1933 Act Registration No.
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 1998
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ____ [ ]
Post-Effective Amendment No. ____ [ ]
(Check appropriate box or boxes)
Exact name of Registrant as Specified in Charter:
FIRST AMERICAN INVESTMENT FUNDS, INC.
Area Code and Telephone Number:
(610) 676-1924
Address of Principal Executive Offices:
Oaks, Pennsylvania 19456
Name and Address of Agent for Service:
Kathryn Stanton, Esq.
c/o SEI Investments Company
Oaks, Pennsylvania 19456
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 on May 15, 1998
(30 days after filing) pursuant to Rule 488
No filing fee is required because an indefinite number of shares have previously
been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940.
Registrant is filing as an exhibit to this Registration Statement a copy of its
earlier declaration under Rule 24f-2. Registrant filed its Rule 24f-2 Notice on
December 9, 1997 for its fiscal year ended September 30, 1997.
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
REGISTRATION STATEMENT ON FORM N-14
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 481 (a))
<TABLE>
<CAPTION>
PART A OF FORM N-14 PROSPECTUS/PROXY STATEMENT CAPTION
<S> <C>
1. Beginning of Registration Statement and Outside Front
Cover Page of Prospectus ..................................Cross Reference Sheet and Cover Page
2. Beginning and Outside Back Cover Page of Prospectus ........Table of Contents
3. Fee Table, Synopsis Information
and Risk Factors ..........................................Summary; Principal Risk Factors; Comparison of FAIF
and the Piper Funds; Appendix VI
4. Information about the Transaction ..........................Summary; Information Relating to the Interim Advisory
and Sub-Advisory Agreements; Information Relating to
the Proposed Reorganizations; Comparison of FAIF Funds
and the Piper Funds
5. Information about the Registrant ...........................Comparison of FAIF Funds and the Piper Funds; Additional
Information about the FAIF Funds; Appendix V; Appendix IX;
Appendix X
6. Information about the Company Being
Acquired ..................................................Inside Front Cover (Incorporation by Reference);
Comparison of the FAIF Funds and the Piper Funds;
Additional Information about the Piper Funds; Appendix V
7. Voting Information .........................................Summary; Information about the Reorganizations;
Information Relating to Voting Matters
8. Interest of Certain Persons and Experts ....................Information Relating to Voting Matters
9. Additional Information .....................................Not Applicable
PART B OF FORM N-14 STATEMENT OF ADDITIONAL INFORMATION
CAPTION
10. Cover Page ................................................Cover Page
11. Table of Contents .........................................Table of Contents
12. Additional Information about the
Registrant ...............................................Cover Page (Incorporation by Reference); Appendix A to
Statement of Additional Information
13. Additional Information about the Company
Being Acquired ...........................................Cover Page (Incorporation by Reference);
14. Financial Statements ......................................Cover Page (Incorporation by Reference) Pro Forma
Financial Statements, Appendix B to the Statement of
Additional Information
PART C OF FORM N-14
Information required to be included in Part C is set forth under the appropriate
item in Part C of this Registration Statement.
</TABLE>
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
REGISTRATION STATEMENT ON FORM N-14
PART A
PRESIDENT'S LETTER
SHAREHOLDER Q & A
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
PROSPECTUS/PROXY STATEMENT
<PAGE>
PIPER FUNDS INC.
SMALL COMPANY GROWTH FUND, EMERGING GROWTH FUND, GROWTH FUND,
GROWTH AND INCOME FUND, BALANCED FUND, GOVERNMENT INCOME FUND,
INTERMEDIATE BOND FUND, NATIONAL TAX-EXEMPT FUND, MINNESOTA TAX-EXEMPT FUND
PIPER FUNDS INC.--II
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
PIPER GLOBAL FUNDS INC.
PACIFIC-EUROPEAN GROWTH FUND, EMERGING MARKETS GROWTH FUND
222 SOUTH NINTH STREET
MINNEAPOLIS, MINNESOTA 55402-3804
_______, 1998
Dear Piper Fund Shareholder:
On behalf of the Board of Directors of Piper Funds Inc. ("PFI"),
Piper Funds Inc.--II ("PFI--II") and Piper Global Funds Inc. ("PGF") (the "Piper
Board"), we are pleased to invite you to a special shareholder meeting (the
"Meeting") for the funds listed above (the "Piper Funds"). The Meeting will be
held at the offices of the Piper Funds on __________, 1998 at __ a.m. central
time at 222 South Ninth Street, __ floor, Minneapolis, Minnesota.
At the Meeting, you will be asked to consider the following
proposals: (1) the approval of an interim advisory agreement with Piper Capital
Management Incorporated ("Piper Capital"), which became effective on April __,
1998 (when Piper Jaffray Companies Inc. merged with U.S. Bancorp, as discussed
below), (2) if you are a shareholder of Pacific-European Growth Fund or Emerging
Markets Growth Fund, the approval of an interim sub-advisory agreement between
Piper Capital and Edinburgh Fund Managers plc ("EFM") relating to the respective
Fund, which also became effective on April __, 1998, and (3) a proposed
reorganization of each of the Piper Funds into the corresponding fund of First
American Investment Funds, Inc. ("FAIF") (the "FAIF Funds").
As a result of the merger of Piper Jaffray Companies Inc. and U.S.
Bancorp, by law the merger resulted in the automatic termination of the Piper
Funds' then current investment advisory agreements with Piper Capital, and in
the automatic termination of the sub-advisory agreements between Piper Capital
and EFM relating to Pacific-European Growth Fund and Emerging Markets Growth
Fund. The terms of the interim advisory and sub-advisory agreements are
substantially identical to the terms of the Piper Funds' previous advisory and
sub-advisory agreements. At the upcoming meeting, you will be asked to ratify
and approve the interim advisory agreement applicable to your Piper Fund and, if
you are a shareholder of Pacific-European Growth Fund or Emerging Markets Growth
Fund, to ratify and approve the interim sub-advisory agreement for your fund. By
approving these agreements, you also will be approving the receipt of investment
advisory fees by Piper Capital (or, in the case of the sub-advisory agreements,
the receipt of sub-advisory fees by EFM) under the agreements. These fees are
currently being held in escrow.
In addition, at the upcoming meeting, you will be asked to approve
the reorganization of your Piper Fund into a corresponding FAIF Fund. Each FAIF
Fund is a series of FAIF, an open-end investment company advised by U.S. Bank
National Association ("U.S. Bank"). If required approvals are obtained, the
Piper Funds are expected to be reorganized into the corresponding FAIF Funds on
or about July 31, 1998, when your Piper Fund shares will be exchanged for shares
of the corresponding FAIF Fund of equal value.
<PAGE>
The formal Notice of Special Meeting, a Combined Proxy
Statement/Prospectus and a Proxy Ballot are enclosed. If you own shares in more
than one Piper Fund, more than one Proxy Ballot accompanies these proxy
materials.
YOUR VOTE IS VERY IMPORTANT TO US. WHETHER OR NOT YOU PLAN TO ATTEND
THE SPECIAL MEETING, PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY
BALLOT PROMPTLY, USING THE ENCLOSED POSTAGE-PAID ENVELOPE. YOU MAY ALSO HAVE
YOUR VOTE RECORDED BY TELEPHONE. PLEASE CALL _______________ FOR MORE
INFORMATION.
The interim investment advisory agreements with Piper Capital, the
interim sub-advisory agreements between Piper Capital and EFM, the proposed
reorganization and the reasons for the Piper Board's recommendation are
discussed in detail in the enclosed materials, which you should read carefully.
If you have any questions about the new investment advisory and sub-advisory
agreements or the reorganization, please do not hesitate to call ____________
toll free at 1-800-___-____.
Very truly yours,
---------------------
President
<PAGE>
[logo] PIPER FUNDS
SHAREHOLDER Q&A
May 15,1997
Piper Funds shareholders are being asked to approve three proposals:
1) an interim advisory agreement with Piper Capital Management;
2) an interim sub-advisory agreement between Piper Capital and Edinburgh Fund
Managers for shareholders of each of Pacific-European Growth Fund and
Emerging Markets Growth Fund;
3) a merger of each Piper Fund with a corresponding First American Fund, which
is a part of a family of funds advised by First American Asset Management.
WHY AM I BEING ASKED TO APPROVE ADVISORY AND SUB-ADVISORY ARRANGEMENTS WITH
PIPER CAPITAL AND EDINBURGH FUND MANAGERS AT THE SAME TIME I'M BEING ASKED TO
APPROVE A MERGER OF THE FUNDS INTO THE FAMILY OF FUNDS ADVISED BY FIRST AMERICAN
ASSET MANAGEMENT?
As you may know, Piper Jaffray Companies, the parent company of Piper Capital,
was acquired by U.S. Bancorp on May x, 1998. By law, this acquisition resulted
in the termination of the advisory and sub-advisory arrangements Piper Funds had
with Piper Capital and Edinburgh Fund Managers. To keep the Piper Funds'
management in place and running smoothly until the merger of the two fund
families, the Piper Funds' board of directors approved interim advisory
agreements, which you now are being asked to approve for your funds. These
agreements are substantially identical to those in place prior to the
acquisition, and the fee rates are unchanged. By approving the agreements,
you also will be approving the receipt of investment advisory fees by Piper
Capital and Edinburgh Fund Managers under the agreements. (These fees are
currently being held in escrow.)
HOW WILL PIPER FUNDS BE AFFECTED BY THE ACQUISITION?
Piper Capital and First American Asset Management currently act as investment
advisers to two separate fund families. Our goal is to consolidate similar funds
in the two families into a single, broadly diversified fund family. The matrix
following this Q&A shows which First American Funds the Piper Funds will merge
into. The proposed merger would be tax-free, in the opinion of First American
Funds' counsel, and would not involve any sales charges, commissions or
transaction fees. The merger is scheduled to take place on or about July 31,
1998, pending shareholder approval.
If shareholders approve the merger, most of the Piper Funds will merge into
existing First American Funds that have similar investment objectives and
management styles. Several Piper Funds will be merged into new First American
Funds with similar objectives that have been created for purposes of the merger.
Although the Piper Funds are similar to the First American Funds into which they
will merge, there are some differences, which are discussed in the enclosed
proxy statement/prospectus.
WHY NOT KEEP BOTH FUND FAMILIES?
The proposed merger is expected to promote efficiency and eliminate duplicate
costs. In addition, Piper Funds shareholders will have a greater variety of
investment options across asset classes available to them through the First
American family of funds.
WILL THERE BE ANY COST TO ME FOR THE MERGER?
No. The cost of the reorganization is the responsibility of U.S. Bancorp, to the
extent costs exceed the cost of the annual meeting. Reorganization costs are not
expected to be passed on to shareholders in any way.
WHAT EXPERIENCE WILL FIRST AMERICAN ASSET MANAGEMENT BRING TO THE MANAGEMENT OF
THE FUNDS?
First American Asset Management has more than $___ billion under management as
of May . The firm employs ___ people, including 41 portfolio managers averaging
20 years of experience. The company was formed in 1967 and is a
multi-discipline, multi-product investment firm.
CAN I TRANSFER INTO OTHER FIRST AMERICAN FUNDS WITHOUT A FEE THE WAY I COULD
WITH MY PIPER FUNDS?
Yes. If your investment goals or your financial needs change, you may move from
one First American Fund to the same class of another First American Fund at net
asset value. There is no fee to exchange shares. However, if your new fund has a
higher sales charge, you must pay the difference.
<PAGE>
SHAREHOLDER Q&A
IS THERE ANYTHING I NEED TO DO TO CONVERT MY SHARES? COMPLETE A SPECIAL FORM?
SUBMIT SOME SORT OF ORDER?
No. If shareholders approve the merger through proxy vote, your Piper Funds
shares will be exchanged for shares of the appropriate First American Funds
automatically. The total value of the First American Fund shares that you
receive will be the same as the total value of the Piper Fund shares that you
hold immediately before the merger.
WHEN IS MY PROXY DUE?
We would like to receive your vote as soon as possible. You may cast your
vote...
BY MAIL: Please note that you received one proxy ballot for each fund you own.
All ballots must be marked with your vote and returned in the business reply
envelope included in this package. If you have misplaced your enve1ope, please
mail your proxy to: Attn: Piper Funds, SEI Fund Resources, 530 E. Swedesford
Rd., Wayne PA 19087.
BY PHONE: Refer to the to11-free number in your proxy and follow the recorded
instructions.
If you have not returned your ballot as the July 10 meeting date approaches, you
may receive a call from SEI Investments reminding you to vote. U.S. Bank has
hired SEI to assist with the solicitation of proxies.
WHEN AND WHERE WILL THE SHAREHOLDER MEETING TAKE PLACE?
The shareholder meeting will be held at 10 a.m. on July 10, 1998, on the third
floor of the Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota. Piper Capital will validate parking for the Energy Center Ramp
located at South Ninth Street and Third Avenue South. Please bring your parking
ticket to the meeting for validation. Regardless of whether you plan to attend
the meeting, you should vote by phone or return your proxy card(s) in the mail
as soon as possible.
PLEASE READ THE FULL TEXT OF THE ATTACHED PROXY STATEMENT/PROSPECTUS FOR FURTHER
INFORMATION. IF YOU HAVE ADDITIONAL QUESTIONS, PLEASE CALL YOUR INVESTMENT
PROFESSIONAL OR PIPER CAPITAL MUTUAL FUND SERVICES AT 800 866-7778.
PROPOSED FUND-TO-FUND MERGER MATRIX
PIPER FUND FIRST AMERICAN FUND
Emerging Markets Growth ................Emerging Markets*
Pacific-European Growth ................International
Small Company Growth ...................Small Cap Growth
Emerging Growth ........................Mid Cap Growth*
Growth .................................Large Cap Growth
Growth and Income ......................Large Cap Value
Balanced ...............................Balanced
Government Income ......................Fixed Income
Intermediate Bond ......................Intermediate Term
Income
Adjustable Rate Mortgage ...............Adjustable Rate
Securities Mortgage
Securities*
Minnesota Tax-Exempt ...................Minnesota Tax Free*
National Tax-Exempt ....................Tax Free*
*Indicates new funds, created especially for the purposes of this merger.
[logo] PIPER FUNDS
PIPER FUNDS 222 South Ninth Street
Minneapolis, MN 55402-3804
Toll Free 800 866-7778
PIPER JAFFRAY INC., FUND DISTRIBUTOR AND NASD MEMBER.
http://www.piperjaffray.com/
<PAGE>
PIPER FUNDS INC.
SMALL COMPANY GROWTH FUND, EMERGING GROWTH FUND, GROWTH FUND,
GROWTH AND INCOME FUND, BALANCED FUND, GOVERNMENT INCOME FUND,
INTERMEDIATE BOND FUND, NATIONAL TAX-EXEMPT FUND, MINNESOTA TAX-EXEMPT FUND
PIPER FUNDS INC.--II
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
PIPER GLOBAL FUNDS INC.
EMERGING MARKETS GROWTH FUND, PACIFIC-EUROPEAN GROWTH FUND
222 SOUTH NINTH STREET
MINNEAPOLIS, MINNESOTA 55402-3804
NOTICE OF SPECIAL SHAREHOLDERS MEETING
TO BE HELD ON _________, 1998
NOTICE IS HEREBY GIVEN THAT a Special Meeting of the Shareholders of
Small Company Growth Fund, Emerging Growth Fund, Growth Fund, Growth and Income
Fund, Balanced Fund, Government Income Fund, Intermediate Bond Fund, National
Tax-Exempt Fund and Minnesota Tax-Exempt Fund, series of Piper Funds Inc.
("PFI"), Adjustable Rate Mortgage Securities Fund, a series of Piper Funds
Inc.--II ("PFI--II"), and Emerging Markets Growth Fund and Pacific-European
Growth Fund, series of Piper Global Funds Inc. ("PGF") (such series of PFI,
PFI--II and PGF are sometimes referred to individually as a "Piper Fund" and
collectively as the "Piper Funds") will be held at the offices of the Piper
Funds, 222 South Ninth Street, __ floor, Minneapolis, Minnesota on _______,
1998, at ____ a.m. central time for the purpose of considering and voting upon:
1. FOR EACH PIPER FUND, a proposal to ratify and approve an interim
investment advisory agreement between the corporation of which such Fund is a
series (either PFI, PFI--II or PGF), on behalf of such Fund, and Piper Capital
Management Incorporated ("Piper Capital"), and the receipt of investment
advisory fees by Piper Capital under such agreement.
2. FOR EACH OF PACIFIC-EUROPEAN GROWTH FUND AND EMERGING MARKETS
GROWTH FUND, a proposal to ratify and approve an interim sub-advisory agreement
between Piper Capital and Edinburgh Fund Managers plc ("EFM") relating to the
respective Fund, and the receipt of sub-advisory fees by EFM under such
agreement.
3. FOR EACH PIPER FUND, a proposal to approve an Agreement and Plan
of Reorganization (the "Reorganization Agreement") between First American
Investment Funds, Inc. ("FAIF") and the corporation of which such Piper Fund is
a series (either PFI, PFI--II or PGF) providing for the transfer of the assets
and liabilities of such Piper Fund to a corresponding fund of FAIF in exchange
for shares of the corresponding FAIF Fund. A vote in favor of the Reorganization
Agreement for PFI or PGF will be considered a vote in favor of an amendment to
the articles of incorporation of the respective company required to effect the
reorganization as contemplated by the Reorganization Agreement.
4. For each Piper Fund, such other business as may properly come
before the Special Meeting or any adjournment(s).
The proposals are described in the attached Combined Proxy
Statement/Prospectus. THE BOARD OF DIRECTORS OF PFI, PFI--II AND PGF RECOMMENDS
THAT YOU VOTE IN FAVOR OF EACH OF THESE PROPOSALS.
<PAGE>
Shareholders of record as of the close of business on ______, 1998
are entitled to notice of, and to vote at, the Special Meeting or any
adjournment(s) thereof.
SHAREHOLDERS ARE REQUESTED TO MARK, DATE, SIGN AND RETURN PROMPTLY
IN THE ENCLOSED ENVELOPE THE ACCOMPANYING PROXY CARD, WHICH IS BEING SOLICITED
BY THE BOARD OF DIRECTORS OF PFI, PFI--II AND PGF. THIS IS IMPORTANT TO ENSURE A
QUORUM AT THE MEETING. SHAREHOLDERS MAY ALSO HAVE THEIR VOTES RECORDED BY
TELEPHONE. PLEASE CALL __________ FOR MORE INFORMATION. PROXIES MAY BE REVOKED
AT ANY TIME BEFORE THEY ARE EXERCISED BY SUBMITTING TO THE RESPECTIVE PIPER FUND
A WRITTEN NOTICE OF REVOCATION OR A SUBSEQUENTLY EXECUTED PROXY OR BY ATTENDING
THE MEETING AND VOTING IN PERSON. HOWEVER, ATTENDANCE AT THE MEETING WILL NOT BY
ITSELF SERVE TO REVOKE A PROXY.
---------------------------
Secretary
________, 1998
<PAGE>
COMBINED PROXY STATEMENT/PROSPECTUS
DATED _______, 1998
PIPER FUNDS INC.
PIPER FUNDS INC.--II
PIPER GLOBAL FUNDS INC.
222 SOUTH NINTH STREET
MINNEAPOLIS, MINNESOTA 55402-3804
1-800-866-7778
FIRST AMERICAN INVESTMENT FUNDS, INC.
OAKS, PENNSYLVANIA 19456
1-800-637-2548
This Combined Proxy Statement/Prospectus is furnished in connection
with the solicitation of proxies by the Board of Directors of Piper Funds Inc.
("PFI"), Piper Funds Inc.--II ("PFI--II") and Piper Global Funds Inc. ("PGF")
(the "Piper Board") in connection with a Special Meeting of Shareholders of
Small Company Growth Fund, Emerging Growth Fund, Growth Fund, Growth and Income
Fund, Balanced Fund, Government Income Fund, Intermediate Bond Fund, National
Tax-Exempt Fund and Minnesota Tax-Exempt Fund, series of PFI, Adjustable Rate
Mortgage Securities Fund, a series of PFI--II, and Emerging Markets Growth Fund
and Pacific-European Growth Fund, series of PGF (such series of PFI, PFI--II and
PGF are sometimes referred to individually as a "Piper Fund" and collectively as
the "Piper Funds") to be held at ____ a.m. central time on ______, 1998 at the
offices of the Piper Funds, 222 South Ninth Street, ____ floor, Minneapolis,
Minnesota. At the meeting, shareholders will be asked to vote on the following
proposals:
<TABLE>
<CAPTION>
=======================================================================================================
Proposals Funds to Which Each Proposal Applies
- -------------------------------------------------------------------------------------------------------
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1) Ratification and approval of an interim investment Each Piper Fund
advisory agreement with Piper Capital Management
Incorporated ("Piper Capital") and the receipt of
investment advisory fees by Piper Capital under such
agreement.
- -------------------------------------------------------------------------------------------------------
2) Ratification and approval of an interim sub-advisory Pacific-European Growth Fund
agreement between Piper Capital and Edinburgh Fund Emerging Markets Growth Fund
Managers plc ("EFM") and the receipt of sub-advisory fees
by EFM under such agreement.
- -------------------------------------------------------------------------------------------------------
3) Approval of a proposed Agreement and Plan of Each Piper Fund
Reorganization (the "Reorganization Agreement") dated
________, 1998. For each Fund which is a series of PFI
or PGF, a vote in favor of the Reorganization Agreement
will be considered a vote in favor of an amendment to the
articles of incorporation of either PFI or PGF, as the
case may be, required to effect the reorganization.
=======================================================================================================
</TABLE>
Copies of the interim investment advisory agreements, the interim sub-advisory
agreements and the Reorganization Agreements are attached as Appendices I(a),
(b) and (c), II(a) and (b) and III(a), (b) and (c), respectively.
PFI, PFI--II, PGF and FAIF are open-end management investment
companies (mutual funds) that offer their shares in a number of different
investment portfolios, or "funds." Each of PFI, PFI--II
<PAGE>
and PGF has entered into a Reorganization Agreement with FAIF providing for the
transfer of the assets and liabilities of the Piper Funds which are series of
PFI, PFI--II or PGF, as the case may be, to corresponding investment portfolios
of FAIF (the "FAIF Funds") in exchange for shares of designated classes of the
FAIF Funds having an equal aggregate value (the "Reorganizations"). As a result
of the Reorganizations, shareholders of the Piper Funds will become shareholders
of the FAIF Funds.
The following table sets forth the Piper Funds, the corresponding
FAIF Funds into which each Piper Fund will be organized, and the investment
objectives of such FAIF Funds.
<TABLE>
<CAPTION>
Piper Fund Corresponding FAIF Fund Investment Objective of FAIF Fund
- ---------- ----------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Small Company Growth Fund Small Cap Growth Fund Growth of capital.
Emerging Growth Fund Mid Cap Growth Fund Growth of capital.
Growth Fund Large Cap Growth Fund Primary objective of long-term growth of
capital; secondary objective of current
income.
Growth and Income Fund Large Cap Value Fund Primary objective of capital
appreciation; secondary objective of
current income.
Balanced Fund Balanced Fund Maximizing total return (capital
appreciation plus income).
Government Income Fund Fixed Income Fund High current income consistent with
limited risk to capital.
Intermediate Bond Fund Intermediate Term Income Current income consistent with preserva-
Fund tion of capital.
Minnesota Tax-Exempt Fund Minnesota Tax Free Fund Maximum current income which is exempt
from both federal income tax and
Minnesota state income tax to the extent
consistent with prudent investment risk.
National Tax-Exempt Fund Tax Free Fund Maximum current income which is exempt
from federal taxation to the extent
consistent with prudent investment risk.
Adjustable Rate Mortgage Adjustable Rate Mortgage Providing current income while attempt-
Securities Fund Securities Fund ing to provide a high degree of principal
stability.
Pacific-European Growth International Fund Long-term growth of capital.
Fund
Emerging Markets Growth Emerging Markets Fund Long-term growth of capital.
Fund
</TABLE>
Table I under "Information Relating to the Proposed
Reorganization--Description of the Reorganization Agreements" shows the classes
of the FAIF Funds to be issued to the shareholders of the corresponding Piper
Funds in the Reorganizations.
<PAGE>
This Combined Proxy Statement/Prospectus sets forth concisely the
information that a Piper Fund shareholder should know before voting, and should
be retained for future reference. For shareholders of the Piper Funds that will
be reorganized into the FAIF Small Cap Growth Fund, Large Cap Growth Fund, Large
Cap Value Fund, Balanced Fund, Intermediate Term Income Fund, Fixed Income Fund
and International Fund (the "Existing FAIF Funds"), this Combined Proxy
Statement/Prospectus is accompanied by the following additional documents: (i)
the 1997 Annual Report for the Existing FAIF Funds and (ii) the current
Prospectus(es) for the Existing FAIF Funds, each dated January 31, 1998, as
supplemented through the date hereof. There are no Annual Reports or
Prospectuses for the other five FAIF Funds (the "New FAIF Funds"), which have
been created for purposes of the Reorganizations and have not yet commenced
operations. However, information regarding the New FAIF Funds is set forth in
the preliminary prospectuses for the Class A and Class B shares and for the
Class Y shares of such Funds, which are attached hereto as Appendix IX and
Appendix X, respectively. Additional information relating to this Combined Proxy
Statement/Prospectus is set forth in the Statement of Additional Information,
dated the date hereof, which is incorporated herein by reference, and in the
Prospectuses dated November 24, 1997, as supplemented through the date hereof,
for the Piper Funds. Each of these documents is on file with the Securities and
Exchange Commission (the "SEC"), and is available without charge by calling or
writing the Piper Funds or FAIF, at the respective telephone numbers or
addresses stated above. The information contained in the Existing FAIF Fund
Prospectuses and the Prospectuses for the Piper Funds is incorporated by
reference into this Combined Proxy Statement/Prospectus.
This Combined Proxy Statement/Prospectus is expected to be first
sent to shareholders on or about _______, 1998.
THE SECURITIES OF THE FAIF FUNDS OFFERED HEREBY HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
COMBINED PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS COMBINED PROXY
STATEMENT/PROSPECTUS AND IN THE MATERIALS EXPRESSLY INCORPORATED HEREIN BY
REFERENCE AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PFI, PFI--II, PGF, FAIF OR THEIR
RESPECTIVE ADVISERS AND DISTRIBUTORS.
SHARES OF PFI, PFI--II, PGF AND FAIF ARE NOT DEPOSITS OR OBLIGATIONS
OF, OR GUARANTEED OR ENDORSED BY, U.S. BANK NATIONAL ASSOCIATION OR ANY OTHER
BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. MUTUAL FUND SHARES
INVOLVE CERTAIN INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY............................................................................... 6
Interim Advisory and Sub-Advisory Agreements ................................... 6
Piper Board Considerations...................................................... 7
Proposed Reorganizations ....................................................... 7
Overview of the FAIF Funds and the Piper Funds.................................. 8
Piper Funds and FAIF Board Considerations....................................... 11
Voting Information.............................................................. 12
PRINCIPAL RISK FACTORS................................................................ 12
Common Risks.................................................................... 12
Differing Risks of Certain Piper Funds and FAIF Funds........................... 15
INFORMATION RELATING TO THE INTERIM ADVISORY AND SUB-ADVISORY
AGREEMENTS............................................................................ 16
The Merger of Piper Jaffray Companies Inc. and U.S. Bancorp..................... 16
The Interim Advisory and Sub-Advisory Agreements................................ 17
Information About Piper Capital................................................. 19
Payments to Piper Capital Affiliates............................................ 21
Affiliated Broker Commissions................................................... 21
Information About EFM........................................................... 21
Section 15(f) of the 1940 Act................................................... 22
Approval of the Piper Board..................................................... 22
INFORMATION RELATING TO THE PROPOSED REORGANIZATIONS.................................. 23
Description of the Reorganization Agreements.................................... 24
Table I--Piper Funds and Corresponding FAIF Funds............................... 24
Piper Board Considerations...................................................... 26
Capitalization.................................................................. 27
Table II--Pro Forma Capitalization Table (as of September 30, 1997)............. 28
Federal Income Tax Treatment.................................................... 31
COMPARISON OF FAIF FUNDS AND PIPER FUNDS.............................................. 32
Investment Objectives and Policies.............................................. 32
Investment Advisory Fees and Total Expense Ratios............................... 32
Table III--Investment Advisory and Total Expense Information.................... 33
FAIF Funds' Investment Advisory Agreement....................................... 35
FAIF Funds' Sub-Advisory Agreement.............................................. 35
Information About U.S. Bank, Marvin & Palmer and Other Service Providers........ 35
Share Structure................................................................. 36
Distribution Plans.............................................................. 37
Shareholder Transactions and Services........................................... 38
INFORMATION RELATING TO VOTING MATTERS................................................ 39
General Information............................................................. 39
Shareholder and Board Approvals................................................. 41
Table IV(A)--Piper Funds--5% Ownership as of _________, 1998.................... 42
Table IV(B)--FAIF Funds--5% Ownership as of _________, 1998..................... 42
Quorum.......................................................................... 42
Annual Meetings................................................................. 42
Interests of Certain Persons.................................................... 43
<PAGE>
ADDITIONAL INFORMATION ABOUT THE FAIF FUNDS........................................... 43
ADDITIONAL INFORMATION ABOUT THE PIPER FUNDS.......................................... 43
FINANCIAL STATEMENTS.................................................................. 44
OTHER BUSINESS........................................................................ 44
SHAREHOLDER INQUIRIES................................................................. 44
APPENDICES:
I(a) - FORM OF INTERIM INVESTMENT ADVISORY AGREEMENT FOR PFI
I(b) - FORM OF INTERIM INVESTMENT ADVISORY AGREEMENT FOR PFI--II
I(c) - FORM OF INTERIM INVESTMENT ADVISORY AGREEMENT FOR PGF
II(a) - FORM OF INTERIM SUB-ADVISORY AGREEMENT FOR PACIFIC-EUROPEAN
GROWTH FUND
II(b) - FORM OF INTERIM SUB-ADVISORY AGREEMENT FOR EMERGING MARKETS
GROWTH FUND
III(a) - FORM OF AGREEMENT AND PLAN OF REORGANIZATION FOR PFI
III(b) - FORM OF AGREEMENT AND PLAN OF
REORGANIZATION FOR PFI--II
III(c) - FORM OF AGREEMENT AND PLAN OF
REORGANIZATION FOR PGF
IV(a) - PRINCIPAL EXECUTIVE OFFICER AND DIRECTORS OF PIPER CAPITAL
MANAGEMENT INCORPORATED
IV(b) - PRINCIPAL EXECUTIVE OFFICER AND DIRECTORS OF EDINBURGH FUND
MANAGERS PLC
V - COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
VI - FEES AND EXPENSES OF THE PIPER FUNDS AND CORRESPONDING FAIF
FUNDS
VII - COMPARISON OF PIPER FUNDS AND FAIF ADVISORY AND SUB-ADVISORY
AGREEMENTS
VIII - SHAREHOLDER TRANSACTIONS AND SERVICES
IX - PRELIMINARY PROSPECTUS OF NEW FAIF FUNDS--CLASS A AND CLASS B
SHARES
X - PRELIMINARY PROSPECTUS OF NEW FAIF FUNDS--CLASS Y SHARES
XI - MANAGEMENT OF FAIF FUNDS AFTER THE REORGANIZATION
</TABLE>
<PAGE>
SUMMARY
The following is a summary of certain information relating to the
interim investment advisory and sub-advisory agreements and the proposed
Reorganizations, and is qualified by reference to the more complete information
contained elsewhere in this Combined Proxy Statement/Prospectus, the
Prospectuses and Statements of Additional Information of the Piper Funds and the
FAIF Funds, and the Appendices attached hereto.
INTERIM ADVISORY AND SUB-ADVISORY AGREEMENTS. On April ___, 1998,
pursuant to an Agreement and Plan of Merger, U.S. Bancorp acquired Piper Jaffray
Companies Inc. ("Piper Jaffray") and its direct and indirect subsidiaries
(including Piper Capital) by merging a wholly owned subsidiary of U.S. Bancorp
with and into Piper Jaffray, with Piper Jaffray as the surviving corporation
(the "Holding Company Merger"). As a result of the Holding Company Merger, Piper
Capital, the investment adviser to the Piper Funds, became an indirect
wholly-owned subsidiary of U.S. Bancorp. In accordance with the terms of the
then current investment advisory agreements between Piper Capital and PFI,
PFI--II or PGF, on behalf of their respective series (the "Old Advisory
Agreements"), and consistent with the requirements of the Investment Company Act
of 1940, as amended (the "1940 Act"), this change in control of Piper Capital
resulted in the automatic and immediate termination of the Old Advisory
Agreements. Similarly, the sub-advisory agreements between Piper Capital and
Edinburgh Fund Managers plc ("EFM") relating to the Pacific-European Growth
Fund and Emerging Markets Growth Fund series of PGF (the "Old Sub-Advisory
Agreements") also automatically and immediately terminated on the effective date
of the Holding Company Merger.
To better ensure that the Holding Company Merger and these automatic
terminations would not disrupt the investment advisory and sub-advisory services
provided to the Piper Funds, Piper Capital, EFM and the Piper Funds obtained an
exemptive order from the SEC (the "Order"). The Order permitted Piper Capital
and EFM, after termination of the Old Advisory and Sub-Advisory Agreements, to
enter into new interim investment advisory agreements between Piper Capital and
each of PFI, PFI--II and PGF, on behalf of the respective Piper Funds (the
"Interim Advisory Agreements"), and new interim sub-advisory agreements between
Piper Capital and EFM relating to Pacific-European Growth Fund and Emerging
Markets Growth Fund (the "Interim Sub-Advisory Agreements"), without obtaining
prior shareholder approval. In accordance with the Order, the Interim Advisory
and Sub-Advisory Agreements are subject to ratification and approval by the
shareholders of the Piper Funds at a meeting to be held within 120 days after
April ___, 1998 (the "Interim Period").
The Piper Board now is proposing that the shareholders of each Piper
Fund ratify and approve their Fund's Interim Advisory Agreement and that the
shareholders of each of Pacific-European Growth Fund and Emerging Markets Growth
Fund ratify and approve their Fund's Interim Sub-Advisory Agreement. The Interim
Advisory and Sub-Advisory Agreements became effective on April __, 1998, the
effective date of the Holding Company Merger. Pending the ratification and
approval of the Interim Advisory and Sub-Advisory Agreements, all fees payable
under the Agreements are being held in escrow. Any escrowed fees relating to a
Piper Fund will be received by Piper Capital or EFM only if the related Interim
Advisory or Sub-Advisory Agreement is ratified and approved by the shareholders
of such Piper Fund.
The terms of each Interim Advisory and Sub-Advisory Agreement are
substantially identical to the terms of the corresponding Old Advisory or
Sub-Advisory Agreement, except for (i) the effective date, (ii) the termination
date, and (iii) inclusion of a provision requiring that all fees payable by each
Piper Fund under the particular Interim Advisory Agreement, or all fees payable
by Piper Capital to EFM under the particular Interim Sub-Advisory Agreement, be
held in escrow until the Agreement is approved by the applicable Fund's
shareholders. The advisory fee rates payable under each Interim Advisory or Sub-
Advisory Agreement are identical to those previously payable under the
corresponding Old Advisory or Sub-Advisory Agreement. A description of Piper
Capital, EFM, the Interim Advisory and Sub-Advisory Agreements and the services
provided by Piper Capital or EFM
<PAGE>
thereunder is set forth below under the heading "Information Relating to the
Interim Advisory and Sub-Advisory Agreements." Copies of the Interim Advisory
Agreements are attached to this Combined Proxy Statement/Prospectus as
Appendices I(a), I(b) and I(c). Copies of the Interim Sub-Advisory Agreements
are attached to this Combined Proxy Statement/Prospectus as Appendices II(a) and
II(b). The descriptions of the Interim Advisory and Sub-Advisory Agreements are
qualified in their entirety by reference to the copies of such agreements
attached hereto.
If ratified and approved, an Interim Advisory or Sub-Advisory
Agreement will continue in effect with respect to the Piper Funds covered
thereby either (i) for an initial period of two years from the effective date of
such Agreement and thereafter for successive one-year terms, subject to certain
annual approval requirements, or (ii) until the related Reorganization is
completed (which, subject to various conditions described herein, is expected to
occur on or about July 31, 1998) (the "Closing"), whichever occurs earlier. In
the event that an Interim Advisory or Sub-Advisory Agreement is not ratified and
approved with respect to a Piper Fund, the fees held in escrow with respect to
that Fund will be returned to the Fund, and the Piper Board will consider what
actions should be taken with respect to management of the assets of the Piper
Fund until a new investment advisory or sub-advisory agreement is approved by
the shareholders of the Fund or the Reorganization occurs.
PIPER BOARD CONSIDERATIONS. In approving the Interim Advisory and
Sub-Advisory Agreements and recommending their ratification and approval to the
shareholders of the Piper Funds, the Piper Board considered, among other things,
that the provisions of the Interim Advisory and Sub-Advisory Agreements were
substantially identical to those of the Old Advisory and Sub-Advisory
Agreements; in particular, that the advisory fee rates were exactly the same as
under the Old Advisory and Sub-Advisory Agreements. In addition, Piper Capital
and EFM provided assurances that the investment advisory and sub-advisory
services provided to the Piper Funds during the Interim Period would not be
diminished in scope or quality, and agreed to certain conditions that were
intended to protect the interests of shareholders. See "Information Relating to
the Interim Advisory and Sub-Advisory Agreements--Approval of the Piper Board."
THE PIPER BOARD RECOMMENDS THAT THE SHAREHOLDERS OF EACH PIPER FUND RATIFY AND
APPROVE THE INTERIM ADVISORY AGREEMENT APPLICABLE TO SUCH FUND AND THE RECEIPT
OF INVESTMENT ADVISORY FEES BY PIPER CAPITAL UNDER SUCH AGREEMENT, AND THAT
SHAREHOLDERS OF PACIFIC-EUROPEAN GROWTH FUND AND EMERGING MARKETS GROWTH FUND
RATIFY AND APPROVE THEIR RESPECTIVE INTERIM SUB-ADVISORY AGREEMENT AND THE
RECEIPT OF SUB-ADVISORY FEES BY EFM UNDER SUCH AGREEMENT.
PROPOSED REORGANIZATIONS. Each of PFI, PFI--II and PGF has entered
into a reorganization agreement with FAIF (the "Reorganization Agreements").
Other than the parties to such agreements, the terms of the Reorganization
Agreements are substantially identical (except that, because PFI--II has only a
single series of shares outstanding, its Reorganization Agreement does not
require the filing of an amendment to PFI--II's articles of incorporation to
effect the Reorganization). The Reorganization Agreements provide for: (i) the
transfer of all of the assets and liabilities of each of the twelve Piper Funds
to FAIF in exchange for shares of designated classes of the corresponding FAIF
Funds of equal value; and (ii) the distribution of these FAIF Fund shares to the
shareholders of the Piper Funds in liquidation of the Piper Funds. The
Reorganizations are subject to a number of conditions with respect to each Piper
Fund, including the shareholder approvals described below. Following the
Reorganizations, it is contemplated that there will be a winding up of the
affairs of PFI, PFI--II and PGF, including the deregistration of each as an
investment company under the 1940 Act.
As a result of the proposed Reorganizations, each shareholder of a
Piper Fund will become a shareholder of the corresponding FAIF Fund and will
hold, immediately after the Closing, shares of the designated class of the
corresponding FAIF Fund having a total value equal to the total value of the
shares of the Piper Fund the shareholder holds immediately before the Closing.
Table I, under "Information Relating to the Proposed Reorganizations --
Description of the Reorganization
<PAGE>
Agreements," shows each class of each Piper Fund and the corresponding class of
each corresponding FAIF Fund.
Each Reorganization Agreement provides that the respective
Reorganization may be abandoned at any time prior to the Closing upon the mutual
consent of both PFI, PFI--II or PGF, as the case may be, and FAIF, among other
reasons. For further information, see "Information Relating to the Proposed
Reorganizations--Description of the Reorganization Agreements."
OVERVIEW OF THE FAIF FUNDS AND THE PIPER FUNDS. The investment
objectives, policies and restrictions of the Piper Funds are, in general,
similar to those of their corresponding FAIF Funds. There are, however,
differences. A brief summary of the FAIF Funds and the corresponding Piper Funds
is provided below. Additional information is provided in Appendix V to this
Combined Proxy Statement/Prospectus, which sets forth the investment objectives
and certain significant investment policies and limitations of the FAIF Funds
and the Piper Funds.
Piper Small Company Growth Fund and FAIF Small Cap Growth Fund have
similar objectives of long-term capital appreciation and growth of capital,
respectively. Each Fund invests at least 65% of its total assets under normal
conditions in small companies with, in the opinion of the Fund's adviser, the
potential for superior growth. The Funds' definitions of what will be considered
a small company vary, however, which may result in some differences in the
average market capitalizations of the Funds' respective portfolios. As of March
31, 1998, the average market capitalizations of the portfolio securities held by
Piper Fund and the FAIF Fund were $672,000,000 and $534,000,000, respectively.
In addition, the Piper Fund does not invest in convertible securities, whereas
the FAIF Fund may.
Piper Emerging Growth Fund and FAIF Mid Cap Growth Fund have similar
objectives of long-term capital appreciation and growth of capital,
respectively. The Piper Fund invests at least 65% of its total assets under
normal market conditions in common stocks of emerging growth companies that the
adviser believes offer superior growth potential. The FAIF Fund invests at least
65% of its total assets under normal market conditions in equity securities of
mid-capitalization companies that the adviser believes offer superior growth
potential. The definitions of emerging growth companies and mid-capitalization
companies vary, which may result in some differences in the average
capitalizations of the Funds' respective portfolios. As of March 31, 1998, the
average market capitalization of the Piper Fund was $3,743,000,000. The FAIF
Fund had not commenced operations as of March 31, 1998. In addition, the Piper
Fund does not invest in convertible securities, whereas the FAIF Fund may.
Piper Growth Fund and FAIF Large Cap Growth Fund have similar
investment objectives. Piper Growth Fund has a primary objective of long-term
capital appreciation and secondary objectives of current income and conservation
of principal. FAIF Large Cap Growth Fund has a primary objective of long-term
growth of capital and a secondary objective of current income. In attempting to
achieve its objective, the Piper Fund normally invests at least 90% of its total
assets in common stocks, securities convertible into or that carry the right to
buy common stocks and repurchase agreements, and invests at least 60% of its
total assets in securities of companies with market capitalizations of over $1
billion. The Piper Fund does not invest, under normal market conditions, in debt
securities (other than convertible securities). The FAIF Fund invests at least
65% of its total assets under normal market conditions in common stocks of
companies with market capitalizations of at least $1 billion, and may invest up
to 35% of its total assets in stocks of smaller companies and fixed income
securities.
Piper Growth and Income Fund and FAIF Large Cap Value Fund have
similar objectives. Piper Growth and Income Fund has an objective of current
income and long-term growth of capital and income. FAIF Large Cap Value Fund has
a primary objective of capital appreciation; current income is a secondary
objective. Securities in which the Funds invest are similar. The Piper Fund
invests under normal market conditions primarily in common stocks and securities
convertible into common stocks, although the Fund also may invest in debt
securities. The FAIF Fund invests at least 65% of its total assets under normal
market conditions in common stocks of companies with market capitalizations of
at
<PAGE>
least $1 billion, and 35% of its total assets in stocks of smaller companies and
fixed income securities. Although the Piper Fund does not have a stated
capitalization limit similar to that of the FAIF Fund, it emphasizes securities
of large, established companies.
Piper Balanced Fund and FAIF Balanced Fund have similar objectives.
Piper Balanced Fund has objectives of both current income and long-term capital
appreciation consistent with conservation of principal. FAIF Balanced Fund has
an objective of maximizing total return (capital appreciation plus income). The
Funds' permissible investments are very similar, with each Fund having the
ability to invest in both equity securities and fixed income securities. Both
Funds may invest in certain derivative securities. The Piper Fund may invest, in
the aggregate, up to 5% of its net assets in inverse floating rate,
interest-only, principal-only, inverse interest-only and Z tranches of
collateralized mortgage obligations, and stripped mortgage-related securities.
The FAIF Fund may invest up to 10% of its total fixed income assets in
interest-only, principal-only, inverse interest-only or inverse floating rate
mortgage-backed securities. The FAIF Fund has no limitations on investments in Z
tranches of collateralized mortgage obligations.
Piper Minnesota Tax-Exempt Fund and FAIF Minnesota Tax Free Fund
have nearly identical objectives. The Piper Fund has an objective of seeking
maximum current income exempt from both federal and Minnesota state income
taxes, consistent with prudent investment risk and preservation of capital. The
FAIF Fund has an objective of providing maximum current income which is exempt
from both federal income tax and Minnesota state income tax to the extent
consistent with prudent investment risk. Each Fund invests, under normal market
conditions, at least 80% of its net assets in municipal securities the interest
payable on which is exempt, in the opinion of bond counsel to the issuer, from
federal and Minnesota state income taxes, including the federal and state
alternative minimum tax.
Piper National Tax-Exempt Fund and FAIF Tax Free Fund also have
nearly identical objectives. The Piper Fund has an objective of seeking maximum
current income exempt from federal income taxes, consistent with prudent
investment risk and preservation of capital. The FAIF Fund has an objective of
providing maximum current income which is exempt from federal income tax to the
extent consistent with prudent investment risk. Each Fund invests, under normal
market conditions, at least 80% of its net assets in municipal securities the
interest payable on which is exempt, in the opinion of bond counsel to the
issuer, from federal income tax, including the federal alternative minimum tax.
Piper Intermediate Bond Fund and FAIF Intermediate Term Income Fund
have similar objectives of high current income consistent with preservation of
capital, for the Piper Fund, and current income consistent with preservation of
capital, for the FAIF Fund. Types of securities in which the Funds invest are
similar. The Piper Fund invests, under normal market conditions, at least 65% of
its total assets in securities issued, or guaranteed as to the payment of
principal and interest, by the U.S. government, its agencies or its
instrumentalities, corporate fixed income securities and other fixed income
securities, including mortgage-and asset-backed securities. Securities must be
investment grade or of comparable quality, as determined by the Fund's adviser.
The FAIF Fund invests in investment grade debt securities, at least 65% of which
must be U.S. government obligations or corporate debt obligations and
mortgage-backed and asset-backed securities rated at least A by Standard &
Poor's Rating Service ("S&P") or Moody's Investors Service, Inc. ("Moody's") or
assigned an equivalent rating by another nationally recognized statistical
rating organization ("NRSRO"). The Piper Fund and the FAIF Fund attempt to
maintain weighted average maturities of three to ten years and two to seven
years, respectively. Thus, the Piper Fund may have a slightly longer weighted
average maturity. The FAIF Fund may invest up to 10% of its total assets, in the
aggregate, in inverse floating rate, inverse interest-only, interest-only and
principal-only mortgage-backed securities. The Piper Fund may not invest in such
securities.
Piper Government Income Fund and FAIF Fixed Income Fund have similar
objectives of high current income consistent with, in the case of the Piper
Fund, preservation of capital, and, in the case of
<PAGE>
the FAIF Fund, limited risk to capital. There are some differences, however, in
the types of securities in which the Funds invest to pursue their objectives.
The Piper Fund invests at least 65% of its total assets, under normal market
conditions, in securities issued, or guaranteed as to the payment of principal
and interest, by the U.S. government, its agencies or instrumentalities. Much of
the Piper Fund is invested in mortgage-related securities. The Piper Fund may
invest up to 10% of its total assets in mortgage-related securities issued by
private entities. The Piper Fund does not invest in corporate debt obligations
(other than short-term money market securities). The FAIF Fund invests in U.S.
government obligations and investment grade debt securities. At least 65% of
such investments are U.S. government obligations and corporate debt obligations
and mortgage-backed and asset-backed securities rated at least A by S&P or
Moody's or assigned an equivalent rating by another NRSRO. The Piper Fund may
invest up to 10% of its net assets, in the aggregate, in inverse floating rate,
inverse interest-only, interest-only and principal-only mortgage-backed
securities. The FAIF Fund may invest up to 10% of its total assets in such
securities.
Piper Adjustable Rate Mortgage Securities Fund and FAIF Adjustable
Rate Mortgage Securities Fund have similar investment objectives. Piper
Adjustable Rate Mortgage Securities Fund has an investment objective of seeking
maximum current income consistent with low volatility of principal. FAIF
Adjustable Rate Mortgage Securities Fund has an objective of providing current
income while attempting to provide a high degree of principal stability. The
principal investments of the Funds are also identical, with each Fund investing,
under normal market conditions, at least 65% of its total assets in
mortgage-related securities having adjustable interest rates which reset at
periodic intervals (adjustable rate mortgage securities).
Piper Pacific-European Growth Fund and FAIF International Fund have
similar objectives of long-term capital appreciation and long-term growth of
capital, respectively. Under normal market conditions, the Piper Fund invests at
least 65% of its total assets in common stocks of companies located in at least
three countries of the Pacific Basin or Europe. The Piper Fund does not invest
in stocks of U.S. companies. Up to 25% of the Piper Fund's total assets may be
invested in other areas of the world. Under normal market conditions, the FAIF
Fund invests at least 65% of its total assets in equity securities which trade
in markets other than the United States. Normally, the Fund will invest at least
65% of its total assets in securities traded in at least three foreign
countries. It is possible, although not currently anticipated, that up to 35% of
the FAIF Fund's assets could be invested in United States companies. As a result
of these differences in investment policies, the countries in which the Piper
Fund and the FAIF Fund invest may differ significantly.
Piper Emerging Markets Growth Fund and FAIF Emerging Markets Fund
have objectives of long-term capital appreciation and long-term growth of
capital, respectively. The Funds' principal investments are very similar, with
the Funds investing, under normal market conditions, at least 65% of total
assets in common stocks, in the case of the Piper Fund, and equity securities,
in the case of the FAIF Fund, which trade in the world's emerging markets.
Each Fund normally will maintain investments in at least six countries having
emerging markets.
The investment objective of each Piper Fund, other than
Pacific-European Growth Fund, is fundamental, which means that it cannot be
changed without the vote of a majority of the outstanding shares (as defined in
the 1940 Act) of such Fund. Each FAIF Fund's investment objective (and the
investment objective of the Pacific-European Growth Fund) is non-fundamental,
which means that it can be changed without a vote of shareholders. Shareholders
will receive written notification at least 30 days prior to any change in a FAIF
Fund's investment objective.
In addition to any differences outlined above, there are other
differences between the Piper Funds and the FAIF Funds which should be
considered. Additional information is provided below under "Comparison of FAIF
Funds and Piper Funds - Investment Objectives and Policies" and in Appendix V to
this Combined Proxy Statement/Prospectus, which sets forth the investment
objectives and certain significant investment policies and limitations of the
FAIF Funds and the Piper Funds.
<PAGE>
As discussed under "Comparison of FAIF Funds and Piper
Funds--Investment Advisory Fees and Total Expense Ratios," U.S. Bank currently
serves as the investment adviser to each Existing FAIF Fund, and will serve as
the investment adviser to each of the New FAIF Funds. Table III thereunder shows
the investment advisory fees paid by the Piper Funds during their latest fiscal
year and the investment advisory fees that would be paid after consummation of
the Reorganization. Table III also shows that in all cases, except with respect
to the Class Y shares of FAIF Intermediate Term Income Fund, the overall expense
ratios of the FAIF Funds, after any fee waivers that are currently in effect,
are expected to be less than the overall expense ratios of the corresponding
Piper Funds. In addition, in this regard, U.S. Bank has agreed that for a
two-year period commencing on the Closing, U.S. Bank will waive fees and
reimburse expenses to the FAIF Funds to the extent necessary so that no FAIF
Fund will have total fund operating expense ratios in excess of those currently
applicable to its corresponding Piper Fund (except for the Class Y shares of
FAIF Intermediate Term Income Fund), taking into account current Piper Fund fee
waivers and expense reimbursements. The Piper Funds and the FAIF Funds have
different investment advisers (and sub-advisers in the case of the Piper Funds
and FAIF Funds investing primarily in foreign securities), administrators,
custodians, transfer agents and directors, as discussed under "Comparison of
FAIF Funds and Piper Funds--Information About Piper Capital, U.S. Bank and Other
Service Providers." Appendix VI to this Combined Proxy Statement/Prospectus
provides additional information about the fees and expenses for each of the FAIF
Funds and corresponding Piper Funds.
As discussed under "Comparison of FAIF Funds and Piper Funds--Share
Structure," the FAIF Funds will issue Class A and Class Y shares in connection
with the Reorganization. Certain FAIF Funds also offer Class B shares. Class A
and Class B shares of the FAIF Funds are sold to the general public as well as
to retail customers of banks and other institutions. Class A shares are sold
with a front-end sales charge. Class B shares are sold at net asset value, but
are subject to a contingent deferred sales charge if sold during the first six
years after purchase. In addition, Class B shares are subject to higher Rule
12b-1 fees than Class A shares. Class Y Shares are offered through banks and
certain other institutions for the investment of their own funds and funds for
which they act in a fiduciary, agency or custodial capacity. Such shares are
offered at net asset value without any front-end or contingent deferred sales
charge and are not subject to any Rule 12b-1 fees. Each of the Piper Funds
offers Class A shares, and certain Piper Funds also offer Class B and/or Class Y
shares. Class A, Class B and Class Y shares of the Piper Funds are similarly
structured to Class A, Class B and Class Y shares, respectively, of the FAIF
Funds. There are certain differences with respect to the sales charge structures
of the Piper Funds and the FAIF Funds. (See Appendix V.) NO FRONT-END OR
CONTINGENT DEFERRED SALES CHARGE WILL BE IMPOSED ON ANY OF THE FAIF FUND SHARES
THAT ARE ISSUED TO PIPER FUND SHAREHOLDERS IN CONNECTION WITH THE
REORGANIZATION.
With certain exceptions, the purchase, redemption, dividend and
other policies and procedures of the FAIF Funds and the Piper Funds are
generally similar. Additional information concerning these policies and
procedures for the Piper Funds and the FAIF Funds is discussed further under
"Comparison of FAIF Funds and Piper Funds--Shareholder Transactions and
Services" and in Appendix VIII to this Combined Proxy Statement/Prospectus. In
addition, Appendix XI sets forth a list of the portfolio managers of the FAIF
Funds after the Reorganization, which is subject to change.
PIPER FUNDS AND FAIF BOARD CONSIDERATIONS. In reviewing the proposed
Reorganizations, the Piper Board and the FAIF Board of Directors considered,
among other things, (i) the terms and conditions of the Reorganization
Agreements, including provisions intended to avoid the dilution of shareholder
interests; (ii) the investment management capabilities of U.S. Bank; (iii) the
sub-advisory capabilities of Marvin & Palmer Associates, Inc., with respect to
the FAIF International Fund and FAIF Emerging Markets Fund; (iv) the
capabilities of the administrator, distributor and other service providers to
the FAIF Funds; (v) the systems capabilities of U.S. Bank to provide shareholder
servicing, reporting and systems integration with related programs for Piper
Funds shareholders; (vi) the potential synergies of the distribution channels
used by the FAIF Funds and the Piper Funds; (vii) the comparative investment
objectives, policies and limitations of the FAIF Funds and the Piper Funds;
(viii) the historical investment performance of the FAIF Funds and the Piper
Funds; (ix) the historical
<PAGE>
and projected operating expenses of the FAIF Funds and the Piper Funds (both
with and without waivers and expense reimbursements); and (x) the anticipated
tax treatment of the Reorganizations. See "Information Relating to the Proposed
Reorganizations--Board Considerations."
Based upon their evaluations of the information presented to them,
and in light of their fiduciary duties under Federal and state law, the Piper
Board and the Board of Directors of FAIF, including all of the members of each
Board who are not interested persons, as that term is defined in the 1940 Act,
of PFI, PFI--II or PGF, or of FAIF, have determined that the proposed
Reorganizations are in the best interests of the shareholders of the Piper Funds
and FAIF Funds, respectively, and that the interests of the shareholders of the
respective Piper Funds and FAIF Funds will not be diluted as a result of the
Reorganizations. THE PIPER BOARD RECOMMENDS THAT THE SHAREHOLDERS OF EACH PIPER
FUND APPROVE THE REORGANIZATION AGREEMENT FOR SUCH FUND.
VOTING INFORMATION. This Combined Proxy Statement/Prospectus is
being furnished in connection with the solicitation of proxies by the Piper
Board for a Special Meeting of Shareholders to be held at the offices of the
Piper Funds, 222 South Ninth Street, __ floor, Minneapolis, Minnesota, on
______, 1998 at _____ a.m. central time. (This special meeting and any
adjournment(s) thereof are referred to as the "Meeting.") Only shareholders of
record at the close of business on ______, 1998 will be entitled to vote at the
Meeting. Each shareholder is entitled to one vote for each share held and to a
fractional vote for any fractional share held. Shares represented by a properly
executed proxy will be voted in accordance with the instructions thereon or, if
no specification is made, the persons named as proxies will vote in favor of
each proposal set forth in the Notice of Meeting. Proxies may be revoked at any
time before they are exercised by submitting to the Piper Funds a written notice
of revocation or a subsequently executed proxy or by attending the Meeting and
voting in person. However, attendance at the Meeting will not by itself serve to
revoke a proxy. For additional information, including a description of the
shareholder votes required for approval of the Interim Advisory and Sub-Advisory
Agreements and the Reorganization Agreements, see "Information Relating to
Voting Matters."
PRINCIPAL RISK FACTORS
COMMON RISKS. Because of the similarities of the investment
objectives, policies and restrictions of the Piper Funds and their corresponding
FAIF Funds, Piper Funds' management believes that an investment in a FAIF Fund
involves risks that are generally similar to those of the corresponding Piper
Fund. These investment risks, in general, are those typically associated with
investing in a portfolio of government or investment grade bonds in the case of
funds investing primarily in taxable debt securities; investment grade municipal
obligations in the case of funds investing primarily in tax-exempt debt
securities; and common stocks and securities convertible into common stocks in
the case of funds investing primarily in equity securities. The Piper Funds and
FAIF Funds that invest in foreign securities are subject to the additional risks
of foreign investments. The principal differences in the risks associated with
investments in certain Piper Funds and the corresponding FAIF Funds are set
forth below under "Differing Risks of Certain Piper Funds and FAIF Funds." The
general investment risks applicable to the Piper Funds and the FAIF Funds
include the following:
INTEREST RATE RISK. The Piper Funds and the FAIF Funds that invest
in fixed-rate taxable and tax-exempt debt securities are subject to interest
rate risk, which is the risk that the value of a debt security will decline due
to changes in market interest rates. In general, when interest rates rise, the
value of a debt security declines. Conversely, when interest rates decline, the
value of a debt security generally increases. Thus, shareholders in these Funds
bear the risk that increases in market interest rates will cause the value of
their Fund's portfolio investments to decline.
CREDIT RISK. The Piper Funds and the FAIF Funds that invest in
taxable and tax-exempt debt securities also are subject to credit risk. Credit
risk is the risk that the issuer of a debt security will fail to make payments
on the security when due. Securities issued or guaranteed by the U.S. government
generally are viewed as carrying minimal credit risk. Securities issued by
governmental entities but not
<PAGE>
backed by the full faith and credit of the U.S. government, and securities
issued by private entities, are subject to higher levels of credit risk. The
following Piper Funds and FAIF Funds may each invest in debt securities rated as
low as BBB by S&P or Baa by Moody's, or which have been assigned an equivalent
rating by another nationally recognized statistical rating organization or are
of comparable quality in the judgment of the investment adviser: FAIF Small Cap
Growth Fund, FAIF Mid Cap Growth Fund, FAIF Large Cap Growth Fund, FAIF Large
Cap Value Fund, FAIF Balanced Fund, FAIF Minnesota Tax Free Fund, FAIF Tax Free
Fund, FAIF Intermediate Term Income Fund, FAIF Fixed Income Fund, Piper Growth
and Income Fund, Piper Balanced Fund, Piper Minnesota Tax-Exempt Fund, Piper
National Tax-Exempt Fund and Piper Intermediate Bond Fund. Although these rating
categories are investment grade, obligations with these ratings are viewed as
having speculative characteristics and carry a somewhat higher risk of default
than obligations rated in the higher investment grade categories.
CALL RISK. Many corporate and municipal bonds may be redeemed at the
option of the issuer ("called") at a specified price prior to their stated
maturity date. In general, it is advantageous for an issuer to call its bonds if
they can be refinanced through the issuance of new bonds which bear a lower
interest rate than that of the called bonds. Call risk is the risk that bonds
will be called during a period of declining market interest rates so that such
refinancings may take place.
If a bond held by a Fund is called during a period of declining
interest rates, the Fund probably will have to reinvest the proceeds received by
it at a lower interest rate than that borne by the called bond, thus resulting
in a decrease in the Fund's income. To the extent that the Funds invest in
callable corporate or municipal bonds, shareholders bear the risk that
reductions in income will result from the call of bonds. Most U.S. government
securities are not callable before their stated maturity, although U.S. agency
securities often are.
MORTGAGE-BACKED SECURITIES. Because residential mortgage loans
generally can be prepaid in whole or in part by the borrowers at any time
without any prepayment penalty, the holder of a mortgage-backed security which
represents an interest in a pool of such mortgage loans is subject to a form of
call risk which is generally called "prepayment risk." In addition, it is more
difficult to predict the effect of changes in market interest rates on the
return on mortgaged-backed securities than to predict the effect of such changes
on the return of a conventional fixed-rate debt instrument and the magnitude of
such effects may be greater in some cases. For these reasons, a Fund's
investments in mortgage-backed securities may involve greater risks than
investments in governmental or corporate bonds.
POLITICAL AND ECONOMIC CONDITIONS. The value of municipal
obligations owned by Piper Minnesota Tax-Exempt Fund, Piper National Tax-Exempt
Fund, FAIF Minnesota Tax Free Fund and FAIF Tax Free Fund may be adversely
affected by local political and economic conditions and developments. Adverse
conditions in an industry significant to a local economy could have a
correspondingly adverse effect on the financial condition of local issuers.
Other factors that could affect tax-exempt obligations include a change in the
local, state or national economy, demographic factors, ecological or
environmental concerns, statutory limitations on the issuer's ability to
increase taxes and other developments generally affecting the revenues of
issuers (for example, legislation or court decisions reducing state aid to local
governments or mandating additional services). The value of certain municipal
obligations may also be adversely affected by the enactment of changes to
certain federal or state income tax laws, including, but not limited to, income
tax rate reductions or the imposition of a flat tax. Municipal obligations held
by Piper Minnesota Tax-Exempt Fund and FAIF Minnesota Tax Free Fund will be
particularly affected by local conditions in the State of Minnesota.
RISKS OF EQUITY SECURITIES GENERALLY. Market prices of equity
securities generally, and of particular companies' equity securities, frequently
are subject to greater volatility than prices of fixed income securities. Market
prices of equity securities as a group have dropped dramatically in a short
<PAGE>
period of time on several occasions in the past, and they may do so again in the
future. Each of the Funds investing in equity securities is subject to the risk
of generally adverse equity markets.
SMALL-CAPITALIZATION COMPANIES. Piper Small Company Growth Fund and
FAIF Small Cap Growth Fund emphasize investments in companies with relatively
small market capitalizations. The equity securities of such companies frequently
have experienced greater price volatility in the past than those of
larger-capitalization companies, and they may be expected to do so in the
future. The other Funds that invest primarily in equity securities may invest
lesser proportions of their assets in such issues.
MID-CAPITALIZATION COMPANIES. Piper Emerging Growth Fund and FAIF
Mid Cap Growth Fund emphasize investments in mid-capitalization stocks. While
these stocks may be slightly less volatile than those of small-capitalization
companies, they still involve substantial risk and may be subject to more abrupt
or erratic market movements than those of larger, more established companies.
The other Funds that invest primarily in equity securities may invest lesser
proportions of their assets in such issues.
FOREIGN SECURITIES. Piper Pacific-European Growth Fund, Piper
Emerging Markets Growth Fund, FAIF International Fund and FAIF Emerging Markets
Fund invest primarily in equity securities which trade in markets other than the
United States. The other Funds (other than Piper Intermediate Bond Fund, Piper
Government Income Fund, Piper Minnesota Tax-Exempt Fund, Piper National
Tax-Exempt Fund, Piper Adjustable Rate Mortgage Securities Fund, FAIF Minnesota
Tax Free Fund, FAIF Tax Free Fund and FAIF Adjustable Rate Mortgage Securities
Fund) may invest lesser proportions of their assets in foreign securities.
Investment in foreign securities is subject to special investment risks that
differ in some respects from those related to investments in securities of
United States domestic issuers. These risks include political, social or
economic instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the imposition of exchange
controls, expropriation, limits on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation, and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Foreign securities also may be subject to greater
fluctuations in price than securities issued by United States corporations. The
principal markets on which these securities trade may have less volume and
liquidity, and may be more volatile, than securities markets in the United
States.
Funds investing in non-U.S. dollar denominated foreign securities
are also subject to currency risk. A decline in the value of any particular
currency against the U.S. dollar will cause a decline in the U.S. dollar value
of a Fund's holdings of securities denominated in such currency and, therefore,
will cause an overall decline in the Fund's net asset value and net investment
income and capital gains, if any, to be distributed in U.S. dollars to Fund
shareholders.
In addition, there may be less publicly available information about
a foreign company than a United States domiciled company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to United States domestic
companies. There is also generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the United States.
Confiscatory taxation or diplomatic developments could also affect investment in
those countries. In addition, foreign branches of United States banks, foreign
banks and foreign issuers may be subject to less stringent reserve requirements
and to different accounting, auditing, reporting and recordkeeping standards
than those applicable to domestic branches of United States banks and United
States domestic issuers.
EMERGING MARKETS. Piper Emerging Markets Growth Fund and FAIF
Emerging Markets Fund invest primarily, and Piper Pacific-European Growth Fund
and FAIF International Fund invest to a lesser extent, in securities of
companies located in the world's emerging markets. Investing in emerging
<PAGE>
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.
DERIVATIVE MORTGAGE-BACKED SECURITIES. Certain Piper Funds and FAIF
Funds may invest to a limited extent in inverse floating rate, inverse
interest-only, interest-only and principal-only mortgage-backed securities. Such
securities can be extremely sensitive to interest rate changes and are therefore
more volatile than conventional debt securities. Some of these securities may
decline in value at times when other debt securities are increasing in value.
Conversely, some may increase in value at times when conventional debt
securities are decreasing.
OTHER. The Piper Funds and the FAIF Funds may engage in certain
investment techniques to the extent set forth in their respective prospectuses.
These techniques include entering into repurchase agreements, reverse repurchase
agreements and dollar roll agreements, purchasing and selling put and call
options, entering into futures contracts, purchasing securities on a when-issued
or delayed-delivery basis and lending portfolio securities. These techniques
involve certain risks, as described in the prospectuses for the Existing FAIF
Funds and the Piper Funds which are incorporated by reference in this Combined
Proxy Statement/Prospectus, and in the preliminary prospectuses for the Class A
and Class B shares and for the Class Y shares of the New FAIF Funds, which are
attached to this Combined Proxy Statement/Prospectus as Appendix IX and Appendix
X, respectively.
DIFFERING RISKS OF CERTAIN PIPER FUNDS AND FAIF FUNDS. As discussed
above, Piper Growth Fund does not invest in debt securities under normal market
conditions (other than convertible securities), whereas FAIF Large Cap Growth
Fund may invest up to 35% of its total assets in such securities. As a result,
the FAIF Fund may be subject to the risks of debt securities discussed under
"Common Risks," whereas the Piper Fund will not generally be subject to such
risks.
As discussed above, Piper Government Income Fund is required to
invest at least 65% of its total assets, under normal market conditions, in
securities issued, or guaranteed as to the payment of principal and interest, by
the U.S. government, its agencies or instrumentalities. The Fund may invest up
to 10% of its total assets in mortgage-related securities issued by private
entities. The Fund does not invest in corporate debt obligations (other than
short-term money market securities). FAIF Fixed Income Fund invests in U.S.
government obligations and investment grade corporate debt obligations,
mortgage-backed securities and asset-backed securities. Because FAIF Fixed
Income Fund may invest to a greater extent in non-U.S. government debt
obligations, it may be subject to a greater degree of credit risk than Piper
Government Income Fund.
There may also be differing degrees of credit risk in the Piper
Intermediate Bond Fund and the FAIF Intermediate Term Income Fund. The FAIF Fund
invests in investment grade debt securities, at least 65% of which must be U.S.
government obligations or corporate debt obligations and mortgage-backed and
asset-backed securities rated at least A by S&P or Moody's or assigned an
equivalent rating by another NRSRO. The Piper Fund does not require that a
certain percentage of its assets be rated A or better. Thus, the FAIF Fund's
portfolio may have a higher average credit quality and therefore may be subject
to less credit risk. The Piper and FAIF Funds may also be subject to different
risks as a result of the FAIF Fund's ability to invest in certain derivative
mortgage-backed securities. The FAIF Fund may invest up to 10% of its total
assets, in the aggregate, in inverse floating rate, inverse interest-only,
interest-only and principal-only mortgage-backed securities. The Piper Fund may
not invest in such securities. Such securities can be extremely sensitive to
interest rate changes and therefore more volatile than conventional debt
securities. Some of these securities may decline in value at times when other
debt securities are increasing in value. Conversely, some may increase in value
at times when conventional debt securities are decreasing.
As discussed above, both the Piper Balanced Fund and FAIF Balanced
Fund may invest in Z tranches of collateralized mortgage obligations. However,
the Piper Balanced Fund may invest up to 5% of its net assets in such
obligations while FAIF Balanced Fund has no limitation on such obligations.
<PAGE>
As a result, FAIF Balanced Fund may be subject to a greater degree of credit
risk than investments in Piper Balanced Fund.
As discussed above, the countries in which Piper Pacific-European
Growth Fund and FAIF International Fund invest may differ significantly. This
may result in differing investment risks for the Funds relating to the different
risks associated with particular countries.
Certain other differences between the Piper Funds and the FAIF Funds
are discussed above under "Summary--Overview of the FAIF Funds and the Piper
Funds" and in Appendix V to this combined Proxy Statement/Prospectus.
INFORMATION RELATING TO THE INTERIM
ADVISORY AND SUB-ADVISORY AGREEMENTS
THE MERGER OF PIPER JAFFRAY COMPANIES INC. AND U.S. BANCORP. On
April __, 1998, pursuant to an Agreement and Plan of Merger dated as of December
14, 1997 (the "Merger Agreement"), U.S. Bancorp acquired Piper Jaffray and its
direct and indirect subsidiaries (including Piper Capital) by merging Cub
Acquisition Corporation (the "Merger Subsidiary") with and into Piper Jaffray,
with Piper Jaffray as the surviving corporation. The Merger Subsidiary was a
wholly owned subsidiary of U.S. Bancorp, organized for the purpose of
participating in the Holding Company Merger. On the date and at the time when
the Holding Company Merger became effective (the "Effective Time"), the Merger
Subsidiary merged into Piper Jaffray with Piper Jaffray as the surviving
corporation and a wholly owned subsidiary of U.S. Bancorp.
At the Effective Time, each issued and outstanding share of the
common stock, $1.00 par value, of Piper Jaffray common stock other than treasury
shares and dissenters' shares was converted into the right to receive $37.25 in
cash, without interest thereon. Shares of Piper Jaffray common stock held by
Piper Jaffray or any of its subsidiaries and shares of Piper Jaffray common
stock the holders of which perfected their dissenters' rights to payment under
Delaware law immediately prior to the Effective Time, were excluded from this
conversion.
The officers and directors of Piper Capital had no interest in the
Holding Company Merger other than as a result of their ownership of shares of
Piper Jaffray common stock. The officers and directors of U.S. Bank had no
interest in the Holding Company Merger.
As a result of the Holding Company Merger, Piper Capital, the
investment adviser to the Piper Funds, became an indirect wholly-owned
subsidiary of U.S. Bancorp. In accordance with the terms of the Old Advisory and
Sub-Advisory Agreements and consistent with the requirements of the 1940 Act,
this change in control of Piper Capital resulted in the automatic and immediate
termination of the Old Advisory and Sub-Advisory Agreements. The Old Advisory
Agreements between Piper Capital and PFI, PFI--II and PGF were dated February
19, 1987, June 21, 1995 and August 28, 1992, respectively, were adopted by the
sole shareholder of each Piper Fund prior to commencement of operations (except
that the shareholders of Pacific-European Growth Fund approved the Old Advisory
Agreement for their Fund at a meeting held _____, 1992), and were last approved
by the Piper Board on May 23, 1997. The Old Sub-Advisory Agreements relating to
Pacific-European Growth Fund and Emerging Markets Growth Fund were dated August
28, 1992 and June 21, 1996, respectively. The sub-advisory agreement relating to
Pacific-European Growth Fund was approved by Fund shareholders at a meeting held
_____, 1992, the sub-advisory agreement relating to Emerging Markets Growth Fund
was approved by the Fund's sole shareholder prior to commencement of operations,
and both Old Sub-Advisory Agreements were last approved by the Piper Board on
May 23, 1997. Table III, under "Comparison of FAIF Funds and Piper
Funds--Investment Advisory Fees and Total Expense Ratios," shows for their
latest fiscal year the advisory fees paid to Piper Capital by the Piper Funds,
amounts paid by Piper Capital to EFM under the Old Sub-Advisory Agreements for
Pacific-European Growth Fund and Emerging Markets Growth Fund, and the
contractual rates that Piper Capital and EFM were entitled to
<PAGE>
receive. (Neither Piper Capital nor EFM waived any fees during such fiscal year
under their respective advisory and sub-advisory agreements.)
To better ensure that the automatic terminations of the Old Advisory
and Sub-Advisory Agreements would not disrupt the investment advisory and
sub-advisory services provided to the Piper Funds, Piper Capital, EFM and the
Piper Funds filed an exemptive application with the SEC on March __, 1998. This
application requested that the SEC permit Piper Capital and EFM, after
termination of the Old Advisory and Sub-Advisory Agreements as a result of the
Holding Company Merger, to enter into the Interim Advisory and Sub-Advisory
Agreements prior to obtaining shareholder approval. The application also
requested that the SEC permit Piper Capital and EFM to receive fees (which are
currently held in escrow) under the respective Interim Advisory and Sub-Advisory
Agreements, subject to approval of such agreements by the shareholders of the
respective Piper Funds at a meeting to be held no later than August __, 1998. In
connection with this application, Piper Capital and EFM agreed to take steps to
ensure that the scope and quality of the investment advisory and sub-advisory
services will be the same during the Interim Period as previously provided under
the Old Advisory and Sub-Advisory Agreements. The requested Order was granted by
the SEC on ____, 1998.
THE INTERIM ADVISORY AND SUB-ADVISORY AGREEMENTS. As a result of the
automatic termination of the Old Advisory and Sub-Advisory Agreements as
described above, the Piper Board is proposing that the shareholders of each
Piper Fund ratify and approve the Fund's Interim Advisory Agreement, and that
the shareholders of each of Pacific-European Growth Fund and Emerging Markets
Growth Fund ratify and approve the Fund's Interim Sub-Advisory Agreement. The
Interim Advisory and Sub-Advisory Agreements became effective on April __, 1998,
the date of the Holding Company Merger. Pending such ratification and approvals,
in accordance with the conditions of the Order, all fees payable by the Piper
Funds under the Interim Advisory Agreements, including all fees payable by Piper
Capital to EFM under the Interim Sub-Advisory Agreements, are being held in
escrow. Such escrowed fees attributable to a Piper Fund will be released to
Piper Capital or, in the case of an Interim Sub-Advisory Agreement, to EFM, only
if the Interim Advisory or Sub-Advisory Agreement applicable to such Fund is
ratified and approved by the shareholders of such Fund. If ratified and
approved, the Interim Advisory and Sub-Advisory Agreements will continue in
effect for an initial period of two years and thereafter for successive one-year
terms, subject to certain annual approval requirements, or until the Closing
(which, subject to various conditions described herein, is expected to occur on
or about July 31, 1998), whichever occurs earlier. In the event an Interim
Advisory or Sub-Advisory Agreement is not ratified and approved with respect to
a Piper Fund, in accordance with the conditions of the Order, the escrowed fees
payable by that Fund will be returned to the Fund and the Piper Board will
consider what actions should be taken with respect to management of the assets
of the Piper Fund until a new investment advisory or sub-advisory agreement is
approved by the shareholders of the Fund or the Reorganization applicable to
such Fund occurs.
The terms of the Interim Advisory and Sub-Advisory Agreements, which
are more fully described below, are substantially identical to the terms of the
Old Advisory and Sub-Advisory Agreements, except for (i) the effective date,
(ii) the termination date, and (iii) inclusion of a provision requiring that all
fees payable by each Piper Fund under the particular Interim Advisory Agreement,
or all fees payable by Piper Capital to EFM under the particular Interim
Sub-Advisory Agreement, be held in escrow until the Agreement is approved by the
applicable Fund's shareholders. The advisory and sub-advisory fee rates payable
under the Interim Advisory and Sub-Advisory Agreements are identical to those
payable under the corresponding Old Advisory and Sub-Advisory Agreements. Copies
of the Interim Advisory Agreements are attached to this Combined Proxy
Statement/Prospectus as Appendix I(a), I(b) and I(c). Copies of the Interim
Sub-Advisory Agreements are attached as Appendix II(a) and II(b).
INTERIM ADVISORY AGREEMENTS. Pursuant to the Interim Advisory
Agreements for PFI and PFI--II, Piper Capital agrees, subject to the supervision
of the Piper Board, to furnish the Piper Funds with investment advice and to
supervise the management and investment programs of the respective
<PAGE>
Piper Funds. Under such Agreements, Piper Capital furnishes at its own expense
all necessary administrative services, office space, equipment and clerical
personnel for servicing the investments of the Piper Funds. Piper Capital also
provides investment advisory facilities and executive and supervisory personnel
for managing the investments and effecting the portfolio transactions of the
Piper Funds. In addition, Piper Capital pays the salaries and fees of all
officers and directors of PFI or PFI--II who are affiliated with Piper Capital.
Pursuant to the Interim Advisory Agreement for PGF, Piper Capital
supervises, directs and monitors the day-to-day operations of Pacific-European
Growth Fund and Emerging Markets Growth Fund in accordance with each Fund's
investment objective, policies and restrictions, as well as the implementation
of investment programs formulated by EFM. Piper Capital reviews investment and
allocation determinations of EFM. In addition, EFM must obtain the approval of
Piper Capital prior to (a) any investment of the assets of Pacific-European
Growth Fund in any country outside of the Pacific Basin or Europe and (b) any
investment by EFM which would result in reallocation of in excess of 5% of such
Fund's total assets. Piper Capital furnishes at its own expense all necessary
administrative services, office space, equipment and clerical personnel for
providing the foregoing services. In addition, Piper Capital pays the salaries
and fees of all officers and directors of PGF who are affiliated with Piper
Capital. Under the Interim Advisory Agreement for PGF, Piper Capital is liable
to Pacific-European Growth Fund and Emerging Markets Growth Fund for losses
resulting from willful misconduct, bad faith or gross negligence in the
performance of its duties or from its reckless disregard of its duties under
such Interim Advisory Agreement.
Each Interim Advisory Agreement provides that, unless sooner
terminated, it will continue in effect for an initial period of two years and
thereafter for successive annual terms, provided that such successive terms are
specifically approved at least annually (a) by a vote of a majority of those
members of the Piper Board who are not parties to the Agreement or "interested
persons" (as defined in the 1940 Act) of any party to the Agreement, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the vote of a majority of the Piper Board or, with respect to a particular
Piper Fund, a vote of a majority of the outstanding shares of such Fund.
Each Interim Advisory Agreement provides that it will terminate
automatically in the event of its assignment. In addition, each Interim Advisory
Agreement is terminable at any time, without penalty, by the Piper Board or,
with respect to any Piper Fund, by a vote of a majority of such Fund's
outstanding voting securities on 60 days' written notice to Piper Capital, and
by Piper Capital on 60 days' written notice to PFI, PFI--II or PGF, as the case
may be.
As investment adviser to the Piper Funds, Piper Capital receives
research services from broker-dealers that execute portfolio transactions for
the Piper Funds. In selecting brokers to execute portfolio transactions for the
Piper Funds, Piper Capital seeks to obtain the best price and execution of
orders. When consistent with these criteria, business may be placed with
broker-dealers who furnish investment research services to Piper Capital. Such
research services are used by Piper Capital in carrying out its investment
management responsibilities with respect to its client accounts generally, but
not necessarily in connection with the Fund.
INTERIM SUB-ADVISORY AGREEMENTS. Under each Interim Sub-Advisory
Agreement, EFM is responsible for formulating and implementing a continuing
program for the management of the respective Piper Fund's assets and resources
and for directing the investment of such Fund's assets in accordance with
applicable law and the investment objectives, policies and restrictions of the
Fund. Under each Interim Sub-Advisory Agreement, EFM is responsible for
selecting the brokers and dealers that will execute the purchases and sales of
portfolio instruments for the respective Piper Fund. EFM is not required under
the Interim Sub-Advisory Agreements to pay any expenses of PGF or the
respective Piper Funds. The Interim Sub-Advisory Agreements provide that EFM
will not be liable for any error of judgment or mistake of law or for any loss
suffered by Pacific-European Growth Fund or Emerging Markets Growth Fund or
their shareholders in connection with the performance by EFM of its duties
<PAGE>
under an Interim Sub-Advisory Agreement, except a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its duties under such Agreement.
Each Interim Sub-Advisory Agreement provides that, unless sooner
terminated, it will continue in effect for an initial period of two years and
thereafter for successive annual terms, provided that such successive terms are
specifically approved at least annually (a) by a vote of a majority of those
members of the Piper Board who are not parties to the Agreement or "interested
persons" (as defined in the 1940 Act) of any party to the Agreement, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the vote of a majority of the Piper Board or a vote of a majority of the
outstanding shares of the respective Piper Fund.
Each Interim Sub-Advisory Agreement provides that it will terminate
automatically in the event of its assignment. In addition, each Interim
Sub-Advisory Agreement is terminable at any time, without penalty, by the Piper
Board or by a vote of a majority the outstanding voting securities of the
respective Piper Fund on 60 days' written notice to Piper Capital and EFM, by
Piper Capital on 60 days' written notice to EFM, or by EFM, on 60 days' written
notice to Piper Capital.
INFORMATION ABOUT PIPER CAPITAL. In addition to acting as the
investment adviser for the Piper Funds, Piper Capital also serves as investment
adviser to several other mutual funds, to a number of closed-end investment
companies, and to various other concerns, including pension and profit-sharing
funds, corporate funds and individuals. Piper Capital is registered as an
investment adviser under the Investment Advisers Act of 1940 and is an indirect
wholly owned subsidiary of U.S. Bancorp, 601 Second Avenue South, Minneapolis,
Minnesota 55480. U.S. Bancorp is a multi-state bank holding company
headquartered in Minneapolis, Minnesota with a geographic service area spanning
17 states.
Piper Capital serves as the investment adviser to the following
investment companies or series thereof which have investment objectives similar
to those of one or more of the Piper Funds. For the closed-end investment
companies listed below, Piper Capital also serves as the companies'
administrator. Piper Capital is entitled to receive advisory and administration
fees from such investment companies or series thereof as follows:
<PAGE>
<TABLE>
<CAPTION>
Advisory Fee Administration Fee
Net Assets as of (as a percentage (as a percentage
Name of Fund March 31, 1998 of net assets) of net assets)
- ------------ ---------------- ---------------- ------------------
<S> <C> <C> <C>
American Government Income
Fund Inc. ("AGF") $ 94,212,389 *see below 0.20%
American Government Income
Portfolio, Inc. ("AAF") $ 127,793,694 *see below 0.20%
American Opportunity Income
Fund Inc. ("OIF") $ 113,904,601 **see below 0.20%
American Strategic Income
Portfolio Inc. ("ASP") $ 61,192,895 **see below 0.20%
American Strategic Income
Portfolio Inc.--II ("BSP") $ 234,151,160 **see below 0.20%
American Strategic Income
Portfolio Inc.--III ("CSP") $ 299,349,331 **see below 0.20%
American Select Portfolio Inc. $ 154,317,436 0.50% 0.20%
Highlander Income Fund Inc. $ 29,514,909 0.60% 0.20%
The Americas Income Trust Inc. $ 60,118,239 0.50% 0.20%
American Municipal Term $ 139,841,247 0.25% 0.15%
Trust Inc.
American Municipal Term $ 122,336,938 0.25% 0.15%
Trust Inc.--II
American Municipal Term $ 87,133,705 0.25% 0.15%
Trust Inc.--III
Minnesota Municipal Term $ 93,556,967 0.25% 0.15%
Trust Inc.
Minnesota Municipal Term $ 55,358,957 0.25% 0.15%
Trust Inc.--II
American Municipal Income $ 129,140,552 0.35% 0.15%
Portfolio Inc.
Minnesota Municipal Income $ 92,825,478 0.35% 0.15%
Portfolio Inc.
</TABLE>
- ---------------
* With respect to AGF and AAF, Piper Capital receives monthly advisory fees
in an amount equal to the sum of .025% of the average weekly net assets of
each such fund during the month (approximately .30 of 1% on an annual
basis) and 5.25% of the daily gross income (i.e., income other than gains
from the sale of securities or gains received from options and futures
contracts less interest on money borrowed by the fund) accrued by the fund
during the month, but such monthly management fee may not exceed in the
aggregate 1/12 of .60% of such fund's average weekly net assets during the
month (approximately .60% on an annual basis).
** Piper Capital receives a monthly management fee from each of OIF, ASP, BSP
and CSP equal to the sum of .01667% of the average weekly net assets of
such fund during the month (approximately .20 of 1% on an annual basis)
and 4.5% of the daily gross income (i.e., income other than gains from the
sale of securities or gains received from options and futures contracts
less interest on money borrowed by such fund) accrued by such fund during
the month, but such monthly management fee shall not exceed in the
aggregate 1/12 of .725% of the fund's average weekly net assets during the
month (approximately .725% on an annual basis).
Piper Capital has not waived, reduced or otherwise agreed to reduce
its compensation under any contract applicable to the above investment companies
or series thereof.
<PAGE>
As of March 31, 1998, Piper Capital had approximately $12.8 billion
under management. The address of Piper Capital is 222 South Ninth Street,
Minneapolis, Minnesota 55402. Appendix IV(a) identifies the principal executive
officer and the directors of Piper Capital.
No officer or director of PFI, PFI--II or PGF is an officer,
employee, director, general partner or shareholder of Piper Capital or any of
its affiliates. In addition, no director of PFI, PFI--II or PGF has any material
interest in any material transaction in which Piper Capital or its affiliates is
a party.
PAYMENTS TO PIPER CAPITAL AFFILIATES. During the fiscal year ended
September 30, 1997, Piper Jaffray Inc. received fees from the Piper Funds
pursuant to distribution agreements with PFI, PFI--II and PGF, and Piper Jaffray
Inc. and Piper Trust Company received fees from the Piper Funds for providing
certain transfer agent and dividend disbursing agent services for the Funds. The
table below sets forth the amounts of the payments made to such affiliates by
the Piper Funds.
<TABLE>
<CAPTION>
Distribution and Transfer Agent Transfer Agent
Service Fees Fees Paid to Fees Paid to
Piper Fund Paid to Piper Jaffray Piper Jaffray Piper Trust
- ---------- --------------------- ------------- -----------
<S> <C> <C> <C>
Small Company Growth Fund $ 101,905 $ 28,521 $ 840
Emerging Growth Fund $ 917,512 $ 131,958 $ 26,866
Growth Fund $ 635,340 $ 76,219 $ 20,219
Growth and Income Fund $ 399,106 $ 58,500 $ 2,843
Balanced Fund $ 164,585 $ 16,141 $ 11,429
Government Income Fund $ 255,992 $ 38,429 $ 6,162
Intermediate Bond Fund $ 206,012 $ 16,406 $ 2,737
National Tax-Exempt Fund $ 116,562 $ 11,758 $ 0
Minnesota Tax-Exempt Fund $ 305,731 $ 22,113 $ 0
Adjustable Rate Mortgage Securities Fund $ 327,317 $ 60,613 $ 0
Emerging Markets Growth Fund $ 53,654 $ 19,896 $ 0
Pacific-European Growth Fund $ 381,430 $ 83,724 $ 12,727
</TABLE>
In addition, U.S. Bank Trust National Association (formerly First
Trust National Association), which is an affiliate of Piper Capital as a result
of the Holding Company Merger, received $298,930 in fees from Pacific-European
Growth Fund during the fiscal year ended September 30, 1997 for acting as the
Fund's custodian. (Bankers Trust Company was appointed custodian for the
Pacific-European Growth Fund effective December 1, 1997.)
It is expected that affiliates of Piper Capital will continue to
receive transfer agent and dividend disbursing agent fees from the Piper Funds
until the Reorganizations are consummated. Piper Jaffray Inc. has not acted as
the distributor for the Piper Funds since the date of the Holding Company
Merger, although Piper Jaffray Inc. acts as a selected dealer in connection with
the sale of Piper Fund shares and receives compensation in connection therewith.
AFFILIATED BROKER COMMISSIONS. During the fiscal year ended
September 30, 1997, the Piper Small Company Growth Fund paid $4,020 in brokerage
commissions to Piper Jaffray Inc. in connection with purchases and sales of
portfolio securities. None of the other Piper Funds paid brokerage commissions
to Piper Jaffray Inc. during such fiscal year.
INFORMATION ABOUT EFM. EFM, Donaldson House, 97 Haymarket Terrace,
Edinburgh, Scotland EH12, 5HD, is a public limited company that was incorporated
in 1969. An investment adviser registered under the Investment Advisers Act of
1940, EFM currently furnishes investment management services, directly or
through subsidiaries, to 13 closed-end investment companies, 20 open-end
investment companies, 19 U.K. pension plans, 2 charitable organizations and 11
overseas pension plans/mutual fund clients. As of February 28, 1998, EFM managed
approximately $12.5 billion in assets.
<PAGE>
EFM serves as the investment adviser to the following investment
companies or series thereof which have investment objectives similar to those of
Pacific-European Growth Fund or Emerging Markets Growth Fund, and is entitled to
receive advisory fees from such investment companies or series thereof as
follows:
<TABLE>
<CAPTION>
Net Assets (in Advisory Fee
millions) as of (as a percentage
Name of Fund March 31, 1998 of average net assets)
- ------------ --------------- ----------------------
<S> <C> <C>
Lord Abbett Global Equity Fund $ 48 0.57%
M Financial $ 7 0.90%
Caisse De Depot et Placement Du Quebec $ 323 0.21%
First Canadian Emerging Markets Fund $ 111 0.39%
</TABLE>
EFM has not waived, reduced or otherwise agreed to reduce its
compensation under any contract applicable to the above investment companies or
series thereof.
Appendix IV(b) identifies the principal executive officers and the
directors of EFM. No officer or Director of PFI, PFI--II or PGF is an officer,
employee, director, general partner or shareholder of EFM or any of its
affiliates. In addition, no Director of PFI, PFI--II or PGF has any material
interest in any material transaction in which EFM or its affiliates is a party.
SECTION 15(f) OF THE 1940 ACT. Piper Capital and U.S. Bank have
agreed to use their best efforts to meet the requirements for the statutory
exemption offered by Section 15(f) of the 1940 Act to an investment adviser that
receives "any amount or benefit" in connection with the sale of interests that
constitute a "change in control" of the adviser. The statutory exemption under
Section 15(f) is available provided two conditions are satisfied: (1) for a
three-year period following the transaction, each of PFI, PFI--II and PGF or
their successors (which, assuming the Reorganizations are consummated, may
include FAIF) maintains a Board of Directors at least 75% of whose members are
not "interested persons," as that term is defined in the 1940 Act, of the
predecessor or successor investment adviser, and (2) no "unfair burden" is
imposed on PFI, PFI--II or PGF as a result of the transaction. As defined in the
1940 Act, an "unfair burden" includes any arrangement during the two-year period
after the change in control whereby the investment adviser (or predecessor or
successor adviser), or any interested person of such adviser, receives or is
entitled to receive any compensation directly or indirectly, from the investment
company or its security holders (other than fees for bona fide investment
advisory or other services), or from any person in connection with the purchase
or sale of securities or other property to, from, or on behalf of, the
investment company (other than fees for bona fide principal underwriting
services provided to the investment company). Piper Capital and U.S. Bank have
agreed that no such prohibited compensation arrangements will be entered into in
connection with either the Holding Company Merger or the Reorganizations.
APPROVAL OF THE PIPER BOARD. As described above, the Old Advisory
and Sub-Advisory Agreements that were previously in effect for the Piper Funds
automatically terminated on April __, 1998 as a result of the Holding Company
Merger. In anticipation of this termination, and in order to minimize any
potential disruption of the advisory and sub-advisory services provided to the
Piper Funds, on January 21, 1998 the Piper Board authorized the filing with the
SEC of the exemptive application described above in order to permit Piper
Capital to act as investment adviser to the Piper Funds and to permit EFM to act
as the sub-adviser to Pacific-European Growth Fund and Emerging Markets Growth
Fund on and after April __, 1998 but prior to obtaining shareholder approval. In
addition, at a meeting held April 13, 1998, the Piper Board, including all of
the Directors who are not interested persons (as that term is defined in the
1940 Act) of Piper Capital or EFM (the "Non-Interested Directors"), approved
each Interim Advisory Agreement with Piper Capital and the Interim Sub-Advisory
Agreements between Piper Capital and EFM relating to each of Pacific-European
Growth Fund and Emerging Markets Growth Fund, all of which became effective upon
the consummation of the Holding Company Merger on April __ 1998. If approved by
shareholders of the respective Piper Funds
<PAGE>
at the Meeting, these agreements will continue in effect either (i) for an
initial period of two years from the effective date of such agreements and
thereafter for successive one-year terms, subject to certain annual approval
requirements, or (ii) until the consummation of the Reorganization applicable to
such Fund.
In considering whether to approve the Interim Advisory and
Sub-Advisory Agreements and submit them to shareholders for their approval, the
Piper Board considered the following factors: (i) representations of Piper
Capital and EFM that they would provide investment advisory and other services
to the Piper Funds of at least the scope and quality previously provided by them
to the Piper Funds; (ii) the substantially identical terms and conditions
contained in the Interim Advisory and Sub-Advisory Agreements as compared to the
corresponding Old Advisory and Sub-Advisory Agreements; and (iii)
representations by each of Piper Capital and EFM that in the event of any
material change in personnel providing services under an Interim Advisory or
Sub-Advisory Agreement during the Interim Period, the Piper Board would be
consulted for the purpose of assuring themselves that the services provided
would not be diminished in scope or quality. Additionally, the Piper Board
considered the benefits that would be obtained by the Piper Funds in maintaining
continuity of investment advisory services for the Funds during the Interim
Period, and determined that such continuity was advantageous to the Piper Funds
as it would minimize any potential disruption in the advisory services provided
to the Piper Funds resulting from the Holding Company Merger.
Based on the foregoing factors, the Piper Board concluded that
approval of the Interim Advisory and Sub-Advisory Agreements was in the best
interests of the Piper Funds and their shareholders. The Piper Board further
concluded that entering into the Interim Advisory and Sub-Advisory Agreements
would be appropriate and fair considering that (i) the fees to be paid, and the
services to be provided therefor, would be unchanged from the Old Advisory and
Sub-Advisory Agreements; (ii) the fees would be maintained in an
interest-bearing escrow account until payment was approved or disapproved by
shareholders of the Piper Funds; (iii) because of the relatively short period
for the consummation of the Holding Company Merger, there was insufficient time
to seek prior shareholder approval of the Interim Advisory and Sub-Advisory
Agreements; and (iv) the non-payment of investment advisory and sub-advisory
fees during the Interim Period would be an unduly harsh result to Piper Capital
and EFM in view of the services provided by Piper Capital and EFM to the Piper
Funds, and the expenses incurred in connection with such services, under the
Interim Advisory and Sub-Advisory Agreements.
Each Piper Fund will vote separately on a series-by-series basis
with respect to the approval of the Interim Advisory Agreement applicable to
such Fund. Pacific-European Growth Fund and Emerging Markets Growth Fund will
vote separately with respect to the approval of their respective Interim Sub-
Advisory Agreements. THE PIPER BOARD RECOMMENDS THAT THE SHAREHOLDERS OF EACH
PIPER FUND RATIFY AND APPROVE THEIR FUND'S INTERIM ADVISORY AGREEMENT AND THE
RECEIPT OF INVESTMENT ADVISORY FEES BY PIPER CAPITAL FOR THE PERIOD FROM APRIL
__, 1998 FORWARD, AND THAT THE SHAREHOLDERS OF PACIFIC-EUROPEAN GROWTH FUND AND
EMERGING MARKETS GROWTH FUND RATIFY AND APPROVE THEIR FUND'S INTERIM SUB-
ADVISORY AGREEMENT AND THE RECEIPT OF SUB-ADVISORY FEES BY EFM FOR THE PERIOD
FROM APRIL __, 1998 FORWARD.
INFORMATION RELATING TO THE PROPOSED REORGANIZATIONS
The terms and conditions of the Reorganizations are set forth in the
Reorganization Agreements relating to PFI, PFI--II and PGF. The terms of the
Reorganization Agreements are substantially similar (except that, because
PFI--II has only a single series of shares outstanding, its Reorganization
Agreement does not require the filing of an amendment to PFI--II's articles of
incorporation to effect the Reorganization). Significant provisions of the
Reorganization Agreements are summarized below; however, this summary is
qualified in its entirety by reference to the Reorganization Agreements,
<PAGE>
copies of which are attached as Appendix III(a), III(b) and III(c) to this
Combined Proxy Statement/Prospectus.
DESCRIPTION OF THE REORGANIZATION AGREEMENTS. Each Reorganization
Agreement provides that at the Closing the assets and liabilities of the Piper
Funds that are subject to such Agreement will be transferred to the
corresponding FAIF Funds in exchange for full and fractional shares of the FAIF
Funds as shown in the following table.
TABLE I
PIPER FUNDS AND CORRESPONDING FAIF FUNDS
<TABLE>
<CAPTION>
PIPER CORRESPONDING FAIF
FUND/SHARE CLASS FUND/SHARE CLASS
---------------- ----------------
<S> <C>
Small Company Growth Fund Small Cap Growth Fund
Class A Shares Class A Shares
Class B Shares Class A Shares
Emerging Growth Fund Mid Cap Growth Fund
Class A Shares Class A Shares
Class B Shares Class A Shares
Class Y Shares Class Y Shares
Growth Fund Large Cap Growth Fund
Class A Shares Class A Shares
Class B Shares Class A Shares
Growth and Income Fund Large Cap Value Fund
Class A Shares Class A Shares
Class B Shares Class A Shares
Class Y Shares Class Y Shares
Balanced Fund Balanced Fund
Class A Shares Class A Shares
Class B Shares Class A Shares
Minnesota Tax-Exempt Fund Minnesota Tax Free Fund
Class A Shares Class A Shares
Class Y Shares Class Y Shares
National Tax-Exempt Fund Tax Free Fund
Class A Shares Class A Shares
Intermediate Bond Fund Intermediate Term Income Fund
Class A Shares Class A Shares
Class Y Shares Class Y Shares
Government Income Fund Fixed Income Fund
Class A Shares Class A Shares
Adjustable Rate Mortgage Securities Fund Adjustable Rate Mortgage Securities Fund
Class A Shares Class A Shares
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Pacific-European Growth Fund International Fund
Class A Shares Class A Shares
Class B Shares Class A Shares
Class Y Shares Class Y Shares
Emerging Markets Growth Fund Emerging Markets Fund
Class A Shares Class A Shares
Class B Shares Class A Shares
</TABLE>
The shares issued by each FAIF Fund in the Reorganization will have
an aggregate value equal to the aggregate value of the shares of the respective
Piper Fund that are outstanding immediately before the Closing. Immediately
after the Closing, the Piper Funds will distribute the shares of the FAIF Funds
received in the Reorganization to their shareholders in liquidation of the Piper
Funds. Each shareholder owning shares of a particular Piper Fund at the Closing
will receive shares of the designated class of the corresponding FAIF Fund (as
specified in the foregoing table) of equal value, and will receive any unpaid
dividends or distributions that were declared before the Closing on their Piper
Fund shares. FAIF will establish an account for each former shareholder of the
Piper Funds reflecting the appropriate number of FAIF Fund shares distributed to
the shareholder. These accounts will be identical to the accounts currently
maintained by the Piper Funds for each shareholder. Shares of the FAIF Funds are
in uncertificated form.
Upon completion of the Reorganization, all outstanding shares of the
Piper Funds will be redeemed and canceled in exchange for shares of the FAIF
Funds distributed. Thereafter each of PFI (assuming that the three investment
portfolios of PFI that are not parties to the Reorganization have discontinued
operations), PFI--II and PGF will wind up its affairs and be deregistered as an
investment company under the 1940 Act. The stock transfer books of the Piper
Funds will be permanently closed as of the Closing. Exchange or redemption
requests received thereafter will be deemed to be exchange or redemption
requests for shares of the FAIF Funds distributed to the former shareholders of
the Piper Funds.
Each Reorganization is subject to a number of conditions, including
approval of the Reorganization Agreement by the shareholders of each Piper Fund
subject to such Agreement; the receipt of certain legal opinions described in
the respective Reorganization Agreement (which include an opinion of counsel to
FAIF that the FAIF Fund shares issued in the Reorganization will be validly
issued, fully paid and non-assessable); the receipt of certain certificates from
the parties concerning the continuing accuracy of the representations and
warranties in the respective Reorganization Agreement; and the parties'
performance in all material respects of their respective agreements and
undertakings in the respective Reorganization Agreement. For each
Reorganization, assuming satisfaction of the conditions in the Reorganization
Agreement applicable thereto, the Closing will be effective on July 31, 1998, or
such other date as agreed to by the parties.
U.S. Bank has undertaken to bear any Reorganization expenses
incurred by the Piper Funds and FAIF Funds, including the costs associated with
this Combined Proxy Statement/Prospectus and the Meeting, but not including
share registration expenses.
Each Reorganization may be abandoned at any time prior to the
Closing upon the mutual consent of both PFI, PFI--II or PGF, as the case may be,
and FAIF, or by either PFI, PFI--II or PGF, as the case may be, or FAIF if
determined by the Board of Directors of such investment company that proceeding
with the Reorganization is inadvisable. Each Reorganization Agreement provides
further that at any time before or (to the extent permitted by law) after
approval of the agreement by the shareholders of the respective Piper Funds (i)
the parties may, by written agreement authorized by their respective Boards of
Directors and with or without the approval of their shareholders, amend any of
the provisions of the Reorganization Agreement and (ii) either party may waive
any default by the other party or the failure to satisfy any of the conditions
to its obligations (the waiver to be in
<PAGE>
writing and authorized by the Board of Directors of the waiving party with or
without the approval of such party's shareholders).
BOARD CONSIDERATIONS. At a meeting held February 13, 1998, the Piper
Board was advised that U.S. Bank was considering the possibility of
consolidating the Piper Funds with the FAIF Funds following the Holding Company
Merger. Such consolidation was being considered as a part of the larger
consolidation of the mutual fund operations of Piper Capital and U.S. Bank into
a combined mutual fund family. Following that meeting, U.S. Bank provided
information requested by the Board relating to the possible consolidation of the
two fund groups. This information was reviewed in detail by the Piper Board at a
meeting held April 13, 1998, at which the proposal that each Piper Fund be
reorganized into the corresponding FAIF Fund, as set forth in the applicable
Reorganization Agreement, was approved by the Piper Board.
During its deliberations, the Piper Board (with the advice and
assistance of independent counsel) reviewed, among other things: (i) the
potential effect of the Reorganizations on the shareholders of the Piper Funds;
(ii) the investment management capabilities of U.S. Bank; (iii) the sub-advisory
capabilities of Marvin & Palmer Associates, Inc., with respect to the FAIF
International Fund and FAIF Emerging Markets Fund; (iv) the capabilities of the
administrator, distributor and other service providers to the FAIF Funds; (v)
the systems capabilities of U.S. Bank to provide shareholder servicing,
reporting and systems integration with related programs for Piper Funds
shareholders; (vi) the potential synergies of the distribution channels used by
the FAIF Funds and the Piper Funds; (vii) the investment advisory and other fees
paid by the FAIF Funds, and the historical and projected expense ratios of the
FAIF Funds as compared to those of the Piper Funds (both with and without
waivers and expense reimbursements); (viii) the potential economies of scale
that may result from the Reorganization given the fact that each of the Existing
FAIF Funds is larger than its corresponding Piper Fund; (ix) the expected
cost-savings for the Piper Funds as a result of the Reorganizations; (x) the
investment objectives, policies and limitations of the FAIF Funds and their
relative compatibility with those of the Piper Funds as discussed in this
Combined Proxy Statement/Prospectus; (xi) the historical investment performance
records of the Piper Funds and the Existing FAIF Funds; (xii) the terms and
conditions of the Reorganization Agreements, including those provisions that
were intended to avoid dilution of the interests of the Piper Funds
shareholders; (xiii) the sales load structure applicable to the FAIF Funds as
compared to the sales loads applicable to the Piper Funds; (xiv) the greater
number of investment portfolio options that would be available to shareholders
after the Reorganizations; and (xv) the anticipated tax treatment of the
Reorganizations for the respective Piper Funds and their shareholders.
In connection with the foregoing, the Piper Board noted that FAIF
had undertaken to create the five New FAIF Funds that have investment objectives
and policies similar to those of their corresponding Piper Funds.
The Piper Board also noted U.S. Bank's offer to pay the expenses
incurred by the Piper Funds and the First American Funds in connection with the
Reorganizations. In addition, the Piper Board considered U.S. Bank's written
commitment that it would waive fees and reimburse expenses to the extent
necessary so that after the Closing and until September 30, 1998, the total fund
operating expense ratios of the FAIF Funds (excluding interest, taxes, brokerage
commissions, litigation expenses and extraordinary expenses) do not exceed the
pro forma expense ratios set forth in Appendix VI to this Combined Proxy
Statement/Prospectus. These ordinary operating expense ratios are lower than
those currently applicable to the respective Piper Funds, other than the Class Y
shares of Piper Intermediate Bond Fund. U.S. Bank has also committed that, for a
period of two years following the Closing, it will waive fees and reimburse
expenses to the extent necessary so that no FAIF Fund will have total fund
operating expense ratios in excess of those currently applicable to its
corresponding Piper Fund (other than the Class Y shares of Piper Intermediate
Bond Fund), as set forth in Appendix VI. With respect to the Class Y shares of
Piper Intermediate Bond Fund, the Board noted that the expense ratio for such
shares for the most recent fiscal year, taking into account waivers, is seven
basis points lower than the
<PAGE>
expense ratio for Class Y shares of FAIF Intermediate Term Income Fund. The
Board also noted that the FAIF Fund has lower 12b-1 fees and other expenses than
the Piper Fund, and that the higher FAIF Fund expense ratio was due to the
higher advisory fee incurred by that Fund. In considering the potential benefits
to shareholders of Intermediate Bond Fund resulting from the proposed merger,
the Board noted that the assets of Piper Intermediate Bond Fund have declined
significantly in recent years and may continue to decline and considered the
adverse effects that a shrinking asset base is likely to have on expenses and
performance. The Board also considered the FAIF Fund's prospects for asset
growth and, thus, its potential for lower expenses from economies of scale.
The Piper Board also considered the limitations on the use of the
capital loss carryovers of Piper Intermediate Bond Fund, Government Income Fund
and Pacific-European Growth Fund that would result from their Reorganization
(see "Tax Aspects of the Reorganization" below) and the likelihood that the loss
carryovers would be utilized by each applicable Piper Fund.
After consideration of all of the factors described above, the Piper
Board determined that each Reorganization Agreement was in the best interests of
the shareholders of each of the Piper Funds subject thereto, and that the
interests of the shareholders of the respective Piper Funds would not be diluted
as a result of the Reorganizations.
The Board of Directors of FAIF also determined, after considering
the factors discussed above with respect to the Piper Board's deliberations,
that the Reorganizations are in the best interests of the FAIF Funds and that
the interests of existing shareholders of the FAIF Funds will not be diluted as
a result thereof. The Reorganizations will enable the FAIF Funds to acquire
investment securities which are consistent with the objectives of such Funds
without the brokerage costs attendant to the purchase of such securities in the
market. Also, the addition to the FAIF Funds' assets should result in some cost
savings to the extent that the fixed expenses of the FAIF Funds can be spread
over a larger asset base.
CAPITALIZATION. Seven of the Piper Funds will be reorganized into
the seven Existing FAIF Funds, and five of the Piper Funds will be reorganized
into five Funds that are being created by FAIF and that will have nominal assets
and liabilities at the Closing. The following table sets forth, as of March 31,
1998, (i) the capitalization of each of the seven Piper Funds that will be
reorganized into Existing FAIF Funds; (ii) the capitalization of each of the
corresponding Existing FAIF Funds involved; and (iii) the pro forma
capitalization of each of the Existing FAIF Funds as adjusted to give effect to
the Reorganizations of the foregoing Portfolios. The capitalization of each
Piper Fund and Existing FAIF Fund is likely to be different at the Closing as a
result of daily share purchase and redemption activity in the Piper Funds and
the FAIF Funds as well as the effects of the Piper Funds' and FAIF Funds' other
ongoing operations. Because the other five Piper Funds are to be reorganized
into the New FAIF Funds, which will have nominal assets and liabilities before
the Reorganization, information on the capitalization of these other Piper Funds
and FAIF Funds is not presented.
<PAGE>
TABLE II
PRO FORMA CAPITALIZATION (AS OF MARCH 31, 1998)
PIPER SMALL COMPANY GROWTH FUND/FAIF SMALL CAP GROWTH FUND
<TABLE>
<CAPTION>
Piper Fund FAIF Fund Pro Forma
---------- --------- ---------
<S> <C> <C> <C>
Class A Shares
Net assets .............................. $ 36,744,767 $ 6,601,223 $ 44,360,910
Net asset value per share ............... $ 9.94 $ 16.95 $ 16.95
Shares outstanding ...................... 3,696,840 389,416 2,617,126
Class B Shares
Net assets .............................. $ 1,014,920 $ 1,600,835 $ 1,600,835
Net asset value per share ............... $ 9.88 $ 16.45 $ 16.45
Shares outstanding ...................... 102,731 97,290 97,290
Class Y Shares
Net assets .............................. $ -- $169,042,943 $169,042,943
Net asset value per share ............... $ -- $ 17.05 $ 17.05
Shares outstanding ...................... -- 9,912,046 9,912,046
Total Net Assets ........................... $ 37,759,687 $177,245,001 $215,004,688
</TABLE>
PIPER GROWTH FUND/FAIF LARGE CAP GROWTH FUND
<TABLE>
<CAPTION>
Piper Fund FAIF Fund Pro Forma
---------- --------- ---------
<S> <C> <C> <C>
Class A Shares
Net assets .............................. $193,858,894 $ 19,463,569 $213,651,793
Net asset value per share ............... $ 12.13 $ 18.20 $ 18.20
Shares outstanding ...................... 15,975,325 1,069,300 11,738,983
Class B Shares
Net assets .............................. $ 329,330 $ 11,279,942 $ 11,279,942
Net asset value per share ............... $ 12.05 $ 18.01 $ 18.01
Shares outstanding ...................... 27,337 626,148 626,148
Class Y Shares
Net assets .............................. $ -- $749,912,360 $749,912,360
Net asset value per share ............... $ -- $ 18.24 $ 18.24
Shares outstanding ...................... -- 41,115,054 41,115,054
Total Net Assets ........................... $194,188,224 $780,655,871 $974,844,095
</TABLE>
<PAGE>
PIPER GROWTH AND INCOME FUND/FAIF LARGE CAP VALUE FUND
<TABLE>
<CAPTION>
Piper Fund FAIF Fund Pro Forma
---------- --------- ---------
<S> <C> <C> <C>
Class A Shares
Net assets ........................ $ 134,618,293 $ 77,810,603 $ 213,855,962
Net asset value per share ......... $ 18.18 $ 26.81 $ 26.81
Shares outstanding ................ 7,406,019 2,902,252 7,976,678
Class B Shares
Net assets ........................ $ 1,427,066 $ 67,021,998 $ 67,021,998
Net asset value per share ......... $ 18.11 $ 26.60 $ 26.60
Shares outstanding ................ 78,817 2,519,324 2,519,324
Class Y Shares
Net assets ........................ $ 16,466,505 $1,524,399,369 $1,540,865,874
Net asset value per share ......... $ 18.16 $ 26.85 $ 26.85
Shares outstanding ................ 906,889 56,781,487 57,394,765
Total Net Assets ..................... $ 152,511,864 $1,669,231,970 $1,821,743,834
</TABLE>
PIPER BALANCED FUND/FAIF BALANCED FUND
<TABLE>
<CAPTION>
Piper Fund FAIF Fund Pro Forma
---------- --------- ---------
<S> <C> <C> <C>
Class A Shares
Net assets ........................ $ 50,081,493 $ 44,723,921 $ 94,916,738
Net asset value per share ......... $ 15.44 $ 15.06 $ 15.06
Shares outstanding ................ 3,243,143 2,968,774 6,301,631
Class B Shares
Net assets ........................ $ 111,324 $ 61,202,355 $ 61,202,355
Net asset value per share ......... $ 15.39 $ 15.01 $ 15.01
Shares outstanding ................ 7,233 4,077,608 4,077,608
Class Y Shares
Net assets ........................ $ -- $ 530,612,383 $ 530,612,383
Net asset value per share ......... $ -- $ 15.10 $ 15.10
Shares outstanding ................ -- 35,151,382 35,151,382
Total Net Assets ..................... $ 50,192,817 $ 636,538,659 $ 686,731,476
</TABLE>
<PAGE>
PIPER INTERMEDIATE BOND FUND/FAIF INTERMEDIATE TERM INCOME FUND
<TABLE>
<CAPTION>
Piper Fund FAIF Fund Pro Forma
---------- --------- ---------
<S> <C> <C> <C>
Class A Shares
Net assets ..................................... $ 50,061,076 $ 4,266,777 $ 54,327,853
Net asset value per share ...................... $ 7.71 $ 10.06 $ 10.06
Shares outstanding ............................. 6,491,084 424,105 5,400,355
Class B Shares
Net assets ..................................... $ -- $ -- $ --
Net asset value per share ...................... $ -- $ -- $ --
Shares outstanding ............................. -- -- --
Class Y Shares
Net assets ..................................... $ 9,122,810 $ 442,526,051 $ 451,648,861
Net asset value per share ...................... $ 7.72 $ 10.04 $ 10.04
Shares outstanding ............................. 1,182,247 44,084,643 $ 44,993,290
Total Net Assets .................................. $ 59,183,886 $ 446,792,828 $ 505,976,714
</TABLE>
PIPER GOVERNMENT INCOME FUND/FAIF FIXED INCOME FUND
<TABLE>
<CAPTION>
Piper Fund FAIF Fund Pro Forma
---------- --------- ---------
<S> <C> <C> <C>
Class A Shares
Net assets ..................................... $ 62,601,686 $ 11,443,978 $ 74,045,664
Net asset value per share ...................... $ 9.27 $ 11.12 $ 11.12
Shares outstanding ............................. 6,752,501 1,028,881 6,658,529
Class B Shares
Net assets ..................................... $ -- $ 16,078,958 $ 16,078,958
Net asset value per share ...................... $ -- $ 11.07 $ 11.07
Shares outstanding ............................. -- 1,453,105 1,453,105
Class Y Shares
Net assets ..................................... $ -- $1,132,153,644 $1,132,153,644
Net asset value per share ...................... $ -- $ 11.12 $ 11.12
Shares outstanding ............................. -- 101,802,742 101,802,742
Total Net Assets .................................. $ 62,601,686 $1,159,676,581 $1,222,278,267
</TABLE>
<PAGE>
PIPER PACIFIC-EUROPEAN GROWTH FUND/FAIF INTERNATIONAL FUND
<TABLE>
<CAPTION>
Piper Fund FAIF Fund Pro Forma
---------- --------- ---------
<S> <C> <C> <C>
Class A Shares
Net assets ..................................... $ 56,858,230 $ 9,109,027 $ 66,048,102
Net asset value per share....................... $ 13.46 $ 13.55 $ 13.55
Shares outstanding ............................. 4,225,204 672,187 4,874,333
Class B Shares
Net assets ..................................... $ 80,845 $ 2,616,421 $ 2,616,421
Net asset value per share....................... $ 13.38 $ 13.31 $ 13.31
Shares outstanding ............................. 6,042 196,615 196,615
Class Y Shares
Net assets ..................................... $ 2,678,924 $336,171,620 $338,850,544
Net asset value per share....................... $ 13.47 $ 13.54 $ 13.54
Shares outstanding ............................. 198,892 24,819,781 25,017,633
Total Net Assets .................................. $ 59,617,999 $347,897,068 $407,515,067
</TABLE>
FEDERAL INCOME TAX TREATMENT. Consummation of the Reorganizations
with respect to each Piper Fund is subject to the condition that the Piper Funds
and the FAIF Funds receive an opinion from Dorsey & Whitney LLP, counsel to
FAIF, to the effect that, for federal income tax purposes: (i) the transfer of
all of the assets and liabilities of each Piper Fund to its corresponding FAIF
Fund in exchange for shares of the FAIF Fund and the distribution of these FAIF
shares to shareholders of the Piper Fund, as described in the Reorganization
Agreements, will constitute a reorganization within the meaning of Section
368(a)(1)(C), Section 368(a)(1)(D) or Section 368(a)(1)(F) of the Internal
Revenue Code of 1986, as amended (the "Code"); (ii) no income, gain or loss will
be recognized by the Piper Funds as a result of these transactions; (iii) no
income, gain or loss will be recognized by the FAIF Funds as a result of these
transactions; (iv) no income, gain or loss will be recognized by the
shareholders of each Piper Fund on the distribution to them of shares of the
corresponding FAIF Fund in exchange for their shares of the Piper Fund (but
shareholders of a Piper Fund subject to taxation will recognize income upon
receipt of any net investment income or net capital gains of such Piper Fund
which are distributed by such Piper Fund prior to the Closing); (v) the tax
basis of FAIF Fund shares received by a shareholder of a Piper Fund will be the
same as the tax basis of the shareholder's Piper Fund shares immediately before
the Reorganization; (vi) the tax basis to each FAIF Fund of the assets of the
corresponding Piper Fund received pursuant to the Reorganization will be the
same as the tax basis of the assets in the hands of the Piper Fund immediately
before the Reorganization; (vii) a shareholder's holding period for FAIF Fund
shares will be determined by including the period for which the shareholder held
the Piper Fund shares exchanged therefor, provided the shareholder held the
Piper Fund shares as a capital asset; (viii) each FAIF Fund's holding period
with respect to the assets received in the applicable Reorganization will
include the period for which the assets were held by the corresponding Piper
Fund, provided that each corresponding Piper Fund held such Fund assets as
capital assets; and (ix) each FAIF Fund will succeed to and take into account
the earnings and profits, or deficit in earnings and profits, of the
corresponding Piper Fund immediately before the applicable Reorganization.
