1933 Act Registration No. 33-16905
1940 Act Registration No. 811-5309
As filed with the Securities and Exchange Commission on December 2, 1998
FORM N-1A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. | |
Post-Effective Amendment No. 41 |X|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 |X|
Amendment No. 41
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)
JAMES R. FOGGO
C/O SEI INVESTMENTS COMPANY, OAKS, PENNSYLVANIA 19456
(Name and Address of Agent for Service)
COPIES TO:
Kathleen L. Prudhomme, Esq.
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
It is proposed that this filing shall become effective (check appropriate box):
| | immediately upon filing pursuant to paragraph (b) of Rule 485
| | on (date) pursuant to paragraph (b) of Rule 485
| | 60 days after filing pursuant to paragraph (a)(1) of Rule 485
|X| on February 1, 1999 pursuant to paragraph (a)(1) of Rule 485
| | 75 days after filing pursuant to paragraph (a)(2) of Rule 485
| | on (date) pursuant to paragraph (a)(2) of Rule 485
<PAGE>
FEBRUARY 1, 1999S
LARGE CAP FUNDS
CLASS A, CLASS B AND CLASS C SHARES
BALANCED FUND
EQUITY INCOME FUND
EQUITY INDEX FUND
LARGE CAP GROWTH FUND
LARGE CAP VALUE FUND
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of these funds, or determined if the
information in this prospectus is accurate or complete. Any statement to the
contrary is a criminal offense.
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(R)
<PAGE>
TABLE OF CONTENTS
FUND SUMMARIES
- --------------------------------------------------------------------------------
Balanced Fund 2
- --------------------------------------------------------------------------------
Equity Income Fund 4
- --------------------------------------------------------------------------------
Equity Index Fund 6
- --------------------------------------------------------------------------------
Large Cap Growth Fund 8
- --------------------------------------------------------------------------------
Large Cap Value Fund 10
- --------------------------------------------------------------------------------
POLICIES & SERVICES
- --------------------------------------------------------------------------------
Buying Shares 12
- --------------------------------------------------------------------------------
Selling Shares 15
- --------------------------------------------------------------------------------
Managing Your Investment 16
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Management 18
- --------------------------------------------------------------------------------
More About The Funds 19
- --------------------------------------------------------------------------------
Financial Highlights 21
- --------------------------------------------------------------------------------
FOR MORE INFORMATION Back Cover
- --------------------------------------------------------------------------------
<PAGE>
FUND SUMMARIES
INTRODUCTION
This section of the prospectus describes the objectives of the First American
Large Cap Funds, summarizes the main investment strategies used by each fund in
trying to achieve its objectives, and highlights the risks involved with these
strategies. It also provides you with information about the performance, fees
and expenses of the funds.
AN INVESTMENT IN THE FUNDS IS NOT A DEPOSIT OF U.S. BANK NATIONAL ASSOCIATION
AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
1 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
FUND SUMMARIES
BALANCED FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Balanced Fund's objective is to maximize total return (capital appreciation plus
income).
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Balanced Fund invests in a balanced portfolio of
stocks and bonds. The mix of securities will change based on existing and
anticipated market conditions. Over the long term, the fund's asset mix is
likely to average approximately 60% equity securities and 40% debt securities.
The equity portion of the fund's portfolio will be invested primarily in common
stocks of companies that cover a broad range of industries and that have market
capitalizations of at least $5 billion at the time of purchase. The funds'
advisor will use the same approach in selecting stocks as it uses for Large Cap
Value Fund. The fund may also invest in preferred stocks and corporate debt
securities which are convertible into common stocks. Up to 25% of the common
stock portion of the fund's portfolio may be invested in securities of foreign
issuers which are either listed on a U.S. stock exchange or represented by
American Depositary Receipts.
Debt securities in the fund may include:
o U.S. GOVERNMENT SECURITIES (SECURITIES ISSUED OR GUARANTEED BY THE U.S.
GOVERNMENT OR ITS AGENCIES OR INSTRUMENTALITIES)
o MORTGAGE-AND ASSET-BACKED SECURITIES
o FIXED AND FLOATING RATE CORPORATE DEBT OBLIGATIONS
The fund's debt securities will be rated investment grade at the time or
purchase or, if unrated, determined to be of comparable quality by the fund's
advisor. At least 65% of these securities will be either U.S. government
securities or securities rated A or better by Standard & Poor's Ratings Service
or Moody's Investors Service or assigned an equivalent rating by another
nationally recognized rating agency. The fund may invest up to 15% of its total
fixed income assets in foreign securities payable in United States dollars.
Under normal market conditions the fund attempts to maintain a weighted average
maturity for the debt securities in its portfolio of 15 years or less and an
average effective duration of three to eight years.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions. It also may invest up to 25% of total assets in dollar roll
transactions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition, value
stocks and/or large capitalization stocks may underperform the market as a
whole.
FOREIGN SECURITY RISK
Securities of foreign issuers, even when dollar-denominated and publicly traded
in the United States, may involve risks not associated with the securities of
domestic issuers, including the risk of political or social instability or
diplomatic developments that could adversely affect the securities.
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities. One measure of interest rate
risk is effective duration, explained on page 19 under "More About the Funds --
Investment Strategies."
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities, or the other party to a contract (such as a securities
lending agreement) may default on its obligations.
CALL RISK
During periods of falling interest rates, a bond issuer may "call" -- or repay
- -- its high-yielding bonds before their maturity date. The fund would then be
forced to invest the unanticipated proceeds at lower interest rates, resulting
in a decline in the fund's income.
RISKS OF MORTGAGE-RELATED SECURITIES
Falling interest rates may cause faster than expected mortgage prepayments,
which the fund would have to reinvest at lower interest rates. On the other
hand, rising interest rates could cause mortgage prepayments to slow, which
would increase the price volatility of mortgage-related securities and cause
their prices to decline.
RISKS OF DOLLAR ROLL TRANSACTIONS
The use of mortgage dollar rolls could increase the volatility of the fund's
share price. It could also diminish the fund's investment performance if the
advisor does not predict mortgage prepayments and interest rates correctly.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
The illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's class A shares has varied
from year to year. The performance of class B and class C shares will be lower
due to their higher expenses. Sales charges are not reflected in the chart; if
they had been, returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
2 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
FUND SUMMARIES
BALANCED FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR
[BAR GRAPH]
1993 12.31%
1994 0.79%
1995 26.51%
1996 17.76%
1997 16.98%
1998
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98 One Year Five Years Since Inception(1)
- --------------------------------------------------------------------------------
Balanced Fund (Class A) % % %
- --------------------------------------------------------------------------------
Balanced Fund (Class B) % % %
- --------------------------------------------------------------------------------
Balanced Fund (Class C) N/A N/A N/A
- --------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index(2)
- --------------------------------------------------------------------------------
(1) Class A and class B shares commenced operations on December 14, 1992, and
August 15, 1994, respectively. Class C shares have not been offered prior to
the date of this prospectus. The since inception performance of the index is
calculated from the moth end following the fund's inception.
(2) An unmanaged index of large capitalization stocks.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below are based on class A
and class B share expenses before any waivers during the fiscal year ended
September 30, 1998.(1)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER FEES
- -----------------------------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)
AS A % OF OFFERING PRICE 4.50%(2) 0.00% 1.00%
MAXIMUM DEFERRED SALES CHARGE (LOAD)
AS A % OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS 0.00%(3) 5.00% 1.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------------
Management Fees 0.70% 0.70% 0.70%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses % % %
TOTAL % % %
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
1.05%, 1.80% AND 1.80%, RESPECTIVELY, FOR CLASS A, CLASS B AND CLASS C
SHARES. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. See "Buying Shares
-- Calculating Your Share Price."
(3) Class A share investments of $1 million or more on which no front-end sales
charge is paid may be subject to a contingent deferred sales charge. See
"Buying Shares -- Calculating Your Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
CLASS B CLASS B CLASS C CLASS C
assuming assuming no assuming assuming no
redemption redemption redemption redemption
at end of at end of at end of at end of
CLASS A each period each period each period each period
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 year $ $ $ $ $
3 years
5 years
10 years
</TABLE>
3 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
FUND SUMMARIES
EQUITY INCOME FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Equity Income Fund's objective is long-term growth of capital and income.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Equity Income Fund invests primarily in equity
securities of companies which the fund's investment advisor believes are
characterized by:
o THE ABILITY TO PAY ABOVE AVERAGE DIVIDENDS
o THE ABILITY TO FINANCE EXPECTED GROWTH
o STRONG MANAGEMENT
The fund will attempt to maintain a dividend that will grow quickly enough to
maintain its purchasing power. As a result, higher-yielding equity securities
will generally represent the core holdings of the fund. However, the fund also
may invest in lower-yielding, higher growth equity securities if the advisor
believes they will help balance the portfolio. The fund's equity securities
include common stocks and preferred stocks and corporate debt securities which
are convertible into common stocks. All securities held by the fund will provide
current income.
The fund invests in convertible securities in pursuit of both long-term growth
of capital and income. The securities' conversion features provide long-term
growth potential, while interest payments on the securities provide income. The
fund may invest in convertible securities without regard to their ratings, and
therefore may hold convertible securities which are rated lower than investment
grade.
Up to 25% of the fund's total assets may be invested in securities of foreign
issuers which are either listed on a United States stock exchange or represented
by American Depositary Receipts.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market.
RISKS OF NON-INVESTMENT GRADE SECURITIES
The fund may invest in securities which are rated lower than investment grade.
These securities, which are commonly called "high-yield" securities or "junk
bonds," generally have more volatile prices and carry more risk to principal
than investment grade securities.
FOREIGN SECURITY RISK
Securities of foreign issuers, even when dollar-denominated and publicly traded
in the United States, may involve risks not associated with the securities of
domestic issuers, including the risk of political or social instability or
diplomatic developments that could adversely affect the securities.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
The illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's class A shares has varied
from year to year. The performance of class B and class C shares will be lower
due to their higher expenses. Sales charges are not reflected in the chart; if
they had been, returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
4 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
FUND SUMMARIES
EQUITY INCOME FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR(1)
[BAR GRAPH]
1995 22.73%
1996 19.80%
1997 27.53%
1998
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98 One Year Since Inception(1)
- -------------------------------------------------------------------------
Equity Income Fund (Class A) % %
- ------------------------------------------------------------------------
Equity Income Fund (Class B) % %
- -------------------------------------------------------------------------
Equity Income Fund (Class C) N/A N/A
- -------------------------------------------------------------------------
Standard & Poor's 500 Composite Index(2)
- -------------------------------------------------------------------------
(1) U.S. Bank National Association became investment advisor to the fund on
April 28, 1994. Class A share performance information for prior periods is
not shown. Class B shares commenced operations on August 15, 1994. Class C
shares have not been offered prior to the date of this prospectus. The since
inception performance of the index is calculated from the month end
following the fund's inception.
(2) An unmanaged index of large capitalization stocks.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below are based on class A
and class B share expenses before any waivers during the fiscal year ended
September 30, 1998.(1)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER FEES
- -----------------------------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)
AS A % OF OFFERING PRICE 4.50%(2) 0.00% 1.00%
MAXIMUM DEFERRED SALES CHARGE (LOAD)
AS A % OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS 0.00%(3) 5.00% 1.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------------
Management Fees 0.70% 0.70% 0.70%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses % % %
TOTAL % % %
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
1.00%, 1.75% AND 1.75%, RESPECTIVELY, FOR CLASS A, CLASS B AND CLASS C
SHARES. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME
(2) Certain investors may qualify for reduced sales charges. See "Buying Shares
-- Calculating Your Share Price."
(3) Class A share investments of $1 million or more on which no front-end sales
charge is paid may be subject to a contingent deferred sales charge. See
"Buying Shares -- Calculating Your Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
CLASS B CLASS B CLASS C CLASS C
assuming assuming no assuming assuming no
redemption redemption redemption redemption
at end of at end of at end of at end of
CLASS A each period each period each period each period
--------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1 year $ $ $ $ $
3 years
5 years
10 years
</TABLE>
5 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
FUND SUMMARIES
EQUITY INDEX FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Equity Index Fund's objective is to provide investment results that correspond
to the performance of the Standard & Poor's Composite Index (S&P 500).
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Equity Index Fund invests primarily in common
stocks included in the S&P 500. The fund's advisor believes that the fund's
objective can best be achieved by investing in common stocks of approximately
90% to 100% of the issues included in the S&P 500, depending on the size of the
fund. A computer program is used to identify which stocks should be purchased or
sold in order to replicate, as closely as possible, the composition of the S&P
500.
Because the fund may not always hold all of the stocks included in the S&P 500,
and because the fund has expenses and the index does not, the fund will not
duplicate the index's performance precisely. However, the fund's advisor
believes there should be a close correlation between the fund's performance and
that of the S&P 500 in both rising and falling markets.
The fund also may invest up to 10% of its total assets 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 makes these investments
to maintain the liquidity needed 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.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may affect the market as a whole, or they may affect only a
particular company, industry or sector of the market.
FAILURE TO MATCH PERFORMANCE OF 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.
RISKS OF OPTIONS AND FUTURES
The fund will suffer a loss in connection with its use of options, futures
contracts and options on futures contracts if securities prices do not move in
the direction anticipated by the fund's advisor when entering into the options
or the futures contracts.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
The illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's class A shares has varied
from year to year. The performance of class B and class C shares will be lower
due to their higher expenses. Sales charges are not reflected in the chart; if
they had been, returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
fund's performance reflects sales charges and fund expenses; the benchmark is
unmanaged and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
6 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
FUND SUMMARIES
EQUITY INDEX FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR
[BAR GRAPH]
1993 9.80%
1994 1.02%
1995 36.63%
1996 22.13%
1997 32.51%
1998
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98 One Year Since Inception(1)
- -------------------------------------------------------------------------
Equity Index Fund (Class A) % %
- -------------------------------------------------------------------------
Equity Index Fund (Class B) % %
- -------------------------------------------------------------------------
Equity Index Fund (Class C) N/A N/A
- -------------------------------------------------------------------------
Standard & Poor's 500 Composite Index(2) % %
- -------------------------------------------------------------------------
(1) Class A and class B shares commenced operations on December 14, 1992 and
August 15, 1994, respectively. Class C shares have not been offered prior to
the date of this prospectus. The since inception performance of the index is
calculated from the month end following the fund's inception.
(2) An unmanaged index of large capitalization stocks.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below are based on class A
and class B share expenses before any waivers during the fiscal year ended
September 30, 1998.(1)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER FEES
- -----------------------------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)
AS A % OF OFFERING PRICE 4.50%(2) 0.00% 1.00%
MAXIMUM DEFERRED SALES CHARGE (LOAD)
AS A % OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS 0.00%(3) 5.00% 1.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------------
Management Fees 0.70% 0.70% 0.70%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses % % %
TOTAL % % %
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
0.60%, 1.35% AND 1.75%, RESPECTIVELY, FOR CLASS A, CLASS B AND CLASS C
SHARES. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. See "Buying Shares
-- Calculating Your Share Price."
(3) Class A share investments of $1 million or more on which no front-end sales
charge is paid may be subject to a contingent deferred sales charge. See
"Buying Shares -- Calculating Your Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
CLASS B CLASS B CLASS C CLASS C
assuming assuming no assuming assuming no
redemption redemption redemption redemption
at end of at end of at end of at end of
CLASS A each period each period each period each period
--------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1 year $ $ $ $ $
3 years
5 years
10 years
</TABLE>
7 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
FUND SUMMARIES
LARGE CAP GROWTH FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Large Cap Growth Fund's primary objective is long-term growth of capital.
Current income is a secondary objective of the fund.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Large Cap Growth Fund invests primarily in
common stocks of companies that have market capitalizations of at least $5
billion at the time of purchase. The advisor will select companies that it
believes exhibit the potential for superior growth based on factors such as:
o ABOVE AVERAGE GROWTH IN REVENUE AND EARNINGS
o STRONG COMPETITIVE POSITION
o STRONG MANAGEMENT
o SOUND FINANCIAL CONDITION
The fund may also invest in preferred stocks and corporate debt securities which
are convertible into common stocks. Up to 25% of the fund's total assets may be
invested in securities of foreign issuers which are either listed on a United
States stock exchange or represented by American Depositary Receipts.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition, growth
stocks and/or large capitalization stocks may underperform the market as a
whole.
FOREIGN SECURITY RISK
Securities of foreign issuers, even when dollar-denominated and publicly traded
in the United States, may involve risks not associated with the securities of
domestic issuers, including the risks of adverse currency fluctuations and of
political or social instability or diplomatic developments that could adversely
affect the securities.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
The illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's class A shares has varied
from year to year. The performance of class B and class C shares will be lower
due to their higher expenses. Sales charges are not reflected in the chart; if
they had been, returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
8 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
FUND SUMMARIES
LARGE CAP GROWTH FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1)
[BAR GRAPH]
1995 32.43%
1996 22.93%
1997 21.42%
1998
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98 One Year Five Years Since Inception(1)
- --------------------------------------------------------------------------------
Large Cap Growth Fund (Class A) % % %
- --------------------------------------------------------------------------------
Large Cap Growth Fund (Class B) % % %
- --------------------------------------------------------------------------------
Large Cap Growth Fund (Class C) N/A N/A N/A
- --------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index(2) % % %
- --------------------------------------------------------------------------------
(1) Class A and class B shares commenced operations on December 14, 1992 and
August 15, 1994, respectively. Class C shares have not been offered prior to
the date of this prospectus. The since inception performance of the index is
calculated from the month end following the fund's inception.
(2) An unmanaged index of large capitalization stocks.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below are based on class A
and class B share expenses before any waivers during the fiscal year ended
September 30, 1998.(1)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER FEES
- -----------------------------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)
AS A % OF OFFERING PRICE 4.50%(2) 0.00% 1.00%
MAXIMUM DEFERRED SALES CHARGE (LOAD)
AS A % OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS 0.00%(3) 5.00% 1.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------------
Management Fees 0.70% 0.70% 0.70%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses % % %
TOTAL % % %
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
1.05%, 1.80% AND 1.35%, RESPECTIVELY, FOR CLASS A, CLASS B AND CLASS C
SHARES. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. See "Buying Shares
-- Calculating Your Share Price."
(3) Class A share investments of $1 million or more on which no front-end sales
charge is paid may be subject to a contingent deferred sales charge. See
"Buying Shares -- Calculating Your Share Price."
----------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
CLASS B CLASS B CLASS C CLASS C
assuming assuming no assuming assuming no
redemption redemption redemption redemption
at end of at end of at end of at end of
CLASS A each period each period each period each period
--------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1 year $ $ $ $ $
3 years
5 years
10 years
</TABLE>
9 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
FUND SUMMARIES
LARGE CAP VALUE FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Large Cap Value Fund's primary objective is capital appreciation. Current income
is a secondary objective of the fund.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Large Cap Value Fund invests primarily in common
stocks of companies that cover a broad range of industries and that have market
capitalizations of at least $5 billion at the time of purchase. In selecting
stocks, the fund's advisor invests in securities that it believes:
o ARE UNDERVALUED RELATIVE TO OTHER SECURITIES IN THE SAME INDUSTRY OR MARKET;
o EXHIBIT GOOD OR IMPROVING FUNDAMENTALS; AND
o EXHIBIT AN IDENTIFIABLE CATALYST THAT COULD CLOSE THE GAP BETWEEN MARKET VALUE
AND FAIR VALUE OVER THE NEXT ONE TO TWO YEARS.
The fund may also invest in preferred stocks and corporate debt securities which
are convertible into common stocks. Up to 25% of the fund's total assets may be
invested in securities of foreign issuers which are either listed on a United
States stock exchange or represented by American Depositary Receipts.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition, value
stocks and/or large capitalization stocks may underperform the market as a
whole.
FOREIGN SECURITY RISK
Securities of foreign issuers, even when dollar-denominated and publicly traded
in the United States, may involve risks not associated with the securities of
domestic issuers, including the risks of adverse currency fluctuations and of
political or social instability or diplomatic developments that could adversely
affect the securities.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
The illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's class A shares has varied
from year to year. The performance of class B and class C shares will be lower
due to their higher expenses. Sales charges are not reflected in the chart; if
they had been, returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
10 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
FUND SUMMARIES
LARGE CAP VALUE FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR
[BAR GRAPH]
1989 26.90%
1990 -2.01%
1991 21.46%
1992 7.98%
1993 15.10%
1994 4.12%
1995 31.94%
1996 29.10%
1997 22.41%
1998
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS Ten Years or
AS OF 12/31/98 One Year Five Years Since Inception(1)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Large Cap Value Fund (Class A) % % %
- ----------------------------------------------------------------------------------------
Large Cap Value Fund (Class B) % % %
- ----------------------------------------------------------------------------------------
Large Cap Value Fund (Class C) N/A N/A N/A
- ----------------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index(2) % % %
- ----------------------------------------------------------------------------------------
</TABLE>
(1) Class A and class B shares commenced operations on December 14, 1992 and
August 15, 1994, respectively. Class C shares have not been offered prior to
the date of this prospectus. The since inception performance of the index is
calculated from the month end following the fund's inception.
(2) An unmanaged index of large capitalization stocks.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below are based on class A
and class B share expenses before any waivers during the fiscal year ended
September 30, 1998.(1)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER FEES
- -----------------------------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)
AS A % OF OFFERING PRICE 4.50%(2) 0.00% 1.00%
MAXIMUM DEFERRED SALES CHARGE (LOAD)
AS A % OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS 0.00%(3) 5.00% 1.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------------
Management Fees 0.70% 0.70% 0.70%
Distribution and Service (12b-1) Fees 1.00% 1.00%
Other Expenses % % %
TOTAL % % %
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
1.05%, 1.80% AND 1.80%, RESPECTIVELY, FOR CLASS A, CLASS B AND CLASS C
SHARES. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. See "Buying Shares
-- Calculating Your Share Price.
(3) Class A share investments of $1 million or more on which no front-end sales
charge is paid may be subject to a contingent deferred sales charge. See
"Buying Shares -- Calculating Your Share Price."
----------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
CLASS B CLASS B CLASS C CLASS C
assuming assuming no assuming assuming no
redemption redemption redemption redemption
at end of at end of at end of at end of
CLASS A each period each period each period each period
--------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1 year $ $ $ $ $
3 years
5 years
10 years
</TABLE>
11 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
POLICIES & SERVICES
BUYING SHARES
You may become a shareholder in any of the funds with an initial investment of
$1,000 or more ($250 for a retirement plan). Additional investments can be made
for as little as $100 ($25 for a retirement plan). The funds have the right to
waive these minimum investment requirements for employees of the funds' advisor
and its affiliates. The funds also have the right to reject any purchase order.
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
All funds in this prospectus offer class A, class B and class C shares.
Each class has its own cost structure. The amount of your purchase and the
length of time you expect to hold your shares will be factors in determining
which class of shares is best for you.
CLASS A SHARES
If you are making an investment that qualifies for a reduced sales charge, class
A shares may be best for you. Class A shares feature:
o A FRONT-END SALES CHARGE, DESCRIBED BELOW
o LOWER ANNUAL EXPENSES THAN CLASS B AND CLASS C SHARES. SEE "FUND SUMMARIES"
FOR MORE INFORMATION ON FEES AND EXPENSES
Because class a shares will normally be the better choice if your investment
qualifies for a reduced sales charge:
o ORDERS FOR CLASS B SHARES FOR $250,000 OR MORE NORMALLY WILL BE TREATED AS
ORDERS FOR CLASS A SHARES
o ORDERS FOR CLASS C SHARES FOR $1 MILLION OR MORE NORMALLY WILL BE TREATED AS
ORDERS FOR CLASS A SHARES
o ORDERS FOR CLASS B OR CLASS C SHARES BY AN INVESTOR ELIGIBLE TO PURCHASE
CLASS A SHARES WITHOUT A FRONT-END SALES CHARGE NORMALLY WILL BE TREATED AS
ORDERS FOR CLASS A SHARES
CLASS B SHARES
If you want all your money to go to work for you immediately, you may prefer
class B shares. Class B shares have no front-end sales charge, however they do
have:
o HIGHER ANNUAL EXPENSES THAN CLASS A SHARES. (SEE "FEES AND EXPENSES" IN THE
"FUND SUMMARIES" SECTION)
o A BACK-END SALES CHARGE, CALLED A "CONTINGENT DEFERRED SALES CHARGE," IF YOU
REDEEM YOUR SHARES WITHIN SIX YEARS OF PURCHASE
o AUTOMATIC CONVERSION TO CLASS A SHARES APPROXIMATELY EIGHT YEARS AFTER
PURCHASE, THEREBY REDUCING FUTURE ANNUAL EXPENSES
CLASS C SHARES
These shares combine some of the characteristics of class A and class B shares.
Class C shares have a low front-end sales charge of 1%, so more of your
investment goes to work immediately than if you had purchased class A shares.
However, class C shares also feature:
o A 1% CONTINGENT DEFERRED SALES CHARGE IF YOU REDEEM YOUR SHARES WITHIN 18
MONTHS OF PURCHASE
o HIGHER ANNUAL EXPENSES THAN CLASS A SHARES. (SEE "FEES AND EXPENSES" IN THE
"FUND SUMMARIES" SECTION")
o NO CONVERSION TO CLASS A SHARES
Because class C shares do not convert to class A shares, they will continue to
have higher annual expenses than class A shares for as long as you hold them.
- --------------------------------------------------------------------------------
12b-1 FEES
Under Rule 12b-1 of the Investment Company Act, each fund is allowed to pay the
fund's distributor an annual fee for the distribution and sale of its shares and
for services provided to shareholders.
FOR 12b-1 FEES ARE EQUAL TO:
- ---------------- ----------------------------------
CLASS A SHARES 0.25% OF AVERAGE DAILY NET ASSETS
CLASS B SHARES 1% OF AVERAGE DAILY NET ASSETS
CLASS C SHARES 1% OF AVERAGE DAILY NET ASSETS
Because these fees are paid out of a fund's assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
The class A share 12b-1 fee is a shareholder servicing fee. For class B and
class C shares, a portion of the 12b-1 fee equal to 0.25% of average daily net
assets is a shareholder servicing fee and the rest is a distribution fee.
The funds' distributor uses the shareholder servicing fee to compensate brokers,
participating institutions and "one-stop" mutual fund networks for providing
ongoing services to shareholder accounts. These institutions receive annual fees
equal to 0.25% of a fund's class A, class B and class C share average daily net
assets attributable to shares sold through such institutions. The fund's
distributor also pays institutions which sell class C shares a 0.75% annual
distribution fee beginning one year after the shares are sold. The distributor
may pay additional fees to institutions, using the sales charges it receives, in
exchange for sales and/or administrative services performed on behalf of the
institution's customers.
- --------------------------------------------------------------------------------
CALCULATING YOUR SHARE PRICE
Your purchase price will be based on the fund's net asset value (NAV) per share,
which is generally calculated as of the close of regular trading on the New York
Stock Exchange (usually 3 p.m. Central time) every day the exchange is open.
Your order will be priced at the next NAV calculated after your order is
accepted by the fund.
A fund's NAV is equal to the market value of its investments and other assets,
less any liabilities, divided by the number of fund shares. If market prices are
not readily available for an investment or if the advisor believes they are
unreliable, fair value prices may be determined in good faith using methods
approved by the funds' board of directors.
CLASS A SHARES
Your purchase price is typically the net asset value of your shares plus a
front-end sales charge. Sales charges
12 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
POLICIES & SERVICES
BUYING SHARES (CONTINUED)
vary depending on the amount of your purchase. The funds' distributor receives
the sales charge you pay and reallows a portion of the sales charge to your
broker or participating institution.
MAXIMUM
SALES CHARGE REALLOWANCE
AS A % OF AS A % OF AS A % OF
PURCHASE NET AMOUNT PURCHASE
PRICE INVESTED PRICE
- -------------------------------------------------------------------------------
LESS THAN $ 50,000 4.50% 4.71% 4.05%
$ 50,000 - $ 99,999 4.00% 4.17% 3.60%
$100,000 - $249,999 3.50% 3.63% 3.15%
$250,000 - $499,999 2.75% 2.83% 2.47%
$500,000 - $999,999 2.00% 2.04% 1.80%
$1 MILLION AND OVER 0% 0% 0%
REDUCING YOUR SALES CHARGE
As shown in the preceding tables, larger purchases of class A shares reduce the
percentage sales charge you pay. You also may reduce your sales charge in the
following ways:
PRIOR PURCHASES. Prior purchases of class A shares of any First American fund
(except a money market fund) will be factored into your sales charge
calculation. For example, let's say you're making a $10,000 investment. If the
current value of all other First American fund class A shares that you hold is
$40,000 or more, your current sales charge is reduced. To receive a reduced
sales charge, you must notify the funds' transfer agent of your prior purchases.
This must be done at the time of purchase, either directly to the transfer agent
in writing or by notifying your broker or financial institution.
PURCHASES BY RELATED ACCOUNTS. Concurrent and prior purchases of class A shares
by certain other accounts also will be combined with your purchase to determine
your sales charge. For example, purchases made by your spouse or children under
age 21 will reduce your sales charge. To receive a reduced sales charge, you
must notify the funds' transfer agent of purchases by any related accounts. This
must be done at the time of purchase, either directly to the transfer agent in
writing or by notifying your broker or financial institution.
LETTER OF INTENT. If you plan to invest $50,000 or more over a 13-month period
in class A shares of any First American fund except the money market funds, you
may reduce your sales charge by signing a non-binding letter of intent. (If you
do not fulfill the letter of intent, you must pay the applicable sales charge.
In addition, if you reduce your sales charge to zero under a letter of intent
and then sell your class A shares within 12 months of their purchase, you may be
charged a contingent deferred sales charge of 1%. See "For Investments of Over
$1 Million.")
More information on these ways to reduce your sales charge appears in the
Statement of Additional Information (SAI). The SAI also contains information on
investors who are eligible to purchase class A shares without a sales charge.
FOR INVESTMENTS OF OVER $1 MILLION
There is no initial sales charge on class A share purchases of $1 million or
more. However, your broker or financial institution may receive a commission of
up to 1% on your purchase. If such a commission is paid, you will be assessed a
contingent deferred sales charge (CDSC) of 1% if you sell your shares within 12
months. To find out whether you will be assessed a CDSC, ask your broker or
financial institution. The funds' distributor receives any CDSC imposed when you
sell your class A shares. The CDSC is based on the value of your shares at the
time of purchase or at the time of sale, whichever is less. The charge does not
apply to shares you acquired by reinvesting your dividend or capital gain
distributions.
To help lower your costs, shares that are not subject to a CDSC will be sold
first. Other shares will then be sold in an order that minimizes your CDSC. The
CDSC will be waived for (i) redemptions following the death or disability of a
shareholder and (ii) redemptions that equal the minimum required distribution
from an individual retirement account or other retirement plan to a shareholder
who has reached the age of 70 1/2.
CLASS B SHARES
Your purchase price for class B shares is their net asset value -- there is no
front-end sales charge. However, if you redeem your shares within six years of
purchase, you will pay a back-end sales charge, called a contingent deferred
sales charge (CDSC). Although you pay no front-end sales charge when you buy
class B shares, the funds' distributor pays a sales commission of 4.25% of the
amount invested to brokers and financial institutions which sell class B shares.
The funds' distributor receives any CDSC imposed when you sell your class B
shares.
Your CDSD will be based on the value of your shares at the time of purchase or
at the time of sale, whichever is less. The charge does not apply to shares you
acquired by reinvesting your dividend or capital gain distributions. Shares will
be sold in the order that minimizes your CDSC.
CDSC AS A % OF THE
YEAR SINCE PURCHASE VALUE OF YOUR SHARES
- --------------------------------------------------------------------------------
FIRST 5%
SECOND 5%
THIRD 4%
FOURTH 3%
FIFTH 2%
SIXTH 1%
SEVENTH 0%
EIGHTH 0%
13 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
POLICIES & SERVICES
BUYING SHARES (CONTINUED)
Your class B shares will automatically convert to class A shares, eight years
after the first day of the month following your purchase of shares. For example,
if you purchase class B shares on June 15, 1999, they will convert to class A
shares on June 1, 2007.
The CDSC will be waived for:
o REDEMPTIONS FOLLOWING THE DEATH OR DISABILITY OF A SHAREHOLDER.
o REDEMPTIONS THAT EQUAL THE MINIMUM REQUIRED DISTRIBUTION FROM AN INDIVIDUAL
RETIREMENT ACCOUNT OR OTHER RETIREMENT PLAN TO A SHAREHOLDER WHO HAS REACHED
THE AGE OF 701/2.
o REDEMPTIONS THROUGH A SYSTEMATIC WITHDRAWAL PLAN, AT A RATE OF UP TO 12% A
YEAR OF YOUR ACCOUNT'S VALUE. DURING THE FIRST YEAR, THE 12% ANNUAL LIMIT
WILL BE BASED ON THE VALUE OF YOUR ACCOUNT ON THE DATE THE PLAN IS
ESTABLISHED. THEREAFTER, IT WILL BE BASED ON THE VALUE OF YOUR ACCOUNT ON
THE PRECEDING DECEMBER 31.
CLASS C SHARES
Your purchase price for class C shares is their net asset value plus a front-end
sales charge equal to 1% of the purchase price (1.01% of the net amount
invested). If you redeem your shares within 18 months of purchase, you will be
assessed a contingent deferred sales charge (CDSC) of 1% of the value of your
shares at the time of purchase or at the time of sale, whichever is less. The
CDSC does not apply to shares you acquired by reinvesting your dividend or
capital gain distributions. Shares will be sold in the order that minimizes your
CDSC.
Even though your sales charge is only 1%, the funds' distributor pays a
commission equal to 2% of your purchase price to your broker or participating
institution. The distributor receives any CDSC imposed when you sell your class
C shares.
The CDSC for class C shares will be waived in the same circumstances as the
class B share CDSC. See "Class B Shares" above.
Unlike class B shares, class C shares do not convert to class A shares after a
specified period of time. Therefore, your shares will continue to have higher
annual expenses than class A shares.
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
BY PHONE
You may purchase shares by calling your broker or financial institution, if they
have a sales agreement with the funds' distributor. In many cases, your order
will be effective that day if received by your broker or financial institution
by the close of regular trading on the New York Stock Exchange. In some cases,
however, you will have to transmit your request by an earlier time in order for
your purchase request to be effective that day. This allows your broker or
financial institution time to process your request and transmit it to the fund.
Some financial institutions may charge a fee for helping you purchase shares.
Contact your broker or financial institution for more information.
If you are paying by wire, you may purchase shares by calling 1-800-637-2548
before 3 p.m. Central time. All information will be taken over the telephone,
and your order will be placed when the funds' custodian receives payment by
wire. Wire federal funds as follows:
U.S. BANK NATIONAL ASSOCIATION, MINNEAPOLIS, MN
ABA NUMBER 091000022
FOR CREDIT TO: DST SYSTEMS, INC.:
ACCOUNT NUMBER 160234580266
FOR FURTHER CREDIT TO (INVESTOR NAME AND FUND NAME)
You cannot purchase shares by wire on days when the New York Stock Exchange or
federally chartered banks are closed.
BY MAIL
To purchase shares by mail, simply complete and sign a new account form, enclose
a check made payable to the fund you wish to invest in, and mail both to:
FIRST AMERICAN FUNDS
C/O DST SYSTEMS, INC.
P.O. BOX 419382
KANSAS CITY, MISSOURI 64141-6382
After you have established an account, you may continue to purchase shares by
mailing your check to First American Funds at the same address.
Please note the following:
o ALL PURCHASES MUST BE MADE IN U.S. DOLLARS
o THIRD-PARTY CHECKS, CREDIT CARDS, CREDIT CARD CHECKS AND CASH ARE NOT
ACCEPTED
o IF A CHECK DOES NOT CLEAR YOUR BANK, THE FUNDS RESERVE THE RIGHT TO CANCEL
THE PURCHASE, AND YOU COULD BE LIABLE FOR ANY LOSSES OR FEES INCURRED
- --------------------------------------------------------------------------------
INVESTING AUTOMATICALLY
To purchase shares as part of a savings discipline, you may add to your
investment on a regular basis:
o BY HAVING $100 OR MORE AUTOMATICALLY WITHDRAWN FROM YOUR BANK ACCOUNT ON A
PERIODIC BASIS AND INVESTED IN FUND SHARES
o THROUGH AUTOMATIC MONTHLY EXCHANGES OF YOUR SHARES OF PRIME OBLIGATIONS
FUND, A MONEY MARKET FUND IN THE FIRST AMERICAN FAMILY OF FUNDS. EXCHANGES
MUST BE MADE INTO THE SAME CLASS OF SHARES THAT YOU HOLD IN PRIME
OBLIGATIONS FUND
You may apply for participation in either of these programs through your broker
or financial institution or by calling 1-800-637-2548.
14 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
POLICIES & SERVICES
SELLING SHARES
- --------------------------------------------------------------------------------
HOW TO SELL SHARES
You may sell your shares on any day when the New York Stock Exchange is open.
Your shares will be sold at the next NAV calculated after your order is accepted
by the funds' transfer agent, less any applicable contingent deferred sales
charge.
The proceeds from your sale normally will be mailed or wired within one day, but
in no event more than seven days, after your request is received in proper form.
- --------------------------------------------------------------------------------
BY PHONE
If you purchased shares through a broker or financial institution, simply call
them to sell your shares. In many cases, your redemption will be effective that
day if received by your broker or financial institution by the close of regular
trading on the New York Stock Exchange. In some cases, however, you will have to
call by an earlier time in order for your redemption to be effective that day.
This allows your broker or financial institution time to process your request
and transmit it to the fund. Contact your broker or financial institution
directly for more information.
If you did not purchase shares through a broker or financial institution, you
may sell your shares by calling 1-800-637-2548. Proceeds can be wired to your
bank account (if the proceeds are at least $1,000 and you have previously
supplied your bank account information to the transfer agent) or sent to you by
check.
If you recently purchased your shares by check or through the Automated Clearing
House (ACH), proceeds from the sale of those shares may not be available until
your check or ACH payment has cleared, which may take up to 10 calendar days.
BY MAIL
To sell shares by mail, send a written request to your broker or financial
institution, or to the funds' transfer agent at the following address:
FIRST AMERICAN FUNDS
C/O DST SYSTEMS, INC.
P.O. BOX 419382
KANSAS CITY, MISSOURI 64141-6382
Your request should include the following information:
o NAME OF THE FUND
o ACCOUNT NUMBER
o DOLLAR AMOUNT OR NUMBER OF SHARES REDEEMED
o NAME ON THE ACCOUNT
o SIGNATURES OF ALL REGISTERED ACCOUNT OWNERS
Signatures on a written request must be guaranteed if:
o YOU WOULD LIKE THE PROCEEDS FROM THE SALE TO BE PAID TO ANYONE OTHER THAN TO
THE SHAREHOLDER OF RECORD
o YOU WOULD LIKE THE CHECK MAILED TO AN ADDRESS OTHER THAN THE ADDRESS ON THE
FUNDS' RECORDS
o YOUR REDEMPTION REQUEST IS FOR $25,000 OR MORE
A signature guarantee assures that a signature is genuine and protects
shareholders from unauthorized account transfers. Banks, savings and loan
associations, trust companies, credit unions, broker-dealers and member firms of
a national securities exchange may guarantee signatures. Call your financial
institution to determine if it has this capability.
Proceeds from a written redemption request will be sent to you by check.
- --------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWALS
If your account has a value of $5,000 or more, you may redeem a specific dollar
amount from your account on a regular basis. To set up systematic withdrawals,
contact your broker or financial institution.
You should not make systematic withdrawals if you plan to continue investing in
the fund, due to sales charges and tax liabilities.
- --------------------------------------------------------------------------------
REINVESTING AFTER A SALE
If you sell class A shares, you may reinvest in class A shares of that fund or
another First American fund within 31 days without a sales charge. If you sell
shares of any class subject to a CDSC, that charge will be credited to your
account and the reinvested shares will be subject to a CDSC, which will be
determined based on the date of your reinvestment.
- --------------------------------------------------------------------------------
ACCOUNTS WITH LOW BALANCES
Except for retirement plans, if your account balance falls below $500 as a
result of selling or exchanging shares, you will be given 60 days to
re-establish the minimum balance. If you do not, the fund may close your
account and send you the proceeds, less any applicable contingent deferred
sales charge.
15 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT
- --------------------------------------------------------------------------------
EXCHANGING SHARES
If your investment goals or your financial needs change, you may move from one
First American fund to another. There is no fee to exchange shares.
Generally, you may exchange your shares only for shares of the same class.
However, you may exchange your class A shares for class Y shares of the same or
another First American fund if you subsequently become eligible to participate
in that class (for example, by opening a fiduciary, custody or agency account
with a financial institution which invests in class Y shares).
Exchanges are made based on the net asset value per share of each fund at the
time of the exchange. When you exchange your class A shares of one of the funds
for class A shares of another First American fund, you do not have to pay a
sales charge. When you exchange your class B or class C shares for class B or
class C shares of another First American fund, the time you held the shares of
the "old" fund will be added to the time you hold the shares of the "new" fund
for purposes of determining your CDSC or, in the case of class B shares,
calculating when your shares convert to class A shares.
Before exchanging into any fund, be sure to read its prospectus carefully. A
fund may change or cancel its exchange policies at any time. You will be
notified of any changes. The funds have the right to limit exchanges to four
times per year.
BY PHONE
You may exchange shares by calling your broker, your financial institution, or
the funds' transfer agent, provided that both funds have identical shareholder
registrations. To request an exchange through the funds' transfer agent, call
1-800-637-2548. Your instructions must be received by the funds' transfer agent
before 3 p.m. Central time, or by the time specified by your broker or financial
institution, in order for shares to be exchanged the same day.
BY MAIL
To exchange shares by written request, please follow the procedures under
"Selling Shares." Be sure to include the names of both funds involved in the
exchange.
- --------------------------------------------------------------------------------
TELEPHONE TRANSACTIONS
You may buy, sell or exchange shares by telephone, unless you elected on your
new account form to restrict this privilege. If you wish to reinstate this
option on an existing account, please call Investor Services at 1-800-637-2548
to request the appropriate form.
The funds and their agents will not be responsible for any losses that may
result from acting on wire or telephone instructions that they reasonably
believe to be genuine. The funds and their agents will each follow reasonable
procedures to confirm that instructions received by telephone are genuine, which
may include taping telephone conversations.
It may be difficult to reach the funds by telephone during periods of unusual
market activity. If you are unable to reach the funds or their agents by
telephone, please consider sending written instructions.
- --------------------------------------------------------------------------------
STAYING INFORMED
SHAREHOLDER REPORTS
Shareholder reports are mailed twice a year, in November and May. They include
financial statements, performance information, a message from your portfolio
managers, and, on an annual basis, the auditors' report.
In an attempt to reduce shareholder costs and help eliminate duplication, the
funds will try to limit their mailings to one report for each address that lists
one or more shareholders with the same last name. If you would like additional
copies, please call 1-800-637-2548.
STATEMENTS AND CONFIRMATIONS
Statements summarizing activity in your account are mailed at least quarterly.
Confirms are mailed following each purchase or sale of fund shares.
16 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT (CONTINUED)
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from a fund's net investment income are declared and paid monthly. Any
capital gains are distributed at least once each year.
On the ex-dividend date for a distribution, a fund's share price is reduced by
the amount of the distribution. If you buy shares just before the ex-dividend
date, in effect, you "buy the dividend." You will pay the full price for the
shares and then receive a portion of that price back as a taxable distribution.
Dividend and capital gain distributions will be reinvested in additional shares
of the fund paying the distribution, unless you request cash payments on your
new account form or by writing to the fund. Shares will be priced at the NAV
computed on the ex-dividend date.
- --------------------------------------------------------------------------------
TAXES
Some of the tax consequences of investing in the funds are discussed below. More
information about taxes is in the Statement of Additional Information. However,
because everyone's tax situation is unique, always consult your tax professional
about federal, state and local tax consequences.
TAXES ON DISTRIBUTIONS
Each fund pays its shareholders dividends from its net investment income and any
net capital gains that it has realized. For most investors, fund dividends and
distributions are considered taxable whether they are reinvested or taken in
cash (unless your investment is in an IRA or other tax-advantaged account).
Dividends from a fund's net investment income are taxable as ordinary income.
Distributions of a fund's long-term capital gains are taxable as long-term
gains, regardless of how long you have held your shares. Because of their
investment objectives and strategies, distributions for Large Cap Growth Fund
and Large Cap Value Fund are expected to consist primarily of capital gains.
TAXES ON TRANSACTIONS
The sale or exchange of fund shares will be a taxable event for you and may
result in a capital gain or loss. The gain or loss will be considered long-term
if you have held your shares for more than one year. A gain or loss on shares
held for one year or less is considered short-term and is taxed at the same
rates as ordinary income.
17 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
MANAGEMENT
INVESTMENT ADVISOR
FIRST AMERICAN ASSET MANAGEMENT
601 SECOND AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55402
U.S. Bank National Association (U.S. Bank), acting through its First American
Asset Management division, is the funds' investment advisor. First American
Asset Management provides investment management services to individuals and
institutions, including corporations, foundations, pensions and retirement
plans. As of December 31, 1998, it had more than $ in assets under
management, including investment company assets of approximately $ . As
investment advisor, First American Asset Management manages the funds' business
and investment activities, subject to the authority of the board of directors.
Each fund pays the investment advisor a monthly fee for providing investment
advisory services. During their most recent fiscal years, the funds paid the
following investment advisory fees to First American Asset Management:
ADVISORY FEE
AS A % OF
AVERAGE DAILY
NET ASSETS
- --------------------------------------------------------------------------------
BALANCED FUND %
EQUITY INCOME FUND %
EQUITY INDEX FUND %
LARGE CAP GROWTH FUND %
LARGE CAP VALUE FUND %
- --------------------------------------------------------------------------------
CUSTODIAN
U.S. BANK NATIONAL ASSOCIATION
U.S. BANK CENTER
180 EAST FIFTH STREET
ST. PAUL, MINNESOTA 55101
ADMINISTRATOR
SEI INVESTMENTS MANAGEMENT CORPORATION
OAKS, PENNSYLVANIA 19456
DISTRIBUTOR
SEI INVESTMENTS DISTRIBUTION CO.
OAKS, PENNSYLVANIA 19456
TRANSFER AGENT
DST SYSTEMS, INC.
330 WEST NINTH STREET
KANSAS CITY, MISSOURI 64105
ADDITIONAL COMPENSATION
In addition to receiving compensation for acting as the funds' investment
advisor as described above, U.S. Bank and its affiliates receive compensation in
connection with the following:
CUSTODY SERVICES. As compensation for acting as the funds' custodian, U.S. Bank
is paid monthly fees equal, on an annual basis, to 0.03% of a fund's average
daily net assets. In addition, U.S. Bank is reimbursed for its out-of-pocket
expenses incurred while providing custody services to the funds.
TRANSFER AGENT SERVICES. U.S. Bank performs certain transfer agent and dividend
disbursing agent services with respect to the class A, class B and class C
shares of the funds held through accounts at U.S. Bank and its affiliates. The
funds pay U.S. Bank an annual fee of $15 per account for providing these
services.
SECURITIES LENDING SERVICES. In connection with lending their portfolio
securities, the funds pay administrative and custodial fees to U.S. Bank which
are equal to 40% of the funds' income from these securities lending
transactions.
BROKERAGE TRANSACTIONS. When purchasing and selling portfolio securities for
the funds, the funds' investment advisor may place trades through its
affiliates, U.S. Bancorp Investments, Inc. and U.S. Bancorp Piper Jaffray Inc.,
which will earn commissions on such transactions.
SALES OF FUND SHARES. U.S. Bancorp Investments, Inc. and U.S. Bancorp Piper
Jaffray Inc., broker-dealers affiliated with U.S. Bank, have entered into
agreements with the funds' distributor to sell fund shares and will earn
commissions on these sales.
ERISA ACCOUNTS. U.S. Bank 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.
PORTFOLIO MANAGEMENT
Each fund's investments are managed by a team of persons associated with First
American Asset Management.
18 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS
- --------------------------------------------------------------------------------
OBJECTIVES
The funds' objectives, which are described in the "Fund Summaries" section, may
be changed without shareholder approval. If a fund's objectives change, you will
be notified at least 30 days in advance. Please remember: There is no guarantee
that any fund will achieve its objectives.
- --------------------------------------------------------------------------------
INVESTMENT STRATEGIES
The funds' main investment strategies are discussed in the "Fund Summaries"
section. These are the strategies that the funds' investment advisor believes
are most likely to be important in trying to achieve the funds' objectives. You
should be aware that each fund may also use strategies and invest in securities
that are not described in this prospectus, but that are described in the
Statement of Additional Information (SAI). For a copy of the SAI, call Investor
Services at 1-800-637-2548.
TEMPORARY INVESTMENTS
In an attempt to respond to adverse market, economic, political or other
conditions, each fund may invest without limit in cash and in U.S.
dollar-denominated high-quality money market instruments and other short-term
securities, including money market funds advised by the funds' advisor. Being
invested in these securities may keep a fund from participating in a market
upswing and prevent the fund from achieving its investment objectives.
EFFECTIVE DURATION
Balanced Fund normally attempts to maintain an average effective duration of
three to eight years for the debt securities portion of its portfolio. Effective
duration, one measure of interest rate risk, measures how much the value of a
security is expected to change with a given change in interest rates. The longer
a security's effective duration, the more sensitive its price to changes in
interest rates. For example, if interest rates were to increase by one
percentage point, the market value of a bond with an effective duration of five
years would decrease by 5%, with all other factors being constant. However, all
other factors are rarely constant. Effective duration is based on assumptions
and subject to a number of limitations. It is most useful when interest rate
changes are small, rapid and occur equally in short-term and long-term
securities. In addition, it is difficult to calculate precisely for bonds with
prepayment options, such as mortgage-related securities, because the calculation
requires assumptions about prepayment rates.
PORTFOLIO TURNOVER
Portfolio managers for the funds other than Equity Index Fund may trade
securities frequently, resulting, from time to time, in an annual portfolio
turnover rate of over 100%. Trading of securities may produce capital gains,
which are taxable to shareholders when distributed. Active trading may also
increase the amount of commissions or mark-ups to broker-dealers that the fund
pays when it buys and sells securities. Portfolio turnover for Equity Index Fund
is expected to be well below that of actively managed mutual funds. The
"Financial Highlights" section of this prospectus shows each fund's historical
portfolio turnover rate.
- --------------------------------------------------------------------------------
RISKS
The main risks of investing in the funds are summarized in the "Fund Summaries"
section. More information about fund risks is presented below.
COMPANY RISK
Individual stocks can perform differently than the overall market. This may be a
result of specific factors such as changes in corporate profitability due to the
success or failure of specific products or management strategies, or it may be
due to changes in investor perceptions regarding a company.
MARKET RISK
All stocks are subject to price movements due to changes in general economic
conditions, the level of prevailing interest rates or investor perceptions of
the market. Prices also are affected by the outlook for overall corporate
profitability.
SECTOR RISK
The stocks of companies within specific industries or sectors of the economy can
periodically perform differently than the overall stock market. This can be due
to changes in such things as the regulatory or competitive environment or to
changes in investor perceptions of a particular industry or sector.
RISK OF ACTIVE MANAGEMENT
Each fund other than Equity Index Fund is actively managed and its performance
therefore will reflect in part the advisor's ability to make investment
decisions which are suited to achieving the fund's investment objectives. Due to
their active management, the funds could underperform other mutual funds with
similar investment objectives.
RISKS OF SECURITIES LENDING
When a fund loans its portfolio securities, it will receive collateral equal to
at least 100% of the value of the loaned securities. Nevertheless, the fund
risks a delay in the recovery of the loaned securities, or even the loss of
rights in the collateral deposited by the borrower if the borrower should fail
financially. To reduce these risks, the funds enter into loan arrangements only
with institutions which the funds' advisor has determined are creditworthy under
guidelines established by the funds' board of directors.
YEAR 2000 ISSUES
Like other mutual funds and business and financial organizations, the funds
could be adversely affected if the computer systems used by the funds' advisor,
other service providers and entities with computer systems that are linked to
fund records do not properly process and calculate date-related information from
and after January 1, 2000. While year 2000-related computer problems could have
a negative effect on the funds, the funds' administrator has undertaken a
program designed to assess and monitor the steps being taken by the funds'
service providers to address year 2000 issues. This program includes seeking
assurances from service providers that their systems are or will be year 2000
compliant and reviewing service providers' periodic reports to monitor their
status concerning their year 2000 readiness and compliance.
The administrator and the advisor also report regularly to the funds' board of
directors concerning their own and other service providers' progress toward year
2000
19 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS (CONTINUED)
readiness. Although these reports indicate that service providers are or expect
to be year 2000 compliant, there can be no assurance that this will be the case
in all instances or that year 2000 difficulties experienced by others in the
financial services industry will not impact the funds. In addition, there can be
no assurance that year 2000 difficulties will not have an adverse effect on the
funds' investments or on global markets or economies, generally. The funds are
not bearing any of the expenses incurred by their service providers in preparing
for the year 2000.
- --------------------------------------------------------------------------------
ADDITIONAL RISKS OF BALANCED FUND
CALL RISK
Many corporate bonds may be redeemed at the option of the issuer, or "called,"
before their stated maturity date. In general, an issuer will call its bonds if
they can be refinanced by issuing new bonds which bear a lower interest rate.
Balanced Fund is subject to the possibility that during periods of falling
interest rates, a bond issuer will call its high-yielding bonds. The fund would
then be forced to invest the unanticipated proceeds at lower interest rates,
resulting in a decline in the fund's income.
CREDIT RISK
Balanced Fund is subject to the risk that the issuers of debt securities held by
the fund will not make payments on the securities, or that the other party to a
contract (such as a securities lending agreement or repurchase agreement) will
default on its obligations. There is also the risk that an issuer could suffer
adverse changes in financial condition that could lower the credit quality of a
security. This could lead to greater volatility in the price of the security and
in shares of the fund. Also, a change in the credit quality rating of a bond
could affect the bond's liquidity and make it more difficult for the fund to
sell.
Balanced Fund attempts to minimize credit risk by investing in securities
considered at least investment grade at the time of purchase. However, all of
these securities, especially those in the lower investment grade rating
categories, have credit risk. In adverse economic or other circumstances,
issuers of these lower rated securities are more likely to have difficulty
making principal and interest payments than issuers of higher rated securities.
When Balanced Fund purchases unrated securities, it will depend on the advisor's
analysis of credit risk more heavily than usual.
EXTENSION RISK
Balanced Fund may invest significantly in mortgage-related securities. These
securities are subject to extension risk, which is the risk that rising interest
rates could cause homeowners to prepay their mortgages more slowly than
expected, resulting in slower prepayments of the securities. This would, in
effect, convert a short-or medium-duration mortgage-related security into a
longer-duration security, increasing its sensitivity to interest rate changes
and causing its price to decline.
INTEREST RATE RISK
Debt securities in Balanced Fund will fluctuate in value with changes in
interest rates. In general, debt securities will increase in value when interest
rates fall and decrease in value when interest rates rise. Longer-term debt
securities are generally more sensitive to interest rate changes. ARMS are
generally less sensitive to interest rate changes because their interest rates
move with market rates.
PREPAYMENT RISK
Mortgage-related securities also are subject to prepayment risk, which is the
risk that falling interest rates could cause prepayments of the securities to
occur more quickly than expected. This occurs because, as interest rates fall,
more homeowners refinance the mortgages underlying mortgage-related securities.
Balanced Fund must reinvest the prepayments at a time when interest rates on new
mortgage investments are falling, reducing the income of the fund. In addition,
when interest rates fall, prices on mortgage-related securities may not rise as
much as for other types of comparable debt securities because investors may
anticipate an increase in mortgage prepayments.
RISKS OF DOLLAR ROLL TRANSACTIONS
In a dollar roll transaction, Balanced Fund sells mortgage-related securities
for delivery in the current month while contracting with the same party to
repurchase similar securities at a future date. Because the fund gives up the
right to receive principal and interest paid on the securities sold, a mortgage
dollar roll transaction will diminish the investment performance of the fund
unless the difference between the price received for the securities sold and the
price to be paid for the securities to be purchased in the future, plus any fee
income received, exceeds any income, principal payments and appreciation on the
securities sold as part of the mortgage dollar roll. Whether mortgage dollar
rolls will benefit Balanced Fund may depend upon the advisor's ability to
predict mortgage prepayments and interest rates. In addition, the use of
mortgage dollar rolls by the fund increases the amount of the fund's assets that
are subject to market risk, which could increase the volatility of the price of
the fund's shares.
20 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about the class A and
class B shares of each fund. The funds did not have any class C shares
outstanding during the periods for which information is presented. This
information is intended to help you understand each fund's financial performance
for the past five years or, if shorter, the period of the fund's operations.
Some of this information reflects financial results for a single fund share.
Total returns in the tables represent the rate that you would have earned or
lost on an investment in a fund, excluding sales charges and assuming you
reinvested all of your dividends and distributions.
This information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report, along with the funds' financial statements, is included
in the funds' annual report, which is available upon request.
BALANCED FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS A SHARES 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 13.14 $ 12.12 $ 10.54 $ 10.73
-------- ------- ------- ------- --------
Investment Operations:
Net Investment Income 0.39 0.39 0.38 0.34
Net Gains (Losses) on Securities
(both realized and unrealized) 2.85 1.43 1.72 (0.02)
-------- ------- ------- ------- --------
Total From Investment Operations 3.24 1.82 2.10 0.32
-------- ------- ------- ------- --------
Less Distributions:
Dividends (from net investment income) (0.39) (0.39) (0.37) (0.34)
Distributions (from capital gains) (0.58) (0.41) (0.15) (0.17)
-------- ------- ------- ------- --------
Total Distributions (0.97) (0.80) (0.52) (0.51)
-------- ------- ------- ------- --------
Net Asset Value, End of Period $ $ 15.41 $ 13.14 $ 12.12 $ 10.54
======== ======== ======== ======== ========
Total Return % 25.80% 15.61% 20.57% 3.02%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 32,309 $ 0,927 $ 15,288 $ 13,734
Ratio of Expenses to Average Net Assets % 1.05% 1.05% 0.99% 0.77%
Ratio of Net Income to Average Net Assets % 2.74% 3.05% 3.41% 2.63%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.13% 1.14% 1.19% 1.24%
Ratio of Net Income to Average Net Assets (excluding waivers) % 2.66% 2.96% 3.21% 2.16%
Portfolio Turnover Rate % 84% 73% 77% 98%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS B SHARES 1998 1997 1996 1995 1994(1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 13.10 $ 12.09 $10.53 $ 10.66
-------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.29 0.31 0.29 0.06
Net Gains (Losses) on Securities
(both realized and unrealized) 2.84 1.42 1.71 (0.12)
-------- ------- ------- ------- -------
Total From Investment Operations 3.13 1.73 2.00 (0.06)
-------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.29) (0.31) (0.29) (0.07)
Distributions (from capital gains) (0.58) (0.41) (0.15) --
-------- ------- ------- ------- -------
Total Distributions (0.87) (0.72) (0.44) (0.07)
-------- ------- ------- ------- -------
Net Asset Value, End of Period $ $ 15.36 $ 13.10 $12.09 $ 10.53
======== ======== ======== ======= =======
Total Return % 24.93% 14.78% 19.58% (0.55)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 43,707 $ 15,542 $ 3,120 $ 270
Ratio of Expenses to Average Net Assets % 1.80% 1.80% 1.79% 1.75%
Ratio of Net Income to Average Net Assets % 1.99% 2.32% 2.60% 2.80%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.88% 1.89% 1.94% 2.05%
Ratio of Net Income to Average Net Assets (excluding waivers) % 1.91% 2.23% 2.45% 2.33%
Portfolio Turnover Rate % 84% 73% 77% 98%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)Class B shares have been offered since August 15, 1994. All ratios for the
period have been annualized.
21 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
EQUITY INCOME FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS A SHARES 1998 1997 1996 1995 1994(1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 12.65 $ 11.24 $ 9.89 $ 9.87
-------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.40 0.39 0.41 0.41
Net Gains (Losses) on Securities
(both realized and unrealized) 3.40 1.42 1.33 --
-------- ------- ------- ------- -------
Total From Investment Operations 3.80 1.81 1.74 0.41
-------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.41) ( 0.39) ( 0.39) (0.39)
Distributions (from capital gains) (0.35) ( 0.01) -- --
-------- ------- ------- ------- -------
Total Distributions (0.76) ( 0.40) ( 0.39) (0.39)
-------- ------- ------- ------- -------
Net Asset Value, End of Period $ $ 15.69 $ 12.65 $ 11.24 $ 9.89
======== ======= ======= ======= =======
Total Return % 31.16% 16.41% 18.06% 4.22%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 7,276 $ 2,581 $ 1,995 $ 1,852
Ratio of Expenses to Average Net Assets % 1.00% 1.00% 0.92% 0.88%
Ratio of Net Income to Average Net Assets % 2.96% 3.25% 3.91% 4.88%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.17% 1.20% 1.31% 1.39%
Ratio of Net Income to Average Net Assets (excluding waivers) % 2.79% 3.05% 3.52% 4.37%
Portfolio Turnover Rate % 39% 23% 23% 108%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS B SHARES 1998 1997 1996 1995 1994(2)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 12.61 $ 11.20 $ 9.88 $ 9.87
-------- ------- ------- ------- ------
Investment Operations:
Net Investment Income 0.29 0.31 0.33 0.04
Net Gains (Losses) on Securities
(both realized and unrealized) 3.37 1.42 1.32 0.02
-------- ------- ------- ------- ------
Total From Investment Operations 3.66 1.73 1.65 0.06
-------- ------- ------- ------- ------
Less Distributions:
Dividends (from net investment income) (0.30) (0.31) ( 0.33) (0.05)
Distributions (from capital gains) (0.35) (0.01) -- --
-------- ------- ------- ------- ------
Total Distributions (0.65) (0.32) ( 0.33) (0.05)
-------- ------- ------- ------- ------
Net Asset Value, End of Period $ $ 15.62 $ 12.61 $ 11.20 $ 9.88
======== ======= ======= ======= =======
Total Return % 30.06% 15.66% 17.10% 0.57%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 6,619 $3,770 $ 1,233 $ 1
Ratio of Expenses to Average Net Assets % 1.75% 1.75% 1.75% 1.75%
Ratio of Net Income to Average Net Assets % 2.19% 2.49% 3.05% 4.39%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.92% 1.95% 2.06% 2.14%
Ratio of Net Income to Average Net Assets (excluding waivers) % 2.02% 2.29% 2.74% 4.00%
Portfolio Turnover Rate % 39% 23% 23% 108%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Ten month period ended September 30, 1994. 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 advisor from Boulevard Bank National Association to
U.S. Bank National Association. 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.
22 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
EQUITY INDEX FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS A SHARES 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 15.49 $ 13.35 $ 10.68 $ 10.60
-------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.12 0.27 0.25 0.25
Net Gains (Losses) on Securities
(both realized and unrealized) 5.70 2.32 2.76 0.09
-------- ------- ------- ------- -------
Total From Investment Operations 5.82 2.59 3.01 0.34
-------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.12) (0.27) (0.25) (0.25)
Distributions (from capital gains) (0.43) (0.18) (0.09) (0.01)
-------- ------- ------- ------- -------
Total Distributions (0.55) (0.45) (0.34) (0.26)
-------- ------- ------- ------- -------
Net Asset Value, End of Period $ $ 20.76 $ 15.49 $ 13.35 $ 10.68
======== ======== ======= ======= ========
Total Return % 39.47% 19.75% 28.90% 3.25%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 15,977 $ 6,221 $ 2,140 $ 758
Ratio of Expenses to Average Net Assets % 0.60% 0.60% 0.57% 0.35%
Ratio of Net Income to Average Net Assets % 1.36% 1.87% 2.16% 2.23%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.13% 1.15% 1.20% 1.23%
Ratio of Net Income to Average Net Assets (excluding waivers) % 0.83% 1.32% 1.59% 1.35%
Portfolio Turnover Rate % 8% 10% 9% 11%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS B SHARES 1998 1997 1996 1995 1994(1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 15.43 $ 13.30 $ 10.66 $ 10.68
-------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.12 0.17 0.23 0.01
Net Gains (Losses) on Securities
(both realized and unrealized) 5.67 2.31 2.68 0.04
-------- ------- ------- ------- -------
Total From Investment Operations 5.79 2.48 2.91 0.05
-------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.12) (0.17) (0.18) (0.07)
Distributions (from capital gains) (0.43) (0.18) (0.09) --
-------- ------- ------- ------- -------
Total Distributions (0.55) (0.35) (0.27) (0.07)
-------- ------- ------- ------- -------
Net Asset Value, End of Period $ $ 20.67 $ 15.43 $ 13.30 $ 10.66
======== ======== ======= ======= ========
Total Return % 38.45% 18.95% 27.87% 0.48%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 23,733 $ 8,252 $ 1,197 $ 29
Ratio of Expenses to Average Net Assets % 1.35% 1.35% 1.35% 1.35%
Ratio of Net Income to Average Net Assets % 0.61% 1.11% 1.34% 1.68%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.88% 1.90% 1.95% 2.03%
Ratio of Net Income to Average Net Assets (excluding waivers) % 0.08% 0.56% 0.74% 1.00%
Portfolio Turnover Rate % 8% 10% 9% 11%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class B shares have been offered since August 15, 1994. All ratios for the
period have been annualized.
23 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
LARGE CAP GROWTH FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS A SHARES 1998 1997 1996 1995 1994(1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 13.63 $11.75 $ 9.09 $ 9.39
-------- ------- ------- ------- --------
Investment Operations:
Net Investment Income 0.09 0.15 0.15 0.10
Net Gains (Losses) on Securities
(both realized and unrealized) 4.28 1.88 2.66 (0.29)
-------- ------- ------- ------- --------
Total From Investment Operations 4.37 2.03 2.81 (0.19)
-------- ------- ------- ------- --------
Less Distributions:
Dividends (from net investment income) (0.10) (0.15) (0.15) (0.11)
Distributions (from capital gains) (0.27) -- -- --
-------- ------- ------- ------- --------
Total Distributions (0.37) 0.15) (0.15) (0.11)
-------- ------- ------- ------- --------
Net Asset Value, End of Period $ $ 17.63 $13.63 $ 11.75 $ 9.09
======== ======== ======= ======= =======
Total Return % 32.69% 17.38% 31.21% (2.07)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 12,017 $5,318 $ 2,710 $ 1,900
Ratio of Expenses to Average Net Assets % 1.05% 1.04% 0.92% 0.90%
Ratio of Net Income to Average Net Assets % 0.57% 1.13% 1.52% 1.15%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.14% 1.17% 1.26% 1.33%
Ratio of Net Income to Average Net Assets (excluding waivers) % 0.48% 1.00% 1.18% 0.72%
Portfolio Turnover Rate % 34% 21% 28% 101%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS B SHARES 1998 1997 1996 1995 1994(2)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 13.57 $ 11.73 $ 9.09 $ 8.87
-------- ------- ------- ------- ------
Investment Operations:
Net Investment Income 0.01 0.08 0.09 0.01
Net Gains (Losses) on Securities
(both realized and unrealized) 4.18 1.84 2.65 0.23
-------- ------- ------- ------- ------
Total From Investment Operations 4.19 1.92 2.74 0.24
-------- ------- ------- ------- ------
Less Distributions:
Dividends (from net investment income) (0.02) (0.08) ( 0.10) (0.02)
Distributions (from capital gains) (0.27) -- -- --
-------- ------- ------- ------- ------
Total Distributions (0.29) (0.08) ( 0.10) (0.02)
-------- ------- ------- ------- ------
Net Asset Value, End of Period $ $ 17.47 $13.57 $ 11.73 $ 9.09
======== ======= ======= ======= =======
Total Return % 31.42% 16.41% 30.29% 2.75%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 9,487 $5,775 $ 819 $ 12
Ratio of Expenses to Average Net Assets % 1.80% 1.79% 1.75% 1.75%
Ratio of Net Income (Loss) to Average Net Assets % (0.18)% 0.36% 0.58% 1.20%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.89% 1.92% 2.01% 2.08%
Ratio of Net Income (Loss) to Average Net Assets (excluding
waivers) % (0.27)% 0.23% 0.32% 0.87%
Portfolio Turnover Rate % 34% 21% 28% 101%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Ten month period ended September 30, 1994. 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 advisor from Boulevard Bank National Association to
U.S. Bank National Association. 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.
24 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
LARGE CAP VALUE FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS A SHARES 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 22.59 $ 19.57 $ 16.51 $ 16.00
-------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.33 0.36 0.33 0.31
Net Gains (Losses) on Securities
(both realized and unrealized) 7.90 4.07 3.64 1.00
-------- ------- ------- ------- -------
Total From Investment Operations 8.23 4.43 3.97 1.31
-------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.32) (0.36) (0.32) (0.30)
Distributions (from capital gains) (1.76) (1.05) (0.59) (0.50)
-------- ------- ------- ------- -------
Total Distributions (2.08) (1.41) (0.91) (0.80)
-------- ------- ------- ------- -------
Net Asset Value, End of Period $ $ 28.74 $ 22.59 $ 19.57 $ 16.51
======== ======== ======== ======== =======
Total Return % 38.82% 23.90% 25.26% 8.35%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 50,381 $22,965 $ 13,076 $ 8,421
Ratio of Expenses to Average Net Assets % 1.05% 1.05% 1.00% 0.76%
Ratio of Net Income to Average Net Assets % 1.14% 1.64% 1.89% 1.51%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.14% 1.13% 1.19% 1.20%
Ratio of Net Income to Average Net Assets (excluding waivers) % 1.05% 1.56% 1.70% 1.07%
Portfolio Turnover Rate % 57% 40% 52% 65%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS B SHARES 1998 1997 1996 1995 1994(1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 22.50 $ 19.49 $ 16.49 $ 16.65
-------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.18 0.22 0.26 0.03
Net Gains (Losses) on Securities
(both realized and unrealized) 7.81 4.06 3.55 (0.10)
-------- ------- ------- ------- -------
Total From Investment Operations 7.99 4.28 3.81 (0.07)
-------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.18) (0.22) (0.22) (0.09)
Distributions (from capital gains) (1.76) (1.05) (0.59) --
-------- ------- ------- ------- -------
Total Distributions (1.94) ( 1.27) (0.81) (0.09)
-------- ------- ------- ------- -------
Net Asset Value, End of Period $ $ 28.55 $ 22.50 $ 19.49 $ 16.49
======== ======= ======= ======= =======
Total Return % 37.71% 23.08% 24.20% (0.43)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 53,420 $23,316 $ 7,051 $ 346
Ratio of Expenses to Average Net Assets % 1.80% 1.80% 1.79% 1.75%
Ratio of Net Income to Average Net Assets % 0.39% 0.89% 1.10% 1.58%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.89% 1.88% 1.94% 2.01%
Ratio of Net Income to Average Net Assets (excluding waivers) % 0.30% 0.81% 0.95% 1.32%
Portfolio Turnover Rate % 57% 40% 52% 65%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class B shares have been offered since August 15, 1994. All ratios for the
period have been annualized.
25 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
FOR MORE INFORMATION
More information about the funds is available in the funds' Statement of
Additional Information and annual and semiannual reports.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more details about the funds and their policies. A current SAI
is on file with the Securities and Exchange Commission (SEC) and is incorporated
into this prospectus by reference (which means that it is legally considered
part of this prospectus).
ANNUAL AND SEMIANNUAL REPORTS
Additional information about the funds' investments is available in the funds'
annual and semiannual reports to shareholders. In the funds' annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the funds' performance during their last fiscal year.
You can obtain a free copy of the funds' SAI and/or free copies of the funds'
most recent annual or semiannual reports by calling Investor Services at
1-800-637-2548. The material you request will be sent by first-class mail or
other means designed to ensure equally prompt delivery, within three business
days of receipt of the request.
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC, or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. For more information, call
1-800-SEC-0330.
Information about the funds is also available on the Internet. Text-only
versions of fund documents can be viewed online or downloaded from the SEC's
Internet site at http://www.sec.gov.
SEC file number: 811-05309
FAIF-1001 (9/1998)
<PAGE>
FEBRUARY 1, 1999
LARGE CAP FUNDS
CLASS Y SHARES
BALANCED FUND
EQUITY INCOME FUND
EQUITY INDEX FUND
LARGE CAP GROWTH FUND
LARGE CAP VALUE FUND
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of these funds, or determined if the
information in this prospectus is accurate or complete. Any statement to the
contrary is a criminal offense.
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(R)
<PAGE>
TABLE OF CONTENTS
FUND SUMMARIES
- --------------------------------------------------------------------------------
Balanced Fund 2
- --------------------------------------------------------------------------------
Equity Income Fund 4
- --------------------------------------------------------------------------------
Equity Index Fund 6
- --------------------------------------------------------------------------------
Large Cap Growth Fund 8
- --------------------------------------------------------------------------------
Large Cap Value Fund 10
- --------------------------------------------------------------------------------
POLICIES & SERVICES
- --------------------------------------------------------------------------------
Buying and Selling Shares 12
- --------------------------------------------------------------------------------
Managing Your Investment 13
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Management 14
- --------------------------------------------------------------------------------
More About The Funds 15
- --------------------------------------------------------------------------------
Financial Highlights 17
- --------------------------------------------------------------------------------
FOR MORE INFORMATION Back Cover
- --------------------------------------------------------------------------------
<PAGE>
FUND SUMMARIES
INTRODUCTION
This section of the prospectus describes the objectives of the First American
Large Cap Funds, summarizes the main investment strategies used by each fund in
trying to achieve its objectives, and highlights the risks involved with these
strategies. It also provides you with information about the performance, fees
and expenses of the funds.
AN INVESTMENT IN THE FUNDS IS NOT A DEPOSIT OF U.S. BANK NATIONAL ASSOCIATION
AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
1 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
FUND SUMMARIES
BALANCED FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Balanced Fund's objective is to maximize total return (capital appreciation plus
income).
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Balanced Fund invests in a balanced portfolio of
stocks and bonds. The mix of securities will change based on existing and
anticipated market conditions. Over the long term, the fund's asset mix is
likely to average approximately 60% equity securities and 40% debt securities.
The equity portion of the fund's portfolio will be invested primarily in common
stocks of companies that cover a broad range of industries and that have market
capitalizations of at least $5 billion at the time of purchase. The funds'
advisor will use the same approach in selecting stocks as it uses for Large Cap
Value Fund. The fund may also invest in preferred stocks and corporate debt
securities which are convertible into common stocks. Up to 25% of the common
stock portion of the fund's portfolio may be invested in securities of foreign
issuers which are either listed on a U.S. stock exchange or represented by
American Depositary Receipts.
Debt securities in the fund may include:
o U.S. government securities (securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities)
o Mortgage-and asset-backed securities
o Fixed and floating rate corporate debt obligations
The fund's debt securities will be rated investment grade at the time or
purchase or, if unrated, determined to be of comparable quality by the fund's
advisor. At least 65% of these securities will be either U.S. government
securities or securities rated A or better by Standard & Poor's Ratings Service
or Moody's Investors Service or assigned an equivalent rating by another
nationally recognized rating agency. The fund may invest up to 15% of its total
fixed income assets in foreign securities payable in United States dollars.
Under normal market conditions the fund attempts to maintain a weighted average
maturity for the debt securities in its portfolio of 15 years or less and an
average effective duration of three to eight years.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions. It also may invest up to 25% of total assets in dollar roll
transactions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition, value
stocks and/or large capitalization stocks may underperform the market as a
whole.
FOREIGN SECURITY RISK
Securities of foreign issuers, even when dollar-denominated and publicly traded
in the United States, may involve risks not associated with the securities of
domestic issuers, including the risk of political or social instability or
diplomatic developments that could adversely affect the securities.
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities. One measure of interest rate
risk is effective duration, explained on page 19 under "More About the Funds --
Investment Strategies."
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities, or the other party to a contract (such as a securities
lending agreement) may default on its obligations.
CALL RISK
During periods of falling interest rates, a bond issuer may "call" -- or repay
- -- its high-yielding bonds before their maturity date. The fund would then be
forced to invest the unanticipated proceeds at lower interest rates, resulting
in a decline in the fund's income.
RISKS OF MORTGAGE-RELATED SECURITIES
Falling interest rates may cause faster than expected mortgage prepayments,
which the fund would have to reinvest at lower interest rates. On the other
hand, rising interest rates could cause mortgage prepayments to slow, which
would increase the price volatility of mortgage-related securities and cause
their prices to decline.
RISKS OF DOLLAR ROLL TRANSACTIONS
The use of mortgage dollar rolls could increase the volatility of the fund's
share price. It could also diminish the fund's investment performance if the
advisor does not predict mortgage prepayments and interest rates correctly.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
The illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
2 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
FUND SUMMARIES
BALANCED FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) Class Y shares have been
offered since 2/4/94. The
since inception
[BAR CHART] performance of the index
is calculated from the
month end following the
1995 fund's inception.
1996
1997 (2) An unmanaged index of
1998 large capitalization
stocks.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98 One Year Since Inception(1)
- --------------------------------------------------------------------------------
Balanced Fund % %
- --------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index(2)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
before any waivers during the fiscal year ended September 30, 1998.(1)
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
0.80%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years
5 years
10 years
3 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
FUND SUMMARIES
EQUITY INCOME FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Equity Income Fund's objective is long-term growth of capital and income.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Equity Income Fund invests primarily in equity
securities of companies which the fund's investment advisor believes are
characterized by:
o THE ABILITY TO PAY ABOVE AVERAGE DIVIDENDS
o THE ABILITY TO FINANCE EXPECTED GROWTH
o STRONG MANAGEMENT
The fund will attempt to maintain a dividend that will grow quickly enough to
maintain its purchasing power. As a result, higher-yielding equity securities
will generally represent the core holdings of the fund. However, the fund also
may invest in lower-yielding, higher growth equity securities if the advisor
believes they will help balance the portfolio. The fund's equity securities
include common stocks and preferred stocks and corporate debt securities which
are convertible into common stocks. All securities held by the fund will provide
current income.
The fund invests in convertible securities in pursuit of both long-term growth
of capital and income. The securities' conversion features provide long-term
growth potential, while interest payments on the securities provide income. The
fund may invest in convertible securities without regard to their ratings, and
therefore may hold convertible securities which are rated lower than investment
grade.
Up to 25% of the fund's total assets may be invested in securities of foreign
issuers which are either listed on a United States stock exchange or represented
by American Depositary Receipts.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market.
RISKS OF NON-INVESTMENT GRADE SECURITIES
The fund may invest in securities which are rated lower than investment grade.
These securities, which are commonly called "high-yield" securities or "junk
bonds," generally have more volatile prices and carry more risk to principal
than investment grade securities.
FOREIGN SECURITY RISK
Securities of foreign issuers, even when dollar-denominated and publicly traded
in the United States, may involve risks not associated with the securities of
domestic issuers, including the risk of political or social instability or
diplomatic developments that could adversely affect the securities.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
The illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
4 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
FUND SUMMARIES
EQUITY INCOME FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) Class Y shares have been
offered since 8/2/94. The
[BAR CHART] since inception
performance of the index
1995 is calculated from the
1996 month end following the
1997 fund's inception.
1998
(2) An unmanaged index of
Best Quarter: Quarter ending , 199 % large capitalization
Worst Quarter: Quarter ending , 199 % stocks.
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98 One Year Since Inception(1)
- --------------------------------------------------------------------------------
Equity Income Fund % %
- --------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index(2)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
before any waivers during the fiscal year ended September 30, 1998.(1)
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
0.75%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years
5 years
10 years
5 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
FUND SUMMARIES
EQUITY INDEX FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Equity Index Fund's objective is to provide investment results that correspond
to the performance of the Standard & Poor's Composite Index (S&P 500).
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Equity Index Fund invests primarily in common
stocks included in the S&P 500. The fund's advisor believes that the fund's
objective can best be achieved by investing in common stocks of approximately
90% to 100% of the issues included in the S&P 500, depending on the size of the
fund. A computer program is used to identify which stocks should be purchased or
sold in order to replicate, as closely as possible, the composition of the S&P
500.
Because the fund may not always hold all of the stocks included in the S&P 500,
and because the fund has expenses and the index does not, the fund will not
duplicate the index's performance precisely. However, the fund's advisor
believes there should be a close correlation between the fund's performance and
that of the S&P 500 in both rising and falling markets.
The fund also may invest up to 10% of its total assets 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 makes these investments
to maintain the liquidity needed 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.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may affect the market as a whole, or they may affect only a
particular company, industry or sector of the market.
FAILURE TO MATCH PERFORMANCE OF 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.
RISKS OF OPTIONS AND FUTURES
The fund will suffer a loss in connection with its use of options, futures
contracts and options on futures contracts if securities prices do not move in
the direction anticipated by the fund's advisor when entering into the options
or the futures contracts.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
The illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
fund's performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
6 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
FUND SUMMARIES
EQUITY INDEX FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) Class Y shares have been
offered since 2/4/94. The
[BAR CHART] since inception
performance of the index
1995 is calculated from the
1996 month end following the
1997 fund's inception.
1998
(2) An unmanaged index of
large capitalization
stocks.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98 One Year Since Inception(1)
- --------------------------------------------------------------------------------
Equity Index Fund % %
- --------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
before any waivers during the fiscal year ended September 30, 1998.(1)
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
0.35%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
7 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
FUND SUMMARIES
LARGE CAP GROWTH FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Large Cap Growth Fund's primary objective is long-term growth of capital.
Current income is a secondary objective of the fund.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Large Cap Growth Fund invests primarily in
common stocks of companies that have market capitalizations of at least $5
billion at the time of purchase. The advisor will select companies that it
believes exhibit the potential for superior growth based on factors such as:
o ABOVE AVERAGE GROWTH IN REVENUE AND EARNINGS
o STRONG COMPETITIVE POSITION
o STRONG MANAGEMENT
o SOUND FINANCIAL CONDITION
The fund may also invest in preferred stocks and corporate debt securities which
are convertible into common stocks. Up to 25% of the fund's total assets may be
invested in securities of foreign issuers which are either listed on a United
States stock exchange or represented by American Depositary Receipts.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition, growth
stocks and/or large capitalization stocks may underperform the market as a
whole.
FOREIGN SECURITY RISK
Securities of foreign issuers, even when dollar-denominated and publicly traded
in the United States, may involve risks not associated with the securities of
domestic issuers, including the risks of adverse currency fluctuations and of
political or social instability or diplomatic developments that could adversely
affect the securities.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
The illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
8 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
FUND SUMMARIES
LARGE CAP GROWTH FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) Class Y shares have been
offered since 8/2/94. The
[BAR CHART] since inception
performance of the index
1995 is calculated from the
1996 month end following the
1997 fund's inception.
1998
(2) An unmanaged index of
large capitalization
stocks.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98 One Year Since Inception(1)
- --------------------------------------------------------------------------------
Large Cap Growth Fund % %
- --------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
before any waivers during the fiscal year ended September 30, 1998.(1)
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
0.80%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years
5 years
10 years
9 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
FUND SUMMARIES
LARGE CAP VALUE FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Large Cap Value Fund's primary objective is capital appreciation. Current income
is a secondary objective of the fund.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Large Cap Value Fund invests primarily in common
stocks of companies that cover a broad range of industries and that have market
capitalizations of at least $5 billion at the time of purchase. In selecting
stocks, the fund's advisor invests in securities that it believes:
o ARE UNDERVALUED RELATIVE TO OTHER SECURITIES IN THE SAME INDUSTRY OR MARKET;
o EXHIBIT GOOD OR IMPROVING FUNDAMENTALS; AND
o EXHIBIT AN IDENTIFIABLE CATALYST THAT COULD CLOSE THE GAP BETWEEN MARKET VALUE
AND FAIR VALUE OVER THE NEXT ONE TO TWO YEARS.
The fund may also invest in preferred stocks and corporate debt securities which
are convertible into common stocks. Up to 25% of the fund's total assets may be
invested in securities of foreign issuers which are either listed on a United
States stock exchange or represented by American Depositary Receipts.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition, value
stocks and/or large capitalization stocks may underperform the market as a
whole.
FOREIGN SECURITY RISK
Securities of foreign issuers, even when dollar-denominated and publicly traded
in the United States, may involve risks not associated with the securities of
domestic issuers, including the risks of adverse currency fluctuations and of
political or social instability or diplomatic developments that could adversely
affect the securities.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
The illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
10 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
FUND SUMMARIES
LARGE CAP VALUE FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) Class Y shares have been
offered since 2/4/94. The
[BAR CHART] since inception
performance of the index
1995 is calculated from the
1996 month end following the
1997 fund's inception.
1998
(2) An unmanaged index of
large capitalization
stocks.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98 One Year Since Inception(1)
- --------------------------------------------------------------------------------
Large Cap Value Fund % %
- --------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
before any waivers during the fiscal year ended September 30, 1998.(1)
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
0.80%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years
5 years
10 years
11 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
POLICIES & SERVICES
BUYING AND SELLING SHARES
Class Y shares are offered through banks and other financial institutions that
have entered into sales agreements with the funds' distributor. Class Y shares
are available to these financial institutions for the investment of their own
funds. Class Y shares also are available to certain accounts for which the
financial institution acts in a fiduciary, agency or custodial capacity, such as
certain trust accounts and investment advisory accounts. To find out whether you
may purchase class Y shares, contact your financial institution.
- --------------------------------------------------------------------------------
CALCULATING YOUR SHARE PRICE
Your purchase price will be equal to the fund's net asset value (NAV) per share,
which is generally calculated as of the close of regular trading on the New York
Stock Exchange (usually 3 p.m. Central time) every day the exchange is open.
A fund's NAV is equal to the market value of its investments and other assets,
less any liabilities, divided by the number of fund shares. If market prices are
not readily available for an investment or if the advisor believes they are
unreliable, fair value prices may be determined in good faith using methods
approved by the funds' board of directors.
- --------------------------------------------------------------------------------
HOW TO BUY AND SELL SHARES
You may purchase or sell shares by calling your financial institution.
When purchasing shares, payment must be made by wire transfer, which can be
arranged by your financial institution. Because purchases must be paid for by
wire transfer, you can purchase shares only on days when both the New York Stock
Exchange and federally chartered banks are open. You may sell your shares on any
day when the New York Stock Exchange is open.
Purchase orders and redemption requests must be received by your financial
institution by the time specified by the institution to be assured same day
processing. In order for shares to be purchased at that day's price, the funds
must receive your purchase order by 3:00 p.m. Central time and the funds'
custodian must receive federal funds before the close of business. In order for
shares to be sold at that day's price, the funds must receive your redemption
request by 3:00 p.m. Central time. It is the responsibility of your financial
institution to promptly transmit orders to the funds.
If the funds receive your redemption request by 3:00 p.m. Central time, payment
of your redemption proceeds will ordinarily be made by wire on the next business
day. It is possible, however, that payment could be delayed by up to seven days.
- --------------------------------------------------------------------------------
HOW TO EXCHANGE SHARES
If your investment goals or your financial needs change, you may exchange your
shares for class Y shares of another First American fund. Exchanges will be made
at the net asset value per share of each fund at the time of the exchange. There
is no fee to exchange shares. If you are no longer eligible to hold class Y
shares, for example, if you decide to discontinue your fiduciary, agency or
custodian account, you may exchange your shares for class A shares at net asset
value. Class A shares have higher expenses than class Y shares.
To exchange your shares, call your financial institution. In order for your
shares to be exchanged the same day, you must call your financial institution by
the time specified by the institution and your exchange order must be received
by the funds by 3:00 p.m. Central time. It is the responsibility of your
financial institution to promptly transmit your exchange order to the funds.
Before exchanging into any fund, be sure to read its prospectus carefully. A
fund may change or cancel its exchange policies at any time. You will be
notified of any changes. The funds have the right to limit exchanges to four
times per year.
12 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT
- --------------------------------------------------------------------------------
STAYING INFORMED
SHAREHOLDER REPORTS
Shareholder reports are mailed twice a year, in November and May. They include
financial statements, performance information, a message from your portfolio
managers, and, on an annual basis, the auditors' report.
In an attempt to reduce shareholder costs and help eliminate duplication, the
funds will try to limit their mailings to one report for each address that lists
one or more shareholders with the same last name. If you would like additional
copies, please call 1-800-637-2548.
STATEMENTS AND CONFIRMATIONS
Statements summarizing activity in your account are mailed at least quarterly.
Confirms are mailed following each purchase or sale of fund shares.
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from a fund's net investment income are declared and paid monthly. Any
capital gains are distributed at least once each year.
On the ex-dividend date for a distribution, a fund's share price is reduced by
the amount of the distribution. If you buy shares just before the ex-dividend
date, in effect, you "buy the dividend." You will pay the full price for the
shares and then receive a portion of that price back as a taxable distribution.
Dividend and capital gain distributions will be reinvested in additional shares
of the fund paying the distribution, unless you request cash payments on your
new account form or by writing to the fund. Shares will be priced at the NAV
computed on the ex-dividend date.
- --------------------------------------------------------------------------------
TAXES
Some of the tax consequences of investing in the funds are discussed below. More
information about taxes is in the Statement of Additional Information. However,
because everyone's tax situation is unique, always consult your tax professional
about federal, state and local tax consequences.
TAXES ON DISTRIBUTIONS
Each fund pays its shareholders dividends from its net investment income and any
net capital gains that it has realized. For most investors, fund dividends and
distributions are considered taxable whether they are reinvested or taken in
cash (unless your investment is in an IRA or other tax-advantaged account).
Dividends from a fund's net investment income are taxable as ordinary income.
Distributions of a fund's long-term capital gains are taxable as long-term
gains, regardless of how long you have held your shares. Because of their
investment objectives and strategies, distributions for Large Cap Growth Fund
and Large Cap Value Fund are expected to consist primarily of capital gains.
TAXES ON TRANSACTIONS
The sale or exchange of fund shares will be a taxable event for you and may
result in a capital gain or loss. The gain or loss will be considered long-term
if you have held your shares for more than one year. A gain or loss on shares
held for one year or less is considered short-term and is taxed at the same
rates as ordinary income.
13 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
MANAGEMENT
INVESTMENT ADVISOR
FIRST AMERICAN ASSET MANAGEMENT
601 SECOND AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55402
U.S. Bank National Association (U.S. Bank), acting through its First American
Asset Management division, is the funds' investment advisor. First American
Asset Management provides investment management services to individuals and
institutions, including corporations, foundations, pensions and retirement
plans. As of December 31, 1998, it had more than $_____ in assets under
management, including investment company assets of approximately $_____ As
investment advisor, First American Asset Management manages the funds' business
and investment activities, subject to the authority of the board of directors.
Each fund pays the investment advisor a monthly fee for providing investment
advisory services. During their most recent fiscal years, the funds paid the
following investment advisory fees to First American Asset Management:
ADVISORY FEE
AS A % OF
AVERAGE DAILY
NET ASSETS
- --------------------------------------------------------------------------------
BALANCED FUND %
EQUITY INCOME FUND %
EQUITY INDEX FUND %
LARGE CAP GROWTH FUND %
LARGE CAP VALUE FUND %
- --------------------------------------------------------------------------------
CUSTODIAN
U.S. BANK NATIONAL ASSOCIATION
U.S. BANK CENTER
180 EAST FIFTH STREET
ST. PAUL, MINNESOTA 55101
ADMINISTRATOR
SEI INVESTMENTS MANAGEMENT CORPORATION
OAKS, PENNSYLVANIA 19456
DISTRIBUTOR
SEI INVESTMENTS DISTRIBUTION CO.
OAKS, PENNSYLVANIA 19456
TRANSFER AGENT
DST SYSTEMS, INC.
330 WEST NINTH STREET
KANSAS CITY, MISSOURI 64105
ADDITIONAL COMPENSATION
In addition to receiving compensation for acting as the funds' investment
advisor as described above, U.S. Bank and its affiliates receive compensation in
connection with the following:
CUSTODY SERVICES. As compensation for acting as the funds' custodian, U.S. Bank
is paid monthly fees equal, on an annual basis, to 0.03% of a fund's average
daily net assets. In addition, U.S. Bank is reimbursed for its out-of-pocket
expenses incurred while providing custody services to the funds.
SECURITIES LENDING SERVICES. In connection with lending their portfolio
securities, the funds pay administrative and custodial fees to U.S. Bank which
are equal to 40% of the funds' income from these securities lending
transactions.
BROKERAGE TRANSACTIONS. When purchasing and selling portfolio securities for
the funds, the funds' investment advisor may place trades through its
affiliates, U.S. Bancorp Investments, Inc. and U.S. Bancorp Piper Jaffray Inc.,
which will earn commissions on such transactions.
ERISA ACCOUNTS. U.S. Bank 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.
PORTFOLIO MANAGEMENT
Each fund's investments are managed by a team of persons associated with First
American Asset Management.
14 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS
- --------------------------------------------------------------------------------
OBJECTIVES
The funds' objectives, which are described in the "Fund Summaries" section, may
be changed without shareholder approval. If a fund's objectives change, you will
be notified at least 30 days in advance. Please remember: There is no guarantee
that any fund will achieve its objectives.
- --------------------------------------------------------------------------------
INVESTMENT STRATEGIES
The funds' main investment strategies are discussed in the "Fund Summaries"
section. These are the strategies that the funds' investment advisor believes
are most likely to be important in trying to achieve the funds' objectives. You
should be aware that each fund may also use strategies and invest in securities
that are not described in this prospectus, but that are described in the
Statement of Additional Information (SAI). For a copy of the SAI, call Investor
Services at 1-800-637-2548.
TEMPORARY INVESTMENTS
In an attempt to respond to adverse market, economic, political or other
conditions, each fund may invest without limit in cash and in U.S.
dollar-denominated high-quality money market instruments and other short-term
securities, including money market funds advised by the funds' advisor. Being
invested in these securities may keep a fund from participating in a market
upswing and prevent the fund from achieving its investment objectives.
EFFECTIVE DURATION
Balanced Fund normally attempts to maintain an average effective duration of
three to eight years for the debt securities portion of its portfolio. Effective
duration, one measure of interest rate risk, measures how much the value of a
security is expected to change with a given change in interest rates. The longer
a security's effective duration, the more sensitive its price to changes in
interest rates. For example, if interest rates were to increase by one
percentage point, the market value of a bond with an effective duration of five
years would decrease by 5%, with all other factors being constant. However, all
other factors are rarely constant. Effective duration is based on assumptions
and subject to a number of limitations. It is most useful when interest rate
changes are small, rapid and occur equally in short-term and long-term
securities. In addition, it is difficult to calculate precisely for bonds with
prepayment options, such as mortgage-related securities, because the calculation
requires assumptions about prepayment rates.
PORTFOLIO TURNOVER
Portfolio managers for the funds other than Equity Index Fund may trade
securities frequently, resulting, from time to time, in an annual portfolio
turnover rate of over 100%. Trading of securities may produce capital gains,
which are taxable to shareholders when distributed. Active trading may also
increase the amount of commissions or mark-ups to broker-dealers that the fund
pays when it buys and sells securities. Portfolio turnover for Equity Index Fund
is expected to be well below that of actively managed mutual funds. The
"Financial Highlights" section of this prospectus shows each fund's historical
portfolio turnover rate.
- --------------------------------------------------------------------------------
RISKS
The main risks of investing in the funds are summarized in the "Fund Summaries"
section. More information about fund risks is presented below.
COMPANY RISK
Individual stocks can perform differently than the overall market. This may be a
result of specific factors such as changes in corporate profitability due to the
success or failure of specific products or management strategies, or it may be
due to changes in investor perceptions regarding a company.
MARKET RISK
All stocks are subject to price movements due to changes in general economic
conditions, the level of prevailing interest rates or investor perceptions of
the market. Prices also are affected by the outlook for overall corporate
profitability.
SECTOR RISK
The stocks of companies within specific industries or sectors of the economy can
periodically perform differently than the overall stock market. This can be due
to changes in such things as the regulatory or competitive environment or to
changes in investor perceptions of a particular industry or sector.
RISK OF ACTIVE MANAGEMENT
Each fund other than Equity Index Fund is actively managed and its performance
therefore will reflect in part the advisor's ability to make investment
decisions which are suited to achieving the fund's investment objectives. Due to
their active management, the funds could underperform other mutual funds with
similar investment objectives.
RISKS OF SECURITIES LENDING
When a fund loans its portfolio securities, it will receive collateral equal to
at least 100% of the value of the loaned securities. Nevertheless, the fund
risks a delay in the recovery of the loaned securities, or even the loss of
rights in the collateral deposited by the borrower if the borrower should fail
financially. To reduce these risks, the funds enter into loan arrangements only
with institutions which the funds' advisor has determined are creditworthy under
guidelines established by the funds' board of directors.
YEAR 2000 ISSUES
Like other mutual funds and business and financial organizations, the funds
could be adversely affected if the computer systems used by the funds' advisor,
other service providers and entities with computer systems that are linked to
fund records do not properly process and calculate date-related information from
and after January 1, 2000. While year 2000-related computer problems could have
a negative effect on the funds, the funds' administrator has undertaken a
program designed to assess and monitor the steps being taken by the funds'
service providers to address year 2000 issues. This program includes seeking
assurances from service providers that their systems are or will be year 2000
compliant and reviewing service providers' periodic reports to monitor their
status concerning their year 2000 readiness and compliance.
The administrator and the advisor also report regularly to the funds' board of
directors concerning their own and other service providers' progress toward year
2000
15 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS (CONTINUED)
readiness. Although these reports indicate that service providers are or expect
to be year 2000 compliant, there can be no assurance that this will be the case
in all instances or that year 2000 difficulties experienced by others in the
financial services industry will not impact the funds. In addition, there can be
no assurance that year 2000 difficulties will not have an adverse effect on the
funds' investments or on global markets or economies, generally. The funds are
not bearing any of the expenses incurred by their service providers in preparing
for the year 2000.
- --------------------------------------------------------------------------------
ADDITIONAL RISKS OF BALANCED FUND
CALL RISK
Many corporate bonds may be redeemed at the option of the issuer, or "called,"
before their stated maturity date. In general, an issuer will call its bonds if
they can be refinanced by issuing new bonds which bear a lower interest rate.
Balanced Fund is subject to the possibility that during periods of falling
interest rates, a bond issuer will call its high-yielding bonds. The fund would
then be forced to invest the unanticipated proceeds at lower interest rates,
resulting in a decline in the fund's income.
CREDIT RISK
Balanced Fund is subject to the risk that the issuers of debt securities held by
the fund will not make payments on the securities, or that the other party to a
contract (such as a securities lending agreement or repurchase agreement) will
default on its obligations. There is also the risk that an issuer could suffer
adverse changes in financial condition that could lower the credit quality of a
security. This could lead to greater volatility in the price of the security and
in shares of the fund. Also, a change in the credit quality rating of a bond
could affect the bond's liquidity and make it more difficult for the fund to
sell.
Balanced Fund attempts to minimize credit risk by investing in securities
considered at least investment grade at the time of purchase. However, all of
these securities, especially those in the lower investment grade rating
categories, have credit risk. In adverse economic or other circumstances,
issuers of these lower rated securities are more likely to have difficulty
making principal and interest payments than issuers of higher rated securities.
When Balanced Fund purchases unrated securities, it will depend on the advisor's
analysis of credit risk more heavily than usual.
EXTENSION RISK
Balanced Fund may invest significantly in mortgage-related securities. These
securities are subject to extension risk, which is the risk that rising interest
rates could cause homeowners to prepay their mortgages more slowly than
expected, resulting in slower prepayments of the securities. This would, in
effect, convert a short-or medium-duration mortgage-related security into a
longer-duration security, increasing its sensitivity to interest rate changes
and causing its price to decline.
INTEREST RATE RISK
Debt securities in Balanced Fund will fluctuate in value with changes in
interest rates. In general, debt securities will increase in value when interest
rates fall and decrease in value when interest rates rise. Longer-term debt
securities are generally more sensitive to interest rate changes. ARMS are
generally less sensitive to interest rate changes because their interest rates
move with market rates.
PREPAYMENT RISK
Mortgage-related securities also are subject to prepayment risk, which is the
risk that falling interest rates could cause prepayments of the securities to
occur more quickly than expected. This occurs because, as interest rates fall,
more homeowners refinance the mortgages underlying mortgage-related securities.
Balanced Fund must reinvest the prepayments at a time when interest rates on new
mortgage investments are falling, reducing the income of the fund. In addition,
when interest rates fall, prices on mortgage-related securities may not rise as
much as for other types of comparable debt securities because investors may
anticipate an increase in mortgage prepayments.
RISKS OF DOLLAR ROLL TRANSACTIONS
In a dollar roll transaction, Balanced Fund sells mortgage-related securities
for delivery in the current month while contracting with the same party to
repurchase similar securities at a future date. Because the fund gives up the
right to receive principal and interest paid on the securities sold, a mortgage
dollar roll transaction will diminish the investment performance of the fund
unless the difference between the price received for the securities sold and the
price to be paid for the securities to be purchased in the future, plus any fee
income received, exceeds any income, principal payments and appreciation on the
securities sold as part of the mortgage dollar roll. Whether mortgage dollar
rolls will benefit Balanced Fund may depend upon the advisor's ability to
predict mortgage prepayments and interest rates. In addition, the use of
mortgage dollar rolls by the fund increases the amount of the fund's assets that
are subject to market risk, which could increase the volatility of the price of
the fund's shares.
16 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about the class Y shares
of each fund. This information is intended to help you understand each fund's
financial performance for the past five years or, if shorter, the period of the
fund's class Y share operations. Some of this information reflects financial
results for a single fund share. Total returns in the tables represent the rate
that you would have earned or lost on an investment in a fund, assuming you
reinvested all of your dividends and distributions.
This information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report, along with the funds' financial statements, is included
in the funds' annual report, which is available upon request.
BALANCED FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994(1)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 13.15 $ 12.13 $ 10.54 $ 10.86
-------- -------- -------- -------- --------
Investment Operations:
Net Investment Income 0.42 0.42 0.40 0.25
Net Gains (Losses) on Securities
(both realized and unrealized) 2.86 1.43 1.73 (0.32)
-------- -------- -------- -------- --------
Total From Investment Operations 3.28 1.85 2.13 (0.07)
-------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.42) (0.42) (0.39) (0.25)
Distributions (from capital gains) (0.58) (0.41) (0.15) --
-------- -------- -------- -------- --------
Total Distributions (0.97) (0.80) (0.52) (0.25)
-------- -------- -------- -------- --------
Net Asset Value, End of Period $ $ 15.43 $ 13.15 $ 12.13 $ 10.54
======== ======== ======== ======== ========
Total Return % 26.17% 15.89% 20.89% (0.64)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $418,087 $332,786 $192,145 $125,285
Ratio of Expenses to Average Net Assets % 0.80% 0.80% 0.79% 0.75%
Ratio of Net Income to Average Net Assets % 2.99% 3.31% 3.61% 3.51%
Ratio of Expenses to Average Net Assets (excluding waivers) % 0.88% 0.89% 0.94% 1.05%
Ratio of Net Income to Average Net Assets (excluding waivers) % % % % %
Portfolio Turnover Rate % 84% 73% 77% 98%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class Y shares have been offered since February 4, 1994. All ratios for the
period have been annualized.
