1933 Act Registration No. 33-16905
1940 Act Registration No. 811-5309
As filed with the Securities and Exchange Commission on July 31, 1998
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 39 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 [X]
Amendment No. 39
FIRST AMERICAN INVESTMENT FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
OAKS, PENNSYLVANIA 19456
(Address of Principal Executive Offices) (Zip Code)
(610) 676-1924
(Registrant's Telephone Number, including Area Code)
KATHRYN STANTON
C/O SEI INVESTMENTS COMPANY, OAKS, PENNSYLVANIA 19456
(Name and Address of Agent for Service)
COPIES TO:
Kathryn Stanton, Esq. Michael J. Radmer, Esq.
SEI Investments Company James D. Alt, Esq.
Oaks, Pennsylvania 19456 Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
It is proposed that this filing shall become effective (check
appropriate box):
[X] immediately upon filing pursuant to paragraph (b) of rule 485
[ ] on (specify date) pursuant to paragraph (b) of rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (specify date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on (specify date) pursuant to paragraph (a)(2) of Rule 485
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
POST-EFFECTIVE AMENDMENT NO. 39
CROSS REFERENCE SHEET FOR ITEMS REQUIRED BY FORM N-1A
ITEM NUMBER OF FORM N-1A
PART A CAPTION IN PROSPECTUS
- ------ ---------------------
RETAIL CLASSES PROSPECTUS
1 Cover Page
2 Fees and Expenses
3 Not Applicable
4 The Fund; Investment Objectives and Policies; Special Investment Methods
5 Management; Distributor
5A Not Applicable
6 Fund Shares; Investing in the Funds; Federal Income Taxes
7 Distributor; Investing in the Fund; Determining the Price of Shares
8 Redeeming Shares
9 Not Applicable
INSTITUTIONAL CLASS PROSPECTUS
1 Cover Page
2 Fees and Expenses
3 Not Applicable
4 The Fund; Investment Objectives and Policies; Special Investment Methods
5A Not Applicable
5 Management; Distributor
6 Fund Shares; Purchases and Redemptions of Shares; Federal Income Taxes
7 Distributor; Purchases and Redemptions of Shares
8 Purchases and Redemptions of Shares
9 Not Applicable
CAPTION IN COMBINED STATEMENT
PART B OF ADDITIONAL INFORMATION
- ------ -------------------------
10 Cover Page
11 Table of Contents
12 General Information
13 Additional Information Concerning Fund Investments; Investment
Restrictions
14 Directors and Executive Officers
15 Capital Stock
16 Investment Advisory and Other Services
17 Portfolio Transactions and Allocation of Brokerage
18 Not Applicable
19 Net Asset Value and Public Offering Price
20 Taxation
21 Investment Advisory and Other Services
22 Fund Performance
23 Not Applicable
<PAGE>
JULY 31, 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
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(R)
<PAGE>
TABLE OF CONTENTS
Summary 2
..............................................
Fees and Expenses 5
..............................................
Financial Highlights 8
..............................................
The Funds 18
..............................................
Investment Objectives and Policies 18
..............................................
Management 25
..............................................
Distributor 30
..............................................
Investing in the Funds 31
..............................................
Redeeming Shares 39
..............................................
Determining the Price of Shares 41
..............................................
Income Taxes 43
..............................................
Tax-Exempt vs. Taxable Income 45
..............................................
Fund Shares 46
..............................................
Calculation of Performance Data 46
..............................................
Special Investment Methods 47
..............................................
Information Concerning Compensation Paid
to U.S. Bank National Association and Other
Affiliates 60
..............................................
<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 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 July 31, 1998 for the Funds has
been filed with the Securities and Exchange Commission ("SEC") and is
incorporated in its entirety by reference in this Prospectus. To obtain
copies of the Statement of Additional Information at no charge, or to obtain
other information or make inquiries about the Funds, call (800) 637-2548 or
write SEI Investments Distribution Co., Oaks, Pennsylvania 19456. The SEC
maintains a World Wide Web site that contains reports and information
regarding issuers that file electronically with the SEC. The address of such
site is "http://www.sec.gov."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE- SENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus is July 31, 1998.
<PAGE>
SUMMARY
First American Investment Funds, Inc. ("FAIF") is an open-end investment
company which offers shares in several different mutual funds. This
Prospectus provides information with respect to the Class A Shares of the
following funds (the "Funds"). 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 opinion of the Fund's advisor, 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 with adjustable interest
rates that reset at periodic intervals.
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. 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 the 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 the 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, the 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 the 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 the Fund will range from 15 to 25 years.
INVESTMENT ADVISOR. U.S. Bank National Association (the "Advisor" or "U.S.
Bank") serves as investment advisor to each of the Funds through its First
American Asset Management group. Marvin & Palmer Associates, Inc. (the
"Sub-Advisor") serves as sub-advisor 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 equal to 1.00% of the first
$3 million of shares purchased, 0.75% of shares purchased in excess of $3
million up to $5 million, and 0.50% of shares purchased in excess of $5
million.
<PAGE>
If such a commission is paid, redemptions of Class A Shares within 12 month
following such purchases will be subject to a contingent deferred sales
charge of 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 Advisor or Sub-Advisor 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; (iv) Emerging Markets Fund is subject to the
risks associated with investing in securities issued by issuers in emerging
market countries; and (v) 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
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
<PAGE>
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. 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(4) 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(5)
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 ADVISOR AND THE DISTRIBUTOR INTEND TO WAIVE A PORTION OF THEIR FEES ON A
VOLUNTARY BASIS, AND THE AMOUNTS SHOWN REFLECT THESE WAIVERS AS OF THE DATE
OF THIS PROSPECTUS. THE ADVISOR AND THE DISTRIBUTOR INTEND TO MAINTAIN SUCH
WAIVERS IN EFFECT FOR THE CURRENT FISCAL YEAR BUT RESERVE THE RIGHT TO
DISCONTINUE SUCH WAIVERS AT ANY TIME THEREAFTER IN THEIR SOLE DISCRETION.
NOTWITHSTANDING THE FOREGOING, THE ADVISOR AND THE DISTRIBUTOR 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 FOR EACH FUND 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) OTHER EXPENSES ARE BASED ON ESTIMATED AMOUNTS FOR THE CURRENT FISCAL YEAR.
(5) 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 (continued)
----------------------------------------------------------------------------
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(3) 0.17% 0.75%
Total fund operating expenses
(after voluntary fee waivers)(1) 1.87% 2.45%
- -------------------------------------------------------------------------------------------------
EXAMPLE(4)
You would pay the following expenses on a $1,000 investment, assuming (i) the
maximum applicable sales charge for all funds; (ii) a 5% annual return; and
(iii) redemption at the end of each time period:
1 year $69 $75
3 years $99 $116
- -------------------------------------------------------------------------------------------------
ASSUMING NO REDEMPTION(5)
You would pay the following exepnses on the same investment, assuming no
redemption:
1 year $19 $25
3 years $59 $76
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) THE ADVISOR INTENDS TO WAIVE A PORTION OF ITS FEES ON A VOLUNTARY BASIS, AND
THE AMOUNTS SHOWN REFLECT WAIVERS CURRENTLY IN EFFECT FOR EMERGING MARKETS
FUND. THE ADVISOR INTENDS TO MAINTAIN SUCH WAIVERS IN EFFECT FOR THE CURRENT
FISCAL YEAR BUT RESERVES THE RIGHT TO DISCONTINUE SUCH WAIVERS AT ANY TIME
THEREAFTER IN ITS SOLE DISCRETION. ABSENT ANY FEE WAIVERS, INVESTMENT
ADVISORY FEES FOR EMERGING MARKETS FUND AS AN ANNUALIZED PERCENTAGE OF
AVERAGE DAILY NET ASSETS WOULD BE 1.25%; AND TOTAL FUND OPERATING EXPENSE
CALCULATED ON SUCH BASIS WOULD BE 3.00%. "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) OTHER EXPENSES ARE BASED ON ESTIMATED AMOUNTS FOR THE CURRENT FISCAL YEAR.
(4) ABSENT THE FEE WAIVERS REFERRED TO IN (1) ABOVE, THE DOLLAR AMOUNTS FOR THE
1 AND 3-YEAR PERIODS WOULD BE $80 AND $133 FOR EMERGING MARKETS FUND.
(5) ABSENT THE FEE WAIVER REFERRED TO IN (1) ABOVE (ASSUMING NO REDEMPTION), THE
DOLLAR AMOUNTS FOR THE 1 AND 3-YEAR PERIODS WOULD BE $30 AND $93 FOR
EMERGING MARKETS FUND.
<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>
(This page has been left blank intentionally.)
