1933 Act Registration No. 33-16905
1940 Act Registration No. 811-5309
As filed with the Securities and Exchange Commission on January 30, 1998
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 34 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 [X]
Amendment No. 35
FIRST AMERICAN INVESTMENT FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
OAKS, PENNSYLVANIA 19456
(Address of Principal Executive Offices) (Zip Code)
(610) 676-1924
(Registrant's Telephone Number, including Area Code)
DAVID LEE
C/O SEI INVESTMENTS COMPANY, OAKS, PENNSYLVANIA 19456
(Name and Address of Agent for Service)
COPIES TO:
Kathryn Stanton, Esq. Michael J. Radmer, Esq.
SEI Investments Company James D. Alt, Esq.
Oaks, Pennsylvania 19456 Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
It is proposed that this filing shall become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b) of rule 485
[X] on January 31, 1998 pursuant to paragraph (b) of rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on January 31, 1995 pursuant to paragraph (a)(2) of Rule 485
Registrant has registered an indefinite number or amount of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940. A Rule 24f-2 Notice was filed with the Securities and Exchange
Commission on November 25, 1997.
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
POST-EFFECTIVE AMENDMENT NO. 34
CROSS REFERENCE SHEET FOR ITEMS REQUIRED BY FORM N-1A
NOTE:
PART A of this Registration Statement consists of the following documents:
(1) Retail Classes Prospectus relating to Class A and Class B Shares of
the following funds (the "Equity Funds"): Balanced Fund, Real Estate
Securities Fund, Equity Income Fund, Equity Index Fund, Stock Fund,
Diversified Growth Fund, Special Equity Fund, Regional Equity Fund,
Emerging Growth Fund, Small Cap Value Fund, Micro Cap Value Fund,
International Index Fund, International Fund, Health Sciences Fund and
Technology Fund.
(2) Institutional Class Prospectus relating to Class C Shares of the
Equity Funds.
(3) Retail Classes Prospectus relating to the Class A and Class B Shares
of the following funds (the "Fixed Income Funds"): Limited Term Income
Fund, Intermediate Term Income Fund, Fixed Income Fund and
Intermediate Government Bond Fund.
(4) Institutional Class Prospectus relating to Class C Shares of the Fixed
Income Funds.
(5) Retail Class Prospectus relating to Class A Shares of the following
funds (collectively with the Oregon Intermediate Tax Free Fund, the
"Tax Free Funds"): Intermediate Tax Free Fund, California Intermediate
Tax Free Fund, Colorado Intermediate Tax Free Fund and Minnesota
Insured Intermediate Tax Free Fund.
(6) Institutional Class Prospectus relating to Class C Shares of the Tax
Free Funds.
PART B of this Registration Statement consists of one Statement of
Additional Information which relates to all six Prospectuses listed above.
<PAGE>
CROSS REFERENCE SHEET FOR THE EQUITY FUNDS
ITEM NUMBER OF FORM N-1A
PART A CAPTION IN PROSPECTUS
RETAIL CLASSES PROSPECTUS
1 Cover Page
2 Fees and Expenses
3 Financial Highlights
4 The Funds; Investment Objectives and Policies; Special Investment
Methods
5 Management; Distributor
5A Not Applicable
6 Fund Shares; Investing in the Funds; Federal Income Taxes
7 Distributor; Investing in the Funds; Determining the Price of
Shares
8 Redeeming Shares
9 Not Applicable
INSTITUTIONAL CLASS PROSPECTUS
1 Cover Page
2 Fees and Expenses
3 Financial Highlights
4 The Funds; Investment Objectives and Policies; Special Investment
Methods
5A Not Applicable
5 Management; Distributor
6 Fund Shares; Purchases and Redemptions of Shares; Federal Income
Taxes
7 Distributor; Purchases and Redemptions of Shares
8 Purchases and Redemptions of Shares
9 Not Applicable
CAPTION IN COMBINED STATEMENT
PART B OF ADDITIONAL INFORMATION
10 Cover Page
11 Table of Contents
12 General Information
13 Additional Information Concerning Fund Investments; Investment
Restrictions
14 Directors and Executive Officers
15 Capital Stock
16 Investment Advisory and Other Services
17 Portfolio Transactions and Allocation of Brokerage
18 Not Applicable
19 Net Asset Value and Public Offering Price
20 Taxation
21 Investment Advisory and Other Services
22 Fund Performance
23 Financial Statements
<PAGE>
CROSS REFERENCE SHEET FOR THE FIXED INCOME FUNDS
ITEM NUMBER OF FORM N-1A
PART A CAPTION IN PROSPECTUS
RETAIL CLASSES PROSPECTUS
1 Cover Page
2 Fees and Expenses
3 Financial Highlights
4 The Funds; Investment Objectives and Policies; Special Investment
Methods
5 Management; Distributor
5A Not Applicable
6 Fund Shares; Investing in the Funds; Federal Income Taxes
7 Distributor; Investing in the Funds; Determining the Price of
Shares
8 Redeeming Shares
9 Not Applicable
INSTITUTIONAL CLASS PROSPECTUS
1 Cover Page
2 Fees and Expenses
3 Financial Highlights
4 The Funds; Investment Objectives and Policies; Special Investment
Methods
5A Not Applicable
5 Management; Distributor
6 Fund Shares; Purchases and Redemptions of Shares; Federal Income
Taxes
7 Distributor; Purchases and Redemptions of Shares
8 Purchases and Redemptions of Shares
9 Not Applicable
CAPTION IN COMBINED STATEMENT
PART B OF ADDITIONAL INFORMATION
10 Cover Page
11 Table of Contents
12 General Information
13 Additional Information Concerning Fund Investments; Investment
Restrictions
14 Directors and Executive Officers
15 Capital Stock
16 Investment Advisory and Other Services
17 Portfolio Transactions and Allocation of Brokerage
18 Not Applicable
19 Net Asset Value and Public Offering Price
20 Taxation
21 Investment Advisory and Other Services
22 Fund Performance
23 Financial Statements
<PAGE>
CROSS REFERENCE SHEET FOR THE TAX FREE FUNDS
ITEM NUMBER OF FORM N-1A
PART A CAPTION IN PROSPECTUS
RETAIL CLASS PROSPECTUS
1 Cover Page
2 Fees and Expenses
3 Financial Highlights
4 The Funds; Investment Objectives and Policies; Special Investment
Methods
5 Management; Distributor
5A Not Applicable
6 Fund Shares; Investing in the Funds; Federal Income Taxes
7 Distributor; Investing in the Funds; Determining the Price of
Shares
8 Redeeming Shares
9 Not Applicable
INSTITUTIONAL CLASS PROSPECTUS
1 Cover Page
2 Fees and Expenses
3 Financial Highlights
4 The Funds; Investment Objectives and Policies; Special Investment
Methods
5A Not Applicable
5 Management; Distributor
6 Fund Shares; Purchases and Redemptions of Shares; Federal Income
Taxes
7 Distributor; Purchases and Redemptions of Shares
8 Purchases and Redemptions of Shares
9 Not Applicable
CAPTION IN COMBINED STATEMENT
PART B OF ADDITIONAL INFORMATION
10 Cover Page
11 Table of Contents
12 General Information
13 Additional Information Concerning Fund Investments; Investment
Restrictions
14 Directors and Executive Officers
15 Capital Stock
16 Investment Advisory and Other Services
17 Portfolio Transactions and Allocation of Brokerage
18 Not Applicable
19 Net Asset Value and Public Offering Price
20 Taxation
21 Investment Advisory and Other Services
22 Fund Performance
23 Financial Statements
<PAGE>
JANUARY 31, 1998
EQUITY FUNDS
CLASS A AND CLASS B SHARES
Balanced Fund Emerging Growth Fund
Real Estate Securities Fund Small Cap Value Fund
Equity Income Fund Micro Cap Value Fund
Equity Index Fund International Index Fund
Stock Fund International Fund
Diversified Growth Fund Health Sciences Fund
Special Equity Fund Technology Fund
Regional Equity Fund
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(SM)
<PAGE>
TABLE OF CONTENTS
Summary 2
Fees and Expenses 6
Financial Highlights 12
The Funds 22
Investment Objectives and Policies 22
Management 37
Distributor 42
Investing in the Funds 43
Redeeming Shares 50
Determining the Price of Shares 52
Federal Income Taxes 53
Fund Shares 54
Calculation of Performance Data 55
Performance Information For Successor to
Common Trust Fund 56
Special Investment Methods 56
Information Concerning Compensation
Paid to U.S. Bank National Association,
First Trust National Association and
Other Affiliates
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
CLASS A AND CLASS B SHARES
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"):
* BALANCED FUND
* REAL ESTATE SECURITIES FUND
* EQUITY INCOME FUND
* EQUITY INDEX FUND
* STOCK FUND
* DIVERSIFIED GROWTH FUND
* SPECIAL EQUITY FUND
* REGIONAL EQUITY FUND
* EMERGING GROWTH FUND
* SMALL CAP VALUE FUND
* MICRO CAP VALUE FUND
* INTERNATIONAL INDEX FUND
* INTERNATIONAL FUND
* HEALTH SCIENCES FUND
* TECHNOLOGY FUND
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING U.S. 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 January 31, 1998 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 January 31, 1998.
<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 and Class B Shares of the following
funds (the "Funds"):
BALANCED FUND has an objective of maximizing total return (capital appreciation
plus income). The Fund seeks to achieve its objective by investing in a balanced
portfolio of equity securities and fixed income securities. Over the long term,
it is anticipated that the Fund's asset mix will average approximately 60%
equity securities and 40% fixed income securities, with the asset mix normally
ranging between 40% and 75% equity securities, between 25% and 60% fixed income
securities (including only that portion of the value of the convertible
securities attributable to their fixed income characteristics) and between 0%
and 25% money market instruments.
REAL ESTATE SECURITIES FUND has an objective of providing above average current
income and long-term capital appreciation by investing primarily in equity
securities of real estate companies. Under normal market conditions, the Fund
invests at least 65% of its total assets in income producing equity securities
of publicly traded companies principally engaged in the real estate industry. A
majority of the Fund's total assets will be invested in securities of real
estate investment trusts ("REITs"), with an expected emphasis on equity REITs.
EQUITY INCOME FUND has an objective of long-term growth of capital and income.
Under normal market conditions, the Fund invests at least 65% of its total
assets in equity securities of issuers believed by the Fund's adviser to be
characterized by sound management, the ability to finance expected growth and
the ability to pay above average dividends.
EQUITY 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"). The Fund invests primarily (at least 65% of total assets)
in common stocks included in the S&P 500. The Fund's adviser believes that its
objective can best be achieved by investing in the common stocks of
approximately 50% to 100% of the issues included in the S&P 500, depending on
the size of the Fund.
STOCK FUND has a primary objective of capital appreciation and a secondary
objective to provide current income. Under normal market conditions, the Fund
invests at least 65% of its total assets in common stocks diversified among a
broad range of industries and among companies that have a market capitalization
of at least $1 billion at the time of purchase. In selecting equity securities,
the Fund's adviser employs a value-based selection discipline, investing in
equity securities it believes are undervalued relative to other securities in
the same industry or market at the time of purchase.
DIVERSIFIED GROWTH FUND has a primary objective of long-term growth of capital
and a secondary objective to provide current income. Under normal market
conditions, the Fund invests at least 65% of its total assets in equity
securities of a diverse group of companies that, in the Fund's adviser's
judgment, exhibit a combination of above average growth in revenue and earnings,
strong management and sound and improving financial condition.
SPECIAL EQUITY 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 mid-capitalization companies (those with market capitalizations
from $1 billion to $5 billion at the time of purchase). The Fund's policy is to
invest in equity securities which the Fund's adviser believes offer the
potential for greater than average capital appreciation. In selecting equity
securities, the Fund's adviser employs a value-based selection discipline,
investing in equity securities it believes are undervalued relative to other
securities in the same industry or market at the time of purchase.
<PAGE>
REGIONAL EQUITY FUND has an objective of capital appreciation. The Fund seeks to
achieve its objective by investing, in normal market conditions, 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)
headquartered in Minnesota, North and South Dakota, Montana, Wisconsin,
Michigan, Iowa, Nebraska, Colorado and Illinois. The Fund invests in the
securities of rapidly growing companies within this size category and geographic
area. In selecting equity securities, the Fund's adviser employs a value-based
selection discipline, investing in equity securities it believes are undervalued
relative to other securities in the same industry or market at the time of
purchase.
EMERGING GROWTH FUND has an objective of growth of capital. 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) that exhibit, in the Fund's
adviser's opinion, outstanding potential for superior growth. Companies that
participate in sectors that are identified by the adviser as having long-term
growth potential generally are expected to make up a substantial portion of the
Fund's holdings.
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 employs a value-based selection discipline,
investing in equity securities it believes are undervalued relative to other
securities in the same industry or market at the time of purchase.
MICRO CAP VALUE FUND has an objective of capital appreciation. Under normal
market conditions, the Fund invests at least 65% of its total assets in equity
securities of very small-capitalization companies (those with market
capitalizations of less than $500 million at the time of purchase). In selecting
equity securities, the Fund's adviser employs a value-based selection
discipline, investing in equity securities it believes are undervalued relative
to other securities in the same industry or market 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 primarily (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.
INTERNATIONAL FUND has an objective of long-term growth of capital. Under normal
market conditions, the Fund invests at least 65% of its total assets in an
internationally diversified portfolio of equity securities which trade in
markets other than the United States. Investments are expected to be made
primarily in developed markets and larger capitalization companies. However, the
Fund also may invest in emerging markets where smaller capitalization companies
are the norm.
HEALTH SCIENCES FUND has an objective of long-term growth of capital. Under
normal market conditions, the Fund invests at least 65% of its total assets in
equity securities of companies which the Fund's adviser considers to be
principally engaged in the development, production or distribution of products
or services connected with health care or medicine.
TECHNOLOGY FUND has an objective of long-term growth of capital. Under normal
market conditions, the Fund invests at least 65% of its total assets in equity
securities of companies which the Fund's adviser believes have, or will develop,
products, processes or services that will provide or will benefit significantly
from technological advances and improvements.
<PAGE>
INVESTMENT ADVISER AND SUB-ADVISER U.S. Bank National Association (the "Adviser"
or "U.S. Bank") serves as investment adviser to each of the Funds through its
First American Asset Management group. Marvin & Palmer Associates, Inc. (the
"Sub-Adviser") serves as sub-adviser to International Fund. 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 the Distributor and certain securities
firms, financial institutions (including, without limitation, banks) and other
industry professionals may receive a commission of up to 1.00% on such sales.
Redemptions of Class A Shares within 24 months following such purchases will be
subject to a contingent deferred sales charge of up to 1.00% except in the case
of Equity Index Fund and International Index Fund. 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 the Funds 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
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 any Fund may be exchanged for the same class of shares of
other funds in the First American family of funds 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. If a
redemption request is received by an authorized financial institution, shares of
each Fund may be redeemed at their net asset value determined as of the same of
the redemption request. 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 each of the Funds other than Equity Index Fund and International Index
Fund is actively managed to a greater or lesser degree, their performance will
reflect in part the ability of the Adviser or Sub-Adviser to select securities
which are suited to achieving their investment objectives. Due to their active
management, these Funds could underperform other mutual funds with similar
investment objectives or the market generally.
In addition, (i) certain of the Funds are subject to risks associated with
investing in
<PAGE>
small-capitalization companies; (ii) Micro Cap Value Fund is subject to risks
associated with investing in very small-capitalization companies; (iii) Regional
Equity Fund is subject to risks associated with concentrating its investments in
a single geographic region; (iv) Real Estate Securities Fund, Health Sciences
Fund and Technology Fund are subject to risks associated with concentrating
their investments in a single or related economic sectors; (v) Real Estate
Securities Fund is subject to risks associated with direct investments in REITs;
(vi) International Index Fund and International Fund are subject to risks
associated with investing in foreign securities and to currency risk; (vii)
Equity Income Fund may invest a significant portion of its assets in less than
investment grade convertible debt obligations; (viii) certain Funds other than
International Index Fund and International Fund may invest specified portions of
their assets in securities of foreign issuers which are listed on a United
States stock exchange or represented by American Depository Receipts or, in the
case of Balanced Fund, are debt obligations of foreign issuers denominated in
United States dollars; and (ix) certain Funds may invest (but not for
speculative purposes) in stock index futures contracts, options on stock
indices, options on stock index futures, index participation contracts based on
the S&P 500 or the EAFE Index, and/or exchange traded put and call options on
interest rate futures contracts and on interest rates indices. See "Investment
Objectives and Policies" and "Special Investment Methods."
SHAREHOLDER INQUIRIES Any questions or communications regarding the Funds or a
shareholder account should be directed to the Distributor by calling (800)
637-2548, or to the financial institution which holds shares on an investor's
behalf.
FEES AND EXPENSES
CLASS A SHARE FEES AND EXPENSES
<TABLE>
<CAPTION>
REAL ESTATE
BALANCED SECURITIES
FUND 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 fee (after voluntary
fee waivers)(2) 0.62% 0.45%
Rule 12b-1 fees 0.25%(3) 0.25%(3)
Other expenses 0.18% 0.35%
Total fund operating expenses
(after voluntary fee waivers)(2) 1.05% 1.05%
EXAMPLE(4)
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 $ 55 $ 55
3 years $ 77 $ 77
5 years $100 $100
10 years $167 $167
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
EQUITY EQUITY DIVERSIFIED
INCOME INDEX STOCK GROWTH
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on
purchases (as a percentage of offering
price)(1) 4.50% 4.50% 4.50% 4.50%
Maximum sales load imposed on
reinvested dividends None None None None
Deferred sales load None None None None
Redemption fees None None None None
Exchange fees None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fee (after voluntary
fee waivers)(2) 0.53% 0.17% 0.61% 0.61%
Rule 12b-1 fees 0.25%(3) 0.25%(3) 0.25%(3) 0.25%(3)
Other expenses 0.22% 0.18% 0.19% 0.19%
Total fund operating expenses
(after voluntary fee waivers)(2) 1.00% 0.60% 1.05% 1.05%
EXAMPLE(4)
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 $ 55 $ 51 $ 55 $ 55
3 years $ 75 $ 63 $ 77 $ 77
5 years $ 98 $ 77 $100 $100
10 years $162 $117 $167 $167
</TABLE>
+ The advisory fees, other expenses and total fund operating expenses set
forth above reflect estimates of current expenses.
(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 the
Distributor and certain securities firms, financial institutions
(including, without limitations, banks) and other industry professionals
may receive a commission of up to 1.00% on such sales. In addition, a
contingent deferred sales charge of up to 1.00% may be imposed on such
purchases in the event of redemption within 24 months following the
purchase except in the case of Equity Index Fund and International Index
Fund. See "Investing in the Funds -- Alternative Sales Charge Options."
(2) 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 for the
current fiscal year but reserves the right to discontinue such waivers at
any time in its sole discretion. Notwithstanding the foregoing, the Adviser
will maintain such waivers of Stock Fund, Equity Index Fund, Small Cap
Value Fund and International Index Fund in effect through September 30,
1998. For Special Equity Fund and International Fund, the Adviser has
agreed to waive advisory fees on a voluntary basis to the extent necessary
to keep the total fund operating expenses for the current fiscal year from
exceeding 1.15% and 2.00%, respectively. Absent any fee waivers, investment
advisory fees as an annualized percentage of average daily net assets would
be 0.70% for each Fund except International Fund, as to which they would be
1.25%; and total fund operating expenses calculated on such basis would be
1.13% for Balanced
<PAGE>
<TABLE>
<CAPTION>
SPECIAL REGIONAL EMERGING SMALL CAP
EQUITY EQUITY GROWTH VALUE
FUND FUND FUND FUND
<S> <C> <C> <C>
4.50% 4.50% 4.50% 4.50%
None None None None
None None None None
None None None None
None None None None
0.70% 0.70% 0.69% 0.70% +
0.25%(3) 0.25%(3) 0.25%(3) 0.25%(3)
0.19% 0.20% 0.21% 0.20% +
1.14% 1.15% 1.15% 1.15% +
$ 56 $ 56 $ 56 $ 56
$ 80 $ 80 $ 80 $ 80
$105 $105 $105 $105
$177 $178 $178 $178
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
MICRO CAP INTERNATIONAL HEALTH
VALUE INDEX INTERNATIONAL SCIENCES TECHNOLOGY
FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C>
4.50% 4.50% 4.50% 4.50% 4.50%
None None None None None
None None None None None
None None None None None
None None None None None
0.53% 0.46% + 1.25% 0.56% 0.68%
0.25%(3) 0.25%(3) 0.25%(3) 0.25%(3) 0.25%(3)
0.37% 0.29% + 0.42% 0.34% 0.22%
1.15% 1.00% + 1.92% 1.15% 1.15%
$ 56 $ 55 $ 64 $ 56 $ 56
$ 80 $ 75 $103 $ 80 $ 80
$105 $ 98 $144 $105 $105
$178 $162 $259 $178 $178
</TABLE>
Fund, 1.30% for Real Estate Securities Fund, 1.17% for Equity Income Fund,
1.13% for Equity Index Fund, 1.14% for Stock Fund, 1.14% for Diversified
Growth Fund, 1.15% for Special Equity Fund, 1.15% for Regional Equity Fund,
1.16% for Emerging Growth Fund, 1.15% for Small Cap Value Fund, 1.32% for
Micro Cap Value Fund, 1.24% for International Index Fund, 1.92% for
International Fund, 1.29% for Health Sciences Fund and 1.17% for Technology
Fund. "Other expenses" includes an administration fee and, for Small Cap
Value Fund and International Index Fund, is based on estimated amounts for
the current fiscal year.
(3) Of this amount, 0.25% is designated as a shareholder servicing fee and none
as a distribution fee.
(4) Absent the fee waivers referred to in (2) above, the dollar amounts for the
1, 3, 5 and 10-year periods would be as follows: Balanced Fund $56, $79,
$104 and $176; Real Estate Securities Fund, $58, $84, $113 and $195; Equity
Income Fund, $56, $80, $106 and $181; Equity Index Fund, $56, $79, $104 and
$176; Stock Fund, $56, $80, $105 and $177; Diversified Growth Fund, $56,
$80, $105 and $177; Special Equity Fund, $56, $80, $105 and $177; Regional
Equity Fund, $56, $80, $105 and $177; Emerging Growth Fund, $56, $80, $106
and $180; Small Cap Value Fund, $56, $80, $105 and $177; Micro Cap Value
Fund, $58, $85, $114 and $197; International Index Fund, $57, $83, $110 and
$188; International Fund, $64, $103, $144 and $259; Health Sciences Fund,
$58, $84, $113 and $194; and Technology Fund, $56, $80, $106 and $181.
<PAGE>
FEES AND EXPENSES (continued)
CLASS B SHARE FEES AND EXPENSES
<TABLE>
<CAPTION>
REAL ESTATE
BALANCED SECURITIES
FUND 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) 0.62% 0.45%
Rule 12b-1 fees 1.00%(2) 1.00%(2)
Other expenses 0.18% 0.35%
Total fund operating expenses
(after voluntary fee waivers)(3) 1.80% 1.80%
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, 4%
in year 3, 2% in year 5, and automatic conversion to Class A shares at the end
of year 8:
1 year $ 68 $ 68
3 years $ 97 $ 97
5 years $117 $117
10 years $192 $192
ASSUMING NO REDEMPTION(4)
You would pay the following expenses on the same investment, assuming no
redemption:
1 year $18 $ 18
3 years $57 $ 57
5 years $97 $ 97
10 years $192 $192
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
EQUITY EQUITY DIVERSIFIED
INCOME INDEX STOCK GROWTH
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on
purchases (as a percentage of offering
price) None None None None
Maximum sales load imposed on
reinvested dividends None None None None
Maximum contingent deferred sales
charge (as a percentage of original
purchase price or redemption proceeds, as
applicable) 5.00% 5.00% 5.00% 5.00%
Redemption fees None None None None
Exchange fees None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees (after voluntary
fee waivers)(1) 0.53% 0.17% 0.61% 0.61%
Rule 12b-1 fees 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2)
Other expenses 0.22% 0.18% 0.19% 0.19%
Total fund operating expenses
(after voluntary fee waivers)(3) 1.75% 1.35% 1.80% 1.80%
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, 4%
in year 3, 2% in year 5, and automatic conversion to Class A shares at the end
of year 8:
1 year $ 68 $ 64 $ 68 $ 68
3 years $ 95 $ 83 $ 97 $ 97
5 years $ 115 $ 94 $ 117 $ 117
10 years $ 186 $ 142 $ 192 $ 192
ASSUMING NO REDEMPTION(4)
You would pay the following expenses on the same investment, assuming no
redemption:
1 year $ 18 $ 14 $ 18 $ 18
3 years $ 55 $ 43 $ 57 $ 57
5 years $ 95 $ 74 $ 97 $ 97
10 years $ 186 $ 142 $ 192 $ 192
</TABLE>
+ The advisory fees, other expenses and total fund operating expenses set
forth above reflect estimates of current expenses.
(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 for the
current fiscal year but reserves the right to discontinue such waivers at
any time in its sole discretion. For Special Equity and International Fund,
the Adviser has agreed to waive advisory fees on a voluntary basis to the
extent necessary to keep the total fund operating expenses for the current
fiscal year from exceeding 1.90% and 2.75%, respectively. Absent any fee
waivers, investment advisory fees for each Fund as an annualized percentage
of average daily net assets would be 0.70% for each Fund except
International Fund, as to which they would be 1.25%; and total fund
operating expenses calculated on such basis would be 1.88% for Balanced
Fund, 2.00% for Real Estate Securities Fund, 1.92% for Equity Income Fund,
1.88% for Equity Index Fund, 1.89% for Stock Fund, 1.89% for Diversified
Growth Fund, 1.90% for Special Equity Fund, 1.90% for Regional Equity Fund,
1.91% for Emerging Growth Fund, 1.90% for Small Cap Value Fund, 2.07% for
Micro Cap Value Fund, 1.99% for International Index Fund, 2.67% for
International Fund, 2.04% for Health Sciences Fund and 1.92% for Technology
Fund. "Other expenses" includes an administration fee and for Small Cap
Value Fund and International Index Fund is based on estimated amounts for
the current fiscal year.
<PAGE>
<TABLE>
<CAPTION>
SPECIAL REGIONAL EMERGING SMALL CAP
EQUITY EQUITY GROWTH VALUE
FUND FUND FUND FUND
<S> <C> <C> <C>
None None None None
None None None None
5.00% 5.00% 5.00% 5.00%
None None None None
None None None None
0.70% 0.70% 0.69% 0.70% +
1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2)
0.20% 0.20% 0.21% 0.20% +
1.90% 1.90% 1.90% 1.90% +
$ 69 $ 69 $ 69 $ 69
$100 $100 $100 $100
$123 $123 $123 $123
$202 $203 $203 $203
$ 19 $ 19 $ 19 $ 19
$ 60 $ 60 $ 60 $ 60
$103 $103 $103 $103
$202 $203 $203 $203
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
MICRO CAP INTERNATIONAL HEALTH
VALUE INDEX INTERNATIONAL SCIENCES TECHNOLOGY
FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C>
None None None None None
None None None None None
5.00% 5.00% 5.00% 5.00% 5.00%
None None None None None
None None None None None
0.53% 0.46% + 1.25% 0.56% 0.68%
1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2)
0.37% 0.29% + 0.42% 0.34% 0.22%
1.90% 1.75% + 2.67% 1.90% 1.90%
$ 69 $ 68 $ 77 $ 69 $ 69
$100 $ 95 $123 $100 $100
$123 $115 $161 $123 $123
$203 $186 $282 $203 $203
$ 19 $ 18 $ 27 $ 19 $ 19
$ 60 $ 55 $ 83 $ 60 $ 60
$103 $ 95 $141 $103 $103
$203 $186 $282 $203 $203
</TABLE>
(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 referred to in (1) above, the dollar amounts for the
1, 3, 5 and 10-year periods would be as follows: Balanced Fund, $69, $99,
$122 and $201; Real Estate Securities Fund, $70, $103, $128 and $213;
Equity Income Fund, $69, $100, $124 and $205; Equity Index Fund, $69, $99,
$122 and $201; Stock Fund, $69, $99, $122 and $202; Diversified Growth
Fund, $69, $99, $122 and $202; Special Equity Fund, $69, $100, $123 and
$203; Regional Equity Fund, $69, $100, $123 and $203; Emerging Growth Fund,
$69, $100, $123 and $204; Small Cap Value Fund, $69, $100, $123 and $203;
Micro Cap Value Fund, $71, $105, $131 and $221; International Index Fund,
$70, $102, $127 and $212; International Fund, $77, $123, $161 and $282;
Health Sciences Fund, $71, $104, $130 and $218; and Technology Fund, $69,
$100, $124 and $205.
(4) Absent the fee waivers referred to in (1) above (assuming no redemption),
the dollar amounts for the 1, 3, 5 and 10-year periods would be as follows:
Balanced Fund, $19, $59, $102 and $202; Real Estate Securities Fund, $21,
$64, $110 and $219; Equity Income Fund, $19, $60, $104 and $205; Equity
Index Fund, $19, $59, $102 and $202; Stock Fund, $19, $59, $102 and $202;
Diversified Growth Fund, $19, $60, $103 and $203; Special Equity Fund, $19,
$60, $103 and $203; Regional Equity Fund, $19, $59, $102 and $202; Emerging
Growth Fund, $19, $60, $103 and $204; Small Cap Value Fund, $19, $60, $103
and $203; Micro Cap Value Fund, $21, $65, $111 and $221; International
Index Fund, $20, $62, $107 and $212; International Fund, $27, $83, $141 and
$282; Health Sciences Fund, $21, $64, $110 and $218; and Technology Fund,
$19, $60, $104 and $205.
<PAGE>
FEES AND EXPENSES
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.
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
FINANCIAL HIGHLIGHTS
The following audited financial highlights for each of the Funds should be read
in conjunction with the Funds' financial statements, the related notes thereto
and the independent auditors' report of KPMG Peat Marwick LLP appearing in
FAIF's annual reports to shareholders dated September 30, 1997 and dated
November 30, 1997 (for Small Cap Value Fund and International Index Fund).
Further information about the Funds' performance is contained in such FAIF
annual reports which may be obtained without charge by calling (800) 637-2548 or
by writing SEI Investments Distribution Co., Oaks, Pennsylvania 19456.
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
For the periods ended September 30,
For a share outstanding throughout the period
<TABLE>
<CAPTION>
REALIZED AND
UNREALIZED DIVIDENDS
NET ASSET NET GAINS OR FROM NET DISTRIBUTIONS
VALUE BEGINNING INVESTMENT (LOSSES) ON INVESTMENT FROM
OF PERIOD INCOME INVESTMENTS INCOME CAPITAL GAINS
<S> <C> <C> <C> <C> <C>
BALANCED FUND Class A
1997 $ 13.14 $ 0.39 $ 2.85 $ (0.39) $ (0.58)
1996 12.12 0.39 1.43 (0.39) (0.41)
1995 10.54 0.38 1.72 (0.37) (0.15)
1994 10.73 0.34 (0.02) (0.34) (0.17)
1993(1) 10.00 0.28 0.75 (0.28) (0.02)
Class B
1997 $ 13.10 $ 0.29 $ 2.84 $ (0.29) $ (0.58)
1996 12.09 0.31 1.42 (0.31) (0.41)
1995 10.53 0.29 1.71 (0.29) (0.15)
1994(2) 10.66 0.06 (0.12) (0.07) --
REAL ESTATE SECURITIES FUND Class A
1997 $ 11.52 $ 0.72 $ 3.42 $ (0.65) $ (0.03)
1996 10.38 0.52 1.30 (0.51) --
1995(12) 10.37 -- 0.01 -- --
Class B
1997 $ 11.46 $ 0.63 $ 3.38 $ (0.57) $ (0.03)
1996 10.37 0.44 1.27 (0.45) --
1995(12) 10.37 -- -- -- --
EQUITY INCOME FUND Class A
1997 $ 12.65 $ 0.40 $ 3.40 $ (0.41) $ (0.35)
1996 11.24 0.39 1.42 (0.39) (0.01)
1995 9.89 0.41 1.33 (0.39) --
1994(3) 9.87 0.41 -- (0.39) --
1993(4)(5) 10.00 0.57 (0.14) (0.56) --
Class B
1997 $ 12.61 $ 0.29 $ 3.37 $ (0.30) $ (0.35)
1996 11.20 0.31 1.42 (0.31) (0.01)
1995 9.88 0.33 1.32 (0.33) --
1994(2) 9.87 0.04 0.02 (0.05) --
EQUITY INDEX FUND Class A
1997 $ 15.49 $ 0.12 $ 5.70 $ (0.12) $ (0.43)
1996 13.35 0.27 2.32 (0.27) (0.18)
1995 10.68 0.25 2.76 (0.25) (0.09)
1994 10.60 0.25 0.09 (0.25) (0.01)
1993(1) 10.00 0.20 0.60 (0.20) --
Class B
1997 $ 15.43 $ 0.12 $ 5.67 $ (0.12) $ (0.43)
1996 13.30 0.17 2.31 (0.17) (0.18)
1995 10.66 0.23 2.68 (0.18) (0.09)
1994(2) 10.68 0.01 0.04 (0.07) --
STOCK FUND Class A
1997 $ 22.59 $ 0.33 $ 7.90 $ (0.32) $ (1.76)
1996 19.57 0.36 4.07 (0.36) (1.05)
1995 16.51 0.33 3.64 (0.32) (0.59)
1994 16.00 0.31 1.00 (0.30) (0.50)
1993 14.04 0.22 1.99 (0.23) (0.02)
1992 13.62 0.24 0.81 (0.29) (0.34)
1991(6) 10.64 0.28 2.95 (0.22) (0.03)
1990(7) 12.09 0.25 (1.17) (0.25) (0.28)
1989(7) 10.35 0.25 1.70 (0.20) (0.01)
1988(7)(8) 10.03 0.27 0.35 (0.30) --
Class B
1997 $ 22.50 $ 0.18 $ 7.81 $ (0.18) $ (1.76)
1996 19.49 0.22 4.06 (0.22) (1.05)
1995 16.49 0.26 3.55 (0.22) (0.59)
1994(2) 16.65 0.03 (0.10) (0.09) --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
NET ASSET RATIO OF INVESTMENT AVERAGE
DISTRIBUTIONS VALUE NET ASSETS EXPENSES TO INCOME TO NET ASSETS PORTFOLIO AVERAGE
FROM RETURN END OF TOTAL END OF AVERAGE AVERAGE (EXCLUDING TURNOVER COMMISSION
OF CAPITAL PERIOD RETURN* PERIOD (000) NET ASSETS NET ASSETS WAIVERS) RATE RATE (A)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ -- $ 15.41 25.80% $ 32,309 1.05% 2.74% 1.13% 84% $0.0700
-- 13.14 15.61 20,927 1.05 3.05 1.14 73 0.0619
-- 12.12 20.57 15,288 0.99 3.41 1.19 77 --
-- 10.54 3.02 13,734 0.77 2.63 1.24 98 --
-- 10.73 10.39+ 111,225 0.75 3.31 1.29 77 --
$ -- $ 15.36 24.93% $ 43,707 1.80% 1.99% 1.88% 84% $0.0700
-- 13.10 14.78 15,542 1.80 2.32 1.89 73 0.0619
-- 12.09 19.58 3,120 1.79 2.60 1.94 77 --
-- 10.53 (0.55)+ 270 1.75 2.80 2.05 98 --
$(0.01) $ 14.97 36.77% $ 2,105 1.05% 4.46% 1.30% 14% $0.0700
(0.17) 11.52 18.17 226 1.05 4.36 1.76 8 0.0704
-- 10.38 0.00 1 1.05 0.00 2.59 0 --
$(0.01) $ 14.86 35.77% $ 3,318 1.80% 3.61% 2.00% 14% $0.0700
(0.17) 11.46 17.00 263 1.80 4.29 2.51 8 0.0704
-- 10.37 0.00 1 1.80 0.00 3.34 0 --
$ -- $ 15.69 31.16% $ 7,276 1.00% 2.96% 1.17% 39% $0.0571
-- 12.65 16.41 2,581 1.00 3.25 1.20 23 0.0700
-- 11.24 18.06 1,995 0.92 3.91 1.31 23 --
-- 9.89 4.22+ 1,852 0.88 4.88 1.39 108 --
-- 9.87 4.44+ 28,786 0.75 6.09 1.36 68 --
$ -- $ 15.62 30.06% $ 6,619 1.75% 2.19% 1.92% 39% $0.0571
-- 12.61 15.66 3,770 1.75 2.49 1.95 23 0.0700
-- 11.20 17.10 1,233 1.75 3.05 2.06 23 --
-- 9.88 0.57+ 1 1.75 4.39 2.14 108 --
$ -- $ 20.76 39.47% $ 15,977 0.60% 1.36% 1.13% 8% $0.0419
-- 15.49 19.75 6,221 0.60 1.87 1.15 10 0.0377
-- 13.35 28.90 2,140 0.57 2.16 1.20 9 --
-- 10.68 3.25 758 0.35 2.23 1.23 11 --
-- 10.60 8.02+ 139,957 0.35 2.52 1.30 1 --
$ -- $ 20.67 38.45% $ 23,733 1.35% 0.61% 1.88% 8% $0.0419
-- 15.43 18.95 8,252 1.35 1.11 1.90 10 0.0377
-- 13.30 27.87 1,197 1.35 1.34 1.95 9 --
-- 10.66 0.48+ 29 1.35 1.68 2.03 11 --
$ -- $ 28.74 38.82 $ 50,381 1.05% 1.14% 1.14% 57% $0.0640
-- 22.59 23.90 22,965 1.05 1.64 1.13 40 0.0653
-- 19.57 25.26 13,076 1.00 1.89 1.19 52 --
-- 16.51 8.35 8,421 0.76 1.51 1.20 65 --
-- 16.00 15.82 134,186 0.75 1.94 1.28 48 --
-- 14.04 7.88 3,644 1.45 1.75 4.46 39 --
-- 13.62 30.49+ 2,386 1.45 2.47 7.42 76 --
-- 10.64 (8.22) 1,161 1.45 2.24 9.47 41 --
-- 12.09 20.33 323 1.24 2.26 36.39 74 --
-- 10.35 6.40+ 206 1.02 2.67 28.60 80 --
$ -- $ 28.55 37.71% $ 53,420 1.80% 0.39% 1.89% 57% $0.0640
-- 22.50 23.08 23,316 1.80 0.89 1.88 40 0.0653
-- 19.49 24.20 7,051 1.79 1.10 1.94 52 --
-- 16.49 (0.43)+ 346 1.75 1.58 2.01 65 --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
* Total return excludes sales charges.
+ Returns, excluding sales charges, are for the period indicated and have not
been annualized.
(A) Beginning in 1996, average commission rate paid per share is disclosed for
all applicable security purchases and sales subject to commissions. The
comparability of this information may be affected by the fact that
commission rates per share vary significantly among foreign countries.
(B) Represents a distribution or partial distribution in excess of net
investment income due to the tax treatment of foreign currency related
transactions.
(1) Commenced operations on December 14, 1992. All ratios for the period have
been annualized.
(2) Class B shares have been offered since August 15, 1994. All ratios for the
period have been annualized.
(3) On April 28, 1994 the Board of Directors approved a change in this Fund's
fiscal year end from November 30 to September 30, effective September 30,
1994, and shareholders approved a change of investment adviser from
Boulevard Bank National Association to First Bank National Association. All
ratios for the period have been annualized.
(4) For the period ended November 30.
(5) Commenced operations on December 18, 1992. All ratios for the period have
been annualized.
(6) On September 3, 1991, the Board of Directors of FAIF approved a change in
FAIF's fiscal year end from October 31 to September 30, effective September
30, 1991. All ratios for the period have been annualized.
(7) For the period ended October 31.
(8) Commenced operations on December 22, 1987. All ratios for the period have
been annualized.
(9) Commenced operations on April 4, 1994. All ratios for the period have been
annualized.
(10) Class A shares have been offered since April 7, 1994. All ratios for the
period have been annualized.
(11) Commenced operations on January 31, 1996. All ratios for the period have
been annualized.
(12) Commenced operations on September 29, 1995. All ratios for the period have
been annualized.
(13) The financial highlights for International Index Fund and Small Cap Value
Fund as set forth herein include the historical financial highlights of the
Qualivest International Opportunities Fund and the Qualivest Small
Companies Value Fund, Class A shares, respectively. The assets of the
Qualivest International Opportunities Fund and the Qualivest Small
Companies Value Fund were acquired by International Index Fund and Small
Cap Value Fund, respectively, on November 21, 1997. In connection with such
acquisition, Class A and Class C shares of the Qualivest International
Opportunities Fund and the Qualivest Small Companies Value Fund were
exchanged for Class A Shares of International Index Fund and Small Cap
Value Fund, respectively.
(14) For the four month period ended November 30, 1997. All ratios for the
period have been annualized.
(15) The board of directors of FAIF approved a change in the Fund's fiscal year
end from July 31 to November 30, effective November 30, 1997.
(16) Commenced operations on August 1, 1994. All ratios for the period have been
annualized.
(17) Commenced operations on November 24, 1997. All ratios for the period have
been annualized.
(18) Commenced operations on August 8, 1997. All ratios for the period have been
annualized.
(19) For the period ended July 31.
(20) Commenced operations on July 3, 1995. All ratios for the period have been
annualized.
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
For the periods ended September 30,
For a share outstanding throughout the period
<TABLE>
<CAPTION>
REALIZED AND
UNREALIZED DIVIDENDS
NET ASSET NET GAINS OR FROM NET DISTRIBUTIONS
VALUE BEGINNING INVESTMENT (LOSSES) ON INVESTMENT FROM
OF PERIOD INCOME INVESTMENTS INCOME CAPITAL GAINS
<S> <C> <C> <C> <C> <C>
DIVERSIFIED GROWTH FUND Class A
1997 $ 13.63 $ 0.09 $ 4.28 $ (0.10) $ (0.27)
1996 11.75 0.15 1.88 (0.15) --
1995 9.09 0.15 2.66 (0.15) --
1994(3) 9.39 0.10 (0.29) (0.11) --
1993(4)(5) 10.00 0.11 (0.63) (0.09) --
Class B
1997 $ 13.57 $ 0.01 $ 4.18 $ (0.02) $ (0.27)
1996 11.73 0.08 1.84 (0.08) --
1995 9.09 0.09 2.65 (0.10) --
1994(2) 8.87 0.01 0.23 (0.02) --
SPECIAL EQUITY FUND Class A
1997 $ 20.41 $ 0.11 $ 6.98 $ (0.11) $ (3.20)
1996 17.89 0.20 3.94 (0.20) (1.42)
1995 17.30 0.35 1.60 (0.34) (1.02)
1994 15.81 0.28 2.52 (0.28) (1.03)
1993 13.61 0.23 2.32 (0.25) (0.10)
1992 12.98 0.21 1.61 (0.27) (0.92)
1991(6) 10.33 0.30 2.61 (0.26) --
1990(7) 12.96 0.47 (2.03) (0.46) (0.61)
1989(7) 11.55 0.47 1.39 (0.41) (0.04)
1988(7)(8) 10.03 0.34 1.57 (0.39) --
Class B
1997 $ 20.31 $ 0.02 $ 6.85 $ (0.02) $ (3.20)
1996 17.83 0.09 3.91 (0.10) (1.42)
1995 17.29 0.29 1.51 (0.24) (1.02)
1994(2) 16.51 0.01 0.85 (0.08) --
REGIONAL EQUITY FUND Class A
1997 $ 17.71 $ 0.03 $ 6.14 $ (0.07) $ (0.69)
1996 17.12 0.04 1.70 (0.04) (1.11)
1995 12.52 0.08 4.90 (0.06) (0.32)
1994 11.96 0.08 0.71 (0.07) (0.16)
1993(1) 10.00 0.05 1.96 (0.05) --
Class B
1997 $ 17.47 $ (0.03) $ 5.97 $ -- $ (0.69)
1996 16.99 (0.04) 1.64 (0.01) (1.11)
1995 12.50 0.04 4.80 (0.03) (0.32)
1994(2) 12.19 -- 0.33 (0.02) --
EMERGING GROWTH FUND Class A
1997 $ 14.77 $ (0.07) $ 3.51 $ -- $ (0.66)
1996 13.40 (0.06) 1.78 -- (0.35)
1995 10.57 0.01 2.99 (0.02) (0.15)
1994(9) 10.00 0.01 0.57 (0.01) --
Class B
1997 $ 14.53 $ (0.16) $ 3.44 $ -- $ (0.66)
1996 13.29 (0.12) 1.71 -- (0.35)
1995 10.55 (0.03) 2.92 -- (0.15)
1994(2) 9.89 (0.01) 0.67 -- --
SMALL CAP VALUE FUND(13) Class A
1997(14)(15) $ 17.86 $ (0.03) $ 0.37 $ -- $ --
1997(19) 13.95 0.01 5.43 (0.01) (1.52)
1996(19) 13.23 0.04 1.83 (0.04) (1.11)
1995(16)(19) 10.00 0.09 3.29 (0.10) (0.05)
Class B
1997(17) $ 18.36 $ (0.00) $ (0.13) $ -- $ --
MICRO CAP VALUE FUND Class A
1997(18) $ 10.00 $ -- $ 0.96 $ -- $ --
Class B
1997(18) $ 10.00 $ -- $ 0.95 $ -- $ --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
NET ASSET NET RATIO OF INVESTMENT AVERAGE
DISTRIBUTIONS VALUE ASSETS EXPENSES TO INCOME (LOSS) NET ASSETS PORTFOLIO AVERAGE
FROM RETURN END OF TOTAL END OF AVERAGE TO AVERAGE (EXCLUDING TURNOVER COMMISSION
OF CAPITAL PERIOD RETURN* PERIOD (000) NET ASSETS NET ASSETS WAIVERS) RATE RATE (A)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ -- $ 17.63 32.69% $12,017 1.05% 0.57% 1.14% 34% $ 0.0633
-- 13.63 17.38 5,318 1.04 1.13 1.17 21 0.0593
-- 11.75 31.21 2,710 0.92 1.52 1.26 28 --
-- 9.09 (2.07)+ 1,900 0.90 1.15 1.33 101 --
-- 9.39 (5.18)+ 31,084 0.78 1.26 1.25 5 --
$ -- $ 17.47 31.42% $ 9,487 1.80% (0.18)% 1.89% 34% $ 0.0633
-- 13.57 16.41 5,775 1.79 0.36 1.92 21 0.0593
-- 11.73 30.29 819 1.75 0.58 2.01 28 --
-- 9.09 2.75+ 12 1.75 1.20 2.08 101 --
$ -- $ 24.19 39.93% $35,207 1.14% 0.58% 1.15% 82% $ 0.0691
-- 20.41 25.23 17,987 1.13 1.06 1.13 143 0.0673
-- 17.89 12.63 11,609 1.09 2.08 1.20 72 --
-- 17.30 18.70 7,333 0.81 1.88 1.23 116 --
-- 15.81 18.91 81,899 0.81 2.07 1.31 104 --
-- 13.61 15.17 3,586 1.50 1.61 4.18 146 --
-- 12.98 28.38+ 3,423 1.50 2.60 5.13 116 --
-- 10.33 (13.24) 2,761 1.50 4.09 4.21 113 --
-- 12.96 17.41 2,000 1.38 4.07 8.68 102 --
-- 11.55 19.56+ 578 1.20 4.02 15.60 51 --
$ -- $ 23.96 38.81% $36,649 1.90% (0.18)% 1.90% 82% $ 0.0691
-- 20.31 24.35 12,847 1.88 0.25 1.88 143 0.0673
-- 17.83 11.64 4,847 1.88 1.22 1.95 72 --
-- 17.29 5.22+ 370 1.68 0.47 2.03 116 --
$ -- $ 23.12 36.13% $37,677 1.15% 0.11% 1.15% 17% $ 0.0699
-- 17.71 10.97 25,325 1.13 0.24 1.15 36 0.0697
-- 17.12 41.17 14,917 1.05 0.58 1.20 42 --
-- 12.52 6.76 8,345 0.82 0.59 1.25 41 --
-- 11.96 20.17+ 58,427 0.80 0.59 1.30 28 --
$ -- $ 22.72 35.18% $39,683 1.90% (0.65)% 1.90% 17% $ 0.0699
-- 17.47 10.14 27,671 1.88 (0.52) 1.90 36 0.0697
-- 16.99 39.98 7,630 1.84 (0.25) 1.95 42 --
-- 12.50 2.73+ 185 1.80 (0.41) 2.05 41 --
$ -- $ 17.55 24.73% $ 5,270 1.15% (0.51)% 1.16% 54% $ 0.0681
-- 14.77 13.21 1,867 1.14 (0.52) 1.21 39 0.0700
-- 13.40 28.82 386 1.04 0.00 1.44 51 --
-- 10.57 5.88+ 91 0.79 0.23 2.84 19 --
$ -- $ 17.15 24.01% $ 1,263 1.90% (1.28)% 1.91% 54% $ 0.0681
-- 14.53 12.32 799 1.89 (1.26) 1.96 39 0.0700
-- 13.29 27.89 268 1.84 (0.83) 2.19 51 --
-- 10.55 6.67+ 18 1.80 (0.85) 3.59 19 --
$ -- $ 18.20 1.90%+ $19,194 1.37% (0.37)% 1.37% 3% $ 0.0638
-- 17.86 41.71 22,429 1.31 0.01 1.31 29 0.0519
-- 13.95 14.93 10,247 1.33 0.14 1.33 34 0.0398
-- 13.23 34.29+ 1,569 1.11 0.63 1.38 37 N/A
$ -- $ 18.23 (0.70)%+ $ 1 1.90% (1.53)% 1.90% 3% $ 0.0638
$ -- $ 10.96 9.60% $ 44 1.15% (0.25)% 1.32% 0% $ 0.0676
$ -- $ 10.95 9.50% $ 50 1.90% (1.04)% 2.07% 0% $ 0.0676
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
For the periods ended September 30,
For a share outstanding throughout the period
<TABLE>
<CAPTION>
REALIZED AND
UNREALIZED DIVIDENDS
NET ASSET NET GAINS OR FROM NET DISTRIBUTIONS
VALUE BEGINNING INVESTMENT (LOSSES) ON INVESTMENT FROM
OF PERIOD INCOME INVESTMENTS INCOME CAPITAL GAINS
<S> <C> <C> <C> <C> <C>
INTERNATIONAL INDEX FUND(13) Class A
1997(14)(15) $ 12.32 $ 0.05 $ (1.41) $ (0.02) $ --
1997(19) 10.64 0.10 1.70 (0.10)(B) (0.02)
1996(19) 10.45 0.07 0.17 (0.05) --
1995(19)(20) 10.00 -- 0.45 -- --
Class B(17)
1997 $ 11.08 $ 0.00 $ (0.09) $ -- $ --
INTERNATIONAL FUND Class A
1997 $ 10.28 $ 0.01 $ 3.04 $ (0.15)(B) $ --
1996 10.28 (0.02) 0.20 (0.18)(B) --
1995 10.21 -- 0.07 -- --
1994(10) 9.98 (0.01) 0.24 -- --
Class B
1997 $ 10.14 $ (0.08) $ 3.01 $ (0.10)(B) $ --
1996 10.20 (0.07) 0.17 (0.16)(B) --
1995 10.21 (0.03) 0.02 -- --
1994(2) 10.23 (0.01) (0.01) -- --
HEALTH SCIENCES FUND Class A
1997 $ 9.86 $ (0.01) $ 2.30 $ -- $ (0.10)
1996(11) 10.00 0.01 (0.14) (0.01) --
Class B
1997 $ 9.81 $ (0.01) $ 2.20 $ -- $ (0.10)
1996(11) 10.00 (0.02) (0.16) (0.01) --
TECHNOLOGY FUND Class A
1997 $ 19.25 $ (0.11) $ 3.12 $ -- $ (2.06)
1996 18.24 (0.05) 2.95 -- (1.89)
1995 11.19 (0.03) 7.31 -- (0.23)
1994(9) 10.00 (0.01) 1.20 -- --
Class B
1997 $ 18.85 $ (0.20) $ 2.99 $ -- $ (2.06)
1996 18.02 (0.14) 2.86 -- (1.89)
1995 11.17 (0.04) 7.12 -- (0.23)
1994(2) 9.85 (0.02) 1.34 -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
NET ASSET NET RATIO OF INVESTMENT AVERAGE
DISTRIBUTIONS VALUE ASSETS EXPENSES TO INCOME (LOSS) NET ASSETS PORTFOLIO AVERAGE
FROM RETURN END OF TOTAL END OF AVERAGE TO AVERAGE (EXCLUDING TURNOVER COMMISSION
OF CAPITAL PERIOD RETURN* PERIOD (000) NET ASSETS NET ASSETS WAIVERS) RATE RATE (A)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ -- $ 10.94 (11.03)%+ $1,270 0.92% 0.98% 1.21% 0% $ 0.0207
-- 12.32 17.03 1,605 0.98 0.90 1.28 3 0.0241
-- 10.64 2.29 2,005 1.06 0.84 1.35 6 0.0221
-- 10.45 4.50+ 20 1.40 0.23 1.54 0 N/A
$ -- $ 10.99 (0.36)%+ $ 1 1.29% 0.00% 1.29% 0% $ 0.0207
$ -- $ 13.18 30.03% $8,003 1.92% (0.09)% 1.92% 96% $ 0.0199
-- 10.28 1.84 1,964 1.97 (0.28) 1.97 100 0.0345
-- 10.28 0.69 876 1.93 (0.13) 2.06 57 --
-- 10.21 2.30+ 464 1.75 (0.26) 2.30 16 --
$ -- $ 12.97 29.13% $2,188 2.67% (0.94)% 2.67 96% $ 0.0199
-- 10.14 1.02 1,175 2.72 (0.96) 2.72 100 0.0345
-- 10.20 (0.10) 306 2.76 (0.95) 2.81 57 --
-- 10.21 (0.20)+ 22 2.75 (0.71) 3.05 16 --
$ -- $ 12.05 23.60% $ 849 1.15% (0.20)% 1.29% 54% $ 0.0695
-- 9.86 (1.32)+ 629 1.15 0.18 2.12 19 0.0700
$ -- $ 11.90 22.69% $ 516 1.90% (0.94)% 2.04% 54% $ 0.0695
-- 9.81 (1.86)+ 281 1.90 (0.61) 2.87 19 0.0700
$ -- $ 20.20 17.71% $5,564 1.15% (0.59)% 1.17% 150% $ 0.0675
-- 19.25 18.60 4,799 1.15 (0.85) 1.26 119 0.0700
-- 18.24 66.22 1,464 1.13 (0.61) 1.55 74 --
-- 11.19 11.90+ 61 0.80 (0.21) 3.37 43 --
$ -- $ 19.58 16.82% $8,463 1.90% (1.41)% 1.92% 150% $ 0.0675
-- 18.85 17.75 4,881 1.90 (1.60) 2.01 119 0.0700
-- 18.02 64.52 2,031 1.88 (1.41) 2.30 74 --
-- 11.17 13.40+ 2 1.80 (1.44) 4.12 43 --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
The following unaudited financial highlights for Micro Cap Value Fund for
the period commencing August 8, 1997 and ending December 31, 1997 should be read
in conjunction with the Fund's unaudited financial statements and the related
notes thereto appearing in the Funds' Statement of Additional Information dated
January 31, 1998.
Further information about the Fund's performance for the period commencing
August 8, 1997 and ending December 31, 1997 is contained in such Statement of
Additional Information, which may be obtained without charge by calling (800)
637-2548 or by writing SEI Investments Distribution Co., Oaks, Pennsylvania
19456.
For the period ended December 31, 1997.
<TABLE>
<CAPTION>
REALIZED AND DIVIDENDS
NET ASSET NET UNREALIZED FROM NET DISTRIBUTION
VALUE BEGINNING INVESTMENT GAINS ON INVESTMENT FROM
OF PERIOD INCOME INVESTMENTS INCOME CAPITAL GAIN
Micro Cap Value Fund (1)
<S> <C> <C> <C> <C> <C>
Class A $10.00 $ -- $(0.01) $ 0.00 $(0.59)
Class B $10.00 $ -- $(0.06) $ -- $(0.59)
</TABLE>
WIDE TABLE CONTINUED
<TABLE>
<CAPTION>
RATIO OF
NET RATIO OF NET EXPENSES TO
NET ASSET ASSETS RATIO OF INVESTMENT AVERAGE
VALUE END OF EXPENSES TO INCOME TO NET ASSETS AVERAGE
END OF TOTAL PERIOD AVERAGE AVERAGE (EXCLUDING PORTFOLIO COMMISSION
PERIOD RETURN (000) NET ASSETS NET ASSETS WAIVERS) TURNOVER (B)
Micro Cap Value Fund (1)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $ 9.40 0.08%+ $ 274 1.13% 0.06% 1.14% 2% $0.0622
Class B $ 9.35 (0.46)%+ $ 127 1.88% -(0.63)% 1.91% 2% $0.0622
</TABLE>
+ Returns are for the period indicated and have not been annualized.
(1) Commenced operations on August 8, 1997. All ratios for the period have been
annualized.
<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 three separate classes (Class A, Class
B and Class C) 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 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 except Real Estate Securities Fund, Health
Sciences Fund and Technology Fund is a diversified investment company, as
defined in the Investment Company Act of 1940 (the 1940 Act"). Real Estate
Securities Fund, Health Sciences Fund and Technology Fund are non-diversified
companies under the 1940 Act.
If a percentage limitation on investments by a Fund stated below or in the
Statement of Additional Information is adhered to at the time of an investment,
a later increase or decrease in percentage resulting from changes in asset
values will not be deemed to violate the limitation except in the case of the
limitation on illiquid investments. 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 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, except in the case of
Equity Income Fund, in no event will more than 5% of any Fund's net assets be
invested in non-investment grade securities. Descriptions of the rating
categories of Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies, Inc. ("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."
<PAGE>
BALANCED FUND
OBJECTIVE. Balanced Fund has an objective of maximizing total return (capital
appreciation plus income).
INVESTMENT POLICIES. Balanced Fund seeks to achieve its objective by investing
in a balanced portfolio of equity securities and fixed income securities. Over
the long term, it is anticipated that the Fund's asset mix will average
approximately 60% equity securities and 40% fixed income securities with the
asset mix normally ranging between 40% and 75% equity securities, between 25%
and 60% fixed income securities (including only that portion of the value of
convertible securities attributable to their fixed income characteristics), and
between 0% and 25% money market instruments. The Adviser may make moderate
shifts among asset classes in order to attempt to increase returns or reduce
risk.
With respect to the equity security portion of the Fund's portfolio, the Adviser
follows the same investment policies as are described below under "-- Stock Fund
- -- Investment Policies."
The fixed income portion of the Fund's portfolio is invested in investment grade
debt securities, at least 65% of which are United States Government obligations
and corporate debt obligations and mortgage-related securities rated at least A
by Standard & Poor's or Moody's or which have been assigned an equivalent rating
by another nationally recognized statistical rating organization. Under normal
market conditions, the weighted average maturity of the fixed income securities
held by the Fund will not exceed 15 years.
The Fund's permitted fixed income investments include notes, bonds and discount
notes of United States Government agencies or instrumentalities; domestic issues
of corporate debt obligations having floating or fixed rates of interest and
rated at least BBB by Standard & Poor's or Baa by Moody's, or which have been
assigned an equivalent rating by another nationally recognized statistical
rating organization, or which are of comparable quality in the judgment of the
Adviser; other investments, including mortgage-backed securities, which are
rated in one of the four highest categories by a nationally recognized
statistical rating organization or which are of comparable quality in the
judgment of the Adviser; and commercial paper which is rated A-1 by Standard &
Poor's or P-1 by Moody's or which has been assigned an equivalent rating by
another nationally recognized statistical rating organization. Unrated
securities will not exceed 10% in the aggregate of the value of the total fixed
income securities held by the Fund.
Subject to the foregoing limitations, the fixed income securities in which the
Fund may invest include (i) mortgage-backed securities (provided that the Fund
will not invest more than 10% of its total fixed income assets in interest-only,
principal-only or inverse floating rate mortgage-backed securities); (ii)
asset-backed securities; and (iii) bank instruments. In addition, the Fund may
invest up to 15% of its total fixed income assets in foreign securities payable
in United States dollars. For information about these kinds of investments and
certain associated risks, see the related headings under "Special Investment
Methods," and for information concerning certain risks associated with investing
in fixed income securities generally, see "Special Investment Methods -- Fixed
Income 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 and write call options on stock indices
related to such equity securities; (iv) purchase securities on a when-issued or
delayed delivery basis; (v) engage in the lending of portfolio securities; (vi)
in order to attempt to reduce risk, invest in exchange traded put and call
options on interest rate futures contracts and on interest rate indices; and
(vii) in order to attempt to reduce risk, write covered call options on interest
rate indices. For information about these investment methods, restrictions on
their use, and certain
<PAGE>
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.
REAL ESTATE SECURITIES FUND
OBJECTIVE. Real Estate Securities Fund has an objective of providing above
average current income and long-term capital appreciation by investing primarily
in equity securities of real estate companies.
INVESTMENT POLICIES. Under normal market conditions, Real Estate Securities Fund
invests at least 65% of its total assets in income producing equity securities
of publicly traded companies principally engaged in the real estate industry.
For this purpose, a company is deemed to be "principally engaged" in the real
estate industry if (i) it derives at least 50% of its revenues or profits from
the ownership, construction, management, financing or sale of residential,
commercial or industrial real estate, or (ii) has at least 50% of the fair
market value of its assets invested in such real estate. The Fund seeks to
invest in equity securities that provide a dividend yield that exceeds the
composite dividend yield of the securities included in the S&P 500.
A majority of the Fund's total assets will be invested in securities of real
estate investment trusts ("REITs"). REITs are publicly traded corporations or
trusts that specialize in acquiring, holding, and managing residential,
commercial or industrial real estate. A REIT is not taxed at the entity level on
income distributed to its shareholders or unitholders if it distributes to
shareholders or unitholders at least 95% of its taxable income for each taxable
year and complies with regulatory requirements relating to its organization,
ownership, assets and income.
REITs generally can be classified as Equity REITs, Mortgage REITs, and Hybrid
REITs. An Equity REIT invests the majority of its assets directly in real
property and derives its income primarily from rents and from capital gains on
real estate appreciation which are realized through property sales. A Mortgage
REIT invests the majority of its assets in real estate mortgage loans and
derives its income primarily from interest payments. A Hybrid REIT combines the
characteristics of an Equity REIT and a Mortgage REIT. Although the Fund can
invest in all three kinds of REITs, its emphasis is expected to be on
investments in Equity REITs.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund and write call options on stock indices
related to such equity securities; (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, the Fund may without limitation hold cash or
invest in cash items of the kinds described under "Special Investment
<PAGE>
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.
Because Real Estate Securities Fund invests primarily in the real estate
industry, it is particularly subject to risks associated with that industry. The
real estate industry has been subject to substantial fluctuations and declines
on a local, regional and national basis in the past and may continue to be in
the future. Real property values and incomes from real property may decline due
to general and local economic conditions, overbuilding and increased
competition, increases in property taxes and operating expenses, changes in
zoning laws, casualty or condemnation losses, regulatory limitations on rents,
changes in neighborhoods and in demographics, increases in market interest
rates, or other factors. Factors such as these may adversely affect companies
which own and operate real estate directly, companies which lend to such
companies, and companies which service the real estate industry. Although the
Fund will operate as a non-diversified investment company under the 1940 Act, it
intends to conduct its operations so as to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended.
Because the Fund may invest a substantial portion of its assets in REITs, it
also is subject to risks associated with direct investments in REITs. Equity
REITs will be affected by changes in the values of and incomes from the
properties they own, while Mortgage REITs may be affected by the credit quality
of the mortgage loans they hold. In addition, REITs are dependent on specialized
management skills and on their ability to generate cash flow for operating
purposes and to make distributions to shareholders or unitholders. REITs may
have limited diversification and are subject to risks associated with obtaining
financing for real property, as well as to the risk of self-liquidation. REITs
also can be adversely affected by their failure to qualify for tax-free
pass-through treatment of their income under the Code or their failure to
maintain an exemption from registration under the 1940 Act. By investing in
REITs indirectly through the Fund, a shareholder bears not only a proportionate
share of the expenses of the Fund, but also may indirectly bear similar expenses
of some of the REITs in which it invests.
EQUITY INCOME FUND
OBJECTIVE. Equity Income Fund has an objective of long-term growth of capital
and income.
INVESTMENT POLICIES. Under normal market conditions, Equity Income Fund invests
at least 65% of its total assets in equity securities of issuers believed by the
Adviser to be characterized by sound management, the ability to finance expected
growth and the ability to pay above average dividends.
The Fund invests in equity securities that have relatively high dividend yields
and which, in the Adviser's opinion, will result in a relatively stable Fund
dividend with a growth rate sufficient to maintain the purchasing power of the
income stream. Although the Adviser anticipates that higher yielding equity
securities will generally represent the core holdings of the Fund, the Fund may
invest in lower yielding but higher growth equity securities to the extent that
the Adviser believes such investments are appropriate to achieve portfolio
balance. All securities held by the Fund will provide current income consistent
with the Fund's investment objective.
The "equity securities" in which the Fund may invest include corporate debt
obligations which are convertible into common stock. These convertible debt
obligations may include obligations rated at the time of purchase 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, or which are of comparable quality in the judgment of the Adviser.
Debt obligations rated less than BBB by Standard & Poor's or Baa by Moody's are
considered to be less than "investment grade" and are sometimes referred to as
"junk bonds." Obligations rated CCC by
<PAGE>
Standard & Poor's or Caa by Moody's are considered to be of poor standing and
are predominantly speculative. Descriptions of Standard & Poor's and Moody's
rating categories are contained in the Statement of Additional Information. If
the rating of an obligation is reduced below the categories set forth above
after purchase or is discontinued, the Fund is not required to sell the
obligation but may consider doing so.
Purchases of less than investment grade convertible debt obligations are
intended to advance the Fund's objective of long-term growth of capital through
the "upside" potential of the obligations' conversion features and to advance
the Fund's objective of income through receipt of interest payable on the
obligations. The Fund will not invest more than 25% of its total assets in
convertible debt obligations which are rated less than investment grade or which
are of comparable quality in the judgment of the Adviser. For the year ended
September 30, 1997, the following weighted average percentages of the Fund's
total assets were invested in convertible and nonconvertible debt obligations
with the indicated Standard & Poor's ratings or their equivalents: AAA, 0%; AA,
0%; A, 0%; BBB, 1%; BB, 0%; B, 1%; and CCC, 0%.
Debt obligations which are rated less than investment grade generally are
subject to greater market fluctuations and greater risk of loss of income and
principal due to default by the issuer than are higher-rated obligations. The
value of these obligations tends to reflect short-term corporate, economic,
interest rate and market developments and investor perceptions of the issuer's
credit quality to a greater extent than investment grade obligations. In
addition, since the market for these obligations is relatively new and does not
have as many participants as the market for higher-rated obligations, it may be
more difficult to dispose of or to determine the value of these obligations. In
the case of a convertible debt obligation, these risks may be present in a
greater degree where the principal amount of the obligation is greater than the
current market value of the common stock into which it is convertible.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund and write call options on stock indices
related to such equity securities; (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, 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.
EQUITY INDEX FUND
OBJECTIVE. Equity 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. Equity Index Fund invests primarily (at least 65% of total
assets) in common stocks included in the S&P 500. The Adviser believes that the
Fund's objective can best
<PAGE>
be achieved by investing in the common stocks of approximately 50% to 100% of
the issues included in the S&P 500, depending on the size of the Fund.
Standard & Poor's designates the stocks included in the S&P 500 on a statistical
basis. A particular stock's weighting in the S&P 500 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 S&P 500. From time
to time, Standard & Poor's may add or delete stocks to or from the S&P 500.
Inclusion of a particular stock in the S&P 500 does not imply any opinion by
Standard & Poor's as to its merits as an investment, nor is Standard & Poor's 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 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. Portfolio turnover is expected to be well
below that of actively managed mutual funds. Inasmuch as the common stock of the
Adviser's parent company U.S. Bancorp is included in the S&P 500, such stock may
be purchased by the Fund consistent with its indexing-based policies.
Because the Fund may not always hold all of the stocks included in the S&P 500,
the Fund will not duplicate the S&P 500's performance precisely. However, there
will be a close correlation between the Fund's performance and that of the S&P
500 in both rising and falling markets. The Fund will attempt to achieve a
correlation between the performance of its portfolio and that of the S&P 500 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 S&P 500. The Fund's ability to replicate the performance of the S&P 500 may
be affected by, among other things, changes in securities markets, the manner in
which Standard & Poor's calculates the S&P 500, the amount and timing of cash
flows into and out of the Fund, commissions, sales charges (if any) and other
expenses. Although cash flows into and out of the Fund will affect the Fund's
portfolio turnover rate and its ability to replicate the S&P 500's performance,
investment adjustments will be made, as practicably as possible, to account for
these circumstances. In the event the Fund is unable to achieve this correlation
over time, the Board of Directors of the Fund will consider alternative
strategies for the Fund.
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 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. These types of contracts and options and
certain associated risks are described under "Special Investment Methods --
Options Transactions." In addition, the Fund may engage in securities lending as
described under "Special Investment Methods -- Lending of Portfolio Securities."
For temporary defensive purposes, 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.
<PAGE>
STOCK FUND
OBJECTIVES. Stock Fund has a primary objective of capital appreciation. A
secondary objective of the Fund is to provide current income.
INVESTMENT POLICIES. Under normal market conditions, Stock Fund invests at least
65% of its total assets in common stocks diversified among a broad range of
industries and among companies that have a market capitalization of at least $1
billion at the time of purchase. In selecting equity securities, the Adviser
employs a value-based selection discipline, investing in equity securities it
believes are undervalued relative to other securities in the same industry or
market at the time of purchase. In assessing relative value, the Adviser will
consider factors such as ratios of market price to earnings, market price to
book value, 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 less than $1
billion and in fixed income securities of the kinds described under "Special
Investment Methods -- Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund and write call options on stock indices
related to such equity securities; (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, 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.
DIVERSIFIED GROWTH FUND
OBJECTIVES. Diversified Growth Fund has a primary objective of long-term growth
of capital. A secondary objective of the Fund is to provide current income.
INVESTMENT POLICIES. Under normal market conditions, Diversified Growth Fund
invests at least 65% of its total assets in equity securities of a diverse group
of companies that, in the Adviser's judgment, exhibit a combination of above
average growth in revenue and earnings, strong management and sound and
improving financial condition.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund and write call options on stock indices
<PAGE>
related to such equity securities; (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, 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.
SPECIAL EQUITY FUND
OBJECTIVE. Special Equity Fund has an objective of capital appreciation.
INVESTMENT POLICIES. Under normal market conditions, Special Equity Fund invests
at least 65% of its total assets in equity securities of mid-capitalization
companies. For these purposes, mid-capitalization companies are deemed those
with market capitalizations of from $1 billion to $5 billion at the time of
purchase. In selecting equity securities, the Adviser employs a value-based
selection discipline, investing in equity securities it believes are undervalued
relative to other securities in the same industry or market at the time of
purchase. In assessing relative value, the Adviser will consider factors such as
ratios of market price to earnings, market price to book value, 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 fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund and write call options on stock indices
related to such equity securities; (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, 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.
REGIONAL EQUITY FUND
OBJECTIVE. Regional Equity Fund has an objective of capital appreciation.
INVESTMENT POLICIES. Regional Equity Fund seeks to achieve its objective by
investing, in normal market conditions, at least 65% of its total assets in
equity securities of small-capitalization companies headquartered in Minnesota,
North and South Dakota, Montana, Wisconsin, Michigan, Iowa, Nebraska, Colorado
and Illinois. 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 employs a value-based
selection discipline, investing in equity securities it believes are undervalued
relative to other securities in the same industry or market at the time of
purchase. In assessing relative value,
<PAGE>
the Adviser will consider factors such as ratios of market price to earnings,
market price to book value, market price to assets, estimated earnings growth
rate, cash flow and liquidation value.
In addition to the risks associated with investing in small-capitalization
companies, see "-- Risks to Consider -- Small-Capitalization Companies" below,
the Fund's policy of concentrating its equity investments in a geographic region
means that it will be subject to adverse economic, political or other
developments in that region. Although the region in which the Fund principally
invests has a diverse industrial base (including, but not limited to,
agriculture, mining, retail, transportation, utilities, heavy and light
manufacturing, financial services, insurance, computer technology and medical
technology), this industrial base is not as diverse as that of the country as a
whole. The Fund therefore may be less diversified by industry and company than
other funds with a similar investment objective and no geographic limitation.
The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities without regard to the location of the issuer's headquarters or
the issuer's market capitalization and in fixed income securities of the kinds
described under "Special Investment Methods -- Fixed Income 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 and write call options on stock indices
related to such equity securities; (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, 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.
EMERGING GROWTH FUND
OBJECTIVE. Emerging Growth Fund has an objective of growth of capital.
INVESTMENT POLICIES. Under normal market conditions, Emerging Growth Fund
invests at least 65% of its total assets in equity securities of
small-capitalization companies that exhibit, in the Adviser's opinion,
outstanding potential for superior growth. For these purposes,
small-capitalization companies are deemed those with market capitalizations of
less than $1 billion at the time of purchase. Companies that participate in
sectors that are identified by the Adviser as having long-term growth potential
generally are expected to make up a substantial portion of the Fund's holdings.
These companies often have established a market niche or have developed unique
products or technologies that are expected by the Adviser to produce superior
growth in revenues and earnings.
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
<PAGE>
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 and write call options on stock indices
related to such equity securities; (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, 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.
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 in the same industry or market at the time of
purchase. In assessing relative value, the Adviser will consider such factors as
ratios of market price to earnings, market price to book value, 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 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, 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.
MICRO CAP VALUE FUND
OBJECTIVE. Micro Cap Value Fund has an objective of capital appreciation.
INVESTMENT POLICIES. Under normal market conditions, Micro Cap Value Fund
invests at least
<PAGE>
65% of its total assets in equity securities of very small-capitalization
companies. For these purposes, very small-capitalization companies are deemed
those with market capitalizations of less than $500 million 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 in the same industry or market at the time of
purchase. In assessing relative value, the Adviser will consider such factors as
ratios of market price to earnings, market price to book value, and market price
to assets, estimated earnings growth rate, cash flow and liquidation value.
The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of $500 million or
more and in fixed income securities of the kinds described under "Special
Investment Methods -- Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed delivery basis; and (v) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes, 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 primarily (at least 65% of
total assets) in common stocks included in the EAFE Index. The EAFE Index
includes approximately 1,077 companies representing the stock markets of
approximately 14 European countries, Australia, New Zealand, Japan, Hong Kong
and Singapore/Malaysia. 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
<PAGE>
weighted stock. Thus, the proportion of Fund assets invested in an industry or
country closely approximates the percentage of the EAFE Index represented by
that industry or country. Portfolio turnover is expected to be well below that
of actively managed mutual funds.
Because the Fund may not always hold all of the stocks included in the EAFE
Index, the Fund will not duplicate the EAFE Index performance precisely.
However, 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), the amount and timing of cash
flows into and out of the Fund, commissions, sales charges (if any) and other
expenses. 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. In the event the Fund is unable to achieve this
correlation over time, the Board of Directors of the Fund will consider
alternative strategies for the Fund.
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."
For temporary defensive purposes, 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 FUND
OBJECTIVE. International Fund has an objective of long-term growth of capital.
INVESTMENT POLICIES. Under normal market conditions, International Fund invests
at least 65% of its total assets in an internationally diversified portfolio of
equity securities which trade in markets other than the United States. Generally
these securities are issued by companies (i) domiciled in countries other than
the United States, or (ii) that derive at least 50% of either their revenues or
their pre-tax income from activities outside of the United States. The
securities in which the Fund invests include common and preferred stock,
securities (bonds and preferred stock) convertible into common stock, warrants
and securities representing underlying international securities such as American
Depositary Receipts and European Depositary Receipts. The Fund also may hold
securities of other investment companies (which investments are also subject to
the advisory fee) and depositary or custodial receipts
<PAGE>
representing beneficial interests in any of the foregoing securities.
The Fund may invest in securities of issuers in, but not limited to, Argentina,
Australia, Austria, Belgium, Brazil, Canada, Chile, China, Columbia, the Czech
Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India,
Indonesia, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Malaysia, Mexico,
the Netherlands, New Zealand, Norway, Pakistan, Peru, the Philippines, Poland,
Portugal, Singapore, South Africa, Spain, Sri Lanka, Sweden, Switzerland,
Taiwan, Thailand, Turkey, the United Kingdom, and Venezuela. Normally, the Fund
will invest at least 65% of its total assets in securities traded in at least
three foreign countries, including the countries listed above. It is possible,
although not currently anticipated, that up to 35% of the Fund's assets could be
invested in United States companies.
In investing the Fund's assets, the Sub-Adviser expects to place primary
emphasis on country selection, followed by selection of industries or sectors
within or across countries and by selection of individual stocks corresponding
to the industries or sectors selected. Investments are expected to be made
primarily in developed markets and larger capitalization companies. However, the
Fund also may invest in emerging markets where smaller capitalization companies
are the norm.
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 50% of the
equity securities owned by the Fund and write call options on stock indices
related to such equity securities; (iv) purchase securities on a when-issued or
delayed delivery basis; (v) engage in the lending of portfolio securities; (vi)
engage in foreign currency transactions; (vii) in order to attempt to reduce
risk, purchase put and call options on foreign currencies; (viii) write covered
call options on foreign currencies owned by the Fund; and (ix) enter into
contracts for the future purchase or delivery of securities, foreign currencies,
and indices, purchase or sell options on any such futures contracts and engage
in related closing transactions. For information about these investment methods,
restrictions on their use, and certain associated risks, see the related
headings under "Special Investment Methods."
Under normal market conditions, it is expected that the Fund will be fully
invested in equity securities and related hedging instruments (except for
short-term investments of cash for liquidity purposes and pending investment).
However, for temporary defensive purposes, 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 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" and
"-- Foreign Currency Transactions" elsewhere herein. Because of the special
risks associated with foreign investing and the Sub-Adviser's ability to invest
substantial portions of the Fund's assets in a small number of countries, the
Fund may be subject to greater volatility than most mutual funds which invest
principally in domestic securities.
HEALTH SCIENCES FUND
OBJECTIVE. Health Sciences Fund has an objective of long-term growth of capital.
INVESTMENT POLICIES. Under normal market conditions, Health Sciences Fund
invests at least 65% of its total assets in equity securities of companies which
the Adviser considers to be principally engaged in the development, production
or distribution of products or services connected with health care or medicine.
Examples of these
<PAGE>
products and services include pharmaceuticals, health care services and
administration, diagnostics, medical equipment and supplies, medical technology,
and medical research and development. The Adviser anticipates investing in
companies that have the potential for above average growth in revenue and
earnings as a result of new or unique products, processes or services,
increasing demand for a company's products or services, established market
leadership, or exceptional management. A company will be deemed "principally
engaged" in the health sciences industries if at the time of investment the
Adviser determines that at least 50% of its assets, revenues or profits are
derived from those industries.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund and write call options on stock indices
related to such equity securities; (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, 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.
Health Sciences Fund operates as a non-diversified investment company, as
defined in the 1940 Act, but intends to conduct its operations so as to qualify
as a regulated investment company for purposes of the Internal Revenue Code of
1986, as amended. Since a relatively high percentage of the assets of the Fund
may be invested in the securities of a limited number of issuers which will be
in the same or related economic sectors, the Fund's portfolio securities may be
more susceptible to any single economic, technological or regulatory occurrence
than the portfolio securities of diversified investment companies. Many products
and services in the health sciences industries may become rapidly obsolete due
to technological and scientific advances. In addition, the health sciences
industries generally are subject to greater governmental regulation than many
other industries, so that changes in governmental policies may have a material
effect on the demand for products and services in these industries. Regulatory
approvals generally are required before new drugs, medical devices or medical
procedures can be introduced and before health care providers can acquire
additional facilities or equipment.
TECHNOLOGY FUND
OBJECTIVE. Technology Fund has an objective of long-term growth of capital.
INVESTMENT POLICIES. Under normal market conditions, Technology Fund invests at
least 65% of its total assets in equity securities of companies which the
Adviser believes have, or will develop, products, processes or services that
will provide or will benefit significantly from technological advances and
improvements. The description of the technology sector is interpreted broadly by
the Adviser and may include such products or services as inexpensive computing
power, such as personal computers; improved methods of communications,
<PAGE>
such as satellite transmission; or labor saving machines or instruments, such as
computer-aided design equipment. The prime emphasis of the Fund is to identify
those companies positioned, in the Adviser's opinion, to benefit from
technological advances in areas such as semiconductors, minicomputers and
peripheral equipment, scientific instruments, computer software, communications,
and future automation trends in both office and factory settings.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund and write call options on stock indices
related to such equity securities; (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, 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.
Technology Fund operates as a non-diversified investment company, as defined in
the 1940 Act, but intends to conduct its operations so as to qualify as a
regulated investment company for purposes of the Internal Revenue Code of 1986,
as amended. Since a relatively high percentage of the assets of the Fund may be
invested in the securities of a limited number of issuers which will be in the
same or related economic sectors, the Fund's portfolio securities may be more
susceptible to any single economic, technological or regulatory occurrence than
the portfolio securities of diversified investment companies. In addition,
competitive pressures may have a significant effect on the financial condition
of companies in the technology industry. For example, if technology continues to
advance at an accelerated rate, and the number of companies and product
offerings continue to expand, these companies could become increasingly
sensitive to short product cycles and aggressive pricing.
RISKS TO CONSIDER
An investment in any of the Funds involves certain risks in addition to those
noted above with respect to particular Funds. 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. Regional Equity Fund, Emerging Growth Fund,
Small Cap Value Fund and Micro Cap Value Fund emphasize investments in companies
with small or very small market capitalizations, and the remaining Funds
(excluding Equity Index Fund and International Index Fund) are permitted to
invest in equity securities of such companies. The equity securities of such
companies frequently have experienced greater price volatility in the past than
those of
<PAGE>
larger-capitalization companies, and they may be expected to do so in the
future. To the extent that the Funds invest in small or very small
capitalization companies, they are subject to this risk of greater volatility.
ACTIVE MANAGEMENT. All of the Funds other than Equity Index Fund and
International Index Fund are actively managed to a greater or lesser degree by
the Adviser or, in the case of International Fund, the Sub-Adviser. The
performance of these Funds therefore will reflect in part the ability of the
Adviser or Sub-Adviser to select securities which are suited to achieving the
Funds' investment objectives. Due to their active management, these Funds could
underperform other mutual funds with similar investment objectives or the market
generally.
FOREIGN SECURITIES. International Index Fund and International Fund are 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 securities. These risks are discussed under "Special
Investment Methods -- Foreign Securities" elsewhere herein. Because of the
special risks associated with foreign investing, the Funds 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
U.S. Bank National Association, 601 Second Avenue South, Minneapolis, Minnesota
55402, acts as the Funds' investment adviser through its First American 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 September 30, 1997, the Adviser was managing accounts with an aggregate value
of approximately $55 billion, including mutual fund assets of approximately $20
billion. U.S. Bancorp, 601 Second Avenue South, Minneapolis, Minnesota 55480, is
the holding company for the Adviser.
Each of the Funds other than International Fund has agreed to pay the Adviser
monthly fees calculated on an annual basis equal to 0.70% of its average daily
net assets. International Fund pays the Adviser a monthly fee calculated on the
same basis equal to 1.25% of its average daily net assets, out of which the
Adviser pays the Sub-Adviser's fee. The Adviser may, at its option, waive any or
all of its fees, or reimburse expenses, with respect to any Fund from time to
time. Any such waiver or reimbursement is voluntary and may be discontinued at
any time except, with respect to the Class A Shares of Stock Fund, Equity Index
Fund, Small Cap Value Fund and International Index Fund, the Adviser will
maintain current waivers in effect through September 30, 1998. 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.
While the advisory fee payable to the Adviser with respect to International Fund
is higher than the advisory fee paid by most mutual funds, the Adviser believes
it is comparable to that paid by
<PAGE>
many funds having similar investment objectives and policies.
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 certain broker-dealers affiliated with the Adviser are
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 certain affiliated broker-dealers 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.
SUB-ADVISER TO INTERNATIONAL FUND
Marvin & Palmer Associates, Inc., 1201 North Market Street, Suite 2300,
Wilmington, Delaware 19801, is Sub-Adviser to International Fund under an
agreement with the Adviser (the "Sub-Advisory Agreement"). The Sub-Adviser is
responsible for the investment and reinvestment of International Fund's assets
and the placement of brokerage transactions in connection therewith. For its
services under the Sub-Advisory Agreement, the Sub-Adviser is paid a monthly fee
by the Adviser calculated on an annual basis equal to 0.75% of the first $100
million of International Fund's average daily net assets, 0.50% of International
Fund's average daily net assets in excess of $100 million up to $300 million,
0.45% of the International Fund's average daily net assets in excess of $300
million up to $500 million and 0.40% of International Fund's average daily net
assets in excess of $500 million.
The Sub-Adviser, a privately held company, was founded in 1986 by David F.
Marvin and Stanley Palmer. The stock of the Sub-Adviser is owned by Mr. Marvin,
Mr. Palmer and 24 other holders. The Sub-Adviser is engaged in the management of
global, non-United States and emerging markets equity portfolios for
institutional accounts. At September 30, 1997, the Sub-Adviser managed a total
of $4.7 billion in investments for 50 institutional investors.
PORTFOLIO MANAGERS
Balanced Fund and Stock Fund are managed by a committee comprised of Mr. Doak,
Mr. Murphy, Mr. Rovner, Mr. Dubiak, Mr. Whitcomb, Mr. Shields and Mr. Twele,
whose backgrounds are set forth below. Equity Income Fund and Diversified Growth
Fund are managed by a committee comprised of Mr. Bren, Mr. Doak, Mr. Dubiak, Ms.
Johnson, Mr. Murphy, Mr. Whitcomb, and Mr. Glenn Johnson, whose backgrounds also
are set forth below. Health Sciences Fund, Regional Equity Fund, Emerging Growth
Fund, Small Cap Value Fund and Micro Cap Value Fund are managed by a committee
comprised of Mr. Dubiak, Mr. Bren, Mr. Rose, Mr. Buss, Mr. Hipple and Mr.
Magdlen, whose backgrounds also are set forth below. The remaining Funds are
managed or co-managed as indicated below.
JAMES DOAK is a member of the committees which manage four of the Funds, as set
forth above. Mr. Doak joined the Adviser in 1982 after serving for two years as
vice president of INA Capital
<PAGE>
Advisors and ten years as Vice President of Loomis-Sayles & Co. He has managed
assets for individual and institutional clients, specializing in equity
investments. Mr. Doak received his bachelor's degree from Brown University and
his master's degree in business administration from the Wharton School of
Business. He is a Chartered Financial Analyst.
JOHN M. MURPHY, JR. is a member of the committees which manage four of the
Funds, as set forth above. Mr. Murphy is Chief Investment Officer of the
Adviser's First American Asset Management group, having joined the Adviser in
1984. He has more than 30 years in the investment management field and served
with Investment Advisers, Inc. and Blyth, Eastman, Dillon & Co. before joining
the Adviser. Mr. Murphy received his bachelor's degree from Regis College.
JAMES S. ROVNER is a member of the committee which manages two of the Funds, as
set forth above, and he is portfolio co-manager for Special Equity Fund, Equity
Index Fund and International Index Fund. Mr. Rovner joined the Adviser in 1986
and has managed assets for institutional and individual clients for over 15
years, specializing in equity and balanced investment strategies. Mr. Rovner
received his bachelor's degree and his master's degree in business
administration from the University of Wisconsin. He is a Chartered Financial
Analyst.
GERALD C. BREN is a member of the committees which manage seven of the Funds, as
set forth above. Mr. Bren joined the Adviser in 1972 as an investment analyst.
Mr. Bren received his master's degree in business administration from the
University of Chicago. He is a Chartered Financial Analyst.
ALBIN S. DUBIAK is a member of the committees which manage nine of the Funds, as
set forth above. Mr. Dubiak began his investment career as a security trader
with The 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.
CORI B. JOHNSON is a member of the committee which manages two of the Funds, as
set forth above, and she is portfolio co-manager for Real Estate Securities
Fund. She joined the Adviser in 1991 as a securities analyst. Ms. Johnson
received her bachelor's degree from Concordia College and her master's degree in
business administration from the University of Minnesota. She is a Chartered
Financial Analyst.
ROLAND P. WHITCOMB, JR. is a member of the committees which manage four of the
Funds, as set forth above, and he is portfolio manager for Technology Fund. Mr.
Whitcomb joined the Adviser in 1986 after serving as an account executive with
Smith Barney & Co. since 1979. Mr. Whitcomb received his bachelor's degree from
the University of Chicago. He is a Chartered Financial Analyst.
KEVIN SHIELDS is a member of the committee which manages two of the Funds and is
portfolio co-manager for Special Equity Fund. Mr. Shields joined the Adviser in
1993 and has five years of investment industry experience. Mr. Shields has
analytic responsibilities for the banking, financial services and insurance
industries. Mr. Shields received his bachelor's degree from Marquette University
and his master's degree from the Applied Security and Analysis program at the
University of Wisconsin.
JOHN A. TWELE is a member of the committee which manages two of the Funds, as
set forth above. Prior to joining the Adviser in 1996, he was employed in
various positions at American Express Financial Advisers, Investment Advisers,
Inc., Kemper Financial, and Mercantile Trust. Mr. Twele received his bachelor's
degree from Indiana University.
DOUGLAS K. ROSE is a member of the committee which manages five of the Funds.
Mr. Rose joined the Adviser in 1996 and has 10 years of investment industry
experience. Mr. Rose has analytic responsibilities for the business services,
environmental
<PAGE>
services, leisure and restaurant/lodging industries. Mr. Rose holds a bachelor's
degree from the University of Nebraska, and a master's degree in business
administration from the University of Minnesota. He is a Chartered Financial
Analyst
ROBERT L. BUSS is a member of the committee which manages five of the Funds. Mr.
Buss joined the Adviser in 1989 and has nine years of investment industry
experience. In 1996, Mr. Buss began analytical work in the equity research area
covering electric equipment, machinery and diversified manufacturing. Mr. Buss
holds a bachelor's degree in economics from the University of Minnesota.
ANTHONY W. HIPPLE is a member of the committee which manages five of the Funds.
Mr. Hipple is primarily responsible for portfolio analytics and screening. Mr
Hipple joined the Adviser in 1996 and has 4 years of investment industry
experience. Mr. Hipple holds a bachelor's degree from the University of Northern
Iowa and a master's degree in business administration from the University of
Iowa.
EVAN C. LUNDQUIST is a portfolio co-manager of Equity Index Fund and
International Index Fund. He joined the Adviser in 1993 and has four years of
investment industry experience. Mr. Lundquist has analytic responsibilities for
paper/forest products, metals and mining, steel, engineering and construction,
and building and appliances industries. Mr. Lundquist received his bachelor's
degree from St. Mary's College.
FRANK G. MAGDLEN is a member of the committee which manages five of the Funds.
He joined the Adviser in 1979 and has 24 years of investment industry
experience. Prior to joining the Adviser, he was with First Interstate and
Farmers Group. Mr. Magdlen received his bachelor's degree from the University of
Portland and his master's degree in business administration from the University
of Southern California. He is a Chartered Financial Analyst and past president
of the Portland Society of Financial Analysts.
GLENN E. JOHNSON is a member of the committee which manages two of the Funds. He
joined the Adviser in 1989 and has 13 years of investment industry experience.
Prior to joining the Adviser, he was an analyst with Piper Jaffray. Mr. Johnson
received his bachelor's degree and his master's degree in business
administration from the University of Minnesota. He is a Chartered Financial
Analyst.
DAVID JOHNSON is a co-manager of Real Estate Securities Fund. He joined the
Adviser in 1997 and has four years of investment industry experience. He has
analytic responsibilities for REITS, business services, printing and publishing,
and advertising. Prior to joining the Adviser he was with the State of Wisconsin
Investment Board. Mr. Johnson received his bachelor's degree from St. Lawrence
University and his master's degree in business administration from the
University of Connecticut.
DAVID F. MARVIN is Chairman of the Sub-Adviser and founded the firm together
with Mr. Palmer in 1986. Before founding the Sub-Adviser, Mr. Marvin was Vice
President in charge of DuPont Corporation's $10 billion internally-managed
pension fund. Prior to that Mr. Marvin was Associate Portfolio Manager, and then
Head Portfolio Manager, for Investors Diversified Services' IDS Stock Fund. Mr.
Marvin started in the investment business in 1965 as a securities analyst for
Chicago Title & Trust. Mr. Marvin received his bachelor's degree from the
University of Illinois and his master's degree in business administration from
Northwestern University. He is a Chartered Financial Analyst and a member of the
Financial Analysts Federation.
STANLEY PALMER is President of the Sub-Adviser and co-founder of the firm. Mr.
Palmer was Equity Portfolio Manager for DuPont Corporation from 1978 through
1986, an analyst and portfolio manager at Investors Diversified Services from
1971 through 1978, and an analyst at Harris Trust & Savings Bank from 1964
through 1971. Mr. Palmer received his bachelor's degree from Gustavus Adolphus
College and his master's degree in business administration from the University
of Iowa. He is a Chartered Financial Analyst and a member of the Financial
Analysts Federation.
<PAGE>
WILLIAM E. DODGE has been Senior Managing Director and Portfolio Manager of the
Sub-Adviser since 1996. Mr. Dodge was Chief Investment Strategist and Chairman
of the Investment Policy Committee of Dean Witter in New York from 1991 to 1996,
and he served as a Senior Portfolio Manager, Director of Quantitative Equity
Strategies, and United States equity analyst at the DuPont Corporation pension
fund from 1983 to 1991. From 1976 to 1983 Mr. Dodge served in various United
States portfolio management and analytical positions including senior investment
manager of a bank trust department from 1981 to 1983. Mr. Dodge received his
bachelor's degree and his master's degree in business administration from the
University of Massachusetts at Amherst. He is a Chartered Financial Analyst and
a member of the Financial Analysts Federation.
TERRY B. MASON is a Senior Vice President and Portfolio Manager of the
Sub-Adviser. Before joining the Sub-Adviser, Mr. Mason was employed for 14 years
by DuPont Corporation, the last five as international equity analyst and
international trader. Mr. Mason received his bachelor's degree from Glassboro
State College and his master's degree in business administration from Widener
University.
JAY F. MIDDLETON is a Vice President and Portfolio Manager for the Sub-Adviser
and joined the firm in 1989. Mr. Middleton received his bachelor's degree from
Wesleyan University.
TODD D. MARVIN is a Vice President and Portfolio Manager for the Sub-Adviser and
joined the firm in 1991. Before joining the Sub-Adviser, Mr. Marvin was employed
by Oppenheimer & Company as an analyst in investment banking. Mr. Marvin
received his bachelor's degree from Wesleyan University.
DAVID L. SCHAEN is a Vice President and Portfolio Manager of the Sub-Adviser.
Before becoming a Portfolio Manager, Mr. Schaen was Head Trader for the
Sub-Adviser from 1991 to 1994 and an International Analyst for the Sub-Adviser
from 1994 to 1995. Prior to 1991 he was Head Trader and Investment Officer at
the Bank of Delaware. Mr. Schaen received his bachelor's degree from the
University of Delaware and his master's degree in business administration from
Widener University.
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 U.S. Bancorp.
As compensation for its services to the Funds, the Custodian is paid monthly
fees equal to 0.03% of the applicable Fund's average daily net assets (0.10% of
average daily net assets in the case of International Index Fund and
International Fund). In addition, the Custodian is reimbursed for its
out-of-pocket expenses incurred while providing its services to the Funds.
Rules adopted under the 1940 Act permit International Index Fund and
International Fund to maintain their securities and cash in the custody of
certain eligible foreign banks and depositories. International Index Fund's and
International Fund's portfolio of non-United States securities are held by
sub-custodians which are approved by the directors of FAIF or a foreign custody
manager appointed by the directors 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 and International 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 or
International Fund's assets.
Sub-custodian fees with respect to International Index Fund and International
Fund are paid by the Custodian out of the Custodian's fees.
<PAGE>
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, 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. U.S. Bank assists the Administrator and provides
sub-administration services for the Funds. For these services, the Administrator
compensates the sub-administrator at an annual rate of up to 0.05% of each
Fund's average daily net assets.
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, which is not affiliated with the Adviser, is a wholly-owned
subsidiary of SEI Investments Company and is located at Oaks, Pennsylvania
19456.
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") pursuant to which the
Distributor agrees to provide, or enter into written agreements with service
providers to provide, one or more specified shareholder services to beneficial
owners of shares of the Funds. 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 -- Alternative Sales Charge Options." In consideration
of the services and facilities to be provided by the Distributor or any service
provider, each Fund also pays the Distributor a shareholder servicing fee at an
annual rate of 0.25% of the Fund's Class A Shares' average daily net asset
value, which fee is computed and paid monthly. 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 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 any of the Funds. Any such waivers may be
made at the Distributor's discretion and may be terminated at any time.
<PAGE>
Under another distribution plan (the "Class B Distribution Plan") adopted in
accordance with Rule 12b-1 under the 1940 Act, the Funds may pay to the
Distributor a sales support fee at an annual rate of up to 0.75% of the Fund's
Class B Shares' average daily net asset value, which fee is computed and paid
monthly. The sales support fee may be used by the Distributor to provide
compensation for sales support and distribution activities with respect to Class
B Shares of the Funds. 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 Funds.
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 of
funds). The service fee payable under the Class B Service Plan is prepaid for
the first year as described above.
The Class A and Class B Distribution Plans recognize that the Adviser, the
Administrator, the Distributor, and any Participating Institution may in their
discretion use their own assets to pay for certain additional costs of
distributing Fund shares. Any arrangement to pay such additional costs may be
commenced or discontinued by any of these persons at any time. In addition,
while there is no sales charge on purchases of Class A Shares of $1 million and
more, the Adviser may pay amounts to broker-dealers from its own assets with
respect to such sales. U.S. Bancorp Investments, Inc., a broker-dealer
affiliated with the Adviser ("USBI"), 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 both the
New York Stock Exchange and federally-chartered banks are open for business.
Shares may be purchased as described below. The Funds reserve the right to
reject any purchase order.
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 unless the financial institution has been
authorized to accept purchase orders on behalf of the Funds. It is the financial
institution's responsibility to transmit orders promptly.
Certain financial institutions assist their clients in the purchase or
redemption of shares and charge a fee for this service. In addition, certain
financial institutions are authorized to act as the Funds' agent for the purpose
of accepting purchase orders, and the Funds will be deemed to have received a
purchase order upon receipt of the order by the financial institution.
BY MAIL. An investor may place an order to purchase shares of the Funds directly
through the Transfer Agent. Orders by mail will be executed upon receipt of
payment by the Transfer Agent. If an investor's check does not clear, the
purchase will be cancelled and the investor could be liable for any losses or
fees incurred. Third-party checks, credit cards, credit card checks and cash
will not be accepted. When purchases are made by check, the proceeds of
redemptions of the shares purchased are not available until the Transfer Agent
is reasonably certain that the purchase payment has cleared, which could take up
to ten calendar days from the purchase date. In order to purchase shares by
mail, an investor must:
* complete and sign the new account form;
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* 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: U.S. Bank National Association, Minneapolis, Minnesota, ABA Number
091000022; For Credit to: DST Systems, Inc.: 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 or
federally-chartered banks are closed.