17 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
EQUITY INCOME FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994(1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 12.66 $ 11.24 $ 9.89 $ 9.90
-------- -------- ------- ------- -------
Investment Operations:
Net Investment Income 0.43 0.42 0.41 0.07
Net Gains (Losses) on Securities
(both realized and unrealized) 3.40 1.43 1.35 (0.03)
-------- -------- ------- ------- -------
Total From Investment Operations 3.83 1.85 1.76 0.04
-------- -------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.44) (0.42) (0.41) (0.05)
Distributions (from capital gains) (0.35) (0.01) -- --
-------- -------- ------- ------- -------
Total Distributions (0.79) (0.43) (0.41) (0.05)
-------- -------- ------- ------- -------
Net Asset Value, End of Period $ $ 15.70 $ 12.66 $ 11.24 $ 9.89
======== ======== ======= ======= =======
Total Return % 31.45% 16.79% 18.24% 0.45%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $369,919 $64,590 $52,126 $17,489
Ratio of Expenses to Average Net Assets % 0.75% 0.75% 0.75% 0.75%
Ratio of Net Income to Average Net Assets % 3.12% 3.50% 4.11% 5.61%
Ratio of Expenses to Average Net Assets (excluding waivers) % 0.92% 0.95% 1.06% 1.14%
Ratio of Net Income to Average Net Assets (excluding waivers) % % % % %
Portfolio Turnover Rate % 39% 23% 23% 108%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class Y shares have been offered since August 2, 1994. All ratios for the
period have been annualized.
EQUITY INDEX FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994(1)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 15.47 $ 13.34 $ 10.67 $ 10.85
-------- -------- -------- -------- --------
Investment Operations:
Net Investment Income 0.29 0.31 0.28 0.20
Net Gains (Losses) on Securities
(both realized and unrealized) 5.70 2.31 2.75 (0.18)
-------- -------- -------- -------- --------
Total From Investment Operations 5.99 2.62 3.03 0.02
-------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.29) (0.31) (0.27) (0.20)
Distributions (from capital gains) (0.43) (0.18) (0.09) --
-------- -------- -------- -------- --------
Total Distributions (0.72) (0.49) (0.36) (0.20)
-------- -------- -------- -------- --------
Net Asset Value, End of Period $ $ 20.74 $ 15.47 $ 13.34 $ 10.67
======== ======== ======== ======== ========
Total Return % 39.85% 19.98% 29.17% 0.18%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $557,258 $348,539 $218,932 $163,688
Ratio of Expenses to Average Net Assets % 0.35% 0.35% 0.35% 0.35%
Ratio of Net Income to Average Net Assets % 1.62% 2.14% 2.41% 2.59%
Ratio of Expenses to Average Net Assets (excluding waivers) % 0.88% 0.90% 0.95% 1.03%
Ratio of Net Income to Average Net Assets (excluding waivers) % % % % %
Portfolio Turnover Rate % 8% 10% 9% 11%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class Y shares have been offered since February 4, 1994. All ratios for the
period have been annualized.
18 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
LARGE CAP GROWTH FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994(1)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 13.66 $ 11.78 $ 9.10 $ 8.92
-------- -------- -------- -------- --------
Investment Operations:
Net Investment Income 0.12 0.18 0.17 0.03
Net Gains (Losses) on Securities
(both realized and unrealized) 4.26 1.88 2.67 0.18
-------- -------- -------- -------- --------
Total From Investment Operations 4.38 2.06 2.84 0.21
-------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.13) (0.18) (0.16) (0.03)
Distributions (from capital gains) (0.27) -- -- --
-------- -------- -------- -------- --------
Total Distributions (0.40) (0.18) (0.16) (0.03)
-------- -------- -------- -------- --------
Net Asset Value, End of Period $ $ 17.64 $ 13.66 $ 11.78 $ 9.10
======== ======== ======== ======== ========
Total Return % 32.75% 17.58% 31.57% 2.36%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $681,151 $255,900 $132,854 $ 31,875
Ratio of Expenses to Average Net Assets % 0.80% 0.79% 0.75% 0.75%
Ratio of Net Income to Average Net Assets % 0.77% 1.39% 1.69% 2.37%
Ratio of Expenses to Average Net Assets (excluding waivers) % 0.89% 0.92% 1.01% 1.08%
Ratio of Net Income to Average Net Assets (excluding waivers) % % % % %
Portfolio Turnover Rate % 34% 21% 28% 101%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class Y shares have been offered since August 2, 1994. All ratios for the
period have been annualized.
LARGE CAP VALUE FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994(1)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 22.60 $ 19.56 $ 16.50 $ 16.47
-------- ---------- -------- -------- --------
Investment Operations:
Net Investment Income 0.39 0.42 0.36 0.25
Net Gains (Losses) on Securities
(both realized and unrealized) 7.90 4.09 3.64 0.03
-------- ---------- -------- -------- --------
Total From Investment Operations 8.29 4.51 4.00 0.28
-------- ---------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.38) (0.42) (0.35) (0.25)
Distributions (from capital gains) (1.76) (1.05) (0.59) --
-------- ---------- -------- -------- --------
Total Distributions (2.14) (1.47) (0.94) (0.25)
-------- ---------- -------- -------- --------
Net Asset Value, End of Period $ $ 28.75 $ 22.60 $ 19.56 $ 16.50
======== ========== ======== ======== ========
Total Return % 39.13% 24.32% 25.50% 1.70%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $1,095,262 $471,206 $312,559 $154,949
Ratio of Expenses to Average Net Assets % 0.80% 0.80% 0.79% 0.75%
Ratio of Net Income to Average Net Assets % 1.39% 1.90% 2.10% 2.28%
Ratio of Expenses to Average Net Assets (excluding waivers) % 0.89% 0.88% 0.94% 1.01%
Ratio of Net Income to Average Net Assets (excluding waivers) % % % % %
Portfolio Turnover Rate % 57% 40% 52% 65%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class Y shares have been offered since February 4, 1994. All ratios for the
period have been annualized.
19 PROSPECTUS - FIRST AMERICAN LARGE CAP FUNDS
<PAGE>
FOR MORE INFORMATION
More information about the funds is available in the funds' Statement of
Additional Information and annual and semiannual reports.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more details about the funds and their policies. A current SAI
is on file with the Securities and Exchange Commission (SEC) and is incorporated
into this prospectus by reference (which means that it is legally considered
part of this prospectus).
ANNUAL AND SEMIANNUAL REPORTS
Additional information about the funds' investments is available in the funds'
annual and semiannual reports to shareholders. In the funds' annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the funds' performance during their last fiscal year.
You can obtain a free copy of the funds' SAI and/or free copies of the funds'
most recent annual or semiannual reports by calling Investor Services at
1-800-637-2548. The material you request will be sent by first-class mail or
other means designed to ensure equally prompt delivery, within three business
days of receipt of the request.
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC, or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. For more information, call
1-800-SEC-0330.
Information about the funds is also available on the Internet. Text-only
versions of fund documents can be viewed online or downloaded from the SEC's
Internet site at http://www.sec.gov.
SEC file number: 811-05309
FAIF-1001 (9/1998)
<PAGE>
FEBRUARY 1, 1999
MID CAP FUNDS
CLASS A, CLASS B, AND CLASS C SHARES
MID CAP GROWTH FUND
MID CAP VALUE FUND
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of these funds, or determined if the
information in this prospectus is accurate or complete. Any statement to the
contrary is a criminal offense.
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(R)
<PAGE>
TABLE OF CONTENTS
FUND SUMMARIES
- --------------------------------------------------------------------------------
Mid Cap Growth Fund 2
- --------------------------------------------------------------------------------
Mid Cap Value Fund 4
- --------------------------------------------------------------------------------
POLICIES & SERVICES
- --------------------------------------------------------------------------------
Buying Shares 6
- --------------------------------------------------------------------------------
Selling Shares 9
- --------------------------------------------------------------------------------
Managing Your Investment 10
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Management 12
- --------------------------------------------------------------------------------
More About The Funds 13
- --------------------------------------------------------------------------------
Financial Highlights 15
- --------------------------------------------------------------------------------
FOR MORE INFORMATION Back Cover
- --------------------------------------------------------------------------------
<PAGE>
FUND SUMMARIES
INTRODUCTION
This section of the prospectus describes the objectives of the First American
Mid Cap Funds, summarizes the main investment strategies used by each fund in
trying to achieve its objectives, and highlights the risks involved with these
strategies. It also provides you with information about the performance, fees
and expenses of the funds.
AN INVESTMENT IN THE FUNDS IS NOT A DEPOSIT OF U.S. BANK NATIONAL ASSOCIATION
AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
1 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
FUND SUMMARIES
MID CAP GROWTH FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Mid Cap Growth Fund has an objective of growth of capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Mid Cap Growth Fund invests primarily in common
stocks of mid cap companies, defined as companies that have market
capitalizations at the time of purchase within the range of the market
capitalizations of companies constituting the Russell Midcap Index. The advisor
will select companies that it believes exhibit the potential for superior growth
based on factors such as:
o ABOVE AVERAGE GROWTH IN REVENUE AND EARNINGS
o STRONG COMPETITIVE POSITION
o STRONG MANAGEMENT
o SOUND FINANCIAL CONDITION
The fund may also invest in preferred stocks and corporate debt securities which
are convertible into common stocks. Up to 25% of the fund's total assets may be
invested in securities of foreign issuers which are either listed on a United
States stock exchange or represented by American Depositary Receipts.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition, growth
stocks and/or mid cap stocks may underperform the market as a whole.
RISKS OF MID CAP STOCKS
While stocks of mid cap companies may be slightly less volatile than those of
small cap companies, they still involve substantial risk and their prices may be
subject to more abrupt or erratic movements than those of larger, more
established companies or the market averages in general.
FOREIGN SECURITY RISK
Securities of foreign issuers, even when dollar-denominated and publicly traded
in the United States, may involve risks not associated with the securities of
domestic issuers, including the risks of adverse currency fluctuations and of
political or social instability or diplomatic developments that could adversely
affect the securities.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's class A shares has varied
from year to year. The performance of class B and class C shares will be lower
due to their higher expenses. Sales charges are not reflected in the chart; if
they had been, returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
2 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
FUND SUMMARIES
MID CAP GROWTH FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) Performance prior to
August 10, 1998,
[BAR CHART] represents that of the
Emerging Growth Fund, a
1991 65.43% series of Piper Funds Inc.
1992 7.30%
1993 18.46% (2) The since inception
1994 -4.95% performance of the index
1995 39.37% is calculated from the
1996 11.88% month end following the
1997 23.40% inception of the class A
1998 shares.
(3) An unmanaged index
comprised of the 800
smallest securities in the
Russell 1000 Index, which
represent approximately
35% of the total market
capitalization.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Inception Since
AS OF 12/31/98(1) Date One Year Five Years Inception(2)
- --------------------------------------------------------------------------------
Mid Cap Growth Fund (Class A) 4/23/90 % % %
- --------------------------------------------------------------------------------
Mid Cap Growth Fund (Class B) / /98 N/A N/A %
- --------------------------------------------------------------------------------
Mid Cap Growth Fund (Class C) 1/31/99 N/A N/A N/A
- --------------------------------------------------------------------------------
Russell Midcap Index(3) % % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below are based on class A
and class B share expenses during the fiscal year ended September 30, 1998.(1)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER FEES
- -----------------------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)
AS A % OF OFFERING PRICE 4.50%(2) 0.00% 1.00%
MAXIMUM DEFERRED SALES CHARGE (LOAD)
AS A % OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS 0.00%(3) 5.00% 1.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------
Management Fees 0.70% 0.70% 0.70%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses % % %
TOTAL % % %
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) THE ADVISOR INTENDS TO WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT
TOTAL FUND OPERATING EXPENSES DO NOT EXCEED 1.15%, 1.90% AND 1.90%,
RESPECTIVELY, FOR CLASS A, CLASS B AND CLASS C SHARES. FEE WAIVERS MAY BE
DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. See "Buying Shares
-- Calculating Your Share Price."
(3) Class A share investments of $1 million or more on which no front-end sales
charge is paid may be subject to a contingent deferred sales charge. See
"Buying Shares -- Calculating Your Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
CLASS B CLASS B CLASS C CLASS C
assuming assuming no assuming assuming no
redemption redemption redemption redemption
at end of at end of at end of at end of
CLASS A each period each period each period each period
--------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
</TABLE>
3 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
FUND SUMMARIES
MID CAP VALUE FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Mid Cap Value Fund has an objective of capital appreciation.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Mid Cap Value Fund invests primarily in common
stocks of mid cap companies, defined as companies that have market
capitalizations at the time of purchase within the range of the market
capitalizations of companies constituting the Russell Midcap Index. In selecting
stocks, the fund's advisor invests in securities it believes:
o ARE UNDERVALUED RELATIVE TO OTHER SECURITIES IN THE SAME INDUSTRY OR
MARKET;
o EXHIBIT GOOD OR IMPROVING FUNDAMENTALS; AND
o EXHIBIT AN IDENTIFIABLE CATALYST THAT COULD CLOSE THE GAP BETWEEN MARKET
VALUE AND FAIR VALUE OVER THE NEXT ONE TO TWO YEARS.
The fund also may invest in preferred stocks and corporate debt securities which
are convertible into common stocks. In an attempt to reduce risk, the fund may
purchase put and call options on stocks and stock indices. The fund also may
write covered call options on securities it owns and it may write call options
on stock indices.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition, value
stocks and/or mid cap stocks may underperform the market as a whole.
RISKS OF MID CAP STOCKS
While stocks of mid cap companies may be slightly less volatile than those of
small cap companies, they still involve substantial risk and their prices may be
subject to more abrupt or erratic movements than those of larger, more
established companies or the market averages in general.
RISKS OF OPTIONS TRANSACTIONS
The fund purchases put and call options only for "hedging" purposes -- for the
purpose of reducing risk to the fund. Successful use of a hedging instrument
depends on the advisor's ability to correctly forecast the direction of market
movements. In the case of an incorrect market forecast, the use of options will
reduce or eliminate gains. In addition, changes in the price of an option may
not correlate perfectly with changes in the market value of the securities
subject to the hedge. Nevertheless, the fund's loss exposure in purchasing an
option is limited to the sum of the premium paid and any commission or other
transaction expense associated with purchasing the option.
When the fund writes a call option on a security, it runs the risk that it will
not realize the benefit of an increase in the market price of the security above
the exercise price of the option. Writing a call option on a stock index entails
the risk of an imperfect correlation between movements of the index and
movements in the price of the fund's portfolio securities.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's class A shares has varied
from year to year. The performance of class B and class C shares will be lower
due to their higher expenses. Sales charges are not reflected in the chart; if
they had been, returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
4 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
FUND SUMMARIES
MID CAP VALUE FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED) (1) Average annual total
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR returns for the past 10
years for class A shares
and the index and since
[BAR CHART] inception for class B
shares. Class C shares
1989 19.66% have not been offered
1990 -6.82% prior to the date of this
1991 18.70% prospectus.
1992 19.33%
1993 19.01% (2) An unmanaged index
1994 6.72% comprised of the 800
1995 20.02% smallest securities in
1996 31.94% the Russell 1000 Index,
1997 24.21% which represent
1998 approximately 35% of the
total market
capitalization.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS Inception 10 Years or
AS OF 12/31/98 Date One Year Five Years Since Inception(1)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mid Cap Value Fund (Class A) / / % % %
- ---------------------------------------------------------------------------------------
Mid Cap Value Fund (Class B) 8/15/94 % % %
- ---------------------------------------------------------------------------------------
Mid Cap Value Fund (Class C) 1/31/99 N/A N/A N/A
- ---------------------------------------------------------------------------------------
Russell Midcap Index(2) % % %
- ---------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below are based on class A
and class B share expenses during the fiscal year ended September 30, 1998.(1)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER FEES
- -------------------------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)
AS A % OF OFFERING PRICE 4.50%(2) 0.00% 1.00%
MAXIMUM DEFERRED SALES CHARGE (LOAD)
AS A % OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS 0.00%(3) 5.00% 1.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------------------
Management Fees 0.70% 0.70% 0.70%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses % % %
TOTAL % % %
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) THE ADVISOR INTENDS TO WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT
TOTAL FUND OPERATING EXPENSES DO NOT EXCEED 1.15%, 1.90% AND 1.90%,
RESPECTIVELY, FOR CLASS A, CLASS B AND CLASS C SHARES. FEE WAIVERS MAY BE
DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. See "Buying Shares
-- Calculating Your Share Price."
(3) Class A share investments of $1 million or more on which no front-end sales
charge is paid may be subject to a contingent deferred sales charge. See
"Buying Shares -- Calculating Your Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
CLASS B CLASS B CLASS C CLASS C
assuming assuming no assuming assuming no
redemption redemption redemption redemption
at end of at end of at end of at end of
CLASS A each period each period each period each period
--------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
</TABLE>
5 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
POLICIES & SERVICES
BUYING SHARES
You may become a shareholder in any of the funds with an initial investment of
$1,000 or more ($250 for a retirement plan). Additional investments can be made
for as little as $100 ($25 for a retirement plan). The funds have the right to
waive these minimum investment requirements for employees of the funds' advisor
and its affiliates. The funds also have the right to reject any purchase order.
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
Both funds in this prospectus offer class A, class B and class C shares.
Each class has its own cost structure. The amount of your purchase and the
length of time you expect to hold your shares will be factors in determining
which class of shares is best for you.
CLASS A SHARES
If you are making an investment that qualifies for a reduced sales charge, class
A shares may be best for you. Class A shares feature:
o A FRONT-END SALES CHARGE, DESCRIBED BELOW
o LOWER ANNUAL EXPENSES THAN CLASS B OR CLASS C SHARES SEE "FUND SUMMARIES"
FOR MORE INFORMATION ON FEES AND EXPENSES
Because class A shares will normally be the better choice if your investment
qualifies for a reduced sales charge:
o ORDERS FOR CLASS B SHARES FOR $250,000 OR MORE NORMALLY WILL BE TREATED AS
ORDERS FOR CLASS A SHARES
o ORDERS FOR CLASS C SHARES FOR $1 MILLION OR MORE NORMALLY WILL BE TREATED AS
ORDERS FOR CLASS A SHARES
o ORDERS FOR CLASS B OR CLASS C SHARES BY AN INVESTOR ELIGIBLE TO PURCHASE
CLASS A SHARES WITHOUT A FRONT-END SALES CHARGE NORMALLY WILL BE TREATED AS
ORDERS FOR CLASS A SHARES
CLASS B SHARES
If you want all your money to go to work for you immediately, you may prefer
class B shares. Class B shares have no front-end sales charge, however they do
have:
o HIGHER ANNUAL EXPENSES THAN CLASS A SHARES. (SEE "FEES AND EXPENSES" IN THE
"FUND SUMMARIES" SECTION)
o A BACK-END SALES CHARGE, CALLED A "CONTINGENT DEFERRED SALES CHARGE," IF
YOU REDEEM YOUR SHARES WITHIN SIX YEARS OF PURCHASE
o AUTOMATIC CONVERSION TO CLASS A SHARES APPROXIMATELY EIGHT YEARS AFTER
PURCHASE, THEREBY REDUCING FUTURE ANNUAL EXPENSES
CLASS C SHARES
These shares combine some of the characteristics of class A and class B shares.
Class C shares have a low front-end sales charge of 1%, so more of your
investment goes to work immediately than if you had purchased class A shares.
However, class C shares also feature:
o A 1% CONTINGENT DEFERRED SALES CHARGE IF YOU REDEEM YOUR SHARES WITHIN 18
MONTHS OF PURCHASE
o HIGHER ANNUAL EXPENSES THAN CLASS A SHARES. (SEE "FEES AND EXPENSES" IN THE
"FUND SUMMARIES" SECTION)
o NO CONVERSION TO CLASS A SHARES
Because class C shares do not convert to class A shares, they will continue to
have higher annual expenses than class A shares for as long as you hold them.
- --------------------------------------------------------------------------------
12b-1 FEES
Under Rule 12b-1 of the Investment Company Act, each fund is allowed to pay the
fund's distributor an annual fee for the distribution and sale of its shares and
for services provided to shareholders.
FOR 12b-1 FEES ARE EQUAL TO:
- --------------------------------------------------------------------------------
CLASS A SHARES 0.25% OF AVERAGE DAILY NET ASSETS
CLASS B SHARES 1% OF AVERAGE DAILY NET ASSETS
CLASS C SHARES 1% OF AVERAGE DAILY NET ASSETS
Because these fees are paid out of a fund's assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
The class A share 12b-1 fee is a shareholder servicing fee. For class B and
class C shares, a portion of the 12b-1 fee equal to 0.25% of average daily net
assets is a shareholder servicing fee and the rest is a distribution fee.
The funds' distributor uses the shareholder servicing fee to compensate brokers,
participating institutions and "one-stop" mutual fund networks for providing
ongoing services to shareholder accounts. These institutions receive annual fees
equal to 0.25% of a fund's class A, class B and class C share average daily net
assets attributable to shares sold through such institutions. The funds'
distributor also pays institutions which sell class C shares a 0.75% annual
distribution fee beginning one year after the shares are sold. The distributor
may pay additional fees to institutions, using the sales charges it receives, in
exchange for sales and/or administrative services performed on behalf of the
institution's customers.
- --------------------------------------------------------------------------------
CALCULATING YOUR SHARE PRICE
Your purchase price will be based on the fund's net asset value (NAV) per share,
which is generally calculated as of the close of regular trading on the New York
Stock Exchange (usually 3 p.m. Central time) every day the exchange is open.
Your order will be priced at the next NAV calculated after your order is
accepted by the fund.
A fund's NAV is equal to the market value of its investments and other assets,
less any liabilities, divided by the number of fund shares. If market prices are
not readily available for an investment or if the advisor believes they are
unreliable, fair value prices may be determined in good faith using methods
approved by the funds' board of directors.
6 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
POLICIES & SERVICES
Buying Shares (CONTINUED)
CLASS A SHARES
Your purchase price is typically the net asset value of your shares, plus a
front-end sales charge. Sales charges vary depending on the amount of your
purchase. The funds' distributor receives the sales charge you pay and reallows
a portion of the sales charge to your broker or participating institution.
MAXIMUM
SALES CHARGE REALLOWANCE
AS A % OF AS A % OF AS A % OF
PURCHASE NET AMOUNT PURCHASE
PRICE INVESTED PRICE
- --------------------------------------------------------------------------------
LESS THAN $ 50,000 4.50% 4.71% 4.05%
$ 50,000 - $ 99,999 4.00% 4.17% 3.60%
$100,000 - $249,999 3.50% 3.63% 3.15%
$250,000 - $499,999 2.75% 2.83% 2.47%
$500,000 - $999,999 2.00% 2.04% 1.80%
$1 MILLION AND OVER 0% 0% 0%
REDUCING YOUR SALES CHARGE
As shown in the preceding tables, larger purchases of class A shares reduce the
percentage sales charge you pay. You also may reduce your sales charge in the
following ways:
PRIOR PURCHASES. Prior purchases of class A shares of any First American fund
(except a money market fund) will be factored into your sales charge
calculation. For example, let's say you're making a $10,000 investment. If the
current value of all other First American fund class A shares that you hold is
$40,000 or more, your current sales charge is reduced. To receive a reduced
sales charge, you must notify the funds' transfer agent of your prior purchases.
This must be done at the time of purchase, either directly to the transfer agent
in writing or by notifying your broker or financial institution.
PURCHASES BY RELATED ACCOUNTS. Concurrent and prior purchases of class A shares
by certain other accounts also will be combined with your purchase to determine
your sales charge. For example, purchases made by your spouse or children under
age 21 will reduce your sales charge. To receive a reduced sales charge, you
must notify the funds' transfer agent of purchases by any related accounts. This
must be done at the time of purchase, either directly to the transfer agent in
writing or by notifying your broker or financial institution.
LETTER OF INTENT. If you plan to invest $50,000 or more over a 13-month period
in class A shares of any First American fund except the money market funds, you
may reduce your sales charge by signing a non-binding letter of intent. (If you
do not fulfill the letter of intent, you must pay the applicable sales charge.
In addition, if you reduce your sales charge to zero under a letter of intent
and then sell your class A shares within 12 months of their purchase, you may be
charged a contingent deferred sales charge of 1%. See "For Investments of Over
$1 Million.")
More information on these ways to reduce your sales charge appears in the
Statement of Additional Information (SAI). The SAI also contains information on
investors who are eligible to purchase class A shares without a sales charge.
- --------------------------------------------------------------------------------
FOR INVESTMENTS OF OVER $1 MILLION
There is no initial sales charge on class A share purchases of $1 million
or more. However, your broker or financial institution may receive a
commission of up to 1% on your purchase. If such a commission is paid, you
will be assessed a contingent deferred sales charge (CDSC) of 1% if you
sell your shares within 12 months. To find out whether you will be assessed
a CDSC, ask your broker or financial institution. The funds' distributor
receives any CDSC imposed when you sell your class A shares. The CDSC is
based on the value of your shares at the time of purchase or at the time of
sale, whichever is less. The charge does not apply to shares you acquired
by reinvesting your dividend or capital gain distributions.
To help lower your costs, shares that are not subject to a CDSC will be
sold first. Other shares will then be sold in an order that minimizes your
CDSC. The CDSC will be waived for (i) redemptions following the death or
disability of a shareholder and (ii) redemptions that equal the minimum
required distribution from an individual retirement account or other
retirement plan to a shareholder who has reached the age of 70 1/2.
CLASS B SHARES
Your purchase price for class B shares is their net asset value -- there is no
front-end sales charge. However, if you redeem your shares within six years of
purchase, you will pay a back-end sales charge, called a contingent deferred
sales charge (CDSC). Although you pay no front-end sales charge when you buy
class B shares, the funds' distributor pays a sales commission of 4.25% of the
amount invested to brokers and financial institutions which sell class B shares.
The funds' distributor receives any CDSC imposed when you sell your class B
shares.
Your CDSD will be based on the value of your shares at the time of purchase or
at the time of sale, whichever is less. The charge does not apply to shares you
acquired by reinvesting your dividend or capital gain distributions. Shares will
be sold in the order that minimizes your CDSC.
CDSC AS A % OF THE
YEAR SINCE PURCHASE VALUE OF YOUR SHARES
- --------------------------------------------------------------------------------
FIRST 5%
SECOND 5%
THIRD 4%
FOURTH 3%
FIFTH 2%
SIXTH 1%
SEVENTH 0%
EIGHTH 0%
7 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
POLICIES & SERVICES
BUYING SHARES (CONTINUED)
Your class B shares will automatically convert to class A shares, eight years
after the first day of the month following your purchase of shares. For example,
if you purchase class B shares on June 15, 1999, they will convert to class A
shares on June 1, 2007.
The CDSC will be waived for:
o REDEMPTIONS FOLLOWING THE DEATH OR DISABILITY OF A SHAREHOLDER
o REDEMPTIONS THAT EQUAL THE MINIMUM REQUIRED DISTRIBUTION FROM AN INDIVIDUAL
RETIREMENT ACCOUNT OR OTHER RETIREMENT PLAN TO A SHAREHOLDER WHO HAS
REACHED THE AGE OF 70 1/2
o REDEMPTIONS THROUGH A SYSTEMATIC WITHDRAWAL PLAN, AT A RATE OF UP TO 12% A
YEAR OF YOUR ACCOUNT'S VALUE. DURING THE FIRST YEAR, THE 12% ANNUAL LIMIT
WILL BE BASED ON THE VALUE OF YOUR ACCOUNT ON THE DATE THE PLAN IS
ESTABLISHED. THEREAFTER, IT WILL BE BASED ON THE VALUE OF YOUR ACCOUNT ON
THE PRECEDING DECEMBER 31.
CLASS C SHARES
Your purchase price for class C shares is their net asset value plus a front-end
sales charge equal to 1% of the purchase price (1.01% of the net amount
invested). If you redeem your shares within 18 months of purchase, you will be
assessed a contingent deferred sales charge (CDSC) of 1% of the value of your
shares at the time of purchase or at the time of sale, whichever is less. The
CDSC does not apply to shares you acquired by reinvesting your dividend or
capital gain distributions. Shares will be sold in the order that minimizes your
CDSC.
Even though your sales charge is only 1%, the funds' distributor pays a
commission equal to 2% of your purchase price to your broker or participating
institution. The distributor receives any CDSC imposed when you sell your class
C shares.
The CDSC for class C shares will be waived in the same circumstances as the
class B share CDSC. See "Class B Shares" above.
Unlike class B shares, class C shares do not convert to class A shares after a
specified period of time. Therefore, your shares will continue to have higher
annual expenses than class A shares.
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
BY PHONE
You may purchase shares by calling your broker or financial institution, if they
have a sales agreement with the funds' distributor. In many cases, your order
will be effective that day if received by your broker or financial institution
by the close of regular trading on the New York Stock Exchange. In some cases,
however, you will have to transmit your request by an earlier time in order for
your purchase request to be effective that day. This allows your broker or
financial institution time to process your request and transmit it to the fund.
Some financial institutions may charge a fee for helping you purchase shares.
Contact your broker or financial institution for more information.
If you are paying by wire, you may purchase shares by calling 1-800-637-2548
before 3 p.m. Central time. All information will be taken over the telephone,
and your order will be placed when the funds' custodian receives payment by
wire. Wire federal funds as follows:
U.S. BANK NATIONAL ASSOCIATION, MINNEAPOLIS, MN
ABA NUMBER 091000022
FOR CREDIT TO: DST SYSTEMS, INC.:
ACCOUNT NUMBER 160234580266
FOR FURTHER CREDIT TO (INVESTOR NAME AND FUND NAME)
You cannot purchase shares by wire on days when the New York Stock Exchange or
federally chartered banks are closed.
BY MAIL
To purchase shares by mail, simply complete and sign a new account form, enclose
a check made payable to the fund you wish to invest in, and mail both to:
FIRST AMERICAN FUNDS
C/O DST SYSTEMS, INC.
P.O. BOX 419382
KANSAS CITY, MISSOURI 64141-6382
After you have established an account, you may continue to purchase shares by
mailing your check to First American Funds at the same address. Please note the
following:
o ALL PURCHASES MUST BE MADE IN U.S. DOLLARS
o THIRD-PARTY CHECKS, CREDIT CARDS, CREDIT CARD CHECKS AND CASH ARE NOT
ACCEPTED
o IF A CHECK DOES NOT CLEAR YOUR BANK, THE FUNDS RESERVE THE RIGHT TO CANCEL
THE PURCHASE, AND YOU COULD BE LIABLE FOR ANY LOSSES OR FEES INCURRED
- --------------------------------------------------------------------------------
INVESTING AUTOMATICALLY
To purchase shares as part of a savings discipline, you may add to your
investment on a regular basis:
o BY HAVING $100 OR MORE AUTOMATICALLY WITHDRAWN FROM YOUR BANK ACCOUNT ON A
PERIODIC BASIS AND INVESTED IN FUND SHARES
o THROUGH AUTOMATIC MONTHLY EXCHANGES OF YOUR SHARES OF PRIME OBLIGATIONS
FUND, A MONEY MARKET FUND IN THE FIRST AMERICAN FAMILY OF FUNDS. EXCHANGES
MUST BE MADE INTO THE SAME CLASS OF SHARES THAT YOU HOLD IN PRIME
OBLIGATIONS FUND
You may apply for participation in either of these programs through your broker
or financial institution or by calling 1-800-637-2548.
8 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
POLICIES & SERVICES
SELLING SHARES
- --------------------------------------------------------------------------------
HOW TO SELL SHARES
You may sell your shares on any day when the New York Stock Exchange is open.
Your shares will be sold at the next NAV calculated after your order is accepted
by the funds' transfer agent, less any applicable contingent deferred sales
charge.
The proceeds from your sale normally will be mailed or wired within one day, but
in no event more than seven days, after your request is received in proper form.
BY PHONE
If you purchased shares through a broker or financial institution, simply call
them to sell your shares. In many cases, your redemption will be effective that
day if received by your broker or financial institution by the close of regular
trading on the New York Stock Exchange. In some cases, however, you will have to
call by an earlier time in order for your redemption to be effective that day.
This allows your broker or financial institution time to process your request
and transmit it to the fund. Contact your broker or financial institution
directly for more information.
If you did not purchase shares through a broker or financial institution, you
may sell your shares by calling 1-800-637-2548. Proceeds can be wired to your
bank account (if the proceeds are at least $1,000 and you have previously
supplied your bank account information to the transfer agent) or sent to you by
check.
If you recently purchased your shares by check or through the Automated Clearing
House (ACH), proceeds from the sale of those shares may not be available until
your check or ACH payment has cleared, which may take up to 10 calendar days.
BY MAIL
To sell shares by mail, send a written request to your broker or financial
institution, or to the funds' transfer agent at the following address:
FIRST AMERICAN FUNDS
C/O DST SYSTEMS, INC.
P.O. BOX 419382
KANSAS CITY, MISSOURI 64141-6382
Your request should include the following information:
o NAME OF THE FUND
o ACCOUNT NUMBER
o DOLLAR AMOUNT OR NUMBER OF SHARES REDEEMED
o NAME ON THE ACCOUNT
o SIGNATURES OF ALL REGISTERED ACCOUNT OWNERS
Signatures on a written request must be guaranteed if:
o YOU WOULD LIKE THE PROCEEDS FROM THE SALE TO BE PAID TO ANYONE OTHER THAN
TO THE SHAREHOLDER OF RECORD
o YOU WOULD LIKE THE CHECK MAILED TO AN ADDRESS OTHER THAN THE ADDRESS ON THE
FUNDS' RECORDS
o YOUR REDEMPTION REQUEST IS FOR $25,000 OR MORE
A signature guarantee assures that a signature is genuine and protects
shareholders from unauthorized account transfers. Banks, savings and loan
associations, trust companies, credit unions, broker-dealers and member firms of
a national securities exchange may guarantee signatures. Call your financial
institution to determine if it has this capability.
Proceeds from a written redemption request will be sent to you by check.
- --------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWALS
If your account has a value of $5,000 or more, you may redeem a specific dollar
amount from your account on a regular basis. To set up systematic withdrawals,
contact your broker or financial institution.
You should not make systematic withdrawals if you plan to continue investing in
the fund, due to sales charges and tax liabilities.
- --------------------------------------------------------------------------------
REINVESTING AFTER A SALE
If you sell class A shares, you may reinvest in class A shares of that fund or
another First American fund within 31 days without a sales charge. If you sell
shares of any class subject to a CDSC, that charge will be credited to your
account and the reinvested shares will be subject to a CDSC, which will be
determined based on the date of your investment.
- --------------------------------------------------------------------------------
ACCOUNTS WITH LOW BALANCES
Accounts with Low Balances Except for retirement plans, if your account
balance falls below $500 as a result of selling or exchanging shares, you
will be given 60 days to re-establish the minimum balance. If you do not,
the fund may close your account and send you the proceeds, less any
applicable contingent deferred sales charge.
9 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT
- --------------------------------------------------------------------------------
EXCHANGING SHARES
If your investment goals or your financial needs change, you may move from one
First American fund to another. There is no fee to exchange shares.
Generally, you may exchange your shares only for shares of the same class.
However, you may exchange your class A shares for class Y shares of the same or
another First American fund if you subsequently become eligible to participate
in that class (for example, by opening a fiduciary, custody or agency account
with a financial institution which invests in class Y shares).
Exchanges are made based on the net asset value per share of each fund at the
time of the exchange. When you exchange your class A shares of one of the funds
for class A shares of another First American fund, you do not have to pay a
sales charge. When you exchange your class B or class C shares for class B or
class C shares of another First American fund, the time you held the shares of
the "old" fund will be added to the time you hold the shares of the "new" fund
for purposes of determining your CDSC or, in the case of class C shares,
calculating when your shares convert to class A shares.
Before exchanging into any fund, be sure to read its prospectus carefully. A
fund may change or cancel its exchange policies at any time. You will be
notified of any changes. The funds have the right to limit exchanges to four
times per year.
BY PHONE
You may exchange shares by calling your broker, your financial institution, or
the funds' transfer agent, provided that both funds have identical shareholder
registrations. To request an exchange through the funds' transfer agent, call
1-800-637-2548. Your instructions must be received by the funds' transfer agent
before 3 p.m. Central time, or by the time specified by your broker or financial
institution, in order for shares to be exchanged the same day.
BY MAIL
To exchange shares by written request, please follow the procedures under
"Selling Shares." Be sure to include the names of both funds involved in the
exchange.
- --------------------------------------------------------------------------------
TELEPHONE TRANSACTIONS
You may buy, sell or exchange shares by telephone, unless you elected on
your new account form to restrict this privilege. If you wish to reinstate
this option on an existing account, please call Investor Services at
1-800-637-2548 to request the appropriate form.
The funds and their agents will not be responsible for any losses that may
result from acting on wire or telephone instructions that they reasonably
believe to be genuine. The funds and their agents will each follow
reasonable procedures to confirm that instructions received by telephone
are genuine, which may include taping telephone conversations.
It may be difficult to reach the funds by telephone during periods of
unusual market activity. If you are unable to reach the funds or their
agents by telephone, please consider sending written instructions.
- --------------------------------------------------------------------------------
STAYING INFORMED
SHAREHOLDER REPORTS
Shareholder reports are mailed twice a year, in November and May. They include
financial statements, performance information, a message from your portfolio
managers, and, on an annual basis, the auditors' report.
In an attempt to reduce shareholder costs and help eliminate duplication, the
funds will try to limit their mailings to one report for each address that lists
one or more shareholders with the same last name. If you would like additional
copies, please call 1-800-637-2548.
STATEMENTS AND CONFIRMATIONS
Statements summarizing activity in your account are mailed at least quarterly.
Confirms are mailed following each purchase or sale of fund shares.
10 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT (CONTINUED)
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from a fund's net investment income are declared and paid monthly. Any
capital gains are distributed at least once each year.
On the ex-dividend date for a distribution, a fund's share price is reduced by
the amount of the distribution. If you buy shares just before the ex-dividend
date, in effect, you "buy the dividend." You will pay the full price for the
shares and then receive a portion of that price back as a taxable distribution.
Dividend and capital gain distributions will be reinvested in additional shares
of the fund paying the distribution, unless you request cash payments on your
new account form or by writing to the fund. Shares will be priced at the NAV
computed on the ex-dividend date.
- --------------------------------------------------------------------------------
TAXES
Some of the tax consequences of investing in the funds are discussed below. More
information about taxes is in the Statement of Additional Information. However,
because everyone's tax situation is unique, always consult your tax professional
about federal, state and local tax consequences.
TAXES ON DISTRIBUTIONS
Each fund pays its shareholders dividends from its net investment income and any
net capital gains that it has realized. For most investors, fund dividends and
distributions are considered taxable whether they are reinvested or taken in
cash (unless your investment is in an IRA or other tax-advantaged account).
Dividends from a fund's net investment income are taxable as ordinary income.
Distributions of a fund's long-term capital gains are taxable as long-term
gains, regardless of how long you have held your shares. The funds expect that,
as a result of their investment objectives and strategies, their distributions
will consist primarily of capital gains.
TAXES ON TRANSACTIONS
The sale or exchange of fund shares will be a taxable event for you and may
result in a capital gain or loss. The gain or loss will be considered long-term
if you have held your shares for more than one year. A gain or loss on shares
held for one year or less is considered short-term and is taxed at the same
rates as ordinary income.
11 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
MANAGEMENT
INVESTMENT ADVISOR
FIRST AMERICAN ASSET MANAGEMENT
601 SECOND AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55402
U.S. Bank National Association (U.S. Bank), acting through its First American
Asset Management division, is the funds' investment advisor. First American
Asset Management provides investment management services to individuals and
institutions, including corporations, foundations, pensions and retirement
plans. As of December 31, 1998, it had more than $_____ in assets under
management, including investment company assets of approximately $_____. As
investment advisor, First American Asset Management manages the funds' business
and investment activities, subject to the authority of the board of directors.
Each fund pays the investment advisor a monthly fee for providing investment
advisory services. During their most recent fiscal years, the funds paid the
following investment advisory fees to First American Asset Management:
ADVISORY FEE
AS A % OF
AVERAGE DAILY
NET ASSETS
- --------------------------------------------------------------------------------
MID CAP GROWTH FUND %
MID CAP VALUE FUND %
- --------------------------------------------------------------------------------
CUSTODIAN
U.S. BANK NATIONAL ASSOCIATION
U.S. BANK CENTER
180 EAST FIFTH STREET
ST. PAUL, MINNESOTA 55101
ADMINISTRATOR
SEI INVESTMENTS MANAGEMENT CORPORATION
OAKS, PENNSYLVANIA 19456
DISTRIBUTOR
SEI INVESTMENTS DISTRIBUTION CO.
OAKS, PENNSYLVANIA 19456
TRANSFER AGENT
DST SYSTEMS, INC.
330 WEST NINTH STREET
KANSAS CITY, MISSOURI 64105
ADDITIONAL COMPENSATION
In addition to receiving compensation for acting as the funds' investment
advisor as described above, U.S. Bank and its affiliates receive compensation in
connection with the following:
CUSTODY SERVICES. As compensation for acting as the funds' custodian, U.S. Bank
is paid monthly fees equal, on an annual basis, to 0.03% of a fund's average
daily net assets. In addition, U.S. Bank is reimbursed for its out-of-pocket
expenses incurred while providing custody services to the funds.
SUB-ADMINISTRATION SERVICES. U.S. Bank assists the administrator and provides
sub-administration services to the funds. For providing these services, U.S.
Bank is compensated by the funds' administrator at an annual rate of up to
0.05% of each fund's average daily net assets.
TRANSFER AGENT SERVICES. U.S. Bank performs certain transfer agent and dividend
disbursing agent services with respect to the class A, class B and class C
shares of the funds held through accounts at U.S. Bank and its affiliates. The
funds pay U.S. Bank an annual fee of $15 per account for providing these
services.
SECURITIES LENDING SERVICES. In connection with lending their portfolio
securities, the funds pay administrative and custodial fees to U.S. Bank which
are equal to 40% of the funds' income from these securities lending
transactions.
BROKERAGE TRANSACTIONS. When purchasing and selling portfolio securities for
the funds, the funds' investment advisor may place trades through its
affiliates, U.S. Bancorp Investments, Inc. and U.S. Bancorp Piper Jaffray Inc.,
which will earn commissions on such transactions.
SALES OF FUND SHARES. U.S. Bancorp Investments, Inc. and U.S. Bancorp Piper
Jaffray Inc., broker-dealers affiliated with U.S. Bank, have entered into
agreements with the funds' distributor to sell fund shares and will earn
commissions on these sales.
ERISA ACCOUNTS. U.S. Bank 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.
PORTFOLIO MANAGEMENT
Each fund's investments are managed by a team of persons associated with First
American Asset Management.
12 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS
- --------------------------------------------------------------------------------
OBJECTIVES
The funds' objectives, which are described in the "Fund Summaries" section, may
be changed without shareholder approval. If a fund's objectives change, you will
be notified at least 30 days in advance. Please remember: There is no guarantee
that any fund will achieve its objectives.
- --------------------------------------------------------------------------------
INVESTMENT STRATEGIES
The funds' main investment strategies are discussed in the "Fund Summaries"
section. These are the strategies that the funds' investment advisor believes
are most likely to be important in trying to achieve the funds' objectives. You
should be aware that each fund may also use strategies and invest in securities
that are not described in this prospectus, but that are described in the
Statement of Additional Information (SAI). For a copy of the SAI, call Investor
Services at 1-800-637-2548.
TEMPORARY INVESTMENTS
In an attempt to respond to adverse market, economic, political or other
conditions, each fund may invest without limit in cash and in U.S.
dollar-denominated high-quality money market instruments and other short-term
securities, including money market funds advised by the funds' advisor. Being
invested in these securities may keep a fund from participating in a market
upswing and prevent the fund from achieving its investment objectives.
PORTFOLIO TURNOVER
Fund managers may trade securities frequently, resulting, from time to time, in
an annual portfolio turnover rate of over 100%. Trading of securities may
produce capital gains, which are taxable to shareholders when distributed.
Active trading may also increase the amount of commissions or mark-ups to
broker-dealers that the fund pays when it buys and sells securities. The
"Financial Highlights" section of this prospectus shows each fund's historical
portfolio turnover rate.
- --------------------------------------------------------------------------------
RISKS
The main risks of investing in the funds are summarized in the "Fund Summaries"
section. More information about fund risks is presented below.
MARKET RISK
All stocks are subject to price movements due to changes in general economic
conditions, changes in the level of prevailing interest rates, changes in
investor perceptions of the market, or the outlook for overall corporate
profitability.
SECTOR RISK
The stocks of companies within specific industries or sectors of the economy can
periodically perform differently than the overall stock market. This can be due
to changes in such things as the regulatory or competitive environment or to
changes in investor perceptions of a particular industry or sector.
COMPANY RISK
Individual stocks can perform differently than the overall market. This may be a
result of specific factors such as changes in corporate profitability due to the
success or failure of specific products or management strategies, or it may be
due to changes in investor perceptions regarding a company.
RISKS OF MID CAP STOCKS
While stocks of mid cap companies may be slightly less volatile than those of
small cap companies, they still involve substantial risk. Mid cap companies may
have limited product lines, markets or financial resources, and they may be
dependent on a limited management group. Stocks of mid cap companies may be
subject to more abrupt or erratic market movements than those of larger, more
established companies or the market averages in general.
FOREIGN SECURITY RISK
Up to 25% of each fund's total assets may be invested in securities of foreign
issuers which are either listed on a United States stock exchange or represented
by American Depository Receipts. Securities of foreign issuers, even when
dollar-denominated and publicly traded in the United States, may involve risks
not associated with the securities of domestic issuers. For certain foreign
countries, political or social instability or diplomatic developments could
adversely affect the securities. There is also the risk of loss due to
governmental actions such as a change in tax statutes or the modification of
individual property rights. In addition, individual foreign economies may differ
favorably or unfavorably from the U.S. economy.
RISK OF ACTIVE MANAGEMENT
Each fund is actively managed and its performance therefore will reflect in part
the advisor's ability to make investment decisions which are suited to achieving
the fund's investment objectives. Due to their active mangement, the funds could
underperform other mututal funds with similar investment objectives.
RISKS OF SECURITIES LENDING
When a fund loans its portfolio securities, it will receive collateral equal to
at least 100% of the value of the loaned securities. Nevertheless, the fund
risks a delay in the recovery of the loaned securities, or even the loss of
rights in the collateral deposited by the borrower if the borrower should fail
financially. To reduce these
13 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS (CONTINUED)
risks, the funds enter into loan arrangements only with institutions which the
funds' advisor has determined are creditworthy under guidelines established by
the funds' board of directors.
YEAR 2000 ISSUES
Like other mutual funds and business and financial organizations, the funds
could be adversely affected if the computer systems used by the funds' advisor,
other service providers and entities with computer systems that are linked to
fund records do not properly process and calculate date-related information from
and after January 1, 2000. While year 2000-related computer problems could have
a negative effect on the funds, the funds' administrator has undertaken a
program designed to assess and monitor the steps being taken by the funds'
service providers to address year 2000 issues. This program includes seeking
assurances from service providers that their systems are or will be year 2000
compliant and reviewing service providers' periodic reports to monitor their
status concerning their year 2000 readiness and compliance.
The administrator and the advisor also report regularly to the funds' board of
directors concerning their own and other service providers' progress toward year
2000 readiness. Although these reports indicate that service providers are or
expect to be year 2000 compliant, there can be no assurance that this will be
the case in all instances or that year 2000 difficulties experienced by others
in the financial services industry will not impact the funds. In addition, there
can be no assurance that year 2000 difficulties will not have an adverse effect
on the funds' investments or on global markets or economies, generally. The
funds are not bearing any of the expenses incurred by their service providers in
preparing for the year 2000.
14 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about the class A and
class B shares of each fund. There were no class C shares outstanding during the
periods for which information is presented. This information is intended to help
you understand each fund's financial performance for the past five years or, if
shorter, the period of the fund's operations. Some of this information reflects
financial results for a single fund share. Total returns in the tables represent
the rate that you would have earned or lost on an investment in a fund,
excluding sales charges and assuming you reinvested all of your dividends and
distributions.
This information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report, along with the funds' financial statements, is included
in the funds' annual report, which is available upon request.
MID CAP GROWTH FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS A SHARES 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 13.86 $ 12.97 $ 9.63 $ 9.87
-------- -------- -------- --------
Investment Operations:
Net Investment Loss ( 0.08) ( 0.05) ( 0.06) (0.04)
Net Gains (Losses) on Securities
(both realized and unrealized) 2.72 2.18 3.40 (0.20)
-------- -------- -------- --------
Total From Investment Operations 2.64 2.13 3.34 (0.24)
-------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) -- -- -- --
Distributions (from capital gains) ( 1.25) ( 1.24) -- --
-------- -------- -------- --------
Total Distributions ( 1.25) ( 1.24) -- --
-------- -------- -------- --------
Net Asset Value, End of Period $ $ 15.25 $ 13.86 $ 12.97 $ 9.63
======== ======== ======== ========
Total Return % 21.04% 17.84% 34.68% (2.38)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 275 $ 304 $ 253 $ 224
Ratio of Expenses to Average Net Assets % 1.23% 1.18% 1.24% 1.24%
Ratio of Net Income to Average Net Assets % ( 0.55)% ( 0.41)% ( 0.51)% 0.38%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.39% 1.37% 1.42% 1.44%
Ratio of Net Income (Loss) to Average Net Assets (excluding waivers) ( 0.71)% ( 0.60)% ( 0.69)% 0.18%
Portfolio Turnover Rate % 51% 44% 33% 31%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal
period ended
September 30,
CLASS B SHARES 1998(1)
- ---------------------------------------------------------------------------------------
PER SHARE DATA
<S> <C>
Net Asset Value, Beginning of Period $
Investment Operations:
Net Investment Income (Loss)
Net Gains (Losses) on Securities
(both realized and unrealized)
Total From Investment Operations
Less Distributions:
Dividends (from net investment income)
Distributions (from capital gains)
Total Distributions
Net Asset Value, End of Period $
Total Return %
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000)
Ratio of Expenses to Average Net Assets %
Ratio of Net Income to Average Net Assets %
Ratio of Expenses to Average Net Assets (excluding waivers) %
Ratio of Net Income (Loss) to Average Net Assets (excluding waivers) %
Portfolio Turnover Rate %
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Class B shares have been offered since . All ratios for the period have
been annualized.
15 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
MID CAP VALUE FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS A SHARES 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 20.41 $ 17.89 $ 17.30 $ 15.81
------- ------- ------- -------
Investment Operations:
Net Investment Income 0.11 0.20 0.35 0.28
Net Gains (Losses) on Securities
(both realized and unrealized) 6.98 3.94 1.60 2.52
------- ------- ------- -------
Total From Investment Operations 7.09 4.14 1.95 2.80
------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) ( 0.11) ( 0.20) ( 0.34) ( 0.28)
Distributions (from capital gains) ( 3.20) ( 1.42) ( 1.02) ( 1.03)
-------- -------- -------- -------
Total Distributions ( 3.31) ( 1.62) ( 1.36) ( 1.31)
-------- -------- -------- -------
Net Asset Value, End of Period $ $ 24.19 $ 20.41 $ 17.89 $ 17.30
======== ======== ======== =======
Total Return % 39.93% 25.23% 12.63% 18.70%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 35,207 $ 17,987 $ 11,609 $ 7,333
Ratio of Expenses to Average Net Assets % 1.14% 1.13% 1.09% 0.81%
Ratio of Net Income to Average Net Assets % 0.58% 1.06% 2.08% 1.88%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.15% 1.13% 1.20% 1.23%
Ratio of Net Income to Average Net Assets (excluding waivers) 0.57% 1.06% 1.97% 1.46%
Portfolio Turnover Rate % 82% 143% 72% 116%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS B SHARES 1998 1997 1996 1995 1994(1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 20.31 $ 17.83 $17.29 $ 16.51
------- ------- ------- -------
Investment Operations:
Net Investment Income 0.02 0.09 0.29 0.01
Net Gains (Losses) on Securities
(both realized and unrealized) 6.85 3.91 1.51 0.85
------- ------- ------- -------
Total From Investment Operations 6.87 4.00 1.80 0.86
------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) ( 0.02) ( 0.10) ( 0.24) ( 0.08)
Distributions (from capital gains) ( 3.20) ( 1.42) ( 1.02) --
------- -------- ------- --------
Total Distributions ( 3.22) ( 1.52) ( 1.26) ( 0.08)
------- -------- ------- --------
Net Asset Value, End of Period $ $ 23.96 $ 20.31 $ 17.83 $ 17.29
======= ======== ======= ========
Total Return % 38.81% 24.35% 11.64% 5.22%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $36,649 $12,847 $ 4,847 $ 370
Ratio of Expenses to Average Net Assets % 1.90% 1.88% 1.88% 1.68%
Ratio of Net Income to Average Net Assets % ( 0.18)% 0.25% 1.22% 0.47%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.90% 1.88% 1.95% 2.03%
Ratio of Net Income (Loss) to Average Net Assets (excluding
waivers) ( 0.18)% 0.25% 1.15% 0.12%
Portfolio Turnover Rate % 82% 143% 72% 116%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class B shares have been offered since August 15, 1994. All ratios for the
period have been annualized.
16 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
FOR MORE INFORMATION
More information about the funds is available in the funds' Statement of
Additional Information and annual and semiannual reports.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more details about the funds and their policies. A current SAI
is on file with the Securities and Exchange Commission (SEC) and is incorporated
into this prospectus by reference (which means that it is legally considered
part of this prospectus).
ANNUAL AND SEMIANNUAL REPORTS
Additional information about the funds' investments is available in the funds'
annual and semiannual reports to shareholders. In the funds' annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the funds' performance during their last fiscal year.
You can obtain a free copy of the funds' SAI and/or free copies of the funds'
most recent annual or semiannual reports by calling Investor Services at
1-800-637-2548. The material you request will be sent by first-class mail or
other means designed to ensure equally prompt delivery, within three business
days of receipt of the request.
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC, or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. For more information, call
1-800-SEC-0330.
Information about the funds is also available on the Internet. Text-only
versions of fund documents can be viewed online or downloaded from the SEC's
Internet site at http://www.sec.gov.
SEC file number: 811-05309
FAIF-1001 (9/1998)
<PAGE>
FEBRUARY 1, 1999
MID CAP FUNDS
CLASS Y SHARES
MID CAP GROWTH FUND
MID CAP VALUE FUND
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of these funds, or determined if the
information in this prospectus is accurate or complete. Any statement to the
contrary is a criminal offense.
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(R)
<PAGE>
TABLE OF CONTENTS
FUND SUMMARIES
- --------------------------------------------------------------------------------
Mid Cap Growth Fund 2
- --------------------------------------------------------------------------------
Mid Cap Value Fund 4
- --------------------------------------------------------------------------------
POLICIES & SERVICES
- --------------------------------------------------------------------------------
Buying and Selling Shares 6
- --------------------------------------------------------------------------------
Managing Your Investment 7
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Management 8
- --------------------------------------------------------------------------------
More About The Funds 9
- --------------------------------------------------------------------------------
Financial Highlights 11
- --------------------------------------------------------------------------------
FOR MORE INFORMATION Back Cover
- --------------------------------------------------------------------------------
<PAGE>
FUND SUMMARIES
INTRODUCTION
This section of the prospectus describes the objectives of the First American
Mid Cap Funds, summarizes the main investment strategies used by each fund in
trying to achieve its objectives, and highlights the risks involved with these
strategies. It also provides you with information about the performance, fees
and expenses of the funds.
AN INVESTMENT IN THE FUNDS IS NOT A DEPOSIT OF U.S. BANK NATIONAL ASSOCIATION
AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
1 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
FUND SUMMARIES
MID CAP GROWTH FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Mid Cap Growth Fund has an objective of growth of capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Mid Cap Growth Fund invests primarily in common
stocks of mid cap companies, defined as companies that have market
capitalizations at the time of purchase within the range of the market
capitalizations of companies constituting the Russell Midcap Index. The advisor
will select companies that it believes exhibit the potential for superior growth
based on factors such as:
o ABOVE AVERAGE GROWTH IN REVENUE AND EARNINGS
o STRONG COMPETITIVE POSITION
o STRONG MANAGEMENT
o SOUND FINANCIAL CONDITION
The fund may also invest in preferred stocks and corporate debt securities which
are convertible into common stocks. Up to 25% of the fund's total assets may be
invested in securities of foreign issuers which are either listed on a United
States stock exchange or represented by American Depositary Receipts.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition, growth
stocks and/or mid cap stocks may underperform the market as a whole.
RISKS OF MID CAP STOCKS
While stocks of mid cap companies may be slightly less volatile than those of
small cap companies, they still involve substantial risk and their prices may be
subject to more abrupt or erratic movements than those of larger, more
established companies or the market averages in general.
FOREIGN SECURITY RISK
Securities of foreign issuers, even when dollar-denominated and publicly traded
in the United States, may involve risks not associated with the securities of
domestic issuers, including the risks of adverse currency fluctuations and of
political or social instability or diplomatic developments that could adversely
affect the securities.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
Because class Y shares have not been offered for a full calendar year,
information in the chart and the table is for the fund's class A shares, which
are offered through another prospectus. The classes will have substantially
similar returns, because they are invested in the same portfolio of securities.
However, class Y shares will have higher returns because their expenses are
lower.
2 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
FUND SUMMARIES
MID CAP GROWTH FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) Performance prior to
August 10, 1998,
[BAR CHART] represents that of the
Emerging Growth Fund, a
1991 65.43% series of Piper Funds Inc.
1992 7.30%
1993 18.46% (2) Class A shares have been
1994 -4.95% offered since April 23,
1995 39.37% 1990. The since inception
1996 11.88% performance of the index
1997 23.40% is calculated from the
1998 month end following such
date.
(3) Class A share returns
reflect a 4.5% front-end
sales charge. Class Y
shares have no sales
charges.
(4) An unmanaged index
comprised of the 800
smallest securities in the
Russell 1000 Index, which
represent approximately
35% of the total market
capitalization.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since
AS OF 12/31/98(1) One Year Five Years Inception(2)
- --------------------------------------------------------------------------------
Mid Cap Growth Fund (Class A)(3) % % %
- --------------------------------------------------------------------------------
Russell Midcap Index(4) % % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
during the fiscal year ended September 30, 1998.(1)
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) THE ADVISOR INTENDS TO WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT
TOTAL FUND OPERATING EXPENSES DO NOT EXCEED 0.90%. FEE WAIVERS MAY BE
DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
3 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
FUND SUMMARIES
MID CAP VALUE FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Mid Cap Value Fund has an objective of capital appreciation.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Mid Cap Value Fund invests primarily in common
stocks of mid cap companies, defined as companies that have market
capitalizations at the time of purchase within the range of the market
capitalizations of companies constituting the Russell Midcap Index. In selecting
stocks, the fund's advisor invests in securities it believes:
o ARE UNDERVALUED RELATIVE TO OTHER SECURITIES IN THE SAME INDUSTRY OR MARKET;
o EXHIBIT GOOD OR IMPROVING FUNDAMENTALS; AND
o EXHIBIT AN IDENTIFIABLE CATALYST THAT COULD CLOSE THE GAP BETWEEN MARKET VALUE
AND FAIR VALUE OVER THE NEXT ONE TO TWO YEARS.
The fund also may invest in preferred stocks and corporate debt securities which
are convertible into common stocks. In an attempt to reduce risk, the fund may
purchase put and call options on stocks and stock indices. The fund also may
write covered call options on securities it owns and it may write call options
on stock indices.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition, value
stocks and/or mid cap stocks may underperform the market as a whole.
RISKS OF MID CAP STOCKS
While stocks of mid cap companies may be slightly less volatile than those of
small cap companies, they still involve substantial risk and their prices may be
subject to more abrupt or erratic movements than those of larger, more
established companies or the market averages in general.
RISKS OF OPTIONS TRANSACTIONS
The fund purchases put and call options only for "hedging" purposes -- for the
purpose of reducing risk to the fund. Successful use of a hedging instrument
depends on the advisor's ability to correctly forecast the direction of market
movements. In the case of an incorrect market forecast, the use of options will
reduce or eliminate gains. In addition, changes in the price of an option may
not correlate perfectly with changes in the market value of the securities
subject to the hedge. Nevertheless, the fund's loss exposure in purchasing an
option is limited to the sum of the premium paid and any commission or other
transaction expense associated with purchasing the option.
When the fund writes a call option on a security, it runs the risk that it will
not realize the benefit of an increase in the market price of the security above
the exercise price of the option. Writing a call option on a stock index entails
the risk of an imperfect correlation between movements of the index and
movements in the price of the fund's portfolio securities.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
4 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
FUND SUMMARIES
MID CAP VALUE FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) Class Y shares have been
offered since 2/4/94. The
[BAR CHART] since inception
performance of the index
1995 is calculated from the
1996 month end following such
1997 date.
1998
(2) An unmanaged index
comprised of the 800
smallest securities in the
Russell 1000 Index, which
represent approximately
35% of the total market
capitalization.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98 One Year Since Inception(1)
- --------------------------------------------------------------------------------
Mid Cap Value Fund % %
- --------------------------------------------------------------------------------
Russell Midcap Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
during the fiscal year ended September 30, 1998.(1)
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) THE ADVISOR INTENDS TO WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT
TOTAL FUND OPERATING EXPENSES DO NOT EXCEED 0.90%. FEE WAIVERS MAY BE
DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
5 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
POLICIES & SERVICES
BUYING AND SELLING SHARES
Class Y shares are offered through banks and other financial institutions that
have entered into sales agreements with the funds' distributor. Class Y shares
are available to these financial institutions for the investment of their own
funds. Class Y shares also are available to certain accounts for which the
financial institution acts in a fiduciary, agency or custodial capacity, such as
certain trust accounts and investment advisory accounts. To find out whether you
may purchase class Y shares, contact your financial institution.
- --------------------------------------------------------------------------------
CALCULATING YOUR SHARE PRICE
Your purchase price will be equal to the fund's net asset value (NAV) per share,
which is generally calculated as of the close of regular trading on the New York
Stock Exchange (usually 3 p.m. Central time) every day the exchange is open.
A fund's NAV is equal to the market value of its investments and other assets,
less any liabilities, divided by the number of fund shares. If market prices are
not readily available for an investment or if the advisor believes they are
unreliable, fair value prices may be determined in good faith using methods
approved by the funds' board of directors.
- --------------------------------------------------------------------------------
HOW TO BUY AND SELL SHARES
You may purchase or sell shares by calling your financial institution.
When purchasing shares, payment must be made by wire transfer, which can be
arranged by your financial institution. Because purchases must be paid for by
wire transfer, you can purchase shares only on days when both the New York Stock
Exchange and federally chartered banks are open. You may sell your shares on any
day when the New York Stock Exchange is open.
Purchase orders and redemption requests must be received by your financial
institution by the time specified by the institution to be assured same day
processing. In order for shares to be purchased at that day's price, the funds
must receive your purchase order by 3:00 p.m. Central time and the funds'
custodian must receive federal funds before the close of business. In order for
shares to be sold at that day's price, the funds must receive your redemption
request by 3:00 p.m. Central time. It is the responsibility of your financial
institution to promptly transmit orders to the funds.
If the funds receive your redemption request by 3:00 p.m. Central time, payment
of your redemption proceeds will ordinarily be made by wire on the next business
day. It is possible, however, that payment could be delayed by up to seven days.
- --------------------------------------------------------------------------------
HOW TO EXCHANGE SHARES
If your investment goals or your financial needs change, you may exchange your
shares for class Y shares of another First American fund. Exchanges will be made
at the net asset value per share of each fund at the time of the exchange. There
is no fee to exchange shares. If you are no longer eligible to hold class Y
shares, for example, if you decide to discontinue your fiduciary, agency or
custodian account, you may exchange your shares for class A shares at net asset
value. Class A shares have higher expenses than class Y shares.
To exchange your shares, call your financial institution. In order for your
shares to be exchanged the same day, you must call your financial institution by
the time specified by the institution and your exchange order must be received
by the funds by 3:00 p.m. Central time. It is the responsibility of your
financial institution to promptly transmit your exchange order to the funds.
Before exchanging into any fund, be sure to read its prospectus carefully. A
fund may change or cancel its exchange policies at any time. You will be
notified of any changes. The funds have the right to limit exchanges to four
times per year.
6 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT
- --------------------------------------------------------------------------------
STAYING INFORMED
SHAREHOLDER REPORTS
Shareholder reports are mailed twice a year, in November and May. They include
financial statements, performance information, a message from your portfolio
managers, and, on an annual basis, the auditors' report.
In an attempt to reduce shareholder costs and help eliminate duplication, the
funds will try to limit their mailings to one report for each address that lists
one or more shareholders with the same last name. If you would like additional
copies, please call 1-800-637-2548.
STATEMENTS AND CONFIRMATIONS
Statements summarizing activity in your account are mailed at least quarterly.
Confirms are mailed following each purchase or sale of fund shares.
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from a fund's net investment income are declared and paid monthly. Any
capital gains are distributed at least once each year.
On the ex-dividend date for a distribution, a fund's share price is reduced by
the amount of the distribution. If you buy shares just before the ex-dividend
date, in effect, you "buy the dividend." You will pay the full price for the
shares and then receive a portion of that price back as a taxable distribution.
Dividend and capital gain distributions will be reinvested in additional shares
of the fund paying the distribution, unless you request cash payments on your
new account form or by writing to the fund. Shares will be priced at the NAV
computed on the ex-dividend date.
- --------------------------------------------------------------------------------
TAXES
Some of the tax consequences of investing in the funds are discussed below. More
information about taxes is in the Statement of Additional Information. However,
because everyone's tax situation is unique, always consult your tax professional
about federal, state and local tax consequences.
TAXES ON DISTRIBUTIONS
Each fund pays its shareholders dividends from its net investment income and any
net capital gains that it has realized. For most investors, fund dividends and
distributions are considered taxable whether they are reinvested or taken in
cash (unless your investment is in an IRA or other tax-advantaged account).
Dividends from a fund's net investment income are taxable as ordinary income.
Distributions of a fund's long-term capital gains are taxable as long-term
gains, regardless of how long you have held your shares. The funds expect that,
as a result of their investment objectives and strategies, their distributions
will consist primarily of capital gains.
TAXES ON TRANSACTIONS
The sale or exchange of fund shares will be a taxable event for you and may
result in a capital gain or loss. The gain or loss will be considered long-term
if you have held your shares for more than one year. A gain or loss on shares
held for one year or less is considered short-term and is taxed at the same
rates as ordinary income.
7 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
MANAGEMENT
INVESTMENT ADVISOR
FIRST AMERICAN ASSET MANAGEMENT
601 SECOND AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55402
U.S. Bank National Association (U.S. Bank), acting through its First American
Asset Management division, is the funds' investment advisor. First American
Asset Management provides investment management services to individuals and
institutions, including corporations, foundations, pensions and retirement
plans. As of December 31, 1998, it had more than $ in assets under management,
including investment company assets of approximately $ . As investment advisor,
First American Asset Management manages the funds' business and investment
activities, subject to the authority of the board of directors. Each fund pays
the investment advisor a monthly fee for providing investment advisory services.
During their most recent fiscal years, the funds paid the following investment
advisory fees to First American Asset Management:
ADVISORY FEE
AS A % OF
AVERAGE DAILY
NET ASSETS
- --------------------------------------------------------------------------------
MID CAP GROWTH FUND %
MID CAP VALUE FUND %
- --------------------------------------------------------------------------------
CUSTODIAN
U.S. BANK NATIONAL ASSOCIATION
U.S. BANK CENTER
180 EAST FIFTH STREET
ST. PAUL, MINNESOTA 55101
ADMINISTRATOR
SEI INVESTMENTS MANAGEMENT CORPORATION
OAKS, PENNSYLVANIA 19456
DISTRIBUTOR
SEI INVESTMENTS DISTRIBUTION CO.
OAKS, PENNSYLVANIA 19456
TRANSFER AGENT
DST SYSTEMS, INC.
330 WEST NINTH STREET
KANSAS CITY, MISSOURI 64105
ADDITIONAL COMPENSATION
In addition to receiving compensation for acting as the funds' investment
advisor as described above, U.S. Bank and its affiliates receive compensation in
connection with the following:
CUSTODY SERVICES. As compensation for acting as the funds' custodian, U.S. Bank
is paid monthly fees equal, on an annual basis, to 0.03% of a fund's average
daily net assets. In addition, U.S. Bank is reimbursed for its out-of-pocket
expenses incurred while providing custody services to the funds.
SUB-ADMINISTRATION SERVICES. U.S. Bank assists the administrator and provides
sub-administration services to the funds. For providing these services, U.S.
Bank is compensated by the funds' administrator at an annual rate of up to
0.05% of each fund's average daily net assets.
SECURITIES LENDING SERVICES. In connection with lending their portfolio
securities, the funds pay administrative and custodial fees to U.S. Bank which
are equal to 40% of the funds' income from these securities lending
transactions.
BROKERAGE TRANSACTIONS. When purchasing and selling portfolio securities for
the funds, the funds' investment advisor may place trades through its
affiliates, U.S. Bancorp Investments, Inc. and U.S. Bancorp Piper Jaffray Inc.,
which will earn commissions on such transactions.
ERISA ACCOUNTS. U.S. Bank 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.
PORTFOLIO MANAGEMENT
Each fund's investments are managed by a team of persons associated with First
American Asset Management.
8 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS
- --------------------------------------------------------------------------------
OBJECTIVES
The funds' objectives, which are described in the "Fund Summaries" section, may
be changed without shareholder approval. If a fund's objectives change, you will
be notified at least 30 days in advance. Please remember: There is no guarantee
that any fund will achieve its objectives.
- --------------------------------------------------------------------------------
INVESTMENT STRATEGIES
The funds' main investment strategies are discussed in the "Fund Summaries"
section. These are the strategies that the funds' investment advisor believes
are most likely to be important in trying to achieve the funds' objectives. You
should be aware that each fund may also use strategies and invest in securities
that are not described in this prospectus, but that are described in the
Statement of Additional Information (SAI). For a copy of the SAI, call Investor
Services at 1-800-637-2548.
TEMPORARY INVESTMENTS
In an attempt to respond to adverse market, economic, political or other
conditions, each fund may invest without limit in cash and in U.S.
dollar-denominated high-quality money market instruments and other short-term
securities, including money market funds advised by the funds' advisor. Being
invested in these securities may keep a fund from participating in a market
upswing and prevent the fund from achieving its investment objectives.
PORTFOLIO TURNOVER
Fund managers may trade securities frequently, resulting, from time to time, in
an annual portfolio turnover rate of over 100%. Trading of securities may
produce capital gains, which are taxable to shareholders when distributed.
Active trading may also increase the amount of commissions or mark-ups to
broker-dealers that the fund pays when it buys and sells securities. The
"Financial Highlights" section of this prospectus shows each fund's historical
portfolio turnover rate.
- --------------------------------------------------------------------------------
RISKS
The main risks of investing in the funds are summarized in the "Fund Summaries"
section. More information about fund risks is presented below.
MARKET RISK
All stocks are subject to price movements due to changes in general economic
conditions, changes in the level of prevailing interest rates, changes in
investor perceptions of the market, or the outlook for overall corporate
profitability.
SECTOR RISK
The stocks of companies within specific industries or sectors of the economy can
periodically perform differently than the overall stock market. This can be due
to changes in such things as the regulatory or competitive environment or to
changes in investor perceptions of a particular industry or sector.
COMPANY RISK
Individual stocks can perform differently than the overall market. This may be a
result of specific factors such as changes in corporate profitability due to the
success or failure of specific products or management strategies, or it may be
due to changes in investor perceptions regarding a company.
RISKS OF MID CAP STOCKS
While stocks of mid cap companies may be slightly less volatile than those of
small cap companies, they still involve substantial risk. Mid cap companies may
have limited product lines, markets or financial resources, and they may be
dependent on a limited management group. Stocks of mid cap companies may be
subject to more abrupt or erratic market movements than those of larger, more
established companies or the market averages in general.
FOREIGN SECURITY RISK
Up to 25% of each fund's total assets may be invested in securities of foreign
issuers which are either listed on a United States stock exchange or represented
by American Depository Receipts. Securities of foreign issuers, even when
dollar-denominated and publicly traded in the United States, may involve risks
not associated with the securities of domestic issuers. For certain foreign
countries, political or social instability or diplomatic developments could
adversely affect the securities. There is also the risk of loss due to
governmental actions such as a change in tax statutes or the modification of
individual property rights. In addition, individual foreign economies may differ
favorably or unfavorably from the U.S. economy.
9 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS (CONTINUED)
RISK OF ACTIVE MANAGEMENT
Each fund is actively managed and its performance therefore will reflect in part
the advisor's ability to make investment decisions which are suited to achieving
the fund's investment objectives. Due to their active mangement, the funds could
underperform other mututal funds with similar investment objectives.
RISKS OF SECURITIES LENDING
When a fund loans its portfolio securities, it will receive collateral equal to
at least 100% of the value of the loaned securities. Nevertheless, the fund
risks a delay in the recovery of the loaned securities, or even the loss of
rights in the collateral deposited by the borrower if the borrower should fail
financially. To reduce these risks, the funds enter into loan arrangements only
with institutions which the funds' advisor has determined are creditworthy under
guidelines established by the funds' board of directors.
YEAR 2000 ISSUES
Like other mutual funds and business and financial organizations, the funds
could be adversely affected if the computer systems used by the funds' advisor,
other service providers and entities with computer systems that are linked to
fund records do not properly process and calculate date-related information from
and after January 1, 2000. While year 2000-related computer problems could have
a negative effect on the funds, the funds' administrator has undertaken a
program designed to assess and monitor the steps being taken by the funds'
service providers to address year 2000 issues. This program includes seeking
assurances from service providers that their systems are or will be year 2000
compliant and reviewing service providers' periodic reports to monitor their
status concerning their year 2000 readiness and compliance.
The administrator and the advisor also report regularly to the funds' board of
directors concerning their own and other service providers' progress toward year
2000 readiness. Although these reports indicate that service providers are or
expect to be year 2000 compliant, there can be no assurance that this will be
the case in all instances or that year 2000 difficulties experienced by others
in the financial services industry will not impact the funds. In addition, there
can be no assurance that year 2000 difficulties will not have an adverse effect
on the funds' investments or on global markets or economies, generally. The
funds are not bearing any of the expenses incurred by their service providers in
preparing for the year 2000.
10 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about the class Y shares
of each fund. This information is intended to help you understand each fund's
financial performance for the past five years or, if shorter, the period of the
fund's class Y share operations. Some of this information reflects financial
results for a single fund share. Total returns in the tables represent the rate
that you would have earned or lost on an investment in a fund, assuming you
reinvested all of your dividends and distributions.
This information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report, along with the funds' financial statements, is included
in the funds' annual report, which is available upon request.
MID CAP GROWTH FUND
<TABLE>
<CAPTION>
Fiscal ended
September 30,
1998(1)
- ------------------------------------------------------------------------------------
<S> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $
Investment Operations:
Net Investment Loss
Net Gains (Losses) on Securities
(both realized and unrealized)
Total From Investment Operations
Less Distributions:
Dividends (from net investment income)
Distributions (from capital gains)
Total Distributions
Net Asset Value, End of Period $
Total Return %
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $
Ratio of Expenses to Average Net Assets %
Ratio of Net Income to Average Net Assets %
Ratio of Expenses to Average Net Assets (excluding waivers) %
Ratio of Net Income (Loss) to Average Net Assets (excluding waivers)
Portfolio Turnover Rate %
- ------------------------------------------------------------------------------------
</TABLE>
(1) Class Y shares have been offered since July 31, 1998. All ratios for the
period have been annualized.
11 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
MID CAP VALUE FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994(1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 20.43 $ 17.89 $ 17.30 $ 16.34
-------- -------- -------- --------
Investment Operations:
Net Investment Income 0.16 0.25 0.38 0.22
Net Gains (Losses) on Securities
(both realized and unrealized) 6.98 3.95 1.61 0.96
-------- -------- -------- --------
Total From Investment Operations 7.14 4.20 1.99 1.18
-------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.16) (0.24) (0.38) (0.22)
Distributions (from capital gains) (3.20) (1.42) (1.02) --
-------- -------- -------- --------
Total Distributions (3.36) (1.66) (1.40) (0.22)
-------- -------- -------- --------
Net Asset Value, End of Period $ $ 24.21 $ 20.43 $ 17.89 $ 17.30
======== ======== ======== ========
Total Return % 40.25% 25.61% 12.84% 7.31%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $509,308 $247,828 $201,786 $128,806
Ratio of Expenses to Average Net Assets % 0.89% 0.88% 0.88% 0.79%
Ratio of Net Income to Average Net Assets % 0.82% 1.35% 2.30% 1.93%
Ratio of Expenses to Average Net Assets (excluding waivers) % 0.90% 0.88% 0.95% 1.03%
Ratio of Net Income to Average Net Assets (excluding waivers) % % % % %
Portfolio Turnover Rate % 82% 143% 72% 116%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class Y shares have been offered since February 4, 1994. All ratios for the
period have been annualized.
12 PROSPECTUS - FIRST AMERICAN MID CAP FUNDS
<PAGE>
FOR MORE INFORMATION
More information about the funds is available in the funds' Statement of
Additional Information and annual and semiannual reports.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more details about the funds and their policies. A current SAI
is on file with the Securities and Exchange Commission (SEC) and is incorporated
into this prospectus by reference (which means that it is legally considered
part of this prospectus).
ANNUAL AND SEMIANNUAL REPORTS
Additional information about the funds' investments is available in the funds'
annual and semiannual reports to shareholders. In the funds' annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the funds' performance during their last fiscal year.
You can obtain a free copy of the funds' SAI and/or free copies of the funds'
most recent annual or semiannual reports by calling Investor Services at
1-800-637-2548. The material you request will be sent by first-class mail or
other means designed to ensure equally prompt delivery, within three business
days of receipt of the request.
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC, or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. For more information, call
1-800-SEC-0330.
Information about the funds is also available on the Internet. Text-only
versions of fund documents can be viewed online or downloaded from the SEC's
Internet site at http://www.sec.gov.
SEC file number: 811-05309
FAIF-1001 (9/1998)
<PAGE>
FEBRUARY 1, 1999
SMALL CAP FUNDS
CLASS A, CLASS B AND CLASS C SHARES
MICRO CAP VALUE FUND
REGIONAL EQUITY FUND
SMALL CAP GROWTH FUND
SMALL CAP VALUE FUND
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of these funds, or determined if the
information in this prospectus is accurate or complete. Any statement to the
contrary is a criminal offense.
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(R)
<PAGE>
TABLE OF CONTENTS
FUND SUMMARIES
- --------------------------------------------------------------------------------
Micro Cap Value Fund 2
- --------------------------------------------------------------------------------
Regional Equity Fund 4
- --------------------------------------------------------------------------------
Small Cap Growth Fund 6
- --------------------------------------------------------------------------------
Small Cap Value Fund 8
- --------------------------------------------------------------------------------
POLICIES & SERVICES
- --------------------------------------------------------------------------------
Buying Shares 10
- --------------------------------------------------------------------------------
Selling Shares 13
- --------------------------------------------------------------------------------
Managing Your Investment 14
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Management 16
- --------------------------------------------------------------------------------
More About The Funds 17
- --------------------------------------------------------------------------------
Financial Highlights 19
- --------------------------------------------------------------------------------
FOR MORE INFORMATION Back Cover
- --------------------------------------------------------------------------------
<PAGE>
FUND SUMMARIES
INTRODUCTION
This section of the prospectus describes the objectives of the First American
Small Cap Funds, summarizes the main investment strategies used by each fund in
trying to achieve its objectives, and highlights the risks involved with these
strategies. It also provides you with information about the performance, fees
and expenses of the funds.
AN INVESTMENT IN THE FUNDS IS NOT A DEPOSIT OF U.S. BANK NATIONAL ASSOCIATION
AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
1 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
FUND SUMMARIES
MICRO CAP VALUE FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Micro Cap Value Fund has an objective of capital appreciation.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Micro Cap Value Fund invests primarily in common
stocks of very small capitalization companies, defined as companies that have
market capitalizations of less than $500 million at the time of purchase. In
selecting stocks, the fund's advisor invests in securities it believes:
o ARE UNDERVALUED RELATIVE TO OTHER SECURITIES IN THE SAME INDUSTRY OR MARKET;
o EXHIBIT GOOD OR IMPROVING FUNDAMENTALS; AND
o EXHIBIT AN IDENTIFIABLE CATALYST THAT COULD CLOSE THE GAP BETWEEN MARKET
VALUE AND FAIR VALUE OVER THE NEXT ONE TO TWO YEARS.
The fund also may invest in preferred stocks and corporate debt securities which
are convertible into common stocks.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition, value
stocks and/or stocks of very small capitalization companies may underperform the
market as a whole.
RISKS OF MICRO CAP STOCKS
Stocks of very small capitalization companies involve substantial risk. These
stocks historically have experienced greater price volatility than stocks of
larger-capitalization companies, and they may be expected to do so in the
future.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's class A shares has varied
from year to year. The performance of class B shares will be lower due to their
higher expenses. Sales charges are not reflected in the chart; if they had been,
returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
2 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
FUND SUMMARIES
MICRO CAP VALUE FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) An unmanaged index
comprised of the smallest
[BAR CHART] 2000 companies in the
Russell 3000 Index. The
1998 latter index is composed
of 3000 large U.S.
companies representing
approximately 98% of the
investable U.S. equity
market.
(2) The since inception
performance of the index
is calculated from the
month end following the
fund's inception.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception(2)
AS OF 12/31/98 One Year (8/8/97)
- --------------------------------------------------------------------------------
Micro Cap Value Fund (Class A) % %
- --------------------------------------------------------------------------------
Micro Cap Value Fund (Class B) % %
- --------------------------------------------------------------------------------
Russell 2000 Index(1) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show expenses before
any waivers during the fiscal year ended September 30, 1998.(1)
CLASS A CLASS B
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)
AS A % OF OFFERING PRICE 4.50%(2) 0.00%
MAXIMUM DEFERRED SALES CHARGE (LOAD)
AS A % OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS 0.00%(3) 5.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70% 0.70%
Distribution and Service (12b-1) Fees 0.25% 1.00%
Other Expenses % %
TOTAL % %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
1.15% AND 1.90%, RESPECTIVELY, FOR CLASS A AND CLASS B SHARES. FEE WAIVERS
MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. See "Buying Shares
-- Calculating Your Share Price."
(3) Class A share investments of $1 million or more on which no front-end sales
charge is paid may be subject to a contingent deferred sales charge. See
"Buying Shares -- Calculating Your Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
CLASS B CLASS B
assuming assuming no
redemption redemption
at end of at end of
CLASS A each period each period
- --------------------------------------------------------------------------------
1 year $ $ $
3 years
5 years
10 years
3 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
FUND SUMMARIES
REGIONAL EQUITY FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Regional Equity Fund has an objective of capital appreciation.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Regional Equity Fund invests primarily in common
stocks of small capitalization companies headquartered in Minnesota, North and
South Dakota, Montana, Wisconsin, Michigan, Iowa, Nebraska, Colorado and
Illinois. Small capitalization companies are defined as companies that have
market capitalizations of less than $1 billion at the time of purchase. The fund
may also invest in preferred stocks and corporate debt securities which are
convertible into common stocks.
In selecting stocks, the fund's advisor invests in securities it believes:
o ARE UNDERVALUED RELATIVE TO OTHER SECURITIES IN THE SAME INDUSTRY OR MARKET;
o EXHIBIT GOOD OR IMPROVING FUNDAMENTALS; AND
o EXHIBIT AN IDENTIFIABLE CATALYST THAT COULD CLOSE THE GAP BETWEEN MARKET
VALUE AND FAIR VALUE OVER THE NEXT ONE TO TWO YEARS.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition, value
stocks and/or stocks of small capitalization companies may underperform the
market as a whole.
RISKS OF SMALL CAP STOCKS
Stocks of small capitalization companies involve substantial risk. These stocks
historically have experienced greater price volatility than stocks of
larger-capitalization companies, and they may be expected to do so in the
future.
RISKS OF REGIONAL CONCENTRATION
The fund's policy of concentrating its investments in a geographic region means
that it will be subject to adverse economic, political or other developments in
that region.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's class A shares has varied
from year to year. The performance of class B shares will be lower due to their
higher expenses. Sales charges are not reflected in the chart; if they had been,
returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
4 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
FUND SUMMARIES
REGIONAL EQUITY FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The fund commenced
operations on 12/14/92.
Class B Shares have been
[BAR CHART] offered since 8/15/94. The
since inception
1993 21.06% performance of the index
1994 1.69% is calculated from the
1995 48.73% month end following the
1996 13.77% date the fund commenced
1997 22.59% operations.
1998
(2) An unmanaged index
comprised of the smallest
2000 companies in the
Russell 3000 Index. The
latter index is composed
of 3000 large U.S.
companies representing
approximately 98% of the
investable U.S. equity
market.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98 One Year Five Years Since Inception(1)
- --------------------------------------------------------------------------------
Regional Equity Fund (Class A) % % %
- --------------------------------------------------------------------------------
Regional Equity Fund (Class B) % % %
- --------------------------------------------------------------------------------
Russell 2000 Index(2) % % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show actual expenses
during the fiscal year ended September 30, 1998.
CLASS A CLASS B
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)
AS A % OF OFFERING PRICE 4.50%(1) 0.00%
MAXIMUM DEFERRED SALES CHARGE (LOAD)
AS A % OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS 0.00%(2) 5.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70% 0.70%
Distribution and Service (12b-1) Fees 0.25% 1.00%
Other Expenses % %
TOTAL(3) % %
- --------------------------------------------------------------------------------
(1) Certain investors may qualify for reduced sales charges. See "Buying Shares
-- Calculating Your Share Price."
(2) Class A share investments of $1 million or more on which no front-end sales
charge is paid may be subject to a contingent deferred sales charge. See
"Buying Shares -- Calculating Your Share Price."
(3) THE ADVISOR INTENDS TO WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT
TOTAL FUND OPERATING EXPENSES DO NOT EXCEED 1.15% AND 1.90%, RESPECTIVELY,
FOR CLASS A AND CLASS B SHARES. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
CLASS B CLASS B
assuming assuming no
redemption redemption
at end of at end of
CLASS A each period each period
- --------------------------------------------------------------------------------
1 year $ $ $
3 years
5 years
10 years
5 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
FUND SUMMARIES
SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Small Cap Growth Fund has an objective of growth of capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Small Cap Growth Fund invests primarily in
common stocks of small capitalization companies, defined as companies that have
market capitalizations of less than $1 billion at the time of purchase. The
advisor will select companies that it believes exhibit the potential for
superior growth based on factors such as:
o ABOVE AVERAGE GROWTH IN REVENUE AND EARNINGS
o STRONG COMPETITIVE POSITION
o STRONG MANAGEMENT
o SOUND FINANCIAL CONDITION
The fund also may invest in preferred stocks and corporate debt securities which
are convertible into common stocks. Up to 25% of the fund's total assets may be
invested in securities of foreign issuers which are either listed on a United
States stock exchange or represented by American Depositary Receipts.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition, growth
stocks and/or stocks of small capitalization companies may underperform the
market as a whole.
RISKS OF SMALL CAP STOCKS
Stocks of small capitalization companies involve substantial risk. These stocks
historically have experienced greater price volatility than stocks of
larger-capitalization companies, and they may be expected to do so in the
future.
FOREIGN SECURITY RISK
Securities of foreign issuers, even when dollar-denominated and publicly traded
in the United States, may involve risks not associated with the securities of
domestic issuers, including the risks of adverse currency fluctuations and of
political or social instability or diplomatic developments that could adversely
affect the securities.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's class A shares has varied
from year to year. The performance of class B and class C shares will be lower
due to their higher expenses. Sales charges are not reflected in the chart; if
they had been, returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
6 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
FUND SUMMARIES
SMALL CAP GROWTH FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The fund commenced
operations on 4/4/94.
Class B shares have been
[BAR CHART] offered since 8/15/94.
Class C shares have not
1995 28.65% been offered prior to the
1996 8.22% date of this prospectus.
1997 19.93% The since inception
1998 performance of the index
is calculated from the
month end following the
date the fund commenced
operations.
(2) An unmanaged index
comprised of the smallest
2000 companies in the
Russell 3000 Index. The
latter index is composed
of 3000 large U.S.
companies representing
approximately 98% of the
investable U.S. equity
market.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98(1) One Year Since Inception(1)
- --------------------------------------------------------------------------------
Small Cap Growth Fund (Class A) % %
- --------------------------------------------------------------------------------
Small Cap Growth Fund (Class B) % %
- --------------------------------------------------------------------------------
Small Cap Growth Fund (Class C) N/A N/A
- --------------------------------------------------------------------------------
Russell 2000 Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below are based on class A
and class B share expenses before any waivers during the fiscal year ended
September 30, 1998.(1)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER FEES
- --------------------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)
AS A % OF OFFERING PRICE 4.50%(2) 0.00% 1.00%
MAXIMUM DEFERRED SALES CHARGE (LOAD)
AS A % OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS 0.00%(3) 5.00% 1.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------
Management Fees 0.70% 0.70% 0.70%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses % % %
TOTAL % % %
- --------------------------------------------------------------------------------------------
</TABLE>
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
1.15%, 1.90% AND 1.90%, RESPECTIVELY, FOR CLASS A, CLASS B AND CLASS C
SHARES. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. See "Buying Shares
-- Calculating Your Share Price."
(3) Class A share investments of $1 million or more on which no front-end sales
charge is paid may be subject to a contingent deferred sales charge. See
"Buying Shares -- Calculating Your Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
CLASS B CLASS B CLASS C CLASS C
assuming assuming no assuming assuming no
redemption redemption redemption redemption
at end of at end of at end of at end of
CLASS A each period each period each period each period
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 year $ $ $ $ $
3 years
5 years
10 years
</TABLE>
7 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
FUND SUMMARIES
SMALL CAP VALUE FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Small Cap Value Fund has an objective of capital appreciation.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Small Cap Value Fund invests primarily in common
stocks of small capitalization companies, defined as companies that have market
capitalizations of less than $1 billion at the time of purchase. In selecting
stocks, the fund's advisor invests in securities it believes:
o ARE UNDERVALUED RELATIVE TO OTHER SECURITIES IN THE SAME INDUSTRY OR MARKET;
o EXHIBIT GOOD OR IMPROVING FUNDAMENTALS; AND
o EXHIBIT AN IDENTIFIABLE CATALYST THAT COULD CLOSE THE GAP BETWEEN MARKET
VALUE AND FAIR VALUE OVER THE NEXT ONE TO TWO YEARS.
The fund also may invest in preferred stocks and corporate debt securities which
are convertible into common stocks.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition, value
stocks and/or stocks of small capitalization companies may underperform the
market as a whole.
RISKS OF SMALL CAP STOCKS
Stocks of small capitalization companies involve substantial risk. These stocks
historically have experienced greater price volatility than stocks of
larger-capitalization companies, and they may be expected to do so in the
future.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's class A shares has varied
from year to year. The performance of class B and class C shares will be lower
due to their higher expenses. Sales charges are not reflected in the chart; if
they had been, returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
8 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
FUND SUMMARIES
SMALL CAP VALUE FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The fund commenced
operations on 8/1/94.
Class B shares have been
[BAR CHART] offered since 11/24/97.
Class C shares have not
1995 47.30% been offered prior to the
1996 20.07% date of this prospectus.
1997 20.07% The since inception
1998 performance of the index
is calculated from the
month end following the
date the fund commenced
operations.
(2) An unmanaged index
comprised of the smallest
2000 companies in the
Russell 3000 Index. The
latter index is composed
of 3000 large U.S.
companies representing
approximately 98% of the
investable U.S. equity
market.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98 One Year Since Inception(1)
- --------------------------------------------------------------------------------
Small Cap Value Fund (Class A) % %
- --------------------------------------------------------------------------------
Small Cap Value Fund (Class B) % %
- --------------------------------------------------------------------------------
Small Cap Value Fund (Class C) N/A N/A
- --------------------------------------------------------------------------------
Russell 2000 Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below are based on class A
and class B share expenses during the fiscal year ended September 30, 1998.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER FEES
- ----------------------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)
AS A % OF OFFERING PRICE 4.50%(1) 0.00% 1.00%
MAXIMUM DEFERRED SALES CHARGE (LOAD)
AS A % OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS 0.00%(2) 5.00% 1.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------
Management Fees 0.70% 0.70% 0.70%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses % % %
TOTAL(3) % % %
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Certain investors may qualify for reduced sales charges. See "Buying Shares
-- Calculating Your Share Price."
(2) Class A share investments of $1 million or more on which no front-end sales
charge is paid may be subject to a contingent deferred sales charge. See
"Buying Shares -- Calculating Your Share Price."
(3) THE ADVISOR INTENDS TO WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT
TOTAL FUND OPERATING EXPENSES DO NOT EXCEED 1.15%, 1.90% AND 1.90%,
RESPECTIVELY, FOR CLASS A, CLASS B AND CLASS C SHARES. FEE WAIVERS MAY BE
DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
CLASS B CLASS B CLASS C CLASS C
assuming assuming no assuming assuming no
redemption redemption redemption redemption
at end of at end of at end of at end of
CLASS A each period each period each period each period
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 year $ $ $ $ $
3 years
5 years
10 years
</TABLE>
9 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
POLICIES & SERVICES
BUYING SHARES
You may become a shareholder in any of the funds with an initial investment of
$1,000 or more ($250 for a retirement plan). Additional investments can be made
for as little as $100 ($25 for a retirement plan). The funds have the right to
waive these minimum investment requirements for employees of the funds' advisor
and its affiliates. The funds also have the right to reject any purchase order.
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
All funds in this prospectus offer class A and class B shares. Small Cap Growth
Fund and Small Cap Value Fund also offer class C shares. Each class has its own
cost structure. The amount of your purchase and the length of time you expect to
hold your shares will be factors in determining which class of shares is best
for you.
CLASS A SHARES
If you are making an investment that qualifies for a reduced sales charge, class
A shares may be best for you. Class A shares feature:
o A FRONT-END SALES CHARGE, DESCRIBED BELOW
o LOWER ANNUAL EXPENSES THAN CLASS B OR CLASS C SHARES. SEE "FUND SUMMARIES"
FOR MORE INFORMATION ON FEES AND EXPENSES
Because class A shares will normally be the better choice if your investment
qualifies for a reduced sales charge:
o ORDERS FOR CLASS B SHARES FOR $250,000 OR MORE NORMALLY WILL BE TREATED AS
ORDERS FOR CLASS A SHARES
o ORDERS FOR CLASS C SHARES FOR $1 MILLION OR MORE NORMALLY WILL BE TREATED AS
ORDERS FOR CLASS A SHARES
o ORDERS FOR CLASS B OR CLASS C SHARES BY AN INVESTOR ELIGIBLE TO PURCHASE
CLASS A SHARES WITHOUT A FRONT-END SALES CHARGE NORMALLY WILL BE TREATED AS
ORDERS FOR CLASS A SHARES
CLASS B SHARES
If you want all your money to go to work for you immediately, you may prefer
class B shares. Class B shares have no front-end sales charge, however they do
have:
o HIGHER ANNUAL EXPENSES THAN CLASS A SHARES. (SEE "FEES AND EXPENSES" IN THE
"FUND SUMMARIES" SECTION)
o A BACK-END SALES CHARGE, CALLED A "CONTINGENT DEFERRED SALES CHARGE," IF YOU
REDEEM YOUR SHARES WITHIN SIX YEARS OF PURCHASE
o AUTOMATIC CONVERSION TO CLASS A SHARES APPROXIMATELY EIGHT YEARS AFTER
PURCHASE, THEREBY REDUCING FUTURE ANNUAL EXPENSES
CLASS C SHARES
These shares combine some of the characteristics of class A and class B shares.
Class C shares have a low front-end sales charge of 1%, so more of your
investment goes to work immediately than if you had purchased class A shares.
However, class C shares also feature:
o A 1% CONTINGENT DEFERRED SALES CHARGE IF YOU REDEEM YOUR SHARES WITHIN 18
MONTHS OF PURCHASE
o HIGHER ANNUAL EXPENSES THAN CLASS A SHARES. (SEE "FEES AND EXPENSES" IN THE
"FUND SUMMARIES" SECTION")
o NO CONVERSION TO CLASS A SHARES
Because class C shares do not convert to class A shares, they will continue to
have higher annual expenses than class A shares for as long as you hold them.
- --------------------------------------------------------------------------------
12b-1 FEES
Under Rule 12b-1 of the Investment Company Act, each fund is allowed to pay the
fund's distributor an annual fee for the distribution and sale of its shares and
for services provided to shareholders.
FOR 12b-1 FEES ARE EQUAL TO:
- --------------------------------------------------------------------------------
CLASS A SHARES 0.25% OF AVERAGE DAILY NET ASSETS
CLASS B SHARES 1% OF AVERAGE DAILY NET ASSETS
CLASS C SHARES 1% OF AVERAGE DAILY NET ASSETS
Because these fees are paid out of a fund's assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
The class A share 12b-1 fee is a shareholder servicing fee. For class B and
class C shares, a portion of the 12b-1 fee equal to 0.25% of average daily net
assets is a shareholder servicing fee and the rest is a distribution fee.
The funds' distributor uses the shareholder servicing fee to compensate brokers,
participating institutions and "one-stop" mutual fund networks for providing
ongoing services to shareholder accounts. These institutions receive annual fees
equal to 0.25% of a fund's class A, class B and class C share average daily net
assets attributable to shares sold through such institutions. The funds'
distributor also pays institutions which sell class C shares a 0.75% annual
distribution fee beginning one year after the shares are sold. The distributor
may pay additional fees to institutions using the sales charges it receives, in
exchange for sales and/or administrative services performed on behalf of the
institution's customers.
- --------------------------------------------------------------------------------
CALCULATING YOUR SHARE PRICE
Your purchase price will be based on the fund's net asset value (NAV) per share,
which is generally calculated as of the close of regular trading on the New York
Stock Exchange (usually 3 p.m. Central time) every day the exchange is open.
Your order will be priced at the next NAV calculated after your order is
accepted by the fund.
A fund's NAV is equal to the market value of its investments and other assets,
less any liabilities, divided by the number of fund shares. If market prices are
not readily available for an investment or if the advisor believes they are
unreliable, fair value prices may be determined in good faith using methods
approved by the funds' board of directors.
CLASS A SHARES
Your purchase price is typically the net asset value of your shares, plus a
front-end sales charge. Sales charges
10 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
POLICIES & SERVICES
BUYING SHARES (CONTINUED)
- --------------------------------------------------------------------------------
vary depending on the amount of your purchase. The funds' distributor receives
the sales charge you pay and reallows a portion of the sales charge to your
broker or participating institution.
MAXIMUM
SALES CHARGE REALLOWANCE
AS A % OF AS A % OF AS A % OF
PURCHASE NET AMOUNT PURCHASE
PRICE INVESTED PRICE
- --------------------------------------------------------------------------------
LESS THAN $ 50,000 4.50% 4.71% 4.05%
$ 50,000 - $ 99,999 4.00% 4.17% 3.60%
$100,000 - $249,999 3.50% 3.63% 3.15%
$250,000 - $499,999 2.75% 2.83% 2.47%
$500,000 - $999,999 2.00% 2.04% 1.80%
$1 MILLION AND OVER 0% 0% 0%
REDUCING YOUR SALES CHARGE
As shown in the preceding tables, larger purchases of class A shares reduce the
percentage sales charge you pay. You also may reduce your sales charge in the
following ways:
PRIOR PURCHASES. Prior purchases of class A shares of any First American fund
(except a money market fund) will be factored into your sales charge
calculation. For example, let's say you're making a $10,000 investment. If the
current value of all other First American fund class A shares that you hold is
$40,000 or more, your current sales charge is reduced. To receive a reduced
sales charge, you must notify the funds' transfer agent of your prior purchases.
This must be done at the time of purchase, either directly to the transfer agent
in writing or by notifying your broker or financial institution.
PURCHASES BY RELATED ACCOUNTS. Concurrent and prior purchases of class A shares
by certain other accounts also will be combined with your purchase to determine
your sales charge. For example, purchases made by your spouse or children under
age 21 will reduce your sales charge. To receive a reduced sales charge, you
must notify the funds' transfer agent of purchases by any related accounts. This
must be done at the time of purchase, either directly to the transfer agent in
writing or by notifying your broker or financial institution.
LETTER OF INTENT. If you plan to invest $50,000 or more over a 13-month period
in class A shares of any First American fund except the money market funds, you
may reduce your sales charge by signing a non-binding letter of intent. (If you
do not fulfill the letter of intent, you must pay the applicable sales charge.
In addition, if you reduce your sales charge to zero under a letter of intent
and then sell your class A shares within 12 months of their purchase, you may be
charged a contingent deferred sales charge of 1%. See "For Investments of Over
$1 Million.")
More information on these ways to reduce your sales charge appears in the
Statement of Additional Information (SAI). The SAI also contains information on
investors who are eligible to purchase class A shares without a sales charge.
- --------------------------------------------------------------------------------
FOR INVESTMENTS OF OVER $1 MILLION
There is no initial sales charge on class A share purchases of $1 million
or more. However, your broker or financial institution may receive a
commission of up to 1% on your purchase. If such a commission is paid, you
will be assessed a contingent deferred sales charge (CDSC) of 1% if you
sell your shares within 12 months. To find out whether you will be assessed
a CDSC, ask your broker or financial institution. The funds' distributor
receives any CDSC imposed when you sell your class A shares. The CDSC is
based on the value of your shares at the time of purchase or at the time of
sale, whichever is less. The charge does not apply to shares you acquired
by reinvesting your dividend or capital gain distributions.
To help lower your costs, shares that are not subject to a CDSC will be
sold first. Other shares will then be sold in an order that minimizes your
CDSC. The CDSC will be waived for (i) redemptions following the death or
disability of a shareholder and (ii) redemptions that equal the minimum
required distribution from an individual retirement account or other
retirement plan to a shareholder who has reached the age of 70 1/2.
CLASS B SHARES
Your purchase price for class B shares is their net asset value -- there is no
front-end sales charge. However, if you redeem your shares within six years of
purchase, you will pay a back-end sales charge, called a contingent deferred
sales charge (CDSC). Although you pay no front-end sales charge when you buy
class B shares, the funds' distributor pays a sales commission of 4.25% of the
amount invested to brokers and financial institutions which sell class B shares.
The funds' distributor receives any CDSC imposed when you sell your class B
shares.
Your CDSC will be based on the value of your shares at the time of purchase or
at the time of sale, whichever is less. The charge does not apply to shares you
acquired by reinvesting your dividend or capital gain distributions. Shares will
be sold in the order that minimizes your CDSC.
CDSC AS A % OF THE
YEAR SINCE PURCHASE VALUE OF YOUR SHARES
- --------------------------------------------------------------------------------
FIRST 5%
SECOND 5%
THIRD 4%
FOURTH 3%
FIFTH 2%
SIXTH 1%
SEVENTH 0%
EIGHTH 0%
11 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
POLICIES & SERVICES
BUYING SHARES (CONTINUED)
Your class B shares will automatically convert to class A shares, eight years
after the first day of the month following your purchase of shares. For example,
if you purchase class B shares on June 15, 1999, they will convert to class A
shares on June 1, 2007.
The CDSC will be waived for:
o REDEMPTIONS FOLLOWING THE DEATH OR DISABILITY OF A SHAREHOLDER
o REDEMPTIONS THAT EQUAL THE MINIMUM REQUIRED DISTRIBUTION FROM AN INDIVIDUAL
RETIREMENT ACCOUNT OR OTHER RETIREMENT PLAN TO A SHAREHOLDER WHO HAS REACHED
THE AGE OF 70 1/2
o REDEMPTIONS THROUGH A SYSTEMATIC WITHDRAWAL PLAN, AT A RATE OF UP TO 12% A
YEAR OF YOUR ACCOUNT'S VALUE. DURING THE FIRST YEAR, THE 12% ANNUAL LIMIT
WILL BE BASED ON THE VALUE OF YOUR ACCOUNT ON THE DATE THE PLAN IS
ESTABLISHED. THEREAFTER, IT WILL BE BASED ON THE VALUE OF YOUR ACCOUNT ON
THE PRECEDING DECEMBER 31.