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights show certain per share data and selected
information for a share of capital stock outstanding during the indicated
periods. The information presented for the Class A Shares of Mid Cap Growth
Fund, Emerging Markets Fund, Adjustable Rate Mortgage Securities Fund, Tax
Free Fund and Minnesota Tax Free Fund (the "First American Funds")
represents the financial history of the Class A Shares of Piper Emerging
Growth Fund, Piper Emerging Markets Growth Fund, Piper Adjustable Rate
Mortgage Securities Fund, Piper National Tax-Exempt Fund and Piper Minnesota
Tax-Exempt Fund (the "Piper Funds"), respectively. Shareholders of each of
the Piper Funds have approved a reorganization into the corresponding First
American Funds. These reorganizations will become effective with the close
of business on July 31, 1998 for Adjustable Rate Mortgage Securities Fund,
Tax Free Fund and Minnesota Tax Free Fund and August 7, 1998 for Mid Cap
Growth Fund and Emerging Markets Fund. Since the First American Funds will
have no assets or liabilities prior to the reorganizations, the financial
highlights for each First American Fund will represent the financial history
of its predecessor Piper Fund upon consummation of the respective
reorganization.
Except as indicated, this information has been audited by KPMG Peat Marwick
LLP, independent auditors. The financial highlights should be read in
conjunction with the financial statements of each applicable Piper Fund. The
independent auditors' reports and related financial statements can be found
in the September 30, 1997 Annual Reports to Shareholders of the Piper Funds,
which, along with the March 31, 1998 Semiannual Report of the Piper Funds,
can be obtained without charge by calling (800) 637-2548.
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
----------------------------------------------------------------------------
MID CAP GROWTH FUND CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS FISCAL YEAR ENDED SEPTEMBER 30,
ENDED 3/31/98 ---------------------------------------------
(UNAUDITED) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE DATA(2)
Net asset value, beginning of period $ 15.25 $ 13.86 $ 12.97 $ 9.63
- ---------------------------------------------------------------------------------------------------------------------------------
Operations:
Net investment income (loss) (0.05) (0.08) (0.05) (0.06)
Net realized and unrealized gains (losses) on investments 1.46 2.72 2.18 3.40
- ---------------------------------------------------------------------------------------------------------------------------------
Total from operations 1.41 2.64 2.13 3.34
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income -- -- -- --
From net realized gains on investments (1.56) (1.25) (1.24) --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1.56) (1.25) (1.24) --
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 15.10 $ 15.25 $ 13.86 $ 12.97
- ---------------------------------------------------------------------------------------------------------------------------------
SELECTED INFORMATION
Total return(3) 11.26% 21.04% 17.84% 34.68%
Net assets, end of period (in millions) $ 276 $ 275 $ 304 $ 253
Ratio of expenses to average daily net assets 1.18%(5) 1.23% 1.18% 1.24%
Ratio of net investment income (loss) to average daily
net assets (0.66)%(5) (0.55)% (0.41)% (0.51)%
Average commission rate paid on portfolio transactions(4) $0.0600 $0.0600 $0.0600 --
Portfolio turnover rate (excluding short-term securities) 21% 51% 44% 33%
Ratios before waivers by the advisor and/or distributor:
Of expenses to average daily net assets 1.35%(5) 1.39% 1.37% 1.42%
Of net investment income (loss) to average daily net assets (0.83)%(5) (0.71)% (0.60)% (0.69)%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) PER-SHARE AMOUNTS HAVE BEEN ADJUSTED TO REFLECT THE EFFECT OF THE STOCK
DIVIDEND DECLARED ON 12/23/95.
(3) TOTAL RETURN ASSUMES REINVESTMENT OF DISTRIBUTIONS AND DOES NOT REFLECT A
SALES CHARGE.
(4) DISCLOSED IN ACCORDANCE WITH GUIDELINES ADOPTED IN 1996.
(5) ANNUALIZED.
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30, PERIOD FROM
--------------------------------------------------------- 4/23/90(1)
1994 1993 1992 1991 TO 9/30/90
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 9.87 $ 7.21 $ 6.93 $ 4.30 $ 5.00
- -------------------------------------------------------------------------------
(0.04) (0.03) -- 0.01 0.01
(0.20) 2.69 0.32 2.64 (0.71)
- -------------------------------------------------------------------------------
(0.24) 2.66 0.32 2.65 (0.70)
- -------------------------------------------------------------------------------
-- -- -- (0.02) --
-- -- (0.04) -- --
- -------------------------------------------------------------------------------
-- -- (0.04) (0.02) --
- -------------------------------------------------------------------------------
$ 9.63 $ 9.87 $ 7.21 $ 6.93 $ 4.30
- -------------------------------------------------------------------------------
(2.38)% 36.92% 4.55% 61.80% (14.01)%
$ 224 $ 191 $ 110 $ 56 $ 21
1.24% 1.29% 1.30% 1.30% 1.30%(5)
(0.38)% (0.34)% (0.14)% 0.11% 0.71%(5)
-- -- -- -- --
31% 30% 21% 27% 6%
1.44% 1.49% 1.56% 1.70% 1.95%(5)
(0.58)% (0.54)% (0.40)% (0.29)% 0.06%(5)
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
----------------------------------------------------------------------------
EMERGING MARKETS FUND CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR PERIOD FROM YEAR ENDED PERIOD FROM
ENDED 3/31/98 ENDED 7/1/96 -------------------- 11/9/93(1)
(UNAUDITED) 9/30/97 TO 9/30/96 6/30/96(2) 6/30/95 TO 6/30/94
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value, beginning of period $ 10.96 $ 8.85 $ 8.84 $ 7.20 $ 9.14 $ 10.00
- ------------------------------------------------------------------------------------------------------------------------------------
Operations:
Net investment income (0.07) 0.02 -- 0.01 -- 0.01
Net realized and unrealized gains (losses) on
investments (1.08) 2.10 0.01 1.63 (1.94) (0.87)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from operations (1.15) 2.12 0.01 1.64 (1.94) (0.86)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income (0.02) (0.01) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.79 $ 10.96 $ 8.85 $ 8.84 $ 7.20 $ 9.14
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED INFORMATION
Total return(3) (10.85)% 23.91% 0.11% 22.78% (21.23)% (8.60)%
Net assets, end of period (in millions) $ 12 $ 17 $ 14 $ 14 $ 23 $ 28
Ratio of expenses to average daily net assets 1.98%(4) 2.00% 2.00%(4) 2.00% 2.00% 2.00%(4)
Ratio of net investment income (loss) to average
daily net assets (1.19)%(4) 0.17% 0.26%(4) 0.15% (0.03)% 0.14%(4)
Average commission rate paid on portfolio transactions(5) $0.0001 $0.0007 $0.0009 -- -- --
Portfolio turnover rate (excluding short-term securities) 34% 105% 0% 140% 161% 78%
Ratios before waivers by the advisor and distributor:
Of expenses to average daily net assets 3.25%(4) 3.34% 4.09%(4) 3.54% 3.47% 3.10%(4)
Of net investment loss to average daily net assets (2.46)%(4) (1.17)% (1.83)%(4) (1.39)% (1.50)% (0.96)%(4)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) THE FUND ACQUIRED THE NET ASSETS OF HERCULES LATIN AMERICAN VALUE FUND ON
6/21/96, VIA A TAX-FREE REORGANIZATION. THE FUND HAD NO ASSETS OR
LIABILITIES PRIOR TO THE ACQUISITION. CONSEQUENTLY, THE INFORMATION
PRESENTED FOR THE FUND PRIOR TO 6/21/96 REPRESENTS THE FINANCIAL HISTORY OF
THE HERCULES FUND. AS A RESULT OF THE REORGANIZATION, THE FUND'S SUB-ADVISOR
CHANGED FROM BANKERS TRUST COMPANY TO EDINBURGH FUND MANAGERS PLC. ON
7/18/95, SHAREHOLDERS APPROVED A CHANGE IN THE FUND'S INVESTMENT MANAGER
FROM HERCULES INTERNATIONAL MANAGEMENT LLC TO PIPER CAPITAL MANAGEMENT
INCORPORATED.
(3) TOTAL RETURN ASSUMES REINVESTMENT OF DISTRIBUTIONS AND DOES NOT REFLECT A
SALES CHARGE.
(4) ANNUALIZED.
(5) DISCLOSED IN ACCORDANCE WITH GUIDELINES ADOPTED IN 1996. THE COMPARABILITY
OF THIS INFORMATION MAY BE AFFECTED BY THE FACT THAT COMMISSION RATES PER
SHARE VARY SIGNIFICANTLY AMONG FOREIGN COUNTRIES.