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 the Adviser and its 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 per share plus a sales charge which, at the
investor's election, may be imposed 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 Shares represents a Fund's interest in its portfolio of investments. The
classes have the same rights and are identical in all respects except that (i)
Class B Shares bear the expenses of the contingent deferred sales charge
arrangement and distribution and service fees resulting from such sales
arrangement, while Class A Shares bear only shareholder servicing fees; (ii)
each class has exclusive voting rights with respect to approvals of any Rule
12b-1 distribution plan related to that specific class (although Class B
shareholders may vote on any distribution fees imposed on Class A Shares as long
as Class B Shares convert into Class A Shares); (iii) only Class B Shares carry
a conversion feature; and (iv) each class has different exchange privileges.
Sales personnel of financial institutions distributing the Funds' shares, and
other persons entitled to receive compensation for selling shares, may receive
differing compensation for selling Class A and Class B Shares.
These alternative purchase arrangements permit an investor 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 for $250,000 or more ordinarily will be
treated as orders for Class A Shares or declined.
<PAGE>
The Directors of FAIF have determined that no conflict of interest currently
exists between the Class A and Class B Shares. On an ongoing basis, the
Directors, pursuant to their fiduciary duties under the 1940 Act and state laws,
will seek to ensure that no such conflict arises.
CLASS A SHARES.
WHAT CLASS A SHARES COST. Class A Shares of each Fund are offered on a
continuous basis at their next determined offering price, which is net asset
value, plus a sales charge as set forth below:
EACH FUND:
MAXIMUM
AMOUNT OF
SALES CHARGE SALES CHARGE SALES CHARGE
AS PERCENTAGE AS PERCENTAGE REALLOWED TO
OF OFFERING OF NET ASSET PARTICIPATING
PRICE VALUE INSTITUTIONS
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%
There is no initial sales charge on purchases of Class A Shares of $1 million or
more. However, Participating Institutions may receive a commission of up to
1.00% on such sales. Redemptions of Class A Shares purchased at net asset value
within 24 months of such purchase will be subject to a contingent deferred sales
charge of up to 1.00% except in the case of Equity Index Fund and International
Index Fund. 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 as of the earlier of the close of the New York
Stock Exchange or 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) days on which the New York Stock Exchange
or federally-chartered banks are closed including, but not limited to, the
following federal holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day. In addition, net asset value will not be calculated on Good
Friday.
DEALER CONCESSION. A dealer will normally receive up to 90% of the applicable
sales charge. Any portion of the sales charge which is not paid to a dealer will
be retained by the Distributor. In addition, the Distributor may, from time to
time in its sole discretion, institute one or more promotional incentive
programs which will be paid by the Distributor from the sales charge it receives
or from any other source available to it. Under any such program, the
Distributor will provide promotional incentives, in the form of cash or other
compensation including merchandise, airline vouchers, trips and vacation
packages, to all dealers selling shares of the Funds. Promotional incentives of
these kinds will be offered uniformly to all dealers and predicated upon the
amount of shares of the Funds sold by the dealer. Whenever 90% or more of a
sales charge is paid to a dealer, that dealer may be deemed to be an underwriter
as defined in the Securities Act of 1933.
<PAGE>
The sales charge for shares sold other than through registered broker-dealers
will be retained by the Distributor. The Distributor may pay fees to financial
institutions out of the sales charge in exchange for sales and/or administrative
services performed on behalf of the institution's customers in connection with
the initiation of customer accounts and purchases of Fund shares.
REDUCING THE CLASS A SALES CHARGE. The sales charge can be reduced on the
purchase of Class A Shares through (i) quantity discounts and accumulated
purchases, or (ii) signing a 13-month letter of intent:
* QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES: As shown in the table above,
larger purchases of Class A Shares reduce the percentage sales charge paid.
Each Fund will combine purchases made on the same day by an investor, the
investor's spouse, and the investor's children under age 21 when it
calculates the sales charge. In addition, the sales charge, if applicable,
is reduced for purchases made at one time by a trustee or fiduciary for a
single trust estate or a single fiduciary account.
The sales charge discount applies to the total current market value of any
Fund, plus the current market value of any other FAIF Fund and any other
mutual funds having a sales charge and distributed as part of the First
American family of funds. Prior purchases and concurrent purchases of Class
A Shares of any FAIF Fund will be considered in determining the sales
charge reduction. In order for an investor to receive the sales charge
reduction on Class A Shares, the Transfer Agent must be notified by the
investor in writing or by his or her financial institution at the time the
purchase is made that Fund shares are already owned or that purchases are
being combined.
* LETTER OF INTENT: If an investor intends to purchase at least $50,000 of
Class A Shares in a Fund and other FAIF Funds over the next 13 months, the
sales charge may be reduced by signing a letter of intent to that effect.
This letter of intent includes a provision for a sales charge adjustment
depending on the amount actually purchased within the 13-month period and a
provision for the Custodian to hold a percentage equal to the particular
FAIF Fund's maximum sales charge rate of the total amount intended to be
purchased in escrow (in shares) for all FAIF Funds until the purchase is
completed.
The amount held in escrow for all FAIF Funds will be applied to the
investor's account at the end of the 13-month period after deduction of the
sales load applicable to the dollar value of shares actually purchased. In
this event, an appropriate number of escrowed shares may be redeemed in
order to realize the difference in the sales charge.
A letter of intent will not obligate the investor to purchase shares, but
if he or she does, each purchase during the period will be at the sales
charge applicable to the total amount intended to be purchased. This letter
may be dated as of a prior date to include any purchases made within the
past 90 days.
SALES OF CLASS A SHARES AT NET ASSET VALUE. Purchases of a Fund's Class A Shares
by the Adviser, the Sub-Adviser or any of their affiliates, or any of their or
FAIF's officers, directors, employees, retirees, sales representatives and
partners, registered representatives of any broker-dealer authorized to sell
Fund shares, and full-time employees of FAIF's general counsel, and members of
their immediate families (i.e., parent, child, spouse, sibling, step or adopted
relationships, and UTMA accounts naming qualifying persons), may be made at net
asset value without a sales charge. A Fund's Class A Shares also may be
purchased at net asset value without a sales charge by fee-based registered
investment advisers, financial planners and registered broker-dealers who are
purchasing shares on behalf of their customers and by purchasers through
"one-stop" mutual fund networks through which the Funds are made available. In
addition, Class A Shares may be purchased at net asset value without a sales
charge
<PAGE>
by qualified defined contribution plans participating in the First American
401(k) Plan Program, investors participating in asset allocation "wrap" accounts
offered by the Adviser or any of its affiliates, 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 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 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
YEAR SINCE PURCHASE SUBJECT TO CHARGE
First 5.00%
Second 5.00%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh None
Eighth None
In determining whether a particular redemption is subject to a contingent
deferred sales charge, it is assumed that the redemption is first of any Class A
Shares in the shareholder's Fund account; second, of any Class B Shares held for
more than eight years and Class B Shares acquired pursuant to reinvestment of
dividends or other distributions; and third, of Class B Shares held longest
during the eight-year period. This method should result in the lowest possible
sales charge.
The contingent deferred sales charge is waived on redemption of Class B Shares
(i) within one year following the death or disability (as defined in the
Internal Revenue Code) of a shareholder, and (ii) to the extent that the
redemption represents a minimum required distribution from an individual
retirement account or other retirement plan to a shareholder who has attained
the age of 70 1/2. A shareholder or his or her representative must notify the
Transfer Agent prior to the time of redemption if such circumstances exist and
the shareholder is eligible for this waiver.
CONVERSION FEATURE. At the end of the period ending eight years after the
beginning of the month
<PAGE>
in which the shares were issued, Class B Shares will automatically convert to
Class A Shares and will no longer be subject to the Class B distribution and
service fees. This conversion will be on the basis of the relative net asset
values of the two classes.
SYSTEMATIC EXCHANGE PROGRAM
Shares of a Fund may also be purchased through automatic monthly deductions from
a shareholder's account in the same class of shares of Prime Obligations Fund of
First American Funds, Inc. Under a systematic exchange program, a shareholder
enters an agreement to purchase a specified class of shares of one or more Funds
over a specified period of time, and initially purchases Prime Obligations Fund
shares of the same class in an amount equal to the total amount of the
investment. On a monthly basis a specified dollar amount of shares of Prime
Obligations Fund is exchanged for shares of the same class of the Funds
specified. The systematic exchange program of investing a fixed dollar amount at
regular intervals over time has the effect of reducing the average cost per
share of the Funds. This effect also can be achieved through the systematic
investment program described below. Because purchases of Class A Shares are
subject to an initial sales charge, it may be beneficial for an investor to
execute a Letter of Intent in connection with the systematic exchange program. A
shareholder may apply for participation in this program through his or her
financial institution or by calling (800) 637-2548.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Fund shares at the net asset value next determined after an order is
received, plus any applicable sales charge. A shareholder may apply for
participation in this program through his or her financial institution or call
(800) 637-2548.
EXCHANGING SECURITIES FOR FUND SHARES
A Fund may accept securities in exchange for Fund shares. A Fund will allow such
exchanges only upon the prior approval by the Fund and a determination by the
Fund and the Adviser that the securities to be exchanged are acceptable.
Securities accepted by a Fund will be valued in the same manner that a Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Fund shares on the day the securities are valued.
CERTIFICATES AND CONFIRMATIONS
The Transfer Agent maintains a share account for each shareholder. Share
certificates will not be issued by the Funds.
Confirmations of each purchase and redemption are sent to each shareholder. In
addition, monthly confirmations are sent to report all transactions and
dividends paid during that month for the Funds.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly with respect to Balanced Fund, Equity
Income Fund, Equity Index Fund, Stock Fund, Diversified Growth Fund and Special
Equity Fund, to all shareholders of record on the record date. Dividends are
declared paid quarterly with respect to Real Estate Securities Fund, Emerging
Growth Fund, Small Cap Value Fund, Micro Cap Value Fund, International Index
Fund, Health Sciences Fund, and Technology Fund, and annually with respect to
International Fund. Distributions of any net realized long-term capital gains
will be made at least once every 12 months. A portion of the quarterly
distributions paid by Real Estate Securities Fund may be a return of capital.
<PAGE>
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 Class B Shares.
EXCHANGE PRIVILEGE
Shareholders may exchange Class A 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 of funds. Class A Shares of the Funds,
whether acquired by direct purchase, reinvestment of dividends on such shares,
or otherwise, may be exchanged for Class A Shares of other funds without the
payment of any sales charge (i.e., at net asset value). Exchanges of shares
among the First American family of funds must meet any applicable minimum
investment of the fund for which shares are being exchanged.
For purposes of calculating the Class B Shares' eight-year conversion period or
contingent deferred sales charges payable upon redemption, the holding period of
Class B Shares of the "old" fund and the holding period of Class B Shares of the
"new" fund are aggregated.
The ability to exchange shares of the Funds does not constitute an offering or
recommendation of shares of one fund by another fund. This privilege is
available to shareholders resident in any state in which the fund shares being
acquired may be sold. An investor who is considering acquiring shares in another
First American Fund pursuant to the exchange privilege should obtain and
carefully read a prospectus of the fund to be acquired. Exchanges may be
accomplished by a written request, or by telephone if a preauthorized exchange
authorization is on file with the Transfer Agent, shareholder servicing agent,
or financial institution.
Written exchange requests must be signed exactly as shown on the authorization
form, and the signatures may be required to be guaranteed as for a redemption of
shares by an entity described below under "Redeeming Shares -- Directly From the
Funds -- Signatures." Neither the Funds, the Distributor, the Transfer Agent,
any shareholder servicing agent, nor 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
<PAGE>
instructions received by telephone if it reasonably believes those instructions
to be genuine. The Funds and the Transfer Agent will each employ reasonable
procedures to confirm that telephone instructions are genuine, and they may be
liable for losses resulting from unauthorized or fraudulent telephone
instructions if they do not employ these procedures.
Shareholders of the Funds may have difficulty in making exchanges by telephone
through brokers and other financial institutions during times of drastic
economic or market changes. If a shareholder cannot contact his or her broker or
financial institution by telephone, it is recommended that an exchange request
be made in writing and sent by overnight mail to DST Systems, Inc., 1004
Baltimore, Kansas City, Missouri 64105.
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 such an exchange would be a situation in which an
individual holder of Class A Shares subsequently opens a fiduciary, 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 (less the amount of any applicable contingent deferred sales
charge). 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 unless the financial institution has been
authorized to accept redemption requests on behalf of the Funds. 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.
Certain financial institutions are authorized to act as the Funds' agent for the
purpose of accepting redemption requests, and the Funds will be deemed to have
received a redemption request upon receipt of the request by the financial
institution.
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.
<PAGE>
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. The Transfer Agent and the Funds will each employ
reasonable procedures to confirm that instructions communicated by telephone are
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 tax identification number at the time such request is
made. The Transfer Agent subsequently sends confirmations of both exchange sales
and exchange purchases to the shareholder for verification. If reasonable
procedures are not employed, the Transfer Agent and the Funds may be liable for
any losses due to unauthorized or fraudulent telephone transactions.
BY MAIL
Any shareholder may redeem Fund shares by sending a written request to the
Transfer Agent, shareholder servicing agent, or financial institution. The
written request should include the shareholder's name, the Fund name, the
account number, and the share or dollar amount requested to be redeemed, and
should be signed exactly as the shares are registered. Shareholders should call
the Fund, shareholder servicing agent or financial institution for assistance in
redeeming by mail. A check for redemption proceeds normally is mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
Shareholders requesting a redemption of $5,000 or more, a redemption of any
amount to be sent to an address other than that on record with the Fund, or a
redemption payable other than to the shareholder of record, must have signatures
on written redemption requests guaranteed by:
* a trust company or commercial bank the deposits of which are insured by the
Bank Insurance Fund, which is administered by the Federal Deposit Insurance
Corporation ("FDIC");
* a member firm of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges or of the National Association of Securities Dealers;
* a savings bank or savings and loan association the deposits of which are
insured by the Savings Association Insurance Fund, which is administered by
the FDIC; or
* any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public.
The Funds and the Transfer Agent have adopted standards for accepting signature
guarantees from the above institutions. The Funds may elect in the future to
limit eligible signature guarantees to institutions that are members of a
signature guarantee program. The Funds and the Transfer Agent reserve the right
to amend these standards at any time without notice.
BY SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders whose account value is at least $5,000 may elect to participate in
the Systematic Withdrawal Program. Under this program, Fund shares are redeemed
to provide for periodic withdrawal payments in an amount directed by the
shareholder. A shareholder may apply to participate in this program through his
or her financial institution. It is generally not in a shareholder's best
interest to participate in the Systematic Withdrawal Program at the same time
that the shareholder is purchasing additional shares if a sales charge must be
paid in connection with such purchases.
<PAGE>
REDEMPTION BEFORE PURCHASE
INSTRUMENTS CLEAR
When shares are purchased by check or with funds transmitted through the
Automated Clearing House, the proceeds of redemptions of those shares are not
available until the Transfer Agent is reasonably certain that the purchase
payment has cleared, which could take up to ten calendar days from the purchase
date.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, a Fund may
redeem shares in any account, except retirement plans, and pay the proceeds,
less any applicable contingent deferred sales charge, to the shareholder if the
account balance falls below the required minimum value of $500. Shares will not
be redeemed in this manner, however, if the balance falls below $500 because of
changes in a Fund's net asset value. Before shares are redeemed to close an
account, the shareholder will be notified in writing and allowed 60 days to
purchase additional shares to meet the minimum account requirement.
DETERMINING THE PRICE
OF SHARES
Class A Shares of the Funds are sold at net asset value plus a sales charge,
while Class B Shares 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 and federally-chartered banks are 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 a purchase order or redemption request. If a financial institution,
which is authorized to receive purchase orders or redemption requests on behalf
of the Funds, receives the purchase order or redemption request, the price per
share for purchases and redemptions may be the net asset value determined the
same day as the purchase order or redemption request.
It is the responsibility of Participating Institutions promptly to forward
purchase and redemption orders to the Transfer Agent. In the case of redemptions
and repurchases of shares owned by corporations, trusts or estates, the Transfer
Agent or Fund may require additional documents to evidence appropriate authority
in order to effect the redemption, and the applicable price will be that next
determined following the receipt of the required documentation.
DETERMINING NET ASSET VALUE
The net asset value per share for each of the Funds is determined by dividing
the value of the securities owned by the Fund plus any cash and other assets
(including interest accrued and dividends declared but not collected), less all
liabilities, by the number of Fund shares outstanding. For the purpose of
determining the aggregate net assets of the Funds, cash and receivables will be
valued at their face amounts. Interest will be recorded as accrued and dividends
will be recorded on the ex-dividend date. Security valuations are furnished by
an independent pricing service that has been approved by the
Board of Directors. Securities listed on a securities exchange or an automated
quotation system for which quotations are readily available, including
securities traded over the counter, are valued at the last quoted sale price on
the principal exchange on which they are traded on the valuation date, or, if
there is no such reported sale on the valuation date, at the most recently
quoted bid price. Debt obligations with remaining maturities in excess of sixty
days are valued at the most recently quoted bid price. For such debt obligations
the pricing service may employ methods that utilize actual market transactions,
broker-dealer valuations, or other electronic data processing techniques. These
techniques generally consider such factors as
<PAGE>
security prices, yields, maturities, call features, ratings and developments
relating to specific securities in arriving at security valuations. Debt
obligations with remaining maturities of sixty days or less may be valued at
their amortized cost which approximates market value. If a security price cannot
be obtained from an independent pricing service a bid price may be obtained from
an independent broker who makes a market in the security. Foreign securities
owned by the Funds are valued at the closing prices on the principal exchange on
which they trade. If the value for a security cannot be obtained from the
sources described above, the security's value may be determined pursuant to the
fair value procedures established by the Board of Directors.
Financial futures are valued at the settlement price established each day by the
board of exchange on which they are traded. The daily settlement prices for
financial futures are provided by an independent source. Portfolio securities
underlying actively traded options are valued at their market price as
determined above. The current market value of any exchange traded options held
or written by a fund, are valued at the closing bid price for a long position or
the closing ask price for a short position.
Foreign currency forward contracts are valued at the current day's interpolated
foreign exchange rate, as calculated using the current day's exchange rate, and
the thirty, sixty, ninety and one-hundred eighty day forward rates provided by
the Reuters system.
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 differing
distribution and/or shareholder servicing expenses charged to Class A and Class
B Shares.
FOREIGN SECURITIES
Any assets or liabilities of the Funds 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 the Funds. Thus, the calculation of
the Funds' net asset value may not take place contemporaneously with the
determination of the prices of foreign securities held in the Funds' portfolios.
In addition, trading in securities on foreign markets may not take place on all
days on which the New York Stock Exchange is open for business or may take place
on days on which the New York Stock Exchange is not open for business.
Therefore, the net asset value of a Fund which holds foreign securities might be
significantly affected on days when an investor has no access to the Fund.
FEDERAL INCOME TAXES
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 from a Fund's net capital gains and designated as capital
gain dividends generally are taxable as long-term capital gains in the hands
<PAGE>
of shareholders, regardless of the length of time during which they have held
their shares. In the case of shareholders who are individuals, estates, or
trusts, each Fund will designate the portion of each capital gain dividend that
must be treated as mid-term capital gain and the portion that must be treated as
long-term capital gain.
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. For
shareholders who are individuals, estates or trusts, the gain or loss will be
considered long-term if the shareholder has held the shares for more than 18
months and mid-term if the shareholder has held the shares for more than one
year but not more than 18 months.
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 and International Fund may be required to pay
withholding and other taxes imposed by foreign countries, generally at rates
from 10% to 40%, which would reduce each 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 and International Fund's taxable
year more than 50% of their respective total assets consist of securities of
foreign corporations, such Fund 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 and International Fund shareholders will be
notified of the amounts which they may deduct as foreign taxes paid or used as
foreign tax credits. International Fund filed this election for each of its two
most recent completed fiscal years ending September 30, 1997 and 1996.
Alternatively, if the amount of foreign taxes paid by International Index Fund
or International Fund is not large enough in future years to warrant making the
election described above, each 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 each 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 Funds.
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 of shares, 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 of shares.
<PAGE>
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 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, as
applicable, 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 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,
<PAGE>
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.
CASH ITEMS
The "cash items" in which the Funds may invest, as described under "Investment
Objectives and Policies," include short-term obligations such as rated
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 a Fund; securities of other mutual funds which invest
primarily in debt obligations with remaining maturities of 13 months or less
(which investments also are subject to the advisory fee); and other similar
high-quality short-term United States dollar-denominated obligations. The other
mutual funds in which the Funds may so invest include money market funds advised
by the Adviser, subject to
<PAGE>
certain restrictions contained in an exemptive order issued by the Securities
and Exchange Commission with respect thereto.
REPURCHASE AGREEMENTS
Each of the Funds may 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 or, in the case of
International Fund, the Sub-Adviser will monitor the creditworthiness of the
firms with which the Funds enter into repurchase agreements.
WHEN-ISSUED AND DELAYED DELIVERY
TRANSACTIONS
Each of the Funds (excluding Equity Index Fund and International Index 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. A Fund will not accrue income with respect to securities
purchased on a when-issued or delayed delivery basis prior to their stated
delivery date. Pending delivery of the securities, each Fund will maintain in a
segregated account cash or liquid high-grade securities in an amount sufficient
to meet its purchase commitments.
The purchase of securities on a when-issued or delayed delivery basis exposes a
Fund to risk because the securities may decrease in value prior to delivery. In
addition, a Fund's purchase of securities on a when-issued or delayed delivery
basis while remaining substantially fully invested could increase the amount of
the Fund's total assets that are subject to market risk, resulting in increased
sensitivity of net asset value to changes in market prices. However, the Funds
will engage in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with their investment
objectives, and not for the purpose of investment leverage. A seller's failure
to deliver securities to a Fund could prevent the Fund from realizing a price or
yield considered to be advantageous.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, each of the Funds may lend portfolio
securities representing up to one-third of the value of its total assets to
broker-dealers, banks or other institutional borrowers of securities. 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
or, in the case of International Fund, the Sub-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
in connection with these loans which, in the case of First Trust National
Association, are 40% of the
<PAGE>
Funds' income from such securities lending transactions.
OPTIONS TRANSACTIONS
PURCHASES OF PUT AND CALL OPTIONS. The Funds may purchase put and call options.
These transactions will be undertaken only for the purpose of reducing risk to
the Funds; that is, for "hedging" purposes. Depending on the Fund, these
transactions may include the purchase of put and call options on equity
securities, on stock indices, on interest rate indices, or (only in the case of
International Fund) on foreign currencies. Options on futures contracts are
discussed below under "Futures and Options on Futures."
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.
None of the Funds other than International 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
a Fund and the prices of options, and the risk of limited liquidity in the event
that a Fund seeks to close out an options position before expiration by entering
into an offsetting transaction.
WRITING OF CALL OPTIONS. The Funds may write (sell) covered call options to the
extent specified with respect to particular Funds under "Investment Objectives
and Policies." These transactions would be undertaken principally to produce
additional income. Depending on the Fund, these transactions may include the
writing of covered call options on equity securities or (only in the case of
International Fund) on foreign currencies which a Fund owns or has the right to
acquire or on interest rate indices.
When a Fund sells a covered call option, it is paid a premium by the purchaser.
If the market price of the security covered by the option does not increase
above the exercise price before the option expires, the option generally will
expire without being exercised, and the Fund will retain both the premium paid
for the option and the security. If the market price of the security covered by
the option does increase above the exercise price before the option expires,
however, the option is likely to be exercised by the purchaser. In that case the
Fund will be required to sell the security at the exercise price, and it will
not realize the benefit of increases in the market price of the security above
the exercise price of the option.
The Funds also may, to the extent specified with respect to particular Funds
under "Investment Objectives and Policies," write call options on stock indices
the movements of which generally correlate with those of the respective Funds'
<PAGE>
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.
FUTURES AND OPTIONS ON FUTURES
Balanced Fund, Equity Index Fund, International Index Fund and International
Fund may engage in futures transactions and purchase options on futures to the
extent specified with under "Investment Objectives and Policies." Depending on
the Fund, these transactions may include the purchase of stock index futures and
options on stock index futures, and the purchase of interest rate futures and
options on interest rate futures. In addition, International 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, or foreign
currency.
A futures contract on a security obligates one party to purchase, and the other
to sell, a specified security at a specified price on a date certain in the
future. 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 a 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.
A Fund may use futures contracts and options on futures in an effort to hedge
against market risks and, in the case of International Fund, as part of its
management of foreign currency transactions. In addition, Equity Index Fund and
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 S&P 500 or EAFE
Index, respectively, and to reduce transaction costs.
Aggregate initial margin deposits for futures contracts, and premiums paid for
related options, may not exceed 5% of a Fund's total assets, and the value of
securities that are the subject of such futures and options (both for receipt
and delivery) may not exceed 1/3 of the market value of a Fund's total assets.
Futures transactions will be limited to the extent necessary to maintain each
Fund's qualification as a regulated investment company under the Internal
Revenue Code of 1986, as amended.
Where a 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 a Fund's total assets. Where a Fund is
permitted to enter into futures contracts obligating it to purchase securities,
currency or an index in the future at a specified price, such Fund could lose
100% of its net assets in connection therewith if it engaged extensively in such
transactions and if the market value or index value of the subject securities,
currency or index at the delivery or settlement date fell to zero for all
contracts into which a Fund was permitted to enter. Where a Fund is permitted to
enter into futures contracts obligating it to sell securities or currencies (as
is the case with respect only to International Fund), its potential losses are
unlimited if it does not own the securities or currencies covered by the
contracts and it is unable to close out the contracts prior to the settlement
date.
Futures transactions involve brokerage costs and require a Fund to segregate
assets to cover contracts that would require it to purchase securities or
currencies. A Fund may lose the expected benefit of futures transactions if
interest rates, exchange rates or securities prices move 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. In addition, the
value of a Fund's futures positions
<PAGE>
may not prove to be perfectly or even highly correlated with the value of its
portfolio securities or foreign currencies, limiting the Fund's ability to hedge
effectively against interest rate, exchange rate and/or market risk and giving
rise to additional risks. 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 Real Estate Securities Fund, Equity Income
Fund, Stock Fund, Diversified Growth Fund, Special Equity Fund, Regional Equity
Fund, Emerging Growth Fund, Small Cap Value Fund, Micro Cap Value Fund, Health
Sciences Fund and Technology 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 "Special Investment
Methods -- Cash Items." Investments in nonconvertible preferred stocks and
nonconvertible corporate debt securities 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, Equity Income Fund may invest up to 25% of its total assets, and
each of the other Funds may invest up to 5% of its net assets, in less than
investment grade convertible debt obligations. For a description of such
obligations and the risks associated therewith, see "Investment Objectives and
Policies -- Equity Income Fund."
The fixed income securities specified above, as well as the fixed income
securities in which Balanced Fund may invest as described under "Investment
Objectives and Policies," 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 a Fund); (ii) credit risk (the risk that the issuers of debt
securities held by a Fund default in making required payments); and (iii) call
or prepayment risk (the risk that a borrower may exercise the right to prepay a
debt obligation before its stated maturity, requiring a Fund to reinvest the
prepayment at a lower interest rate).
FOREIGN SECURITIES
GENERAL. Under normal market conditions International Index Fund and
International Fund invest at least 65% of their respective total assets in
equity securities which trade in markets other than the United States. In
addition, the other Funds (excluding Equity Index Fund and Regional Equity 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.
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
<PAGE>
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.
JAPANESE SECURITIES. Japanese securities comprised 29.2% of the EAFE Index as of
September 30, 1997. As a result, securities of Japanese companies may represent
a significant component of International Index Fund's investment assets.
Japan is politically organized as a democratic, parliamentary republic and has a
population of approximately 122 million. The Japanese economy is heavily
industrial and export-oriented. Although Japan is dependent upon foreign
economies for raw materials, Japan's balance of payments in recent years has
been strong and positive. Japan has eight stock exchanges located throughout the
country, but over 80% of all trading is conducted on the Tokyo Stock Exchange.
Prices of stocks listed on the Japanese stock exchanges are quoted continuously
during regular business hours. Trading commissions are at fixed scale rates
which vary by the type and the value of the transaction, but can be negotiable
for large transactions. Securities in Japan are denominated and quoted in yen.
Yen are fully convertible and transferable based on floating exchange rates into
all currencies, without administrative or legal restrictions, for both
nonresidents and residents of Japan.
A significant investment in Japanese securities by International Index Fund may
entail a higher degree of risk than with more diversified international
portfolios.
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, a
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 and International 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.
<PAGE>
FOREIGN CURRENCY TRANSACTIONS
International Index Fund and International Fund invest in securities which are
purchased and sold in foreign currencies. The value of its assets as measured in
United States dollars therefore may be affected favorably or unfavorably by
changes in foreign currency exchange rates and exchange control regulations.
International Index Fund and International Fund also will incur costs in
converting United States dollars to local currencies, and vice versa.
International Fund will 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. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date certain at a
specified price. These forward currency contracts are traded directly between
currency traders (usually large commercial banks) and their customers.
International Fund may enter into forward currency contracts in order to hedge
against adverse movements in exchange rates between currencies. It may engage in
"transaction hedging" to protect against a change in the foreign currency
exchange rate between the date the Fund contracts to purchase or sell a security
and the settlement date, or to "lock in" the United States dollar equivalent of
a dividend or interest payment made in a foreign currency. It also may engage in
"portfolio hedging" to protect against a decline in the value of its portfolio
securities as measured in United States dollars which could result from changes
in exchange rates between the United States dollar and the foreign currencies in
which the portfolio securities are purchased and sold. International Fund also
may hedge its foreign currency exchange rate risk by engaging in currency
financial futures and options transactions.
Although a foreign currency hedge may be effective in protecting the Fund from
losses resulting from unfavorable changes in exchanges rates between the United
States dollar and foreign currencies, it also would limit the gains which might
be realized by the Fund from favorable changes in exchange rates. The
Sub-Adviser's decision whether to enter into currency hedging transactions will
depend in part on its view regarding the direction and amount in which exchange
rates are likely to move. The forecasting of movements in exchange rates is
extremely difficult, so that it is highly uncertain whether a hedging strategy,
if undertaken, would be successful. To the extent that the Sub-Adviser's view
regarding future exchange rates proves to have been incorrect, International
Fund may realize losses on its foreign currency transactions.
International Fund does not intend to enter into forward currency contracts or
maintain a net exposure in such contracts where it would be obligated to deliver
an amount of foreign currency in excess of the value of its portfolio securities
or other assets denominated in that currency.
MORTGAGE-BACKED SECURITIES
Balanced Fund may invest in mortgage-backed securities which are Agency
Pass-Through Certificates or collateralized mortgage obligations ("CMOs"), as
described below.
Agency Pass-Through Certificates are mortgage pass-through certificates
representing undivided interests in pools of residential mortgage loans.
Distribution of principal and interest on the mortgage loans underlying an
Agency Pass-Through Certificate is an obligation of or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC").
The obligation of GNMA with respect to such certificates is backed by the full
faith and credit of the United States, while the obligations of FNMA and FHLMC
with respect to such certificates rely solely on the assets and credit of those
entities. The mortgage loans underlying GNMA certificates are partially or fully
guaranteed by the Federal Housing Administration or the Veterans Administration,
while the mortgage loans underlying FNMA certificates and FHLMC certificates are
<PAGE>
conventional mortgage loans which are, in some cases, insured by private
mortgage insurance companies. Agency Pass-Through Certificates may be issued in
a single class with respect to a given pool of mortgage loans or in multiple
classes.
CMOs are debt obligations typically issued by a private special-purpose entity
and collateralized by residential or commercial mortgage loans or Agency
Pass-Through Certificates. Balanced Fund will invest only in CMOs which are
rated in one of the four highest rating categories by a nationally recognized
statistical rating organization or which are of comparable quality in the
judgment of the Adviser. Because CMOs are debt obligations of private entities,
payments on CMOs generally are not obligations of or guaranteed by any
governmental entity, and their ratings and creditworthiness typically depend,
among other factors, on the legal insulation of the issuer and transaction from
the consequences of a sponsoring entity's bankruptcy. CMOs generally are issued
in multiple classes, with holders of each class entitled to receive specified
portions of the principal payments and prepayments and/or of the interest
payments on the underlying mortgage loans. These entitlements can be specified
in a wide variety of ways, so that the payment characteristics of various
classes may differ greatly from one another. Examples of the more common classes
are provided in the Statement of Additional Information. The CMOs in which the
Fund may invest include classes which are subordinated in right of payment to
other classes, as long as they have the required rating referred to above.
It generally 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. The
return on interest-only and principal-only mortgage-backed securities is
particularly sensitive to changes in interest rates and prepayment speeds. When
interest rates decline and prepayment speeds increase, the holder of an
interest-only mortgage-backed security may not even recover its initial
investment. Similarly, the return on an inverse floating rate CMO is likely to
decline more sharply in periods of increasing interest rates than that of a
fixed-rate security. For these reasons, interest-only, principal-only and
inverse floating rate mortgage-backed securities generally have greater risk
than more conventional classes of mortgage-backed securities. Balanced Fund will
not invest more than 10% of its total fixed income assets in interest-only,
principal-only or inverse floating rate mortgage backed securities.
ASSET-BACKED SECURITIES
Balanced Fund may invest in asset-backed securities. Asset-backed securities
generally constitute interests in, or obligations secured by, a pool of
receivables other than mortgage loans, such as automobile loans and leases,
credit card receivables, home equity loans and trade receivables. Asset-backed
securities generally are issued by a private special-purpose entity. Their
ratings and creditworthiness typically depend on the legal insulation of the
issuer and transaction from the consequences of a sponsoring entity's
bankruptcy, as well as on the credit quality of the underlying receivables and
the amount and credit quality of any third-party credit enhancement supporting
the underlying receivables or the asset-backed securities. Asset-backed
securities and their underlying receivables generally are not issued or
guaranteed by any governmental entity.
BANK INSTRUMENTS
The bank instruments in which Balanced Fund may invest include time and savings
deposits, deposit notes and bankers' acceptances (including certificates of
deposit) in commercial or savings banks. They also include Eurodollar
Certificates of Deposit issued by foreign branches of United States or foreign
banks; Eurodollar Time Deposits, which are United States dollar-denominated
deposits in foreign branches of United States or foreign banks; and Yankee
Certificates of Deposit, which are United States dollar-denominated
<PAGE>
certificates of deposit issued by United States branches of foreign banks and
held in the United States. For a description of certain risks of investing in
foreign issuers' securities, see "-- Foreign Securities" above. In each
instance, Balanced Fund may only invest in bank instruments issued by an
institution which has capital, surplus and undivided profits of more than $100
million or the deposits of which are insured by the Bank Insurance Fund or the
Savings Association Insurance Fund.
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 or, in the case of International Fund,
the Sub-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 (100% or more) generally would result in higher
transaction costs and could result in additional tax consequences to a Fund's
shareholders.
INVESTMENT RESTRICTIONS
The fundamental and nonfundamental investment restrictions of the Funds are set
forth in full in the Statement of Additional Information. The fundamental
restrictions include the following:
* None of the Funds will borrow money, except from banks for temporary or
emergency purposes. The amount of such borrowing may not exceed 10% of the
borrowing Fund's total assets. None of the Funds will borrow money for
leverage purposes. For the purpose of this investment restriction, the use
of options and futures transactions and the purchase of securities on a
when-issued or delayed delivery basis shall not be deemed the borrowing of
money. If a Fund engages in borrowing, its share price may be subject to
greater fluctuation, and the interest expense associated with the borrowing
may reduce the Fund's net income.
* None of the Funds will 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 and except, in the case of Emerging Growth Fund, Technology
Fund, and International Fund as may be necessary to make margin payments in
connection with foreign currency futures and other derivative 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>
INFORMATION CONCERNING COMPENSATION
PAID TO U.S. BANK NATIONAL ASSOCIATION,
FIRST TRUST NATIONAL ASSOCIATION AND
OTHER AFFILIATES
U.S. Bank National Association, First Trust National Association and other
affiliates of U.S. Bancorp may act as a fiduciary with respect to plans subject
to the Employee Retirement Income Security Act of 1974 ("ERISA") and other trust
and agency accounts that invest in the Funds. These U.S. Bancorp affiliates may
receive compensation from the Funds for the services they provide to the Funds,
as described more fully in the following sections of this Prospectus:
Investment advisory services -- see "Management-Investment Adviser"
Custodian services -- see "Management-Custodian"
Sub-administration services -- see "Management-Administrator"
Shareholder servicing -- see "Distributor"
Securities lending -- see "Special Investment Methods-Lending of
Portfolio Securities"
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
Oaks, Pennsylvania 19456
Investment Adviser
U.S. 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-1003 (1/98) R
<PAGE>
JANUARY 31, 1998
EQUITY FUNDS
CLASS C SHARES
Balanced Fund Emerging Growth Fund
Real Estate Securities Fund Small Cap Value Fund
Equity Income Fund Micro Cap Value Fund
Equity Index Fund International Index Fund
Stock Fund International Fund
Diversified Growth Fund Health Sciences Fund
Special Equity Fund Technology Fund
Regional Equity Fund
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(SM)
<PAGE>
TABLE OF CONTENTS
Summary 4
Fees and Expenses 8
Financial Highlights 11
The Funds 16
Investment Objectives and Policies 16
Management 34
Distributor 41
Purchases and Redemptions of Shares 41
Federal Income Taxes 45
Fund Shares 46
Calculation of Performance Data 47
Performance Information for Successors to
Common Trust Fund 48
Special Investment Methods 49
Information Concerning Compensation
Paid to U.S. Bank National Association,
First Trust National Association and
Other Affiliates
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
CLASS C SHARES
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"):
* BALANCED FUND
* REAL ESTATE SECURITIES FUND
* EQUITY INCOME FUND
* EQUITY INDEX FUND
* STOCK FUND
* DIVERSIFIED GROWTH FUND
* SPECIAL EQUITY FUND
* REGIONAL EQUITY FUND
* EMERGING GROWTH FUND
* SMALL CAP VALUE FUND
* MICRO CAP VALUE FUND
* INTERNATIONAL INDEX FUND
* INTERNATIONAL FUND
* HEALTH SCIENCES FUND
* TECHNOLOGY FUND
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING U.S. 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 January 31, 1998 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 January 31, 1998
<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"):
BALANCED FUND has an objective of maximizing total return (capital appreciation
plus income). The Fund seeks to achieve its objective by investing in a balanced
portfolio of equity securities and fixed income securities. Over the long term,
it is anticipated that the Fund's asset mix will average approximately 60%
equity securities and 40% fixed income securities, with the asset mix normally
ranging between 40% and 75% equity securities, between 25% and 60% fixed income
securities (including only that portion of the convertible securities
attributable to their fixed income characteristics), and between 0% and 25%
money market instruments.
REAL ESTATE SECURITIES FUND has an objective of providing above average current
income and long-term capital appreciation by investing primarily in equity
securities of real estate companies. Under normal market conditions, the Fund
invests at least 65% of its total assets in income producing equity securities
of publicly traded companies principally engaged in the real estate industry. A
majority of the Fund's total assets will be invested in securities of real
estate investment trusts ("REITs"), with an expected emphasis on equity REITs.
EQUITY INCOME FUND has an objective of long-term growth of capital and income.
Under normal market conditions, the Fund invests at least 65% of its total
assets in equity securities of issuers believed by the Fund's adviser to be
characterized by sound management, the ability to finance expected growth and
the ability to pay above average dividends.
EQUITY 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"). The Fund invests primarily (at least 65% of total assets)
in common stocks included in the S&P 500. The Fund's adviser believes that its
objective can best be achieved by investing in the common stocks of
approximately 50% to 100% of the issues included in the S&P 500, depending on
the size of the Fund.
STOCK FUND has a primary objective of capital appreciation and a secondary
objective to provide current income. Under normal market conditions, the Fund
invests at least 65% of its total assets in common stocks diversified among a
broad range of industries and among companies that have a market capitalization
of at least $1 billion at the time of purchase. In selecting equity securities,
the Fund's adviser employs a value-based selection discipline, investing in
equity securities it believes are undervalued relative to other securities in
the same industry or market at the time of purchase.
DIVERSIFIED GROWTH FUND has a primary objective of long-term growth of capital
and a secondary objective to provide current income. Under normal market
conditions, the Fund invests at least 65% of its total assets in equity
securities of a diverse group of companies that, in the Fund's adviser's
judgment, exhibit a combination of above average growth in revenue and earnings,
strong management and sound and improving financial condition.
SPECIAL EQUITY 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 mid-capitalization companies (those with market capitalizations
from $1 billion to $5 billion at the time of purchase). The Fund's policy is to
invest in equity securities which the Fund's adviser believes offer the
potential for greater than average capital appreciation. In selecting equity
securities, the Fund's adviser employs a value-based selection discipline,
investing in equity securities it believes are undervalued relative to other
securities in the same industry or market at the time of purchase.
<PAGE>
REGIONAL EQUITY FUND has an objective of capital appreciation. The Fund seeks to
achieve its objective by investing, in normal market conditions, 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)
headquartered in Minnesota, North and South Dakota, Montana, Wisconsin,
Michigan, Iowa, Nebraska, Colorado and Illinois. The Fund invests in the
securities of rapidly growing companies within this size category and geographic
area. In selecting equity securities, the Fund's adviser employs a value-based
selection discipline, investing in equity securities it believes are undervalued
relative to other securities in the same industry or market at the time of
purchase.
EMERGING GROWTH FUND has an objective of growth of capital. 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) that exhibit, in the Fund's
adviser's opinion, outstanding potential for superior growth. Companies that
participate in sectors that are identified by the adviser as having long-term
growth potential generally are expected to make up a substantial portion of the
Fund's holdings.
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 employs a value-based selection discipline,
investing in equity securities it believes are undervalued relative to other
securities in the same industry or market at the time of purchase.
MICRO CAP VALUE FUND has an objective of capital appreciation. Under normal
market conditions, the Fund invests at least 65% of its total assets in equity
securities of very small-capitalization companies (those with market
capitalizations of less than $500 million at the time of purchase). In selecting
equity seecurities, the Fund's adviser employs a value-based selection
discipline, investing in equity securities it believes are undervalued relative
to other securities in the same industry or market 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 primarily (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.
INTERNATIONAL FUND has an objective of long-term growth of capital. Under normal
market conditions, the Fund invests at least 65% of its total assets in an
internationally diversified portfolio of equity securities which trade in
markets other than the United States. Investments are expected to be made
primarily in developed markets and larger capitalization companies. However, the
Fund also may invest in emerging markets where smaller capitalization companies
are the norm.
HEALTH SCIENCES FUND has an objective of long-term growth of capital. Under
normal market conditions, the Fund invests at least 65% of its total assets in
equity securities of companies which the Fund's adviser considers to be
principally engaged in the development, production or distribution of products
or services connected with health care or medicine.
TECHNOLOGY FUND has an objective of long-term growth of capital. Under normal
market conditions, the Fund invests at least 65% of its total assets in equity
securities of companies which the Fund's adviser believes have, or will develop,
products, processes or services that will provide or will benefit significantly
from technological advances and improvements.
<PAGE>
INVESTMENT ADVISER AND SUB-ADVISER U.S. Bank National Association (the "Adviser"
or "U.S. Bank") serves as investment adviser to each of the Funds through its
First American Asset Management group. Marvin & Palmer Associates, Inc. (the
"Sub-Adviser") serves as sub-adviser to International Fund. 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 of funds at the shares' respective net
asset values with no additional charge. See "Purchases and Redemptions of Shares
- -- Exchange Privilege."
REDEMPTIONS Shares of each Fund may be redeemed at any time at their net asset
value next determined after receipt of a redemption request by the Funds'
transfer agent, with no additional charge. See "Purchases and Redemptions of
Shares."
RISKS TO CONSIDER Each of 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 each of the Funds other than Equity Index Fund and International Index
Fund is actively managed to a greater or lesser degree, their performance will
reflect in part the ability of the Adviser or Sub-Adviser to select securities
which are suited to achieving their investment objectives. Due to their active
management, these Funds could underperform other mutual funds with similar
investment objectives or the market generally.
In addition, (i) certain of the Funds are subject to risks associated with
investing in small-capitalization companies; (ii) Micro Cap Value Fund is
subject to risks associated with investing in very small capitalization
companies; (iii) Regional Equity Fund is subject to risks associated with
concentrating its investments in a single geographic region; (iv) Real Estate
Securities Fund, Health Sciences Fund and Technology Fund are subject to risks
associated with concentrating their investments in a single or related economic
sectors; (v) Real Estate Securities Fund is subject to risks associated with
direct investments in REITs; (vi) International Index Fund and International
Fund are subject to risks associated with investing in foreign securities and to
currency risk; (vii) Equity Income Fund may invest a significant portion of its
assets in less than investment grade convertible debt obligations; (viii)
certain Funds other than International Index Fund and International Fund may
invest specified portions of their assets in securities of foreign issuers which
are listed on a United States stock exchange or represented by American
Depository Receipts or, in the case of Balanced Fund, are debt obligations of
foreign issuers denominated in United States dollars; and (ix) certain Funds may
invest (but not for speculative purposes) in stock index futures contracts,
options on stock indices, options on stock index futures, index participation
contracts based on the S&P 500 or the EAFE Index and/or exchange traded put and
call options on interest rate futures contracts and on interest rate indices.
See "Investment Objectives and Policies" 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>
(This page has been left blank intentionally.)
<PAGE>
FEES AND EXPENSES
CLASS C SHARE FEES AND EXPENSES
<TABLE>
<CAPTION>
REAL ESTATE EQUITY EQUITY DIVERSIFIED
BALANCED SECURITIES INCOME INDEX STOCK GROWTH
FUND FUND FUND FUND FUND FUND
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C> <C> <C> <C>
Maximum sales load imposed on
purchases None None None None None None
Maximum sales load imposed on
reinvested dividends None None None None None None
Deferred sales load None None None None None None
Redemption fees None None None None None None
Exchange fees None None None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees
(after voluntary fee waivers)(1) 0.62% 0.45% 0.53% 0.17% 0.61% 0.61%
Rule 12b-1 fees None None None None None None
Other expenses(1) 0.18% 0.35% 0.22% 0.18% 0.19% 0.19%
Total fund operating expenses
(after voluntary fee waivers(1) 0.80% 0.80% 0.75% 0.35% 0.80% 0.80%
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 $ 8 $ 8 $ 8 $ 4 $ 8 $ 8
3 years $26 $26 $24 $11 $26 $26
5 years $44 $44 $42 $20 $44 $44
10 years $99 $99 $93 $44 $99 $99
</TABLE>
+ The advisory fees, other expenses, and total fund operating expense set
forth above reflect estimates of current expenses.
(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 for the
current fiscal year but reserves the right to discontinue such waivers at
any time in its sole discretion. Notwithstanding the foregoing, the Adviser
will maintain such waivers of Stock Fund, Equity Index Fund, Small Cap
Value Fund and International Index Fund in effect through September 30,
1998. For Special Equity Fund and International Fund, the Adviser has
agreed to waive advisory fees on a voluntary basis to the extent necessary
to keep total fund operating expenses for the current fiscal year from
exceeding 0.09% and 1.75%, respectively. Absent any fee waivers, investment
advisory fees as an annualized percentage of average daily net assets would
be 0.70% for each Fund except International Fund, as to which they would be
1.25%; and total fund operating expenses calculated on such basis would be
0.88% for Balanced Fund, 1.05% for Real Estate Securities Fund, 0.92% for
Equity Income Fund, 0.88% for Equity Index Fund, 0.89% for Stock Fund,
0.89% for Diversified Growth Fund, 0.90% for Special Equity Fund, 0.90% for
Regional Equity Fund, 0.91% for Emerging Growth Fund, 0.90% for Small Cap
Value Fund, 1.07% for Micro Cap Value Fund, 0.99% for International Index
Fund, 1.67% for International Fund, 1.04% for Health Sciences Fund, and
0.92% for Technology Fund. "Other expenses" includes an administration fee
and, for Small Cap Value Fund and International Index Fund, is based on
estimated amounts for the current fiscal year.
<PAGE>
<TABLE>
<CAPTION>
SPECIAL REGIONAL EMERGING SMALL CAP MICRO CAP INTERNATIONAL HEALTH
EQUITY EQUITY GROWTH VALUE VALUE INDEX INTERNATIONAL SCIENCES TECHNOLOGY
FUND FUND FUND FUND FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
None None None None None None None None None
None None None None None None None None None
None None None None None None None None None
None None None None None None None None None
None None None None None None None None None
0.70% 0.70% 0.69% 0.70%+ 0.53% 0.46%+ 1.25% 0.56% 0.68%
None None None None None None None None None
0.19% 0.20% 0.21% 0.20%+ 0.37% 0.29%+ 0.42% 0.34% 0.22%
0.89% 0.90% 0.90% 0.90%+ 0.90% 0.75%+ 1.67% 0.90% 0.90%
$ 9 $ 9 $ 9 $ 9 $ 9 $ 8 $ 17 $ 9 $ 9
$ 28 $ 29 $ 29 $ 29 $ 29 $ 24 $ 53 $ 29 $ 29
$ 49 $ 50 $ 50 $ 50 $ 50 $ 42 $ 91 $ 50 $ 50
$ 110 $111 $111 $111 $111 $ 93 $198 $111 $111
</TABLE>
(2) Absent the fee waivers referred to in (1) above, the dollar amounts for the
1, 3, 5 and 10-year periods would be as follows: Balanced Fund, $ 9, $28,
$49 and $108; Real Estate Securities Fund, $11, $33, $58 and $128; Equity
Income Fund, $9, $29, $51 and $113; Equity Index Fund , $9, $28, $49 and
$108; Stock Fund, $9, $28, $49 and $110; Diversified Growth Fund, $9, $28,
$49 and $110; Special Equity Fund, $9, $29, $50 and $111; Regional Equity
Fund, $9, $29, $50 and $111; Emerging Growth Fund, $9, $29, $50 and $112;
Small Cap Value Fund, $9, $29, $50 and $111; Micro Cap Value Fund, $11,
$34, $59 and $131; International Index Fund, $10, $32, $55 and $121;
International Fund, $17, $53, $91 and $198; Health Sciences Fund, $11, $33,
$57 and $127; and Technology Fund, $9, $29, $51 and $113.
<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.
<PAGE>
FINANCIAL HIGHLIGHTS
The following audited financial highlights for each of the Funds should be read
in conjunction with the Funds' financial statements, the related notes thereto
and the independent auditors' report of KPMG Peat Marwick LLP appearing in
FAIF's annual reports to shareholders dated September 30, 1997 and dated
November 30, 1997 (for Small Cap Value Fund and International Index Fund only).
Further information about the Funds' performance is contained in such FAIF
annual reports which may be obtained without charge by calling (800) 637-2548 or
by writing SEI Investments Distribution Co., Oaks, Pennsylvania 19456.
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
For the periods ended September 30,
For a share outstanding throughout the period
<TABLE>
<CAPTION>
REALIZED AND
UNREALIZED DIVIDENDS DISTRIBUTIONS
NET ASSET NET GAINS OR FROM NET FROM
VALUE BEGINNING INVESTMENT (LOSSES ON) INVESTMENT CAPITAL
OF PERIOD INCOME INVESTMENTS INCOME GAINS
<S> <C> <C> <C> <C> <C>
BALANCED FUND Class C
1997 $13.15 $0.42 $ 2.86 $(0.42) $(0.58)
1996 12.13 0.42 1.43 (0.42) (0.41)
1995 10.54 0.40 1.73 (0.39) (0.15)
1994(2) 10.86 0.25 (0.32) (0.25) --
REAL ESTATE SECURITIES FUND Class C
1997 $11.53 $0.74 $ 3.43 $(0.67) $(0.03)
1996 10.37 0.57 1.29 (0.53) --
1995(6) 10.00 0.13 0.39 (0.11) --
EQUITY INCOME FUND Class C
1997 $12.66 $0.43 $ 3.40 $(0.44) $(0.35)
1996 11.24 0.42 1.43 (0.42) (0.01)
1995 9.89 0.41 1.35 (0.41) --
1994(3) 9.90 0.07 (0.03) (0.05) --
EQUITY INDEX FUND Class C
1997 $15.47 $0.29 $ 5.70 $(0.29) $(0.43)
1996 13.34 0.31 2.31 (0.31) (0.18)
1995 10.67 0.28 2.75 (0.27) (0.09)
1994(2) 10.85 0.20 (0.18) (0.20) --
STOCK FUND Class C
1997 $22.60 $0.39 $ 7.90 $(0.38) $(1.76)
1996 19.56 0.42 4.09 (0.42) (1.05)
1995 16.50 0.36 3.64 (0.35) (0.59)
1994(1) 16.47 0.25 0.03 (0.25) --
</TABLE>
+ Returns are for the period indicated and have not been annualized.
(A) Beginning in 1996, average commission rate paid per share is disclosed for
all applicable securities purchases and sales subject to commissions. The
comparability of this information may be affected by the fact that
commission rates vary significantly among foreign countries.
(B) Represents a distribution or partial distribution in excess of net
investment income due to the tax treatment of foreign currency related
transactions.
(1) This class of shares has been offered since February 4, 1994 (the Fund
itself having commenced operations on December 22, 1987). All ratios for
the period have been annualized.
(2) This class of shares has been offered since February 4. 1994 (the Fund
itself having commenced operations on December 14, 1992). All ratios for
the period have been annualized.
(3) This class of shares has been offered since August 2, 1994 (the Fund itself
having commenced operations on December 18, 1992). All ratios for the
period have been annualized.
(4) Commenced operations on April 4, 1994. All ratios for the period have been
annualized.
(5) Commenced operations on January 31, 1996. All ratios for the period have
been annualized.
(6) Commenced operations on June 30, 1995. All ratios for the period have been
annualized.
(7) The financial highlights for International Index Fund and Small Cap Value
Fund as set forth herein include the historical financial highlights of the
Qualivest International Opportunities Fund and the Qualivest Small
Companies Value Fund Class Y shares. The assets of the Qualivest
International Opportunities Fund and the Qualivest Small Companies Value
Fund were acquired by International Index Fund and Small Cap Value Fund
respectively, on November 21, 1997. In connection with such acquisition,
the Class Y and Class Q shares of the Qualivest International Opportunities
Fund and the Qualivest Small Companies Value Fund were exchanged for Class
C Shares of International Index Fund and Small Cap Value Fund,
respectively.
<PAGE>
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
NET ASSET RATIO OF INVESTMENT AVERAGE
DISTRIBUTIONS VALUE NET ASSETS EXPENSES TO INCOME TO NET ASSETS PORTFOLIO AVERAGE
FROM END OF TOTAL END OF AVERAGE AVERAGE (EXCLUDING TURNOVER COMMISSION
CAPITAL GAINS PERIOD RETURN PERIOD (000) NET ASSETS NET ASSETS WAIVERS) RATE RATE (A)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ -- $15.43 26.17% $ 418,087 0.80% 2.99% 0.88% 84% $ 0.0700
-- 13.15 15.89 332,786 0.80 3.31 0.89 73 0.0619
-- 12.13 20.89 192,145 0.79 3.61 0.94 77 --
-- 10.54 (0.64)+ 125,285 0.75 3.51 1.05 98 --
$(0.01) $14.99 37.07% $ 40,501 0.80% 4.57% 1.05% 14% $ 0.0700
(0.17) 11.53 18.53 17,895 0.80 5.13 1.51 8 0.0704
(0.04) 10.37 5.19+ 5,756 0.80 6.01 2.34 0 --
$ -- $15.70 31.45% $ 369,919 0.75% 3.12% 0.92% 39% $ 0.0571
-- 12.66 16.79 64,590 0.75 3.50 0.95 23 0.0700
-- 11.24 18.24 52,126 0.75 4.11 1.06 23 --
-- 9.89 0.45+ 17,489 0.75 5.61 1.14 108 --
$ -- $20.74 39.85% $ 557,258 0.35% 1.62% 0.88% 8% $ 0.0419
-- 15.47 19.98 348,539 0.35 2.14 0.90 10 0.0377
-- 13.34 29.17 218,932 0.35 2.41 0.95 9 --
-- 10.67 0.18+ 163,688 0.35 2.59 1.03 11 --
$ -- $28.75 39.13% $1,095,262 0.80% 1.39% 0.89% 57% $ 0.0640
-- 22.60 24.32 471,206 0.80 1.90 0.88 40 0.0653
-- 19.56 25.50 312,559 0.79 2.10 0.94 52 --
-- 16.50 1.70+ 154,949 0.75 2.28 1.01 65 --
</TABLE>
(8) For the four month period ended November 30, 1997. All ratios for the
period have been annualized.
(9) The board of directors of FAIF approved a change in the Funds' fiscal year
end from July 31 to November 30, effective November 30, 1997.
(10) Commenced operations on August 1, 1994. All ratios for the period have been
annualized.
(11) Commenced operations on August 8, 1997. All ratios for the period have been
annualized.
(12) For the period ended July 31.
(13) Commenced operations on July 3, 1995. All ratios for the period have been
annualized.
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
For the periods ended September 30,
For a share outstanding throughout the period
<TABLE>
<CAPTION>
REALIZED AND
UNREALIZED DIVIDENDS DISTRIBUTIONS
NET ASSET NET GAINS OR FROM NET FROM
VALUE BEGINNING INVESTMENT (LOSSES ON) INVESTMENT CAPITAL
OF PERIOD INCOME INVESTMENTS INCOME GAINS
<S> <C> <C> <C> <C> <C>
DIVERSIFIED GROWTH FUND Class C
1997 $13.66 $ 0.12 $ 4.26 $(0.13) $(0.27)
1996 11.78 0.18 1.88 (0.18) --
1995 9.10 0.17 2.67 (0.16) --
1994(3) 8.92 0.03 0.18 (0.03) --
SPECIAL EQUITY FUND Class C
1997 $20.43 $ 0.16 $ 6.98 $(0.16) $(3.20)
1996 17.89 0.25 3.95 (0.24) (1.42)
1995 17.30 0.38 1.61 (0.38) (1.02)
1994(1) 16.34 0.22 0.96 (0.22) --
REGIONAL EQUITY FUND Class C
1997 $17.75 $ 0.05 $ 6.18 $(0.13) $(0.69)
1996 17.13 0.09 1.70 (0.06) $(1.11)
1995 12.52 0.11 4.90 (0.08) (0.32)
1994(2) 12.41 0.07 0.11 (0.07) --
EMERGING GROWTH FUND Class C
1997 $14.79 $(0.04) $ 3.55 $ -- $(0.66)
1996 13.41 (0.03) 1.77 (0.01) (0.35)
1995 10.56 0.03 2.99 (0.02) (0.15)
1994(4) 10.00 0.01 0.56 (0.01) --
SMALL CAP VALUE FUND(7) Class C
1997(8)(9) $17.87 $(0.01) $ 0.37 $ -- $ --
1997(12) 13.96 0.04 5.43 (0.04) (1.52)
1996(12) 13.26 0.06 1.81 (0.06) (1.11)
1995(10)(12) 10.00 0.13 3.30 (0.12) (0.05)
MICRO CAP VALUE FUND Class C
1997(11) $10.00 $ -- $ 0.95 $ -- $ --
INTERNATIONAL INDEX FUND(7) Class C
1997(8)(9) $12.37 $ 0.06 $(1.41) $(0.03) $ --
1997(12) 10.69 0.13 1.70 (0.13)(B) (0.02)
1996(12) 10.48 0.09 0.18 (0.06) --
1995(12)(13) 10.00 0.01 0.47 -- --
INTERNATIONAL FUND Class C
1997 $10.31 $ 0.03 $ 3.06 $(0.17)(B) $ --
1996 10.30 (0.01) 0.22 (0.20)(B) --
1995 10.22 0.01 0.07 -- --
1994(4) 10.00 (0.01) 0.23 -- --
HEALTH SCIENCES FUND Class C
1997 $ 9.87 $(0.01) $ 2.33 $(0.01) $(0.10)
1996(5) 10.00 0.03 (0.15) (0.01) --
TECHNOLOGY FUND Class C
1997 $19.29 $(0.06) $ 3.12 $ -- $(2.06)
1996 18.24 (0.04) 2.98 -- (1.89)
1995 11.19 (0.03) 7.31 -- (0.23)
1994(4) 10.00 (0.01) 1.20 -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
NET ASSET RATIO OF INVESTMENT AVERAGE
DISTRIBUTIONS VALUE NET ASSETS EXPENSES TO INCOME (LOSS) NET ASSETS PORTFOLIO AVERAGE
FROM RETURN END OF TOTAL END OF AVERAGE TO AVERAGE (EXCLUDING TURNOVER COMMISSION
OF CAPITAL PERIOD RETURN PERIOD (000) NET ASSETS NET ASSETS WAIVERS) RATE RATE (A)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$-- $17.64 32.75% $681,151 0.80% 0.77% 0.89% 34% $0.0633
-- $13.66 17.58 255,900 0.79 1.39 0.92 21 0.0593
-- 11.78 31.57 132,854 0.75 1.69 1.01 28 --
-- 9.10 2.36+ 31,875 0.75 2.37 1.08 101 --
$-- $24.21 40.25% $509,308 0.89% 0.82% 0.90% 82% $0.0691
-- 20.43 25.61 247,828 0.88 1.35 0.88 143 0.0673
-- 17.89 12.84 201,786 0.88 2.30 0.95 72 --
-- 17.30 7.31+ 128,806 0.79 1.93 1.03 116 --
$-- $23.16 36.49% $351,007 0.90% 0.35% 0.90% 17% $0.0699
-- 17.75 11.27 259,138 0.88 0.49 0.90 36 0.0697
-- 17.13 41.40 188,583 0.84 0.78 0.95 42 --
-- 12.52 1.46+ 96,045 0.80 0.82 1.05 41 --
$-- $17.64 25.19% $151,607 0.90% (0.28)% 0.91% 54% $0.0681
-- 14.79 13.39 73,025 0.89 (0.24) 0.96 39 0.0700
-- 13.41 29.16 41,716 0.84 0.20 1.19 51 --
-- 10.56 5.68+ 6,849 0.80 0.23 2.59 19 --
$-- $18.23 2.01%+ $461,046 1.06% (0.06)% 1.06% 3% $0.0638
-- 17.87 41.96 449,988 1.06 0.25 1.06 29 0.0519
-- 13.96 14.94 297,793 1.08 0.41 1.08 34 0.0398
-- 13.26 34.76+ 209,626 0.60 1.20 1.12 37 N/A
$-- $10.95 9.50% $246,601 0.90% (0.02)% 1.07% 0% $0.0676
$-- $10.99 (10.93)%+ $155,976 0.66% 1.23% 0.95% 0% $0.0207
-- 12.37 17.24 210,538 0.73 1.15 1.03 3 0.0241
-- 10.69 2.56 142,478 0.81 1.18 1.10 6 0.0221
-- 10.48 4.80+ 60,073 1.18 1.32 1.39 0 N/A
$-- $13.23 30.38% $217,414 1.67% 0.06% 1.67% 96% $0.0199
-- 10.31 2.11 135,238 1.72 (0.06) 1.72 100 0.0345
-- 10.30 0.78 94,400 1.74 0.12 1.81 57 --
-- 10.22 2.20+ 47,963 1.75 (0.19) 2.05 16 --
$-- $12.08 23.89% $ 41,243 0.90% 0.06% 1.04% 54% $0.0695
-- 9.87 (1.20)%+ $ 12,485 0.90 0.43 1.87 19 $0.0700
$-- $20.29 17.95% $148,659 0.90% (0.41)% 0.92% 150% $0.0675
-- 19.29 18.85 64,602 0.90 (0.60) 1.01 119 0.0700
-- 18.24 66.22 29,272 0.88 (0.35) 1.30 74 --
-- 11.19 11.90%+ 6,491 0.80 (0.21) 3.12 43 --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
The following unaudited financial highlights for Micro Cap Value Fund for
the period commencing August 8, 1997 and ending December 31, 1997 should be read
in conjunction with the Fund's unaudited financial statements and the related
notes thereto appearing in the Funds' Statement of Additional Information dated
January 31, 1998.
Further information about the Fund's performance for the period commencing
August 8, 1997 and ending December 31, 1997 is contained in such Statement of
Additional Information, which may be obtained without charge by calling (800)
637-2548 or by writing SEI Investments Distribution Co., Oaks, Pennsylvania
19456.
For the periods ended December 31, 1997.
<TABLE>
<CAPTION>
REALIZED AND DIVIDENDS
NET ASSET NET UNREALIZED FROM NET DISTRIBUTION
VALUE BEGINNING INVESTMENT GAINS ON INVESTMENT FROM
OF PERIOD INCOME INVESTMENTS INCOME CAPITAL GAIN
Micro Cap Value Fund (1)
<S> <C> <C> <C> <C> <C>
Class C $10.00 $0.01 $(0.04) $(0.01) $(0.59)
</TABLE>
WIDE TABLE CONTINUED
<TABLE>
<CAPTION>
RATIO OF
NET RATIO OF NET EXPENSES TO
NET ASSET ASSETS RATIO OF INVESTMENT AVERAGE
VALUE END OF EXPENSES TO INCOME TO NET ASSETS AVERAGE
END OF TOTAL PERIOD AVERAGE AVERAGE (EXCLUDING PORTFOLIO COMMISSION
PERIOD RETURN (000) NET ASSETS NET ASSETS WAIVERS) TURNOVER (B)
Micro Cap Value Fund (1)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class C $ 9.37 (0.19)%+ $220,228 0.88% 0.17% 0.97% 2% $0.0622
</TABLE>
+ Return is for the period indicated and has not been annualized.
(1) Commenced operations on August 8, 1997. All ratios for the period have been
annualized.
<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 three separate classes (Class A, Class
B and Class C) 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 except Real Estate Securities Fund, Health
Sciences Fund, and Technology Fund is a diversified investment company, as
defined in the Investment Company Act of 1940 (the "1940 Act"). Real Estate
Securities Fund, Health Sciences Fund, and Technology Fund are non-diversified
companies under the 1940 Act.
If a percentage limitation on investments by a Fund stated below or in the
Statement of Additional Information is adhered to at the time of an investment,
a later increase or decrease in percentage resulting from changes in asset
values will not be deemed to violate the limitation except in the case of the
limitation on illiquid investments. 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 their shares will not be deemed to violate the 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, except in the case of
Equity Income Fund, in no event will more than 5% of any Fund's net assets be
invested in non-investment grade securities. Descriptions of the rating
categories of Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies, Inc. ("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."
<PAGE>
BALANCED FUND
OBJECTIVE. Balanced Fund has an objective of maximizing total return (capital
appreciation plus income).
INVESTMENT POLICIES. Balanced Fund seeks to achieve its objective by investing
in a balanced portfolio of equity securities and fixed income securities. Over
the long term, it is anticipated that the Fund's asset mix will average
approximately 60% equity securities and 40% fixed income securities with the
asset mix normally ranging between 40% and 75% equity securities, between 25%
and 60% fixed income securities (including only that portion of the value of
convertible securities attributable to their fixed income characteristics), and
between 0% and 25% money market instruments. The Adviser may make moderate
shifts among asset classes in order to attempt to increase returns or reduce
risk.
With respect to the equity security portion of the Fund's portfolio, the Adviser
follows the same investment policies as are described below under "-- Stock Fund
- -- Investment Policies."
The fixed income portion of the Fund's portfolio is invested in investment grade
debt securities, at least 65% of which are United States Government obligations
and corporate debt obligations and mortgage-related securities rated at least A
by Standard & Poor's or Moody's or which have been assigned an equivalent rating
by another nationally recognized statistical rating organization. Under normal
market conditions, the weighted average maturity of the fixed income securities
held by the Fund will not exceed 15 years.
The Fund's permitted fixed income investments include notes, bonds and discount
notes of United States Government agencies or instrumentalities; domestic issues
of corporate debt obligations having floating or fixed rates of interest and
rated at least BBB by Standard & Poor's or Baa by Moody's, or which have been
assigned an equivalent rating by another nationally recognized statistical
rating organization, or which are of comparable quality in the judgment of the
Adviser; other investments, including mortgage-backed securities, which are
rated in one of the four highest categories by a nationally recognized
statistical rating organization or which are of comparable quality in the
judgment of the Adviser; and commercial paper which is rated A-1 by Standard &
Poor's or P-1 by Moody's or which has been assigned an equivalent rating by
another nationally recognized statistical rating organization. Unrated
securities will not exceed 10% in the aggregate of the value of the total fixed
income securities held by the Fund.
Subject to the foregoing limitations, the fixed income securities in which the
Fund may invest include (i) mortgage-backed securities (provided that the Fund
will not invest more than 10% of its total fixed income assets in interest-only,
principal-only or inverse floating rate mortgage-backed securities); (ii)
asset-backed securities; and (iii) bank instruments. In addition, the Fund may
invest up to 15% of its total fixed income assets in foreign securities payable
in United States dollars. For information about these kinds of investments and
certain associated risks, see the related headings under "Special Investment
Methods," and for information concerning certain risks associated with investing
in fixed income securities generally, see "Special Investment Methods -- Fixed
Income 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 and write call options on stock indices
related to such equity securities; (iv) purchase securities on a when-issued or
delayed delivery basis; (v) engage in the lending of portfolio securities; (vi)
in order to attempt to reduce risk, invest in exchange traded put and call
options on interest rate futures contracts and on interest rate indices; and
(vii) in order to attempt to reduce risk, write covered call options on interest
rate indices. For information about these investment methods, restrictions on
their use, and certain
<PAGE>
associated risks, see the related headings under "Special Investment Methods."
For temporary defensive purposes, 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.
REAL ESTATE SECURITIES FUND
OBJECTIVE. Real Estate Securities Fund has an objective of providing above
average current income and long-term capital appreciation by investing primarily
in equity securities of real estate companies.
INVESTMENT POLICIES. Under normal market conditions, Real Estate Securities Fund
invests at least 65% of its total assets in income producing equity securities
of publicly traded companies principally engaged in the real estate industry.
For this purpose, a company is deemed to be "principally engaged" in the real
estate industry if (i) it derives at least 50% of its revenues or profits from
the ownership, construction, management, financing or sale of residential,
commercial or industrial real estate, or (ii) has at least 50% of the fair
market value of its assets invested in such real estate. The Fund seeks to
invest in equity securities that provide a dividend yield that exceeds the
composite dividend yield of the securities included in the S&P 500.
A majority of the Fund's total assets will be invested in securities of real
estate investment trusts ("REITs"). REITs are publicly traded corporations or
trusts that specialize in acquiring, holding, and managing residential,
commercial or industrial real estate. A REIT is not taxed at the entity level on
income distributed to its shareholders or unitholders if it distributes to
shareholders or unitholders at least 95% of its taxable income for each taxable
year and complies with regulatory requirements relating to its organization,
ownership, assets and income.
REITs generally can be classified as Equity REITs, Mortgage REITs, and Hybrid
REITs. An Equity REIT invests the majority of its assets directly in real
property and derives its income primarily from rents and from capital gains on
real estate appreciation which are realized through property sales. A Mortgage
REIT invests the majority of its assets in real estate mortgage loans and
derives its income primarily from interest payments. A Hybrid REIT combines the
characteristics of an Equity REIT and a Mortgage REIT. Although the Fund can
invest in all three kinds of REITs, its emphasis is expected to be on
investments in Equity REITs.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund and write call options on stock indices
related to such equity securities; (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, the Fund may without limitation hold cash or
invest in cash items of the kinds described under "Special Investment
<PAGE>
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.
Because Real Estate Securities Fund invests primarily in the real estate
industry, it is particularly subject to risks associated with that industry. The
real estate industry has been subject to substantial fluctuations and declines
on a local, regional and national basis in the past and may continue to be in
the future. Real property values and incomes from real property may decline due
to general and local economic conditions, overbuilding and increased
competition, increases in property taxes and operating expenses, changes in
zoning laws, casualty or condemnation losses, regulatory limitations on rents,
changes in neighborhoods and in demographics, increases in market interest
rates, or other factors. Factors such as these may adversely affect companies
which own and operate real estate directly, companies which lend to such
companies, and companies which service the real estate industry. Although the
Fund will operate as a non-diversified investment company under the 1940 Act, it
intends to conduct its operations so as to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended.
Because the Fund may invest a substantial portion of its assets in REITs, it
also is subject to risks associated with direct investments in REITs. Equity
REITs will be affected by changes in the values of and incomes from the
properties they own, while Mortgage REITs may be affected by the credit quality
of the mortgage loans they hold. In addition, REITs are dependent on specialized
management skills and on their ability to generate cash flow for operating
purposes and to make distributions to shareholders or unitholders. REITs may
have limited diversification and are subject to risks associated with obtaining
financing for real property, as well as to the risk of self-liquidation. REITs
also can be adversely affected by their failure to qualify for tax-free
pass-through treatment of their income under the Code or their failure to
maintain an exemption from registration under the 1940 Act. By investing in
REITs indirectly through the Fund, a shareholder bears not only a proportionate
share of the expenses of the Fund, but also may indirectly bear similar expenses
of some of the REITs in which it invests.
EQUITY INCOME FUND
OBJECTIVE. Equity Income Fund has an objective of long-term growth of capital
and income.
INVESTMENT POLICIES. Under normal market conditions, Equity Income Fund invests
at least 65% of its total assets in equity securities of issuers believed by the
Adviser to be characterized by sound management, the ability to finance expected
growth and the ability to pay above average dividends.
The Fund invests in equity securities that have relatively high dividend yields
and which, in the Adviser's opinion, will result in a relatively stable Fund
dividend with a growth rate sufficient to maintain the purchasing power of the
income stream. Although the Adviser anticipates that higher yielding equity
securities will generally represent the core holdings of the Fund, the Fund may
invest in lower yielding but higher growth equity securities to the extent that
the Adviser believes such investments are appropriate to achieve portfolio
balance. All securities held by the Fund will provide current income consistent
with the Fund's investment objective.
The "equity securities" in which the Fund may invest include corporate debt
obligations which are convertible into common stock. These convertible debt
obligations may include obligations rated at the time of purchase 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, or which are of comparable quality in the judgment of the Adviser.
Debt obligations rated less than BBB by Standard & Poor's or Baa by Moody's are
considered to be less than "investment grade" and are sometimes referred to as
"junk bonds." Obligations rated CCC by
<PAGE>
Standard & Poor's or Caa by Moody's are considered to be of poor standing and
are predominantly speculative. Descriptions of Standard & Poor's and Moody's
rating categories are contained in the Statement of Additional Information. If
the rating of an obligation is reduced below the categories set forth above
after purchase or is discontinued, the Fund is not required to sell the
obligation but may consider doing so.
Purchases of less than investment grade convertible debt obligations are
intended to advance the Fund's objective of long-term growth of capital through
the "upside" potential of the obligations' conversion features and to advance
the Fund's objective of income through receipt of interest payable on the
obligations. The Fund will not invest more than 25% of its total assets in
convertible debt obligations which are rated less than investment grade or which
are of comparable quality in the judgment of the Adviser. For the year ended
September 30, 1997, the following weighted average percentages of the Fund's
total assets were invested in convertible and nonconvertible debt obligations
with the indicated Standard & Poor's ratings or their equivalents: AAA, 0%; AA,
0%; A, 0%; BBB, 1%; BB, 0%; B, 1%; and CCC, 0%.
Debt obligations which are rated less than investment grade generally are
subject to greater market fluctuations and greater risk of loss of income and
principal due to default by the issuer than are higher-rated obligations. The
value of these obligations tends to reflect short-term corporate, economic,
interest rate and market developments and investor perceptions of the issuer's
credit quality to a greater extent than investment grade obligations. In
addition, since the market for these obligations is relatively new and does not
have as many participants as the market for higher-rated obligations, it may be
more difficult to dispose of or to determine the value of these obligations. In
the case of a convertible debt obligation, these risks may be present in a
greater degree where the principal amount of the obligation is greater than the
current market value of the common stock into which it is convertible.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund and write call options on stock indices
related to such equity securities; (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, 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.
EQUITY INDEX FUND
OBJECTIVE. Equity 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. Equity Index Fund invests primarily (at least 65% of total
assets) in common stocks included in the S&P 500. The Adviser believes that the
Fund's objective can best
<PAGE>
be achieved by investing in the common stocks of approximately 50% to 100% of
the issues included in the S&P 500, depending on the size of the Fund.
Standard & Poor's designates the stocks included in the S&P 500 on a statistical
basis. A particular stock's weighting in the S&P 500 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 S&P 500. From time
to time, Standard & Poor's may add or delete stocks to or from the S&P 500.
Inclusion of a particular stock in the S&P 500 does not imply any opinion by
Standard & Poor's as to its merits as an investment, nor is Standard & Poor's 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 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. Portfolio turnover is expected to be well
below that of actively managed mutual funds. Inasmuch as the common stock of the
Adviser's parent company U.S. Bancorp is included in the S&P 500, such stock may
be purchased by the Fund consistent with its indexing-based policies.
Because the Fund may not always hold all of the stocks included in the S&P 500,
the Fund will not duplicate the S&P 500's performance precisely. However, there
will be a close correlation between the Fund's performance and that of the S&P
500 in both rising and falling markets. The Fund will attempt to achieve a
correlation between the performance of its portfolio and that of the S&P 500 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 S&P 500. The Fund's ability to replicate the performance of the S&P 500 may
be affected by, among other things, changes in securities markets, the manner in
which Standard & Poor's calculates the S&P 500, the amount and timing of cash
flows into and out of the Fund, commissions, sales charges (if any) and other
expenses. Although cash flows into and out of the Fund will affect the Fund's
portfolio turnover rate and its ability to replicate the S&P 500's performance,
investment adjustments will be made, as practicably as possible, to account for
these circumstances. In the event the Fund is unable to achieve this correlation
over time, the Board of Directors of the Fund will consider alternative
strategies for the Fund.
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 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. These types of contracts and options and
certain associated risks are described under "Special Investment Methods --
Options Transactions." In addition, the Fund may engage in securities lending as
described under "Special Investment Methods -- Lending of Portfolio Securities."
For temporary defensive purposes, 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.
<PAGE>
STOCK FUND
OBJECTIVES. Stock Fund has a primary objective of capital appreciation. A
secondary objective of the Fund is to provide current income.
INVESTMENT POLICIES. Under normal market conditions, Stock Fund invests at least
65% of its total assets in common stocks diversified among a broad range of
industries and among companies that have a market capitalization of at least $1
billion at the time of purchase. In selecting equity securities, the Adviser
employs a value-based selection discipline, investing in equity securities it
believes are undervalued relative to other securities in the same industry or
market at the time of purchase. In assessing relative value, the Adviser will
consider factors such as ratios of market price to earnings, market price to
book value, 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 less than $1
billion and in fixed income securities of the kinds described under "Special
Investment Methods -- Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund and write call options on stock indices
related to such equity securities; (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, 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.
DIVERSIFIED GROWTH FUND
OBJECTIVES. Diversified Growth Fund has a primary objective of long-term growth
of capital. A secondary objective of the Fund is to provide current income.
INVESTMENT POLICIES. Under normal market conditions, Diversified Growth Fund
invests at least 65% of its total assets in equity securities of a diverse group
of companies that, in the Adviser's judgment, exhibit a combination of above
average growth in revenue and earnings, strong management and sound and
improving financial condition.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund and write call options on stock indices
<PAGE>
related to such equity securities; (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, 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.
SPECIAL EQUITY FUND
OBJECTIVE. Special Equity Fund has an objective of capital appreciation.
INVESTMENT POLICIES. Under normal market conditions, Special Equity Fund invests
at least 65% of its total assets in equity securities of mid-capitalization
companies. For these purposes, mid-capitalization companies are deemed those
with market capitalizations of from $1 billion to $5 billion at the time of
purchase. In selecting equity securities, the Adviser employs a value-based
selection discipline, investing in equity securities it believes are undervalued
relative to other securities in the same industry or market at the time of
purchase. In assessing relative value, the Adviser will consider factors such as
ratios of market price to earnings, market price to book value, 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 fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund and write call options on stock indices
related to such equity securities; (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, 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.
REGIONAL EQUITY FUND
OBJECTIVE. Regional Equity Fund has an objective of capital appreciation.
INVESTMENT POLICIES. Regional Equity Fund seeks to achieve its objective by
investing, in normal market conditions, at least 65% of its total assets in
equity securities of small-capitalization companies headquartered in Minnesota,
North and South Dakota, Montana, Wisconsin, Michigan, Iowa, Nebraska, Colorado
and Illinois. 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 employs a value-based
selection discipline, investing in equity securities it believes are undervalued
relative to other securities in the same industry or market at the time of
purchase. In assessing relative value,
<PAGE>
the Adviser will consider factors such as ratios of market price to earnings,
market price to book value, market price to assets, estimated earnings growth
rate, cash flow and liquidation value.
In addition to the risks associated with investing in small-capitalization
companies, see "-- Risks to Consider -- Small-Capitalization Companies" below,
the Fund's policy of concentrating its equity investments in a geographic region
means that it will be subject to adverse economic, political or other
developments in that region. Although the region in which the Fund principally
invests has a diverse industrial base (including, but not limited to,
agriculture, mining, retail, transportation, utilities, heavy and light
manufacturing, financial services, insurance, computer technology and medical
technology), this industrial base is not as diverse as that of the country as a
whole. The Fund therefore may be less diversified by industry and company than
other funds with a similar investment objective and no geographic limitation.
The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities without regard to the location of the issuer's headquarters or
the issuer's market capitalization and in fixed income securities of the kinds
described under "Special Investment Methods -- Fixed Income 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 and write call options on stock indices
related to such equity securities; (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, 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.
EMERGING GROWTH FUND
OBJECTIVE. Emerging Growth Fund has an objective of growth of capital.
INVESTMENT POLICIES. Under normal market conditions, Emerging Growth Fund
invests at least 65% of its total assets in equity securities of
small-capitalization companies that exhibit, in the Adviser's opinion,
outstanding potential for superior growth. For these purposes,
small-capitalization companies are deemed those with market capitalizations of
less than $1 billion at the time of purchase. Companies that participate in
sectors that are identified by the Adviser as having long-term growth potential
generally are expected to make up a substantial portion of the Fund's holdings.
These companies often have established a market niche or have developed unique
products or technologies that are expected by the Adviser to produce superior
growth in revenues and earnings.
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
<PAGE>
covering up to 25% of the equity securities owned by the Fund and write call
options on stock indices related to such equity securities; (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, 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.
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 capitalization 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 in the same industry or market at time of purchase.
In assessing relative value, the Adviser will consider such factors as ratios of
market price to earnings, market price to book value, 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 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, 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.
MICRO CAP VALUE FUND
OBJECTIVE. Micro Cap Value Fund has an objective of capital appreciation.
INVESTMENT POLICIES. Under normal market conditions, Micro Cap Value Fund
invests at least 65% of its total assets in equity securities of very small-
capitalization companies. For these purposes, very small-capitalization
companies are deemed those with market capitalizations of less than $500 million
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 in the same industry or market at time
of purchase. In assessing relative value, the Adviser will consider
<PAGE>
such factors as ratios of market price to earnings, market price to book value,
market price to assets, estimated earnings growth rate, cash flow and
liquidation value.
The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of $500 million or
more and in fixed income securities of the kinds described under "Special
Investment Methods -- Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed delivery basis; and (v) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes, 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 primarily (at least 65% of
total assets) in common stocks included in the EAFE Index. The EAFE Index
includes approximately 1,077 companies representing the stock markets of
approximately 14 European countries, Australia, New Zealand, Japan, Hong Kong
and Singapore/Malaysia. 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
an industry or country closely approximates the percentage of the EAFE Index
represented by that industry or country. Portfolio turnover is expected to be
well below that of actively managed mutual funds.
Because the Fund may not always hold all of the stocks included in the EAFE
Index, the Fund will not duplicate the EAFE Index performance
<PAGE>
precisely. However, 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 market, 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),
the amount and timing of cash flows into and out of the Fund, commissions, sales
charges (if any) and other expenses. 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. In the event the
Fund is unable to achieve this correlation over time, the Board of Directors of
the Fund will consider alternative strategies for the Fund.
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."
For temporary defensive purposes, 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 FUND
OBJECTIVE. International Fund has an objective of long-term growth of capital.
INVESTMENT POLICIES. Under normal market conditions, International Fund invests
at least 65% of its total assets in an internationally diversified portfolio of
equity securities which trade in markets other than the United States. Generally
these securities are issued by companies (i) domiciled in countries other than
the United States, or (ii) that derive at least 50% of either their revenues or
their pre-tax income from activities outside of the United States. The
securities in which the Fund invests include common and preferred stock,
securities (bonds and preferred stock) convertible into common stock, warrants
and securities representing underlying international securities such as American
Depositary Receipts and European Depositary Receipts. The Fund also may hold
securities of other investment companies (which investments are also subject to
the advisory fee) and depositary or custodial receipts representing beneficial
interests in any of the foregoing securities.
The Fund may invest in securities of issuers in, but not limited to, Argentina,
Australia, Austria, Belgium, Brazil, Canada, Chile, China, Columbia, the Czech
Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India,
Indonesia, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Malaysia, Mexico,
the Netherlands, New Zealand, Norway, Pakistan, Peru, The
<PAGE>
Philippines, Poland, Portugal, Singapore, South Africa, Spain, Sri Lanka,
Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Kingdom, and
Venezuela. Normally, the Fund will invest at least 65% of its total assets in
securities traded in at least three foreign countries, including the countries
listed above. It is possible, although not currently anticipated, that up to 35%
of the Fund's assets could be invested in United States companies.
In investing the Fund's assets, the Sub-Adviser expects to place primary
emphasis on country selection, followed by selection of industries or sectors
within or across countries and by selection of individual stocks corresponding
to the industries or sectors selected. Investments are expected to be made
primarily in developed markets and larger capitalization companies. However, the
Fund also may invest in emerging markets where smaller capitalization companies
are the norm.
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 50% of the
equity securities owned by the Fund and write call options on stock indices
related to such equity securities; (iv) purchase securities on a when-issued or
delayed delivery basis; (v) engage in the lending of portfolio securities; (vi)
engage in foreign currency transactions; (vii) in order to attempt to reduce
risk, purchase put and call options on foreign currencies; (viii) write covered
call options on foreign currencies owned by the Fund; and (ix) enter into
contracts for the future purchase or delivery of securities, foreign currencies,
and indices, purchase or sell options on any such futures contracts and engage
in related closing transactions. For information about these investment methods,
restrictions on their use, and certain associated risks, see the related
headings under "Special Investment Methods."
Under normal market conditions, it is expected that the Fund will be fully
invested in equity securities and related hedging instruments (except for
short-term investments of cash for liquidity purposes and pending investment).
However, for temporary defensive purposes, 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 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" and
"-- Foreign Currency Transactions" elsewhere herein. Because of the special
risks associated with foreign investing and the Sub-Adviser's ability to invest
substantial portions of the Fund's assets in a small number of countries, the
Fund may be subject to greater volatility than most mutual funds which invest
principally in domestic securities.
HEALTH SCIENCES FUND
OBJECTIVE.
Health Sciences Fund has an objective of long-term growth of capital.
INVESTMENT POLICIES. Under normal market conditions, Health Sciences Fund
invests at least 65% of its total assets in equity securities of companies which
the Adviser considers to be principally engaged in the development, production
or distribution of products or services connected with health care or medicine.
Examples of these products and services include pharmaceuticals, health care
services and administration, diagnostics, medical equipment and supplies,
medical technology, and medical research and development. The Adviser
anticipates investing in companies that have the potential for above average
growth in revenue and earnings as a result of new or unique products, processes
or services, increasing demand for a company's products or services, established
market leadership, or
<PAGE>
exceptional management. A company will be deemed "principally engaged" in the
health sciences industries if at the time of investment the Adviser determines
that at least 50% of its assets, revenues or profits are derived from those
industries.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund and write call options on stock indices
related to such equity securities; (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, 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.
Health Sciences Fund operates as a non-diversified investment company, as
defined in the 1940 Act, but intends to conduct its operations so as to qualify
as a regulated investment company for purposes of the Internal Revenue Code of
1986, as amended. Since a relatively high percentage of the assets of the Fund
may be invested in the securities of a limited number of issuers which will be
in the same or related economic sectors, the Fund's portfolio securities may be
more susceptible to any single economic, technological or regulatory occurrence
than the portfolio securities of diversified investment companies. Many products
and services in the health sciences industries may become rapidly obsolete due
to technological and scientific advances. In addition, the health sciences
industries generally are subject to greater governmental regulation than many
other industries, so that changes in governmental policies may have a material
effect on the demand for products and services in these industries. Regulatory
approvals generally are required before new drugs, medical devices or medical
procedures can be introduced and before health care providers can acquire
additional facilities or equipment.
TECHNOLOGY FUND
OBJECTIVE. Technology Fund has an objective of long-term growth of capital.
INVESTMENT POLICIES. Under normal market conditions, Technology Fund invests at
least 65% of its total assets in equity securities of companies which the
Adviser believes have, or will develop, products, processes or services that
will provide or will benefit significantly from technological advances and
improvements. The description of the technology sector is interpreted broadly by
the Adviser and may include such products or services as inexpensive computing
power, such as personal computers; improved methods of communications, such as
satellite transmission; or labor saving machines or instruments, such as
computer-aided design equipment. The prime emphasis of the Fund is to identify
those companies positioned, in the Adviser's opinion, to benefit from
technological advances in areas such as semiconductors, minicomputers and
peripheral equipment, scientific instruments, computer software, communications,
and future automation trends in both office and factory settings.
<PAGE>
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund and write call options on stock indices
related to such equity securities; (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, 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.
Technology Fund operates as a non-diversified investment company, as defined in
the 1940 Act, but intends to conduct its operations so as to qualify as a
regulated investment company for purposes of the Internal Revenue Code of 1986,
as amended. Since a relatively high percentage of the assets of the Fund may be
invested in the securities of a limited number of issuers which will be in the
same or related economic sectors, the Fund's portfolio securities may be more
susceptible to any single economic, technological or regulatory occurrence than
the portfolio securities of diversified investment companies. In addition,
competitive pressures may have a significant effect on the financial condition
of companies in the technology industry. For example, if technology continues to
advance at an accelerated rate, and the number of companies and product
offerings continue to expand, these companies could become increasingly
sensitive to short product cycles and aggressive pricing.
RISKS TO CONSIDER
An investment in any of the Funds involves certain risks in addition to those
noted above with respect to particular Funds. 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. Regional Equity Fund, Emerging Growth Fund,
Small Cap Value Fund and Micro Cap Value Fund emphasize investments in companies
with small or very small market capitalizations, and the remaining Funds
(excluding Equity Index Fund and International Index Fund) are permitted to
invest in equity securities of such companies. 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 the Funds invest in small or very small
capitalization companies, they are subject to this risk of greater volatility.
ACTIVE MANAGEMENT. All of the Funds other than Equity Index Fund and
International Index Fund are actively managed to a greater or lesser degree by
the Adviser or, in the case of International Fund, the Sub-Adviser. The
performance of these
<PAGE>
Funds therefore will reflect in part the ability of the Adviser or Sub-Adviser
to select securities which are suited to achieving the Funds' investment
objectives. Due to their active management, these Funds could underperform other
mutual funds with similar investment objectives or the market generally.
FOREIGN SECURITIES. International Index Fund and International Fund are 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 securities. These risks are discussed under "Special
Investment Methods -- Foreign Securities" elsewhere herein. Because of the
special risks associated with foreign investing, the Funds 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
U.S. Bank National Association, 601 Second Avenue South, Minneapolis, Minnesota
55402, acts as the Funds' investment adviser through its First American 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 September 30, 1997, the Adviser was managing accounts with an aggregate value
of approximately $55 billion, including mutual fund assets of approximately $20
billion. U.S. Bancorp, 601 Second Avenue South, Minneapolis, Minnesota 55480, is
the holding company for the Adviser.
Each of the Funds other than International Fund has agreed to pay the Adviser
monthly fees calculated on an annual basis equal to 0.70% of its average daily
net assets. International Fund pays the Adviser a monthly fee calculated on the
same basis equal to 1.25% of its average daily net assets, out of which the
Adviser pays the Sub-Adviser's fee. The Adviser may, at its option, waive any or
all of its fees, or reimburse expenses, with respect to any Fund from time to
time. Any such waiver or reimbursement is voluntary and may be discontinued at
any time except, with respect to the Class C Shares of Stock Fund, Equity Index
Fund, Small Cap Value Fund and International Index Fund, the Adviser will
maintain current waivers in effect through September 30, 1998. 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.
While the advisory fee payable to the Adviser with respect to International Fund
is higher than the advisory fee paid by most mutual funds, the Adviser believes
it is comparable to that paid by many funds having similar investment objectives
and policies.
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,
<PAGE>
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.
SUB-ADVISER TO INTERNATIONAL FUND
Marvin & Palmer Associates, Inc., 1201 North Market Street, Suite 2300,
Wilmington, Delaware 19801, is Sub-Adviser to International Fund under an
agreement with the Adviser (the "Sub-Advisory Agreement"). The Sub-Adviser is
responsible for the investment and reinvestment of International Fund's assets
and the placement of brokerage transactions in connection therewith. For its
services under the Sub-Advisory Agreement, the Sub-Adviser is paid a monthly fee
by the Adviser calculated on an annual basis equal to 0.75% of the first $100
million of International Fund's average daily net assets, 0.50% of International
Fund's average daily net assets in excess of $100 million up to $300 million,
0.45% of International Fund's average daily net assets in excess of $300 million
up to $500 million, and 0.40% of International Fund's average daily net assets
in excess of $500 million.
The Sub-Adviser, a privately held company, was founded in 1986 by David F.
Marvin and Stanley Palmer. The stock of the Sub-Adviser is owned by Mr. Marvin,
Mr. Palmer and 24 other holders. The Sub-Adviser is engaged in the management of
global, non-United States and emerging markets equity portfolios for
institutional accounts. At September 30, 1997, the Sub-Adviser managed a total
of $4.7 billion in investments for 50 institutional investors.
PORTFOLIO MANAGERS
Balanced Fund and Stock Fund are managed by a committee comprised of Mr.
Doak, Mr. Murphy, Mr. Rovner, Mr. Dubiak, Mr. Whitcomb, Mr. Shields and Mr.
Twele, whose backgrounds are set forth below. Equity Income Fund and
Diversified Growth Fund are managed by a committee comprised of Mr. Bren, Mr.
Doak, Mr. Dubiak, Ms. Johnson, Mr. Murphy, Mr. Whitcomb, and Mr. Glenn
Johnson, whose backgrounds also are set forth below. Health Sciences Fund,
Regional Equity Fund, Emerging Growth Fund, Small Cap Value Fund and Micro
Cap Value Fund are managed by a committee comprised of Mr. Dubiak, Mr. Bren,
Mr. Rose, Mr. Buss, Mr. Hipple and Mr. Magdlen, whose backgrounds also are
set forth below. The remaining Funds are managed or co-managed as indicated
below.
JAMES DOAK is a member of the committees which manage four of the Funds, as set
forth above. Mr. Doak joined the Adviser in 1982 after serving for two years as
vice president of INA Capital Advisors and ten years as Vice President of
Loomis-Sayles & Co. He has managed assets for individual and institutional
clients, specializing in equity investments. Mr. Doak received his bachelor's
degree from Brown University and his master's degree in business administration
from the Wharton School of Business. He is a Chartered Financial Analyst.
JOHN M. MURPHY, JR. is a member of the committees which manage four of the
Funds, as set forth above. Mr. Murphy is Chief Investment Officer of the
Adviser's First American Asset Management
<PAGE>
group, having joined the Adviser in 1984. He has more than 30 years in the
investment management field and served with Investment Advisers, Inc. and Blyth,
Eastman, Dillon & Co. before joining the Adviser. Mr. Murphy received his
bachelor's degree from Regis College.
JAMES S. ROVNER is a member of the committee which manages two of the Funds,
as set forth above, and he is portfolio co-manager for Special Equity Fund,
Equity Index Fund and International Index Fund. Mr. Rovner joined the Adviser
in 1986 and has managed assets for institutional and individual clients for
over 15 years, specializing in equity and balanced investment strategies. Mr.
Rovner received his bachelor's degree and his master's degree in business
administration from the University of Wisconsin. He is a Chartered Financial
Analyst.
GERALD C. BREN is a member of the committees which manage seven of the Funds,
as set forth above. Mr. Bren joined the Adviser in 1972 as an investment
analyst. Mr. Bren received his master's degree in business administration
from the University of Chicago. He is a Chartered Financial Analyst.
ALBIN S. DUBIAK is a member of the committees which manage nine of the Funds,
as set forth above. Mr. Dubiak began his investment career as a security
trader with The 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.
CORI B. JOHNSON is a member of the committee which manages two of the Funds,
as set forth above, and she is portfolio co-manager for Real Estate
Securities Fund. She joined the Adviser in 1991 as a securities analyst. Ms.
Johnson received her bachelor's degree from Concordia College and her
master's degree in business administration from the University of Minnesota.
She is a Chartered Financial Analyst.
ROLAND P. WHITCOMB, JR. is a member of the committees which manage four of
the Funds, as set forth above, and he is portfolio co-manager for Technology
Fund. Mr. Whitcomb joined the Adviser in 1986 after serving as an account
executive with Smith Barney & Co. since 1979. Mr. Whitcomb received his
bachelor's degree from the University of Chicago. He is a Chartered Financial
Analyst.
KEVIN SHIELDS is a member of the committee which manages two of the Funds and
is portfolio co-manager for Special Equity Fund. Mr. Shields joined the
Adviser in 1993 and has five years of investment industry experience. Mr.
Shields has analytic responsibilities for the banking, financial services and
insurance industries. Mr. Shields received his bachelor's degree from
Marquette University and his master's degree from the Applied Security and
Analysis program at the University of Wisconsin.
JOHN A. TWELE is a member of the committee which manages two of the Funds, as
set forth above. Prior to joining the Adviser in 1996, he was employed in
various positions at American Express Financial Advisors, Investment
Advisers, Inc., Kemper Financial, and Mercantile Trust. Mr. Twele received
his bachelor's degree from Indiana University.
DOUGLAS K. ROSE is a member of the committee which manages five of the Funds.
Mr. Rose joined the Adviser in 1996 and has ten years of investment industry
experience. Mr. Rose has analytic responsibilities for business services,
environmental services, leisure and restaurant/lodging industries. Mr. Rose
holds a bachelor's degree from the University of Nebraska, and master's degree
in business administration from the University of Minnesota. He is a Chartered
Financial Analyst.
ROBERT L. BUSS is a member of the committee which manages five of the Funds.
Mr. Buss joined the Adviser in 1989 and has nine years of investment industry
experience. In 1996, Mr. Buss began analytical work in the equity research
area covering electric equipment, machinery and diversified manufacturing.
Mr. Buss holds a
<PAGE>
bachelor's degree in economics from the University of Minnesota.
ANTHONY W. HIPPLE is a member of the committee which manages five of the
Funds. Mr. Hipple is primarily responsible for portfolio analytics and
screening. Mr Hipple joined the Adviser in 1996 and has four years of
investment industry experience. Mr. Hipple holds a bachelor's degree from the
University of Northern Iowa and a master's degree in business administration
from the University of Iowa.