CLASS C SHARES
Your purchase price for class C shares is their net asset value plus a front-end
sales charge equal to 1% of the purchase price (1.01% of the net amount
invested). If you redeem your shares within 18 months of purchase, you will be
assessed a contingent deferred sales charge (CDSC) of 1% of the value of your
shares at the time of purchase or at the time of sale, whichever is less. The
CDSC does not apply to shares you acquired by reinvesting your dividend or
capital gain distributions. Shares will be sold in the order that minimizes your
CDSC.
Even though your sales charge is only 1%, the funds' distributor pays a
commission equal to 2% of your purchase price to your broker or participating
institution. The distributor receives any CDSC imposed when you sell your class
C shares.
The CDSC for class C shares will be waived in the same circumstances as the
class B share CDSC. See "Class B Shares" above.
Unlike class B shares, class C shares do not convert to class A shares after a
specified period of time. Therefore, your shares will continue to have higher
annual expenses than class A shares.
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
BY PHONE
You may purchase shares by calling your broker or financial institution, if they
have a sales agreement with the funds' distributor. In many cases, your order
will be effective that day if received by your broker or financial institution
by the close of regular trading on the New York Stock Exchange. In some cases,
however, you will have to transmit your request by an earlier time in order for
your purchase request to be effective that day. This allows your broker or
financial institution time to process your request and transmit it to the fund.
Some financial institutions may charge a fee for helping you purchase shares.
Contact your broker or financial institution for more information.
If you are paying by wire, you may purchase shares by calling 1-800-637-2548
before 3 p.m. Central time. All information will be taken over the telephone,
and your order will be placed when the funds' custodian receives payment by
wire. Wire federal funds as follows:
U.S. BANK NATIONAL ASSOCIATION, MINNEAPOLIS, MN
ABA NUMBER 091000022
FOR CREDIT TO: DST SYSTEMS, INC.
ACCOUNT NUMBER 160234580266
FOR FURTHER CREDIT TO (INVESTOR NAME AND FUND NAME)
You cannot purchase shares by wire on days when the New York Stock Exchange or
federally chartered banks are closed.
BY MAIL
To purchase shares by mail, simply complete and sign a new account form, enclose
a check made payable to the fund you wish to invest in, and mail both to:
FIRST AMERICAN FUNDS
C/O DST SYSTEMS, INC.
P.O. BOX 419382
KANSAS CITY, MISSOURI 64141-6382
After you have established an account, you may continue to purchase shares by
mailing your check to First American Funds at the same address.
Please note the following:
o ALL PURCHASES MUST BE MADE IN U.S. DOLLARS
o THIRD-PARTY CHECKS, CREDIT CARDS, CREDIT CARD CHECKS AND CASH ARE NOT
ACCEPTED
o IF A CHECK DOES NOT CLEAR YOUR BANK, THE FUNDS RESERVE THE RIGHT TO CANCEL
THE PURCHASE, AND YOU COULD BE LIABLE FOR ANY LOSSES OR FEES INCURRED
- --------------------------------------------------------------------------------
INVESTING AUTOMATICALLY
To purchase shares as part of a savings discipline, you may add to your
investment on a regular basis:
o BY HAVING $100 OR MORE AUTOMATICALLY WITHDRAWN FROM YOUR BANK ACCOUNT ON A
PERIODIC BASIS AND INVESTED IN FUND SHARES
o THROUGH AUTOMATIC MONTHLY EXCHANGES OF YOUR SHARES OF PRIME OBLIGATIONS
FUND, A MONEY MARKET FUND IN THE FIRST AMERICAN FAMILY OF FUNDS. EXCHANGES
MUST BE MADE INTO THE SAME CLASS OF SHARES THAT YOU HOLD IN PRIME
OBLIGATIONS FUND
You may apply for participation in either of these programs through your broker
or financial institution or by calling 1-800-637-2548.
12 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
POLICIES & SERVICES
SELLING SHARES
- --------------------------------------------------------------------------------
HOW TO SELL SHARES
You may sell your shares on any day when the New York Stock Exchange is open.
Your shares will be sold at the next NAV calculated after your order is accepted
by the funds' transfer agent, less any applicable contingent deferred sales
charge.
The proceeds from your sale normally will be mailed or wired within one day, but
in no event more than seven days, after your request is received in proper form.
BY PHONE
If you purchased shares through a broker or financial institution, simply call
them to sell your shares. In many cases, your redemption will be effective that
day if received by your broker or financial institution by the close of regular
trading on the New York Stock Exchange. In some cases, however, you will have to
call by an earlier time in order for your redemption to be effective that day.
This allows your broker or financial institution time to process your request
and transmit it to the fund. Contact your broker or financial institution
directly for more information.
If you did not purchase shares through a broker or financial institution, you
may sell your shares by calling 1-800-637-2548. Proceeds can be wired to your
bank account (if the proceeds are at least $1,000 and you have previously
supplied your bank account information to the transfer agent) or sent to you by
check.
If you recently purchased your shares by check or through the Automated Clearing
House (ACH), proceeds from the sale of those shares may not be available until
your check or ACH payment has cleared, which may take up to 10 calendar days.
BY MAIL
To sell shares by mail, send a written request to your broker or financial
institution, or to the funds' transfer agent at the following address:
FIRST AMERICAN FUNDS
C/O DST SYSTEMS, INC.
P.O. BOX 419382
KANSAS CITY, MISSOURI 64141-6382
Your request should include the following information:
o NAME OF THE FUND
o ACCOUNT NUMBER
o DOLLAR AMOUNT OR NUMBER OF SHARES REDEEMED
o NAME ON THE ACCOUNT
o SIGNATURES OF ALL REGISTERED ACCOUNT OWNERS
Signatures on a written request must be guaranteed if:
o YOU WOULD LIKE THE PROCEEDS FROM THE SALE TO BE PAID TO ANYONE OTHER THAN TO
THE SHAREHOLDER OF RECORD
o YOU WOULD LIKE THE CHECK MAILED TO AN ADDRESS OTHER THAN THE ADDRESS ON THE
FUNDS' RECORDS
o YOUR REDEMPTION REQUEST IS FOR $25,000 OR MORE
A signature guarantee assures that a signature is genuine and protects
shareholders from unauthorized account transfers. Banks, savings and loan
associations, trust companies, credit unions, broker-dealers and member firms of
a national securities exchange may guarantee signatures. Call your financial
institution to determine if it has this capability.
Proceeds from a written redemption request will be sent to you by check.
- --------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWALS
If your account has a value of $5,000 or more, you may redeem a specific dollar
amount from your account on a regular basis. To set up systematic withdrawals,
contact your broker or financial institution.
You should not make systematic withdrawals if you plan to continue investing in
the fund, due to sales charges and tax liabilities.
- --------------------------------------------------------------------------------
REINVESTING AFTER A SALE
If you sell class A shares, you may reinvest in class A shares of that fund or
another First American fund within 31 days without a sales charge. If you sell
shares of any class subject to a CDSC, that charge will be credited to your
account and the reinvested shares will be subject to a CDSC, which will be
determined based on the date of your reinvestment.
- --------------------------------------------------------------------------------
ACCOUNTS WITH LOW BALANCES
Except for retirement plans, if your account balance falls below $500 as a
result of selling or exchanging shares, you will be given 60 days to
re-establish the minimum balance. If you do not, the fund may close your
account and send you the proceeds, less any applicable contingent deferred
sales charge.
13 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT
- --------------------------------------------------------------------------------
EXCHANGING SHARES
If your investment goals or your financial needs change, you may move from one
First American fund to another. There is no fee to exchange shares.
Generally, you may exchange your shares only for shares of the same class.
However, you may exchange your class A shares for class Y shares of the same or
another First American fund if you subsequently become eligible to participate
in that class (for example, by opening a fiduciary, custody or agency account
with a financial institution which invests in class Y shares).
Exchanges are made based on the net asset value per share of each fund at the
time of the exchange. When you exchange your class A shares of one of the funds
for class A shares of another First American fund, you do not have to pay a
sales charge. When you exchange your class B or class C shares for class B or
class C shares of another First American fund, the time you held the shares of
the "old" fund will be added to the time you hold the shares of the "new" fund
for purposes of determining your CDSC or, in the case of class B shares,
calculating when your shares convert to class A shares.
Before exchanging into any fund, be sure to read its prospectus carefully. A
fund may change or cancel its exchange policies at any time. You will be
notified of any changes. The funds have the right to limit exchanges to four
times per year.
BY PHONE
You may exchange shares by calling your broker, your financial institution, or
the funds' transfer agent, provided that both funds have identical shareholder
registrations. To request an exchange through the funds' transfer agent, call
1-800-637-2548. Your instructions must be received by the funds' transfer agent
before 3 p.m. Central time, or by the time specified by your broker or financial
institution, in order for shares to be exchanged the same day.
BY MAIL
To exchange shares by written request, please follow the procedures under
"Selling Shares." Be sure to include the names of both funds involved in the
exchange.
- --------------------------------------------------------------------------------
TELEPHONE TRANSACTIONS
You may buy, sell or exchange shares by telephone, unless you elected on
your new account form to restrict this privilege. If you wish to reinstate
this option on an existing account, please call Investor Services at
1-800-637-2548 to request the appropriate form.
The funds and their agents will not be responsible for any losses that may
result from acting on wire or telephone instructions that they reasonably
believe to be genuine. The funds and their agents will each follow
reasonable procedures to confirm that instructions received by telephone
are genuine, which may include taping telephone conversations.
It may be difficult to reach the funds by telephone during periods of
unusual market activity. If you are unable to reach the funds or their
agents by telephone, please consider sending written instructions.
- --------------------------------------------------------------------------------
STAYING INFORMED
SHAREHOLDER REPORTS
Shareholder reports are mailed twice a year, in November and May. They include
financial statements, performance information, a message from your portfolio
managers, and, on an annual basis, the auditors' report.
In an attempt to reduce shareholder costs and help eliminate duplication, the
funds will try to limit their mailings to one report for each address that lists
one or more shareholders with the same last name. If you would like additional
copies, please call 1-800-637-2548.
STATEMENTS AND CONFIRMATIONS
Statements summarizing activity in your account are mailed at least quarterly.
Confirms are mailed following each purchase or sale of fund shares.
14 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT (CONTINUED)
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from a fund's net investment income are declared and paid quarterly.
Any capital gains are distributed at least once each year.
On the ex-dividend date for a distribution, a fund's share price is reduced by
the amount of the distribution. If you buy shares just before the ex-dividend
date, in effect, you "buy the dividend." You will pay the full price for the
shares and then receive a portion of that price back as a taxable distribution.
Dividend and capital gain distributions will be reinvested in additional shares
of the fund paying the distribution, unless you request cash payments on your
new account form or by writing to the fund. Shares will be priced at the NAV
computed on the ex-dividend date.
- --------------------------------------------------------------------------------
TAXES
Some of the tax consequences of investing in the funds are discussed below. More
information about taxes is in the Statement of Additional Information. However,
because everyone's tax situation is unique, always consult your tax professional
about federal, state and local tax consequences.
TAXES ON DISTRIBUTIONS
Each fund pays its shareholders dividends from its net investment income and any
net capital gains that it has realized. For most investors, fund dividends and
distributions are considered taxable whether they are reinvested or taken in
cash (unless your investment is in an IRA or other tax-advantaged account).
Dividends from a fund's net investment income are taxable as ordinary income.
Distributions of a fund's long-term capital gains are taxable as long-term
gains, regardless of how long you have held your shares. The funds expect that,
as a result of their investment objectives and strategies, their distributions
will consist primarily of capital gains.
TAXES ON TRANSACTIONS
The sale or exchange of fund shares will be a taxable event for you and may
result in a capital gain or loss. The gain or loss will be considered long-term
if you have held your shares for more than one year. A gain or loss on shares
held for one year or less is considered short-term and is taxed at the same
rates as ordinary income.
15 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
MANAGEMENT
INVESTMENT ADVISOR
FIRST AMERICAN ASSET MANAGEMENT
601 SECOND AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55402
U.S. Bank National Association (U.S. Bank), acting through its First American
Asset Management division, is the funds' investment advisor. First American
Asset Management provides investment management services to individuals and
institutions, including corporations, foundations, pensions and retirement
plans. As of December 31, 1998, it had more than $_____ in assets under
management, including investment company assets of approximately $_____. As
investment advisor, First American Asset Management manages the funds' business
and investment activities, subject to the authority of the board of directors.
Each fund pays the investment advisor a monthly fee for providing investment
advisory services. During their most recent fiscal years, the funds paid the
following investment advisory fees to First American Asset Management:
ADVISORY FEE
AS A % OF
AVERAGE DAILY
NET ASSETS
- --------------------------------------------------------------------------------
MICRO CAP VALUE FUND %
REGIONAL EQUITY FUND %
SMALL CAP GROWTH FUND %
SMALL CAP VALUE FUND %
- --------------------------------------------------------------------------------
CUSTODIAN
U.S. BANK NATIONAL ASSOCIATION
U.S. BANK CENTER
180 EAST FIFTH STREET
ST. PAUL, MINNESOTA 55101
ADMINISTRATOR
SEI INVESTMENTS MANAGEMENT CORPORATION
OAKS, PENNSYLVANIA 19456
DISTRIBUTOR
SEI INVESTMENTS DISTRIBUTION CO.
OAKS, PENNSYLVANIA 19456
TRANSFER AGENT
DST SYSTEMS, INC.
330 WEST NINTH STREET
KANSAS CITY, MISSOURI 64105
ADDITIONAL COMPENSATION
In addition to receiving compensation for acting as the funds' investment
advisor as described above, U.S. Bank and its affiliates receive compensation in
connection with the following:
CUSTODY SERVICES. As compensation for acting as the funds' custodian, U.S. Bank
is paid monthly fees equal, on an annual basis, to 0.03% of a fund's average
daily net assets. In addition, U.S. Bank is reimbursed for its out-of-pocket
expenses incurred while providing custody services to the funds.
SUB-ADMINISTRATION SERVICES. U.S. Bank assists the administrator and provides
sub-administration services to the funds. For providing these services, U.S.
Bank is compensated by the funds' administrator at an annual rate of up to
0.05% of each fund's average daily net assets.
TRANSFER AGENT SERVICES. U.S. Bank performs certain transfer agent and dividend
disbursing agent services with respect to the class A, class B and class C
shares of the funds held through accounts at U.S. Bank and its affiliates. The
funds pay U.S. Bank an annual fee of $15 per account for providing these
services.
SECURITIES LENDING SERVICES. In connection with lending their portfolio
securities, the funds pay administrative and custodial fees to U.S. Bank which
are equal to 40% of the funds' income from these securities lending
transactions.
BROKERAGE TRANSACTIONS. When purchasing and selling portfolio securities for
the funds, the funds' investment advisor may place trades through its
affiliates, U.S. Bancorp Investments, Inc. and U.S. Bancorp Piper Jaffray Inc.,
which will earn commissions on such transactions.
SALES OF FUND SHARES. U.S. Bancorp Investments, Inc. and U.S. Bancorp Piper
Jaffray Inc., broker-dealers affiliated with U.S. Bank, have entered into
agreements with the funds' distributor to sell fund shares and will earn
commissions on these sales.
ERISA ACCOUNTS. U.S. Bank 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.
PORTFOLIO MANAGEMENT
Each fund's investments are managed by a team of persons associated with First
American Asset Management.
16 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS
- --------------------------------------------------------------------------------
OBJECTIVES
The funds' objectives, which are described in the "Fund Summaries" section, may
be changed without shareholder approval. If a fund's objectives change, you will
be notified at least 30 days in advance. Please remember: There is no guarantee
that any fund will achieve its objectives.
- --------------------------------------------------------------------------------
INVESTMENT STRATEGIES
The funds' main investment strategies are discussed in the "Fund Summaries"
section. These are the strategies that the funds' investment advisor believes
are most likely to be important in trying to achieve the funds' objectives. You
should be aware that each fund may also use strategies and invest in securities
that are not described in this prospectus, but that are described in the
Statement of Additional Information (SAI). For a copy of the SAI, call Investor
Services at 1-800-637-2548.
TEMPORARY INVESTMENTS
In an attempt to respond to adverse market, economic, political or other
conditions, each fund may invest without limit in cash and in U.S.
dollar-denominated high-quality money market instruments and other short-term
securities. Being invested in these securities may keep a fund from
participating in a market upswing and prevent the fund from achieving its
objectives.
PORTFOLIO TURNOVER
Fund managers may trade securities frequently, resulting, from time to time, in
an annual portfolio turnover rate of over 100%. Trading of securities may
produce capital gains, which are taxable to shareholders when distributed.
Active trading may also increase the amount of commissions or mark-ups to
broker-dealers that the fund pays when it buys and sells securities. The
"Financial Highlights" section of this prospectus shows each fund's historical
portfolio turnover rate.
- --------------------------------------------------------------------------------
RISKS
The main risks of investing in the funds are summarized in the "Fund Summaries"
section. More information about fund risks is presented below.
MARKET RISK
All stocks are subject to price movements due to changes in general economic
conditions, changes in the level of prevailing interest rates, changes in
investor perceptions of the market, or the outlook for overall corporate
profitability.
SECTOR RISK
The stocks of companies within specific industries or sectors of the economy can
periodically perform differently than the overall stock market. This can be due
to changes in such things as the regulatory or competitive environment or to
changes in investor perceptions of a particular industry or sector.
COMPANY RISK
Individual stocks can perform differently than the overall market. This may be a
result of specific factors such as changes in corporate profitability due to the
success or failure of specific products or management strategies, or it may be
due to changes in investor perceptions regarding a company.
RISKS OF SMALL AND MICRO CAP STOCKS
Stocks of small and very small capitalization companies involve substantial
risk. These companies may lack the management expertise, financial resources,
product diversification and competitive strengths of larger companies. Prices of
small and micro cap stocks may be subject to more abrupt or erratic movements
than stock prices of larger, more established companies or the market averages
in general. In addition, the frequency and volume of their trading may be less
than is typical of larger companies, making them subject to wider price
fluctuations. In some cases, there could be difficulties in selling the stocks
of small and very small capitalization companies at the desired time and price.
RISKS OF REGIONAL CONCENTRATION
Regional Equity Fund invests primarily in common stocks of companies
headquartered in Minnesota, North and South Dakota, Montana, Wisconsin,
Michigan, Iowa, Nebraska, Colorado and Illinois. 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 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.
FOREIGN SECURITY RISK
Up to 25% of each fund's total assets may be invested in securities of foreign
issuers which are either listed on a United States stock exchange or represented
by American Depositary Receipts. Securities of foreign issuers, even when
dollar-denominated and publicly traded in the United States, may involve risks
not associated with the securities of domestic issuers. For certain foreign
countries, political or social instability or diplomatic developments could
adversely affect the securities. There is also the risk of loss due to
governmental actions such as a change in tax statutes or the modification of
individual property rights. In addition, individual foreign economies may differ
favorably or unfavorably from the U.S. economy.
RISK OF ACTIVE MANAGEMENT
Each fund is actively managed and its performance therefore will reflect in part
the advisor's ability to make investment decisions which are suited to achieving
the fund's investment objectives. Due to their active management, the funds
could underperform other mutual funds with similar investment objectives.
RISKS OF SECURITIES LENDING
When a fund loans its portfolio securities, it will receive collateral equal to
at least 100% of the value of the loaned securities. Nevertheless, the fund
risks a delay in the recovery of the loaned securities, or even the loss of
rights in the collateral deposited by the borrower if the borrower should fail
financially. To reduce these risks, the funds enter into loan arrangements only
with
17 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS (CONTINUED)
institutions which the funds' advisor has determined are creditworthy under
guidelines established by the funds' board of directors.
YEAR 2000 ISSUES
Like other mutual funds and business and financial organizations, the funds
could be adversely affected if the computer systems used by the funds' advisor,
other service providers and entities with computer systems that are linked to
fund records do not properly process and calculate date-related information from
and after January 1, 2000. While year 2000-related computer problems could have
a negative effect on the funds, the funds' administrator has undertaken a
program designed to assess and monitor the steps being taken by the funds'
service providers to address year 2000 issues. This program includes seeking
assurances from service providers that their systems are or will be year 2000
compliant and reviewing service providers' periodic reports to monitor their
status concerning their year 2000 readiness and compliance.
The administrator and the advisor also report regularly to the funds' board of
directors concerning their own and other service providers' progress toward year
2000 readiness. Although these reports indicate that service providers are or
expect to be year 2000 compliant, there can be no assurance that this will be
the case in all instances or that year 2000 difficulties experienced by others
in the financial services industry will not impact the funds. In addition, there
can be no assurance that year 2000 difficulties will not have an adverse effect
on the funds' investments or on global markets or economies, generally. The
funds are not bearing any of the expenses incurred by their service providers in
preparing for the year 2000.
18 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about the class A and
class B shares of each fund. Small Cap Growth Fund and Small Cap Value Fund did
not have any class C shares outstanding during the periods for which information
is presented. This information is intended to help you understand each fund's
financial performance for the past five years or, if shorter, the period of the
fund's operations. Some of this information reflects financial results for a
single fund share. Total returns in the tables represent the rate that you would
have earned or lost on an investment in a fund, excluding sales charges and
assuming you reinvested all of your dividends and distributions.
This information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report, along with the funds' financial statements, is included
in the funds' annual report, which is available upon request.
MICRO CAP VALUE FUND
<TABLE>
<CAPTION>
Fiscal year ended
September 30,
CLASS A SHARES 1998 1997(1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 10.00
-------- -------
Investment Operations:
Net Investment Income --
Net Gains (Losses) on Securities
(both realized and unrealized) 0.96
-------
Total From Investment Operations 0.96
-------
Less Distributions:
Dividends (from net investment income) --
Distributions (from capital gains) --
-------
Total Distributions --
-------
Net Asset Value, End of Period $ $ 10.96
======== =======
Total Return % 9.60%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 44
Ratio of Expenses to Average Net Assets % 1.15%
Ratio of Net Income (Loss) to Average Net Assets % ( 0.25)%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.32%
Ratio of Net Income (Loss) to Average Net Assets (excluding waivers) ( 1.42)%
Portfolio Turnover Rate % 0%
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended
September 30,
CLASS B SHARES 1998 1997(1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 10.00
-------- -------
Investment Operations:
Net Investment Income --
Net Gains (Losses) on Securities
(both realized and unrealized) 0.95
-------
Total From Investment Operations 0.95
-------
Less Distributions:
Dividends (from net investment income) --
Distributions (from capital gains) --
-------
Total Distributions --
-------
Net Asset Value, End of Period $ $ 10.95
======== =======
Total Return % 9.50%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 50
Ratio of Expenses to Average Net Assets % 1.90%
Ratio of Net Income (Loss) to Average Net Assets % ( 1.04)%
Ratio of Expenses to Average Net Assets (excluding waivers) % 2.07%
Ratio of Net Income (Loss) to Average Net Assets (excluding waivers) ( 1.21)%
Portfolio Turnover Rate % 0%
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) Commenced operations on August 8, 1997. All ratios for the period have been
annualized.
19 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
REGIONAL EQUITY FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS A SHARES 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 17.71 $ 17.12 $ 12.52 $ 11.96
-------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.03 0.04 0.08 0.08
Net Gains (Losses) on Securities
(both realized and unrealized) 6.14 1.70 4.90 0.71
------- ------- ------- -------
Total From Investment Operations 6.17 1.74 4.98 0.79
------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) ( 0.07) ( 0.04) ( 0.06) ( 0.07)
Distributions (from capital gains) ( 0.69) ( 1.11) ( 0.32) ( 0.16)
-------- -------- -------- -------
Total Distributions ( 0.76) ( 1.15) ( 0.38) ( 0.23)
-------- -------- -------- -------
Net Asset Value, End of Period $ $ 23.12 $ 17.71 $ 17.12 $ 12.52
======== ======== ======== ======== =======
Total Return % 36.13% 10.97% 41.17% 6.76%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 37,677 $ 25,325 $ 14,917 $ 8,345
Ratio of Expenses to Average Net Assets % 1.15% 1.13% 1.05% 0.82%
Ratio of Net Income to Average Net Assets % 0.11% 0.24% 0.58% 0.59%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.15% 1.15% 1.20% 1.25%
Ratio of Net Income to Average Net Assets (excluding waivers) % 0.11% 0.22% 0.43% 0.16%
Portfolio Turnover Rate % 17% 36% 42% 41%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS B SHARES 1998 1997 1996 1995 1994(1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 17.47 $ 16.99 $ 12.50 $ 12.19
-------- ------- ------- ------- -------
Investment Operations:
Net Investment Income (Loss) ( 0.03) ( 0.04) 0.04 --
Net Gains (Losses) on Securities
(both realized and unrealized) 5.97 1.64 4.80 0.33
------- ------- ------- -------
Total From Investment Operations 5.94 1.60 4.84 0.33
------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) -- ( 0.01) ( 0.03) ( 0.02)
Distributions (from capital gains) ( 0.69) ( 1.11) ( 0.32) --
------- ------- ------- -------
Total Distributions ( 0.69) ( 1.12) ( 0.35) ( 0.02)
------- ------- ------- -------
Net Asset Value, End of Period $ $ 22.72 $ 17.47 $ 16.99 $ 12.50
======== ======= ======= ======= =======
Total Return % 35.18% 10.14% 39.98% 2.73%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 39,683 $ 27,671 $ 7,630 $ 185
Ratio of Expenses to Average Net Assets % 1.90% 1.88% 1.84% 1.80%
Ratio of Net (Loss) to Average Net Assets % ( 0.65)% ( 0.52)% ( 0.25)% ( 0.41)%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.90% 1.90% 1.95% 2.05%
Ratio of Net (Loss) to Average Net Assets (excluding waivers) % ( 0.65)% ( 0.54)% ( 0.36)% ( 0.66)%
Portfolio Turnover Rate % 17% 36% 42% 41%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class B shares have been offered since August 15, 1994. All ratios for the
period have been annualized.
20 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
SMALL CAP GROWTH FUND
<TABLE>
<CAPTION>
Fiscal year ended
September 30,
CLASS A SHARES(1) 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 17.11
-------- -------
Investment Operations:
Net Investment Income (Loss) ( 0.16)
Net Gains (Losses) on Securities
(both realized and unrealized) 5.66
-------
Total From Investment Operations 5.50
-------
Less Distributions:
Dividends (from net investment income) ( 0.04)
Distributions (from capital gains) ( 5.16)
-------
Total Distributions ( 5.20)
-------
Net Asset Value, End of Period $ $ 17.41
======== =======
Total Return % 45.66%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 35,647
Ratio of Expenses to Average Net Assets % 1.34%
Ratio of Net Income (Loss) to Average Net Assets % ( 0.75)%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.98%
Ratio of Net Income (Loss) to Average Net Assets (excluding waivers) % ( 1.39)%
Portfolio Turnover Rate % 109%
- --------------------------------------------------------------------------------------------
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS A SHARES(1) 1996(2) 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ 17.68 $ 15.61 $ 15.30
------- ------- -------
Investment Operations:
Net Investment Income (Loss) 0.06 0.09 0.07
Net Gains (Losses) on Securities
(both realized and unrealized) 0.87 2.07 0.27
------- ------- -------
Total From Investment Operations 0.93 2.16 0.34
------- ------- -------
Less Distributions:
Dividends (from net investment income) ( 0.07) ( 0.09) ( 0.03)
Distributions (from capital gains) ( 1.43) -- --
------- ------- --------
Total Distributions ( 1.50) ( 0.09) ( 0.03)
------- ------- --------
Net Asset Value, End of Period $ 17.11 $ 17.68 $ 15.61
======= ======== ========
Total Return 5.38% 13.88% 2.12%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 30,968 $ 48,421 $ 78,376
Ratio of Expenses to Average Net Assets 1.32% 1.40% 1.32%
Ratio of Net Income (Loss) to Average Net Assets 0.20% 0.43% 0.37%
Ratio of Expenses to Average Net Assets (excluding waivers) 1.79% 1.63% 1.54%
Ratio of Net Income (Loss) to Average Net Assets (excluding waivers) ( 0.27)% 0.20% 0.15%
Portfolio Turnover Rate 125% 182% 177%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS B SHARES(1) 1998 1997(3)
- -------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 13.17
-------- -------
Investment Operations:
Net Investment Income (Loss) ( 0.06)
Net Gains (Losses) on Securities
(both realized and unrealized) 4.24
-------
Total From Investment Operations 4.18
-------
Less Distributions:
Dividends (from net investment income) --
Distributions (from capital gains) --
-------
Total Distributions --
-------
Net Asset Value, End of Period $ $ 17.35
======== =======
Total Return % 31.77%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 480
Ratio of Expenses to Average Net Assets % 1.98%
Ratio of Net (Loss) to Average Net Assets % ( 1.49)%
Ratio of Expenses to Average Net Assets (excluding waivers) % 2.15%
Ratio of Net (Loss) to Average Net Assets (excluding waivers) % ( 1.66)%
Portfolio Turnover Rate % 109%
- -------------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts for Small Cap Growth Fund have been adjusted to reflect
the conversion ratios utilized for the reorganization of Piper Small
Company Growth Fund and Small Cap Growth Fund that occurred on July 31,
1998. Piper Small Company Growth Fund is the financial reporting survivor.
Therefore, the financial highlights for Small Cap Growth Fund represent the
financial highlights of Piper Small Company Growth Fund.
(2) Per share amounts have been adjusted to reflect the effect of the stock
dividend declared on October 21, 1996.
(3) Class B shares have been offered since February 18, 1997. All ratios for
the period have been annualized.
21 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
SMALL CAP VALUE FUND
<TABLE>
<CAPTION>
Fiscal year
ended November 30,
-----------------------
CLASS A SHARES(1) 1998 1997(2)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 17.86
-------- -------
Investment Operations:
Net Investment Income (Loss) ( 0.03)
Net Gains (Losses) on Securities
(both realized and unrealized) 0.37
-------
Total From Investment Operations 0.34
-------
Less Distributions:
Dividends (from net investment income) --
Distributions (from capital gains) --
-------
Total Distributions --
-------
Net Asset Value, End of Period $ $ 18.20
======== =======
Total Return(4) % 1.90%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 19,194
Ratio of Expenses to Average Net Assets % 1.37%
Ratio of Net Income (Loss) to Average Net Assets % ( 0.38)%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.37%
Ratio of Net Income (Loss) to Average Net Assets (excluding waivers) % ( 0.38)%
Portfolio Turnover Rate % 3%
- -----------------------------------------------------------------------------------------------
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
Fiscal year
ended July 31,
-------------------------------------
CLASS A SHARES(1) 1997 1996 1995(3)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ 13.95 $ 13.23 $ 10.00
------- ------- -------
Investment Operations:
Net Investment Income (Loss) 0.01 0.04 0.09
Net Gains (Losses) on Securities
(both realized and unrealized) 5.43 1.83 3.29
------- ------- -------
Total From Investment Operations 5.44 1.87 3.38
------- ------- -------
Less Distributions:
Dividends (from net investment income) ( 0.01) ( 0.04) ( 0.10)
Distributions (from capital gains) ( 1.52) ( 1.11) ( 0.05)
-------- -------- -------
Total Distributions ( 1.53) ( 1.15) ( 0.15)
-------- -------- -------
Net Asset Value, End of Period $ 17.86 $ 13.95 $ 13.23
======== ======== =======
Total Return(4) 41.71% 14.93% 34.29%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 22,429 $ 10,247 $ 1,569
Ratio of Expenses to Average Net Assets 1.31% 1.33% 1.11%
Ratio of Net Income (Loss) to Average Net Assets 0.01% 0.14% 0.63%
Ratio of Expenses to Average Net Assets (excluding waivers) 1.31% 1.33% 1.38%
Ratio of Net Income (Loss) to Average Net Assets (excluding waivers) 0.01% 0.14% 0.36%
Portfolio Turnover Rate 29% 34% 37%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended November 30,
CLASS B SHARES 1998 1997(4)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 18.36
-------- -------
Investment Operations:
Net Investment Income --
Net Gains (Losses) on Securities
(both realized and unrealized) ( 0.13)
-------
Total From Investment Operations ( 0.13)
-------
Less Distributions:
Dividends (from net investment income) --
Distributions (from capital gains) --
-------
Total Distributions --
-------
Net Asset Value, End of Period $ $ 18.23
======== =======
Total Return % ( 0.70)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 1
Ratio of Expenses to Average Net Assets % 1.90%
Ratio of Net (Loss) to Average Net Assets % ( 1.53)%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.90%
Ratio of Net (Loss) to Average Net Assets (excluding waivers) % ( 1.53)%
Portfolio Turnover Rate % 3%
- -----------------------------------------------------------------------------------------
</TABLE>
(1) The financial highlights for Small Cap Value Fund set forth herein include
the historical financial highlights of the Qualivest Small Companies Value
Fund (class A shares). The assets of the Qualivest Small Companies Value
Fund were acquired by Small Cap Value Fund on November 21, 1997. In
connection with such acquisition, class A and class C shares of the
Qualivest Small Companies Value Fund were exchanged for class A shares of
Small Cap Value Fund.
(2) For the four month period ended November 30, 1997. Effective November 30,
1997 the fund's fiscal year end changed from July 31 to November 30.
(3) Commenced operations on August 1, 1994. All ratios for the period have been
annualized.
(4) Class B shares have been offered since November 24, 1997. All ratios for
the period have been annualized.
22 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
FOR MORE INFORMATION
More information about the funds is available in the funds' Statement of
Additional Information and annual and semiannual reports.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more details about the funds and their policies. A current SAI
is on file with the Securities and Exchange Commission (SEC) and is incorporated
into this prospectus by reference (which means that it is legally considered
part of this prospectus).
ANNUAL AND SEMIANNUAL REPORTS
Additional information about the funds' investments is available in the funds'
annual and semiannual reports to shareholders. In the funds' annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the funds' performance during their last fiscal year.
You can obtain a free copy of the funds' SAI and/or free copies of the funds'
most recent annual or semiannual reports by calling Investor Services at
1-800-637-2548. The material you request will be sent by first-class mail or
other means designed to ensure equally prompt delivery, within three business
days of receipt of the request.
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC, or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. For more information, call
1-800-SEC-0330.
Information about the funds is also available on the Internet. Text-only
versions of fund documents can be viewed online or downloaded from the SEC's
Internet site at http://www.sec.gov.
SEC file number: 811-05309
FAIF-1001 (9/1998)
<PAGE>
FEBRUARY 1, 1999
SMALL CAP FUNDS
CLASS Y SHARES
MICRO CAP VALUE FUND
REGIONAL EQUITY FUND
SMALL CAP GROWTH FUND
SMALL CAP VALUE FUND
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of these funds, or determined if the
information in this prospectus is accurate or complete. Any statement to the
contrary is a criminal offense.
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(R)
<PAGE>
TABLE OF CONTENTS
FUND SUMMARIES
- --------------------------------------------------------------------------------
Micro Cap Value Fund 2
- --------------------------------------------------------------------------------
Regional Equity Fund 4
- --------------------------------------------------------------------------------
Small Cap Growth Fund 6
- --------------------------------------------------------------------------------
Small Cap Value Fund 8
- --------------------------------------------------------------------------------
POLICIES & SERVICES
- --------------------------------------------------------------------------------
Buying and Selling Shares 10
- --------------------------------------------------------------------------------
Managing Your Investment 11
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Management 12
- --------------------------------------------------------------------------------
More About The Funds 13
- --------------------------------------------------------------------------------
Financial Highlights 15
- --------------------------------------------------------------------------------
FOR MORE INFORMATION Back Cover
- --------------------------------------------------------------------------------
<PAGE>
FUND SUMMARIES
INTRODUCTION
This section of the prospectus describes the objectives of the First American
Small Cap Funds, summarizes the main investment strategies used by each fund in
trying to achieve its objectives, and highlights the risks involved with these
strategies. It also provides you with information about the performance, fees
and expenses of the funds.
AN INVESTMENT IN THE FUNDS IS NOT A DEPOSIT OF U.S. BANK NATIONAL ASSOCIATION
AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
1 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
FUND SUMMARIES
MICRO CAP VALUE FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Micro Cap Value Fund has an objective of capital appreciation.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Micro Cap Value Fund invests primarily in common
stocks of very small capitalization companies, defined as companies that have
market capitalizations of less than $500 million at the time of purchase. In
selecting stocks, the fund's advisor invests in securities it believes:
o ARE UNDERVALUED RELATIVE TO OTHER SECURITIES IN THE SAME INDUSTRY OR MARKET;
o EXHIBIT GOOD OR IMPROVING FUNDAMENTALS; AND
o EXHIBIT AN IDENTIFIABLE CATALYST THAT COULD CLOSE THE GAP BETWEEN MARKET VALUE
AND FAIR VALUE OVER THE NEXT ONE TO TWO YEARS.
The fund also may invest in preferred stocks and corporate debt securities which
are convertible into common stocks.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition, value
stocks and/or stocks of very small capitalization companies may underperform the
market as a whole.
RISKS OF MICRO CAP STOCKS
Stocks of very small capitalization companies involve substantial risk. These
stocks historically have experienced greater price volatility than stocks of
larger-capitalization companies, and they may be expected to do so in the
future.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart is intended to show you how performance of the fund's shares has
varied from year to year. However, because class Y shares were first offered in
1997, only one calendar year of information is available.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
2 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
FUND SUMMARIES
MICRO CAP VALUE FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The since inception
performance of the index
[BAR CHART] is calculated from the
month end following the
1998 inception of the class Y
shares.
(2) An unmanaged index
comprised of the smallest
2000 companies in the
Russell 3000 Index. The
latter index is composed
of 3000 large U.S.
companies representing
approximately 98% of the
investable U.S. equity
market.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception(1)
AS OF 12/31/98 One Year (8/8/97)
- --------------------------------------------------------------------------------
Micro Cap Value Fund % %
- --------------------------------------------------------------------------------
Russell 2000 Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
before any waivers during the fiscal year ended September 30, 1998.(1)
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees 0.25%
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
0.90%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years
5 years
10 years
3 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
FUND SUMMARIES
REGIONAL EQUITY FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Regional Equity Fund has an objective of capital appreciation.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Regional Equity Fund invests primarily in common
stocks of small capitalization companies headquartered in Minnesota, North and
South Dakota, Montana, Wisconsin, Michigan, Iowa, Nebraska, Colorado and
Illinois. Small capitalization companies are defined as companies that have
market capitalizations of less than $1 billion at the time of purchase. The fund
may also invest in preferred stocks and corporate debt securities which are
convertible into common stocks.
In selecting stocks, the fund's advisor invests in securities it believes:
o ARE UNDERVALUED RELATIVE TO OTHER SECURITIES IN THE SAME INDUSTRY OR MARKET;
o EXHIBIT GOOD OR IMPROVING FUNDAMENTALS; AND
o EXHIBIT AN IDENTIFIABLE CATALYST THAT COULD CLOSE THE GAP BETWEEN MARKET VALUE
AND FAIR VALUE OVER THE NEXT ONE TO TWO YEARS.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition, value
stocks and/or stocks of small capitalization companies may underperform the
market as a whole.
RISKS OF SMALL CAP STOCKS
Stocks of small capitalization companies involve substantial risk. These stocks
historically have experienced greater price volatility than stocks of larger-
capitalization companies, and they may be expected to do so in the future.
RISKS OF REGIONAL CONCENTRATION
The fund's policy of concentrating its investments in a geographic region means
that it will be subject to adverse economic, political or other developments in
that region.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you expect differences in performance. In addition, the fund's performance
reflects fund expenses; the benchmark is unmanaged and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
4 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
FUND SUMMARIES
REGIONAL EQUITY FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The since inception
performance of the index
[BAR CHART] is calculated from the
month end following the
1995 inception of the class Y
1996 shares.
1997
1998 (2) An unmanaged index
comprised of the smallest
2000 companies in the
Russell 3000 Index. The
latter index is composed
of 3000 large U.S.
companies representing
approximately 98% of the
investable U.S. equity
market.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception(1)
AS OF 12/31/98 One Year (2/4/94)
- --------------------------------------------------------------------------------
Regional Equity Fund % %
- --------------------------------------------------------------------------------
Russell 2000 Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show actual expenses
during the fiscal year ended September 30, 1998.(1)
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL(3) %
- --------------------------------------------------------------------------------
(1) THE ADVISOR INTENDS TO WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT
TOTAL FUND OPERATING EXPENSES DO NOT EXCEED 0.90%. FEE WAIVERS MAY BE
DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years
5 years
10 years
5 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
FUND SUMMARIES
SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Small Cap Growth Fund has an objective of growth of capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Small Cap Growth Fund invests primarily in
common stocks of small capitalization companies, defined as companies that have
market capitalizations of less than $1 billion at the time of purchase. The
advisor will select companies that it believes exhibit the potential for
superior growth based on factors such as:
o ABOVE AVERAGE GROWTH IN REVENUE AND EARNINGS
o STRONG COMPETITIVE POSITION
o STRONG MANAGEMENT
o SOUND FINANCIAL CONDITION
The fund also may invest in preferred stocks and corporate debt securities which
are convertible into common stocks. Up to 25% of the fund's total assets may be
invested in securities of foreign issuers which are either listed on a United
States stock exchange or represented by American Depositary Receipts.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition, growth
stocks and/or stocks of small capitalization companies may underperform the
market as a whole.
RISKS OF SMALL CAP STOCKS
Stocks of small capitalization companies involve substantial risk. These stocks
historically have experienced greater price volatility than stocks of larger-
capitalization companies, and they may be expected to do so in the future.
FOREIGN SECURITY RISK
Securities of foreign issuers, even when dollar-denominated and publicly traded
in the United States, may involve risks not associated with the securities of
domestic issuers, including the risks of adverse currency fluctuations and of
political or social instability or diplomatic developments that could adversely
affect the securities.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
6 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
FUND SUMMARIES
SMALL CAP GROWTH FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The since inception
performance of the index
[BAR CHART] is calculated from the
month end following the
1995 date the fund commenced
1996 operations.
1997
1998 (2) An unmanaged index
comprised of the smallest
2000 companies in the
Russell 3000 Index. The
latter index is composed
of 3000 large U.S.
companies representing
approximately 98% of the
investable U.S. equity
market.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception(1)
AS OF 12/31/98(1) One Year (4/4/94)
- --------------------------------------------------------------------------------
Small Cap Growth Fund % %
- --------------------------------------------------------------------------------
Russell 2000 Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
before any waivers during the fiscal year ended September 30, 1998.(1)
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
0.90%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years
5 years
10 years
7 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
FUND SUMMARIES
SMALL CAP VALUE FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Small Cap Value Fund has an objective of capital appreciation.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Small Cap Value Fund invests primarily in common
stocks of small capitalization companies, defined as companies that have market
capitalizations of less than $1 billion at the time of purchase. In selecting
stocks, the fund's advisor invests in securities it believes:
o ARE UNDERVALUED RELATIVE TO OTHER SECURITIES IN THE SAME INDUSTRY OR MARKET;
o EXHIBIT GOOD OR IMPROVING FUNDAMENTALS; AND
o EXHIBIT AN IDENTIFIABLE CATALYST THAT COULD CLOSE THE GAP BETWEEN MARKET VALUE
AND FAIR VALUE OVER THE NEXT ONE TO TWO YEARS.
The fund also may invest in preferred stocks and corporate debt securities which
are convertible into common stocks.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition, value
stocks and/or stocks of small capitalization companies may underperform the
market as a whole.
RISKS OF SMALL CAP STOCKS
Stocks of small capitalization companies involve substantial risk. These stocks
historically have experienced greater price volatility than stocks of larger-
capitalization companies, and they may be expected to do so in the future.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
8 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
FUND SUMMARIES
SMALL CAP VALUE FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The since inception
performance of the index
[BAR CHART] is calculated from the
month end following the
1995 date the fund commenced
1996 operations.
1997
1998 (2) An unmanaged index
comprised of the smallest
2000 companies in the
Russell 3000 Index. The
latter index is composed
of 3000 large U.S.
companies representing
approximately 98% of the
investable U.S. equity
market.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception(1)
AS OF 12/31/98 One Year (8/1/94)
- --------------------------------------------------------------------------------
Small Cap Value Fund % %
- --------------------------------------------------------------------------------
Russell 2000 Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
during the fiscal year ended September 30, 1998.(1)
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL(3) %
- --------------------------------------------------------------------------------
(1) THE ADVISOR INTENDS TO WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT
TOTAL FUND OPERATING EXPENSES DO NOT EXCEED 0.90%. FEE WAIVERS MAY BE
DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years
5 years
10 years
9 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
POLICIES & SERVICES
BUYING AND SELLING SHARES
Class Y shares are offered through banks and other financial institutions that
have entered into sales agreements with the funds' distributor. Class Y shares
are available to these financial institutions for the investment of their own
funds. Class Y shares also are available to certain accounts for which the
financial institution acts in a fiduciary, agency or custodial capacity, such as
certain trust accounts and investment advisory accounts. To find out whether you
may purchase class Y shares, contact your financial institution.
- --------------------------------------------------------------------------------
CALCULATING YOUR SHARE PRICE
Your purchase price will be equal to the fund's net asset value (NAV) per share,
which is generally calculated as of the close of regular trading on the New York
Stock Exchange (usually 3 p.m. Central time) every day the exchange is open.
A fund's NAV is equal to the market value of its investments and other assets,
less any liabilities, divided by the number of fund shares. If market prices are
not readily available for an investment or if the advisor believes they are
unreliable, fair value prices may be determined in good faith using methods
approved by the funds' board of directors.
- --------------------------------------------------------------------------------
HOW TO BUY AND SELL SHARES
You may purchase or sell shares by calling your financial institution.
When purchasing shares, payment must be made by wire transfer, which can be
arranged by your financial institution. Because purchases must be paid for by
wire transfer, you can purchase shares only on days when both the New York Stock
Exchange and federally chartered banks are open. You may sell your shares on any
day when the New York Stock Exchange is open.
Purchase orders and redemption requests must be received by your financial
institution by the time specified by the institution to be assured same day
processing. In order for shares to be purchased at that day's price, the funds
must receive your purchase order by 3:00 p.m. Central time and the funds'
custodian must receive federal funds before the close of business. In order for
shares to be sold at that day's price, the funds must receive your redemption
request by 3:00 p.m. Central time. It is the responsibility of your financial
institution to promptly transmit orders to the funds.
If the funds receive your redemption request by 3:00 p.m. Central time, payment
of your redemption proceeds will ordinarily be made by wire on the next business
day. It is possible, however, that payment could be delayed by up to seven days.
- --------------------------------------------------------------------------------
HOW TO EXCHANGE SHARES
If your investment goals or your financial needs change, you may exchange your
shares for class Y shares of another First American fund. Exchanges will be made
at the net asset value per share of each fund at the time of the exchange. There
is no fee to exchange shares. If you are no longer eligible to hold class Y
shares, for example, if you decide to discontinue your fiduciary, agency or
custodian account, you may exchange your shares for class A shares at net asset
value. Class A shares have higher expenses than class Y shares.
To exchange your shares, call your financial institution. In order for your
shares to be exchanged the same day, you must call your financial institution by
the time specified by the institution and your exchange order must be received
by the funds by 3:00 p.m. Central time. It is the responsibility of your
financial institution to promptly transmit your exchange order to the funds.
Before exchanging into any fund, be sure to read its prospectus carefully. A
fund may change or cancel its exchange policies at any time. You will be
notified of any changes. The funds have the right to limit exchanges to four
times per year.
10 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT
- --------------------------------------------------------------------------------
STAYING INFORMED
SHAREHOLDER REPORTS
Shareholder reports are mailed twice a year, in November and May. They include
financial statements, performance information, a message from your portfolio
managers, and, on an annual basis, the auditors' report.
In an attempt to reduce shareholder costs and help eliminate duplication, the
funds will try to limit their mailings to one report for each address that lists
one or more shareholders with the same last name. If you would like additional
copies, please call 1-800-637-2548.
STATEMENTS AND CONFIRMATIONS
Statements summarizing activity in your account are mailed at least quarterly.
Confirms are mailed following each purchase or sale of fund shares.
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from a fund's net investment income are declared and paid quarterly.
Any capital gains are distributed at least once each year.
On the ex-dividend date for a distribution, a fund's share price is reduced by
the amount of the distribution. If you buy shares just before the ex-dividend
date, in effect, you "buy the dividend." You will pay the full price for the
shares and then receive a portion of that price back as a taxable distribution.
Dividend and capital gain distributions will be reinvested in additional shares
of the fund paying the distribution, unless you request cash payments on your
new account form or by writing to the fund. Shares will be priced at the NAV
computed on the ex-dividend date.
- --------------------------------------------------------------------------------
TAXES
Some of the tax consequences of investing in the funds are discussed below. More
information about taxes is in the Statement of Additional Information. However,
because everyone's tax situation is unique, always consult your tax professional
about federal, state and local tax consequences.
TAXES ON DISTRIBUTIONS
Each fund pays its shareholders dividends from its net investment income and any
net capital gains that it has realized. For most investors, fund dividends and
distributions are considered taxable whether they are reinvested or taken in
cash (unless your investment is in an IRA or other tax-advantaged account).
Dividends from a fund's net investment income are taxable as ordinary income.
Distributions of a fund's long-term capital gains are taxable as long-term
gains, regardless of how long you have held your shares. The funds expect that,
as a result of their investment objectives and strategies, their distributions
will consist primarily of capital gains.
TAXES ON TRANSACTIONS
The sale or exchange of fund shares will be a taxable event for you and may
result in a capital gain or loss. The gain or loss will be considered long-term
if you have held your shares for more than one year. A gain or loss on shares
held for one year or less is considered short-term and is taxed at the same
rates as ordinary income.
11 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
MANAGEMENT
INVESTMENT ADVISOR
FIRST AMERICAN ASSET MANAGEMENT
601 SECOND AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55402
U.S. Bank National Association (U.S. Bank), acting through its First American
Asset Management division, is the funds' investment advisor. First American
Asset Management provides investment management services to individuals and
institutions, including corporations, foundations, pensions and retirement
plans. As of December 31, 1998, it had more than $ in assets under
management, including investment company assets of approximately $ . As
investment advisor, First American Asset Management manages the funds' business
and investment activities, subject to the authority of the board of directors.
Each fund pays the investment advisor a monthly fee for providing investment
advisory services. During their most recent fiscal years, the funds paid the
following investment advisory fees to First American Asset Management:
ADVISORY FEE
AS A % OF
AVERAGE DAILY
NET ASSETS
- --------------------------------------------------------------------------------
MICRO CAP VALUE FUND %
REGIONAL EQUITY FUND %
SMALL CAP GROWTH FUND %
SMALL CAP VALUE FUND %
- --------------------------------------------------------------------------------
CUSTODIAN
U.S. BANK NATIONAL ASSOCIATION
U.S. BANK CENTER
180 EAST FIFTH STREET
ST. PAUL, MINNESOTA 55101
ADMINISTRATOR
SEI INVESTMENTS MANAGEMENT CORPORATION
OAKS, PENNSYLVANIA 19456
DISTRIBUTOR
SEI INVESTMENTS DISTRIBUTION CO.
OAKS, PENNSYLVANIA 19456
TRANSFER AGENT
DST SYSTEMS, INC.
330 WEST NINTH STREET
KANSAS CITY, MISSOURI 64105
ADDITIONAL COMPENSATION
In addition to receiving compensation for acting as the funds' investment
advisor as described above, U.S. Bank and its affiliates receive compensation in
connection with the following:
CUSTODY SERVICES. As compensation for acting as the funds' custodian, U.S. Bank
is paid monthly fees equal, on an annual basis, to 0.03% of a fund's average
daily net assets. In addition, U.S. Bank is reimbursed for its out-of-pocket
expenses incurred while providing custody services to the funds.
SUB-ADMINISTRATION SERVICES. U.S. Bank assists the administrator and provides
sub-administration services to the funds. For providing these services, U.S.
Bank is compensated by the funds' administrator at an annual rate of up to
0.05% of each fund's average daily net assets.
SECURITIES LENDING SERVICES. In connection with lending their portfolio
securities, the funds pay administrative and custodial fees to U.S. Bank which
are equal to 40% of the funds' income from these securities lending
transactions.
BROKERAGE TRANSACTIONS. When purchasing and selling portfolio securities for
the funds, the funds' investment advisor may place trades through its
affiliates, U.S. Bancorp Investments, Inc. and U.S. Bancorp Piper Jaffray Inc.,
which will earn commissions on such transactions.
ERISA ACCOUNTS. U.S. Bank 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.
PORTFOLIO MANAGEMENT
Each fund's investments are managed by a team of persons associated with First
American Asset Management.
12 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS
- --------------------------------------------------------------------------------
OBJECTIVES
The funds' objectives, which are described in the "Fund Summaries" section, may
be changed without shareholder approval. If a fund's objectives change, you will
be notified at least 30 days in advance. Please remember: There is no guarantee
that any fund will achieve its objectives.
- --------------------------------------------------------------------------------
INVESTMENT STRATEGIES
The funds' main investment strategies are discussed in the "Fund Summaries"
section. These are the strategies that the funds' investment advisor believes
are most likely to be important in trying to achieve the funds' objectives. You
should be aware that each fund may also use strategies and invest in securities
that are not described in this prospectus, but that are described in the
Statement of Additional Information (SAI). For a copy of the SAI, call Investor
Services at 1-800-637-2548.
TEMPORARY INVESTMENTS
In an attempt to respond to adverse market, economic, political or other
conditions, each fund may invest without limit in cash and in U.S.
dollar-denominated high-quality money market instruments and other short-term
securities. Being invested in these securities may keep a fund from
participating in a market upswing and prevent the fund from achieving its
objectives.
PORTFOLIO TURNOVER
Fund managers may trade securities frequently, resulting, from time to time, in
an annual portfolio turnover rate of over 100%. Trading of securities may
produce capital gains, which are taxable to shareholders when distributed.
Active trading may also increase the amount of commissions or mark-ups to
broker-dealers that the fund pays when it buys and sells securities. The
"Financial Highlights" section of this prospectus shows each fund's historical
portfolio turnover rate.
- --------------------------------------------------------------------------------
RISKS
The main risks of investing in the funds are summarized in the "Fund Summaries"
section. More information about fund risks is presented below.
MARKET RISK
All stocks are subject to price movements due to changes in general economic
conditions, changes in the level of prevailing interest rates, changes in
investor perceptions of the market, or the outlook for overall corporate
profitability.
SECTOR RISK
The stocks of companies within specific industries or sectors of the economy can
periodically perform differently than the overall stock market. This can be due
to changes in such things as the regulatory or competitive environment or to
changes in investor perceptions of a particular industry or sector.
COMPANY RISK
Individual stocks can perform differently than the overall market. This may be a
result of specific factors such as changes in corporate profitability due to the
success or failure of specific products or management strategies, or it may be
due to changes in investor perceptions regarding a company.
RISKS OF SMALL AND MICRO CAP STOCKS
Stocks of small and very small capitalization companies involve substantial
risk. These companies may lack the management expertise, financial resources,
product diversification and competitive strengths of larger companies. Prices of
small and micro cap stocks may be subject to more abrupt or erratic movements
than stock prices of larger, more established companies or the market averages
in general. In addition, the frequency and volume of their trading may be less
than is typical of larger companies, making them subject to wider price
fluctuations. In some cases, there could be difficulties in selling the stocks
of small and very small capitalization companies at the desired time and price.
RISKS OF REGIONAL CONCENTRATION
Regional Equity Fund invests primarily in common stocks of companies
headquartered in Minnesota, North and South Dakota, Montana, Wisconsin,
Michigan, Iowa, Nebraska, Colorado and Illinois. 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 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.
FOREIGN SECURITY RISK
Up to 25% of each fund's total assets may be invested in securities of foreign
issuers which are either listed on a United States stock exchange or represented
by American Depositary Receipts. Securities of foreign issuers, even when
dollar-denominated and publicly traded in the United States, may involve risks
not associated with the securities of domestic issuers. For certain foreign
countries, political or social instability or diplomatic developments could
adversely affect the securities. There is also the risk of loss due to
governmental actions such as a change in tax statutes or the modification of
individual property rights. In addition, individual foreign economies may differ
favorably or unfavorably from the U.S. economy.
RISK OF ACTIVE MANAGEMENT
Each fund is actively managed and its performance therefore will reflect in part
the advisor's ability to make investment decisions which are suited to achieving
the fund's investment objectives. Due to their active management, the funds
could underperform other mutual funds with similar investment objectives.
RISKS OF SECURITIES LENDING
When a fund loans its portfolio securities, it will receive collateral equal to
at least 100% of the value of the loaned securities. Nevertheless, the fund
risks a delay in the recovery of the loaned securities, or even the loss of
rights in the collateral deposited by the borrower if the borrower should fail
financially. To reduce these risks, the funds enter into loan arrangements only
with
13 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS (CONTINUED)
institutions which the funds' advisor has determined are creditworthy under
guidelines established by the funds' board of directors.
YEAR 2000 ISSUES
Like other mutual funds and business and financial organizations, the funds
could be adversely affected if the computer systems used by the funds' advisor,
other service providers and entities with computer systems that are linked to
fund records do not properly process and calculate date-related information from
and after January 1, 2000. While year 2000-related computer problems could have
a negative effect on the funds, the funds' administrator has undertaken a
program designed to assess and monitor the steps being taken by the funds'
service providers to address year 2000 issues. This program includes seeking
assurances from service providers that their systems are or will be year 2000
compliant and reviewing service providers' periodic reports to monitor their
status concerning their year 2000 readiness and compliance.
The administrator and the advisor also report regularly to the funds' board of
directors concerning their own and other service providers' progress toward year
2000 readiness. Although these reports indicate that service providers are or
expect to be year 2000 compliant, there can be no assurance that this will be
the case in all instances or that year 2000 difficulties experienced by others
in the financial services industry will not impact the funds. In addition, there
can be no assurance that year 2000 difficulties will not have an adverse effect
on the funds' investments or on global markets or economies, generally. The
funds are not bearing any of the expenses incurred by their service providers in
preparing for the year 2000.
14 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about the class Y shares
of each fund. Small Cap Growth Fund and Small Cap Value Fund. This information
is intended to help you understand each fund's financial performance for the
past five years or, if shorter, the period of the fund's class Y share
operations. Some of this information reflects financial results for a single
fund share. Total returns in the tables represent the rate that you would have
earned or lost on an investment in a fund, assuming you reinvested all of your
dividends and distributions.
This information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report, along with the funds' financial statements, is included
in the funds' annual report, which is available upon request.
MICRO CAP VALUE FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997(1)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 10.00
-------- --------
Investment Operations:
Net Investment Income --
Net Gains (Losses) on Securities
(both realized and unrealized) 0.95
-------- --------
Total From Investment Operations 0.95
-------- --------
Less Distributions:
Dividends (from net investment income) --
Distributions (from capital gains) --
-------- --------
Total Distributions --
-------- --------
Net Asset Value, End of Period $ $ 10.95
======== ========
Total Return % 9.50%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $246,601
Ratio of Expenses to Average Net Assets % 0.90%
Ratio of Net Income (Loss) to Average Net Assets % (0.02)%
Ratio of Expenses to Average Net Assets (excluding waivers) % (1.07)%
Ratio of Net Income (Loss) to Average Net Assets (excluding waivers) %
Portfolio Turnover Rate % 0%
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Commenced operations on August 8, 1997. All ratios for the period have been
annualized.
15 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
REGIONAL EQUITY FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994(1)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 17.75 $ 17.13 $ 12.52 $ 12.41
-------- -------- -------- -------- --------
Investment Operations:
Net Investment Income 0.05 0.09 0.11 0.07
Net Gains (Losses) on Securities
(both realized and unrealized) 6.18 1.70 4.90 0.11
-------- -------- -------- -------- --------
Total From Investment Operations 6.23 1.79 5.01 0.18
-------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.13) (0.06) (0.08) (0.07)
Distributions (from capital gains) (0.69) (1.11) (0.32) --
-------- -------- -------- -------- --------
Total Distributions (0.82) (1.17) (0.40) (0.07)
-------- -------- -------- -------- --------
Net Asset Value, End of Period $ $ 23.16 $ 17.75 $ 17.13 $ 12.52
======== ======== ======== ======== ========
Total Return % 36.49% 11.27% 41.40% 1.46%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $351,007 $259,138 $188,583 $ 96,045
Ratio of Expenses to Average Net Assets % 0.90% 0.88% 0.84% 0.80%
Ratio of Net Income to Average Net Assets % 0.85% 0.49% 0.78% 0.82%
Ratio of Expenses to Average Net Assets (excluding waivers) % 0.90% 0.90% 0.95% 1.05%
Ratio of Net Income to Average Net Assets (excluding waivers) % % % % %
Portfolio Turnover Rate % 17% 36% 42% 41%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class Y shares have been offered since February 4, 1994. All ratios for the
period have been annualized.
16 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
SMALL CAP GROWTH FUND(1)
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996(2) 1995 1994(3)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 17.11 $ 17.68 $ 15.61 $ 15.30
-------- -------- -------- -------- --------
Investment Operations:
Net Investment Income (Loss) (0.16) 0.06 0.09 0.07
Net Gains (Losses) on Securities
(both realized and unrealized) 5.66 0.87 2.07 0.27
-------- -------- -------- -------- --------
Total From Investment Operations 5.50 0.93 2.16 0.34
-------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.04) (0.07) (0.09) (0.03)
Distributions (from capital gains) (5.16) (1.43) -- --
-------- -------- -------- -------- --------
Total Distributions (5.20) (1.50) (0.09) (0.03)
-------- -------- -------- -------- --------
Net Asset Value, End of Period $ $ 17.41 $ 17.11 $ 17.68 $ 15.61
======== ======== ======== ======== ========
Total Return % 45.66% 5.38% 13.88% 2.12%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $35,647 $ 30,908 $ 48,421 $ 78,376
Ratio of Expenses to Average Net Assets % 1.34% 1.32% 1.40% 1.32%
Ratio of Net Income (Loss) to Average Net Assets % (0.75)% 0.20% 0.43% 0.37%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.98% 1.79% 1.63% 1.54%
Ratio of Net Income (Loss) to Average Net Assets (excluding waivers) % % % % %
Portfolio Turnover Rate % 109% 125% 182% 177%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts for Small Cap Growth Fund have been adjusted to reflect
the conversion ratios utilized for the reorganization of Piper Small Company
Growth Fund and Small Cap Growth Fund that occurred on July 31, 1998. Piper
Small Company Growth Fund is the financial reporting survivor. Therefore,
the financial highlights for Small Cap Growth Fund represent the financial
highlights of Piper Small Company Growth Fund.
(2) Per share amounts have been adjusted to reflect the effect of the stock
dividend declared on October 21, 1996.
(3) Commenced operations on April 4, 1994. All ratios for the period have been
annualized.
17 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
SMALL CAP VALUE FUND(1)
<TABLE>
<CAPTION>
Fiscal year Fiscal year
ended November 30, ended July 31,
-------------------- ---------------------------------
1998 1997(2) 1997 1996 1995(3)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 17.87 $ 13.96 $ 13.26 $ 10.00
-------- -------- -------- -------- --------
Investment Operations:
Net Investment Income (Loss) (0.01) 0.04 0.06 0.13
Net Gains (Losses) on Securities
(both realized and unrealized) 0.37 5.43 1.81 3.30
-------- -------- -------- -------- --------
Total From Investment Operations 0.36 5.47 1.87 3.43
-------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) -- (0.04) (0.06) (0.12)
Distributions (from capital gains) -- (1.52) (1.11) (0.05)
-------- -------- -------- -------- --------
Total Distributions -- (1.56) (1.17) (0.17)
-------- -------- -------- -------- --------
Net Asset Value, End of Period $ $ 18.23 $ 17.87 $ 13.96 $ 13.26
======== ======== ======== ======== ========
Total Return % 2.01% 41.96% 14.94% 34.76%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $461,046 $449,988 $297,793 $209,626
Ratio of Expenses to Average Net Assets % 1.06% 1.06% 1.08% 0.60%
Ratio of Net Income (Loss) to Average Net Assets % (0.06)% 0.25% 0.41% 1.20%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.06% 1.06% 1.08% 1.12%
Ratio of Net Income (Loss) to Average Net Assets (excluding waivers) % % % % %
Portfolio Turnover Rate % 3% 29% 34% 37%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The financial highlights for Small Cap Value Fund set forth herein include
the historical financial highlights of the Qualivest Small Companies Value
Fund (class Q shares). The assets of the Qualivest Small Companies Value
Fund were acquired by Small Cap Value Fund on November 21, 1997. In
connection with such acquisition, class Q shares of the Qualivest Small
Companies Value Fund were exchanged for class Y shares of Small Cap Value
Fund.
(2) For the four month period ended November 30, 1997. Effective November 30,
1997 the fund's fiscal year end changed from July 31 to November 30.
(3) Commenced operations on August 1, 1994. All ratios for the period have been
annualized.
18 PROSPECTUS - FIRST AMERICAN SMALL CAP FUNDS
<PAGE>
FOR MORE INFORMATION
More information about the funds is available in the funds' Statement of
Additional Information and annual and semiannual reports.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more details about the funds and their policies. A current SAI
is on file with the Securities and Exchange Commission (SEC) and is incorporated
into this prospectus by reference (which means that it is legally considered
part of this prospectus).
ANNUAL AND SEMIANNUAL REPORTS
Additional information about the funds' investments is available in the funds'
annual and semiannual reports to shareholders. In the funds' annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the funds' performance during their last fiscal year.
You can obtain a free copy of the funds' SAI and/or free copies of the funds'
most recent annual or semiannual reports by calling Investor Services at
1-800-637-2548. The material you request will be sent by first-class mail or
other means designed to ensure equally prompt delivery, within three business
days of receipt of the request.
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC, or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. For more information, call
1-800-SEC-0330.
Information about the funds is also available on the Internet. Text-only
versions of fund documents can be viewed online or downloaded from the SEC's
Internet site at http://www.sec.gov.
SEC file number: 811-05309
FAIF-1001 (9/1998)
<PAGE>
FEBRUARY 1, 1999
INTERNATIONAL FUNDS
CLASS A, CLASS B AND CLASS C SHARES
EMERGING MARKETS FUND
INTERNATIONAL FUND
INTERNATIONAL INDEX FUND
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of these funds, or determined if the
information in this prospectus is accurate or complete. Any statement to the
contrary is a criminal offense.
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(R)
<PAGE>
TABLE OF CONTENTS
FUND SUMMARIES
- --------------------------------------------------------------------------------
Emerging Markets Fund 2
- --------------------------------------------------------------------------------
International Fund 4
- --------------------------------------------------------------------------------
International Index Fund 6
- --------------------------------------------------------------------------------
POLICIES & SERVICES
- --------------------------------------------------------------------------------
Buying Shares 8
- --------------------------------------------------------------------------------
Selling Shares 11
- --------------------------------------------------------------------------------
Managing Your Investment 12
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Management 14
- --------------------------------------------------------------------------------
More About The Funds 15
- --------------------------------------------------------------------------------
Financial Highlights 17
- --------------------------------------------------------------------------------
FOR MORE INFORMATION Back Cover
- --------------------------------------------------------------------------------
<PAGE>
FUND SUMMARIES
INTRODUCTION
This section of the prospectus describes the objectives of the First American
International Funds, summarizes the main investment strategies used by each fund
in trying to achieve its objectives, and highlights the risks involved with
these strategies. It also provides you with information about the performance,
fees and expenses of the funds.
AN INVESTMENT IN THE FUNDS IS NOT A DEPOSIT OF U.S. BANK NATIONAL ASSOCIATION
AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
1 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
FUND SUMMARIES
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Emerging Markets Fund has an objective of long-term growth of capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Emerging Markets Fund invests primarily in
equity securities from the world's emerging markets. Normally, the fund will
invest in securities traded in at least six foreign countries.
A country is considered to have an "emerging market" if it has a relatively low
gross national product per capita compared to the world's major economies, and
the potential for rapid economic growth. Countries with emerging markets
include:
o THOSE THAT HAVE AN EMERGING STOCK MARKET (AS DEFINED BY THE INTERNATIONAL
FINANCIAL CORPORATION)
o THOSE WITH LOW-TO MIDDLE-INCOME ECONOMICS (ACCORDING TO THE WORLD BANK)
o THOSE LISTED IN WORLD BANK PUBLICATIONS AS "DEVELOPING"
In choosing investments for the fund, the fund's sub-advisor places primary
emphasis on country selection. This is followed by the selection of industries
or sectors within or across countries and the selection of individual stocks
within those industries or sectors.
Equity securities in which the fund invests include common and preferred stock,
securities convertible into common stock and warrants. In addition, the fund may
invest in securities representing underlying international securities, such as
American Depositary Receipts and European Depositary Receipts, and in securities
of other investment companies.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market.
RISKS OF INTERNATIONAL INVESTING
International investing involves risks not typically associated with domestic
investing. Because of these risks, the fund may be subject to greater volatility
than most mutual funds which invest principally in domestic securities. Risks of
international investing include adverse currency fluctuations, potential
political and economic instability, limited liquidity and volatile prices of
non-U.S. securities, limited availability of information regarding non-U.S.
companies, investment and repatriation restrictions, and foreign taxation.
RISKS OF EMERGING MARKETS
The risks of international investing are particularly significant in emerging
markets. Investing in emerging markets generally involves exposure to economic
structures that are less diverse and mature and political systems that are less
stable than those of developed countries.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's class A shares has varied
from year to year. The performance of class B shares will be lower due to their
higher expenses. Sales charges are not reflected in the chart; if they had been,
returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
2 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
FUND SUMMARIES
EMERGING MARKETS FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) Performance from June 21,
1996, to August 10, 1998,
[BAR CHART] is that of Emerging
Markets Growth Fund, a
1994 -18.10% series of Piper Global
1995 -21.77% Funds, Inc. -- II.
1996 29.31% Performance prior to June
1997 -1.27% 21, 1996, is that of
1998 Hercules Latin American
Value Fund, a series of
Hercules Funds Inc.
(2) The since inception
performance of the index
is calculated from the
month end following the
fund's inception.
(3) An unmanaged index of
securities from emerging
markets that are open to
foreign investors.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Inception Since
AS OF 12/31/98(1) Date One Year Five Years Inception(2)
- --------------------------------------------------------------------------------
Emerging Markets Fund (Class A) 11/9/93 % % %
- --------------------------------------------------------------------------------
Emerging Markets Fund (Class B) 1/98 N/A N/A %
- --------------------------------------------------------------------------------
Morgan Stanley Emerging Markets
Free Index(3) % % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below are based on class A
share expenses before any waivers during the fiscal year ended September 30,
1998.(1)
CLASS A CLASS B
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)
AS A % OF OFFERING PRICE 4.50%(2) 0.00%
MAXIMUM DEFERRED SALES CHARGE (LOAD)
AS A % OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS 0.00%(3) 5.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 1.25% 1.25%
Distribution and Service (12b-1) Fees 0.25% 1.00%
Other Expenses % %
TOTAL % %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
1.70% AND 2.45%, RESPECTIVELY, FOR CLASS A AND CLASS B SHARES. FEE WAIVERS
MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. See "Buying Shares
-- Calculating Your Share Price."
(3) Class A share investments of $1 million or more on which no front-end sales
charge is paid may be subject to a contingent deferred sales charge. See
"Buying Shares -- Calculating Your Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
CLASS B CLASS B
assuming assuming no
redemption redemption
at end of at end of
CLASS A each period each period
- --------------------------------------------------------------------------------
1 year $ $ $
3 years $ $ $
5 years $ $ $
10 years $ $ $
3 PROSPECTUS - First American International Funds
<PAGE>
FUND SUMMARIES
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
OBJECTIVE
International Fund has an objective of long-term growth of capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, International Fund invests primarily in equity
securities which trade in markets other than the United States. These
securities generally are issued by companies:
o THAT ARE DOMICILED IN COUNTRIES OTHER THAN THE UNITED STATES, OR
o THAT DERIVE AT LEAST 50% OF EITHER THEIR REVENUES OR THEIR PRE-TAX INCOME
FROM ACTIVITIES OUTSIDE OF THE UNITED STATES.
Normally, the fund will invest in securities traded in at least three foreign
countries.
In choosing investments for the fund, the fund's sub-advisor places primary
emphasis on country selection. This is followed by the selection of industries
or sectors within or across countries and the selection of individual stocks
within those industries or sectors. Investments are expected to be made
primarily in developed markets and larger capitalization companies.
Equity securities in which the fund invests include common and preferred stock,
securities convertible into common stock and warrants. In addition, the fund may
invest in securities representing underlying international securities, such as
American Depositary Receipts and European Depositary Receipts, and in securities
of other investment companies.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market.
RISKS OF INTERNATIONAL INVESTING
International investing involves risks not typically associated with domestic
investing. Because of these risks, and because of the sub-advisor'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. Risks of international investing
include adverse currency fluctuations, potential political and economic
instability, limited liquidity and volatile prices of non-U.S. securities,
limited availability of information regarding non-U.S. companies, investment and
repatriation restrictions, and foreign taxation.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's class A shares has varied
from year to year. The performance of class B and class C shares will be lower
due to their higher expenses. Sales charges are not reflected in the chart; if
they had been, returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
4 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
FUND SUMMARIES
INTERNATIONAL FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The since inception
performance of the index
[BAR CHART] is calculated from the
month end following the
1995 9.08% date the fund commenced
1996 7.84% operations.
1997 16.63%
1998 (2) An unmanaged index
including approximately
1,027 companies
representing the stock
markets of approximately
14 European countries,
Australia, New Zealand,
Japan, Hong Kong and
Singapore.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Inception Since
AS OF 12/31/98 Date One Year Five Years Inception(1)
- --------------------------------------------------------------------------------
International Fund (Class A) 4/7/94 % % %
- --------------------------------------------------------------------------------
International Fund (Class B) 8/15/94 % % %
- --------------------------------------------------------------------------------
Morgan Stanley Europe, Australia,
Far East Composite Index(2) % % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below are based on class A
and class B expenses before any waivers during the fiscal year ended September
30, 1998.(1)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------------------
SHAREHOLDER FEES
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MAXIMUM SALES CHARGE (LOAD)
AS A % OF OFFERING PRICE 4.50%(2) 0.00% 1.00%
MAXIMUM DEFERRED SALES CHARGE (LOAD)
AS A % OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS 0.00%(3) 5.00% 1.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------------
Management Fees 1.25% 1.25% 1.25%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses % % %
TOTAL % % %
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
1.60%, 2.35% AND 2.35%, RESPECTIVELY, FOR CLASS A, CLASS B AND CLASS C
SHARES. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. See "Buying Shares
-- Calculating Your Share Price."
(3) Class A share investments of $1 million or more on which no front-end sales
charge is paid may be subject to a contingent deferred sales charge. See
"Buying Shares -- Calculating Your Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
CLASS B CLASS B CLASS C CLASS C
assuming assuming no assuming assuming no
redemption redemption redemption redemption
at end of at end of at end of at end of
CLASS A each period each period each period each period
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
</TABLE>
5 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
FUND SUMMARIES
INTERNATIONAL INDEX FUND
- --------------------------------------------------------------------------------
OBJECTIVE
International Index Fund's objective is to provide investment results that
correspond to the performance of the Morgan Stanley Europe, Australia, Far East
Composite Index (the "EAFE Index").
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, International Index Fund invests primarily in
common stocks included in the EAFE Index. The EAFE Index currently includes
approximately 1,027 companies representing the stock markets of approximately 14
European countries, Australia, New Zealand, Japan, Hong Kong and Singapore. The
fund's advisor believes that the fund's objective can best be 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. A computer program is used
to identify which stocks should be purchased or sold in order to replicate, as
closely as possible, the composition of the EAFE Index.
Because the fund may not always hold all of the stocks included in the EAFE
Index, and because the fund has expenses and the index does not, the fund will
not duplicate the index's performance precisely. However, the fund's advisor
believes that there should be a close correlation between the fund's performance
and that of the EAFE Index in both rising and falling markets.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market.
RISKS OF INTERNATIONAL INVESTING
International investing involves risks not typically associated with domestic
investing. Because of these risks, the fund may be subject to greater volatility
than most mutual funds which invest principally in domestic securities. Risks of
international investing include adverse currency fluctuations, potential
political and economic instability, limited liquidity and volatile prices of
non-U.S. securities, limited availability of information regarding non-U.S.
companies, investment and repatriation restrictions, and foreign taxation.
FAILURE TO MATCH THE PERFORMANCE OF 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.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's class A shares has varied
from year to year. The performance of class B shares will be lower due to their
higher expenses. Sales charges are not reflected in the chart; if they had been,
returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
fund's performance reflects sales charges and fund expenses; the benchmark is
unmanaged and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
6 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
FUND SUMMARIES
INTERNATIONAL INDEX FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The since inception
performance of the index
is calculated from the
[BAR CHART] month end following the
date the fund commenced
1996 4.81% operations.
1997 0.02%
1998 (2) An unmanaged index
including approximately
1,027 companies
representing the stock
markets of approximately
14 European countries,
Australia, New Zealand,
Japan, Hong Kong and
Singapore.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Inception Since
AS OF 12/31/98 Date One Year Inception(1)
- --------------------------------------------------------------------------------
International Index Fund (Class A) 7/3/95 % %
- --------------------------------------------------------------------------------
International Index Fund (Class B) 11/24/97 % %
- --------------------------------------------------------------------------------
Morgan Stanley Europe, Australia,
Far East Composite Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show expenses before
any waivers during the fiscal year ended September 30, 1998.(1)
CLASS A CLASS B
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)
AS A % OF OFFERING PRICE 4.50%(2) 0.00%
MAXIMUM DEFERRED SALES CHARGE (LOAD)
AS A % OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS 0.00%(3) 5.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70% 0.70%
Distribution and Service (12b-1) Fees 0.25% 1.00%
Other Expenses % %
TOTAL % %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
1.00% AND 1.75%, RESPECTIVELY, FOR CLASS A AND CLASS B SHARES. FEE WAIVERS
MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. See "Buying Shares
-- Calculating Your Share Price."
(3) Class A share investments of $1 million or more on which no front-end sales
charge is paid may be subject to a contingent deferred sales charge. See
"Buying Shares -- Calculating Your Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
CLASS B CLASS B
assuming assuming no
redemption redemption
at end of at end of
CLASS A each period each period
- --------------------------------------------------------------------------------
1 year $ $ $
3 years $ $ $
5 years $ $ $
10 years $ $ $
7 PROSPECTUS - First American International Funds
<PAGE>
POLICIES & SERVICES
BUYING SHARES
You may become a shareholder in any of the funds with an initial investment of
$1,000 or more ($250 for a retirement plan). Additional investments can be made
for as little as $100 ($25 for a retirement plan). The funds have the right to
waive these minimum investment requirements for employees of the funds' advisor
and its affiliates. The funds also have the right to reject any purchase order.
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
All funds in this prospectus offer class A and class B shares. International
Fund also offers class C shares.
Each class has its own cost structure. The amount of your purchase and the
length of time you expect to hold your shares will be factors in determining
which class of shares is best for you.
CLASS A SHARES
If you are making an investment that qualifies for a reduced sales charge, class
A shares may be best for you. Class A shares feature:
o A FRONT-END SALES CHARGE, DESCRIBED BELOW
o LOWER ANNUAL EXPENSES THAN CLASS B OR CLASS C SHARES SEE "FUND SUMMARIES"
FOR MORE INFORMATION ON FEES AND EXPENSES
Because class A shares will normally be the better choice if your investment
qualifies for a reduced sales charge:
o ORDERS FOR CLASS B SHARES FOR $250,000 OR MORE NORMALLY WILL BE TREATED AS
ORDERS FOR CLASS A SHARES
o ORDERS FOR CLASS C SHARES FOR $1 MILLION OR MORE NORMALLY WILL BE TREATED AS
ORDERS FOR CLASS A SHARES
o ORDERS FOR CLASS B OR CLASS C SHARES BY AN INVESTOR ELIGIBLE TO PURCHASE
CLASS A SHARES WITHOUT A FRONT-END SALES CHARGE NORMALLY WILL BE TREATED AS
ORDERS FOR CLASS A SHARES
CLASS B SHARES
If you want all your money to go to work for you immediately, you may prefer
class B shares. Class B shares have no front-end sales charge, however they do
have:
o HIGHER ANNUAL EXPENSES THAN CLASS A SHARES. (SEE "FEES AND EXPENSES" IN THE
"FUND SUMMARIES" SECTION)
o A BACK-END SALES CHARGE, CALLED A "CONTINGENT DEFERRED SALES CHARGE," IF YOU
REDEEM YOUR SHARES WITHIN SIX YEARS OF PURCHASE
o AUTOMATIC CONVERSION TO CLASS A SHARES APPROXIMATELY EIGHT YEARS AFTER
PURCHASE, THEREBY REDUCING FUTURE ANNUAL EXPENSES
CLASS C SHARES
These shares combine some of the characteristics of class A and class B shares.
Class C shares have a low front-end sales charge of 1%, so more of your
investment goes to work immediately than if you had purchased class A shares.
However, class C shares also feature:
o A 1% CONTINGENT DEFERRED SALES CHARGE IF YOU REDEEM YOUR SHARES WITHIN 18
MONTHS OF PURCHASE
o HIGHER ANNUAL EXPENSES THAN CLASS A SHARES. (SEE "FEES AND EXPENSES" IN THE
"FUND SUMMARIES" SECTION)
o NO CONVERSION TO CLASS A SHARES
Because class C shares do not convert to class A shares, they will continue to
have higher annual expenses than class A shares for as long as you hold them.
- --------------------------------------------------------------------------------
12b-1 FEES
Under Rule 12b-1 of the Investment Company Act, each fund is allowed to pay the
fund's distributor an annual fee for the distribution and sale of its shares and
for services provided to shareholders.
FOR 12b-1 FEES ARE EQUAL TO:
- ---------------- ---------------------------------
CLASS A SHARES 0.25% OF AVERAGE DAILY NET ASSETS
CLASS B SHARES 1% OF AVERAGE DAILY NET ASSETS
CLASS C SHARES 1% OF AVERAGE DAILY NET ASSETS
Because these fees are paid out of a fund's assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
The class A share 12b-1 fee is a shareholder servicing fee. For class B and
class C shares, a portion of the 12b-1 fee equal to 0.25% of average daily net
assets is a shareholder servicing fee and the rest is a distribution fee.
The funds' distributor uses the shareholder servicing fee to compensate brokers,
participating institutions and "one-stop" mutual fund networks for providing
ongoing services to shareholder accounts. These institutions receive annual fees
equal to 0.25% of a fund's class A, class B and class C share average daily net
assets attributable to shares sold through such institutions. The funds'
distributor also pays institutions which sell class C shares a 0.75% annual
distribution fee beginning one year after the shares are sold. The distributor
may pay additional fees to institutions, using the sales charges it receives, in
exchange for sales and/or administrative services performed on behalf of the
institution's customers.
- --------------------------------------------------------------------------------
CALCULATING YOUR SHARE PRICE
Your purchase price will be based on the fund's net asset value (NAV) per share,
which is generally calculated as of the close of regular trading on the New York
Stock Exchange (usually 3 p.m. Central time) every day the exchange is open.
Your order will be priced at the next NAV calculated after your order is
accepted by the fund.
A fund's NAV is equal to the market value of its investments and other assets,
less any liabilities, divided by the number of fund shares. If market prices are
not readily available for an investment or if the advisor believes they are
unreliable, fair value prices may be determined in good faith using methods
approved by the funds' board of directors.
Each fund will hold portfolio securities that trade on weekends or other days
when the fund does not price
8 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
POLICIES & SERVICES
BUYING SHARES (CONTINUED)
its shares. Therefore, the net asset value of a fund's shares may change on days
when shareholders will not be able to purchase or redeem their shares.
CLASS A SHARES
Your purchase price is typically the net asset value of your shares, plus a
front-end sales charge. Sales charges vary depending on the amount of your
purchase. The funds' distributor receives the sales charge you pay and reallows
a portion of the sales charge to your broker or participating institution.
MAXIMUM
SALES CHARGE REALLOWANCE
AS A % OF AS A % OF AS A % OF
PURCHASE NET AMOUNT PURCHASE
PRICE INVESTED PRICE
- --------------------------------------------------------------------------------
LESS THAN $ 50,000 4.50% 4.71% 4.05%
$ 50,000 - $ 99,999 4.00% 4.17% 3.60%
$100,000 - $249,999 3.50% 3.63% 3.15%
$250,000 - $499,999 2.75% 2.83% 2.47%
$500,000 - $999,999 2.00% 2.04% 1.80%
$1 MILLION AND OVER 0% 0% 0%
REDUCING YOUR SALES CHARGE
As shown in the preceding tables, larger purchases of class A shares reduce the
percentage sales charge you pay. You also may reduce your sales charge in the
following ways:
PRIOR PURCHASES. Prior purchases of class A shares of any First American fund
(except a money market fund) will be factored into your sales charge
calculation. For example, let's say you're making a $10,000 investment. If the
current value of all other First American fund class A shares that you hold is
$40,000 or more, your current sales charge is reduced. To receive a reduced
sales charge, you must notify the funds' transfer agent of your prior purchases.
This must be done at the time of purchase, either directly to the transfer agent
in writing or by notifying your broker or financial institution.
PURCHASES BY RELATED ACCOUNTS. Concurrent and prior purchases by certain other
accounts also will be combined with your purchase to determine your sales
charge. For example, purchases made by your spouse or children under age 21 will
reduce your sales charge. To receive a reduced sales charge, you must notify the
funds' transfer agent of purchases by any related accounts. This must be done at
the time of purchase, either directly to the transfer agent in writing or by
notifying your broker or financial institution.
LETTER OF INTENT. If you plan to invest $50,000 or more over a 13-month period
in class A shares of any First American fund except the money market funds, you
may reduce your sales charge by signing a non-binding letter of intent. (If you
do not fulfill the letter of intent, you must pay the applicable sales charge.
In addition, if you reduce your sales charge to zero under a letter of intent
and then sell your class A shares within 12 months of their purchase, you may be
charged a contingent deferred sales charge of 1%. See "For Investments of Over
$1 Million.")
More information on these ways to reduce your sales charge appears in the
Statement of Additional Information (SAI). The SAI also contains information on
investors who are eligible to purchase class A shares without a sales charge.
- --------------------------------------------------------------------------------
FOR INVESTMENTS OF OVER $1 MILLION
There is no initial sales charge on class A share purchases of $1 million
or more. However, your broker or financial institution may receive a
commission of up to 1% on your purchase. If such a commission is paid, you
will be assessed a contingent deferred sales charge (CDSC) of 1% if you
sell your shares within 12 months. To find out whether you will be assessed
a CDSC, ask your broker or financial institution. The funds' distributor
receives any CDSC imposed when you sell your class A shares. The CDSC is
based on the value of your shares at the time of purchase or at the time of
sale, whichever is less. The charge does not apply to shares you acquired
by reinvesting your dividend or capital gain distributions.
To help lower your costs, shares that are not subject to a CDSC will be
sold first. Other shares will then be sold in an order that minimizes your
CDSC. The CDSC will be waived for (i) redemptions following the death or
disability of a shareholder and (ii) redemptions that equal the minimum
required distribution from an individual retirement account or other
retirement plan to a shareholder who has reached the age of 70 1/2.
CLASS B SHARES
Your purchase price for class B shares is their net asset value -- there is no
front-end sales charge. However, if you redeem your shares within six years of
purchase, you will pay a back-end sales charge, called a contingent deferred
sales charge (CDSC). Although you pay no front-end sales charge when you buy
class B shares, the funds' distributor pays a sales commission of 4.25% of the
amount invested to brokers and financial institutions which sell class B shares.
The funds' distributor receives any CDSC imposed when you sell your class B
shares.
Your CDSC will be based on the value of your shares at the time of purchase or
at the time of sale, whichever is less. The charge does not apply to shares you
acquired by reinvesting your dividend or capital gain distributions. Shares will
be sold in the order that minimizes your CDSC.
9 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
POLICIES & SERVICES
BUYING SHARES (CONTINUED)
CDSC AS A % OF THE
YEAR SINCE PURCHASE VALUE OF YOUR SHARES
- --------------------------------------------------------------------------------
FIRST 5%
SECOND 5%
THIRD 4%
FOURTH 3%
FIFTH 2%
SIXTH 1%
SEVENTH 0%
EIGHTH 0%
Your class B shares will automatically convert to class A shares, eight years
after the first day of the month following your purchase of shares. For example,
if you purchase class B shares on June 15, 1999, they will convert to class A
shares on June 1, 2007.
The CDSC will be waived for:
o REDEMPTIONS FOLLOWING THE DEATH OR DISABILITY OF A SHAREHOLDER.
o REDEMPTIONS THAT EQUAL THE MINIMUM REQUIRED DISTRIBUTION FROM AN INDIVIDUAL
RETIREMENT ACCOUNT OR OTHER RETIREMENT PLAN TO A SHAREHOLDER WHO HAS REACHED
THE AGE OF 70 1/2.
o REDEMPTIONS THROUGH A SYSTEMATIC WITHDRAWAL PLAN, AT A RATE OF UP TO 12% A
YEAR OF YOUR ACCOUNT'S VALUE. DURING THE FIRST YEAR, THE 12% ANNUAL LIMIT
WILL BE BASED ON THE VALUE OF YOUR ACCOUNT ON THE DATE THE PLAN IS
ESTABLISHED. THEREAFTER, IT WILL BE BASED ON THE VALUE OF YOUR ACCOUNT ON
THE PRECEDING DECEMBER 31.
CLASS C SHARES
Your purchase price for class C shares is their net asset value plus a front-end
sales charge equal to 1% of the purchase price (1.01% of the net amount
invested). If you redeem your shares within 18 months of purchase, you will be
assessed a contingent deferred sales charge (CDSC) of 1% of the value of your
shares at the time of purchase or at the time of sale, whichever is less. The
CDSC does not apply to shares you acquired by reinvesting your dividend or
capital gain distributions. Shares will be sold in the order that minimizes your
CDSC.
Even though your sales charge is only 1%, the funds' distributor pays a
commission equal to 2% of your purchase price to your broker or participating
institution. The distributor receives any CDSC imposed when you sell your class
C shares.
The CDSC for class C shares will be waived in the same circumstances as the
class B share CDSC. See "Class B Shares" above.
Unlike class B shares, class C shares do not convert to class A shares after a
specified period of time. Therefore, your shares will continue to have higher
annual expenses than class A shares.
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
BY PHONE
You may purchase shares by calling your broker or financial institution, if they
have a sales agreement with the funds' distributor. In many cases, your order
will be effective that day if received by your broker or financial institution
by the close of regular trading on the New York Stock Exchange. In some cases,
however, you will have to transmit your request by an earlier time in order for
your purchase request to be effective that day. This allows your broker or
financial institution time to process your request and transmit it to the fund.
Some financial institutions may charge a fee for helping you purchase shares.
Contact your broker or financial institution for more information.
If you are paying by wire, you may purchase shares by calling 1-800-637-2548
before 3 p.m. Central time. All information will be taken over the telephone,
and your order will be placed when the funds' custodian receives payment by
wire. Wire federal funds as follows:
U.S. BANK NATIONAL ASSOCIATION, MINNEAPOLIS, MN
ABA NUMBER 091000022
FOR CREDIT TO: DST SYSTEMS, INC.:
ACCOUNT NUMBER 160234580266
FOR FURTHER CREDIT TO (INVESTOR NAME AND FUND NAME)
You cannot purchase shares by wire on days when the New York Stock Exchange or
federally chartered banks are closed.
BY MAIL
To purchase shares by mail, simply complete and sign a new account form, enclose
a check made payable to the fund you wish to invest in, and mail both to:
FIRST AMERICAN FUNDS
C/O DST SYSTEMS, INC.
P.O. BOX 419382
KANSAS CITY, MISSOURI 64141-6382
After you have established an account, you may continue to purchase shares by
mailing your check to First American Funds at the same address.
Please note the following:
o ALL PURCHASES MUST BE MADE IN U.S. DOLLARS
o THIRD-PARTY CHECKS, CREDIT CARDS, CREDIT CARD CHECKS AND CASH ARE NOT
ACCEPTED
o IF A CHECK DOES NOT CLEAR YOUR BANK, THE FUNDS RESERVE THE RIGHT TO CANCEL
THE PURCHASE, AND YOU COULD BE LIABLE FOR ANY LOSSES OR FEES INCURRED
- --------------------------------------------------------------------------------
INVESTING AUTOMATICALLY
To purchase shares as part of a savings discipline, you may add to your
investment on a regular basis:
o BY HAVING $100 OR MORE AUTOMATICALLY WITHDRAWN FROM YOUR BANK ACCOUNT ON A
PERIODIC BASIS AND INVESTED IN FUND SHARES
o THROUGH AUTOMATIC MONTHLY EXCHANGES OF YOUR SHARES OF PRIME OBLIGATIONS
FUND, A MONEY MARKET FUND IN THE FIRST AMERICAN FAMILY OF FUNDS. EXCHANGES
MUST BE MADE INTO THE SAME CLASS OF SHARES THAT YOU HOLD IN PRIME
OBLIGATIONS FUND
You may apply for participation in either of these programs through your broker
or financial institution or by calling 1-800-637-2548.
10 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
POLICIES & SERVICES
SELLING SHARES
- --------------------------------------------------------------------------------
HOW TO SELL SHARES
You may sell your shares on any day when the New York Stock Exchange is open.
Your shares will be sold at the next NAV calculated after your order is accepted
by the funds' transfer agent, less any applicable contingent deferred sales
charge.
The proceeds from your sale normally will be mailed or wired within one day, but
in no event more than seven days, after your request is received in proper form.
BY PHONE
If you purchased shares through a broker or financial institution, simply call
them to sell your shares. In many cases, your redemption will be effective that
day if received by your broker or financial institution by the close of regular
trading on the New York Stock Exchange. In some cases, however, you will have to
call by an earlier time in order for your redemption to be effective that day.
This allows your broker or financial institution time to process your request
and transmit it to the fund. Contact your broker or financial institution
directly for more information.
If you did not purchase shares through a broker or financial institution, you
may sell your shares by calling 1-800-637-2548. Proceeds can be wired to your
bank account (if the proceeds are at least $1,000 and you have previously
supplied your bank account information to the transfer agent) or sent to you by
check.
If you recently purchased your shares by check or through the Automated Clearing
House (ACH), proceeds from the sale of those shares may not be available until
your check or ACH payment has cleared, which may take up to 10 calendar days.
BY MAIL
To sell shares by mail, send a written request to your broker or financial
institution, or to the funds' transfer agent at the following address:
FIRST AMERICAN FUNDS
C/O DST SYSTEMS, INC.
P.O. BOX 419382
KANSAS CITY, MISSOURI 64141-6382
Your request should include the following information:
o NAME OF THE FUND
o ACCOUNT NUMBER
o DOLLAR AMOUNT OR NUMBER OF SHARES REDEEMED
o NAME ON THE ACCOUNT
o SIGNATURES OF ALL REGISTERED ACCOUNT OWNERS
Signatures on a written request must be guaranteed if:
o YOU WOULD LIKE THE PROCEEDS FROM THE SALE TO BE PAID TO ANYONE OTHER THAN TO
THE SHAREHOLDER OF RECORD
o YOU WOULD LIKE THE CHECK MAILED TO AN ADDRESS OTHER THAN THE ADDRESS ON THE
FUNDS' RECORDS
o YOUR REDEMPTION REQUEST IS FOR $25,000 OR MORE
A signature guarantee assures that a signature is genuine and protects
shareholders from unauthorized account transfers. Banks, savings and loan
associations, trust companies, credit unions, broker-dealers and member firms of
a national securities exchange may guarantee signatures. Call your financial
institution to determine if it has this capability.
Proceeds from a written redemption request will be sent to you by check.
- --------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWALS
If your account has a value of $5,000 or more, you may redeem a specific dollar
amount from your account on a regular basis. To set up systematic withdrawals,
contact your broker or financial institution.
You should not make systematic withdrawals if you plan to continue investing in
the fund, due to sales charges and tax liabilities.
- --------------------------------------------------------------------------------
REINVESTING AFTER A SALE
If you sell class A shares, you may reinvest in class A shares of that fund or
another First American fund within 31 days without a sales charge. If you sell
shares of any class subject to a CDSC, that charge will be credited to your
account and the reinvested shares will be subject to a CDSC, which will be
determined based on the date of your reinvestment.
- --------------------------------------------------------------------------------
ACCOUNTS WITH LOW BALANCES
Except for retirement plans, if your account balance falls below $500 as a
result of selling or exchanging shares, you will be given 60 days to
re-establish the minimum balance. If you do not, the fund may close your
account and send you the proceeds, less any applicable contingent deferred
sales charge.
11 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT
- --------------------------------------------------------------------------------
EXCHANGING SHARES
If your investment goals or your financial needs change, you may move from one
First American fund to another. There is no fee to exchange shares.
Generally, you may exchange your shares only for shares of the same class.
However, you may exchange your class A shares for class Y shares of the same or
another First American fund if you subsequently become eligible to participate
in that class (for example, by opening a fiduciary, custody or agency account
with a financial institution which invests in class Y shares).
Exchanges are made based on the net asset value per share of each fund at the
time of the exchange. When you exchange your class A shares of one of the funds
for class A shares of another First American fund, you do not have to pay a
sales charge. When you exchange your class B or class C shares for class B or
class C shares of another First American fund, the time you held the shares of
the "old" fund will be added to the time you hold the shares of the "new" fund
for purposes of determining your CDSC or, in the case of class B shares,
calculating when your shares convert to class A shares.
Before exchanging into any fund, be sure to read its prospectus carefully. A
fund may change or cancel its exchange policies at any time. You will be
notified of any changes. The funds have the right to limit exchanges to four
times per year.
BY PHONE
You may exchange shares by calling your broker, your financial institution, or
the funds' transfer agent, provided that both funds have identical shareholder
registrations. To request an exchange through the funds' transfer agent, call
1-800-637-2548. Your instructions must be received by the funds' transfer agent
before 3 p.m. Central time, or by the time specified by your broker or financial
institution, in order for shares to be exchanged the same day.
BY MAIL
To exchange shares by written request, please follow the procedures under
"Selling Shares." Be sure to include the names of both funds involved in the
exchange.
- --------------------------------------------------------------------------------
TELEPHONE TRANSACTIONS
You may buy, sell or exchange shares by telephone, unless you elected on
your new account form to restrict this privilege. If you wish to reinstate
this option on an existing account, please call Investor Services at
1-800-637-2548 to request the appropriate form.
The funds and their agents will not be responsible for any losses that may
result from acting on wire or telephone instructions that they reasonably
believe to be genuine. The funds and their agents will each follow
reasonable procedures to confirm that instructions received by telephone
are genuine, which may include taping telephone conversations.
It may be difficult to reach the funds by telephone during periods of
unusual market activity. If you are unable to reach the funds or their
agents by telephone, please consider sending written instructions.
- --------------------------------------------------------------------------------
STAYING INFORMED
SHAREHOLDER REPORTS
Shareholder reports are mailed twice a year, in November and May. They include
financial statements, performance information, a message from your portfolio
managers, and, on an annual basis, the auditors' report.
In an attempt to reduce shareholder costs and help eliminate duplication, the
funds will try to limit their mailings to one report for each address that lists
one or more shareholders with the same last name. If you would like additional
copies, please call 1-800-637-2548.
STATEMENTS AND CONFIRMATIONS
Statements summarizing activity in your account are mailed at least quarterly.
Confirms are mailed following each purchase or sale of fund shares.
12 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT (CONTINUED)
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from a fund's net investment income are declared and paid quarterly
for International Index Fund and annually for Emerging Markets Fund and
International Fund. Any capital gains are distributed at least once each year.
On the ex-dividend date for a distribution, a fund's share price is reduced by
the amount of the distribution. If you buy shares just before the ex-dividend
date, in effect, you "buy the dividend." You will pay the full price for the
shares and then receive a portion of that price back as a taxable distribution.
Dividend and capital gain distributions will be reinvested in additional shares
of the fund paying the distribution, unless you request cash payments on your
new account form or by writing to the fund. Shares will be priced at the NAV
computed on the ex-dividend date.
- --------------------------------------------------------------------------------
TAXES
Some of the tax consequences of investing in the funds are discussed below. More
information about taxes is in the Statement of Additional Information. However,
because everyone's tax situation is unique, always consult your tax professional
about federal, state and local tax consequences.
TAXES ON DISTRIBUTIONS
Each fund pays its shareholders dividends from its net investment income and any
net capital gains that it has realized. For most investors, fund dividends and
distributions are considered taxable whether they are reinvested or taken in
cash (unless your investment is in an IRA or other tax-advantaged account).
Dividends from a fund's net investment income are taxable as ordinary income.
Distributions of a fund's long-term capital gains are taxable as long-term
gains, regardless of how long you have held your shares. The funds expect that,
as a result of their investment objectives and strategies, their distributions
will consist primarily of capital gains.
The funds may be required to pay withholding and other taxes imposed by foreign
countries. If a fund has more than 50% of its total assets invested in
securities of foreign corporations at the end of its taxable year, it may make
an election that will permit you either to claim a foreign tax credit with
respect to foreign taxes paid by the fund or to deduct those amounts as an
itemized deduction on your tax return. If a fund makes this election, you will
be notified and provided with sufficient information to calculate the amount you
may deduct as foreign taxes paid or your foreign tax credit.
TAXES ON TRANSACTIONS
The sale or exchange of fund shares will be a taxable event for you and may
result in a capital gain or loss. The gain or loss will be considered long-term
if you have held your shares for more than one year. A gain or loss on shares
held for one year or less is considered short-term and is taxed at the same
rates as ordinary income.
13 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
ADDITIONAL INFORMATION
MANAGEMENT
INVESTMENT ADVISOR
FIRST AMERICAN ASSET MANAGEMENT
601 SECOND AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55402
U.S. Bank National Association (U.S. Bank), acting through its First American
Asset Management division, is the funds' investment advisor. First American
Asset Management provides investment management services to individuals and
institutions, including corporations, foundations, pensions and retirement
plans. As of December 31, 1998, it had more than $ in assets under
management, including investment company assets of approximately $ . As
investment advisor, First American Asset Management manages the funds' business
and investment activities, subject to the authority of the board of directors.
Each fund pays the investment advisor a monthly fee for providing investment
advisory services. During their most recent fiscal years, the funds paid the
following investment advisory fees to First American Asset Management:
ADVISORY FEE
AS A % OF
AVERAGE DAILY
NET ASSETS
- --------------------------------------------------------------------------------
EMERGING MARKETS FUND %
INTERNATIONAL FUND %
INTERNATIONAL INDEX FUND %
- --------------------------------------------------------------------------------
SUB-ADVISOR
MARVIN & PALMER ASSOCIATES, INC.
1201 NORTH MARKET STREET, SUITE 2300
WILMINGTON, DELAWARE 19801
Marvin & Palmer is the sub-advisor to Emerging Markets Fund and International
Fund, and is responsible for the investment and reinvestment of the funds'
assets and the placement of brokerage transactions for the funds. Marvin &
Palmer has been retained by the funds' investment advisor and is paid a portion
of the advisory fee.