<PAGE>
----------------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE SECURITIES FUND CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED FISCAL YEAR MONTH YEAR ENDED AUGUST 31, ERIOD FROM
3/31/98 ENDED ENDED --------------------------------------- 1/30/92(1)
(UNAUDITED) 9/30/97 9/30/96 1996 1995 1994 1993 TO 8/31/92
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA(2)
Net asset value, beginning of
period $ 8.15 $ 8.06 $ 8.03 $ 7.99 $ 8.10 $ 8.88 $ 8.95 $ 8.80
- ---------------------------------------------------------------------------------------------------------------------------------
Operations:
Net investment income 0.23 0.47 0.04 0.49 0.47 0.55 0.63 0.40
Net realized and unrealized
gains (losses) on investments (0.01) 0.09 0.03 0.01 (0.05) (0.82) (0.09) 0.07
- ---------------------------------------------------------------------------------------------------------------------------------
Total from operations 0.22 0.56 0.07 0.50 0.42 (0.27) 0.54 0.47
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income (0.23) (0.47) (0.04) (0.46) (0.53) (0.51) (0.61) (0.32)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.14 $ 8.15 $ 8.06 $ 8.03 $ 7.99 $ 8.10 $ 8.88 $ 8.95
- ---------------------------------------------------------------------------------------------------------------------------------
SELECTED INFORMATION(2)
Total return(3) 2.75% 7.16% 0.85% 6.40% 5.43% (3.18)% 6.24% 5.49%
Net assets, end of period
(in millions) $ 158 $ 185 $ 263 $ 270 $ 409 $ 500 $ 551 $ 555
Ratio of expenses to average daily
net assets(6) 0.80%(4) 0.81% 0.82%(4) 0.60% 0.63% 0.60% 0.58% 0.58%(4)
Ratio of net investment income to
average daily net assets(6) 5.71%(4) 5.84% 5.82%(4) 5.74% 5.62% 6.39% 7.25% 7.70%(4)
Portfolio turnover rate (excluding
short-term securities) 10% 25% 2% 51% 36% 39% 39% 41%
Amount of borrowings outstanding
at end of period (in millions)(5) -- -- -- -- -- $ 145 $ 145 $ 145
Average amount of borrowings
outstanding during the period (in
millions)(5) -- -- -- -- $ 57 $ 145 $ 149 $ 90
Average number of shares
outstanding during the period (in
millions) -- -- -- -- 53 62 62 52
Average per-share amount of
borrowings outstanding during the
period(5) -- -- -- -- $ 1.09 $ 2.34 $ 2.41 $ 1.67
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ON 9/1/95, FOUR CLOSED-END FUNDS, AMERICAN ADJUSTABLE RATE TERM TRUSTS 1996,
1997, 1998 AND 1999 (BDJ, CDJ, DDJ AND EDJ) WERE COMBINED TO CREATE THE
FUND. DDJ WAS CONSIDERED THE SURVIVING ENTITY FOR FINANCIAL REPORTING
PURPOSES. THE FINANCIAL HIGHLIGHTS PRESENTED FOR THE PERIODS PRIOR TO 9/1/95
ARE THOSE OF DDJ. THE PER SHARE HISTORICAL INFORMATION FOR THOSE PERIODS HAS
BEEN RESTATED TO REFLECT THE IMPACT OF ADDITIONAL SHARES CREATED RESULTING
FROM THE DIFFERENCE IN THE NET ASSET VALUE PER SHARE OF DDJ AT THE TIME OF
THE MERGER ($8.71) AND THE INITIAL NET ASSET VALUE PER SHARE OF THE FUND
($8.00).
(3) TOTAL RETURN ASSUMES REINVESTMENT OF DISTRIBUTIONS AND DOES NOT REFLECT A
SALES CHARGE.
(4) ANNUALIZED.
(5) DDJ WAS A CLOSED-END MANAGEMENT COMPANY AND WAS PERMITTED TO ENTER INTO
BORROWINGS FOR OTHER THAN TEMPORARY OR EMERGENCY PURPOSES.
(6) VARIOUS FEES AND EXPENSES OF THE FUND WERE VOLUNTARILY WAIVED OR ABSORBED BY
THE FUND'S ADVISOR DURING THE YEAR ENDING 8/31/96. HAD THE FUND PAID ALL
EXPENSES, THE RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE DAILY
NET ASSETS WOULD HAVE BEEN 0.76%/5.58%, RESPECTIVELY.
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
----------------------------------------------------------------------------
TAX FREE FUND CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS FISCAL YEAR ENDED SEPTEMBER 30,
ENDED 3/31/98 ---------------------------------------------
(UNAUDITED) 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value, beginning of period $ 11.21 $ 10.81 $ 10.69 $ 10.22 $ 11.76
- ---------------------------------------------------------------------------------------------------------------------------
Operations:
Net investment income 0.27 0.54 0.56 0.60 0.57
Net realized and unrealized gains (losses) on investments 0.13 0.42 0.12 0.47 (1.21)
- ---------------------------------------------------------------------------------------------------------------------------
Total from operations 0.40 0.96 0.68 1.07 (0.64)
- ---------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income(2) (0.27) (0.54) (0.56) (0.60) (0.57)
From net realized gains on investments (0.05) (0.02) -- -- (0.33)
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (0.32) (0.56) (0.56) (0.60) (0.90)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.29 $ 11.21 $ 10.81 $ 10.69 $ 10.22
- ---------------------------------------------------------------------------------------------------------------------------
SELECTED INFORMATION
Total return(3) 3.66% 9.09% 6.42% 10.30% (5.72)%
Net assets, end of period (in millions) $ 46 $ 50 $ 46 $ 57 $ 68
Ratio of expenses to average daily net assets 1.09%(4) 1.11% 1.03% 1.01% 0.93%
Ratio of net investment income to average daily net assets 4.82%(4) 4.91% 5.15% 5.37% 5.25%
Portfolio turnover rate (excluding short-term securities) 4% 28% 43% 28% 65%
Ratios before waivers by the advisor and distributor:
Of expenses to average daily net assets 1.16%(4) 1.17% 1.13% 1.09% 1.03%
Of net investment income to average daily net assets 4.75%(4) 4.85% 5.05% 5.29% 5.15%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) AMOUNTS INCLUDED IN DISTRIBUTIONS FROM NET INVESTMENT INCOME THAT ARE
TAXABLE FOR FEDERAL INCOME TAX PURPOSES ARE $0.001, $0.002, $0.013 AND $0.03
PER SHARE FOR FISCAL 1991, 1990, 1989 AND 1988, RESPECTIVELY.
(3) TOTAL RETURN ASSUMES REINVESTMENT OF DISTRIBUTIONS AND DOES NOT REFLECT A
SALES CHARGE.
(4) ANNUALIZED.
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30, PERIOD FROM
----------------------------------------------------------------- 7/11/88(1)
1993 1992 1991 1990 1989 TO 9/30/88
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 10.94 $ 10.51 $ 9.91 $ 9.99 $ 10.03 $ 10.00
- ------------------------------------------------------------------------------------------
0.61 0.66 0.68 0.68 0.71 0.12
0.94 0.43 0.60 (0.08) (0.04) 0.03
- ------------------------------------------------------------------------------------------
1.55 1.09 1.28 0.60 0.67 0.15
- ------------------------------------------------------------------------------------------
(0.61) (0.66) (0.68) (0.68) (0.71) (0.12)
(0.12) -- -- -- -- --
- ------------------------------------------------------------------------------------------
(0.73) (0.66) (0.68) (0.68) (0.71) (0.12)
- ------------------------------------------------------------------------------------------
$ 11.76 $ 10.94 $ 10.51 $ 9.91 $ 9.99 $ 10.03
- ------------------------------------------------------------------------------------------
14.76% 10.68% 13.31% 6.15% 6.82% 1.50%
$ 79 $ 59 $ 46 $ 36 $ 36 $ 5
0.94% 0.94% 0.92% 0.86% 0.80% 0.80%(4)
5.42% 6.13% 6.59% 6.78% 6.56% 5.90%(4)
43% 35% 59% 80% 57% 10%
1.04% 1.10% 1.15% 1.13% 1.62% 2.76%(4)
5.32% 5.97% 6.36% 6.51% 5.74% 3.94%(4)
- ------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
----------------------------------------------------------------------------
MINNESOTA TAX FREE FUND CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS FISCAL YEAR ENDED SEPTEMBER 30,
ENDED 3/31/98 ----------------------------------------------
(UNAUDITED) 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value, beginning of period $ 11.15 $ 10.89 $ 10.81 $ 10.28 $ 11.43
- ----------------------------------------------------------------------------------------------------------------------------
Operations:
Net investment income 0.28 0.57 0.59 0.66 0.61
Net realized and unrealized gains (losses) on
investments 0.14 0.31 0.07 0.53 (0.95)
- ----------------------------------------------------------------------------------------------------------------------------
Total from operations 0.42 0.88 0.66 1.19 (0.34)
- ----------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income(2) (0.28) (0.57) (0.58) (0.66) (0.61)
From net realized gains on investments (0.06) (0.05) -- -- (0.20)
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (0.34) (0.62) (0.58) (0.66) (0.81)
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.23 $ 11.15 $ 10.89 $ 10.81 $ 10.28
- ----------------------------------------------------------------------------------------------------------------------------
SELECTED INFORMATION
Total return(3) 3.78% 8.32% 6.24% 11.38% (3.14)%
Net assets, end of period (in millions) $ 121 $ 126 $ 126 $ 134 $ 162
Ratio of expenses to average daily net assets 0.92%(4) 0.95% 0.90% 0.91% 0.89%
Ratio of net investment income to average daily net
assets 5.06%(4) 5.17% 5.38% 5.80% 5.61%
Portfolio turnover rate (excluding short-term securities) 13% 17% 35% 30% 44%
Ratios before waivers by the advisor and distributor:
Of expenses to average daily net assets 1.00%(4) 1.01% 0.99% 0.99% 0.99%
Of net investment income to average daily net assets 4.98%(4) 5.11% 5.29% 5.72% 5.51%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) AMOUNTS INCLUDED IN DISTRIBUTIONS FROM NET INVESTMENT INCOME THAT ARE
TAXABLE FOR FEDERAL INCOME TAX PURPOSES ARE $0.003, $0.001, $0.012, $0.011
AND $0.02 PER SHARE FOR FISCAL 1992, 1991, 1990, 1989 AND 1988,
RESPECTIVELY.