EVAN C. LUNDQUIST is portfolio co-manager of Equity Index Fund and
International Index Fund. He joined the Adviser in 1993 and has four years of
investment industry experience. Mr. Lundquist has analytic responsibilities
for paper/forest products, metals and mining, steel, engineering and
construction, and building and appliances industries. Mr. Lundquist received
his bachelor's degree from St. Mary's College.
FRANK G. MAGDLEN is a member of the committee which manages five of the funds.
He joined the Adviser in 1979 and has 24 years of investment industry
experience. Prior to joining the Adviser, he was with First Interstate and
Farmers Group. Mr. Magdlen received his bachelor's degree from the University of
Portland and his master's degree in business administration from the University
of Southern California. He is a Chartered Financial Analyst and past president
of the Portland Society of Financial Analysts.
GLENN E. JOHNSON is a member of the committee which manages two of the funds.
He joined the Adviser in 1989 and has 13 years of investment industry
experience. Prior to joining the Adviser, he was an analyst with Piper
Jaffray. Mr. Johnson received his bachelor's degree and his master's degree
in business administration from the University of Minnesota. He is a
Chartered Financial Analyst.
DAVID JOHNSON is a co-manager of Real Estate Securities Fund. He joined the
Adviser in 1997 and has four years of investment industry experience. He has
analytic responsibilities for REITs, business services, printing and publishing,
and advertising. Prior to joining the Adviser, he was with the State of
Wisconsin Investment Board. He received his bachelor's degree from St. Lawrence
University and his master's degree in business administration from the
University of Connecticut.
A committee comprised of the following seven individuals shares the management
of International Fund on behalf of the Sub-Adviser:
DAVID F. MARVIN is Chairman of the Sub-Adviser and founded the firm together
with Mr. Palmer in 1986. Before founding the Sub-Adviser, Mr. Marvin was Vice
President in charge of DuPont Corporation's $10 billion internally-managed
pension fund. Prior to that Mr. Marvin was Associate Portfolio Manager, and
then Head Portfolio Manager, for Investors Diversified Services' IDS Stock
Fund. Mr. Marvin started in the investment business in 1965 as a securities
analyst for Chicago Title & Trust. Mr. Marvin received his bachelor's degree
from the University of Illinois and his master's degree in business
administration from Northwestern University. He is a Chartered Financial
Analyst and a member of the Financial Analysts Federation.
STANLEY PALMER is President of the Sub-Adviser and co-founder of the firm. Mr.
Palmer was Equity Portfolio Manager for DuPont Corporation from 1978 through
1986, an analyst and portfolio manager at Investors Diversified Services from
1971 through 1978, and an analyst at Harris Trust & Savings Bank from 1964
through 1971. Mr. Palmer received his bachelor's degree from Gustavus Adolphus
College and his master's degree in business administration from the University
of Iowa. He is a Chartered Financial Analyst and a member of the Financial
Analysts Federation.
WILLIAM E. DODGE has been Senior Managing Director and Portfolio Manager of the
Sub-Adviser since 1996. Mr. Dodge was Chief Investment Strategist and Chairman
of the Investment Policy Committee of Dean Witter in New York from 1991 to 1996,
and he served as a Senior Portfolio Manager, Director of Quantitative Equity
<PAGE>
Strategies, and United States equity analyst at the DuPont Corporation pension
fund from 1983 to 1991. From 1976 to 1983 Mr. Dodge served in various United
States portfolio management and analytical positions including senior investment
manager of a bank trust department from 1981 to 1983. Mr. Dodge received his
bachelor's degree and his master's degree in business administration from the
University of Massachusetts at Amherst. He is a Chartered Financial Analyst and
a member of the Financial Analysts Federation.
TERRY B. MASON is a Senior Vice President and Portfolio Manager of the
Sub-Adviser. Before joining the Sub-Adviser, Mr. Mason was employed for 14
years by DuPont Corporation, the last five as international equity analyst
and international trader. Mr. Mason received his bachelor's degree from
Glassboro State College and his master's degree in business administration
from Widener University.
JAY F. MIDDLETON is a Vice President and Portfolio Manager for the
Sub-Adviser and joined the firm in 1989. Mr. Middleton received his
bachelor's degree from Wesleyan University.
TODD D. MARVIN is a Vice President and Portfolio Manager for the Sub-Adviser
and joined the firm in 1991. Before joining the Sub-Adviser, Mr. Marvin was
employed by Oppenheimer & Company as an analyst in investment banking. Mr.
Marvin received his bachelor's degree from Wesleyan University.
DAVID L. SCHAEN is a Vice President and Portfolio Manager of the Sub-Adviser.
Before becoming a Portfolio Manager, Mr. Schaen was Head Trader for the
Sub-Adviser from 1991 to 1994 and an International Analyst for the Sub-Adviser
from 1994 to 1995. Prior to 1991 he was Head Trader and Investment Officer at
the Bank of Delaware. Mr. Schaen received his bachelor's degree from the
University of Delaware and his master's degree in business administration from
Widener University.
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 U.S. Bancorp.
As compensation for its services to the Funds, the Custodian is paid monthly
fees equal to 0.03% of the applicable Fund's average daily net assets (0.10% of
average daily net assets in the case of International Index Fund and
International Fund). In addition, the Custodian is reimbursed for its
out-of-pocket expenses incurred while providing its services to the Funds.
Rules adopted under the 1940 Act permit International Index Fund and
International Fund to maintain their securities and cash in the custody of
certain eligible foreign banks and depositories. International Index Fund's and
International Fund's portfolio of non-United States securities are held by
sub-custodians which are approved by the directors of FAIF or a foreign custody
manager appointed by the directors 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 and International 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 or
International Fund's assets.
Sub-custodian fees with respect to International Index Fund and International
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
<PAGE>
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, 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. U.S. Bank assists the Administrator and provides
sub-administration services for the Funds. For these services, the Administrator
compensates the sub-administrator at an annual rate of up to 0.05% of each
Fund's average daily net assets.
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, which is not affiliated with the Adviser, is a wholly-owned
subsidiary of SEI Investments Company and is located at Oaks, Pennsylvania
19456.
The Distributor, the Administrator and the Adviser may in their discretion use
their own assets to pay for certain 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, the Distributor and the Adviser and
its affiliates may provide compensation from their own resources for shareholder
services provided by third parties, including "one-stop" mutual fund networks
through which the Funds are made available.
PURCHASES AND REDEMPTIONS
OF SHARES
SHARE PURCHASES AND REDEMPTIONS
Shares of the Funds are sold and redeemed on days on which both the New York
Stock Exchange and federally-chartered banks are open for business ("Business
Days").
Payment for shares can be made only by wire transfer. All information needed
will be taken over the telephone, and the order will be considered placed when
the Custodian receives payment by wire. Federal funds should be wired as
follows: U.S. Bank National Association, Minneapolis, Minnesota, ABA Number
091000022; For Credit to: DST Systems, Inc.: 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 or
federally-chartered banks are closed. 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 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 requests 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 after the
request.
<PAGE>
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 Business Day, provided
that net asset value need not be determined on days when no Fund shares are
tendered for redemption and no order for that Fund's shares is received and on
days on which changes in the value of portfolio securities will not materially
affect the current net asset value of the Fund's shares. The price per share for
purchases or redemptions is such value next computed after the Transfer Agent
receives the purchase order or redemption request. In the case of redemptions
and repurchases of shares owned by corporations, trusts or estates, the Transfer
Agent may require additional documents to evidence appropriate authority in
order to effect the redemption, and the applicable price will be that next
determined following the receipt of the required documentation.
DETERMINING NET ASSET VALUE. The net asset value per share for each of the Funds
is determined by dividing the value of the securities owned by the Fund plus any
cash and other assets (including interest accrued and dividends declared but not
collected), less all liabilities, by the number of Fund shares outstanding. For
the purpose of determining the aggregate net assets of the Funds, cash and
receivables will be valued at their face amounts. Interest will be recorded as
accrued and dividends will be recorded on the ex-dividend date. Investments in
equity securities which are traded on a national securities exchange (or
reported on the NASDAQ national market system) are stated at the last quoted
sales price if readily available for such equity securities on each business
day; other equity securities traded in the over-the-counter market and listed
equity securities for which no sale was reported on that date are stated at the
last quoted bid price. Security valuations are furnished by an independent
pricing service that has been approved by the Board of Directors. Securities
listed on a securities exchange or an automated quotation system for which
quotations are readily available, including securities traded over the counter,
are valued at the last quoted sale price on the principal exchange on which they
are traded on the valuation date, or, if there is no such reported sale on the
valuation date, at the most recently quoted bid price. Debt obligations with
remaining maturities in excess of sixty days are valued at the most recently
quoted bid price. For such debt obligations the pricing service may employ
methods that utilize actual market transactions, broker-dealer valuations, or
other electronic data processing techniques. These techniques generally consider
such factors as security prices, yields, maturities, call features, ratings and
developments relating to specific securities in arriving at security valuations.
Debt obligations with remaining maturities of sixty days or less may be valued
at their amortized cost which approximates market value. If a security price
cannot be obtained from an independent pricing service a bid price may be
obtained from an independent broker who makes a market in the security. Foreign
securities owned by the Funds are valued at the closing prices on the principal
exchange on which they trade. If the value for a security cannot be obtained
from the sources described above, the security's value may be determined
pursuant to the fair value procedures established by the Board of Directors.
Financial futures are valued at the settlement price established each day by the
board of exchange on which they are traded. The daily settlement prices for
financial futures are provided by an independent source. Portfolio securities
underlying actively traded options are valued at their market price as
determined above. The current market value of any exchange traded options held
or written by a fund, are valued at the closing bid price for a long position or
the closing ask price for a short position.
Foreign currency forward contracts are valued at the current day's interpolated
foreign exchange rate, as calculated using the current day's exchange rate, and
the thirty, sixty, ninety and one-hundred eighty day forward rates provided by
the Reuters system.
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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 the Funds 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 the Funds. Thus,
the calculation of the Funds' net asset value may not take place
contemporaneously with the determination of the prices of foreign securities
held in the Funds' portfolios. In addition, trading in securities on foreign
markets may not take place on all days on which the New York Stock Exchange is
open for business or may take place on days on which the New York Stock Exchange
is not open for business. Therefore, the net asset value of a Fund which holds
foreign securities 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 monthly with respect to Balanced Fund, Equity
Income Fund, Equity Index Fund, Stock Fund, Diversified Growth Fund and Special
Equity Fund, to all shareholders of record on the record date. Dividends are
declared paid quarterly with respect to Real Estate Securities Fund, Emerging
Growth Fund, Small Cap Value Fund, Micro Cap Value Fund, International Index
Fund, Health Sciences Fund, and Technology Fund, and annually with respect to
International Fund. Distributions of any net realized long-term capital gains
will be made at least once every 12 months. A portion of the quarterly
distributions paid by Real Estate Securities Fund may be a return of capital.
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
of funds 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.
FEDERAL INCOME TAXES
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 from a Fund's net capital gains and designed as capital gain
dividends generally are taxable as long-term capital gains in the hands of
shareholders, regardless of the length of time during which they have held their
shares. In the case of shareholders who are individuals, estates, or trusts,
each Fund will designate the portion of each capital gain dividend that must be
treated as mid-term capital gain and the portion that must be treated as
long-term capital gain.
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. For
shareholders who are individuals, estates or trusts, the gain or loss will be
considered long-term if the shareholder has held the shares for more than 18
months and mid-term if the shareholder has held the shares for more than one
year but not more than 18 months.
A Fund may be required to "back-up" withhold 31% of any dividend, distribution,
or redemption
<PAGE>
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 and International Fund may be required to pay
withholding and other taxes imposed by foreign countries, generally at rates
from 10% to 40%, which would reduce each 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 and International Fund's taxable
year more than 50% of their respective total assets consist of securities of
foreign corporations, such Fund 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 and International Fund shareholders will be
notified of the amounts which they may deduct as foreign taxes paid or used as
foreign tax credits. International Fund filed this election for each of its two
most recent completed fiscal years ended September 30, 1997 and 1996.
Alternatively, if the amount of foreign taxes paid by International Index Fund
or International Fund is not large enough in future years to warrant making the
election described above, each Fund may claim the amount of foreign taxes paid
as a deduction against its own gross income. In that case, shareholders 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 Funds.
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 of shares, 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 of shares.
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.
<PAGE>
"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. "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.
"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.
PERFORMANCE INFORMATION
FOR SUCCESSORS TO
COMMON TRUST FUND
From time to time, Small Cap Value Fund and Micro Cap Value Fund may advertise
performance information, which includes performance data for certain predecessor
common trust funds. On November 21, 1997, Small Cap Value Fund acquired the
assets and assumed all identified liabilities of the Qualivest Small Companies
Value Fund. The Qualivest Small Companies Value Fund commenced operations on
August 1, 1994, when substantially all of the assets of a certain common trust
fund which was exempt from registration under the 1940 Act was transferred to
such fund. Micro Cap Value Fund commenced operations on August 8, 1997 when
substantially all of the assets of a certain common trust fund which was exempt
from registration under the 1940 Act was transferred to the Fund. The
predecessor common trust fund was managed by Qualivest Capital Management, Inc.
prior to the acquisition of its parent company by the Adviser's parent company.
The personnel who managed the common trust fund on behalf of Qualivest Capital
Management became employees of the Adviser, and assumed management of the Fund,
at the time the assets were transferred from the common trust fund to the Fund.
Such performance data is deemed relevant because the common trust funds were
managed using investment objectives, policies and restrictions very similar to
those of the Fund. However, the predecessor common trust funds were not subject
to certain investment restrictions that are imposed by the 1940 Act.
Accordingly, if the common trust funds have been registered under the 1940 Act,
their performance could have been adversely affected by virtue of such
investment restrictions.
<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.
CASH ITEMS
The "cash items" in which the Funds may invest, as described under "Investment
Objectives and Policies," include short-term obligations such as rated
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 a Fund; securities of other mutual funds which invest
primarily in debt obligations with remaining maturities of 13 months or less
(which investments also are subject to the advisory fee); and other similar
high-quality short-term United States dollar-denominated obligations. The other
mutual funds in which the Funds 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.
REPURCHASE AGREEMENTS
Each of the Funds may 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 or, in the case of
International Fund, the Sub-Adviser will monitor the creditworthiness of the
firms with which the Funds enter into repurchase agreements.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
Each of the Funds (excluding Equity Index Fund and International Index 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. A Fund will not accrue income with respect to securities
purchased on a when-issued or delayed delivery basis prior to their stated
delivery date.
<PAGE>
Pending delivery of the securities, each Fund will maintain in a segregated
account cash or liquid high-grade securities in an amount sufficient to meet its
purchase commitments.
The purchase of securities on a when-issued or delayed delivery basis exposes a
Fund to risk because the securities may decrease in value prior to delivery. In
addition, a Fund's purchase of securities on a when-issued or delayed delivery
basis while remaining substantially fully invested could increase the amount of
the Fund's total assets that are subject to market risk, resulting in increased
sensitivity of net asset value to changes in market prices. However, the Funds
will engage in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with their investment
objectives, and not for the purpose of investment leverage. A seller's failure
to deliver securities to a Fund could prevent the Fund from realizing a price or
yield considered to be advantageous.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, each of the Funds may lend portfolio
securities representing up to one-third of the value of its total assets to
broker-dealers, banks or other institutional borrowers of securities. 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
or, in the case of International Fund, the Sub-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
in connection with these loans, which, in the case of First Trust National
Association, are 40% of the Fund's income from such securities lending
transactions.
OPTIONS TRANSACTIONS
PURCHASES OF PUT AND CALL OPTIONS. The Funds may purchase put and call options.
These transactions will be undertaken only for the purpose of reducing risk to
the Funds; that is, for "hedging" purposes. Depending on the Fund, these
transactions may include the purchase of put and call options on equity
securities, on stock indices, on interest rate indices, or (only in the case of
International Fund) on foreign currencies. Options on futures contracts are
discussed below under "Futures and Options on Futures."
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.
None of the Funds other than International 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
<PAGE>
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
a Fund and the prices of options, and the risk of limited liquidity in the event
that a Fund seeks to close out an options position before expiration by entering
into an offsetting transaction.
WRITING OF CALL OPTIONS. The Funds may write (sell) covered call options to the
extent specified with respect to particular Funds under "Investment Objectives
and Policies." These transactions would be undertaken principally to produce
additional income. Depending on the Fund, these transactions may include the
writing of covered call options on equity securities or (only in the case of
International Fund) on foreign currencies which a Fund owns or has the right to
acquire or on interest rate indices.
When a Fund sells a covered call option, it is paid a premium by the purchaser.
If the market price of the security covered by the option does not increase
above the exercise price before the option expires, the option generally will
expire without being exercised, and the Fund will retain both the premium paid
for the option and the security. If the market price of the security covered by
the option does increase above the exercise price before the option expires,
however, the option is likely to be exercised by the purchaser. In that case the
Fund will be required to sell the security at the exercise price, and it will
not realize the benefit of increases in the market price of the security above
the exercise price of the option.
The Funds also may, to the extent specified with respect to particular Funds
under "Investment Objectives and Policies," write call options on stock indices
the movements of which generally correlate with those of the respective Funds'
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.
FUTURES AND OPTIONS ON FUTURES
Balanced Fund, Equity Index Fund, International Index Fund and International
Fund may engage in futures transactions and purchase options on futures to the
extent specified with under "Investment Objectives and Policies." Depending on
the Fund, these transactions may include the purchase of stock index futures and
options on stock index futures, and the purchase of interest rate futures and
options on interest rate futures. In addition, International 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, or foreign
currency.
A futures contract on a security obligates one party to purchase, and the other
to sell, a specified security at a specified price on a date certain in the
future. 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 a 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.
A Fund may use futures contracts and options on futures in an effort to hedge
against market risks and, in the case of International Fund, as part of its
management of foreign currency transactions. In addition, Equity Index Fund and
International Index Fund may use stock index futures and
<PAGE>
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 S&P 500 or EAFE Index, respectively, and to reduce transaction costs.
Aggregate initial margin deposits for futures contracts, and premiums paid for
related options, may not exceed 5% of a Fund's total assets, and the value of
securities that are the subject of such futures and options (both for receipt
and delivery) may not exceed 1/3 of the market value of a Fund's total assets.
Futures transactions will be limited to the extent necessary to maintain each
Fund's qualification as a regulated investment company under the Internal
Revenue Code of 1986, as amended.
Where a 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 a Fund's total assets. Where a Fund is
permitted to enter into futures contracts obligating it to purchase securities,
currency or an index in the future at a specified price, such Fund could lose
100% of its net assets in connection therewith if it engaged extensively in such
transactions and if the market value or index value of the subject securities,
currency or index at the delivery or settlement date fell to zero for all
contracts into which a Fund was permitted to enter. Where a Fund is permitted to
enter into futures contracts obligating it to sell securities or currencies (as
is the case with respect only to International Fund), its potential losses are
unlimited if it does not own the securities or currencies covered by the
contracts and it is unable to close out the contracts prior to the settlement
date.
Futures transactions involve brokerage costs and require a Fund to segregate
assets to cover contracts that would require it to purchase securities or
currencies. A Fund may lose the expected benefit of futures transactions if
interest rates, exchange rates or securities prices move 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. In addition, the
value of a Fund's futures positions may not prove to be perfectly or even highly
correlated with the value of its portfolio securities or foreign currencies,
limiting the Fund's ability to hedge effectively against interest rate, exchange
rate and/or market risk and giving rise to additional risks. 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 Real Estate Securities Fund, Equity Income
Fund, Stock Fund, Diversified Growth Fund, Special Equity Fund, Regional Equity
Fund, Emerging Growth Fund, Small Cap Value Fund, Micro Cap Value Fund, Health
Sciences Fund and Technology 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
securities 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, Equity Income Fund may invest up to 25% of its total assets, and
each of the other Funds may invest up to 5% of its net assets, in less than
investment grade convertible debt obligations. For a description of such
obligations and the risks associated therewith, see "Investment Objectives and
Policies -- Equity Income Fund."
<PAGE>
The fixed income securities specified above, as well as the fixed income
securities in which Balanced Fund may invest as described under "Investment
Objectives and Policies," 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 a Fund); (ii) credit risk (the risk that the issuers of debt
securities held by a Fund default in making required payments); and (iii) call
or prepayment risk (the risk that a borrower may exercise the right to prepay a
debt obligation before its stated maturity, requiring a Fund to reinvest the
prepayment at a lower interest rate).
FOREIGN SECURITIES
GENERAL. Under normal market conditions International Index Fund and
International Fund invests at least 65% of their respective total assets in
equity securities which trade in markets other than the United States. In
addition, the other Funds (excluding Equity Index Fund and Regional Equity 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.
Investment in foreign securities is subject to special investment risks that
differ in some respects from those related to investments in securities of
United States domestic issuers. These risks include political, social or
economic instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the imposition of exchange
controls, expropriation, limits on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation, and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Foreign securities also may be subject to greater
fluctuations in price than securities issued by United States corporations. The
principal markets on which these securities trade may have less volume and
liquidity, and may be more volatile, than securities markets in the United
States.
In addition, there may be less publicly available information about a foreign
company than about a United States domiciled company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to United States domestic
companies. There is also generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the United States.
Confiscatory taxation or diplomatic developments could also affect investment in
those countries. In addition, foreign branches of United States banks, foreign
banks and foreign issuers may be subject to less stringent reserve requirements
and to different accounting, auditing, reporting, and recordkeeping standards
than those applicable to domestic branches of United States banks and United
States domestic issuers.
JAPANESE SECURITIES. Japanese securities comprised 29.2% of the EAFE Index as of
September 30, 1997. As a result, securities of Japanese companies may represent
a significant component of International Index Fund's investment assets.
Japan is politically organized as a democratic, parliamentary republic and has a
population of approximately 122 million. The Japanese economy is heavily
industrial and export-oriented. Although Japan is dependent upon foreign
economies for raw materials, Japan's balance of payments in recent years has
been strong and positive. Japan has eight stock exchanges located throughout the
country, but over 80% of all trading is conducted on the Tokyo Stock Exchange.
Prices of stocks listed on the Japanese stock exchanges are quoted continuously
during regular business hours. Trading commissions are at fixed scale rates
which vary by the type and the value of the transaction, but can be negotiable
for large transactions. Securities in Japan are denominated and quoted in yen.
Yen are fully convertible and transferable based on floating exchange rates into
all currencies, without administrative or legal restrictions, for both
nonresidents and residents of Japan.
A significant investment in Japanese securities by International Index Fund may
entail a higher
<PAGE>
degree of risk than with more diversified international portfolios.
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, a
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 and International 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.
FOREIGN CURRENCY TRANSACTIONS
International Index Fund and International Fund invest in securities which are
purchased and sold in foreign currencies. The value of its assets as measured in
United States dollars therefore may be affected favorably or unfavorably by
changes in foreign currency exchange rates and exchange control regulations.
International Index Fund and International Fund also will incur costs in
converting United States dollars to local currencies, and vice versa.
International Fund will 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. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date certain at a
specified price. These forward currency contracts are traded directly between
currency traders (usually large commercial banks) and their customers.
International Fund may enter into forward currency contracts in order to hedge
against adverse movements in exchange rates between currencies. It may engage in
"transaction hedging" to protect against a change in the foreign currency
exchange rate between the date the Fund contracts to purchase or sell a security
and the settlement date, or to "lock in" the United States dollar equivalent of
a dividend or interest payment made in a foreign currency. It also may engage in
"portfolio hedging" to protect against a decline in the value of its portfolio
securities as measured in United States dollars which could result from changes
in exchange rates between the United States dollar and the foreign currencies in
which the portfolio securities are purchased and sold. International Fund also
may hedge its foreign currency exchange rate risk by engaging in currency
financial futures and options transactions.
<PAGE>
Although a foreign currency hedge may be effective in protecting the Fund from
losses resulting from unfavorable changes in exchanges rates between the United
States dollar and foreign currencies, it also would limit the gains which might
be realized by the Fund from favorable changes in exchange rates. The
Sub-Adviser's decision whether to enter into currency hedging transactions will
depend in part on its view regarding the direction and amount in which exchange
rates are likely to move. The forecasting of movements in exchange rates is
extremely difficult, so that it is highly uncertain whether a hedging strategy,
if undertaken, would be successful. To the extent that the Sub-Adviser's view
regarding future exchange rates proves to have been incorrect, International
Fund may realize losses on its foreign currency transactions.
International Fund does not intend to enter into forward currency contracts or
maintain a net exposure in such contracts where it would be obligated to deliver
an amount of foreign currency in excess of the value of its portfolio securities
or other assets denominated in that currency.
MORTGAGE-BACKED SECURITIES
Balanced Fund may invest in mortgage-backed securities which are Agency
Pass-Through Certificates or collateralized mortgage obligations ("CMOs"), as
described below.
Agency Pass-Through Certificates are mortgage pass-through certificates
representing undivided interests in pools of residential mortgage loans.
Distribution of principal and interest on the mortgage loans underlying an
Agency Pass-Through Certificate is an obligation of or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC").
The obligation of GNMA with respect to such certificates is backed by the full
faith and credit of the United States, while the obligations of FNMA and FHLMC
with respect to such certificates rely solely on the assets and credit of those
entities. The mortgage loans underlying GNMA certificates are partially or fully
guaranteed by the Federal Housing Administration or the Veterans Administration,
while the mortgage loans underlying FNMA certificates and FHLMC certificates are
conventional mortgage loans which are, in some cases, insured by private
mortgage insurance companies. Agency Pass-Through Certificates may be issued in
a single class with respect to a given pool of mortgage loans or in multiple
classes.
CMOs are debt obligations typically issued by a private special-purpose entity
and collateralized by residential or commercial mortgage loans or Agency
Pass-Through Certificates. Balanced Fund will invest only in CMOs which are
rated in one of the four highest rating categories by a nationally recognized
statistical rating organization or which are of comparable quality in the
judgment of the Adviser. Because CMOs are debt obligations of private entities,
payments on CMOs generally are not obligations of or guaranteed by any
governmental entity, and their ratings and creditworthiness typically depend,
among other factors, on the legal insulation of the issuer and transaction from
the consequences of a sponsoring entity's bankruptcy. CMOs generally are issued
in multiple classes, with holders of each class entitled to receive specified
portions of the principal payments and prepayments and/or of the interest
payments on the underlying mortgage loans. These entitlements can be specified
in a wide variety of ways, so that the payment characteristics of various
classes may differ greatly from one another. Examples of the more common classes
are provided in the Statement of Additional Information. The CMOs in which the
Fund may invest include classes which are subordinated in right of payment to
other classes, as long as they have the required rating referred to above.
It generally 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. The
return on interest-only and principal-only mortgage-backed securities is
<PAGE>
particularly sensitive to changes in interest rates and prepayment speeds. When
interest rates decline and prepayment speeds increase, the holder of an
interest-only mortgage-backed security may not even recover its initial
investment. Similarly, the return on an inverse floating rate CMO is likely to
decline more sharply in periods of increasing interest rates than that of a
fixed-rate security. For these reasons, interest-only, principal-only and
inverse floating rate mortgage-backed securities generally have greater risk
than more conventional classes of mortgage-backed securities. Balanced Fund will
not invest more than 10% of its total fixed income assets in interest-only,
principal-only or inverse floating rate mortgage backed securities.
ASSET-BACKED SECURITIES
Balanced Fund may invest in asset-backed securities. Asset-backed securities
generally constitute interests in, or obligations secured by, a pool of
receivables other than mortgage loans, such as automobile loans and leases,
credit card receivables, home equity loans and trade receivables. Asset-backed
securities generally are issued by a private special-purpose entity. Their
ratings and creditworthiness typically depend on the legal insulation of the
issuer and transaction from the consequences of a sponsoring entity's
bankruptcy, as well as on the credit quality of the underlying receivables and
the amount and credit quality of any third-party credit enhancement supporting
the underlying receivables or the asset-backed securities. Asset-backed
securities and their underlying receivables generally are not issued or
guaranteed by any governmental entity.
BANK INSTRUMENTS
The bank instruments in which Balanced Fund may invest include time and savings
deposits, deposit notes and bankers acceptances (including certificates of
deposit) in commercial or savings banks. They also include Eurodollar
Certificates of Deposit issued by foreign branches of United States or foreign
banks; Eurodollar Time Deposits, which are United States dollar-denominated
deposits in foreign branches of United States or foreign banks; and Yankee
Certificates of Deposit, which are United States dollar-denominated certificates
of deposit issued by United States branches of foreign banks and held in the
United States. For a description of certain risks of investing in foreign
issuers' securities, see "-- Foreign Securities" above. In each instance,
Balanced Fund may only invest in bank instruments issued by an institution which
has capital, surplus and undivided profits of more than $100 million or the
deposits of which are insured by the Bank Insurance Fund or the Savings
Association Insurance Fund.
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 or, in the case of International Fund,
the Sub-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 (100% or more) generally would result in higher
transaction costs and could result in additional tax consequences to a Fund's
shareholders.
<PAGE>
INVESTMENT RESTRICTIONS
The fundamental and nonfundamental investment restrictions of the Funds are set
forth in full in the Statement of Additional Information. The fundamental
restrictions include the following:
* None of the Funds will borrow money, except from banks for temporary or
emergency purposes. The amount of such borrowing may not exceed 10% of the
borrowing Fund's total assets.
* None of the Funds will borrow money for leverage purposes. For the purpose
of this investment restriction, the use of options and futures transactions
and the purchase of securities on a when-issued or delayed delivery basis
shall not be deemed the borrowing of money. If a Fund engages in borrowing,
its share price may be subject to greater fluctuation, and the interest
expense associated with the borrowing may reduce the Fund's net income.
* None of the Funds will 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 and except, in the case of Emerging Growth Fund, Technology
Fund, and International Fund, as may be necessary to make margin payments
in connection with foreign currency futures and other derivative
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.
INFORMATION CONCERNING COMPENSATION
PAID TO U.S. BANK NATIONAL ASSOCIATION,
FIRST TRUST NATIONAL ASSOCIATION AND
OTHER AFFILIATES
U.S. Bank National Association, First Trust National Association and other
affiliates of U.S. Bancorp may act as a fiduciary with respect to plans subject
to the Employee Retirement Income Security Act of 1974 ("ERISA") and other trust
and agency accounts that invest in the Funds. These U.S. Bancorp affiliates may
receive compensation from the Funds for the services they provide to the Funds,
as described more fully in the following sections of this Prospectus:
Investment advisory services -- see "Management-Investment Adviser"
Custodian services -- see "Management-Custodian"
Sub-administration services -- see "Management-Administrator"
Shareholder servicing -- see "Distributor"
Securities lending -- see "Special Investment Methods-Lending of
Portfolio Securities"
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
Oaks, Pennsylvania 19456
Investment Adviser
U.S. 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-1503 (1/98) I
<PAGE>
JANUARY 31, 1998
FIXED INCOME FUNDS
CLASS A AND CLASS B SHARES
Limited Term Fixed Income Fund
Income Fund
Intermediate Term Intermediate Government
Income Fund Bond Fund
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(SM)
<PAGE>
TABLE OF CONTENTS
Summary 2
Fees and Expenses 4
Financial Highlights 7
The Funds 10
Investment Objectives and Policies 10
Management 14
Distributor 16
Investing in the Funds 17
Redeeming Shares 24
Determining the Price of Shares 26
Federal Income Taxes 27
Fund Shares 28
Calculation of Performance Data 28
Special Investment Methods 29
Information Concerning Compensation Paid
to U.S. Bank National Association, First
Trust National Association and Other
Affiliates 34
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
CLASS A AND CLASS B SHARES
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"):
* LIMITED TERM INCOME FUND
* INTERMEDIATE TERM INCOME FUND
* FIXED INCOME FUND
* INTERMEDIATE GOVERNMENT BOND FUND
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING U.S. 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 January 31, 1998 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 January 31, 1998.
<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 and Class B Shares of the following
funds (the "Funds"):
LIMITED TERM INCOME FUND has an objective of providing current income while
attempting to provide a high degree of principal stability. This Fund invests in
investment grade debt securities, at least 65% of which are United States
Government obligations and corporate debt obligations and mortgage-backed and
asset-backed securities rated at least A by Standard & Poor's or Moody's or
which have been assigned an equivalent rating by another nationally recognized
statistical rating organization. Under normal market conditions, the weighted
average maturity of the securities held by this Fund will range from 6 months to
2 years.
INTERMEDIATE TERM INCOME FUND has an objective of providing current income to
the extent consistent with preservation of capital. This Fund generally invests
in the same kinds of debt securities as Limited Term Income Fund. Under normal
market conditions, the weighted average maturity of the securities held by this
Fund will range from 2 to 7 years.
FIXED INCOME FUND has an objective of providing a high level of current income
consistent with limited risk to capital. This Fund generally invests in the same
kinds of debt securities as Limited Term Income Fund. Under normal market
conditions, the weighted average maturity of the securities held by this Fund
will not exceed 15 years.
INTERMEDIATE GOVERNMENT BOND FUND has an objective of providing current income
to the extent consistent with preservation of capital. Under normal market
conditions, this Fund invests at least 65% of its total assets in securities
issued or guaranteed by the United States Government and its agencies and
instrumentalities. Under normal market conditions, the weighted average maturity
of the securities held by this Fund will range from 2 to 7 years.
At the present time, Class B Shares are offered only with respect to Fixed
Income Fund.
INVESTMENT ADVISER U.S. Bank National Association (the "Adviser" or "U.S. Bank")
serves as investment adviser to each of the Funds through its First American
Asset Management group. 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 2.00% for Limited Term Income Fund, 3.00% for
Intermediate Government Bond Fund, and 3.75% for Intermediate Term Income Fund
and Fixed Income Fund. These sales charges are reduced on purchases of $50,000
or more. Purchases of $1 million or more of Class A Shares are not subject to an
initial sales charge, but the Distributor and certain securities firms,
financial institutions (including, without limitation, banks) and other industry
professionals may receive a commission of up to 1.00% on such sales. Redemptions
of Class A Shares within 24 months following such purchases will be subject to a
contingent deferred sales charge of up to 1.00%. 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 the Funds 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
<PAGE>
annual rate totaling 1.00% of the average daily net assets of that class. If
Class B Shares are redeemed within six years after purchase, they are subject to
a contingent deferred sales charge declining from 5.00% in the first year to
zero after six years. Class B Shares automatically convert into Class A Shares
approximately eight years after purchase. 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 any Fund may be exchanged for the same class of shares of
other funds in the First American family of funds 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 or authorized financial institution 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 (i) interest rate risk (the
risk that increases in market interest rates will cause declines in the value of
debt securities held by a Fund); (ii) credit risk (the risk that the issuers of
debt securities held by a Fund default in making required payments); and (iii)
call or prepayment risk (the risk that a borrower may exercise the right to
prepay a debt obligation before its stated maturity, requiring a Fund to
reinvest the prepayment at a lower interest rate). In addition, those Funds
which may invest in mortgage-backed securities are subject to certain additional
risks associated with investing in securities representing interests in, or
secured by, pools of residential mortgage loans. The Funds also may, in order to
attempt to reduce risk, invest in exchange traded put and call options on
interest rate futures contracts and on interest rate indices. See "Investment
Objectives and Policies -- Risks to Consider" 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 A SHARE FEES AND EXPENSES
<TABLE>
<CAPTION>
LIMITED INTERMEDIATE INTERMEDIATE
TERM TERM FIXED GOVERNMENT
INCOME INCOME INCOME BOND
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases
(as a percentage of offering price)(1) 2.00% 3.75% 3.75% 3.00%
Maximum sales load imposed on reinvested
dividends None None None None
Deferred sales load None None None None
Redemption fees None None None None
Exchange fees None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees (after voluntary
fee waivers)(2) 0.40% 0.48% 0.52% 0.53%
Rule 12b-1 fees (after voluntary fee
waivers)(2) 0% 0% 0.25%(3) 0%
Other expenses 0.20% 0.22% 0.18% 0.17%
Total fund operating expenses
(after voluntary fee waivers)(2)(3) 0.60% 0.70% 0.95% 0.70%
EXAMPLE(4)
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 $ 26 $ 44 $ 47 $ 37
3 years $ 39 $ 59 $ 67 $ 52
5 years $ 53 $ 75 $ 88 $ 68
10 years $ 94 $ 121 $ 143 $ 114
</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 the
Distributor and certain securities firms, financial institutions
(including, without limitation, banks) and other industry professionals may
receive a commission of up to 1.00% on such sales. In addition, a
contingent deferred sales charge of up to 1.00% may be imposed on such
purchases in the event of redemption within 24 months following the
purchase. See "Investing in the Funds -- Alternative Sales Charge Options."
(2) The Adviser and the Distributor intend to waive a portion of their fees 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 for the current fiscal year but reserves the right to discontinue
such waivers at any time in its sole discretion. Notwithstanding the
foregoing, the Adviser will maintain such waivers of Intermediate Term
Income Fund and Fixed Income Fund in effect through September 30, 1998.
Absent any fee waivers, investment advisory fees for each Fund as an
annualized percentage of average daily net assets would be 0.70%; Rule
12b-1 fees calculated on such basis would be 0.25%; and total fund
operating expenses calculated on such basis would be 1.15% for Limited Term
Income Fund, 1.17% for Intermediate Term Income Fund, 1.13% for Fixed
Income Fund and 1.12% for Intermediate Government Bond Fund. "Other
expenses" includes an administration fee.
(3) Of this amount, 0.25% is designated as a shareholder servicing fee and none
as a distribution fee.
(4) Absent the fee waivers referred to in (2) above, the dollar amounts for the
1, 3, 5 and 10-year periods would be as follows: Limited Term Income Fund,
$31, $56, $82 and $157; Intermediate Term Income Fund, $49, 73, $99 and
$174; Fixed Income Fund, $49, $72, $97 and $170; and Intermediate
Government Bond Fund, $48, $72, $97 and $169.
<PAGE>
CLASS B SHARE FEES AND EXPENSES
<TABLE>
<CAPTION>
LIMITED INTERMEDIATE INTERMEDIATE
TERM TERM FIXED GOVERNMENT
INCOME INCOME INCOME BOND
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases
(as a percentage of offering price) None None None None
Maximum sales load imposed on reinvested
dividends None None None None
Maximum contingent deferred sales charge (as
a percentage of original purchase price or
redemption proceeds, as applicable) 5.00% 5.00% 5.00% 5.00%
Redemption fees None None None None
Exchange fees None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees (after voluntary fee
waivers)(1) 0.40% 0.48% 0.52% 0.53%
Rule 12b-1 fees 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2)
Other expenses (after voluntary
fee waivers)(1) 0.20% 0.22% 0.18% 0.17%
Total fund operating expenses
(after voluntary fee waivers)(1) 1.60% 1.70% 1.70% 1.70%
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, 4%
in year 3, 2% in year 5, and automatic conversion at the end of year 8:
1 year $ 66 $ 67 $ 67 $ 67
3 years $ 90 $ 94 $ 94 $ 94
5 years $ 107 $ 112 $ 112 $ 112
10 years $ 163 $ 174 $ 174 $ 174
Assuming No Redemption(4)
You would pay the following expenses on the same investment, assuming no redemption:
1 year $ 16 $ 17 $ 17 $ 17
3 years $ 50 $ 54 $ 54 $ 54
5 years $ 87 $ 92 $ 92 $ 92
10 years $ 163 $ 174 $ 174 $ 174
</TABLE>
(1) The Adviser and the Distributor intend to waive a portion of their 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 for the current fiscal year but reserves the right to discontinue
such waivers at any time in its sole discretion. Absent any fee waivers,
investment advisory fees for each Fund as an annualized percentage of
average daily net assets would be 0.70%; and total fund operating expenses
calculated on such basis would be 1.90% for Limited Term Income Fund, 1.92%
for Intermediate Term Income Fund, 1.88% for Fixed Income Fund and 1.87%
for Intermediate Government Bond Fund. "Other expenses" includes an
administration fee.
(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 referred to in (1) above, the dollar amounts for the
1, 3, 5 and 10-year periods would be as follows: Limited Term Income Fund,
$69, $100, $123 and $203; Intermediate Term Income Fund, $69, $100, $124
and $205; Fixed Income Fund, $69, $99, $122 and $201; and Intermediate
Government Bond Fund, $69, $99, $121 and $199.
(4) Absent the fee waivers referred to in (1) above (assuming no redemption),
the dollar amounts for the 1, 3, 5 and 10-year periods would be as follows:
Limited Term Income Fund, $19, $60, $103 and $203; Intermediate Term Income
Fund, $19, $60, $104 and $205; Fixed Income Fund, $19, $59, $101 and $199;
and Intermediate Government Bond Fund, $19, $59, $101 and $199.
<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.
<PAGE>
FINANCIAL HIGHLIGHTS
The following audited financial highlights should be read in conjunction with
the Funds' financial statements, the related notes thereto and the independent
auditors' report of KPMG Peat Marwick LLP appearing in FAIF's annual report to
shareholders dated September 30, 1997. Further information about the Funds'
performance is contained in such annual report to shareholders, which may be
obtained without charge by calling (800) 637-2548 or by writing SEI Investments
Distribution Co., Oaks, Pennsylvania 19456.
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
For the periods ended September 30,
For a share outstanding throughout the period
REALIZED AND
NET ASSET UNREALIZED DIVIDENDS
VALUE NET GAINS OR FROM NET
BEGINNING INVESTMENT (LOSSES) ON INVESTMENT
OF PERIOD INCOME INVESTMENTS INCOME
LIMITED TERM INCOME FUND Class A
1997 $ 9.91 $ 0.56 $ 0.03 $ (0.56)
1996 9.92 0.58 (0.01) (0.58)
1995 9.85 0.56 0.07 (0.56)
1994 10.06 0.44 (0.22) (0.43)
1993(1) 10.00 0.29 0.07 (0.30)
INTERMEDIATE TERM INCOME FUND Class A
1997 $ 9.93 $ 0.55 $ 0.15 $ (0.56)
1996 9.94 0.55 -- (0.55)
1995 9.55 0.59 0.38 (0.58)
1994 10.22 0.46 (0.56) (0.46)
1993(1) 10.00 0.41 0.29 (0.41)
FIXED INCOME FUND Class A
1997 $ 10.77 $ 0.59 $ 0.27 $ (0.59)
1996 10.98 0.61 (0.11) (0.61)
1995 10.37 0.66 0.61 (0.63)
1994 11.38 0.57 (0.89) (0.57)
1993 11.13 0.62 0.36 (0.61)
1992 10.59 0.66 0.60 (0.66)
1991(2) 10.01 0.65 0.58 (0.65)
1990(3) 10.44 0.74 (0.26) (0.74)
1989(3) 10.13 0.74 0.31 (0.74)
1988(3)(4) 10.03 0.62 0.13 (0.65)
Class B
1997 $ 10.72 $ 0.51 $ 0.26 $ (0.51)
1996 10.94 0.52 (0.11) (0.53)
1995 10.35 0.58 0.60 (0.56)
1994(5) 10.54 0.08 (0.17) (0.10)
INTERMEDIATE GOVERNMENT BOND FUND Class A
1997 $ 9.19 $ 0.54 $ 0.09 $ (0.54)
1996 9.29 0.54 (0.10) (0.54)
1995 8.98 0.54 0.31 (0.54)
1994 9.52 0.41 (0.51) (0.39)
1993 10.18 0.44 0.02 (0.44)
1992 10.25 0.60 0.28 (0.60)
1991(2) 10.01 0.65 0.24 (0.65)
1990(3) 10.05 0.75 (0.04) (0.75)
1989(3) 9.99 0.74 0.06 (0.74)
1988(3)(4) 10.03 0.58 (0.01) (0.61)
* Total return excludes sales charges.
+ Returns, excluding sales charges, are for the period indicated and have not
been annualized.
(1) Commenced operations on December 14, 1992. All ratios for the period have
been annualized.
(2) On September 3, 1991, the Board of Directors of FAIF approved a change in
FAIF's fiscal year end from October 31 to September 30, effective September
30, 1991. All ratios for the period have been annualized.
<PAGE>
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
NET ASSET RATIO OF INVESTMENT AVERAGE
DISTRIBUTIONS VALUE NET ASSETS EXPENSES TO INCOME TO NET ASSETS PORTFOLIO
FROM END OF END OF AVERAGE AVERAGE (EXCLUDING TURNOVER
CAPITAL GAINS PERIOD TOTAL RETURN* PERIOD (000) NET ASSETS NET ASSETS WAIVERS) RATE
<S> <C> <C> <C> <C> <C> <C> <C>
$ -- $ 9.94 6.09% $ 7,152 0.60% 5.61% 1.15% 147%
-- 9.91 5.93 7,627 0.60 5.80 1.09 61
-- 9.92 6.57 9,977 0.60 5.60 1.22 120
-- 9.85 2.21 9,509 0.60 4.17 1.23 48
-- 10.06 3.61+ 121,800 0.60 3.61 1.27 104
$(0.07) $10.00 7.19% $ 2.484 0.70% 5.51% 1.17% 165%
(0.01) 9.93 5.63 2,213 0.70 5.43 1.13 161
-- 9.94 10.51 2,437 0.70 5.97 1.19 69
(0.11) 9.55 (1.05) 3,208 0.69 2.48 1.24 177
(0.07) 10.22 7.21+ 67,291 0.70 4.90 1.29 163
$(0.07) $10.97 8.26% $ 8,535 0.95% 5.44% 1.13% 130%
(0.10) 10.77 4.64 8,332 0.95 5.55 1.12 108
(0.03) 10.98 12.78 7,853 0.86 6.14 1.19 106
(0.12) 10.37 (2.92) 8,028 0.68 3.83 1.06 142
(0.12) 11.38 9.20 53,601 0.70 5.65 1.14 91
(0.06) 11.13 12.34 5,645 0.99 6.12 2.68 180
-- 10.59 12.48+ 6,045 0.99 6.85 4.11 176
(0.17) 10.01 5.14 2,209 1.07 7.49 5.46 144
-- 10.44 10.93 555 1.22 7.26 22.44 157
-- 10.13 8.07+ 240 0.96 7.18 20.70 93
$ 0.07) $10.91 7.40% $ 15,253 1.70% 4.68% 1.88% 130%
(0.10) 10.72 3.93 16,092 1.70 4.81 1.87 108
(0.03) 10.94 11.75 7,280 1.70 5.12 1.94 106
-- 10.35 (0.88)+ 115 1.70 4.89 1.92 142
$ -- $ 9.28 7.06% $ 3,525 0.70% 5.88% 1.12% 22%
-- 9.19 4.85 3,320 0.70 5.85 1.10 29
-- 9.29 9.82 2,860 0.70 6.10 1.22 17
(0.05) 8.98 (1.13) 1,977 0.53 4.49 2.14 74
(0.68) 9.52 4.99 3,716 0.71 4.00 4.73 182
(0.35) 10.18 8.88 589 0.99 6.03 14.14 101
-- 10.25 9.13+ 1,756 0.99 6.99 6.76 100
-- 10.01 7.41 1,573 1.08 7.57 5.55 40
-- 10.05 8.35 1,501 1.19 7.49 9.65 72
-- 9.99 6.18+ 375 0.95 6.78 17.20 0
</TABLE>
(3) For the period ended October 31.
(4) Commenced operations on December 22, 1987. All ratios for the period have
been annualized.
(5) Class B Shares have been offered since August 15, 1994. All ratios for the
period have been annualized.
<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 three separate classes (Class A, Class
B and Class C) 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 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. A Fund which is limited to investing in
securities with specified ratings is not required to sell a security if its
rating is reduced or discontinued after purchase, but the Fund may consider
doing so. However, in no event will more than 5% of any Fund's net assets be
invested in non-investment grade securities. Descriptions of the rating
categories of Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies, Inc. ("Standard & Poor's") and Moody's Investors Service, Inc.
("Moody's") are contained in the Statement of Additional Information.
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."
LIMITED TERM INCOME FUND,
INTERMEDIATE TERM INCOME FUND AND
FIXED INCOME FUND
OBJECTIVES. Limited Term Income Fund has an objective of providing current
income while attempting to provide a high degree of principal stability.
Intermediate Term Income Fund has an objective of providing current income to
the extent consistent with preservation of capital. Fixed Income Fund has an
objective of providing a high level of current income consistent with limited
risk to capital.
INVESTMENT POLICIES Each of these Funds invests in investment grade debt
securities, at least 65% of which are United States Government obligations and
corporate debt obligations and mortgage-backed and asset-backed securities rated
at least A by Standard & Poor's or Moody's or
<PAGE>
which have been assigned an equivalent rating by another nationally recognized
statistical rating organization.
Under normal market conditions, the weighted average maturity of the securities
held by Limited Term Income Fund will range from 6 months to 2 years; that of
Intermediate Term Income Fund will range from 2 to 7 years; and that of Fixed
Income Fund will not exceed 15 years.
These Funds' permitted investments include notes, bonds and discount notes of
United States Government agencies or instrumentalities; domestic issues of
corporate debt obligations having floating or fixed rates of interest and rated
at least BBB by Standard & Poor's or Baa by Moody's, or which have been assigned
an equivalent rating by another nationally recognized statistical rating
organization, or which are of comparable quality in the judgment of the Adviser;
other fixed income securities, including mortgage-backed securities, which are
rated in one of the four highest categories by a nationally recognized
statistical rating organization or which are of comparable quality in the
judgment of the Adviser; and commercial paper which is rated A-1 by Standard &
Poor's or P-1 by Moody's or which has been assigned an equivalent rating by
another nationally recognized statistical rating organization. Unrated
securities deemed to be of comparable quality to rated securities as set forth
above will not exceed 10% in the aggregate of the value of the total assets of
any of these Funds. At least 65% of the total assets of Fixed Income Fund will
be invested in fixed rate obligations.
Subject to the foregoing limitations, each of these Funds may invest in the
following kinds of securities, as described under the related headings under
"Special Investment Methods:" (i) mortgage-backed securities (provided that
Limited Term Income Fund will not invest in interest-only, principal-only or
inverse floating rate mortgage-backed securities, and each of Intermediate Term
Income Fund and Fixed Income Fund will not invest more than 10% of its total
assets in the aggregate in these kinds of securities); (ii) asset-backed
securities; and (iii) bank instruments.
In addition, each of these Funds may (i) invest up to 15% of its total assets in
foreign securities payable in United States dollars; (ii) enter into repurchase
agreements; (iii) in order to attempt to reduce risk, invest in exchange traded
put and call options on interest rate futures contracts and on interest rate
indices; (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."
Limited Term Income Fund also may purchase investment-type insurance products
such as Guaranteed Investment Contracts ("GICs"). A GIC is a deferred annuity
under which the purchaser agrees to pay money to an insurer (either in a lump
sum or in installments) and the insurer promises to pay interest at a guaranteed
rate for the life of the contract. GICs may have fixed or variable interest
rates. A GIC is a general obligation of the issuing insurance company. The
purchase price paid for a GIC becomes part of the general assets of the insurer,
and the contract is paid at maturity from the general assets of the insurer. In
general, GICs are not assignable or transferable without the permission of the
issuing insurance companies and can be redeemed before maturity only at a
substantial discount or penalty. GICs therefore are usually considered to be
illiquid investments. Limited Term Income Fund will purchase only GICs which are
obligations of insurance companies with a policyholder's rating of A or better
by A.M. Best Company. A description of these ratings is contained in the
Statement of Additional Information.
Although these Funds will not make direct purchases of common or preferred
stocks or rights to acquire common or preferred stocks, they may invest in debt
securities which are convertible into or exchangeable for, or which carry
warrants or other rights to acquire, such stocks. Equity interests
<PAGE>
acquired through conversion, exchange or exercise of rights to acquire stock
will be disposed of by these Funds as soon as practicable in an orderly manner.
For temporary defensive purposes, these Funds may without limitation hold cash
or invest in cash items. The Funds also may invest not more than 35% of their
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; 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; and securities of other
mutual funds which invest primarily in debt securities with remaining maturities
of 13 months or less (which investments also are subject to the advisory fee).
Such other mutual funds 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.
INTERMEDIATE GOVERNMENT BOND FUND
OBJECTIVE. Intermediate Government Bond Fund has an objective of providing
current income to the extent consistent with preservation of capital.
INVESTMENT POLICIES. Under normal market conditions, Intermediate Government
Bond Fund invests at least 65% of its total assets in securities issued or
guaranteed by the United States Government and its agencies and
instrumentalities. The Fund's share price and yield, however, are not guaranteed
or insured by the United States Government or any of its agencies or
instrumentalities. Under normal market conditions, the weighted average maturity
of the securities held by this Fund will range from 2 to 7 years.
The types of securities in which the Fund may invest include direct obligations
of the United States Treasury, such as United States Treasury bonds, notes and
bills. In addition, the Fund may invest in obligations issued or guaranteed as
to principal and interest by agencies of the United States Government or by
instrumentalities which have been established or sponsored by the United States
Government, provided, in each case, that interest on the obligations is
excludable from state taxable income by the holders thereof. Such agencies and
instrumentalities include, but are not limited to, the Farm Credit System
Financial Assistance Corporation, the Federal Home Loan Banks System, the
Student Loan Marketing Association and the Tennessee Valley Authority.
Obligations issued or guaranteed by some of these agencies or instrumentalities
are not guaranteed by the United States Government, but instead rely solely on
the assets and credit of the issuing agency or instrumentality. The United
States Treasury, agency and instrumentality securities in which the Fund may
invest include adjustable rate securities and United States Treasury
inflation-protection securities. The principal amount of such
inflation-protection securities is adjusted for inflation, and periodic interest
payments are an amount equal to a fixed percentage of the inflation-adjusted
principal amount.
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, invest in exchange traded put and call options on
interest rate futures contracts and on interest rate indices; (iii) purchase
securities on a when-issued or delayed delivery basis; and (iv) 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, the Fund may without limitation hold cash or
invest in short-term government securities maturing within 13 months from the
date of purchase; or repurchase agreements with respect to government
securities; and securities of other mutual funds which invest primarily in debt
securities with remaining
<PAGE>
maturities of 13 months or less (which investments also are subject to the
advisory fee). Such other mutual funds 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. The Fund also
may so invest not more than 35% of its total assets in such investments in order
to utilize assets awaiting normal investment. See "Special Investment Methods --
Repurchase Agreements."
RISKS TO CONSIDER
An investment in any of the Funds involves certain risks. These include the
following:
INTEREST RATE RISK. Interest rate risk is the risk that the value of a
fixed-rate debt security will decline due to changes in market interest rates.
Because the Funds invest in fixed-rate debt securities, they are subject to
interest rate risk. In general, when interest rates rise, the value of a
fixed-rate debt security declines. Conversely, when interest rates decline, the
value of a fixed-rate debt security generally increases. Thus, shareholders in
the Funds bear the risk that increases in market interest rates will cause the
value of their Fund's portfolio investments to decline.
In general, the value of fixed-rate debt securities with longer maturities is
more sensitive to changes in market interest rates than the value of such
securities with shorter maturities. Thus, the net asset value of a Fund which
invests in securities with longer weighted average maturities, such as Fixed
Income Fund, should be expected to have greater volatility in periods of
changing market interest rates than that of a Fund which invests in securities
with shorter weighted average maturities, such as Limited Term Income Fund.
Similarly, the volatility of Intermediate Term Income Fund and Intermediate
Government Bond Fund generally should be expected to be between that of Fixed
Income Fund and Limited Term Income Fund. As described below under "Special
Investment Methods -- Mortgage-Backed Securities," it is more difficult to
generalize about the effect of changes in market interest rates on the values of
mortgage-backed securities.
Although the Adviser may engage in transactions intended to hedge the value of
the Funds' portfolios against changes in market interest rates, there is no
assurance that such hedging transactions will be undertaken or will fulfill
their purpose. See "Special Investment Methods -- Options Transactions."
CREDIT RISK. Credit risk is the risk that the issuer of a debt security will
fail to make payments on the security when due. Because the Funds invest in debt
securities, they are subject to credit risk.
Securities issued or guaranteed by the United States 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 United States, and
securities issued by private entities, are subject to higher levels of credit
risk. The ratings and certain other requirements which apply to the Funds'
permitted investments, as described elsewhere in this Prospectus, are intended
to limit the amount of credit risk undertaken by the Funds. Nevertheless,
shareholders in the Funds bear the risk that payment defaults could cause the
value of their Fund's portfolio investments to decline. Investors also should
note that Limited Term Income Fund, Intermediate Term Income Fund and Fixed
Income Fund can invest in debt securities rated as low as BBB by Standard &
Poor's or Baa by Moody's, or which have been assigned an equivalent rating by
another nationally recognized statistical rating organization, or which are of
comparable quality in the judgment of the Adviser. Although these rating
categories are investment grade, obligations with these ratings are viewed as
having speculative characteristics and carry a somewhat higher risk of default
than obligations rated in the higher investment grade categories.
CALL RISK. Many 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
<PAGE>
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 is called during a period of declining interest rates,
the Fund probably will have to reinvest the proceeds received by it at a lower
interest rate than that borne by the called bond, thus resulting in a decrease
in the Fund's income. To the extent that the Funds invest in callable corporate
bonds, Fund shareholders bear the risk that reductions in income will result
from the call of bonds. Most United States Government securities are not
callable before their stated maturity, although U.S. agency securities often
are.
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
U.S. Bank National Association, 601 Second Avenue South, Minneapolis, Minnesota
55402, acts as the Funds' investment adviser through its First American 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 September 30, 1997, the Adviser was managing accounts with an aggregate value
of approximately $55 billion, including mutual fund assets of approximately $20
billion. U.S. Bancorp, 601 Second Avenue South, Minneapolis, Minnesota 55480, is
the holding company for the Adviser.
Each of the Funds has agreed to pay the Adviser monthly fees calculated on an
annual basis equal to 0.70% of its average daily net assets. The Adviser may, at
its option, waive any or all of its fees, or reimburse expenses, with respect to
any Fund from time to time. Any such waiver or reimbursement is voluntary and
may be discontinued at any time except, with respect to Class A Shares of
Intermediate Term Income Fund and Fixed Income Fund, the Adviser will maintain
current waivers in effect through September 30, 1998. 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
<PAGE>
that certain broker-dealers affiliated with the Adviser are 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 certain affiliated broker-dealers 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
Limited Term Income Fund, Intermediate Term Income Fund and Fixed Income Fund
are managed by a committee comprised of Mr. Jones, Mr. Green and Ms. Rehkamp,
whose backgrounds are set below. Intermediate Government Bond Fund is managed
by Mr. Drahn, whose background is set forth below.
MARTIN L. JONES is a member of the committee that manages Limited Term Income
Fund, Intermediate Term Income Fund and Fixed Income Fund. Mr. Jones heads the
Fixed Income Group of the Adviser and has over 20 years of investment industry
experience. Formerly with Harris Trust & Savings Bank, Dillon, Read & Co., and
Loeb Rhoades & Co., Mr. Jones received his bachelor's degree from Texas Tech
University, his master's degree from University of Texas and his master's degree
in business administration from the University of Chicago.
CHRISTOPHER L. DRAHN is portfolio manager for Intermediate Government Bond
Fund. He joined the Adviser in 1985 and has 12 years of investment industry
experience. Mr. Drahn received his bachelor's degree from Wartburg College
and his master's degree in business administration from the University of
Minnesota. He is a Chartered Financial Analyst.
LUCILLE C. REHKAMP is a member of the committee that manages Limited Term
Income Fund, Intermediate Term Income Fund and Fixed Income Fund. She joined
the Adviser in 1979 and has 21 years of investment industry experience. Ms.
Rehkamp received her bachelor's degree from Marquette University.
MARK M. GREEN is a member of the committee that manages Limited Term Income
Fund, Intermediate Term Income Fund and Fixed Income Fund. He joined the
Adviser in 1996 and has over ten years of investment industry experience.
Prior to joining the Adviser, Mr. Green was a portfolio manager at Wells
Fargo Investment Management. Mr. Green received his bachelor's degree and
master's degree from San Francisco State University.
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 U.S. Bancorp.
As compensation for its services to the Funds, the Custodian is paid monthly
fees calculated on an annual basis equal to 0.03% of the applicable Fund's
average daily net assets. In addition, the Custodian is reimbursed for its
out-of-pocket expenses incurred while providing its services to the Funds.
ADMINISTRATOR
The Administrator for the Funds is SEI 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,
<PAGE>
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.
U.S. Bank assists the Administrator and provides sub-administration services for
the Funds. For these services, the Administrator compensates the
sub-administrator at an annual rate of up to 0.05% of each Fund's average daily
net assets.
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, which is not affiliated with the Adviser, is a wholly-owned
subsidiary of SEI Investments Company and is located at Oaks, Pennsylvania
19456.
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"), pursuant to which
the Distributor agrees to provide, or enter into written agreements with service
providers to provide, one or more specified shareholder services to beneficial
owners of shares of the Funds. 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 -- Alternative Sales Charge Options." In consideration
of the services and facilities to be provided by the Distributor or any service
provider, each Fund also pays the Distributor a shareholder servicing fee at an
annual rate of 0.25% of the Fund's Class A Shares' average daily net asset
value, which is computed and paid monthly. 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 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 any 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, the Funds may pay to the
Distributor a sales support fee at an annual rate of up to 0.75% of the Funds'
Class B Shares average daily net asset value, which fee is computed and paid
monthly. The sales support fee may be used by the Distributor to provide
compensation for sales support and distribution activities with respect to Class
B Shares of the Funds. 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
<PAGE>
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 Funds.
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 of
funds). The service fee payable under the Class B Service Plan is prepaid for
the first year as described above.
The Class A and Class B Distribution Plans recognize that the Adviser, the
Administrator, the Distributor, and any Participating Institution may in their
discretion use their own assets to pay for certain additional costs of
distributing Fund shares. Any arrangement to pay such additional costs may be
commenced or discontinued by any of these persons at any time. In addition,
while there is no sales charge on purchases of Class A Shares of $1 million and
more, the Adviser may pay amounts to broker-dealers from its own assets with
respect to such sales. U.S. Bancorp Investments, Inc., a broker-dealer
affiliated with the Adviser ("USBI"), 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 both the
New York Stock Exchange and federally-chartered banks are open for business.
Shares may be purchased as described below. The Funds reserve the right to
reject any purchase order.
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 unless the financial institution has been
authorized to accept purchase orders on behalf of the Funds. It is the financial
institution's responsibility to transmit orders promptly.
Certain financial institutions assist their clients in the purchase or
redemption of shares and charge a fee for this service. In addition, certain
financial institutions are authorized to act as the Funds' agent for the purpose
of accepting purchase orders, and the Funds will be deemed to have received a
purchase order upon receipt of the order by the financial institution.
BY MAIL. An investor may place an order to purchase shares of the Funds directly
through the Transfer Agent. Orders by mail will be executed upon receipt of
payment by the Transfer Agent. If an investor's check does not clear, the
purchase will be cancelled and the investor could be liable for any losses or
fees incurred. Third-party checks, credit cards, credit card checks and cash
will not be accepted. When purchases are made by check, the proceeds of
redemptions of the shares purchased are not available until the Transfer Agent
is reasonably certain that the purchase payment has cleared, which could take up
to ten calendar days from the purchase date. In order to purchase shares by
mail, an investor must: complete and sign the new account form; enclose a check
made payable to (Fund name); and mail both to DST Systems, Inc., P.O. Box
419382, Kansas City, Missouri 64141-6382.
After an account is established, an investor can purchase shares by mail by
enclosing a check and mailing it to DST Systems, Inc. at the above address.
BY WIRE. To purchase shares of a Fund by wire, call (800) 637-2548 before 3:00
p.m. Central time. All information needed will be taken over the telephone, and
the order will be considered placed
<PAGE>
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: U.S. Bank National Association,
Minneapolis, Minnesota, ABA Number 091000022; For Credit to: DST Systems, Inc.:
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 or federally-chartered banks are closed.
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 the Adviser and its 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 per share plus a sales charge which, at the
investor's election, may be imposed 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 Shares represents a Fund's interest in its portfolio of investments. The
classes have the same rights and are identical in all respects except that (i)
Class B Shares bear the expenses of the contingent deferred sales charge
arrangement and distribution and service fees resulting from such sales
arrangement, while Class A Shares bear only shareholder servicing fees; (ii)
each class has exclusive voting rights with respect to approvals of any Rule
12b-1 distribution plan related to that specific class (although Class B
shareholders may vote on any distribution fees imposed on Class A Shares as long
as Class B Shares convert into Class A Shares); (iii) only Class B Shares carry
a conversion feature; and (iv) each class has different exchange privileges.
Sales personnel of financial institutions distributing the Funds' shares, and
other persons entitled to receive compensation for selling shares, may receive
differing compensation for selling Class A and Class B Shares.
These alternative purchase arrangements permit an investor 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 for $250,000 or more ordinarily will be
treated as orders for Class A Shares or declined.
The Directors of FAIF have determined that no conflict of interest currently
exists between the Class A and Class B Shares. On an ongoing basis, the
Directors, pursuant to their fiduciary duties under the 1940 Act and state laws,
will seek to ensure that no such conflict arises.
CLASS A SHARES
WHAT CLASS A SHARES COST. Class A Shares of each Fund are offered on a
continuous basis at their next determined offering price, which is net asset
value, plus a sales charge as set forth below:
<PAGE>
LIMITED TERM INCOME FUND:
MAXIMUM
AMOUNT OF
SALES CHARGE SALES CHARGE SALES CHARGE
AS PERCENTAGE AS PERCENTAGE REALLOWED TO
OF OFFERING OF NET ASSET PARTICIPATING
PRICE VALUE INSTITUTIONS
Less than $50,000 2.00% 2.04% 1.80%
$50,000 but less
than $100,000 1.50% 1.52% 1.35%
$100,000 but less
than $250,000 1.00% 1.01% 0.90%
$250,000 but less
than $500,000 0.75% 0.76% 0.68%
$500,000 but less
than $1,000,000 0.50% 0.50% 0.45%
$1,000,000 and
over 0.00% 0.00% 0.00%
INTERMEDIATE TERM INCOME FUND AND FIXED INCOME FUND:
MAXIMUM
AMOUNT OF
SALES CHARGE SALES CHARGE SALES CHARGE
AS PERCENTAGE AS PERCENTAGE REALLOWED TO
OF OFFERING OF NET ASSET PARTICIPATING
PRICE VALUE INSTITUTIONS
Less than $50,000 3.75% 3.90% 3.38%
$50,000 but less
than $100,000 3.25% 3.36% 2.93%
$100,000 but less
than $250,000 2.75% 2.83% 2.48%
$250,000 but less
than $500,000 2.00% 2.04% 1.80%
$500,000 but less
than $1,000,000 1.00% 1.01% 0.90%
$1,000,000 and
over 0.00% 0.00% 0.00%
INTERMEDIATE GOVERNMENT BOND FUND:
MAXIMUM
AMOUNT OF
SALES CHARGE SALES CHARGE SALES CHARGE
AS PERCENTAGE AS PERCENTAGE REALLOWED TO
OF OFFERING OF NET ASSET PARTICIPATING
PRICE VALUE INSTITUTIONS
Less than $50,000 3.00% 3.09% 2.70%
$50,000 but less
than $100,000 2.50% 2.56% 2.25%
$100,000 but less
than $250,000 2.00% 2.04% 1.80%
$250,000 but less
than $500,000 1.50% 1.52% 1.35%
$500,000 but less
than $1,000,000 1.00% 1.01% 0.80%
$1,000,000 and
over 0.00% 0.00% 0.00%
There is no initial sales charge on purchases of Class A Shares of $1 million or
more. However, Participating Institutions may receive a commission of up to
1.00% on such sales. Redemptions of Class A Shares purchased at net asset value
within 24 months of such purchases will be subject to a contingent deferred
sales charge of up to 1.00%. 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 as of the earlier of the close of the New York
Stock Exchange or 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) days in which the New York Stock
Exchange or federally-chartered banks are closed including, but not limited to,
the following federal holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day. In addition, net asset value will not be calculated on Good
Friday.
DEALER CONCESSION. A dealer will normally receive up to 90% of the applicable
sales charge. Any portion of the sales charge which is not paid to a dealer will
be retained by the Distributor. In addition, the Distributor may, from time to
time in its sole discretion, institute one or more promotional incentive
programs which will be paid by the Distributor from the sales charge it receives
or from any other source available to it. Under any such program, the
Distributor will provide promotional incentives, in the form of cash or other
compensation including merchandise, airline vouchers, trips and vacation
packages, to all dealers selling shares of the Funds. Promotional incentives of
these kinds will be offered uniformly to all dealers and predicated upon the
amount of shares of the Funds sold by the dealer. Whenever 90% or more of a
sales charge is paid to a dealer, that
<PAGE>
dealer may be deemed to be an underwriter as defined in the Securities Act of
1933.
The sales charge for shares sold other than through registered broker-dealers
will be retained by the Distributor. The Distributor may pay fees to financial
institutions out of the sales charge in exchange for sales and/or administrative
services performed on behalf of the institution's customers in connection with
the initiation of customer accounts and purchases of Fund shares.
REDUCING THE CLASS A SALES CHARGE. The sales charge can be reduced on the
purchase of Class A Shares through (i) quantity discounts and accumulated
purchases, or (ii) signing a 13-month letter of intent:
* QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES: As shown in the table above,
larger purchases of Class A Shares reduce the percentage sales charge paid.
Each Fund will combine purchases made on the same day by an investor, the
investor's spouse, and the investor's children under age 21 when it
calculates the sales charge. In addition, the sales charge, if applicable,
is reduced for purchases made at one time by a trustee or fiduciary for a
single trust estate or a single fiduciary account.
The sales charge discount applies to the total current market value of any
Fund, plus the current market value of any other FAIF Fund and any other
mutual funds having a sales charge and distributed as part of the First
American family of funds. Prior purchases and concurrent purchases of Class
A Shares of any FAIF Fund will be considered in determining the sales
charge reduction. In order for an investor to receive the sales charge
reduction on Class A Shares, the Transfer Agent must be notified by the
investor in writing or by his or her financial institution at the time the
purchase is made that Fund shares are already owned or that purchases are
being combined.
* LETTER OF INTENT: If an investor intends to purchase at least $50,000 of
Class A Shares in a Fund and other FAIF Funds over the next 13 months, the
sales charge may be reduced by signing a letter of intent to that effect.
This letter of intent includes a provision for a sales charge adjustment
depending on the amount actually purchased within the 13-month period and a
provision for the Custodian to hold a percentage equal to the particular
FAIF Fund's maximum sales charge rate of the total amount intended to be
purchased in escrow (in shares) for all FAIF Funds until the purchase is
completed.
The amount held in escrow for all FAIF Funds will be applied to the
investor's account at the end of the 13-month period after deduction of the
sales load applicable to the dollar value of shares actually purchased. In
this event, an appropriate number of escrowed shares may be redeemed in
order to realize the difference in the sales charge.
A letter of intent will not obligate the investor to purchase shares, but
if he or she does, each purchase during the period will be at the sales
charge applicable to the total amount intended to be purchased. This letter
may be dated as of a prior date to include any purchases made within the
past 90 days.
SALES OF CLASS A SHARES AT NET ASSET VALUE. Purchases of a Fund's Class A Shares
by the Adviser or any of its affiliates, or any of 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
<PAGE>
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, investors participating in asset
allocation "wrap" accounts offered by the Adviser or any of its affiliates, 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 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 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
YEAR SINCE PURCHASE SUBJECT TO CHARGE
First 5.00%
Second 5.00%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh None
Eighth None
In determining whether a particular redemption is subject to a contingent
deferred sales charge, it is assumed that the redemption is first of any Class A
Shares in the shareholder's Fund account; second, of any Class B Shares held for
more than eight years and Class B Shares acquired pursuant to reinvestment of
dividends or other distributions; and third, of Class B Shares held longest
during the eight-year period. This method should result in the lowest possible
sales charge.
The contingent deferred sales charge is waived on redemption of Class B Shares
(i) within one year following the death or disability (as defined in the
Internal Revenue Code) of a shareholder, and (ii) to the extent that the
redemption represents a minimum required distribution from an individual
retirement account or other retirement plan to a shareholder who has attained
the age of 70 1/2. A shareholder or his or her representative must notify the
Transfer Agent prior to the time of redemption if such circumstances exist and
the shareholder is eligible for this waiver.
CONVERSION FEATURE. At the end of the period ending eight years after the
beginning of the month
<PAGE>
in which the shares were issued, Class B Shares will automatically convert to
Class A Shares and will no longer be subject to the Class B distribution and
service fees. This conversion will be on the basis of the relative net asset
values of the two classes.
SYSTEMATIC EXCHANGE PROGRAM
Shares of a Fund may also be purchased through automatic monthly deductions from
a shareholder's account in the same class of shares of Prime Obligations Fund of
First American Funds, Inc. Under a systematic exchange program, a shareholder
enters an agreement to purchase a specified class of shares of one or more Funds
over a specified period of time, and initially purchases Prime Obligations Fund
shares of the same class in an amount equal to the total amount of the
investment. On a monthly basis a specified dollar amount of shares of Prime
Obligations Fund is exchanged for shares of the same class of the Funds
specified. The systematic exchange program of investing a fixed dollar amount at
regular intervals over time has the effect of reducing the average cost per
share of the Funds. This effect also can be achieved through the systematic
investment program described below. Because purchases of Class A Shares are
subject to an initial sales charge, it may be beneficial for an investor to
execute a Letter of Intent in connection with the systematic exchange program. A
shareholder may apply for participation in this program through his or her
financial institution or by calling (800) 637-2548.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Fund shares at the net asset value next determined after an order is
received, plus any applicable sales charge. A shareholder may apply for
participation in this program through his or her financial institution or call
(800) 637-2548.
EXCHANGING SECURITIES FOR FUND SHARES
A Fund may accept securities in exchange for Fund shares. A Fund will allow such
exchanges only upon the prior approval by the Fund and a determination by the
Fund and the Adviser that the securities to be exchanged are acceptable.
Securities accepted by a Fund will be valued in the same manner that a Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Fund shares on the day the securities are valued.
CERTIFICATES AND CONFIRMATIONS
The Transfer Agent maintains a share account for each shareholder. Share
certificates will not be issued by the Funds.
Confirmations of each purchase and redemption are sent to each shareholder. In
addition, monthly confirmations are sent to report all transactions and
dividends paid during that month for the Funds.
DIVIDENDS AND DISTRIBUTIONS
Dividends with respect to each Fund are declared and paid monthly 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
<PAGE>
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 Class B Shares.
EXCHANGE PRIVILEGE
Shareholders may exchange Class A 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 of funds. Class A Shares of the Funds,
whether acquired by direct purchase, reinvestment of dividends on such shares,
or otherwise, may be exchanged for Class A Shares of other funds without the
payment of any sales charge (i.e., at net asset value). Exchanges of shares
among the First American family of funds must meet any applicable minimum
investment of the fund for which shares are being exchanged.
For purposes of calculating the Class B Shares' eight-year conversion period or
contingent deferred sales charges payable upon redemption, the holding period of
Class B Shares of the "old" fund and the holding period of Class B Shares of the
"new" fund are aggregated.
The ability to exchange shares of the Funds does not constitute an offering or
recommendation of shares of one fund by another fund. This privilege is
available to shareholders resident in any state in which the fund shares being
acquired may be sold. An investor who is considering acquiring shares in another
First American Fund pursuant to the exchange privilege should obtain and
carefully read a prospectus of the fund to be acquired. Exchanges may be
accomplished by a written request, or by telephone if a preauthorized exchange
authorization is on file with the Transfer Agent, shareholder servicing agent,
or financial institution.
Written exchange requests must be signed exactly as shown on the authorization
form, and the signatures may be required to be guaranteed as for a redemption of
shares by an entity described below under "Redeeming Shares -- Directly From the
Funds -- Signatures." Neither the Funds, the Distributor, the Transfer Agent,
any shareholder servicing agent, nor any financial institution will be
responsible for further verification of the authenticity of the exchange
instructions.
Telephone exchange instructions made by an investor may be carried out only if a
telephone authorization form completed by the investor is on file with the
Transfer Agent, shareholder servicing agent, or financial institution. Shares
may be exchanged between two First American funds by telephone only if both
funds have identical shareholder registrations.
Telephone exchange instructions may be recorded and will be binding upon the
shareholder. Telephone instructions must be received by the Transfer Agent
before 3:00 p.m. Central time, or by a shareholder's shareholder servicing agent
or financial institution by the time specified by it, in order for shares to be
exchanged the same day. Neither the Transfer Agent nor any Fund will be
responsible for the authenticity of exchange instructions received by telephone
if it reasonably believes those instructions to be genuine. The Funds and the
Transfer Agent will each employ reasonable procedures to confirm that telephone
instructions are genuine, and they may be liable for losses resulting from
unauthorized or fraudulent telephone instructions if they do not employ these
procedures.
Shareholders of the Funds may have difficulty in making exchanges by telephone
through brokers
<PAGE>
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.
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 such an exchange would be a situation in which an
individual holder of Class A Shares subsequently opens a fiduciary, 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 (less the amount of any applicable contingent deferred sales
charge). 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 unless the financial institution has been
authorized to accept redemption requests on behalf of the Funds. 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. Certain financial institutions are
authorized to act as the Funds' agent for the purpose of accepting redemption
requests, and the Funds will be deemed to have received a redemption request
upon receipt of the request by the financial institution.
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. The Transfer Agent and the Funds will each employ
reasonable
<PAGE>
procedures to confirm that instructions communicated are 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 tax
identification number at the time such request is made. The Transfer Agent
subsequently sends confirmations of both exchange sales and exchange purchases
to the shareholder for verification. If reasonable procedures are not employed,
the Transfer Agent and the Funds may be liable for any losses due to
unauthorized or fraudulent telephone transactions.
BY MAIL
Any shareholder may redeem Fund shares by sending a written request to the
Transfer Agent, shareholder servicing agent, or financial institution. The
written request should include the shareholder's name, the Fund name, the
account number, and the share or dollar amount requested to be redeemed, and
should be signed exactly as the shares are registered. Shareholders should call
the Fund, shareholder servicing agent or financial institution for assistance in
redeeming by mail. A check for redemption proceeds normally is mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
Shareholders requesting a redemption of $5,000 or more, a redemption of any
amount to be sent to an address other than that on record with the Fund, or a
redemption payable other than to the shareholder of record, must have signatures
on written redemption requests guaranteed by:
* a trust company or commercial bank the deposits of which are insured by the
Bank Insurance Fund, which is administered by the Federal Deposit Insurance
Corporation ("FDIC");
* a member firm of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges or of the National Association of Securities Dealers;
* a savings bank or savings and loan association the deposits of which are
insured by the Savings Association Insurance Fund, which is administered by
the FDIC; or
* any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public.
The Funds and the Transfer Agent have adopted standards for accepting signature
guarantees from the above institutions. The Funds may elect in the future to
limit eligible signature guarantees to institutions that are members of a
signature guarantee program. The Funds and the Transfer Agent reserve the right
to amend these standards at any time without notice.
BY SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders whose account value is at least $5,000 may elect to participate in
the Systematic Withdrawal Program. Under this program, Fund shares are redeemed
to provide for periodic withdrawal payments in an amount directed by the
shareholder. A shareholder may apply to participate in this program through his
or her financial institution. It is generally not in a shareholder's best
interest to participate in the Systematic Withdrawal
Program at the same time that the shareholder is purchasing additional shares if
a sales charge must be paid in connection with such purchases.
REDEMPTION BEFORE
PURCHASE INSTRUMENTS CLEAR
When shares are purchased by check or with funds transmitted through the
Automated Clearing House, the proceeds of redemptions of those shares are not
available until the Transfer Agent is reasonably certain that the purchase
payment has cleared, which could take up to ten calendar days from the purchase
date.
<PAGE>
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 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 and federally-chartered banks are 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 a purchase order or redemption request.
It is the responsibility of Participating Institutions promptly to forward
purchase and redemption orders to the Transfer Agent. In the case of redemptions
and repurchases of shares owned by corporations, trusts or estates, the Transfer
Agent or Fund may require additional documents to evidence appropriate authority
in order to effect the redemption, and the applicable price will be that next
determined following the receipt of the required documentation.
DETERMINING NET ASSET VALUE
The net asset value per share for each of the Funds is determined by dividing
the value of the securities owned by the Fund plus any cash and other assets
(including interest accrued and dividends declared but not collected), less all
liabilities, by the number of Fund shares outstanding. For the purpose of
determining the aggregate net assets of the Funds, cash and receivables will be
valued at their face amounts. Interest will be recorded as accrued and dividends
will be recorded on the ex-dividend date. Security valuations are furnished by
an independent pricing service that has been approved by the Board of Directors.
Debt obligations with remaining maturities in excess of sixty days are valued at
the most recently quoted bid price. For such debt obligations the pricing
service may employ methods that utilize actual market transactions,
broker-dealer valuations, or other electronic data processing techniques. These
techniques generally consider such factors as security prices, yields,
maturities, call features, ratings and developments relating to specific
securities in arriving at security valuations. Debt obligations with remaining
maturities of sixty days or less may be valued at their amortized cost which
approximates market value. If a security price cannot be obtained from an
independent pricing service a bid price may be obtained from an independent
broker who makes a market in the security. Foreign securities owned by the Funds
are valued at the closing prices on the principal exchange on which they trade.
If the value for a security cannot be obtained from the sources described above,
the security's value may be determined pursuant to the fair value procedures
established by the Board of Directors.
Portfolio securities underlying actively traded options are valued at their
market price as
<PAGE>
determined above. The current market value of any exchange traded options held
or written by a Fund, are valued at the closing bid price for a long position or
the closing ask price for a short position.
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 differing
distribution and/or shareholder servicing expenses charged to Class A and Class
B Shares.
FOREIGN SECURITIES
Any assets or liabilities of the Funds 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 the Funds. Thus, the calculation of
the Funds' net asset value may not take place contemporaneously with the
determination of the prices of foreign securities held in the Funds' portfolios.
In addition, trading in securities on foreign markets may not take place on all
days on which the New York Stock Exchange is open for business or may take place
on days on which the New York Stock Exchange is not open for business.
Therefore, the net asset value of a Fund which holds foreign securities might be
significantly affected on days when an investor has no access to the Fund.
FEDERAL INCOME TAXES
GENERAL
Each Fund intends to qualify as a regulated investment company under Subchapter
M of the Internal Revenue Code of 1986, as amended (the "Code"), during its
current taxable year in order to be relieved of payment of federal income taxes
on amounts of taxable income it distributes to shareholders.
Dividends paid from each Fund's net investment income and net short-term capital
gains will be taxable to shareholders as ordinary income, whether or not the
shareholder elects to have such dividends automatically reinvested in additional
shares. Dividends paid by the Funds will not be eligible for the 70% deduction
for dividends received by corporations.
Dividends paid from the net capital gains of each Fund and designated as capital
gain dividends generally will be taxable to shareholders as long-term capital
gains, regardless of the length of time for which they have held their shares in
the Fund. In the case of shareholders who are individuals, estates, or trusts,
each Fund will designate the portion of each capital gain dividend that must be
treated as mid-term capital gain and the portion that must be treated as
long-term capital gain.
Gain or loss realized upon the sale of shares in the Funds will be treated as
capital gain or loss, provided that the shares represented a capital asset in
the hands of the shareholder. For corporate shareholders, such gain or loss will
be long-term gain or loss if the shares were held for more than one year. For
shareholders who are individuals, estates, or trusts the gain or loss will be
considered long-term if the shareholder has held the shares for more than 18
months and mid-term if the shareholder has held the shares for more than one
year but not more than 18 months.
Each Fund is required by federal law to withhold 31% of reportable payments
(including dividends, capital gain distributions, and redemptions) paid to
certain shareholders who have not complied with IRS regulations. In order to
avoid this withholding requirement, each investor will be asked to certify on
his or her account application that the social security or taxpayer
identification number provided is correct and that the investor
<PAGE>
is not subject to backup withholding for previous underreporting to the IRS.
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 of shares, 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 of shares.
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 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, as
applicable, 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
<PAGE>
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 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.
BANK INSTRUMENTS
The bank instruments in which Limited Term Income Fund, Intermediate Term Income
Fund, and Fixed Income Fund may invest include time and savings deposits,
deposit notes and bankers' acceptances (including certificates of deposit) in
commercial or savings banks. They also include Eurodollar Certificates of
Deposit issued by foreign branches of United States or foreign banks; Eurodollar
Time Deposits, which are United States dollar-denominated deposits in foreign
branches of United States or foreign banks; and Yankee Certificates of Deposit,
which are United States dollar-denominated certificates of deposit issued by
United States branches of foreign banks and held in the United States. For a
description of certain risks of investing in foreign issuers' securities, see
"-- Foreign Securities" below. In each instance, the Funds may only invest in
bank instruments issued by an institution which has capital, surplus and
undivided profits of more than $100 million or the deposits of which are insured
by the Bank Insurance Fund or the Savings Association Insurance Fund.
FOREIGN SECURITIES
Each of Limited Term Income Fund, Intermediate Term Income Fund and Fixed Income
Fund may invest up to 15% of its total assets in foreign securities payable in
United States dollars. These securities may include securities issued or
guaranteed by (i) the Government of Canada, any Canadian Province, or any
instrumentality or political subdivision thereof; (ii) any other foreign
government, agency or instrumentality; (iii) foreign subsidiaries of United
States corporations; and (iv) foreign banks having total capital and surplus at
the time of investment of at least $1 billion. Such foreign bank or corporate
securities must be rated by at least one major United States rating agency as
having a quality not less than that which would be required for comparable
domestic securities. In addition, Limited Term Income Fund, Intermediate Term
Income Fund, and Fixed Income Fund also may invest in Eurodollar Certificates of
<PAGE>
Deposit, Eurodollar Time Deposits and Yankee Certificates of Deposit as
described under "-- Bank Instruments" above.
Although investments of these kinds are not subject to currency risk because
they are denominated in United States dollars, they are subject to certain other
risks associated with foreign investments. Risks which may affect foreign
issuers include political, social or economic instability in the country of the
issuer, the possibility of the imposition of exchange controls, expropriation,
limits on removal of currency or other assets, and nationalization of assets.
Foreign issuers may not be subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic United States
issuers. In addition, foreign branches of United States banks and foreign banks
may be subject to less stringent regulatory requirements than United States
banks.
ASSET-BACKED SECURITIES
Each of Limited Term Income Fund, Intermediate Term Income Fund, and Fixed
Income Fund may invest in asset-backed securities. Asset-backed securities
generally constitute interests in, or obligations secured by, a pool of
receivables other than mortgage loans, such as automobile loans and leases,
credit card receivables, home equity loans and trade receivables. Asset-backed
securities generally are issued by a private special-purpose entity. Their
ratings and creditworthiness typically depend on the legal insulation of the
issuer and transaction from the consequences of a sponsoring entity's
bankruptcy, as well as on the credit quality of the underlying receivables and
the amount and credit quality of any third-party credit enhancement supporting
the underlying receivables or the asset-backed securities. Asset-backed
securities and their underlying receivables generally are not issued or
guaranteed by any governmental entity.
MORTGAGE-BACKED SECURITIES
Limited Term Income Fund, Intermediate Term Income Fund and Fixed Income Fund
may invest in mortgage-backed securities which are Agency Pass-Through
Certificates or collateralized mortgage obligations ("CMOs"), as described
below.
Agency Pass-Through Certificates are mortgage pass-through certificates
representing undivided interests in pools of residential mortgage loans.
Distribution of principal and interest on the mortgage loans underlying an
Agency Pass-Through Certificate is an obligation of or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC").
The obligation of GNMA with respect to such certificates is backed by the full
faith and credit of the United States, while the obligations of FNMA and FHLMC
with respect to such certificates rely solely on the assets and credit of those
entities. The mortgage loans underlying GNMA certificates are partially or fully
guaranteed by the Federal Housing Administration or the Veterans Administration,
while the mortgage loans underlying FNMA certificates and FHLMC certificates are
conventional mortgage loans which are, in some cases, insured by private
mortgage insurance companies. Agency Pass-Through Certificates may be issued in
a single class with respect to a given pool of mortgage loans or in multiple
classes.
CMOs are debt obligations typically issued by a private special-purpose entity
and collateralized by residential or commercial mortgage loans or Agency
Pass-Through Certificates. The Funds will invest only in CMOs which are rated in
one of the four highest rating categories by a nationally recognized statistical
rating organization, or which are of comparable quality in the judgment of the
Adviser. Because CMOs are debt obligations of private entities, payments on CMOs
generally are not obligations of or guaranteed by any governmental entity, and
their ratings and creditworthiness typically depend on, among other factors, the
legal insulation of the issuer and transaction from the consequences of a
sponsoring entity's bankruptcy. CMOs generally are issued in multiple classes,
with holders of each class entitled
<PAGE>
to receive specified portions of the principal payments and prepayments and/or
of the interest payments on the underlying mortgage loans. These entitlements
can be specified in a wide variety of ways, so that the payment characteristics
of various classes may differ greatly from one another. Examples of the more
common classes are provided in the Statement of Additional Information. The CMOs
in which the Funds may invest include classes which are subordinated in right of
payment to other classes, as long as they have the required rating referred to
above.
It is generally 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. The
return on interest-only and principal-only mortgage-backed securities is
particularly sensitive to changes in interest rates and prepayment speeds. When
interest rates decline and prepayment speeds increase, the holder of an
interest-only mortgage-backed security may not even recover its initial
investment. Similarly, the return on an inverse floating rate CMO is likely to
decline more sharply in periods of increasing interest rates than that of a
fixed-rate security. For these reasons, interest-only, principal-only and
inverse floating rate mortgage-backed securities generally have greater risk
than more conventional classes of mortgage-backed securities. The limitations on
each Fund's investments in interest-only, principal-only and inverse floating
rate mortgage-backed securities are set forth above under "Investment Objectives
and Policies."
REPURCHASE AGREEMENTS
Each of the Funds may 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
Each of the Funds may purchase securities on a when-issued or delayed delivery
basis. When such a transaction is negotiated, the purchase price is fixed at the
time the purchase commitment is entered, but delivery of and payment for the
securities take place at a later date. A Fund will not accrue income with
respect to securities purchased on a when-issued or delayed delivery basis prior
to their stated delivery date. Pending delivery of the securities, each Fund
will maintain in a segregated account cash or liquid high-grade securities in an
amount sufficient to meet its purchase commitments.
The purchase of securities on a when-issued or delayed delivery basis exposes a
Fund to risk because the securities may decrease in value prior to delivery. In
addition, a Fund's purchase of securities on a when-issued or delayed delivery
basis while remaining substantially fully invested could increase the amount of
the Fund's total assets that are subject to market risk, resulting in increased
sensitivity of net asset value to changes in market prices. However, the Funds
will engage in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with their investment
<PAGE>
objectives, and not for the purpose of investment leverage. A seller's failure
to deliver securities to a Fund could prevent the Fund from realizing a price or
yield considered to be advantageous.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, each of the Funds may lend portfolio
securities representing up to one-third of the value of its total assets to
broker-dealers, banks or other institutional borrowers of securities. 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 which, in the case of First Trust
National Association, are 40% of the Funds' income from such securities lending
transactions.
OPTIONS TRANSACTIONS
Each of the Funds may, in order to reduce risk, invest in exchange traded put
and call options on interest rate futures contracts and on interest rate
indices. Such investments will be made solely as a hedge against adverse changes
resulting from market conditions in the values of securities held by the Funds
or which they intend to purchase and where the transactions are deemed
appropriate to reduce risks inherent in the Funds' portfolios or contemplated
investments.
None of the Funds will invest more than 5% of the value of its total assets in
purchased options, provided that options which are "in the money" at the time of
purchase may be excluded from this 5% limitation. A call option is "in the
money" if the exercise price is lower than the current market price of the
underlying contract or index, and a put option is "in the money" if the exercise
price is higher than the current market price. A Fund's loss exposure in
purchasing an option is limited to the sum of the premium paid (purchase price
of the option) and the commission or other transaction expenses associated with
acquiring the option.
An interest rate futures contract provides for the future sale by one party and
purchase by the other party of a certain amount of a specific financial
instrument (debt security) at a specified price, date, time and place. An option
on an interest rate futures contract, as contrasted with the direct investment
in such a contract, gives the purchaser the right, in return for the premium
paid, to purchase (in the case of a call option) or sell (in the case of a put
option) an interest rate futures contract at a specified exercise price at any
time prior to the expiration date of the option. In order to hedge its portfolio
against anticipated changes in interest rates, a Fund might purchase a put
option on an interest rate futures contract if interest rates were expected to
rise, or might purchase a call option on an interest rate futures contract if
rates were expected to decline.
Options on interest rate indices are similar to options on interest rate futures
contracts except that, rather than the right to take or make delivery of a
specific financial instrument at a specified price, an option on an interest
rate index gives the holder the right to receive, upon exercise of the option, a
defined amount of cash if the closing value of the interest rate index upon
which the option is based is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. Put and call options on
interest rate indices thus may be used in a fashion similar to that of options
on interest rate futures contracts to hedge the value of a portfolio of debt
securities against anticipated changes in interest rates.
<PAGE>
The use of options on interest rate futures contracts and on interest rate
indices involves certain risks. These include the risk that changes in interest
rates on the hedged instruments may not correlate to changes in interest rates
on the instrument or index upon which the hedge is based, and the risk of
limited liquidity in the event that a Fund seeks to close out an options
position before expiration by entering into an offsetting transaction.
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 (100% or more) generally
would result in higher transaction costs and could result in additional tax
consequences to a Fund's shareholders.
INVESTMENT RESTRICTIONS
The fundamental and nonfundamental investment restrictions of the Funds are set
forth in full in the Statement of Additional Information. The fundamental
restrictions include the following:
* None of the Funds will borrow money, except from banks for temporary or
emergency purposes. The amount of such borrowing may not exceed 10% of the
borrowing Fund's total assets. None of the Funds will borrow money for
leverage purposes. For the purpose of this investment restriction, the use
of options and futures transactions and the purchase of securities on a
when-issued or delayed delivery basis shall not be deemed the borrowing of
money. If a Fund engages in borrowing, its share price may be subject to
greater fluctuation, and the interest expense associated with the borrowing
may reduce the Fund's net income.
* None of the Funds will 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.
<PAGE>
INFORMATION CONCERNING COMPENSATION
PAID TO U.S. BANK NATIONAL ASSOCIATION,
FIRST TRUST NATIONAL ASSOCIATION AND
OTHER AFFILIATES
U.S. Bank National Association, First Trust National Association and other
affiliates of U.S. Bancorp may act as a fiduciary with respect to plans subject
to the Employee Retirement Income Security Act of 1974 ("ERISA") and other trust
and agency accounts that invest in the Funds. These U.S. Bancorp affiliates may
receive compensation from the Funds for the services they provide to the Funds,
as described more fully in the following sections of this Prospectus:
Investment advisory services -- see "Management-Investment Adviser"
Custodian services -- see "Management-Custodian"
Sub-administration services -- see "Management-Administrator"
Shareholder servicing -- see "Distributor"
Securities lending -- see "Special Investment Methods-Lending of Portfolio
Securities"
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
Oaks, Pennsylvania 19456
Investment Adviser
U.S. 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-1001 (1/98) R
<PAGE>
JANUARY 31, 1998
FIXED INCOME FUNDS
CLASS C SHARES
Limited Term Fixed Income Fund
Income Fund
Intermediate Term Intermediate Government
Income Fund Bond Fund
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(SM)
<PAGE>
TABLE OF CONTENTS
Summary 2
Fees and Expenses 4
Financial Highlights 6
The Funds 8
Investment Objectives and Policies 8
Management 12
Distributor 14
Purchases and Redemptions of Shares 14
Federal Income Taxes 17
Fund Shares 17
Calculation of Performance Data 17
Special Investment Methods 18
Information Concerning Compensation
Paid to U.S. Bank National Association,
First Trust National Association and
Other Affiliates 23
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
CLASS C SHARES 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"):
* LIMITED TERM INCOME FUND
* INTERMEDIATE TERM INCOME FUND
* FIXED INCOME FUND
* INTERMEDIATE GOVERNMENT BOND FUND
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING U.S. 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 January 31, 1998 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 January 31, 1998.
<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"):
LIMITED TERM INCOME FUND has an objective of providing current income while
attempting to provide a high degree of principal stability. This Fund invests in
investment grade debt securities, at least 65% of which are United States
Government obligations and corporate debt obligations and mortgage-backed and
asset-backed securities rated at least A by Standard & Poor's or Moody's or
which have been assigned an equivalent rating by another nationally recognized
statistical rating organization. Under normal market conditions, the weighted
average maturity of the securities held by this Fund will range from 6 months to
2 years.
INTERMEDIATE TERM INCOME FUND has an objective of providing current income to
the extent consistent with preservation of capital. This Fund generally invests
in the same kinds of debt securities as Limited Term Income Fund. Under normal
market conditions, the weighted average maturity of the securities held by this
Fund will range from 2 to 7 years.
FIXED INCOME FUND has an objective of providing a high level of current income
consistent with limited risk to capital. This Fund generally invests in the same
kinds of debt securities as Limited Term Income Fund. Under normal market
conditions, the weighted average maturity of the securities held by this Fund
will not exceed 15 years.
INTERMEDIATE GOVERNMENT BOND FUND has an objective of providing current income
to the extent consistent with preservation of capital. Under normal market
conditions, this Fund invests at least 65% of its total assets in securities
issued or guaranteed by the United States Government and its agencies and
instrumentalities. Under normal market conditions, the weighted average maturity
of the securities held by this Fund will range from 2 to 7 years.
INVESTMENT ADVISER U.S. Bank National Association (the "Adviser or U.S. Bank")
serves as investment adviser to each of the Funds through its First American
Asset Management group. 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 of funds at the shares' respective net
asset values with no additional charge. See "Purchases and Redemptions of Shares
- -- Exchange Privilege."
<PAGE>
REDEMPTIONS Shares of each Fund may be redeemed at any time at their net asset
value next determined after receipt of a redemption request by the Funds'
transfer agent, with no additional charge. See "Purchases and Redemptions of
Shares."
RISKS TO CONSIDER Each of the Funds is subject to (i) interest rate risk (the
risk that increases in market interest rates will cause declines in the value of
debt securities held by a Fund); (ii) credit risk (the risk that the issuers of
debt securities held by a Fund default in making required payments); and (iii)
call or prepayment risk (the risk that a borrower may exercise the right to
prepay a debt obligation before its stated maturity, requiring a Fund to
reinvest the prepayment at a lower interest rate). In addition, those Funds
which may invest in mortgage-backed securities are subject to certain additional
risks associated with investing in securities representing interests in, or
secured by, pools of residential mortgage loans. The Funds also may, in order to
attempt to reduce risk, invest in exchange traded put and call options on
interest rate futures contracts and on interest rate indices. See "Investment
Objectives and Policies -- Risks to Consider" 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>
LIMITED INTERMEDIATE INTERMEDIATE
TERM TERM FIXED GOVERNMENT
INCOME INCOME INCOME BOND
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases None None None None
Maximum sales load imposed on reinvested
dividends None None None None
Deferred sales load None None None None
Redemption fees None None None None
Exchange fees None None None None
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
Investment advisory fees (after voluntary fee
waivers)(1) 0.40% 0.48% 0.52% 0.53%
Rule 12b-1 fees None None None None
Other expenses 0.20% 0.22% 0.18% 0.17%
Total fund operating expenses
(after voluntary fee waivers)(1) 0.60% 0.70% 0.70% 0.70%
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 $ 6 $ 7 $ 7 $ 7
3 years $19 $22 $22 $22
5 years $33 $39 $39 $39
10 years $75 $87 $87 $87
</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 for the
current fiscal year but reserves the right to discontinue such waivers at
any time in its sole discretion. Notwithstanding the foregoing, the Adviser
will maintain such waivers of Intermediate Term Income Fund and Fixed
Income Fund in effect through September 30, 1998. Absent any fee waivers,
investment advisory fees for each Fund as an annualized percentage of
average daily net assets would be 0.70%; and total fund operating expenses
calculated on such basis would be 0.90% for Limited Term Income Fund, 0.92%
for Intermediate Term Income Fund, 0.88% for Fixed Income Fund and 0.87%
for Intermediate Government Bond Fund. "Other expenses" includes an
administration fee.