As of September 30, 1997, Intermediate Bond Fund had capital loss
carryovers of $276,058,273, due to expire between 2003 and 2006, Government
Income Fund had capital loss carryovers of $15,932,943, due to expire between
2002 and 2004, and Pacific-European Growth Fund had capital loss carryovers of
$2,338,979, due to expire between 2003 and 2006. The Piper Board noted that, as
a result of the Reorganizations, each Fund's ability to use these capital loss
carryovers to offset its net capital gains will be limited. Generally, the
amount of a Piper Fund's capital loss carryovers that the corresponding FAIF
Fund will be able to use to offset net capital gains in any future year will be
limited to the value of the outstanding shares of the Piper Fund at the time of
its Reorganization multiplied by
<PAGE>
the federal long-term tax-exempt interest rate in effect at the time of the
reorganization. Based on the value of each Piper Fund's outstanding shares as of
March 31, 1998, and the long-term tax-exempt interest rate in effect for March
1998, the maximum amount of each Piper Fund's capital loss carryovers that the
corresponding FAIF Fund will be able to use in any post-Reorganization taxable
years is $3,018,378 for Intermediate Bond Fund, $3,192,686 for Government Income
Fund and $3,040,518 for Pacific-European Growth Fund.
In addition, FAIF Small Cap Growth Fund, Large Cap Growth Fund,
Large Cap Value Fund and Balanced Fund had undistributed realized net capital
gains as of March 31, 1998 equal to 3.0%, 3.1%, 8.4% and 5.5%, respectively, of
each such Fund's net assets. Prior to the consummation of the Reorganizations,
each corresponding Piper Fund will have distributed to its shareholders all of
its net capital gain. As a result, shareholders of the corresponding Piper
Funds, when they receive FAIF Small Cap Growth Fund, Large Cap Growth Fund,
Large Cap Value Fund and Balanced Fund shares in the Reorganization, will be in
effect "buying a dividend," since such capital gains (to the extent they are not
offset by future capital losses) will be distributed to shareholders in December
1998 as a taxable distribution.
The FAIF Funds and the Piper Funds have not sought, and do not
intend to seek, a ruling from the Internal Revenue Service ("IRS") concerning
the tax treatment of the Reorganizations. The opinion of counsel is not binding
on the IRS and does not preclude the IRS from adopting a contrary position.
Shareholders may wish to consult their own tax advisors concerning the potential
tax consequences of the Reorganizations to them, including state and local
income tax consequences.
COMPARISON OF FAIF FUNDS AND PIPER FUNDS
INVESTMENT OBJECTIVES AND POLICIES. The investment objectives,
policies and restrictions of the FAIF Funds are, in general, similar to those of
the Piper Funds. There are, however, certain differences, as noted above under
"Summary--Overview of the FAIF Funds and the Piper Funds." Other differences in
the investment objectives, and in certain significant investment policies and
restrictions, are also discussed in Appendix V to this Combined Proxy
Statement/Prospectus.
Additional information with respect to the investment policies and
restrictions of the seven Existing FAIF Funds and of the Piper Funds is included
in their respective Prospectuses, which have been incorporated herein by
reference. Additional information with respect to the investment policies and
restrictions of the New FAIF Funds is included in the preliminary prospectuses
for the Class A and Class B shares and for the Class Y shares of such Funds,
attached as Appendix IX and Appendix X, respectively, to this Combined Proxy
Statement/Prospectus.
INVESTMENT ADVISORY FEES AND TOTAL EXPENSE RATIOS. Currently, U.S.
Bank serves as the investment adviser for each of the Existing FAIF Funds, and,
after the Reorganizations, U.S. Bank will serve as the investment adviser to
each of the New FAIF Funds, at the fee rates stated in Table III below. Marvin &
Palmer Associates, Inc. ("Marvin & Palmer") currently serves as sub-adviser to
the FAIF International Fund and will serve as sub-adviser to the FAIF Emerging
Markets Fund after the Reorganizations.
Table III shows (i) the advisory fees in dollars paid by the Piper
Funds for their latest fiscal year (no advisory fees were waived by Piper
Capital during such fiscal year), (ii) the effective rate of advisory fees paid
by the Piper Funds for their latest fiscal year; (iii) the current contractual
advisory fee rates payable with respect to the Piper Funds, (iv) the
post-Reorganization contractual advisory fees payable with respect to the
corresponding FAIF Funds, (v) the current total expense ratios of the Piper
Funds after waivers and (vi) the pro forma total expense ratio of the
corresponding FAIF Funds based upon the fee arrangements, including waivers and
reimbursements, that will be in place upon consummation of the Reorganization.
Footnotes to the table also include information on sub-advisory fees paid during
the Piper Funds' last fiscal year. All fee rates are annualized, and are
computed daily
<PAGE>
and payable monthly based on a Fund's average daily net assets. Table III shows
that while in several cases the contractual investment advisory fee rates of the
FAIF Funds are higher than the contractual rates for the corresponding Piper
Funds, in all cases except with respect to the Class Y shares of Piper
Intermediate Bond Fund, the total expense ratios of the FAIF Funds, after
waivers, are expected to be less than the total expense ratios of the
corresponding Piper Funds. In this regard, U.S. Bank has agreed that for the
period commencing on the Closing and continuing until September 30, 1998, U.S.
Bank will waive fees and reimburse expenses to the FAIF Funds to the extent
necessary to maintain the total expense ratios at the pro forma expense levels
provided in Table III. In addition, U.S. Bank has agreed that, for a two-year
period following the Closing, it will waive fees and reimburse expenses to the
extent necessary so that no FAIF Fund will have ordinary expense ratios in
excess of those currently applicable to its corresponding Piper Fund (taking
into account current Piper Fund fee waivers and expense reimbursements) as set
forth in Appendix VI, except with respect to the Class Y shares of Piper
Intermediate Bond Fund. Absent such waivers and reimbursements, FAIF
Intermediate Term Income Fund (Class A and Y), FAIF International Fund (Class
C), FAIF Adjustable Rate Mortgage Securities Fund (Class A), FAIF Emerging
Markets Fund (Class A and Y) and FAIF Minnesota Tax Free Fund (Class A and Y)
have, or in the case of the new FAIF Funds, will have higher ordinary expense
ratios than the corresponding Piper Fund. Detailed pro forma expense information
for each proposed reorganization is included in Appendix VI to this Combined
Proxy Statement/Prospectus.
TABLE III
INVESTMENT ADVISORY AND TOTAL EXPENSE INFORMATION(1)
<TABLE>
<CAPTION>
Post- Pro Forma
Effective Reorganization Total
Rate of Contractual Fund Operating
Advisory Fees Advisory Fees Current Advisory Fee Current Total Expenses of the
For Fiscal for Fiscal Contractual Rate of the Fund Operating Corresponding
Name of Year Year Ended Advisory Corresponding Expenses FAIF Fund
Piper Fund Ended 9/30/97 9/30/97(2) Fee Rate FAIF Fund (after waivers) (after waivers)(9)
- ---------- ------------- ---------- -------- --------- --------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Small Company $ 223,793 0.75% 0.75%(3) 0.70% 1.34% 1.15%
Growth Fund (Class A) (Class A)
2.00% 1.15%
(Class B) (Class A)
Emerging Growth $ 2,034,041 0.69% 0.75%(3) 0.70% 1.23% 1.12%
Fund (Class A) (Class A)
1.85% 1.12%
(Class B) (Class A)
0.89% 0.87%
(Class Y) (Class Y)
Growth Fund $ 1,314,478 0.70% 0.75%(3) 0.70% 1.26% 1.05%
(Class A) (Class A)
1.90% 1.05%
(Class B) (Class A)
Growth and $ 901,743 0.73% 0.75%(3) 0.70% 1.34% 1.05%
Income Fund (Class A) (Class A)
2.00% 1.05%
(Class B) (Class A)
1.00% 0.80%
(Class Y) (Class Y)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Post- Pro Forma
Effective Reorganization Total
Rate of Contractual Fund Operating
Advisory Fees Advisory Fees Current Advisory Fee Current Total Expenses of the
For Fiscal for Fiscal Contractual Rate of the Fund Operating Corresponding
Name of Year Year Ended Advisory Corresponding Expenses FAIF Fund
Piper Fund Ended 9/30/97 9/30/97(2) Fee Rate FAIF Fund (after waivers) (after waivers)(9)
- ---------- ------------- ---------- -------- --------- --------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund $ 362,819 0.75% 0.75%(3) 0.70% 1.34% 1.05%
(Class A) (Class A)
2.00% 1.05%
(Class B) (Class A)
MN Tax-Exempt $ 645,935 0.50% 0.50%(4) 0.70% 0.95% 0.95%
Fund (Class A) (Class A)
0.71% 0.70%
(Class Y) (Class Y)
Natl Tax-Exempt $ 243,669 0.50% 0.50%(4) 0.70% 1.11% 1.10%
Fund (Class A) (Class A)
Intermediate Bond $ 303,718 0.30% 0.30%(3) 0.70% 0.85% 0.70%
Fund (Class A) (Class A)
0.63% 0.70%
(Class Y) (Class Y)
Government $ 377,386 0.50% 0.50%(4) 0.70% 1.19% 0.95%
Income Fund (Class A) (Class A)
Pacific-European $ 936,677 0.75% 1.00%(3)(5) 1.25% 1.72% 1.60%
Growth Fund(6) (Class A) (Class A)
2.44% 1.60%
(Class B) (Class A)
1.39% 1.35%
(Class Y) (Class Y)
Emerging Markets $ 160,956 1.00% 1.00% 1.25% 2.00% 1.70%
Growth Fund(7) (Class A) (Class A)
2.64% 1.70%
(Class B) (Class A)
Adjustable Rate $ 766,709 0.35% 0.35%(8) 0.70% 0.81% 0.80%
Mortgage Securities (Class A) (Class A)
Fund
</TABLE>
- --------------------------
(1) Fee Rates and Expense Ratios are based on a percentage of average daily net
assets.
(2) Certain Piper Funds have breakpoints in their advisory fee schedules which
result in an effective rate which is lower than the listed contractual
advisory fee rate.
(3) On average daily net assets up to $100 million. Fees are scaled downward as
assets increase in size.
(4) On average daily net assets up to $250 million. Fees are scaled downward as
assets increase in size.
(5) This Basic Fee is subject to a performance adjustment whereby the Basic Fee
may be increased or decreased by up to a maximum, on an annual basis, of
.25% of average daily net assets.
(6) For acting as sub-adviser to Pacific-European Growth Fund, EFM is entitled
to receive 65% of Piper Capital's Basic Fee plus or minus 90% of the
performance fee adjustment. During the fiscal year ended September 30,
1997, EFM received $393,689 in sub-advisory fees from Piper Capital. The
contractual sub-advisory fee rate for the FAIF International Fund is 0.75%
of the first $100 million of the Fund's average daily net assets.
<PAGE>
(7) For acting as sub-adviser to Emerging Markets Growth Fund, EFM is paid a
fee by Piper Capital equal to 0.50% of the Fund's average daily net assets.
The contractual sub-advisory fee rate for the FAIF Emerging Markets Fund
will be 0.85% of the first $100 million of the Fund's average daily net
assets.
(8) On average daily net assets up to $500 million. The fee is 0.30% on average
daily net assets in excess of $500 million.
(9) Absent fee waivers, the Pro-Forma Total Fund Operating Expenses of each
corresponding FAIF Fund would be as follows: 1.16% for Class A of FAIF
Small Cap Growth Fund, 1.13% for Class A of FAIF Balanced Fund, 1.12% and
0.87% for Class A and Class Y, respectively, of FAIF Mid Cap Growth Fund,
1.14% for Class A of FAIF Large Cap Growth Fund, 1.14% and 0.89% for Class
A and Class Y, respectively, of FAIF Large Cap Value Fund, 1.13% and 0.88%
for Class A and Class Y, respectively, of FAIF Minnesota Tax Free Fund,
1.17% for Class A of FAIF Tax Free Fund, 1.17% and 0.92% for Class A and
Class Y, respectively, of FAIF Intermediate Term Income Fund, 1.13% for
Class A of FAIF Fixed Income Fund, 1.20% for Class A of FAIF Adjustable
Rate Mortgage Securities Fund, 1.77% and 1.52% for Class A and Class Y,
respectively, of FAIF International Fund, and 2.25% for Class A of FAIF
Emerging Markets Fund.
FAIF FUNDS' INVESTMENT ADVISORY AGREEMENT. After the Closing, U.S.
Bank will serve as the investment adviser for each investment portfolio of FAIF,
including the New FAIF Funds, pursuant to the FAIF Funds' Investment Advisory
Agreement. As set forth in Table III, the contractual fee rates of the FAIF
Funds differ from those of the corresponding Piper Funds. In addition, there are
certain differences between the Interim Advisory Agreements and the FAIF Funds'
Investment Advisory Agreement. The principal differences between these
Agreements are summarized and compared in Appendix VII to this Combined Proxy
Statement/Prospectus. The portfolio managers of each of FAIF Funds after the
Reorganization are listed in Appendix XI to this Combined Proxy
Statement/Prospectus, although the list of portfolio managers is subject to
change.
FAIF FUNDS' SUB-ADVISORY AGREEMENT. After the Closing, Marvin &
Palmer will serve as the sub-adviser to the FAIF International Fund and the
FAIF Emerging Markets Growth Fund pursuant to a sub-advisory agreement between
U.S. Bank and Marvin & Palmer. The principal differences between this sub-
advisory agreement and the Interim Sub-Advisory Agreements are summarized and
compared in Appendix VII to this Combined Proxy Statement/Prospectus.
INFORMATION ABOUT U.S. BANK, MARVIN & PALMER AND OTHER SERVICE
PROVIDERS. U.S. Bank acts as the investment adviser to the FAIF Funds through
its First American Asset Management group. U.S. Bank has acted as an investment
adviser to FAIF since its inception in 1987 and has acted as investment adviser
to First American Funds, Inc. since 1982 and to First American Strategy Funds,
Inc. since 1996. As of December 31, 1997, U.S. Bank managed more than $55
billion in assets, including approximately $20.5 billion in assets of the First
American Fund family. U.S. Bank is a national banking association organized
under the laws of the United States and, as such, is exempt from registration as
an investment adviser under the Investment Advisers Act of 1940.
The Glass-Steagall Act generally prohibits banks from engaging in
the business of underwriting, selling or distributing securities and from being
affiliated with companies principally engaged in those activities. In addition,
administrative and judicial interpretations of the Glass-Steagall Act prohibit
bank holding companies and their bank and nonbank subsidiaries from organizing,
sponsoring or controlling registered open-end investment companies that are
continuously engaged in distributing their shares. Bank holding companies and
their bank and nonbank subsidiaries may serve, however, as investment advisers
to registered investment companies, subject to a number of terms and conditions.
Although the scope of the prohibitions and limitations imposed by
the Glass-Steagall Act has not been fully defined by the courts or the
appropriate regulatory agencies, FAIF has received an opinion from its counsel
that U.S. Bank and its affiliates are not prohibited from performing the
services contemplated by the FAIF Funds' Investment Advisory Agreement and the
prospectuses for the FAIF Funds. In the event of changes in federal or state
statutes or regulations or judicial and administrative interpretations or
decisions pertaining to permissible activities of bank holding companies and
their bank and nonbank subsidiaries, U.S. Bank and its affiliates might be
prohibited
<PAGE>
from continuing these arrangements. In that event, it is expected
that the Board of Directors of FAIF would make other arrangements and that
shareholders would not suffer adverse financial consequences.
Marvin & Palmer, 1201 North Market Street, Suite 2300, Wilmington,
Delaware 19801, is a privately held company founded in 1986 by David F. Marvin
and Stanley Palmer. The stock of Marvin & Palmer is owned by Mr. Marvin, Mr.
Palmer and 24 other holders. 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
approximately $5.6 billion in investments for 53 institutional investors.
The Piper Funds engaged SEI Investments Distribution Co. ("SEI") to
act as the principal distributor of the Funds' shares, effective as of the date
of the Holding Company Merger. SEI also acts as the principal distributor of the
shares of the FAIF Funds. The Piper Funds and the FAIF Funds also employ the
same independent auditors. The other service providers for the Piper Funds and
the FAIF Funds differ, as set forth below.
SERVICE PROVIDERS
FOR PIPER FUNDS AND FAIF FUNDS
<TABLE>
<CAPTION>
PIPER FUNDS FAIF FUNDS
----------- ----------
<S> <C> <C>
Adviser Piper Capital U.S. Bank
Sub-Adviser EFM (for Emerging Markets Marvin & Palmer (for International
Growth Fund and Pacific-European Fund and Emerging Markets Fund)
Growth Fund)
Distributor SEI Investments Distribution Co. SEI Investments Distribution Co.
Administrator None SEI Investments Management Corporation
Accounting Agent Investors Fiduciary Trust Company None
Transfer Agent Investors Fiduciary Trust Company DST Systems, Inc.
Piper Jaffray Inc.
Piper Trust Company
Custodian Investors Fiduciary Trust U.S. Bank Trust National Association
Company (PFI and PFI--II)
Bankers Trust Company (PGF)
Independent Auditors KPMG Peat Marwick LLP KPMG Peat Marwick LLP
</TABLE>
Investors Fiduciary Trust Company's custodian and accounting agent
offices are located at 801 Pennsylvania Avenue, Kansas City, Missouri 64105. DST
Systems, Inc. is located at 130 West Ninth Street, Kansas City, Missouri 64105.
Bankers Trust Company is located at 130 Liberty Street, New York, New York
10006. The address of Piper Jaffray Inc. and Piper Trust Company is that of
Piper Capital and the Piper Funds. SEI Investments Distribution Co. and SEI
Investments Management Corporation, wholly owned subsidiaries of SEI Investments
Company, are located at Oaks, Pennsylvania 19456.
SHARE STRUCTURE. Each of PFI, PFI--II, PGF and FAIF is registered as
an open-end management investment company under the 1940 Act. Each offers its
shares in a number of separate series or "funds" (although PFI--II currently has
only one series outstanding).
<PAGE>
PFI, PFI--II and PGF are organized as corporations under the laws of
the State of Minnesota and are subject to the provisions of their Articles of
Incorporation and Bylaws, as amended. PFI, PFI--II and PGF are authorized to
issue 10 trillion, 100 billion and one billion shares of common stock,
respectively, in each case with a par value of $.01 per share. Such authorized
shares of common stock may be divided into separate funds and separate classes.
FAIF is organized as a corporation under the laws of the State of Maryland and
is subject to the provisions of its Amended and Restated Articles of
Incorporation, as amended and supplemented, and Bylaws. FAIF is authorized to
issue 120 billion shares, par value $.0001 per share, which may be divided into
separate funds and separate classes of shares. The attributes of a share of
common stock in a FAIF Fund are comparable to those of a share of common stock
in a Piper Fund. Each share of a Piper Fund or FAIF Fund is fully paid,
nonassessable and transferable. Shares may be issued as either full or
fractional shares. Fractional shares have pro rata the same rights and
privileges as full shares. Shares of the Piper Funds and the FAIF Funds have no
preemptive or conversion rights. Each share of a Piper Fund or FAIF Fund has one
vote. On some issues, such as the election of directors, all shares of PFI,
PFI--II, PGF or FAIF vote together as one series. For each of PFI, PFI--II, PGF
and FAIF, the shares do not have cumulative voting rights. Consequently, the
holders of more than 50% of the shares voting for the election of directors are
able to elect all of the directors if they choose to do so. On issues affecting
only a particular Piper Fund or FAIF Fund, or a particular class of shares of a
Piper Fund or FAIF Fund (or where a particular Fund or class has different
interests than the other Funds or classes voting on the same proposal), the
shares of that Fund or class will vote as a separate series. Examples of such
issues would be proposals to alter a fundamental investment restriction
pertaining to a Fund or to approve, disapprove or alter a distribution plan
pertaining to a class of shares.
The FAIF Funds and the Piper Funds offer separate share classes in
order to allocate certain expenses, such as distribution payments, shareholder
servicing fees and other "class" expenses, to the different shareholder groups
for which the fees and expenses are incurred. In this regard, FAIF's Board of
Directors has authorized the issuance of three classes of shares in each of the
FAIF Funds (Class A, Class B and Class Y shares). No Piper Fund shareholders
will receive Class B shares in the Reorganization. Each share of a class of an
FAIF Fund represents an equal proportionate interest in the Fund with other
shares of the same class and is entitled to cash dividends and distributions
earned on such shares as are declared in the discretion of the FAIF Board of
Directors.
Shares of each class of an FAIF Fund bear a pro rata portion of all
operating expenses paid by the Fund except for distribution payments and
shareholder servicing fees paid on Class A or Class B shares and other "class"
expenses that are allocated to a particular share class. Class Y shares do not
have a distribution or shareholder servicing plan.
Additional information concerning the attributes of the shares
issued by the Piper Funds and the Existing FAIF Funds is included in their
respective Prospectuses, as supplemented to the date hereof, which are
incorporated herein by reference. Additional information concerning the
attributes of the shares issued by the New FAIF Funds is included in the
preliminary prospectuses of the Class A and Class B shares and of the Class Y
shares attached as Appendix IX and Appendix X, respectively, to this Combined
Proxy Statement/Prospectus. Shareholders may obtain copies of FAIF's Amended and
Restated Articles of Incorporation and Bylaws from FAIF upon written request at
its principal office and copies of the Articles of Incorporation and Bylaws of
each of PFI, PFI--II and PGF from the Piper Funds at their principal office.
DISTRIBUTION PLANS. FAIF, PFI, PFI--II and PGF have adopted
distribution plans pursuant to Rule 12b-1 under the 1940 Act. The FAIF Funds
maintain separate Distribution Plans for their Class A and Class B shares. No
Class B shares are being issued in the Reorganizations. There is no Distribution
Plan for the Class Y shares of the FAIF Funds. Pursuant to the Distribution Plan
adopted for the Class A shares, each FAIF Fund pays the distributor of the
Fund's shares a shareholder servicing fee monthly at an annual rate of 0.25% of
the average daily net assets of the Fund's Class A shares. The shareholder
servicing fee is intended to compensate the distributor for ongoing servicing
and/or maintenance of shareholder accounts and may be used by the distributor to
provide compensation to institutions through which shareholders hold their
shares for ongoing servicing and/or
<PAGE>
maintenance of shareholder accounts. The shareholder servicing fee may be used
to provide compensation for shareholder servicing provided by "one-stop" mutual
fund networks through which the FAIF Funds are made available.
PFI, PFI--II and PGF have adopted Distribution Plans which cover
their Class A and Class B shares. The Class Y shares of the Piper Funds are not
subject to a Distribution Plan. Pursuant to their Distribution Plans, each Piper
Fund is authorized to pay the distributor of the Fund's shares a fee for
providing distribution-related services and for servicing shareholder accounts,
except that for Pacific-European Growth Fund the distributor is reimbursed for
its actual expenses incurred in providing distribution-related services and
servicing shareholder accounts. The following Piper Funds are authorized to pay
quarterly fees under the Distribution Plans (reimbursements in the case of the
Distribution Plan for Pacific-European Growth Fund) at annual rates of up to
0.50% of the average daily net assets of Fund's Class A shares and 1.00% of the
average daily net assets of the Fund's Class B shares: Small Company Growth
Fund, Emerging Growth Fund, Growth Fund, Emerging Markets Growth Fund,
Pacific-European Growth Fund, Growth and Income Fund, Balanced Fund and
Government Income Fund. For each such Fund the distributor is currently
voluntarily limiting the fees or reimbursements it receives from Class A shares
to 0.34% of average daily net assets (0.33% for Emerging Markets Growth Fund and
Pacific-European Growth Fund). For National Tax-Exempt Fund, Minnesota
Tax-Exempt Fund and Intermediate Bond Fund, the Funds are authorized to pay
quarterly fees to the distributor at annual rates equal to 0.30% of the Fund's
Class A shares. The distributor is currently voluntarily limiting these fees to
0.24% of the Class A shares' average daily net assets (0.22% for Intermediate
Bond Fund). Such Funds do not have Class B shares. The Adjustable Rate Mortgage
Securities Fund pays a fee under its Distribution Plan equal to 0.15% of such
Fund's average daily net assets. (Such Fund has only one class of shares
outstanding.) The Piper Funds' distributor pays a portion of the amounts paid
under the Distribution Plans to brokerage firms which have sold shares of the
Piper Funds. The distributor may also use such payments to pay other
distribution expenses and shareholder servicing costs, such as printing and
promotional costs.
SHAREHOLDER TRANSACTIONS AND SERVICES. The respective purchase,
redemption, exchange, dividend and other policies and procedures of the FAIF
Funds and the corresponding Piper Funds are generally similar. These policies
and procedures are more fully set forth in Appendix VIII to this Combined Proxy
Statement/Prospectus.
Piper Funds' Class A and Class B shareholders will receive Class A
shares of the FAIF Funds in connection with the Reorganization. As shown in
Appendix VIII, there are differences in the sales charge structures applicable
to these shares. The Class A shares of the Piper Funds and the FAIF Funds are
sold with a front-end sales charge. The front-end sales charge applicable to
purchases of Class A shares of the FAIF Funds is generally higher than the
front-end sales charge applicable to Class A shares of the Piper Funds. Piper
Funds' Class B shares are not subject to a front-end sales charge, but are
subject to a CDSC if shares are redeemed during the calendar year in which they
were purchased or in any of the following five calendar years. In addition, as
discussed above, Class B shares are subject to higher Rule 12b-1 fees than the
Class A shares of either the Piper Funds or the FAIF Funds. Piper Fund Class B
shareholders will receive Class A shares of the FAIF Funds in the
Reorganizations. NO FRONT-END OR CONTINGENT DEFERRED SALES CHARGE WILL BE
IMPOSED ON ANY OF THE FAIF FUND SHARES THAT ARE ISSUED TO PIPER FUND
SHAREHOLDERS IN CONNECTION WITH THE REORGANIZATIONS. Piper Funds Class Y
shareholders will receive Class Y shares of the FAIF Funds in connection with
the Reorganization. The Piper Fund and FAIF Fund Class Y shares are sold at net
asset value without any front-end sales charge or CDSC.
Purchase, redemption and exchange procedures for the Piper Funds are
generally similar to those for the FAIF Funds. However, the minimum purchase
amount is lower for the Class A and Class B shares of the Piper Funds than for
the Class A shares of the FAIF Funds. The minimum purchase
<PAGE>
required to open an account generally is $250 for the Class A and Class B shares
of the Piper Funds and $1,000 for the Class A shares of the FAIF Funds.
Subsequent purchases generally require a minimum payment of $100 for the FAIF
Funds. There is no minimum amount for subsequent investments in the Piper Funds.
A minimum purchase of $1 million is required to purchase Class Y shares of the
Piper Funds. Class Y shares of the FAIF Funds are offered only through banks and
certain other institutions for the investment of their own funds and funds for
which they act in a fiduciary, agency or custodial capacity. Thus, Piper Fund
Class Y shareholders who receive FAIF Fund Class Y shares in a Reorganization
may be ineligible to purchase additional FAIF Fund Class Y shares.
There are also some differences in the dividend policies of the
Piper Funds and the FAIF Funds. For Piper Minnesota Tax-Exempt Fund, National
Tax-Exempt Fund, Intermediate Bond Fund, Government Income Fund and Adjustable
Rate Mortgage Securities Fund, net income dividends are declared daily and
paid monthly, whereas for the corresponding FAIF Funds they are declared and
paid monthly. For Piper Growth and Income Fund and Balanced Fund, net income
dividends are declared and paid quarterly, whereas they are declared and paid
monthly for the corresponding FAIF Funds. For Piper Small Company Growth Fund,
Emerging Growth Fund and Growth Fund, net income dividends are declared and paid
annually, whereas they are declared and paid monthly for the FAIF Large Cap
Growth Fund and quarterly for the FAIF Small Cap Growth Fund and Mid Cap Growth
Fund. For Piper Pacific-European Growth Fund and Emerging Markets Growth Fund,
and for the corresponding FAIF Funds, net investment income dividends are
declared and paid annually. For all Piper Funds and FAIF Funds, distributions of
any net realized long-term capital gains are made at least once annually.
INFORMATION RELATING TO VOTING MATTERS
GENERAL INFORMATION. This Combined Proxy Statement/Prospectus is
being furnished in connection with the solicitation of proxies for the Meeting
by the Piper Board. Officers and service contractors of the Piper Funds and the
FAIF Funds may, without cost to the Piper Funds, solicit proxies on behalf of
management of the Piper Funds personally or by mail, telephone, telegraph or
otherwise. In addition, the Piper Funds have retained ____________ to assist in
the solicitation of proxies. The cost of solicitation is estimated to be
____________ and will be borne by U.S. Bank.
____________________ may call shareholders to ask if they would be
willing to have their votes recorded by telephone. The telephone voting
procedure is designed to authenticate shareholders' identities, to allow
shareholders to authorize the voting of their shares in accordance with their
instructions, and to confirm that their instructions have been recorded
properly. The Piper Funds have been advised by counsel that these procedures are
consistent with the requirements of applicable law. Shareholders voting by
telephone will be asked for their social security number or other identifying
information and will be given an opportunity to authorize proxies to vote their
shares in accordance with their instructions. To ensure that the shareholders'
instructions have been recorded correctly, they will receive a confirmation of
their instructions in the mail. A special toll-free number will be available in
case the information contained in the confirmation is incorrect. Although a
shareholder's vote may be taken by telephone, each shareholder will receive a
copy of this Proxy Statement/Prospectus and may vote by mail using the enclosed
proxy card. If you have any questions or need assistance in voting, please
contact ____________________ at its toll-free number, 1-800-__________.
Any shareholder giving a proxy may revoke it at any time before it
is exercised by submitting to the Piper Funds a written notice of revocation or
a subsequently executed proxy or by attending the Meeting and voting in person.
Only shareholders of record at the close of business on
____________, 1998 will be entitled to vote at the Meeting. On that date, the
following shares of the Piper Funds were outstanding and entitled to be voted:
<PAGE>
NAME OF PIPER FUND
AND CLASS SHARES ENTITLED TO VOTE
--------- -----------------------
Small Company Growth Fund
Class A Shares
Class B Shares
Emerging Growth Fund
Class A Shares
Class B Shares
Class Y Shares
Growth Fund
Class A Shares
Class B Shares
Growth and Income Fund
Class A Shares
Class B Shares
Class Y Shares
Balanced Fund
Class A Shares
Class B Shares
Minnesota Tax-Exempt Fund
Class A Shares
Class Y Shares
National Tax-Exempt Fund
Class A Shares
Intermediate Bond Fund
Class A Shares
Class Y Shares
Government Income Fund
Class A Shares
Pacific-European Growth Fund
Class A Shares
Class B Shares
Class Y Shares
Emerging Markets Growth Fund
Class A Shares
Class B Shares
Adjustable Rate Mortgage Securities Fund
Class A Shares
Each shareholder is entitled to one vote for each share held, and a
fractional vote for any fractional shares held.
<PAGE>
SHAREHOLDER AND BOARD APPROVALS. Pursuant to the Order granted by
the SEC, the Interim Advisory Agreements are being submitted for the
ratification and approval of the shareholders of each of the respective Piper
Funds and the Interim Sub-Advisory Agreements are being submitted for the
ratification and approval of the shareholders of Piper Pacific-European Growth
Fund and Piper Emerging Markets Growth Fund. An Interim Advisory or Sub-Advisory
Agreement must be ratified and approved by a majority of the outstanding shares
(as defined below) of a Piper Fund in order to remain effective with respect to
such Fund. In the event an Interim Advisory or Sub-Advisory Agreement is not
ratified and approved with respect to a Piper Fund, the Interim Advisory or
Sub-Advisory Agreement will terminate with respect to such Fund, the investment
advisory or sub-advisory fees accrued under such Agreement and held in escrow
with respect to that Fund will be returned to the Fund, and the Piper Board will
consider what actions should be taken with respect to management of the assets
of the Piper Fund until a new investment advisory or sub-advisory agreement is
approved by the shareholders of that Fund or the Reorganization applicable to
such Fund occurs.
The Reorganization Agreements for PFI, PFI--II and PGF are being
submitted for approval at the Meeting by the shareholders of each of the Piper
Funds which is a series of either PFI, PFI--II or PGF, as the case may be,
pursuant to the provisions of the Articles of Incorporation of each of PFI,
PFI--II and PGF. Approval of a Reorganization Agreement by a particular Piper
Fund requires the affirmative vote of a majority of the outstanding shares (as
defined below) of each class of such Fund, voting as separate classes. Each
Reorganization Agreement provides that in the event the Reorganization Agreement
is approved with respect to some but not all of the Piper Funds subject thereto,
the Board of Directors of FAIF and the Piper Board may, in the exercise of their
reasonable business judgment, either abandon such Reorganization Agreement with
respect to all of the Piper Funds subject thereto or direct that the
Reorganization and the other transactions described in the Reorganization
Agreement be consummated to the extent they deem advisable.
With respect to approval of the Interim Advisory and Sub-Advisory
Agreements, the term "majority of the outstanding shares" of a particular Piper
Fund or class thereof means the lesser of (i) 67% of the shares of the Fund or
class present at the Meeting if the holders of more than 50% of the outstanding
shares of such Fund or class are present or (ii) more than 50% of the
outstanding shares of the Fund or class, as applicable. With respect to approval
of the Reorganization Agreements, the term "majority of the outstanding shares"
of a particular Piper Fund or class thereof means more than 50% of the
outstanding shares of such Fund or class. The vote of the shareholders of the
FAIF Funds is not being solicited, since their approval or consent is not
necessary for the Reorganization.
The approval of the Reorganization Agreements by the Piper Board is
discussed above under "Information Relating to the Proposed
Reorganizations--Board Considerations." The Reorganization Agreements were
unanimously approved by the Board of Directors of FAIF at a meeting held on
_______________, 1998.
As of _________, 1998 the officers and Directors of PFI, PFI--II and
PGF as a group owned less than 1% of each Piper Fund. As of ____________, 1998
the officers and Directors of FAIF as a group owned less than 1% of each FAIF
Fund. Table IV(A) shows the name, address and share ownership of each person
known to PFI, PFI--II or PGF, as the case may be, to have beneficial or record
ownership with respect to 5% or more of a class of a Piper Fund as of
____________, 1998. Table IV(B) shows the name, address and share ownership of
each person known to FAIF to have beneficial or record ownership with respect to
5% or more of a class of a FAIF Fund as of _____________, 1998.
<PAGE>
TABLE IV(A)
PIPER FUNDS--5% OWNERSHIP AS OF ____________, 1998
<TABLE>
<CAPTION>
CLASS AND AMOUNT OF PERCENTAGE PERCENTAGE PERCENTAGE
PIPER NAME AND SHARES OWNED AND OF OF OF FUND
FUND ADDRESS TYPE OF OWNERSHIP CLASS FUND POST-CLOSING
- ---- ------- ----------------- ----- ---- ------------
<S> <C> <C> <C> <C> <C>
</TABLE>
TABLE IV(B)
FAIF FUNDS--5% OWNERSHIP AS OF ______________, 1998
<TABLE>
<CAPTION>
CLASS AND AMOUNT OF PERCENTAGE PERCENTAGE PERCENTAGE
FAIF NAME AND SHARES OWNED AND OF OF OF FUND
FUND ADDRESS TYPE OF OWNERSHIP CLASS FUND POST-CLOSING
- ---- ------- ----------------- ----- ---- ------------
<S> <C> <C> <C> <C> <C>
</TABLE>
For purposes of the 1940 Act, any person who owns directly or
through one or more controlled companies more than 25% of the voting securities
of a company is presumed to "control" such company. Under this definition,
__________ and its affiliates may be deemed to be controlling persons of each of
the FAIF Funds and Piper Funds.
QUORUM. In the event that a quorum is not present at the Meeting, or
in the event that a quorum is present at the Meeting but sufficient votes to
approve an Interim Advisory or Sub-Advisory Agreement or a Reorganization
Agreement are not received with respect to one or more of the Piper Funds, the
persons named as proxies may propose one or more adjournments of the Meeting to
permit further solicitation of proxies. Any such adjournment(s) will require the
affirmative vote of a majority of those shares affected by the adjournment(s)
that are represented at the Meeting in person or by proxy. If a quorum is
present, the persons named as proxies will vote those proxies which they are
entitled to vote FOR the particular proposal for which a quorum exists in favor
of such adjournment(s), and will vote those proxies required to be voted AGAINST
such proposal against any adjournment(s). A shareholder vote may be taken with
respect to one or more Piper Fund (but not the other Piper Funds) on some or all
matters before any such adjournment(s) if sufficient votes have been received
for approval. A quorum is constituted with respect to a Piper Fund by the
presence in person or by proxy of the holders of more than 10% of the
outstanding shares of the Fund entitled to vote at the Meeting. For purposes of
determining the presence of a quorum for transacting business at the Meeting,
abstentions will be treated as shares that are present at the Meeting but which
have not been voted. Abstentions will have the effect of a "no" vote for
purposes of obtaining the requisite approvals. Broker "non-votes" (that is,
proxies from brokers or nominees indicating that such persons have not received
instructions from the beneficial owners or other persons entitled to vote shares
on a particular matter with respect to which the brokers or nominees do not have
discretionary power) will not be treated as shares that are present at the
Meeting and, accordingly, could make it more difficult to obtain the requisite
approvals.
ANNUAL MEETINGS. The Bylaws of each of PFI, PFI--II and PGF provide
that shareholder meetings be held only with such frequency as required under
Minnesota law. Minnesota corporation law requires only that the Board of
Directors convene shareholder meetings when it deems appropriate. In addition,
Minnesota law provides that if a regular meeting of shareholders has not been
held during the immediately preceding 15 months, a shareholder or shareholders
holding 3% or more of the voting shares of the company may demand a regular
meeting of shareholders by written notice given to the chief executive officer
or chief financial officer of the company. PFI, PFI--II and PGF are also
required to hold shareholder meetings if they are required by the 1940 Act. The
1940 Act requires a shareholder
<PAGE>
vote for all amendments to fundamental investment policies and restrictions, for
all amendments to investment advisory contracts and for certain amendments to
Rule 12b-1 distribution plans. Similarly, under the laws of the State of
Maryland and FAIF's Amended and Restated Articles of Incorporation, FAIF is not
required to hold shareholder meetings unless they (i) are required by the 1940
Act, or (ii) are requested in writing by the holders of 25% or more of the
outstanding shares of FAIF.
INTERESTS OF CERTAIN PERSONS. The following receive payments from
the FAIF Funds for services rendered pursuant to contractual arrangements with
the Funds: U.S. Bank, as the adviser of each Fund, receives payments for its
investment advisory and management services; Marvin & Palmer, as the sub-
adviser for the International Fund, receives payments for its sub-advisory
services; SEI Investments Distribution Co., as the distributor for each Fund,
receives payments for providing distribution services; SEI Investments
Management Corporation, in its capacity as the administrator for each Fund,
receives payments for providing shareholder servicing, legal and accounting and
other administrative personnel and services; U.S. Bank receives payments for
providing sub-administration services to the FAIF Funds; DST Systems, Inc., in
its capacity as transfer and dividend disbursing agent for each Fund, receives
payments for providing transfer agency and dividend disbursing services; and
U.S. Bank also receives payments for providing custodial services for each Fund,
and may also act as securities lending agent in connection with the Funds'
securities lending transactions and receive, as compensation for such services,
fees equal to 40% of the Funds' income from such securities lending
transactions.
ADDITIONAL INFORMATION ABOUT THE FAIF FUNDS
Additional information about the Existing FAIF Funds is included in
Prospectuses and Statement of Additional Information dated January 31, 1998, as
supplemented through the date hereof, copies of which, to the extent not
included herewith, may be obtained without charge by writing to FAIF, c/o SEI
Investments Distribution Co., Oaks, Pennsylvania 19456, or by calling
1-800-637-2548. FAIF is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and the 1940 Act, and in accordance
therewith it files reports, proxy materials and other information with the SEC.
Reports and other information filed by FAIF can be inspected and copied at the
Public Reference Facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, these materials can be inspected and copied
at the SEC's Regional Offices at 7 World Trade Center, Suite 1300, New York, New
York 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials also can be obtained from the
Public Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington, D.C. 20549, at prescribed rates.
Information included in this Combined Proxy Statement/Prospectus
concerning FAIF was provided by FAIF.
ADDITIONAL INFORMATION ABOUT THE PIPER FUNDS
Additional information about the Piper Funds is included in the
Prospectuses, dated November 24, 1997, as supplemented through the date hereof,
which have been filed with the SEC. Copies of these Prospectuses and the related
Statements of Additional Information may be obtained without charge by writing
to Piper Capital Management, Attn: Mutual Fund Services, 222 South Ninth Street,
Minneapolis, Minnesota 55402-3804 or by calling 1-800-866-7778. Reports and
other information filed by the Piper Funds can be inspected and copied at the
Public Reference Facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the offices of the Piper Funds listed above. In
addition, these materials can be inspected and copied at the SEC's Regional
Offices at 7 World Trade Center, Suite 1300, New York, New York 10048, and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials also can be obtained from the Public
Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington, D.C. 20549, at prescribed rates.
<PAGE>
Information included in this Combined Proxy Statement/Prospectus
concerning the Piper Funds was provided by PFI, PFI--II and PGF.
FINANCIAL STATEMENTS
The audited statements of assets and liabilities, including the
schedules of investments in securities, of the Piper Funds and of the Existing
FAIF Funds as of September 30, 1997, and the related statements of operations,
the statements of changes in net assets, and the financial highlights for the
periods indicated therein, as included in the September 30, 1997 Annual Reports
of the Piper Funds and of the Existing FAIF Funds, have been incorporated by
reference into this Combined Proxy Statement/Prospectus in reliance on the
reports of KPMG Peat Marwick LLP, independent auditors for the Piper Funds and
FAIF, given on the authority of such firm as experts in accounting and auditing.
OTHER BUSINESS
The Piper Board knows of no other business to be brought before the
Meeting. However, if any other matters come before the Meeting, it is the
intention that proxies which do not contain specific restrictions to the
contrary will be voted on such matters in accordance with the judgment of the
persons named in the enclosed form of proxy.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Piper Funds or the
FAIF Funds in writing at the appropriate addresses on the cover page of this
Combined Proxy Statement/Prospectus or by telephoning the Piper Funds at
1-800-866-7778 or the FAIF Funds at 1-800-637-2548.
* * *
SHAREHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE MEETING ARE
REQUESTED TO MARK, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE
ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
SHAREHOLDERS ALSO MAY RETURN PROXIES BY TELEFAX OR VOTE BY TELEPHONE.
THE PIPER FUNDS WILL FURNISH, WITHOUT CHARGE, COPIES OF THEIR
SEPTEMBER 30, 1997 ANNUAL SHAREHOLDER REPORTS AND THEIR MARCH 31, 1998
SEMI-ANNUAL SHAREHOLDER REPORTS TO ANY SHAREHOLDER UPON REQUEST ADDRESSED TO 222
SOUTH NINTH STREET, MINNEAPOLIS, MINNESOTA 55402-3804 OR BY TELEPHONE AT
1-800-866-7778.
<PAGE>
Appendix I(a)
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
THIS AGREEMENT, made this _____ day of _____ 1998, by and between Piper
Funds Inc., a Minnesota corporation (the "Fund") and Piper Capital Management
Incorporated, a Delaware corporation (the "Adviser").
1. Investment Advisory and Management Services. The Fund hereby engages
the Adviser, and the Adviser hereby agrees to act as investment adviser for, and
to manage the affairs, business and the investment of the assets of the Fund's
Portfolios (the "Portfolios").
The investment of the assets of the Portfolios shall at all times be
subject to the applicable provisions of the Articles of Incorporation, Bylaws,
Registration Statement and currently effective Prospectus of the Fund and shall
conform to the policies and purposes of the Fund and the Portfolios as set forth
in the Registration Statement and Prospectus and as interpreted from time to
time by the Board of Directors of the Fund. Within the framework of the
investment policies of the Fund, the Adviser shall have the sole and exclusive
responsibility for the management of the Fund's Portfolios and the making and
execution of all investment decisions for the Fund. The Adviser shall report to
the Board of Directors of the Fund regularly at such times and in such detail as
the Board may from time to time determine to be appropriate, in order to permit
the Board to determine the adherence of the Adviser to the investment policies
of the Fund.
The Adviser shall, at its own expense, furnish the Fund suitable office
space, and all necessary office facilities, equipment and personnel for
servicing the investments of the Fund. The Adviser shall arrange, if requested
by the Fund, for officers, employees or other Affiliated Persons (as defined in
Section 2(a)(3) of the Investment Company Act of 1940 (the "1940 Act") and the
rules, regulations and releases relating thereto) of the Adviser to serve
without compensation from the Fund as directors, officers, or employees of the
Fund if duly elected to such positions by the shareholders or directors of the
Fund.
The Adviser hereby acknowledges that all records necessary in the
operation of the Fund, including records pertaining to its shareholders and
investments, are the property of the Fund, and in the event that a transfer of
management or investment advisory services to someone other than the Adviser
should ever occur, the Adviser will promptly, and at its own cost, take all
steps necessary to segregate such records and deliver them to the Fund.
2. Compensation for Services. In payment for all services, facilities,
equipment and personnel, and for other costs of the Adviser hereunder, the Fund
shall pay to the Adviser a monthly investment advisory fee for each Portfolio,
which fee shall be paid to the Adviser not later than the fifth business day of
the month following the month in which such services are rendered. Each such
monthly fee shall be 1/12 of the per annum rate or rates set forth below and
shall be based on the average net asset value of all of the issued and
outstanding shares of the respective Portfolio as determined as of the close of
each business day of the month pursuant to the currently effective Prospectus of
the Fund. The fees shall be prorated for any fraction of a month at the
commencement or termination of this Agreement. The following table sets forth
the fees on a monthly and annual basis:
<PAGE>
<TABLE>
<CAPTION>
Per Average Net Asset
Monthly Rate Annum Rate Values of the Portfolio
------------ ---------- -----------------------
<S> <C> <C> <C>
Growth Fund, Small 1/12 of .75% .75% On the first $100,000,000
Company Growth 1/12 of .65% .65% On the next $200,000,000
Fund, Balanced Fund 1/12 of .55% .55% On the next $200,000,000
Emerging Growth 1/12 of .50% .50% On average net assets over
Fund and Growth $500,000,000
Income Fund
Government Income 1/12 of .50% .50% On the first $250,000,000
Fund 1/12 of .45% .45% On the next $250,000,000
1/12 of .40% .40% On average net assets over
$500,000,000
Money Market Fund, 1/12 of .50% .50% On the first $500,000,000
U.S. Government 1/12 of .425% .425% On the next $250,000,000
Money Market Fund, 1/12 of .375% .375% On the next $250,000,000
and Tax-Exempt 1/12 of .35% .35% On the next $500,000,000
Money Market Fund 1/12 of .325% .325% On the next $500,000,000
1/12 of .30% .30% On the next $500,000,000
1/12 of .275% .275% On average net assets over
$2,500,000,000
National Tax-Exempt 1/12 of .50% .50% On the first $250,000,000
Fund and Minnesota 1/12 of .45% .45% On the next $250,000,000
Tax-Exempt Fund 1/12 of .40% .40% On average net assets over
$500,000,000
Intermediate Bond 1/12 of .30% .30% On the first $100,000,000
Fund 1/12 of .25% .25% On the next $150,000,000
1/12 of .20% .20% On average net assets over
$250,000,000
</TABLE>
The fees shall be prorated for any fraction of a month at the
commencement or termination of this Agreement.
Pursuant to the terms of an order of exemption granted by the Securities
and Exchange Commission in PIPER FUNDS INC., ET AL., Investment Company Act Rel.
No._______ (_______, 1998), all fees payable under this Agreement by any
Portfolio shall be payable to an independent escrow agent to be maintained in an
interest-bearing escrow account until this Agreement is approved by shareholders
of such Portfolio in accordance with the provisions of Section 6 of this
Agreement. If shareholders of any Portfolio fail to approve this Agreement, the
escrow agent will pay to the Portfolio the applicable escrowed amounts
(including interest earned). The escrow agent will release the escrowed funds
only upon receipt of a certificate from officers of the Fund stating whether the
escrowed funds are to be delivered to the Adviser or the Portfolio.
3. Allocation of Expenses.
(a) In addition to the fees described in Section 2 hereof, the Fund shall
pay all its expenses which are not assumed by the Adviser and/or SEI Investments
Distribution Co. (the "Distributor"). These Fund expenses include, by way of
example, but not by way of limitation, the fees and expenses of directors and
officers of the Fund who are not Affiliated Persons of the Adviser, interest
expenses, taxes, brokerage fees and commissions, fees and expenses of
registering and qualifying the Fund and its
<PAGE>
shares for distribution under federal and state securities laws, expenses of
preparing prospectuses and of printing and distributing prospectuses annually to
existing shareholders, custodian charges, auditing and legal expenses, insurance
expenses, association membership dues, and the expense of reports to
shareholders, shareholders' meetings, and proxy solicitations.
(b) The Adviser or the Distributor shall bear all promotional expenses in
connection with the distribution of the Fund's shares, including but not limited
to the costs of printing and distributing prospectuses and shareholder reports
for new shareholders and the costs of sales literature and advertising.
4. Limit on Expenses. It is understood that the laws of certain states
in which each Portfolio's shares are offered for sale may require that the
Portfolios be reimbursed for excess Portfolio expenses, and the Adviser agrees
to make such reimbursement.
5. Freedom to Deal with Third Parties. The Adviser shall be free to
render services to others similar to those rendered under this Agreement or of a
different nature except as such services may conflict with the services to be
rendered or the duties to be assumed hereunder.
6. Effective Date, Duration and Termination of Agreement. The effective
date of this Agreement shall be the date first set forth above. Wherever
referred to in this Agreement, the vote or approval of the holders of a majority
of the outstanding shares of the Fund or any Portfolio of the Fund shall mean
the vote of 67% or more of such shares if the holders of more than 50% of such
shares are present in person or by proxy or the vote of more than 50% of such
shares, whichever is less.
Unless sooner terminated as hereinafter provided, this Agreement shall
continue in effect only so long as such continuance is specifically approved at
least annually by the Board of Directors of the Fund, including the specific
approval of a majority of the directors who are not Interested Persons (as
defined in Section 2(a)(19) of the 1940 Act and the rules, regulations and
releases relating thereto) of the Adviser or of the Fund cast in person at a
meeting called for the purpose of voting on such approval, or by the vote of the
holders of a majority of the Fund's outstanding shares; provided that, if a
majority of the outstanding shares of any Portfolio approves this Agreement,
this Agreement shall continue in effect with respect to such approving Portfolio
whether or not the shareholders of any other Portfolio of the Fund approve this
Agreement.
This Agreement may be terminated at any time without the payment of any
penalty by the vote of the Board of Directors of the Fund or by the vote of the
holders of a majority of the outstanding shares of the Fund, or by the Adviser,
upon sixty (60) days written notice to the other party; provided that if a
majority of the outstanding shares of any Portfolio of the Fund votes to
terminate this Agreement, such termination shall be effective with respect to
such Portfolio whether or not the shareholders of any other Portfolio vote to
terminate this Agreement. Any such termination may be made effective with
respect to both the investment advisory and management services provided for in
this Agreement or with respect to either of such kinds of services. This
Agreement shall automatically terminate in the event of its assignment.
7. Amendments to Agreement. No material amendment to this Agreement shall
be effective until approved by vote of the holders of a majority of the
outstanding shares of the Portfolios which have approved and are subject to this
Agreement. In addition, if a majority of the outstanding shares of any Portfolio
of the Fund votes to amend this Agreement, such amendment shall be effective
with respect to such Portfolio whether or not the shareholders of any other
Portfolio vote to adopt such amendment.
8. Notice. Any notice under this Agreement shall be in writing,
addressed, delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate in writing for receipt of such notice.
<PAGE>
IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to
be executed by their duly authorized officers as of the day and year first above
written.
PIPER FUNDS INC.
By _____________________
Its ____________________
PIPER CAPITAL MANAGEMENT
INCORPORATED
By _____________________
Its ____________________
<PAGE>
Appendix I(b)
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
THIS AGREEMENT, made this _____ day of _____ 1998, by and between Piper
FUNDS INC.--II, a Minnesota corporation (the "Company") and Piper Capital
Management Incorporated, a Delaware corporation (the "Adviser").
1. Investment Advisory and Management Services. The Company hereby
engages the Adviser, and the Adviser hereby agrees to act as investment adviser
for, and to manage the affairs, business and the investment of the assets of the
Adjustable Rate Mortgage Securities Fund series of the Company and any other
series of the Company established in the future (the "Funds").
The investment of the assets of each Fund shall at all times be subject
to the applicable provisions of the Articles of Incorporation, Bylaws,
Registration Statement on Form N-1A and any representations contained in the
Prospectus and Statement of Additional Information of the Company and shall
conform to the policies and purposes of the respective Fund as set forth in such
documents and (a) as interpreted from time to time by the Board of Directors of
the Company and (b) as may be amended from time to time by the Board of
Directors and/or the shareholders of the Company as permitted by the Investment
Company Act of 1940, as amended (the "1940 Act"). Within the framework of the
investment policies of the Funds, the Adviser shall have the sole and exclusive
responsibility for the management of the Funds and the making and execution of
all investment decisions for the Funds. The Adviser shall report to the Board of
Directors regularly at such times and in such detail as the Board may from time
to time determine to be appropriate, in order to permit the Board to determine
the adherence of the Adviser to the investment policies of the Funds.
The Adviser shall, at its own expense, furnish suitable office space and
all necessary office facilities, equipment and personnel for servicing the
investments of the Funds. The Adviser shall arrange, if requested by the
Company, for officers, employees or other Affiliated Persons (as defined in
Section 2(a)(3) of the 1940 Act and the rules, regulations and releases relating
thereto) of the Adviser to serve without compensation from the Company as
directors, officers, or employees of the Company if duly elected to such
positions by the shareholders or directors of the Company.
The Adviser hereby acknowledges that all records necessary in the
operation of the Funds, including records pertaining to shareholders and
investments, are the property of the Company, and in the event that a transfer
of management or investment advisory services to someone other than the Adviser
should ever occur, the Adviser will promptly, and at its own cost, take all
steps necessary to segregate such records and deliver them to the Company.
2. Compensation for Services. In payment for all services, facilities,
equipment and personnel, and for other costs of the Adviser hereunder, the
Company shall pay to the Adviser a monthly investment advisory fee on behalf of
each Fund. The monthly fee payable with respect to Adjustable Rate Mortgage
Securities Fund shall be equivalent to an annual rate of .35% of the first $500
million of the Fund's average daily net assets and .30% of average daily net
assets in excess of $500 million. The monthly fee payable with respect to any
Fund established in the future shall be set forth in a supplement to this
Agreement. The monthly fee payable by each Fund shall be based on the average
net asset values of all of the issued and outstanding shares of such Fund as
determined as of the close of each business day of the month pursuant to the
Articles and Bylaws of the Company and the currently effective Prospectus and
Statement of Additional Information of the Company applicable to such Fund. The
fee shall be prorated for any fraction of a month at the commencement or
termination of this Agreement.
<PAGE>
Pursuant to the terms of an order of exemption granted by the Securities
and Exchange Commission in PIPER FUNDS INC., ET AL., Investment Company Act Rel.
No. ________ (_________, 1998), all fees payable under this Agreement by the
Fund shall be payable to an independent escrow agent to be maintained in an
interest-bearing escrow account until this Agreement is approved by shareholders
in accordance with the provisions of Section 6 of this Agreement. If
shareholders of the Fund fail to approve this Agreement, the escrow agent will
pay to the Fund the applicable escrowed amounts (including interest earned). The
escrow agent will release the escrowed funds only upon receipt of a certificate
from officers of the Company stating whether the escrowed funds are to be
delivered to the Adviser or the Fund.
3. Allocation of Expenses.
(a) In addition to the fee described in Section 2 hereof, each Fund shall
pay all its expenses which are not assumed by the Adviser or SEI Investments
Distribution Co. (the "Distributor"). These expenses include, by way of example,
but not by way of limitation, (i) brokerage and commission expenses; (ii)
federal, state, local and foreign taxes, including issue and transfer taxes
incurred by or levied on the Fund; (iii) interest charges on borrowings; (iv)
the Fund's organizational and offering expenses, whether or not advanced by the
Adviser; (v) the cost of other personnel providing services to the Fund; (vi)
fees and expenses of registering shares under applicable state securities laws;
(vii) expenses of printing and distributing reports to shareholders; (viii)
costs of shareholders' meetings and proxy solicitation; (ix) charges and
expenses of the Company's custodian and registrar, transfer agent and dividend
disbursing agent applicable to the Fund; (x) that portion allocable to the Fund
of any compensation of the Company's officers, directors and employees that are
not Affiliated Persons or Interested Persons (as defined in Section 2(a)(19) of
the 1940 Act and the rules, regulations and releases relating thereto) of the
Adviser; (xi) legal and auditing expenses; (xii) costs of stationery and
supplies; (xiii) expenses of preparing prospectuses and of printing and
distributing prospectuses and statements of additional information annually to
existing shareholders; (xiv) insurance expenses; (xv) association membership
dues; (xvi) Rule 12b-1 Plan of Distribution fees (when applicable); and (xvii)
the fees and expenses and registering and maintaining the registration of the
Fund and its shares with the Securities and Exchange Commission.
(b) The Distributor or the Adviser shall bear all advertising and
promotional expenses in connection with the distribution of the Company's
shares, including paying for prospectuses, statements of additional information
and shareholder reports for new shareholders and the costs of sales literature
and advertising. The Company shall not use any of its assets to finance costs
incurred in connection with the distribution of its shares except pursuant to a
Plan of Distribution, if any, adopted pursuant to Rule 12b-1 under the 1940 Act.
4. Limit on Expense. It is understood that the laws of certain states in
which the shares of a Fund are offered for sale may require that the such Fund
be reimbursed for its excess expenses, and the Adviser agrees to make such
reimbursement.
5. Freedom to Deal with Third Parties. The Adviser shall be free to
render services to other similar to those rendered under this Agreement or of a
different nature except as such services may conflict with the services to be
rendered or the duties to be assumed hereunder.
6. Effective Date, Duration and Termination of Agreement. The effective
date of this Agreement shall be the date first set forth above. Wherever
referred to in this Agreement, the vote or approval of the holders of a majority
of the outstanding voting securities or shares of a Fund shall mean the vote of
67% or more of such shares if the holders of more than 50% of such shares are
present in person or by proxy or the vote of more than 50% of such shares,
whichever is less.
Unless sooner terminated as hereinafter provided, this Agreement shall
continue in effect for a period of two years from the date of its execution, and
thereafter shall continue in effect with respect to
<PAGE>
a Fund only so long as such continuance is specifically approved at least
annually (a) by the Board of Directors of the Company or by the vote of a
majority of the outstanding voting securities of such Fund and (b) by the vote
of a majority of the directors who are not parties to this Agreement or
Interested Persons of the Adviser or of the Company, cast in person at a meeting
called for the purpose of voting on such approval.
This Agreement may be terminated with respect to any Fund at any time
without the payment of any penalty by the vote of the Board of Directors of the
Company or by the vote of the holders of a majority of the outstanding voting
securities of such Fund, or by the Adviser, upon sixty (60) days written notice
to the other party. Any such termination may be made effective with respect to
both the investment advisory and management services provided for in this
Agreement or with respect to either of such kinds of services. This Agreement
shall automatically terminate in the event of its assignment as defined in the
1940 Act and the rules thereunder. This Agreement shall automatically terminate
upon completion of the dissolution, liquidation or winding up of the Company.
7. Amendments to Agreement. No material amendment to this Agreement shall
be effective with respect to a Fund until approved by a vote of the holders of a
majority of the outstanding shares of such Fund.
8. Notices. Any notice under this Agreement shall be in writing,
addressed, delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate in writing for receipt of such notice.
IN WITNESS WHEREOF, the Company and the Adviser have caused this
Agreement to be executed by their duly authorized officers as of the day and
year first above written.
PIPER FUNDS INC. -- II
By ________________________
Its______________________
PIPER CAPITAL MANAGEMENT
INCORPORATED
By ________________________
Its______________________
<PAGE>
Appendix I(c)
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
THIS AGREEMENT, made this ____ day of ____ 1998, by and between Piper
Global Funds Inc., a Minnesota corporation (the "Company") and Piper Capital
Management Incorporated, a Delaware Corporation (the "Adviser").
1. Investment Advisory and Management Services. The Company hereby engages
the Adviser, and the Adviser hereby agrees to act as investment adviser for, and
to manage the affairs, business and the investment of the assets of the
Pacific-European Growth Fund and the Emerging Markets Growth Fund (referred to
individually as a "Fund" and collectively as the "Funds"), each a series of the
Company.
The investment of the assets of each Fund shall at all times be subject to
the applicable provisions of the Articles of Incorporation and Bylaws of the
Company and the Registration Statement on Form N-1A of the Fund and any
representations contained in the Prospectus and Statement of Additional
Information of the Fund and shall conform to the policies and purposes of the
Fund as set forth in such Registration Statement, Prospectus and Statement of
Additional Information and (a) as interpreted from time to time by the Board of
Directors of the Company and (b) as may be amended or limited from time to time
by such Board of Directors and/or the shareholders of the Fund as permitted by
the Investment Company Act of 1940, as amended (the "1940 Act"). Within the
framework of the investment policies of each Fund, and subject to such other
limitations and directions as the Board of Directors may from time to time
prescribe, the Adviser shall have the sole and exclusive responsibility for the
management of the Fund's assets and making and execution of all investment
decisions for the Fund, provided that the Adviser shall be authorized to retain
a sub-adviser to assist the Adviser in furnishing investment advice to the Fund,
and provided further that the Adviser shall be responsible for monitoring
compliance by the sub-adviser with the investment policies and restrictions of
the Fund and with such other limitations or directions as the Board of Directors
of the Company may from time to time prescribe. The Adviser shall report to the
Board of Directors of the Company regularly at such times and in such detail as
the Board may from time to time determine to be appropriate, in order to permit
the Board to determine the adherence of the Adviser to the investment policies
of each Fund.
The Adviser shall, at its own expense, furnish the Company with suitable
office space, and all necessary office facilities, equipment and personnel for
servicing the investments of each Fund. The Adviser shall arrange, if requested
by the Company, for officers, employees or other Affiliated Persons (as defined
in Section 2(a)(3) of the Investment Company Act of 1940, as amended and the
rules, regulations and releases relating thereto) of the Adviser to serve
without compensation from the Company as directors, officers or employees of the
Company if duly elected to such positions by Fund shareholders or directors of
the Company.
The Adviser hereby acknowledges that all records necessary in the operation
of each Fund, including records pertaining to its shareholders and investments,
are the property of the Company, and in the event that a transfer of management
or investment advisory services to someone other than the Adviser should ever
occur, the Adviser will promptly, and at its own cost, take all steps necessary
to segregate such records and deliver them to the Company.
2. Compensation for Services.
(a) Pacific-European Growth Fund. In payment for all services, facilities,
equipment and personnel, and for other costs of the Adviser hereunder, the
Company shall pay to the Adviser, from the assets of the Pacific-European Growth
Fund, a monthly investment advisory fee determined by applying the annual rate
of 1.00% to the Fund's average daily net assets up to $100 million, the annual
<PAGE>
rate of .875% to such assets between $100 million and $200 million, and the
annual rate of .75% to such assets in excess of $200 million and multiplying
such amount by 1/12 (the "Basic Fee"). The Basic Fee shall be subject to
adjustment based on a comparison of the investment performance of the Class A
shares of the Fund for the applicable performance period to the investment
record of the Morgan Stanley Capital International EAFE(sm) Index ("EAFE"). For
purposes of calculating such performance adjustment, the applicable performance
period shall be a rolling 12-month period comprised of the most recent calendar
month and the 11 immediately preceding calendar months. The Basic Fee, plus or
minus the performance adjustment, shall be calculated and paid to the Adviser
monthly. The monthly performance adjustment shall be calculated as follows: (a)
for each percentage point by which the investment performance of the Fund's
Class A shares exceeds that of EAFE (subject to a maximum of 5 percentage
points), the Basic Fee shall be increased by an amount equal to the product of
.05% of the Fund's average daily net assets and 1/12, and (b) for each
percentage point by which the investment performance of the Fund's Class A
shares is exceeded by that of EAFE (subject to a maximum of 5 percentage
points), the Basic Fee shall be decreased by an amount equal to the product of
.05% of the Fund's average daily net assets and 1/12.
RANGE OF PERMITTED INCREASES OR DECREASES
TO THE BASIC FEE ON AN ANNUALIZED BASIS
Percentage Point Difference
Between Performance of
Class A Shares of Fund Adjustment to Basic Fee
and % Change in EAFE Index (Annualized)
- -------------------------- ------------
+5 percentage +.25%
points or more
+4 +.20
+3 +.15
+2 +.10
+1 +.05
+0 0
-1 -.05
-2 -.10
-3 -.15
-4 -.20
-5 percentage -.25
points or more
In comparing the investment performance of the Pacific-European Growth
Fund's Class A shares to the investment record of the EAFE, dividends and other
distributions of the Fund's Class A shares and dividends and other distributions
reported with respect to component securities of the EAFE during the performance
period will be treated as having been reinvested. Investment performance of the
Fund's Class A shares will be calculated based on the total return of such
shares for the applicable period, which consists of the total net asset value of
such shares at the end of the applicable period, including reinvestment of
dividends and distributions, less the net asset value of such shares at the
commencement of the applicable period divided by the net asset value of such
shares at the commencement of the applicable period. Fractions of a percentage
point are recorded to the nearest whole point (to the higher whole point if
exactly one-half).
For purposes of the calculation of such fee, "average daily net assets"
for a particular period shall be determined on the basis of the Fund's net
assets as determined as of the close of each business day of the month pursuant
to the currently effective prospectus of the Fund. Such fee shall be payable on
the fifth day of each calendar month for services performed hereunder during the
preceding month.
<PAGE>
If this agreement terminates prior to the end of a month, such fee shall be
prorated according to the proportion which such portion of the month bears to
the full month.
(b) Emerging Markets Growth Fund. The fee to be paid by Emerging Markets
Growth Fund to the Adviser shall be a monthly investment advisory fee payable at
an annual rate of 1.00% of the average daily net assets of Emerging Markets
Growth Fund. Except as hereinafter set forth, such fee shall be calculated and
accrued daily and the amounts of the daily accruals shall be paid monthly on the
fifth day following the end of a month. Such calculations shall be made by
applying 1/365th (1/366th in a leap year) of the annual rate to Emerging
Markets Growth Fund's net assets each day determined as of the close of business
on that day or the last previous business day. If this Agreement becomes
effective subsequent to the first day of a month or if the Agreement shall
terminate with respect to Emerging Markets Fund before the last day of a month,
compensation for that part of the month during which the Agreement is in effect
shall be prorated in a manner consistent with the calculation of fees as set
forth above.
(c) Pursuant to the terms of an order of exemption granted by the
Securities and Exchange Commission in PIPER FUNDS INC., ET AL., Investment
Company Act Rel. No. ____ (____, 1998), all fees payable under this Agreement by
either Fund shall be payable to an independent escrow agent to be maintained in
an interest-bearing escrow account until this Agreement is approved by
shareholders of such Fund in accordance with the provisions of Section 6 of this
Agreement. If shareholders of either Fund fail to approve this Agreement, the
escrow agent will pay to the Fund the applicable escrowed amounts (including
interest earned). The escrow agent will release the escrowed funds only upon
receipt of a certificate from officers of the Company stating whether the
escrowed funds are to be delivered to the Adviser or the Fund.
3. Allocation of Expenses.
(a) In addition to the fees described in Section 2 hereof, the Company
shall pay all the expenses of each Fund which are not assumed by the Adviser
and/or SEI Investments Distribution Co. (the "Distributor,"). These Fund
expenses include, by way of example, but not by way of limitation, (i) brokerage
and commission expenses; (ii) Federal, state, local and foreign taxes, including
issue and transfer taxes incurred by or levied on the Fund; (iii) interest
charges on borrowings; (iv) the Fund's organizational and offering expenses
whether or not advanced by the Adviser; (v) the cost of other personnel
providing services to the Fund; (vi) fees and expenses of registering and
maintaining registration of the Fund's shares under the appropriate Federal
securities laws and of qualifying and maintaining qualification of the Fund's
shares under applicable state securities laws; (vii) expenses of printing and
distributing reports to shareholders; (viii) expenses of printing and
distributing prospectuses annually to existing shareholders; (ix) costs of
shareholders' meetings and proxy solicitation; (x) charges and expenses of the
Fund's custodian and registrar, transfer agent and dividend disbursing agent;
(xi) compensation of the Company's officers, employees and directors that are
not Affiliated Persons or Interested Persons (as defined in Section 2(a) of the
1940 Act and the rules, regulations and releases relating thereto) of the
Adviser or the Sub-Adviser; (xii) legal and auditing expenses; (xiii) costs of
stationery and supplies; (xiv) insurance expenses; (xv) association membership
dues; (xvi) travel expenses of officers and employees of Edinburgh Fund Managers
plc to the extent such expenses relate to the attendance of such persons at
meetings at the request of the Board of Directors of the Company; and (xvii)
travel expenses for attendance at Board of Directors meetings by members of the
Board of Directors of the Company who are also "interested persons" or
"affiliated persons" of the Sub-Adviser.
(b) The Adviser or the Distributor shall bear all promotional expenses in
connection with the distribution of each Fund's shares (other than any expenses
assumed by the Funds pursuant to a Plan of Distribution adopted in conformity
with Rule 12b-1 under the 1940 Act), including but not limited to the costs of
printing and distributing prospectuses, statements of additional information and
shareholder reports for new shareholders and the costs of sales literature and
advertising.
<PAGE>
4. Limit on Expenses. If the total expenses of a Fund for any fiscal year
(including the fees payable to the Adviser but excluding interest, taxes,
brokerage commissions or other costs of acquiring or disposing of any of the
Fund's portfolio securities, distribution fees, litigation and indemnification
expenses and other extraordinary expenses not incurred in the ordinary course of
the Fund's business, all to the extent permitted by applicable state law and
regulation) exceed any expense limitation imposed by applicable state law, the
Adviser shall reimburse the Fund for such excess in the manner and to the extent
required by applicable state law.
5. Freedom to Deal With Third Parties. The Adviser shall be free to render
services to others similar to those rendered under this Agreement or of a
different nature except as such services may conflict with the services to be
rendered or the duties to be assumed hereunder.
6. Effective Date, Duration and Termination of Agreement. The effective
date of this Agreement shall be the date first set forth above. Wherever
referred to in this Agreement, the vote or approval of the holders of a majority
of the outstanding shares of a Fund shall mean the vote of 67% or more of such
shares if the holders of more than 50% of such shares are present in person or
by proxy or the vote of more than 50% of such shares, whichever is less.
Unless sooner terminated as hereinafter provided, this Agreement shall
continue in effect for a period ending two years from the date of execution, and
thereafter shall continue in effect only so long as such continuance is
specifically approved at least annually by the Board of Directors of the Company
or by the vote of the holders of a majority of the Fund's outstanding shares
and, in either case, by a majority of the directors of the Company who are not
Interested Persons of the Adviser or of the Company by vote cast in person at a
meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time without the payment of any
penalty by the vote of the Board of Directors of the Company or by the vote of
the holders of a majority of the outstanding shares of a Fund, or by the
Adviser, upon sixty (60) days written notice to the other party. Any such
termination may be made effective with respect to both the investment advisory
and management services provided for in this Agreement or with respect to either
of such kinds of services. This Agreement shall automatically terminate in the
event of its assignment as defined in the 1940 Act and the rules thereunder.
This Agreement shall automatically terminate upon completion of the dissolution,
liquidation and winding up of a Fund.
7. Limitation of liability. The Adviser will not be liable for any error of
judgment or mistake of law or for any loss suffered by a Fund or its
shareholders in connection with the performance of its duties under this
Agreement, except a loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its duties under this Agreement.
8. Amendments to Agreement. No material amendment to this Agreement shall
be effective until approved by vote of the holders of a majority of the
outstanding shares of each Fund.
9. Notices. Any notice under this Agreement shall be in writing, addressed,
delivered or mailed, postage prepaid, to the other party at such address as such
other party may designate in writing for receipt of such notice.
<PAGE>
IN WITNESS WHEREOF, the Company and the Adviser have caused this Agreement
to be executed by their duly authorized officers as of the day and year
indicated below.
PIPER GLOBAL FUNDS INC.
By ________________________
Its ____________________
PIPER CAPITAL MANAGEMENT
INCORPORATED
By ________________________
Its ____________________
<PAGE>
Appendix II(a)
SUB-INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT, made this ____ day of ____ 1998, by and between Piper
Capital Management Incorporated, a Delaware corporation (the "Adviser") and
Edinburgh Fund Managers plc, a Scottish corporation (the "Sub-Adviser").
WHEREAS, the Adviser has been retained by Piper Global Funds Inc. (the
"Company"), an open-end diversified management investment company which may
offer its shares in one or more series, to act as the investment adviser to
Pacific-European Growth Fund, a series of the Company (the "Fund");
WHEREAS, the Fund seeks to accomplish its investment objective of
achieving long-term capital appreciation through investment primarily in equity
securities of companies in the Pacific Basin and in Europe (as defined herein);
WHEREAS, the Adviser desires to retain the Sub-Adviser to assist the
Adviser in furnishing an investment program to the Fund;
NOW, THEREFORE, in consideration of the mutual agreements herein made,
the Adviser and the Sub-Adviser agree as follows:
1. The Adviser hereby employs the Sub-Adviser to serve as sub-adviser
with respect to the assets of the Fund and to perform the services hereinafter
set forth. The Sub-Adviser hereby accepts such employment and agrees, for the
compensation herein provided, to assume all obligations herein set forth and to
bear all expenses of its performance of such obligations (but no other
expenses). The Sub-Adviser shall not be required to pay expenses of the Fund,
including, but not limited to: (a) brokerage and commission expenses; (b)
Federal, state, local and foreign taxes, including issue and transfer taxes
incurred by or levied on the Fund; (c) interest charges on borrowings; (d) the
Fund's organizational and offering expenses; (e) the cost of other personnel
providing services to the Fund; (f) fees and expenses of registering and
maintaining registration of the Fund's shares under the appropriate federal
securities laws and of qualifying and maintaining qualification of the Fund's
shares under applicable state securities laws; (g) expenses of printing and
distributing reports to shareholders; (h) expenses of printing and distributing
prospectuses annually to existing shareholders; (i) costs of shareholders'
meetings and proxy solicitation; j) charges and expenses of the Fund's custodian
and registrar, transfer agent and dividend disbursing agent; (k) compensation of
the Company's officers, directors and employees that are not "affiliated
persons" or "interested persons" (as defined in Section 2(a) of the Investment
Company Act of 1940, as amended (the "1940 Act") and the rules, regulations and
releases relating thereto) of the Adviser or the Sub-Adviser; (l) legal and
auditing expenses; (m) costs of stationery and supplies; (n) insurance expenses;
(o) association membership dues; (p) travel expenses of officers and employees
of the Sub-Adviser to the extent such expenses relate to the attendance of such
persons at meetings at the request of the Board of Directors of the Company; (q)
travel expenses for attendance at Board of Directors meetings by members of the
Board of Directors of the Company who are also "interested persons" or
"affiliated persons" of the Sub-Adviser; and (r) promotional expenses in
connection with the distribution of the Fund's shares. The Sub-Adviser shall for
all purposes herein be deemed to be an independent contractor and shall, except
as expressly provided or authorized (whether herein or otherwise) have no
authority to act for or on behalf of the Fund in any way or otherwise be deemed
an agent of the Fund.
2. The Sub-Adviser shall direct the investment of the Fund's assets in
accordance with applicable law and the investment objectives, policies and
restrictions set forth in the then-current Prospectus and Statement of
Additional Information relating to the Fund contained in its Registration
<PAGE>
Statement under the 1940 Act and the Securities Act of 1933, as amended, in
accordance with the investment objectives, policies and restrictions from time
to time prescribed by the Board of Directors of the Company and communicated by
the Adviser to the Sub-Adviser and subject to such further reasonable
limitations as the Adviser may from time to time impose by written notice to the
Sub-Adviser. The Sub-Adviser hereby acknowledges that the investment objective
of the Fund is long-term capital appreciation and, therefore, it agrees, that
(a) to the extent it invests in equity securities it shall make such investments
solely for the purpose of achieving long-term capital appreciation and shall not
purchase or sell securities with the intent of achieving short-term capital
gains, provided that the foregoing shall not restrict the Sub-Adviser from any
sale of securities originally purchased to be held for long-term capital
appreciation, regardless of the holding period, to the extent such sale is
determined by the Sub-Adviser to be in the best interests of the Fund and its
shareholders and (b) to the extent it enters into option and futures
transactions, such transactions shall be for hedging purposes only.
3. The Sub-Adviser shall formulate and implement a continuing program for
the management of the Fund's assets and resources. The Sub-Adviser shall amend
and update such program from time to time as financial and other economic
conditions warrant. The Sub-Adviser shall make all determinations with respect
to the investment of the assets of the Fund in companies in countries in the
Pacific Basin and Europe and shall take such steps as may be necessary to
implement the same, including the placement of purchase and sale orders on
behalf of the Fund, provided that the Sub-Adviser must obtain the prior approval
of the Adviser to (a) any investment of the assets of the Fund in countries in
the Pacific Basin and Europe which countries were not specifically approved of
for investment at the time of the Adviser's approval of the initial investment
of the Fund's assets; (b) any investment of the assets of the Fund in any
country outside of the Pacific Basin or Europe and (c) any subsequent investment
by the Sub-Adviser which would result in the reallocation of in excess of five
(5%) percent of the Fund's total assets. For the purposes of this Agreement:
countries in the "Pacific Basin" shall include Australia, New Zealand, Hong
Kong, South Korea, Malaysia, Pakistan, Sri Lanka, the Philippines, Singapore,
Taiwan, Thailand, Indonesia, Japan, China and India and any other countries
hereafter designated by the Fund to the Adviser and Sub-Adviser in writing and
countries in "Europe: shall include the United Kingdom. In addition, the
Sub-Adviser shall advise the Adviser and, if requested by the Adviser, advise
the Company's Board of Directors (which shall make all non-investment decisions
with respect to the securities in which the assets of the Fund may be invested),
of the manner in which voting rights, rights to consent to corporate action, and
any other non-investment decisions pertaining to the Fund's portfolio securities
should be exercised.
4. The Sub-Adviser shall furnish such reports to the Adviser as the
Adviser may reasonably request for the Adviser's use in discharging its
obligations under the Investment Advisory and Management Agreement regarding the
Fund between the Company and the Adviser (the "Advisory Agreement,"), which
reports may be distributed by the Adviser to the Company at periodic meetings of
the Company's Board of Directors and at such other times as may be reasonably
requested by the Company's Board of Directors. Copies of all such reports shall
be furnished to the Adviser for examination and review within a reasonable time
prior to the presentation of such reports to the Company's Board of Directors.
5. The Sub-Adviser has previously furnished to the Adviser a list of
brokers and dealers which it may use to execute transactions on behalf of the
Fund and the Adviser has approved the use of such brokers and dealers on behalf
of the Fund ("Eligible Broker-Dealers"). The Adviser may, from time-to-time,
approve additional Eligible Broker-Dealers. The Sub-Adviser shall select the
Eligible Broker-Dealers that will execute the purchases and sales of portfolio
securities for the Fund and markets on or in which such transactions will be
executed and shall place, in the name of the Fund or its nominee, all such
orders.
(a) When placing such orders, the Sub-Adviser shall use its best efforts
to obtain the best available price and most favorable and efficient execution
for the Fund. Where best price and execution may be obtained from more than one
Eligible Broker-Dealer, the Sub-Adviser may, in its discretion,
<PAGE>
purchase and sell securities through Eligible Broker-Dealers who provide
research, statistical and other information to the Sub-Adviser. It is understood
that such services may be used by the Sub-Adviser for all of its investment
advisory accounts and accordingly, not all such services may be used by the
Sub-Adviser in connection with the Fund.
It is understood that certain other clients of the Sub-Adviser may have
investment objectives and policies similar to those of the Fund and that the
Sub-Adviser may, from time to time, make recommendations that result in the
purchase or sale of a particular security by its other clients simultaneously
with the Fund. If transactions on behalf of more than one client during the same
period increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price or quantity. In
such event, the Sub-Adviser shall allocate advisory recommendations and the
placing of orders in a manner that is deemed equitable by the Sub-Adviser to the
accounts involved, including the Fund. When two or more of the clients of the
Sub-Adviser (including the Fund) are purchasing or selling the same security on
a given day from the same Eligible Broker-Dealer, such transactions may be
averaged as to price.
(b) The Sub-Adviser agrees that it will not purchase or sell securities
for the Fund in any transaction in which it, the Adviser or any "affiliated
person" of the Fund, the Adviser or Sub-Adviser or any affiliated person of
such "affiliated person" is acting as principal.
(c) The Sub-Adviser agrees that it will not execute any portfolio
transactions for the Fund with a broker or dealer which is an "affiliated
person" of the Company, the Adviser or the Sub-Adviser or an "affiliated person"
of such an "affiliated person" without the prior written consent of the Adviser.
Notwithstanding the foregoing, transactions may be effected through Piper
Jaffray Inc. if the commissions, fees or other remuneration received by Piper
Jaffray Inc. are reasonable and fair compared to the commissions, fees or other
remuneration paid to other brokers or dealers or other futures commission
merchants in connection with comparable transactions involving similar
securities or similar futures contracts or options thereon being purchased or
sold on an exchange or contract market during a comparable period of time. In
effecting portfolio transactions through Piper Jaffray Inc., the Sub-Adviser
shall comply with Section 17(e)(1) of the 1940 Act.
(d) The Sub-Adviser shall promptly communicate to the Adviser and, if
requested by the Adviser, to the Company's Board of Directors, such information
relating to portfolio transactions as the Adviser may reasonably request. The
parties understand that the Fund shall bear all brokerage commissions in
connection with purchases and sales of portfolio securities for the Fund and all
ordinary and reasonable transaction costs in connection with purchases of such
securities in private placements and subsequent sales thereof.
6. The Sub-Adviser may (at its cost except as contemplated by paragraph 5
of this Agreement) employ, retain or otherwise avail itself of the services and
facilities of persons and entities within its own organization or any other
organization for the purpose of providing the Sub-Adviser, the Adviser or the
Fund with such information, advice or assistance, including but not limited to
advice regarding economic factors and trends and advice as to transactions in
specific securities, as the Sub-Adviser may deem necessary, appropriate or
convenient for the discharge of its obligations hereunder or otherwise helpful
to the Adviser or the Fund, or in the discharge of the Sub-Adviser's overall
responsibilities with respect to the other accounts which it serves as
investment manager or investment adviser.
7. The Sub-Adviser shall cooperate with and make available to the Adviser,
the Fund and an agents engaged by the Fund, the Sub-Adviser's expertise relating
to matters affecting the Fund which involve the Pacific Basin and European
markets, securities or individual companies. Such matters shall include, but
shall not be limited to, assisting in the pricing of Pacific Basin and European
securities owed by the Fund for the purpose of determining the Fund's net asset
value.
<PAGE>
8. For the services to be rendered under this Agreement, and the
facilities to be furnished for each fiscal year of the Fund, the Adviser shall
pay to the Sub-Adviser a monthly management fee of 65% of the basic fee payable
to the Adviser pursuant to the Advisory Agreement with respect to such month
(the "Basic Fee"), subject to adjustment based on a comparison of the
investment performance of the Class A shares of the Fund for the applicable
performance period to the investment record of the Morgan Stanley Capital
International EAFE(sm) Index ("EAFE"). The Basic Fee for each month shall be
adjusted by an amount equal to 90% of the performance adjustment, if any,
received by the Adviser with respect to such month pursuant to the Advisory
Agreement (as described below). For purposes of calculating such performance
adjustment, the applicable performance period shall be a rolling 12-month period
comprised of the most recent calendar month and the 11 immediately preceding
calendar months.
Pursuant to the Advisory Agreement, the Company pays the Adviser monthly,
from the assets of the Fund, a basic fee at the per annum rate of 1.00% of the
Funds average daily net assets up to $100 million, .875% of such assets between
$100 million and $200 million, and .75% on such assets in excess of $200
million. The Basic Fee received by the Adviser shall be increased or decreased,
as the case may be, by .05% (on an annualized basis) of the Fund's average daily
net assets for each percentage point by which the investment performance of the
Fund's Class A shares over the applicable performance period varies from the
EAFE up to a maximum increase or decrease of .25% (on an annualized basis).
RANGE OF PERMITTED INCREASES OR DECREASES
TO THE BASIC FEE PAYABLE TO THE INVESTMENT ADVISER
(ON AN ANNUALIZED BASIS)
Percentage Point Difference
Between Performance of Adjustment
Class A Shares of Fund to Basic Fee
and % Change in-EAFE Index (Annualized)
-------------------------- ------------
+5 percentage + .25%
points or more
+4 + .20
+3 + .15
+2 + .10
+1 + .05
+0 0
-1 - .05
-2 - .10
-3 - .15
-4 - .20
-5 percentage - .25
points or more
In comparing the investment performance of the Fund's Class A shares to
the investment record of the EAFE, dividends and other distributions of the
Fund's Class A shares and dividends and other distributions reported with
respect to component securities of the EAFE during the performance period will
be treated as having been reinvested. Investment performance of the Fund's Class
A shares will be calculated based on the total return of such shares for the
applicable period, which consists of the total net asset value of such shares at
the end of the applicable period, including reinvestment of dividends and
distributions, less the net asset value of such shares at the commencement of
the applicable period divided by the net asset value of such shares at the
commencement of the applicable period. Fractions of a percentage point are
rounded to the nearest whole point (to the higher whole point if exactly
one-half).
<PAGE>
For purposes of calculation of the fee payable hereunder, the "average
daily net assets" of the Fund for a particular period shall be determined on the
basis of the Fund's net assets as determined as of the close of each business
day of the month pursuant to the currently effective prospectus of the Fund.
Pursuant to the terms of an order of exemption granted by the Securities
and Exchange Commission in PIPER FUNDS INC., ET AL., Investment Company Act Rel.
No _____ (____, 1998), all fees payable under this Agreement shall be payable to
an independent escrow agent to be maintained in an interest-bearing escrow
account until this Agreement is approved by shareholders of the Fund in
accordance with the provisions of Section 13 of this Agreement. If shareholders
of the Fund fail to approve this Agreement, the escrow agent will pay to the
Fund the applicable escrowed amounts (including interest earned). The escrow
agent will release the escrowed funds only upon receipt of a certificate from
officers of the Company stating whether the escrowed funds are to be delivered
to the Adviser or the Fund.
9. The Sub-Adviser shall share with the Adviser the costs of assisting the
Fund in complying with all applicable state expense limitations by waiving its
rights to receive its sub-advisory fees in an amount which bears the same ratio
to total fee reductions absorbed by the Adviser under its Investment Advisory
and Management Agreement with the Fund as sub-advisory fees which the
Sub-Adviser would otherwise be entitled to receive during the applicable period
bears to advisory fees which the Adviser would be entitled to receive during
such period had the Fund not exceeded state expense limitations.
10. The Sub-Adviser represents, warrants and agrees that:
(a) The Sub-Adviser is registered as an "investment adviser" under the
investment Advisers Act of 1940 ("Advisers Act") and is currently in compliance
and shall at all times continue to comply with the requirements imposed upon it
by the Advisers Act and other applicable laws and regulations. The Sub-Adviser
agrees to (i) supply the Adviser with such documents as the Adviser may
reasonably request to document compliance with such laws and regulations and
(ii) immediately notify the Adviser of the occurrence of any event which would
disqualify the Sub-Adviser from serving as an investment adviser of a registered
investment company pursuant to any applicable law or regulation.
(b) The Sub-Adviser will maintain, keep current and preserve on behalf of
the Fund all records required or permitted by the 1940 Act in the manner
provided by such Act. The Sub-Adviser agrees that such records are the property
of the Fund, and will be surrendered to the Fund promptly upon request.
(c) The Sub-Adviser will complete such reports concerning purchases or
sales of securities on behalf of the Sub-Adviser as the Adviser may from time to
time require to document compliance with the 1940 Act, the Advisers Act, the
Internal Revenue Code, applicable state securities laws, and other applicable
laws and regulations of regulatory and taxing authorities in countries other
than the United States.
(d) After filing with the Securities and Exchange Commission any
amendment to its ADV, the Sub-Adviser will promptly furnish a copy of such
amendment to the Adviser.
(e) The Sub-Adviser will immediately notify the Adviser of the occurrence
of any event which would disqualify the Sub-Adviser from serving as an
investment adviser of an investment company pursuant to Section 9(a) of the 1940
Act or any other applicable statute or regulation.
11. The Adviser represents, warrants and agrees that:
(a) It has been duly authorized by the Board of Directors of the Company
to delegate to the Sub-Adviser the provision of the services contemplated
hereby.
<PAGE>
(b) The Adviser and the Fund are currently in compliance and shall at all
times continue to comply with the requirements imposed upon the Adviser and the
Fund by applicable law and regulations.
12. The Sub-Adviser will not be liable for any error of judgment or
mistake of law or for any loss suffered by the Fund or its shareholders in
connection with the performance of its duties under this Agreement, except a
loss resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
duties under this Agreement.
13. This Agreement shall become effective as of the date first set forth
above. This Agreement shall continue in effect for a period of two years from
the date of execution, and thereafter shall continue in effect only so long as
such continuance is specifically approved at least annually by the Board of
Directors of the Company or by the vote of the holders of a majority of the
Fund's outstanding shares and, in either case, by a majority of the directors of
the Company who are not parties to the agreement or interested persons of any
such parties (other than as directors of the Company), by vote cast in person at
a meeting called for the purpose of voting on such approval. It shall be the
duty of the directors of the Company to request and evaluate, and the duty of
the Adviser and Sub-Adviser to furnish, such information as may be reasonably
necessary to evaluate the terms of this Agreement and any renewal thereof.
This Agreement may be terminated at any time without the payment of any
penalty: (a) Board of Directors of the Company on sixty (60) days' written
notice to the Adviser and the Sub-Adviser; or (b) by vote of the holders of a
majority of the outstanding shares of the Fund.
This Agreement shall automatically terminate in the event of its
assignment, the term "assignment" for this purpose having the meaning defined
in Section 2(a)(4) of the 1940 Act and the rules thereunder.
14. No amendment to or modification of this Agreement shall be effective
unless and until approved by the vote of a majority of the outstanding shares of
the Fund.
15. This Agreement shall be binding upon, and inure to the benefit of,
the Adviser and the Sub-Adviser, and their respective successors.
16. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby.
17. To the extent that state law is not preempted by the provisions of
any law of the United States heretofore or hereafter enacted, as the same may be
amended from time to time, this Agreement shall be administered, construed and
enforced according to the laws of the State of Minnesota.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed on the date indicated by their officers thereunto duly authorized in
multiple counterparts, each of which shall be an original but all of which shall
constitute one of the same instrument.
PIPER CAPITAL MANAGEMENT
INCORPORATED
By ___________________________
Its _______________________
EDINBURGH FUND MANAGERS plc
By ___________________________
Its _______________________
<PAGE>
Appendix II(b)
SUB-ADVISORY AGREEMENT
THIS AGREEMENT, made this ____ day of ____ 1998, by and between Piper
Capital Management Incorporated, a Delaware corporation (the "Adviser") and
Edinburgh Fund Managers plc, a Scottish corporation (the "Sub-Adviser").
WHEREAS, the Adviser has been retained by Piper Global Funds Inc. (the
"Company"), an open-end diversified management investment company which may
offer its shares in one or more series, to act as the investment adviser to
Emerging Markets Growth Fund, a series of the Company (the "Fund");
WHEREAS, the Fund seeks to accomplish its investment objective of
long-term capital appreciation through investment primarily in common stocks of
issuers in the world's emerging securities markets;
WHEREAS, the Adviser desires to retain the Sub-Adviser to assist the
Adviser in fur an investment program to the Fund;
NOW, THEREFORE, in consideration of the mutual agreements herein made, the
Adviser the Sub-Adviser agree as follows:
1. The Adviser hereby employs the Sub-Adviser to serve as sub-adviser with
respect to the assets of the Fund and to perform the services hereinafter set
forth. The Sub-Adviser hereby accepts such employment and agrees, for the
compensation herein provided, to assume all obligations herein set forth and to
bear all expenses of its performance of such obligations (but no other
expenses). The Sub-Adviser shall not be required to pay expenses of the Company
or of the Fund, including, but not limited to: (a) fees pursuant to any plan of
distribution that the Company may adopt on behalf of the Fund; (b) brokerage and
commission expenses; (c) federal, state, local and foreign taxes, including
issue and transfer taxes incurred by or levied on the Fund; (d) interest charges
on borrowings; (e) the Fund's organizational and offering expenses; (f) the cost
of other personnel providing services to the Fund; (g) fees and expenses of
registering and maintaining registration of the Fund's shares under the
appropriate federal securities laws and of registering or otherwise qualifying
and maintaining registration or qualification of the Fund's shares under
applicable state securities laws and pursuant to any foreign laws; (h) expenses
of printing and distributing reports to shareholders; (i) expenses of printing
and distributing prospectuses annually to existing shareholders; j) costs of
shareholders' meetings and proxy solicitation; (k) charges and expenses of the
Fund's custodian and registrar, transfer agent and dividend disbursing agent;
(l) compensation of the Company's officers, directors and employees that are not
"affiliated persons" or "interested persons" (as defined in Section 2(a) of the
Investment Company Act of 1940, as amended (the "1940 Act") and the rules,
regulations and releases relating thereto) of the Adviser or the Sub-Adviser;
(m) legal and auditing expenses; (n) costs of stationery and supplies; (o)
insurance expenses; (p) association membership dues; (q) travel expenses of
officers and employees of the Sub-Adviser to the extent such expenses relate to
the attendance of such persons at meetings at the request of the Board of
Directors of the Company; (r) travel expenses for attendance at Board of
Directors meetings by members of the Board of Directors of the Company who are
also "interested persons" or "affiliated persons" of the Sub-Adviser; and (s)
all other charges and costs of the Company's operation unless otherwise
explicitly provided herein. The Sub-Adviser shall for all purposes herein be
deemed to be an independent contractor and shall, except as expressly provided
or authorized (whether herein or otherwise) have no authority to act for or on
behalf of the Fund or the Company in any way or otherwise be deemed an agent of
the Fund or the Company.
<PAGE>
2. The Sub-Adviser shall direct the investment of the Fund's assets in
accordance with applicable law and the investment objectives, policies and
restrictions set forth in the then-current Prospectus and Statement of
Additional Information relating to the Fund contained in the Company's
Registration Statement under the 1940 Act and the Securities Act of 1933, as
amended, subject to the supervision of the Company, its officers and directors,
and the Adviser and in accordance with the investment objectives, policies and
restrictions from time to time prescribed by the Board of Directors of the
Company and communicated by the Adviser to the Sub-Adviser and subject to such
further reasonable limitations as the Adviser may from time to time impose by
written notice to the Sub-Adviser.
3. The Sub-Adviser shall formulate and implement a continuing program for
the management of the Funds' assets. The Sub-Adviser shall amend and update such
program from time to time as financial and other economic conditions warrant.
The Sub-Adviser shall make all determinations with respect to the investment of
the assets of the Fund and shall take such steps as may be necessary to
implement the same, including the placement of purchase and sale orders on
behalf of the Fund. The Sub-Adviser shall advise the Adviser and, if requested
by the Adviser, advise the Company's Board of Directors (which shall make all
non-investment decisions with respect to the securities in which the assets of
the Fund may be invested), of the manner in which voting rights, rights to
consent to corporate action, and any other noninvestment decisions pertaining to
the Fund's portfolio securities should be exercised.
4. The Sub-Adviser shall furnish such reports to the Adviser as the
Adviser may reasonably request for the Adviser's use in discharging its
obligations under the Investment Advisory and Management Agreement regarding the
Fund between the Company and the Adviser (the "Advisory Agreement"), which
reports may be distributed by the Adviser to the Company's Board of Directors at
periodic meetings of such Board and at such other times as may be reasonably
requested by the Company's Board of Directors. Copies of all such reports shall
be furnished to the Adviser for examination and review within a reasonable time
prior to the presentation of such reports to the Company's Board of Directors.
5. The Sub-Adviser shall select the brokers and dealers that will execute
the purchases and sales of portfolio instruments for the Fund and markets on or
in which such transactions will be executed and shall place, in the name of the
Fund or its nominee, all such orders.
(a) When placing such orders, the Sub-Adviser shall use its best efforts
to obtain the best available price and most favorable and efficient execution
for the Fund. Where best price and execution may be obtained from more than one
broker or dealer, the Sub-Adviser may, in its discretion, purchase and sell
securities through brokers or dealers who provide research, statistical and
other information to the Sub-Adviser. It is understood that such services may be
used by the Sub-Adviser for all of its investment advisory accounts and
accordingly, not all such services may be used by the Sub-Adviser in connection
with the Fund.
It is understood that certain other clients of the Sub-Adviser may have
investment objectives and policies similar to those of the Fund and that the
Sub-Adviser may, from time to time, make recommendations that result in the
purchase or sale of a particular security by its other clients simultaneously
with the Fund. If transactions on behalf of more than one client during the same
period increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price or quantity. In
such event, the Sub-Adviser shall allocate advisory recommendations and the
placing of orders in a manner that is deemed equitable by the Sub-Adviser to the
accounts involved, including the Fund. When two or more of the clients of the
Sub-Adviser (including the Fund) are purchasing or selling the same security on
a given day from the same broker or dealer, such transactions may be averaged as
to price.
<PAGE>
(b) The Sub-Adviser agrees that, except to the extent permitted under Rule
17a-7 under the 1940 Act, or under any no-action letter or exemptive order
issued to the Company by the Securities and Exchange Commission, it will not
purchase or sell securities for the Fund in any transaction in which it, the
Adviser or any "affiliated person" of the Fund, the Adviser or Sub-Adviser or
any affiliated person of such "affiliated person" is acting as principal. The
Sub-Adviser agrees that any transactions effected under Rule 17a-7 shall comply
with the then-effective procedures adopted under such rule by the Company's
Board of Directors.
(c) The Sub-Adviser agrees that it will not execute any portfolio
transactions for the Fund with a broker or dealer or futures commission merchant
which is an "affiliated person" of the Company, the Adviser or the Sub-Adviser
or an "affiliated person" of such an "affiliated person" without the prior
written consent of the Adviser. Notwithstanding the foregoing, transactions may
be effected through Piper Jaffray Inc. if the commissions, fees or other
remuneration received by Piper Jaffray Inc. are reasonable and fair compared to
the commissions, fees or other remuneration paid to other brokers or dealers or
other futures commission merchants in connection with comparable transactions
involving similar securities or similar futures contracts or options thereon
being purchased or sold on an exchange or contract market during a comparable
period of time. In effecting such transactions, the Sub-Adviser shall comply
with Section 17(e)(1) of the 1940 Act and the then-effective procedures adopted
under Rule 17e-1 thereunder by the Company's Board of Directors.
(d) The Sub-Adviser shall promptly communicate to the Adviser and, if
requested by the Adviser, to the Company's Board of Directors, such information
relating to portfolio transactions as the Adviser may reasonably request. The
parties understand that the Fund shall bear all brokerage commissions in
connection with purchases and sales of portfolio securities for the Fund and all
ordinary and reasonable transaction costs in connection with purchases of such
securities in private placements and subsequent sales thereof.
6. The Sub-Adviser may (at its cost except as contemplated by paragraph 5
of this Agreement) employ, retain or otherwise avail itself of the services and
facilities of persons and entities within its own organization or any other
organization for the purpose of providing the Sub-Adviser, the Adviser or the
Fund with such information, advice or assistance, including but not limited to
advice regarding economic factors and trends and advice as to transactions in
specific securities, as the Sub-Adviser may deem necessary, appropriate or
convenient for the discharge of its obligations hereunder or otherwise helpful
to the Adviser or the Fund, or in the discharge of the Sub-Adviser's overall
responsibilities with respect to the other accounts which it serves as
investment manager or investment adviser.
7. The Sub-Adviser shall cooperate with and make available to the Adviser,
the Fund and any agents engaged by the Fund, the Sub-Adviser's expertise
relating to matters affecting the Fund.
8. For the services to be rendered under this Agreement, the Adviser shall
pay to the Sub-Adviser a monthly management fee at the annual rate of.50% of the
average daily net assets of the Fund.
Except as hereinafter set forth, compensation under this Agreement shall
be calculated and accrued daily and the amounts of the daily accruals shall be
paid monthly on the fifth day following the end of a month. Such calculations
shall be made by applying 1/365th (1/366th in a leap year) of the annual rate to
the Fund's net assets each day determined as of the close of business on that
day or the last previous business day. If this Agreement becomes effective
subsequent to the first day of a month or shall terminate before the last day of
a month, compensation for that part of the month during which this Agreement is
in effect shall be prorated in a manner consistent with the calculation of fees
as set forth above.
Pursuant to the Investment Advisory and Management Agreement, the Adviser
receives monthly from the Fund compensation at the annual rate of 1.00% of the
Fund's daily net assets. If the
<PAGE>
Adviser has undertaken in the Company's Registration Statement, as filed under
the 1940 Act or elsewhere, to waive all or part of its fee under the Investment
Advisory and Management Agreement or to reduce such fee upon order of the Board
of Directors or on the vote of a majority of the outstanding voting securities
of the Fund, the Sub-Adviser's fee payable under this Agreement will be
proportionately waived or reduced in whole or in part.
Pursuant to the terms of an order of exemption granted by the Securities
and Exchange Commission in PIPER FUNDS INC., ET AL., Investment Company Act Rel.
No. ____ (____, 1998), all fees payable under this Agreement shall be payable to
an independent escrow agent to be maintained in an interest-bearing escrow
account until this Agreement is approved by shareholders of the Fund in
accordance with the provisions of Section 13 of this Agreement. If shareholders
of the Fund fail to approve this Agreement, the escrow agent will pay to the
Fund the applicable escrowed amounts (including interest earned). The escrow
agent will release the escrowed funds only upon receipt of a certificate from
officers of the Company stating whether the escrowed funds are to be delivered
to the Adviser or the Fund.
9. The Sub-Adviser shall share with the Adviser the costs of assisting the
Fund in complying with all applicable state expense limitations by waiving its
rights to receive its sub-advisory fees in an amount which bears the same ratio
to total fee reductions absorbed by the Adviser under its Investment Advisory
and Management Agreement with the Fund as sub-advisory fees which the
Sub-Adviser would otherwise be entitled to receive during the applicable period
bears to advisory fees which the Adviser would be entitled to receive during
such period had the Fund not exceeded state expense limitations.
10. The Sub-Adviser represents, warrants and agrees that:
(a) The Sub-Adviser is registered as an "investment adviser" under the
Investment Advisers Act of 1940 ("Advisers Act") and is currently in compliance
and shall at all times continue to comply with the requirements imposed upon it
by the Advisers Act and other applicable laws and regulations. The Sub-Adviser
agrees to (i) supply the Adviser with such documents as the Adviser may
reasonably request to document compliance with such laws and regulations and
(ii) immediately notify the Adviser of the occurrence of any event which would
disqualify the Sub-Adviser from serving as an investment adviser of a registered
investment company pursuant to any applicable law or regulation.
(b) The Sub-Adviser will maintain, keep current and preserve on behalf of
the Fund in the manner provided by the 1940 Act all records required by the 1940
Act with respect to the Sub-Adviser's activities hereunder. The Sub-Adviser
agrees that such records are the property of the Fund, and will be surrendered
to the Fund promptly upon request.
(c) The Sub-Adviser will complete such reports concerning purchases or
sales of securities on behalf of the Fund as the Adviser may from time to time
require to document compliance with the 1940 Act, the Advisers Act, the Internal
Revenue Code, applicable state securities laws, and other applicable laws and
regulations of regulatory and taxing authorities in countries other than the
United States.
(d) After filing with the Securities and Exchange Commission any amendment
to its Form ADV, the Sub-Adviser will promptly furnish a copy of such amendment
to the Adviser.
(e) The Sub-Adviser will immediately notify the Adviser of the occurrence
of any event which would disqualify the Sub-Adviser from serving as an
investment adviser of an investment company pursuant to Section 9 of the
Investment Company Act or any other applicable statute or regulation.
<PAGE>
11. The Adviser represents, warrants and agrees that:
(a) It has been duly authorized by the Board of Directors of the Company
to delegate to the Sub-Adviser the provision of the services contemplated
hereby.
(b) The Adviser and the Fund are currently in compliance and shall at all
times continue to comply with the requirements imposed upon the Adviser and the
Fund by applicable law and regulations.
12. The Sub-Adviser will not be liable for any error of judgment or
mistake of law or for any loss suffered by the Fund or its shareholders in
connection with the performance of its duties under this Agreement, except a
loss resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
duties under this Agreement.
13. This Agreement shall become effective as of the date first set forth
above. Unless sooner terminated as hereinafter provided, this Agreement shall
continue in effect for a period of two years from the date of its execution, and
thereafter shall continue in effect only so long as such continuance is
specifically approved at least annually (a) by the Board of Directors of the
Company or by the vote of a majority of the outstanding voting securities of the
Company, and (b) by the vote of a majority of the Directors who are not parties
to this Agreement or Interested Persons of any such parties, cast in person at a
meeting called for the purpose of voting on such approval. It shall be the duty
of the Directors of the Company to request and evaluate, and the duty of the
Adviser and Sub-Adviser to furnish, such information as may be reasonably
necessary to evaluate the terms of this Agreement and any renewal thereof.
This Agreement may be terminated at any time without the payment of any
penalty (a) by the vote of the Board of Directors of the Company or by the vote
of the holders of a majority of the outstanding voting securities of the Fund,
upon 60 days' written notice to the Adviser and the Sub-Adviser, or (b) by the
Adviser, upon 60 days' written notice to the Sub-Adviser; or (c) by the
Sub-Adviser, upon 60 days' written notice to the Adviser. This Agreement shall
automatically terminate in the event of its assignment as defined in the 1940
Act and the rules thereunder. This Agreement shall automatically terminate upon
completion of the dissolution, liquidation or winding up of the Company
Wherever referred to in this Agreement, the vote or approval of the
holders of a majority of the outstanding voting securities or shares of the
Company shall mean the vote of 67% or more of such shares if the holders of more
than 50% of such shares are present in person or by proxy or the vote of more
than 50% of such shares, whichever is less.
14. No amendment to or modification of this Agreement shall be effective
unless and until approved by the vote of a majority of the outstanding shares of
the Fund.
15. This Agreement shall be binding upon, and inure to the benefit of, the
Adviser and the Sub-Adviser, and their respective successors.
16. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby.
17. To the extent that state law is not preempted by the provisions of any
law of the United States heretofore or hereafter enacted, as the same may be
amended from time to time, this Agreement shall be administered, construed and
enforced according to the laws of the State of Minnesota.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed on the date indicated by their officers thereunto duly authorized in
multiple counterparts, each of which shall be an original but all of which shall
constitute one of the same instrument.
PIPER CAPITAL MANAGEMENT
INCORPORATED
By ___________________________
Its _______________________
EDINBURGH FUND MANAGERS plc
By ___________________________
Its _______________________
<PAGE>
APPENDIX III(a)
AGREEMENT AND PLAN OF REORGANIZATION
BY AND BETWEEN
FIRST AMERICAN INVESTMENT FUNDS, INC.
AND
PIPER FUNDS INC.
DATED: AS OF __________ __, 1998
TABLE OF CONTENTS
SECTION PAGE
- ------- ----
1. CONVEYANCE OF ASSETS OF PIPER FUNDS................................. 2
2. LIQUIDATION OF PIPER FUNDS.......................................... 4
3. EFFECTIVE TIME OF THE REORGANIZATION................................ 5
4. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF PIPER......... 5
5. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF FAIF.......... 8
6. SHAREHOLDER ACTION.................................................. 10
7. REGULATORY FILINGS.................................................. 10
8. AMENDMENT FILING.................................................... 10
9. FAIF CONDITIONS..................................................... 10
10. PIPER CONDITIONS.................................................... 13
11. FURTHER ASSURANCES.................................................. 14
12. INDEMNIFICATION..................................................... 14
13. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.......................... 15
14. TERMINATION OF AGREEMENT............................................ 15
15. AMENDMENT AND WAIVER................................................ 15
16. GOVERNING LAW....................................................... 15
17. SUCCESSORS AND ASSIGNS.............................................. 15
18. BENEFICIARIES....................................................... 15
19. BROKERAGE FEES AND EXPENSES......................................... 15
20. NOTICES............................................................. 16
21. ANNOUNCEMENTS....................................................... 16
22. ENTIRE AGREEMENT.................................................... 16
23. COUNTERPARTS........................................................ 16
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made
as of this ____ day of _____, 1998 by and between Piper Funds Inc. ("Piper"), a
Minnesota corporation consisting of multiple investment portfolios including,
among others, Small Company Growth Fund, Emerging Growth Fund, Growth Fund,
Growth and Income Fund, Balanced Fund, Government Income Fund, Intermediate Bond
Fund, National Tax-Exempt Fund and Minnesota Tax-Exempt Fund (such named
portfolios are referred to herein as the "Piper Funds"), and First American
Investment Funds, Inc. ("FAIF"), a Maryland corporation consisting of multiple
investment portfolios including, among others, Small Cap Growth Fund, Mid Cap
Growth Fund, Large Cap Growth Fund, Large Cap Value Fund, Balanced Fund,
Intermediate Term Income Fund, Fixed Income Fund, Tax Free Fund and Minnesota
Tax Free Fund (such named portfolios are referred to herein as the "FAIF
Funds").
WHEREAS, each of Piper and FAIF is an open-end management investment
company registered with the Securities and Exchange Commission (the "SEC") under
the Investment Company Act of 1940, as amended (the "1940 Act");
<PAGE>
WHEREAS, the parties desire that the assets and liabilities of each
Piper Fund be conveyed to, and be acquired and assumed by, the respective FAIF
Fund corresponding thereto, as stated herein, in exchange for shares of
specified classes of the corresponding FAIF Fund which shall thereafter promptly
be distributed by Piper to the shareholders of the corresponding classes of the
Piper Fund in connection with its liquidation as described in this Agreement
(the "Reorganization");
WHEREAS, the distribution of FAIF Fund shares to Piper Fund
shareholders and the retirement and cancellation of Piper Fund shares will be
effected pursuant to an amendment to the Articles of Incorporation of Piper in
the form attached hereto as Exhibit 1 (the "Amendment"), to be adopted by Piper
in accordance with the Minnesota Business Corporation Act;
WHEREAS, the parties intend that the following FAIF Funds -- Mid Cap
Growth Fund, Minnesota Tax Free Fund and Tax Free Fund (the "Shell FAIF Funds")
- -- shall have nominal assets and liabilities before the Reorganization and shall
continue the investment operations of the corresponding Piper Funds thereafter,
and that in this regard certain actions shall be taken as described in this
Agreement;
WHEREAS, FAIF also maintains twenty additional investment portfolios
- -- Micro Cap Value Fund, Regional Equity Fund, Small Cap Value Fund, Mid Cap
Value Fund, Equity Income Fund, Equity Index Fund, Health Sciences Fund, Real
Estate Securities Fund, Technology Fund, Emerging Markets Fund, International
Fund, International Index Fund, Minnesota Intermediate Tax Free Fund, California
Intermediate Tax Free Fund, Colorado Intermediate Tax Free Fund, Intermediate
Tax Free Fund, Limited Term Income Fund, Adjustable Rate Mortgage Securities
Fund, Intermediate Government Bond Fund and Strategic Income Fund -- that are
not parties to the Reorganization; and
WHEREAS, Piper also maintains three additional investment portfolios
- -- Money Market Fund, U.S. Government Money Market Fund and Tax-Exempt Money
Market Fund -- that are not parties to the Reorganization.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth and subject to the terms and conditions hereof,
the parties hereto, intending to be legally bound, agree as follows:
1. CONVEYANCE OF ASSETS OF PIPER FUNDS. (a) At the Effective Time of
the Reorganization, as defined in Section 3, all assets of every kind, and all
interests, rights, privileges and powers of each of the Piper Funds, subject to
all liabilities of such Funds, whether accrued, absolute, contingent or
otherwise existing as of the Effective Time of the Reorganization, which
liabilities shall include any obligation of the Piper Funds to indemnify the
directors and officers of Piper, acting in their capacities as such, to the
fullest extent permitted by law and Piper's Articles of Incorporation as in
effect on the date hereof (such assets subject to such liabilities are herein
referred to as the "Fund Assets"), shall be transferred and conveyed by each
Piper Fund to the corresponding FAIF Fund (as set forth below) and shall be
accepted and assumed by such FAIF Fund as more particularly set forth in this
Agreement and in the Amendment, such that at and after the Effective Time of the
Reorganization: (i) all assets of the Piper Funds shall become and be the assets
of the respective corresponding FAIF Funds; and (ii) all liabilities of the
Piper Funds shall attach to the respective corresponding FAIF Funds as aforesaid
and may thenceforth be enforced against the respective FAIF Funds to the same
extent as if incurred by them.
(b) Without limiting the generality of the foregoing, it is
understood that the Fund Assets shall include all property and assets of any
nature whatsoever, including, without limitation, all cash, cash equivalents,
securities, claims (whether absolute or contingent, known or unknown, accrued or
unaccrued) and receivables (including dividend and interest receivables) owned
by each Piper Fund, and any deferred or prepaid expenses shown as an asset on
each Piper Fund's books, at the Effective Time of the Reorganization, and all
goodwill, all other intangible property and all books and records belonging
<PAGE>
to the Piper Funds. Notwithstanding anything herein to the contrary, FAIF shall
not be deemed to have assumed any liability of Piper to FAIF that arises as a
result of the breach of any of the representations, warranties and agreements of
Piper set forth in Section 4, hereof.
(c) In particular, the Fund Assets of each Piper Fund shall be
transferred and conveyed to the corresponding FAIF Fund, as set forth below:
PIPER FUND CORRESPONDING FAIF FUND
- ---------- -----------------------
Small Company Growth Fund Small Cap Growth Fund
Emerging Growth Fund Mid Cap Growth Fund*
Growth Fund Large Cap Growth Fund
Growth and Income Fund Large Cap Value Fund
Balanced Fund Balanced Fund
Minnesota Tax-Exempt Fund Minnesota Tax Free Fund*
National Tax-Exempt Fund Tax Free Fund*
Intermediate Bond Fund Intermediate Term Income Fund
Government Income Fund Fixed Income Fund
- --------------------
* These FAIF Funds shall be new investment portfolios with nominal assets
and liabilities prior to the Effective Time of the Reorganization.
(d) In exchange for the transfer of the Fund Assets, each FAIF Fund
shall simultaneously issue to each corresponding Piper Fund at the Effective
Time of the Reorganization full and fractional shares of common stock in the
FAIF Fund of the classes set forth in the table below having an aggregate net
asset value equal to the net value of the Fund Assets so conveyed, all
determined and adjusted as provided in this Section 1. In particular, each FAIF
Fund shall deliver to the corresponding Piper Fund the number of shares of each
of its share classes set forth in the table, including fractional shares,
determined by dividing the value of the Fund Assets of the corresponding Piper
Fund that are so conveyed and are attributable to each of the FAIF Fund's
respective share classes set forth in the table, computed in the manner and as
of the time and date set forth in this Section, by the net asset value of one
FAIF Fund share of the particular share class that is to be delivered with
respect thereto, computed in the manner and as of the time and date set forth in
this Section.
(e) The net asset value of shares to be delivered by the FAIF Funds,
and the net value of the Fund Assets to be conveyed by the Piper Funds, shall,
in each case, be determined as of the Effective Time of the Reorganization. The
net asset value of shares of the FAIF Funds shall be computed in the manner set
forth in the FAIF Funds' then current prospectuses under the Securities Act of
1933, as amended (the "1933 Act"). The net value of the Fund Assets to be
transferred by the Piper Funds shall be computed by Piper and shall be subject
to adjustment by the amount, if any, agreed to by FAIF and the respective Piper
Funds. In determining the value of the securities transferred by the Piper Funds
to the FAIF Funds, each security shall be priced in accordance with the pricing
policies and procedures of FAIF as described in its then current prospectuses.
For such purposes, price quotations and the security characteristics relating to
establishing such quotations shall be determined by Piper, provided that such
determination shall be subject to the approval of FAIF. Piper and FAIF agree to
use all commercially reasonable efforts to resolve any material pricing
differences between the prices of portfolio securities determined in accordance
with the pricing policies and procedures of Piper and those determined in
accordance with the pricing policies and procedures of FAIF prior to the
Effective Time of the Reorganization.
