE>
the country in which the institution is located; and the risks of potential
nationalization or expropriation of International Index Fund's assets.
Sub-custodian fees with respect to International Index Fund are paid by the
Custodian out of the custodian's fees.
ADMINISTRATOR
The administrator for the Funds is SEI Investments 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.
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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.
<PAGE>
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. Foreign securities are valued
based upon quotation from the primary market in which they are traded. 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.
FOREIGN SECURITIES
Any assets or liabilities of International Index Fund initially expressed in
terms of foreign currencies are translated into United States dollars using
current exchange rates. Trading in securities on foreign markets may be
completed before the close of business on each business day of International
Index Fund. Thus, the calculation of the Fund's net asset value may not take
place contemporaneously with the determination of the prices of foreign
securities held in the Fund's portfolios. If events materially affecting the
value of foreign securities occur between the time when their price is
determined and the time when the Fund's net asset value is calculated, such
securities will be valued at fair value as determined in good faith by or under
the direction of the Board
<PAGE>
of Directors. In addition, trading in securities on foreign markets may not take
place on all days on which the New York Stock Exchange (the "Exchange") is open
for business or may take place on days on which the Exchange is not open for
business. Therefore, the net asset value of International Index Fund might be
significantly affected on days when an investor has no access to the Fund.
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 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.
<PAGE>
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 intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"). If so qualified
<PAGE>
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 paid from the net investment income 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. Dividends
paid by the Funds attributable to investments in the securities of foreign
issuers will not be eligible for the 70% deduction for dividends received by
corporations. 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.
International Index Fund may be required to pay withholding and other taxes
imposed by foreign countries, generally at rates from 10% to 40%, which would
reduce the Fund's investment income. Tax conventions between certain countries
and the United States may reduce or eliminate such taxes.
If at the end of International Index Fund's taxable year more than 50% of its
total assets consist of securities of foreign corporations, it will be eligible
to file an election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to include their respective pro rata
portions of such foreign taxes in gross income, treat such amounts as foreign
taxes paid by them, and deduct such amounts in computing their taxable income
or, alternatively, use them as foreign tax credits against their federal income
taxes. If such an election is filed for a year, International Index Fund
shareholders will be notified of the amounts which they may deduct as foreign
taxes paid or used as foreign tax credits.
Alternatively, if the amount of foreign taxes paid by International Index Fund
is not large enough in future years to warrant its making the election described
above, the Fund may claim the amount of foreign taxes paid as a deduction
against its own gross income. In that case, shareholders would not be required
to include any amount of foreign taxes paid by the Fund in their income and
would not be permitted either to deduct any portion of foreign taxes from their
own income or to claim any amount of foreign tax credit for taxes paid by the
Fund.
<PAGE>
This is a general summary of the federal tax laws applicable to the Funds and
their shareholders as of the date of this Prospectus. See the Statement of
Additional Information for further details.
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." 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," 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
<PAGE>
is generated over a one year period. The yield formula annualizes net investment
income by providing for semi-annual compounding.
"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 at the end of the specified period covered by the
total return figure. "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. 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.
<PAGE>
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.
REPURCHASE AGREEMENTS
Each Fund is permitted to enter into repurchase 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.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS
Small Cap Value Fund 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. The 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, the 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
the Fund to risk because the securities may decrease in value prior to delivery.
In addition, the 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 Fund 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.
<PAGE>
A seller's failure to deliver securities to the 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
PURCHASES OF PUT AND CALL OPTIONS. Small Cap Value Fund may purchase put and
call options on equity securities, and both Funds may purchase put and call
options 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.
<PAGE>
Neither Fund 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 security 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 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. Small 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." These transactions
would be undertaken primarily to produce additional income.
When the 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.
OPTIONS ON STOCK INDICES. Each 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 each Fund may invest, as described under "Investment
Objectives and Policies," 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
<PAGE>
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 each 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.
FUTURES AND OPTIONS ON FUTURES
International Index Fund may engage in futures transactions and purchase options
on futures to the extent specified under "Investment Objectives and Policies."
These transactions may include the purchase of stock index futures and options
on stock index futures.
A futures contract on an index obligates the seller to deliver, and entitles the
purchaser to receive, an amount of cash equal to a specific dollar amount times
the difference between the value of the index at the expiration date of the
contract and the index value specified in the contract. The acquisition of put
and call options on futures contracts will, respectively, give International
Index Fund the right (but not the obligation), for a specified exercise price,
to sell or to purchase the underlying futures contract at any time during the
option period.
The Fund may use futures contracts and options on futures in an effort to hedge
against market risks. In addition, International Index Fund may use stock index
futures and options on futures to maintain sufficient liquidity to meet
redemption requests, to increase the level of Fund assets devoted to replicating
the composition of the EAFE Index and to reduce transaction costs.
Aggregate initial margin deposits for futures contracts, and premiums paid for
related options, may not exceed 5% of the Fund's total assets. Futures
transactions will be limited to the extent necessary to maintain the Fund's
qualification as a regulated investment company under the Internal Revenue Code
of 1986, as amended.
Where International Index Fund is permitted to purchase options on futures, its
potential loss is limited to the amount of the premiums paid for the options. As
stated above, this amount may not exceed 5% of the Fund's total assets. Where
International Index Fund is permitted to enter into futures contracts obligating
it to purchase an index in the future at a specified price, the Fund could lose
100% of its net assets in connection therewith if it engaged extensively in such
transactions and if the value of the subject index at the delivery or settlement
date fell to zero for all contracts into which the Fund was permitted to enter.
<PAGE>
Futures transactions involve brokerage costs and require International Index
Fund to segregate assets to cover contracts that would require it to purchase an
index in the future at a specified date. The Fund may lose the expected benefit
of futures transactions if the index value or exchange rates moves in an
unanticipated manner. Such unanticipated changes may also result in poorer
overall performance than if the Fund had not entered into any futures
transactions. There is no assurance of liquidity in the secondary market for
purposes of closing out futures positions.
FIXED INCOME SECURITIES
The fixed income securities in which Small 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, Small
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 (i) interest rate
risk (the risk that increases in market interest rates will cause declines in
the value of debt securities held by the Fund), (ii) credit risk (the risk that
issuers of debt securities held by the 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 the Fund to reinvest the prepayment at a lower interest rate).
FOREIGN SECURITIES
GENERAL. Under normal market conditions, International Index Fund invests at
least 65% of its total assets in equity securities which trade in markets other
than the United States. In addition, Small 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
<PAGE>
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 AND EUROPEAN 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. International Index Fund also may invest in
European Depositary Receipts, which are receipts evidencing an arrangement with
a European bank similar to that for American Depositary Receipts and which are
designed for use in the European securities markets. European Depositary
Receipts are not necessarily denominated in the currency of the underlying
security.
Certain American Depositary Receipts and European Depositary Receipts, typically
those denominated as unsponsored, require the holders thereof to
<PAGE>
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.
<PAGE>
* 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.
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.
<PAGE>
I
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 INVESTMENTS 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
FAIF-1502 (7/97)I
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
DATED ________, 1997
PROPOSED ACQUISITION OF ASSETS OF
SMALL COMPANIES VALUE FUND, LARGE COMPANIES VALUE FUND,
OPTIMIZED STOCK FUND, INTERMEDIATE BOND FUND,
DIVERSIFIED BOND FUND, AND INTERNATIONAL OPPORTUNITIES FUND
PORTFOLIOS OF
QUALIVEST FUNDS
3435 STELZER ROAD
COLUMBUS, OHIO 43219-3035
1-800-743-8637
BY AND IN EXCHANGE FOR SHARES OF
SMALL CAP VALUE FUND, STOCK FUND, EQUITY INDEX FUND,
INTERMEDIATE TERM INCOME FUND, FIXED INCOME FUND
AND INTERNATIONAL INDEX FUND
PORTFOLIOS OF
FIRST AMERICAN INVESTMENT FUNDS, INC.
OAKS, PENNSYLVANIA 19456
1-800-637-2548
This Statement of Additional Information relates to the proposed
Agreement and Plan of Reorganization providing for (a) the acquisition of all of
the assets and the assumption of all liabilities of the Small Companies Value
Fund, Large Companies Value Fund, Optimized Stock Fund, Intermediate Bond Fund,
Diversified Bond Fund, and International Opportunities Fund (the "Qualivest
Portfolios"), each separately managed portfolios of Qualivest Funds
("Qualivest"), by the Small Cap Value Fund, Stock Fund, Equity Index Fund,
Intermediate Term Income Fund, Fixed Income Fund and International Index Fund
("FAIF Funds"), each separately managed series of First American Investment
Funds, Inc. ("FAIF"), in exchange for shares of capital stock of the FAIF Funds
having an aggregate net asset value equal to the aggregate value of the assets
acquired (less the liabilities assumed) of the Qualivest Portfolios and (b) the
liquidation of the Qualivest Portfolios and the pro rata distribution of the
Qualivest Portfolio shares to FAIF Fund shareholders. This Statement of
Additional Information consists of this cover page, the preliminary Statement of
Additional Information of FAIF relating to the Small Cap Value Fund and
International Index Fund, which is attached as Appendix A to this Statement of
Additional Information, and the following documents, each of which is
incorporated by reference herein:
1. Statement of Additional Information of FAIF dated January 31, 1997,
containing information concerning the Stock Fund, Equity Index Fund,
Intermediate Term Income Fund and Fixed Income Fund.
2. Statement of Additional Information of Qualivest dated December 1,
1996.
3. Annual report of FAIF for the fiscal year ended September 30, 1996.
4. Semi-Annual report of FAIF for the six months ended March 31, 1997.
5. Annual report of Qualivest for the fiscal year ended July 31, 1996.
6. Semi-Annual report of Qualivest for the six months ended January 31,
1997.
7. Financial Statements required by Form N-14, Item 14 (to the extent
not included in Items 3, 4, 5 and 6 above).
This Statement of Additional Information is not a prospectus. The
Prospectus/Proxy Statement dated the date hereof relating to the
above-referenced transaction may be obtained without charge by writing or
calling Qualivest or FAIF at the addresses or telephone numbers noted above.
This Statement of Additional Information relates to, and should be read in
conjunction with, such Prospectus/Proxy Statement.
Note: In the SEC filing package, Items No. 3 and 4 referred to above are
included in Part A as materials to be delivered
<PAGE>
APPPENDIX A
FIRST AMERICAN INVESTMENT FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED __________, 1997
SMALL CAP VALUE FUND
INTERNATIONAL INDEX FUND
This Statement of Additional Information relates to the Class A Shares,
Class B Shares and Class C Shares of Small Cap Value Fund and International
Index Fund, 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.......................... 4
Lending of Portfolio Securities........... 4
Options Transactions...................... 4
Foreign Securities........................ 5
Debt Obligations Rated Less Than
Investment Grade...................... 5
CFTC Information.......................... 6
INVESTMENT RESTRICTIONS........................ 6
DIRECTORS AND EXECUTIVE OFFICERS............... 9
Directors................................. 9
Executive Officers........................ 9
Compensation.............................. 11
INVESTMENT ADVISORY AND OTHER
SERVICES....................................... 12
Investment Advisory Agreement............. 12
Administration Agreement.................. 12
Distributor and Distribution Plans........ 12
Custodian; Transfer Agent; Counsel;
Accountants........................... 14
PORTFOLIO TRANSACTIONS AND ALLOCATION
OF BROKERAGE................................... 14
CAPITAL STOCK.................................. 16
NET ASSET VALUE AND PUBLIC OFFERING
PRICE.......................................... 16
FUND PERFORMANCE............................... 17
SEC Standardized Performance Figures...... 17
Non-Standard Distribution Rates........... 18
Certain Performance Comparisons........... 18
TAXATION....................................... 18
RATINGS........................................ 22
Ratings of Corporate Debt Obligations
and Municipal Bonds................... 22
Ratings of Preferred Stock................ 24
Ratings of Municipal Notes................ 24
Ratings of Commercial Paper............... 25
SUBJECT TO COMPLETION -- July 21, 1997
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 any offers to buy be accepted prior to the time the Registration
Statement becomes effective. This Statement of Additional Information does
not constitute a prospectus.
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
26 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."
Shareholders may purchase shares of Small Cap Value Fund and
International Index 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 (the "Retail Class Prospectus") and a Prospectus relating to the
Institutional Class Shares (the "Institutional Class Prospectus") 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
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 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 Small Cap Value 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, Small Cap Value 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 Small Cap Value 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 Small Cap Value 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, Small Cap Value 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,
Small Cap Value Fund may purchase put and call options on securities and may
write covered call options on securities which it owns or has the right to
acquire. The Fund may purchase put options to hedge against a decline in the
value of its portfolio. By using put options in this way, the 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, the 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 the
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.
FOREIGN SECURITIES
As described in the applicable Prospectuses, under normal market
conditions International Index Fund invests principally in foreign securities,
and Small Cap Value Fund may invest lesser proportions of their assets in
securities of foreign issuers which are either listed on a United States
securities exchange or represented by American Depositary Receipts.
Fixed commissions on foreign securities exchanges are generally higher
than negotiated commissions on United States exchanges. Foreign markets also
have different clearance and settlement procedures, and in some markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of International Index Fund is uninvested. In addition, settlement
problems could cause International Index Fund to miss attractive investment
opportunities or to incur losses due to an inability to sell or deliver
securities in a timely fashion. In the event of a default by an issuer of
foreign securities, it may be more difficult for a Fund to obtain or to enforce
a judgment against the issuer.
DEBT OBLIGATIONS RATED LESS THAN INVESTMENT GRADE
As described in the Prospectuses, the "equity securities" in which
Small 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 Small 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
Small 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.
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.
Neither of the Funds will:
1. 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. 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. 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. (As a non-fundamental policy, neither 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 either 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.
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. Neither 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 guaranteed 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) each 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; (b) International Index Fund may
purchase shares of open-end investment companies which invest
in permitted investments for such Fund; and (c) each Fund may
purchase securities as part of a merger, consolidation,
reorganization or acquisition of assets.
16. Invest in foreign securities, except that Small 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
stock exchange or represented by American Depositary Receipts
and International Index Fund may invest in foreign securities
without limitation.
17. Invest in warrants; provided, that a 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. 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 Investments Distribution Co. (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 Investments Company ("SEI"), SEI Investments
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
Name of Compensation Benefits Accrued as Annual Benefits and 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
- ------------------
* Not a director during the fiscal year ended September 30, 1996.
</TABLE>
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 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 Investments 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 monitoring 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 each Fund 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 re-allowed 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
Index 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 by each Fund calculated on an annual basis equal to, for Small Cap
Value Fund, 0.03% of Small Cap Value Fund's average daily net assets, and, for
International Index Fund, 0.10% of International Index 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. 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 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 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.
It is expected that International Index Fund will purchase most foreign
equity securities in the over-the-counter markets or stock exchanges located in
the countries in which the respective principal offices of the issuers of the
various securities are located if that is the best available market. The fixed
commissions paid in connection with most such foreign stock transactions
generally are higher than negotiated commissions on United States transactions.
There generally is less governmental supervision and regulation of foreign stock
exchanges than in the United States. Foreign securities settlements may in some
instances be subject to delays and related administrative uncertainties.
Foreign equity securities may be held in the form of American
Depositary Receipts, or ADRs, European Depositary Receipts, or EDRs, or
securities convertible into foreign equity securities. ADRs and EDRs may be
listed on stock exchanges or traded in the over-the-counter markets in the
United States or overseas. The foreign and domestic debt securities and money
market instruments in which the Funds may invest are generally traded in the
over-the-counter markets.
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
purposes 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
determines 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 has 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 July 11, 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)(6th power) - 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
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)(nth power) = 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.
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:
SMALL 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. Small Cap Value Fund also may compare its performance to the
LIPPER SMALL CAP AVERAGE, which is an average of funds which invest primarily in
companies with market capitalizations of less than $1 billion at the time of
purchase.
INTERNATIONAL INDEX FUND may compare its performance to the Morgan
Stanley Europe, Australia, Far East Composite Index which is an aggregate of 15
individual country indices that collectively represent many of the major markets
in the world, excluding the United States and Canada. International Index Fund
also may compare its performance to the LIPPER INTERNATIONAL AVERAGE, which is
an average of funds which primarily invest in equity securities whose primary
trading markets are outside the United States.
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.
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.
Sales of forward currency contracts that are intended to hedge against
a change in the value of securities or currencies held by a Fund may affect the
holding period of such securities or currencies and, consequently, the nature of
the gain or loss on such securities or currencies upon disposition.
As stated above, the Code requires a regulated investment company to
diversity 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.
Code Section 988 may also apply to forward currency contracts. Under Section
988, each foreign currency gain or loss is generally computed separately and
treated as ordinary income or loss. In the case of overlap between Sections 1256
and 988, special provisions determine the character and timing of any income,
gain or loss. International Index Fund will attempt to monitor Section 988
transactions to avoid an adverse tax impact.
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. Market 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.
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
INTRODUCTION TO PRO FORMA COMBINING STATEMENTS
MARCH 31, 1997
The accompanying unaudited pro forma combining Statements of Assets and
Liabilities, Statements of Operations and Schedules of Investments, reflect the
accounts of Qualivest Large Companies Value Fund, Qualivest Optimized Stock
Fund, Qualivest Intermediate Bond Fund and Qualivest Diversified Bond Fund (the
Qualivest Funds) and the corresponding First American Investment Funds, Inc.
(the FAIF Funds) which include the First American Stock Fund, First American
Equity Index Fund, First American Intermediate Term Income Fund and First
American Fixed Income Fund (collectively, the Funds).
These statements have been derived from the underlying accounting records for
the FAIF Funds and Qualivest Funds used in calculating net asset values for the
twelve-month period ended March 31, 1997. The pro forma combining Statements of
Operations have been prepared based upon the fee and expense structure of the
FAIF Funds.
Under the proposed merger agreement and plan of reorganization, all outstanding
shares of each class of each Qualivest Fund will be issued in exchange for
shares of specified classes of the corresponding FAIF Fund.
<PAGE>
First American Investment Funds, Inc.
Stock Fund
Pro Forma Combining Statement of Assets and Liabilities
3/31/97
(Unaudited)
<TABLE>
<CAPTION>
Large Pro Forma
Companies Adjustments Pro Forma
Value Stock (Note 2) Combined
(000) (000) (000) (000)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Total Investments (Cost $126,460,
$802,403 and $928,863,
respectively) $ 148,771 $ 913,169 $ -- $ 1,061,940
Receivables: --
Accrued Income 206 1,435 -- 1,641
Investment Securities Sold 281 5,360 -- 5,641
Capital Shares Sold 38 2,121 -- 2,159
Other Assets 4 22 -- 26
----------- ----------- ----------- -----------
Total Assets 149,300 922,107 -- 1,071,407
----------- ----------- ----------- -----------
Liabilities:
Payables
Investment Securities Purchased 270 4,614 -- 4,884
Capital Shares Redeemed -- 3,718 -- 3,718
Accrued Expenses 149 713 -- 862
----------- ----------- ----------- -----------
Total Liabilities 419 9,045 -- 9,464
----------- ----------- ----------- -----------
Net Assets applicable to:
Stock Fund Institutional Class
($.0001 par value - 2 billion authorized)
based on 36,939,998 and 43,083,166
outstanding shares, respectively -- 651,786 112,273(a) 764,059
Stock Fund Class A
($.0001 par value - 2 billion authorized)
based on 1,262,261 and 1,589,340
outstanding shares, respectively -- 23,332 7,003(a) 30,335
Stock Fund Class B
($.0001 par value - 2 billion authorized)
based on 1,482,676 outstanding shares -- 30,767 -- 30,767
Large Companies Value Class A based on
506,483 outstanding shares 6,167 -- (6,167)(a) --
Large Companies Value Class Y based on
10,782,573 outstanding shares 112,273 -- (112,273)(a) --
Large Companies Value Class C based on
71,917 outstanding shares 836 -- (836)(a) --
Undistributed net investment income 239 (646) -- (407)
Accumulated net realized gain/(loss)
on investments 7,055 97,057 -- 104,112
Net unrealized appreciation/(depreciation)
of investments 22,311 110,766 -- 133,077
----------- ----------- ----------- -----------
Total Net Assets $ 148,881 $ 913,062 $ -- $ 1,061,943
=========== =========== =========== ===========
Net Asset Value,
offering price and redemption price per share -
Class Y and Institutional Class, respectively $13.11 $23.01 $23.01
=========== =========== ===========
Net Asset Value
and redemption price per share - Class A $13.04 $23.01 $23.01
=========== =========== ===========
Net Asset Value
and offering price per share - Class C $12.82
===========
Net Asset Value
and offering price per share - Class B $22.89 $22.89
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
First American Investment Funds, Inc.
Equity Index Fund
Pro Forma Combining Statement of Assets and Liabilities
3/31/97
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
Optimized Equity Adjustments Pro Forma
Stock Index (Note 2) Combined
(000) (000) (000) (000)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Assets:
Total Investments (Cost $217,224,
$304,272 and $521,496,
respectively) $ 269,460 $ 422,113 $ -- $ 691,573
Cash -- 3 -- 3
Receivables: --
Accrued Income 457 704 -- 1,161
Capital Shares Sold 27 2,151 -- 2,178
Other Assets 9 13 -- 22
--------- --------- --------- ---------
Total Assets 269,953 424,984 694,937
--------- --------- --------- ---------
Liabilities:
Payables
Capital Shares Redeemed -- 220 -- 220
Accrued Expenses 148 168 -- 316
Other Payables -- 341 -- 341
--------- --------- --------- ---------
Total Liabilities 148 729 -- 877
--------- --------- --------- ---------
Net Assets applicable to:
Equity Index Institutional Class
($.0001 par value - 2 billion authorized)
based on 24,330,592 and 40,431,313
outstanding shares, respectively -- 288,325 208,917(a) 497,242
Equity Index Class A
($.0001 par value - 2 billion authorized)
based on 527,482 and 689,672
outstanding shares, respectively -- 7,377 2,528(a) 9,905
Equity Index Class B
($.0001 par value - 2 billion authorized)
based on 715,723 outstanding shares -- 10,572 -- 10,572
Optimized Stock Class A based on 180,690
outstanding shares 2,311 -- (2,311)(a) --
Optimized Stock Class Y based on 19,588,216
outstanding shares 208,917 -- (208,917)(a) --
Optimized Stock Class C based on 17,095
outstanding shares 217 -- (217)(a) --
Undistributed net investment income 512 132 -- 644
Accumulated net realized gain/(loss)
on investments 5,612 652 -- 6,264
Net unrealized appreciation/(depreciation)
of investments 52,236 117,841 -- 170,077
Net unrealized appreciation/(depreciation)
of futures contracts -- (644) -- (644)
--------- --------- --------- ---------
Total Net Assets $ 269,805 $ 424,255 $ -- $ 694,060
========= ========= ========= =========
Net Asset Value,
offering price and redemption price per share -
Class Y and Institutional Class, respectively $13.64 $16.59 $16.59
========= ========= =========
Net Asset Value
and redemption price per share - Class A $13.62 $16.60 $16.60
========= ========= =========
Net Asset Value
and offering price per share - Class C $13.56
=========
Net Asset Value
and offering price per share - Class B $16.54 $16.54
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
First American Investment Funds, Inc.
Intermediate Term Income Fund
Pro Forma Combining Statement of Assets and Liabilities
3/31/97
(Unaudited)
<TABLE>
<CAPTION>
Intermediate Pro Forma
Intermediate Term Adjustments Pro Forma
Bond Income (Note 2) Combined
(000) (000) (000) (000)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Assets:
Total Investments (Cost $181,410,
$158,814 and $340,224,
respectively) $ 178,813 $ 156,351 $ -- $ 335,164
Cash -- 13 -- 13
Receivables:
Accrued Income 2,364 2,236 -- 4,600
Capital Shares Sold 5 62 -- 67
Income and Other Receivables 38 -- -- 38
Other Assets 5 4 -- 9
--------- --------- --------- ---------
Total Assets 181,225 158,666 -- 339,891
--------- --------- --------- ---------
Liabilities:
Payables
Investment Securities Purchased 2,490 -- -- 2,490
Capital Shares Redeemed -- 884 -- 884
Accrued Expenses 123 108 -- 231
--------- --------- --------- ---------
Total Liabilities 2,613 992 -- 3,605
--------- --------- --------- ---------
Net Assets applicable to:
Intermediate Term Income Institutional Class
($.0001 par value - 2 billion authorized)
based on 15,925,054 and 34,128,739
outstanding shares, respectively -- 157,801 179,803(a) 337,604
Intermediate Term Income Class A
($.0001 par value - 2 billion authorized)
based on 207,169 and 285,190
outstanding shares, respectively -- 2,116 773(a) 2,889
Intermediate Bond Class A based on
70,489 outstanding shares 706 -- (706(a) --
Intermediate Bond Class Y based on
17,917,093 outstanding shares 179,803 -- (179,803)(a) --
Intermediate Bond Class C based on
7,102 outstanding shares 67 -- (67)(a) --
Undistributed net investment income 442 17 -- 459
Accumulated net realized gain/(loss)
on investments 191 203 -- 394
Net unrealized appreciation/(depreciation)
of investments (2,597) (2,463) -- (5,060)
--------- --------- --------- ---------
Total Net Assets $ 178,612 $ 157,674 $ -- $ 336,286
========= ========= ========= =========
Net Asset Value,
offering price and redemption price per share -
Class Y and Institutional Class, respectively $9.93 $9.77 $9.77
========= ========= =========
Net Asset Value
and redemption price per share - Class A $9.83 $9.77 $9.77
========= ========= =========
Net Asset Value
and offering price per share - Class C $9.76
=========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
First American Investment Funds, Inc.