(3) TOTAL RETURN ASSUMES REINVESTMENT OF DISTRIBUTIONS AND DOES NOT REFLECT A
SALES CHARGE.
(4) ANNUALIZED.
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30, PERIOD FROM
----------------------------------------------------------------- 7/11/88(1)
1993 1992 1991 1990 1989 TO 9/30/88
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 10.79 $ 10.46 $ 9.92 $ 10.06 $ 9.94 $ 10.00
- ------------------------------------------------------------------------------------------
0.62 0.64 0.66 0.66 0.68 0.12
0.68 0.33 0.54 (0.14) 0.12 (0.06)
- ------------------------------------------------------------------------------------------
1.30 0.97 1.20 0.52 0.80 0.06
- ------------------------------------------------------------------------------------------
(0.62) (0.64) (0.66) (0.66) (0.68) (0.12)
(0.04) -- -- -- -- --
- ------------------------------------------------------------------------------------------
(0.66) (0.64) (0.66) (0.66) (0.68) (0.12)
- ------------------------------------------------------------------------------------------
$ 11.43 $ 10.79 $ 10.46 $ 9.92 $ 10.06 $ 9.94
- ------------------------------------------------------------------------------------------
12.52% 9.56% 12.49% 5.30% 8.23% 0.58%
$ 169 $ 132 $ 83 $ 63 $ 51 $ 9
0.91% 0.93% 0.92% 0.87% 0.80% 0.80%(4)
5.62% 6.00% 6.44% 6.58% 6.45% 5.91%(4)
29% 35% 22% 41% 54% 12%
1.00% 1.01% 1.05% 1.06% 1.33% 1.97%(4)
5.53% 5.92% 6.31% 6.39% 5.92% 4.74%(4)
- ------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
THE FUNDS
FAIF is an open-end management investment company which offers shares in
several different mutual funds (collectively, the "FAIF Funds"), each of
which evidences an interest in a separate and distinct investment portfolio.
Shareholders may purchase shares in each FAIF Fund through 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 limitations on illiquid investments and borrowing.
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. In addition, if a Fund
is restricted to investing in securities which have received at least a
specific rating, the Fund may invest in securities of the lowest gradation
within that rating category. 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
<PAGE>
matters is set forth under "Special Investment Methods."
----------------------------------------------------------------------------
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 Advisor'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 limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed on
a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
associated risks, see "Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund and write call options
on stock indices related to such equity securities; (iv) purchase securities
on a when-issued or delayed delivery basis; and (v) engage in the lending of
portfolio securities. For information about these investment methods,
restrictions on their use, and certain associated risks, see the related
headings under "Special Investment Methods."
For temporary defensive purposes, the Fund may without limitation hold cash
or invest in cash items of the kinds described under "Special Investment
Methods -- Cash Items." The Fund also may invest not more than 35% of its
total assets in cash and cash items in order to utilize assets awaiting
normal investment.
----------------------------------------------------------------------------
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 a relatively low
gross national product per capita compared to the world's major economies
and the potential for rapid economic growth. Countries with emerging markets
include 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
<PAGE>
time, the Fund has no intention of investing all of its assets in a single
country.
In investing the Fund's assets, the Sub-Advisor 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.
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 with adjustable interest rates that reset at
periodic intervals ("adjustable rate mortgage securities" or "ARMS"). ARMS
have interest rates which reset periodically in response to changes in the
current interest rate environment. ARMS 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 payment of
principal or interest by the U.S. government or its agencies or
instrumentalities, private pass-through securities, asset backed securities
and other 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 contracts and options thereon, (iii) in order to attempt to reduce
risk, invest in exchange traded put and call options 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 85% of the Fund's total assets must be invested in securities
issued or guaranteed by the U.S. government or its agencies or
instrumentalities or securities rated AA or better by Standard & Poor's, Aa
or better by Moody's, comparably rated by another nationally recognized
statistical rating organization ("NRSRO") or, if unrated, of comparable
quality as determined by the Advisor. The Fund may not invest in any
security rated
<PAGE>
lower than A by Standard & Poor's or Moody's (or below a comparable rating
by any other NRSRO) or, if unrated, of a quality lower than A as determined
by the Advisor. Unrated securities deemed to be of comparable quality to
rated securities will not exceed 25% of the Fund's total assets.
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 or 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 Advisor. Unrated securities deemed
to be of comparable quality to rated securities as set forth above will not
exceed 25% of the Fund's total assets.
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 net 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 net 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 Advisor. 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
contracts and options thereon; (iii) in order to
<PAGE>
attempt to reduce risk, invest in exchange traded put and call options 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."
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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 the 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 or 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 Advisor. Unrated
securities deemed to be of comparable quality to rated securities as set
forth above will not exceed 25% of the Fund's total assets.
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 net 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 net 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 Advisor. 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,
<PAGE>
invest in exchange traded interest rate futures contracts and options
thereon; (iii) in order to attempt to reduce risk, invest in exchange traded
put and call options 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."
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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 Advisor, or in the case of Emerging Markets Fund,
the Sub-Advisor. The performance of these Funds will reflect in part the
ability of the Advisor or Sub-Advisor 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. Emerging Markets Fund is also subject to
risks associated with investing in securities issued by issuers in emerging
market countries. These risks are discussed under "Special Investment
Methods -- Foreign Securities" elsewhere herein. Because of the special
risks associated with foreign investing, Emerging Markets Fund 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-backed 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
<PAGE>
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 Intermediate Tax
Free Fund.
Although the Advisor may engage in transactions intended to hedge the value
of the Funds' portfolios against changes in market interest rates, there is
no assurance that such hedging transactions will be undertaken or will
fulfill their purpose. See "Special Investment Methods -- Options
Transactions," "-- Futures and Options on Futures" and "-- Interest Rate
Transactions."
CREDIT RISK. Credit risk is the risk that the issuer of a debt security will
fail to make payments on the security when due. Because Adjustable Rate
Mortgage Securities Fund, Tax Free Fund and Minnesota Tax Free Fund invest
in debt securities, they are subject to credit risk.
As described under "Special Investment Methods -- Municipal Bonds and Other
Municipal Obligations," the revenue bonds and municipal lease obligations in
which 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, which have been assigned an equivalent rating by another
nationally recognized statistical rating organization, or which are of
comparable quality in the judgment of the Advisor. 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 and corporate bonds may be redeemed at the option
of the issuer ("called") at a specified price prior to their stated maturity
date. In general, it is advantageous for 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 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
<PAGE>
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
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.
YEAR 2000. Like other mutual funds, financial and business organizations,
the Funds could be adversely affected if the computer systems used by the
Advisor, the Sub-Advisor, the Administrator and other service providers and
entities with computer systems that are linked to Fund records do not
properly process and calculate date-related information and data from and
after January 1, 2000. This is commonly known as the "Year 2000 issue." The
Funds have undertaken a Year 2000 program that is believed by the Advisor to
be reasonably designed to assess and monitor the steps being taken by the
Funds' service providers to address the Year 2000 issue with respect to the
computer systems they use. However, there can be no assurance that these
steps will be sufficient to avoid any adverse impact on the Funds.
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 Advisor
acts as investment advisor for and manages the investment portfolios of
FAIF.
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INVESTMENT ADVISOR
U.S. Bank National Association, 601 Second Avenue South, Minneapolis,
Minnesota 55402,
<PAGE>
acts as the Funds' investment advisor through its First American Asset
Management group. The Advisor has acted as an investment advisor to FAIF
since its inception in 1987 and has acted as investment advisor to First
American Funds, Inc. since 1982 and to First American Strategy Funds, Inc.
since 1996. As of September 30, 1997, the Advisor 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 Advisor.