<PAGE>
(f) The classes of shares of each FAIF Fund that will be delivered
in the Reorganization are as follows:
PIPER CORRESPONDING FAIF
FUND/SHARE CLASS FUND/SHARE CLASS
---------------- ----------------
Small Company Growth Fund-- Small Cap Growth Fund--
Class A Shares Class A Shares
Class B Shares Class A Shares
Emerging Growth Fund-- Mid Cap Growth Fund--
Class A Shares Class A Shares
Class B Shares Class A Shares
Class Y Shares Class Y Shares
Growth Fund-- Large Cap Growth Fund--
Class A Shares Class A Shares
Class B Shares Class A Shares
Growth and Income Fund-- Large Cap Value Fund
Class A Shares Class A Shares
Class B Shares Class A Shares
Class Y Shares Class Y Shares
Balanced Fund-- Balanced Fund--
Class A Shares Class A Shares
Class B Shares Class A Shares
Minnesota Tax-Exempt Fund-- Minnesota Tax Free Fund--
Class A Shares Class A Shares
Class Y Shares Class Y Shares
National Tax-Exempt Fund Tax Free Fund
Class A Shares Class A Shares
Intermediate Bond Fund-- Intermediate Term Income Fund--
Class A Shares Class A Shares
Class Y Shares Class Y Shares
Government Income Fund-- Fixed Income Fund--
Class A Shares Class A Shares
2. LIQUIDATION OF PIPER FUNDS. At the Effective Time of the
Reorganization, each of the Piper Funds shall make a liquidating distribution to
its shareholders as follows. Shareholders of record of each Piper Fund shall be
credited with full and fractional shares of the class of common stock that is
issued by the corresponding FAIF Fund in connection with the Reorganization with
respect to the shares that are held of record by the shareholder. In addition,
each shareholder of record of a Piper Fund shall have the right to receive any
unpaid dividends or other distributions which were declared before the Effective
Time of the Reorganization with respect to the shares of such Piper Fund that
are held by the shareholder at the Effective Time of the Reorganization. In
accordance with instructions it receives from Piper, FAIF shall record on its
books the ownership of the respective FAIF Fund shares by the shareholders of
record of the Piper Funds. All of the issued and outstanding shares of the Piper
Funds at the Effective Time of the Reorganization shall be redeemed and canceled
on the books of Piper at such time. After the Effective Time of the
Reorganization, Piper shall wind up the affairs of the
<PAGE>
Piper Funds and shall file any final regulatory reports, including but not
limited to any Form N-SAR and Rule 24f-2 filings with respect to the Piper Funds
and, assuming the three other investment portfolios of Piper have wound up their
operations, an application pursuant to Section 8(f) of the 1940 Act for an order
declaring that Piper has ceased to be an investment company.
3. EFFECTIVE TIME OF THE REORGANIZATION. (a) Delivery of the Fund
Assets and the shares of the FAIF Funds to be issued pursuant to Section 1 and
the liquidation of the Piper Funds pursuant to Section 2 (the "Closing") shall
occur as of the close of normal trading on the New York Stock Exchange (the
"Exchange") (currently, 4:00 p.m. Eastern time), and after the declaration of
any dividends or distributions on such date, on July 31, 1998, or at such time
on such later date as provided herein or as the parties otherwise may agree in
writing. (The date and time at which such actions are taken are referred to
herein as the "Effective Time of the Reorganization.") To the extent any Fund
Assets are, for any reason, not transferred at the Effective Time of the
Reorganization, Piper shall cause such Fund Assets to be transferred in
accordance with this Agreement at the earliest practicable date thereafter. All
acts taking place at the Closing shall be deemed to take place simultaneously as
of the Effective Time of the Reorganization unless otherwise agreed to by the
parties. The Closing shall be held at the offices of Dorsey & Whitney LLP, 220
South Sixth Street, Minneapolis, Minnesota 55402, or at such other place as the
parties may agree.
(b) In the event the Effective Time of the Reorganization occurs on
a day on which (i) the Exchange or another primary trading market for portfolio
securities of the FAIF Funds or the Piper Funds shall be closed to trading or
trading thereon shall be restricted, or (ii) trading or the reporting of trading
on the Exchange or elsewhere shall be disrupted so that accurate appraisal of
the value of the net assets of the FAIF Funds or the Piper Funds is
impracticable, the Effective Time of the Reorganization shall be postponed until
the close of normal trading on the Exchange on the first business day when
trading shall have been fully resumed and reporting shall have been restored.
4. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF PIPER.
Piper, on behalf of itself and the Piper Funds, represents and warrants to, and
agrees with, FAIF as follows, such representations, warranties and agreements
being made on behalf of each Piper Fund on a several (and not joint, or joint
and several) basis:
(a) It is a Minnesota corporation duly created pursuant
to its Articles of Incorporation for the purpose of acting as a
management investment company under the 1940 Act, and is validly
existing under the laws of the State of Minnesota. It is registered
as an open-end management investment company under the 1940 Act, and
its registration with the SEC as an investment company is in full
force and effect.
(b) It has the power to own all of its properties and
assets and, subject to the approvals of shareholders referred to in
Section 6, to carry out and consummate the transactions contemplated
herein, and has all necessary federal, state and local
authorizations to carry on its business as now being conducted and,
except as stated in Section 4(j), below, to consummate the
transactions contemplated by this Agreement.
(c) This Agreement has been duly authorized, executed
and delivered by it, and represents a valid and binding contract,
enforceable in accordance with its terms, subject as to enforcement
to bankruptcy, insolvency, reorganization, moratorium or other
similar laws of general application relating to or affecting
creditors' rights and to the application of general principles of
equity. The execution and delivery of this Agreement does not, and,
subject to the approval of shareholders referred to in Section 6,
the consummation of the transactions contemplated by this Agreement
will not, violate Piper's Articles of Incorporation or By-Laws or
any agreement or arrangement to which it is a party or by which it
is bound.
<PAGE>
(d) Each Piper Fund has elected to qualify and has
qualified as a regulated investment company under Part I of
Subchapter M of Subtitle A, Chapter 1, of the Internal Revenue Code
of 1986, as amended (the "Code"), as of and since its first taxable
year, except that Small Company Growth Fund (formerly Sector
Performance Fund) failed to so qualify for the taxable years ended
September 30, 1988, 1990 and 1992; each Fund has been a regulated
investment company under such Part of the Code at all times since
the end of its first taxable year when it so qualified; and each
Fund qualifies and shall continue to qualify as a regulated
investment company for its taxable year ending upon its liquidation.
(e) The audited financial statements for its fiscal year
ended September 30, 1997, and the unaudited financial statements for
the period ended March 31, 1998, copies of which have been
previously furnished to FAIF, present fairly the financial position
of the Piper Funds as of such dates and the results of their
operations and changes in their net assets for the periods
indicated, in conformity with generally accepted accounting
principles applied on a consistent basis. To the best of Piper's
knowledge, there are no liabilities of a material amount of any
Piper Fund, whether accrued, absolute, contingent or otherwise
existing, other than: (i) as of March 31, 1998, liabilities
disclosed or provided for in the unaudited financial statements for
the period ended March 31, 1998 and liabilities incurred in the
ordinary course of business subsequent to March 31, 1998 and (ii) as
of the Effective Time of the Reorganization, liabilities disclosed
or provided for in the statement of assets and liabilities of each
Piper Fund that is delivered to FAIF pursuant to Section 8(b) of
this Agreement and liabilities incurred in the ordinary course of
business.
(f) Since the end of its most recently concluded fiscal
year, there have been no material changes by any Piper Fund in
accounting methods, principles or practices, including those
required by generally accepted accounting principles, except as
disclosed in writing to FAIF.
(g) It has valued, and will continue to value, its
portfolio securities and other assets in accordance with applicable
legal requirements.
(h) Except as disclosed in the Piper Funds' currently
effective Prospectuses and Statements of Additional Information or
as otherwise disclosed in writing to FAIF, there are no material
legal, administrative or other proceedings pending or, to its
knowledge, threatened, against it or the Piper Funds which could
result in liability on the part of Piper or the Piper Funds and
Piper knows of no facts that might form the basis of a legal,
administrative or other proceeding which, if adversely determined,
would materially and adversely affect any Piper Fund's financial
condition or the conduct of its business and Piper is not a party to
or subject to the provisions of any order, decree or judgment of any
court or governmental body that materially and adversely affects, or
is reasonably likely to materially and adversely affect, its
business or its ability to consummate the transactions contemplated
herein.
(i) At the Effective Time of the Reorganization, all
federal and other tax returns and reports of each Piper Fund
required by law to have been filed by such time shall have been
filed, and all federal and other taxes shall have been paid so far
as due, or provision shall have been made for the payment thereof
and, to the best of Piper's knowledge, no such return or report
shall be currently under audit and no assessment shall have been
asserted with respect to such returns or reports.
(j) Subject to the approvals of shareholders referred to
in Section 6, at the Effective Time of the Reorganization, it shall
have full right, power and authority to sell, assign, transfer and
deliver the Fund Assets and, upon delivery and payment for the Fund
Assets as contemplated herein, the FAIF Funds shall acquire good and
marketable title thereto, subject to no restrictions on the
ownership or transfer thereof, except as imposed by federal or state
<PAGE>
securities laws or as disclosed to FAIF in writing prior to the
Effective Time of the Reorganization.
(k) No consent, approval, authorization or order of any
court or governmental authority is required for the consummation by
it of the transactions contemplated by this Agreement, except such
as may be required under the 1933 Act, the Securities Exchange Act
of 1934, as amended (the "1934 Act"), the 1940 Act, the rules and
regulations under those Acts, or state securities laws, all of which
shall have been received prior to the Effective Time of the
Reorganization, except for such consents, approvals, authorizations
or orders as may be required subsequent to the Effective Time of the
Reorganization.
(l) Insofar as the following relate to it, (i) the
registration statement filed by FAIF on Form N-14 relating to the
shares of the FAIF Funds that will be registered with the SEC
pursuant to this Agreement, which shall include or incorporate by
reference the proxy statement of the Piper Funds and prospectuses of
the FAIF Funds with respect to the transactions contemplated by this
Agreement, and any supplement or amendment thereto or to the
documents contained or incorporated therein by reference (the "N-14
Registration Statement"), and (ii) the proxy materials of Piper
included in the N-14 Registration Statement and filed with the SEC
pursuant to Section 14(a) of the 1934 Act and Section 20(a) of the
1940 Act with respect to the transactions contemplated by this
Agreement, and any supplement or amendment thereto or the documents
appended thereto (the "Reorganization Proxy Materials"), from their
respective effective and clearance dates with the SEC, through the
time of the shareholders meeting referred to in Section 6 and at the
Effective Time of the Reorganization: (i) shall comply in all
material respects with the provisions of the 1933 Act, 1934 Act and
the 1940 Act, and the rules and regulations thereunder, and (ii)
shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided, that the
representations and warranties made by it in this subsection shall
not apply to statements in or omissions from the N-14 Registration
Statement or the Reorganization Proxy Materials made in reliance
upon and in conformity with information furnished by or on behalf of
FAIF for use therein as provided in Section 7. For these purposes,
information shall be considered to have been provided "on behalf" of
FAIF if furnished by its investment adviser, administrator,
custodian or transfer agent, acting in their capacity as such.
(m) All of the issued and outstanding shares of each of
the Piper Funds have been validly issued and are fully paid and
non-assessable, and were offered for sale and sold in conformity
with the registration requirements of all applicable federal and
state securities laws.
(n) It shall not sell or otherwise dispose of any shares
of the FAIF Funds to be received in the transactions contemplated
herein, except in distribution to its shareholders as contemplated
herein.
(o) It shall operate its business in the ordinary course
between the date hereof and the Effective Time of the
Reorganization. It is understood that such ordinary course of
business will include the declaration and payment of customary
dividends and distributions and any other dividends and
distributions deemed advisable.
(p) Any reporting responsibility of a Piper Fund is and
shall remain the responsibility of the Piper Fund for all periods
before and including the Effective Time of the Reorganization and
such later date on which the Piper Fund is terminated.
(q) Except for agreements or other arrangements relating
to the purchase and sale of portfolio securities, it has furnished
FAIF with copies or descriptions of all contracts to which it is a
party.
<PAGE>
(r) Each Piper Fund shall provide a list of all
portfolio securities held by it to FAIF at least fifteen days before
the Effective Time of the Reorganization and shall immediately
notify FAIF's investment adviser of any portfolio security
thereafter acquired or sold by the Piper Fund. At the Effective Time
of the Reorganization, no Piper Fund shall hold any portfolio
security that is impermissible under the investment policies,
objectives and limitations of the corresponding FAIF Fund.
5. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF FAIF.
FAIF, on behalf of the FAIF Funds, represents and warrants to, and agrees with,
Piper as follows, such representations, warranties and agreements being made on
behalf of each FAIF Fund on a several (and not joint, or joint and several)
basis:
(a) It is a Maryland corporation duly created pursuant
to its Articles of Incorporation for the purpose of acting as a
management investment company under the 1940 Act, and is validly
existing under the laws of the State of Maryland. It is registered
as an open-end management investment company under the 1940 Act and
its registration with the SEC as an investment company is in full
force and effect.
(b) It has the power to own all of its properties and
assets and to consummate the transactions contemplated herein, and
has all necessary federal, state and local authorizations to carry
on its business as now being conducted and, except as stated in
Section 5(j) below, to consummate the transactions contemplated by
this Agreement.
(c) This Agreement has been duly authorized, executed
and delivered by it, and represents a valid and binding contract,
enforceable in accordance with its terms, subject as to enforcement
to bankruptcy, insolvency, reorganization, moratorium or other
similar laws of general application relating to or affecting
creditors' rights and to the application of general principles of
equity. The execution and delivery of this Agreement does not, and
the consummation of the transactions contemplated by this Agreement
will not, violate FAIF's Articles of Incorporation or By-Laws or any
agreement or arrangement to which it is a party or by which it is
bound.
(d) Each FAIF Fund intends to qualify as a regulated
investment company under Part I of Subchapter M of the Code, and
with respect to each FAIF Fund that has conducted operations prior
to the Effective Time of the Reorganization, has elected to qualify
and has qualified as a regulated investment company under Part I of
Subchapter M of Subtitle A, Chapter 1, of the Code, as of and since
its first taxable year; has been a regulated investment company
under such Part of the Code at all times since the end of its first
taxable year when it so qualified; and qualifies and shall continue
to qualify as a regulated investment company for its current taxable
year.
(e) The audited financial statements for its fiscal year
ended September 30, 1997, and the unaudited financial statements for
the period ended March 31, 1998, copies of which have been
previously furnished to Piper, present fairly the financial position
of the FAIF Funds as of such dates and the results of their
operations for the periods indicated, in conformity with generally
accepted accounting principles applied on a consistent basis. To the
best of FAIF's knowledge, there are no liabilities of a material
amount of any FAIF Fund, whether accrued, absolute, contingent or
otherwise existing, other than, as of March 31, 1998, liabilities
disclosed or provided for in the unaudited financial statements for
the period ended March 31, 1998, and liabilities incurred in the
ordinary course of business subsequent to March 31, 1998.
(f) It has valued, and will continue to value, its
portfolio securities and other assets in accordance with applicable
legal requirements.
<PAGE>
(g) There are no material contracts outstanding with
respect to the FAIF Funds that have not been disclosed in FAIF's
current registration statement and which under applicable law are
required to be disclosed therein.
(h) At the Effective Time of the Reorganization, all
federal and other tax returns and reports of each FAIF Fund required
by law to have been filed by such time shall have been filed, and
all federal and other taxes shall have been paid so far as due, or
provisions shall have been made for the payment thereof and, to the
best knowledge of each FAIF Fund, no such return or report shall be
currently under audit and no assessment shall have been asserted
with respect to such returns or reports.
(i) There are no material legal, administrative or other
proceedings pending or, to its knowledge threatened, against it or
the FAIF Funds which could result in liability on the part of FAIF
or the FAIF Funds and FAIF knows of no facts that might form the
basis of a legal, administrative or other proceeding which, if
adversely determined, would materially and adversely affect any FAIF
Fund's financial condition or the conduct of its business and FAIF
is not a party to or subject to the provisions of any order, decree
or judgment of any court or governmental body that materially and
adversely affects, or is reasonably likely to materially and
adversely affect, its business or its ability to consummate the
transactions contemplated herein.
(j) No consent, approval, authorization or order of any
court or governmental authority is required for the consummation by
FAIF of the transactions contemplated by this Agreement, except such
as may be required under the 1933 Act, the 1934 Act, the 1940 Act,
the rules and regulations under those Acts, or state securities
laws, all of which shall have been received prior to the Effective
Time of the Reorganization, except for such consents, approvals,
authorizations or orders as may be required subsequent to the
Effective Time of the Reorganization.
(k) The N-14 Registration Statement and the
Reorganization Proxy Materials, from their respective effective and
clearance dates with the SEC, through the time of the shareholders
meeting referred to in Section 6 and at the Effective Time of the
Reorganization, insofar as they relate to FAIF (i) shall comply in
all material respects with the provisions of the 1933 Act, the 1934
Act and the 1940 Act, and the rules and regulations thereunder, and
(ii) shall not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements made therein not misleading;
provided, that the representations and warranties in this subsection
shall not apply to statements in or omissions from the N-14
Registration Statement or the Reorganization Proxy Materials made in
reliance upon and in conformity with information furnished by or on
behalf of Piper for use therein as provided in Section 7. For those
purposes, information shall be considered to have been provided "on
behalf" of Piper if furnished by its investment adviser,
administrator, custodian or transfer agent, acting in their capacity
as such.
(l) The shares of the FAIF Funds to be issued and
delivered to the Piper Funds for the account of the shareholders of
the Piper Funds, pursuant to the terms hereof, shall have been duly
authorized as of the Effective Time of the Reorganization and, when
so issued and delivered, shall be duly and validly issued, fully
paid and non-assessable, and no shareholder of FAIF shall have any
preemptive right of subscription or purchase in respect thereto.
(m) All of the issued and outstanding shares of each of
the FAIF Funds have been validly issued and are fully paid and
non-assessable, and were offered for sale and sold in conformity
with the registration requirements of all applicable federal and
state securities laws.
<PAGE>
(n) It shall operate its business in the ordinary course
between the date hereof and the Effective Time of the
Reorganization. It is understood that such ordinary course of
business will include the declaration and payment of customary
dividends and distributions and any other dividends and
distributions deemed advisable.
6. SHAREHOLDER ACTION. As soon as practicable after the effective
date of the N-14 Registration Statement and SEC clearance of the proxy
solicitation materials referred to in Section 7, but in any event prior to the
Effective Time of the Reorganization and as a condition thereto, the Board of
Directors of Piper shall call, and Piper shall hold, a meeting of the
shareholders of each of the Piper Funds for the purpose of considering and
voting upon:
(a) in the case of all Piper Funds, a proposal, in
connection with the merger between U.S. Bancorp and Piper Jaffray
Companies Inc., to ratify and approve investment advisory
agreements, on behalf of each Piper Fund, between Piper and Piper
Capital Management Incorporated;
(b) in the case of all Piper Funds, approval of this
Agreement and the transactions contemplated hereby, which approval
shall be considered a vote in favor of the Amendment; and
(c) such other matters as may be determined by the
Boards of Directors of Piper and FAIF.
7. REGULATORY FILINGS. FAIF shall file a post-effective amendment
(the "N-1A Post-Effective Amendment") to its registration statement on Form N-1A
(File Nos. 33-16905; 811-5309) with the SEC as promptly as practicable so that
the Shell FAIF Funds and their shares are registered under the 1933 Act and 1940
Act and shall take all required actions to qualify such shares for sale in the
appropriate states. In addition, FAIF shall file an N-14 Registration Statement,
which shall include the Reorganization Proxy Materials of Piper, with the SEC,
and with the appropriate state securities commissions, relating to the matters
described in Section 6 as promptly as practicable. FAIF and Piper have
cooperated and shall continue to cooperate with each other, and have furnished
and shall continue to furnish each other with the information relating to itself
that is required by the 1933 Act, the 1934 Act, the 1940 Act, and the rules and
regulations under each of those Acts, to be included in the N-1A Post-Effective
Amendment, the N-14 Registration Statement and the Reorganization Proxy
Materials.
8. AMENDMENT FILING. Prior to the Effective Time of the
Reorganization and as a condition thereto, Piper shall have filed the Amendment
in accordance with applicable provisions of Minnesota law.
9. FAIF CONDITIONS. The obligations of FAIF hereunder shall be
subject to the following conditions precedent:
(a) This Agreement and the transactions contemplated by
this Agreement (which shall not be deemed to include, for these
purposes, the matters described in Section 6(a)) shall have been
approved by the Board of Directors of Piper and by the shareholders
of the Piper Funds in the manner required by law and this Agreement.
(b) Piper shall have delivered to FAIF a statement of
assets and liabilities of each Piper Fund, together with a list of
the portfolio securities of the Piper Fund showing the tax costs of
such securities by lot and the holding periods of such securities,
as of the Effective Time of the Reorganization, certified by the
Treasurer of Piper as having been prepared in accordance with
generally accepted accounting principles consistently applied.
<PAGE>
(c) Piper shall have duly executed and delivered to FAIF
such bills of sale, assignments, certificates and other instruments
of transfer ("Transfer Documents") as FAIF may reasonably deem
necessary or desirable to transfer all of each Piper Fund's right,
title and interest in and to the Fund Assets. Such Fund Assets shall
be accompanied by all necessary state stock transfer stamps or cash
for the appropriate purchase price therefor.
(d) All representations and warranties of Piper made in
this Agreement shall be true and correct in all material respects as
if made at and as of the Effective Time of the Reorganization.
(e) Piper shall have delivered to FAIF a certificate
executed in its name by its President or Vice President and its
Treasurer or Assistant Treasurer, in a form reasonably satisfactory
to FAIF and dated as of the Effective Time of the Reorganization, to
the effect that the representations and warranties of the Piper
Funds made in this Agreement are true and correct at and as of the
Effective Time of the Reorganization, except as they may be affected
by the transactions contemplated by this Agreement.
(f) Piper shall have delivered to FAIF Piper's written
instructions to the custodian for the Piper Funds, acknowledged and
agreed to in writing by such custodian, irrevocably instructing such
custodian to transfer to each FAIF Fund all of the corresponding
Piper Fund's portfolio securities, cash and any other assets to be
acquired by such FAIF Fund pursuant to this Agreement.
(g) Piper shall have delivered to FAIF a certificate of
Piper's transfer agent stating that the records maintained by the
transfer agent (which shall be made available to FAIF) contain the
names and addresses of the shareholders of each Piper Fund and the
numbers and classes of the outstanding shares of such Piper Fund
owned by each such shareholder as of the Effective Time of the
Reorganization.
(h) At or prior to the Effective Time of the
Reorganization, the expenses incurred by each Piper Fund (or accrued
up to the Effective Time of the Reorganization) shall have been
maintained by Piper Funds' investment adviser or otherwise so as not
to exceed any contractual expense limitations or any expense
limitations set forth in such Piper Fund's then current prospectus.
(i) At or prior to the Effective Time of the
Reorganization, appropriate action shall have been taken by Piper
Funds' investment adviser or otherwise such that no unamortized
organizational expenses shall be reflected in any Piper Fund's
statement of assets and liabilities delivered pursuant to Section
8(b).
(j) FAIF shall have received an opinion of Dorsey &
Whitney LLP, counsel to Piper, in form reasonably satisfactory to
FAIF and dated the Effective Time of the Reorganization,
substantially to the effect that (i) Piper is a Minnesota
corporation duly established and validly existing under the laws of
the State of Minnesota; (ii) this Agreement and the Transfer
Documents have been duly authorized, executed and delivered by Piper
and represent legal, valid and binding contracts, enforceable in
accordance with their terms, subject as to enforcement to
bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and other similar laws of general application relating to
or affecting creditors' rights and to the application of general
principles of equity; (iii) the execution and delivery of this
Agreement did not, and the consummation of the transactions
contemplated by this Agreement will not, violate the Articles of
Incorporation or Bylaws of Piper or any material contract known to
such counsel to which Piper is a party or by which it is bound; (iv)
the only Piper shareholder approvals required with respect to the
consummation of the transactions contemplated by this Agreement are
the approval, for each Piper Fund, of a majority of the outstanding
shares of
<PAGE>
each class, voting as separate classes; and (v) no consent,
approval, authorization or order of any court or governmental
authority is required for the consummation by Piper of the
transactions contemplated by this Agreement, except such as have
been obtained under the 1933 Act, the 1934 Act, the 1940 Act, the
rules and regulations under those Acts and such as may be required
under the state securities laws or such as may be required
subsequent to the Effective Time of the Reorganization. Such opinion
may rely on the opinion of other counsel to the extent set forth in
such opinion, provided such other counsel is reasonably acceptable
to FAIF.
(k) FAIF shall have received an opinion of Dorsey &
Whitney LLP addressed to FAIF and Piper in form reasonably
satisfactory to them, and dated the Effective Time of the
Reorganization, substantially to the effect that, for federal income
tax purposes (i) the transfer by each Piper Fund of all of its Fund
Assets to the corresponding FAIF Fund in exchange for shares of the
corresponding FAIF Fund, and the distribution of such shares to the
shareholders of the Piper Fund, as provided in this Agreement, will
constitute a reorganization within the meaning of Section
368(a)(1)(C), (D) or (F) of the Code; (ii) no income, gain or loss
will be recognized by the Piper Funds as a result of such
transactions; (iii) no income, gain or loss will be recognized by
the FAIF Funds as a result of such transactions; (iv) no income,
gain or loss will be recognized by the shareholders of the Piper
Funds on the distribution to them by the Piper Funds of shares of
the corresponding FAIF Funds in exchange for their shares of the
Piper Funds (but shareholders of a Piper Fund subject to taxation
will recognize income upon receipt of any net investment income or
net capital gains of such Piper Fund which are distributed by such
Piper Fund prior to the Effective Time of the Reorganization); (v)
the tax basis of the FAIF Fund shares received by each shareholder
of a Piper Fund will be the same as the tax basis of the
shareholder's Piper Fund shares exchanged therefor; (vi) the tax
basis of the Fund Assets received by each FAIF Fund will be the same
as the basis of such Fund Assets in the hands of the corresponding
Piper Fund immediately prior to the transactions; (vii) a
shareholder's holding period for FAIF Fund shares will be determined
by including the period for which the shareholder held the shares of
the Piper Fund exchanged therefor, provided that the shareholder
held such shares of the Piper Fund as a capital asset at the
Effective Time of the Reorganization; (viii) the holding period of
each FAIF Fund with respect to the Fund Assets will include the
period for which such Fund Assets were held by the corresponding
Piper Fund, provided that the Piper Fund held such assets as capital
assets; and (ix) each FAIF Fund will succeed to and take into
account the earnings and profits, or deficit in earnings and
profits, of the corresponding Piper Fund as of the Effective Time of
the Reorganization.
(l) The Fund Assets to be transferred to a FAIF Fund
under this Agreement shall include no assets which such FAIF Fund
may not properly acquire pursuant to its investment limitations or
objectives or may not otherwise lawfully acquire.
(m) The N-1A Post-Effective Amendment and the N-14
Registration Statement shall have become effective under the 1933
Act and no stop order suspending such effectiveness shall have been
instituted or, to the knowledge of FAIF, contemplated by the SEC and
the parties shall have received all permits and other authorizations
necessary under state securities laws to consummate the transactions
contemplated by this Agreement.
(n) No action, suit or other proceeding shall be
threatened or pending before any court or governmental agency in
which it is sought to restrain or prohibit or obtain damages or
other relief in connection with this Agreement or the transactions
contemplated herein.
(o) The SEC shall not have issued any unfavorable
advisory report under Section 25(b) of the 1940 Act nor instituted
any proceeding seeking to enjoin consummation of the transactions
contemplated by this Agreement under Section 25(c) of the 1940 Act.
<PAGE>
(p) Prior to the Effective Time of the Reorganization,
each Piper Fund shall have declared a dividend or dividends, with a
record date and ex-dividend date prior to the Effective Time of the
Reorganization, which, together with all previous dividends, shall
have the effect of distributing to its shareholders all of its net
investment company taxable income, if any, for the taxable years
ending September 30, 1997 and for the taxable periods from said date
to and including the Effective Time of the Reorganization (computed
without regard to any deduction for dividends paid), and all of its
net capital gain, if any, realized in taxable years ending September
30, 1997, and in the taxable periods from said date to and including
the Effective Time of Reorganization.
(q) Piper shall have performed and complied in all
material respects with each of its agreements and covenants required
by this Agreement to be performed or complied with by it prior to or
at the Effective Time of the Reorganization.
(r) FAIF shall have been furnished at the Effective Time
of the Reorganization with a certificate signed by an appropriate
officer of Piper Capital Management Incorporated dated as of such
date stating that all statistical and research data, clerical,
accounting and bookkeeping records, periodic reports to the SEC and
any state securities agencies, tax returns and other tax filings,
shareholder lists and other material shareholder data, complaint
files and all other information, books, records and documents
maintained by Piper Capital Management Incorporated and belonging to
the Piper Funds, including those required to be maintained by
Section 31(a) of the 1940 Act and Rules 31a-1 to 31a-3 thereunder,
have been delivered to FAIF.
10. PIPER CONDITIONS. The obligations of Piper hereunder shall be
subject to the following conditions precedent:
(a) This Agreement and the transactions contemplated by
this Agreement (which shall not be deemed, for these purposes, to
include the matter described in Section 6(a)) shall have been
approved by the Board of Directors of FAIF and by the shareholders
of the Piper Funds in the manner required by law and this Agreement.
(b) All representations and warranties of FAIF made in
this Agreement shall be true and correct in all material respects as
if made at and as of the Effective Time of the Reorganization.
(c) FAIF shall have delivered to Piper a certificate
executed in its name by its President or Vice President and its
Treasurer or Assistant Treasurer, in a form reasonably satisfactory
to Piper and dated as of the Effective Time of the Reorganization,
to the effect that the representations and warranties of the FAIF
Funds made in this Agreement are true and correct at and as of the
Effective Time of the Reorganization, except as they may be affected
by the transactions contemplated by this Agreement and that, to its
best knowledge, the Fund Assets to be transferred to an FAIF Fund
under this Agreement as set forth in Subsection 9(b) include only
assets which such FAIF Fund may properly acquire under its
investment policies, limitations and objectives and may otherwise be
lawfully acquired by such FAIF Fund.
(d) Piper shall have received an opinion of Dorsey &
Whitney LLP in form reasonably satisfactory to Piper and dated the
Effective Time of the Reorganization, substantially to the effect
that (i) FAIF is a Maryland corporation duly established and validly
existing under the laws of the State of Maryland; (ii) the shares of
the FAIF Funds to be delivered to the Piper Funds as provided for by
this Agreement are duly authorized and upon delivery will be validly
issued, fully paid and non-assessable by FAIF; (iii) this Agreement
has been duly authorized, executed and delivered by FAIF, and
represents a legal, valid and binding contract, enforceable in
accordance with its terms, subject as to enforcement to bankruptcy,
insolvency, reorganization,
<PAGE>
moratorium or other similar laws of general application relating to
or affecting creditors' rights generally and to the application of
general principles of equity; (iv) the execution and delivery of
this Agreement did not, and the consummation of the transactions
contemplated by this Agreement will not, violate the Articles of
Incorporation or By-Laws of FAIF or any material contract known to
such counsel to which FAIF is a party or by which it is bound; and
(v) no consent, approval, authorization or order of any court or
governmental authority is required for the consummation by FAIF of
the transactions contemplated by this Agreement, except such as have
been obtained under the 1933 Act, the 1934 Act, the 1940 Act, the
rules and regulations under those Acts and such as may be required
by state securities laws or such as may be required subsequent to
the Effective Time of the Reorganization. Such opinion may rely on
the opinion of other counsel to the extent set forth in such
opinion, provided such other counsel is reasonably acceptable to
Piper.
(e) Piper shall have received an opinion of Dorsey &
Whitney LLP addressed to FAIF and Piper in form reasonably
satisfactory to them, and dated the Effective Time of
Reorganization, with respect to the matters specified in Subsection
9(k).
(f) The N-1A Post-Effective Amendment and the N-14
Registration Statement shall have become effective under the 1933
Act and no stop order suspending the effectiveness shall have been
instituted, or to the knowledge of FAIF, contemplated by the SEC and
the parties shall have received all permits and other authorizations
necessary under state securities laws to consummate the transactions
contemplated herein.
(g) No action, suit or other proceeding shall be
threatened or pending before any court or governmental agency in
which it is sought to restrain or prohibit, or obtain damages or
other relief in connection with, this Agreement or the transactions
contemplated herein.
(h) The SEC shall not have issued any unfavorable
advisory report under Section 25(b) of the 1940 Act nor instituted
any proceeding seeking to enjoin consummation of the transactions
contemplated by this Agreement under Section 25(c) of the 1940 Act.
(i) FAIF shall have performed and complied in all
material respects with each of its agreements and covenants required
by this Agreement to be performed or complied with by it prior to or
at the Effective Time of the Reorganization.
(j) Piper shall have received from FAIF a duly executed
instrument whereby each FAIF Fund assumes all of the liabilities of
its corresponding Piper Fund.
11. FURTHER ASSURANCES. Subject to the terms and conditions herein
provided, each of the parties hereto shall use its best efforts to take, or
cause to be taken, such action, to execute and deliver, or cause to be executed
and delivered, such additional documents and instruments and to do, or cause to
be done, all things necessary, proper or advisable under the provisions of this
Agreement and under applicable law to consummate and make effective the
transactions contemplated by this Agreement, including without limitation,
delivering and/or causing to be delivered to the other party hereto each of the
items required under this Agreement as a condition to such party's obligations
hereunder.
12. INDEMNIFICATION. (a) FAIF agrees to indemnify and hold harmless
Piper and each of Piper's directors and officers from and against any and all
losses, claims, damages, liabilities or expenses (including, without limitation,
the payment of reasonable legal fees and reasonable costs of investigation) to
which, jointly or severally, Piper or any of its directors or officers may
become subject, insofar as any such loss, claim, damage, liability or expense
(or actions with respect thereto) arises out of or is based on any breach by
FAIF of any of its representations, warranties, covenants or agreements set
forth in this Agreement.
<PAGE>
(b) Piper agrees to indemnify and hold harmless FAIF and each of
FAIF's directors and officers from and against any and all losses, claims,
damages, liabilities or expenses (including, without limitation, the payment of
reasonable legal fees and reasonable costs of investigation) to which, jointly
or severally, FAIF or any of its directors or officers may become subject,
insofar as any such loss, claim, damage, liability or expense (or actions with
respect thereto) arises out of or is based on any breach by Piper of any of its
representation, warranties, covenants or agreements set forth in this Agreement.
13. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of the parties set forth in this Agreement shall survive the
delivery of the Fund Assets to the FAIF Funds and the issuance of the shares of
the FAIF Funds at the Effective Time of the Reorganization.
14. TERMINATION OF AGREEMENT. This Agreement may be terminated by a
party at or, in the case of Subsections 14(c) or (d), below, at any time prior
to, the Effective Time of the Reorganization by a vote of a majority of its
Board of Directors as provided below:
(a) by FAIF if the conditions set forth in Section 8 are
not satisfied as specified in said Section;
(b) by Piper if the conditions set forth in Section 9
are not satisfied as specified in said Section;
(c) by mutual consent of both parties; and
(d) by Piper or FAIF if determined by its Board of
Directors that proceeding with the transactions contemplated herein
is inadvisable.
15. AMENDMENT AND WAIVER. At any time prior to or (to the fullest
extent permitted by law) after approval of this Agreement by the shareholders of
Piper (a) the parties hereto may, by written agreement authorized by their
respective Boards of Directors and with or without the further approval of their
shareholders, amend any of the provisions of this Agreement, and (b) either
party may waive any breach by the other party or the failure to satisfy any of
the conditions to its obligations (such waiver to be in writing and authorized
by the Board of Directors of the waiving party with or without the approval of
such party's shareholders). Without limiting the foregoing, in the event
shareholder approval of the matters specified in Section 6 is obtained with
respect to certain Piper Funds but not with respect to the other Piper Funds,
with the result that the transactions contemplated by this Agreement may be
consummated with respect to some but not all the Piper Funds, the Boards of
Directors of FAIF and of Piper may, in the exercise of their reasonable business
judgment, either abandon this Agreement with respect to all of the Piper Funds
or direct that the Reorganization and other transactions described herein be
consummated to the degree the Boards deem advisable.
16. GOVERNING LAW. This Agreement and the transactions contemplated
hereby shall be governed, construed and enforced in accordance with the laws of
the State of Minnesota.
17. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
respective successors and permitted assigns of the parties hereto. This
Agreement and the rights, obligations and liabilities hereunder may not be
assigned by either party without the consent of the other party.
18. BENEFICIARIES. Except as set forth in Section 12 hereof with
respect to the directors and officers of Piper and of FAIF, nothing contained in
this Agreement shall be deemed to create rights in persons not parties hereto,
other than the successors and permitted assigns of the parties.
19. BROKERAGE FEES AND EXPENSES. FAIF and Piper each represents and
warrants to the other that there are no brokers or finders entitled to receive
any payments in connection with the transactions provided for herein.
<PAGE>
20. NOTICES. All notices required or permitted herein shall be in
writing and shall be deemed to be properly given when delivered personally or by
telefacsimile to the party entitled to receive the notice or when sent by
certified or registered mail, postage prepaid, or delivered to an
internationally recognized overnight courier service, in each case properly
addressed to the party entitled to receive such notice at the address or telefax
number stated below or to such other address or telefax number as may hereafter
be furnished in writing by notice similarly given by one party to the other
party hereto:
If to FAIF: First American Investment Funds, Inc.
Oaks, Pennsylvania 19456
With copies to: Kathleen L. Prudhomme
Dorsey & Whitney LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402
Telefax Number: (612) 340-8738
If to Piper: Piper Funds Inc.--II
222 South Ninth Street
Minneapolis, MN 55402-3804
With copies to: Susan S. Miley, Esq.
Piper Capital Management Incorporated
222 South Ninth Street
Minneapolis, MN 55402-3804
Telefax Number: (612) 342-1673
Stuart Strauss, Esq.
Gordon Altman Butowsky Weitzen
Shalov & Wein
114 W. 47th Street
New York, New York 10036
Telefax Number: (212) 626-0799
21. ANNOUNCEMENTS. Any announcement or similar publicity with
respect to this Agreement or the transactions contemplated herein shall be made
only at such time and in such manner as the parties shall agree; provided that
nothing herein shall prevent either party upon notice to the other party from
making such public announcements as such party's counsel may consider advisable
in order to satisfy the party's legal and contractual obligations in such
regard.
22. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
and understanding of the parties hereto and supersedes any and all prior
agreements, arrangements and understandings relating to matters provided for
herein.
23. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed to be an
original, but all of which together shall constitute one and the same
instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed by their duly authorized officers designated below as of the date
first written above.
PIPER FUNDS INC.
ATTEST:
- ------------------------------------ -------------------------------------
- --------------------- --------------------
Secretary President
FIRST AMERICAN INVESTMENT FUNDS, INC.
ATTEST:
- ------------------------------------ -------------------------------------
Michael J. Radmer
Secretary --------------------
President
<PAGE>
EXHIBIT 1 TO AGREEMENT AND PLAN OF REORGANIZATION
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
PIPER FUNDS INC.
The undersigned officer of Piper Funds Inc. ("PFI"), a corporation
subject to the provisions of Chapter 302A of the Minnesota statutes, hereby
certifies that PFI's (a) Board of Directors, at a meeting held April 13, 1998,
and (b) shareholders, at a meeting held ______, 1998, adopted the resolutions
hereinafter set forth; and such officer further certifies that the amendments to
PFI's Articles of Incorporation set forth in such resolutions were adopted
pursuant to Chapter 302A.
WHEREAS, PFI is registered as an open-end management investment
company (I.E., a mutual fund) under the Investment Company Act of 1940 and
offers its shares to the public in more than one series, each of which
represents a separate and distinct portfolio of assets;
WHEREAS, it is desirable and in the best interest of the
shareholders of Growth Fund, Small Company Growth Fund, Balanced Fund,
Government Income Fund, Intermediate Bond Fund, National Tax-Exempt Fund,
Minnesota Tax-Exempt Fund, Emerging Growth Fund and Growth and Income Fund (the
"Acquired Funds"), series of PFI, that the assets belonging to each such series,
subject to all liabilities of such series, be sold to Large Cap Growth Fund,
Small Cap Growth Fund, Balanced Fund, Fixed Income Fund, Intermediate Term
Income Fund, Tax Free Fund, Minnesota Tax Free Fund, Mid Cap Growth Fund and
Large Cap Value Fund, respectively (the "Acquiring Funds"), series of First
American Investment Funds, Inc. ("FAIF"), a Maryland corporation and an open-end
management investment company registered under the Investment Company Act of
1940, in exchange for shares of the respective Acquiring Funds;
WHEREAS, PFI wishes to provide for the PRO RATA distribution of such
shares of the Acquiring Funds received by it to holders of shares of the
respective Acquired Funds and the simultaneous cancellation and retirement of
the outstanding shares of the Acquired Funds;
WHEREAS, PFI and FAIF have entered into an Agreement and Plan of
Reorganization providing for the foregoing transactions; and
WHEREAS, the Agreement and Plan of Reorganization requires that, in
order to bind all shareholders of each Acquired Fund to the foregoing
transactions, and in particular to bind such shareholders to the cancellation
and retirement of the outstanding shares of such Acquired Fund, it is necessary
to adopt an amendment to PFI's Articles of Incorporation.
NOW, THEREFORE, BE IT RESOLVED, that PFI's Articles of Incorporation
be, and the same hereby are, amended to add the following Article 5A immediately
following Article 5 thereof:
5A. (a) For purposes of this Article 5A, the following
terms shall have the following meanings:
"PFI" means the Corporation.
"FAIF" means First American Investment Funds, Inc., a
Maryland corporation.
"ACQUIRED FUNDS" means Growth Fund, the Series A Shares
of the Corporation, Small Company Growth Fund, the Series B Shares
of the Corporation, Balanced Fund, the Series C
<PAGE>
Shares of the Corporation, Government Income Fund, the Series D
Shares of the Corporation, Intermediate Bond Fund, the Series H
Shares of the Corporation, National Tax-Exempt Fund, the Series I
Shares of the Corporation, Minnesota Tax-Exempt Fund, the Series J
Shares of the Corporation, Emerging Growth Fund, the Series K Shares
of the Corporation, and Growth and Income Fund, the Series L Shares
of the Corporation.
"ACQUIRING FUNDS" means Large Cap Growth Fund, Small Cap
Growth Fund, Balanced Fund, Fixed Income Fund, Intermediate Term
Income Fund, Tax Free Fund, Minnesota Tax Free Fund, Mid Cap Growth
Fund and Large Cap Value Fund, series of FAIF.
"REORGANIZATION AGREEMENT" means that Agreement and Plan
of Reorganization dated ___________, 1998 between PFI and FAIF.
"EFFECTIVE TIME OF THE REORGANIZATION" means the date
and time at which delivery of the assets of the Acquired Funds and
the shares of the Acquiring Funds to be issued pursuant to the
Reorganization Agreement, and the liquidation of the Acquired Funds,
occurs.
(b) At the Effective Time of the Reorganization, with
respect to each Acquired Fund and its corresponding Acquiring Fund,
the assets belonging to the Acquired Fund, the Special Liabilities
associated with such assets, and the General Assets and General
Liabilities allocated to the Acquired Fund shall be sold to and
assumed by the Acquiring Fund in return for Acquiring Fund shares,
all pursuant to the Reorganization Agreement. For purposes of the
foregoing, the terms "Assets belonging to," "Special Liabilities,"
"General Assets" and "General Liabilities" have the meanings
assigned to them in Article 7(b), (c) and (d) of PFI's Articles of
Incorporation.
(c) With respect to each Acquired Fund and its
corresponding Acquiring Fund, the number of Acquiring Fund shares to
be received by the Acquired Fund and distributed by it to the
Acquired Fund shareholders shall be determined as follows:
(i) The value of the Acquired Fund's assets
and the net asset value per share of the Acquiring
Fund's shares shall be computed as of the Effective Time
of the Reorganization using the pricing policies and
procedures of FAIF, as described in its then current
prospectuses.
(ii) The total number of Acquiring Fund
shares to be issued (including fractional shares, if
any) in exchange for assets and liabilities of the
Acquired Fund shall be determined as of the Effective
Time of the Reorganization by dividing the value of the
Acquired Fund's assets, net of all liabilities of the
Acquired Fund, by the net asset value of the Acquiring
Fund's shares, each as determined pursuant to (i) above.
(iii) At the Effective Time of the
Reorganization, the Acquired Fund shall distribute PRO
RATA to its shareholders of record as of the Effective
Time of the Reorganization the full and fractional
Acquiring Fund shares received by the Acquired Fund
pursuant to (ii) above.
(d) The distribution of the shares of each Acquiring
Fund to shareholders of the corresponding Acquired Fund provided for
in paragraph (c) above shall be accomplished by an instruction,
signed by PFI's Secretary, to transfer the Acquiring Fund shares
then credited to the Acquired Fund's account on the books of the
Acquiring Fund to open accounts on the books of the Acquiring Fund
in the names of the Acquired Fund shareholders in amounts
representing the respective PRO RATA number of Acquiring Fund shares
due each such shareholder pursuant to the foregoing provisions. All
issued and outstanding shares of the Acquired Fund shall
simultaneously be canceled on the books of the Acquired Fund and
retired.
<PAGE>
(e) From and after the Closing Date, the shares of each
Acquired Fund canceled and retired pursuant to paragraph (d) above
shall have the status of authorized and unissued Shares of PFI,
without designation as to series.
IN WITNESS WHEREOF, the undersigned officer of PFI has executed
these Articles of Amendment on behalf of PFI on __________, 1998.
PIPER FUNDS INC.
By
-----------------------------
Its
--------------------------
<PAGE>
APPENDIX III(b)
AGREEMENT AND PLAN OF REORGANIZATION
BY AND BETWEEN
FIRST AMERICAN INVESTMENT FUNDS, INC.
AND
PIPER FUNDS INC.--II
DATED: AS OF __________ __, 1998
TABLE OF CONTENTS
SECTION PAGE
- ------- ----
1. CONVEYANCE OF ASSETS OF PIPER FUND................................... 2
2. LIQUIDATION OF THE PIPER FUND........................................ 3
3. EFFECTIVE TIME OF THE REORGANIZATION................................. 3
4. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF PIPER.......... 6
5. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF FAIF........... 8
6. SHAREHOLDER ACTION................................................... 8
7. REGULATORY FILINGS................................................... 8
8. AMENDMENT FILING..................................................... 8
9. FAIF CONDITIONS...................................................... 8
10. PIPER CONDITIONS..................................................... 11
11. FURTHER ASSURANCES................................................... 12
12. INDEMNIFICATION...................................................... 12
13. SURVIVAL OF REPRESENTATIONS AND WARRANTIES........................... 13
14. TERMINATION OF AGREEMENT............................................. 13
15. AMENDMENT AND WAIVER................................................. 13
16. GOVERNING LAW........................................................ 13
17. SUCCESSORS AND ASSIGNS............................................... 13
18. BENEFICIARIES........................................................ 13
19. BROKERAGE FEES AND EXPENSES.......................................... 13
20. NOTICES.............................................................. 13
21. ANNOUNCEMENTS........................................................ 14
22. ENTIRE AGREEMENT..................................................... 14
23. COUNTERPARTS......................................................... 14
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made
as of this ____ day of _____, 1998 by and between Piper Funds Inc.--II
("Piper"), a Minnesota corporation consisting of a single investment portfolio,
Adjustable Rate Mortgage Securities Fund (the "Piper Fund"), and First American
Investment Funds, Inc. ("FAIF"), a Maryland corporation consisting of multiple
investment portfolios including, among others, Adjustable Rate Mortgage
Securities Fund (the "FAIF Fund").
WHEREAS, each of Piper and FAIF is an open-end management investment
company registered with the Securities and Exchange Commission (the "SEC") under
the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the parties desire that the assets and liabilities of the
Piper Fund be conveyed to, and be acquired and assumed by, the FAIF Fund, in
exchange for shares of the FAIF Fund which shall thereafter promptly be
distributed by Piper to the shareholders of the Piper Fund in connection with
its liquidation as described in this Agreement (the "Reorganization");
<PAGE>
WHEREAS, the parties intend that the FAIF Fund shall have nominal
assets and liabilities before the Reorganization and shall continue the
investment operations of the Piper Fund thereafter, and that in this regard
certain actions shall be taken as described in this Agreement;
WHEREAS, FAIF also maintains twenty-eight additional investment
portfolios -- Micro Cap Value Fund, Regional Equity Fund, Small Cap Value Fund,
Mid Cap Value Fund, Equity Income Fund, Equity Index Fund, Health Sciences Fund,
Real Estate Securities Fund, Technology Fund, Emerging Markets Fund,
International Fund, International Index Fund, Minnesota Intermediate Tax Free
Fund, California Intermediate Tax Free Fund, Colorado Intermediate Tax Free
Fund, Intermediate Tax Free Fund, Limited Term Income Fund, Intermediate
Government Bond Fund, Strategic Income Fund, Small Cap Growth Fund, Mid Cap
Growth Fund, Large Cap Growth Fund, Large Cap Value Fund, Balanced Fund,
Intermediate Term Income Fund, Fixed Income Fund, Tax Free Fund and Minnesota
Tax Free Fund -- that are not parties to the Reorganization.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth and subject to the terms and conditions hereof,
the parties hereto, intending to be legally bound, agree as follows:
1. CONVEYANCE OF ASSETS OF THE PIPER FUND. (a) At the Effective Time
of the Reorganization, as defined in Section 3, all assets of every kind, and
all interests, rights, privileges and powers of the Piper Fund, subject to all
liabilities of the Piper Fund, whether accrued, absolute, contingent or
otherwise existing as of the Effective Time of the Reorganization, which
liabilities shall include any obligation of the Piper Fund to indemnify the
directors and officers of Piper, acting in their capacities as such, to the
fullest extent permitted by law and Piper's Articles of Incorporation as in
effect on the date hereof (such assets subject to such liabilities are herein
referred to as the "Fund Assets"), shall be transferred and conveyed by the
Piper Fund to the FAIF Fund and shall be accepted and assumed by the FAIF Fund
as more particularly set forth in this Agreement, such that at and after the
Effective Time of the Reorganization: (i) all assets of the Piper Fund shall
become and be the assets of the FAIF Fund; and (ii) all liabilities of the Piper
Fund shall attach to the FAIF Fund as aforesaid and may thenceforth be enforced
against the FAIF Fund to the same extent as if incurred by it.
(b) Without limiting the generality of the foregoing, it is
understood that the Fund Assets shall include all property and assets of any
nature whatsoever, including, without limitation, all cash, cash equivalents,
securities, claims (whether absolute or contingent, known or unknown, accrued or
unaccrued) and receivables (including dividend and interest receivables) owned
by the Piper Fund, and any deferred or prepaid expenses shown as an asset on the
Piper Fund's books, at the Effective Time of the Reorganization, and all
goodwill, all other intangible property and all books and records belonging to
the Piper Fund. Notwithstanding anything herein to the contrary, FAIF shall not
be deemed to have assumed any liability of Piper to FAIF that arises as a result
of the breach of any of the representations, warranties and agreements of Piper
set forth in Section 4, hereof.
(c) In exchange for the transfer of the Fund Assets, the FAIF Fund
shall simultaneously issue to the Piper Fund at the Effective Time of the
Reorganization full and fractional shares of common stock in the FAIF Fund
having an aggregate net asset value equal to the net value of the Fund Assets so
conveyed, all determined and adjusted as provided in this Section 1. In
particular, the FAIF Fund shall deliver to the Piper Fund the number of shares,
including fractional shares, determined by dividing the value of the Fund Assets
of the Piper Fund that are so conveyed, computed in the manner and as of the
time and date set forth in this Section, by the net asset value of one FAIF Fund
share, computed in the manner and as of the time and date set forth in this
Section.
(d) The net asset value of shares to be delivered by the FAIF Fund,
and the net value of the Fund Assets to be conveyed by the Piper Fund, shall, in
each case, be determined as of the Effective Time of the Reorganization. The net
asset value of shares of the FAIF Fund shall be computed in the manner set forth
in the FAIF Fund's then current prospectuses under the Securities Act of 1933,
as
<PAGE>
amended (the "1933 Act"). The net value of the Fund Assets to be transferred by
the Piper Fund shall be computed by Piper and shall be subject to adjustment by
the amount, if any, agreed to by FAIF and the Piper Fund. In determining the
value of the securities transferred by the Piper Fund to the FAIF Fund, each
security shall be priced in accordance with the pricing policies and procedures
of FAIF as described in its then current prospectuses. For such purposes, price
quotations and the security characteristics relating to establishing such
quotations shall be determined by Piper, provided that such determination shall
be subject to the approval of FAIF. Piper and FAIF agree to use all commercially
reasonable efforts to resolve any material pricing differences between the
prices of portfolio securities determined in accordance with the pricing
policies and procedures of Piper and those determined in accordance with the
pricing policies and procedures of FAIF prior to the Effective Time of the
Reorganization.
2. LIQUIDATION OF THE PIPER FUND. At the Effective Time of the
Reorganization, the Piper Fund shall make a liquidating distribution to its
shareholders as follows. Shareholders of record of the Piper Fund shall be
credited with full and fractional shares of the common stock that is issued by
the FAIF Fund in connection with the Reorganization. In addition, each
shareholder of record of the Piper Fund shall have the right to receive any
unpaid dividends or other distributions which were declared before the Effective
Time of the Reorganization with respect to the shares of the Piper Fund that are
held by the shareholder at the Effective Time of the Reorganization. In
accordance with instructions it receives from Piper, FAIF shall record on its
books the ownership of the FAIF Fund shares by the shareholders of record of the
Piper Fund. All of the issued and outstanding shares of the Piper Fund at the
Effective Time of the Reorganization shall be redeemed and canceled on the books
of Piper at such time. After the Effective Time of the Reorganization, Piper
shall wind up the affairs of the Piper Fund and shall file any final regulatory
reports, including but not limited to any Form N-SAR and Rule 24f-2 filings with
respect to the Piper Fund and an application pursuant to Section 8(f) of the
1940 Act for an order declaring that Piper has ceased to be an investment
company.
3. EFFECTIVE TIME OF THE REORGANIZATION. (a) Delivery of the Fund
Assets and the shares of the FAIF Fund to be issued pursuant to Section 1 and
the liquidation of the Piper Fund pursuant to Section 2 (the "Closing") shall
occur as of the close of normal trading on the New York Stock Exchange (the
"Exchange") (currently, 4:00 p.m. Eastern time), and after the declaration of
any dividends or distributions on such date, on July 31, 1998, or at such time
on such later date as provided herein or as the parties otherwise may agree in
writing. (The date and time at which such actions are taken are referred to
herein as the "Effective Time of the Reorganization.") To the extent any Fund
Assets are, for any reason, not transferred at the Effective Time of the
Reorganization, Piper shall cause such Fund Assets to be transferred in
accordance with this Agreement at the earliest practicable date thereafter. All
acts taking place at the Closing shall be deemed to take place simultaneously as
of the Effective Time of the Reorganization unless otherwise agreed to by the
parties. The Closing shall be held at the offices of Dorsey & Whitney LLP, 220
South Sixth Street, Minneapolis, Minnesota 55402, or at such other place as the
parties may agree.
(b) In the event the Effective Time of the Reorganization occurs on
a day on which (i) the Exchange or another primary trading market for portfolio
securities of the FAIF Fund or the Piper Fund shall be closed to trading or
trading thereon shall be restricted, or (ii) trading or the reporting of trading
on the Exchange or elsewhere shall be disrupted so that accurate appraisal of
the value of the net assets of the FAIF Fund or the Piper Fund is impracticable,
the Effective Time of the Reorganization shall be postponed until the close of
normal trading on the Exchange on the first business day when trading shall have
been fully resumed and reporting shall have been restored.
4. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF PIPER.
Piper, on behalf of itself and the Piper Fund, represents and warrants to, and
agrees with, FAIF as follows:
(a) It is a Minnesota corporation duly created pursuant
to its Articles of Incorporation for the purpose of acting as a
management investment company under the 1940 Act, and is
<PAGE>
validly existing under the laws of the State of Minnesota. It is
registered as an open-end management investment company under the
1940 Act, and its registration with the SEC as an investment company
is in full force and effect.
(b) It has the power to own all of its properties and
assets and, subject to the approvals of shareholders referred to in
Section 6, to carry out and consummate the transactions contemplated
herein, and has all necessary federal, state and local
authorizations to carry on its business as now being conducted and,
except as stated in Section 4(j), below, to consummate the
transactions contemplated by this Agreement.
(c) This Agreement has been duly authorized, executed
and delivered by it, and represents a valid and binding contract,
enforceable in accordance with its terms, subject as to enforcement
to bankruptcy, insolvency, reorganization, moratorium or other
similar laws of general application relating to or affecting
creditors' rights and to the application of general principles of
equity. The execution and delivery of this Agreement does not, and,
subject to the approval of shareholders referred to in Section 6,
the consummation of the transactions contemplated by this Agreement
will not, violate Piper's Articles of Incorporation or By-Laws or
any agreement or arrangement to which it is a party or by which it
is bound.
(d) The Piper Fund has elected to qualify and has
qualified as a regulated investment company under Part I of
Subchapter M of Subtitle A, Chapter 1, of the Internal Revenue Code
of 1986, as amended (the "Code"), as of and since its first taxable
year; the Piper Fund has been a regulated investment company under
such Part of the Code at all times since the end of its first
taxable year when it so qualified; and the Piper Fund qualifies and
shall continue to qualify as a regulated investment company for its
taxable year ending upon its liquidation.
(e) The audited financial statements for its fiscal year
ended September 30, 1997, and the unaudited financial statements for
the period ended March 31, 1998, copies of which have been
previously furnished to FAIF, present fairly the financial position
of the Piper Fund as of such dates and the results of its operations
and changes in its net assets for the periods indicated, in
conformity with generally accepted accounting principles applied on
a consistent basis. To the best of Piper's knowledge, there are no
liabilities of a material amount of the Piper Fund, whether accrued,
absolute, contingent or otherwise existing, other than: (i) as of
March 31, 1998, liabilities disclosed or provided for in the
unaudited financial statements for the period ended March 31, 1998
and liabilities incurred in the ordinary course of business
subsequent to March 31, 1998 and (ii) as of the Effective Time of
the Reorganization, liabilities disclosed or provided for in the
statement of assets and liabilities of the Piper Fund that is
delivered to FAIF pursuant to Section 8(b) of this Agreement and
liabilities incurred in the ordinary course of business.
(f) Since the end of its most recently concluded fiscal
year, there have been no material changes by the Piper Fund in
accounting methods, principles or practices, including those
required by generally accepted accounting principles, except as
disclosed in writing to FAIF.
(g) It has valued, and will continue to value, its
portfolio securities and other assets in accordance with applicable
legal requirements.
(h) Except as disclosed in the Piper Fund's currently
effective Prospectus and Statement of Additional Information or as
otherwise disclosed in writing to FAIF, there are no material legal,
administrative or other proceedings pending or, to its knowledge,
threatened, against it or the Piper Fund which could result in
liability on the part of Piper or the Piper Fund and Piper knows of
no facts that might form the basis of a legal, administrative or
other proceeding which, if adversely determined, would materially
and adversely affect the Piper Fund's financial condition or the
conduct of its business and Piper is not a party to or subject to
the
<PAGE>
provisions of any order, decree or judgment of any court or
governmental body that materially and adversely affects, or is
reasonably likely to materially and adversely affect, its business
or its ability to consummate the transactions contemplated herein.
(i) At the Effective Time of the Reorganization, all
federal and other tax returns and reports of the Piper Fund required
by law to have been filed by such time shall have been filed, and
all federal and other taxes shall have been paid so far as due, or
provision shall have been made for the payment thereof and, to the
best of Piper's knowledge, no such return or report shall be
currently under audit and no assessment shall have been asserted
with respect to such returns or reports.
(j) Subject to the approvals of shareholders referred to
in Section 6, at the Effective Time of the Reorganization, it shall
have full right, power and authority to sell, assign, transfer and
deliver the Fund Assets and, upon delivery and payment for the Fund
Assets as contemplated herein, the FAIF Fund shall acquire good and
marketable title thereto, subject to no restrictions on the
ownership or transfer thereof, except as imposed by federal or state
securities laws or as disclosed to FAIF in writing prior to the
Effective Time of the Reorganization.
(k) No consent, approval, authorization or order of any
court or governmental authority is required for the consummation by
it of the transactions contemplated by this Agreement, except such
as may be required under the 1933 Act, the Securities Exchange Act
of 1934, as amended (the "1934 Act"), the 1940 Act, the rules and
regulations under those Acts, or state securities laws, all of which
shall have been received prior to the Effective Time of the
Reorganization, except for such consents, approvals, authorizations
or orders as may be required subsequent to the Effective Time of the
Reorganization.
(l) Insofar as the following relate to it, (i) the
registration statement filed by FAIF on Form N-14 relating to the
shares of the FAIF Fund that will be registered with the SEC
pursuant to this Agreement, which shall include or incorporate by
reference the proxy statement of the Piper Fund and prospectus of
the FAIF Fund with respect to the transactions contemplated by this
Agreement, and any supplement or amendment thereto or to the
documents contained or incorporated therein by reference (the "N-14
Registration Statement"), and (ii) the proxy materials of Piper
included in the N-14 Registration Statement and filed with the SEC
pursuant to Section 14(a) of the 1934 Act and Section 20(a) of the
1940 Act with respect to the transactions contemplated by this
Agreement, and any supplement or amendment thereto or the documents
appended thereto (the "Reorganization Proxy Materials"), from their
respective effective and clearance dates with the SEC, through the
time of the shareholders meeting referred to in Section 6 and at the
Effective Time of the Reorganization: (i) shall comply in all
material respects with the provisions of the 1933 Act, 1934 Act and
the 1940 Act, and the rules and regulations thereunder, and (ii)
shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided, that the
representations and warranties made by it in this subsection shall
not apply to statements in or omissions from the N-14 Registration
Statement or the Reorganization Proxy Materials made in reliance
upon and in conformity with information furnished by or on behalf of
FAIF for use therein as provided in Section 7. For these purposes,
information shall be considered to have been provided "on behalf" of
FAIF if furnished by its investment adviser, administrator,
custodian or transfer agent, acting in their capacity as such.
(m) All of the issued and outstanding shares of the
Piper Fund have been validly issued and are fully paid and
non-assessable, and were offered for sale and sold in conformity
with the registration requirements of all applicable federal and
state securities laws.
<PAGE>
(n) It shall not sell or otherwise dispose of any shares
of the FAIF Fund to be received in the transactions contemplated
herein, except in distribution to its shareholders as contemplated
herein.
(o) It shall operate its business in the ordinary course
between the date hereof and the Effective Time of the
Reorganization. It is understood that such ordinary course of
business will include the declaration and payment of customary
dividends and distributions and any other dividends and
distributions deemed advisable.
(p) Any reporting responsibility of the Piper Fund is
and shall remain the responsibility of the Piper Fund for all
periods before and including the Effective Time of the
Reorganization and such later date on which the Piper Fund is
terminated.
(q) Except for agreements or other arrangements relating
to the purchase and sale of portfolio securities, it has furnished
FAIF with copies or descriptions of all contracts to which it is a
party.
(r) The Piper Fund shall provide a list of all portfolio
securities held by it to FAIF at least fifteen days before the
Effective Time of the Reorganization and shall immediately notify
FAIF's investment adviser of any portfolio security thereafter
acquired or sold by the Piper Fund. At the Effective Time of the
Reorganization, the Piper Fund shall not hold any portfolio security
that is impermissible under the investment policies, objectives and
limitations of the FAIF Fund.
5. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF FAIF.
FAIF, on behalf of the FAIF Fund, represents and warrants to, and agrees with,
Piper as follows:
(a) It is a Maryland corporation duly created pursuant
to its Articles of Incorporation for the purpose of acting as a
management investment company under the 1940 Act, and is validly
existing under the laws of the State of Maryland. It is registered
as an open-end management investment company under the 1940 Act and
its registration with the SEC as an investment company is in full
force and effect.
(b) It has the power to own all of its properties and
assets and to consummate the transactions contemplated herein, and
has all necessary federal, state and local authorizations to carry
on its business as now being conducted and, except as stated in
Section 5(j) below, to consummate the transactions contemplated by
this Agreement.
(c) This Agreement has been duly authorized, executed
and delivered by it, and represents a valid and binding contract,
enforceable in accordance with its terms, subject as to enforcement
to bankruptcy, insolvency, reorganization, moratorium or other
similar laws of general application relating to or affecting
creditors' rights and to the application of general principles of
equity. The execution and delivery of this Agreement does not, and
the consummation of the transactions contemplated by this Agreement
will not, violate FAIF's Articles of Incorporation or By-Laws or any
agreement or arrangement to which it is a party or by which it is
bound.
(d) The FAIF Fund intends to qualify as a regulated
investment company under Part I of Subchapter M of the Code.
(e) It will value its portfolio securities and other
assets in accordance with applicable legal requirements.
<PAGE>
(f) There are no material contracts outstanding with
respect to the FAIF Fund that have not been disclosed in FAIF's
current registration statement and which under applicable law are
required to be disclosed therein.
(g) At the Effective Time of the Reorganization, all
federal and other tax returns and reports of the FAIF Fund required
by law to have been filed by such time shall have been filed, and
all federal and other taxes shall have been paid so far as due, or
provisions shall have been made for the payment thereof and, to the
best knowledge of the FAIF Fund, no such return or report shall be
currently under audit and no assessment shall have been asserted
with respect to such returns or reports.
(h) There are no material legal, administrative or other
proceedings pending or, to its knowledge threatened, against it or
the FAIF Fund which could result in liability on the part of FAIF or
the FAIF Fund and FAIF knows of no facts that might form the basis
of a legal, administrative or other proceeding which, if adversely
determined, would materially and adversely affect the FAIF Fund's
financial condition or the conduct of its business and FAIF is not a
party to or subject to the provisions of any order, decree or
judgment of any court or governmental body that materially and
adversely affects, or is reasonably likely to materially and
adversely affect, its business or its ability to consummate the
transactions contemplated herein.
(i) No consent, approval, authorization or order of any
court or governmental authority is required for the consummation by
FAIF of the transactions contemplated by this Agreement, except such
as may be required under the 1933 Act, the 1934 Act, the 1940 Act,
the rules and regulations under those Acts, or state securities
laws, all of which shall have been received prior to the Effective
Time of the Reorganization, except for such consents, approvals,
authorizations or orders as may be required subsequent to the
Effective Time of the Reorganization.
(j) The N-14 Registration Statement and the
Reorganization Proxy Materials, from their respective effective and
clearance dates with the SEC, through the time of the shareholders
meeting referred to in Section 6 and at the Effective Time of the
Reorganization, insofar as they relate to FAIF (i) shall comply in
all material respects with the provisions of the 1933 Act, the 1934
Act and the 1940 Act, and the rules and regulations thereunder, and
(ii) shall not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements made therein not misleading;
provided, that the representations and warranties in this subsection
shall not apply to statements in or omissions from the N-14
Registration Statement or the Reorganization Proxy Materials made in
reliance upon and in conformity with information furnished by or on
behalf of Piper for use therein as provided in Section 7. For those
purposes, information shall be considered to have been provided "on
behalf" of Piper if furnished by its investment adviser,
administrator, custodian or transfer agent, acting in their capacity
as such.
(k) The shares of the FAIF Fund to be issued and
delivered to the Piper Fund for the account of the shareholders of
the Piper Fund, pursuant to the terms hereof, shall have been duly
authorized as of the Effective Time of the Reorganization and, when
so issued and delivered, shall be duly and validly issued, fully
paid and non-assessable, and no shareholder of FAIF shall have any
preemptive right of subscription or purchase in respect thereto.
(l) All of the issued and outstanding shares of the FAIF
Fund have been validly issued and are fully paid and non-assessable,
and were offered for sale and sold in conformity with the
registration requirements of all applicable federal and state
securities laws.
<PAGE>
(m) It shall operate its business in the ordinary course
between the date hereof and the Effective Time of the
Reorganization. It is understood that such ordinary course of
business will include the declaration and payment of customary
dividends and distributions and any other dividends and
distributions deemed advisable.
6. SHAREHOLDER ACTION. As soon as practicable after the effective
date of the N-14 Registration Statement and SEC clearance of the proxy
solicitation materials referred to in Section 7, but in any event prior to the
Effective Time of the Reorganization and as a condition thereto, the Board of
Directors of Piper shall call, and Piper shall hold, a meeting of the
shareholders of the Piper Fund for the purpose of considering and voting upon:
(a) a proposal, in connection with the merger between
U.S. Bancorp and Piper Jaffray Companies Inc., to ratify and approve
an investment advisory agreement, on behalf of the Piper Fund,
between Piper and Piper Capital Management Incorporated;
(b) approval of this Agreement and the transactions
contemplated hereby; and
(c) such other matters as may be determined by the
Boards of Directors of Piper and FAIF.
7. REGULATORY FILINGS. FAIF shall file a post-effective amendment
(the "N-1A Post-Effective Amendment") to its registration statement on Form N-1A
(File Nos. 33-16905; 811-5309) with the SEC as promptly as practicable so that
the FAIF Fund and its shares are registered under the 1933 Act and 1940 Act and
shall take all required actions to qualify such shares for sale in the
appropriate states. In addition, FAIF shall file an N-14 Registration Statement,
which shall include the Reorganization Proxy Materials of Piper, with the SEC,
and with the appropriate state securities commissions, relating to the matters
described in Section 6 as promptly as practicable. FAIF and Piper have
cooperated and shall continue to cooperate with each other, and have furnished
and shall continue to furnish each other with the information relating to itself
that is required by the 1933 Act, the 1934 Act, the 1940 Act, and the rules and
regulations under each of those Acts, to be included in the N-1A Post-Effective
Amendment, the N-14 Registration Statement and the Reorganization Proxy
Materials.
8. AMENDMENT FILING. Prior to the Effective Time of the
Reorganization and as a condition thereto, Piper shall have filed the Amendment
in accordance with applicable provisions of Minnesota law.
9. FAIF CONDITIONS. The obligations of FAIF hereunder shall be
subject to the following conditions precedent:
(a) This Agreement and the transactions contemplated by
this Agreement (which shall not be deemed to include, for these
purposes, the matters described in Section 6(a)) shall have been
approved by the Board of Directors of Piper and by the shareholders
of the Piper Fund in the manner required by law and this Agreement.
(b) Piper shall have delivered to FAIF a statement of
assets and liabilities of the Piper Fund, together with a list of
the portfolio securities of the Piper Fund showing the tax costs of
such securities by lot and the holding periods of such securities,
as of the Effective Time of the Reorganization, certified by the
Treasurer of Piper as having been prepared in accordance with
generally accepted accounting principles consistently applied.
(c) Piper shall have duly executed and delivered to FAIF
such bills of sale, assignments, certificates and other instruments
of transfer ("Transfer Documents") as FAIF may reasonably deem
necessary or desirable to transfer all of the Piper Fund's right,
title and
<PAGE>
interest in and to the Fund Assets. Such Fund Assets shall be
accompanied by all necessary state stock transfer stamps or cash for
the appropriate purchase price therefor.
(d) All representations and warranties of Piper made in
this Agreement shall be true and correct in all material respects as
if made at and as of the Effective Time of the Reorganization.
(e) Piper shall have delivered to FAIF a certificate
executed in its name by its President or Vice President and its
Treasurer or Assistant Treasurer, in a form reasonably satisfactory
to FAIF and dated as of the Effective Time of the Reorganization, to
the effect that the representations and warranties of the Piper Fund
made in this Agreement are true and correct at and as of the
Effective Time of the Reorganization, except as they may be affected
by the transactions contemplated by this Agreement.
(f) Piper shall have delivered to FAIF Piper's written
instructions to the custodian for the Piper Fund, acknowledged and
agreed to in writing by such custodian, irrevocably instructing such
custodian to transfer to the FAIF Fund all of the Piper Fund's
portfolio securities, cash and any other assets to be acquired by
the FAIF Fund pursuant to this Agreement.
(g) Piper shall have delivered to FAIF a certificate of
Piper's transfer agent stating that the records maintained by the
transfer agent (which shall be made available to FAIF) contain the
names and addresses of the shareholders of the Piper Fund and the
numbers and classes of the outstanding shares of the Piper Fund
owned by each such shareholder as of the Effective Time of the
Reorganization.
(h) At or prior to the Effective Time of the
Reorganization, the expenses incurred by the Piper Fund (or accrued
up to the Effective Time of the Reorganization) shall have been
maintained by the Piper Fund's investment adviser or otherwise so as
not to exceed any contractual expense limitations or any expense
limitations set forth in the Piper Fund's then current prospectus.
(i) At or prior to the Effective Time of the
Reorganization, appropriate action shall have been taken by the
Piper Fund's investment adviser or otherwise such that no
unamortized organizational expenses shall be reflected in the Piper
Fund's statement of assets and liabilities delivered pursuant to
Section 8(b).
(j) FAIF shall have received an opinion of Dorsey &
Whitney LLP, counsel to Piper, in form reasonably satisfactory to
FAIF and dated the Effective Time of the Reorganization,
substantially to the effect that (i) Piper is a Minnesota
corporation duly established and validly existing under the laws of
the State of Minnesota; (ii) this Agreement and the Transfer
Documents have been duly authorized, executed and delivered by Piper
and represent legal, valid and binding contracts, enforceable in
accordance with their terms, subject as to enforcement to
bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and other similar laws of general application relating to
or affecting creditors' rights and to the application of general
principles of equity; (iii) the execution and delivery of this
Agreement did not, and the consummation of the transactions
contemplated by this Agreement will not, violate the Articles of
Incorporation or Bylaws of Piper or any material contract known to
such counsel to which Piper is a party or by which it is bound; (iv)
the only Piper shareholder approval required with respect to the
consummation of the transactions contemplated by this Agreement is
the approval of a majority of the outstanding shares of the Piper
Fund; and (v) no consent, approval, authorization or order of any
court or governmental authority is required for the consummation by
Piper of the transactions contemplated by this Agreement, except
such as have been obtained under the 1933 Act, the 1934 Act, the
1940 Act, the rules and regulations
<PAGE>
under those Acts and such as may be required under the state
securities laws or such as may be required subsequent to the
Effective Time of the Reorganization. Such opinion may rely on the
opinion of other counsel to the extent set forth in such opinion,
provided such other counsel is reasonably acceptable to FAIF.
(k) FAIF shall have received an opinion of Dorsey &
Whitney LLP addressed to FAIF and Piper in form reasonably
satisfactory to them, and dated the Effective Time of the
Reorganization, substantially to the effect that, for federal income
tax purposes (i) the transfer by the Piper Fund of all of its Fund
Assets to the FAIF Fund in exchange for shares of the FAIF Fund, and
the distribution of such shares to the shareholders of the Piper
Fund, as provided in this Agreement, will constitute a
reorganization within the meaning of Section 368(a)(1)(C), (D) or
(F) of the Code; (ii) no income, gain or loss will be recognized by
the Piper Fund as a result of such transactions; (iii) no income,
gain or loss will be recognized by the FAIF Fund as a result of such
transactions; (iv) no income, gain or loss will be recognized by the
shareholders of the Piper Fund on the distribution to them by the
Piper Fund of shares of the FAIF Fund in exchange for their shares
of the Piper Fund (but shareholders of the Piper Fund subject to
taxation will recognize income upon receipt of any net investment
income or net capital gains of the Piper Fund which are distributed
by the Piper Fund prior to the Effective Time of the
Reorganization); (v) the tax basis of the FAIF Fund shares received
by each shareholder of the Piper Fund will be the same as the tax
basis of the shareholder's Piper Fund shares exchanged therefor;
(vi) the tax basis of the Fund Assets received by the FAIF Fund will
be the same as the basis of such Fund Assets in the hands of the
Piper Fund immediately prior to the transactions; (vii) a
shareholder's holding period for FAIF Fund shares will be determined
by including the period for which the shareholder held the shares of
the Piper Fund exchanged therefor, provided that the shareholder
held such shares of the Piper Fund as a capital asset at the
Effective Time of the Reorganization; (viii) the holding period of
the FAIF Fund with respect to the Fund Assets will include the
period for which such Fund Assets were held by the Piper Fund,
provided that the Piper Fund held such assets as capital assets; and
(ix) the FAIF Fund will succeed to and take into account the
earnings and profits, or deficit in earnings and profits, of the
Piper Fund as of the Effective Time of the Reorganization.
(l) The Fund Assets to be transferred to the FAIF Fund
under this Agreement shall include no assets which the FAIF Fund may
not properly acquire pursuant to its investment limitations or
objectives or may not otherwise lawfully acquire.
(m) The N-1A Post-Effective Amendment and the N-14
Registration Statement shall have become effective under the 1933
Act and no stop order suspending such effectiveness shall have been
instituted or, to the knowledge of FAIF, contemplated by the SEC and
the parties shall have received all permits and other authorizations
necessary under state securities laws to consummate the transactions
contemplated by this Agreement.
(n) No action, suit or other proceeding shall be
threatened or pending before any court or governmental agency in
which it is sought to restrain or prohibit or obtain damages or
other relief in connection with this Agreement or the transactions
contemplated herein.
(o) The SEC shall not have issued any unfavorable
advisory report under Section 25(b) of the 1940 Act nor instituted
any proceeding seeking to enjoin consummation of the transactions
contemplated by this Agreement under Section 25(c) of the 1940 Act.
(p) Prior to the Effective Time of the Reorganization,
the Piper Fund shall have declared a dividend or dividends, with a
record date and ex-dividend date prior to the Effective Time of the
Reorganization, which, together with all previous dividends, shall
have the effect of distributing to its shareholders all of its net
investment company taxable income, if any, for the taxable years
ending September 30, 1997 and for the taxable periods from
<PAGE>
said date to and including the Effective Time of the Reorganization
(computed without regard to any deduction for dividends paid), and
all of its net capital gain, if any, realized in taxable years
ending September 30, 1997, and in the taxable periods from said date
to and including the Effective Time of Reorganization.
(q) Piper shall have performed and complied in all
material respects with each of its agreements and covenants required
by this Agreement to be performed or complied with by it prior to or
at the Effective Time of the Reorganization.
(r) FAIF shall have been furnished at the Effective Time
of the Reorganization with a certificate signed by an appropriate
officer of Piper Capital Management Incorporated dated as of such
date stating that all statistical and research data, clerical,
accounting and bookkeeping records, periodic reports to the SEC and
any state securities agencies, tax returns and other tax filings,
shareholder lists and other material shareholder data, complaint
files and all other information, books, records and documents
maintained by Piper Capital Management Incorporated and belonging to
the Piper Fund, including those required to be maintained by Section
31(a) of the 1940 Act and Rules 31a-1 to 31a-3 thereunder, have been
delivered to FAIF.
10. PIPER CONDITIONS. The obligations of Piper hereunder shall be
subject to the following conditions precedent:
(a) This Agreement and the transactions contemplated by
this Agreement (which shall not be deemed, for these purposes, to
include the matter described in Section 6(a)) shall have been
approved by the Board of Directors of FAIF and by the shareholders
of the Piper Fund in the manner required by law and this Agreement.
(b) All representations and warranties of FAIF made in
this Agreement shall be true and correct in all material respects as
if made at and as of the Effective Time of the Reorganization.
(c) FAIF shall have delivered to Piper a certificate
executed in its name by its President or Vice President and its
Treasurer or Assistant Treasurer, in a form reasonably satisfactory
to Piper and dated as of the Effective Time of the Reorganization,
to the effect that the representations and warranties of the FAIF
Fund made in this Agreement are true and correct at and as of the
Effective Time of the Reorganization, except as they may be affected
by the transactions contemplated by this Agreement and that, to its
best knowledge, the Fund Assets to be transferred to the FAIF Fund
under this Agreement as set forth in Subsection 9(b) include only
assets which the FAIF Fund may properly acquire under its investment
policies, limitations and objectives and may otherwise be lawfully
acquired by the FAIF Fund.
(d) Piper shall have received an opinion of Dorsey &
Whitney LLP in form reasonably satisfactory to Piper and dated the
Effective Time of the Reorganization, substantially to the effect
that (i) FAIF is a Maryland corporation duly established and validly
existing under the laws of the State of Maryland; (ii) the shares of
the FAIF Fund to be delivered to the Piper Fund as provided for by
this Agreement are duly authorized and upon delivery will be validly
issued, fully paid and non-assessable by FAIF; (iii) this Agreement
has been duly authorized, executed and delivered by FAIF, and
represents a legal, valid and binding contract, enforceable in
accordance with its terms, subject as to enforcement to bankruptcy,
insolvency, reorganization, moratorium or other similar laws of
general application relating to or affecting creditors' rights
generally and to the application of general principles of equity;
(iv) the execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated by this Agreement will
not, violate the Articles of Incorporation or By-Laws of FAIF or any
material contract known to such counsel to which FAIF is a party or
by which it is bound; and
<PAGE>
(v) no consent, approval, authorization or order of any court or
governmental authority is required for the consummation by FAIF of
the transactions contemplated by this Agreement, except such as have
been obtained under the 1933 Act, the 1934 Act, the 1940 Act, the
rules and regulations under those Acts and such as may be required
by state securities laws or such as may be required subsequent to
the Effective Time of the Reorganization. Such opinion may rely on
the opinion of other counsel to the extent set forth in such
opinion, provided such other counsel is reasonably acceptable to
Piper.
(e) Piper shall have received an opinion of Dorsey &
Whitney LLP addressed to FAIF and Piper in form reasonably
satisfactory to them, and dated the Effective Time of
Reorganization, with respect to the matters specified in Subsection
9(k).
(f) The N-1A Post-Effective Amendment and the N-14
Registration Statement shall have become effective under the 1933
Act and no stop order suspending the effectiveness shall have been
instituted, or to the knowledge of FAIF, contemplated by the SEC and
the parties shall have received all permits and other authorizations
necessary under state securities laws to consummate the transactions
contemplated herein.
(g) No action, suit or other proceeding shall be
threatened or pending before any court or governmental agency in
which it is sought to restrain or prohibit, or obtain damages or
other relief in connection with, this Agreement or the transactions
contemplated herein.
(h) The SEC shall not have issued any unfavorable
advisory report under Section 25(b) of the 1940 Act nor instituted
any proceeding seeking to enjoin consummation of the transactions
contemplated by this Agreement under Section 25(c) of the 1940 Act.
(i) FAIF shall have performed and complied in all
material respects with each of its agreements and covenants required
by this Agreement to be performed or complied with by it prior to or
at the Effective Time of the Reorganization.
(j) Piper shall have received from FAIF a duly executed
instrument whereby the FAIF Fund assumes all of the liabilities of
the Piper Fund.
11. FURTHER ASSURANCES. Subject to the terms and conditions herein
provided, each of the parties hereto shall use its best efforts to take, or
cause to be taken, such action, to execute and deliver, or cause to be executed
and delivered, such additional documents and instruments and to do, or cause to
be done, all things necessary, proper or advisable under the provisions of this
Agreement and under applicable law to consummate and make effective the
transactions contemplated by this Agreement, including without limitation,
delivering and/or causing to be delivered to the other party hereto each of the
items required under this Agreement as a condition to such party's obligations
hereunder.
12. INDEMNIFICATION. (a) FAIF agrees to indemnify and hold harmless
Piper and each of Piper's directors and officers from and against any and all
losses, claims, damages, liabilities or expenses (including, without limitation,
the payment of reasonable legal fees and reasonable costs of investigation) to
which, jointly or severally, Piper or any of its directors or officers may
become subject, insofar as any such loss, claim, damage, liability or expense
(or actions with respect thereto) arises out of or is based on any breach by
FAIF of any of its representations, warranties, covenants or agreements set
forth in this Agreement.
(b) Piper agrees to indemnify and hold harmless FAIF and each of
FAIF's directors and officers from and against any and all losses, claims,
damages, liabilities or expenses (including, without limitation, the payment of
reasonable legal fees and reasonable costs of investigation) to which, jointly
or severally, FAIF or any of its directors or officers may become subject,
insofar as any such loss, claim,
<PAGE>
damage, liability or expense (or actions with respect thereto) arises out of or
is based on any breach by Piper of any of its representation, warranties,
covenants or agreements set forth in this Agreement.
13. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of the parties set forth in this Agreement shall survive the
delivery of the Fund Assets to the FAIF Fund and the issuance of the shares of
the FAIF Fund at the Effective Time of the Reorganization.
14. TERMINATION OF AGREEMENT. This Agreement may be terminated by a
party at or, in the case of Subsections 14(c) or (d), below, at any time prior
to, the Effective Time of the Reorganization by a vote of a majority of its
Board of Directors as provided below:
(a) by FAIF if the conditions set forth in Section 8 are
not satisfied as specified in said Section;
(b) by Piper if the conditions set forth in Section 9
are not satisfied as specified in said Section;
(c) by mutual consent of both parties; and
(d) by Piper or FAIF if determined by its Board of
Directors that proceeding with the transactions contemplated herein
is inadvisable.
15. AMENDMENT AND WAIVER. At any time prior to or (to the fullest
extent permitted by law) after approval of this Agreement by the shareholders of
Piper (a) the parties hereto may, by written agreement authorized by their
respective Boards of Directors and with or without the further approval of their
shareholders, amend any of the provisions of this Agreement, and (b) either
party may waive any breach by the other party or the failure to satisfy any of
the conditions to its obligations (such waiver to be in writing and authorized
by the Board of Directors of the waiving party with or without the approval of
such party's shareholders).
16. GOVERNING LAW. This Agreement and the transactions contemplated
hereby shall be governed, construed and enforced in accordance with the laws of
the State of Minnesota.
17. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
respective successors and permitted assigns of the parties hereto. This
Agreement and the rights, obligations and liabilities hereunder may not be
assigned by either party without the consent of the other party.
18. BENEFICIARIES. Except as set forth in Section 12 hereof with
respect to the directors and officers of Piper and of FAIF, nothing contained in
this Agreement shall be deemed to create rights in persons not parties hereto,
other than the successors and permitted assigns of the parties.
19. BROKERAGE FEES AND EXPENSES. FAIF and Piper each represents and
warrants to the other that there are no brokers or finders entitled to receive
any payments in connection with the transactions provided for herein.
20. NOTICES. All notices required or permitted herein shall be in
writing and shall be deemed to be properly given when delivered personally or by
telefacsimile to the party entitled to receive the notice or when sent by
certified or registered mail, postage prepaid, or delivered to an
internationally recognized overnight courier service, in each case properly
addressed to the party entitled to receive such notice at the address or telefax
number stated below or to such other address or telefax number as may hereafter
be furnished in writing by notice similarly given by one party to the other
party hereto:
If to FAIF: First American Investment Funds, Inc.
Oaks, Pennsylvania 19456
<PAGE>
With copies to: Kathleen L. Prudhomme
Dorsey & Whitney LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402
Telefax Number: (612) 340-8738
If to Piper: Piper Funds Inc.--II
222 South Ninth Street
Minneapolis, MN 55402-3804
With copies to: Susan S. Miley, Esq.
Piper Capital Management Incorporated
222 South Ninth Street
Minneapolis, MN 55402-3804
Telefax Number: (612) 342-1673
Stuart Strauss, Esq.
Gordon Altman Butowsky Weitzen
Shalov & Wein
114 W. 47th Street
New York, New York 10036
Telefax Number: (212) 626-0799
21. ANNOUNCEMENTS. Any announcement or similar publicity with
respect to this Agreement or the transactions contemplated herein shall be made
only at such time and in such manner as the parties shall agree; provided that
nothing herein shall prevent either party upon notice to the other party from
making such public announcements as such party's counsel may consider advisable
in order to satisfy the party's legal and contractual obligations in such
regard.
22. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
and understanding of the parties hereto and supersedes any and all prior
agreements, arrangements and understandings relating to matters provided for
herein.
23. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed to be an
original, but all of which together shall constitute one and the same
instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed by their duly authorized officers designated below as of the date
first written above.
PIPER FUNDS INC.--II
ATTEST:
- ------------------------------------ -------------------------------------
- --------------------- --------------------
Secretary President
FIRST AMERICAN INVESTMENT FUNDS, INC.
ATTEST:
- ------------------------------------ -------------------------------------
Michael J. Radmer
Secretary --------------------
President
IIIb-15
<PAGE>
APPENDIX III(c)
AGREEMENT AND PLAN OF REORGANIZATION
BY AND BETWEEN
FIRST AMERICAN INVESTMENT FUNDS, INC.
AND
PIPER GLOBAL FUNDS INC.
DATED: AS OF __________ __, 1998
TABLE OF CONTENTS
SECTION PAGE
- ------- ----
1. CONVEYANCE OF ASSETS OF PIPER FUNDS................................. 2
2. LIQUIDATION OF PIPER FUNDS.......................................... 3
3. EFFECTIVE TIME OF THE REORGANIZATION................................ 4
4. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF PIPER......... 4
5. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF FAIF.......... 7
6. SHAREHOLDER ACTION.................................................. 9
7. REGULATORY FILINGS.................................................. 9
8. AMENDMENT FILING.................................................... 9
9. FAIF CONDITIONS..................................................... 10
10. PIPER CONDITIONS.................................................... 12
11. FURTHER ASSURANCES.................................................. 13
12. INDEMNIFICATION..................................................... 14
13. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.......................... 14
14. TERMINATION OF AGREEMENT............................................ 14
15. AMENDMENT AND WAIVER................................................ 14
16. GOVERNING LAW....................................................... 15
17. SUCCESSORS AND ASSIGNS.............................................. 15
18. BENEFICIARIES....................................................... 15
19. BROKERAGE FEES AND EXPENSES......................................... 15
20. NOTICES............................................................. 15
21. ANNOUNCEMENTS....................................................... 15
22. ENTIRE AGREEMENT.................................................... 16
23. COUNTERPARTS........................................................ 16
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made
as of this ____ day of _____, 1998 by and between Piper Global Funds Inc.
("Piper"), a Minnesota corporation consisting of the Emerging Markets Growth
Fund and Pacific-European Growth Fund portfolios (such portfolios are referred
to herein as the "Piper Funds"), and First American Investment Funds, Inc.
("FAIF"), a Maryland corporation consisting of multiple investment portfolios
including, among others, Emerging Markets Fund and International Fund (such
named portfolios are referred to herein as the "FAIF Funds").
WHEREAS, each of Piper and FAIF is an open-end management investment
company registered with the Securities and Exchange Commission (the "SEC") under
the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the parties desire that the assets and liabilities of each
Piper Fund be conveyed to, and be acquired and assumed by, the respective FAIF
Fund corresponding thereto, as stated herein, in exchange for shares of
specified classes of the corresponding FAIF Fund which shall thereafter
<PAGE>
promptly be distributed by Piper to the shareholders of the corresponding
classes of the Piper Fund in connection with its liquidation as described in
this Agreement (the "Reorganization");
WHEREAS, the distribution of FAIF Fund shares to Piper Fund
shareholders and the retirement and cancellation of Piper Fund shares will be
effected pursuant to an amendment to the Articles of Incorporation of Piper in
the form attached hereto as Exhibit 1 (the "Amendment"), to be adopted by Piper
in accordance with the Minnesota Business Corporation Act;
WHEREAS, the parties intend that FAIF Emerging Markets Fund shall
have nominal assets and liabilities before the Reorganization and shall continue
the investment operations of the corresponding Piper Fund thereafter, and that
in this regard certain actions shall be taken as described in this Agreement;
and
WHEREAS, FAIF also maintains twenty-seven additional investment
portfolios -- Micro Cap Value Fund, Regional Equity Fund, Small Cap Value Fund,
Mid Cap Value Fund, Equity Income Fund, Equity Index Fund, Health Sciences Fund,
Real Estate Securities Fund, Technology Fund, International Index Fund,
Minnesota Intermediate Tax Free Fund, California Intermediate Tax Free Fund,
Colorado Intermediate Tax Free Fund, Intermediate Tax Free Fund, Limited Term
Income Fund, Adjustable Rate Mortgage Securities Fund, Intermediate Government
Bond Fund, Strategic Income Fund, Small Cap Growth Fund, Mid Cap Growth Fund,
Large Cap Growth Fund, Large Cap Value Fund, Balanced Fund, Intermediate Term
Income Fund, Fixed Income Fund, Tax Free Fund and Minnesota Tax Free Fund --
that are not parties to the Reorganization.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth and subject to the terms and conditions hereof,
the parties hereto, intending to be legally bound, agree as follows:
1. CONVEYANCE OF ASSETS OF PIPER FUNDS. (a) At the Effective Time of
the Reorganization, as defined in Section 3, all assets of every kind, and all
interests, rights, privileges and powers of each of the Piper Funds, subject to
all liabilities of such Funds, whether accrued, absolute, contingent or
otherwise existing as of the Effective Time of the Reorganization, which
liabilities shall include any obligation of the Piper Funds to indemnify the
directors and officers of Piper, acting in their capacities as such, to the
fullest extent permitted by law and Piper's Articles of Incorporation as in
effect on the date hereof (such assets subject to such liabilities are herein
referred to as the "Fund Assets"), shall be transferred and conveyed by each
Piper Fund to the corresponding FAIF Fund (as set forth below) and shall be
accepted and assumed by such FAIF Fund as more particularly set forth in this
Agreement and in the Amendment, such that at and after the Effective Time of the
Reorganization: (i) all assets of the Piper Funds shall become and be the assets
of the respective corresponding FAIF Funds; and (ii) all liabilities of the
Piper Funds shall attach to the respective corresponding FAIF Funds as aforesaid
and may thenceforth be enforced against the respective FAIF Funds to the same
extent as if incurred by them.
(b) Without limiting the generality of the foregoing, it is
understood that the Fund Assets shall include all property and assets of any
nature whatsoever, including, without limitation, all cash, cash equivalents,
securities, claims (whether absolute or contingent, known or unknown, accrued or
unaccrued) and receivables (including dividend and interest receivables) owned
by each Piper Fund, and any deferred or prepaid expenses shown as an asset on
each Piper Fund's books, at the Effective Time of the Reorganization, and all
goodwill, all other intangible property and all books and records belonging to
the Piper Funds. Notwithstanding anything herein to the contrary, FAIF shall not
be deemed to have assumed any liability of Piper to FAIF that arises as a result
of the breach of any of the representations, warranties and agreements of Piper
set forth in Section 4, hereof.
(c) In particular, the Fund Assets of each Piper Fund shall be
transferred and conveyed to the corresponding FAIF Fund, as set forth below:
<PAGE>
PIPER FUND CORRESPONDING FAIF FUND
- ---------- -----------------------
Emerging Markets Growth Fund Emerging Markets Fund*
Pacific-European Growth Fund International Fund
- --------------------
* These FAIF Funds shall be new investment portfolios with nominal assets
and liabilities prior to the Effective Time of the Reorganization.
(d) In exchange for the transfer of the Fund Assets, each FAIF Fund
shall simultaneously issue to each corresponding Piper Fund at the Effective
Time of the Reorganization full and fractional shares of common stock in the
FAIF Fund of the classes set forth in the table below having an aggregate net
asset value equal to the net value of the Fund Assets so conveyed, all
determined and adjusted as provided in this Section 1. In particular, each FAIF
Fund shall deliver to the corresponding Piper Fund the number of shares of each
of its share classes set forth in the table, including fractional shares,
determined by dividing the value of the Fund Assets of the corresponding Piper
Fund that are so conveyed and are attributable to each of the FAIF Fund's
respective share classes set forth in the table, computed in the manner and as
of the time and date set forth in this Section, by the net asset value of one
FAIF Fund share of the particular share class that is to be delivered with
respect thereto, computed in the manner and as of the time and date set forth in
this Section.
(e) The net asset value of shares to be delivered by the FAIF Funds,
and the net value of the Fund Assets to be conveyed by the Piper Funds, shall,
in each case, be determined as of the Effective Time of the Reorganization. The
net asset value of shares of the FAIF Funds shall be computed in the manner set
forth in the FAIF Funds' then current prospectuses under the Securities Act of
1933, as amended (the "1933 Act"). The net value of the Fund Assets to be
transferred by the Piper Funds shall be computed by Piper and shall be subject
to adjustment by the amount, if any, agreed to by FAIF and the respective Piper
Funds. In determining the value of the securities transferred by the Piper Funds
to the FAIF Funds, each security shall be priced in accordance with the pricing
policies and procedures of FAIF as described in its then current prospectuses.
For such purposes, price quotations and the security characteristics relating to
establishing such quotations shall be determined by Piper, provided that such
determination shall be subject to the approval of FAIF. Piper and FAIF agree to
use all commercially reasonable efforts to resolve any material pricing
differences between the prices of portfolio securities determined in accordance
with the pricing policies and procedures of Piper and those determined in
accordance with the pricing policies and procedures of FAIF prior to the
Effective Time of the Reorganization.
(f) The classes of shares of each FAIF Fund that will be delivered
in the Reorganization are as follows:
PIPER CORRESPONDING FAIF
FUND/SHARE CLASS FUND/SHARE CLASS
---------------- ----------------
Emerging Markets Growth Fund-- Emerging Markets Fund--
Class A Shares Class A Shares
Class B Shares Class A Shares
Pacific-European Growth Fund-- International Fund--
Class A Shares Class A Shares
Class B Shares Class A Shares
Class Y Shares Class Y Shares
2. LIQUIDATION OF PIPER FUNDS. At the Effective Time of the
Reorganization, each of the Piper Funds shall make a liquidating distribution to
its shareholders as follows. Shareholders of record of each Piper Fund shall be
credited with full and fractional shares of the class of common stock that is
<PAGE>
issued by the corresponding FAIF Fund in connection with the Reorganization with
respect to the shares that are held of record by the shareholder. In addition,
each shareholder of record of a Piper Fund shall have the right to receive any
unpaid dividends or other distributions which were declared before the Effective
Time of the Reorganization with respect to the shares of such Piper Fund that
are held by the shareholder at the Effective Time of the Reorganization. In
accordance with instructions it receives from Piper, FAIF shall record on its
books the ownership of the respective FAIF Fund shares by the shareholders of
record of the Piper Funds. All of the issued and outstanding shares of the Piper
Funds at the Effective Time of the Reorganization shall be redeemed and canceled
on the books of Piper at such time. After the Effective Time of the
Reorganization, Piper shall wind up the affairs of the Piper Funds and shall
file any final regulatory reports, including but not limited to any Form N-SAR
and Rule 24f-2 filings with respect to the Piper Funds and an application
pursuant to Section 8(f) of the 1940 Act for an order declaring that Piper has
ceased to be an investment company.
3. EFFECTIVE TIME OF THE REORGANIZATION. (a) Delivery of the Fund
Assets and the shares of the FAIF Funds to be issued pursuant to Section 1 and
the liquidation of the Piper Funds pursuant to Section 2 (the "Closing") shall
occur as of the close of normal trading on the New York Stock Exchange (the
"Exchange") (currently, 4:00 p.m. Eastern time), and after the declaration of
any dividends or distributions on such date, on July 31, 1998, or at such time
on such later date as provided herein or as the parties otherwise may agree in
writing. (The date and time at which such actions are taken are referred to
herein as the "Effective Time of the Reorganization.") To the extent any Fund
Assets are, for any reason, not transferred at the Effective Time of the
Reorganization, Piper shall cause such Fund Assets to be transferred in
accordance with this Agreement at the earliest practicable date thereafter. All
acts taking place at the Closing shall be deemed to take place simultaneously as
of the Effective Time of the Reorganization unless otherwise agreed to by the
parties. The Closing shall be held at the offices of Dorsey & Whitney LLP, 220
South Sixth Street, Minneapolis, Minnesota 55402, or at such other place as the
parties may agree.
(b) In the event the Effective Time of the Reorganization occurs on
a day on which (i) the Exchange or another primary trading market for portfolio
securities of the FAIF Funds or the Piper Funds shall be closed to trading or
trading thereon shall be restricted, or (ii) trading or the reporting of trading
on the Exchange or elsewhere shall be disrupted so that accurate appraisal of
the value of the net assets of the FAIF Funds or the Piper Funds is
impracticable, the Effective Time of the Reorganization shall be postponed until
the close of normal trading on the Exchange on the first business day when
trading shall have been fully resumed and reporting shall have been restored.
4. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF PIPER.
Piper, on behalf of itself and the Piper Funds, represents and warrants to, and
agrees with, FAIF as follows, such representations, warranties and agreements
being made on behalf of each Piper Fund on a several (and not joint, or joint
and several) basis:
(a) It is a Minnesota corporation duly created pursuant
to its Articles of Incorporation for the purpose of acting as a
management investment company under the 1940 Act, and is validly
existing under the laws of the State of Minnesota. It is registered
as an open-end management investment company under the 1940 Act, and
its registration with the SEC as an investment company is in full
force and effect.
(b) It has the power to own all of its properties and
assets and, subject to the approvals of shareholders referred to in
Section 6, to carry out and consummate the transactions contemplated
herein, and has all necessary federal, state and local
authorizations to carry on its business as now being conducted and,
except as stated in Section 4(j), below, to consummate the
transactions contemplated by this Agreement.
(c) This Agreement has been duly authorized, executed
and delivered by it, and represents a valid and binding contract,
enforceable in accordance with its terms, subject as to
<PAGE>
enforcement to bankruptcy, insolvency, reorganization, moratorium or
other similar laws of general application relating to or affecting
creditors' rights and to the application of general principles of
equity. The execution and delivery of this Agreement does not, and,
subject to the approval of shareholders referred to in Section 6,
the consummation of the transactions contemplated by this Agreement
will not, violate Piper's Articles of Incorporation or By-Laws or
any agreement or arrangement to which it is a party or by which it
is bound.
(d) Each Piper Fund has elected to qualify and has
qualified as a regulated investment company under Part I of
Subchapter M of Subtitle A, Chapter 1, of the Internal Revenue Code
of 1986, as amended (the "Code"), as of and since its first taxable
year; each Fund has been a regulated investment company under such
Part of the Code at all times since the end of its first taxable
year when it so qualified; and each Fund qualifies and shall
continue to qualify as a regulated investment company for its
taxable year ending upon its liquidation.
(e) The audited financial statements for its fiscal year
ended September 30, 1997, and the unaudited financial statements for
the period ended March 31, 1998, copies of which have been
previously furnished to FAIF, present fairly the financial position
of the Piper Funds as of such dates and the results of their
operations and changes in their net assets for the periods
indicated, in conformity with generally accepted accounting
principles applied on a consistent basis. To the best of Piper's
knowledge, there are no liabilities of a material amount of any
Piper Fund, whether accrued, absolute, contingent or otherwise
existing, other than: (i) as of March 31, 1998, liabilities
disclosed or provided for in the unaudited financial statements for
the period ended March 31, 1998 and liabilities incurred in the
ordinary course of business subsequent to March 31, 1998 and (ii) as
of the Effective Time of the Reorganization, liabilities disclosed
or provided for in the statement of assets and liabilities of each
Piper Fund that is delivered to FAIF pursuant to Section 8(b) of
this Agreement and liabilities incurred in the ordinary course of
business.
(f) Since the end of its most recently concluded fiscal
year, there have been no material changes by either Piper Fund in
accounting methods, principles or practices, including those
required by generally accepted accounting principles, except as
disclosed in writing to FAIF.
(g) It has valued, and will continue to value, its
portfolio securities and other assets in accordance with applicable
legal requirements.
(h) Except as disclosed in the Piper Funds' currently
effective Prospectuses and Statements of Additional Information or
as otherwise disclosed in writing to FAIF, there are no material
legal, administrative or other proceedings pending or, to its
knowledge, threatened, against it or the Piper Funds which could
result in liability on the part of Piper or the Piper Funds and
Piper knows of no facts that might form the basis of a legal,
administrative or other proceeding which, if adversely determined,
would materially and adversely affect any Piper Fund's financial
condition or the conduct of its business and Piper is not a party to
or subject to the provisions of any order, decree or judgment of any
court or governmental body that materially and adversely affects, or
is reasonably likely to materially and adversely affect, its
business or its ability to consummate the transactions contemplated
herein.
(i) At the Effective Time of the Reorganization, all
federal and other tax returns and reports of each Piper Fund
required by law to have been filed by such time shall have been
filed, and all federal and other taxes shall have been paid so far
as due, or provision shall have been made for the payment thereof
and, to the best of Piper's knowledge, no such return or report
shall be currently under audit and no assessment shall have been
asserted with respect to such returns or reports.
<PAGE>
(j) Subject to the approvals of shareholders referred to
in Section 6, at the Effective Time of the Reorganization, it shall
have full right, power and authority to sell, assign, transfer and
deliver the Fund Assets and, upon delivery and payment for the Fund
Assets as contemplated herein, the FAIF Funds shall acquire good and
marketable title thereto, subject to no restrictions on the
ownership or transfer thereof, except as imposed by federal or state
securities laws or as disclosed to FAIF in writing prior to the
Effective Time of the Reorganization.
(k) No consent, approval, authorization or order of any
court or governmental authority is required for the consummation by
it of the transactions contemplated by this Agreement, except such
as may be required under the 1933 Act, the Securities Exchange Act
of 1934, as amended (the "1934 Act"), the 1940 Act, the rules and
regulations under those Acts, or state securities laws, all of which
shall have been received prior to the Effective Time of the
Reorganization, except for such consents, approvals, authorizations
or orders as may be required subsequent to the Effective Time of the
Reorganization.
(l) Insofar as the following relate to it, (i) the
registration statement filed by FAIF on Form N-14 relating to the
shares of the FAIF Funds that will be registered with the SEC
pursuant to this Agreement, which shall include or incorporate by
reference the proxy statement of the Piper Funds and prospectuses of
the FAIF Funds with respect to the transactions contemplated by this
Agreement, and any supplement or amendment thereto or to the
documents contained or incorporated therein by reference (the "N-14
Registration Statement"), and (ii) the proxy materials of Piper
included in the N-14 Registration Statement and filed with the SEC
pursuant to Section 14(a) of the 1934 Act and Section 20(a) of the
1940 Act with respect to the transactions contemplated by this
Agreement, and any supplement or amendment thereto or the documents
appended thereto (the "Reorganization Proxy Materials"), from their
respective effective and clearance dates with the SEC, through the
time of the shareholders meeting referred to in Section 6 and at the
Effective Time of the Reorganization: (i) shall comply in all
material respects with the provisions of the 1933 Act, 1934 Act and
the 1940 Act, and the rules and regulations thereunder, and (ii)
shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided, that the
representations and warranties made by it in this subsection shall
not apply to statements in or omissions from the N-14 Registration
Statement or the Reorganization Proxy Materials made in reliance
upon and in conformity with information furnished by or on behalf of
FAIF for use therein as provided in Section 7. For these purposes,
information shall be considered to have been provided "on behalf" of
FAIF if furnished by its investment adviser, administrator,
custodian or transfer agent, acting in their capacity as such.
(m) All of the issued and outstanding shares of each of
the Piper Funds have been validly issued and are fully paid and
non-assessable, and were offered for sale and sold in conformity
with the registration requirements of all applicable federal and
state securities laws.
(n) It shall not sell or otherwise dispose of any shares
of the FAIF Funds to be received in the transactions contemplated
herein, except in distribution to its shareholders as contemplated
herein.
(o) It shall operate its business in the ordinary course
between the date hereof and the Effective Time of the
Reorganization. It is understood that such ordinary course of
business will include the declaration and payment of customary
dividends and distributions and any other dividends and
distributions deemed advisable.
<PAGE>
(p) Any reporting responsibility of a Piper Fund is and
shall remain the responsibility of the Piper Fund for all periods
before and including the Effective Time of the Reorganization and
such later date on which the Piper Fund is terminated.
(q) Except for agreements or other arrangements relating
to the purchase and sale of portfolio securities, it has furnished
FAIF with copies or descriptions of all contracts to which it is a
party.
(r) Each Piper Fund shall provide a list of all
portfolio securities held by it to FAIF at least fifteen days before
the Effective Time of the Reorganization and shall immediately
notify FAIF's investment adviser of any portfolio security
thereafter acquired or sold by the Piper Fund. At the Effective Time
of the Reorganization, no Piper Fund shall hold any portfolio
security that is impermissible under the investment policies,
objectives and limitations of the corresponding FAIF Fund.
5. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF FAIF.
FAIF, on behalf of the FAIF Funds, represents and warrants to, and agrees with,
Piper as follows, such representations, warranties and agreements being made on
behalf of each FAIF Fund on a several (and not joint, or joint and several)
basis:
(a) It is a Maryland corporation duly created pursuant
to its Articles of Incorporation for the purpose of acting as a
management investment company under the 1940 Act, and is validly
existing under the laws of the State of Maryland. It is registered
as an open-end management investment company under the 1940 Act and
its registration with the SEC as an investment company is in full
force and effect.
(b) It has the power to own all of its properties and
assets and to consummate the transactions contemplated herein, and
has all necessary federal, state and local authorizations to carry
on its business as now being conducted and, except as stated in
Section 5(j) below, to consummate the transactions contemplated by
this Agreement.
(c) This Agreement has been duly authorized, executed
and delivered by it, and represents a valid and binding contract,
enforceable in accordance with its terms, subject as to enforcement
to bankruptcy, insolvency, reorganization, moratorium or other
similar laws of general application relating to or affecting
creditors' rights and to the application of general principles of
equity. The execution and delivery of this Agreement does not, and
the consummation of the transactions contemplated by this Agreement
will not, violate FAIF's Articles of Incorporation or By-Laws or any
agreement or arrangement to which it is a party or by which it is
bound.
(d) Each FAIF Fund intends to qualify as a regulated
investment company under Part I of Subchapter M of the Code, and
with respect to each FAIF Fund that has conducted operations prior
to the Effective Time of the Reorganization, has elected to qualify
and has qualified as a regulated investment company under Part I of
Subchapter M of Subtitle A, Chapter 1, of the Code, as of and since
its first taxable year; has been a regulated investment company
under such Part of the Code at all times since the end of its first
taxable year when it so qualified; and qualifies and shall continue
to qualify as a regulated investment company for its current taxable
year.
(e) The audited financial statements for its fiscal year
ended September 30, 1997, and the unaudited financial statements for
the period ended March 31, 1998, copies of which have been
previously furnished to Piper, present fairly the financial position
of the FAIF Funds as of such dates and the results of their
operations for the periods indicated, in conformity with generally
accepted accounting principles applied on a consistent basis. To the
best of FAIF's
<PAGE>
knowledge, there are no liabilities of a material amount of any FAIF
Fund, whether accrued, absolute, contingent or otherwise existing,
other than, as of March 31, 1998, liabilities disclosed or provided
for in the unaudited financial statements for the period ended March
31, 1998, and liabilities incurred in the ordinary course of
business subsequent to March 31, 1998.
(f) It has valued, and will continue to value, its
portfolio securities and other assets in accordance with applicable
legal requirements.
(g) There are no material contracts outstanding with
respect to the FAIF Funds that have not been disclosed in FAIF's
current registration statement and which under applicable law are
required to be disclosed therein.
(h) At the Effective Time of the Reorganization, all
federal and other tax returns and reports of each FAIF Fund required
by law to have been filed by such time shall have been filed, and
all federal and other taxes shall have been paid so far as due, or
provisions shall have been made for the payment thereof and, to the
best knowledge of each FAIF Fund, no such return or report shall be
currently under audit and no assessment shall have been asserted
with respect to such returns or reports.
(i) There are no material legal, administrative or other
proceedings pending or, to its knowledge threatened, against it or
the FAIF Funds which could result in liability on the part of FAIF
or the FAIF Funds and FAIF knows of no facts that might form the
basis of a legal, administrative or other proceeding which, if
adversely determined, would materially and adversely affect any FAIF
Fund's financial condition or the conduct of its business and FAIF
is not a party to or subject to the provisions of any order, decree
or judgment of any court or governmental body that materially and
adversely affects, or is reasonably likely to materially and
adversely affect, its business or its ability to consummate the
transactions contemplated herein.
(j) No consent, approval, authorization or order of any
court or governmental authority is required for the consummation by
FAIF of the transactions contemplated by this Agreement, except such
as may be required under the 1933 Act, the 1934 Act, the 1940 Act,
the rules and regulations under those Acts, or state securities
laws, all of which shall have been received prior to the Effective
Time of the Reorganization, except for such consents, approvals,
authorizations or orders as may be required subsequent to the
Effective Time of the Reorganization.
(k) The N-14 Registration Statement and the
Reorganization Proxy Materials, from their respective effective and
clearance dates with the SEC, through the time of the shareholders
meeting referred to in Section 6 and at the Effective Time of the
Reorganization, insofar as they relate to FAIF (i) shall comply in
all material respects with the provisions of the 1933 Act, the 1934
Act and the 1940 Act, and the rules and regulations thereunder, and
(ii) shall not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements made therein not misleading;
provided, that the representations and warranties in this subsection
shall not apply to statements in or omissions from the N-14
Registration Statement or the Reorganization Proxy Materials made in
reliance upon and in conformity with information furnished by or on
behalf of Piper for use therein as provided in Section 7. For those
purposes, information shall be considered to have been provided "on
behalf" of Piper if furnished by its investment adviser,
administrator, custodian or transfer agent, acting in their capacity
as such.
(l) The shares of the FAIF Funds to be issued and
delivered to the Piper Funds for the account of the shareholders of
the Piper Funds, pursuant to the terms hereof, shall have been duly
authorized as of the Effective Time of the Reorganization and, when
so issued and
<PAGE>
delivered, shall be duly and validly issued, fully paid and
non-assessable, and no shareholder of FAIF shall have any preemptive
right of subscription or purchase in respect thereto.
(m) All of the issued and outstanding shares of each of
the FAIF Funds have been validly issued and are fully paid and
non-assessable, and were offered for sale and sold in conformity
with the registration requirements of all applicable federal and
state securities laws.
(n) It shall operate its business in the ordinary course
between the date hereof and the Effective Time of the
Reorganization. It is understood that such ordinary course of
business will include the declaration and payment of customary
dividends and distributions and any other dividends and
distributions deemed advisable.
6. SHAREHOLDER ACTION. As soon as practicable after the effective
date of the N-14 Registration Statement and SEC clearance of the proxy
solicitation materials referred to in Section 7, but in any event prior to the
Effective Time of the Reorganization and as a condition thereto, the Board of
Directors of Piper shall call, and Piper shall hold, a meeting of the
shareholders of each of the Piper Funds for the purpose of considering and
voting upon:
(a) in the case of both Piper Funds, a proposal, in
connection with the merger between U.S. Bancorp and Piper Jaffray
Companies Inc., to ratify and approve investment advisory
agreements, on behalf of each Piper Fund, between Piper and Piper
Capital Management Incorporated;
(b) in the case of both Piper Funds, a proposal, in
connection with the merger between U.S. Bancorp and Piper Jaffray
Companies Inc., to ratify and approve sub-advisory agreements
relating to each Piper Fund between Piper Capital Management
Incorporated and Edinburgh Fund Managers plc;
(c) in the case of both Piper Funds, approval of this
Agreement and the transactions contemplated hereby, which approval
shall be considered a vote in favor of the Amendment; and
(d) such other matters as may be determined by the
Boards of Directors of Piper and FAIF.
7. REGULATORY FILINGS. FAIF shall file a post-effective amendment
(the "N-1A Post-Effective Amendment") to its registration statement on Form N-1A
(File Nos. 33-16905; 811-5309) with the SEC as promptly as practicable so that
the Emerging Markets Fund and its shares are registered under the 1933 Act and
1940 Act and shall take all required actions to qualify such shares for sale in
the appropriate states. In addition, FAIF shall file an N-14 Registration
Statement, which shall include the Reorganization Proxy Materials of Piper, with
the SEC, and with the appropriate state securities commissions, relating to the
matters described in Section 6 as promptly as practicable. FAIF and Piper have
cooperated and shall continue to cooperate with each other, and have furnished
and shall continue to furnish each other with the information relating to itself
that is required by the 1933 Act, the 1934 Act, the 1940 Act, and the rules and
regulations under each of those Acts, to be included in the N-1A Post-Effective
Amendment, the N-14 Registration Statement and the Reorganization Proxy
Materials.
8. AMENDMENT FILING. Prior to the Effective Time of the
Reorganization and as a condition thereto, Piper shall have filed the Amendment
in accordance with applicable provisions of Minnesota law.
<PAGE>
9. FAIF CONDITIONS. The obligations of FAIF hereunder shall be
subject to the following conditions precedent:
(a) This Agreement and the transactions contemplated by
this Agreement (which shall not be deemed to include, for these
purposes, the matters described in Section 6(a)) shall have been
approved by the Board of Directors of Piper and by the shareholders
of the Piper Funds in the manner required by law and this Agreement.
(b) Piper shall have delivered to FAIF a statement of
assets and liabilities of each Piper Fund, together with a list of
the portfolio securities of the Piper Fund showing the tax costs of
such securities by lot and the holding periods of such securities,
as of the Effective Time of the Reorganization, certified by the
Treasurer of Piper as having been prepared in accordance with
generally accepted accounting principles consistently applied.
(c) Piper shall have duly executed and delivered to FAIF
such bills of sale, assignments, certificates and other instruments
of transfer ("Transfer Documents") as FAIF may reasonably deem
necessary or desirable to transfer all of each Piper Fund's right,
title and interest in and to the Fund Assets. Such Fund Assets shall
be accompanied by all necessary state stock transfer stamps or cash
for the appropriate purchase price therefor.
(d) All representations and warranties of Piper made in
this Agreement shall be true and correct in all material respects as
if made at and as of the Effective Time of the Reorganization.
(e) Piper shall have delivered to FAIF a certificate
executed in its name by its President or Vice President and its
Treasurer or Assistant Treasurer, in a form reasonably satisfactory
to FAIF and dated as of the Effective Time of the Reorganization, to
the effect that the representations and warranties of the Piper
Funds made in this Agreement are true and correct at and as of the
Effective Time of the Reorganization, except as they may be affected
by the transactions contemplated by this Agreement.