Fixed Income Fund
Pro Forma Combining Statement of Assets and Liabilities
3/31/97
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
Diversified Fixed Adjustments Pro Forma
Bond Income (Note 2) Combined
(000) (000) (000) (000)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Assets:
Total Investments (Cost $229,506,
$637,111 and 866,617,
respectively) $ 224,192 $ 625,544 $ -- $ 849,736
Cash -- 108 -- 108
Receivables:
Accrued Income 3,161 8,061 -- 11,222
Capital Shares Sold -- 697 -- 697
Income and Other Receivables 28 1 -- 29
Other Assets 13 9 -- 22
--------- --------- --------- ---------
Total Assets 227,394 634,420 -- 861,814
--------- --------- --------- ---------
Liabilities:
Payables
Capital Shares Redeemed -- 894 -- 894
Accrued Expenses 120 437 -- 557
--------- --------- --------- ---------
Total Liabilities 120 1,331 -- 1,451
--------- --------- --------- ---------
Net Assets applicable to:
Fixed Income Institutional Class
($.0001 par value - 2 billion authorized)
based on 57,630,154 and 79,033,749
outstanding shares, respectively -- 621,471 231,856(a) 853,327
Fixed Income Class A
($.0001 par value - 2 billion authorized)
based on 678,299 and 715,547
outstanding shares, respectively -- 7,531 408(a) 7,939
Fixed Income Class B
($.0001 par value - 2 billion authorized)
based on 1,444,925 outstanding shares -- 15,742 -- 15,742
Diversified Bond Class A based on 38,361
outstanding shares 386 -- (386)(a) --
Diversified Bond Class Y based on 22,853,059
outstanding shares 231,856 -- (231,856)(a) --
Diversified Bond Class C based on 2,326
outstanding shares 22 -- (22)(a) --
Undistributed net investment income 627 (5) -- 622
Accumulated net realized gain/(loss)
on investments (303) (83) -- (386)
Net unrealized appreciation/(depreciation)
of investments (5,314) (11,567) -- (16,881)
--------- --------- --------- ---------
Total Net Assets $ 227,274 $ 633,089 $ -- $ 860,363
========= ========= ========= =========
Net Asset Value,
offering price and redemption price per share -
Class Y and Institutional Class, respectively $9.93 $10.60 $10.60
========= ========= =========
Net Asset Value
and redemption price per share - Class A $9.74 $10.61 $10.61
========= ========= =========
Net Asset Value
and offering price per share - Class C $9.30
=========
Net Asset Value
and offering price per share - Class B $10.55 $10.55
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
First American Investment Funds, Inc.
Stock Fund
Pro Forma Combining Statement of Operations
For the Year Ended March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Large Pro Forma Adjustments
Stock Companies (Note 2) Pro Forma
Fund Value Debit Credit Combined
(000) (000) (000) (000) (000)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Investment Income:
Interest $ 3,251 $ 634 $ -- $ -- $ 3,885
Dividends 9,877 2,705 -- -- 12,582
Less: Foreign taxes withheld -- (1) -- -- (1)
--------- --------- --------- --------- ---------
Total investment income 13,128 3,338 -- -- 16,466
--------- --------- --------- --------- ---------
Expenses:
Investment advisory fees 3,939 814 760(b) 814(b) 4,699
Waiver of investment advisory fees (444) -- -- 68(b) (512)
Administrative fees 654 241 105(b) 241(b) 759
Transfer agent fees 107 75 40(c) 75(c) 147
Amortization of organizational costs -- 2 -- 2(c) --
Custodian fees 34 41 10(b) 41(b) 44
Directors' fees 17 7 1(c) 7(c) 18
Registration fees 80 24 8(c) 24(c) 88
Professional fees 44 20 5(c) 20(c) 49
Printing 50 10 2(c) 10(c) 52
Distribution fees - FAIF Retail Class A 58 -- 15(b) -- 73
Distribution fees - Qualivest Class A -- 13 -- 13(b) --
Distribution fees - FAIF Retail Class B 243 -- -- -- 243
Distribution fees - Qualivest Class C -- 7 -- 7(b) --
Other 23 4 4(c) 4(c) 27
--------- --------- --------- --------- ---------
Net expenses before expenses paid indirectly 4,805 1,258 950 1,326 5,687
Less: Expenses paid indirectly (1) -- -- -- (1)
--------- --------- --------- --------- ---------
Total net expenses 4,804 1,258 950 1,326 5,686
--------- --------- --------- --------- ---------
Investment income (loss) - net 8,324 2,080 (950) (1,326) 10,780
--------- --------- --------- --------- ---------
Realized and Unrealized Gains (Losses) on Investments
Net realized gain on investments 118,883 12,074 -- -- 130,957
Net change in unrealized appreciation
(depreciation) of investments (37,915) 2,618 -- -- (35,297)
--------- --------- --------- --------- ---------
Net Gain on Investments 80,968 14,692 -- -- 95,660
--------- --------- --------- --------- ---------
Net Increase (Decrease) in Net Assets Resulting
from Operations $ 89,292 $ 16,772 $ (950) $ (1,326) $ 106,440
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
First American Investment Funds, Inc.
Equity Index Fund
Pro Forma Combining Statement of Operations
For the Year Ended March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Adjustments
Equity Optimized (Note 2) Pro Forma
Index Stock Debit Credit Combined
(000) (000) (000) (000) (000)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Investment Income:
Interest $ 561 $ 251 $ -- $ -- $ 812
Dividends 7,600 5,030 -- -- 12,630
Less: Foreign taxes withheld -- -- -- -- --
--------- --------- --------- --------- ---------
Total investment income 8,161 5,281 -- -- 13,442
--------- --------- --------- --------- ---------
Expenses:
Investment advisory fees 2,591 732 1,025(b) 732(b) 3,616
Waiver of investment advisory fees (1,983) -- -- 776(b) (2,759)
Administrative fees 430 427 154(b) 427(b) 584
Transfer agent fees 38 60 14(c) 60(c) 52
Amortization of organizational costs 5 2 -- 2(c) 5
Custodian fees 87 73 68(b) 73(b) 155
Directors' fees 12 12 2(c) 12(c) 14
Registration fees 53 42 10(c) 42(c) 63
Professional fees 29 32 10(c) 32(c) 39
Printing 20 18 1(c) 18(c) 21
Distribution fees - FAIF Retail Class A 17 -- 4(b) -- 21
Distribution fees - Qualivest Class A -- 4 -- 4(b) --
Distribution fees - FAIF Retail Class B 82 -- -- -- 82
Distribution fees - Qualivest Class C -- 1 -- 1(b) --
Other 13 6 6(c) 6(c) 19
--------- --------- --------- --------- ---------
Net expenses before expenses paid indirectly 1,394 1,409 1,294 2,185 1,912
Less: Expenses paid indirectly (1) -- -- -- (1)
--------- --------- --------- --------- ---------
Total net expenses 1,393 1,409 1,294 2,185 1,911
--------- --------- --------- --------- ---------
Investment income (loss) - net 6,768 3,872 (1,294) (2,185) 11,531
--------- --------- --------- --------- ---------
Realized and Unrealized Gains(Losses) on Investments
Net realized gain (loss) on investments 1,969 17,543 -- -- 19,512
Net realized gain (loss) on futures contracts 817 -- -- -- 817
Net change in unrealized appreciation
(depreciation) of investments 55,292 21,435 -- -- 76,727
Net change in unrealized appreciation
(depreciation) on futures contra (718) -- -- -- (718)
--------- --------- --------- --------- ---------
Net Gain on Investments 57,360 38,978 -- -- 96,338
--------- --------- --------- --------- ---------
Net Increase(Decrease) in Net Assets Resulting
from Operations $ 64,128 $ 42,850 $ (1,294) $ (2,185) $ 107,869
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
First American Investment Funds, Inc.
Intermediate Term Income Fund
Pro Forma Combining Statement of Operations
For the Year Ended March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Adjustments
Intermediate Intermediate (Note 2) Pro Forma
Term Income Bond Debit Credit Combined
(000) (000) (000) (000) (000)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Investment Income:
Interest $ 6,636 $ 10,666 $ -- $ -- $ 17,302
Dividends -- -- -- -- --
Less: Foreign taxes withheld -- -- -- -- --
-------- -------- -------- -------- --------
Total investment income 6,636 10,666 -- -- 17,302
-------- -------- -------- -------- --------
Expenses:
Investment advisory fees 746 751 876(b) 751(b) 1,622
Waiver of investment advisory fees (192) -- -- 188(b) (380)
Administrative fees 125 294 137(b) 294(b) 262
Transfer agent fees 22 51 20(c) 51(c) 42
Amortization of organizational costs 4 11 -- 11(c) 4
Custodian fees 7 50 10(b) 50(b) 17
Directors' fees 3 9 1(c) 9(c) 4
Registration fees 11 13 10(c) 13(c) 21
Professional fees 8 22 4(c) 22(c) 12
Printing 6 12 3(c) 12(c) 9
Distribution fees - FAIF Retail Class A 6 -- 2(b) -- 8
Waiver of Distribution fees - FAIF Retail Class A (6) -- -- 2(b) (8)
Distribution fees - Qualivest Class A -- 2 -- (b) 2(b) --
Distribution fees - Qualivest Class C -- 1 -- 1(b) --
Other 5 6 4(c) 6(c) 9
-------- -------- -------- -------- --------
Total net expenses 745 1,222 1,067 1,412 1,622
-------- -------- -------- -------- --------
Investment income (loss) - net 5,891 9,444 (1,067) (1,412) 15,680
-------- -------- -------- -------- --------
Realized and Unrealized Gains(Losses) on Investments
Net realized gain (loss) on investments (388) (132) -- -- (520)
Net change in unrealized appreciation
(depreciation) of investments (1,988) (3,181) -- -- (5,169)
-------- -------- -------- -------- --------
Net Loss on Investments (2,376) (3,313) -- -- (5,689)
-------- -------- -------- -------- --------
Net Increase(Decrease) in Net Assets Resulting
from Operations $ 3,515 $ 6,131 $ (1,067) $ (1,412) $ 9,991
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
First American Investment Funds, Inc.
Fixed Income Fund
Pro Forma Combining Statement of Operations
For the Year Ended March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Adjustments
Fixed Diversified (Note 2) Pro Forma
Income Bond Debit Credit Combined
(000) (000) (000) (000) (000)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Investment Income:
Interest $ 30,204 $ 12,584 $ -- $ -- $ 42,788
Dividends -- -- -- -- --
Less: Foreign taxes withheld -- -- -- -- --
-------- -------- -------- -------- --------
Total investment income 30,204 12,584 -- -- 42,788
-------- -------- -------- -------- --------
Expenses:
Investment advisory fees 3,241 586 684(b) 586(b) 3,925
Waiver of investment advisory fees (790) -- -- 161(b) (951)
Administrative fees 538 341 96(b) 341(b) 634
Transfer agent fees 44 51 20(c) 51(c) 64
Amortization of organizational costs -- 2 -- 2(c) --
Custodian fees 23 59 10(b) 59(b) 33
Directors' fees 14 9 1(c) 9(c) 15
Registration fees 90 39 20(c) 39(c) 110
Professional fees 41 27 4(c) 27(c) 45
Printing 24 14 4(c) 14(c) 28
Distribution fees - FAIF Retail Class A 21 -- 1(b) -- 22
Distribution fees - Qualivest Class A -- 1 -- 1(b) --
Distribution fees - FAIF Retail Class B 157 -- -- -- 157
Other 19 6 3(c) 6(c) 22
-------- -------- -------- -------- --------
Net expenses before expenses paid indirectly 3,422 1,135 843 1,296 4,104
Less: Expenses paid indirectly (3) -- -- -- (3)
-------- -------- -------- -------- --------
Total net expenses 3,419 1,135 843 1,296 4,101
-------- -------- -------- -------- --------
Investment income (loss) - net 26,785 11,449 (843) (1,296) 38,687
-------- -------- -------- -------- --------
Realized and Unrealized Gains(Losses) on Investments
Net realized gain (loss) on investments (1,230) (316) -- -- (1,546)
Net change in unrealized appreciation
(depreciation) of investments (11,131) (4,172) -- -- (15,303)
-------- -------- -------- -------- --------
Net Gain(Loss) on Investments (12,361) (4,488) -- -- (16,849)
-------- -------- -------- -------- --------
Net Increase(Decrease) in Net Assets Resulting
from Operations $ 14,424 $ 6,961 $ (843) $ (1,296) $ 21,838
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
NOTES TO PRO FORMA STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION
The unaudited pro forma combining Statements of Assets and Liabilities,
Statements of Operations and Schedules of Investments give effect to the
proposed acquisition of the Qualivest Large Companies Value Fund (Large
Companies Value), Qualivest Optimized Stock Fund (Optimized Stock), Qualivest
Intermediate Bond Fund (Intermediate Bond) and Qualivest Diversified Bond Fund
(Diversified Bond) (the Qualivest Funds) by the corresponding First American
Investment Funds, Inc. (the FAIF Funds) which include the First American Stock
Fund (Stock), First American Equity Index Fund (Equity Index), First American
Intermediate Term Income Fund (Intermediate Term Income) and First American
Fixed Income Fund (Fixed Income) (collectively, the Funds). The proposed
acquisition will be accounted for by the method of accounting for tax free
mergers of investment companies (sometimes referred to as the pooling without
restatement method). The acquisition will be accomplished by an exchange of all
outstanding shares of each class for each Qualivest Fund in exchange for shares
of specified classes of the corresponding FAIF Fund.
The pro forma combining statements should be read in conjunction with the
historical financial statements of the constituent funds and the notes thereto
incorporated by reference in the Statement of Additional Information.
Stock Fund, Equity Index Fund, Intermediate Term Income Fund and Fixed Income
Fund are portfolios offered by First American Investment Funds, Inc. (FAIF) a
diversified, open-end, management investment company registered under the
Investment Company Act of 1940, as amended. FAIF presently includes a series of
twenty funds.
2. PRO FORMA ADJUSTMENTS
(a) The pro forma combining statements of assets and liabilities
assumes the issuance of additional shares of the Funds as if
the reorganization were to have taken place on March 31, 1997
and is based on the net asset value of the acquiring fund.
Transactions in shares of capital stock are as follows:
506,483, 180,690, 70,489 and 38,361 Class A shares and 71,917,
17,095, 7,102 and 2,326 Class C shares of Large Companies
Value, Optimized Stock, Intermediate Bond and Diversified
Bond, respectively, exchanged for 327,079, 162,190, 78,021 and
37,248 Class A shares of Stock, Equity Index, Intermediate
Term Income and Fixed Income, respectively; and 10,782,573,
19,588,216, 17,917,093 and 22,853,059 Class Y shares of
<PAGE>
Large Companies Value, Optimized Stock, Intermediate Bond and
Diversified Bond, respectively, exchanged for 6,143,168,
16,100,721, 18,203,685 and 21,403,595 Institutional Class
shares of Stock, Equity Index, Intermediate Term Income and
Fixed Income, respectively.
(b) The pro forma adjustments to investment advisory fees
(including waivers), administrative fees, custodian fees and
distribution fees (including waivers) reflect the difference
in fees charged by the FAIF Funds based upon the effective fee
schedule.
First Bank National Association (FBNA) has agreed to waive
fees and reimburse expenses through September 30, 1998, to the
extent necessary to maintain overall total Fund operating
expense ratios at the pro forma expense levels as follows:
Class A Institutional Class
------- -------------------
Stock 1.05% 0.80%
Equity Index 0.60 0.35
Intermediate Term Income 0.70 0.70
Fixed Income 0.95 0.70
(c) The pro forma adjustments to transfer agent fees, directors'
fees, registration fees, professional fees, printing expenses
and other expenses reflect the expected savings due to the
combination of the funds.
<PAGE>
First American Investment Funds, Inc.
Stock Fund
Pro Forma Combining Schedule of Investments
3/31/97
(Unaudited)
<TABLE>
<CAPTION>
Shares Value
------ -----
Large
Large Companies Pro Forma
Companies Pro Forma Value Stock Combined
Value Stock Combined Security (000) (000) (000)
------ ----- -------- -------- ----- ----- -----
COMMON STOCKS - 92.5% (Percentages represent pro forma value of investments compared to pro forma net assets)
<S> <C> <C> <C> <C> <C>
AEROSPACE & DEFENSE - 1.2%
- 281,500 281,500 RAYTHEON COMPANY $ - $ 12,703 $ 12,703
----------------------------------------------
AGRICULTURE - 0.1%
71,700 - 71,700 HUDSON FOODS INC. 1,120 - 1,120
----------------------------------------------
AUTOMOTIVE - 2.3%
32,200 - 32,200 A.O. SMITH CORP 1,123 - 1,123
91,670 - 91,670 FORD MOTOR COMPANY 2,876 - 2,876
19,600 352,100 371,700 GENERAL MOTORS CORP 1,085 19,498 20,583
----------------------------------------------
5,084 19,498 24,582
----------------------------------------------
BANKS - 6.1%
- 273,700 273,700 BANK OF BOSTON CORP. - 18,338 18,338
- 214,100 214,100 CHASE MANHATTAN CORP - 20,045 20,045
20,200 174,100 194,300 CITICORP 2,187 18,846 21,033
39,000 - 39,000 CORESTATES FINANCIAL CORP 1,852 - 1,852
10,400 - 10,400 FIRST UNION CORP (N.C.) 844 - 844
20,700 - 20,700 MELLON BANK CORP 1,506 - 1,506
20,000 - 20,000 NATIONSBANK 1,108 - 1,108
----------------------------------------------
7,497 57,229 64,726
----------------------------------------------
BUILDING & CONSTRUCTION - 0.3%
51,600 - 51,600 CONGOLEUM CORP CL A 619 - 619
10,600 - 10,600 CONTINENTAL HOMES HLDG 176 - 176
53,000 - 53,000 MARTIN MARIETTA MATERIALS 1,365 - 1,365
29,900 - 29,900 SCHULLER CORP 344 - 344
23,400 - 23,400 USG CORP 734 - 734
----------------------------------------------
3,238 - 3,238
----------------------------------------------
CHEMICALS - 3.9%
47,400 - 47,400 DEXTER CORP 1,428 - 1,428
4,800 - 4,800 DU PONT E I DE NEMOURS 509 - 509
56,400 - 56,400 ECOLAB INC 2,143 - 2,143
24,600 - 24,600 FERRO CORP 738 - 738
- 74,400 74,400 HERCULES INC - 3,143 3,143
- 347,400 347,400 PPG INDUSTRIES - 18,760 18,760
- 317,600 317,600 W.R. GRACE AND CO. - 15,046 15,046
11,300 - 11,300 WELLMAN INCORPORATED 198 - 198
----------------------------------------------
5,016 36,949 41,965
----------------------------------------------
COMMUNICATION EQUIPMENT - 1.6% -
- 300,800 300,800 NOKIA, ADR - 17,522 17,522
----------------------------------------------
COMPUTER & SERVICES - 5.5%
- 223,900 223,900 COMPAQ COMPUTER CORP - 17,156 17,156
21,500 - 21,500 DIGITAL EQUIPMENT CORP 589 - 589
9,300 - 9,300 ELECTRONIC DATA SERVICES 375 - 375
25,839 164,300 190,139 I B M 3,550 22,571 26,121
43,300 - 43,300 INTERGRAPH CORP 335 - 335
- 244,500 244,500 U S ROBOTICS - 13,539 13,539
----------------------------------------------
4,849 53,266 58,115
----------------------------------------------
CONSUMER PRODUCTS - 1.7%
38,100 - 38,100 AMERICAN GREETINGS CORP 1,217 - 1,217
30,700 - 30,700 BLACK & DECKER CORP 986 - 986
9,600 - 9,600 EASTMAN KODAK COMPANY 728 - 728
77,000 - 77,000 FURNITURE BRANDS 1,155 - 1,155
- 412,900 412,900 TUPPERWARE - 13,832 13,832
----------------------------------------------
4,086 13,832 17,918
----------------------------------------------
CONTAINERS & PACKAGING - 2.6%
- 473,300 473,300 BALL - 12,542 12,542
- 387,000 387,000 BEMIS - 15,480 15,480
----------------------------------------------
- 28,022 28,022
----------------------------------------------
See accompanying notes to financial statements.
<PAGE>
Shares Value
------ -----
Large
Large Companies Pro Forma
Companies Pro Forma Value Stock Combined
Value Stock Combined Security (000) (000) (000)
------ ----- -------- -------- ----- ----- -----
DRUGS - 5.0%
- 329,800 329,800 AMERICAN HOME PRODUCTS $ - $ 19,788 $ 19,788
25,400 - 25,400 ASTRA AB 1,181 - 1,181
- 267,450 267,450 BRISTOL-MYERS SQUIBB CO. - 15,780 15,780
30,000 326,600 356,600 PHARMACIA & UPJOHN INC. 1,963 11,962 13,925
30,000 - 30,000 SCHERING-PLOUGH 2,183 - 2,183
---------------------------------------------
5,327 47,530 52,857
---------------------------------------------
FINANCIAL SERVICES - 2.9%
111,200 - 111,200 ADVANTA CORPORATION, CL-A 2,989 - 2,989
- 140,000 140,000 AMERICAN EXPRESS - 8,382 8,382
30,357 - 30,357 BEAR STEARNS COMPANIES 797 - 797
16,000 - 16,000 BENEFICIAL CORP 1,034 - 1,034
43,000 - 43,000 FEDERAL NAT'L MRTGE ASSN. 1,553 - 1,553
- 139,600 139,600 HOUSEHOLD INTL INC - 11,988 11,988
24,300 - 24,300 STANDARD FEDERAL BANCORP 1,409 - 1,409
4,753 - 4,753 TRANSAMERICA CORPORATION 425 - 425
54,665 - 54,665 TRAVELERS INC 2,617 - 2,617
---------------------------------------------
10,824 20,370 31,194
---------------------------------------------
FOOD, BEVERAGE & TOBACCO - 6.5%
- 133,623 133,623 ARCHER DANIELS MIDLAND - 2,389 2,389
- 441,500 441,500 CONAGRA INC - 23,951 23,951
95,300 - 95,300 COTT CORPORATION 941 - 941
- 361,900 361,900 DOLE FOOD - 13,662 13,662
15,000 - 15,000 PHILIP MORRIS, INC. 1,712 - 1,712
- 577,600 577,600 SARA LEE CORP - 23,393 23,393
5,900 - 5,900 SYSCO CORP 201 - 201
26,500 - 26,500 UNIVERSAL FOODS CORP 881 - 881
72,000 - 72,000 WENDYS INTERNATIONAL 1,485 - 1,485
---------------------------------------------
5,220 63,395 68,615
---------------------------------------------
FOREST PRODUCTS - LUMBER, PAPER - 0.6%
122,700 - 122,700 BOISE CASCADE CORP 3,742 - 3,742
17,500 - 17,500 CHESAPEAKE CORP 481 - 481
11,600 - 11,600 MEAD CORP 615 - 615
33,950 - 33,950 RAYONIER INC 1,265 - 1,265
---------------------------------------------
6,103 - 6,103
---------------------------------------------
INSURANCE - 7.2%
- 221,200 221,200 AETNA SERVICES, INC. - 18,996 18,996
- 188,100 188,100 AMBAC - 12,132 12,132
- 97,600 97,600 CIGNA CORP - 14,262 14,262
17,206 - 17,206 CONSECO INC. 613 - 613
- 74,100 74,100 GENERAL REINSURANCE - 11,708 11,708
- 36,200 36,200 LOEWS CORPORATION - 3,217 3,217
26,900 - 26,900 MID OCEAN LTD 1,284 - 1,284
- 464,700 464,700 TIG HOLDINGS - 14,754 14,754
---------------------------------------------
1,897 75,069 76,966
---------------------------------------------
LEISURE/ENTERTAINMENT - 2.0%
- 723,800 723,800 BRUNSWICK CORP - 19,452 19,452
28,400 - 28,400 ITT 1,672 - 1,672
---------------------------------------------
1,672 19,452 21,124
---------------------------------------------
MACHINERY - 3.3%
- 375,700 375,700 CASE CORPORATION - 19,067 19,067
81,900 - 81,900 CINCINNATI MILACRON INC 1,536 - 1,536
- 95,700 95,700 GENERAL ELECTRIC COMPANY - 9,498 9,498
- 106,800 106,800 YORK INTERNATIONAL - 4,472 4,472
---------------------------------------------
1,536 33,037 34,573
---------------------------------------------
MANUFACTURING - 1.0%
74,000 - 74,000 ALBANY INTL CORP -CLASS A 1,526 - 1,526
111,900 - 111,900 FLEETWOOD ENTERPRISES INC 2,798 - 2,798
121,200 - 121,200 KENNAMETAL INC 4,393 - 4,393
68,900 - 68,900 PALL CORP 1,593 - 1,593
5,310 - 5,310 SEQUA CORP CLASS A 237 - 237
5,400 - 5,400 SPRINGS INDUSTRIES INC 242 - 242
---------------------------------------------
10,789 - 10,789
---------------------------------------------
MEDICAL/HOSPITAL - 1.0%
46,350 - 46,350 COLUMBIA/HCA HEALTHCARE 1,559 - 1,559
57,000 - 57,000 FOUNDATION HEALTH CORP 2,080 - 2,080
45,400 - 45,400 HEALTH SYSTEMS INTER. INC 1,277 - 1,277
7,800 - 7,800 MALLINCKRODT INC 321 - 321
243,000 - 243,000 SUN HEALTHCARE GROUP INC. 3,493 - 3,493
75,000 - 75,000 TENET HEALTHCARE CORP. 1,847 - 1,847
---------------------------------------------
10,577 - 10,577
---------------------------------------------
See accompanying notes to financial statements.