Each of the Funds, other than Emerging Markets Fund, has agreed to pay the
Advisor monthly fees calculated on an annual basis equal to 0.70% of its
average daily net assets. Emerging Markets Fund pays the Advisor a monthly
fee calculated on the same basis equal to 1.25% of its average daily net
assets, out of which the Advisor pays the Sub-Advisor's fee. The Advisor
may, at its option, waive any or all of its fees, or reimburse expenses,
with respect to any Fund from time to time. Any such waiver or reimbursement
is voluntary and may be discontinued at any time except as discussed under
"Fees and Expenses -- Class A Share Fees and Expenses." The Advisor also may
absorb or reimburse expenses of the Funds from time to time, in its
discretion, while retaining the ability to be reimbursed by the Funds for
such amounts prior to the end of the fiscal year. This practice would have
the effect of lowering a Fund's overall expense ratio and of increasing
yield to investors, or the converse, at the time such amounts are absorbed
or reimbursed, as the case may be.
The Glass-Steagall Act generally prohibits banks from engaging in the
business of underwriting, selling or distributing securities and from being
affiliated with companies principally engaged in those activities. In
addition, administrative and judicial interpretations of the Glass-Steagall
Act prohibit bank holding companies and their bank and nonbank subsidiaries
from organizing, sponsoring or controlling registered open-end investment
companies that are continuously engaged in distributing their shares. Bank
holding companies and their bank and nonbank subsidiaries may serve,
however, as investment advisors to registered investment companies, subject
to a number of terms and conditions.
Although the scope of the prohibitions and limitations imposed by the
Glass-Steagall Act has not been fully defined by the courts or the
appropriate regulatory agencies, FAIF has received an opinion from its
counsel that the Advisor is not prohibited from performing the investment
advisory services described above, and that certain broker-dealers
affiliated with the Advisor are not prohibited from serving as Participating
Institutions 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 Advisor 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-ADVISOR TO EMERGING MARKETS FUND
Marvin & Palmer Associates, Inc., 1201 North Market Street, Suite 2300,
Wilmington, Delaware 19801, is sub-advisor to Emerging Markets Fund under an
agreement with the Advisor (the "Sub-Advisory Agreement"). The Sub-Advisor
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-Advisor is paid a monthly fee by the Advisor calculated on an annual
basis equal to 0.85% of the first $100 million of Emerging Markets Fund's
average daily net assets, 0.60% of the Fund's average daily net assets in
excess of $100 million up to $300 million, 0.55% of the Fund's average daily
net assets in excess of $300 million up to $500 million and 0.50% of the
Fund's average daily net assets in excess of $500 million.
<PAGE>
The Sub-Advisor, a privately held company, was founded in 1986 by David F.
Marvin and Stanley Palmer. The stock of the Sub-Advisor is owned by Mr.
Marvin, Mr. Palmer and 24 other holders. The Sub-Advisor is engaged in the
management of global, non-United States and emerging markets equity
portfolios for institutional accounts. At January 1, 1998, the Sub-Advisor
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 Advisor in 1998, Ms. Shrewsbury 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. 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 four years of investment industry experience. Prior to
joining the Advisor 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 Advisor 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
Advisor. 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 Advisor 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 Advisor overseeing the
management of the Advisor'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 Advisor 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
<PAGE>
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 nine years of investment industry experience.
Prior to joining the Advisor 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 Advisor in 1998, Mr. McGlinch
served as a senior vice president and 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.
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 Advisor 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 Advisor 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
Advisor, 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 Advisor in 1998, Mr. Reuss served as an economist,
senior vice president and portfolio manager for Piper Capital Management
Incorporated, overseeing the management of several Piper Funds, including
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 Advisor in 1998, Mr. White served as a
senior vice president and portfolio manager for Piper Capital Management
Incorporated, overseeing the management of several Piper Funds, including
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 seven individuals shares the
management of Emerging Markets Fund on behalf of the Sub-Advisor:
DAVID F. MARVIN is Chairman of the Sub-Advisor and founded the firm
together with Mr. Palmer in
<PAGE>
1986. Before founding the Sub-Advisor, 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 and President of the Sub-Advisor 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.
TERRY B. MASON is a Senior Vice President and portfolio manager of the
Sub-Advisor. Before joining the Sub-Advisor, 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-Advisor 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-Advisor and joined the firm in 1991. Before joining the Sub-Advisor,
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-Advisor. Before becoming a portfolio manager, Mr. Schaen was Head Trader
for the Sub-Advisor from 1991 to 1994 and an International Analyst for the
Sub-Advisor 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-Advisor and joined the firm in 1994. Before joining the Sub-Advisor,
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 National Association (the
"Custodian"), U.S. Bank 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
<PAGE>
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.
----------------------------------------------------------------------------
ADMINISTRATOR
The administrator for the Funds is SEI Investments Management Corporation,
Oaks, Pennsylvania 19456. The Administrator, a wholly-owned subsidiary of
SEI Investments Company, provides the Funds with certain administrative
services necessary to operate the Funds. These services include shareholder
servicing and certain accounting and other services. The Administrator
provides these services for a fee calculated at an annual rate of 0.12% of
each Fund's average daily net assets, provided that to the extent that the
aggregate net assets of all First American Funds exceed $8 billion, the
percentage stated above is reduced to 0.105%. From time to time, the
Administrator may voluntarily waive its fees or reimburse expenses with
respect to any of the Funds. Any such waivers or reimbursements may be made
at the Administrator's discretion and may be terminated at any time. U.S.
Bank assists the Administrator and provides sub-administration services for
the Funds. For these services, the Administrator compensates the
sub-administrator at an annual rate of up to 0.05% of each Fund's average
daily net assets.
----------------------------------------------------------------------------
TRANSFER AGENT
DST Systems, Inc. (the "Transfer Agent") serves as the transfer agent and
dividend disbursing agent for the Funds. The address of the Transfer Agent
is 330 West Ninth Street, Kansas City, Missouri 64105. The Transfer Agent
is not affiliated with the Distributor, the Administrator or the Advisor.
Effective October 1, 1998, FAIF has appointed U.S. Bank 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 U.S. Bank and its affiliates. The Funds pay U.S. Bank 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 Advisor, 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
<PAGE>
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, computed and paid monthly. For
Adjustable Rate Mortgage Securities Fund, the Distributor is currently
limiting its shareholder servicing fee to 0.15% of such Fund's Class A
shares' average daily net asset value. The shareholder servicing fee is
intended to compensate the Distributor for ongoing servicing and/or
maintenance of shareholder accounts and may be used by the Distributor to
provide compensation to institutions through which shareholders hold their
shares for ongoing servicing and/or maintenance of shareholder accounts.
However, for a one year period following the date of purchase, the
Distributor pays no shareholder servicing fee to such institutions for Class
A Shares which are sold at net asset value if a commission is paid in
connection with such sale. 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 Advisor and their 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 Distributor is paid a shareholder servicing fee of
0.25% of the average daily net assets of the Class B Shares pursuant to a
service plan (the "Class B Service Plan"), which fee may be used by the
Distributor to provide compensation for ongoing servicing and/or maintenance
of shareholder accounts with respect to Class B Shares of the Funds.
Although Class B Shares are sold without an initial sales charge, the
Distributor pays a total of 4.25% of the amount invested (including a
prepaid service fee of 0.25% of the amount invested) to dealers who sell
Class B Shares (excluding exchanges from other Class B Shares in the First
American family of funds). The service fee payable under the Class B Service
Plan is prepaid for the first year as described above.
The Class A and Class B Distribution Plans recognize that the Advisor, 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 Advisor may pay amounts to broker-dealers from its
own assets with respect to such sales. U.S. Bancorp Investments, Inc., and
U.S. Bancorp Piper Jaffray Inc., broker-dealers affiliated with the Advisor,
are Participating Institutions.
INVESTING IN THE FUNDS
----------------------------------------------------------------------------
SHARE PURCHASES
Shares of the Funds are sold at their net asset value, next determined after
an order is received, plus any applicable sales charge, on days on which
both the New York Stock Exchange and federally- chartered banks are open for
business. Shares may be purchased as described below. The Funds reserve the
right to reject any purchase request.
THROUGH A FINANCIAL INSTITUTION. Shares may be purchased through a
financial institution which has a sales agreement with the Distributor. An
investor may call his or her financial institution to place an order.
Purchase orders must be received
<PAGE>
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 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.
----------------------------------------------------------------------------
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 Advisor and its
affiliates.
----------------------------------------------------------------------------
ALTERNATIVE SALES CHARGE OPTIONS
THE TWO ALTERNATIVES: OVERVIEW. An investor may purchase shares of a Fund at
a price equal to its net asset value per share plus a sales charge which, at
the investor's election, may be imposed either (i) at the time of the
purchase (the Class A "initial sales charge alternative"), or (ii) 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
<PAGE>
exclusive voting rights with respect to approvals of any Rule 12b-1
distribution plan related to that specific class (although Class B
shareholders may vote on any distribution fees imposed on Class A Shares as
long as Class B Shares convert into Class A Shares); (iii) only Class B
Shares carry a conversion feature; and (iv) each class has different
exchange privileges. Sales personnel of financial institutions distributing
the Funds' shares, and other persons entitled to receive compensation for
selling shares, may receive differing compensation for selling Class A and
Class B Shares.