(f) Piper shall have delivered to FAIF Piper's written
instructions to the custodian for the Piper Funds, acknowledged and
agreed to in writing by such custodian, irrevocably instructing such
custodian to transfer to each FAIF Fund all of the corresponding
Piper Fund's portfolio securities, cash and any other assets to be
acquired by such FAIF Fund pursuant to this Agreement.
(g) Piper shall have delivered to FAIF a certificate of
Piper's transfer agent stating that the records maintained by the
transfer agent (which shall be made available to FAIF) contain the
names and addresses of the shareholders of each Piper Fund and the
numbers and classes of the outstanding shares of such Piper Fund
owned by each such shareholder as of the Effective Time of the
Reorganization.
(h) At or prior to the Effective Time of the
Reorganization, the expenses incurred by each Piper Fund (or accrued
up to the Effective Time of the Reorganization) shall have been
maintained by Piper Funds' investment adviser or otherwise so as not
to exceed any contractual expense limitations or any expense
limitations set forth in such Piper Fund's then current prospectus.
(i) At or prior to the Effective Time of the
Reorganization, appropriate action shall have been taken by Piper
Funds' investment adviser or otherwise such that no unamortized
organizational expenses shall be reflected in any Piper Fund's
statement of assets and liabilities delivered pursuant to Section
8(b).
<PAGE>
(j) FAIF shall have received an opinion of Dorsey &
Whitney LLP, counsel to Piper, in form reasonably satisfactory to
FAIF and dated the Effective Time of the Reorganization,
substantially to the effect that (i) Piper is a Minnesota
corporation duly established and validly existing under the laws of
the State of Minnesota; (ii) this Agreement and the Transfer
Documents have been duly authorized, executed and delivered by Piper
and represent legal, valid and binding contracts, enforceable in
accordance with their terms, subject as to enforcement to
bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and other similar laws of general application relating to
or affecting creditors' rights and to the application of general
principles of equity; (iii) the execution and delivery of this
Agreement did not, and the consummation of the transactions
contemplated by this Agreement will not, violate the Articles of
Incorporation or Bylaws of Piper or any material contract known to
such counsel to which Piper is a party or by which it is bound; (iv)
the only Piper shareholder approvals required with respect to the
consummation of the transactions contemplated by this Agreement are
the approval, for each Piper Fund, of a majority of the outstanding
shares of each class, voting as separate classes; and (v) no
consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Piper of
the transactions contemplated by this Agreement, except such as have
been obtained under the 1933 Act, the 1934 Act, the 1940 Act, the
rules and regulations under those Acts and such as may be required
under the state securities laws or such as may be required
subsequent to the Effective Time of the Reorganization. Such opinion
may rely on the opinion of other counsel to the extent set forth in
such opinion, provided such other counsel is reasonably acceptable
to FAIF.
(k) FAIF shall have received an opinion of Dorsey &
Whitney LLP addressed to FAIF and Piper in form reasonably
satisfactory to them, and dated the Effective Time of the
Reorganization, substantially to the effect that, for federal income
tax purposes (i) the transfer by each Piper Fund of all of its Fund
Assets to the corresponding FAIF Fund in exchange for shares of the
corresponding FAIF Fund, and the distribution of such shares to the
shareholders of the Piper Fund, as provided in this Agreement, will
constitute a reorganization within the meaning of Section
368(a)(1)(C), (D) or (F) of the Code; (ii) no income, gain or loss
will be recognized by the Piper Funds as a result of such
transactions; (iii) no income, gain or loss will be recognized by
the FAIF Funds as a result of such transactions; (iv) no income,
gain or loss will be recognized by the shareholders of the Piper
Funds on the distribution to them by the Piper Funds of shares of
the corresponding FAIF Funds in exchange for their shares of the
Piper Funds (but shareholders of a Piper Fund subject to taxation
will recognize income upon receipt of any net investment income or
net capital gains of such Piper Fund which are distributed by such
Piper Fund prior to the Effective Time of the Reorganization); (v)
the tax basis of the FAIF Fund shares received by each shareholder
of a Piper Fund will be the same as the tax basis of the
shareholder's Piper Fund shares exchanged therefor; (vi) the tax
basis of the Fund Assets received by each FAIF Fund will be the same
as the basis of such Fund Assets in the hands of the corresponding
Piper Fund immediately prior to the transactions; (vii) a
shareholder's holding period for FAIF Fund shares will be determined
by including the period for which the shareholder held the shares of
the Piper Fund exchanged therefor, provided that the shareholder
held such shares of the Piper Fund as a capital asset at the
Effective Time of the Reorganization; (viii) the holding period of
each FAIF Fund with respect to the Fund Assets will include the
period for which such Fund Assets were held by the corresponding
Piper Fund, provided that the Piper Fund held such assets as capital
assets; and (ix) each FAIF Fund will succeed to and take into
account the earnings and profits, or deficit in earnings and
profits, of the corresponding Piper Fund as of the Effective Time of
the Reorganization.
(l) The Fund Assets to be transferred to a FAIF Fund
under this Agreement shall include no assets which such FAIF Fund
may not properly acquire pursuant to its investment limitations or
objectives or may not otherwise lawfully acquire.
<PAGE>
(m) The N-1A Post-Effective Amendment and the N-14
Registration Statement shall have become effective under the 1933
Act and no stop order suspending such effectiveness shall have been
instituted or, to the knowledge of FAIF, contemplated by the SEC and
the parties shall have received all permits and other authorizations
necessary under state securities laws to consummate the transactions
contemplated by this Agreement.
(n) No action, suit or other proceeding shall be
threatened or pending before any court or governmental agency in
which it is sought to restrain or prohibit or obtain damages or
other relief in connection with this Agreement or the transactions
contemplated herein.
(o) The SEC shall not have issued any unfavorable
advisory report under Section 25(b) of the 1940 Act nor instituted
any proceeding seeking to enjoin consummation of the transactions
contemplated by this Agreement under Section 25(c) of the 1940 Act.
(p) Prior to the Effective Time of the Reorganization,
each Piper Fund shall have declared a dividend or dividends, with a
record date and ex-dividend date prior to the Effective Time of the
Reorganization, which, together with all previous dividends, shall
have the effect of distributing to its shareholders all of its net
investment company taxable income, if any, for the taxable years
ending September 30, 1997 and for the taxable periods from said date
to and including the Effective Time of the Reorganization (computed
without regard to any deduction for dividends paid), and all of its
net capital gain, if any, realized in taxable years ending September
30, 1997, and in the taxable periods from said date to and including
the Effective Time of Reorganization.
(q) Piper shall have performed and complied in all
material respects with each of its agreements and covenants required
by this Agreement to be performed or complied with by it prior to or
at the Effective Time of the Reorganization.
(r) FAIF shall have been furnished at the Effective Time
of the Reorganization with a certificate signed by an appropriate
officer of Piper Capital Management Incorporated dated as of such
date stating that all statistical and research data, clerical,
accounting and bookkeeping records, periodic reports to the SEC and
any state securities agencies, tax returns and other tax filings,
shareholder lists and other material shareholder data, complaint
files and all other information, books, records and documents
maintained by Piper Capital Management Incorporated and belonging to
the Piper Funds, including those required to be maintained by
Section 31(a) of the 1940 Act and Rules 31a-1 to 31a-3 thereunder,
have been delivered to FAIF.
10. PIPER CONDITIONS. The obligations of Piper hereunder shall be
subject to the following conditions precedent:
(a) This Agreement and the transactions contemplated by
this Agreement (which shall not be deemed, for these purposes, to
include the matter described in Section 6(a)) shall have been
approved by the Board of Directors of FAIF and by the shareholders
of the Piper Funds in the manner required by law and this Agreement.
(b) All representations and warranties of FAIF made in
this Agreement shall be true and correct in all material respects as
if made at and as of the Effective Time of the Reorganization.
(c) FAIF shall have delivered to Piper a certificate
executed in its name by its President or Vice President and its
Treasurer or Assistant Treasurer, in a form reasonably satisfactory
to Piper and dated as of the Effective Time of the Reorganization,
to the effect that the representations and warranties of the FAIF
Funds made in this Agreement are true and
<PAGE>
correct at and as of the Effective Time of the Reorganization,
except as they may be affected by the transactions contemplated by
this Agreement and that, to its best knowledge, the Fund Assets to
be transferred to an FAIF Fund under this Agreement as set forth in
Subsection 9(b) include only assets which such FAIF Fund may
properly acquire under its investment policies, limitations and
objectives and may otherwise be lawfully acquired by such FAIF Fund.
(d) Piper shall have received an opinion of Dorsey &
Whitney LLP in form reasonably satisfactory to Piper and dated the
Effective Time of the Reorganization, substantially to the effect
that (i) FAIF is a Maryland corporation duly established and validly
existing under the laws of the State of Maryland; (ii) the shares of
the FAIF Funds to be delivered to the Piper Funds as provided for by
this Agreement are duly authorized and upon delivery will be validly
issued, fully paid and non-assessable by FAIF; (iii) this Agreement
has been duly authorized, executed and delivered by FAIF, and
represents a legal, valid and binding contract, enforceable in
accordance with its terms, subject as to enforcement to bankruptcy,
insolvency, reorganization, moratorium or other similar laws of
general application relating to or affecting creditors' rights
generally and to the application of general principles of equity;
(iv) the execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated by this Agreement will
not, violate the Articles of Incorporation or By-Laws of FAIF or any
material contract known to such counsel to which FAIF is a party or
by which it is bound; and (v) no consent, approval, authorization or
order of any court or governmental authority is required for the
consummation by FAIF of the transactions contemplated by this
Agreement, except such as have been obtained under the 1933 Act, the
1934 Act, the 1940 Act, the rules and regulations under those Acts
and such as may be required by state securities laws or such as may
be required subsequent to the Effective Time of the Reorganization.
Such opinion may rely on the opinion of other counsel to the extent
set forth in such opinion, provided such other counsel is reasonably
acceptable to Piper.
(e) Piper shall have received an opinion of Dorsey &
Whitney LLP addressed to FAIF and Piper in form reasonably
satisfactory to them, and dated the Effective Time of
Reorganization, with respect to the matters specified in Subsection
9(k).
(f) The N-1A Post-Effective Amendment and the N-14
Registration Statement shall have become effective under the 1933
Act and no stop order suspending the effectiveness shall have been
instituted, or to the knowledge of FAIF, contemplated by the SEC and
the parties shall have received all permits and other authorizations
necessary under state securities laws to consummate the transactions
contemplated herein.
(g) No action, suit or other proceeding shall be
threatened or pending before any court or governmental agency in
which it is sought to restrain or prohibit, or obtain damages or
other relief in connection with, this Agreement or the transactions
contemplated herein.
(h) The SEC shall not have issued any unfavorable
advisory report under Section 25(b) of the 1940 Act nor instituted
any proceeding seeking to enjoin consummation of the transactions
contemplated by this Agreement under Section 25(c) of the 1940 Act.
(i) FAIF shall have performed and complied in all
material respects with each of its agreements and covenants required
by this Agreement to be performed or complied with by it prior to or
at the Effective Time of the Reorganization.
(j) Piper shall have received from FAIF a duly executed
instrument whereby each FAIF Fund assumes all of the liabilities of
its corresponding Piper Fund.
11. FURTHER ASSURANCES. Subject to the terms and conditions herein
provided, each of the parties hereto shall use its best efforts to take, or
cause to be taken, such action, to execute and deliver,
<PAGE>
or cause to be executed and delivered, such additional documents and instruments
and to do, or cause to be done, all things necessary, proper or advisable under
the provisions of this Agreement and under applicable law to consummate and make
effective the transactions contemplated by this Agreement, including without
limitation, delivering and/or causing to be delivered to the other party hereto
each of the items required under this Agreement as a condition to such party's
obligations hereunder.
12. INDEMNIFICATION. (a) FAIF agrees to indemnify and hold harmless
Piper and each of Piper's directors and officers from and against any and all
losses, claims, damages, liabilities or expenses (including, without limitation,
the payment of reasonable legal fees and reasonable costs of investigation) to
which, jointly or severally, Piper or any of its directors or officers may
become subject, insofar as any such loss, claim, damage, liability or expense
(or actions with respect thereto) arises out of or is based on any breach by
FAIF of any of its representations, warranties, covenants or agreements set
forth in this Agreement.
(b) Piper agrees to indemnify and hold harmless FAIF and each of
FAIF's directors and officers from and against any and all losses, claims,
damages, liabilities or expenses (including, without limitation, the payment of
reasonable legal fees and reasonable costs of investigation) to which, jointly
or severally, FAIF or any of its directors or officers may become subject,
insofar as any such loss, claim, damage, liability or expense (or actions with
respect thereto) arises out of or is based on any breach by Piper of any of its
representation, warranties, covenants or agreements set forth in this Agreement.
13. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of the parties set forth in this Agreement shall survive the
delivery of the Fund Assets to the FAIF Funds and the issuance of the shares of
the FAIF Funds at the Effective Time of the Reorganization.
14. TERMINATION OF AGREEMENT. This Agreement may be terminated by a
party at or, in the case of Subsections 14(c) or (d), below, at any time prior
to, the Effective Time of the Reorganization by a vote of a majority of its
Board of Directors as provided below:
(a) by FAIF if the conditions set forth in Section 8 are
not satisfied as specified in said Section;
(b) by Piper if the conditions set forth in Section 9
are not satisfied as specified in said Section;
(c) by mutual consent of both parties; and
(d) by Piper or FAIF if determined by its Board of
Directors that proceeding with the transactions contemplated herein
is inadvisable.
15. AMENDMENT AND WAIVER. At any time prior to or (to the fullest
extent permitted by law) after approval of this Agreement by the shareholders of
Piper (a) the parties hereto may, by written agreement authorized by their
respective Boards of Directors and with or without the further approval of their
shareholders, amend any of the provisions of this Agreement, and (b) either
party may waive any breach by the other party or the failure to satisfy any of
the conditions to its obligations (such waiver to be in writing and authorized
by the Board of Directors of the waiving party with or without the approval of
such party's shareholders). Without limiting the foregoing, in the event
shareholder approval of the matters specified in Section 6 is obtained with
respect to certain Piper Funds but not with respect to the other Piper Funds,
with the result that the transactions contemplated by this Agreement may be
consummated with respect to some but not all the Piper Funds, the Boards of
Directors of FAIF and of Piper may, in the exercise of their reasonable business
judgment, either abandon this Agreement with respect to all of the Piper Funds
or direct that the Reorganization and other transactions described herein be
consummated to the degree the Boards deem advisable.
<PAGE>
16. GOVERNING LAW. This Agreement and the transactions contemplated
hereby shall be governed, construed and enforced in accordance with the laws of
the State of Minnesota.
17. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
respective successors and permitted assigns of the parties hereto. This
Agreement and the rights, obligations and liabilities hereunder may not be
assigned by either party without the consent of the other party.
18. BENEFICIARIES. Except as set forth in Section 12 hereof with
respect to the directors and officers of Piper and of FAIF, nothing contained in
this Agreement shall be deemed to create rights in persons not parties hereto,
other than the successors and permitted assigns of the parties.
19. BROKERAGE FEES AND EXPENSES. FAIF and Piper each represents and
warrants to the other that there are no brokers or finders entitled to receive
any payments in connection with the transactions provided for herein.
20. NOTICES. All notices required or permitted herein shall be in
writing and shall be deemed to be properly given when delivered personally or by
telefacsimile to the party entitled to receive the notice or when sent by
certified or registered mail, postage prepaid, or delivered to an
internationally recognized overnight courier service, in each case properly
addressed to the party entitled to receive such notice at the address or telefax
number stated below or to such other address or telefax number as may hereafter
be furnished in writing by notice similarly given by one party to the other
party hereto:
If to FAIF: First American Investment Funds, Inc.
Oaks, Pennsylvania 19456
With copies to: Kathleen L. Prudhomme
Dorsey & Whitney LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402
Telefax Number: (612) 340-8738
If to Piper: Piper Global Funds Inc.
222 South Ninth Street
Minneapolis, MN 55402-3804
With copies to: Susan S. Miley, Esq.
Piper Capital Management Incorporated
222 South Ninth Street
Minneapolis, MN 55402-3804
Telefax Number: (612) 342-1673
Stuart Strauss, Esq.
Gordon Altman Butowsky Weitzen
Shalov & Wein
114 W. 47th Street
New York, New York 10036
Telefax Number: (212) 626-0799
21. ANNOUNCEMENTS. Any announcement or similar publicity with
respect to this Agreement or the transactions contemplated herein shall be made
only at such time and in such manner as the parties shall agree; provided that
nothing herein shall prevent either party upon notice to the other party from
making such public announcements as such party's counsel may consider advisable
in order to satisfy the party's legal and contractual obligations in such
regard.
<PAGE>
22. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
and understanding of the parties hereto and supersedes any and all prior
agreements, arrangements and understandings relating to matters provided for
herein.
23. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed to be an
original, but all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed by their duly authorized officers designated below as of the date
first written above.
PIPER GLOBAL FUNDS INC.
ATTEST:
- ------------------------------------ -------------------------------------
- --------------------- --------------------
Secretary President
FIRST AMERICAN INVESTMENT FUNDS, INC.
ATTEST:
- ------------------------------------ -------------------------------------
Michael J. Radmer
Secretary --------------------
President
<PAGE>
EXHIBIT 1 TO AGREEMENT AND PLAN OF REORGANIZATION
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
PIPER GLOBAL FUNDS INC.
The undersigned officer of Piper Global Funds Inc. ("PGF"), a
corporation subject to the provisions of Chapter 302A of the Minnesota statutes,
hereby certifies that PGF's (a) Board of Directors, at a meeting held April 13,
1998, and (b) shareholders, at a meeting held ______, 1998, adopted the
resolutions hereinafter set forth; and such officer further certifies that the
amendments to PGF's Articles of Incorporation set forth in such resolutions were
adopted pursuant to Chapter 302A.
WHEREAS, PGF is registered as an open-end management investment
company (I.E., a mutual fund) under the Investment Company Act of 1940 and
offers its shares to the public in more than one series, each of which
represents a separate and distinct portfolio of assets;
WHEREAS, it is desirable and in the best interest of the
shareholders of Pacific-European Growth Fund and Emerging Markets Growth Fund
(the "Acquired Funds"), series of PGF, that the assets belonging to each such
series, subject to all liabilities of such series, be sold to International Fund
and Emerging Markets Fund, respectively (the "Acquiring Funds"), series of First
American Investment Funds, Inc. ("FAIF"), a Maryland corporation and an open-end
management investment company registered under the Investment Company Act of
1940, in exchange for shares of the respective Acquiring Funds;
WHEREAS, PGF wishes to provide for the PRO RATA distribution of such
shares of the Acquiring Funds received by it to holders of shares of the
respective Acquired Funds and the simultaneous cancellation and retirement of
the outstanding shares of the Acquired Funds;
WHEREAS, PGF and FAIF have entered into an Agreement and Plan of
Reorganization providing for the foregoing transactions; and
WHEREAS, the Agreement and Plan of Reorganization requires that, in
order to bind all shareholders of each Acquired Fund to the foregoing
transactions, and in particular to bind such shareholders to the cancellation
and retirement of the outstanding shares of such Acquired Fund, it is necessary
to adopt an amendment to PGF's Articles of Incorporation.
NOW, THEREFORE, BE IT RESOLVED, that PGF's Articles of Incorporation
be, and the same hereby are, amended to add the following Article 5A immediately
following Article 5 thereof:
5A. (a) For purposes of this Article 5A, the following
terms shall have the following meanings:
"PGF" means the Corporation.
"FAIF" means First American Investment Funds, Inc., a
Maryland corporation.
"ACQUIRED FUNDS" means Pacific-European Growth Fund, the
Series A Shares of the Corporation, and Emerging Markets Growth
Fund, the Series B Shares of the Corporation.
"ACQUIRING FUNDS" means International Fund and Emerging
Markets Fund, series of FAIF.
<PAGE>
"REORGANIZATION AGREEMENT" means that Agreement and Plan
of Reorganization dated ___________, 1998 between PFI and FAIF.
"EFFECTIVE TIME OF THE REORGANIZATION" means the date
and time at which delivery of the assets of the Acquired Funds and
the shares of the Acquiring Funds to be issued pursuant to the
Reorganization Agreement, and the liquidation of the Acquired Funds,
occurs.
(b) At the Effective Time of the Reorganization, with
respect to each Acquired Fund and its corresponding Acquiring Fund,
all assets and liabilities belonging to the Acquired Fund shall be
sold to and assumed by the Acquiring Fund in return for Acquiring
Fund shares, all pursuant to the Reorganization Agreement.
(c) With respect to each Acquired Fund and its
corresponding Acquiring Fund, the number of Acquiring Fund shares to
be received by the Acquired Fund and distributed by it to the
Acquired Fund shareholders shall be determined as follows:
(i) The value of the Acquired Fund's assets
and the net asset value per share of the Acquiring
Fund's shares shall be computed as of the Effective Time
of the Reorganization using the pricing policies and
procedures of FAIF, as described in its then current
prospectuses.
(ii) The total number of Acquiring Fund
shares to be issued (including fractional shares, if
any) in exchange for assets and liabilities of the
Acquired Fund shall be determined as of the Effective
Time of the Reorganization by dividing the value of the
Acquired Fund's assets, net of all liabilities of the
Acquired Fund, by the net asset value of the Acquiring
Fund's shares, each as determined pursuant to (i) above.
(iii) At the Effective Time of the
Reorganization, the Acquired Fund shall distribute PRO
RATA to its shareholders of record as of the Effective
Time of the Reorganization the full and fractional
Acquiring Fund shares received by the Acquired Fund
pursuant to (ii) above.
(d) The distribution of the shares of each Acquiring
Fund to shareholders of the corresponding Acquired Fund provided for
in paragraph (c) above shall be accomplished by an instruction,
signed by PGF's Secretary, to transfer the Acquiring Fund shares
then credited to the Acquired Fund's account on the books of the
Acquiring Fund to open accounts on the books of the Acquiring Fund
in the names of the Acquired Fund shareholders in amounts
representing the respective PRO RATA number of Acquiring Fund shares
due each such shareholder pursuant to the foregoing provisions. All
issued and outstanding shares of the Acquired Fund shall
simultaneously be canceled on the books of the Acquired Fund and
retired.
(e) From and after the Closing Date, the shares of each
Acquired Fund canceled and retired pursuant to paragraph (d) above
shall have the status of authorized and unissued Shares of PGF,
without designation as to series.
IN WITNESS WHEREOF, the undersigned officer of PGF has executed
these Articles of Amendment on behalf of PGF on __________, 1998.
PIPER GLOBAL FUNDS INC.
By
-----------------------------
Its
--------------------------
<PAGE>
APPENDIX IV(a)
PRINCIPAL EXECUTIVE OFFICER AND DIRECTORS OF
PIPER CAPITAL MANAGEMENT INCORPORATED
The names and principal occupations of the principal executive
officer and each director of Piper Capital are set forth below. The address of
all individuals is that of the Piper Funds.
Name Principal Occupation
- ---- --------------------
Paul A. Dow Chief Executive Officer and Chief Investment Officer of
Piper Capital
Deborah K. Roesler Director of Piper Capital and Chief Financial
Officer/Treasurer of Piper Jaffray Companies Inc.
Paula R. Meyer Director and President of Piper Capital
Keith A. Kale Director of Piper Capital and Director of Marketing for
Piper Jaffray Inc.
IVa-1
<PAGE>
APPENDIX IV(b)
PRINCIPAL EXECUTIVE OFFICER AND DIRECTORS OF
EDINBURGH FUND MANAGERS PLC
The names and principal occupations of the principal executive
officer and each director of EFM are set forth below. The address of all
individuals is Donaldson House, 97 Haymarket Terrace, Edinburgh, Scotland EH12,
5HD.
Name Principal Occupation
- ---- --------------------
Iain Watt Chief Executive Officer
Michael Balfour Chief Investment Officer, Chairman of the Asset
Allocation Committee
Iain Beattie Investment Director, Head of Developed Markets
Graham Brock Finance Director
Graham Campbell Head of UK Income
Alistair Currie Head of UK Smaller Companies
David Currie Head of North America, Director in charge of the
Quantative Analysis Team, Chairman of the Investment
Management Committee
Helen Fallow Head of Emerging Markets Research
Alex Gowans Responsible for development of the investment trust
business.
Carole Haddow Group marketing
Jim Hay Managing Director, Edinburgh Unit Trust Managers Ltd.
Rod MacRae Head of Administration
Ian Massie Responsible for investment trust operations and
reporting to institutional investors
David McCraw Head of Institutional Investment Management
Graham McGeorge Head of International Sales
Kenneth McKenna Head of Information Technology
Cathy Miller Secretary
Harry Morgan Managing Director, Edinburgh Portfolio Managers
Richard Muckart Investment Director, Head of Emerging Markets
Colin Peters Head of Human Resources and Operations
Jamie Sandison Head of European Department
<PAGE>
Elizabeth Thom Head of UK Large Companies
Nigel Whittingham Head of Group Sales and Marketing
IVb-2
<PAGE>
APPENDIX V
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
This Appendix compares the investment objectives and certain
investment policies and restrictions of the FAIF Funds and their corresponding
Piper Funds. The following is qualified in its entirety by the more detailed
information included in the prospectuses for the Existing FAIF Funds and the
Piper Funds which are incorporated by reference in this Combined Proxy
Statement/Prospectus, and to the preliminary prospectuses for the Class A and
Class B shares and for the Class Y shares of the New FAIF Funds, which are
attached to this Combined Proxy Statement/Prospectus as Appendix IX and Appendix
X, respectively.
The investment objective of each Piper Fund (with the exception of
the Pacific-European Growth Fund) is fundamental, which means that it may not be
changed without a vote of the holders of a majority, as that term is defined in
the 1940 Act, of the outstanding shares of that Fund. The investment objectives
of the FAIF Funds are not fundamental and therefore may be changed without a
vote of shareholders. Such changes could result in an FAIF Fund having
investment objectives different from those which shareholders considered
appropriate at the time of approving the Reorganization. Shareholders will
receive written notification at least 30 days prior to any change in an FAIF
Fund's investment objectives.
PIPER SMALL COMPANY GROWTH FUND/FAIF SMALL CAP GROWTH FUND
Investment Objectives
Piper Small Company Growth Fund ("Piper Small Company Fund") has an
objective of seeking long-term capital appreciation.
FAIF Small Cap Growth Fund ("FAIF Small Cap Fund") has an objective
of growth of capital.
Investment Policies and Restrictions
PRINCIPAL INVESTMENTS
Under normal market conditions, Piper Small Company Fund invests at
least 65% of its total assets in common stocks of small companies that the
adviser believes offer superior growth potential. A company is considered small
if, at the time of purchase, it has a market capitalization within the range of
companies included in the Standard & Poor's SmallCap 600 Index. Piper Small
Company Fund does not invest in convertible securities.
Similarly, under normal market conditions, FAIF Small Cap Fund
invests at least 65% of its total assets in equity securities of
small-capitalization companies that exhibit, in the adviser's opinion,
outstanding potential for superior growth. Small-capitalization companies are
deemed those with market capitalizations of less than $1 billion at the time of
purchase. Equity securities include common stocks and securities which are
convertible into or exchangeable for, or which carry warrants or other rights to
acquire, common stock. FAIF Small Cap Fund may not invest more than 5% of its
net assets in convertible securities rated below investment grade.
For Piper Small Company Fund, the adviser uses a long-term
fundamental approach to identify and select small companies which appear to
offer superior growth potential. A "fundamental" approach includes looking at a
company's earnings and sales growth, competitive advantages, management, and
market opportunities and evaluating whether its stock is fairly valued at the
current market price.
<PAGE>
For FAIF Small Cap Fund, companies that participate in sectors that
are identified by the fund's adviser as having long-term growth potential
generally are expected to make up a substantial portion of the Fund's holdings.
These companies often have established a market niche or have developed unique
products or technologies that are expected by the adviser to produce superior
growth in revenues and earnings.
OTHER INVESTMENTS
Piper Small Company Fund generally will be fully invested in a
diversified portfolio of common stocks, except that a small portion of assets
will be held in short-term money market securities and cash to pay redemption
requests and Fund expenses. Up to 35% of the Fund's total assets may be invested
in common stocks of companies which are not considered "small companies," as
defined above.
FAIF Small Cap Fund may invest up to 35% of its total assets in the
aggregate in equity securities of issuers with a market capitalization of $1
billion or more and in the following types of fixed income securities:
securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities ("U.S. Government Securities"), nonconvertible preferred
stocks, nonconvertible corporate debt securities and short-term obligations such
as rated commercial paper and variable amount master demand notes; U.S.
dollar-denominated time and savings deposits (including certificates of
deposit); bankers' acceptances; short-term U.S. Government Securities;
repurchase agreements; securities of other mutual funds which invest primarily
in debt obligations with remaining maturities of 13 months or less; and other
similar high-quality short-term U.S. dollar-denominated obligations. Investments
in nonconvertible preferred stocks and nonconvertible corporate debt securities
are limited to investment grade securities or non-rated securities judged to be
of comparable quality by the investment adviser.
FAIF Small Cap Fund may invest up to 25% of its total assets and
Piper Small Company Fund may invest up to 10% of its total assets in securities
of foreign issuers. With respect to FAIF Small Cap Fund, such securities must be
either listed on a U.S stock exchange or represented by American Depositary
Receipts ("ADRs"). As a result, FAIF Small Cap Fund's investments in foreign
securities are not subject to currency risks during the settlement period for
purchases or sales. Piper Small Company Fund may invest up to 5% of its total
assets in securities of foreign issuers which are neither listed on a U.S. stock
exchange nor represented by ADRs. Such direct investments in foreign securities
are subject to currency risk as well as other risks associated with investments
in securities of foreign issuers.
Each Fund may invest in high quality short-term securities without
limitation for temporary defensive purposes.
INVESTMENT TECHNIQUES
Piper Small Company Fund and FAIF Small Cap Fund may engage in the
following investment techniques to the extent indicated.
Repurchase Agreements. Both Funds may invest in repurchase
agreements.
Put and Call Options. Piper Small Company Fund may purchase or write
put and call options on the securities in which it may invest and on stock
indices listed on national securities exchanges. FAIF Small Cap Fund may
purchase put and call options on equity securities and on stock indices, write
covered call options covering up to 25% of the equity securities owned by the
Fund and write call options on stock indices related to such equity securities.
Futures Contracts. Piper Small Company Fund may enter into stock
index futures contracts, may purchase and sell put and call options on futures
contracts, and may enter into closing transactions
<PAGE>
with respect to such options to terminate existing positions. FAIF Small Cap
Fund may not enter into futures contracts or purchase or sell options thereon.
When-Issued and Delayed-Delivery Transactions. FAIF Small Cap Fund
may purchase securities on a when-issued or delayed-delivery basis. Piper Small
Company Fund does not purchase when-issued or delayed-delivery securities.
Lending of Portfolio Securities. In order to generate additional
income, FAIF Small Cap Fund may lend portfolio securities representing up to
one-third of the value of its total assets to broker-dealers, banks or other
institutional borrowers of securities. Although Piper Small Company Fund has the
ability to lend its portfolio securities, it has not done so in the past and
does not currently intend to do so.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions which are
set forth in full in such Fund's Statement of Additional Information. Among
those restrictions are the following:
Borrowing. Each Fund may borrow money from banks for temporary or
emergency purposes only, in an amount not to exceed 10% of its total assets.
Illiquid Securities. Each Fund may invest up to 15% of its net
assets in illiquid securities.
PIPER EMERGING GROWTH FUND/FAIF MID CAP GROWTH FUND
Investment Objectives
Piper Emerging Growth Fund ("Emerging Growth Fund") has an objective
of seeking long-term capital appreciation.
FAIF Mid Cap Growth Fund ("Mid Cap Fund") has an objective of growth
of capital.
Investment Policies and Restrictions
PRINCIPAL INVESTMENTS
Under normal market conditions, Emerging Growth Fund invests at
least 65% of its total assets in common stocks of emerging growth companies that
the adviser believes offer superior growth potential. A company is considered an
emerging growth company if, at the time of purchase, it has a market
capitalization within the range of companies included in the Standard & Poor's
MidCap 400 Index. Emerging Growth Fund does not invest in convertible
securities.
Similarly, under normal market conditions, Mid Cap Fund invests at
least 65% of its total assets in equity securities of mid-capitalization
companies that exhibit, in the adviser's opinion, outstanding potential for
superior growth. Mid-capitalization companies are deemed those with market
capitalizations of from $1 billion to $5 billion at the time of purchase. Equity
securities include common stocks and securities which are convertible into or
exchangeable for, or which carry warrants or other rights to acquire, common
stock. Mid Cap Fund may not invest more than 5% of its net assets in convertible
securities rated below investment grade.
Emerging Growth Fund's adviser uses a long-term fundamental approach
to identify and select small companies which appear to offer superior growth
potential. A "fundamental" approach includes looking at a company's earnings and
sales growth, competitive advantages, management, and market opportunities and
evaluating whether its stock is fairly valued at the current market price. For
Mid
<PAGE>
Cap Fund, companies that participate in sectors that are identified by the
fund's adviser as having long-term growth potential generally are expected to
make up a substantial portion of the Fund's holdings. These companies often have
established a market niche or have developed unique products or technologies
that are expected by the adviser to produce superior growth in revenues and
earnings.
OTHER INVESTMENTS
Emerging Growth Fund generally will be fully invested in a
diversified portfolio of common stocks, except that a small portion of assets
will be held in short-term money market securities and cash to pay redemption
requests and Fund expenses. Up to 35% of the Fund's total assets may be invested
in common stocks of companies which are not considered "emerging growth
companies," as defined above.
Mid Cap Fund may invest up to 35% of its total assets in the
aggregate in equity securities of issuers with a market capitalization less than
$1 billion or greater than $5 billion and in the following types of fixed income
securities: U.S. Government Securities, nonconvertible preferred stocks,
nonconvertible corporate debt securities and short-term obligations such as
rated commercial paper and variable amount master demand notes; U.S.
dollar-denominated time and savings deposits (including certificates of
deposit); bankers' acceptances; short-term U.S. Government Securities;
repurchase agreements; securities of other mutual funds which invest primarily
in debt obligations with remaining maturities of 13 months or less; and other
similar high-quality short-term U.S. dollar-denominated obligations. Investments
in nonconvertible preferred stocks and nonconvertible corporate debt securities
are limited to investment grade securities or non-rated securities judged to be
of comparable quality by the investment adviser.
Mid Cap Fund may invest up to 25% of its total assets and Emerging
Growth Fund may invest up to 10% of its total assets in securities of foreign
issuers. With respect to Mid Cap Fund, such securities must be either listed on
a U.S stock exchange or represented by ADRs. As a result, Mid Cap Fund's
investments in foreign securities are not subject to currency risks during the
settlement period for purchases or sales. Emerging Growth Fund may invest up to
5% of its total assets in securities of foreign issuers which are neither listed
on a U.S. stock exchange nor represented by ADRs. Such direct investments in
foreign securities are subject to currency risk as well as other risks
associated with investments in securities of foreign issuers.
Each Fund may invest in high quality short-term securities without
limitation for temporary defensive purposes.
INVESTMENT TECHNIQUES
Emerging Growth Fund and Mid Cap Fund may engage in the following
investment techniques to the extent indicated.
Repurchase Agreements. Both Funds may invest in repurchase
agreements.
Put and Call Options. Emerging Growth Fund may purchase or write put
and call options on the securities in which it may invest and on stock indices
listed on national securities exchanges. Mid Cap Fund may purchase put and call
options on equity securities and on stock indices, write covered call options
covering up to 25% of the equity securities owned by the Fund and write call
options on stock indices related to such equity securities.
Futures Contracts. Emerging Growth Fund may enter into stock index
futures contracts, may purchase and sell put and call options on futures
contracts, and may enter into closing transactions with respect to such options
to terminate existing positions. Mid Cap Fund may not enter into futures
contracts or purchase or sell options thereon.
<PAGE>
When-Issued and Delayed-Delivery Transactions. Mid Cap Fund may
purchase securities on a when-issued or delayed-delivery basis. Emerging Growth
Fund does not purchase when-issued or delayed- delivery securities.
Lending of Portfolio Securities. In order to generate additional
income, Mid Cap Fund may lend portfolio securities representing up to one-third
of the value of its total assets to broker-dealers, banks or other institutional
borrowers of securities. Although Emerging Growth Fund has the ability to lend
its portfolio securities, it has not done so in the past and does not currently
intend to do so.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions which are
set forth in full in such Fund's Statement of Additional Information. Among
those restrictions are the following:
Borrowing. Each Fund may borrow money from banks for temporary or
emergency purposes only, in an amount not to exceed 10% of its total assets.
Illiquid Securities. Each Fund may invest up to 15% of its net
assets in illiquid securities.
PIPER GROWTH FUND/FAIF LARGE CAP GROWTH FUND
Investment Objectives
Piper Growth Fund ("Growth Fund") has a primary objective of
long-term capital appreciation. Secondary objectives of the Fund are current
income and conservation of principal.
FAIF Large Cap Growth Fund ("Large Cap Growth Fund") has a primary
objective of long-term growth of capital. A secondary objective of the Fund is
to provide current income.
Investment Policies and Restrictions
PRINCIPAL INVESTMENTS
Under normal market conditions, Growth Fund will invest at least 90%
of its total assets in common stocks or securities convertible into or that
carry the right to buy common stocks, and in repurchase agreements. Growth Fund
invests at least 60% of its total assets in securities of companies with market
capitalizations over $1 billion. In selecting these securities, the adviser
seeks companies which it believes have the potential for long-term earnings
growth, a cyclical earnings rebound, or attractive relative valuations when
compared to the Standard & Poor's 500 Index. Emphasis is placed on companies
which appear well managed with strong business fundamentals and which are
trading at a discount to the present value of their projected future earnings.
Large Cap Growth Fund invests at least 65% of its total assets under
normal market conditions in equity securities of a diverse group of companies
that have market capitalizations of at least $1 billion at the time of purchase
and that, in the Adviser's judgment, exhibit a combination of above average
growth in revenue and earnings, strong management and sound and improving
financial condition.
OTHER INVESTMENTS
Growth Fund may invest up to 40% of its total assets in securities
of companies with market capitalizations of $1 billion or less. Under normal
market conditions, Growth Fund does not invest in debt securities, other than
securities convertible into or that carry the right to buy common stocks,
<PAGE>
except that a small portion of the fund's assets usually will be held in
short-term money market securities and cash to pay redemption requests and fund
expenses.
Large Cap Growth Fund may invest up to 35% of its total assets in
the aggregate in equity securities of issuers with a market capitalization of
less than $1 billion and in the following types of fixed income securities: U.S.
Government Securities, nonconvertible preferred stocks, nonconvertible corporate
debt securities and short-term obligations such as rated commercial paper and
variable amount master demand notes; U.S. dollar-denominated time and savings
deposits (including certificates of deposit); bankers' acceptances; short-term
U.S. Government Securities; repurchase agreements; securities of other mutual
funds which invest primarily in debt obligations with remaining maturities of 13
months or less; and other similar high-quality short-term U.S.
dollar-denominated obligations. Investments in nonconvertible preferred stocks
and nonconvertible corporate debt securities are limited to investment grade
securities or non-rated securities judged to be of comparable quality by the
investment adviser. Large Cap Growth Fund may invest up to 5% of its net assets
in less than investment grade convertible debt obligations.
Large Cap Growth Fund may invest up to 25% of its total assets and
Growth Fund may invest up to 10% of its total assets in securities of foreign
issuers. With respect to Large Cap Growth Fund, such securities must be either
listed on a U.S stock exchange or represented by ADRs. As a result, Large Cap
Growth Fund's investments in foreign securities are not subject to currency
risks during the settlement period for purchases or sales. Growth Fund may
invest up to 5% of its total assets in securities of foreign issuers which are
neither listed on a U.S. stock exchange nor represented by ADRs. Such direct
investments in foreign securities are subject to currency risk as well as other
risks associated with investments in securities of foreign issuers.
Each of Growth Fund and Large Cap Growth Fund may invest in high
quality short-term securities without limitation for temporary defensive
purposes.
INVESTMENT TECHNIQUES
Growth Fund and Large Cap Growth Fund may engage in the following
investment techniques to the extent indicated.
Repurchase Agreements. Both Funds may invest in repurchase
agreements.
Put and Call Options. Growth Fund may purchase or write put and call
options on the securities in which it may invest and on stock indices listed on
national securities exchanges. Large Cap Growth Fund may purchase put and call
options on equity securities and on stock indices, write covered call options
covering up to 25% of the equity securities owned by the Fund and write call
options on stock indices related to such equity securities.
Futures Contracts. Growth Fund may enter into stock index futures
contracts, may purchase and sell put and call options on futures contracts, and
may enter into closing transactions with respect to such options to terminate
existing positions. Large Cap Growth Fund may not enter into futures contracts
or purchase or sell options thereon.
When-Issued and Delayed-Delivery Transactions. Large Cap Growth Fund
may purchase securities on a when-issued or delayed-delivery basis. Growth Fund
does not purchase when-issued or delayed- delivery securities.
Lending of Portfolio Securities. In order to generate additional
income, Large Cap Growth Fund may lend portfolio securities representing up to
one-third of the value of its total assets to broker-dealers, banks or other
institutional borrowers of securities. Although Growth Fund has the ability to
lend its portfolio securities, it has not done so in the past and does not
currently intend to do so.
<PAGE>
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions which are
set forth in full in such Fund's Statement of Additional Information. Among
those restrictions are the following:
Borrowing. Each Fund may borrow money from banks for temporary or
emergency purposes only, in an amount not to exceed 10% of its total assets.
Illiquid Securities. Each Fund may invest up to 15% of its net
assets in illiquid securities.
PIPER GROWTH AND INCOME FUND/FAIF LARGE CAP VALUE FUND
Investment Objectives
Piper Growth and Income Fund ("Growth and Income Fund") has an
objective of seeking current income and long-term growth of capital and income.
FAIF Large Cap Value Fund ("Large Cap Value Fund") has a primary
objective of capital appreciation. A secondary objective of the Fund is to
provide current income.
Investment Policies and Restrictions
PRINCIPAL INVESTMENTS
Under normal market conditions, Growth and Income Fund invests
primarily in common stocks and securities convertible into common stocks,
although the Fund may also invest in debt securities. Growth and Income Fund
emphasizes securities of large, established companies.
Large Cap Value Fund invests at least 65% of its total assets under
normal market conditions in common stocks diversified among a broad range of
industries and among companies that have market capitalizations of at least $1
billion at the time of purchase.
In selecting stocks for Growth and Income Fund's portfolio, the
Fund's adviser emphasizes securities of large, established companies that may be
undervalued and that have a history of dividend payments. Similarly, the adviser
for Large Cap Value Fund employs a value-based selection discipline, investing
in equity securities it believes are undervalued relative to other securities in
the same industry or market at the time of purchase.
OTHER INVESTMENTS
Debt securities in which Growth and Income Fund may invest include
U.S. Government Securities, asset-backed securities, corporate fixed income
securities, mortgage-related securities, including adjustable rate mortgage
securities, collateralized mortgage obligations and pass-throughs, preferred
stocks, Yankee bonds, zero coupon and delayed interest securities and short-term
money market securities. Securities which are not U.S. Government Securities
must be rated at the time of purchase within the four highest rating groups
assigned by Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A and Baa) or
Standard & Poor's Ratings Service ("S&P") (AAA, AA, A and BBB), which are
considered to be investment grade, or, if unrated, such securities must be of
comparable quality as determined by the investment adviser.
Large Cap Value Fund may invest up to 35% of its total assets in the
aggregate in equity securities of issuers with a market capitalization of less
than $1 billion and in the following types of fixed income securities: U.S.
Government Securities, nonconvertible preferred stocks, nonconvertible corporate
debt securities and short-term obligations such as rated commercial paper and
variable
<PAGE>
amount master demand notes; U.S. dollar-denominated time and savings deposits
(including certificates of deposit); bankers' acceptances; short-term U.S.
Government Securities; repurchase agreements; securities of other mutual funds
which invest primarily in debt obligations with remaining maturities of 13
months or less; and other similar high-quality short-term U.S.
dollar-denominated obligations. Large Cap Value Fund may not invest in
mortgage-backed or asset-backed securities. Investments in nonconvertible
preferred stocks and nonconvertible corporate debt securities are limited to
investment grade securities or non-rated securities judged to be of comparable
quality by the investment adviser. Large Cap Value Fund may invest up to 5% of
its net assets in less than investment grade convertible debt obligations.
Large Cap Value Fund may invest up to 25% of its total assets and
Growth and Income Fund may invest up to 10% of its total assets in securities of
foreign issuers. With respect to Large Cap Value Fund, such securities must be
either listed on a U.S stock exchange or represented by ADRs. As a result, Large
Cap Value Fund's investments in foreign securities are not subject to currency
risks during the settlement period for purchases or sales. Growth and Income
Fund may invest up to 5% of its total assets in securities of foreign issuers
which are neither listed on a U.S. stock exchange nor represented by ADRs. Such
direct investments in foreign securities are subject to currency risk as well as
other risks associated with investments in securities of foreign issuers.
Each of Growth and Income Fund and Large Cap Value Fund may invest
in high quality short-term securities without limitation for temporary defensive
purposes.
INVESTMENT TECHNIQUES
Growth and Income Fund and Large Cap Value Fund may engage in the
following investment techniques to the extent indicated.
Repurchase Agreements. Both Funds may invest in repurchase
agreements.
Mortgage Dollar Rolls. Growth and Income Fund may enter into
mortgage dollar rolls in which the Fund sells securities for delivery in the
current month and simultaneously contracts with the same counter party to
repurchase similar but not identical securities on a specified future date.
Large Cap Value Fund does not enter into such arrangements.
Put and Call Options. Growth and Income Fund may purchase or write
put and call options on the securities in which it may invest and on stock
indices listed on national securities exchanges. Large Cap Value Fund may
purchase put and call options on equity securities and on stock indices, write
covered call options covering up to 25% of the equity securities owned by the
Fund and write call options on stock indices related to such equity securities.
Futures Contracts. Growth and Income Fund may purchase and sell
stock index futures contracts and interest rate futures contracts, may purchase
and sell put and call options on futures contracts and may enter into closing
transactions with respect to such options to terminate existing positions. Large
Cap Value Fund may not enter into futures contracts or purchase or sell options
thereon.
When-Issued and Delayed-Delivery Transactions. Each Fund may
purchase securities on a when- issued or delayed-delivery basis.
Lending of Portfolio Securities. In order to generate additional
income, Large Cap Value Fund may lend portfolio securities representing up to
one-third of the value of its total assets to broker-dealers, banks or other
institutional borrowers of securities. Although Growth and Income Fund has the
ability to lend its portfolio securities, it has not done so in the past and
does not currently intend to do so.
<PAGE>
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions which are
set forth in full in such Fund's Statement of Additional Information. Among
those restrictions are the following:
Borrowing. Each Fund may borrow money from banks for temporary or
emergency purposes only, in an amount not to exceed 10% of its total assets.
Illiquid Securities. Each Fund may invest up to 15% of its net
assets in illiquid securities.
PIPER BALANCED FUND/FAIF BALANCED FUND
Investment Objectives
Piper Balanced Fund has objectives of both current income and
long-term capital appreciation consistent with conservation of principal.
FAIF Balanced Fund has an objective of maximizing total return
(capital appreciation plus income).
Investment Policies and Restrictions
PRINCIPAL INVESTMENTS
Piper Balanced Fund may invest in any type of security, including
common and preferred stocks, convertible securities, fixed income securities and
money market instruments. The mix of securities will change based on existing
and anticipated market conditions. At least 35% of the Fund's assets must be
invested in fixed income securities.
FAIF Balanced Fund invests in a balanced portfolio of equity
securities and fixed income securities. Over the long term, it is anticipated
that the Fund's asset mix will average approximately 60% equity securities and
40% fixed income securities.
When investing in common stocks, Piper Balanced Fund emphasizes
stocks of large companies that the adviser believes offer above average earnings
growth potential at a reasonable price, relative to the Standard & Poor's 500
Index. Large companies are considered to be those with market capitalizations
within the range of companies included in the Standard & Poor's 500 Index.
With respect to the equity security portion of FAIF Balanced Fund's
portfolio, the Fund's adviser invests in equity securities diversified among a
broad range of industries, with at least 65% of the total assets of such portion
of the portfolio being invested in companies that have a market capitalization
of at least $1 billion at the time of purchase. Up to 35% may be invested in
equity securities of issuers with a market capitalization of less than $1
billion. In selecting equity securities, FAIF Balanced Fund's adviser employs a
value-based selection discipline, investing in equity securities it believes are
undervalued relative to other securities in the same industry or market at the
time of purchase.
Piper Balanced Fund's investments in fixed income securities include
collateralized mortgage obligations and other mortgage-related securities, U.S.
Government Securities, corporate fixed income securities, asset-backed
securities, Yankee bonds, zero coupon and delayed interest securities and
short-term money market securities. No more than 5% of Piper Balanced Fund's net
assets may be invested, in the aggregate, in inverse floating rate,
interest-only, principal-only, inverse interest-only and Z tranches of
collateralized mortgage obligations, and stripped mortgage-related securities.
Investments in long-term debt securities will be limited to U.S. Government
Securities, securities rated at the time of
<PAGE>
purchase within the four highest investment grades assigned by Moody's or S&P,
or unrated securities judged by the Fund's adviser to be of comparable quality.
No more than 20% of the long-term debt securities held by the Fund will be
unrated. Piper Balanced Fund seeks to maintain an average effective duration of
3 to 6-1/2 years for the fixed income portion of its portfolio.
FAIF Balanced Fund's permitted fixed income investments include
notes, bonds and discount notes of United States Government agencies or
instrumentalities; domestic issues of corporate debt obligations having floating
or fixed rates of interest and rated at least BBB by S&P or Baa by Moody's, or
which have been assigned an equivalent rating by another nationally recognized
statistical rating organization ("NRSRO"), or which are of comparable quality in
the judgment of the Fund's adviser, other investments, including mortgage-backed
securities (including Z tranches of collateralized mortgage obligations) which
are rated in one of the four highest categories by an NRSRO or which are of
comparable quality in the judgment of the Fund's adviser; and commercial paper
which is rated A-1 by S&P or P-1 by Moody's or which has been assigned an
equivalent rating by another NRSRO. Unrated securities will not exceed 10% in
the aggregate of the value of the total fixed income securities held by the
Fund. At least 65% of the Fund's fixed income investments must be United States
Government obligations and corporate debt obligations and mortgage-related
securities rated at least A by S&P or Moody's or which have been assigned an
equivalent rating by another NRSRO. The fixed income securities in which FAIF
Balanced Fund may invest include (i) mortgage-backed securities (provided that
the Fund will not invest more than 10% of its total fixed income assets in
interest-only, principal-only, inverse interest-only or inverse floating rate
mortgage-backed securities); (ii) asset-backed securities; and (iii) bank
instruments. Under normal market conditions, the weighted average maturity of
the fixed income securities held by FAIF Balanced Fund will not exceed 15 years.
OTHER INVESTMENTS
FAIF Balanced Fund may invest up to 15% of its total fixed income
assets in foreign securities payable in United States dollars and up to 25% of
its total equity assets in securities of foreign issuers which are either listed
on a United States stock exchange or represented by ADRs. As a result of these
restrictions, FAIF Balanced Fund's investments in foreign securities are not
subject to currency risks during the settlement period for purchases or sales.
Piper Balanced Fund may invest up to 25% of its total assets in securities of
foreign issuers. There is no requirement that such securities be listed on a
U.S. stock exchange or represented by ADRs. Direct investments in foreign
securities are subject to currency risk as well as other risks associated with
investments in securities of foreign issuers.
Each of Piper Balanced Fund and FAIF Balanced Fund may invest in
high quality short-term securities without limitation for temporary defensive
purposes.
INVESTMENT TECHNIQUES
Piper Balanced Fund and FAIF Balanced Fund may engage in the
following investment techniques to the extent indicated.
Repurchase Agreements. Both Funds may invest in repurchase
agreements.
Mortgage Dollar Rolls. Piper Balanced Fund and FAIF Balanced Fund
may enter into mortgage dollar rolls in which the Fund sells securities for
delivery in the current month and simultaneously contracts with the same counter
party to repurchase similar but not identical securities on a specified future
date.
Put and Call Options. Piper Balanced Fund may purchase or write put
and call options on the securities in which it may invest and on stock indices
listed on national securities exchanges. FAIF Balanced Fund may purchase put and
call options on equity securities and on stock indices, write covered call
options covering up to 25% of the equity securities owned by the Fund, write
call options on stock
<PAGE>
indices related to such equity securities, invest in exchange traded put and
call options on interest rate indices and write covered call options on interest
rate indices.
Futures Contracts. Piper Balanced Fund may purchase and sell stock
index futures contracts and interest rate futures contracts, may purchase and
sell put and call options on futures contracts and may enter into closing
transactions with respect to such options to terminate existing positions. FAIF
Balanced Fund may enter into stock index futures contracts and interest rate
futures contracts and invest in exchange traded put and call options on interest
rate futures contracts.
When-Issued and Delayed-Delivery Transactions. Each Fund may
purchase securities on a when- issued or delayed-delivery basis.
Lending of Portfolio Securities. In order to generate additional
income, FAIF Balanced Fund may lend portfolio securities representing up to
one-third of the value of its total assets to broker-dealers, banks or other
institutional borrowers of securities. Although Piper Balanced Fund has the
ability to lend its portfolio securities, it has not done so in the past and
does not currently intend to do so.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions which are
set forth in full in such Fund's Statement of Additional Information. Among
those restrictions are the following:
Borrowing. Each Fund may borrow money from banks for temporary or
emergency purposes only, in an amount not to exceed 10% of its total assets.
Illiquid Securities. Each Fund may invest up to 15% of its net
assets in illiquid securities.
PIPER GOVERNMENT INCOME FUND/FAIF FIXED INCOME FUND
Investment Objectives
Piper Government Income Fund ("Government Income Fund") has an
objective of seeking high current income consistent with preservation of
capital.
FAIF Fixed Income Fund ("Fixed Income Fund") has an objective of
providing a high level of current income consistent with limited risk to
capital.
Investment Policies and Restrictions
PRINCIPAL INVESTMENTS
Under normal market conditions, Government Income Fund will invest
at least 65% of its total assets in U.S. Government Securities. Much of the Fund
is invested in mortgage-related securities; investments in inverse floating
rate, interest-only, inverse interest-only and principal-only securities are
limited to 10% of the Fund's net assets. Government Income Fund may invest up to
10% of its total assets in mortgage-related securities issued by private
entities, provided these securities are rated at least Aa by S&P or AA by
Moody's at the time of purchase of, if unrated, are of comparable quality as
determined by the Fund's investment adviser. Government Income Fund does not
invest in corporate debt obligations (other than short-term money market
securities). Government Income Fund attempts to maintain an average effective
duration of three to eight years.
Fixed Income Fund invests in investment grade debt securities, at
least 65% of which are U.S. government obligations and corporate debt
obligations and mortgage-backed and asset-backed securities
<PAGE>
rated at least A by S&P or Moody's or assigned an equivalent rating by another
NRSRO. Under normal market conditions, the weighted average maturity of Fixed
Income Fund will not exceed 15 years.
Permitted investments for Fixed Income Fund include notes, bonds and
discount notes of U.S. government agencies or instrumentalities; domestic issues
of corporate debt obligations having floating or fixed rates of interest and
rated at least BBB by S&P or Baa by Moody's, assigned an equivalent rating by
another NRSRO, or, if unrated, judged to be of comparable quality in the
judgment of the adviser; other fixed income securities, including
mortgage-backed securities, asset-backed securities and zero coupon securities,
which are rated in one of the four highest categories by an NRSRO or judged to
be of comparable quality by the adviser; and commercial paper rated A-1 by S&P,
P-1 by Moody's, or assigned an equivalent rating by another NRSRO. Fixed Income
Fund will not invest more than 10% of its total assets, in the aggregate, in
interest-only, principal-only, inverse interest-only and inverse floating rate
mortgage-backed securities. Fixed Income Fund also may invest up to 15% of its
total assets in foreign securities payable in U.S. dollars. At least 65% of the
total assets of Fixed Income Fund will be invested in fixed rate obligations.
OTHER INVESTMENTS
Government Income Fund may invest up to 35% of its total assets in
cash and short-term money market securities to provide flexibility and
liquidity. For temporary defensive purposes, Government Income Fund may invest
without limitation in these securities. Money market securities in which the
Fund may invest include short-term U.S. government securities, time deposits,
bank certificates of deposit, bankers' acceptances, high-grade commercial paper
and other money market instruments.
Fixed Income Fund may invest up to 35% of its total assets in cash
and cash items in order to utilize assets awaiting normal investment. Cash items
may include short-term obligations such as rated commercial paper and variable
amount master demand notes; U.S. dollar-denominated time and savings deposits
(including certificates of deposit); bankers' acceptances; U.S. government
securities; repurchase agreements; and securities of other mutual funds which
invest primarily in debt obligations with remaining maturities of 13 months or
less. The Fund may hold cash or invest in cash items without limitation for
temporary defensive purposes during times of unusual market conditions.
INVESTMENT TECHNIQUES
Government Income Fund and Fixed Income Fund may engage in the
following investment techniques to the extent indicated.
Repurchase Agreements. Both Government Income Fund and Fixed Income
Fund may invest in repurchase agreements.
Reverse Repurchase Agreements. Government Income Fund may enter into
reverse repurchase agreements with respect to 25% of its total assets. Fixed
Income Fund may not enter into such agreements.
Mortgage Dollar Rolls. Government Income Fund and Fixed Income Fund
may enter into mortgage dollar rolls in which the Fund sells securities for
delivery in the current month and simultaneously contracts with the same counter
party to repurchase similar but not identical securities on a specified future
date.
Put and Call Options. Government Income Fund may purchase and write
both exchange traded and over-the-counter put and call options on securities.
Fixed Income Fund may invest in exchange traded put and call options on interest
rate indices.
<PAGE>
Futures Contracts. Government Income Fund may enter into interest
rate futures contracts and contracts for the future delivery of fixed-income
securities. The Fund also may purchase and sell put and call options on futures
contracts and enter into closing transactions with respect to such options to
terminate existing positions. Fixed Income Fund may enter into interest rate
futures contracts and invest in exchange traded put and call options on interest
rate futures contracts.
When-Issued and Delayed-Delivery Transactions. Both Funds may
purchase securities on a when- issued or delayed-delivery basis.
Lending of Portfolio Securities. In order to generate additional
income, Fixed Income Fund may lend portfolio securities representing up to
one-third of the value of its total assets to broker-dealers, banks or other
institutional borrowers of securities. Although Government Income Fund has the
ability to lend its portfolio securities, it has not done so in the past and
does not currently intend to do so.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions which are
set forth in full in such Fund's Statement of Additional Information. Among
those restrictions are the following:
Borrowing. Both Funds may borrow money from banks for temporary or
emergency purposes only, in an amount not to exceed 10% of a Fund's total
assets.
Illiquid Securities. Each Fund may invest up to 15% of its net
assets in illiquid securities.
PIPER INTERMEDIATE BOND FUND/FAIF INTERMEDIATE TERM INCOME FUND
Investment Objectives
Piper Intermediate Bond Fund ("Piper Intermediate Fund") has an
objective of seeking high current income consistent with preservation of
capital.
FAIF Intermediate Term Income Fund ("FAIF Intermediate Fund") has an
objective of providing current income to the extent consistent with preservation
of capital.
Investment Policies and Restrictions
PRINCIPAL INVESTMENTS
Under normal market conditions, Piper Intermediate Fund will invest
at least 65% of its total assets in U.S. Government Securities, corporate fixed
income securities, and other fixed income securities, such as privately issued
mortgage-related securities, asset backed securities, U.S. dollar-denominated
Yankee bonds, and zero coupon, pay-in-kind and delayed interest securities.
Securities other than U.S. Government Securities must be rated at least BBB by
S&P or Baa by Moody's or, if unrated, such securities must be of comparable
quality, as determined by the Fund's investment adviser. Investments in
mortgage-related securities may include collateralized mortgage obligations.
However, the Fund will not invest in inverse floating rate, interest-only,
principal-only, inverse interest-only, or stripped mortgage-backed securities.
Piper Intermediate Fund attempts to maintain an average effective duration of
two to six years and a dollar-weighted average maturity of three to ten years.
FAIF Intermediate Fund invests in investment grade debt securities,
at least 65% of which are U.S. government obligations and corporate debt
obligations and mortgage-backed and asset-backed securities rated at least A by
S&P or Moody's or assigned an equivalent rating by another NRSRO. Under normal
market conditions, the weighted average maturity of FAIF Intermediate Fund will
range from two to seven years.
<PAGE>
Permitted investments for FAIF Intermediate Fund include notes,
bonds and discount notes of U.S. government agencies or instrumentalities;
domestic issues of corporate debt obligations having floating or fixed rates of
interest and rated at least BBB by S&P or Moody's, assigned an equivalent rating
by another NRSRO, or, if unrated, judged to be of comparable quality in the
judgment of the adviser; other fixed income securities, including
mortgage-backed securities, asset-backed securities and zero coupon securities,
which are rated in one of the four highest categories by an NRSRO or judged to
be of comparable quality by the adviser; and commercial paper rated A-1 by S&P,
P-1 by Moody's, or assigned an equivalent rating by another NRSRO. FAIF
Intermediate Fund will not invest more than 10% of its total assets, in the
aggregate, in interest-only, principal-only, inverse interest-only and inverse
floating rate mortgage-backed securities. FAIF Intermediate Fund also may invest
up to 15% of its total assets in foreign securities payable in U.S. dollars.
OTHER INVESTMENTS
Piper Intermediate Fund may invest up to 35% of its total assets in
cash and short-term money market securities to provide flexibility and
liquidity. For temporary defensive purposes, Piper Intermediate Fund may invest
without limitation in these securities. Money market securities in which the
Fund may invest include short-term U.S. government securities, time deposits,
bank certificates of deposit, bankers' acceptances, high-grade commercial paper
and other money market instruments.
FAIF Intermediate Fund may invest up to 35% of its total assets in
cash and cash items in order to utilize assets awaiting normal investment. Cash
items may include short-term obligations such as rated commercial paper and
variable amount master demand notes; U.S. dollar-denominated time and savings
deposits (including certificates of deposit); bankers' acceptances; U.S.
government securities; repurchase agreements; and securities of other mutual
funds which invest primarily in debt obligations with remaining maturities of 13
months or less. The Fund may hold cash or invest in cash items without
limitation for temporary defensive purposes during times of unusual market
conditions.
INVESTMENT TECHNIQUES
Piper Intermediate Fund and FAIF Intermediate Fund may engage in the
following investment techniques to the extent indicated.
Repurchase Agreements. Both Piper Intermediate Fund and FAIF
Intermediate Fund may invest in repurchase agreements.
Mortgage Dollar Rolls. Piper Intermediate Fund and FAIF Intermediate
Fund may enter into mortgage dollar rolls in which the Fund sells securities for
delivery in the current month and simultaneously contracts with the same counter
party to repurchase similar but not identical securities on a specified future
date.
Put and Call Options. Piper Intermediate Fund does not purchase or
sell options on securities or indices. FAIF Intermediate Fund may invest in
exchange traded put and call options on interest rate indices.
Futures Contracts. Piper Intermediate Fund does not enter into
futures contracts or purchase or sell options on futures contracts. FAIF
Intermediate Fund may enter into interest rate futures contracts and invest in
exchange traded put and call options on interest rate futures contracts.
When-Issued and Delayed-Delivery Transactions. Both Funds may
purchase securities on a when- issued or delayed-delivery basis.
Lending of Portfolio Securities. In order to generate additional
income, FAIF Intermediate Fund may lend portfolio securities representing up to
one-third of the value of its total assets to broker-
<PAGE>
dealers, banks or other institutional borrowers of securities. Although Piper
Intermediate Fund has the ability to lend its portfolio securities, it has not
done so in the past and does not currently intend to do so.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions which are
set forth in full in such Fund's Statement of Additional Information. Among
those restrictions are the following:
Borrowing. Both Funds may borrow money from banks for temporary or
emergency purposes only, in an amount not to exceed 10% of FAIF Intermediate
Fund's total assets and 5% of Piper Intermediate Fund's total assets.
Illiquid Securities. FAIF Intermediate Fund may invest up to 15% of
its net assets in illiquid securities. Piper Intermediate Fund may not invest in
such securities.
PIPER NATIONAL TAX-EXEMPT FUND/FAIF TAX FREE FUND
Investment Objectives
Piper National Tax-Exempt Fund ("Piper Tax-Exempt Fund") has an
objective of seeking maximum current income exempt from federal income taxes,
consistent with prudent investment risk and preservation of capital.
FAIF Tax Free Fund ("FAIF Tax Free Fund") has an objective of
providing maximum current income which is exempt from federal income tax to the
extent consistent with prudent investment risk.
Investment Policies and Restrictions
PRINCIPAL INVESTMENTS
Under normal market conditions, Piper Tax-Exempt Fund will invest at
least 80% of its net assets in municipal securities exempt (in the opinion of
bond counsel to the issuer) from federal income tax, including the federal
alternative minimum tax ("AMT").
Similarly, FAIF Tax Free Fund invests, under normal market
conditions, at least 80% of its net assets in municipal bonds and other
municipal obligations the interest on which is, in the opinion of bond counsel
to the issuer, exempt from federal income tax. No more than 20% of the
securities owned by the Fund will generate income that is an item of tax
preference for purposes of federal AMT.
Piper Tax-Exempt Fund invests in securities rated, at the time of
purchase, no lower than Baa by Moody's or BBB by S&P with respect to long-term
bonds, MIG/VMIG-2 by Moody's or SP-2 by S&P with respect to notes, and Prime-2
by Moody's or A-2 by S&P with respect to commercial paper, or in unrated
securities judged to be of comparable quality at the time of purchase by the
Fund's adviser.
FAIF Tax Free Fund may purchase long-term obligations rated no lower
than BBB by S&P or Baa by Moody's, state and municipal notes rated no lower than
SP-1 by S&P or MIG/VMIG-1 by Moody's, commercial paper rated no lower than
Prime-1 by Moody's or A-1 by S&P, securities assigned an equivalent rating by
another NRSRO, or securities which are of comparable quality in the judgment of
the Fund's adviser.
<PAGE>
OTHER INVESTMENTS
Piper Tax-Exempt Fund may invest up to 20% of its net assets in
taxable obligations, and it may temporarily invest without limitation in these
obligations during periods of abnormal market conditions. Taxable obligations
include municipal securities subject to regular federal income tax or federal
AMT which are rated investment grade or are of comparable quality, U.S.
Government Securities, corporate bonds rated within the three highest grades by
either Moody's or S&P, commercial paper rated within the two highest grades by
either Moody's or S&P, certificates of deposit, bankers' acceptances, repurchase
agreements and cash. The Fund may invest in derivative municipal securities,
including, with respect to 20% of its total assets, inverse floating rate
municipal securities.
Under normal circumstances FAIF Tax Free Fund may invest up to 20%
of its assets in temporary taxable investments or cash. FAIF Tax Free Fund may
invest without limitation in such investments when a temporary defensive
position to protect capital is deemed advisable and practicable. Temporary
taxable investments will include only the following types of obligations
maturing within 13 months from the date of purchase: (i) U.S. Government
Securities; (ii) commercial paper rated not less than A-1 by S&P or P-1 by
Moody's or equivalently rated by another NRSRO; (iii) other short term debt
securities issued or guaranteed by corporations having outstanding debt rated
not less than BBB by S&P or Baa by Moody's or which have been assigned an
equivalent rating by another NRSRO; (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. FAIF Tax Free Fund also may temporarily invest in shares of
investment companies which invest primarily in short-term municipal obligations
with maturities not exceeding 13 months. The Fund may invest up to 10% of its
total assets in inverse floating rate municipal obligations.
INVESTMENT TECHNIQUES
Piper Tax-Exempt Fund and FAIF Tax Free Fund may engage in the
following investment techniques to the extent indicated.
Repurchase Agreements. Both Piper Tax-Exempt Fund and FAIF Tax Free
Fund may invest in repurchase agreements.
Put and Call Options. Piper Tax-Exempt Fund does not purchase or
sell options on securities or indices. FAIF Tax Free Fund may invest in exchange
traded put and call options on interest rate indices.
Futures Contracts. Piper Tax-Exempt Fund does not enter into futures
contracts or purchase or sell options on futures contracts. FAIF Tax Free Fund
may enter into interest rate futures contracts and invest in exchange traded put
and call options on interest rate futures contracts.
When-Issued and Delayed-Delivery Transactions. Both Funds may
purchase securities on a when- issued or delayed-delivery basis.
Lending of Portfolio Securities. In order to generate additional
income, FAIF Tax Free Fund may lend portfolio securities representing up to
one-third of the value of its total assets to broker-dealers, banks or other
institutional borrowers of securities. Although Piper Tax-Exempt Fund has the
ability to lend its portfolio securities, it has not done so in the past and
does not currently intend to do so.
<PAGE>
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions which are
set forth in full in such Fund's Statement of Additional Information. Among
those restrictions are the following:
Borrowing. Both Funds may borrow money from banks for temporary or
emergency purposes only, in an amount not to exceed 10% of a Fund's total
assets.
Illiquid Securities. Each Fund may invest up to 15% of its net
assets in illiquid securities.
PIPER MINNESOTA TAX-EXEMPT FUND/FAIF MINNESOTA TAX FREE FUND
Investment Objectives
Piper Minnesota Tax-Exempt Fund ("Piper Minnesota Fund") has an
objective of seeking maximum current income exempt from both federal and
Minnesota state income taxes, consistent with prudent investment risk and
preservation of capital.
FAIF Minnesota Tax Free Fund ("FAIF Minnesota Fund") has an
objective of providing maximum current income which is exempt from both federal
income tax and Minnesota state income tax to the extent consistent with prudent
investment risk.
Investment Policies and Restrictions
PRINCIPAL INVESTMENTS
Under normal market conditions, Piper Minnesota Fund will invest at
least 80% of its net assets in municipal securities exempt (in the opinion of
bond counsel to the issuer) from both federal and Minnesota state income taxes,
including federal and state alternative minimum tax ("AMT").
Similarly, FAIF Minnesota Fund invests, under normal market
conditions, at least 80% of its net assets in municipal bonds and other
municipal obligations of the State of Minnesota the interest on which is, in the
opinion of bond counsel to the issuer, exempt from federal and Minnesota state
income taxes. No more than 20% of the securities owned by the Fund will generate
income that is an item of tax preference for purposes of federal and state AMT.
Piper Minnesota Fund invests in securities rated, at the time of
purchase, no lower than Baa by Moody's or BBB by S&P with respect to long-term
bonds, MIG/VMIG-2 by Moody's or SP-2 by S&P with respect to notes, and Prime-2
by Moody's or A-2 by S&P with respect to commercial paper, or in unrated
securities judged to be of comparable quality at the time of purchase by the
Fund's adviser.
FAIF Minnesota Fund may purchase long-term obligations rated no
lower than BBB by S&P or Baa by Moody's, state and municipal notes rated no
lower than SP-1 by S&P or MIG/VMIG-1 by Moody's, commercial paper rated no lower
than Prime-1 by Moody's or A-1 by S&P, securities assigned an equivalent rating
by another NRSRO, or securities which are of comparable quality in the judgment
of the Fund's adviser.
OTHER INVESTMENTS
Piper Minnesota Fund may invest up to 20% of its net assets in
taxable obligations, and it may temporarily invest without limitation in these
obligations during periods of abnormal market conditions. Taxable obligations
include municipal securities subject to regular federal and state income tax or
AMT which are rated investment grade or are of comparable quality, U.S.
Government Securities, corporate bonds rated within the three highest grades by
either Moody's or S&P, commercial paper
<PAGE>
rated within the two highest grades by either Moody's or S&P, certificates of
deposit, bankers' acceptances, repurchase agreements and cash. The Fund may
invest in derivative municipal securities, including, with respect to 20% of its
total assets, inverse floating rate municipal securities.
Under normal circumstances FAIF Minnesota Fund may invest up to 20%
of its assets in temporary taxable investments or cash. FAIF Minnesota Fund may
invest without limitation in such investments when a temporary defensive
position to protect capital is deemed advisable and practicable. Temporary
taxable investments will include only the following types of obligations
maturing within 13 months from the date of purchase: (i) U.S. Government
Securities; (ii) commercial paper rated not less than A-1 by S&P or P-1 by
Moody's or equivalently rated by another NRSRO; (iii) other short term debt
securities issued or guaranteed by corporations having outstanding debt rated
not less than BBB by S&P or Baa by Moody's or which have been assigned an
equivalent rating by another NRSRO; (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. FAIF Minnesota Fund also may temporarily invest in shares of
investment companies which invest primarily in short-term municipal obligations
with maturities not exceeding 13 months. The Fund may invest up to 10% of its
total assets in inverse floating rate municipal obligations.
INVESTMENT TECHNIQUES
Piper Minnesota Fund and FAIF Minnesota Fund may engage in the
following investment techniques to the extent indicated.
Repurchase Agreements. Both Piper Minnesota Fund and FAIF Minnesota
Fund may invest in repurchase agreements.
Put and Call Options. Piper Minnesota Fund does not purchase or sell
options on securities or indices. FAIF Minnesota Fund may invest in exchange
traded put and call options on interest rate indices.
Futures Contracts. Piper Minnesota Fund does not enter into futures
contracts or purchase or sell options on futures contracts. FAIF Minnesota Fund
may enter into interest rate futures contracts and invest in exchange traded put
and call options on interest rate futures contracts.
When-Issued and Delayed-Delivery Transactions. Both Funds may
purchase securities on a when- issued or delayed-delivery basis.
Lending of Portfolio Securities. In order to generate additional
income, FAIF Minnesota Fund may lend portfolio securities representing up to
one-third of the value of its total assets to broker-dealers, banks or other
institutional borrowers of securities. Although Piper Minnesota Fund has the
ability to lend its portfolio securities, it has not done so in the past and
does not currently intend to do so.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions which are
set forth in full in such Fund's Statement of Additional Information. Among
those restrictions are the following:
Borrowing. Both Funds may borrow money from banks for temporary or
emergency purposes only, in an amount not to exceed 10% of a Fund's total
assets.
Illiquid Securities. Each Fund may invest up to 15% of its net
assets in illiquid securities.
<PAGE>
PIPER ADJUSTABLE RATE MORTGAGE SECURITIES FUND/FAIF ADJUSTABLE RATE MORTGAGE
SECURITIES FUND
Investment Objectives
Piper Adjustable Rate Mortgage Securities Fund ("Piper Adjustable
Fund") has an objective of seeking maximum current income consistent with low
volatility of principal.
FAIF Adjustable Rate Mortgage Securities Fund ("FAIF Adjustable
Fund") has an objective of providing current income while attempting to provide
a high degree of principal stability.
Investment Policies and Restrictions
PRINCIPAL INVESTMENTS
Under normal market conditions, both Piper Adjustable Fund and FAIF
Adjustable Fund will invest at least 65% of their total assets in
mortgage-related securities having adjustable interest rates which reset at
periodic intervals ("adjustable rate mortgage securities" or "ARMS"). At least
65% of each Fund's total assets must be either U.S. Government Securities or
securities rated, as of the date of purchase, A or better by S&P or by Moody's,
comparably rated by any other NRSRO or, if unrated, of a comparable quality as
determined by the Fund's adviser. Up to 15% of each Fund's total assets may be
invested in securities rated, as of the date of purchase, A by S&P or Moody's,
comparably rated by any other NRSRO or, if unrated, of comparable quality as
determined by the Fund's adviser. Piper Adjustable Fund attempts to maintain an
average effective duration of one to four years. For FAIF Adjustable Fund, the
weighted average maturity of the securities held by the Fund will range from __
to __ years under normal market conditions.
OTHER INVESTMENTS
Each Fund may invest up to 35% of its total assets in
mortgage-related securities other than ARMS (pass throughs and collateralized
mortgage obligations), securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities (including, with respect to 10% of each Fund's
net assets, U.S. government zero-coupon securities), asset backed securities and
corporate fixed income securities.
For temporary defensive purposes, Piper Adjustable Fund may invest
without limitation in cash and short-term money market securities. Money market
securities in which the Fund may invest include short-term U.S. Government
Securities, time deposits, bank certificates of deposit, bankers' acceptances,
high-grade commercial paper and other money market instruments.
Similarly, FAIF Adjustable Fund may hold cash or invest in cash
items without limitation for temporary defensive purposes during times of
unusual market conditions. Cash items may include short-term obligations such as
rated commercial paper and variable amount master demand notes; U.S.
dollar-denominated time and savings deposits (including certificates of
deposit); bankers' acceptances; U.S. Government Securities; repurchase
agreements; and securities of other mutual funds which invest primarily in debt
obligations with remaining maturities of 13 months or less.
INVESTMENT TECHNIQUES
Piper Adjustable Fund and FAIF Adjustable Fund may engage in the
following investment techniques to the extent indicated.
Repurchase Agreements. Both Piper Adjustable Fund and FAIF
Adjustable Fund may invest in repurchase agreements.
<PAGE>
Reverse Repurchase Agreements. Piper Adjustable Fund may enter into
reverse repurchase agreements with respect to 10% of its total assets. FAIF
Adjustable Fund may not enter into such agreements.
Put and Call Options. Piper Adjustable Fund may purchase and write
exchange traded put and call options on securities. FAIF Adjustable Fund may
invest in exchange traded put and call options on interest rate indices.
Futures Contracts. Piper Adjustable Fund may enter into interest
rate futures contracts and contracts for the future delivery of fixed-income
securities. The Fund also may purchase and sell put and call options on futures
contracts and enter into closing transactions with respect to such options to
terminate existing positions. FAIF Adjustable Fund may enter into interest rate
futures contracts and invest in exchange traded put and call options on interest
rate futures contracts. Each Fund's investment in futures contracts or options
thereon include investments in Eurodollar instruments.
Interest Rate Caps and Floors. Each Fund may purchase or sell
interest rate caps and floors.
When-Issued and Delayed-Delivery Transactions. Both Funds may
purchase securities on a when- issued or delayed-delivery basis.
Lending of Portfolio Securities. In order to generate additional
income, FAIF Adjustable Fund may lend portfolio securities representing up to
one-third of the value of its total assets to broker-dealers, banks or other
institutional borrowers of securities. Although Piper Adjustable Fund has the
ability to lend its portfolio securities, it has not done so in the past and
does not currently intend to do so.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions which are
set forth in full in such Fund's Statement of Additional Information. Among
those restrictions are the following:
Borrowing. Both Funds may borrow money from banks for temporary or
emergency purposes only, in an amount not to exceed 10% of a Fund's total
assets.
Illiquid Securities. Each Fund may invest up to 15% of its net
assets in illiquid securities.
PIPER EMERGING MARKETS GROWTH FUND/FAIF EMERGING MARKETS FUND
Investment Objectives
Piper Emerging Markets Growth Fund ("Piper Emerging Markets Fund")
has an objective of long-term capital appreciation.
FAIF Emerging Markets Fund has an objective of long-term growth of
capital.
Investment Policies and Restrictions
PRINCIPAL INVESTMENTS
Under normal market conditions, Piper Emerging Markets Fund invests
at least 65% of its total assets in common stocks from the world's emerging
securities markets. Common stock includes foreign equity securities which are
substantially similar to common stock in the U.S. It does not include
convertible debt securities or foreign equity securities which are substantially
similar to preferred stock
<PAGE>
in the U.S. The Fund will maintain investments in at least three countries
having emerging markets, except during defensive periods.
Under normal market conditions, FAIF Emerging Markets Fund invests
at least 65% of its total assets in an internationally diversified portfolio of
equity securities which trade in emerging markets. The securities in which FAIF
Emerging Markets Fund primarily invests include common and preferred stock,
securities (bonds and preferred stock) convertible into common stock, warrants
and securities representing underlying international securities such as American
and European Depositary Receipts. The Fund also may hold securities of other
investment companies and depositary or custodial receipts representing
beneficial interests in any of the foregoing securities. Normally, the Fund will
invest at least 65% of its total assets in securities that are traded in at
least six different countries.
OTHER INVESTMENTS
In addition to investing directly in common stock, Piper Emerging
Markets Fund may invest up to 35% of its total assets in American, European and
Global Depository Receipts, in shares of investment companies or trusts which
invest principally in securities in which the Fund is authorized to invest, in
convertible debt securities, and, with respect to up to 10% of total assets,
rights or warrants to purchase common stock. Up to 35% of the Fund's total
assets may be invested in U.S. dollar denominated or foreign currency
denominated cash or in short-term money market securities. Short-term money
market securities include short-term securities issued by the U.S. or a foreign
government, their agencies or instrumentalities, time deposits, bank
certificates of deposit, bankers' acceptances, high-grade commercial paper and
other money market instruments. Piper Emerging Markets Fund may invest in cash
or short-term money market securities without limitation for temporary defensive
purposes.
For FAIF Emerging Markets Fund, it is possible, although not
currently anticipated, that up to 35% of the Fund's assets could be invested in
non-emerging markets, including the United States. FAIF Emerging Markets Fund
may invest up to 35% of its total assets in cash and cash items in order to
utilize assets awaiting normal investment. Cash items may include short-term
obligations such as rated commercial paper and variable amount master demand
notes; U.S. dollar-denominated time and savings deposits (including certificates
of deposit); bankers' acceptances; U.S. Government Securities; repurchase
agreements; and securities of other mutual funds which invest primarily in debt
obligations with remaining maturities of 13 months or less. The Fund may hold
cash or invest in cash items without limitation for temporary defensive purposes
during times of unusual market conditions.
INVESTMENT TECHNIQUES
Piper Emerging Markets Fund and FAIF Emerging Markets Fund may
engage in the following investment techniques to the extent indicated.
Repurchase Agreements. Both Funds may invest in repurchase
agreements.
Put and Call Options. Piper Emerging Markets Fund may purchase or
write put and call options on the securities in which it may invest, it may
purchase put and call options on foreign currencies, and it may write covered
call options on foreign currencies. FAIF Emerging Markets Fund may purchase put
and call options on equity securities and on stock indices, write covered call
options covering up to 50% of the equity securities owned by the Fund and write
call options on stock indices related to such equity securities, purchase put
and call options on foreign currencies and write covered call options on foreign
currencies owned by the Fund.
<PAGE>
Futures Contracts. Each Fund may enter into contracts for the future
purchase or delivery of securities, foreign currencies, and indices, purchase or
sell options on any such futures contracts and engage in related closing
purchase transactions.
Foreign Currency Transactions. Each Fund may engage in foreign
currency transactions.
When-Issued and Delayed-Delivery Transactions. Each Fund may
purchase securities on a when- issued or delayed-delivery basis.
Lending of Portfolio Securities. In order to generate additional
income, FAIF Emerging Markets Fund may lend portfolio securities representing up
to one-third of the value of its total assets to broker-dealers, banks or other
institutional borrowers of securities. Although Piper Emerging Markets Fund has
the ability to lend its portfolio securities, it has not done so in the past and
does not currently intend to do so.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions which are
set forth in full in such Fund's Statement of Additional Information. Among
those restrictions are the following:
Borrowing. Each Fund may borrow money from banks for temporary or
emergency purposes only, in an amount not to exceed 10% of its total assets.
Illiquid Securities. Each Fund may invest up to 15% of its net
assets in illiquid securities.
PIPER PACIFIC-EUROPEAN GROWTH FUND/FAIF INTERNATIONAL FUND
Investment Objectives
Piper Pacific-European Growth Fund ("Pacific-European Fund") has an
objective of long-term capital appreciation.
FAIF International Fund ("International Fund") has an objective of
long-term growth of capital.
Investment Policies and Restrictions
PRINCIPAL INVESTMENTS
Under normal market conditions, Pacific-European Fund invests at
least 65% of its total assets in common stocks of companies located in at least
three countries of the Pacific Basin or Europe. Common stock includes foreign
equity securities which are substantially similar to common stock in the U.S. It
does not include convertible debt securities or foreign equity securities which
are substantially similar to preferred stock in the U.S.
Pacific-European Fund's assets will be allocated between the Pacific
Basin and Europe based on management's views of the opportunities for long-term
capital appreciation in those regions. When selecting securities within a
country, management emphasizes companies which appear undervalued in the
marketplace in relation to such factors as their assets, earnings and growth
potential. Management also seeks companies that are positioned to take advantage
of specific economic and political factors which are likely to result in growth
for their industries. Many of the Pacific Basin, Eastern European and other
countries in which the Fund may invest are emerging markets.
Under normal market conditions, International Fund invests at least
65% of its total assets in an internationally diversified portfolio of equity
securities which trade in markets other than the United
<PAGE>
States. Normally, the Fund will invest at least 65% of its total assets in
securities traded in at least three foreign countries. The securities in which
International Fund invests include common and preferred stock, securities (bonds
and preferred stock) convertible into common stock, warrants and securities
representing underlying international securities such as American and European
Depository Receipts. The Fund also may hold securities of other investment
companies and depositary or custodial receipts representing beneficial interests
in any of the foregoing securities.
In investing the assets of International Fund, the Fund's
sub-adviser expects to place primary emphasis on country selection, followed by
selection of industries or sectors within or across countries and by selection
of individual stocks corresponding to the industries or sectors selected.
Investments are expected to be made primarily in developed markets and larger
capitalization companies. However, the Fund also may invest in emerging markets
where smaller capitalization companies are the norm.
OTHER INVESTMENTS
Up to 25% of Pacific-European Fund's total assets may be invested in
areas of the world other than the Pacific Basin and Europe. The Fund does not
invest in stocks of U.S. companies. In addition to investing directly in common
stock, Pacific-European Fund may invest up to 35% of its total assets in
American, European and Global Depository Receipts, in shares of investment
companies or trusts which invest principally in securities in which the Fund is
authorized to invest, in convertible debt securities, and, with respect to up to
10% of total assets, rights or warrants to purchase common stock. Up to 35% of
the Fund's total assets may be invested in U.S. dollar denominated or foreign
currency denominated cash or in short-term money market securities. Short-term
money market securities include short-term securities issued by the U.S. or a
foreign government, their agencies or instrumentalities, time deposits, bank
certificates of deposit, bankers' acceptances, high-grade commercial paper and
other money market instruments. Pacific- European Fund may invest in cash or
short-term money market securities without limitation for temporary defensive
purposes.
For International Fund, it is possible, although not currently
anticipated, that up to 35% of the Fund's assets could be invested in United
States companies. International Fund may invest up to 35% of its total assets in
cash and cash items in order to utilize assets awaiting normal investment. Cash
items may include short-term obligations such as rated commercial paper and
variable amount master demand notes; U.S. dollar-denominated time and savings
deposits (including certificates of deposit); bankers' acceptances; U.S.
Government Securities; repurchase agreements; and securities of other mutual
funds which invest primarily in debt obligations with remaining maturities of 13
months or less. The Fund may hold cash or invest in cash items without
limitation for temporary defensive purposes during times of unusual market
conditions.
INVESTMENT TECHNIQUES
Pacific-European Fund and International Fund may engage in the
following investment techniques to the extent indicated.
Repurchase Agreements. Both Funds may invest in repurchase
agreements.
Put and Call Options. Pacific-European Fund may purchase or write
put and call options on the securities in which it may invest, it may purchase
put and call options on foreign currencies, and it may write covered call
options on foreign currencies. International Fund may purchase put and call
options on equity securities and on stock indices, write covered call options
covering up to 50% of the equity securities owned by the Fund and write call
options on stock indices related to such equity securities, purchase put and
call options on foreign currencies and write covered call options on foreign
currencies owned by the Fund.
<PAGE>
Futures Contracts. Each Fund may enter into contracts for the future
purchase or delivery of securities, foreign currencies, and indices, purchase or
sell options on any such futures contracts and engage in related closing
transactions.
Foreign Currency Transactions. Each Fund may engage in foreign
currency transactions.
When-Issued and Delayed-Delivery Transactions. Each Fund may
purchase securities on a when- issued or delayed-delivery basis.
Lending of Portfolio Securities. In order to generate additional
income, International Fund may lend portfolio securities representing up to
one-third of the value of its total assets to broker-dealers, banks or other
institutional borrowers of securities. Although Pacific-European Fund has the
ability to lend its portfolio securities, it has not done so in the past and
does not currently intend to do so.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions which are
set forth in full in such Fund's Statement of Additional Information. Among
those restrictions are the following:
Borrowing. Each Fund may borrow money from banks for temporary or
emergency purposes only, in an amount not to exceed 10% of its total assets.
Illiquid Securities. Each Fund may invest up to 15% of its net
assets in illiquid securities.
V-24
<PAGE>
APPENDIX VI
FEES AND EXPENSES OF THE PIPER FUNDS
AND CORRESPONDING FAIF FUNDS
The following tables compare the current fees and expenses for each
Piper Fund and its corresponding FAIF Fund. U.S. Bank has agreed that, for the
period commencing on the Closing and continuing until September 30, 1998, it
will waive fees and reimburse expenses to the FAIF Funds to the extent necessary
to maintain FAIF Fund total operating expenses at the levels provided in the
tables. The purpose of these tables is to assist shareholders in understanding
the various costs and expenses that investors in these portfolios will bear as
shareholders. THE EXAMPLES CONTAINED IN THE TABLES SHOULD NOT BE CONSIDERED
REPRESENTATIONS OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
Piper Small Company Growth Fund/FAIF Small Cap Growth Fund
----------------------------------------------------------
<TABLE>
<CAPTION>
Piper Small FAIF Small
Company Growth Fund Cap Growth Fund
------------------- ---------------
Class A Class B Class A
------- ------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)...................... 4.00% None 4.50%
Maximum Sales Charge Imposed on Reinvested
Dividends................................................ None None None
Maximum Deferred Sales Charge (as a percentage of
net asset value at purchase or redemption
whichever is less)(1).................................... None 4.00% None
Redemption Fees ........................................... None None None
Exchange Fees ............................................. None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fees (after waivers)(2)................ 0.75% 0.75% 0.69%
Rule 12b-1 Fees (after waivers)(3)......................... 0.34% 1.00% 0.25%
Other Expenses (after reimbursements)(4)................... 0.25% 0.25% 0.21%
Total Fund Operating Expenses (after reimbursements
and waivers)(5).......................................... 1.34% 2.00% 1.15%
</TABLE>
- --------------------
(1) For Class A shares of both the Piper Fund and the FAIF Fund, a 1%
contingent deferred sales charge ("CDSC") is imposed on purchases of a
certain amount that were not subject to an initial sales charge. ($500,000
or more for the Piper Fund and $1 million or more for the FAIF Fund). Such
CDSC is imposed in the event of a redemption within 24 months of purchase
for both the Piper Fund and the FAIF Fund.
(2) Investment advisory fees for the FAIF Fund reflect voluntary fee waivers by
the investment adviser. Absent voluntary waivers, investment advisory fees
for the FAIF Fund would be 0.70% of average daily net assets.
(3) As a result of the payment of Rule 12b-1 fees, long-term shareholders of
the Piper Fund's Class A and Class B shares may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc. Rule 12b-1 fees for the Piper Fund
reflect voluntary waivers by the distributor. Absent voluntary waivers,
Rule 12b-1 fees for the Piper Fund Class A shares would be 0.50% of average
daily net assets.
(4) The investment adviser for the Piper Fund voluntarily reimbursed certain
other expenses. Absent any reimbursements, other expenses as a percentage
of average daily net assets would be 0.73% for the Piper Fund Class A
shares and 0.40% for the Piper Fund Class B shares. For Class B shares of
the Piper Fund, "other expenses" are based on intended reimbursements for
fiscal 1998.
(5) Absent any fee waivers or expense reimbursements, total fund operating
expenses as a percentage of average daily net assets would be 1.98% and
2.15%, respectively, for the Class A and Class B shares of the Piper Fund,
and 1.16% for the Class A shares of the FAIF Fund.
<PAGE>
Example:
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of each time
period:
Piper Small FAIF Small
Company Growth Fund Cap Growth Fund
------------------- ---------------
Class A Class B Class A
------- ------- -------
1 year.................. $ 53 $ 60 $ 56
3 years................. $ 81 $ 93 $ 80
5 years................. $ 110 $ 128 $ 105
10 years................ $ 195 $ 200(1) $ 178
- --------------------
(1) Assumes that the Class B shares are purchased on January 1 and convert to
Class A shares at the beginning of the sixth full calendar year following
the year of purchase.
Piper Emerging Growth Fund/FAIF Mid Cap Growth Fund
---------------------------------------------------
<TABLE>
<CAPTION>
Piper Emerging FAIF Mid
Growth Fund Cap Growth Fund
----------- ---------------
Class A Class B Class Y Class A Class Y
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)................... 4.00% None None 4.50% None
Maximum Sales Charge Imposed on Reinvested
Dividends............................................. None None None None None
Maximum Deferred Sales Charge (as a percentage of
net asset value at purchase or redemption
whichever is less)(1)................................. None 4.00% None None None
Redemption Fees ........................................ None None None None None
Exchange Fees .......................................... None None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fees ............................... 0.69% 0.69% 0.69% 0.70% 0.70%
Rule 12b-1 Fees (after waivers)(2)...................... 0.34% 1.00% None 0.25% None
Other Expenses ......................................... 0.20% 0.16% 0.20% 0.17% 0.17%
Total Fund Operating Expenses (after waivers)(3)........ 1.23% 1.85% 0.89% 1.12% 0.87%
</TABLE>
- --------------------
(1) For Class A shares of both the Piper Fund and the FAIF Fund, a 1%
contingent deferred sales charge ("CDSC") is imposed on purchases of a
certain amount that were not subject to an initial sales charge. ($500,000
or more for the Piper Fund and $1 million or more for the FAIF Fund). Such
CDSC is imposed in the event of a redemption within 24 months of purchase
for both the Piper Fund and the FAIF Fund.
(2) As a result of the payment of Rule 12b-1 fees, long-term shareholders of
the Piper Fund's Class A and Class B shares may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc. Rule 12b-1 fees for the Piper Fund
reflect voluntary waivers by the distributor. Absent voluntary waivers,
Rule 12b-1 fees for the Piper Fund Class A shares would be 0.50% of average
daily net assets.
(3) Absent any fee waivers, total fund operating expenses as a percentage of
average daily net assets would be 1.39% for the Class A shares of the Piper
Fund.
<PAGE>
Example:
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of each time
period:
Piper Emerging FAIF Mid Cap
Growth Fund Growth Fund
----------- -----------
Class A Class B Class Y Class A Class Y
------- ------- ------- ------- -------
1 year......... $ 52 $ 59 $ 9 $ 56 $ 9
3 years........ $ 77 $ 88 $ 28 $ 79 $ 28
5 years........ $ 105 $ 120 $ 49 $ 104 $ 48
10 years....... $ 183 $ 186(1) $ 110 $ 175 $ 107
- --------------------
(1) Assumes that the Class B shares are purchased on January 1 and convert to
Class A shares at the beginning of the sixth full calendar year following
the year of purchase.
Piper Growth Fund/FAIF Large Cap Growth Fund
--------------------------------------------
<TABLE>
<CAPTION>
FAIF Large
Piper Growth Fund Cap Growth Fund
----------------- ---------------
Class A Class B Class A
------- ------- -------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)...................... 4.00% None 4.50%
Maximum Sales Charge Imposed on Reinvested
Dividends................................................ None None None
Maximum Deferred Sales Charge (as a percentage of
net asset value at purchase or redemption
whichever is less)(1).................................... None 4.00% None
Redemption Fees ........................................... None None None
Exchange Fees ............................................. None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fees (after waivers)(2)................ 0.70% 0.70% 0.61%
Rule 12b-1 Fees (after waivers)(3)......................... 0.34% 1.00% 0.25%
Other Expenses ............................................ 0.22% 0.20% 0.19%
Total Fund Operating Expenses (after waivers)(4)........... 1.26% 1.90% 1.05%
</TABLE>
- --------------------
(1) For Class A shares of both the Piper Fund and the FAIF Fund, a 1%
contingent deferred sales charge ("CDSC") is imposed on purchases of a
certain amount that were not subject to an initial sales charge. ($500,000
or more for the Piper Fund and $1 million or more for the FAIF Fund). Such
CDSC is imposed in the event of a redemption within 24 months of purchase
for both the Piper Fund and the FAIF Fund.
(2) Investment advisory fees for the FAIF Fund reflect voluntary fee waivers by
the investment adviser. Absent voluntary waivers, investment advisory fees
for the FAIF Fund would be 0.70% of average daily net assets.
(3) As a result of the payment of Rule 12b-1 fees, long-term shareholders of
the Piper Fund's Class A and Class B shares may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc. Rule 12b-1 fees for the Piper Fund
reflect voluntary waivers by the distributor. Absent voluntary waivers,
Rule 12b-1 fees for the Piper Fund Class A shares would be 0.50% of average
daily net assets.
(4) Absent any fee waivers, total fund operating expenses as a percentage of
average daily net assets would be 1.42% for the Class A shares of the Piper
Fund, and 1.14% for the Class A shares of the FAIF Fund.
<PAGE>
Example:
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of each time
period:
FAIF Large
Piper Growth Fund Cap Growth Fund
----------------- ---------------
Class A Class B Class A
------- ------- -------
1 year.......... $ 52 $ 59 $ 55
3 years......... $ 78 $ 90 $ 77
5 years......... $ 106 $ 123 $ 100
10 years........ $ 186 $ 190(1) $ 167
- --------------------
(1) Assumes that the Class B shares are purchased on January 1 and convert to
Class A shares at the beginning of the sixth full calendar year following
the year of purchase.
Piper Growth and Income Fund/FAIF Large Cap Value Fund
------------------------------------------------------
<TABLE>
<CAPTION>
Piper Growth FAIF Large
and Income Fund Cap Value Fund
--------------- --------------
Class A Class B Class Y Class A Class Y
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)......................... 4.00% None None 4.50% None
Maximum Sales Charge Imposed on Reinvested
Dividends................................................... None None None None None
Maximum Deferred Sales Charge (as a percentage of
net asset value at purchase or redemption
whichever is less)(1)....................................... None 4.00% None None None
Redemption Fees .............................................. None None None None None
Exchange Fees ................................................ None None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fees (after waivers)(2)................... 0.73% 0.73% 0.73% 0.61% 0.61%
Rule 12b-1 Fees (after waivers)(3)............................ 0.34% 1.00% None 0.25% None
Other Expenses (after reimbursements)(4)...................... 0.27% 0.27% 0.27% 0.19% 0.19%
Total Fund Operating Expenses (after reimbursements
and waivers)(5)............................................. 1.34% 2.00% 1.00% 1.05% 0.80%
</TABLE>
- --------------------
(1) For Class A shares of both the Piper Fund and the FAIF Fund, a 1%
contingent deferred sales charge ("CDSC") is imposed on purchases of a
certain amount that were not subject to an initial sales charge. ($500,000
or more for the Piper Fund and $1 million or more for the FAIF Fund). Such
CDSC is imposed in the event of a redemption within 24 months of purchase
for both the Piper Fund and the FAIF Fund.
(2) Investment advisory fees for the FAIF Fund reflect voluntary fee waivers by
the investment adviser. Absent voluntary waivers, investment advisory fees
for Class A and Class Y shares of the FAIF Fund would be 0.70% of average
daily net assets.
(3) As a result of the payment of Rule 12b-1 fees, long-term shareholders of
the Piper Fund's Class A and Class B shares may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc. Rule 12b-1 fees for the Piper Fund
reflect voluntary waivers by the distributor. Absent voluntary waivers,
Rule 12b-1 fees for the Piper Fund Class A shares would be 0.50% of average
daily net assets.
(4) The investment adviser for the Piper Fund voluntarily reimbursed certain
other expenses. Absent any reimbursements, other expenses as a percentage
of average daily net assets would be 0.29% for the Class A shares of the
Piper Fund.
<PAGE>
(5) Absent any fee waivers or expense reimbursements, total fund operating
expenses as a percentage of average daily net assets would be 1.52% for the
Class A shares of the Piper Fund, and 1.14% and 0.89%, respectively, for
the Class A and Class Y shares of the FAIF Fund.
Example:
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of each time
period:
Piper Growth FAIF Large
and Income Fund Cap Value Fund
--------------- --------------
Class A Class B Class Y Class A Class Y
------- ------- ------- ------- -------
1 year.......... $ 53 $ 60 $ 10 $ 55 $ 8
3 years......... $ 81 $ 93 $ 32 $ 77 $ 26
5 years......... $ 110 $ 128 $ 55 $ 100 $ 44
10 years........ $ 195 $ 200(1) $ 122 $ 167 $ 99
- --------------------
(1) Assumes that the Class B shares are purchased on January 1 and convert to
Class A shares at the beginning of the sixth full calendar year following
the year of purchase.
Piper Balanced Fund/FAIF Balanced Fund
--------------------------------------
<TABLE>
<CAPTION>
Piper FAIF
Balanced Fund Balanced Fund
------------- -------------
Class A Class B Class A
------- ------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)..................... 4.00% None 4.50%
Maximum Sales Charge Imposed on Reinvested
Dividends............................................... None None None
Maximum Deferred Sales Charge (as a percentage of
net asset value at purchase or redemption
whichever is less)(1)................................... None 4.00% None
Redemption Fees .......................................... None None None
Exchange Fees ............................................ None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fees (after waivers)(2)............... 0.75% 0.75% 0.62%
Rule 12b-1 Fees (after waivers)(3)........................ 0.34% 1.00% 0.25%
Other Expenses (after reimbursements)(4).................. 0.25% 0.25% 0.18%
Total Fund Operating Expenses (after reimbursements
and waivers)(5)......................................... 1.34% 2.00% 1.05%
</TABLE>
- --------------------
(1) For Class A shares of both the Piper Fund and the FAIF Fund, a 1%
contingent deferred sales charge ("CDSC") is imposed on purchases of a
certain amount that were not subject to an initial sales charge. ($500,000
or more for the Piper Fund and $1 million or more for the FAIF Fund). Such
CDSC is imposed in the event of a redemption within 24 months of purchase
for both the Piper Fund and the FAIF Fund.
(2) Investment advisory fees for the FAIF Fund reflect voluntary fee waivers by
the investment adviser. Absent voluntary waivers, investment advisory fees
for the FAIF Fund would be 0.70% of average daily net assets.
(3) As a result of the payment of Rule 12b-1 fees, long-term shareholders of
the Piper Fund's Class A and Class B shares may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc. Rule 12b-1 fees for the Piper Fund
reflect voluntary waivers by the distributor. Absent voluntary waivers,
Rule 12b-1 fees for the Piper Fund Class A shares would be 0.50% of average
daily net assets.
<PAGE>
(4) The investment adviser for the Piper Fund voluntarily reimbursed certain
other expenses. Absent any reimbursements, other expenses as a percentage
of average daily net assets would be 0.48% for the Piper Fund Class A
shares and 0.36% for the Piper Fund Class B shares.
(5) Absent any fee waivers or expense reimbursements, total fund operating
expenses as a percentage of average daily net assets would be 1.73% and
2.11%, respectively, for the Class A and Class B shares of the Piper Fund,
and 1.13% for the Class A shares of the FAIF Fund.
Example:
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of each time
period:
Piper FAIF
Balanced Fund Balanced Fund
------------- -------------
Class A Class B Class A
------- ------- -------
1 year........... $ 53 $ 60 $ 55
3 years.......... $ 81 $ 93 $ 77
5 years.......... $ 110 $ 128 $ 100
10 years......... $ 195 $ 2001 $ 167
- --------------------
(1) Assumes that the Class B shares are purchased on January 1 and convert to
Class A shares at the beginning of the sixth full calendar year following
the year of purchase.
Piper Minnesota Tax-Exempt Fund/FAIF Minnesota Tax Free Fund
------------------------------------------------------------
<TABLE>
<CAPTION>
Piper Minnesota FAIF Minnesota
Tax-Exempt Fund Tax Free Fund
--------------- -------------
Class A Class Y Class A Class Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)...................... 2.00% None 3.00% None
Maximum Sales Charge Imposed on Reinvested
Dividends................................................ None None None None
Maximum Deferred Sales Charge (as a percentage of
net asset value at purchase or redemption
whichever is less)(1).................................... None None None None
Redemption Fees ........................................... None None None None
Exchange Fees ............................................. None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fees (after waivers)(2)................ 0.50% 0.50% 0.52% 0.52%
Rule 12b-1 Fees (after waivers)(3)......................... 0.24% None 0.25% None
Other Expenses ............................................ 0.21% 0.21% 0.18% 0.18%
Total Fund Operating Expenses (after waivers)(4)........... 0.95% 0.71% 0.95% 0.70%
</TABLE>
- --------------------
(1) For Class A shares of both the Piper Fund and the FAIF Fund, a contingent
deferred sales charge ("CDSC") is imposed on purchases of a certain amount
that were not subject to an initial sales charge. ($500,000 or more for the
Piper Fund and $1 million or more for the FAIF Fund). Such CDSC is equal to
0.50% for the Piper Fund and 1.00% for the FAIF Fund and is imposed in the
event of a redemption within 12 months of purchase for the Piper Fund and
24 months of purchase for the FAIF Fund.
(2) Investment advisory fees for the FAIF Fund reflect voluntary fee waivers by
the investment adviser. Absent voluntary waivers, investment advisory fees
for Class A and Class Y shares of the FAIF Fund would be 0.70% of average
daily net assets.
(3) As a result of the payment of Rule 12b-1 fees, long-term shareholders of
the Piper Fund's Class A shares may pay more than the economic equivalent
of the maximum front-end sales charge permitted by the National Association
of Securities Dealers, Inc. Rule 12b-1 fees for the Piper Fund reflect
voluntary waivers by the distributor. Absent
<PAGE>
voluntary waivers, Rule 12b-1 fees as a percentage of average daily net
assets would be 0.30% for the Piper Fund Class A shares.
(4) Absent any fee waivers, total fund operating expenses as a percentage of
average daily net assets would be 1.01% for the Class A shares of the Piper
Fund and 1.13% and 0.88%, respectively, for the Class A and Class Y shares
of the FAIF Fund.
Example:
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of each time
period:
Piper Minnesota FAIF Minnesota
Tax-Exempt Fund Tax Free Fund
--------------- -------------
Class A Class Y Class A Class Y
------- ------- ------- -------
1 year......... $ 29 $ 7 $ 39 $ 7
3 years........ $ 50 $ 23 $ 59 $ 22
5 years........ $ 71 $ 40 $ 81 $ 39
10 years....... $ 134 $ 88 $ 143 $ 87
Piper National Tax-Exempt Fund/FAIF Tax Free Fund
-------------------------------------------------
Piper National FAIF Tax
Tax-Exempt Fund Free Fund
--------------- ---------
Class A Class A
------- -------
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)............... 2.00% 3.00%
Maximum Sales Charge Imposed on Reinvested
Dividends......................................... None None
Maximum Deferred Sales Charge (as a percentage of
net asset value at purchase or redemption
whichever is less)(1)............................. None None
Redemption Fees .................................... None None
Exchange Fees ...................................... None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fees (after waivers)(2)......... 0.50% 0.63%
Rule 12b-1 Fees (after waivers)(3).................. 0.24% 0.25%
Other Expenses ..................................... 0.37% 0.22%
Total Fund Operating Expenses (after waivers)(4).... 1.11% 1.10%
- --------------------
(1) For Class A shares of both the Piper Fund and the FAIF Fund, a contingent
deferred sales charge ("CDSC") is imposed on purchases of a certain amount
that were not subject to an initial sales charge. ($500,000 or more for the
Piper Fund and $1 million or more for the FAIF Fund). Such CDSC is equal to
0.50% for the Piper Fund and 1.00% for the FAIF Fund and is imposed in the
event of a redemption within 12 months of purchase for the Piper Fund and
24 months of purchase for the FAIF Fund.
(2) Investment advisory fees for the FAIF Fund reflect voluntary fee waivers by
the investment adviser. Absent voluntary waivers, investment advisory fees
for the FAIF Fund would be 0.70% of average daily net assets.
(3) As a result of the payment of Rule 12b-1 fees, long-term shareholders of
the Piper Fund's Class A shares may pay more than the economic equivalent
of the maximum front-end sales charge permitted by the National Association
of Securities Dealers, Inc. Rule 12b-1 fees for the Piper Fund reflect
voluntary waivers by the distributor. Absent voluntary waivers, Rule 12b-1
fees as a percentage of average daily net assets would be 0.30% for the
Piper Fund.
<PAGE>
(4) Absent any fee waivers, total fund operating expenses as a percentage of
average daily net assets would be 1.17% for the Piper Fund and 1.17% for
the FAIF Fund.
Example:
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of each time
period:
Piper National FAIF Tax
Tax-Exempt Fund Free Fund
--------------- ---------
Class A Class A
------- -------
1 year........... $ 31 $ 41
3 years.......... $ 55 $ 64
5 years.......... $ 80 $ 89
10 years......... $ 152 $ 160
Piper Intermediate Bond Fund/FAIF Intermediate Term Income Fund
---------------------------------------------------------------
<TABLE>
<CAPTION>
Piper Intermediate FAIF Intermediate
Bond Fund Term Income Fund
--------- ----------------
Class A Class Y Class A Class Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchase
(as a percentage of offering price)..................... 2.00% None 3.75% None
Maximum Sales Charge Imposed on Reinvested
Dividends............................................... None None None None
Maximum Deferred Sales Charge (as a percentage of
net asset value at purchase or redemption
whichever is less)(1)................................... None None None None
Redemption Fees .......................................... None None None None
Exchange Fees ............................................ None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fees (after waivers)(2)............... 0.30% 0.30% 0.00% 0.48%
Rule 12b-1 Fees (after waivers)(3)........................ 0.22% None 0.00% None
Other Expenses ........................................... 0.33% 0.33% 0.22% 0.22%
Total Fund Operating Expenses (after waivers)(4).......... 0.85% 0.63% 0.70% 0.70%
</TABLE>
- --------------------
(1) For Class A shares of both the Piper Fund and the FAIF Fund, a contingent
deferred sales charge ("CDSC") is imposed on purchases of a certain amount
that were not subject to an initial sales charge. ($500,000 or more for the
Piper Fund and $1 million or more for the FAIF Fund). Such CDSC is equal to
0.50% for the Piper Fund and 1.00% for the FAIF Fund and is imposed in the
event of a redemption within 12 months of purchase for the Piper Fund and
24 months of purchase for the FAIF Fund.
(2) Investment advisory fees for the FAIF Fund reflect voluntary fee waivers by
the investment adviser. Absent voluntary waivers, investment advisory fees
for Class A and Class Y shares of the FAIF Fund would be 0.70% of average
daily net assets.
(3) As a result of the payment of Rule 12b-1 fees, long-term shareholders of
the Piper Fund's Class A shares may pay more than the economic equivalent
of the maximum front-end sales charge permitted by the National Association
of Securities Dealers, Inc. Rule 12b-1 fees for both the Piper Fund and the
FAIF Fund reflect voluntary waivers by the distributor. Absent voluntary
waivers, Rule 12b-1 fees as a percentage of average daily net assets would
be 0.30% for the Piper Fund Class A shares and 0.25% for the FAIF Fund
Class A shares.
(4) Absent any fee waivers, total fund operating expenses as a percentage of
average daily net assets would be 0.93% for the Class A shares of the Piper
Fund and 1.17% and 0.92%, respectively, for the Class A and Class Y shares
of the FAIF Fund.
<PAGE>
Example:
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of each time
period:
Piper Intermediate FAIF Intermediate
Bond Fund Term Income Fund
--------- ----------------
Class A Class Y Class A Class Y
------- ------- ------- -------
1 year........... $ 29 $ 6 $ 44 $ 7
3 years.......... $ 47 $ 20 $ 59 $ 22
5 years.......... $ 66 $ 35 $ 75 $ 39
10 years......... $ 123 $ 79 $ 121 $ 87
Piper Government Income Fund/FAIF Fixed Income Fund
---------------------------------------------------
Piper Government FAIF Fixed
Income Fund Income Fund
----------- -----------
Class A Class A
------- -------
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)................ 2.00% 3.75%
Maximum Sales Charge Imposed on Reinvested
Dividends.......................................... None None
Maximum Deferred Sales Charge (as a percentage of
net asset value at purchase or redemption
whichever is less)(1).............................. None None
Redemption Fees ..................................... None None
Exchange Fees ....................................... None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fees (after waivers)(2).......... 0.50% 0.52%
Rule 12b-1 Fees (after waivers)(3)................... 0.34% 0.25%
Other Expenses ...................................... 0.35% 0.18%
Total Fund Operating Expenses (after waivers)(4)..... 1.19% 0.95%
- --------------------
(1) For Class A shares of both the Piper Fund and the FAIF Fund, a contingent
deferred sales charge ("CDSC") is imposed on purchases of a certain amount
that were not subject to an initial sales charge. ($500,000 or more for the
Piper Fund and $1 million or more for the FAIF Fund). Such CDSC is equal to
0.50% for the Piper Fund and 1.00% for the FAIF Fund and is imposed in the
event of a redemption within 12 months of purchase for the Piper Fund and
24 months of purchase for the FAIF Fund.
(2) Investment advisory fees for the FAIF Fund reflect voluntary fee waivers by
the investment adviser. Absent voluntary waivers, investment advisory fees
for the FAIF Fund would be 0.70% of average daily net assets.
(3) As a result of the payment of Rule 12b-1 fees, long-term shareholders of
the Piper Fund's Class A shares may pay more than the economic equivalent
of the maximum front-end sales charge permitted by the National Association
of Securities Dealers, Inc. Rule 12b-1 fees for the Piper Fund reflect
voluntary waivers by the distributor. Absent voluntary waivers, Rule 12b-1
fees for the Piper Fund would be 0.50% of average daily net assets.
(4) Absent any fee waivers, total fund operating expenses as a percentage of
average daily net assets would be 1.35% for the Piper Fund and 1.13% for
the FAIF Fund.
<PAGE>
Example:
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of each time
period:
Piper Government FAIF Fixed
Income Fund Income Fund
----------- -----------
Class A Class A
------- -------
1 year.......... $ 32 $ 47
3 years......... $ 57 $ 67
5 years......... $ 84 $ 88
10 years........ $ 161 $ 143
Piper Adjustable Rate Mortgage Securities Fund/
FAIF Adjustable Rate Mortgage Securities Fund
---------------------------------------------
Piper Adjustable FAIF Adjustable
Rate Mortgage Rate Mortgage
Securities Fund Securities Fund
--------------- ---------------
Class A Class A
------- -------
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)............... 2.00% 2.00%
Maximum Sales Charge Imposed on Reinvested
Dividends......................................... None None
Maximum Deferred Sales Charge (as a percentage of
net asset value at purchase or redemption
whichever is less)(1)............................. None None
Redemption Fees .................................... None None
Exchange Fees ...................................... None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fees (after waivers)(2)......... 0.35% 0.40%
Rule 12b-1 Fees (after waivers)(3).................. 0.15% 0.15%
Other Expenses ..................................... 0.31% 0.25%
Total Fund Operating Expenses (after waivers)(4).... 0.81% 0.80%
- --------------------
(1) For Class A shares of both the Piper Fund and the FAIF Fund, a contingent
deferred sales charge ("CDSC") is imposed on purchases of a certain amount
that were not subject to an initial sales charge. ($500,000 or more for the
Piper Fund and $1 million or more for the FAIF Fund). Such CDSC is equal to
0.50% for the Piper Fund and 1.00% for the FAIF Fund and is imposed in the
event of a redemption within 12 months of purchase for the Piper Fund and
24 months of purchase for the FAIF Fund.
(2) Investment advisory fees for the FAIF Fund reflect voluntary fee waivers by
the investment adviser. Absent voluntary waivers, investment advisory fees
for the FAIF Fund would be 0.70% of average daily net assets.
(3) Rule 12b-1 fees for the FAIF Fund reflect voluntary waivers by the
distributor. Absent voluntary waivers, Rule 12b-1 fees would be 0.25% of
average daily net assets.
(4) Absent any fee waivers, total fund operating expenses for the FAIF Fund
would be 1.20% of average daily net assets.
<PAGE>
Example:
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of each time
period:
Piper Adjustable FAIF Adjustable
Rate Mortgage Rate Mortgage
Securities Fund Securities Fund
Class A Class A
1 year.............. $ 28 $ 28
3 years............. $ 45 $ 45
5 years............. $ 64 $ 64
10 years............ $ 118 $ 117
Piper Pacific-European Growth Fund/FAIF International Fund
----------------------------------------------------------
<TABLE>
<CAPTION>
Piper Pacific- FAIF
European Growth Fund International Fund
-------------------- ------------------
Class A Class B Class Y Class A Class Y
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price).................. 4.00% None None 4.50% None
Maximum Sales Charge Imposed on Reinvested
Dividends............................................ None None None None None
Maximum Deferred Sales Charge (as a percentage of
net asset value at purchase or redemption
whichever is less)(1)................................ None 4.00% None None None
Redemption Fees ....................................... None None None None None
Exchange Fees ......................................... None None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fees (after waivers)(2)............ 0.75% 0.75% 0.75% 1.08% 1.08%
Rule 12b-1 Fees (after waivers)(3)..................... 0.33% 1.00% None 0.25% None
Other Expenses ........................................ 0.64% 0.69% 0.64% 0.27% 0.27%
Total Fund Operating Expenses (after waivers)(4)....... 1.72% 2.44% 1.39% 1.60% 1.35%
</TABLE>
- --------------------
(1) For Class A shares of both the Piper Fund and the FAIF Fund, a 1%
contingent deferred sales charge ("CDSC") is imposed on purchases of a
certain amount that were not subject to an initial sales charge. ($500,000
or more for the Piper Fund and $1 million or more for the FAIF Fund). Such
CDSC is imposed in the event of a redemption within 24 months of purchase
for both the Piper Fund and the FAIF Fund.
(2) Investment advisory fees for the FAIF Fund reflect voluntary fee waivers by
the investment adviser. Absent voluntary waivers, investment advisory fees
for Class A and Class Y shares of the FAIF Fund would be 1.25% of average
daily net assets.