<PAGE>
Shares Value
------ -----
Large
Large Companies Pro Forma
Companies Pro Forma Value Stock Combined
Value Stock Combined Security (000) (000) (000)
------ ----- -------- -------- ----- ----- -----
METAL FABRICATION & PRODUCTION - 0.2%
29,894 - 29,894 CLEVELAND CLIFFS $ 1,263 $ - $ 1,263
95,800 - 95,800 GREENBRIER COMPANIES INC 862 - 862
----------------------------------------------
2,125 - 2,125
----------------------------------------------
MULTI-INDUSTRY - 2.6%
- 353,800 353,800 CORNING - 15,700 15,700
32,800 - 32,800 MILLIPORE CORP 1,390 - 1,390
- 123,900 123,900 MINNESOTA MINING & MFTG - 10,470 10,470
----------------------------------------------
1,390 26,170 27,560
----------------------------------------------
OIL/OIL SERVICE - 10.2%
- 233,300 233,300 AMERADA HESS CORP - 12,365 12,365
27,000 - 27,000 ASHLAND INC. 1,087 - 1,087
12,000 - 12,000 ATLANTIC RICHFIELD CO. 1,620 - 1,620
- 208,200 208,200 ELF AQUITAINE, ADR - 10,254 10,254
- 166,300 166,300 EXXON CORPORATION - 17,919 17,919
53,100 - 53,100 GLOBAL MARINE 1,142 - 1,142
92,500 - 92,500 MCDERMOTT INTERNATIONAL 1,977 - 1,977
- 129,800 129,800 MOBIL CORPORATION - 16,955 16,955
65,000 - 65,000 NEWFIELD EXPL. CO. 1,235 - 1,235
53,800 - 53,800 OCCIDENTAL PETROLEUM CORP 1,325 - 1,325
46,100 - 46,100 READING & BATES CORP. 1,043 - 1,043
- 105,500 105,500 ROYAL DUTCH PETROLIUM CO - 18,463 18,463
- 179,600 179,600 TEXACO INCORPORATED - 19,666 19,666
39,000 - 39,000 UNION PACIFIC RESOURCES 1,043 - 1,043
43,000 - 43,000 UNION TEXAS PETROL HOLDGS 790 - 790
30,011 - 30,011 UNOCAL CORPORATION 1,144 - 1,144
----------------------------------------------
12,406 95,622 108,028
----------------------------------------------
POLLUTION CONTROL - 0.1%
30,000 - 30,000 BROWNING-FERRIS IND INC 866 - 866
----------------------------------------------
PRINTING & PUBLISHING - 1.3%
- 334,900 334,900 KNIGHT RIDDER - 13,354 13,354
8,800 - 8,800 READER'S DIGEST CL B 238 - 238
----------------------------------------------
238 13,354 13,592
----------------------------------------------
RAILROADS - 2.7%
- 227,000 227,000 BURLINGTON NORTHERN SANTA - 16,798 16,798
- 459,600 459,600 CANADIAN PACIFIC - 11,030 11,030
9,200 - 9,200 UNION PAC CORP 522 - 522
----------------------------------------------
522 27,828 28,350
----------------------------------------------
REAL ESTATE/REAL ESTATE INV. TRUSTS - 4.7%
- 258,400 258,400 DUKE REALTY INVESTMENTS - 10,498 10,498
- 338,000 338,000 EQUITY RESIDENTIAL PROP TR - 14,999 14,999
33,700 - 33,700 LENNAR CORPORATION 826 - 826
35,300 - 35,300 MEDITRUST SHRS BEN INT 1,315 - 1,315
730,500 730,500 SIMON DEBARTOLO GROUP - 22,098 22,098
----------------------------------------------
2,141 47,595 49,736
----------------------------------------------
RETAIL - 4.6%
42,000 - 42,000 DILLARD DEPT STORES CL A 1,323 - 1,323
53,000 - 53,000 FEDERATED DEPT STORES 1,742 - 1,742
23,000 - 23,000 J. C. PENNEY COMPANY INC 1,095 - 1,095
134,000 - 134,000 INTIMATE BRANDS INC 2,529 - 2,529
44,386 - 44,386 THE LIMITED, INC. 816 - 816
13,400 - 13,400 MAY DEPT STORES 610 - 610
56,000 - 56,000 RITE AID CORP 2,352 - 2,352
- 303,500 303,500 SEARS ROEBUCK & CO. - 15,251 15,251
- 751,300 751,300 TOYS R US - 21,036 21,036
93,000 - 93,000 WABAN INC 2,592 - 2,592
----------------------------------------------
13,059 36,287 49,346
----------------------------------------------
SEMI-CONDUCTORS/ELECTRIC INSTRUMENT - 2.2%
32,900 - 32,900 ADVANCED MICRO DEVICES 1,365 - 1,365
14,000 - 14,000 GENERAL SIGNAL CORP 548 - 548
68,200 - 68,200 NATL SEMICONDUCTOR CORP 1,876 - 1,876
- 236,100 236,100 SGS-THOMSON MICROELEC - 15,612 15,612
7,468 - 7,468 TEXAS INSTRUMENTS 559 - 559
28,400 - 28,400 THOMAS & BETTS CORP 1,214 - 1,214
63,600 - 63,600 WYLE ELECTRONICS 2,139 - 2,139
----------------------------------------------
7,701 15,612 23,313
----------------------------------------------
SPECIALTY CONSTRUCTION - 1.9%
21,600 - 21,600 E G & G INC 451 - 451
- 542,300 542,300 MASCO - 19,387 19,387
----------------------------------------------
451 19,387 19,838
----------------------------------------------
See accompanying notes to financial statements.
<PAGE>
Shares Value
------ -----
Large
Large Companies Pro Forma
Companies Pro Forma Value Stock Combined
Value Stock Combined Security (000) (000) (000)
------ ----- -------- -------- ----- ----- -----
TELEPHONES & TELECOMMUNICATIONS - 5.2%
55,900 - 55,900 AT&T CORP. $ 1,943 $ - $ 1,943
- 319,600 319,600 CENTURY TELEPHONE ENT - 9,428 9,428
37,000 - 37,000 COMSAT CORP 902 - 902
- 885,000 885,000 DEUTSCHE TELEKOM - 19,359 19,359
- 412,500 412,500 NYNEX CORP - 18,820 18,820
47,000 - 47,000 SBC COMMUNICATIONS INC 2,473 - 2,473
35,000 - 35,000 SPRINT CORPORATION 1,593 - 1,593
31,000 - 31,000 TELE DANMARK A/S ADR 810 - 810
----------------------------------------------
7,721 47,607 55,328
----------------------------------------------
TRANSPORTATION LEASING - 0.1%
28,500 - 28,500 CSX CORPORATION 1,325 - 1,325
----------------------------------------------
UTILITIES - 0.4%
55,000 - 55,000 HOUSTON INDUSTRIES 1,148 - 1,148
29,900 - 29,900 MINNESOTA POWER & LIGHT 833 - 833
31,700 - 31,700 PANENERGY CORP. 1,367 - 1,367
63,300 - 63,300 PECO ENERGY COMPANY 1,290 - 1,290
----------------------------------------------
4,638 - 4,638
----------------------------------------------
WHOLESALE - 1.5%
- 201,600 201,600 GRAINGER WW INC - 14,918 14,918
48,000 - 48,000 MOORE & ASSOCIATES LTD 960 - 960
----------------------------------------------
960 14,918 15,878
----------------------------------------------
TOTAL COMMON STOCKS 140,378 842,254 982,632
----------------------------------------------
CONVERTIBLE PREFERRED STOCK - 0.1%
56,700 - 56,700 RJR NABISCO 369 - 369
----------------------------------------------
WARRANTS - 0.0%
2,617 - 2,617 SOUND ADVICE (EXPIRE 6/14/99) - - -
----------------------------------------------
RELATED PARTY MONEY MARKET FUNDS - 6.7%
- 25,159,649 25,159,649 FIRST AM. GOVERNMENT OBLIGATIONS - 25,160 25,160
- 45,754,754 45,754,754 FIRST AM. PRIME OBLIGATIONS - 45,755 45,755
----------------------------------------------
- 70,915 70,915
----------------------------------------------
REPURCHASE AGREEMENTS - 0.7%
8,023,653 - 8,023,653 MERRILL LYNCH VARIABLE
RATE NOTE 8,024 - 8,024
----------------------------------------------
TOTAL INVESTMENTS
(Cost $126,460, $802,403 and
$928,863, respectively) $ 148,771 $ 913,169 $ 1,061,940
==============================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
First American Investment Funds, Inc.
Equity Index Fund
Pro Forma Combining Schedule of Investments
3/31/97
(Unaudited)
<TABLE>
<CAPTION>
Shares Value
------ -----
Optimized Equity Pro Forma
Optimized Equity Pro Forma Stock Index Combined
Stock Index Combined Security (000) (000) (000)
----- ----- -------- -------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCKS - 97.2% (Percentages represent pro forma value of investments compared to pro forma net assets)
AEROSPACE & DEFENSE - 0.3%
5,100 13,527 18,627 LOCKHEED MARTIN CORP $ 428 $ 1,136 $ 1,564
700 16,600 17,300 RAYTHEON COMPANY 32 749 781
------------------------------------------------
460 1,885 2,345
------------------------------------------------
AGRICULTURE - 0.1%
5,600 5,800 11,400 PIONEER HI-BRED 352 365 717
------------------------------------------------
AIR TRANSPORTATION - 0.4%
1,700 6,400 8,100 AMR CORPORATION 140 528 668
6,100 5,200 11,300 DELTA AIR LINES 513 437 950
5,100 8,000 13,100 FEDERAL EXPRESS 266 417 683
100 10,200 10,300 SOUTHWEST AIRLINES 2 226 228
7,700 4,500 12,200 US AIR GROUP INC. 189 110 299
------------------------------------------------
1,110 1,718 2,828
------------------------------------------------
AIRCRAFT - 2.0%
9,000 19,900 28,900 ALLIEDSIGNAL INC. 641 1,418 2,059
18,500 25,138 43,638 BOEING COMPANY 1,825 2,479 4,304
4,200 4,400 8,600 GENERAL DYNAMICS CORP 283 296 579
11,400 14,900 26,300 MCDONNELL DOUGLAS CORP 695 909 1,604
1,500 4,100 5,600 NORTHROP CORP 113 310 423
9,800 5,800 15,600 TEXTRON INC 1,029 609 1,638
29,900 16,900 46,800 UNITED TECHNOLOGIES CORP 2,250 1,272 3,522
------------------------------------------------
6,836 7,293 14,129
------------------------------------------------
APPAREL/TEXTILES - 0.3%
5,200 5,400 10,600 FRUIT OF THE LOOM 216 224 440
4,900 5,000 9,900 LIZ CLAIBORNE, INC. 214 218 432
3,800 3,900 7,700 REEBOK INTERNATIONAL LTD 171 175 346
2,600 2,700 5,300 RUSSELL CORP 93 97 190
1,300 1,400 2,700 SPRINGS INDUSTRIES INC 58 63 121
4,000 4,500 8,500 V F CORPORATION 268 301 569
------------------------------------------------
1,020 1,078 2,098
------------------------------------------------
AUTOMOTIVE - 2.0%
97,600 51,200 148,800 CHRYSLER CORP 2,928 1,536 4,464
6,600 7,200 13,800 DANA CORP 217 237 454
5,300 5,400 10,700 EATON CORP 376 383 759
4,200 4,400 8,600 ECHLIN INC 143 150 293
4,800 2,500 7,300 FLEETWOOD ENTERPRISES INC 120 63 183
9,200 83,300 92,500 FORD MOTOR COMPANY 289 2,614 2,903
9,200 53,100 62,300 GENERAL MOTORS CORP 509 2,940 3,449
4,900 5,200 10,100 NAVISTAR INTERNATIONAL 46 49 95
5,200 2,695 7,895 PACCAR INCORPORATED 347 180 527
8,500 8,900 17,400 TRW INC 440 461 901
------------------------------------------------
5,415 8,613 14,028
------------------------------------------------
BANKS - 7.8%
7,200 7,400 14,600 AHMANSON H F & CO 263 270 533
29,100 30,013 59,113 BANC ONE 1,157 1,193 2,350
10,200 27,500 37,700 BANK OF BOSTON CORP. 683 1,011 1,694
26,300 10,700 37,000 BANK OF NEW YORK CO INC 967 717 1,684
20,300 25,200 45,500 BANKAMERICA CORPORATION 2,045 2,539 4,584
100 5,700 5,800 BANKERS TRUST NY 8 467 475
13,200 13,700 26,900 BARNETT BANKS INC. 614 637 1,251
42,600 30,796 73,396 CHASE MANHATTAN CORP 3,988 2,883 6,871
15,000 33,000 48,000 CITICORP 1,624 3,572 5,196
7,300 7,500 14,800 COMERICA, INC. 412 423 835
100 15,600 15,700 CORESTATES FINANCIAL CORP 5 741 746
See accompanying notes to financial statements
<PAGE>
Shares Value
------ -----
Optimized Equity Pro Forma
Optimized Equity Pro Forma Stock Index Combined
Stock Index Combined Security (000) (000) (000)
----- ----- -------- -------- ----- ----- -----
BANKS (CONTINUED)
1,100 7,400 8,500 FIFTH THIRD BANCORP $ 85 $ 574 $ 659
100 9,500 9,600 FIRST BANK SYSTEMS INC 7 694 701
11,900 22,364 34,264 FIRST CHICAGO NDB CORP 644 1,210 1,854
18,600 19,900 38,500 FIRST UNION CORP (N.C.) 1,509 1,614 3,123
2,400 18,400 20,800 FLEET FINL GROUP INC NEW 137 1,053 1,190
3,800 4,000 7,800 GOLDEN WEST FINANCIAL DEL 238 251 489
100 9,700 9,800 GREAT WESTERN FINANCIAL 4 392 396
12,500 13,100 25,600 J.P. MORGAN 1,228 1,287 2,515
7,200 15,800 23,000 KEYCORP 351 770 1,121
22,500 23,450 45,950 MBNA CORP 627 654 1,281
9,000 9,050 18,050 MELLON BANK CORP 655 658 1,313
2,300 15,600 17,900 NATIONAL CITY CORP 107 727 834
24,400 54,624 79,024 NATIONSBANK 1,351 3,025 4,376
11,400 26,000 37,400 NORWEST CORP 527 1,203 1,730
100 23,900 24,000 PNC BANK CORP 4 956 960
3,800 3,900 7,700 REPUBLIC NEW YORK CORP 335 344 679
15,000 15,700 30,700 SUNTRUST BKS INC. 696 728 1,424
6,800 10,600 17,400 U S BANCORP 364 567 931
100 11,600 11,700 WACHOVIA CORP 5 632 637
100 6,500 6,600 WELLS FARGO & CO 28 1,847 1,875
------------------------------------------------
20,668 33,639 54,307
------------------------------------------------
BEAUTY PRODUCTS - 2.0%
200 4,000 4,200 ALBERTO CULVER CO 5 105 110
9,000 9,300 18,300 AVON PRODUCTS INC. 473 488 961
4,800 10,300 15,100 COLGATE PALMOLIVE 478 1,026 1,504
4,400 4,500 8,900 ECOLAB INC 167 171 338
7,400 7,800 15,200 INTL FLAVORS & FRAGRANCES 324 341 665
40,600 47,900 88,500 PROCTER & GAMBLE CO. 4,668 5,508 10,176
------------------------------------------------
6,115 7,639 13,754
------------------------------------------------
BROADCASTING, NEWSPAPERS & ADVERT ISING - 0.3%
100 22,900 23,000 COMCAST CORPORATION 2 386 388
3,700 5,700 9,400 INTERPUBLIC GROUP COS INC 195 301 496
100 46,600 46,700 TELE-COMMUNICATIONS CL A 1 559 560
100 24,845 24,945 VIACOM INC 3 823 826
------------------------------------------------
201 2,069 2,270
------------------------------------------------
BUILDING & CONSTRUCTION - 0.3%
2,000 2,000 4,000 CENTEX CORP 71 71 142
100 5,900 6,000 FLUOR CORP. 5 310 315
2,700 2,900 5,600 FOSTER WHEELER CORP 96 103 199
8,400 8,800 17,200 HALLIBURTON CO 569 596 1,165
100 2,700 2,800 KAUFMAN & BROAD HOME CORP 1 36 37
3,500 3,600 7,100 OWENS CORNING 141 145 286
100 1,600 1,700 PULTE CORPORATION 3 47 50
------------------------------------------------
886 1,308 2,194
------------------------------------------------
CHEMICALS - 2.7%
7,500 7,800 15,300 AIR PRODUCTS & CHEMS INC 509 529 1,038
16,300 17,100 33,400 DOW CHEMICAL COMPANY 1,304 1,368 2,672
19,700 39,500 59,200 DU PONT E I DE NEMOURS 2,088 4,186 6,274
5,200 5,475 10,675 EASTMAN CHEMICAL 280 294 574
100 2,600 2,700 FMC CORP 6 159 165
3,600 3,800 7,400 GOODRICH B F CO 132 139 271
4,200 5,800 10,000 GREAT LAKES CHEMICAL 193 275 468
6,900 4,400 11,300 HERCULES INC 292 202 494
39,500 7,200 46,700 MONSANTO COMPANY 1,511 304 1,815
10,800 41,300 52,100 MORTON INTERNATIONAL INC. 456 1,580 2,036
4,500 10,000 14,500 NALCO CHEMICAL CO 168 423 591
11,200 4,700 15,900 PRAXAIR INC. 503 176 679
8,600 11,000 19,600 ROHM & HAAS CO 644 494 1,138
100 4,500 4,600 UNION CARBIDE CORP. 4 337 341
100 8,900 9,000 W.R. GRACE AND CO. 5 394 399
------------------------------------------------
8,095 10,860 18,955
------------------------------------------------
See accompanying notes to financial statements
<PAGE>
Shares Value
------ -----
Optimized Equity Pro Forma
Optimized Equity Pro Forma Stock Index Combined
Stock Index Combined Security (000) (000) (000)
----- ----- -------- -------- ----- ----- -----
COMMUNICATIONS EQUIPMENT - 1.4%
6,000 6,300 12,300 ANDREW CORP $ 217 $ 228 $ 445
5,100 8,200 13,300 DSC COMMUNICATIONS CORP 107 172 279
100 9,600 9,700 GENERAL INSTRUMENT CORP 2 220 222
3,700 2,700 6,400 HARRIS CORP. 284 208 492
7,900 8,300 16,200 ITT INDUSTRIES INC. 177 186 363
31,800 41,600 73,400 MOTOROLA, INC. 1,920 2,512 4,432
16,500 18,200 34,700 NORTHERN TELECOM LTD 1,079 1,190 2,269
4,900 5,400 10,300 SCIENTIFIC ATLANTA INC. 75 82 157
12,200 12,600 24,800 TELLABS INC 441 455 896
------------------------------------------------
4,302 5,253 9,555
------------------------------------------------
COMPUTERS & SERVICES - 3.9%
1,300 8,500 9,800 AMDAHL CORPORATION 12 80 92
100 8,700 8,800 APPLE COMPUTER, INC. 2 159 161
100 13,600 13,700 BAY NETWORKS COM STOCK 2 243 245
2,700 11,000 13,700 CABLETRON SYSTEMS 79 322 401
4,600 4,800 9,400 CERIDIAN CORP 165 172 337
28,900 19,000 47,900 COMPAQ COMPUTER CORP 2,214 1,456 3,670
2,600 2,800 5,400 DATA GENERAL CORP 44 48 92
12,200 12,700 24,900 DELL COMPUTER CORP 825 859 1,684
100 10,900 11,000 DIGITAL EQUIPMENT CORP 3 298 301
4,800 16,300 21,100 EMC CORPORATION 170 579 749
52,500 71,400 123,900 HEWLETT-PACKARD COMPANY 2,796 3,802 6,598
26,400 36,400 62,800 I B M 3,627 5,000 8,627
100 3,300 3,400 INTERGRAPH CORP 1 26 27
15,600 10,400 26,000 PITNEY BOWES, INC. 917 611 1,528
28,100 17,600 45,700 SEAGATE TECHNOLOGY 1,261 790 2,051
100 12,308 12,408 SILICON GRAPHICS, INC. 2 240 242
100 8,300 8,400 TANDEM COMPUTERS INC 1 99 100
3,900 4,080 7,980 TANDY CORPORATION 195 205 400
100 12,300 12,400 UNISYS CORP 1 78 79
------------------------------------------------
12,317 15,067 27,384
------------------------------------------------
CONSUMER PRODUCTS - 0.1%
100 3,500 3,600 STRIDE RITE CORP 2 53 55
4,100 4,400 8,500 TUPPERWARE CORPORATION 137 147 284
------------------------------------------------
139 200 339
------------------------------------------------
CONTAINERS & PACKAGING - 0.2%
2,000 2,100 4,100 BALL CORP 53 56 109
7,000 9,000 16,000 CROWN CORK & SEAL INC 361 465 826
10,500 11,200 21,700 NEWELL CO 352 375 727
------------------------------------------------
766 896 1,662
------------------------------------------------
DRUGS - 8.1%
52,600 54,600 107,200 ABBOTT LABORATORIES 2,952 3,064 6,016
4,400 4,600 9,000 ALLERGAN INC 128 134 262
100 5,900 6,000 ALZA CORP 3 162 165
23,600 44,900 68,500 AMERICAN HOME PRODUCTS 1,416 2,694 4,110
5,600 18,600 24,200 AMGEN INC 313 1,039 1,352
32,200 70,400 102,600 BRISTOL-MYERS SQUIBB CO. 1,900 4,154 6,054
50,100 93,500 143,600 JOHNSON & JOHNSON 2,649 4,943 7,592
16,600 38,788 55,388 ELI LILY 1,365 3,190 4,555
53,300 84,700 138,000 MERCK & COMPANY, INC. 4,491 7,135 11,626
24,600 45,300 69,900 PFIZER, INCORPORATED 2,069 3,811 5,880
19,700 35,725 55,425 PHARMACIA & UPJOHN INC. 722 1,308 2,030
22,500 25,900 48,400 SCHERING-PLOUGH 1,637 1,884 3,521
18,300 19,100 37,400 WARNER LAMBERT CO 1,583 1,652 3,235
------------------------------------------------
21,228 35,170 56,398
------------------------------------------------
ELECTRICAL SERVICES - 2.5%
12,200 13,200 25,400 AMERICAN ELECTRIC POWER 503 545 1,048
See accompanying notes to financial statements
<PAGE>
Shares Value
------ -----
Optimized Equity Pro Forma
Optimized Equity Pro Forma Stock Index Combined
Stock Index Combined Security (000) (000) (000)
----- ----- -------- -------- ----- ----- -----
ELECTRICAL SERVICES (CONTINUED)
10,000 10,400 20,400 BALTIMORE GAS & ELECTRIC $ 268 $ 278 $ 546
10,200 10,600 20,800 CAROLINA POWER & LIGHT 370 384 754
100 14,800 14,900 CENTRAL & SOUTH WEST CORP 2 316 318
10,700 11,073 21,773 CINERGY CORPORATION 365 378 743
12,700 16,500 29,200 CONSOLIDATED EDISON 381 495 876
8,200 12,700 20,900 DOMINION RESOURCES INC VA 298 462 760
400 10,200 10,600 DTE ENERGY COMPANY 11 274 285
100 14,200 14,300 DUKE ENERGY CORP. 4 627 631
29,300 30,400 59,700 EDISON INTERNATIONAL 659 684 1,343
15,000 16,200 31,200 ENTERGY CORPORATION 368 397 765
100 12,900 13,000 FPL GROUP, INC. 4 569 573
16,200 8,500 24,700 GENERAL PUBLIC UTILITIES 520 273 793
100 16,500 16,600 HOUSTON INDUSTRIES 2 344 346
19,400 10,100 29,500 NIAGARA MOHAWK PWR CORP 165 86 251
100 4,900 5,000 NORTHERN STATES PWR CO MN 5 232 237
10,200 10,700 20,900 OHIO EDISON 215 226 441
3,900 20,700 24,600 P.P. & L. RESOURCES, INC. 79 442 521
27,600 15,600 43,200 PACIFIC GAS & ELECTRIC 649 318 967
3,800 29,000 32,800 PACIFICORP 81 682 763
14,900 11,400 26,300 PECO ENERGY COMPANY 304 231 535
16,000 16,800 32,800 PUBLIC SVC ENTRPRS GROUP 420 441 861
6,100 47,300 53,400 SOUTHERN COMPANY 129 999 1,128
15,100 15,800 30,900 TEXAS UTILITIES 517 541 1,058
14,400 15,100 29,500 UNICOM CORPORATION 281 294 575
6,800 7,200 14,000 UNION ELECTRIC CO 251 266 517
------------------------------------------------
6,851 10,784 17,635
------------------------------------------------
ENTERTAINMENT - 1.0%
1,700 7,200 8,900 HARRAH'S ENTERTAINEMENT 29 123 152
100 8,200 8,300 ITT (NEW) 6 483 489
2,500 2,600 5,100 KING WORLD PRODTNS INC 91 95 186
35,400 47,600 83,000 THE WALT DISNEY COMPANY 2,584 3,475 6,059
------------------------------------------------
2,710 4,176 6,886
------------------------------------------------
ENVIRONMENTAL SERVICES - 0.4%
13,900 14,900 28,800 BROWNING-FERRIS IND INC 401 430 831
19,100 22,100 41,200 LAIDLAW INC B 263 304 567
100 34,100 34,200 WMX TECHNOLOGIES, INC. 3 1,044 1,047
------------------------------------------------
667 1,778 2,445
------------------------------------------------
FINANCIAL SERVICES - 3.9%
27,700 33,300 61,000 AMERICAN EXPRESS 1,659 1,994 3,653
3,600 3,800 7,400 BENEFICIAL CORP 233 246 479