A privately held company founded in 1986, Marvin & Palmer is engaged in the
management of global, non-United States and emerging markets equity portfolios
for institutional accounts. As of December 31, 1998, the sub-advisor managed a
total of $ in investments for institutional investors.
CUSTODIAN
U.S. BANK NATIONAL ASSOCIATION
U.S. BANK CENTER
180 EAST FIFTH STREET
ST. PAUL, MINNESOTA 55101
ADMINISTRATOR
SEI INVESTMENTS MANAGEMENT CORPORATION
OAKS, PENNSYLVANIA 19456
DISTRIBUTOR
SEI INVESTMENTS DISTRIBUTION CO.
OAKS, PENNSYLVANIA 19456
TRANSFER AGENT
DST SYSTEMS, INC.
330 WEST NINTH STREET
KANSAS CITY, MISSOURI 64105
ADDITIONAL COMPENSATION
In addition to receiving compensation for acting as the funds' investment
advisor as described above, U.S. Bank and its affiliates receive compensation in
connection with the following:
CUSTODY SERVICES. As compensation for acting as the funds' custodian, U.S. Bank
is paid monthly fees equal, on an annual basis, to 0.10% of a fund's average
daily net assets. In addition, U.S. Bank is reimbursed for its out-of-pocket
expenses incurred while providing custody services to the funds.
SUB-ADMINISTRATION SERVICES. U.S. Bank assists the administrator and provides
sub-administration services to the funds. For providing these services, U.S.
Bank is compensated by the funds' administrator at an annual rate of up to
0.05% of each fund's average daily net assets.
TRANSFER AGENT SERVICES. U.S. Bank performs certain transfer agent and dividend
disbursing agent services with respect to the class A, class B and class C
shares of the funds held through accounts at U.S. Bank and its affiliates. The
funds pay U.S. Bank an annual fee of $15 per account for providing these
services.
SECURITIES LENDING SERVICES. In connection with lending their portfolio
securities, the funds pay administrative and custodial fees to U.S. Bank which
are equal to 40% of the funds' income from these securities lending
transactions.
BROKERAGE TRANSACTIONS. When purchasing and selling portfolio securities for
the funds, the funds' investment advisor may place trades through its
affiliates, U.S. Bancorp Investments, Inc. and U.S. Bancorp Piper Jaffray Inc.,
which will earn commissions on such transactions.
SALES OF FUND SHARES. U.S. Bancorp Investments, Inc. and U.S. Bancorp Piper
Jaffray Inc., broker-dealers affiliated with U.S. Bank, have entered into
agreements with the funds' distributor to sell fund shares and will earn
commissions on these sales.
ERISA ACCOUNTS. U.S. Bank 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.
PORTFOLIO MANAGEMENT
Each fund's investments are managed by a team of persons associated with Marvin
& Palmer, in the case of Emerging Markets Fund and International Fund, or First
American Asset Management, in the case of International Index Fund.
14 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS
- --------------------------------------------------------------------------------
OBJECTIVES
The funds' objectives, which are described in the "Fund Summaries" section, may
be changed without shareholder approval. If a fund's objectives change, you will
be notified at least 30 days in advance. Please remember: There is no guarantee
that any fund will achieve its objectives.
- --------------------------------------------------------------------------------
INVESTMENT STRATEGIES
The funds' main investment strategies are discussed in the "Fund Summaries"
section. These are the strategies that the funds' investment advisor believes
are most likely to be important in trying to achieve the funds' objectives. You
should be aware that each fund may also use strategies and invest in securities
that are not described in this prospectus, but that are described in the
Statement of Additional Information (SAI). For a copy of the SAI, call Investor
Services at 1-800-637-2548.
TEMPORARY INVESTMENTS
In an attempt to respond to adverse market, economic, political or other
conditions, each fund may invest without limit in cash and in U.S.
dollar-denominated high-quality money market instruments and other short-term
securities, including money market funds advised by the funds' advisor. Being
invested in these securities may keep a fund from participating in a market
upswing and prevent the fund from achieving its investment objectives.
PORTFOLIO TURNOVER
Portfolio managers for Emerging Markets Fund and International Fund may trade
securities frequently, resulting, from time to time, in an annual portfolio
turnover rate of over 100%. Trading of securities may produce capital gains,
which are taxable to shareholders when distributed. Active trading may also
increase the amount of commissions or mark-ups to broker-dealers that the fund
pays when it buys and sells securities. Portfolio turnover for International
Index Fund is expected to be well below that of actively managed mutual funds.
The "Financial Highlights" section of this prospectus shows each fund's
historical portfolio turnover rate.
- --------------------------------------------------------------------------------
RISKS
The main risks of investing in the funds are summarized in the "Fund Summaries"
section. More information about fund risks is presented below.
MARKET RISK
All stocks are subject to price movements due to changes in general economic
conditions changes in the level of prevailing interest rates, changes in
investor perceptions of the market, or the outlook for overall corporate
profitability.
SECTOR RISK
The stocks of companies within specific industries or sectors of the economy can
periodically perform differently than the overall stock market. This can be due
to changes in such things as the regulatory or competitive environment or to
changes in investor perceptions of a particular industry or sector.
COMPANY RISK
Individual stocks can perform differently than the overall market. This may be a
result of specific factors such as changes in corporate profitability due to the
success or failure of specific products or management strategies, or it may be
due to changes in investor perceptions regarding a company.
RISKS OF INTERNATIONAL INVESTING
International investing involves risks not typically associated with U.S.
investing. These risks include:
CURRENCY RISK. Because foreign securities often trade in currencies other than
the U.S. dollar, changes in currency exchange rates will affect a fund's net
asset value, the value of dividends and interest earned, and gains and losses
realized on the sale of securities. A strong U.S. dollar relative to these
other currencies will adversely affect the value of the fund.
RISKS OF FOREIGN CURRENCY HEDGING TRANSACTIONS. Attempts by the funds to
minimize the effects of currency fluctuations through the use of foreign
currency hedging transactions may not be successful or the funds' hedging
transactions may cause the funds to be unable to take advantage of a favorable
change in the value of foreign currencies.
POLITICAL AND ECONOMIC RISKS. International investing is subject to the risk of
political, social or economic instability in the country of the issuer of a
security, the difficulty of predicting international trade patterns, the
possibility of the imposition of exchange controls, expropriation, limits on
removal of currency or other assets and nationalization of assets.
FOREIGN TAX RISK. Each fund's income from foreign issuers may be subject to
non-U.S. withholding taxes. In some countries, the funds also may be subject to
taxes on trading profits and, on certain securities transactions, transfer or
stamp duties tax. To the extent foreign income taxes are paid by a fund, U.S.
shareholders may be entitled to a credit or deduction for U.S. tax purposes.
See the Statement of Additional Information for details.
RISK OF INVESTMENT RESTRICTIONS. Some countries, particularly emerging markets,
restrict to varying degrees foreign investment in their securities markets. In
some circumstances, these restrictions may limit or preclude investment in
certain countries or may increase the cost of investing in securities of
particular companies.
FOREIGN SECURITIES MARKET RISK. Securities of many non-U.S. companies may be
less liquid and their prices more volatile than securities of comparable U.S.
companies. Securities of companies traded in many countries outside the U.S.,
particularly those of emerging securities markets, may be subject to further
risks due to the inexperience of local brokers and financial institutions, the
possibility of permanent or temporary termination of trading, and greater
spreads between bid and asked prices for securities. In addition, non-U.S.
stock exchanges and brokers are subject to less governmental regulation, and
commissions may be
15 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS (CONTINUED)
higher than in the United States. Also, there may be delays in the settlement
of non-U.S. stock exchange transactions.
INFORMATION RISK. Non-U.S. companies generally are not subject to uniform
accounting, auditing and financial reporting standards or to other regulatory
requirements comparable to those which apply to U.S. companies. As a result,
less information may be available concerning non-U.S. issuers. Accounting and
financial reporting standards in emerging markets may be especially lacking.
RISKS OF EMERGING MARKETS
Investing in securities of issuers in emerging markets involves exposure to
economic infrastructures that are generally less diverse and mature than, and to
political systems that can be expected to have less stability than, those of
developed countries. Other characteristics of emerging market countries that may
affect investment in their markets include certain governmental policies that
may restrict investment by foreigners and the absence of developed legal
structures governing private and foreign investments and private property. The
typical small size of the markets for securities issued by issuers located in
emerging markets and the possibility of low or nonexistent volume of trading in
those securities may also result in a lack of liquidity and in price volatility
of those securities. In addition, issuers in emerging markets typically are
subject to a greater degree of change in earnings and business prospects than
are companies in developed markets.
RISK OF ACTIVE MANAGEMENT
Emerging Markets Fund and International Fund are actively managed and their
performance therefore will reflect in part the sub-advisor's ability to make
investment decisions which are suited to achieving the funds' respective
investment objectives. Due to their active management, the funds could
underperform other mutual funds with similar investment objectives.
RISKS OF SECURITIES LENDING
When a fund loans its portfolio securities, it will receive collateral equal to
at least 100% of the value of the loaned securities. Nevertheless, the fund
risks a delay in the recovery of the loaned securities, or even the loss of
rights in the collateral deposited by the borrower if the borrower should fail
financially. To reduced these risks, the funds enter into loan arrangements only
with institutions which the funds' advisor has determined are creditworthy under
guidelines established by the funds' board of directors.
YEAR 2000 ISSUES
Like other mutual funds and business and financial organizations, the funds
could be adversely affected if the computer systems used by the funds' advisor,
sub-advisor, other service providers and entities with computer systems that are
linked to fund records do not properly process and calculate date-related
information from and after January 1, 2000. While year 2000-related computer
problems could have a negative effect on the funds, the funds' administrator has
undertaken a program designed to assess and monitor the steps being taken by the
funds' service providers to address year 2000 issues. This program includes
seeking assurances from service providers that their systems are or will be year
2000 compliant and reviewing service providers' periodic reports to monitor
their status concerning their year 2000 readiness and compliance.
The administrator and the advisor also report regularly to the funds' board of
directors concerning their own and other service providers' progress toward year
2000 readiness. Although these reports indicate that service providers are or
expect to be year 2000 compliant, there can be no assurance that this will be
the case in all instances or that year 2000 difficulties experienced by others
in the financial services industry will not impact the funds. In addition, there
can be no assurance that year 2000 difficulties will not have an adverse effect
on the funds' investments or on global markets or economies, generally. Year
2000 difficulties may be more pronounced in foreign markets, and particularly in
emerging markets. The funds are not bearing any of the expenses incurred by
their service providers in preparing for the year 2000.
16 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about the class A shares
of each fund and the class B shares of International Fund and International
Index Fund. There were no class B shares of Emerging Markets Fund or class C
shares of International Fund outstanding during the periods for which
information is presented. This information is intended to help you understand
each fund's financial performance for the past five years or, if shorter, the
period of the fund's operations. Some of this information reflects financial
results for a single fund share. Total returns in the tables represent the rate
that you would have earned or lost on an investment in a fund, excluding sales
charges and assuming you reinvested all of your dividends and distributions.
This information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report, along with the funds' financial statements, is included
in the funds' annual report, which is available upon request.
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30, Fiscal year ended June 30,
----------------------------------- -----------------------------------
CLASS A SHARES(1) 1998 1997 1996(3) 1996 1995 1994(2)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 8.85 $ 8.84 $ 7.20 $ 9.14 $ 10.00
-------- ------- ------- ------- -------- -------
Investment Operations:
Net Investment Income 0.02 -- 0.01 -- 0.01
Net Gains (Losses) on Securities
(both realized and unrealized) 2.10 0.01 1.63 (1.94) (0.87)
-------- ------- ------- ------- -------- -------
Total From Investment Operations 2.12 0.01 1.64 (1.94) (0.86)
-------- ------- ------- ------- -------- -------
Less Distributions:
Dividends (from net investment income) (0.01) -- -- -- --
Distributions (from capital gains) -- -- -- -- --
-------- ------- ------- ------- -------- -------
Total Distributions (0.01) -- -- -- --
-------- ------- ------- ------- -------- -------
Net Asset Value, End of Period $ $ 10.96 $ 8.85 $ 8.84 $ 7.20 $ 9.14
======== ======= ======= ======= ======== =======
Total Return % 23.91% 0.11% 22.78% (21.23)% (8.60)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 17 $ 14 $ 14 $ 23 $ 28
Ratio of Expenses to Average Net Assets % 2.00% 2.00% 2.00% 2.00% 2.00%
Ratio of Net Income (Loss) to Average Net Assets % 0.17% 0.26% 0.15% (0.03)% 0.14%
Ratio of Expenses to Average Net Assets
(excluding waivers) % 3.34% 4.09% 3.54% 3.47% 3.10%
Ratio of Net (Loss) to Average Net Assets
(excluding waivers) % (1.17)% (1.83)% (1.39)% (1.50)% (0.96)%
Portfolio Turnover Rate % 105% 0% 140% 161% 78%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The financial highlights for the period from 6/21/96 through 8/7/98 are
those of Emerging Markets Growth Fund, a series of Piper Global Funds Inc.
This predecessor fund was reorganized into the fund as of the close of
business on 8/7/98. The fund had no assets or liabilities prior to the
reorganization. The financial highlights of the period prior to 6/21/96 are
those of Hercules Latin American Value Fund, a series of Hercules Funds Inc.
and the predecessor of the Piper fund.
(2) Commenced operations on 11/9/93. All ratios for the period have been
annualized.
(3) For the three month period ended September 30, 1996. The board of directors
approved a change in the fund's fiscal year end from June 30 to September
30, effective September 30, 1996. All ratios for the period have been
annualized.
17 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
INTERNATIONAL FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS A SHARES 1998 1997 1996 1995 1994(1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 10.28 $ 10.28 $ 10.21 $ 9.98
-------- -------- -------- -------- -------
Investment Operations:
Net Investment Income (Loss) 0.01 (0.02) -- (0.01)
Net Gains (Losses) on Securities
(both realized and unrealized) 3.04 0.20 0.07 0.24
-------- -------- -------- -------- -------
Total From Investment Operations 3.05 0.18 0.07 0.23
-------- -------- -------- -------- -------
Less Distributions:
Dividends (from net investment income)2 (0.15)(2) (0.18)(2) -- --
Distributions (from capital gains) -- -- -- --
-------- -------- -------- -------- -------
Total Distributions (0.15) (0.18) -- --
-------- -------- -------- -------- -------
Net Asset Value, End of Period $ $ 13.18 $ 10.28 $ 10.28 $ 10.21
======== ======== ======== ======== =======
Total Return % 30.03% 1.84% 0.69% 2.30%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 8,003 $ 1,964 $ 876 $ 464
Ratio of Expenses to Average Net Assets % 1.92% 1.97% 1.93% 1.75%
Ratio of Net (Loss) to Average Net Assets % (0.09)% (0.28)% (0.13)% (0.26)%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.92% 1.97% 2.06% 2.30%
Ratio of Net (Loss) to Average Net Assets (excluding waivers) % (0.09)% (0.28)% (0.26)% (0.81)%
Portfolio Turnover Rate % 96% 100% 57% 16%
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Fiscal year ended September 30,
CLASS B SHARES 1998 1997 1996 1995 1994(3)
- ---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 10.14 $ 10.20 $ 10.21 $ 10.23
-------- -------- -------- -------- -------
Investment Operations:
Net Investment Income (0.08) (0.07) (0.03) (0.01)
Net Gains (Losses) on Securities
(both realized and unrealized) 3.01 0.17 0.02 (0.01)
-------- -------- -------- -------- -------
Total From Investment Operations 2.93 0.10 (0.01) (0.02)
-------- -------- -------- -------- -------
Less Distributions:
Dividends (from net investment income) (0.10)(2) (0.16)(2) -- --
Distributions (from capital gains) -- -- -- --
-------- -------- -------- -------- -------
Total Distributions (0.10) (0.16) -- --
-------- -------- -------- -------- -------
Net Asset Value, End of Period $ $ 12.97 $ 10.14 $ 10.20 $ 10.21
======== ======== ======== ======== =======
Total Return % 29.13% 1.02% (0.10)% (0.20)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 2,188 $ 1,175 $ 306 $ 22
Ratio of Expenses to Average Net Assets % 2.67% 2.72% 2.76% 2.75%
Ratio of Net (Loss) to Average Net Assets % (0.94)% (0.96)% (0.95)% (0.71)%
Ratio of Expenses to Average Net Assets (excluding waivers) % 2.67% 2.72% 2.81% 3.05%
Ratio of Net (Loss) to Average Net Assets (excluding waivers) % (0.94)% (0.96)% (1.00)% (1.01)%
Portfolio Turnover Rate % 96% 100% 57% 16%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class A shares have been offered since April 7, 1994. All ratios for the
period have been annualized.
(2) Represents a distribution or partial distribution in excess of net
investment income due to the tax treatment of foreign currency related
transactions.
(3) Class B Shares have been offered since August 15, 1994. All ratios for the
period have been annualized.
18 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
INTERNATIONAL INDEX FUND
<TABLE>
<CAPTION>
Fiscal year Fiscal year
ended November 30, ended July 31,
--------------------- --------------------------------
CLASS A SHARES(1) 1998 1997(2) 1997 1996 1995(3)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 12.32 $ 10.64 $ 10.45 $ 10.00
-------- -------- ------- ------- -------
Investment Operations:
Net Investment Income 0.05 0.10 0.07 --
Net Gains (Losses) on Securities
(both realized and unrealized) (1.41) 1.70 0.17 0.45
-------- -------- ------- ------- -------
Total From Investment Operations (1.36) 1.80 0.24 0.45
-------- -------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.02) (0.10)(5) (0.05) --
Distributions (from capital gains) -- -- (0.02) -- --
-------- -------- ------- ------- -------
Total Distributions (0.02) (0.12) (0.05) --
-------- -------- ------- ------- -------
Net Asset Value, End of Period $ $ 10.94 $ 12.32 $ 10.64 $ 10.45
======== ======== ======= ======= =======
Total Return % (11.03)% 17.03% 2.29% 4.50%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 1,270 $ 1,605 $ 2,005 $ 20
Ratio of Expenses to Average Net Assets % 0.92% 0.98% 1.06% 1.40%
Ratio of Net Income to Average Net Assets % 0.98% 0.90% 0.84% 0.23%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.21% 1.28% 1.35% 1.54%
Ratio of Net Income to Average Net Assets (excluding waivers) % 0.69% 0.60% 0.55% 0.09%
Portfolio Turnover Rate % 0% 3% 6% 0%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended
November 30,
----------------------
CLASS B SHARES 1998 1997(4)
- --------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 11.08
-------- --------
Investment Operations:
Net Investment Income --
Net Gains (Losses) on Securities
(both realized and unrealized) (0.09)
-------- --------
Total From Investment Operations (0.09)
-------- --------
Less Distributions:
Dividends (from net investment income) --
Distributions (from capital gains) --
-------- --------
Total Distributions --
-------- --------
Net Asset Value, End of Period $ $ 10.99
======== ========
Total Return % (0.36)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 1
Ratio of Expenses to Average Net Assets % 1.29%
Ratio of Net Income to Average Net Assets % 0.00%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.29%
Ratio of Net Income to Average Net Assets (excluding waivers) % 0.00%
Portfolio Turnover Rate % 0%
- ----------------------------------------------------------------------------------------
</TABLE>
(1) The financial highlights for International Index Fund include the historical
financial highlights of the Qualivest International Opportunities Fund. The
assets of the Qualivest International Opportunities Fund were acquired by
International Index Fund on November 21, 1997. In connection with such
acquisition, class A and class C shares of the Qualivest International
Opportunities Fund were exchanged for class A shares of International Index
Fund.
(2) For the four month period ended November 30, 1997. The board of directors
approved a change in the fund's fiscal year end from July 31 to November 30
effective November 30, 1997.
(3) Commenced operations on July 3, 1995. All ratios for the period have been
annualized.
(4) Commenced operations on November 24, 1997. All ratios for the period have
been annualized.
(5) Represents a distribution or partial distribution in excess of net
investment income due to the tax treatment of foreign currency related
transactions.
19 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
FOR MORE INFORMATION
More information about the funds is available in the funds' Statement of
Additional Information and annual and semiannual reports.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more details about the funds and their policies. A current SAI
is on file with the Securities and Exchange Commission (SEC) and is incorporated
into this prospectus by reference (which means that it is legally considered
part of this prospectus).
ANNUAL AND SEMIANNUAL REPORTS
Additional information about the funds' investments is available in the funds'
annual and semiannual reports to shareholders. In the funds' annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the funds' performance during their last fiscal year.
You can obtain a free copy of the funds' SAI and/or free copies of the funds'
most recent annual or semiannual reports by calling Investor Services at
1-800-637-2548. The material you request will be sent by first-class mail or
other means designed to ensure equally prompt delivery, within three business
days of receipt of the request.
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC, or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. For more information, call
1-800-SEC-0330.
Information about the funds is also available on the Internet. Text-only
versions of fund documents can be viewed online or downloaded from the SEC's
Internet site at http://www.sec.gov.
SEC file number: 811-05309
FAIF-1001 (9/1998)
<PAGE>
FEBRUARY 1, 1999
INTERNATIONAL FUNDS
CLASS Y SHARES
EMERGING MARKETS FUND
INTERNATIONAL FUND
INTERNATIONAL INDEX FUND
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of these funds, or determined if the
information in this prospectus is accurate or complete. Any statement to the
contrary is a criminal offense.
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(R)
<PAGE>
TABLE OF CONTENTS
FUND SUMMARIES
- --------------------------------------------------------------------------------
Emerging Markets Fund 2
- --------------------------------------------------------------------------------
International Fund 4
- --------------------------------------------------------------------------------
International Index Fund 6
- --------------------------------------------------------------------------------
POLICIES & SERVICES
- --------------------------------------------------------------------------------
Buying and Selling Shares 8
- --------------------------------------------------------------------------------
Managing Your Investment 9
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Management 10
- --------------------------------------------------------------------------------
More About The Funds 11
- --------------------------------------------------------------------------------
Financial Highlights 13
- --------------------------------------------------------------------------------
FOR MORE INFORMATION Back Cover
- --------------------------------------------------------------------------------
<PAGE>
FUND SUMMARIES
INTRODUCTION
This section of the prospectus describes the objectives of the First American
International Funds, summarizes the main investment strategies used by each fund
in trying to achieve its objectives, and highlights the risks involved with
these strategies. It also provides you with information about the performance,
fees and expenses of the funds.
AN INVESTMENT IN THE FUNDS IS NOT A DEPOSIT OF U.S. BANK NATIONAL ASSOCIATION
AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
1 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
FUND SUMMARIES
EMERGING MARKETS FUND
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OBJECTIVE
Emerging Markets Fund has an objective of long-term growth of capital.
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MAIN INVESTMENT STRATEGIES
Under normal market conditions, Emerging Markets Fund invests primarily in
equity securities from the world's emerging markets. Normally, the fund will
invest in securities traded in at least six foreign countries.
A country is considered to have an "emerging market" if it has a relatively low
gross national product per capita compared to the world's major economies, and
the potential for rapid economic growth. Countries with emerging markets
include:
o THOSE THAT HAVE AN EMERGING STOCK MARKET (AS DEFINED BY THE INTERNATIONAL
FINANCIAL CORPORATION)
o THOSE WITH LOW-TO MIDDLE-INCOME ECONOMICS (ACCORDING TO THE WORLD BANK)
o THOSE LISTED IN WORLD BANK PUBLICATIONS AS "DEVELOPING"
In choosing investments for the fund, the fund's sub-advisor places primary
emphasis on country selection. This is followed by the selection of industries
or sectors within or across countries and the selection of individual stocks
within those industries or sectors.
Equity securities in which the fund invests include common and preferred stock,
securities convertible into common stock and warrants. In addition, the fund may
invest in securities representing underlying international securities, such as
American Depositary Receipts and European Depositary Receipts, and in securities
of other investment companies.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
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MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market.
RISKS OF INTERNATIONAL INVESTING
International investing involves risks not typically associated with domestic
investing. Because of these risks, the fund may be subject to greater volatility
than most mutual funds which invest principally in domestic securities. Risks of
international investing include adverse currency fluctuations, potential
political and economic instability, limited liquidity and volatile prices of
non-U.S. securities, limited availability of information regarding non-U.S.
companies, investment and repatriation restrictions, and foreign taxation.
RISKS OF EMERGING MARKETS
The risks of international investing are particularly significant in emerging
markets. Investing in emerging markets generally involves exposure to economic
structures that are less diverse and mature and political systems that are less
stable than those of developed countries.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
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FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
Because class Y shares have not been offered for a full calendar year,
information in the chart and the table is for the fund's class A shares, which
are offered through another prospectus. The classes will have substantially
similar returns, because they are invested in the same portfolio of securities.
However, class Y shares will have higher returns because their expenses are
lower.
2 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
FUND SUMMARIES
EMERGING MARKETS FUND (CONTINUED)
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FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR(1) (1) Performance from June 21,
1996 to August 10, 1998,
[BAR CHART] is that of Emerging
Markets Growth Fund, a
series of Piper Global
1994 -18.10% Funds Inc. Performance
1995 -21.77% prior to June 21, 1996 is
1996 29.31% that of Hercules Latin
1997 -1.27% American Value Fund, a
1998 series of Hercules Funds
Inc.
(2) Class A share returns
reflect a 4.5% front-end
sales charge. Class Y
shares have no sales
charge.
(3) The since inception
performance of the index
is calculated from the
month end following the
fund's inception.
(4) An unmanaged index of
securities from emerging
markets that are open to
foreign investors.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception
AS OF 12/31/98(1) One Year Five Years (11/9/93)(3)
- --------------------------------------------------------------------------------
Emerging Markets Fund (Class A)(2) %
- --------------------------------------------------------------------------------
Morgan Stanley Emerging Markets
Free Index(4) %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund share
expenses before any waivers during the fiscal year ended September 30, 1998.(1)
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 1.25%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
1.45%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
3 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
FUND SUMMARIES
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
OBJECTIVE
International Fund has an objective of long-term growth of capital.
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MAIN INVESTMENT STRATEGIES
Under normal market conditions, International Fund invests primarily in equity
securities which trade in markets other than the United States. These
securities generally are issued by companies:
o THAT ARE DOMICILED IN COUNTRIES OTHER THAN THE UNITED STATES, OR
o THAT DERIVE AT LEAST 50% OF EITHER THEIR REVENUES OR THEIR PRE-TAX INCOME
FROM ACTIVITIES OUTSIDE OF THE UNITED STATES.
Normally, the fund will invest in securities traded in at least three foreign
countries.
In choosing investments for the fund, the fund's sub-advisor places primary
emphasis on country selection. This is followed by the selection of industries
or sectors within or across countries and the selection of individual stocks
within those industries or sectors. Investments are expected to be made
primarily in developed markets and larger capitalization companies.
Equity securities in which the fund invests include common and preferred stock,
securities convertible into common stock and warrants. In addition, the fund may
invest in securities representing underlying international securities, such as
American Depositary Receipts and European Depositary Receipts, and in securities
of other investment companies.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market.
RISKS OF INTERNATIONAL INVESTING
International investing involves risks not typically associated with domestic
investing. Because of these risks, and because of the sub-advisor'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. Risks of international investing
include adverse currency fluctuations, potential political and economic
instability, limited liquidity and volatile prices of non-U.S. securities,
limited availability of information regarding non-U.S. companies, investment and
repatriation restrictions, and foreign taxation.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
4 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
FUND SUMMARIES
INTERNATIONAL FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The since inception
performance of the index
[BAR CHART] is calculated from the
month end following the
1995 date the fund commenced
1996 operations.
1997
1998 (2) An unmanaged index
including approximately
1,027 companies
representing the stock
markets of approximately
14 European countries,
Australia, New Zealand,
Japan, Hong Kong and
Singapore.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception
AS OF 12/31/98 One Year (4/4/94)(1)
- --------------------------------------------------------------------------------
International Fund % %
- --------------------------------------------------------------------------------
Morgan Stanley Europe, Australia,
Far East Composite Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
before any waivers during the fiscal year ended September 30, 1998.(1)
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 1.25%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
1.35%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
5 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
FUND SUMMARIES
INTERNATIONAL INDEX FUND
- --------------------------------------------------------------------------------
OBJECTIVE
International Index Fund's objective is to provide investment results that
correspond to the performance of the Morgan Stanley Europe, Australia, Far East
Composite Index (the "EAFE Index").
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, International Index Fund invests primarily in
common stocks included in the EAFE Index. The EAFE Index currently includes
approximately 1,027 companies representing the stock markets of approximately 14
European countries, Australia, New Zealand, Japan, Hong Kong and Singapore. The
fund's advisor believes that the fund's objective can best be 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. A computer program is used
to identify which stocks should be purchased or sold in order to replicate, as
closely as possible, the composition of the EAFE Index.
Because the fund may not always hold all of the stocks included in the EAFE
Index, and because the fund has expenses and the index does not, the fund will
not duplicate the index's performance precisely. However, the fund's advisor
believes that there should be a close correlation between the fund's performance
and that of the EAFE Index in both rising and falling markets.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market.
RISKS OF INTERNATIONAL INVESTING
International investing involves risks not typically associated with domestic
investing. Because of these risks, the fund may be subject to greater volatility
than most mutual funds which invest principally in domestic securities. Risks of
international investing include adverse currency fluctuations, potential
political and economic instability, limited liquidity and volatile prices of
non-U.S. securities, limited availability of information regarding non-U.S.
companies, investment and repatriation restrictions, and foreign taxation.
FAILURE TO MATCH THE PERFORMANCE OF 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.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
fund's performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
6 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
FUND SUMMARIES
INTERNATIONAL INDEX FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The since inception
performance of the index
[BAR CHART] is calculated from the
month end following the
1996 date the fund commenced
1997 operations.
1998
(2) An unmanaged index
including approximately
1,027 companies
representing the stock
markets of approximately
14 European countries,
Australia, New Zealand,
Japan, Hong Kong and
Singapore.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception
AS OF 12/31/98 One Year (7/3/95)(1)
- --------------------------------------------------------------------------------
International Index Fund % %
- --------------------------------------------------------------------------------
Morgan Stanley Europe, Australia,
Far East Composite Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show expenses before
any waivers during the fiscal year ended September 30, 1998.(1)
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
0.75%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the table above, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
7 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
POLICIES & SERVICES
BUYING AND SELLING SHARES
Class Y shares are offered through banks and other financial institutions that
have entered into sales agreements with the funds' distributor. Class Y shares
are available to these financial institutions for the investment of their own
funds. Class Y shares also are available to certain accounts for which the
financial institution acts in a fiduciary, agency or custodial capacity, such as
certain trust accounts and investment advisory accounts. To find out whether you
may purchase class Y shares, contact your financial institution.
- --------------------------------------------------------------------------------
CALCULATING YOUR SHARE PRICE
Your purchase price will be equal to the fund's net asset value (NAV) per share,
which is generally calculated as of the close of regular trading on the New York
Stock Exchange (usually 3 p.m. Central time) every day the exchange is open.
A fund's NAV is equal to the market value of its investments and other assets,
less any liabilities, divided by the number of fund shares. If market prices are
not readily available for an investment or if the advisor believes they are
unreliable, fair value prices may be determined in good faith using methods
approved by the funds' board of directors.
Each fund will hold portfolio securities that trade on weekends or other days
when the fund does not price its shares. Therefore, the net asset value of a
fund's shares may change on days when shareholders will not be able to purchase
or redeem their shares.
- --------------------------------------------------------------------------------
HOW TO BUY AND SELL SHARES
You may purchase or sell shares by calling your financial institution.
When purchasing shares, payment must be made by wire transfer, which can be
arranged by your financial institution. Because purchases must be paid for by
wire transfer, you can purchase shares only on days when both the New York Stock
Exchange and federally chartered banks are open. You may sell your shares on any
day when the New York Stock Exchange is open.
Purchase orders and redemption requests must be received by your financial
institution by the time specified by the institution to be assured same day
processing. In order for shares to be purchased at that day's price, the funds
must receive your purchase order by 3:00 p.m. Central time and the funds'
custodian must receive federal funds before the close of business. In order for
shares to be sold at that day's price, the funds must receive your redemption
request by 3:00 p.m. Central time. It is the responsibility of your financial
institution to promptly transmit orders to the funds.
If the funds receive your redemption request by 3:00 p.m. Central time, payment
of your redemption proceeds will ordinarily be made by wire on the next business
day. It is possible, however, that payment could be delayed by up to seven days.
- --------------------------------------------------------------------------------
HOW TO EXCHANGE SHARES
If your investment goals or your financial needs change, you may exchange your
shares for class Y shares of another First American fund. Exchanges will be made
at the net asset value per share of each fund at the time of the exchange. There
is no fee to exchange shares. If you are no longer eligible to hold class Y
shares, for example, if you decide to discontinue your fiduciary, agency or
custodian account, you may exchange your shares for class A shares at net asset
value. Class A shares have higher expenses than class Y shares.
To exchange your shares, call your financial institution. In order for your
shares to be exchanged the same day, you must call your financial institution by
the time specified by the institution and your exchange order must be received
by the funds by 3:00 p.m. Central time. It is the responsibility of your
financial institution to promptly transmit your exchange order to the funds.
Before exchanging into any fund, be sure to read its prospectus carefully. A
fund may change or cancel its exchange policies at any time. You will be
notified of any changes. The funds have the right to limit exchanges to four
times per year.
8 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT
- --------------------------------------------------------------------------------
STAYING INFORMED
SHAREHOLDER REPORTS
Shareholder reports are mailed twice a year, in November and May. They include
financial statements, performance information, a message from your portfolio
managers, and, on an annual basis, the auditors' report.
In an attempt to reduce shareholder costs and help eliminate duplication, the
funds will try to limit their mailings to one report for each address that lists
one or more shareholders with the same last name. If you would like additional
copies, please call 1-800-637-2548.
STATEMENTS AND CONFIRMATIONS
Statements summarizing activity in your account are mailed at least quarterly.
Confirms are mailed following each purchase or sale of fund shares.
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from a fund's net investment income are declared and paid quarterly
for International Index Fund and annually for Emerging Markets Fund and
International Fund. Any capital gains are distributed at least once each year.
On the ex-dividend date for a distribution, a fund's share price is reduced by
the amount of the distribution. If you buy shares just before the ex-dividend
date, in effect, you "buy the dividend." You will pay the full price for the
shares and then receive a portion of that price back as a taxable distribution.
Dividend and capital gain distributions will be reinvested in additional shares
of the fund paying the distribution, unless you request cash payments on your
new account form or by writing to the fund. Shares will be priced at the NAV
computed on the ex-dividend date.
- --------------------------------------------------------------------------------
TAXES
Some of the tax consequences of investing in the funds are discussed below. More
information about taxes is in the Statement of Additional Information. However,
because everyone's tax situation is unique, always consult your tax professional
about federal, state and local tax consequences.
TAXES ON DISTRIBUTIONS
Each fund pays its shareholders dividends from its net investment income and any
net capital gains that it has realized. For most investors, fund dividends and
distributions are considered taxable whether they are reinvested or taken in
cash (unless your investment is in an IRA or other tax-advantaged account).
Dividends from a fund's net investment income are taxable as ordinary income.
Distributions of a fund's long-term capital gains are taxable as long-term
gains, regardless of how long you have held your shares. The funds expect that,
as a result of their investment objectives and strategies, their distributions
will consist primarily of capital gains.
The funds may be required to pay withholding and other taxes imposed by foreign
countries. If a fund has more than 50% of its total assets invested in
securities of foreign corporations at the end of its taxable year, it may make
an election that will permit you either to claim a foreign tax credit with
respect to foreign taxes paid by the fund or to deduct those amounts as an
itemized deduction on your tax return. If a fund makes this election, you will
be notified and provided with sufficient information to calculate the amount you
may deduct as foreign taxes paid or your foreign tax credit.
TAXES ON TRANSACTIONS
The sale or exchange of fund shares will be a taxable event for you and may
result in a capital gain or loss. The gain or loss will be considered long-term
if you have held your shares for more than one year. A gain or loss on shares
held for one year or less is considered short-term and is taxed at the same
rates as ordinary income.
9 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
ADDITIONAL INFORMATION
MANAGEMENT
INVESTMENT ADVISOR
FIRST AMERICAN ASSET MANAGEMENT
601 SECOND AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55402
U.S. Bank National Association (U.S. Bank), acting through its First American
Asset Management division, is the funds' investment advisor. First American
Asset Management provides investment management services to individuals and
institutions, including corporations, foundations, pensions and retirement
plans. As of December 31, 1998, it had more than $ in assets under
management, including investment company assets of approximately $ . As
investment advisor, First American Asset Management manages the funds' business
and investment activities, subject to the authority of the board of directors.
Each fund pays the investment advisor a monthly fee for providing investment
advisory services. During their most recent fiscal years, the funds paid the
following investment advisory fees to First American Asset Management:
ADVISORY FEE
AS A % OF
AVERAGE DAILY
NET ASSETS
- --------------------------------------------------------------------------------
EMERGING MARKETS FUND %
INTERNATIONAL FUND %
INTERNATIONAL INDEX FUND %
- --------------------------------------------------------------------------------
SUB-ADVISOR
MARVIN & PALMER ASSOCIATES, INC.
1201 NORTH MARKET STREET, SUITE 2300
WILMINGTON, DELAWARE 19801
Marvin & Palmer is the sub-advisor to Emerging Markets Fund and International
Fund, and is responsible for the investment and reinvestment of the funds'
assets and the placement of brokerage transactions for the funds. Marvin &
Palmer has been retained by the funds' investment advisor and is paid a portion
of the advisory fee.
A privately held company founded in 1986, Marvin & Palmer is engaged in the
management of global, non-United States and emerging markets equity portfolios
for institutional accounts. As of December 31, 1998, the sub-advisor managed a
total of $ in investments for institutional investors.
CUSTODIAN
U.S. BANK NATIONAL ASSOCIATION
U.S. BANK CENTER
180 EAST FIFTH STREET
ST. PAUL, MINNESOTA 55101
ADMINISTRATOR
SEI INVESTMENTS MANAGEMENT CORPORATION
OAKS, PENNSYLVANIA 19456
DISTRIBUTOR
SEI INVESTMENTS DISTRIBUTION CO.
OAKS, PENNSYLVANIA 19456
TRANSFER AGENT
DST SYSTEMS, INC.
330 WEST NINTH STREET
KANSAS CITY, MISSOURI 64105
ADDITIONAL COMPENSATION
In addition to receiving compensation for acting as the funds' investment
advisor as described above, U.S. Bank and its affiliates receive compensation in
connection with the following:
CUSTODY SERVICES. As compensation for acting as the funds' custodian, U.S. Bank
is paid monthly fees equal, on an annual basis, to 0.10% of a fund's average
daily net assets. In addition, U.S. Bank is reimbursed for its out-of-pocket
expenses incurred while providing custody services to the funds.
SUB-ADMINISTRATION SERVICES. U.S. Bank assists the administrator and provides
sub-administration services to the funds. For providing these services, U.S.
Bank is compensated by the funds' administrator at an annual rate of up to
0.05% of each fund's average daily net assets.
SECURITIES LENDING SERVICES. In connection with lending their portfolio
securities, the funds pay administrative and custodial fees to U.S. Bank which
are equal to 40% of the funds' income from these securities lending
transactions.
BROKERAGE TRANSACTIONS. When purchasing and selling portfolio securities for
the funds, the funds' investment advisor may place trades through its
affiliates, U.S. Bancorp Investments, Inc. and U.S. Bancorp Piper Jaffray Inc.,
which will earn commissions on such transactions.
ERISA ACCOUNTS. U.S. Bank 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.
PORTFOLIO MANAGEMENT
Each fund's investments are managed by a team of persons associated with Marvin
& Palmer, in the case of Emerging Markets Fund and International Fund, or First
American Asset Management, in the case of International Index Fund.
10 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS
- --------------------------------------------------------------------------------
OBJECTIVES
The funds' objectives, which are described in the "Fund Summaries" section, may
be changed without shareholder approval. If a fund's objectives change, you will
be notified at least 30 days in advance. Please remember: There is no guarantee
that any fund will achieve its objectives.
- --------------------------------------------------------------------------------
INVESTMENT STRATEGIES
The funds' main investment strategies are discussed in the "Fund Summaries"
section. These are the strategies that the funds' investment advisor believes
are most likely to be important in trying to achieve the funds' objectives. You
should be aware that each fund may also use strategies and invest in securities
that are not described in this prospectus, but that are described in the
Statement of Additional Information (SAI). For a copy of the SAI, call Investor
Services at 1-800-637-2548.
TEMPORARY INVESTMENTS
In an attempt to respond to adverse market, economic, political or other
conditions, each fund may invest without limit in cash and in U.S.
dollar-denominated high-quality money market instruments and other short-term
securities, including money market funds advised by the funds' advisor. Being
invested in these securities may keep a fund from participating in a market
upswing and prevent the fund from achieving its investment objectives.
PORTFOLIO TURNOVER
Portfolio managers for Emerging Markets Fund and International Fund may trade
securities frequently, resulting, from time to time, in an annual portfolio
turnover rate of over 100%. Trading of securities may produce capital gains,
which are taxable to shareholders when distributed. Active trading may also
increase the amount of commissions or mark-ups to broker-dealers that the fund
pays when it buys and sells securities. Portfolio turnover for International
Index Fund is expected to be well below that of actively managed mutual funds.
The "Financial Highlights" section of this prospectus shows each fund's
historical portfolio turnover rate.
- --------------------------------------------------------------------------------
RISKS
The main risks of investing in the funds are summarized in the "Fund Summaries"
section. More information about fund risks is presented below.
MARKET RISK
All stocks are subject to price movements due to changes in general economic
conditions changes in the level of prevailing interest rates, changes in
investor perceptions of the market, or the outlook for overall corporate
profitability.
SECTOR RISK
The stocks of companies within specific industries or sectors of the economy can
periodically perform differently than the overall stock market. This can be due
to changes in such things as the regulatory or competitive environment or to
changes in investor perceptions of a particular industry or sector.
COMPANY RISK
Individual stocks can perform differently than the overall market. This may be a
result of specific factors such as changes in corporate profitability due to the
success or failure of specific products or management strategies, or it may be
due to changes in investor perceptions regarding a company.
RISKS OF INTERNATIONAL INVESTING
International investing involves risks not typically associated with U.S.
investing. These risks include:
CURRENCY RISK. Because foreign securities often trade in currencies other than
the U.S. dollar, changes in currency exchange rates will affect a fund's net
asset value, the value of dividends and interest earned, and gains and losses
realized on the sale of securities. A strong U.S. dollar relative to these
other currencies will adversely affect the value of the fund.
RISKS OF FOREIGN CURRENCY HEDGING TRANSACTIONS. Attempts by the funds to
minimize the effects of currency fluctuations through the use of foreign
currency hedging transactions may not be successful or the funds' hedging
transactions may cause the funds to be unable to take advantage of a favorable
change in the value of foreign currencies.
POLITICAL AND ECONOMIC RISKS. International investing is subject to the risk of
political, social or economic instability in the country of the issuer of a
security, the difficulty of predicting international trade patterns, the
possibility of the imposition of exchange controls, expropriation, limits on
removal of currency or other assets and nationalization of assets.
FOREIGN TAX RISK. Each fund's income from foreign issuers may be subject to
non-U.S. withholding taxes. In some countries, the funds also may be subject to
taxes on trading profits and, on certain securities transactions, transfer or
stamp duties tax. To the extent foreign income taxes are paid by a fund, U.S.
shareholders may be entitled to a credit or deduction for U.S. tax purposes.
See the Statement of Additional Information for details.
RISK OF INVESTMENT RESTRICTIONS. Some countries, particularly emerging markets,
restrict to varying degrees foreign investment in their securities markets. In
some circumstances, these restrictions may limit or preclude investment in
certain countries or may increase the cost of investing in securities of
particular companies.
FOREIGN SECURITIES MARKET RISK. Securities of many non-U.S. companies may be
less liquid and their prices more volatile than securities of comparable U.S.
companies. Securities of companies traded in many countries outside the U.S.,
particularly those of emerging securities markets, may be subject to further
risks due to the inexperience of local brokers and financial institutions, the
possibility of permanent or temporary termination of trading, and greater
spreads between bid and asked prices for securities. In addition, non-U.S.
stock exchanges and brokers are subject to less governmental regulation, and
commissions may be
11 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS (CONTINUED)
higher than in the United States. Also, there may be delays in the settlement
of non-U.S. stock exchange transactions.
INFORMATION RISK. Non-U.S. companies generally are not subject to uniform
accounting, auditing and financial reporting standards or to other regulatory
requirements comparable to those which apply to U.S. companies. As a result,
less information may be available concerning non-U.S. issuers. Accounting and
financial reporting standards in emerging markets may be especially lacking.
RISKS OF EMERGING MARKETS
Investing in securities of issuers in emerging markets involves exposure to
economic infrastructures that are generally less diverse and mature than, and to
political systems that can be expected to have less stability than, those of
developed countries. Other characteristics of emerging market countries that may
affect investment in their markets include certain governmental policies that
may restrict investment by foreigners and the absence of developed legal
structures governing private and foreign investments and private property. The
typical small size of the markets for securities issued by issuers located in
emerging markets and the possibility of low or nonexistent volume of trading in
those securities may also result in a lack of liquidity and in price volatility
of those securities. In addition, issuers in emerging markets typically are
subject to a greater degree of change in earnings and business prospects than
are companies in developed markets.
RISK OF ACTIVE MANAGEMENT
Emerging Markets Fund and International Fund are actively managed and their
performance therefore will reflect in part the sub-advisor's ability to make
investment decisions which are suited to achieving the funds' respective
investment objectives. Due to their active management, the funds could
underperform other mutual funds with similar investment objectives.
RISKS OF SECURITIES LENDING
When a fund loans its portfolio securities, it will receive collateral equal to
at least 100% of the value of the loaned securities. Nevertheless, the fund
risks a delay in the recovery of the loaned securities, or even the loss of
rights in the collateral deposited by the borrower if the borrower should fail
financially. To reduced these risks, the funds enter into loan arrangements only
with institutions which the funds' advisor has determined are creditworthy under
guidelines established by the funds' board of directors.
YEAR 2000 ISSUES
Like other mutual funds and business and financial organizations, the funds
could be adversely affected if the computer systems used by the funds' advisor,
sub-advisor, other service providers and entities with computer systems that are
linked to fund records do not properly process and calculate date-related
information from and after January 1, 2000. While year 2000-related computer
problems could have a negative effect on the funds, the funds' administrator has
undertaken a program designed to assess and monitor the steps being taken by the
funds' service providers to address year 2000 issues. This program includes
seeking assurances from service providers that their systems are or will be year
2000 compliant and reviewing service providers' periodic reports to monitor
their status concerning their year 2000 readiness and compliance.
The administrator and the advisor also report regularly to the funds' board of
directors concerning their own and other service providers' progress toward year
2000 readiness. Although these reports indicate that service providers are or
expect to be year 2000 compliant, there can be no assurance that this will be
the case in all instances or that year 2000 difficulties experienced by others
in the financial services industry will not impact the funds. In addition, there
can be no assurance that year 2000 difficulties will not have an adverse effect
on the funds' investments or on global markets or economies, generally. Year
2000 difficulties may be more pronounced in foreign markets, and particularly in
emerging markets. The funds are not bearing any of the expenses incurred by
their service providers in preparing for the year 2000.
12 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about the class Y shares
of each fund. This information is intended to help you understand each fund's
financial performance for the past five years or, if shorter, the period of the
fund's class Y share operations. Some of this information reflects financial
results for a single fund share. Total returns in the tables represent the rate
that you would have earned or lost on an investment in a fund, assuming you
reinvested all of your dividends and distributions.
This information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report, along with the funds' financial statements, is included
in the funds' annual report, which is available upon request.
EMERGING MARKETS FUND
Period ended
September 30,
1998(1)
- -------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $
--------
Investment Operations:
Net Investment Income
Net Gains (Losses) on Securities
(both realized and unrealized)
--------
Total From Investment Operations
--------
Less Distributions:
Dividends (from net investment income)
Distributions (from capital gains)
--------
Total Distributions
--------
Net Asset Value, End of Period $
========
Total Return %
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $
Ratio of Expenses to Average Net Assets %
Ratio of Net Income (Loss) to Average Net Assets %
Ratio of Expenses to Average Net Assets
(excluding waivers) %
Ratio of Net (Loss) to Average Net Assets
(excluding waivers) %
Portfolio Turnover Rate %
- -------------------------------------------------------------------
(1) Class Y shares have been offered since August 7, 1998. All ratios for the
period have been annualized.
13 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
INTERNATIONAL FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994(1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 10.31 $ 10.30 $ 10.22 $ 10.00
-------- -------- -------- -------- --------
Investment Operations:
Net Investment Income (Loss) 0.03 (0.01) 0.01 (0.01)
Net Gains (Losses) on Securities
(both realized and unrealized) 3.06 0.22 0.07 0.23
-------- -------- -------- -------- --------
Total From Investment Operations 3.09 0.21 0.08 0.22
-------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment income)2 (0.17)(2) (0.20)(2) -- --
Distributions (from capital gains) -- -- -- --
-------- -------- -------- -------- --------
Total Distributions (0.17) (0.20) -- --
-------- -------- -------- -------- --------
Net Asset Value, End of Period $ $ 13.23 $ 10.31 $ 10.30 $ 10.22
======== ======== ======== ======== ========
Total Return % 30.38% 2.11% 0.78% 2.20%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $217,414 $135,238 $ 94,400 $ 47,963
Ratio of Expenses to Average Net Assets % 1.67% 1.72% 1.74% 1.75%
Ratio of Net (Loss) to Average Net Assets % 0.06% (0.06)% 0.12% (0.19)%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.67% 1.72% 1.81% 2.05%
Ratio of Net (Loss) to Average Net Assets (excluding waivers) % % % % %
Portfolio Turnover Rate % 96% 100% 57% 16%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class Y shares have been offered since April 4, 1994. All ratios for the
period have been annualized.
(2) Represents a distribution or partial distribution in excess of net
investment income due to the tax treatment of foreign currency related
transactions.
14 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
INTERNATIONAL INDEX FUND(1)
<TABLE>
<CAPTION>
Fiscal year Fiscal year
ended November 30, ended July 31,
-------------------- ----------------------------------
1998 1997(2) 1997 1996 1995(3)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 12.37 $ 10.69 $ 10.48 $ 10.00
-------- -------- -------- -------- --------
Investment Operations:
Net Investment Income 0.06 0.13 0.09 0.01
Net Gains (Losses) on Securities
(both realized and unrealized) (1.41) 1.70 0.18 0.47
-------- -------- -------- -------- --------
Total From Investment Operations (1.35) 1.83 0.27 0.48
-------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.03) (0.13)(4) (0.06) --
Distributions (from capital gains) -- -- (0.02) -- --
-------- -------- -------- -------- --------
Total Distributions (0.03) (0.15) (0.05) --
-------- -------- -------- -------- --------
Net Asset Value, End of Period $ $ 10.99 $ 12.37 $ 10.69 $ 10.48
======== ======== ======== ======== ========
Total Return % (10.93)% 17.24% 2.56% 4.80%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $155,976 $210,538 $142,478 $ 60,073
Ratio of Expenses to Average Net Assets % 0.66% 0.73% 0.81% 1.18%
Ratio of Net Income to Average Net Assets % 1.23% 1.15% 1.18% 1.32%
Ratio of Expenses to Average Net Assets (excluding waivers) % 0.95% 1.03% 1.10% 1.39%
Ratio of Net Income to Average Net Assets (excluding waivers) % % % % %
Portfolio Turnover Rate % 0% 3% 6% 0%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The financial highlights for International Index Fund include the historical
financial highlights of the Qualivest International Opportunities Fund. The
assets of the Qualivest International Opportunities Fund were acquired by
International Index Fund on November 21, 1997. In connection with such
acquisition, class Q shares of the Qualivest International Opportunities
Fund were exchanged for class Y shares of International Index Fund.
(2) For the four month period ended November 30, 1997. The board of directors
approved a change in the fund's fiscal year end from July 31 to November 30
effective November 30, 1997.
(3) Commenced operations on July 3, 1995. All ratios for the period have been
annualized.
(4) Represents a distribution or partial distribution in excess of net
investment income due to the tax treatment of foreign currency related
transactions.
15 PROSPECTUS - FIRST AMERICAN INTERNATIONAL FUNDS
<PAGE>
FOR MORE INFORMATION
More information about the funds is available in the funds' Statement of
Additional Information and annual and semiannual reports.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more details about the funds and their policies. A current SAI
is on file with the Securities and Exchange Commission (SEC) and is incorporated
into this prospectus by reference (which means that it is legally considered
part of this prospectus).
ANNUAL AND SEMIANNUAL REPORTS
Additional information about the funds' investments is available in the funds'
annual and semiannual reports to shareholders. In the funds' annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the funds' performance during their last fiscal year.
You can obtain a free copy of the funds' SAI and/or free copies of the funds'
most recent annual or semiannual reports by calling Investor Services at
1-800-637-2548. The material you request will be sent by first-class mail or
other means designed to ensure equally prompt delivery, within three business
days of receipt of the request.
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC, or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. For more information, call
1-800-SEC-0330.
Information about the funds is also available on the Internet. Text-only
versions of fund documents can be viewed online or downloaded from the SEC's
Internet site at http://www.sec.gov.
SEC file number: 811-05309
FAIF-1001 (9/1998)
<PAGE>
FEBRUARY 1, 1999
SECTOR FUNDS
CLASS A AND CLASS B SHARES
HEALTH SCIENCES FUND
REAL ESTATE SECURITIES FUND
TECHNOLOGY FUND
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of these funds, or determined if the
information in this prospectus is accurate or complete. Any statement to the
contrary is a criminal offense.
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(R)
<PAGE>
TABLE OF CONTENTS
FUND SUMMARIES
- --------------------------------------------------------------------------------
Health Sciences Fund 2
- --------------------------------------------------------------------------------
Real Estate Securities Fund 4
- --------------------------------------------------------------------------------
Technology Fund 6
- --------------------------------------------------------------------------------
POLICIES & SERVICES
- --------------------------------------------------------------------------------
Buying Shares 8
- --------------------------------------------------------------------------------
Selling Shares 11
- --------------------------------------------------------------------------------
Managing Your Investment 12
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Management 14
- --------------------------------------------------------------------------------
More About The Funds 15
- --------------------------------------------------------------------------------
Financial Highlights 17
- --------------------------------------------------------------------------------
FOR MORE INFORMATION Back Cover
- --------------------------------------------------------------------------------
<PAGE>
FUND SUMMARIES
INTRODUCTION
This section of the prospectus describes the objectives of the First American
Sector Funds, summarizes the main investment strategies used by each fund in
trying to achieve its objectives, and highlights the risks involved with these
strategies. It also provides you with information about the performance, fees
and expenses of the funds.
AN INVESTMENT IN THE FUNDS IS NOT A DEPOSIT OF U.S. BANK NATIONAL ASSOCIATION
AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
1 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
FUND SUMMARIES
HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Health Sciences Fund has an objective of long-term growth of capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Health Sciences Fund invests primarily in common
stocks of companies which develop, produce or distribute products or services
connected with health care or medicine, and which derive at least 50% of their
assets, revenues or profits from these products or services at the time of
investment. The fund may also invest in preferred stocks and corporate debt
securities which are convertible into common stocks.
Examples of products or services connected with health care or medicine include:
o PHARMACEUTICALS
o HEALTH CARE SERVICES AND ADMINISTRATION
o DIAGNOSTICS
o MEDICAL EQUIPMENT AND SUPPLIES
o MEDICAL TECHNOLOGY
o MEDICAL RESEARCH AND DEVELOPMENT
The fund's advisor will invest in companies that it believes 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.
The fund's investments may include development stage companies (companies that
do not have significant revenues) and small capitalization companies. The fund
may also invest in real estate investment trusts (REITs) that finance medical
care facilities. REITs and their risks are discussed below under "Real Estate
Securities Fund."
Up to 25% of the fund's total assets may be invested in securities of foreign
issuers which are either listed on a United States stock exchange or represented
by American Depository Receipts.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may affect the market as a whole, or they may affect only a
particular company, industry or sector of the market.
RISKS OF THE HEALTH SCIENCES SECTOR
Because the fund invests primarily in stocks related to health care or medicine,
it is particularly susceptible to risks associated with the health sciences
industries. Many products and services in the health sciences industries may
become rapidly obsolete due to technological and scientific advances. In
addition, governmental regulation may have a material effect on the demand for
products and services in these industries.
RISKS OF NON-DIVERSIFICATION
The fund is non-diversified. This means that it may invest a larger portion of
its assets in a limited number of companies than a diversified fund. Because a
relatively high percentage of the fund's assets may be invested in the
securities of a limited number of issuers, and because those issuers 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 a diversified fund.
RISKS OF DEVELOPMENT STAGE AND SMALL CAP STOCKS
Stocks of development stage and small capitalization companies involve
substantial risk. These stocks historically have experienced greater price
volatility than stocks of more established and larger capitalization companies,
and they may be expected to do so in the future.
FOREIGN SECURITY RISK
Securities of foreign issuers, even when dollar-denominated and publicly traded
in the United States, may involve risks not associated with the securities of
domestic issuers, including the risk of political or social instability or
diplomatic developments that could adversely affect the securities.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's class A shares has varied
from year to year. The performance of class B shares will be lower due to their
higher expenses. Sales charges are not reflected in the chart; if they had been,
returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have reinvested.
2 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
FUND SUMMARIES
HEALTH SCIENCES FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The since inception
performance of the index
[BAR CHART] is calculated from the
month end following the
1997 16.14% inception of the class A
1998 shares.
(2) An unmanaged index
comprised of the smallest
2000 companies in the
Russell 3000 Index. The
latter index is composed
of 3000 large U.S.
companies representing
approximately 98% of the
investable U.S. equity
market.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception(1)
AS OF 12/31/98(1) One Year (1/31/96)
- --------------------------------------------------------------------------------
Health Sciences Fund (Class A) % %
- --------------------------------------------------------------------------------
Health Sciences Fund (Class B) % %
- --------------------------------------------------------------------------------
Russell 2000 Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show expenses before
any waivers during the fiscal year ended September 30, 1998.(1)
CLASS A CLASS B
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)
AS A % OF OFFERING PRICE 4.50%(2) 0.00%
MAXIMUM DEFERRED SALES CHARGE (LOAD)
AS A % OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS 0.00%(3) 5.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70% 0.70%
Distribution and Service (12b-1) Fees 0.25% 1.00%
Other Expenses % %
TOTAL % %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
1.15% AND 1.90%, RESPECTIVELY, FOR CLASS A AND CLASS B SHARES. FEE WAIVERS
MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. See "Buying Shares
-- Calculating Your Share Price."
(3) Class A share investments of $1 million or more on which no front-end sales
charge is paid may be subject to a contingent deferred sales charge. See
"Buying Shares -- Calculating Your Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
CLASS B CLASS B
assuming assuming no
redemption redemption
at end of at end of
CLASS A each period each period
- --------------------------------------------------------------------------------
1 year $ $ $
3 years $ $ $
5 years $ $ $
10 years $ $ $
3 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
FUND SUMMARIES
REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Real Estate Securities Fund's objective is to provide above average current
income and long-term capital appreciation.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Real Estate Securities Fund invests primarily in
income producing common stocks of publicly traded companies engaged in the real
estate industry. These companies derive at least 50% of their revenues or
profits from the ownership, construction, management, financing or sale of real
estate, or have at least 50% of the fair market value of their assets invested
in real estate. The fund may also invest in preferred stocks and corporate debt
securities which are convertible into common stocks. In making investments, the
fund's advisor will attempt to select securities that provide a dividend yield
that exceeds the composite yield of the S&P 500.
A majority of the fund's total assets will be invested in real estate investment
trusts (REITs). REITs are publicly traded corporations or trusts that acquire,
hold and manage residential or commercial real estate. REITs generally can be
divided into the following three types:
o EQUITY REITS, WHICH INVEST THE MAJORITY OF THEIR ASSETS DIRECTLY IN REAL
PROPERTY AND DERIVE THEIR INCOME PRIMARILY FROM RENTS AND CAPITAL GAINS OR
REAL ESTATE APPRECIATION
o MORTGAGE REITS, WHICH INVEST THE MAJORITY OF THEIR ASSETS IN REAL ESTATE
MORTGAGE LOANS AND DERIVE THEIR INCOME PRIMARILY FROM INTEREST PAYMENTS
o HYBRID REITS, WHICH COMBINE THE CHARACTERISTICS OF EQUITY REITS AND
MORTGAGE REITS
The fund expects to emphasize investments in equity REITs, although it may
invest in all three kinds of REITs.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market.
RISKS OF THE REAL ESTATE INDUSTRY
Because the fund invests primarily in the real estate industry, it is
particularly susceptible 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.
RISK OF REITS
There are 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. REITs are dependent on specialized management skills which may
affect their ability to generate cash flow for operating purposes and to make
distributions to shareholders or unitholders.
RISKS OF NON-DIVERSIFICATION
The fund is non-diversified. This means that it may invest a larger portion of
its assets in a limited number of companies than a diversified fund. Because a
relatively high percentage of the fund's assets may be invested in the
securities of a limited number of issuers, and because those issuers generally
will be in the real estate industry, the fund's portfolio securities may be more
susceptible to any single economic or regulatory occurrence than the portfolio
securities of a diversified fund.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's class A shares has varied
from year to year. The performance of class B shares will be lower due to their
higher expenses. Sales charges are not reflected in the chart; if they had been,
returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
4 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
FUND SUMMARIES
REAL ESTATE SECURITIES FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The since inception
performance of the index
is calculated from the
[BAR CHART] month end following the
inception of the class A
1996 shares.
1997
1998 (2) An unmanaged index of the
most actively traded real
estate investment trusts.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception(1)
AS OF 12/31/98 One Year (9/29/95)
- --------------------------------------------------------------------------------
Real Estate Securities Fund (Class A) % %
- --------------------------------------------------------------------------------
Real Estate Securities Fund (Class B) % %
- --------------------------------------------------------------------------------
Morgan Stanley REIT Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show expenses before
any waivers during the fiscal year ended September 30, 1998.(1)
CLASS A CLASS B
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)
AS A % OF OFFERING PRICE 4.50%(2) 0.00%
MAXIMUM DEFERRED SALES CHARGE (LOAD)
AS A % OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS 0.00%(3) 5.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70% 0.70%
Distribution and Service (12b-1) Fees 0.25% 1.00%
Other Expenses % %
TOTAL % %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
1.05% AND 1.80%, RESPECTIVELY, FOR CLASS A AND CLASS B SHARES. FEE WAIVERS
MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. See "Buying Shares
-- Calculating Your Share Price."
(3) Class A share investments of $1 million or more on which no front-end sales
charge is paid may be subject to a contingent deferred sales charge. See
"Buying Shares -- Calculating Your Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
CLASS B CLASS B
assuming assuming no
redemption redemption
at end of at end of
CLASS A each period each period
- --------------------------------------------------------------------------------
1 year $ $ $
3 years $ $ $
5 years $ $ $
10 years $ $ $
5 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
FUND SUMMARIES
TECHNOLOGY FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Technology Fund has an objective of long-term growth of capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Technology Fund invests primarily in common
stocks of companies which the fund's advisor believes either have, or will
develop, products, processes or services that will provide or will benefit
significantly from technological innovations, advances and improvements. These
may include:
o INEXPENSIVE COMPUTING POWER, SUCH AS PERSONAL COMPUTERS
o IMPROVED METHODS OF COMMUNICATIONS, SUCH AS SATELLITE TRANSMISSION, AND
o TECHNOLOGY RELATED SERVICES SUCH AS INTERNET RELATED MARKETING SERVICES.
The prime emphasis of the fund is to identify companies which the advisor
believes are positioned to benefit from technological advances in areas such as
semiconductors, computers, software, communications, and online services.
Companies in which the fund invests may include development stage companies
(companies that do not have significant revenues) and small capitalization
companies.
In addition to common stocks, the fund may invest in preferred stocks and
corporate debt securities which are convertible into common stocks. Up to 25% of
the fund's total assets may be invested in securities of foreign issuers which
are either listed on a United States stock exchange or represented by American
Depository Receipts.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may affect the market as a whole, or they may affect only a
particular company, industry or sector of the market.
RISKS OF NON-DIVERSIFICATION
The fund is non-diversified. This means that it may invest a larger portion of
its assets in a limited number of companies than a diversified fund. Because a
relatively high percentage of the fund's assets may be invested in the
securities of a limited number of issuers, and because those issuers 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 a diversified fund.
RISKS OF THE TECHNOLOGY SECTOR
Because the fund invests primarily in technology related stocks, it is
particularly susceptible to risks associated with the technology industry.
Competitive pressures may have a significant effect on the financial condition
of companies in that industry.
RISKS OF DEVELOPMENT STAGE AND SMALL CAP STOCKS
Stocks of development stage and small capitalization companies involve
substantial risk. These stocks historically have experienced greater price
volatility than stocks of more established and larger capitalization companies,
and they may be expected to do so in the future.
FOREIGN SECURITY RISK
Securities of foreign issuers, even when dollar-denominated and publicly traded
in the United States, may involve risks not associated with the securities of
domestic issuers, including the risk of political or social instability or
diplomatic developments that could adversely affect the securities.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's class A shares has varied
from year to year. The performance of class B shares will be lower due to their
higher expenses. Sales charges are not reflected in the chart; if they had been,
returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses. Both the chart and the table assume that all distibutions
have been reinvested.
6 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
FUND SUMMARIES
TECHNOLOGY FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The fund commenced
operations on 4/4/94.
[BAR CHART] Class B shares have been
offered since 8/15/94.
1995 40.93% The since inception
1996 22.12% performance of the index
1997 6.91% is calculated from the
1998 month end following the
date the fund commenced
operations.
(2) An unmanaged index
comprised of the smallest
2000 companies in the
Russell 3000 Index. The
latter index is composed
of 3000 large U.S.
companies representing
approximately 98% of the
investable U.S. equity
market.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98(1) One Year Since Inception(1)
- --------------------------------------------------------------------------------
Technology Fund (Class A) % %
- --------------------------------------------------------------------------------
Technology Fund (Class B) % %
- --------------------------------------------------------------------------------
Russell 2000 Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show expenses before
any waivers during the fiscal year ended September 30, 1998.(1)
CLASS A CLASS B
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)
AS A % OF OFFERING PRICE 4.50%(2) 0.00%
MAXIMUM DEFERRED SALES CHARGE (LOAD)
AS A % OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS 0.00%(3) 5.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70% 0.70%
Distribution and Service (12b-1) Fees 0.25% 1.00%
Other Expenses % %
TOTAL % %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
1.15% AND 1.90%, RESPECTIVELY, FOR CLASS A AND CLASS B SHARES. FEE WAIVERS
MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. See "Buying Shares
-- Calculating Your Share Price."
(3) Class A share investments of $1 million or more on which no front-end sales
charge is paid may be subject to a contingent deferred sales charge. See
"Buying Shares -- Calculating Your Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
CLASS B CLASS B
assuming assuming no
redemption redemption
at end of at end of
CLASS A each period each period
- --------------------------------------------------------------------------------
1 year $ $ $
3 years $ $ $
5 years $ $ $
10 years $ $ $
7 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
POLICIES & SERVICES
BUYING SHARES
You may become a shareholder in any of the funds with an initial investment of
$1,000 or more ($250 for a retirement plan). Additional investments can be made
for as little as $100 ($25 for a retirement plan). The funds have the right to
waive these minimum investment requirements for employees of the funds' advisor
and its affiliates. The funds also have the right to reject any purchase order.
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
All funds in this prospectus offer class A and class B shares. Each class has
its own cost structure. The amount of your purchase and the length of time you
expect to hold your shares will be factors in determining which class of shares
is best for you.
CLASS A SHARES
If you are making an investment that qualifies for a reduced sales charge, class
A shares may be best for you. Class A shares feature:
o A FRONT-END SALES CHARGE, DESCRIBED BELOW
o LOWER ANNUAL EXPENSES THAN CLASS B SHARES. SEE "FUND SUMMARIES" FOR MORE
INFORMATION ON FEES AND EXPENSES
Because class A shares will normally be the better choice if your investment
qualifies for a reduced sales charge:
o ORDERS FOR CLASS B SHARES FOR $250,000 OR MORE NORMALLY WILL BE TREATED AS
ORDERS FOR CLASS A SHARES
o ORDERS FOR CLASS B SHARES BY AN INVESTOR ELIGIBLE TO PURCHASE CLASS A SHARES
WITHOUT A FRONT-END SALES CHARGE NORMALLY WILL BE TREATED AS ORDERS FOR
CLASS A SHARES
CLASS B SHARES
If you want all your money to go to work for you immediately, you may prefer
class B shares. Class B shares have no front-end sales charge, however they do
have:
o HIGHER ANNUAL EXPENSES THAN CLASS A SHARES. (SEE "FEES AND EXPENSES" IN THE
"FUND SUMMARIES" SECTION)
o A BACK-END SALES CHARGE, CALLED A "CONTINGENT DEFERRED SALES CHARGE," IF YOU
REDEEM YOUR SHARES WITHIN SIX YEARS OF PURCHASE
o AUTOMATIC CONVERSION TO CLASS A SHARES APPROXIMATELY EIGHT YEARS AFTER
PURCHASE, THEREBY REDUCING FUTURE ANNUAL EXPENSES
- --------------------------------------------------------------------------------
12b-1 FEES
Under Rule 12b-1 of the Investment Company Act, each fund is allowed to pay the
fund's distributor an annual fee for the distribution and sale of its shares and
for services provided to shareholders.
FOR 12b-1 FEES ARE EQUAL TO:
- --------------------------------------------------------------------------------
CLASS A SHARES 0.25% OF AVERAGE DAILY NET ASSETS
CLASS B SHARES 1% OF AVERAGE DAILY NET ASSETS
Because these fees are paid out of a fund's assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
The class A share 12b-1 fee is a shareholder servicing fee. For class B shares,
a portion of the 12b-1 fee equal to 0.25% of average daily net assets is a
shareholder servicing fee and the rest is a distribution fee.
For both class A and class B shares, the funds' distributor uses the shareholder
servicing fee to compensate brokers, participating institutions and "one-stop"
mutual fund networks for providing ongoing services to shareholder accounts.
These institutions receive annual fees equal to 0.25% of a fund's class A and
class B share average daily net assets attributable to shares sold through such
institutions. The distributor may pay additional fees to institutions, using the
sales charges it receives, in exchange for sales and/or administrative services
performed on behalf of the institution's customers.
- --------------------------------------------------------------------------------
CALCULATING YOUR SHARE PRICE
Your purchase price will be based on the fund's net asset value (NAV) per share,
which is generally calculated as of the close of regular trading on the New York
Stock Exchange (usually 3 p.m. Central time) every day the exchange is open.
Your order will be priced at the next NAV calculated after your order is
accepted by the fund.
A fund's NAV is equal to the market value of its investments and other assets,
less any liabilities, divided by the number of fund shares. If market prices are
not readily available for an investment or if the advisor believes they are
unreliable, fair value prices may be determined in good faith using methods
approved by the funds' board of directors.
CLASS A SHARES
Your purchase price is typically the net asset value of your shares, plus a
front-end sales charge. Sales charges vary depending on the amount of your
purchase. The funds' distributor receives the sales charge you pay and reallows
a portion of the sales charge to your broker or participating institution.
MAXIMUM
SALES CHARGE REALLOWANCE
AS A % OF AS A % OF AS A % OF
PURCHASE NET AMOUNT PURCHASE
PRICE INVESTED PRICE
- --------------------------------------------------------------------------------
LESS THAN $ 50,000 4.50% 4.71% 4.05%
$ 50,000 - $ 99,999 4.00% 4.17% 3.60%
$100,000 - $249,999 3.50% 3.63% 3.15%
$250,000 - $499,999 2.75% 2.83% 2.47%
$500,000 - $999,999 2.00% 2.04% 1.80%
$1 MILLION AND OVER 0% 0% 0%
8 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
POLICIES & SERVICES
BUYING SHARES (CONTINUED)
REDUCING YOUR SALES CHARGE
As shown in the preceding tables, larger purchases of class A shares reduce the
percentage sales charge you pay. You also may reduce your sales charge in the
following ways:
PRIOR PURCHASES. Prior purchases of class A shares of any First American fund
(except a money market fund) will be factored into your sales charge
calculation. For example, let's say you're making a $10,000 investment. If the
current value of all other First American fund class A shares that you hold is
$40,000 or more, your current sales charge is reduced. To receive a reduced
sales charge, you must notify the funds' transfer agent of your prior purchases.
This must be done at the time of purchase, either directly to the transfer agent
in writing or by notifying your broker or financial institution.
PURCHASES BY RELATED ACCOUNTS. Concurrent and prior purchases by certain other
accounts also will be combined with your purchase to determine your sales
charge. For example, purchases made by your spouse or children under age 21 will
reduce your sales charge. To receive a reduced sales charge, you must notify the
funds' transfer agent of purchases by any related accounts. This must be done at
the time of purchase, either directly to the transfer agent in writing or by
notifying your broker or financial institution.
LETTER OF INTENT. If you plan to invest $50,000 or more over a 13-month period
in class A shares of any First American fund except the money market funds, you
may reduce your sales charge by signing a non-binding letter of intent. (If you
do not fulfill the letter of intent, you must pay the applicable sales charge.
In addition, if you reduce your sales charge to zero under a letter of intent
and then sell your class A shares within 12 months of their purchase, you may be
charged a contingent deferred sales charge of 1%. See "For Investments of Over
$1 Million.")
More information on these ways to reduce your sales charge appears in the
Statement of Additional Information (SAI). The SAI also contains information on
investors who are eligible to purchase class A shares without a sales charge.
CLASS B SHARES
Your purchase price for class B shares is their net asset value -- there is no
front-end sales charge. However, if you redeem your shares within six years of
purchase, you will pay a back-end sales charge, called a contingent deferred
sales charge (CDSC). Although you pay no front-end sales charge when you buy
class B shares, the funds' distributor pays a sales commission of 4.5% of the
amount invested to brokers and financial institutions which sell class B shares.
The funds' distributor receives any CDSC imposed when you sell your class B
shares.
Your CDSC will be based on the value of your shares at the time of purchase or
at the time of sale, whichever is less. The charge does not apply to shares you
acquired by reinvesting your dividend or capital gain distributions. Shares will
be sold in the order that minimizes your CDSC.
- --------------------------------------------------------------------------------
FOR INVESTMENTS OF OVER $1 MILLION
There is no initial sales charge on class A share purchases of $1 million
or more. However, your broker or financial institution may receive a
commission of up to 1% on your purchase. If such a commission is paid, you
will be assessed a contingent deferred sales charge (CDSC) of 1% if you
sell your shares within 12 months. To find out whether you will be assessed
a CDSC, ask your broker or financial institution. The funds' distributor
receives any CDSC imposed when you sell your class A shares. The CDSC is
based on the value of your shares at the time of purchase or at the time of
sale, whichever is less. The charge does not apply to shares you acquired
by reinvesting your dividend or capital gain distributions. To help lower
your costs, shares that are not subject to a CDSC will be sold first. Other
shares will then be sold in an order that minimizes your CDSC. The CDSC
will be waived for (i) redemptions following the death or disability of a
shareholder and (ii) redemptions that equal the minimum required
distribution from an individual retirement account or other retirement plan
to a shareholder who has reached the age of 70 1/2.
CDSC AS A % OF THE
YEAR SINCE PURCHASE VALUE OF YOUR SHARES
- --------------------------------------------------------------------------------
FIRST 5%
SECOND 5%
THIRD 4%
FOURTH 3%
FIFTH 2%
SIXTH 1%
SEVENTH 0%
EIGHTH 0%
Your class B shares will automatically convert to class A shares, eight years
after the first day of the month following your purchase of shares. For example,
if you purchase class B shares on June 15, 1999, they will convert to class A
shares on June 1, 2007.
The CDSC will be waived for:
o REDEMPTIONS FOLLOWING THE DEATH OR DISABILITY OF A SHAREHOLDER.
o REDEMPTIONS THAT EQUAL THE MINIMUM REQUIRED DISTRIBUTION FROM AN INDIVIDUAL
RETIREMENT ACCOUNT OR OTHER RETIREMENT PLAN TO A SHAREHOLDER WHO HAS REACHED
THE AGE OF 70 1/2.
o REDEMPTIONS THROUGH A SYSTEMATIC WITHDRAWAL PLAN, AT A RATE OF UP TO 12% A
YEAR OF YOUR ACCOUNT'S VALUE. DURING THE FIRST YEAR, THE 12% ANNUAL LIMIT
WILL BE BASED ON THE VALUE OF YOUR ACCOUNT ON THE DATE THE PLAN IS
ESTABLISHED. THEREAFTER, IT WILL BE BASED ON THE VALUE OF YOUR ACCOUNT ON
THE PRECEDING DECEMBER 31.
9 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
POLICIES & SERVICES
BUYING SHARES (CONTINUED)
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
BY PHONE
You may purchase shares by calling your broker or financial institution, if they
have a sales agreement with the funds' distributor. In many cases, your order
will be effective that day if received by your broker or financial institution
by the close of regular trading on the New York Stock Exchange. In some cases,
however, you will have to transmit your request by an earlier time in order for
your purchase request to be effective that day. This allows your broker or
financial institution time to process your request and transmit it to the fund.
Some financial institutions may charge a fee for helping you purchase shares.
Contact your broker or financial institution for more information.
If you are paying by wire, you may purchase shares by calling 1-800-637-2548
before 3 p.m. Central time. All information will be taken over the telephone,
and your order will be placed when the funds' custodian receives payment by
wire. Wire federal funds as follows:
U.S. BANK NATIONAL ASSOCIATION, MINNEAPOLIS, MN
ABA NUMBER 091000022
FOR CREDIT TO: DST SYSTEMS, INC.:
ACCOUNT NUMBER 160234580266
FOR FURTHER CREDIT TO (INVESTOR NAME AND FUND NAME)
You cannot purchase shares by wire on days when the New York Stock Exchange or
federally chartered banks are closed.
BY MAIL
To purchase shares by mail, simply complete and sign a new account form, enclose
a check made payable to the fund you wish to invest in, and mail both to:
FIRST AMERICAN FUNDS
C/O DST SYSTEMS, INC.
P.O. BOX 419382
KANSAS CITY, MISSOURI 64141-6382
After you have established an account, you may continue to purchase shares by
mailing your check to First American Funds at the same address.
Please note the following:
o ALL PURCHASES MUST BE MADE IN U.S. DOLLARS
o THIRD-PARTY CHECKS, CREDIT CARDS, CREDIT CARD CHECKS AND CASH ARE NOT
ACCEPTED
O IF A CHECK DOES NOT CLEAR YOUR BANK, THE FUNDS RESERVE THE RIGHT TO CANCEL
THE PURCHASE, AND YOU COULD BE LIABLE FOR ANY LOSSES OR FEES INCURRED
- --------------------------------------------------------------------------------
INVESTING AUTOMATICALLY
To purchase shares as part of a savings discipline, you may add to your
investment on a regular basis:
o BY HAVING $100 OR MORE AUTOMATICALLY WITHDRAWN FROM YOUR BANK ACCOUNT ON A
PERIODIC BASIS AND INVESTED IN FUND SHARES
o THROUGH AUTOMATIC MONTHLY EXCHANGES OF YOUR SHARES OF PRIME OBLIGATIONS
FUND, A MONEY MARKET FUND IN THE FIRST AMERICAN FAMILY OF FUNDS. EXCHANGES
MUST BE MADE INTO THE SAME CLASS OF SHARES THAT YOU HOLD IN PRIME
OBLIGATIONS FUND
YOU MAY APPLY FOR PARTICIPATION IN EITHER OF THESE PROGRAMS THROUGH YOUR
BROKER OR FINANCIAL INSTITUTION OR BY CALLING 1-800-637-2548.
10 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
POLICIES & SERVICES
SELLING SHARES
- --------------------------------------------------------------------------------
HOW TO SELL SHARES
You may sell your shares on any day when the New York Stock Exchange is open.
Your shares will be sold at the next NAV calculated after your order is accepted
by the funds' transfer agent, less any applicable contingent deferred sales
charge.
The proceeds from your sale normally will be mailed or wired within one day, but
in no event more than seven days, after your request is received in proper form.
BY PHONE
If you purchased shares through a broker or financial institution, simply call
them to sell your shares. In many cases, your redemption will be effective that
day if received by your broker or financial institution by the close of regular
trading on the New York Stock Exchange. In some cases, however, you will have to
call by an earlier time in order for your redemption to be effective that day.
This allows your broker or financial institution time to process your request
and transmit it to the fund. Contact your broker or financial institution
directly for more information.
If you did not purchase shares through a broker or financial institution, you
may sell your shares by calling 1-800-637-2548. Proceeds can be wired to your
bank account (if the proceeds are at least $1,000 and you have previously
supplied your bank account information to the transfer agent) or sent to you by
check.
If you recently purchased your shares by check or through the Automated Clearing
House (ACH), proceeds from the sale of those shares may not be available until
your check or ACH payment has cleared, which may take up to 10 calendar days.
BY MAIL
To sell shares by mail, send a written request to your broker or financial
institution, or to the funds' transfer agent at the following address:
FIRST AMERICAN FUNDS
C/O DST SYSTEMS, INC.
P.O. BOX 419382
KANSAS CITY, MISSOURI 64141-6382
Your request should include the following information:
o NAME OF THE FUND
o ACCOUNT NUMBER
o DOLLAR AMOUNT OR NUMBER OF SHARES REDEEMED
o NAME ON THE ACCOUNT
o SIGNATURES OF ALL REGISTERED ACCOUNT OWNERS
Signatures on a written request must be guaranteed if:
o YOU WOULD LIKE THE PROCEEDS FROM THE SALE TO BE PAID TO ANYONE OTHER THAN TO
THE SHAREHOLDER OF RECORD
o YOU WOULD LIKE THE CHECK MAILED TO AN ADDRESS OTHER THAN THE ADDRESS ON THE
FUNDS' RECORDS
o YOUR REDEMPTION REQUEST IS FOR $25,000 OR MORE
A signature guarantee assures that a signature is genuine and protects
shareholders from unauthorized account transfers. Banks, savings and loan
associations, trust companies, credit unions, broker-dealers and member firms of
a national securities exchange may guarantee signatures. Call your financial
institution to determine if it has this capability.
Proceeds from a written redemption request will be sent to you by check.
- --------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWALS
If your account has a value of $5,000 or more, you may redeem a specific dollar
amount from your account on a regular basis. To set up systematic withdrawals,
contact your broker or financial institution. You should not make systematic
withdrawals if you plan to continue investing in the fund, due to sales charges
and tax liabilities.
- --------------------------------------------------------------------------------
REINVESTING AFTER A SALE
If you sell class A shares, you may reinvest in class A shares of that fund or
another First American fund within 31 days without a sales charge. If you sell
class B shares or other shares subject to a CDSC, that charge will be credited
to your account and the reinvested shares will be subject to a CDSC, which will
be determined based on the date of your reinvestment.
- --------------------------------------------------------------------------------
ACCOUNTS WITH LOW BALANCES
Except for retirement plans, if your account balance falls below $500 as a
result of selling or exchanging shares, you will be given 60 days to
re-establish the minimum balance. If you do not, the fund may close your
account and send you the proceeds, less any applicable contingent deferred
sales charge.
11 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT
- --------------------------------------------------------------------------------
EXCHANGING SHARES
If your investment goals or your financial needs change, you may move from one
First American fund to another. There is no fee to exchange shares.
Generally, you may exchange your shares only for shares of the same class.
However, you may exchange your class A shares for class Y shares of the same or
another First American fund if you subsequently become eligible to participate
in that class (for example, by opening a fiduciary, custody or agency account
with a financial institution which invests in class Y shares).
Exchanges are made based on the net asset value per share of each fund at the
time of the exchange. When you exchange your class A shares of one of the funds
for class A shares of another First American fund, you do not have to pay a
sales charge. When you exchange your class B shares for class B shares of
another First American fund, the time you held the shares of the "old" fund will
be added to the time you hold the shares of the "new" fund for purposes of
determining your CDSC or calculating when your class B shares convert to class A
shares.
Before exchanging into any fund, be sure to read its prospectus carefully. A
fund may change or cancel its exchange policies at any time. You will be
notified of any changes. The funds have the right to limit exchanges to four
times per year.
BY PHONE
You may exchange shares by calling your broker, your financial institution, or
the funds' transfer agent, provided that both funds have identical shareholder
registrations. To request an exchange through the funds' transfer agent, call
1-800-637-2548. Your instructions must be received by the funds' transfer agent
before 3 p.m. Central time, or by the time specified by your broker or financial
institution, in order for shares to be exchanged the same day.
BY MAIL
To exchange shares by written request, please follow the procedures under
"Selling Shares." Be sure to include the names of both funds involved in the
exchange.
- --------------------------------------------------------------------------------
TELEPHONE TRANSACTIONS
You may buy, sell or exchange shares by telephone, unless you elected on
your new account form to restrict this privilege. If you wish to reinstate
this option on an existing account, please call Investor Services at
1-800-637-2548 to request the appropriate form.
The funds and their agents will not be responsible for any losses that may
result from acting on wire or telephone instructions that they reasonably
believe to be genuine. The funds and their agents will each follow
reasonable procedures to confirm that instructions received by telephone
are genuine, which may include taping telephone conversations.
It may be difficult to reach the funds by telephone during periods of
unusual market activity. If you are unable to reach the funds or their
agents by telephone, please consider sending written instructions.
- --------------------------------------------------------------------------------
STAYING INFORMED
SHAREHOLDER REPORTS
Shareholder reports are mailed twice a year, in November and May. They include
financial statements, performance information, a message from your portfolio
managers, and, on an annual basis, the auditors' report.
In an attempt to reduce shareholder costs and help eliminate duplication, the
funds will try to limit their mailings to one report for each address that lists
one or more shareholders with the same last name. If you would like additional
copies, please call 1-800-637-2548.
STATEMENTS AND CONFIRMATIONS
Statements summarizing activity in your account are mailed at least quarterly.
Confirms are mailed following each purchase or sale of fund shares.
12 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT (CONTINUED)
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from a fund's net investment income are declared and paid quarterly.
Any capital gains are distributed at least once each year.
On the ex-dividend date for a distribution, a fund's share price is reduced by
the amount of the distribution. If you buy shares just before the ex-dividend
date, in effect, you "buy the dividend." You will pay the full price for the
shares and then receive a portion of that price back as a taxable distribution.
Dividend and capital gain distributions will be reinvested in additional shares
of the fund paying the distribution, unless you request cash payments on your
new account form or by writing to the fund. Shares will be priced at the NAV
computed on the ex-dividend date.
- --------------------------------------------------------------------------------
TAXES
Some of the tax consequences of investing in the funds are discussed below. More
information about taxes is in the Statement of Additional Information. However,
because everyone's tax situation is unique, always consult your tax professional
about federal, state and local tax consequences.
TAXES ON DISTRIBUTIONS
Each fund pays its shareholders dividends from its net investment income and any
net capital gains that it has realized. For most investors, fund dividends and
distributions are considered taxable whether they are reinvested or taken in
cash (unless your investment is in an IRA or other tax-advantaged account).
Dividends from a fund's net investment income are taxable as ordinary income.
Distributions of a fund's long-term capital gains are taxable as long-term
gains, regardless of how long you have held your shares. The funds expect that,
as a result of their investment objectives and strategies, their distributions
will consist primarily of ordinary income in the case of Real Estate Securities
Fund and capital gains in the case of Health Sciences Fund and Technology Fund.
TAXES ON TRANSACTIONS
The sale or exchange of fund shares will be a taxable event for you and may
result in a capital gain or loss. The gain or loss will be considered long-term
if you have held your shares for more than one year. A gain or loss on shares
held for one year or less is considered short-term and is taxed at the same
rates as ordinary income.
13 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
ADDITIONAL INFORMATION
MANAGEMENT
INVESTMENT ADVISOR
FIRST AMERICAN ASSET MANAGEMENT
601 SECOND AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55402
U.S. Bank National Association (U.S. Bank), acting through its First American
Asset Management division, is the funds' investment advisor. First American
Asset Management provides investment management services to individuals and
institutions, including corporations, foundations, pensions and retirement
plans. As of December 31, 1998, it had more than $______ in assets under
management, including investment company assets of approximately $______. As
investment advisor, First American Asset Management manages the funds' business
and investment activities, subject to the authority of the board of directors.
Each fund pays the investment advisor a monthly fee for providing investment
advisory services. During their most recent fiscal years, the funds paid the
following investment advisory fees to First American Asset Management:
ADVISORY FEE
AS A % OF
AVERAGE DAILY
NET ASSETS
- --------------------------------------------------------------------------------
HEALTH SCIENCES FUND %
REAL ESTATE SECURITIES FUND %
TECHNOLOGY FUND %
- --------------------------------------------------------------------------------
CUSTODIAN
U.S. BANK NATIONAL ASSOCIATION
U.S. BANK CENTER
180 EAST FIFTH STREET
ST. PAUL, MINNESOTA 55101
ADMINISTRATOR
SEI INVESTMENTS MANAGEMENT CORPORATION
OAKS, PENNSYLVANIA 19456
DISTRIBUTOR
SEI INVESTMENTS DISTRIBUTION CO.
OAKS, PENNSYLVANIA 19456
TRANSFER AGENT
DST SYSTEMS, INC.
330 WEST NINTH STREET
KANSAS CITY, MISSOURI 64105
ADDITIONAL COMPENSATION
In addition to receiving compensation for acting as the funds' investment
advisor as described above, U.S. Bank and its affiliates receive compensation in
connection with the following:
CUSTODY SERVICES. As compensation for acting as the funds' custodian, U.S. Bank
is paid monthly fees equal, on an annual basis, to 0.03% of a fund's average
daily net assets. In addition, U.S. Bank is reimbursed for its out-of-pocket
expenses incurred while providing custody services to the funds.
SUB-ADMINISTRATION SERVICES. U.S. Bank assists the administrator and provides
sub-administration services to the funds. For providing these services, U.S.
Bank is compensated by the funds' administrator at an annual rate of up to
0.05% of each fund's average daily net assets.
TRANSFER AGENT SERVICES. U.S. Bank performs certain transfer agent and dividend
disbursing agent services with respect to the class A and class B shares of the
funds held through accounts at U.S. Bank and its affiliates. The funds pay U.S.
Bank an annual fee of $15 per account for providing these services.
SECURITIES LENDING SERVICES. In connection with lending their portfolio
securities, the funds pay administrative and custodial fees to U.S. Bank which
are equal to 40% of the funds' income from these securities lending
transactions.
BROKERAGE TRANSACTIONS. When purchasing and selling portfolio securities for the
funds, the funds' investment advisor may place trades through its affiliates,
U.S. Bancorp Investments, Inc. and U.S. Bancorp Piper Jaffray Inc., which will
earn commissions on such transactions.
SALES OF FUND SHARES. U.S. Bancorp Investments, Inc. and U.S. Bancorp Piper
Jaffray Inc., broker-dealers affiliated with U.S. Bank, have entered into
agreements with the funds' distributor to sell fund shares and will earn
commissions on these sales.
ERISA ACCOUNTS. U.S. Bank 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.
PORTFOLIO MANAGEMENT
Each fund's investments are managed by a team of persons associated with First
American Asset Management.
14 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS
- --------------------------------------------------------------------------------
OBJECTIVES
The funds' objectives may be changed without shareholder approval. If a fund's
objectives change, you will be notified at least 30 days in advance. Please
remember: There is no guarantee that any fund will achieve its objectives.
- --------------------------------------------------------------------------------
INVESTMENT STRATEGIES
The funds' main investment strategies are the strategies that the funds'
investment advisor believes are most likely to be important in trying to achieve
the funds' objectives. You should be aware that each fund may also use
strategies and invest in securities that are not described in this prospectus,
but that are described in the Statement of Additional Information (SAI). For a
copy of the SAI, call Investor Services at 1-800-637-2548.
TEMPORARY INVESTMENTS
In an attempt to respond to adverse market, economic, political or other
conditions, each fund may invest without limit in cash and in U.S.
dollar-denominated high-quality money market instruments and other short-term
securities. Being invested in these securities may keep a fund from
participating in a market upswing and prevent the fund from achieving its
investment objectives.
PORTFOLIO TURNOVER
Fund managers may trade securities frequently, resulting, from time to time, in
an annual portfolio turnover rate of over 100%. Trading of securities may
produce capital gains, which are taxable to shareholders when distributed.
Active trading may also increase the amount of commissions or mark-ups to
broker-dealers that the fund pays when it buys and sells securities. The
"Financial Highlights" section of this prospectus shows each fund's historical
portfolio turnover rate.
- --------------------------------------------------------------------------------
RISKS
The main risks of investing in the funds are summarized in the "Fund Summaries"
section. More information about fund risks is presented below.
MARKET RISK
All stocks are subject to price movements due to changes in general economic
conditions, changes in the level of prevailing interest rates, changes in
investor perceptions of the market, or the outlook for overall corporate
profitability.
COMPANY RISK
Individual stocks can perform differently than the overall market. This may be a
result of specific factors such as changes in corporate profitability due to the
success or failure of specific products or management strategies, or it may be
due to changes in investor perceptions regarding a company.
SECTOR RISK
The stocks of companies within specific industries or sectors of the economy can
periodically perform differently than the overall stock market. This can be due
to changes in such things as the regulatory or competitive environment or to
changes in investor perceptions of a particular industry or sector. Each fund is
subject to the particular risks of the sector in which it principally invests.
RISKS OF THE HEALTH SCIENCES SECTOR. Health Sciences Fund invests primarily in
equity securities of companies which develop, produce or distribute products or
services connected with health care or medicine. 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.
RISKS OF THE REAL ESTATE SECTOR. Real Estate Securities Fund invests primarily
in equity securities of publicly traded companies in the real estate 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 them, and
companies which service the real estate industry.
RISKS OF THE TECHNOLOGY SECTOR. Technology Fund invests primarily in equity
securities of companies which the fund's advisor believes have, or will develop,
products, processes or services that will provide or benefit significantly from
technological advances and improvements. 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 continues to expand, these
companies could become increasingly sensitive to short product cycles and
aggressive pricing.
15 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS (CONTINUED)
RISKS OF DEVELOPMENT STAGE AND SMALL CAP STOCKS
Health Sciences Fund and Technology Fund may have significant investments in
development stage and small capitalization companies. Stocks of development
stage and small capitalization companies involve substantial risk. These
companies may lack the management expertise, financial resources, product
diversification and competitive strengths of larger companies. Their stock
prices may be subject to more abrupt or erratic movements than stock prices of
larger, more established companies or the market averages in general. In
addition, the frequency and volume of their trading may be less than is typical
of larger companies, making them subject to wider price fluctuations. In some
cases, there could be difficulties in selling the stocks of development stage
and small capitalization companies at the desired time and price.
RISKS OF REITS
Because Real Estate Securities Fund invests a majority of its assets in REITs,
it is subject to the 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. REITs are subject to other risks as well,
including the fact that REITs are dependent on specialized management skills
which may affect 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 the risks associated with obtaining financing
for real property.
A REIT can pass its income through to shareholders or unitholders without any
tax at the entity level if it complies with various requirements under the
Internal Revenue Code. There is the risk that a REIT held by the fund will fail
to qualify for this tax-free pass-through treatment of its income.
By investing in REITS indirectly through the fund, in addition to bearing a
proportionate share of the expenses of the fund, you will also indirectly bear
similar expenses of some of the REITs in which the fund invests.
FOREIGN SECURITY RISK
Up to 25% of each fund's total assets may be invested in securities of foreign
issuers which are either listed on a United States stock exchange or represented
by American Depository Receipts. Securities of foreign issuers, even when
dollar-denominated and publicly traded in the United States, may involve risks
not associated with the securities of domestic issuers. For certain foreign
countries, political or social instability or diplomatic developments could
adversely affect the securities. There is also the risk of loss due to
governmental actions such as a change in tax statutes or the modification of
individual property rights. In addition, individual foreign economies may differ
favorably or unfavorably from the U.S. economy.
RISKS OF ACTIVE MANAGEMENT
Each fund is actively managed and its performance therefore will reflect in part
the advisor's ability to make investment decisions which are suited to achieving
the fund's investment objectives. Due to their active management, the funds
could underperform other mutual funds with similar investment objectives.
RISKS OF SECURITIES LENDING
When a fund loans its portfolio securities, it will receive collateral equal to
at least 100% of the value of the loaned securities. Nevertheless, the fund
risks a delay in the recovery of the loaned securities, or even the loss of
rights in the collateral deposited by the borrower if the borrower should fail
financially. To reduced these risks, the funds enter into loan arrangements only
with institutions which the funds' advisor has determined are creditworthy under
guidelines established by the funds' board of directors.
YEAR 2000 ISSUES
Like other mutual funds and business and financial organizations, the funds
could be adversely affected if the computer systems used by the funds' advisor,
other service providers and entities with computer systems that are linked to
fund records do not properly process and calculate date-related information from
and after January 1, 2000. While year 2000-related computer problems could have
a negative effect on the funds, the funds' administrator has undertaken a
program designed to assess and monitor the steps being taken by the funds'
service providers to address year 2000 issues. This program includes seeking
assurances from service providers that their systems are or will be year 2000
compliant and reviewing service providers' periodic reports to monitor their
status concerning their year 2000 readiness and compliance.
The administrator and the advisor also report regularly to the funds' board of
directors concerning their own and other service providers' progress toward year
2000 readiness. Although these reports indicate that service providers are or
expect to be year 2000 compliant, there can be no assurance that this will be
the case in all instances or that year 2000 difficulties experienced by others
in the financial services industry will not impact the funds. In addition, there
can be no assurance that year 2000 difficulties will not have an adverse effect
on the funds' investments or on global markets or economies, generally. The
funds are not bearing any of the expenses incurred by their service providers in
preparing for the year 2000.
16 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about the class A and
class B shares of each fund. This information is intended to help you understand
each fund's financial performance for the past five years or, if shorter, the
period of the fund's operations. Some of this information reflects financial
results for a single fund share. Total returns in the tables represent the rate
that you would have earned or lost on an investment in a fund, excluding sales
charges and assuming you reinvested all of your dividends and distributions.
This information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report, along with the funds' financial statements, is included
in the funds' annual report, which is available upon request.
HEALTH SCIENCES FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS A SHARES 1998 1997 1996(1)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 9.86 $ 10.00
-------- ------- -------
Investment Operations:
Net Investment Income (Loss) (0.01) 0.01
Net Gains (Losses) on Securities
(both realized and unrealized) 2.30 (0.14)
-------- -------- --------
Total From Investment Operations 2.29 (0.13)
-------- -------- --------
Less Distributions:
Dividends (from net investment income) -- (0.01)
Distributions (from capital gains) (0.10) --
-------- -------- --------
Total Distributions (0.10) (0.01)
-------- -------- --------
Net Asset Value, End of Period $ $ 12.05 $ 9.86
======== ======== =======
Total Return 23.60% (1.32)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 849 $ 629
Ratio of Expenses to Average Net Assets 1.15% 1.15%
Ratio of Net Income (Loss) to Average Net Assets % (0.20)% 0.18%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.29% 2.12%
Ratio of Net (Loss) to Average Net Assets (excluding waivers) (0.34)% (0.79)%
Portfolio Turnover Rate % 54% 19%
- -------------------------------------------------------------------------------------------------------
<CAPTION>
Fiscal year ended September 30,
CLASS B SHARES 1998 1997 1996(1)
- -------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 9.81 $ 10.00
-------- -------- --------
Investment Operations:
Net Investment Income (Loss) (0.01) (0.02)
Net Gains (Losses) on Securities
(both realized and unrealized) 2.20 (0.16)
-------- -------- --------
Total From Investment Operations 2.19 (0.18)
-------- -------- --------
Less Distributions:
Dividends (from net investment income) -- (0.01)
Distributions (from capital gains) (0.10) --
-------- -------- --------
Total Distributions (0.10) (0.01)
-------- -------- --------
Net Asset Value, End of Period $ $ 11.90 $ 9.81
======== ======== ========
Total Return % 22.69% (1.86)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 516 $ 281
Ratio of Expenses to Average Net Assets % 1.90% 1.90%
Ratio of Net Income (Loss) to Average Net Assets % (0.94)% (0.61)%
Ratio of Expenses to Average Net Assets (excluding waivers) % 2.04% 2.87%
Ratio of Net (Loss) to Average Net Assets (excluding waivers) (1.08)% (1.58)%
Portfolio Turnover Rate % 54% 19%
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commenced operations on January 31, 1996. All ratios for the period have
been annualized.
17 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
REAL ESTATE SECURITIES FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS A SHARES 1998 1997 1996 1995(1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 11.52 $ 10.38 $ 10.37
-------- ------- ------- -------
Investment Operations:
Net Investment Income 0.72 0.52 --
Net Gains (Losses) on Securities
(both realized and unrealized) 3.42 1.30 0.01
-------- ------- -------- -------
Total From Investment Operations 4.14 1.82 0.01
Less Distributions:
Dividends (from net investment income) (0.65) (0.51) --
Distributions (from capital gains) (0.03) -- --
Tax Return of Capital (0.01) (0.17) --
-------- ------- -------- -------
Total Distributions (0.69) (0.68) --
-------- ------- -------- -------
Net Asset Value, End of Period $ $ 14.97 $ 11.52 $ 10.38
======== ======= ======== =======
Total Return % 36.77% 18.17% 0.00%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 2,105 $ 226 $ 1
Ratio of Expenses to Average Net Assets % 1.05% 1.05% 1.05%
Ratio of Net Income to Average Net Assets % 4.46% 4.36% 0.00%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.30% 1.76% 2.59%
Ratio of Net Income (Loss) to Average Net Assets (excluding waivers) 4.21% 3.65% (1.54)%
Portfolio Turnover Rate % 14% 8% 0%
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Fiscal year ended September 30,
CLASS B SHARES 1998 1997 1996 1995(1)
- ----------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 11.46 $ 10.37 $ 10.37
-------- ------- -------- -------
Investment Operations:
Net Investment Income 0.63 0.44 --
Net Gains (Losses) on Securities
(both realized and unrealized) 3.38 1.27 --
-------- ------- -------- -------
Total From Investment Operations 4.01 1.71 --
-------- ------- -------- -------
Less Distributions:
Dividends (from net investment income) (0.57) (0.45) --
Distributions (from capital gains) (0.03) -- --
Tax Return of Capital (0.01) (0.17) --
-------- ------- -------- -------
Total Distributions (0.61) (0.62) --
-------- ------- -------- -------
Net Asset Value, End of Period $ $ 14.86 $ 11.46 $ 10.37
======== ======= ======== =======
Total Return % 35.77% 17.00% 0.00%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 3,318 $ 263 $ 1
Ratio of Expenses to Average Net Assets % 1.80% 1.80% 1.80%
Ratio of Net Income to Average Net Assets % 3.61% 4.29% 0.00%
Ratio of Expenses to Average Net Assets (excluding waivers) % 2.00% 2.51% 3.34%
Ratio of Net Income (Loss) to Average Net Assets (excluding waivers) 3.41% 3.58% (1.54)%
Portfolio Turnover Rate % 14% 8% 0%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commenced operations on September 29, 1995. All ratios for the period have
been annualized.