(3) As a result of the payment of Rule 12b-1 fees, long-term shareholders of
the Piper Fund's Class A and Class B shares may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc. Rule 12b-1 fees for the Piper Fund
reflect voluntary waivers by the distributor. Absent voluntary waivers,
Rule 12b-1 fees for the Piper Fund Class A shares would be 0.50% of average
daily net assets.
(4) Absent any fee waivers, total fund operating expenses as a percentage of
average daily net assets would be 1.89% for the Class A shares of the Piper
Fund, and 1.77% and 1.52%, respectively, for the Class A and Class Y shares
of the FAIF Fund.
<PAGE>
Example:
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of each time
period:
Piper Pacific- FAIF
European Growth Fund International Fund
-------------------- ------------------
Class A Class B Class Y Class A Class Y
------- ------- ------- ------- -------
1 year....... $ 57 $ 65 $ 14 $ 61 $ 14
3 years...... $ 92 $ 106 $ 44 $ 93 $ 43
5 years...... $ 130 $ 150 $ 76 $ 128 $ 74
10 years..... $ 235 $ 244(1) $ 167 $ 226 $ 162
- --------------------
(1) Assumes that the Class B shares are purchased on January 1 and convert to
Class A shares at the beginning of the sixth full calendar year following
the year of purchase.
Piper Emerging Markets Growth Fund/FAIF Emerging Markets Fund
-------------------------------------------------------------
<TABLE>
<CAPTION>
Piper Emerging FAIF Emerging
Markets Growth Fund Markets Fund
------------------- ------------
Class A Class B Class A
------- ------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)....................... 4.00% None 4.50%
Maximum Sales Charge Imposed on Reinvested
Dividends................................................. None None None
Maximum Deferred Sales Charge (as a percentage of
net asset value at purchase or redemption
whichever is less)(1)..................................... None 4.00% None
Redemption Fees ............................................ None None None
Exchange Fees .............................................. None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fees (after waivers)(2)................. 1.00% 1.00% 0.70%
Rule 12b-1 Fees (after waivers)(3).......................... 0.33% 1.00% 0.25%
Other Expenses (after reimbursements)(4).................... 0.67% 0.64% 0.75%
Total Fund Operating Expenses (after reimbursements
and waivers)(5)........................................... 2.00% 2.64% 1.70%
</TABLE>
- --------------------
(1) For Class A shares of both the Piper Fund and the FAIF Fund, a 1%
contingent deferred sales charge ("CDSC") is imposed on purchases of a
certain amount that were not subject to an initial sales charge. ($500,000
or more for the Piper Fund and $1 million or more for the FAIF Fund). Such
CDSC is imposed in the event of a redemption within 24 months of purchase
for both the Piper Fund and the FAIF Fund.
(2) Investment advisory fees for the FAIF Fund reflect voluntary fee waivers by
the investment adviser. Absent voluntary waivers, investment advisory fees
for the FAIF Fund would be 1.25% of average daily net assets.
(3) As a result of the payment of Rule 12b-1 fees, long-term shareholders of
the Piper Fund's Class A and Class B shares may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc. Rule 12b-1 fees for the Piper Fund
reflect voluntary waivers by the distributor. Absent voluntary waivers,
Rule 12b-1 fees for the Piper Fund Class A shares would be 0.50% of average
daily net assets.
(4) The investment adviser for the Piper Fund voluntarily reimbursed certain
other expenses. Absent any reimbursements, other expenses as a percentage
of average daily net assets would be 1.84% for the Piper Fund Class A
shares and 1.39% for the Piper Fund Class B shares.
(5) Absent any fee waivers or expense reimbursements, total fund operating
expenses as a percentage of average daily net assets would be 3.34% and
3.39%, respectively, for the Class A and Class B shares of the Piper Fund,
and 2.25% for the Class A shares of the FAIF Fund.
<PAGE>
Example:
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of each time
period:
Piper Emerging FAIF Emerging
Markets Growth Fund Markets Fund
------------------- -------------------
Class A Class B Class A
------- ------- -------
1 year.......... $ 59 $ 67 $ 62
3 years......... $ 100 $ 112 $ 96
5 years......... $ 143 $ 160 $ 133
10 years........ $ 263 $ 268(1) $ 237
- --------------------
(1) Assumes that the Class B shares are purchased on January 1 and convert to
Class A shares at the beginning of the sixth full calendar year following
the year of purchase.
<PAGE>
APPENDIX VII
COMPARISON OF INTERIM ADVISORY AND SUB-ADVISORY AGREEMENTS AND
FAIF INVESTMENT ADVISORY AND SUB-ADVISORY AGREEMENTS
This Appendix summarizes and compares certain significant provisions
of the Interim Advisory Agreements and the Interim Sub-Advisory Agreements
against corresponding provisions of the FAIF Investment Advisory Agreement (the
"FAIF Advisory Agreement") and the Sub-Advisory Agreement between U.S. Bank and
Marvin & Palmer (the "FAIF Sub-Advisory Agreement"). Fees payable under the
Agreements are set forth in Table III in the Combined Proxy
Statement/Prospectus.
COMPARISON OF INTERIM ADVISORY AGREEMENTS AND FAIF ADVISORY AGREEMENT
ADVISORY SERVICES. Pursuant to the Interim Advisory Agreements for
PFI and PFI--II, the adviser agrees, subject to the supervision of the Board of
Directors, to furnish the respective Piper Funds with investment advice and to
supervise the management and investment programs of the respective Piper Funds.
Under such Agreements, the adviser furnishes at its own expense all necessary
administrative services, office space, equipment and clerical personnel for
servicing the investments of the Piper Funds. The adviser also provides
investment advisory facilities and executive and supervisory personnel for
managing the investments and effecting the portfolio transactions of the Piper
Funds. In addition, the Adviser pays the salaries and fees of all officers and
directors of PFI or PFI--II who are affiliated with the adviser.
Pursuant to the Interim Advisory Agreement for PGF, the adviser
supervises, directs and monitors the day-to-day operations of Pacific-European
Growth Fund and Emerging Markets Growth Fund in accordance with each Fund's
investment objective, policies and restrictions, as well as the implementation
of investment programs formulated by the sub-adviser. Piper Capital reviews
investment and allocation determinations of the sub-adviser. In addition, the
sub-adviser must obtain the approval of the adviser prior to (a) any investment
of the assets of Pacific-European Growth Fund in any country outside of the
Pacific Basin or Europe and (b) any investment by the sub-adviser which would
result in reallocation of in excess of 5% of such Fund's total assets. The
adviser furnishes at its own expense all necessary administrative services,
office space, equipment and clerical personnel for providing the foregoing
services. In addition, the adviser pays the salaries and fees of all officers
and directors of PGF who are affiliated with the adviser.
Similarly, the FAIF Advisory Agreement provides that the adviser
agrees to act as the investment adviser for, and to manage the investment of the
assets of, the FAIF Funds. Under the FAIF Advisory Agreement the adviser is
required, at its own expense, to provide the FAIF Funds with all necessary
office space, personnel and facilities necessary and incident to the performance
of the adviser's services under the Agreement. In addition, under the FAIF
Advisory Agreement, the adviser is required to pay or be responsible for the
payment of all compensation to personnel of the FAIF Funds and the officers and
directors of the FAIF Funds who are affiliated with the adviser or any entity
which controls, is controlled by or is under common control with the adviser.
FEE AND EXPENSE LIMITATIONS. Each Agreement requires that if the
expenses of any Fund exceed the expense limitations imposed under the securities
regulations of a state, the adviser will reimburse the Fund. Under federal law,
states may no longer impose expense limitations on mutual funds.
STANDARD OF CARE. The Interim Advisory Agreement for PGF provides
that the adviser shall be liable to Pacific-European Growth Fund and Emerging
Markets Growth Fund for losses resulting from willful misconduct, bad faith or
gross negligence in the performance of its duties or from its reckless disregard
of its duties under such Interim Advisory Agreement. The Interim Advisory
Agreements for PFI and PFI--II do not contain any standard of care provisions.
<PAGE>
The FAIF Advisory Agreement provides that the adviser shall be
liable to the Funds and their shareholders or former shareholders for any
negligence or willful misconduct on the part of the adviser or any of its
directors, officers, employees, representatives or agents in connection with the
responsibilities assumed by it under the FAIF Agreement, provided that the
adviser shall not be liable for any investments made by the adviser in
accordance with the explicit or implicit direction of the Board of Directors of
FAIF or the investment objectives and policies of a Fund, and provided further
that any liability of the adviser resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services shall be limited to the
period and amount set forth in Section 36(b)(3) of the 1940 Act. In addition,
the adviser agrees in the FAIF agreement to indemnify FAIF and each Fund with
respect to any loss, liability, judgment, cost or penalty which FAIF or any Fund
may directly or indirectly suffer or incur in any way arising out of or in
connection with any breach of the FAIF Advisory Agreement by the adviser.
COMPARISON OF INTERIM SUB-ADVISORY AGREEMENTS AND FAIF SUB-ADVISORY AGREEMENTS
SUB-ADVISORY SERVICES. Under each Interim Sub-Advisory Agreement,
the sub-adviser is responsible for formulating and implementing a continuing
program for the management of the respective Piper Fund's assets and resources
and for directing the investment of such Fund's assets in accordance with
applicable law and the investment objectives, policies and restrictions of the
Fund. Under each Interim Sub-Advisory Agreement, the sub-adviser is responsible
for selecting the brokers and dealers that will execute the purchases and sales
of portfolio instruments for the respective Piper Fund. The Sub-Adviser is not
required under the Interim Sub-Advisory Agreements to pay any expenses of PGF or
the respective Piper Funds.
Under the FAIF Sub-Advisory Agreements, the sub-adviser agrees to
manage the assets of the International Fund and the Emerging Markets Growth
Fund, subject to the investment objectives, policies and restrictions of such
Funds. The adviser is required to communicate to the sub-adviser any changes or
additions to or interpretations of such investment objectives, policies and
restrictions made by the Board of Directors of FAIF. The allocation of portfolio
transactions by the sub-adviser is subject to such policies and supervision as
the Board of Directors or any committee thereof deems appropriate and any
brokerage policy set forth in the then-current Registration Statement of FAIF.
Under the FAIF Sub-Advisory Agreements, the sub-adviser is required, at its own
expense, to provide all office space, personnel and facilities necessary and
incident to the performance of its services under the Agreement, Agreement but
is not required to pay for any other expenses of the adviser, International
Fund, Emerging Markets Growth Fund or FAIF.
STANDARD OF CARE. The Interim Sub-Advisory Agreements provide that
EFM will not be liable for any error of judgment or mistake of law or for any
loss suffered by Pacific-European Growth Fund or Emerging Markets Growth Fund or
their shareholders in connection with the performance by EFM of its duties under
an Interim Sub-Advisory Agreement, except a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its duties under such Agreement.
Under the FAIF Sub-Advisory Agreements, the sub-adviser agrees to
indemnify International Fund, Emerging Markets Fund, FAIF and the adviser with
respect to any loss, liability, judgment, cost or penalty which International
Fund, Emerging Markets Fund, FAIF or the adviser may directly or indirectly
suffer or incur in any way arising out of or in connection with any material
breach of the applicable FAIF Sub-Advisory Agreement by the sub-adviser. The
FAIF Sub-Advisory Agreements provide that the sub- adviser shall not be liable
for any act or omission or for any loss sustained by the International Fund or
the Emerging Markets Growth Fund in connection with the matters to which such
Agreement relates, except a loss resulting from wilful misfeasance, bad faith or
negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations and duties under the Agreement. The sub-adviser is
not entitled to indemnity for any loss liability,
<PAGE>
judgment, cost or penalty resulting from willful misfeasance, bad faith or
negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations and duties, under the FAIF Sub-Advisory Agreements.
<PAGE>
APPENDIX VIII
SHAREHOLDER TRANSACTIONS AND SERVICES
This Appendix compares the shareholder transactions and services of
the Piper Funds and the corresponding FAIF Funds. The following is qualified in
its entirety by the more detailed information included in the prospectuses for
the Piper Funds and the Existing FAIF Funds which are incorporated by reference
in this Combined Proxy Statement/Prospectus and by the preliminary prospectuses
for the Class A and Class B shares and for the Class Y shares of the New FAIF
Funds, which are attached to this Combined Proxy Statement/Prospectus as
Appendix IX and Appendix X, respectively.
PURCHASE, EXCHANGE AND REDEMPTION PROCEDURES
PURCHASES OF PIPER FUND AND FAIF FUND CLASS A SHARES AND PIPER FUND
CLASS B SHARES. Class A shares of both the Piper Funds and the FAIF Funds may be
purchased at a public offering price equal to their net asset value per share
plus a sales charge. Front-end sales charges for the Piper Funds are generally
less than for the FAIF Funds. A comparison of front-end sales charges is set
forth in the following tables.
Sales Charges for Equity Funds*
<TABLE>
<CAPTION>
FAIF Funds Piper Funds
Sales Charge as Sales Charge as
------------------------------ ------------------------------
% of % of Net % of % of Net
Size of Transaction at Offering Price Offering Price Asset Value Offering Price Asset Value
- ------------------------------------- -------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Less than $50,000............................. 4.50% 4.71% 4.00% 4.17%
$50,000 but less than $100,000................ 4.00% 4.17% 4.00% 4.17%
$100,000 but less than $250,000............... 3.50% 3.63% 3.25% 3.36%
$250,000 but less than $500,000............... 2.75% 2.83% 2.50% 2.56%
$500,000 but less than $1,000,000**........... 2.00% 2.04% 0.00% 0.00%
$1,000,000 and over**......................... 0.00% 0.00% 0.00% 0.00%
</TABLE>
- --------------------
* FAIF Small Cap Growth Fund, Mid Cap Growth Fund, Large Cap Growth Fund,
Large Cap Value Fund, International Fund and Emerging Markets Fund;
Piper Small Company Growth Fund, Emerging Growth Fund, Growth Fund, Growth
and Income Fund, Balanced Fund, Pacific-European Growth Fund and Emerging
Markets Growth Fund.
** No initial sales charge applies to purchases of Class A shares of $500,000
or more for the Piper Funds and $1,000,000 or more for the FAIF Funds.
However, for both the Piper Funds and the FAIF Funds, a 1.00% contingent
deferred sales charge will be imposed if those shares are redeemed within
24 months of purchase.
<PAGE>
Sales Charges for Taxable Income Funds
(other than FAIF Adjustable Rate Mortgage Securities Fund)*
<TABLE>
<CAPTION>
FAIF Funds Piper Funds
Sales Charge as Sales Charge as
------------------------------- -------------------------------
% of % of Net % of % of Net
Size of Transaction at Offering Price Offering Price Asset Value Offering Price Asset Value
- ------------------------------------- -------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Less than $50,000............................. 3.75% 3.90% 2.00% 2.04%
$50,000 but less than $100,000................ 3.25% 3.36% 2.00% 2.04%
$100,000 but less than $250,000............... 2.75% 2.83% 1.25% 1.27%
$250,000 but less than $500,000............... 2.00% 2.04% 0.50% 0.50%
$500,000 but less than $1,000,000............. 1.00% 1.01% 0.00% 0.00%
$1,000,000 and over**......................... 0.00% 0.00% 0.00% 0.00%
</TABLE>
- --------------------
* FAIF Intermediate Term Income Fund and Fixed Income Fund; Piper
Intermediate Bond Fund, Government Income Fund and Adjustable Rate Mortgage
Securities Fund.
** No initial sales charge applies to purchases of Class A shares of $500,000
or more for the Piper Funds and $1,000,000 or more for the FAIF Funds.
However, for the FAIF Funds a 1.00% contingent deferred sales charge will
be imposed if those shares are redeemed within 24 months of purchase, and
for the Piper Funds a 0.50% contingent deferred sales charge will be
imposed if those shares are redeemed within 12 months of purchase.
Sales Charges for FAIF Adjustable Rate Mortgage Securities Fund
<TABLE>
<CAPTION>
Sales Charge as Sales Charge as
Size of Transaction at Offering Price % of Offering Price % of Net Asset Value
- ------------------------------------- ------------------- --------------------
<S> <C> <C>
Less than $50,000............................. 2.00% 2.04%
$50,000 but less than $100,000................ 1.50% 1.52%
$100,000 but less than $250,000............... 1.00% 1.01%
$250,000 but less than $500,000............... 0.75% 0.76%
$500,000 but less than $1,000,000............. 0.50% 0.50%
$1,000,000 and over*.......................... 0% 0%
</TABLE>
- --------------------
* No initial sales charge applies to purchases of Class A shares of
$1,000,000 or more. However, a 1.00% contingent deferred sales charge will
be imposed if those shares are redeemed within 24 months of purchase.
Sales Charges for Tax-Exempt Income Funds*
<TABLE>
<CAPTION>
FAIF Funds Piper Funds
Sales Charge as Sales Charge as
------------------------------- ------------------------------
% of % of Net % of % of Net
Size of Transaction at Offering Price Offering Price Asset Value Offering Price Asset Value
- ------------------------------------- -------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Less than $50,000............................. 3.00% 3.09% 2.00% 2.04%
$50,000 but less than $100,000................ 2.50% 2.56% 2.00% 2.04%
$100,000 but less than $250,000............... 2.00% 2.04% 1.25% 1.27%
$250,000 but less than $500,000............... 1.50% 1.52% 0.50% 0.50%
$500,000 but less than $1,000,000............. 1.00% 1.01% 0.00% 0.00%
$1,000,000 and over**......................... 0.00% 0.00% 0.00% 0.00%
</TABLE>
- --------------------
<PAGE>
* FAIF Minnesota Tax Free Fund and Tax Free Fund; Piper Minnesota Tax-Exempt
Fund and National Tax-Exempt Fund.
** No initial sales charge applies to purchases of Class A shares of $500,000
or more for the Piper Funds and $1,000,000 or more for the FAIF Funds.
However, for the FAIF Funds a 1.00% contingent deferred sales charge will
be imposed if those shares are redeemed within 24 months of purchase, and
for the Piper Funds a 0.50% contingent deferred sales charge will be
imposed if those shares are redeemed within 12 months of purchase.
Class B shares of the Piper Funds may be purchased at net asset
value without an initial sales charge. Investors generally are subject to a
contingent deferred sales charge ("CDSC") if they sell their shares during the
calendar year in which they were purchased or in any of the following five full
calendar years. Such CDSC is based on the lesser of the net asset value of such
shares at the time of purchase or at the time of redemption, according to the
following schedule :
If Redeemed During CDSC
- ------------------ ----
Calendar year of purchase.................................... 4%
First calendar year after purchase........................... 4%
Second calendar year after purchase.......................... 3%
Third calendar year after purchase........................... 2%
Fourth calendar year after purchase.......................... 2%
Fifth calendar year after purchase........................... 1%
The CDSC does not apply to shares acquired by reinvesting dividend or capital
gain distributions. Class B shares automatically convert to Class A shares on
January 1 of the sixth calendar year following the year in which shares are
purchased.
The minimum initial investment for Piper Funds Class A and Class B
shares generally is $250, with no minimum for subsequent purchases. The minimum
initial investment for FAIF Funds Class A shares generally is $1,000, with a
minimum of $100 for subsequent purchases.
Class A and Class B Piper Fund shares may be purchased directly from
the Piper Funds' distributor or through a broker-dealer who has established a
dealer agreement with the distributor. Such purchases may be made by contacting
an investment executive of the Piper Funds' distributor or such other authorized
broker-dealer. Class A FAIF Fund shares may be purchased through a financial
institution which has a sales agreement with the Funds' distributor, by mail
directly through the Funds' transfer agent, or by wire.
Both the FAIF Funds and the Piper Funds have automatic investment
programs which allow shareholders to make regular purchases of shares through
automatic deduction from their bank accounts or a related money market fund.
PURCHASES AT REDUCED OR NO SALES CHARGE. For the Class A shares of
the Piper Funds and the FAIF Funds, various persons, entities and groups may
qualify for reduced sales charges, or for purchases at net asset value without a
sales charge. Ways in which the sales charge may be reduced or waived are set
forth in the prospectuses for the Existing FAIF Funds and the Piper Funds
incorporated herein by reference and in the preliminary prospectus for the Class
A and Class B shares of the New FAIF Funds attached as Appendix IX to this
combined Proxy Statement/Prospectus.
PURCHASES OF PIPER FUND AND FAIF FUND CLASS Y SHARES. The Class Y
shares of the Piper Funds and the FAIF Funds are offered at net asset value
without any initial or contingent deferred sales charges. Class Y shares of the
Piper Funds are available to investors making an initial investment of $1
million or more. Class Y shares of the FAIF Funds are offered through banks and
certain other institutions for the investment of their own funds and funds for
which they act in a fiduciary, agency or
<PAGE>
custodial capacity. Such shares may be purchased by wire, or the Fund may accept
securities in exchange for Fund shares.
EXCHANGES. Shares of a Piper Fund may be exchanged for shares of the
same class of the other Piper Funds or of other open-end funds in the Piper
family of funds. Similarly, shares of a FAIF Fund may be exchanged for shares of
the same class of the other FAIF Funds or of other funds in the First American
family.
REDEMPTIONS. An investor may sell shares of the Piper Funds by
calling his or her broker. Class A shares of the FAIF Funds may be redeemed by
written request or by telephone. In addition, Class A and Class B Piper Fund
shareholders with an account balance of at least $5,000, Class Y Piper Fund
shareholders maintaining a minimum account balance of $1 million, and Class A
FAIF Fund shareholders with an account balance of at least $5,000 may elect to
participate in a systematic withdrawal program under which shares are redeemed
to provide for periodic withdrawal payments in an amount directed by the
shareholder. Payments for redeemed Class Y shares of the FAIF Funds can be made
only by wire transfer.
DIVIDENDS AND DISTRIBUTIONS.
There are differences in the dividend policies of the Piper Funds
and the FAIF Funds. For Piper Minnesota Tax-Exempt Fund, National Tax-Exempt
Fund, Intermediate Bond Fund, Government Income Fund and Adjustable Rate
Mortgage Securities Fund, net income dividends are declared daily and paid
monthly, whereas for the corresponding FAIF Funds they are declared and paid
monthly. For Piper Growth and Income Fund and Balanced Fund, net income
dividends are declared and paid quarterly, whereas they are declared and paid
monthly for the corresponding FAIF Funds. For Piper Small Company Growth Fund,
Emerging Growth Fund and Growth Fund, net income dividends are declared and paid
annually, whereas they are declared and paid monthly for the FAIF Large Cap
Growth Fund and quarterly for the FAIF Small Cap Growth Fund and Mid Cap Growth
Fund. For Piper Pacific-European Growth Fund and Emerging Markets Growth Fund,
and for the corresponding FAIF Funds, net investment income dividends are
declared and paid annually. For all Piper Funds and FAIF Funds, distributions of
any net realized long-term capital gains are made at least once annually.
<PAGE>
APPENDIX IX
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION AND AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
, 1998
CLASS A AND CLASS B SHARES
Mid Cap
Growth Fund
Emerging
Markets Fund
Adjustable Rate
Mortgage Securities Fund
Tax Free Fund
Minnesota
Tax Free Fund
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
Subject to Completion -- April 15, 1998
[LOGO]
FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING (R)
<PAGE>
TABLE OF CONTENTS
Summary 2
...............................................
Fees and Expenses 5
...............................................
The Funds 8
...............................................
Investment Objectives and Policies 8
...............................................
Management 15
...............................................
Distributor 20
...............................................
Investing in the Funds 21
...............................................
Redeeming Shares 29
...............................................
Determining the Price of Shares 31
...............................................
Income Taxes 32
...............................................
Tax-Exempt vs. Taxable Income 35
...............................................
Fund Shares 35
...............................................
Calculation of Performance Data 36
...............................................
Special Investment Methods 37
...............................................
Information Concerning Compensation Paid
to U.S. Bank National Association, U.S. Bank
Trust National Association and Other
Affiliates 49
...............................................
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
CLASS A AND CLASS B
SHARES PROSPECTUS
The shares described in this Prospectus represent interests in First
American Investment Funds, Inc., which consists of mutual funds with several
different investment portfolios and objectives. This Prospectus relates to
the Class A Shares of the following funds (the "Funds"):
* MID CAP GROWTH FUND
* EMERGING MARKETS FUND
* ADJUSTABLE RATE MORTGAGE SECURITIES FUND
* TAX FREE FUND
* MINNESOTA TAX FREE FUND
This Prospectus also relates to the Class B Shares of Mid Cap Growth Fund
and Emerging Markets Fund.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING U.S. BANK NATIONAL ASSOCIATION AND ANY OF
ITS AFFILIATES, NOR ARE THEY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. AN INVESTMENT IN
THE FUNDS INVOLVES INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL,
DUE TO FLUCTUATIONS IN EACH FUND'S NET ASSET VALUE.
This Prospectus concisely sets forth information about the Funds that a
prospective investor should know before investing. It should be read and
retained for future reference.
A Statement of Additional Information dated _______________, 1998 for the
Funds has been filed with the Securities and Exchange Commission ("SEC") and
is incorporated in its entirety by reference in this Prospectus. To obtain
copies of the Statement of Additional Information at no charge, or to obtain
other information or make inquiries about the Funds, call (800) 637-2548 or
write SEI Investments Distribution Co., Oaks, Pennsylvania 19456. The SEC
maintains a World Wide Web site that contains reports and information
regarding issuers that file electronically with the SEC. The address of such
site is "http://www.sec.gov."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE- SENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus is _________, 1998.
<PAGE>
SUMMARY
First American Investment Funds, Inc. ("FAIF") is an open-end investment
company which offers shares in several different mutual funds. This
Prospectus provides information with respect to the Class A Shares of the
following funds (the "Funds"). It also relates to the Class B Shares of Mid
Cap Growth Fund and Emerging Markets Fund.
MID CAP GROWTH FUND has an objective of growth of capital. Under normal
market conditions, the Fund invests at least 65% of its total assets in
equity securities of mid-capitalization companies (those with market
capitalizations from $1 billion to $5 billion at the time of purchase) that,
in the Fund's adviser's opinion, exhibit outstanding potential for superior
growth based on a combination of factors such as above average growth in
revenue and earnings, strong management and sound and improving financial
condition.
EMERGING MARKETS FUND has an objective of long-term growth of capital. Under
normal market conditions, the Fund invests at least 65% of its total assets
in an internationally diversified portfolio of equity securities which trade
in emerging markets.
ADJUSTABLE RATE MORTGAGE SECURITIES FUND has an objective of providing
current income while attempting to provide a high degree of principal
stability. Under normal market conditions, the Fund will invest at least 65%
of its total assets in mortgage-related securities having adjustable
interest rates which reset at periodic intervals.
TAX FREE FUND has an objective of providing maximum current income which is
exempt from federal taxation to the extent consistent with prudent
investment risk. Under normal market conditions, the Fund will invest at
least 80% of its net assets in municipal obligations, the interest on which
is, exempt from federal income tax. No more than 20% of the securities owned
by this Fund will generate income that is subject to the federal alternative
minimum tax. Under normal market conditions, the weighted average maturity
of the securities held by this Fund will range from 15 to 25 years.
MINNESOTA TAX FREE FUND has an objective of providing maximum current income
which is exempt from both federal income tax and Minnesota state income tax
to the extent consistent with prudent investment risk. Under normal market
conditions, this Fund invests at least 80% of its net assets in municipal
obligations, the interest on which is exempt from federal and Minnesota
income tax. No more than 20% of the securities owned by this Fund will
generate income that is subject to the federal or the Minnesota alternative
minimum tax. Under normal market conditions, the weighted average maturity
of the securities held by this Fund will range from 15 to 25 years.
INVESTMENT ADVISER. U.S. Bank National Association (the "Adviser" or "U.S.
Bank") serves as investment adviser to each of the Funds through its First
American Asset Management group. Marvin & Palmer Associates, Inc. (the
"Sub-Adviser") serves as sub-adviser to Emerging Markets Fund. See
"Management."
DISTRIBUTOR; ADMINISTRATOR. SEI Investments Distribution Co. (the
"Distributor") serves as the distributor of the Funds' shares. SEI
Investments Management Corporation (the "Administrator") serves as the
administrator of the Funds. See "Management" and "Distributor."
OFFERING PRICES. Class A Shares of the Funds are sold at net asset value
plus a maximum sales charge of 4.50%, in the case of Mid Cap Growth Fund and
Emerging Markets Fund; 3.00%, in the case of Tax Free Fund and Minnesota Tax
Free Fund; and 2.00% in the case of Adjustable Rate Mortgage Securities
Fund. These sales charges are reduced on purchases of $50,000 or more.
Purchases of $1 million or more of Class A Shares are not subject to an
initial sales charge, but the Distributor and certain securities firms,
financial institutions (including, without limitation, banks) and other
industry professionals may receive a commission of up to 1.00% on such
sales.
<PAGE>
Redemptions of Class A Shares within 24 months following such purchases will
be subject to a contingent deferred sales charge of up to 1.00%. Class A
Shares of the Funds otherwise are redeemed at net asset value without any
additional charge. Class A Shares of each Fund are subject to a shareholder
servicing fee computed at an annual rate of 0.25% of the average daily net
assets of that class. See "Investing in the Funds -- Class A Share Price and
Sales Charge."
Class B Shares of Mid Cap Growth Fund and Emerging Markets Fund are sold at
net asset value without an initial sales charge. Class B Shares of such
Funds are subject to Rule 12b-1 distribution and shareholder servicing fees
computed at an annual rate totaling 1.00% of the average daily net assets of
that class. If Class B Shares are redeemed within six years after purchase,
they are subject to a contingent deferred sales charge declining from 5.00%
in the first year to zero after six years. Class B Shares automatically
convert into Class A Shares approximately eight years after purchase. See
"Investing in the Funds -- Alternative Sales Charge Options."
MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS. The minimum initial investment
is $1,000 ($250 for IRAs) for each Fund. Subsequent investments must be
$100 or more. Regular investment in the Funds is simplified through the
Systematic Investment Program through which monthly purchases of $100 or
more are possible. See "Investing in the Funds -- Minimum Investment
Required" and "-- Systematic Investment Program."
EXCHANGES. Shares of any Fund may be exchanged for the same class of shares
of other funds in the First American family of funds at the shares'
respective net asset values with no additional charge. See "Investing in the
Funds -- Exchange Privilege."
REDEMPTIONS. Shares of each Fund may be redeemed at any time at their net
asset value next determined after receipt of a redemption request by the
Funds' transfer agent, less any applicable contingent deferred sales
charge. Each Fund may, upon 60 days written notice, redeem an account if
the account's net asset value falls below $500. See "Investing in the
Funds" and "Redeeming Shares."
RISKS TO CONSIDER. Mid Cap Growth Fund and Emerging Markets Fund are subject
to the risk of generally adverse equity markets. Investors also should
recognize that market prices of equity securities generally, and of
particular companies' equity securities, frequently are subject to greater
volatility than prices of fixed income securities. Because Mid Cap Growth
Fund and Emerging Markets Fund are actively managed, their performance will
reflect in part the ability of the Adviser or Sub-Adviser to select
securities which are suited to achieving their investment objectives. Due to
their active management, these Funds could underperform other mutual funds
with similar investment objectives or the market generally. In addition, (i)
Mid Cap Growth Fund and Emerging Markets Fund are subject to risks
associated with investing in mid- and small-capitalization companies; (ii)
Emerging Markets Fund is subject to the risks associated with investing in
foreign securities and to currency risk; (iii) Mid Cap Growth Fund may
invest specified portions of its assets in securities of foreign issuers
which are listed on a United States stock exchange or represented by
American Depositary Receipts; and (iv) certain Funds may invest (but not for
speculative purposes) in stock index futures contracts, options on stock
indices and options on stock index futures.
Adjustable Rate Mortgage Securities Fund, Tax Free Fund and Minnesota Tax
Free Fund are subject to (i) interest rate risk (the risk that increases in
market interest rates will cause declines in the value of debt securities or
mortgage-related securities held by a Fund); (ii) credit risk (the risk that
the issuers of debt securities or mortgage-related 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). Adjustable Rate Mortgage Securities Fund endeavors to
limit
<PAGE>
interest rate risk and prepayment risk by investing primarily in
mortgage-related securities which have adjustable interest rates. Adjustable
Rate Mortgage Securities Fund is also subject to extension risk. That is,
rising interest rates could cause homeowners to prepay their mortgages more
slowly than expected, and 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.
In addition, the value of municipal obligations held by Tax Free Fund and
Minnesota Tax Free Fund may be adversely affected by local political and
economic conditions and developments in the states and political
subdivisions which issue the obligations. Investors should note in this
regard that Minnesota Tax Free Fund invests principally in municipal
obligations of issuers located only in Minnesota. Adjustable Rate Mortgage
Securities Fund, Tax Free Fund and Minnesota Tax Free Fund also may, in
order to attempt to reduce risk, invest in exchange traded interest rate
futures contracts, interest rate index futures contracts, traded put and
call options on interest rate futures contracts and on interest rate
indices. See "Investment Objectives and Policies -- Risks to Consider" and
"Special Investment Methods."
SHAREHOLDER INQUIRIES. Any questions or communications regarding the Funds
or a shareholder account should be directed to the Distributor by calling
(800) 637-2548, or to the financial institution which holds shares on an
investor's behalf.
<PAGE>
FEES AND EXPENSES
-----------------------------------------------------------------------------
CLASS A SHARE FEES AND EXPENSES
<TABLE>
<CAPTION>
ADJUSTABLE RATE
MID CAP EMERGING MORTGAGE MINNESOTA
GROWTH MARKETS SECURITIES TAX FREE TAX FREE
FUND FUND FUND FUND FUND
=============================================================================================================
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum sales load imposed on purchases
(as a percentage of offering price)(1) 4.50% 4.50% 2.00% 3.00% 3.00%
Maximum sales load imposed on reinvested
dividends None None None None None
Deferred sales load None None None None None
Redemption fees None None None None None
Exchange fees None None None None None
=============================================================================================================
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees (after voluntary
fee waivers)(2) 0.70% 0.70% 0.40% 0.63% 0.52%
Rule 12b-1 fees
(after voluntary fee waivers)(2) 0.25%(3) 0.25%(3) 0.15%(3) 0.25%(3) 0.25%(3)
Other expenses 0.17% 0.75% 0.25% 0.22% 0.18%
Total fund operating expenses
(after voluntary fee waivers)(2) 1.12% 1.70% 0.80% 1.10% 0.95%
=============================================================================================================
EXAMPLE(3)
You would pay the following expenses on a $1,000 investment, assuming (i) the
maximum applicable sales charge for all funds; (ii) a 5% annual return; and
(iii) redemption at the end of each time period:
1 year $ 56 $ 62 $ 28 $ 41 $ 39
3 years $ 79 $ 96 $ 45 $ 64 $ 59
</TABLE>
(1) THE RULES OF THE SECURITIES AND EXCHANGE COMMISSION REQUIRE THAT THE MAXIMUM
SALES CHARGE BE REFLECTED IN THE ABOVE TABLE. HOWEVER, CERTAIN INVESTORS MAY
QUALIFY FOR REDUCED SALES CHARGES. PURCHASES OF $1 MILLION OR MORE OF CLASS
A SHARES ARE NOT SUBJECT TO AN INITIAL SALES CHARGE, BUT THE DISTRIBUTOR AND
CERTAIN SECURITIES FIRMS, FINANCIAL INSTITUTIONS (INCLUDING, WITHOUT
LIMITATION, BANKS) AND OTHER INDUSTRY PROFESSIONALS MAY RECEIVE A COMMISSION
OF UP TO 1.00% ON SUCH SALES. IN ADDITION, A CONTINGENT DEFERRED SALES
CHARGE OF UP TO 1.00% MAY BE IMPOSED ON SUCH PURCHASES IN THE EVENT OF
REDEMPTION WITHIN 24 MONTHS FOLLOWING THE DATE OF THE APPLICABLE PURCHASE.
SEE "INVESTING IN THE FUNDS -- CLASS A SHARE PRICE AND SALES CHARGE."
(2) THE ADVISER INTENDS TO WAIVE A PORTION OF ITS FEES ON A VOLUNTARY BASIS, AND
THE AMOUNTS SHOWN REFLECT THESE WAIVERS AS OF THE DATE OF THIS PROSPECTUS.
THE ADVISER INTENDS TO MAINTAIN SUCH WAIVERS IN EFFECT FOR THE CURRENT
FISCAL YEAR BUT RESERVES THE RIGHT TO DISCONTINUE SUCH WAIVERS AT ANY TIME
IN ITS SOLE DISCRETION, NOTWITHSTANDING THE FOREGOING, THE ADVISER WILL
MAINTAIN SUCH WAIVERS FOR THE FUNDS AT LEAST THROUGH JULY 31, 2000 SO THAT
THE TOTAL FUND OPERATING EXPENSES DO NOT EXCEED 1.23% FOR MID CAP GROWTH
FUND, 2.00% FOR EMERGING MARKETS FUND, 0.81% FOR ADJUSTABLE RATE MORTGAGE
SECURITIES FUND, 1.11% FOR TAX FREE FUND, AND 0.95% FOR MINNESOTA TAX FREE
FUND. ABSENT ANY FEE WAIVERS, INVESTMENT ADVISORY FEES FOR EACH FUND AS AN
ANNUALIZED PERCENTAGE OF AVERAGE DAILY NET ASSETS WOULD BE 0.70%, EXCEPT, IN
THE CASE OF EMERGING MARKETS FUND, 1.25%; RULE 12b-1 FEES CALCULATED ON SUCH
BASIS WOULD BE 0.25%; AND TOTAL FUND OPERATING EXPENSES CALCULATED ON SUCH
BASIS WOULD BE 1.12% FOR MID CAP GROWTH FUND, 2.25% FOR EMERGING MARKETS
FUND, 1.20% FOR ADJUSTABLE RATE MORTGAGE SECURITIES FUND, 1.17% FOR TAX FREE
FUND AND 1.13% FOR MINNESOTA TAX FREE FUND. "OTHER EXPENSES" INCLUDES AN
ADMINISTRATION FEE.
(3) ALL OF THIS AMOUNT IS DESIGNATED AS A SHAREHOLDER SERVICING FEE AND NONE AS
A DISTRIBUTION FEE.
(4) ABSENT THE FEE WAIVERS REFERRED TO IN (2) ABOVE, THE DOLLAR AMOUNTS FOR THE
1 AND 3-YEAR PERIODS WOULD BE AS FOLLOWS: MID CAP GROWTH FUND, $56 AND $79;
EMERGING MARKETS FUND, $67 AND $112; ADJUSTABLE RATE MORTGAGE SECURITIES
FUND, $32 AND $57; TAX FREE FUND, $42 AND $66; AND MINNESOTA TAX FREE FUND,
$41 AND $65.
<PAGE>
FEES AND EXPENSES
- --------------------------------------------------------------------------------
CLASS B SHARE FEES AND EXPENSES
<TABLE>
<CAPTION>
MID CAP EMERGING
GROWTH MARKETS
FUND FUND
=======================================================================================
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases (as a
percentage of offering price)(1) None None
Maximum sales load imposed on reinvested dividends None None
Deferred sales load 5.00% 5.00%
Redemption fees None None
Exchange fees None None
=======================================================================================
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees (after voluntary fee waivers)(1) 0.70% 0.70%
Rule 12b-1 fees(2) 1.00% 1.00%
Other expenses 0.17% 0.75%
Total fund operating expenses
(after voluntary fee waivers)(1) 1.87% 2.45%
=======================================================================================
EXAMPLE(3)
You would pay the following expenses on a $1,000 investment, assuming (i) the
maximum applicable sales charge for all funds; (ii) a 5% annual return; and
(iii) redemption at the end of each time period:
1 year $ 69 $ 75
3 years $ 99 $ 116
=======================================================================================
ASSUMING NO REDEMPTION(4)
You would pay the following exepnses on the same investment, assuming no
redemption:
1 year $ 19 $ 25
3 years $ 59 $ 76
=======================================================================================
</TABLE>
(1) THE ADVISER INTENDS TO WAIVE A PORTION OF ITS FEES ON A VOLUNTARY BASIS, AND
THE AMOUNTS SHOWN REFLECT THESE WAIVERS AS OF THE DATE OF THIS PROSPECTUS.
THE ADVISER INTENDS TO MAINTAIN SUCH WAIVERS IN EFFECT FOR THE CURRENT
FISCAL YEAR BUT RESERVES THE RIGHT TO DISCONTINUE SUCH WAIVERS AT ANY TIME
IN ITS SOLE DISCRETION. ABSENT ANY FEE WAIVERS, INVESTMENT ADVISORY FEES FOR
MID CAP GROWTH FUND AS AN ANNUALIZED PERCENTAGE OF AVERAGE DAILY NET ASSETS
WOULD BE 0.70%, AND FOR EMERGING MARKETS FUND, 1.25%; AND TOTAL FUND
OPERATING EXPENSE CALCULATED ON SUCH BASIS WOULD BE 1.87% FOR MID CAP GROWTH
FUND AND 3.00% FOR EMERGING MARKETS FUND. "OTHER EXPENSES" INCLUDES AN
ADMINISTRATION FEE.
(2) OF THIS AMOUNT, 0.25% IS DESIGNATED AS A SHAREHOLDER SERVICING FEE AND 0.75%
AS A DISTRIBUTION FEE.
(3) ABSENT THE FEE WAIVERS REFERRED TO IN (1) ABOVE, THE DOLLAR AMOUNTS FOR THE
1 AND 3-YEAR PERIODS WOULD BE AS FOLLOWS: MID CAP GROWTH FUND, $69 AND $99;
AND EMERGING MARKETS FUND, $80 AND $133.
(4) ABSENT THE FEE WAIVER REFERRED TO IN (1) ABOVE (ASSUMING NO REDEMPTION), THE
DOLLAR AMOUNTS FOR THE 1 AND 3-YEAR PERIODS WOULD BE AS FOLLOWS: MID CAP
GROWTH FUND, $19 AND $59; AND EMERGING MARKETS FUND, $30 AND $93.
<PAGE>
---------------------------------------------------------------------------
INFORMATION CONCERNING FEES AND EXPENSES
The purpose of the preceding tables is to assist the investor in
understanding the various costs and expenses that an investor in a Fund may
bear directly or indirectly. THE EXAMPLES CONTAINED IN THE TABLES SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
<PAGE>
THE FUNDS
FAIF is an open-end management investment company which offers shares in
several different mutual funds (collectively, the "FAIF Funds"), each of
which evidences an interest in a separate and distinct investment portfolio.
Shareholders may purchase shares in each FAIF Fund through several separate
classes which provide for variations in distribution costs, shareholder
servicing fees, voting rights and dividends. Except for these differences
among classes, each share of each FAIF Fund represents an undivided
proportionate interest in that Fund. FAIF is incorporated under the laws of
the State of Maryland, and its principal offices are located at Oaks,
Pennsylvania 19456.
This Prospectus relates to the Class A Shares of the Funds named on the
cover hereof. In addition, this Prospectus also relates to the Class B
Shares of Mid Cap Growth Fund and Emerging Markets Fund. Information
regarding the Class Y Shares of these Funds and regarding the Class A, Class
B and Class Y Shares of the other FAIF Funds is contained in separate
prospectuses that may be obtained from FAIF's Distributor, SEI Investments
Distribution Co., Oaks, Pennsylvania 19456, or by calling (800) 637-2548.
The Board of Directors of FAIF may authorize additional series or classes of
common stock in the future.
INVESTMENT OBJECTIVES
AND POLICIES
This section describes the investment objectives and policies of the Funds.
There is no assurance that any of these objectives will be achieved. The
Funds' investment objectives are not fundamental and therefore may be
changed without a vote of shareholders. Such changes could result in a Fund
having investment objectives different from those which shareholders
considered appropriate at the time of their investment in a Fund.
Shareholders will receive written notification at least 30 days prior to any
change in a Fund's investment objectives. Each of the Funds (except
Minnesota Tax Free Fund) is a diversified investment company, as defined in
the Investment Company Act of 1940 (the "1940 Act"). Minnesota Tax Free Fund
is a nondiversified investment company under the 1940 Act.
If a percentage limitation on investments by a Fund stated below or in the
Statement of Additional Information is adhered to at the time of an
investment, a later increase or decrease in percentage resulting from
changes in asset values will not be deemed to violate the limitation except
in the case of the limitation on illiquid investments. Similarly, if a Fund
is required or permitted to invest a stated percentage of its assets in
companies with no more or no less than a stated market capitalization,
deviations from the stated percentages which result from changes in
companies' market capitalizations after the Fund purchases their shares will
not be deemed to violate the limitation. A Fund which is limited to
investing in securities with specified ratings is not required to sell a
security if its rating is reduced or discontinued after purchase, but the
Fund may consider doing so. However, in no event will more than 5% of any
Fund's net assets be invested in non-investment grade securities.
Descriptions of the rating categories of Standard & Poor's Rating Services,
a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's") and
Moody's Investors Service, Inc. ("Moody's") are contained in the Statement
of Additional Information.
When the term "equity securities" is used in this Prospectus, it refers to
common stock and securities which are convertible into or exchangeable for,
or which carry warrants or other rights to acquire, common stock.
This section also contains information concerning certain investment risks
borne by Fund shareholders under the heading "-- Risks to Consider." Further
information concerning the securities in which the Funds may invest and
related matters is set forth under "Special Investment Methods."
<PAGE>
---------------------------------------------------------------------------
MID CAP GROWTH FUND
OBJECTIVE. Mid Cap Growth Fund has an objective of growth of capital.
INVESTMENT POLICIES. Under normal market conditions, Mid Cap Growth Fund
invests at least 65% of its total assets in equity securities of
mid-capitalization companies that, in the Adviser's opinion, exhibit
outstanding potential for superior growth based on a combination of factors
such as above average growth in revenue and earnings, strong management and
sound and improving financial condition. For these purposes,
mid-capitalization growth companies are deemed those with market
capitalizations from $1 billion to $5 billion at the time of purchase.
The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of less than $1
billion or more than $5 billion and in fixed income securities of the kinds
described under "Special Investment Methods -- Fixed Income
Securities."
Subject to the limitation stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts.
For information about these kinds of investments and certain associated
risks, see "Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund and write call options
on stock indices related to such equity securities; (iv) purchase securities
on a when-issued or delayed delivery basis; and (v) engage in the lending of
portfolio securities. For information about these investment methods,
restrictions on their use, and certain associated risks, see the related
headings under "Special Investment Methods."
For temporary defensive purposes, the Fund may without limitation hold cash
or invest in cash items of the kinds described under "Special Investment
Methods -- Cash Items." The Fund also may invest not more than 35% of its
total assets in cash and cash items in order to utilize assets awaiting
normal investment.
---------------------------------------------------------------------------
EMERGING MARKETS FUND
OBJECTIVE. Emerging Markets Fund has an objective of long-term growth of
capital.
INVESTMENT POLICIES. Under normal market conditions, Emerging Markets Fund
invests at least 65% of its total assets in an internationally diversified
portfolio of equity securities which trade in emerging markets. A country
will be considered to have an "emerging market" if it has 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 those that have an emerging stock market (as defined by the
International Finance Corporation), those with low- to middle income
economies (according to the World Bank), and those listed in World Bank
publications as "developing."
The securities in which the Fund invests include common and preferred stock,
securities (bonds and preferred stock) convertible into common stock,
warrants and securities representing underlying international securities
such as American Depositary Receipts and European Depositary Receipts. The
Fund may also hold securities of other investment companies (which
investments are also subject to the advisory fee) and depositary or
custodial receipts representing beneficial interests in any of the foregoing
securities. Normally, the Fund will invest at least 65% of its total assets
in securities traded in at least six foreign countries although it may
invest all of its assets in a single country. At the present time, the Fund
has no intention of investing all of its assets in a single country.
In investing the Fund's assets, the Sub-Adviser expects to place primary
emphasis on country selection, followed by selection of industries or
<PAGE>
sectors within or across countries and by selection of individual stocks
corresponding to the industries or sectors selected.
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 50% of the
equity securities owned by the Fund and write call options on stock indices
related to such equity securities; (iv) purchase securities on a when-issued
or delayed delivery basis; (v) engage in the lending of portfolio
securities; (vi) engage in foreign currency transactions; (vii) in order to
attempt to reduce risk, purchase put and call options on foreign currencies;
(viii) write covered call options on foreign currencies owned by the Fund;
and (ix) enter into contracts for the future purchase or delivery of
securities, foreign currencies, and indices, purchase or sell options on any
such futures contracts and engage in related closing purchase transactions.
For information about these investment methods, restrictions on their use,
and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes, the Fund may without limitation hold cash
or invest in cash items of the kinds described under "Special Investment
Methods -- Cash Items." The Fund also may invest not more than 35% of its
total assets in cash and cash items in order to utilize assets awaiting
normal investment.
---------------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
OBJECTIVE. Adjustable Rate Mortgage Securities Fund has an objective of
providing current income while attempting to provide a high degree of
principal stability.
INVESTMENT POLICIES. Under normal market conditions, Adjustable Rate
Mortgage Securities Fund will invest at least 65% of its total assets in
mortgage-related securities having adjustable interest rates which reset at
periodic intervals ("adjustable rate mortgage securities" or "ARMS"). ARM
securities have interest rates which reset periodically in response to
changes in the current interest rate environment. ARM securities include
pass-through securities and floating rate collateralized mortgage
obligations.
The Fund may invest up to 35% of its total assets in mortgage-related
securities other than ARMS, securities issued or guaranteed as to principal
or interest by the U.S. government or its agencies or instrumentalities
private pass-through securities, asset backed securities and fixed income
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under
"Special Investment Methods."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, invest in exchange traded interest rate
futures and interest rate index futures contracts, (iii) in order to attempt
to reduce risk, invest in exchange traded put and call options on interest
rate futures contracts and on interest rate indices; (iv) purchase
securities on a when-issued or delayed delivery basis; (v) purchase interest
rate caps and floors; (vi) in order to attempt to reduce risk, invest in
Eurodollar instruments; and (vii) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under
"Special Investment Methods."
At least 65% of the Fund's total assets must be U.S. government securities,
securities with a minimum rating of A by Standard & Poor's and by Moody's or
which have been assigned an equivalent rating by another nationally
recognized statistical rating organization, or unrated securities of
comparable quality as determined by the Adviser. The Fund may not invest in
securities rated lower than A by Standard & Poor's or Moody's. If a
security's rating falls below an A, the Fund will sell the security as
promptly as possible.
<PAGE>
For temporary defensive purposes, the Fund may without limitation hold cash
or invest in cash items of the kinds described under "Special Investment
Methods -- Cash Items." The Fund also may invest not more than 35% of its
total assets in cash and cash items in order to utilize assets awaiting
normal investment.
---------------------------------------------------------------------------
TAX FREE FUND
OBJECTIVE. Tax Free Fund has an objective of providing maximum current
income which is exempt from federal income tax to the extent consistent with
prudent investment risk.
INVESTMENT POLICIES. Under normal market conditions, Tax Free Fund invests
at least 80% of its net assets in municipal bonds and other municipal
obligations, the interest on which is exempt from federal income tax. No
more than 20% of the securities owned by the Fund will generate income that
is subject to federal alternative minimum tax. Municipal obligations
generating income subject to taxation under the federal alternative minimum
tax rules will not be counted as tax exempt obligations for purposes of the
80% test. See "Income Taxes." The types of municipal bonds and other
municipal obligations in which the Fund may invest are described under
"Special Investment Methods -- Municipal Bonds and Other Municipal
Obligations."
Under normal market conditions, the weighted average maturity of the
securities held by Tax Free Fund will range from 15 to 25 years.
Tax Free Fund may purchase (i) municipal bonds which are rated no lower than
BBB by Standard & Poor's and Baa by Moody's, (ii) state and municipal notes
which are rated SP-1 by Standard & Poor's or MIG-1/VMIG-1 by Moody's, and
(iii) commercial paper which is rated A-1 by Standard & Poor's or Prime-1 by
Moody's, or which have been assigned an equivalent rating by another
nationally recognized statistical rating organization or which are of
comparable quality in the judgment of the Adviser.
While the assets of the Fund ordinarily will be invested in municipal
obligations, on occasion the Fund may temporarily hold short-term
securities, other than municipal obligations, the income from which is
taxable. Temporary taxable investments would be held solely for the purpose
of managing exceptional in-flows and out-flows of cash or for temporary
defensive purposes to preserve existing portfolio values. Under normal
circumstances, the Fund may not invest more than 20% of its assets in
investments other than municipal obligations. However, when a temporary
defensive position to protect capital is deemed advisable and practicable,
the Fund may have more than 20% of its assets in temporary taxable
investments or cash. The types of investments which are permitted for these
purposes are described under "Special Investment Methods -- Temporary
Taxable Investments."
The Fund also may temporarily invest in shares of investment companies which
invest primarily in short-term municipal obligations with maturities not
exceeding 13 months including, but not limited to, tax free money market
funds advised by the Adviser. Investments of these types are also subject to
the advisory fee. Income from these investments is normally exempt from
federal income tax. Where the income from these investments is exempt from
federal income tax, the investments will be counted as tax exempt
obligations for purposes of the 80% test described above.
The Fund also may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, invest in exchange traded interest rate futures and
interest rate index futures contracts; (iii) in order to attempt to reduce
risk, invest in exchange traded put and call options on interest rate
futures contracts and on interest rate indices; (iv) purchase securities on
a when-issued or delayed delivery basis; and (v) engage in the lending of
portfolio securities. In addition, the Fund may invest up to 10% of its
total assets in inverse floating rate municipal obligations. For information
about these investment methods, restrictions on their use, and certain
associated risks, see the related headings under "Special Investment
Methods."
<PAGE>
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MINNESOTA TAX FREE FUND
OBJECTIVE. Minnesota Tax Free Fund has an objective of providing maximum
current income which is exempt from both federal income tax and Minnesota
state income tax to the extent consistent with prudent investment risk.
INVESTMENT POLICIES. Under normal market conditions, Minnesota Tax Free Fund
invests at least 80% of its net assets in municipal bonds and other
municipal obligations of the State of Minnesota, the interest on which is
exempt from federal income tax and the Minnesota state income tax. No more
than 20% of the securities owned by this Fund will generate income that is
an item of tax preference for the purpose of the federal alternative minimum
tax and for the purpose of the Minnesota alternative minimum tax. Municipal
obligations generating income subject to taxation under the federal
alternative minimum tax rules or under the Minnesota alternative minimum tax
rules, will not be counted as tax exempt obligations for purposes of the 80%
test. See "Income Taxes." The types of municipal bonds and other municipal
obligations in which the Fund may invest are described under "Special
Investment Methods -- Municipal Bonds and Other Municipal Obligations."
Under normal market conditions, the weighted average maturity of the
securities held by the Fund will range from 15 to 25 years.
Minnesota Tax Free Fund may purchase (i) municipal bonds which are rated no
lower than BBB by Standard & Poor's and Baa by Moody's, (ii) state and
municipal notes which are rated SP-1 by Standard & Poor's or MIG-1/VMIG-1 by
Moody's, and (iii) commercial paper which is rated A-1 by Standard and
Poor's or Prime-1 by Moody's, or which have been assigned an equivalent
rating by another nationally recognized statistical rating organization or
which are of comparable quality in the judgment of the Adviser.
While the assets of the Fund ordinarily will be invested in municipal
obligations, on occasion the Fund may temporarily hold short-term
securities, other than municipal obligations, the income from which is
taxable. Temporary taxable investments would be held solely for the purpose
of managing exceptional in-flows and out-flows of cash or for temporary
defensive purposes to preserve existing portfolio values. Under normal
circumstances, the Fund may not invest more than 20% of its assets in
investments other than municipal obligations. However, when a temporary
defensive position to protect capital is deemed advisable and practicable,
the Fund may have more than 20% (and up to 100%) of its assets in temporary
taxable investments or cash. The types of investments which are permitted
for these purposes are described under "Special Investment Methods --
Temporary Taxable Investments."
The Fund also may temporarily invest in shares of investment companies which
invest primarily in short-term municipal obligations with maturities not
exceeding 13 months including, but not limited to, tax free money market
funds advised by the Adviser. Investments of these types are also subject to
the advisory fee. Income from these investments is normally exempt from
federal income tax but may not be exempt from the applicable state tax.
Where the income from these investments is exempt from both federal income
tax and the applicable state tax, the investments will be counted as tax
exempt obligations for purposes of the 80% test described above.
The Fund also may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, invest in exchange traded interest rate futures and
interest rate index futures contracts; (iii) in order to attempt to reduce
risk, invest in exchange traded put and call options on interest rate
futures contracts and on interest rate indices; (iv) purchase securities on
a when-issued or delayed delivery basis; (v) engage in the lending of
portfolio securities; and (vi) invest up to 10% of its total assets in
inverse floating rate municipal obligations. For information about these
investment methods, restrictions on their use, and certain associated risks,
see the related headings under "Special Investment Methods."
<PAGE>
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RISKS TO CONSIDER
An investment in the Funds involves certain risks in addition to those noted
above with respect to particular Funds. These include the following:
EQUITY SECURITIES GENERALLY. Market prices of equity securities generally,
and of particular companies' equity securities, frequently are subject to
greater volatility than prices of fixed income securities. Market prices of
equity securities as a group have dropped dramatically in a short period of
time on several occasions in the past, and they may do so again in the
future. Mid Cap Growth Fund and Emerging Markets Fund are subject to the
risks of generally adverse equity markets.
SMALL CAPITALIZATION COMPANIES. Emerging Markets Fund and Mid Cap Growth
Fund are permitted to invest in equity securities of companies with small
market capitalizations. The equity securities of such companies frequently
have experienced greater price volatility in the past than those of
larger-capitalization companies, and they may be expected to do so in the
future. To the extent that the Funds invest in small capitalization
companies, they are subject to this risk of greater volatility.
ACTIVE MANAGEMENT. Mid Cap Growth Fund and Emerging Markets Fund are
actively managed by the Adviser, or in the case of Emerging Markets Fund,
the Sub-Adviser. The performance of these Funds will reflect in part the
ability of the Adviser or Sub-Adviser to select equity securities which are
suited to achieving the Funds' investment objectives. Due to their active
management, these Funds could under perform other mutual funds with similar
investment objectives or the market generally.
FOREIGN SECURITIES. Emerging Markets Fund is subject to special risks
associated with investing in foreign securities and to declines in net asset
value resulting from changes in exchange rates between the United States
dollar and foreign currencies. These risks are discussed under "Special
Investment Methods -- Foreign Securities" elsewhere herein. Because of the
special risks associated with foreign investing, the Funds may be subject to
greater volatility than most mutual funds which invest principally in
domestic securities.
INTEREST RATE RISK. Tax Free Fund and Minnesota Tax Free Fund emphasize
investments in fixed income securities. Investments in fixed income
securities give rise to interest rate risk. Interest rate risk is the risk
that the value of a fixed-rate debt security will decline due to changes in
market interest rates. Because such Funds invest in fixed-rate debt
securities, they are subject to interest rate risk. In general, when
interest rates rise, the value of a fixed-rate debt security declines.
Conversely, when interest rates decline, the value of a fixed-rate debt
security generally increases. Thus, shareholders in these Funds bear the
risk that increases in market interest rates will cause the value of their
Fund's portfolio investments to decline. In addition to the extent that
Adjustable Rate Mortgage Securities Fund invests in fixed rate
mortgage-based securities, and to the extent that market interest rates
change between the dates upon which the interest rates borne by the
adjustable-rate securities held by this Fund adjust, this Fund is also
exposed to interest rate risk.
In general, the value of fixed-rate debt securities with longer maturities
are more sensitive to changes in market interest rates than the value of
such securities with shorter maturities. Thus, the net asset value of a Fund
which invests in securities with longer weighted average maturities should
be expected to have greater volatility in periods of changing market
interest rates than that of a Fund which invests in securities with shorter
weighted average maturities. Investors should note in this regard that Tax
Free Fund and Minnesota Tax Free Fund invest in securities with longer
weighted average maturities than First American's Intermediate Tax Free Fund
and Minnesota Insured Intermediate Tax Free Fund.
Although the Adviser may engage in transactions intended to hedge the value
of the Funds' portfolios against changes in market interest rates, there is
no assurance that such hedging transactions will
<PAGE>
be undertaken or will fulfill their purpose. See "Special Investment
Methods -- Options Transactions."
CREDIT RISK. Credit risk is the risk that the issuer of a debt security or
mortgage-related security will fail to make payments on the security when
due. Because Adjustable Rate Mortgage Securities Fund, Tax Free Fund and
Minnesota Tax Free Fund invest in debt securities or mortgage-related
securities, they are subject to credit risk.
As described under "Special Investment Methods -- Municipal Bonds and Other
Municipal Obligations," the revenue bonds and municipal lease obligations in
which Tax Free Fund and Minnesota Tax Free Fund invest may entail greater
credit risk than the general obligation bonds in which they invest. This is
the case because revenue bonds and municipal lease obligations generally are
not backed by the faith, credit or general taxing power of the issuing
governmental entity. In addition, as described under that section, municipal
lease obligations also may be subject to nonappropriation risk, which is a
type of nonpayment risk. Investors also should note that even general
obligation bonds of the states and their political subdivisions are not free
from the risk of default.
The ratings and certain other requirements which apply to these Funds'
permitted investments, as described elsewhere in this Prospectus, are
intended to limit the amount of credit risk undertaken by these Funds.
Nevertheless, shareholders in such Funds bear the risk that payment defaults
could cause the value of their Fund's portfolio investments to decline.
Investors also should note that Tax Free Fund and Minnesota Tax Free Fund
can invest in municipal obligations rated as low as BBB by Standard & Poor's
or Baa by Moody's, that Adjustable Rate Mortgage Securities Fund can invest
in mortgage-related and other securities rated as low as A by Standard &
Poor's or Moody's, or which have been assigned an equivalent rating by
another nationally recognized statistical rating organization, or which are
of comparable quality in the judgment of the Adviser. Although these rating
categories are investment grade, obligations and securities with these
ratings are viewed as having speculative characteristics and carry a
somewhat higher risk of default than obligations and securities rated in the
higher investment grade categories.
CALL RISK. Many municipal bonds and mortgage-related securities may be
redeemed at the option of the issuer ("called") at a specified price prior
to their stated maturity date. In general, it is advantageous for an issuer
to call its bonds or mortgage-related securities if they can be refinanced
through the issuance of new bonds or mortgage-related securities which bear
a lower interest rate than that of the called bonds or mortgage-related
securities. Call risk is the risk that bonds or mortgage-related securities
will be called during a period of declining market interest rates so that
such refinancings may take place.
If a bond held by a Fund is called during a period of declining interest
rates, the Fund probably will have to reinvest the proceeds received by it
at a lower interest rate than that borne by the called bond, thus resulting
in a decrease in the Fund's income. To the extent that these Funds invest in
callable bonds, Fund shareholders bear the risk that reductions in income
will result from the call of bonds.
MORTGAGE-BACKED SECURITIES. Because residential mortgage loans generally can
be prepaid in whole or in part by the borrowers at any time without any
prepayment penalty, the holder of a mortgage-backed security which
represents an interest in a pool of such mortgage loans is subject to a form
of call risk which is generally called "prepayment risk." In addition, it is
more difficult to predict the effect of changes in market interest rates on
the return on mortgage-backed securities than to predict the effect of such
changes on the return of a conventional fixed-rate debt instrument; the
magnitude of such effects may be greater in some cases; and the return on
certain types of mortgage-backed securities, such as interest-only,
principal-only and inverse floating rate mortgage-backed securities, are
particularly sensitive to changes in interest rates and in the rate at which
the mortgage loans underlying the
<PAGE>
securities are prepaid by borrowers. For these reasons, Adjustable Rate
Mortgage Securities Fund's investments in mortgage-backed securities may
involve greater risks than investments in governmental or corporate bonds.
For further information, see "Special Investment Methods --
Mortgage-Backed Securities."
POLITICAL AND ECONOMIC CONDITIONS. The value of municipal obligations owned
by Tax Free Fund or Minnesota Tax Free Fund may be adversely affected by
local political and economic conditions and developments. Adverse conditions
in an industry significant to a local economy could have a correspondingly
adverse effect on the financial condition of local issuers. Other factors
that could affect tax-exempt obligations include a change in the local,
state or national economy, demographic factors, ecological or environmental
concerns, statutory limitations on the issuer's ability to increase taxes
and other developments generally affecting the revenues of issuers (for
example, legislation or court decisions reducing state aid to local
governments or mandating additional services). The value of certain
municipal obligations may also be adversely affected by the enactment of
changes to certain federal or state income tax laws, including, but not
limited to, income tax rate reductions or the imposition of a flat tax.
Tax Free Fund cannot invest 25% or more of its total assets in obligations
of issuers located in the same state (for this purpose, the location of an
"issuer" shall be deemed to be the location of the entity the revenues of
which are the primary source of payment or the location of the project or
facility which may be the subject of the obligation). See "Special
Investment Methods -- Investment Restrictions." Minnesota Tax Free Fund will
invest primarily in municipal obligations issued by the State of Minnesota
and its political subdivisions. For this reason, the municipal obligations
held by this Fund will be particularly affected by local conditions in the
State of Minnesota. A more detailed description of the factors affecting
Minnesota issuers of municipal obligations is set forth in the Statement of
Additional Information.
OTHER. Investors also should review "Special Investment Methods" for
information concerning risks associated with certain investment techniques
which may be utilized by the Funds.
MANAGEMENT
The Board of Directors of FAIF has the primary responsibility for overseeing
the overall management and electing the officers of FAIF. Subject to the
overall direction and supervision of the Board of Directors, the Adviser
acts as investment adviser for and manages the investment portfolios of
FAIF.
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INVESTMENT ADVISER
U.S. Bank National Association, 601 Second Avenue South, Minneapolis,
Minnesota 55402, acts as the Funds' investment adviser through its First
American Asset Management group. The Adviser has acted as an investment
adviser to FAIF since its inception in 1987 and has acted as investment
adviser to First American Funds, Inc. since 1982 and to First American
Strategy Funds, Inc. since 1996. As of September 30, 1997, the Adviser was
managing accounts with an aggregate value of approximately $55 billion,
including mutual fund assets of approximately $20 billion. U.S. Bancorp, 601
Second Avenue South, Minneapolis, Minnesota 55402, is the holding company
for the Adviser.
Each of the Funds, other than Emerging Markets Fund, has agreed to pay the
Adviser monthly fees calculated on an annual basis equal to 0.70% of its
average daily net assets. Emerging Markets Fund pays the Adviser a monthly
fee calculated on the same basis equal to 1.25% of its average daily net
assets, out of which the Adviser pays the Sub-Adviser's fee. The Adviser
may, at its option, waive any or all of its fees, or reimburse expenses,
with respect to any Fund from time to time. Any such waiver or reimbursement
is voluntary and may be discontinued at any time. The Adviser also may
absorb or reimburse expenses of the Funds
<PAGE>
from time to time, in its discretion, while retaining the ability to be
reimbursed by the Funds for such amounts prior to the end of the fiscal
year. This practice would have the effect of lowering a Fund's overall
expense ratio and of increasing yield to investors, or the converse, at the
time such amounts are absorbed or reimbursed, as the case may be.
The Glass-Steagall Act generally prohibits banks from engaging in the
business of underwriting, selling or distributing securities and from being
affiliated with companies principally engaged in those activities. In
addition, administrative and judicial interpretations of the Glass-Steagall
Act prohibit bank holding companies and their bank and nonbank subsidiaries
from organizing, sponsoring or controlling registered open-end investment
companies that are continuously engaged in distributing their shares. Bank
holding companies and their bank and nonbank subsidiaries may serve,
however, as investment advisers to registered investment companies, subject
to a number of terms and conditions.
Although the scope of the prohibitions and limitations imposed by the
Glass-Steagall Act has not been fully defined by the courts or the
appropriate regulatory agencies, the Funds have received an opinion from
their counsel that the Adviser is not prohibited from performing the
investment advisory services described above, and that certain
broker-dealers affiliated with the Adviser, are not prohibited from serving
as a Participating Institution as described herein. In the event of changes
in federal or state statutes or regulations or judicial and administrative
interpretations or decisions pertaining to permissible activities of bank
holding companies and their bank and nonbank subsidiaries, the Adviser and
certain affiliated broker-dealers might be prohibited from continuing these
arrangements. In that event, it is expected that the Board of Directors
would make other arrangements and that shareholders would not suffer adverse
financial consequences.
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SUB-ADVISER TO EMERGING MARKETS FUND
Marvin & Palmer Associates, Inc., 1201 North Market Street, Suite 2300,
Wilmington, Delaware 19801, is Sub-Adviser to Emerging Markets Fund under an
agreement with the Adviser (the "Sub-Advisory Agreement"). The Sub-Adviser
is responsible for the investment and reinvestment of Emerging Markets
Fund's assets and the placement of brokerage transactions in connection
therewith. For its services under the Sub-Advisory Agreement, the
Sub-Adviser is paid a monthly fee by the Adviser calculated on an annual
basis equal to 0.85% 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 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.
The Sub-Adviser, a privately held company, was founded in 1986 by David F.
Marvin and Stanley Palmer. The stock of the Sub-Adviser is owned by Mr.
Marvin, Mr. Palmer and 24 other holders. The Sub-Adviser is engaged in the
management of global, non-United States and emerging markets equity
portfolios for institutional accounts. At January 1, 1998, the Sub-Adviser
managed a total of $4.6 billion in investments for 53 institutional
investors.
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PORTFOLIO MANAGERS
Mid Cap Growth Fund is managed by a committee comprised of Ms. Shrewsbury,
Mr. Benson, Ms. Halbe, Ms. Hoyme, Mr. McSweeney and Ms. Thompson, whose
backgrounds are set forth below. Adjustable Rate Mortgage Securities Fund
is managed by a committee comprised of Mr. McGlinch, Ms. Kung and Mr.
Green, whose backgrounds are also set forth below. The remaining Funds are
managed or co-managed as indicated below.
SANDRA SHREWSBURY is a member of the committee which manages Mid Cap
Growth Fund. Ms. Shrewsbury has over 11 years of investment industry
experience. Prior to joining the Adviser in 1998, Ms. Shrewsbury served as
a portfolio co-manager for Piper Capital Management
<PAGE>
Incorporated overseeing the management of the Piper Funds Emerging Growth
Fund and Small Company Growth Fund. Ms. Shrewsbury received her bachelor's
degree in mathematics and education from Nebraska Wesleyan University and
a master's degree from Iowa State University. Ms. Shrewsbury is a
Chartered Financial Analyst.
ADAM BENSON is a member of the committee which manages Mid Cap Growth Fund.
Mr. Benson has over 4 years of investment industry experience. Prior to
joining the Adviser in 1998, Mr. Benson served as an assistant vice
president and portfolio co-manager for Piper Capital Management Incorporated
overseeing the management of the Piper Funds Emerging Growth Fund and Small
Company Growth Fund. Mr. Benson received his bachelor's degree in economics
from Luther College and master's degree in finance from the University of
Minnesota.
JOYCE HALBE is a member of the committee which manages Mid Cap Growth
Fund. Ms. Halbe has over 13 years of investment industry experience. Prior
to joining the Adviser in 1998, Ms. Halbe served, from 1996 to 1998, as a
senior vice president and portfolio co-manager for Piper Capital
Management Incorporated overseeing the management of the Piper Funds
Emerging Growth Fund and Small Company Growth Fund. Prior to 1996, Ms.
Halbe served as a vice president, analyst and portfolio manager for the
Adviser. Ms. Halbe received her bachelor's degree, master's degree and
master's degree in business administration from the University of
Wisconsin. Ms. Halbe is a Chartered Financial Analyst.
MARY HOYME is a member of the committee which manages Mid Cap Growth Fund.
Ms. Hoyme has over 15 years of investment industry experience. Prior to
joining the Adviser in 1998, Ms. Hoyme served, from 1996 to 1998, as a
senior vice president and portfolio co-manager for Piper Capital Management
Incorporated overseeing the management of the Piper Funds Emerging Growth
Fund and Small Company Growth Fund. Prior to 1996, Ms. Hoyme served as a
portfolio manager for the Adviser overseeing the management of the Adviser's
real estate and growth portfolios. Ms. Hoyme received her bachelor's degree
in finance and economics from the University of Wisconsin-Eau Claire and
master's degree in business administration from the University of St.
Thomas. Ms. Hoyme is a Chartered Financial Analyst.
TIMOTHY MCSWEENEY is a member of the committee which manages Mid Cap Growth
Fund. Mr. McSweeney has over 11 years of investment industry experience.
Prior to joining the Adviser in 1998, Mr. McSweeney served, from 1997 to
1998, as assistant vice president and portfolio co-manager for Piper Capital
Management Incorporated overseeing the management of the Piper Funds
Emerging Growth Fund and Small Company Growth Fund. Prior to 1997, Mr.
McSweeney served as a technology analyst for Gintel Asset Management. Mr.
McSweeney received his bachelor's degree in economics from Clark University
and master's degree in business administration from Northeastern University.
JILL THOMPSON is a member of the committee which manages Mid Cap Growth
Fund. Ms. Thompson has over 9 years of investment industry experience.
Prior to joining the Adviser in 1998, Ms. Thompson served as a senior vice
president and portfolio co-manager for Piper Capital Management
Incorporated overseeing the management of the Piper Funds Emerging Growth
Fund and Small Company Growth Fund. Ms. Thompson received her bachelor's
degree from St. Cloud State University. Ms. Thompson is a Chartered
Financial Analyst.
THOMAS MCGLINCH is a member of the committee which manages Adjustable Rate
Mortgage Securities Fund. Mr. McGlinch has over 16 years of investment
industry experience. Prior to joining the Adviser in 1998, Mr. McGlinch
served as a portfolio co-manager for Piper Capital Management Incorporated
overseeing the management of several Piper Funds including the Piper Funds
Adjustable Rate Mortgage Securities Fund. Mr. McGlinch received his
bachelor's degree in accounting from St. John's University and
<PAGE>
master's degree in business administration from the University of St.
Thomas. Mr. McGlinch is a Chartered Financial Analyst.
WAN-CHONG KUNG is a member of the committee which manages Adjustable Rate
Mortgage Securities Fund. Ms. Kung has over five years of investment
industry experience. Prior to joining the Adviser in 1998, Ms. Kung served
as a vice president and a portfolio co-manager for Piper Capital
Management Incorporated overseeing the management of several Piper Funds
including the Piper Funds Adjustable Rate Mortgage Securities Fund. Ms.
Kung received her bachelor's degree in economics from the University of
the Philippines and received her master's degree in business
administration from the University of Minnesota. Ms. Kung is a Chartered
Financial Analyst.
MARK M. GREEN is a member of the committee which manages Adjustable Rate
Mortgage Securities Fund. Mr. Green joined the Adviser in 1996 and has
over ten years of investment industry experience. Mr. Green is also a
member of the committee which manages FAIF Limited Term Income Fund,
Intermediate Term Income Fund and Fixed Income Fund. Prior to joining the
Adviser, Mr. Green was a portfolio manager at Wells Fargo Investment
Management. Mr. Green received his bachelor's degree and master's degree
from San Francisco State University.
RONALD REUSS is a portfolio co-manager for Tax Free Fund and Minnesota Tax
Free Fund. Mr. Reuss has over 28 years of investment industry experience.
Prior to joining the Adviser in 1998, Mr. Reuss served as an economist, a
senior vice president and portfolio manager for Piper Capital Management
Incorporated overseeing the management of the Piper Funds National
Tax-Exempt Fund and Minnesota Tax-Exempt Fund. Mr. Reuss received his
bachelor's degree in business administration from John Carroll University
and master's degree in economics from Cleveland State University. Mr. Reuss
is a Chartered Financial Analyst.
DOUGLAS WHITE is a portfolio co-manager for Tax Free Fund and Minnesota
Tax Free Fund. Mr. White has over 14 years of investment industry
experience. Prior to joining the Adviser in 1998, Mr. White served as a
portfolio manager for Piper Capital Management Incorporated overseeing the
management of the Piper Funds Tax-Exempt Fund and Minnesota Tax-Exempt
Fund. Mr. White received his bachelor's degree in political science from
Carleton College and his master's degree in business administration from
the University of Minnesota. Mr. White is a Chartered Financial Analyst.
A committee comprised of the following eight individuals shares the
management of Emerging Markets Fund on behalf of the Sub-Adviser:
DAVID F. MARVIN is Chairman of the Sub-Adviser and founded the firm
together with Mr. Palmer in 1986. Before founding the Sub-Adviser, Mr.
Marvin was Vice President in charge of DuPont Corporation's $10 billion
internally-managed pension fund. Prior to that Mr. Marvin was Associate
Portfolio Manager, and then Head Portfolio Manager, for Investors
Diversified Services' IDS Stock Fund. Mr. Marvin started in the investment
business in 1965 as a securities analyst for Chicago Title & Trust. Mr.
Marvin received his bachelor's degree from the University of Illinois and
his master's degree in business administration from Northwestern
University. He is a Chartered Financial Analyst and a member of the
Financial Analysts Federation.
STANLEY PALMER is Vice Chairman of the Sub-Adviser and co-founder of the
firm. Mr. Palmer was Equity Portfolio Manager for DuPont Corporation from
1978 through 1986, an analyst and portfolio manager at Investors Diversified
Services from 1971 through 1978, and an analyst at Harris Trust & Savings
Bank from 1964 through 1971. Mr. Palmer received his bachelor's degree from
Gustavus Adolphus College and his master's degree in business administration
from the University of Iowa. He is a Chartered Financial Analyst and a
member of the Financial Analysts Federation.
WILLIAM E. DODGE has been President since January 1998 and a portfolio
manager of the Sub-Adviser since 1996. Mr. Dodge was Chief Investment
Strategist and
<PAGE>
Chairman of the Investment Policy Committee of Dean Witter in New York from
1991 to 1996, and he served as a Senior Portfolio Manager, Director of
Quantitative Equity Strategies, and United States equity analyst at the
DuPont Corporation pension fund from 1983 to 1991. From 1976 to 1983 Mr.
Dodge served in various United States portfolio management and analytical
positions including senior investment manager of a bank trust department
from 1981 to 1983. Mr. Dodge received his bachelor's degree and his master's
degree in business administration from the University of Massachusetts at
Amherst. He is a Chartered Financial Analyst and a member of the Financial
Analysts Federation.
TERRY B. MASON is a Senior Vice President and portfolio manager of the
Sub-Adviser. Before joining the Sub-Adviser, Mr. Mason was employed for 14
years by DuPont Corporation, the last five as international equity analyst
and international trader. Mr. Mason received his bachelor's degree from
Glassboro State College and his master's degree in business administration
from Widener University.
JAY F. MIDDLETON is a Senior Vice President and portfolio manager for the
Sub-Adviser and joined the firm in 1989. Mr. Middleton received his
bachelor's degree from Wesleyan University.
TODD D. MARVIN is a Senior Vice President and portfolio manager for the
Sub-Adviser and joined the firm in 1991. Before joining the Sub-Adviser,
Mr. Marvin was employed by Oppenheimer & Company as an analyst in
investment banking. Mr. Marvin received his bachelor's degree from
Wesleyan University.
DAVID L. SCHAEN is a Vice President and portfolio manager of the
Sub-Adviser. Before becoming a portfolio manager, Mr. Schaen was Head Trader
for the Sub-Adviser from 1991 to 1994 and an International Analyst for the
Sub-Adviser from 1994 to 1995. Prior to 1991 he was Head Trader and
Investment Officer at the Bank of Delaware. Mr. Schaen received his
bachelor's degree from the University of Delaware and his master's degree in
business administration from Widener University.
STEPHEN D. MARVIN is a Vice President and portfolio manager for the
Sub-Adviser and joined the firm in 1994. Before joining the Sub-Adviser,
Mr. Marvin was employed by Bear, Stearns & Company as a corporate
financial analyst. Mr. Marvin received his bachelor's degree from Carleton
College.
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CUSTODIAN
The Custodian of the Funds' assets is U.S. Bank Trust National Association
(the "Custodian"), U.S. Bank Trust Center, 180 East Fifth Street, St. Paul,
Minnesota 55101. The Custodian is a subsidiary of U.S. Bancorp.
As compensation for its services to the Funds, the Custodian is paid monthly
fees calculated on an annual basis equal to 0.03% of the applicable Fund's
(except Emerging Markets Fund) average daily net assets and, in the case of
Emerging Markets Fund, 0.10% of the Fund's average daily net assets. In
addition, the Custodian is reimbursed for its out-of-pocket expenses
incurred while providing its services to the Funds.
Rules adopted under the 1940 Act permit Emerging Markets Fund to maintain
its securities and cash in the custody of certain eligible foreign banks and
depositories. Emerging Markets Fund's portfolio of non-United States
securities are held by sub-custodians which are approved by the directors of
FAIF or a foreign custody manager appointed by the directors in accordance
with these rules. This determination is made pursuant to these rules
following a consideration of a number of factors including, but not limited
to, the reliability and financial stability of the institution; the ability
of the institution to perform custodian services for Emerging Markets Fund;
the reputation of the institution in its national market; the political and
economic stability of the country in which the institution is located; and
the risks of potential nationalization or expropriation of Emerging Markets
Fund's assets.
<PAGE>
Sub-custodian fees with respect to Emerging Markets Fund are paid by the
Custodian out of the Custodian's fees.
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ADMINISTRATOR
The administrator for the Funds is SEI Investments Management Corporation,
Oaks, Pennsylvania 19456. The Administrator, a wholly-owned subsidiary of
SEI Investments Company, provides the Funds with certain administrative
services necessary to operate the Funds. These services include shareholder
servicing and certain accounting and other services. The Administrator
provides these services for a fee calculated at an annual rate of 0.12% of
each Fund's average daily net assets, provided that to the extent that the
aggregate net assets of all First American Funds exceed $8 billion, the
percentage stated above is reduced to 0.105%. From time to time, the
Administrator may voluntarily waive its fees or reimburse expenses with
respect to any of the Funds. Any such waivers or reimbursements may be made
at the Administrator's discretion and may be terminated at any time. U.S.
Bank assists the Administrator and provides sub-administration services for
the Funds. For these services, the Administrator compensates the
sub-administrator at an annual rate of up to 0.05% of each Fund's average
daily net assets.
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TRANSFER AGENT
DST Systems, Inc. (the "Transfer Agent") serves as the transfer agent and
dividend disbursing agent for the Funds. The address of the Transfer Agent
is 330 West Ninth Street, Kansas City, Missouri 64105. The Transfer Agent is
not affiliated with the Distributor, the Administrator or the Adviser.
FAIF has appointed Piper Jaffray Inc., a broker-dealer affiliated with the
Adviser, as servicing agent to perform certain transfer agent and dividend
disbursing agent services with respect to the Class A Shares and the Class B
Shares of the Funds held through accounts at Piper Jaffray Inc. and its
affiliates. The Funds pay Piper Jaffray Inc. an annual fee of $15 per
account for such services.
DISTRIBUTOR
SEI Investments Distribution Co. is the principal distributor for shares of
the Funds and of the other FAIF Funds. The Distributor is a Pennsylvania
corporation and is the principal distributor for a number of investment
companies. The Distributor, which is not affiliated with the Adviser, is a
wholly-owned subsidiary of SEI Investments Company, and is located at Oaks,
Pennsylvania 19456.
Shares of the Funds are distributed through the Distributor and securities
firms, financial institutions (including, without limitation, banks) and
other industry professionals (the "Participating Institutions") which enter
into sales agreements with the Distributor to perform share distribution or
shareholder support services.
FAIF has adopted a Plan of Distribution for the Class A Shares pursuant to
Rule 12b-1 under the 1940 Act (the "Class A Distribution Plan") pursuant to
which the Distributor agrees to provide, or enter into written agreements
with service providers to provide, one or more specified shareholder
services to beneficial owners of shares of the Funds. The Class A
Distribution Plan authorizes the Distributor to retain the sales charge paid
upon purchases of Class A Shares, except that portion which is reallowed to
Participating Institutions. See "Investing in the Funds -- Class A Share
Price and Sales Charge." In consideration of the services and facilities to
be provided by the Distributor or any service provider, each Fund also pays
the Distributor a shareholder servicing fee at an annual rate of 0.25% of
the Fund's Class A Shares' average daily net asset value, which fee is
computed and paid monthly. The shareholder servicing fee is intended to
compensate the Distributor for ongoing servicing and/or maintenance of
shareholder accounts and may be used by the Distributor to provide
compensation to institutions through which shareholders hold
<PAGE>
their shares for ongoing servicing and/or maintenance of shareholder
accounts. The shareholder servicing fee may be used to provide compensation
for shareholder services provided by "one-stop" mutual fund networks through
which the Funds are made available. In addition, the Distributor and the
Adviser and its affiliates may provide compensation for services provided by
such networks from their own resources. From time to time, the Distributor
may voluntarily waive its fees with respect to the Class A Shares of any of
the Funds. Any such waivers may be made at the Distributor's discretion and
may be terminated at any time.
Under another distribution plan (the "Class B Distribution Plan") adopted in
accordance with Rule 12b-1 under the 1940 Act, Mid Cap Growth Fund and
Emerging Markets Fund may pay to the Distributor a sales support fee at an
annual rate of up to 0.75% of the Fund's Class B Shares' average daily net
asset value, which fee is computed and paid monthly. The sales support fee
may be used by the Distributor to provide compensation for sales support and
distribution activities with respect to Class B Shares of the Funds. In
addition to this fee, the Distribution is paid a shareholder servicing fee
of 0.25% of the average daily net assets of the Class B Shares pursuant to a
service plan (the "Class B Service Plan"), which fee may be used by the
Distributor to provide compensation for ongoing servicing and/or maintenance
of shareholder accounts with respect to Class B Shares of the Funds.
Although Class B Share are sold without an initial sales charge, the
Distributor pays a total of 4.25% of the amount invested (including a
prepaid service fee of 0.25% of the amount invested) to dealers who sell
Class B Shares (excluding exchanges from other Class B Shares in the First
American family of funds). The service fee payable under the Class B Service
Plan is prepaid for the first year as described above.
The Class A and Class B Distribution Plans recognize that the Adviser, the
Administrator, the Distributor, and any Participating Institution may in
their discretion use their own assets to pay for certain additional costs of
distributing Fund shares. Any arrangement to pay such additional costs may
be commenced or discontinued by any of these persons at any time. In
addition, while there is no sales charge on purchases of Class A Shares of
$1 million and more, the Adviser may pay amounts to broker-dealers from its
own assets with respect to such sales. U.S. Bancorp Investments, Inc., and
Piper Jaffray Inc., broker-dealers affiliated with the Adviser ("USBI"),
each is a Participating Institution.
INVESTING IN THE FUNDS
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SHARE PURCHASES
Shares of the Funds are sold at their net asset value, next determined after
an order is received, plus any applicable sales charge, on days on which
both the New York Stock Exchange and federally- chartered banks are open for
business. Shares may be purchased as described below. The Funds reserve the
right to reject any purchase request.
THROUGH A FINANCIAL INSTITUTION. Shares may be purchased through a financial
institution which has a sales agreement with the Distributor. An investor
may call his or her financial institution to place an order. Purchase orders
must be received by the financial institution by the time specified by the
institution to be assured same day processing, and purchase orders must be
transmitted to and received by the Funds by 3:00 p.m. Central time in order
for shares to be purchased at that day's price unless the financial
institution has been authorized to accept purchase orders on behalf of the
Funds. It is the financial institution's responsibility to transmit orders
promptly.
Certain financial institutions assist their clients in the purchase or
redemption of shares and charge a fee for this service. In addition, certain
financial institutions are authorized to act as Mid Cap Growth Fund's and
Emerging Markets Fund's agent for the purpose of accepting purchase orders,
and such Funds will be deemed to have received a
<PAGE>
purchase order upon receipt of the order by the financial institution.
BY MAIL. An investor may place an order to purchase shares of the Funds
directly through the Transfer Agent. Orders by mail will be executed upon
receipt of payment by the Transfer Agent. If an investor's check does not
clear, the purchase will be cancelled and the investor could be liable for
any losses or fees incurred. Third-party checks, credit cards, credit card
checks and cash will not be accepted. When purchases are made by check, the
proceeds of redemptions of the shares purchased are not available until the
Transfer Agent is reasonably certain that the purchase payment has cleared,
which could take up to ten calendar days from the purchase date. In order to
purchase shares by mail, an investor must:
* complete and sign the new account form;
* enclose a check made payable to (Fund name); and
* mail both to DST Systems, Inc., P.O. Box 419382, Kansas City, Missouri
64141-6382.
After an account is established, an investor can purchase shares by mail by
enclosing a check and mailing it to DST Systems, Inc. at the above address.
BY WIRE. To purchase shares of a Fund by wire, call (800) 637-2548 before
3:00 p.m. Central time. All information needed will be taken over the
telephone, and the order will be considered placed when the Custodian
receives payment by wire. If the Custodian does not receive the wire by 3:00
p.m. Central time, the order will be executed the next business day. Federal
funds should be wired as follows: U.S. Bank National Association,
Minneapolis, Minnesota, ABA Number 091000022; For Credit to: DST Systems,
Inc., Account Number 160234580266; For Further Credit To: (Investor Name and
Fund Name). Shares cannot be purchased by Federal Reserve wire on days on
which the New York Stock Exchange is closed or federally-chartered banks are
closed.
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MINIMUM INVESTMENT REQUIRED
The minimum initial investment for each Fund is $1,000 unless the investment
is in a retirement plan, in which case the minimum investment is $250. The
minimum subsequent investment is $100. The Funds reserve the right to waive
the minimum investment requirement for employees of the Adviser and its
affiliates.
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ALTERNATIVE SALES CHARGE OPTIONS
THE TWO ALTERNATIVES: OVERVIEW. An investor may purchase shares of a Fund at
a price equal to its net asset value per share plus a sales charge which, at
the investor's election, may be imposed either (i) at the time of the
purchase (the Class A "initial sales charge alternative"), or (ii), in the
case of Mid Cap Growth and Emerging Markets Fund, on a contingent deferred
basis (the Class B "deferred sales charge alternative"). Each of Class A and
Class B Shares represents a Fund's interest in its portfolio of investments.
The classes have the same rights and are identical in all respects except
that (i) Class B Shares bear the expenses of the contingent deferred sales
charge arrangement and distribution and service fees resulting from such
sales arrangement, while Class A Shares bear only shareholder servicing
fees; (ii) each class has exclusive voting rights with respect to approvals
of any Rule 12b-1 distribution plan related to that specific class (although
Class B shareholders may vote on any distribution fees imposed on Class A
Shares as long as Class B Shares convert into Class A Shares); (iii) only
Class B Shares carry a conversion feature; and (iv) each class has different
exchange privileges. Sales personnel of financial institutions distributing
the Funds' shares, and other persons entitled to receive compensation for
selling shares, may receive differing compensation for selling Class A and
Class B Shares.
These alternative purchase arrangements permit an investor to choose the
method of purchasing shares that is more beneficial to that investor. The
amount of a purchase, the length of time an investor expects to hold the
shares, and whether
<PAGE>
the investor wishes to receive dividends in cash or in additional shares,
will all be factors in determining which sales charge option is best for a
particular investor. An investor should consider whether, over the time he
or she expects to maintain the investment, the accumulated sales charges on
Class B Shares prior to conversion would be less than the initial sales
charge on Class A Shares, and to what extent the differential may be offset
by the expected higher yield of Class A Shares. Class A Shares will normally
be more beneficial to an investor if he or she qualifies for reduced sales
charges as described below. Accordingly, orders for Class B Shares for
$250,000 or more ordinarily will be treated as orders for Class A Shares or
declined.
The Directors of FAIF have determined that no conflict of interest currently
exists between the Class A and Class B Shares. On an ongoing basis, the
Directors, pursuant to their fiduciary duties under the 1940 Act and state
laws, will seek to ensure that no such conflict arises.
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CLASS A SHARES
WHAT CLASS A SHARES COST. Class A Shares of each Fund are offered on a
continuous basis at their next determined offering price, which is net asset
value, plus a sales charge as set forth below:
----------------------------------------------------------------------------
MIDCAP GROWTH FUND AND EMERGING MARKETS FUND
MAXIMUM
AMOUNT OF
SALES CHARGE SALES CHARGE SALES CHARGE
AS PERCENTAGE AS PERCENTAGE REALLOWED TO
OF OFFERING OF NET ASSET PARTICIPATING
PRICE VALUE INSTITUTIONS
================================================================================
Less than $50,000 4.50% 4.71% 4.05%
$50,000 but less than $100,000 4.00% 4.17% 3.60%
$100,000 but less than $250,000 3.50% 3.63% 3.15%
$250,000 but less than $500,000 2.75% 2.83% 2.47%
$500,000 but less than $1,000,000 2.00% 2.04% 1.80%
$1,000,000 and over 0% 0% 0%
================================================================================
----------------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
MAXIMUM
AMOUNT OF
SALES CHARGE SALES CHARGE SALES CHARGE
AS PERCENTAGE AS PERCENTAGE REALLOWED TO
OF OFFERING OF NET ASSET PARTICIPATING
PRICE VALUE INSTITUTIONS
================================================================================
Less than $50,000 2.00% 2.04% 1.80%
$50,000 but less than $100,000 1.50% 1.52% 1.35%
$100,000 but less than $250,000 1.00% 1.01% 0.90%
$250,000 but less than $500,000 0.75% 0.76% 0.68%
$500,000 but less than $1,000,000 0.50% 0.50% 0.45%
$1,000,000 and over 0% 0% 0%
================================================================================
<PAGE>
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TAX FREE FUND AND MINNESOTA TAX FREE FUND
MAXIMUM
AMOUNT OF
SALES CHARGE SALES CHARGE SALES CHARGE
AS PERCENTAGE AS PERCENTAGE REALLOWED TO
OF OFFERING OF NET ASSET PARTICIPATING
PRICE VALUE INSTITUTIONS
================================================================================
Less than $50,000 3.00% 3.09% 2.70%
$50,000 but less than $100,000 2.50% 2.56% 2.25%
$100,000 but less than $250,000 2.00% 2.04% 1.80%
$250,000 but less than $500,00 0 1.50% 1.52% 1.35%
$500,000 but less than $1,000,000 1.00% 1.01% 0.80%
$1,000,000 and over 0% 0% 0%
================================================================================
There is no initial sales charge on purchases of Class A Shares of $1
million or more. However, Participating Institutions may receive a
commission of up to 1.00% on such sales. Redemptions of Class A Shares
purchased at net asset value within 24 months of such purchases will be
subject to a contingent deferred sales charge of up to 1.00%. Class A Shares
that are redeemed will not be subject to this contingent deferred sales
charge to the extent that the value of the shares represents capital
appreciation of Fund assets or reinvestment of dividends or capital gain
distributions.
Net asset value is determined as of the close of normal trading on the New
York Stock Exchange (3:00 p.m. Central time Monday through Friday) except on
(i) days on which there are not sufficient changes in the value of a Fund's
portfolio securities that its net asset value might be materially affected;
(ii) days during which no shares are tendered for redemption and no orders
to purchase shares are received; and (iii) days on which the New York Stock
Exchange or federally-chartered banks are closed including, but not limited
to, the following federal holidays: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. In addition, net asset value will not
be calculated on Good Friday.
DEALER CONCESSION. A dealer will normally receive up to 90% of the
applicable sales charge. Any portion of the sales charge which is not paid
to a dealer will be retained by the Distributor. In addition, the
Distributor may, from time to time in its sole discretion, institute one or
more promotional incentive programs which will be paid by the Distributor
from the sales charge it receives or from any other source available to it.
Under any such program, the Distributor will provide promotional incentives,
in the form of cash or other compensation including merchandise, airline
vouchers, trips and vacation packages, to all dealers selling shares of the
Funds. Promotional incentives of these kinds will be offered uniformly to
all dealers and predicated upon the amount of shares of the Funds sold by
the dealer. Whenever 90% or more of a sales charge is paid to a dealer, that
dealer may be deemed to be an underwriter as defined in the Securities Act
of 1933.
The sales charge for shares sold other than through registered
broker-dealers will be retained by the Distributor. The Distributor may pay
fees to financial institutions out of the sales charge in exchange for sales
and/or administrative services performed on behalf of the institution's
customers in connection with the initiation of customer accounts and
purchases of Fund shares.
REDUCING THE CLASS A SALES CHARGE. The sales charge can be reduced on the
purchase of Class A Shares through (i) quantity discounts and accumulated
purchases, or (ii) signing a 13-month letter of intent:
* QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES: As shown in the table
above, larger
<PAGE>
purchases of Class A Shares reduce the percentage sales charge paid.
Each Fund will combine purchases made on the same day by an investor,
the investor's spouse, and the investor's children under age 21 when it
calculates the sales charge. In addition, the sales charge, if
applicable, is reduced for purchases made at one time by a trustee or
fiduciary for a single trust estate or a single fiduciary account.
The sales charge discount applies to the total current market value of
any Fund, plus the current market value of any other FAIF Fund and any
other mutual funds having a sales charge and distributed as part of the
First American family of funds. Prior purchases and concurrent purchases
of Class A Shares of any FAIF Fund will be considered in determining the
sales charge reduction. In order for an investor to receive the sales
charge reduction on Class A Shares, the Transfer Agent must be notified
by the investor in writing or by his or her financial institution at the
time the purchase is made that Fund shares are already owned or that
purchases are being combined.
* LETTER OF INTENT: If an investor intends to purchase at least $50,000 of
Class A Shares in a Fund and other FAIF Funds over the next 13 months,
the sales charge may be reduced by signing a letter of intent to that
effect. This letter of intent includes a provision for a sales charge
adjustment depending on the amount actually purchased within the
13-month period and a provision for the Custodian to hold a percentage
equal to the particular FAIF Fund's maximum sales charge rate of the
total amount intended to be purchased in escrow (in shares) for all FAIF
Funds until the purchase is completed.
The amount held in escrow for all FAIF Funds will be applied to the
investor's account at the end of the 13-month period after deduction of
the sales load applicable to the dollar value of shares actually
purchased. In this event, an appropriate number of escrowed shares may
be redeemed in order to realize the difference in the sales charge.
A letter of intent will not obligate the investor to purchase shares,
but if he or she does, each purchase during the period will be at the
sales charge applicable to the total amount intended to be purchased.
This letter may be dated as of a prior date to include any purchases
made within the past 90 days.
SALES OF CLASS A SHARES AT NET ASSET VALUE. Purchases of a Fund's Class A
Shares by the Adviser, the Sub-Adviser, or any of their affiliates, or any
of their or FAIF's officers, directors, employees, retirees, sales
representatives and partners, registered representatives of any
broker-dealer authorized to sell Fund shares, and full-time employees of
FAIF's general counsel, and members of their immediate families (i.e.,
parent, child, spouse, sibling, step or adopted relationships, and UTMA
accounts naming qualifying persons), may be made at net asset value without
a sales charge. A Fund's Class A Shares also may be purchased at net asset
value without a sales charge by fee-based registered investment advisers,
financial planners and registered broker-dealers who are purchasing shares
on behalf of their customers and by purchasers through "one-stop" mutual
fund networks through which the Funds are made available. In addition, Class
A Shares may be purchased at net asset value without a sales charge by
qualified defined contribution plans participating in the First American
401(k) Plan Program, investors participating in asset allocation "wrap"
accounts offered by the Adviser or any of its affiliates, and by retirement
and deferred compensation plans and the trusts used to fund such plans
(including, but not limited to, those defined in sections 401(a), 403(b) and
457 of the Internal Revenue Code and "rabbi trusts"), which plans and trusts
purchase through "one-stop" mutual fund networks.
If Class A Shares of a Fund have been redeemed, the shareholder has a
one-time right, within 30 days, to reinvest the redemption proceeds in Class
A Shares of any FAIF Fund at the next-determined net asset value without any
sales charge. The Transfer Agent must be notified by the shareholder in
writing or by his or her financial institution of
<PAGE>
the reinvestment in order to eliminate a sales charge. If the shareholder
redeems his or her shares of a Fund, there may be tax consequences.
In addition, purchases of Class A Shares of a Fund that are funded by
proceeds received upon the redemption (within 60 days of the purchase of
Fund shares) of shares of any unrelated open-end investment company that
charges a sales load and rollovers from retirement plans that utilize the
Funds as investment options may be made at net asset value. To make such a
purchase at net asset value, an investor or the investor's broker must, at
the time of purchase, submit a written request to the Transfer Agent that
the purchase be processed at net asset value pursuant to this privilege,
accompanied by a photocopy of the confirmation (or similar evidence) showing
the redemption from the unrelated fund. The redemption of the shares of the
non-related fund is, for federal income tax purposes, a sale upon which a
gain or loss may be realized.
---------------------------------------------------------------------------
CLASS B SHARES
CONTINGENT DEFERRED SALES CHARGE. Class B Shares are sold at net asset value
without any initial sales charge. If an investor redeems Class B Shares
within eight years of purchase, he or she will pay a contingent deferred
sales charge at the rates set forth below. This charge is assessed on an
amount equal to the lesser of the then-current market value or the cost of
the shares being redeemed. Accordingly, no sales charge is imposed on
increases in net asset value above the initial purchase price or on shares
derived from reinvestment of dividends or capital gain distributions.
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
YEAR SINCE DOLLAR AMOUNT
PURCHASE SUBJECT TO CHARGE
-------------------------------------
First 5.00%
Second 5.00%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh None
Eighth None
-------------------------------------
In determining whether a particular redemption is subject to a contingent
deferred sales charge, it is assumed that the redemption is first of any
Class A Shares in the shareholder's Fund account; second, of any Class B
Shares held for more than eight years and Class B Shares acquired pursuant
to reinvestment of dividends or other distributions; and third, of Class B
Shares held longest during the eight-year period. This method should result
in the lowest possible sales charge.
The contingent deferred sales charge is waived on redemption of Class B
Shares (i) within one year following the death or disability (as defined in
the Internal Revenue Code) of a shareholder and (ii) to the extent that the
redemption represents a minimum required distribution from an individual
retirement account or other retirement plan to a shareholder who has
attained the age of 70 1/2. A shareholder or his or her representative must
notify the Transfer Agent prior to the time of redemption if such
circumstances exist and the shareholder is eligible for this waiver.
<PAGE>
CONVERSION FEATURE. At the end of the period ending eight years after the
beginning of the month in which the shares were issued, Class B Shares will
automatically convert to Class A Shares and will no longer be subject to the
Class B distribution and service fees. This conversion will be on the basis
of the relative net asset values of the two classes.
---------------------------------------------------------------------------
SYSTEMATIC EXCHANGE PROGRAM
Shares of a Fund may also be purchased through automatic monthly deductions
from a shareholder's account in the same class of shares of Prime
Obligations Fund of First American Funds, Inc. Under a systematic exchange
program, a shareholder enters an agreement to purchase a specified class of
shares of one or more Funds over a specified period of time, and initially
purchases Prime Obligations Fund shares of the same class in an amount equal
to the total amount of the investment. On a monthly basis a specified dollar
amount of shares of Prime Obligations Fund is exchanged for shares of the
same class of the Funds specified. The systematic exchange program of
investing a fixed dollar amount at regular intervals over time has the
effect of reducing the average cost per share of the Funds. This effect also
can be achieved through the systematic investment program described below.
Because purchases of Class A Shares are subject to an initial sales charge,
it may be beneficial for an investor to execute a Letter of Intent in
connection with the systematic exchange program. A shareholder may apply for
participation in this program through his or her financial institution or by
calling (800) 637-2548.
---------------------------------------------------------------------------
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their
investment on a regular basis in a minimum amount of $100. Under this
program, funds may be automatically withdrawn periodically from the
shareholder's checking account and invested in Fund shares at the net asset
value next determined after an order is received, plus any applicable sales
charge. A shareholder may apply for participation in this program through
his or her financial institution or by calling (800) 637-2548.
---------------------------------------------------------------------------
EXCHANGING SECURITIES FOR FUND SHARES
A Fund may accept securities in exchange for Fund shares. A Fund will allow
such exchanges only upon the prior approval by the Fund and a determination
by the Fund and the Adviser that the securities to be exchanged are
acceptable. Securities accepted by a Fund will be valued in the same manner
that a Fund values its assets. The basis of the exchange will depend upon
the net asset value of Fund shares on the day the securities are valued.
---------------------------------------------------------------------------
CERTIFICATES AND CONFIRMATIONS
The Transfer Agent maintains a share account for each shareholder. Share
certificates will not be issued by the Funds.
Confirmations of each purchase and redemption are sent to each shareholder.
In addition, monthly confirmations are sent to report all transactions and
dividends paid during that month for the Funds.
---------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends with respect to each Fund (except Emerging Markets Fund) are
declared and paid monthly to all shareholders of record on the record date.
Dividends with respect to Emerging Markets Fund are declared and paid
annually to all shareholders of record on the record date. Distributions of
any net realized long-term capital gains will be made at least once every 12
months. Dividends and distributions are automatically reinvested in
additional shares of the Fund paying the dividend on payment dates at the
ex-dividend date net asset value without a sales charge, unless shareholders
request cash payments on the new account form or by writing to the Fund.
<PAGE>
All shareholders on the record date are entitled to the dividend. If shares
are purchased before a record date for a dividend or a distribution of
capital gains, a shareholder will pay the full price for the shares and will
receive some portion of the purchase price back as a taxable dividend or
distribution (to the extent, if any, that the dividend or distribution is
otherwise taxable to holders of Fund shares). If shares are redeemed or
exchanged before the record date for a dividend or distribution or are
purchased after the record date, those shares are not entitled to the
dividend or distribution.
The amount of dividends payable on Class A and Class B Shares generally will
be less than the dividends payable on Class Y Shares because of the
shareholder servicing expenses charged to Class A and Class B Shares. The
amount of dividends payable on Class A Shares generally will be more than
the dividends payable on the Class B Shares because of the higher
distribution and shareholder servicing fees paid by Class B Shares.
---------------------------------------------------------------------------
EXCHANGE PRIVILEGE
Shareholders may exchange Class A or Class B Shares of a Fund for currently
available Class A Shares or Class B Shares, respectively, of the other FAIF
Funds or of other funds in the First American family of funds. Class A
Shares of the Funds, whether acquired by direct purchase, reinvestment of
dividends on such shares, or otherwise, may be exchanged for Class A Shares
of other funds without the payment of any sales charge (i.e., at net asset
value). Exchanges of shares among the First American family of funds must
meet any applicable minimum investment of the fund for which shares are
being exchanged.
For purposes of calculating the Class B Shares' eight-year conversion period
or contingent deferred sales charges payable upon redemption, the holding
period of Class B Shares of the "old" fund and the holding period of Class B
Shares of the "new" fund are aggregated.
The ability to exchange shares of the Funds does not constitute an offering
or recommendation of shares of one fund by another fund. This privilege is
available to shareholders resident in any state in which the fund shares
being acquired may be sold. An investor who is considering acquiring shares
in another First American fund pursuant to the exchange privilege should
obtain and carefully read a prospectus of the fund to be acquired. Exchanges
may be accomplished by a written request, or by telephone if a preauthorized
exchange authorization is on file with the Transfer Agent, shareholder
servicing agent, or financial institution.
Written exchange requests must be signed exactly as shown on the
authorization form, and the signatures may be required to be guaranteed as
for a redemption of shares by an entity described below under "Redeeming
Shares -- Directly From the Funds -- Signatures." Neither the Funds, the
Distributor, the Transfer Agent, any shareholder servicing agent, or any
financial institution will be responsible for further verification of the
authenticity of the exchange instructions.
Telephone exchange instructions made by an investor may be carried out only
if a telephone authorization form completed by the investor is on file with
the Transfer Agent, shareholder servicing agent, or financial institution.
Shares may be exchanged between two First American funds by telephone only
if both funds have identical shareholder registrations.
Telephone exchange instructions may be recorded and will be binding upon the
shareholder. Telephone instructions must be received by the Transfer Agent
before 3:00 p.m. Central time, or by a shareholder's shareholder servicing
agent or financial institution by the time specified by it, in order for
shares to be exchanged the same day. Neither the Transfer Agent nor any Fund
will be responsible for the authenticity of exchange instructions received
by telephone if it reasonably believes those instructions to be genuine. The
Funds and the Transfer Agent will each employ reasonable procedures to
confirm that telephone instructions are genuine, and they may be liable for
losses resulting from unauthorized or fraudulent
<PAGE>
telephone instructions if they do not employ these procedures.
Shareholders of the Funds may have difficulty in making exchanges by
telephone through brokers and other financial institutions during times of
drastic economic or market changes. If a shareholder cannot contact his or
her broker or financial institution by telephone, it is recommended that an
exchange request be made in writing and sent by overnight mail to DST
Systems, Inc., 330 West Ninth Street, Kansas City, Missouri 64105. The
exchange privilege should not be used to take advantage of short-term swings
in the securities markets. The Funds reserve the right to limit or terminate
exchange privileges as to any shareholder who makes exchanges more than four
times a year (other than through the Systematic Exchange Program or similar
periodic investment program). The Funds may modify or revoke the exchange
privilege for all shareholders upon 60 days' prior written notice or without
notice in times of drastic economic or market changes.
Shares of a class in which an investor is no longer eligible to participate
may be exchanged for shares of a class in which that investor is eligible to
participate. An example of such an exchange would be a situation in which an
individual holder of Class A Shares subsequently opens a fiduciary, custody
or agency account with a financial institution which invests in Class Y
Shares.
The terms of any exchange privilege may be modified or terminated by the
Funds at any time. There are currently no additional fees or charges for the
exchange service. The Funds do not contemplate establishing such fees or
charges, but they reserve the right to do so. Shareholders will be notified
of any modification or termination of the exchange privilege and of the
imposition of any additional fees or charges.
REDEEMING SHARES
Each Fund redeems shares at their net asset value next determined after the
Transfer Agent receives the redemption request, reduced by any applicable
contingent deferred sales charge. Redemptions will be made on days on which
the Fund computes its net asset value. Redemption requests can be made as
described below and must be received in proper form.
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BY TELEPHONE
A shareholder may redeem shares of a Fund, if he or she elects the privilege
on the initial shareholder application, by calling his or her financial
institution to request the redemption. Shares will be redeemed at the net
asset value next determined after the Fund receives the redemption request
from the financial institution (less the amount of any applicable contingent
deferred sales charge). Redemption requests must be received by the
financial institution by the time specified by the institution in order for
shares to be redeemed at that day's net asset value, and redemption requests
must be transmitted to and received by the Funds by 3:00 p.m. Central time
in order for shares to be redeemed at that day's net asset value unless the
financial institution has been authorized to accept redemption requests on
behalf of the Funds. Pursuant to instructions received from the financial
institution, redemptions will be made by check or by wire transfer. It is
the financial institution's responsibility to transmit redemption requests
promptly.
Certain financial institutions are authorized to act as Mid Cap Growth
Fund's and Emerging Markets Fund's agent for the purpose of accepting
redemption requests, and such 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
<PAGE>
System, normally within one business day, but in no event more than seven
days after the request. Wire instructions must be previously established on
the account or provided in writing. The minimum amount for a wire transfer
is $1,000. If at any time the Funds determine it necessary to terminate or
modify this method of redemption, shareholders will be promptly notified.
In the event of drastic economic or market changes, a shareholder may
experience difficulty in redeeming shares by telephone. If this should
occur, another method of redemption should be considered. Neither the
Transfer Agent nor any Fund will be responsible for any loss, liability,
cost or expense for acting upon wire transfer instructions or telephone
instructions that it reasonably believes to be genuine. The Transfer Agent
and the Funds will each employ reasonable procedures to confirm that
instructions communicated are genuine. These procedures may include taping
of telephone conversations. To ensure authenticity of redemption or exchange
instructions received by telephone, the Transfer Agent examines each
shareholder request by verifying the account number and/or taxpayer
identification number at the time such request is made. The Transfer Agent
subsequently sends confirmations of both exchange sales and exchange
purchases to the shareholder for verification. If reasonable procedures are
not employed, the Transfer Agent and the Funds may be liable for any losses
due to unauthorized or fraudulent telephone transactions.
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BY MAIL
Any shareholder may redeem Fund shares by sending a written request to the
Transfer Agent, shareholder servicing agent, or financial institution. The
written request should include the shareholder's name, the Fund name, the
account number, and the share or dollar amount requested to be redeemed, and
should be signed exactly as the shares are registered. Shareholders should
call the Fund, shareholder servicing agent or financial institution for
assistance in redeeming by mail. A check for redemption proceeds normally is
mailed within one business day, but in no event more than seven days, after
receipt of a proper written redemption request.
Shareholders requesting a redemption of $5,000 or more, a redemption of any
amount to be sent to an address other than that on record with the Fund, or
a redemption payable other than to the shareholder of record, must have
signatures on written redemption requests guaranteed by:
* a trust company or commercial bank the deposits of which are insured by
the Bank Insurance Fund, which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
* a member firm of the New York, American, Boston, Midwest, or Pacific
Stock Exchanges or of the National Association of Securities Dealers;
* a savings bank or savings and loan association the deposits of which are
insured by the Savings Association Insurance Fund, which is administered
by the FDIC; or
* any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public.
The Funds and the Transfer Agent have adopted standards for accepting
signature guarantees from the above institutions. The Funds may elect in the
future to limit eligible signature guarantees to institutions that are
members of a signature guarantee program. The Funds and the Transfer Agent
reserve the right to amend these standards at any time without notice.
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BY SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders whose account value is at least $5,000 may elect to participate
in the Systematic Withdrawal Program. Under this program, Fund shares are
redeemed to provide for periodic withdrawal payments in an amount directed
by the shareholder. A shareholder may apply to
<PAGE>
participate in this program through his or her financial institution. It is
generally not in a shareholder's best interest to participate in the
Systematic Withdrawal Program at the same time that the shareholder is
purchasing additional shares if a sales charge must be paid in connection
with such purchases.
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REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When shares are purchased by check or with funds transmitted through the
Automated Clearing House, the proceeds of redemptions of those shares are
not available until the Transfer Agent is reasonably certain that the
purchase payment has cleared, which could take up to ten calendar days from
the purchase date.
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ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, a Fund may
redeem shares in any account, except retirement plans, and pay the proceeds,
less any applicable contingent deferred sales charge, to the shareholder if
the account balance falls below the required minimum value of $500. Shares
will not be redeemed in this manner, however, if the balance falls below
$500 because of changes in a Fund's net asset value. Before shares are
redeemed to close an account, the shareholder will be notified in writing
and allowed 60 days to purchase additional shares to meet the minimum
account requirement.
DETERMINING THE PRICE
OF SHARES
Class A Shares of the Funds are sold at net asset value plus a sales charge,
while Class B Shares are sold without a front-end sales charge. Shares are
redeemed at net asset value less any applicable contingent deferred sales
charge. See "Investing in the Funds -- Alternative Sales Charge Options."
The net asset value per share is determined as of the close of normal
trading on the New York Stock Exchange (3:00 p.m. Central time) on each day
the New York Stock Exchange and federally-chartered banks are open for
business, provided that net asset value need not be determined on days when
no Fund shares are tendered for redemption and no order for that Fund's
shares is received and on days on which changes in the value of portfolio
securities will not materially affect the current net asset value of the
Fund's shares. The price per share for purchases or redemptions is such
value next computed after the Transfer Agent receives the purchase order or
redemption request.
It is the responsibility of Participating Institutions promptly to forward
purchase and redemption orders to the Transfer Agent. In the case of
redemptions and repurchases of shares owned by corporations, trusts or
estates, the Transfer Agent or Fund may require additional documents to
evidence appropriate authority in order to effect the redemption, and the
applicable price will be that next determined following the receipt of the
required documentation.
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DETERMINING NET ASSET VALUE
The net asset value per share for each of the Funds is determined by
dividing the value of the securities owned by the Fund plus any cash and
other assets (including interest accrued and dividends declared but not
collected), less all liabilities, by the number of Fund shares outstanding.
For the purpose of determining the aggregate net assets of the Funds, cash
and receivables will be valued at their face amounts. Interest will be
recorded as accrued and dividends will be recorded on the ex-dividend date.
Security valuations are furnished by an independent pricing service that has
been approved by the Board of Directors. Securities listed on a securities
exchange or an automated quotation system for which quotations are readily
available, including securities traded over the counter, are valued at the
last quoted sale price on the principal exchange on which they are traded on
the valuation date, or, if there is no such reported sale on the valuation
date, at the most recently quoted bid price.
<PAGE>
Debt obligations with remaining maturities in excess of sixty days are
valued at the most recently quoted bid price. For such debt obligations the
pricing service may employ methods that utilize actual market transactions,
broker-dealer valuations, or other electronic data processing techniques.
These techniques generally consider such factors as security prices, yields,
maturities, call features, ratings and developments relating to specific
securities in arriving at security valuations. Debt obligations with
remaining maturities of sixty days or less may be valued at their amortized
cost which approximates market value. If a security price cannot be obtained
from an independent pricing service a bid price may be obtained from an
independent broker who makes a market in the security.
Foreign securities owned by the Funds are valued at the closing prices on
the principal exchange on which they trade.
If the value for a security cannot be obtained from the sources described
above, the security's value may be determined pursuant to the fair value
procedures established by the Board of Directors.
Financial futures are valued at the settlement price established each day by
the board of exchange on which they are traded. Portfolio securities
underlying actively traded options are valued at their market price as
determined above. The current market value of any exchange traded options
held or written by a Fund, are valued at the closing bid price for a long
position or the closing ask price for a short position.
Foreign currency forward contracts are valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
exchange rate and the thirty, sixty, ninety and one-hundred eighty day
forward rates provided by the Reuters system.
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FOREIGN SECURITIES
Any assets or liabilities of the Funds initially expressed in terms of
foreign currencies are translated into United States dollars using current
exchange rates. Trading in securities on foreign markets may be completed
before the close of business on each business day of the Funds. Thus, the
calculation of the Funds' net asset value may not take place
contemporaneously with the determination of the prices of foreign securities
held in the Funds' portfolios. In addition, trading in securities on foreign
markets may not take place on all days on which the New York Stock Exchange
is open for business or may take place on days on which the New York Stock
Exchange is not open for business. Therefore, the net asset value of a Fund
which holds foreign securities might be significantly affected on days when
an investor has no access to the Fund.