200 22,572 22,772 DEAN WITTER DISCOVER 7 787 794
33,500 76,700 110,200 FEDERAL HM LN MTG CORP 913 2,771 3,684
32,300 50,200 82,500 FEDERAL NAT'L MRTGE ASSN. 1,167 1,368 2,535
100 9,700 9,800 GREEN TREE ACCEPT INC 3 327 330
6,600 6,800 13,400 HOUSEHOLD INTL INC 567 584 1,151
11,200 8,300 19,500 ITT HARTFORD GROUP INC 808 599 1,407
11,100 11,600 22,700 MERRILL LYNCH & CO INC 953 996 1,949
10,200 10,700 20,900 MORGAN STANLEY GROUP INC. 599 629 1,228
7,300 7,700 15,000 SALOMON INC 364 384 748
352,917 - 352,917 SEI INDEX FUND S&P 500 8,691 - 8,691
3,000 4,623 7,623 TRANSAMERICA CORPORATION 269 414 683
------------------------------------------------
16,233 11,099 27,332
------------------------------------------------
FOOD, BEVERAGE & TOBACCO - 8.2%
2,500 12,000 14,500 ADOLPH COORS CO 53 608 661
1,500 35,100 36,600 AMERICAN BRANDS INC 76 1,479 1,555
14,000 38,211 52,211 ANHEUSER BUSCH COMPANY 590 683 1,273
37,000 4,800 41,800 ARCHER DANIELS MIDLAND 661 229 890
3,000 32,800 35,800 BROWN FORMAN CORP 143 1,521 1,664
44,800 174,800 219,600 CAMPBELL SOUP CO 2,078 9,766 11,844
111,200 16,900 128,100 COCA-COLA COMPANY 6,212 917 7,129
14,700 2,700 17,400 CONAGRA INC 797 57 854
See accompanying notes to financial statements
<PAGE>
Shares Value
------ -----
Optimized Equity Pro Forma
Optimized Equity Pro Forma Stock Index Combined
Stock Index Combined Security (000) (000) (000)
----- ----- -------- -------- ----- ----- -----
FOOD, BEVERAGE & TOBACCO (CONTINUED)
13,700 10,100 23,800 CPC INTL INC $ 1,123 $ 828 $ 1,951
3,600 11,000 14,600 GENERAL MILLS 224 683 907
100 25,850 25,950 H.J. HEINZ CO. 4 1,021 1,025
10,400 10,800 21,200 HERSHEY FOODS CORP 520 540 1,060
100 14,800 14,900 KELLOGG CO. 7 995 1,002
10,400 109,100 119,500 PEPSICO INCORPORATED 339 3,559 3,898
37,200 57,200 94,400 PHILIP MORRIS, INC. 4,244 6,527 10,771
100 9,500 9,600 QUAKER OATS CO 4 347 351
100 7,400 7,500 RALSTON-RALSTON PURINA GP 8 578 586
32,400 34,000 66,400 SARA LEE CORP 1,312 1,377 2,689
100 26,200 26,300 SEAGRAM LTD. 4 1,002 1,006
10,200 11,200 21,400 UNILEVER N V 1,900 2,086 3,986
12,600 13,100 25,700 UST INCORPORATED 351 365 716
6,900 7,300 14,200 WHITMAN CORPORATION 169 179 348
100 8,200 8,300 WRIGLEY WM JR. COMPANY 6 479 485
------------------------------------------------
20,825 35,826 56,651
------------------------------------------------
GAS/NATURAL GAS - 0.8%
700 7,400 8,100 COASTAL CORP 34 355 389
3,800 3,900 7,700 COLUMBIA GAS SYSTEMS INC 220 226 446
2,500 6,700 9,200 CONSOLIDATED NAT GAS CO 126 338 464
1,400 1,400 2,800 EASTERN ENTERPRISES 43 43 86
17,100 17,900 35,000 ENRON CORPORATION 650 680 1,330
100 4,900 5,000 ENSERCH CORP 2 100 102
3,300 3,500 6,800 NICOR INC 106 112 218
9,200 9,600 18,800 NORAM ENERGY CORPORATION 135 140 275
1,800 1,900 3,700 ONEOK INC 47 49 96
900 6,000 6,900 PACIFIC ENTERPRISES 27 182 209
10,200 10,600 20,800 PANENERGY CORP. 440 457 897
2,300 2,500 4,800 PEOPLES ENERGY CORP. 76 83 159
2,900 - 2,900 PEOPLES ENERGY RIGHTS - - -
5,500 6,100 11,600 SONAT, INC. 300 332 632
200 11,050 11,250 WILLIAMS COMPANIES INC. 9 492 501
------------------------------------------------
2,215 3,589 5,804
------------------------------------------------
GLASS PRODUCTS - 0.3%
23,100 16,200 39,300 CORNING INC 1,025 719 1,744
------------------------------------------------
HOME APPLIANCES - 0.5%
6,800 7,000 13,800 MAYTAG CORP 140 144 284
3,200 3,300 6,500 NATIONAL SERVICE INDS INC 125 129 254
12,700 12,900 25,600 PPG INDUSTRIES INC 686 697 1,383
3,400 3,100 6,500 RAYCHEM CORP DEL 280 255 535
200 12,000 12,200 SHERWIN WILLIAMS CO 5 324 329
4,200 4,250 8,450 SNAP ON TOOLS CORP 163 165 328
2,800 3,700 6,500 THOMAS & BETTS CORP 120 158 278
100 5,200 5,300 WHIRLPOOL 5 248 253
------------------------------------------------
1,524 2,120 3,644
------------------------------------------------
HOTELS & LODGING - 0.4%
6,000 9,000 15,000 HFS INCORPORATED 353 530 883
5,500 17,400 22,900 HILTON HOTELS CORP 133 422 555
10,700 9,000 19,700 MARRIOTT INTERNATIONAL 532 448 980
------------------------------------------------
1,018 1,400 2,418
------------------------------------------------
HOUSEHOLD FURNITURE & FIXTURES 0. 1%
100 11,300 11,400 MASCO CORPORATION 4 404 408
------------------------------------------------
HOUSEHOLD PRODUCTS - 0.9%
3,400 3,600 7,000 CLOROX COMPANY 381 404 785
28,500 39,000 67,500 GILLETTE COMPANY 2,070 2,832 4,902
5,800 6,200 12,000 STANLEY WORKS 220 235 455
------------------------------------------------
2,671 3,471 6,142
------------------------------------------------
See accompanying notes to financial statements
<PAGE>
Shares Value
------ -----
Optimized Equity Pro Forma
Optimized Equity Pro Forma Stock Index Combined
Stock Index Combined Security (000) (000) (000)
----- ----- -------- -------- ----- ----- -----
INSURANCE - 4.2%
7,100 10,590 17,690 AETNA SERVICES, INC. $ 610 $ 909 $ 1,519
15,600 31,250 46,850 ALLSTATE 926 1,855 2,781
10,500 14,300 24,800 AMERICAN GENERAL CORP. 428 583 1,011
16,100 33,025 49,125 AMERICAN INTERNATIONAL 1,890 3,876 5,766
100 7,600 7,700 AON CORPORATION 6 466 472
11,700 12,200 23,900 CHUBB CORP 630 657 1,287
5,800 5,300 11,100 CIGNA CORP 848 774 1,622
10,400 10,800 21,200 CONSECO INC. 371 385 756
100 5,800 5,900 GENERAL REINSURANCE 16 916 932
100 4,975 5,075 JEFFERSON PILOT CORP 5 271 276
7,000 7,300 14,300 LINCOLN NATIONAL CORP 375 391 766
3,900 8,100 12,000 LOEWS CORPORATION 347 720 1,067
3,800 5,000 8,800 MARSH MCLENNAN 430 566 996
3,900 3,000 6,900 MBIA INCORPORATED 374 288 662
4,000 4,100 8,100 MGIC INVESTMENT CORP 283 290 573
6,300 6,600 12,900 PROVIDIAN CORP 337 353 690
8,400 8,900 17,300 SAFECO CORP 336 356 692
5,600 5,800 11,400 ST. PAUL COMPANIES 363 376 739
4,700 4,950 9,650 TORCHMARK 260 274 534
39,800 44,982 84,782 TRAVELERS INC 1,905 2,154 4,059
11,500 12,900 24,400 UNITED HEALTHCARE CORP 548 614 1,162
3,500 5,100 8,600 UNUM CORPORATION 256 372 628
2,300 2,400 4,700 US LIFE CORP 108 112 220
100 8,100 8,200 USF&G CORPORATION 2 174 176
------------------------------------------------
11,654 17,732 29,386
------------------------------------------------
LEISURE - 0.1%
13,000 6,900 19,900 BRUNSWICK CORP 349 185 534
2,600 2,700 5,300 JOSTENS INC 59 61 120
------------------------------------------------
408 246 654
------------------------------------------------
LUMBER & WOOD - 0.0%
100 7,600 7,700 LOUISIANA PACIFIC CORP 2 158 160
------------------------------------------------
MACHINERY - 4.7%
800 12,600 13,400 APPLIED MATERIALS 37 584 621
1,400 10,200 11,600 BAKER HUGHES 54 391 445
100 6,200 6,300 BLACK & DECKER CORP 3 199 202
1,900 2,000 3,900 BRIGGS & STRATTON CORP 85 90 175
4,900 5,200 10,100 CASE CORPORATION 249 264 513
20,800 13,500 34,300 CATERPILLAR, INC. 1,669 1,083 2,752
2,700 2,800 5,500 CINCINNATI MILACRON INC 51 53 104
3,100 3,200 6,300 CRANE CO 97 100 197
2,600 2,800 5,400 CUMMINS ENGINE INC 133 144 277
17,600 18,100 35,700 DEERE & COMPANY 766 787 1,553
100 7,900 8,000 DOVER CORPORATION 5 415 420
15,300 12,300 27,600 DRESSER INDS INC 463 372 835
30,000 31,600 61,600 EMERSON ELECTRIC COMPANY 1,350 1,422 2,772
58,000 115,600 173,600 GENERAL ELECTRIC COMPANY 5,756 11,472 17,228
3,400 3,500 6,900 GENERAL SIGNAL CORP 133 137 270
2,200 2,300 4,500 GIDDINGS & LEWIS INC WIS 33 34 67
3,300 3,500 6,800 HARNISCHFEGER INDS INC 153 163 316
100 7,700 7,800 INGERSOLL RAND COMPANY 4 336 340
100 3,900 4,000 MCDERMOTT INTERNATIONAL 2 83 85
500 530 1,030 NACCO INDUSTRIES INC CL A 25 26 51
7,700 8,100 15,800 PALL CORP 178 187 365
5,000 5,250 10,250 PARKER HANNIFIN 214 224 438
100 12,000 12,100 TENNECO INC. (NEW) 4 468 472
2,100 2,200 4,300 TIMKEN CO. 112 118 230
3,800 2,000 5,800 TRINOVA CORP 127 67 194
15,700 11,000 26,700 TYCO LABS INC. 864 605 1,469
------------------------------------------------
12,567 19,824 32,391
------------------------------------------------
See accompanying notes to financial statements
<PAGE>
Shares Value
------ -----
Optimized Equity Pro Forma
Optimized Equity Pro Forma Stock Index Combined
Stock Index Combined Security (000) (000) (000)
----- ----- -------- -------- ----- ----- -----
MEASURING DEVICES - 0.4%
8,600 8,900 17,500 HONEYWELL INC $ 584 $ 604 $ 1,188
2,900 2,900 5,800 JOHNSON CONTROLS INC 233 233 466
2,900 3,000 5,900 MILLIPORE CORP 123 127 250
2,900 3,000 5,900 PERKIN ELMER CORP 187 193 380
2,000 2,300 4,300 TEKTRONIX INC 101 116 217
100 10,500 10,600 THERMO ELECTRON 3 324 327
------------------------------------------------
1,231 1,597 2,828
------------------------------------------------
MEDICAL PRODUCTS & SERVICES - 1.8%
3,800 4,000 7,800 BARD C.R. INC 108 114 222
3,700 3,900 7,600 BAUSCH & LOMB INC 146 154 300
100 19,200 19,300 BAXTER INTL INC 4 828 832
15,500 8,700 24,200 BECTON DICKINSON & CO 698 392 1,090
6,700 7,000 13,700 BEVERLY ENTERPRISES INC 95 100 195
7,700 8,100 15,800 BIOMET INC 130 137 267
13,800 12,500 26,300 BOSTON SCIENTIFIC CORP 852 772 1,624
36,400 47,105 83,505 COLUMBIA/HCA HEALTHCARE 1,224 1,584 2,808
1,700 5,200 6,900 GUIDANT 105 320 425
200 22,200 22,400 HEALTHSOUTH CORP 4 425 429
10,800 11,400 22,200 HUMANA, INCORPORATED 238 251 489
5,000 5,200 10,200 MALLINCKRODT INC 206 214 420
4,200 4,400 8,600 MANOR CARE, INC. 102 107 209
14,100 16,800 30,900 MEDTRONIC INCORPORATED 878 1,046 1,924
5,400 5,650 11,050 ST JUDE MEDICAL INC 180 189 369
16,600 15,200 31,800 TENET HEALTHCARE CORP. 409 374 783
4,300 4,400 8,700 U.S. SURGICAL CORPORATION 131 134 265
------------------------------------------------
5,510 7,141 12,651
------------------------------------------------
METALS & MINING - 0.1%
6,200 6,550 12,750 CYPRUS AMAX MINERALS 147 156 303
100 13,600 13,700 FREEPORT MC MORGAN 3 413 416
------------------------------------------------
150 569 719
------------------------------------------------
MISCELLANEOUS BUSINESS SERVICES - 3.8%
11,700 12,200 23,900 3 COM 383 400 783
100 20,400 20,500 AUTODESK, INC. 3 854 857
25,800 3,200 29,000 AUTOMATIC DATA PROCESSING 1,080 99 1,179
22,900 45,600 68,500 CISCO SYSTEMS, INC. 1,102 2,195 3,297
12,400 25,625 38,025 COMPUTER ASSOC INTL INC 482 996 1,478
3,600 5,300 8,900 COMPUTER SCIENCE CORP 222 327 549
6,500 27,675 34,175 CUC INTERNATIONAL INC 146 623 769
12,200 31,400 43,600 FIRST DATA CORPORATION 413 1,064 1,477
40,700 83,900 124,600 MICROSOFT CORP. 3,732 7,693 11,425
100 24,200 24,300 NOVELL INC 1 230 231
25,200 46,125 71,325 ORACLE CORPORATION 972 1,779 2,751
3,900 4,100 8,000 SAFETY KLEEN 58 60 118
100 1,700 1,800 SHARED MEDICAL SYSTM CORP 5 79 84
21,900 25,800 47,700 SUN MICROSYSTEMS, INC. 632 745 1,377
------------------------------------------------
9,231 17,144 26,375
------------------------------------------------
MISCELLANEOUS CONSUMER SERVICES - 0.2%
7,000 7,300 14,300 H & R BLOCK, INC. 206 214 420
14,500 16,600 31,100 SERVICE CORPORATION INTL 431 494 925
------------------------------------------------
637 708 1,345
------------------------------------------------
OFFICE PRODUCTS & SUPPLIES - 0.0%
100 9,200 9,300 IKON OFFICE SOLUTIONS 3 308 311
------------------------------------------------
OIL-DOMESTIC - 1.4%
1,300 4,500 5,800 ASHLAND INC. 52 181 233
10,800 11,300 22,100 ATLANTIC RICHFIELD CO. 1,458 1,526 2,984
3,200 3,400 6,600 KERR MCGEE CORP 198 210 408
100 2,400 2,500 LOUISIANA LD & EXPL CO. 5 114 119
3,200 3,300 6,500 PENNZOIL CO 166 171 337
35,200 18,500 53,700 PHILLIPS PETROLEUM CO 1,439 756 2,195
100 5,174 5,274 SUN COMPANY INC 3 135 138
See accompanying notes to financial statements
<PAGE>
Shares Value
------ -----
Optimized Equity Pro Forma
Optimized Equity Pro Forma Stock Index Combined
Stock Index Combined Security (000) (000) (000)
----- ----- -------- -------- ----- ----- -----
OIL-DOMESTIC (CONTINUED)
24,600 17,600 42,200 UNOCAL CORPORATION $ 938 $ 671 $ 1,609
38,600 20,200 58,800 USX-MARATHON GROUP 1,076 563 1,639
------------------------------------------------
5,335 4,327 9,662
------------------------------------------------
OIL-INTERNATIONAL - 6.0%
100 6,500 6,600 AMERADA HESS CORP 5 345 350
26,300 34,900 61,200 AMOCO CORPORATION 2,278 3,023 5,301
40,500 45,800 86,300 CHEVRON CORPORATION 2,820 3,189 6,009
36,700 87,200 123,900 EXXON CORPORATION 3,954 9,395 13,349
100 27,700 27,800 MOBIL CORPORATION 13 3,618 3,631
19,900 37,700 57,600 ROYAL DUTCH PETROLIUM CO 3,483 6,598 10,081
10,100 18,600 28,700 TEXACO INCORPORATED 1,106 2,037 3,143
------------------------------------------------
13,659 28,205 41,864
------------------------------------------------
PAPER & PAPER PRODUCTS - 1.8%
14,000 7,300 21,300 AVERY DENNISON CORP. 539 281 820
7,000 3,700 10,700 BEMIS INC 280 148 428
100 3,400 3,500 BOISE CASCADE CORP 3 104 107
100 6,700 6,800 CHAMPION INTL CORP 5 305 310
100 6,400 6,500 GEORGIA PACIFIC CORP. 7 464 471
100 21,100 21,200 INTERNATIONAL PAPER CO 4 820 824
5,900 6,000 11,900 JAMES RIVER CORP VA 172 175 347
15,700 19,850 35,550 KIMBERLY CLARK CORP 1,560 1,973 3,533
3,600 3,700 7,300 MEAD CORP 191 196 387
400 29,400 29,800 MINNESOTA MINING & MFG. 34 2,484 2,518
1,900 2,000 3,900 POTLATCH CORP 78 82 160
100 7,000 7,100 STONE CONTAINER CORP. 1 78 79
100 3,900 4,000 TEMPLE INLAND INC. 5 205 210
100 4,900 5,000 UNION CAMP CORPORATION 5 231 236
600 7,200 7,800 WESTVACO CORPORATION 15 181 196
16,000 13,900 29,900 WEYERHAUSER 714 620 1,334
2,300 3,900 6,200 WILLAMETTE INDUSTRIES INC 144 244 388
------------------------------------------------
3,757 8,591 12,348
------------------------------------------------
PETROLEUM & FUEL PRODUCTS - 1.1%
16,800 8,800 25,600 BURLINGTON RESOURCES 718 376 1,094
1,800 1,700 3,500 HELMERICH & PAYNE INC 83 79 162
22,100 23,100 45,200 OCCIDENTAL PETROLEUM CORP 544 569 1,113
7,100 7,400 14,500 ORYX ENERGY CO 137 142 279
5,800 6,000 11,800 ROWAN COMPANIES INC 131 136 267
6,200 6,400 12,600 SANTA FE ENERGY PARTNERS 86 89 175
9,700 17,300 27,000 SCHLUMBERGER LTD. 1,040 1,855 2,895
23,100 17,543 40,643 UNION PACIFIC RESOURCES 618 469 1,087
3,900 3,800 7,700 WESTERN ATLAS INC 236 230 466
------------------------------------------------
3,593 3,945 7,538
------------------------------------------------
PHOTOGRAPHIC EQUIPMENT & SUPPLIES - 0.6%
9,200 23,400 32,600 EASTMAN KODAK COMPANY 698 1,775 2,473
2,600 3,200 5,800 POLAROID CORPORATION 103 127 230
100 22,800 22,900 XEROX CORPORATION 6 1,297 1,303
------------------------------------------------
807 3,199 4,006
------------------------------------------------
PRECIOUS METALS - 0.3%
100 25,100 25,200 BARRICK GOLD CORP 2 596 598
15,100 15,800 30,900 BATTLE MOUNTAIN GOLD 100 105 205
100 9,800 9,900 ECHO BAY MINES LTD 1 65 66
100 10,300 10,400 HOMESTAKE MINING 2 156 158
6,700 6,943 13,643 NEWMONT MINING CORP 260 269 529
100 16,800 16,900 PLACER DOME INCORPORATED 2 305 307
100 9,240 9,340 SANTA FE PACIFIC GOLD 2 152 154
------------------------------------------------
369 1,648 2,017
------------------------------------------------
PRINTING & PUBLISHING - 1.3%
5,000 5,300 10,300 AMERICAN GREETINGS CORP 160 169 329
5,500 5,800 11,300 DELUXE CORPORATION 178 188 366
10,100 10,600 20,700 DONNELLEY R R & SONS 352 370 722
See accompanying notes to financial statements
<PAGE>
Shares Value
------ -----
Optimized Equity Pro Forma
Optimized Equity Pro Forma Stock Index Combined
Stock Index Combined Security (000) (000) (000)
----- ----- -------- -------- ----- ----- -----
PRINTING & PUBLISHING (CONTINUED)
6,400 6,800 13,200 DOW JONES & CO INC $ 260 $ 276 $ 536
16,600 9,900 26,500 GANNETT COMPANY INC 1,426 850 2,276
2,200 2,200 4,400 JOHN HARLAND 52 52 104
1,400 6,600 8,000 KNIGHT RIDDER 56 263 319
6,700 7,000 13,700 MCGRAW-HILL 343 358 701
3,800 3,800 7,600 MEREDITH CORP 88 88 176
6,700 7,000 13,700 MOORE & ASSOCIATES LTD 134 140 274
6,600 6,800 13,400 NEW YORK TIMES CO CLASS A 291 300 591
100 39,900 40,000 TIME WARNER INC 4 1,726 1,730
6,700 6,900 13,600 TIMES MIRROR CO CLASS A 366 377 743
1,100 8,700 9,800 TRIBUNE CO 45 352 397
------------------------------------------------
3,755 5,509 9,264
------------------------------------------------
PROFESSIONAL SERVICES - 0.2%
8,600 12,000 20,600 COGNIZANT CORP 250 350 600
11,400 12,000 23,400 DUN & BRADSTREET CORP 289 305 594
100 3,300 3,400 E G & G INC 2 69 71
------------------------------------------------
541 724 1,265
------------------------------------------------
RAILROADS - 0.9%
3,800 10,708 14,508 BURLINGTON NORTHERN SANTA 281 792 1,073
5,009 4,882 9,891 CONRAIL INC 565 550 1,115
16,900 15,200 32,100 CSX CORPORATION 786 707 1,493
4,000 8,800 12,800 NORFOLK & SOUTHERN CORP 341 750 1,091
9,800 17,200 27,000 UNION PAC CORP 556 976 1,532
------------------------------------------------
2,529 3,775 6,304
------------------------------------------------
REPAIR SERVICES - 0.0%
1,900 5,800 7,700 RYDER SYSTEMS INC 56 170 226
------------------------------------------------
RETAIL - 5.4%
17,100 17,700 34,800 ALBERTSONS, INC. 581 602 1,183
9,900 10,200 20,100 AMERICAN STORES CO NEW 441 454 895
100 10,500 10,600 AUTOZONE INC 2 236 238
100 7,400 7,500 CHARMING SHOPPES INC 1 40 41
100 6,900 7,000 CIRCUIT CITY STORES INC 3 230 233
15,800 14,700 30,500 COSTCO COMPANIES INC. 436 406 842
100 7,400 7,500 CVS CORPORATION 5 341 346
10,600 11,100 21,700 DARDEN RESTAURANTS 83 87 170
29,000 15,200 44,200 DAYTON HUDSON CORP 1,211 635 1,846
400 8,000 8,400 DILLARD DEPT STORES CL A 13 252 265
3,600 14,600 18,200 FEDERATED DEPT STORES 118 480 598
26,300 19,900 46,200 GAP INC 881 667 1,548
2,900 4,200 7,100 GIANT FOOD INC 93 134 227
100 2,700 2,800 GREAT ATLNTC & PACFC TEA 3 69 72
3,700 5,000 8,700 HARCOURT GENERAL INC. 172 233 405
8,700 9,150 17,850 HASBRO INC 238 250 488
21,800 33,733 55,533 HOME DEPOT INC. 1,166 1,805 2,971
15,500 16,200 31,700 J. C. PENNEY COMPANY INC 738 772 1,510
100 34,000 34,100 K MART CORPORATION 1 412 413
8,000 8,900 16,900 KROGER CO 406 452 858
3,200 18,992 22,192 LIMITED INC 59 349 408
2,700 2,700 5,400 LONGS DRUG STORES CORP 63 63 126
11,800 12,100 23,900 LOWES COS INC. 441 452 893
18,200 19,081 37,281 MATTEL INC. 437 458 895
11,000 17,700 28,700 MAY DEPT STORES 501 805 1,306
38,300 49,000 87,300 MCDONALD'S CORPORATION 1,810 2,315 4,125
1,700 2,600 4,300 MERCANTILE STORES INC 79 121 200
100 5,700 5,800 NORDSTROM INC 4 216 220
8,200 4,400 12,600 PEP BOYS MANNY MOE & JACK 246 132 378
13,800 8,600 22,400 RITE AID CORP 580 361 941
See accompanying notes to financial statements
<PAGE>
Shares Value
------ -----
Optimized Equity Pro Forma
Optimized Equity Pro Forma Stock Index Combined
Stock Index Combined Security (000) (000) (000)
----- ----- -------- -------- ----- ----- -----
RETAIL (CONTINUED)
27,500 27,500 55,000 SEARS ROEBUCK & CO. $ 1,382 $ 1,382 $ 2,764
5,300 5,500 10,800 TJX COMPANIES, INC. 227 235 462
100 19,300 19,400 TOYS R US 3 540 543
55,300 161,100 216,400 WAL-MART STORES, INC. 1,541 4,491 6,032
16,600 17,300 33,900 WALGREEN 695 724 1,419
8,800 9,100 17,900 WENDYS INTERNATIONAL 182 188 370
10,100 10,600 20,700 WINN DIXIE STORES INC. 333 350 683
9,000 9,400 18,400 WOOLWORTH CORPORATION 210 220 430
------------------------------------------------
15,385 21,959 37,344
------------------------------------------------
RUBBER & PLASTIC - 0.9%
2,800 2,900 5,700 ARMSTRONG WORLD INDS INC 181 188 369
100 5,800 5,900 COOPER TIRE & RUBBER CO 2 107 109
15,200 10,900 26,100 GOODYEAR 794 570 1,364
7,000 8,700 15,700 ILLNOIS TOOL WORKS 571 710 1,281