18 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
TECHNOLOGY FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS A SHARES 1998 1997 1996 1995 1994(1)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 19.25 $ 18.24 $ 11.19 $ 10.00
-------- ------- ------- ------- -------
Investment Operations:
Net Investment (Loss) (0.11) (0.05) (0.03) (0.01)
Net Gains (Losses) on Securities
(both realized and unrealized) 3.12 2.95 7.31 1.20
-------- ------- ------- ------- -------
Total From Investment Operations 3.01 2.90 7.28 (1.19)
-------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) -- -- -- --
Distributions (from capital gains) (2.06) (1.89) (0.23) --
-------- ------- ------- ------- -------
Total Distributions (2.06) (1.89) (0.23) --
-------- ------- ------- ------- -------
Net Asset Value, End of Period $ $ 20.20 $ 19.25 $ 18.24 $ 11.19
======== ======= ======= ======= =======
Total Return % 17.71% 18.60% 66.22% 11.90%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 5,564 $ 4,799 $ 1,464 $ 61
Ratio of Expenses to Average Net Assets % 1.15% 1.15% 1.13% 0.80%
Ratio of Net Loss to Average Net Assets % (0.59)% (0.85)% (0.61)% (0.21)%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.17% 1.26% 1.55% 3.37%
Ratio of Net (Loss) to Average Net Assets (excluding waivers) (0.61)% (0.96)% (1.03)% (2.78)%
Portfolio Turnover Rate % 150% 119% 74% 43%
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Fiscal year ended September 30,
CLASS B SHARES 1998 1997 1996 1995 1994(2)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 18.85 $ 18.02 $ 11.17 $ 9.85
-------- ------- ------- ------- -------
Investment Operations:
Net Investment (Loss) (0.20) (0.14) (0.04) (0.02)
Net Gains (Losses) on Securities
(both realized and unrealized) 2.99 2.86 7.12 1.34
-------- ------- ------- ------- -------
Total From Investment Operations 2.79 2.72 7.08 1.32
-------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) -- -- -- --
Distributions (from capital gains) (2.06) (1.89) (0.23) --
-------- ------- ------- ------- -------
Total Distributions (2.06) (1.89) (0.23) --
-------- ------- ------- ------- -------
Net Asset Value, End of Period $ $ 19.58 $ 18.85 $ 18.02 $ 11.17
======== ======= ======= ======= =======
Total Return % 16.82% 17.75% 64.52% 13.40%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 8,463 $ 4,881 $ 2,031 $ 2
Ratio of Expenses to Average Net Assets % 1.90% 1.90% 1.88% 1.80%
Ratio of Net (Loss) to Average Net Assets % (1.41)% (1.60)% (1.41)% (1.44)%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.92% 2.01% 2.30% 4.12%
Ratio of Net (Loss) to Average Net Assets (excluding waivers) (1.43)% (1.71)% (1.83)% (3.76)%
Portfolio Turnover Rate % 150% 119% 74% 43%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commenced operations on April 4, 1994. 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.
19 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
FOR MORE INFORMATION
More information about the funds is available in the funds' Statement of
Additional Information and annual and semiannual reports.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more details about the funds and their policies. A current SAI
is on file with the Securities and Exchange Commission (SEC) and is incorporated
into this prospectus by reference (which means that it is legally considered
part of this prospectus).
ANNUAL AND SEMIANNUAL REPORTS
Additional information about the funds' investments is available in the funds'
annual and semiannual reports to shareholders. In the funds' annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the funds' performance during their last fiscal year.
You can obtain a free copy of the funds' SAI and/or free copies of the funds'
most recent annual or semiannual reports by calling Investor Services at
1-800-637-2548. The material you request will be sent by first-class mail or
other means designed to ensure equally prompt delivery, within three business
days of receipt of the request.
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC, or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. For more information, call
1-800-SEC-0330.
Information about the funds is also available on the Internet. Text-only
versions of fund documents can be viewed online or downloaded from the SEC's
Internet site at http://www.sec.gov.
SEC file number: 811-05309
FAIF-1001 (9/1998)
<PAGE>
FEBRUARY 1, 1999
SECTOR FUNDS
CLASS Y SHARES
HEALTH SCIENCES FUND
REAL ESTATE SECURITIES FUND
TECHNOLOGY FUND
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of these funds, or determined if the
information in this prospectus is accurate or complete. Any statement to the
contrary is a criminal offense.
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(R)
<PAGE>
TABLE OF CONTENTS
FUND SUMMARIES
- --------------------------------------------------------------------------------
Health Sciences Fund 2
- --------------------------------------------------------------------------------
Real Estate Securities Fund 4
- --------------------------------------------------------------------------------
Technology Fund 6
- --------------------------------------------------------------------------------
POLICIES & SERVICES
- --------------------------------------------------------------------------------
Buying and Selling Shares 8
- --------------------------------------------------------------------------------
Managing Your Investment 9
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Management 10
- --------------------------------------------------------------------------------
More About The Funds 11
- --------------------------------------------------------------------------------
Financial Highlights 13
- --------------------------------------------------------------------------------
FOR MORE INFORMATION Back Cover
- --------------------------------------------------------------------------------
<PAGE>
FUND SUMMARIES
INTRODUCTION
This section of the prospectus describes the objectives of the First American
Sector Funds, summarizes the main investment strategies used by each fund in
trying to achieve its objectives, and highlights the risks involved with these
strategies. It also provides you with information about the performance, fees
and expenses of the funds.
AN INVESTMENT IN THE FUNDS IS NOT A DEPOSIT OF U.S. BANK NATIONAL ASSOCIATION
AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
1 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
FUND SUMMARIES
HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Health Sciences Fund has an objective of long-term growth of capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Health Sciences Fund invests primarily in common
stocks of companies which develop, produce or distribute products or services
connected with health care or medicine, and which derive at least 50% of their
assets, revenues or profits from these products or services at the time of
investment. The fund may also invest in preferred stocks and corporate debt
securities which are convertible into common stocks.
Examples of products or services connected with health care or medicine include:
o PHARMACEUTICALS
o HEALTH CARE SERVICES AND ADMINISTRATION
o DIAGNOSTICS
o MEDICAL EQUIPMENT AND SUPPLIES
o MEDICAL TECHNOLOGY
o MEDICAL RESEARCH AND DEVELOPMENT
The fund's advisor will invest in companies that it believes 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.
The fund's investments may include development stage companies (companies that
do not have significant revenues) and small capitalization companies. The fund
may also invest in real estate investment trusts (REITs) that finance medical
care facilities. REITs and their risks are discussed below under "Real Estate
Securities Fund."
Up to 25% of the fund's total assets may be invested in securities of foreign
issuers which are either listed on a United States stock exchange or represented
by American Depository Receipts.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may affect the market as a whole, or they may affect only a
particular company, industry or sector of the market.
RISKS OF THE HEALTH SCIENCES SECTOR
Because the fund invests primarily in stocks related to health care or medicine,
it is particularly susceptible to risks associated with the health sciences
industries. Many products and services in the health sciences industries may
become rapidly obsolete due to technological and scientific advances. In
addition, governmental regulation may have a material effect on the demand for
products and services in these industries.
RISKS OF NON-DIVERSIFICATION
The fund is non-diversified. This means that it may invest a larger portion of
its assets in a limited number of companies than a diversified fund. Because a
relatively high percentage of the fund's assets may be invested in the
securities of a limited number of issuers, and because those issuers 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 a diversified fund.
RISKS OF DEVELOPMENT STAGE AND SMALL CAP STOCKS
Stocks of development stage and small capitalization companies involve
substantial risk. These stocks historically have experienced greater price
volatility than stocks of more established and larger capitalization companies,
and they may be expected to do so in the future.
FOREIGN SECURITY RISK
Securities of foreign issuers, even when dollar-denominated and publicly traded
in the United States, may involve risks not associated with the securities of
domestic issuers, including the risk of political or social instability or
diplomatic developments that could adversely affect the securities.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have reinvested.
2 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
FUND SUMMARIES
HEALTH SCIENCES FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The since inception
performance of the index
is calculated from the
[BAR CHART] month end following the
inception of the class Y
1997 shares.
1998
(2) An unmanaged index
comprised of the smallest
2000 companies in the
Russell 3000 Index. The
latter index is composed
of 3000 large U.S.
companies representing
approximately 98% of the
investable U.S. equity
market.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception(1)
AS OF 12/31/98(1) One Year (1/31/96)
- --------------------------------------------------------------------------------
Health Sciences Fund % %
- --------------------------------------------------------------------------------
Russell 2000 Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show expenses before
any waivers during the fiscal year ended September 30, 1998.(1)
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
0.90%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
3 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
FUND SUMMARIES
REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Real Estate Securities Fund's objective is to provide above average current
income and long-term capital appreciation.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Real Estate Securities Fund invests primarily in
income producing common stocks of publicly traded companies engaged in the real
estate industry. These companies derive at least 50% of their revenues or
profits from the ownership, construction, management, financing or sale of real
estate, or have at least 50% of the fair market value of their assets invested
in real estate. The fund may also invest in preferred stocks and corporate debt
securities which are convertible into common stocks. In making investments, the
fund's advisor will attempt to select securities that provide a dividend yield
that exceeds the composite yield of the S&P 500.
A majority of the fund's total assets will be invested in real estate investment
trusts (REITs). REITs are publicly traded corporations or trusts that acquire,
hold and manage residential or commercial real estate. REITs generally can be
divided into the following three types:
o EQUITY REITS, WHICH INVEST THE MAJORITY OF THEIR ASSETS DIRECTLY IN REAL
PROPERTY AND DERIVE THEIR INCOME PRIMARILY FROM RENTS AND CAPITAL GAINS OR
REAL ESTATE APPRECIATION
o MORTGAGE REITS, WHICH INVEST THE MAJORITY OF THEIR ASSETS IN REAL ESTATE
MORTGAGE LOANS AND DERIVE THEIR INCOME PRIMARILY FROM INTEREST PAYMENTS
o HYBRID REITS, WHICH COMBINE THE CHARACTERISTICS OF EQUITY REITS AND
MORTGAGE REITS
The fund expects to emphasize investments in equity REITs, although it may
invest in all three kinds of REITs.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market.
RISKS OF THE REAL ESTATE INDUSTRY
Because the fund invests primarily in the real estate industry, it is
particularly susceptible 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.
RISK OF REITS
There are 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. REITs are dependent on specialized management skills which may
affect their ability to generate cash flow for operating purposes and to make
distributions to shareholders or unitholders.
RISKS OF NON-DIVERSIFICATION
The fund is non-diversified. This means that it may invest a larger portion of
its assets in a limited number of companies than a diversified fund. Because a
relatively high percentage of the fund's assets may be invested in the
securities of a limited number of issuers, and because those issuers generally
will be in the real estate industry, the fund's portfolio securities may be more
susceptible to any single economic or regulatory occurrence than the portfolio
securities of a diversified fund.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
4 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
FUND SUMMARIES
REAL ESTATE SECURITIES FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The since inception
performance of the index
is calculated from the
[BAR CHART] month end following the
inception of the class Y
1996 shares.
1997
1998 (2) An unmanaged index of the
most actively traded real
estate investment trusts.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception(1)
AS OF 12/31/98 One Year (6/30/95)
- --------------------------------------------------------------------------------
Real Estate Securities Fund % %
- --------------------------------------------------------------------------------
Morgan Stanley REIT Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show expenses before
any waivers during the fiscal year ended September 30, 1998.(1)
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
0.80%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
5 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
FUND SUMMARIES
TECHNOLOGY FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Technology Fund has an objective of long-term growth of capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Technology Fund invests primarily in common
stocks of companies which the fund's advisor believes either have, or will
develop, products, processes or services that will provide or will benefit
significantly from technological innovations, advances and improvements. These
may include:
o INEXPENSIVE COMPUTING POWER, SUCH AS PERSONAL COMPUTERS
o IMPROVED METHODS OF COMMUNICATIONS, SUCH AS SATELLITE TRANSMISSION, AND
o TECHNOLOGY RELATED SERVICES SUCH AS INTERNET RELATED MARKETING SERVICES.
The prime emphasis of the fund is to identify companies which the advisor
believes are positioned to benefit from technological advances in areas such as
semiconductors, computers, software, communications, and online services.
Companies in which the fund invests may include development stage companies
(companies that do not have significant revenues) and small capitalization
companies.
In addition to common stocks, the fund may invest in preferred stocks and
corporate debt securities which are convertible into common stocks. Up to 25% of
the fund's total assets may be invested in securities of foreign issuers which
are either listed on a United States stock exchange or represented by American
Depository Receipts.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The value of your investment in this fund will change daily, which means you
could lose money. The main risks of investing in this fund include:
MARKET RISK
Stocks may decline significantly in price over short or extended periods of
time. Price changes may affect the market as a whole, or they may affect only a
particular company, industry or sector of the market.
RISKS OF NON-DIVERSIFICATION
The fund is non-diversified. This means that it may invest a larger portion of
its assets in a limited number of companies than a diversified fund. Because a
relatively high percentage of the fund's assets may be invested in the
securities of a limited number of issuers, and because those issuers 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 a diversified fund.
RISKS OF THE TECHNOLOGY SECTOR
Because the fund invests primarily in technology related stocks, it is
particularly susceptible to risks associated with the technology industry.
Competitive pressures may have a significant effect on the financial condition
of companies in that industry.
RISKS OF DEVELOPMENT STAGE AND SMALL CAP STOCKS
Stocks of development stage and small capitalization companies involve
substantial risk. These stocks historically have experienced greater price
volatility than stocks of more established and larger capitalization companies,
and they may be expected to do so in the future.
FOREIGN SECURITY RISK
Securities of foreign issuers, even when dollar-denominated and publicly traded
in the United States, may involve risks not associated with the securities of
domestic issuers, including the risk of political or social instability or
diplomatic developments that could adversely affect the securities.
RISKS OF SECURITIES LENDING
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses. Both the chart and the table assume that all distibutions have been
reinvested.
6 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
FUND SUMMARIES
TECHNOLOGY FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The since inception
performance of the index
is calculated from the
[BAR CHART] month end following the
date the fund commenced
1995 operations.
1996
1997 (2) An unmanaged index
1998 comprised of the smallest
2000 companies in the
Russell 3000 Index. The
latter index is composed
of 3000 large U.S.
companies representing
approximately 98% of the
investable U.S. equity
market.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception(1)
AS OF 12/31/98(1) One Year (4/4/94)
- --------------------------------------------------------------------------------
Technology Fund % %
- --------------------------------------------------------------------------------
Russell 2000 Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show expenses before
any waivers during the fiscal year ended September 30, 1998.(1)
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
0.90%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
7 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
POLICIES & SERVICES
BUYING AND SELLING SHARES
Class Y shares are offered through banks and other financial institutions that
have entered into sales agreements with the funds' distributor. Class Y shares
are available to these financial institutions for the investment of their own
funds. Class Y shares also are available to certain accounts for which the
financial institution acts in a fiduciary, agency or custodial capacity, such as
certain trust accounts and investment advisory accounts. To find out whether you
may purchase class Y shares, contact your financial institution.
- --------------------------------------------------------------------------------
CALCULATING YOUR SHARE PRICE
Your purchase price will be equal to the fund's net asset value (NAV) per share,
which is generally calculated as of the close of regular trading on the New York
Stock Exchange (usually 3 p.m. Central time) every day the exchange is open.
A fund's NAV is equal to the market value of its investments and other assets,
less any liabilities, divided by the number of fund shares. If market prices are
not readily available for an investment or if the advisor believes they are
unreliable, fair value prices may be determined in good faith using methods
approved by the funds' board of directors.
- --------------------------------------------------------------------------------
HOW TO BUY AND SELL SHARES
You may purchase or sell shares by calling your financial institution.
When purchasing shares, payment must be made by wire transfer, which can be
arranged by your financial institution. Because purchases must be paid for by
wire transfer, you can purchase shares only on days when both the New York Stock
Exchange and federally chartered banks are open. You may sell your shares on any
day when the New York Stock Exchange is open.
Purchase orders and redemption requests must be received by your financial
institution by the time specified by the institution to be assured same day
processing. In order for shares to be purchased at that day's price, the funds
must receive your purchase order by 3:00 p.m. Central time and the funds'
custodian must receive federal funds before the close of business. In order for
shares to be sold at that day's price, the funds must receive your redemption
request by 3:00 p.m. Central time. It is the responsibility of your financial
institution to promptly transmit orders to the funds.
If the funds receive your redemption request by 3:00 p.m. Central time, payment
of your redemption proceeds will ordinarily be made by wire on the next business
day. It is possible, however, that payment could be delayed by up to seven days.
- --------------------------------------------------------------------------------
HOW TO EXCHANGE SHARES
If your investment goals or your financial needs change, you may exchange your
shares for class Y shares of another First American fund. Exchanges will be made
at the net asset value per share of each fund at the time of the exchange. There
is no fee to exchange shares. If you are no longer eligible to hold class Y
shares, for example, if you decide to discontinue your fiduciary, agency or
custodian account, you may exchange your shares for class A shares at net asset
value. Class A shares have higher expenses than class Y shares.
To exchange your shares, call your financial institution. In order for your
shares to be exchanged the same day, you must call your financial institution by
the time specified by the institution and your exchange order must be received
by the funds by 3:00 p.m. Central time. It is the responsibility of your
financial institution to promptly transmit your exchange order to the funds.
Before exchanging into any fund, be sure to read its prospectus carefully. A
fund may change or cancel its exchange policies at any time. You will be
notified of any changes. The funds have the right to limit exchanges to four
times per year.
8 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT
- --------------------------------------------------------------------------------
STAYING INFORMED
SHAREHOLDER REPORTS
Shareholder reports are mailed twice a year, in November and May. They include
financial statements, performance information, a message from your portfolio
managers, and, on an annual basis, the auditors' report.
In an attempt to reduce shareholder costs and help eliminate duplication, the
funds will try to limit their mailings to one report for each address that lists
one or more shareholders with the same last name. If you would like additional
copies, please call 1-800-637-2548.
STATEMENTS AND CONFIRMATIONS
Statements summarizing activity in your account are mailed at least quarterly.
Confirms are mailed following each purchase or sale of fund shares.
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from a fund's net investment income are declared and paid quarterly.
Any capital gains are distributed at least once each year.
On the ex-dividend date for a distribution, a fund's share price is reduced by
the amount of the distribution. If you buy shares just before the ex-dividend
date, in effect, you "buy the dividend." You will pay the full price for the
shares and then receive a portion of that price back as a taxable distribution.
Dividend and capital gain distributions will be reinvested in additional shares
of the fund paying the distribution, unless you request cash payments on your
new account form or by writing to the fund. Shares will be priced at the NAV
computed on the ex-dividend date.
- --------------------------------------------------------------------------------
TAXES
Some of the tax consequences of investing in the funds are discussed below. More
information about taxes is in the Statement of Additional Information. However,
because everyone's tax situation is unique, always consult your tax professional
about federal, state and local tax consequences.
TAXES ON DISTRIBUTIONS
Each fund pays its shareholders dividends from its net investment income and any
net capital gains that it has realized. For most investors, fund dividends and
distributions are considered taxable whether they are reinvested or taken in
cash (unless your investment is in an IRA or other tax-advantaged account).
Dividends from a fund's net investment income are taxable as ordinary income.
Distributions of a fund's long-term capital gains are taxable as long-term
gains, regardless of how long you have held your shares. The funds expect that,
as a result of their investment objectives and strategies, their distributions
will consist primarily of ordinary income in the case of Real Estate Securities
Fund and capital gains in the case of Health Sciences Fund and Technology Fund.
TAXES ON TRANSACTIONS
The sale or exchange of fund shares will be a taxable event for you and may
result in a capital gain or loss. The gain or loss will be considered long-term
if you have held your shares for more than one year. A gain or loss on shares
held for one year or less is considered short-term and is taxed at the same
rates as ordinary income.
9 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
ADDITIONAL INFORMATION
MANAGEMENT
INVESTMENT ADVISOR
FIRST AMERICAN ASSET MANAGEMENT
601 SECOND AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55402
U.S. Bank National Association (U.S. Bank), acting through its First American
Asset Management division, is the funds' investment advisor. First American
Asset Management provides investment management services to individuals and
institutions, including corporations, foundations, pensions and retirement
plans. As of December 31, 1998, it had more than $_____ in assets under
management, including investment company assets of approximately $_____. As
investment advisor, First American Asset Management manages the funds' business
and investment activities, subject to the authority of the board of directors.
Each fund pays the investment advisor a monthly fee for providing investment
advisory services. During their most recent fiscal years, the funds paid the
following investment advisory fees to First American Asset Management:
ADVISORY FEE
AS A % OF
AVERAGE DAILY
NET ASSETS
- --------------------------------------------------------------------------------
HEALTH SCIENCES FUND %
REAL ESTATE SECURITIES FUND %
TECHNOLOGY FUND %
- --------------------------------------------------------------------------------
CUSTODIAN
U.S. BANK NATIONAL ASSOCIATION
U.S. BANK CENTER
180 EAST FIFTH STREET
ST. PAUL, MINNESOTA 55101
ADMINISTRATOR
SEI INVESTMENTS MANAGEMENT CORPORATION
OAKS, PENNSYLVANIA 19456
DISTRIBUTOR
SEI INVESTMENTS DISTRIBUTION CO.
OAKS, PENNSYLVANIA 19456
TRANSFER AGENT
DST SYSTEMS, INC.
330 WEST NINTH STREET
KANSAS CITY, MISSOURI 64105
ADDITIONAL COMPENSATION
In addition to receiving compensation for acting as the funds' investment
advisor as described above, U.S. Bank and its affiliates receive compensation in
connection with the following:
CUSTODY SERVICES. As compensation for acting as the funds' custodian, U.S. Bank
is paid monthly fees equal, on an annual basis, to 0.03% of a fund's average
daily net assets. In addition, U.S. Bank is reimbursed for its out-of-pocket
expenses incurred while providing custody services to the funds.
SUB-ADMINISTRATION SERVICES. U.S. Bank assists the administrator and provides
sub-administration services to the funds. For providing these services, U.S.
Bank is compensated by the funds' administrator at an annual rate of up to
0.05% of each fund's average daily net assets.
SECURITIES LENDING SERVICES. In connection with lending their portfolio
securities, the funds pay administrative and custodial fees to U.S. Bank which
are equal to 40% of the funds' income from these securities lending
transactions.
BROKERAGE TRANSACTIONS When purchasing and selling portfolio securities for the
funds, the funds' investment advisor may place trades through its affiliates,
U.S. Bancorp Investments, Inc. and U.S. Bancorp Piper Jaffray Inc., which will
earn commissions on such transactions.
ERISA ACCOUNTS. U.S. Bank 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.
PORTFOLIO MANAGEMENT
Each fund's investments are managed by a team of persons associated with First
American Asset Management.
10 PROSPECTUS - First American Sector Funds
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS
- --------------------------------------------------------------------------------
OBJECTIVES
The funds' objectives may be changed without shareholder approval. If a fund's
objectives change, you will be notified at least 30 days in advance. Please
remember: There is no guarantee that any fund will achieve its objectives.
- --------------------------------------------------------------------------------
INVESTMENT STRATEGIES
The funds' main investment strategies are the strategies that the funds'
investment advisor believes are most likely to be important in trying to achieve
the funds' objectives. You should be aware that each fund may also use
strategies and invest in securities that are not described in this prospectus,
but that are described in the Statement of Additional Information (SAI). For a
copy of the SAI, call Investor Services at 1-800-637-2548.
TEMPORARY INVESTMENTS
In an attempt to respond to adverse market, economic, political or other
conditions, each fund may invest without limit in cash and in U.S.
dollar-denominated high-quality money market instruments and other short-term
securities. Being invested in these securities may keep a fund from
participating in a market upswing and prevent the fund from achieving its
investment objectives.
PORTFOLIO TURNOVER
Fund managers may trade securities frequently, resulting, from time to time, in
an annual portfolio turnover rate of over 100%. Trading of securities may
produce capital gains, which are taxable to shareholders when distributed.
Active trading may also increase the amount of commissions or mark-ups to
broker-dealers that the fund pays when it buys and sells securities. The
"Financial Highlights" section of this prospectus shows each fund's historical
portfolio turnover rate.
- --------------------------------------------------------------------------------
RISKS
The main risks of investing in the funds are summarized in the "Fund Summaries"
section. More information about fund risks is presented below.
MARKET RISK
All stocks are subject to price movements due to changes in general economic
conditions, changes in the level of prevailing interest rates, changes in
investor perceptions of the market, or the outlook for overall corporate
profitability.
COMPANY RISK
Individual stocks can perform differently than the overall market. This may be a
result of specific factors such as changes in corporate profitability due to the
success or failure of specific products or management strategies, or it may be
due to changes in investor perceptions regarding a company.
SECTOR RISK
The stocks of companies within specific industries or sectors of the economy can
periodically perform differently than the overall stock market. This can be due
to changes in such things as the regulatory or competitive environment or to
changes in investor perceptions of a particular industry or sector. Each fund is
subject to the particular risks of the sector in which it principally invests.
RISKS OF THE HEALTH SCIENCES SECTOR. Health Sciences Fund invests primarily in
equity securities of companies which develop, produce or distribute products or
services connected with health care or medicine. 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.
RISKS OF THE REAL ESTATE SECTOR. Real Estate Securities Fund invests primarily
in equity securities of publicly traded companies in the real estate 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 them, and
companies which service the real estate industry.
RISKS OF THE TECHNOLOGY SECTOR. Technology Fund invests primarily in equity
securities of companies which the fund's advisor believes have, or will develop,
products, processes or services that will provide or benefit significantly from
technological advances and improvements. 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 continues to expand, these
companies could become increasingly sensitive to short product cycles and
aggressive pricing.
RISKS OF DEVELOPMENT STAGE AND SMALL CAP STOCKS
Health Sciences Fund and Technology Fund may have significant investments in
development stage and small capitalization companies. Stocks of development
stage and small capitalization companies involve substantial risk. These
companies may lack the management expertise, financial resources, product
diversification and competitive strengths of larger companies. Their stock
prices may be subject to more abrupt or erratic movements than stock prices of
larger, more established
11 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS (CONTINUED)
companies or the market averages in general. In addition, the frequency and
volume of their trading may be less than is typical of larger companies, making
them subject to wider price fluctuations. In some cases, there could be
difficulties in selling the stocks of development stage and small capitalization
companies at the desired time and price.
RISKS OF REITS
Because Real Estate Securities Fund invests a majority of its assets in REITs,
it is subject to the 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. REITs are subject to other risks as well,
including the fact that REITs are dependent on specialized management skills
which may affect 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 the risks associated with obtaining financing
for real property.
A REIT can pass its income through to shareholders or unitholders without any
tax at the entity level if it complies with various requirements under the
Internal Revenue Code. There is the risk that a REIT held by the fund will fail
to qualify for this tax-free pass-through treatment of its income.
By investing in REITS indirectly through the fund, in addition to bearing a
proportionate share of the expenses of the fund, you will also indirectly bear
similar expenses of some of the REITs in which the fund invests.
FOREIGN SECURITY RISK
Up to 25% of each fund's total assets may be invested in securities of foreign
issuers which are either listed on a United States stock exchange or represented
by American Depository Receipts. Securities of foreign issuers, even when
dollar-denominated and publicly traded in the United States, may involve risks
not associated with the securities of domestic issuers. For certain foreign
countries, political or social instability or diplomatic developments could
adversely affect the securities. There is also the risk of loss due to
governmental actions such as a change in tax statutes or the modification of
individual property rights. In addition, individual foreign economies may differ
favorably or unfavorably from the U.S. economy.
RISKS OF ACTIVE MANAGEMENT
Each fund is actively managed and its performance therefore will reflect in part
the advisor's ability to make investment decisions which are suited to achieving
the fund's investment objectives. Due to their active management, the funds
could underperform other mutual funds with similar investment objectives.
RISKS OF SECURITIES LENDING
When a fund loans its portfolio securities, it will receive collateral equal to
at least 100% of the value of the loaned securities. Nevertheless, the fund
risks a delay in the recovery of the loaned securities, or even the loss of
rights in the collateral deposited by the borrower if the borrower should fail
financially. To reduced these risks, the funds enter into loan arrangements only
with institutions which the funds' advisor has determined are creditworthy under
guidelines established by the funds' board of directors.
YEAR 2000 ISSUES
Like other mutual funds and business and financial organizations, the funds
could be adversely affected if the computer systems used by the funds' advisor,
other service providers and entities with computer systems that are linked to
fund records do not properly process and calculate date-related information from
and after January 1, 2000. While year 2000-related computer problems could have
a negative effect on the funds, the funds' administrator has undertaken a
program designed to assess and monitor the steps being taken by the funds'
service providers to address year 2000 issues. This program includes seeking
assurances from service providers that their systems are or will be year 2000
compliant and reviewing service providers' periodic reports to monitor their
status concerning their year 2000 readiness and compliance.
The administrator and the advisor also report regularly to the funds' board of
directors concerning their own and other service providers' progress toward year
2000 readiness. Although these reports indicate that service providers are or
expect to be year 2000 compliant, there can be no assurance that this will be
the case in all instances or that year 2000 difficulties experienced by others
in the financial services industry will not impact the funds. In addition, there
can be no assurance that year 2000 difficulties will not have an adverse effect
on the funds' investments or on global markets or economies, generally. The
funds are not bearing any of the expenses incurred by their service providers in
preparing for the year 2000.
12 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about the class Y shares
of each fund. This information is intended to help you understand each fund's
financial performance for the past five years or, if shorter, the period of the
fund's class Y shares operations. Some of this information reflects financial
results for a single fund share. Total returns in the tables represent the rate
that you would have earned or lost on an investment in a fund, assuming you
reinvested all of your dividends and distributions.
This information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report, along with the funds' financial statements, is included
in the funds' annual report, which is available upon request.
HEALTH SCIENCES FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996(1)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 9.87 $ 10.00
------- ------- -------
Investment Operations:
Net Investment Income (Loss) (0.01) 0.03
Net Gains (Losses) on Securities
(both realized and unrealized) 2.33 (0.15)
------- ------- -------
Total From Investment Operations 2.32 (0.12)
------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.01) (0.01)
Distributions (from capital gains) (0.10) --
------- ------- -------
Total Distributions (0.11) (0.01)
------- ------- -------
Net Asset Value, End of Period $ $ 12.08 $ 9.87
======= ======= =======
Total Return 23.89% (1.20)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $41,243 $12,485
Ratio of Expenses to Average Net Assets 0.90% 0.90%
Ratio of Net Income (Loss) to Average Net Assets % 0.06% 0.43%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.04% 1.87%
Ratio of Net (Loss) to Average Net Assets (excluding waivers) % %
Portfolio Turnover Rate % 54% 19%
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commenced operations on January 31, 1996. All ratios for the period have
been annualized.
13 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
REAL ESTATE SECURITIES FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995(1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 11.53 $ 10.37 $ 10.00
------- ------- ------- -------
Investment Operations:
Net Investment Income 0.74 0.57 0.13
Net Gains (Losses) on Securities
(both realized and unrealized) 3.43 1.29 0.39
------- ------- -------
Total From Investment Operations 4.15 1.86 0.52
Less Distributions:
Dividends (from net investment income) (0.67) (0.53) (0.11)
Distributions (from capital gains) (0.03) -- --
Tax Return of Capital (0.01) (0.17) (0.04)
------- ------- -------
Total Distributions (0.71) (0.70) (0.15)
------- ------- -------
Net Asset Value, End of Period $ $ 14.99 $ 11.53 $ 10.37
======= ======= ======= =======
Total Return % 37.07% 18.53% 5.19%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $40,501 $17,895 $ 5,756
Ratio of Expenses to Average Net Assets % 0.80% 0.80% 0.80%
Ratio of Net Income to Average Net Assets % 4.57% 5.13% 6.01%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.05% 1.51% 2.34%
Ratio of Net Income (Loss) to Average Net Assets (excluding waivers) % % %
Portfolio Turnover Rate % 14% 8% 0%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class Y shares have been offered since June 30, 1995. All ratios for the
period have been annualized.
14 PROSPECTUS - FIRST AMERICAN SECTOR FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
TECHNOLOGY FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994(1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 19.29 $ 18.24 $ 11.19 $ 10.00
------- -------- ------- ------- -------
Investment Operations:
Net Investment (Loss) (0.06) (0.04) (0.03) (0.01)
Net Gains (Losses) on Securities
(both realized and unrealized) 3.12 2.98 7.31 1.20
------- -------- ------- ------- -------
Total From Investment Operations 3.06 2.94 7.28 (1.19)
------- -------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) -- -- -- --
Distributions (from capital gains) (2.06) (1.89) (0.23) --
------- -------- ------- ------- -------
Total Distributions (2.06) (1.89) (0.23) --
------- -------- ------- ------- -------
Net Asset Value, End of Period $ $ 20.29 $ 19.29 $ 18.24 $ 11.19
======= ======== ======= ======= =======
Total Return % 17.71% 18.85% 66.22% 11.90%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $148,659 $64,602 $29,272 $ 6,491
Ratio of Expenses to Average Net Assets % 0.90% 0.90% 0.88% 0.80%
Ratio of Net Loss to Average Net Assets % (0.41)% (0.60)% (0.35)% (0.21)%
Ratio of Expenses to Average Net Assets (excluding waivers) % 0.92% 1.01% 1.30% 3.12%
Ratio of Net (Loss) to Average Net Assets (excluding waivers) % % % %
Portfolio Turnover Rate % 150% 119% 74% 43%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commenced operations on April 4, 1994. All ratios for the period have been
annualized.
15 PROSPECTUS - First American Sector Funds
<PAGE>
FOR MORE INFORMATION
More information about the funds is available in the funds' Statement of
Additional Information and annual and semiannual reports.
STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI provides more details about
the funds and their policies. A current SAI is on file with the Securities and
Exchange Commission (SEC) and is incorporated into this prospectus by reference
(which means that it is legally considered part of this prospectus).
ANNUAL AND SEMIANNUAL REPORTS
Additional information about the funds' investments is available in the funds'
annual and semiannual reports to shareholders. In the funds' annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the funds' performance during their last fiscal year.
You can obtain a free copy of the funds' SAI and/or free copies of the funds'
most recent annual or semiannual reports by calling Investor Services at
1-800-637-2548. The material you request will be sent by first-class mail or
other means designed to ensure equally prompt delivery, within three business
days of receipt of the request.
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC, or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. For more information, call
1-800-SEC-0330.
Information about the funds is also available on the Internet. Text-only
versions of fund documents can be viewed online or downloaded from the SEC's
Internet site at http://www.sec.gov.
SEC file number: 811-05309
FAIF-1001 (9/1998)
<PAGE>
FEBRUARY 1, 1999
BOND FUNDS
CLASS A, CLASS B AND CLASS C SHARES
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
FIXED INCOME FUND
INTERMEDIATE GOVERNMENT BOND FUND
INTERMEDIATE TERM INCOME FUND
LIMITED TERM INCOME FUND
STRATEGIC INCOME FUND
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of these funds, or determined if the
information in this prospectus is accurate or complete. Any statement to the
contrary is a criminal offense.
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(R)
<PAGE>
TABLE OF CONTENTS
FUND SUMMARIES
- --------------------------------------------------------------------------------
Adjustable Rate Mortgage Securities Fund 2
- --------------------------------------------------------------------------------
Fixed Income Fund 4
- --------------------------------------------------------------------------------
Intermediate Government Bond Fund 6
- --------------------------------------------------------------------------------
Intermediate Term Income Fund 8
- --------------------------------------------------------------------------------
Limited Term Income Fund 10
- --------------------------------------------------------------------------------
Strategic Income Fund 12
- --------------------------------------------------------------------------------
POLICIES & SERVICES
- --------------------------------------------------------------------------------
Buying Shares 14
- --------------------------------------------------------------------------------
Selling Shares 18
- --------------------------------------------------------------------------------
Managing Your Investment 19
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Management 21
- --------------------------------------------------------------------------------
More About The Funds 23
- --------------------------------------------------------------------------------
Financial Highlights 26
- --------------------------------------------------------------------------------
FOR MORE INFORMATION Back Cover
- --------------------------------------------------------------------------------
<PAGE>
FUND SUMMARIES
INTRODUCTION
This section of the prospectus describes the objectives of the First American
Bond Funds, summarizes the main investment strategies used by each fund in
trying to achieve its objectives, and highlights the risks involved with these
strategies. It also provides you with information about the performance, fees
and expenses of the funds. (Because of its limited history of operations,
performance information is not provided for Strategic Income Fund.)
AN INVESTMENT IN THE FUNDS IS NOT A DEPOSIT OF U.S. BANK NATIONAL ASSOCIATION
AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
1 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Adjustable Rate Mortgage Securities Fund's objective is to provide investors
with current income while maintaining a high degree of principal stability.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Adjustable Rate Mortgage Securities Fund invests
primarily in adjustable rate mortgage securities (ARMS). ARMS have interest
rates that reset periodically in response to changes in the current interest
rate environment.
The fund may also invest in other debt securities, including:
o FIXED-RATE MORTGAGE RELATED SECURITIES
o U.S. GOVERNMENT SECURITIES, WHICH ARE SECURITIES ISSUED OR GUARANTEED BY THE
U.S. GOVERNMENT OR ITS AGENCIES OR INSTRUMENTALITIES
o PRIVATE PASS-THROUGH SECURITIES
o ASSET-BACKED SECURITIES
o CORPORATE DEBT OBLIGATIONS
Debt securities in the fund will be rated investment grade at the time of
purchase or, if unrated, determined to be of comparable quality by the fund's
advisor. At least 65% of the fund's debt securities must be either U.S.
government securities or securities rated A or better by Standard & Poor's
Ratings Service or Moody's Investors Service or assigned an equivalent rating by
another nationally recognized rating agency. Unrated securities will not exceed
25% of the fund's total assets.
Under normal market conditions the fund attempts to maintain an average
effective duration for its portfolio securities of zero to four years.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities. ARMS are generally less
sensitive to interest rate changes because their interest rates move with market
rates. One measure of interest rate risk is effective duration, explained on
page 23 under "More About The Funds -- Investment Strategies."
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities, or the other party to a contract (such as a securities
lending agreement) may default on its obligations.
CALL RISK
During periods of falling interest rates, a bond issuer may "call" -- or repay
- -- its high-yielding bonds before their maturity date. The fund would then be
forced to invest the unanticipated proceeds at lower interest rates, resulting
in a decline in the fund's income.
RISKS OF MORTGAGE-RELATED SECURITIES
Falling interest rates may cause faster than expected mortgage prepayments,
which the fund would have to reinvest at lower interest rates. On the other
hand, rising interest rates could cause mortgage prepayments to slow, which
would increase the price volatility of mortgage-related securities and cause
their prices to decline.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year. Sales charges are not reflected in the chart; if they had been,
returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
2 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
ADJUSTABLE RATE MORTGAGE SECURITIES FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) Performance prior to
August 3, 1998, is that of
[BAR CHART] the fund's predecessors
for financial reporting
1993 8.11% purposes. Performance from
1994 -6.54% September 1, 1995, to
1995 10.55% August 3, 1998, is that of
1996 6.76% Adjustable Rate Mortgage
1997 6.31% Securities Fund, a series
1998 of Piper Funds Inc. -- II.
Performance prior to
September 1, 1995, is that
of American Adjustable
Rate Term Trust Inc. --
1998, a closed-end
investment company.
(2) An unmanaged index of U.S.
agency adjustable rate
mortgage securities. The
since inception
performance of the index
is calculated from the
month end following the
fund's inception.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception
AS OF 12/31/98(1) One Year Five Years (1/30/92)
- --------------------------------------------------------------------------------
Adjustable Rate Mortgage Securities Fund % % %
- --------------------------------------------------------------------------------
Lehman Adjustable Rate Mortgage Index(2) % % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show expenses before
any waivers during the fiscal year ended September 30, 1998.(1)
CLASS A
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)(2)
AS A % OF OFFERING PRICE 2.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees 0.25%
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor and the distributor. See
"Additional Information -- Financial Highlights." THE ADVISOR INTENDS TO
WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING
EXPENSES DO NOT EXCEED 0.80%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. Investments of $1
million or more on which no front-end sales charge is paid may be subject to
a contingent deferred sales charge. See "Buying Shares -- Calculating Your
Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
3 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
FIXED INCOME FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Fixed Income Fund's objective is to provide investors with high current income
consistent with limited risk to capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Fixed Income Fund invests in investment grade
debt securities, such as:
o U.S. GOVERNMENT SECURITIES, (SECURITIES ISSUED OR GUARANTEED BY THE U.S.
GOVERNMENT OR ITS AGENCIES OR INSTRUMENTALITIES), INCLUDING ZERO COUPON
SECURITIES
o MORTGAGE- AND ASSET-BACKED SECURITIES
o FIXED AND FLOATING RATE CORPORATE DEBT OBLIGATIONS
Debt securities in the fund will be rated investment grade at the time of
purchase or, if unrated, determined to be of comparable quality by the fund's
advisor. At least 65% of the fund's debt securities must be either U.S.
government securities or securities rated A or better by Standard & Poor's
Ratings Service or Moody's Investors Service or assigned an equivalent rating by
another nationally recognized rating agency. Unrated securities will not exceed
25% of the fund's total assets.
At least 65% of the fund's total assets will be invested in fixed rate
obligations.The fund may invest up to 15% of its total assets in foreign
securities payable in U.S. dollars.
Under normal market conditions the fund attempts to maintain a weighted average
maturity for its portfolio securities of 15 years or less and an average
effective duration of three to eight years.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions. It also may invest up to 25% of total assets in dollar roll
transactions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities. One measure of interest rate
risk is effective duration, explained on page 23 under "More About the Funds --
Investment Strategies."
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities, or the other party to a contract (such as a securities
lending agreement) may default on its obligations.
CALL RISK
During periods of falling interest rates, a bond issuer may "call" -- or repay
- -- its high-yielding bonds before their maturity date. The fund would then be
forced to invest the unanticipated proceeds at lower interest rates, resulting
in a decline in the fund's income.
RISKS OF MORTGAGE-RELATED SECURITIES
Falling interest rates may cause faster than expected mortgage prepayments,
which the fund would have to reinvest at lower interest rates. On the other
hand, rising interest rates could cause mortgage prepayments to slow, which
would increase the price volatility of mortgage-related securities and cause
their prices to decline.
FOREIGN SECURITY RISK
Securities of foreign issuers, even when dollar-denominated and publicly traded
in the United States, may involve risks not associated with the securities of
domestic issuers, including the risks of adverse currency fluctuations and of
political or social instability or diplomatic developments that could adversely
affect the securities.
RISKS OF DOLLAR ROLL TRANSACTIONS
The use of mortgage dollar rolls could increase the volatility of the fund's
share price. It could also diminish the fund's investment performance if the
advisor does not predict mortgage prepayments and interest rates correctly.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's class A shares has varied
from year to year. The performance of class B and class C shares will be lower
due to their higher expenses. Sales charges are not reflected in the chart; if
they had been, returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
4 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
FIXED INCOME FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) Average annual total
returns for the past 10
[BAR CHART] years for class A shares
and the index and since
1989 12.83% inception (8/15/94) for
1990 7.65% class B shares. Class C
1991 14.37% shares have not been
1992 6.42% offered prior to the date
1993 9.62% of this prospectus.
1994 -2.39%
1995 16.97% (2) An unmanaged index of
1996 3.19% Treasury securities,
1997 8.41% other securities issued
1998 or guaranteed by the U.S.
government or its
agencies or
instrumentalities, and
investment-grade
corporate debt
securities.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS 10 Years or
AS OF 12/31/98 One Year Five Years Since Inception(1)
- --------------------------------------------------------------------------------
Fixed Income Fund (Class A) % % %
- --------------------------------------------------------------------------------
Fixed Income Fund (Class B)
- --------------------------------------------------------------------------------
Fixed Income Fund (Class C) N/A N/A N/A
- --------------------------------------------------------------------------------
Lehman Gov't/Corp Bond Index(2)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below are based on class A
and class B share expenses before any waivers during the fiscal year ended
September 30, 1998.(1)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- -----------------------------------------------------------------------------------------------------
SHAREHOLDER FEES
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MAXIMUM SALES CHARGE (LOAD)
AS A % OF OFFERING PRICE 3.75%(2) 0.00% 1.00%
MAXIMUM DEFERRED SALES CHARGE (LOAD)
AS A % OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS 0.00%(3) 5.00% 1.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------------
Management Fees 0.70% 0.70% 0.70%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses % % %
TOTAL % % %
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
0.95%, 1.70% AND 1.70%, RESPECTIVELY, FOR THE CLASS A, CLASS B AND CLASS C
SHARES. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. See "Buying Shares
-- Calculating Your Share Price."
(3) Class A share investments of $1 million or more on which no front-end sales
charge is paid may be subject to a contingent deferred sales charge. See
"Buying Shares -- Calculating Your Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
CLASS B CLASS B CLASS C CLASS C
assuming assuming no assuming assuming no
redemption redemption redemption redemption
at end of at end of at end of at end of
CLASS A each period each period each period each period
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
</TABLE>
5 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
INTERMEDIATE GOVERNMENT BOND FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Intermediate Government Bond Fund's objective is to provide investors with
current income to the extent consistent with preservation of capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Intermediate Government Bond Fund invests
primarily in U.S. government securities, which are securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities. The Fund
invests only in U.S. government securities which generate interest that is
excluded from state taxable income. For example, the fund may invest in U.S.
Treasury obligations and in obligations issued or guaranteed by the following:
o FARM CREDIT SYSTEM FINANCIAL ASSISTANCE CORPORATION;
o FEDERAL HOME LOAN BANKS SYSTEM;
o STUDENT LOAN MARKETING ASSOCIATION; AND
o TENNESSEE VALLEY AUTHORITY.
The fund's investments in Treasury, agency and instrumentality securities may
include zero coupon securities, adjustable rate securities and U.S. Treasury
inflation-indexed securities.
Under normal market conditions the fund attempts to maintain a weighted average
maturity for its portfolio securities of two to seven years and an average
effective duration of one to five years.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions. It also may invest up to 25% of total assets in dollar roll
transactions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities. One measure of interest rate
risk is effective duration, explained on page 23 under "More About The Funds --
Investment Strategies."
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities, or the other party to a contract (such as a securities
lending agreement) may default on its obligations.
CALL RISK
During periods of falling interest rates, a bond issuer may "call" -- or repay
- -- its high-yielding bonds before their maturity date. The fund would then be
forced to invest the unanticipated proceeds at lower interest rates, resulting
in a decline in the fund's income.
RISKS OF MORTGAGE-RELATED SECURITIES
Falling interest rates may cause faster than expected mortgage prepayments,
which the fund would have to reinvest at lower interest rates. On the other
hand, rising interest rates could cause mortgage prepayments to slow, which
would increase the price volatility of mortgage-related securities and cause
their prices to decline.
RISKS OF DOLLAR ROLL TRANSACTIONS
The use of mortgage dollar rolls could increase the volatility of the fund's
share price. It could also diminish the fund's investment performance if the
advisor does not predict mortgage prepayments and interest rates correctly.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year. Sales charges are not reflected in the chart; if they had been,
returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
6 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
INTERMEDIATE GOVERNMENT BOND FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) An unmanaged index of
Treasury securities and
[BAR CHART] other securities issued by
the U.S. government or its
1989 10.00% agencies or
1990 8.34% instrumentalities, in each
1991 10.85% case with maturities of
1992 4.54% one to 10 years.
1993 5.74%
1994 -1.70
1995 13.47%
1996 3.81%
1997 6.89%
1998
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98 One Year Five Years 10 Years
- --------------------------------------------------------------------------------
Intermediate Government Bond Fund % % %
- --------------------------------------------------------------------------------
Lehman Intermediate U.S. Government
Bond Index(1) % % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show expenses before
any waivers during the fiscal year ended September 30, 1998.(1)
CLASS A
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)(2)
AS A % OF OFFERING PRICE 3.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees 0.25%
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor and the distributor. See
"Additional Information -- Financial Highlights." THE ADVISOR INTENDS TO
WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING
EXPENSES DO NOT EXCEED 0.70%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. Investments of $1
million or more on which no front-end sales charge is paid may be subject to
a contingent deferred sales charge. See "Buying Shares -- Calculating Your
Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
7 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
INTERMEDIATE TERM INCOME FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Intermediate Term Income Fund's objective is to provide investors with current
income to the extent consistent with preservation of capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Intermediate Term Income Fund invests in
investment grade debt securities, such as:
o U.S. GOVERNMENT SECURITIES, (SECURITIES ISSUED OR GUARANTEED BY THE U.S.
GOVERNMENT OR ITS AGENCIES OR INSTRUMENTALITIES), INCLUDING ZERO COUPON
SECURITIES
o MORTGAGE- AND ASSET-BACKED SECURITIES
o FIXED AND FLOATING RATE CORPORATE DEBT OBLIGATIONS
Debt securities in the fund will be rated investment grade at the time of
purchase or, if unrated, determined to be of comparable quality by the fund's
advisor. At least 65% of the fund's debt securities must be either U.S.
government securities or securities rated A or better by Standard & Poor's
Ratings Service or Moody's Investors Service or assigned an equivalent rating by
another nationally recognized rating agency. Unrated securities will not exceed
25% of the fund's total assets.
The fund may invest up to 15% of its total assets in foreign securities payable
in U.S. dollars.
Under normal market conditions the fund attempts to maintain a weighted average
maturity for its portfolio securities of two to seven years and an average
effective duration of two to six years.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions. It also may invest up to 25% of total assets in dollar roll
transactions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities. One measure of interest rate
risk is effective duration, explained on page 23 under "More About The Funds --
Investment Strategies."
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities, or the other party to a contract (such as a securities
lending agreement) may default on its obligations.
CALL RISK
During periods of falling interest rates, a bond issuer may "call" -- or repay
- -- its high-yielding bonds before their maturity date. The fund would then be
forced to invest the unanticipated proceeds at lower interest rates, resulting
in a decline in the fund's income.
RISKS OF MORTGAGE-RELATED SECURITIES
Falling interest rates may cause faster than expected mortgage prepayments,
which the fund would have to reinvest at lower interest rates. On the other
hand, rising interest rates could cause mortgage prepayments to slow, which
would increase the price volatility of mortgage-related securities and cause
their prices to decline.
FOREIGN SECURITY RISK
Securities of foreign issuers, even when dollar-denominated and publicly traded
in the United States, may involve risks not associated with the securities of
domestic issuers, including the risks of adverse currency fluctuations and of
political or social instability or diplomatic developments that could adversely
affect the securities.
RISKS OF DOLLAR ROLL TRANSACTIONS
The use of mortgage dollar rolls could increase the volatility of the fund's
share price. It could also diminish the fund's investment performance if the
advisor does not predict mortgage prepayments and interest rates correctly.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year. Sales charges are not reflected in the chart; if they had been,
returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
8 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
INTERMEDIATE TERM INCOME FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) An unmanaged index of
Treasury securities, other
[BAR CHART] securities issued by the
U.S. government or its
1993 6.80% agencies or
1994 -1.33% instrumentalities, and
1995 14.59% investment grade corporate
1996 4.21% debt securities, in each
1997 7.07% case with maturities of
1998 one to 10 years.
(2) The since inception
performance of the index
is calculated from the
month end following the
fund's inception.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception(2)
AS OF 12/31/98 One Year Five Years (12/14/92)
- --------------------------------------------------------------------------------
Intermediate Term Income Fund % % %
- --------------------------------------------------------------------------------
Lehman Intermediate Gov't/Corp
Bond Index(1) % % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show expenses before
any waivers during the fiscal year ended September 30, 1998.(1)
CLASS A
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)(2)
AS A % OF OFFERING PRICE 3.75%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees 0.25%
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor and the distributor. See
"Additional Information -- Financial Highlights." THE ADVISOR INTENDS TO
WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING
EXPENSES DO NOT EXCEED 0.85%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. Investments of $1
million or more on which no front-end sales charge is paid may be subject to
a contingent deferred sales charge. See "Buying Shares -- Calculating Your
Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
9 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
LIMITED TERM INCOME FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Limited Term Income Fund's objective is to provide investors with current income
while maintaining a high degree of principal stability.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Limited Term Income Fund invests in investment
grade debt securities, such as:
o MORTGAGE- AND ASSET-BACKED SECURITIES
o FIXED AND FLOATING RATE CORPORATE DEBT OBLIGATIONS
o U.S. GOVERNMENT SECURITIES, WHICH ARE SECURITIES ISSUED OR GUARANTEED BY THE
U.S. GOVERNMENT OR ITS AGENCIES OR INSTRUMENTALITIES
o COMMERCIAL PAPER
Debt securities in the fund will be rated investment grade at the time of
purchase or, if unrated, determined to be of comparable quality by the fund's
advisor. At least 65% of the fund's debt securities must be either U.S.
government securities or securities rated A or better by Standard & Poor's
Ratings Service or Moody's Investors Service or assigned an equivalent rating by
another nationally recognized rating agency. Unrated securities will not exceed
25% of the fund's total assets.
The fund may invest up to 15% of its total assets in foreign securities payable
in U.S. dollars.
Under normal market conditions the fund attempts to maintain a weighted average
maturity and an average effective duration for its portfolio securities of six
months to two years.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities. One measure of interest rate
risk is effective duration, explained on page 23 under "More About The Funds --
Investment Strategies."
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities, or the other party to a contract (such as a securities
lending agreement) may default on its obligations.
CALL RISK
During periods of falling interest rates, a bond issuer may "call" -- or repay
- -- its high-yielding bonds before their maturity date. The fund would then be
forced to invest the unanticipated proceeds at lower interest rates, resulting
in a decline in the fund's income.
RISKS OF MORTGAGE-RELATED SECURITIES
Falling interest rates may cause faster than expected mortgage prepayments,
which the fund would have to reinvest at lower interest rates. On the other
hand, rising interest rates could cause mortgage prepayments to slow, which
would increase the price volatility of mortgage-related securities and cause
their prices to decline.
FOREIGN SECURITY RISK
Securities of foreign issuers, even when dollar-denominated and publicly traded
in the United States, may involve risks not associated with the securities of
domestic issuers, including the risks of adverse currency fluctuations and of
political or social instability or diplomatic developments that could adversely
affect the securities.
RISKS OF DOLLAR ROLL TRANSACTIONS
The use of mortgage dollar rolls could increase the volatility of the fund's
share price. It could also diminish the fund's investment performance if the
advisor does not predict mortgage prepayments and interest rates correctly.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year. Sales charges are not reflected in the chart; if they had been,
returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
10 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
LIMITED TERM INCOME FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) An unmanaged index of
one-year constant maturity
[BAR CHART] Treasury bills.
1993 4.07% (2) The since inception
1994 1.77% performance of the index
1995 8.18% is calculated from the
1996 5.55% month end following the
1997 5.88% fund's inception.
1998
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception(2)
AS OF 12/31/98 One Year Five Years (12/14/92)
- --------------------------------------------------------------------------------
Limited Term Income Fund % % %
- --------------------------------------------------------------------------------
Merrill Lynch 1-Year Treasury
Index(1) % % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show expenses before
any waivers during the fiscal year ended September 30, 1998.(1)
CLASS A
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)(2)
AS A % OF OFFERING PRICE 2.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees 0.25%
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor and the distributor. See
"Additional Information -- Financial Highlights." THE ADVISOR INTENDS TO
WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING
EXPENSES DO NOT EXCEED 0.60%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. Investments of $1
million or more on which no front-end sales charge is paid may be subject to
a contingent deferred sales charge. See "Buying Shares -- Calculating Your
Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
11 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Strategic Income Fund's objective is to provide investors with a high level of
current income.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Strategic Income Fund invests primarily in a
combination of:
o SECURITIES ISSUED OR GUARANTEED BY THE U.S. GOVERNMENT OR ITS AGENCIES OR
INSTRUMENTALITIES AND INVESTMENT GRADE DEBT OBLIGATIONS ISSUED BY DOMESTIC
ISSUERS,
o HIGH-YIELD (NON-INVESTMENT GRADE) DEBT OBLIGATIONS ISSUED BY DOMESTIC ISSUERS
AND U.S. DOLLAR DENOMINATED HIGH-YIELD DEBT OBLIGATIONS ISSUED BY FOREIGN
ISSUERS, AND
o INVESTMENT GRADE AND NON-U.S. DOLLAR DENOMINATED HIGH-YIELD DEBT OBLIGATIONS
ISSUED BY FOREIGN GOVERNMENTS AND OTHER FOREIGN ISSUERS.
Normally, the fund's assets will be invested in each of these three sectors,
with no more than 50% invested in any one sector. However, the fund may from
time to time invest up to 100% of its total assets in any one sector if the
advisor believes it will help the fund achieve its objective without undue risk
to principal.
The fund's investments may include securities which do not pay interest
currently, such as zero coupon securities and delayed interest securities. It
also may invest in payment-in-kind bonds, where interest is paid in other
securities rather than cash.
In addition, the fund may invest in preferred stock, convertible securities and
equity securities, including common stock and warrants. These investments may be
denominated in U.S. dollars or foreign currencies.
There is no minimum rating requirement for securities in which the fund may
invest. In addition, there is no limitation on the average maturity or average
effective duration of securities held by the fund.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions. It also may invest up to 25% of total assets in dollar roll
transactions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
RISKS OF HIGH-YIELD SECURITIES
A significant portion of the fund's portfolio may consist of lower-rated debt
obligations, which are commonly called "high-yield" securities or "junk bonds."
High-yield securities generally have more volatile prices and carry more risk to
principal than investment grade securities.
RISKS OF FOREIGN SECURITIES
Investing in foreign securities involves risks not typically associated with
U.S. investing, including the risk that the fund may experience a decline in net
asset value resulting from changes in exchange rates between the United States
dollar and foreign currencies. This fund may invest in emerging markets, where
the risks of foreign investing are higher.
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities.
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities, or the other party to a contract (such as a securities
lending agreement) may default on its obligations.
CALL RISK
During periods of falling interest rates, a bond issuer may "call" -- or repay
- -- its high-yielding bonds before their maturity date. The fund would then be
forced to invest the unanticipated proceeds at lower interest rates, resulting
in a decline in the fund's income.
MARKET RISK
The fund's investments may include common stock and warrants to purchase, or
securities convertible into, common stocks. Stocks may decline significantly in
price over short or extended periods of time. Price changes may occur in the
market as a whole, or they may occur in only a particular company, industry or
sector of the market.
RISKS OF MORTGAGE-RELATED SECURITIES
The fund's investments in debt obligations may include mortgage-related
securities. Falling interest rates may cause faster than expected mortgage
prepayments, which the fund would have to reinvest at lower interest rates. On
the other hand, rising interest rates could cause mortgage prepayments to slow,
which would increase the price volatility of mortgage-related securities and
cause their prices to decline.
RISKS OF DOLLAR ROLL TRANSACTIONS
The use of mortgage dollar rolls could increase the volatility of the fund's
share price. It could also diminish the fund's investment performance if the
advisor does not predict mortgage prepayments and interest rates correctly.
12 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
STRATEGIC INCOME FUND (CONTINUED)
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MAXIMUM SALES CHARGE (LOAD)
AS A % OF OFFERING PRICE 4.50%(1) 0.00% 1.00%
MAXIMUM DEFERRED SALES CHARGE (LOAD)
AS A % OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS 0.00%(2) 5.00% 1.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------
Management Fees 0.70% 0.70% 0.70%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses(3) % % %
TOTAL(4) % % %
- --------------------------------------------------------------------------------------------
</TABLE>
(1) Certain investors may qualify for reduced sales charges. See "Buying Shares
-- Calculating Your Share Price."
(2) Investments of $1 million or more on which no front-end sales charge is paid
may be subject to a contingent deferred sales charge. See "Buying Shares --
Calculating Your Share Price."
(3) Other expenses are based on estimated amounts for the current fiscal year.
(4) THE ADVISOR INTENDS TO WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT
TOTAL FUND OPERATING EXPENSES DO NOT EXCEED 1.15%, 1.90% AND 1.90%,
RESPECTIVELY, FOR THE CLASS A, CLASS B AND CLASS C SHARES. FEE WAIVERS MAY
BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
CLASS B CLASS B CLASS C CLASS C
assuming assuming no assuming assuming no
redemption redemption redemption redemption
at end of at end of at end of at end of
CLASS A each period each period each period each period
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
</TABLE>
13 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
POLICIES & SERVICES
BUYING SHARES
You may become a shareholder in any of the funds with an initial investment of
$1,000 or more ($250 for a retirement plan). Additional investments can be made
for as little as $100 ($25 for a retirement plan). The funds have the right to
waive these minimum investment requirements for employees of the funds' advisor
and its affiliates. The funds also have the right to reject any purchase order.
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
All funds in this prospectus offer class A shares. Fixed Income Fund and
Strategic Income Fund also offer class B and class C shares.
Each class has its own cost structure. The amount of your purchase and the
length of time you expect to hold your shares will be factors in determining
which class of shares is best for you.
CLASS A SHARES
If you are making an investment that qualifies for a reduced sales charge, class
A shares may be best for you. Class A shares feature:
o A FRONT-END SALES CHARGE, DESCRIBED BELOW
o LOWER ANNUAL EXPENSES THAN CLASS B OR CLASS C SHARES SEE "FUND SUMMARIES" FOR
MORE INFORMATION ON FEES AND EXPENSES
Because class A shares will normally be the better choice if your investment
qualifies for a reduced sales charge:
o ORDERS FOR CLASS B SHARES FOR $250,000 OR MORE NORMALLY WILL BE TREATED AS
ORDERS FOR CLASS A SHARES
o ORDERS FOR CLASS C SHARES FOR $1 MILLION OR MORE NORMALLY WILL BE TREATED AS
ORDERS FOR CLASS A SHARES
o ORDERS FOR CLASS B OR CLASS C SHARES BY AN INVESTOR ELIGIBLE TO PURCHASE
CLASS A SHARES WITHOUT A FRONT-END SALES CHARGE NORMALLY WILL BE TREATED AS
ORDERS FOR CLASS A SHARES
CLASS B SHARES
If you want all your money to go to work for you immediately, you may prefer
class B shares. Class B shares have no front-end sales charge, however they do
have:
o HIGHER ANNUAL EXPENSES THAN CLASS A SHARES. (SEE "FEES AND EXPENSES" IN THE
"FUND SUMMARIES" SECTION)
o A BACK-END SALES CHARGE, CALLED A "CONTINGENT DEFERRED SALES CHARGE," IF YOU
REDEEM YOUR SHARES WITHIN SIX YEARS OF PURCHASE
o AUTOMATIC CONVERSION TO CLASS A SHARES APPROXIMATELY EIGHT YEARS AFTER
PURCHASE, THEREBY REDUCING FUTURE ANNUAL EXPENSES
CLASS C SHARES
These shares combine some of the characteristics of class A and class B shares.
Class C shares have a low front-end sales charge of 1%, so more of your
investment goes to work immediately than if you had purchased class A shares.
However, class C shares also feature:
o A 1% CONTINGENT DEFERRED SALES CHARGE IF YOU REDEEM YOUR SHARES WITHIN 18
MONTHS OF PURCHASE
o HIGHER ANNUAL EXPENSES THAN CLASS A SHARES. (SEE "FEES AND EXPENSES" IN THE
"FUND SUMMARIES" SECTION")
o NO CONVERSION TO CLASS A SHARES
Because class C shares do not convert to class A shares, they will continue to
have higher annual expenses than class A shares.
- --------------------------------------------------------------------------------
12b-1 FEES
Under Rule 12b-1 of the Investment Company Act, each fund is allowed to pay the
fund's distributor an annual fee for the distribution and sale of its shares and
for services provided to shareholders.
FOR 12b-1 FEES ARE EQUAL TO:
- --------------------------------------------------------------------------------
CLASS A SHARES 0.25% OF AVERAGE DAILY NET ASSETS
CLASS B SHARES 1% OF AVERAGE DAILY NET ASSETS
CLASS C SHARES 1% OF AVERAGE DAILY NET ASSETS
Because these fees are paid out of a fund's assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
The class A share 12b-1 fee is a shareholder servicing fee. For class B and
class C shares, a portion of the 12b-1 fee equal to 0.25% of average daily net
assets is a shareholder servicing fee and the rest is a distribution fee.
The funds' distributor uses the shareholder servicing fee to compensate brokers,
participating institutions and "one-stop" mutual fund networks for providing
ongoing services to shareholder accounts. These institutions receive annual fees
equal to 0.25% of a fund's class A and class B share average daily net assets
and 0.15% of a fund's class C share average daily net assets attributable to
shares sold through such institutions. The funds' distributor also pays
institutions which sell class C shares a 0.50% annual distribution fee beginning
one year after the shares are sold. The distributor may pay additional fees to
institutions, using the sales charges it receives, in exchange for sales and/or
administrative services performed on behalf of the institution's customers.
The distributor is currently waiving all or a portion of its 12b-1 fees for
class A shares of certain funds. See "Fees and Expenses " in the "Fund
Summaries" section.
- --------------------------------------------------------------------------------
CALCULATING YOUR SHARE PRICE
Your purchase price will be based on the fund's net asset value (NAV) per share,
which is generally calculated as of the close of regular trading on the New York
Stock Exchange (usually 3 p.m. Central time) every day the exchange is open.
Your order will be priced at the next NAV calculated after your order is
accepted by the fund.
A fund's NAV is equal to the market value of its investments and other assets,
less any liabilities, divided by the number of fund shares. If market prices are
not readily available for an investment or if the advisor believes they are
unreliable, fair value prices may be
14 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
POLICIES & SERVICES
BUYING SHARES (CONTINUED)
determined in good faith using methods approved by the funds' board of
directors.
Strategic Income Fund may hold portfolio securities that trade on weekends or
other days when the fund does not price its shares. Therefore, the net asset
value of Strategic Income Fund's shares may change on days when shareholders
will not be able to purchase or redeem their shares.
CLASS A SHARES
Your purchase price is typically the net asset value of your shares, plus a
front-end sales charge. Sales charges vary depending on the amount of your
purchase. The funds' distributor receives the sales charge you pay and reallows
a portion of the sales charge to your broker or participating institution.
LIMITED TERM INCOME FUND
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
MAXIMUM
SALES CHARGE REALLOWANCE
AS A % OF AS A % OF AS A % OF
OFFERING NET ASSET PURCHASE
PRICE VALUE PRICE
- --------------------------------------------------------------------------------
LESS THAN $ 50,000 2.00% 2.04% 1.80%
$ 50,000 - $ 99,999 1.50% 1.52% 1.35%
$100,000 - $249,999 1.00% 1.01% 0.90%
$250,000 - $499,999 0.75% 0.76% 0.68%
$500,000 - $999,999 0.50% 0.50% 0.45%
$1 MILLION AND OVER 0% 0% 0%
INTERMEDIATE GOVERNMENT BOND FUND
MAXIMUM
SALES CHARGE REALLOWANCE
AS A % OF AS A % OF AS A % OF
OFFERING NET ASSET PURCHASE
PRICE VALUE PRICE
- --------------------------------------------------------------------------------
LESS THAN $ 50,000 3.00% 3.09% 2.70%
$ 50,000 - $ 99,999 2.50% 2.56% 2.25%
$100,000 - $249,999 2.00% 2.04% 1.80%
$250,000 - $499,999 1.50% 1.52% 1.35%
$500,000 - $999,999 1.00% 1.01% 0.80%
$1 MILLION AND OVER 0% 0% 0%
INTERMEDIATE TERM INCOME FUND
FIXED INCOME FUND
MAXIMUM
SALES CHARGE REALLOWANCE
AS A % OF AS A % OF AS A % OF
OFFERING NET ASSET PURCHASE
PRICE VALUE PRICE
- --------------------------------------------------------------------------------
LESS THAN $ 50,000 3.75% 3.90% 3.38%
$ 50,000 - $ 99,999 3.25% 3.36% 2.93%
$100,000 - $249,999 2.75% 2.83% 2.48%
$250,000 - $499,999 2.00% 2.04% 1.80%
$500,000 - $999,999 1.00% 1.01% 0.90%
$1 MILLION AND OVER 0% 0% 0%
STRATEGIC INCOME FUND
MAXIMUM
SALES CHARGE REALLOWANCE
AS A % OF AS A % OF AS A % OF
OFFERING NET ASSET PURCHASE
PRICE VALUE PRICE
- --------------------------------------------------------------------------------
LESS THAN $ 50,000 4.50% 4.71% 4.05%
$ 50,000 - $ 99,999 4.00% 4.17% 3.60%
$100,000 - $249,999 3.50% 3.63% 3.15%
$250,000 - $499,999 2.75% 2.83% 2.47%
$500,000 - $999,999 2.00% 2.04% 1.80%
$1 MILLION AND OVER 0% 0% 0%
- --------------------------------------------------------------------------------
FOR INVESTMENTS OF OVER $1 MILLION
There is no initial sales charge on class A share purchases of $1 million or
more. However, your broker or financial institution may receive a commission
of up to 1% on your purchase. If such a commission is paid, you will be
assessed a contingent deferred sales charge (CDSC) of 1% if you sell your
shares within 12 months. To find out whether you will be assessed a CDSC, ask
your broker or financial institution. The funds' distributor receives any CDSC
imposed when you sell your class A shares. The CDSC is based on the value of
your shares at the time of purchase or at the time of sale, whichever is less.
The charge does not apply to shares you acquired by reinvesting your dividend
or capital gain distributions.
To help lower your costs, shares that are not subject to a CDSC will be sold
first. Other shares will then be sold in an order that minimizes your CDSC.
The CDSC will be waived for (i) redemptions following the death or disability
of a shareholder and (ii) redemptions that equal the minimum required
distribution from an individual retirement account or other retirement plan to
a shareholder who has reached the age of 70 1/2.
REDUCING YOUR SALES CHARGE
As shown in the preceding tables, larger purchases of class A shares reduce the
percentage sales charge you pay. You also may reduce your sales charge in the
following ways:
PRIOR PURCHASES. Prior purchases of class A shares of any First American fund
(except a money market fund) will be factored into your sales charge
calculation. For example, let's say you're making a $10,000 investment. If the
current value of all other First American fund class A shares that you hold is
$40,000 or more, your current sales charge is reduced. To receive a reduced
sales charge, you must notify the funds' transfer agent of your prior purchases.
This must be done at the time of purchase, either directly to the transfer agent
in writing or by notifying your broker or financial institution.
15 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
POLICIES & SERVICES
BUYING SHARES (CONTINUED)
PURCHASES BY RELATED ACCOUNTS. Concurrent and prior purchases of class A shares
by certain other accounts also will be combined with your purchase to determine
your sales charge. For example, purchases made by your spouse or children under
age 21 will reduce your sales charge. To receive a reduced sales charge, you
must notify the funds' transfer agent of purchases by any related accounts. This
must be done at the time of purchase, either directly to the transfer agent in
writing or by notifying your broker or financial institution.
LETTER OF INTENT. If you plan to invest $50,000 or more over a 13-month period
in class A shares of any First American fund except the money market funds, you
may reduce your sales charge by signing a non-binding letter of intent. (If you
do not fulfill the letter of intent, you must pay the applicable sales charge.
In addition, if you reduce your sales charge to zero under a letter of intent
and then sell your class A shares within 12 months of their purchase, you may be
charged a contingent deferred sales charge of 1%. See "For Investments of Over
$1 Million.")
More information on these ways to reduce your sales charge appears in the
Statement of Additional Information (SAI). The SAI also contains information on
investors who are eligible to purchase class A shares without a sales charge.
CLASS B SHARES
Your purchase price for class B shares is their net asset value -- there is no
front-end sales charge. However, if you redeem your shares within six years of
purchase, you will pay a back-end sales charge, called a contingent deferred
sales charge (CDSC). Although you pay no front-end sales charge when you buy
class B shares, the funds' distributor pays a sales commission of 4.25% of the
amount invested to brokers and financial institutions which sell class B shares.
The funds' distributor receives any CDSC imposed when you sell your class B
shares.
Your CDSD will be based on the value of your shares at the time of purchase or
at the time of sale, whichever is less. The charge does not apply to shares you
acquired by reinvesting your dividend or capital gain distributions. Shares will
be sold in the order that minimizes your CDSC.
CDSC AS A % OF THE
YEAR SINCE PURCHASE VALUE OF YOUR SHARES
- --------------------------------------------------------------------------------
FIRST 5%
SECOND 5%
THIRD 4%
FOURTH 3%
FIFTH 2%
SIXTH 1%
SEVENTH 0%
EIGHTH 0%
Your class B shares will automatically convert to class A shares, eight years
after the first day of the month following your purchase of shares. For example,
if you purchase class B shares on June 15, 1999, they will convert to class A
shares on June 1, 2007.
The CDSC will be waived for:
o REDEMPTIONS FOLLOWING THE DEATH OR DISABILITY OF A SHAREHOLDER.
o REDEMPTIONS THAT EQUAL THE MINIMUM REQUIRED DISTRIBUTION FROM AN INDIVIDUAL
RETIREMENT ACCOUNT OR OTHER RETIREMENT PLAN TO A SHAREHOLDER WHO HAS REACHED
THE AGE OF 701/2.
o REDEMPTIONS THROUGH A SYSTEMATIC WITHDRAWAL PLAN, AT A RATE OF UP TO 12% A
YEAR OF YOUR ACCOUNT'S VALUE. DURING THE FIRST YEAR, THE 12% ANNUAL LIMIT
WILL BE BASED ON THE VALUE OF YOUR ACCOUNT ON THE DATE THE PLAN IS
ESTABLISHED. THEREAFTER, IT WILL BE BASED ON THE VALUE OF YOUR ACCOUNT ON
THE PRECEDING DECEMBER 31.
CLASS C SHARES
Your purchase price for class C shares is their net asset value plus a front-end
sales charge equal to 1% of the purchase price (1.01% of the net amount
invested). If you redeem your shares within 18 months of purchase, you will be
assessed a contingent deferred sales charge (CDSC) of 1% of the value of your
shares at the time of purchase or at the time of sale, whichever is less. The
CDSC does not apply to shares you acquired by reinvesting your dividend or
capital gain distributions. Shares will be sold in the order that minimizes your
CDSC.
Even though your sales charge is only 1%, the funds' distributor pays a
commission equal to 2% of your purchase price to your broker or participating
institution. The distributor receives any CDSC imposed when you sell your class
C shares.
The CDSC for class C shares will be waived in the same circumstances as the
class B share CDSC. See "Class B Shares" above.
Unlike class B shares, class C shares do not convert to class A shares after a
specified period of time. Therefore, your shares will continue to have higher
annual expenses than class A shares.
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
BY PHONE
You may purchase shares by calling your broker or financial institution, if they
have a sales agreement with the funds' distributor. In many cases, your order
will be effective that day if received by your broker or financial institution
by the close of regular trading on the New York Stock Exchange. In some cases,
however, you will have to transmit your request by an earlier time in order for
your purchase request to be effective that day. This allows your broker or
financial institution time to process your request and transmit it to the fund.
Some financial institutions may charge a fee for helping you purchase shares.
Contact your broker or financial institution for more information.
If you are paying by wire, you may purchase shares by calling 1-800-637-2548
before 3 p.m. Central time. All information will be taken over the telephone,
and your order will be placed when the funds' custodian receives payment by
wire. Wire federal funds as follows:
U.S. BANK NATIONAL ASSOCIATION, MINNEAPOLIS, MN
ABA NUMBER 091000022
FOR CREDIT TO: DST SYSTEMS, INC.:
ACCOUNT NUMBER 160234580266
FOR FURTHER CREDIT TO (INVESTOR NAME AND FUND NAME)
16 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
POLICIES & SERVICES
BUYING SHARES (CONTINUED)
You cannot purchase shares by wire on days when the New York Stock Exchange or
federally chartered banks are closed.
BY MAIL
To purchase shares by mail, simply complete and sign a new account form, enclose
a check made payable to the fund you wish to invest in, and mail both to:
FIRST AMERICAN FUNDS
C/O DST SYSTEMS, INC.
P.O. BOX 419382
KANSAS CITY, MISSOURI 64141-6382
After you have established an account, you may continue to purchase shares by
mailing your check to First American Funds at the same address.
Please note the following:
o ALL PURCHASES MUST BE MADE IN U.S. DOLLARS
o THIRD-PARTY CHECKS, CREDIT CARDS, CREDIT CARD CHECKS AND CASH ARE NOT
ACCEPTED
o IF A CHECK DOES NOT CLEAR YOUR BANK, THE FUNDS RESERVE THE RIGHT TO CANCEL THE
PURCHASE, AND YOU COULD BE LIABLE FOR ANY LOSSES OR FEES INCURRED
- --------------------------------------------------------------------------------
INVESTING AUTOMATICALLY
To purchase shares as part of a savings discipline, you may add to your
investment on a regular basis:
o BY HAVING $100 OR MORE AUTOMATICALLY WITHDRAWN FROM YOUR BANK ACCOUNT ON A
PERIODIC BASIS AND INVESTED IN FUND SHARES
o THROUGH AUTOMATIC MONTHLY EXCHANGES OF YOUR SHARES OF PRIME OBLIGATIONS FUND,
A MONEY MARKET FUND IN THE FIRST AMERICAN FAMILY OF FUNDS. EXCHANGES MUST BE
MADE INTO THE SAME CLASS OF SHARES THAT YOU HOLD IN PRIME OBLIGATIONS FUND
You may apply for participation in either of these programs through your broker
or financial institution or by calling 1-800-637-2548.
17 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
POLICIES & SERVICES
SELLING SHARES
- --------------------------------------------------------------------------------
HOW TO SELL SHARES
You may sell your shares on any day when the New York Stock Exchange is open.
Your shares will be sold at the next NAV calculated after your order is accepted
by the funds' transfer agent, less any applicable contingent deferred sales
charge.
The proceeds from your sale normally will be mailed or wired within one day, but
in no event more than seven days, after your request is received in proper form.
BY PHONE
If you purchased shares through a broker or financial institution, simply call
them to sell your shares. In many cases, your redemption will be effective that
day if received by your broker or financial institution by the close of regular
trading on the New York Stock Exchange. In some cases, however, you will have to
call by an earlier time in order for your redemption to be effective that day.
This allows your broker or financial institution time to process your request
and transmit it to the fund. Contact your broker or financial institution
directly for more information.
If you did not purchase shares through a broker or financial institution, you
may sell your shares by calling 1-800-637-2548. Proceeds can be wired to your
bank account (if the proceeds are at least $1,000 and you have previously
supplied your bank account information to the transfer agent) or sent to you by
check.
If you recently purchased your shares by check or through the Automated Clearing
House (ACH), proceeds from the sale of those shares may not be available until
your check or ACH payment has cleared, which may take up to 10 calendar days.
BY MAIL
To sell shares by mail, send a written request to your broker or financial
institution, or to the funds' transfer agent at the following address:
FIRST AMERICAN FUNDS
C/O DST SYSTEMS, INC.
P.O. BOX 419382
KANSAS CITY, MISSOURI 64141-6382
Your request should include the following information:
o NAME OF THE FUND
o ACCOUNT NUMBER
o DOLLAR AMOUNT OR NUMBER OF SHARES REDEEMED
o NAME ON THE ACCOUNT
o SIGNATURES OF ALL REGISTERED ACCOUNT OWNERS
Signatures on a written request must be guaranteed if:
o YOU WOULD LIKE THE PROCEEDS FROM THE SALE TO BE PAID TO ANYONE OTHER THAN TO
THE SHAREHOLDER OF RECORD
o YOU WOULD LIKE THE CHECK MAILED TO AN ADDRESS OTHER THAN THE ADDRESS ON THE
FUNDS' RECORDS
o YOUR REDEMPTION REQUEST IS FOR $25,000 OR MORE
A signature guarantee assures that a signature is genuine and protects
shareholders from unauthorized account transfers. Banks, savings and loan
associations, trust companies, credit unions, broker-dealers and member firms of
a national securities exchange may guarantee signatures. Call your financial
institution to determine if it has this capability.
Proceeds from a written redemption request will be sent to you by check.
- --------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWALS
If your account has a value of $5,000 or more, you may redeem a specific dollar
amount from your account on a regular basis. To set up systematic withdrawals,
contact your broker or financial institution.
You should not make systematic withdrawals if you plan to continue investing in
the fund, due to sales charges and tax liabilities.
- --------------------------------------------------------------------------------
REINVESTING AFTER A SALE
If you sell class A shares, you may reinvest in class A shares of that fund or
another First American fund within 31 days without a sales charge. If you sell
shares of any class subject to a CDSC, that charge will be credited to your
account and the reinvested shares will be subject to a CDSC which will be
determined based on the date of your reinvestment.
- --------------------------------------------------------------------------------
ACCOUNTS WITH LOW BALANCES
Except for retirement plans, if your account balance falls below $500 as a
result of selling or exchanging shares, you will be given 60 days to
re-establish the minimum balance. If you do not, the fund may close your
account and send you the proceeds, less any applicable contingent deferred
sales charge.
18 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT
- --------------------------------------------------------------------------------
EXCHANGING SHARES
If your investment goals or your financial needs change, you may move from one
First American fund to another. There is no fee to exchange shares.
Generally, you may exchange your shares only for shares of the same class.
However, you may exchange your class A shares for class Y shares of the same or
another First American fund if you subsequently become eligible to participate
in that class (for example, by opening a fiduciary, custody or agency account
with a financial institution which invests in class Y shares).
Exchanges are made based on the net asset value per share of each fund at the
time of the exchange. When you exchange your class A shares of one of the funds
for class A shares of another First American fund, you do not have to pay a
sales charge. When you exchange your class B or class C shares for class B or
class C shares of another First American fund, the time you held the shares of
the "old" fund will be added to the time you hold the shares of the "new" fund
for purposes of determining your CDSC or, in the case of class B shares,
calculating when your shares convert to class A shares.
Before exchanging into any fund, be sure to read its prospectus carefully. A
fund may change or cancel its exchange policies at any time. You will be
notified of any changes. The funds have the right to limit exchanges to four
times per year.
BY PHONE
You may exchange shares by calling your broker, your financial institution, or
the funds' transfer agent, provided that both funds have identical shareholder
registrations. To request an exchange through the funds' transfer agent, call
1-800-637-2548. Your instructions must be received by the funds' transfer agent
before 3 p.m. Central time, or by the time specified by your broker or financial
institution, in order for shares to be exchanged the same day.
BY MAIL
To exchange shares by written request, please follow the procedures under
"Selling Shares." Be sure to include the names of both funds involved in the
exchange.
- --------------------------------------------------------------------------------
STAYING INFORMED
SHAREHOLDER REPORTS
Shareholder reports are mailed twice a year, in November and May. They include
financial statements, performance information, a message from your portfolio
managers, and, on an annual basis, the auditors' report.
In an attempt to reduce shareholder costs and help eliminate duplication, the
funds will try to limit their mailings to one report for each address that lists
one or more shareholders with the same last name. If you would like additional
copies, please call 1-800-637-2548.
STATEMENTS AND CONFIRMATIONS
Statements summarizing activity in your account are mailed at least quarterly.
Confirms are mailed following each purchase or sale of fund shares.
- --------------------------------------------------------------------------------
TELEPHONE TRANSACTIONS
You may buy, sell or exchange shares by telephone, unless you elected on
your new account form to restrict this privilege. If you wish to reinstate
this option on an existing account, please call Investor Services at
1-800-637-2548 to request the appropriate form.
The funds and their agents will not be responsible for any losses that may
result from acting on wire or telephone instructions that they reasonably
believe to be genuine. The funds and their agents will each follow
reasonable procedures to confirm that instructions received by telephone
are genuine, which may include taping telephone conversations.
It may be difficult to reach the funds by telephone during periods of
unusual market activity. If you are unable to reach the funds or their
agents by telephone, please consider sending written instructions.
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from a fund's net investment income are declared and paid monthly. Any
capital gains are distributed at least once each year.
On the ex-dividend date for a distribution, a fund's share price is reduced by
the amount of the distribution. If you buy shares just before the ex-dividend
date, in effect, you "buy the dividend." You will pay the full price for the
shares and then receive a portion of that price back as a taxable distribution.
Dividend and capital gain distributions will be reinvested in additional shares
of the fund paying the distribution, unless you request cash payments on your
new account form or by writing to the fund. Shares will be priced at the NAV
computed on the ex-dividend date.
Strategic Income Fund may realize foreign currency losses that will reduce the
amount of ordinary income that the fund has available to distribute to
shareholders. As a result, some of the distributions made by the fund may be
characterized as a return of capital rather than as taxable dividends. Strategic
Income Fund will report to shareholders after the close of the calendar year the
portion of distributions made during the year that constituted a return of
capital and the portion that constituted taxable dividends.
19 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT (CONTINUED)
- --------------------------------------------------------------------------------
TAXES
Some of the tax consequences of investing in the funds are discussed below. More
information about taxes is in the Statement of Additional Information. However,
because everyone's tax situation is unique, always consult your tax professional
about federal, state and local tax consequences.
TAXES ON DISTRIBUTIONS
Each fund pays its shareholders dividends from its net investment income and any
net capital gains that it has realized. For most investors, fund dividends and
distributions are considered taxable whether they are reinvested or taken in
cash (unless your investment is in an IRA or other tax-advantaged account).
Dividends from a fund's net investment income are taxable as ordinary income.
Distributions of a fund's long-term capital gains are taxable as long-term
gains, regardless of how long you have held your shares. The funds expect that,
as a result of their investment objectives and strategies, their distributions
will consist primarily of ordinary income.
TAXES ON TRANSACTIONS
The sale or exchange of fund shares will be a taxable event for you and may
result in a capital gain or loss. The gain or loss will be considered long-term
if you have held your shares for more than one year. A gain or loss on shares
held for one year or less is considered short-term and is taxed at the same
rates as ordinary income.
20 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
MANAGEMENT
INVESTMENT ADVISOR
FIRST AMERICAN ASSET MANAGEMENT
601 SECOND AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55402
U.S. Bank National Association (U.S. Bank), acting through its First American
Asset Management division, is the funds' investment advisor. First American
Asset Management provides investment management services to individuals and
institutions, including corporations, foundations, pensions and retirement
plans. As of December 31, 1998, it had more than $_____ in assets under
management, including investment company assets of approximately $_____. As
investment advisor, First American Asset Management manages the funds' business
and investment activities, subject to the authority of the board of directors.
Each fund pays the investment advisor a monthly fee for providing investment
advisory services. During their most recent fiscal years, the funds paid the
following investment advisory fees to First American Asset Management:
Advisory fee
as a % of
average daily
net assets
- --------------------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE
SECURITIES FUND* %
FIXED INCOME FUND %
INTERMEDIATE GOVERNMENT
BOND FUND %
INTERMEDIATE TERM
INCOME FUND %
LIMITED TERM INCOME FUND %
STRATEGIC INCOME FUND* %
- --------------------------------------------------------------------------------
* Adjustable Rate Mortgage Securities Fund and Strategic Income Fund have not
operated for a full fiscal year. Fees in the table are contractual fee rates.
SUB-ADVISORS
FEDERATED INVESTMENT COUNSELING
1001 LIBERTY AVENUE
PITTSBURGH, PENNSYLVANIA 15222-3779
FEDERATED GLOBAL RESEARCH CORP.
175 WATER STREET
NEW YORK, NEW YORK 10038-4964
The above mentioned subsidiaries of Federated Investors are sub-advisors to
Strategic Income Fund. The sub-advisors have been retained by the fund's
investment advisor and are paid a portion of the advisory fee.
Federated Investment Counseling manages Strategic Income Fund's investments in
domestic high-yield debt obligations and U.S. dollar denominated foreign
corporate debt obligations. Federated Global Research Corp. manages the fund's
investments in investment grade and high-yield foreign government and foreign
corporate debt obligations. First American Asset Management manages the fund's
investments in U.S. government and investment grade domestic debt obligations
and determines how the fund's assets will be allocated among the three sectors
in which the fund invests.
The sub-advisors and other subsidiaries of Federated Investors serve as
investment advisors to a number of investment companies and private accounts.
CUSTODIAN
U.S. BANK NATIONAL ASSOCIATION
U.S. BANK CENTER
180 EAST FIFTH STREET
ST. PAUL, MINNESOTA 55101
ADMINISTRATOR
SEI INVESTMENTS MANAGEMENT CORPORATION
OAKS, PENNSYLVANIA 19456
DISTRIBUTOR
SEI INVESTMENTS DISTRIBUTION CO.
OAKS, PENNSYLVANIA 19456
TRANSFER AGENT
DST SYSTEMS, INC.
330 WEST NINTH STREET
KANSAS CITY, MISSOURI 64105
ADDITIONAL COMPENSATION
In addition to receiving compensation for acting as the funds' investment
advisor as described above, U.S. Bank and its affiliates receive compensation in
connection with the following:
CUSTODY SERVICES. As compensation for acting as the funds' custodian, U.S. Bank
is paid monthly fees equal, on an annual basis, to 0.03% of a fund's average
daily net assets. In addition, U.S. Bank is reimbursed for its out-of-pocket
expenses incurred while providing custody services to the funds.
SUB-ADMINISTRATION SERVICES. U.S. Bank assists the administrator and provides
sub-administration services to the funds. For providing these services, U.S.
Bank is compensated by the funds' administrator at an annual rate of up to
0.05% of each fund's average daily net assets.
TRANSFER AGENT SERVICES. U.S. Bank performs certain transfer agent and dividend
disbursing agent services with respect to the class A, class B and class C
shares of the funds held through accounts at U.S. Bank and its affiliates. The
funds pay U.S. Bank an annual fee of $15 per account for providing these
services.
SECURITIES LENDING SERVICES. In connection with lending their portfolio
securities, the funds pay administrative and custodial fees to U.S. Bank which
are equal to 40% of the funds' income from these securities lending
transactions.
21 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
MANAGEMENT (CONTINUED)
BROKERAGE TRANSACTIONS. The funds purchase most of their portfolio securities
directly from the issuer or from an underwriter or market maker, and not from a
broker acting as agent. However, the funds may from time to time use brokers
when buying portfolio securities. The funds' investment advisor may place
trades through its affiliates, U.S. Bancorp Investments, Inc. and U.S. Bancorp
Piper Jaffray Inc., which will earn commissions on such transactions.
SALES OF FUND SHARES. U.S. Bancorp Investments, Inc. and U.S. Bancorp Piper
Jaffray Inc., broker-dealers affiliated with U.S. Bank, have entered into
agreements with the funds' distributor to sell fund shares and will earn
commissions on these sales.
ERISA ACCOUNTS. U.S. Bank 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.
PORTFOLIO MANAGEMENT
Each fund's investments are managed by a team of persons associated with First
American Asset Management or, in the case of Strategic Income Fund, one of the
sub-advisors.
22 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS
- --------------------------------------------------------------------------------
OBJECTIVES
The funds' objectives, which are described in the "Fund Summaries" section, may
be changed without shareholder approval. If a fund's objectives change, you will
be notified at least 30 days in advance. Please remember: There is no guarantee
that any fund will achieve its objectives.
- --------------------------------------------------------------------------------
INVESTMENT STRATEGIES
The funds' main investment strategies are discussed in the "Fund Summaries"
section. These are the strategies that the funds' investment advisor believes
are most likely to be important in trying to achieve the funds' objectives. You
should be aware that each fund may also use strategies and invest in securities
that are not described in this prospectus, but that are described in the
Statement of Additional Information (SAI). For a copy of the SAI, call Investor
Services at 1-800-637-2548.
INVESTMENT APPROACH
Except as set forth below, fund managers generally employ a "top-down" approach
in selecting securities for the funds. First, they determine their economic
outlook and the direction in which inflation and interest rates are expected to
move. Then they choose certain sectors or industries within the overall market.
Last, they select individual securities within those sectors for the funds. Fund
managers also analyze expected changes to the yield curve under multiple market
conditions to help define maturity and duration selection. For the high-yield
and foreign security components of Strategic Income Fund, fund managers employ a
"bottom-up" approach. With this type of approach, managers do a
company-by-company analysis, rather than focusing on a specific economic sector
or industry.
EFFECTIVE DURATION
Each fund, other than Strategic Income Fund, attempts to maintain the effective
duration of its portfolio securities within a specified range. Effective
duration, one measure of interest rate risk, measures how much the value of a
security is expected to change with a given change in interest rates. The longer
a security's effective duration, the more sensitive its price to changes in
interest rates. For example, if interest rates were to increase by one
percentage point, the market value of a bond with an effective duration of five
years would decrease by 5%, with all other factors being constant. However, all
other factors are rarely constant. Effective duration is based on assumptions
and subject to a number of limitations. It is most useful when interest rate
changes are small, rapid and occur equally in short-term and long-term
securities. In addition, it is difficult to calculate precisely for bonds with
prepayment options, such as mortgage-related securities, because the calculation
requires assumptions about prepayment rates. For these reasons, the effective
durations of funds which invest a significant portion of their assets in
mortgage-backed securities can be greatly affected by changes in interest rates.
TEMPORARY INVESTMENTS
In an attempt to respond to adverse market, economic, political or other
conditions, each fund may invest without limit in cash and in U.S.
dollar-denominated high-quality money market instruments and other short-term
securities, including money market funds advised by the funds' advisor. These
investments may result in a lower yield than would be available from investments
with a lower quality or longer term and may prevent a fund from achieving its
investment objectives.
PORTFOLIO TURNOVER
Fund managers may trade securities frequently, resulting, from time to time, in
an annual portfolio turnover rate of over 100%. Trading of securities may
produce capital gains, which are taxable to shareholders when distributed.
Active trading may also increase the amount of commissions or mark-ups to
broker-dealers that the fund pays when it buys and sells securities. The
"Financial Highlights" section of this prospectus shows each fund's historical
portfolio turnover rate (except for Strategic Income Fund, which just began
operations).
- --------------------------------------------------------------------------------
RISKS
The main risks of investing in the funds are summarized in the "Fund Summaries"
section. More information about fund risks is presented below.
CALL RISK
Many corporate bonds may be redeemed at the option of the issuer, or "called,"
before their stated maturity date. In general, an issuer will call its bonds if
they can be refinanced by issuing new bonds which bear a lower interest rate.
The funds are subject to the possibility that during periods of falling interest
rates, a bond issuer will call its high-yielding bonds. A fund would then be
forced to invest the unanticipated proceeds at lower interest rates, resulting
in a decline in the fund's income.
CREDIT RISK
Each fund is subject to the risk that the issuers of debt securities held by the
fund will not make payments on the securities, or that the other party to a
contract (such as a securities lending agreement or repurchase agreement) will
default on its obligations. There is also the risk that an issuer could suffer
adverse changes in financial condition that could lower the credit quality of a
security. This could lead to greater volatility in the price of the security and
in shares of the fund. Also, a change in the credit quality rating of a bond
could affect the bond's liquidity and make it more difficult for the fund to
sell. When a fund purchases unrated securities, it will depend on the advisor's
analysis of credit risk more heavily than usual.
Each fund other than Strategic Income Fund attempts to minimize credit risk by
investing in securities considered at least investment grade at the time of
purchase. However, all of these securities, especially those in the lower
investment grade rating categories, have credit risk. In adverse economic or
other circumstances, issuers of these lower rated securities are more likely to
have difficulty making principal and interest payments than issuers of higher
rated securities.
EXTENSION RISK
Each fund may invest significantly in mortgage-related securities. These
securities are subject to extension risk, which is the risk that rising interest
rates could cause homeowners to prepay their mortgages more slowly
23 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS (CONTINUED)
than expected, resulting in slower prepayments of the securities. This would, in
effect, convert a short- or medium-duration mortgage-related security into a
longer-duration security, increasing its sensitivity to interest rate changes
and causing its price to decline.
PREPAYMENT RISK
Mortgage-related securities also are subject to prepayment risk, which is the
risk that falling interest rates could cause prepayments of the securities to
occur more quickly than expected. This occurs because, as interest rates fall,
more homeowners refinance the mortgages underlying mortgage-related securities.
The fund must reinvest the prepayments at a time when interest rates on new
mortgage investments are falling, reducing the income of the fund. In addition,
when interest rates fall, prices on mortgage-related securities may not rise as
much as for other types of comparable debt securities because investors may
anticipate an increase in mortgage prepayments.
INTEREST RATE RISK
Debt securities in the funds will fluctuate in value with changes in interest
rates. In general, debt securities will increase in value when interest rates
fall and decrease in value when interest rates rise. Longer-term debt securities
are generally more sensitive to interest rate changes. ARMS are generally less
sensitive to interest rate changes because their interest rates move with market
rates. Securities which do not pay interest on a current basis, such as zero
coupon securities and delayed interest securities, may be highly volatile as
interest rates rise or fall. Payment-in-kind bonds, which pay interest in other
securities rather than in cash, also may be highly volatile.
RISK OF ACTIVE MANAGEMENT
Each fund is actively managed and its performance therefore will reflect in part
the advisor's ability to make investment decisions which are suited to achieving
the fund's investment objectives. Due to their active management, the funds
could underperform other mutual funds with similar investment objectives.
RISKS OF DOLLAR ROLL TRANSACTIONS
In a dollar roll transaction, a fund sells mortgage-related securities for
delivery in the current month while contracting with the same party to
repurchase similar securities at a future date. Because the fund gives up the
right to receive principal and interest paid on the securities sold, a mortgage
dollar roll transaction will diminish the investment performance of a fund
unless the difference between the price received for the securities sold and the
price to be paid for the securities to be purchased in the future, plus any fee
income received, exceeds any income, principal payments and appreciation on the
securities sold as part of the mortgage dollar roll. Whether mortgage dollar
rolls will benefit a fund may depend upon the advisor's ability to predict
mortgage prepayments and interest rates. In addition, the use of mortgage dollar
rolls by a fund increases the amount of the fund's assets that are subject to
market risk, which could increase the volatility of the price of the fund's
shares.
RISKS OF SECURITIES LENDING
When a fund loans its portfolio securities, it will receive collateral equal to
at least 100% of the value of the loaned securities. Nevertheless, the fund
risks a delay in the recovery of the loaned securities, or even the loss of
rights in the collateral deposited by the borrower if the borrower should fail
financially. To reduce these risks, the funds enter into loan arrangements only
with institutions which the funds' advisor has determined are creditworthy under
guidelines established by the funds' board of directors.
YEAR 2000 ISSUES
Like other mutual funds and business and financial organizations, the funds
could be adversely affected if the computer systems used by the funds' advisor,
sub-advisors, other service providers and entities with computer systems that
are linked to fund records do not properly process and calculate date-related
information from and after January 1, 2000. While year 2000-related computer
problems could have a negative effect on the funds, the funds' administrator has
undertaken a program designed to assess and monitor the steps being taken by the
funds' service providers to address year 2000 issues. This program includes
seeking assurances from service providers that their systems are or will be year
2000 compliant and reviewing service providers' periodic reports to monitor
their status concerning their year 2000 readiness and compliance.
The administrator and the advisor also report regularly to the funds' board of
directors concerning their own and other service providers' progress toward year
2000 readiness. Although these reports indicate that service providers are or
expect to be year 2000 compliant, there can be no assurance that this will be
the case in all instances or that year 2000 difficulties experienced by others
in the financial services industry will not impact the funds. In addition, there
can be no assurance that year 2000 difficulties will not have an adverse effect
on the funds' investments or on global markets or economies, generally. The
funds are not bearing any of the expenses incurred by their service providers in
preparing for the year 2000.
- --------------------------------------------------------------------------------
ADDITIONAL RISKS OF STRATEGIC INCOME FUND
RISKS OF FOREIGN SECURITIES
Investing in foreign securities involves risks not typically associated with
U.S. investing. Therefore, the Strategic Income Fund may experience a decline in
net asset value resulting from changes in exchange rates between the United
States dollar and foreign currencies. Other risks of foreign investing include
limited liquidity and volatile prices of non-U.S. securities, limited
availability of information regarding non-U.S. companies, investment and
repatriation restrictions, and foreign taxation. The risks of foreign investing
are higher in emerging markets. Investing in emerging markets generally involves
exposure to economic structures that are less diverse and mature and political
systems that are less stable than those of developed countries.
24 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS (CONTINUED)
RISKS OF HIGH YIELD SECURITIES
A significant portion of Strategic Income Fund's portfolio may consist of
lower-rated corporate debt obligations, which are commonly referred to as "high
yield" securities or "junk bonds." Although these securities usually offer
higher yields than investment grade securities, they also involve more risk.
High yield bonds may be more susceptible to real or perceived adverse economic
conditions than investment grade bonds. In addition, the secondary trading
market may be less liquid. High yield securities generally have more volatile
prices and carry more risk to principal than investment grade securities.
25 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about the class A shares
of each fund and the class B shares of Strategic Income Fund and Fixed Income
Fund. There were no class C shares outstanding during the periods for which
information is presented. This information is intended to help you understand
each fund's financial performance for the past five years or, if shorter, the
period of the fund's operations. Some of this information reflects financial
results for a single fund share. Total returns in the tables represent the rate
that you would have earned or lost on an investment in a fund, excluding sales
charges and assuming you reinvested all of your dividends and distributions.
This information has been audited by KPMG Peat Marwick, LLP, independent
auditors, whose report, along with the funds' annual report, which is available
upon request.
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
<TABLE>
<CAPTION>
Fiscal year Fiscal year
ended September 30, ended August 31,
--------------------------------- ----------------------------------
1998 1997 1996(4) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA(1)
Net Asset Value, Beginning of Period $ $ 8.06 $ 8.03 $ 7.99 $ 8.10 $ 8.88
-------- ------- ------- ------- ------ -------
Investment Operations:
Net Investment Income 0.47 0.04 0.49 0.47 0.55
Net Gains (Losses) on Securities
(both realized and unrealized) 0.09 0.03 0.01 (0.05) (0.82)
------- ------- ------- ------- -------
Total From Investment Operations 0.56 0.07 0.50 0.42 (0.27)
------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.47) (0.04) (0.46) (0.53) (0.51)
------- ------- ------- ------- -------
Total Distributions (0.47) (0.04) (0.46) (0.53) (0.51)
------- ------- ------- ------- -------
Net asset value, end of period $ $ 8.15 $ 8.06 $ 8.03 $ 7.99 $ 8.10
======== ======= ======= ======= ======= =======
Total Return % 7.16% 0.85% 6.40% 5.43% (3.18)%
RATIOS/SUPPLEMENTAL DATA(1)
Net Assets, End of Period (000) $ $ 185 $ 263 $ 270 $ 409 $ 500
Ratio of Expenses to Average Net Assets(2) % 0.81% 0.82% 0.60% 0.63% 0.60%
Ratio of Net Income to Average Net Assets(2) % 5.84% 5.28% 5.74% 5.62% 6.39%
Portfolio Turnover Rate (excluding short-term securities) % 25% 2% 51% 36% 39%
Amount of borrowings outstanding at end of
period (000)(3) N/A N/A N/A N/A $ 145
Average amount of borrowings outstanding during
the period (000)(3) N/A N/A N/A $ 57 $ 145
Average number of shares outstanding during the
period (000) N/A N/A N/A 53 62
Average per-share amount of borrowings outstanding
during the period (000)(3) N/A N/A N/A $ 1.09 $ 2.34
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The financial highlights for the period from 9/1/95 to 8/3/98 are those of
Adjustable Rate Mortgage Securities Fund, a series of Piper Funds Inc. --
II. This predecessor fund was reorganized into the fund as of the close of
business on 7/31/98. The financial highlights for periods prior to 9/1/95
are those of American Adjustable Rate Term Trust 1998. On 9/1/95, four
closed-end funds, American Adjustable Rate Term Trusts 1996, 1997, 1998 and
1999 (BDJ, CDJ, DDJ and EDJ) were combined to create the Piper fund. DDJ
was considered the surviving entity for financial reporting purposes. The
per share historical information for periods prior to 9/1/95 has been
restated to reflect the impact of additional shares created resulting from
the difference in the net asset value per share of DDJ at the time of the
merger ($8.71) and the initial net asset value per share of the Piper fund
($8.00).