INCOME TAXES
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FEDERAL INCOME TAXATION -- ALL OF THE FUNDS
Each Fund is treated as a different entity for federal income tax purposes.
Each of the Funds intends to qualify as a regulated investment company under
the Internal Revenue Code of 1986, as amended (the "Code"), for the current
fiscal year and in the future. If so qualified and provided certain
distribution requirements are met, a Fund will not be liable for federal
income taxes to the extent it distributes its income to its shareholders.
Distributions paid from net taxable investment income and any net realized
short-term capital gains will be taxable to shareholders as ordinary income,
whether received in cash or in additional shares.
Distributions paid from long-term capital gains (and designated as such)
generally will be taxable as long-term capital gains for federal income tax
purposes, whether received in cash or shares, regardless of how long a
shareholder has held the shares in a Fund. In the case of shareholders who
are individuals, estates, or trusts, each Fund will designate the portion of
each capital gain dividend that must be treated as mid-term capital gain
(subject to a maximum tax rate of 28%) and the
<PAGE>
portion that must be treated as long-term capital gain (subject to a maximum
tax rate of 20%).
Gain or loss realized on the sale or exchange of shares in a Fund will be
treated as capital gain or loss, provided that (as is usually the case) the
shares represented a capital asset in the hands of the shareholder. For
corporate shareholders, such gain or loss will be long-term gain or loss if
the shares were held more than one year. For shareholders who are
individuals, estates, or trusts the gain or loss will be considered
long-term (subject to a maximum tax rate of 20%) if the shareholder has held
the shares for more than 18 months and mid-term (subject to a maximum tax
rate of 28%) if the shareholder has held the shares for more than one year
but not more than 18 months.
A Fund may be required to "back-up" withhold 31% of any dividend,
distribution, or redemption payment made to a shareholder who fails to
furnish the Fund with the shareholder's Social Security number or other
taxpayer identification number or to certify that he or she is not subject
to back-up withholding.
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TAX FREE FUND AND MINNESOTA TAX FREE FUND
Distributions of net interest income from tax-exempt obligations that are
designated by Tax Free Fund and Minnesota Tax Free Fund as exempt-interest
dividends are excludable from the gross income of each Fund's shareholders.
A portion of such dividends may, however, be subject to the alternative
minimum tax, as discussed below.
For federal income tax purposes, an alternative minimum tax ("AMT") is
imposed on taxpayers to the extent that such tax, if any, exceeds a
taxpayer's regular income tax liability (with certain adjustments).
Liability for AMT will depend on each shareholder's tax situation.
Exempt-interest dividends attributable to interest income on certain
tax-exempt obligations issued after August 7, 1986, to finance certain
private activities will be treated as an item of tax preference that is
included in alternative minimum taxable income for purposes of computing the
federal AMT for all taxpayers. Each of Tax Free Fund and Minnesota Tax Free
Fund may invest up to 20% of its assets in obligations the interest on which
is treated as an item of tax preference for federal income tax purposes.
Also, a portion of all other tax-exempt interest received by a corporation,
including exempt-interest dividends, will be included in adjusted current
earnings and in earnings and profits for purposes of determining the federal
corporate alternative minimum tax and the branch profits tax imposed on
foreign corporations under Section 884 of the Code. Each shareholder is
advised to consult his or her tax adviser with respect to the possible
effects of such tax preference items.
The Tax Reform Act of 1986 imposed new requirements on certain tax-exempt
bonds which, if not satisfied, could result in loss of tax exemption for
interest on such bonds, even retroactively to the date of issuance of the
bonds. Proposals may be introduced before Congress in the future, the
purpose of which will be to further restrict or eliminate the federal income
tax exemption for tax-exempt bonds held by Tax Free Fund and Minnesota Tax
Free Fund. Tax Free Fund and Minnesota Tax Free Fund will avoid investment
in bonds which, in the opinion of the Adviser, pose a material risk of the
loss of tax exemption. Further, if a bond in a Fund's portfolio lost its
exempt status, the Fund would make every effort to dispose of that
investment on terms that are not detrimental to the Fund.
In certain instances, the portion of Social Security benefits received by a
shareholder that is subject to federal income tax may be affected by the
amount of exempt-interest dividends received by the shareholder from Tax
Free Fund or Minnesota Tax Free Fund.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of Tax Free Fund and Minnesota Tax Free Fund will not be deductible
for federal income purposes.
<PAGE>
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EMERGING MARKETS FUND
Dividends paid by Emerging Markets Fund attributable to investments in the
securities of foreign issuers will not be eligible for the 70% deduction for
dividends received by corporations.
Emerging Markets Fund may be required to pay withholding and other taxes
imposed by foreign countries, generally at rates from 10% to 40%, which
would reduce the Fund's investment income. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
If at the end of Emerging Markets Fund's taxable year more than 50% of its
total assets consists of stock or securities of foreign corporations, the
Fund will be eligible to file an election with the Internal Revenue Service
to "pass through" to its shareholders the amount of foreign income taxes
(including withholding taxes) it paid. Pursuant to this election,
shareholders of the Fund will be required to include in gross income their
respective pro rata portions of such foreign taxes, treat such amounts as
foreign taxes paid by them, and subject to certain limitations, deduct such
amounts in computing their taxable income or, alternatively, use them as
foreign tax credits against their federal income taxes. If such an election
is filed for a year, Emerging Markets Fund shareholders will be notified of
the amounts which they may deduct as foreign taxes paid or used as foreign
tax credits.
Alternatively, if the amount of foreign taxes paid by Emerging Markets Fund
is not large enough in future years to warrant making the election described
above, the Fund may claim the amount of foreign taxes paid as a deduction
against its own gross income. In that case, shareholders will not be
required to include any amount of foreign taxes paid by the Fund in their
income and will not be permitted either to deduct any portion of foreign
taxes from their own income or to claim any amount of foreign tax credit for
taxes paid by the Fund.
Information concerning distributions will be mailed to shareholders
annually. Shareholders are required for information purposes to report
exempt-interest dividends and other tax-exempt interest on their tax
returns.
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MINNESOTA INCOME TAXATION -- MINNESOTA TAX FREE FUND
The portion of exempt-interest dividends paid by Minnesota Tax Free Fund
that is derived from interest on tax-exempt obligations issued by the State
of Minnesota, its political subdivisions and instrumentalities, is excluded
from the Minnesota taxable net income of individuals, estates and trusts,
provided that the portion of the exempt-interest dividends from such
Minnesota sources paid to all shareholders represent 95 percent or more of
the exempt-interest dividends paid by the Fund. The remaining portion of
such dividends, and dividends or capital gain dividends, are included in the
Minnesota taxable net income of individuals, estates and trusts, except for
dividends directly attributable to interest on obligations of the United
States Government, its territories and possessions. Exempt-interest
dividends are not excluded from the Minnesota taxable income of corporations
and financial institutions. Dividends qualifying for federal income tax
purposes as capital gain dividends are to be treated by shareholders as
long-term capital gains. Minnesota has repealed the favorable treatment of
long-term capital gains, while retaining restrictions on the deductibility
of capital losses. As under federal law, the portion of Social Security
benefits subject to Minnesota income tax may be affected by the amount of
exempt-interest dividends received by the shareholders. Exempt-interest
dividends attributable to interest on certain private activity bonds issued
after August 7, 1986 will be included in Minnesota alternative minimum
taxable income of individuals, estates and trusts for purposes of computing
Minnesota's alternative minimum tax. Dividends generally will not qualify
for the dividends-received deduction for corporations and financial
institutions.
<PAGE>
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OTHER STATE AND LOCAL TAXATION
Except to the extent described above under "-- Minnesota Income Taxation --
Minnesota Tax Free Fund," distributions by all of the Funds may be subject
to state and local taxation (even if, in the case of Tax Free Fund, they are
exempt from federal income taxes). Shareholders are urged to consult their
own tax advisers regarding state and local taxation.
TAX-EXEMPT VS.
INCOME TAXABLE
The tables above show the approximate yields that taxable securities must
earn to equal yields that are (i) exempt from federal income taxes; and (ii)
exempt from both federal and Minnesota income taxes, under selected income
tax brackets scheduled to be in effect in 1998. The effective combined rates
reflect the deduction of state income taxes from federal income. The 34.1%,
36.9%, 41.4%, and 44.7% combined federal/Minnesota rates assume that the
investor is subject to an 8.5% marginal Minnesota income tax rate and a
marginal federal income tax rate of 28%, 31%, 36% and 39.6%, respectively.
The combined rates do not reflect federal rules concerning the phase-out of
personal exemptions and limitations on the allowance of itemized deductions
for certain high-income taxpayers. The tables are based upon yields that are
derived solely from tax-exempt income. To the extent that a Fund's yield is
derived from taxable income, the Fund's tax equivalent yield will be less
than set forth in the tables. The tax-free yields used in these tables
should not be considered as representations of any particular rates of
return and are for purposes of illustration only.
FUND SHARES
Each share of a Fund is fully paid, nonassessable, and transferable. Shares
may be issued as either full or fractional shares. Fractional shares have
pro rata the same rights and privileges as full shares. Shares of the Funds
have no preemptive or conversion rights.
Each share of a Fund has one vote. On some issues, such as the election of
directors, all shares of all FAIF Funds vote together as one series. The
shares do not have cumulative voting rights. Consequently, the holders of
more than 50% of the shares voting for the election of directors are able to
elect all of the directors if they choose to do so. On issues affecting only
a particular Fund or class of shares, the shares of that Fund or class will
vote as a separate series. Examples of such issues would be proposals to
alter a fundamental
<TABLE>
<CAPTION>
TAX-EQUIVALENT YIELDS
COMBINED FEDERAL AND
FEDERAL TAX BRACKETS MINNESOTA TAX BRACKETS
- ------------------------------------------------- --------------------------------------
TAX-FREE
YIELDS 28% 31% 36% 39.6% 34.1% 36.9% 41.4% 44.7%
================================================= ======================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3.0% 4.17% 4.35% 4.69% 4.97% 4.55% 4.75% 5.12% 5.42%
3.5% 4.86% 5.07% 5.47% 5.79% 5.31% 5.55% 5.97% 6.33%
4.0% 5.56% 5.80% 6.25% 6.62% 6.07% 6.34% 6.83% 7.23%
4.5% 6.25% 6.52% 7.03% 7.45% 6.83% 7.13% 7.68% 8.14%
5.0% 6.94% 7.25% 7.81% 8.28% 7.59% 7.92% 8.53% 9.04%
5.5% 7.64% 7.97% 8.59% 9.11% 8.35% 8.72% 9.39% 9.95%
6.0% 8.33% 8.70% 9.38% 9.93% 9.10% 9.51% 10.24% 10.85%
6.5% 9.03% 9.42% 10.16% 10.76% 9.86% 10.30% 11.09% 11.75%
================================================= ======================================
</TABLE>
<PAGE>
investment restriction pertaining to a Fund or to approve, disapprove or
alter a distribution plan pertaining to a class of shares.
Under the laws of the State of Maryland and FAIF's Articles of
Incorporation, FAIF is not required to hold shareholder meetings unless they
(i) are required by the 1940 Act, or (ii) are requested in writing by the
holders of 25% or more of the outstanding shares of FAIF.
CALCULATION OF
PERFORMANCE DATA
From time to time, any of the Funds may advertise information regarding its
performance. Each Fund may publish its "yield," its "cumulative total
return," its "average annual total return" and its "distribution rate." In
addition, Tax Free Fund and Minnesota Tax Free Fund may publish their "tax
equivalent yield" and their "tax equivalent distribution rate." Distribution
rates and tax equivalent distribution rates may only be used in connection
with sales literature and shareholder communications preceded or accompanied
by a Prospectus. Each of these performance figures is based upon historical
results and is not intended to indicate future performance, and, except for
"distribution rate" and "tax equivalent distribution rate," is standardized
in accordance with Securities and Exchange Commission ("SEC") regulations.
"Yield" for the Funds is computed by dividing the net investment income per
share (as defined in applicable SEC regulations) earned during a 30-day
period (which period will be stated in the advertisement) by the maximum
offering price per share on the last day of the period. Yield is an
annualized figure, in that it assumes that the same level of net investment
income is generated over a one year period. The yield formula annualizes net
investment income by providing for semi-annual compounding.
"Tax equivalent yield" is that yield which a taxable investment must
generate in order to equal a Fund's yield for an investor in a stated
federal or combined federal/state income tax bracket (normally assumed to be
the maximum tax rate or combined rate). Tax equivalent yield is computed by
dividing that portion of the yield which is tax-exempt by one minus the
stated income tax rate, and adding the resulting amount to that portion, if
any, of the yield which is not tax-exempt.
"Total return" is based on the overall dollar or percentage change in value
of a hypothetical investment in a Fund assuming reinvestment of dividend
distributions and deduction of all charges and expenses, including, as
applicable, the maximum sales charge imposed on Class A Shares or the
contingent deferred sales charge imposed on Class B Shares redeemed at the
end of the specified period covered by the total return figure. "Cumulative
total return" reflects a Fund's performance over a stated period of time.
"Average annual total return" reflects the hypothetical annually compounded
rate that would have produced the same cumulative total return if
performance had been constant over the entire period. Because average annual
returns tend to smooth out variations in a Fund's performance, they are not
the same as actual year-by-year results. As a supplement to total return
computations, a Fund may also publish "total investment return" computations
which do not assume deduction of the maximum sales charge imposed on Class A
Shares or the contingent deferred sales charge imposed on Class B Shares.
"Distribution rate" is determined by dividing the income dividends per share
for a stated period by the maximum offering price per share on the last day
of the period. "Tax equivalent distribution rate" is computed by dividing
the portion of the distribution rate (determined as described above) which
is tax-exempt by one minus the stated federal or combined federal/state
income tax rate, and adding to the resulting amount that portion, if any, of
the distribution rate which is not tax-exempt. All distribution rates
published for the Funds are measures of the level of income dividends
distributed during a specified period. Thus, these rates differ from yield
(which measures income actually earned by a Fund) and total return (which
measures actual income, plus realized and
<PAGE>
unrealized gains or losses of a Fund's investments). Consequently,
distribution rates alone should not be considered complete measures of
performance.
The performance of the Class A and Class B Shares of a Fund will normally be
lower than for the Class Y Shares because Class Y Shares are not subject to
the sales charges and shareholder servicing expenses applicable to Class A
and Class B Shares. In addition, the performance of Class A and Class B
Shares of a Fund will differ because of the different sales charge
structures of the classes and because of the differing distribution and
shareholder servicing fees charged to Class B Shares.
In reports or other communications to shareholders and in advertising
material, the performance of each Fund may be compared to recognized
unmanaged indices or averages of the performance of similar securities and
to composites of such indices and averages. Also, the performance of each
Fund may be compared to that of other funds of similar size and objectives
as listed in the rankings prepared by Lipper Analytical Services, Inc. or
similar independent mutual fund rating services, and each Fund may include
in such reports, communications and advertising material evaluations
published by nationally recognized independent ranking services and
publications. For further information regarding the Funds' performance, see
"Fund Performance" in the Statement of Additional Information.
SPECIAL INVESTMENT METHODS
This section provides additional information concerning the securities in
which the Funds may invest and related topics. Further information
concerning these matters is contained in the Statement of Additional
Information.
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CASH ITEMS
The "cash items" in which certain of the Funds may invest, as described
under "Investment Objectives and Policies," include short-term obligations
such as rated commercial paper and variable amount master demand notes;
United States dollar-denominated time and savings deposits (including
certificates of deposit); bankers' acceptances; obligations of the United
States Government or its agencies or instrumentalities (including
zero-coupon securities); repurchase agreements collateralized by eligible
investments of a Fund; securities of other mutual funds which invest
primarily in debt obligations with remaining maturities of 13 months or less
(which investments also are subject to the advisory fee); and other similar
high-quality short-term United States dollar-denominated obligations. The
other mutual funds in which the Funds may so invest include money market
funds advised by the Adviser, subject to certain restrictions contained in
an exemptive order issued by the Securities and Exchange Commission with
respect thereto.
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MUNICIPAL BONDS AND OTHER MUNICIPAL OBLIGATIONS
As described under "Investment Objectives and Policies," Tax Free Fund and
Minnesota Tax Free Fund invest principally in municipal bonds and other
municipal obligations. These bonds and other obligations are issued by the
states and by their local and special-purpose political subdivisions. The
term "municipal bond" as used in this Prospectus includes short-term
municipal notes issued by the states and their political subdivisions.
MUNICIPAL BONDS. The two general classifications of municipal bonds are
"general obligation" bonds and "revenue" bonds. General obligation bonds are
secured by the governmental issuer's pledge of its faith, credit and taxing
power for the payment of principal and interest. They are usually paid from
general revenues of the issuing governmental entity. Revenue bonds, on the
other hand, are usually payable only out of a specific revenue source rather
than from general revenues. Revenue bonds ordinarily are not backed by the
faith, credit or general taxing power of the issuing governmental entity.
The principal and interest on revenue bonds for private facilities are
typically paid out of rents or
<PAGE>
other specified payments made to the issuing governmental entity by a
private company which uses or operates the facilities. Examples of these
types of obligations are industrial revenue bonds and pollution control
revenue bonds. Industrial revenue bonds are issued by governmental entities
to provide financing aid to community facilities such as hospitals, hotels,
business or residential complexes, convention halls and sport complexes.
Pollution control revenue bonds are issued to finance air, water and solids
pollution control systems for privately operated industrial or commercial
facilities.
Revenue bonds for private facilities usually do not represent a pledge of
the credit, general revenues or taxing powers of the issuing governmental
entity. Instead, the private company operating the facility is the sole
source of payment of the obligation. Sometimes, the funds for payment of
revenue bonds come solely from revenue generated by operation of the
facility. Revenue bonds which are not backed by the credit of the issuing
governmental entity frequently provide a higher rate of return than other
municipal obligations, but they entail greater risk than obligations which
are guaranteed by a governmental unit with taxing power. Federal income tax
laws place substantial limitations on industrial revenue bonds, and
particularly certain specified private activity bonds issued after August 7,
1986. In the future, legislation could be introduced in Congress which could
further restrict or eliminate the income tax exemption for interest on debt
obligations in which Tax Free Fund and Minnesota Tax Free Fund may invest.
Certain municipal securities may carry variable or floating rates of
interest whereby the rate of interest is not fixed but varies with changes
in specified market rates or indexes, such a a bank prime rate or a
tax-exempt money market index. Accordingly, the yield on such securities can
be expected to fluctuate with changes in prevailing interest rates.
DERIVATIVE MUNICIPAL SECURITIES. Tax Free Fund and Minnesota Tax Free Fund
may also acquire derivative municipal securities, which are custodial
receipts or 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
obligations.
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.
MUNICIPAL LEASES. Tax Free Fund and Minnesota Tax Free Fund also may
purchase participation interests in municipal leases. Participation
interests in municipal leases are undivided interests in a lease,
installment purchase contract or conditional sale contract entered into by a
state or local governmental unit to acquire equipment or facilities.
Municipal leases frequently have special risks which generally are not
associated with general obligation bonds or revenue bonds.
Municipal leases and installment purchase or conditional sale contracts
(which usually provide for title to the leased asset to pass to the
governmental issuer upon payment of all amounts due under the contract) have
evolved as a means for governmental issuers to acquire property and
equipment without meeting the constitutional and statutory requirements for
the issuance of municipal debt. The debt-issuance limitations are deemed to
be inapplicable because of the inclusion in many leases and contracts of
"non-appropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money
is appropriated for this purpose by the appropriate legislative body on a
yearly or other periodic basis. Although these kinds of obligations are
secured by the leased equipment or facilities,
<PAGE>
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, Tax Free Fund and Minnesota Tax Free Fund will
adopt 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 the Fund's portfolio. These
procedures will require that a number of factors be used in evaluating the
liquidity of a municipal lease security, including the frequency of trades
and quotes for the security, the number of dealers willing to purchase or
sell the security and the number of other potential purchasers, the
willingness of dealers to undertake to make a market in the security, the
nature of the marketplace in which the security trades, and other factors
which the Adviser may deem relevant. As described below under "-- Investment
Restrictions," Tax Free Fund and Minnesota Tax Free Fund are subject to
limitations on the percentage of illiquid securities they can hold.
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TEMPORARY TAXABLE INVESTMENTS
Tax Free Fund and Minnesota Tax Free Fund may make temporary taxable
investments as described under "Investment Objectives and Policies."
Temporary taxable investments will include only the following types of
obligations maturing within 13 months from the date of purchase: (i)
obligations of the United States Government, its agencies and
instrumentalities; (ii) commercial paper rated not less than A-2 by Standard
& Poor's or Prime-2 by Moody's or which has been assigned an equivalent
rating by another nationally recognized statistical rating organization;
(iii) other short-term debt securities issued or guaranteed by corporations
having outstanding debt rated not less than BBB by Standard & Poor's or Baa
by Moody's or which have been assigned an equivalent rating by another
nationally recognized statistical rating organization; (iv) certificates of
deposit of domestic commercial banks subject to regulation by the United
States Government or any of its agencies or instrumentalities, with assets
of $500 million or more based on the most recent published reports; and (v)
repurchase agreements with domestic banks or securities dealers involving
any of the securities which the Fund is permitted to hold. See "--
Repurchase Agreements" below.
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REPURCHASE AGREEMENTS
Each of the Funds may enter into repurchase agreements. A repurchase
agreement involves the purchase by a Fund of securities with the agreement
that after a stated period of time, the original seller will buy back the
same securities ("collateral") at a predetermined price or yield. Repurchase
agreements involve certain risks not associated with direct investments in
securities. If the original seller defaults on its obligation to repurchase
as a result of its bankruptcy or otherwise, the purchasing Fund will seek to
sell the collateral, which could involve costs or delays. Although
collateral (which may consist of any fixed income security which is an
eligible investment for the Fund entering into the repurchase agreement)
will at all times be maintained in an amount equal to the repurchase price
under the agreement (including accrued interest), a Fund would suffer a loss
if the proceeds from the sale of the collateral were less than the
agreed-upon repurchase price. The Adviser and, in the case of Emerging
Markets Fund, Sub-Adviser will monitor the creditworthiness of the firms
with which the Funds enter into repurchase agreements.
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INVERSE FLOATING RATE OBLIGATIONS
Tax Free Fund and Minnesota Tax Free Fund may invest up to 10% of their
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
<PAGE>
in a multiple of, changes in a specified index rate. Although an inverse
floating rate municipal obligation would tend to increase portfolio income
during a period of generally decreasing market interest rates, its income
and value would tend to decline during a period of generally increasing
market interest rates. In addition, its decline in value may be greater than
for a fixed-rate municipal obligation, particularly if the interest rate
borne by the floating rate municipal obligation is adjusted by a multiple of
changes in the specified index rate. For these reasons, inverse floating
rate municipal obligations have more risk than more conventional fixed-rate
and floating rate municipal obligations.
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WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
Each of the Funds may purchase securities on a when-issued or delayed
delivery basis. When such a transaction is negotiated, the purchase price is
fixed at the time the purchase commitment is entered, but delivery of and
payment for the securities take place at a later date. A Fund will not
accrue income with respect to securities purchased on a when-issued or
delayed delivery basis prior to their stated delivery date. Pending delivery
of the securities, each Fund will maintain in a segregated account cash or
liquid high-grade securities in an amount sufficient to meet its purchase
commitments.
The purchase of securities on a when-issued or delayed delivery basis
exposes a Fund to risk because the securities may decrease in value prior to
delivery. In addition, a Fund's purchase of securities on a when-issued or
delayed delivery basis while remaining substantially fully invested could
increase the amount of the Fund's total assets that are subject to market
risk, resulting in increased sensitivity of net asset value to changes in
market prices. However, the Funds will engage in when-issued and delayed
delivery transactions only for the purpose of acquiring portfolio securities
consistent with their investment objectives, and not for the purpose of
investment leverage. A seller's failure to deliver securities to a Fund
could prevent the Fund from realizing a price or yield considered to be
advantageous.
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ZERO-COUPON SECURITIES
Adjustable Rate Mortgage Securities Fund, Tax Free Fund and Minnesota Tax
Free Fund 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 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.
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LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, each of the Funds may lend portfolio
securities representing up to one-third of the value of its total assets to
broker-dealers, banks or other institutional borrowers of securities. If the
Funds engage in securities lending, distributions paid to shareholders from
the resulting income will not be excludable from shareholders' gross income
for income tax purposes. As with other extensions of credit, there may be
risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. However,
the Funds will only enter into loan arrangements with broker-dealers, banks,
or other institutions which the Adviser or, in the case of Emerging Markets
Fund, the Sub-Adviser has determined are creditworthy under guidelines
established by the Board of Directors. In these loan arrangements, the Funds
will receive collateral in the form of cash, United States Government
securities or other high-grade debt obligations
<PAGE>
equal to at least 100% of the value of the securities loaned. Collateral is
marked to market daily. The Funds will pay a portion of the income earned on
the lending transaction to the placing broker and may pay administrative and
custodial fees in connection with these loans, which in the case of U.S.
Bank Trust National Association, are 40% of the Funds' income from such
securities lending transactions.
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OPTIONS TRANSACTIONS
The Funds may purchase put and call options. These transactions will be
undertaken only for the purpose of reducing risk to the Funds. Depending on
the Fund, these transactions may include the purchase of put and call
options on equity securities on stock indices, on interest rate indices or
(in the case of Emerging Markets Fund) on foreign currencies. Options on
futures contracts are discussed below under "-- Futures and Options on
Futures."
A put option on a security gives the purchaser of the option the right (but
not the obligation) to sell, and the writer of the option the obligation to
buy, the underlying security at a stated price (the "exercise price") at any
time before the option expires. A call option on a security gives the
purchaser the right (but not the obligation) to buy, and the writer the
obligation to sell, the underlying security at the exercise price at any
time before the option expires. The purchase price for a put or call option
is the "premium" paid by the purchaser for the right to sell or buy.
Options on indices are similar to options on securities except that, rather
than the right to take or make delivery of a specific security at a stated
price, an option on an index gives the holder the right to receive, upon
exercise of the option, a defined amount of cash if the closing value of the
index upon which the option is based is greater than, in the case of a call,
or less than, in the case of a put, the exercise price of the option.
None of the Funds other than Mid Cap Growth Fund and Emerging Markets Fund
will invest more than 5% of the value of its total assets in purchased
options, provided that options which are "in the money" at the time of
purchase may be excluded from this 5% limitation. A call option is "in the
money" if the exercise price is lower than the current market price of the
underlying security or index, and a put option is "in the money" if the
exercise price is higher than the current market price. A Fund's loss
exposure in purchasing an option is limited to the sum of the premium paid
and the commission or other transaction expenses associated with acquiring
the option.
The use of purchased put and call options involves certain risks. These
include the risk of an imperfect correlation between market prices of
securities held by a Fund and the prices of options, and the risk of limited
liquidity in the event that a Fund seeks to close out an options position
before expiration by entering into an offsetting transaction.
WRITING OF CALL OPTIONS. The Funds may write (sell) covered call options to
the extent specified with respect to particular Funds under "Investment
Objectives and Policies." These transactions would be undertaken principally
to produce additional income. Depending on the Fund, these transactions may
include the writing of covered call options on equity securities or (only in
the case of Emerging Markets Fund) on foreign currencies which a Fund owns
or has the right to acquire or on interest rate indices.
When a Fund sells a covered call option, it is paid a premium by the
purchaser. If the market price of the security covered by the option does
not increase above the exercise price before the option expires, the option
generally will expire without being exercised, and the Fund will retain both
the premium paid for the option and the security. If the market price of the
security covered by the option does increase above the exercise price before
the option expires, however, the option is likely to be exercised by the
purchaser. In that case the Fund will be required to sell the security at
the exercise price, and it will not realize the benefit of increases in the
market price of the security above the exercise price of the option.
<PAGE>
The Funds also may, to the extent specified with respect to particular Funds
under "Investment Objectives and Policies," write call options on stock
indices the movements of which generally correlate with those of the
respective Funds' portfolio holdings, These transactions, which would be
undertaken principally to produce additional income, entail the risk of an
imperfect correlation between movements of the index covered by the option
and movements in the price of the Fund's portfolio securities.
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FUTURES AND OPTIONS ON FUTURES
Emerging Markets Fund, Adjustable Rate Mortgage Securities Fund, Tax Free
Fund and Minnesota Tax Free Fund may engage in futures transactions and
purchase options on futures to the extent specified with under "Investment
Objectives and Policies." Depending on the Fund, these transactions may
include the purchase of stock index futures and options on stock index
futures, and the purchase of interest rate futures and options on interest
rate futures. In addition, Emerging Markets Fund may enter into contracts
for the future delivery of securities or foreign currencies and futures
contracts based on a specific security, class of securities, or foreign
currency.
A futures contract on a security obligates one party to purchase, and the
other to sell, a specified security at a specified price on a date certain
in the future. A futures contract on an index obligates the seller to
deliver, and entitles the purchaser to receive, an amount of cash equal to a
specific dollar amount times the difference between the value of the index
at the expiration date of the contract and the index value specified in the
contract. The acquisition of put and call options on futures contracts will,
respectively, give a Fund the right (but not the obligation), for a
specified exercise price, to sell or to purchase the underlying futures
contract at any time during the option period.
A Fund may use futures contracts and options on futures in an effort to
hedge against market risks and, in the case of Emerging Markets Fund, as
part of its management of foreign currency transactions.
Aggregate initial margin deposits for futures contracts, and premiums paid
for related options, may not exceed 5% of a Fund's total assets, and the
value of securities that are the subject of such futures and options (both
for receipt and delivery) may not exceed 1/3 of the market value of a Fund's
total assets. Futures transactions will be limited to the extent necessary
to maintain each Fund's qualification as a regulated investment company
under the Internal Revenue Code of 1986, as amended. Futures and options on
futures transactions will also be limited by regulations of the Commodity
Futures Trading Commission.
Adjustable Rate Mortgage Securities Fund may make investments in Eurodollar
instruments in order to attempt to reduce investment risk. Eurodollar
instruments are essentially U.S. dollar denominated futures contracts or
options thereon that are linked 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 Fund 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
<PAGE>
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), 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.
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FIXED INCOME SECURITIES
The fixed income securities in which Mid Cap Growth Fund and Adjustable Rate
Mortgage Securities Fund may invest include securities issued or guaranteed
by the United States Government or its agencies or instrumentalities,
nonconvertible preferred stocks, nonconvertible corporate debt securities,
and short-term obligations of the kinds described above under "Special
Investment Methods -- Cash Items." Investments in nonconvertible preferred
stocks and nonconvertible corporate debt securities will be limited to
securities which are rated at the time of purchase not less than BBB by
Standard & Poor's or Baa by Moody's (or equivalent short-term ratings), or
which have been assigned an equivalent rating by another nationally
recognized statistical rating organization, or which are of comparable
quality in the judgment of the Adviser. Obligations rated BBB, Baa or their
equivalent, although investment grade, have speculative characteristics and
carry a somewhat higher risk of default than obligations rated in the higher
investment grade categories.
The fixed income securities specified above are subject to (i) interest rate
risk (the risk that increases in market interest rates will cause declines
in the value of debt securities held by 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).
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FOREIGN SECURITIES
GENERAL. Under normal market conditions Emerging Markets Fund invests at
least 65% of its total assets in equity securities which trade in foreign
emerging markets. In addition, Mid Cap Growth Fund may invest lesser
proportions of its assets in securities of foreign issuers which are either
listed on a United States securities exchange or represented by American
Depositary Receipts.
Investment in foreign securities is subject to special investment risks that
differ in some respects from those related to investments in securities of
United States domestic issuers. These risks include political, social or
economic instability in the country of the issuer, the difficulty of
predicting international trade patterns, the possibility of the imposition
of exchange controls, expropriation, limits on removal of currency or other
assets, nationalization of assets, foreign withholding and income taxation,
and foreign trading practices (including higher trading commissions,
custodial charges and delayed settlements). Foreign securities also may be
subject to greater fluctuations in price than securities issued by United
States corporations. The principal markets on which these securities trade
may have less volume and liquidity,
<PAGE>
and may be more volatile, than securities markets in the United States.
In addition, there may be less publicly available information about a
foreign company than about a United States domiciled company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to United
States domestic companies. There is also generally less government
regulation of securities exchanges, brokers and listed companies abroad than
in the United States. Confiscatory taxation or diplomatic developments could
also affect investment in those countries. In addition, foreign branches of
United States banks, foreign banks and foreign issuers may be subject to
less stringent reserve requirements and to different accounting, auditing,
reporting, and recordkeeping standards than those applicable to domestic
branches of United States banks and United States domestic issuers.
AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS. For many
foreign securities, United States dollar-denominated American Depositary
Receipts, which are traded in the United States on exchanges or
over-the-counter, are issued by domestic banks. American Depositary Receipts
represent the right to receive securities of foreign issuers deposited in a
domestic bank or a correspondent bank. American Depositary Receipts do not
eliminate all the risk inherent in investing in the securities of foreign
issuers. However, by investing in American Depositary Receipts rather than
directly in foreign issuers' stock, 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 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.
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FOREIGN CURRENCY TRANSACTIONS
Emerging Markets Fund may invest in securities which are purchased and sold
in foreign currencies. The value of its assets as measured in United States
dollars therefore may be affected favorably or unfavorably by changes in
foreign currency exchange rates and exchange control regulations. Emerging
Markets Fund also will incur costs in converting United States dollars to
local currencies, and vice versa.
Emerging Markets Fund will conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing
in the foreign currency exchange market, or through forward contracts to
purchase or sell foreign currencies. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date certain at a specified price. These forward currency contracts
are traded directly between currency traders (usually large commercial
banks) and their customers.
Emerging Markets Fund may enter into forward currency contracts in order
to hedge against
<PAGE>
adverse movements in exchange rates between currencies. It may engage in
"transaction hedging" to protect against a change in the foreign currency
exchange rate between the date the Fund contracts to purchase or sell a
security and the settlement date, or to "lock in" the United States dollar
equivalent of a dividend or interest payment made in a foreign currency. It
also may engage in "portfolio hedging" to protect against a decline in the
value of its portfolio securities as measured in United States dollars which
could result from changes in exchange rates between the United States dollar
and the foreign currencies in which the portfolio securities are purchased
and sold. Emerging Markets Fund also may hedge its foreign currency exchange
rate risk by engaging in currency financial futures and options
transactions.
Although a foreign currency hedge may be effective in protecting the Fund
from losses resulting from unfavorable changes in exchanges rates between
the United States dollar and foreign currencies, it also would limit the
gains which might be realized by the Fund from favorable changes in exchange
rates. The Sub-Adviser's decision whether to enter into currency hedging
transactions will depend in part on its view regarding the direction and
amount in which exchange rates are likely to move. The forecasting of
movements in exchange rates is extremely difficult, so that it is highly
uncertain whether a hedging strategy, if undertaken, would be successful. To
the extent that the Sub-Adviser's view regarding future exchange rates
proves to have been incorrect, Emerging Markets Fund may realize losses on
its foreign currency transactions.
Emerging Markets Fund does not intend to enter into forward currency
contracts or maintain a net exposure in such contracts where it would be
obligated to deliver an amount of foreign currency in excess of the value of
its portfolio securities or other assets denominated in that currency.
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ADJUSTABLE RATE MORTGAGE SECURITIES
Adjustable Rate Mortgage Securities Fund invests 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. 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 swings 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.
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MORTGAGE-BACKED SECURITIES
Adjustable Rate Mortgage Securities Fund may invest in mortgage-backed
securities which are Agency Pass-Through Certificates, private pass-through
securities or collateralized mortgage obligations ("CMOs"), as described
below.
Agency Pass-Through Certificates are mortgage pass-through certificates
representing undivided interests in pools of residential mortgage loans.
<PAGE>
Distribution of principal and interest on the mortgage loans underlying an
Agency Pass-Through Certificate is an obligation of or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA"), or the Federal Home Loan Mortgage Corporation
("FHLMC"). The obligation of GNMA with respect to such certificates is
backed by the full faith and credit of the United States, while the
obligations of FNMA and FHLMC with respect to such certificates rely solely
on the assets and credit of those entities. The mortgage loans underlying
GNMA certificates are partially or fully guaranteed by the Federal Housing
Administration or the Veterans Administration, while the mortgage loans
underlying FNMA certificates and FHLMC certificates are conventional
mortgage loans which are, in some cases, insured by private mortgage
insurance companies. Agency Pass-Through Certificates may be issued in a
single class with respect to a given pool of mortgage loans or in multiple
classes.
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 FHMLC, 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 provision 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. Adjustable Rate Mortgage Securities Fund
will invest only in CMOs which are rated in one of the four highest rating
categories by a nationally recognized statistical rating organization or
which are of comparable quality in the judgment of the Adviser. Because CMOs
are debt obligations of private entities, payments on CMOs generally are not
obligations of or guaranteed by any governmental entity, and their ratings
and creditworthiness typically depend, among other factors, on the legal
insulation of the issuer and transaction from the consequences of a
sponsoring entity's bankruptcy. CMOs generally are issued in multiple
classes, with holders of each class entitled to receive specified portions
of the principal payments and prepayments and/or of the interest payments on
the underlying mortgage loans. These entitlements can be specified in a wide
variety of ways, so that the payment characteristics of various classes may
differ greatly from one another. 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. Examples of
the more common classes are provided in the Statement of Additional
Information. The CMOs in which the Fund may invest include classes which are
subordinated in right of payment to other classes, as long as they have the
required rating referred to above.
It generally is more difficult to predict the effect of changes in market
interest rates on the return on mortgaged-backed securities than to predict
the effect of such changes on the return of a
<PAGE>
conventional fixed-rate debt instrument, and the magnitude of such effects
may be greater in some cases. The return on interest-only and principal-only
mortgage-backed securities is particularly sensitive to changes in interest
rates and prepayment speeds. When interest rates decline and prepayment
speeds increase, the holder of an interest-only mortgage-backed security may
not even recover its initial investment. Similarly, the return on an inverse
floating rate CMO is likely to decline more sharply in periods of increasing
interest rates than that of a fixed-rate security. For these reasons,
interest-only, principal-only and inverse floating rate mortgage-backed
securities generally have greater risk than more conventional classes of
mortgage-backed securities.
---------------------------------------------------------------------------
ASSET-BACKED SECURITIES
Adjustable Rate Mortgage Securities Fund may invest in asset-backed
securities. Asset-backed securities generally constitute interests in, or
obligations secured by, a pool of receivables other than mortgage loans,
such as automobile loans and leases, credit card receivables, home equity
loans and trade receivables. Asset-backed securities generally are issued by
a private special-purpose entity. Their ratings and creditworthiness
typically depend on the legal insulation of the issuer and transaction from
the consequences of a sponsoring entity's bankruptcy, as well as on the
credit quality of the underlying receivables and the amount and credit
quality of any third-party credit enhancement supporting the underlying
receivables or the asset-backed securities. Asset-backed securities and
their underlying receivables generally are not issued or guaranteed by any
governmental entity.
---------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
Portfolio transactions in the over-the-counter market will be effected with
market makers or issuers, unless better overall price and execution are
available through a brokerage transaction. It is anticipated that most
portfolio transactions involving debt securities will be executed on a
principal basis. Also, with respect to the placement of portfolio
transactions with securities firms, subject to the overall policy to seek to
place portfolio transactions as efficiently as possible and at the best
price, research services and placement of orders by securities firms for a
Fund's shares may be taken into account as a factor in placing portfolio
transactions for the Fund.
---------------------------------------------------------------------------
PORTFOLIO TURNOVER
Although the Funds do not intend generally to trade for short-term profits,
they may dispose of a security without regard to the time it has been held
when such action appears advisable to the Adviser, and in the case of
Emerging Markets Fund, the Sub-Adviser. The portfolio turnover rate for a
Fund may vary from year to year and may be affected by cash requirements for
redemptions of shares. High portfolio turnover rates (100% or more)
generally would result in higher transaction costs and could result in
additional tax consequences to a Fund's shareholders.
---------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
The fundamental and nonfundamental investment restrictions of the Funds
are set forth in full in the Statement of Additional Information. The
fundamental restrictions include the following:
* None of the Funds will borrow money, except from banks for temporary or
emergency purposes. The amount of such borrowing may not exceed 10% of
the borrowing Fund's total assets. None of the Funds will borrow money
for leverage purposes. For the purpose of this investment restriction,
the use of options and futures transactions and the purchase of
securities on a when-issued or delayed delivery basis shall not be
deemed the borrowing of money. If a Fund engages in borrowing, its share
price may be subject to greater fluctuation, and the interest expense
associated with the borrowing may reduce the Fund's net income.
<PAGE>
* None of the Funds will make short sales of securities.
* None of the Funds will purchase any securities on margin except to
obtain such short-term credits as may be necessary for the clearance of
transactions and except, in the case of Emerging Markets Fund, as may be
necessary to make margin payments in connection with foreign currency
futures and other derivatives transactions.
* Tax Free Fund will not invest 25% or more of the value of its total
assets in obligations of issuers located in the same state (for this
purpose, the location of an "issuer" shall be deemed to be the location
of the entity the revenues of which are the primary source of payment or
the location of the project or facility which may be the subject of the
obligation). Neither Tax Free Fund nor Minnesota Tax Free Fund will
invest 25% or more of the value of its total assets in revenue bonds or
notes, payment for which comes from revenues from any one type of
activity (for this purpose, the term "type of activity" shall include
without limitation (i) sewage treatment and disposal; (ii) gas
provision; (iii) electric power provision; (iv) water provision; (v)
mass transportation systems; (vi) housing; (vii) hospitals; (viii)
nursing homes; (ix) street development and repair; (x) toll roads; (xi)
airport facilities; and (xii) educational facilities), except that, in
circumstances in which other appropriate available investments may be in
limited supply, such Funds may invest without limitation in gas
provision, electric power provision, water provision, housing and
hospital obligations. This restriction does not apply to general
obligation bonds or notes or, in the case of Tax Free Fund, to pollution
control revenue bonds. However, in the case of the latter Fund, it is
anticipated that normally (unless there are unusually favorable interest
and market factors) less than 25% of such Fund's total assets will be
invested in pollution control bonds. This restriction does not apply to
securities of the United States Government or its agencies and
instrumentalities or repurchase agreements relating thereto.
A fundamental policy or restriction, including those stated above, cannot be
changed without an affirmative vote of the holders of a "majority" of the
outstanding shares of the applicable Fund, as defined in the 1940 Act.
As a nonfundamental policy, none of the Funds will invest more than 15% of
its net assets in all forms of illiquid investments, as determined pursuant
to applicable Securities and Exchange Commission rules and interpretations.
Section 4(2) commercial paper and Rule 144A securities may be determined to
be "liquid" under guidelines adopted by the Board of Directors. Investing in
Rule 144A securities could have the effect of increasing the level of
illiquidity in a Fund to the extent that qualified institutional buyers
become, for a time, uninterested in purchasing these securities.
<PAGE>
INFORMATION CONCERNING
COMPENSATION PAID TO
U.S. BANK NATIONAL
ASSOCIATION, U.S. BANK
TRUST NATIONAL ASSOCIATION
AND OTHER AFFILIATES
U.S. Bank National Association, U.S. Bank Trust National Association and
other affiliates of U.S. Bancorp may act as fiduciary with respect to plans
subject to the Employee Retirement Income Security Act of 1974 ("ERISA") and
other trust and agency accounts that invest in the Funds. These U.S. Bancorp
affiliates may receive compensation from the Funds for the services they
provide to the Funds, as described more fully in the following sections of
this Prospectus:
Investment advisory services -- see "Management-
Investment Adviser"
Custodian services -- see "Management-Custodian"
Sub-administration -- see "Management-Administrator"
Transfer agent services -- see "Management-Transfer Agent."
Shareholder servicing -- see "Distributor"
Securities lending -- see "Special Investment Methods-Lending of Portfolio
Securities"
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
Oaks, Pennsylvania 19456
Investment Adviser
U.S. BANK NATIONAL ASSOCIATION
601 Second Avenue South
Minneapolis, Minnesota 55402
Custodian
U.S. BANK TRUST NATIONAL ASSOCIATION
180 East Fifth Street
St. Paul, Minnesota 55101
Distributor
SEI INVESTMENTS DISTRIBUTION CO.
Oaks, Pennsylvania 19456
Administrator
SEI INVESTMENTS MANAGEMENT CORPORATION
Oaks, Pennsylvania 19456
Transfer Agent
DST SYSTEMS, INC.
330 West Ninth Street
Kansas City, Missouri 64105
Independent Auditors
KPMG PEAT MARWICK LLP
90 South Seventh Street
Minneapolis, Minnesota 55402
Counsel
DORSEY & WHITNEY LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
FAIF-1002 (7/98) R
<PAGE>
APPENDIX X
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION AND AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
, 1998
CLASS Y SHARES
Mid Cap
Growth Fund
Emerging
Markets Fund
Adjustable Rate
Mortgage Securities Fund
Tax Free Fund
Minnesota
Tax Free Fund
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
Subject to Completion -- April 15, 1998
[LOGO]
FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING (R)
<PAGE>
TABLE OF CONTENTS
Summary 2
...............................................
Fees and Expenses 4
...............................................
The Funds 6
...............................................
Investment Objectives and Policies 6
...............................................
Management 13
...............................................
Distributor 18
...............................................
Purchases and Redemptions of Shares 18
...............................................
Income Taxes 21
...............................................
Tax-Exempt vs. Taxable Income 23
...............................................
Fund Shares 24
...............................................
Calculation of Performance Data 24
...............................................
Special Investment Methods 25
...............................................
Information Concerning Compensation Paid
to U.S. Bank National Association, U.S. Bank
Trust National Association and Other
Affiliates 38
...............................................
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
CLASS Y SHARES PROSPECTUS
The shares described in this Prospectus represent interests in First
American Investment Funds, Inc., which consists of mutual funds with several
different investment portfolios and objectives. This Prospectus relates to
the Class Y Shares of the following funds (the "Funds"):
* MID CAP GROWTH FUND
* EMERGING MARKETS FUND
* ADJUSTABLE RATE MORTGAGE SECURITIES FUND
* TAX FREE FUND
* MINNESOTA TAX FREE FUND
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING U.S. BANK NATIONAL ASSOCIATION AND ANY OF
ITS AFFILIATES, NOR ARE THEY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. AN INVESTMENT IN
THE FUNDS INVOLVES INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL,
DUE TO FLUCTUATIONS IN EACH FUND'S NET ASSET VALUE.
This Prospectus concisely sets forth information about the Funds that a
prospective investor should know before investing. It should be read and
retained for future reference.
A Statement of Additional Information dated ____________, 1998 for the Funds
has been filed with the Securities and Exchange Commission ("SEC") and is
incorporated in its entirety by reference in this Prospectus. To obtain
copies of the Statement of Additional Information at no charge, or to obtain
other information or make inquiries about the Funds, call (800) 637-2548 or
write SEI Investments Distribution Co., Oaks, Pennsylvania 19456. The SEC
maintains a World Wide Web site that contains reports and information
regarding issuers that file electronically with the SEC. The address of such
site is "http://www.sec.gov."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is ___________ 1998.
<PAGE>
SUMMARY
First American Investment Funds, Inc. ("FAIF") is an open-end investment
company which offers shares in several different mutual funds. This
Prospectus provides information with respect to the Class Y Shares of the
following funds (the "Funds"):
MID CAP GROWTH FUND has an objective of growth of capital. Under normal
market conditions, the Fund invests at least 65% of its total assets in
equity securities of mid-capitalization companies (those with market
capitalizations from $1 billion to $5 billion at the time of purchase) that,
in the Fund's adviser's opinion, exhibit outstanding potential for superior
growth based on a combination of factors such as above average growth in
revenue and earnings, strong management and sound and improving financial
condition.
EMERGING MARKETS FUND has an objective of long-term growth of capital. Under
normal market conditions, the Fund invests at least 65% of its total assets
in an internationally diversified portfolio of equity securities which trade
in emerging markets.
ADJUSTABLE RATE MORTGAGE SECURITIES FUND has an objective of providing
current income while attempting to provide a high degree of principal
stability. Under normal market conditions, the Fund will invest at least 65%
of its total assets in mortgage-related securities having adjustable
interest rates which reset at periodic intervals.
TAX FREE FUND has an objective of providing maximum current income which is
exempt from federal taxation to the extent consistent with prudent
investment risk. Under normal market conditions, the Fund will invest at
least 80% of its net assets in municipal obligations, the interest on which
is, exempt from federal income tax. No more than 20% of the securities owned
by this Fund will generate income that is subject to the federal alternative
minimum tax. Under normal market conditions, the weighted average maturity
of the securities held by this Fund will range from 15 to 25 years.
MINNESOTA TAX FREE FUND has an objective of providing maximum current income
which is exempt from both federal income tax and Minnesota state income tax
to the extent consistent with prudent investment risk. Under normal market
conditions, this Fund invests at least 80% of its net assets in municipal
obligations, the interest on which is exempt from federal and Minnesota
income tax. No more than 20% of the securities owned by this Fund will
generate income that is subject to the federal or the Minnesota alternative
minimum tax. Under normal market conditions, the weighted average maturity
of the securities held by this Fund will range from 15 to 25 years.
INVESTMENT ADVISER. U.S. Bank National Association (the "Adviser" or "U.S.
Bank") serves as investment adviser to each of the Funds though its First
American Asset Management group. Marvin & Palmer Associates, Inc. (the
"Sub-Adviser") serves as sub-adviser to Emerging Markets Fund. See
"Management."
DISTRIBUTOR; ADMINISTRATOR. SEI Investments Distribution Co. (the
"Distributor") serves as the distributor of the Funds' shares. SEI
Investments Management Corporation (the "Administrator") serves as the
administrator of the Funds. See "Management" and "Distributor."
ELIGIBLE INVESTORS; OFFERING PRICES. Class Y Shares are offered through
banks and certain other institutions for the investment of their own funds
and funds for which they act in a fiduciary, agency or custodial capacity.
Class Y Shares are sold at net asset value without any front-end or
deferred sales charges. See "Purchases and Redemptions of Shares."
EXCHANGES. Class Y Shares of any Fund may be exchanged for Class Y shares
of other funds in the First American family of funds at the shares'
respective net asset values with no additional
<PAGE>
charge. See "Purchases and Redemptions of Shares -- Exchange Privilege."
REDEMPTIONS. Shares of each Fund may be redeemed at any time at their net
asset value next determined after receipt of a redemption request by the
Funds' transfer agent, with no additional charge. See "Purchases and
Redemptions of Shares."
RISKS TO CONSIDER. Mid Cap Growth Fund and Emerging Markets Fund are subject
to the risk of generally adverse equity markets. Investors also should
recognize that market prices of equity securities generally, and of
particular companies' equity securities, frequently are subject to greater
volatility than prices of fixed income securities. Because Mid Cap Growth
Fund and Emerging Markets Fund are actively managed, their performance will
reflect in part the ability of the Adviser or Sub-Adviser to select
securities which are suited to achieving their investment objectives. Due to
their active management, these Funds could underperform other mutual funds
with similar investment objectives or the market generally. In addition, (i)
Mid Cap Growth Fund and Emerging Markets Fund are subject to risks
associated with investing in mid- and small capitalization companies, (ii)
Emerging Markets Fund is subject to the risks associated with investing in
foreign securities and to currency risk; (iii) Mid Cap Growth Fund may
invest specified portions of its assets in securities of foreign issuers
which are listed on a United States stock exchange or represented by
American Depositary Receipts; and (iv) certain Funds may invest (but not for
speculative purposes) in stock index futures contracts, options on stock
indices and options on stock index futures.
Adjustable Rate Mortgage Securities Fund, Tax Free Fund and Minnesota Tax
Free Fund are subject to (i) interest rate risk (the risk that increases in
market interest rates will cause declines in the value of debt securities or
mortgage-related securities held by a Fund); (ii) credit risk (the risk that
the issuers of debt securities or mortgage-related 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). Adjustable Rate Mortgage Securities Fund endeavors to
limit interest rate risk and prepayment risk by investing primarily in
mortgage-related securities which have adjustable interest rates. Adjustable
Rate Mortgage Securities Fund is also subject to extension risk. That is,
rising interest rates could cause homeowners to prepay their mortgages more
slowly than expected, and 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.
In addition, the value of municipal obligations held by Tax Free Fund and
Minnesota Tax Free Fund may be adversely affected by local political and
economic conditions and developments in the states and political
subdivisions which issue the obligations. Investors should note in this
regard that Minnesota Tax Free Fund invests principally in municipal
obligations of issuers located only in Minnesota. Adjustable Rate Mortgage
Securities Fund, Tax Free Fund and Minnesota Tax Free Fund also may, in
order to attempt to reduce risk, invest in exchange traded interest rate
futures contracts, interest rate index futures contracts, put and call
options on interest rate futures contracts and on interest rate indices. See
"Investment Objectives and Policies -- Risks to Consider" and "Special
Investment Methods."
SHAREHOLDER INQUIRIES. Any questions or communications regarding the Funds
or a shareholder account should be directed to the Distributor by calling
(800) 637-2548, or to the financial institution which holds shares on an
investor's behalf.
<PAGE>
FEES AND EXPENSES
- --------------------------------------------------------------------------------
CLASS Y SHARE FEES AND EXPENSES
<TABLE>
<CAPTION>
ADJUSTABLE RATE
MID CAP EMERGING MORTGAGE MINNESOTA
GROWTH MARKETS SECURITIES TAX FREE TAX FREE
FUND FUND FUND FUND FUND
========================================================================================================
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed
on purchases None None None None None
Maximum sales load imposed on
reinvested dividends None None None None None
Deferred sales load None None None None None
Redemption fees None None None None None
Exchange fees
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees (after voluntary
fee waivers)(1) 0.70% 0.70% 0.40% 0.63% 0.52%
Rule 12b-1 fees None None None None None
Other expenses 0.17% 0.75% 0.25% 0.22% 0.18%
Total fund operating expenses
(after voluntary fee waivers )(1) 0.87% 1.45% 0.65% 0.85% 0.70%
========================================================================================================
EXAMPLE(2)
You would pay the following expenses on a $1,000 investment, assuming (i) a 5%
annual return and (ii) redemption at the end of each time period:
1 year $ 9 $ 15 $ 7 $ 9 $ 7
3 years $ 28 $ 46 $ 21 $ 27 $ 22
</TABLE>
(1) THE ADVISER INTENDS TO WAIVE A PORTION OF ITS FEES ON A VOLUNTARY BASIS, AND
THE AMOUNTS SHOWN REFLECT THESE WAIVERS AS OF THE DATE OF THIS PROSPECTUS.
THE ADVISER INTENDS TO MAINTAIN SUCH WAIVERS IN EFFECT FOR THE CURRENT
FISCAL YEAR BUT RESERVES THE RIGHT TO DISCONTINUE SUCH WAIVERS AT ANY TIME
IN ITS SOLE DISCRETION. NOTWITHSTANDING THE FOREGOING, THE ADVISER WILL
MAINTAIN SUCH WAIVERS FOR THE FUNDS AT LEAST THROUGH JULY 31, 2000 SO THAT
THE TOTAL FUND OPERATING EXPENSES DO NOT EXCEED 0.89% FOR MID CAP GROWTH
FUND, AND 0.71% FOR MINNESOTA TAX FREE FUND. ABSENT ANY FEE WAIVERS,
INVESTMENT ADVISORY FEES FOR EACH FUND AS AN ANNUALIZED PERCENTAGE OF
AVERAGE DAILY NET ASSETS WOULD BE 0.70% EXCEPT IN THE CASE OF EMERGING
MARKETS FUND, 1.25%; AND TOTAL FUND OPERATING EXPENSES CALCULATED ON SUCH
BASIS WOULD BE 0.87% FOR MID CAP GROWTH FUND, 2.00% FOR EMERGING MARKETS
FUND, 0.95% FOR ADJUSTABLE RATE MORTGAGE SECURITIES FUND, 0.92% FOR TAX FREE
FUND, AND 0.88% FOR MINNESOTA TAX FREE FUND. "OTHER EXPENSES" INCLUDES AN
ADMINISTRATION FEE.
(2) ABSENT THE FEE WAIVERS REFERRED TO IN (1) ABOVE, THE DOLLAR AMOUNTS FOR THE
1 AND 3-YEAR PERIODS WOULD BE AS FOLLOWS: MID CAP GROWTH FUND, $9 AND $28;
EMERGING MARKETS FUND, $20 AND $63; ADJUSTABLE RATE MORTGAGE SECURITIES
FUND, $10 AND $30; TAX FREE FUND, $9 AND $29; AND MINNESOTA TAX FREE FUND,
$9 AND $28.
<PAGE>
---------------------------------------------------------------------------
INFORMATION CONCERNING FEES AND EXPENSES
The purpose of the preceding tables is to assist the investor in
understanding the various costs and expenses that an investor in a Fund may
bear directly or indirectly. THE EXAMPLES CONTAINED IN THE TABLES SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
<PAGE>
THE FUNDS
FAIF is an open-end management investment company which offers shares in
several different mutual funds (collectively, the "FAIF Funds"), each of
which evidences an interest in a separate and distinct investment portfolio.
Shareholders may purchase shares in each FAIF Fund through several separate
classes which provide for variations in distribution costs, shareholder
servicing fees, voting rights and dividends. Except for these differences
among classes, each share of each FAIF Fund represents an undivided
proportionate interest in that Fund. FAIF is incorporated under the laws of
the State of Maryland, and its principal offices are located at Oaks,
Pennsylvania 19456.
This Prospectus relates only to the Class Y Shares of the Funds named on the
cover hereof. Information regarding the Class A Shares of these Funds, the
Class B Shares of Mid Cap Growth Fund and Emerging Markets Fund, and
regarding the Class A, Class B and Class Y Shares of the other FAIF Funds is
contained in separate prospectuses that may be obtained from FAIF's
Distributor, SEI Investments Distribution Co., Oaks, Pennsylvania, 19456, or
by calling (800) 637-2548. The Board of Directors of FAIF may authorize
additional series or classes of common stock in the future.
INVESTMENT OBJECTIVES
AND POLICIES
This section describes the investment objectives and policies of the Funds.
There is no assurance that any of these objectives will be achieved. The
Funds' investment objectives are not fundamental and therefore may be
changed without a vote of shareholders. Such changes could result in a Fund
having investment objectives different from those which shareholders
considered appropriate at the time of their investment in a Fund.
Shareholders will receive written notification at least 30 days prior to any
change in a Fund's investment objectives. Each of the Funds (except
Minnesota Tax Free Fund) is a diversified investment company, as defined in
the Investment Company Act of 1940 (the "1940 Act"). Minnesota Tax Free Fund
is a nondiversified investment company under the 1940 Act.
If a percentage limitation on investments by a Fund stated below or in the
Statement of Additional Information is adhered to at the time of an
investment, a later increase or decrease in percentage resulting from
changes in asset values will not be deemed to violate the limitation except
in the case of the limitation on illiquid investments. Similarly, if a Fund
is required or permitted to invest a stated percentage of its assets in
companies with no more or no less than a stated market capitalization,
deviations from the stated percentages which result from changes in
companies' market capitalization, after the Fund purchases their shares will
not be deemed to violate the limitation. A Fund which is limited to
investing in securities with specified ratings is not required to sell a
security if its rating is reduced or discontinued after purchase, but the
Fund may consider doing so. However, in no event will more than 5% of any
Fund's net assets be invested in non-investment grade securities.
Descriptions of the rating categories of Standard & Poor's Rating Services,
a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's") and
Moody's Investors Service, Inc. ("Moody's") are contained in the Statement
of Additional Information.
When the term "equity securities" is used in this Prospectus, it refers to
common stock and securities which are convertible into or exchangeable for,
or which carry warrants or other rights to acquire, common stock.
This section also contains information concerning certain investment risks
borne by Fund shareholders under the heading "-- Risks to Consider." Further
information concerning the securities in which the Funds may invest and
related matters is set forth under "Special Investment Methods."
<PAGE>
---------------------------------------------------------------------------
MID CAP GROWTH FUND
OBJECTIVE. Mid Cap Growth Fund has an objective of growth of capital.
INVESTMENT POLICIES. Under normal market conditions, Mid Cap Growth Fund
invests at least 65% of its total assets in equity securities of
mid-capitalization companies that, in the Adviser's opinion, exhibit
outstanding potential for superior growth based on a combination of factors
such as above average growth in revenue and earnings, strong management and
sound and improving financial condition. For these purposes,
mid-capitalization growth companies are deemed those with market
capitalizations from $1 billion to $5 billion at the time of purchase.
The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of less than $1
billion or more than $5 billion and in fixed income securities of the kinds
described under "Special Investment Methods -- Fixed Income
Securities."
Subject to the limitation stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts.
For information about these kinds of investments and certain associated
risks, see "Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund and write call options
on stock indices related to such equity securities; (iv) purchase securities
on a when-issued or delayed delivery basis; and (v) engage in the lending of
portfolio securities. For information about these investment methods,
restrictions on their use, and certain associated risks, see the related
headings under "Special Investment Methods."
For temporary defensive purposes, the Fund may without limitation hold cash
or invest in cash items of the kinds described under "Special Investment
Methods -- Cash Items." The Fund also may invest not more 35% of its total
assets in cash and cash items in order to utilize assets awaiting normal
investment.
---------------------------------------------------------------------------
EMERGING MARKETS FUND
OBJECTIVE. Emerging Markets Fund has an objective of long-term growth of
capital.
INVESTMENT POLICIES. Under normal market conditions, Emerging Markets Fund
invests at least 65% of its total assets in an internationally diversified
portfolio of equity securities which trade in emerging markets. A country
will be considered to have an "emerging market" if it has relatively low
gross national product per capita compared to the world's major economics
and the potential for rapid economic growth. Countries with emerging markets
include those that have an emerging stock market (as defined by the
International Financial Corporation), those with low- to middle income
economics (according to the World Bank), and those listed in World Bank
publications as "developing."
The securities in which the Fund invests include common and preferred stock,
securities (bonds and preferred stock) convertible into common stock,
warrants and securities representing underlying international securities
such as American Depositary Receipts and European Depositary Receipts. The
Fund may also hold securities of other investment companies (which
investments are also subject to the advisory fee) and depositary or
custodial receipts representing beneficial interests in any of the foregoing
securities. Normally, the Fund will invest at least 65% of its total assets
in securities traded in at least six foreign countries although it may
invest all of its assets in a single country. At the present time, the Fund
has no intention of investing all of its assets in a single country.
In investing the Fund's assets, the Sub-Adviser expects to place primary
emphasis on country selection, followed by selection of industries or
<PAGE>
sectors within or across countries and by selection of indiviual stocks
corresponding to the industries or sectors selected.
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 50% of the
equity securities owned by the Fund and write call options on stock indices
related to such equity securities; (iv) purchase securities on a when-issued
or delayed delivery basis; (v) engage in the lending of portfolio
securities; (vi) engage in foreign currency transactions; (vii) in order to
attempt to reduce risk, purchase put and call options on foreign currencies;
(viii) write covered call options on foreign currencies owned by the Fund;
and (ix) enter into contracts for the future purchase or delivery of
securities, foreign currencies, and indices, purchase or sell options on any
such futures contracts and engage in related closing purchase transactions.
For information about these investment methods, restrictions on their use,
and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes, the Fund may without limitation hold cash
or invest in cash items of the kinds described under "Special Investment
Methods -- Cash Items." The Fund also may invest not more than 35% of its
total assets in cash and cash items in order to utilize assets awaiting
normal investment.
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ADJUSTABLE RATE MORTGAGE SECURITIES
FUND
OBJECTIVE. Adjustable Rate Mortgage Securities Fund has an objective of
providing current income while attempting to provide a high degree of
principal stability.
INVESTMENT POLICIES. Under normal market conditions, Adjustable Rate
Mortgage Securities Fund will invest at least 65% of its total assets in
mortgage-related securities having adjustable interest rates which reset at
periodic intervals ("adjustable rate mortgage securities" or "ARMS"). ARM
securities have interest rates which reset periodically in response to
changes in the current interest rate environment. ARM securities include
pass-through securities and floating rate collateralized mortgage
obligations.
The Fund may invest up to 35% of its total assets in mortgage-related
securities other than ARMS, securities issued or guaranteed as to principal
or interest by the U.S. government or its agencies or instrumentalities,
private pass-through securities, asset backed securities and fixed income
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under
"Special Investment Methods."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, invest in exchange traded interest rate
futures and interest rate index futures contracts; (iii) in order to attempt
to reduce risk, invest in exchange traded put and call options on interest
rate futures contracts and on interest rate indices; (iv) purchase
securities on a when-issued or delayed delivery basis; (v) purchase interest
rate caps and floors; (vi) in order to attempt to reduce risk, invest in
Eurodollar instruments; and (vii) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under
"Special Investment Methods."
At least 65% of the Fund's total assets must be U.S. government securities,
securities with a minimum rating of A by Standard & Poor's and by Moody's or
which have been assigned an equivalent rating by another nationally
recognized statistical rating organization, or unrated securities of
comparable quality as determined by the Adviser. The Fund may not invest in
securities rated lower than A by Standard & Poor's or Moody's. If a
security's rating falls below an A, the Fund will sell the security as
promptly as possible.
<PAGE>
For temporary defensive purposes, the Fund may without limitation hold cash
or invest in cash items of the kinds described under "Special Investment
Methods -- Cash Items." The Fund also may invest not more than 35% of its
total assets in cash and cash items in order to utilize assets awaiting
normal investment.
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TAX FREE FUND
OBJECTIVE. Tax Free Fund has an objective of providing maximum current
income which is exempt from federal income tax to the extent consistent with
prudent investment risk.
INVESTMENT POLICIES. Under normal market conditions, Tax Free Fund invests
at least 80% of its net assets in municipal bonds and other municipal
obligations, the interest on which is exempt from federal income tax. No
more than 20% of the securities owned by the Fund will generate income that
is subject to the federal alternative minimum tax. Municipal obligations
generating income subject to taxation under the federal alternative minimum
tax rules will not be counted as tax exempt obligations for purposes of the
80% test. See "Income Taxes." The types of municipal bonds and other
municipal obligations in which the Fund may invest are described under
"Special Investment Methods -- Municipal Bonds and Other Municipal
Obligations."
Under normal market conditions, the weighted average maturity of the
securities held by Tax Free Fund will range from 15 to 25 years.
Tax Free Fund may purchase (i) municipal bonds which are rated no lower than
BBB by Standard & Poor's and Baa by Moody's, (ii) state and municipal notes
which are rated SP-1 by Standard & Poor's or MIG-1/VMIG-1 by Moody's, and
(iii) commercial paper which is rated A-1 by Standard & Poor's or Prime-1 by
Moody's, or which have been assigned an equivalent rating by another
nationally recognized statistical rating organization or which are of
comparable quality in the judgement of the Adviser.
While the assets of Tax Free Fund ordinarily will be invested in municipal
obligations, on occasion the Fund may temporarily hold short-term
securities, other than municipal obligations, the income from which is
taxable. Temporary taxable investments would be held solely for the purpose
of managing exceptional in-flows and out-flows of cash or for temporary
defensive purposes to preserve existing portfolio values. Under normal
circumstances, the Fund may not invest more than 20% of its assets in
investments other than municipal obligations. However, when a temporary
defensive position to protect capital is deemed advisable and practicable,
the Fund may have more than 20% of its assets in temporary taxable
investments or cash. The types of investments which are permitted for these
purposes are described under "Special Investment Methods -- Temporary
Taxable Investments."
The Fund also may temporarily invest in shares of investment companies which
invest primarily in short-term municipal obligations with maturities not
exceeding 13 months including, but not limited to, tax free money market
funds advised by the Adviser. Investments of these types are also subject to
the advisory fee. Income from these investments is normally exempt from
federal income tax. Where the income from these investments is exempt from
federal income tax, the investments will be counted as tax exempt
obligations for purposes of the 80% test described above.
The Fund also may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, invest in exchange traded interest rate futures and
interest rate index futures contracts; (iii) in order to attempt to reduce
risk, invest in exchange traded put and call options on interest rate
futures contracts and on interest rate indices; (iv) purchase securities on
a when-issued or delayed delivery basis; and (v) engage in the lending of
portfolio securities. In addition, the Fund may invest up to 10% of its
total assets in inverse floating rate municipal obligations. For information
about these investment methods, restrictions on their use, and certain
associated risks, see the related headings under "Special Investment
Methods."
<PAGE>
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MINNESOTA TAX FREE FUND
OBJECTIVE. Minnesota Tax Free Fund has an objective of providing maximum
current income which is exempt from both federal income tax and Minnesota
state income tax to the extent consistent with prudent investment risk.
INVESTMENT POLICIES. Under normal market conditions, Minnesota Tax Free Fund
invests at least 80% of its net assets in municipal bonds and other
municipal obligations of the State of Minnesota, the interest on which is
exempt from federal income tax and the Minnesota state income tax. No more
than 20% of the securities owned by this Fund will generate income that is
an item of tax preference for the purpose of the federal alternative minimum
tax and for the purpose of the Minnesota alternative minimum tax. Municipal
obligations generating income subject to taxation under the federal
alternative minimum tax rules or under the Minnesota alternative minimum tax
rules, will not be counted as tax exempt obligations for purposes of the 80%
test. See "Income Taxes." The types of municipal bonds and other municipal
obligations in which the Fund may invest are described under "Special
Investment Methods -- Municipal Bonds and Other Municipal Obligations."
Under normal market conditions, the weighted average maturity of the
securities held by the Fund will range from 15 to 25 years.
Minnesota Tax Free Fund may purchase (i) municipal bonds which are rated no
lower than BBB by Standard & Poor's and Baa by Moody's, (ii) state and
municipal notes which are rated SP-1 by Standard & Poor's or MIG-1/VMIG-1 by
Moody's, and (iii) commercial paper which is rated A-1 by Standard & Poor's
or Prime-1 by Moody's, or which have been assigned an equivalent rating by
another nationally recognized statistical rating organization or which are
of comparable quality in the judgement of the Adviser.
While the assets of the Fund ordinarily will be invested in municipal
obligations, on occasion the Fund may temporarily hold short-term
securities, other than municipal obligations, the income from which is
taxable. Temporary taxable investments would be held solely for the purpose
of managing exceptional in-flows and out-flows of cash or for temporary
defensive purposes to preserve existing portfolio values. Under normal
circumstances, the Fund may not invest more than 20% of its assets in
investments other than municipal obligations. However, when a temporary
defensive position to protect capital is deemed advisable and practicable,
the Fund may have more than 20% (and up to 100%) of its assets in temporary
taxable investments or cash. The types of investments which are permitted
for these purposes are described under "Special Investment Methods --
Temporary Taxable Investments."
The Fund also may temporarily invest in shares of investment companies which
invest primarily in short-term municipal obligations with maturities not
exceeding 13 months, including, but not limited to, tax free money market
funds advised by the Adviser. Investments of these types are also subject to
the advisory fee. Income from these investments is normally exempt from
federal income tax but may not be exempt from the applicable state tax.
Where the income from these investments is exempt from both federal income
tax and the applicable state tax, the investments will be counted as tax
exempt obligations for purposes of the 80% test described above.
The Fund also may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, invest in exchange traded interest rate futures and
interest rate index futures contracts; (iii) in order to attempt to reduce
risk, invest in exchange traded put and call options on interest rate
futures contracts and on interest rate indices; (iv) purchase securities on
a when-issued or delayed delivery basis; (v) engage in the lending of
portfolio securities; and (vi) invest up to 10% of its total assets in
inverse floating rate municipal obligations. For information about these
investment methods, restrictions on their use, and certain associated risks,
see the related headings under "Special Investment Methods."
<PAGE>
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RISKS TO CONSIDER
An investment in the Funds involves certain risks in addition to those noted
above with respect to particular Funds. These include the following:
EQUITY SECURITIES GENERALLY. Market prices of equity securities generally,
and of particular companies' equity securities, frequently are subject to
greater volatility than prices of fixed income securities. Market prices of
equity securities as a group have dropped dramatically in a short period of
time on several occasions in the past, and they may do so again in the
future. Mid Cap Growth Fund and Emerging Markets Fund are subject to the
risks of generally adverse equity markets.
SMALL CAPITALIZATION COMPANIES. Emerging Markets Fund and Mid Cap Growth
Fund are permitted to invest in equity securities of companies with small
market capitalizations. The equity securities of such companies frequently
have experienced greater price volatility in the past than those of
larger-capitalization companies, and they may be expected to do so in the
future. To the extent that the Funds invest in small capitalization
companies, they are subject to this risk of greater volatility.
ACTIVE MANAGEMENT. Mid Cap Growth Fund and Emerging Markets Fund are
actively managed by the Adviser, or in the case of Emerging Markets Fund,
the Sub-Adviser. The performance of these Funds will reflect in part the
ability of the Adviser or Sub-Adviser to select equity securities which are
suited to achieving the Funds' investment objectives. Due to their active
management, these Funds could underperform other mutual funds with similar
investment objectives or the market generally.
FOREIGN SECURITIES. Emerging Markets Fund is subject to special risks
associated with investing in foreign securities and to declines in net asset
value resulting from changes in exchange rates between the United States
dollar and foreign currencies. These risks are discussed under "Special
Investment Methods -- Foreign Securities" elsewhere herein. Because of the
special risks associated with foreign investing, the Funds may be subject to
greater volatility than most mutual funds which invest principally in
domestic securities.
INTEREST RATE RISK. Tax Free Fund and Minnesota Tax Free Fund emphasize
investments in fixed income securities. Investments in fixed income
securities give rise to interest rate risk. Interest rate risk is the risk
that the value of a fixed-rate debt security will decline due to changes in
market interest rates. Because such Funds invest in fixed-rate debt
securities, they are subject to interest rate risk. In general, when
interest rates rise, the value of a fixed-rate debt security declines.
Conversely, when interest rates decline, the value of a fixed-rate debt
security generally increases. Thus, shareholders in the Funds bear the risk
that increases in market interest rates will cause the value of their Fund's
portfolio investments to decline. In addition to the extent that Adjustable
Rate Mortgage Securities Fund invests in fixed rate mortgage-based
securities, and to the extent that market interest rates change between the
dates upon which the interest rates borne by the adjustble-rate securities
held by this Fund adjust, this Fund is also exposed to interest rate risk.
In general, the value of fixed-rate debt securities with longer maturities
are more sensitive to changes in market interest rates than the value of
such securities with shorter maturities. Thus, the net asset value of a Fund
which invests in securities with longer weighted average maturities should
be expected to have greater volatility in periods of changing market
interest rates than that of a Fund which invests in securities with shorter
weighted average maturities. Investors should note in this regard that Tax
Free Fund and Minnesota Tax Free Fund invest in securities with longer
weighted average maturities than First American's Intermediate Tax Free Fund
and Minnesota Insured Intermediate Tax Free Fund.
Although the Adviser may engage in transactions intended to hedge the value
of the Funds' portfolios against changes in market interest rates, there is
no assurance that such hedging transactions will
<PAGE>
be undertaken or will fulfill their purpose. See "Special Investment
Methods -- Options Transactions."
CREDIT RISK. Credit risk is the risk that the issuer of a debt security or
mortgage-related security will fail to make payments on the security when
due. Because Adjustable Rate Mortgage Securities Fund, Tax Free Fund and
Minnesota Tax Free Fund invest in debt securities or mortgage-related
securities, they are subject to credit risk.
As described under "Special Investment Methods -- Municipal Bonds and Other
Municipal Obligations," the revenue bonds and municipal lease obligations in
which Tax Free Fund and Minnesota Tax Free Fund invest may entail greater
credit risk than the general obligation bonds in which they invest. This is
the case because revenue bonds and municipal lease obligations generally are
not backed by the faith, credit or general taxing power of the issuing
governmental entity. In addition, as described under that section, municipal
lease obligations also may be subject to nonappropriation risk, which is a
type of nonpayment risk. Investors also should note that even general
obligation bonds of the states and their political subdivisions are not free
from the risk of default.
The ratings and certain other requirements which apply to these Funds'
permitted investments, as described elsewhere in this Prospectus, are
intended to limit the amount of credit risk undertaken by these Funds.
Nevertheless, shareholders in such Funds bear the risk that payment defaults
could cause the value of their Fund's portfolio investments to decline.
Investors also should note that Tax Free Fund and Minnesota Tax Free Fund
can invest in municipal obligations rated as low as BBB by Standard & Poor's
or Baa by Moody's, that Adjustable Rate Mortgage Securities Fund can invest
in mortgage-related and other securities rated as low as A by Standard &
Poor's or Moody's, or which have been assigned an equivalent rating by
another nationally recognized statistical rating organization, or which are
of comparable quality in the judgment of the Adviser. Although these rating
categories are investment grade, obligations and securities with these
ratings are viewed as having speculative characteristics and carry a
somewhat higher risk of default than obligations and securities rated in the
higher investment grade categories.
CALL RISK. Many municipal bonds and mortgage-related securities may be
redeemed at the option of the issuer ("called") at a specified price prior
to their stated maturity date. In general, it is advantageous for an issuer
to call its bonds or mortgage-related securities if they can be refinanced
through the issuance of new bonds or mortgage-related securities which bear
a lower interest rate than that of the called bonds or mortgage-related
securities. Call risk is the risk that bonds or mortgage-related securities
will be called during a period of declining market interest rates so that
such refinancings may take place.
If a bond held by a Fund is called during a period of declining interest
rates, the Fund probably will have to reinvest the proceeds received by it
at a lower interest rate than that borne by the called bond, thus resulting
in a decrease in the Fund's income. To the extent that the Funds invest in
callable bonds, Fund shareholders bear the risk that reductions in income
will result from the call of bonds.
MORTGAGE-BACKED SECURITIES. Because residential mortgage loans generally can
be prepaid in whole or in part by the borrowers at any time without any
prepayment penalty, the holder of a mortgage-backed security which
represents an interest in a pool of such mortgage loans is subject to a form
of call risk which is generally called "prepayment risk." In addition, it is
more difficult to predict the effect of changes in market interest rates on
the return on mortgage-backed securities than to predict the effect of such
changes on the return of a conventional fixed-rate debt instrument; the
magnitude of such effects may be greater in some cases; and the return on
certain types of mortgage-backed securities, such as interest-only,
principal-only and inverse floating rate mortgage-backed securities, are
particularly sensitive to changes in interest rates and in the rate at which
the mortgage loans underlying the
<PAGE>
securities are prepaid by borrowers. For these reasons, Adjustable Rate
Mortgage Securities Fund's investments in mortgage-backed securities may
involve greater risks than investments in governmental or corporate bonds.
For further information, see "Special Investment Methods --
Mortgage-Backed Securities."
POLITICAL AND ECONOMIC CONDITIONS. The value of municipal obligations owned
by Tax Free Fund or Minnesota Tax Free Fund may be adversely affected by
local political and economic conditions and developments. Adverse conditions
in an industry significant to a local economy could have a correspondingly
adverse effect on the financial condition of local issuers. Other factors
that could affect tax-exempt obligations include a change in the local,
state or national economy, demographic factors, ecological or environmental
concerns, statutory limitations on the issuer's ability to increase taxes
and other developments generally affecting the revenues of issuers (for
example, legislation or court decisions reducing state aid to local
governments or mandating additional services). The value of certain
municipal obligations also may be adversely affected by the enactment of
changes to certain federal or state income tax laws including, but not
limited to, income tax rate reductions or the imposition of a flat tax.
Tax Free Fund cannot invest 25% or more of its total assets in obligations
of issuers located in the same state (for this purpose, the location of an
"issuer" shall be deemed to be the location of the entity the revenues of
which are the primary source of payment or the location of the project or
facility which may be the subject of the obligation). See "Special
Investment Methods -- Investment Restrictions." Minnesota Tax Free Fund will
invest primarily in municipal obligations issued by the State of Minnesota
and its political subdivisions. For this reason, the municipal obligations
held by this Fund will be particularly affected by local conditions in the
State of Minnesota. A more detailed description of the factors affecting
Minnesota issuers of municipal obligations is set forth in the Statement of
Additional Information.
OTHER. Investors also should review "Special Investment Methods" for
information concerning risks associated with certain investment techniques
which may be utilized by the Funds.
MANAGEMENT
The Board of Directors of FAIF has the primary responsibility for overseeing
the overall management and electing the officers of FAIF. Subject to the
overall direction and supervision of the Board of Directors, the Adviser
acts as investment adviser for and manages the investment portfolios of
FAIF.
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INVESTMENT ADVISER
U.S. Bank National Association, 601 Second Avenue South, Minneapolis,
Minnesota 55402, acts as the Funds' investment adviser through its First
American Asset Management group. The Adviser has acted as an investment
adviser to FAIF since its inception in 1987 and has acted as investment
adviser to First American Funds, Inc. since 1982 and to First American
Strategy Funds, Inc. since 1996. As of September 30, 1997, the Adviser was
managing accounts with an aggregate value of approximately $55 billion,
including mutual fund assets of approximately $20 billion. U.S. Bancorp, 601
Second Avenue South, Minneapolis, Minnesota 55402, is the holding company
for the Adviser.
Each of the Funds, other than Emerging Markets Fund, has agreed to pay the
Adviser monthly fees calculated on an annual basis equal to 0.70% of its
average daily net assets. Emerging Markets Fund pays the Adviser a monthly
fee calculated on the same basis equal to 1.25% of its average daily net
assets, out of which the Adviser pays the Sub-Adviser's fee. The Adviser
may, at its option, waive any or all of its fees, or reimburse expenses,
with respect to any Fund from time to time. Any such waiver or reimbursement
is voluntary and may be discontinued at any time. The Adviser also may
absorb or reimburse expenses of the Funds
<PAGE>
from time to time, in its discretion, while retaining the ability to be
reimbursed by the Funds for such amounts prior to the end of the fiscal
year. This practice would have the effect of lowering a Fund's overall
expense ratio and of increasing yield to investors, or the converse, at the
time such amounts are absorbed or reimbursed, as the case may be.
The Glass-Steagall Act generally prohibits banks from engaging in the
business of underwriting, selling or distributing securities and from being
affiliated with companies principally engaged in those activities. In
addition, administrative and judicial interpretations of the Glass-Steagall
Act prohibit bank holding companies and their bank and nonbank subsidiaries
from organizing, sponsoring or controlling registered open-end investment
companies that are continuously engaged in distributing their shares. Bank
holding companies and their bank and nonbank subsidiaries may serve,
however, as investment advisers to registered investment companies, subject
to a number of terms and conditions.
Although the scope of the prohibitions and limitations imposed by the
Glass-Steagall Act has not been fully defined by the courts or the
appropriate regulatory agencies, the Funds have received an opinion from
their counsel that the Adviser is not prohibited from performing the
investment advisory services described above. In the event of changes in
federal or state statutes or regulations or judicial and administrative
interpretations or decisions pertaining to permissible activities of bank
holding companies and their bank and nonbank subsidiaries, the Adviser might
be prohibited from continuing these arrangements. In that event, it is
expected that the Board of Directors would make other arrangements and that
shareholders would not suffer adverse financial consequences.
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SUB-ADVISER TO EMERGING MARKETS FUND
Marvin & Palmer Associates, Inc., 1201 North Market Street, Suite 2300,
Wilmington, Delaware 19801, is Sub-Adviser to Emerging Markets Fund under an
agreement with the Adviser (the "Sub-Advisory Agreement"). The Sub-Adviser
is responsible for the investment and reinvestment of Emerging Markets
Fund's assets and the placement of brokerage transactions in connection
therewith. For its services under the Sub-Advisory Agreement, the
Sub-Adviser is paid a monthly fee by the Adviser calculated on an annual
basis equal to 0.85% 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 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.
The Sub-Adviser, a privately held company, was founded in 1986 by David F.
Marvin and Stanley Palmer. The stock of the Sub-Adviser is owned by Mr.
Marvin, Mr. Palmer and 24 other holders. The Sub-Adviser is engaged in the
management of global, non-United States and emerging markets equity
portfolios for institutional accounts. At January 1, 1998, the Sub-Adviser
managed a total of $4.6 billion in investments for 53 institutional
investors.
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PORTFOLIO MANAGERS
Mid Cap Growth Fund is managed by a committee comprised of Ms. Shrewsbury,
Mr. Benson, Ms. Halbe, Ms. Hoyme, Mr. McSweeney and Ms. Thompson, whose
backgrounds are set forth below. Adjustable Rate Mortgage Securities Fund
is managed by a committee comprised of Mr. McGlinch, Ms. Kung and Mr.
Green, whose backgrounds are also set forth below. The remaining Funds are
managed or co-managed as indicated below.
SANDRA SHREWSBURY is a member of the committee which manages Mid Cap Growth
Fund. Ms. Shrewsbury has over 11 years of investment industry experience.
Prior to joining the Adviser in 1998, Ms. Shrewsbury served as a portfolio
manager for Piper Capital Management Incorporated overseeing the management
of the Piper Funds Emerging Growth Fund and Small
<PAGE>
Company Growth Fund. Ms. Shrewsbury received her bachelor's degree in
mathematics and education from Nebraska Wesleyan University and a master's
degree from Iowa State University. Ms. Shrewsbury is a Chartered Financial
Analyst.
ADAM BENSON is a member of the committee which manages Mid Cap Growth Fund.
Mr. Benson has over 4 years of investment industry experience. Prior to
joining the Adviser in 1998, Mr. Benson served as an assistant vice
president and portfolio co-manager for Piper Capital Management Incorporated
overseeing the management of the Piper Funds Emerging Growth Fund and Small
Company Growth Fund. Mr. Benson received his bachelor's degree in economics
from Luther College and master's degree in finance from the University of
Minnesota.
JOYCE HALBE is a member of the committee which manages Mid Cap Growth
Fund. Ms. Halbe has over 13 years of investment industry experience. Prior
to joining the Adviser in 1998, Ms. Halbe served, from 1996 to 1998, as a
senior vice president and portfolio co-manager for Piper Capital
Management Incorporated overseeing the management of the Piper Funds
Emerging Growth Fund and Small Company Growth Fund. Prior to 1996, Ms.
Halbe served as a vice president, analyst and portfolio manager for the
Adviser. Ms. Halbe received her bachelor's degree, master's degree and
master's degree in business administration from the University of
Wisconsin. Ms. Halbe is a Chartered Financial Analyst.
MARY HOYME is a member of the committee which manages Mid Cap Growth Fund.
Ms. Hoyme has over 15 years of investment industry experience. Prior to
joining the Adviser in 1998, Ms. Hoyme served, from 1996 to 1998, as a
senior vice president and portfolio co-manager for Piper Capital Management
Incorporated overseeing the management of the Piper Funds Emerging Growth
Fund and Small Company Growth Fund. Prior to 1996, Ms. Hoyme served as a
portfolio manager for the Adviser overseeing the management of the Adviser's
real estate and growth portfolios. Ms. Hoyme received her bachelor's degree
in finance and economics from the University of Wisconsin-Eau Claire and
master's degree in business administration from the University of St.
Thomas. Ms. Hoyme is a Chartered Financial Analyst.
TIMOTHY MCSWEENEY is a member of the committee which manages Mid Cap Growth
Fund. Mr. McSweeney has over 11 years of investment industry experience.
Prior to joining the Adviser in 1998, Mr. McSweeney served, from 1997 to
1998, as assistant vice president and portfolio co-manager for Piper Capital
Management Incorporated overseeing the management of the Piper Funds
Emerging Growth Fund and Small Company Growth Fund. Prior to 1997, Mr.
McSweeney served as a technology analyst for Gintel Asset Management. Mr.
McSweeney received his bachelor's degree in economics from Clark University
and master's degree in business administration from Northeastern University.
JILL THOMPSON is a member of the committee which manages Mid Cap Growth
Fund. Ms. Thompson has over 9 years of investment industry experience.
Prior to joining the Adviser in 1998, Ms. Thompson served as a senior vice
president and portfolio co-manager for Piper Capital Management
Incorporated overseeing the management of the Piper Funds Emerging Growth
Fund and Small Company Growth Fund. Ms. Thompson received her bachelor's
degree from St. Cloud State University. Ms. Thompson is a Chartered
Financial Analyst.
THOMAS MCGLINCH is a member of the committee which manages Adjustable Rate
Mortgage Securities Fund. Mr. McGlinch has over 16 years of investment
industry experience. Prior to joining the Adviser in 1998, Mr. McGlinch
served as a portfolio co-manager for Piper Capital Management Incorporated
overseeing the management of several Piper Funds including the Piper Funds
Adjustable Rate Mortgage Securities Fund. Mr. McGlinch received his
bachelor's degree in accounting from St. John's University and master's
degree in business administration from the University of St. Thomas. Mr.
McGlinch is a Chartered Financial Analyst.
<PAGE>
WAN-CHONG KUNG is a member of the committee which manages Adjustable Rate
Mortgage Securities Fund. Ms. Kung has over five years of investment
industry experience. Prior to joining the Adviser in 1998, Ms. Kung served
as a vice president and a portfolio co-manager for Piper Capital
Management Incorporated overseeing the management of several Piper Funds
including the Piper Funds Adjustable Rate Morgage Securities Fund. Ms.
Kung received her bachelor's degree in economics from the University of
the Philippines and received her master's degree in business
administration from the University of Minnesota. Ms. Kung is a Chartered
Financial Analyst.
MARK M. GREEN is a member of the committee which manages Adjustable Rate
Mortgage Securities Fund. Mr. Green joined the Adviser in 1996 and has
over ten years of investment industry experience. Mr. Green is also a
member of the committee which manages FAIF Limited Term Income Fund,
Intermediate Term Income Fund and Fixed Income Fund. Prior to joining the
Adviser, Mr. Green was a portfolio manager at Wells Fargo Investment
Management. Mr. Green received his bachelor's degree and master's degree
from San Francisco State University.
RONALD REUSS is a portfolio co-manager for Tax Free Fund and Minnesota Tax
Free Fund. Mr. Reuss has over 28 years of investment industry experience.
Prior to joining the Adviser in 1998, Mr. Reuss served as an economist, a
senior vice president and portfolio manager for Piper Capital Management
Incorporated overseeing the management of the Piper Funds National
Tax-Exempt Fund and Minnesota Tax-Exempt Fund. Mr. Reuss received his
bachelor's degree in business administration from John Carroll University
and master's degree in economics from Cleveland State University. Mr. Reuss
is a Chartered Financial Analyst.
DOUGLAS WHITE is a portfolio co-manager for Tax Free Fund and Minnesota
Tax Free Fund. Mr. White has over 14 years of investment industry
experience. Prior to joining the Adviser in 1998, Mr. White served as a
portfolio manager for Piper Capital Management Incorporated overseeing the
management of the Piper Funds Tax-Exempt Fund and Minnesota Tax-Exempt
Fund. Mr. White received his bachelor's degree in political science from
Carleton College and his master's degree in business administration from
the University of Minnesota. Mr. White is a Chartered Financial Analyst.
A committee comprised of the following eight individuals shares the
management of Emerging Markets Fund on behalf of the Sub-Adviser:
DAVID F. MARVIN is Chairman of the Sub-Adviser and founded the firm
together with Mr. Palmer in 1986. Before founding the Sub-Adviser, Mr.
Marvin was Vice President in charge of DuPont Corporation's $10 billion
internally-managed pension fund. Prior to that Mr. Marvin was Associate
Portfolio Manager, and then Head Portfolio Manager, for Investors
Diversified Services' IDS Stock Fund. Mr. Marvin started in the investment
business in 1965 as a securities analyst for Chicago Title & Trust. Mr.
Marvin received his bachelor's degree from the University of Illinois and
his master's degree in business administration from Northwestern
University. He is a Chartered Financial Analyst and a member of the
Financial Analysts Federation.
STANLEY PALMER is Vice Chairman of the Sub-Adviser and co-founder of the
firm. Mr. Palmer was Equity Portfolio Manager for DuPont Corporation from
1978 through 1986, an analyst and portfolio manager at Investors Diversified
Services from 1971 through 1978, and an analyst at Harris Trust & Savings
Bank from 1964 through 1971. Mr. Palmer received his bachelor's degree from
Gustavus Adolphus College and his master's degree in business administration
from the University of Iowa. He is a Chartered Financial Analyst and a
member of the Financial Analysts Federation.
WILLIAM E. DODGE has been President since January 1998 and a portfolio
manager of the Sub-Adviser since 1996. Mr. Dodge was Chief Investment
Strategist and Chairman of the Investment Policy Committee of Dean Witter in
New York from 1991 to 1996, and he served as a Senior Portfolio Manager,
<PAGE>
Director of Quantitative Equity Strategies, and United States equity analyst
at the DuPont Corporation pension fund from 1983 to 1991. From 1976 to 1983
Mr. Dodge served in various United States portfolio management and
analytical positions including senior investment manager of a bank trust
department from 1981 to 1983. Mr. Dodge received his bachelor's degree and
his master's degree in business administration from the University of
Massachusetts at Amherst. He is a Chartered Financial Analyst and a member
of the Financial Analysts Federation.
TERRY B. MASON is a Senior Vice President and portfolio manager of the
Sub-Adviser. Before joining the Sub-Adviser, Mr. Mason was employed for 14
years by DuPont Corporation, the last five as international equity analyst
and international trader. Mr. Mason received his bachelor's degree from
Glassboro State College and his master's degree in business administration
from Widener University.
JAY F. MIDDLETON is a Senior Vice President and portfolio manager for the
Sub-Adviser and joined the firm in 1989. Mr. Middleton received his
bachelor's degree from Wesleyan University.
TODD D. MARVIN is a Senior Vice President and portfolio manager for the
Sub-Adviser and joined the firm in 1991. Before joining the Sub-Adviser,
Mr. Marvin was employed by Oppenheimer & Company as an analyst in
investment banking. Mr. Marvin received his bachelor's degree from
Wesleyan University.
DAVID L. SCHAEN is a Vice President and portfolio manager of the
Sub-Adviser. Before becoming a Portfolio Manager, Mr. Schaen was Head Trader
for the Sub-Adviser from 1991 to 1994 and an International Analyst for the
Sub-Adviser from 1994 to 1995. Prior to 1991 he was Head Trader and
Investment Officer at the Bank of Delaware. Mr. Schaen received his
bachelor's degree from the University of Delaware and his master's degree in
business administration from Widener University.
STEPHEN D. MARVIN is a Vice President and portfolio manager for the
Sub-Adviser and joined the firm in 1994. Before joining the Sub-Adviser,
Mr. Marvin was employed by Bear, Stearns & Company as a corporate
financial analyst. Mr. Marvin received his bachelor's degree from Carleton
College.
---------------------------------------------------------------------------
CUSTODIAN
The Custodian of the Funds' assets is U.S. Bank Trust National Association
(the "Custodian"), U.S. Bank Trust Center, 180 East Fifth Street, St. Paul,
Minnesota 55101. The Custodian is a subsidiary of U.S. Bancorp.
As compensation for its services to the Funds, the Custodian is paid monthly
fees calculated on an annual basis equal to 0.03% of the applicable Fund's
(except Emerging Markets Fund) average daily net assets and, in the case of
Emerging Markets Fund, 0.10% of the Fund's average daily net assets. In
addition, the Custodian is reimbursed for its out-of-pocket expenses
incurred while providing its services to the Funds.
Rules adopted under the 1940 Act permit Emerging Markets Fund to maintain
its securities and cash in the custody of certain eligible foreign banks and
depositories. Emerging Markets Fund's portfolio of non-United States
securities are held by sub-custodians which are approved by the directors of
FAIF or a foreign custody manager appointed by the directors in accordance
with these rules. This determination is made pursuant to these rules
following a consideration of a number of factors including, but not limited
to, the reliability and financial stability of the institution; the ability
of the institution to perform custodian services for Emerging Markets Fund;
the reputation of the institution in its national market; the political and
economic stability of the country in which the institution is located; and
the risks of potential nationalization or expropriation of Emerging Markets
Fund's assets.
Sub-custodian fees with respect to Emerging Markets Fund are paid by the
Custodian out of the Custodian's fees.
<PAGE>
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ADMINISTRATOR
The administrator for the Funds is SEI Investments Management Corporation,
Oaks, Pennsylvania 19456. The Administrator, a wholly-owned subsidiary of
SEI Investments Company, provides the Funds with certain administrative
services necessary to operate the Funds. These services include shareholder
servicing and certain accounting and other services. The Administrator
provides these services for a fee calculated at an annual rate of 0.12% of
each Fund's average daily net assets, provided that to the extent that the
aggregate net assets of all First American Funds exceed $8 billion, the
percentage stated above is reduced to 0.105%. From time to time, the
Administrator may voluntarily waive its fees or reimburse expenses with
respect to any of the Funds. Any such waivers or reimbursements may be made
at the Administrator's discretion and may be terminated at any time. U.S.
Bank assists the Administrator and provides sub-administration services for
the Funds. For these services, the Administrator compensates the
sub-administrator at an annual rate of up to 0.05% of each Fund's average
daily net assets.
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TRANSFER AGENT
DST Systems, Inc. (the "Transfer Agent") serves as the transfer agent and
dividend disbursing agent for the Funds. The address of the Transfer Agent
is 330 West Ninth Street, Kansas City, Missouri 64105. The Transfer Agent
is not affiliated with the Distributor, the Administrator or the Adviser.
DISTRIBUTOR
SEI Investments Distribution Co. is the principal distributor for shares of
the Funds and of the other FAIF Funds. The Distributor is a Pennsylvania
corporation and is the principal distributor for a number of investment
companies. The Distributor, which is not affiliated with the Adviser, is a
wholly-owned subsidiary of SEI Investments Company and is located at Oaks,
Pennsylvania 19456.
The Distributor, the Administrator and the Adviser may in their discretion
use their own assets to pay for certain costs of distributing Fund shares.
Any arrangement to pay such additional costs may be commenced or
discontinued by any of these persons at any time. In addition, the
Distributor and the Adviser and its affiliates may provide compensation from
their own resources for shareholder services provided by third parties,
including "one-stop" mutual fund networks through which the Funds are made
available.
PURCHASES AND REDEMPTIONS
OF SHARES
---------------------------------------------------------------------------
SHARE PURCHASES AND REDEMPTIONS
Shares of the Funds are sold and redeemed on days on which both the New York
Stock Exchange and federally-chartered banks are open for business
("Business Days").
Payment for shares can be made only by wire transfer. All information needed
will be taken over the telephone and the order will be considered placed
when the Custodian receives payment by wire. Federal funds should be wired
as follows: U.S. Bank National Association, Minneapolis, Minnesota, ABA
Number 091000022; For Credit to: DST Systems, Inc.: Account Number
160234580266; For Further Credit To: (Investor Name and Fund Name). Shares
cannot be purchased by Federal Reserve wire on days on which the New York
Stock Exchange is closed or federally-chartered banks are closed. Purchase
orders will be effective and eligible to receive dividends declared the same
day if the Transfer Agent receives an order before 3:00 p.m. Central time
and the Custodian receives federal funds before the close of business that
day. Otherwise, the purchase order will be effective the next Business Day.
The Funds reserve the right to reject a purchase order.
The Funds are required to redeem for cash all full and fractional shares of
the Funds. Redemption requests may be made any time before 3:00 p.m.
<PAGE>
Central time in order to receive that day's redemption price. For redemption
requests received before 3:00 p.m. Central time, payment will ordinarily be
made the next business day by transfer of federal funds, but payment may be
made up to 7 days after the request.
---------------------------------------------------------------------------
WHAT SHARES COST
Class Y Shares of the Funds are sold and redeemed at net asset value. The
net asset value per share is determined as of the close of normal trading on
the New York Stock Exchange (3:00 p.m. Central time) on each Business Day,
provided that net asset value need not be determined on days when no Fund
shares are tendered for redemption and no order for that Fund's shares is
received and on days on which changes in the value of portfolio securities
will not materially affect the current net asset value of the Fund's shares.
The price per share for purchases or redemptions is such value next computed
after the Transfer Agent receives the purchase order or redemption request.
In the case of redemptions and repurchases of shares owned by corporations,
trusts or estates, the Transfer Agent may require additional documents to
evidence appropriate authority in order to effect the redemption, and the
applicable price will be that next determined following the receipt of the
required documentation.
DETERMINING NET ASSET VALUE. The net asset value per share for each of the
Funds is determined by dividing the value of the securities owned by the
Fund plus any cash and other assets (including interest accrued and
dividends declared but not collected), less all liabilities, by the number
of Fund shares outstanding. For the purpose of determining the aggregate net
assets of the Funds, cash and receivables will be valued at their face
amounts. Interest will be recorded as accrued and dividends will be recorded
on the ex-dividend date. Security valuations are furnished by an independent
pricing service that has been approved by the Board of Directors. Securities
listed on a securities exchange or an automated quotation system for which
quotations are readily available, including securities traded over the
counter, are valued at the last quoted sale price on the principal exchange
on which they are traded on the valuation date, or, if there is no such
reported sale on the valuation date, at the most recently quoted bid price.
Debt obligations with remaining maturities in excess of sixty days are
valued at the most recently quoted bid price. For such debt obligations the
pricing service may employ methods that utilize actual market transactions,
broker-dealer valuations, or other electronic data processing techniques.
These techniques generally consider such factors as security prices, yields,
maturities, call features, ratings and developments relating to specific
securities in arriving at security valuations. Debt obligations with
remaining maturities of sixty days or less may be valued at their amortized
cost which approximates market value. If a security price cannot be obtained
from an independent pricing service a bid price may be obtained from an
independent broker who makes a market in the security.
Foreign securities owned by the Funds are valued at the closing prices on
the principal exchange on which they trade.
If the value for a security cannot be obtained from the sources described
above, the security's value may be determined pursuant to the fair value
procedures established by the Board of Directors.
Financial futures are valued at the settlement price established each day by
the board of exchange on which they are traded. Portfolio securities
underlying actively traded options are valued at their market price as
determined above. The current market value of any exchange traded options
held or written by a Fund, are valued at the closing bid price for a long
position or the closing ask price for a short position.
Foreign currency forward contracts are valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
exchange rate, and the thirty, sixty, ninety and one-hundred eighty day
forward rates provided by the Reuters system.
<PAGE>
Although the methodology and procedures for determining net asset value are
identical for all classes of shares, the net asset value per share of
different classes of shares of the same Fund may differ because of
distribution and/or shareholder servicing expenses charged to Class A and
Class B Shares.
FOREIGN SECURITIES. Any assets or liabilities of the Funds initially
expressed in terms of foreign currencies are translated into United States
dollars using current exchange rates. Trading in securities on foreign
markets may be completed before the close of business on each business day
of the Funds. Thus, the calculation of the Funds' net asset value may not
take place contemporaneously with the determination of the prices of foreign
securities held in the Funds' portfolios. In addition, trading in securities
on foreign markets may not take place on all days on which the New York
Stock Exchange is open for business or may take place on days on which the
New York Stock Exchange is not open for business. Therefore, the net asset
value of a Fund which holds foreign securities might be significantly
affected on days when an investor has no access to the Fund.
---------------------------------------------------------------------------
EXCHANGING SECURITIES FOR FUND SHARES
A Fund may accept securities in exchange for Fund shares. A Fund will allow
such exchanges only upon the prior approval by the Fund and a determination
by the Fund and the Adviser or Sub-Adviser that the securities to be
exchanged are acceptable. Securities accepted by a Fund will be valued in
the same manner that a Fund values its assets. The basis of the exchange
will depend upon the net asset value of Fund shares on the day the
securities are valued.
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CERTIFICATES AND CONFIRMATIONS
The Transfer Agent maintains a share account for each shareholder. Share
certificates will not be issued by the Funds.
Confirmations of each purchase and redemption are sent to each shareholder.
In addition, monthly confirmations are sent to report all transactions and
dividends paid during that month for the Funds.
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DIVIDENDS AND DISTRIBUTIONS
Dividends with respect to each Fund (except Emerging Markets Fund) are
declared and paid monthly to all shareholders of record on the record date.
Dividends with respect to Emerging Markets Fund are declared and paid
annually to all shareholders of record on the record date. Distributions of
any net realized long-term capital gains will be made at least once every 12
months. Dividends and distributions are automatically reinvested in
additional shares of the Fund paying the dividend on payment dates at the
ex-dividend date net asset value without a sales charge, unless shareholders
request cash payments on the new account form or by writing to the Fund.
All shareholders on the record date are entitled to the dividend. If shares
are purchased before a record date for a dividend or a distribution of
capital gains, a shareholder will pay the full price for the shares and will
receive some portion of the purchase price back as a taxable dividend or
distribution (to the extent, if any, that the dividend or distribution is
otherwise taxable to holders of Fund shares). If shares are redeemed or
exchanged before the record date for a dividend or distribution or are
purchased after the record date, those shares are not entitled to the
dividend or distribution.
The amount of dividends payable on Class Y Shares generally will be more
than the dividends payable on Class A and Class B Shares because of
distribution and/or shareholder servicing expenses charged to Class A and
Class B Shares.
---------------------------------------------------------------------------
EXCHANGE PRIVILEGE
Shareholders may exchange Class Y Shares of a Fund for currently available
Class Y Shares of the other FAIF Funds or of other funds in the First
<PAGE>
American family of funds at net asset value. Exchanges of shares among the
First American family of funds must meet any applicable minimum investment
of the fund for which shares are being exchanged.
The ability to exchange shares of the Funds does not constitute an offering
or recommendation of shares of one fund by another fund. This privilege is
available to shareholders resident in any state in which the fund shares
being acquired may be sold. An investor who is considering acquiring shares
in another First American fund pursuant to the exchange privilege should
obtain and carefully read a prospectus of the fund to be acquired. Exchanges
may be accomplished by a written request, or by telephone if a preauthorized
exchange authorization is on file with the Transfer Agent, shareholder
servicing agent, or financial institution. Neither the Transfer Agent nor
any Fund will be responsible for the authenticity of exchange instructions
received by telephone if it reasonably believes those instructions to be
genuine. The Funds and the Transfer Agent will each employ reasonable
procedures to confirm that telephone instructions are genuine, and they may
be liable for losses resulting from unauthorized or fraudulent telephone
instructions if they do not employ these procedures. These procedures may
include taping of telephone conversations.
Shares of a class in which an investor is no longer eligible to participate
may be exchanged for shares of a class in which that investor is eligible to
participate. An example of this kind of exchange would be a situation in
which Class Y Shares of a Fund held by a financial institution in a trust or
agency capacity for one or more individual benefi- ciaries are exchanged for
Class A Shares of that Fund and distributed to the individual beneficiaries.
INCOME TAXES
---------------------------------------------------------------------------
FEDERAL INCOME TAXATION -- ALL OF THE FUNDS
Each Fund is treated as a different entity for federal income tax purposes.
Each of the Funds intends to qualify as a regulated investment company under
the Internal Revenue Code of 1986, as amended (the "Code"), for the current
fiscal year and in the future. If so qualified and provided certain
distribution requirements are met, a Fund will not be liable for federal
income taxes to the extent it distributes its income to its shareholders.
Distributions paid from net taxable investment income and any net realized
short-term capital gains will be taxable to shareholders as ordinary income,
whether received in cash or in additional shares.
Distributions paid from long-term capital gains (and designated as such)
generally will be taxable as long-term capital gains for federal income tax
purposes, whether received in cash or shares, regardless of how long a
shareholder has held the shares in a Fund. In the case of shareholders who
are individuals, estates, or trusts, each Fund will designate the portion of
each capital gain dividend that must be treated as mid-term capital gain
(subject to a maximum tax rate of 28%) and the portion that must be treated
as long-term capital gain (subject to a maximum tax rate of 20%).
Gain or loss realized on the sale or exchange of shares in a Fund will be
treated as capital gain or loss, provided that (as is usually the case) the
shares represented a capital asset in the hands of the shareholder. For
corporate shareholders, such gain or loss will be long-term gain or loss if
the shares were held more than one year. For shareholders who are
individuals, estates, or trusts the gain or loss will be considered
long-term (subject to a maximum tax rate of 20%) if the shareholder has held
the shares for more than 18 months and mid-term (subject to a maximum tax
rate of 28%) if the shareholder has held the shares for more than one year
but not more than 18 months.
A Fund may be required to "back-up" withhold 31% of any dividend,
distribution, or redemption payment made to a shareholder who fails to
furnish the Fund with the shareholder's Social Security number or other
taxpayer identification number
<PAGE>
or to certify that he or she is not subject to back-up withholding.
---------------------------------------------------------------------------
TAX FREE FUND AND MINNESOTA TAX FREE FUND
Distributions of net interest income from tax-exempt obligations that are
designated by Tax Free Fund and Minnesota Tax Free Fund as exempt-interest
dividends are excludable from the gross income of each Fund's shareholders.
A portion of such dividends may, however, be subject to the alternative
minimum tax, as discussed below.
For federal income tax purposes, an alternative minimum tax ("AMT") is
imposed on taxpayers to the extent that such tax, if any, exceeds a
taxpayer's regular income tax liability (with certain adjustments).
Liability for AMT will depend on each shareholder's tax situation.
Exempt-interest dividends attributable to interest income on certain
tax-exempt obligations issued after August 7, 1986, to finance certain
private activities will be treated as an item of tax preference that is
included in alternative minimum taxable income for purposes of computing the
federal AMT for all taxpayers. Each of Tax Free Fund and Minnesota Tax Free
Fund may invest up to 20% of its assets in obligations the interest on which
is treated as an item of tax preference for federal income tax purposes.
Also, a portion of all other tax-exempt interest received by a corporation,
including exempt-interest dividends, will be included in adjusted current
earnings and in earnings and profits for purposes of determining the federal
corporate alternative minimum tax and the branch profits tax imposed on
foreign corporations under Section 884 of the Code. Each shareholder is
advised to consult his or her tax adviser with respect to the possible
effects of such tax preference items.
The Tax Reform Act of 1986 imposed new requirements on certain tax-exempt
bonds which, if not satisfied, could result in loss of tax exemption for
interest on such bonds, even retroactively to the date of issuance of the
bonds. Proposals may be introduced before Congress in the future, the
purpose of which will be to further restrict or eliminate the federal income
tax exemption for tax-exempt bonds held by Tax Free Fund and Minnesota Tax
Free Fund. Tax Free Fund and Minnesota Tax Free Fund will avoid investment
in bonds which, in the opinion of the Adviser, pose a material risk of the
loss of tax exemption. Further, if a bond in a Fund's portfolio lost its
exempt status, the Fund would make every effort to dispose of that
investment on terms that are not detrimental to the Fund.
In certain instances, the portion of Social Security benefits received by a
shareholder that is subject to federal income tax may be affected by the
amount of exempt-interest dividends received by the shareholder from Tax
Free Fund or Minnesota Tax Free Fund.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of Tax Free Fund and Minnesota Tax Free Fund will not be deductible
for federal income purposes.
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EMERGING MARKETS FUND
Dividends paid by Emerging Markets Fund attributable to investments in the
securities of foreign issuers will not be eligible for the 70% deduction for
dividends received by corporations.
Emerging Markets Fund may be required to pay withholding and other taxes
imposed by foreign countries, generally at rates from 10% to 40%, which
would reduce the Fund's investment income. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
If at the end of Emerging Markets Fund's taxable year more than 50% of its
total assets consists of stock or securities of foreign corporations, the
Fund will be eligible to file an election with the Internal Revenue Service
to "pass through" to its shareholders the amount of foreign income taxes
(including withholding taxes) it paid. Pursuant to this election,
shareholders of the Fund will be
<PAGE>
required to include in gross income their respective pro rata portions of
such foreign taxes, treat such amounts as foreign taxes paid by them, and
subject to certain limitations, deduct such amounts in computing their
taxable income or, alternatively, use them as foreign tax credits against
their federal income taxes. If such an election is filed for a year,
Emerging Markets Fund shareholders will be notified of the amounts which
they may deduct as foreign taxes paid or used as foreign tax credits.
Alternatively, if the amount of foreign taxes paid by Emerging Markets Fund
is not large enough in future years to warrant making the election described
above, the Fund may claim the amount of foreign taxes paid as a deduction
against its own gross income. In that case, shareholders will not be
required to include any amount of foreign taxes paid by the Fund in their
income and will not be permitted either to deduct any portion of foreign
taxes from their own income or to claim any amount of foreign tax credit for
taxes paid by the Fund.
Information concerning distributions will be mailed to shareholders
annually. Shareholders are required for information purposes to report
exempt-interest dividends and other tax-exempt interest on their tax
returns.
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MINNESOTA INCOME TAXATION -- MINNESOTA TAX FREE FUND
The portion of exempt-interest dividends paid by Minnesota Tax Free Fund
that is derived from interest on tax-exempt obligations issued by the State
of Minnesota, its political subdivisions and instrumentalities, is excluded
from the Minnesota taxable net income of individuals, estates and trusts,
provided that the portion of the exempt-interest dividends from such
Minnesota sources paid to all shareholders represent 95 percent or more of
the exempt-interest dividends paid by the Fund. The remaining portion of
such dividends, and dividends or capital gain dividends, are included in the
Minnesota taxable net income of individuals, estates and trusts, except for
dividends directly attributable to interest on obligations of the United
States Government, its territories and possessions. Exempt-interest
dividends are not excluded from the Minnesota taxable income of corporations
and financial institutions. Dividends qualifying for federal income tax
purposes as capital gain dividends are to be treated by shareholders as
long-term capital gains. Minnesota has repealed the favorable treatment of
long-term capital gains, while retaining restrictions on the deductibility
of capital losses. As under federal law, the portion of Social Security
benefits subject to Minnesota income tax may be affected by the amount of
exempt-interest dividends received by the shareholders. Exempt-interest
dividends attributable to interest on certain private activity bonds issued
after August 7, 1986 will be included in Minnesota alternative minimum
taxable income of individuals, estates and trusts for purposes of computing
Minnesota's alternative minimum tax. Dividends generally will not qualify
for the dividends-received deduction for corporations and financial
institutions.
---------------------------------------------------------------------------
OTHER STATE AND LOCAL TAXATION
Except to the extent described above under "-- Minnesota Income Taxation --
Minnesota Tax Free Fund," distributions by all of the Funds may be subject
to state and local taxation (even if, in the case of Tax Free Fund, they are
exempt from federal income taxes). Shareholders are urged to consult their
own tax advisers regarding state and local taxation.
TAX-EXEMPT VS.
TAXABLE INCOME
The tables below show the approximate yields that taxable securities must
earn to equal yields that are (i) exempt from federal income taxes; (ii)
exempt from both federal and Minnesota income taxes, under selected income
tax brackets scheduled to be in effect in 1998. The effective combined rates
reflect the deduction of state
<PAGE>
income taxes from federal income. The 34.1%, 36.9%, 41.4% and 44.7% combined
federal/Minnesota rates assume that the investor is subject to an 8.5%
marginal Minnesota income tax rate and a marginal federal income tax rate of
28%, 31%, 36% and 39.6%, respectively. The combined rates do not reflect
federal rules concerning the phase-out of personal exemptions and
limitations on the allowance of itemized deductions for certain high-income
taxpayers. The tables are based upon yields that are derived solely from
tax-exempt income. To the extent that a Fund's yield is derived from taxable
income, the Fund's tax equivalent yield will be less than set forth in the
tables. The tax-free yields used in these tables should not be considered as
representations of any particular rates of return and are for purposes of
illustration only.
FUND SHARES
Each share of a Fund is fully paid, nonassessable, and transferable. Shares
may be issued as either full or fractional shares. Fractional shares have
pro rata the same rights and privileges as full shares. Shares of the Funds
have no preemptive or conversion rights.
Each share of a Fund has one vote. On some issues, such as the election of
directors, all shares of all FAIF Funds vote together as one series. The
shares do not have cumulative voting rights. Consequently, the holders of
more than 50% of the shares voting for the election of directors are able to
elect all of the directors if they choose to do so. On issues affecting only
a particular Fund or class of shares, the shares of that Fund or class will
vote as a separate series. Examples of such issues would be proposals to
alter a fundamental investment restriction pertaining to a Fund or to
approve, disapprove or alter a distribution plan pertaining to a class of
shares.
Under the laws of the State of Maryland and FAIF's Articles of
Incorporation, FAIF is not required to hold shareholder meetings unless they
(i) are required by the 1940 Act or (ii) are requested in writing by the
holders of 25% or more of the outstanding shares of FAIF.
CALCULATION OF
PERFORMANCE DATA
From time to time, any of the Funds may advertise information regarding its
performance. Each Fund may publish its "yield," its "cumulative total
return," its "average annual total return" and its "distribution rate." In
addition, Tax Free Fund and Minnesota Tax Free Fund may publish their "tax
equivalent yield" and its "tax equivalent distribution rate." Distribution
rates and tax equivalent distribution rates may only be used in
<TABLE>
<CAPTION>
Tax-Equivalent Yields
Combined Federal and
Federal Tax Brackets Minnesota Tax Brackets
- ----------------------------------------------- ------------------------------------
Tax-Free
Yields 28% 31% 36% 39.6% 34.1% 36.9% 41.4% 44.7%
=============================================== ====================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3.0% 4.17% 4.35% 4.69% 4.97% 4.55% 4.75% 5.12% 5.42%
3.5% 4.86% 5.07% 5.47% 5.79% 5.31% 5.55% 5.97% 6.33%
4.0% 5.56% 5.80% 6.25% 6.62% 6.07% 6.34% 6.83% 7.23%
4.5% 6.25% 6.52% 7.03% 7.45% 6.83% 7.13% 7.68% 8.14%
5.0% 6.94% 7.25% 7.81% 8.28% 7.59% 7.92% 8.53% 9.04%
5.5% 7.64% 7.97% 8.59% 9.11% 8.35% 8.72% 9.39% 9.95%
6.0% 8.33% 8.70% 9.38% 9.93% 9.10% 9.51% 10.24% 10.85%
6.5% 9.03% 9.42% 10.16% 10.76% 9.86% 10.30% 11.09% 11.75%
=============================================== ====================================
</TABLE>
<PAGE>
connection with sales literature and shareholder communications preceded or
accompanied by a Prospectus. Each of these performance figures is based upon
historical results and is not intended to indicate future performance, and,
except for "distribution rate" and "tax equivalent distribution rate," is
standardized in accordance with Securities and Exchange Commission ("SEC")
regulations.