19,500 20,200 39,700 NIKE, INC. CLASS B 1,209 1,252 2,461
10,000 10,500 20,500 RUBBERMAID 249 261 510
------------------------------------------------
3,006 3,088 6,094
------------------------------------------------
SEMI-CONDUCTORS/INSTRUMENTS - 2.8%
9,300 9,600 18,900 ADVANCED MICRO DEVICES 386 398 784
14,700 15,452 30,152 AMP INCORPORATED 505 531 1,036
41,200 57,600 98,800 INTEL CORPORATION 5,732 8,014 13,746
100 9,000 9,100 LSI LOGIC CORP 3 313 316
100 14,700 14,800 MICRON TECHNOLOGY INC 4 595 599
4,200 9,700 13,900 NATL SEMICONDUCTOR CORP 116 267 383
9,700 15,300 25,000 ROCKWELL K 629 993 1,622
100 13,300 13,400 TEXAS INSTRUMENTS 7 996 1,003
------------------------------------------------
7,382 12,107 19,489
------------------------------------------------
SPECIALTY MACHINERY - 0.2%
7,300 7,628 14,928 COOPER INDUSTRIES 317 331 648
100 44,000 44,100 WESTINGHOUSE ELEC CORP 2 781 783
------------------------------------------------
319 1,112 1,431
------------------------------------------------
STEEL & STEEL WORKS - 0.8%
100 15,900 16,000 ALCAN ALUMINUM LTD 3 539 542
5,300 12,222 17,522 ALLEGEGHENY TELEDYNE INC 149 344 493
10,300 12,200 22,500 ALUMINUM CO OF AMERICA 700 830 1,530
100 7,500 7,600 ARMCO INC - 30 30
2,900 3,000 5,900 ASARCO INC 82 84 166
100 7,800 7,900 BETHLEHEM STEEL CORP 1 64 65
9,700 10,112 19,812 ENGELHARD CORP 204 212 416
100 11,800 11,900 INCO LTD 3 385 388
100 3,400 3,500 INLAND STEEL INDUSTRIES 2 66 68
100 6,200 6,300 NUCOR CORP 5 284 289
4,300 4,600 8,900 PHELPS DODGE CORP 314 336 650
100 4,500 4,600 REYNOLDS METALS CO. 6 279 285
5,700 5,900 11,600 USX-U S STEEL GROUP 152 157 309
6,100 6,350 12,450 WORTHINGTON INDS INC 117 121 238
------------------------------------------------
1,738 3,731 5,469
------------------------------------------------
TELEPHONES & TELCOMMUNICATION - 6.7%
100 35,200 35,300 AIRTOUCH COMMUNICATIONS 2 810 812
100 13,300 13,400 ALLTEL CORP 3 432 435
47,700 38,600 86,300 AMERITECH CORP 2,934 2,374 5,308
72,300 113,800 186,100 AT&T CORP. 2,512 3,955 6,467
100 30,800 30,900 BELL ATLANTIC CORP 6 1,875 1,881
37,700 69,800 107,500 BELL SOUTH 1,593 2,949 4,542
100 11,500 11,600 FRONTIER CORP 2 206 208
11,600 67,600 79,200 GTE CORPORATION 541 3,152 3,693
47,100 44,675 91,775 LUCENT TECHNOLOGIES INC. 2,485 2,357 4,842
19,300 48,100 67,400 MCI TELECOMMUNICATIONS 688 1,714 2,402
26,900 30,900 57,800 NYNEX CORP 1,227 1,410 2,637
28,800 30,100 58,900 PACIFIC TELESIS GROUP 1,087 1,136 2,223
51,400 42,400 93,800 SBC COMMUNICATIONS INC 2,705 2,231 4,936
See accompanying notes to financial statements
<PAGE>
Shares Value
------ -----
Optimized Equity Pro Forma
Optimized Equity Pro Forma Stock Index Combined
Stock Index Combined Security (000) (000) (000)
----- ----- -------- -------- ----- ----- -----
TELEPHONES & TELCOMMUNICATION (CONTINUED)
28,800 30,200 59,000 SPRINT CORPORATION $ 1,310 $ 1,374 $ 2,684
100 33,600 33,700 U S WEST MEDIA GROUP 2 1,142 1,144
100 43,900 44,000 U.S. WEST INC 3 818 821
14,000 61,200 75,200 WORLDCOM INC. 308 1,346 1,654
------------------------------------------------
17,408 29,281 46,689
------------------------------------------------
TRUCKING - 0.0%
100 2,800 2,900 CALIBER SYSTEM, INC. 3 74 77
------------------------------------------------
WHOLESALE - 0.4%
100 2,700 2,800 FLEMING COS INC 2 47 49
7,300 8,450 15,750 GENUINE PARTS COMPANY 340 394 734
3,600 3,700 7,300 GRAINGER WW INC 266 274 540
2,400 7,000 9,400 SIGMA ALDRICH COM 74 216 290
4,500 4,700 9,200 SUPER VALUE, INC. 134 140 274
12,000 12,600 24,600 SYSCO CORP 410 430 840
------------------------------------------------
1,226 1,501 2,727
------------------------------------------------
TOTAL COMMON STOCKS 267,914 406,792 674,706
------------------------------------------------
TREASURY BILL - 0.1%
- 700,000 700,000 TREASURY BILL (5.08%) - 692 692
------------------------------------------------
RELATED PARTY MONEY MARKET FUNDS - 2.1%
- 14,629,160 14,629,160 FIRST AM. PRIME OBLIGATION - 14,629 14,629
------------------------------------------------
REPURCHASE AGREEMENTS - 0.2%
1,546,488 - 1,546,488 MERRILL VARIABLE RATE NOTE 1,546 - 1,546
------------------------------------------------
TOTAL INVESTMENTS (Cost
$217,224, $304,272, and
$521,496 respectively) $ 269,460 $ 422,113 $ 691,573
================================================
</TABLE>
See accompanying notes to financial statements
<PAGE>
First American Investment Funds, Inc
Intermediate Term Income Fund
Pro Forma Combining Schedule of Investments
3/31/97
(Unaudited)
<TABLE>
<CAPTION>
Par/Shares Value
---------- -----
Intermediate Intermediate Pro Forma Intermediate Intermediate Pro Forma
Bond Term Income Combined Bond Term Income Combined
(000) (000) (000) Security Coupon Maturity (000) (000) (000)
----- ----- ----- -------- ------ -------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. TREASURY OBLIGATIONS-62.0% (Percentages represent pro forma value of investments compared to pro forma net assets)
3,700 - 3,700 U.S. TREASURY NOTE 8.000 5/15/01 $ 3,868 - $ 3,868
1,965 - 1,965 U.S. TREASURY NOTE 7.500 11/15/01 2,021 - 2,021
7,747 - 7,747 U.S. TREASURY NOTE 6.375 1/15/99 7,747 - 7,747
3,950 12,900 16,850 U.S. TREASURY NOTE 6.250 2/15/03 3,844 12,559 16,403
2,500 - 2,500 U.S. TREASURY NOTE 5.875 2/15/04 2,365 - 2,365
3,700 - 3,700 U.S. TREASURY NOTE 7.250 5/15/04 3,778 - 3,778
- 6,250 6,250 U.S. TREASURY NOTE 7.250 8/15/04 - 6,377 6,377
6,566 - 6,566 U.S. TREASURY NOTE 7.125 9/30/99 6,652 - 6,652
- 20,875 20,875 U.S. TREASURY NOTE 7.500 10/31/99 - 21,322 21,322
5,309 - 5,309 U.S. TREASURY NOTE 7.750 12/31/99 5,460 - 5,460
3,500 - 3,500 U.S. TREASURY NOTE 7.500 2/15/05 3,621 - 3,621
3,300 - 3,300 U.S. TREASURY NOTE 6.875 3/31/00 3,323 - 3,323
4,000 - 4,000 U.S. TREASURY NOTE 6.125 5/15/98 3,999 - 3,999
4,300 - 4,300 U.S. TREASURY NOTE 6.125 7/31/00 4,233 - 4,233
4,450 8,410 12,860 U.S. TREASURY NOTE 6.500 8/15/05 4,326 8,177 12,503
- 8,710 8,710 U.S. TREASURY NOTE 5.750 9/30/97 - 8,711 8,711
- 31,750 31,750 U.S. TREASURY NOTE 6.375 3/31/01 - 31,360 31,360
5,550 - 5,550 U.S. TREASURY NOTE 6.875 5/15/06 5,521 - 5,521
7,100 - 7,100 U.S. TREASURY NOTE 6.625 7/31/01 7,066 - 7,066
4,500 43,910 48,410 U.S. TREASURY NOTE 5.875 10/31/98 4,466 43,584 48,050
4,000 - 4,000 U.S. TREASURY NOTE 6.250 10/31/01 3,919 - 3,919
-------------------------------
TOTAL U.S. TREASURY OBLIGATIONS 76,209 132,090 208,299
-------------------------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED OBLIGATIONS-11.1%
- 2,630 2,630 FHLMC 8.000 10/15/20 - 2,660 2,660
2,889 - 2,889 FHLMC 7.000 6/1/10 2,849 - 2,849
- 3,500 3,500 FHLMC 6.000 11/15/08 - 3,221 3,221
3,000 - 3,000 FHLMC 6.780 3/15/99 2,900 - 2,900
1,000 - 1,000 FHLMC 7.120 3/27/06 973 - 973
2,800 - 2,800 FNMA 8.400 10/25/04 2,882 - 2,882
1,000 - 1,000 FNMA 8.500 2/1/05 1,039 - 1,039
2,000 - 2,000 FNMA 6.500 1/18/04 1,924 - 1,924
- - - FNMA 14.750 3/1/12 - - -
2,000 - 2,000 FNMA 5.670 1/25/01 1,918 - 1,918
2,500 - 2,500 FNMA 6.960 4/2/07 2,490 - 2,490
3,000 - 3,000 FNMA 6.870 10/2/01 2,984 - 2,984
2,000 - 2,000 FNMA 6.810 11/21/06 1,917 - 1,917
1,578 - 1,578 FNMA 7.000 3/1/09 1,557 - 1,557
621 - 621 FNMA 7.000 3/1/09 612 - 612
2,841 - 2,841 FNMA 7.000 1/1/11 2,796 - 2,796
2,773 - 2,773 FNMA 7.500 9/1/10 2,776 - 2,776
1,000 - 1,000 PRIV EXPORT 5.750 4/30/98 994 - 994
943 - 943 SLMA 7.723 1/25/99 962 - 962
-------------------------------
TOTAL U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED OBLIGATIONS 31,573 5,881 37,454
-------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS-5.2%
2,000 - 2,000 AMHPT 6.700 3/15/27 1,983 - 1,983
3,266 - 3,266 FHLMC REMIC 7.000 7/15/26 3,274 - 3,274
1,897 - 1,897 FHLMC REMIC 7.000 5/15/03 1,901 - 1,901
2,500 - 2,500 FNMA REMIC 7.000 6/25/02 2,481 - 2,481
1,603 - 1,603 FNMA REMIC 6.000 9/25/08 1,508 - 1,508
3,000 - 3,000 FNMA REMIC 7.000 5/18/17 2,971 - 2,971
3,473 - 3,473 GNMA REMIC 7.500 4/20/03 3,516 - 3,516
-------------------------------
TOTAL COLLATERALIZED MORTGAGE
OBLIGATIONS 17,634 - 17,634
-------------------------------
OTHER MORTGAGE-BACKED OBLIGATIONS-0.7%
- 60 60 DREXEL BURNHAM REMIC 9.000 8/1/18 - 61 61
- 2,231 2,231 PRUDENTIAL HOME MORTGAGE 6.763 9/25/01 - 2,167 2,167
-------------------------------
TOTAL OTHER MORTGAGE-BACKED
OBLIGATIONS - 2,228 2,228
-------------------------------
<PAGE>
Par/Shares Value
---------- -----
Intermediate Intermediate Pro Forma Intermediate Intermediate Pro Forma
Bond Term Income Combined Bond Term Income Combined
(000) (000) (000) Security Coupon Maturity (000) (000) (000)
----- ----- ----- -------- ------ -------- ----- ----- -----
ASSET-BACKED SECURITIES-2.5%
1,500 - 1,500 EQUICREDIT 7.350% 6/15/14 $ 1,499 - $ 1,499
2,000 - 2,000 EQCC 6.700 6/15/08 1,974 - 1,974
- 19 19 FLEET FIN REMIC 8.900 1/16/06 - 20 20
1,500 - 1,500 GE CAPITAL 7.150 10/31/11 1,499 - 1,499
1,500 - 1,500 OAKWOOD 6.750 4/15/27 1,462 - 1,462
- 2,000 2,000 ZALE FUNDING 144A 7.500 5/15/03 - 1,993 1,993
--------------------------------
TOTAL ASSET-BACKED SECURITIES 6,434 2,013 8,447
--------------------------------
CORPORATE BONDS-13.2%
1,000 - 1,000 ASSOC CORP NA 6.000 3/15/00 976 - 976
2,000 - 2,000 AT&T CAP 6.570 1/21/00 1,983 - 1,983
1,000 - 1,000 AUSTRALIA 7.550 9/15/06 1,001 - 1,001
1,000 - 1,000 BAKER HUGH 7.620 2/15/99 1,016 - 1,016
500 - 500 BAYERISCHE 7.370 12/14/02 504 - 504
1,000 - 1,000 BAYERISCHE 6.200 2/9/06 920 - 920
- 2,800 2,800 BEAR STEARNS 6.500 6/15/00 - 2,744 2,744
1,000 - 1,000 CHRYSLER 6.180 12/15/00 973 - 973
- 3,075 3,075 CIGNA CORP. 7.400 1/15/03 - 3,063 3,063
1,057 - 1,057 CONSOLIDATED EDISON 6.370 4/1/03 1,011 - 1,011
1,000 - 1,000 DAIMLER 7.370 9/15/06 998 - 998
1,000 - 1,000 DAYTON HUDSON 6.800 10/1/01 980 - 980
1,000 - 1,000 ENRON 7.620 9/10/04 1,009 - 1,009
1,000 - 1,000 FORD MOTOR 5.750 1/25/01 955 - 955
1,000 - 1,000 GE CAPITAL 5.470 1/19/99 981 - 981
1,000 - 1,000 GMAC 7.250 5/15/03 996 - 996
1,000 - 1,000 HOUSEHOLD INC 7.250 5/15/06 984 - 984
1,000 - 1,000 HYDRO-QUEBEC 7.370 2/1/03 1,000 - 1,000
- 3,155 3,155 MET LIFE 144A 6.300 11/1/03 - 2,974 2,974
1,000 - 1,000 NATIONAL RURAL 8.500 2/15/98 1,018 - 1,018
1,000 - 1,000 NIPPON 9.500 7/27/98 1,038 - 1,038
1,000 - 1,000 NORWEST 6.750 5/12/00 993 - 993
1,000 - 1,000 OCCIDENTAL 5.840 11/9/98 988 - 988
1,000 - 1,000 PACIFIC GAS 6.640 7/5/00 984 - 984
1,000 - 1,000 PACIFICORP 6.750 4/1/05 959 - 959
1,000 - 1,000 PRICE/COSTCO 7.120 6/15/05 971 - 971
1,057 - 1,057 PUBLIC SVC 7.620 2/1/00 1,073 - 1,073
1,000 - 1,000 SAFECO 7.870 4/1/05 1,014 - 1,014
1,000 - 1,000 SEARS 6.690 4/30/01 981 - 981
1,000 - 1,000 SHELL OIL 6.620 7/1/99 998 - 998
1,000 - 1,000 ST PAUL COS 9.370 6/15/97 1,007 - 1,007
2,013 - 2,013 STANDARD 7.870 7/23/00 2,049 - 2,049
1,000 - 1,000 UNION OIL 8.750 8/15/01 1,055 - 1,055
1,000 - 1,000 US WEST 6.460 12/2/02 963 - 963
1,000 - 1,000 VF CORP 7.600 4/1/04 990 - 990
1,000 - 1,000 WALMART 6.750 5/15/02 988 - 988
1,000 - 1,000 WESTPAC 9.120 8/15/01 1,070 - 1,070
--------------------------------
TOTAL CORPORATE BONDS 35,426 8,781 44,207
--------------------------------
MUNICIPAL BONDS-0.6%
2,000 - 2,000 CHELAN,WA 6.560 6/1/00 1,978 - 1,978
--------------------------------
RELATED PARTY MONEY MARKET FUND-1.6%
- 5,358 5,358 FIRST AM. PRIME OBLIGATION - 5,358 5,358
--------------------------------
REPURCHASE AGREEMENTS-2.8%
9,559 - 9,559 MERRILL VARIABLE RATE NOTE 9,559 - 9,559
--------------------------------
TOTAL INVESTMENTS (Cost $181,410, $158,814
and $340,224, respectively) $ 178,813 $ 156,351 $ 335,164
=================================
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
First American Investment Funds, Inc
Fixed Income Fund
Pro Forma Combining Schedule of Investments
3/31/97
(Unaudited)
Par/Shares Value
---------- -----
Diversified Fixed Pro Forma Diversified Fixed Pro Forma
Bond Income Combined Bond Income Combined
(000) (000) (000) Security Coupon Maturity (000) (000) (000)
----- ------- ----- -------- ----- ------- ----- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S TREASURY OBLIGATIONS-67.7% (Percentages represent pro forma value of investments compared to pro forma net assets)
3,450 - 3,450 U.S. TREASURY BOND 7.250% 5/15/16 $ 3,469 - $ 3,469
5,000 - 5,000 U.S. TREASURY BOND 9.125 5/15/18 6,020 - 6,020
9,000 - 9,000 U.S. TREASURY BOND 7.250 8/15/22 9,023 - 9,023
- 83,230 83,230 U.S. TREASURY BOND 7.125 2/15/23 - 82,246 82,246
10,800 - 10,800 U.S. TREASURY BOND 6.250 8/15/23 9,575 - 9,575
7,000 - 7,000 U.S. TREASURY NOTE 7.250 5/15/16 7,038 - 7,038
7,000 - 7,000 U.S. TREASURY NOTE 7.500 11/15/01 7,200 - 7,200
8,100 - 8,100 U.S. TREASURY NOTE 7.500 5/15/02 8,353 - 8,353
4,500 - 4,500 U.S. TREASURY NOTE 6.750 5/31/97 4,508 - 4,508
8,300 - 8,300 U.S. TREASURY NOTE 6.375 8/15/02 8,152 - 8,152
2,000 - 2,000 U.S. TREASURY NOTE 5.625 1/31/98 1,993 - 1,993
8,000 42,365 50,365 U.S. TREASURY NOTE 6.250 2/15/03 7,788 41,241 49,029
9,500 - 9,500 U.S. TREASURY NOTE 5.125 11/30/98 9,317 - 9,317
8,500 - 8,500 U.S. TREASURY NOTE 6.500 4/30/99 8,509 - 8,509
- 16,900 16,900 U.S. TREASURY NOTE 7.250 8/15/04 - 17,244 17,244
8,350 - 8,350 U.S. TREASURY NOTE 7.125 9/30/99 8,461 - 8,461
- 62,830 62,830 U.S. TREASURY NOTE 7.500 10/31/99 - 64,176 64,176
5,250 - 5,250 U.S. TREASURY NOTE 7.500 2/15/05 5,432 - 5,432
9,000 - 9,000 U.S. TREASURY NOTE 6.750 4/30/00 9,025 - 9,025
9,000 - 9,000 U.S. TREASURY NOTE 6.125 7/31/00 8,860 - 8,860
- 21,475 21,475 U.S. TREASURY NOTE 6.500 8/15/05 - 20,880 20,880
- 40,570 40,570 U.S. TREASURY NOTE 5.750 9/30/97 - 40,575 40,575
9,000 - 9,000 U.S. TREASURY NOTE 5.625 2/28/01 8,668 - 8,668
- 86,215 86,215 U.S. TREASURY NOTE 6.375 3/31/01 - 85,155 85,155
7,000 - 7,000 U.S. TREASURY NOTE 6.875 5/15/06 6,964 - 6,964
- 92,870 92,870 U.S. TREASURY NOTE 5.875 10/31/98 - 92,180 92,180
-------------------------------
TOTAL U.S. TREASURY OBLIGATIONS 138,355 443,697 582,052
-------------------------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED OBLIGATIONS-9.5%
1,000 - 1,000 FFCB 7.060 5/24/10 979 - 979
4,209 - 4,209 FHLMC 8.500 6/1/24 4,313 - 4,313
2,830 - 2,830 FHLMC 7.500 2/1/23 2,797 - 2,797
2,072 - 2,072 FHLMC 7.500 10/1/22 2,048 - 2,048
- 1,275 1,275 FHLMC 6.000 11/15/08 - 1,173 1,173
- 5,439 5,439 FHLMC 6.500 12/15/23 - 4,972 4,972
- 7,103 7,103 FHLMC 6.500 1/15/24 - 5,908 5,908
- 5,046 5,046 FHLMC 6.750 12/15/05 - 4,780 4,780
- 7,133 7,133 FHLMC 7.000 2/15/24 - 6,736 6,736
- 13,994 13,994 FHLMC 7.000 4/17/06 - 13,902 13,902
1,000 - 1,000 FNMA 7.050 11/12/02 1,006 - 1,006
3,958 - 3,958 FNMA 6.750 12/25/21 3,816 - 3,816
2,000 - 2,000 FNMA 6.440 6/21/05 1,908 - 1,908
2,000 - 2,000 FNMA 6.540 10/3/05 1,918 - 1,918
2,796 - 2,796 FNMA 6.500 2/1/09 2,709 - 2,709
3,295 - 3,295 FNMA 6.500 6/1/10 3,186 - 3,186
2,489 - 2,489 FNMA 7.500 4/1/26 2,444 - 2,444
2,799 - 2,799 FNMA 8.000 3/1/23 2,811 - 2,811
435 - 435 FNMA 7.500 5/1/26 428 - 428
585 - 585 GNMA 7.000 7/15/08 580 - 580
3,628 - 3,628 GNMA 7.000 7/15/23 3,480 - 3,480
1,799 - 1,799 GNMA 6.500 4/15/24 1,664 - 1,664
164 - 164 GNMA 7.000 5/15/08 163 - 163
767 - 767 GNMA 7.000 6/15/09 759 - 759
4,430 - 4,430 GNMA 8.500 3/15/22 4,534 - 4,534
455 - 455 GNMA 7.000 10/15/07 451 - 451
1,873 - 1,873 GNMA 7.000 8/15/23 1,786 - 1,786
291 - 291 GNMA 7.000 10/15/07 288 - 288
------------------------------
TOTAL U.S. GOVERNMENT
AGENCY MORTGAGE-BACKED 44,068 37,471 81,539
------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS-0.5%
4,000 - 4,000 MIDLAND CMO 7.635 8/25/28 4,008 - 4,008
------------------------------
<PAGE>
Par/Shares Value
---------- -----
Diversified Fixed Pro Forma Diversified Fixed Pro Forma
Bond Income Combined Bond Income Combined
(000) (000) (000) Security Coupon Maturity (000) (000) (000)
----- ------- ----- -------- ------ -------- ----- ----- ---------
OTHER MORTGAGE-BACKED OBLIGATIONS-6.1%
- 2,380 2,380 CWMBS INC. MTG. PASS 6.500% 4/25/24 - $ 2,293 $ 2,293
- 84 84 COLLAT MORT CORP 8.000 9/20/19 - 85 85
- 524 524 DREXEL BURNHAM REMIC 9.000 8/1/18 - 534 534
- 5,179 5,179 GE CAP MTG REMIC 7.000 5/25/24 - 4,797 4,797
- 7,000 7,000 GE CAP MTG REMIC 7.000 5/25/94 - 6,707 6,707
- 5,519 5,519 GE CAP MTS REMIC 6.500 3/25/24 - 5,459 5,459
- 3,146 3,146 GECMS 8.300 11/25/24 - 3,160 3,160
4,000 - 4,000 GREEN TREE 6.900 6/15/05 3,924 - 3,924
- 6,000 6,000 MERRILL LYNCH 6.500 3/15/18 - 6,049 6,049
- 10,329 10,329 J.P. MORGAN COM MTG 7.619 7/25/10 - 10,076 10,076
- 5,859 5,859 PRUDENTIAL HOME MORT 6.763 9/25/01 - 5,693 5,693
- 494 494 RESIDENTIAL FUNDNG 5.700 11/25/07 - 491 491
3,000 - 3,000 WILSHIRE 6.750 6/25/15 2,950 - 2,950
-------------------------------
TOTAL OTHER MORTGAGE-
BACKED OBLIGATIONS 6,874 45,344 52,218
------------------------------
ASSET-BACKED SECURITIES-1.2%
- 6,500 6,500 CORESTATES HOME EQUITY 7.000 10/15/09 - 6,422 6,422
- 4,100 4,100 ZALE FUNDING TR 144A 7.500 5/15/03 - 4,086 4,086
------------------------------
TOTAL ASSET-BACKED SECURITIES - 10,508 10,508
------------------------------
CORPORATE OBLIGATIONS-9.6%
1,250 - 1,250 AIRTOUCH COMMUN 7.500 7/15/06 1,239 - 1,239
1,000 - 1,000 ASSOC NA 6.750 7/15/97 1,002 - 1,002
- 150 150 BANK AMERICA TR 8.375 5/1/07 - 152 152
- 10,475 10,475 CIGNA CORP. 7.400 1/15/03 - 10,436 10,436
1,000 - 1,000 COMM. CRT 6.375 9/15/02 965 - 965
1,000 - 1,000 CONSOLIDATED EDISON 6.500 2/1/01 981 - 981
976 - 976 CONRAIL 6.760 5/25/15 943 - 943
1,000 - 1,000 ENRON 7.125 5/15/07 969 - 969
1,000 - 1,000 FORD MOTOR 5.750 1/25/01 955 - 955
1,000 - 1,000 GE CAPITAL 5.470 1/19/99 981 - 981
1,000 - 1,000 GMAC 7.000 9/15/02 990 - 990
- 11,000 11,000 GENERAL MOTORS ACCEPT MTN 7.350 1/27/98 - 11,100 11,100
1,000 - 1,000 J & J 8.250 11/9/04 1,063 - 1,063
2,981 - 2,981 LB COM COND 7.416 6/25/06 2,972 - 2,972
- 11,990 11,990 MET LIFE 144A 6.300 11/1/03 - 11,301 11,301
1,000 - 1,000 NORWEST FIN 6.250 12/15/07 908 - 908
1,000 - 1,000 OCCIDENTAL 6.390 11/9/00 978 - 978
1,000 - 1,000 PACIFIC GAS 7.100 6/1/05 970 - 970
1,000 - 1,000 PACIFICORP 6.750 4/1/05 959 - 959
1,000 - 1,000 PRICE/COSTCO 7.125 6/15/05 971 - 971
1,000 - 1,000 SAFECO 7.875 4/1/05 1,014 - 1,014
- 20,915 20,915 SANTANDER FINANCIAL 7.250 5/30/06 - 20,444 20,444
2,000 - 2,000 SAXON ASST 6.475 11/25/20 1,964 - 1,964
- 5,000 5,000 TORCHMARK CORP. 7.875 5/15/23 - 4,769 4,769
1,000 - 1,000 VF CORP 7.600 4/1/04 990 - 990
1,000 - 1,000 WALMART 6.750 5/15/02 988 - 988
1,000 - 1,000 WESTPAC 9.125 8/15/01 1,070 - 1,070
1,000 - 1,000 WEYERHAUSER 7.250 7/1/13 964 - 964
------------------------------
TOTAL CORPORATE OBLIGATIONS 24,836 58,202 83,038
------------------------------
MUNICIPAL BONDS-1.0%
3,000 - 3,000 CHELAN, WA 6.690 6/1/04 2,963 - 2,963
- 5,780 5,780 MN TAXABLE SINGLE FAMILY 6.920 4/1/09 - 5,736 5,736
------------------------------
TOTAL MUNICIPAL BONDS 2,963 5,736 8,699
------------------------------
RELATED PARTY MONEY MARKET FUND-2.9%
- 24,586 24,586 FIRST AM. PRIME OBLIGATION - 24,586 24,586
------------------------------
REPURCHASE AGREEMENTS-0.4%
3,088 - 3,088 MERRILL VARIABLE RATE NOTE 3,088 - 3,088
------------------------------
TOTAL INVESTMENTS (Cost $229,506, $637,111
and $866,617, respectively) $224,192 625,544 849,736
===============================
See accompanying notes to financial statements
</TABLE>
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
PART C - OTHER INFORMATION
ITEM 15. 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.