(2) Various fees and expenses of the fund were voluntarily waived or absorbed
by the fund's advisor during the year ending 8/31/96. Had the fund paid all
expenses, the ratios of expenses and net investment income to average daily
net assets would have been 0.76% and 5.58%, respectively.
(3) DDJ was a closed-end investment company and was permitted to enter into
borrowings for other than temporary or emergency purposes.
(4) For the one month period ended September 30, 1996. The board of directors
approved a change in the fund's fiscal year end from August 31 to September
30, effective September 30, 1996. All ratios for the period have been
annualized.
26 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
FIXED INCOME FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS A SHARES 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 10.77 $ 10.98 $ 10.37 $ 11.38
-------- -------- ------- -------- -------
Investment Operations:
Net Investment Income 0.59 0.61 0.66 0.57
Net Gains (Losses) on Securities
(both realized and unrealized) 0.27 ( 0.11) 0.61 ( 0.89)
-------- -------- -------- -------- -------
Total From Investment Operations 0.86 0.50 1.27 ( 0.32)
-------- -------- -------- -------- -------
Less Distributions:
Dividends (from net investment income) ( 0.59) ( 0.61) ( 0.63) ( 0.57)
Distributions (from capital gains) ( 0.07) ( 0.10) ( 0.03) ( 0.12)
-------- -------- -------- -------- -------
Total Distributions ( 0.66) ( 0.71) ( 0.66) ( 0.69)
-------- -------- -------- -------- -------
Net Asset Value, End of Period $ $ 10.97 $ 10.77 $ 10.98 $ 10.37
======== ======== ======== ======== =======
Total Return % 8.26% 4.64% 12.78% ( 2.92)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 8,535 $ 8,332 $ 7,853 $ 8,028
Ratio of Expenses to Average Net Assets % 0.95% 0.95% 0.86% 0.68%
Ratio of Net Income to Average Net Assets % 5.44% 5.55% 6.14% 3.83%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.13% 1.12% 1.19% 1.06%
Ratio of Net Income to Average Net Assets (excluding waivers) % 5.26% 5.38% 5.81% 3.45%
Portfolio Turnover Rate % 130% 108% 106% 142%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended September 30,
CLASS B SHARES 1998 1997 1996 1995 1994(1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 10.72 $ 10.94 $ 10.35 $ 10.54
-------- ------- ------- -------- -------
Investment Operations:
Net Investment Income 0.51 0.52 0.58 0.08
Net Gains (Losses) on Securities
(both realized and unrealized) 0.26 ( 0.11) 0.60 ( 0.17)
-------- ------- ------- -------- -------
Total From Investment Operations 0.77 0.41 1.18 ( 0.09)
-------- ------- ------- -------- -------
Less Distributions:
Dividends (from net investment income) ( 0.51) ( 0.53) ( 0.56) ( 0.10)
Distributions (from capital gains) ( 0.07) ( 0.10) ( 0.03) 0.00
-------- ------- ------- -------- -------
Total Distributions ( 0.58) ( 0.63) ( 0.59) ( 0.10)
-------- ------- ------- -------- -------
Net Asset Value, End of Period $ $ 10.91 $ 10.72 $ 10.94 $ 10.35
======== ======= ======= ======== =======
Total Return % 7.40% 3.93% 11.75% ( 0.88)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $15,253 $16,092 $ 7,280 $ 115
Ratio of Expenses to Average Net Assets % 1.70% 1.70% 1.70% 1.70%
Ratio of Net Income to Average Net Assets % 4.68% 4.81% 5.12% 4.89%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.88% 1.87% 1.94% 1.92%
Ratio of Net Income to Average Net Assets (excluding waivers) % 4.50% 4.64% 4.88% 4.67%
Portfolio Turnover Rate % 130% 108% 106% 142%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class B Shares have been offered since August 15, 1994. All ratios for the
period have been annualized.
27 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
INTERMEDIATE GOVERNMENT BOND FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 9.19 $ 9.29 $ 8.98 $ 9.52
-------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.54 0.54 0.54 0.41
Net Gains (Losses) on Securities
(both realized and unrealized) 0.09 (0.10) 0.31 (0.51)
-------- ------- ------- ------- -------
Total From Investment Operations 0.63 0.44 0.85 (0.10)
-------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.54) (0.54) (0.54) (0.39)
Distributions (from capital gains) -- -- -- (0.05)
-------- ------- ------- ------- -------
Total Distributions (0.54) (0.54) (0.54) (0.44)
-------- ------- ------- ------- -------
Net Asset Value, End of Period $ $ 9.28 $ 9.19 $ 9.29 $ 8.98
======== ======= ======= ======= =======
Total Return % 7.06% 4.85% 9.82% (1.13)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 3,525 $ 3,320 $ 2,860 $ 1,977
Ratio of Expenses to Average Net Assets % 0.70% 0.70% 0.70% 0.53%
Ratio of Net Income to Average Net Assets % 5.88% 5.85% 6.10% 4.49%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.12% 1.10% 1.22% 2.14%
Ratio of Net Income to Average Net Assets (excluding waivers) % 5.46% 5.45% 5.58% 2.88%
Portfolio Turnover Rate % 22% 29% 17% 74%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
28 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
INTERMEDIATE TERM INCOME FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 9.93 $ 9.94 $ 9.55 $ 10.22
-------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.55 0.55 0.59 0.46
Net Gains (Losses) on Securities
(both realized and unrealized) 0.15 -- 0.38 ( 0.56)
-------- ------- ------- ------- -------
Total From Investment Operations 0.70 0.55 0.97 ( 0.10)
-------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) ( 0.56) (0.55) (0.58) ( 0.46)
Distributions (from capital gains) ( 0.07) (0.01) -- ( 0.11)
-------- ------- ------- ------- -------
Total Distributions ( 0.63) (0.56) (0.58) ( 0.57)
-------- ------- ------- ------- -------
Net Asset Value, End of Period $ $ 10.00 $ 9.93 $ 9.94 $ 9.55
======== ======= ======= ======= =======
Total Return % 7.19% 5.63% 10.51% ( 1.05)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 2,484 $ 2,213 $ 2,437 $ 3,208
Ratio of Expenses to Average Net Assets % 0.70% 0.70% 0.70% 0.69%
Ratio of Net Income to Average Net Assets % 5.51% 5.43% 5.97% 2.48%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.17% 1.13% 1.19% 1.24%
Ratio of Net Income to Average Net Assets (excluding waivers) % 5.04% 5.00% 5.48% 1.93%
Portfolio Turnover Rate % 165% 161% 69% 177%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
29 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
LIMITED TERM INCOME FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 9.91 $ 9.92 $ 9.85 $ 10.06
-------- ------ ------ ------ -------
Investment Operations:
Net Investment Income 0.56 0.58 0.56 0.44
Net Gains (Losses) on Securities
(both realized and unrealized) 0.03 (0.01) 0.07 ( 0.22)
-------- ------ ------- ------ --------
Total From Investment Operations 0.59 0.57 0.63 0.22
-------- ------ ------- ------ --------
Less Distributions:
Dividends (from net investment income) (0.56) (0.58) (0.56) ( 0.43)
Distributions (from capital gains) -- -- -- --
-------- ------- ------- ------- --------
Total Distributions (0.56) (0.58) (0.56) ( 0.43)
-------- ------- ------- ------- --------
Net Asset Value, End of Period $ $ 9.94 $ 9.91 $ 9.92 $ 9.85
======== ======= ======= ======= ========
Total Return 6.09% 5.93% 6.57% 2.21%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 7,152 $ 7,627 $ 9,977 $ 9,509
Ratio of Expenses to Average Net Assets % 0.60% 0.60% 0.60% 0.60%
Ratio of Net Income to Average Net Assets % 5.61% 5.80% 5.60% 4.17%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.15% 1.09% 1.22% 1.23%
Ratio of Net Income to Average Net Assets (excluding waivers) % 5.06% 5.31% 4.98% 3.57%
Portfolio Turnover Rate % 147% 61% 120% 48%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
30 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
Period ended
September 30,
CLASS A SHARES 1998(1)
- --------------------------------------------------------------------------------
<S> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $
Investment Operations:
Net Investment Income
Net Gains (Losses) on Securities
(both realized and unrealized)
Total From Investment Operations
Less Distributions:
Dividends (from net investment income)
Distributions (from capital gains)
Tax Return of Capital Total Distributions
Net Asset Value, End of Period $
Total Return
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000)
Ratio of Expenses to Average Net Assets
Ratio of Net Income to Average Net Assets
Ratios of Expenses to Average Net Assets (excluding waivers)
Ratio of Net Income to Average Net Assets (excluding waivers)
Portfolio Turnover Rate %
- ---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Period ended
September 30,
CLASS B SHARES 1998(1)
- ---------------------------------------------------------------------------------
<S> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $
Investment Operations:
Net Investment Income
Net Gains (Losses) on Securities
(both realized and unrealized)
Total From Investment Operations
Less Distributions:
Dividends (from net investment income)
Distributions (from capital gains)
Tax Return of Capital Total Distributions
Net Asset Value, End of Period $
Total Return
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000)
Ratio of Expenses to Average Net Assets
Ratio of Net Income to Average Net Assets
Ratio of Expenses to Average Net Assets (excluding waivers)
Ratio of Net Income to Average Net Assets (excluding waivers)
Portfolio Turnover Rate %
- ---------------------------------------------------------------------------------
</TABLE>
(1) The fund commenced operations on July 27, 1998.
31 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FOR MORE INFORMATION
More information about the funds is available in the funds' Statement of
Additional Information and annual and semiannual reports.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more details about the funds and their policies. A current SAI
is on file with the Securities and Exchange Commission (SEC) and is incorporated
into this prospectus by reference (which means that it is legally considered
part of this prospectus).
ANNUAL AND SEMIANNUAL REPORTS
Additional information about the funds' investments is available in the funds'
annual and semiannual reports to shareholders. In the funds' annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the funds' performance during their last fiscal year.
You can obtain a free copy of the funds' SAI and/or free copies of the funds'
most recent annual or semiannual reports by calling Investor Services at
1-800-637-2548. The material you request will be sent by first-class mail or
other means designed to ensure equally prompt delivery, within three business
days of receipt of the request.
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC, or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. For more information, call
1-800-SEC-0330.
Information about the funds is also available on the Internet. Text-only
versions of fund documents can be viewed online or down-loaded from the SEC's
Internet site at http://www.sec.gov.
SEC file number: 811-05309
FAIF-1001 (9/1998)
<PAGE>
FEBRUARY 1, 1999
BOND FUNDS
CLASS Y SHARES
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
FIXED INCOME FUND
INTERMEDIATE GOVERNMENT BOND FUND
INTERMEDIATE TERM INCOME FUND
LIMITED TERM INCOME FUND
STRATEGIC INCOME FUND
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of these funds, or determined if the
information in this prospectus is accurate or complete. Any statement to the
contrary is a criminal offense.
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(R)
<PAGE>
TABLE OF CONTENTS
FUND SUMMARIES
- --------------------------------------------------------------------------------
Adjustable Rate Mortgage Securities Fund 2
- --------------------------------------------------------------------------------
Fixed Income Fund 4
- --------------------------------------------------------------------------------
Intermediate Government Bond Fund 6
- --------------------------------------------------------------------------------
Intermediate Term Income Fund 8
- --------------------------------------------------------------------------------
Limited Term Income Fund 10
- --------------------------------------------------------------------------------
Strategic Income Fund 12
- --------------------------------------------------------------------------------
POLICIES & SERVICES
- --------------------------------------------------------------------------------
Buying and Selling Shares 14
- --------------------------------------------------------------------------------
Managing Your Investment 15
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Management 16
- --------------------------------------------------------------------------------
More About The Funds 18
- --------------------------------------------------------------------------------
Financial Highlights 21
- --------------------------------------------------------------------------------
FOR MORE INFORMATION Back Cover
- --------------------------------------------------------------------------------
<PAGE>
FUND SUMMARIES
INTRODUCTION
This section of the prospectus describes the objectives of the First American
Bond Funds, summarizes the main investment strategies used by each fund in
trying to achieve its objectives, and highlights the risks involved with these
strategies. It also provides you with information about the performance, fees
and expenses of the funds. (Because of its limited history of operations,
performance information is not provided for Strategic Income Fund.)
AN INVESTMENT IN THE FUNDS IS NOT A DEPOSIT OF U.S. BANK NATIONAL ASSOCIATION
AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
1 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Adjustable Rate Mortgage Securities Fund's objective is to provide investors
with current income while maintaining a high degree of principal stability.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Adjustable Rate Mortgage Securities Fund invests
primarily in adjustable rate mortgage securities (ARMS). ARMS have interest
rates that reset periodically in response to changes in the current interest
rate environment.
The fund may also invest in other debt securities, including:
o FIXED-RATE MORTGAGE RELATED SECURITIES
o U.S. GOVERNMENT SECURITIES, WHICH ARE SECURITIES ISSUED OR GUARANTEED BY THE
U.S. GOVERNMENT OR ITS AGENCIES OR INSTRUMENTALITIES
o PRIVATE PASS-THROUGH SECURITIES
o ASSET-BACKED SECURITIES
o CORPORATE DEBT OBLIGATIONS
Debt securities in the fund will be rated investment grade at the time of
purchase or, if unrated, determined to be of comparable quality by the fund's
advisor. At least 65% of the fund's debt securities must be either U.S.
government securities or securities rated A or better by Standard & Poor's
Ratings Service or Moody's Investors Service or assigned an equivalent rating by
another nationally recognized rating agency. Unrated securities will not exceed
25% of the fund's total assets.
Under normal market conditions the fund attempts to maintain an average
effective duration for its portfolio securities of zero to four years.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities. ARMS are generally less
sensitive to interest rate changes because their interest rates move with market
rates. One measure of interest rate risk is effective duration, explained on
page 23 under "More About The Funds -- Investment Strategies."
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities, or the other party to a contract (such as a securities
lending agreement) may default on its obligations.
CALL RISK
During periods of falling interest rates, a bond issuer may "call" -- or repay
- -- its high-yielding bonds before their maturity date. The fund would then be
forced to invest the unanticipated proceeds at lower interest rates, resulting
in a decline in the fund's income.
RISKS OF MORTGAGE-RELATED SECURITIES
Falling interest rates may cause faster than expected mortgage prepayments,
which the fund would have to reinvest at lower interest rates. On the other
hand, rising interest rates could cause mortgage prepayments to slow, which
would increase the price volatility of mortgage-related securities and cause
their prices to decline.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
Because class Y shares have not been offered for a full calendar year,
information in the chart and the table is for the fund's class A shares, which
are offered through another prospectus. The classes will have substantially
similar returns, because they are invested in the same portfolio of securities.
However, class Y shares will have higher returns because their expenses are
lower.
2 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
ADJUSTABLE RATE MORTGAGE SECURITIES FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) Performance from
September 1, 1995, to
August 3, 1998, is that
[BAR CHART] of Adjustable Rate
Mortgage Securities Fund,
1993 8.11% a series of Piper Funds
1994 -6.54% Inc. -- II. Performance
1995 10.55% prior to September 1,
1996 6.76% 1995, is that of American
1997 6.31% Adjustable Rate Term
1998 Trust Inc. -- 1998, a
closed-end investment
company.
(2) Class A share returns
reflect a 2% front-end
sales charge. Class Y
shares have no sales
charges.
(3) An unmanaged index of
U.S. agency adjustable
rate mortgage securities.
The since inception
performance of the index
is calculated from the
month end following the
fund's inception.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception
AS OF 12/31/98(1) One Year Five Years (1/30/92)
- --------------------------------------------------------------------------------
Adjustable Rate Mortgage Securities Fund
(Class A)(2) % % %
- --------------------------------------------------------------------------------
Lehman Adjustable Rate Mortgage Index(3) % % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
before any waivers during the fiscal year ended September 30, 1998.(1)
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
0.65%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
3 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
FIXED INCOME FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Fixed Income Fund's objective is to provide investors with high current income
consistent with limited risk to capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Fixed Income Fund invests in investment grade
debt securities, such as:
o U.S. GOVERNMENT SECURITIES, (SECURITIES ISSUED OR GUARANTEED BY THE U.S.
GOVERNMENT OR ITS AGENCIES OR INSTRUMENTALITIES), INCLUDING ZERO COUPON
SECURITIES
o MORTGAGE- AND ASSET-BACKED SECURITIES
o FIXED AND FLOATING RATE CORPORATE DEBT OBLIGATIONS
Debt securities in the fund will be rated investment grade at the time of
purchase or, if unrated, determined to be of comparable quality by the fund's
advisor. At least 65% of the fund's debt securities must be either U.S.
government securities or securities rated A or better by Standard & Poor's
Ratings Service or Moody's Investors Service or assigned an equivalent rating by
another nationally recognized rating agency. Unrated securities will not exceed
25% of the fund's total assets.
At least 65% of the fund's total assets will be invested in fixed rate
obligations.The fund may invest up to 15% of its total assets in foreign
securities payable in U.S. dollars.
Under normal market conditions the fund attempts to maintain a weighted average
maturity for its portfolio securities of 15 years or less and an average
effective duration of three to eight years.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions. It also may invest up to 25% of total assets in dollar roll
transactions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities. One measure of interest rate
risk is effective duration, explained on page 23 under "More About the Funds --
Investment Strategies."
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities, or the other party to a contract (such as a securities
lending agreement) may default on its obligations.
CALL RISK
During periods of falling interest rates, a bond issuer may "call" -- or repay
- -- its high-yielding bonds before their maturity date. The fund would then be
forced to invest the unanticipated proceeds at lower interest rates, resulting
in a decline in the fund's income.
RISKS OF MORTGAGE-RELATED SECURITIES
Falling interest rates may cause faster than expected mortgage prepayments,
which the fund would have to reinvest at lower interest rates. On the other
hand, rising interest rates could cause mortgage prepayments to slow, which
would increase the price volatility of mortgage-related securities and cause
their prices to decline.
FOREIGN SECURITY RISK
Securities of foreign issuers, even when dollar-denominated and publicly traded
in the United States, may involve risks not associated with the securities of
domestic issuers, including the risks of adverse currency fluctuations and of
political or social instability or diplomatic developments that could adversely
affect the securities.
RISKS OF DOLLAR ROLL TRANSACTIONS
The use of mortgage dollar rolls could increase the volatility of the fund's
share price. It could also diminish the fund's investment performance if the
advisor does not predict mortgage prepayments and interest rates correctly.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
4 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
FIXED INCOME FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) Class Y shares have been
offered since 2/4/94. The
[BAR CHART] since inception
performance of the index
1995 is calculated from the
1996 month end following such
1997 date.
1998
(2) An unmanaged index of
Treasury securities, other
securities issued or
guaranteed by the U.S.
government or its agencies
or instrumentalities, and
investment-grade corporate
debt securities.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98 One Year Since Inception(1)
- --------------------------------------------------------------------------------
Fixed Income Fund % %
- --------------------------------------------------------------------------------
Lehman Gov't/Corp Bond Index(2)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
before any waivers during the fiscal year ended September 30, 1998.(1)
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
0.70%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
5 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
INTERMEDIATE GOVERNMENT BOND FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Intermediate Government Bond Fund's objective is to provide investors with
current income to the extent consistent with preservation of capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Intermediate Government Bond Fund invests
primarily in U.S. government securities, which are securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities. The Fund
invests only in U.S. government securities which generate interest that is
excluded from state taxable income. For example, the fund may invest in U.S.
Treasury obligations and in obligations issued or guaranteed by the following:
o FARM CREDIT SYSTEM FINANCIAL ASSISTANCE CORPORATION;
o FEDERAL HOME LOAN BANKS SYSTEM;
o STUDENT LOAN MARKETING ASSOCIATION; AND
o TENNESSEE VALLEY AUTHORITY.
The fund's investments in Treasury, agency and instrumentality securities may
include zero coupon securities, adjustable rate securities and U.S. Treasury
inflation-indexed securities.
Under normal market conditions the fund attempts to maintain a weighted average
maturity for its portfolio securities of two to seven years and an average
effective duration of one to five years.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions. It also may invest up to 25% of total assets in dollar roll
transactions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities. One measure of interest rate
risk is effective duration, explained on page 23 under "More About The Funds --
Investment Strategies."
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities, or the other party to a contract (such as a securities
lending agreement) may default on its obligations.
CALL RISK
During periods of falling interest rates, a bond issuer may "call" -- or repay
- -- its high-yielding bonds before their maturity date. The fund would then be
forced to invest the unanticipated proceeds at lower interest rates, resulting
in a decline in the fund's income.
RISKS OF MORTGAGE-RELATED SECURITIES
Falling interest rates may cause faster than expected mortgage prepayments,
which the fund would have to reinvest at lower interest rates. On the other
hand, rising interest rates could cause mortgage prepayments to slow, which
would increase the price volatility of mortgage-related securities and cause
their prices to decline.
RISKS OF DOLLAR ROLL TRANSACTIONS
The use of mortgage dollar rolls could increase the volatility of the fund's
share price. It could also diminish the fund's investment performance if the
advisor does not predict mortgage prepayments and interest rates correctly.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
6 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
INTERMEDIATE GOVERNMENT BOND FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) Class Y shares have been
offered since 2/4/94. The
since inception
[BAR CHART] performance of the index
is calculated from the
1995 month end following such
1996 date.
1997
1998 (2) An unmanaged index of
Treasury securities and
other securities issued
by the U.S. government or
its agencies or
instrumentalities, in
each case with maturities
of one to 10 years.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98 One Year Since Inception(1)
- --------------------------------------------------------------------------------
Intermediate Government Bond Fund % %
- --------------------------------------------------------------------------------
Lehman Intermediate U.S. Government
- --------------------------------------------------------------------------------
Bond Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
before any waivers during the fiscal year ended September 30, 1998.(1)
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
0.70%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
7 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
INTERMEDIATE TERM INCOME FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Intermediate Term Income Fund's objective is to provide investors with current
income to the extent consistent with preservation of capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Intermediate Term Income Fund invests in
investment grade debt securities, such as:
o U.S. GOVERNMENT SECURITIES, (SECURITIES ISSUED OR GUARANTEED BY THE U.S.
GOVERNMENT OR ITS AGENCIES OR INSTRUMENTALITIES), INCLUDING ZERO COUPON
SECURITIES
o MORTGAGE- AND ASSET-BACKED SECURITIES
o FIXED AND FLOATING RATE CORPORATE DEBT OBLIGATIONS
Debt securities in the fund will be rated investment grade at the time of
purchase or, if unrated, determined to be of comparable quality by the fund's
advisor. At least 65% of the fund's debt securities must be either U.S.
government securities or securities rated A or better by Standard & Poor's
Ratings Service or Moody's Investors Service or assigned an equivalent rating by
another nationally recognized rating agency. Unrated securities will not exceed
25% of the fund's total assets.
The fund may invest up to 15% of its total assets in foreign securities payable
in U.S. dollars.
Under normal market conditions the fund attempts to maintain a weighted average
maturity for its portfolio securities of two to seven years and an average
effective duration of two to six years.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions. It also may invest up to 25% of total assets in dollar roll
transactions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities. One measure of interest rate
risk is effective duration, explained on page 23 under "More About The Funds --
Investment Strategies."
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities, or the other party to a contract (such as a securities
lending agreement) may default on its obligations.
CALL RISK
During periods of falling interest rates, a bond issuer may "call" -- or repay
- -- its high-yielding bonds before their maturity date. The fund would then be
forced to invest the unanticipated proceeds at lower interest rates, resulting
in a decline in the fund's income.
RISKS OF MORTGAGE-RELATED SECURITIES
Falling interest rates may cause faster than expected mortgage prepayments,
which the fund would have to reinvest at lower interest rates. On the other
hand, rising interest rates could cause mortgage prepayments to slow, which
would increase the price volatility of mortgage-related securities and cause
their prices to decline.
FOREIGN SECURITY RISK
Securities of foreign issuers, even when dollar-denominated and publicly traded
in the United States, may involve risks not associated with the securities of
domestic issuers, including the risks of adverse currency fluctuations and of
political or social instability or diplomatic developments that could adversely
affect the securities.
RISKS OF DOLLAR ROLL TRANSACTIONS
The use of mortgage dollar rolls could increase the volatility of the fund's
share price. It could also diminish the fund's investment performance if the
advisor does not predict mortgage prepayments and interest rates correctly.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
8 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
INTERMEDIATE TERM INCOME FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) Class Y shares have been
offered since 2/4/94. The
[BAR CHART] since inception
performance of the index
1995 is calculated from the
1996 month end following such
1997 date.
1998
(2) An unmanaged index of
Treasury securities, other
securities issued by the
U.S. government or its
agencies or
instrumentalities, and
investment grade corporate
debt securities, in each
case with maturities of
one to 10 years.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98 One Year Since Inception(1)
- --------------------------------------------------------------------------------
Intermediate Term Income Fund % %
- --------------------------------------------------------------------------------
Lehman Intermediate Gov't/Corp
Bond Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
before any waivers during the fiscal year ended September 30, 1998.(1)
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM CONTINGENT DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees 0.25%
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
0.70%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
9 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
LIMITED TERM INCOME FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Limited Term Income Fund's objective is to provide investors with current income
while maintaining a high degree of principal stability.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Limited Term Income Fund invests in investment
grade debt securities, such as:
o MORTGAGE- AND ASSET-BACKED SECURITIES
o FIXED AND FLOATING RATE CORPORATE DEBT OBLIGATIONS
o U.S. GOVERNMENT SECURITIES, WHICH ARE SECURITIES ISSUED OR GUARANTEED BY THE
U.S. GOVERNMENT OR ITS AGENCIES OR INSTRUMENTALITIES
o COMMERCIAL PAPER
Debt securities in the fund will be rated investment grade at the time of
purchase or, if unrated, determined to be of comparable quality by the fund's
advisor. At least 65% of the fund's debt securities must be either U.S.
government securities or securities rated A or better by Standard & Poor's
Ratings Service or Moody's Investors Service or assigned an equivalent rating by
another nationally recognized rating agency. Unrated securities will not exceed
25% of the fund's total assets.
The fund may invest up to 15% of its total assets in foreign securities payable
in U.S. dollars.
Under normal market conditions the fund attempts to maintain a weighted average
maturity and an average effective duration for its portfolio securities of six
months to two years.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities. One measure of interest rate
risk is effective duration, explained on page 23 under "More About The Funds --
Investment Strategies."
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities, or the other party to a contract (such as a securities
lending agreement) may default on its obligations.
CALL RISK
During periods of falling interest rates, a bond issuer may "call" -- or repay
- -- its high-yielding bonds before their maturity date. The fund would then be
forced to invest the unanticipated proceeds at lower interest rates, resulting
in a decline in the fund's income.
RISKS OF MORTGAGE-RELATED SECURITIES
Falling interest rates may cause faster than expected mortgage prepayments,
which the fund would have to reinvest at lower interest rates. On the other
hand, rising interest rates could cause mortgage prepayments to slow, which
would increase the price volatility of mortgage-related securities and cause
their prices to decline.
FOREIGN SECURITY RISK
Securities of foreign issuers, even when dollar-denominated and publicly traded
in the United States, may involve risks not associated with the securities of
domestic issuers, including the risks of adverse currency fluctuations and of
political or social instability or diplomatic developments that could adversely
affect the securities.
RISKS OF DOLLAR ROLL TRANSACTIONS
The use of mortgage dollar rolls could increase the volatility of the fund's
share price. It could also diminish the fund's investment performance if the
advisor does not predict mortgage prepayments and interest rates correctly.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
10 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
LIMITED TERM INCOME FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) Class Y shares have been
offered since 2/4/94. The
[BAR CHART] since inception
performance of the index
1995 is calculated from the
1996 month end following such
1997 date.
1998
(2) An unmanaged index of
one-year constant maturity
Treasury bills.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98 One Year Five Years Since Inception(1)
- --------------------------------------------------------------------------------
Limited Term Income Fund % % %
- --------------------------------------------------------------------------------
Merrill Lynch 1-Year Treasury
Index(2) % % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
before any waivers during the fiscal year ended September 30, 1998.(1)
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor. See "Additional Information
-- Financial Highlights." THE ADVISOR INTENDS TO WAIVE FEES DURING THE
CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING EXPENSES DO NOT EXCEED
0.60%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
11 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Strategic Income Fund's objective is to provide investors with a high level of
current income.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Strategic Income Fund invests primarily in a
combination of:
o SECURITIES ISSUED OR GUARANTEED BY THE U.S. GOVERNMENT OR ITS AGENCIES OR
INSTRUMENTALITIES AND INVESTMENT GRADE DEBT OBLIGATIONS ISSUED BY DOMESTIC
ISSUERS,
o HIGH-YIELD (NON-INVESTMENT GRADE) DEBT OBLIGATIONS ISSUED BY DOMESTIC
ISSUERS AND U.S. DOLLAR DENOMINATED HIGH-YIELD DEBT OBLIGATIONS ISSUED BY
FOREIGN ISSUERS, AND
o INVESTMENT GRADE AND NON-U.S. DOLLAR DENOMINATED HIGH-YIELD DEBT OBLIGATIONS
ISSUED BY FOREIGN GOVERNMENTS AND OTHER FOREIGN ISSUERS.
Normally, the fund's assets will be invested in each of these three sectors,
with no more than 50% invested in any one sector. However, the fund may from
time to time invest up to 100% of its total assets in any one sector if the
advisor believes it will help the fund achieve its objective without undue risk
to principal.
The fund's investments may include securities which do not pay interest
currently, such as zero coupon securities and delayed interest securities. It
also may invest in payment-in-kind bonds, where interest is paid in other
securities rather than cash.
In addition, the fund may invest in preferred stock, convertible securities and
equity securities, including common stock and warrants. These investments may be
denominated in U.S. dollars or foreign currencies.
There is no minimum rating requirement for securities in which the fund may
invest. In addition, there is no limitation on the average maturity or average
effective duration of securities held by the fund.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions. It also may invest up to 25% of total assets in dollar roll
transactions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
RISKS OF HIGH-YIELD SECURITIES
A significant portion of the fund's portfolio may consist of lower-rated debt
obligations, which are commonly called "high-yield" securities or "junk bonds."
High-yield securities generally have more volatile prices and carry more risk to
principal than investment grade securities.
RISKS OF FOREIGN SECURITIES
Investing in foreign securities involves risks not typically associated with
U.S. investing, including the risk that the fund may experience a decline in net
asset value resulting from changes in exchange rates between the United States
dollar and foreign currencies. This fund may invest in emerging markets, where
the risks of foreign investing are higher.
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities.
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities, or the other party to a contract (such as a securities
lending agreement) may default on its obligations.
CALL RISK
During periods of falling interest rates, a bond issuer may "call" -- or repay
- -- its high-yielding bonds before their maturity date. The fund would then be
forced to invest the unanticipated proceeds at lower interest rates, resulting
in a decline in the fund's income.
MARKET RISK
The fund's investments may include common stock and warrants to purchase, or
securities convertible into, common stocks. Stocks may decline significantly in
price over short or extended periods of time. Price changes may occur in the
market as a whole, or they may occur in only a particular company, industry or
sector of the market.
RISKS OF MORTGAGE-RELATED SECURITIES
The fund's investments in debt obligations may include mortgage-related
securities. Falling interest rates may cause faster than expected mortgage
prepayments, which the fund would have to reinvest at lower interest rates. On
the other hand, rising interest rates could cause mortgage prepayments to slow,
which would increase the price volatility of mortgage-related securities and
cause their prices to decline.
RISKS OF DOLLAR ROLL TRANSACTIONS
The use of mortgage dollar rolls could increase the volatility of the fund's
share price. It could also diminish the fund's investment performance if the
advisor does not predict mortgage prepayments and interest rates correctly.
12 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FUND SUMMARIES
STRATEGIC INCOME FUND (CONTINUED)
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price.
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses(1) %
TOTAL(2) %
- --------------------------------------------------------------------------------
(1) Other expenses are based on estimated amounts for the current fiscal year.
(2) THE ADVISOR INTENDS TO WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT
TOTAL FUND OPERATING EXPENSES DO NOT EXCEED 0.90%. FEE WAIVERS MAY BE
DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
13 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
POLICIES & SERVICES
BUYING AND SELLING SHARES
Class Y shares are offered through banks and other financial institutions that
have entered into sales agreements with the funds' distributor. Class Y shares
are available to these financial institutions for the investment of their own
funds. Class Y shares also are available to certain accounts for which the
financial institution acts in a fiduciary, agency or custodial capacity, such as
certain trust accounts and investment advisory accounts. To find out whether you
may purchase class Y shares, contact your financial institution.
- --------------------------------------------------------------------------------
CALCULATING YOUR SHARE PRICE
Your purchase price will be equal to the fund's net asset value (NAV) per share,
which is generally calculated as of the close of regular trading on the New York
Stock Exchange (usually 3 p.m. Central time) every day the exchange is open.
A fund's NAV is equal to the market value of its investments and other assets,
less any liabilities, divided by the number of fund shares. If market prices are
not readily available for an investment or if the advisor believes they are
unreliable, fair value prices may be determined in good faith using methods
approved by the funds' board of directors.
Strategic Income Fund may hold portfolio securities that trade on weekends or
other days when the fund does not price its shares. Therefore, the net asset
value of Strategic Income Fund's shares may change on days when shareholders
will not be able to purchase or redeem their shares.
- --------------------------------------------------------------------------------
HOW TO BUY AND SELL SHARES
You may purchase or sell shares by calling your financial institution.
When purchasing shares, payment must be made by wire transfer, which can be
arranged by your financial institution. Because purchases must be paid for by
wire transfer, you can purchase shares only on days when both the New York Stock
Exchange and federally chartered banks are open. You may sell your shares on any
day when the New York Stock Exchange is open.
Purchase orders and redemption requests must be received by your financial
institution by the time specified by the institution to be assured same day
processing. In order for shares to be purchased at that day's price, the funds
must receive your purchase order by 3:00 p.m. Central time and the funds'
custodian must receive federal funds before the close of business. In order for
shares to be sold at that day's price, the funds must receive your redemption
request by 3:00 p.m. Central time. It is the responsibility of your financial
institution to promptly transmit orders to the funds.
If the funds receive your redemption request by 3:00 p.m. Central time, payment
of your redemption proceeds will ordinarily be made by wire on the next business
day. It is possible, however, that payment could be delayed by up to seven days.
- --------------------------------------------------------------------------------
HOW TO EXCHANGE SHARES
If your investment goals or your financial needs change, you may exchange your
shares for class Y shares of another First American fund. Exchange will be made
at the net asset value per share of each fund at the time of the exchange. There
is no fee to exchange shares. If you are no longer eligible to hold class Y
shares, for example, if you decide to discontinue your fiduciary, agency or
custodian account, you may exchange your shares for class A shares at net asset
value. Class A shares have higher expenses than class Y shares.
To exchange your shares, call your financial institution. In order for your
shares to be exchanged the same day, you must call your financial institution by
the time specified by the institution and your exchange order must be received
by the funds by 3:00 p.m. Central time. It is the responsibility of your
financial institution to promptly transmit your exchange order to the funds.
Before exchanging into any fund, be sure to read its prospectus carefully. A
fund may change or cancel its exchange policies at any time. You will be
notified of any changes. The funds have the right to limit exchanges to four
times per year.
14 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT
- --------------------------------------------------------------------------------
STAYING INFORMED
SHAREHOLDER REPORTS
Shareholder reports are mailed twice a year, in November and May. They include
financial statements, performance information, a message from your portfolio
managers, and, on an annual basis, the auditors' report.
In an attempt to reduce shareholder costs and help eliminate duplication, the
funds will try to limit their mailings to one report for each address that lists
one or more shareholders with the same last name. If you would like additional
copies, please call 1-800-637-2548.
STATEMENTS AND CONFIRMATIONS
Statements summarizing activity in your account are mailed at least quarterly.
Confirms are mailed following each purchase or sale of fund shares.
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from a fund's net investment income are declared and paid monthly. Any
capital gains are distributed at least once each year.
On the ex-dividend date for a distribution, a fund's share price is reduced by
the amount of the distribution. If you buy shares just before the ex-dividend
date, in effect, you "buy the dividend." You will pay the full price for the
shares and then receive a portion of that price back as a taxable distribution.
Dividend and capital gain distributions will be reinvested in additional shares
of the fund paying the distribution, unless you request cash payments on your
new account form or by writing to the fund. Shares will be priced at the NAV
computed on the ex-dividend date.
Strategic Income Fund may realize foreign currency losses that will reduce the
amount of ordinary income that the fund has available to distribute to
shareholders. As a result, some of the distributions made by the fund may be
characterized as a return of capital rather than as taxable dividends. Strategic
Income Fund will report to shareholders after the close of the calendar year the
portion of distributions made during the year that constituted a return of
capital and the portion that constituted taxable dividends.
- --------------------------------------------------------------------------------
TAXES
Some of the tax consequences of investing in the funds are discussed below. More
information about taxes is in the Statement of Additional Information. However,
because everyone's tax situation is unique, always consult your tax professional
about federal, state and local tax consequences.
TAXES ON DISTRIBUTIONS
Each fund pays its shareholders dividends from its net investment income and any
net capital gains that it has realized. For most investors, fund dividends and
distributions are considered taxable whether they are reinvested or taken in
cash (unless your investment is in an IRA or other tax-advantaged account).
Dividends from a fund's net investment income are taxable as ordinary income.
Distributions of a fund's long-term capital gains are taxable as long-term
gains, regardless of how long you have held your shares. The funds expect that,
as a result of their investment objectives and strategies, their distributions
will consist primarily of ordinary income.
TAXES ON TRANSACTIONS
The sale or exchange of fund shares will be a taxable event for you and may
result in a capital gain or loss. The gain or loss will be considered long-term
if you have held your shares for more than one year. A gain or loss on shares
held for one year or less is considered short-term and is taxed at the same
rates as ordinary income.
15 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
MANAGEMENT
INVESTMENT ADVISOR
FIRST AMERICAN ASSET MANAGEMENT
601 SECOND AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55402
U.S. Bank National Association (U.S. Bank), acting through its First American
Asset Management division, is the funds' investment advisor. First American
Asset Management provides investment management services to individuals and
institutions, including corporations, foundations, pensions and retirement
plans. As of December 31, 1998, it had more than $ in assets under management,
including investment company assets of approximately $ . As investment advisor,
First American Asset Management manages the funds' business and investment
activities, subject to the authority of the board of directors. Each fund pays
the investment advisor a monthly fee for providing investment advisory services.
During their most recent fiscal years, the funds paid the following investment
advisory fees to First American Asset Management:
ADVISORY FEE
AS A % OF
AVERAGE DAILY
NET ASSETS
- --------------------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE
SECURITIES FUND* %
FIXED INCOME FUND %
INTERMEDIATE GOVERNMENT
BOND FUND %
INTERMEDIATE TERM
INCOME FUND %
LIMITED TERM INCOME FUND %
STRATEGIC INCOME FUND* %
- --------------------------------------------------------------------------------
* Adjustable Rate Mortgage Securities Fund and Strategic Income Fund have not
operated for a full fiscal year. Fees in the table are contractual fee
rates.
SUB-ADVISORS
FEDERATED INVESTMENT COUNSELING
1001 LIBERTY AVENUE
PITTSBURGH, PENNSYLVANIA 15222-3779
FEDERATED GLOBAL RESEARCH CORP.
175 WATER STREET
NEW YORK, NEW YORK 10038-4964
The above mentioned subsidiaries of Federated Investors are sub-advisors to
Strategic Income Fund. The sub-advisors have been retained by the fund's
investment advisor and are paid a portion of the advisory fee.
Federated Investment Counseling manages Strategic Income Fund's investments in
domestic high-yield debt obligations and U.S. dollar denominated foreign
corporate debt obligations. Federated Global Research Corp. manages the fund's
investments in investment grade and high-yield foreign government and foreign
corporate debt obligations. First American Asset Management manages the fund's
investments in U.S. government and investment grade domestic debt obligations
and determines how the fund's assets will be allocated among the three sectors
in which the fund invests.
The sub-advisors and other subsidiaries of Federated Investors serve as
investment advisors to a number of investment companies and private accounts.
CUSTODIAN
U.S. BANK NATIONAL ASSOCIATION
U.S. BANK CENTER
180 EAST FIFTH STREET
ST. PAUL, MINNESOTA 55101
ADMINISTRATOR
SEI INVESTMENTS MANAGEMENT CORPORATION
OAKS, PENNSYLVANIA 19456
DISTRIBUTOR
SEI INVESTMENTS DISTRIBUTION CO.
OAKS, PENNSYLVANIA 19456
TRANSFER AGENT
DST SYSTEMS, INC.
330 WEST NINTH STREET
KANSAS CITY, MISSOURI 64105
ADDITIONAL COMPENSATION
In addition to receiving compensation for acting as the funds' investment
advisor as described above, U.S. Bank and its affiliates receive compensation in
connection with the following:
CUSTODY SERVICES. As compensation for acting as the funds' custodian, U.S. Bank
is paid monthly fees equal, on an annual basis, to 0.03% of a fund's average
daily net assets. In addition, U.S. Bank is reimbursed for its out-of-pocket
expenses incurred while providing custody services to the funds.
SUB-ADMINISTRATION SERVICES. U.S. Bank assists the administrator and provides
sub-administration services to the funds. For providing these services, U.S.
Bank is compensated by the funds' administrator at an annual rate of up to
0.05% of each fund's average daily net assets.
SECURITIES LENDING SERVICES. In connection with lending their portfolio
securities, the funds pay administrative and custodial fees to U.S. Bank which
are equal to 40% of the funds' income from these securities lending
transactions.
16 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
MANAGEMENT (CONTINUED)
BROKERAGE TRANSACTIONS. The funds purchase most of their portfolio securities
directly from the issuer or from an underwriter or market maker, and not from a
broker acting as agent. However, the funds may from time to time use brokers
when buying portfolio securities. The funds' investment advisor may place
trades through its affiliates, U.S. Bancorp Investments, Inc. and U.S. Bancorp
Piper Jaffray Inc., which will earn commissions on such transactions.
ERISA ACCOUNTS. U.S. Bank 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.
PORTFOLIO MANAGEMENT
Each fund's investments are managed by a team of persons associated with First
American Asset Management or, in the case of Strategic Income Fund, one of the
sub-advisors.
17 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS
- --------------------------------------------------------------------------------
OBJECTIVES
The funds' objectives, which are described in the "Fund Summaries" section, may
be changed without shareholder approval. If a fund's objectives change, you will
be notified at least 30 days in advance. Please remember: There is no guarantee
that any fund will achieve its objectives.
- --------------------------------------------------------------------------------
INVESTMENT STRATEGIES
The funds' main investment strategies are discussed in the "Fund Summaries"
section. These are the strategies that the funds' investment advisor believes
are most likely to be important in trying to achieve the funds' objectives. You
should be aware that each fund may also use strategies and invest in securities
that are not described in this prospectus, but that are described in the
Statement of Additional Information (SAI). For a copy of the SAI, call Investor
Services at 1-800-637-2548.
INVESTMENT APPROACH
Except as set forth below, fund managers employ a "top-down" approach in
selecting securities for the funds. First, they determine their economic outlook
and the direction in which inflation and interest rates are expected to move.
Then they choose certain sectors or industries within the overall market. Last,
they select individual securities within those sectors for the funds. Fund
managers also analyze expected changes to the yield curve under multiple market
conditions to help define maturity and duration selection. For the high-yield
and foreign security components of Strategic Income Fund, fund managers employ a
"bottom-up" approach. With this type of approach, managers do a
company-by-company analysis, rather than focusing on a specific economic sector
or industry.
EFFECTIVE DURATION
Each fund, other than Strategic Income Fund, attempts to maintain the effective
duration of its portfolio securities within a specified range. Effective
duration, one measure of interest rate risk, measures how much the value of a
security is expected to change with a given change in interest rates. The longer
a security's effective duration, the more sensitive its price to changes in
interest rates. For example, if interest rates were to increase by one
percentage point, the market value of a bond with an effective duration of five
years would decrease by 5%, with all other factors being constant. However, all
other factors are rarely constant. Effective duration is based on assumptions
and subject to a number of limitations. It is most useful when interest rate
changes are small, rapid and occur equally in short-term and long-term
securities. In addition, it is difficult to calculate precisely for bonds with
prepayment options, such as mortgage-related securities, because the calculation
requires assumptions about prepayment rates. For these reasons, the effective
durations of funds which invest a significant portion of their assets in
mortgage-backed securities can be greatly affected by changes in interest rates.
TEMPORARY INVESTMENTS
In an attempt to respond to adverse market, economic, political or other
conditions, each fund may invest without limit in cash and in U.S.
dollar-denominated high-quality money market instruments and other short-term
securities, including money market funds advised by the funds' advisor. These
investments may result in a lower yield than would be available from investments
with a lower quality or longer term and may prevent a fund from achieving its
investment objectives.
PORTFOLIO TURNOVER
Fund managers may trade securities frequently, resulting, from time to time, in
an annual portfolio turnover rate of over 100%. Trading of securities may
produce capital gains, which are taxable to shareholders when distributed.
Active trading may also increase the amount of commissions or mark-ups to
broker-dealers that the fund pays when it buys and sells securities. The
"Financial Highlights" section of this prospectus shows each fund's historical
portfolio turnover rate (except for Strategic Income Fund, which just began
operations).
- --------------------------------------------------------------------------------
RISKS
The main risks of investing in the funds are summarized in the "Fund Summaries"
section. More information about fund risks is presented below.
CALL RISK
Many corporate bonds may be redeemed at the option of the issuer, or "called,"
before their stated maturity date. In general, an issuer will call its bonds if
they can be refinanced by issuing new bonds which bear a lower interest rate.
The funds are subject to the possibility that during periods of falling interest
rates, a bond issuer will call its high-yielding bonds. A fund would then be
forced to invest the unanticipated proceeds at lower interest rates, resulting
in a decline in the fund's income.
CREDIT RISK
Each fund is subject to the risk that the issuers of debt securities held by the
fund will not make payments on the securities, or that the other party to a
contract (such as a securities lending agreement or repurchase agreement) will
default on its obligations. There is also the risk that an issuer could suffer
adverse changes in financial condition that could lower the credit quality of a
security. This could lead to greater volatility in the price of the security and
in shares of the fund. Also, a change in the credit quality rating of a bond
could affect the bond's liquidity and make it more difficult for the fund to
sell. When a fund purchases unrated securities, it will depend on the advisor's
analysis of credit risk more heavily than usual.
18 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS (CONTINUED)
Each fund other than Strategic Income Fund attempts to minimize credit risk by
investing in securities considered at least investment grade at the time of
purchase. However, all of these securities, especially those in the lower
investment grade rating categories, have credit risk. In adverse economic or
other circumstances, issuers of these lower rated securities are more likely to
have difficulty making principal and interest payments than issuers of higher
rated securities.
EXTENSION RISK
Each fund may invest significantly in mortgage-related securities. These
securities are subject to extension risk, which is the risk that rising interest
rates could cause homeowners to prepay their mortgages more slowly than
expected, resulting in slower prepayments of the securities. This would, in
effect, convert a short- or medium-duration mortgage-related security into a
longer-duration security, increasing its sensitivity to interest rate changes
and causing its price to decline.
PREPAYMENT RISK
Mortgage-related securities also are subject to prepayment risk, which is the
risk that falling interest rates could cause prepayments of the securities to
occur more quickly than expected. This occurs because, as interest rates fall,
more homeowners refinance the mortgages underlying mortgage-related securities.
The fund must reinvest the prepayments at a time when interest rates on new
mortgage investments are falling, reducing the income of the fund. In addition,
when interest rates fall, prices on mortgage-related securities may not rise as
much as for other types of comparable debt securities because investors may
anticipate an increase in mortgage prepayments.
INTEREST RATE RISK
Debt securities in the funds will fluctuate in value with changes in interest
rates. In general, debt securities will increase in value when interest rates
fall and decrease in value when interest rates rise. Longer-term debt securities
are generally more sensitive to interest rate changes. ARMS are generally less
sensitive to interest rate changes because their interest rates move with market
rates. Securities which do not pay interest on a current basis, such as zero
coupon securities and delayed interest securities, may be highly volatile as
interest rates rise or fall. Payment-in-kind bonds, which pay interest in other
securities rather than in cash, also may be highly volatile.
RISK OF ACTIVE MANAGEMENT
Each fund is actively managed and its performance therefore will reflect in part
the advisor's ability to make investment decisions which are suited to achieving
the fund's investment objectives. Due to their active management, the funds
could underperform other mutual funds with similar investment objectives.
RISKS OF DOLLAR ROLL TRANSACTIONS
In a dollar roll transaction, a fund sells mortgage-related securities for
delivery in the current month while contracting with the same party to
repurchase similar securities at a future date. Because the fund gives up the
right to receive principal and interest paid on the securities sold, a mortgage
dollar roll transaction will diminish the investment performance of a fund
unless the difference between the price received for the securities sold and the
price to be paid for the securities to be purchased in the future, plus any fee
income received, exceeds any income, principal payments and appreciation on the
securities sold as part of the mortgage dollar roll. Whether mortgage dollar
rolls will benefit a fund may depend upon the advisor's ability to predict
mortgage prepayments and interest rates. In addition, the use of mortgage dollar
rolls by a fund increases the amount of the fund's assets that are subject to
market risk, which could increase the volatility of the price of the fund's
shares.
RISKS OF SECURITIES LENDING
When a fund loans its portfolio securities, it will receive collateral equal to
at least 100% of the value of the loaned securities. Nevertheless, the fund
risks a delay in the recovery of the loaned securities, or even the loss of
rights in the collateral deposited by the borrower if the borrower should fail
financially. To reduce these risks, the funds enter into loan arrangements only
with institutions which the funds' advisor has determined are creditworthy under
guidelines established by the funds' board of directors.
YEAR 2000 ISSUES
Like other mutual funds and business and financial organizations, the funds
could be adversely affected if the computer systems used by the funds' advisor,
sub-advisors, other service providers and entities with computer systems that
are linked to fund records do not properly process and calculate date-related
information from and after January 1, 2000. While year 2000-related computer
problems could have a negative effect on the funds, the funds' administrator has
undertaken a program designed to assess and monitor the steps being taken by the
funds' service providers to address year 2000 issues. This program includes
seeking assurances from service providers that their systems are or will be year
2000 compliant and reviewing service providers' periodic reports to monitor
their status concerning their year 2000 readiness and compliance.
19 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS (CONTINUED)
The administrator and the advisor also report regularly to the funds' board of
directors concerning their own and other service providers' progress toward year
2000 readiness. Although these reports indicate that service providers are or
expect to be year 2000 compliant, there can be no assurance that this will be
the case in all instances or that year 2000 difficulties experienced by others
in the financial services industry will not impact the funds. In addition, there
can be no assurance that year 2000 difficulties will not have an adverse effect
on the funds' investments or on global markets or economies, generally. The
funds are not bearing any of the expenses incurred by their service providers in
preparing for the year 2000.
- --------------------------------------------------------------------------------
ADDITIONAL RISKS OF STRATEGIC INCOME FUND
RISKS OF FOREIGN SECURITIES
Investing in foreign securities involves risks not typically associated with
U.S. investing. Therefore, the Strategic Income Fund may experience a decline in
net asset value resulting from changes in exchange rates between the United
States dollar and foreign currencies. Other risks of foreign investing include
limited liquidity and volatile prices of non-U.S. securities, limited
availability of information regarding non-U.S. companies, investment and
repatriation restrictions, and foreign taxation. The risks of foreign investing
are higher in emerging markets. Investing in emerging markets generally involves
exposure to economic structures that are less diverse and mature and political
systems that are less stable than those of developed countries.
RISKS OF HIGH YIELD SECURITIES
A significant portion of Strategic Income Fund's portfolio may consist of
lower-rated corporate debt obligations, which are commonly referred to as "high
yield" securities or "junk bonds." Although these securities usually offer
higher yields than investment grade securities, they also involve more risk.
High yield bonds may be more susceptible to real or perceived adverse economic
conditions than investment grade bonds. In addition, the secondary trading
market may be less liquid. High yield securities generally have more volatile
prices and carry more risk to principal than investment grade securities.
20 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about the class Y shares
of each fund. This information is intended to help you understand each fund's
financial performance for the past five years or, if shorter, the period of the
fund's class Y share operations. Some of this information reflects financial
results for a single fund share. Total returns in the tables represent the rate
that you would have earned or lost on an investment in a fund, assuming you
reinvested all of your dividends and distributions.
This information has been audited by KPMG Peat Marwick, LLP, independent
auditors, whose report, along with the funds' annual report, which is available
upon request.
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
FISCAL
PERIOD ENDED
SEPTEMBER 30,
1998(1)
- --------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $
---------
Investment Operations:
Net Investment Income
Net Gains (Losses) on Securities
(both realized and unrealized)
---------
Total From Investment Operations
---------
Less Distributions:
Dividends (from net investment income)
---------
Total Distributions
---------
Net asset value, end of period $
=========
Total Return %
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $
Ratio of Expenses to Average Net Assets %
Ratio of Net Income to Average Net Assets %
Ratio of Expenses to Average Net Assets (excluding waivers) %
Ratio of Net Income to Average Net Assets (excluding waivers) %
Portfolio Turnover Rate (excluding short-term securities) %
- --------------------------------------------------------------------------------
(1) Class Y shares have been offered since July 31, 1998. All ratios for the
period have been annualized.
21 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
FIXED INCOME FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994(1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 10.76 $ 10.97 $ 10.37 $ 11.11
-------- -------- -------- -------- -------
Investment Operations:
Net Investment Income 0.62 0.63 0.66 0.38
Net Gains (Losses) on Securities
(both realized and unrealized) 0.27 (0.11) 0.62 (0.74)
-------- -------- -------- -------- -------
Total From Investment Operations 0.89 0.52 1.28 (0.36)
-------- -------- -------- -------- -------
Less Distributions:
Dividends (from net investment income) (0.62) (0.63) (0.65) (0.38)
Distributions (from capital gains) (0.07) (0.10) (0.03) --
-------- -------- -------- -------- -------
Total Distributions (0.69) (0.73) (0.68) (0.38)
-------- -------- -------- -------- -------
Net Asset Value, End of Period $ $ 10.96 $ 10.76 $ 10.97 $ 10.37
======== ======== ======== ======== =======
Total Return % 8.54% 4.90% 12.86% (3.23)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $705,719 $391,211 $289,816 $90,187
Ratio of Expenses to Average Net Assets % 0.70% 0.70% 0.70% 0.61%
Ratio of Net Income to Average Net Assets % 5.71% 5.81% 6.28% 5.53%
Ratio of Expenses to Average Net Assets (excluding waivers) % 0.88% 0.87% 0.94% 0.92%
Ratio of Net Income to Average Net Assets (excluding waivers) % % % % %
Portfolio Turnover Rate % 130% 108% 106% 142%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class Y shares have been offered since February 4, 1994. All ratios for the
period have been annualized.
INTERMEDIATE GOVERNMENT BOND FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994(1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 9.18 $ 9.29 $ 8.98 $ 9.41
-------- -------- -------- -------- -------
Investment Operations:
Net Investment Income 0.54 0.54 0.54 0.27
Net Gains (Losses) on Securities
(both realized and unrealized) 0.09 (0.11) 0.31 (0.43)
-------- -------- -------- -------- -------
Total From Investment Operations 0.63 0.43 0.85 (0.16)
-------- -------- -------- -------- -------
Less Distributions:
Dividends (from net investment income) (0.54) (0.54) (0.54) (0.27)
Distributions (from capital gains) -- -- -- --
-------- -------- -------- -------- -------
Total Distributions (0.54) (0.54) (0.54) (0.27)
-------- -------- -------- -------- -------
Net Asset Value, End of Period $ $ 9.27 $ 9.18 $ 9.29 $ 8.98
======== ======== ======== ======== =======
Total Return % 7.07% 4.74% 9.82% (1.66)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 18,889 $140,230 $100,168 $27,776
Ratio of Expenses to Average Net Assets % 0.70% 0.70% 0.70% 0.36%
Ratio of Net Income to Average Net Assets % 5.88% 5.85% 6.13% 5.32%
Ratio of Expenses to Average Net Assets (excluding waivers) % 0.87% 0.85% 0.97% 1.45%
Ratio of Net Income to Average Net Assets (excluding waivers) % % % % %
Portfolio Turnover Rate % 22% 29% 17% 74%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class Y shares have been offered since February 4, 1994. All ratios for the
period have been annualized.
22 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
INTERMEDIATE TERM INCOME FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994(1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 9.93 $ 9.94 $ 9.55 $ 10.01
-------- -------- -------- -------- -------
Investment Operations:
Net Investment Income 0.55 0.55 0.58 0.31
Net Gains (Losses) on Securities
(both realized and unrealized) 0.13 -- 0.39 (0.46)
-------- -------- -------- -------- -------
Total From Investment Operations 0.68 0.55 0.97 (0.15)
-------- -------- -------- -------- -------
Less Distributions:
Dividends (from net investment income) (0.56) (0.55) (0.58) (0.31)
Distributions (from capital gains) (0.07) (0.01) -- --
-------- -------- -------- -------- -------
Total Distributions (0.63) (0.56) (0.58) (0.31)
-------- -------- -------- -------- -------
Net Asset Value, End of Period $ $ 9.98 $ 9.93 $ 9.94 $ 9.55
======== ======== ======== ======== =======
Total Return % 6.98% 5.63% 10.51% (1.48)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $324,250 $ 98,702 $ 88,375 $68,445
Ratio of Expenses to Average Net Assets % 0.70% 0.70% 0.70% 0.58%
Ratio of Net Income to Average Net Assets % 5.51% 5.45% 5.94% 4.81%
Ratio of Expenses to Average Net Assets (excluding waivers) % 0.92% 0.88% 0.94% 1.07%
Ratio of Net Income to Average Net Assets (excluding waivers) % % % % %
Portfolio Turnover Rate % 165% 161% 69% 177%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class Y shares have been offered since February 4, 1994. All ratios for the
period have been annualized.
LIMITED TERM INCOME FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994(1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 9.91 $ 9.92 $ 9.85 $ 10.02
-------- -------- -------- -------- -------
Investment Operations:
Net Investment Income 0.56 0.58 0.56 0.29
Net Gains (Losses) on Securities
(both realized and unrealized) 0.03 (0.01) 0.07 (0.17)
-------- -------- -------- -------- -------
Total From Investment Operations 0.59 0.57 0.63 0.12
-------- -------- -------- -------- -------
Less Distributions:
Dividends (from net investment income) (0.56) (0.58) (0.56) (0.29)
Distributions (from capital gains) -- -- -- --
-------- -------- -------- -------- -------
Total Distributions (0.56) (0.58) (0.56) (0.29)
-------- -------- -------- -------- -------
Net Asset Value, End of Period $ $ 9.94 $ 9.91 $ 9.92 $ 9.85
======== ======== ======== ======== =======
Total Return 6.09% 5.93% 6.57% 1.24%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $184,368 $ 93,588 $111,439 $70,266
Ratio of Expenses to Average Net Assets % 0.60% 0.60% 0.60% 0.60%
Ratio of Net Income to Average Net Assets % 5.60% 5.80% 5.67% 4.40%
Ratio of Expenses to Average Net Assets (excluding waivers) % 0.90% 0.84% 0.97% 1.03%
Ratio of Net Income to Average Net Assets (excluding waivers) % % % % %
Portfolio Turnover Rate % 147% 61% 120% 48%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class Y shares have been offered since February 4, 1994. All ratios for the
period have been annualized.
23 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
STRATEGIC INCOME FUND
Period ended
September 30,
1998(1)
- --------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $
Investment Operations:
Net Investment Income
Net Gains (Losses) on Securities
(both realized and unrealized)
Total From Investment Operations
Less Distributions:
Dividends (from net investment income)
Distributions (from capital gains)
Tax Return of Capital
Total Distributions
Net Asset Value, End of Period $
Total Return
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000)
Ratio of Expenses to Average Net Assets
Ratio of Net Income to Average Net Assets
Ratios of Expenses to Average Net Assets (excluding waivers)
Ratio of Net Income to Average Net Assets (excluding waivers)
Portfolio Turnover Rate %
- --------------------------------------------------------------------------------
(1) The fund commenced operations on July 27, 1998.
24 PROSPECTUS - FIRST AMERICAN BOND FUNDS
<PAGE>
FOR MORE INFORMATION
More information about the funds is available in the funds' Statement of
Additional Information and annual and semiannual reports.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more details about the funds and their policies. A current SAI
is on file with the Securities and Exchange Commission (SEC) and is incorporated
into this prospectus by reference (which means that it is legally considered
part of this prospectus).
ANNUAL AND SEMIANNUAL REPORTS
Additional information about the funds' investments is available in the funds'
annual and semiannual reports to shareholders. In the funds' annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the funds' performance during their last fiscal year.
You can obtain a free copy of the funds' SAI and/or free copies of the funds'
most recent annual or semiannual reports by calling Investor Services at
1-800-637-2548. The material you request will be sent by first-class mail or
other means designed to ensure equally prompt delivery, within three business
days of receipt of the request.
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC, or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. For more information, call
1-800-SEC-0330.
Information about the funds is also available on the Internet. Text-only
versions of fund documents can be viewed online or down-loaded from the SEC's
Internet site at http://www.sec.gov.
SEC file number: 811-05309
FAIF-1001 (9/1998)
<PAGE>
FEBRUARY 1, 1999
TAX FREE BOND FUNDS
CLASS A AND CLASS C SHARES
CALIFORNIA INTERMEDIATE TAX FREE FUND
COLORADO INTERMEDIATE TAX FREE FUND
INTERMEDIATE TAX FREE FUND
MINNESOTA INTERMEDIATE TAX FREE FUND
MINNESOTA TAX FREE FUND
OREGON INTERMEDIATE TAX FREE FUND
TAX FREE FUND
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of these funds, or determined if the
information in this prospectus is accurate or complete. Any statement to the
contrary is a criminal offense.
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(R)
<PAGE>
TABLE OF CONTENTS
FUND SUMMARIES
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California Intermediate Tax Free Fund 2
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Colorado Intermediate Tax Free Fund 4
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Intermediate Tax Free Fund 6
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Minnesota Intermediate Tax Fee Fund 8
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Minnesota Tax Free Fund 10
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Oregon Intermediate Tax Free Fund 12
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Tax Free Fund 14
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POLICIES & SERVICES
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Buying Shares 16
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Selling Shares 19
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Managing Your Investment 20
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ADDITIONAL INFORMATION
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Management 22
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More About The Funds 23
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Financial Highlights 25
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FOR MORE INFORMATION Back Cover
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<PAGE>
FUND SUMMARIES
INTRODUCTION
This section of the prospectus describes the objectives of the First American
Tax Free Bond Funds, summarizes the main investment strategies used by each fund
in trying to achieve its objectives, and highlights the risks involved with
these strategies. It also provides you with information about the performance,
fees and expenses of the funds.
AN INVESTMENT IN THE FUNDS IS NOT A DEPOSIT OF U.S. BANK NATIONAL ASSOCIATION
AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
1 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
CALIFORNIA INTERMEDIATE TAX FREE FUND
- --------------------------------------------------------------------------------
OBJECTIVE
California Intermediate Tax Free Fund has an objective of providing current
income that is exempt from both federal income tax and California state income
tax to the extent consistent with preservation of capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, California Intermediate Tax Free Fund invests at
least 80% of its net assets in municipal securities that pay interest that is
exempt from federal income tax, including the federal alternative minimum tax,
and from California income tax. The fund normally may invest up to 20% of its
net assets in taxable obligations, including obligations subject to the federal
alternative minimum tax.
The fund may invest in "general obligation" bonds, which are backed by the full
faith, credit and taxing power of the issuer, and in "revenue" bonds, which are
payable only from the revenues generated by a specific project or from another
specific revenue source. The fund may also purchase participation interests in
municipal leases. The fund's municipal security investments may include zero
coupon securities, which pay no cash income to their holders until they mature.
Up to 10% of the fund's total assets may be invested in inverse floating rate
municipal securities.
The fund only invests in securities that, at the time of purchase, are either
rated investment grade or are unrated and determined to be of comparable quality
by the fund's advisor. Long-term securities must be rated BBB or better by
Standard & Poor's Corporation, Baa or better by Moody's Investors Service or
comparably rated by another national rating organization. Municipal notes must
be rated SP-1 or better by Standard & Poor's, MIG/VMIG-1 by Moody's or
comparably rated by another national rating organization. Unrated securities
will not exceed 25% of the fund's total assets.
The fund will attempt to maintain the weighted average maturity of its portfolio
securities at 3 to 10 years under normal market conditions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities.
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities. The revenue bonds and municipal lease obligations in which
the fund invests may entail greater credit risk than the fund's investments in
general obligation bonds.
CALL RISK
Some municipal securities held by the fund may be redeemed by the issuer, or
"called," prior to their stated maturity dates. If a security is redeemed during
a time of declining interest rates, the fund may be unable to reinvest in
securities providing as high a level of income.
POLITICAL AND ECONOMIC RISK
Because the fund invests primarily in municipal securities issued by the state
of California and its political subdivisions, the fund will be particularly
affected by political and economic conditions and developments in that state.
See the Statement of Additional Information for details. The value of municipal
securities owned by the fund also may be adversely affected by future changes in
federal or state income tax laws, including rate reductions or the imposition of
a flat tax.
RISKS OF NON-DIVERSIFICATION
The fund is non-diversified. This means that it may invest a larger portion of
its assets in a limited number of issuers than a diversified fund. Because a
relatively high percentage of the fund's assets may be invested in the
securities of a limited number of issuers, the fund may be more susceptible to
any single economic, political or regulatory occurrence than a diversified fund.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart is intended to show you how performance of the fund's shares has
varied from year to year. However, because the fund did not commence operations
until 1997, only one calendar year of information is available. Sales charges
are not reflected in the chart; if they had been, returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
2 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
CALIFORNIA INTERMEDIATE TAX FREE FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) An unmanaged index
comprised of fixed rate,
[BAR CHART] investment grade
tax-exempt bonds with
maturities between six and
1998 eight years.
(2) The since inception
performance for the index
is calculated from the
month end following the
fund's inception.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception(2)
AS OF 12/31/98 One Year (8/8/97)
- --------------------------------------------------------------------------------
California Intermediate Tax Free Fund % %
- --------------------------------------------------------------------------------
Lehman Brothers 7-Year Municipal Bond Index(1) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show expenses before
any waivers during the fiscal year ended September 30, 1998.(1)
CLASS A
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)(2)
AS A % OF OFFERING PRICE 3.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees 0.25%
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor and the distributor. See
"Additional Information -- Financial Highlights." THE ADVISOR INTENDS TO
WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING
EXPENSES DO NOT EXCEED 0.70%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. Investments of $1
million or more on which no front-end sales charge is paid may be subject to
a contingent deferred sales charge. See "Buying Shares -- Calculating Your
Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
3 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
COLORADO INTERMEDIATE TAX FREE FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Colorado Intermediate Tax Free Fund has an objective of providing current income
that is exempt from both federal income tax and Colorado state income tax to the
extent consistent with preservation of capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Colorado Intermediate Tax Free Fund invests at
least 80% of its net assets in municipal securities that pay interest that is
exempt from federal income tax, including the federal alternative minimum tax,
and from Colorado income tax. The fund normally may invest up to 20% of its net
assets in taxable obligations, including obligations subject to the federal
alternative minimum tax.
The fund may invest in "general obligation" bonds, which are backed by the full
faith, credit and taxing power of the issuer, and in "revenue" bonds, which are
payable only from the revenues generated by a specific project or from another
specific revenue source. The fund may also purchase participation interests in
municipal leases. The fund's municipal security investments may include zero
coupon securities, which pay no cash income to their holders until they mature.
Up to 10% of the fund's total assets may be invested in inverse floating rate
municipal securities.
The fund only invests in securities that, at the time of purchase, are either
rated investment grade or are unrated and determined to be of comparable quality
by the fund's advisor. Long-term securities must be rated BBB or better by
Standard & Poor's Corporation, Baa or better by Moody's Investors Service or
comparably rated by another national rating organization. Municipal notes must
be rated SP-1 or better by Standard & Poor's, MIG/VMIG-1 by Moody's or
comparably rated by another national rating organization. Municipal notes must
be rated SP-1 or better by Standard & Poor's, MIG/VMIG-1 by Moody's or
comparably rated by another rating organization. Unrated securities will not
exceed 25% of the fund's total assets.
The fund will attempt to maintain the weighted average maturity of its portfolio
securities at 3 to 10 years under normal market conditions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities.
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities. The revenue bonds and municipal lease obligations in which
the fund invests may entail greater credit risk than the fund's investments in
general obligation bonds.
CALL RISK
Some municipal securities held by the fund may be redeemed by the issuer, or
"called," prior to their stated maturity dates. If a security is redeemed during
a time of declining interest rates, the fund may be unable to reinvest in
securities providing as high a level of income.
POLITICAL AND ECONOMIC RISK
Because the fund invests primarily in municipal securities issued by the state
of Colorado and its political subdivisions, the fund will be particularly
affected by political and economic conditions and developments in that state.
See the Statement of Additional Information for details. The value of municipal
securities owned by the fund also may be adversely affected by future changes in
federal or state income tax laws, including rate reductions or the imposition of
a flat tax.
RISKS OF NON-DIVERSIFICATION
The fund is non-diversified. This means that it may invest a larger portion of
its assets in a limited number of issuers than a diversified fund. Because a
relatively high percentage of the fund's assets may be invested in the
securities of a limited number of issuers, the fund may be more susceptible to
any single economic, political or regulatory occurrence than a diversified fund.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year. Sales charges are not reflected in the chart; if they had been,
returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
4 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
COLORADO INTERMEDIATE TAX FREE FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) An unmanaged index
comprised of fixed rate,
[BAR CHART] investment grade
tax-exempt bonds with
1995 12.33% maturities between six and
1996 3.86% eight years.
1997 7.07%
1998 (2) The since inception
performance for the index
is calculated from the
month end following the
fund's inception.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception(2)
AS OF 12/31/98 One Year (4/4/94)
- --------------------------------------------------------------------------------
Colorado Intermediate Tax Free Fund % %
- --------------------------------------------------------------------------------
Lehman Brothers 7-Year Municipal Bond Index(1) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show expenses before
any waivers during the fiscal year ended September 30, 1998.(1)
CLASS A
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)(2)
AS A % OF OFFERING PRICE 3.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees 0.25%
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor and the distributor. See
"Additional Information -- Financial Highlights." THE ADVISOR INTENDS TO
WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING
EXPENSES DO NOT EXCEED 0.70%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. Investments of $1
million or more on which no front-end sales charge is paid may be subject to
a contingent deferred sales charge. See "Buying Shares -- Calculating Your
Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
5 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
INTERMEDIATE TAX FREE FUND
- --------------------------------------------------------------------------------
OBJECTIVE
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.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Intermediate Tax Free Fund invests at least 80%
of its net assets in municipal securities that pay interest that is exempt from
federal income tax, including the federal alternative minimum tax. The fund
normally may invest up to 20% of its net assets in taxable obligations,
including obligations subject to the federal alternative minimum tax.
The fund may invest in "general obligation" bonds, which are backed by the full
faith, credit and taxing power of the issuer, and in "revenue" bonds, which are
payable only from the revenues generated by a specific project or from another
specific revenue source. The fund may also purchase participation interests in
municipal leases. The fund's municipal security investments may include zero
coupon securities, which pay no cash income to their holders until they mature.
Up to 10% of the fund's total assets may be invested in inverse floating rate
municipal securities.
The fund only invests in securities that, at the time of purchase, are either
rated investment grade or are unrated and determined to be of comparable quality
by the fund's advisor. Long-term securities must be rated BBB or better by
Standard & Poor's Corporation, Baa or better by Moody's Investors Service or
comparably rated by another national rating organization. Municipal notes must
be rated SP-1 or better by Standard & Poor's, MIG/VMIG-1 by Moody's or
comparably rated by another national rating organization. Unrated securities
will not exceed 25% of the fund's total assets.
The fund will attempt to maintain the weighted average maturity of its portfolio
securities at 3 to 10 years under normal market conditions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities.
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities. The revenue bonds and municipal lease obligations in which
the fund invests may entail greater credit risk than the fund's investments in
general obligation bonds.
CALL RISK
Some municipal securities held by the fund may be redeemed by the issuer, or
"called," prior to their stated maturity dates. If a security is redeemed during
a time of declining interest rates, the fund may be unable to reinvest in
securities providing as high a level of income.
POLITICAL AND ECONOMIC RISK
The value of municipal securities owned by the fund may be adversely affected by
state and local political and economic conditions and developments, or by future
changes in federal or state income tax laws, including rate reductions or the
imposition of a flat tax.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year. Sales charges are not reflected in the chart; if they had been,
returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
6 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
INTERMEDIATE TAX FREE FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) An unmanaged index
comprised of fixed rate,
[BAR CHART] investment grade, general
obligation tax-exempt
1989 6.19% bonds with maturities
1990 5.54% between six and eight
1991 8.44% years.
1992 6.49%
1993 8.20%
1994 -2.95%
1995 12.89%
1996 3.72%
1997 6.79%
1998
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98 One Year Five Years Ten Years
- --------------------------------------------------------------------------------
Intermediate Tax Free Fund % % %
- --------------------------------------------------------------------------------
Lehman Brothers 7-Year G.O. Index(1) % % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show expenses before
any waivers during the fiscal year ended September 30, 1998.(1)
CLASS A
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)(2)
AS A % OF OFFERING PRICE 3.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees 0.25%
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor and the distributor. See
"Additional Information -- Financial Highlights." THE ADVISOR INTENDS TO
WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING
EXPENSES DO NOT EXCEED 0.70%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. Investments of $1
million or more on which no front-end sales charge is paid may be subject to
a contingent deferred sales charge. See "Buying Shares -- Calculating Your
Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
7 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
MINNESOTA INTERMEDIATE TAX FREE FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Minnesota Intermediate Tax Free Fund has an objective of providing current
income that is exempt from both federal income tax and Minnesota state income
tax to the extent consistent with preservation of capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Minnesota Intermediate Tax Free Fund invests at
least 80% of its net assets in municipal securities that pay interest that is
exempt from federal and Minnesota income tax, including federal and state of
Minnesota alternative minimum tax. The fund normally may invest up to 20% of its
net assets in taxable obligations, including obligations subject to federal and
state of Minnesota alternative minimum tax.
The fund may invest in "general obligation" bonds, which are backed by the full
faith, credit and taxing power of the issuer, and in "revenue" bonds, which are
payable only from the revenues generated by a specific project or from another
specific revenue source. The fund may also purchase participation interests in
municipal leases. The fund's municipal security investments may include zero
coupon securities, which pay no cash income to their holders until they mature.
Up to 10% of the fund's total assets may be invested in inverse floating rate
municipal securities.
The fund only invests in securities that, at the time of purchase, are either
rated investment grade or are unrated and determined to be of comparable quality
by the fund's advisor. Long-term securities must be rated BBB or better by
Standard & Poor's Corporation, Baa or better by Moody's Investors Service or
comparably rated by another national rating organization. Municipal notes must
be rated SP-1 or better by Standard & Poor's, MIG/VMIG-1 by Moody's or
comparably rated by another national rating organization. Unrated securities
will not exceed 25% of the fund's total assets.
The fund will attempt to maintain the weighted average maturity of its portfolio
securities at 3 to 10 years under normal market conditions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities.
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities. The revenue bonds and municipal lease obligations in which
the fund invests may entail greater credit risk than the fund's investments in
general obligation bonds.
CALL RISK
Some municipal securities held by the fund may be redeemed by the issuer, or
"called," prior to their stated maturity dates. If a security is redeemed during
a time of declining interest rates, the fund may be unable to reinvest in
securities providing as high a level of income.
POLITICAL AND ECONOMIC RISK
Because the fund invests primarily in municipal securities issued by the state
of Minnesota and its political subdivisions, the fund will be particularly
affected by political and economic conditions and developments in that state.
See the Statement of Additional Information for details. The value of municipal
securities owned by the fund also may be adversely affected by future changes in
federal or state income tax laws, including rate reductions or the imposition of
a flat tax.
RISKS OF NON-DIVERSIFICATION
The fund is non-diversified. This means that it may invest a larger portion of
its assets in a limited number of issuers than a diversified fund. Because a
relatively high percentage of the fund's assets may be invested in the
securities of a limited number of issuers, the fund may be more susceptible to
any single economic, political or regulatory occurrence than a diversified fund.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year. Sales charges are not reflected in the chart; if they had been,
returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
8 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
MINNESOTA INTERMEDIATE TAX FREE FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) An unmanaged index
comprised of fixed rate,
[BAR CHART] investment grade
tax-exempt bonds with
1995 12.67% maturities between six and
1996 3.82% eight years.
1997 6.74%
1998 (2) The since inception
performance for the index
is calculated from the
month end following the
fund's inception.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception(2)
AS OF 12/31/98 One Year (2/25/94)
- --------------------------------------------------------------------------------
Minnesota Intermediate Tax Free Fund % %
- --------------------------------------------------------------------------------
Lehman Brothers 7-Year Municipal Bond Index(1) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show expenses before
any waivers during the fiscal year ended September 30, 1998.(1)
CLASS A
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)(2)
AS A % OF OFFERING PRICE 3.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees 0.25%
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor and the distributor. See
"Additional Information -- Financial Highlights." THE ADVISOR INTENDS TO
WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING
EXPENSES DO NOT EXCEED 0.70%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. Investments of $1
million or more on which no front-end sales charge is paid may be subject to
a contingent deferred sales charge. See "Buying Shares -- Calculating Your
Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
9 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
MINNESOTA TAX FREE FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Minnesota Tax Free Fund has an objective of providing maximum current income
that is exempt from both federal income tax and Minnesota state income tax to
the extent consistent with prudent investment risk.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Minnesota Tax Free Fund invests at least 80% of
its net assets in municipal securities that pay interest that is exempt from
federal and Minnesota income tax, including federal and state of Minnesota
alternative minimum tax. The fund normally may invest up to 20% of its net
assets in taxable obligations, including obligations subject to federal and
state of Minnesota alternative minimum tax.
The fund may invest in "general obligation" bonds, which are backed by the full
faith, credit and taxing power of the issuer, and in "revenue" bonds, which are
payable only from the revenues generated by a specific project or from another
specific revenue source. The fund may also purchase participation interest in
municipal leases. The fund's municipal security investments may include zero
coupon securities, which pay no cash income to their holders until they mature.
Up to 10% of the fund's total assets may be invested in inverse floating rate
municipal securities.
The fund only invests in securities that, at the time of purchase, are either
rated investment grade or are unrated and determined to be of comparable quality
by the fund's advisor. Long-term securities must be rated BBB or better by
Standard & Poor's Corporation, Baa or better by Moody's Investors Service or
comparably rated by another national rating organization. Municipal notes must
be rated SP-1 or better by Standard & Poor's, MIG/VMIG-1 by Moody's or
comparably rated by another national rating organization. Unrated securities
will not exceed 25% of the fund's total assets.
The fund will attempt to maintain the weighted average maturity of its portfolio
securities at 15 to 25 years under normal market conditions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities.
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities. The revenue bonds and municipal lease obligations in which
the fund invests may entail greater credit risk than the fund's investments in
general obligation bonds.
CALL RISK
Some municipal securities held by the fund may be redeemed by the issuer, or
"called," prior to their stated maturity dates. If a security is redeemed during
a time of declining interest rates, the fund may be unable to reinvest in
securities providing as high a level of income.
POLITICAL AND ECONOMIC RISK
Because the fund invests primarily in municipal securities issued by the state
of Minnesota and its political subdivisions, the fund will be particularly
affected by political and economic conditions and developments in that state.
See the Statement of Additional Information for details. The value of municipal
securities owned by the fund also may be adversely affected by future changes in
federal or state income tax laws, including rate reductions or the imposition of
a flat tax.
RISKS OF NON-DIVERSIFICATION
The fund is non-diversified. This means that it may invest a larger portion of
its assets in a limited number of issuers than a diversified fund. Because a
relatively high percentage of the fund's assets may be invested in the
securities of a limited number of issuers, the fund may be more susceptible to
any single economic, political or regulatory occurrence than a diversified fund.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's class A shares has varied
from year to year. The performance of class C shares will be lower due to their
higher expenses. Sales charges are not reflected in the chart; if they had been,
returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
10 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
MINNESOTA TAX FREE FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) Class C shares have not
been offered prior to the
[BAR CHART] date of this prospectus.
1989 10.17% (2) An unmanaged index
1990 6.40% comprised of fixed rate,
1991 10.97% investment grade
1992 8.14% tax-exempt bonds with
1993 11.97% remaining maturities of
1994 -5.47% one year or more.
1995 19.37%
1996 2.73%
1997 8.77%
1998
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98 One Year Five Years Ten Years
- --------------------------------------------------------------------------------
Minnesota Tax Free Fund (Class A) % % %
- --------------------------------------------------------------------------------
Minnesota Tax Free Fund (Class C)(1) N/A N/A N/A
- --------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index(2) % % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below are based on class A
share expenses before any waivers during the fiscal year ended September 30,
1998.(1)
CLASS A CLASS C
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)
AS A % OF OFFERING PRICE 3.00%(2) 1.00%
MAXIMUM DEFERRED SALES CHARGE (LOAD)
AS A % OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS 0.00%(3) 1.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70% 0.70%
Distribution and Service (12b-1) Fees 0.25% 1.00%
Other Expenses % %
TOTAL % %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor and the distributor. See
"Additional Information -- Financial Highlights." THE ADVISOR INTENDS TO
WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING
EXPENSES DO NOT EXCEED 0.95% AND 1.70%, RESPECTIVELY, FOR CLASS A AND CLASS
C SHARES. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. See "Buying Shares
-- Calculating Your Share Price."
(3) Class A share investments of $1 million or more on which no front-end sales
charge is paid may be subject to a contingent deferred sales charge. See
"Buying Shares -- Calculating Your Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
CLASS C CLASS C
ASSUMING ASSUMING NO
REDEMPTION REDEMPTION
AT END OF AT END OF
CLASS A EACH PERIOD EACH PERIOD
- --------------------------------------------------------------------------------
1 year $ $ $
3 years $ $ $
5 years $ $ $
10 years $ $ $
- --------------------------------------------------------------------------------
11 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
OREGON INTERMEDIATE TAX FREE FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Oregon Intermediate Tax Free Fund has an objective of providing current income
that is exempt from both federal income tax and Oregon state income tax to the
extent consistent with preservation of capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Oregon Intermediate Tax Free Fund invests at
least 80% of its net assets in municipal securities that pay interest that is
exempt from federal income tax, including the federal alternative minimum tax,
and from Oregon income tax. The fund normally may invest up to 20% of its net
assets in taxable obligations, including obligations subject to the federal
alternative minimum tax.
The fund may invest in "general obligation" bonds, which are backed by the full
faith, credit and taxing power of the issuer, and in "revenue" bonds, which are
payable only from the revenues generated by a specific project or from another
specific revenue source. The fund may also purchase participation interests in
municipal leases. The fund's municipal security investments may include zero
coupon securities, which pay no cash income to their holders until they mature.
Up to 10% of the fund's total assets may be invested in inverse floating rate
municipal securities.
The fund only invests in securities that, at the time of purchase, are either
rated investment grade or are unrated and determined to be of comparable quality
by the fund's advisor. Long-term securities must be rated BBB or better by
Standard & Poor's Corporation, Baa or better by Moody's Investors Service or
comparably rated by another national rating organization. Municipal notes must
be rated SP-1 or better by Standard & Poor's, MIG/VMIG-1 by Moody's or
comparably rated by another national rating organization. Unrated securities
will not exceed 25% of the fund's total assets.
The fund will attempt to maintain the weighted average maturity of its portfolio
securities at 3 to 10 years under normal market conditions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities.
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities. The revenue bonds and municipal lease obligations in which
the fund invests may entail greater credit risk than the fund's investments in
general obligation bonds.
CALL RISK
Some municipal securities held by the fund may be redeemed by the issuer, or
"called," prior to their stated maturity dates. If a security is redeemed during
a time of declining interest rates, the fund may be unable to reinvest in
securities providing as high a level of income.
POLITICAL AND ECONOMIC RISK
Because the fund invests primarily in municipal securities issued by the state
of Oregon and its political subdivisions, the fund will be particularly affected
by political and economic conditions and developments in that state. See the
Statement of Additional Information for details. The value of municipal
securities owned by the fund also may be adversely affected by future changes in
federal or state income tax laws, including rate reductions or the imposition of
a flat tax.
RISKS OF NON-DIVERSIFICATION
The fund is non-diversified. This means that it may invest a larger portion of
its assets in a limited number of issuers than a diversified fund. Because a
relatively high percentage of the fund's assets may be invested in the
securities of a limited number of issuers, the fund may be more susceptible to
any single economic, political or regulatory occurrence than a diversified fund.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart is intended to show you how performance of the fund's shares has
varied from year to year. However, because the fund did not commence operations
until 1997, only one calendar year of information is available.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Information in the bar chart and the table is for the fund's class Y shares,
which are offered through another prospectus. The fund just began to offer class
A shares. The classes will have substantially similar returns, because they are
invested in the same portfolio of securities. However, class A share returns
will be lower because these shares have higher expenses.
Both the chart and the table assume that all distributions have been reinvested.
12 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
OREGON INTERMEDIATE TAX FREE FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) An unmanaged index
comprised of fixed rate,
[BAR CHART] investment grade
tax-exempt bonds with
1998 maturities between six and
eight years.
(2) The since inception
performance for the index
is calculated from the
month end following the
fund's inception.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception(2)
AS OF 12/31/98 One Year (8/8/97)
- --------------------------------------------------------------------------------
Oregon Intermediate Tax Free Fund (Class Y) % %
- --------------------------------------------------------------------------------
Lehman Brothers 7-Year Municipal Bond Index(1) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below are based on fund
expenses before any waivers during the fiscal year ended September 30, 1998.(1)
CLASS A
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)(2)
AS A % OF OFFERING PRICE 3.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees 0.25%
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Operating expenses are based on class Y share expenses, but reflect the
higher distribution and service fees for class A shares. Actual management
fees for the fiscal year were lower than those shown in the table because of
voluntary fee waivers by the advisor. Taking these waivers into account,
management fees were % for the fiscal year ended September 30, 1998, which
would result in class A share total operating expenses of %. THE ADVISOR
INTENDS TO WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT TOTAL FUND
OPERATING EXPENSES DO NOT EXCEED 0.70% FOR THE CLASS A SHARES. FEE WAIVERS
MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. Investments of $1
million or more on which no front-end sales charge is paid may be subject to
a contingent deferred sales charge. See "Buying Shares -- Calculating Your
Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
13 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
TAX FREE FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Tax Free Fund has an objective of providing maximum current income that is
exempt from federal income tax to the extent consistent with prudent investment
risk.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Tax Free Fund invests at least 80% of its net
assets in municipal securities that pay interest that is exempt from federal
income tax, including the federal alternative minimum tax. The fund normally may
invest up to 20% of its net assets in taxable obligations, including obligations
subject to the federal alternative minimum tax.
The fund may invest in "general obligation" bonds, which are backed by the full
faith, credit and taxing power of the issuer, and in "revenue" bonds, which are
payable only from the revenues generated by a specific project or from another
specific revenue source. The fund may also purchase participation interests in
municipal leases. The fund's municipal security investments may include zero
coupon securities, which pay no cash income to their holders until they mature.
Up to 10% of the fund's total assets may be invested in inverse floating rate
municipal securities.
The fund only invests in securities that, at the time of purchase, are either
rated investment grade or are unrated and determined to be of comparable quality
by the fund's advisor. Long-term securities must be rated BBB or better by
Standard & Poor's Corporation, Baa or better by Moody's Investors Service or
comparably rated by another national rating organization. Municipal notes must
be rated SP-1 or better by Standard & Poor's, MIG/VMIG-1 by Moody's or
comparably rated by another national rating organization. Unrated securities
will not exceed 25% of the fund's total assets.
The fund attempts to maintain the weighted average maturity of its portfolio
securities at 15 to 25 years under normal market conditions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities.
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities. The revenue bonds and municipal lease obligations in which
the fund invests may entail greater credit risk than the fund's investments in
general obligation bonds.
CALL RISK
Some municipal securities held by the fund may be redeemed by the issuer, or
"called," prior to their stated maturity dates. If a security is redeemed during
a time of declining interest rates, the fund may be unable to reinvest in
securities providing as high a level of income.
POLITICAL AND ECONOMIC CONDITIONS
The value of municipal securities owned by the fund may be adversely affected by
state and local political and economic conditions and developments, or by future
changes in federal or state income tax laws, including rate reductions or the
imposition of a flat tax.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's class A shares has varied
from year to year. The performance of class C shares will be lower due to their
higher expenses. Sales charges are not reflected in the chart; if they had been,
returns would be lower.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects sales charges and fund expenses; the benchmark is unmanaged
and has no expenses.
Both the chart and the table assume that all distributions have been reinvested.
14 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
TAX FREE FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) Class C shares have not
been offered prior to the
[BAR CHART] date of this prospectus.
1989 8.77% (2) An unmanaged index
1990 7.24% comprised of fixed rate,
1991 12.03% investment grade
1992 8.58% tax-exempt bonds with
1993 14.55% remaining maturities of
1994 -8.46% one year or more.
1995 18.54%
1996 3.45%
1997 9.04%
1998
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98 One Year Five Years Ten Years
- --------------------------------------------------------------------------------
Tax Free Fund (Class A) % % %
- --------------------------------------------------------------------------------
Tax Free Fund (Class C)(1)
- --------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index(2) % % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below are based on class A
share expenses before any waivers during the fiscal year ended September 30,
1998.(1)
CLASS A CLASS C
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD)
AS A % OF OFFERING PRICE 3.00%(2) 1.00%
MAXIMUM DEFERRED SALES CHARGE (LOAD)
AS A % OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS 0.00%(3) 1.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70% 0.70%
Distribution and Service (12b-1) Fees 0.25% 1.00%
Other Expenses % %
TOTAL % %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor and the distributor. See
"Additional Information -- Financial Highlights." THE ADVISOR INTENDS TO
WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING
EXPENSES DO NOT EXCEED 0.95% AND 1.70%, RESPECTIVELY, FOR CLASS A AND CLASS
C SHARES. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
(2) Certain investors may qualify for reduced sales charges. See "Buying Shares
-- Calculating Your Share Price."
(3) Investments of $1 million or more on which no front-end sales charge is paid
may be subject to a contingent deferred sales charge. See "Buying Shares --
Calculating Your Share Price."
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
CLASS C CLASS C
ASSUMING ASSUMING NO
REDEMPTION REDEMPTION
AT END OF AT END OF
CLASS A EACH PERIOD EACH PERIOD
- --------------------------------------------------------------------------------
1 year $ $ $
3 years $ $ $
5 years $ $ $
10 years $ $ $
- --------------------------------------------------------------------------------
15 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
POLICIES & SERVICES
BUYING SHARES
You may become a shareholder in any of the funds with an initial investment of
$1,000 or more ($250 for a retirement plan). Additional investments can be made
for as little as $100 ($25 for a retirement plan). The funds have the right to
waive these minimum investment requirements for employees of the funds' advisor
and its affiliates. The funds also have the right to reject any purchase order.
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
All funds in this prospectus offer class A shares. Minnesota Tax Free Fund and
Tax Free Fund also offer class C shares.
Each class has its own cost structure. The amount of your purchase and the
length of time you expect to hold your shares will be factors in determining
which class of shares is best for you.
CLASS A SHARES
If you are making an investment that qualifies for a reduced sales charge, class
A shares may be best for you. Class A shares feature:
o A FRONT-END SALES CHARGE, DESCRIBED BELOW
o LOWER ANNUAL EXPENSES THAN CLASS C SHARES SEE "FUND SUMMARIES" FOR MORE
INFORMATION ON FEES AND EXPENSES
Because class A shares will normally be the better choice if your investment
qualifies for a reduced sales charge:
o ORDERS FOR CLASS C SHARES FOR $1 MILLION OR MORE NORMALLY WILL BE TREATED AS
ORDERS FOR CLASS A SHARES
o ORDERS FOR CLASS C SHARES BY AN INVESTOR ELIGIBLE TO PURCHASE CLASS A SHARES
WITHOUT A FRONT-END SALES CHARGE NORMALLY WILL BE TREATED AS ORDERS FOR CLASS
A SHARES
CLASS C SHARES
Class C shares have a low front-end sales charge of 1%, so more of your
investment goes to work immediately than if you had purchased class A shares.
However, class C shares also feature:
o A 1% CONTINGENT DEFERRED SALES CHARGE IF YOU REDEEM YOUR SHARES WITHIN 18
MONTHS OF PURCHASE
o HIGHER ANNUAL EXPENSES THAN CLASS A SHARES. (SEE "FEES AND EXPENSES" IN THE
"FUND SUMMARIES" SECTION")
- --------------------------------------------------------------------------------
12b-1 FEES
Under Rule 12b-1 of the Investment Company Act, each fund is allowed to pay the
fund's distributor an annual fee for the distribution and sale of its shares and
for services provided to shareholders.
FOR 12b-1 FEES ARE EQUAL TO:
- ----------------------------------------------------------------
CLASS A SHARES 0.25% OF AVERAGE DAILY NET ASSETS
CLASS C SHARES 1% OF AVERAGE DAILY NET ASSETS
Because these fees are paid out of a fund's assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
The class A share 12b-1 fee is a shareholder servicing fee. For class C shares,
a portion of the 12b-1 fee equal to 0.25% of average daily net assets is a
shareholder servicing fee and the rest is a distribution fee.
The funds' distributor uses the shareholder servicing fee to compensate brokers,
participating institutions and "one-stop" mutual fund networks for providing
ongoing services to shareholder accounts. These institutions receive annual fees
equal to 0.25% of a fund's class A share average daily net assets and 0.15% of a
fund class C share average daily net assets attributable to shares sold through
such institutions. The funds' distributor also pays institutions which sell
class C shares a 0.50% annual distribution fee beginning one year after the
shares are sold. The distributor may pay additional fees to institutions using
the sales charges it receives, in exchange for sales and/or administrative
services performed on behalf of the institution's customers.
The distributor is currently waiving all or a portion of its 12b-1 fees for
class A shares of certain funds. See "Fees and Expenses " in the "Fund
Summaries" section.
- --------------------------------------------------------------------------------
CALCULATING YOUR SHARE PRICE
Your purchase price will be based on the fund's net asset value (NAV) per share,
which is generally calculated as of the close of regular trading on the New York
Stock Exchange (usually 3 p.m. Central time) every day the exchange is open.
Your order will be priced at the next NAV calculated after your order is
accepted by the fund.
A fund's NAV is equal to the market value of its investments and other assets,
less any liabilities, divided by the number of fund shares. If market prices are
not readily available for an investment or if the advisor believes they are
unreliable, fair value prices may be determined in good faith using methods
approved by the funds' board of directors.
CLASS A SHARES
Your purchase price is typically the net asset value of your shares, plus a
front-end sales charge. Sales charges vary depending on the amount of your
purchase. The funds' distributor receives the sales charge you pay and reallows
a portion of the sales charge to your broker or participating institution.
SALES CHARGE MAXIMUM
REALLOWANCE
AS A % OF AS A % OF AS A % OF
OFFERING NET ASSET PURCHASE
PRICE VALUE PRICE
- --------------------------------------------------------------------------------
LESS THAN $ 50,000 3.00% 3.09% 2.70%
$ 50,000 - $ 99,999 2.50% 2.56% 2.25%
$100,000 - $249,999 2.00% 2.04% 1.80%
$250,000 - $499,999 1.50% 1.52% 1.35%
$500,000 - $999,999 1.00% 1.01% 0.80%
$1 MILLION AND OVER 0% 0% 0%
16 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
POLICIES & SERVICES
BUYING SHARES (CONTINUED)
REDUCING YOUR SALES CHARGE
As shown in the preceding tables, larger purchases of class A shares reduce the
percentage sales charge you pay. You also may reduce your sales charge in the
following ways:
PRIOR PURCHASES. Prior purchases of class A shares of any First American fund
(except a money market fund) will be factored into your sales charge
calculation. For example, let's say you're making a $10,000 investment. If the
current value of all other First American fund class A shares that you hold is
$40,000 or more, your current sales charge is reduced. To receive a reduced
sales charge, you must notify the funds' transfer agent of your prior purchases.
This must be done at the time of purchase, either directly to the transfer agent
in writing or by notifying your broker or financial institution.
PURCHASES BY RELATED ACCOUNTS. Concurrent and prior purchases of class A shares
by certain other accounts also will be combined to determine your sales charge.
For example, purchases made by your spouse or children under age 21 will reduce
your sales charge. To receive a reduced sales charge, you must notify the funds'
transfer agent of purchases by any related accounts. This must be done at the
time of purchase, either directly to the transfer agent in writing or by
notifying your broker or financial institution.
LETTER OF INTENT. If you plan to invest $50,000 or more over a 13-month period
in class A shares of any First American fund except the money market funds, you
may reduce your sales charge by signing a non-binding letter of intent. (If you
do not fulfill the letter of intent, you must pay the applicable sales charge.
In addition, if you reduce your sales charge to zero under a letter of intent
and then sell your class A shares within 12 months of their purchase, you may be
charged a contingent deferred sales charge of 1%. (See "For Investments of Over
$1 Million.")
More information on these ways to reduce your sales charge appears in the
Statement of Additional Information (SAI). The SAI also contains information on
investors who are eligible to purchase class A shares without a sales charge.
- --------------------------------------------------------------------------------
FOR INVESTMENTS OF OVER $1 MILLION
There is no initial sales charge on class A share purchases of $1 million or
more. However, your broker or financial institution may receive a commission
of up to 1% on your purchase. If such a commission is paid, you will be
assessed a contingent deferred sales charge (CDSC) of 1% if you sell your
shares within 12 months. The funds' distributor receives any CDSC imposed when
you sell your class A shares The CDSC is based on the value of your shares at
the time of purchase or at the time of sale, whichever is less. The charge
does not apply to shares you acquired by reinvesting your dividend or capital
gain distributions.
To help lower your costs, shares that are not subject to a CDSC will be sold
first. Other shares will then be sold in an order that minimizes your CDSC.
The CDSC will be waived for (i) redemptions following the death or disability
of a shareholder and (ii) redemptions that equal the minimum required
distribution from an individual retirement account or other retirement plan to
a shareholder who has reached the age of 70 1/2.
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CLASS C SHARES
Your purchase price for class C shares is their net asset value plus a front-end
sales charge equal to 1% of the purchase price (1.01% of the net amount
invested). If you redeem your shares within 18 months of purchase, you will be
assessed a contingent deferred sales charge (CDSC) of 1% of the value of your
shares at the time of purchase or at the time of sale, whichever is less. The
CDSC does not apply to shares you acquired by reinvesting your dividend or
capital gain distributions. Shares will be sold in the order that minimizes your
CDSC.
Even though your sales charge is only 1%, the funds' distributor pays a
commission equal to 2% of your purchase price to your broker or participating
institution. The distributor receives any CDSC imposed when you sell your class
C shares.
17 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
POLICIES & SERVICES
BUYING SHARES (CONTINUED)
The CDSC for class C shares will be waived for:
o REDEMPTIONS FOLLOWING THE DEATH OR DISABILITY OF A SHAREHOLDER.
o REDEMPTIONS THAT EQUAL THE MINIMUM REQUIRED DISTRIBUTION FROM AN INDIVIDUAL
RETIREMENT ACCOUNT OR OTHER RETIREMENT PLAN TO A SHAREHOLDER WHO HAS REACHED
THE AGE OF 70 1/2.
o REDEMPTIONS THROUGH A SYSTEMATIC WITHDRAWAL PLAN, AT A RATE OF UP TO 12% A
YEAR OF YOUR ACCOUNT'S VALUE. DURING THE FIRST YEAR, THE 12% ANNUAL LIMIT WILL
BE BASED ON THE VALUE OF YOUR ACCOUNT ON THE DATE THE PLAN IS ESTABLISHED.
THEREAFTER, IT WILL BE BASED ON THE VALUE OF YOUR ACCOUNT ON THE PRECEDING
DECEMBER 31.
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HOW TO BUY SHARES
BY PHONE
You may purchase shares by calling your broker or financial institution, if they
have a sales agreement with the funds' distributor. In many cases, your order
will be effective that day if received by your broker or financial institution
by the close of regular trading on the New York Stock Exchange. In some cases,
however, you will have to transmit your request by an earlier time in order for
your purchase request to be effective that day. This allows your broker or
financial institution time to process your request and transmit it to the fund.
Some financial institutions may charge a fee for helping you purchase shares.
Contact your broker or financial institution for more information.
If you are paying by wire, you may purchase shares by calling 1-800-637-2548
before 3 p.m. Central time. All information will be taken over the telephone,
and your order will be placed when the funds' custodian receives payment by
wire. Wire federal funds as follows:
U.S. BANK NATIONAL ASSOCIATION, MINNEAPOLIS, MN
ABA NUMBER 091000022
FOR CREDIT TO: DST SYSTEMS, INC.:
ACCOUNT NUMBER 160234580266
FOR FURTHER CREDIT TO (INVESTOR NAME AND FUND NAME)
You cannot purchase shares by wire on days when the New York Stock Exchange or
federally chartered banks are closed.
BY MAIL
To purchase shares by mail, simply complete and sign a new account form, enclose
a check made payable to the fund you wish to invest in, and mail both to:
FIRST AMERICAN FUNDS
C/O DST SYSTEMS, INC.
P.O. BOX 419382
KANSAS CITY, MISSOURI 64141-6382
After you have established an account, you may continue to purchase shares by
mailing your check to First American Funds at the same address.
Please note the following:
o ALL PURCHASES MUST BE MADE IN U.S. DOLLARS
o THIRD-PARTY CHECKS, CREDIT CARDS, CREDIT CARD CHECKS AND CASH ARE NOT ACCEPTED
o IF A CHECK DOES NOT CLEAR YOUR BANK, THE FUNDS RESERVE THE RIGHT TO CANCEL THE
PURCHASE, AND YOU COULD BE LIABLE FOR ANY LOSSES OR FEES INCURRED
- --------------------------------------------------------------------------------
INVESTING AUTOMATICALLY
To purchase shares as part of a savings discipline, you may add to your
investment on a regular basis:
o BY HAVING $100 OR MORE AUTOMATICALLY WITHDRAWN FROM YOUR CHECKING ACCOUNT ON A
PERIODIC BASIS AND INVESTED IN FUND SHARES
o THROUGH AUTOMATIC MONTHLY EXCHANGES OF YOUR SHARES OF PRIME OBLIGATIONS FUND,
A MONEY MARKET FUND IN THE FIRST AMERICAN FAMILY OF FUNDS. EXCHANGES MUST BE
MADE INTO THE SAME CLASS OF SHARES THAT YOU HOLD IN PRIME OBLIGATIONS FUND
You may apply for participation in either of these programs through your broker
or financial institution or by calling 1-800-637-2548.
18 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
POLICIES & SERVICES
SELLING SHARES
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HOW TO SELL SHARES
You may sell your shares on any day when the New York Stock Exchange is open.
Your shares will be sold at the next NAV calculated after your order is accepted
by the funds' transfer agent, less any applicable contingent deferred sales
charge.
The proceeds from your sale normally will be mailed or wired within one day, but
in no event more than seven days, after your request is received in proper form.