(2) Absent the fee waivers referred to in (1) above, the dollar amounts for the
1, 3, 5 and 10-year periods would be as follows: Limited Term Income Fund,
$9, $29, $50 and $111; Intermediate Term Income Fund, $9, $29, $51 and
$113; Fixed Income Fund, $9, $28, $49 and $108; and Intermediate Government
Bond Fund, $9, $28, $48 and $107.
<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.
<PAGE>
FINANCIAL HIGHLIGHTS
The following audited financial highlights should be read in conjunction with
the Funds' financial statements, the related notes thereto and the independent
auditors' report of KPMG Peat Marwick LLP appearing in FAIF's annual report to
shareholders dated September 30, 1997. Further information about the Funds'
performance is contained in such annual report to shareholders, which may be
obtained without charge by calling (800) 637-2548 or by writing SEI Investments
Distribution Co., Oaks, Pennsylvania 19456.
For the periods ended September 30,
For a share outstanding throughout the period
REALIZED AND NET
UNREALIZED ASSET
NET ASSET NET GAINS OR VALUE
VALUE BEGINNING INVESTMENT (LOSSES) ON END OF
OF PERIOD INCOME INCOME PERIOD
LIMITED TERM INCOME FUND Class C
1997 $ 9.91 $0.56 $ 0.03 $(0.56)
1996 9.92 0.58 (0.01) (0.58)
1995 9.85 0.56 0.07 (0.56)
1994(1) 10.02 0.29 (0.17) (0.29)
INTERMEDIATE TERM INCOME FUND Class C
1997 $ 9.93 $0.55 $ 0.13 $(0.56)
1996 9.94 0.55 -- (0.55)
1995 9.55 0.58 0.39 (0.58)
1994(1) 10.01 0.31 (0.46) (0.31)
FIXED INCOME FUND Class C
1997 $10.76 $0.62 $ 0.27 $(0.62)
1996 10.97 0.63 (0.11) (0.63)
1995 10.37 0.66 0.62 (0.65)
1994(2) 11.11 0.38 (0.74) (0.38)
INTERMEDIATE GOVERNMENT BOND FUND Class C
1997 $ 9.18 $0.54 $ 0.09 $(0.54)
1996 9.29 0.54 (0.11) (0.54)
1995 8.98 0.54 0.31 (0.54)
1994(2) 9.41 0.27 (0.43) (0.27)
+Returns are for the period indicated and have not been annualized.
(1) This class of shares has been offered since February 4, 1994 (the Fund
itself having commenced operations on December 14, 1992). All ratios for
the period have been annualized.
(2) This class of shares has been offered since February 4, 1994 (the Fund
itself having commenced operations on December 22, 1987). All ratios for
the period have been annualized.
<PAGE>
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
NET ASSET RATIO OF INVESTMENT AVERAGE
DISTRIBUTIONS VALUE NET ASSETS EXPENSES TO INCOME TO NET ASSETS PORTFOLIO
FROM END OF TOTAL END OF AVERAGE AVERAGE (EXCLUDING TURNOVER
CAPITAL GAINS PERIOD RETURN PERIOD (000) NET ASSETS NET ASSETS WAIVERS) RATE
<S> <C> <C> <C> <C> <C> <C> <C>
$ -- $ 9.94 6.09% $184,368 0.60% 5.60% 0.90% 147%
-- 9.91 5.93 93,588 0.60 5.80 0.84 61
-- 9.92 6.57 111,439 0.60 5.67 0.97 120
-- 9.85 1.24+ 70,266 0.60 4.40 1.03 48
$(0.07) $ 9.98 6.98% $324,250 0.70% 5.51% 0.92% 165%
(0.01) 9.93 5.63 98,702 0.70 5.45 0.88 161
-- 9.94 10.51 88,375 0.70 5.94 0.94 69
-- 9.55 (1.48)+ 68,445 0.58 4.81 1.07 177
$(0.07) $10.96 8.54% $705,719 0.70% 5.71% 0.88% 130%
(0.10) 10.76 4.90 391,211 0.70 5.81 0.87 108
(0.03) 10.97 12.86 289,816 0.70 6.28 0.94 106
-- 10.37 (3.23)+ 90,187 0.61 5.53 0.92 142
$ -- $ 9.27 7.07% $181,889 0.70% 5.88% 0.87% 22%
-- 9.18 4.74 140,230 0.70 5.85 0.85 29
-- 9.29 9.82 100,168 0.70 6.13 0.97 17
-- 8.98 (1.66)+ 27,776 0.36 5.32 1.45 74
</TABLE>
<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 three separate classes (Class A, Class
B and Class C) 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. A Fund which is limited to investing in
securities with specified ratings is not required to sell a security if its
rating is reduced or discontinued after purchase, but the Fund may consider
doing so. However, in no event will more than 5% of any Fund's net assets be
invested in non-investment grade securities. Descriptions of the rating
categories of Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies, Inc. ("Standard & Poor's") and Moody's Investors Service, Inc.
("Moody's") are contained in the Statement of Additional Information.
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."
LIMITED TERM INCOME FUND, INTERMEDIATE TERM INCOME FUND AND FIXED INCOME FUND
OBJECTIVES. Limited Term Income Fund has an objective of providing current
income while attempting to provide a high degree of principal stability.
Intermediate Term Income Fund has an objective of providing current income to
the extent consistent with preservation of capital. Fixed Income Fund has an
objective of providing a high level of current income consistent with limited
risk to capital.
INVESTMENT POLICIES. Each of these Funds invests in investment grade debt
securities, at least 65% of which are United States Government obligations and
corporate debt obligations and mortgage-backed and asset-backed securities rated
at least A by Standard & Poor's or Moody's or
<PAGE>
which have been assigned an equivalent rating by another nationally recognized
statistical rating organization.
Under normal market conditions, the weighted average maturity of the securities
held by Limited Term Income Fund will range from 6 months to 2 years; that of
Intermediate Term Income Fund will range from 2 to 7 years; and that of Fixed
Income Fund will not exceed 15 years.
These Funds' permitted investments include notes, bonds and discount notes of
United States Government agencies or instrumentalities; domestic issues of
corporate debt obligations having floating or fixed rates of interest and rated
at least BBB by Standard & Poor's or Baa by Moody's, or which have been assigned
an equivalent rating by another nationally recognized statistical rating
organization, or which are of comparable quality in the judgment of the Adviser;
other fixed income securities, including mortgage-backed securities, which are
rated in one of the four highest categories by a nationally recognized
statistical rating organization or which are of comparable quality in the
judgment of the Adviser; and commercial paper which is rated A-1 by Standard &
Poor's or P-1 by Moody's or which has been assigned an equivalent rating by
another nationally recognized statistical rating organization. Unrated
securities deemed to be of comparable quality to rated securities as set forth
above will not exceed 10% in the aggregate of the value of the total assets of
any of these Funds. At least 65% of the total assets of Fixed Income Fund will
be invested in fixed rate obligations.
Subject to the foregoing limitations, each of these Funds may invest in the
following kinds of securities, as described under the related headings under
"Special Investment Methods:" (i) mortgage-backed securities (provided that
Limited Term Income Fund will not invest in interest-only, principal-only or
inverse floating rate mortgage-backed securities, and each of Intermediate Term
Income Fund and Fixed Income Fund will not invest more than 10% of its total
assets in the aggregate in these kinds of securities); (ii) asset-backed
securities; and (iii) bank instruments.
In addition, each of these Funds may (i) invest up to 15% of its total assets in
foreign securities payable in United States dollars; (ii) enter into repurchase
agreements; (iii) in order to attempt to reduce risk, invest in exchange traded
put and call options on interest rate futures contracts and on interest rate
indices; (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."
Limited Term Income Fund also may purchase investment-type insurance products
such as Guaranteed Investment Contracts ("GICs"). A GIC is a deferred annuity
under which the purchaser agrees to pay money to an insurer (either in a lump
sum or in installments) and the insurer promises to pay interest at a guaranteed
rate for the life of the contract. GICs may have fixed or variable interest
rates. A GIC is a general obligation of the issuing insurance company. The
purchase price paid for a GIC becomes part of the general assets of the insurer,
and the contract is paid at maturity from the general assets of the insurer. In
general, GICs are not assignable or transferable without the permission of the
issuing insurance companies and can be redeemed before maturity only at a
substantial discount or penalty. GICs therefore are usually considered to be
illiquid investments. Limited Term Income Fund will purchase only GICs which are
obligations of insurance companies with a policyholder's rating of A or better
by A.M. Best Company. A description of these ratings is contained in the
Statement of Additional Information.
Although these Funds will not make direct purchases of common or preferred
stocks or rights to acquire common or preferred stocks, they may invest in debt
securities which are convertible into or exchangeable for, or which carry
warrants or other rights to acquire, such stocks. Equity interests
<PAGE>
acquired through conversion, exchange or exercise of rights to acquire stock
will be disposed of by these Funds as soon as practicable in an orderly manner.
For temporary defensive purposes, these Funds may without limitation hold cash
or invest in cash items. The Funds also may invest not more than 35% of their
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; 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; and securities of other
mutual funds which invest primarily in debt securities with remaining maturities
of 13 months or less (which investments also are subject to the advisory fee).
Such other mutual funds 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.
INTERMEDIATE GOVERNMENT BOND FUND
OBJECTIVE. Intermediate Government Bond Fund has an objective of providing
current income to the extent consistent with preservation of capital.
INVESTMENT POLICIES. Under normal market conditions, Intermediate Government
Bond Fund invests at least 65% of its total assets in securities issued or
guaranteed by the United States Government and its agencies and
instrumentalities. The Fund's share price and yield, however, are not guaranteed
or insured by the United States Government or any of its agencies or
instrumentalities. Under normal market conditions, the weighted average maturity
of the securities held by this Fund will range from 2 to 7 years.
The types of securities in which the Fund may invest include direct obligations
of the United States Treasury, such as United States Treasury bonds, notes and
bills. In addition, the Fund may invest in obligations issued or guaranteed as
to principal and interest by agencies of the United States Government or by
instrumentalities which have been established or sponsored by the United States
Government, provided, in each case, that interest on the obligations is
excludable from state taxable income by the holders thereof. Such agencies and
instrumentalities include, but are not limited to, the Farm Credit System
Financial Assistance Corporation, the Federal Home Loan Banks System, the
Student Loan Marketing Association and the Tennessee Valley Authority.
Obligations issued or guaranteed by some of these agencies or instrumentalities
are not guaranteed by the United States Government, but instead rely solely on
the assets and credit of the issuing agency or instrumentality. The United
States Treasury, agency and instrumentality securities in which the Fund may
invest include adjustable rate securities and United States Treasury
inflation-protection securities. The principal amount of such
inflation-protection securities is adjusted for inflation, and periodic interest
payments are an amount equal to a fixed percentage of the inflation-adjusted
principal amount.
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, invest in exchange traded put and call options on
interest rate futures contracts and on interest rate indices; (iii) purchase
securities on a when-issued or delayed delivery basis; and (iv) 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, the Fund may without limitation hold cash or
invest in short-term government securities maturing within 13 months from the
date of purchase; repurchase agreements with respect to government securities;
and securities of other mutual funds which invest primarily in debt securities
with remaining
<PAGE>
maturities of 13 months or less (which investments also are subject to the
advisory fee). Such other mutual funds 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. The Fund also
may so invest not more than 35% of its total assets in such investments in order
to utilize assets awaiting normal investment. See "Special Investment Methods --
Repurchase Agreements."
RISKS TO CONSIDER
An investment in any of the Funds involves certain risks. These include the
following:
INTEREST RATE RISK. Interest rate risk is the risk that the value of a
fixed-rate debt security will decline due to changes in market interest rates.
Because the Funds invest in fixed-rate debt securities, they are subject to
interest rate risk. In general, when interest rates rise, the value of a
fixed-rate debt security declines. Conversely, when interest rates decline, the
value of a fixed-rate debt security generally increases. Thus, shareholders in
the Funds bear the risk that increases in market interest rates will cause the
value of their Fund's portfolio investments to decline.
In general, the value of fixed-rate debt securities with longer maturities is
more sensitive to changes in market interest rates than the value of such
securities with shorter maturities. Thus, the net asset value of a Fund which
invests in securities with longer weighted average maturities, such as Fixed
Income Fund, should be expected to have greater volatility in periods of
changing market interest rates than that of a Fund which invests in securities
with shorter weighted average maturities, such as Limited Term Income Fund.
Similarly, the volatility of Intermediate Term Income Fund and Intermediate
Government Bond Fund generally should be expected to be between that of Fixed
Income Fund and Limited Term Income Fund. As described below under "Special
Investment Methods -- Mortgage-Backed Securities," it is more difficult to
generalize about the effect of changes in market interest rates on the values of
mortgage-backed securities.
Although the Adviser may engage in transactions intended to hedge the value of
the Funds' portfolios against changes in market interest rates, there is no
assurance that such hedging transactions will be undertaken or will fulfill
their purpose. See "Special Investment Methods -- Options Transactions."
CREDIT RISK. Credit risk is the risk that the issuer of a debt security will
fail to make payments on the security when due. Because the Funds invest in debt
securities, they are subject to credit risk.
Securities issued or guaranteed by the United States 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 United States, and
securities issued by private entities, are subject to higher levels of credit
risk. The ratings and certain other requirements which apply to the Funds'
permitted investments, as described elsewhere in this Prospectus, are intended
to limit the amount of credit risk undertaken by the Funds. Nevertheless,
shareholders in the Funds bear the risk that payment defaults could cause the
value of their Fund's portfolio investments to decline. Investors also should
note that Limited Term Income Fund, Intermediate Term Income Fund and Fixed
Income Fund can invest in debt securities rated as low as BBB by Standard &
Poor's or Baa by Moody's, or which have been assigned an equivalent rating by
another nationally recognized statistical rating organization, or which are of
comparable quality in the judgment of the Adviser. Although these rating
categories are investment grade, obligations with these ratings are viewed as
having speculative characteristics and carry a somewhat higher risk of default
than obligations rated in the higher investment grade categories.
CALL RISK. Many 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
<PAGE>
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 is called during a period of declining interest rates,
the Fund probably will have to reinvest the proceeds received by it at a lower
interest rate than that borne by the called bond, thus resulting in a decrease
in the Fund's income. To the extent that the Funds invest in callable corporate
bonds, Fund shareholders bear the risk that reductions in income will result
from the call of bonds. Most United States Government securities are not
callable before their stated maturity, although U.S. agency securities often
are.
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
U.S. Bank National Association, 601 Second Avenue South, Minneapolis, Minnesota
55402, acts as the Funds' investment adviser through its First American 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 September 30, 1997, the Adviser was managing accounts with an aggregate value
of approximately $55 billion, including mutual fund assets of approximately $20
billion. U.S. Bancorp, 601 Second Avenue South, Minneapolis, Minnesota 55480, is
the holding company for the Adviser.
Each of the Funds has agreed to pay the Adviser monthly fees calculated on an
annual basis equal to 0.70% of its average daily net assets. The Adviser may, at
its option, waive any or all of its fees, or reimburse expenses, with respect to
any Fund from time to time. Any such waiver or reimbursement is voluntary and
may be discontinued at any time except, with respect to Class C Shares of
Intermediate Term Income Fund and Fixed Income Fund, the Adviser will maintain
current waivers in effect through September 30, 1998. 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
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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
Limited Term Income Fund, Intermediate Term Income Fund and Fixed Income Fund
are managed by a committee comprised of Mr. Jones, Mr. Green and Ms. Rehkamp,
whose backgrounds are set below. Intermediate Government Bond Fund is managed by
Mr. Drahn, whose background is set forth below.
MARTIN L. JONES is a member of the committee that manages Limited Term Income
Fund, Intermediate Term Income Fund and Fixed Income Fund. Mr. Jones heads the
Fixed Income Group of the Adviser and has over 20 years of investment industry
experience. Formerly with Harris Trust & Savings Bank, Dillon, Read & Co., and
Loeb Rhoades & Co., Mr. Jones received his bachelor's degree from Texas Tech
University, his master's degree from University of Texas, and his master's
degree in business administration from the University of Chicago.
CHRISTOPHER L. DRAHN is portfolio manager for Intermediate Government Bond
Fund. He joined the Adviser in 1985 and has 12 years of investment industry
experience. Mr. Drahn received his bachelor's degree from Wartburg College
and his master's degree in business administration from the University of
Minnesota. He is a Chartered Financial Analyst.
LUCILLE C. REHKAMP is a member of the committee that manages Limited Term
Income Fund, Intermediate Term Income Fund and Fixed Income Fund. She joined
the Adviser in 1979 and has 21 years of investment industry experience. Ms.
Rehkamp received her bachelor's degree from Marquette University.
MARK M. GREEN is a member of the committee that manages Limited Term Income
Fund, Intermediate Term Income Fund and Fixed Income Fund. He joined the
Adviser in 1996 and has over ten years of investment industry experience.
Prior to joining the Adviser, Mr. Green was a portfolio manager at Wells
Fargo Investment Management. Mr. Green received his bachelor's degree and
master's degree from San Francisco State University.
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 U.S. Bancorp.
As compensation for its services to the Funds, the Custodian is paid monthly
fees calculated on an annual basis equal to 0.03% of the applicable Fund's
average daily net assets. In addition, the Custodian is reimbursed for its
out-of-pocket expenses incurred while providing its services to the Funds.
ADMINISTRATOR
The Administrator for the Funds is SEI 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, provided that to the extent that the aggregate net assets of all First
American Funds exceed $8 billion,
<PAGE>
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. U.S. Bank assists
the Administrator and provides sub-administration services for the Funds. For
these services, the Administrator compensates the sub-administrator at an annual
rate of up to 0.05% of each Fund's average daily net assets.
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, which is not affiliated with the Adviser, is a wholly-owned
subsidiary of SEI Investments Company and is located at Oaks, Pennsylvania
19456.
The Distributor, the Administrator and the Adviser may in their discretion use
their own assets to pay for certain 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, the Distributor and the Adviser and
its affiliates may provide compensation from their own resources for shareholder
services provided by third parties, including "one-stop" mutual fund networks
through which the Funds are made available.
PURCHASES AND REDEMPTIONS OF SHARES
SHARE PURCHASES AND REDEMPTIONS
Shares of the Funds are sold and redeemed on days on which both the New York
Stock Exchange and federally-chartered banks are open for business ("Business
Days").
Payment for shares can be made only by wire transfer. All information needed
will be taken over the telephone and the order will be considered placed when
the Custodian receives payment by wire. Federal funds should be wired as
follows: U.S. Bank National Association, Minneapolis, Minnesota, ABA Number
091000022; For Credit to: DST Systems, Inc. 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 or
federally-chartered banks are closed. 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 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 requests may be made any time before 3:00 p.m. Central time in
order to receive that day's redemption price. For redemption requests 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
<PAGE>
New York Stock Exchange or 3:00 p.m. Central time on each Business Day provided
that net asset value need not be determined on days when no Fund shares are
tendered for redemption and no order for that Fund's shares is received and on
days on which changes in the value of portfolio securities will not materially
affect the current net asset value of the Fund's shares. The price per share for
purchases or redemptions is such value next computed after the Transfer Agent
receives the purchase order or redemption request. In the case of redemptions
and repurchases of shares owned by corporations, trusts or estates, the Transfer
Agent may require additional documents to evidence appropriate authority in
order to effect the redemption, and the applicable price will be that next
determined following the receipt of the required documentation.
DETERMINING NET ASSET VALUE. The net asset value per share for each of the Funds
is determined by dividing the value of the securities owned by the Fund plus any
cash and other assets (including interest accrued and dividends declared but not
collected), less all liabilities, by the number of Fund shares outstanding. For
the purpose of determining the aggregate net assets of the Funds, cash and
receivables will be valued at their face amounts. Interest will be recorded as
accrued and dividends will be recorded on the ex-dividend date. Security
valuations are furnished by an independent pricing service that has been
approved by the Board of Directors. Debt obligations with remaining maturities
in excess of sixty days are valued at the most recently quoted bid price. For
such debt obligations the pricing service may employ methods that utilize actual
market transactions, broker-dealer valuations, or other electronic data
processing techniques. These techniques generally consider such factors as
security prices, yields, maturities, call features, ratings and developments
relating to specific securities in arriving at security valuations. Debt
obligations with remaining maturities of sixty days or less may be valued at
their amortized cost which approximates market value. If a security price cannot
be obtained from an independent pricing service a bid price may be obtained from
an independent broker who makes a market in the security. Foreign securities
owned by the Funds are valued at the closing prices on the principal exchange on
which they trade. If the value for a security cannot be obtained from the
sources described above, the security's value may be determined pursuant to the
fair value procedures established 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 options held or written by a Fund, are valued at the closing bid price
for a long position or the closing ask price for a short position.
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 the Funds 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 the Funds. Thus,
the calculation of the Funds' net asset value may not take place
contemporaneously with the determination of the prices of foreign securities
held in the Funds' portfolios. In addition, trading in securities on foreign
markets may not take place on all days on which the New York Stock Exchange is
open for business or may take place on days on which the New York Stock Exchange
is not open for business. Therefore, the net asset value of a Fund which holds
foreign
<PAGE>
securities 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 with respect to each Fund are declared and paid monthly to all
shareholders of record on the record date. Distributions of any net realized
long-term capital gains will be made at least once every 12 months. Dividends
and distributions are automatically reinvested in additional shares of the Fund
paying the dividend on payment dates at the ex-dividend date net asset value
without a sales charge, unless shareholders request cash payments on the new
account form or by writing to the Fund.
All shareholders on the record date are entitled to the dividend. If shares are
purchased before a record date for a dividend or a distribution of capital
gains, a shareholder will pay the full price for the shares and will receive
some portion of the purchase price back as a taxable dividend or distribution
(to the extent, if any, that the dividend or distribution is otherwise taxable
to holders of Fund shares). If shares are redeemed or exchanged before the
record date for a dividend or distribution or are purchased after the record
date, those shares are not entitled to the dividend or distribution.
The amount of dividends payable on Class C Shares generally will be more than
the dividends payable on Class A or Class B Shares because of the distribution
and/or shareholder servicing expenses charged to Class A and Class B Shares.
EXCHANGE PRIVILEGE
Shareholders may exchange Class C Shares of a Fund for currently available Class
C Shares of the other FAIF Funds or of other funds in the First American family
of funds 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
<PAGE>
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.
FEDERAL INCOME TAXES
Each Fund intends to qualify as a regulated investment company under Subchapter
M of the Internal Revenue Code of 1986, as amended (the "Code"), during its
current taxable year in order to be relieved of payment of federal income taxes
on amounts of taxable income it distributes to shareholders.
Dividends paid from each Fund's net investment income and net short-term capital
gains will be taxable to shareholders as ordinary income, whether or not the
shareholder elects to have such dividends automatically reinvested in additional
shares. Dividends paid by the Funds will not be eligible for the 70% deduction
for dividends received by corporations. Dividends paid from the net capital
gains of each Fund and designated as capital gain dividends generally will be
taxable to shareholders as long-term capital gains, regardless of the length of
time for which they have held their shares in the Fund. In the case of
shareholders who are individuals, estates, or trusts, each Fund will designate
the portion of each capital gain dividend that must be treated as mid-term
capital gain and the portion that must be treated as long-term capital gain.
Gain or loss realized upon the sale of shares in the Funds will be treated as
capital gain or loss, provided that the shares represented a capital asset in
the hands of the shareholder. For corporate shareholders, such gain or loss will
be long-term gain or loss if the shares were held more than one year. For
shareholders who are individuals, estates, or trusts the gain or loss will be
considered long-term if the shareholder has held the shares for more than 18
months and mid-term if the shareholder has held the shares for more than one
year but not more than 18 months.
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 of shares, 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 of shares.
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
<PAGE>
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. "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.
"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.
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.
BANK INSTRUMENTS
The bank instruments in which Limited Term Income Fund, Intermediate Term Income
Fund and Fixed Income Fund may invest include time and savings deposits, deposit
notes and bankers' acceptances (including certificates of deposit) in commercial
or savings banks. They also include Eurodollar Certificates of Deposit issued by
foreign branches of United States or foreign banks; Eurodollar Time Deposits,
which are United States
<PAGE>
dollar-denominated deposits in foreign branches of United States or foreign
banks; and Yankee Certificates of Deposit, which are United States
dollar-denominated certificates of deposit issued by United States branches of
foreign banks and held in the United States. For a description of certain risks
of investing in foreign issuers' securities, see "-- Foreign Securities" below.
In each instance, the Funds may only invest in bank instruments issued by an
institution which has capital, surplus and undivided profits of more than $100
million or the deposits of which are insured by the Bank Insurance Fund or the
Savings Association Insurance Fund.
FOREIGN SECURITIES
Each of Limited Term Income Fund, Intermediate Term Income Fund and Fixed Income
Fund may invest up to 15% of its total assets in foreign securities payable in
United States dollars. These securities may include securities issued or
guaranteed by (i) the Government of Canada, any Canadian Province, or any
instrumentality or political subdivision thereof; (ii) any other foreign
government, agency or instrumentality; (iii) foreign subsidiaries of United
States corporations; and (iv) foreign banks having total capital and surplus at
the time of investment of at least $1 billion. Such foreign bank or corporate
securities must be rated by at least one major United States rating agency as
having a quality not less than that which would be required for comparable
domestic securities. In addition, Limited Term Income Fund, Intermediate Term
Income Fund and Fixed Income Fund also may invest in Eurodollar Certificates of
Deposit, Eurodollar Time Deposits and Yankee Certificates of Deposit as
described under "-- Bank Instruments" above.
Although investments of these kinds are not subject to currency risk because
they are denominated in United States dollars, they are subject to certain other
risks associated with foreign investments. Risks which may affect foreign
issuers include political, social or economic instability in the country of the
issuer, the possibility of the imposition of exchange controls, expropriation,
limits on removal of currency or other assets, and nationalization of assets.
Foreign issuers may not be subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic United States
issuers. In addition, foreign branches of United States banks and foreign banks
may be subject to less stringent regulatory requirements than United States
banks.
ASSET-BACKED SECURITIES
Each of Limited Term Income Fund, Intermediate Term Income Fund and Fixed Income
Fund may invest in asset-backed securities. Asset-backed securities generally
constitute interests in, or obligations secured by, a pool of receivables other
than mortgage loans, such as automobile loans and leases, credit card
receivables, home equity loans and trade receivables. Asset-backed securities
generally are issued by a private special-purpose entity. Their ratings and
creditworthiness typically depend on the legal insulation of the issuer and
transaction from the consequences of a sponsoring entity's bankruptcy, as well
as on the credit quality of the underlying receivables and the amount and credit
quality of any third-party credit enhancement supporting the underlying
receivables or the asset-backed securities. Asset-backed securities and their
underlying receivables generally are not issued or guaranteed by any
governmental entity.
MORTGAGE-BACKED SECURITIES
Limited Term Income Fund, Intermediate Term Income Fund and Fixed Income Fund
may invest in mortgage-backed securities which are Agency Pass-Through
Certificates or collateralized mortgage obligations ("CMOs"), as described
below.
Agency Pass-Through Certificates are mortgage pass-through certificates
representing undivided interests in pools of residential mortgage loans.
Distribution of principal and interest on the mortgage loans underlying an
Agency
<PAGE>
Pass-Through Certificate is an obligation of or guaranteed by the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC").
The obligation of GNMA with respect to such certificates is backed by the full
faith and credit of the United States, while the obligations of FNMA and FHLMC
with respect to such certificates rely solely on the assets and credit of those
entities. The mortgage loans underlying GNMA certificates are partially or fully
guaranteed by the Federal Housing Administration or the Veterans Administration,
while the mortgage loans underlying FNMA certificates and FHLMC certificates are
conventional mortgage loans which are, in some cases, insured by private
mortgage insurance companies. Agency Pass-Through Certificates may be issued in
a single class with respect to a given pool of mortgage loans or in multiple
classes.
CMOs are debt obligations typically issued by a private special-purpose entity
and collateralized by residential or commercial mortgage loans or Agency
Pass-Through Certificates. The Funds will invest only in CMOs which are rated in
one of the four highest rating categories by a nationally recognized statistical
rating organization or which are of comparable quality in the judgment of the
Adviser. Because CMOs are debt obligations of private entities, payments on CMOs
generally are not obligations of or guaranteed by any governmental entity, and
their ratings and creditworthiness typically depend on, among other factors, the
legal insulation of the issuer and transaction from the consequences of a
sponsoring entity's bankruptcy. CMOs generally are issued in multiple classes,
with holders of each class entitled to receive specified portions of the
principal payments and prepayments and/or of the interest payments on the
underlying mortgage loans. These entitlements can be specified in a wide variety
of ways, so that the payment characteristics of various classes may differ
greatly from one another. Examples of the more common classes are provided in
the Statement of Additional Information. The CMOs in which the Funds may invest
include classes which are subordinated in right of payment to other classes, as
long as they have the required rating referred to above.
It is generally 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. The
return on interest-only and principal-only mortgage-backed securities is
particularly sensitive to changes in interest rates and prepayment speeds. When
interest rates decline and prepayment speeds increase, the holder of an
interest-only mortgage-backed security may not even recover its initial
investment. Similarly, the return on an inverse floating rate CMO is likely to
decline more sharply in periods of increasing interest rates than that of a
fixed-rate security. For these reasons, interest-only, principal-only and
inverse floating rate mortgage-backed securities generally have greater risk
than more conventional classes of mortgage-backed securities. The limitations on
each Fund's investments in interest-only, principal-only and inverse floating
rate mortgage-backed securities are set forth above under "Investment Objectives
and Policies."
REPURCHASE AGREEMENTS
Each of the Funds may 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
<PAGE>
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
Each of the Funds may purchase securities on a when-issued or delayed delivery
basis. When such a transaction is negotiated, the purchase price is fixed at the
time the purchase commitment is entered, but delivery of and payment for the
securities take place at a later date. A Fund will not accrue income with
respect to securities purchased on a when-issued or delayed delivery basis prior
to their stated delivery date. Pending delivery of the securities, each Fund
will maintain in a segregated account cash or liquid high-grade securities in an
amount sufficient to meet its purchase commitments.
The purchase of securities on a when-issued or delayed delivery basis exposes a
Fund to risk because the securities may decrease in value prior to delivery. In
addition, a Fund's purchase of securities on a when-issued or delayed delivery
basis while remaining substantially fully invested could increase the amount of
the Fund's total assets that are subject to market risk, resulting in increased
sensitivity of net asset value to changes in market prices. However, the Funds
will engage in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with their investment
objectives, and not for the purpose of investment leverage. A seller's failure
to deliver securities to a Fund could prevent the Fund from realizing a price or
yield considered to be advantageous.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, each of the Funds may lend portfolio
securities representing up to one-third of the value of its total assets to
broker-dealers, banks or other institutional borrowers of securities. 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, which, in the case of First Trust National
Association, are 40% of the Funds' income from such securities lending
transactions.
OPTIONS TRANSACTIONS
Each of the Funds may, in order to reduce risk, invest in exchange traded put
and call options on interest rate futures contracts and on interest rate
indices. Such investments will be made solely as a hedge against adverse changes
resulting from market conditions in the values of securities held by the Funds
or which they intend to purchase and where the transactions are deemed
appropriate to reduce risks inherent in the Funds' portfolios or contemplated
investments.
None of the Funds will invest more than 5% of the value of its total assets in
purchased options, provided that options which are "in the money" at the time of
purchase may be excluded from this 5% limitation. A call option is "in the
money" if the exercise price is lower than the current market price of the
underlying contract or index, and a put option is "in the money" if the exercise
price is higher than the current market price. A Fund's loss exposure in
purchasing an option is limited to the sum of the premium paid (purchase price
of
<PAGE>
the option) and the commission or other transaction expenses associated with
acquiring the option.
An interest rate futures contract provides for the future sale by one party and
purchase by the other party of a certain amount of a specific financial
instrument (debt security) at a specified price, date, time and place. An option
on an interest rate futures contract, as contrasted with the direct investment
in such a contract, gives the purchaser the right, in return for the premium
paid, to purchase (in the case of a call option) or sell (in the case of a put
option) an interest rate futures contract at a specified exercise price at any
time prior to the expiration date of the option. In order to hedge its portfolio
against anticipated changes in interest rates, a Fund might purchase a put
option on an interest rate futures contract if interest rates were expected to
rise, or might purchase a call option on an interest rate futures contract if
rates were expected to decline.
Options on interest rate indices are similar to options on interest rate futures
contracts except that, rather than the right to take or make delivery of a
specific financial instrument at a specified price, an option on an interest
rate index gives the holder the right to receive, upon exercise of the option, a
defined amount of cash if the closing value of the interest rate index upon
which the option is based is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. Put and call options on
interest rate indices thus may be used in a fashion similar to that of options
on interest rate futures contracts to hedge the value of a portfolio of debt
securities against anticipated changes in interest rates.
The use of options on interest rate futures contracts and on interest rate
indices involves certain risks. These include the risk that changes in interest
rates on the hedged instruments may not correlate to changes in interest rates
on the instrument or index upon which the hedge is based, and the risk of
limited liquidity in the event that a Fund seeks to close out an options
position before expiration by entering into an offsetting transaction.
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 (100% or more) 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
<PAGE>
basis shall not be deemed the borrowing of money. If a Fund engages in
borrowing, its share price may be subject to greater fluctuation, and the
interest expense associated with the borrowing may reduce the Fund's net
income.
* None of the Funds will 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.
INFORMATION CONCERNING COMPENSATION PAID TO U.S. BANK NATIONAL ASSOCIATION,
FIRST TRUST NATIONAL ASSOCIATION AND OTHER AFFILIATES
U.S. Bank National Association, First Trust National Association and other
affiliates of U.S. Bancorp may act as a fiduciary with respect to plans subject
to the Employee Retirement Income Security Act of 1974 ("ERISA") and other trust
and agency accounts that invest in the Funds. These U.S. Bancorp affiliates may
receive compensation from the Funds for the services they provide to the Funds,
as described more fully in the following sections of this Prospectus:
Investment advisory services -- see "Management-Investment Adviser"
Custodian services -- see "Management-Custodian"
Sub-administration services -- see "Management-Administrator"
Shareholder servicing -- see "Distributor"
Securities lending -- see "Special Investment Methods-Lending of Portfolio
Securities"
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
Oaks, Pennsylvania 19456
Investment Adviser
U.S. 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-1501 (1/98) I
<PAGE>
JANUARY 31, 1998
TAX FREE INCOME FUNDS
CLASS A SHARES
Intermediate Tax Colorado Intermediate
Free Fund Tax Free Fund
California Intermediate Minnesota Insured
Tax Free Fund Intermediate Tax Free Fund
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(SM)
<PAGE>
TABLE OF CONTENTS
Summary 2
Fees and Expenses 4
Financial Highlights 6
The Funds 8
Investment Objectives and Policies 8
Management 13
Distributor 14
Investing in the Funds 15
Redeeming Shares 20
Determining the Price of Shares 22
Income Taxes 23
Tax-Exempt vs. Taxable Income 26
Fund Shares 26
Calculation of Performance Data 27
Performance Information for Successor to
Common Trust Funds 28
Special Investment Methods 28
Information Concerning Compensation
Paid to U.S. Bank National Association,
First Trust National Association and
Other Affiliates 37
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
CLASS A SHARES PROSPECTUS
The shares described in this Prospectus represent interests in First American
Investment Funds, Inc., which consists of mutual funds with several different
investment portfolios and objectives. This Prospectus relates to the Class A
Shares of the following funds (the "Funds"):
* INTERMEDIATE TAX FREE FUND
* CALIFORNIA INTERMEDIATE TAX FREE FUND
* COLORADO INTERMEDIATE TAX FREE FUND
* MINNESOTA INSURED INTERMEDIATE
TAX FREE FUND
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING U.S. 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 January 31, 1998 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 January 31, 1998.
<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 of the
following funds (the "Funds"):
INTERMEDIATE TAX FREE FUND has an objective of providing current income that is
exempt from federal income tax to the extent consistent with preservation of
capital. Under normal market conditions, this Fund invests at least 80% of its
net assets in municipal obligations, the interest on which is exempt from
federal income tax. No more than 20% of the securities owned by this Fund will
generate income that is subject to the federal alternative minimum tax. Under
normal market conditions, the weighted average maturity of the securities held
by this Fund will range from 3 to 10 years.
CALIFORNIA INTERMEDIATE TAX FREE FUND has an objective of providing current
income which is exempt from both federal income tax and California state income
tax to the extent consistent with preservation of capital. Under normal market
conditions, this Fund invests at least 80% of its net assets in municipal
obligations, the interest on which is exempt from federal and California income
tax. No more than 20% of the securities owned by this Fund will generate income
that is subject to the federal alternative minimum tax. Under normal market
conditions, the weighted average maturity of the securities held by this Fund
will range from 3 to 10 years.
COLORADO INTERMEDIATE TAX FREE FUND has an objective of providing current income
which is exempt from both federal income tax and Colorado state income tax to
the extent consistent with preservation of capital. Under normal market
conditions, this Fund invests at least 80% of its net assets in municipal
obligations, the interest on which is exempt from federal and Colorado income
tax. No more than 20% of the securities owned by this Fund will generate income
that is subject to the federal alternative minimum tax. Under normal market
conditions, the weighted average maturity of the securities held by this Fund
will range from 3 to 10 years.
MINNESOTA INSURED INTERMEDIATE TAX FREE FUND has an objective of providing
current income which is exempt from both federal income tax and Minnesota state
income tax to the extent consistent with preservation of capital. Under normal
market conditions, this Fund invests at least 80% of its net assets in municipal
obligations, the interest on which is exempt from federal and Minnesota income
tax. No more than 20% of the securities owned by this Fund will generate income
that is subject to the federal or the Minnesota alternative minimum tax. At
least 65% of the tax-exempt obligations held by this Fund will consist of
insured bonds, escrow secured bonds and defeased bonds. Under normal market
conditions, the weighted average maturity of the securities held by this Fund
will range from 3 to 10 years.
INVESTMENT ADVISER U.S. Bank National Association (the "Adviser" or "U.S. Bank")
serves as investment adviser to each of the Funds through its First American
Asset Management group. 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 3.00%. 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 the Distributor and certain securities
firms, financial institutions (including, without limitation, banks) and other
industry professionals may receive a commission of up to 1.00% on such sales.
Redemptions of Class A Shares within 24 months following such purchases will be
subject to a contingent deferred
<PAGE>
sales charge of up to 1.00%. 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 --
Class A Share Price and Sales Charge."
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 any Fund may be exchanged for the same class of shares of
other funds in the First American family of funds 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 (i) interest rate risk (the
risk that increases in market interest rates will cause declines in the value of
debt securities held by a Fund); (ii) credit risk (the risk that the issuers of
debt securities held by a Fund default in making required payments); and (iii)
call or prepayment risk (the risk that a borrower may exercise the right to
prepay a debt obligation before its stated maturity, requiring a Fund to
reinvest the prepayment at a lower interest rate).
In addition, the value of municipal obligations held by the Funds may be
adversely affected by local political and economic conditions and
developments in the states and political subdivisions which issue the
obligations. Investors should note in this regard that California
Intermediate Tax Free Fund, Colorado Intermediate Tax Free Fund and
Minnesota Insured Intermediate Tax Free Fund invest principally in
municipal obligations of issuers located only in California, Colorado and
Minnesota, respectively. The Funds also may, in order to attempt to reduce
risk, invest in exchange traded put and call options on interest rate
futures contracts and on interest rate indices. See "Investment Objectives
and Policies -- Risks to Consider" 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 A SHARE FEES AND EXPENSES
<TABLE>
<CAPTION>
MINNESOTA
CALIFORNIA COLORADO INSURED
INTERMEDIATE INTERMEDIATE INTERMEDIATE INTERMEDIATE
TAX FREE TAX FREE TAX FREE TAX FREE
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases (as a
percentage of offering price)(1) 3.00% 3.00% 3.00% 3.00%
Maximum sales load imposed on reinvested dividends None None None None
Deferred sales load None None None None
Redemption fees None None None None
Exchange fees None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees (after voluntary fee
waivers)(2) 0.47% 0.29% 0.49% 0.50%
Rule 12b-1 fees(2) 0.00% 0.00% 0.00% 0.00%
Other expenses 0.23% 0.41% 0.21% 0.20%
Total fund operating expenses
(after voluntary fee waivers)(2) 0.70% 0.70% 0.70% 0.70%
EXAMPLE(3)
You would pay the following expenses on a $1,000 investment, assuming (i) the
maximum applicable sales charge for all funds; (ii) a 5% annual return; and
(iii) redemption at the end of each time period:
1 year $ 37 $ 37 $ 37 $ 37
3 years $ 52 $ 52 $ 52 $ 52
5 years $ 68 $ 68 $ 68 $ 68
10 years $114 $114 $114 $114
</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 the
Distributor and certain securities firms, financial institutions
(including, without limitation, banks) and other industry professionals may
receive a commission of up to 1.00% on such sales. In addition, a
contingent deferred sales charge of up to 1.00% may be imposed on such
purchases in the event of redemption within 24 months following the
purchase. See "Investing in the Funds -- Class A Share Price and Sales
Charge."
(2) The Adviser and the Distributor intend to waive a portion of their fees on
a voluntary basis, and the amounts shown reflect these waivers as of the
date of this Prospectus. Each of these persons intends to maintain such
waivers in effect for the current fiscal year but reserves the right to
discontinue such waivers at any time in its sole discretion. Absent any fee
waivers, investment advisory fees for each Fund as an annualized percentage
of average daily net assets would be 0.70%; Rule 12b-1 fees calculated on
such basis would be 0.25%; and total fund operating expenses calculated on
such basis would be 1.18% for Intermediate Tax Free Fund, 1.36% for
California Intermediate Tax Free Fund, 1.16% for Colorado Intermediate Tax
Free Fund, and 1.15% for Minnesota Insured Intermediate Tax Free Fund.
"Other expenses" includes an administration fee.
(3) Absent the fee waivers referred to in (2) above, the dollar amounts for the
1, 3, 5 and 10-year periods would be as follows: Intermediate Tax Free
Fund, $42, $66, $93 and $169; California Intermediate Tax Free Fund, $43,
$72, $102 and $189; Colorado Intermediate Tax Free Fund, $41, $66, $92 and
$167; and Minnesota Insured Intermediate Tax Free Fund, $41, $65, $91 and
$166.
<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.
<PAGE>
FINANCIAL HIGHLIGHTS
The following audited financial highlights should be read in conjunction with
the Funds' financial statements, the related notes thereto and the independent
auditors' report of KPMG Peat Marwick LLP appearing in FAIF's annual report to
shareholders dated September 30, 1997. Further information about the Funds'
performance is contained in such annual report to shareholders, which may be
obtained without charge by calling (800) 637-2548 or by writing SEI Investments
Distribution Co., Oaks, Pennsylvania 19456.
For the periods ended September 30,
For a share outstanding throughout the period
REALIZED AND
NET ASSET UNREALIZED DIVIDENDS
VALUE NET GAINS OR FROM NET
BEGINNING INVESTMENT (LOSSES) ON INVESTMENT
OF PERIOD INCOME INVESTMENTS INCOME
INTERMEDIATE TAX FREE FUND Class A
1997 $ 10.66 $ 0.47 $ 0.24 $ (0.47)
1996 10.72 0.46 0.01 (0.46)
1995 10.28 0.49 0.43 (0.48)
1994 10.92 0.44 (0.57) (0.44)
1993 10.56 0.47 0.42 (0.47)
1992 10.34 0.53 0.22 (0.53)
1991(1) 10.04 0.50 0.31 (0.50)
1990(2) 10.08 0.56 (0.04) (0.56)
1989(2) 10.19 0.56 (0.11) (0.56)
1988(2)(3) 10.03 0.47 0.16 (0.47)
CALIFORNIA INTERMEDIATE TAX FREE FUND Class A
1997(4) $ 10.00 $ 0.06 $ 0.04 $ (0.06)
COLORADO INTERMEDIATE TAX FREE FUND Class A
1997 $ 10.42 $ 0.48 $ 0.24 $ (0.48)
1996 10.51 0.49 (0.04) (0.49)
1995 10.15 0.49 0.36 (0.49)
1994(5) 10.00 0.21 0.16 (0.22)
MINNESOTA INSURED INTERMEDIATE TAX FREE FUND Class A
1997 $ 9.91 $ 0.44 $ 0.21 $ (0.44)
1996 9.92 0.45 0.02 (0.45)
1995 9.58 0.46 0.33 (0.45)
1994(6) 10.00 0.25 (0.42) (0.25)
* Total return excludes sales charges.
+ Returns, excluding sales charges, are for the period indicated and have not
been annualized.
(1) On September 3, 1991, the Board of Directors of FAIF approved a change in
FAIF's fiscal year end from October 31 to September 30, effective September
30, 1991. All ratios for the period have been annualized.
(2) For the period ended October 31.
(3) Commenced operations on December 22, 1987. All ratios for the period have
been annualized.
(4) Commenced operations on August 8, 1997. All ratios for the period have been
annualized.
(5) Commenced operations on April 4, 1994. All ratios for the period have been
annualized.
(6) Commenced operations on February 25, 1994. All ratios for the period have
been annualized.
<PAGE>
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
NET ASSET RATIO OF INVESTMENT AVERAGE
DISTRIBUTIONS VALUE NET ASSETS EXPENSES TO INCOME TO NET ASSETS PORTFOLIO
FROM END OF TOTAL END OF AVERAGE AVERAGE (EXCLUDING TURNOVER
CAPITAL GAINS PERIOD RETURN PERIOD (000) NET ASSETS NET ASSETS WAIVERS) RATE
<S> <C> <C> <C> <C> <C> <C> <C>
$ (0.06) $ 10.84 6.84% $3,849 0.67% 4.41% 1.18% 66%
(0.07) 10.66 4.45 2,618 0.66 4.35 1.17 53
-- 10.72 9.15 983 0.67 4.71 1.30 68
(0.07) 10.28 (1.25) 1,128 0.59 4.13 2.78 52
(0.06) 10.92 8.66 2,969 0.71 4.31 5.09 27
-- 10.56 7.23 725 0.99 4.83 16.09 23
(0.01) 10.34 8.15+ 637 0.99 5.35 15.48 15
-- 10.04 5.31 537 1.08 5.58 13.85 4
-- 10.08 4.57 491 1.09 5.57 19.55 4
-- 10.19 6.73+ 425 0.84 5.87 13.60 0
$ -- $ 10.04 1.02%+ $ 1 0.69% 4.48% 1.36% 3%
$ (0.05) $ 10.61 7.11% $4,187 0.70% 4.55% 1.16% 11%
(0.05) 10.42 4.39 2,861 0.70 4.69 1.18 20
-- 10.51 8.57 2,189 0.70 4.83 1.27 19
-- 10.15 3.66+ 693 0.69 4.51 4.96 4
$ (0.03) $ 10.09 6.72% $7,453 0.70% 4.49% 1.15% 20%
(0.03) 9.91 4.80 3,916 0.70 4.52 1.18 19
-- 9.92 8.46 2,219 0.70 4.74 1.25 38
-- 9.58 (1.68)+ 1,508 0.67 4.57 1.84 22
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
The following unaudited financial highlights for California Intermediate
Tax Free Fund for the period commencing August 8, 1997 and ending December 31,
1997 should be read in conjunction with the Fund's unaudited financial
statements and the related notes thereto appearing in the Funds' Statement of
Additional Information dated January 31, 1998.
Further information about the Fund's performance for the period commencing
August 8, 1997 and ending December 31, 1997 is contained in such Statement of
Additional Information, which may be obtained without charge by calling (800)
637-2548 or by writing SEI Investments Destribution Co., Oaks, Pennsylvania
19456.
For the period ended December 31, 1997.
<TABLE>
<CAPTION>
REALIZED AND DIVIDENDS
NET ASSET NET UNREALIZED FROM NET DISTRIBUTION
VALUE BEGINNING INVESTMENT GAINS ON INVESTMENT FROM
OF PERIOD INCOME INVESTMENTS INCOME CAPITAL GAIN
California Intermediate
Tax Free Fund (1)
<S> <C> <C> <C> <C> <C>
Class A $10.00 $ 0.17 $ 0.11 $(0.17) $ --
</TABLE>
WIDE TABLE CONTINUED
<TABLE>
<CAPTION>
RATIO OF
NET RATIO OF NET EXPENSES TO
NET ASSET ASSETS RATIO OF INVESTMENT AVERAGE
VALUE END OF EXPENSES TO INCOME TO NET ASSETS
END OF TOTAL PERIOD AVERAGE AVERAGE (EXCLUDING PORTFOLIO
PERIOD RETURN (000) NET ASSETS NET ASSETS WAIVERS) TURNOVER
California Intermediate
Tax Free Fund (1)
<S> <C> <C> <C> <C> <C> <C> <C>
Class A $10.11 2.86%+ $ 1 0.70% 4.40% 1.26% 11%
</TABLE>
+ Return is for the period indicated and have not been annualized.
(1) Commenced operations on August 8, 1997. All ratios for the period have been
annualized.
<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 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. Intermediate Tax Free Fund is a diversified investment
company, as defined in the Investment Company Act of 1940 (the "1940 Act").
California Intermediate Tax Free Fund, Colorado Intermediate Tax Free Fund,
and Minnesota Insured Intermediate Tax Free Fund are nondiversified
investment companies under the 1940 Act.
If a percentage limitation on investments by a Fund stated below or in the
Statement of Additional Information is adhered to at the time of an investment,
a later increase or decrease in percentage resulting from changes in asset
values will not be deemed to violate the limitation except in the case of the
limitation on illiquid investments. A Fund which is limited to investing in
securities with specified ratings is not required to sell a security if its
rating is reduced or discontinued after purchase, but the Fund may consider
doing so. However, in no event will more than 5% of any Fund's net assets be
invested in non-investment grade securities. Descriptions of the rating
categories of Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies, Inc. ("Standard & Poor's") and Moody's Investors Service, Inc.
("Moody's") are contained in the Statement of Additional Information.
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."
INTERMEDIATE TAX FREE FUND
OBJECTIVE. Intermediate Tax Free Fund has an objective of providing current
income which is exempt from federal income tax to the extent consistent with
preservation of capital.
INVESTMENT POLICIES. Under normal market conditions, Intermediate Tax Free Fund
invests at least 80% of its net assets in municipal bonds and other municipal
obligations, the interest on which is, in the opinion of bond counsel to the
issuer, exempt from federal income tax. No more than 20% of the securities owned
by the Fund will generate income that is an item of tax preference
<PAGE>
for the purpose of the federal alternative minimum tax. Municipal obligations
generating income subject to taxation under the federal alternative minimum tax
rules will not be counted as tax exempt obligations for purposes of the 80%
test. See "Income Taxes." The types of municipal bonds and other municipal
obligations in which the Fund may invest are described under "Special Investment
Methods -- Municipal Bonds and Other Municipal Obligations."
Under normal market conditions, the weighted average maturity of the
securities held by Intermediate Tax Free Fund will range from 3 to 10
years.
Intermediate Tax Free Fund may purchase obligations which are rated no lower
than BBB by Standard & Poor's or Baa by Moody's, or which have been assigned an
equivalent rating by another nationally recognized statistical rating
organization, or which are of comparable quality in the judgment of the Adviser.
The Fund also may purchase municipal notes which are rated no lower than SP-1 by
Standard & Poor's or MIG/VMIG-1 by Moody's or which have been assigned an
equivalent rating by another nationally recognized statistical rating
organization. Unrated securities will not exceed 10% in the aggregate of the
value of the total assets of the Fund.
While the assets of Intermediate Tax Free Fund ordinarily will be invested in
municipal obligations, on occasion the Fund may temporarily hold short-term
securities, other than municipal obligations, the income from which is taxable.
Temporary taxable investments would be held solely for the purpose of managing
exceptional in-flows and out-flows of cash or for temporary defensive purposes
to preserve existing portfolio values. Under normal circumstances, the Fund may
not invest more than 20% of its assets in investments other than municipal
obligations. However, when a temporary defensive position to protect capital is
deemed advisable and practicable, the Fund may have more than 20% of its assets
in temporary taxable investments or cash. The types of investments which are
permitted for these purposes are described under "Special Investment Methods --
Temporary Taxable Investments."
The Fund also may temporarily invest in shares of investment companies
which invest primarily in short-term municipal obligations with maturities
not exceeding 13 months including, but not limited to, tax free money
market funds advised by the Adviser. Investments of these types are also
subject to the advisory fee. Income from these investments is normally
exempt from federal income tax. Where the income from these investments is
exempt from federal income tax, the investments will be counted as tax
exempt obligations for purposes of the 80% test described above.
The Fund also may (i) in order to attempt to reduce risk, invest in
exchange traded put and call options on interest rate futures contracts
and on interest rate indices; (ii) purchase securities on a when-issued or
delayed delivery basis; and (iii) engage in the lending of portfolio
securities. In addition, the Fund may invest up to 5% of its net assets in
inverse floating rate municipal obligations. For information about these
investment methods, restrictions on their use, and certain associated
risks, see the related headings under "Special Investment Methods."
The requirement, described above, that Intermediate Tax Free Fund invest
at least 80% of its net assets in tax free obligations under normal market
conditions is a fundamental policy, which cannot be changed without
shareholder vote. Under normal market conditions, the Fund will invest at
least 65% of its total assets in municipal obligations which are municipal
bonds. See "Special Investment Methods -- Municipal Bonds and Other
Municipal Obligations."
CALIFORNIA INTERMEDIATE TAX FREE FUND,
COLORADO INTERMEDIATE TAX FREE FUND
AND MINNESOTA INSURED INTERMEDIATE TAX
FREE FUND
OBJECTIVES. California Intermediate Tax Free Fund has an objective of providing
current income
<PAGE>
which is exempt from both federal income tax and California state income tax to
the extent consistent with preservation of capital. Colorado Intermediate Tax
Free Fund has an objective of providing current income which is exempt from both
federal income tax and Colorado state income tax to the extent consistent with
preservation of capital. Minnesota Insured Intermediate Tax Free Fund has an
objective of providing current income which is exempt from both federal income
tax and Minnesota state income tax to the extent consistent with preservation of
capital.
INVESTMENT POLICIES. Under normal market conditions, each of these Funds invests
at least 80% of its net assets in municipal bonds and other municipal
obligations of the state referred to in its title, the interest on which is, in
the opinion of bond counsel to the issuer, exempt from federal income tax and
that state's income tax. No more than 20% of the securities owned by any of
these Funds will generate income that is an item of tax preference for the
purpose of the federal alternative minimum tax and, in the case of Minnesota
Insured Intermediate Tax Free Fund, for the purpose of the Minnesota alternative
minimum tax. Municipal obligations generating income subject to taxation under
the federal alternative minimum tax rules or, in the case of Minnesota Insured
Intermediate Tax Free Fund, under the Minnesota alternative minimum tax rules,
will not be counted as tax exempt obligations for purposes of the 80% test. See
"Income Taxes." The types of municipal bonds and other municipal obligations in
which these Funds may invest are described under "Special Investment Methods --
Municipal Bonds and Other Municipal Obligations."
Under normal market conditions, the weighted average maturity of the
securities held by each of these Funds will range from 3 to 10 years.
Each of these Funds may purchase obligations which are rated (without regard to
insurance) no lower than BBB by Standard & Poor's or Baa by Moody's, or which
have been assigned an equivalent rating by another nationally recognized
statistical rating organization, or which are of comparable quality in the
judgment of the Adviser. Each of these Funds also may purchase municipal notes
which are rated no lower than SP-1 by Standard & Poor's or MIG/VMIG-1 by Moody's
or which have been assigned an equivalent rating by another nationally
recognized statistical rating organization. Unrated securities will not exceed
10% in the aggregate of the value of the total assets of any of these Funds.
While the assets of each of these Funds ordinarily will be invested in municipal
obligations, on occasion either Fund may temporarily hold short-term securities,
other than municipal obligations, the income from which is taxable. Temporary
taxable investments would be held solely for the purpose of managing exceptional
in-flows and out-flows of cash or for temporary defensive purposes to preserve
existing portfolio values. Under normal circumstances, a Fund may not invest
more than 20% of its assets in investments other than municipal obligations.
However, when a temporary defensive position to protect capital is deemed
advisable and practicable, a Fund may have more than 20% (and up to 100%) of its
assets in temporary taxable investments or cash. The types of investments which
are permitted for these purposes are described under "Special Investment Methods
- -- Temporary Taxable Investments."
Each of these Funds also may temporarily invest in shares of investment
companies which invest primarily in short-term municipal obligations with
maturities not exceeding 13 months. Investments of these types are also
subject to the advisory fee. Such investments may include tax free money
market funds advised by the Adviser. Income from these investments is
normally exempt from federal income tax but may not be exempt from the
applicable state tax. Where the income from these investments is exempt
from both federal income tax and the applicable state tax, the investments
will be counted as tax exempt obligations for purposes of the 80% test
described above.
Each of these Funds also may (i) in order to attempt to reduce risk,
invest in exchange traded put and
<PAGE>
call options on interest rate futures contracts and on interest rate indices;
(ii) purchase securities on a when-issued or delayed delivery basis; (iii)
engage in the lending of portfolio securities; and (iv) invest up to 5% of its
net assets in inverse floating rate municipal obligations. For information about
these investment methods, restrictions on their use, and certain associated
risks, see the related headings under "Special Investment Methods."
As a nonfundamental policy, at least 65% of the tax-exempt obligations in
the investment portfolio of Minnesota Insured Intermediate Tax Free Fund
will consist of: (i) obligations that at all times are fully insured as to
the scheduled payment of all installments of interest and principal; and
(ii) obligations which have an AAA rating by Standard & Poor's or an Aaa
rating by Moody's or which have been assigned an equivalent rating by
another nationally recognized statistical rating organization, where the
payment of interest and principal is guaranteed by the United States
Government or an agency or instrumentality of the United States
Government, or where the payment of interest and principal is secured by
an escrow account consisting of obligations guaranteed by the United
States Government or its agencies or instrumentalities ("escrow secured
bonds" or "defeased bonds"), without having to purchase additional
insurance therefor. This policy may not be eliminated except upon 30 days
advance notice to shareholders of Minnesota Insured Intermediate Tax Free
Fund. In addition, pending the investment or reinvestment of its assets in
longer-term tax-exempt obligations, this Fund may invest in short-term
tax-exempt obligations, without obtaining insurance, provided such
instruments carry an AAA or A-1 rating by Standard & Poor's or an Aaa or
SP-1 rating by Moody's or which have been assigned an equivalent rating by
another nationally recognized statistical rating organization. Bond
insurance does not guarantee the market value of the securities held in
this Fund's portfolio. For further information concerning the insurance
applicable to this Fund's investments, see "Special Investment Methods --
Insurance for Minnesota Insured Intermediate Tax Free Fund."
The tax-exempt obligations held by California Intermediate Tax Free Fund
and Colorado Intermediate Tax Free Fund need not be insured.
RISKS TO CONSIDER
An investment in any of the Funds involves certain risks. These include the
following:
INTEREST RATE RISK. Interest rate risk is the risk that the value of a
fixed-rate debt security will decline due to changes in market interest rates.
Because the Funds invest in fixed-rate debt securities, they are subject to
interest rate risk. In general, when interest rates rise, the value of a
fixed-rate debt security declines. Conversely, when interest rates decline, the
value of a fixed-rate debt security generally increases. Thus, shareholders in
the Funds bear the risk that increases in market interest rates will cause the
value of their Fund's portfolio investments to decline.
In general, the value of fixed-rate debt securities with longer maturities is
more sensitive to changes in market interest rates than the value of such
securities with shorter maturities. Thus, the net asset value of a Fund which
invests in securities with longer weighted average maturities should be expected
to have greater volatility in periods of changing market interest rates than
that of a Fund which invests in securities with shorter weighted average
maturities.
Although the Adviser may engage in transactions intended to hedge the
value of the Funds' portfolios against changes in market interest rates,
there is no assurance that such hedging transactions will be undertaken or
will fulfill their purpose. See "Special Investment Methods -- Options
Transactions."
CREDIT RISK. Credit risk is the risk that the issuer of a debt security will
fail to make payments on the security when due. Because the Funds invest in debt
securities, they are subject to credit risk.
As described under "Special Investment Methods -- Municipal Bonds and Other
Municipal Obligations," the revenue bonds and municipal
<PAGE>
lease obligations in which the Funds invest may entail greater credit risk than
the general obligation bonds in which they invest. This is the case because
revenue bonds and municipal lease obligations generally are not backed by the
faith, credit or general taxing power of the issuing governmental entity. In
addition, as described under that section, municipal lease obligations also are
subject to nonappropriation risk, which is a type of nonpayment risk. Investors
also should note that even general obligation bonds of the states and their
political subdivisions are not free from the risk of default.
The ratings and certain other requirements which apply to the Funds'
permitted investments, as described elsewhere in this Prospectus, are
intended to limit the amount of credit risk undertaken by the Funds.
Nevertheless, shareholders in the Funds bear the risk that payment
defaults could cause the value of their Fund's portfolio investments to
decline. Investors also should note that the Funds can invest in municipal
obligations rated as low as BBB by Standard & Poor's or Baa by Moody's, or
which have been assigned an equivalent rating by another nationally
recognized statistical rating organization, or which are of comparable
quality in the judgment of the Adviser. Although these rating categories
are investment grade, obligations with these ratings are viewed as having
speculative characteristics and carry a somewhat higher risk of default
than obligations rated in the higher investment grade categories.
Although the bond insurance carried by Minnesota Insured Intermediate Tax
Free Fund is intended to mitigate credit risk, its effectiveness depends
on the creditworthiness of the bond insurers. See "Special Investment
Methods -- Insurance for Minnesota Insured Intermediate Tax Free Fund."
CALL RISK. Many municipal bonds may be redeemed at the option of the issuer
("called") at a specified price prior to their stated maturity date. In general,
it is advantageous for an issuer to call its bonds if they can be refinanced
through the issuance of new bonds which bear a lower interest rate than that of
the called bonds. Call risk is the risk that bonds will be called during a
period of declining market interest rates so that such refinancings may take
place.
If a bond held by a Fund is called during a period of declining interest
rates, the Fund probably will have to reinvest the proceeds received by it
at a lower interest rate than that borne by the called bond, thus
resulting in a decrease in the Fund's income. To the extent that the Funds
invest in callable bonds, Fund shareholders bear the risk that reductions
in income will result from the call of bonds.
POLITICAL AND ECONOMIC CONDITIONS. The value of municipal obligations owned by
the Funds may be adversely affected by local political and economic conditions
and developments. Adverse conditions in an industry significant to a local
economy could have a correspondingly adverse effect on the financial condition
of local issuers. Other factors that could affect tax-exempt obligations include
a change in the local, state or national economy, demographic factors,
ecological or environmental concerns, statutory limitations on the issuer's
ability to increase taxes and other developments generally affecting the
revenues of issuers (for example, legislation or court decisions reducing state
aid to local governments or mandating additional services). The value of certain
municipal obligations may also be adversely affected by the enactment of changes
to certain federal or state income tax laws, including, but not limited to,
income tax rate reductions or the imposition of a flat tax.
Intermediate Tax Free Fund cannot invest 25% or more of its total assets in
obligations of issuers located in the same state (for this purpose, the location
of an "issuer" shall be deemed to be the location of the entity the revenues of
which are the primary source of payment or the location of the project or
facility which may be the subject of the obligation). See "Special Investment
Methods -- Investment Restrictions." California Intermediate Tax Free Fund,
Colorado Intermediate Tax Free Fund and Minnesota Insured Intermediate Tax Free
Fund each will invest primarily in municipal obligations issued by the state and
its political subdivisions named in its
<PAGE>
title. For this reason, the municipal obligations held by these three Funds will
be particularly affected by local conditions in those states. A more detailed
description of the factors affecting California, Colorado and Minnesota issuers
of municipal obligations is set forth in the Statement of Additional
Information.
OTHER. Investors also should review "Special Investment Methods" for information
concerning risks associated with certain investment techniques which may be
utilized by the 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
U.S. Bank National Association, 601 Second Avenue South, Minneapolis, Minnesota
55402, acts as the Funds' investment adviser through its First American 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 September 30, 1997, the Adviser was managing accounts with an aggregate value
of approximately $55 billion, including mutual fund assets of approximately $20
billion. U.S. Bancorp, 601 Second Avenue South, Minneapolis, Minnesota 55480, is
the holding company for the Adviser.
Each of the Funds has agreed to pay the Adviser monthly fees calculated on an
annual basis equal to 0.70% of its average daily net assets. The Adviser may,
at its option, waive any or all of its fees, or reimburse expenses, with
respect to any Fund from time to time. Any such waiver or reimbursement is
voluntary and may be discontinued at any time. The Adviser also may absorb or
reimburse expenses of the Funds from time to time, in its discretion, while
retaining the ability to be reimbursed by the Funds for such amounts prior to
the end of the fiscal year. This practice would have the effect of lowering a
Fund's overall expense ratio and of increasing yield to investors, or the
converse, at the time such amounts are absorbed or reimbursed, as the case
may be.
The Glass-Steagall Act generally prohibits banks from engaging in the business
of underwriting, selling or distributing securities and from being affiliated
with companies principally engaged in those activities. In addition,
administrative and judicial interpretations of the Glass-Steagall Act prohibit
bank holding companies and their bank and nonbank subsidiaries from organizing,
sponsoring or controlling registered open-end investment companies that are
continuously engaged in distributing their shares. Bank holding companies and
their bank and nonbank subsidiaries may serve, however, as investment advisers
to registered investment companies, subject to a number of terms and conditions.
Although the scope of the prohibitions and limitations imposed by the
Glass-Steagall Act has not been fully defined by the courts or the
appropriate regulatory agencies, the Funds have received an opinion from
their counsel that the Adviser is not prohibited from performing the
investment advisory services described above, and that certain broker-dealers
affiliated with the Adviser, are 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
certain affiliated broker-dealers 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
RICHARD W. STANLEY is portfolio co-manager for each of the Funds. He joined
the Adviser in 1986 and has 39 years of investment industry experience. Prior
to joining the Adviser, Mr. Stanley was with Heritage Investment Advisers and
Smith Barney, Inc. Mr. Stanley received his bachelor's degree from Dartmouth
College and his master's degree in business administration from Cornell
University. He is a Chartered Financial Analyst.
CHRISTOPHER L. DRAHN is portfolio co-manager for Intermediate Tax Free Fund,
California Intermediate Tax Free Fund and Minnesota Insured Intermediate Tax
Free Fund. He joined the Adviser in 1985 and has 12 years of investment industry
experience. Mr. Drahn received his bachelor's degree from Wartburg College and
his master's degree in business administration from the University of Minnesota.
He is a Chartered Financial Analyst.
TERRY L. MALTARICH is portfolio co-manager for Colorado Intermediate Tax Free
Fund. Mr. Maltarich joined the Adviser in 1994 and has over 23 years of
investment industry experience. Prior to joining the Adviser, Mr. Maltarich
was with Great West Life Insurance. Mr. Maltarich received his bachelor's
degree from Miami University.
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 U.S. Bancorp.
As compensation for its services to the Funds, the Custodian is paid monthly
fees calculated on an annual basis equal to 0.03% of the applicable Fund's
average daily net assets. In addition, the Custodian is reimbursed for its
out-of-pocket expenses incurred while providing its services to the Funds.
ADMINISTRATOR
The Administrator for the Funds is SEI 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, 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. U.S. Bank assists the Administrator and provides
sub-administration services for the Funds. For these services, the Administrator
compensates the sub-administrator at an annual rate of up to 0.05% of each
Fund's average daily net assets.
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, which is not affiliated with the Adviser, is a
wholly-owned subsidiary of SEI
<PAGE>
Investments Company, and is located at Oaks, Pennsylvania 19456.
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") pursuant to which the
Distributor agrees to provide, or enter into written agreements with service
providers to provide, one or more specified shareholder services to beneficial
owners of shares of the Funds. The Class A Distribution Plan authorizes the
Distributor to retain the sales charge paid upon purchase of Class A Shares,
except that portion which is reallowed to Participating Institutions. See
"Investing in the Funds -- Class A Share Price and Sales Charge." In
consideration of the services and facilities to be provided by the Distributor
or any service provider, each Fund also pays the Distributor a shareholder
servicing fee at an annual rate of 0.25% of the Fund's Class A Shares' average
daily net asset value, which fee is computed and paid monthly. 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 any of the Funds. Any such waivers may be
made at the Distributor's discretion and may be terminated at any time.
The Class A Distribution Plan recognizes 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. U.S. Bancorp Investments, Inc., a broker-dealer affiliated with
the Adviser ("USBI"), 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 both
the New York Stock Exchange and federally-chartered banks are 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 financial institutions 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
<PAGE>
Transfer Agent. Orders by mail will be executed upon receipt of payment by the
Transfer Agent. If an investor's check does not clear, the purchase will be
cancelled and the investor could be liable for any losses or fees incurred.
Third-party checks, credit cards, credit card checks and cash will not be
accepted. When purchases are made by check, the proceeds of redemptions of the
shares purchased are not available until the Transfer Agent is reasonably
certain that the purchase payment has cleared, which could take up to ten
calendar days from the purchase date. In order to purchase shares by mail, an
investor must:
* complete and sign the new account form;
* enclose a check made payable to (Fund name); and
* mail both to DST Systems, Inc., P.O. Box 419382, Kansas City, Missouri
64141-6382.
After an account is established, an investor can purchase shares by mail by
enclosing a check and mailing it to DST Systems, Inc. at the above address.
BY WIRE. To purchase shares of a Fund by wire, call (800) 637-2548 before 3:00
p.m. Central time. All information needed will be taken over the telephone, and
the order will be considered placed when the Custodian receives payment by wire.
If the Custodian does not receive the wire by 3:00 p.m. Central time, the order
will be executed the next business day. Federal funds should be wired as
follows: U.S. Bank National Association, Minneapolis, Minnesota, ABA Number
091000022; For Credit to: DST Systems, Inc., 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 or
federally-chartered banks are closed.
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 the Adviser and its
affiliates.
CLASS A SHARE PRICE AND SALES CHARGE
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:
MAXIMUM
AMOUNT OF
SALES CHARGE SALES CHARGE SALES CHARGE
AS PERCENTAGE AS PERCENTAGE REALLOWED TO
OF OFFERING OF NET ASSET PARTICIPATING
PRICE VALUE INSTITUTIONS
Less than $50,000 3.00% 3.09% 2.70%
$50,000 but less than $100,000 2.50% 2.56% 2.25%
$100,000 but less than $250,000 2.00% 2.04% 1.80%
$250,000 but less than $500,000 1.50% 1.52% 1.35%
$500,000 but less than $1,000,000 1.00% 1.01% 0.80%
$1,000,000 and over 0.00% 0.00% 0.00%
There is no initial sales charge on purchases of Class A Shares of $1
million or more. However, Participating Institutions may receive a
commission of up to 1.00% on such sales. Redemptions of Class A Shares
purchased at net asset value within 24 months of such purchases will be
subject to a contingent deferred sales charge of up to 1.00%. 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
<PAGE>
capital appreciation of Fund assets or reinvestment of dividends or capital gain
distributions.
Net asset value is determined as of the earlier of the close of the New York
Stock Exchange or 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) days on which the New York Stock
Exchange or federally-chartered banks are closed including, but not limited to,
the following federal holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day. In addition, net asset value will not be calculated on Good
Friday.
DEALER CONCESSION. A dealer will normally receive up to 90% of the applicable
sales charge. Any portion of the sales charge which is not paid to a dealer will
be retained by the Distributor. In addition, the Distributor may, from time to
time in its sole discretion, institute one or more promotional incentive
programs which will be paid by the Distributor from the sales charge it receives
or from any other source available to it. Under any such program, the
Distributor will provide promotional incentives, in the form of cash or other
compensation including merchandise, airline vouchers, trips and vacation
packages, to all dealers selling shares of the Funds. Promotional incentives of
these kinds will be offered uniformly to all dealers and predicated upon the
amount of shares of the Funds sold by the dealer. Whenever 90% or more of a
sales charge is paid to a dealer, that dealer may be deemed to be an underwriter
as defined in the Securities Act of 1933.
The sales charge for shares sold other than through registered
broker-dealers will be retained by the Distributor. The Distributor may
pay fees to financial institutions out of the sales charge in exchange for
sales and/or administrative services performed on behalf of the
institution's customers in connection with the initiation of customer
accounts and purchases of Fund shares.
REDUCING THE CLASS A SALES CHARGE. The sales charge can be reduced on the
purchase of Class A Shares through (i) quantity discounts and accumulated
purchases, or (ii) signing a 13-month letter of intent:
* QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES: As shown in the table above,
larger purchases of Class A Shares reduce the percentage sales charge paid.
Each Fund will combine purchases made on the same day by an investor, the
investor's spouse, and the investor's children under age 21 when it
calculates the sales charge. In addition, the sales charge, if applicable,
is reduced for purchases made at one time by a trustee or fiduciary for a
single trust estate or a single fiduciary account.
The sales charge discount applies to the total current market value of any
Fund, plus the current market value of any other FAIF Fund and any other
mutual funds having a sales charge and distributed as part of the First
American family of funds. Prior purchases and concurrent purchases of Class
A Shares of any FAIF Fund will be considered in determining the sales
charge reduction. In order for an investor to receive the sales charge
reduction on Class A Shares, the Transfer Agent must be notified by the
investor in writing or by his or her financial institution at the time the
purchase is made that Fund shares are already owned or that purchases are
being combined.
* LETTER OF INTENT: If an investor intends to purchase at least $50,000 of
Class A Shares in a Fund and other FAIF Funds over the next 13 months, the
sales charge may be reduced by signing a letter of intent to that effect.
This letter of intent includes a provision for a sales charge adjustment
depending on the amount actually purchased within the 13-month period and a
provision for the Custodian to hold a percentage equal to the particular
FAIF Fund's maximum sales charge rate of the total amount intended to be
purchased in escrow
<PAGE>
(in shares) for all FAIF Funds until the purchase is completed.
The amount held in escrow for all FAIF Funds will be applied to the
investor's account at the end of the 13-month period after deduction of the
sales load applicable to the dollar value of shares actually purchased. In
this event, an appropriate number of escrowed shares may be redeemed in
order to realize the difference in the sales charge.
A letter of intent will not obligate the investor to purchase shares, but
if he or she does, each purchase during the period will be at the sales
charge applicable to the total amount intended to be purchased. This letter
may be dated as of a prior date to include any purchases made within the
past 90 days.
SALES OF CLASS A SHARES AT NET ASSET VALUE. Purchases of a Fund's Class A Shares
by the Adviser, or any of its affiliates, or any of their or FAIF's officers,
directors, employees, retirees, sales representatives and partners, registered
representatives of any broker-dealer authorized to sell Fund shares, and
full-time employees of FAIF's general counsel, and members of their immediate
families (i.e., parent, child, spouse, sibling, step or adopted relationships,
and UTMA accounts naming qualifying persons), may be made at net asset value
without a sales charge. A Fund's Class A Shares also may be purchased at net
asset value without a sales charge by fee-based registered investment advisers,
financial planners and registered broker-dealers who are purchasing shares on
behalf of their customers and by purchasers through "one-stop" mutual fund
networks through which the Funds are made available. In addition, Class A Shares
may be purchased at net asset value without a sales charge by qualified defined
contribution plans participating in the First American 401(k) Plan Program,
investors participating in asset allocation "wrap" accounts offered by the
Adviser or any of its affiliates, and by retirement and deferred compensation
plans and the trusts used to fund such plans (including, but not limited to,
those defined in sections 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 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.
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
<PAGE>
dollar amount of shares of Prime Obligations Fund is exchanged for shares of the
same class of the Funds specified. The systematic exchange program of investing
a fixed dollar amount at regular intervals over time has the effect of reducing
the average cost per share of the Funds. This effect also can be achieved
through the systematic investment program described below. Because purchases of
Class A Shares are subject to an initial sales charge, it may be beneficial for
an investor to execute a Letter of Intent in connection with the systematic
exchange program. A shareholder may apply for participation in this program
through his or her financial institution or by calling (800) 637-2548.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Fund shares at the net asset value next determined after an order is
received, plus any applicable sales charge. A shareholder may apply for
participation in this program through his or her financial institution or call
(800) 637-2548.
EXCHANGING SECURITIES FOR FUND SHARES
A Fund may accept securities in exchange for Fund shares. A Fund will allow
such exchanges only upon the prior approval by the Fund and a determination
by the Fund and the Adviser that the securities to be exchanged are
acceptable. Securities accepted by a Fund will be valued in the same manner
that a Fund values its assets. The basis of the exchange will depend upon the
net asset value of Fund shares on the day the securities are valued.
CERTIFICATES AND CONFIRMATIONS
The Transfer Agent maintains a share account for each shareholder. Share
certificates will not be issued by the Funds.
Confirmations of each purchase and redemption are sent to each shareholder.
In addition, monthly confirmations are sent to report all transactions and
dividends paid during that month for the Funds.
DIVIDENDS AND DISTRIBUTIONS
Dividends with respect to each Fund are declared and paid monthly 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 Shares generally will be less than
the dividends payable on Class C Shares because of the shareholder servicing
expenses charged to Class A Shares.
EXCHANGE PRIVILEGE
Shareholders may exchange Class A Shares of a Fund for currently available
Class A Shares of the other FAIF Funds or of other funds in the First
American family of funds. Class A Shares of the Funds, whether acquired by
direct purchase, reinvestment of dividends on such shares, or
<PAGE>
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.
The ability to exchange shares of the Funds does not constitute an offering
or recommendation of shares of one fund by another fund. This privilege is
available to shareholders resident in any state in which the fund shares
being acquired may be sold. An investor who is considering acquiring shares
in another First American Fund pursuant to the exchange privilege should
obtain and carefully read a prospectus of the fund to be acquired. Exchanges
may be accomplished by a written request, or by telephone if a preauthorized
exchange authorization is on file with the Transfer Agent, shareholder
servicing agent, or financial institution.
Written exchange requests must be signed exactly as shown on the
authorization form, and the signatures may be required to be guaranteed as
for a redemption of shares by an entity described below under "Redeeming
Shares -- Directly From the Funds -- Signatures." Neither the Funds, the
Distributor, the Transfer Agent, any shareholder servicing agent, or any
financial institution will be responsible for further verification of the
authenticity of the exchange instructions.
Telephone exchange instructions made by an investor may be carried out only
if a telephone authorization form completed by the investor is on file with
the Transfer Agent, shareholder servicing agent, or financial institution.
Shares may be exchanged between two First American funds by telephone only if
both funds have identical shareholder registrations.
Telephone exchange instructions may be recorded and will be binding upon the
shareholder. Telephone instructions must be received by the Transfer Agent
before 3:00 p.m. Central time, or by a shareholder's shareholder servicing
agent or financial institution by the time specified by it, in order for
shares to be exchanged the same day.
Neither the Transfer Agent nor any Fund will be responsible for the authenticity
of exchange instructions received by telephone if it reasonably believes those
instructions to be genuine. The Funds and the Transfer Agent will each employ
reasonable procedures to confirm that telephone instructions are genuine, and
they may be liable for losses resulting from unauthorized or fraudulent
telephone instructions if they do not employ these procedures.
Shareholders of the Funds may have difficulty in making exchanges by
telephone through brokers and other financial institutions during times of
drastic economic or market changes. If a shareholder cannot contact his or
her broker or financial institution by telephone, it is recommended that an
exchange request be made in writing and sent by overnight mail to DST
Systems, Inc., 1004 Baltimore, Kansas City, Missouri 64105.
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 such an exchange would be a situation in which an
individual holder of Class A Shares subsequently opens a fiduciary, 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
<PAGE>
net asset value. Redemption requests can be made as described below and must be
received in proper form.
BY TELEPHONE
A shareholder may redeem shares of a Fund, if he or she elects the privilege
on the initial shareholder application, by calling his or her financial
institution to request the redemption. Shares will be redeemed at the net
asset value next determined after the Fund receives the redemption request
from the financial institution. Redemption requests must be received by the
financial institution by the time specified by the institution in order for
shares to be redeemed at that day's net asset value, and redemption requests
must be transmitted to and received by the Funds by 3:00 p.m. Central time in
order for shares to be redeemed at that day's net asset value. Pursuant to
instructions received from the financial institution, redemptions will be
made by check or by wire transfer. It is the financial institution's
responsibility to transmit redemption requests promptly.
Shareholders who did not purchase their shares of a Fund through a financial
institution may redeem their shares by telephoning (800) 637-2548. At the
shareholder's request, redemption proceeds will be paid by check mailed to
the shareholder's address of record or wire transferred to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System, normally within one business day, but in no event more than seven
days after the request. Wire instructions must be previously established on
the account or provided in writing. The minimum amount for a wire transfer is
$1,000. If at any time the Funds determine it necessary to terminate or
modify this method of redemption, shareholders will be promptly notified.
In the event of drastic economic or market changes, a shareholder may
experience difficulty in redeeming shares by telephone. If this should occur,
another method of redemption should be considered. Neither the Transfer Agent
nor any Fund will be responsible for any loss, liability, cost or expense for
acting upon wire transfer instructions or telephone instructions that it
reasonably believes to be genuine. The Transfer Agent and the Funds will each
employ reasonable procedures to confirm that instructions communicated are
genuine. These procedures may include taping of telephone conversations. To
ensure authenticity of redemption or exchange instructions received by
telephone, the Transfer Agent examines each shareholder request by verifying
the account number and/or taxpayer identification number at the time such
request is made. The Transfer Agent subsequently sends confirmations of both
exchange sales and exchange purchases to the shareholder for verification. If
reasonable procedures are not employed, the Transfer Agent and the Funds may
be liable for any losses due to unauthorized or fraudulent telephone
transactions.
BY MAIL
Any shareholder may redeem Fund shares by sending a written request to the
Transfer Agent, shareholder servicing agent, or financial institution. The
written request should include the shareholder's name, the Fund name, the
account number, and the share or dollar amount requested to be redeemed, and
should be signed exactly as the shares are registered. Shareholders should
call the Fund, shareholder servicing agent or financial institution for
assistance in redeeming by mail. A check for redemption proceeds normally is
mailed within one business day, but in no event more than seven days, after
receipt of a proper written redemption request.
Shareholders requesting a redemption of $5,000 or more, a redemption of any
amount to be sent to an address other than that on record with the Fund, or a
redemption payable other than to the shareholder of record, must have
signatures on written redemption requests guaranteed by:
* a trust company or commercial bank the deposits of which are insured by the
Bank Insurance Fund, which is administered by the
<PAGE>
Federal Deposit Insurance Corporation ("FDIC");
* a member firm of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges or of the National Association of Securities Dealers;
* a savings bank or savings and loan association the deposits of which are
insured by the Savings Association Insurance Fund, which is administered by
the FDIC; or
* any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public.
The Funds and the Transfer Agent have adopted standards for accepting
signature guarantees from the above institutions. The Funds may elect in the
future to limit eligible signature guarantees to institutions that are
members of a signature guarantee program. The Funds and the Transfer Agent
reserve the right to amend these standards at any time without notice.
BY SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders whose account value is at least $5,000 may elect to participate
in the Systematic Withdrawal Program. Under this program, Fund shares are
redeemed to provide for periodic withdrawal payments in an amount directed by
the shareholder. A shareholder may apply to participate in this program
through his or her financial institution. It is generally not in a
shareholder's best interest to participate in the Systematic Withdrawal
Program at the same time that the shareholder is purchasing additional shares
if a sales charge must be paid in connection with such purchases.
REDEMPTION BEFORE PURCHASE
INSTRUMENTS CLEAR
When shares are purchased by check or with funds transmitted through the
Automated Clearing House, the proceeds of redemptions of those shares are not
available until the Transfer Agent is reasonably certain that the purchase
payment has cleared, which could take up to ten calendar days from the
purchase date.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, a Fund may
redeem shares in any account, except retirement plans, and pay the proceeds,
less any applicable contingent deferred sales charge, to the shareholder if
the account balance falls below the required minimum value of $500. Shares
will not be redeemed in this manner, however, if the balance falls below $500
because of changes in a Fund's net asset value. Before shares are redeemed to
close an account, the shareholder will be notified in writing and allowed 60
days to purchase additional shares to meet the minimum account requirement.
DETERMINING THE PRICE
OF SHARES
Class A Shares of the Funds are sold at net asset value plus a sales charge.
Shares are redeemed at net asset value less any applicable contingent
deferred sales charge. See "Investing in the Funds -- Class A Share Price and
Sales Charge."
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 and federally-chartered banks are 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.
<PAGE>
It is the responsibility of Participating Institutions promptly to forward
purchase and redemption orders to the Transfer Agent. In the case of
redemptions and repurchases of shares owned by corporations, trusts or
estates, the Transfer Agent or Fund may require additional documents to
evidence appropriate authority in order to effect the redemption, and the
applicable price will be that next determined following the receipt of the
required documentation.
DETERMINING NET ASSET VALUE
The net asset value per share for each of the Funds is determined by dividing
the value of the securities owned by the Fund plus any cash and other assets
(including interest accrued and dividends declared but not collected), less
all liabilities, by the number of Fund shares outstanding. For the purpose of
determining the aggregate net assets of the Funds, cash and receivables will
be valued at their face amounts. Interest will be recorded as accrued and
dividends will be recorded on the ex-dividend date. Security valuations are
furnished by an independent pricing service that has been approved by the
Board of Directors. Debt obligations with remaining maturities in excess of
sixty days are valued at the most recently quoted bid price. For such debt
obligations the pricing service may employ methods that utilize actual market
transactions, broker-dealer valuations, or other electronic data processing
techniques. These techniques generally consider such factors as security
prices, yields, maturities, call features, ratings and developments relating
to specific securities in arriving at security valuations. Debt obligations
with remaining maturities of sixty days or less may be valued at their
amortized cost which approximates market value. If a security price cannot be
obtained from an independent pricing service a bid price may be obtained from
an independent broker who makes a market in the security. Foreign securities
owned by the Funds are valued at the closing prices on the principal exchange
on which they trade. If the value for a security cannot be obtained from the
sources described above, the security's value may be determined pursuant to
the fair value procedures established 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 options held or written by a Fund, are valued at the closing bid price
for a long position or the closing ask price for a short position.
INCOME TAXES
FEDERAL INCOME TAXATION
Each Fund is treated as a different entity for federal income tax purposes.
Each of the Funds qualified during its last fiscal year as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"), and all of the Funds intend to so qualify in the future. If so
qualified and provided certain distribution requirements are met, a Fund will
not be liable for federal income taxes to the extent it distributes its
income to its shareholders.
Distributions of net interest income from tax-exempt obligations that are
designated by each Fund as exempt-interest dividends are excludable from the
gross income of the Fund's shareholders. A portion of such dividends may,
however, be subject to the alternative minimum tax, as discussed below.
Distributions paid from other interest income and from any net realized
short-term capital gains will be taxable to shareholders as ordinary income,
whether received in cash or in additional shares. Since none of the Funds'
income will consist of dividends from domestic corporations, the
dividends-received deduction for corporations will not be applicable to
taxable distributions by the Funds. Distributions paid from long-term capital
gains (and designated as such) generally 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
<PAGE>
held the shares in a Fund. In the case of shareholders who are individuals,
estates, or trusts, each Fund will designate the portion of each capital gain
dividend that must be treated as mid-term capital gain and the portion that must
be treated as long-term capital gain.
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. For
corporate shareholders, such gain or loss will be long-term gain or loss if
the shares were held more than one year. For shareholders who are
individuals, estates, or trusts the gain or loss will be considered long-term
if the shareholder has held the shares for more than 18 months and mid-term
if the shareholder has held the shares for more than one year but not more
than 18 months.
For federal income tax purposes, an alternative minimum tax ("AMT") is
imposed on taxpayers to the extent that such tax, if any, exceeds a
taxpayer's regular income tax liability (with certain adjustments). Liability
for AMT will depend on each shareholder's tax situation.
Exempt-interest dividends attributable to interest income on certain
tax-exempt obligations issued after August 7, 1986, to finance certain
private activities will be treated as an item of tax preference that is
included in alternative minimum taxable income for purposes of computing the
federal AMT for all taxpayers. Each Fund may invest up to 20% of its total
assets in obligations the interest on which is treated as an item of tax
preference for federal income tax purposes. Also, a portion of all other
tax-exempt interest received by a corporation, including exempt-interest
dividends, will be included in adjusted current earnings and in earnings and
profits for purposes of determining the federal corporate alternative minimum
tax, and the branch profits tax imposed on foreign corporations under Section
884 of the Code. Each shareholder is advised to consult his or her tax
adviser with respect to the possible effects of such tax preference items.
The Tax Reform Act of 1986 imposed new requirements on certain tax-exempt
bonds which, if not satisfied, could result in loss of tax exemption for
interest on such bonds, even retroactively to the date of issuance of the
bonds. Proposals may be introduced before Congress in the future, the purpose
of which will be to further restrict or eliminate the federal income tax
exemption for tax-exempt bonds held by the Funds. The Funds will avoid
investment in bonds which, in the opinion of the Adviser, pose a material
risk of the loss of tax exemption. Further, if a bond in a Fund's portfolio
lost its exempt status, the Fund would make every effort to dispose of that
investment on terms that are not detrimental to the Fund.
In certain instances, the portion of Social Security benefits received by a
shareholder that is subject to federal income tax may be affected by the
amount of exempt-interest dividends received by the shareholder from the
Funds.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Funds will not be deductible for federal income purposes.
A Fund may be required to "back-up" withhold 31% of any dividend,
distribution, or redemption payment made to a shareholder who fails to
furnish the Fund with the shareholder's Social Security number or other
taxpayer identification number or to certify that he or she is not subject to
back-up withholding.
Information concerning distributions will be mailed to shareholders annually.
Shareholders are required for information purposes to report exempt-interest
dividends and other tax-exempt interest on their tax returns.
CALIFORNIA INCOME TAXATION
The portion of exempt-interest dividends paid by California Intermediate Tax
Free Fund that is derived from interest on tax-exempt obligations issued by
the State of California, its political subdivisions and instrumentalities, is
excluded
<PAGE>
from the California taxable income of individuals, estates, and trusts, provided
that at least 50% of the value of the Fund's total assets consists of
obligations the interest on which is exempt from California personal income
taxation pursuant to federal or California law. The remaining portion of such
dividends, and dividends that are not exempt-interest dividends or capital gains
dividends, are included in the California taxable income of individuals, estates
and trusts, except for dividends directly attributable to interest on
obligations of the United States Government, its territories and possessions.
Exempt-interest dividends are not excluded from the California taxable income of
corporations and financial institutions. Dividends qualifying for federal income
tax purposes as capital gains dividends are to be treated by shareholders as
long-term capital gains. California has repealed the favorable treatment of
long-term capital gains, while retaining restrictions on the deductibility of
capital losses. Dividends generally will not qualify for the dividends-received
deduction for corporations and financial institutions.
COLORADO INCOME TAXATION
To the extent that dividends paid by Colorado Intermediate Tax Free Fund are
derived from interest on tax-exempt obligations issued by the state of
Colorado, its political subdivisions and instrumentalities, such dividends
will also be exempt from Colorado income taxes for individuals, trusts,
estates, and corporations. The remaining portion of such dividends are
included in the Colorado taxable income of individuals, trusts, estates, and
corporations, except for dividends directly attributable to interest on
obligations of the United States Government. Dividends qualifying for federal
income tax purposes as capital gain dividends are to be treated by
shareholders as long-term capital gains under Colorado law. However, Colorado
has repealed the favorable treatment of long-term capital gains, while
retaining restrictions on the deductibility of capital losses.
Dividends paid by Colorado Intermediate Tax Free Fund that are derived from
interest on tax-exempt obligations issued by the state of Colorado, its
political subdivisions and instrumentalities (including tax-exempt obligations
treated for federal purposes as private activity bonds) will not be treated as
items of tax preference for purposes of the alternative minimum tax that
Colorado imposes on individuals, trusts and estates.
As under federal law, the portion of Social Security benefits subject to
Colorado income tax may be affected by the amount of exempt-interest
dividends received by the shareholders.
MINNESOTA INCOME TAXATION
The portion of exempt-interest dividends paid by Minnesota Insured Intermediate
Tax Free Fund that is derived from interest on tax-exempt obligations issued by
the state of Minnesota, its political subdivisions and instrumentalities, is
excluded from the Minnesota taxable net income of individuals, estates and
trusts, provided that the portion of the exempt-interest dividends from such
Minnesota sources paid to all shareholders represents 95 percent or more of the
exempt-interest dividends paid by the respective Fund. The remaining portion of
such dividends, and dividends that are not exempt-interest dividends or capital
gain dividends, are included in the Minnesota taxable net income of individuals,
estates and trusts, except for dividends directly attributable to interest on
obligations of the United States Government, its territories and possessions.
Exempt-interest dividends are not excluded from the Minnesota taxable income of
corporations and financial institutions. Dividends qualifying for federal income
tax purposes as capital gain dividends are to be treated by shareholders as
long-term capital gains. Minnesota has repealed the favorable treatment of
long-term capital gains, while retaining restrictions on the deductibility of
capital losses. As under federal law, the portion of Social Security benefits
subject to Minnesota income tax may be affected by the amount of
<PAGE>
exempt-interest dividends received by the shareholders. Exempt-interest
dividends attributable to interest on certain private activity bonds issued
after August 7, 1986 will be included in Minnesota alternative minimum taxable
income of individuals, estates and trusts for purposes of computing Minnesota's
alternative minimum tax. Dividends generally will not qualify for the
dividends-received deduction for corporations and financial institutions.
OTHER STATE AND LOCAL TAXATION
Except to the extent described above under "-- California Income Taxation,"
"-- Colorado Income Taxation" and "Minnesota Income Taxation," distributions
by all the Funds may be subject to state and local taxation even if they are
exempt from federal income taxes. Shareholders are urged to consult their own
tax advisers regarding state and local taxation.
<TABLE>
<CAPTION>
Tax-Equivalent Yields
Combined Federal and
Federal Tax Brackets California Tax Brackets
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-Free
Yields 28% 31% 36% 39.6% 34.7% 37.4% 42.0% 45.2%
3.0% 4.17% 4.35% 4.69% 4.97% 4.59% 4.79% 5.17% 5.47%
3.5% 4.86% 5.07% 5.47% 5.79% 5.37% 5.59% 6.03% 6.39%
4.0% 5.56% 5.80% 6.25% 6.62% 6.13% 6.39% 6.90% 7.30%
4.5% 6.25% 6.52% 7.03% 7.45% 6.89% 7.19% 7.76% 8.21%
5.0% 6.94% 7.25% 7.81% 8.28% 7.66% 7.99% 8.62% 9.12%
5.5% 7.64% 7.97% 8.59% 9.11% 8.42% 8.79% 9.48% 10.04%
6.0% 8.33% 8.70% 9.38% 9.93% 9.19% 9.58% 10.34% 10.95%
6.5% 9.03% 9.42% 10.16% 10.76% 9.95% 10.38% 11.21% 11.86%
</TABLE>
<TABLE>
<CAPTION>
[WIDE TABLE CONTINUED FROM ABOVE]
Tax-Equivalent Yields
Combined Federal and Combined Federal and
Colorado Tax Brackets Minnesota Tax Brackets
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-Free
Yields 31.6% 34.5% 39.2% 42.6% 34.1% 36.9% 41.4% 44.7%
3.0% 4.39% 4.58% 4.93% 5.23% 4.55% 4.75% 5.12% 5.42%
3.5% 5.12% 5.34% 5.76% 6.10% 5.31% 5.55% 5.97% 6.33%
4.0% 5.85% 6.11% 6.58% 6.97% 6.07% 6.34% 6.83% 7.23%
4.5% 6.58% 6.87% 7.40% 7.84% 6.83% 7.13% 7.68% 8.14%
5.0% 7.31% 7.63% 8.22% 8.71% 7.59% 7.92% 8.53% 9.04%
5.5% 8.04% 8.40% 9.05% 9.58% 8.35% 8.72% 9.39% 9.95%
6.0% 8.77% 9.16% 9.87% 10.45% 9.10% 9.51% 10.24% 10.85%
6.5% 9.50% 9.92% 10.69% 11.32% 9.86% 10.30% 11.09% 11.75%
</TABLE>
TAX-EXEMPT VS. TAXABLE
INCOME
The tables above show the approximate yields that taxable securities must
earn to equal yields that are (i) exempt from federal income taxes; (ii)
exempt from both federal and California income taxes; (iii) exempt from both
federal and Colorado income taxes; and (iv) exempt from both federal and
Minnesota income taxes under selected income tax brackets scheduled to be in
effect in 1998. The effective combined rates reflect the deduction of state
income taxes from federal income. The 34.7%, 37.4%, 42.0% and 45.2% combined
federal/California rates assume that the investor is subject to a 9.3%
marginal California income tax rate and a marginal federal income tax rate of
28%, 31%, 36% and 39.6%, respectively. The 31.6%, 34.5%, 39.2% and 42.6%
combined federal/Colorado rates assume that the investor is subject to a 5%
Colorado income tax rate and a marginal federal income tax rate of 28%, 31%,
36% and 39.6%, respectively. The 34.1%, 36.9%, 41.4%, and 44.7% combined
federal/Minnesota rates assume that the investor is subject to an 8.5%
marginal Minnesota income tax rate and a marginal federal income tax rate of
28%, 31%, 36% and 39.6%, respectively. The combined rates do not reflect
federal rules concerning the phase-out of personal exemptions and limitations
on the allowance of itemized deductions for certain high-income taxpayers.
The tables are based upon yields that are derived solely from tax-exempt
income. To the extent that a Fund's yield is derived from taxable income, the
Fund's tax equivalent yield will be less than set forth in the tables. The
tax-free yields used in these tables should not be considered as
representations of any particular rates of return and are for purposes of
illustration only.
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
<PAGE>
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 of shares,
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 of shares.
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 "tax equivalent yield,"
its "cumulative total return," its "average annual total return," its
"distribution rate" and its "tax equivalent distribution rate." Distribution
rates and tax equivalent distribution rates may only be used in connection
with sales literature and shareholder communications preceded or accompanied
by a Prospectus. Each of these performance figures is based upon historical
results and is not intended to indicate future performance, and, except for
"distribution rate" and "tax equivalent distribution rate," is standardized
in accordance with Securities and Exchange Commission ("SEC") regulations.
"Yield" for the Funds is computed by dividing the net investment income per
share (as defined in applicable SEC regulations) earned during a 30-day
period (which period will be stated in the advertisement) by the maximum
offering price per share on the last day of the period. Yield is an
annualized figure, in that it assumes that the same level of net investment
income is generated over a one year period. The yield formula annualizes net
investment income by providing for semi-annual compounding.