These alternative purchase arrangements permit an investor to choose the
method of purchasing shares that is more beneficial to that investor. The
amount of a purchase, the length of time an investor expects to hold the
shares, and whether the investor wishes to receive dividends in cash or in
additional shares, will all be factors in determining which sales charge
option is best for a particular investor. An investor should consider
whether, over the time he or she expects to maintain the investment, the
accumulated sales charges on Class B Shares prior to conversion would be
less than the initial sales charge on Class A Shares, and to what extent the
differential may be offset by the expected higher yield of Class A Shares.
Class A Shares will normally be more beneficial to an investor if he or she
qualifies for reduced sales charges as described below. Accordingly, orders
for Class B Shares for $250,000 or more ordinarily will be treated as orders
for Class A Shares or declined.
The Directors of FAIF have determined that no conflict of interest currently
exists between the Class A and Class B Shares. On an ongoing basis, the
Directors, pursuant to their fiduciary duties under the 1940 Act and state
laws, will seek to ensure that no such conflict arises.
----------------------------------------------------------------------------
CLASS A SHARES
WHAT CLASS A SHARES COST. Class A Shares of each Fund are offered on a
continuous basis at their next determined offering price, which is net asset
value, plus a sales charge as set forth below:
----------------------------------------------------------------------------
MID CAP GROWTH FUND AND EMERGING MARKETS FUND
<TABLE>
<CAPTION>
MAXIMUM
AMOUNT OF
SALES CHARGE SALES CHARGE SALES CHARGE
AS PERCENTAGE AS PERCENTAGE REALLOWED TO
OF OFFERING OF NET ASSET PARTICIPATING
PRICE VALUE INSTITUTIONS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.05%
$50,000 but less than $100,000 4.00% 4.17% 3.60%
$100,000 but less than $250,000 3.50% 3.63% 3.15%
$250,000 but less than $500,000 2.75% 2.83% 2.47%
$500,000 but less than $1,000,000 2.00% 2.04% 1.80%
$1,000,000 and over 0% 0% 0%
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
----------------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
<TABLE>
<CAPTION>
MAXIMUM
AMOUNT OF
SALES CHARGE SALES CHARGE SALES CHARGE
AS PERCENTAGE AS PERCENTAGE REALLOWED TO
OF OFFERING OF NET ASSET PARTICIPATING
PRICE VALUE INSTITUTIONS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
- --------------------------------------------------------------------------------------------
</TABLE>
----------------------------------------------------------------------------
TAX FREE FUND AND MINNESOTA TAX FREE FUND
<TABLE>
<CAPTION>
MAXIMUM
AMOUNT OF
SALES CHARGE SALES CHARGE SALES CHARGE
AS PERCENTAGE AS PERCENTAGE REALLOWED TO
OF OFFERING OF NET ASSET PARTICIPATING
PRICE VALUE INSTITUTIONS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 3.00% 3.09% 2.70%
$50,000 but less than $100,000 2.50% 2.56% 2.25%
$100,000 but less than $250,000 2.00% 2.04% 1.80%
$250,000 but less than $500,000 1.50% 1.52% 1.35%
$500,000 but less than $1,000,000 1.00% 1.01% 0.80%
$1,000,000 and over 0% 0% 0%
- --------------------------------------------------------------------------------------------
</TABLE>
There is no initial sales charge on purchases of Class A Shares of $1
million or more. However, Participating Institutions may receive a
commission equal to 1.00% of the first $3 million of shares purchased, 0.75%
of shares purchased in excess of $3 million up to $5 million, and 0.50% of
shares purchased in excess of $5 million. If such a commission is paid,
redemptions of Class A Shares purchased at net asset value within 12 month
of such purchases will be subject to a contingent deferred sales charge of
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
<PAGE>
to a dealer will be retained by the Distributor. In addition, the
Distributor may, from time to time in its sole discretion, institute one or
more promotional incentive programs which will be paid by the Distributor
from the sales charge it receives or from any other source available to it.
Under any such program, the Distributor will provide promotional incentives,
in the form of cash or other compensation including merchandise, airline
vouchers, trips and vacation packages, to all dealers selling shares of the
Funds. Promotional incentives of these kinds will be offered uniformly to
all dealers and predicated upon the amount of shares of the Funds sold by
the dealer. Whenever 90% or more of a sales charge is paid to a dealer, that
dealer may be deemed to be an underwriter as defined in the Securities Act
of 1933.
The sales charge for shares sold other than through registered
broker-dealers will be retained by the Distributor. The Distributor may pay
fees to financial institutions out of the sales charge in exchange for sales
and/or administrative services performed on behalf of the institution's
customers in connection with the initiation of customer accounts and
purchases of Fund shares.
REDUCING THE CLASS A SALES CHARGE. The sales charge can be reduced on the
purchase of Class A Shares through (i) quantity discounts and accumulated
purchases, or (ii) signing a 13-month letter of intent:
* QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES: As shown in the table
above, larger purchases of Class A Shares reduce the percentage sales
charge paid. Each Fund will combine purchases made on the same day by an
investor, the investor's spouse, and the investor's children under age
21 when it calculates the sales charge. In addition, the sales charge,
if applicable, is reduced for purchases made at one time by a trustee or
fiduciary for a single trust estate or a single fiduciary account.
The sales charge discount applies to the total current market value of
any Fund, plus the current market value of any other FAIF Fund and any
other mutual funds having a sales charge and distributed as part of the
First American family of funds. Prior purchases and concurrent purchases
of Class A Shares of any FAIF Fund will be considered in determining the
sales charge reduction. In order for an investor to receive the sales
charge reduction on Class A Shares, the Transfer Agent must be notified
by the investor in writing or by his or her financial institution at the
time the purchase is made that Fund shares are already owned or that
purchases are being combined.
* LETTER OF INTENT: If an investor intends to purchase at least $50,000 of
Class A Shares in a Fund and other FAIF Funds over the next 13 months,
the sales charge may be reduced by signing a letter of intent to that
effect. This letter of intent includes a provision for a sales charge
adjustment depending on the amount actually purchased within the
13-month period and a provision for the Custodian to hold a percentage
equal to the particular FAIF Fund's maximum sales charge rate of the
total amount intended to be purchased in escrow (in shares) for all FAIF
Funds until the purchase is completed.
The amount held in escrow for all FAIF Funds will be applied to the
investor's account at the end of the 13-month period after deduction of
the sales load applicable to the dollar value of shares actually
purchased. In this event, an appropriate number of escrowed shares may
be redeemed in order to realize the difference in the sales charge.
A letter of intent will not obligate the investor to purchase shares,
but if he or she does, each purchase during the period will be at the
sales charge applicable to the total amount intended to be purchased.
This letter may be dated as of a prior date to include any purchases
made within the past 90 days.
SALES OF CLASS A SHARES AT NET ASSET VALUE. Purchases of a Fund's Class A
Shares by the Advisor, the Sub-Advisor, or any of their affiliates, or any
of their or FAIF's officers, directors, employees, retirees, sales
representatives and
<PAGE>
partners, registered representatives of any broker-dealer authorized to sell
Fund shares, and full-time employees of FAIF's general counsel, and members
of their immediate families (i.e., parent, child, spouse, sibling, step or
adopted relationships, and UTMA accounts naming qualifying persons), may be
made at net asset value without a sales charge. A Fund's Class A Shares also
may be purchased at net asset value without a sales charge by fee-based
registered investment advisors, financial planners and registered
broker-dealers who are purchasing shares on behalf of their customers and by
purchasers through "one-stop" mutual fund networks through which the Funds
are made available. In addition, Class A Shares may be purchased at net
asset value without a sales charge by investors participating in asset
allocation "wrap" accounts offered by the Advisor or any of its affiliates,
and by retirement and deferred compensation plans and the trusts used to
fund such plans (including, but not limited to, those defined in sections
401(a), 403(b) and 457 of the Internal Revenue Code and "rabbi trusts"),
which plans and trusts purchase through "one-stop" mutual fund networks. No
commission is paid in connection with net asset value purchases of Class A
Shares made pursuant to this paragraph, nor is any contingent deferred sales
charge imposed upon the redemption of such shares.
Class A Shares may also be purchased without a sales charge by retirement
and deferred compensation plans and trusts used to fund such plans, as
defined in Sections 401(a), 403(b) and 457 of the Internal Revenue Code,
which either have 200 or more eligible participants or purchase shares
through an affiliate of the Advisor. A contingent deferred sales charge of
1.00% will be imposed if shares are redeemed within 12 months of purchase.
Participating Institutions may receive a commission on such sales equal to
1.00% of the first $3 million of shares purchased, 0.75% of shares purchased
in excess of $3 million up to $5 million, and 0.50% of shares purchased in
excess of $5 million.