"Yield" for the Funds is computed by dividing the net investment income per
share (as defined in applicable SEC regulations) earned during a 30-day
period (which period will be stated in the advertisement) by the maximum
offering price per share on the last day of the period. Yield is an
annualized figure, in that it assumes that the same level of net investment
income is generated over a one year period. The yield formula annualizes net
investment income by providing for semi-annual compounding.
"Tax equivalent yield" is that yield which a taxable investment must
generate in order to equal a Fund's yield for an investor in a stated
federal or combined federal/state income tax bracket (normally assumed to be
the maximum tax rate or combined rate). Tax equivalent yield is computed by
dividing that portion of the yield which is tax-exempt by one minus the
stated income tax rate, and adding the resulting amount to that portion, if
any, of the yield which is not tax-exempt.
"Total return" is based on the overall dollar or percentage change in value
of a hypothetical investment in a Fund assuming reinvestment of dividend
distributions and deduction of all charges and expenses. "Cumulative total
return" reflects a Fund's performance over a stated period of time. "Average
annual total return" reflects the hypothetical annually compounded rate that
would have produced the same cumulative total return if performance had been
constant over the entire period. Because average annual returns tend to
smooth out variations in a Fund's performance, they are not the same as
actual year-by-year results.
"Distribution rate" is determined by dividing the income dividends per share
for a stated period by the maximum offering price per share on the last day
of the period. "Tax equivalent distribution rate" is computed by dividing
the portion of the distribution rate (determined as described above) which
is tax-exempt by one minus the stated federal or combined federal/state
income tax rate, and adding to the resulting amount that portion, if any, of
the distribution rate which is not tax-exempt. All distribution rates
published for the Funds are measures of the level of income dividends
distributed during a specified period. Thus, these rates differ from yield
(which measures income actually earned by a Fund) and total return (which
measures actual income, plus realized and unrealized gains or losses of a
Fund's investments). Consequently, distribution rates alone should not be
considered complete measures of performance.
The performance of the Class Y Shares of a Fund will normally be higher than
for the Class A and Class B Shares because Class Y Shares are not subject to
the sales charges and shareholder servicing expenses applicable to Class A
and Class B Shares.
In reports or other communications to shareholders and in advertising
material, the performance of each Fund may be compared to recognized
unmanaged indices or averages of the performance of similar securities and
to composites of such indices and averages. Also, the performance of each
Fund may be compared to that of other funds of similar size and objectives
as listed in the rankings prepared by Lipper Analytical Services, Inc. or
similar independent mutual fund rating services, and each Fund may include
in such reports, communications and advertising material evaluations
published by nationally recognized independent ranking services and
publications. For further information regarding the Funds' performance, see
"Fund Performance" in the Statement of Additional Information.
SPECIAL INVESTMENT METHODS
This section provides additional information concerning the securities in
which the Funds may invest and related topics. Further information
concerning these matters is contained in the Statement of Additional
Information.
<PAGE>
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CASH ITEMS
The "cash items" in which certain of the Funds may invest, as described
under "Investment Objectives and Policies," include short-term obligations
such as rated commercial paper and variable amount master demand notes;
United States dollar-denominated time and savings deposits (including
certificates of deposit); bankers' acceptances; obligations of the United
States Government or its agencies or instrumentalities (including
zero-coupon securities); repurchase agreements collateralized by eligible
investments of a Fund; securities of other mutual funds which invest
primarily in debt obligations with remaining maturities of 13 months or less
(which investments also are subject to the advisory fee); and other similar
high-quality short-term United States dollar-denominated obligations. The
other mutual funds in which the Funds may so invest include money market
funds advised by the Adviser, subject to certain restrictions contained in
an exemptive order issued by the Securities and Exchange Commission with
respect thereto.
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MUNICIPAL BONDS AND OTHER MUNICIPAL OBLIGATIONS
As described under "Investment Objectives and Policies," Tax Free Fund and
Minnesota Tax Free Fund invest principally in municipal bonds and other
municipal obligations. These bonds and other obligations are issued by the
states and by their local and special-purpose political subdivisions. The
term "municipal bond" as used in this Prospectus includes short-term
municipal notes issued by the states and their political subdivisions.
MUNICIPAL BONDS. The two general classifications of municipal bonds are
"general obligation" bonds and "revenue" bonds. General obligation bonds are
secured by the governmental issuer's pledge of its faith, credit and taxing
power for the payment of principal and interest. They are usually paid from
general revenues of the issuing governmental entity. Revenue bonds, on the
other hand, are usually payable only out of a specific revenue source rather
than from general revenues. Revenue bonds ordinarily are not backed by the
faith, credit or general taxing power of the issuing governmental entity.
The principal and interest on revenue bonds for private facilities are
typically paid out of rents or other specified payments made to the issuing
governmental entity by a private company which uses or operates the
facilities. Examples of these types of obligations are industrial revenue
bonds and pollution control revenue bonds. Industrial revenue bonds are
issued by governmental entities to provide financing aid to community
facilities such as hospitals, hotels, business or residential complexes,
convention halls and sport complexes. Pollution control revenue bonds are
issued to finance air, water and solids pollution control systems for
privately operated industrial or commercial facilities.
Revenue bonds for private facilities usually do not represent a pledge of
the credit, general revenues or taxing powers of the issuing governmental
entity. Instead, the private company operating the facility is the sole
source of payment of the obligation. Sometimes, the funds for payment of
revenue bonds come solely from revenue generated by operation of the
facility. Revenue bonds which are not backed by the credit of the issuing
governmental entity frequently provide a higher rate of return than other
municipal obligations, but they entail greater risk than obligations which
are guaranteed by a governmental unit with taxing power. Federal income tax
laws place substantial limitations on industrial revenue bonds, and
particularly certain specified private activity bonds issued after August 7,
1986. In the future, legislation could be introduced in Congress which could
further restrict or eliminate the income tax exemption for interest on debt
obligations in which Tax Free Fund and Minnesota Tax Free Fund may invest.
Certain municipal securities may carry variable or floating rates of
interest whereby the rate of interest is not fixed but varies with changes
in specified market rates or indexes, such as a bank prime rate or a
tax-exempt money market index. Accordingly, the yield on such securities can
be expected to fluctuate with changes in prevailing interest rates.
<PAGE>
DERIVATIVE MUNICIPAL SECURITIES. Tax Free Fund and Minnesota Tax Free Fund
may also acquire derivative municipal securities, which are custodial
receipts or 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
obligations.
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.
MUNICIPAL LEASES. Tax Free Fund and Minnesota Tax Free Fund also may
purchase participation interests in municipal leases. Participation
interests in municipal leases are undivided interests in a lease,
installment purchase contract or conditional sale contract entered into by a
state or local governmental unit to acquire equipment or facilities.
Municipal leases frequently have special risks which generally are not
associated with general obligation bonds or revenue bonds.
Municipal leases and installment purchase or conditional sale contracts
(which usually provide for title to the leased asset to pass to the
governmental issuer upon payment of all amounts due under the contract) have
evolved as a means for governmental issuers to acquire property and
equipment without meeting the constitutional and statutory requirements for
the issuance of municipal debt. The debt-issuance limitations are deemed to
be inapplicable because of the inclusion in many leases and contracts of
"nonappropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money
is appropriated for this purpose by the appropriate legislative body on a
yearly or other periodic basis. Although these kinds of obligations are
secured by the leased equipment or facilities, the disposition of the
pledged property in the event of non-appropriation or foreclosure might, in
some cases, prove difficult and time-consuming. In addition, disposition
upon non-appropriation or foreclosure might not result in recovery by a Fund
of the full principal amount represented by an obligation.
In light of these concerns, Tax Free Fund and Minnesota Tax Free Fund will
adopt 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 the Fund's portfolio. These
procedures will require that a number of factors be used in evaluating the
liquidity of a municipal lease security, including the frequency of trades
and quotes for the security, the number of dealers willing to purchase or
sell the security and the number of other potential purchasers, the
willingness of dealers to undertake to make a market in the security, the
nature of the marketplace in which the security trades, and other factors
which the Adviser may deem relevant. As described below under "-- Investment
Restrictions," Tax Free Fund and Minnesota Tax Free Fund are subject to
limitations on the percentage of illiquid securities they can hold.
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TEMPORARY TAXABLE INVESTMENTS
Tax Free Fund and Minnesota Tax Free Fund may make temporary taxable
investments as described under "Investment Objectives and Policies."
Temporary taxable investments will include only the following types of
obligations maturing within 13 months from the date of purchase: (i)
obligations of the United States Government, its agencies and
instrumentalities; (ii) commercial paper rated not less than A-2 by Standard
& Poor's or Prime-2 by Moody's or which has been assigned an equivalent
rating by another nationally recognized statistical rating organization;
(iii) other
<PAGE>
short-term debt securities issued or guaranteed by corporations having
outstanding debt rated not less than BBB by Standard & Poor's or Baa by
Moody's or which have been assigned an equivalent rating by another
nationally recognized statistical rating organization; (iv) certificates of
deposit of domestic commercial banks subject to regulation by the United
States Government or any of its agencies or instrumentalities, with assets
of $500 million or more based on the most recent published reports; and (v)
repurchase agreements with domestic banks or securities dealers involving
any of the securities which the Fund is permitted to hold. See "--
Repurchase Agreements" below.
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REPURCHASE AGREEMENTS
Each of the Funds may enter into repurchase agreements. A repurchase
agreement involves the purchase by a Fund of securities with the agreement
that after a stated period of time, the original seller will buy back the
same securities ("collateral") at a predetermined price or yield. Repurchase
agreements involve certain risks not associated with direct investments in
securities. If the original seller defaults on its obligation to repurchase
as a result of its bankruptcy or otherwise, the purchasing Fund will seek to
sell the collateral, which could involve costs or delays. Although
collateral (which may consist of any fixed income security which is an
eligible investment for the Fund entering into the repurchase agreement)
will at all times be maintained in an amount equal to the repurchase price
under the agreement (including accrued interest), a Fund would suffer a loss
if the proceeds from the sale of the collateral were less than the
agreed-upon repurchase price. The Adviser and, in the case of Emerging
Markets Fund, Sub-Adviser will monitor the creditworthiness of the firms
with which the applicable Funds enter into repurchase agreements.
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INVERSE FLOATING RATE OBLIGATIONS
Tax Free Fund and Minnesota Tax Free Fund may invest up to 10% of their
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, its income
and value would tend to decline during a period of generally increasing
market interest rates. In addition, its decline in value may be greater than
for a fixed-rate municipal obligation, particularly if the interest rate
borne by the floating rate municipal obligation is adjusted by a multiple of
changes in the specified index rate. For these reasons, inverse floating
rate municipal obligations have more risk than more conventional fixed-rate
and floating rate municipal obligations.
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WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
Each of the Funds may purchase securities on a when-issued or delayed
delivery basis. When such a transaction is negotiated, the purchase price is
fixed at the time the purchase commitment is entered, but delivery of and
payment for the securities take place at a later date. A Fund will not
accrue income with respect to securities purchased on a when-issued or
delayed delivery basis prior to their stated delivery date. Pending delivery
of the securities, each Fund will maintain in a segregated account cash or
liquid high-grade securities in an amount sufficient to meet its purchase
commitments.
The purchase of securities on a when-issued or delayed delivery basis
exposes a Fund to risk because the securities may decrease in value prior to
delivery. In addition, a Fund's purchase of securities on a when-issued or
delayed delivery basis while remaining substantially fully invested could
increase the amount of the Fund's total assets that are subject to market
risk, resulting in increased sensitivity of net asset value to changes in
market prices. However, the Funds will engage
<PAGE>
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.
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ZERO-COUPON SECURITIES
Adjustable Rate Mortgage Securities Fund, Tax Free Fund and Minnesota Tax
Free Fund 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 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.
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LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, each of the Funds may lend portfolio
securities representing up to one-third of the value of its total assets to
broker-dealers, banks or other institutional borrowers of securities. If the
Funds engage in securities lending, distributions paid to shareholders from
the resulting income will not be excludable from shareholders' gross income
for income tax purposes. As with other extensions of credit, there may be
risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. However,
the Funds will only enter into loan arrangements with broker-dealers, banks,
or other institutions which the Adviser or, in the case of Emerging Markets
Fund, the Sub-Adviser has determined are creditworthy under guidelines
established by the Board of Directors. In these loan arrangements, the Funds
will receive collateral in the form of cash, United States Government
securities or other high-grade debt obligations equal to at least 100% of
the value of the securities loaned. Collateral is marked to market daily.
The Funds will pay a portion of the income earned on the lending transaction
to the placing broker and may pay administrative and custodial fees in
connection with these loans, which in the case of U.S. Bank Trust National
Association, are 40% of the Funds' income from such securities lending
transactions.
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OPTIONS TRANSACTIONS
The Funds may purchase put and call options. These transactions will be
undertaken only for the purpose of reducing risk to the Funds. Depending on
the Fund, these transactions may include the purchase of put and call
options on equity securities, on stock indices, on interest rate indices or
(in the case of Emerging Markets Fund) on foreign currencies. Options on
futures contracts are discussed below under "-- Futures and Options on
Futures."
A put option on a security gives the purchaser of the option the right (but
not the obligation) to sell, and the writer of the option the obligation to
buy, the underlying security at a stated price (the "exercise price") at any
time before the option expires. A call option on a security gives the
purchaser the right (but not the obligation) to buy, and the writer the
obligation to sell, the underlying security at the exercise price at any
time before the option expires. The purchase price for a put or call option
is the "premium" paid by the purchaser for the right to sell or buy.
Options on indices are similar to options on securities except that, rather
than the right to take or make delivery of a specific security at a stated
price, an option on an index gives the holder the right to receive, upon
exercise of the option, a defined amount of cash if the closing value of the
index upon which the option is based is greater
<PAGE>
than, in the case of a call, or less than, in the case of a put, the
exercise price of the option.
None of the Funds other than Mid Cap Growth Fund and Emerging Markets Fund
will invest more than 5% of the value of its total assets in purchased
options, provided that options which are "in the money" at the time of
purchase may be excluded from this 5% limitation. A call option is "in the
money" if the exercise price is lower than the current market price of the
underlying security or index, and a put option is "in the money" if the
exercise price is higher than the current market price. A Fund's loss
exposure in purchasing an option is limited to the sum of the premium paid
and the commission or other transaction expenses associated with acquiring
the option.
The use of purchased put and call options involves certain risks. These
include the risk of an imperfect correlation between market prices of
securities held by a Fund and the prices of options, and the risk of limited
liquidity in the event that a Fund seeks to close out an options position
before expiration by entering into an offsetting transaction.
WRITING OF CALL OPTIONS. The Funds may write (sell) covered call options to
the extent specified with respect to particular Funds under "Investment
Objectives and Policies." These transactions would be undertaken principally
to produce additional income. Depending on the Fund, these transactions may
include the writing of covered call options on equity securities or (only in
the case of Emerging Markets Fund) on foreign currencies which a Fund owns
or has the right to acquire or on interest rate indices.
When a Fund sells a covered call option, it is paid a premium by the
purchaser. If the market price of the security covered by the option does
not increase above the exercise price before the option expires, the option
generally will expire without being exercised, and the Fund will retain both
the premium paid for the option and the security. If the market price of the
security covered by the option does increase above the exercise price before
the option expires, however, the option is likely to be exercised by the
purchaser. In that case the Fund will be required to sell the security at
the exercise price, and it will not realize the benefit of increases in the
market price of the security above the exercise price of the option.
The Funds also may, to the extent specified with respect to particular Funds
under "Investment Objectives and Policies," write call options on stock
indices the movements of which generally correlate with those of the
respective Funds' portfolio holdings, These transactions, which would be
undertaken principally to produce additional income, entail the risk of an
imperfect correlation between movements of the index covered by the option
and movements in the price of the Fund's portfolio securities.
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FUTURES AND OPTIONS ON FUTURES
Emerging Markets Fund, Adjustable Rate Mortgage Securities Fund, Tax Free
Fund and Minnesota Tax Free Fund may engage in futures transactions and
purchase options on futures to the extent specified with under "Investment
Objectives and Policies." Depending on the Fund, these transactions may
include the purchase of stock index futures and options on stock index
futures, and the purchase of interest rate futures and options on interest
rate futures. In addition, Emerging Markets Fund may enter into contracts
for the future delivery of securities or foreign currencies and futures
contracts based on a specific security, class of securities, or foreign
currency.
A futures contract on a security obligates one party to purchase, and the
other to sell, a specified security at a specified price on a date certain
in the future. A futures contract on an index obligates the seller to
deliver, and entitles the purchaser to receive, an amount of cash equal to a
specific dollar amount times the difference between the value of the index
at the expiration date of the contract and the index value specified in the
contract. The acquisition of put and call options on futures contracts will,
respectively, give a Fund the right (but not the obligation), for a
specified
<PAGE>
exercise price, to sell or to purchase the underlying futures contract at
any time during the option period.
A Fund may use futures contracts and options on futures in an effort to
hedge against market risks and, in the case of Emerging Markets Fund, as
part of its management of foreign currency transactions.
Aggregate initial margin deposits for futures contracts, and premiums paid
for related options, may not exceed 5% of a Fund's total assets, and the
value of securities that are the subject of such futures and options (both
for receipt and delivery) may not exceed 1/3 of the market value of a Fund's
total assets. Futures transactions will be limited to the extent necessary
to maintain each Fund's qualification as a regulated investment company
under the Internal Revenue Code of 1986, as amended. Futures and options on
futures transactions will also be limited by regulations of the Commodity
Futures Trading Commission.
Adjustable Rate Mortgage Securities Fund may make investments in Eurodollar
instruments in order to attempt to reduce investment risk. Eurodollar
instruments are essentially U.S. dollar denominated futures contracts or
options thereon that are linked 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), 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.
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FIXED INCOME SECURITIES
The fixed income securities in which Mid Cap Growth Fund and Adjustable Rate
Mortgage Securities Fund may invest include securities issued or guaranteed
by the United States Government or its agencies or instrumentalities,
nonconvertible preferred stocks, nonconvertible corporate debt securities,
and short-term obligations of the kinds described above under "Special
Investment Methods -- Cash Items." Investments in nonconvertible preferred
stocks and nonconvertible corporate debt securities will be limited to
securities
<PAGE>
which are rated at the time of purchase not less than BBB by Standard &
Poor's or Baa by Moody's (or equivalent short-term ratings), or which have
been assigned an equivalent rating by another nationally recognized
statistical rating organization, or which are of comparable quality in the
judgment of the Adviser. Obligations rated BBB, Baa or their equivalent,
although investment grade, have speculative characteristics and carry a
somewhat higher risk of default than obligations rated in the higher
investment grade categories.
The fixed income securities specified above are subject to (i) interest rate
risk (the risk that increases in market interest rates will cause declines
in the value of debt securities held by 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).
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FOREIGN SECURITIES
GENERAL. Under normal market conditions Emerging Markets Fund invests at
least 65% of its total assets in equity securities which trade in foreign
emerging markets. In addition, Mid Cap Growth Fund may invest lesser
proportions of its assets in securities of foreign issuers which are either
listed on a United States securities exchange or represented by American
Depositary Receipts.
Investment in foreign securities is subject to special investment risks that
differ in some respects from those related to investments in securities of
United States domestic issuers. These risks include political, social or
economic instability in the country of the issuer, the difficulty of
predicting international trade patterns, the possibility of the imposition
of exchange controls, expropriation, limits on removal of currency or other
assets, nationalization of assets, foreign withholding and income taxation,
and foreign trading practices (including higher trading commissions,
custodial charges and delayed settlements). Foreign securities also may be
subject to greater fluctuations in price than securities issued by United
States corporations. The principal markets on which these securities trade
may have less volume and liquidity, and may be more volatile, than
securities markets in the United States.
In addition, there may be less publicly available information about a
foreign company than about a United States domiciled company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to United
States domestic companies. There is also generally less government
regulation of securities exchanges, brokers and listed companies abroad than
in the United States. Confiscatory taxation or diplomatic developments could
also affect investment in those countries. In addition, foreign branches of
United States banks, foreign banks and foreign issuers may be subject to
less stringent reserve requirements and to different accounting, auditing,
reporting, and recordkeeping standards than those applicable to domestic
branches of United States banks and United States domestic issuers.
AMERICAN DEPOSITARY RECEIPTS 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
<PAGE>
traded, which standards are more uniform and more exacting than those to
which many foreign issuers may be subject. Emerging Markets 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.
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FOREIGN CURRENCY TRANSACTIONS
Emerging Markets Fund may invest in securities which are purchased and sold
in foreign currencies. The value of its assets as measured in United States
dollars therefore may be affected favorably or unfavorably by changes in
foreign currency exchange rates and exchange control regulations. Emerging
Markets Fund also will incur costs in converting United States dollars to
local currencies, and vice versa.
Emerging Markets Fund will conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing
in the foreign currency exchange market, or through forward contracts to
purchase or sell foreign currencies. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date certain at a specified price. These forward currency contracts
are traded directly between currency traders (usually large commercial
banks) and their customers.
Emerging Markets Fund may enter into forward currency contracts in order to
hedge against adverse movements in exchange rates between currencies. It may
engage in "transaction hedging" to protect against a change in the foreign
currency exchange rate between the date the Fund contracts to purchase or
sell a security and the settlement date, or to "lock in" the United States
dollar equivalent of a dividend or interest payment made in a foreign
currency. It also may engage in "portfolio hedging" to protect against a
decline in the value of its portfolio securities as measured in United
States dollars which could result from changes in exchange rates between the
United States dollar and the foreign currencies in which the portfolio
securities are purchased and sold. Emerging Markets Fund also may hedge its
foreign currency exchange rate risk by engaging in currency financial
futures and options transactions.
Although a foreign currency hedge may be effective in protecting the Fund
from losses resulting from unfavorable changes in exchanges rates between
the United States dollar and foreign currencies, it also would limit the
gains which might be realized by the Fund from favorable changes in exchange
rates. The Sub-Adviser's decision whether to enter into currency hedging
transactions will depend in part on its view regarding the direction and
amount in which exchange rates are likely to move. The forecasting of
movements in exchange rates is extremely difficult, so that it is highly
uncertain whether a hedging strategy, if undertaken, would be successful. To
the extent that the Sub-Adviser's view regarding future exchange rates
proves to have been incorrect, Emerging Markets Fund may realize losses on
its foreign currency transactions.
Emerging Markets Fund does not intend to enter into forward currency
contracts or maintain a net exposure in such contracts where it would be
obligated to deliver an amount of foreign currency in excess of the value of
its portfolio securities or other assets denominated in that currency.
<PAGE>
---------------------------------------------------------------------------
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. 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 swings 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.
---------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES
Adjustable Rate Mortgage Securities Fund may invest in mortgage-backed
securities which are Agency Pass-Through Certificates, private pass-through
securities or collateralized mortgage obligations ("CMOs"), as described
below.
Agency Pass-Through Certificates are mortgage pass-through certificates
representing undivided interests in pools of residential mortgage loans.
Distribution of principal and interest on the mortgage loans underlying an
Agency Pass-Through Certificate is an obligation of or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA"), or the Federal Home Loan Mortgage Corporation
("FHLMC"). The obligation of GNMA with respect to such certificates is
backed by the full faith and credit of the United States, while the
obligations of FNMA and FHLMC with respect to such certificates rely solely
on the assets and credit of those entities. The mortgage loans underlying
GNMA certificates are partially or fully guaranteed by the Federal Housing
Administration or the Veterans Administration, while the mortgage loans
underlying FNMA certificates and FHLMC certificates are conventional
mortgage loans which are, in some cases, insured by private mortgage
insurance companies. Agency Pass-Through Certificates may be issued in a
single class with respect to a given pool of mortgage loans or in multiple
classes.
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 FHMLC, 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 provision of
<PAGE>
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. Adjustable Rate Mortgage Securities Fund
will invest only in CMOs which are rated in one of the four highest rating
categories by a nationally recognized statistical rating organization or
which are of comparable quality in the judgment of the Adviser. Because CMOs
are debt obligations of private entities, payments on CMOs generally are not
obligations of or guaranteed by any governmental entity, and their ratings
and creditworthiness typically depend, among other factors, on the legal
insulation of the issuer and transaction from the consequences of a
sponsoring entity's bankruptcy. CMOs generally are issued in multiple
classes, with holders of each class entitled to receive specified portions
of the principal payments and prepayments and/or of the interest payments on
the underlying mortgage loans. These entitlements can be specified in a wide
variety of ways, so that the payment characteristics of various classes may
differ greatly from one another. 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. Examples of
the more common classes are provided in the Statement of Additional
Information. The CMOs in which the Fund may invest include classes which are
subordinated in right of payment to other classes, as long as they have the
required rating referred to above.
It generally is more difficult to predict the effect of changes in market
interest rates on the return on mortgaged-backed securities than to predict
the effect of such changes on the return of a conventional fixed-rate debt
instrument, and the magnitude of such effects may be greater in some cases.
The return on interest-only and principal-only mortgage-backed securities is
particularly sensitive to changes in interest rates and prepayment speeds.
When interest rates decline and prepayment speeds increase, the holder of an
interest-only mortgage-backed security may not even recover its initial
investment. Similarly, the return on an inverse floating rate CMO is likely
to decline more sharply in periods of increasing interest rates than that of
a fixed-rate security. For these reasons, interest-only, principal-only and
inverse floating rate mortgage-backed securities generally have greater risk
than more conventional classes of mortgage-backed securities.
---------------------------------------------------------------------------
ASSET-BACKED SECURITIES
Adjustable Rate Mortgage Securities 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
<PAGE>
entity's bankruptcy, as well as on the credit quality of the underlying
receivables and the amount and credit quality of any third-party credit
enhancement supporting the underlying receivables or the asset-backed
securities. Asset-backed securities and their underlying receivables
generally are not issued or guaranteed by any governmental entity.
---------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
Portfolio transactions in the over-the-counter market will be effected with
market makers or issuers, unless better overall price and execution are
available through a brokerage transaction. It is anticipated that most
portfolio transactions involving debt securities will be executed on a
principal basis. Also, with respect to the placement of portfolio
transactions with securities firms, subject to the overall policy to seek to
place portfolio transactions as efficiently as possible and at the best
price, research services and placement of orders by securities firms for a
Fund's shares may be taken into account as a factor in placing portfolio
transactions for the Fund.
---------------------------------------------------------------------------
PORTFOLIO TURNOVER
Although the Funds do not intend generally to trade for short-term profits,
they may dispose of a security without regard to the time it has been held
when such action appears advisable to the Adviser, and in the case of
Emerging Markets Fund, the Sub-Adviser. The portfolio turnover rate for a
Fund may vary from year to year and may be affected by cash requirements for
redemptions of shares. High portfolio turnover rates (100% or more)
generally would result in higher transaction costs and could result in
additional tax consequences to a Fund's shareholders.
---------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
The fundamental and nonfundamental investment restrictions of the Funds
are set forth in full in the Statement of Additional Information. The
fundamental restrictions include the following:
* None of the Funds will borrow money, except from banks for temporary or
emergency purposes. The amount of such borrowing may not exceed 10% of
the borrowing Fund's total assets. None of the Funds will borrow money
for leverage purposes. For the purpose of this investment restriction,
the use of options and futures transactions and the purchase of
securities on a when-issued or delayed delivery basis shall not be
deemed the borrowing of money. If a Fund engages in borrowing, its share
price may be subject to greater fluctuation, and the interest expense
associated with the borrowing may reduce the Fund's net income.
* None of the Funds will make short sales of securities.
* None of the Funds will purchase any securities on margin except to
obtain such short-term credits as may be necessary for the clearance of
transactions and except, in the case of Emerging Markets Fund, as may be
necessary to make margin payments in connection with foreign currency
futures and other derivatives transactions.
* Tax Free Fund will not invest 25% or more of the value of its total
assets in obligations of issuers located in the same state (for this
purpose, the location of an "issuer" shall be deemed to be the location
of the entity the revenues of which are the primary source of payment or
the location of the project or facility which may be the subject of the
obligation). Neither Tax Free Fund nor Minnesota Tax Free Fund 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;
<PAGE>
(x) toll roads; (xi) airport facilities; and (xii) educational
facilities), except that, in circumstances in which other appropriate
available investments may be in limited supply, such Funds may invest
without limitation in gas provision, electric power provision, water
provision, housing and hospital obligations. This restriction does not
apply to general obligation bonds or notes or, in the case of Tax Free
Fund, to pollution control revenue bonds. However, in the case of the
latter Fund, it is anticipated that normally (unless there are unusually
favorable interest and market factors) less than 25% of such Fund's
total assets will be invested in pollution control bonds. This
restriction does not apply to securities of the United States Government
or its agencies and instrumentalities or repurchase agreements relating
thereto.
A fundamental policy or restriction, including those stated above, cannot be
changed without an affirmative vote of the holders of a "majority" of the
outstanding shares of the applicable Fund, as defined in the 1940 Act.
As a nonfundamental policy, none of the Funds will invest more than 15% of
its net assets in all forms of illiquid investments, as determined pursuant
to applicable Securities and Exchange Commission rules and interpretations.
Section 4(2) commercial paper and Rule 144A securities may be determined to
be "liquid" under guidelines adopted by the Board of Directors. Investing in
Rule 144A securities could have the effect of increasing the level of
illiquidity in a Fund to the extent that qualified institutional buyers
become, for a time, uninterested in purchasing these securities.
<PAGE>
INFORMATION CONCERNING
COMPENSATION PAID TO
U.S. BANK NATIONAL
ASSOCIATION, U.S. BANK
TRUST NATIONAL ASSOCIATION
AND OTHER AFFILIATES
U.S. Bank National Association, U.S. Bank Trust National Association and
other affiliates of U.S. Bancorp may act as fiduciary with respect to plans
subject to the Employee Retirement Income Security Act of 1974 ("ERISA") and
other trust and agency accounts that invest in the Funds. These U.S. Bancorp
affiliates may receive compensation from the Funds for the services they
provide to the Funds, as described more fully in the following sections of
this Prospectus:
Investment advisory services -- see "Management-Investment Adviser"
Custodian services -- see "Management-Custodian"
Sub-administration -- see "Management-Administrator"
Shareholder servicing -- see "Distributor"
Securities lending -- see "Special Investment Methods-Lending of Portfolio
Securities"
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
Oaks, Pennsylvania 19456
Investment Adviser
U.S. BANK NATIONAL ASSOCIATION
601 Second Avenue South
Minneapolis, Minnesota 55402
Custodian
U.S. BANK TRUST NATIONAL ASSOCIATION
180 East Fifth Street
St. Paul, Minnesota 55101
Distributor
SEI INVESTMENTS DISTRIBUTION CO.
Oaks, Pennsylvania 19456
Administrator
SEI INVESTMENTS MANAGEMENT CORPORATION
Oaks, Pennsylvania 19456
Transfer Agent
DST SYSTEMS, INC.
330 West Ninth Street
Kansas City, Missouri 64105
Independent Auditors
KPMG PEAT MARWICK LLP
90 South Seventh Street
Minneapolis, Minnesota 55402
Counsel
DORSEY & WHITNEY LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
FAIF-1502 (7/98) I
<PAGE>
Appendix XI
MANAGEMENT OF FAIF FUNDS AFTER THE REORGANIZATION
This Appendix provides a list of the portfolio managers for the Piper Funds
and the FAIF Funds prior to the Reorganization and the portfolio managers of the
FAIF Funds after the Reorganization. Please note that the list of portfolio
managers for the FAIF Funds after the Reorganization is tentative and is
subject to change.
<TABLE>
<CAPTION>
Current Current Portfolio
Portfolio Acquiring First Portfolio Managers After
Piper Fund Manager(s) American Fund Manager(s) Fund Combination
---------- ---------- ------------- ---------- ----------------
<S> <C> <C> <C> <C>
U.S. Government Nancy Olsen Government Joseph Ulrey Joseph Ulrey
Money Market Fund Shaista Tajamal Obligations Fund James Palmer James Palmer
Nancy Olsen
Money Market Fund Nancy Olsen Prime Obligations Joseph Ulrey Joseph Ulrey
Shaista Tajamal Fund James Palmer James Palmer
Nancy Olsen
Tax-Exempt Money Douglas White Tax Free Joseph Ulrey Joseph Ulrey
Market Fund Catherine Stienstra Obligations Fund James Palmer James Palmer
Catherine Stienstra
Adjustable Rate Thomas McGlinch Adjustable Rate N/A Thomas McGlinch
Mortgage Securities Wan-Chong Kung Mortgage Securities Wan-Chong Kung
Fund Fund ("shell" fund) Mark Green
Intermediate Bond Bruce Salvog Intermediate Term Martin Jones Martin Jones
Fund David Steele Income Fund Lucille Rehkamp Lucille Rehkamp
Mark Green Mark Green
Bruce Salvog
David Steele
Government Income Bruce Salvog Fixed Income Fund Martin Jones Martin Jones
Fund David Steele Lucille Rehkamp Lucille Rehkamp
Mark Green Mark Green
Bruce Salvog
David Steele
National Tax- Ronald Reuss Tax Free Fund N/A Ronald Reuss
Exempt Fund Douglas White Douglas White
Minnesota Tax- Ronald Reuss Minnesota Tax Free N/A Ronald Reuss
Exempt Fund Douglas White Fund Douglas White
Balanced Fund Steven Markusen Balanced Fund James Doak James Doak
Bruce Salvog John Murphy John Murphy
David Steele James Rovner James Rovner
Paul Dow Albin Dubiak Albin Dubiak
Roland Whitcomb Roland Whitcomb
Kevin Shields Kevin Shields
John Twele John Twele
Martin Jones Martin Jones
Lucille Rehkamp Lucille Rehkamp
Mark Green Mark Green
Paul Dow
Brent Mellum
Bruce Salvog
David Steele
<PAGE>
Current Current Portfolio
Portfolio Acquiring First Portfolio Managers After
Piper Fund Manager(s) American Fund Manager(s) Fund Combination
---------- ---------- ------------- ---------- ----------------
Growth and Income Steven Markusen Large Cap James Doak James Doak
Fund Brent Mellum Growth John Murphy John Murphy
Paul Dow James Rovner James Rovner
Albin Dubiak Albin Dubiak
Roland Whitcomb Roland Whitcomb
Kevin Shields Kevin Shields
John Twele John Twele
Paul Dow
Brent Mellum
Growth Fund Steven Markusen Large Cap Gerry Bren Gerry Bren
Mary Baniak Growth James Doak James Doak
Jeff Johnson Cori Johnson Cori Johnson
David Luebke John Murphy John Murphy
Brent Mellum Glenn Johnson Glenn Johnson
Steven Markusen
Paul Dow
Jeff Johnson
Dan Zarling
Mark Kelliher
Emerging Growth Sandra Shrewsbury Mid Cap N/A Sandra Shrewsbury
Fund Adam Benson Growth Adam Benson
Joyce Halbe Joyce Halbe
Mary Hoyme Mary Hoyme
Timothy McSweeney Timothy McSweeney
Jill Thompson Jill Thompson
Small Company Sandra Shrewsbury Small Cap Albin Dubiak Sandra Shrewsbury
Growth Fund Adam Benson Growth Gerry Bren Adam Benson
Joyce Halbe Douglas Rose Joyce Halbe
Mary Hoyme Robert Buss Mary Hoyme
Timothy McSweeney Anthony Hipple Timothy McSweeney
Jill Thompson Frank Magdlen Jill Thompson
Pacific-European Edinburgh Fund International Fund Marvin & Palmer Marvin & Palmer
Growth Fund Managers plc Associates, Inc. Associates, Inc.
(subadviser) (subadviser) (subadviser)
Emerging Markets Edinburgh Fund Emerging Markets N/A Marvin & Palmer
Growth Fund Managers plc Fund Associates, Inc.
(subadviser) (subadviser)
</TABLE>
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
dated ______, 1998
Proposed Acquisition of Assets of
SMALL COMPANY GROWTH FUND, EMERGING GROWTH FUND, GROWTH FUND,
GROWTH AND INCOME FUND, BALANCED FUND, GOVERNMENT INCOME FUND,
INTERMEDIATE BOND FUND, NATIONAL TAX-EXEMPT FUND, MINNESOTA TAX-EXEMPT FUND
Series of
PIPER FUNDS INC.
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
A Series of
PIPER FUNDS INC.-II
PACIFIC-EUROPEAN GROWTH FUND AND EMERGING MARKETS GROWTH FUND
Series of
PIPER GLOBAL FUNDS INC.
222 South Ninth Street
Minneapolis, Minnesota 55402-3804
1-800-866-7778
By and in Exchange for Shares of
EMERGING GROWTH FUND, MID CAP GROWTH FUND, DIVERSIFIED GROWTH FUND,
STOCK FUND, BALANCED FUND, FIXED INCOME FUND, INTERMEDIATE TERM
INCOME FUND, TAX FREE FUND, MINNESOTA TAX FREE FUND, ADJUSTABLE RATE
MORTGAGE SECURITIES FUND, INTERNATIONAL FUND AND EMERGING MARKETS FUND
Portfolios of
FIRST AMERICAN INVESTMENT FUNDS, INC.
Oaks, Pennsylvania 19456
1-800-637-2548
This Statement of Additional Information relates to the proposed Agreement
and Plan of Reorganization providing for (a) the acquisition of all of the
assets and the assumption of all liabilities of the Small Company Growth Fund,
Emerging Growth Fund, Growth Fund, Growth and Income Fund, Balanced Fund,
Government Income Fund, Intermediate Bond Fund, National Tax-Exempt Fund and
Minnesota Tax-Exempt Fund, each a separately managed series of Piper Funds Inc.;
Pacific-European Growth Fund and Emerging Markets Growth Fund, each a separately
managed series of Piper Global Funds Inc.; and Adjustable Rate Mortgage
Securities Fund, a separately managed series of Piper Funds Inc-II ("Piper
Funds"), by the Emerging Growth Fund, Mid Cap Growth Fund, Diversified Growth
Fund, Stock Fund, Balanced Fund, Fixed Income Fund, Intermediate Term Income
Fund, Tax Free Fund, Minnesota Tax Free Fund, Adjustable Rate Mortgage
Securities Fund, International Fund and Emerging Markets Fund ("FAIF Funds"),
each a separately managed series of First American Investment Funds, Inc.
("FAIF"), in exchange for shares of capital stock of the FAIF Funds having an
aggregate net asset value equal to the aggregate value of the assets acquired
(less the liabilities assumed) of the Piper Funds and (b) the liquidation of the
Piper Funds and the pro rata distribution of the Piper Fund shares to FAIF Fund
shareholders. This Statement of Additional Information consists of this cover
page, the preliminary Statement of Additional Information of FAIF relating to
the Adjustable Rate Mortgage Securities Fund, Tax Free Fund, Minnesota Tax Free
Fund, Mid Cap Growth Fund and Emerging Markets Fund, which is attached as
Appendix A to this Statement of Additional Information, the pro forma combined
financial statements reflecting the accounts of the Piper Funds and the
corresponding FAIF Funds dated September 30, 1997, which are attached hereto as
Appendix B, and the following documents, each of which is incorporated by
reference herein:
1. Statement of Additional Information of FAIF dated January 31, 1998,
containing information concerning the Stock Fund, Equity Index Fund,
Intermediate Term Income Fund and Fixed Income Fund.
2. Statement of Additional Information of Small Company Growth Fund,
Emerging Growth Fund, Growth Fund, Growth and Income Fund and
Balanced Fund, series of Piper Funds Inc., dated November 24,1997.
<PAGE>
3. Statement of Additional Information of Government Income Fund and
Intermediate Bond Fund, series of Piper Funds Inc., and Adjustable
Rate Mortgage Securities Fund, a series of Piper Funds Inc.-II,
dated November 24,1997.
4. Statement of Additional Information of National Tax-Exempt Fund and
Minnesota Tax-Exempt Fund, series of Piper Funds Inc., dated
November 24, 1997.
5. Statement of Additional Information of Piper Global Funds Inc. dated
November 24,1997.
6. Annual report of FAIF for the fiscal year ended September 30, 1997.
7. Annual report of Piper Funds Small Company Growth Fund, Emerging
Growth Fund and Growth Fund for the fiscal year ended September 30,
1997.
8. Annual report of Piper Funds National Tax-Exempt Fund and Minnesota
Tax-Exempt Fund for the fiscal year ended September 30, 1997.
9. Annual report of Piper Funds Emerging Markets Growth Fund and
Pacific-European Growth Fund for the fiscal year ended September 30,
1997.
10. Annual Report of Piper Funds Government Income Fund, Intermediate
Bond Fund and Adjustable Rate Mortgage Securities Fund for the
fiscal year ended September 30, 1997.
11. Annual Report of Piper Funds Growth and Income Fund and Balanced
Fund for the fiscal year ended September 30, 1997.
12. Financial Statements required by Form N-14, Item 14 (to the extent
not included in Items 5, 6, 7, 8, 9, 10 and 11 above).
This Statement of Additional Information is not a prospectus. The Prospectus/
Proxy Statement dated the date hereof relating to the above-referenced
transaction may be obtained without charge by writing or calling Piper Funds or
FAIF at the addresses or telephone numbers noted above. This Statement of
Additional Information relates to, and should be read in conjunction with, such
Prospectus/ Proxy Statement.
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED __________, 1998
MID CAP GROWTH FUND TAX FREE FUND
EMERGING MARKETS FUND MINNESOTA TAX FREE FUND
ADJUSTABLE RATE MORTGAGE SECURITIES FUND STRATEGIC INCOME FUND
This Statement of Additional Information relates to the Class A and
Class Y Shares of the funds named above (the "Funds"), each of which is a series
of First American Investment Funds, Inc. ("FAIF"). In addition, this Statement
of Additional Information relates to the Class B Shares of Mid Cap Growth Fund,
Emerging Markets Fund and Strategic Income Fund. This Statement of Additional
Information is not a prospectus, but should be read in conjunction with the
Funds' current Prospectuses dated __________, 1998. This Statement of Additional
Information is incorporated into the Funds' Prospectuses by reference. To obtain
copies of a Prospectus, write or call the Funds' distributor SEI Investments
Distribution Co., Oaks, Pennsylvania 19456, telephone: (800) 637-2548. Please
retain this Statement of Additional Information for future reference.
TABLE OF CONTENTS
GENERAL INFORMATION ................................................... 2
ADDITIONAL INFORMATION CONCERNING FUND INVESTMENTS .................... 3
SHORT-TERM INVESTMENTS ............................................. 3
REPURCHASE AGREEMENTS .............................................. 3
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS ...................... 4
MORTGAGE DOLLAR ROLLS .............................................. 4
LENDING OF PORTFOLIO SECURITIES .................................... 4
OPTIONS TRANSACTIONS ............................................... 4
FUTURES AND OPTIONS ON FUTURES ..................................... 5
EURODOLLAR INSTRUMENTS ............................................. 6
INTEREST RATE TRANSACTIONS ......................................... 6
FOREIGN SECURITIES ................................................. 7
FOREIGN CURRENCY TRANSACTIONS ...................................... 7
MORTGAGE-BACKED SECURITIES ......................................... 8
DERIVATIVE MUNICIPAL SECURITIES .................................... 9
DEBT OBLIGATIONS RATED LESS THAN INVESTMENT GRADE .................. 10
U.S. TREASURY INFLATION-PROTECTION SECURITIES ...................... 11
SPECIAL FACTORS AFFECTING MINNESOTA TAX FREE FUND .................. 12
CFTC INFORMATION ................................................... 13
INVESTMENT RESTRICTIONS ............................................... 13
DIRECTORS AND EXECUTIVE OFFICERS ...................................... 16
DIRECTORS .......................................................... 16
EXECUTIVE OFFICERS ................................................. 16
COMPENSATION ....................................................... 18
INVESTMENT ADVISORY AND OTHER SERVICES ................................ 19
INVESTMENT ADVISORY AGREEMENT ...................................... 19
SUB-ADVISORY AGREEMENT FOR EMERGING MARKETS FUND AND
STRATEGIC INCOME FUND ........................................... 19
ADMINISTRATION AGREEMENT ........................................... 20
DISTRIBUTOR AND DISTRIBUTION PLANS ................................. 20
CUSTODIAN; TRANSFER AGENT; COUNSEL; ACCOUNTANTS .................... 22
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE .................... 22
CAPITAL STOCK ......................................................... 24
NET ASSET VALUE AND PUBLIC OFFERING PRICE ............................. 24
FUND PERFORMANCE ...................................................... 24
SEC STANDARDIZED PERFORMANCE FIGURES ............................... 24
NON-STANDARD DISTRIBUTION RATES .................................... 26
CERTAIN PERFORMANCE COMPARISONS .................................... 26
TAXATION .............................................................. 26
RATINGS ............................................................... 30
RATINGS OF CORPORATE DEBT OBLIGATIONS AND MUNICIPAL
BONDS ........................................................... 30
RATINGS OF PREFERRED STOCK ......................................... 32
RATINGS OF MUNICIPAL NOTES ......................................... 32
RATINGS OF COMMERCIAL PAPER ........................................ 33
BEST'S RATING SYSTEM FOR INSURANCE COMPANIES ...................... 33
SUBJECT TO COMPLETION -- APRIL 15, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY ANY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A
PROSPECTUS.
<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 30 series. Each series of shares represents a separate investment portfolio
with its own investment objective and policies (in essence, a separate mutual
fund). The series of FAIF to which this Statement of Additional Information
relates are named on the cover hereof. These series are referred to in this
Statement of Additional Information as the "Funds."
Shareholders may purchase shares of each Fund through three separate
classes, Class A, Class B (Mid Cap Growth Fund, Emerging Markets Fund and
Strategic Income Fund only) 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 and Class B Shares of the Funds. Except for differences
among the classes pertaining to distribution costs and shareholder servicing
fees, each share of each Fund represents an equal proportionate interest in that
Fund.
FAIF has prepared and will provide Prospectuses relating to the
Class A and Class Y Shares of Funds, and the Class B Shares of Mid Cap Growth
Fund, Emerging Markets Fund and Strategic Income Fund. These Prospectuses can be
obtained by calling or writing SEI Investments Distribution Co., at the address
and telephone number set forth on the cover of this Statement of Additional
Information. This Statement of Additional Information relates both to the Class
A and Class B Shares Prospectuses and to the Class 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.
- 2 -
<PAGE>
ADDITIONAL INFORMATION CONCERNING FUND INVESTMENTS
The investment objectives, policies and restrictions of the Funds
are set forth in their respective Prospectuses. Additional information
concerning the investments which may be made by the Funds is set forth under
this caption. Additional information concerning the Funds' investment
restrictions is set forth below under the caption "Investment Restrictions."
SHORT-TERM INVESTMENTS
Most of the Funds can invest in a variety of short-term instruments
which are specified in the respective Prospectuses. Short-term investments and
repurchase agreements may be entered into on a joint basis by the Funds and
other funds advised by the Adviser to the extent permitted by Securities and
Exchange Commission exemptive order relief obtained by them. A brief description
of certain kinds of short-term instruments follows:
COMMERCIAL PAPER. Commercial paper consists of unsecured promissory
notes issued by corporations. Issues of commercial paper normally have
maturities of less than nine months and fixed rates of return. Subject to the
limitations described in the Prospectuses, the Funds may purchase commercial
paper consisting of issues rated at the time of purchase within the two highest
rating categories by Standard & Poor's Rating Services, a division of the
McGraw-Hill Companies, Inc. ("Standard & Poor's") or Moody's Investors Service,
Inc. ("Moody's"), or which have been assigned an equivalent rating by another
nationally recognized statistical rating organization. The Funds also may invest
in commercial paper that is not rated but that is determined by the Adviser to
be of comparable quality to instruments that are so rated. For a description of
the rating categories of Standard & Poor's and Moody's, see "Ratings" herein.
BANKERS' ACCEPTANCES. Bankers' acceptances are credit instruments
evidencing the obligation of a bank to pay a draft drawn on it by a customer.
These instruments reflect the obligation both of the bank and of the drawer to
pay the full amount of the instrument upon maturity.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand
notes are unsecured demand notes that permit the indebtedness thereunder to vary
and provide for periodic adjustments in the interest rate according to the terms
of the instrument. Because master demand notes are direct lending arrangements
between a Fund and the issuer, they are not normally traded. Although there is
no secondary market in the notes, a Fund may demand payment of principal and
accrued interest at any time. While the notes are not typically rated by credit
rating agencies, issuers of variable amount master demand notes (which are
normally manufacturing, retail, financial, and other business concerns) must
satisfy the same criteria as set forth above for commercial paper. The Adviser
or Sub-Adviser will consider the earning power, cash flow, and other liquidity
ratios of the issuers of such notes and will continuously monitor their
financial status and ability to meet payment on demand.
REPURCHASE AGREEMENTS
The Funds may invest in repurchase agreements to the extent
specified in their respective Prospectuses. The Funds' custodian will hold the
securities underlying any repurchase agreement, or the securities will be part
of the Federal Reserve/Treasury Book Entry System. The market value of the
collateral underlying the repurchase agreement will be determined on each
business day. If at any time the market value of the collateral falls below the
repurchase price under the repurchase agreement (including any accrued
interest), the appropriate Fund will promptly receive additional collateral (so
the total collateral is an amount at least equal to the repurchase price plus
accrued interest).
In addition, Strategic Income Fund, although it currently does not
do so, may engage in reverse repurchase agreement transactions. At the time the
Fund enters into a reverse repurchase agreement, cash or liquid securities
having a value sufficient to make payments for the securities to be repurchased
will be segregated, and will be maintained throughout the period of the
obligation.
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WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
When a Fund agrees to purchase securities on a when-issued or
delayed delivery basis, the Custodian will maintain in a segregated account cash
or liquid securities in an amount sufficient to meet the Fund's purchase
commitments. It may be expected that a Fund's net assets will fluctuate to a
greater degree when it sets aside securities to cover such purchase commitments
than when it sets aside cash. In addition, because a Fund will set aside cash or
liquid securities to satisfy its purchase commitments in the manner described
above, its liquidity and the ability of the Adviser to manage it might be
affected in the event its commitments to purchase when-issued or delayed
delivery securities ever exceeded 25% of the value of its assets. Under normal
market conditions, however, a Fund's commitments to purchase when-issued or
delayed delivery securities will not exceed 25% of the value of its assets.
MORTGAGE DOLLAR ROLLS
In connection with their ability to purchase securities on a
when-issued or forward commitment basis, Strategic Income Fund may 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, the 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. Strategic Income 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. The benefits
derived from the use of mortgage dollar rolls may depend on the Adviser's
ability to predict correctly mortgage prepayments and interest rates. There is
no assurance that mortgage dollar rolls can be successfully employed. In
addition, the use of mortgage dollar rolls by the Fund while remaining
substantially fully invested increases the amount of the Fund's assets that are
subject to market risk to an amount that is greater than the Fund's net asset
value, which could result in increased volatility of the price of the Fund's
shares.
For financial reporting and tax purposes, mortgage dollar rolls are
considered as two separate transactions: one involving the purchase of a
security and a separate transactions involving a sale. The Fund does not
currently intend to enter into mortgage dollar rolls that are accounted for as a
financing.
LENDING OF PORTFOLIO SECURITIES
When a Fund lends portfolio securities, it must receive 100%
collateral as described in the Prospectuses. This collateral must be valued
daily by the Adviser or Sub-Adviser and, if the market value of the loaned
securities increases, the borrower must furnish additional collateral to the
lending Fund. During the time portfolio securities are on loan, the borrower
pays the lending Fund any dividends or interest paid on the securities. Loans
are subject to termination by the lending Fund or the borrower at any time.
While a Fund does not have the right to vote securities on loan, it would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
U.S. Bank Trust National Association, the Funds' custodian and an
affiliate of their Adviser, may act as securities lending agent for the Funds
and receive separate compensation for such services, subject to compliance with
conditions contained in a Securities and Exchange Commission exemptive order
permitting U.S. Bank Trust to provide such services and receive such
compensation.
OPTIONS TRANSACTIONS
OPTIONS ON SECURITIES. To the extent specified in the Prospectuses,
Funds may purchase put and call options on securities and may write covered call
options on securities which they own or have the
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right to acquire. A Fund may purchase put options to hedge against a decline in
the value of its portfolio. By using put options in this way, a Fund would
reduce any profit it might otherwise have realized in the underlying security by
the amount of the premium paid for the put option and by transaction costs. In
similar fashion, a Fund may purchase call options to hedge against an increase
in the price of securities that the Fund anticipates purchasing in the future.
The premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
unexercised.
The writer (seller) of a call option has no control over when the
underlying securities must be sold; the writer may be assigned an exercise
notice at any time prior to the termination of the option. If a call option is
exercised, the writer experiences a profit or loss from the sale of the
underlying security. The writer of a call option that wishes to terminate its
obligation may effect a "closing purchase transaction." This is accomplished by
buying an option on the same security as the option previously written. If a
Fund was unable to effect a closing purchase transaction in a secondary market,
it would not be able to sell the underlying security until the option expires or
it delivers the underlying security upon exercise.
OPTIONS ON STOCK INDICES. Options on stock indices are similar to
options on individual stocks except that, rather than the right to take or make
delivery of stock at a specified price, an option on a stock index gives the
holder the right to receive, upon exercise of the option, an amount of cash if
the closing value of the stock index upon which the option is based is greater
than, in the case of a call, or lesser than, in the case of a put, the exercise
price of the option. This amount of cash is equal to the difference between the
closing price of the index and the exercise price of the option expressed in
dollars times a specified multiple (the "multiplier"). The writer of the option
is obligated, in return for the premium received, to make delivery of this
amount. Unlike stock options, all settlements for stock index options are in
cash, and gain or loss depends on price movements in the stock market generally
(or in a particular industry or segment of the market) rather than price
movements in individual stocks. The multiplier for an index option performs a
function similar to the unit of trading for a stock option. It determines the
total dollar value per contract of each point in the difference between the
underlying stock index. A multiplier of 100 means that a one-point difference
will yield $100. Options on different stock indices may have different
multipliers.
OPTIONS ON INTEREST RATE INDICES. An option on an interest rate
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing value of the interest rate index upon which the
option is based is greater than, in the case of a call, or lesser than, in the
case of a put, the exercise price of the option. This amount of cash is equal to
the difference between the closing price of the index and the exercise price of
the option expressed in dollars times a specified multiple (the "multiplier").
The writer of the option is obligated, for the premium received, to make
delivery of this amount. Unlike interest rate futures options contracts,
settlements for interest rate index options are always in cash. Gain or loss
depends on price movements in the interest rate movements with respect to
specific financial instruments. As with stock index options, the multiplier for
interest rate index options determines the total dollar value per contract of
each point in the difference between the exercise price of an option and the
current value of the underlying interest rate index. Options on different
interest rate indices may have different multipliers.
FUTURES AND OPTIONS ON FUTURES
As discussed in the Prospectuses, certain of the Funds may enter
into futures contracts and may purchase options on futures contracts of various
types. These investment techniques are designed primarily to hedge against
anticipated future changes in market conditions or foreign exchange rates which
otherwise might adversely affect the value of securities which a Fund holds or
intends to purchase. The types of futures and options on futures which
particular Funds may utilize are described in the applicable Prospectuses.
At the same time a futures contract is purchased or sold, a Fund
generally must allocate cash or securities as a deposit payment ("initial
deposit"). It is expected that the initial deposit would be
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approximately 1-1/2% to 5% of a contract's face value. Daily thereafter, the
futures contract is valued and the payment of "variation margin" may be
required, since each day the Fund would provide or receive cash that reflects
any decline or increase in the contract's value. Futures transactions also
involve brokerage costs and require a Fund to segregate liquid assets, such as
cash, United States Government securities or other liquid high grade debt
obligations, to cover its performance under such contracts.
A Fund may lose the expected benefit of futures transactions if
interest rates, securities prices or foreign exchange rates move in an
unanticipated manner. Such unanticipated changes may also result in poorer
overall performance than if the Fund had not entered into any futures
transactions. In addition, the value of a Fund's futures positions may not prove
to be perfectly or even highly correlated with the value of its portfolio
securities and foreign currencies, limiting the Fund's ability to hedge
effectively against interest rate, foreign exchange rate and/or market risk and
giving rise to additional risks. Because of the low margin requirements in the
futures markets, they may be subject to market forces, including speculative
activity, which do not affect the cash markets. There also is no assurance of
liquidity in the secondary market for purposes of closing out futures positions.
EURODOLLAR INSTRUMENTS
Adjustable Rate Mortgage Securities Fund may make investments in
Eurodollar instruments in order to attempt to reduce investment risk. Eurodollar
instruments are essentially U.S. dollar denominated futures contracts or options
thereon that are linked to 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 Fund 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.
INTEREST RATE TRANSACTIONS
Adjustable Rate Mortgage Securities Fund may purchase or sell
interest rate caps and floors to preserve a return or spread on a particular
investment or portion of its portfolio or for other non-speculative purposes.
The aggregate purchase price of caps and floors held by Adjustable Rate Mortgage
Securities Fund may not exceed 5% of the Fund's total assets. Adjustable Rate
Mortgage Securities Fund may sell,, I.E., write, caps and floors without
limitation, subject to the segregated account requirement described below. The
Fund does not intend to use these transactions for 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 or
interest on a contractually-based principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, 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.
Adjustable Rate Mortgage Securities Fund may enter into interest
rate caps and floors on either an asset-based or liability-based basis,
depending on whether it is hedging its assets or its liabilities. To the extent
the Fund sells caps and floors, it will maintain in a segregated account cash or
high quality liquid securities having an aggregate net asset value at least
equal to the full amount, accrued on a daily basis, of the Fund's obligations
with respect to any caps or floors. Adjustable Rate Mortgage Securities Fund
will not enter into any interest rate cap or floor transaction unless the
unsecured senior debt or the claims-paying ability of the other party thereto is
rated at least A by Standard & Poor's or Moody's or is comparably rated by any
other nationally recognized statistical rating organization. If there is a
default by the other party to such a transaction, the Fund will have contractual
remedies pursuant to the agreements related to the transaction. Interest rate
caps and floors are somewhat recent innovations for which standardized
documentation has not yet been developed and, accordingly, they are less liquid
than many other investments.
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FOREIGN SECURITIES
As described in the applicable Prospectuses, under normal market
conditions Emerging Markets Fund invests principally in foreign securities, and
certain other Funds, including Strategic Income Funds, may invest lesser
proportions of their assets in securities of foreign issuers which are either
listed on a United States securities exchange or represented by American
Depositary Receipts. In addition, Strategic Income Fund may invest proportions
of their assets in foreign securities which are not publicly traded in the
United States.
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 or Strategic Income Fund are
uninvested. In addition, settlement problems could cause Emerging Markets Fund
or Strategic Income Fund to miss attractive investment opportunities or to incur
losses due to an inability to sell or deliver securities in a timely fashion. In
the event of a default by an issuer of foreign securities, it may be more
difficult for a Fund to obtain or to enforce a judgment against the issuer.
FOREIGN CURRENCY TRANSACTIONS
As described in the applicable Prospectuses, Emerging Markets Fund
and Strategic Income Fund may engage in a variety of foreign currency
transactions in connection with its investment activities. These include forward
foreign currency exchange contracts, foreign currency futures, and foreign
currency options.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded directly between currency traders (usually
large commercial banks) and their customers. Emerging Markets Fund and Strategic
Income Fund will not enter into such forward contracts or maintain a net
exposure in such contracts where the Fund would be obligated to deliver an
amount of foreign currency in excess of the value of the Fund's securities or
other assets denominated in that currency. The Funds will comply with applicable
Securities and Exchange Commission announcements requiring each Fund to
segregate assets to cover the Fund's commitments with respect to such contracts.
At the present time, these announcements generally require a Fund with a long
position in a forward foreign currency contract to establish with its custodian
a segregated account containing cash or liquid high grade debt securities equal
to the purchase price of the contract, and require a Fund with a short position
in a forward foreign currency contract to establish with its custodian a
segregated account containing cash or liquid high grade debt securities that,
when added to any margin deposit, equal the market value of the currency
underlying the forward contract. These requirements will not apply where a
forward contract is used in connection with the settlement of investment
purchases or sales or where the position has been "covered" by entering into an
offsetting position. The 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 its financial
futures transactions, Emerging Markets 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, the Fund may be able to achieve
many of the same objectives as through forward foreign currency exchange
contracts more effectively and possibly at a lower cost.
FOREIGN CURRENCY OPTIONS. A foreign currency option provides the
option buyer with the right to buy or sell a stated amount of foreign currency
at the exercise price at a specified date or during the
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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 and 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 the Fund were holding securities denominated in an appreciating
foreign currency and had purchased a foreign currency put to hedge against a
decline in the value of the currency, it would not have to exercise its put. In
such an event, however, the amount of the Fund's gain would be offset in part by
the premium paid for the option. Similarly, if the Fund entered into a contract
to purchase a security denominated in a foreign currency and purchased a foreign
currency call to hedge against a rise in the value of the currency between the
date of purchase and the settlement date, the Fund would not need to exercise
its call if the currency instead depreciated in value. In such a case, the Fund
could acquire the amount of foreign currency needed for settlement in the spot
market at a lower price than the exercise price of the option.
MORTGAGE-BACKED SECURITIES
As described in the applicable Prospectuses, Adjustable Rate
Mortgage Securities Fund and Strategic Income Fund also invest in
mortgage-backed securities. Each of these Funds will invest only in
mortgage-backed securities which are Agency Pass-Through Certificates, private
pass-through securities or collateralized mortgage obligations ("CMOs"), as
defined and described in those Prospectuses.
Agency Pass-Through Certificates are issued or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC").
GNMA is a wholly-owned corporate instrumentality of the United States within the
Department of Housing and Urban Development. The guarantee of GNMA with respect
to GNMA certificates is backed by the full faith and credit of the United
States, and GNMA is authorized to borrow from the United States Treasury in an
amount which is at any time sufficient to enable GNMA, with no limitation as to
amount, to perform its guarantee.
FNMA is a federally chartered and privately owned corporation
organized and existing under federal law. Although the Secretary of the Treasury
of the United States has discretionary authority to lend funds to FNMA, neither
the United States nor any agency thereof is obligated to finance FNMA's
operations or to assist FNMA in any other manner.
FHLMC is a federally chartered corporation organized and existing
under federal law, the common stock of which is owned by the Federal Home Loan
Banks. Neither the United States nor any agency thereof is obligated to finance
FNMA's operations or to assist FNMA in any other manner.
The residential mortgage loans evidenced by Agency Pass-Through
Certificates, private pass-through securities and upon which CMOs are based
generally are secured by first mortgages on one- to four-family residential
dwellings. Such mortgage loans generally have final maturities ranging from 15
to 30 years and provide for monthly payments in amounts sufficient to amortize
their original principal amounts by the maturity dates. Thus, each monthly
payment on such mortgage loans generally includes both an interest component and
a principal component, so that the holder of the mortgage loans receives both
interest and a partial return of principal in each monthly payment. In general,
such mortgage loans can be prepaid by the borrowers at any time without any
prepayment penalty. In addition, many such mortgage loans contain a
"due-on-sale" clause requiring the loans to be repaid in full upon the sale of
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
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stated final maturity date. The rate at which a pool of residential mortgage
loans is prepaid may be influenced by many factors and is not predictable with
precision.
As stated in the applicable Prospectuses, CMOs generally are issued
in multiple classes, with holders of each class entitled to receive specified
portions of the principal payments and prepayments and/or of the interest
payments on the underlying mortgage loans. These entitlements can be specified
in a wide variety of ways, so that the payment characteristics of various
classes may differ greatly from one another. For example:
* In a sequential-pay CMO structure, one class is entitled to
receive all principal payments and prepayments on the
underlying mortgage loans (and interest on unpaid principal)
until the principal of the class is repaid in full, while the
remaining classes receive only interest; when the first class
is repaid in full, a second class becomes entitled to receive
all principal payments and prepayments on the underlying
mortgage loans until the class is repaid in full, and so
forth.
* A planned amortization class ("PAC") of CMOs is entitled to
receive principal on a stated schedule to the extent that it
is available from the underlying mortgage loans, thus
providing a greater (but not absolute) degree of certainty as
to the schedule upon which principal will be repaid.
* An accrual class of CMOs provides for interest to accrue and
be added to principal (but not be paid currently) until
specified payments have been made on prior classes, at which
time the principal of the accrual class (including the accrued
interest which was added to principal) and interest thereon
begins to be paid from payments on the underlying mortgage
loans.
* As discussed above with respect to Agency Pass-Through
Certificates, an interest-only class of CMOs entitles the
holder to receive all of the interest and none of the
principal on the underlying mortgage loans, while a
principal-only class of CMOs entitles the holder to receive
all of the principal payments and prepayments and none of the
interest on the underlying mortgage loans.
* A floating rate class of CMOs entitles the holder to receive
interest at a rate which changes in the same direction and
magnitude as changes in a specified index rate. An inverse
floating rate class of CMOs entitles the holder to receive
interest at a rate which changes in the opposite direction
from, and in the same magnitude as or in a multiple of,
changes in a specified index rate. Floating rate and inverse
floating rate classes also may be subject to "caps" and
"floors" on adjustments to the interest rates which they bear.
* A subordinated class of CMOs is subordinated in right of
payment to one or more other classes. Such a subordinated
class provides some or all of the credit support for the
classes that are senior to it by absorbing losses on the
underlying mortgage loans before the senior classes absorb any
losses. A subordinated class which is subordinated to one or
more classes but senior to one or more other classes is
sometimes referred to as a "mezzanine" class. A subordinated
class generally carries a lower rating than the classes that
are senior to it, but may still carry an investment grade
rating.
DERIVATIVE MUNICIPAL SECURITIES
Tax Free Fund and Minnesota Tax Free Fund (the "Tax Free Funds") may
also acquire derivative municipal securities, which are custodial receipts or
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
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and the final principal payment on the obligations. Although under the terms of
a custodial receipt a Fund typically would be authorized to assert its rights
directly against the issuer of the underlying obligation, the Fund could be
required to assert through the custodian bank those rights as may exist against
the underlying issuer. Thus, in the event the underlying issuer fails to pay
principal and/or interest when due, a Fund may be subject to delays, expenses
and risks that are greater than those that would have been involved if the Fund
had purchased a direct obligation of the issuer. In addition, in the event the
trust or custodial account in which the underlying security has been deposited
is determined to be an association taxable as a corporation, instead of a
non-taxable entity, it would be subject to state income tax (but not federal
income tax) on the income it earned on the underlying security, and the yield on
the security paid to the fund and its shareholders would be reduced by the
amount of taxes paid. Furthermore, amounts paid by the trust or custodial
account to a Fund would lose their tax-exempt character and become taxable, for
federal and state purposes, in the hands of the Fund and its shareholders.
However, custodial receipts in which the Funds will invest will be accompanied
by a tax opinion stating that interest payable on the receipts is tax exempt. If
a Fund invests in custodial receipts, it is possible that a portion of the
discount at which the Fund purchases the receipts might have to be accrued as
taxable income during the period that the Fund holds the receipts. See
"Taxation."
DEBT OBLIGATIONS RATED LESS THAN INVESTMENT GRADE
As described in the applicable Prospectuses, 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 or are unrated but deemed of comparable quality by the Adviser or
Sub-Adviser. There are no minimum rating requirements for these investments by
Strategic Income Fund. Debt obligations rated BB, B or CCC by Standard & Poor's
or Ba, B or Caa by Moody's are considered to be less than "investment grade" and
are sometimes referred to as "junk bonds." The limitations on investments by
these Funds in less than investment grade convertible debt obligations are set
forth in the applicable Prospectuses.
Purchases of less than investment grade corporate debt obligations
generally involve greater risks than purchases of higher rated obligations. Less
than investment grade debt obligations are especially subject to adverse changes
in general economic conditions and to changes in the financial condition of
their issuers. During periods of economic downturn or rising interest rates,
issuers of such obligations may experience financial stress that could adversely
affect their ability to make payments of principal and interest and increase the
possibility of default.
Yields on less than investment grade debt obligations will fluctuate
over time. The prices of such obligations have been found to be less sensitive
to interest rate changes than higher rated obligations, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or period of rising interest rates, highly leveraged issuers
may experience financial stress which could adversely affect their ability to
service principal and interest payment obligations, to meet projected business
goals, and to obtain additional financing. In addition, periods of economic
uncertainty and changes can be expected to result in increased volatility of
market prices of less than investment grade debt obligations.
In addition, the secondary trading market for less than investment
grade debt obligations may be less developed than the market for investment
grade obligations. This may make it more difficult for 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
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than investment grade convertible debt obligations may be more dependent on the
Adviser's own credit analysis than is the case with investment grade
obligations.
U.S. TREASURY INFLATION-PROTECTION SECURITIES
To the extent they may invest in fixed-income securities, certain
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 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.
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<PAGE>
STRIPS components will be maintained and transferred in TRADES at their value
based on the original par amount of the fully constituted security.
SPECIAL FACTORS AFFECTING MINNESOTA TAX FREE FUND
As described in the Prospectuses relating to Minnesota Tax Free
Fund, except during temporary defensive periods, this Fund will invest most of
its total assets in Minnesota municipal obligations. This Fund therefore is
susceptible to political, economic and regulatory factors affecting issuers of
Minnesota municipal obligations. The following information provides only a brief
summary of the complex factors affecting the financial situation in Minnesota.
This information is derived from sources that are generally available to
investors and is based in part on information obtained from various state and
local agencies in Minnesota. It should be noted that the creditworthiness of
obligations issued by local Minnesota issuers may be unrelated to the
creditworthiness of obligations issued by the State of Minnesota, and that there
is no obligation on the part of Minnesota to make payment on such local
obligations in the event of default.
MINNESOTA FISCAL CONDITION. Minnesota's constitutionally prescribed
fiscal period is a biennium, and Minnesota operates on a biennial budget basis.
Legislative appropriations for each biennium are prepared and adopted during the
final legislative session of the immediately preceding biennium. Prior to each
fiscal year of a biennium, Minnesota's Department of Finance allots a portion of
the applicable biennial appropriation to each agency or other entity for which
an appropriation has been made. An agency or other entity may not expend moneys
in excess of its allotment. If revenues are insufficient to balance total
available resources and expenditures, Minnesota's Commissioner of Finance, with
the approval of the Governor, is required to reduce allotments to the extent
necessary to balance expenditures and forecasted available resources for the
then current biennium. The Governor may prefer legislative action when a large
reduction in expenditures appears necessary, and if Minnesota's legislature is
not in session the Governor is empowered to convene a special session.
Frequently in recent years, legislation has been required to
eliminate projected budget deficits by raising additional revenue, reducing
expenditures, including aids to political subdivisions and higher education,
reducing the State's budget reserve, imposing a sales tax on purchases by local
governmental units, and making other budgetary adjustments.
The Minnesota Department of Finance February 1998 Forecast projects
that, under current law, the State will complete its current biennium June 30,
1999 with a more than $1 billion surplus, plus a $350 million cash flow account
balance, plus a $522 million budget reserve. Total General Fund expenditures and
transfers for the biennium are projected to be $20.6 billion.
The 1998 Legislature, however, is considering tax cuts and spending
increases that would reduce the projected budget surplus.
The State is party to a variety of civil actions that could
adversely affect the State's General Fund. In addition, substantial portions of
State and local revenues are derived from federal expenditures, and reductions
in federal aid to the State and its political subdivisions and other federal
spending cuts may have substantial adverse effects on the economic and fiscal
condition of the State and its local governmental units. Risks are inherent in
making revenue and expenditure forecasts. Economic or fiscal conditions less
favorable than those reflected in State budget forecasts and planning estimates
may create additional budgetary pressures.
State grants and aids represent a large percentage of the total
revenues of cities, towns, counties and school districts in Minnesota. Even with
respect to bonds that are revenue obligations of the issuer and not general
obligations of Minnesota, there can be no assurance that the fiscal problems
referred to above will not adversely affect the market value or marketability of
the bonds or the ability of the respective obligors to pay interest on and
principal of the bonds.
There can be no assurance that Minnesota's economy and fiscal
condition will not materially change in the future or that future difficulties
will not occur. Economic difficulties and the resultant
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<PAGE>
impact on state and local government finances may adversely affect the market
value of obligations in the portfolio of Minnesota Tax Free Fund or the ability
of respective obligors to make timely payment of the principal and interest on
such obligations.
CFTC INFORMATION
The Commodity Futures Trading Commission (the "CFTC"), a federal
agency, regulates trading activity pursuant to the Commodity Exchange Act, as
amended. The CFTC requires the registration of "commodity pool operators," which
are defined as any person engaged in a business which is of the nature of an
investment trust, syndicate or a similar form of enterprise, and who, in
connection therewith, solicits, accepts or receives from others funds,
securities or property for the purpose of trading in 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 Tax Free Fund and Minnesota Tax Free Fund
(collectively, the "Tax Free Funds"), invest in any securities
if, as a result, 25% or more of the value of its total assets
would be invested in the securities of issuers conducting
their principal business activities in any one industry.
None of the Tax Free Funds will invest 25% or more of the
value of its total assets in revenue bonds or notes, payment
for which comes from revenues from any one type of activity
(for this purpose, the term "type of activity" shall include
without limitation (i) sewage treatment and disposal; (ii) gas
provision; (iii) electric power provision; (iv) water
provision; (v) mass transportation systems; (vi) housing;
(vii) hospitals; (viii) nursing homes; (ix) street development
and repair; (x) toll roads; (xi) airport facilities; and (xii)
educational facilities), except that, in circumstances in
which other appropriate available investments may be in
limited supply, such Funds may invest without limitation in
gas provision, electric power provision, water provision,
housing and hospital obligations. This restriction does not
apply to general obligation bonds or notes or, in the case of
the Tax Free Funds, 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
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<PAGE>
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. Notwithstanding the foregoing, Strategic Income Fund
may engage in reverse repurchase agreement transactions. 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
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
Adjustable Rate Mortgage Securities Fund and Strategic Income
Fund may invest in mortgage-backed securities.
8. Act as an underwriter of securities of other issuers, except
to the extent a Fund may be deemed to be an underwriter, under
Federal securities laws, in connection with the disposition of
portfolio securities.
9. Lend any of their assets, except portfolio securities
representing up to one-third of the value of their total
assets.
The following restrictions are non-fundamental and may be changed by
FAIF's Board of Directors without a shareholder vote. None of the Funds will:
10. Invest more than 15% of its net assets in all forms of
illiquid investments.
11. Invest for the purpose of exercising control or management.
12. Purchase or sell real estate limited partnership interests
(other than, in the case of Adjustable Rate Mortgage
Securities Fund and Strategic Income Fund, publicly traded
real estate limited partnership interests or REITS), or oil,
gas or other mineral leases,
- 14 -
<PAGE>
rights or royalty contracts, except that the Funds may
purchase or sell securities of companies which invest in or
hold the foregoing.
13. Purchase securities of any other registered investment company
(as defined in the 1940 Act), except, subject to 1940 Act
limitations, (a) the Tax Free Funds may purchase shares of
open-end investment companies investing primarily in municipal
obligations with remaining maturities of 13 months or less;
(b) Emerging Markets Fund and Strategic Income Fund may
purchase shares of open-end investment companies which invest
in permitted investments for such Funds; (c) each of Mid Cap
Growth Fund, Emerging Markets Fund, Adjustable Rate Mortgage
Securities Fund and Strategic Income Fund may, as part of its
investment in cash items, invest in securities of other mutual
funds which invest primarily in debt obligations with
remaining maturities of 13 months or less; and (d) all Funds
may purchase securities as part of a merger, consolidation,
reorganization or acquisition of assets.
14. Invest in foreign securities, except that Mid Cap Growth Fund
may invest may invest up to 25% of its total assets in
securities of foreign issuers which are either listed on a
United States stock exchange or represented by American
Depositary Receipts; and (c) Emerging Markets Fund and
Strategic Income Fund may invest in foreign securities without
limitation.
15. Except for Emerging Markets Fund and Strategic Income Fund,
invest in warrants; provided, that the other Funds except for
the Tax Free Funds may invest in warrants in an amount not
exceeding 5% of a Fund's net assets. No more than 2% of this
5% may be warrants which are not listed on the New York Stock
Exchange.
For determining compliance with its investment restriction relating
to industry concentration, each Fund classifies asset-backed securities in its
portfolio in separate industries based upon a combination of the industry of the
issuer or sponsor and the type of collateral. The industry of the issuer or
sponsor and the type of collateral will be determined by the Adviser. For
example, an asset-backed security known as "Money Store 94D A2" would be
classified as follows: the issuer or sponsor of the 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.
- 15 -
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of FAIF are listed below,
together with their business addresses and their principal occupations during
the past five years. Directors who are "interested persons" (as that term is
defined in the 1940 Act) of FAIF are identified with an asterisk.
DIRECTORS
Robert J. Dayton, 5140 Norwest Center, Minneapolis, Minnesota 55402:
Director of FAIF since September 1994 and of First American Funds, Inc. ("FAF")
since December 1994 and of First American Strategy Funds, Inc. ("FASF") since
June 1996; Chairman (1989-1993) and Chief Executive Officer (1993- present),
Okabena Company (private family investment office). Age: 54.
Roger A. Gibson, 1020 15th Street, Suite 41A, Denver, Colorado
80202: Director of FAF, FAIF and FASF since October 1997; Vice President of
North America-Mountain Region for United Airlines since June 1995; prior to his
current position, served most recently as Vice President, Customer Service for
United Airlines in the West Region in San Francisco, California and the Mountain
Region in Denver, Colorado; employed at United Airlines since 1967. Age: 51.
Andrew M. Hunter III, 537 Harrington Road, Wayzata, Minnesota 55391:
Director of FAIF, FAF and FASF since January 1997; Chairman of Hunter, Keith
Industries, a diversified manufacturing and management services company, since
1975. Age: 49.
Leonard W. Kedrowski, 16 Dellwood Avenue, Dellwood, Minnesota 55110:
Director of FAIF and FAF since November 1993 and of FASF since June 1996;
President and owner of Executive Management Consulting, Inc., a management
consulting firm; Vice President, Chief Financial Officer, Treasurer, Secretary
and Director of Anderson Corporation, a large privately-held manufacturer of
wood windows, from 1983 to October 1992. Age: 55.
* Robert L. Spies, 4715 Twin Lakes Avenue, Brooklyn Center,
Minnesota 55429: Director of FAIF, FAF and FASF since January 31, 1997; employed
by First Bank System, Inc. and subsidiaries from 1957 to January 31, 1997, most
recently as Vice President, First Bank National Association. Age: 62.
Joseph D. Strauss, 8617 Edenbrook Crossing, # 443, Brooklyn Park,
Minnesota 55443: Director of FAF since 1984 and of FAIF since April 1991 and of
FASF since June 1996; Chairman of FAF's and FAIF's Boards from 1993 to September
1997 and of FASF's Board from June 1996 to September 1997; President of FAF and
FAIF from June 1989 to November 1989; Owner and President, Strauss Management
Company, since 1993; Owner and President, Community Resource Partnerships, Inc.,
a community business retention survey company, since 1992; attorney-at-law. Age:
56.
Virginia L. Stringer, 712 Linwood Avenue, St. Paul, Minnesota 55105:
Director of FAIF since August 1987 and of FAF since April 1991 and of FASF since
June 1996; Chair of FAIF's, FAF's and FASF's Boards since September 1997; Owner
and President, Strategic Management Resources, Inc. since 1993; formerly
President and Director of The Inventure Group, a management consulting and
training company, President of Scott's, Inc., a transportation company, and Vice
President of Human Resources of The Pillsbury Company. Age: 52.
EXECUTIVE OFFICERS
Kathryn Stanton, SEI Investments Company, Oaks, Pennsylvania 19456:
Acting President, Vice President and Assistant Secretary of FAIF and FAF since
April 1994 and of FASF since June 1996; Vice President and Assistant Secretary
of the Administrator and the Distributor since April 1994; Associate, Morgan,
Lewis & Bockius, from 1989 to 1994. Age: 37.
Carmen V. Romeo, SEI Investments Company, Oaks, Pennsylvania 19456:
Treasurer and Assistant Secretary of FAIF and FAF since November 1992 and of
FASF since June 1996; Director, Executive Vice President, Chief Financial
Officer and Treasurer of SEI Investments Company ("SEI"),
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<PAGE>
SEI Investments Management Corporation (the "Administrator") and the Distributor
since 1981. Age: 52.
Kevin P. Robins, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF and FAF since April 1994 and of
FASF since June 1996; Vice President, Assistant Secretary and General Counsel of
the Administrator and the Distributor. Age: 36.
Sandra K. Orlow, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF and FAF since 1992 and of FASF
since June 1996; Vice President and Assistant Secretary of SEI, the
Administrator and the Distributor since 1983. Age: 40.
Todd Cipperman, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF, FAF and FASF since December
1996; Vice President and Assistant Secretary of SEI, the Administrator and the
Distributor since 1995. Associate, Dewey Ballantine from 1994 to 1995;
Associate, Winston & Strawn from 1991 to 1994. Age: 31.
Michael G. Beattie, SEI Investments Company, Oaks, Pennsylvania
19456: Controller of FAIF, FAF and FASF since December 1997; Associate Director,
Funds Accounting, SEI Investments Company since July 1997; prior to his current
position, served most recently as Fund Accounting Manager of SEI (from 1993 to
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
_____________, 1998. Assistant General Counsel and Director of Arbitration,
Philadelphia Stock Exchange from 1989 to 1998. Age: 33
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
_____________, 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 1991 to 1995. Age: 49.
Kathy Heilig, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF, FAF and FASF, and Treasurer of
the 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: 39.
Michael J. Radmer, 220 South Sixth Street, Minneapolis, Minnesota
55402: Secretary of FAIF since April 1991 and of FAF since 1981 and of FASF
since June 1996; Partner, Dorsey & Whitney LLP, a Minneapolis-based law firm and
general counsel of FAIF, FAF and FASF. Age: 52.
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<PAGE>
COMPENSATION
The First American Family of Funds, which includes FAIF, FAF and
FASF, currently pays only to directors of the funds who are not paid employees
or affiliates of the funds a fee of $15,000 per year ($22,500 in the case of the
Chair) plus $2,500 ($3,750 in the case of the Chair) per meeting of the Board
attended and $800 per committee meeting attended ($1,600 in the case of a
committee chair) and reimburses travel expenses of directors and officers to
attend Board meetings. In the event of telephonic Board or committee meetings,
each director receives a fee of $500 per Board or committee meeting ($750 in the
case of the Chair or committee chair). In addition, directors may receive a per
diem fee of $1,000 per day, plus travel expenses when directors travel out of
town on Fund business. However, directors do not receive the $1,000 per diem
amount plus the foregoing Board or committee fee for an out-of-town committee or
Board meeting but instead receive the greater of the total per diem fee or
meeting fee. Legal fees and expenses are also paid to Dorsey & Whitney LLP, the
law firm of which Michael J. Radmer, secretary of FAIF, FAF and FASF, is a
partner. The following table sets forth information concerning aggregate
compensation paid to each director of FAIF (i) by FAIF (column 2), and (ii) by
FAIF, FAF and FASF collectively (column 5) during the fiscal year ended
September 30, 1997. No executive officer or affiliated person of FAIF had
aggregate compensation from FAIF in excess of $60,000 during such fiscal year:
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Total Compensation
Aggregate Pension or Retirement Estimated From Registrant and
Name of Compensation Benefits Accrued as Annual Benefits Fund Complex
Person, Position From Registrant Part of Fund Expenses Upon Retirement Paid to Directors
----------------- --------------- --------------------- --------------- -----------------
<S> <C> <C> <C> <C>
Robert J. Dayton, Director $12,632 -0- -0- $33,500
Roger A. Gibson, Director * -0- -0- -0- -0-
Andrew M. Hunter III, Director $9,046 -0- -0- $23,250
Leonard W. Kedrowski, Director $12,291 -0- -0- $32,700
Robert L. Spies, Director $9,331 -0- -0- $24,050
Joseph D. Strauss, Director $14,974 -0- -0- $39,925
Virginia L. Stringer, Director $15,254 -0- -0- $39,925
</TABLE>
- ---------------
* Not a director during the fiscal year ended September 30, 1997.
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<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
U.S. Bank National Association (the "Adviser"), 601 Second Avenue
South, Minneapolis, Minnesota 55480, serves as the investment adviser and
manager of the Funds through its First American Asset Management group. The
Adviser is a national banking association that has professionally managed
accounts for individuals, insurance companies, foundations, commingled accounts,
trust funds, and others for over 75 years. The Adviser is a subsidiary of U.S.
Bancorp ("USB"), 601 Second Avenue South, Minneapolis, Minnesota 55480, which is
a regional multi-state bank holding company headquartered in Minneapolis,
Minnesota that primarily serves the Midwestern, Rocky Mountain and Northwestern
states. USB operates five banks and eleven trust companies with offices in 17
contiguous states from Illinois to Washington. USB also has various other
subsidiaries engaged in financial services. At December 31, 1997, on a pro forma
combined basis, USB and its consolidated subsidiaries had consolidated assets of
approximately $71 billion, consolidated deposits of $48 billion and
shareholders' equity of $6 billion.
Pursuant to an Investment Advisory Agreement dated April 2, 1991
(the "Advisory Agreement"), the Funds engage the Adviser to act as investment
adviser for and to manage the investment of the assets of the Funds. Each Fund
pays the Adviser monthly fees calculated on an annual basis equal to 0.70% of
its average daily net assets except, in the case of Emerging Markets Fund, 1.25%
of the Fund's average daily net assets. The Advisory Agreement requires the
Adviser to provide FAIF with all necessary office space, personnel and
facilities necessary and incident to the Adviser's performance of its services
thereunder. The Adviser is responsible for the payment of all compensation to
personnel of FAIF and the officers and directors of FAIF, if any, who are
affiliated with the Adviser or any of its affiliates.
In addition to the investment advisory fee, each Fund pays all its
expenses that are not expressly assumed by the Adviser or any other organization
with which the Fund may enter into an agreement for the performance of services.
Each Fund is liable for such nonrecurring expenses as may arise, including
litigation to which the Fund may be a party, and it may have an obligation to
indemnify its directors and officers with respect to such litigation.
Because the Funds were not in operation prior to the date hereof, no
advisory fees were paid in fiscal year ended September 30, 1997.
SUB-ADVISORY AGREEMENT FOR EMERGING MARKETS FUND AND STRATEGIC INCOME FUND
Marvin & Palmer Associates, Inc., 1201 North Market Street, Suite
2300, Wilmington, Delaware 19801 ("Marvin & Palmer") is sub-adviser for Emerging
Markets Fund under an agreement with the Adviser (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 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 Adviser or the Board regularly at such times and in such detail as
the Adviser or the Board may from time to time request in order to permit the
Adviser and the Board to determine the adherence of Emerging Markets Fund to its
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 under the Marvin & Palmer Sub-Advisory Agreement,
Marvin & Palmer is paid a monthly fee by the Adviser calculated on an annual
basis equal to 0.85% of the first $100 million of
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<PAGE>
International Fund's average daily net assets, 0.60% of Emerging Markets Fund's
average daily net assets in 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-Advisers"), each
subsidiaries of Federated Investors ("Federated") are sub-advisers for Strategic
Income Fund under an agreement with the Adviser (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 advisers 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. Under the Federated Sub-Advisory Agreement, the Sub-Advisers are required,
among other things, to report to the Adviser or the Board regularly at such
times and in such detail as the Adviser or the Board may from time to time
request in order to permit the Adviser 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-Advisers to provide all office space, personnel and facilities necessary and
incident to the Sub-Adviser's performance of their services under the Federated
Sub-Advisory Agreement.
For their services under the Sub-Advisory Agreement, the Sub-Advisers
are paid a monthly fee by the Adviser calculated on an annual basis equal to
0.40% of the first $25 million of the Fund's average daily net assets, 0.33% of
the Fund's average daily net assets in excess of $25 million up to $50 million,
0.26% of the Fund's average daily net assets in excess of $50 million up to $100
million and 0.21% of the 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 Adviser as a
sub-administrator (the "Sub- Administrator") effective January 1, 1998. It is
contemplated that the Sub-Administrator will assist the Administrator in the
performance of administrative services for the Funds.
Because the Funds were not in operation before the date hereof, no
administrative fees were paid in fiscal year ended September 30, 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
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and Service Agreement") between itself and the Funds. These agreements are
referred to collectively as the "Distribution Agreements."
Under the Distribution Agreements, the Distributor has agreed to
perform all distribution services and functions of the Funds to the extent such
services and functions are not provided to the Funds pursuant to another
agreement. The Distribution Agreements provide that shares of the Funds are
distributed through the Distributor and, with respect to Class A and Class B
Shares, through securities firms, financial institutions (including, without
limitation, banks) and other industry professionals (the "Participating
Institutions") which enter into sales agreements with the Distributor to perform
share distribution or shareholder support services.
The Distributor receives no compensation for distribution of the
Class 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 and Class B
Shares Prospectuses.
The Funds which offer Class B Shares pay to the Distributor a sales
support fee at an annual rate of 0.75% of the average daily net assets of the
Class B Shares of such Fund, which fee may be used by the Distributor to provide
compensation for sales support and distribution activities with respect to the
Class B Shares. This fee is calculated and paid each month based on average
daily net assets of Class B of each Fund for that month. In addition to this
fee, the Distributor is paid a shareholder servicing fee at an annual rate of
0.25% of the average daily net assets of each Fund's Class B Shares pursuant to
a service plan (the "Class B Service Plan"), which fee may be used by the
Distributor to provide compensation for shareholder servicing activities with
respect to the Class B Shares of a Fund of the kinds described in the Class A
and Class B Shares Prospectuses. Although Class B Shares are sold without a
front-end sales charge, the Distributor pays a total of 4.25% of the amount
invested (including a pre-paid service fee of 0.25% of the amount invested) to
dealers who sell Class B Shares (excluding exchanges from other Class B Shares
in the First American family). The servicing fee payable under the Class B
Service Plan is prepaid as described above.
The Distribution Agreements provide that they will continue in
effect for a period of more than one year from the date of their execution only
so long as such continuance is specifically approved at least annually by the
vote of a majority of the Board members of FAIF and by the vote of the majority
of those Board members of FAIF who are not interested persons of FAIF and who
have no direct or indirect financial interest in the operation of FAIF's Rule
12b-1 Plans of Distribution or in any agreement related to such Plans.
FAIF has adopted Plans of Distribution with respect to the Class A
and Class B Shares of the Funds, respectively, pursuant to Rule 12b-1 under the
1940 Act (collectively, the "Plans"). Rule 12b-1 provides in substance that a
mutual fund may not engage directly or indirectly in financing any activity
which is primarily intended to result in the sale of shares, except pursuant to
a plan adopted under the Rule. The Plans authorize the Distributor to retain the
sales charges paid upon purchase of Class A and Class B Shares. Each of the
Plans is a "compensation-type" plan under which the Distributor is entitled to
receive the distribution fee regardless of whether its actual distribution
expenses are more or less than the amount of the fee. The Class B Plan
authorizes the Distributor to retain the contingent deferred sales charge
applied on redemptions of Class B Shares, except that portion which is reallowed
to Participating Institutions. The Plans recognize that the Distributor, any
Participating Institution, the Administrator, and the Adviser, in their
discretion, may from time to time use their own assets to pay for certain
additional costs of distributing Class A and Class B Shares. Any such
arrangements to pay such additional costs may be commenced or discontinued by
the Distributor, any Participating Institution, the Administrator, or the
Adviser at any time.
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<PAGE>
Because the Funds were not in operation prior to the date hereof, no
Rule 12b-1 fees were paid in fiscal year ended September 30, 1997.
The Distributor received no sales charges for fiscal year ended
September 30, 1997.
CUSTODIAN; TRANSFER AGENT; COUNSEL; ACCOUNTANTS
The custodian of the Funds' assets is U.S. Bank Trust National
Association (the "Custodian"), U.S. Bank Trust Center, 180 East Fifth Street,
St. Paul, Minnesota 55101. The Custodian is a subsidiary of USB.
The Custodian takes no part in determining the investment policies
of the Funds or in deciding which securities are purchased or sold by the Funds.
All of the instruments representing the investments of the Funds and all cash is
held by the Custodian or, as described in the Prospectuses for Emerging Markets
Fund, by a sub-custodian with respect to such Fund. The Custodian or such
sub-custodian delivers securities against payment upon sale and pays for
securities against delivery upon purchase. The Custodian also remits Fund assets
in payment of Fund expenses, pursuant to instructions of FAIF's officers or
resolutions of the Board of Directors.
As compensation for its services to the Funds, the Custodian is paid
a monthly fee calculated on an annual basis equal to 0.03% of such Fund's
(except Emerging Markets Fund) average daily net assets and, in the case of
Emerging Markets Fund, 0.10% of the Funds average daily net assets.
Sub-custodian fees with respect to Emerging Markets 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 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.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Decisions with respect to placement of the Funds' portfolio
transactions are made by the Adviser, in the case of Strategic Income Fund,
Federated, or in the case of Emerging Markets Fund, Marvin & Palmer. The Funds'
policy is to seek to place portfolio transactions with brokers or dealers who
will execute transactions as efficiently as possible and at the most favorable
price. The Adviser, Federated or Marvin & Palmer may, however, select a broker
or dealer to effect a particular transaction without communicating with all
brokers or dealers who might be able to effect such transaction because of the
volatility of the market and the desire of the Adviser, Federated or Marvin &
Palmer 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.
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<PAGE>
While the Adviser does not deem it practicable and in the Funds'
best interest to solicit competitive bids for commission rates on each
transaction, consideration will regularly be given by the Adviser to posted
commission rates as well as to other information concerning the level of
commissions charged on comparable transactions by other qualified brokers.
It is expected that Emerging Markets 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 commissions paid in connection with most such
foreign stock transactions generally are higher than negotiated commissions on
United States transactions. There generally is less governmental supervision and
regulation of foreign stock exchanges than in the United States. Foreign
securities settlements may in some instances be subject to delays and related
administrative uncertainties.
Foreign equity securities may be held in the form of American
Depositary Receipts, or ADRs, European Depositary Receipts, or EDRs, or
securities convertible into foreign equity securities. ADRs and EDRs may be
listed on stock exchanges or traded in the over-the-counter markets in the
United States or overseas. The foreign and domestic debt securities and money
market instruments in which the Funds may invest are generally traded in the
over-the-counter markets.
Subject to the policy of seeking favorable price and execution for
the transaction size and risk involved, in selecting brokers and dealers other
than the Distributor and determining commissions paid to them, the Adviser,
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 purpose for consideration, analysis and
evaluation by the staff of the Adviser, 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 Adviser, Federated or
Marvin & Palmer would include advice, both directly and in writing, as to the
value of securities, the advisability of investing in, purchasing, or selling
securities, and the availability of securities or purchasers or sellers of
securities, as well as analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts. The research services may allow the Adviser, Federated or Marvin &
Palmer to supplement its own investment research activities and enable the
Adviser, 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
Adviser, 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 Adviser, 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
Adviser, Federated or Marvin & Palmer in performing services for the Funds. The
Adviser, 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 Adviser, 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
Adviser, Federated or Marvin & Palmer, except as noted below. The Adviser,
Federated or Marvin & Palmer may, from time to time, maintain an informal list
of brokers and dealers that will be
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<PAGE>
used as a general guide in the placement of Fund business in order to encourage
certain brokers and dealers to provide the Adviser, Federated or Marvin & Palmer
with research services, which the Adviser, 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 Adviser,
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 Adviser,
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 Adviser, 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 Adviser or the Distributor unless such transactions, including the
frequency thereof, the receipt of commissions payable in connection therewith,
and the selection of the affiliated broker or dealer effecting such transactions
are not unfair or unreasonable to the shareholders of the Funds, as determined
by the Board of Directors. Any transactions with an affiliated broker or dealer
must be on terms that are both at least as favorable to the Funds as the Funds
can obtain elsewhere and at least as favorable as such affiliated broker or
dealer normally gives to others.
When two or more clients of the Adviser, 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 Adviser, 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.
CAPITAL STOCK
As of April 14, 1998, no shares of the Funds were outstanding.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of the shares
of a Fund is summarized in the Class A Shares Prospectus under the captions
"Investing in the Funds" and "Determining the Price of Shares" and in the Class
Y Shares Prospectus under the caption "Purchases and Redemptions of Shares." The
net asset value of each Fund's shares is determined on each day during which the
New York Stock Exchange (the "NYSE") 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.
As of April 14, 1998, the Funds had not commenced operations.
FUND PERFORMANCE
SEC STANDARDIZED PERFORMANCE FIGURES
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<PAGE>
YIELD FOR THE FUNDS. Yield for the Funds is a measure of the net
investment income per share (as defined) earned over a 30-day period expressed
as a percentage of the maximum offering price of a Fund's shares at the end of
the period.
Because the Funds were not in operation prior to the date hereof,
yield information is not available.
Yield figures were determined by dividing the net investment income per share
earned during the specified 30-day period by the maximum offering price per
share on the last day of the period, according to the following formula:
Yield = 2 [((a - b) / cd) + 1)(6th power) - 1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of
reimbursements)
c = average daily number of shares outstanding during
the period that were entitled to receive dividends
d = maximum offering price per share on the last day of
the period
TAX EQUIVALENT YIELD FOR TAX FREE FUNDS. Tax equivalent yield is the
yield that a taxable investment must generate in order to equal a Fund's yield
for an investor in a stated federal or combined federal/state income tax
bracket. The tax equivalent yield for each Tax Free Fund is computed by dividing
that portion of such Fund's yield (computed as described above) that is tax
exempt by one minus the stated federal or combined federal/state income tax
rate, and adding the resulting number to that portion, if any, of such Fund's
yield that is not tax exempt. Because Tax Free Fund and Minnesota Tax Free Fund
were not in operation prior to the date hereof, information on tax equivalent
yield information is not available for such Funds.
TOTAL RETURN. Total return measures both the net investment income
generated by, and the effect of any realized or unrealized appreciation or
depreciation of, the underlying investments in a Fund's portfolio. The Fund
average annual and cumulative total return figures are computed in accordance
with the standardized methods prescribed by the Securities and Exchange
Commission.
AVERAGE ANNUAL TOTAL RETURN. Average annual total return figures are
computed by determining the average annual compounded rates of return over the
periods indicated in the advertisement, sales literature or shareholders'
report, that would equate the initial amount invested to the ending redeemable
value, according to the following formula:
P(1 + T)(nth power) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the period
of a hypothetical $1,000 payment made at the
beginning of such period
This calculation (i) assumes all dividends and distributions are reinvested at
net asset value on the appropriate reinvestment dates as described in the
Prospectuses, and (ii) deducts (a) the maximum sales charge from the
hypothetical initial $1,000 investment (if applicable), and (b) all recurring
fees, such as advisory fees, charged as expenses to all shareholder accounts.
CUMULATIVE TOTAL RETURN. Cumulative total return is computed by
finding the cumulative compounded rate of return over the period indicated in
the advertisement that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
CTR = ((ERV - P) / P ) 10
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<PAGE>
Where: CTR = cumulative total return
ERV = ending redeemable value at the end of, the period
of a hypothetical $1,000 payment made at the
beginning of such period; and
P = initial payment of $1,000
This calculation (i) assumes all dividends and distributions are reinvested at
net asset value on the appropriate reinvestment dates as described in the
Prospectuses, and (ii) deducts (a) the maximum sales charge from the
hypothetical initial $1,000 investment (if applicable), and (b) all recurring
fees, such as advisory fees, charged as expenses to all shareholder accounts.
Because the Funds were not in operation prior to the date hereof,
information on average annual return and aggregate total returns is not
available.
NON-STANDARD DISTRIBUTION RATES
HISTORICAL DISTRIBUTION RATES. The Funds' historical annualized
distribution rates are computed by dividing the income dividends of a Fund for a
stated period by the maximum offering price on the last day of such period.
Because the Funds were not in operation prior to the date hereof, no information
on historical annualized distribution rates is available.
ANNUALIZED CURRENT DISTRIBUTION RATES. The Funds' annualized current
distribution rates are computed by dividing a Fund's income dividends for a
specified month (or three-month period, in the case of an Equity Fund) by the
number of days in that month (or three-month period, in the case of an Equity
Fund) and multiplying by 365, and dividing the resulting figure by the maximum
offering price on the last day of the specified period. Because the Funds were
not in operation prior to the date hereof, no information on the annualized
current distribution rates is available.
TAX EQUIVALENT DISTRIBUTION RATES. The tax equivalent distribution
rate for the Tax Free Funds is computed by dividing that portion of such a
Fund's annualized current distribution rate (computed as described above) which
is tax-exempt by one minus the stated federal or combined federal/state income
tax rate, and adding the resulting figure to that portion, if any, of the
annualized current distribution rate which is not tax-exempt. Because the Tax
Free Fund and Minnesota Tax Free Fund were not in operation prior to the date
hereof, no information on the tax equivalent distribution rates is available.
CERTAIN PERFORMANCE COMPARISONS
The Funds may compare their performance to that of certain published
or otherwise widely disseminated indices or averages compiled by third parties.
The Funds, and the indices and averages to which they may compare their
performance, are as follows, among others:
MID CAP GROWTH FUND may compare its performance to the LIPPER
MID-CAP FUNDS AVERAGE, which is an average of funds which limit their
investments to companies with average market capitalizations and/or revenues
between $800 million and the average market capitalization of the Wilshire 4500
Index. Mid Cap Growth Fund may also compare its performance to the S&P 400
MIDCAP AVERAGE, which is a capitalization-weighted index that measures the
performance of the mid-range sector of the U.S. stock market where the median
market capitalization is approximately $700 million and the RUSSELL MID-CAP
INDEX, which is an index that measures the performance of the 800 smallest
companies in the Russell 1000 Index, which measures the performance of the 1,000
largest companies in the Russell 1000 Index. The Russell 1000 Index represents
approximately 90% of the total market capitalization of the Russell 3000 Index.
EMERGING MARKETS FUND may compare its performance to the LIPPER
EMERGING MARKETS FUNDS AVERAGE, which is an average of funds that seek long-term
capital appreciation by investing at least 65% of total assets in emerging
market equity securities, where "emerging market" is defined by a country's GNP
per capita or other economic measures. The Emerging Markets Fund may also
compare its
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performance to the MSCI EMERGING MARKETS FREE INDEX, which is an unmanaged index
of securities from emerging markets, limited to securities in which foreigners
may invest.
ADJUSTABLE RATE MORTGAGE SECURITIES FUND may compare its performance
to the LIPPER ADJUSTABLE RATE MORTGAGE AVERAGE, which is an average of funds
that invest at least 65% of total assets in adjustable rate mortgage securities
or other securities collaterized by or representing an interest in mortgages.
Adjustable rate Mortgage Securities Fund may also compare its performance to the
LEHMAN ADJUSTABLE RATE MORTGAGE INDEX, which is an unmanaged index of U.S.
agency adjustable rate mortgage (ARM) securities that include no expenses or
transaction charges.
TAX FREE FUND may compare its performance to the LIPPER GENERAL
MUNICIPAL DEBT FUNDS AVERAGE, which is an average of fund that invest at least
65% of total assets in municipal debt issues in the top four credit ratings, and
to the LEHMAN BROTHER MUNICIPAL BOND INDEX, which is an index comprised of 8,000
actual bonds, all of which are investment grade, fixed rate with long term (more
than two years) maturities and are selected from issues larger than $50 million
dated since January, 1984.
MINNESOTA TAX FREE FUND may compare its performance to the LIPPER
MINNESOTA MUNICIPAL BOND AVERAGE, which is an average of funds that limit their
assets to those securities that are exempt from taxation in a specified state
(double tax-exempt) or city ( triple tax-exempt), and the LEHMAN BROTHER
MUNICIPAL BOND INDEX, which is described above.
STRATEGIC INCOME FUND may compare its performance to the LIPPER
MULTI SECTOR INCOME FUNDS AVERAGE, which is an average of funds that seek
current income by allocating assets among several different fixed income
securities sectors (with no more than 65% in any one sector except for defensive
purposes) including U.S. government and foreign sectors, with a significant
portion of assets in securities rated below investment grade, and the J.P.
MORGAN GLOBAL GOVERNMENT BOND INDEX, an index with total return calculated based
on gross that assumes that a coupon received in one currency is immediately
reinvestment back into the bonds of that country's index, and the local currency
return is expressed as a basket of currencies which make up the index. Strategic
Income Fund may also compare its performance to the LEHMAN SINGLE B-RATED INDEX,
which is a proprietary unmanaged index of single B -rated securities and the
LEHMAN MORTGAGE-BACKED INDEX, which is an index that covers all fixed-rate
securities backed by mortgage pools of the GNMA, FHLMC and FNMA. Strategic
Income Fund may also compare its performance to the LEHMAN AGGREGATE BOND INDEX,
which is an index composed of the Lehman Government/Corporate Index and the
Mortgage-Backed Securities Index and includes treasury issues, agency issues,
corporate bond issues and mortgage-backed securities.
Each of the Funds also may compare its performance to the CONSUMER
PRICE INDEX, which is a measure of the average change in prices over time in a
fixed market basket of goods and services.
TAXATION
The tax status of the Funds and the distributions that the Funds
will make to shareholders are summarized in the Prospectuses in the sections
entitled "Income Taxes" (or, in the Prospectus for Strategic Income Fund,
"Federal Income Taxes"). Each Fund intends to fulfill the requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), as a
regulated investment company. If so qualified, each Fund will not be liable for
federal income taxes to the extent it distributes its taxable income to its
shareholders.
To qualify under Subchapter M for tax treatment as a regulated
investment company, each Fund must, among other things: (1) derive at least 90%
of its gross income from dividends, interest, and certain other types of
payments related to its investment in stock or securities; (2) distribute to its
shareholders at least 90% of its investment company taxable income (as that term
is defined in the Code determined without regard to the deduction for dividends
paid) and 90% of its net tax-exempt income; and (3) diversify its holdings so
that, at the end of each fiscal quarter of the Fund, (a) at least 50% of the
market value of the Fund's assets is represented by cash, cash items, U.S.
Government
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<PAGE>
securities and securities of other regulated investment companies, and other
securities, with these other securities limited, with respect to any one issuer,
to an amount no greater than 5% of the Fund's total assets and no greater than
10% of the outstanding voting securities of such issuer, and (b) not more than
25% of the market value of the Fund's total assets is invested in the securities
of any one issuer (other than U.S. Government securities or securities of other
regulated investment companies).
Each Fund is subject to a nondeductible excise tax equal to 4% of
the excess, if any, of the amount required to be distributed for each calendar
year over the amount actually distributed. For this purpose, any amount on which
the Fund is subject to corporate-level income tax is considered to have been
distributed. In order to avoid the imposition of this excise tax, each Fund must
declare and pay dividends representing 98% of its net investment income for that
calendar year and 98% of its capital gains (both long-term and short-term) for
the twelve-month period ending October 31 of the calendar year.
Any loss on the sale or exchange of shares of a Fund generally will
be disallowed to the extent that a shareholder acquires or contracts to acquire
shares of the same Fund within 30 days before or after such sale or exchange.
Furthermore, if Fund shares with respect to which a long-term capital gain
distribution has been made are held for less than six months, any loss on the
sale or exchange of such shares will be treated as a long-term capital loss to
the extent of such long-term capital gain distribution. Furthermore, if a
shareholder of Tax Free Fund or Minnesota Tax Free Fund receives an
exempt-interest dividend from such fund and then disposes of his or her shares
in such fund within six months after acquiring them, any loss on the sale or
exchange of such shares will be disallowed to the extent of the exempt-interest
dividend.
If Tax Free Fund or Minnesota Tax Free Fund 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. In addition, all or
a portion of the gain that any of the Funds realize from engaging in "conversion
transactions" are defined to include certain forward, futures, option and
"straddle" transactions marketed or sold to produce capital gains, or
transactions described in Treasury regulations to be issued in the future.
For federal tax purposes, if a shareholder exchanges shares of a
Fund for shares of any other FAIF Fund pursuant to the exchange privilege (see
"Investing in the Funds -- Exchange Privilege" in the Prospectuses for Class A
and Class B Shares, and "Purchases and Redemptions of Shares -- Exchange
Privilege" in the Prospectuses for Class Y Shares), such exchange will be
considered a taxable sale of the shares being exchanged. Furthermore, if a
shareholder of Class A Shares carries out the exchange within 90 days of
purchasing shares in a fund on which he or she has incurred a sales charge, the
sales charge cannot be taken into account in determining the shareholder's gain
or loss on the sale of those shares to the extent that the sales charge that
would have been applicable to the purchase of the later-acquired shares in the
other fund is reduced because of the exchange privilege. However, the amount of
any sales charge that may not be taken into account in determining the
shareholder's gain or loss on the sale of the first-acquired shares may be taken
into account in determining gain or loss on the eventual sale or exchange of the
later-acquired shares.
Dividends generally are taxable to shareholders at the time they are
paid. However, dividends declared in October, November and December, made
payable to shareholders of record in such a month and actually paid in January
of the following year are treated as paid and are thereby taxable to
shareholders as of December 31.
If a Fund invests in U.S. Treasury inflation-protection securities,
it will be required to treat as original issue discount any increase in the
principal amount of the securities that occurs during the course of its taxable
year. If a Fund purchases such inflation-protection securities that are issued
in stripped form either as stripped bonds or coupons, it will be treated as if
it had purchased a newly issued debt instrument having original issue discount.
Generally, the original issue discount equals the difference between the "stated
redemption price at maturity" of the obligation and its "issue price" as those
terms are defined in the Code. A Fund holding an obligation with original issue
discount is
- 28 -
<PAGE>
required to accrue as ordinary income a portion of such original issue discount
even though it receives no cash currently as interest payment corresponding to
the amount of the original issue discount. Because each Fund is required to
distribute substantially all of its net investment income (including accrued
original issue discount) in order to be taxed as a regulated investment company,
it may be required to distribute an amount greater than the total cash income it
actually receives. Accordingly, in order to make the required distributions, a
Fund may be required to borrow or liquidate securities.
Under Code Section 1256, except for the transactions the Fund has
identified as hedging transactions, each Fund is required for federal income tax
purposes to recognize as income for each taxable year its net unrealized gains
and losses on futures contracts, options, and (in the case of Emerging Markets
Fund) forward currency contracts as of the end of the year as well as those
actually realized during the year. Except for transactions in futures contracts,
options, or forward currency contracts that are classified as part of a "mixed
straddle," gain or loss recognized with respect to such contracts or options is
considered to be 60% long-term capital gain or loss and 40% short-term capital
gain or loss, without regard to the holding period of the contract. In the case
of a transaction classified as a "mixed straddle," the recognition of losses may
be deferred to a later taxable year.
Sales of forward currency contracts that are intended to hedge
against a change in the value of securities or currencies held by Emerging
Markets Fund may affect the holding period of such securities or currencies and,
consequently, the nature of the gain or loss on such securities or currencies
upon disposition.
Under recently enacted Code Section 1259, if a Fund enters into
short sales of securities that it holds, notional principal contracts or certain
other transactions designed to hedge against the loss of value in appreciated
positions that it holds, it will be treated as having sold such appreciated
positions and will be required to recognize gain on the constructive sale. This
constructive sale rule will not apply in the case of any appreciated position
that the Fund is required to mark-to-market at the close of the year, as
described above. As stated above, the Code requires a regulated investment
company to diversify its holdings. The Internal Revenue Service has not made its
position clear regarding the treatment of futures contracts and options for
purposes of the diversification test, and the extent to which a Fund can buy or
sell futures contracts and options may be limited by this requirement.
It is expected that any net gain realized from the closing out of
futures contracts, options, or forward currency contracts will be considered
gain from the sale of securities or currencies and therefore qualifying income
for purposes of the 90% of gross income from qualified sources requirement, as
discussed above.
Any realized gain or loss on closing out a futures contract, option,
or forward currency contract such as a forward commitment for the purchase or
sale of foreign currency will generally result in a recognized capital gain or
loss for tax purposes. Code Section 988 may also apply to forward currency
contracts. Under Section 988, each foreign currency gain or loss is generally
computed separately and treated as ordinary income or loss. In the case of
overlap between Sections 1256 and 988, special provisions determine the
character and timing of any income, gain or loss. Emerging Markets Fund will
attempt to monitor Section 988 transactions to avoid an adverse tax impact.
Each Fund will distribute to shareholders annually any net long-term
capital gains that have been recognized for federal income tax purposes
(including unrealized gains at the end of the Fund's fiscal year) on futures
contract, option, or forward currency contract transactions. Such distributions
will be combined with distributions of capital gains realized on the Fund's
other investments.
As stated in the Prospectuses relating to Emerging Markets Fund
under "Income Taxes," Emerging Markets Fund may make an election pursuant to
which shareholders will be able to claim on their tax returns a foreign tax
credit for their pro rata share of the income taxes that that Fund has paid
during the year to foreign countries.
- 29 -
<PAGE>
Generally, a credit for foreign taxes is subject to the limitation
that it may not exceed the shareholder's federal income tax (before the credit)
attributable to the shareholder's total foreign source taxable income. For this
purpose, the portion of dividends and distributions paid by Emerging Markets
Fund from its foreign source income will be treated as foreign source income.
Emerging Markets Fund's gains and losses from the sale of securities, and
certain currency gains and losses, will generally be treated as derived from
United States sources. The limitation on the foreign tax credit is applied
separately to foreign source "passive income," such as dividend income. Because
of these limitations, a shareholder may be unable to claim a credit for the full
amount of the shareholder's proportionate share of foreign income taxes paid by
Emerging Markets Fund. In addition, no deduction for foreign income taxes may be
claimed by a shareholder who does not itemize deductions. Shareholders are
advised to consult their tax advisers on the application of the foreign tax
credit rules to their own particular circumstances.
Emerging Markets Fund will invest in, among other things, foreign
securities. If, in connection with such investments, Emerging Markets Fund owns
shares of stock in certain foreign investment entities, referred to as passive
foreign investment companies ("PFICs"), the Fund may be subject to U.S. federal
income tax, and additional charges in the nature of interest, on a portion of
any "excess distribution" from such company or gain from the disposition of such
shares, even if the entire distribution or gain is distributed by Emerging
Markets Fund to its shareholders. If Emerging Markets Fund were able and elected
to treat a PFIC as a "qualified electing fund," in lieu of the treatment
described above, Emerging Markets Fund would be required each year to include in
income its pro rata share of the ordinary earnings and net capital gains of the
company, whether or not actually received by the Fund. Proposed Treasury
Regulations and newly enacted provisions of the Code would allow certain
regulated investment companies to elect to mark-to-market their stock in certain
PFICs at the end of each taxable year, whereby Emerging Markets Fund would
include in its taxable income each year any unrealized gain on such PFIC
investments. In order to distribute the income includible in Emerging Markets
Fund's income under either election, maintain its qualification as a regulated
investment company, and avoid income or excise taxes, Emerging Markets Fund may
be required to liquidate portfolio securities that is might otherwise have
continued to hold. In the case of the proposed Treasury Regulations, there can
be no assurance that these regulations will be finalized in the form proposed or
as to the effective date of any such final regulations.
Pursuant to the Code, distributions of net investment income by a
Fund to a shareholder who is a foreign shareholder (as defined below) as to the
United States, is a nonresident alien individual, nonresident alien fiduciary of
a trust or estate, foreign corporation, or foreign partnership (a "foreign
shareholder") will be subject to U.S. withholding tax (at a rate of 30% or lower
treaty rate). Withholding will not apply if a dividend paid by a Fund to a
foreign shareholder is `'effectively connected" with a U.S. trade or business of
such shareholder, in which case the reporting and withholding requirements
applicable to U.S. citizens or domestic corporations will apply. Distributions
of net long-term capital gains are not subject to tax withholding but, in the
case of a foreign shareholder who is a nonresident alien individual, such
distributions ordinarily will be subject to U.S. income tax at a rate of 30% if
the individual is physically present in the U.S. for more than 182 days during
the taxable year. Each Fund will report annually to its shareholders the amount
of any withholding.
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 United States or
political subdivision thereof, (iii) an estate whose income is includible in
gross income for U.S. federal income tax purposes or (iv) a trust whose
administration is subject to the primary supervision of a 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 and is a
general summary of the federal tax law in effect as of the date of this
Statement of Additional Information.
- 30 -
<PAGE>
With respect to 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 begin during or after the calendar year in which any such
court decision becomes final, irrespective of the date on which the obligations
were issued. Minnesota Tax Free Fund is 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 Fund would become taxable under this
Minnesota statutory provisions.
- 31 -
<PAGE>
RATINGS
A rating of a rating service represents that service's opinion as to
the credit quality of the rated security. However, such ratings are general and
cannot be considered absolute standards of quality or guarantees as to the
creditworthiness of an issuer. A rating is not a recommendation to purchase,
sell or hold a security, because it does not take into account market value or
suitability for a particular investor. Markets values of debt securities may
change as a result of a variety of factors unrelated to credit quality,
including changes in market interest rates.
When a security has been rated by more than one service, the ratings
may not coincide, and each rating should be evaluated independently. Ratings are
based on current information furnished by the issuer or obtained by the rating
services from other sources which they consider reliable. Ratings may be
changed, suspended or withdrawn as a result of changes in or unavailability of
such information, or for other reasons. In general, the Funds are not required
to dispose of a security if its rating declines after it is purchased, although
they may consider doing so.
RATINGS OF CORPORATE DEBT OBLIGATIONS AND MUNICIPAL BONDS
STANDARD & POOR'S
AAA: Securities rated AAA have the highest rating assigned by
Standard & Poor's to a debt obligation. Capacity to pay interest and
repay principal is extremely strong.
AA: Securities rated AA have a very strong capacity to pay interest
and repay principal and differ from the highest rated issues only to
a small degree.
A: Securities rated A have a strong capacity to pay interest and
repay principal, although they are somewhat more susceptible to
adverse effects of changes in circumstances and economic conditions
than bonds in higher rated categories.
BBB: Securities rated BBB are regarded as having an adequate
capacity to pay interest and repay principal. Although such
securities normally exhibit adequate protection standards, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal for
securities in this category than for those in higher rated
categories.
Debt rated BB, B, CCC, CC, and C by Standard & Poor's is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
BB: Securities rated BB have less near-term vulnerability to default
than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to meet
timely interest and principal payments. The BB rating category is
also used for debt subordinated to senior debt that is assigned an
actual or implied BBB- rating.