BY PHONE
If you purchased shares through a broker or financial institution, simply call
them to sell your shares. In many cases, your redemption will be effective that
day if received by your broker or financial institution by the close of regular
trading on the New York Stock Exchange. In some cases, however, you will have to
call by an earlier time in order for your redemption to be effective that day.
This allows your broker or financial institution time to process your request
and transmit it to the fund. Contact your broker or financial institution
directly for more information.
If you did not purchase shares through a broker or financial institution, you
may sell your shares by calling 1-800-637-2548. Proceeds can be wired to your
bank account (if the proceeds are at least $1,000 and you have previously
supplied your bank account information to the transfer agent) or sent to you by
check.
If you recently purchased your shares by check or through the Automated Clearing
House (ACH), proceeds from the sale of those shares may not be available until
your check or ACH payment has cleared, which may take up to 10 calendar days.
BY MAIL
To sell shares by mail, send a written request to your broker or financial
institution, or to the funds' transfer agent at the following address:
FIRST AMERICAN FUNDS
C/O DST SYSTEMS, INC.
P.O. BOX 419382
KANSAS CITY, MISSOURI 64141-6382
Your request should include the following information:
o NAME OF THE FUND
o ACCOUNT NUMBER
o DOLLAR AMOUNT OR NUMBER OF SHARES REDEEMED
o NAME ON THE ACCOUNT
o SIGNATURES OF ALL REGISTERED ACCOUNT OWNERS
Signatures on a written request must be guaranteed if:
o YOU WOULD LIKE THE PROCEEDS FROM THE SALE TO BE PAID TO ANYONE OTHER THAN TO
THE SHAREHOLDER OF RECORD
o YOU WOULD LIKE THE CHECK MAILED TO AN ADDRESS OTHER THAN THE ADDRESS ON THE
FUNDS' RECORDS
o YOUR REDEMPTION REQUEST IS FOR $25,000 OR MORE
A signature guarantee assures that a signature is genuine and protects
shareholders from unauthorized account transfers. Banks, savings and loan
associations, trust companies, credit unions, broker-dealers and member firms of
a national securities exchange may guarantee signatures. Call your financial
institution to determine if it has this capability.
Proceeds from a written redemption request will be sent to you by check.
- --------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWALS
If your account has a value of $5,000 or more, you may redeem a specific dollar
amount from your account on a regular basis. To set up systematic withdrawals,
contact your broker or financial institution.
You should not make systematic withdrawals if you plan to continue investing in
the fund, due to sales charges and tax liabilities.
- --------------------------------------------------------------------------------
REINVESTING AFTER A SALE
If you sell class A shares, you may reinvest in class A shares of that fund or
another First American fund within 31 days without a sales charge. If you sell
class A or class C shares subject to a CDSC, that charge will be credited to
your account and the reinvested shares will be subject to a CDSC, which will be
determined based on the date of your reinvestment.
- --------------------------------------------------------------------------------
ACCOUNTS WITH LOW BALANCES
Except for retirement plans, if your account balance falls below $500 as a
result of selling or exchanging shares, you will be given 60 days to
re-establish the minimum balance. If you do not, the fund may close your
account and send you the proceeds, less any applicable contingent deferred
sales charge.
- --------------------------------------------------------------------------------
19 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT
- --------------------------------------------------------------------------------
EXCHANGING SHARES
If your investment goals or your financial needs change, you may move from one
First American fund to another. There is no fee to exchange shares.
Generally, you may exchange your shares only for shares of the same class.
However, you may exchange your class A shares for class Y shares of the same or
another First American fund if you subsequently become eligible to participate
in that class (for example, by opening a fiduciary, custody or agency account
with a financial institution which invests in class Y shares).
Exchanges are made based on the net asset value per share of each fund at the
time of the exchange. When you exchange your class A shares of one of the funds
for class A shares of another First American fund, you do not have to pay a
sales charge. When you exchange your class C shares for class C shares of
another First American fund, the time you held the shares of the "old" fund will
be added to the time you hold the shares of the "new" fund for purposes of
determining your CDSC.
Before exchanging into any fund, be sure to read its prospectus carefully. A
fund may change or cancel its exchange policies at any time. You will be
notified of any changes. The funds have the right to limit exchanges to four
times per year.
BY PHONE
You may exchange shares by calling your broker, your financial institution, or
the funds' transfer agent, provided that both funds have identical shareholder
registrations. To request an exchange through the funds' transfer agent, call
1-800-637-2548. Your instructions must be received by the funds' transfer agent
before 3 p.m. Central time, or by the time specified by your broker or financial
institution, in order for shares to be exchanged the same day.
BY MAIL
To exchange shares by written request, please follow the procedures under
"Selling Shares." Be sure to include the names of both funds involved in the
exchange.
- --------------------------------------------------------------------------------
TELEPHONE TRANSACTIONS
You may buy, sell or exchange shares by telephone, unless you elected on your
new account form to restrict this privilege. If you wish to reinstate this
option on an existing account, please call Investor Services at 1-800-637-2548
to request the appropriate form.
The funds and their agents will not be responsible for any losses that may
result from acting on wire or telephone instructions that they reasonably
believe to be genuine. The funds and their agents will each follow reasonable
procedures to confirm that instructions received by telephone are genuine,
which may include taping telephone conversations.
It may be difficult to reach the funds by telephone during periods of unusual
market activity. If you are unable to reach the funds or their agents by
telephone, please consider sending written instructions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STAYING INFORMED
SHAREHOLDER REPORTS
Shareholder reports are mailed twice a year, in November and May. They include
financial statements, performance information, a message from your portfolio
managers, and, on an annual basis, the auditors' report.
In an attempt to reduce shareholder costs and help eliminate duplication, the
funds will try to limit their mailings to one report for each address that lists
one or more shareholders with the same last name. If you would like additional
copies, please call 1-800-637-2548.
STATEMENTS AND CONFIRMATIONS
Statements summarizing activity in your account are mailed at least quarterly.
Confirms are mailed following each purchase or sale of fund shares.
20 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT (CONTINUED)
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from a fund's net investment income are declared and paid monthly. Any
capital gains are distributed at least once each year.
On the ex-dividend date for a distribution, a fund's share price is reduced by
the amount of the distribution. If you buy shares just before the ex-dividend
date, in effect, you "buy the dividend." You will pay the full price for the
shares and then receive a portion of that price back as a distribution, all or a
portion of which may be taxable (to the same extent the distribution is
otherwise taxable to fund shareholders).
Dividend and capital gain distributions will be reinvested in additional shares
of the fund paying the distribution, unless you request cash payments on your
new account form or by writing to the fund. Shares will be priced at the NAV
computed on the ex-dividend date.
- --------------------------------------------------------------------------------
TAXES
Some of the tax consequences of investing in the funds are discussed below. More
information about taxes is in the Statement of Additional Information. However,
because everyone's tax situation is unique, always consult your tax professional
about federal, state and local tax consequences.
TAXES ON DISTRIBUTIONS
Each fund intends to meet certain federal tax requirements so that distributions
of tax-exempt interest income may be treated as "exempt-interest dividends."
These dividends are not subject to regular federal income tax. However, each
fund may invest up to 20% of its net assets in municipal securities subject to
the alternative minimum tax. Any portion of exempt- interest dividends
attributable to interest on these securities may increase some shareholders'
alternative minimum tax. The funds expect that their distributions will consist
primarily of exempt-interest dividends. Intermediate Tax Free Fund's and Tax
Free Fund's exempt-interest dividends may be subject to state or local taxes.
Distributions paid from any interest income that is not tax-exempt and from any
net realized capital gains will be taxable whether you reinvest those
distributions or take them in cash.
TAXES ON TRANSACTIONS
The sale or exchange of fund shares will be a taxable event for you and may
result in a capital gain or loss. The gain or loss will be considered long-term
if you have held your shares for more than one year. A gain or loss on shares
held for one year or less is considered short-term and is taxed at the same
rates as ordinary income.
CALIFORNIA INCOME TAXATION
California Intermediate Tax Free Fund intends to comply with certain state tax
requirements so that dividends it pays that are attributable to interest on
California municipal securities will be excluded from the California taxable
income of individuals, trusts and estates. To meet these requirements, at least
50% of the value of the fund's total assets must consist of obligations which
pay interest that is exempt from California personal income tax. Exempt-interest
dividends are not excluded from the California taxable income of corporations
and financial institutions.
COLORADO INCOME TAXATION
Dividends paid by Colorado Intermediate Tax Free Fund will be exempt from
Colorado income taxes for individuals, trusts, estates and corporations to the
extent that they are derived from interest on Colorado municipal securities. In
addition, dividends derived from interest on Colorado municipal securities
(including securities treated for federal purposes as private activity bonds)
will not be treated as items of tax preference for purposes of Colorado's
alternative minimum tax.
MINNESOTA INCOME TAXATION
Minnesota Intermediate Tax Free Fund and Minnesota Tax Free Fund intend to
comply with certain state tax requirements so that dividends they pay that are
attributable to interest on Minnesota municipal securities will be excluded from
the Minnesota taxable net income of individuals estates and trusts. To meet
these requirements, at least 95% of the exempt-interest dividends paid by each
fund must be derived from interest income on Minnesota municipal securities. A
portion of each fund's dividends may be subject to the Minnesota alternative
minimum tax. Exempt-interest dividends are not excluded from the Minnesota
taxable income of corporations and financial institutions.
OREGON INCOME TAXATION
Dividends paid by Oregon Intermediate Tax Free Fund will be exempt from Oregon
income taxes for individuals, trusts and estates to the extent that they are
derived from interest on Oregon municipal securities. Such dividends will not be
excluded from the Oregon taxable income of corporations.
21 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
MANAGEMENT
INVESTMENT ADVISOR
FIRST AMERICAN ASSET MANAGEMENT
601 SECOND AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55402
U.S. Bank National Association (U.S. Bank), acting through its First American
Asset Management division, is the funds' investment advisor. First American
Asset Management provides investment management services to individuals and
institutions, including corporations, foundations, pensions and retirement
plans. As of December 31, 1998, it had more than $ in assets under
management, including investment company assets of approximately $ . As
investment advisor, First American Asset Management manages the funds' business
and investment activities, subject to the authority of the board of directors.
Each fund pays the investment advisor a monthly fee for providing investment
advisory services. During their most recent fiscal years, the funds paid the
following investment advisory fees to First American Asset Management:
ADVISORY FEE
AS A % OF
AVERAGE DAILY
NET ASSETS
- --------------------------------------------------------------------------------
CALIFORNIA INTERMEDIATE
TAX FREE FUND %
COLORADO INTERMEDIATE
TAX FREE FUND %
INTERMEDIATE TAX FREE FUND %
MINNESOTA INTERMEDIATE
TAX FREE FUND %
MINNESOTA TAX FREE FUND %
OREGON INTERMEDIATE
TAX FREE FUND %
TAX FREE FUND %
- --------------------------------------------------------------------------------
CUSTODIAN
U.S. BANK NATIONAL ASSOCIATION
U.S. BANK CENTER
180 EAST FIFTH STREET
ST. PAUL, MINNESOTA 55101
ADMINISTRATOR
SEI INVESTMENTS MANAGEMENT CORPORATION
OAKS, PENNSYLVANIA 19456
DISTRIBUTOR
SEI INVESTMENTS DISTRIBUTION CO.
OAKS, PENNSYLVANIA 19456
TRANSFER AGENT
DST SYSTEMS, INC.
330 WEST NINTH STREET
KANSAS CITY, MISSOURI 64105
ADDITIONAL COMPENSATION
In addition to receiving compensation for acting as the funds' investment
advisor as described above, U.S. Bank and its affiliates receive compensation in
connection with the following:
CUSTODY SERVICES. As compensation for acting as the funds' custodian, U.S. Bank
is paid monthly fees equal, on an annual basis, to 0.03% of a fund's average
daily net assets. In addition, U.S. Bank is reimbursed for its out-of-pocket
expenses incurred while providing custody services to the funds.
SUB-ADMINISTRATION SERVICES. U.S. Bank assists the administrator and provides
sub-administration services to the funds. For providing these services, U.S.
Bank is compensated by the funds' administrator at an annual rate of up to
0.05% of each fund's average daily net assets.
TRANSFER AGENT SERVICES. U.S. Bank performs certain transfer agent and dividend
disbursing agent services with respect to the class A and class C shares of the
funds held through accounts at U.S. Bank and its affiliates. The funds pay U.S.
Bank an annual fee of $15 per account for providing these services.
SECURITIES LENDING SERVICES. In connection with lending their portfolio
securities, the funds pay administrative and custodial fees to U.S. Bank which
are equal to 40% of the funds' income from these securities lending
transactions.
BROKERAGE TRANSACTIONS. The funds purchase most of their portfolio securities
directly from the issuer or from an underwriter or market maker, and not from a
broker acting as agent. However, the funds may from time to time use brokers
when buying portfolio securities. The funds' investment advisor may place
trades through its affiliates, U.S. Bancorp Investments, Inc. and U.S. Bancorp
Piper Jaffray Inc., which will earn commissions on such transactions.
SALES OF FUND SHARES. U.S. Bancorp Investments, Inc. and U.S. Bancorp Piper
Jaffray Inc., broker-dealers affiliated with U.S. Bank, have entered into
agreements with the funds' distributor to sell fund shares and will earn
commissions on these sales.
ERISA ACCOUNTS. U.S. Bank 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.
PORTFOLIO MANAGEMENT
Each fund's investments are managed by a team of persons associated with First
American Asset Management.
22 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS
- --------------------------------------------------------------------------------
OBJECTIVES
The Funds' objectives, which are described in the "Fund Summaries" section, may
be changed without shareholder approval. If a fund's objectives change, you will
be notified at least 30 days in advance. Please remember: There is no guarantee
that any fund will achieve its objectives.
- --------------------------------------------------------------------------------
INVESTMENT STRATEGIES
The funds' main investment strategies are discussed in the "Fund Summaries"
section. These are the strategies that the funds' investment advisor believes
are most likely to be important in trying to achieve the funds' objectives. You
should be aware that each fund may also use strategies and invest in securities
that are not described in this prospectus, but that are described in the
Statement of Additional Information (SAI). For a copy of the SAI, call Investor
Services at 1-800-637-2548.
INVESTMENT APPROACH
In selecting securities for the funds, fund managers first determine their
economic outlook and the direction in which inflation and interest rates are
expected to move. In selecting individual securities consistent with this
outlook, the portfolio managers evaluate factors such as credit quality, yield,
maturity, liquidity and portfolio diversification. In the case of Intermediate
Tax Free Fund and Tax Free Fund, geographical diversification is also a factor.
The portfolio managers conduct research on potential and current holdings in the
funds to determine whether a fund should purchase or retain a security. This is
a continuing process the focus of which changes according to market conditions,
the availability of various permitted investments, and cash flows into and out
of the funds.
MUNICIPAL SECURITIES
Municpal securities are issued to finance public infrastructure projects such as
streets and highways, schools, water and sewer systems, hospitals, and airports.
They also may be issued to refinance outstanding obligations as well as to
obtain funds for general operating expenses and for loans to other public
institutions and facilities.
The funds may invest in "general obligation" bonds, which are backed by the full
faith, credit and taxing power of the issuer, and in "revenue" bonds, which are
payable only from the revenues generated by a specific project or from another
specific revenue source. 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 government unit to acquire equipment or
facilities. Municipal leases frequently have special risks which generally are
not associated with general obligation bonds or revenue bonds. See "Risks --
Risks of Municipal Lease Obligations" below.
Up to 10% of each fund's total assets may be invested in inverse floating rate
municipal securities. The values of these securities may be highly volatile as
interest rates rise or fall. See "Risks -- Risks of Inverse Floating Rate
Securities" below.
TEMPORARY INVESTMENTS
In an attempt to respond to adverse market, economic, political or other
conditions, each fund may invest without limit in cash and in U.S.
dollar-denominated high-quality money market instruments and other short-term
securities, including securities which pay income that is subject to federal and
state income tax. Because these investments may be taxable, and may result in a
lower yield than would be available from investments with a lower quality or
longer term, they may prevent a fund from achieving its investment objective.
PORTFOLIO TURNOVER
Fund managers may trade securities frequently, resulting, from time to time, in
an annual portfolio turnover rate of over 100%. Trading of securities may
produce capital gains, which are taxable to shareholders when distributed.
Active trading may also increase the amount of commissions or mark-ups to
broker-dealers that the fund pays when it buys and sells securities. The
"Financial Highlights" section of this prospectus shows each fund's historical
portfolio turnover rate.
- --------------------------------------------------------------------------------
RISKS
The main risks of investing in the funds are summarized in the "Fund Summaries"
section. More information about fund risks is presented below.
CALL RISK
Many municipal bonds may be redeemed at the option of the issuer, or "called,"
before their stated maturity date. In general, an issuer will call its bonds if
they can be refinanced by issuing new bonds which bear a lower interest rate.
The funds are subject to the possibility that during periods of falling interest
rates, a municipal bond issuer will call its high-yielding bonds. A fund would
then be forced to invest the unanticipated proceeds at lower interest rates,
resulting in a decline in the fund's income.
CREDIT RISK
Each fund is subject to the risk that the issuers of debt securities held by the
fund will not make payments on the securities, or that the other party to a
contract (such as a repurchase agreement) will default on its obligations. There
is also the risk that an issuer could suffer adverse changes in financial
condition that could lower the credit quality of a security. This could lead to
greater volatility in the price of the security and in shares of the fund. Also,
a change in the credit quality rating of a bond could affect the bond's
liquidity and make it more difficult for the fund to sell.
Each fund attempts to minimize credit risk by investing in securities considered
at least investment grade at the time of purchase. However, all of these
securities, especially those in the lower investment grade rating categories,
have credit risk. In adverse economic or other circumstances, issuers of these
lower rated securities are more likely to have difficulty making principal and
interest payments than issuers of higher rated securities. When a fund purchases
unrated
23 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS (CONTINUED)
securities, it will depend on the advisor's analysis of credit risk more heavily
than usual.
INTEREST RATE RISK
Debt securities in the funds will fluctuate in value with changes in interest
rates. In general, debt securities will increase in value when interest rates
fall and decrease in value when interest rates rise. Longer-term debt securities
are generally more sensitive to interest rate changes. Each fund may invest in
zero coupon securities, which do not pay interest on a current basis and which
may be highly volatile as interest rates rise or fall. The funds' investments in
inverse floating rate municipal securities also may be highly volatile with
changing interest rates. See "Risks of Inverse Floating Rate Securities" below.
POLITICAL AND ECONOMIC RISK
The values of municipal securities 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
municipal securities 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 revenue of issuers (for example, legislation or court decisions
reducing state aid to local governments or mandating additional services). To
the extent a fund invests in the securities of issuers located in a single
state, it will be disproportionately affected by political and economic
conditions and developments in that state. The value of municipal securities
also may be adversely affected by future changes in federal or state income tax
laws, including rate reductions or the imposition of a flat tax.
RISK OF ACTIVE MANAGEMENT
Each fund is actively managed and its performance therefore will reflect in part
the advisor's ability to make investment decisions which are suited to achieving
the fund's investment objectives. Due to their active management, the funds
could underperform other mutual funds with similar investment objectives.
RISKS OF INVERSE FLOATING RATE SECURITIES.
Each fund may invest up to 10% of its total assets in inverse floating rate
municipal securities. These securities pay interest at a rate that varies
inversely to changes in the interest rate of specified municipal securities or a
specified index. The interest rate on this type of security will generally
change at a multiple of any change in the reference interest rate. As a result,
the values of these securities may be highly volatile as interest rates rise or
fall.
RISKS OF MUNICIPAL LEASE OBLIGATIONS
Each fund may purchase participation interests in municipal leases. These are
undivided interests in a lease, installment purchase contract or conditional
sale contract entered into by a state or local government unit to acquire
equipment or facilities. Participation interests in municipal leases pose
special risks because many leases and contracts contain "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. Although these kinds of
obligations are secured by the leased equipment or facilities, it might be
difficult and time consuming to dispose of the equipment or facilities in the
event of non-appropriation, and the fund might not recover the full principal
amount of the obligation.
YEAR 2000 ISSUES
Like other mutual funds and business and financial organizations, the funds
could be adversely affected if the computer systems used by the funds' advisor,
sub-advisors, other service providers and entities with computer systems that
are linked to fund records do not properly process and calculate date-related
information from and after January 1, 2000. While year 2000-related computer
problems could have a negative effect on the funds, the funds' administrator has
undertaken a program designed to assess and monitor the steps being taken by the
funds' service providers to address year 2000 issues.This program includes
seeking assurances from service providers that their systems are or will be year
2000 compliant and reviewing service providers' periodic reports to monitor
their status concerning their year 2000 readiness and compliance.
The administrator and the advisor also report regularly to the funds' board of
directors concerning their own and other service providers' progress toward year
2000 readiness. Although these reports indicate that service providers are or
expect to be year 2000 compliant, there can be no assurance that this will be
the case in all instances or that year 2000 difficulties experienced by others
in the financial services industry will not impact the funds. In addition, there
can be no assurance that year 2000 difficulties will not have an adverse effect
on the funds' investments or on global markets or economies, generally. The
funds are not bearing any of the expenses incurred by their service providers in
preparing for the year 2000.
24 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about the class A shares
of the funds. Oregon Intermediate Tax Free Fund just commenced offering class A
shares and Minnesota Tax Free Fund and Tax Free Fund just commenced offering
class C shares. Therefore, no information is presented for those shares. This
information is intended to help you understand each fund's financial performance
for the past five years or, if shorter, the period of the fund's operations.
Some of this information reflects financial results for a single fund share.
Total returns in the tables represent the rate that you would have earned or
lost on an investment in a fund, excluding sales charges and assuming you
reinvested all of your dividends and distributions.
This information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report, along with the funds' financial statements, included in
the funds' annual report, which is available upon request.
CALIFORNIA INTERMEDIATE TAX FREE FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997(1)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 10.00
-------
Investment Operations:
Net Investment Income 0.06
Net Gains (Losses) on Securities
(both realized and unrealized) 0.04
-------
Total From Investment Operations 0.10
-------
Less Distributions:
Dividends (from net investment income) (0.06)
Distributions (from capital gains) --
-------
Total Distributions (0.06)
-------
Net Asset Value, End of Period $ $ 10.04
=======
Total Return % 1.02%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 1
Ratio of Expenses to Average Net Assets % 0.69%
Ratio of Net Income to Average Net Assets % 4.48%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.36%
Ratio of Net Income to Average Net Assets (excluding waivers) % 3.81%
Portfolio Turnover Rate % 3%
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) The fund commenced operations on August 8, 1997. All ratios for the period
have been annualized.
25 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
COLORADO INTERMEDIATE TAX FREE FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994(1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 10.42 $ 10.51 $ 10.15 $ 10.00
------- ------- ------- -------
Investment Operations:
Net Investment Income 0.48 0.49 0.49 0.21
Net Gains (Losses) on Securities
(both realized and unrealized) 0.24 (0.04) 0.36 0.16
------- ------- ------- -------
Total From Investment Operations 0.72 0.45 0.85 0.37
------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.48) (0.49) (0.49) (0.22)
Distributions (from capital gains) (0.05) (0.05) -- --
------- ------- ------- -------
Total Distributions (0.53) (0.54) (0.49) (0.22)
------- ------- ------- -------
Net Asset Value, End of Period $ $ 10.61 $ 10.42 $ 10.51 $ 10.15
======= ======= ======= =======
Total Return % 7.11% 4.39% 8.57% 3.66%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 4,187 $ 2,861 $ 2,189 $ 693
Ratio of Expenses to Average Net Assets % 0.70% 0.70% 0.70% 0.69%
Ratio of Net Income to Average Net Assets % 4.55% 4.69% 4.83% 4.51%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.16% 1.18% 1.27% 4.96%
Ratio of Net Income to Average Net Assets (excluding waivers) % 4.09% 4.21% 4.26% 0.24%
Portfolio Turnover Rate % 11% 20% 19% 4%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The fund commenced operations on April 4, 1994. All ratios for the period
have been annualized.
26 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
INTERMEDIATE TAX FREE FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 10.66 $ 10.72 $ 10.28 $ 10.92
------- ------- ------- -------
Investment Operations:
Net Investment Income 0.47 0.46 0.49 0.44
Net Gains (Losses) on Securities
(both realized and unrealized) 0.24 0.01 0.43 (0.57)
------- ------- ------- -------
Total From Investment Operations 0.71 0.47 0.92 (0.13)
------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.47) (0.46) (0.48) (0.44)
Distributions (from capital gains) (0.06) (0.07) -- (0.07)
------- ------- ------- -------
Total Distributions (0.53) (0.53) (0.48) (0.51)
------- ------- ------- -------
Net Asset Value, End of Period $ $ 10.84 $ 10.66 $ 10.72 $ 10.28
------- ------- ------- -------
Total Return % 6.84% 4.45% 9.15% (1.25)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 3,849 $ 2,618 $ 983 $ 1,128
Ratio of Expenses to Average Net Assets % 0.67% 0.66% 0.67% 0.59%
Ratio of Net Income to Average Net Assets % 4.41% 4.35% 4.71% 4.13%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.18% 1.17% 1.30% 2.78%
Ratio of Net Income to Average Net Assets (excluding waivers) % 3.90% 3.84% 4.08% 1.94%
Portfolio Turnover Rate % 66% 53% 68% 52%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
27 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
MINNESOTA INTERMEDIATE TAX FREE FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994(1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 9.91 $ 9.92 $ 9.58 $ 10.00
------- ------- ------- -------
Investment Operations:
Net Investment Income 0.44 0.45 0.46 0.25
Net Gains (Losses) on Securities
(both realized and unrealized) 0.21 0.02 0.33 (0.42)
------- ------- ------- -------
Total From Investment Operations 0.65 0.47 0.79 (0.17)
------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.44) (0.45) (0.45) (0.25)
Distributions (from capital gains) (0.03) (0.03) -- --
------- ------- ------- -------
Total Distributions (0.47) (0.48) (0.45) ( 0.25)
------- ------- ------- -------
Net Asset Value, End of Period $ $ 10.09 $ 9.91 $ 9.92 $ 9.58
======= ======= ======= =======
Total Return % 6.72% 4.80% 8.46% (1.68)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 7,453 $ 3,916 $ 2,219 $ 1,508
Ratio of Expenses to Average Net Assets % 0.70% 0.70% 0.70% 0.67%
Ratio of Net Income to Average Net Assets % 4.49% 4.52% 4.74% 4.57%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.15% 1.18% 1.25% 1.84%
Ratio of Net Income to Average Net Assets (excluding waivers) % 4.04% 4.04% 4.19% 3.40%
Portfolio Turnover Rate % 20% 19% 38% 22%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The fund commenced operations on February 25, 1994. All ratios for the
period have been annualized.
28 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
MINNESOTA TAX FREE FUND(1)
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 10.89 $ 10.81 $ 10.28 $ 11.43
------- ------- ------- -------
Investment Operations:
Net Investment Income 0.57 0.59 0.66 0.61
Net Gains (Losses) on Securities
(both realized and unrealized) 0.31 0.07 0.53 (0.95)
------- ------- ------- -------
Total From Investment Operations 0.88 0.66 1.19 (0.34)
------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.57) (0.58) (0.66) (0.61)
Distributions (from capital gains) (0.05) -- -- (0.20)
------- ------- ------- -------
Total Distributions (0.62) (0.58) (0.66) (0.81)
------- ------- ------- -------
Net Asset Value, End of Period $ $ 11.15 $ 10.89 $ 10.81 $ 10.28
======= ======= ======= =======
Total Return % 8.32% 6.24% 11.38% (3.14)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) % $ 126 $ 126 $ 134 $ 162
Ratio of Expenses to Average Net Assets % 0.95% 0.90% 0.91% 0.89%
Ratio of Net Income to Average Net Assets % 5.17% 5.38% 5.80% 5.61%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.01% 0.99% 0.99% 0.99%
Ratio of Net Income to Average Net Assets (excluding waivers) % 5.11% 5.29% 5.72% 5.51%
Portfolio Turnover Rate % 17% 35% 30% 44%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The financial highlights for the periods prior to August 1, 1998 are those
of Minnesota Tax-Exempt Fund, a series of Piper Funds Inc. This predecessor
fund was reorganized into the fund as of the close of business on July 31,
1998. The fund had no assets or liabilities prior to the reorganization.
29 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
TAX FREE FUND(1)
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 10.81 $ 10.69 $ 10.22 $ 11.76
------- ------- ------- -------
Income From Investment Operations:
Net Investment Income 0.54 0.56 0.60 0.57
Net Gains or Losses on Securities
(both realized and unrealized) 0.42 0.12 0.47 (1.21)
------- ------- ------- -------
Total From Investment Operations 0.96 0.68 1.07 (0.64)
------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.54) (0.56) (0.60) (0.57)
Distributions (from capital gains) (0.02) -- -- (0.33)
------- ------- ------- -------
Total Distributions (0.56) (0.56) (0.60) (0.90)
------- ------- ------- -------
Net Asset Value, End of Period $ $ 11.21 $ 10.81 $ 10.69 $ 10.22
======= ======= ======= =======
Total Return % 9.09% 6.42% 10.30% (5.72)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $ 50 $ 46 $ 57 $ 68
Ratio of Expenses to Average Net Assets % 1.11% 1.03% 1.01% 0.93%
Ratio of Net Income to Average Net Assets % 4.91% 5.15% 5.37% 5.25%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.17% 1.13% 1.09% 1.03%
Ratio of Net Income to Average Net Assets (excluding waivers) % 4.85% 5.05% 5.29% 5.15%
Portfolio Turnover Rate % 28% 43% 28% 65%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The financial highlights for the periods prior to August 1, 1998 are those
of National Tax-Exempt Fund, a series of Piper Funds Inc. This predecessor
fund was reorganized into the fund as of the close of business on July 31,
1998. The fund had no assets or liabilities prior to the reorganization.
30 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FOR MORE INFORMATION
More information about the funds is available in the funds' Statement of
Additional Information and annual and semiannual reports.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more details about the funds and their policies. A current SAI
is on file with the Securities and Exchange Commission (SEC) and is incorporated
into this prospectus by reference (which means that it is legally considered
part of this prospectus).
ANNUAL AND SEMIANNUAL REPORTS
Additional information about the funds' investments is available in the funds'
annual and semiannual reports to shareholders. In the funds' annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the funds' performance during their last fiscal year.
You can obtain a free copy of the funds' SAI and/or free copies of the funds'
most recent annual or semiannual reports by calling Investor Services at
1-800-637-2548. The material you request will be sent by first-class mail or
other means designed to ensure equally prompt delivery, within three business
days of receipt of the request.
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC, or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. For more information, call
1-800-SEC-0330.
Information about the funds is also available on the Internet. Text-only
versions of fund documents can be viewed online or down-loaded from the SEC's
Internet site at http://www.sec.gov.
SEC file number: 811-05309
FAIF-1001 (9/1998)
<PAGE>
FEBRUARY 1, 1999
TAX FREE BOND FUNDS
CLASS Y SHARES
CALIFORNIA INTERMEDIATE TAX FREE FUND
COLORADO INTERMEDIATE TAX FREE FUND
INTERMEDIATE TAX FREE FUND
MINNESOTA INTERMEDIATE TAX FREE FUND
MINNESOTA TAX FREE FUND
OREGON INTERMEDIATE TAX FREE FUND
TAX FREE FUND
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of these funds, or determined if the
information in this prospectus is accurate or complete. Any statement to the
contrary is a criminal offense.
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(R)
<PAGE>
TABLE OF CONTENTS
FUND SUMMARIES
- --------------------------------------------------------------------------------
California Intermediate Tax Free Fund 2
- --------------------------------------------------------------------------------
Colorado Intermediate Tax Free Fund 4
- --------------------------------------------------------------------------------
Intermediate Tax Free Fund 6
- --------------------------------------------------------------------------------
Minnesota Intermediate Tax Fee Fund 8
- --------------------------------------------------------------------------------
Minnesota Tax Free Fund 10
- --------------------------------------------------------------------------------
Oregon Intermediate Tax Free Fund 12
- --------------------------------------------------------------------------------
Tax Free Fund 14
- --------------------------------------------------------------------------------
POLICIES & SERVICES
- --------------------------------------------------------------------------------
Buying and Selling Shares 16
- --------------------------------------------------------------------------------
Managing Your Investment 17
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Management 18
- --------------------------------------------------------------------------------
More About The Funds 19
- --------------------------------------------------------------------------------
Financial Highlights 21
- --------------------------------------------------------------------------------
FOR MORE INFORMATION Back Cover
<PAGE>
FUND SUMMARIES
INTRODUCTION
This section of the prospectus describes the objectives of the First American
Tax Free Bond Funds, summarizes the main investment strategies used by each fund
in trying to achieve its objectives, and highlights the risks involved with
these strategies. It also provides you with information about the performance,
fees and expenses of the funds.
AN INVESTMENT IN THE FUNDS IS NOT A DEPOSIT OF U.S. BANK NATIONAL ASSOCIATION
AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
1 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
CALIFORNIA INTERMEDIATE TAX FREE FUND
- --------------------------------------------------------------------------------
OBJECTIVE
California Intermediate Tax Free Fund has an objective of providing current
income that is exempt from both federal income tax and California state income
tax to the extent consistent with preservation of capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, California Intermediate Tax Free Fund invests at
least 80% of its net assets in municipal securities that pay interest that is
exempt from federal income tax, including the federal alternative minimum tax,
and from California income tax. The fund normally may invest up to 20% of its
net assets in taxable obligations, including obligations subject to the federal
alternative minimum tax.
The fund may invest in "general obligation" bonds, which are backed by the full
faith, credit and taxing power of the issuer, and in "revenue" bonds, which are
payable only from the revenues generated by a specific project or from another
specific revenue source. The fund may also purchase participation interests in
municipal leases. The fund's municipal security investments may include zero
coupon securities, which pay no cash income to their holders until they mature.
Up to 10% of the fund's total assets may be invested in inverse floating rate
municipal securities.
The fund only invests in securities that, at the time of purchase, are either
rated investment grade or are unrated and determined to be of comparable quality
by the fund's advisor. Long-term securities must be rated BBB or better by
Standard & Poor's Corporation, Baa or better by Moody's Investors Service or
comparably rated by another national rating organization. Municipal notes must
be rated SP-1 or better by Standard & Poor's, MIG/VMIG-1 by Moody's or
comparably rated by another national rating organization. Unrated securities
will not exceed 25% of the fund's total assets.
The fund will attempt to maintain the weighted average maturity of its portfolio
securities at 3 to 10 years under normal market conditions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities.
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities. The revenue bonds and municipal lease obligations in which
the fund invests may entail greater credit risk than the fund's investments in
general obligation bonds.
CALL RISK
Some municipal securities held by the fund may be redeemed by the issuer, or
"called," prior to their stated maturity dates. If a security is redeemed during
a time of declining interest rates, the fund may be unable to reinvest in
securities providing as high a level of income.
POLITICAL AND ECONOMIC RISK
Because the fund invests primarily in municipal securities issued by the state
of California and its political subdivisions, the fund will be particularly
affected by political and economic conditions and developments in that state.
See the Statement of Additional Information for details. The value of municipal
securities owned by the fund also may be adversely affected by future changes in
federal or state income tax laws, including rate reductions or the imposition of
a flat tax.
RISKS OF NON-DIVERSIFICATION
The fund is non-diversified. This means that it may invest a larger portion of
its assets in a limited number of issuers than a diversified fund. Because a
relatively high percentage of the fund's assets may be invested in the
securities of a limited number of issuers, the fund may be more susceptible to
any single economic, political or regulatory occurrence than a diversified fund.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart is intended to show you how performance of the fund's shares has
varied from year to year. However, because the fund did not commence operations
until 1997, only one calendar year of information is available.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
2 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
CALIFORNIA INTERMEDIATE TAX FREE FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The since inception
performance for the index
[BAR CHART] is calculated from the
month end following the
1998 fund's inception.
(2) An unmanaged index
comprised of fixed rate,
investment grade
tax-exempt bonds with
maturities between six and
eight years.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception(1)
AS OF 12/31/98 One Year (8/8/97)
- --------------------------------------------------------------------------------
California Intermediate Tax Free Fund % %
- --------------------------------------------------------------------------------
Lehman Brothers 7-Year Municipal Bond Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
before any waivers during the fiscal year ended September 30, 1998.(1)
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor and the distributor. See
"Additional Information -- Financial Highlights." THE ADVISOR INTENDS TO
WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING
EXPENSES DO NOT EXCEED 0.70%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
3 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
COLORADO INTERMEDIATE TAX FREE FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Colorado Intermediate Tax Free Fund has an objective of providing current income
that is exempt from both federal income tax and Colorado state income tax to the
extent consistent with preservation of capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Colorado Intermediate Tax Free Fund invests at
least 80% of its net assets in municipal securities that pay interest that is
exempt from federal income tax, including the federal alternative minimum tax,
and from Colorado income tax. The fund normally may invest up to 20% of its net
assets in taxable obligations, including obligations subject to the federal
alternative minimum tax.
The fund may invest in "general obligation" bonds, which are backed by the full
faith, credit and taxing power of the issuer, and in "revenue" bonds, which are
payable only from the revenues generated by a specific project or from another
specific revenue source. The fund may also purchase participation interests in
municipal leases. The fund's municipal security investments may include zero
coupon securities, which pay no cash income to their holders until they mature.
Up to 10% of the fund's total assets may be invested in inverse floating rate
municipal securities.
The fund only invests in securities that, at the time of purchase, are either
rated investment grade or are unrated and determined to be of comparable quality
by the fund's advisor. Long-term securities must be rated BBB or better by
Standard & Poor's Corporation, Baa or better by Moody's Investors Service or
comparably rated by another national rating organization. Municipal notes must
be rated SP-1 or better by Standard & Poor's, MIG/VMIG-1 by Moody's or
comparably rated by another national rating organization. Municipal notes must
be rated SP-1 or better by Standard & Poor's, MIG/VMIG-1 by Moody's or
comparably rated by another rating organization. Unrated securities will not
exceed 25% of the fund's total assets.
The fund will attempt to maintain the weighted average maturity of its portfolio
securities at 3 to 10 years under normal market conditions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities.
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities. The revenue bonds and municipal lease obligations in which
the fund invests may entail greater credit risk than the fund's investments in
general obligation bonds.
CALL RISK
Some municipal securities held by the fund may be redeemed by the issuer, or
"called," prior to their stated maturity dates. If a security is redeemed during
a time of declining interest rates, the fund may be unable to reinvest in
securities providing as high a level of income.
POLITICAL AND ECONOMIC RISK
Because the fund invests primarily in municipal securities issued by the state
of Colorado and its political subdivisions, the fund will be particularly
affected by political and economic conditions and developments in that state.
See the Statement of Additional Information for details. The value of municipal
securities owned by the fund also may be adversely affected by future changes in
federal or state income tax laws, including rate reductions or the imposition of
a flat tax.
RISKS OF NON-DIVERSIFICATION
The fund is non-diversified. This means that it may invest a larger portion of
its assets in a limited number of issuers than a diversified fund. Because a
relatively high percentage of the fund's assets may be invested in the
securities of a limited number of issuers, the fund may be more susceptible to
any single economic, political or regulatory occurrence than a diversified fund.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
4 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
COLORADO INTERMEDIATE TAX FREE FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The since inception
performance for the index
[BAR CHART] is calculated from the
month end following the
1995 fund's inception.
1996
1997 (2) An unmanaged index
1998 comprised of fixed rate,
investment grade
tax-exempt bonds with
maturities between six and
eight years.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception(1)
AS OF 12/31/98 One Year (4/4/94)
- --------------------------------------------------------------------------------
Colorado Intermediate Tax Free Fund % %
- --------------------------------------------------------------------------------
Lehman Brothers 7-Year Municipal Bond Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
before any waivers during the fiscal year ended September 30, 1998.(1)
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor and the distributor. See
"Additional Information -- Financial Highlights." THE ADVISOR INTENDS TO
WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING
EXPENSES DO NOT EXCEED 0.70%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
5 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
INTERMEDIATE TAX FREE FUND
- --------------------------------------------------------------------------------
OBJECTIVE
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.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Intermediate Tax Free Fund invests at least 80%
of its net assets in municipal securities that pay interest that is exempt from
federal income tax, including the federal alternative minimum tax. The fund
normally may invest up to 20% of its net assets in taxable obligations,
including obligations subject to the federal alternative minimum tax.
The fund may invest in "general obligation" bonds, which are backed by the full
faith, credit and taxing power of the issuer, and in "revenue" bonds, which are
payable only from the revenues generated by a specific project or from another
specific revenue source. The fund may also purchase participation interests in
municipal leases. The fund's municipal security investments may include zero
coupon securities, which pay no cash income to their holders until they mature.
Up to 10% of the fund's total assets may be invested in inverse floating rate
municipal securities.
The fund only invests in securities that, at the time of purchase, are either
rated investment grade or are unrated and determined to be of comparable quality
by the fund's advisor. Long-term securities must be rated BBB or better by
Standard & Poor's Corporation, Baa or better by Moody's Investors Service or
comparably rated by another national rating organization. Municipal notes must
be rated SP-1 or better by Standard & Poor's, MIG/VMIG-1 by Moody's or
comparably rated by another national rating organization. Unrated securities
will not exceed 25% of the fund's total assets.
The fund will attempt to maintain the weighted average maturity of its portfolio
securities at 3 to 10 years under normal market conditions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities.
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities. The revenue bonds and municipal lease obligations in which
the fund invests may entail greater credit risk than the fund's investments in
general obligation bonds.
CALL RISK
Some municipal securities held by the fund may be redeemed by the issuer, or
"called," prior to their stated maturity dates. If a security is redeemed during
a time of declining interest rates, the fund may be unable to reinvest in
securities providing as high a level of income.
POLITICAL AND ECONOMIC RISK
The value of municipal securities owned by the fund may be adversely affected by
state and local political and economic conditions and developments, or by future
changes in federal or state income tax laws, including rate reductions or the
imposition of a flat tax.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
6 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
INTERMEDIATE TAX FREE FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The since inception
performance for the index
[BAR CHART] is calculated from the
month end following the
1995 inception of class Y
1996 shares.
1997
1998 (2) An unmanaged index
comprised of fixed rate,
investment grade, general
obligation tax-exempt
bonds with maturities
between six and eight
years.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception(1)
AS OF 12/31/98 One Year (2/4/94)
- --------------------------------------------------------------------------------
Intermediate Tax Free Fund % %
- --------------------------------------------------------------------------------
Lehman Brothers 7-Year G.O. Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
before any waivers during the fiscal year ended September 30, 1998.(1)
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor and the distributor. See
"Additional Information -- Financial Highlights." THE ADVISOR INTENDS TO
WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING
EXPENSES DO NOT EXCEED 0.70%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
7 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
MINNESOTA INTERMEDIATE TAX FREE FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Minnesota Intermediate Tax Free Fund has an objective of providing current
income that is exempt from both federal income tax and Minnesota state income
tax to the extent consistent with preservation of capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Minnesota Intermediate Tax Free Fund invests at
least 80% of its net assets in municipal securities that pay interest that is
exempt from federal and Minnesota income tax, including federal and state of
Minnesota alternative minimum tax. The fund normally may invest up to 20% of its
net assets in taxable obligations, including obligations subject to federal and
state of Minnesota alternative minimum tax.
The fund may invest in "general obligation" bonds, which are backed by the full
faith, credit and taxing power of the issuer, and in "revenue" bonds, which are
payable only from the revenues generated by a specific project or from another
specific revenue source. The fund may also purchase participation interests in
municipal leases. The fund's municipal security investments may include zero
coupon securities, which pay no cash income to their holders until they mature.
Up to 10% of the fund's total assets may be invested in inverse floating rate
municipal securities.
The fund only invests in securities that, at the time of purchase, are either
rated investment grade or are unrated and determined to be of comparable quality
by the fund's advisor. Long-term securities must be rated BBB or better by
Standard & Poor's Corporation, Baa or better by Moody's Investors Service or
comparably rated by another national rating organization. Municipal notes must
be rated SP-1 or better by Standard & Poor's, MIG/VMIG-1 by Moody's or
comparably rated by another national rating organization. Unrated securities
will not exceed 25% of the fund's total assets.
The fund will attempt to maintain the weighted average maturity of its portfolio
securities at 3 to 10 years under normal market conditions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities.
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities. The revenue bonds and municipal lease obligations in which
the fund invests may entail greater credit risk than the fund's investments in
general obligation bonds.
CALL RISK
Some municipal securities held by the fund may be redeemed by the issuer, or
"called," prior to their stated maturity dates. If a security is redeemed during
a time of declining interest rates, the fund may be unable to reinvest in
securities providing as high a level of income.
POLITICAL AND ECONOMIC RISK
Because the fund invests primarily in municipal securities issued by the state
of Minnesota and its political subdivisions, the fund will be particularly
affected by political and economic conditions and developments in that state.
See the Statement of Additional Information for details. The value of municipal
securities owned by the fund also may be adversely affected by future changes in
federal or state income tax laws, including rate reductions or the imposition of
a flat tax.
RISKS OF NON-DIVERSIFICATION
The fund is non-diversified. This means that it may invest a larger portion of
its assets in a limited number of issuers than a diversified fund. Because a
relatively high percentage of the fund's assets may be invested in the
securities of a limited number of issuers, the fund may be more susceptible to
any single economic, political or regulatory occurrence than a diversified fund.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
8 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
MINNESOTA INTERMEDIATE TAX FREE FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The since inception
performance for the index
[BAR CHART] is calculated from the
month end following the
1995 fund's inception.
1996
1997 (2) An unmanaged index
1998 comprised of fixed rate,
investment grade
tax-exempt bonds with
maturities between six and
eight years.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception(1)
AS OF 12/31/98 One Year (2/25/94)
- --------------------------------------------------------------------------------
Minnesota Intermediate Tax Free Fund % %
- --------------------------------------------------------------------------------
Lehman Brothers 7-Year Municipal Bond Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
before any waivers during the fiscal year ended September 30, 1998.(1)
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor and the distributor. See
"Additional Information -- Financial Highlights." THE ADVISOR INTENDS TO
WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING
EXPENSES DO NOT EXCEED 0.70%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
9 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
MINNESOTA TAX FREE FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Minnesota Tax Free Fund has an objective of providing maximum current income
that is exempt from both federal income tax and Minnesota state income tax to
the extent consistent with prudent investment risk.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Minnesota Tax Free Fund invests at least 80% of
its net assets in municipal securities that pay interest that is exempt from
federal and Minnesota income tax, including federal and state of Minnesota
alternative minimum tax. The fund normally may invest up to 20% of its net
assets in taxable obligations, including obligations subject to federal and
state of Minnesota alternative minimum tax.
The fund may invest in "general obligation" bonds, which are backed by the full
faith, credit and taxing power of the issuer, and in "revenue" bonds, which are
payable only from the revenues generated by a specific project or from another
specific revenue source. The fund may also purchase participation interest in
municipal leases. The fund's municipal security investments may include zero
coupon securities, which pay no cash income to their holders until they mature.
Up to 10% of the fund's total assets may be invested in inverse floating rate
municipal securities.
The fund only invests in securities that, at the time of purchase, are either
rated investment grade or are unrated and determined to be of comparable quality
by the fund's advisor. Long-term securities must be rated BBB or better by
Standard & Poor's Corporation, Baa or better by Moody's Investors Service or
comparably rated by another national rating organization. Municipal notes must
be rated SP-1 or better by Standard & Poor's, MIG/VMIG-1 by Moody's or
comparably rated by another national rating organization. Unrated securities
will not exceed 25% of the fund's total assets.
The fund will attempt to maintain the weighted average maturity of its portfolio
securities at 15 to 25 years under normal market conditions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities.
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities. The revenue bonds and municipal lease obligations in which
the fund invests may entail greater credit risk than the fund's investments in
general obligation bonds.
CALL RISK
Some municipal securities held by the fund may be redeemed by the issuer, or
"called," prior to their stated maturity dates. If a security is redeemed during
a time of declining interest rates, the fund may be unable to reinvest in
securities providing as high a level of income.
POLITICAL AND ECONOMIC RISK
Because the fund invests primarily in municipal securities issued by the state
of Minnesota and its political subdivisions, the fund will be particularly
affected by political and economic conditions and developments in that state.
See the Statement of Additional Information for details. The value of municipal
securities owned by the fund also may be adversely affected by future changes in
federal or state income tax laws, including rate reductions or the imposition of
a flat tax.
RISKS OF NON-DIVERSIFICATION
The fund is non-diversified. This means that it may invest a larger portion of
its assets in a limited number of issuers than a diversified fund. Because a
relatively high percentage of the fund's assets may be invested in the
securities of a limited number of issuers, the fund may be more susceptible to
any single economic, political or regulatory occurrence than a diversified fund.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart is intended to show you how performance of the fund's shares has
varied from year to year. However, because class Y shares were first offered in
1997, only one calendar year of information is available.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
10 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
MINNESOTA TAX FREE FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The since inception
performance for the index
[BAR CHART] is calculated from the
month end following the
1998 inception of class Y
shares.
(2) An unmanaged index
comprised of fixed rate,
investment grade
tax-exempt bonds with
remaining maturities of
one year or more.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception(1)
AS OF 12/31/98 One Year (8/1/97)
- --------------------------------------------------------------------------------
Minnesota Tax Free Fund % %
- --------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
before any waivers during the fiscal year ended September 30, 1998.(1)
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor and the distributor. See
"Additional Information -- Financial Highlights." THE ADVISOR INTENDS TO
WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING
EXPENSES DO NOT EXCEED 0.70%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
11 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
OREGON INTERMEDIATE TAX FREE FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Oregon Intermediate Tax Free Fund has an objective of providing current income
that is exempt from both federal income tax and Oregon state income tax to the
extent consistent with preservation of capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Oregon Intermediate Tax Free Fund invests at
least 80% of its net assets in municipal securities that pay interest that is
exempt from federal income tax, including the federal alternative minimum tax,
and from Oregon income tax. The fund normally may invest up to 20% of its net
assets in taxable obligations, including obligations subject to the federal
alternative minimum tax.
The fund may invest in "general obligation" bonds, which are backed by the full
faith, credit and taxing power of the issuer, and in "revenue" bonds, which are
payable only from the revenues generated by a specific project or from another
specific revenue source. The fund may also purchase participation interests in
municipal leases. The fund's municipal security investments may include zero
coupon securities, which pay no cash income to their holders until they mature.
Up to 10% of the fund's total assets may be invested in inverse floating rate
municipal securities.
The fund only invests in securities that, at the time of purchase, are either
rated investment grade or are unrated and determined to be of comparable quality
by the fund's advisor. Long-term securities must be rated BBB or better by
Standard & Poor's Corporation, Baa or better by Moody's Investors Service or
comparably rated by another national rating organization. Municipal notes must
be rated SP-1 or better by Standard & Poor's, MIG/VMIG-1 by Moody's or
comparably rated by another national rating organization. Unrated securities
will not exceed 25% of the fund's total assets.
The fund will attempt to maintain the weighted average maturity of its portfolio
securities at 3 to 10 years under normal market conditions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities.
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities. The revenue bonds and municipal lease obligations in which
the fund invests may entail greater credit risk than the fund's investments in
general obligation bonds.
CALL RISK
Some municipal securities held by the fund may be redeemed by the issuer, or
"called," prior to their stated maturity dates. If a security is redeemed during
a time of declining interest rates, the fund may be unable to reinvest in
securities providing as high a level of income.
POLITICAL AND ECONOMIC RISK
Because the fund invests primarily in municipal securities issued by the state
of Oregon and its political subdivisions, the fund will be particularly affected
by political and economic conditions and developments in that state. See the
Statement of Additional Information for details. The value of municipal
securities owned by the fund also may be adversely affected by future changes in
federal or state income tax laws, including rate reductions or the imposition of
a flat tax.
RISKS OF NON-DIVERSIFICATION
The fund is non-diversified. This means that it may invest a larger portion of
its assets in a limited number of issuers than a diversified fund. Because a
relatively high percentage of the fund's assets may be invested in the
securities of a limited number of issuers, the fund may be more susceptible to
any single economic, political or regulatory occurrence than a diversified fund.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart is intended to show you how performance of the fund's shares has
varied from year to year. However, because the fund did not commence operations
until 1997, only one calendar year of information is available.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
12 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
OREGON INTERMEDIATE TAX FREE FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) The since inception
performance for the index
[BAR CHART] is calculated from the
month end following the
1998 fund's inception.
(2) An unmanaged index
comprised of fixed rate,
investment grade
tax-exempt bonds with
maturities between six and
eight years.
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS Since Inception(1)
AS OF 12/31/98 One Year (8/8/97)
- --------------------------------------------------------------------------------
Oregon Intermediate Tax Free Fund % %
- --------------------------------------------------------------------------------
Lehman Brothers 7-Year Municipal Bond Index(2) % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
before any waivers during the fiscal year ended September 30, 1998.(1)
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor and the distributor. See
"Additional Information -- Financial Highlights." THE ADVISOR INTENDS TO
WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING
EXPENSES DO NOT EXCEED 0.70%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
13 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
TAX FREE FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Tax Free Fund has an objective of providing maximum current income that is
exempt from federal income tax to the extent consistent with prudent investment
risk.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Tax Free Fund invests at least 80% of its net
assets in municipal securities that pay interest that is exempt from federal
income tax, including the federal alternative minimum tax. The fund normally may
invest up to 20% of its net assets in taxable obligations, including obligations
subject to the federal alternative minimum tax.
The fund may invest in "general obligation" bonds, which are backed by the full
faith, credit and taxing power of the issuer, and in "revenue" bonds, which are
payable only from the revenues generated by a specific project or from another
specific revenue source. The fund may also purchase participation interests in
municipal leases. The fund's municipal security investments may include zero
coupon securities, which pay no cash income to their holders until they mature.
Up to 10% of the fund's total assets may be invested in inverse floating rate
municipal securities.
The fund only invests in securities that, at the time of purchase, are either
rated investment grade or are unrated and determined to be of comparable quality
by the fund's advisor. Long-term securities must be rated BBB or better by
Standard & Poor's Corporation, Baa or better by Moody's Investors Service or
comparably rated by another national rating organization. Municipal notes must
be rated SP-1 or better by Standard & Poor's, MIG/VMIG-1 by Moody's or
comparably rated by another national rating organization. Unrated securities
will not exceed 25% of the fund's total assets.
The fund attempts to maintain the weighted average maturity of its portfolio
securities at 15 to 25 years under normal market conditions.
- --------------------------------------------------------------------------------
MAIN RISKS
The price and yield of this fund will change daily due to changes in interest
rates and other factors, which means you could lose money. The main risks of
investing in this fund include:
INTEREST RATE RISK
Debt securities typically decrease in value when interest rates rise. This risk
is usually greater for longer-term debt securities.
CREDIT RISK
An issuer of debt securities may not make timely principal or interest payments
on its securities. The revenue bonds and municipal lease obligations in which
the fund invests may entail greater credit risk than the fund's investments in
general obligation bonds.
CALL RISK
Some municipal securities held by the fund may be redeemed by the issuer, or
"called," prior to their stated maturity dates. If a security is redeemed during
a time of declining interest rates, the fund may be unable to reinvest in
securities providing as high a level of income.
POLITICAL AND ECONOMIC CONDITIONS
The value of municipal securities owned by the fund may be adversely affected by
state and local political and economic conditions and developments, or by future
changes in federal or state income tax laws, including rate reductions or the
imposition of a flat tax.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
Illustrations on the next page provide you with information on the fund's
volatility and performance. Of course, how the fund has performed in the past
does not necessarily indicate how it will perform in the future.
The bar chart shows you how performance of the fund's shares has varied from
year to year.
The table compares the fund's performance over different time periods to that of
the fund's benchmark index, which is a broad measure of market performance. The
composition of the index differs from that of the fund's portfolio. Therefore,
you should expect differences in performance. In addition, the fund's
performance reflects fund expenses; the benchmark is unmanaged and has no
expenses.
Both the chart and the table assume that all distributions have been reinvested.
Because class Y shares have not been offered for a full calendar year,
information in the chart and the table is for the fund's class A shares, which
are offered through another prospectus. The classes will have substantially
similar returns, because they are invested in the same portfolio of securities.
However, class Y shares will have higher returns because their expenses are
lower.
14 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FUND SUMMARIES
TAX FREE FUND (CONTINUED)
- --------------------------------------------------------------------------------
FUND PERFORMANCE (CONTINUED)
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (1) Class A share returns
reflect a 2% front-end
[BAR CHART] sales charge. Class Y
shares have no sales
1989 8.77% charge.
1990 7.24%
1991 12.03% (2) An unmanaged index
1992 8.58% comprised of fixed rate,
1993 14.55% investment grade
1994 -8.46% tax-exempt bonds with
1995 18.54% remaining maturities of
1996 3.45% one year or more.
1997 9.04%
1998
Best Quarter: Quarter ending , 199 %
Worst Quarter: Quarter ending , 199 %
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98 One Year Five Years Ten Years
- --------------------------------------------------------------------------------
Tax Free Fund (Class A)(1) % % %
- --------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index(2) % % %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEES AND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of the fund.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly. They are deducted from fund assets and their
effect is reflected in the share price. The figures below show fund expenses
before any waivers during the fiscal year ended September 30, 1998.(1)
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Management Fees 0.70%
Distribution and Service (12b-1) Fees None
Other Expenses %
TOTAL %
- --------------------------------------------------------------------------------
(1) Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers by the advisor and the distributor. See
"Additional Information -- Financial Highlights." THE ADVISOR INTENDS TO
WAIVE FEES DURING THE CURRENT FISCAL YEAR SO THAT TOTAL FUND OPERATING
EXPENSES DO NOT EXCEED 0.70%. FEE WAIVERS MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
FOR EXAMPLE This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 for the time periods indicated, that your investment has a
5% return each year, and that the fund's operating expenses remain as set
forth in the above table, without any waivers. Although your actual costs and
returns may differ, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 year $
3 years $
5 years $
10 years $
15 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
POLICIES & SERVICES
BUYING AND SELLING SHARES
Class Y shares are offered through banks and other financial institutions that
have entered into sales agreements with the funds' distributor. Class Y shares
are available to these financial institutions for the investment of their own
funds. Class Y shares also are available to certain accounts for which the
financial institution acts in a fiduciary, agency or custodial capacity, such as
certain trust accounts and investment advisory accounts. To find out whether you
may purchase class Y shares, contact your financial institution.
- --------------------------------------------------------------------------------
CALCULATING YOUR SHARE PRICE
Your purchase price will be equal to the fund's net asset value (NAV) per share,
which is generally calculated as of the close of regular trading on the New York
Stock Exchange (usually 3 p.m. Central time) every day the exchange is open.
A fund's NAV is equal to the market value of its investments and other assets,
less any liabilities, divided by the number of fund shares. If market prices are
not readily available for an investment or if the advisor believes they are
unreliable, fair value prices may be determined in good faith using methods
approved by the funds' board of directors.
- --------------------------------------------------------------------------------
HOW TO BUY AND SELL SHARES
You may purchase or sell shares by calling your financial institution.
When purchasing shares, payment must be made by wire transfer, which can be
arranged by your financial institution. Because purchases must be paid for by
wire transfer, you can purchase shares only on days when both the New York Stock
Exchange and federally chartered banks are open. You may sell your shares on any
day when the New York Stock Exchange is open.
Purchase orders and redemption requests must be received by your financial
institution by the time specified by the institution to be assured same day
processing. In order for shares to be purchased at that day's price, the funds
must receive your purchase order by 3:00 p.m. Central time and the funds'
custodian must receive federal funds before the close of business. In order for
shares to be sold at that day's price, the funds must receive your redemption
request by 3:00 p.m. Central time. It is the responsibility of your financial
institution to promptly transmit orders to the funds.
If the funds receive your redemption request by 3:00 p.m. Central time, payment
of your redemption proceeds will ordinarily be made by wire on the next business
day. It is possible, however, that payment could be delayed by up to seven days.
- --------------------------------------------------------------------------------
HOW TO EXCHANGE SHARES
If your investment goals or your financial needs change, you may exchange your
shares for class Y shares of another First American fund. Exchanges will be made
at the net asset value per share of each fund at the time of the exchange. There
is no fee to exchange shares. If you are no longer eligible to hold class Y
shares, for example, if you decide to discontinue your fiduciary, agency or
custodian account, you may exchange your shares for class A shares at net asset
value. Class A shares have higher expenses than class Y shares.
To exchange your shares, call your financial institution. In order for your
shares to be exchanged the same day, you must call your financial institution by
the time specified by the institution and your exchange order must be received
by the funds by 3:00 p.m. Central time. It is the responsibility of your
financial institution to promptly transmit your exchange order to the funds.
Before exchanging into any fund, be sure to read its prospectus carefully. A
fund may change or cancel its exchange policies at any time. You will be
notified of any changes. The funds have the right to limit exchanges to four
times per year.
16 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT
- --------------------------------------------------------------------------------
STAYING INFORMED
SHAREHOLDER REPORTS
Shareholder reports are mailed twice a year, in November and May. They include
financial statements, performance information, a message from your portfolio
managers, and, on an annual basis, the auditors' report.
In an attempt to reduce shareholder costs and help eliminate duplication, the
funds will try to limit their mailings to one report for each address that lists
one or more shareholders with the same last name. If you would like additional
copies, please call 1-800-637-2548.
STATEMENTS AND CONFIRMATIONS
Statements summarizing activity in your account are mailed at least quarterly.
Confirms are mailed following each purchase or sale of fund shares.
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from a fund's net investment income are declared and paid monthly. Any
capital gains are distributed at least once each year.
On the ex-dividend date for a distribution, a fund's share price is reduced by
the amount of the distribution. If you buy shares just before the ex-dividend
date, in effect, you "buy the dividend." You will pay the full price for the
shares and then receive a portion of that price back as a distribution, all or a
portion of which may be taxable (to the same extent the distribution is
otherwise taxable to fund shareholders).
Dividend and capital gain distributions will be reinvested in additional shares
of the fund paying the distribution, unless you request cash payments on your
new account form or by writing to the fund. Shares will be priced at the NAV
computed on the ex-dividend date.
- --------------------------------------------------------------------------------
TAXES
Some of the tax consequences of investing in the funds are discussed below. More
information about taxes is in the Statement of Additional Information. However,
because everyone's tax situation is unique, always consult your tax professional
about federal, state and local tax consequences.
TAXES ON DISTRIBUTIONS
Each fund intends to meet certain federal tax requirements so that distributions
of tax-exempt interest income may be treated as "exempt-interest dividends."
These dividends are not subject to regular federal income tax. However, each
fund may invest up to 20% of its net assets in municipal securities subject to
the alternative minimum tax. Any portion of exempt- interest dividends
attributable to interest on these securities may increase some shareholders'
alternative minimum tax. The funds expect that their distributions will consist
primarily of exempt-interest dividends. Intermediate Tax Free Fund's and Tax
Free Fund's exempt-interest dividends may be subject to state or local taxes.
Distributions paid from any interest income that is not tax-exempt and from any
net realized capital gains will be taxable whether you reinvest those
distributions or take them in cash.
TAXES ON TRANSACTIONS
The sale or exchange of fund shares will be a taxable event for you and may
result in a capital gain or loss. The gain or loss will be considered long-term
if you have held your shares for more than one year. A gain or loss on shares
held for one year or less is considered short-term and is taxed at the same
rates as ordinary income.
CALIFORNIA INCOME TAXATION
California Intermediate Tax Free Fund intends to comply with certain state tax
requirements so that dividends it pays that are attributable to interest on
California municipal securities will be excluded from the California taxable
income of individuals, trusts and estates. To meet these requirements, at least
50% of the value of the fund's total assets must consist of obligations which
pay interest that is exempt from California personal income tax. Exempt-interest
dividends are not excluded from the California taxable income of corporations
and financial institutions.
COLORADO INCOME TAXATION
Dividends paid by Colorado Intermediate Tax Free Fund will be exempt from
Colorado income taxes for individuals, trusts, estates and corporations to the
extent that they are derived from interest on Colorado municipal securities. In
addition, dividends derived from interest on Colorado municipal securities
(including securities treated for federal purposes as private activity bonds)
will not be treated as items of tax preference for purposes of Colorado's
alternative minimum tax.
MINNESOTA INCOME TAXATION
Minnesota Intermediate Tax Free Fund and Minnesota Tax Free Fund intend to
comply with certain state tax requirements so that dividends they pay that are
attributable to interest on Minnesota municipal securities will be excluded from
the Minnesota taxable net income of individuals estates and trusts. To meet
these requirements, at least 95% of the exempt-interest dividends paid by each
fund must be derived from interest income on Minnesota municipal securities. A
portion of each fund's dividends may be subject to the Minnesota alternative
minimum tax. Exempt-interest dividends are not excluded from the Minnesota
taxable income of corporations and financial institutions.
OREGON INCOME TAXATION
Dividends paid by Oregon Intermediate Tax Free Fund will be exempt from Oregon
income taxes for individuals, trusts and estates to the extent that they are
derived from interest on Oregon municipal securities. Such dividends will not be
excluded from the Oregon taxable income of corporations.
17 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
MANAGEMENT
INVESTMENT ADVISOR
FIRST AMERICAN ASSET MANAGEMENT
601 SECOND AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55402
U.S. Bank National Association (U.S. Bank), acting through its First American
Asset Management division, is the funds' investment advisor. First American
Asset Management provides investment management services to individuals and
institutions, including corporations, foundations, pensions and retirement
plans. As of December 31, 1998, it had more than $______ in assets under
management, including investment company assets of approximately $______. As
investment advisor, First American Asset Management manages the funds' business
and investment activities, subject to the authority of the board of directors.
Each fund pays the investment advisor a monthly fee for providing investment
advisory services. During their most recent fiscal years, the funds paid the
following investment advisory fees to First American Asset Management:
ADVISORY FEE
AS A % OF
AVERAGE DAILY
NET ASSETS
- --------------------------------------------------------------------------------
CALIFORNIA INTERMEDIATE
TAX FREE FUND %
COLORADO INTERMEDIATE
TAX FREE FUND %
INTERMEDIATE TAX FREE FUND %
MINNESOTA INTERMEDIATE
TAX FREE FUND %
MINNESOTA TAX FREE FUND %
OREGON INTERMEDIATE
TAX FREE FUND %
TAX FREE FUND %
- --------------------------------------------------------------------------------
CUSTODIAN
U.S. BANK NATIONAL ASSOCIATION
U.S. BANK CENTER
180 EAST FIFTH STREET
ST. PAUL, MINNESOTA 55101
ADMINISTRATOR
SEI INVESTMENTS MANAGEMENT CORPORATION
OAKS, PENNSYLVANIA 19456
DISTRIBUTOR
SEI INVESTMENTS DISTRIBUTION CO.
OAKS, PENNSYLVANIA 19456
TRANSFER AGENT
DST SYSTEMS, INC.
330 WEST NINTH STREET
KANSAS CITY, MISSOURI 64105
ADDITIONAL COMPENSATION
In addition to receiving compensation for acting as the funds' investment
advisor as described above, U.S. Bank and its affiliates receive compensation in
connection with the following:
CUSTODY SERVICES. As compensation for acting as the funds' custodian, U.S. Bank
is paid monthly fees equal, on an annual basis, to 0.03% of a fund's average
daily net assets. In addition, U.S. Bank is reimbursed for its out-of-pocket
expenses incurred while providing custody services to the funds.
SUB-ADMINISTRATION SERVICES. U.S. Bank assists the administrator and provides
sub-administration services to the funds. For providing these services, U.S.
Bank is compensated by the funds' administrator at an annual rate of up to
0.05% of each fund's average daily net assets.
SECURITIES LENDING SERVICES. In connection with lending their portfolio
securities, the funds pay administrative and custodial fees to U.S. Bank which
are equal to 40% of the funds' income from these securities lending
transactions.
BROKERAGE TRANSACTIONS. The funds purchase most of their portfolio securities
directly from the issuer or from an underwriter or market maker, and not from a
broker acting as agent. However, the funds may from time to time use brokers
when buying portfolio securities. The funds' investment advisor may place
trades through its affiliates, U.S. Bancorp Investments, Inc. and U.S. Bancorp
Piper Jaffray Inc., which will earn commissions on such transactions.
ERISA ACCOUNTS. U.S. Bank 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.
PORTFOLIO MANAGEMENT
Each fund's investments are managed by a team of persons associated with First
American Asset Management.
18 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS
- --------------------------------------------------------------------------------
OBJECTIVES
The Funds' objectives, which are described in the "Fund Summaries" section, may
be changed without shareholder approval. If a fund's objectives change, you will
be notified at least 30 days in advance. Please remember: There is no guarantee
that any fund will achieve its objectives.
- --------------------------------------------------------------------------------
INVESTMENT STRATEGIES
The funds' main investment strategies are discussed in the "Fund Summaries"
section. These are the strategies that the funds' investment advisor believes
are most likely to be important in trying to achieve the funds' objectives. You
should be aware that each fund may also use strategies and invest in securities
that are not described in this prospectus, but that are described in the
Statement of Additional Information (SAI). For a copy of the SAI, call Investor
Services at 1-800-637-2548.
INVESTMENT APPROACH
In selecting securities for the funds, fund managers first determine their
economic outlook and the direction in which inflation and interest rates are
expected to move. In selecting individual securities consistent with this
outlook, the portfolio managers evaluate factors such as credit quality, yield,
maturity, liquidity and portfolio diversification. In the case of Intermediate
Tax Free Fund and Tax Free Fund, geographical diversification is also a factor.
The portfolio managers conduct research on potential and current holdings in the
funds to determine whether a fund should purchase or retain a security. This is
a continuing process the focus of which changes according to market conditions,
the availability of various permitted investments, and cash flows into and out
of the funds.
MUNICIPAL SECURITIES
Municpal securities are issued to finance public infrastructure projects such as
streets and highways, schools, water and sewer systems, hospitals, and airports.
They also may be issued to refinance outstanding obligations as well as to
obtain funds for general operating expenses and for loans to other public
institutions and facilities.
The funds may invest in "general obligation" bonds, which are backed by the full
faith, credit and taxing power of the issuer, and in "revenue" bonds, which are
payable only from the revenues generated by a specific project or from another
specific revenue source. 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 government unit to acquire equipment or
facilities. Municipal leases frequently have special risks which generally are
not associated with general obligation bonds or revenue bonds. See "Risks --
Risks of Municipal Lease Obligations" below.
Up to 10% of each fund's total assets may be invested in inverse floating rate
municipal securities. The values of these securities may be highly volatile as
interest rates rise or fall. See "Risks -- Risks of Inverse Floating Rate
Securities" below.
TEMPORARY INVESTMENTS
In an attempt to respond to adverse market, economic, political or other
conditions, each fund may invest without limit in cash and in U.S.
dollar-denominated high-quality money market instruments and other short-term
securities, including securities which pay income that is subject to federal and
state income tax. Because these investments may be taxable, and may result in a
lower yield than would be available from investments with a lower quality or
longer term, they may prevent a fund from achieving its investment objective.
PORTFOLIO TURNOVER
Fund managers may trade securities frequently, resulting, from time to time, in
an annual portfolio turnover rate of over 100%. Trading of securities may
produce capital gains, which are taxable to shareholders when distributed.
Active trading may also increase the amount of commissions or mark-ups to
broker-dealers that the fund pays when it buys and sells securities. The
"Financial Highlights" section of this prospectus shows each fund's historical
portfolio turnover rate.
- --------------------------------------------------------------------------------
RISKS
The main risks of investing in the funds are summarized in the "Fund Summaries"
section. More information about fund risks is presented below.
CALL RISK
Many municipal bonds may be redeemed at the option of the issuer, or "called,"
before their stated maturity date. In general, an issuer will call its bonds if
they can be refinanced by issuing new bonds which bear a lower interest rate.
The funds are subject to the possibility that during periods of falling interest
rates, a municipal bond issuer will call its high-yielding bonds. A fund would
then be forced to invest the unanticipated proceeds at lower interest rates,
resulting in a decline in the fund's income.
CREDIT RISK
Each fund is subject to the risk that the issuers of debt securities held by the
fund will not make payments on the securities, or that the other party to a
contract (such as a repurchase agreement) will default on its obligations. There
is also the risk that an issuer could suffer adverse changes in financial
condition that could lower the credit quality of a security. This could lead to
greater volatility in the price of the security and in shares of the fund. Also,
a change in the credit quality rating of a bond could affect the bond's
liquidity and make it more difficult for the fund to sell.
Each fund attempts to minimize credit risk by investing in securities considered
at least investment grade at the time of purchase. However, all of these
securities, especially those in the lower investment grade rating categories,
have credit risk. In adverse economic or other circumstances, issuers of these
lower rated securities are more likely to have difficulty making principal and
interest payments than issuers of higher rated securities. When a fund purchases
unrated
19 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS (CONTINUED)
securities, it will depend on the advisor's analysis of credit risk more heavily
than usual.
INTEREST RATE RISK
Debt securities in the funds will fluctuate in value with changes in interest
rates. In general, debt securities will increase in value when interest rates
fall and decrease in value when interest rates rise. Longer-term debt securities
are generally more sensitive to interest rate changes. Each fund may invest in
zero coupon securities, which do not pay interest on a current basis and which
may be highly volatile as interest rates rise or fall. The funds' investments in
inverse floating rate municipal securities also may be highly volatile with
changing interest rates. See "Risks of Inverse Floating Rate Securities" below.
POLITICAL AND ECONOMIC RISK
The values of municipal securities 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
municipal securities 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 revenue of issuers (for example, legislation or court decisions
reducing state aid to local governments or mandating additional services). To
the extent a fund invests in the securities of issuers located in a single
state, it will be disproportionately affected by political and economic
conditions and developments in that state. The value of municipal securities
also may be adversely affected by future changes in federal or state income tax
laws, including rate reductions or the imposition of a flat tax.
RISK OF ACTIVE MANAGEMENT
Each fund is actively managed and its performance therefore will reflect in part
the advisor's ability to make investment decisions which are suited to achieving
the fund's investment objectives. Due to their active management, the funds
could underperform other mutual funds with similar investment objectives.
RISKS OF INVERSE FLOATING RATE SECURITIES.
Each fund may invest up to 10% of its total assets in inverse floating rate
municipal securities. These securities pay interest at a rate that varies
inversely to changes in the interest rate of specified municipal securities or a
specified index. The interest rate on this type of security will generally
change at a multiple of any change in the reference interest rate. As a result,
the values of these securities may be highly volatile as interest rates rise or
fall.
RISKS OF MUNICIPAL LEASE OBLIGATIONS
Each fund may purchase participation interests in municipal leases. These are
undivided interests in a lease, installment purchase contract or conditional
sale contract entered into by a state or local government unit to acquire
equipment or facilities. Participation interests in municipal leases pose
special risks because many leases and contracts contain "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. Although these kinds of
obligations are secured by the leased equipment or facilities, it might be
difficult and time consuming to dispose of the equipment or facilities in the
event of non-appropriation, and the fund might not recover the full principal
amount of the obligation.
YEAR 2000 ISSUES
Like other mutual funds and business and financial organizations, the funds
could be adversely affected if the computer systems used by the funds' advisor,
sub-advisors, other service providers and entities with computer systems that
are linked to fund records do not properly process and calculate date-related
information from and after January 1, 2000. While year 2000-related computer
problems could have a negative effect on the funds, the funds' administrator has
undertaken a program designed to assess and monitor the steps being taken by the
funds' service providers to address year 2000 issues.This program includes
seeking assurances from service providers that their systems are or will be year
2000 compliant and reviewing service providers' periodic reports to monitor
their status concerning their year 2000 readiness and compliance.
The administrator and the advisor also report regularly to the funds' board of
directors concerning their own and other service providers' progress toward year
2000 readiness. Although these reports indicate that service providers are or
expect to be year 2000 compliant, there can be no assurance that this will be
the case in all instances or that year 2000 difficulties experienced by others
in the financial services industry will not impact the funds. In addition, there
can be no assurance that year 2000 difficulties will not have an adverse effect
on the funds' investments or on global markets or economies, generally. The
funds are not bearing any of the expenses incurred by their service providers in
preparing for the year 2000.
20 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about the class Y shares
of the funds. This information is intended to help you understand each fund's
financial performance for the past five years or, if shorter, the period of the
fund's class Y share operations. Some of this information reflects financial
results for a single fund share. Total returns in the tables represent the rate
that you would have earned or lost on an investment in a fund, assuming you
reinvested all of your dividends and distributions.
This information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report, along with the funds' financial statements, included in
the funds' annual report, which is available upon request.
CALIFORNIA INTERMEDIATE TAX FREE FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997(1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 10.00
-------
Investment Operations:
Net Investment Income 0.06
Net Gains (Losses) on Securities
(both realized and unrealized) 0.03
-------
Total From Investment Operations 0.09
-------
Less Distributions:
Dividends (from net investment income) (0.06)
Distributions (from capital gains) --
-------
Total Distributions (0.06)
-------
Net Asset Value, End of Period $ $ 10.03
=======
Total Return % 0.92%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $33,287
Ratio of Expenses to Average Net Assets % 0.69%
Ratio of Net Income to Average Net Assets % 4.14%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.11%
Ratio of Net Income to Average Net Assets (excluding waivers) % %
Portfolio Turnover Rate % 3%
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) The fund commenced operations on August 8, 1997. All ratios for the period
have been annualized.
21 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
COLORADO INTERMEDIATE TAX FREE FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994(1)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 10.42 $ 10.51 $ 10.16 $ 10.00
------- ------- ------- -------
Investment Operations:
Net Investment Income 0.48 0.49 0.48 0.22
Net Gains (Losses) on Securities
(both realized and unrealized) 0.24 (0.04) 0.36 0.16
------- ------- ------- -------
Total From Investment Operations 0.72 0.45 0.85 0.37
------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.48) (0.49) (0.49) (0.22)
Distributions (from capital gains) (0.05) (0.05) -- --
------- ------- ------- -------
Total Distributions (0.53) (0.54) (0.49) (0.22)
------- ------- ------- -------
Net Asset Value, End of Period $ $ 10.61 $ 10.42 $ 10.51 $ 10.16
======= ======= ======= =======
Total Return % 7.11% 4.39% 8.47% 3.76%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $54,378 $48,927 $50,071 $ 7,281
Ratio of Expenses to Average Net Assets % 0.70% 0.70% 0.70% 0.69%
Ratio of Net Income to Average Net Assets % 4.55% 4.69% 4.84% 4.51%
Ratio of Expenses to Average Net Assets (excluding waivers) % 0.91% 0.93% 1.02% 4.71%
Ratio of Net Income to Average Net Assets (excluding waivers) % % % % %
Portfolio Turnover Rate % 11% 20% 19% 4%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The fund commenced operations on April 4, 1994. All ratios for the period
have been annualized.
22 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
INTERMEDIATE TAX FREE FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994(1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 10.65 $ 10.72 $ 10.28 $ 10.89
-------- ------- ------- -------
Investment Operations:
Net Investment Income 0.47 0.46 0.49 0.29
Net Gains (Losses) on Securities
(both realized and unrealized) 0.23 0.00 0.43 (0.61)
-------- ------- ------- -------
Total From Investment Operations 0.70 0.46 0.92 (0.32)
-------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.47) (0.46) (0.48) (0.29)
Distributions (from capital gains) (0.06) (0.07) -- --
-------- ------- ------- -------
Total Distributions (0.53) (0.53) (0.48) (0.29)
-------- ------- ------- -------
Net Asset Value, End of Period $ $ 10.82 $ 10.65 $ 10.72 $ 10.28
======== ======= ======= =======
Total Return % 6.75% 4.35% 9.15% (2.91)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $431,000 $66,994 $46,025 $ 6,168
Ratio of Expenses to Average Net Assets % 0.67% 0.66% 0.67% 0.45%
Ratio of Net Income to Average Net Assets % 4.40% 4.35% 4.73% 4.48%
Ratio of Expenses to Average Net Assets (excluding waivers) % 0.93% 0.92% 1.05% 2.20%
Ratio of Net Income to Average Net Assets (excluding waivers) % % % % %
Portfolio Turnover Rate % 66% 53% 68% 52%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class Y shares have been offered since February 4, 1994. All ratios for the
period have been annualized.
23 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
MINNESOTA INTERMEDIATE TAX FREE FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997 1996 1995 1994(1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 9.91 $ 9.92 $ 9.59 $ 10.00
-------- ------- ------- -------
Investment Operations:
Net Investment Income 0.44 0.45 0.45 0.25
Net Gains (Losses) on Securities
(both realized and unrealized) 0.18 0.02 0.33 (0.41)
-------- ------- ------- -------
Total From Investment Operations 0.62 0.47 0.78 (0.16)
-------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.44) (0.45) (0.45) (0.25)
Distributions (from capital gains) (0.03) (0.03) -- --
-------- ------- ------- -------
Total Distributions (0.47) (0.48) (0.45) (0.25)
-------- ------- ------- -------
Net Asset Value, End of Period $ $ 10.06 $ 9.91 $ 9.92 $ 9.59
======== ======= ======= =======
Total Return % 6.42% 4.80% 8.34% (1.58)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $297,122 $93,394 $61,693 $20,272
Ratio of Expenses to Average Net Assets % 0.70% 0.70% 0.70% 0.67%
Ratio of Net Income to Average Net Assets % 4.47% 4.53% 4.76% 4.57%
Ratio of Expenses to Average Net Assets (excluding waivers) % 0.90% 0.93% 1.00% 0.59%
Ratio of Net Income to Average Net Assets (excluding waivers) % % % % %
Portfolio Turnover Rate % 20% 19% 38% 22%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The fund commenced operations on February 25, 1994. All ratios for the
period have been annualized.
24 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
MINNESOTA TAX FREE FUND(1)
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 11.19
-------
Investment Operations:
Net Investment Income 0.10
Net Gains (Losses) on Securities
(both realized and unrealized) (0.04)
-------
Total From Investment Operations 0.08
-------
Less Distributions:
Dividends (from net investment income) (0.10)
Distributions (from capital gains) --
-------
Total Distributions (0.10)
-------
Net Asset Value, End of Period $ $ 11.14
=======
Total Return % 0.72%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $
Ratio of Expenses to Average Net Assets % 0.75%
Ratio of Net Income to Average Net Assets % 5.73%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.01%
Ratio of Net Income to Average Net Assets (excluding waivers) % 5.11%
Portfolio Turnover Rate % 17%
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) The financial highlights for the periods prior to August 1, 1998 are those
of Minnesota Tax-Exempt Fund, a series of Piper Funds Inc. This predecessor
fund was reorganized into the fund as of the close of business on July 31,
1998. The fund had no assets or liabilities prior to the reorganization.
(2) Class Y shares have been offered since August 1, 1997. All ratios for the
period have been annualized.
25 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
OREGON INTERMEDIATE TAX FREE FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1998 1997(1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ $ 10.00
--------
Income From Investment Operations:
Net Investment Income 0.07
Net Gains or Losses on Securities
(both realized and unrealized) 0.05
--------
Total From Investment Operations 0.12
--------
Less Distributions:
Dividends (from net investment income) (0.07)
Distributions (from capital gains) --
--------
Total Distributions (0.07)
--------
Net Asset Value, End of Period $ $ 10.05
========
Total Return % 1.17%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ $182,069
Ratio of Expenses to Average Net Assets % 0.70%
Ratio of Net Income to Average Net Assets % 4.55%
Ratio of Expenses to Average Net Assets (excluding waivers) % 1.09%
Ratio of Net Income to Average Net Assets (excluding waivers) % %
Portfolio Turnover Rate % 4%
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Class Y shares have been offered since August 7, 1997. All ratios for the
period have been annualized.
26 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
TAX FREE FUND
<TABLE>
<CAPTION>
Period ended
September 30,
1998(1)
- ---------------------------------------------------------------------------------
<S> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $
Income From Investment Operations:
Net Investment Income
Net Gains or Losses on Securities
(both realized and unrealized)
Total From Investment Operations
Less Distributions:
Dividends (from net investment income)
Distributions (from capital gains)
Total Distributions
Net Asset Value, End of Period $
Total Return %
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $
Ratio of Expenses to Average Net Assets %
Ratio of Net Income to Average Net Assets %
Ratio of Expenses to Average Net Assets (excluding waivers) %
Ratio of Net Income to Average Net Assets (excluding waivers) %
Portfolio Turnover Rate %
- ---------------------------------------------------------------------------------
</TABLE>
(1) Class Y shares have been offered since July 31, 1998. All ratios for the
period have been annualized.
27 PROSPECTUS - FIRST AMERICAN TAX FREE BOND FUNDS
<PAGE>
FOR MORE INFORMATION
More information about the funds is available in the funds' Statement of
Additional Information and annual and semiannual reports.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more details about the funds and their policies. A current SAI
is on file with the Securities and Exchange Commission (SEC) and is incorporated
into this prospectus by reference (which means that it is legally considered
part of this prospectus).
ANNUAL AND SEMIANNUAL REPORTS
Additional information about the funds' investments is available in the funds'
annual and semiannual reports to shareholders. In the funds' annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the funds' performance during their last fiscal year.
You can obtain a free copy of the funds' SAI and/or free copies of the funds'
most recent annual or semiannual reports by calling Investor Services at
1-800-637-2548. The material you request will be sent by first-class mail or
other means designed to ensure equally prompt delivery, within three business
days of receipt of the request.
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC, or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. For more information, call
1-800-SEC-0330.
Information about the funds is also available on the Internet. Text-only
versions of fund documents can be viewed online or down-loaded from the SEC's
Internet site at http://www.sec.gov.
SEC file number: 811-05309
FAIF-1001 (9/1998)
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED FEBRUARY 1, 1999
BALANCED FUND REAL ESTATE SECURITIES FUND
EQUITY INCOME FUND TECHNOLOGY FUND
EQUITY INDEX FUND ADJUSTABLE RATE MORTGAGE SECURITIES FUND
LARGE CAP GROWTH FUND FIXED INCOME FUND
LARGE CAP VALUE FUND INTERMEDIATE GOVERNMENT BOND FUND
MID CAP GROWTH FUND INTERMEDIATE TERM INCOME FUND
MID CAP VALUE FUND LIMITED TERM INCOME FUND
MICRO CAP VALUE FUND STRATEGIC INCOME FUND
REGIONAL EQUITY FUND CALIFORNIA INTERMEDIATE TAX FREE FUND
SMALL CAP GROWTH FUND COLORADO INTERMEDIATE TAX FREE FUND
SMALL CAP VALUE FUND INTERMEDIATE TAX FREE FUND
EMERGING MARKETS FUND MINNESOTA INTERMEDIATE TAX FREE FUND
INTERNATIONAL FUND MINNESOTA TAX FREE FUND
INTERNATIONAL INDEX FUND OREGON INTERMEDIATE TAX FREE FUND
HEALTH SCIENCES FUND TAX FREE FUND
This Statement of Additional Information relates to the Class A, Class
B, Class C and Class Y 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 February 1, 1999. 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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION.......................................................................................1
ADDITIONAL INFORMATION CONCERNING FUND INVESTMENTS........................................................2
Short-Term Investments...........................................................................2
U.S. Government Securities.......................................................................2
Repurchase Agreements............................................................................3
When-Issued and Delayed Delivery Transactions....................................................3
Lending of Portfolio Securities..................................................................4
Options Transactions.............................................................................5
Futures and Options on Futures...................................................................6
Fixed Income Securities -- Equity Funds..........................................................7
Fixed Rate Corporate Debt Obligations -- Strategic Income Fund...................................8
Foreign Securities...............................................................................8
Foreign Currency Transactions...................................................................10
Mortgage-Backed Securities......................................................................11
REIT Securities.................................................................................14
Asset-backed Securities.........................................................................14
Bank Instruments................................................................................15
Municipal Bonds and Other Municipal Obligations.................................................15
Temporary Taxable Investments...................................................................16
Inverse Floating Rate Obligations...............................................................16
Zero Coupon Securities..........................................................................16
Adjustable Rate Mortgage Securities.............................................................17
Interest Rate Transactions......................................................................17
Guaranteed Investment Contracts.................................................................17
Debt Obligations -- Strategic Income Fund.......................................................17
Debt Obligations Rated Less Than Investment Grade...............................................18
Floating Rate Corporate Debt Obligations -- Strategic Income Fund...............................18
Payment-In-Kind Debentures and Delayed Interest Securities......................................18
Preferred Stock.................................................................................19
Participation Interests.........................................................................19
U.S. Treasury Inflation-Protection Securities...................................................19
Portfolio Transactions..........................................................................20
Special Factors Affecting California Intermediate Tax Free Fund.................................20
Special Factors Affecting Colorado Intermediate Tax Free Fund...................................24
Special Factors Affecting Minnesota Intermediate Tax Free Fund and Minnesota Tax Free Fund......26
Special Factors Affecting Oregon Intermediate Tax Free Fund.....................................27
CFTC Information................................................................................30
INVESTMENT RESTRICTIONS..................................................................................30
DIRECTORS AND EXECUTIVE OFFICERS.........................................................................32
Directors.......................................................................................32
Executive Officers..............................................................................33
Compensation....................................................................................34
INVESTMENT ADVISORY AND OTHER SERVICES...................................................................34
Investment Advisory Agreement...................................................................34
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
SUB-ADVISORY AGREEMENT FOR EMERGING MARKETS FUND,
INTERNATIONAL FUND AND STRATEGIC INCOME FUND....................................................36
Administration Agreement........................................................................37
Distributor and Distribution Plans..............................................................38
Custodian; Transfer Agent; Counsel; Accountants.................................................41
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE.......................................................41
CAPITAL STOCK............................................................................................45
NET ASSET VALUE AND PUBLIC OFFERING PRICE................................................................53
FUND PERFORMANCE.........................................................................................56
TAXATION.................................................................................................63
REDUCING SALES CHARGES...................................................................................65
Class A Sales Charge............................................................................65
Sales of Class A Shares at Net Asset Value......................................................66
ADDITIONAL INFORMATION ABOUT SELLING SHARES..............................................................66
By Telephone....................................................................................66
By Mail.........................................................................................67
Redemptions Before Purchase Instruments Clear...................................................68
RATINGS ................................................................................................68
Ratings of Corporate Debt Obligations and Municipal Bonds.......................................68
Ratings of Preferred Stock......................................................................70
Ratings of Municipal Notes......................................................................70
Ratings of Commercial Paper.....................................................................71
Best's Rating System for Insurance Companies....................................................71
FINANCIAL STATEMENTS.....................................................................................72
</TABLE>
-ii-
<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."
For purposes of this Statement of Additional Information, "Equity
Funds" shall constitute Balanced Fund, Equity Income Fund, Equity Index Fund,
Large Cap Growth Fund, Large Cap Value Fund, Mid Cap Growth Fund, Mid Cap Value
Fund, Micro Cap Value Fund, Regional Equity Fund, Small Cap Growth Fund, Small
Cap Value Fund, Emerging Markets Fund, International Fund, International Index
Fund, Health Sciences Fund, Technology Fund and Real Estate Securities Fund.
"Bond Funds" shall constitute Adjustable Rate Mortgage Securities Fund, Fixed
Income Fund, Intermediate Government Bond Fund, Intermediate Term Income Fund,
Limited Term Income Fund and Strategic Income Fund. "Tax Free Funds" shall
constitute California Intermediate Tax Free Fund, Colorado Intermediate Tax Free
Fund, Intermediate Tax Free Fund, Minnesota Intermediate Tax Free Fund,
Minnesota Tax Free Fund, Oregon Intermediate Tax Free Fund and Tax Free Fund.
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), Class C (except for Health Sciences Fund, Technology
Fund and Real Estate Securities Fund) and Class Y, 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, Class B and Class C 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, Class C and Class Y 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 to the Class A,
Class B and Class C Shares Prospectuses and to the Class Y 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.
-1-
<PAGE>
ADDITIONAL INFORMATION CONCERNING FUND INVESTMENTS
The main investment strategies of all Funds are set forth in such
Funds' Prospectus. Additional information concerning such main investment
strategies and other investment strategies 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
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 (including, in the case of Balanced Fund, zero
coupon securities); repurchase agreements collateralized by eligible investments
of a Fund; securities of other mutual funds that 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 U.S. Bank National
Association, the Funds' investment advisor ("U.S. Bank" or the "Advisor"),
subject to certain restrictions contained in an exemptive order issued by the
Securities and Exchange Commission ("SEC") with respect thereto.
Short-term investments and repurchase agreements may be entered into on
a joint basis by the Funds and other funds advised by the Advisor to the extent
permitted by an exemptive order issued by Securities and Exchange Commission
with respect to the Funds. 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 Advisor 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 Advisor
or the applicable Funds' investment sub-advisor 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.
U.S. GOVERNMENT SECURITIES
The U.S. government securities in which the Funds may invest are either
issued or guaranteed by the U.S.government, its agencies or instrumentalities.
The U.S. government securities in which the Funds invest principally are:
* direct obligations of the U.S. Treasury, such as U.S. Treasury
bills, notes, and bonds;
-2-
<PAGE>
* notes, bonds, and discount notes issued and guaranteed by U.S.
government agencies and instrumentalities supported by the full
faith and credit of the United States;
* notes, bonds, and discount notes of U.S. government agencies or
instrumentalities which receive or have access to federal
funding; and
* notes, bonds, and discount notes of other U.S. government
instrumentalities supported only by the credit of the
instrumentalities supported only by the credit of the
instrumentalities.
The government securities in which the Funds may invest are backed in a
variety of ways by the U.S. government or its agencies or instrumentalities.
Some of these securities, such as Government National Mortgage Association
("GNMA") mortgage-backed securities, are backed by the full faith and credit of
the U.S. government. Other securities, such as obligations of the Federal
National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC") are backed by the credit of the agency or instrumentality
issuing the obligations but not the full faith and credit of the U.S.
government. No assurances can be given that the U.S. government will provide
financial support to these other agencies or instrumentalities because it is not
obligated to do so. See "--Mortgage-Backed Securities" below for a description
of these securities and the Funds that may invest in such securities.
REPURCHASE AGREEMENTS
The Funds may invest in repurchase agreements to the extent specified
in their respective Prospectuses. 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 Advisor or, in the case of Emerging Markets Fund,
International Fund, Strategic Income Fund, such Fund's investment sub-advisor
will monitor the creditworthiness of the firms with which the Funds enter into
repurchase agreements.
The Funds' custodian will hold the securities underlying any repurchase
agreement, or the securities will be part of the Federal Reserve/Treasury Book
Entry System. The market value of the collateral underlying the repurchase
agreement will be determined on each business day. If at any time the market
value of the collateral falls below the repurchase price under the repurchase
agreement (including any accrued interest), the appropriate Fund will promptly
receive additional collateral (so the total collateral is an amount at least
equal to the repurchase price plus accrued interest).
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
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
-3-
<PAGE>
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.
In connection with its ability to purchase securities on a when-issued
or delayed delivery basis, Balanced Fund and the Bond Funds may, with respect to
its fixed income assets, enter into mortgage "dollar rolls" in which the Fund
sells securities and simultaneously contracts with the same counterparty to
repurchase similar (same type, coupon and maturity) but not identical securities
on a specified future date. In a mortgage dollar roll, a Fund gives up the right
to receive principal and interest paid on the securities sold. However, the Fund
would benefit to the extent of any difference between the price received for the
securities sold and the lower forward price for the future purchase plus any fee
income received. Unless such benefits exceed the income, capital appreciation
and gain or loss due to mortgage prepayments that would have been realized on
the securities sold as part of the mortgage dollar roll, the use of this
technique will diminish the investment performance of the Fund compared with
what such performance would have been without the use of mortgage dollar rolls.
The Fund will hold and maintain in a segregated account until the settlement
date cash or liquid securities in an amount equal to the forward purchase price.
When a Fund agrees to purchase securities on a when-issued or delayed
delivery basis, the Fund's 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 Advisor or a Fund's investment
sub-advisor, if any, 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
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 Advisor
or, in the case of Emerging Markets Fund, International Fund or Strategic Income
Fund, such Fund's sub-advisor has determined are creditworthy under guidelines
established by the Board of Directors. 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
Advisor) in connection with these loans which, in the case of U.S. Bank, are 40%
of the Funds' income from such securities lending transactions.
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. This
collateral must be valued daily by the Advisor or the applicable Fund's
sub-advisor 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
at any time by the lending Fund or the borrower. 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.
U.S. Bank, the Funds' custodian and investment advisor, may act as
securities lending agent for the Funds and receive separate compensation for
such services, subject to compliance with conditions contained in an SEC
exemptive order permitting U.S. Bank to provide such services and receive such
compensation.
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OPTIONS TRANSACTIONS
The Funds may purchase put and call options on equity securities, stock
indices, interest rate indices and/or foreign currencies on securities that they
own or have the right to acquire. These transactions will be undertaken only for
the purpose of reducing risk to the Funds; that is, for "hedging" purposes.
Options on futures contracts are discussed below under "Futures and Options on
Futures."
OPTIONS ON SECURITIES. The Equity Funds (other than Equity Index Fund
and International Index Fund) and Strategic Income Fund may purchase put and
call options on securities they own or have the right to acquire. 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.
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.
OPTIONS ON STOCK INDICES. The Equity Funds (other than Equity Index
Fund and International Index Fund) and Strategic Income Fund may purchase put
and call options on stock indices. Options on stock indices are similar to
options on individual stocks except that, rather than the right to take or make
delivery of stock at a specified price, an option on a stock index gives the
holder the right to receive, upon exercise of the option, an amount of cash if
the closing value of the stock index upon which the option is based is greater
than, in the case of a call, or lesser than, in the case of a put, the exercise
price of the option. This amount of cash is equal to the difference between the
closing price of the index and the exercise price of the option expressed in
dollars times a specified multiple (the "multiplier"). The writer of the option
is obligated, in return for the premium received, to make delivery of this
amount. Unlike stock options, all settlements for stock index options are in
cash, and gain or loss depends on price movements in the stock market generally
(or in a particular industry or segment of the market) rather than price
movements in individual stocks. The multiplier for an index option performs a
function similar to the unit of trading for a stock option. It determines the
total dollar value per contract of each point in the difference between the
underlying stock index. A multiplier of 100 means that a one-point difference
will yield $100. Options on different stock indices may have different
multipliers.
OPTIONS ON INTEREST RATE INDICES. The Bond Funds and Tax Free Fund may
purchase put and call 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.
WRITING OF CALL OPTIONS. The Equity Funds (other than Equity Index Fund
and International Fund) and Strategic Income Fund may write (sell) covered call
options. 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
Emerging Markets Fund, International Fund and Strategic Income Fund) on foreign
currencies. These Equity Funds (other than Emerging Markets Fund and
International Fund) may write (sell) covered call options covering up to 25% of
the equity securities owned by such Funds, and, in the case of Emerging
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Markets Fund and International Fund, covering up to 50% of the equity securities
owned by such Funds. Strategic Income Fund may write (sell) covered call options
on equity securities covering up to 25% of its net assets.
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. These Funds may also 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.
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.
LIMITATIONS. None of the Funds other than Mid Cap Growth Fund, Emerging
Markets Fund, International Fund and Strategic Income 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.
FUTURES AND OPTIONS ON FUTURES
Balanced Fund, Equity Index Fund, International Fund, Emerging Markets
Fund, International Index Fund, the Bond Funds and the Tax Free Funds may engage
in futures transactions and options on futures transactions. Emerging Markets
Fund, International Fund and Strategic Income Fund may enter into contracts for
the future delivery of securities and options thereon. Emerging Markets Fund,
International Fund, Strategic Income Fund, Equity Index Fund and International
Index Fund may enter into stock index futures contracts and options thereon.
Balanced Fund, the Bond Funds and the Tax Free Funds may enter into interest
rate futures, interest rate index futures (for the Bond Funds and Tax Free
Funds) and options thereon. In addition, Emerging Markets Fund, International
Fund and Strategic Income Fund may enter into contracts for the future delivery
of foreign currencies and options thereon.
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.
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
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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 use futures contracts and options on futures in an effort to
hedge against market risks and, in the case of Emerging Markets Fund and
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 Composite Index or the Morgan Stanley Europe,
Australia, Far East Composite Index (the "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 Code.
Adjustable Rate Mortgage Securities Fund may make instruments in Euro
dollar instruments in order to attempt to reduce investment risk. Eurodollar
instruments are essentially U.S. dollar denominated futures contracts or options
thereon that are inked to the London Interbank Offered Rate ("LIBOR").
Eurodollar futures contracts enable purchasers to obtain a fixed rate for the
lending of funds and sellers to obtain a fixed rate for borrowings. Adjustable
Rate Mortgage Securities Funds uses Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many short-term borrowings
and floating rate securities are linked. Eurodollar instruments are subject to
the same limitations and risks as other futures contracts and options thereon.
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 Emerging Markets Fund, International Fund and
Strategic Income 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 -- EQUITY FUNDS
The fixed income securities in which Equity Income Fund, Large Cap
Growth Fund, Large Cap Value Fund, Mid Cap Growth Fund, Mid Cap Value Fund,
Micro Cap Value Fund, Small Cap Growth Fund, Small Cap Value Fund, Regional
Equity Fund, Health Sciences Fund, Real Estate Securities 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. 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 Advisor.
Obligations rated BBB, Baa or their
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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 "Debt Obligations Rated
Less Than Investment Grade."
The fixed income securities specified above, as well as the fixed
income securities in which Balanced Fund may invest as described in the
applicable prospectus, 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).
FIXED RATE CORPORATE DEBT OBLIGATIONS -- STRATEGIC INCOME FUND
Strategic Income Fund will also invest in fixed rate securities. Fixed
rate securities tend to exhibit more price volatility during times of rising or
falling interest rates than securities with floating rates of interest. This is
because floating rate securities, as described above, behave like short-term
instruments in that the rate of interest they pay is subject to periodic
adjustments based on a designated interest rate index. Fixed rate securities pay
a fixed rate of interest and are more sensitive to fluctuating interest rates.
In periods of rising interest rates the value of a fixed rate security is likely
to fall. Fixed rate securities with short-term characteristics are not subject
to the same price volatility as fixed rate securities without such
characteristics. Therefore, they behave more like floating rate securities with
respect to price volatility.
FOREIGN SECURITIES
GENERAL. Under normal market conditions Emerging Markets Fund,
International Fund, International Index Fund and Strategic Income Fund invest
principally in foreign securities, and certain other Funds may invest lesser
proportions of their assets in securities of foreign issuers that are either
listed on a United States securities exchange or represented by American
Depositary Receipts. In addition, Mid Cap Growth Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed on a
United States securities exchange or represented by American Depositary
Receipts. Furthermore, Limited Term Income Fund, Intermediate Term Income Fund
and Fixed Income Fund may invest up to 15% of their total assets in foreign
securities payable in United States dollars.
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.
EMERGING MARKETS. Emerging Markets Fund and Strategic Income Fund ma
invest in securities issued by the governmental and corporate issuers that are
located in emerging market countries. Investing in securities of issuers in
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emerging markets involves exposure to economic infrastructures that are
generally less diverse and mature than, and to political systems that can be
expected to have less stability than, those of developed countries. Other
characteristics of emerging market countries that may affect investment in their
markets include certain governmental policies that may restrict investment by
foreigners and the absence of developed legal structures governing private and
foreign investments and private property. The typical small size of the markets
for securities issued by issuers located in emerging markets and the possibility
of low or nonexistent volume of trading in those securities may also result in a
lack of liquidity and in price volatility of those securities. In addition,
issuers in emerging market countries are typically subject to a greater degree
of change in earnings and business prospects than are companies in developed
markets.