If Class A Shares of a Fund have been redeemed, the shareholder has a
one-time right, within 30 days, to reinvest the redemption proceeds in Class
A Shares of any FAIF Fund at the next-determined net asset value without any
sales charge. The Transfer Agent must be notified by the shareholder in
writing or by his or her financial institution of the reinvestment in order
to eliminate a sales charge. If the shareholder redeems his or her shares of
a Fund, there may be tax consequences.
In addition, purchases of Class A Shares of a Fund that are funded by
proceeds received upon the redemption (within 60 days of the purchase of
Fund shares) of shares of any unrelated open-end investment company that
charges a sales load and rollovers from retirement plans that utilize the
Funds as investment options may be made at net asset value. To make such a
purchase at net asset value, an investor or the investor's broker must, at
the time of purchase, submit a written request to the Transfer Agent that
the purchase be processed at net asset value pursuant to this privilege,
accompanied by a photocopy of the confirmation (or similar evidence) showing
the redemption from the unrelated fund. The redemption of the shares of the
non-related fund is, for federal income tax purposes, a sale upon which a
gain or loss may 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.
<PAGE>
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, 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 701/2. A shareholder or his or her representative must
notify the Transfer Agent prior to the time of redemption if such
circumstances exist and the shareholder is eligible for this waiver.
CONVERSION FEATURE. At the end of the period ending eight years after the
beginning of the month in which the shares were issued, Class B Shares 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
<PAGE>
only upon the prior approval by the Fund and a determination by the Fund and
the Advisor 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.
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
distribution, shareholder servicing, transfer agent and/or dividend
disbursing 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.
<PAGE>
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 -- By Mail." Neither the Funds, the Distributor, the Transfer Agent,
any shareholder servicing agent, or any financial institution will be
responsible for further verification of the authenticity of the exchange
instructions.
Telephone exchange instructions made by an investor may be carried out only
if a telephone authorization form completed by the investor is on file with
the Transfer Agent, shareholder servicing agent, or financial institution.
Shares may be exchanged between two First American funds by telephone only
if both funds have identical shareholder registrations.
Telephone exchange instructions may be recorded and will be binding upon the
shareholder. Telephone instructions must be received by the Transfer Agent
before 3:00 p.m. Central time, or by a shareholder's shareholder servicing
agent or financial institution by the time specified by it, in order for
shares to be exchanged the same day. Neither the Transfer Agent nor any Fund
will be responsible for the authenticity of exchange instructions received
by telephone if it reasonably believes those instructions to be genuine. The
Funds and the Transfer Agent will each employ reasonable procedures to
confirm that telephone instructions are genuine, and they may be liable for
losses resulting from unauthorized or fraudulent telephone instructions if
they do not employ these procedures.
Shareholders of the Funds may have difficulty in making exchanges by
telephone through brokers and other financial institutions during times of
drastic economic or market changes. If a shareholder cannot contact his or
her broker or financial institution by telephone, it is recommended that an
exchange request be made in writing and sent by overnight mail to DST
Systems, Inc., 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 may be exchanged for shares of a class in which an
investor subsequently becomes 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.
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 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
<PAGE>
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 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:
<PAGE>
* 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 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.
<PAGE>
It is the responsibility of Participating Institutions promptly to forward
purchase and redemption orders to the Transfer Agent. In the case of
redemptions and repurchases of shares owned by corporations, trusts or
estates, the Transfer Agent or Fund may require additional documents to
evidence appropriate authority in order to effect the redemption, and the
applicable price will be that next determined following the receipt of the
required documentation.
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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.
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 asked 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
<PAGE>
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 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 the shares represented a
capital asset in the hands of the shareholder. Such gain or loss will be
long-term (subject to a maximum 20% tax rate in the case of individuals,
estates and trusts) if the shares were held for more than one year.
A Fund may be required to "back-up" withhold 31% of any dividend,
distribution, or redemption payment made to a shareholder who fails to
furnish the Fund with the shareholder's Social Security number or other
taxpayer identification number or to certify that he or she is not subject
to back-up withholding.
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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 advisor with respect to the possible
effects of such tax preference items.
<PAGE>
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 Advisor, 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 the
value 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.
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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 that are not exempt-interest or capital gain
dividends, are included in the Minnesota taxable net income of individuals,
<PAGE>
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.
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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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 advisors regarding state and local taxation.
TAX-EXEMPT VS. INCOME TAXABLE
The tables below 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
Tax-Equivalent Yields
<TABLE>
<CAPTION>
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>
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 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.
<PAGE>
"Cumulative total return" reflects a Fund's performance over a stated period
of time. "Average annual total return" reflects the hypothetical annually
compounded rate that would have produced the same cumulative total return if
performance had been constant over the entire period. Because average annual
returns tend to smooth out variations in a Fund's performance, they are not
the same as actual year-by-year results. As a supplement to total return
computations, a Fund may also publish "total investment return" computations
which do not assume deduction of the maximum sales charge imposed on Class A
Shares or the contingent deferred sales charge imposed on Class B Shares.
"Distribution rate" is determined by dividing the income dividends per share
for a stated period by the maximum offering price per share on the last day
of the period. "Tax equivalent distribution rate" is computed by dividing
the portion of the distribution rate (determined as described above) which
is tax-exempt by one minus the stated federal or combined federal/state
income tax rate, and adding to the resulting amount that portion, if any, of
the distribution rate which is not tax-exempt. All distribution rates
published for the Funds are measures of the level of income dividends
distributed during a specified period. Thus, these rates differ from yield
(which measures income actually earned by a Fund) and total return (which
measures actual income, plus realized and unrealized gains or losses of a
Fund's investments). Consequently, distribution rates alone should not be
considered complete measures of performance.
The performance of the Class A and Class B Shares of a Fund will normally be
lower than for the Class Y Shares because Class Y Shares are not
subject to the sales charges, shareholder servicing, transfer agent and/or
dividend disbursing 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 Advisor, subject to certain restrictions contained in
an exemptive order
<PAGE>
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 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
<PAGE>
securities which pay only the principal or interest due on the underlying
municipal securities. Tax Free Fund and Minnesota Tax Free Fund may each
invest up to 10% of their total assets in custodial receipts which have
inverse floating interest rates. See "-- Inverse Floating Rate Obligations,"
below.
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, 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 Advisor 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.
<PAGE>
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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 Advisor and, in the case of Emerging
Markets Fund, Sub-Advisor 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 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.
<PAGE>
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 Advisor or, in the case of Emerging Markets
Fund, the Sub-Advisor 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 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
<PAGE>
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. Mid Cap Growth Fund and Emerging Markets Fund may
write (sell) covered call options to the extent specified under "Investment
Objectives and Policies." These transactions would be undertaken principally
to produce additional income. These transactions may include the writing of
covered call options on equity securities or, in the case of Emerging
Markets Fund, on foreign currencies which the Fund owns or has the right to
acquire.
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 futures
contracts based on foreign currencies.
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
<PAGE>
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 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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FOREIGN SECURITIES
IN 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 up to 25% of
its total assets in securities of foreign issuers which are either listed on
a United States securities exchange or represented by American Depositary
Receipts.
Investment in foreign securities is subject to special investment risks that
differ in some respects from those related to investments in securities of
United States domestic issuers. These risks include political, social or
economic instability in the country of the issuer, the difficulty of
predicting international trade patterns, the possibility of the imposition
of exchange controls, expropriation, limits on removal of currency or other
assets, nationalization of assets, foreign withholding and income taxation,
and foreign trading practices (including higher trading commissions,
custodial charges and delayed settlements). Foreign securities also may be
subject to greater fluctuations in price than securities issued by United
States corporations. The principal markets on which these securities trade
may have less volume and liquidity, and may be more volatile, than
securities markets in the United States.
In addition, there may be less publicly available information about a
foreign company than about a United States domiciled company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to United
States domestic companies. There is also generally
<PAGE>
less government regulation of securities exchanges, brokers and listed
companies abroad than in the United States. Confiscatory taxation or
diplomatic developments could also affect investment in those countries. In
addition, foreign branches of United States banks, foreign banks and foreign
issuers may be subject to less stringent reserve requirements and to
different accounting, auditing, reporting, and recordkeeping standards than
those applicable to domestic branches of United States banks and United
States domestic issuers.
EMERGING MARKETS. Emerging Markets Fund may invest in securities issued by
governmental and corporate issuers that are located in emerging market
countries. Investing in securities of issuers in emerging markets involves
exposure to economic infrastructures that are generally less diverse and
mature than, and to political systems that can be expected to have less
stability than, those of developed countries. Other characteristics of
emerging market countries that may affect investment in their markets
include certain governmental policies that may restrict investment by
foreigners and the absence of developed legal structures governing private
and foreign investments and private property. The typical small size of the
markets for securities issued by issuers located in emerging markets and the
possibility of low or non-existent volume of trading in those securities may
also result in a lack of liquidity and in price volatility of those
securities. In addition, issuers in emerging market countries are typically
subject to a greater degree of change in earnings and business prospects
than are companies in developed markets.
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.