B: Securities rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Securities rated CCC have a currently identifiable
vulnerability to default, and are dependent upon favorable business,
financial, and economic conditions to meet timely payment
- 32 -
<PAGE>
of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, they are not likely to
have the capacity to pay interest and repay principal. The CCC
rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied B or B- rating.
D: An issue which is rated D is used when interest payments or
principal payments are not made on the due date even if the
applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period.
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.
Ca: An issue which is rated Ca represents an obligation which is
speculative in a high degree.
C: An issue which is rated C is regarded as having extremely poor
prospects of ever attaining any real investment standing.
Those securities in the Aa, A and Baa groups which Moody's believes possess the
strongest investment attributes are designated by the symbols Aa-1, A-1 and
Baa-1. Other Aa, A and Baa securities comprise the balance of their respective
groups. These rankings (1) designate the securities which offer the maximum in
security within their quality groups, (2) designate securities which can be
bought for possible upgrading in quality and (3) additionally afford the
investor an opportunity to gauge more precisely the relative attractiveness of
offerings in the marketplace.
- 33 -
<PAGE>
RATINGS OF PREFERRED STOCK
STANDARD & POOR'S. Standard & Poor's ratings for preferred stock
have the following definitions:
AAA: An issue rated "AAA" has the highest rating that may be
assigned by Standard & Poor's to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock
obligations.
AA: A preferred stock issue rated "AA" also qualifies as a
high-quality fixed income security. The capacity to pay preferred
stock obligations is very strong, although not as overwhelming as
for issues rated "AAA."
A: An issue rated "A" is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more
susceptible to the adverse effects of changes in circumstances and
economic conditions.
BBB: An issue rated "BBB" is regarded as backed by an adequate
capacity to pay the preferred stock obligations. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions
or changing circumstances are more likely to lead to a weakened
capacity to make payments for a preferred stock in this category
than for issues in the category.
MOODY'S. Moody's ratings for preferred stock include the following:
aaa: An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
aa: An issue which is rated "aa" is considered a high grade
preferred stock. This rating indicates that there is reasonable
assurance that earnings and asset protection will remain relatively
well maintained in the foreseeable future.
a: An issue which is rate "a" is considered to be an upper medium
grade preferred stock. While risks are judged to be somewhat greater
than in the "aaa" and "aa" classifications, earnings and asset
protection are, nevertheless, expected to be maintained at adequate
levels.
baa: An issue which is rated "baa" is considered to be medium grade,
neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over
any great length of time.
RATINGS OF MUNICIPAL NOTES
STANDARD & POOR'S
SP-1: Very strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics are
given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest.
SP-3: Speculative capacity to pay principal and interest.
None of the Funds will purchase SP-3 municipal notes.
MOODY'S. Generally, Moody's ratings for state and municipal
short-term obligations are designated Moody's Investment Grade ("MIG"); however,
where an issue has a demand feature which makes the issue a variable rate demand
obligation, the applicable Moody's rating is "VMIG."
- 34 -
<PAGE>
MIG 1/VMIG 1: This designation denotes the best quality. There is
strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for
refinancing.
MIG 2/VMIG 2: This designation denotes high quality, with margins of
protection ample although not so large as available in the preceding
group.
MIG 3/VMIG 3: This designation denotes favorable quality, with all
security elements accounted for, but lacking the strength of the
preceding grades. Liquidity and cash flow protection may be narrow
and market access for refinancing is likely to be less well
established.
None of the Funds will purchase MIG 3/VMIG 3 municipal notes.
RATINGS OF COMMERCIAL PAPER
STANDARD & POOR'S. Commercial paper ratings are graded into four
categories, ranging from "A" for the highest quality obligations to "D" for the
lowest. Issues assigned the A rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designation 1, 2 and 3 to indicate the relative degree of safety. The "A-1"
designation indicates that the degree of safety regarding timely payment is very
strong. Those issues determined to possess overwhelming safety characteristics
will be denoted with a plus (+) symbol designation. None of the Funds will
purchase commercial paper rated A-3 or lower.
MOODY'S. Moody's commercial paper ratings are opinions as to the
ability of the issuers to timely repay promissory obligations not having an
original maturity in excess of nine months. Moody's makes no representation that
such obligations are exempt from registration under the Securities Act of 1933,
and it does not represent that any specific instrument is a valid obligation of
a rated issuer or issued in conformity with any applicable law. Moody's employs
the following three designations, all judged to be investment grade, to indicate
the relative repayment capacity of rated issuers:
PRIME-1: Superior capacity for repayment.
PRIME-2: Strong capacity for repayment .
PRIME-3: Acceptable capacity for repayment .
None of the Funds will purchase Prime-3 commercial paper.
BEST'S RATING SYSTEM FOR INSURANCE COMPANIES
The objective of Best's Rating System is to evaluate the various
factors affecting the overall performance of an insurance company in order to
provide an opinion as to the company's relative financial strength and ability
to meet its contractual obligations. The procedure includes both a quantitative
and qualitative review of the company.
The quantitative evaluation is based on an analysis of the company's
financial condition and operating performance utilizing a series of financial
tests. These tests measure a company's performance in the three critical areas
of Profitability, Leverage and Liquidity in comparison to the norms established
by the A.M. Best Company. These norms are based on an evaluation of the actual
performance of the insurance industry.
Best's review also includes a qualitative evaluation of the adequacy
and soundness of a company's reinsurance, the adequacy of its reserves and the
experience of its management. In addition, various other factors of importance
are considered such as the composition of the company's book of business and the
quality and diversification of its assets.
- 35 -
<PAGE>
Upon completion of analysis, Best's Ratings are assigned to those
companies that meet the qualifications for rating. The Best's Rating
classifications are A+ (Superior); A & A- (Excellent); B+ (Very Good); B & B-
(Good); C+ (Fairly Good); and C & C- (Fair). Those not qualifying for a current
Best's Rating are classified in the "Not Assigned" category that has ten
classifications which identify why a company is not eligible for a Best's
Rating. Care should be exercised in the use of Best's Ratings without further
reference to additional Best's publications.
FINANCIAL STATEMENTS
Because the Funds were not in operation prior to the date hereof, no
financial statements for the Funds are available.
<PAGE>
APPENDIX B
FIRST AMERICAN INVESTMENT FUNDS, INC.
INTRODUCTION TO PRO FORMA COMBINING STATEMENTS
SEPTEMBER 30, 1997
The accompanying unaudited pro forma combining Statements of Assets and
Liabilities, Statements of Operations and Schedules of Investments, reflect the
accounts of Piper Intermediate Bond Fund, Piper Growth Fund, Piper Small Company
Growth Fund and Piper Pacific-European Growth Fund (the Piper Funds) and the
corresponding First American Investment Funds, Inc. (the FAIF Funds), which
include the First American Intermediate Term Income Fund, First American Large
Cap Growth Fund (formerly First American Diversified Growth Fund), First
American Small Cap Growth Fund (formerly First American Emerging Growth Fund)
and First American International Fund (collectively, the Funds).
These statements have been derived from the underlying accounting records for
the FAIF Funds and Piper Funds used in calculating net asset values for the
twelve-month period ended September 30, 1997. The pro forma combining Statements
of Operations have been prepared based upon the fee and expense structure of the
FAIF Funds.
Pro forma combining statements are not presented for other reorganizations
outlined in the Combined Proxy Statement / Prospectus because either (1) the
Piper Fund's net assets are less than 10% of the corresponding FAIF Fund's net
assets at March 31, 1998, or (2) the Piper Fund will be reorganized into a newly
created FAIF Fund which currently has no assets or liabilities and the only
significant proforma financial statement impact relates to fees and expenses of
the Funds which are outlined in Appendix VI of the Combined Proxy / Prospectus.
Under the proposed merger agreement and plan of reorganization, all outstanding
shares of each class of each Piper Fund will be issued in exchange for shares of
specified classes of the corresponding FAIF Fund.
<PAGE>
First American Investment Funds, Inc.
Intermediate Term Income Fund
Pro Forma Combining Statement of Assets and Liabilities
September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Intermediate
Intermediate Term Pro Forma
Bond Income Adjustments Pro Forma
Fund Fund (Note 2) Combined
(000) (000) (000) (000)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Assets:
Total investments (Cost $77,129,
$321,320, and $398,449,
respectively) $ 78,214 $ 322,753 $ -- $ 400,967
Cash 27 -- -- 27
Collateral for securities lending transactions -- 147,932 -- 147,932
Receivables:
Accrued income 1,002 3,984 -- 4,986
Capital shares sold 18 350 -- 368
Income and other receivables -- 11 -- 11
Other assets -- 3 -- 3
--------- --------- --------- ---------
Total Assets 79,261 475,033 -- 554,294
--------- --------- --------- ---------
Liabilities:
Payables
Payable upon return of securities loaned -- 147,932 -- 147,932
Dividends payable to shareholders 325 -- -- 325
Capital shares redeemed 517 102 -- 619
Accrued expenses 32 260 -- 292
Other liabilities -- 5 -- 5
--------- --------- --------- ---------
Total Liabilities 874 148,299 -- 149,173
--------- --------- --------- ---------
Net Assets:
Intermediate Term Income Class Y
based on 32,474,228 and 33,875,561
outstanding shares, respectively -- 322,602 13,912(a) 336,514
Intermediate Term Income Class A
based on 248,466 and 6,688,610
outstanding shares, respectively -- 2,521 339,725(a) 342,246
Intermediate Bond Class Y based on
1,821,360 outstanding shares 13,912 -- (13,912)(a) --
Intermediate Bond Class A based on
8,391,288 outstanding shares 339,725 -- (339,725)(a) --
Distributions in excess of net investment income (125) (1) -- (126)
Accumulated net realized gain/(loss)
on investments (276,210) 179 -- (276,031)
Net unrealized appreciation of investments 1,085 1,433 -- 2,518
--------- --------- --------- ---------
Total Net Assets $ 78,387 $ 326,734 $ -- $ 405,121
========= ========= ========= =========
Net Asset Value,
offering price and redemption price per share -
Class Y $ 7.68 $ 9.98 $ 9.98
========= ========= =========
Net Asset Value
and redemption price per share - Class A $ 7.67 $ 10.00 $ 10.00
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
First American Investment Funds, Inc.
Intermediate Term Income Fund
Pro Forma Combining Statement of Operations
For the Year Ended September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Intermediate Pro Forma Adjustments
Intermediate Term Income (Note 2) Pro Forma
Bond Fund Fund Debit Credit Combined
(000) (000) (000) (000) (000)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Investment Income:
Interest $ 6,803 $ 9,738 $ -- $ -- $ 16,541
-------- -------- -------- -------- --------
Expenses:
Investment advisory fees 304 1,098 709(b) 304(b) 1,807
Less: Waiver of investment advisory fees -- (341) -- 215(b) (556)
Administrative, accounting and custodian fees 93 214 139(b) 93(b) 353
Transfer agent fees 55 23 40(c) 55(c) 63
Amortization of organizational costs -- 3 -- -- 3
Directors' fees 8 3 1(c) 8(c) 4
Registration fees 33 79 20(c) 33(c) 99
Professional fees 54 9 6(c) 54(c) 15
Printing 66 6 4(c) 66(c) 10
Distribution fees - FAIF Retail Class A -- 6 234(b) -- 240
Less: Waiver of FAIF Class A distribution fees -- (6) -- 234(b) (240)
Distribution fees - Piper Class A 281 -- -- 281(b) --
Less: Waiver of Piper Class A distribution fees (75) -- 75(b) -- --
Other 24 4 3(c) 24(c) 7
-------- -------- -------- -------- --------
Net expenses before expenses paid indirectly 843 1,098 1,233 1,367 1,807
Less: Expenses paid indirectly (2) -- -- -- (2)
-------- -------- -------- -------- --------
Total net expenses 841 1,098 1,233 1,367 1,805
-------- -------- -------- -------- --------
Investment income - net 5,962 8,640 (1,233) (1,367) 14,736
-------- -------- -------- -------- --------
Realized and Unrealized Gains on Investments
Net realized gain on investments 282 263 -- -- 545
Net change in unrealized appreciation/
(depreciation) of investments 2,016 2,441 -- -- 4,457
-------- -------- -------- -------- --------
Net gain on investments 2,298 2,704 -- -- 5,002
-------- -------- -------- -------- --------
Net increase in net assets resulting from operations $ 8,260 $ 11,344 $ (1,233) $ (1,367) $ 19,738
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
First American Investment Funds, Inc
Intermediate Term Income Fund
Pro Forma Combining Schedule of Investments
September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Par/Shares Value
---------- -----
Intermediate Intermediate
Intermediate Term Income Pro Forma Intermediate Term Income Pro Forma
Bond Fund Fund Combined Bond Fund Fund Combined
(000) (000) (000) Security Coupon Maturity (000) (000) (000)
----- ----- ----- -------- ------ -------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. TREASURY OBLIGATIONS- 65.1% (Percentages represent pro forma value of investments compared to pro forma net assets)
$ - $ 8,035 $ 8,035 U.S. TREASURY NOTE 5.125% 4/30/98 $ - $ 8,019 $ 8,019
- 24,175 24,175 U.S. TREASURY NOTE 6.250 3/31/99 - 24,346 24,346
- 33,860 33,860 U.S. TREASURY NOTE 6.250 5/31/99 - 34,096 34,096
4,000 - 4,000 U.S. TREASURY NOTE 8.000 8/15/99 4,154 - 4,154
3,500 - 3,500 U.S. TREASURY NOTE 7.875 11/15/99 3,642 - 3,642
2,000 42,200 44,200 U.S. TREASURY NOTE 6.750 4/30/00 2,042 43,064 45,106
5,000 - 5,000 U.S. TREASURY NOTE 5.500 12/31/00 4,938 - 4,938
- 44,355 44,355 U.S. TREASURY NOTE 6.375 3/31/01 - 44,901 44,901
- 35,900 35,900 U.S. TREASURY NOTE 6.250 2/15/03 - 36,248 36,248
3,000 22,775 25,775 U.S. TREASURY NOTE 7.250 8/15/04 3,191 24,223 27,414
- 26,550 26,550 U.S. TREASURY NOTE 6.875 5/15/06 - 27,749 27,749
3,000 - 3,000 U.S. TREASURY NOTE 6.500 10/15/06 3,065 - 3,065
--------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS 21,032 242,646 263,678
--------------------------------------
CORPORATE OBLIGATIONS- 11.5%
1,000 - 1,000 AMERICAN EXPRESS CREDIT 6.500 8/01/00 1,008 - 1,008
- 2,800 2,800 BEAR STEARNS 6.500 6/15/00 - 2,818 2,818
- 3,000 3,000 BEAR STEARNS MED.TERM 6.560 6/20/00 - 3,023 3,023
- 3,075 3,075 CIGNA CORP 7.400 1/15/03 - 3,163 3,163
2,000 - 2,000 COCA-COLA 6.700 10/15/36 2,052 - 2,052
- 6,450 6,450 COMDISCO INC 5.780 1/19/99 - 6,418 6,418
1,000 - 1,000 FIRST CHICAGO 7.625 1/15/03 1,049 - 1,049
3,000 - 3,000 FORD CREDIT GLOBAL 7.000 9/25/01 3,071 - 3,071
1,500 - 1,500 GMAC 8.500 1/01/03 1,636 - 1,636
2,000 - 2,000 HERTZ CORP 6.300 11/15/06 1,995 - 1,995
2,300 - 2,300 HYDRO QUEBEC 9.400 2/01/21 2,855 - 2,855
2,000 - 2,000 KOREA ELECTRIC 6.375 12/01/03 1,923 - 1,923
2,000 - 2,000 LEHMAN BROS INC 7.500 8/01/26 2,111 - 2,111
- 6,050 6,050 LEHMAN BROS HOLDING 8.375 2/15/99 - 6,232 6,232
- 3,155 3,155 METROPOLITAN LIFE INSURANCE 6.300 11/1/03 - 3,095 3,095
1,000 - 1,000 MORGAN STANLEY 8.100 6/26/02 1,066 - 1,066
1,000 - 1,000 NORDSTROM CREDIT 6.700 7/01/05 1,002 - 1,002
2,000 - 2,000 SMITH BARNEY 7.000 3/15/04 2,037 - 2,037
--------------------------------------
TOTAL CORPORATE OBLIGATIONS 21,805 24,749 46,554
--------------------------------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED OBLIGATIONS- 11.4%
2,121 - 2,121 FHLMC 7.000 9/01/10 2,150 - 2,150
- 4,925 4,925 FHLMC CMO 6.000 11/15/08 - 4,744 4,744
- 2,630 2,630 FHLMC REMIC 8.000 10/15/20 - 2,702 2,702
- 1,982 1,982 FHLMC REMIC 5.500 1/15/01 - 1,955 1,955
- 1,234 1,234 FHLMC REMIC 7.000 5/15/03 - 1,257 1,257
2,162 - 2,162 FNMA 7.000 11/01/10 2,187 - 2,187
1,971 - 1,971 FNMA 9.000 12/01/20 2,104 - 2,104
2,341 - 2,341 FNMA 9.500 6/01/21 2,530 - 2,530
2,358 - 2,358 FNMA 10.000 11/01/18 2,588 - 2,588
- 1,000 1,000 FNMA REMIC 6.500 11/25/07 - 1,006 1,006
- 2,683 2,683 FNMA REMIC 7.000 6/25/03 - 2,729 2,729
- 2,000 2,000 FNMA REMIC 6.500 1/18/04 - 1,998 1,998
- 2,750 2,750 FNMA REMIC 6.500 5/18/20 - 2,747 2,747
- 2,426 2,426 FNMA REMIC 7.000 6/25/02 - 2,449 2,449
See accompanying notes to financial statements.
<PAGE>
U.S. GOVERNMENT AGENCY MORTAGE-BACKED OBLIGATIONS (Continued)
$ 4,525 $ - $ 4,525 GNMA 9.000% 8/15/21 $ 4,872 $ - $ 4,872
1,986 - 1,986 GNMA 9.000 5/20/25 2,106 - 2,106
2,766 - 2,766 GNMA 8.500 7/20/25 2,887 - 2,887
- 3,237 3,237 GNMA 7.500 4/20/03 - 3,331 3,331
-------------------------------------
TOTAL U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED OBLIGATIONS 21,424 24,918 46,342
-------------------------------------
OTHER MORTGAGE-BACKED OBLIGATIONS- 2.7%
- 8,320 8,320 AM. SOUTHWEST FINANCIAL SERVICES 7.400 11/17/04 - 8,618 8,618
- 54 54 DREXEL BURNHAM LAMBERT TRUST 9.000 8/1/18 - 55 55
- 2,214 2,214 PRUDENTIAL HOME MORTGAGE 6.751 9/25/01 - 2,236 2,236
-------------------------------------
TOTAL OTHER MORTGAGE-BACKED
OBLIGATIONS - 10,909 10,909
-------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS- 4.0%
- 2,000 2,000 FHLB 7.280 5/18/99 - 2,042 2,042
- 1,000 1,000 FHLMC 6.660 12/5/05 - 991 991
- 1,000 1,000 FHLMC 6.970 6/16/05 - 1,007 1,007
- 1,000 1,000 FNMA 8.450 7/12/99 - 1,042 1,042
2,000 - 2,000 FNMA 8.650 2/10/98 2,024 - 2,024
2,000 - 2,000 FNMA 7.400 7/01/04 2,122 - 2,122
- 1,000 1,000 FNMA 7.350 3/28/05 - 1,061 1,061
- 1,000 1,000 FNMA 7.740 2/3/98 - 1,007 1,007
- 2,000 2,000 FNMA 7.890 2/23/00 - 2,019 2,019
2,000 - 2,000 FNMA MEDIUM TERM NOTE 6.160 4/03/01 2,007 - 2,007
1,000 - 1,000 FNMA MEDIUM TERM NOTE 6.180 3/15/01 1,004 - 1,004
-------------------------------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS 7,157 9,169 16,326
-------------------------------------
ASSET-BACKED SECURITIES- 1.7%
2,000 - 2,000 CITIBANK CREDIT 6.350 8/15/02 2,011 - 2,011
1,282 - 1,282 DAIMLER-BENZ 5.850 7/20/03 1,284 - 1,284
- 2 2 FLEET FINANCE HOME EQUITY 8.900 1/16/06 - 2 2
1,500 - 1,500 NORWEST 5.900 3/15/00 1,502 - 1,502
- 2,000 2,000 ZALE FUNDING SERIES 7.500 5/15/03 - 2,016 2,016
-------------------------------------
TOTAL ASSET-BACKED SECURITIES 4,797 2,018 6,815
-------------------------------------
REPURCHASE AGREEMENTS- 0.5%
1,999 - 1,999 GOLDMAN SACHS 6.150 10/01/97 1,999 - 1,999
-------------------------------------
RELATED PARTY MONEY MARKET FUND- 2.1%
- 8,344 8,344 FIRST AM. PRIME OBLIGATIONS 5.360 - 8,344 8,344
-------------------------------------
TOTAL INVESTMENTS (Cost $77,129,
$321,320 and $398,449 respectively) $ 78,214 $ 322,753 $ 400,967
=====================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
First American Investment Funds, Inc.
Large Cap Growth Fund
Pro Forma Combining Statement of Assets and Liabilities
September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Large Cap Pro Forma
Growth Growth Adjustments Pro Forma
Fund Fund (Note 2) Combined
(000) (000) (000) (000)
----------- ----------- ----------- -----------
Assets:
<S> <C> <C> <C> <C>
Total investments (Cost $114,120,
$415,221 and $529,341,
respectively) $ 199,054 $ 701,273 $ -- $ 900,327
Cash 26 5 -- 31
Collateral for securities lending transactions -- 195,251 -- 195,251
Receivables:
Accrued income 106 1,222 -- 1,328
Investment securities sold -- 891 -- 891
Capital shares sold 3,645 373 -- 4,018
Income and other receivables -- 13 -- 13
Other assets -- 7 -- 7
----------- ----------- ----------- -----------
Total Assets 202,831 899,035 1,101,866
----------- ----------- ----------- -----------
Liabilities:
Payables
Payable upon return of securities loaned -- 195,251 -- 195,251
Capital shares redeemed 494 527 -- 1,021
Accrued expenses 174 602 -- 776
----------- ----------- ----------- -----------
Total Liabilities 668 196,380 -- 197,048
----------- ----------- ----------- -----------
Net Assets:
Large Cap Growth Class Y
based on 38,611,657 outstanding shares -- 346,636 -- 346,636
Large Cap Growth Class A
based on 681,691 and 12,148,716
outstanding shares, respectively -- 8,738 96,506(a) 105,244
Large Cap Growth Class B
based on 543,043 outstanding shares -- 6,943 -- 6,943
Growth Class A based on 15,788,836
outstanding shares 96,318 -- (96,318)(a) --
Growth Class B based on 16,426
outstanding shares 188 -- (188)(a) --
Undistributed net investment income -- 109 -- 109
Accumulated net realized gain on investments 20,723 54,177 -- 74,900
Net unrealized appreciation of investments 84,934 286,052 -- 370,986
----------- ----------- ----------- -----------
Total Net Assets $ 202,163 $ 702,655 $ -- $ 904,818
=========== =========== =========== ===========
Net Asset Value,
offering price and redemption price per share -
Class Y $ 17.64 $ 17.64
=========== ===========
Net Asset Value
and redemption price per share - Class A $ 12.79 $ 17.63 $ 17.63
=========== =========== ===========
Net Asset Value
and offering price per share - Class B $ 12.75 $ 17.47 $ 17.47
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
First American Investment Funds, Inc.
Large Cap Growth Fund
Pro Forma Combining Statement of Operations
For the Year Ended September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Large Cap Pro Forma Adjustments
Growth Growth (Note 2) Pro Forma
Fund Fund Debit Credit Combined
(000) (000) (000) (000) (000)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Investment Income:
Interest $ 263 $ 1,417 $ -- $ -- $ 1,680
Dividends 2,350 6,885 -- -- 9,235
Less: Foreign taxes withheld (16) -- -- -- (16)
--------- --------- --------- --------- ---------
Total investment income 2,597 8,302 -- -- 10,899
--------- --------- --------- --------- ---------
Expenses:
Investment advisory fees 1,314 3,691 1,314(b) 1,314(b) 5,005
Less: Waiver of investment advisory fees -- (484) -- 198(b) (682)
Administrative, accounting and custodian fees 147 757 273(b) 147(b) 1,030
Transfer agent fees 120 47 80(c) 120(c) 127
Amortization of organizational costs -- 9 -- -- 9
Directors' fees 8 11 2(c) 8(c) 13
Registration fees 35 115 10(c) 35(c) 125
Professional fees 42 40 10(c) 42(c) 50
Printing 38 20 9(c) 38(c) 29
Distribution fees - FAIF Retail Class A -- 21 467(b) -- 488
Distribution fees - Piper Class A 934 -- -- 934(b) --
Less: Waiver of Piper Class A distribution fees (299) -- 299(b) -- --
Distribution fees - FAIF Retail Class B -- 75 -- -- 75
Distribution fees - Piper Class B 1 -- -- 1(b) --
Other 20 13 1(c) 20(c) 14
--------- --------- --------- --------- ---------
Total net expenses 2,360 4,315 2,465 2,857 6,283
--------- --------- --------- --------- ---------
Investment income - net 237 3,987 (2,465) (2,857) 4,616
--------- --------- --------- --------- ---------
Realized and Unrealized Gains on Investments
Net realized gain on investments 24,239 56,183 -- -- 80,422
Net change in unrealized appreciation/
(depreciation) of investments 30,824 83,459 -- -- 114,283
--------- --------- --------- --------- ---------
Net gain on investments 55,063 139,642 -- -- 194,705
--------- --------- --------- --------- ---------
Net increase in net assets resulting from operations $ 55,300 $ 143,629 $ (2,465) $ (2,857) $ 199,321
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
First American Investment Funds, Inc
Large Cap Growth Fund
Pro Forma Combining Schedule of Investments
September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Par/Shares Value
---------- -----
Large Cap
Large Cap Growth Growth Pro Forma
Growth Growth Pro Forma Fund Fund Combined
Fund Fund Combined Security (000) (000) (000)
---- ---- -------- -------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCKS- 91.8% (Percentages represent pro forma value of investments compared to pro forma net assets)
ADVERTISING- 1.6%
- 247,000 247,000 COX COMMUNICATIONS $ - $ 6,808 $ 6,808
- 403,988 403,988 TELE-COMMUNICATIONS INC - 8,282 8,282
-------------------------------------
- 15,090 15,090
-------------------------------------
AIRCRAFT- 1.0%
- 173,750 173,750 BOEING - 9,459 9,459
-------------------------------------
AUTOMOTIVE- 2.2%
125,000 328,000 453,000 FORD MOTOR COMPANY 5,656 14,842 20,498
-------------------------------------
BANKS- 9.4%
- 143,000 143,000 BANK NEW YORK INC - 6,864 6,864
- 200,000 200,000 BANKAMERICA CORP - 14,663 14,663
- 81,200 81,200 CITICORP - 10,876 10,876
- 132,850 132,850 FIRST AMERICAN BANK - 7,132 7,132
- 145,800 145,800 MELLON BANK - 7,983 7,983
100,000 - 100,000 NORWEST CORP 6,125 - 6,125
- 276,000 276,000 SIGNET BANK - 14,972 14,972
70,000 - 70,000 TCF FINANCIAL 4,091 - 4,091
50,000 - 50,000 U.S. BANCORP* 4,825 - 4,825
- 108,000 108,000 WASHINGTON MUTUAL INC - 7,533 7,533
-------------------------------------
15,041 70,023 85,064
-------------------------------------
BASIC MATERIALS- 2.2%
50,000 - 50,000 ALUMINUM COMPANY OF AMERICA 4,100 - 4,100
150,000 - 150,000 MORTON INTERNATIONAL 5,325 - 5,325
50,000 - 50,000 PHELPS DODGE 3,881 - 3,881
80,000 - 80,000 USX - U.S. STEEL GROUP 2,780 - 2,780
100,000 - 100,000 WILLAMETTE INDUSTRIES 3,825 - 3,825
-------------------------------------
19,911 - 19,911
-------------------------------------
CAPITAL GOODS & SERVICES- 2.7%
200,000 - 200,000 ALLIEDSIGNAL INC 8,500 - 8,500
100,000 - 100,000 MAGNA INTERNATIONAL 6,913 - 6,913
150,000 - 150,000 PENTAIR INC 5,531 - 5,531
30,000 - 30,000 THOMAS & BETTS 1,639 - 1,639
80,000 - 80,000 WABASH NATIONAL 2,315 - 2,315
-------------------------------------
24,898 - 24,898
-------------------------------------
CHEMICALS- 1.7%
- 254,000 254,000 DUPONT - 15,637 15,637
-------------------------------------
COMMUNICATIONS EQUIPMENT- 3.5%
60,000 32,000 92,000 ADC TELECOMMUNICATIONS 1,950 1,040 2,990
- 226,100 226,100 ASCEND COMMUNICATIONS - 7,320 7,320
- 230,000 230,000 NOKIA ADR - 21,576 21,576
-------------------------------------
1,950 29,936 31,886
-------------------------------------
* U.S. Bancorp Stock will be disposed of prior to the Reorganization.
See accompanying notes to financial statements.
<PAGE>
COMPUTERS & SERVICES- 4.9%
- 35,250 35,250 3COM CORPORATION $ - $ 1,807 $ 1,807
30,000 275,500 305,500 CISCO SYSTEMS 2,192 20,128 22,320
30,000 - 30,000 COMPAQ COMPUTER 2,243 - 2,243
70,000 22,800 92,800 EMC CORPORATION 4,086 1,331 5,417
45,000 - 45,000 HEWLETT-PACKARD CO 3,130 - 3,130
30,000 - 30,000 INTERNATIONAL BUSINESS MACHINES 3,178 - 3,178
- 182,000 182,000 SEAGATE TECHNOLOGY - 6,575 6,575
-------------------------------------
14,829 29,841 44,670
-------------------------------------
DRUGS- 5.6%
- 224,000 224,000 ABBOTT LABS - 14,322 14,322
- 7,100 7,100 BRISTOL-MYERS SQUIBB CO - 588 588
- 242,150 242,150 JOHNSON & JOHNSON - 13,954 13,954
- 9,300 9,300 LILLY ELI & CO - 1,120 1,120
- 8,900 8,900 MERCK & CO - 889 889
- 303,650 303,650 PFIZER - 18,237 18,237
- 18,200 18,200 SCHERING PLOUGH CORP - 937 937
- 19,000 19,000 WATSON PHARMACEUTICAL - 1,135 1,135
-------------------------------------
- 51,182 51,182
-------------------------------------
ELECTRICAL SERVICES- 0.9%
- 229,000 229,000 TEXAS UTILITIES - 8,244 8,244
-------------------------------------
ENERGY & POWER- 3.3%
75,000 - 75,000 ANADARKO PETROLEUM 5,386 - 5,386
175,000 - 175,000 BAKER HUGHES INC 7,656 - 7,656
- 181,000 181,000 THERMO ELECTRON CORP - 7,240 7,240
200,000 - 200,000 TRANSOCEAN OFFSHORE INC 9,587 - 9,587
-------------------------------------
22,629 7,240 29,869
-------------------------------------
FINANCIAL SERVICES- 6.2%
- 163,400 163,400 AMERICAN EXPRESS CO - 13,378 13,378
60,000 - 60,000 AMERICAN INTERNATIONAL GROUP 6,191 - 6,191
70,000 374,700 444,700 FEDERAL NATIONAL MORTGAGE ASSOC 3,290 17,611 20,901
50,000 - 50,000 FINOVA GROUP 4,731 - 4,731
40,000 - 40,000 FRANKLIN RESOURCES 3,725 - 3,725
- 132,550 132,550 MORGAN STANLEY, DEAN WITTER - 7,166 7,166
-------------------------------------
17,937 38,155 56,092
-------------------------------------
FOOD, BEVERAGE & TOBACCO- 3.8%
- 276,000 276,000 PEPSICO INC - 11,195 11,195
- 312,000 312,000 PHILIP MORRIS INC - 12,968 12,968
- 194,000 194,000 SARA LEE CORP - 9,991 9,991
-------------------------------------
- 34,154 34,154
-------------------------------------
GAS/NATURAL GAS- 1.5%
100,000 270,000 370,000 ENRON CORP 3,850 10,395 14,245
-------------------------------------
GLASS PRODUCTS- 0.8%
- 160,000 160,000 CORNING INCORPORATED - 7,560 7,560
-------------------------------------
HOUSEHOLD PRODUCTS- 1.4%
- 310,000 310,000 NEWELL COMPANY - 12,400 12,400
-------------------------------------
INSURANCE- 0.7%
- 128,000 128,000 UNITED HEALTHCARE CORP - 6,400 6,400
-------------------------------------
MACHINERY- 2.4%
- 164,000 164,000 CASE CORPORATION - 10,927 10,927
- 26,200 26,200 DRESSER INDUSTRIES - 1,127 1,127
- 147,000 147,000 GENERAL ELECTRIC - 10,005 10,005
-------------------------------------
- 22,059 22,059
-------------------------------------
See accompanying notes to financial statements.
<PAGE>
MEDICAL PRODUCTS & SERVICES- 5.4%
- 580,000 580,000 BIOCHEM PHARMACEUTICALS $ - $ 18,270 $ 18,270
4,000 - 4,000 CARDIOVASCULAR DYNAMICS 32 - 32
- 312,000 312,000 COLUMBIA/HCA HEALTHCARE - 8,970 8,970
100,000 - 100,000 ENDOSONICS CORP 1,469 - 1,469
50,000 - 50,000 HEALTHCARE COMPARE 3,194 - 3,194
60,000 220,000 280,000 MEDTRONIC INC 2,820 10,340 13,160
100,000 - 100,000 ST. JUDE MEDICAL 3,506 - 3,506
-------------------------------------
11,021 37,580 48,601
-------------------------------------
MISCELLANEOUS BUSINESS SERVICES- 4.4%
- 134,000 134,000 FIRST DATA CORP - 5,033 5,033
- 81,800 81,800 MICROSOFT INC. - 10,823 10,823
60,000 443,774 503,774 ORACLE CORPORATION 2,186 16,170 18,356
- 227,700 227,700 SUNGARD DATA SYSTEMS INC - 5,522 5,522
-------------------------------------
2,186 37,548 39,734
-------------------------------------
MISCELLANEOUS CONSUMER SERVICES- 0.8%
- 240,000 240,000 ACCUSTAFF INC - 7,560 7,560
-------------------------------------
OIL-INTERNATIONAL- 4.7%
- 126,000 126,000 AMOCO CORP - 12,143 12,143
- 210,340 210,340 EXXON CORP - 13,475 13,475
- 234,400 234,400 MOBIL CORP - 17,346 17,346
-------------------------------------
- 42,964 42,964
-------------------------------------
PAPER & PAPER PRODUCTS- 1.7%
- 150,000 150,000 KIMBERLY-CLARK CORP - 7,341 7,341
- 138,500 138,500 WEYERHAEUSER COMPANY - 8,223 8,223
-------------------------------------
- 15,564 15,564
-------------------------------------
PETROLEUM & FUEL PRODUCTS- 2.5%
- 22,500 22,500 DIAMOND OFFSHORE DRILL - 1,242 1,242
- 40,700 40,700 READING AND BATES CORP - 1,692 1,692
125,000 113,200 238,200 SCHLUMBERGER LTD 10,522 9,530 20,052
-------------------------------------
10,522 12,464 22,986
-------------------------------------
RAILROADS- 1.4%
40,000 - 40,000 BURLINGTON NORTHERN SANTA FE 3,865 - 3,865
- 139,000 139,000 UNION PACIFIC CORP - 8,705 8,705
-------------------------------------
3,865 8,705 12,570
-------------------------------------
REAL ESTATE INVESTMENT TRUSTS- 2.2%
- 159,000 159,000 NATIONAL GOLF PROPERTIES - 5,207 5,207
- 451,260 451,260 SIMON DEBARTOLO GROUP - 14,892 14,892
-------------------------------------
- 20,099 20,099
-------------------------------------
RETAIL- 5.0%
- 352,000 352,000 AUTOZONE INC - 10,560 10,560
175,000 - 175,000 GAP INC 8,760 - 8,760
- 487,000 487,000 INTIMATE BRANDS INC - 11,353 11,353
- 190,000 190,000 MCDONALD'S CORP - 9,049 9,049
125,000 - 125,000 REEBOK INTERNATIONAL 6,086 - 6,086
100,000 - 100,000 SEARS ROEBUCK 5,694 - 5,694
-------------------------------------
20,540 30,962 51,502
-------------------------------------
SEMI-CONDUCTORS/INSTRUMENTS- 2.6%
40,000 213,000 253,000 INTEL CORP 3,693 19,663 23,356
-------------------------------------
See accompanying notes to financial statements.
<PAGE>
SERVICES-PREPACKAGED SOFTWARE- 0.8%
- 126,000 126,000 PEOPLESOFT INC $ - $ 7,529 $ 7,529
-------------------------------------
TECHNOLOGY- 0.8%
60,000 - 60,000 CABLETRON SYSTEMS 1,920 - 1,920
150,000 - 150,000 SENSORMATIC ELECTRONICS 2,119 - 2,119
75,000 - 75,000 TECH DATA CORP 3,450 - 3,450
-------------------------------------
7,489 - 7,489
-------------------------------------
TELEPHONES & TELECOMMUNICATION- 3.0%
230,000 234,600 464,600 AIRTOUCH COMMUNICATIONS 8,152 8,314 16,466
- 227,200 227,200 L.M. ERICSSON - 10,890 10,890
-------------------------------------
8,152 19,204 27,356
-------------------------------------
TRANSPORTATION- 0.6%
40,000 - 40,000 AMR CORP 4,428 - 4,428
- 37,250 37,250 SOUTHWEST AIRLINES CO - 1,190 1,190
-------------------------------------
4,428 1,190 5,618
-------------------------------------
WHOLESALE- 0.1%
- 9,100 9,100 MOTOROLA INC - 654 654
-------------------------------------
TOTAL COMMON STOCKS 198,597 644,303 842,900
-------------------------------------
CONVERTIBLE PREFERRED STOCK- 2.8%
- 284,800 284,800 AIRTOUCH COMMUNICATIONS - 12,657 12,657
-------------------------------------
CONVERTIBLE BONDS- 2.4%
$ - $ 7,500,000 $7,500,000 3COM CORP, 10.25%, 11/01/01 - 11,372 11,372
- 6,600,000 6,600,000 DANKA BUSINESS, 6.75%, 04/01/02 - 10,494 10,494
-------------------------------------
TOTAL CONVERTIBLE BONDS - 21,866 21,866
-------------------------------------
RELATED PARTY MONEY MARKET FUND- 2.5%
- 22,446,987 22,446,987 FIRST AM. PRIME OBLIGATIONS - 22,447 22,447
-------------------------------------
REPURCHASE AGREEMENT- 0.1%
$ 457,000 $ - $ 457,000 GOLDMAN SACHS, 6.15%, 10/01/97 457 - 457
-------------------------------------
TOTAL INVESTMENTS (Cost $114,120,
$415,221, and $529,341, respectively) $ 199,054 $ 701,273 $ 900,327
=====================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
First American Investment Funds, Inc.
Small Cap Growth Fund
Pro Forma Combining Statement of Assets and Liabilities
September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Small
Company Small Cap Pro Forma
Growth Growth Adjustments Pro Forma
Fund Fund (Note 2) Combined
(000) (000) (000) (000)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Assets:
Total investments (Cost $24,805,
$117,541 and $142,346,
respectively) $ 36,282 $ 159,239 $ -- $ 195,521
Cash 117 -- -- 117
Collateral for securities lending transactions -- 28,028 -- 28,028
Receivables:
Accrued income 3 44 -- 47
Investment securities sold 332 1,750 -- 2,082
Income and other receivables -- 9 -- 9
Capital shares sold 185 145 -- 330
Other assets 2 7 -- 9
--------- --------- --------- ---------
Total Assets 36,921 189,222 -- 226,143
--------- --------- --------- ---------
Liabilities:
Payables
Payable upon return of securities loaned -- 28,028 -- 28,028
Investment securities purchased 677 -- -- 677
Capital shares redeemed 86 -- -- 86
Accrued expenses 31 3,054 -- 3,085
--------- --------- --------- ---------
Total Liabilities 794 31,082 -- 31,876
--------- --------- --------- ---------
Net Assets:
Small Cap Growth Class Y
based on 8,596,681shares outstanding -- 101,553 -- 101,553
Small Cap Growth Class A
based on 300,199 and 2,358,744
outstanding shares, respectively -- 3,487 24,368(a) 27,855
Small Cap Growth Class B
based on 73,646 outstanding shares -- 996 -- 996
Small Company Class A based on
3,725,085 outstanding shares 23,968 -- (23,968)(a) --
Small Company Class B based on
50,254 outstanding shares 400 -- (400)(a) --
Distribution in excess of net investment income -- (4) -- (4)
Accumulated net realized gain on investments 282 10,410 -- 10,692
Net unrealized appreciation of investments 11,477 41,698 -- 53,175
--------- --------- --------- ---------
Total Net Assets $ 36,127 $ 158,140 $ -- $ 194,267
========= ========= ========= =========
Net Asset Value,
offering price and redemption price per share -
Class Y $ 17.64 $ 17.64
========= =========
Net Asset Value
and redemption price per share - Class A $ 9.57 $ 17.55 $ 17.55
========= ========= =========
Net Asset Value
and offering price per share - Class B $ 9.54 $ 17.15 $ 17.15
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
First American Investment Funds, Inc.
Small Cap Growth Fund
Pro Forma Combining Statement of Operations
For the Year Ended September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Small
Company Small Cap Pro Forma Adjustments
Growth Growth (Note 2) Pro Forma
Fund Fund Debit Credit Combined
(000) (000) (000) (000) (000)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Investment Income:
Interest $ 92 $ 523 $ -- $ -- $ 615
Dividends 85 211 -- -- 296
-------- -------- -------- -------- --------
Total investment income 177 734 -- -- 911
-------- -------- -------- -------- --------
Expenses:
Investment advisory fees 224 834 209(b) 224(b) 1,043
Less: Waiver of investment advisory fees (144) (14) 144(b) 25(b) (39)
Administrative, accounting and custodian fees 44 171 30(b) 44(b) 201
Transfer agent fees 50 32 35(c) 50(c) 67
Amortization of organizational costs -- 6 -- -- 6
Directors' fees 8 3 1(c) 8(c) 4
Registration fees 37 18 10(c) 37(c) 28
Professional fees 48 10 2(c) 48(c) 12
Printing 24 9 6(c) 24(c) 15
Distribution fees - FAIF Retail Class A -- 9 75(b) -- 84
Distribution fees - Piper Class A 149 -- -- 149(b) --
Less: Waiver of Piper Class A distribution fees (48) -- 48(b) -- --
Distribution fees - FAIF Retail Class B -- 9 -- -- 9
Distribution fees - Piper Class B 1 -- -- 1(b) --
Other 8 3 1(c) 8(c) 4
-------- -------- -------- -------- --------
Total net expenses 401 1,090 561 618 1,434
-------- -------- -------- -------- --------
Investment loss - net (224) (356) (561) (618) (523)
-------- -------- -------- -------- --------
Realized and Unrealized Gains on Investments
Net realized gain on investments 3,716 11,274 -- -- 14,990
Net change in unrealized appreciation/
(depreciation) of investments 8,022 22,599 -- -- 30,621
-------- -------- -------- -------- --------
Net gain on investments 11,738 33,873 -- -- 45,611
-------- -------- -------- -------- --------
Net increase in net assets resulting from operations $ 11,514 $ 33,517 $ (561) $ (618) $ 45,088
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
First American Investment Funds, Inc
Small Cap Growth Fund
Pro Forma Combining Schedule of Investments
September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Par/Shares Value
---------- -----
Small Small Cap
Small Small Cap Company Growth Pro Forma
Company Growth Pro Forma Growth Fund Fund Combined
Growth Fund Fund Combined Security (000) (000) (000)
----------- ---- -------- -------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCKS- 92.4% (Percentages represent pro forma value of investments compared to pro forma net assets)
AEROSPACE & DEFENSE- 2.8%
- 67,500 67,500 REMEC INC $ - $ 2,464 $ 2,464
- 96,000 96,000 TRACOR INC - 2,952 2,952
---------------------------------
- 5,416 5,416
---------------------------------
AIRCRAFT- 1.7%
- 94,000 94,000 BE AEROSPACE INCORPORATED - 3,384 3,384
---------------------------------
APPAREL/TEXTILES- 1.0%
- 29,000 29,000 CULP INCORPORATED - 602 602
- 77,000 77,000 HIRSCH INTERNATIONAL - 1,362 1,362
---------------------------------
- 1,964 1,964
---------------------------------
AUTOMOTIVE- 1.8%
- 78,000 78,000 TOWER AUTOMOTIVE - 3,510 3,510
---------------------------------
BANKS- 2.2%
- 3,000 3,000 BANK UNITED CORPORATION - 133 133
- 77,000 77,000 BAY VIEW CAP CORP - 2,108 2,108
6,825 - 6,825 COMMERCE BANCORP 265 - 265
20,000 - 20,000 FIRST REPUBLIC BANCORP 535 - 535
15,000 - 15,000 FIRST SAVINGS BANK OF WASHINGTON 371 - 371
15,000 - 15,000 TCF FINANCIAL 877 - 877
---------------------------------
2,048 2,241 4,289
---------------------------------
BASIC MATERIALS- 1.4%
7,000 - 7,000 APTAR GROUP INC 392 - 392
30,000 - 30,000 BRUNSWICK TECHNOLOGIES 480 - 480
29,000 - 29,000 CHIREX INC 740 - 740
27,000 - 27,000 CUNO INC 469 - 469
15,000 - 15,000 OM GROUP 599 - 599
---------------------------------
2,680 - 2,680
---------------------------------
BATTERIES & BATTERY SYSTEMS- 0.8%
- 115,000 115,000 BOULDER TECHNOLOGIES - 1,610 1,610
---------------------------------
BROADASTING, NEWSPAPERS & ADVERTISING- 2.3%
- 105,000 105,000 GETTY COMMUNICATIONS - 1,942 1,942
- 69,200 69,200 NTL INCORPORATED - 1,825 1,825
- 81,444 81,444 PRICELLULAR CORP - 809 809
-------------------------------------------
- 4,576 4,576
-------------------------------------------
BUILDING & CONSTRUCTION- 0.3%
- 30,000 30,000 CROSSMAN COMMUNITIES INC - 679 679
-------------------------------------------
CAPITAL GOODS & SERVICES- 1.3%
12,000 - 12,000 AMERICAN DISPOSAL SERVICES INC 375 - 375
13,000 - 13,000 CHICAGO MINIATURE LAMP 432 - 432
See accompanying notes to financial statements.
<PAGE>
CAPITAL GOODS & SERVICES (Continued)
15,000 - 15,000 CONTROL DEVICES INC $ 225 $ - $ 225
10,800 - 10,800 DURA AUTOMOTIVE SYSTEMS 340 - 340
14,000 - 14,000 MILLER (HERMAN) 749 - 749
22,000 - 22,000 RENTAL SERVICE 494 - 494
-------------------------------------------
2,615 - 2,615
-------------------------------------------
CHEMICALS- 1.3%
- 55,500 55,500 CAMBREX CORPORATION - 2,588 2,588
-------------------------------------------
COMMERCIAL SERVICES- 1.9%
13,000 - 13,000 ABR INFORMATION SERVICES 359 - 359
15,000 - 15,000 AMERICAN BUILDING MAINTENANCE 397 - 397
13,500 - 13,500 G & K SERVICES 469 - 469
20,000 - 20,000 JP FOODSERVICE 630 - 630
15,000 - 15,000 LEARNING TREE INTERNATIONAL 429 - 429
17,000 - 17,000 WACKENHUT CORRECTIONS 527 - 527
12,000 - 12,000 WATSCO INC 375 - 375
20,000 - 20,000 WILMAR INDUSTRIES 540 - 540
-------------------------------
3,726 - 3,726
-------------------------------
COMMUNICATIONS EQUIPMENT- 4.7%
- 90,000 90,000 CHECKPOINT SYSTEMS INC - 1,316 1,316
- 90,000 90,000 COMMUNICATIONS SYTEMS INC - 1,867 1,867
- 100,000 100,000 CTC COMMUNICATIONS CORP - 812 812
- 63,000 63,000 HARMONIC LITE - 1,032 1,032
- 160,000 160,000 MEDIALINK WORLDWIDE - 2,580 2,580
- 130,000 130,000 ULTRAK INCORPORATED - 1,592 1,592
-------------------------------
- 9,199 9,199
-------------------------------
COMPUTERS & SERVICES- 3.6%
- 142,000 142,000 ACCENT COLOR SCIENCES - 790 790
- 65,000 65,000 APEX PC SOLUTIONS INC - 2,462 2,462
- 20,000 20,000 HCIA INC - 270 270
- 95,000 95,000 HMT TECHNOLOGY - 1,490 1,490
- 53,200 53,200 IMNET SYSTEMS INC - 1,430 1,430
- 65,000 65,000 MACKIE DESIGNS INC - 617 617
-------------------------------
- 7,059 7,059
-------------------------------
CONSUMER DURABLES- 0.3%
21,000 - 21,000 ITI TECHNOLOGIES 598 - 598
-------------------------------
CONSUMER NON-DURABLES- 0.3%
25,000 - 25,000 HOME PRODUCTS INTERNATIONAL INC 366 - 366
4,150 - 4,150 ROBERT MONDAVI 227 - 227
-------------------------------
593 - 593
-------------------------------
CONSUMER SERVICES- 1.2%
10,000 - 10,000 BRIDGESTREET ACCOMODATIONS 115 - 115
10,000 - 10,000 CHANCELLOR MEDIA CORP 526 - 526
17,000 - 17,000 EQUITY CORPORATION INTERNATIONAL 396 - 396
23,000 - 23,000 PJ AMERICA INC 394 - 394
10,000 - 10,000 STRAYER EDUCATION 455 - 455
18,000 - 18,000 YORK GROUP INC 389 - 389
-------------------------------
2,275 - 2,275
-------------------------------
See accompanying notes to financial statements.
<PAGE>
DRUGS- 0.6%
- 75,000 75,000 IDEXX LABORATORIES INC $ - 1,256 1,256
-------------------------------
ENERGY & POWER- 1.7%
- 60,000 60,000 CALENERGY INC - 1,995 1,995
18,000 - 18,000 NEWPARK RESOURCES 707 - 707
22,000 - 22,000 TUBOSCOPE INC 690 - 690
-------------------------------
1,397 1,995 3,392
-------------------------------
FINANCIAL SERVICES- 0.8%
13,000 - 13,000 AMRESCO INC 483 - 483
15,000 - 15,000 MONEY STORE 428 - 428
20,000 - 20,000 RELIASTAR FINANCIAL 796 - 796
-------------------------------
1,707 - 1,707
-------------------------------
FOOD, BEVERAGE, & TOBACCO- 1.0%
- 50,000 50,000 CONS CIGAR HOLDINGS INC - 2,044 2,044
-------------------------------
HOME APPLIANCES- 0.1%
- 42,000 42,000 MOLTEN METAL TECHNOLOGY - 231 231
-------------------------------
INSURANCE- 5.9%
- 119,000 119,000 AMERIN CORP - 3,421 3,421
- 12,300 12,300 ARM FINANCIAL GROUP INC - 293 293
- 80,000 80,000 HEALTHCARE RECOVERIES INC - 1,800 1,800
- 16,300 16,300 MEADOWBROOK INSURANCE GROUP - 394 394
- 100,000 100,000 UNITED PAY & UNITED PROVIDERS - 1,725 1,725
- 67,000 67,000 VESTA INSURANCE GROUP - 3,819 3,819
-------------------------------
- 11,452 11,452
-------------------------------
LEASING & RENTING- 1.0%
- 90,000 90,000 RENTERS' CHOICE INC - 2,045 2,045
-------------------------------
LEISURE- 0.6%
- 100,000 100,000 T-HQ INC - 1,194 1,194
-------------------------------
MACHINERY- 1.4%
- 70,500 70,500 ELECTRIC FUEL CORP - 639 639
- 99,500 99,500 SHAW GROUP INC - 2,183 2,183
-------------------------------
- 2,822 2,822
-------------------------------
MEASURING DEVICES- 0.8%
- 100,000 100,000 CYBERONICS - 1,612 1,612
-------------------------------
MEDICAL PRODUCTS & SERVICES- 9.9%
5,391 - 5,391 ALPHA 1 BIOMEDICALS INC 1 - 1
- 160,900 160,900 ATS MEDICAL INC - 945 945
2,000 - 2,000 BIORELIANCE CORP 53 - 53
15,000 - 15,000 BIOSITE DIAGNOSTICS 131 - 131
- 85,000 85,000 CARDIMA INC - 494 494
10,000 - 10,000 CENTENNIAL HEALTHCARE 230 - 230
- 70,000 70,000 CLOSURE MEDICAL CORP - 2,415 2,415
- 110,300 110,300 CONCEPTUS - 779 779
11,000 - 11,000 CYTYC CORP 276 - 276
31,000 - 31,000 DAOU SYSTEMS INC 968 - 968
See accompanying notes to financial statements.
<PAGE>
MEDICAL PRODUCTS & SERVICES (Continued)
17,000 - 17,000 DIGENE CORP $ 219 $ - $ 219
7,000 - 7,000 EXPRESS SCRIPTS 377 - 377
15,000 - 15,000 FPA MEDICAL MANAGEMENT INC 516 - 516
10,000 - 10,000 GENESIS HEALTH VENTURES 389 - 389
- 154,000 154,000 HESKA CORP - 2,194 2,194
20,000 - 20,000 HPR INC 438 - 438
- 76,000 76,000 MEDICAL ALLIANCE INC - 304 304
8,000 - 8,000 NEXSTAR PHARMACEUTICALS 142 - 142
- 134,000 134,000 NITINOL MEDICAL TECHNOLOGIES - 1,909 1,909
9,000 - 9,000 NOVOSTE CORP 150 - 150
19,500 - 19,500 PHYSICIAN SALES & SERVICE 380 - 380
11,000 - 11,000 PHYSIO-CONTROL INTERNATIONAL 186 - 186
- 45,000 45,000 QIAGEN - 2,092 2,092
- 112,500 112,500 QUORUM HEALTH GROUP - 2,749 2,749
8,000 - 8,000 SCHERER 496 - 496
10,000 - 10,000 UROGEN - - -
20,000 - 20,000 UROLOGIX INC 475 - 475
-------------------------------
5,427 13,881 19,308
-------------------------------
METALWORKING, MACHINERY & EQUIPMENT- 1.4%
- 70,000 70,000 GREENFIELD INDUSTRIES INC - 2,012 2,012
- 20,000 20,000 WOLVERINE TUBE INC - 627 627
-------------------------------
- 2,639 2,639
-------------------------------
MISCELLANEOUS BUSINESS SERVICES- 9.6%
- 28,500 28,500 BA MERCHANT SERVICES INC - 527 527
- 60,000 60,000 CCC INFORMATION SERVICES - 1,275 1,275
- 60,000 60,000 CRYSTAL SYSTEMS SOLUTIONS - 1,605 1,605
- 150,000 150,000 DYNAMIC HEALTHCARE TECHNOLOGIES - 816 816
- 16,000 16,000 ENGINEERING ANIMATION INC - 610 610
- 20,000 20,000 HARBINGER CORP - 728 728
- 10,400 10,400 J.D. EDWARDS & COMPANY - 348 348
- 65,000 65,000 KEANE INC - 2,064 2,064
- 75,000 75,000 ONTRACK DATA - 1,744 1,744
- 30,000 30,000 PEGASYSTEMS INC - 911 911
- 25,000 25,000 QAD INC - 466 466
- 133,000 133,000 QUADRAMED CORP - 2,294 2,294
- 25,000 25,000 RWD TECHNOLOGIES INC - 575 575
- 94,200 94,200 SPATIAL TECHNOLOGY - 224 224
- 120,000 120,000 STAFFMARK INC - 4,575 4,575
-------------------------------
- 18,762 18,762
-------------------------------
MISCELLANEOUS MANUFACTURING- 0.4%
- 40,000 40,000 SPECIAL METALS CORP - 750 750
-------------------------------
OIL- DOMESTIC- 3.1%
- 175,000 175,000 CAIRN ENERGY USA INC - 2,428 2,428
- 55,000 55,000 PETROLEUM GEO SERVICES - 3,719 3,719
-------------------------------
- 6,147 6,147
-------------------------------
PETROLEUM & FUEL PRODUCTS- 2.2%
- 75,000 75,000 GLOBAL INDUSTRIES - 2,991 2,991
- 41,000 41,000 HANOVER COMPRESSOR - 1,005 1,005
16,000 - 16,000 LOMAK PETROLEUM 309 - 309
-------------------------------
309 3,996 4,305
-------------------------------
See accompanying notes to financial statements.
<PAGE>
PROFESSIONAL SERVICES- 0.5%
- 75,000 75,000 FIREARMS TRAINING SYSTEMS $ - $ 469 $ 469
- 70,000 70,000 PRECISION RESPONSE CORP - 543 543
-------------------------------
- 1,012 1,012
-------------------------------
REAL ESTATE INVESTMENT TRUSTS- 1.2%
- 54,600 54,600 ALEXANDRIA REAL ESTATE - 1,560 1,560
- 32,000 32,000 GOLF TRUST OF AMERICA - 864 864
-------------------------------
- 2,424 2,424
-------------------------------
RETAIL- 8.2%
- 175,000 175,000 BAB HOLDINGS INC - 372 372
- 146,250 146,250 BUFFETS INCORPORATED - 1,581 1,581
- 130,000 130,000 COOKER RESTAURANT - 1,357 1,357
- 80,000 80,000 DRESS BARN INC - 1,920 1,920
- 170,000 170,000 EAGLE HARDWARE & GARDEN - 3,347 3,347
5,000 - 5,000 HIBBETT SPORTING GOODS 139 - 139
10,000 - 10,000 MAZEL STORES 248 - 248
13,000 - 13,000 O'REILLY AUTOMOTIVE 296 - 296
30,000 - 30,000 PIER 1 IMPORTS 538 - 538
- 60,000 60,000 ST. JOHN KNITS - 2,696 2,696
14,000 - 14,000 STAGE STORES 603 - 603
- 150,000 150,000 THE BOMBAY COMPANY INC - 1,153 1,153
- 70,000 70,000 TUESDAY MORNING CORP - 1,649 1,649
-------------------------------
1,824 14,075 15,899
-------------------------------
SEMI-CONDUCTORS/INSTRUMENTS- 2.3%
11,000 100,000 111,000 ADVANCED ENERGY INDUSTRIES 311 2,831 3,142
- 54,000 54,000 AETRIUM INCOPORATED - 1,343 1,343
-------------------------------
311 4,174 4,485
-------------------------------
SERVICES-PREPACKAGED SOFTWARE- 3.6%
- 150,000 150,000 BTG INC - 2,138 2,138
- 53,000 53,000 HYPERION SOFTWARE CORP - 1,653 1,653
- 44,000 44,000 NATIONAL INSTRUMENTS CORP - 2,041 2,041
- 55,000 55,000 PLATINUM TECHNOLOGY INC - 1,183 1,183
-------------------------------
- 7,015 7,015
-------------------------------
TECHNOLOGY- 3.7%
5,000 - 5,000 ANADIGICS INC 247 - 247
5,200 - 5,200 ASPECT DEVELOPMENT 214 - 214
15,000 - 15,000 COHERENT COMMUNICATION SYSTEMS 426 - 426
15,000 - 15,000 COMVERSE TECHNOLOGY 791 - 791
11,800 - 11,800 CYBERONICS 190 - 190
10,000 - 10,000 DUPONT PHOTOMASKS 720 - 720
20,000 - 20,000 FSI INTERNATIONAL 418 - 418
20,000 - 20,000 NATURAL MICROSYSTEMS CORP 760 - 760
30,000 - 30,000 ONTRACK DATA INTERNATIONAL 698 - 698
27,000 - 27,000 PEERLESS SYSTEMS 378 - 378
30,000 - 30,000 SIPEX CORP 952 - 952
15,000 - 15,000 TECHNOLOGY SOLUTIONS 484 - 484
15,000 - 15,000 TECNOMATIX TECHNOLOGIES LTD 574 - 574
8,000 - 8,000 TRIQUINT SEMICONDUCTOR 291 - 291
12,000 - 12,000 WONDERWARE CORP 221 - 221
-------------------------------
7,364 - 7,364
-------------------------------
See accompanying notes to financial statements.
<PAGE>
TELEPHONES & TELECOMMUNICATIONS- 1.8%
- 32,000 32,000 BROOKS FIBER PROPERTIES $ - 1,494 $ 1,494
- 77,000 77,000 LIGHTBRIDGE INC - 1,251 1,251
- 80,000 80,000 METRO ONE TELECOMMUNICATIONS - 730 730
-------------------------------
- 3,475 3,475
-------------------------------
TRANSPORTATION- 0.3%
20,000 - 20,000 KNIGHTSBRIDGE TANKERS LTD 566 - 566
-------------------------------
WATER UTILITIES- 0.1%
- 10,000 10,000 WATERLINK INC - 188 188
-------------------------------
WHOLESALE- 1.4%
- 85,000 85,000 H.T.E. INC - 1,286 1,286
- 65,000 65,000 NEUROMEDICAL SYSTEMS - 333 333
- 100,000 100,000 SCHEID VINEYARDS INC - 1,113 1,113
-------------------------------
- 2,732 2,732
-------------------------------
TOTAL COMMON STOCKS 33,440 148,147 181,587
-------------------------------
PREFERRED STOCK- 0.1%
- 26,000 26,000 NETWORK IMAGING - 198 198
------------------------------
RELATED PARTY MONEY MARKET FUNDS- 5.6%
- 3,968,000 3,968,000 FIRST AM. GOVERMENT OBLIGATIONS - 3,968 3,968
- 6,925,801 6,925,801 FIRST AM. PRIME OBLIGATIONS - 6,926 6,926
-------------------------------
TOTAL RELATED PARTY MONEY MARKET
FUNDS - 10,894 10,894
-------------------------------
REPURCHASE AGREEMENT- 1.5%
$2,842,000 $ - $2,842,000 GOLDMAN SACHS, 6.15%, 10/01/97 2,842 - 2,842
-------------------------------
RIGHTS-0.0%
- 38,011 38,011 METROCALL - - -
-------------------------------
TOTAL INVESTMENTS (Cost $24,805,
$117,541 and $142,346,
respectively) $ 36,282 $ 159,239 $ 195,521
==================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
First American Investment Funds, Inc.
International Fund
Pro Forma Combining Statement of Assets and Liabilities
September 30, 1997
(Unaudited)
Pacific-
European Pro Forma
Growth International Adjustments Pro Forma
Fund Fund (Note 2) Combined
(000) (000) (000) (000)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Assets:
Total investments (Cost $81,741,
$189,084 and $270,825,
respectively) $ 94,433 $ 231,300 $ - $ 325,733
Cash 87 - - 87
Receivables:
Accrued income 444 322 - 766
Capital shares sold 173 280 - 453
Income and other receivables 1,306 153 - 1,459
Investment securities sold - 892 - 892
Reclaim receivable - 214 - 214
Other assets - 4 - 4
--------- --------- --------- ---------
Total Assets 96,443 233,165 - 329,608
--------- --------- --------- ---------
Liabilities:
Payables
Investment securities purchased 1,172 1,353 - 2,525
Capital shares redeemed 1,238 2,375 - 3,613
Unrealized depreciation on forward
foreign currency contracts 4 1,351 - 1,355
Accrued expenses 110 340 - 450
Other liabilities - 141 - 141
--------- --------- --------- ---------
Total Liabilities 2,524 5,560 - 8,084
--------- --------- --------- ---------
Net Assets:
International Class Y
based on 16,436,608 and 17,575,018
outstanding shares, respectively - 168,370 13,843(a) 182,213
International Class A
based on 607,164 and 6,590,306
outstanding shares, respectively - 6,100 69,921(a) 76,021
International Class B
based on 168,706 outstanding shares - 1,749 - 1,749
Pacific-European Growth Class Y
1,111,928 outstanding shares 13,843 - (13,843)(a) -
Pacific-European Growth Class A
5,836,071 outstanding shares 69,868 - (69,868)(a) -
Pacific-European Growth Class B
4,120 outstanding shares 53 - (53)(a) -
Undistributed net investment income 3,067 9,906 - 12,973
Accumulated net realized gain/(loss)
on investments (5,592) 618 - (4,974)
Net unrealized appreciation of investments
and on translation of other assets and
liabilities demoninated in foreign currencies 12,684 42,216 - 54,900
Net unrealized depreciation of forward
foreign currency contracts (4) (1,354) - (1,358)
--------- --------- --------- ---------
Total Net Assets $ 93,919 $ 227,605 $ - $ 321,524
========= ========= ========= =========
Net Asset Value,
offering price and redemption price per share -
Class Y $ 13.55 $ 13.23 $ 13.23
========= ========= =========
Net Asset Value
and redemption price per share - Class A $ 13.50 $ 13.18 $ 13.18
========= ========= =========
Net Asset Value
and offering price per share - Class B $ 13.47 $ 12.97 $ 12.97
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
First American Investment Funds, Inc.
International Fund
Pro Forma Combining Statement of Operations
For the Year Ended September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Pacific-
European Pro Forma Adjustments
Growth International (Note 2) Pro Forma
Fund Fund Debit Credit Combined
(000) (000) (000) (000) (000)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Investment Income:
Interest $ 70 $ 699 $ - $ - $ 769
Dividends 2,034 2,469 - - 4,503
Less: Foreign taxes withheld (218) (210) - - (428)
-------- -------- -------- -------- --------
Total investment income 1,886 2,958 - - 4,844
-------- -------- -------- -------- --------
Expenses:
Investment advisory fees 937 2,144 1,562(b) 937(b) 3,706
Less: Waiver of investment advisory fees - - - 971(b) (971)
Administrative, accounting and custodian fees 419 624 455(b) 419(b) 1,079
Transfer agent fees 141 31 90(c) 141(c) 121
Amortization of organizational costs - 6 - - 6
Directors' fees 9 4 1(c) 9(c) 5
Registration fees 46 17 10(c) 46(c) 27
Professional fees 72 10 6(c) 72(c) 16
Printing 97 6 4(c) 97(c) 10
Pricing fees - 15 9(c) - 24
Distribution fees - FAIF Retail Class A - 9 289(b) - 298
Distribution fees - Piper Class A 578 - - 578(b) -
Less: Waiver of Piper Class A distribution fees (197) - 197(b) - -
Distribution fees - FAIF Retail Class B - 15 - - 15
Other 22 2 1(c) 22(c) 3
-------- -------- -------- -------- --------
Net expenses before expenses paid indirectly 2,124 2,883 2,624 3,292 4,339
Less: Expenses paid indirectly (3) - - - (3)
-------- -------- -------- -------- --------
Total net expenses 2,121 2,883 2,624 3,292 4,336
-------- -------- -------- -------- --------
Investment income (loss) - net (235) 75 (2,624) (3,292) 508
-------- -------- -------- -------- --------
Realized and Unrealized Gains (Losses) on Investments
and Foreign Currency Transactions
Net realized gain on investments 1,445 5,280 - - 6,725
Net realized gain (loss) on forward foreign currency
contracts and foreign currency transactions (581) 11,283 - - 10,702
Net change in unrealized appreciation/(depreciation)
of investments, forward foreign currency contracts,
foreign currency and translation of other assets
and liabilities in foreign currency 6,160 31,468 - - 37,628
-------- -------- -------- -------- --------
Net gain on investments and foreign currency transactions 7,024 48,031 - - 55,055
-------- -------- -------- -------- --------
Net increase in net assets resulting from operations $ 6,789 $ 48,106 $ (2,624) $ (3,292) $ 55,563
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
First American Investment Funds, Inc
International Fund
Pro Forma Combining Schedule of Investments
September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Par/Shares Value
---------- -----
Pacific
Pacific European International Pro Forma
European International Pro Forma Growth Fund Fund Combined
Growth Fund Fund Combined Security (000) (000) (000)
- ----------- ---- -------- -------- ----- ------ -----
COMMON STOCKS- 88.5% (Percentages represent pro forma value of investments compared to pro forma net assets)
<S> <C> <C> <C> <C> <C> <C>
ARGENTINA- 0.2%
4,600 - 4,600 INVERSIONES Y REPRESENTACIONES $ 204 $ - $ 204
13,800 - 13,800 TELECOM ARGENTINA 420 - 420
-----------------------------------
624 - 624
-----------------------------------
AUSTRALIA- 0.8%
17,000 - 17,000 BRAMBLES INDUSTRIES 354 - 354
260,000 - 260,000 FUTURIS 384 - 384
120,000 - 120,000 GIO AUSTRALIA HOLDINGS 357 - 357
30,000 - 30,000 LEND LEASE 713 - 713
148,000 - 148,000 REINSURANCE AUSTRALIA 403 - 403
38,000 - 38,000 WESTPAC BANKING CORP 240 - 240
-----------------------------------
2,451 - 2,451
-----------------------------------
BRAZIL- 0.4%
- 6,300 6,300 TELEBRAS - 811 811
4,700 - 4,700 TELECOMUNICACOES BRASILEIRAS 605 - 605
-----------------------------------
605 811 1,416
-----------------------------------
CANADA- 1.6%
- 25,300 25,300 CANADIAN IMPERIAL BANK - 729 729
- 20,600 20,600 CANADIAN NATIONAL RAILWAY - 1,071 1,071
- 21,000 21,000 NORTHERN TELECOM - 2,187 2,187
- 24,100 24,100 ROYAL BANK OF CANADA - 1,184 1,184
-----------------------------------
- 5,171 5,171
-----------------------------------
CHILE- 0.2%
15,500 - 15,500 ENERSIS 574 - 574
-----------------------------------
DENMARK- 0.1%
- 4,100 4,100 NOVO NORDISK - 458 458
-----------------------------------
FINLAND- 0.6%
- 5,800 5,800 NOKIA - 544 544
- 39,400 39,400 POHJOLA - 1,409 1,409
-----------------------------------
- 1,953 1,953
-----------------------------------
FRANCE- 9.9%
- 38,600 38,600 CAP GEMINI SOGETI - 2,507 2,507
- 6,160 6,160 L'OREAL - 2,468 2,468
4,980 - 4,980 PINAULT 2,342 - 2,342
- 4,000 4,000 PROMODES - 1,563 1,563
52,500 62,000 114,500 RHONE POULENC 2,093 2,468 4,561
33,400 7,400 40,800 SCHNEIDER 2,113 467 2,580
- 19,400 19,400 SGS THOMSON MICRO - 1,829 1,829
- 58,000 58,000 SOC NAT ELF AQUITAINE - 7,749 7,749
See accompanying notes to financial statements.
<PAGE>
FRANCE (Continued)
17,700 33,500 51,200 TOTAL $ 2,030 $ 3,837 $ 5,867
- 6,400 6,400 VALEO - 421 421
-----------------------------------
8,578 23,309 31,887
-----------------------------------
GERMANY- 9.8%
- 34,800 34,800 ADIDAS AG - 4,530 4,530
- 9,200 9,200 ALLIANZ - 2,226 2,226
52,200 13,300 65,500 BAYER 2,083 529 2,612
- 900 900 BAYERISCHE MOTOREN WERKE - 765 765
- 31,600 31,600 COMMERZBANK AG - 1,140 1,140
- 22,000 22,000 DAIMLER-BENZ AG - 1,818 1,818
31,000 48,600 79,600 DEUTSCHE BANK 2,188 3,412 5,600
- 12,500 12,500 DRESDNER BANK - 574 574
4,135 5,800 9,935 MANNESMANN 1,975 2,758 4,733
6,200 - 6,200 METRO AG 286 - 286
- 3,700 3,700 S G L CARBON - 540 540
- 18,500 18,500 SCHERING - 1,941 1,941
- 14,600 14,600 SIEMENS - 985 985
9,320 - 9,320 THYSSEN 2,179 - 2,179
29,900 - 29,900 VEBA 1,752 - 1,752
- 1,500 1,500 VOLKSWAGEN - 1,041 1,041
-----------------------------------
10,463 22,259 32,722
-----------------------------------
HONG KONG- 3.0%
80,000 278,000 358,000 CHEUNG KONG 899 3,126 4,025
165,000 - 165,000 DAO HENG BANK GROUP 744 - 744
- 102,800 102,800 HSBC HLDGS - 3,441 3,441
90,000 - 90,000 HUTCHISON WHAMPOA 887 - 887
170,000 - 170,000 HYSAN DEVELOPMENT 509 - 509
-----------------------------------
3,039 6,567 9,606
-----------------------------------
INDONESIA- 0.0%
1,500 - 1,500 GULF INDONESIA 33 - 33
-----------------------------------
IRELAND- 1.0%
- 64,400 64,400 ELAN - 3,224 3,224
-----------------------------------
ISRAEL- 0.3%
- 26,900 26,900 ECI TELECOM - 871 871
-----------------------------------
ITALY- 2.5%
- 522,000 522,000 CREDITO ITALIANO - 1,410 1,410
279,100 - 279,100 ENTE NAZIONALE IDROCARBURI 1,762 - 1,762
- 549,000 549,000 PARMALAT FINANZIARIA - 942 942
- 200,000 200,000 PIRELLI - 586 586
- 600,000 600,000 TELECOM ITALIA MOBILE - 2,382 2,382
- 99,000 99,000 TELECOM ITALIA - 660 660
- 116,000 116,000 TELECOM ITALIA RINASCENTE - 451 451
-----------------------------------
1,762 6,431 8,193
-----------------------------------
JAPAN- 17.7%
- 12,800 12,800 ADVANTEST - 1,263 1,263
30,000 - 30,000 AOYAMA TRADING 862 - 862
20,000 - 20,000 BANK OF TOKYO - MITSIBUSHI 382 - 382
25,000 40,000 65,000 BRIDGESTONE 602 962 1,564
35,000 130,000 165,000 CANON 1,026 3,804 4,830
See accompanying notes to financial statements.
<PAGE>
JAPAN (Continued)
40,000 - 40,000 CANON SALES $ 791 $ - $ 791
120 - 120 DDI 604 - 604
24,000 38,000 62,000 FUJI PHOTO FILM 993 1,569 2,562
100,000 - 100,000 FUJIKURA 717 - 717
70,000 179,000 249,000 FUJITSU 878 2,241 3,119
- 7,000 7,000 HIROSE ELECTRIC - 516 516
90,000 - 90,000 HITACHI 785 - 785
18,000 - 18,000 HONDA MOTOR 630 - 630
70,000 - 70,000 ISETAN 675 - 675
15,000 - 15,000 KYOCERA 983 - 983
- 63,000 63,000 MATSUSHITA COMMUNICATIONS - 2,011 2,011
50,000 - 50,000 MATSUSHITA ELECTRIC INDUSTRIAL 906 - 906
100,000 - 100,000 MATSUSHITA ELECTRIC WORKS 1,047 - 1,047
110,000 - 110,000 MITSUI & CO 867 - 867
70,000 - 70,000 MITSUI FUDOSAN 855 - 855
50,000 - 50,000 MORI SEIKI 586 - 586
- 21,000 21,000 MURATA MANUFACTURING - 909 909
- 130,000 130,000 NIKON - 2,048 2,048
10,000 - 10,000 NIPPON TELEPHONE AND TELEGRAPH 922 - 922
150,000 - 150,000 NISSAN MOTOR 897 - 897
30,000 - 30,000 ONO PHARMACEUTICAL 895 - 895
- 62,000 62,000 RICOH - 930 930
- 16,000 16,000 ROHM CO - 1,883 1,883
- 126,000 126,000 SANKYO - 4,366 4,366
88,000 - 88,000 SEKISUI CHEMICAL 665 - 665
1,800 - 1,800 SHOHKOH FUND 504 - 504
6,000 57,300 63,300 SONY CORP 568 5,415 5,983
350,000 - 350,000 SUMITOMO METAL INDUSTRIES 730 - 730
45,000 - 45,000 SUMITOMO TRUST AND BANKING 449 - 449
- 151,000 151,000 TAKEDA CHEMICAL - 4,531 4,531
- 13,000 13,000 TDK - 1,164 1,164
- 52,000 52,000 TOKYO ELECTRONICS - 3,177 3,177
185,000 - 185,000 TOKYU LAND CORP 478 - 478
-----------------------------------
20,297 36,789 57,086
-----------------------------------
MALAYSIA- 0.1%
120,000 - 120,000 GUINNESS ANCHOR 185 - 185
-----------------------------------
MEXICO- 1.5%
66,400 - 66,400 CEMEX 345 - 345
47,200 - 47,200 FOMENTO ECONOMICO MEXICANO 407 - 407
59,606 - 59,606 GRUMA 289 - 289
- 80,000 80,000 GRUPO ELEKTRA - 1,293 1,293
- 15,000 15,000 GRUPO IMSA - 455 455
- 825,000 825,000 GRUPO POSADAS - 597 597
60,700 - 60,700 KIMBERLY CLARK 312 - 312
- 26,000 26,000 TELEFONOS DE MEXICO - 1,345 1,345
-----------------------------------
1,353 3,690 5,043
-----------------------------------
NETHERLANDS- 11.4%
- 63,200 63,200 ABN AMRO HLDGS - 1,281 1,281
- 11,500 11,500 AEGON - 922 922
- 19,900 19,900 AHOLD - 538 538
- 55,700 55,700 ASM LITHO HOLDINGS - 5,500 5,500
- 65,000 65,000 BAAN - 4,615 4,615
See accompanying notes to financial statements.
<PAGE>
NETHERLANDS (Continued)
- 14,000 14,000 FORTIS AMEV $ - $ 585 $ 585
- 40,000 40,000 GETRONICS - 1,253 1,253
21,700 105,000 126,700 ING GROEP 999 4,825 5,824
96,000 - 96,000 KONINKLIJKE AHOLD 2,602 - 2,602
- 19,000 19,000 NUTRICIA VERENIDE BEDRIJVEN - 571 571
- 112,000 112,000 ROYAL DUTCH PETROLEUM - 6,273 6,273
- 9,100 9,100 UNILEVER - 1,944 1,944
122,500 - 122,500 VERENIGDE NEDERLANDSE 2,851 - 2,851
- 41,800 41,800 VNU - 971 971
- 7,500 7,500 WOLTERS KLUWER - 1,012 1,012
-----------------------------------
6,452 30,290 36,742
-----------------------------------
NEW ZEALAND- 0.0%
81,000 - 81,000 RESTAURANT BRANDS NEW ZEALAND 123 - 123
-----------------------------------
PAPUA NEW GUINEA- 0.2%
195,000 - 195,000 OROGEN MINERALS 559 - 559
-----------------------------------
SINGAPORE- 0.5%
64,400 - 64,400 CITY DEVELOPMENTS 417 - 417
61,000 - 61,000 DEVELOPMENT BANK OF SINGAPORE 622 - 622
68,000 - 68,000 UNITED OVERSEAS BANK 503 - 503
-----------------------------------
1,542 - 1,542
-----------------------------------
SPAIN- 1.2%
63,000 - 63,000 BANCO BILBAO VIZCAYA 1,945 - 1,945
- 8,000 8,000 BANCO POPULAR - 515 515
- 43,600 43,600 TELEFONICA DE ESPANA - 1,371 1,371
-----------------------------------
1,945 1,886 3,831
-----------------------------------
SWEDEN- 5.5%
- 259,600 259,600 ASEA - 3,659 3,659
87,500 - 87,500 ASTRA 1,618 - 1,618
- 57,100 57,100 ATLAS - 1,941 1,941
- 14,000 14,000 ELECTROLUX - 1,094 1,094
- 170,000 170,000 ERICSSON PHONE - 8,149 8,149
28,000 - 28,000 NORDBANKEN 958 - 958
- 16,100 16,100 SECURITAS - 383 383
-----------------------------------
2,576 15,226 17,802
-----------------------------------
SWITZERLAND- 7.5%
1,110 - 1,110 ABB AG BEARER 1,640 - 1,640
- 7,750 7,750 ADECCO - 3,120 3,120
- 21,500 21,500 CREDIT SUISSE GROUP - 2,908 2,908
- 1,830 1,830 NESTLE - 2,552 2,552
1,360 3,000 4,360 NOVARTIS 2,092 4,604 6,696
- 320 320 ROCHE HOLDINGS - 2,841 2,841
- 1,200 1,200 SCHWEIZ RUCKVERSICHERUNG - 1,801 1,801
2,221 - 2,221 UNION BANK OF SWITZERLAND 2,603 - 2,603
-----------------------------------
6,335 17,826 24,161
-----------------------------------
UNITED KINGDOM- 12.5%
- 24,700 24,700 AIRTOURS - 419 419
40,000 - 40,000 BARCLAYS 1,077 - 1,077
145,000 - 145,000 BBA 988 - 988
See accompanying notes to financial statements.
<PAGE>
UNITED KINGDOM (Continued)
48,000 20,400 68,400 BRITISH AEROSPACE $ 1,272 $ 547 $ 1,819
127,000 71,900 198,900 BRITISH PETROLEUM 1,918 1,084 3,002
130,000 - 130,000 BRITISH TELECOM 858 - 858
- 129,000 129,000 ENTERPRISE OIL - 1,408 1,408
120,000 - 120,000 GENERAL ELECTRIC 756 - 756
33,500 - 33,500 GKN 759 - 759
41,000 110,000 151,000 GLAXO WELLCOME 923 2,472 3,395
26,500 - 26,500 HSBC HOLDINGS 1,297 - 1,297
- 126,000 126,000 IMPERIAL CHEMICAL - 2,042 2,042
140,000 - 140,000 LEGAL & GENERAL GROUP 1,090 - 1,090
130,000 - 130,000 LLOYDS TSB GROUP 1,747 - 1,747
- 54,000 54,000 LOGICA - 769 769
119,400 - 119,400 MARKS & SPENCERS 1,222 - 1,222
- 79,400 79,400 NEXT - 929 929
- 198,200 198,200 RECKIT & COLMAN - 3,039 3,039
90,497 - 90,497 SEAPERFECT - - -
- 650,000 650,000 SMITHKLINE BEECHAM UNITS - 6,300 6,300
90,000 - 90,000 TI GROUP 966 - 966
18,200 - 18,200 UNILEVER 533 - 533
133,000 - 133,000 WOLSELEY 1,093 - 1,093
39,000 102,200 141,200 ZENECA 1,275 3,329 4,604
-----------------------------------
17,774 22,338 40,112
-----------------------------------
TOTAL COMMON STOCKS 87,270 199,099 286,369
-----------------------------------
PREFERRED STOCKS- 5.6%
25,150 - 25,150 CENTRAIS ELECTRICAS BRASILEIRAS 699 - 699
- 2,359,000 2,359,000 ELETROBRAS - 1,311 1,311
180,000,000 - 180,000,000 FUJI INTERNATIONAL FINANCE TRUST 1,407 - 1,407
- 75,000 75,000 NOKIA - 7,052 7,052
- 29,200 29,200 SAP - 7,828 7,828
----------------------------------
TOTAL PREFERRED STOCKS 2,106 16,191 18,297
----------------------------------
CONVERTIBLE CORPORATE NOTES & BONDS- 0.8%
$11,854,100 $ - $11,854,100 FINAXA , 2.75%, 01/01/06 2,108 - 2,108
55,000,000 - 55,000,000 STB CAYMAN CAPITAL , 0.50%, 10/01/97 509 - 509
----------------------------------
TOTAL CONVERTIBLE CORPORATE NOTES
& BONDS 2,617 - 2,617
----------------------------------
REPURCHASE AGREEMENTS- 5.7%
- 16,009,660 16,009,660 MERRILL LYNCH, 6.03%, 10/01/97 - 16,010 16,010
2,440,000 - 2,440,000 GOLDMAN SACHS, 6.15%, 10/01/07 2,440 - 2,440
----------------------------------
TOTAL REPURCHASE AGREEMENTS 2,440 16,010 18,450
----------------------------------
TOTAL INVESTMENTS (Cost $81,741,
$189,084, and $270,825,
respectively) $ 94,433 $ 231,300 $ 325,733
==================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
NOTES TO PRO FORMA STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION
The unaudited pro forma combining Statements of Assets and Liabilities,
Statements of Operations and Schedules of Investments give effect to the
proposed acquisition of the Piper Intermediate Bond Fund (Intermediate Bond),
Piper Growth Fund (Growth), Piper Small Company Growth Fund (Small Company
Growth) and Piper Pacific-European Growth Fund (Pacific-European Growth) (the
Piper Funds) by the corresponding First American Investment Funds, Inc. (the
FAIF Funds) which include the First American Intermediate Term Income Fund
(Intermediate Term Income), First American Large Cap Growth Fund (Large Cap
Growth) (formerly First American Diversified Growth Fund), First American Small
Cap Growth Fund (Small Cap Growth)(formerly First American Emerging Growth Fund)
and First American International Fund (International Fund) (collectively, the
Funds). The proposed acquisition will be accounted for by the method of
accounting for tax free mergers of investment companies (sometimes referred to
as the pooling without restatement method). The acquisition will be accomplished
by an exchange of all outstanding shares of each class for each Piper Fund in
exchange for shares of specified classes of the corresponding FAIF Fund. For
financial reporting purposes the accounting survivors will be the FAIF
Intermediate Term Income Fund, FAIF Large Cap Growth Fund, Piper Small Company
Growth Fund and FAIF International Fund.
The pro forma combining schedules of investments do not reflect any changes
which could occur before or after the acquisition closing date due to changes in
market conditions or differences in investment management practices of the Funds
compared with the Piper Funds. However, aside from portfolio decisions made as a
result of market condition changes that have or may occur between the date of
the pro forma financial statements and the acquisition closing date, management
does not have any specific plans at this time regarding the disposition of
investments presented in the pro forma schedules of investments that would have
a material impact on the presentation of such schedules.
The pro forma combining statements should be read in conjunction with the
historical financial statements of the constituent funds and the notes thereto
incorporated by reference in the Statement of Additional Information.
Intermediate Term Income Fund, Large Cap Growth Fund, Small Cap Growth Fund and
International Fund are portfolios offered by First American Investment Funds,
Inc. (FAIF) a diversified, open-end, management investment company registered
under the Investment Company Act of 1940, as amended. FAIF presently includes a
series of twenty-six funds.
<PAGE>
2. PRO FORMA ADJUSTMENTS
(a) The pro forma combining statements of assets and liabilities
assumes the issuance of additional shares of the FAIF Funds as
if the reorganization were to have taken place on September 30,
1997 and is based on the net asset value of the acquiring fund.
Transactions in shares of capital stock are as follows:
8,391,288, 15,788,836, 3,725,085 and 5,836,071 Class A shares
and 0, 16,426, 50,254 and 4,120 Class B shares of Intermediate
Bond, Growth, Small Company Growth and Pacific-European Growth,
respectively, exchanged for 6,440,144, 11,467,025, 2,058,545 and
5,983,142 Class A shares of Intermediate Term Income Fund, Large
Cap Growth Fund, Small Cap Growth Fund and International Fund,
respectively; and 1,821,360 and 1,111,928 Class Y shares of
Intermediate Bond and Pacific-European Growth, respectively,
exchanged for 1,401,333 and 1,138,410 Class Y (formerly
Institutional Class) shares Intermediate Term Income Fund and
International Fund, respectively.
(b) The pro forma adjustments to investment advisory fees (including
waivers), administrative fees, custodian fees and distribution
fees (including waivers) reflect the difference in fees charged
by the FAIF Funds based upon the effective fee schedule.
U.S. Bank National Association has agreed to waive fees and
reimburse expenses through September 30, 1998, to the extent
necessary to maintain overall total Fund operating expense
ratios at the pro forma expense levels as follows:
Class A Institutional Class
------- -------------------
Intermediate Term Income 0.70% 0.70%
Large Cap Growth 1.05 0.80
Small Cap Growth 1.15 0.90
International 1.60 1.35
(c) The pro forma adjustments to transfer agent fees, directors'
fees, registration fees, professional fees, printing expenses
and other expenses reflect the expected savings due to the
combination of the funds.
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
PART C - OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
The first four paragraphs of Item 27 of Part C of Pre-Effective
Amendment No. 1 to the Registrant's Registration Statement on Form N-1A, dated
November 27, 1987, are incorporated herein by reference.
On February 18, 1988 the indemnification provisions of the Maryland
General Corporation Law (the "Law") were amended to permit, among other things,
corporations to indemnify directors and officers unless it is proved that the
individual (1) acted in bad faith or with active and deliberate dishonesty, (2)
actually received an improper personal benefit in money, property or services,
or (3) in the case of a criminal proceeding, had reasonable cause to believe
that his act or omission was unlawful. The Law was also amended to permit
corporations to indemnify directors and officers for amounts paid in settlement
of stockholders' derivative suits.
The Registrant undertakes that no indemnification or advance will be
made unless it is consistent with Sections 17(h) or 17(i) of the Investment
Company Act of 1940, as now enacted or hereafter amended, and Securities and
Exchange Commission rules, regulations, and releases (including, without
limitation, Investment Company Act of 1940 Release No. 11330, September 2,
1980).
Insofar as the indemnification for liability arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in such Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any action,
suit, or proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
The Registrant maintains officers' and directors' liability
insurance providing coverage, with certain exceptions, for acts and omissions in
the course of the covered persons' duties as officers and directors.
ITEM 16. EXHIBITS.
1. Amended and Restated Articles of Incorporation, as
supplemented through March 30, 1998. (Incorporated by
reference to Post-Effective Amendment No. 36 to the
Registrant's Registration Statement on Form N-1A, File
No. 33-16905.)
2. Bylaws, as amended through February 23, 1998.
(Incorporated by reference to Post-Effective Amendment
No. 36 to the Registrant's Registration Statement on
Form N-1A, File No. 33-16905.)
<PAGE>
3. Not applicable.
* 4.1 Agreement and Plan of Reorganization by and between the
Registrant and Piper Funds Inc., attached as Appendix
IIIa to the Prospectus/Proxy Statement included in Part
A of this Registration Statement on Form N-14.
4.2 Agreement and Plan of Reorganization by and between the
Registrant and Piper Funds Inc.-II, attached as
Appendix IIIb to the Proxy Statement/Prospectus included
in Part A of the Registration Statement on Form N-14.
4.3 Agreement and Plan of Reorganization by and between the
Registrant and Piper Global Funds Inc. attached as
Appendix IIIc to the Proxy Statement/Prospectus included
in Part A of this Registration Statement on Form N-14.
5. Not applicable.
6.1 Investment Advisory Agreement dated April 2, 1991
between Registrant and First Bank National Association,
as amended and supplemented through August 1994.
(Incorporated by reference to Post-Effective Amendment
No. 21 to the Registrant's Registration Statement on
Form N-1A, File No. 33-16905.)
6.2 Sub-Advisory Agreement dated March 28, 1994 relating to
International Fund between First Bank National
Association and Marvin & Palmer Associates, Inc.
(Incorporated by reference to Post-Effective Amendment
No. 21 to the Registrant's Registration Statement on
Form N-1A, File No. 33-16905.)
6.3 Amendment No. 8 to Investment Advisory Agreement.
(Incorporated by reference to Post-Effective Amendment
No. 34 to the Registrant's Registration Statement on
Form N-1A, File No. 33-16905.)
6.4 Amendment No. 1 to Sub-Advisory Agreement. (Incorporated
by reference to Post-Effective Amendment No. 34 to the
Registrant's Registration Statement on Form N-1A, File
No. 33-16905.)
7.1 Distribution Agreement [Class A and Class C shares]
dated February 10, 1994 between Registrant and SEI
Financial Services Company. (Incorporated by reference
to Post-Effective Amendment No. 21 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
7.2 Distribution and Service Agreement [Class B shares]
dated August 1, 1994, as amended September 14, 1994,
between Registrant and SEI Financial Services Company.
(Incorporated by reference to Post-Effective Amendment
No. 21 to the Registrant's Registration Statement on
Form N-1A, File No. 33-16905.)
7.3 Form of Dealer Agreement. (Incorporated by reference to
Post-Effective Amendment No. 21 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
8. Not applicable.
9.1 Custodian Agreement dated September 20, 1993, between
Registrant and First Trust National Association, as
supplemented through August 1994. (Incorporated by
<PAGE>
reference to Post-Effective Amendment No. 18 to the
Registrant's Registration Statement on Form N-1A, File
No. 33- 16905.)
9.2 Compensation Agreement dated June 1, 1995, pursuant to
Custodian Agreement. (Incorporated by reference to
Post-Effective Amendment No. 24 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
9.3 Compensation Agreement dated January 1, 1997, pursuant
to Custodian Agreement. (Incorporated by reference to
Post-Effective Amendment No. 27 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
9.4 Compensation Agreement dated January 1, 1997, pursuant
to Custodian Agreement. (Incorporated by reference to
Post-Effective Amendment No. 27 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
9.5 Compensation Agreement dated August 5, 1997, pursuant to
Custodian Agreement. (Incorporated by reference to
Post-Effective Amendment No. 34 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
9.6 Compensation Agreement dated November 21, 1997, pursuant
to Custodian Agreement. (Incorporated by reference to
Post-Effective Amendment No. 34 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
10.1 Form of Distribution Plan [Class A shares].
(Incorporated by reference to Post-Effective Amendment
No. 21 to the Registrant's Registration Statement on
Form N-1A, File No. 33-16905.)
10.2 Distribution Plan [Class B shares]. (Incorporated by
reference to Post-Effective Amendment No. 21 to the
Registrant's Registration Statement on Form N-1A, File
No. 33-16905.)
10.3 Service Plan [Class B shares]. (Incorporated by
reference to Post-Effective Amendment No. 21 to the
Registrant's Registration Statement on Form N-1A, File
No. 33-16905.)
10.4 Multiple Class Plan Pursuant to Rule 18f-3.
(Incorporated by reference to Post-Effective Amendment
No. 23 to the Registrant's Registration Statement on
Form N-1A, File No. 33-16905.)
* 11. Opinion and Consent of Dorsey & Whitney LLP with respect
to the legality of the securities being registered.
** 12. Opinion and Consent of Dorsey & Whitney LLP with respect
to tax matters.
13.1 Administration Agreement dated January 1, 1995 between
Registrant and SEI Financial Management Corporation.
(Incorporated by reference to Post-Effective Amendment
No. 23 to the Registrant's Registration Statement on
Form N-1A, File No. 33-16905.)
<PAGE>
13.2 Form of Transfer Agency Agreement dated October 1, 1996
between Registrant and DST Systems, Inc. (Incorporated
by reference to Post-Effective Amendment No. 27 to the
Registrant's Registration Statement on Form N-1A, File
No. 33-16905.)
13.3 Sub-Administration Agreement effective January 1, 1998
between SEI and First Bank National Association.
(Incorporated by reference to Post-Effective Amendment
No. 31 to the Registrant's Registration Statement on
Form N-1A, File No. 33-16905.)
13.4 Amended and Restated Administration Agreement dated July
1, 1997 between Registrant and SEI Investments
Management Corporation. (Incorporated by reference to
Post-Effective Amendment No. 31 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
13.5 Agreement dated July 1, 1997 between SEI and First Bank
National Association. (Incorporated by reference to
Post-Effective Amendment No. 31 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
13.6 Agreement dated July 1, 1997 between First Bank National
Association and SEI Investments Management Corporation.
(Incorporated by reference to Post-Effective Amendment
No. 31 to the Registrant's Registration Statement on
Form N-1A, File No. 33-16905.)
* 14.1 Consent of KPMG Peat Marwick LLP.
* 14.2 Consent of KPMG Peat Marwick LLP.
15. Not applicable.
* 16.1 Power of Attorney of Director Dayton.
* 16.2 Power of Attorney of Director Hunter.
* 16.3 Power of Attorney of Director Kedrowski.
* 16.4 Power of Attorney of Director Strauss.
* 16.5 Power of Attorney of Director Stringer.
* 16.6 Power of Attorney of Director Gibson.
* 17.1 Form of Proxy Card.
* 17.2 Rule 24f-2 Notice filed December 9, 1997.
* Filed herewith.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus which is
a part of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until
<PAGE>
the amendment is effective, and that, in determining any liability under the
1933 Act, each post-effective amendment shall be deemed to be a new registration
statement for the securities offered therein, and the offering of the securities
at that time shall be deemed to be the initial bona fide offering of them.
(3) The undersigned Registrant agrees to file, by post-effective
amendment, an opinion of counsel or a copy of a ruling of the Internal Revenue
Service supporting the tax consequences of the proposed reorganization within a
reasonable time after receipt of such opinion or ruling.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this registration
statement has been signed on behalf of the registrant, in the City of Oaks,
Commonwealth of Pennsylvania, on the 15th day of April, 1998.
FIRST AMERICAN INVESTMENT FUNDS, INC.
ATTEST: /s/ Michael G. Beattie By: /s/ Kathryn L. Stanton
-------------------------------- ---------------------------------
Michael G. Beattie Kathryn L. Stanton
Acting President and
Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacity and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Michael G. Beattie Controller **
- ------------------------------- (Principal Financial and
Michael G. Beattie Accounting Officer)
* Director **
- -------------------------------
Robert J. Dayton
* Director **
- -------------------------------
Roger A. Gibson
* Director **
- -------------------------------
Andrew M. Hunter III
* Director **
- -------------------------------
Leonard W. Kedrowski
Director **
- -------------------------------
Robert L. Spies
* Director **
- -------------------------------
Joseph D. Strauss
* Director **
- -------------------------------
Virginia L. Stringer
* By: /s/ Kathryn L. Stanton
-------------------------------
Kathryn L. Stanton
Attorney in Fact
** April 15, 1998
EXHIBIT 11
[LETTERHEAD OF DORSEY & WHITNEY LLP]
April 15, 1998
First American Investment Funds, Inc.
Oaks, Pennsylvania 19456
Re: First American Investment Funds, Inc.
Shares to be Issued Pursuant to Agreement and Plan of Reorganization
Ladies and Gentlemen:
We have acted as counsel to First American Investment Funds, Inc., a
Maryland corporation ("FAIF"), in connection with FAIF's authorization and
proposed issuance of its Class A and Class Y common shares, par value $.0001 per
share, of Small Cap Growth Fund, Mid Cap Growth Fund, Large Cap Growth Fund,
Large Cap Value Fund, Balanced Fund, Minnesota Tax Free Fund, Tax Free Fund,
Intermediate Term Income Fund, Fixed Income Fund, Adjustable Rate Mortgage
Securities Fund, International Fund and Emerging Markets Fund (the "Shares").
The Shares are to be issued pursuant to Agreements and Plans of Reorganization
(the "Agreement"), by and between FAIF (the "Acquiring Fund"), and Piper Fund
Inc., Piper Funds Inc.--II, Piper Global Funds Inc. (the "Acquired Fund"), the
form of which Agreements are included as Appendices IIIa, IIIb, IIIc,
respectively, to the Combined Proxy Statement /Prospectus relating to the
transactions contemplated by the Agreement included in FAIF's Registration
Statement on Form N-14 filed with the Securities and Exchange Commission (the
"Registration Statement").
In rendering the opinions hereinafter expressed, we have reviewed the
corporate proceedings taken by FAIF in connection with the authorization and
issuance of the Shares, and we have reviewed such questions of law and examined
copies of such corporate records of FAIF, certificates of public officials and
of responsible officers of FAIF, and other documents as we have deemed necessary
as a basis for such opinions. As to the various matters of fact material to such
opinions, we have, when such facts were not independently established, relied to
the extent we deem proper on certificates of public officials and of responsible
officers of FAIF. In connection with such review and examination, we have
assumed that all copies of documents provided to us conform to the originals;
that all signatures are genuine; and that prior to the consummation of the
transactions contemplated thereby, the Agreement will have been duly and validly
executed and delivered on behalf of each of the parties thereto in substantially
the form included in the Registration Statement.
<PAGE>
Based on the foregoing, it is our opinion that:
1. FAIF is validly existing as a corporation in good standing under the
laws of the State of Maryland.
2. The Shares, when issued and delivered by the Acquiring Fund pursuant
to, and upon satisfaction of the conditions contained in, the Agreement, will be
duly authorized, validly issued, fully paid and non-assessable.
In rendering the foregoing opinions (a) we express no opinion as to the
laws of any jurisdiction other than the State of Maryland and (b) we have
assumed, with your concurrence, that the conditions to closing set forth in the
Agreement will have been satisfied.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Information Relating to the Proposed Reorganization-Federal Income Tax
Consequences" in FAIF's final Combined Proxy Statement/ Prospectus relating to
the Shares included in the Registration Statement.
Very truly yours,
/s/ Dorsey & Whitney LLP
JDA
Independent Auditors' Consent
The Board of Directors
First American Investment Funds, Inc.:
We consent to the incorporation by reference in the registration statement on
Form N-14 (the "Registration Statement") of First American Investment Funds,
Inc. (the "FAIF Funds") of our report, dated November 7, 1997, relating to the
financial statements and financial highlights of the FAIF Funds. We also consent
to the references to our Firm under the headings (a) "Financial Statements" and
"Comparison of FAIF Funds and Piper Funds" in the Registration Statement, (b)
"Financial Highlights" in the prospectuses of the FAIF Funds dated January 31,
1998, which are incorporated by reference in the Registration Statement and (c)
"Custodian; Transfer Agent; Counsel; Accountants" in the statement of additional
information of the FAIF Funds dated January 31, 1998, which is incorporated by
reference in the Registration Statement.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
April 14, 1998
Independent Auditors' Consent
The Board of Directors
Piper Funds Inc,
Piper Funds Inc, -II
Piper Global Funds Inc.
We consent to the incorporation by reference in the registration statement on
Form N-14 (the "Registration Statement") of First American Investment Funds,
Inc. (the "FAIF Funds") of each of our reports dated November 7, 1997, relating
to the financial statements and financial highlights of Piper Funds Inc., Piper
Funds Inc. -II and Piper Global Funds Inc. (collectively, the "Piper Funds"). We
also consent to the references to our Firm under the headings (a) "Comparison of
FAIF Funds and Piper Funds" in the Registration Statement, (b) "Financial
Highlights" in the prospectuses of the Piper Funds dated November 24, 1997,
which are incorporated by reference in the Registration Statement and (c)
"Financial Statements" in the statements of additional information of the Piper
Funds dated November 24, 1997, which are incorporated by reference in the
Registration Statement.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
April 14, 1998
EXHIBIT 16.1
FIRST AMERICAN INVESTMENT FUNDS, INC.
POWER OF ATTORNEY -- N-14 REGISTRATION STATEMENT
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Kathryn L. Stanton, Michael J.
Radmer, and Donna Rafa, and each of them, his or her true and lawful
attorneys-in-fact and agents, each acting alone, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign a Registration Statement on Form N-14 of First
American Investment Funds, Inc. ("FAIF"), relating to the combination of Small
Company Growth Fund, Emerging Growth Fund, Growth Fund, Growth and Income Fund,
Balanced Fund, Minnesota Tax-Exempt Fund, National Tax- Exempt Fund,
Intermediate Bond Fund, Government Income Fund, Adjustable Rate Mortgage
Securities Fund, Pacific-European Growth Fund and Emerging Markets Growth Fund,
each a Series of Piper Funds Inc., Piper Funds Inc.-II or Piper Global Funds
Inc. with and into FAIF's Small Cap Growth Fund, Mid Cap Growth Fund, Large Cap
Growth Fund, Large Cap Value Fund, Balanced Fund, Minnesota Tax Free Fund, Tax
Free Fund, Intermediate Term Income Fund, Fixed Income Fund, Adjustable Rate
Mortgage Securities Fund, International Fund and Emerging Markets Growth Fund,
respectively, and any and all amendments thereto, including post-effective
amendments, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or the substitutes for such
attorneys-in-fact and agents, may lawfully do or cause to be done by virtue
hereof.
Signature Title Date
--------- ----- ----
/s/Robert J. Dayton Director April 8, 1998
- -----------------------------
Robert J. Dayton
EXHIBIT 16.2
FIRST AMERICAN INVESTMENT FUNDS, INC.
POWER OF ATTORNEY -- N-14 REGISTRATION STATEMENT
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Kathryn L. Stanton, Michael J.
Radmer, and Donna Rafa, and each of them, his or her true and lawful
attorneys-in-fact and agents, each acting alone, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign a Registration Statement on Form N-14 of First
American Investment Funds, Inc. ("FAIF"), relating to the combination of Small
Company Growth Fund, Emerging Growth Fund, Growth Fund, Growth and Income Fund,
Balanced Fund, Minnesota Tax-Exempt Fund, National Tax- Exempt Fund,
Intermediate Bond Fund, Government Income Fund, Adjustable Rate Mortgage
Securities Fund, Pacific-European Growth Fund and Emerging Markets Growth Fund,
each a Series of Piper Funds Inc., Piper Funds Inc.-II or Piper Global Funds
Inc. with and into FAIF's Small Cap Growth Fund, Mid Cap Growth Fund, Large Cap
Growth Fund, Large Cap Value Fund, Balanced Fund, Minnesota Tax Free Fund, Tax
Free Fund, Intermediate Term Income Fund, Fixed Income Fund, Adjustable Rate
Mortgage Securities Fund, International Fund and Emerging Markets Growth Fund,
respectively, and any and all amendments thereto, including post-effective
amendments, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or the substitutes for such
attorneys-in-fact and agents, may lawfully do or cause to be done by virtue
hereof.
Signature Title Date
--------- ----- ----
/s/Andrew M. Hunter III Director April 8, 1998
- -----------------------------
Andrew M. Hunter III
EXHIBIT 16.3
FIRST AMERICAN INVESTMENT FUNDS, INC.
POWER OF ATTORNEY -- N-14 REGISTRATION STATEMENT
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Kathryn L. Stanton, Michael J.
Radmer, and Donna Rafa, and each of them, his or her true and lawful
attorneys-in-fact and agents, each acting alone, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign a Registration Statement on Form N-14 of First
American Investment Funds, Inc. ("FAIF"), relating to the combination of Small
Company Growth Fund, Emerging Growth Fund, Growth Fund, Growth and Income Fund,
Balanced Fund, Minnesota Tax-Exempt Fund, National Tax- Exempt Fund,
Intermediate Bond Fund, Government Income Fund, Adjustable Rate Mortgage
Securities Fund, Pacific-European Growth Fund and Emerging Markets Growth Fund,
each a Series of Piper Funds Inc., Piper Funds Inc.-II or Piper Global Funds
Inc. with and into FAIF's Small Cap Growth Fund, Mid Cap Growth Fund, Large Cap
Growth Fund, Large Cap Value Fund, Balanced Fund, Minnesota Tax Free Fund, Tax
Free Fund, Intermediate Term Income Fund, Fixed Income Fund, Adjustable Rate
Mortgage Securities Fund, International Fund and Emerging Markets Growth Fund,
respectively, and any and all amendments thereto, including post-effective
amendments, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or the substitutes for such
attorneys-in-fact and agents, may lawfully do or cause to be done by virtue
hereof.
Signature Title Date
--------- ----- ----
/s/Leonard W. Kedrowski Director April 8, 1998
- -----------------------------
Leonard W. Kedrowski
EXHIBIT 16.4
FIRST AMERICAN INVESTMENT FUNDS, INC.
POWER OF ATTORNEY -- N-14 REGISTRATION STATEMENT
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Kathryn L. Stanton, Michael J.
Radmer, and Donna Rafa, and each of them, his or her true and lawful
attorneys-in-fact and agents, each acting alone, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign a Registration Statement on Form N-14 of First
American Investment Funds, Inc. ("FAIF"), relating to the combination of Small
Company Growth Fund, Emerging Growth Fund, Growth Fund, Growth and Income Fund,
Balanced Fund, Minnesota Tax-Exempt Fund, National Tax- Exempt Fund,
Intermediate Bond Fund, Government Income Fund, Adjustable Rate Mortgage
Securities Fund, Pacific-European Growth Fund and Emerging Markets Growth Fund,
each a Series of Piper Funds Inc., Piper Funds Inc.-II or Piper Global Funds
Inc. with and into FAIF's Small Cap Growth Fund, Mid Cap Growth Fund, Large Cap
Growth Fund, Large Cap Value Fund, Balanced Fund, Minnesota Tax Free Fund, Tax
Free Fund, Intermediate Term Income Fund, Fixed Income Fund, Adjustable Rate
Mortgage Securities Fund, International Fund and Emerging Markets Growth Fund,
respectively, and any and all amendments thereto, including post-effective
amendments, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or the substitutes for such
attorneys-in-fact and agents, may lawfully do or cause to be done by virtue
hereof.
Signature Title Date
--------- ----- ----
/s/Joseph D. Strauss Director April 8, 1998
- -----------------------------
Joseph D. Strauss
EXHIBIT 16.5
FIRST AMERICAN INVESTMENT FUNDS, INC.
POWER OF ATTORNEY -- N-14 REGISTRATION STATEMENT
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Kathryn L. Stanton, Michael J.
Radmer, and Donna Rafa, and each of them, his or her true and lawful
attorneys-in-fact and agents, each acting alone, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign a Registration Statement on Form N-14 of First
American Investment Funds, Inc. ("FAIF"), relating to the combination of Small
Company Growth Fund, Emerging Growth Fund, Growth Fund, Growth and Income Fund,
Balanced Fund, Minnesota Tax-Exempt Fund, National Tax- Exempt Fund,
Intermediate Bond Fund, Government Income Fund, Adjustable Rate Mortgage
Securities Fund, Pacific-European Growth Fund and Emerging Markets Growth Fund,
each a Series of Piper Funds Inc., Piper Funds Inc.-II or Piper Global Funds
Inc. with and into FAIF's Small Cap Growth Fund, Mid Cap Growth Fund, Large Cap
Growth Fund, Large Cap Value Fund, Balanced Fund, Minnesota Tax Free Fund, Tax
Free Fund, Intermediate Term Income Fund, Fixed Income Fund, Adjustable Rate
Mortgage Securities Fund, International Fund and Emerging Markets Growth Fund,
respectively, and any and all amendments thereto, including post-effective
amendments, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or the substitutes for such
attorneys-in-fact and agents, may lawfully do or cause to be done by virtue
hereof.
Signature Title Date
--------- ----- ----
/s/Virginia L. Stringer Director April 8, 1998
- -----------------------------
Virginia L. Stringer
EXHIBIT 16.6
FIRST AMERICAN INVESTMENT FUNDS, INC.
POWER OF ATTORNEY -- N-14 REGISTRATION STATEMENT
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Kathryn L. Stanton, Michael J.
Radmer, and Donna Rafa, and each of them, his or her true and lawful
attorneys-in-fact and agents, each acting alone, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign a Registration Statement on Form N-14 of First
American Investment Funds, Inc. ("FAIF"), relating to the combination of Small
Company Growth Fund, Emerging Growth Fund, Growth Fund, Growth and Income Fund,
Balanced Fund, Minnesota Tax-Exempt Fund, National Tax- Exempt Fund,
Intermediate Bond Fund, Government Income Fund, Adjustable Rate Mortgage
Securities Fund, Pacific-European Growth Fund and Emerging Markets Growth Fund,
each a Series of Piper Funds Inc., Piper Funds Inc.-II or Piper Global Funds
Inc. with and into FAIF's Small Cap Growth Fund, Mid Cap Growth Fund, Large Cap
Growth Fund, Large Cap Value Fund, Balanced Fund, Minnesota Tax Free Fund, Tax
Free Fund, Intermediate Term Income Fund, Fixed Income Fund, Adjustable Rate
Mortgage Securities Fund, International Fund and Emerging Markets Growth Fund,
respectively, and any and all amendments thereto, including post-effective
amendments, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or the substitutes for such
attorneys-in-fact and agents, may lawfully do or cause to be done by virtue
hereof.
Signature Title Date
--------- ----- ----
/s/Roger A. Gibson Director April 14, 1998
- -----------------------------
Roger A. Gibson
Exhibit 17.1
FORM OF PROXY
_________ FUND
OAKS, PENNSYLVANIA 19456
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE PIPER FUNDS
The undersigned hereby appoints Kathryn L. Stanton, Michael J. Radmer and
Donna Rafa, and each of them, with power to act without the other and with the
right of substitution in each, as proxies of the undersigned and hereby
authorizes each of them to represent and to vote, as designated below, all the
shares of _______________ Fund (the "Piper Fund"), held of record by the
undersigned on _______________, 1998, at the Special Meeting of Shareholders of
the Fund to be held on _______________, 1998, or any adjournments or
postponements thereof, with all powers the undersigned would possess if present
in person. All previous proxies given with respect to the Special Meeting hereby
are revoked.
THE PROXIES ARE INSTRUCTED TO VOTE AS FOLLOWS:
1. PROPOSAL TO RATIFY AND APPROVE AN INTERIM ADVISORY AGREEMENT between the
Piper Fund and Piper Capital Management Incorporated ("Piper Capital"),
and the receipt of investment advisory fees by Piper Capital under such
agreement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. PROPOSAL TO RATIFY AND APPROVE AN INTERIM SUB-ADVISORY AGREEMENT between
the Piper Capital Management Incorporated and Edinburgh Fund Managers plc
("Edinburgh") and the receipt of sub-advisory fees by Edinburgh under such
agreement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. PROPOSAL TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION providing for
the transfer of the assets and liabilities of each of the Piper Funds into
a corresponding fund of First American Investment Funds, Inc. ("FAIF"), in
exchange for Class ___ Shares of the applicable Piper Fund.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the annual meeting or any adjournments or
postponements thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL
BE VOTED "FOR" THE PROPOSALS ABOVE. RECEIPT OF THE NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS AND THE PROXY STATEMENT RELATING TO THE MEETING IS ACKNOWLEDGED BY
YOUR EXECUTION OF THIS PROXY.
PLEASE SIGN THIS PROXY EXACTLY AS YOUR NAME APPEARS BELOW. WHEN SHARES ARE
HELD BY JOINT TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A
CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR
<PAGE>
OTHER AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY
PARTNER OR OTHER AUTHORIZED PERSON.
DATED: _________________, 1998
_____________________________
Signature
_____________________________
Signature if held jointly
TO SAVE FURTHER SOLICITATION EXPENSE, PLEASE MARK, SIGN, DATE AND RETURN THIS
PROXY PROMPTLY USING THE ENCLOSED POSTAGE-PREPAID ENVELOPE.
Exhibit 17.2
APPENDIX 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 24F-2
Annual Notice of Securities Sold
Pursuant to Rule 24f-2
OMB APPROVAL
OMB Number: 3235-0456
Expires: August 31, 2000
Estimated average burden
hours per response . . . . . 1
1. Name and address of issuer:
First American Investment Funds, Inc.
530 East Swedesford Road
Wayne, PA 19087
2. The name of each series or class of securities for which this notice is
filed (if the form is being filed for all series and classes of securities
of the issuer, check the box but do not list series or classes): [ ]
Intermediate Government Bond Fund
Intermediate Tax Free Fund
Fixed Income Fund
Stock Fund
Special Equity Fund
Equity Index Fund
Regional Equity Fund
Limited Term Income Fund
Intermediate Term Income Fund
Balanced Fund
Asset Allocation Fund
Colorado Intermediate Tax Free Fund
Minnesota Insured Intermediate Tax Free Fund
Technology Fund
Emerging Growth Fund
Equity Income Fund
Diversified Growth Fund
Real Estate Securities Fund
Health Sciences Fund
California Intermediate Tax Free Fund
Oregon Intermediate Tax Free Fund
Micro Cap Value Fund
International Fund
<PAGE>
3. Investment Company Act File Number: 811-5309
Securities Act File Number: 033-16905
4(a). Last day of fiscal year for which this Form is filed: September 30, 1997
4(b). Check box if this Form is being filed late (i.e., more than 90 calendar
days after the end of the issuer's fiscal year). (See Instruction A-2)
[ ]
Note: If the Form is being filed late, interest must be paid on the
registration fee due.
4(c). Check box if this is the last time the issuer will be filing this Form.
[ ]
5. Calculation of registration fee:
(i) Aggregate sale price of securities sold during the fiscal year pursuant to
section 24(f): $4,901,403,931
(ii) Aggregate price of securities redeemed or repurchased during the fiscal
year: $1,555,720,311
(iii) Aggregate price of securities redeemed or repurchased during any prior
fiscal year ending no earlier than October 11, 1995 that were not
previously used to reduce registration fees payable to the commission:
$ 0
(iv) Total available redemption credits [add Items 5(ii) and 5(iii)]:
$4,901,403,931
(v) Net Sales - if Item 5(i) is greater than Item 5(iv) [subtract Item 5(iv)
from Item 5(i)] $3,345,683,620
(vi) Redemption credits available for use in future years __if Item 5(i) is
less than Item 5 (iv) [subtract Item 5(iv) from Item 5(i)]: $ 0
(vii) Multiplier for determining registration fee (See Instruction C.9):
x .000295
(viii) Registration fee due [multiply item 5(v) by Item 5(vii)] (enter "0" if no
fee is due): + $986,976.67
6. If the response to Item 5(i) was determined by deducting an amount of
securities that were registered under the Securities Act of 1933 pursuant
to rule 24e-2 as in effect before October 11, 1997, then report the amount
of securities (number of shares or other units) deducted here:
_____0_____. If there is a number of shares or other units that were
registered pursuant to rule 24e-2 remaining unsold at the end of the
fiscal
<PAGE>
year for which this form is filed that are available for use by the issuer
in future fiscal years, then state that number here: __0___.
7. Interest due - if this Form is being filed more than 90 days after the end
of the issuer's fiscal year (see instruction D):
+ $
---------
8. Total of the amount of the registration fee due plus any interest due
[line 5(viii) plus line 7]:
= $986,976.67
9. Date the registration fee and any interest payment was sent to the
Commission's lockbox depository:
Method of Delivery:
[x] Wire Transfer
[ ] Mail or other means
SIGNATURES
This report has been signed below by the following person on behalf of the
issuer and in the capacities and on the dates indicated.
By (Signature and Title)* /s/Stephen G. Meyer, Controller
Stephen G. Meyer, Controller and Chief Financial Officer
Date: December 9, 1997