The Registrant maintains officers' and directors' liability insurance
providing coverage, with certain exceptions, for acts and omissions in the
course of the covered persons' duties as officers and directors.
ITEM 16. EXHIBITS.
(1) Articles of Incorporation, as amended and supplemented through
July 1997. (Incorporated by reference to Exhibit (1) to
Post-Effective Amendment No. 30 to the Registrant's Registration
Statement on Form N- 1A, File No. 33-16905.)
(2) Bylaws, as amended through December 1995. (Incorporated by
reference to Exhibit (2) to Post-Effective Amendment No. 30 to
the Registrant's Registration Statement on Form N-1A, File No.
33-16905.)
(3) Not Applicable.
<PAGE>
*(4) Agreement and Plan of Reorganization, attached as Appendix III
to the Prospectus/Proxy Statement included in Part A of this
Registration Statement on Form N-14.
(5) Not Applicable.
(6) (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 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905
(the "Post-Effective Amendment No. 21").)
(b) Amendment No. 5 to Exhibit A to Investment Advisory
Agreement. (Incorporated by reference to Exhibit (5)(b)
to Post-Effective Amendment No. 24 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
(c) Sub-Advisory Agreement relating to the International
Fund between First Bank National Association and Marvin
& Palmer Associates, Inc. (Incorporated by reference to
Exhibit (5)(b) to the Post-Effective Amendment No. 21.)
(d) Amendment No. 6 to Exhibit A to Investment Advisory
Agreement. (Incorporated by reference to Exhibit (5)(d)
to Post-Effective Amendment No. 27 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
(7) (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 the Post-Effective Amendment No. 21.)
(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 the
Post-Effective Amendment No. 21.)
(c) Form of Dealer Agreement. (Incorporated by reference to
Exhibit (6)(c) to the Post-Effective Amendment No. 21.)
(8) Not Applicable.
(9) (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 to the Registrant's Registration Statement on
Form N-1A, File No. 33-16905.)
<PAGE>
(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 to the Registrant's Registration Statement on
Form N-1A, File No. 33-16905.)
(c) Compensation Agreement dated as of June 1, 1997,
pursuant to Custodian Agreement. (Incorporated by
reference to Exhibit (8)(c) to Post-Effective Amendment
No. 27 to the Registrant's Registration Statement on
Form N-1A, File No. 33-16905.)
(10) (a) Form of Distribution Plan [Class A] shares.
(Incorporated by reference to Exhibit (15)(a) to the
Post-Effective Amendment No. 21.)
(b) Class B Distribution Plan. (Incorporated by reference to
Exhibit (15)(b) to the Post-Effective Amendment No. 21.)
(c) Service Plan [Class B]. (Incorporated by reference to
Exhibit (15)(c) to the Post-Effective Amendment No. 21.)
(d) Multiple Class Plan Pursuant to Rule 18f-3.
(Incorporated by reference to Exhibit (18) to
Post-Effective Amendment No. 23 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
*(11) Opinion and Consent of Dorsey & Whitney LLP with respect to the
legality of the securities being registered.
**(12) Opinion and Consent of Dorsey & Whitney LLP with respect to tax
matters.
(13) (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 to the
Registrant's Registration Statement on Form N-1A, File
No. 33- 16905.)
(b) Transfer Agent Agreement dated as of March 31, 1994
between Registrant and Supervised Service Company, Inc.
[superseded] (Incorporated by reference to Exhibit
(9)(a) to Post-Effective Amendment No. 23 to the
Registrant's Registration Statement on Form N-1A, File
No. 33-16905.)
(c) Assignment Transfer Agency Agreement to DST Systems,
Inc. [superseded] (Incorporated by reference to Exhibit
(9)(c) to Post- Effective Amendment No. 24 to the
Registrant's Registration Statement on Form N-1A, File
No. 33-16905.)
*(d) Transfer Agency Agreement dated as of January 1, 1997,
between Registrant and DST Systems, Inc.
<PAGE>
*(14) (a) Consent of KPMG Peat Marwick LLP.
(b) Consent of Deloitte & Touche LLP.
(15) Not Applicable.
*(16) Powers of Attorney of Directors signing the Registration
Statement.
*(17) (a) Rule 24f-2 Election of Registrant.
* (b) Form of Proxy Card.
* Filed herewith.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(1) The undersigned Registrant agrees that prior to any public reoffering of
the securities registered through the use of a prospectus which is a part of
this Registration Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
(3) The undersigned Registrant agrees to file, by post-effective amendment,
an opinion of counsel or a copy of a ruling of the Internal Revenue Service
supporting the tax consequences of the proposed reorganization within a
reasonable time after receipt of such opinion or ruling.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this registration statement has
been signed on behalf of the registrant, in the City of Oaks, Commonwealth of
Pennsylvania, on the 8th day of August, 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
* Director **
Robert J. Dayton
* Director **
Andrew M. Hunter III
* Director **
Leonard W. Kedrowski
* Director **
Robert L. Spies
* Director **
Joseph D. Strauss
* Director **
Virginia L. Stringer
* Director **
Gae B. Veit
* By: /s/ Kathryn L. Stanton
Kathryn L. Stanton
Attorney in Fact
** August 8, 1997
EXHIBIT 11
[LETTERHEAD OF DORSEY & WHITNEY LLP]
August 8, 1997
First American Investment Funds, Inc.
Oaks, Pennsylvania 19456
Re: First American Investment Funds, Inc.
Shares to be Issued Pursuant to Agreement and Plan of Reorganization
Ladies and Gentlemen:
We have acted as counsel to First American Investment Funds, Inc., a
Maryland corporation ("FAIF"), in connection with FAIF's authorization and
proposed issuance of its Class A and Class C common shares, par value $.0001 per
share, of Small Cap Value Fund, Stock Fund, Equity Index Fund, Intermediate Term
Income Fund, Fixed Income Fund and International Index Fund of FAIF (the
"Shares"). The Shares are to be issued pursuant to an Agreement and Plan of
Reorganization (the "Agreement"), by and between FAIF (the "Acquiring Fund"),
and Qualivest Funds (the "Acquired Fund"), the form of which Agreement is
included as Appendix III to the Combined Proxy Statement/Prospectus relating to
the transactions contemplated by the Agreement included in FAIF's Registration
Statement on Form N-14 filed with the Securities and Exchange Commission (the
"Registration Statement").
In rendering the opinions hereinafter expressed, we have reviewed the
corporate proceedings taken by FAIF in connection with the authorization and
issuance of the Shares, and we have reviewed such questions of law and examined
copies of such corporate records of FAIF, certificates of public officials and
of responsible officers of FAIF, and other documents as we have deemed necessary
as a basis for such opinions. As to the various matters of fact material to such
opinions, we have, when such facts were not independently established, relied to
the extent we deem proper on certificates of public officials and of responsible
officers of FAIF. In connection with such review and examination, we have
assumed that all copies of documents provided to us conform to the originals;
that all signatures are genuine; and that prior to the consummation of the
transactions contemplated thereby, the Agreement will have been duly and validly
executed and delivered on behalf of each of the parties thereto in substantially
the form included in the Registration Statement.
<PAGE>
Based on the foregoing, it is our opinion that:
1. FAIF is validly existing as a corporation in good standing under the
laws of the State of Maryland.
2. The Shares, when issued and delivered by the Acquiring Fund pursuant
to, and upon satisfaction of the conditions contained in, the Agreement, will be
duly authorized, validly issued, fully paid and non-assessable.
In rendering the foregoing opinions (a) we express no opinion as to the
laws of any jurisdiction other than the State of Maryland and (b) we have
assumed, with your concurrence, that the conditions to closing set forth in the
Agreement will have been satisfied.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Information Relating to the Proposed Reorganization-Federal Income Tax
Consequences" in FAIF's final Combined Proxy Statement/Prospectus relating to
the Shares included in the Registration Statement.
Very truly yours,
/s/ Dorsey & Whitney LLP
JDA
EXHIBIT (13)(d)
AGENCY AGREEMENT
THIS AGREEMENT made the 1st day of January, 1997, by and between FIRST
AMERICAN INVESTMENT FUNDS, INC., a corporation existing under the laws of the
State of Maryland, having its principal place of business at 680 East Swedesford
Road, Wayne, Pennsylvania 19087 (the "Fund"), and DST SYSTEMS, INC., a
corporation existing under the laws of the State of Delaware, having its
principal place of business at 333 W. 11th St., 5th Fl., Kansas City, Missouri
64105 ("DST"):
WITNESSETH:
WHEREAS, the Fund desires to appoint DST as Transfer Agent and Dividend
Disbursing Agent, and DST desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
1. Documents to be Filed with Appointment.
In connection with the appointment of DST as Transfer Agent and
Dividend Disbursing Agent for the Fund, there will be filed with DST
the following documents:
A. A certified copy of the resolutions of the Board of Directors
of the Fund (which term when used herein shall include any
Board of Trustees, or other governing body of the Fund,
however styled) appointing DST as Transfer Agent and Dividend
Disbursing Agent, approving the form of this Agreement, and
designating certain persons to sign stock certificates, if
any, and give written instructions and requests on behalf of
the Fund;
B. A certified copy of the Articles of Incorporation (which term
as used herein shall include, where relevant, the Declaration
of Trust, or other basic instrument establishing the existence
and nature of the Fund) of the Fund and all amendments
thereto;
C. A certified copy of the Bylaws of the Fund;
D. Copies of Registration Statements and amendments thereto,
filed with the Securities and Exchange Commission.
E. Specimens of all forms of outstanding stock certificates, in
the forms approved by the Board of Directors of the Fund, with
a certificate of the Secretary of the Fund, as to such
approval;
F. Specimens of the signatures of the officers of the Fund
authorized to sign stock certificates and individuals
authorized to sign written instructions and requests;
G. An opinion of counsel for the Fund, as such opinion(s) have
been filed with the Fund's Registration Statement or notices
required under Rule 24f-2 under the Investment Company Act of
1940 (the "1940 Act"), with respect to:
(1) The Fund's organization and existence under the laws
of its state of organization, and
(2) That all issued shares are validly issued, fully paid
and nonassessable.
2. Certain Representations and Warranties of DST.
DST represents and warrants to the Fund that:
A. It is a corporation duly organized and existing and in good
standing under the laws of Delaware.
B. It is duly qualified to carry on its business in the State of
Missouri.
C. It is empowered under applicable laws and by its Articles of
Incorporation and Bylaws to enter into and perform the
services contemplated in this Agreement.
D. It is registered as a transfer agent to the extent required
under the Securities Exchange Act of 1934 (the "1934 Act").
E. All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
F. It has and will continue to have and maintain the necessary
facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
G. It is in compliance with Securities and Exchange Commission
("SEC") regulations and is not subject to restrictions under
Rule 17Ad.
H. Copies of DST's Rule 17Ad-13 reports will be provided to the
Fund annually as and to the extent required under Rule 17Ad-13
under the 1934 Act.
I. Its fidelity bonding and minimum capital meet the transfer
agency requirements of the New York Stock Exchange and the
American Stock Exchange.
3. Certain Representations and Warranties of the Fund. The Fund represents
and warrants to DST that:
A. It is a corporation duly organized and existing and in good
standing under the laws of the State of Maryland.
B. It is an open-end management investment company registered
under the 1940 Act, as amended, the portfolios of which may be
diversified or non-diversified.
C. A registration statement under the Securities Act of 1933 has
been filed and will be effective with respect to all shares of
the Fund being offered for sale.
D. All requisite steps have been and will continue to be taken to
register the Fund's shares for sale in all applicable states
and such registration will be effective at all times shares
are offered for sale in such state.
E. The Fund is empowered under applicable laws and by its charter
and Bylaws to enter into and perform this Agreement.
4. Scope of Appointment.
A. Subject to the conditions set forth in this Agreement, the
Fund hereby appoints DST as Transfer Agent and Dividend
Disbursing Agent.
B. DST hereby accepts such appointment and agrees that it will
act as the Fund's Transfer Agent and Dividend Disbursing
Agent. DST agrees that it will also act as agent in connection
with the Fund's periodic withdrawal payment accounts and other
open accounts or similar plans for shareholders, if any.
C. The Fund agrees to use its reasonable efforts to deliver to
DST in Kansas City, Missouri, as soon as they are available,
all of its shareholder account records.
D. DST, utilizing TA2000(R), DST's computerized data processing
system for securityholder accounting (the "TA2000 System"),
will perform the following services as transfer and dividend
disbursing agent for the Fund, and as agent of the Fund for
shareholder accounts thereof, in a timely manner: issuing
(including countersigning), transferring and canceling share
certificates, if any; maintaining all shareholder accounts;
providing transaction journals; as requested by the Fund and
subject to payment by the Fund of an additional fee, preparing
shareholder meeting lists for use in connection with any
annual or special meeting and arrange for an affiliate to
print, mail and receive back proxies and to certify the
shareholder votes of the Fund of any portfolios thereof;
mailing shareholder reports and prospectuses; withholding, as
required by federal law, taxes on shareholder accounts,
disbursing income dividends and capital gains distributions to
shareholders, preparing, filing and mailing U.S. Treasury
Department Forms 1099, 1042, and 1042S and performing and
paying backup withholding as required for all shareholders;
preparing and mailing confirmation forms to shareholders and
dealers, as instructed, for all purchases and liquidations of
shares of the Fund and other confirmable transactions in
shareholders' accounts; recording reinvestment of dividends
and distributions in shares of the Fund; providing or making
available on-line daily and monthly reports as provided by the
TA2000 System and as requested by the Fund or its management
company; maintaining those records necessary to carry out
DST's duties hereunder, including all information reasonably
required by the Fund to account for all transactions in the
Fund shares, calculating the appropriate sales charge with
respect to each purchase of the Fund shares as set forth in
the prospectus for the Fund, determining the portion of each
sales charge payable to the dealer participating in a sale in
accordance with schedules delivered to DST by the Fund's
principal underwriter or distributor (hereinafter "principal
underwriter") from time to time, disbursing dealer commissions
collected to such dealers, determining the portion of each
sales charge payable to such principal underwriter and
disbursing such commissions to the principal underwriter;
receiving correspondence pertaining to any former, existing or
new shareholder account, processing such correspondence for
proper recordkeeping, and responding promptly to shareholder
correspondence; mailing to dealers confirmations of wire order
trades; mailing copies of shareholder statements to
shareholders and registered representatives of dealers in
accordance with the Fund's instructions; interfacing with,
accepting and effectuating order for transactions and
registration and maintenance information, all on an automated
basis, from, and providing advices to the Fund's custodian
bank and to the Fund's settlement bank in connection with the
settling of such transactions, with, the National Securities
Clearing Corporation ("NSCC") pertaining to NSCC's Fund/SERV
and Networking programs; and processing, generally on the date
of receipt, purchases or redemptions or instructions to settle
any mail or wire order purchases or redemptions received in
proper order as set forth in the prospectus, rejecting
promptly any requests not received in proper order (as defined
by the Fund or its agents), and causing exchanges of shares to
be executed in accordance with the Fund's instructions and
prospectus and the general exchange privilege applicable.
E. At the request of Fund, DST shall use reasonable efforts to
provide the services set forth in Section 4.D. other than
through DST's usual methods of and procedures to utilize the
TA2000 System, that is by using methods and procedures other
than those usually employed by DST to perform services
requiring more manual intervention by DST, either in the entry
of data, in the maintenance of account lists and/or the
effecting of transactions with respect to timers and accounts
subject to agreements with timers, or in the modification or
amendment of reports generated by the TA2000 System, or which
provides information to DST after the commencement of the
nightly processing cycle of the TA2000 System, thereby
decreasing the effective time for performance by DST (the
"Exception Services").
F. DST shall use reasonable efforts to provide, reasonably
promptly under the circumstances, the same transfer agent
services with respect to any new, additional functions or
features or any changes or improvements to existing functions
or features as provided for in the Fund's instructions,
prospectus or application as amended from time to time, for
the Fund provided (i) DST is advised in advance by the Fund of
any changes therein and (ii) the TA2000 System and the mode of
operations utilized by DST as then constituted supports such
additional functions and features. If any addition to,
improvement of or change in the features and functions
currently provided by the TA2000 System or the operations as
requested by the Fund requires an enhancement or modification
to the TA2000 System or to operations as then conducted by
DST, DST shall not be liable therefore until such modification
or enhancement is installed on the TA2000 System or new mode
of operation is instituted. If any new, additional function or
feature or change or improvement to existing functions or
features or new service or mode of operation measurably
increases DST's cost of performing the services required
hereunder at the current level of service, DST shall advise
the Fund of the amount of such increase and if the Fund elects
to utilize such function, feature or service, DST shall be
entitled to increase its fees by the amount of the increase in
costs. In no event shall DST be responsible for or liable to
provide any additional function, feature, improvement or
change in method of operation until it has consented thereto
in writing.
G. The Fund shall have the right to add new series to the TA2000
System upon at least thirty (30) days' prior written notice to
DST provided that the requirements of the new series are
generally consistent with services then being provided by DST
under this Agreement. Rates or charges for additional series
shall be as set forth in Exhibit A, as hereinafter defined,
for the remainder of the contract term except as such series
use functions, features or characteristics for which DST has
imposed an additional charge as part of its standard pricing
schedule. In the latter event, rates and charges shall be in
accordance with DST's then-standard pricing schedule.
5. Limit of Authority.
Unless otherwise expressly limited by the resolution of appointment or
by subsequent action by the Fund, the appointment of DST as Transfer
Agent will be construed to cover the full amount of authorized stock of
the class or classes for which DST is appointed as the same will, from
time to time, be constituted, and any subsequent increases in such
authorized amount.
In case of such increase the Fund will file with DST:
A. If the appointment of DST was theretofore expressly limited, a
certified copy of a resolution of the Board of Directors of
the Fund increasing the authority of DST;
B. A certified copy of the amendment to the Articles of
Incorporation of the Fund authorizing the increase of stock;
C. A certified copy of the order or consent of each governmental
or regulatory authority required by law to consent to the
issuance of the increased stock, and an opinion of counsel
that the order or consent of no other governmental or
regulatory authority is required;
D. Opinion of counsel for the Fund, as such opinion(s) have been
filed with the Fund's Registration Statement or notices
required under Rule 24f-2 under the 1940 Act, stating:
(1) The status of the additional shares of stock of the
Fund under the Securities Act of 1933, as amended,
and any other applicable federal or state statute;
and
(2) That the additional shares are validly issued, fully
paid and nonassessable.
6. Compensation and Expenses.
A. In consideration for its services hereunder as Transfer Agent
and Dividend Disbursing Agent, the Fund will pay to DST from
time to time a reasonable compensation for all services
rendered as Agent, and also, all its reasonable billable
expenses, charges, counsel fees, and other disbursements
including, in the event of a termination of this Agreement,
the post-deconversion fees ("Compensation and Expenses")
incurred in connection with the agency. Such compensation is
set forth in separate schedules to be agreed to by the Fund
and DST, copies of the initial schedules are attached hereto
as Exhibits A and B. If the Fund has not paid such
Compensation and Expenses to DST within a reasonable time, DST
may charge against any monies held under this Agreement, the
amount of any Compensation and/or Expenses for which it shall
be entitled to reimbursement under this Agreement.
B. The Fund also agrees promptly to reimburse DST for all
reasonable billable expenses or disbursements incurred by DST
in connection with the performance of services under this
Agreement including, but not limited to, expenses for postage,
express delivery services, freight charges, envelopes, checks,
drafts, forms (continuous or otherwise), specially requested
reports and statements, telephone calls, telegraphs,
stationery supplies, counsel fees, outside printing and
mailing firms (including Output Technology, Inc. and Support
Resources, Inc.), magnetic tapes, reels or cartridges (if sent
to the Fund or to a third party at the Fund's request) and
magnetic tape handling charges, off-site record storage, media
for storage of records (e.g., microfilm, microfiche, optical
platters, computer tapes), computer equipment installed at the
Fund's request at the Fund's or a third party's premises,
telecommunications equipment, telephone/telecommunication
lines between the Fund and its agents, on one hand, and DST on
the other, proxy soliciting, processing and/or tabulating
costs, second-site backup computer facility, transmission of
statement data for remote printing or processing, and National
Securities Clearing Corporation ("NSCC") transaction fees to
the extent any of the foregoing are paid by DST. The Fund
agrees to pay postage expenses at least one day in advance if
so requested. In addition, any other expenses incurred by DST
at the request or with the consent of the Fund will be
promptly reimbursed by the Fund.
C. Amounts due hereunder shall be due and paid on or before the
thirtieth (30th) business day after receipt of the statement
therefor by the Fund (the "Due Date"). The Fund is aware that
its failure to pay all amounts in a timely fashion so that
they will be received by DST on or before the Due Date will
give rise to costs to DST not contemplated by this Agreement,
including but not limited to carrying, processing and
accounting charges. Accordingly, subject to Section 6.D.
hereof, in the event that any amounts due hereunder are not
received by DST by the Due Date, the Fund shall pay a late
charge equal to the lesser of the maximum amount permitted by
applicable law or the product of that rate announced from time
to time by State Street Bank and Trust Company as its "Prime
Rate" plus three (3) percentage points times the amount
overdue, times the number of days from the Due Date up to and
including the day on which payment is received by DST divided
by 365. The parties hereby agree that such late charge
represents a fair and reasonable computation of the costs
incurred by reason of late payment or payment of amounts not
properly due. Acceptance of such late charge shall in no event
constitute a waiver of the Fund's or DST's default or prevent
the non-defaulting party from exercising any other rights and
remedies available to it.
D. In the event that any charges are disputed, the Fund shall, on
or before the Due Date, pay all undisputed amounts due
hereunder and notify DST in writing of any disputed charges
for billable expenses which it is disputing in good faith.
Payment for such disputed charges shall be due on or before
the close of the fifth (5th) business day after the day on
which DST provides to the Fund documentation which an
objective observer would agree reasonably supports the
disputed charges (the "Revised Due Date"). Late charges shall
not begin to accrue as to charges disputed in good faith until
the first business day after the Revised Due Date.
E. The fees and charges set forth on Exhibit A shall increase or
may be increased as follows:
(1) On the first day of each new term, but only in
accordance with the "Fee Increases" provision in
Exhibit A;
(2) DST may increase the fees and charges set forth on
Exhibit A upon at least ninety (90) days prior
written notice, if changes in existing laws, rules or
regulations: (i) require substantial system
modifications or (ii) materially increase cost of
performance hereunder;
(3) Upon at least ninety (90) days prior written notice,
DST may impose a reasonable charge for additional
features of TA2000 used by the Fund which features
are not consistent with the Fund's current processing
requirements; and
(4) In the event DST, at the Fund's request or direction,
performs Exception Services, DST shall be entitled to
impose a reasonable increase in the fees and charges
for such Exception Services from those set forth on
Exhibit A to the extent such Exception Services
increase DST's cost of performance.
If DST notifies the Fund of an increase in fees or charges pursuant to
subparagraph (2) of this Section 6.E., the parties shall confer, diligently and
in good faith and agree upon a new fee to cover the amount necessary, but not
more than such amount, to reimburse DST for the Fund's aliquot portion of the
cost of developing the new software to comply with regulatory charges and for
the increased cost of operation.
If DST notifies the Fund of an increase in fees or charges under
subparagraphs (3) or (4) of this Section 6.E., the parties shall confer,
diligently and in good faith, and agree upon a new fee to cover such new fund
feature.