"Tax equivalent yield" is that yield which a taxable investment must generate
in order to equal a Fund's yield for an investor in a stated federal or
combined federal/state income tax bracket (normally assumed to be the maximum
tax rate or combined rate). Tax equivalent yield is computed by dividing that
portion of the yield which is tax-exempt by one minus the stated income tax
rate, and adding the resulting amount to that portion, if any, of the yield
which is not tax-exempt.
"Total return" is based on the overall dollar or percentage change in value
of a hypothetical investment in a Fund assuming reinvestment of dividend
distributions and deduction of all charges and expenses, including the
maximum sales charge imposed on Class A Shares. "Cumulative total return"
reflects a Fund's performance over a stated period of time. "Average annual
total return" reflects the hypothetical annually compounded rate that would
have produced the same cumulative total return if performance had been
constant over the entire period. Because average annual returns tend to
smooth out variations in a Fund's performance, they are not the same as
actual year-by-year results. As a supplement to total return computations, a
Fund may also publish "total investment return" computations which do not
assume deduction of the maximum sales charge imposed on Class A Shares.
"Distribution rate" is determined by dividing the income dividends per share
for a stated period by the maximum offering price per share on the last day
of the period. "Tax equivalent distribution rate" is computed by dividing the
portion of the distribution rate (determined as described above) which is
tax-exempt by one minus the stated federal or combined federal/state income
tax rate, and adding to the resulting amount that portion, if any, of the
distribution rate which is not tax-exempt. All distribution rates published
for the Funds are measures of the level of income
<PAGE>
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 Shares of a Fund will normally be lower than
for the Class C Shares because Class C Shares are not subject to the sales
charges and shareholder servicing expenses applicable to Class A Shares.
In reports or other communications to shareholders and in advertising
material, the performance of each Fund may be compared to recognized
unmanaged indices or averages of the performance of similar securities and to
composites of such indices and averages. Also, the performance of each Fund
may be compared to that of other funds of similar size and objectives as
listed in the rankings prepared by Lipper Analytical Services, Inc. or
similar independent mutual fund rating services, and each Fund may include in
such reports, communications and advertising material evaluations published
by nationally recognized independent ranking services and publications. For
further information regarding the Funds' performance, see "Fund Performance"
in the Statement of Additional Information.
PERFORMANCE INFORMATION FOR
SUCCESSOR TO COMMON
TRUST FUNDS
From time to time California Intermediate Tax Free Fund may advertise
performance information which includes performance data of certain predecessor
common trust funds. California Intermediate Tax Free Fund commenced operations
when substantially all of the assets of certain common trust funds which were
exempt from registration under the 1940 Act were transferred to the Fund. One
predecessor common trust fund was managed by the Adviser, while the other was
managed by Qualivest Capital Management, Inc. prior to the acquisition of its
parent company by the Adviser's parent company. The personnel who managed that
common trust fund on behalf of Qualivest Capital Management became employees of
the Adviser, and assumed management of the Fund, at the time the assets were
transferred from the common trust fund to the Fund. Such performance data is
deemed relevant because the common trust funds were managed using investment
objectives, policies and restrictions very similar to those of the Fund.
However, the predecessor common trust funds were not subject to certain
investment restrictions that are imposed by the 1940 Act. Accordingly, if the
common trust funds had been registered under the 1940 Act, their performance
could have been adversely affected by virtue of such investment restrictions. In
addition, the predecessor common trust funds did not incur the same expenses as
California Intermediate Tax Free Fund.
SPECIAL INVESTMENT
METHODS
This section provides additional information concerning the securities in
which the Funds may
<PAGE>
invest and related topics. Further information concerning these matters is
contained in the Statement of Additional Information.
MUNICIPAL BONDS AND OTHER MUNICIPAL OBLIGATIONS
As described under "Investment Objectives and Policies," each of the Funds
invests principally in municipal bonds and other municipal obligations. These
bonds and other obligations are issued by the states and by their local and
special-purpose political subdivisions. The term "municipal bond" as used in
this Prospectus includes short-term municipal notes issued by the states and
their political subdivisions.
MUNICIPAL BONDS. The two general classifications of municipal bonds are "general
obligation" bonds and "revenue" bonds. General obligation bonds are secured by
the governmental issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. They are usually paid from general revenues
of the issuing governmental entity. Revenue bonds, on the other hand, are
usually payable only out of a specific revenue source rather than from general
revenues. Revenue bonds ordinarily are not backed by the faith, credit or
general taxing power of the issuing governmental entity.
The principal and interest on revenue bonds for private facilities are
typically paid out of rents or other specified payments made to the
issuing governmental entity by a private company which uses or operates
the facilities. Examples of these types of obligations are industrial
revenue bonds and pollution control revenue bonds. Industrial revenue
bonds are issued by governmental entities to provide financing aid to
community facilities such as hospitals, hotels, business or residential
complexes, convention halls and sport complexes. Pollution control revenue
bonds are issued to finance air, water and solids pollution control
systems for privately operated industrial or commercial facilities.
Revenue bonds for private facilities usually do not represent a pledge of the
credit, general revenues or taxing powers of the issuing governmental entity.
Instead, the private company operating the facility is the sole source of
payment of the obligation. Sometimes, the funds for payment of revenue bonds
come solely from revenue generated by operation of the facility. Revenue bonds
which are not backed by the credit of the issuing governmental entity frequently
provide a higher rate of return than other municipal obligations, but they
entail greater risk than obligations which are guaranteed by a governmental unit
with taxing power. Federal income tax laws place substantial limitations on
industrial revenue bonds, and particularly certain specified private activity
bonds issued after August 7, 1986. In the future, legislation could be
introduced in Congress which could further restrict or eliminate the income tax
exemption for interest on debt obligations in which the Funds may invest.
MUNICIPAL LEASES. Each Fund also may purchase participation interests in
municipal leases. Participation interests in municipal leases are undivided
interests in a lease, installment purchase contract or conditional sale contract
entered into by a state or local governmental unit to acquire equipment or
facilities. Municipal leases frequently have special risks which generally are
not associated with general obligation bonds or revenue bonds.
Municipal leases and installment purchase or conditional sale contracts
(which usually provide for title to the leased asset to pass to the
governmental issuer upon payment of all amounts due under the contract)
have evolved as a means for governmental issuers to acquire property and
equipment without meeting the constitutional and statutory requirements
for the issuance of municipal debt. The debt-issuance limitations are
deemed to be inapplicable because of the inclusion in many leases and
contracts of "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for this purpose by the
appropriate legislative body on a yearly or other periodic basis. Although
these kinds of obligations
<PAGE>
are secured by the leased equipment or facilities, the disposition of the
pledged property in the event of non-appropriation or foreclosure might, in some
cases, prove difficult and time-consuming. In addition, disposition upon
non-appropriation or foreclosure might not result in recovery by a Fund of the
full principal amount represented by an obligation.
In light of these concerns, each Fund has adopted and follows procedures
for determining whether municipal lease obligations purchased by the Fund
are liquid and for monitoring the liquidity of municipal lease securities
held in the Fund's portfolio. These procedures require that a number of
factors be used in evaluating the liquidity of a municipal lease security,
including the frequency of trades and quotes for the security, the number
of dealers willing to purchase or sell the security and the number of
other potential purchasers, the willingness of dealers to undertake to
make a market in the security, the nature of the marketplace in which the
security trades, and other factors which the Adviser may deem relevant. As
described below under "-- Investment Restrictions," each Fund is subject
to limitations on the percentage of illiquid securities it can hold.
INSURANCE FOR MINNESOTA INSURED
INTERMEDIATE TAX FREE FUND
At least 65% of the tax-exempt obligations in the investment portfolio of
Minnesota Insured Intermediate Tax Free Fund will consist of insured
securities, escrow secured bonds or defeased bonds. The "insured securities"
in this Fund's investment portfolio are insured as to the scheduled payment
of all installments of principal and interest as they fall due. The purpose
of this insurance is to minimize credit risk to this Fund and its
shareholders associated with defaults in tax-exempt obligations owned by the
Fund. However, insurance does not guarantee the market value of the
securities in this Fund's investment portfolio, which will continue to
fluctuate in response to changes in market interest rates. See "Investment
Objectives and Policies -- Risks to Consider -- Interest Rate Risk."
Therefore, the amount received upon redemption of shares of this Fund may be
more or less than the original cost of the shares less any applicable sales
charge paid in connection with the acquisition of such shares.
Generally, except as noted above, each insured municipal obligation held by
Minnesota Insured Intermediate Tax Free Fund will be covered by Original
Issue Insurance, Secondary Market Insurance or Portfolio Insurance. "Original
Issue Insurance" is purchased by the issuer of a municipal obligation or by a
third party at the time of original issuance of the obligation, while
"Secondary Market Insurance" may be purchased by a third party (including
Minnesota Insured Intermediate Tax Free Fund) subsequent to the original
issuance of a municipal obligation. "Portfolio Insurance" is insurance
purchased by Minnesota Insured Intermediate Tax Free Fund to cover municipal
obligations while they are held in the Fund's portfolio. Premiums for
Portfolio Insurance will be paid from the Fund's assets and will reduce the
current yield on its investment portfolio by the amount of the premiums. The
Fund's investment manager estimates that annual premiums for Portfolio
Insurance would be less than .01% of the Fund's average daily net assets.
Because Portfolio Insurance coverage would terminate upon the sale of an
insured security by Minnesota Insured Intermediate Tax Free Fund, this kind
of insurance would not have an effect on the resale value of the security.
Therefore, the Fund generally will retain any such securities covered only by
Portfolio Insurance which are in default or in significant risk of default
and will place a value on the insurance equal to the difference between the
market value of the defaulted security and the market value of similar
securities which are not in default. Both Original Issue Insurance and
Secondary Market Insurance are non-cancelable and continue in force as long
as the insured security is outstanding and the applicable insurer remains in
business.
Minnesota Insured Intermediate Tax Free Fund may acquire securities that are
already covered by
<PAGE>
Original Issue Insurance or Secondary Market Insurance without having to acquire
additional insurance thereon, provided that the claims paying ability of the
insurer is rated AAA or SP-1 by Standard & Poor's or Aaa or MIG-1 by Moody's or
has been assigned an equivalent rating by another nationally recognized
statistical rating organization. One of the purposes of these kinds of insurance
is to enable the securities covered thereby to be sold as AAA or Aaa rated
insured securities at a market price higher than might be obtained if the
securities were not insured. Therefore, these kinds of insurance may be
considered to represent an element of the market value of the securities
insured. However, the exact effect, if any, on market value cannot be estimated.
Secondary Market Insurance may be purchased by Minnesota Insured Intermediate
Tax Free Fund if, in the opinion of the Fund's investment manager, the market
value or net proceeds of a sale of the covered security by the Fund would
exceed the current value of the security without insurance, plus the cost of
the insurance. When the Fund purchases Secondary Market Insurance, the single
premium is added to the cost basis of the security and is not considered an
item of expense of the Fund. Any excess of a security's market value as an
AAA or Aaa rated security over its market value without the insurance,
including the single premium cost thereof, would inure to the Fund in
determining the net capital gain or loss realized by the Fund upon the sale
of the security.
The investment policy of this Fund requiring insurance on investments applies
only to tax-exempt obligations held by the Fund and will not affect the
Fund's ability to hold its assets in cash or to invest in escrow secured and
defeased bonds or in certain short-term tax-exempt obligations as described
elsewhere herein, or its ability to invest in uninsured taxable obligations
for temporary or liquidity purposes or on a defensive basis in accordance
with the investment policies and restrictions of the Fund.
Minnesota Insured Intermediate Tax Free Fund is authorized to obtain
Portfolio Insurance from insurers that have obtained a claims-paying ability
rating of AAA or SP-1 from Standard & Poor's or Aaa or MIG-1 from Moody's or
an equivalent rating from another nationally recognized statistical rating
organization. Such insurers may include AMBAC Indemnity Corporation
("AMBAC"), Municipal Bond Investors Assurance Corp. ("MBIA"), Financial
Guaranty Insurance Company ("FGIC"), Financial Security Assurance, Inc.
("FSA"), or other companies meeting these criteria. For more information
concerning Portfolio Insurance, see the Statement of Additional Information.
TEMPORARY TAXABLE INVESTMENTS
Each of the Funds may make temporary taxable investments as described under
"Investment Objectives and Policies." Temporary taxable investments will
include only the following types of obligations maturing within 13 months
from the date of purchase: (i) obligations of the United States Government,
its agencies and instrumentalities; (ii) commercial paper rated not less than
A-1 by Standard & Poor's or P-1 by Moody's or which has been assigned an
equivalent rating by another nationally recognized statistical rating
organization; (iii) other short-term debt securities issued or guaranteed by
corporations having outstanding debt rated not less than BBB by Standard &
Poor's or Baa by Moody's or which have been assigned an equivalent rating by
another nationally recognized statistical rating organization; (iv)
certificates of deposit of domestic commercial banks subject to regulation by
the United States Government or any of its agencies or instrumentalities,
with assets of $500 million or more based on the most recent published
reports; and (v) repurchase agreements with domestic banks or securities
dealers involving any of the securities which the Fund is permitted to hold.
See "-- Repurchase Agreements" below.
REPURCHASE AGREEMENTS
The temporary taxable investments which each Fund may make include repurchase
agreements. A
<PAGE>
repurchase agreement involves the purchase by a Fund of securities with the
agreement that after a stated period of time, the original seller will buy back
the same securities ("collateral") at a predetermined price or yield. Repurchase
agreements involve certain risks not associated with direct investments in
securities. If the original seller defaults on its obligation to repurchase as a
result of its bankruptcy or otherwise, the purchasing Fund will seek to sell the
collateral, which could involve costs or delays. Although collateral (which may
consist of any fixed income security which is an eligible investment for the
Fund entering into the repurchase agreement) will at all times be maintained in
an amount equal to the repurchase price under the agreement (including accrued
interest), a Fund would suffer a loss if the proceeds from the sale of the
collateral were less than the agreed-upon repurchase price. The Adviser will
monitor the creditworthiness of the firms with which the Funds enter into
repurchase agreements.
INVERSE FLOATING RATE OBLIGATIONS
Each of the Funds may invest up to 5% of its net assets in inverse floating
rate municipal obligations. An inverse floating rate obligation entitles the
holder to receive interest at a rate which changes in the opposite direction
from, and in the same magnitude as or in a multiple of, changes in a
specified index rate. Although an inverse floating rate municipal obligation
would tend to increase portfolio income during a period of generally
decreasing market interest rates, its income and value would tend to decline
during a period of generally increasing market interest rates. In addition,
its decline in value may be greater than for a fixed-rate municipal
obligation, particularly if the interest rate borne by the floating rate
municipal obligation is adjusted by a multiple of changes in the specified
index rate. For these reasons, inverse floating rate municipal obligations
have more risk than more conventional fixed-rate and floating rate municipal
obligations.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
Each of the Funds may purchase securities on a when-issued or delayed
delivery basis. When such a transaction is negotiated, the purchase price is
fixed at the time the purchase commitment is entered, but delivery of and
payment for the securities take place at a later date. A Fund will not accrue
income with respect to securities purchased on a when-issued or delayed
delivery basis prior to their stated delivery date. Pending delivery of the
securities, each Fund will maintain in a segregated account cash or liquid
high-grade securities in an amount sufficient to meet its purchase
commitments.
The purchase of securities on a when-issued or delayed delivery basis exposes
a Fund to risk because the securities may decrease in value prior to
delivery. In addition, a Fund's purchase of securities on a when-issued or
delayed delivery basis while remaining substantially fully invested could
increase the amount of the Fund's total assets that are subject to market
risk, resulting in increased sensitivity of net asset value to changes in
market prices. However, the Funds will engage in when-issued and delayed
delivery transactions only for the purpose of acquiring portfolio securities
consistent with their investment objectives, and not for the purpose of
investment leverage. A seller's failure to deliver securities to a Fund could
prevent the Fund from realizing a price or yield considered to be
advantageous.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, each of the Funds may lend portfolio
securities representing up to one-third of the value of its total assets to
broker-dealers, banks or other institutional borrowers of securities. If the
Funds engage in securities lending, distributions paid to shareholders from the
resulting income will not be excludable from shareholders' gross income for
income tax purposes. As with other extensions of credit, there may be risks of
delay in recovery of
<PAGE>
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 in connection with these loans, which in the
case of First Trust National Association, are 40% of the Funds' income from such
securities lending transactions.
OPTIONS TRANSACTIONS
Each of the Funds may, in order to reduce risk, invest in exchange traded put
and call options on interest rate futures contracts and on interest rate
indices. Such investments will be made solely as a hedge against adverse changes
resulting from market conditions in the values of securities held by the Funds
or which they intend to purchase and where the transactions are deemed
appropriate to reduce risks inherent in the Funds' portfolios or contemplated
investments.
None of the Funds will invest more than 5% of the value of its total assets in
purchased options, provided that options which are "in the money" at the time of
purchase may be excluded from this 5% limitation. A call option is "in the
money" if the exercise price is lower than the current market price of the
underlying contract or index, and a put option is "in the money" if the exercise
price is higher than the current market price. A Fund's loss exposure in
purchasing an option is limited to the sum of the premium paid (purchase price
of the option) and the commission or other transaction expenses associated with
acquiring the option.
An interest rate futures contract provides for the future sale by one party and
purchase by the other party of a certain amount of a specific financial
instrument (debt security) at a specified price, date, time and place. An option
on an interest rate futures contract, as contrasted with the direct investment
in such a contract, gives the purchaser the right, in return for the premium
paid, to purchase (in the case of a call option) or sell (in the case of a put
option) an interest rate futures contract at a specified exercise price at any
time prior to the expiration date of the option. In order to hedge its portfolio
against anticipated changes in interest rates, a Fund might purchase a put
option on an interest rate futures contract if interest rates were expected to
rise, or might purchase a call option on an interest rate futures contract if
rates were expected to decline.
Options on interest rate indices are similar to options on interest rate
futures contracts except that, rather than the right to take or make delivery
of a specific financial instrument at a specified price, an option on an
interest rate index gives the holder the right to receive, upon exercise of
the option, a defined amount of cash if the closing value of the interest
rate index upon which the option is based is greater than, in the case of a
call, or less than, in the case of a put, the exercise price of the option.
Put and call options on interest rate indices thus may be used in a fashion
similar to that of options on interest rate futures contracts to hedge the
value of a portfolio of debt securities against anticipated changes in
interest rates.
The use of options on interest rate futures contracts and on interest rate
indices involves certain risks. These include the risk that changes in
interest rates on the hedged instruments may not correlate to changes in
interest rates on the instrument or index upon which the hedge is based, and
the risk of limited liquidity in the event that a Fund seeks to close out an
options position before expiration by entering into an offsetting
transaction.
PORTFOLIO TRANSACTIONS
Portfolio transactions in the over-the-counter market will be effected with
market makers or
<PAGE>
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 (100%
or more) generally would result in higher transaction costs and could result
in additional tax consequences to a Fund's shareholders.
INVESTMENT RESTRICTIONS
The fundamental and nonfundamental investment restrictions of the Funds are
set forth in full in the Statement of Additional Information. The fundamental
restrictions include the following:
* None of the Funds will borrow money, except from banks for temporary or
emergency purposes. The amount of such borrowing may not exceed 10% of the
borrowing Fund's total assets. None of the Funds will borrow money for
leverage purposes. For the purpose of this investment restriction, the use
of options and futures transactions and the purchase of securities on a
when-issued or delayed delivery basis shall not be deemed the borrowing of
money. If a Fund engages in borrowing, its share price may be subject to
greater fluctuation, and the interest expense associated with the borrowing
may reduce the Fund's net income.
* None of the Funds will 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.
* Intermediate Tax Free Fund will not invest 25% or more of the value of its
total assets in obligations of issuers located in the same state (for this
purpose, the location of an "issuer" shall be deemed to be the location of
the entity the revenues of which are the primary source of payment or the
location of the project or facility which may be the subject of the
obligation). None of the Funds will invest 25% or more of the value of its
total assets in revenue bonds or notes, payment for which comes from
revenues from any one type of activity (for this purpose, the term "type of
activity" shall include without limitation (i) sewage treatment and
disposal; (ii) gas provision; (iii) electric power provision; (iv) water
provision; (v) mass transportation systems; (vi) housing; (vii) hospitals;
(viii) nursing homes; (ix) street development and repair; (x) toll roads;
(xi) airport facilities; and (xii) educational facilities), except that, in
circumstances in which other appropriate available investments may be in
limited supply, such Funds may invest without limitation in gas provision,
electric power provision, water provision, housing and hospital
obligations. This restriction does not apply to general obligation bonds or
notes or, in the case of Intermediate Tax Free Fund, to pollution control
revenue bonds. However, in the case of the latter Fund, it is anticipated
that normally (unless there are unusually favorable interest and market
factors) less than 25% of such Fund's total assets will be invested in
pollution control bonds. This restriction does not apply to securities of
the United States
<PAGE>
Government or its agencies and instrumentalities or repurchase agreements
relating thereto.
A fundamental policy or restriction, including those stated above, cannot be
changed without an affirmative vote of the holders of a "majority" of the
outstanding shares of the applicable Fund, as defined in the 1940 Act.
INFORMATION CONCERNING COMPENSATION
PAID TO U.S. BANK NATIONAL ASSOCIATION,
FIRST TRUST NATIONAL ASSOCIATION AND
OTHER AFFILIATES
U.S. Bank National Association, First Trust National Association and other
affiliates of U.S. Bancorp may act as fiduciary with respect to plans subject
to the Employee Retirement Income Security Act of 1974 ("ERISA") and other
trust and agency accounts that invest in the Funds. These U.S. Bancorp
affiliates may receive compensation from the Funds for the services they
provide to the Funds, as described more fully in the following sections of
this Prospectus:
Investment advisory services -- see "Management-Investment Adviser"
Custodian services -- see "Management-Custodian"
Sub-administration -- see "Management-Administrator"
Shareholder servicing -- see "Distributor"
Securities lending -- see "Special Investment Methods-Lending of
Portfolio Securities"
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
Oaks, Pennsylvania 19456
Investment Adviser
U.S. 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 (1/98) R
<PAGE>
JANUARY 31, 1998
TAX FREE INCOME FUNDS
CLASS C SHARES
Intermediate Tax
Free Fund
California Intermediate
Tax Free Fund
Colorado Intermediate
Tax Free Fund
Minnesota Insured
Intermediate Tax Free Fund
Oregon Intermediate
Tax Free Fund
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(SM)
<PAGE>
TABLE OF CONTENTS
Summary 2
Fees and Expenses 4
Financial Highlights 6
The Funds 8
Investment Objectives and Policies 8
Management 13
Distributor 15
Purchases and Redemptions of Shares 15
Income Taxes 17
Tax-Exempt vs. Taxable Income 20
Fund Shares 21
Calculation of Performance Data 21
Performance Information for Successors to
Common Trust Funds 22
Special Investment Methods 23
Information Concerning Compensation Paid to U.S. 32
Bank National Association, First Trust National
Association and Other Affiliates
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
CLASS C SHARES 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"):
* INTERMEDIATE TAX FREE FUND
* CALIFORNIA INTERMEDIATETAX FREE FUND
* COLORADO INTERMEDIATE TAX FREE FUND
* MINNESOTA INSURED INTERMEDIATE TAX FREE FUND
* OREGON INTERMEDIATE TAX FREE FUND
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING U.S. 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 January 31, 1998 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 January 31, 1998.
<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"):
INTERMEDIATE TAX FREE FUND has an objective of providing current income that is
exempt from federal income tax to the extent consistent with preservation of
capital. Under normal market conditions, this Fund invests at least 80% of its
net assets in municipal obligations, the interest on which is exempt from
federal income tax. No more than 20% of the securities owned by this Fund will
generate income that is subject to the federal alternative minimum tax. Under
normal market conditions, the weighted average maturity of the securities held
by this Fund will range from 3 to 10 years.
CALIFORNIA INTERMEDIATE TAX FREE FUND has an objective of providing current
income which is exempt from both federal income tax and California state income
tax to the extent consistent with preservation of capital. Under normal market
conditions, this Fund invests at least 80% of its net assets in municipal
obligations, the interest on which is exempt from federal and California income
tax. No more than 20% of the securities owned by this Fund will generate income
that is subject to the federal alternative minimum tax. Under normal market
conditions, the weighted average maturity of the securities held by this Fund
will range from 3 to 10 years.
COLORADO INTERMEDIATE TAX FREE FUND has an objective of providing current income
which is exempt from both federal income tax and Colorado state income tax to
the extent consistent with preservation of capital. Under normal market
conditions, this Fund invests at least 80% of its net assets in municipal
obligations, the interest on which is exempt from federal and Colorado income
tax. No more than 20% of the securities owned by this Fund will generate income
that is subject to the federal alternative minimum tax. Under normal market
conditions, the weighted average maturity of the securities held by this Fund
will range from 3 to 10 years.
MINNESOTA INSURED INTERMEDIATE TAX FREE FUND has an objective of providing
current income which is exempt from both federal income tax and Minnesota state
income tax to the extent consistent with preservation of capital. Under normal
market conditions, this Fund invests at least 80% of its net assets in municipal
obligations, the interest on which is exempt from federal and Minnesota income
tax. No more than 20% of the securities owned by this Fund will generate income
that is subject to the federal or the Minnesota alternative minimum tax. At
least 65% of the tax-exempt obligations held by this Fund will consist of
insured bonds, escrow secured bonds and defeased bonds. Under normal market
conditions, the weighted average maturity of the securities held by this Fund
will range from 3 to 10 years.
OREGON INTERMEDIATE TAX FREE FUND has an objective of providing current income
which is exempt from both federal and Oregon state income tax to the extent
consistent with preservation of capital. Under normal market conditions, this
Fund invests at least 80% of its net assets in municipal obligations, the
interest on which is exempt from federal and Oregon income tax. No more than 20%
of the securities owned by this Fund will generate income that is subject to the
federal alternative minimum tax. Under normal market conditions, the weighted
average maturity of the securities held by this Fund will range from 3 to 10
years.
INVESTMENT ADVISER U.S. Bank National Association (the "Adviser" or "U.S. Bank")
serves as investment adviser to each of the Funds though its First American
Asset Management group. See "Management."
DISTRIBUTOR; ADMINISTRATOR SEI Investments Distribution Co. (the "Distributor")
serves as the distributor of the Funds' shares. SEI Investments Management
Corporation (the "Administrator")
<PAGE>
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 of funds at the shares' respective net
asset values with no additional charge. See "Purchases and Redemptions of Shares
- -- Exchange Privilege."
REDEMPTIONS Shares of each Fund may be redeemed at any time at their net asset
value next determined after receipt of a redemption request by the Funds'
transfer agent, with no additional charge. See "Purchases and Redemptions of
Shares."
RISKS TO CONSIDER Each of the Funds is subject to (i) interest rate risk (the
risk that increases in market interest rates will cause declines in the value of
debt securities held by a Fund); (ii) credit risk (the risk that the issuers of
debt securities held by a Fund default in making required payments); and (iii)
call or prepayment risk (the risk that a borrower may exercise the right to
prepay a debt obligation before its stated maturity, requiring a Fund to
reinvest the prepayment at a lower interest rate).
In addition, the value of municipal obligations held by the Funds may be
adversely affected by local political and economic conditions and developments
in the states and political subdivisions which issue the obligations. Investors
should note in this regard that California Intermediate Tax Free Fund, Colorado
Intermediate Tax Free Fund, Minnesota Insured Intermediate Tax Free Fund and
Oregon Intermediate Tax Free Fund invest principally in municipal obligations of
issuers located only in California, Colorado, Minnesota and Oregon,
respectively. The Funds also may, in order to attempt to reduce risk, invest in
exchange traded put and call options on interest rate futures contracts and on
interest rate indices. See "Investment Objectives and Policies -- Risks to
Consider" 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>
MINNESOTA
CALIFORNIA COLORADO INSURED OREGON
INTERMEDIATE INTERMEDIATE INTERMEDIATE INTERMEDIATE INTERMEDIATE
TAX FREE TAX FREE TAX FREE TAX FREE TAX FREE
FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed
on purchases None None None None None
Maximum sales load imposed on reinvested
dividends None None None None None
Deferred sales load None None 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
voluntary fee waivers)(1) 0.47% 0.29% 0.49% 0.50% 0.31%
Rule 12b-1 fees None None None None None
Other expenses 0.23% 0.41% 0.21% 0.20% 0.39%
Total fund operating expenses
(after voluntary fee waivers )(1) 0.70% 0.70% 0.70% 0.70% 0.70%
EXAMPLE(2)
You would pay the following expenses on a $1,000 investment, assuming (i) a 5%
annual return, and (ii) redemption at the end of each time period:
1 year $ 7 $ 7 $ 7 $ 7 $ 7
3 years $ 22 $ 22 $ 22 $ 22 $ 22
5 years $ 39 $ 39 $ 39 $ 39 $ 39
10 years $ 87 $ 87 $ 87 $ 87 $ 87
</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 for the
current fiscal year but reserves the right to discontinue such waivers at
any time in its sole discretion. Absent any fee waivers, investment
advisory fees for each Fund as an annualized percentage of average daily
net assets would be 0.70%; and total fund operating expenses calculated on
such basis would be 0.93% for Intermediate Tax Free Fund, 1.11% for
California Intermediate Tax Free Fund, 0.91% for Colorado Intermediate Tax
Free Fund, 0.90% for Minnesota Insured Intermediate Tax Free Fund and 1.09%
for Oregon Intermediate Tax Free Fund. "Other expenses" includes an
administration fee.
(2) Absent the fee waivers referred to in (1) above, the dollar amounts for the
1, 3, 5 and 10-year periods would be as follows: Intermediate Tax Free
Fund, $9, $30, $51 and $114; California Intermediate Tax Free Fund, $11,
$35, $61, and $135; Colorado Intermediate Tax Free Fund, $9, $29, $50 and
$112; Minnesota Insured Intermediate Tax Free Fund, $9, $29, $50 and $111;
and Oregon Intermediate Tax Free Fund, $11, $35, $60 and $133.
<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.
<PAGE>
FINANCIAL HIGHLIGHTS
The following audited financial highlights should be read in conjunction with
the Funds' financial statements, the related notes thereto and the independent
auditors' report of KPMG Peat Marwick LLP appearing in FAIF's annual report to
shareholders dated ended September 30, 1997. Further information about the
Funds' performance is contained in such annual report to shareholders, which may
be obtained without charge by calling (800) 637-2548 or by writing SEI
Investments Distribution Co., Oaks, Pennsylvania, 19456.
For the periods ended September 30,
For a share outstanding throughout this period
REALIZED AND
UNREALIZED DIVIDENDS
NET ASSET NET GAINS OR FROM NET
VALUE BEGINNING INVESTMENT (LOSSES) ON INVESTMENT
OF PERIOD INCOME INVESTMENTS INCOME
INTERMEDIATE TAX FREE FUND Class C
1997 $10.65 $0.47 $ 0.23 $(0.47)
1996 10.72 0.46 0.00 (0.46)
1995 10.28 0.49 0.43 (0.48)
1994(1) 10.89 0.29 (0.61) (0.29)
CALIFORNIA INTERMEDIATE TAX FREE FUND Class C
1997(2) $10.00 $0.06 $ 0.03 $(0.06)
COLORADO INTERMEDIATE TAX FREE FUND Class C
1997 $10.42 $0.48 $ 0.24 $(0.48)
1996 10.51 0.49 (0.04) (0.49)
1995 10.16 0.48 0.36 (0.49)
1994(3) 10.00 0.22 0.16 (0.22)
MINNESOTA INSURED INTERMEDIATE TAX FREE FUND Class C
1997 $ 9.91 $0.44 $ 0.18 $(0.44)
1996 9.92 0.45 0.02 (0.45)
1995 9.59 0.45 0.33 (0.45)
1994(4) 10.00 0.25 (0.41) (0.25)
OREGON INTERMEDIATE TAX FREE FUND Class C
1997(2) $10.00 $0.07 $ 0.05 $(0.07)
+ Returns are for the period indicated and have not been annualized.
(1) This class of shares has been offered since February 4, 1994 (the Fund
itself having commenced operations on December 22, 1987). All ratios for
the period have been annualized.
(2) Commenced operations on August 8, 1997. All ratios for the period have been
annualized.
<PAGE>
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
NET ASSET RATIO OF INVESTMENT AVERAGE
DISTRIBUTIONS VALUE NET ASSETS EXPENSES TO INCOME TO NET ASSETS PORTFOLIO
FROM END OF END OF AVERAGE AVERAGE (EXCLUDING TURNOVER
CAPITAL GAINS PERIOD TOTAL RETURN PERIOD (000) NET ASSETS NET ASSETS WAIVERS) RATE
<S> <C> <C> <C> <C> <C> <C> <C>
$(0.06) $10.82 6.75% $431,000 0.67% 4.40% 0.93% 66%
(0.07) 10.65 4.35 66,994 0.66 4.35 0.92 53
-- 10.72 9.15 46,025 0.67 4.73 1.05 68
-- 10.28 (2.91)+ 6,168 0.45 4.48 2.20 52
$ -- $10.03 0.92%+ $ 33,287 0.69% 4.14% 1.11% 3%
$(0.05) $10.61 7.11% $ 54,378 0.70% 4.55% 0.91% 11%
(0.05) 10.42 4.39 48,927 0.70 4.69 0.93 20
-- 10.51 8.47 50,071 0.70 4.84 1.02 19
-- 10.16 3.76+ 7,281 0.69 4.51 4.71 4
$(0.03) $10.06 6.42% $297,122 0.70% 4.47% 0.90% 20%
(0.03) 9.91 4.80 93,394 0.70 4.53 0.93 19
-- 9.92 8.34 61,693 0.70 4.76 1.00 38
-- 9.59 (1.58)+ 20,272 0.67 4.57 1.59 22
$ -- $10.05 1.17%+ $182,069 0.70% 4.55% 1.09% 4%
</TABLE>
(3) Commenced operations on April 4, 1994. All ratios for the period have been
annualized.
(4) Commenced operations on February 25, 1994. All ratios for the period have
been annualized.
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
The following unaudited financial highlights for California Intermediate
Tax Free Fund and Oregon Intermediate Tax Free Fund for the period commencing
August 8, 1997 and ending December 31, 1997 should be read in conjunction with
the Funds' unaudited financial statements and the related notes thereto
appearing in the Funds' Statement of Additional Information dated January 31,
1998.
Further information about the Fund's performance for the period commencing
August 8, 1997 and ending December 31, 1997 is contained in such Statement of
Additional Information, which may be obtained without charge by calling (800)
637-2548 or by writing SEI Investments Distribution Co., Oaks, Pennsylvania
19456.
For the period ended December 31, 1997.
<TABLE>
<CAPTION>
REALIZED AND DIVIDENDS
NET ASSET NET UNREALIZED FROM NET DISTRIBUTION
VALUE BEGINNING INVESTMENT GAINS ON INVESTMENT FROM
OF PERIOD INCOME INVESTMENTS INCOME CAPITAL GAIN
California Intermediate
Tax Free Fund (1)
<S> <C> <C> <C> <C> <C>
Class C $10.00 $ 0.17 $ 0.10 $(0.17) $ --
Oregon Intermediate
Tax Free Fund (1)
Class C $10.00 $ 0.18 $ 0.12 $(0.18) $(0.02)
</TABLE>
WIDE TABLE CONTINUED
<TABLE>
<CAPTION>
RATIO OF
NET RATIO OF NET EXPENSES TO
NET ASSET ASSETS RATIO OF INVESTMENT AVERAGE
VALUE END OF EXPENSES TO INCOME TO NET ASSETS
END OF TOTAL PERIOD AVERAGE AVERAGE (EXCLUDING PORTFOLIO
PERIOD RETURN (000) NET ASSETS NET ASSETS WAIVERS) TURNOVER
California Intermediate
Tax Free Fund (1)
<S> <C> <C> <C> <C> <C>
Class C $10.10 2.76%+ $ 34,039 0.70% 4.37% 1.01% 11%
Oregon Intermediate
Tax Free Fund (1)
Class C $10.10 2.97%+ $182,309 0.70% 4.56% 0.95% 8%
</TABLE>
+ Returns are for the period indicated and have not been annualized.
(1) Commenced operations on August 8, 1997. All ratios for the period have been
annualized.
<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 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. Intermediate Tax Free Fund is a diversified investment company, as
defined in the Investment Company Act of 1940 (the "1940 Act"). California
Intermediate Tax Free Fund, Colorado Intermediate Tax Free Fund, Minnesota
Insured Intermediate Tax Free Fund and Oregon Intermediate Tax Free Fund are
nondiversified investment companies under the 1940 Act.
If a percentage limitation on investments by a Fund stated below or in the
Statement of Additional Information is adhered to at the time of an investment,
a later increase or decrease in percentage resulting from changes in asset
values will not be deemed to violate the limitation except in the case of the
limitation on illiquid investments. A Fund which is limited to investing in
securities with specified ratings is not required to sell a security if its
rating is reduced or discontinued after purchase, but the Fund may consider
doing so. However, in no event will more than 5% of any Fund's net assets be
invested in non-investment grade securities. Descriptions of the rating
categories of Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. ("Standard & Poor's") and Moody's Investors Service, Inc.
("Moody's") are contained in the Statement of Additional Information.
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."
INTERMEDIATE TAX FREE FUND
OBJECTIVE. Intermediate Tax Free Fund has an objective of providing current
income which is exempt from federal income tax to the extent consistent with
preservation of capital.
INVESTMENT POLICIES. Under normal market conditions, Intermediate Tax Free Fund
invests at least 80% of its net assets in municipal bonds and other municipal
obligations, the interest on which is, in the opinion of bond counsel to the
issuer, exempt from federal income tax. No more than 20% of the securities owned
by the Fund will generate income that is an item of tax preference
<PAGE>
for the purpose of the federal alternative minimum tax. Municipal obligations
generating income subject to taxation under the federal alternative minimum tax
rules will not be counted as tax exempt obligations for purposes of the 80%
test. See "Income Taxes." The types of municipal bonds and other municipal
obligations in which the Fund may invest are described under "Special Investment
Methods -- Municipal Bonds and Other Municipal Obligations."
Under normal market conditions, the weighted average maturity of the securities
held by Intermediate Tax Free Fund will range from 3 to 10 years.
Intermediate Tax Free Fund may purchase obligations which are rated no lower
than BBB by Standard & Poor's or Baa by Moody's, or which have been assigned an
equivalent rating by another nationally recognized statistical rating
organization, or which are of comparable quality in the judgment of the Adviser.
The Fund also may purchase municipal notes which are rated no lower than SP-1 by
Standard & Poor's or MIG/VMIG-1 by Moody's or which have been assigned an
equivalent rating by another nationally recognized statistical rating
organization. Unrated securities will not exceed 10% in the aggregate of the
value of the total assets of the Fund.
While the assets of Intermediate Tax Free Fund ordinarily will be invested in
municipal obligations, on occasion the Fund may temporarily hold short-term
securities, other than municipal obligations, the income from which is taxable.
Temporary taxable investments would be held solely for the purpose of managing
exceptional in-flows and out-flows of cash or for temporary defensive purposes
to preserve existing portfolio values. Under normal circumstances, the Fund may
not invest more than 20% of its assets in investments other than municipal
obligations. However, when a temporary defensive position to protect capital is
deemed advisable and practicable, the Fund may have more than 20% of its assets
in temporary taxable investments or cash. The types of investments which are
permitted for these purposes are described under "Special Investment Methods --
Temporary Taxable Investments."
The Fund also may temporarily invest in shares of investment companies which
invest primarily in short-term municipal obligations with maturities not
exceeding 13 months including, but not limited to, tax free money market funds
advised by the Adviser. Investments of these types are also subject to the
advisory fee. Income from these investments is normally exempt from federal
income tax. Where the income from these investments is exempt from federal
income tax, the investments will be counted as tax exempt obligations for
purposes of the 80% test described above.
The Fund also may (i) in order to attempt to reduce risk, invest in exchange
traded put and call options on interest rate futures contracts and on interest
rate indices; (ii) purchase securities on a when-issued or delayed delivery
basis; and (iii) engage in the lending of portfolio securities. In addition, the
Fund may invest up to 5% of its net assets in inverse floating rate municipal
obligations. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
The requirement, described above, that Intermediate Tax Free Fund invest at
least 80% of its net assets in tax free obligations under normal market
conditions is a fundamental policy, which cannot be changed without shareholder
vote. Under normal market conditions, that Fund will invest at least 65% of its
total assets in municipal obligations which are municipal bonds. See "Special
Investment Methods -- Municipal Bonds and Other Municipal Obligations."
<PAGE>
CALIFORNIA INTERMEDIATE TAX FREE FUND, COLORADO INTERMEDIATE TAX FREE FUND,
MINNESOTA INSURED INTERMEDIATE TAX FREE FUND AND OREGON INTERMEDIATE TAX FREE
FUND
OBJECTIVES. California Intermediate Tax Free Fund has an objective of providing
current income which is exempt from both federal income tax and California state
income tax to the extent consistent with preservation of capital. Colorado
Intermediate Tax Free Fund has an objective of providing current income which is
exempt from both federal income tax and Colorado state income tax to the extent
consistent with preservation of capital. Minnesota Insured Intermediate Tax Free
Fund has an objective of providing current income which is exempt from both
federal income tax and Minnesota state income tax to the extent consistent with
preservation of capital. Oregon Intermediate Tax Free Fund has an objective of
providing current income which is exempt from both federal income tax and Oregon
state income tax to the extent consistent with preservation of capital.
INVESTMENT POLICIES. Under normal market conditions, each of these Funds invests
at least 80% of its net assets in municipal bonds and other municipal
obligations of the state referred to in its title, the interest on which is, in
the opinion of bond counsel to the issuer, exempt from federal income tax and
that state's income tax. No more than 20% of the securities owned by any of
these Funds will generate income that is an item of tax preference for the
purpose of the federal alternative minimum tax and, in the case of Minnesota
Insured Intermediate Tax Free Fund, for the purpose of the Minnesota alternative
minimum tax. Municipal obligations generating income subject to taxation under
the federal alternative minimum tax rules or, in the case of Minnesota Insured
Intermediate Tax Free Fund, under the Minnesota alternative minimum tax rules,
will not be counted as tax exempt obligations for purposes of the 80% test. See
"Income Taxes." The types of municipal bonds and other municipal obligations in
which these Funds may invest are described under "Special Investment Methods --
Municipal Bonds and Other Municipal Obligations."
Under normal market conditions, the weighted average maturity of the securities
held by each of these Funds will range from 3 to 10 years.
Each of these Funds may purchase obligations which are rated (without regard to
insurance) no lower than BBB by Standard & Poor's or Baa by Moody's, or which
have been assigned an equivalent rating by another nationally recognized
statistical rating organization, or which are of comparable quality in the
judgment of the Adviser. Each of these Funds also may purchase municipal notes
which are rated no lower than SP-1 by Standard & Poor's or MIG/VMIG-1 by Moody's
or which have been assigned an equivalent rating by another nationally
recognized statistical rating organization. Unrated securities will not exceed
10% in the aggregate of the value of the total assets of any of these Funds.
While the assets of each of these Funds ordinarily will be invested in municipal
obligations, on occasion any Fund may temporarily hold short-term securities,
other than municipal obligations, the income from which is taxable. Temporary
taxable investments would be held solely for the purpose of managing exceptional
in-flows and out-flows of cash or for temporary defensive purposes to preserve
existing portfolio values. Under normal circumstances, a Fund may not invest
more than 20% of its assets in investments other than municipal obligations.
However, when a temporary defensive position to protect capital is deemed
advisable and practicable, a Fund may have more than 20% (and up to 100%) of its
assets in temporary taxable investments or cash. The types of investments which
are permitted for these purposes are described under "Special Investment Methods
- -- Temporary Taxable Investments."
Each of these Funds also may temporarily invest in shares of investment
companies which invest
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primarily in short-term municipal obligations with maturities not exceeding 13
months. Investments of these types are also subject to the advisory fee. Such
investments may include tax free money market funds advised by the Adviser.
Income from these investments is normally exempt from federal income tax but may
not be exempt from the applicable state tax. Where the income from these
investments is exempt from both federal income tax and the applicable state tax,
the investments will be counted as tax exempt obligations for purposes of the
80% test described above.
Each of these Funds also may (i) in order to attempt to reduce risk, invest in
exchange traded put and call options on interest rate futures contracts and on
interest rate indices; (ii) purchase securities on a when-issued or delayed
delivery basis; (iii) engage in the lending of portfolio securities; and (iv)
invest up to 5% of its net assets in inverse floating rate municipal
obligations. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
As a nonfundamental policy, at least 65% of the tax-exempt obligations in the
investment portfolio of Minnesota Insured Intermediate Tax Free Fund will
consist of: (i) obligations that at all times are fully insured as to the
scheduled payment of all installments of interest and principal; and (ii)
obligations which have an AAA rating by Standard & Poor's or an Aaa rating by
Moody's or which have been assigned an equivalent rating by another nationally
recognized statistical rating organization, where the payment of interest and
principal is guaranteed by the United States Government or an agency or
instrumentality of the United States Government, or where the payment of
interest and principal is secured by an escrow account consisting of obligations
guaranteed by the United States Government or its agencies or instrumentalities
("escrow secured bonds" or "defeased bonds"), without having to purchase
additional insurance therefor. This policy may not be eliminated except upon 30
days advance notice to shareholders of Minnesota Insured Intermediate Tax Free
Fund. In addition, pending the investment or reinvestment of its assets in
longer-term tax-exempt obligations, this Fund may invest in short-term
tax-exempt obligations, without obtaining insurance, provided such instruments
carry an AAA or A-1 rating by Standard & Poor's or an Aaa or SP-1 rating by
Moody's or which have been assigned an equivalent rating by another nationally
recognized statistical rating organization. Bond insurance does not guarantee
the market value of the securities held in this Fund's portfolio. For further
information concerning the insurance applicable to this Fund's investments, see
"Special Investment Methods -- Insurance for Minnesota Insured Intermediate Tax
Free Fund."
The tax-exempt obligations held by California Intermediate Tax Free Fund,
Colorado Intermediate Tax Free Fund and Oregon Intermediate Tax Free Fund need
not be insured.
RISKS TO CONSIDER
An investment in any of the Funds involves certain risks. These include the
following:
INTEREST RATE RISK. Interest rate risk is the risk that the value of a
fixed-rate debt security will decline due to changes in market interest rates.
Because the Funds invest in fixed-rate debt securities, they are subject to
interest rate risk. In general, when interest rates rise, the value of a
fixed-rate debt security declines. Conversely, when interest rates decline, the
value of a fixed-rate debt security generally increases. Thus, shareholders in
the Funds bear the risk that increases in market interest rates will cause the
value of their Fund's portfolio investments to decline.
In general, the value of fixed-rate debt securities with longer maturities is
more sensitive to changes in market interest rates than the value of such
securities with shorter maturities. Thus, the net asset value of a Fund which
invests in securities with longer weighted average maturities should be expected
to have greater volatility in periods of changing market interest rates than
that of a Fund
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which invests in securities with shorter weighted average maturities.
Although the Adviser may engage in transactions intended to hedge the value of
the Funds' portfolios against changes in market interest rates, there is no
assurance that such hedging transactions will be undertaken or will fulfill
their purpose. See "Special Investment Methods -- Options Transactions."
CREDIT RISK. Credit risk is the risk that the issuer of a debt security will
fail to make payments on the security when due. Because the Funds invest in debt
securities, they are subject to credit risk.
As described under "Special Investment Methods -- Municipal Bonds and Other
Municipal Obligations," the revenue bonds and municipal lease obligations in
which the Funds invest may entail greater credit risk than the general
obligation bonds in which they invest. This is the case because revenue bonds
and municipal lease obligations generally are not backed by the faith, credit or
general taxing power of the issuing governmental entity. In addition, as
described under that section, municipal lease obligations also are subject to
nonappropriation risk, which is a type of nonpayment risk. Investors also should
note that even general obligation bonds of the states and their political
subdivisions are not free from the risk of default.
The ratings and certain other requirements which apply to the Funds' permitted
investments, as described elsewhere in this Prospectus, are intended to limit
the amount of credit risk undertaken by the Funds. Nevertheless, shareholders in
the Funds bear the risk that payment defaults could cause the value of their
Fund's portfolio investments to decline. Investors also should note that the
Funds can invest in municipal obligations rated as low as BBB by Standard &
Poor's or Baa by Moody's, or which have been assigned an equivalent rating by
another nationally recognized statistical rating organization, or which are of
comparable quality in the judgment of the Adviser. Although these rating
categories are investment grade, obligations with these ratings are viewed as
having speculative characteristics and carry a somewhat higher risk of default
than obligations rated in the higher investment grade categories.
Although the bond insurance carried by Minnesota Insured Intermediate Tax Free
Fund is intended to mitigate credit risk, its effectiveness depends on the
creditworthiness of the bond insurers. See "Special Investment Methods --
Insurance for Minnesota Insured Intermediate Tax Free Fund."
CALL RISK. Many municipal bonds may be redeemed at the option of the issuer
("called") at a specified price prior to their stated maturity date. In general,
it is advantageous for an issuer to call its bonds if they can be refinanced
through the issuance of new bonds which bear a lower interest rate than that of
the called bonds. Call risk is the risk that bonds will be called during a
period of declining market interest rates so that such refinancings may take
place.
If a bond held by a Fund is called during a period of declining interest rates,
the Fund probably will have to reinvest the proceeds received by it at a lower
interest rate than that borne by the called bond, thus resulting in a decrease
in the Fund's income. To the extent that the Funds invest in callable bonds,
Fund shareholders bear the risk that reductions in income will result from the
call of bonds.
POLITICAL AND ECONOMIC CONDITIONS. The value of municipal obligations owned by
the Funds may be adversely affected by local political and economic conditions
and developments. Adverse conditions in an industry significant to a local
economy could have a correspondingly adverse effect on the financial condition
of local issuers. Other factors that could affect tax-exempt obligations include
a change in the local, state or national economy, demographic factors,
ecological or environmental concerns, statutory limitations on the issuer's
ability to increase taxes and other developments generally affecting the
revenues of issuers (for example, legislation or court decisions reducing state
aid to local governments or mandating additional services). The value of certain
municipal obligations also may be adversely
<PAGE>
affected by the enactment of changes to certain federal or state income tax
laws, including, but not limited to, income tax rate reductions or the
imposition of a flat tax.
Intermediate Tax Free Fund cannot invest 25% or more of its total assets in
obligations of issuers located in the same state (for this purpose, the location
of an "issuer" shall be deemed to be the location of the entity the revenues of
which are the primary source of payment or the location of the project or
facility which may be the subject of the obligation). See "Special Investment
Methods -- Investment Restrictions." California Intermediate Tax Free Fund,
Colorado Intermediate Tax Free Fund, Minnesota Insured Intermediate Tax Free
Fund and Oregon Intermediate Tax Free Fund each will invest primarily in
municipal obligations issued by the state and its political subdivisions named
in its title. For this reason, the municipal obligations held by these four
Funds will be particularly affected by local conditions in those states. A more
detailed description of the factors affecting California, Colorado, Minnesota
and Oregon issuers of municipal obligations is set forth in the Statement of
Additional Information.
OTHER. Investors also should review "Special Investment Methods" for information
concerning risks associated with certain investment techniques which may be
utilized by the 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
U.S. Bank National Association, 601 Second Avenue South, Minneapolis, Minnesota
55402, acts as the Funds' investment adviser through its First American 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 September 30, 1997, the Adviser was managing accounts with an aggregate value
of approximately $55 billion, including mutual fund assets of approximately $20
billion. U.S. Bancorp, 601 Second Avenue South, Minneapolis, Minnesota 55480, is
the holding company for the Adviser.
Each of the Funds has agreed to pay the Adviser monthly fees calculated on an
annual basis equal to 0.70% of its average daily net assets. The Adviser may, at
its option, waive any or all of its fees, or reimburse expenses, with respect to
any Fund from time to time. Any such waiver or reimbursement is voluntary and
may be discontinued at any time. The Adviser also may absorb or reimburse
expenses of the Funds from time to time, in its discretion, while retaining the
ability to be reimbursed by the Funds for such amounts prior to the end of the
fiscal year. This practice would have the effect of lowering a Fund's overall
expense ratio and of increasing yield to investors, or the converse, at the time
such amounts are absorbed or reimbursed, as the case may be.
The Glass-Steagall Act generally prohibits banks from engaging in the business
of underwriting, selling or distributing securities and from being affiliated
with companies principally engaged in those activities. In addition,
administrative and judicial interpretations of the Glass-Steagall Act prohibit
bank holding companies and their bank and nonbank subsidiaries from organizing,
sponsoring or controlling registered open-end investment companies that are
continuously engaged in distributing their shares. Bank holding companies and
their bank and nonbank subsidiaries may serve, however, as investment advisers
to registered investment companies, subject to a number of terms and conditions.
Although the scope of the prohibitions and limitations imposed by the
Glass-Steagall Act has
<PAGE>
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
RICHARD W. STANLEY is portfolio co-manager for each of the Funds. He joined
the Adviser in early 1986 and has 39 years of investment industry experience.
Prior to joining the Adviser, Mr. Stanley was with Heritage Investment
Advisers and Smith Barney, Inc. Mr. Stanley received his bachelor's degree
from Dartmouth College and his master's degree in business administration
from Cornell University. He is a Chartered Financial Analyst.
CHRISTOPHER L. DRAHN is portfolio co-manager for Intermediate Tax Free Fund,
California Intermediate Tax Free Fund and Minnesota Insured Intermediate Tax
Free Fund. He joined the Adviser in 1985 and has 12 years of investment
industry experience. Mr. Drahn received his bachelor's degree from Wartburg
College and his master's degree in business administration from the
University of Minnesota. He is a Chartered Financial Analyst.
TERRY L. MALTARICH is portfolio co-manager for Colorado Intermediate Tax Free
Fund. Mr. Maltarich joined the Adviser in 1994 and has over 23 years of
investment industry experience. Prior to joining the Adviser, Mr. Maltarich
was with Great West Life Insurance. Mr. Maltarich received his bachelor's
degree from Miami University.
MICHAEL S. HAMILTON is portfolio co-manager for Oregon Intermediate Tax Free
Fund. He joined the Adviser in 1989 and has six years of investment industry
experience. Mr. Hamilton received his bachelor's degree from Albertson
College and his master's degree in business administration from Western
Washington University.
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 U.S. Bancorp.
As compensation for its services to the Funds, the Custodian is paid monthly
fees calculated on an annual basis equal to 0.03% of the applicable Fund's
average daily net assets. In addition, the Custodian is reimbursed for its
out-of-pocket expenses incurred while providing its services to the Funds.
ADMINISTRATOR
The Administrator for the Funds is SEI 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, 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. U.S. Bank assists the Administrator and
<PAGE>
provides sub-administration services for the Funds. For these services, the
Administrator compensates the sub-administrator at an annual rate of up to 0.05%
of each Fund's average daily net assets.
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, which is not affiliated with the Adviser, is a wholly-owned
subsidiary of SEI Investments Company and is located at Oaks, Pennsylvania,
19456.
The Distributor, the Administrator and the Adviser may in their discretion use
their own assets to pay for certain 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, the Distributor and the Adviser and
its affiliates may provide compensation from their own resources for shareholder
services provided by third parties, including "one-stop" mutual fund networks
through which the Funds are made available.
PURCHASES AND REDEMPTIONS OF SHARES
SHARE PURCHASES AND REDEMPTIONS
Shares of the Funds are sold and redeemed on days on which both the New York
Stock Exchange and federally-chartered banks are open for business ("Business
Days").
Payment for shares can be made only by wire transfer. All information needed
will be taken over the telephone and the order will be considered placed when
the Custodian receives payment by wire. Federal funds should be wired as
follows: U.S. Bank National Association, Minneapolis, Minnesota, ABA Number
091000022; For Credit to: DST Systems, Inc.: 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 or
federally-chartered banks are closed. 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 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 requests may be made any time before 3:00 p.m. Central time in
order to receive that day's redemption price. For redemption requests 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 after the
request.
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 Business Day, 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
<PAGE>
share for purchases or redemptions is such value next computed after the
Transfer Agent receives the purchase order or redemption request. In the case of
redemptions and repurchases of shares owned by corporations, trusts or estates,
the Transfer Agent may require additional documents to evidence appropriate
authority in order to effect the redemption, and the applicable price will be
that next determined following the receipt of the required documentation.
DETERMINING NET ASSET VALUE. The net asset value per share for each of the Funds
is determined by dividing the value of the securities owned by the Fund plus any
cash and other assets (including interest accrued and dividends declared but not
collected), less all liabilities, by the number of Fund shares outstanding. For
the purpose of determining the aggregate net assets of the Funds, cash and
receivables will be valued at their face amounts. Interest will be recorded as
accrued and dividends will be recorded on the ex-dividend date. Security
valuations are furnished by an independent pricing service that has been
approved by the Board of Directors. Debt obligations with remaining maturities
in excess of sixty days are valued at the most recently quoted bid price. For
such debt obligations the pricing service may employ methods that utilize actual
market transactions, broker-dealer valuations, or other electronic data
processing techniques. These techniques generally consider such factors as
security prices, yields, maturities, call features, ratings and developments
relating to specific securities in arriving at security valuations. Debt
obligations with remaining maturities of sixty days or less may be valued at
their amortized cost which approximates market value. If a security price cannot
be obtained from an independent pricing service a bid price may be obtained from
an independent broker who makes a market in the security. Foreign securities
owned by the Funds are valued at the closing prices on the principal exchange on
which they trade. If the value for a security cannot be obtained from the
sources described above, the security's value may be determined pursuant to the
fair value procedures established 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 options held or written by a Fund, are valued at the closing bid price
for a long position or the closing ask price for a short position.
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 distribution and/or
shareholder servicing expenses charged to Class A Shares.
EXCHANGING SECURITIES FOR FUND SHARES
A Fund may accept securities in exchange for Fund shares. A Fund will allow such
exchanges only upon the prior approval by the Fund and a determination by the
Fund and the Adviser that the securities to be exchanged are acceptable.
Securities accepted by a Fund will be valued in the same manner that a Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Fund shares on the day the securities are valued.
CERTIFICATES AND CONFIRMATIONS
The Transfer Agent maintains a share account for each shareholder. Share
certificates will not be issued by the Funds.
Confirmations of each purchase and redemption are sent to each shareholder. In
addition, monthly confirmations are sent to report all transactions and
dividends paid during that month for the Funds.
DIVIDENDS AND DISTRIBUTIONS
Dividends with respect to each Fund are declared and paid monthly 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
<PAGE>
automatically reinvested in additional shares of the Fund paying the dividend on
payment dates at the ex-dividend date net asset value without a sales charge,
unless shareholders request cash payments on the new account form or by writing
to the Fund.
All shareholders on the record date are entitled to the dividend. If shares are
purchased before a record date for a dividend or a distribution of capital
gains, a shareholder will pay the full price for the shares and will receive
some portion of the purchase price back as a taxable dividend or distribution
(to the extent, if any, that the dividend or distribution is otherwise taxable
to holders of Fund shares). If shares are redeemed or exchanged before the
record date for a dividend or distribution or are purchased after the record
date, those shares are not entitled to the dividend or distribution.
The amount of dividends payable on Class C Shares generally will be more than
the dividends payable on Class A Shares because of distribution and/or
shareholder servicing expenses charged to Class A 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
of funds at net asset value. Exchanges of shares among the First American family
of funds must meet any applicable minimum investment of the fund for which
shares are being exchanged.
The ability to exchange shares of the Funds does not constitute an offering or
recommendation of shares of one fund by another fund. This privilege is
available to shareholders resident in any state in which the fund shares being
acquired may be sold. An investor who is considering acquiring shares in another
First American Fund pursuant to the exchange privilege should obtain and
carefully read a prospectus of the fund to be acquired. Exchanges may be
accomplished by a written request, or by telephone if a preauthorized exchange
authorization is on file with the Transfer Agent, shareholder servicing agent,
or financial institution. Neither the Transfer Agent nor any Fund will be
responsible for the authenticity of exchange instructions received by telephone
if it reasonably believes those instructions to be genuine. The Funds and the
Transfer Agent will each employ reasonable procedures to confirm that telephone
instructions are genuine, and they may be liable for losses resulting from
unauthorized or fraudulent telephone instructions if they do not employ these
procedures. These procedures may include taping of telephone conversations.
Shares of a class in which an investor is no longer eligible to participate may
be exchanged for shares of a class in which that investor is eligible to
participate. An example of this kind of exchange would be a situation in which
Class C Shares of a Fund held by a financial institution in a trust or agency
capacity for one or more individual beneficiaries are exchanged for Class A
Shares of that Fund and distributed to the individual beneficiaries.
INCOME TAXES
FEDERAL INCOME TAXATION
Each Fund is treated as a different entity for federal income tax purposes. Each
of the Funds qualified during its last fiscal year as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code"), and
all of the Funds intend to so qualify in the future. If so qualified and
provided certain distribution requirements are met, a Fund will not be liable
for federal income taxes to the extent it distributes its income to its
shareholders.
Distributions of net interest income from tax-exempt obligations that are
designated by each Fund as exempt-interest dividends are excludable from the
gross income of the Fund's shareholders. A portion of such dividends may,
however, be subject to the alternative minimum tax, as discussed below.
<PAGE>
Distributions paid from other interest income and from any net realized
short-term capital gains will be taxable to shareholders as ordinary income,
whether received in cash or in additional shares. Since none of the Funds'
income will consist of dividends from domestic corporations, the
dividends-received deduction for corporations will not be applicable to taxable
distributions by the Funds. Distributions paid from long-term capital gains (and
designated as such) generally 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. In the case of
shareholders who are individuals, estates, or trusts, each Fund will designate
the portion of each capital gain dividend that must be treated as mid-term
capital gains and the portion that must be treated as long-term capital gain.
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. For
corporate shareholders, such gain or loss will be long-term gain or loss if the
shares were held more than one year. For shareholders who are individuals,
estates, or trusts the gain or loss will be considered long-term if the
shareholder has held the shares for more than 18 months and mid-term if the
shareholder has held the shares for more than one year but not more than 18
months.
For federal income tax purposes, an alternative minimum tax ("AMT") is imposed
on taxpayers to the extent that such tax, if any, exceeds a taxpayer's regular
income tax liability (with certain adjustments). Liability for AMT will depend
on each shareholder's tax situation.
Exempt-interest dividends attributable to interest income on certain tax-exempt
obligations issued after August 7, 1986, to finance certain private activities
will be treated as an item of tax preference that is included in alternative
minimum taxable income for purposes of computing the federal AMT for all
taxpayers. Each Fund may invest up to 20% of its total assets in obligations the
interest on which is treated as an item of tax preference for federal income tax
purposes. Also, a portion of all other tax-exempt interest received by a
corporation, including exempt-interest dividends, will be included in adjusted
current earnings and in earnings and profits for purposes of determining the
federal corporate alternative minimum tax and the branch profits tax imposed on
foreign corporations under Section 884 of the Code.
The Tax Reform Act of 1986 imposed new requirements on certain tax-exempt bonds
which, if not satisfied, could result in loss of tax exemption for interest on
such bonds, even retroactively to the date of issuance of the bonds. Proposals
may be introduced before Congress in the future, the purpose of which will be to
further restrict or eliminate the federal income tax exemption for tax-exempt
bonds held by the Funds. The Funds will avoid investment in bonds which, in the
opinion of the Adviser, pose a material risk of the loss of tax exemption.
Further, if a bond in a Fund's portfolio lost its exempt status, the Fund would
make every effort to dispose of that investment on terms that are not
detrimental to the Fund.
In certain instances, the portion of Social Security benefits received by a
shareholder that is subject to federal income tax may be affected by the amount
of exempt-interest dividends received by the shareholder from the Funds.
Interest on indebtedness incurred by a shareholder to purchase or carry shares
of the Funds will not be deductible for federal income purposes.
Information concerning distributions will be mailed to shareholders annually.
Shareholders who are subject to federal income tax are required for information
purposes to report exempt-interest dividends and other tax-exempt interest on
their tax returns.
CALIFORNIA INCOME TAXATION
The portion of exempt-interest dividends paid by California Intermediate Tax
Free Fund that is
<PAGE>
derived from interest on tax-exempt obligations issued by the state of
California, its political subdivisions and instrumentalities, is excluded from
the California taxable income of individuals, estates, and trusts, provided that
at least 50% of the value of the Fund's total assets consists of obligations of
the interest on which is exempt from California personal income taxation
pursuant to federal or California law. The remaining portion of such dividends,
and dividends that are not exempt-interest dividends or capital gains dividends,
are included in the California taxable income of individuals, estates and
trusts, except for dividends directly attributable to interest on obligations of
the United States Government, its territories and possessions. Exempt-interest
dividends are not excluded from the California taxable income of corporations
and financial institutions. Dividends qualifying for federal income tax purposes
as capital gains dividends are to be treated by shareholders as long-term
capital gains. California has repealed the favorable treatment of long-term
capital gains, while retaining restrictions on the deductibility of capital
losses. Dividends generally will not qualify for the dividends-received
deduction for corporations and financial institutions.
COLORADO INCOME TAXATION
To the extent that dividends paid by Colorado Intermediate Tax Free Fund are
derived from interest on tax-exempt obligations issued by the state of Colorado,
its political subdivisions and instrumentalities, such dividends will also be
exempt from Colorado income taxes for individuals, trusts, estates, and
corporations. The remaining portion of such dividends are included in the
Colorado taxable income of individuals, trusts, estates, and corporations,
except for dividends directly attributable to interest on obligations of the
United States Government. Dividends qualifying for federal income tax purposes
as capital gain dividends are to be treated by shareholders as long-term capital
gains under Colorado law. However, Colorado has repealed the favorable treatment
of long-term capital gains, while retaining restrictions on the deductibility of
capital losses.
Dividends paid by Colorado Intermediate Tax Free Fund that are derived from
interest on tax-exempt obligations issued by the state of Colorado, its
political subdivisions and instrumentalities (including tax-exempt obligations
treated for federal purposes as private activity bonds) will not be treated as
items of tax preference for purposes of the alternative minimum tax that
Colorado imposes on individuals, trusts and estates.
As under federal law, the portion of Social Security benefits subject to
Colorado income tax may be affected by the amount of exempt-interest dividends
received by the shareholders.
MINNESOTA INCOME TAXATION
The portion of exempt-interest dividends paid by Minnesota Insured Intermediate
Tax Free Fund that is derived from interest on tax-exempt obligations issued by
the state of Minnesota, its political subdivisions and instrumentalities, is
excluded from the Minnesota taxable net income of individuals, estates and
trusts, provided that the portion of the exempt-interest dividends from such
Minnesota sources paid to all shareholders represents 95 percent or more of the
exempt-interest dividends paid by the respective Fund. The remaining portion of
such dividends, and dividends that are not exempt-interest dividends or capital
gain dividends, are included in the Minnesota taxable net income of individuals,
estates and trusts, except for dividends directly attributable to interest on
obligations of the United States Government, its territories and possessions.
Exempt-interest dividends are not excluded from the Minnesota taxable income of
corporations and financial institutions. Dividends qualifying for federal income
tax purposes as capital gain dividends are to be treated by shareholders as
long-term capital gains. Minnesota has repealed the favorable treatment of
long-term capital gains, while retaining restrictions on the deductibility of
capital losses. As under federal law, the portion of
<PAGE>
Social Security benefits subject to Minnesota income tax may be affected by the
amount of exempt-interest dividends received by the shareholders.
Exempt-interest dividends attributable to interest on certain private activity
bonds issued after August 7, 1986 will be included in Minnesota alternative
minimum taxable income of individuals, estates and trusts for purposes of
computing Minnesota's alternative minimum tax. Dividends generally will not
qualify for the dividends-received deduction for corporations and financial
institutions.
OREGON INCOME TAXATION
The portion of exempt-interest dividends paid by Oregon Intermediate Tax Free
Fund that is derived from interest on tax-exempt obligations issued by the state
of Oregon, its political subdivisions and instrumentalities, is excluded from
the taxable income of individuals, trusts and estates. All remaining dividends
(except for dividends, if any, derived from interest paid on obligations of the
United States, its territories and possessions), including dividends derived
from capital gains, will be includable in the taxable income of individuals,
trusts and estates. Furthermore, all dividends, including exempt-interest
dividends, will be includable in the taxable income of corporations subject to
the Oregon corporation excise tax. Dividends qualifying for federal income tax
purposes as capital gains dividends are to be treated by shareholders as
long-term capital gains. Oregon taxes long-term capital gains at the same rates
as ordinary income, while restricting the deductibility of capital losses.
OTHER STATE AND LOCAL TAXATION
Except to the extent described above under "-- California Income Taxation," "--
Colorado Income Taxation," "-- Minnesota Income Taxation" and "-- Oregon Income
Taxation," distributions by all the Funds may be subject to state and local
taxation even if they are exempt from federal income taxes. Shareholders are
urged to consult their own tax advisers regarding state and local taxation.
TAX-EXEMPT VS. TAXABLE INCOME
The tables below show the approximate yields that taxable securities must earn
to equal yields that are (i) exempt from federal income taxes; (ii) exempt from
both federal and California income taxes; (iii) exempt from both federal and
Colorado income taxes; (iv) exempt from both federal and Minnesota income taxes;
and (v) exempt from both federal and Oregon income taxes, under selected income
tax brackets scheduled to be in effect in 1998. The effective combined rates
reflect the deduction of state income taxes from federal income. The 34.7%,
37.4%, 42.0% and 45.2% combined federal/California rates assume that the
investor is subject to a 9.3% marginal California income tax rate and a marginal
federal income tax rate of 28%, 31%, 36% and 39.6%, respectively. The 31.6%,
34.5%, 39.2% and 42.6% combined federal/Colorado rates assume that the investor
is subject to a 5% Colorado income tax rate and a marginal federal income tax
rate of 28%, 31%, 36% and 39.6%, respectively. The 34.1%, 36.9%, 41.4% and 44.7%
combined federal/Minnesota rates assume that the investor is subject to an 8.5%
marginal Minnesota income tax rate and a marginal federal income tax rate of
28%, 31%, 36% and 39.6%, respectively. The 34.5%, 37.2%, 41.8% and 45.0%
combined federal/Oregon rates assume that the investor is subject to a 9%
marginal Oregon income tax rate and a marginal federal income tax rate of 28%,
31%, 36% and 39.6%, respectively. The combined rates do not reflect federal
rules concerning the phase-out of personal exemptions and limitations on the
allowance of itemized deductions for certain high-income taxpayers. The tables
are based upon yields that are derived solely from tax-exempt income. To the
extent that a Fund's yield is derived from taxable income, the Fund's tax
equivalent yield will be less than set forth in the tables. The tax-free yields
used in
<PAGE>
Tax-Equivalent Yields
<TABLE>
<CAPTION>
Combined Federal and Combined Federal and
Federal Tax Brackets California Tax Brackets Colorado Tax Brackets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-Free
Yields 28% 31% 36% 39.6% 34.7% 37.4% 42.0% 45.2% 31.6% 34.5% 39.2% 42.6%
3.0% 4.17% 4.35% 4.69% 4.97% 4.59% 4.79% 5.17% 5.47% 4.39% 4.58% 4.93% 5.23%
3.5% 4.86% 5.07% 5.47% 5.79% 5.37% 5.59% 6.03% 6.39% 5.12% 5.34% 5.76% 6.10%
4.0% 5.56% 5.80% 6.25% 6.62% 6.13% 6.39% 6.90% 7.30% 5.85% 6.11% 6.58% 6.97%
4.5% 6.25% 6.52% 7.03% 7.45% 6.89% 7.19% 7.76% 8.21% 6.58% 6.87% 7.40% 7.84%
5.0% 6.94% 7.25% 7.81% 8.28% 7.66% 7.99% 8.62% 9.12% 7.31% 7.63% 8.22% 8.71%
5.5% 7.64% 7.97% 8.59% 9.11% 8.42% 8.79% 9.48% 10.04% 8.04% 8.40% 9.05% 9.58%
6.0% 8.33% 8.70% 9.38% 9.93% 9.19% 9.58% 10.34% 10.95% 8.77% 9.16% 9.87% 10.45%
6.5% 9.03% 9.42% 10.16% 10.76% 9.95% 10.38% 11.21% 11.86% 9.50% 9.92% 10.69% 11.32%
</TABLE>
Tax-Equivalent Yields
(Continued)
<TABLE>
<CAPTION>
Combined Federal and Combined Federal and
Minnesota Tax Brackets Oregon Tax Brackets
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-Free
Yields 34.1% 36.9% 41.4% 44.7% 34.5% 37.2% 41.8% 45.0%
3.0% 4.55% 4.75% 5.12% 5.42% 4.58% 4.78% 5.15% 5.45%
3.5% 5.31% 5.55% 5.97% 6.33% 5.34% 5.57% 6.01% 6.36%
4.0% 6.07% 6.34% 6.83% 7.23% 6.11% 6.37% 6.87% 7.27%
4.5% 6.83% 7.13% 7.68% 8.14% 6.87% 7.17% 7.73% 8.18%
5.0% 7.59% 7.92% 8.53% 9.04% 7.63% 7.96% 8.59% 9.09%
5.5% 8.35% 8.72% 9.39% 9.95% 8.40% 8.76% 9.45% 10.00%
6.0% 9.10% 9.51% 10.24% 10.85% 9.16% 9.55% 10.31% 10.91%
6.5% 9.86% 10.30% 11.09% 11.75% 9.92% 10.35% 11.17% 11.82%
</TABLE>
these tables should not be considered as representations of any particular rates
of return and are for purposes of illustration only.
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 of shares, 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 of shares.
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 "tax equivalent yield," its
"cumulative total return," its "average annual total return," its "distribution
rate" and its "tax equivalent distribution rate." Distribution rates and tax
equivalent distribution rates may only be used in connection with sales
literature and shareholder communications preceded or accompanied by a
Prospectus. Each of these performance figures is based upon historical results
and is not intended to indicate future performance, and, except for
"distribution rate" and "tax equivalent distribution rate," is standardized in
accordance with Securities and Exchange Commission ("SEC") regulations.
<PAGE>
"Yield" for the Funds is computed by dividing the net investment income per
share (as defined in applicable SEC regulations) earned during a 30-day period
(which period will be stated in the advertisement) by the maximum offering price
per share on the last day of the period. Yield is an annualized figure, in that
it assumes that the same level of net investment income is generated over a one
year period. The yield formula annualizes net investment income by providing for
semi-annual compounding.
"Tax equivalent yield" is that yield which a taxable investment must generate in
order to equal a Fund's yield for an investor in a stated federal or combined
federal/state income tax bracket (normally assumed to be the maximum tax rate or
combined rate). Tax equivalent yield is computed by dividing that portion of the
yield which is tax-exempt by one minus the stated income tax rate, and adding
the resulting amount to that portion, if any, of the yield which is not
tax-exempt.
"Total return" is based on the overall dollar or percentage change in value of a
hypothetical investment in a Fund assuming reinvestment of dividend
distributions and deduction of all charges and expenses. "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.
"Distribution rate" is determined by dividing the income dividends per share for
a stated period by the maximum offering price per share on the last day of the
period. "Tax equivalent distribution rate" is computed by dividing the portion
of the distribution rate (determined as described above) which is tax-exempt by
one minus the stated federal or combined federal/state income tax rate, and
adding to the resulting amount that portion, if any, of the distribution rate
which is not tax-exempt. All distribution rates published for the Funds are
measures of the level of income dividends distributed during a specified period.
Thus, these rates differ from yield (which measures income actually earned by a
Fund) and total return (which measures actual income, plus realized and
unrealized gains or losses of a Fund's investments). Consequently, distribution
rates alone should not be considered complete measures of performance.
The performance of the Class C Shares of a Fund will normally be higher than for
the Class A Shares because Class C Shares are not subject to the sales charges
and shareholder servicing expenses applicable to Class A Shares.
In reports or other communications to shareholders and in advertising material,
the performance of each Fund may be compared to recognized unmanaged indices or
averages of the performance of similar securities and to composites of such
indices and averages. Also, the performance of each Fund may be compared to that
of other funds of similar size and objectives as listed in the rankings prepared
by Lipper Analytical Services, Inc. or similar independent mutual fund rating
services, and each Fund may include in such reports, communications and
advertising material evaluations published by nationally recognized independent
ranking services and publications. For further information regarding the Funds'
performance, see "Fund Performance" in the Statement of Additional Information.
PERFORMANCE INFORMATION FOR SUCCESSORS TO COMMON TRUST FUNDS
From time to time California Intermediate Tax Free Fund and Oregon Intermediate
Tax Free Fund may advertise performance information which includes performance
data of certain predecessor common trust funds. Each of California Intermediate
Tax Free Fund and Oregon Intermediate Tax Free Fund commenced operations when
substantially all of the assets of certain common trust funds which were exempt
from registration under the 1940
<PAGE>
Act were transferred to these Funds. One predecessor common trust fund was
managed by the Adviser, while the other was managed by Qualivest Capital
Management, Inc. prior to the acquisition of its parent company by the Adviser's
parent company. The personnel who managed that common trust fund on behalf of
Qualivest Capital Management became employees of the Adviser, and assumed
management of the applicable Fund, at the time the assets were transferred from
the common trust fund to the applicable Fund.
Such performance data is deemed relevant because the common trust
funds were managed using investment objectives, policies, and restrictions very
similar to those of their corresponding Funds. However, the predecessor common
trust funds were not subject to certain investment restrictions that are imposed
by the 1940 Act. Accordingly, if the common trust funds had been registered
under the 1940 Act, their performance could have been adversely affected by
virtue of such investment restrictions. In addition, the
predecessor common trust funds did not incur the same expenses as the Funds.
SPECIAL INVESTMENT METHODS
This section provides additional information concerning the securities in which
the Funds may invest and related topics. Further information concerning these
matters is contained in the Statement of Additional Information.
MUNICIPAL BONDS AND OTHER MUNICIPAL OBLIGATIONS
As described under "Investment Objectives and Policies," each of the Funds
invests principally in municipal bonds and other municipal obligations. These
bonds and other obligations are issued by the states and by their local and
special-purpose political subdivisions. The term "municipal bond" as used in
this Prospectus includes short-term municipal notes issued by the states and
their political subdivisions.
MUNICIPAL BONDS. The two general classifications of municipal bonds are "general
obligation" bonds and "revenue" bonds. General obligation bonds are secured by
the governmental issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. They are usually paid from general revenues
of the issuing governmental entity. Revenue bonds, on the other hand, are
usually payable only out of a specific revenue source rather than from general
revenues. Revenue bonds ordinarily are not backed by the faith, credit or
general taxing power of the issuing governmental entity. The principal and
interest on revenue bonds for private facilities are typically paid out of rents
or other specified payments made to the issuing governmental entity by a private
company which uses or operates the facilities. Examples of these types of
obligations are industrial revenue bonds and pollution control
<PAGE>
revenue bonds. Industrial revenue bonds are issued by governmental entities to
provide financing aid to community facilities such as hospitals, hotels,
business or residential complexes, convention halls and sport complexes.
Pollution control revenue bonds are issued to finance air, water and solids
pollution control systems for privately operated industrial or commercial
facilities.
Revenue bonds for private facilities usually do not represent a pledge of the
credit, general revenues or taxing powers of the issuing governmental entity.
Instead, the private company operating the facility is the sole source of
payment of the obligation. Sometimes, the funds for payment of revenue bonds
come solely from revenue generated by operation of the facility. Revenue bonds
which are not backed by the credit of the issuing governmental entity frequently
provide a higher rate of return than other municipal obligations, but they
entail greater risk than obligations which are guaranteed by a governmental unit
with taxing power. Federal income tax laws place substantial limitations on
industrial revenue bonds, and particularly certain specified private activity
bonds issued after August 7, 1986. In the future, legislation could be
introduced in Congress which could further restrict or eliminate the income tax
exemption for interest on debt obligations in which the Funds may invest.
MUNICIPAL LEASES. Each Fund also may purchase participation interests in
municipal leases. Participation interests in municipal leases are undivided
interests in a lease, installment purchase contract or conditional sale contract
entered into by a state or local governmental unit to acquire equipment or
facilities. Municipal leases frequently have special risks which generally are
not associated with general obligation bonds or revenue bonds.
Municipal leases and installment purchase or conditional sale contracts (which
usually provide for title to the leased asset to pass to the governmental issuer
upon payment of all amounts due under the contract) have evolved as a means for
governmental issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of municipal debt.
The debt-issuance limitations are deemed to be inapplicable because of the
inclusion in many leases and contracts of "nonappropriation" clauses that
provide that the governmental issuer has no obligation to make future payments
under the lease or contract unless money is appropriated for this purpose by the
appropriate legislative body on a yearly or other periodic basis. Although these
kinds of obligations are secured by the leased equipment or facilities, the
disposition of the pledged property in the event of non-appropriation or
foreclosure might, in some cases, prove difficult and time-consuming. In
addition, disposition upon non-appropriation or foreclosure might not result in
recovery by a Fund of the full principal amount represented by an obligation.
In light of these concerns, each Fund has adopted and follows procedures for
determining whether municipal lease obligations purchased by the Fund are liquid
and for monitoring the liquidity of municipal lease securities held in the
Fund's portfolio. These procedures require that a number of factors be used in
evaluating the liquidity of a municipal lease security, including the frequency
of trades and quotes for the security, the number of dealers willing to purchase
or sell the security and the number of other potential purchasers, the
willingness of dealers to undertake to make a market in the security, the nature
of the marketplace in which the security trades, and other factors which the
Adviser may deem relevant. As described below under "-- Investment
Restrictions," each Fund is subject to limitations on the percentage of illiquid
securities it can hold.
INSURANCE FOR MINNESOTA INSURED INTERMEDIATE TAX FREE FUND
At least 65% of the tax-exempt obligations in the investment portfolio of
Minnesota Insured Intermediate Tax Free Fund will consist of insured securities,
escrow secured bonds or defeased bonds. The "insured securities" in this Fund's
investment portfolio are insured as to the scheduled payment
<PAGE>
of all installments of principal and interest as they fall due. The purpose of
this insurance is to minimize credit risk to this Fund and its shareholders
associated with defaults in tax-exempt obligations owned by the Fund. However,
insurance does not guarantee the market value of the securities in this Fund's
investment portfolio, which will continue to fluctuate in response to changes in
market interest rates. See "Investment Objectives and Policies -- Risks to
Consider -- Interest Rate Risk." Therefore, the amount received upon redemption
of shares of this Fund may be more or less than the original cost of the shares
less any applicable sales charge paid in connection with the acquisition of such
shares.
Generally, except as noted above, each insured municipal obligation held by
Minnesota Insured Intermediate Tax Free Fund will be covered by Original Issue
Insurance, Secondary Market Insurance or Portfolio Insurance. "Original Issue
Insurance" is purchased by the issuer of a municipal obligation or by a third
party at the time of original issuance of the obligation, while "Secondary
Market Insurance" may be purchased by a third party (including Minnesota Insured
Intermediate Tax Free Fund) subsequent to the original issuance of a municipal
obligation. "Portfolio Insurance" is insurance purchased by Minnesota Insured
Intermediate Tax Free Fund to cover municipal obligations while they are held in
the Fund's portfolio. Premiums for Portfolio Insurance will be paid from the
Fund's assets and will reduce the current yield on its investment portfolio by
the amount of the premiums. The Fund's investment manager estimates that annual
premiums for Portfolio Insurance would be less than .01% of the Fund's average
daily net assets.
Because Portfolio Insurance coverage would terminate upon the sale of an insured
security by Minnesota Insured Intermediate Tax Free Fund, this kind of insurance
would not have an effect on the resale value of the security. Therefore, the
Fund generally will retain any such securities covered only by Portfolio
Insurance which are in default or in significant risk of default and will place
a value on the insurance equal to the difference between the market value of the
defaulted security and the market value of similar securities which are not in
default. Both Original Issue Insurance and Secondary Market Insurance are
non-cancelable and continue in force as long as the insured security is
outstanding and the applicable insurer remains in business.
Minnesota Insured Intermediate Tax Free Fund may acquire securities that are
already covered by Original Issue Insurance or Secondary Market Insurance
without having to acquire additional insurance thereon, provided that the claims
paying ability of the insurer is rated AAA or SP-1 by Standard & Poor's or Aaa
or MIG-1 by Moody's or has been assigned an equivalent rating by another
nationally recognized statistical rating organization. One of the purposes of
these kinds of insurance is to enable the securities covered thereby to be sold
as AAA or Aaa rated insured securities at a market price higher than might be
obtained if the securities were not insured. Therefore, these kinds of insurance
may be considered to represent an element of the market value of the securities
insured. However, the exact effect, if any, on market value cannot be estimated.
Secondary Market Insurance may be purchased by Minnesota Insured Intermediate
Tax Free Fund if, in the opinion of the Fund's investment manager, the market
value or net proceeds of a sale of the covered security by the Fund would exceed
the current value of the security without insurance, plus the cost of the
insurance. When the Fund purchases Secondary Market Insurance, the single
premium is added to the cost basis of the security and is not considered an item
of expense of the Fund. Any excess of a security's market value as an AAA or Aaa
rated security over its market value without the insurance, including the single
premium cost thereof, would inure to the Fund in determining the net capital
gain or loss realized by the Fund upon the sale of the security.
The investment policy of this Fund requiring insurance on investments applies
only to tax-exempt obligations held by the Fund and will not affect the Fund's
ability to hold its assets in
<PAGE>
cash or to invest in escrow secured and defeased bonds or in certain short-term
tax-exempt obligations as described elsewhere herein, or its ability to invest
in uninsured taxable obligations for temporary or liquidity purposes or on a
defensive basis in accordance with the investment policies and restrictions of
the Fund.
Minnesota Insured Intermediate Tax Free Fund is authorized to obtain Portfolio
Insurance from insurers that have obtained a claims-paying ability rating of AAA
or SP-1 from Standard & Poor's or Aaa or MIG-1 from Moody's or an equivalent
rating from another nationally recognized statistical rating organization. Such
insurers may include AMBAC Indemnity Corporation ("AMBAC"), Municipal Bond
Investors Assurance Corp. ("MBIA"), Financial Guaranty Insurance Company
("FGIC"), Financial Security Assurance, Inc. ("FSA"), or other companies meeting
these criteria. For more information concerning Portfolio Insurance, see the
Statement of Additional Information.
TEMPORARY TAXABLE INVESTMENTS
Each of the Funds may make temporary taxable investments as described under
"Investment Objectives and Policies." Temporary taxable investments will include
only the following types of obligations maturing within 13 months from the date
of purchase: (i) obligations of the United States Government, its agencies and
instrumentalities; (ii) commercial paper rated not less than A-1 by Standard &
Poor's or P-1 by Moody's or which has been assigned an equivalent rating by
another nationally recognized statistical rating organization; (iii) other
short-term debt securities issued or guaranteed by corporations having
outstanding debt rated not less than BBB by Standard & Poor's or Baa by Moody's
or which have been assigned an equivalent rating by another nationally
recognized statistical rating organization; (iv) certificates of deposit of
domestic commercial banks subject to regulation by the United States Government
or any of its agencies or instrumentalities, with assets of $500 million or more
based on the most recent published reports; and (v) repurchase agreements with
domestic banks or securities dealers involving any of the securities which the
Fund is permitted to hold. See "-- Repurchase Agreements" below.
REPURCHASE AGREEMENTS
The temporary taxable investments which each Fund may make include 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.
INVERSE FLOATING RATE OBLIGATIONS
Each of the Funds may invest up to 5% of its net assets in inverse floating rate
municipal obligations. An inverse floating rate obligation entitles the holder
to receive interest at a rate which changes in the opposite direction from, and
in the same magnitude as or in a multiple of, changes in a specified index rate.
Although an inverse floating rate municipal obligation would tend to increase
portfolio income during a period of
<PAGE>
generally decreasing market interest rates, its income and value would tend to
decline during a period of generally increasing market interest rates. In
addition, its decline in value may be greater than for a fixed-rate municipal
obligation, particularly if the interest rate borne by the floating rate
municipal obligation is adjusted by a multiple of changes in the specified index
rate. For these reasons, inverse floating rate municipal obligations have more
risk than more conventional fixed-rate and floating rate municipal obligations.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
Each of the Funds may purchase securities on a when-issued or delayed delivery
basis. When such a transaction is negotiated, the purchase price is fixed at the
time the purchase commitment is entered, but delivery of and payment for the
securities take place at a later date. A Fund will not accrue income with
respect to securities purchased on a when-issued or delayed delivery basis prior
to their stated delivery date. Pending delivery of the securities, each Fund
will maintain in a segregated account cash or liquid high-grade securities in an
amount sufficient to meet its purchase commitments.
The purchase of securities on a when-issued or delayed delivery basis exposes a
Fund to risk because the securities may decrease in value prior to delivery. In
addition, a Fund's purchase of securities on a when-issued or delayed delivery
basis while remaining substantially fully invested could increase the amount of
the Fund's total assets that are subject to market risk, resulting in increased
sensitivity of net asset value to changes in market prices. However, the Funds
will engage in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with their investment
objectives, and not for the purpose of investment leverage. A seller's failure
to deliver securities to a Fund could prevent the Fund from realizing a price or
yield considered to be advantageous.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, each of the Funds may lend portfolio
securities representing up to one-third of the value of its total assets to
broker-dealers, banks or other institutional borrowers of securities. If the
Funds engage in securities lending, distributions paid to shareholders from the
resulting income will not be excludable from shareholders' gross income for
income tax purposes. As with other extensions of credit, there may be risks of
delay in recovery of the securities or even loss of rights in the collateral
should the borrower of the securities fail financially. However, the Funds will
only enter into loan arrangements with broker-dealers, banks, or other
institutions which the Adviser has determined are creditworthy under guidelines
established by the Board of Directors. In these loan arrangements, the Funds
will receive collateral in the form of cash, United States Government securities
or other high-grade debt obligations equal to at least 100% of the value of the
securities loaned. Collateral is marked to market daily. The Funds will pay a
portion of the income earned on the lending transaction to the placing broker
and may pay administrative and custodial fees in connection with these loans,
which in the case of First Trust National Association, are 40% of the Funds'
income from such securities lending transactions.
OPTIONS TRANSACTIONS
Each of the Funds may, in order to reduce risk, invest in exchange traded put
and call options on interest rate futures contracts and on interest rate
indices. Such investments will be made solely as a hedge against adverse changes
resulting from market conditions in the values of securities held by the Funds
or which they intend to purchase and where the transactions are deemed
appropriate to reduce risks inherent in the Funds' portfolios or contemplated
investments.
None of the Funds will invest more than 5% of the value of its total assets in
purchased options, provided that options which are "in the money" at the time of
purchase may be excluded from this 5% limitation. A call option is "in the
money" if the exercise price is lower than the current market
<PAGE>
price of the underlying contract or index, and a put option is "in the money" if
the exercise price is higher than the current market price. A Fund's loss
exposure in purchasing an option is limited to the sum of the premium paid
(purchase price of the option) and the commission or other transaction expenses
associated with acquiring the option.
An interest rate futures contract provides for the future sale by one party and
purchase by the other party of a certain amount of a specific financial
instrument (debt security) at a specified price, date, time and place. An option
on an interest rate futures contract, as contrasted with the direct investment
in such a contract, gives the purchaser the right, in return for the premium
paid, to purchase (in the case of a call option) or sell (in the case of a put
option) an interest rate futures contract at a specified exercise price at any
time prior to the expiration date of the option. In order to hedge its portfolio
against anticipated changes in interest rates, a Fund might purchase a put
option on an interest rate futures contract if interest rates were expected to
rise, or might purchase a call option on an interest rate futures contract if
rates were expected to decline.
Options on interest rate indices are similar to options on interest rate futures
contracts except that, rather than the right to take or make delivery of a
specific financial instrument at a specified price, an option on an interest
rate index gives the holder the right to receive, upon exercise of the option, a
defined amount of cash if the closing value of the interest rate index upon
which the option is based is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. Put and call options on
interest rate indices thus may be used in a fashion similar to that of options
on interest rate futures contracts to hedge the value of a portfolio of debt
securities against anticipated changes in interest rates.
The use of options on interest rate futures contracts and on interest rate
indices involves certain risks. These include the risk that changes in interest
rates on the hedged instruments may not correlate to changes in interest rates
on the instrument or index upon which the hedge is based, and the risk of
limited liquidity in the event that a Fund seeks to close out an options
position before expiration by entering into an offsetting transaction.
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 (100% or more) 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
<PAGE>
not exceed 10% of the borrowing Fund's total assets. None of the Funds will
borrow money for leverage purposes. For the purpose of this investment
restriction, the use of options and futures transactions and the purchase
of securities on a when-issued or delayed delivery basis shall not be
deemed the borrowing of money. If a Fund engages in borrowing, its share
price may be subject to greater fluctuation, and the interest expense
associated with the borrowing may reduce the Fund's net income.
* None of the Funds will 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.
* Intermediate Tax Free Fund will not invest 25% or more of the value of its
total assets in obligations of issuers located in the same state (for this
purpose, the location of an "issuer" shall be deemed to be the location of
the entity the revenues of which are the primary source of payment or the
location of the project or facility which may be the subject of the
obligation). None of the Funds will invest 25% or more of the value of its
total assets in revenue bonds or notes, payment for which comes from
revenues from any one type of activity (for this purpose, the term "type of
activity" shall include without limitation (i) sewage treatment and
disposal; (ii) gas provision; (iii) electric power provision; (iv) water
provision; (v) mass transportation systems; (vi) housing; (vii) hospitals;
(viii) nursing homes; (ix) street development and repair; (x) toll roads;
(xi) airport facilities; and (xii) educational facilities), except that, in
circumstances in which other appropriate available investments may be in
limited supply, such Funds may invest without limitation in gas provision,
electric power provision, water provision, housing and hospital
obligations. This restriction does not apply to general obligation bonds or
notes or, in the case of Intermediate Tax Free Fund, to pollution control
revenue bonds. However, in the case of the latter Fund, it is anticipated
that normally (unless there are unusually favorable interest and market
factors) less than 25% of such Fund's total assets will be invested in
pollution control bonds. This restriction does not apply to securities of
the United States Government or its agencies and instrumentalities or
repurchase agreements relating thereto.
A fundamental policy or restriction, including those stated above, cannot be
changed without an affirmative vote of the holders of a "majority" of the
outstanding shares of the applicable Fund, as defined in the 1940 Act.
INFORMATION CONCERNING COMPENSATION PAID TO U.S. BANK NATIONAL ASSOCIATION,
FIRST TRUST NATIONAL ASSOCIATION AND OTHER AFFILIATES
U.S. Bank National Association, First Trust National Association and other
affiliates of U.S. Bancorp may act as fiduciary with respect to plans subject to
the Employee Retirement Income Security Act of 1974 ("ERISA") and other trust
and agency accounts that invest in the Funds. These U.S. Bancorp affiliates may
receive compensation from the Funds for the services they provide to the Funds,
as described more fully in the following sections of this Prospectus:
Investment advisory services -- see "Management-Investment Adviser"
Custodian services -- see "Management-Custodian"
Sub-administration -- see "Management-Administrator"
Shareholder servicing -- see "Distributor"
Securities lending -- see "Special Investment Methods-Lending of Portfolio
Securities"
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
Oaks, Pennsylvania 19456
Investment Adviser
U.S. 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 (1/98) I
<PAGE>
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 31, 1998
BALANCED FUND INTERNATIONAL FUND
REAL ESTATE SECURITIES FUND HEALTH SCIENCES FUND
EQUITY INCOME FUND TECHNOLOGY FUND
EQUITY INDEX FUND LIMITED TERM INCOME FUND
STOCK FUND INTERMEDIATE TERM INCOME FUND
DIVERSIFIED GROWTH FUND FIXED INCOME FUND
SPECIAL EQUITY FUND INTERMEDIATE GOVERNMENT BOND FUND
REGIONAL EQUITY FUND INTERMEDIATE TAX FREE FUND
EMERGING GROWTH FUND CALIFORNIA INTERMEDIATE TAX FREE FUND
SMALL CAP VALUE FUND COLORADO INTERMEDIATE TAX FREE FUND
MICRO CAP VALUE FUND MINNESOTA INSURED INTERMEDIATE TAX FREE FUND
INTERNATIONAL INDEX FUND OREGON INTERMEDIATE TAX FREE FUND
This Statement of Additional Information relates to the Class A, Class
B and Class C Shares of the funds named above (the "Funds"), each of which is a
series of First American Investment Funds, Inc. ("FAIF"). This Statement of
Additional Information is not a prospectus, but should be read in conjunction
with the Funds' current Prospectuses dated January 31, 1998. 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
<TABLE>
<CAPTION>
<S> <C> <C> <C>
GENERAL INFORMATION.............................. 2 INVESTMENT ADVISORY AND OTHER SERVICES........... 31
Investment Advisory Agreement................. 31
ADDITIONAL INFORMATION CONCERNING Sub-Advisory Agreement for International Fund 32
FUND INVESTMENTS.............................. 3 Administration Agreement...................... 33
Short-Term Investments...................... 3 Distributor and Distribution Plans............ 33
Repurchase Agreements....................... 3 Custodian; Transfer Agent; Counsel; Accountants 35
When-Issued and Delayed Delivery
Transactions.............................. 4 PORTFOLIO TRANSACTIONS AND ALLOCATION
Lending of Portfolio Securities............... 4 OF BROKERAGE.................................. 36
Options Transactions.......................... 4
Futures and Options on Futures................ 5 CAPITAL STOCK.................................... 40
Foreign Securities............................ 6
Foreign Currency Transactions................. 6 NET ASSET VALUE AND PUBLIC OFFERING PRICE........ 49
Mortgage-Backed Securities.................... 7
Debt Obligations Rated Less Than FUND PERFORMANCE................................. 52
Investment Grade............................ 9 SEC Standardized Performance Figures.......... 52
U.S. Treasury Inflation-Protection Securities 9 Non-Standard Distribution Rates............... 56
Special Factors Affecting California Certain Performance Comparisons............... 57
Intermediate Tax Free Fund.................. 10
Special Factors Affecting Colorado TAXATION......................................... 60
Intermediate Tax Free Fund.................. 15
Special Factors Affecting Minnesota RATINGS.......................................... 64
Insured Intermediate Tax Free Fund.......... 17
Special Factors Affecting Oregon FINANCIAL STATEMENTS............................. 68
Intermediate Tax Free Fund.................. 19
Insurance for Minnesota Insured
Intermediate Tax Free Fund.................. 22
CFTC Information.............................. 23
INVESTMENT RESTRICTIONS.......................... 24
DIRECTORS AND EXECUTIVE OFFICERS................. 28
Directors..................................... 28
Executive Officers............................ 28
Compensation.................................. 30
</TABLE>
<PAGE>
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
24 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 each Fund through three separate
classes, Class A (except for Oregon Intermediate Tax Free Fund), Class B (except
for the Tax Free Funds) and Class C, which 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 "1940 Act"), 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.
FAIF has prepared and will provide Prospectuses relating to the Class
A, Class B and Class C Shares of 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 Class
A and Class B Shares Prospectuses and to the Class C Shares Prospectuses for the
Funds. It should be read in conjunction with the applicable Prospectus.
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.