JAPANESE SECURITIES. Japanese securities comprised ____% of the EAFE
Index as of December 31, 1998. 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. Emerging
Markets Fund, International Fund and International Index Fund also may invest in
European Depositary Receipts, which are receipts evidencing an arrangement with
a European bank similar to that for American Depositary Receipts and which are
designed for use in the European securities markets. European Depositary
Receipts are not necessarily denominated in the currency of the underlying
security.
Certain American Depositary Receipts and European Depositary Receipts,
typically those denominated as unsponsored, require the holders thereof to bear
most of the costs of the facilities while issuers of sponsored facilities
normally pay more of the costs thereof. The depository of an unsponsored
facility frequently is under no obligation to distribute shareholder
communications received from the issuer of the deposited securities or to pass
through the voting rights to facility holders in respect to the deposited
securities, whereas the depository of a sponsored facility typically distributes
shareholder communications and passes through voting rights.
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 Emerging Markets Fund, International Fund or International Index Fund
is uninvested. In addition, settlement problems could cause such Funds to miss
attractive investment opportunities or to incur losses due to an inability to
sell
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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
Emerging Markets Fund, International Fund, International Index Fund and
Strategic Income Fund invest in securities which are purchased and sold in
foreign currencies. The value of their 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. These Funds also will
incur costs in converting United States dollars to local currencies, and vice
versa.
Emerging Markets Fund, International Fund, International Index Fund and
Strategic Income Fund will conduct their 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.
Emerging Markets Fund, International Fund and Strategic Income Fund may
enter into forward currency contracts in order to hedge against adverse
movements in exchange rates between currencies. These Funds 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. Emerging Markets Fund,
International Fund and Strategic Income Fund also may hedge foreign currency
exchange rate risk by engaging in currency 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 applicable Fund's investment sub-advisor'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 their respective investment sub-advisor's view regarding future
exchange rates proves to have been incorrect, Emerging Markets Fund,
International Fund and Strategic Income Fund may realize losses on their foreign
currency transactions.
As stated above, Emerging Markets Fund, International Fund and
Strategic Income Fund may engage in a variety of foreign currency transactions
in connection with their 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. These Funds will not enter into such
forward contracts or maintain a net exposure in such contracts where the Funds
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
Funds will comply with applicable SEC announcements requiring them 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
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the settlement of investment purchases or sales or where the position has been
"covered" by entering into an offsetting position. The Funds 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 their financial futures
transactions, Emerging Markets Fund, International Fund and strategic Income
Fund may use foreign currency futures contracts and options on such futures
contracts. Through the purchase or sale of such contracts, these Funds may be
able to achieve many of the same objectives as through investing in forward
foreign currency exchange.
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 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 Emerging Markets Fund, International Fund or Strategic Income
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 a 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 a 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 and the Bond
Funds also may invest in mortgage-backed securities. Each of these Funds will
invest only in mortgage-backed securities that are Agency Pass-Through
Certificates or collateralized mortgage obligations ("CMOs"), as defined and
described below. In addition, Adjustable Rate Mortgage Securities Fund and
Strategic Income Fund may invest in private pass-through securities.
Furthermore, Strategic Income Fund may invest in Real Estate Mortgage Investment
Conduits ("REMICs").
Agency Pass-Through Certificates are mortgage pass-through certificates
representing undivided interests in pools of residential mortgage loans.
Distribution of principal and interest on the mortgage loans underlying an
Agency Pass-Through Certificate is an obligation of or guaranteed by GNMA, FNMA
or FHLMC. GNMA is a wholly-owned corporate instrumentality of the United States
within the Department of Housing and Urban Development. The guarantee of GNMA
with respect to GNMA certificates is backed by the full faith and credit of the
United States, and GNMA is authorized to borrow from the United States Treasury
in an amount which is at any time sufficient to enable GNMA, with no limitation
as to amount, to perform its guarantee.
FNMA is a federally chartered and privately owned corporation organized
and existing under federal law. Although the Secretary of the Treasury of the
United States has discretionary authority to lend funds to FNMA, neither the
United States nor any agency thereof is obligated to finance FNMA's operations
or to assist FNMA in any other manner.
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FHLMC is a federally chartered corporation organized and existing under
federal law, the common stock of which is owned by the Federal Home Loan Banks.
Neither the United States nor any agency thereof is obligated to finance FHLMC's
operations or to assist FHLMC in any other manner.
The mortgage loans underlying GNMA certificates are partially or fully
guaranteed by the Federal Housing Administration or the Veterans Administration,
while the mortgage loans underlying FNMA certificates and FHLMC certificates are
conventional mortgage loans which are, in some cases, insured by private
mortgage insurance companies. Agency Pass-Through Certificates may be issued in
a single class with respect to a given pool of mortgage loans or in multiple
classes.
The residential mortgage loans evidenced by Agency Pass-Through
Certificates and upon which CMOs are based generally are secured by first
mortgages on one- to four-family residential dwellings. Such mortgage loans
generally have final maturities ranging from 15 to 30 years and provide for
monthly payments in amounts sufficient to amortize their original principal
amounts by the maturity dates. Each monthly payment on such mortgage loans
generally includes both an interest component and a principal component, so that
the holder of the mortgage loans receives both interest and a partial return of
principal in each monthly payment. In general, such mortgage loans can be
prepaid by the borrowers at any time without any prepayment penalty. In
addition, many such mortgage loans contain a "due-on-sale" clause requiring the
loans to be repaid in full upon the sale of the property securing the loans.
Because residential mortgage loans generally provide for monthly amortization
and may be prepaid in full at any time, the weighted average maturity of a pool
of residential mortgage loans is likely to be substantially shorter than its
stated final maturity date. The rate at which a pool of residential mortgage
loans is prepaid may be influenced by many factors and is not predictable with
precision.
Private mortgage pass-through securities ("Private Pass-Throughs") are
structured similarly to GNMA, FNMA and FHLMC mortgage pass-through securities
and are issued by originators of and investors in mortgage loans, including
savings and loan associations, mortgage bankers, commercial banks, investment
banks and special purpose subsidiaries of the foregoing. These securities
usually are backed by a pool of conventional fixed rate or adjustable loans.
Since Private Pass-Throughs typically are not guaranteed by an entity having the
credit status of GNMA, FNMA or FHLMC, such securities generally are structured
with one or more types of credit enhancement. Such credit support falls into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provisions of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches. The Funds will not pay any additional fees for such credit support,
although the existence of credit support may increase the price of a security.
The ratings of securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued creditworthiness of the enhancement
provider. The ratings of such securities could be subject to reduction in the
event of deterioration in the creditworthiness of the credit enhancement
provider even in cases where the delinquency and loss experience on the
underlying pool of assets is better than expected.
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
Advisor. 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
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greatly from one another. For instance, holders may hold interests in CMO
tranches called Z-tranches which defer interest and principal payments until one
or other classes of the CMO have been paid in full. In addition, for example:
* In a sequential-pay CMO structure, one class is entitled to
receive all principal payments and prepayments on the underlying
mortgage loans (and interest on unpaid principal) until the
principal of the class is repaid in full, while the remaining
classes receive only interest; when the first class is repaid in
full, a second class becomes entitled to receive all principal
payments and prepayments on the underlying mortgage loans until
the class is repaid in full, and so forth.
* A planned amortization class ("PAC") of CMOs is entitled to
receive principal on a stated schedule to the extent that it is
available from the underlying mortgage loans, thus providing a
greater (but not absolute) degree of certainty as to the schedule
upon which principal will be repaid.
* An accrual class of CMOs provides for interest to accrue and be
added to principal (but not be paid currently) until specified
payments have been made on prior classes, at which time the
principal of the accrual class (including the accrued interest
which was added to principal) and interest thereon begins to be
paid from payments on the underlying mortgage loans.
* As discussed above with respect to 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.
REMICs are offerings of multiple class real estate mortgage-backed
securities which qualify and elect treatment as such under provisions of the
Internal Revenue Code. Issuers of REMICs may take several forms, such as trusts,
partnerships, corporations, associations, or segregated pools of mortgages. Once
REMIC status is elected and obtained, the entity is not subject to federal
income taxation. Instead, income is passed through the entity and is taxed to
the person or persons who hold interests in the REMIC. A REMIC interest must
consist of one or more classes of "regular interests," some of which may offer
adjustable rates of interest (the type in which Strategic Income Fund primarily
invests), and a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly or
indirectly secured principally by real property.
It generally is more difficult to predict the effect of changes in
market interest rates on the return on mortgage-backed securities than to
predict the effect of such changes on the return of a conventional fixed-rate
debt instrument,
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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. None of the Funds will invest more than
10% of its total fixed income assets in interest-only, principal-only or inverse
floating rate mortgage-backed securities.
REIT SECURITIES
A majority of Real Estate Securities 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
services 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.
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 (the
"Code").
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.
ASSET-BACKED SECURITIES
Balanced Fund and the Bond Funds (other than Intermediate Government
Bond 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
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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
Balanced Fund and the Bond Funds may invest in bank instruments
including 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. 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.
MUNICIPAL BONDS AND OTHER MUNICIPAL OBLIGATIONS
The Tax Free Funds may invest 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" includes short-term municipal notes issued by the states and their
political subdivision.
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 a 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 bond 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 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 ___, 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.
DERIVATIVE MUNICIPAL SECURITIES. Tax Free Fund and Minnesota Tax Free
Fund may also acquire derivative municipal securities, which are custodial
receipts of certificates underwritten by securities dealers or banks that
evidence ownership of future interest payments, principal payments or both on
certain municipal securities. The underwriter of these certificates or receipts
typically purchases municipal securities and deposits them in an irrevocable
trust or custodial account with a custodian bank, which then issues receipts or
certificates that evidence ownership of the periodic unmatured coupon payments
and the final principal payment on the obligation.
The principal and interest payments on the municipal securities
underlying custodial receipts may be allocated in a number of ways. For example,
payments may be allocated such that certain custodial receipts may have variable
or floating interest rates and others may be stripped securities which pay only
the principal or interest due on the underlying municipal securities. Tax Free
Fund and Minnesota Tax Free Fund may each invest up to 10% of their total assets
in custodial receipts which have inverse floating interest rates.
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MUNICIPAL LEASES. The Tax Free Funds 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 sales
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 contact 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, the Tax Free Funds have adopted and follow
procedures for determining whether municipal lease obligations purchased by the
Funds are liquid and for monitoring the liquidity of municipal lease securities
held in such 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 security, the nature
of the marketplace in which the security trades, and other factors which the
Advisor may deem relevant. As set forth in "Investment Restrictions" below, each
Fund is subject to limitations on the percentage of illiquid securities it can
hold.
TEMPORARY TAXABLE INVESTMENTS
The Tax Free Funds may make temporary taxable investments. 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 (including zero
coupon securities); (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.
INVERSE FLOATING RATE OBLIGATIONS
Each of the Tax Free Funds may invest up to 10% of its total 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, value would tend to decline during a period of generally
increasing market 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.
ZERO COUPON SECURITIES
The Bond Funds and Tax Free Funds may invest in zero coupon, fixed
income securities. Zero coupon securities pay no cash income to their holders
until they mature and are issued at substantial discounts from their value at
maturity. When held to maturity, their entire return comes from the difference
between their purchase price and their
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maturity value. Because interest on zero coupon securities is not paid on a
current basis, the values of securities of this type are subject to greater
fluctuations than are the value of securities that distribute income regularly
and may be more speculative than such securities. Accordingly, the values of
these securities may be highly volatile as interest rates rise or fall.
ADJUSTABLE RATE MORTGAGE SECURITIES
Adjustable Rate Mortgage Securities Fund may invest in adjustable rate
mortgage securities ("ARMS"). ARMS are pass-through mortgage securities
collateralized by mortgages with interest rates that are adjusted from time to
time. ARMS also include adjustable rate tranches of collateralized mortgage
obligations. The adjustments usually are determined in accordance with a
predetermined interest rate index and may be subject to certain limits. While
the values of ARMS, like other debt securities, generally vary inversely with
changes in market interest rates (increasing in value during periods of
declining interest rates and decreasing in value during periods of increasing
interest rates), the values of ARMS should generally be more resistant to price
savings than other debt securities because the interest rates of ARMs move with
market interest rates. The adjustable rate feature of ARMS will not, however,
eliminate fluctuations in the prices of ARMS, particularly during periods of
extreme fluctuations in interest rates.
ARMS typically have caps which limit the maximum amount by which the
interest rate may be increased or decreased at periodic intervals or over the
life of the loan. To the extent interest rates increase in excess of the caps,
ARMS can be expected to behave more like traditional debt securities and to
decline in value to a greater extent than would be the case in the absence of
such caps. Also, since many adjustable rate mortgages only reset on an annual
basis, it can be expected that the prices of ARMS will fluctuate to the extent
changes in prevailing interest rates are not immediately reflected in the
interest rates payable on the underlying adjustable rate mortgages. The extent
to which the prices of ARMS fluctuate with changes in interest rates will also
be affected by the indices underlying the ARMS.
INTEREST RATE TRANSACTIONS
Adjustable Rate Mortgage Securities Fund may purchase or sell interest
rate caps and floors to preserve a return or a spread on a particular investment
or portion of its portfolio or for other non-speculative purposes. The purchase
of an interest rate cap entitles the purchaser, to the extent a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the party selling such interest rate
cap. The purchase of an interest rate floor entitles the purchase, to the extent
a specified index falls below a predetermined interest rate, to receive payments
of interest on a contractually-based principal amount from the party selling
such interest rate floor.
GUARANTEED INVESTMENT CONTRACTS
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.
DEBT OBLIGATIONS -- STRATEGIC INCOME FUND
Strategic Income Fund may invest in both investment grade and
non-investment grade (lower-rated) bonds (which may be denominated in U.S.
dollars or non-U.S. currencies) and other debt obligations issued by domestic
and foreign corporations and other private issuers. There are no minimum rating
requirements for these investments by the Fund. The Fund's investments may
include U.S. dollar-denominated debt obligations known as "Brady Bonds," which
are issued for the exchange of existing commercial bank loans to foreign
entities for new obligations that are generally
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collateralized by zero coupon Treasury securities having the same maturity. From
time to time, the Fund's portfolio may consist primarily of lower-rated (i.e.,
rated Ba or lower by Moody's, or BB or lower by Standard & Poor's) corporate
debt obligations, which are commonly referred to as "junk bonds." Certain debt
obligations in which the Fund invests may involve equity characteristics. The
Fund may, for example, invest in unit offerings that combine debt securities and
common stock equivalents such as warrants, rights and options. It is anticipated
that the majority of the value attributable to the unit will relate to its debt
component.
The prices and yields of non-investment grade securities generally
fluctuate more than investment grade securities, and such prices may decline
significantly in periods of general economic difficulty or rising interest
rates.
DEBT OBLIGATIONS RATED LESS THAN INVESTMENT GRADE
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."
Participation in non-investment grade securities globally involves
greater returns in the form of higher average yields. 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. If the issuer of a security held by the Fund
defaulted, the Fund might incur additional expenses to seek recovery.
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 Advisor's and applicable sub-advisor's own credit analysis
than is the case with investment grade obligations.
FLOATING RATE CORPORATE DEBT OBLIGATIONS -- STRATEGIC INCOME FUND
Strategic Income Fund expects to invest in floating rate corporate debt
obligations, including increasing rate securities. Floating rate securities are
generally offered at an initial interest rate which is at or above prevailing
market rates. The interest rate paid on these securities is then reset
periodically (commonly every 90 days) to an increment over some predetermined
interest rate index. Commonly utilized indices include the three-month Treasury
bill rate, the 180- day Treasury bill rate, the one-month or three-month London
Interbank Offered Rate (LIBOR), the prime rate of a bank, the commercial paper
rates, or the longer-term rates on U.S. Treasury securities.
PAYMENT-IN-KIND DEBENTURES AND DELAYED INTEREST SECURITIES
Strategic Income Fund may invest in debentures the interest on which
may be paid in other securities rather than cash ("PIKs"). Typically, during a
specified term prior to the debenture's maturity, the issuer of a PIK may
provide for the option or the obligation to make interest payments in
debentures, common stock or other instruments (i.e., "in kind" rather than in
cash). The type of instrument in which interest may or will be paid would be
known by the Fund
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at the time of investment. While PIK's generate income for purposes of generally
accepted accounting standards, they do not generate cash flow and thus could
cause the Fund to be forced to liquidate securities at an inopportune time in
order to distribute cash, as required by the Code.
Unlike PIKs, delayed interest securities do not pay interest for a
specified period. Because values of securities of this type are subject to
greater fluctuations than are the values of securities that distribute income
regularly, they may be more speculative than such securities.
PREFERRED STOCK
The Equity Funds and Strategic Income Fund may invest in preferred
stock. Preferred stock, unlike common stock, offers a stated dividend rate
payable from the issuer's earnings. Preferred stock dividends may be cumulative
or non-cumulative, participating, or auction rate. If interest rates rise, the
fixed dividend on preferred stocks may be less attractive, causing the price of
preferred stocks to decline. Preferred stock may have mandatory sinking fund
provisions, as well as call/redemption provisions prior to maturity, a negative
feature when interest rates decline.
PARTICIPATION INTERESTS
Strategic Income Fund may acquire participation interests in senior,
fully secured floating rate loans that are made primarily to U.S. companies. The
Fund's investments in participation interests are subject to its limitation on
investments in illiquid securities. The Fund may purchase only those
participation interests that mature in one year or less, or, if maturing in more
than one year, have a floating rate that is automatically adjusted at least once
each year according to a specified rate for such investments, such as a
published interest rate or interest rate index. Participation interests are
primarily dependent upon the creditworthiness of the borrower for payment of
interest and principal. Such borrowers may have difficulty making payments and
may have senior securities rated as low as C by Moody's, or D by Standard &
Poor's.
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.
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
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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.
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.
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 creditworthiness of obligations
issued by the State of California, and that there is no obligation on the part
of California to make payment on such local obligations in the event of default.
GENERAL ECONOMIC CONDITIONS. California's economy is the largest among
the 50 states and one of the largest in the world. This diversified economy has
major components in agriculture, manufacturing, high-technology, trade,
entertainment, tourism, construction and services. Total state gross domestic
product of $1 trillion in 1997 will be larger than all but seven nations in the
world and California will become the first state to produce over one trillion
dollars worth of goods and services in a single year.
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.
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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. Non-farm employment created
330,000 additional 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 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.
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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.
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
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approximately $7.5 billion. Many of the entities which deposited moneys in the
Pools, including Orange County, faced interim and/or extended cash flow
difficulties because of the bankruptcy filing and may be required to reduce
programs or capital projects. Orange County has embarked on a fiscal recovery
plan based on sharp reductions in services and personnel, and rescheduling of
outstanding short term debt using certain new revenues transferred to Orange
County from other local governments pursuant to special legislation enacted in
October, 1995. The State has no existing obligation with respect to any
outstanding obligations or securities of Orange County or any of the other
participating entities.
LITIGATION GENERALLY. The State is a party to numerous legal
proceedings, many of which normally occur in governmental operations. In the
consolidated state case of Malibu Video Systems, et al. v. Kathleen Brown and
Abramovitz, et al., a stipulated judgment has been entered requiring return of
$119 million plus interest to specified special funds over a period of up to
five years beginning in fiscal year 1996-1997. The lawsuit challenges the
transfer of monies from special fund accounts within the State Treasury to the
State's General Fund pursuant to the Budget Acts of 1991, 1992, 1993, and 1994.
Plaintiffs allege that the monetary transfers violated various statutes and
provisions of the State Constitution.
FISCAL YEAR 1996 - 1997. 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.
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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").
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
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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 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, as newly-trained former welfare recipients
enter the labor market,
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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 INTERMEDIATE TAX FREE FUND AND MINNESOTA TAX
FREE FUND
As described in the Prospectus relating to Minnesota Intermediate Tax
Free Fund and Minnesota Tax Free Fund, except during temporary defensive
periods, each of these Funds will invest most of its total assets in Minnesota
municipal obligations. These Funds therefore are susceptible to political,
economic and regulatory factors affecting issuers of Minnesota municipal
obligations. The following information provides a 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. The
creditworthiness of obligations issued by local Minnesota issuers may be
unrelated to the creditworthiness of obligations issued by the State of
Minnesota, and there is no obligation on the part of Minnesota to make payments
on such local obligations in the event of default.
Diversity and a significant natural resource base are two important
characteristics of the Minnesota economy. Generally, the structure of the
state's economy parallels the structure of the United States economy as a whole.
There are, however, employment concentrations in the manufacturing categories of
industrial machinery, instruments and miscellaneous, food, paper and related
industries, and printing and publishing. During the period from 1980 to 1990,
overall employment growth in Minnesota lagged behind national employment growth,
in large part due to declining agricultural employment. The rate of non-farm
employment growth in Minnesota exceeded the rate of national growth, however, in
the period of 1990 to 1997. The State's unemployment rate continues to be
substantially less than the national unemployment rate. Since 1980, Minnesota
per capita income generally has remained above the national average.
The State relies heavily on a progressive individual income tax and a
retail sales tax for revenue, which results in a fiscal system that is sensitive
to economic conditions. On a number of occasions in previous 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.
The Minnesota Department of Finance February 1998 Forecast projected, under then
current laws, that the State would complete its current biennium June 30, 1999
with more than a $1 billion surplus, plus a $350 million cash flow account
balance, plus a $522 million budget reserve. The 1998 legislature, however,
adopted various tax cuts, spending increases and other budgetary changes. As a
result, the Department of Finance issued revised projections indicating that the
State would complete the June 30, 1999 biennium with an unrestricted balance of
$35 million, plus a $350 million cash flow account balance, plus a $613 million
budget reserve. Total General Fund expenditures and transfers for the biennium
were projected to be $21.5 billion. 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 could 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 could 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, but
generally the State has no obligation to make payments on local obligations in
the event of a default. Even with respect to revenue obligations, no assurance
can be given that economic or other fiscal difficulties and the resultant impact
on State and local government finances will not adversely affect the ability of
the respective
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obligors to make timely payment of the principal and interest on Minnesota
municipal bonds that are held by the Funds or the value or marketability of such
obligations.
Recent Minnesota tax legislation and possible future changes in federal
and State income tax laws, including rate reductions, could adversely affect the
value and marketability of Minnesota municipal bonds that are held by the Fund.
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 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.
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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 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
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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. 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
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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.
CFTC INFORMATION
The Commodity Futures Trading Commission (the "CFTC"), a federal
agency, regulates trading activity pursuant to the Commodity Exchange Act, as
amended. The CFTC requires the registration of "commodity pool operators," which
are defined as any person engaged in a business which is of the nature of an
investment trust, syndicate or a similar form of enterprise, and who, in
connection therewith, solicits, accepts or receives from others funds,
securities or property for the purpose of trading in 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 California Intermediate Tax Free Fund, Colorado
Intermediate Tax Free Fund, Intermediate Tax Free Fund, Minnesota
Intermediate Tax Free Fund, Minnesota Tax Free Fund, Oregon
Intermediate Tax Free Fund and 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
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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.
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 Markets Fund,
International Fund, Technology Fund and Strategic Income 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, Large
Cap Growth Fund, Large Cap Value Fund, Mid Cap Growth Fund, Mid
Cap Value Fund, Micro Cap Value Fund, Regional Equity Fund, Small
Cap Value Fund, Emerging Markets Fund, International Index Fund,
Minnesota Tax Free Fund and Tax Free 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 restriction is non-fundamental and may be changed by
FAIF's Board of Directors without a shareholder vote. None of the Funds will
invest more than 15% of its net assets in all forms of illiquid investments.
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
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determined by the Advisor. For example, an asset-backed security known as "Money
Store 940 A2" would be classified as follows: the issuer or sponsor of the
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.
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 Advisor. For
example, an asset-backed security known as "Money Store 94D A2" would be
classified as follows: the issuer or sponsor of the 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.
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 management services company, since
1975. Age: 49.
David T. Bennett, ___________________________________: Director of
FAIF, FAF and FASF since August 1998; Of Counsel, Gray, Plant, Mooty, Mooty &
Bennett P.A., from ____________ to __________. Age: 56.
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.
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* 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
Mark Nagle, SEI Investments Company, Oaks, Pennsylvania 19456;
President of FAIF, FAF and FASF since September 1998; Vice President of the
Administrator and Distributor since November 1996; Vice President of Fund
Accounting, BISYS Fund Services, Inc. from November 1995 to November 1996;
Senior Vice President, Fidelity Investments, from __________ 1994 to November
1995. Age: 40.
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: 44.
Michael G. Beattie, SEI Investments Company, Oaks, Pennsylvania 19456:
Controller and Assistant Treasurer 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.
Lydia A. Gavalis, SEI Investments Company, Oaks, Pennsylvania 19456;
Vice President and Assistant Secretary of FAIF, FAF and FASF, and Vice President
and Assistant Secretary of the Administrator and the Distributor each since
January 1998. Assistant General Counsel and Director of Arbitration,
Philadelphia Stock Exchange from 1989 to 1998. Age: 34.
Lynda J. Streigel, SEI Investments Company, Oaks, Pennsylvania 19456;
Vice President and Assistant Secretary of FAIF, FAF and FASF, and Vice President
and Assistant Secretary of the Administrator and the Distributor since January
1998; Senior Asset Management Counsel, Barnett Banks, Inc. from 1993 to 1997;
Partner, Groom and Nordberg, Chartered from 1996 to 1997; and Associate General
Counsel, Riggs Bank, N.A. from 1992 to 1995.
Age: 50.
Kathy Heilig, SEI Investments Company, Oaks, Pennsylvania 19456; Vice
President and Assistant Secretary of FAIF, FAF and FASF, and Treasurer of SEI
Investments Company since 1997; Assistant Controller of SEI Investments Company
from 1995 to 1997; and Vice President of SEI Investments Company from 1991 to
1995.
Age: 40.
James R. Foggo, SEI Investments Company, Oaks, Pennsylvania and
Distributor since September 1998. Associate Attorney, Paul Weiss, Rifkind,
Wharton and Garrison from January 1998 to August 1998. Associate Attorney, Baker
& McKenzie, from January 1995 to January 1998. Age: 34.
-33-
<PAGE>
Michael J. Radmer, 220 South Sixth Street, Minneapolis, Minnesota
55402; Secretary of FAIF since April 1991, of FASF since June 1996 and of FAF
since 1981; Partner, Dorsey & Whitney LLP, a Minneapolis-based law firm and
general counsel of FAIF, FAF and FASF. Age: 52.
COMPENSATION
The First American Family of Funds, which includes FAIF, FAF and FASF,
currently pays only to directors of the funds who are not paid employees or
affiliates of the funds a fee of $15,000 per year ($22,500 in the case of the
Chair) plus $2,500 ($3,750 in the case of the Chair) per meeting of the Board
attended and $800 per committee meeting attended ($1,600 in the case of a
committee chair) and reimburses travel expenses of directors and officers to
attend Board meetings. 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, 1998. 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)
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM REGISTRANT AND
COMPENSATION AS PART OF FUND BENEFITS UPON FUND COMPLEX PAID
NAME OF PERSON, POSITION FROM REGISTRANT EXPENSES RETIREMENT TO DIRECTORS
- ------------------------------------- ---------------- --------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Robert J. Dayton, Director $ -0- -0- $
Roger A. Gibson, Director -0- -0-
David T. Bennett, Director -0- -0-
Andrew M. Hunter III, Director -0- -0-
Leonard W. Kedrowski, Director -0- -0-
Robert L. Spies, Director -0- -0-
Joseph D. Strauss, Director -0- -0-
Virginia L. Stringer, Director -0- -0-
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
U.S. Bank National Association (the "Advisor"), 601 Second Avenue
South, Minneapolis, Minnesota 55480, serves as the investment Advisor and
manager of the Funds through its First American Asset Management group. The
Advisor 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 Advisor 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, 1998, on a pro forma
combined basis, USB and its consolidated subsidiaries had consolidated assets of
approximately $______ billion, consolidated deposits of $______ billion and
shareholders' equity of $______ billion.
Pursuant to an Investment Advisory Agreement dated April 2, 1991 (the
"Advisory Agreement"), the Funds engage the Advisor to act as investment Advisor
for and to manage the investment of the assets of the Funds. Each Fund, other
than International Fund, pays the Advisor monthly fees calculated on an annual
basis equal to 0.70% of its average
-34-
<PAGE>
daily net assets. Emerging Markets Fund and International Fund pay the Advisor
monthly fees calculated on an annual basis equal to 1.25% of their respective
average daily net assets. The Advisory Agreement requires the Advisor to provide
FAIF with all necessary office space, personnel and facilities necessary and
incident to the Advisor's performance of its services thereunder. The Advisor 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 Advisor 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 Advisor 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 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 advisors
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 court or the appropriate
regulatory agencies, FAIF has received an opinion from its counsel that the
Advisor 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 Advisor might be prohibited from continuing these
arrangements. In that event, it is expected that the Board of Directors would
make other arrangements and that shareholders would not suffer adverse financial
consequences.
The following table sets forth total advisory fees before waivers and
after waivers for each of the Funds for the fiscal years ended September 30,
1996, September 30, 1997 and September 30, 1998:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
----------------------- ----------------------- -----------------------
ADVISORY FEE ADVISORY FEE ADVISORY FEE
----------------------- ----------------------- -----------------------
BEFORE AFTER BEFORE AFTER BEFORE AFTER
WAIVER WAIVER WAIVER WAIVER WAIVER WAIVER
--------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund................... $1,935,552 $1,680,465 $2,969,361 $2,633,982
Equity Income Fund.............. 447,530 316,928 1,471,595 1,105,166
Equity Index Fund............... 2,033,763 452,121 3,273,380 822,100
Large Cap Growth Fund........... 1,327,317 1,072,105 3,690,541 3,206,103
Large Cap Value Fund............ 2,987,619 2,624,360 6,016,828 5,258,308
Mid Cap Growth Fund.............
Mid Cap Value Fund.............. 1,583,474 1,583,474 3,025,411 3,002,763
Micro Cap Value Fund............ * * 241,606 182,150
Regional Equity Fund............ 2,009,755 1,952,912 2,402,445 2,384,184
Small Cap Growth Fund(1)........ 374,771 834,130 819,610
Small Cap Value Fund............ -- -- 1,288,688(2) 1,287,355(2)
Emerging Markets Fund...........
International Fund.............. 1,473,242 1,473,242 2,143,703 2,143,703
International Index Fund........ -- 408,101 210,642(2)
Health Sciences Fund............ 48,383 (19,192) 238,884 189,036
Real Estate Securities Fund..... (1,797) 216,398 141,149
Technology Fund................. 345,213 291,109 872,103 843,048
Adjustable Rate Mortgage
Securities Fund.................
</TABLE>
-35-
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
----------------------- ----------------------- -----------------------
ADVISORY FEE ADVISORY FEE ADVISORY FEE
----------------------- ----------------------- -----------------------
BEFORE AFTER BEFORE AFTER BEFORE AFTER
WAIVER WAIVER WAIVER WAIVER WAIVER WAIVER
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Fixed Income Fund .................... 2,619,764 1,980,027 4,163,377 3,118,330
Intermediate Government Bond Fund .... 861,440 640,855 1,205,293 908,919
Intermediate Term Income Fund ........ 692,483 510,735 1,097,629 756,616
Limited Term Income Fund ............. 493,749 826,265 477,717
Strategic Income Fund
California Intermediate Tax Free Fund * * 32,438 13,450
Colorado Intermediate Tax Free Fund .. 362,608 243,815 381,297 265,043
Intermediate Tax Free Fund
Minnesota Intermediate Tax Free Fund . 562,547 378,439 1,853,372 1,326,104
Minnesota Tax Free Fund
Oregon Intermediate Tax Free Fund .... * * 180,599 80,601
Tax Free Fund
</TABLE>
*Fund was not in operation during this fiscal year.
(1) Piper Small Company Growth Fund is the financial reporting survivor of
Small Cap Growth Fund. The total advisory fees for Piper Small Company
Growth Fund for the fiscal years ended September 30, 1996, September
30, 1997 and September 30, 1998 were $307,937, $223,793 and
$__________, respectively.
(2) For the four month period from August 1, 1997 to November 30, 1997.
SUB-ADVISORY AGREEMENT FOR EMERGING MARKETS FUND,
INTERNATIONAL FUND AND STRATEGIC INCOME FUND
Marvin & Palmer Associates, Inc., 1201 North Market Street, Suite 2300,
Wilmington, Delaware 19801 ("Marvin & Palmer") is sub-advisor for Emerging
Markets Fund and International Fund under an agreement with the Advisor (the
"Marvin & Palmer Sub-Advisory Agreement"). Marvin & Palmer, a privately-held
company, was founded in 1986 by David F. Marvin and Stanley Palmer. Marvin &
Palmer is engaged in the management of global, non-United States and emerging
markets equity portfolios for institutional accounts. At January 1, 1998, Marvin
& Palmer managed a total of $4.6 billion in investments for 53 institutional
investors. Pursuant to the Marvin & Palmer Sub-Advisory Agreement, Marvin &
Palmer is responsible for the investment and reinvestment of Emerging Markets
Fund's and International Fund's assets and the placement of brokerage
transactions in connection therewith. Under the Marvin & Palmer Sub-Advisory
Agreement, Marvin & Palmer is required, among other things, to report to the
Advisor or the Board regularly at such times and in such detail as the Advisor
or the Board may from time to time request in order to permit the Advisor and
the Board to determine the adherence of Emerging Markets Fund and International
Fund to their respective investment objectives, policies and restrictions. The
Marvin & Palmer Sub-Advisory Agreement also requires Marvin & Palmer to provide
all office space, personnel and facilities necessary and incident to Marvin &
Palmer's performance of its services under the Marvin & Palmer Sub-Advisory
Agreement.
For its services to International Fund under the Marvin & Palmer
Sub-Advisory Agreement, Marvin & Palmer is paid a monthly fee by the Advisor
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.
For its services to Emerging Markets Fund under the Marvin & Palmer
Sub-Advisory Agreement, Marvin & Palmer is paid a monthly fee by the Advisor
calculated on an annual basis equal to 0.85% of the first $100 million of
Emerging Markets Fund's average daily net assets, 0.60% of Emerging Markets
Fund's average daily net assets in
-36-
<PAGE>
excess of $100 million up to $300 million, 0.55% of Emerging Markets Fund's
average daily net assets in excess of $300 million up to $500 million, and 0.50%
of Emerging Markets Fund's average daily net assets in excess of $500 million.
Federated Investment Counseling, 1001 Liberty Avenue, Pittsburgh,
Pennsylvania 15222-3779 and Federated Global Research Corp., 175 Water Street,
New York, New York 10038-4965 (collectively, the "Sub-Advisors"), each
subsidiaries of Federated Investors ("Federated") are sub-advisors for Strategic
Income Fund under an agreement with the Advisor (the "Federated Sub-Advisory
Agreement"). Federated Investment Counseling, which is a Delaware business
trust, and Federated Global Research Corp., which is a Delaware corporation, are
each registered investment advisors under the 1940 Act. As of March 31, 1998,
Federated Investment Counseling, Federated Global Research Corp. and such other
subsidiaries of Federated rendered investment advice regarding over $1.26
billion of assets. Pursuant to the Federated Sub-Advisory Agreement, Federated
Investment Counseling is responsible for investment of the high yield portion of
Strategic Income Fund's assets and Federated Global Research Corp. is
responsible for the investment of the international portion of Strategic Income
Fund's assets. Under the Federated Sub-Advisory Agreement, the Sub-Advisors are
required, among other things, to report to the Advisor or the Board regularly at
such times and in such detail as the Advisor or the Board may from time to time
request in order to permit the Advisor and the board to determine the adherence
of Strategic Income Fund to its investment objectives, policies and
restrictions. The Federated Sub-Advisory Agreement also requires the
Sub-Advisors to provide all office space, personnel and facilities necessary and
incident to the Sub-Advisor's performance of their services under the Federated
Sub-Advisory Agreement.
For their services under the Sub-Advisory Agreement, the Sub-Advisors
are paid a monthly fee by the Advisor calculated on an annual basis equal to
0.40% of the first $25 million of Strategic Income Fund's average daily net
assets, 0.33% of Strategic Income Fund's average daily net assets in excess of
$25 million up to $50 million, 0.26% of Strategic Income Fund's average daily
net assets in excess of $50 million up to $100 million and 0.21% of Strategic
Income Fund's average daily net assets in excess of $100 million.
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 Advisor as a
sub-administrator (the "Sub-Administrator"). The Sub-Administrator assists 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,
1996, September 30, 1997 and September 30, 1998:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPT. 30, SEPT. 30, SEPT. 30,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Balanced Fund .................................. $ 328,792 $ 483,173
Equity Income Fund ............................. 76,098 238,527
Equity Index Fund .............................. 345,460 532,263
Large Cap Growth Fund .......................... 225,373 599,349
Large Cap Value Fund ........................... 507,743 977,071
Mid Cap Growth Fund ............................ * *
Mid Cap Value Fund ............................. 269,161 491,566
</TABLE>
-37-
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPT. 30, SEPT. 30, SEPT. 30,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Micro Cap Value Fund ........................... * 38,730(3)
Regional Equity Fund ........................... 341,361 390,986
Small Cap Growth Fund(1) ....................... 70,492 135,387
Small Cap Value Fund ........................... -- 209,129(2)
Emerging Markets Fund .......................... * *
International Fund ............................. 140,215 195,362
International Index Fund ....................... -- 86,702(2)
Health Sciences Fund ........................... 33,059 48,839
Real Estate Securities Fund .................... 50,010 49,002
Technology Fund ................................ 61,764 141,679
Adjustable Rate Mortgage Securities Fund ....... * *
Fixed Income Fund .............................. 445,300 676,891
Intermediate Government Bond Fund .............. 146,381 196,129
Intermediate Term Income Fund .................. 117,703 178,052
Limited Term Income Fund ....................... 135,704 134,340
Strategic Income Fund .......................... * *
California Intermediate Tax Free Fund .......... * 5,200
Colorado Intermediate Tax Free Fund ............ 61,659 62,075
Intermediate Tax Free Fund ..................... * *
Minnesota Intermediate Tax Free Fund ........... 95,590 301,176
Minnesota Tax Free Fund ........................ * *
Oregon Intermediate Tax Free Fund .............. * 28,951
Tax Free Fund .................................. * *
</TABLE>
- ---------------
* Fund was not in operation during this fiscal year.
(1) On July 31, 1998, Piper Small Company Growth Fund and Small Cap Growth
Fund consummated a reorganization transaction pursuant to which shares
of Piper Small Company Growth Fund were exchanged for shares of Small
Cap Growth Fund. Piper Small Company Growth Fund is the financial
reporting survivor of Small Cap Growth Fund. During the foregoing
fiscal years, Piper Small Company Growth Fund did not pay any
administration fees.
(2) For the four month period from August 1, 1997 to November 30, 1997.
(3) 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 Y Shares of the Funds. The
Distributor is a wholly-owned subsidiary of SEI Investments Company, which also
owns the Funds' Administrator. See "-- Administration Agreement" above.
The Distributor serves as distributor for the Class A and Class Y
Shares pursuant to a Distribution Agreement dated February 10, 1994 (the "Class
A/Class Y 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. In addition,
the Distributor serves as distributor for the Class C Shares pursuant to a
Distribution and Service Agreement dated
-38-
<PAGE>
___________, 1999 ("Class C Distribution and Service Agreement") between itself
and the Funds. These agreements are referred to collectively as the
"Distribution Agreements."
Under the Distribution Agreements, the Distributor has agreed to
perform all distribution services and functions of the Funds to the extent such
services and functions are not provided to the Funds pursuant to another
agreement. The Distribution Agreements provide that shares of the Funds are
distributed through the Distributor and, with respect to Class A, Class B and
Class C 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
Y 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, Class B and
Class C Shares Prospectuses.
The Class B and Class C Shares of each Fund pay to the Distributor a
sales support fee at an annual rate of 0.75% of the average daily net assets of
the respective Class B and Class C 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 and Class C Shares. This fee is
calculated and paid each month based on average daily net assets of the
respective Class B and Class C Shares 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 respective Class B
and Class C Shares pursuant to a service plan (the "Class B and Class C Service
Plan"), which fee may be used by the Distributor to provide compensation for
shareholder servicing activities with respect to the Class B and Class C Shares
of a Fund of the kinds described in the Class A, Class B and Class C Shares
Prospectuses. Although Class B Shares are sold without a front-end sales charge,
the Distributor pays a total of 4.25% of the amount invested (including a
pre-paid service fee of 0.25% of the amount invested) to dealers who sell Class
B Shares (excluding exchanges from other Class B Shares in the First American
family). The servicing fee payable under the Class B and Class C 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.
<PAGE>
The following tables set forth the amount of underwriting commissions
paid by each Fund and the amount of such commissions retained by the
Underwriter.
<TABLE>
<CAPTION>
TOTAL UNDERWRITING COMMISSIONS
------------------------------
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
September 30, September 30, September 30,
------------- ------------- -------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Balanced Fund $ $ $
Equity Income Fund $ $ $
Equity Index Fund $ $ $
Large Cap Growth Fund $ $ $
Large Cap Value Fund $ $ $
Mid Cap Growth Fund $ $ $
Mid Cap Value Fund $ $ $
Micro Cap Value Fund $ $ $
Regional Equity Fund $ $ $
Small Cap Growth Fund $ $ $
Small Cap Value Fund $ $ $
Emerging Markets Fund $ $ $
International Fund $ $ $
International Index Fund $ $ $
Health Sciences Fund $ $ $
Real Estate Securities Fund $ $ $
Technology Fund $ $ $
Adjustable Rate Mortgage Securities
Fund $ $ $
Fixed Income Fund $ $ $
Intermediate Government Bond Fund $ $ $
Intermediate Term Income Fund $ $ $
Limited Term Income Fund $ $ $
Strategic Income Fund $ $ $
California Intermediate Tax Free Fund $ $ $
Colorado Intermediate Tax Free Fund $ $ $
Intermediate Tax Free Fund $ $ $
Minnesota Intermediate Tax Free Fund $ $ $
Minnesota Tax Free Fund $ $ $
Oregon Intermediate Tax Free Fund $ $ $
Tax Free Fund $ $ $
<PAGE>
UNDERWRITING COMMISSIONS
------------------------
RETAINED BY THE UNDERWRITER
---------------------------
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
September 30, September 30, September 30,
------------- ------------- -------------
1996 1997 1998
---- ---- ----
Balanced Fund $ $ $
Equity Income Fund $ $ $
Equity Index Fund $ $ $
Large Cap Growth Fund $ $ $
Large Cap Value Fund $ $ $
Mid Cap Growth Fund $ $ $
Mid Cap Value Fund $ $ $
Micro Cap Value Fund $ $ $
Regional Equity Fund $ $ $
Small Cap Growth Fund $ $ $
Small Cap Value Fund $ $ $
Emerging Markets Fund $ $ $
International Fund $ $ $
International Index Fund $ $ $
Health Sciences Fund $ $ $
Real Estate Securities Fund $ $ $
Technology Fund $ $ $
Adjustable Rate Mortgage Securities
Fund $ $ $
Fixed Income Fund $ $ $
Intermediate Government Bond Fund $ $ $
Intermediate Term Income Fund $ $ $
Limited Term Income Fund $ $ $
Strategic Income Fund $ $ $
California Intermediate Tax Free Fund $ $ $
Colorado Intermediate Tax Free Fund $ $ $
Intermediate Tax Free Fund $ $ $
Minnesota Intermediate Tax Free Fund $ $ $
Minnesota Tax Free Fund $ $ $
Oregon Intermediate Tax Free Fund $ $ $
Tax Free Fund $ $ $
The Underwriter received the following compensation from each Fund
during its most recent fiscal year.
<PAGE>
Net Underwriting Compensation on
Discounts and Redemptions and Brokerage Other
Commissions Repurchases Commissions Compensation
----------- ----------- ----------- ------------
Balanced Fund $ $ $ $
Equity Income Fund $ $ $ $
Equity Index Fund $ $ $ $
Large Cap Growth Fund $ $ $ $
Large Cap Value Fund $ $ $ $
Mid Cap Growth Fund $ $ $ $
Mid Cap Value Fund $ $ $ $
Micro Cap Value Fund $ $ $ $
Regional Equity Fund $ $ $ $
Small Cap Growth Fund $ $ $ $
Small Cap Value Fund $ $ $ $
Emerging Markets Fund $ $ $ $
International Fund $ $ $ $
International Index Fund $ $ $ $
Health Sciences Fund $ $ $ $
Real Estate Securities Fund $ $ $ $
Technology Fund $ $ $ $
Adjustable Rate Mortgage
Securities Fund $ $ $ $
Fixed Income Fund $ $ $ $
Intermediate Government Bond
Fund $ $ $ $
Intermediate Term Income Fund $ $ $ $
Limited Term Income Fund $ $ $ $
Strategic Income Fund $ $ $ $
California Intermediate Tax Free
Fund $ $ $ $
Colorado Intermediate Tax Free
Fund $ $ $ $
Intermediate Tax Free Fund $ $ $ $
Minnesota Intermediate Tax Free
Fund $ $ $ $
Minnesota Tax Free Fund $ $ $ $
Oregon Intermediate Tax Free Fund $ $ $ $
Tax Free Fund $ $ $ $
</TABLE>
<PAGE>
FAIF has adopted Plans of Distribution with respect to the Class A,
Class B and Class C 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, Class B and Class C
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 Advisor,
in their discretion, may from time to time use their own assets to pay for
certain additional costs of distributing Class A, Class B and Class C Shares.
Any such arrangements to pay such additional costs may be commenced or
discontinued by the Distributor, any Participating Institution, the
Administrator, or the Advisor 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,
1996, September 30, 1997 and September 30, 1998 with respect to the Class A
Shares and the Class B Shares of the Funds. Please note that as of September 30,
1998, there were no Class C Shares outstanding. As noted above, no distribution
fees are paid with respect to Class Y Shares of the Funds.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
----------------------- ----------------------- -----------------------
RULE 12b-1 FEES RULE 12b-1 FEES RULE 12b-1 FEES
----------------------- ----------------------- -----------------------
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........................ $ 43,620 $ 83,213 $ 65,211 $ 284,082
Equity Income Fund................... 5,787 24,127 10,355 50,769
Equity Index Fund.................... 10,536 43,676 24,989 139,149
Large Cap Growth Fund................ 10,113 36,952 21,223 75,168
Large Cap Value Fund................. 44,423 148,550 82,694 367,871
Mid Cap Growth Fund.................. * * * *
Mid Cap Value Fund................... 32,527 79,817 59,658 227,800
Micro Cap Value Fund................. * * 8 12
Regional Equity Fund................. 52,806 182,709 68,712 313,016
Small Cap Growth Fund(1)............. 2,147 4,985 9,165 8,939
Small Cap Value Fund................. -- -- 23,014(2) 0
Emerging Markets Fund................ * * * *
International Fund................... 3,203 6,605 9,497 15,477
International Index Fund............. -- -- 1,250(2) 0
Health Sciences Fund................. 554 1,001 1,725 3,921
Real Estate Securities Fund.......... 397 1,660 2,975 17,056
Technology Fund...................... 5,967 31,470 12,736 58,415
Adjustable Rate Mortgage Securities..
Fund................................. * * * *
Fixed Income Fund.................... 20,620 134,380 20,065 15,180
Intermediate Government Bond Fund.... 0 * 0 0
Intermediate Term Income Fund........ 0 * 0 0
Limited Term Income Fund............. 0 * 0 0
Strategic Income Fund................ * * * *
California Intermediate Tax Free
Fund(3).............................. * * 0 0
Colorado Intermediate Tax Free Fund.. 0 * 0 0
Intermediate Tax Free Fund...........
Minnesota Intermediate Tax Free Fund. 0 * 0 0
Minnesota Tax Free Fund..............
Oregon Intermediate Tax Free Fund.... * * 0 0
Tax Free Fund........................
</TABLE>
- ---------------
* Fund or class was not in operation during this fiscal year.
(1) Piper Small Company Growth Fund is the financial reporting survivor of
Small Cap Growth Fund. Total distribution fees for the fiscal year
ended September 30, 1997 paid by Piper Small Company Growth Fund were
$101,905.
(2) For the four month period from August 1, 1997 to November 30, 1997.
(3) Commenced operations on August 8, 1997.
-40-
<PAGE>
CUSTODIAN; TRANSFER AGENT; COUNSEL; ACCOUNTANTS
The custodian of the Funds' assets is U.S. Bank National Association
(the "Custodian"), U.S. Bank 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, for Emerging Markets Fund and International Fund, by a
sub-custodian with respect to such Fund. The Custodian or such sub-custodian
delivers securities against payment upon sale and pays for securities against
delivery upon purchase. The Custodian also remits Fund assets in payment of Fund
expenses, pursuant to instructions of FAIF's officers or resolutions of the
Board of Directors.
As compensation for its services to the Funds, the Custodian is paid a
monthly fee calculated on an annual basis equal to 0.03% (0.10% in the case of
Emerging Markets Fund, International Index Fund and International Fund) of such
Fund's average daily net assets. Sub-custodian fees with respect to Emerging
Markets Fund and 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., 330 West Ninth Street, Kansas City, Missouri 64105,
is transfer agent (the "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 Advisor or, in the case of Emerging Markets Fund,
International Fund and Strategic Income Fund, their respective investment
sub-advisors. 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 Advisor or applicable investment sub-advisor
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
Advisor or applicable investment sub-advisor to accept a particular price for a
security because the price offered by the broker or dealer meets guidelines for
profit, yield or both. Many of the portfolio transactions involve payment of a
brokerage commission by the appropriate Fund. In some cases, transactions are
with dealers or issuers who act as principal for their own accounts and not as
brokers. Transactions effected on a principal basis are made without the payment
of brokerage commissions but at net prices, which usually include a spread or
markup. In effecting transactions in over-the-counter securities, the Funds deal
with market makers unless it appears that better price and execution are
available elsewhere.
While the Advisor and applicable investment sub-advisor do 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 Advisor and investment sub-advisor to posted commission rates as well as to
other information concerning the level of commissions charged on comparable
transactions by other qualified brokers.
It is expected that Emerging Markets Fund, International Fund,
International Index Fund and Strategic Income 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
commission paid in connection with most such foreign stock transactions
generally are
-41-
<PAGE>
higher than negotiated commission 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 Advisor, Federated
or Marvin & Palmer may consider ability to provide supplemental performance,
statistical and other research information as well as computer hardware and
software for research purposes for consideration, analysis and evaluation by the
staff of the Advisor, Federated or Marvin & Palmer. 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 Advisor, Federated or
Marvin & Palmer would include advice, both directly and indirectly 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
Advisor, Federated or Marvin & Palmer to supplement its own investment research
activities and enable the Advisor, Federated or Marvin & Palmer 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 Advisor, Federated or Marvin & Palmer would receive a
benefit, which is not capable of evaluation in dollar amounts, without providing
any direct monetary benefit to the Funds from these transactions. Research
services furnished by brokers and dealers used by the Funds for portfolio
transactions may be utilized by the Advisor, Federated or Marvin & Palmer 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 Advisor, Federated or Marvin & Palmer in performing
services for the Funds. The Advisor, Federated or Marvin & Palmer 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 Advisor, Federated or Marvin & Palmer 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
Advisor, Federated or Marvin & Palmer, except as noted below. The Advisor,
Federated or Marvin & Palmer 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
Advisor, Federated or Marvin & Palmer with research services, which the Advisor,
Federated or Marvin & Palmer 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
Advisor, Federated or Marvin & Palmer would authorize the Funds to pay an amount
of commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged only if the Advisor,
Federated or Marvin & Palmer 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 Advisor, Federated
or Marvin & Palmer 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
Advisor or the Distributor unless such transactions, including the frequency
thereof, the receipt of commission payable in connection therewith, and the
selection of the affiliated broker or dealer
-42-
<PAGE>
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 Advisor, Federated or Marvin & Palmer
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
Advisor, Federated or Marvin & Palmer 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.
-43-
<PAGE>
The following table sets forth the aggregate brokerage commissions paid
by each of the Funds during the fiscal years ended September 30, 1996, September
30, 1997 and September 30, 1998:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPT. 30, SEPT. 30, SEPT. 30,
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Balanced Fund............................................. $ 232,149 $ 290,704
Equity Income Fund........................................ 32,789 180,195
Equity Index Fund......................................... 85,568 117,618
Large Cap Growth Fund..................................... 142,912 327,653
Large Cap Value Fund...................................... 565,446 1,205,280
Mid Cap Growth Fund....................................... * *
Mid Cap Value Fund........................................ 1,192,448 1,489,411
Micro Cap Value Fund...................................... * 31,662
Regional Equity Fund...................................... 213,138 96,219
Small Cap Growth Fund(1).................................. 18,305 63,981
Small Cap Value Fund...................................... -- 5,845(2)
Emerging Markets Fund..................................... * *
International Fund........................................ 598,535 818,016
International Index Fund.................................. -- 81,688(2)
Health Sciences Fund...................................... 11,932 17,550
Real Estate Securities Fund............................... 34,674 56,817
Technology Fund........................................... 31,789 60,918
Adjustable Rate Mortgage Securities Fund.................. * *
Fixed Income Fund......................................... 0 0
Intermediate Government Bond Fund......................... 0 0
Intermediate Term Income Fund............................. 0 0
Limited Term Income Fund.................................. 0 0
Strategic Income Fund..................................... * *
California Intermediate Tax Free Fund..................... * 0
Colorado Intermediate Tax Free Fund....................... 0 0
Intermediate Tax Free Fund................................ * *
Minnesota Intermediate Tax Free Fund...................... 0 0
Minnesota Tax Free Fund................................... * *
Oregon Intermediate Tax Free Fund......................... * 0
Tax Free Fund............................................. * *
</TABLE>
- ---------------
* Fund was not in operation during this fiscal year.
(1) Piper Small Company Growth Fund is the financial reporting survivor of
Small Cap Growth Fund. Piper Small Company Growth Fund paid aggregate
brokerage commissions during the fiscal years ended September 30, 1995,
September 30, 1996 and September 30, 1997, of $125,638, $65,924 and
$4,020, respectively.
(2) For the four month period from August 1, 1997 to November 30, 1997.
At September 30, 1998, 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 $____________. In addition, at September 30, 1998, Large Cap Growth Fund held
an equity security of Morgan Stanley Group in the amount of $____________;
Limited Term Income Fund held a corporate obligation of Salomon Brothers
-44-
<PAGE>
in the amount of $_____________; and Intermediate Term Income Fund held a
corporate obligation of Lehman Brothers in the amount of $_____________, all of
which are deemed "principal brokers or dealers."
CAPITAL STOCK
Each of the Fund's shares of common stock, and each class thereof, have
a par value of $.01 per share, and have equal voting rights to share in
dividends and assets. The shares possess no preemptive or conversion rights. As
of _________, 1998, the directors of FAIF, owned shares of FAIF, FAF and FASF
with an aggregate net asset value of $_____________. As of __________, 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. Please note that no
Class C Shares were outstanding as of __________________, 1998.
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING SHARES
CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
BALANCED FUND
Piper Jaffray for the Exclusive Benefit of Piper Jaffray.....
222 South 9th Street
Minneapolis, MN 55432
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust NA as fiduciary for First Retirement.............
Attn: Reconciliation SPFT0401
180 East Fifth Street
St. Paul, MN 55101-1631
EQUITY INCOME FUND
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
First American Strategy Income Fund..........................
c/o First Trust National Assn
Attn Greg Wilhelmy SPFT0912
P.O. Box 64010
St. Paul, MN 55164-0010
EQUITY INDEX FUND
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
Metlife Defined Contribution Group...........................
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.............................
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East Fifth Street
St. Paul, MN 55101-1631
</TABLE>
-45-
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING SHARES
CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
LARGE CAP GROWTH FUND
Piper Jaffray for the Exclusive Benefit of Piper Jaffray.....
222 South 9th Street
Minneapolis, MN 55432
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
LARGE CAP VALUE FUND
Piper Jaffray for the Exclusive Benefit of Piper Jaffray.....
222 South 9th Street
Minneapolis, MN 55432
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust National Association.............................
As a Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East 5th Street
St. Paul, MN 55101-1631
MID CAP VALUE FUND
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust National Association.............................
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East Fifth Street
St. Paul, MN 55101-1631
Investors Bank & Trust Co. Tr................................
U/A 06-15-98
Hormel Foods Corp Trust
Attn Bob Dana
P.O. Box 9130
Boston, MA 02117-9130
MICRO CAP VALUE FUND
BHC Securities Inc...........................................
FBO William Maingwaring
A/C 332406737 Attn TOA
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103-7042
Santa Barbara Bank & Trust...................................
William J. Weeks Trust
P.O. Box 2340
Santa Barbara, CA 93120-2340
Shangri-La & Co..............................................
c/o Northwest National Bank Trust
P.O. Box 1867
Vancouver, WA 98668-1867
U.S. Bancorp Investments, Inc................................
FBO 362046751
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
</TABLE>
-46-
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING SHARES
CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
U.S. Bancorp Investments, Inc................................
FBO 363124861
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
U.S. Bancorp Investments, Inc................................
FBO 394723781
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
U.S. Bancorp Investments, Inc................................
FBO 369232821
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
Piper Jaffray Cust...........................................
FBO Duane C. Bernhardt
IRA 430132781
222 South 9th Street
Minneapolis, MN 55402-3389
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
REGIONAL EQUITY FUND
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust National Association.............................
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East Fifth Street
St. Paul, MN 55101-1631
SMALL CAP GROWTH FUND
Piper Jaffray for the Exclusive Benefit of Piper Jaffray.....
222 South 9th Street
Minneapolis, MN 55432
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust National Association.............................
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East 5th Street
St. Paul, MN 55101-1631
First American Strategy Growth and Income Fund...............
C/O First Trust National Assn.
Attn: Greg Wilhelmy SPFT 0912
P.O. Box 64010
St. Paul, MN 55164-0010
First American Strategy Aggressive Growth Fund...............
c/o First Trust National Assn
Attn Greg Wilhelmy SPFT 0912
P.O. Box 64010
St. Paul, MN 55164-0010
</TABLE>
-47-
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING SHARES
CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
SMALL CAP VALUE FUND
Paul A. Bareilles............................................
P.O. Box 6610
Eureka, CA 95502-6610
U.S. Bancorp Investments, Inc................................
FBO 373710021
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
U.S. Bancorp Investments, Inc................................
FBO 305888261
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
INTERNATIONAL FUND
Piper Jaffray for the Exclusive Benefit of Piper Jaffray.....
222 South 9th Street
Minneapolis, MN 55432
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust National Association.............................
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East 5th Street
St. Paul, MN 55101-1631
INTERNATIONAL INDEX FUND
BHC Securities Inc...........................................
FAO 32206314
Attn: Mutual Funds
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103-7042
BHC Securities, Inc. ........................................
FBO William Maingwaring
A/C 332406737 Attn TOA
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103-7042
U.S. Bancorp Investments, Inc................................
FBO 365823511
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
U.S. Bancorp Investments, Inc................................
FBO 314174701
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
U.S. Bancorp Investments, Inc................................
FBO 354681071
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
</TABLE>
-48-
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING SHARES
CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
U.S. Bancorp Investments, Inc................................
FBO 397786181
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
U.S. Bancorp Investments, Inc................................
FBO 570323021
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
U.S. Bancorp Investments, Inc................................
FBO 385803041
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
Var & Co ....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
HEALTH SCIENCES FUND
Northern Trust Co. Tr........................................
FBO James L. French Irrev. Trust
of 1991 #2 A/C #2242148
P.O. Box 92956
Chicago, IL 60675-2956
U.S. Bancorp Investments, Inc................................
FBO 130266871
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
REAL ESTATE SECURITIES FUND
U.S. Bancorp Investments Inc.................................
FBO 304029031
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
First American Strategy Growth and Income Fund...............
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..........................
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........................................
FBO James L. French Irrev. Trust
of 1991 #2 A/C #2242148
P.O. Box 92956
Chicago, IL 60675-2956
</TABLE>
-49-
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING SHARES
CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust National Association.............................
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East 5th Street
St. Paul, MN 55101-1631
FIXED INCOME FUND
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
First American Strategy Income Fund..........................
c/o First Trust National Assn
Attn Greg Wilhelmy SPFT0912
PO Box 64010
St. Paul, MN 55164-0010
First American Strategy Growth and Income Fund...............
C/O First Trust National Assn.
Attn: Greg Wilhelmy SPFT 0912
P.O. Box 64010
St. Paul, MN 55164-0010
First Trust National Association.............................
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East Fifth Street
St. Paul, MN 55101-1631
INTERMEDIATE GOVERNMENT BOND FUND
U.S. Bancorp Investments, Inc................................
FBO 120039921
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
U.S. Bancorp Investments, Inc................................
FBO 173182051
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
Gretchen Cowles..............................................
c/o Pitcairn Trust Co.
1 Pitcairn Pl., Suite 3000
Jenkington, PA 19046-3531
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164
INTERMEDIATE TERM INCOME FUND
Piper Jaffray for the Exclusive Benefit of Piper Jaffray.....
222 South 9th Street
Minneapolis, MN 55432
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
</TABLE>
-50-
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING SHARES
CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
LIMITED TERM INCOME FUND
Planned Parenthood of Minnesota..............................
Operating Reserve Fund
Thomas Webber, Executive Director
1965 Ford Parkway
St. Paul, MN 55116-1996
Charles A. Beck, M.D.........................................
Charles A. Beck, M.D. LTD.
Money Purchase Trust
71 West 156 Street, Apt. 210
Harvey, IL 60426-4293
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust National Association.............................
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East 5th Street
St. Paul, MN 55101-1631
CALIFORNIA INTERMEDIATE TAX FREE FUND
Richard & Diane Develyn Trust................................
U/A 1997
The Richard & Diane Develyn Family Trust
42 West Grandview Avenue
Arcadia, CA 91006-1616
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
COLORADO INTERMEDIATE TAX FREE FUND
U.S. Bancorp Investments, Inc................................
FBO 349087311
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
U.S. Bancorp Investments, Inc................................
FBO 172385771
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
Donaldson Lufkin Jenrette....................................
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
INTERMEDIATE TAX FREE FUND
U.S. Bancorp Investments, Inc................................
FBO 180931041
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
Carl Thomas..................................................
8633 Trianon Lane
Las Vegas, NV 89128-4875
</TABLE>
-51-
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING SHARES
CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
Eleanor C. Nolan Trust.......................................
U/A U/A 05-22-1998
Eleanor C. Nolan Rev Trust
P.O. Box 160450
Big Sky, MT 59716-0450
BHC Securities...............................................
FBO Joseph & Patsy Rosenzweig
Acct 33822372
1 Commerce Square
2005 Market Street, 12th Floor
Philadelphia, PA 19103-7042
Shangri-La & Co .............................................
C/o Northwest National Bank Trust
P.O. Box 1867
Vancouver, WA 98668-1867
Var & Co.....................................................
P.O. Box 6482
St. Paul, MN 55164-0482
MINNESOTA INTERMEDIATE TAX FREE FUND
Alfred P. Gale...............................................
2350 Highland Rd.
Maple Plain, MN 55359-9570
U.S. Bancorp Investments Inc.................................
FBO 130015321
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
U.S. Bancorp Investments Inc.................................
FBO 112089981
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
OREGON INTERMEDIATE TAX FREE FUND
Var & Co.....................................................
P.O. Box 64482
St. Paul, MN 55164-0482
</TABLE>
-52-
<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 Prospectuses under the caption "Buying 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 the 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, 1998, the net asset values per share for each class of
shares of the Funds were calculated as follows. Please note that there were no
Class C Shares outstanding as of September 30, 1998.
NET ASSET
NET ASSETS SHARES VALUE PER SHARE
(IN DOLLARS) OUTSTANDING (IN DOLLARS)
--------------- ---------------- ----------------
BALANCED FUND
Class A $ $
Class B
Class Y
EQUITY INCOME FUND
Class A
Class B
Class Y
EQUITY INDEX FUND
Class A
Class B
Class Y
LARGE CAP GROWTH FUND
Class A
Class B
Class Y
LARGE CAP VALUE FUND
Class A
Class B
Class Y
MID CAP GROWTH FUND
Class A
Class B
Class Y
-53-
<PAGE>
NET ASSET
NET ASSETS SHARES VALUE PER SHARE
(IN DOLLARS) OUTSTANDING (IN DOLLARS)
--------------- ---------------- ----------------
MID CAP VALUE FUND
Class A
Class B
Class Y
MICRO CAP VALUE FUND
Class A
Class B
Class Y
REGIONAL EQUITY FUND
Class A
Class B
Class Y
SMALL CAP GROWTH FUND
Class A
Class B
Class Y
SMALL CAP VALUE FUND
Class A
Class B
Class Y
EMERGING MARKETS FUND
Class A
Class B
Class Y
INTERNATIONAL FUND
Class A
Class B
Class Y
INTERNATIONAL INDEX FUND
Class A
Class B
Class Y
HEALTH SCIENCES FUND
Class A
Class B
Class Y
-54-
<PAGE>
<TABLE>
<CAPTION>
NET ASSET
NET ASSETS SHARES VALUE PER SHARE
(IN DOLLARS) OUTSTANDING (IN DOLLARS)
----------------- ------------------ ------------------
<S> <C> <C> <C>
REAL ESTATE SECURITIES FUND
Class A
Class B
Class Y
TECHNOLOGY FUND
Class A
Class B
Class Y
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
Class A
Class B
Class Y
FIXED INCOME FUND
Class A
Class B
Class Y
INTERMEDIATE GOVERNMENT BOND FUND
Class A
Class B
Class Y
INTERMEDIATE TERM INCOME FUND
Class A
Class B
Class Y
LIMITED TERM INCOME FUND
Class A
Class B
Class Y
STRATEGIC INCOME FUND
Class A
Class B
Class Y
CALIFORNIA INTERMEDIATE TAX FREE FUND
Class A
Class B
Class Y
</TABLE>
-55-
<PAGE>
<TABLE>
<CAPTION>
NET ASSET
NET ASSETS SHARES VALUE PER SHARE
(IN DOLLARS) OUTSTANDING (IN DOLLARS)
----------------- ------------------ ------------------
<S> <C> <C> <C>
COLORADO INTERMEDIATE TAX FREE FUND
Class A
Class B
Class Y
INTERMEDIATE TAX FREE FUND
Class A
Class B
Class Y
MINNESOTA INTERMEDIATE TAX FREE FUND
Class A
Class B
Class Y
MINNESOTA TAX FREE FUND
Class A
Class B
Class Y
OREGON INTERMEDIATE TAX FREE FUND
Class A
Class B
Class Y
TAX FREE FUND
Class A
Class B
Class Y
</TABLE>
FUND PERFORMANCE
Advertisements and other sales literature for the Funds may refer to a
Fund's "average annual total return" and "cumulative total return." In addition,
each Fund may provide yield calculations in advertisements and other sales
literature. All such yield and total return quotations are based on historical
earnings and are not intended to indicate future performance. The return on and
principal value of an investment in any of the Funds will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is the average
annual compounded rate of return on a hypothetical $1,000 investment made at the
beginning of the advertised period. Average annual total return figures are
computed according to the following formula:
-56-
<PAGE>
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of
$1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end
of the period of a hypothetical
$1,000 payment made at the beginning
of such period
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gains distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the applicable Prospectus, and includes all recurring fees, such as
investment advisory and management fees, charged to all shareholder accounts.
For Class B and Class C Shares, the calculation assumes the maximum deferred
sales load is deducted at the times, in the amounts and under the terms
disclosed in the applicable Prospectus. Average annual total return quotations
may be accompanied by quotations that do not reflect the sales charges, and
therefore will be higher.
The Advisor has waived a portion of its fees on a voluntary basis,
thereby increasing total return and yield. These fees may or may not be waived
in the future in the Advisor's discretion.
CUMULATIVE TOTAL RETURN. Cumulative total return is calculated by
subtracting a hypothetical $1,000 investment in a Fund from the redeemable value
of such investment at the end of the advertised period, dividing such difference
by $1,000 and multiplying the quotient by 100. Cumulative total return is
computed according to the following formula:
CTR = (ERV-P) 100
-----
P
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of
the period of a hypothetical $1,000
payment made at the beginning of such
period; and
P = initial payment of $1,000.
This calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the applicable Prospectus and includes all recurring fees, such as investment
advisory and management fees, charged to all shareholder accounts.
Based on the foregoing, the cumulative and the average annual total
returns for each class of the Funds from inception through ___________ were as
follows. The performance for Class A and Class B Shares will normally be lower
than for Class Y Shares because Class A and Class B Shares are subject to sales
and distribution charges and/or shareholder servicing fees not charged to Class
Y Shares. Please note that there were no Class C Shares outstanding as of
_______.
<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 CHARGE SALES CHARGE SALES CHARGE SALES CHARGE
----------------------- -------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Balanced Fund
Class A...................
Class B...................
Class Y...................
Equity Income Fund
***Class A................
Class B...................
Class Y...................
</TABLE>
-57-
<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 CHARGE SALES CHARGE SALES CHARGE SALES CHARGE
----------------------- -------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Equity Index Fund
Class A...................
Class B...................
Class Y...................
Large Cap Growth Fund
***Class A................
Class B...................
Class Y...................
Large Cap Value Fund
Class A...................
Class B...................
Class Y...................
Mid Cap Growth Fund
Class A...................
Class B...................
Class Y...................
Mid Cap Value Fund
Class A...................
Class B...................
Class Y...................
Micro Cap Value Fund(1)
Class A...................
Class B...................
Class Y...................
Regional Equity Fund
Class A...................
Class B...................
Class Y...................
Small Cap Growth Fund(2)
Class A...................
Class B...................
Class Y...................
Small Cap Value Fund(3)
Class A...................
Class B...................
Class Y...................
Emerging Markets Fund
Class A...................
Class B...................
Class Y...................
</TABLE>
-58-
<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 CHARGE SALES CHARGE SALES CHARGE SALES CHARGE
----------------------- -------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
International Fund
Class A...................
Class B...................
Class Y...................
International Index Fund(4)
Class A...................
Class B...................
Class Y...................
Health Sciences Fund
Class A...................
Class B...................
Class Y...................
Real Estate Securities Fund
Class A...................
Class B...................
Class Y...................
Technology Fund
Class A...................
Class B...................
Class Y...................
Adjustable Rate Mortgage
Securities Fund
Class A...................
Class B...................
Class Y...................
Fixed Income Fund
Class A...................
Class B...................
Class Y...................
Intermediate Government Bond
Fund
Class A...................
Class B...................
Class Y...................
Intermediate Term Income Fund
Class A...................
Class B...................
Class Y...................
</TABLE>
-59-
<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 CHARGE SALES CHARGE SALES CHARGE SALES CHARGE
----------------------- -------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Limited Term Income Fund
Class A...................
Class B...................
Class Y...................
Strategic Income Fund
Class A...................
Class B...................
Class Y...................
California Intermediate Tax
Free Fund(5)
Class A...................
Class B...................
Class Y...................
Colorado Intermediate Tax Free
Fund
Class A...................
Class B...................
Class Y...................
Intermediate Tax Free Fund
Class A...................
Class B...................
Class Y...................
Minnesota Intermediate Tax
Free Fund
Class A...................
Class B...................
Class Y...................
Minnesota Tax Free Fund
Class A...................
Class B...................
Class Y...................
Oregon Intermediate Tax Free
Fund(6)
Class A...................
Class B...................
Class Y...................
Tax Free Fund
Class A...................
Class B...................
Class Y...................
</TABLE>
- ------------------
-60-
<PAGE>
+ For the ten year period ending March 31, 1998.
* The following are the inceptions dates for the Funds. Please note that
Class C Shares for purposes of the inception dates have now been
designated as Class Y Shares. Balanced Fund, Class A, December 14,
1992; Class B, August 15, 1994; Class C, February 4, 1994; 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; Diversified Growth
Fund (now known as Large Cap Growth Fund), Class A, December 18, 1992;
Class B, August 15, 1994; Class C, August 2, 1994; Stock Fund (now
known as Large Cap Value Fund); Class B, August 15, 1994; Class C,
February 4, 1994; Mid Cap Growth Fund, Class A, July 31, 1998; Class B,
July 31, 1998; Class C, July 31, 1998; Special Equity Fund (now known
as Mid Cap Value Fund); Class B, August 15, 1994; Class C, February 4,
1994; Micro Cap Value Fund Class A, August 8, 1997; Class B, August 8,
1997; and Class C, August 8, 1997; Regional Equity Fund, Class A,
December 14, 1992; Class B, August 15, 1994; Class C, February 4, 1994;
Small Cap Growth Fund (Class A, B and Y), July 31, 1998; Small Cap
Value Fund, November 24, 1997; Emerging Markets Fund (Class A, B and
Y), July 31, 1998; International Fund, Class A, April 7, 1994, Class B,
August 15, 1994, Class C, April 4, 1994; International Index Fund
(Class A, B and Y), November 24, 1997; Health Sciences Fund, Class A,
Class B and Class C, January 31, 1996; Real Estate Securities Fund,
Class A, September 29, 1995; Class B, September 29, 1995; Class C, June
30, 1995; Technology Fund, Class A, April 4, 1994; Class B, August 15,
1994; Class C, April 4, 1994; Adjustable Rate Mortgage Securities Fund
(Class A, B and Y), July 31, 1998; Fixed Income Fund, Class B, August
15, 1994; Class C, February 4, 1994; Intermediate Government Bond Fund;
Class B, not in operation at March 31, 1998; 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; Limited
Term Income Fund, Class A, December 14, 1992; Class B, August 15, 1994
(closed January 31, 1995); Class C, February 4, 1994; Strategic Income
Fund (Class A, B and Y), July 20, 1998; California Intermediate Tax
Free Fund, _______, __________; Colorado Intermediate Tax Free Fund,
Class C, April 4, 1994; Intermediate Tax Free Fund, Class C, February
4, 1994; Minnesota Insured Intermediate Tax Free Fund (now known as
Minnesota Intermediate Tax Free Fund), Class A, February 25, 1994,
Class C, February 28, 1994; Minnesota Tax Free Fund (Class A, B and Y),
Class A and B, July 31, 1998; Oregon Intermediate Tax Free Fund, Class
__, ________, ____; Tax Free Fund (Class A and B), July 31, 1998.
** 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 Advisor. 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 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 therefore was not subject to certain investment
restrictions that may have adversely affected performance.
(2) Reflects performance of Piper Small Company Growth Fund, which
consummated a reorganization transaction with Small Cap Growth Fund on
July 31, 1998. Piper Small Company Growth Fund is the financial
reporting survivor. Effective September 12, 1996, shareholders of Piper
Small Company Growth Fund approved a change in the Fund's investment
objective from high total investment return consistent with prudent
investment risk to long-term capital appreciation. In connection with
this change, the fund's investment policies were revised accordingly.
(3) Reflects performance commencing January 1, 1988 of a predecessor common
trust fund of the Qualivest Small Companies Value Fund, 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 that may have adversely
affected performance. On November 1, 1997, Small Cap Value Fund became
the successor by merger to the Qualivest Small Companies Value Fund.
(4) 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.
(5) 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
-61-
<PAGE>
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 that may have adversely affected
performance.
(6) Reflects performance commencing on October 31, 1986 of a predecessor
common trust fund of Oregon Intermediate Tax Free Fund, adjusted for
fees and expenses 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 that may have adversely affected
performance.
YIELD. Yield is computed by dividing the net investment income per
share (as defined under Securities and Exchange Commission rules and
regulations) earned during the advertised period by the offering price per share
(including the maximum sales charge) on the last day of the period. The result
will then be "annualized" using a formula that provides for semi-annual
compounding of income. Yield is computed according to the following formula:
YIELD = 2[(a-b + 1)6 - 1]
cd
Where: a = dividends and interest earned during the
period;
b = expenses accrued for the period (net of
reimbursements);
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends; and
d = the maximum offering price per share on the
last day of the period.
Based upon the 30-day period ended September 30, 1998, the yields for
the Class A, Class B and Class Y Shares of the Funds were as set forth below.
Please note that there were no Class C Shares outstanding as of September 30,
1998.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS Y
------------ ------------ -----------
<S> <C> <C> <C>
Balanced Fund...........................................
Equity Income Fund......................................
Equity Index Fund.......................................
Large Cap Growth Fund...................................
Large Cap Value Fund....................................
Mid Cap Growth Fund.....................................
Mid Cap Value Fund......................................
Micro Cap Value Fund....................................
Regional Equity Fund....................................
Small Cap Growth Fund...................................
Small Cap Value Fund....................................
Emerging Markets Fund...................................
International Fund......................................
International Index Fund................................
Health Sciences Fund....................................
Real Estate Securities Fund.............................
Technology Fund.........................................
Adjustable Rate Mortgage Securities Fund................
Fixed Income Fund.......................................
Intermediate Government Bond Fund.......................
Intermediate Term Income Fund...........................
Limited Term Income Fund................................
Strategic Income Fund...................................
California Intermediate Tax Free Fund...................
Colorado Intermediate Tax Free Fund.....................
Intermediate Tax Free Fund..............................
</TABLE>
-62-
<PAGE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS Y
------------ ------------ -----------
<S> <C> <C> <C>
Minnesota Intermediate Tax Free Fund....................
Minnesota Tax Free Fund.................................
Oregon Intermediate Tax Free Fund.......................
Tax Free Fund...........................................
</TABLE>
- -----------------
* Not in operation during fiscal period ended September 30, 1998.
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 for the Tax Free Funds named below for the 30-day period
ended __________, 1998, computed as described above, were as follows:
CLASS A CLASS Y
California Intermediate Tax Free Fund
Colorado Intermediate Tax Free Fund
Intermediate Tax Free Fund
Minnesota Intermediate Tax Free Fund
Minnesota Tax Free Fund
Oregon Intermediate Tax Free Fund
Tax Free Fund
- ----------------
* Not in operation during fiscal period ended ______________.
CERTAIN PERFORMANCE COMPARISONS. In addition to advertising total
return and yield, comparative performance information may be used from time to
time in advertising the Funds' shares, including data from Lipper Analytical
Services, Inc. ("Lipper"), Morningstar, other industry publications and other
entities or organizations which track the performance of investment companies.
The performance of each Fund may be compared to that of its unmanaged benchmark
index and to the performance of similar funds as reported by Lipper or such
other database services
TAXATION
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.
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 tripped 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
-63-
<PAGE>
receives. Accordingly, in order to make the required distributions, a Fund may
be required to borrow or liquidate securities.
If one of the Tax Free Bond 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.
Some of the investment practices that may be employed by the Funds will
be subject to special provisions that, among other things, may defer the use of
certain losses of such Funds, affect the holding period of the securities held
by the Funds and, particularly in the case of transactions in or with respect to
foreign currencies, affect the character of the gains or losses realized. These
provisions may also require the Funds to mark-to-market some of the positions in
their respective portfolios (i.e., treat them as closed out) or to accrue
original discount, both of which may cause such Funds to recognize income
without receiving cash with which to make distributions in amounts necessary to
satisfy the distribution requirements for qualification as a regulated
investment company and for avoiding income and excise taxes. Accordingly, in
order to make the required distributions, a Fund may be required to borrow or
liquidate securities. Each Fund will monitor its transactions and may make
certain elections in order to mitigate the effect of these rules and prevent
disqualification of the Funds as regulated investments companies.
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 loss on the sale or exchange of shares of a Fund generally will be
disallowed to the extent that a shareholder acquires or contracts to acquire
shares of the same Fund within 30 days before or after such sale or exchange.
Furthermore, if Fund shares with respect to which a long-term capital gain
distribution has been made are held for less than six months, any loss on the
sale of 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.
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
"Managing Your Investment -- Exchanging Your Shares" in the Prospectuses), such
exchange sill be considered a taxable sale of the shares being exchanged.
Furthermore, if a shareholder of Class A or Class B Shares carries out the
exchange within 90 days of purchasing shares in a fund on which he or she has
incurred a sales charge, the sales charge cannot be taken into account in
determining the shareholder's gain or loss on the sale of those shares to the
extent that the sales charge that would have been applicable to the purchase of
the later- acquired shares in the other fund is reduced because of the exchange
privilege. However, the amount of any sales charge that may not be taken into
account in determining the shareholder's gain or loss on the sale of the
first-acquired shares may be taken into account in determining gain or loss on
the eventual sale or exchange of the later-acquired shares.
Pursuant to the Code, distributions of net investment income by a Fund
to a shareholder who is a foreign shareholder (as defined below) 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.
A foreign shareholder is any person who is not (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
organized in the United States or under the laws of the Untied States or a
political subdivision thereof, (iii) an estate whose income is includible in
gross income for U.S. federal income tax purposes of (iv) a trust
-64-
<PAGE>
whose administration is subject to the primary supervision of the U.S. court and
which has one or more U.S. fiduciaries who have authority to control all
substantial decisions of the trust.
The foregoing relates only to federal income taxation ans 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 Intermediate Tax Free Fund and the
Minnesota 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 is so
included. This provision applies to taxable years that being 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 Intermediate Tax Free
Fund and the Minnesota Tax Free Fund are not aware of any decision in which a
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 Funds would become taxable under
this Minnesota statutory provisions.
REDUCING SALES CHARGES
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: 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 Funds' 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.
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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 Advisor, Marvin & Palmer,
Federated, 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 advisors,
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 investors
participating in asset allocation "wrap" accounts offered by the Advisor 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. No commission is paid in connection with net asset value purchases of
Class A Shares made pursuant to this paragraph, nor is any contingent deferred
sales charge imposed upon the redemption of such shares.
Class A Shares may also be purchased without a sales charge by
retirement and deferred compensation plans and trusts used to fund such plans,
as defined in Sections 401(a), 403(b) and 457 of the Internal Revenue Code,
which either have 200 or more eligible participants or purchase shares through
an affiliate of the Advisor. A contingent deferred sales charge of 1.00% will be
imposed if shares are redeemed within 12 months of purchase. Securities firms,
financial institutions and other industry professionals that enter into sales
agreements with the Funds' distributor to perform share distribution services
may receive a commission on such sales equal to 1.00% of the first $3 million of
shares purchased, 0.75% of shares purchased in excess of $3 million up to $5
million, and 0.50% of shares purchased in excess of $5 million.
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 realized.
ADDITIONAL INFORMATION ABOUT SELLING SHARES
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
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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 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 confirmation 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;
* 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 from the above institutions. The Funds may elect in the future to
limit eligible signature guarantees to institutions that are members of a
signature
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guarantee program. The Funds and the Transfer Agent reserve the right to amend
these standards at any time without notice.
REDEMPTIONS 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.
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.
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B: Securities rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BB or BB- rating.
CCC: Securities rated CCC have a currently identifiable vulnerability
to default, and are dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial, or economic
conditions, they are not likely to have the capacity to pay interest
and repay principal. The CCC rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied B or
B- rating.
The ratings from AA to CCC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
MOODY'S
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,
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(2) designate securities which can be bought for possible upgrading in quality
and (3) additionally afford the investor an opportunity to gauge more precisely
the relative attractiveness of offerings in the marketplace.
RATINGS OF PREFERRED STOCK
STANDARD & POOR'S. 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.
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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."
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
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considered such as the composition of the company's book of business and the
quality and diversification of its assets.
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 report to
shareholders dated September 30, 1998 is incorporated herein by reference. Such
annual report to shareholders accompanies this Statement of Additional
Information.
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FIRST AMERICAN INVESTMENT FUNDS, INC.
PART C -- OTHER INFORMATION
ITEM 23. EXHIBITS
(a)(1) Amended and Restated Articles of Incorporation, as amended
through April 2, 1998. (Incorporated by reference to Exhibit
(1) to Post-Effective Amendment No. 36.)
** (a)(2) Articles Supplementary designating Class C Shares.
(b) Bylaws, as amended through February 23, 1998. (Incorporated by
reference to Exhibit (2) to Post-Effective Amendment No. 36.)
(c) Not applicable.
(d)(1) 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.)
* (d)(2) Amendment No. 9 to Investment Advisory Agreement.
(d)(3) Sub-Advisory Agreement dated March 28, 1994, between First
Bank National Association and Marvin & Palmer Associates,
Inc., with respect to International Fund. (Incorporated by
reference to Exhibit 5(b) to Post-Effective Amendment No. 21.)
(d)(4) Sub-Advisory Agreement dated July 23, 1998, between U.S. Bank
National Association and Marvin & Palmer Associates, Inc.,
with respect to Emerging Markets Fund. (Incorporated by
reference to Exhibit 5(f) to Post-Effective Amendment No. 39.)
(d)(5) Sub-Advisory Agreement dated July 24, 1998, between U.S. Bank
National Association and Federated Global Research Corp., with
respect to Strategic Income Fund. (Incorporated by reference
to Exhibit 5(g) to Post-Effective Amendment No. 39.)
(d)(6) Sub-Advisory Agreement dated July 24, 1998, between U.S. Bank
National Association and Federated Investment Counseling, with
respect to Strategic Income Fund. (Incorporated by reference
to Exhibit 5(h) to Post-Effective Amendment No. 39.)
(d)(7) Amendment No. 1 to Sub-Advisory Agreement between Bank
National Association and Marvin & Palmer Associates, Inc.,
with respect to International Fund . (Incorporated by
reference to Exhibit 5(d) to Post-Effective Amendment No. 34.)
(e)(1) Distribution Agreement [Class A and Class Y 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.)
(e)(2) 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.)
** (e)(3) Distribution and Service Agreement [Class C] dated ____, 1998,
between Registrant and SEI Investments Distribution Co.
(e)(4) Form of Dealer Agreement. (Incorporated by reference to
Exhibit (6)(c) to Post-Effective Amendment No. 21.)
(f) Not applicable.
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(g)(1) 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.)
(g)(2) Supplement dated March 15, 1994, to Custodian Agreement dated
September 20, 1993.
(g)(3) Further Supplement dated November 21, 1997, with respect to
International Index Fund, and July 23, 1998, with respect to
Strategic Income Fund and Emerging Markets Fund, to Custodian
Agreement dated September 20, 1993. (Incorporated by reference
to Exhibit 8(c) to Post-Effective Amendment No. 39.)
(g)(4) Compensation Agreement dated July 23, 1998, pursuant to
Custodian Agreement dated September 20, 1993. (Incorporated by
reference to Exhibit (8)(b) to Post-Effective Amendment No.
38.)
* (g)(5) Assignment of Custodian Agreements and Security Lending Agency
Agreement to U.S. Bank National Association, dated May 1,
1998.
(h)(1) 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. 31.)
(h)(2) Sub-Administration Agreement effective January 1, 1998, by and
between SEI and First Bank National Association. (Incorporated
herein by reference to Exhibit (9)(e) to Post-Effective
Amendment No. 31.)
* (h)(3) Revised Schedule A, dated June 29, 1998, to Sub-Administration
Agreement.
(h)(4) 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.)
(h)(5) Shareholder Account Servicing Agreement dated October 1, 1998,
between the Registrant and U.S. Bank National Association.
(Incorporated by reference to Exhibit 9(d) to Post-Effective
Amendment No. 39.)
(i)(1) Opinion and Consent of D'Ancona & Pflaum dated November 10,
1987. (Incorporated by reference to Exhibit (10)(a) to
Post-Effective Amendment No. 21.)
(i)(2) Opinion and Consent of Dorsey & Whitney. (Incorporated by
reference to Exhibit (10)(a) to Post-Effective Amendment No.
15.)
(i)(3) Opinion and Consent of Dorsey & Whitney, LLP with respect to
Strategic Income Fund, Class HH, dated July 24, 1998.
(Incorporated by reference to Exhibit (10)(c) to
Post-Effective Amendment No. 38.)
(i)(4) Opinion and Consent of Dorsey & Whitney, LLP with respect to
Adjustable Rate Mortgage Securities Fund (Class CC), Tax Free
Fund (Class DD), Minnesota Tax Free Fund (Class EE), Mid Cap
Growth Fund (Class FF) and Emerging Markets Fund (Class GG),
dated July 31, 1998. (Incorporated by reference to Exhibit
10(d) to Post-Effective Amendment No. 39.)
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(j)(1) Opinion and Consent of Dorsey & Whitney, dated November 25,
1991. (Incorporated by reference to Exhibit (11)(b) to
Post-Effective Amendment No. 21.)
(k) Not applicable.
(l) Not applicable.
(m)(1) Form of Distribution Plan [Class A]. (Incorporated by
reference to Exhibit (15)(a) to Post-Effective Amendment No.
21.)
(m)(2) Class B Distribution Plan. (Incorporated by reference to
Exhibit 15(b) to Post-Effective Amendment No. 21.)
(m)(3) Service Plan [Class B]. (Incorporated by reference to Exhibit
(15)(c) to Post-Effective Amendment No. 21.)
** (m)(4) Class C Distribution Plan.
** (m)(5) Service Plan [Class C].
(n) Not applicable.
(o) Multiple Class Plan Pursuant to Rule 18f-3. (Incorporated by
reference to Exhibit (18) to Post-Effective Amendment No. 23.)
* Filed herewith.
** To be filed by amendment.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
Not applicable.
ITEM 25. INDEMNIFICATION
The first four paragraphs of Item 27 of Part C of Pre-Effective
Amendment No. 1 to the Registrant's Registration Statement on Form N-1A, dated
November 27, 1987, are incorporated herein by reference.
On February 18, 1988 the indemnification provisions of the Maryland
General Corporation Law (the "Law") were amended to permit, among other things,
corporations to indemnify directors and officers unless it is proved that the
individual (1) acted in bad faith or with active and deliberate dishonesty, (2)
actually received an improper personal benefit in money, property or services,
or (3) in the case of a criminal proceeding, had reasonable cause to believe
that his act or omission was unlawful. The Law was also amended to permit
corporations to indemnify directors and officers for amounts paid in settlement
of stockholders' derivative suits.
The Registrant undertakes that no indemnification or advance will be
made unless it is consistent with Sections 17(h) or 17(i) of the Investment
Company Act of 1940, as now enacted or hereafter amended, and Securities and
Exchange Commission rules, regulations, and releases (including, without
limitation, Investment Company Act of 1940 Release No. 11330, September 2,
1980).
Insofar as the indemnification for liability arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in such Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant
C-3
<PAGE>
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933, as amended,
and will be governed by the final adjudication of such issue.
The Registrant maintains officers' and directors' liability insurance
providing coverage, with certain exceptions, for acts and omissions in the
course of the covered persons' duties as officers and directors.
ITEM 26. 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*
Susan E. Lester Director, Executive Vice President and Executive Vice President and Chief
Chief Financial Officer Financial Officer of U.S. Bancorp*
Robert D. Sznewajs Director and Vice Chairman Vice Chairman of U.S. Bancorp*
Gary T. Duim Director and Vice Chairman Vice Chairman of U.S. Bancorp*
</TABLE>
- ---------------
* Address: 601 Second Avenue South, Minneapolis, Minnesota 55402.
ITEM 27. PRINCIPAL UNDERWRITERS:
(a) State the name of each investment company (other than the
Registrant) for which each principal underwriter currently distributing the
Registrant's securities also acts as a principal underwriter, distributor or
investment adviser:
C-4
<PAGE>
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 Institutional International Trust, The Advisors' Inner Circle Fund, Pillar
Funds, CUFund, STI Classic Funds, CoreFunds, Inc., First American Funds, Inc.,
First American Investment Funds, Inc., The Arbor Fund, Boston 1784 Funds, PBHG
Funds, Inc., Marquis Funds, Morgan Grenfell Investment Trust, The Achievement
Funds Trust, Bishop Street Funds, CrestFunds, Inc., STI Classic Variable Trust,
ARK Funds, Monitor Funds, SEI Asset Allocation Trust, Expedition Funds, TIP
Funds, SEI Institutional Investments Trust, First American Strategy Funds, Inc.,
Highmark Funds, Armada Funds, PBHG Insurance Series Fund, Inc., TIP
Institutional Funds, Oak Associates Funds and The Nevis Funds, Inc., pursuant to
distribution agreements dated November 29, 1982, July 15, 1982, December 3,
1982, July 10, 1985, January 22, 1987, August 30, 1988, November 14, 1991,
February 28, 1992, May 1, 1992, May 29, 1992, October 30, 1992, November 1,
1992, November 1, 1992, January 28, 1993, June 1, 1993, July 16, 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, April 1, 1996, April 29,
1996, June 14, 1996, October 1, 1996, February 15, 1997, March 8, 1997, April 1,
1997, June 9, 1997, January 1, 1998, February 27, 1998 and June 29, 1998,
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) Provide the information required by the following table for each
director, officer, or partner of each principal underwriter named in the
response to Item 20. 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 --
Carmen V. Romeo Director --
Mark J. Held President & Chief Operating Officer --
Gilbert L. Beebower Executive Vice President --
Richard B. Lieb Executive Vice President, President -
Investment Services Division --
Dennis J. McGonigle Executive Vice President --
Robert M. Silvestri Chief Financial Officer & Treasurer --
Leo J. Dolan, Jr. Senior Vice President --
Carl A. Guarino Senior Vice President --
Larry Hutchinson Senior Vice President --
Jack May 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
Patrick K. Walsh Senior Vice President --
Ronert Aller Vice President --
Gordon W. Carpenter Vice President --
Todd Cipperman Vice President & Assistant Secretary --
S. Courtney E. Collier Vice President & Assistant Secretary Vice President & Assistant Secretary
Robert Crudup Vice President & Managing Director --
</TABLE>
C-5
<PAGE>
<TABLE>
<S> <C> <C>
Barbara Doyne Vice President --
Jeff Drennen Vice President --
James R. Foggo Vice President & Assistant Secretary
Vic Galef Vice President & Managing Director --
Lydia A. Gavalis Vice President & Assistant Secretary Vice President & Assistant Secretary
Greg Gettinger Vice President & Assistant Secretary --
Jeff Jacobs 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 President
Joanne Nelson Vice President --
Joseph M. O'Donnell Vice President & Assistant Secretary Vice President & Assistant Secretary
Sandra K. Orlow Vice President & 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 --
Lynda J. Striegel Vice President & Assistant Secretary Vice President & Assistant Secretary
Lori L. White Vice President & Assistant Secretary --
Wayne M. Withrow Vice President & Managing Director --
</TABLE>
ITEM 28. 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 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
Not applicable.
C-6
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, as amended, and the Investment
Company Act of 1940, as amended, the Registrant 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 1st day of December, 1998.
FIRST AMERICAN INVESTMENT FUNDS, INC.
ATTEST: /s/ Michael G. Beattie By: /s/ James R. Foggo
-------------------------------- ----------------------------------
Michael G. Beattie James R. Foggo
Vice President
Pursuant to the requirements of the Securities Act of 1933, as
amended, 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 **
- --------------------------------
David T. Bennett
* Director **
- --------------------------------
Robert J. Dayton
* Director **
- --------------------------------
Andrew M. Hunter III
* Director **
- --------------------------------
Leonard W. Kedrowski
* Director **
- --------------------------------
Robert L. Spies
* Director **
- --------------------------------
Joseph D. Strauss
* Director **
- --------------------------------
Virginia L. Stringer
* Director **
- --------------------------------
Roger A. Gibson
* By: /s/ James R. Foggo
- --------------------------------
James R. Foggo
Attorney in Fact
** December 1, 1998
FIRST AMERICAN INVESTMENT FUNDS, INC.
AMENDMENT TO INVESTMENT ADVISORY AGREEMENT
AMENDMENT NO. 9
to
EXHIBIT A
EFFECTIVE DATES:
Portfolio Effective Date
- --------- --------------
Large Cap Value Fund April 2, 1991
Mid Cap Value 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
Minnesota Intermediate Tax Free Fund December 31, 1993
Colorado Intermediate Tax Free Fund December 31, 1993
Small Cap Growth Fund December 31, 1993
Technology Fund December 31, 1993
International Fund December 31, 1993
Equity Income Fund January 31, 1994
Large Cap Growth Fund January 31, 1994
Real Estate Securities Fund June 12, 1995
Health Sciences 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
Adjustable Rate Mortgage Securities Fund July 24, 1998
Tax Free Fund July 24, 1998
Minnesota Tax Free Fund July 24, 1998
Mid Cap Growth Fund July 24, 1998
Emerging Markets Fund July 24, 1998
Strategic Income Fund July 24, 1998
<PAGE>
ADVISORY FEES:
- --------------
Annual Advisory Fee
as a Percentage of
Portfolio Average Daily Net Assets Average Daily Net Assets
----------- -------------------------- --------------------------
Large Cap Value On All Assets .70%
Fund
Mid Cap Value On All Assets .70%
Fund
Fixed Income On All Assets .70%
Fund
Intermediate On All Assets .70%
Government Bond
Fund
Intermediate Tax On All Assets .70%
Free Fund
Intermediate Term On All Assets .70%
Income Fund
Equity Index Fund On All Assets .70%
Regional Equity On All Assets .70%
Fund
Limited Term On All Assets .70%
Income Fund
Balanced Fund On All Assets .70%
Minnesota On All Assets .70%
Intermediate Tax
Free Fund
Colorado Interme- On All Assets .70%
diate Tax Free Fund
Sma11 Cap Growth On All Assets .70%
Fund
Technology Fund On All Assets .70%
International Fund On All Assets 1.25%
Equity Income On All Assets .70%
Fund
<PAGE>
Large Cap Growth Fund On All Assets .70%
Real Estate Securities On All Assets .70%
Fund
Health Sciences On All Assets .70%
Fund
Oregon Intermediate On All Assets .70%
Tax Free Fund
California Interme- On All Assets .70%
diate Tax Free Fund
Micro Cap Value On All Assets .70%
Fund
Small Cap Value On All Assets .70%
Fund
International Index On All Assets .70%
Fund
Adjustable Rate On All Assets .70%
Mortgage Securities
Fund
Tax Free Fund On All Assets .70%
Minnesota Tax Free On All Assets .70%
Fund
Mid Cap Growth On All Assets .70%
Fund
Emerging Markets On All Assets 1.25%
Fund
Strategic Income On All Assets .70%
Fund
EXHIBIT g.5
ASSIGNMENT AND ASSUMPTION AGREEMENT
(Custodian Agreements and Securities Lending Agency Agreement)
This Assignment and Assumption Agreement (this "Assignment"), is made and
entered into as of May 1, 1998 (the "Effective Date"), by and between First
Trust National Association, a national banking association ("First Trust"), and
U.S. Bank National Association, a national banking association ("U.S. Bank").
WHEREAS, First Trust desires to assign to U.S. Bank, and U.S. Bank desires
to acquire and assume from First Trust, all of First Trust's right, title and
interest in, to and under the following agreements (collectively, the "Assumed
Agreements"):
a. Custodian Agreement dated as of September 20, 1993, by and between
First American Investment Funds, Inc. and First Trust, as amended and
supplemented through the Effective Date.
b. Custodian Agreement dated as of January 20, 1995, by and between First
American Funds, Inc. and First Trust, as amended and supplemented
through the Effective Date.
c. Custodian Agreement dated as of October 1, 1996, by and between First
American Strategy Funds, Inc. and First Trust, as amended and
supplemented through the Effective Date.
d. Securities Lending Agreement (Customer Agreement) dated as of January
31, 1997, by and between First Trust and First American Investment
Funds, Inc. and First American Funds, Inc. as amended and supplemented
through the Effective Date.
NOW, THEREFORE, in consideration of the covenants and agreements contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereby agree as follows:
1. First Trust hereby grants, assigns, transfers and conveys to U.S. Bank
its entire right, title and interest in, to and under the Assumed Agreements.
First Trust further agrees to indemnify and save harmless U.S. Bank from and
against any claims which arise in connection with the failure of First Trust to
perform its obligations under the Assumed Agreements applicable to that period
prior to the Effective Date.
2. U.S. Bank hereby accepts the foregoing assignment and hereby assumes and
agrees to perform all of the obligations of First Trust under the Assumed
Agreements applicable to the period beginning the Effective Date. U.S. Bank
agrees to comply with the representations and conditions of that no-action
letter dated April 6, 1998, issued by the Staff of the Securities and Exchange
Commission in connection with the foregoing assignment. U.S. Bank further agrees
to indemnify, and save harmless First Trust from and against any claims which
arise in connection with U.S. Bank's failure to perform such obligations on and
after the Effective Date.
<PAGE>
3. First Trust and U.S. Bank each hereby represents and warrants that it
has not entered into any assignments, contracts or understandings with third
parties in conflict herewith.
4. The terms, covenants and provisions of this Assignment are binding upon
and shall inure to the benefit of First Trust and U.S. Bank and their
respective successors and assigns.
5. This Assignment is and shall be governed by and construed in accordance
with the laws of the State of Minnesota.
IN WITNESS WHEREOF, the parties have caused this Assignment to be duly
executed and delivered as of the date first stated above.
FIRST TRUST NATIONAL ASSOCIATION
By /s/ Jeff Wilson
Its Vice President
U.S. BANK NATIONAL ASSOCIATION
By /s/ Jeff Wilson
Its Vice President
FIRST AMERICAN Investment Funds, Inc., First American Funds, Inc., and
First American Strategy Funds, Inc. each hereby expressly consents to First
Trust's assignment of each Assumed Agreement to which it is a party to U.S. Bank
in accordance with the terms of this Assignment. First American Investment
Funds, Inc., First American Funds, Inc., and First American Strategy Funds, Inc.
each represents and warrants that its consent as set forth herein has been
authorized by its Board of Directors.
Dated as of the date first FIRST AMERICAN INVESTMENT FUNDS, INC.
stated above.
By /s/ Kathryn L. Stanton
Its Acting President
[signatures continue on following page]
- 2 -
<PAGE>
FIRST AMERICAN FUNDS, INC.
By /s/ Kathryn L. Stanton
Its Acting President
FIRST AMERICAN STRATEGY FUNDS, INC.
By /s/ Kathryn L. Stanton
Its Acting President
EXHIBIT h.3
SCHEDULE A
DATED AS OF JUNE 29,1998
TO THE SUB-ADMINISTRATION AGREEMENT
DATED JANUARY 1, 1998
BETWEEN
SEI INVESTMENTS MANAGEMENT CORPORATION
AND
U.S. BANK NATIONAL ASSOCIATION
1. Investment Portfolios
---------------------
Effective Date
--------------
Stock Fund January 1, 1998
Equity Index Fund January 1, 1998
Balanced Fund January 1, 1998
Asset Allocation Fund January 1, 1998
Equity Income Fund January 1, 1998
Diversified Growth Fund January 1, 1998
Emerging Growth Fund January 1, 1998
Regional Equity Fund January 1, 1998
Special Equity Fund January 1, 1998
Technology Fund January 1, 1998
Health Sciences Fund January 1, 1998
Real Estate Securities Fund January 1, 1998
International Fund January 1, 1998
Limited Term Income January 1, 1998
Intermediate Term Income Fund January 1, 1998
Fixed Income Fund January 1, 1998
Intermediate Government Bond Fund January 1, 1998
Intermediate Tax Free Fund January 1, 1998
Minnesota Insured Intermediate Tax Free Fund January 1, 1998
Colorado Intermediate Tax Free Fund January 1, 1998
Mid Cap Growth Fund June 29, 1998
Emerging Markets Fund June 29, 1998
Minnesota Tax Free Fund June 29, 1998
Tax Free Fund June 29, 1998
Adjustable Rate Mortgage Securities Fund June 29, 1998
Strategic Income Fund June 29, 1998
8
<PAGE>
II. Compensation
Annual Rate of up to 0.05% of each such Fund's average daily net assets
SEI INVESTMENTS MANAGEMENT
CORPORATION
By: /s/ Kathryn Stanton
Title: Vice President
U.S. BANK NATIONAL ASSOCIATION
By: /s/ Jeff Wilson
Title: Vice President