7. Operation of DST System.
In connection with the performance of its services under this
Agreement, DST is responsible for such items as:
A. That entries in DST's records, and in the Fund's records on
the TA2000 System created by DST, accurately reflect the
orders, instructions, and other information received by DST
from the Fund, the Fund's distributor, manager or principal
underwriter, the Fund's investment adviser, or the Fund's
administrator (each an "Authorized Person"), broker-dealers
and/or shareholders;
B. That shareholder lists, shareholder account verifications,
confirmations and other shareholder account information to be
produced from its records or data be available and accurately
reflect the data in the Fund's records on the TA2000 System;
C. The accurate and timely issuance of dividend and distribution
checks in accordance with instructions received from the Fund
and the data in the Fund's records on the TA2000 System;
D. That redemption transactions and payments be effected timely,
under normal circumstances on the day of receipt, and
accurately in accordance with redemption instructions received
by DST from Authorized Persons, broker-dealers or shareholders
and the data in the Fund's records on the TA2000 System;
E. The deposit daily in the Fund's appropriate bank account of
all checks and payments received by DST from NSCC,
broker-dealers or shareholders for investment in shares;
F. Notwithstanding anything herein to the contrary, with respect
to "as of" adjustments, DST will not assume one hundred
percent (100%) responsibility for losses resulting from "as
ofs" due to clerical errors or misinterpretations of
shareholder instructions by DST, but DST will discuss with the
Fund DST's accepting liability for an "as of" on a
case-by-case basis and will accept "financial responsibility"
for a particular situation resulting in a "material" financial
loss to the Fund where DST acted in bad faith or without due
diligence. As used herein: (i) the terms "as of" or "as ofs"
refer to the situation where, as a result of DST's sole error
or omission, DST enters a transaction into the TA2000 System
on a basis of a price determined other than the price next
determined after the receipt by DST of instructions to perform
such transaction; (ii) the term "financial responsibility"
shall include only the loss experienced by the Fund during the
period between the entry of the erroneous transaction or the
omission to enter the transaction into the TA2000 System and
one (1) day after the earliest time when a record disclosing
the erroneous transaction or the omission to process shall
have been made available to or received by the presentor or
the presentor's agent [plus any delay occasioned by DST to
research and to correct the error or omission after notice
thereof has been received by DST]; and a financial loss shall
be "material" when the financial consequences to the Fund of
DST's error or omission shall have resulted in a loss to the
Fund of one full cent ($0.01) per share or greater.
G. The requiring of proper forms of instructions, signatures and
signature guarantees (1) and any necessary documents
supporting the opening of shareholder accounts, transfers,
redemptions and other shareholder account transactions, all in
conformance with DST's present procedures as set forth in its
Legal Manual, Check Acceptance Policy, Checkwriting Draft
Procedures, and Signature Guarantee Procedures (collectively
the "Procedures") with such changes or deviations therefrom as
may be from time to time required or approved by the Fund, its
investment adviser, principal underwriter or administrator, or
its or DST's counsel and the rejection of orders or
instructions not in good order in accordance with the
applicable prospectus or the Procedures;
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(1) DST shall ascertain that what reasonably purports to be an appropriate
signature guarantee is present if a signature guarantee is required, but DST
shall have no responsibility for verifying the authenticity thereof or the
authority of the person executing the signature guarantee.
H. The maintenance of customary records in connection with its
agency, and particularly those records required to be
maintained pursuant to subparagraph (2)(iv) of paragraph (b)
of Rule 31a-1 under the Investment Company Act of 1940, if
any; and
I. The maintenance of a current, duplicate set of the Fund's
essential records at a secure separate location, in a form
available and usable forthwith in the event of any breakdown
or disaster disrupting its main operation.
8. Indemnification.
A. DST shall at all times use reasonable care, due diligence and
act in good faith in performing its duties under this
Agreement. DST shall provide its services as Transfer Agent in
accordance with Section 17A of the Securities Exchange Act of
1934, and the rules and regulations thereunder. In the absence
of bad faith, willful misconduct, knowing violations of
applicable law pertaining to the manner in which transfer
agency services are to be performed by DST (excluding any
violations arising directly or indirectly out of the actions
or omissions to act of third parties unaffiliated with DST),
reckless disregard of the performance of its duties, or
negligence on its part, DST shall not be liable for any action
taken, suffered, or omitted by it or for any error of judgment
(including reasonable interpretations of unclear, ambiguous or
obscure instructions) made by it or its employees in the
performance of its duties under this Agreement. For those
activities or actions delineated in the Procedures, DST shall
be presumed to have used reasonable care, due diligence and
acted in good faith if it has acted in accordance with the
Procedures, copies of which have been provided to the SEI
Corporation ("SEI"), the administrator to the Fund and
reviewed and approved by SEI's counsel, as amended from time
to time with approval of counsel, or for any deviation
therefrom approved by the Fund or DST counsel.
B. DST shall not be responsible for, and the Fund shall indemnify
and hold DST harmless from and against, any and all losses,
damages, costs, charges, counsel fees, payments, expenses and
liability which are asserted against DST or for which DST is
to be liable, arising out of or attributable to:
(1) All actions of DST required to be taken by DST
pursuant to this Agreement, provided that DST has
acted in good faith and with due diligence and
reasonable care;
(2) The Fund's refusal or failure to comply with the
terms of this Agreement, the Fund's negligence or
willful misconduct, or the breach of any
representation or warranty of the Fund hereunder;
(3) The good faith reliance on, or the carrying out of,
any written or oral instructions or requests of
persons designated by the Fund in writing (see
Exhibit C) from time to time as authorized to give
instructions on its behalf or representatives of an
Authorized Person or DST's good faith reliance on, or
use of, information, data, records and documents
received from, or which have been prepared and/or
maintained by the Fund, its investment advisor, its
sponsor or its principal underwriter;
(4) Defaults by dealers or shareowners with respect to
payment for share orders previously entered if DST
has acted in good faith;
(5) The offer or sale of the Fund's shares in violation
of any requirement under federal securities laws or
regulations or the securities laws or regulations of
any state or in violation of any stop order or other
determination or ruling by any federal agency or
state with respect to the offer or sale of such
shares in such state (unless such violation results
from DST's failure to comply with written
instructions of the Fund or of any officer of the
Fund that no offers or sales be input into the Fund's
securityholder records in or to residents of such
state);
(6) The Fund's errors and mistakes in the use of the
TA2000 System, the data center, computer and related
equipment used to access the TA2000 System (the "DST
Facilities"), and control procedures relating thereto
in the verification of output and in the remote input
of data;
(7) Errors, inaccuracies, and omissions in, or errors,
inaccuracies or omissions of DST arising out of or
resulting from such errors, inaccuracies and
omissions in, the Fund's records, shareholder and
other records, delivered to DST hereunder by the Fund
or its prior agent(s);
(8) Actions or omissions to act by the Fund or agents
designated by the Fund with respect to duties assumed
thereby as provided for in Section 21 hereof; and
(9) DST's performance of Exception Services except where
DST acted or omitted to act in bad faith, with
reckless disregard of its obligations or with gross
negligence.
C. Except where DST is entitled to indemnification under Section
8.B. hereof and with respect to "as ofs" set forth in Section
7.F., DST shall indemnify and hold the Fund harmless from and
against any and all losses, damages, costs, charges, counsel
fees, payments, expenses and liability arising out of DST's
failure to comply with the terms of this Agreement or arising
out of or attributable to DST's negligence or willful
misconduct or breach of any representation or warranty of DST
hereunder.
D. EXCEPT FOR VIOLATIONS OF SECTION 23, IN NO EVENT AND UNDER NO
CIRCUMSTANCES SHALL EITHER PARTY TO THIS AGREEMENT BE LIABLE
TO ANYONE, INCLUDING, WITHOUT LIMITATION TO THE OTHER PARTY,
FOR CONSEQUENTIAL DAMAGES FOR ANY ACT OR FAILURE TO ACT UNDER
ANY PROVISION OF THIS AGREEMENT EVEN IF ADVISED OF THE
POSSIBILITY THEREOF.
E. Promptly after receipt by an indemnified person of notice of
the commencement of any action, such indemnified person will,
if a claim in respect thereto is to be made against an
indemnifying party hereunder, notify the indemnifying party in
writing of the commencement thereof; but the failure so to
notify the indemnifying party will not relieve an indemnifying
party from any liability that it may have to any indemnified
person for contribution or otherwise under the indemnity
agreement contained herein except to the extent it is
prejudiced as a proximate result of such failure to timely
notify. In case any such action is brought against any
indemnified person and such indemnified person seeks or
intends to seek indemnity from an indemnifying party, the
indemnifying party will be entitled to participate in, and, to
the extent that it may wish, assume the defense thereof (in
its own name or in the name and on behalf of any indemnified
party or both with counsel reasonably satisfactory to such
indemnified person); provided, however, if the defendants in
any such action include both the indemnified person and an
indemnifying party and the indemnified person shall have
reasonably concluded that there may be a conflict between the
positions of the indemnified person and an indemnifying party
in conducting the defense of any such action or that there may
be legal defenses available to it and/or other indemnified
persons which are inconsistent with those available to an
indemnifying party, the indemnified person or indemnified
persons shall have the right to select one separate counsel
(in addition to local counsel) to assume such legal defense
and to otherwise participate in the defense of such action on
behalf of such indemnified person or indemnified persons at
such indemnified party's sole expense. Upon receipt of notice
from an indemnifying party to such indemnified person of its
election so to assume the defense of such action and approval
by the indemnified person of counsel, which approval shall not
be unreasonably withheld (and any disapproval shall be
accompanied by a written statement of the reasons therefor),
the indemnifying party will not be liable to such indemnified
person hereunder for any legal or other expenses subsequently
incurred by such indemnified person in connection with the
defense thereof. An indemnifying party will not settle or
compromise or consent to the entry of any judgment with
respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified
persons are actual or potential parties to such claim, action,
suit or proceeding) unless such settlement, compromise or
consent includes an unconditional release of each indemnified
person from all liability arising out of such claim, action,
suit or proceeding. An indemnified party will not, without the
prior written consent of the indemnifying party settle or
compromise or consent to the entry of any judgment with
respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution
may be sought hereunder. If it does so, it waives its right to
indemnification therefor.
9. Certain Covenants of DST and the Fund.
A. All requisite steps will be taken by the Fund from time to
time when and as necessary to register the Fund's shares for
sale in all states in which the Fund's shares shall at the
time be offered for sale and require registration. If at any
time the Fund receives notice of any stop order or other
proceeding in any such state affecting such registration or
the sale of the Fund's shares, or of any stop order or other
proceeding under the federal securities laws affecting the
sale of the Fund's shares, the Fund will give prompt notice
thereof to DST.
B. DST hereby agrees to perform such transfer agency functions as
are set forth in Section 4.D. above and establish and maintain
facilities and procedures reasonably acceptable to the Fund
for safekeeping of stock certificates, check forms, and
facsimile signature imprinting devices, if any; and for the
preparation or use, and for keeping account of, such
certificates, forms and devices, and to carry such insurance
as it considers adequate and reasonably available.
C. To the extent required by Section 31 of the Investment Company
Act of 1940 as amended and Rules thereunder, DST agrees that
all records maintained by DST relating to the services to be
performed by DST under this Agreement are the property of the
Fund and will be preserved and will be surrendered promptly to
the Fund on request.
D. DST agrees to furnish the Fund annual reports of its financial
condition, consisting of a balance sheet, earnings statement
and any other publicly available financial information
reasonably requested by the Fund and a copy of the report
issued by its certified public accountants pursuant to Rule
17Ad-13 under the 1934 Act as filed with the SEC. The annual
financial statements will be certified by DST's certified
public accountants and may be included in DST's publicly
distributed Annual Report.
E. DST represents and agrees that it will use its reasonable
efforts to keep current on the trends of the investment
company industry relating to shareholder services and will use
its reasonable efforts to continue to modernize and improve.
F. DST will permit the Fund and its authorized representatives to
make periodic inspections of its operations as such would
involve the Fund at reasonable times during business hours.
G. DST will provide in Kansas City at the Fund's request and
expense training for the Fund's personnel in connection with
use and operation of the TA2000 System. All travel and
reimbursable expenses incurred by the Fund's personnel in
connection with and during training at DST's Facility shall be
borne by the Fund. At the Fund's option and expense, DST also
agrees to use its reasonable efforts to provide two (2) man
weeks of training at the Fund's facility for the Fund's
personnel in connection with the continued operation of the
TA2000 System. Reasonable travel, per diem and reimbursable
expenses incurred by DST personnel in connection with and
during training at the Fund's facility or in connection with
the conversion shall be borne by the Fund.
10. Recapitalization or Readjustment.
In case of any recapitalization, readjustment or other change in the
capital structure of the Fund requiring a change in the form of stock
certificates, DST will issue or register certificates in the new form
in exchange for, or in transfer of, the outstanding certificates in the
old form, upon receiving:
A. Written instructions from an officer of the Fund;
B. Certified copy of the amendment to the Articles of
Incorporation or other document effecting the change;
C. Certified copy of the order or consent of each governmental or
regulatory authority, required by law to the issuance of the
stock in the new form, and an opinion of counsel that the
order or consent of no other government or regulatory
authority is required;
D. Specimens of the new certificates in the form approved by the
Board of Directors of the Fund, with a certificate of the
Secretary of the Fund as to such approval;
E. Opinion of counsel for the Fund stating:
(1) The status of the shares of stock of the Fund in the
new form under the Securities Act of 1933, as amended
and any other applicable federal or state statute;
and
(2) That the issued shares in the new form are, and all
unissued shares will be, when issued, validly issued,
fully paid and nonassessable.
11. Reserved.
12. Death, Resignation or Removal of Signing Officer.
The Fund will file promptly with DST written notice of any change in
the officers authorized to sign written requests or instructions to
give requests or instructions, together with two signature cards
bearing the specimen signature of each newly authorized officer.
13. Future Amendments of Charter and Bylaws.
The Fund will promptly file with DST copies of all material amendments
to its Articles of Incorporation or Bylaws made after the date of this
Agreement.
14. Instructions, Opinion of Counsel and Signatures.
At any time DST may apply to any person authorized by the Fund to give
instructions to DST, and may with the approval of a Fund officer and at
the expense of the Fund, either consult with legal counsel for the Fund
or consult with counsel chosen by DST and acceptable to the Fund, with
respect to any matter arising in connection with the agency and it will
not be liable for any action taken or omitted by it in good faith in
reliance upon such instructions or upon the opinion of such counsel.
For purposes hereof, DST's internal counsel and attorneys employed by
Sonnenschein Nath & Rosenthal, DST's primary outside counsel for
transfer agent matters, are acceptable to the Fund. DST will be
protected in acting upon any paper or document reasonably believed by
it to be genuine and to have been signed by the proper person or
persons and will not be held to have notice of any change of authority
of any person, until receipt of written notice thereof from the Fund.
It will also be protected in recognizing stock certificates which it
reasonably believes to bear the proper manual or facsimile signatures
of the officers of the Fund, and the proper countersignature of any
former Transfer Agent or Registrar, or of a co-Transfer Agent or
co-Registrar.
15. Force Majeure and Disaster Recovery Plans.
A. DST shall not be responsible or liable for its failure or
delay in performance of its obligations under this Agreement
arising out of or caused, directly or indirectly, by
circumstances beyond its reasonable control, including,
without limitation: any interruption, loss or malfunction or
any utility, transportation, computer hardware, provided such
equipment has been reasonably maintained, or third party
software or communication service; inability to obtain labor,
material, equipment or transportation, or a delay in mails;
governmental or exchange action, statute, ordinance, rulings,
regulations or direction; war, strike, riot, emergency, civil
disturbance, terrorism, vandalism, explosions, labor disputes,
freezes, floods, fires, tornadoes, acts of God or public
enemy, revolutions, or insurrection; or any other cause,
contingency, circumstance or delay not subject to DST's
reasonable control which prevents or hinders DST's performance
hereunder.
B. DST currently maintains an agreement with a third party
whereby DST is to be permitted to use on a "shared use" basis
a "hot site" (the "Recovery Facility") maintained by such
party in event of a disaster rendering the DST Facilities
inoperable. DST has developed and is continually revising a
business contingency plan (the "Business Contingency Plan")
detailing which, how, when, and by whom data maintained by DST
at the DST Facilities will be installed and operated at the
Recovery Facility. Provided the Fund is paying its pro rata
portion of the charge therefor, DST will, in the event of a
disaster rendering the DST Facilities inoperable, use
reasonable efforts to convert the TA2000 System containing the
designated Fund data to the computers at the Recovery Facility
in accordance with the then current Business Contingency Plan.
C. DST also currently maintains, separate from the area in which
the operations which provides the services to the Fund
hereunder are located, a Crisis Management Center consisting
of phones, computers and the other equipment necessary to
operate a full service transfer agency business in the event
one of its operations areas is rendered inoperable. The
transfer of operations to other operating areas or to the
Crisis Management Center is also covered in DST's Business
Contingency Plan.
16. Certification of Documents.
The required copy of the Articles of Incorporation of the Fund and
copies of all amendments thereto will be certified by the Secretary of
State (or other appropriate official) of the State of Incorporation,
and if such Articles of Incorporation and amendments are required by
law to be also filed with a county, city or other officer of official
body, a certificate of such filing will appear on the certified copy
submitted to DST. A copy of the order or consent of each governmental
or regulatory authority required by law to the issuance of the stock
will be certified by the Secretary or Clerk of such governmental or
regulatory authority, under proper seal of such authority. The copy of
the Bylaws and copies of all amendments thereto, and copies of
resolutions of the Board of Directors of the Fund, will be certified by
the Secretary or an Assistant Secretary of the Fund under the Fund's
seal.
17. Records.
DST will maintain customary records in connection with its agency, and
particularly will maintain those records required to be maintained
pursuant to subparagraph (2) (iv) of paragraph (b) of Rule 31a-1 under
the Investment Company Act of 1940, if any.
18. Disposition of Books, Records and Canceled Certificates.
DST may send periodically to the Fund, or to where designated by the
Secretary or an Assistant Secretary of the Fund, all books, documents,
and all records no longer deemed needed for current purposes and stock
certificates which have been canceled in transfer or in exchange, upon
the understanding that such books, documents, records, and stock
certificates will be maintained by the Fund under and in accordance
with the requirements of Section 17Ad-7 adopted under the Securities
Exchange Act of 1934. Such materials will not be destroyed by the Fund
without the consent of DST (which consent will not be unreasonably
withheld), but will be safely stored for possible future reference.
19. Provisions Relating to DST as Transfer Agent.
A. Instructions for the transfer, exchange or redemption of
shares of the Fund will be accepted, the registration,
redemption or transfer of the shares be effected and, where
applicable, funds remitted therefor. Upon surrender of the old
certificates in form or receipt by DST of instructions deemed
by DST properly endorsed for transfer, exchange or redemption,
accompanied by such documents as DST may deem necessary to
evidence the authority of the person making the transfer,
exchange or redemption, the transfer, exchange or redemption
of the shares reflected by such certificates be effected and
any sums due in connection therewith be remitted, in
accordance with the instructions contained herein. DST
reserves the right to refuse to transfer or redeem shares
until it is satisfied that the endorsement or signature on the
instruction or any other document is valid and genuine, and
for that purpose it may require a guaranty of signature in
accordance with the Signature Guarantee Procedures. DST also
reserves the right to refuse to transfer, exchange or redeem
shares until it is satisfied that the requested transfer,
exchange or redemption is legally authorized, and DST will
incur no liability for the refusal in good faith to make
transfers or redemptions which, in its judgment, are improper
or unauthorized. DST may, in effecting transfers, exchanges or
redemptions, rely upon DST's Procedures and Simplification
Acts, Uniform Commercial Code or other statutes which protect
it and the Fund in not requiring complete fiduciary
documentation. In cases in which DST is not directed or
otherwise required to maintain the consolidated records of
shareholder's accounts, DST will not be liable for any loss
which may arise by reason of not having such records.
B. DST will, at the expense of the Fund, issue and mail
subscription warrants, effectuate stock dividends, exchanges
or split ups, or act as Conversion Agent upon receiving
written instructions from any officer of the Fund and such
other documents as DST deems necessary.
C. DST will, at the expense of the Fund, supply a shareholder's
list to the Fund for its annual meeting upon receiving a
request from an officer of the Fund. It will also, at the
expense of the Fund, supply lists at such other times as may
be requested by an officer of the Fund.
D. Upon receipt of written instructions of an officer of the
Fund, DST will, at the expense of the Fund, address and mail
notices to shareholders.
E. In case of any request or demand for the inspection of the
stock books of the Fund or any other books in the possession
of DST, DST will endeavor to notify the Fund and to secure
instructions as to permitting or refusing such inspection. DST
reserves the right, however, to exhibit the stock books or
other books to any person in case it is advised by its counsel
that it may be held responsible for the failure to exhibit the
stock books or other books to such person.
20. Provisions Relating to Dividend Disbursing Agency.
A. DST will, at the expense of the Fund, provide a special form
of check containing the imprint of any device or other matter
desired by the Fund. Said checks must, however, be of a form
and size convenient for use by DST.
B. If the Fund desires to include additional printed matter,
financial statements, etc., with the dividend checks, the same
will be furnished DST within a reasonable time prior to the
date of mailing of the dividend checks, at the expense of the
Fund.
C. If the Fund desires its distributions mailed in any special
form of envelopes, sufficient supply of the same will be
furnished to DST but the size and form of said envelopes will
be subject to the approval of DST. If stamped envelopes are
used, they must be furnished by the Fund; or if postage stamps
are to be affixed to the envelopes, the stamps or the cash
necessary for such stamps must be furnished by the Fund.
D. DST shall establish and maintain on behalf of the Fund one or
more deposit accounts as Agent for the Fund, into which DST
shall deposit the funds DST receives for payment of dividends,
distributions, redemptions or other disbursements provided for
hereunder and to draw checks against such accounts.
E. DST is authorized and directed to stop payment of checks
theretofore issued hereunder, but not presented for payment,
when the payees thereof allege either that they have not
received the checks or that such checks have been mislaid,
lost, stolen, destroyed or through no fault of theirs, are
otherwise beyond their control, and cannot be produced by them
for presentation and collection, and, to issue and deliver
duplicate checks in replacement thereof.
21. Assumption of Duties By the Fund or Agents Designated By the Fund.
A. The Fund or its designated agents other than DST may assume
certain duties and responsibilities of DST or those services
of Transfer Agent and Dividend Disbursing Agent as those terms
are referred to in Section 4.D. of this Agreement including
but not limited to answering and responding to telephone
inquiries from shareholders and brokers, accepting shareholder
and broker instructions (either or both oral and written) and
transmitting orders based on such instructions to DST,
preparing and mailing confirmations, obtaining certified TIN
numbers, classifying the status of shareholders and
shareholder accounts under applicable tax law, establishing
shareholder accounts on the TA2000 System and assigning social
codes and Taxpayer Identification Number codes thereof, and
disbursing monies of the Fund, said assumption to be embodied
in writing to be signed by both parties.
B. To the extent the Fund or its agent or affiliate assumes such
duties and responsibilities, DST shall be relieved from all
responsibility and liability therefor and is hereby
indemnified and held harmless against any liability therefrom
and in the same manner and degree as provided for in Section 8
hereof.
C. Initially the Fund or its designees shall be responsible for
the following: (i) answer and respond to phone calls from
shareholders and broker-dealers, and (ii) monitor wire order
settlements and order cancellations of unsettled trades.
22. Termination of Agreement.
A. This Agreement shall be in effect for an initial period of
three (3) years and, thereafter, shall automatically extend
for additional, successive twelve (12) month terms upon the
expiration of any term hereof unless terminated as hereinafter
provided. This Agreement may be terminated by either party
upon the expiration of any term by the delivery to the other
party of one hundred twenty (120) days prior written notice of
such termination, provided, however, that the effective date
of any termination shall not occur during the period from
November 15 through March 15 of any year to avoid adversely
impacting year end.
B. Each party, in addition to any other rights and remedies,
shall have the right to terminate this Agreement forthwith
upon the occurrence at any time of any of the following events
with respect to the other party:
(1) The bankruptcy of the other party or its assigns or
the appointment of a receiver for the other party or
its assigns; or
(2) Failure by the other party or its assigns to perform
its duties in accordance with the Agreement, which
failure materially adversely affects the business
operations of the first party and which failure
continues for thirty (30) days after receipt of
written notice from the first party.
C. Either party may terminate this Agreement at any time by
delivering to the other party written notice of such
termination at least six (6) months prior to the effective
date of such termination.
D. In the event of any termination of this Agreement, the Fund
will continue to pay to DST as invoiced all sums due for DST's
services until completion of the conversion and will pay to
DST, no later than contemporaneously with the dispatch by DST
of the Fund's records, all amounts payable to DST hereunder.
An estimated invoice for fees and reimbursable expenses will
be presented prior to conversion for amounts anticipated to
follow the conversion. The Fund should accrue appropriate
reserves in expectation of invoices/amounts which will be
generated and received following the date of conversion, which
the Fund will pay within thirty (30) days of receipt.
E. In addition, in the event of any termination, DST will,
provided the Fund contemporaneously pays all outstanding
charges and fees, promptly transfer all of the records of the
Fund to the designated successor transfer agent. DST shall
also provide reasonable assistance to the Fund and its
designated successor transfer agent and other information
relating to its services provided hereunder (subject to the
recompense of DST for such assistance and information at its
standard rates and fees for personnel then in effect at that
time); provided, however, as used herein "reasonable
assistance" and "other information" shall not include
assisting any new service or system provider to modify, alter,
enhance, or improve its system or to improve, enhance, or
alter its current system, or to provide any new, functionality
or to require DST to disclose any DST Confidential
Information, as hereinafter defined, or any information which
is otherwise confidential to DST.
F. Subsequent to any termination of this Agreement, the Fund
shall continue to pay to DST, subject to and in accordance
with the terms and conditions set forth in Sections 6.A.,
6.B., 6.C. and 6.D. of this Agreement, for all expenses
incurred on the Fund's behalf and the post-deconversion fees
set forth in Exhibit B to this Agreement (a) until the Fund
accounts are purged from the TA2000 System (no longer being
required for Year End Reporting) with respect to closed
account fees and (b) so long as DST's services are utilized by
the Fund with respect to all fees other than those for closed
accounts.