<PAGE>
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
Most of the Funds can invest in a variety of short-term instruments
which are specified in the respective 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 Rating Services, a division of the
McGraw-Hill Companies, Inc. ("Standard & Poor's") or Moody's Investors Service,
Inc. ("Moody's"), or which have been assigned an equivalent rating by another
nationally recognized statistical rating organization. The Funds also may invest
in commercial paper that is not rated but that is determined by the Adviser to
be of comparable quality to instruments that are so rated. For a description of
the rating categories of Standard & Poor's and Moody's, see "Ratings" herein.
BANKERS' ACCEPTANCES. Bankers' acceptances are credit instruments
evidencing the obligation of a bank to pay a draft drawn on it by a customer.
These instruments reflect the obligation both of the bank and of the drawer to
pay the full amount of the instrument upon maturity.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand
notes are unsecured demand notes that permit the indebtedness thereunder to vary
and provide for periodic adjustments in the interest rate according to the terms
of the instrument. Because master demand notes are direct lending arrangements
between a Fund and the issuer, they are not normally traded. Although there is
no secondary market in the notes, a Fund may demand payment of principal and
accrued interest at any time. While the notes are not typically rated by credit
rating agencies, issuers of variable amount master demand notes (which are
normally manufacturing, retail, financial, and other business concerns) must
satisfy the same criteria as set forth above for commercial paper. The Adviser
or Sub-Adviser will consider the earning power, cash flow, and other liquidity
ratios of the issuers of such notes and will continuously monitor their
financial status and ability to meet payment on demand.
REPURCHASE AGREEMENTS
The Funds may invest in repurchase agreements to the extent specified
in their respective Prospectuses. The Funds' custodian will hold the securities
underlying any repurchase agreement, or the securities will be part of the
Federal Reserve/Treasury Book Entry System. The market value of the collateral
underlying the repurchase agreement will be determined on each business day. If
at any time the market value of the collateral falls below the repurchase price
under the repurchase agreement (including any accrued interest), the appropriate
Fund will promptly receive additional collateral (so the total collateral is an
amount at least equal to the repurchase price plus accrued interest).
<PAGE>
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
When a Fund agrees to purchase securities on a when-issued or
delayed delivery basis, the Custodian will maintain in a segregated account cash
or liquid securities in an amount sufficient to meet the Fund's purchase
commitments. It may be expected that a Fund's net assets will fluctuate to a
greater degree when it sets aside securities to cover such purchase commitments
than when it sets aside cash. In addition, because a Fund will set aside cash or
liquid securities to satisfy its purchase commitments in the manner described
above, its liquidity and the ability of the Adviser to manage it might be
affected in the event its commitments to purchase when-issued or
delayed delivery securities ever exceeded 25% of the value of its assets. Under
normal market conditions, however, a Fund's commitments to purchase when-issued
or delayed delivery securities will not exceed 25% of the value of its assets.
LENDING OF PORTFOLIO SECURITIES
When a Fund lends portfolio securities, it must receive 100% collateral
as described in the Prospectuses. This collateral must be valued daily by the
Adviser or Sub-Adviser and, if the market value of the loaned securities
increases, the borrower must furnish additional collateral to the lending Fund.
During the time portfolio securities are on loan, the borrower pays the lending
Fund any dividends or interest paid on the securities. Loans are subject to
termination by the lending Fund or the borrower at any time. While a Fund does
not have the right to vote securities on loan, it would terminate the loan and
regain the right to vote if that were considered important with respect to the
investment.
First Trust National Association, the Funds' custodian and an affiliate
of their Adviser, may act as securities lending agent for the Funds and receive
separate compensation for such services, subject to compliance with conditions
contained in a Securities and Exchange Commission exemptive order permitting
First Trust to provide such services and receive such compensation.
OPTIONS TRANSACTIONS
OPTIONS ON SECURITIES. To the extent specified in the Prospectuses,
Funds may purchase put and call options on securities and may write covered call
options on securities which they own or have the right to acquire. A Fund may
purchase put options to hedge against a decline in the value of its portfolio.
By using put options in this way, a Fund would reduce any profit it might
otherwise have realized in the underlying security by the amount of the premium
paid for the put option and by transaction costs. In similar fashion, a Fund may
purchase call options to hedge against an increase in the price of securities
that the Fund anticipates purchasing in the future. The premium paid for the
call option plus any transaction costs will reduce the benefit, if any, realized
by the Fund upon exercise of the option, and, unless the price of the underlying
security rises sufficiently, the option may expire unexercised.
The writer (seller) of a call option has no control over when the
underlying securities must be sold; the writer may be assigned an exercise
notice at any time prior to the termination of the option. If a call option is
exercised, the writer experiences a profit or loss from the sale of the
underlying security. The writer of a call option that wishes to terminate its
obligation may effect a "closing purchase transaction." This is accomplished by
buying an option on the same security as the option previously written. If a
Fund was unable to effect a closing purchase transaction in a secondary market,
it would not be able to sell the underlying security until the option expires or
it delivers the underlying security upon exercise.
OPTIONS ON STOCK INDICES. Options on stock indices are similar to
options on individual stocks except that, rather than the right to take or make
delivery of stock at a specified price, an option on a stock index gives the
holder the right to receive, upon exercise of the option, an amount of cash if
the closing value of the stock index upon which the option is based is greater
than, in the case of a call, or
<PAGE>
lesser than, in the case of a put, the exercise price of the option. This amount
of cash is equal to the difference between the closing price of the index and
the exercise price of the option expressed in dollars times a specified multiple
(the "multiplier"). The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Unlike stock options, all
settlements for stock index options are in cash, and gain or loss depends on
price movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements in individual stocks. The
multiplier for an index option performs a function similar to the unit of
trading for a stock option. It determines the total dollar value per contract of
each point in the difference between the underlying stock index. A multiplier of
100 means that a one-point difference will yield $100. Options on different
stock indices may have different multipliers.
OPTIONS ON INTEREST RATE INDICES. An option on an interest rate index
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing value of the interest rate index upon which the option is
based is greater than, in the case of a call, or lesser than, in the case of a
put, the exercise price of the option. This amount of cash is equal to the
difference between the closing price of the index and the exercise price of the
option expressed in dollars times a specified multiple (the "multiplier"). The
writer of the option is obligated, for the premium received, to make delivery of
this amount. Unlike interest rate futures options contracts, settlements for
interest rate index options are always in cash. Gain or loss depends on price
movements in the interest rate movements with respect to specific financial
instruments. As with stock index options, the multiplier for interest rate index
options determines the total dollar value per contract of each point in the
difference between the exercise price of an option and the current value of the
underlying interest rate index. Options on different interest rate indices may
have different multipliers.
FUTURES AND OPTIONS ON FUTURES
As discussed in the Prospectuses, certain of the Funds may enter into
futures contracts and may purchase options on futures contracts of various
types. These investment techniques are designed primarily to hedge against
anticipated future changes in market conditions or foreign exchange rates which
otherwise might adversely affect the value of securities which a Fund holds or
intends to purchase. The types of futures and options on futures which
particular Funds may utilize are described in the applicable Prospectuses.
At the same time a futures contract is purchased or sold, a Fund
generally must allocate cash or securities as a deposit payment ("initial
deposit"). It is expected that the initial deposit would be approximately 1-1/2%
to 5% of a contract's face value. Daily thereafter, the futures contract is
valued and the payment of "variation margin" may be required, since each day the
Fund would provide or receive cash that reflects any decline or increase in the
contract's value. Futures transactions also involve brokerage costs and require
a Fund to segregate liquid assets, such as cash, United States Government
securities or other liquid high grade debt obligations, to cover its performance
under such contracts.
A Fund may lose the expected benefit of futures transactions if
interest rates, securities prices or foreign exchange rates move 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. In addition, the value of a Fund's futures positions may not prove
to be perfectly or even highly correlated with the value of its portfolio
securities and foreign currencies, limiting the Fund's ability to hedge
effectively against interest rate, foreign exchange rate and/or market risk and
giving rise to additional risks. Because of the low margin requirements in the
futures markets, they may be subject to market forces, including speculative
activity, which do not affect the cash markets. There also is no assurance of
liquidity in the secondary market for purposes of closing out futures positions.
<PAGE>
FOREIGN SECURITIES
As described in the applicable Prospectuses, under normal market
conditions International Index Fund and International Fund invest principally in
foreign securities, and certain other Funds 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 or International Fund is uninvested. In
addition, settlement problems could cause International Index Fund or
International 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.
FOREIGN CURRENCY TRANSACTIONS
As described in the applicable Prospectuses, International Fund may
engage in a variety of foreign currency transactions in connection with its
investment activities. These include forward foreign currency exchange
contracts, foreign currency futures, and foreign currency options.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
These contracts are traded directly between currency traders (usually large
commercial banks) and their customers. International Fund will not enter into
such forward contracts or maintain a net exposure in such contracts where the
Fund would be obligated to deliver an amount of foreign currency in excess of
the value of the Fund's securities or other assets denominated in that currency.
The Fund will comply with applicable Securities and Exchange Commission
announcements requiring it to segregate assets to cover the Fund's commitments
with respect to such contracts. At the present time, these announcements
generally require a fund with a long position in a forward foreign currency
contract to establish with its custodian a segregated account containing cash or
liquid high grade debt securities equal to the purchase price of the contract,
and require a fund with a short position in a forward foreign currency contract
to establish with its custodian a segregated account containing cash or liquid
high grade debt securities that, when added to any margin deposit, equal the
market value of the currency underlying the forward contract. These requirements
will not apply where a forward contract is used in connection with the
settlement of investment purchases or sales or where the position has been
"covered" by entering into an offsetting position. The Fund generally will not
enter into a forward contract with a term longer than one year.
FOREIGN CURRENCY FUTURES TRANSACTIONS. Unlike forward foreign currency
exchange contracts, foreign currency futures contracts and options on foreign
currency futures contracts are standardized as to amount and delivery period and
may be traded on boards of trade and commodities exchanges or directly with a
dealer which makes a market in such contracts and options. It is anticipated
that such contracts may provide greater liquidity and lower cost than forward
foreign currency exchange contracts. As part of its financial futures
transactions, International Fund may use foreign currency futures contracts and
options on such futures contracts. Through the purchase or sale of such
contracts, the Fund may be able to achieve many of the same objectives as
through forward foreign currency exchange contracts more effectively and
possibly at a lower cost.
FOREIGN CURRENCY OPTIONS. A foreign currency option provides the option
buyer with the right to buy or sell a stated amount of foreign currency at the
exercise price at a specified date or during the
<PAGE>
option period. A call option gives its owner the right, but not the obligation,
to buy the currency, while a put option gives its owner the right, but not the
obligation, to sell the currency. The option seller (writer) is obligated to
fulfill the terms of the option sold if it is exercised. However, either seller
or buyer may close its position during the option period in the secondary market
for such options at any time prior to expiration.
A foreign currency call option rises in value if the underlying
currency appreciates. Conversely, a foreign currency put option rises in value
if the underlying currency depreciates. While purchasing a foreign currency
option may protect International Fund against an adverse movement in the value
of a foreign currency, it would not limit the gain which might result from a
favorable movement in the value of the currency. For example, if the Fund were
holding securities denominated in an appreciating foreign currency and had
purchased a foreign currency put to hedge against a decline in the value of the
currency, it would not have to exercise its put. In such an event, however, the
amount of the Fund's gain would be offset in part by the premium paid for the
option. Similarly, if the Fund entered into a contract to purchase a security
denominated in a foreign currency and purchased a foreign currency call to hedge
against a rise in the value of the currency between the date of purchase and the
settlement date, the Fund would not need to exercise its call if the currency
instead depreciated in value. In such a case, the Fund could acquire the amount
of foreign currency needed for settlement in the spot market at a lower price
than the exercise price of the option.
MORTGAGE-BACKED SECURITIES
As described in the applicable Prospectuses, Balanced Fund, Limited
Term Income Fund, Intermediate Term Income Fund and Fixed Income Fund also
invest in mortgage-backed securities. Each of these Funds will invest only in
mortgage-backed securities which are Agency Pass-Through Certificates or
collateralized mortgage obligations ("CMOs"), as defined and described in those
Prospectuses.
Agency Pass-Through Certificates are issued or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC").
GNMA is a wholly-owned corporate instrumentality of the United States within the
Department of Housing and Urban Development. The guarantee of GNMA with respect
to GNMA certificates is backed by the full faith and credit of the United
States, and GNMA is authorized to borrow from the United States Treasury in an
amount which is at any time sufficient to enable GNMA, with no limitation as to
amount, to perform its guarantee.
FNMA is a federally chartered and privately owned corporation organized
and existing under federal law. Although the Secretary of the Treasury of the
United States has discretionary authority to lend funds to FNMA, neither the
United States nor any agency thereof is obligated to finance FNMA's operations
or to assist FNMA in any other manner.
FHLMC is a federally chartered corporation organized and existing under
federal law, the common stock of which is owned by the Federal Home Loan Banks.
Neither the United States nor any agency thereof is obligated to finance FNMA's
operations or to assist FNMA in any other manner.
The residential mortgage loans evidenced by Agency Pass-Through
Certificates and upon which CMOs are based generally are secured by first
mortgages on one- to four-family residential dwellings. Such mortgage loans
generally have final maturities ranging from 15 to 30 years and provide for
monthly payments in amounts sufficient to amortize their original principal
amounts by the maturity dates. Thus, each monthly payment on such mortgage loans
generally includes both an interest component and a principal component, so that
the holder of the mortgage loans receives both interest and a partial return of
principal in each monthly payment. In general, such mortgage loans can be
prepaid by the borrowers at any time without any prepayment penalty. In
addition, many such mortgage loans contain a "due-on-sale" clause requiring the
loans to be repaid in full upon the sale of
<PAGE>
the property securing the loans. Because residential mortgage loans generally
provide for monthly amortization and may be prepaid in full at any time, the
weighted average maturity of a pool of residential mortgage loans is likely to
be substantially shorter than its stated final maturity date. The rate at which
a pool of residential mortgage loans is prepaid may be influenced by many
factors and is not predictable with precision.
As stated in the applicable Prospectuses, CMOs generally are issued in
multiple classes, with holders of each class entitled to receive specified
portions of the principal payments and prepayments and/or of the interest
payments on the underlying mortgage loans. These entitlements can be specified
in a wide variety of ways, so that the payment characteristics of various
classes may differ greatly from one another. For example:
* In a sequential-pay CMO structure, one class is entitled to
receive all principal payments and prepayments on the
underlying mortgage loans (and interest on unpaid principal)
until the principal of the class is repaid in full, while the
remaining classes receive only interest; when the first class
is repaid in full, a second class becomes entitled to receive
all principal payments and prepayments on the underlying
mortgage loans until the class is repaid in full, and so
forth.
* A planned amortization class ("PAC") of CMOs is entitled to
receive principal on a stated schedule to the extent that it
is available from the underlying mortgage loans, thus
providing a greater (but not absolute) degree of certainty as
to the schedule upon which principal will be repaid.
* An accrual class of CMOs provides for interest to accrue and
be added to principal (but not be paid currently) until
specified payments have been made on prior classes, at which
time the principal of the accrual class (including the accrued
interest which was added to principal) and interest thereon
begins to be paid from payments on the underlying mortgage
loans.
* As discussed above with respect to Agency Pass-Through
Certificates, an interest-only class of CMOs entitles the
holder to receive all of the interest and none of the
principal on the underlying mortgage loans, while a
principal-only class of CMOs entitles the holder to receive
all of the principal payments and prepayments and none of the
interest on the underlying mortgage loans.
* A floating rate class of CMOs entitles the holder to receive
interest at a rate which changes in the same direction and
magnitude as changes in a specified index rate. An inverse
floating rate class of CMOs entitles the holder to receive
interest at a rate which changes in the opposite direction
from, and in the same magnitude as or in a multiple of,
changes in a specified index rate. Floating rate and inverse
floating rate classes also may be subject to "caps" and
"floors" on adjustments to the interest rates which they bear.
* A subordinated class of CMOs is subordinated in right of
payment to one or more other classes. Such a subordinated
class provides some or all of the credit support for the
classes that are senior to it by absorbing losses on the
underlying mortgage loans before the senior classes absorb any
losses. A subordinated class which is subordinated to one or
more classes but senior to one or more other classes is
sometimes referred to as a "mezzanine" class. A subordinated
class generally carries a lower rating than the classes that
are senior to it, but may still carry an investment grade
rating.
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DEBT OBLIGATIONS RATED LESS THAN INVESTMENT GRADE
As described in the applicable Prospectuses, the "equity securities" in
which certain Funds 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 these Funds 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 payment 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 a 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
a Fund's use of less than investment grade convertible debt obligations may be
more dependent on the Adviser' own credit analysis than is the case with
investment grade obligations.
U.S. TREASURY INFLATION-PROTECTION SECURITIES
Intermediate Government Bond Fund and, to the extent they may invest in
fixed-income securities, the other Funds, may invest in U.S. Treasury
inflation-protection securities, which are issued by the United States
Department of Treasury ("Treasury") with a nominal return linked to the
inflation rate in prices. The index used to measure inflation is the
non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All
Urban Consumers ("CPI-U").
The value of the principal is adjusted for inflation, and pays interest
every six months. The interest payment is equal to a fixed percentage of the
inflation-adjusted value of the principal. The final payment of principal of the
security will not be less than the original par amount of the security at
issuance.
<PAGE>
The principal of the inflation-protection security is indexed to the
non-seasonally adjusted CPI-U. To calculate the inflation-adjusted principal
value for a particular valuation date, the value of the principal at issuance is
multiplied by the index ratio applicable to that valuation date. The index ratio
for any date is the ratio of the reference CPI applicable to such date to the
reference CPI applicable to the original issue date. Semiannual coupon interest
is determined by multiplying the inflation-adjusted principal amount by one-half
of the stated rate of interest on each interest payment date.
Inflation-adjusted principal or the original par amount, whichever is
larger, is paid on the maturity date as specified in the applicable offering
announcement. If at maturity the inflation-adjusted principal is less than the
original principal value of the security, an additional amount is paid at
maturity so that the additional amount plus the inflation-adjusted principal
equals the original principal amount. Some inflation-protection securities may
be stripped into principal and interest components. In the case of a stripped
security, the holder of the stripped principal component would receive this
additional amount. The final interest payment, however, will be based on the
final inflation-adjusted principal value, not the original par amount.
The reference CPI for the first day of any calendar month is the CPI-U
for the third preceding calendar month. (For example, the reference CPI for
December 1 is the CPI-U reported for September of the same year, which is
released in October.) The reference CPI for any other day of the month is
calculated by a linear interpolation between the reference CPI applicable to the
first day of the month and the reference CPI applicable to the first day of the
following month.
Any revisions the Bureau of Labor Statistics (or successor agency)
makes to any CPI-U number that has been previously released will not be used in
calculations of the value of outstanding inflation- protection securities. In
the case that the CPI-U for a particular month is not reported by the last day
of the following month, the Treasury will announce an index number based on the
last year-over-year CPI-U inflation rate available. Any calculations of the
Treasury's payment obligations on the inflation-protection security that need
that month's CPI-U number will be based on the index number that the Treasury
has announced. If the CPI-U is rebased to a different year, the Treasury will
continue to use the CPI-U series based on the base reference period in effect
when the security was first issued as long as that series continues to be
published. If the CPI-U is discontinued during the period the
inflation-protection security is outstanding, the Treasury will, in consultation
with the Bureau of Labor Statistics (or successor agency), determine an
appropriate substitute index and methodology for linking the discontinued series
with the new price index series. Determinations of the Secretary of the Treasury
in this regard are final.
Inflation-protection securities will be held and transferred in either
of two book-entry systems: the commercial book-entry system (TRADES) and
TREASURY DIRECT. The securities will be maintained and transferred at their
original par amount, i.e., not at their inflation-adjusted value. STRIPS
components will be maintained and transferred in TRADES at their value based on
the original par amount of the fully constituted security.
SPECIAL FACTORS AFFECTING CALIFORNIA INTERMEDIATE TAX FREE FUND
As described in the Prospectuses relating to California Intermediate
Tax Free Fund, except during temporary defensive periods, California
Intermediate Tax Free Fund will invest most of its total assets in California
municipal obligations. This Fund therefore is susceptible to political, economic
and regulatory factors affecting issuers of California municipal obligations.
The following information provides only a brief summary of the complex factors
affecting the financial situation in California. This information is derived
from sources that are generally available to investors and is based in part on
information obtained from various state and local agencies in California. It
should be noted that the creditworthiness of obligations issued by local
California issuers may be unrelated to the
<PAGE>
creditworthiness of obligations issued by the State of California, and that
there is no obligation on the part of California to make payment on such local
obligations in the event of default.
GENERAL ECONOMIC CONDITIONS. California's economy is the largest among
the 50 states and one of the largest in the world. This diversified economy has
major components in agriculture, manufacturing, high-technology, trade,
entertainment, tourism, construction and services. Total state gross domestic
product of $1 trillion in 1997 will be larger than all but seven nations in the
world and California will become the first state to produce over one trillion
dollars worth of goods and services in single year.
Events in Asia could have implications for California. Over half of
California-made goods exports are sold to Asia, and the state has already seen
declines in cargoes destined for Japan, South Korea, Singapore and Malaysia. At
the same time, strong growth continues in exports to Taiwan, Hong Kong, and
Mexico. Overall, exports of California-made goods slowed to 2% growth in the
first half of 1997, from over 8% the year before. Strong export growth was a
major element during the initial stages of the state's recovery in 1994 and
1995. The upturn has broadened sufficiently over the last two years, to the
point that California is now posting solid gains in employment and income
despite the slowing of exports.
After suffering through a severe recession, California's economy has
been on a steady recovery since the start of 1994. In 1996, California had eight
consecutive months of record high employment levels. Employment grew over
330,000 non-farm jobs in 1996, and between November 1996 and November 1997,
335,000 jobs were added for a growth rate of 2.6%. All industry divisions showed
job gains over the year. The service industries continue to post the largest job
growth, on a numerical basis, up 151,400 jobs or 3.8%. The growth continues to
be primarily in the business service sector. On a percentage basis, employment
in construction shows the strongest job growth, up 8.1%, for an increase of
43,000 jobs. The growth in construction is predominantly in the special trade
contractors sector. Other industries posting strong job growth over the year
were wholesale and trade (up 43,200 jobs), manufacturing (up 38,500) and
government (up 33,200). Residential housing construction reached a seven-year
high at an annual rate of 134,000 units in October 1997, up 29% from the
year-ago poll.
California's population grew by 386,000 people in 1996 to a total of
32.6 million in January 1997. This reflects a 1.2% increase of population for
the year, compared to 1.0% growth posted in calendar year 1995. California's
population is concentrated in metropolitan areas. Los Angeles County posted the
highest annual numerical population gain, adding 113,800 people in 1996 for a
total of 9.49 million. San Diego County posted the second highest numerical
growth, gaining 42,300 for a total of 2.7 million.
California enjoys a large and diverse labor force. As of November 1997,
the total civilian labor force was 15,931,000 with 15,000,000 individuals
employed and 931,000, or 5.8%, unemployed. In comparison, the unemployment rate
for the United States during the same time was 4.6%.
BUDGETARY PROCESS. The State's fiscal year begins on July 1 and ends on
June 30. The annual budget is proposed by the Governor by January 10 of each
year for the next fiscal year (the "Governor's Budget"). Under State law, the
annual proposed Governor's Budget cannot provide for projected expenditures in
excess of projected revenues and balances available from prior fiscal years.
Under the State Constitution, money may be drawn from the Treasury only through
an appropriation made by law. The primary source of the annual expenditure
authorizations is the Budget Act as approved by the Legislature and signed by
the Governor. The Budget Act must be approved by a two-thirds majority vote of
each House of the Legislature. The Governor may reduce or eliminate specific
line items in the Budget Act or any other appropriations bill without vetoing
the entire bill. Such individual line-item vetoes are subject to override by a
two-thirds majority vote of each House of the Legislature.
Appropriations also may be included in legislation other than the
Budget Act. Bills containing appropriations (except K-14 education) must be
approved by a two-thirds majority vote in each House
<PAGE>
of the Legislature and be signed by the Governor. Bills containing K-14
education appropriations only require a simple majority vote. Continuing
appropriations, available without regard to fiscal year, may also be provided by
statute or the State Constitution. Funds necessary to meet an appropriation need
not be in the State Treasury at the time such appropriation is enacted; revenues
may be appropriated in anticipation of their receipt.
REVENUES AND EXPENDITURES. The moneys of the State are segregated into
the General Fund and approximately 600 Special Funds. The General Fund consists
of revenues received by the State Treasury and not required by law to be
credited to any other fund, as well as earnings from the investment of State
moneys not allocable to another fund. The General Fund is the principal
operating fund for the majority of governmental activities and is the depository
of most of the major revenue sources of the State. The General Fund may be
expended as a consequence of appropriation measures enacted by the Legislature
and approved by the Governor, as well as appropriations pursuant to various
constitutional authorizations and initiative statutes.
Moneys on deposit in the State's Centralized Treasury System are
invested by the Treasurer in the Pooled Money Investment Account ("PMIA"). As of
December 17, 1997, the PMIA held approximately $16.8 billion of State moneys,
and $10.3 billion of moneys invested for 2,538 local governmental entities
through the Local Agency Investment Fund ("LAIF"). The total assets of the PMIA
as of December 17, 1997 were $27.1 billion. The Treasurer does not invest in
leveraged products or inverse floating rate securities. The investment policy
permits the use of reverse repurchase agreements subject to limits of no more
than 10% of PMIA. All reverse repurchase agreements are cash matched either to
the maturity of the reinvestment or an adequately positive cash flow date which
is approximate to the maturity date. The average life of the investment
portfolio of the PMIA as of December 17, 1997 was 199 days.
SPECIAL FUND FOR ECONOMIC UNCERTAINTIES. The Special Fund for Economic
Uncertainties ("SFEU") is funded with General Fund revenues and was established
to protect the State from unforeseen revenue reductions and/or unanticipated
expenditure increases. Amounts in the SFEU may be transferred by the State
Controller as necessary to meet cash needs of the General Fund. The State
Controller is required to return moneys so transferred without payment of
interest as soon as there are sufficient moneys in the General Fund. For
budgeting and accounting purposes, any appropriation made from the SFEU is
deemed an appropriation from the General Fund. For year-end reporting purposes,
the State Controller is required to add the balance in the SFEU to the balance
in the General Fund so as to show the total moneys then available for General
Fund purposes. Inter-fund borrowing has been used for many years to meet
temporary imbalances of receipts and disbursements in the General Fund. As of
November 30, 1997, the General Fund had outstanding internal loans from Special
Funds of $2.8 billion (in addition, there are $3 billion of external loans
represented by the 1997 Revenue Anticipation Notes, which mature on June 30,
1998). The revised projected 1997-98 fiscal year General Fund Reserve for
Economic Uncertainties is $329 million.
PROPOSITION 13. The primary units of local government in California are
the counties. Counties are responsible for the provision of many basic services,
including indigent health care, welfare, courts, jails and public safety in
unincorporated areas. There are also about 480 unincorporated cities, and
thousands of other special districts formed for education, utility and other
services. The fiscal condition of local governments has been constrained since
the enactment of "Proposition 13" in 1978, which reduced and limited the future
growth of property taxes, and limited the ability of local governments to impose
"special taxes" (those devoted to a specific purpose) without two-thirds voter
approval. A recent California Supreme Court decision has upheld the
constitutionality of an initiative statute, previously held invalid by lower
courts, which requires voter approval for "general" as well as "special" taxes
at the local level. Counties, in particular, have had fewer options to raise
revenues than many other local government entities, yet have been required to
maintain many services.
<PAGE>
In the aftermath of Proposition 13, the State provided aid from the
General Fund to make up some of the loss of property tax moneys, including
taking over the principal responsibility for funding local K-12 schools and
community colleges. Under the pressure of the recent recession, the Legislature
has eliminated the remnants of this post-Proposition 13 aid to entities other
than K-14 education districts, although it has also provided additional funding
sources (such as sales taxes) and reduced mandates for local services. Many
counties continue to be under severe fiscal stress. While such stress has in
recent years most often been experienced by smaller, rural counties, larger
urban counties, such as Los Angeles, have also been affected.
STATE APPROPRIATIONS LIMIT. The State is subject to an annual
appropriations limit imposed by Article XIII B of the State Constitution (the
"Appropriations Limit"). The Appropriations Limit does not restrict
appropriations to pay debt service on voter-authorized bonds. Article XIII B
prohibits the State from spending "appropriations subject to limitation" in
excess of the Appropriations Limit. "Appropriations subject to limitation," with
respect to the State, are authorizations to spend " proceeds of taxes," which
consist of tax revenues, and certain other funds, including proceeds from
regulatory licenses, user charges or other fees to the extent that such proceeds
exceed "the cost reasonably borne by that entity in providing the regulation,
product or service," but "proceeds of taxes" exclude most state subventions to
local governments, tax refunds and some benefit payments such as unemployment
insurance. No limit is imposed on appropriations of funds which are not
"proceeds of taxes," such as reasonable user charges or fees and certain other
non-tax funds.
Not included in the Appropriations Limit are appropriations for the
debt service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government, appropriations for qualified
capital outlay projects, appropriations of revenues derived from any increase in
gasoline taxes and motor vehicle weight fees above January 1, 1990 levels, and
appropriation of certain special taxes imposed by initiative (e.g., cigarette
and tobacco taxes). The Appropriations Limit may also be exceeded in cases of
emergency.
ORANGE COUNTY, CA. On December 6, 1994, Orange County, together with
its pooled investment funds (the "Pools") filed for protection under Chapter 9
of the federal Bankruptcy Code, after reports that the Pools had suffered
significant market losses in their investments, causing a liquidity crisis for
the Pools and Orange County. More than 200 other public entities, most of which,
but not all, are located in Orange County, were also depositors in the Pools.
Orange County has reported the Pools' loss at about $1.69 billion, or about 23%
of their initial deposits of approximately $7.5 billion. Many of the entities
which deposited moneys in the Pools, including Orange County, faced interim
and/or extended cash flow difficulties because of the bankruptcy filing and may
be required to reduce programs or capital projects. Orange County has embarked
on a fiscal recovery plan based on sharp reductions in services and personnel,
and rescheduling of outstanding short term debt using certain new revenues
transferred to Orange County from other local governments pursuant to special
legislation enacted in October, 1995. The State has no existing obligation with
respect to any outstanding obligations or securities of Orange County or any of
the other participating entities.
LITIGATION GENERALLY. The State is a party to numerous legal
proceedings, many of which normally occur in governmental operations. In the
consolidated state case of Malibu Video Systems, et al. v. Kathleen Brown and
Abramovitz, et al., a stipulated judgment has been entered requiring return of
$119 million plus interest to specified special funds over a period of up to
five years beginning in fiscal year 1996-1997. The lawsuit challenges the
transfer of monies from special fund accounts within the State Treasury to the
State's General Fund pursuant to the Budget Acts of 1991, 1992, 1993, and 1994.
Plaintiffs allege that the monetary transfers violated various statutes and
provisions of the State Constitution.
<PAGE>
FISCAL YEAR 1996 - 1997. General Fund revenues and transfers for fiscal
year 1996-97 were $49.2 billion, a 6% increase from the prior year. Expenditures
for the 1996-97 fiscal year were $49.1 billion, an 8% increase. As of June 30,
1997, the General Fund balance was $906 million.
Overall, General Fund revenues and transfers represent about 78% of
total revenues. The remaining 22% are special funds, dedicated to specific
programs. The three largest revenue sources (personal income, sales, and bank
and corporation) account for about 73% of total revenues.
Several important tax changes were enacted in 1996. The bank and
corporation tax was reduced by 5%, and a number of targeted business tax
incentives were put into place.
1997-98 FISCAL YEAR. A revised balance of $329 million is expected in
the General Fund Reserve for Economic Uncertainties at June 30, 1998. The
balance in the General Fund at the end of fiscal year 1998 is forecast at $773.8
million. Special Fund revenues are estimated to be $14.2 billion and
appropriated Special Fund expenditures are projected at $14.4 billion.
K-12 education remains the state's top funding priority -- nearly 42
cents of every General Fund dollar is spent on K-12 education. Education, public
safety, and health and welfare expenditures constitute nearly 93% of all state
General Fund expenditures. General Fund expenditures for 1997-98 were proposed
in the following amounts and programs: $20.9 billion or 41.6% for K-12
education, $14.6 billion or 28.9% for health and welfare, $6.5 billion or 12.9%
for higher education, and $4.3 billion, or 8.5% for youth and correctional
programs. The remaining expenditures were in areas such as business,
transportation, housing, and environmental protection.
As of November 1997, General Fund cash receipts for the year are $407
million below the 1997 Budget Act Forecast. Also, personal income tax revenues
for the year are below expectations by $56 million. Yet, year-to-date sales and
use tax receipts are $48 million above forecast. Bank and corporation tax
receipts are $384 million below the 1997 Budget Act Forecast.
DEBT ADMINISTRATION AND LIMITATION. The State Treasurer is responsible
for the sale of debt obligations of the State and its various authorities and
agencies. The State Constitution prohibits the creation of indebtedness of the
State unless a bond law is approved by a majority of the electorate voting at a
general election or a direct primary. General obligation bond acts provide that
debt service on general obligation bonds shall be appropriated annually from the
General Fund and all debt service on general obligation bonds is paid from the
General Fund. Under the State Constitution, debt service on general obligation
bonds is the second charge to the General Fund after the application of moneys
in the General Fund to the support of the public school system and public
institutions of higher education. Certain general obligation bond programs
receive revenues from sources other than the sale of bonds or the investment of
bond proceeds. The State had $14.9 billion aggregate principal amount of
non-self liquidating general obligation bonds outstanding, and $6.4 billion
authorized and unissued, as of December 31, 1997. Outstanding lease revenue
bonds totaled $7.2 billion as of December 31, 1997, and are estimated to total
$7.5 billion as of June 30, 1998.
From July 1, 1996 to July 1, 1997, the State issued approximately $1.03
billion in non-self liquidating general obligation bonds and $1.26 billion in
revenue bonds. Refunding bonds, which are used to refinance existing long-term
debt, accounted for none of the general obligation bonds and $841.38 million of
the revenue bonds.
General Fund general obligation debt service expenditures for fiscal
year 1996-97 were $1.92 billion, and are estimated at $1.89 billion for fiscal
year 1997-98.
The State's general obligation bonds have received ratings of "A1" by
Moody's Investors Service, "A+" by Standard & Poor's and "A+" by Fitch IBCA,
Inc. (formerly Fitch Investors Service, L.P.) ("Fitch").
<PAGE>
SPECIAL FACTORS AFFECTING COLORADO INTERMEDIATE TAX FREE FUND
As described in the Prospectuses relating to Colorado Intermediate Tax
Free Fund, except during temporary defensive periods, this Fund will invest most
of its total assets in Colorado municipal obligations. Colorado Intermediate Tax
Free Fund therefore is susceptible to political, economic and regulatory factors
affecting issuers of Colorado municipal obligations. The following information
provides only a brief summary of the complex factors affecting the financial
situation in Colorado. This information is derived from sources that are
generally available to investors and is based in part on information obtained
from various state and local agencies in Colorado. It should be noted that the
creditworthiness of obligations issued by local Colorado issuers may be
unrelated to the creditworthiness of obligations issued by the State of
Colorado, and that there is no obligation on the part of the State of Colorado
to make payment on such local obligations in the event of default.
COLORADO FISCAL CONDITION. The Colorado Constitution allocates to the
General Assembly legislative responsibility for appropriating State moneys to
pay the expenses of State government. The fiscal year of the State is the
12-month period commencing July 1 and ending June 30. During the fiscal year for
which appropriations have been made, the General Assembly may increase or
decrease appropriations through supplementary appropriations.
State general fund tax collections for fiscal year 1996-97 increased
9.6% over fiscal year 1995-96 to reach $4,679.4 million. The current estimate
for fiscal year 1997-98 is $5,178.6 million, or an increase of 10.7%. State cash
funds, which consist of a variety of program revenues, totalled $2,007.7 million
for fiscal year 1996-97, and are projected to increase 4.3% for fiscal year
1997-98 to $2,093.1 million.
The State Constitution requires that expenditures for any fiscal year
not exceed revenues for such fiscal year. In addition, Article X, Section 20, of
the State Constitution (see "-- State Constitutional Amendment" below) limits
increases in expenditures of state general funds and cash revenues from year to
year to the sum of State inflation plus the percentage change in population
(adjusted for revenue changes approved by voters). Expenditures in fiscal year
1997-98 are limited to an increase of no more than 5.5% over 1996-97
expenditures. The 5.5% increase factor is equal to the sum of 1996 inflation of
3.5% and population growth of 2.0%. Based upon total general fund tax
collections and state cash revenues for fiscal year 1996-97 of $6,647.6 million,
expenditures for 1997-98 will be limited to $6,866.6 million. December 20, 1997
estimates show total revenues for the 1997-98 fiscal year to be $7,226.7
million, or $360.1 million over the limit. The 1997 fiscal year General Fund and
program revenues (cash funds) were $139.0 million more than expenditures allowed
under the spending limitation. This is the first time the State breached the
limit since its implementation in 1992. This excess revenue of $139.0 million
will be refunded to Colorado taxpayers during the 1998 tax filing season.
STATE CONSTITUTIONAL AMENDMENT. Section 20, Article X of the Colorado
Constitution ("Amendment One") contains limitations on the ability of
"Districts," which are defined as Colorado State and local governments, to
increase taxes and issue debt obligations, as well as limitations on spending
and revenue generation. The amendment does not apply to "Enterprises," which are
defined as government-owned businesses that are authorized to issue their own
revenue bonds and that receive under 10% of annual revenues in grants from all
Colorado state and local governments combined.
Amendment One limits the ability of Districts to increase taxes by
providing that advance voter approval is required for "any new tax, tax rate
increase, mill levy above that for the prior year, valuation for assessment
ratio increase for a property class, or extension of an expiring tax, or a tax
policy change directly causing a net tax revenue gain to any district." An
additional limitation is placed on the maximum annual percentage increase in
property tax revenue.
Amendment One also imposes limitations on government borrowing. The
amendment provides that Districts must have advance voter approval for the
"creation of any multiple-fiscal year direct or
<PAGE>
indirect district debt or other financial obligation whatsoever without adequate
present cash reserves pledged irrevocably and held for payments in all future
fiscal years," except for refinancing District bonded debt at a lower interest
rate or adding new employees to existing District pension plans. Prior to the
adoption of Amendment One, voter approval was generally required only for the
creation of general obligation debt.
Spending limitations applicable to the State and separately to local
governments are also included in Amendment One. The amendment provides that the
maximum annual percentage change in each local District's Fiscal Year Spending
shall equal inflation in the prior calendar year plus annual local growth,
adjusted for revenue changes approved by voters after 1991 and certain other
allowed adjustments. "Fiscal Year Spending" is defined as all District
expenditures and reserve increases except refunds made in the current or next
fiscal year, gifts, federal funds, collections for another government, pension
contributions by employees and pension fund earnings, reserve transfers or
expenditures, damage awards and property sales. If revenue from sources not
excluded from Fiscal Year Spending exceeds the spending limit for a fiscal year,
Amendment One provides that the excess must be refunded to taxpayers in the next
fiscal year unless voters approve a revenue change as an offset.
Elections required under Amendment One are limited to the State general
election (the first Tuesday after the first Monday in November in even numbered
years), an election held on the first Tuesday in November in odd numbered years,
or the regular biennial election of the local government.
While it is too early to determine what impacts Amendment One will
ultimately have on the financial operations of Colorado state and local
governments, these constraints on budgetary and debt management flexibility may
create credit concerns. Furthermore, the language of Amendment One is not clear
as to certain matters, including (a) whether property tax rates can be increased
without voter approval to support outstanding or refunding general obligation
bonds, (b) whether new lease rental bonds and certificates of participation
constitute multiple-year financial obligations within the context of the
amendment, and (c) the precise definition of exempt Enterprises. A number of
Colorado courts have rendered decisions regarding various provisions of
Amendment One since its passage. However, there are still many uncertainties as
to the appropriate construction of certain provisions of Amendment One. In view
of the fact that no appellate court has ruled on Amendment One comprehensively,
there can still be no assurance as to the appropriate construction of certain
provisions of Amendment One.
COLORADO ECONOMY. Colorado employment has slowed from 5.1% at its peak
in 1994 to 3.4% in 1996. Job creation back in 1994 hit 85,200. During 1996, only
62,500 jobs were created with services and trade being the number one and two,
respectively, largest growing industries in Colorado. Construction reported the
largest percentage gain from 1995 to 1996, at 8.8%, or an additional 9,000
employees. Mining continued to be the weakest industry sector with a loss of
8.1% or 1,200 employees in 1996.
Colorado's job growth is expect to remain at 3.4% for 1997 and an
estimated 64,500 jobs will be created. Growth is expected in every industry
except TCPU (Transportation, Communications and Public Utilities). High
technology industries such as computer services and manufacturing, telephone
communications, cable television and communications equipment manufacturing
continue to expand. The pace of growth in 1997 was brisk, even with such
high-profile losses as Southern Pacific's merger with Union Pacific and
subsequent relocation to Nebraska and the Public Service Company's merger and
downsizing. In 1998, overall growth is expected to continue to shrink as the
building and real estate sectors begin to top out and as manufacturing slows.
Unemployment will bottom out at 3.4% of the workforce in 1997, breaking
through the 4.2% threshold that has held for three years in a row. In
comparison, the national unemployment rate in 1996 was 5.4%. In 1973, Colorado's
unemployment was at 3.0%. In this business cycle, however, that 24- year low
will not be breached. Unemployment rates will rise slightly in 1998 and continue
to creep upward into 2001, as a result of slower labor force growth and slowing
participation rates. Furthermore,
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as newly-trained former welfare recipients enter the labor market, the ranks of
the unemployed will swell. Those looking for first-time jobs and those who must
go through several employment situations before find the right job will add to
the unemployment rate.
Total personal income in Colorado during 1997 is projected to reach
$104.7 billion, an increase of 6.5%, yet lower than the 7.1% increase reached in
1996. During 1996, total United States personal income increased 5.6% and is
estimated to increase 5.8% in 1997. Preliminary estimates for Colorado personal
income predict an annual growth rate of 6.7% for 1998.
Total population in Colorado increased by 75,100 during 1996, resulting
in a growth rate of 2.0%. The preliminary estimate for total population increase
for 1997 is 73,300 or 1.9%.
SPECIAL FACTORS AFFECTING MINNESOTA INSURED INTERMEDIATE TAX FREE FUND
As described in the Prospectuses relating to Minnesota Insured
Intermediate Tax Free Fund, except during temporary defensive periods, this Fund
will invest most of its total assets in Minnesota municipal obligations. This
Fund therefore is susceptible to political, economic and regulatory factors
affecting issuers of Minnesota municipal obligations. The following information
provides only a brief summary of the complex factors affecting the financial
situation in Minnesota. This information is derived from sources that are
generally available to investors and is based in part on information obtained
from various state and local agencies in Minnesota. It should be noted that the
creditworthiness of obligations issued by local Minnesota issuers may be
unrelated to the creditworthiness of obligations issued by the State of
Minnesota, and that there is no obligation on the part of Minnesota to make
payment on such local obligations in the event of default.
MINNESOTA FISCAL CONDITION. Minnesota's constitutionally prescribed
fiscal period is a biennium, and Minnesota operates on a biennial budget basis.
Legislative appropriations for each biennium are prepared and adopted during the
final legislative session of the immediately preceding biennium. Prior to each
fiscal year of a biennium, Minnesota's Department of Finance allots a portion of
the applicable biennial appropriation to each agency or other entity for which
an appropriation has been made. An agency or other entity may not expend moneys
in excess of its allotment. If revenues are insufficient to balance total
available resources and expenditures, Minnesota's Commissioner of Finance, with
the approval of the Governor, is required to reduce allotments to the extent
necessary to balance expenditures and forecasted available resources for the
then current biennium. The Governor may prefer legislative action when a large
reduction in expenditures appears necessary, and if Minnesota's legislature is
not in session the Governor is empowered to convene a special session.
Frequently in recent years, legislation has been required to eliminate
projected budget deficits by raising additional revenue, reducing expenditures,
including aids to political subdivisions and higher education, reducing the
State's budget reserve, imposing a sales tax on purchases by local governmental
units, and making other budgetary adjustments.
During fiscal year 1997, the total fund balance, on a GAAP basis, for
the General Fund increased by $66.9 million to $1.486 billion. At June 30, 1997,
the unreserved, undesignated portion of the fund balance reflected a positive
balance of $642.3 million, after providing for a $583.5 million budgetary
reserve. This compares with a $491.9 million unreserved, undesignated fund
balance at the end of fiscal year 1996 with a $570 million budgetary reserve. On
a budgetary basis, the June 30, 1997, unrestricted (undesignated) fund balance
for the General Fund was $812.7 million, compared with a balance of $506 million
at the end of 1996.
General Fund revenues and transfers-in totaled $10.412 billion for
fiscal year 1997, up 8% from those for fiscal year 1996. General fund
expenditures and transfers-out for the year totaled $9.926 billion, an increase
of 3% from the previous year. Of this amount, $6.917 billion (70%) is in the
form of grants and subsidies to local governments, individuals and non-profit
organizations.
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The Minnesota Department of Finance November 1997 Forecast projects
that, under current law, the State will complete its current biennium June 30,
1999 with a $453 million surplus, plus a $350 million cash flow account balance,
a $522 million budget reserve, and $93 million in other dedicated accounts.
Revenues for the 1998-99 biennium are forecast at $21.045 billion. Total General
Fund expenditures and transfers for the biennium are projected to be $20.7
billion. The forecast balance for the General Fund is $1.36 billion for the
1998-99 biennium.
The State is party to a variety of civil actions that could adversely
affect the State's General Fund. In addition, substantial portions of State and
local revenues are derived from federal expenditures, and reductions in federal
aid to the State and its political subdivisions and other federal spending cuts
may have substantial adverse effects on the economic and fiscal condition of the
State and its local governmental units. Risks are inherent in making revenue and
expenditure forecasts. Economic or fiscal conditions less favorable than those
reflected in State budget forecasts and planning estimates may create additional
budgetary pressures.
State grants and aids represent a large percentage of the total
revenues of cities, towns, counties and school districts in Minnesota. Even with
respect to bonds that are revenue obligations of the issuer and not general
obligations of Minnesota, there can be no assurance that the fiscal problems
referred to above will not adversely affect the market value or marketability of
the bonds or the ability of the respective obligors to pay interest on and
principal of the bonds.
The State issued $170.0 million of new general obligation bonds, and
$172.1 million of general obligation bonds were redeemed during 1997, leaving an
outstanding balance of $2.2 billion. Moody's Investor Services and Fitch's rates
Minnesota general obligation bonds Aaa and AAA, respectively. In August 1997,
Standard & Poor's upgraded the State's general obligation bond rating to AAA
from AA+.
MINNESOTA ECONOMY. Minnesota relies heavily on a progressive individual
income tax and a retail sales tax for revenue, which results in a fiscal system
unusually sensitive to economic conditions. In fiscal year 1997, Minnesota's
economy out performed the United States economy as a whole.
In November 1997, the State's unemployment rate, on a seasonally
adjusted basis, was 2.8%, down 1.2 percentage points from the 4.0% observed one
year earlier. That unemployment rate was well below the national rate of 4.6%.
Payroll employment in Minnesota grew by 53,000 jobs during the 1997 fiscal year.
Employment in fiscal year 1997 grew by 2.2%, the same rate as the U.S. average.
At present, the State's most serious economic challenge is ensuring there will
be sufficient workers to fill the jobs currently being generated.
Personal income in Minnesota is now estimated to have grown at a 6.6%
annual rate during fiscal year 1997, well above the national average of 5.3%.
Wage growth was strong, but as in neighboring Midwestern states, all of whom
also had strong growth in personal income, the agricultural sector was a major
contributor. Prices were higher than average, yields were strong, and federal
farm program payments under the 1996 farm bill were much larger than they would
have been under the previous program.
Personal income in Minnesota is forecast to grow by 5.0% during the
1998 fiscal year, slightly below the average rate forecast for the nation.
Payroll employment is expected to grow at a 2.1% annual rate, consistent with
the national average. Wage and salary income growth, however, is projected to
lag the national average rate as states outside the Midwest also begin to feel
labor market pressures and part-time workers elsewhere increase their hours to,
or beyond, the levels they desire. Farm income in the 1998 fiscal year is also
forecast to be down from the high levels reported during fiscal year 1997 since
commodity prices have returned to more normal levels.
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There can be no assurance that Minnesota's economy and fiscal condition
will not materially change in the future or that future difficulties will not
occur. Economic difficulties and the resultant impact on state and local
government finances may adversely affect the market value of obligations in the
portfolio of Minnesota Insured Intermediate Tax Free Fund or the ability of
respective obligors to make timely payment of the principal and interest on such
obligations.
SPECIAL FACTORS AFFECTING OREGON INTERMEDIATE TAX FREE FUND
As described in the Prospectus relating to Oregon Intermediate Tax Free
Fund, except during temporary defensive periods, Oregon Intermediate Tax Free
Fund will invest most of its total assets in Oregon municipal obligations. This
Fund therefore is susceptible to political, economic and regulatory factors
affecting issuers of Oregon municipal obligations. The following information
provides only a brief summary of the complex factors affecting the financial
situation in Oregon. This information is derived from sources that are generally
available to investors and is based in part on information obtained from various
state and local agencies in Oregon. It should be noted that the creditworthiness
of obligations issued by local Oregon issuers may be unrelated to the
creditworthiness of obligations issued by the State of Oregon, and that there is
no obligation on the part of Oregon to make payment on such local obligations in
the event of default.
GENERAL ECONOMIC CONDITIONS. Oregon's December 1997 forecast issued by
the Department of Administrative Services predicts that downside risks have
increased with volatility in worldwide financial markets and the likelihood of
slower growth in important Asian markets. Yet, there is most likely to be a
continuation of the modest deceleration that has taken place during 1997. Growth
is expected to be led by further expansion of the State's high technology
manufacturing industries and their suppliers, along with additional gains in
transportation equipment manufacturing. Expansion of these manufacturing sectors
will translate into job creation in the service-producing sectors. The
construction sector is expected to level off after four years of extremely rapid
growth, thereby slowing the State's overall growth rate.
A pattern of slowing growth is expected for both personal income and
employment. Total non-farm wage and salary employment is projected to increase
3.5% for 1997, down from 4.0% in 1996. Job growth is expected to slow further to
2.6% in 1998. Personal income will grow a projected 6.7% for 1997 and 5.6% for
1998, down from 7.0% growth in 1996. The State's population is forecast to
increase 1.6% in 1998, up slightly from an estimated 1.5% in 1997.
Oregon's unemployment rate increased from 4.8% in 1995 to 5.2% in 1996.
This compares favorably with the national unemployment rates of 5.6% in 1995 and
5.4% in 1996. However, as of November 1997, Oregon's unemployment rate was 5.3%
while the U.S. unemployment rate was 4.6%.
The statewide timber harvest is expected to be 4.0 billion board feet
for both 1997 and 1998, a slight increase from 3.932 billion board feet in 1996.
The 1996 statewide timber harvest was a decrease of 8.9% from 1995. In the
agricultural industry, cash commodities include farm forest products, cattle and
calves, nursery crops, dairy, wheat, potatoes, alfalfa hay, and perennial rye
grass seed.
BUDGETARY PROCESS. The Oregon budget is approved on a biennial basis by
separate appropriation measures. A biennium begins July 1 and ends June 30 of
odd-numbered years. Measures are passed for the approaching biennium during each
regular Legislative session, held beginning in January of odd-numbered years.
Because the Oregon Legislative Assembly meets in regular session for
approximately six months of each biennium, provision is made for interim funding
through the Legislative Emergency Board. The Emergency Board is authorized to
make allocations of General Fund monies to State agencies from the State
Emergency Fund. The Emergency Board may also authorize increases in expenditure
limitations from Other or Federal Funds (dedicated or continuously appropriated
funds), and may take other
<PAGE>
actions to meet emergency needs when the Legislative Assembly is not in session.
The most significant feature of the budgeting process in Oregon is the
constitutional requirement that the budget be in balance at the end of each
biennium. Because of this provision, Oregon may not budget a deficit and is
required to alleviate any revenue shortfalls within each biennium.
REVENUE AND EXPENDITURES. The Oregon Biennial budget is a two-year
fiscal plan balancing proposed spending against expected revenues. The total
budget consists of three segments distinguished by source of revenues: program
supported by General Fund revenues; programs supported by Other Funds (dedicated
fund) revenues, including lottery funds; and, Federal Funds. General Fund
revenue totaled $7,731.58 million for the 1995-1997 biennium. Revenue exceeded
the May estimate by $187.7 million.
General Fund revenue is projected to be $8,477.4 million for the
1997-99 biennium. The beginning balance is estimated to be $794.2 million for a
total General Fund resource estimate of $9,271.6 million. The December 1997-99
General Fund revenue estimate is $42.9 million higher than the September 1997
forecast. It is $252.4 million higher than the Close of Session (COS) forecast.
The State is involved in certain legal proceedings that, if decided
against the State, may require the State to make significant future expenditures
or may impair future revenue sources. Because of the prospective nature of these
legal proceedings, no provision for these potential liabilities has been
recorded in the publicly disclosed financial statements. Additionally, 1,229
notices of tort claims have been filed against the State. Of those claims, 544
also have been filed as court actions and are pending against the State. These
cases are pending in State courts and are subject to the liability limitations
stated in the Tort Claims Act of $500,000 per occurrence, $200,000 per
individual for physical injuries, and $50,000 per occurrence for property
damage. The likelihood of an unfavorable outcome in these cases ranges from
probable to remote, but it is certain that these cases do not involve real
exposure of $25 million in the aggregate.
In the November 1994 general election, Oregonians approved a ballot
measure, introduced through the initiative process, that will have, or may have,
a material financial impact on the State. "Measure 11" amends Oregon statutes to
require mandated minimum sentences for certain felonies, effective April 1,
1995. "Measure 11" creates a need for an estimated 6,085 new prison beds by the
year 2001 and calls for State correction facility construction costs of
approximately $462 million in the next five years. The State also estimates
increases in State expenditures for correctional operations, beginning with an
increase of $3.2 million in fiscal year 1996, with accelerating costs that
should peak at an annual increase of up to $101.6 million by fiscal year 2001.
Because these demands will be made by on the State General Fund, they will
reduce amounts that otherwise would be available in the future for the Oregon
Legislative Assembly to appropriate for other purposes.
In November of 1996, voters approved Ballot Measure 47, the property
tax cut and cap. It will reduce revenues to schools, cities and counties by as
much as $1 billion and put pressure on the General Fund to make up some or all
of the difference.
Ballot Measure 50, passed by Oregon voters in May of 1997, limits the
taxes a property owner must pay. It limits taxes on each property by rolling
back the 1997-98 assessed value of each property to 90% of its 1995-96 value.
The measure also limits future growth on taxable value to 3% a year, with
exceptions for items such as new construction, remodeling, subdivisions, and
rezoning. It establishes permanent tax rates for Oregon's local taxing
districts, yet allows voters to approve new, short- term option levies outside
the permanent rate limit if approved by a majority of a 50% voter turnout.
DEBT ADMINISTRATION AND LIMITATION. Oregon statutes give the State
Treasurer authority to review and approve the terms and conditions of sale for
State agency bonds. The Governor, by statute, seeks the advice of the State
Treasurer when recommending the total biennial bonding level for State programs.
Agencies may not request that the Treasurer issue bonds or certificates of
requirements for
<PAGE>
state agencies on proposed and outstanding debt. Statutes contain management and
reporting requirements for state agencies on proposed and outstanding debt.
A variety of general obligation and revenue bond programs have been
approved in Oregon to finance public purpose programs and projects. General
obligation bond authority requires voter approval or a constitutional amendment,
while revenue bonds may be issued under statutory authority. However, under the
Oregon Constitution the state may issue up to $50,000 of general obligation debt
without specific voter approval. The State Legislative Assembly has the right to
place limits on general obligation bond programs which are more restrictive than
those approved by the voters. General obligation authorizations are normally
expressed as a percentage of statewide True Cash Value (TCV) of taxable
property. Revenue bonds usually are limited by the Legislative Assembly to a
specific dollar amount.
The State's constitution authorizes the issuance of general obligation
bonds for financing community colleges, highway construction, and pollution
control facilities. Higher education institutions and activities and community
colleges are financed through an appropriation from the General Fund. Facilities
acquired under the pollution control program are required to conservatively
appear to be at least 70% self-supporting and self-liquidating from revenues,
gifts, federal government grants, user charges, assessments, and other fees.
Additionally, the State's constitution authorizes the issuance of
general obligation bonds to make farm and home loans to veterans, provide loans
for state residents to construct water development projects, provide credit for
multi-family housing for elderly and disabled persons, and for small scale local
energy projects. These bonds are self-supporting and are accounted for as
enterprise funds. Certain provisions of the Water Resources general obligation
bond indenture conflict with State statutes. Upon the advice of the Attorney
General, the method of handling investment interest is in compliance with the
statutes rather than the bond indenture. Currently there is litigation pending
against the State concerning this treatment of the investment interest.
The State's constitution further authorizes the issuance of general
obligation bonds for financing higher education building projects, facilities,
institutions, and activities. As of September 1, 1997, the total balance of
general obligation bonds was $3.26 billion. The debt service requirements for
general obligation bonds, including interest of approximately $2.39 billion, as
of September 1, 1997, was $5.66 billion.
In addition to general obligation and direct revenue bonds, the State
of Oregon issues industrial development revenue bonds ("IDBs"), Oregon Mass
Transportation Financing Authority revenue bonds and Health, Housing,
Educational and Cultural Facilities Authority ("HHECFA") revenue bonds. The IDBs
are issued to finance the expansion, enhancement or relocation of private
industry in the State. Before such bonds are issued, the project application
must be reviewed and approved by both the Oregon State Treasury and the Oregon
Economic Development Commission. Strict guidelines for eligibility have been
developed to ensure that the program meets a clearly defined development
objective. IDBs issued by the State are secured solely by payments from the
private company and there is no obligation, either actual or implied, to provide
state funds to secure the bonds. The Oregon Mass Transportation Financing
Authority ("OMTFA") reviews financing requests from local mass transit districts
and may authorize issuance of revenue bonds to finance eligible projects. The
State has no financial obligation for these bonds, which are secured solely by
payments from local transit districts.
The State is statutorily authorized to enter into financing agreements
through the issuance of certificates of participation. Certificates of
participation have been used for the acquisition of computer systems by the
Department of Transportation, Department of Administrative Services, and the
Department of Higher Education. Also, certificates of participation have been
used for the acquisition or construction of buildings by the Department of
Administrative Services, Department of Fish and Wildlife, Department of
Corrections, State Police, and Department of Higher Education.
<PAGE>
Further, certificates of participation were used in the acquisition of
telecommunication systems by the Department of Administrative Services and the
Adult & Family Services Division. As of September 1, 1997, the certificates of
participation debt totaled $634.9 million. The debt service requirements for
certificates of participation for 1995-1997 is estimated at $70.1 million.
HHECFA is a public corporation created in 1989, and modified in 1991,
to assist with the assembling and financing of lands for health care, housing,
educational and cultural uses and for the construction and financing of
facilities for such uses. The Authority reviews proposed projects and makes
recommendations to the State Treasurer as to the issuance of bonds to finance
proposed projects. The State has no financial obligation for these bonds, which
are secured solely by payments from the entities for which the projects were
financed.
The Treasurer on behalf of the State may also issue federally taxable
bonds in those situations where securing a federal tax exemption is unlikely or
undesirable; regulate "current" as well as "advance" refunding bonds; enter into
financing agreements, including lease purchase agreements, installment sales
agreements and loan agreements to finance real or personal property and approve
certificates of participation with respect to the financing agreements. Amounts
payable by the State under a financing agreement are limited to funds
appropriated or otherwise made available by the Legislative Assembly for such
payment. The principal amount of such financing agreements are treated as bonds
subject to maximum annual bonding levels established by the Legislative Assembly
under Oregon statute.
Each of Fitch, Moody's and Standard & Poor's has assigned their
municipal bond ratings of "AA," "Aa," and "AA," respectively.
INSURANCE FOR MINNESOTA INSURED INTERMEDIATE TAX FREE FUND
Minnesota Insured Intermediate Tax Free Fund ("Minnesota Insured Fund")
is authorized to obtain Portfolio Insurance from insurers that have obtained a
claims-paying ability of "AAA" (or a short-term rating of "SP-1") from Standard
& Poor's or "Aaa" (or a short-term rating of "MIG-1") from Moody's or an
equivalent rating from another nationally recognized statistical rating
organization. Such insurers may include AMBAC Assurance Corporation ("AMBAC"),
MBIA Insurance Corp. ("MBIA"), Financial Guaranty Insurance Company ("FGIC"),
Financial Security Assurance, Inc. ("FSA"), or other companies meeting the
foregoing criteria.
Any Portfolio Insurance policy obtained by Minnesota Insured Fund would
be effective only so long as Minnesota Insured Fund is in existence, the insurer
is still in business and the municipal obligations described in the policy
continue to be held by Minnesota Insured Fund. In the event of a sale of any
municipal obligation by Minnesota Insured Fund or payment thereof prior to
maturity, a Portfolio Insurance policy would terminate as to such municipal
obligation on the settlement date of the sale or the redemption date.
Under a Portfolio Insurance policy, the insurer would unconditionally
guarantee to Minnesota Insured Fund the timely payment of principal and interest
on the municipal obligations as such payments become due but are not paid by the
issuer, except that in the event of any acceleration of the due date of the
principal by reason of mandatory or optional redemption or acceleration
resulting from default or otherwise, other than any advancement of maturity
pursuant to a mandatory sinking fund payment, the payments guaranteed will be
made in such amounts and at such times as payments of principal would have been
due and there had not been any such acceleration. Such a policy would not insure
against loss of any prepayment premium that may at any time be payable with
respect to any municipal obligation. It also would not insure against loss
relating to: (i) optional or mandatory redemptions (other than mandatory sinking
fund redemptions); (ii) any payments to be made on an accelerated basis; (iii)
payments of the purchase price of municipal obligations upon tender by an owner
thereof; or (iv) any preference relating to (i) through (iii) above. It also
would not insure against
<PAGE>
nonpayment of principal of or interest on the municipal obligations resulting
from the insolvency, negligence or any other act or omission of the paying agent
for the municipal obligations.
Effective July 14, 1997, AMBAC Indemnity Corporation changed its name
to AMBAC Assurance Corporation. AMBAC is a Wisconsin-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of Wisconsin and licensed to do business in 50 states, the District of
Columbia, the Territory of Guam and the Commonwealth of Puerto Rico, with
admitted assets of approximately $2.813 billion (unaudited) and statutory
capital of approximately $1.605 billion (unaudited as of September 30, 1997.
Statutory capital consists of AMBAC's policyholders' surplus and statutory
contingency reserve. Copies of AMBAC's financial statements prepared in
accordance with statutory accounting standards are available from AMBAC. The
address of AMBAC's administrative offices is One State Street Plaza, 17th Floor,
New York, New York 10004.
MBIA is a limited liability corporation domiciled in the State of New
York and licensed to do business in all 50 states, the District of Columbia, the
Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands,
the Virgin Islands of the United States and the Territory of Guam. As of
September 30, 1997, MBIA had admitted assets of $5.1 billion (unaudited), total
liabilities of $3.4 billion (unaudited), and total capital and surplus of $1.7
billion (unaudited) determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities. Copies of MBIA's
year end financial statements are available from MBIA. The address of MBIA is
113 King Street, Armonk, New York 10504.
On November 14, 1997, MBIA Inc. announced the signing of a definitive
agreement to merge with CapMAC Holdings, Inc. ("CHI"), the parent company of
Capital Markets Assurance Corporation ("CapMAC"), in a stock-for-stock
transaction valued at $607 million. The announcement also stated that all
outstanding policies issued by CapMAC will be backed by the full financial
resources of MBIA Inc., and that the agreement is subject to regulatory
approvals and approval by CHI shareholders.
FGIC is a monoline financial guaranty insurer domiciled in the State of
New York and subject to regulation by the State of New York Insurance
Department. As of September 30, 1997, the total capital and surplus of FGIC was
approximately $1,246.7 million. FGIC prepares financial statements on the basis
of both statutory accounting principles and generally accepted accounting
principles. Copies of such financial statements may be obtained by writing to
FGIC at 115 Broadway, New York, New York 10006, Attention: Communications
Department.
FSA is a monoline insurance company incorporated in 1984 under the laws
of the State of New York. FSA is licensed to engage in financial guaranty
insurance business in all 50 states, the District of Columbia and Puerto Rico.
As of September 30, 1997 the total policyholders' surplus and contingency
reserves and the total unearned premium reserve, respectively, of FSA were, in
accordance with statutory accounting principles, approximately $788.1 million
and $472.3 million, and the total shareholders' equity and total unearned
premium reserve, respectively, of FSA were, in accordance with generally
accepted accounting principles, approximately $894.5 million and $402.9 million.
Copies of FSA's financial statements may be obtained by writing to FSA at 350
Park Avenue, New York, New York 10022, Attention: Communications Department.
The information relating to AMBAC, MBIA, FGIC and FSA set forth above
has been obtained from publicly available sources. No representation is made as
to the accuracy or adequacy of such information.
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
<PAGE>
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 a 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 9
below are fundamental and cannot be changed with respect to a Fund without
approval by the holders of a majority of the outstanding shares of that Fund as
defined in the Investment Company Act of 1940, as amended (the "1940 Act"),
i.e., by the lesser of the vote of (a) 67% of the shares of the Fund present at
a meeting where more than 50% of the outstanding shares are present in person or
by proxy, or (b) more than 50% of the outstanding shares of the Fund.
None of the Funds will:
1. Except for Intermediate Tax Free Fund, California Intermediate
Tax Free Fund, Colorado Intermediate Tax Free Fund, Minnesota
Insured Intermediate Tax Free Fund and Oregon Intermediate Tax
Free Fund (collectively, the "Tax Free Funds") and for
Technology Fund and Health Sciences Fund, 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, except that Real Estate Securities Fund will invest
without restriction in issuers principally engaged in the real
estate industry. Intermediate Tax Free Fund will not invest
25% or more of the value of its total assets in obligations of
issuers located in the same state (for this purpose, the
location of an "issuer" shall be deemed to be the location of
the entity the revenues of which are the primary source of
payment of the location of the project or facility which may
be the subject of the obligation). None of the Tax Free Funds
will invest 25% or more of the value of its total assets in
revenue bonds or notes, payment for which comes from revenues
from any one type of activity (for this purpose, the term
"type of activity" shall include without limitation (i) sewage
treatment and disposal; (ii) gas provision; (iii) electric
power provision; (iv) water provision; (v) mass transportation
systems; (vi) housing; (vii) hospitals; (viii) nursing homes;
(ix) street development and repair; (x) toll roads; (xi)
airport facilities; and (xii) educational facilities), except
that, in circumstances in which other appropriate available
investments may be in limited supply, such Funds may invest
without limitation in gas provision, electric power provision,
water provision, housing and hospital obligations. This
restriction does not apply to general obligation bonds or
notes or, in the case of Intermediate Tax Free Fund, to
pollution control revenue bonds. However, in the case of the
latter Fund, it is anticipated that normally (unless there are
unusually favorable
<PAGE>
interest and market factors) less than 25% of such Fund's
total assets will be invested in pollution control bonds. This
restriction does not apply to securities of the United States
Government or its agencies and instrumentalities or repurchase
agreements relating thereto.
2. Issue any senior securities (as defined in the 1940 Act),
other than as set forth in restriction number 3 below and
except to the extent that using options or purchasing
securities on a when-issued basis may be deemed to constitute
issuing a senior security.
3. Borrow money, except from banks for temporary or emergency
purposes. The amount of such borrowing may not exceed 10% of
the borrowing Fund's total assets. None of the Funds will
borrow money for leverage purposes. For the purpose of this
investment restriction, the use of options and futures
transactions and the purchase of securities on a when-issued
or delayed delivery basis shall not be deemed the borrowing of
money. (As a non-fundamental policy, no Fund will make
additional investments while its borrowings exceed 5% of total
assets.)
4. Make short sales of securities.
5. Purchase any securities on margin except to obtain such
short-term credits as may be necessary for the clearance of
transactions and except, in the case of Emerging Growth Fund,
International Fund and Technology Fund as may be necessary to
make margin payments in connection with foreign currency
futures and other derivative transactions.
6. Purchase or sell physical commodities (including, by way of
example and not by way of limitation, grains, oilseeds,
livestock, meat, food, fiber, metals, petroleum, petroleum-
based products or natural gas) or futures or options contracts
with respect to physical commodities. This restriction shall
not restrict any Fund from purchasing or selling any financial
contracts or instruments which may be deemed commodities
(including, by way of example and not by way of limitation,
options, futures and options on futures with respect, in each
case, to interest rates, currencies, stock indices, bond
indices or interest rate indices) or any security which is
collateralized or otherwise backed by physical commodities.
7. Purchase or sell real estate or real estate mortgage loans,
except that the Funds may invest in securities secured by real
estate or interests therein or issued by companies that invest
in or hold real estate or interests therein, and except that
the Funds (other than Equity Income Fund, Equity Index Fund,
Stock Fund, Diversified Growth Fund, Special Equity Fund,
Regional Equity Fund, Small Cap Value Fund, Micro Cap Value
Fund and International Index Fund) may invest in
mortgage-backed securities.
8. 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.
9. 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 a shareholder vote. None of the Funds will:
10. Invest more than 15% of its net assets in all forms of
illiquid investments.
<PAGE>
11. 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 (other than, in the case of Real Estate Securities
Fund, publicly traded real estate investment trusts) 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
fo more than three years.)
12. Invest for the purpose of exercising control or management.
13. Purchase or sell real estate limited partnership interests
(other than, in the case of Real Estate Securities Fund,
publicly traded 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.
14. Purchase securities of any other registered investment company
(as defined in the 1940 Act), except, subject to 1940 Act
limitations, (a) the Tax Free Funds may purchase shares of
open-end investment companies investing primarily in municipal
obligations with remaining maturities of 13 months or less;
(b) International Index Fund and International Fund may
purchase shares of open-end investment companies which invest
in permitted investments for such Funds; (c) each of Balanced
Fund, Rea Estate Securities Fund, Equity Income Fund, Equity
Index Fund, Stock Fund, Diversified Growth Fund, Special
Equity Fund, Regional Equity Fund, Emerging Growth Fund,
International Fund, Health Sciences Fund, Technology Fund,
Limited Term Income Fund, Intermediate Term Income Fund, Fixed
Income Fund and Intermediate Government Bond Fund may, as part
of its investment in cash items, invest in securities of other
mutual funds which invest primarily in debt obligations with
remaining maturities of 13 months or less; and (d) all Funds
may purchase securities as part of a merger, consolidation,
reorganization or acquisition of assets. Further, so long as
its shares are registered for sale in the state of California,
Intermediate Tax Free Fund will invest in securities of other
open-end investment companies primarily for the purpose of
investing short-term cash on a temporary basis; in addition,
the Fund will waive its advisory fee on any portion of its
assets invested in other open-end investment companies.
15. Invest in foreign securities, except that (a) Limited Term
Income Fund, Intermediate Term Income Fund, and Fixed Income
Fund each may invest up to 15% of its total assets in foreign
securities payable in United States Dollars; (b) Balanced
Fund, Real Estate Securities Fund, Equity Income Fund, Stock
Fund, Diversified Growth Fund, Special Equity Fund, Emerging
Growth Fund, Small Cap Value Fund, Micro Cap Value Fund,
Health Sciences Fund and Technology Fund each may invest may
invest up to 25% of its total assets in securities of foreign
issuers which are either listed on a United States stock
exchange or represented by American Depositary Receipts; and
(c) International Index Fund and International Fund may invest
in foreign securities without limitation.
16. Except for International Fund, invest in warrants; provided,
that the other Funds except for the Tax Free Funds may invest
in warrants in an amount not exceeding 5% of a Fund's net
assets. No more than 2% of this 5% may be warrants which are
not listed on the New York Stock Exchange.
For determining compliance with its investment restriction relating to
industry concentration, each Fund classifies asset-backed securities in its
portfolio in separate industries based upon a combination of the industry of the
issuer or sponsor and the type of collateral. The industry of the issuer or
sponsor and the type of collateral will be determined by the Adviser. For
example, an asset-backed security known as "Money Store 94D A2" would be
classified as follows: the issuer or sponsor of the
<PAGE>
security is The Money Store, a personal finance company, and the collateral
underlying the security is automobile receivables. Therefore, the industry
classification would be Personal Finance Companies -- Automobile. Similarly, an
asset-backed security known as "Midlantic Automobile Grantor Trust 1992-1 B"
would be classified as follows: the issuer or sponsor of the security is
Midlantic National Bank, a banking organization, and the collateral underlying
the security is automobile receivables. Therefore, the industry classification
would be Banks -- Automobile. Thus, an issuer or sponsor may be included in more
than one "industry" classification, as may a particular type of collateral.
<PAGE>
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.
Roger A. Gibson, 1020 15th Street, Suite 41A, Denver, Colorado 80202:
Director of FAF, FAIF and FASF since October 1997; Vice President of North
America-Mountain Region for United Airlines since June 1995; prior to his
current position, served most recently as Vice President, Customer Service for
United Airlines in the West Region in San Francisco, California and the Mountain
Region in Denver, Colorado; employed at United Airlines since 1967. Age: 51.
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 from 1993 to September
1997 and of FASF's Board from June 1996 to September 1997; 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; Chair of FAIF's, FAF's and FASF's Boards since September 1997; 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.
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"),
<PAGE>
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.
Todd Cipperman, SEI Investments Company, Oaks, Pennsylvania 19456: Vice
President and Assistant Secretary of FAIF, FAF and FASF since December 1996;
Vice President and Assistant Secretary of SEI, the Administrator and the
Distributor since 1995. Associate, Dewey Ballantine from 1994 to 1995;
Associate, Winston & Strawn from 1991 to 1994. Age: 31
Joseph M. O'Donnell, Vice President and Assistant Secretary of FAIF,
FAF and FASF beginning in February 1998; Vice President and Assistant Secretary
of the Administrator and Distributor since January 1998; Vice President and
General Counsel, FPS Services, Inc. from 1993 to 1997; Staff Counsel and
Secretary, Provident Mutual Family of Funds from 1990 to 1993. Age: 43.
Michael G. Beattie, SEI Investments Company, Oaks, Pennsylvania 19456:
Controller of FAIF, FAF and FASF since December 1997; Associate Director, Funds
Accounting, SEI Investments Company since July 1997; prior to his current
position, served most recently as Fund Accounting Manager of SEI (1993-1997);
Registered Representative, First Investors Corporation from 1988 to 1990.
Age: 32
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, FAF and FASF. Age: 52.
<PAGE>
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. In the event of telephonic Board or committee meetings,
each director receives a fee of $500 per Board or committee meeting ($750 in the
case of the Chair or committee chair). In addition, directors may receive a per
diem fee of $1,000 per day, plus travel expenses when directors travel out of
town on Fund business. However, directors do not receive the $1,000 per diem
amount plus the foregoing Board or committee fee for an out-of-town committee or
Board meeting but instead receive the greater of the total per diem fee or
meeting fee. 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, 1997. No executive officer or affiliated person of FAIF had
aggregate compensation from FAIF in excess of $60,000 during such fiscal year:
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Total Compensation
Aggregate Pension or Retirement Estimated From Registrant and
Name of Compensation Benefits Accrued as Annual Benefits Fund Complex
Person, Position(1) From Registrant Part of Fund Expenses Upon Retirement Paid to Directors
- ------------------------------ --------------- --------------------- --------------- -----------------
<S> <C> <C> <C> <C>
Robert J. Dayton, Director $12,632 -0- -0- $33,500
Roger A. Gibson*, Director -0- -0- -0- -0-
Andrew M. Hunter III, Director $9,046 -0- -0- $23,250
Leonard W. Kedrowski, Director $12,291 -0- -0- $32,700
Robert L. Spies, Director $9,331 -0- -0- $24,050
Joseph D. Strauss, Director $14,974 -0- -0- $39,925
Virginia L. Stringer, Director $15,254 -0- -0- $39,925
</TABLE>
- ------------------------
* Not a director during the fiscal year ended September 30, 1997.
(1) Gae B. Veit resigned as director of FAIF, FASF and FAF on September 12,
1997.
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
U.S. 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 American 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 U.S.
Bancorp ("USB"), 601 Second Avenue South, Minneapolis, Minnesota 55480, which is
a regional multi-state bank holding company headquartered in Minneapolis,
Minnesota that primarily serves the Midwestern, Rocky Mountain and Northwestern
states. USB operates five banks and eleven trust companies with offices in 17
contiguous states from Illinois to Washington. USB also has various other
subsidiaries engaged in financial services. At December 31, 1997, on a pro forma
combined basis, USB and its consolidated subsidiaries had consolidated assets of
approximately $71 billion, consolidated deposits of $49 billion and
shareholders' equity of $6 billion.
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, other
than International Fund, pays the Adviser monthly fees calculated on an annual
basis equal to 0.70% of its average daily net assets. International Fund pays
the Adviser monthly fees calculated on an annual basis equal to 1.25% of its
average daily net assets. The Advisor Agreement requires the Adviser to provide
FAIF with all necessary office space, personnel and facilities necessary and
incident to the Adviser's performance of its services thereunder. The Adviser is
responsible for the payment of all compensation to personnel of FAIF and the
officers and directors of FAIF, if any, who are affiliated with the Adviser or
any of its affiliates.
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 following table sets forth total advisory fees before waivers and
after waivers for each of the Funds for the fiscal years ended September 30,
1995, September 30, 1996 and September 30, 1997:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
------------------------------ ------------------------------ ------------------------------
ADVISORY FEE ADVISORY FEE ADVISORY FEE ADVISORY FEE ADVISORY FEE ADVISORY FEE
BEFORE WAIVERS AFTER WAIVERS BEFORE WAIVERS AFTER WAIVERS BEFORE WAIVERS AFTER WAIVERS
-------------- ------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund................ $1,174,571 $959,016 $1,935,552 $1,680,465 $2,969,361 $2,633,982
Real Estate Securities Fund.. 8,078 0 82,152 (1,797) 216,398 141,149
Equity Income Fund........... 289,812 165,042 447,530 316,928 1,471,595 1,105,166
Equity Index Fund............ 1,276,975 223,149 2,033,763 452,121 3,273,380 822,100
Stock Fund................... 1,704,596 1,377,513 2,987,619 2,624,360 6,016,828 5,258,308
Diversified Growth Fund...... 574,300 367,357 1,327,317 1,072,105 3,690,541 3,206,103
Special Equity Fund.......... 1,240,586 1,158,848 1,583,474 1,583,474 3,025,411 3,002,763
Regional Equity Fund......... 994,725 870,505 2,009,755 1,952,912 2,402,445 2,384,184
Emerging Growth Fund......... 153,171 76,396 415,300 374,771 834,130 819,610
Small Cap Value Fund(1)...... -- -- -- -- 1,288,688 1,287,355
Micro Cap Value Fund......... -- -- * * 241,606 182,150
International Index Fund(1).. -- -- -- -- 408,101 210,642
International Fund........... 868,706 824,596 1,473,242 1,473,242 2,143,703 2,143,703
Health Sciences Fund......... * * 48,383 (19,192) 238,884 189,036
Technology Fund.............. 121,419 51,186 345,213 291,109 872,103 843,048
Limited Term Income Fund..... 748,504 379,177 771,402 493,749 826,265 477,717
Intermediate Term Income.....
Fund.................... 572,967 393,264 692,483 510,735 1,097,629 756,616
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
------------------------------ ------------------------------ ------------------------------
ADVISORY FEE ADVISORY FEE ADVISORY FEE ADVISORY FEE ADVISORY FEE ADVISORY FEE
BEFORE WAIVERS AFTER WAIVERS BEFORE WAIVERS AFTER WAIVERS BEFORE WAIVERS AFTER WAIVERS
-------------- ------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Income Fund............ 1,394,513 945,687 2,619,764 1,980,027 4,163,377 3,118,330
Intermediate Government
Bond Fund............... 565,522 367,513 861,440 640,855 1,205,293 908,919
Intermediate Tax Free Fund 205,854 93,837 412,479 260,272 1,593,177 1,007,487
California Intermediate
Tax Free Fund........... * * * * 32,438 13,450
Colorado Intermediate Tax
Free Fund............... 284,161 158,606 362,608 243,815 381,297 265,043
Minnesota Insured Inter-
mediate Tax Free Fund... 377,450 227,989 562,547 378,439 1,853,372 1,326,104
Oregon Intermediate Tax
Free Fund............... * * * * 180,599 80,601
</TABLE>
- -----------------------
* Fund was not in operation during this fiscal year.
(1) For the four month period from August 1, 1997 to November 30, 1997.
SUB-ADVISORY AGREEMENT FOR INTERNATIONAL FUND
Marvin & Palmer Associates, Inc., 1201 North Market Street, Suite 2300,
Wilmington, Delaware 19801, is Sub-Adviser for International Fund under an
agreement with the Adviser (the "Sub-Advisory Agreement"). The Sub-Adviser, a
privately-held company, was founded in 1986 by David F. Marvin and Stanley
Palmer. The Sub-Adviser is engaged in the management of global, non-United
States and emerging markets equity portfolios for institutional accounts. At
September 30, 1997, the Sub-Adviser managed a total of $4.7 billion in
investments for 50 institutional investors. Pursuant to the Sub-Advisory
Agreement, the Sub-Adviser is responsible for the investment and reinvestment of
International Fund's assets and the placement of brokerage transactions in
connection therewith. Under the Sub-Advisory Agreement, the Sub-Adviser is
required, among other things, to report to the Adviser or the Board regularly at
such times and in such detail as the Adviser or the Board may from time to time
request in order t permit the Adviser and the Board to determine the adherence
of International Fund to its investment objectives, policies and restrictions.
The Sub-Advisory Agreement also requires the Sub-Adviser to provide all office
space, personnel and facilities necessary and incident to the Sub-Adviser's
performance of its services under the Sub-Advisory Agreement.
For its services under the Sub-Advisory Agreement, the Sub-Adviser is
paid a monthly fee by the Adviser calculated on an annual basis equal to 0.75%
of the first $100 million of International Fund's average daily net assets,
0.50% of International Fund's average daily net assets in excess of $100 million
up to $300 million, 0.45% of International Fund's average daily assets in excess
of $300 million up to $500 million, and 0.40% of International Fund's average
daily assets in excess of $500 million.
<PAGE>
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 have approved the appointment of the Adviser as a
sub-administrator (the "Sub-Administrator") effective January 1, 1998. It is
contemplated that the Sub-Administrator will assist the Administrator in the
performance of administrative services for the Funds.
The following table sets forth total administrative fees, after
waivers, paid by each of the Funds for the fiscal years ended September 30,
1995, September 30, 1996 and September 30, 1997:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPT. 30, 1995 SEPT. 30, 1996 SEPT. 30, 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Balanced Fund................................... $200,402 $328,792 $483,173
Real Estate Securities Fund..................... 12,603 50,010 49,002
Equity Income Fund.............................. 55,267 76,098 238,527
Equity Index Fund............................... 225,545 345,460 532,263
Stock Fund...................................... 294,658 507,743 977,071
Diversified Growth Fund......................... 101,760 225,373 599,349
Special Equity Fund............................. 210,800 269,161 491,566
Regional Equity Fund............................ 168,525 341,361 390,986
Emerging Growth Fund............................ 50,000 70,492 135,387
Small Cap Value Fund(1)......................... -- -- 209,129
Micro Cap Value Fund(2)......................... * * 38,730
International Index Fund(1)..................... -- -- 86,702
International Fund.............................. 89,791 140,215 195,362
Health Sciences Fund............................ * 33,059 48,839
Technology Fund................................. 50,000 61,764 141,679
Limited Term Income Fund........................ 126,380 135,704 134,340
Intermediate Term Income Fund................... 98,013 117,703 178,052
Fixed Income Fund............................... 233,555 445,300 676,891
Intermediate Government Bond Fund............... 100,551 146,381 196,129
Intermediate Tax Free Fund...................... 50,199 70,107 258,212
California Intermediate Tax Free Fund(2)........ * * 5,200
Colorado Intermediate Tax Free Fund............. 56,486 61,659 62,075
Minnesota Insured Intermediate Tax Free
Fund...................................... 68,304 95,590 301,176
Oregon Intermediate Tax Free Fund(2)............ * * 28,951
</TABLE>
- -------------------
* Fund was not in operation during this fiscal year.
(1) For the four month period from August 1, 1997 to November 30, 1997.
(2) Commenced operations on August 8, 1997.
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.
<PAGE>
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 "Distributi 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 Class A and Class B
Shares Prospectuses.
The Class B Shares of each Fund which offers Class B Shares pay to the
Distributor a sales support fee at an annual rate of 0.75% of the average daily
net assets of the Class B Shares of such Fund, which fee may be used by the
Distributor to provide compensation for sales support and distribution
activities with respect to the Class B Shares. This fee is calculated and paid
each month based on average daily net assets of Class B of each Fund for that
month. In addition to this fee, the Distributor is paid a shareholder servicing
fee at an annual rate of 0.25% of the average daily net assets of each Fund's
Class B Shares pursuant to a service plan (the "Class B Service Plan"), which
fee may be used by the Distributor to provide compensation for shareholder
servicing activities with respect to the Class B Shares of a Fund of the kinds
described in the Class A and Class B Shares Prospectuses. Although Class B
Shares are sold without a front-end sales charge, the Distributor pays a total
of 4.25% of th amount invested (including a pre-paid service fee of 0.25% of the
amount invested) to dealers who sell Class B Shares (excluding exchanges from
other Class B Shares in the First American family). The servicing fee payable
under the Class B Service Plan is prepaid as described above.
The Distribution Agreements provide that they will continue in effect
for a period of more than one year from the date of their execution only so long
as such continuance is specifically approved at least annually by the vote of a
majority of the Board members of FAIF and by the vote of the majority of those
Board members of FAIF who are not interested persons of FAIF and who have no
direct or indirect financial interest in the operation of FAIF's Rule 12b-1
Plans of Distribution or in any agreement related to such Plans.
FAIF has adopted Plans of Distribution with respect to the Class A and
Class B Shares of the Funds, respectively, pursuant to Rule 12b-1 under the 1940
Act (collectively, the "Plans"). Rule 12b-1 provides in substance that a mutual
fund may not engage directly or indirectly in financing any activity which is
primarily intended to result in the sale of shares, except pursuant to a plan
adopted under the Rule. The Plans authorize the Distributor to retain the sales
charges paid upon purchase of Class A and Class B Shares. Each of the Plans is a
"compensation-type" plan under which the Distributor is entitled to receive the
distribution fee regardless of whether its actual distribution expenses are more
or less than the amount of the fee. The Class B Plan authorizes the Distributor
to retain the contingent deferred sales charge applied on redemptions of Class B
Shares, except that portion which is reallowed to Participating Institutions.
The Plans recognize that the Distributor, any Participating Institution, the
Administrator, and the Adviser, in their discretion, may from time to time use
their
<PAGE>
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 following table sets forth the total Rule 12b-1 fees, after
waivers, paid by each of the Funds for the fiscal years ended September 30,
1995, September 30, 1996, and September 30, 1997 with respect to the Class A
Shares and the Class B Shares of the Funds. As noted above, no distribution fees
are paid with respect to Class C Shares of the Funds.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPT. 30, 1995 SEPT. 30, 1996 SEPT. 30, 1997
-------------- -------------- --------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
SHARES SHARES SHARES SHARES SHARES SHARES
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund......................... 28,075 11,450 43,620 83,213 65,211 284,082
Real Estate Securities Fund........... 0 0 397 1,660 2,975 17,056
Equity Income Fund.................... 3,108 3,382 5,787 24,127 10,355 50,769
Equity Index Fund..................... 2,789 3,291 10,536 43,676 24,989 139,149
Stock Fund............................ $20,690 $24,481 $44,423 $148,550 82,694 367,871
Diversified Growth Fund............... 3,503 2,020 10,113 36,952 21,223 75,168
Special Equity Fund................... 18,403 23,203 32,527 79,817 59,658 227,800
Regional Equity Fund.................. 21,635 22,185 52,806 182,709 68,712 313,016
Emerging Growth Fund.................. 331 965 2,147 4,985 9,165 8,939
Small Cap Value Fund(1)............... -- -- -- -- 23,014 0
Micro Cap Value Fund(3)............... * * * * 8 12
International Index Fund(2)........... -- -- -- -- 1,250 0
International Fund.................... 1,099 1,229 3,203 6,605 9,497 15,477
Health Sciences Fund.................. * * 554 1,001 1,725 3,921
Technology Fund....................... 960 4,739 5,967 31,470 12,736 58,415
Limited Term Income Fund.............. 0 * 0 * 0 0
Intermediate Term Income Fund......... 0 * 0 * 0 0
Fixed Income Fund..................... 11,797 24,078 20,620 134,380 20,065 156,180
Intermediate Government Bond Fund 0 * 0 * 0 0
Intermediate Tax Free Fund............ 0 * 0 * 0 0
California Intermediate Tax
Free Fund(3)..................... * * * * 0 0
Colorado Intermediate Tax Free Fund 0 * 0 * 0 0
Minnesota Insured Intermediate Tax Free
Fund............................. 0 * 0 * 0 0
Oregon Intermediate Tax
Free Fund(3)..................... * * * * 0 0
</TABLE>
- --------------------
* Fund or class was not in operation during this fiscal year.
(1) For the four month period from August 1, 1997 to November 30, 1997. Of
these amounts, $1,107 and $69 are distribution fees from the Class A and
Class C shares of the Qualivest Small Companies Value Fund and the
Qualivest International Opportunities Fund, which were exchanged for Class
A Shares of Small Cap Value Fund and International Index Fund,
respectively.
(2) For the four month period from August 1, 1997 to November 30, 1997. Of
these amounts, $15,034 and $6,781 are distribution fees from the Class A
and C shares of the Qualivest Small Companies Value Fund and the Qualivest
International Opportunities Fund, which were exchanged for Class A Shares
of Small Cap Value Fund and International Index Fund, respectively.
(3) Commenced operations on August 8, 1997.
For the fiscal years ended September 30, 1995, September 30, 1996, and
September 30, 1997, the Distributor received $56,437, $103,810, and $144,487
respectively, in sales charges.
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 USB.
The Custodian takes no part in determining the investment policies of
the Funds or in deciding which securities are purchased or sold by the Funds.
All of the instruments representing the investments of the Funds and all cash is
held by the Custodian or, as described in the Prospectuses for International
Fund, by a sub-custodian with respect to such Fund. The Custodian or such
sub-custodian delivers securities against payment upon sale and pays for
securities against delivery upon purchase.
<PAGE>
The Custodian also remits Fund assets in payment of Fund expenses, pursuant to
instructions of FAIF's officers or resolutions of the Board of Directors.
As compensation for its services to the Funds, the Custodian is paid a
monthly fee calculated on an annual basis equal to 0.03% (0.10% in the case of
International Index Fund and International Fund) of such Fund's average daily
net assets. Sub-custodian fees with respect to International Fund are paid by
the Custodian out of its fees from such Fund. In addition, the Custodian is
reimbursed for its out-of-pocket expenses incurred while providing its services
to the Funds. The Custodian continues to serve so long as its appointment is
approved at least annually by the Board of Directors including a majority of the
directors who are not interested persons (as defined under the 1940 Act) of
FAIF.
DST Systems, Inc., 1004 Baltimore, Kansas City, Missouri 64105, is
transfer agent and dividend disbursing agent for the shares of the Funds.
Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402, is independent General Counsel for the Funds.
KPMG Peat Marwick LLP, 90 South Seventh Street, Minneapolis, Minnesota
55402, acts as the Funds' independent auditors, providing audit services
including audits of the annual financial statements and assistance and
consultation in connection with SEC filings.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Decisions with respect to placement of the Funds' portfolio
transactions are made by the Adviser or, in the case of International Fund, the
Sub-Adviser. The Funds' policy is to seek to place portfolio transactions with
brokers or dealers who will execute transactions as efficiently as possible and
at the most favorable price. The Adviser or Sub-Adviser may, however, select a
broker or dealer to effect a particular transaction without communicating with
all brokers or dealers who might be able to effect such transaction because of
the volatility of the market and the desire of the Adviser or Sub-Adviser to
accept a particular price for a security because the price offered by the broker
or dealer meets guidelines for profit, yield or both. Many of the portfolio
transactions involve payment of a brokerage commission by the appropriate Fund.
In some cases, transactions are with dealers or issuers who act as principal for
their own accounts and not as brokers. Transactions effected on a principal
basis are made without the payment of brokerage commissions but at net prices,
which usually include a spread or markup. In effecting transactions in
over-the-counter securities, the Funds deal with market makers unless it appears
that better price and execution are available elsewhere.
<PAGE>
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 following table sets
forth the aggregate brokerage commissions paid by each of the Funds during the
fiscal years ended September 30, 1995, September 30, 1996, and September 30,
1997:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPT. 30, 1995 SEPT. 30, 1996 SEPT. 30, 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Balanced Fund.................................. 187,224 232,149 290,704
Real Estate Securities Fund.................... 16,261 34,674 56,817
Equity Income Fund............................. 24,246 32,789 180,195
Equity Index Fund.............................. 48,310 85,568 117,618
Stock Fund..................................... $549,774 $565,446 1,205,280
Diversified Growth Fund........................ 82,987 142,912 327,653
Special Equity Fund............................ 545,209 1,192,448 1,489,411
Regional Equity Fund........................... 102,861 213,138 96,219
Emerging Growth Fund........................... 20,076 18,305 63,981
Small Cap Value Fund(1)........................ -- -- 5,845
Micro Cap Value Fund........................... * * 31,662
International Index Fund(1).................... -- -- 81,688
International Fund............................. 405,632 598,535 818,016
Health Sciences Fund........................... * 11,932 17,550
Technology Fund................................ 21,126 31,789 60,918
Limited Term Income Fund....................... 0 0 0
Intermediate Term Income Fund.................. 0 0 0
Fixed Income Fund.............................. 0 0 0
Intermediate Government Bond Fund.............. 0 0 0
Intermediate Tax Free Fund..................... 0 0 0
California Intermediate Tax Free Fund.......... * * 0
Colorado Intermediate Tax Free Fund............ 0 0 0
Minnesota Insured Intermediate Tax
Free Fund................................ 0 0 0
Oregon Intermediate Tax Free Fund.............. * * 0
</TABLE>
- ---------------------------
* Fund was not in operation during this fiscal year.
(1) For the four month period from August 1, 1997 to November 30, 1997.
During the fiscal year ended September 30, 1997, no brokerage
commissions were paid by any of the Funds.
At September 30, 1997, Balanced Fund held a bond security of Merrill
Lynch & Company which is deemed to be a "regular broker or dealer" of the Funds
under the 1940 Act (or of such broker-dealer's parent companies) in the amount
of $7,552,625. In addition, at September 30, 1997, Diversified Growth Fund held
an equity security of Morgan Stanley Group in the amount of $7,165,984; Limited
Term Income Fund held a corporate obligation of Salomon Brothers in the amount
of $7,603,125; and Intermediate Term Income Fund held a corporate obligation of
Lehman Brothers in the amount of $6,231,500, all of which are deemed "principal
brokers or dealers."
<PAGE>
It is expected that International Index Fund and International 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 and, in
the case of International Fund, the Sub-Adviser may consider ability to provide
supplemental performance, statistical and other research information as well as
computer hardware and software for research purpose for consideration, analysis
and evaluation by the staff of the Adviser or Sub-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 or Sub-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 or Sub-Adviser to
supplement its own investment research activities and enable the Adviser or
Sub-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 or Sub-Adviser would
receive a benefit, which is not capable of evaluation in dollar amounts, without
providing any direct monetar 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 or Sub-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 or Sub-Adviser in performing services for the
Funds. The Adviser and Sub-Adviser determine the reasonableness of the
commissions paid in relation to their view of the value of the brokerage and
research services provided, considered in terms of the particular transactions
and their overall responsibilities with respect to all accounts as to which they
exercise investment discretion.
The Adviser and Sub-Adviser have not entered into any formal or
informal agreements with any broker or dealer, and do not maintain any "formula"
that must be followed in connection with the placement of Fund portfolio
transactions in exchange for research services provided to the Adviser or
Sub-Adviser, except as noted below. The Adviser and Sub-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 and Sub-Adviser with research
services, which the Adviser or Sub-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 or Sub-Adviser would authorize the Funds to pay an
amount of commission for effecting a securities transaction in excess of the
amount of commission another
<PAGE>
broker or dealer would have charged only if the Adviser or Sub-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 or Sub-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 or Sub-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
or Sub-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.
<PAGE>
CAPITAL STOCK
As of December 1, 1997, the directors of FAIF, owned shares of FAIF,
FAF and FASF with an aggregate net asset value of $3,596,000. As of January 14,
1998, the directors and officers of FAIF as a group owned less than one percent
of each class of each Fund's outstanding shares. As of that date, the Funds were
aware that the following persons owned of record five percent or more of the
outstanding shares of each class of stock of the Funds.
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING SHARES
--------------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
BALANCED FUND
Var & Co....................................... 57.91%
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust NA as fiduciary for First Retirement 40.52%
Attn: Reconciliation SPFT0401
180 East Fifth Street
St. Paul, MN 55101-1631
REAL ESTATE SECURITIES FUND
NFSC # BJG-040290.............................. 7.55%
First Bank NA Cust FBO
Brian L. Johnson IRA
P.O. Box 400
Spooner, WI 54801-0400
Var & Co....................................... 74.55%
P.O. Box 64482
St. Paul, MN 55164-0482
First American Strategy Growth and Income Fund 13.81%
C/O First Trust National Assn.
Attn: Greg Wilhelmy SPFT 0912
P.O. Box 64010
St. Paul, MN 55164-0010
First American Strategy Income Fund............ 5.82%
C/O First Trust National Assn.
Attn: Greg Wilhelmy SPFT 0912
P.O. Box 64010
St. Paul, MN 55164-0010
EQUITY INCOME FUND
NFSC FEBO #BJG-115851.......................... 5.58%
Douglas Spedding TTEE
R Douglas Spedding Trust
U/A 4/9/96
C/O 4380 E. Alameda Avenue
Glendale, CO 80222
Var & Co....................................... 61.03%
P.O. Box 64482
St. Paul, MN 55164-0482
Telco.......................................... 24.39%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
<PAGE>
PERCENTAGE OF OUTSTANDING SHARES
--------------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
EQUITY INDEX FUND
Var & Co....................................... 39.09%
P.O. Box 64482
St. Paul, MN 55164-0482
Unit & Co...................................... 32.82%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
Metlife Defined Contribution Group............. 14.32%
as Agent for First Tr. Ntl. Assoc. Tr.