G. In any event, the effective date of any deconversion as a
result a termination of this Agreement shall not occur during
the period from November 15th through March 15th of any year
to avoid adversely impacting year end.
23. Confidentiality.
A. DST agrees that, except as provided in the last sentence of
Section 19.J. hereof, or as otherwise required by law, DST
will keep confidential all records of and information in its
possession relating to the Fund or its shareholders or
shareholder accounts and will not disclose the same to any
person except at the request or with the consent of the Fund.
B. The Fund owns all of the data supplied by or on behalf of the
Fund to DST. The Fund has proprietary rights to all such data,
records and reports containing such data, but not including
the software programs upon which such data is installed, and
all records relating to such data will be transferred in
accordance with Section 22.D above in the event of
termination.
C. The Fund agrees to keep confidential all non-public financial
statements and other financial records of DST received
hereunder, all accountants' reports relating to DST, the terms
and provisions of this Agreement, including all exhibits and
schedules now or in the future attached hereto and all
manuals, systems and other technical information and data, not
publicly disclosed, relating to DST's operations and programs
furnished to it by DST pursuant to this Agreement and will not
disclose the same to any person except at the request or with
the consent of DST.
D. (1) The Fund acknowledges that DST has proprietary rights
in and to the TA2000 System used to perform services
hereunder including, but not limited to the
maintenance of shareholder accounts and records,
processing of related information and generation of
output, including, without limitation any changes or
modifications of the TA2000 System and any other DST
programs, data bases, supporting documentation, or
procedures (collectively "DST Confidential
Information") which the Fund's access to the TA2000
System or computer hardware or software may permit
the Fund or its employees or agents to become aware
of or to access and that the DST Confidential
Information constitutes confidential material and
trade secrets of DST. The Fund agrees to maintain the
confidentiality of the DST Confidential Information.
(2) The Fund acknowledges that any unauthorized use,
misuse, disclosure or taking of DST Confidential
Information which is confidential as provided by law,
or which is a trade secret, residing or existing
internal or external to a computer, computer system,
or computer network, or the knowing and unauthorized
accessing or causing to be accessed of any computer,
computer system, or computer network, may be subject
to civil liabilities and criminal penalties under
applicable state law. The Fund will advise all of its
employees and agents who have access to any DST
Confidential Information or to any computer equipment
capable of accessing DST or DST hardware or software
of the foregoing.
(3) The Fund acknowledges that disclosure of the DST
Confidential Information may give rise to an
irreparable injury to DST inadequately compensable in
damages. Accordingly, DST may seek (without the
posting of any bond or other security) injunctive
relief against the breach of the foregoing
undertaking of confidentiality and nondisclosure, in
addition to any other legal remedies which may be
available, and the Fund consents to the obtaining of
such injunctive relief. All of the undertakings and
obligations relating to confidentiality and
nondisclosure, whether contained in this Section or
elsewhere in this Agreement shall survive the
termination or expiration of this Agreement for a
period of ten (10) years.
24. Changes and Modifications.
A. During the term of this Agreement DST will use on behalf of
the Fund without additional cost all modifications,
enhancements, or changes which DST may make to the TA2000
System in the normal course of its business and which are
applicable to functions and features offered by the Fund,
unless substantially all DST clients are charged separately
for such modifications, enhancements or changes, including,
without limitation, substantial system revisions or
modifications necessitated by changes in existing laws, rules
or regulations. The Fund agrees to pay DST promptly for
modifications and improvements which are charged for
separately at the rate provided for in DST's standard pricing
schedule which shall be identical for substantially all
clients, if a standard pricing schedule shall exist. If there
is no standard pricing schedule, the parties shall mutually
agree upon the rates to be charged.
B. DST shall have the right, at any time and from time to time,
to alter and modify any systems, programs, procedures or
facilities used or employed in performing its duties and
obligations hereunder; provided that the Fund will be notified
as promptly as possible prior to implementation of such
alterations and modifications and that no such alteration or
modification or deletion shall materially adversely change or
affect the operations and procedures of the Fund in using or
employing the TA2000 System or DST Facilities hereunder or the
reports to be generated by such system and facilities
hereunder, unless the Fund is given thirty (30) days prior
notice to allow the Fund to change its procedures and DST
provides the Fund with revised operating procedures and
controls at the time such notice is delivered to the Fund.
C. All enhancements, improvements, changes, modifications or new
features added to the TA2000 System however developed or paid
for shall be, and shall remain, the confidential and exclusive
property of, and proprietary to, DST.
25. Subcontractors.
Nothing herein shall impose any duty upon DST in connection with or
make DST liable for the actions or omissions to act of unaffiliated
third parties such as, by way of example and not limitation, Airborne
Services, the U.S. mails and telecommunication companies, provided, if
DST selected such company, DST shall have exercised due care in
selecting the same.
26. Limitations on Liability. If the Fund is comprised of more than one
Portfolio, each Portfolio shall be regarded for all purposes hereunder
as a separate party apart from each other Portfolio. Unless the context
otherwise requires, with respect to every transaction covered by this
Agreement, every reference herein to the Fund shall be deemed to relate
solely to the particular Portfolio to which such transaction relates.
Under no circumstances shall the rights, obligations or remedies with
respect to a particular Portfolio constitute a right, obligation or
remedy applicable to any other Portfolio. The use of this single
document to memorialize the separate agreement of each Portfolio is
understood to be for clerical convenience only and shall not constitute
any basis for joining the Portfolios for any reason.
27. Miscellaneous.
A. This Agreement shall be construed according to, and the rights
and liabilities of the parties hereto shall be governed by,
the laws of the State of Missouri, excluding that body of law
applicable to choice of law.
B. All terms and provisions of this Agreement shall be binding
upon, inure to the benefit of and be enforceable by the
parties hereto and their respective successors and permitted
assigns.
C. The representations and warranties, the indemnifications
extended hereunder, and the provisions of Sections 22.F and
6.A through and including 6.D., to the extent incorporated by
Section 22.F., are intended to and shall continue after and
survive the expiration, termination or cancellation of this
Agreement.
D. No provisions of this Agreement may be amended or modified in
any manner except by a written agreement properly authorized
and executed by each party hereto.
E. The captions in this Agreement are included for convenience of
reference only, and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or
effect.
F. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
G. If any part, term or provision of this Agreement is by the
courts held to be illegal, in conflict with any law or
otherwise invalid, the remaining portion or portions shall be
considered severable and not be affected, and the rights and
obligations of the parties shall be construed and enforced as
if the Agreement did not contain the particular part, term or
provision held to be illegal or invalid.
H. This Agreement may not be assigned by the Fund or DST without
the prior written consent of the other.
I. Neither the execution nor performance of this Agreement shall
be deemed to create a partnership or joint venture by and
between the Fund and DST. It is understood and agreed that all
services performed hereunder by DST shall be as an independent
contractor and not as an employee of the Fund. This Agreement
is between DST and the Fund and neither this Agreement nor the
performance of services under it shall create any rights in
any third parties. There are no third party beneficiaries
hereto.
J. Except as specifically provided herein, this Agreement does
not in any way affect any other agreements entered into among
the parties hereto and any actions taken or omitted by any
party hereunder shall not affect any rights or obligations of
any other party hereunder.
K. The failure of either party to insist upon the performance of
any terms or conditions of this Agreement or to enforce any
rights resulting from any breach of any of the terms or
conditions of this Agreement, including the payment of
damages, shall not be construed as a continuing or permanent
waiver of any such terms, conditions, rights or privileges,
but the same shall continue and remain in full force and
effect as if no such forbearance or waiver had occurred.
L. This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement, draft or
agreement or proposal with respect to the subject matter
hereof, whether oral or written, and this Agreement may not be
modified except by written instrument executed by both
parties.
M. All notices to be given hereunder shall be deemed properly
given if delivered in person or if sent by U.S. mail, first
class, postage prepaid, or if sent by facsimile and thereafter
confirmed by mail as follows:
If to DST:
DST Systems, Inc.
1055 Broadway, 7th Fl.
Kansas City, Missouri 64105
Attn: Senior Vice President-Full Service
Facsimile No.: 816-435-3455
With a copy of non-operational notices to:
DST Systems, Inc.
333 W. 11th St., 5th Fl.
Kansas City, Missouri 64105
Attn: Legal Department
Facsimile No.: 816-435-8630
If to the Fund:
First American Investment Funds, Inc.
680 East Swedesford Rd.
Wayne, Pennsylvania 19087
Attn: General Counsel
Facsimile No.: (610) 676-1040
or to such other address as shall have been specified in
writing by the party to whom such notice is to be given.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective duly authorized officers, to be effective as of the
day and year first above written.
DST SYSTEMS, INC.
By: /s/ Thomas A. McCullough
Title: Executive Vice President
FIRST AMERICAN INVESTMENT
FUNDS, INC.
By: /s/ Kate Stanton
Title: Vice President
EXHIBIT A
PAGE 1 of 4
DST SYSTEMS, INC.
FIRST AMERICAN TRANSFER AGENCY FEE PROPOSAL
EFFECTIVE JANUARY 1, 1997 THROUGH DECEMBER 31, 1999
<TABLE>
A. MINIMUM FEE
<S> <C>
Year 1 - January 1997 through December 1997
Cusips in the range 1-10 $11,000/year
Cusips in the range 11-20 $10,500/year
Cusips in the range > 20 $9,250/year
Year 2 - January 1998 through December 1998
Cusips in the range 1-10 $13,000/year
Cusips in the range 11-20 $12,500/year
Cusips in the range > 20 $11,000/year
Year 3 - January 1999 through December 1999
Cusips in the range 1-10 $15,500/year
Cusips in the range 11-20 $14,000/year
Cusips in the range > 20 $12,500/year
Note: Minimum fees set forth above apply to each cusip unless charges
included in Paragraph B below for each cusip exceed the applicable minimum
fee.
B. ACCOUNT MAINTENANCE AND PROCESSING FEES
Year 1 - January 1997 through December 1997
Open Accounts:
Daily Accrual Portfolio(s) $23.00 per account per year
Monthly Accrual Portfolio(s) $18.00 per account per year
Other Accruals Portfolio(s) $16.00 per account per year
Closed Accounts $2.85 per account per year
Year 2 - January 1998 through December 1998
Open Accounts:
Daily Accrual Portfolio(s) $24.00 per account per year
Monthly Accrual Portfolio(s) $19.00 per account per year
Other Accruals Portfolio(s) $17.00 per account per year
Closed Accounts $2.85 per account per year
Year 3 - January 1999 through December 1999
Open Accounts:
Daily Accrual Portfolio(s) $25.00 per account per year
Monthly Accrual Portfolio(s) $21.00 per account per year
Other Accruals Portfolio(s) $18.00 per account per year
Closed Accounts $2.85 per account per year
C. OPTIONAL SERVICES
Financial Intermediary Interface (includes generally Schwab and
Schwab-like interfaces, NSCC and transactions with entities entering
more than five transactions a week).
To Be Determined
12b-1 Processing $.15 per open and closed account per cycle
CDSC/Sharelot Accounting $1.90 per account per year
Ad-Hoc Reporting
Multi File Reports $400 per report
Single File Reports $250 per report
*Audio ResponseTM System - Not used currently Charges quoted upon request
*NSCC - To be determined
Escheatment Costs - as incurred
Conversion/Acquisition Costs - Out of Pocket expenses including but not
limited to travel and accommodations, programming, training, equipment
installation, etc.
*Computer/Technical Personnel:
Business Analyst/Tester:
Dedicated $70,500 per year
On Request:
Senior Staff Support $65 per hour
Staff Support $45 per hour
Clerical Support $35 per hour
Technical/Programming:
Dedicated $115,000 per year
On Request $90 per hour
Technical/C Programming:
Dedicated $140,000 per year
On Request $115 per hour
</TABLE>
EXHIBIT A
PAGE 4 of 5
NOTES TO THE ABOVE FEE SCHEDULE
A. The above schedule does not include reimbursable expenses that are
incurred on the Fund's behalf. Examples of reimbursable expenses are
set forth on page 37 of this Agreement. Reimbursable expenses are
billed separately from service fees on a monthly basis. Postage will
be paid in advance if so requested.
B. Any fees or reimbursable expenses not paid within 30 days of the date
of the original invoice will be charged a late payment fee of 1.0% per
month until payment is received.
C. The above fees, except for those indicated by an "*" are guaranteed for
a three year period. All items marked by an "*" are subject to change
with 60 day notice.
D. The monthly fee for an open account shall be charged in the month
during which an account is opened through the month in which such
account is closed. The monthly fee for a closed account shall be
charged in the month following the month during which such account is
closed and shall cease to be charged in the month following the Purge
Date, as hereinafter defined. The "Purge Date" for any year shall be
any day after June 1st of that year, as selected by the Fund, provided
that written notification is presented to DST at least forty-five (45)
days prior to the Purge Date.
FEES ACCEPTED BY:
/s/ Thomas A. McCullough /s/ Kate Stanton
- ------------------------------------ -------------------------------------
DST Systems, Inc. First American Investment Funds, Inc.
3/14/97
- ------------------------------------ -------------------------------------
Date Date
REIMBURSABLE EXPENSES
Forms
Postage (to be paid in advance if so requested)
Mailing Services
Computer Hardware and Software - specific to Fund or installed at
remote site at Fund's direction
Telecommunications Equipment and Lines/Long Distance Charges Magnetic
Tapes, Reels or Cartridges Magnetic Tape Handling Charges
Microfiche/Microfilm Freight Charges Printing Bank Wire and ACH Charges
Proxy Processing - per proxy mailed
not including postage
Includes: Proxy Card
Printing
Outgoing Envelope
Return Envelope
Tabulation and Certification
T.I.N. Certification (W-8 & W-9)
(Postage associated with the return
envelope is included)
N.S.C.C. Communications Charge To be determined
(Fund/Serv and Networking)
Off-site Record Storage
Second Site Disaster Currently $.07
Backup Fee (per account) (guaranteed not to
exceed $.11 through
12/31/97)
Transmission of Statement Data for Currently $.035/per
Remote Processing record
Travel, Per Diem and other Billables
Incurred by DST personnel traveling to,
at and from the Fund at the request
of the Fund
<PAGE>
EXHIBIT B
DST SYSTEMS, INC. / FIRST AMERICAN FUNDS
POST DECONVERSION FEE SCHEDULE
ALL FEES EFFECTIVE AS OF DECONVERSION:
ACCOUNT MAINTENANCE
Closed Accounts $.20/month/acct
Transaction/Maintenance Processing $2.50/item
Telephone Calls $4.00/call
Research Requests $40/hour (1 hr min)
PROGRAMMING
As required at DST's then current standard rates
REIMBURSABLE EXPENSES
This schedule does not include reimbursable expenses that are incurred on the
Fund's behalf. Examples of reimbursable expenses include but are not limited to
forms, postage, mailing services, telephone line/long distance charges,
transmission of statement data for remote print/mail operations, remote client
hardware, document storage, tax certification mailings, magnetic tapes,
printing, microfiche, Fed wire bank charges, ACH bank charges, NSCC charges, as
required or incurred, etc. Reimbursable expenses are billed separately from
Account Maintenance and Programming fees on a monthly basis and late payments
are subject to late charges in accordance with Section 6.C. of this Agreement.
EXHIBIT C
AUTHORIZED PERSONNEL
Pursuant to Section 8.A. of the Agency Agreement between First American
Investment Funds, Inc. (the "Fund") and DST (the "Agreement"), the Fund
authorizes the following Fund personnel to provide instructions to DST, and
receive inquiries from DST in connection with the Agreement:
Name Title
---- -----
Jeff Wilson First Bank - Managing Director of Mutual Funds
- ----------------------------- ----------------------------------------------
Ted Rice First Bank - Trust Counsel
- ----------------------------- ----------------------------------------------
Beth Zerbato SEI - Operations Manager
- ----------------------------- ----------------------------------------------
Craig Rife SEI - Account Director
- ----------------------------- ----------------------------------------------
Kim Petersen SEI - Operations Manager
- ----------------------------- ----------------------------------------------
Kate Stanton SEI - Deputy General Counsel/Vice
President/Asst. Secretary
- ----------------------------- ----------------------------------------------
Donna Rafa SEI - Mutual Fund Manager
- ----------------------------- ----------------------------------------------
This Exhibit may be revised by the Fund by providing DST with a substitute
Exhibit B. Any such substitute Exhibit B shall become effective twenty-four (24)
hours after DST's receipt of the document and shall be incorporated into the
Agreement.
ACKNOWLEDGMENT OF RECEIPT:
FIRST AMERICAN INVESTMENT
DST SYSTEMS, INC. FUNDS, INC.
By: /s/ Thomas A. McCullough By: /s/ Kate Stanton
------------------------------- ---------------------------------
Title: Executive Vice President Title: Vice President
---------------------------- ------------------------------
Date: 3/14/97 Date:
----------------------------- -------------------------------
EXHIBIT 14(a)
[LETTERHEAD]
Independent Auditors' Consent
The Board of Directors
First American Investment Funds, Inc.:
We consent to the incorporation by reference in the registration statement on
Form N-14 (the "Registration Statement") of First American Investment Funds,
Inc. (the "Funds") of our report, dated November 8, 1996, relating to the
financial statements and financial highlights of the Funds. We also consent to
the references to our Firm under the headings (a) "Financial Statements" in the
Registration Statement, (b) "Financial Highlights" in the prospectuses of the
Funds dated January 31, 1997, which are incorporated by reference in the
Registration Statement, and (c) "Custodian; Transfer Agent; Counsel;
Accountants" in the statement of additional information of the Funds dated
January 31, 1997, which is incorporated by reference in the Registration
Statement.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
August 7, 1997
EXHIBIT 14(b)
[LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
We consent to the use in the Registration Statement of First American Investment
Funds, Inc. on Form N-14, under the Securities Act of 1933, of our report dated
September 12, 1996, relating to the Qualivest Small Companies Value Fund,
Qualivest Large Companies Value Fund, Qualivest Optimized Stock Fund, Qualivest
Intermediate Bond Fund, Qualivest Diversified Bond Fund, and Qualivest
International Opportunities Fund, incorporated by reference and to the reference
to us as "experts" under the caption "Financial Statements" in such Registration
Statement.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Dayton, Ohio
August 6, 1997
EXHIBIT 16
FIRST AMERICAN INVESTMENT FUNDS, INC.
POWER OF ATTORNEY -- N-14 REGISTRATION STATEMENT
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Kathryn L. Stanton, Michael J.
Radmer, and Donna Rafa, and each of them, his or her true and lawful
attorneys-in-fact and agents, each acting alone, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign a Registration Statement on Form N-14 of First
American Investment Funds, Inc. ("FAIF"), relating to the combination of each of
Qualivest Funds' Small Companies Value Fund, Large Companies Value Fund,
Optimized Stock Fund, Intermediate Bond Fund, Diversified Bond Fund, and
International Opportunities Fund, with and into each of FAIF's Small Cap Value
Fund, Stock Fund, Equity Index Fund, Intermediate Term Income Fund, Fixed Income
Fund, and International Index Fund, respectively, and any and all amendments
thereto, including post-effective amendments, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, each acting alone, or
the substitutes for such attorneys-in-fact and agents, may lawfully do or cause
to be done by virtue hereof.
Signature Title Date
--------- ----- ----
/s/ Robert J. Dayton Director July 15, 1997
- ----------------------------
Robert J. Dayton
/s/ Virginia L. Stringer Director July 8, 1997
- ----------------------------
Virginia L. Stringer
/s/ Joseph D. Strauss Director July 7, 1997
- ----------------------------
Joseph D. Strauss
/s/ Robert L. Spies Director July 7, 1997
- ----------------------------
Robert L. Spies
/s/ Leonard W. Kedrowski Director July 3, 1997
- ----------------------------
Leonard W. Kedrowski
/s/ Andrew M. Hunter III Director July 11, 1997
- ----------------------------
Andrew M. Hunter III
/s/ Gae B. Veit Director July 7, 1997
- ----------------------------
Gae B. Veit
<PAGE 1>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D C. 50249
FORM 24F-2
Annual Notice of Securities Sold
Pursuant to Rule 24f-2
1. Name and address of issuer:
First American Investment Funds, Inc.
601 Second Ave. South
Minneapolis, MN 55402-4302
2. Name of each series or class of funds for which this notice is filed:
Intermediate Government Bond
Intermediate Tax Free Fund
Fixed Income
Stock
Special Equity
Equity Index
Regional Equity
Limited Term Income
Intermediate Term Income
Mortgage
Balanced
Asset Allocation
Colorado Intermediate Tax Free
Minnesota Insured Intermediate Tax Free
Technology
Emerging Growth
Limited Term Tax Free
Equity Income
Diversified Growth
Real Estate Securities
Limited Volatility
Health Sciences
International
3. Investment Company Act File Number: 811-3313
Securities Act File Number: 2-74747
4. Last day of fiscal year for which this notice is filed:
September 30, 1996
5. Check box if this notice is being filed more than 180 days after the close of
the issuer's fiscal year for purposes of reporting securities sold after the
close of the fiscal year but before termination of the issuer's 24f-2
declaration:
[ ]
<PAGE> 2
6. Date of termination of issuer's declaration under rule 24f-2(a)(1),
if applicable (see instruction A.6):
7. Number and amount of securities of the same class or series which had been
registered under the Securities Act of 1933 other than pursuant to rule 24f-2 in
a prior fiscal year, but which remained unsold at the beginning of the fiscal
year:
Dollars $0
Shares 0
8. Number and amount of securities registered during the fiscal year other than
pursuant to rule 24f-2:
9. Number and aggregate sale price of securities sold during the fiscal year:
Dollars $1,479,719,695
Shares 113,003,766
10. Number and aggregate sale price of securities sold during the fiscal year in
reliance upon registration pursuant to rule 24f-2:
Dollars $1,479,719,695
Shares 113,003,766
11. Number and aggregate sale price of securities issued during the fiscal
year in connection with dividend reinvestment plans, if applicable
(see Instruction B.7):
Dollars $103,677,689
Shares 7,535,796
<TABLE>
<CAPTION>
12. Calculation of registration fee:
<S> <C>
(I) Aggregate sale price of securities sold during the fiscal year in reliance
on rule 24f-2 (from Item 10): $ 1,479,719,695
(ii) Aggregate price of shares issued in connection with dividend reinvestment
plans (from Item 11, if applicable): + 103,677,689
(iii) Aggregate price of shares redeemed or repurchased during the fiscal year
(if applicable): - 739,412,047
(iv) Aggregate price of shares redeemed or repurchased and previously applied as
a reduction to filing fees pursuant to rule 24e-2 (if applicable):
(v) Net Aggregate price of securities sold and issued during the fiscal year in
reliance on rule 24f-2 [line (i), plus line (ii), less line (iii), plus line
(iv)] (if applicable): 843,985,337
(vi) Multiplier prescribed by Section 6(b) of the Securities Act of 1933 or
other applicable law or regulation (see instruction C.6): x1/33th
(vii) Fee due [line (i) or line (v) multiplied by line (vi)]: 255,753.13
</TABLE>
<PAGE> 3
13. Check box if fees are being remitted to the Commission's lockbox depository
as described in section 3a of the Commission's Rules of Informal and Other
Procedures (17 CFR 202.3a).
[x]
Date of mailing or wire transfer of filing fees to the Commission's lockbox
depository: November 25, 1996
SIGNATURES
This report has been signed below by the following person on behalf of the
issuer and in the capacities and on the dates indicated.
By (Signature and Title)* /s/Stephen G. Meyer
Stephen G. Meyer, Controller
Date November 25, 1996
EXHIBIT 17(b)
FORM OF PROXY
FUND
(A SERIES OF QUALIVEST FUNDS)
OAKS, PENNSYLVANIA 19456
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF QUALIVEST FUNDS
The undersigned hereby appoints Kathryn L. Stanton, Michael J. Radmer,
and Donna Rafa, and each of them, with power to act without the other and with
the right of substitution in each, as proxies of the undersigned and hereby
authorizes each of them to represent and to vote, as designated below, all the
shares of ___________ Fund (the "Fund"), a series of Qualivest Funds
("Qualivest"), held of record by the undersigned on ___________, 1997, at the
Special Meeting of Shareholders of the Fund to be held on ___________, 1997, or
any adjournments or postponements thereof, with all powers the undersigned would
possess if present in person. All previous proxies given with respect to the
Special Meeting hereby are revoked.
THE PROXIES ARE INSTRUCTED TO VOTE AS FOLLOWS:
1. PROPOSAL TO RATIFY AND APPROVE AN INTERIM ADVISORY AGREEMENT between
Qualivest, on behalf of the Fund, and First Bank National Association
("FBNA"), and the receipt of investment advisory fees by FBNA for the
period from August 1, 1997 forward.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. PROPOSAL TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION providing
for the transfer of the assets and liabilities of the Fund to a
corresponding fund of First American Investment Funds, Inc. ("FAIF") in
exchange for shares of designated classes of the corresponding FAIF
fund.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the annual meeting or any adjournments or
postponements thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS GIVEN, THIS
PROXY WILL BE VOTED "FOR" THE PROPOSALS ABOVE. RECEIPT OF THE NOTICE OF SPECIAL
MEETING OF SHAREHOLDERS AND THE PROXY STATEMENT RELATING TO THE MEETING IS
ACKNOWLEDGED BY YOUR EXECUTION OF THIS PROXY.
PLEASE SIGN THIS PROXY EXACTLY AS YOUR NAME APPEARS BELOW. WHEN SHARES
ARE HELD BY JOINT TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY,
EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF
A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER
AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY
PARTNER OR OTHER AUTHORIZED PERSON.
DATED: _________________________, 1997
________________________________________
Signature
________________________________________
Signature if held jointly
TO SAVE FURTHER SOLICITATION EXPENSE, PLEASE MARK, SIGN, DATE AND RETURN THIS
PROXY PROMPTLY USING THE ENCLOSED POSTAGE-PREPAID ENVELOPE.