FBO UTD Healthcare Corp. 401(k) SP
180 East Fifth Street
P.O. Box 64488
St. Paul, MN 55164-0488
First Trust National Association............... 9.53%
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East Fifth Street
St. Paul, MN 55101-1631
STOCK FUND
Charles Schwab & Co. Inc....................... 5.81%
Special Custody Account for Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
Wells Fargo Bank TTEE.......................... 5.45%
FBO AMD 401(k) Plan
P.O. Box 9800
Calabasas, CA 91372-0800
Var & Co....................................... 52.77%
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust National Association............... 16.78%
As a Fiduciary for First Retirement
Attn: Reconciliaiton SPFT0401
180 East 5th Street
St. Paul, MN 55101-1631
Telco.......................................... 13.46%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
Unit & Co...................................... 7.74%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
DIVERSIFIED GROWTH FUND
Paul T. Green Agency #31081500................. 5.39%
Norwest Bank SD NA as Agent
P.O. Box 1450 NW8477
Minneapolis, MN 55485-1450
Var & Co....................................... 80.59%
P.O. Box 64482
St. Paul, MN 55164-0482
<PAGE>
PERCENTAGE OF OUTSTANDING SHARES
--------------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
Telco.......................................... 6.73%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
SPECIAL EQUITY FUND
Var & Co....................................... 77.32%
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust National Association............... 13.81%
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East Fifth Street
St. Paul, MN 55101-1631
REGIONAL EQUITY FUND
Var & Co....................................... 63.56%
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust National Association............... 26.80%
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East Fifth Street
St. Paul, MN 55101-1631
EMERGING GROWTH FUND
J.C. Bradford & Co. Cust FBO................... 21.31%
DCIP Limited Partners I
330 Commerce Street
Nashville, TN 37201-1805
G Appel Emerging Markets....................... 15.07%
Limited Partnership
150 Great Neck Road
Great Neck, NY 11021-3309
Appel Aggressive Investors..................... 7.50%
Limited Partnership
150 Great Neck Road
Great Neck, NY 11021-3309
Var & Co....................................... 7.13%
P.O. Box 64482
St. Paul, MN 55164-0482
Var & Co....................................... 73.01%
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust National Association............... 8.83%
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East 5th Street
St. Paul, MN 55101-1631
First American Strategy Growth and Income Fund 7.79%
C/O First Trust National Assn.
Attn: Greg Wilhelmy SPFT 0912
P.O. Box 64010
St. Paul, MN 55164-0010
SMALL CAP VALUE FUND
Charles G. Koch................................ 7.80%
4111 East 37th Street North
Wichita, KS 67220-3203
<PAGE>
PERCENTAGE OF OUTSTANDING SHARES
--------------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
Paul A. Bareilles.............................. 97.13%
P.O. Box 6610
Eureka, CA 95502-6610
Unit & Co...................................... 60.17%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
Var & Co....................................... 26.81%
P.O. Box 64482
St. Paul, MN 55164-0482
MICRO CAP VALUE FUND
Roger H. Fleenor............................... 16.64%
234 Redfish Lane
Boise, ID 83706-4842
NFSC FEBO #03M-252719.......................... 12.80%
Rory Andrews
P.O. Box 150542
Lakewood, CO 80215-0542
Lawrence E. Holboke &.......................... 8.10%
Regina Holboke JTWROS
3737 Kyle Springs Circle
Las Vegas, NV 89108-5155
Unit & Co...................................... 7.39%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
NFSC FEBO #03M-263567.......................... 5.25%
David M. Warner
14239 West Virginia Drive
Lakewood, CO 80228-2333
NFSC FEBO #03M-631248.......................... 25.97%
Colorado National Bank Cust. FBO
Jean Scraggs IRA
2920 South Olympia Lane
Evergreen, CO 80439-8832
NFSC FEBO #03M-947237.......................... 9.42%
Colorado National Bank Cust.
IRA of Richard L. Anway
8323 South Citation Trail
Evergreen, CO 80439-6400
NFSC FEBO #03M-638420.......................... 8.48%
Colorado NA Bank Cust. FBO
James Morello IRA
8852 Martin Lane
Conifer, CO 80433-9718
NFSC FEBO #BJG-120561.......................... 6.76%
Michael Mettler
1240 46th Avenue NE
Columbia Heights, MN 55421-2408
NFSC FEBO #03M-021610.......................... 6.41%
Jean M. Scraggs Cust.
Emily J. Scraggs UTMA Co.
2920 South Olympia Lane
Evergreen, CO 80439-8832
<PAGE>
PERCENTAGE OF OUTSTANDING SHARES
--------------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
Telco.......................................... 48.38%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
ZEREB.......................................... 27.67%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
Unit & Co...................................... 19.50%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
INTERNATIONAL INDEX FUND
BHC Securities Inc............................. 8.16%
FAO 32206314
Attn: Mutual Funds
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103-7042
NFSC FEBO #BJG-152374.......................... 56.06%
Steven H. Silton &
Heidi Drewers-Silton JTWROS
3110 West Calhoun Boulevard
Minneapolis, MN 55416-4693
SEI Corporation................................ 22.08%
Attn: Rob Silvestri
One Freedom Valley Drive
Oaks, PA 19456
NFSC FEBO #BJG-133817.......................... 21.86%
Denis A. Alling
305 Beech Street
Chaska, MN 55318-2115
Unit & Co...................................... 73.17%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
Telco.......................................... 16.73%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
ZEREB.......................................... 7.69%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
INTERNATIONAL FUND
Marin Associates LTD. PA....................... 26.28%
150 Great Neck Road
Great Neck, NY 11021-3309
Blackcomb Associates LP........................ 15.69%
P.O. Box 5430
Incline Village, NV 89450-5430
Marin Sector Ltd. PA........................... 10.46%
150 Great Neck Road
Great Neck, NY 11021-3309
<PAGE>
PERCENTAGE OF OUTSTANDING SHARES
--------------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
Guenther Patzeiberger.......................... 5.73%
Cristobal Colon #98
Colon Echegaray Naucaipan
Edo De Mexico 55310
Var & Co....................................... 78.18%
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust National Association............... 6.45%
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East 5th Street
St. Paul, MN 55101-1631
HEALTH SCIENCES FUND
Northern Trust Co. Tr.......................... 56.15%
FBO James L. French Irrev. Trust
of 1991 #2 A/C #2242148
P.O. Box 92956
Chicago, IL 60675-2956
Var & Co....................................... 91.31%
P.O. Box 64482
St. Paul, MN 55164-0482
First American Strategy Aggressive Growth Fund 7.92%
C/O First Trust National Assn.
Attn: Greg Wilhelmy SPFT 0912
P.O. Box 64010
St. Paul, MN 55164-0010
TECHNOLOGY FUND
Northern Trust Co. Tr.......................... 17.96%
FBO James L. French Irrev. Trust
of 1991 #2 A/C #2242148
P.O. Box 92956
Chicago, IL 60675-2956
J.C. Bradford & Co. Cust. FBO.................. 16.28%
RCIP Limited Partners I
330 Commerce Street
Nashville, TN 37201-1805
Trident Arbitrage Partners LP.................. 9.37%
45 Pine Street, Suite 3A
New Canaan, CT 06840-5409
Var & Co....................................... 88.21%
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust National Association............... 8.16%
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East 5th Street
St. Paul, MN 55101-1631
LIMITED TERM INCOME FUND
Planned Parenthood of Minnesota................ 16.94%
Operating Reserve Fund
Thomas Webber, Executive Director
1965 Ford Parkway
St. Paul, MN 55116-1996
<PAGE>
PERCENTAGE OF OUTSTANDING SHARES
--------------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
Charles A. Beck, M.D........................... 6.17%
Charles A. Beck, M.D. LTD.
Money Purchase Trust
71 West 156 Street, Apt. 210
Harvey, IL 60426-4293
Var & Co....................................... 53.78%
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust National Association............... 7.88%
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East 5th Street
St. Paul, MN 55101-1631
Telco.......................................... 32.41%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
INTERMEDIATE TERM INCOME FUND
Telco.......................................... 33.56%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
Var & Co....................................... 28.21%
P.O. Box 64482
St. Paul, MN 55164-0482
Unit & Co...................................... 28.10%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
ZEREB.......................................... 5.16%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
FIXED INCOME FUND
Var & Co....................................... 59.43%
P.O. Box 64482
St. Paul, MN 55164-0482
Unit & Co...................................... 16.31%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
First American Strategy Growth and Income Fund 7.16%
C/O First Trust National Assn.
Attn: Greg Wilhelmy SPFT 0912
P.O. Box 64010
St. Paul, MN 55164-0010
First Trust National Association............... 5.70%
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East Fifth Street
St. Paul, MN 55101-1631
INTERMEDIATE GOVERNMENT BOND FUND
NFSC FEBO #BJF-003999.......................... 12.23%
The Janice Gardner Foundation
11580 K-Tel Drive
Minnetonka, MN 55343-8855
<PAGE>
PERCENTAGE OF OUTSTANDING SHARES
--------------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
NFSC FEBO #03M-382159.......................... 8.32%
Ethel A. Spector TTEE
Ethel A. Spector Rev. Trust
U/A 10/12/92
740 River Drive, #20A
St. Paul, MN 55116-1036
Gail B. Cox.................................... 5.04%
Wilma M. Cox JTWROS
17417 Hwy. M
Lawson, MO 64062-8227
Var & Co....................................... 91.52%
P.O. Box 64482
St. Paul, MN 55164
INTERMEDIATE TAX FREE FUND
NFSC FEBO #BJG-040487.......................... 22.63%
Brian L. Johnson
Joan M. Johnson
P.O. Box 400
Spooner, WI 54801-0400
Lew & Co....................................... 5.69%
900 Second Avenue South, Suite 300
Minneapolis, MN 55402-3321
Var & Co....................................... 54.58%
P.O. Box 6482
St. Paul, MN 55164-0482
Telco.......................................... 17.72%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
ZEREB.......................................... 16.31%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
Unit & Co...................................... 9.37%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
CALIFORNIA INTERMEDIATE TAX FREE FUND
DST Audit IRA/Reinvest Account................. 33.50%
Attn: SSC Corporate Action FA
210 West 10th Street, Floor 7
Kansas City, MO 64105-1614
DST Audit SWP Account.......................... 33.50%
Attn: SSC Corporate Action-FA
210 West 10th Street, Floor 7
Kansas City, MO 64105-1614
DST Audit Cash Account......................... 33.01%
Attn: SSC Corporate Action FA
210 West 10th Street, Floor 7
Kansas City, MO 64105-1614
Var & Co....................................... 66.53%
P.O. Box 64482
St. Paul, MN 55164-0482
<PAGE>
PERCENTAGE OF OUTSTANDING SHARES
--------------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
Telco.......................................... 26.18%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
COLORADO INTERMEDIATE TAX FREE FUND
NFSC FEBO #03M-420620.......................... 5.62%
Richard E. Butler
T/O/D Jamie L. Butler
1260 South Foothill Drive
Lakewood, CO 80228-3426
NFSC FEBO #03M-490873.......................... 5.42%
William G. Spahr
U/A 09/21/95
P.O. Box 226
Clinton, MO 64735-0226
Var & Co....................................... 95.47%
P.O. Box 64482
St. Paul, MN 55164-0482
MINNESOTA INSURED INTERMEDIATE TAX FREE FUND
Alfred P. Gale................................. 15.64%
2350 Highland Rd.
Maple Plain, MN 55359-9570
NFSC FEBO #03M-693278.......................... 12.75%
Trachsel Dental Studio
Fred & Ramona Trachsel
P.O. Box 6598
Rochester, MN 55903-6598
Var & Co....................................... 97.09%
P.O. Box 64482
St. Paul, MN 55164-0482
OREGON INTERMEDIATE TAX FREE FUND
Telco.......................................... 80.18%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
ZEREB.......................................... 15.14%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
</TABLE>
<PAGE>
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 Class A and Class B Shares Prospectuses under the
captions "Investing in the Funds" and "Determining the Price of Shares" and in
the Class C Shares Prospectuses 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") and federally-chartered
banks are open for business. The NYSE is not open for business on th following
holidays (or on the nearest Monday or Friday if the holiday falls on a weekend):
New Year's Day, Martin Luther King, Jr. 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.
On September 30, 1997, the net asset values per share for each class of
shares of the Funds were calculated as follows:
<TABLE>
<CAPTION>
NET ASSET
NET ASSETS SHARES VALUE PER SHARE
(IN DOLLARS) / OUTSTANDING = (IN DOLLARS)
------------ ----------- ------------
<S> <C> <C> <C>
BALANCED FUND
Class A................................... $ 32,309,175 2,096,489 $15.41
Class B................................... 43,707,370 2,845,117 15.36
Class C................................... 418,086,401 27,092,341 15.43
REAL ESTATE SECURITIES FUND
Class A................................... 2,104,503 140,570 14.97
Class B................................... 3,318,256 223,313 14.86
Class C................................... 40,501,453 2,701,235 14.99
EQUITY INCOME FUND
Class A................................... 7,276,508 463,864 15.69
Class B................................... 6,618,640 423,601 15.62
Class C................................... 369,919,266 23,562,347 15.70
EQUITY INDEX FUND
Class A................................... 15,977,167 769,703 20.76
Class B................................... 23,733,407 1,148,323 20.67
Class C................................... 557,257,826 26,863,917 20.74
STOCK FUND
Class A................................... 50,380,441 1,753,223 28.74
Class B................................... 53,420,365 1,870,880 28.55
Class C................................... 1,095,261,426 38,093,463 28.75
DIVERSIFIED GROWTH FUND
Class A................................... 12,017,275 681,691 17.63
Class B................................... 9,486,600 543,043 17.47
Class C................................... 681,151,065 38,611,657 17.64
<PAGE>
NET ASSET
NET ASSETS SHARES VALUE PER SHARE
(IN DOLLARS) / OUTSTANDING = (IN DOLLARS)
------------ ----------- ------------
SPECIAL EQUITY FUND
Class A................................... 35,206,757 1,455,137 24.19
Class B................................... 36,649,074 1,529,714 23.96
Class C................................... 509,308,332 21,036,357 24.21
REGIONAL EQUITY FUND
Class A................................... 37,676,498 1,629,280 23.12
Class B................................... 39,683,442 1,746,718 22.72
Class C................................... 351,007,153 15,153,019 23.16
EMERGING GROWTH FUND
Class A................................... 5,270,053 300,199 17.55
Class B................................... 1,262,837 73,646 17.15
Class C................................... 151,607,069 8,596,681 17.64
SMALL CAP VALUE FUND(1)
Class A................................... 19,193,610 1,054,515 18.20
Class B................................... 1,002 55 18.23
Class C................................... * 25,279,446 18.23
MICRO CAP VALUE FUND
Class A................................... 44,137 4,026 10.96
Class B................................... 49,803 4,550 10.95
Class C................................... 246,600,679 22,511,045 10.95
INTERNATIONAL INDEX FUND(1)
Class A................................... 1,270,411 116,143 10.94
Class B................................... 996 91 10.99
Class C................................... 155,975,605 14,194,328 10.99
INTERNATIONAL FUND
Class A................................... 8,003,455 607,164 13.18
Class B................................... 2,187,473 168,706 12.97
Class C................................... 217,413,753 16,436,608 13.23
HEALTH SCIENCES FUND
Class A................................... 848,991 70,458 12.05
Class B................................... 515,590 43,337 11.90
Class C................................... 41,243,216 3,413,801 12.08
TECHNOLOGY FUND
Class A................................... 5,564,117 275,483 20.20
Class B................................... 8,463,043 432,292 19.58
Class C................................... 148,658,692 7,327,467 20.29
LIMITED TERM INCOME FUND
Class A................................... 7,151,719 719,548 9.94
Class B................................... * * *
Class C................................... 184,368,139 18,555,702 9.94
<PAGE>
NET ASSET
NET ASSETS SHARES VALUE PER SHARE
(IN DOLLARS) / OUTSTANDING = (IN DOLLARS)
------------ ----------- ------------
INTERMEDIATE TERM INCOME FUND
Class A................................... 2,483,832 248,466 10.00
Class B................................... * * *
Class C................................... 324,250,121 32,474,228 9.98
FIXED INCOME
Class A................................... 8,534,875 778,307 10.97
Class B................................... 15,253,084 1,398,464 10.91
Class C................................... 705,718,768 64,393,856 10.96
INTERMEDIATE GOVERNMENT BOND FUND
Class A................................... 3,525,380 380,039 9.28
Class B................................... * * *
Class C................................... 181,889,221 19,626,325 9.27
INTERMEDIATE TAX FREE FUND
Class A................................... 3,848,588 355,190 10.84
Class B................................... * * *
Class C................................... 430,993,021 39,838,786 10.82
CALIFORNIA INTERMEDIATE TAX FREE FUND
Class A................................... 1,055 105 10.04
Class B................................... * * *
Class C................................... 33,287,025 3,317,702 10.03
COLORADO INTERMEDIATE TAX FREE FUND
Class A................................... 4,187,099 394,652 10.61
Class B................................... * * *
Class C................................... 54,377,857 5,126,395 10.61
MINNESOTA INSURED INTERMEDIATE TAX FREE FUND
Class A................................... 7,453,069 738,624 10.09
Class B................................... * * *
Class C................................... 297,121,718 29,528,389 10.06
OREGON INTERMEDIATE TAX FREE FUND
Class A................................... * * *
Class B................................... * * *
Class C................................... 182,069,069 18,120,305 10.05
</TABLE>
- ----------------------------
* Not in operation during fiscal year ended September 30, 1997.
(1) As of November 30, 1997.
<PAGE>
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. Based upon the 30-day period ended September 30, 1997, the yields
for the Class A, Class B and Class C Shares of the Funds were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Balanced Fund............................................. 2.66% 2.05% 3.03%
Real Estate Securities Fund............................... 4.32% 3.86% 4.77%
Equity Income Fund........................................ 2.44% 1.82% 2.81%
Equity Index Fund......................................... 1.13% 0.45% 1.43%
Stock Fund................................................ 1.07% 0.40% 1.37%
Diversified Growth Fund................................... 0.51% 0.00% 0.78%
Special Equity Fund....................................... 0.46% 0.00% 0.73%
Regional Equity Fund...................................... 0.06% 0.00% 0.29%
Emerging Growth Fund...................................... 0.00% 0.00% 0.00%
Small Cap Value Fund(+)................................... 0.00% ** 0.00%
Micro Cap Value Fund...................................... 0.16% 0.00% 0.28%
International Index Fund(+)............................... 0.00% ** 0.00%
International Fund........................................ 0.00% 0.00% 0.00%
Health Sciences Fund...................................... 0.00% 0.00% 0.00%
Technology Fund........................................... 0.00% 0.00% 0.00%
Limited Term Income Fund.................................. 5.27% * 5.37%
Intermediate Term Income Fund............................. 5.22% * 5.43%
Fixed Income Fund......................................... 5.14% 4.60% 5.61%
Intermediate Government Bond Fund......................... 5.11% * 5.28%
Intermediate Tax Free Fund................................ 3.95% * 4.05%
California Intermediate Tax Free Fund..................... 3.73% * 3.86%
Colorado Intermediate Tax Free Fund....................... 3.89% * 4.01%
Minnesota Insured Intermediate Tax Free Fund.............. 3.86% * 3.99%
Oregon Intermediate Tax Free Fund......................... * * 4.13%
</TABLE>
- ---------------------
* Not in operation during fiscal year ended September 30, 1997.
+ For the period ended November 30, 1997.
** Class B was not open for a thirty day period.
Such yield figures were determined by dividing the net investment income per
share earned during the specified 30-day period by the maximum offering price
per share on the last day of the period, according to the following formula:
Yield = 2 [((a - b) / cd) + 1)6(to the sixth 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
TAX EQUIVALENT YIELD FOR TAX FREE FUNDS. Tax equivalent yield is the
yield that a taxable investment must generate in order to equal a Fund's yield
for an investor in a stated federal or combined federal/state income tax
bracket. The tax equivalent yield for each tax free Fund named below is computed
by dividing that portion of such Fund's yield (computed as described above) that
is tax exempt by one minus the stated federal or combined federal/state income
tax rate, and adding the resulting number to that portion, if any, of such
Fund's yield that is not tax exempt. Based upon the maximum federal income tax
rate of 39.6% and the combined maximum federal/state tax rates of 48.9% for
California, 44.6% for Colorado, 48.1% for Minnesota and 48.6% for Oregon, the
tax equivalent yields
<PAGE>
for the tax free Funds named below for the 30-day period ended September 30,
1997, computed as described above, were as follows:
CLASS A CLASS C
Intermediate Tax Free Fund.............................. 6.54% 6.71%
California Intermediate Tax Free Fund................... 7.30% 7.55%
Minnesota Insured Intermediate Tax Free Fund............ 7.44% 7.69%
Colorado Intermediate Tax Free Fund..................... 7.02% 7.24%
Oregon Intermediate Tax Free Fund....................... * 8.04%
- -----------------------
* Not in operation during fiscal year ended September 30, 1997.
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 Fund"
average annual and cumulative total return figures are computed in accordance
with the standardized methods prescribed by the Securities and Exchange
Commission.
AVERAGE ANNUAL TOTAL RETURN. Average annual total return figures are
computed by determining the average annual compounded rates of return over the
periods indicated in the advertisement, sales literature or shareholders'
report, that would equate the initial amount invested to the ending redeemable
value, according to the following formula:
P(1 + T)n(supscrpt) = 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.
Based on the foregoing, the average annual and aggregate total returns
for each class of the Funds from inception through September 30, 1997 were as
follows. The performance for Class A and Class B Shares will normally be lower
than for Class C Shares because Class A and Class B Shares are
<PAGE>
subject to sales and distribution charges and/or shareholder servicing fees not
charged to Class C Shares.
<TABLE>
<CAPTION>
Cumulative Average Annual Average Annual Average Annual
Since Inception* Since Inception* One Year Five Year
------------------ ----------------- ------------------ ------------------
Without With Without With Without With Without With
Sales Sales Sales Sales Sales Sales Sales Sales
Charge Charge Charge Charge Charge Charge Charge Charge
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCED FUND
Class A........... 99.44% 90.49% 15.49% 14.39% 25.80% 20.13% ** **
Class B........... 70.53% 67.53% 18.62% 17.95% 24.93% 19.93% ** **
Class C........... 75.63% 16.67% 26.17% ** **
REAL ESTATE SECURITIES
Class A........... 61.63% 54.34% 27.09% 24.19% 36.77% 30.65% ** **
Class B........... 58.85% 53.85% 26.00% 24.00% 35.77% 30.77% ** **
Class C........... 70.91% 26.87% 37.07% ** **
EQUITY INCOME FUND
***Class A........ 96.22% 87.41% 15.13% 14.03% 31.16% 25.22% ** **
Class B........... 77.14% 74.14% 20.07% 19.42% 30.06% 25.06% ** **
Class C........... 82.34% 20.92% 31.45% ** **
EQUITY INDEX FUND
Class A........... 140.11% 129.33% 20.04% 18.90% 39.47% 33.19% ** **
Class B........... 111.60% 108.60% 27.10% 26.52% 38.45% 33.45% ** **
Class C........... 117.12% 23.65% 39.85% ** **
STOCK FUND
Class A........... 347.45% 327.36% 16.57% 16.02% 38.82% 32.60% 22.01% 20.89%
Class B........... 109.60% 106.60% 26.71% 26.13% 37.71% 32.71% ** **
Class C........... 120.76% 24.21% 39.13% ** **
DIVERSIFIED GROWTH FUND
***Class A........ 89.76% 81.24% 14.33% 13.24% 32.69% 26.74% ** **
Class B........... 104.82% 101.82% 25.78% 25.19% 31.42% 26.42% ** **
Class C........... 110.21% 26.49% 32.75% ** **
SPECIAL EQUITY FUND
Class A........... 401.77% 379.24% 17.94% 17.39% 39.93% 33.64% 22.75% 21.63%
Class B........... 102.76% 99.76% 25.37% 24.78% 38.81% 33.81% ** **
Class C........... 113.31% 23.05% 40.25% ** **
REGIONAL EQUITY FUND
Class A........... 173.62% 161.33% 23.36% 22.18% 36.13% 30.04% ** **
Class B........... 114.10% 111.10% 27.57% 27.00% 35.18% 30.18% ** **
Class C........... 117.89% 23.77% 36.49% ** **
EMERGING GROWTH FUND
Class A........... 92.60% 83.96% 20.66% 19.08% 24.73% 19.09% ** **
Class B........... 90.02% 87.02% 22.80% 22.17% 24.01% 19.01% ** **
Class C........... 93.76% 20.86% 25.19% ** **
SMALL CAP VALUE FUND(1)
Class A........... 122.89% 112.89% 21.16% 21.06% 24.98% 19.33% 23.18% **
Class B........... 0.05% (4.95)% ** ** ** ** ** **
Class C........... 124.31% ** 21.94% 25.21% 23.45%
MICRO CAP VALUE FUND
Class A........... 9.60% 4.68% 88.00% 37.02% ** ** ** **
Class B........... 9.50% 4.50% 86.83% 35.41% ** ** ** **
Class C........... 9.50% 86.83% ** ** ** **
INTERNATIONAL INDEX FUND(2)
Class A........... 11.29% 6.29% 4.54% 2.56% (11.03)% (15.03)% ** **
Class B........... (0.36)% (5.34)% ** ** ** ** ** **
Class C........... 12.25% ** 4.90% (1.19)% ** **
INTERNATIONAL FUND
Class A........... 36.40% 30.27% 9.32% 7.89% 30.03% 24.23% ** **
Class B........... 30.07% 27.07% 8.77% 7.97% 29.13% 24.13% ** **
Class C........... 37.12% 9.46% 30.38% ** **
HEALTH SCIENCES FUND
Class A........... 21.97% 16.49% 12.66% 9.60% 23.60% 18.09% ** **
Class B........... 20.41% 15.41% 11.79% 8.98% 22.69% 17.69% ** **
Class C........... 22.41% 12.90% 23.89% 22.69% ** **
TECHNOLOGY FUND
Class A........... 159.66% 148.00% 31.44% 29.72% 17.71% 12.39% ** **
Class B........... 156.65% 153.65% 35.19% 34.68% 16.82% 11.82% ** **
Class C........... 160.74% 31.60% 17.95% ** **
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Cumulative Average Annual Average Annual Average Annual
Since Inception* Since Inception* One Year Five Year
------------------ ----------------- ----------------- ------------------
Without With Without With Without With Without With
Sales Sales Sales Sales Sales Sales Sales Sales
Charge Charge Charge Charge Charge Charge Charge Charge
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIMITED TERM INCOME FUND
Class A................... 26.83% 24.34% 5.08% 4.65% 6.09% 3.99% ** **
Class B................... ** ** ** ** ** ** ** **
Class C................... 21.24% 5.42% 6.09% ** **
INTERMEDIATE TERM INCOME FUND
Class A................... 32.76% 27.77% 6.09% 5.24% 7.19% 3.14% ** **
Class B................... ** ** ** ** ** ** ** **
Class C................... 23.03% 5.84% 6.98% ** **
FIXED INCOME FUND
Class A................... 115.72% 107.62% 8.18% 7.76% 8.26% 4.19% 6.26% 5.45%
Class B................... 23.64% 20.64% 7.02% 6.19% 7.40% 2.40% ** **
Class C................... 24.34% 6.15% 8.54% ** **
INTERMEDIATE GOVERNMENT
BOND FUND
Class A................... 87.91% 82.26% 6.67% 6.33% 7.06% 3.89% 5.06% 4.43%
Class B................... ** ** ** ** ** ** ** **
Class C................... 21.11% 5.38% 7.07% ** **
INTERMEDIATE TAX FREE FUND
Class A................... 78.15% 72.79% 6.09% 5.75% 6.84% 3.63% 5.50% 4.85%
Class B................... ** ** ** ** ** ** ** **
Class C................... 18.06% 4.65% 6.75% ** **
CALIFORNIA INTERMEDIATE
TAX FREE FUND
Class A................... 1.02% -2.02% 7.23% -13.11% ** **
Class B................... ** ** ** ** ** ** ** **
Class C................... 0.92% 6.49% ** **
COLORADO INTERMEDIATE
TAX FREE FUND
Class A................... 25.84% 22.06% 6.81% 5.88% 7.11% 3.92% ** **
Class B................... ** ** ** ** ** ** **
Class C................... 25.84% 6.81% 7.11% ** **
MINNESOTA INSURED INTERMEDIATE
TAX FREE FUND
Class A................... 19.27% 15.69% 5.02% 4.14% 6.72% 3.49% ** **
Class B................... ** ** ** ** ** ** ** **
Class C................... 18.92% 4.94% 6.42% ** **
OREGON INTERMEDIATE TAX
FREE FUND
Class A................... ** ** ** ** ** ** ** **
Class B................... ** ** ** ** ** ** ** **
Class C................... 1.17% 8.32% ** **
</TABLE>
- ------------------------
* Inception date are as follows: Inception date are as follows: Balanced
Fund, Class A, December 14, 1992; Class B, August 15, 1994; Class C,
February 4, 1994; Real Estate Securities Fund, Class A, September 29, 1995;
Class B, September 29, 1995; Class C, June 30, 1995; Equity Income Fund,
Class A, December 18, 1992; Class B, August 15, 1994; Class C, August 2,
1994; Equity Index Fund, Class A, December 14, 1992; Class B, August 15,
1994; Class C, February 4, 1994; Stock Fund, Class A, December 22, 1987;
Class B, August 15, 1994; Class C, February 4, 1994; Diversified Growth
Fund, Class A, December 18, 1992; Class B, August 15, 1994; Class C, August
2, 1994; Special Equity Fund, Class A, December 22, 1987; Class B, August
15, 1994; Class C, February 4, 1994; Regional Equity Fund, Class A,
December 14, 1992; Class B, August 15, 1994; Class C, February 4, 1994;
Emerging Growth Fund, Class A, April 4, 1994; Class B, August 15, 1994;
Class C, April 4, 1994; Small Cap Value Fund, Class A, Class B, and Class
C, November 6, 1997; Micro Cap Value Fund, Class A, Class B, and Class C,
August 5, 1997; International Index Fund, Class A, Class B, and Class C,
November 6, 1997; International Fund, Class A, April 7, 1994, Class B,
August 15, 1994, Class C, April 4, 1994; Health Sciences Fund, Class A,
Class B and Class C, January 31, 1996; Technology Fund, Class A, April 4,
1994; Class B, August 15, 1994; Class C, April 4, 1994; Limited Term Income
Fund, Class A, December 14, 1992; Class B, August 15 1994 (closed January
31, 1995); Class C, February 4, 1994; Intermediate Term Income Fund, Class
A, December 14, 1992; Class B, not in operation at September 30, 1997;
Class C, February 4, 1994; Fixed Income Fund, Class A, December 22, 1987;
Class B, August 15, 1994; Class C, February 4, 1994; Intermediate
Government Bond Fund, Class A, December 22, 1987; Class B, not in operation
at September 30, 1997; Class C, February 4, 1994; Intermediate Tax Free
Fund, Class A, December 22, 1987, Class C, Februar 4, 1994; California
Intermediate Tax Free Fund, Class A and Class C, August 5, 1997; Colorado
Intermediate Tax Free Fund, Class A and Class C, April 4, 1994; Minnesota
Insured Intermediate Tax Free Fund, Class A, February 25, 1994, Class C,
February 28, 1994; Oregon Intermediate Tax Free Fund, Class C, August 5,
1997.
** Not in operation for entire period.
*** Performance is presented for the period beginning March 25, 1994, the date
U.S. Bank National Association became the Adviser. The per share income
and capital changes for these Funds since inception can be found in the
financial highlights section of the prospectus and annual report to
shareholders. Total return figures from inception of these Funds are
available upon request from the Funds' Distributor SEI Investments
Distribution Co., Oaks, Pennsylvania 19456, telephone (800) 637-2548.
(1) Reflects performance commencing on January 1, 1988 of a predecessor common
trust fund of the Qualivest Small Companies Value Fund common, adjusted for
fees and expenses for periods prior to August 1, 1994 (the inception date
of the Qualivest Small Companies Value Fund). The common trust fund was not
registered under the 1940 Act and therefore was not subject to certain
investment restrictions which may have adversely affected performance. On
November 21, 1997, Small Cap Value Fund became the successor by merger to
the Qualivest Small Companies Value Fund.
(2) Reflects performance commencing on September 25, 1987 of a predecessor
common trust fund of Micro Cap Value Fund, adjusted for fees and expenses
for periods prior to August 8, 1997 (the inception date of Micro Cap Value
Fund). The common trust fund was not registered under the 1940 Act and the
fund was not subject to certain investment restrictions which may have
adversely affected performance.
(3) Reflects performance commencing on July 3, 1995 of the Qualivest
International Opportunities Fund. On November 21, 1997 the International
Index Fund became the successor by merger to the Qualivest International
Opportunities Fund.
(4) Reflects performance commencing on May 31, 1992 of predecessor common trust
funds of California Intermediate Tax Free Fund, adjusted for fees and
expenses for periods prior to August 8, 1997 (the inception date of
California Intermediate Tax Free Fund). The common trust funds were not
registered under the 1940 Act and therefore were not subject to certain
investment restrictions which may have adversely affected performance.
(5) Reflects performance commencing on October 31, 1986 of a predecessor common
trust fund of Oregon Intermediate Tax Free Fund, adjusted for fees and
epxenses for periods prior to August 8, 1997 (the inception date of Oregon
Intermediate Tax Free Fund). The common trust fund was not registered under
the 1940 Act and therefore was not subject to certain investment
restrictions which may have adversely affected performance.
<PAGE>
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. For
the one-year period ended September 30, 1997, the historical distribution rates
of the Class A, Class B and Class C Shares of the Funds were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Balanced Fund............................................. 2.40% 1.88% 2.73%
Real Estate Securities Fund............................... 4.20% 3.92% 4.55%
Equity Income Fund........................................ 2.48% 1.95% 2.81%
Equity Index Fund......................................... 1.14% 0.59% 1.40%
Stock Fund................................................ 1.07% 0.62% 1.33%
Diversified Growth Fund................................... 0.53% 0.14% 0.74%
Special Equity Fund....................................... 0.42% 0.07% 0.66%
Regional Equity Fund...................................... 0.28% 0.00% 0.55%
Emerging Growth Fund...................................... 0.00% 0.00% 0.00%
Small Cap Value Fund(1)................................... 0.00% 0.00% 0.01%
Micro Cap Value Fund...................................... 0.00% 0.00% 0.00%
International Index Fund(1)............................... 0.07% 0.00% 0.09%
International Fund........................................ 1.07% 0.76% 1.26%
Health Sciences Fund...................................... 0.00% 0.00% 0.07%
Technology Fund........................................... 0.00% 0.00% 0.00%
Limited Term Income Fund.................................. 5.49% * 5.60%
Intermediate Term Income Fund............................. 5.34% * 5.56%
Fixed Income Fund......................................... 5.17% 4.67% 5.63%
Intermediate Government Bond Fund......................... 5.65% * 5.83%
Intermediate Tax Free Fund................................ 4.17% * 4.31%
California Intermediate Tax Free Fund..................... 0.59% * 0.61%
Colorado Intermediate Tax Free Fund....................... 4.36% * 4.50%
Minnesota Insured Intermediate Tax Free Fund.............. 4.22% * 4.36%
Oregon Intermediate Tax Free Fund......................... * * 0.66%
</TABLE>
- ----------------------------
* Not in operation during fiscal year ended September 30, 1997.
(1) For the four month period from August 1, 1997 to November 30, 1997.
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. The annualized current
distribution rates for the one or three-month period (as appropriate) ended
September 30, 1997 for Funds were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Balanced Fund............................................. 2.07% 1.43% 2.42%
Real Estate Securities Fund............................... 3.89% 3.46% 4.30%
Equity Income Fund........................................ 2.88% 2.27% 3.27%
Equity Index Fund......................................... 1.17% 0.49% 1.48%
Stock Fund................................................ 0.23% 0.00% 0.49%
Diversified Growth Fund................................... 0.14% 0.00% 0.39%
Special Equity Fund....................................... 0.23% 0.00% 0.49%
Regional Equity Fund...................................... 0.00% 0.00% 0.00%
Emerging Growth Fund...................................... 0.00% 0.00% 0.00%
Small Cap Value Fund(1)................................... 0.00% 0.00% 0.00%
Micro Cap Value Fund...................................... 0.00% 0.00% 0.00%
International Index Fund(1)............................... 0.00% 0.00% 0.00%
International Fund........................................ 0.00% 0.00% 0.00%
</TABLE>
(1) For the four month period from August 1, 1997 to November 30, 1998.
<PAGE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Health Sciences Fund 0.00% * 0.00%
Technology Fund 0.00% * 0.00%
Limited Term Income Fund 5.27% * 5.37%
Intermediate Term Income Fund 5.24% * 5.46%
Fixed Income Fund 4.91% 4.34% 5.35%
Intermediate Government Bond Fund 5.68% * 5.86%
Intermediate Tax Free Fund 4.28% * 4.43%
California Intermediate Tax Free Fund 4.12% * 4.25%
Colorado Intermediate Tax Free Fund 4.28% * 4.41%
Minnesota Insured Intermediate Tax Free Fund 4.23% * 4.38%
Oregon Intermediate Tax Free Fund * * 4.45%
</TABLE>
- -----------------------
* Not in operation during fiscal year ended September 30, 1997.
(1) For the period ended November 30, 1997.
TAX EQUIVALENT DISTRIBUTION RATES. The tax equivalent distribution rate
for the Tax Free Funds is computed by dividing that portion of such a Fund's
annualized current distribution rate (computed as described above) which is
tax-exempt by one minus the stated federal or combined federal/state income tax
rate, and adding the resulting figure to that portion, if any, of the annualized
current distribution rate which is not tax-exempt. Based upon the maximum
federal or combined federal/state income tax rates set forth above under "-- SEC
Standardized Performance Figures -- Tax Equivalent Yield for Tax Free Funds,"
the annualized current distribution rates for the month ended September 30,
1997, for each class of the Tax Free Funds were as follows:
CLASS A CLASS C
------- -------
Intermediate Tax Free Fund............................. 7.09% 7.33%
California Intermediate Fax Free Fund.................. 8.06% 8.32%
Colorado Intermediate Tax Free Fund.................... 7.46% 7.68%
Minnesota Insured Intermediate Tax Free Fund........... 7.65% 7.92%
Oregon Intermediate Tax Free Fund...................... * 8.66%
* Not in operation during fiscal year ended September 30, 1997.
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:
BALANCED FUND may compare its performance to the S&P 500, which is
described above. Balanced Fund also may compare its performance to the LEHMAN
GOVERNMENT/CORPORATE (TOTAL) INDEX, which is a market weighted index comprised
of all public obligations of the U.S. Treasury, excluding flower bonds and
foreign-targeted issues; all publicly issued debt of U.S. Government agencies
and quasi-federal corporations, and corporate debt guaranteed by the U.S.
Government; and all publicly issued, fixed rate, nonconvertible investment grade
dollar-denominated SEC-registered corporate debt. Balanced Fund also may compare
its performance to the LIPPER BALANCED FUNDS AVERAGE, which is an average of
funds whose primary objective is to conserve principal by maintaining at all
times a balanced portfolio of both stocks and bonds. Balanced Fund also may
compare its performance to a composite constructed from the S&P 500 and the
Lehman Government/Corporate (Total) Index.
REAL ESTATE SECURITIES FUND may compare its performance to the MORGAN
STANLEY REIT INDEX, which is a capitalization weighted index with dividends
reinvested in the most actively traded real estate investment trusts and is
designed to be a measure of real estate equity performance based on the last
closing price of the month for all tax-qualified Equity REITs listed on the New
York Stock Exchange, the American Stock Exchange and the NASDAQ National Market
System. Real Estate Securities Fund also may compare its performance to the
LIPPER REAL ESTATE FUNDS AVERAGE, which is an average of real estate-oriented
funds.
<PAGE>
EQUITY INCOME FUND may compare its performance to the S&P 500 and the
LEHMAN GOVERNMENT/CORPORATE (TOTAL) INDEX, each of which is described above, and
to a composite constructed from these two indices. Equity Income Fund also may
compare its performance to the LIPPER EQUITY INCOME FUNDS AVERAGE, which is an
average of funds which seek relatively high current income and growth of income
through investing 60% or more of their portfolios in equities.
EQUITY INDEX FUND may compare its performance to the S&P 500, which is
described above, and to the LIPPER S&P 500 INDEX FUNDS AVERAGE.
STOCK FUND may compare its performance to the STANDARD & POOR'S DAILY
STOCK PRICE INDEX OF 500 COMMON STOCKS ("S&P 500"), which is a composite index
of common stocks in industrial, transportation, and financial and public utility
companies. The S&P 500 index assumes reinvestment of all dividends paid by
stocks listed in its index. Taxes due on any of these distributions are not
included, nor are brokerage or other fees calculated in Standard & Poor's
figures. Stock Fund also may compare its performance to the LIPPER GROWTH &
INCOME FUNDS AVERAGE, which is an average of funds which combine a growth of
earnings orientation and an income requirement for level and/or rising
dividends.
DIVERSIFIED GROWTH FUND may compare its performance to the S&P 500 and
the LIPPER GROWTH & INCOME FUNDS AVERAGE, each of which is described above.
SPECIAL EQUITY FUND may compare its performance to the S&P 400 MIDCAP
AVERAGE, which is a capitalization-weighted index that measures the performance
of the mid-range sector of the U.S. stock market where the median market
capitalization is approximately $700 million, and the LIPPER MID-CAP FUNDS
AVERAGE, which is an average of funds which limit their investments to companies
with average market capitalizations and/or revenues between $800 million and the
average market capitalization of the Wilshire 4500 Index. Special Equity Fund
may also compare its performance to the RUSSELL MID-CAP INDEX, which is an index
that measures the performance of the 800 smallest companies in the Russell 1000
Index, which measures the performance of the 1,000 largest companies in the
Russell 1000 Index. The Russell 1000 Index represents approximately 90% of the
total market capitalization of the Russell 3000 Index.
REGIONAL EQUITY FUND may compare its performance to the RUSSELL 2000
INDEX and the LIPPER SMALL CAP FUNDS AVERAGE, each of which is described below.
EMERGING GROWTH 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. Emerging Growth Fund also may compare its performance to the
LIPPER SMALL COMPANY GROWTH FUNDS AVERAGE, which is an average of funds which
limit their investments to smaller capitalization companies.
SMALL CAP VALUE FUND may compare its performance to the RUSSELL 2000
INDEX, which is described above. Small Cap Value Fund may also compare its
performance to the LIPPER SMALL CAP FUNDS 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.
MICRO CAP VALUE FUND may compare its performance to the RUSSELL 2000
INDEX, which is described above. Micro Cap Value Fund may also compare its
performance to the LIPPER MICRO CAP FUNDS AVERAGE, which is an average of funds
which invest primarily in companies with market capitalizations of less than
$300 million at the time of purchase.
INTERNATIONAL INDEX FUND may compare its performance to the MORGAN
STANLEY EUROPE, AUSTRALIA, FAR EAST COMPOSITE INDEX (the "EAFE 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 FUNDS
<PAGE>
AVERAGE, which is an average of funds which primarily invest in equity
securities whose primary trading markets are outside the United States.
INTERNATIONAL FUND may compare its performance to that of the EAFE
Index, which is described above. International Fund also may compare its
performance to the LIPPER INTERNATIONAL FUNDS AVERAGE, which is described above.
HEALTH SCIENCES FUND may compare its performance to that of the LIPPER
HEALTH/BIOTECHNOLOGY FUNDS AVERAGE, which is an average of funds which invest at
least 65% of their equity portfolio in shares of companies engaged in health
care, medicine and biotechnology. Health Sciences Fund may also compare its
performance to the Russell 2000 Index, which is described above.
TECHNOLOGY FUND may compare its performance to the LIPPER TECHNOLOGY
FUNDS AVERAGE, which is an average of funds which invest in technology-related
equities, the RUSSELL 2000 INDEX, which is described above, and the PSE
TECHNOLOGY 100 INDEX, which is a broad-based, price-weighted index measuring the
combined performance of 100 listed and over-the-counter stocks in 15 different
industries.
LIMITED TERM INCOME FUND may compare its performance to the MERRILL
LYNCH ONE-YEAR TREASURY INDEX, which is an unmanaged index of a one-year
constant maturity Treasury bills. Limited Term Income Fund also may compare its
performance to the LIPPER SHORT INVESTMENT GRADE DEBT FUNDS AVERAGE, which is an
average of funds which invest at least 65% of assets in investment grade debt
issues with dollar-weighted average maturities of five years or less.
INTERMEDIATE TERM INCOME FUND may compare its performance to the LEHMAN
INTERMEDIATE GOVERNMENT/CORPORATE INDEX, which is a market weighted index
comprised of all public obligations of the U.S. Treasury, excluding flower bonds
and foreign-targeted issues; all publicly issued debt of U.S. Government
agencies and quasi-federal corporations, and corporate debt guaranteed by the
U.S. Government; and all publicly issued, fixed rate, nonconvertible investment
grade dollar-denominated SEC-registered corporate debt, in each case with
maturities of up to ten years. Intermediate Term Income Fund also may compare
its performance to the LIPPER SHORT-INTERMEDIATE INVESTMENT GRADE DEBT FUNDS
AVERAGE, which is an average of funds which invest at least 65% of assets in
investment grade debt with dollar-weighted average maturities of one to five
years.
FIXED INCOME FUND may compare its performance to the LEHMAN
GOVERNMENT/CORPORATE (TOTAL) INDEX, which is described above. Fixed Income Fund
also may compare its performance to the LIPPER CORPORATE DEBT FUNDS A-RATED
AVERAGE, which is an average of funds which invest 65% or more of assets in
corporate debt issues rated "A" or better or government issues.
INTERMEDIATE GOVERNMENT BOND FUND may compare its performance to the
LEHMAN INTERMEDIATE GOVERNMENT INDEX, which is a market weighted index comprised
of all public obligations of the U.S. Treasury, excluding flower bonds and
foreign-targeted issues, and all publicly issued debt of U.S. Government
agencies and quasi-federal corporations, and corporate debt guaranteed by the
U.S. Government, in each case with maturities of up to ten years. Intermediate
Government Bond Fund also may compare its performance to the LIPPER
SHORT-INTERMEDIATE U.S. GOVERNMENT FUNDS AVERAGE, which is an average of funds
which invest at least 65% of assets in securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities with dollar-weighted average
maturities of one to five years.
INTERMEDIATE TAX FREE FUND may compare its performance to the LEHMAN
7-YEAR G.O. INDEX, which is an unmanaged index comprised of state and local
general obligation issues with maturities between 6 and 8 years which were
issued as part of a transaction of at least $50 million and which have a minimum
credit rating of at least Baa. Intermediate Tax Free Fund also may compare its
performance to the LIPPER INTERMEDIATE MUNICIPAL DEBT FUNDS AVERAGE, which is an
average of funds which invest in municipal debt issues with dollar-weighted
average maturities of five to ten years.
<PAGE>
CALIFORNIA INTERMEDIATE TAX FREE FUND may compare its performance to
the LEHMAN 7-YEAR G.O. INDEX, which is described above, and the LIPPER CA
INTERMEDIATE MUNICIPAL DEBT FUNDS AVERAGE, which is an average of funds that
invest in municipal debt issues which are exempt from taxation in California
with dollar-weighted average maturities of five to ten years.
COLORADO INTERMEDIATE TAX FREE FUND may compare its performance to the
LEHMAN 7-YEAR G.O. INDEX and the LIPPER INTERMEDIATE MUNICIPAL DEBT FUNDS
AVERAGE, each of which is described above, and the LIPPER OTHER STATES
INTERMEDIATE MUNICIPAL DEBT FUNDS AVERAGE, which invests in debt issues with
dollar-weighted average maturities of five to ten years and which are exempt
from taxation on a specified city or state basis.
MINNESOTA INSURED INTERMEDIATE TAX FREE FUND may compare its
performance to the LEHMAN 7-YEAR G.O. INDEX and the LIPPER INTERMEDIATE
MUNICIPAL DEBT FUNDS AVERAGE, each of which is described above, and the LIPPER
OTHER STATES INTERMEDIATE MUNICIPAL DEBT FUNDS AVERAGE, which is described
above.
OREGON INTERMEDIATE TAX FREE FUND may compare its performance to the
LEHMAN 7-YEAR G.O. INDEX and LIPPER INTERMEDIATE MUNICIPAL DEBT FUNDS AVERAGE,
each of which is described above, and the LIPPER OTHER STATES INTERMEDIATE
MUNICIPAL DEBT FUNDS AVERAGE, which is described above.
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
"Federal Income Taxes" (or, in the Prospectuses for the Tax Free Funds, "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-exemp income; and (3) 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
<PAGE>
after such sale or exchange. Furthermore, if Fund shares with respect to which a
long-term capital gain distribution has been made are held for less than six
months, any loss on the sale or exchange of such shares will be treated as a
long-term capital loss to the extent of such long-term capital gain
distribution. Furthermore, if a shareholder of any of the Tax-Free Funds
receives an exempt-interest dividend from such fund and then disposes of his or
her shares in such fund within six months after acquiring them, any loss on the
sale or exchange of such shares will be disallowed to the extent of the
exempt-interest dividend.
If one of the Tax-Free Funds disposes of a municipal obligation that it
acquired after April 30, 1993 at a market discount, it must recognize any gain
it realizes on the disposition as ordinary income (and not as capital gain) to
the extent of the accrued market discount.
For federal tax purposes, if a shareholder exchanges shares of a Fund
for shares of any other FAIF Fund pursuant to the exchange privilege (see
"Investing in the Funds -- Exchange Privilege" in the Prospectuses for Class A
and Class B Shares, and "Purchases and Redemptions of Shares -- Exchange
Privilege" in the Prospectuses 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 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.
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, options, and (in the case of International
Fund) forward currency contracts as of the end of the year as well as those
actually realized during the year. Except for transactions in futures contracts,
options, or forward currency contracts 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.
<PAGE>
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
diversify its holdings. The Internal Revenue Service has not made its position
clear regarding the treatment of futures contracts and options for purposes of
the diversification test, and the extent to which a Fund can buy or sell futures
contracts and options may be limited by this requirement.
It is expected that any net gain realized from the closing out of
futures contracts, options, or forward currency contracts 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.
Any realized gain or loss on closing out a futures contract, option, or
forward currency contract such as a forward commitment for the purchase or sale
of foreign currency 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 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, option, or forward currency 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.
With respect to the Minnesota Insured Intermediate Tax Free Fund, the
1995 Minnesota Legislature enacted a statement of intent that interest on
obligations of Minnesota governmental units and Indian tribes be included in net
income of individuals, estates and trusts for Minnesota income tax purposes if a
court determines that Minnesota's exemption of such interest unlawfully
discriminates against interstate commerce because interest on obligations of
governmental issuers located in other states i so included. This provision
applies to taxable years that begin during or after the calendar year in which
any such court decision becomes final, irrespective of the date on which the
obligations were issued. Minnesota Insured Intermediate Tax Free Fund is not
aware of any decision in which a
<PAGE>
court has held that a state's exemption of interest on its own bonds or those of
its political subdivisions or Indian tribes, but not of interest on the bonds of
other states or their political subdivisions or Indian tribes, unlawfully
discriminates against interstate commerce or otherwise contravenes the United
States Constitution. Nevertheless, the Fund cannot predict the likelihood that
interest on the Minnesota bonds held by the Fund would become taxable under this
Minnesota statutory provisions.
<PAGE>
RATINGS
A rating of a rating service represents that service's opinion as to
the credit quality of the rated security. However, such ratings are general and
cannot be considered absolute standards of quality or guarantees as to the
creditworthiness of an issuer. A rating is not a recommendation to purchase,
sell or hold a security, because it does not take into account market value or
suitability for a particular investor. Markets values of debt securities may
change as a result of a variety of factors unrelated to credit quality,
including changes in market interest rates.
When a security has been rated by more than one service, the ratings
may not coincide, and each rating should be evaluated independently. Ratings are
based on current information furnished by the issuer or obtained by the rating
services from other sources which they consider reliable. Ratings may be
changed, suspended or withdrawn as a result of changes in or unavailability of
such information, or for other reasons. In general, the Funds are not required
to dispose of a security if its rating declines after it is purchased, although
they may consider doing so.
RATINGS OF CORPORATE DEBT OBLIGATIONS AND MUNICIPAL BONDS
STANDARD & POOR'S
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
<PAGE>
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
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
impairment 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.
<PAGE>
RATINGS OF PREFERRED STOCK
STANDARD & POOR'S. 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. 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
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. 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."
<PAGE>
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. 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. 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.
BEST'S RATING SYSTEM FOR INSURANCE COMPANIES
The objective of Best's Rating System is to evaluate the various
factors affecting the overall performance of an insurance company in order to
provide an opinion as to the company's relative financial strength and ability
to meet its contractual obligations. The procedure includes both a quantitative
and qualitative review of the company.
The quantitative evaluation is based on an analysis of the company's
financial condition and operating performance utilizing a series of financial
tests. These tests measure a company's performance in the three critical areas
of Profitability, Leverage and Liquidity in comparison to the norms established
by the A.M. Best Company. These norms are based on an evaluation of the actual
performance of the insurance industry.
Best's review also includes a qualitative evaluation of the adequacy
and soundness of a company's reinsurance, the adequacy of its reserves and the
experience of its management. In addition, various other factors of importance
are considered such as the composition of the company's book of business and the
quality and diversification of its assets.
<PAGE>
Upon completion of analysis, Best's Ratings are assigned to those
companies that meet the qualifications for rating. The Best's Rating
classifications are A+ (Superior); A & A- (Excellent); B+ (Very Good); B & B-
(Good); C+ (Fairly Good); and C & C- (Fair). Those not qualifying for a current
Best's Rating are classified in the "Not Assigned" category that has ten
classifications which identify why a company is not eligible for a Best's
Rating. Care should be exercised in the use of Best's Ratings without further
reference to additional Best's publications.
FINANCIAL STATEMENTS
The financial statements of FAIF included in its annual reports to
shareholders for the year ended September 30, 1997 and for the four month period
ended November 30, 1997 are incorporated herein by reference. Such annual
reports to shareholders accompany this Statement of Additional Information. In
addition, the unaudited financial statements for Micro Cap Value Fund,
California Intermediate Tax Free Fund and Oregon Intermediate Tax Free Fund for
the period commencing August 8, 1997 and ending December 30, 1997 are attached
to this Statement of Additional Information.
<PAGE>
STATEMENTS OF OPERATIONS (000) (Unaudited)
For the period ended December 31, 1997
<TABLE>
<CAPTION>
California Oregon
Intermediate Intermediate Micro Cap
Tax Free Tax Free Value
Fund (1) Fund (1) Fund (1)
-------- -------- --------
INVESTMENT INCOME:
<S> <C> <C> <C>
Interest $ 653 $ 3,745 $ 322
Dividends -- 653
-------- -------- --------
Total investment income 653 3,745 975
-------- -------- --------
EXPENSES:
Investment advisory fees 91 500 646
Waiver of investment advisory fees (41) (178) (60)
Administrator fees 15 80 103
Transfer agent fees 7 6 15
Amortization of organizational costs 1 1 --
Custodian fees 4 22 28
Directors' fees -- 1 1
Registration fees 10 60 67
Professional fees 1 3 4
Printing 1 3 8
Distribution Fees-Retail Class A -- -- --
Distribution Fees- Retail Class B -- -- --
Other -- 2 3
-------- -------- --------
TOTAL EXPENSES AFTER WAIVERS AND REIMBURSEMENTS 89 500 815
-------- -------- --------
Investment income- net 564 3,245 160
-------- -------- --------
REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS- NET:
Net realized gain on investments 35 273 27,163
Net change in unrealized appreciation (depreciation) 306 1757 (26,997)
of investments
-------- -------- --------
NET GAIN ON INVESTMENTS 341 2,030 166
-------- -------- --------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 905 $ 5,275 $ 326
======== ======== ========
</TABLE>
(1) Commenced operations on August 8, 1997.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (000) (Unaudited)
<TABLE>
<CAPTION>
California Oregon
Intermediate Intermediate Micro Cap
Tax Free Tax Free Value
Fund Fund Fund
------------ ----------- -----------
8/8/97 to 8/8/97 to 8/8/97 to
12/31/97 (1) 12/31/97 (1) 12/31/97 (1)
--------- --------- ---------
<S> <C> <C> <C>
OPERATIONS:
Investment income - net $ 564 $ 3,245 $ 160
Net realized gain on investments 35 273 27,163
Net change in unrealized depreciation of investments 306 1,757 (26,997)
--------- --------- ---------
Net Decrease in net assets resulting from operations 905 5,275 326
--------- --------- ---------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Investment Income - net:
Institutional Class (564) (3,227) (158)
Retail Class A -- -- --
Retail Class B -- -- --
Net realized gain on investments:
Institutional Class (6) (274) (12,784)
Retail Class A -- -- (15)
Retail Class B -- -- (7)
--------- --------- ---------
Total Distributions (570) (3,501) (12,964)
--------- --------- ---------
CAPITAL SHARE TRANSACTIONS(1):
Institutional Class:
Proceeds from sales 4,121 8,893 9,324
Shares issued in connection with acquisition of 32,213 180,293 239,118
Limited Volatility Stock Fund
Reinvestment of distributions 13 239 6,013
Payments for redemptions (2,643) (8,890) (41,624)
--------- --------- ---------
Increase in net assets from Institutional Class transactions 33,704 180,535 212,831
--------- --------- ---------
Retail Class A:
Proceeds from sales 1 -- 3,519
Reinvestment of distributions -- 9
Payments for redemptions -- (3,232)
--------- --------- ---------
Increase in net assets from Retail Class A transactions 1 -- 296
--------- --------- ---------
Retail Class B:
Proceeds from sales -- 133
Reinvestment of distributions -- 7
Payments for redemptions -- --
--------- --------- ---------
Increase in net assets from Retail Class B transactions -- 140
--------- --------- ---------
Increase in net assets from capital share transactions 33,705 180,535 213,267
--------- --------- ---------
Total increase in net assets 34,040 182,309 200,629
--------- --------- ---------
NET ASSETS AT BEGINNING OF PERIOD -- -- --
--------- --------- ---------
NET ASSETS AT END OF PERIOD (2) $ 34,040 $ 182,309 $ 200,629
--------- --------- ---------
CAPITAL SHARE TRANSACTIONS:
Institutional Class:
Procedes from Sales 411 884 898
Shares issued in connection with acquisition of 3,221 18,030 23,912
Limited Volatility Stock
Reinvestment of distributions 1 24 656
Payments for Redemptions (264) (885) (4,102)
--------- --------- ---------
Total Institutional Class transactions 3,369 18,053 21,364
--------- --------- ---------
Retail Class A:
Procedes from Sales 351
Shares issued in lieu of cash distributions 1
Shares redeemed (323)
--------- --------- ---------
Total Retail Class A transactions 29
--------- --------- ---------
Retail Class B:
Procedes from Sales 14
Shares issued in lieu of cash distributions --
Shares redeemed --
--------- --------- ---------
Total Retail Class B transactions 14
--------- --------- ---------
Net Increase from share transactions 3,369 18,053 21,407
--------- --------- ---------
</TABLE>
(2) Includes undistributed net investment income (000) of $0 for California
Intermediate Tax Free Fund, $19 for Oregon Intermediate Tax Free Fund, and
$2 for Micro Cap Value Fund at December 31, 1997.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
Financial Highlights (Unaudited)
For the period ended December 31, 1997
For a share outstanding throughout the period
<TABLE>
<CAPTION>
REALIZED AND DIVIDENDS DISTRIBUTION
NET ASSET NET UNREALIZED FROM NET FROM NET ASSET
VALUE BEGINNING INVESTMENT GAINS INVESTMENT CAPITAL GAIN VALUE END
OF PERIOD INCOME ON INVESTMENTS INCOME OF PERIOD
<S> <C> <C> <C> <C> <C> <C>
California Intermediate Tax Free Fund (1)
Institutional $ 10.00 $ 0.17 $ 0.10 $ (0.17) $ - $ 10.10
Retail A $ 10.00 $ 0.17 $ 0.11 $ (0.17) $ - $ 10.11
Oregon Intermediate Tax Free Fund (1)
Institutional $ 10.00 $ 0.18 $ 0.12 $ (0.18) $ (0.02) $ 10.10
Micro Cap Value Fund (1)
Institutional $ 10.00 $ 0.01 $ (0.04) $ (0.01) $ (0.59) $ 9.37
Retail A $ 10.00 $ - $ (0.01) $ 0.00 $ (0.59) $ 9.40
Retail B $ 10.00 $ - $ (0.06) $ - $ (0.59) $ 9.35
</TABLE>
WIDE TABLE CONTINUED
<TABLE>
<CAPTION>
RATIO OF NET RATIO OF
RATIO OF INVESTMENT EXPENSES TO AVERAGE
NET ASSETS EXPENSES TO INCOME TO AVERAGE COMMISSION
TOTAL END OF AVERAGE AVERAGE NET ASSETS PORTFOLIO (B)
RETURN PERIOD (000) NET ASSETS NET ASSETS (EXCLUDING WAIVERS) TURNOVER
<S> <C> <C> <C> <C> <C> <C> <C>
California Intermediate Tax Free Fund (1)
Institutional 2.76%+ $ 34,039 0.70% 4.37% 1.01% 11% -
Retail A 2.86%+ $ 1 0.70% 4.40% 1.26% 11% -
Oregon Intermediate Tax Free Fund (1)
Institutional 2.97%+ $ 182,309 0.70% 4.56% 0.95% 8% -
Micro Cap Value Fund (1)
Institutional 0.19%+ $ 200,228 0.88% 0.17% 0.97% 2% $0.0622
Retail A 0.08%+ $ 274 1.13% 0.06% 1.14% 2% $0.0622
Retail B 0.46%+ $ 127 1.88% -0.63% 1.91% 2% $0.0622
</TABLE>
+ Returns are for the period indicated and have not been annualized.
(1) Commenced operations on August 8, 1997. All ratios for the period have been
annualized.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
First American Investment Funds, Inc.
Notes to Financial Statements
December 31, 1997 (Unaudited)
1. Organization:
California Intermediate Tax Free Fund, Oregon Intermediate Tax Free Fund and
Micro Cap Value Fund are funds offered by the First American Investment Funds,
Inc. (FAIF). FAIF (collectively the "Funds") is a corporation organized under
the Investment Company Act of 1940, as amended, as open end, management
investment companies. FAIF's articles of incorporation permit the Board of
Directors to create additional funds and classes in the future.
FAIF offers Class A, Class B, and Class C shares. Class A shares are sold with a
front-end sales charge. Class B shares may be subject to a contingent deferred
sales charge for six years and automatically convert to class A shares after
eight years. Class C shares have no sales charge and are offered only to
qualified investors.
Each Fund's prospectus provides a description of each Fund's investment
objectives, policies, and strategies. All classes of shares have identical
voting, dividend, liquidation and other rights, and the same terms and
conditions, except the level of distribution fees charged may differ among
classes.
2. Summary of Significant Accounting Policies:
The significant accounting policies followed by the Fund are as follows:
SECURITY VALUATION - Security valuation for FAIF investments are furnished by an
independent pricing service that has been approved by the Board of Directors.
Investment securities of the Fund 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 sixty days to maturity
are valued by an independent pricing service. The service may employ
methodologies that utilize actual market transactions, broker-dealer supplied
valuations, or other electronic data processing techniques. These techniques
generally consider such factors as yields or prices of bonds of comparable
quality, type of issue, coupon, maturity, ratings and general market conditions.
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. Debt obligations with sixty days or less remaining until
maturity may be valued at amortized cost.
SECURITY TRANSACTIONS AND INVESTMENT INCOME - The Fund records security
transactions on the trade date, the date the securities are purchased or sold.
Dividend income is recorded on the ex-dividend date. Interest income, including
amortization of bond premium and discount is recorded on the accrual basis.
Security gains and losses are determined on the basis of identified cost, which
is the same basis used for Federal income tax purposes.
DISTRIBUTIONS TO SHAREHOLDERS - The California Intermediate Tax Free Fund and
Oregon Intermediate Tax Free Fund declare and pay income dividends monthly.
Micro Cap Value Fund declares and pays income dividends quarterly, if any. The
Funds pay realized long term capital gain distributions, if any, at least once a
year.
FEDERAL TAXES - It is the Fund's intention to continue to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly, no
provision for Federal income taxes is required. For Federal income tax purposes,
required distributions related to realized gains from security transactions are
computed as of October 31st.
<PAGE>
EXPENSES: Expenses that are directly related to one of the Funds are charged
directly to that fund. Other operating expenses of the fund are prorated to the
Funds on the basis of relative net assets. Class specific distribution fees are
borne by that class. Income, other expenses, and realized and unrealized gains
and losses of a fund are allocated to the respective class on the basis of the
relative net assets each day.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS: The preparation of financial
statements , in conformity with generally accepted accounting principals,
requires management to make estimates and assumptions that affect the reported
amount of contingent assets and liabilities at the date the financial statements
and the reported results of operation during the reporting period. Actual
results could differ from those estimates.
3. Fees and Expenses:
Pursuant to an investment advisory agreement (the Agreement), U.S. Bank National
Association (the Adviser) manages each Fund's assets and furnishes related
office facilities, equipment, research and personnel. The Agreement requires
each Fund to pay the Adviser a monthly fee based upon average daily net assets.
The fee for each of the Funds is equal to an annual rate of 0.70% of the average
daily net assets.
Micro Cap Value Fund may invest in FAF funds, subject to certain limitations.
The terms of such transactions are identical to those of non-related entities
except that, to avoid duplicative investment advisory fees, the Adviser
reimburses to each FAIF fund an amount equal to the investment advisory fee
earned by FAF related to such investments.
Through a separate contractual agreement, First Trust National Association, an
affiliate of the Adviser, serves as the Fund's custodian.
SEI Investments Distribution Co. (SIDCO) and SEI Investments Management
Corporation (SIMC) serve as distributor and administrator of the Funds,
respectively. Under the distribution plan, each Funds pay SIDCO a distribution
fee of .25% of its average daily net assets of the Retail Class A shares, and
1.00% of the Retail Class B shares. No distribution fees are paid by the
Institutional Class C shares. SIMC provides administrative services, including
certain accounting, legal and shareholder services, at an annual rate of .12% of
each Fund's average daily net assets. To the extent that the aggregate net
assets of all First American Funds exceed $8 billion, the annual rate is reduced
to .105%.
In addition to the investment advisory and management fees, custodian fees,
distribution fees, administrator and transfer agent fees, each fund is
responsible for paying most other operating expenses including organization
costs, fees and expenses of outside directors, registration fees, printing
shareholder reports, legal, auditing, insurance and other miscellaneous
expenses.
For the period ended December 31, 1997, legal fees and expenses were paid to a
law firm of which the Secretary of the Funds is a partner.
DST Systems, Inc. provides transfer agent services for the Funds.
A Contingent Deferred Sales Charge (CDSC) is imposed on redemptions made in the
Retail Class B. The CDSC varies depending on the number of years from time of
payment for the purchase of Class B shares until the redemption of such shares.
<PAGE>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLAR
YEAR SINCE PURCHASE AMOUNT SUBJECT TO CHARGE
First 5.00%
Second 5.00%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh 0.00%
Eighth 0.00%
4. Investment Security Transactions
During the period ended December 31,1997, purchases of securities and proceeds
from sales of securities, other than temporary investments in short-term
securities were as follows (000):
Other Investment
Securities
Purchases Sales
California Intermediate Tax Free Fund $5,611 $ 3,405
Oregon Intermediate Tax Free Fund 14,138 17,621
Micro Cap Value Fund 3,357 153
At December 31, 1997 the total cost of securities for Federal income tax
purposes, was not materially different from amounts reported for financial
reporting purposes. The aggregate gross unrealized appreciation and depreciation
for securities held by the Funds at December 31, 1997 is as follows (000):
Aggregate Aggregate
Gross Gross
Appreciation Depreciation Net
California Intermediate
Tax Free Fund $1,432 $ - $ 1,432
Oregon Tax Intermediate
Free Fund 7,173 (27) 7,146
Micro Cap Value Fund 68,731 (18,084) 50,646
5. Deferred Organizational Costs
Organizational costs have been capitalized by the Funds and are being amortized
over 60 months commencing with operations on a straight-line basis.
6. Concentration of Credit Risk
The California Intermediate Tax Free Fund and Oregon Intermediate Tax Free Fund
invest in debt instruments of municipal issuers. Although these funds monitor
investment concentration, the issuers' ability to meet their obligations may be
affected by economic developments in a specific state or region.
The California Intermediate Tax free Fund and Oregon Intermediate Tax Free Fund
invest in securities which include revenue bonds, tax and revenue anticipation
notes, and general obligations. At December 31, 1997, the percentage of
portfolio investments by each revenue source was as follows:
<PAGE>
California Intermediate Oregon Intermediate
Tax Free Fund Tax Free Fund
Revenue Bonds:
Education 3% 2%
Health Care 3 3
Pollution Control 2 2
Public Facility 23 4
Transportation 6 4
Utility 22 17
Other 3 6
General Obligations 36 62
Anticipation Notes 2 0
100% 100%
The rating of long-term debt as a percentage of total value of investments at
December 31, 1997 is as follows:
California Intermediate Oregon Intermediate
Tax Free Fund Tax Free Fund
Standard and Poor's/
Moody's Ratings:
AAA/Aaa 64.9% 45.9%
AA/Aa 24.6 38.0
A/A 10.5 14.8
BBB/Baa -- --
NR -- 1.3
---- ---
100.0% 100.0%
Securities rated by only one agency are shown in that category. Securities rated
by both agencies are shown with their highest rating.
7. Common Trust Fund Conversion
On August 8, 1997 a common trust fund conversion took place. Certain Common
Trust Funds of US Bancorp and its affiliates were converted into FAIF. The Funds
involved in the conversion are as follows:
COMMON TRUST FUND ACQUIRING FUND
US Bancorp California Municipal Bond California Intermediate Tax Free
First Tier California Bond California Intermediate Tax Free
US Bancorp Oregon Municipal Oregon Intermediate Tax Free
US Bancorp Small Companies Value Micro Cap Value
The assets which consisted of securities , and related receivable were converted
on a tax-free basis. The number of shares issued for each fund and the net
assets of each fund (including net unrealized gain/loss) immediately before the
conversion were as follows:
UNREALIZED
COMMON TRUST FUND ASSETS GAIN/(LOSS)
US Bancorp California Municipal $10,891,465 $387,008
Bond
First Tier California Bond $21,321,364 $738,717
US Bancorp Oregon Municipal $180,293,091 5,329,729
US Bancorp Small Companies 239,117,775 77,642,865
Value
<PAGE>
MUTUAL FUNDS NET ASSETS SHARES ISSUED
California Intermediate Tax Free Fund $ -- 3,221,283
Oregon Intermediate Tax Free Fund $ -- 18,029,309
Micro Cap Value Fund $ -- 23,911,778
The value and number of shares issued in exchange for each Common Trust Fund's
assets and shares outstanding in the tax-free conversions are included in the
capital share transactions of the Institutional Class in the Statement of
Changes in Net Assets for each respective fund.
<PAGE>
<TABLE>
<CAPTION>
California Intermediate Tax Free
Schedule of Portfolio Investments Market
December 31, 1997 (Unaudited) Par (000) Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Municipal Bonds--97.1%
California--95.4%
Alisal, School Distict, Series C (GO) (FGIC) 860 528
08/01/2008
Anaheim Electric (RB) 500 515
4.8%, 10/01/2002
Bakersfield, Convention Center Project (COP) (MBIA) 250 265
5.5%, 04/01/2010
Burbank, Public Service Department (RB) (AMBAC) 200 213
6.10%, 06/01/2001
California Educational Facilities Authority, Occidental College, Callable 10/01/07 @ 102 (RB) (MBIA) 500 524
5.30%, 10/01/2010
California Educational Facilities Authority, Pooled College & University Projects, Series A (RB) 500 512
4.85%, 12/01/2001
California Health Facilities Authority, John C. Fremont Hospital District (RB) (CMI) 400 425
6.0%, 06/01/2004
California Health Facilities Finance Authority (RB) (FSA) 500 540
5.50%, 08/15/2006
California Housing Finance Agency, Callable 08/01/04 @ 102 (RB) 150 161
6.55%, 02/01/2005
California Housing Finance Agency, Home Mortgages, Series A (RB) (MBIA) 195 203
5.00%, 08/01/2003
California Housing Finance Agency, Series E (RB) (MBIA) 150 159
5.85%, 08/01/2004
California Industry, Callable 07/01/02 @ 100.25 (GO) (FGIC) 100 107
5.80%, 07/01/2004
California Inland Empire Solid Waste Finance Authority, Landfill Improvements Project, Series B (RB) (AMT) (MLO) (FSA) 500 535
5.75%, 02/01/2004
California Resource Efficiency Finance Authority, First Resource Efficiency Project (RB) (AMBAC) 500 522
5.20%, 07/01/2002
California State (GO) (AMBAC) 300 329
6.30%, 11/01/2002
California State Department of Water, Center Valley Project, Callable 12/01/05 @ 101 (RB) 500 501
5.00%, 12/01/2002
California State Department of Water, Series P, Callable 06/01/06 @ 101 (RB) 750 801
5.30%, 12/01/2007
California State Public Works (RB) 100 106
5.90%, 10/01/2001
California State Public Works (RB) 150 156
5.00%, 06/01/2003
California State Public Works, Department of Corrections, Series A (RB) (AMBAC) 500 511
4.70%, 12/01/2000
California State Public Works, Department of Corrections, Series A (RB) (AMBAC) 545 606
<PAGE>
6.00%, 01/01/2006
California State Public Works, Various University Projects, Series A (RB) (AMBAC) 250 260
5.40%, 12/1/2000
California State, Housing and Homeless (GO) (AMT) 300 316
5.75%, 10/01/2001
California Statewide Communities Development Authority, Health Facilities, Series A, Callable 08/01/03 @ 102 (COP) (CMI) 200 208
5.20%, 08/01/2004
California University, Various Capital Projects, Series B, Callable 09/01/01 @ 102 (COP) (MLO) (MBIA) (A) 300 315
5.35%, 09/01/2002
Contra Costa Water District, Series G (RB) (MBIA) 500 530
5.40%, 10/01/2003
Escondido Civic Center Project, Callable 09/01/01 @ 102 (RB) (AMBAC) 100 109
5.80%, 09/01/2004
Fontana, School District (GO) (MBIA) 500 537
5.55%, 07/01/2004
Huntington Park, Public Financing Authority, Parking Project, LOC: Union Bank of California (RB) 500 500
4.25%, 09/01/2019
Inglewood, Public Financing Authority (RB) (AMBAC) 100 106
5.90%, 05/01/2001
LA Canada, Unified School District (GO) (FGIC) 400 419
5.10%, 08/01/2003
Los Angeles County, Public Works Finance Authority, Callable 03/01/03 @ 102 (RB) 400 409
4.80%, 03/01/2004
Los Angeles County, Public Works Finance Authority, Regional Park & Open Space District, Series A (RB) 500 527
5.50%, 10/01/2002
Los Angeles County, Public Works Finance Authority, Regional Park & Open Space District, Series A (RB) 500 534
5.625%, 10/01/2003
Los Angeles County, Transportation Commission, Series B (RB) (FGIC) 250 268
5.875%, 07/01/2002
Los Angeles County, Transportation Commission, Series B (RB) (FGIC) 250 275
6.00%, 07/01/2004
Los Angeles, Department of Water & Power, Callable 04/15/02 @ 102 (RB) 250 272
6.10%, 04/15/2003
Los Angeles, Earthquake Rehabilitation, Series C, Callable 01/01/00 @ 100 (RB) (AMT) (FNMA) 1,000 1,012
4.85%, 07/01/2002
Los Angeles, Harbor Department, Series B (RB) (AMT) 500 523
6.00%, 08/01/2000
Los Angeles, Sanitation Equipment, Series A (RB) (FSA) 500 559
6.00%, 02/01/2007
Los Angeles, School District, Callable 07/01/08 @ 102 (GO) (FGIC) 300 308
4.90%, 07/01/2009
Los Angeles, Series A, Callable 09/01/04 @ 102 (GO) (MBIA) 250 276
5.80%, 09/01/2007
Martinez County, School District, Callable 08/01/00 @ 102 (GO) 150 158
5.75%, 08/01/2005
Modesto, Water Utility Systems, Refining Project (COP) (FGIC) 740 768
5.00%, 10/01/2005
Montebello, Community Redevelopment Agency (RB) (FSA) 270 273
<PAGE>
4.75%, 09/01/2007
Mt. Diablo, Unified School District, Community Facilities District, Callable 08/01/02 @ 102 (GO) (AMBAC) 100 108
5.80%, 08/01/2003
Northern California Ore Transmission Project (RB) (MBIA) 100 107
6.00%, 05/01/2002
Oakland-Alameda County, Coliseum Authority, Series A, LOC: Canadian Imperial Bank (RB) 170 171
4.40%, 02/01/2000
Oceanside, Water Systems (COP) (AMBAC) 500 520
5.10%, 08/01/2002
Orange County, Waste Management Revenue (RB) (AMT) (AMBAC) 500 501
4.70%, 12/01/2005
Orange County, Junvenile Justice Center Facility (RB) (AMBAC) 100 105
5.75%, 06/01/2001
Orange County, Transportation Authority, Callable 02/15/02 @ 102 (RB) 900 959
5.70%, 02/15/2003
Oxnard, School District (GO) (MBIA) 600 626
5.00%, 08/01/2005
Paradise, Unified School District, Measure M Project, Series A, Callable 09/01/05 @ 102 (COP) (AMBAC) 300 320
5.25%, 09/01/2007
Pomona, Unified School District, Series A (GO) (MBIA) 250 270
5.45%, 02/01/2006
Pomona, Unified School District, Series A (GO) (MBIA) 250 272
5.50%, 08/01/2006
Rancho Mirage Joint Powers Finance Authority, Eisenhower Medical Center, Series A, Callable 07/01/07 @ 102 (COP) (MBIA) 500 521
5.125%, 07/01/2008
Rancho, Water District Finance Authority, Mandatory Put @ 100, LOC: Toronto Dominion Bank (RB) (B) 250 254
4.70%, 09/15/2001
Redding, Joint Powers Finance Authority, Waste Water Project, Callable 12/01/02 @ 102 (RB) (FGIC) 100 107
5.60%, 12/01/2003
Redondo Beach, Redevelopment Agency, Residential Mortgages, FNMA Mortgage Backed Securities Project, Series A (RB) (FNMA)130 132
5.15%, 06/01/2003
Rio Linda, School District, Callable 08/01/08 @ 100 (GO) (FSA) 500 516
5.00%, 08/01/2009
Roseville, High School District, Callable 08/01/00 @ 102 (GO) 100 106
5.75%, 08/01/2002
Sacramento County, Multifamily Housing, Parcwood Apartments, Mandatory Put @ 100 (RB) (CGLI) (B) 1,000 1,021
4.80%, 09/01/2002
Sacramento, Housing Authority, Fairways I Apartments (RB) (FNMA) 90 91
5.875%, 02/01/2008
San Diego County, Water Authority Revenue, Series A (COP) (FGIC) 500 518
5.20%, 05/01/2001
San Diego County, Water Authority Revenue, Series A (COP) 500 529
5.25%, 05/01/2006
San Francisco, City & County Airport Commission, Second Series (RB) (AMT) (FGIC) 500 527
5.40%, 05/01/2006
San Francisco, City & County Library Facilities Project, Series D, Callable 06/15/00 @ 102 (GO) 250 263
5.70%, 06/15/2001
San Francisco, City & County Library Facilities Project, Series D, Callable 06/15/00 @ 102 (GO) 250 265
<PAGE>
5.80%, 06/15/2002
San Francisco, City & County Public Improvements, Series B, Callable 12/15/00 @ 100 (GO) 200 215
6.70%, 12/15/2007
San Francisco, Fire Department Facility Project, Series C (RB) (FGIC) 300 341
7.00%, 06/15/2003
San Francisco, Public Safety Project, Series C, Callable 06/15/00 @ 102 (GO) 100 106
6.00%, 06/15/2003
San Joaquin Hills, Transportation Cooridor Agency (RB) (MBIA) 705 517
01/15/2005
San Jose, Finance Authority, Convention Center Project, Series C (RB) 250 263
5.75%, 09/01/2001
Santa Ana, Community Redevelopment Agency, Series A (GO) 860 923
6.50%, 12/15/2014
Santa Rosa, Wastewater, Series B (RB) (FGIC) 250 259
5.40%, 09/01/2000
South County, Regional Waste Water Authority (RB) (AMBAC) 100 106
5.60%, 08/01/2002
Southern California Metropolitan Waterworks, Series B (RB) (MBIA) 500 504
4.875%, 07/01/2010
Southern California Metropolitan Waterworks, Series B (RB) (MBIA) 500 499
5.00%, 07/01/2014
Stockton-East Water District, Callable 04/01/00 @ 102 (COP) (AMBAC) 100 102
5.55%, 04/01/2001
Sulphur Springs, Unified School District, Series B (GO) 500 522
5.40%, 03/01/2002
Tulare County, Financing Project, Series A (COP) (MBIA) 100 107
5.60%, 11/15/2002
Turlock, Irrigation District, Series A, Callable 07/01/02 @ 102 (RB) (MBIA) 100 109
6.00%, 01/01/2004
Walnut Valley School District, Series A (GO) (MBIA) 250 295
6.80%, 02/01/2007
Walnut Valley School District, Series A (GO) (MBIA) 250 298
6.85%, 08/01/2007
West Covina, Civic Center Project (COP) (FSA) 250 266
5.25%, 09/01/2007
West Covina, Redevelopment Agency, Community Facilities District, Fashion Plaza (RB) 300 313
5.125%, 09/01/2005
William S. Hart Joint School Financing Authority, Callable 09/01/05 @ 102 (RB) (FSA) 200 226
6.10%, 09/01/2006
------
Total California 32,461
------
Puerto Rico--1.7%
Commonwealth of Puerto Rico (GO) (MBIA) 500 578
------
Total Puerto Rico 578
------
Total Municipal Bonds (Cost $31,607) 33,039
<PAGE>
------
Money Market Fund--2.8%
Provident California Tax Free Money Market 955 955
------
Total Money Market Fund (Cost $955) 955
------
Total Investments--99.9% (Cost $32,562) 33,994
------
Other Assets and Liabilities, Net--0.1% 46
------
Net Assets:
Portfolio shares - Institutional class ($.0001 par value - 2 billion authorized) based on 3,369,406 outstanding shares 32,578
Portfolio shares - Retail class ($.0001 par value - 2 billion authorized) based on 106 outstanding shares 1
Accumulated net realized gain on investments 29
Net unrealized appreciation of investments 1,432
------
Total Net Assets--100.0% 34,040
Net asset value, offering price, and redemption price per share- Institutional class 10.10
Net asset value, offering price, and redemption price per share- Retail class A 10.11
Maximum sales charge 3.0% (1) 0.31
Offering price per share- Retail class A 10.42
</TABLE>
(1) The offer price is calculated by dividing the net asset value by 1 minus the
maximum sales charge of 3.00%.
(A) Security sold within the terms of a private placement memorandum. This
security has been determined to be illiquid under the guidelines established by
the Board of Directors
(B) Mandatory Put Security-the mandatory put date is shown as the maturity date
on the Statement of Net Assets.
AMBAC-American Municipal Bond Assurance Company
AMT-Alternative Minimum Tax
CGLI-Connecticut General Life Insurance
CMI-California Mortgage Insurers
COP-Certificates of Participation
FGIC-Financial Guaranty Insurance Corporation
FHA-Federal Housing Authority
FNMA-Federal National Mortgage Association
FSA-Financial Security Assurance
GNMA-Government National Mortgage Association
GO-General Obligation
MBIA-Municipal Bond Insurance Association
MLO-Municipal Lease Obligation
RB-Revenue Bond
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Oregon Intermediate Tax Free
Schedule of Portfolio Investments
December 31, 1997 (Unaudited)
Municipal Bonds--96.8%
Oregon--96.0% Market
Par (000) Value (000)
<S> <C> <C>
Albany, Linn, & Benton Counties, Callable 11/01/97 @ 100 (GO) (MBIA) 420 423
6.3%, 11/01/1998
Albany, Sewer Revenue, Callable 02/01/99 @ 100 (RB) (MBIA) 195 201
6.850%, 02/01/2000
Albany, Sewer Revenue, Pre-refunded @ 100 (RB) (MBIA) (A) 160 165
6.9%, 02/01/2001
Baker County, Pollution Control Revenue (RB) (SBA) 300 306
5.85%, 07/01/2001
Baker County, Pollution Control Revenue (RB) (SBA) 315 322
5.95%, 07/01/2002
Baker County, Pollution Control Revenue (RB) (SBA) 335 342
6.050%, 07/01/2003
Baker County, Pollution Control Revenue, Callable 07/01/97 @ 102 (RB) 285 291
5.750%, 07/01/2000
Bear Creek Valley, Sanitation Authority, Callable 10/01/97 @ 100 (GO) 328 332
7.0%, 10/01/1998
Bear Creek Valley, Sanitation Authority, Callable 10/01/97 @ 100 (GO) 214 217
7.2%, 10/01/2000
Beaverton (GO) 858 905
5.750%, 04/01/2001
Beaverton, Limited Tax, Series B, Callable 04/01/02 @ 100 (GO) 895 927
5.0%, 04/01/2003
Beaverton, Pre-refunded @ 100 (GO) (A) 302 308
6.5%, 06/01/2002
Beaverton, Water Revenue, Callable 06/01/04 @ 101 (RB) (FSA) 1,071 1,092
6.125%, 06/01/2014
Chemeketa, Community College, Callable 06/01/06 @ 100 (GO) (FGIC) 1,000 1,087
5.65%, 06/01/2009
Clackamas & Washington Counties, School District #3, Callable 08/01/02 @ 100 (GO) 996 1,055
5.6%, 08/01/2003
Clackamas & Washington Counties, School District #3, Callable 10/01/02 @ 101 (GO) 234 252
5.65%, 10/01/2005
Clackamas County, Health Facility Authority, Series A (RB) (MBIA) 881 955
5.90%, 03/01/2003
Clackamas County, Hospital Revenue, Sisters Providence, Series A, Callable 04/01/02 @ 102 (RB) 676 742
6.2%, 10/01/2002
Clackamas County, School District #12, Callable 06/01/03 @ 101 (GO) 750 763
4.65%, 06/01/2004
Clackamas County, School District #12, Callable 06/01/03 @ 101 (GO) 1,012 1,043
4.65%, 06/01/2005
Clackamas County, School District #7 (GO) 499 519
6.6%, 06/15/1999
<PAGE>
Clackamas County, School District #7 (GO) 597 634
5.2%, 06/15/2004
Clackamas County, Service District #1, Callable 10/01/97 @ 100 (GO) 375 372
6.6%, 10/01/1999
Clackamas County, Service District #1, Sewer Revenue, Callable 10/01/06 @ 100 (GO) 730 782
6.2%, 10/01/2009
Columbia River, Peoples Utility District, Callable 6/01/06 @ 100 (GO) (MBIA) 1,214 1,248
4.375%, 06/01/2007
Deschutes & Jefferson Counties, School District #2 Redmond, Callable 06/01/03 @ 100 (GO) (MBIA) 1,000 1,056
5.4%, 06/01/2005
Deschutes County, Callable 12/01/06 @ 100 (GO) (MBIA) 990 1,054
5.25%, 12/01/2009
Douglas County, Hospital Facility Authority, Catholic Health Series B, (RB) (MBIA) 501 543
5.5%, 11/15/2004
Emerald, Peoples Utility District (RB) (FGIC) 1,350 1,402
7.2%, 11/01/2002
Emerald, Peoples Utility District, Series B, Escrowed To Maturity (RB) (AMBAC) 629 663
7.0%, 11/01/1999
Eugene, Callable 12/01/97 @ 100.5 (COP) (MBIA) 399 403
6.4%, 06/01/1998
Eugene, Electric Utility Revenue, Callable 09/01/97 @ 100 (RB) 1,194 1,206
6.65%, 09/01/2000
Eugene, Electric Utility Revenue, Callable 08/01/07 @ 100 (RB) (FSA) 1,305 1,333
5.0%, 08/01/2011
Eugene, Public Improvements, Series P, Callable 10/01/00 @ 100 (GO) 69 72
5.6%, 10/01/2004
Eugene, Public Safety Facilities, Callable 06/01/06 @ 100 (GO) (FGIC) 1,314 1,371
5.7%, 06/01/2016
Grants Pass, Callable 06/01/98 @ 100 (GO) (AMBAC) 998 1,007
5.85%, 06/01/2000
Gresham, Sewer Revenue (RB) 613 635
4.95%, 06/01/2002
Gresham, Sewer Revenue, Callable 06/01/02 @ 102 (RB) 506 529
5.25%, 06/01/2005
Jackson County, School District # 549C (GO) (FSA) 1,205 1,249
6.0%, 06/01/2005
Josephine County, School District #7 (GO) (FGIC) 1,632 1,666
5.75%, 06/01/2006
Lake Oswego, Pre-refunded @ 100 (GO) (A) 269 277
6.3%, 02/01/2004
Lane County, Community College (GO) 1,020 1,035
5.0%, 06/01/2001
Lane County, Educational District (GO) 2,354 2,415
5.2%, 06/01/2002
Lane County, Metropolitan Waste Water Service (GO) 657 679
5.1%, 09/01/2000
Lane County, School District #4J, Series A (GO) 1,010 1,032
4.9%, 07/01/2002
Lincoln City, Callable 01/01/98 @ 100 (GO) (AMBAC) 499 504
<PAGE>
5.75%, 07/01/2001
Lincoln City, School District (GO) (FGIC) 2,183 2,247
5.5%, 06/15/2004
Lincoln City, Series A, Callable 08/01/97 @ 100 (GO) (AMBAC) 302 315
5.0%, 02/01/2003
Lincoln County, School District (GO) (FGIC) 1,154 1,183
6.0%, 06/15/2006
Marion & Polk Counties, School District #24-J, Pre-refunded @ 100 (GO) (A) 775 832
5.6%, 10/01/2004
Marion & Polk Counties, School District #24-J, Pre-refunded @ 100 (GO) (A) 653 702
5.7%, 10/01/2005
Marion & Polk Counties, School District #24-J, Pre-refunded @ 100 (GO) (A) 841 870
5.8%, 10/01/2006
Marion County, Office Building Facility (COP) 400 409
10.0%, 05/01/2005
Marion County, School Distric #7-J, Callable 06/01/04 @ 101 (GO) (FSA) 854 930
5.6%, 06/01/2006
Marion County, Solid Waste & Electric Revenue, Ogden Martin System Project (RB) (AMBAC) 2,016 2,037
5.0%, 10/01/1999
Marion County, Solid Waste & Electric Revenue, Ogden Martin System Project (RB) (AMBAC) 1,004 1,042
5.1%, 10/01/2002
Marion County, Solid Waste & Electric Revenue, Ogden Martin System Project (RB) (AMBAC) 1,414 1,524
5.5%, 10/01/2006
Medford, Hospital Facilities Authority (RB) (MBIA) 400 417
6.3%, 12/01/1999
Medford, Hospital Facilities Authority, Callable 12/01/00 @ 102 (RB) (MBIA) 298 325
6.6%, 12/01/2003
Metropolitan, Open Spaces Program, Series A (GO) 2,564 2,601
5.25%, 09/01/2001
Metropolitan, Open Spaces Program, Series A, Callable 09/01/03 @ 102 (GO) 1,281 1,326
5.0%, 09/01/2004
Metropolitan, Open Spaces Program, Series C, Callable 09/01/03 @ 102 (GO) 999 1,026
5.25%, 09/01/2013
Metropolitan, Service District, Oregon Convention Center, Callable 01/01/00 @ 102 (GO) 1,297 1,370
6.0%, 07/01/2002
Metropolitan, Service District, Oregon Convention Center, Series A, Callable 01/01/00 @ 102 (GO) 1,137 1,145
5.75%, 07/01/2000
Metropolitan, Service District, Oregon Convention Center, Series A, Callable 01/01/00 @ 102 (GO) 492 528
6.25%, 01/01/2013
Metropolitan, Service District, Oregon Waste Disposal (RB) 536 563
6.85%, 07/01/1999
Metropolitan, Service District, Oregon Waste Disposal, Continuously Callable (RB) 931 986
6.95%, 01/01/2000
Metropolitan, Washington Park Zoo, Series A (GO) 1,053 1,075
5.0%, 01/15/2002
Metropolitan, Washington Park Zoo, Series A (GO) 1,107 1,137
5.0%, 01/15/2003
Metropolitan, Washington Park Zoo, Series A (GO) 1,301 1,341
6.0%, 01/15/2005
<PAGE>
Metropolitan, Washington Park Zoo, Series A, Callable 01/15/07 @ 100 (GO) 1,004 1,040
5.25%, 01/15/2010
Morrow County (GO) (MBIA) 806 854
5.5%, 06/01/2004
Morrow County (GO) (MBIA) 844 899
5.5%, 06/01/2005
Multnomah County, University of Portland Educational Facilities, Callable 04/01/09 @ 100, (GO) (AMBAC) 1,103 1,118
5.75%, 04/01/2010
Multnomah County, Health Facilities Lease, Series A, Callable 07/01/03 @ 101 (COP) 920 964
5.1%, 07/01/2004
Multnomah County, Juvenile Justice Project, Series A, Callable 08/01/02 @ 101 (COP) 673 724
5.7%, 08/01/2003
Multnomah County, Oregon School District #1J, Series A, (COP) 1,224 1,228
6.5%, 12/15/1998
Multnomah County, School District #1, Callable 06/15/97 @ 100 (GO) 996 1,036
6.3%, 12/15/1999
Multnomah County, School District #1, Callable 06/15/97 @ 100 (GO) 1,403 1,487
6.5%, 12/15/2000
Multnomah County, School District #1-J (GO) 996 1,018
4.5%, 06/01/2001
Multnomah County, School District #1-J (GO) 1,485 1,511
4.25%, 06/01/2003
Multnomah County, School District #1-J, Callable 12/15/97 @ 100 (GO) 511 506
6.7%, 12/15/2002
Multnomah County, School District #1-J, Callable 12/15/97 @ 100 (GO) 1,184 1,179
6.75%, 12/15/2003
Multnomah County, School District #1-J, Series B, Callable 12/15/97 @ 100 (COP) 1,002 1,003
6.6%, 12/15/1998
Multnomah County, School District #3, Callable 12/01/05 @ 100 (GO) (FGIC) 832 842
5.6%, 12/01/2007
Multnomah County, School District #4 (GO) 889 961
5.5%, 01/01/2002
Multnomah County, School District #4, Callable 01/01/02 @ 100 (GO) 1,388 1,484
5.8%, 01/01/2004
Multnomah County, School District #40 (GO) 1,000 1,053
5.25%, 06/01/2004
Multnomah County, School District #7 (GO) (AMBAC) 1,050 1,076
5.875%, 06/01/2002
Multnomah County, School District #7 (GO) (AMBAC) 1,058 1,090
5.5%, 06/01/2006
Northern Wasco County, Hydroelectric Utility, Mcnary Dam Fishway Project, Callable 12/01/03 @ 102 (RB) 466 478
4.750%, 12/01/2006
Oregon State (GO) 2,114 2,265
6.0%, 08/01/2002
Oregon State (GO) 1,000 1,083
6.0%, 02/01/2003
Oregon State, Administrative Services, Callable 11/01/05 @ 101 (COP) (MBIA) 1,308 1,416
5.0%, 11/01/2006
Oregon State, Alternative Energy, Private Act, Callable 07/01/04 @ 100 (GO) 874 953
<PAGE>
5.3%, 07/01/2005
Oregon State, Bank Revenue Economic Development, Series A, Callable 01/01/08 @100 (RB) (MBIA) 500 509
5.0%, 01/01/2011
Oregon State, Board of Higher Education, Series B, Callable 10/15/02 @ 100 (GO) 1,444 1,485
6.25%, 10/15/2012
Oregon State, Department of Administrative Services, Callable 11/01/08 @ 100 (COP) (AMBAC) 839 846
5.0%, 11/01/2011
Oregon State, Department of Administrative Services, Series A (COP) (MBIA) 3,093 3,161
5.375%, 11/01/2002
Oregon State, Department of Administrative Services, Series C (COP) (MBIA) 1,146 1,175
4.8%, 05/01/2002
Oregon State, Department of Administrative Services, Series C, Callable 05/01/06 @ 101 (COP) (MBIA) 1,683 1,801
5.75%, 05/01/2007
Oregon State, Department of General Services, Series E (COP) (AMBAC) 1,051 1,099
6.8%, 09/01/1999
Oregon State, Department of General Services, Series F (COP) (AMBAC) 998 1,045
6.8%, 09/01/1999
Oregon State, Department of Transportation, Regional Light Rail Fund, Callable 06/01/04 @ 102 (RB) (MBIA) 2,142 2,223
6.0%, 06/01/2005
Oregon State, Economic Development Department (RB) 355 357
4.65%, 01/01/2002
Oregon State, Economic Development Department, Callable 01/01/02 @ 102 (RB) 555 562
4.85%, 01/01/2004
Oregon State, Equipment Finance Program, Series I (COP) (MBIA) 735 750
5.05%, 11/01/1999
Oregon State, Fair & Exposition Center, Callable 10/01/01 @ 103 (RB) 1,006 1,073
5.4%, 10/01/2006
Oregon State, Health Housing Educational & Cultural Facilities (RB) (MBIA) 549 576
5.25%, 10/01/2002
Oregon State, Health Housing Educational & Cultural Facilities (RB) (MBIA) 627 665
5.3%, 10/01/2003
Oregon State, Health Housing Educational & Cultural Facilities, Series A, Callable 03/01/07 @ 102 (RB) 395 418
5.4%, 03/01/2009
Oregon State, Health Housing Educational & Cultural Facilities, Series A, Callable 03/01/07 @ 102 (RB) 413 437
5.45%, 03/01/2010
Oregon State, Health Housing, Series A, Callable 07/01/06 @ 102 (RB) 1,950 2,043
5.375%, 07/01/2015
Oregon State, Housing & Community Services (COP) (FHA) 615 630
5.9%, 07/01/1999
Oregon State, Housing & Community Services, Callable 07/01/03 @ 102 (RB) 1,502 1,547
5.75%, 07/01/2012
Oregon State, Housing & Community Services, Series A, Continuously Callable (RB) 1,345 1,390
6.4%, 07/01/2018
Oregon State, Housing & Community Services, Single Family Mortgages, Callable 07/01/01 @ 102 (GO) 140 148
6.4%, 07/01/2005
Oregon State, Housing & Community Services, Single Family Mortgages, Series A, Callable 07/01/03 @ 102 (RB) 1,069 1,098
4.9%, 07/01/2005
Oregon State, Housing & Community Services, Single Family Mortgages, Series A, Callable 07/01/06 @ 102 (RB) 1,200 1,280
6.0%, 07/01/2016
<PAGE>
Oregon State, Housing & Community Services, Single Family Mortgages, Series B, Callable 07/01/03 @ 102 (RB) 478 493
5.1%, 07/01/2007
Oregon State, Pollution Control, Callable 11/01/07 @ 100 (GO) 452 457
4.875%, 11/01/2011
Oregon State, Pollution Control, Series C (GO) 961 986
5.625%, 06/01/2013
Oregon State, Veterans Welfare (GO) 352 363
7.8%, 01/01/1999
Polk, Marion & Benton Counties, School District #13-J (GO) (FGIC) 969 1,028
5.5%, 12/01/2003
Polk, Marion & Benton Counties, School District #13-J, Callable 12/01/04 @ 101 (GO) (FGIC) 574 618
5.5%, 12/01/2005
Port Astoria, Callable 02/01/99 @ 100 (GO) (MBIA) 369 378
6.0%, 02/01/2002
Port Morrow, Pollution Control, Pre-refunded @ 100 (RB) (A) 1,063 1,135
6.375%. 04/01/2008
Port Portland, International Airport, Series 7A (RB) (MBIA) 800 841
6.125%, 07/01/2000
Port Portland, International Airport, Series 7A (RB) (MBIA) 498 535
6.2%, 07/01/2001
Port Portland, International Airport, Series 7A (RB) (MBIA) 534 542
6.5%, 07/01/2004
Port Portland, International Airport, Series 9A, Callable 07/01/01 @ 102 (RB) (FGIC) 1,765 1,873
5.4%, 07/01/2004
Port Portland, Series A (GO) 985 1,005
4.5%, 03/01/2006
Port Portland, Unlimited Tax, Series A (GO) 1,003 1,008
4.3%, 03/01/2003
Port Umpqua, Pollution Control, International Paper Project, Series A, Continuously Callable (RB) 1,032 1,019
6.6%, 03/15/2005
Portland, Community College District, Series A, Callable 01/01/93 @ 100 (GO) 1,456 1,607
6.0%, 07/01/2012
Portland, Housing Authority, Riverwood Project, Callable 01/01/06 @ 100 (RB) 1,170 1,259
6.0%, 01/01/2011
Portland, Oregon Sewer Systems, Callable 06/01/07 @ 100 (FGIC) 996 1,004
5.0%, 06/01.2015
Portland, Parking Revenue, Callable 10/01/00 @ 100 (RB) 434 457
6.3%, 10/01/2006
Portland, Parking Revenue, Callable 10/01/00 @ 100 (RB) 464 489
6.35%, 10/01/2007
Portland, Pre-refunded @ 102 (GO) (A) 562 588
6.6%, 10/01/1999
Portland, Series A (COP) 498 519
6.95%, 04/01/1999
Portland, Series A, Pre-refunded @ 100 (COP) (A) 1,716 1,792
7.2%, 04/01/2005
Portland, Series C, Callable 12/01/97 @ 100 (GO) 252 251
5.5%, 12/01/2000
Portland, Sewer Systems Revenue, Callable 06/01/07 @ 100 (RB) (FGIC) 2,250 2,332
<PAGE>
5.0%, 06/01/2009
Portland, Sewer Systems Revenue, Continuously Callable (RB) 1,002 1,108
6.15%, 06/01/2011
Portland, Sewer Systems Revenue, Series A (RB) (MBIA) 1,168 1,180
5.125%, 06/01/2001
Portland, Sewer Systems Revenue, Series A (RB) 1,129 1,160
5.55%, 06/01/2004
Portland, Sewer Systems Revenue, Series B, Callable 04/01/02 @ 102 (RB) 606 641
5.5%, 04/01/2004
Salem (GO) 600 614
6.75%, 11/01/1998
Salem, Education Facilities, Willamette University (RB) 497 532
5.5%, 04/01/2004
Salem, Education Facilities, Willamette University, Callable 04/01/04 @ 101 (RB) 500 540
5.7%, 04/01/2005
Salem, Series A, Callable 01/01/01 @ 101 (GO) 1,410 1,466
5.6%, 01/01/2003
Salem, Water & Sewer Revenue (RB) (MBIA) 1,226 1,271
6.0%, 06/01/2006
Tri-County Metropolitan, Transit Improvements, Callable 07/01/03 @ 100 (GO) 1,521 1,559
5.7%, 07/01/2004
Tri-County Metropolitan, Transportation District, Series A, Callable 07/01/02 @ 101 (GO) 2,000 2,113
5.6%, 07/01/2003
Tri-County Metropolitan, Transportation District, Series A, Callable 07/01/02 @ 101 (GO) 1,337 1,410
5.8%, 07/01/2005
Tri-County Metropolitan, Transportation District, Series A, Callable 08/01/02 @ 101 (RB) 992 1,061
5.45%, 08/01/2004
Tri-County Service District (GO) 1,559 1,631
5.0%, 09/01/2002
Tualatin Valley, Water District, Wolf Creek, Series A, Callable 12/01/03 @ 100 (GO) 1,137 1,180
4.7%, 12/01/2004
Washington & Clackamas Counties, School District #23-J (GO) (FGIC) 1,120 1,168
5.75%, 06/01/2006
Washington County (GO) 685 730
5.85%, 12/01/2001
Washington County, Criminal Justice Facilities, Callable 12/01/04 @ 100 (GO) 845 921
5.625%, 12/01/2005
Washington County, Criminal Justice Facilities, Callable 12/01/04 @ 100 (GO) 1,012 1,073
6.0%, 12/01/2013
Washington County, Oregon Sewer Revenue (RB) (FGIC) 1,094 1,120
5.75%, 10/01/2008
Washington County, School District #15, Callable 06/01/04 @ 101 (GO) (FGIC) 569 630
5.8%, 06/01/2006
Washington County, School District #3 (GO) (MBIA) 800 879
5.75%, 11/01/2004
Washington County, School District #48-J (GO) 317 324
6.7%, 06/01/1998
Washington County, School District #48-J (GO) 1,061 1,133
5.9%, 09/01/2001
<PAGE>
Washington County, School District #48-J, Series B, Callable 06/01/00 @ 100 (GO) 780 809
5.7%, 06/01/2002
Washington County, School District #48-J, Series C, Pre-refunded @ 100 (GO) (A) 825 848
5.3%, 09/01/2002
Washington County, School District #88-J, Callable 06/01/05 @ 100 (GO) (FSA) 1,000 1,094
5.7%, 06/01/2006
Washington County, Unified Sewerage Agency (RB) (AMBAC) 1,053 1,060
5.5%, 10/01/2002
Washington County, Unified Sewerage Agency, Callable 10/01/06 @ 101 (RB) (FGIC) 1,312 1,372
5.2%, 10/01/2009
Washington County, Unified Sewerage Agency, Series 1 (RB) (AMBAC) 1,317 1,361
5.7%, 10/01/2004
Washington County, Unified Sewerage Agency, Series 1, Callable 10/01/04 @ 100 (RB) (AMBAC) 1,994 2,173
5.8%, 10/01/2005
Wilsonville, Callable 01/01/98 @ 100 (GO) 175 175
6.9%, 01/01/1999
Wilsonville, Callable 01/01/98 @ 100 (GO) 190 190
7.0%, 01/01/2000
Wilsonville, Callable 01/01/98 @ 100 (GO) 200 200
7.1%, 01/01/2001
Wilsonville, Callable 01/01/98 @ 100 (GO) 215 215
7.2%, 01/01/2002
Wilsonville, Callable 01/01/98 @ 100 (GO) 235 236
7.3%, 01/01/2003
Wolf Creek, Highway Water District, Pre-refunded @ 100 (GO) (A) 403 421
6.75%, 12/01/2002
Yamhill County, School District #29-J, Callable 06/01/04 @ 101 (GO) (FSA) 628 680
5.6%, 06/01/2006
Yamhill County, School District #29-J, Pre-refunded @ 100 (GO) (A) 452 478
6.5%, 02/01/2002
Yamhill County, School District #40 (GO) (FGIC) 636 678
6.0%, 06/01/2008 --------- ---------
Total Oregon (Cost $167,868) 174,944
---------
Puerto Rico--0.8%
Commonwealth of Puerto Rico (GO) (MBIA) 1,374 1,444
---------
Total Puerto Rico (Cost $1,374) 1,444
---------
Total Municipal Bonds (Cost $169,242) 176,388
---------
Money Market Fund--2.0%
Federated Tax Free Money Market 3,565 3,565
---------
Total Money Market Fund (Cost $3,565) 3,565
---------
---------
Total Investments--98.7% (Cost $172,807) 172,807 179,953
---------
<PAGE>
Other Assets and Liabilities, Net--1.3% 2,356
Net Assets:
Portfolio shares - Institutional class ($.0001 par value - 2 billion authorized) based on 18,053,169 outstanding shares 175,145
Undistributed net investment income 19
Accumulated net realized loss on investments (1)
Net unrealized appreciation of investments 7,146
---------
Total Net Assets--100.0% 182,309
========= =========
Net asset Value, offering price, and redemption price per share - Institutional Class 10.10
- --------------------------------------------------------------------------------------- ---------
</TABLE>
(A) Pre-refunded Security- the pre-refunded date is shown as the maturity date
on the Statement of Net Assets.
AMBAC-American Municipal Bond Assurance Company
AMT-Alternative Minimum Tax
CGIC-Capital Guaranty Insurance Company
FGIC-Federal Guaranty Insurance Corporation
FHA-Federal Housing Authority
FNMA-Federal National Mortgage Association
FSA-Financial Security Assurance
GNMA-Government National Mortgage Association
GO-General Obligation
MBIA-Municipal Bond Insurance Association
MLO-Municipal Lease Obligation
NN-Northwestern National
RB-Revenue Bond
SDCP-School District Credit Program
VA-Veterans Administration
The accompanying notes are an integral part of these financial statements.
<PAGE>
Micro Cap Value Fund
Schedule of Portfolio Investments
December 31, 1997 (Unaudited) Market
Shares Value
Common Stocks--94.1%
Air Transportation--0.3%
World Airways* 74,000 509
-----------
Total Air Transportation 509
-----------
Apparel/Textiles--1.6%
Hampshire Group Limited* 44,100 827
Quaker Fabric* 68,300 1,340
Tarrant Apparel Group* 61,200 956
-----------
Total Apparel/Textiles 3,123
-----------
Banks--7.5%
Eagle Financial 35,800 1,969
First Republic Bank* 70,000 2,236
ONBANCorp 50,000 3,525
TR Financial 100,000 3,325
UST 35,400 982
Webster Financial 43,200 2,873
-----------
Total Banks 14,910
-----------
Chemicals--3.1%
Borg Warner Security* 210,000 3,701
Cambrex 36,600 1,684
CPAC* 74,900 768
-----------
Total Chemicals 6,153
-----------
Communications Equipment--1.2%
Comdial* 115,500 1,068
Nimbus CD International* 129,200 1,389
-----------
Total Communications Equipment 2,457
-----------
Computers & Services--8.3%
Allstar Systems* 32,700 133
BancTec* 80,000 2,145
Bell & Howell* 64,000 1,548
Concurrent Computer* 146,300 343
Dataflex* 155,900 526
Gatefield* 318,350 438
Government Technology Services* 49,600 285
GSE Systems* 55,000 165
Kentek Information Systems 15,000 101
Kofax Image Products* 25,000 139
National Computer Systems 60,000 2,115
Olicom A/S* 133,900 3,465
Pioneer-Standard Electronics 95,400 1,455
Plaintree Systems* 12,000 19
Pomeroy Computer Resources* 135,000 2,396
Trigen Energy 62,000 1,225
TrueVision* 42,200 106
-----------
Total Computers & Services 16,604
-----------
Containers & Packaging--0.7%
BWay* 59,400 1,359
-----------
Total Containers & Packaging 1,359
-----------
Electrical Services--4.8%
El Paso Electric* 126,800 927
TNP Enterprises 42,900 1,426
Tucson Electric Power* 400,000 7,250
-----------
<PAGE>
Total Electrical Services 9,603
-----------
Environmental Services--0.0%
Heidmij N.V. 77,200 825
Financial Services--3.5%
Aames Financial 48,200 624
Medallion Financial 26,100 574
OMEGA Healthcare Investors 90,000 3,476
Pacific Crest Capital* 10,000 183
Rockford Industries* 106,700 920
WFS Financial* 116,100 1,306
-----------
Total Financial Services 7,083
-----------
Gas/Natural Gas--0.2%
Midcoast Energy Resources 19,100 412
-----------
Total Gas/Natural Gas 412
-----------
Glass Products--1.6%
Excel Industries 75,900 1,371
Libbey 50,000 1,894
-----------
Total Glass Products 3,265
-----------
Hazardous Waste Management--0.3%
Air & Water Technologies* 620,600 698
-----------
Total Hazardous Waste Management 698
-----------
Health & Personal Care Products--0.0%
Nu-Med* 732
-----------
Total Health & Personal Care Products
-----------
Household Furniture & Fixtures--0.8%
Stanley Furniture* 58,900 1,642
-----------
Total Household Furniture & Fixtures 1,642
-----------
Household Products--1.1%
Acorn Products* 11,500 115
Thomas Industries 100,950 1,994
-----------
Total Household Products 2,109
-----------
Housing Construction--1.7%
Centex Construction Products 23,900 720
Continental Homes Holding 35,000 1,409
Morgan Products Limited* 113,700 604
Simpson Manufacturing* 20,000 666
-----------
Total Housing Construction 3,399
-----------
Insurance--7.8%
ACMAT, Cl A* 52,700 896
Amerus Life Holdings, Class A 25,887 955
Chandler Insurance* 81,925 471
Delphi Financial Group, Cl A* 39,902 1,796
Farm Family Holdings* 29,400 957
John Alden Financial 80,700 1,937
LaSalle Re Holdings 45,300 1,602
Penn Treaty American* 118,550 3,764
Philadelphia Consolidated Holding* 112,200 1,992
SCPIE Holdings 29,900 865
Symons International Group* 20,600 396
Westbridge Capital* 43,300 18
-----------
Total Insurance 15,649
<PAGE>
-----------
Leasing & Renting--0.7%
Leasing Solutions* 24,500 585
Willis Lease Finance* 43,200 756
-----------
Total Leasing & Renting 1,341
-----------
Lumber & Wood Products--0.8%
Synthetic Industries* 61,700 1,527
-----------
Total Lumber & Wood Products 1,527
-----------
Machinery--11.6%
Bridgeport Machines* 111,500 1,373
Brown & Sharpe Manufacturing, Cl A* 126,800 1,292
Catalytica* 358,400 4,256
Central Sprinkler* 12,600 232
Dayton Superior* 75,500 1,246
Edelbrock* 55,700 947
Foster (LB), Cl A* 160,000 790
MagneTek* 192,262 3,749
Moog, Cl A* 135,500 4,734
Park-Ohio Industries* 84,535 1,543
Scotsman Industries 30,800 753
Unit Instruments* 112,620 1,063
Walbro 94,500 1,270
-----------
Total Machinery 23,248
-----------
Marine Transportation--0.4%
Anangel American Shipholdings, ADR 85,000 744
-----------
Total Marine Transportation 744
-----------
Measuring Devices--0.9%
Envirosource* 210,300 631
General Scanning* 65,000 1,121
-----------
Total Measuring Devices 1,752
-----------
Medical Products & Services--2.7%
Cholestech* 141,500 1,769
Diagnostic Health Services* 121,400 1,434
Maxxim Medical* 8,611 187
PolyMedica* 79,000 770
Spacelabs Medical* 65,000 1,235
Unison HealthCare* 56,500 74
-----------
Total Medical Products & Services 5,469
-----------
Miscellaneous Business Services--7.3%
American Software, Cl A* 187,200 1,720
Borland International* 185,000 1,353
Cimatron* 69,700 383
Coinmach Laundry* 56,400 1,382
Consilium* 110,000 275
Fourth Shift* 135,700 407
InteliData Technologies* 81,600 150
Kronos* 37,300 1,149
Learmonth & Burchett Management Systems, ADR* 88,400 365
MacNeal-Schwendler* 101,900 981
May & Speh* 90,700 1,224
Mentor Graphics* 15,600 151
Micrografx* 100,000 875
Number Nine Visual Technology* 40,000 72
PMT Services* 94,100 1,306
Sapiens International* 100,000 781
Triple P N.V.* 213,500 480
TRO Learning* 157,700 808
Wonderware* 50,000 706
<PAGE>
-----------
Total Miscellaneous Business Services 14,568
-----------
Miscellaneous Consumer Services--0.5%
Regis 41,300 1,038
-----------
Total Miscellaneous Consumer Services 1,038
-----------
Miscellaneous Manufacturing--3.7%
AFC Cable Systems* 90,750 2,700
Bonded Motors* 42,500 361
Commercial Metals 31,300 988
Matthews International, Cl A 35,400 1,558
Superior TeleCom* 32,000 1,106
Tredegar Industries 10,500 692
-----------
Total Miscellaneous Manufacturing 7,405
-----------
Motorcycles, Bicycles & Parts--0.3%
Huffy 48,300 652
-----------
Total Motorcycles, Bicycles & Parts 652
-----------
Office Furniture & Fixtures--0.5%
Shelby Williams Industries 62,800 1,036
-----------
Total Office Furniture & Fixtures 1,036
-----------
Paper Coated and Laminated--0.5%
FiberMark* 42,150 906
-----------
Total Paper Coated and Laminated 906
-----------
Petroleum & Fuel Products--2.4%
Forest Oil* 77,620 1,281
Meridian Resources* 61,344 587
Nordic American Tanker Ship* 112,900 1,863
Titan Exploration* 85,400 811
Total Containment* 60,455 166
-----------
Total Petroleum & Fuel Products 4,708
-----------
Petroleum Refining--0.5%
Abacan Resource* 213,700 334
Hugoton Energy* 61,900 569
-----------
Total Petroleum Refining 903
-----------
Printing & Publishing--1.6%
Devon Group* 61,400 2,824
Topps* 180,000 399
-----------
Total Printing & Publishing 3,223
-----------
Professional Services--0.6%
Complete Management* 75,800 1,061
Guy F. Atkinson* 76,100 105
-----------
Total Professional Services 1,166
-----------
Real Estate--2.7%
Chelsea GCA Realty 27,100 1,035
Lexington Corporate Properties 53,000 818
RFS Hotel Investors 33,200 662
Shurgard Storage Centers 65,100 1,888
Walden Residential Properties 34,000 867
Winston Hotels 12,900 169
-----------
Total Real Estate 5,439
-----------
Retail--5.2%
<PAGE>
Apple South 114,950 1,509
Bacou USA* 43,000 753
Cross (A.T.), Cl A 33,900 343
Deckers Outdoor* 55,100 413
Drug Emporium* 331,600 1,306
Finish Line, Cl A* 24,100 316
Finlay Enterprises* 55,900 1,272
Friedman's, Cl A* 40,600 553
Genovese Drug Stores, Cl A 66,000 1,130
K-Swiss, Cl A 38,200 621
Marks Bros. Jewelers* 28,400 469
Moovies* 69,500 80
Piercing Pagoda* 39,100 1,124
Sound Advice* 67,300 101
Strouds* 66,900 117
Video Update, Cl A* 123,000 246
West Coast Entertainment* 49,300 74
-----------
Total Retail 10,427
-----------
Semi-Conductors/Instruments--2.7%
Applied Magnetics* 210,000 2,336
FEI* 100,000 1,244
Continental Circuits* 31,700 442
Planar Systems* 91,100 934
Praegitzer Industries* 47,200 451
-----------
Total Semi-Conductors/Instruments 5,407
-----------
Steel & Steel Works--1.6%
Kentucky Electric Steel* 60,000 323
Northwest Pipe* 100,100 2,402
Republic Engineered Steels* 238,700 537
-----------
Total Steel & Steel Works 3,262
-----------
Telephones & Telecommunication--0.0%
Netrix* 74,300 79
-----------
Total Telephones & Telecommunication 79
-----------
Testing Laboratories--0.5%
Collaborative Clinical Research* 20,000 101
Roberts Pharmaceutical* 99,700 953
-----------
Total Testing Laboratories 1,054
-----------
Transportation--0.1%
B&H Ocean Carriers Limited* 41,600 229
-----------
Total Transportation 229
-----------
Trucking--1.2%
Budget Group, Cl A* 48,800 1,687
Supreme Industries* 69,611 626
-----------
Total Trucking 2,313
-----------
Wholesale--0.6%
Performance Food Group* 50,700 1,204
-----------
Total Wholesale 1,204
-----------
Total Common Stocks (Cost $138,733) 188,900
Warrants--0.0%
Consumer Products--0.0%
Sound Advice* 2,025
Total Warrants (Cost $0)
<PAGE>
Convertible Bonds--1.7%
Aames Financial, 53.5619 Shares 200 179
5.50%, 03/15/2006
Complete Management, 62.5000 Shares 300 311
8.00%, 12/15/2003
Complete Management, 71.4286 Shares 590 628
8.00%, 08/15/2003
Drug Emporium, 65.1466 Shares 921 794
7.75%, 10/01/2014
Leasing Solutions, 28.6533 Shares 250 236
6.875%, 10/01/2003
MacNeal-Schwendler, 66.0066 Shares 630 629
7.875%, 08/18/2004
Titan, 285.7143 Shares 360 674
8.25%, 11/01/2003 -----------
Total Convertible Bonds (Cost $2,971) 3,451
-----------
Related Party Money Market Funds--3.6%
First American Prime Obligations Fund (A) 7,260 7,260
-----------
Total Related Party Money Market Funds (Cost $7,260) 7,260
-----------
Total Investments--99.5% (Cost 148,965) 199,611
-----------
Other Assets and Liabilities, Net--0.5% 1,018
Net Assets:
Portfolio shares - Institutional Class -
($.0001 par value - 2 billion authorized)
based on 21,363,649 outstanding shares 135,188
Portfolio shares - Retail Class A - ($.0001
par value - 2 billion authorized) based on
29,142 outstanding shares 296
Portfolio shares - Retail Class B - ($.0001
par value - 2 billion authorized) based on
13,600 outstanding shares 140
Undistributed net investment income 2
Accumulated net realized gain on investments 14,357
Net Unrealized appreciation of investments 50,646
-----------
Total Net Assets--100.0% 200,629
Net asset value, offering price, and redemption price
per share - Institutional class 9.37
Net asset value, offering price, and redemption price
per share - Retail class A 9.40
Maximum sales charge of 4.50% (1) 0.44
Offering price per share - Retail class A 9.84
Net asset value and offering price per share - Retail
class B (2) 9.35
* Non-income producing security
(1) The offer price is calculated by dividing the net asset value by 1 minus the
maximum sales charge of 4.50%
(2) Retail Class B has a contingent deferred sales charge. For a description of
possible redemption charge, see the notes to the financial statements.
(A) This money market fund is advised by First Bank National Association who
also serve as adviser for this Fund. See also the notes to the financial
statements.
ADR--American Depository Receipt
Cl--Class
The accompanying notes are an integral part of these financial statements.
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
PART C -- OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements for each series of the Registrant are
incorporated by reference into the Statement of Additional
Information under the heading "Financial Statements."
(b) Exhibits
(1) (a) Amended and Restated Articles of Incorporation, as
amended through October 2, 1997. (Incorporated by
reference to Exhibit (1) to Post-Effective Amendment
No. 22 and Exhibit (1)(b) to Post-Effective Amendment
No. 25.)
* (1) (b) Amendment to Amended and Restated Articles of
Incorporation, dated December 1, 1997.
(2) Bylaws, as amended through September 12, 1997.
(Incorporated by reference to Exhibit (2) to Post-Effective
Amendment No. 25.)
(3) Not applicable.
(4) Not applicable.
(5) (a) Investment Advisory Agreement, dated April 2,
1991, between the Registrant and First Bank National
Association, as amended and supplemented through
August 1994. (Incorporated by reference to Exhibit
(5)(a) to Post-Effective Amendment No. 21.)
(5) (b) Sub-Advisory Agreement, dated March 28, 1994,
relating to International Fund between First Bank
National Association and Marvin & Palmer Associates,
Inc. (Incorporated by reference to Exhibit 5(b) to
Post-effective Amendment No. 21.)
* (5) (c) Amendment No. 8 to Investment Advisory Agreement.
* (5) (d) Amendment No. 1 to Sub-Advisory Agreement.
(6) (a) Distribution Agreement [Class A and Class C
Shares,] dated February 10, 1994, between the
Registrant and SEI Financial Services Company.
(Incorporated by reference to Exhibit (6)(a) to
Post-Effective Amendment No. 21.)
(6) (b) Distribution and Service Agreement [Class B]
dated August 1, 1994, as amended September 14, 1994
between Registrant and SEI Financial Services
Company. (Incorporated by reference to Exhibit (6)(b)
to Post-Effective Amendment No. 21.)
(6) (c) Form of Dealer Agreement. (Incorporated by reference
to Exhibit (6)(c) to Post-Effective Amendment
No. 21.)
(7) Not applicable.
(8) (a) Custodian Agreement dated September 20, 1993,
between the Registrant and First Trust National
Association, as supplemented through August 1994.
(Incorporated by reference to Exhibit (8) to
Post-Effective Amendment No. 18.)
(8) (b) Compensation Agreement dated June 1, 1995,
pursuant to Custodian Agreement. (Incorporated by
reference to Exhibit (8)(b) to Post-Effective
Amendment No. 21.)
<PAGE>
(8) (c) Compensation Agreement dated January 1, 1997,
pursuant to Custodian Agreement. (Incorporated by
reference to Post-Effective Amendment No. 27.)
* (8) (d) Compensation Agreement dated as of August 5, 1997,
pursuant to Custodian Agreement.
* (8) (e) Compensation Agreement dated as of November 21, 1997,
pursuant to Custodian Agreement.
(9) (a) Administration Agreement dated January 1, 1995
between the Registrant and SEI Financial Management
Corporation. (Incorporated by reference to Exhibit
(9)(a) to Post-Effective Amendment No. 23.)
(9) (b) Transfer Agency Agreement dated March 31, 1994,
between the Registrant and Supervised Service
Company, Inc. [superseded] (Incorporated by reference
to Exhibit (9)(c) to Post-Effective Amendment
No. 24.)
(9) (c) Assignment of Transfer Agency Agreement to DST
Systems, Inc. [superseded] (Incorporated by reference
to Exhibit (9)(b) to Post-Effective Amendment No.
22.)
(9) (d) Form of Transfer Agency Agreement dated as of October
1, 1996, between Registrant and DST Systems, Inc.
(Incorporated by reference to Exhibit 9(d) to
Post-Effective Amendment No. 27.)
(9) (e) Agreement dated July 1, 1997 between SEI and First
Bank National Association. (Incorporated herein by
reference to Exhibit 9(e) to Post-Effective Amendment
No. 25.)
(9) (f) Amended and Restated Administration Agreement, dated
July 1, 1997, by and between the Registrant and SEI
Investments Management Corporation. (Incorporated
herein by reference to Exhibit 9(f) to Post-effective
Amendment No. 26.)
(9) (g) Sub-Administration Agreement effective January 1,
1998, by and between SEI and First Bank National
Association. (Incorporated herein by reference to
Exhibit (9)(g) to Post-Effective Amendment No. 26.)
(9) (h) Agreement dated July 1, 1997, by and between First
Bank National Association and SEI Investments
Management Corporation. (Incorporated herein by
reference to Exhibit (9)(h) to Post-Effective
Amendment No. 26.)
(10) (a) Opinion and Consent of D'Ancona & Pflaum dated
November 10, 1987. (Incorporated by reference to
Exhibit (10)(a) to Post-Effective Amendment No. 21.)
(10) (b) Opinion and Consent of Dorsey & Whitney.
(Incorporated by reference to Exhibit (10)(a) to
Post-Effective Amendment No. 22.)
* (11) (a) (1) Opinion and Consent of Deloitte & Touche LLP
dated January 28, 1998.
* (2) Opinion and Consent of KPMG Peat Marwick LLP
dated January 28, 1998.
<PAGE>
(11) (b) Opinion and Consent of Dorsey & Whitney, dated
November 25, 1991. (Incorporated by reference to
Exhibit (11)(b) to Post-Effective Amendment No. 21.)
(12) Not applicable.
(13) Not applicable.
(14) (a) 401(k) Prototype Basic Plan Document # 02 (1989
Restatement), including Amendment Nos. 1, 2, and 3
and sample Adoption Agreement. (Incorporated by
reference to Exhibit 14(a) to Post-Effective
Amendment No. 27.)
(14) (b) Defined Contribution Prototype Basic Plan Document
#01 (1989 Restatement), including Amendment Nos. 1
and 2 and sample Adoption Agreement. (Incorporated by
reference to Exhibit 14(b) to Post-Effective
Amendment No. 27.)
(14) (c) IRA Applications and Documentation. (Incorporated by
reference to Exhibit 14(c) to Post-Effective
Amendment No. 27.)
(15) (a) Form of Distribution Plan [Class A]. (Incorporated by
reference to Exhibit (15)(a) to Post-Effective
Amendment No. 21.)
(15) (b) Class B Distribution Plan. (Incorporated by reference
to Exhibit 15(b) to Post-Effective Amendment No. 21.)
(15) (c) Service Plan [Class B]. (Incorporated by reference to
Exhibit (15)(c) to Post-Effective Amendment No. 21.)
* (16) Schedule for Computation of Performance Quotations.
* (17) Financial Data Schedule meeting the requirements of Rule 483.
(18) Multiple Class Plan Pursuant to Rule 18f-3. (Incorporated by
reference to Exhibit (18) to Post-Effective Amendment
No. 23.)
(19) (a) Powers of Attorney of Directors Dayton, Kedrowski and
Stringer. (Incorporated by reference to Exhibit (19)
to Post-Effective Amendment No. 26.)
(19) (b) Power of Attorney of Director Hunter. (Incorporated
by reference to Exhibit 19(b) to Post-Effective
Amendment No. 27)
(19) (c) Consent to being named and power of attorney of
director nominee Spies. (Incorporated by reference to
Exhibit 19(c) to Post-Effective Amendment No. 27.)
* (19) (d) Power of Attorney of Director Gibson.
* Filed herewith
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
The following table sets forth the number of holders of shares of each
series and class of First American Investment Funds, Inc. as of January 14,
1998:
Number of
Fund Title of Class Record Holders
Stock Fund Class A 5,309
Stock Fund Class B 6,599
Stock Fund Class C 241
Equity Index Fund Class A 2,836
Equity Index Fund Class B 2,771
Equity Index Fund Class C 66
Balanced Fund Class A 3,100
Balanced Fund Class B 4,282
Balanced Fund Class C 13
Equity Income Fund Class A 550
Equity Income Fund Class B 666
Equity Income Fund Class C 68
Diversified Growth Fund Class A 1,051
Diversified Growth Fund Class B 1,021
Diversified Growth Fund Class C 122
Emerging Growth Fund Class A 447
Emerging Growth Fund Class B 317
Emerging Growth Fund Class C 63
Regional Equity Fund Class A 3,708
Regional Equity Fund Class B 5,450
Regional Equity Fund Class C 78
Special Equity Fund Class A 4,124
Special Equity Fund Class B 5,199
Special Equity Fund Class C 75
Technology Fund Class A 1,058
Technology Fund Class B 1,663
Technology Fund Class C 45
Health Sciences Fund Class A 166
Health Sciences Fund Class B 196
Health Sciences Fund Class C 14
Real Estate Securities Fund Class A 236
Real Estate Securities Fund Class B 407
Real Estate Securities Fund Class C 21
International Fund Class A 481
International Fund Class B 514
International Fund Class C 63
Micro Cap Value Fund Class A 58
Micro Cap Value Fund Class B 30
Micro Cap Value Fund Class C 21
Small Cap Value Fund Class A 2,460
Small Cap Value Fund Class B 3
Small Cap Value Fund Class C 34
International Index Fund Class A 267
International Index Fund Class B 3
International Index Fund Class C 30
Limited Term Income Fund Class A 223
Limited Term Income Fund Class B 0
<PAGE>
Limited Term Income Fund Class C 19
Intermediate Term Income Fund Class A 345
Intermediate Term Income Fund Class B 0
Intermediate Term Income Fund Class C 82
Fixed Income Fund Class A 856
Fixed Income Fund Class B 1,022
Fixed Income Fund Class C 193
Intermediate Government Bond Fund Class A 295
Intermediate Government Bond Fund Class B 0
Intermediate Government Bond Fund Class C 40
Intermediate Tax Free Fund Class A 151
Intermediate Tax Free Fund Class C 40
Minnesota Insured Intermediate
Tax Free Fund Class A 150
Minnesota Insured Intermediate Fund
Tax Free Fund Class C 26
Colorado Intermediate Tax Free Fund Class A 176
Colorado Intermediate Tax Free Fund Class C 17
California Intermediate Tax Free Fund Class A 4
California Intermediate Tax Free Fund Class C 9
Oregon Intermediate Tax Free Fund Class C 11
ITEM 27. INDEMNIFICATION
The Registrant's Articles of Incorporation and Bylaws provide that the
Registrant shall indemnify such persons for such expenses and liabilities, in
such manner, under such circumstances, and to the full extent as permitted by
Section 302A.521 of the Minnesota Statutes, as now enacted or hereafter amended;
provided, however, that no such indemnification may be made if it would be in
violation of Section 17(h) of the Investment Company Act of 1940, as now enacted
or hereafter amended, and any rules, regulations, or releases promulgated
thereunder.
Section 302A.521 of the Minnesota Statutes, as now enacted, provides
that a corporation shall indemnify a person made or threatened to be made a
party to a proceeding by reason of the former or present official capacity of
the person against judgments, penalties, fines, settlements and reasonable
expenses, including attorneys' fees and disbursements, incurred by the person in
connection with the proceeding if, with respect to the acts or omissions of the
person complained of in the proceeding, the person has not been indemnified by
another organization for the same judgments, penalties, fines, settlements, and
reasonable expenses incurred by the person in connection with the proceeding
with respect to the same acts or omissions; acted in good faith, received no
improper personal benefit, and the Minnesota Statutes dealing with directors'
conflicts of interest, if applicable, have been satisfied; in the case of a
criminal proceeding, had no reasonable cause to believe that the conduct was
unlawful; and reasonably believed that the conduct was in the best interests of
the corporation or, in certain circumstances, reasonably believed that the
conduct was not opposed to the best interests of the corporation.
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
<PAGE>
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.
<PAGE>
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Information on the business of the Registrant's investment adviser,
U.S. Bank National Association (the "Manager"), is described in the section of
each series' Statement of Additional Information, filed as part of this
Registration Statement, entitled "Investment Advisory and Other Services." The
directors and officers of the Manager are listed below, together with their
principal occupation or other positions of a substantial nature during the past
two fiscal years.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES OTHER POSITIONS AND OFFICES
NAME WITH THE MANAGER AND PRINCIPAL BUSINESS ADDRESS
<S> <C> <C>
John F. Grundhofer Chairman, President and Chief Chairman, President and Chief
Executive 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 *
J. Robert Hoffmann Director, Chief Credit Officer Executive Vice President and Chief
and Executive Vice President Credit Officer of U.S. Bancorp *
Lee R. Mitau Director, General Counsel, Executive Vice President, Secretary,
Executive Vice President and Secretary and General Counsel of U.S. Bancorp; prior
to October 1995 partner in Dorsey &
Whitney LLP *
Susan E. Lester Director, Executive Vice President and Executive Vice President and Chief
Chief Financial Officer Financial Officer of U.S. Bancorp; prior to
December 1995 executive vice president and
chief financial officer of Shawmut National
Corporation *
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>
ITEM 29. PRINCIPAL UNDERWRITERS:
(a) Furnish the name of each investment company (other than the
Registrant) for which each principal underwriter currently distributing
securities of the Registrant also acts as a principal under-writer, distributor
or investment adviser:
Registrant's distributor, SEI Investments Distribution Co. (the
"Distributor") acts as distributor for SEI Liquid Asset Trust, SEI Daily Income
Trust, SEI Tax Exempt Trust, SEI Index Funds, SEI Institutional Managed Trust,
SEI International Trust, The Advisors' Inner Circle Fund, Pillar Funds, CUFund,
STI Classic Funds, CoreFunds, Inc., First American Investment Funds, Inc., The
Arbor Fund, Boston 1784 Funds, Marquis Funds, Morgan Grenfell Investment Trust,
The PBHG Funds, Inc., The Achievement Funds Trust, Bishop Street Funds,
CrestFunds, Inc., STI Classic Variable Trust, ARK Funds, Monitor Funds, FMB
Funds, Inc., SEI Asset Allocation Trust, TIP Funds, SEI Institutional
Investments Trust, First American Strategy Funds, Inc., Highmark Funds, Armada
Funds, PBHG Insurance Series Fund, Inc. and Expedition Funds pursuant to
distribution agreements dated November 29, 1982, July 15, 1982, December 3,
1982, July 10, 1985, January 22, 1987, August 30, 1988, November 14, 1991,
February 28, 1992, May 1, 1992, May 29, 1992, October 30, 1992, November 1,
1992, January 28, 1993, June 1, 1993, August 17, 1993, January 3, 1994, December
27, 1994, January 27, 1995, March 1, 1995, August 18, 1995, November 1, 1995,
January 11, 1996, March 1, 1996, April 1, 1996, April 29, 1996, June 14, 1996,
October 1, 1996, February 15, 1997, March 8, 1997, April 1, 1997, and June 9,
1997, respectively.
The Distributor provides numerous financial services to investment
managers, pension plan sponsors, and bank trust departments. These services
include portfolio evaluation, performance measurement, and consulting services
("Funds Evaluation") and automated execution, clearing and settlement of
securities transactions ("MarketLink").
(b) Furnish the information required by the following table with respect
to each director, officer or partner of each principal underwriter named in the
answer to Item 21 of Part B. Unless otherwise noted, the business address of
each director or officer is One Freedom Valley Drive, Oaks, Pennsylvania 19456.
<TABLE>
<CAPTION>
NAME POSITIONS AND OFFICES WITH UNDERWRITER POSITIONS AND OFFICES WITH REGISTRANT
<S> <C> <C>
Alfred P. West, Jr. Director, Chairman & Chief --
Executive Officer
Henry H. Greer Director, President & Chief --
Operating Officer
Carmen V. Romeo Director, Executive Treasurer, Assistant Secretary
Vice President & Treasurer
Gilbert L. Beebower Executive Vice President --
Richard B. Lieb Executive Vice President, President -
Investment Services Division --
Dennis J. McGonigle Executive Vice President --
Leo J. Dolan, Jr. Senior Vice President --
Carl A. Guarino Senior Vice President --
Larry Hutchinson Senior Vice President --
David G. Lee Senior Vice President President
Jack May Senior Vice President --
A. Keith McDowell Senior Vice President --
Hartland J. McKeown Senior Vice President --
Barbara J. Moore Senior Vice President --
Kevin P. Robins Senior Vice President, General Counsel Vice President & Assistant Secretary
& Secretary
Robert Wagner Senior Vice President --
<PAGE>
Patrick K. Walsh Senior Vice President --
Ronert Aller Vice President --
Gordon W. Carpenter Vice President --
Todd Cipperman Vice President & Assistant Secretary --
Robert Crudup Vice President & Managing Director --
Barbara Doyne Vice President --
Jeff Drennen Vice President --
Vic Galef Vice President & Managing Director --
Kathy Heilig Vice President --
Michael Kantor Vice President --
Samuel King Vice President --
Kim Kirk Vice President & Managing Director --
John Krzeminski Vice President & Managing Director --
Carolyn McLaurin Vice President & Managing Director --
W. Kelso Morrill Vice President --
Mark Nagle Vice President --
Joanne Nelson Vice President --
Sandra K. Orlow Vice President & Assistant Secretary Vice President & Assistant Secretary
Cynthia M. Parrish Vice President & Assistant Secretary --
Donald Pepin Vice President & Managing Director --
Kim Rainey Vice President --
Rob Redecan Vice President --
Maria Reinhart Vice President --
Mark Samuels Vice President & Managing Director --
Steve Smith Vice President --
Daniel Spaventa Vice President --
Kathryn L. Stanton Vice President & Assistant Secretary Vice President & Assistant Secretary
Wayne M. Withrow Vice President & Managing Director --
James Dougherty Director of Brokerage Services --
</TABLE>
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books, and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are maintained by SEI Investments Distribution Co., Oaks,
Pennsylvania 19456.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
Registrant undertakes to call a meeting of Shareholders for the purpose of
voting upon the question of removal of a Director(s) when requested in writing
to do so by the holders of at least 10% of Registrant's outstanding shares and
in connection with such meetings to comply with the provisions of Section 16(c)
of the Investment Company Act of 1940 relating to Shareholder communications.
Registrant undertakes to furnish to each person to whom a copy of the
prospectus(es) contained in this Registration Statement is delivered a copy of
the FAIF annual reports to shareholders, dated September 30, 1997 and November
30, 1997, respectively, upon the request of such person at no charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all of the requirements for effectiveness of this Post-Effective Amendment
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Post-Effective Amendment to its Registration Statement No. 33-16905 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Oaks, Commonwealth of Pennsylvania, on the 30th day of January, 1998.
FIRST AMERICAN INVESTMENT FUNDS, INC.
ATTEST: /s/ Michael G. Beattie By /s/ Kathryn L. Stanton
------------------ ------------------
Michael G. Beattie Kathryn L. Stanton,
Vice President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacity and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Michael G. Beattie Controller (Principal **
- ------------------------- Financial and Accounting
Michael G. Beattie Officer)
* Director **
- -------------------------
Robert J. Dayton
* Director **
- -------------------------
Andrew M. Hunter III
* Director **
- -------------------------
Robert L. Spies
* Director **
- -------------------------
Leonard W. Kedrowski
* Director **
- -------------------------
Joseph D. Strauss
* Director **
- -------------------------
Virginia L. Stringer
* Director **
- -------------------------
Roger A. Gibson
* By: /s/ Kathryn L. Stanton
- -------------------------
Kathryn L. Stanton
Attorney in Fact
** January 30, 1998
Exhibit (1)(b)
ARTICLES OF AMENDMENT
TO
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
FIRST AMERICAN INVESTMENT FUNDS, INC.
The undersigned officer of First American Investment Funds, Inc. (the
"Corporation"), a Maryland corporation, hereby certifies that the following
amendment to the Corporation's Amended and Restated Articles of Incorporation
have been advised by the Corporation's Board of Directors and approved by the
Corporation's stockholders in the manner required by the Maryland General
Corporation Law:
RESOLVED, that the Corporation's Amended and Restated Articles of
Incorporation be, and the same hereby are, amended as follows:
Article IV, Section 3, is amended to delete the figure "30%" in each of the
three instances in which it appears, and to substitute therefor the figure
"10%".
The undersigned officer of the Corporation hereby acknowledges, in the name
and on behalf of the Corporation, the foregoing Articles of Amendment to be the
corporate act of the Corporation and further certifies that, to the best of his
or her knowledge, information and belief, the matters and facts set forth
therein with respect to the approval thereof are true in all material respects,
under the penalties of perjury.
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
to be signed in its name and on its behalf by its President or Vice President
and witnessed by its Secretary or an Assistant Secretary on December 1, 1997.
FIRST AMERICAN INVESTMENT FUNDS, INC.
By /s/ Kathryn L. Stanton
Kathryn L. Stanton
Its VP
WITNESS:
/s/ Michael A. Radmer
Michael A. Radmer
Secretary
Exhibit 5(c)
FIRST AMERICAN INVESTMENT FUNDS, INC.
AMENDMENT TO INVESTMENT ADVISORY AGREEMENT
AMENDMENT NO. 8
to
EXHIBIT A
EFFECTIVE DATES:
Portfolio Effective Date
- --------- --------------
Stock Fund April 2, 1991
Special Equity Fund April 2, 1991
Fixed Income Fund April 2, 1991
Intermediate Government Bond Fund April 2, 1991
Intermediate Tax Free Fund April 2, 1991
Intermediate Term Income Fund September 15, 1992
Equity Index Fund September 15, 1992
Regional Equity Fund September 15, 1992
Limited Term Income Fund September 15, 1992
Balanced Fund September 15, 1992
Asset Allocation Fund September 15, 1992
Minnesota Insured Intermediate Tax Free Fund December 31, 1993
Colorado Intermediate Tax Free Fund December 31, 1993
Emerging Growth Fund December 31, 1993
Technology Fund December 31, 1993
International Fund December 31, 1993
Equity Income Fund January 31, 1994
Diversified Growth Fund January 31, 1994
Real Estate Securities Fund June 12, 1995
Health Science Fund January 31, 1996
Oregon Intermediate Tax Free Fund August 5, 1997
California Intermediate Tax Free Fund August 5, 1997
Micro Cap Value Fund August 5, 1997
Small Cap Value Fund November 21, 1997
International Index Fund November 21, 1997
ADVISORY FEES:
- --------------
<TABLE>
<CAPTION>
Annual Advisory Fee
As a Percentage of
Portfolio Average Daily Net Assets Average Daily Net Assets
- --------- ------------------------ ------------------------
<S> <C> <C>
Stock Fund On All Assets .70%
Special Equity Fund On All Assets .70%
Fixed Income Fund On All Assets .70%
Intermediate Government Bond Fund On All Assets .70%
Intermediate Tax Free Fund On All Assets .70%
Intermediate Term Income Fund On All Assets .70%
Equity Index Fund On All Assets .70%
Regional Equity Fund On All Assets .70%
Limited Term Income Fund On All Assets .70%
Balanced Fund On All Assets .70%
Asset Allocation Fund On All Assets .70%
Minnesota Insured Intermediate Tax Free Fund On All Assets .70%
Colorado Intermediate Tax Free Fund On All Assets .70%
Emerging Growth Fund On All Assets .70%
Technology Fund On All Assets .70%
International Fund On All Assets 1.25%
Equity Income Fund On All Assets .70%
Diversified Growth Fund On All Assets .70%
Real Estate Securities Fund On All Assets .70%
Health Sciences Fund On All Assets .70%
Oregon Intermediate Tax Free Fund On All Assets .70%
California Intermediate Tax Free Fund On All Assets .70%
Micro Cap Value Fund On All Assets .70%
Small Cap Value Fund On All Assets .70%
International Index Fund On All Assets .70%
</TABLE>
Exhibit (5)(d)
AMENDMENT NO. 1
TO
SUB-ADVISORY AGREEMENT
WHEREAS, U.S. Bank National Association (formerly known as First Bank
National Association), a national banking association organized and existing
under the laws of the United States of America (the "Adviser"), and Marvin &
Palmer Associates, Inc., a Delaware corporation (the "Sub-Adviser"), previously
entered into that Sub-Advisory Agreement dated as of March 28, 1994 (the
"Sub-Advisory Agreement"), pursuant to which the Sub-Adviser acts as sub-adviser
to International Fund, a separately managed series of First American Investment
Funds, Inc., a Maryland corporation.
WHEREAS, the Adviser and the Sub-Adviser wish to amend certain terms of the
Sub-Advisory Agreement.
NOW, THEREFORE, the Adviser and the Sub-Adviser agree as follows:
1. Effective January 31, 1998, the first sentence of Paragraph 5 of the
Sub-Advisory Agreement is amended to read in its entirely as follows:
For the services provided and the expenses assumed by the Sub-Adviser
pursuant to this Agreement, the Adviser will pay to the Sub-Adviser as full
compensation therefor a fee based on an annual rate of 0.75% of the first
$100 million of International Fund's average daily net assets; 0.50% of
International Fund's average daily assets in excess of $100 million up to
$300 million; 0.45% of International Fund's average daily net assets in
excess of $300 million up to $500 million; and 0.40% of International
Fund's average daily assets in excess of $500 million.
2. The Sub-Advisory Agreement, as so amended, is hereby confirmed as
continuing in full force and effect.
IN WITNESS WEHREOF, the Adviser and the Sub-Adviser have caused this
Amendment No. 1 to be executed by their duly authorized officers as of December
31, 1997.
U.S. BANK NATIONAL ASSOCIATION
By /s/ Jeff Wilson
Its VP
MARVIN & PALMER ASSOCIATES, INC.
By /s/ David F. Marvin
Its Chairman
Exhibit (8)(d)
FIRST AMERICAN INVESTMENT FUNDS, INC.
COMPENSATION AGREEMENT DATED AS OF AUGUST 5, 1997
PURSUANT TO CUSTODIAN AGREEMENT
WHEREAS, First American Investment Funds, Inc., a Maryland corporation
(hereinafter called the "Fund"), and First Trust National Association, a
national banking association organized and existing under the laws of the United
States of America with its principal place of business at Minneapolis, Minnesota
(hereinafter called the "Custodian"), previously entered into that Custodian
Agreement dated September 20, 1993 (the "Custodian Agreement"); and
WHEREAS, Article 12 of the Custodian Agreement provides that the
Custodian shall be paid compensation at such rates and at such times as may from
time to time be agreed on in writing by the parties thereto; and
WHEREAS, the Fund and the Custodian previously entered into that
Compensation Agreement dated as of January 1, 1997, for such purpose with
respect to the then-existing series of the Fund; and
WHEREAS, the Fund and the Custodian wish to amend such compensation
agreement in order to add provisions thereto relating to Oregon Intermediate Tax
Free Fund, California Intermediate Tax Free Fund, and Micro-Cap Value Fund.
NOW, THEREFORE, the Fund and the Custodian agree as follows:
1. The compensation payable to the Custodian pursuant to the Custodian
Agreement with respect to the respective series of the Fund shall be payable
monthly at the following annual rates as percentages of the respective series'
average daily net assets: Stock Fund, Equity Index Fund, Balanced Fund, Asset
Allocation Fund, Regional Equity Fund, Special Equity Fund, Limited Term Income
Fund, Intermediate Term Income Fund, Fixed Income Fund, Intermediate Government
Bond Fund, Health Sciences Fund, Real Estate Securities Fund, Equity Income
Fund, Diversified Growth Fund, Emerging Growth Fund, Technology Fund,
Intermediate Tax Free Fund, Minnesota Insured Intermediate Tax Free Fund,
Colorado Intermediate Tax Free Fund, Oregon Intermediate Tax Free Fund,
California Intermediate Tax Free Fund, and Micro Cap Value Fund 0.03%; and
International Fund, 0.25%. The Custodian shall pay subcustodian fees with
respect to International Fund out of the compensation payable to the Custodian
with respect to such fund as set forth above. The Fund shall reimburse the
Custodian for all other out-of-pocket expenses incurred by the Custodian in
connection with the performance of the Custodian's services under the Custodian
Agreement.
2. This Compensation Agreement restates and supersedes all prior
compensation agreements pursuant to Article 12 of the Custodian Agreement.
<PAGE>
IN WITNESS WHEREOF, the Fund and the Custodian have caused this
instrument to be executed in duplicate as of the date first above written by
their duly authorized officers.
FIRST AMERICAN INVESTMENT
FUNDS, INC.
By /s/ Kathryn Stanton
Its Vice President
FIRST TRUST NATIONAL
ASSOCIATION
By /s/ Jeff Wilson
Its Vice President
Exhibit (8)(e)
FIRST AMERICAN INVESTMENT FUNDS, INC.
COMPENSATION AGREEMENT DATED AS OF NOVEMBER 21, 1997
PURSUANT TO CUSTODIAN AGREEMENT
WHEREAS, First American Investment Funds, Inc., a Maryland corporation
(hereinafter called the "Fund"), and First Trust National Association, a
national banking association organized and existing under the laws of the United
States of America with its principal place of business at Minneapolis, Minnesota
(hereinafter called the "Custodian"), previously entered into that Custodian
Agreement dated September 30, 1993 (the "Custodian Agreement"); and
WHEREAS, Article 12 of the Custodian Agreement provides that the Custodian
shall be paid compensation at such rates and at such times as may from time to
time be agreed on in writing by the parties thereto; and
WHEREAS, the Fund and the Custodian previously entered into that
Compensation Agreement dated as of August 5, 1997, for such purpose with respect
to the then-existing series of the Fund; and
WHEREAS, the Fund and the Custodian wish to amend such compensation
agreement in order to add provisions thereto relating to Small Cap Value Fund
and International Index Fund.
NOW, THEREFORE, the Fund and the Custodian agree as follows:
1. The Compensation payable to the Custodian pursuant to the Custodian
Agreement with respect to the respective series of the Fund shall be
payable monthly at the following annual rates as percentages of the
respective series' average daily net assets: Stock Fund, Equity Index
Fund, Balanced Fund, Asset Allocation Fund, Regional Equity Fund,
Special Equity Fund, Limited Term Income Fund, Intermediate Term
Income Fund, Fixed Income Fund, Intermediate Government Bond Fund,
Health Sciences Fund, Real Estate Securities Fund, Equity Income Fund,
Diversified Growth Fund, Emerging Growth Fund, Technology Fund,
Intermediate Tax Free Fund, Minnesota Insured Intermediate Tax Free
Fund, Colorado Intermediate Tax Free Fund, Oregon Intermediate Tax
Free Fund, California Intermediate Tax Free Fund, Micro Cap Value
Fund, and Small Cap Value Fund, .03%; International Index Fund, 0.10%;
and International Fund, 0.25%. The Custodian shall pay subcustodian
fees with respect to International Fund out of the compensation
payable to the Custodian with respect to such fund as set forth above.
The Fund shall reimburse the Custodian for all other out-of-pocket
expenses incurred by the Custodian in connection with the performance
of the Custodian's services under the Custodian Agreement.
2. This Compensation Agreement restates and supersedes all prior
compensation agreements pursuant to Article 12 of the Custodian
Agreement.
IN WITNESS WHEREOF, the Fund and the Custodian have caused this instrument
to be executed in duplicate as of the date first above written by their duly
authorized officers.
FIRST AMERICAN INVESTMENT FUNDS, INC.
By /s/ Kathryn Stanton
Its VP
FIRST TRUST NATIONAL ASSOCIATION
By /s/ Jeff Wilson
Its VP
Exhibit (11)(a)(1)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 34 to Registration
Statement No. 33-16905 of First American Investment Funds, Inc. on Form N-1A,
under the Securities Act of 1933, of our report dated September 12, 1997,
relating to the Qualivest Small Companies Value Fund and Qualivest International
Opportunities Fund, incorporated by reference in the Statement of Additional
Information in such Registration Statement.
DELOITTE & TOUCHE LLP
Dayton, Ohio
January 28, 1998
EXHIBIT 11(a)(3)
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
First American Investment Funds, Inc.:
We consent to the use of our report dated November 7, 1997 incorporated by
reference herein and to the references to our Firm under the headings "Financial
Highlights" in Part A and "Custodian; Transfer Agent; Counsel; Accountants" in
Part B of the Registration Statement.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 28, 1998
First American Investment Funds, Inc.
(Without Sales Charge)
Average Annual Total Return
P(1+T) = ERV
Class A
One Year:
<TABLE>
<CAPTION>
Balanced Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
P = 1,000 1,000 1,000 1,000
n = 1 1 1 1
ERV = 1,258.00 1,367.70 1,311.60 1,394.70
T = 25.80 36.77 31.16 39.47
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Stock Diversified Growth Special Equity Regional Equity
P = 1,000 1,000 1,000 1,000
n = 1 1 1 1
ERV = 1,388.20 1,326.90 1,399.30 1,361.30
T = 38.82 32.69 39.93 36.13
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Emerging Growth Small Cap Value Micro Cap Value International Index
P = 1,000 1,000 1,000 1,000
n = 1 1 1 1
ERV = 1,247.30 1,249.80 1,000.00 986.20
T = 24.73 24.98 0 -1.38
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 11/30/97) Ended 09/30/97) Ended 11/30/97)
International Health Science Technology Limited Term
P = 1,000 1,000 1,000 1,000
n = 1 1 1 1
ERV = 1,300.30 1,225.80 1,177.10 1,060.90
T = 30.03 22.58 17.71 6.09
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Intermediate Term Fixed Income Inter. Gov't. Bond Inter. Tax Free
P = 1,000 1,000 1,000 1,000
n = 1 1 1 1
ERV = 1,071.90 1,082.60 1,070.60 1,068.40
T = 7.19 8.26 7.06 6.84
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
P = 1000 1,000 1,000 1000
n = 1 1 1 1
ERV = 1,000.00 1,071.10 1,067.20 1,000.00
T = 0 7.11 6.72 0
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
</TABLE>
<PAGE>
First American Investment Funds, Inc.
(With Sales Charge)
Average Annual Total Return
P(1+T) = ERV
Class A
One Year:
<TABLE>
<CAPTION>
Balanced Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
P = 1,000 1,000 1,000 1,000
n = 1 1 1 1
ERV = 1,201.30 1,306.50 1,252.20 1,331.90
T = 20.13 30.65 25.22 33.19
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Stock Diversified Growth Special Equity Regional Equity
P = 1,000 1,000 1,000 1,000
n = 1 1 1 1
ERV = 1,326.00 1,267.40 1,336.40 1,300.40
T = 32.60 26.74 33.64 30.04
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Emerging Growth Small Cap Value Micro Cap Value International Index
P = 1,000 1000 1000 1000
n = 1 1 1 1
ERV = 1,190.90 1,193.30 1,000.00 942.20
T = 19.09 19.33 0 -5.78
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 11/30/97) Ended 09/30/97) Ended 11/30/97)
International Health Science Technology Limited Term
P = 1,000 1,000 1,000 1,000
n = 1 1 1 1
ERV = 1,242.30 1,171.00 1,123.90 1,039.90
T = 24.23 17.1 12.39 3.99
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Intermediate Term Fixed Income Inter. Gov't. Bond Inter. Tax Free
P = 1,000 1,000 1,000 1,000
n = 1 1 1 1
ERV = 1,031.40 1,041.90 1,038.90 1,036.30
T = 3.14 4.19 3.89 3.63
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
P = 1000 1,000 1,000 1000
n = 1 1 1 1
ERV = 1,000.00 1,039.20 1,034.90 1,000.00
T = 0 3.92 3.49 0
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
</TABLE>
<PAGE>
First American Investment Funds, Inc.
(Without Sales Charge)
Average Annual Total Return
P(1+T) = ERV
Class B
One Year:
<TABLE>
<CAPTION>
Balanced Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
P = 1,000 1,000 1,000 1,000
n = 1 1 1 1
ERV = 1,249.30 1,357.70 1,300.60 1,384.50
T = 24.93 35.77 30.06 38.45
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Stock Diversified Growth Special Equity Regional Equity
P = 1,000 1,000 1,000 1,000
n = 1 1 1 1
ERV = 1,377.10 1,314.20 1,388.10 1,351.80
T = 37.71 31.42 38.81 35.18
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Emerging Growth Small Cap Value Micro Cap Value International Index
P = 1,000 1,000 1,000 1,000
n = 1 1 1 1
ERV = 1,240.10 1,000.00 1,000.00 1,000.00
T = 24.01 0 0 0
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 11/30/97) Ended 09/30/97) Ended 11/30/97)
International Health Science Technology Limited Term
P = 1,000 1,000 1,000 NA
n = 1 1 1 NA
ERV = 1,291.30 1,218.00 1,168.20 NA
T = 29.13 21.8 16.82 NA
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Intermediate Term Fixed Income Inter. Gov't. Bond Inter. Tax Free
P = NA 1,000 NA NA
n = NA 1 NA NA
ERV = NA 1,074.00 NA NA
T = NA 7.40 NA NA
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
P = NA NA NA NA
n = NA NA NA NA
ERV = NA NA NA NA
T = NA NA NA NA
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
</TABLE>
<PAGE>
First American Investment Funds, Inc.
(With Sales Charge)
Average Annual Total Return
P(1+T) = ERV
Class B
One Year:
<TABLE>
<CAPTION>
Balanced Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
P = 1,000 1,000 1,000 1,000
n = 1 1 1 1
ERV = 1,199.30 1,307.70 1,250.60 1,334.50
T = 19.93 30.77 25.06 33.45
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Stock Diversified Growth Special Equity Regional Equity
P = 1,000 1,000 1,000 1,000
n = 1 1 1 1
ERV = 1,327.10 1,264.20 1,338.10 1,301.80
T = 32.71 26.42 33.81 30.18
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Emerging Growth Small Cap Value Micro Cap Value International Index
P = 1,000 1,000 1,000 1,000
n = 1 1 1 1
ERV = 1,190.10 1,000.00 1,000.00 1,000.00
T = 19.01 0 0 0
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 11/30/97) Ended 09/30/97) Ended 11/30/97)
International Health Science Technology Limited Term
P = 1,000 1,000 1,000 NA
n = 1 1 1 NA
ERV = 1,241.30 1,168.00 1,118.20 NA
T = 24.13 16.80 11.82 NA
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Intermediate Term Fixed Income Inter. Gov't. Bond Inter. Tax Free
P = N/A 1,000 N/A N/A
n = N/A 1 N/A N/A
ERV = N/A 1,024.00 N/A N/A
T = N/A 2.40 N/A N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
P = N/A N/A N/A N/A
n = N/A N/A N/A N/A
ERV = N/A N/A N/A N/A
T = N/A N/A N/A N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
</TABLE>
<PAGE>
First American Investment Funds, Inc.
(Without Sales Charge)
Average Annual Total Return
P(1+T) = ERV
Class C
One Year:
<TABLE>
<CAPTION>
Balanced Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
P = 1,000 1,000 1,000 1,000
n = 1 1 1 1
ERV = 1,261.70 1,370.70 1,314.50 1,398.50
T = 26.17 37.07 31.45 39.85
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Stock Diversified Growth Special Equity Regional Equity
P = 1,000 1,000 1,000 1,000
n = 1 1 1 1
ERV = 1,391.30 1,327.50 1,402.50 1,364.90
T = 39.13 32.75 40.25 36.49
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Emerging Growth Small Cap Value Micro Cap Value International Index
P = 1,000 1000 1000 1000
n = 1 1 1 1
ERV = 1,251.90 1,252.10 1,000.00 988.10
T = 25.19 25.21 0 -1.19
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 11/30/97) Ended 09/30/97) Ended 11/30/97)
International Health Sciences Technology Limited Term
P = 1,000 1,000 1,000 1,000
n = 1 1 1 1
ERV = 1,303.80 1,238.90 1,179.50 1,060.90
T = 30.38 23.89 17.95 6.09
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Intermediate Term Fixed Income Inter. Gov't. Bond Inter. Tax Free
P = 1,000 1,000 1,000 1,000
n = 1 1 1 1
ERV = 1,069.80 1,061.50 1,070.70 1,067.50
T = 6.98 6.15 7.07 6.75
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
P = 1000 1,000 1,000 1000
n = 1 1 1 1
ERV = 1,000.00 1,071.10 1,064.20 1,000.00
T = 0 7.11 6.42 0
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
</TABLE>
<PAGE>
Five Year
(Without Sales Charge)
Class A
<TABLE>
<CAPTION>
Balanced Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
P = N/A N/A N/A N/A
n = N/A N/A N/A N/A
ERV = N/A N/A N/A N/A
T = N/A N/A N/A N/A
(Fiscal Year (For the Period (For the Period (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Stock Diversified Growth Special Equity Regional Equity
P = 1,000 N/A 1,000 N/A
n = 5 N/A 5 N/A
ERV = 2,703.82 N/A 2,786.81 N/A
T = 22.01 N/A 22.75 N/A
(Fiscal Year (For the Period (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Emerging Growth Small Cap Value Micro Cap Value International Index
P = N/A 1,000 N/A N/A
n = N/A 9.92 N/A N/A
ERV = N/A 7,909.68 N/A N/A
T = N/A 23.18 N/A N/A
(For the Period (For the Period (For the Period (For the Period
Ended 09/30/97) Ended 11/30/97) Ended 09/30/97) Ended 11/30/97)
International Health Science Technology Limited Term
P = N/A N/A N/A N/A
n = N/A N/A N/A N/A
ERV = N/A N/A N/A N/A
T = N/A N/A N/A N/A
(For the Period (Not in operation (For the Period (Fiscal Year
Ended 09/30/97) during period) Ended 09/30/97) Ended 09/30/97)
Intermediate Term Fixed Income Inter. Gov't. Bond Inter. Tax Free
P = N/A 1,000 1,000 1,000
n = N/A 5 5 5
ERV = N/A 1,354.72 1,279.93 1,306.96
T = N/A 6.26 5.06 5.50
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
P = N/A N/A N/A N/A
n = N/A N/A N/A N/A
ERV = N/A N/A N/A N/A
T = N/A N/A N/A N/A
(Fiscal Year (For the Period (For the Period (For the Period
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
</TABLE>
<PAGE>
Five Year
(With Sales Charge)
Class A
<TABLE>
<CAPTION>
Balanced Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
P = N/A N/A N/A N/A
n = N/A N/A N/A N/A
ERV = N/A N/A N/A N/A
T = N/A N/A N/A N/A
(Fiscal Year (For the Period (For the Period (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Stock Diversified Growth Special Equity Regional Equity
P = 1,000 N/A 1,000 N/A
n = 5 N/A 5 N/A
ERV = 2,581.97 N/A 2,661.97 N/A
T = 20.89 N/A 21.63 N/A
(Fiscal Year (For the Period (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Emerging Growth Small Cap Value Micro Cap Value International Index
P = N/A 1,000 N/A N/A
n = N/A 9.92 N/A N/A
ERV = N/A 7,218.63 N/A N/A
T = N/A 22.05 N/A N/A
(For the Period (For the Period (For the Period (For the Period
Ended 09/30/97) Ended 11/30/97) Ended 09/30/97) Ended 11/30/97)
International Health Sciences Technology Limited Term
P = N/A N/A N/A N/A
n = N/A N/A N/A N/A
ERV = N/A N/A N/A N/A
T = N/A N/A N/A N/A
(For the Period (Not in operation (For the Period (Fiscal Year
Ended 09/30/97) during period) Ended 09/30/97) Ended 09/30/97)
Intermediate Term Fixed Income Inter. Gov't. Bond Inter. Tax Free
P = N/A 1,000 1,000 1,000
n = N/A 5 5 5
ERV = N/A 1,303.87 1,242.01 1,267.19
T = N/A 5.45 4.43 4.85
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
P = N/A N/A N/A N/A
n = N/A N/A N/A N/A
ERV = N/A N/A N/A N/A
T = N/A N/A N/A N/A
(Fiscal Year (For the Period (For the Period (For the Period
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
</TABLE>
<PAGE>
Cumulative Total Return
(Without Sales Charge)
Class A
CTR=(ERV-P)*100
P
<TABLE>
<CAPTION>
Balanced Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
P = 1,000 1,000 1,000 1,000
ERV = 1,994.40 1,616.30 1,962.20 2,401.10
CTR= 99.44 61.63 96.22 140.11
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Stock Diversified Growth Special Equity Regional Equity
P = 1,000 1,000 1,000 1,000
ERV = 4,474.50 1,897.60 5,017.70 2,736.20
CTR= 347.45 89.76 401.77 173.62
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Emerging Growth Small Cap Value Micro Cap Value International Index
P = 1,000 1,000 1,000 N/A
ERV = 1,926.00 2,228.90 1,096.00 N/A
CTR= 92.60 122.89 9.60 N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 11/30/97) Ended 09/30/97) Ended 11/30/97)
International Health Science Technology Limited Term
P = 1,000 1,000 1,000 1,000
ERV = 1,364.00 1,219.70 2,596.60 1,268.30
CTR= 36.40 21.97 159.66 26.83
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Intermediate Term Fixed Income Inter. Gov't. Bond Inter. Tax Free
P = 1,000 1,000 1,000 1,000
ERV = 1,327.60 2,157.20 1,879.10 1,781.50
CTR= 32.76 115.72 87.91 78.15
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
P = 1,000 1,000 1,000 N/A
ERV = 1,010.20 1,258.40 1,192.70 N/A
CTR= 1.02 25.84 19.27 N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 11/30/97)
</TABLE>
<PAGE>
Cumulative Total Return
(Without Sales Charge)
Class B
CTR=(ERV-P)*100
P
<TABLE>
<CAPTION>
Balanced Fund Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
P = 1,000 1,000 1,000 1,000
ERV = 1,705.30 1,588.50 1,771.40 2,116.00
CTR= 70.53 58.85 77.14 111.60
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Stock Fund Diversified Growth Special Equity Regional Equity
P = 1,000 1,000 1,000 1,000
ERV = 2,096.00 2,048.20 2,027.60 2,141.00
CTR= 109.60 104.82 102.76 114.10
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Emerging Growth Small Cap Value Micro Cap value International Index
P = 1,000 1,000 1,000 N/A
ERV = 1,900.20 1,000.50 1,095.00 N/A
CTR= 90.02 0.05 9.50 N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 11/30/97) Ended 09/30/97) Ended 11/30/97)
International Health Science Technology Limited Term
P = 1,000 1,000 1,000 N/A
ERV = 1,300.70 1,204.10 2,566.50 N/A
CTR= 30.07 20.41 156.65 N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Intermediate Term Fixed Income Inter. Gov't. Bond Inter. Tax Free
P = N/A 1,000 N/A N/A
ERV = N/A 1,236.40 N/A N/A
CTR= N/A 23.64 N/A N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
P = N/A N/A N/A N/A
ERV = N/A N/A N/A N/A
CTR= N/A N/A N/A N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 11/30/97) Ended 09/30/97) Ended 11/30/97)
</TABLE>
<PAGE>
Cumulative Total Return
(Without Sales Charge)
Class C
CTR=(ERV-P)*100
P
<TABLE>
<CAPTION>
Balanced Fund Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
P = 1,000 1,000 1,000 1,000
ERV = 1,756.30 1,709.10 1,823.40 2,171.20
CTR= 75.63 70.91 82.34 117.12
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Stock Fund Diversified Growth Special Equity Regional Equity
P = 1,000 1,000 1,000 1,000
ERV = 2,207.60 2,102.10 2,133.10 2,178.90
CTR= 120.76 110.21 113.31 117.89
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Emerging Growth Small Cap Value Micro Cap Value International Index
P = 1,000 1,000 1,000 N/A
ERV = 1,937.60 2,243.10 1,095.00 N/A
CTR= 93.76 124.31 9.50 N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 11/30/97) Ended 09/30/97) Ended 11/30/97)
International Health Science Technology Limited Term
P = 1,000 1,000 1,000 1,000
ERV = 1,371.20 1,224.10 2,607.40 1,212.40
CTR= 37.12 22.41 160.74 21.24
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Intermediate Term Fixed Income Inter. Gov't. Bond Inter. Tax Free
P = 1,000 1,000 1,000 1,000
ERV = 1,230.30 1,243.40 1,211.10 1,180.60
CTR= 23.03 24.34 21.11 18.06
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
P = 1,000 1,000 1,000 1,000
ERV = 1,009.20 1,258.40 1,189.20 1,011.70
CTR= 0.92 25.84 18.92 1.17
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 11/30/97) Ended 09/30/97) Ended 11/30/97)
</TABLE>
<PAGE>
Cumulative Total Return
(With Sales Charge)
Class A
CTR=(ERV-P)*100
P
<TABLE>
<CAPTION>
Balanced Fund Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
P = 1,000 1,000 1,000 1,000
ERV = 1,904.90 1,543.40 1,874.10 2,293.30
CTR= 90.49 54.34 87.41 129.33
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Stock Fund Diversified Growth Special Equity Regional Equity
P = 1,000 1,000 1,000 1,000
ERV = 4,273.60 1,812.40 4,792.40 2,613.30
CTR= 327.36 81.24 379.24 161.33
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Emerging Growth Small Cap Value Micro Cap value International Index
P = 1,000 1,000 1,000 N/A
ERV = 1,839.60 2,128.80 1,046.80 N/A
CTR= 83.96 112.88 4.68 N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 11/30/97) Ended 09/30/97) Ended 11/30/97)
International Health Science Technology Limited Term
P = 1,000 1,000 1,000 1,000
ERV = 1,302.70 1,164.90 2,480.00 1,243.40
CTR= 30.27 16.49 148.00 24.34
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Intermediate Term Fixed Income Inter. Gov't. Bond Inter. Tax Free
P = 1,000 1,000 1,000 1,000
ERV = 1,277.70 2,076.20 1,822.60 1,727.90
CTR= 27.77 107.62 82.26 72.79
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
P = 1,000 1,000 1,000 N/A
ERV = 979.80 1,220.60 1,156.90 N/A
CTR= (2.02) 22.06 15.69 N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 11/30/97) Ended 09/30/97) Ended 11/30/97)
</TABLE>
<PAGE>
Cumulative Total Return
(With Sales Charge)
Class B
CTR=(ERV-P)*100
P
<TABLE>
<CAPTION>
Balanced Fund Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
P = 1,000 1,000 1,000 1,000
ERV = 1,675.30 1,538.50 1,741.40 2,086.00
CTR= 67.53 53.85 74.14 108.60
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Stock Fund Diversified Growth Special Equity Regional Equity
P = 1,000 1,000 1,000 1,000
ERV = 2,066.00 2,018.20 1,997.60 2,111.00
CTR= 106.60 101.82 99.76 111.10
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Emerging Growth Small Cap Value Micro Cap Value International Index
P = 1,000 1,000 1,000 N/A
ERV = 1,870.20 950.50 1,045.00 N/A
CTR= 87.02 -4.95 4.50 N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 11/30/97) Ended 09/30/97) Ended 11/30/97)
International Health Science Technology Limited Term
P = 1,000 1,000 1,000 N/A
ERV = 1,270.70 1,154.10 2,536.50 N/A
CTR= 27.07 15.41 153.65 N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Intermediate Term Fixed Income Inter. Gov't. Bond Inter. Tax Free
P = N/A 1,000 N/A N/A
ERV = N/A 1,206.40 N/A N/A
CTR= N/A 20.64 N/A N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
P = N/A N/A N/A N/A
ERV = N/A N/A N/A N/A
CTR= N/A N/A N/A N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 11/30/97) Ended 09/30/97) Ended 11/30/97)
</TABLE>
<PAGE>
First American Investment Funds, Inc.
Tax Equivalent Yield
Class A
TEY= TFY
(1-TR)
TEY = Tax Equivalent Yield
TFY = Tax Free Yield
TR = Maximum Tax Rate
Inter. Tax Free California Tax Free Colorado Tax Free
TEY = 6.54% 7.30% 7.02%
TFY = 3.95% 3.73% 3.89%
TR = 39.60% 48.90% 44.60%
Minnesota Tax Free Oregon Tax Free
TEY = 7.44% N/A
TFY = 3.86% N/A
TR = 48.10% 48.60%
First American Investment Funds, Inc.
Tax Equivalent Yield
Class C
TEY= TFY
(1-TR)
TEY = Tax Equivalent Yield
TFY = Tax Free Yield
TR = Maximum Tax Rate
Inter. Tax Free California Tax Free Colorado Tax Free
TEY = 6.71% 7.55% 7.24%
TFY = 4.05% 3.86% 4.01%
TR = 39.60% 48.90% 44.60%
Minnesota Tax Free Oregon Tax Free
TEY = 7.69% 8.04%
TFY = 3.99% 4.13%
TR = 48.10% 48.60%
<PAGE>
First American Investment Funds, Inc.
Tax Equivalent Distribution Rate
Class A
TEDR= ACDR
(1-TR)
TEDR = Tax Equivalent Distribution Rate
ACDR = Annualized Current Distribution Rate
TR = Maximum Tax Rate
Inter. Tax Free California Inter. Colorado Tax Free
TEDR = 7.09% 8.06% 7.46%
ACDR = 4.28% 4.12% 4.28%
TR = 39.60% 48.90% 42.60%
Minnesota Tax Free Oregon Inter.
TEDR = 7.65% N/A
ACDR = 4.23% N/A
TR = 44.70% N/A
First American Investment Funds, Inc.
Tax Equivalent Distribution Rates
Class C
TEDR= ACDR
(1-TR)
TEDR = Tax Equivalent Distribution Rate
ACDR = Annualized Current Distribution Rate
TR = Maximum Tax Rate
Inter. Tax Free California Inter Colorado Tax Free
TEDR = 7.33% 8.32% 7.68%
ACDR = 4.43% 4.25% 4.41%
TR = 39.60% 48.90% 42.60%
Minnesota Tax Free Oregon Inter.
TEDR = 7.92% 8.66%
ACDR = 4.38% 4.45%
TR = 44.70% 48.60%
<PAGE>
First American Investment Funds, Inc.
Historical Distribution Rates:
Class A
Monthly Declaring Quarterly Declaring
AHDR = HD AHDR = HD
POP POP
HD = Fiscal year Distribution
POP = Maximum Public Offering Price on 9/30/97
MD = Monthly declaring
QD = Quarterly declaring
(1)Information is for the four month period August 1, 1997 to November 30, 1997.
(2)POP = Maximum Public Offering Price on 11/30/97
<TABLE>
<CAPTION>
Balanced Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
MD QD MD MD
HD = 0.3871 0.6579 0.4071 0.2479
POP = 16.14 15.68 16.42 21.74
Stock Diversified Growth Special Equity Regional Equity
MD MD MD QD
HD = 0.3225 0.0982 0.1072 0.0675
POP = 30.09 18.46 25.33 24.21
Emerging Growth Small Cap Value (1) (2) Micro Cap Value International Index (1) (2)
QD QD MD QD
HD = N/A N/A N/A 0.0222
POP = N/A N/A N/A 10.94
International Health Science Technology Limited Term
MD QD QD MD
HD = 0.1473 N/A N/A 0.5562
POP = 13.80 N/A N/A 10.14
Intermediate Term Fixed Income Inter. Gov't. Bond Inter. Tax Free
MD MD MD MD
HD = 0.5550 0.5898 0.5403 0.4661
POP = 10.39 11.40 9.57 11.18
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
MD MD MD MD
HD = 0.0615 0.4770 0.4387 N/A
POP = 10.35 10.94 10.40 N/A
</TABLE>
<PAGE>
First American Investment Funds, Inc.
Historical Distribution Rates:
Class B
Monthly Declaring Quarterly Declaring
AHDR = HD AHDR = HD
POP POP
HD = Fiscal year Distribution
POP = Maximum Public Offering Price on 9/30/97
MD = Monthly declaring
QD = Quarterly declaring
(1)Information is for the four month period August 1, 1997 to November 30, 1997.
(2)POP = Maximum Public Offering Price on 11/30/97
<TABLE>
<CAPTION>
Balanced Fund Real Estate Sec Fund Equity Income Equity Index
<S> <C> <C> <C> <C>
MD QD MD QD
HD = 0.2882 0.5826 0.3049 0.1210
POP = 15.36 14.86 15.62 20.67
Stock Fund Diversified Growth Special Equity Regional Equity
QD QD QD QD
HD = 0.1771 0.0238 0.0163 N/A
POP = 28.55 17.47 23.96 N/A
Emerging Growth Small Cap Value (1) (2) Micro Cap Value International Index (1) (2)
QD QD MD QD
HD = N/A N/A N/A N/A
POP = N/A N/A N/A N/A
International Health Science Technology Limited Term
MD QD QD MD
HD = 0.0984 N/A N/A N/A
POP = 12.97 N/A N/A N/A
Intermediate Term Fixed Income Inter. Gov't. Bond Inter. Tax Free
MD MD MD MD
HD = N/A 0.5093 N/A N/A
POP = N/A 10.91 N/A N/A
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
MD MD MD MD
HD = N/A N/A N/A N/A
POP = N/A N/A N/A N/A
</TABLE>
<PAGE>
First American Investment Funds, Inc.
Historical Distribution Rates:
Class C
Monthly Declaring Quarterly Declaring
AHDR = HD AHDR = HD
POP POP
HD = Fiscal year Distribution
POP = Maximum Public Offering Price on 9/30/97
MD = Monthly declaring
QD = Quarterly declaring
(1)Information is for the four month period August 1, 1997 to November 30, 1997.
(2)POP = Maximum Public Offering Price on 11/30/97
<TABLE>
<CAPTION>
Balanced Fund Real Estate Sec Fund Equity Income Equity Index
<S> <C> <C> <C> <C>
MD QD MD MD
HD = 0.4215 0.6824 0.4411 0.2908
POP = 15.43 14.99 15.70 20.74
Stock Fund Diversified Growth Special Equity Regional Equity
MD MD MD QD
HD = 0.3826 0.1307 0.1601 0.1285
POP = 28.75 17.64 24.21 23.16
Emerging Growth Small Cap Value (1) (2) Micro Cap Value International Index (1) (2)
QD QD MD QD
HD = N/A 0.0037 N/A 0.0302
POP = N/A 18.23 N/A 10.99
International Health Science Technology Limited Term
MD QD QD MD
HD = 0.1667 0.0087 N/A 0.5562
POP = 13.23 12.08 N/A 9.94
Intermediate Term Fixed Income Inter. Gov't. Bond Inter. Tax Free
MD MD MD MD
HD = 0.5550 0.6169 0.5403 0.4661
POP = 9.98 10.96 9.27 10.82
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
MD MD MD MD
HD = 0.0615 0.4770 0.4387 0.0663
POP = 10.03 10.61 10.06 10.05
</TABLE>
<PAGE>
First American Investment Funds, Inc.
Annualized Current Distribution Rates:
Class A
Monthly Declaring Quaterly Declaring
ACDR = CD*12 ACDR = CD*4
POP POP
CD = Current Distribution
POP = Maximum Public Offering Price on 9/30/97
MD = Monthly declaring
QD = Quaterly declaring
<TABLE>
<CAPTION>
Balanced Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
MD QD MD MD
CD = 0.0278 0.1526 0.0395 0.0212
POP = 16.14 15.68 16.43 21.74
Stock Diversified Growth Special Equity Regional Equity
MD MD MD QD
CD = 0.0058 0.0022 0.0049 N/A
POP = 30.09 18.46 25.33 N/A
Emerging Growth Small Cap Value Micro Cap Value International Index
QD QD MD QD
CD = N/A N/A N/A N/A
POP = N/A N/A N/A N/A
International Health Science Technology Limited Term
MD QD QD MD
CD = N/A N/A N/A 0.0445
POP = N/A N/A N/A 10.14
Intermediate Term Fixed Income Inter. Gov't. Bond Inter. Tax Free
MD MD MD MD
CD = 0.0454 0.0466 0.0453 0.0399
POP = 10.39 11.40 9.57 11.18
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
MD MD MD MD
CD = 0.0355 0.0390 0.0367 N/A
POP = 10.35 10.94 10.40 N/A
</TABLE>
<PAGE>
First American Investment Funds, Inc.
Annualized Current Distribution Rates:
Class B
Monthly Declaring Quaterly Declaring
ACDR = CD*12 ACDR = CD*4
POP POP
CD = Current Distribution
POP = Maximum Public Offering Price on 9/30/97
MD = Monthly declaring
QD = Quaterly declaring
<TABLE>
<CAPTION>
Balanced Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
MD QD MD MD
CD = 0.0183 0.1285 0.0296 0.0084
POP = 15.36 14.86 15.62 20.67
Stock Diversified Growth Special Equity Regional Equity
MD MD MD QD
CD = N/A N/A N/A N/A
POP = N/A N/A N/A N/A
Emerging Growth Small Cap Value Micro Cap Value International Index
QD QD MD QD
CD = N/A N/A N/A N/A
POP = N/A N/A N/A N/A
International Health Science Technology Limited Term
MD QD QD MD
CD = N/A N/A N/A N/A
POP = N/A N/A N/A N/A
Intermediate Term Fixed Income Inter. Gov't. Bond Inter. Tax Free
MD MD MD MD
CD = N/A 0.0395 N/A N/A
POP = N/A 10.91 N/A N/A
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
MD MD MD MD
CD = N/A N/A N/A N/A
POP = N/A N/A N/A N/A
</TABLE>
<PAGE>
First American Investment Funds, Inc.
Annualized Current Distribution Rates:
Class C
Monthly Declaring Quaterly Declaring
ACDR = CD*12 ACDR = CD*4
POP POP
CD = Current Distribution
POP = Maximum Public Offering Price on 9/30/97
MD = Monthly declaring
QD = Quaterly declaring
<TABLE>
<CAPTION>
Balanced Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
MD QD MD MD
CD = 0.0311 0.1611 0.0428 0.0255
POP = 15.43 14.99 15.70 20.74
Stock Diversified Growth Special Equity Regional Equity
MD MD MD QD
CD = 0.0118 0.0058 0.0098 N/A
POP = 28.75 17.64 24.21 N/A
Emerging Growth Small Cap Value Micro Cap Value International Index
QD QD MD QD
CD = N/A N/A N/A N/A
POP = N/A N/A N/A N/A
International Health Science Fund Technology Limited Term
MD QD QD MD
CD = N/A N/A N/A 0.0445
POP = N/A N/A N/A 9.94
Intermediate Term Fixed Income Interm. Gov't. Bond Interm. Tax Free
MD MD MD MD
CD = 0.0454 0.0489 0.0453 0.0399
POP = 9.98 10.96 9.27 10.82
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
MD MD MD MD
CD = 0.0355 0.0390 0.0367 0.0373
POP = 10.03 10.61 10.06 10.05
</TABLE>
<PAGE>
First American Investment Funds, Inc.
SEC YIELD - Class A
Yield = 2[(((a-b)/cd)^6) + 1)-1]
<TABLE>
<CAPTION>
Balanced Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
a = 99,527.19 9,849.51 8,966.43 22,122.80
b = 26,349.51 1,628.55 2,015.35 7,246.25
c = 2,057,330.722 133,388.242 201,841.456 729,817.411
d = 16.14 15.68 13.25 21.74
Stock Diversified Growth Special Equity Regional Equity
a = 87,141.24 8,292.54 44,009.14 33,604.42
b = 40,896.27 4,311.91 30,536.96 31,612.18
c = 1,729,916.918 384,356.096 1,376,387.137 1,557,549.621
d = 30.09 14.27 25.33 24.02
Emerging Growth Small Cap Value Micro Cap Value International Index
a = 2,459.68 N/A 29.24 N/A
b = 5,163.47 N/A 20.97 N/A
c = 328,418.737 N/A 3,114.132 N/A
d = 18.38 N/A 11.48 N/A
International Health Sciences Technology Limited Term Income
a = N/A 692.56 1,042.30 35,159.66
b = N/A 792.48 6,254.37 3,407.59
c = N/A 72,159.186 335,440.800 721,636.073
d = N/A 12.62 21.15 10.14
Intermediate Term Income Fixed Income Inter. Gov't. Bond Inter. Tax Free
a = 13,314.60 42,586.43 17,556.11 14,548.30
b = 1,500.85 6,303.16 2,042.78 2,034.92
c = 264,206.894 749,981.207 384,315.856 342,105.594
d = 10.39 11.40 9.57 11.18
California Inter Tax Free Colorado Tax Free Minnesota Tax Free Oregon Inter Tax Free
a = 3.81 15,356.11 29,392.68 N/A
b = 0.58 2,266.15 4,368.98 N/A
c = 101.070 371,912.473 753,147.733 N/A
d = 10.35 10.94 10.40 N/A
</TABLE>
<PAGE>
First American Investment Funds, Inc.
SEC YIELD - Class B
Yield = 2[(((a-b)/cd)^6) + 1)-1]
<TABLE>
<CAPTION>
Balanced Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
a = 133,221.19 15,589.43 8,966.43 33,927.42
b = 61,078.18 4,497.97 2,015.35 25,107.18
c = 2,762,624.744 214,958.294 201,841.456 1,119,244.382
d = 15.36 14.86 13.25 20.67
Stock Diversified Growth Special Equity Regional Equity
a = 92,185.95 8,292.54 47,601.83 37,507.97
b = 74,984.92 4,311.91 54,264.36 58,549.60
c = 1,837,808.762 384,356.096 1,488,748.676 1,738,477.443
d = 28.55 14.27 23.96 22.54
Emerging Growth Small Cap Value Micro Cap Value International Index
a = 476.69 N/A 13.16 N/A
b = 1,803.20 N/A 30.48 N/A
c = 70,023.385 N/A 1,401.844 N/A
d = 17.15 N/A 10.95 N/A
International Health Sciences Technology Limited Term Income
a = N/A 415.54 1,228.09 N/A
b = N/A 775.88 12,751.60 N/A
c = N/A 42,998.751 425,016.022 N/A
d = N/A 11.90 19.58 N/A
Intermediate Term Income Fixed Income Inter. Gov't. Bond Inter. Tax Free
a = N/A 79,095.61 17,795.30 N/A
b = N/A 21,094.00 1,898.94 N/A
c = N/A 140,073.224 363,033.083 N/A
d = N/A 10.91 9.47 N/A
California Inter Tax Free Colorado Tax Free Minnesota Tax Free Oregon Inter Tax Free
a = N/A N/A N/A N/A
b = N/A N/A N/A N/A
c = N/A N/A N/A N/A
d = N/A N/A N/A N/A
</TABLE>
<PAGE>
First American Investment Funds, Inc.
SEC YIELD - Class C
Yield = 2[(((a-b)/cd)^6) + 1)-1]
<TABLE>
<CAPTION>
Balanced Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
a = 1,307,670.87 191,590.87 8,966.43 811,767.00
b = 261,657.45 24,638.44 2,015.35 153,348.19
c = 26,995,553.640 2,659,527.960 201,841.456 26,779,685.111
d = 15.43 14.99 13.25 20.74
Stock Diversified Growth Special Equity Regional Equity
a = 1,922,837.64 8,292.54 667,722.88 331,107.44
b = 680,007.63 4,311.91 362,010.02 244,885.89
c = 38,093,597.519 384,356.096 20,883,054.254 15,346,681.521
d = 28.75 14.27 24.21 22.98
Emerging Growth Small Cap Value Micro Cap Value International Index
a = 59,708.67 N/A 216,571.32 N/A
b = 105,908.69 N/A 180,125.29 N/A
c = 8,547,041.567 N/A 23,067,799.707 N/A
d = 17.64 N/A 10.95 N/A
International Health Sciences Technology Limited Term Income
a = N/A 33,300.64 22,013.25 906,769.61
b = N/A 29,288.01 107,711.33 87,888.62
c = N/A 3,413,303.604 7,347,624.038 18,619,425.452
d = N/A 12.08 20.29 9.94
Intermediate Term Income Fixed Income Inter. Gov't. Bond Inter. Tax Free
a = 1,629,568.58 3,557,122.59 894,302.11 1,684,955.77
b = 183,710.68 385,907.13 104,064.85 236,691.23
c = 32,377,994.161 62,643,075.989 19,595,575.269 39,853,544.025
d = 9.98 10.96 9.27 10.82
California Inter Tax Free Colorado Tax Free Minnesota Tax Free Oregon Inter Tax Free
a = 123,255.06 210,310.78 1,152,395.04 724,651.52
b = 18,143.68 31,028.53 170,828.79 104,528.38
c = 3,269,224.099 5,093,555.308 29,528,565.169 18,107,177.203
d = 10.03 10.61 10.06 10.05
</TABLE>
<PAGE>
Average Annual Total Return (Since Inception)
(Without Sales Charge)
Class A
<TABLE>
<CAPTION>
Balanced Real Estate Equity Income Equity Index
<S> <C> <C> <C> <C>
P = 1,000 1,000 1,000 1,000
n = 4.83 2.00 4.83 4.83
ERV = 2,004.88 1,615.21 1,974.88 2,416.26
T = 15.49 27.09 15.13 20.04
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Stock Diversified Growth Special Equity Regional Equity
P = 1000 1,000 1,000 1,000
n = 9.83 4.83 9.83 9.83
ERV = 4,513.86 1,909.47 5,063.24 7,874.88
T = 16.57 14.33 17.94 23.36
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Emerging Growth Small Cap Value Micro Cap Value International Index
P = 1,000 1,000 1,000 1,000
n = 3.50 9.92 0.08 2.92
ERV = 1,929.62 6,713.11 1,051.80 1,138.43
T = 20.66 21.16 88.00 4.54
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 11/30/97) Ended 09/30/97) Ended 11/30/97)
International Health Science Technology Limited Term
P = 1,000 1,000 1,000 1,000
n = 3.50 1.42 3.50 4.83
ERV = 1,365.99 1,184.44 2,603.43 1,270.40
T = 9.32 12.66 31.44 5.08
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Intermediate Term Fixed Income Inter. Gov't. Bond Inter. Tax Free
P = 1,000 1,000 1,000 1,000
n = 4.83 9.83 9.83 9.83
ERV = 1,330.48 2,166.03 1,886.50 1,788.05
T = 6.09 8.18 6.67 6.09
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
P = 1,000 1,000 1,000 N/A
n = 0.17 3.5 3.58 N/A
ERV = 1,011.94 1,259.34 1,191.66 N/A
T = 7.23 6.81 5.02 N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97 Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
</TABLE>
<PAGE>
Average Annual Total Return (Since Inception)
(Without Sales Charge)
Class B
<TABLE>
<CAPTION>
Balanced Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
P = 1,000 1,000 1,000 1,000
n = 3.17 2.00 3.17 3.17
ERV = 1,718.23 1,587.60 1,785.70 2,138.66
T = 18.62 26.00 20.07 27.10
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Stock Diversified Growth Special Equity Regional Equity
P = 1,000 1,000 1,000 1,000
n = 3.17 3.17 3.17 3.17
ERV = 2,117.92 2,069.04 2,047.74 2,163.83
T = 26.71 25.78 25.37 27.57
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Emerging Growth Small Cap Value Micro Cap Value International Index
P = 1,000 1,000 1,000 1,000
n = 3.50 0.08 0.08 0.08
ERV = 2,052.08 1,000.04 1,051.27 999.71
T = 22.80 0.05 86.83 -0.36
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 11/30/97) Ended 09/30/97) Ended 11/30/97)
International Health Science Technology Limited Term
P = 1,000 1,000 1,000 N/A
n = 3.50 1.42 3.50 N/A
ERV = 1,342.09 1,171.47 2,872.80 N/A
T = 8.77 11.79 35.19 N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Intermediate Term Fixed Income Inter. Gov't. Bond Inter. Tax Free
P = N/A 1,000 N/A N/A
n = N/A 3.17 N/A N/A
ERV = N/A 1,239.95 N/A N/A
T = N/A 7.02 N/A N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
P = N/A N/A N/A N/A
n = N/A N/A N/A N/A
ERV = N/A N/A N/A N/A
T = N/A N/A N/A N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
</TABLE>
<PAGE>
Average Annual Total Return (Since Inception)
(Without Sales Charge)
Class C
<TABLE>
<CAPTION>
Balanced Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
P = 1,000 1,000 1,000 1,000
n = 3.67 2.25 3.17 3.67
ERV = 1,760.92 1,708.27 1,826.08 2,179.48
T = 16.67 26.87 20.92 23.65
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Stock Diversified Growth Special Equity Regional Equity
P = 1,000 1,000 1,000 1,000
n = 3.67 3.17 3.67 3.67
ERV = 2,215.92 2,106.29 2,140.92 2,187.25
T = 24.21 26.49 23.05 23.77
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Emerging Growth Small Cap Value Micro Cap Value International Index
P = 1,000 1,000 1,000 1,000
n = 3.50 9.92 0.08 2.92
ERV = 1,940.84 7,154.35 1,051.27 1,149.91
T = 20.86 21.94 86.83 4.90
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 11/30/97) Ended 09/30/97) Ended 11/30/97)
International Health Science Technology Limited Term
P = 1,000 1,000 1,000 1,000
n = 3.50 1.42 3.50 3.66
ERV = 1,372.13 1,188.02 2,614.54 1,213.10
T = 9.46 12.90 31.60 5.42
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Intermediate Term Fixed Income Inter. Gov't. Bond Inter. Tax Free
P = 1,000 1,000 1,000 1,000
n = 3.67 3.67 3.67 3.67
ERV = 1,231.59 1,350.87 1,212.06 1,181.53
T = 5.84 8.54 5.38 4.65
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
P = 1,000 1,000 1,000 1,000
n = 0.17 3.50 3.58 0.17
ERV = 1,010.75 1,259.34 1,188.42 1,013.68
T = 6.49 6.81 4.94 8.32
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
</TABLE>
<PAGE>
Average Annual Total Return (Since Inception)
(With Sales Charge)
Class A
<TABLE>
<CAPTION>
Balanced Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
P = 1,000 1,000 1,000 1,000
n = 4.83 2.00 4.83 4.83
ERV = 1,914.32 1,542.32 1,885.40 2,307.43
T = 14.39 24.19 14.03 18.90
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Stock Diversified Growth Special Equity Regional Equity
P = 1,000 1,000 1,000 1,000
n = 9.83 4.83 9.83 9.83
ERV = 4,308.82 1,823.14 4,835.86 7,164.92
T = 16.02 13.24 17.39 22.18
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Emerging Growth Small Cap Value Micro Cap Value International Index
P = 1,000 1,000 1,000 1,000
n = 3.50 9.92 0.08 2.92
ERV = 1,842.62 6,658.35 1,025.52 1,076.60
T = 19.08 21.06 37.02 2.56
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 11/30/97) Ended 09/30/97) Ended 11/30/97)
International Health Science Technology Limited Term
P = 1,000 1,000 1,000 1,000
n = 3.50 1.42 3.50 4.83
ERV = 1,304.47 1,139.02 2,486.13 1,245.49
T = 7.89 9.60 29.72 4.65
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Intermediate Term Fixed Income Inter. Gov't. Bond Inter. Tax Free
P = 1,000 1,000 1,000 1,000
n = 4.83 9.93 9.83 9.83
ERV = 1,279.77 2,100.41 1,828.21 1,732.51
T = 5.24 7.76 6.33 5.75
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
P = 1,000 1,000 1,000 N/A
n = 0.17 3.50 3.58 N/A
ERV = 976.39 1,221.37 1,156.30 N/A
T = -13.11 5.88 4.14 N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97
</TABLE>
<PAGE>
Average Annual Total Return (Since Inception)
(With Sales Charge)
Class B
<TABLE>
<CAPTION>
Balanced Real Estate Securities Equity Income Equity Index
<S> <C> <C> <C> <C>
P = 1,000 1,000 1,000 1,000
n = 3.17 2.00 3.17 3.17
ERV = 1,687.65 1,537.60 1,755.23 2,107.87
T = 17.95 24.00 19.42 26.52
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Stock Diversified Growth Special Equity Regional Equity
P = 1,000 1,000 1,000 1,000
n = 3.17 3.17 3.17 3.17
ERV = 2,087.35 2,038.43 2,017.34 2,133.33
T = 26.13 25.19 24.78 27.00
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Emerging Growth Small Cap Value Micro Cap Value International Index
P = 1,000 1,000 1,000 1,000
n = 3.50 0.08 0.08 0.08
ERV = 2,015.47 995.95 1,024.55 995.62
T = 22.17 -4.95 35.41 -5.34
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 11/30/97) Ended 09/30/97) Ended 11/30/97)
International Health Science Technology Limited Term
P = 1,000 1,000 1,000 N/A
n = 3.50 1.42 3.50 N/A
ERV = 1,307.86 1,129.88 2,835.05 N/A
T = 7.97 8.98 34.68 N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
Intermediate Term Fixed Income Inter. Gov't. Bond Inter. Tax Free
P = N/A 1,000 N/A N/A
n = N/A 3.17 N/A N/A
ERV = N/A 1,209.72 N/A N/A
T = N/A 6.19 N/A N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97) Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
California Tax Free Colorado Tax Free Minnesota Tax Free Oregon Tax Free
P = N/A N/A N/A N/A
n = N/A N/A N/A N/A
ERV = N/A N/A N/A N/A
T = N/A N/A N/A N/A
(Fiscal Year (Fiscal Year (Fiscal Year (Fiscal Year
Ended 09/30/97 Ended 09/30/97) Ended 09/30/97) Ended 09/30/97)
</TABLE>
Exhibit 19(d)
FIRST AMERICAN INVESTMENT FUNDS, INC.
POWER OF ATTORNEY -- N-1A REGISTRATION STATEMENT
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints David Lee, Kathryn L. Stanton, and
Michael Beattie, 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-1A of First
American Investment Funds, Inc., 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/ Roger A. Gibson Director January 15, 1998
Roger A. Gibson
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<OTHER-ITEMS-LIABILITIES> 767
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<ACCUMULATED-NII-CURRENT> 296
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 37400
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<ACCUM-APPREC-OR-DEPREC> 83335
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<EXPENSES-NET> (3743)
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<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (721)
<DISTRIBUTIONS-OF-GAINS> (962)
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<NUMBER-OF-SHARES-SOLD> 729
<NUMBER-OF-SHARES-REDEEMED> (344)
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<NAME> EQUITY INCOME RETAIL A
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<NAME> EQUITY INCOME RETAIL B
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<NAME> EQUITY INDEX CLASS A
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