<PAGE>
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-Advisor's decision whether to enter into currency hedging
transactions will depend in part on its view regarding the direction and
amount in which exchange rates are likely to move. The forecasting of
movements in exchange rates is extremely difficult, so that it is highly
uncertain whether a hedging strategy, if undertaken, would be successful. To
the extent that the Sub-Advisor'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. ARMS also include adjustable rate tranches of collateralized
mortgage obligations. The adjustments usually are determined in accordance
with a predetermined interest rate index and may be subject to certain
limits. While the values of ARMS, like other debt securities, generally vary
inversely with changes in market interest rates (increasing in value during
periods of declining interest rates and decreasing in value during periods
of increasing interest rates), the values of ARMS should generally be more
resistant to price 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
<PAGE>
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.
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 credit- worthiness of the enhancement provider.
The ratings of such securities could be subject to reduction in the event of
deterioration in the credit- worthiness 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. 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
<PAGE>
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 meet the
Fund's rating requirements.
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 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.
----------------------------------------------------------------------------
CORPORATE FIXED-INCOME SECURITIES
Adjustable Rate Mortgage Securities Fund may invest in corporate
fixed-income securities, which include corporate bonds, debentures, notes
and other similar corporate debt instruments. Fixed-income securities may be
acquired with warrants attached. Corporate income-producing securities may
also include forms of preferred or preference stock. The values of corporate
fixed-income securities typically will fluctuate in response to general
economic conditions, to changes in interest rates and, to a greater extent
than the values of mortgage-related securities, to business conditions
affecting the specific industries in which the issuers are engaged.
Corporate fixed-income securities will typically decrease in value as a
result of increases in interest rates. The Fund may invest in certain types
of corporate fixed-income securities that have been issued with original
issue discount or market discount. An investment in such securities poses
certain economic risks and may have certain adverse cash flow consequences
to the investor.
----------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES
Adjustable Rate Mortgage Securities Fund may invest in securities issued
or guaranteed by the U.S. government or its agencies or instrumentalities
in addition to the U.S. government ARMS
<PAGE>
and other mortgage-backed securities described above. U.S. government
securities in which Adjustable Rate Mortgage Securities Fund may invest
include a variety of Treasury securities, which differ in their interest
rates, maturities and times of issuance. Treasury bills have maturities of
one year or less, Treasury notes have maturities of one to ten years, and
Treasury bonds generally have maturities of greater than ten years. Some
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, for example, GNMA pass-through certificates, are
supported by the full faith and credit of the U.S. Treasury; others, such as
those of the Federal Home Loan Banks, by the right of the issuer to borrow
from the Treasury; others, such as those issued by FNMA, by the
discretionary authority of the U.S. government to purchase certain
obligations of the agency or instrumentality; finally, obligations of other
agencies or instrumentalities are backed only by the credit of the agency or
instrumentality issuing the obligations. While the U.S. government provides
financial support to such U.S. government-sponsored agencies and
instrumentalities, no assurance can be given that it will always do so since
it is not so obligated by law.
----------------------------------------------------------------------------
FIXED INCOME SECURITIES
The fixed income securities in which Mid Cap Growth 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 noncon- vertible preferred stocks and nonconvertible
corporate debt securities will be limited to securities which are rated at
the time of purchase not less than BBB by Standard & Poor's or Baa by
Moody's (or equivalent short-term ratings), or which have been assigned an
equivalent rating by another nationally recognized statistical rating
organization, or which are of comparable quality in the judgment of the
Advisor. Obligations rated BBB, Baa or their 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 the Fund); (ii) credit risk (the
risk that the issuers of debt securities held by the Fund default in making
required payments); and (iii) call or prepayment risk (the risk that a
borrower may exercise the right to prepay a debt obligation before its
stated maturity, requiring the Fund to reinvest the prepayment at a lower
interest rate).
----------------------------------------------------------------------------
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 purchase
of an interest rate cap entitles the purchaser, to the extent a specified
index exceeds a predetermined interest rate, to receive payments of interest
on a contractually-based principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor entitles the
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.
----------------------------------------------------------------------------
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
<PAGE>
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 Advisor, and in the case of
Emerging Markets Fund, the Sub-Advisor. 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 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 to pollution control revenue bonds.
However, in the case of Minnesota Tax Free 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.
<PAGE>
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, Rule 144A securities and municipal lease
obligations may be determined to be "liquid" under guidelines adopted by the
Board of Directors. Investing in Rule 144A securities could have the effect
of increasing the level of illiquidity in a Fund to the extent that
qualified institutional buyers become, for a time, uninterested in
purchasing these securities.
INFORMATION CONCERNING COMPENSATION PAID TO U.S. BANK NATIONAL ASSOCIATION
AND OTHER AFFILIATES
U.S. Bank 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 Advisor"
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 Advisor
U.S. BANK NATIONAL ASSOCIATION
601 Second Avenue South
Minneapolis, Minnesota 55402
Custodian
U.S. BANK 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>
JULY 31, 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
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(R)
<PAGE>
TABLE OF CONTENTS
Summary 2
.........................................
Fees and Expenses 4
.........................................
Financial Highlights 6
.........................................
The Funds 9
.........................................
Investment Objectives and Policies 9
.........................................
Management 16
.........................................
Distributor 21
.........................................
Purchases and Redemptions of Shares 21
.........................................
Income Taxes 25
.........................................
Tax-Exempt vs. Taxable Income 28
.........................................
Fund Shares 28
.........................................
Calculation of Performance Data 28
.........................................
Special Investment Methods 29
.........................................
Information Concerning Compensation
Paid to U.S. Bank National Association
and Other Affiliates 42
.........................................
<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 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 July 31, 1998 for the Funds has
been filed with the Securities and Exchange Commission ("SEC") and is
incorporated in its entirety by reference in this Prospectus. To obtain
copies of the Statement of Additional Information at no charge, or to obtain
other information or make inquiries about the Funds, call (800) 637-2548 or
write SEI Investments Distribution Co., Oaks, Pennsylvania 19456. The SEC
maintains a World Wide Web site that contains reports and information
regarding issuers that file electronically with the SEC. The address of such
site is "http://www.sec.gov."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is July 31, 1998.
<PAGE>
SUMMARY
First American Investment Funds, Inc. ("FAIF") is an open-end investment
company which offers shares in several different mutual funds. This
Prospectus provides information with respect to the Class 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 opinion of the Fund's advisor, 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 with adjustable interest
rates that reset at periodic intervals.
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. 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 the 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 the 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, the 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 the 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 the Fund will range from 15 to 25 years.
INVESTMENT ADVISOR. U.S. Bank National Association (the "Advisor" or "U.S.
Bank") serves as investment advisor to each of the Funds though its First
American Asset Management group. Marvin & Palmer Associates, Inc. (the
"Sub-Advisor") serves as sub-advisor 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 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
<PAGE>
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 Advisor or Sub-Advisor 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; (iv) Emerging Markets Fund is subject to the
risks associated with investing in securities issued by issuers in emerging
market countries; and (v) 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
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). 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. 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(2) 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(3)
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
THEREAFTER IN ITS SOLE DISCRETION. NOTWITHSTANDING THE FOREGOING, THE
ADVISER WILL MAINTAIN WAIVERS FOR THE FUNDS AT LEAST THROUGH JULY 31, 2000
SO THAT THE TOTAL FUND OPERATING EXPENSES FOR CLASS Y SHARES 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) OTHER EXPENSES ARE BASED ON ESTIMATED AMOUNTS FOR THE CURRENT FISCAL YEAR.
(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, $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>
FINANCIAL HIGHLIGHTS
The following financial highlights show certain per share data and selected
information for a share of capital stock outstanding during the indicated
periods. The information presented for Class Y Shares of Mid Cap Growth Fund
and Minnesota Tax Free Fund (the "First American Funds") represents the
financial history of Class Y Shares of Piper Emerging Growth Fund and Piper
Minnesota Tax-Exempt Fund (the "Piper Funds"), respectively. Shareholders of
each of the Piper Funds have approved a reorganization into the
corresponding First American Funds. These reorganizations will become
effective with the close of business on July 31, 1998 for Minnesota Tax Free
Fund and August 7, 1998 for Mid Cap Growth Fund. Since the First American
Funds will have no assets or liabilities prior to the reorganizations, the
financial highlights for each First American Fund will represent the
financial history of its predecessor Piper Fund upon consummation of the
respective reorganization. Since the Piper Emerging Markets Growth Fund,
Piper Adjustable Rate Mortgage Securities Fund and Piper National Tax-Exempt
Fund did not previously offer Class Y Shares, no such information is
provided.
Except as indicated, this information has been audited by KPMG Peat Marwick
LLP, independent auditors. The financial highlights should be read in
conjunction with the financial statements of each applicable Piper Fund. The
independent auditors' reports and related financial statements can be found
in the September 30, 1997 Annual Reports to Shareholders of the Piper Funds,
which, along with the March 31, 1998 Semiannual Report of the Piper Funds,
can be obtained without charge by calling (800) 637-2548.
<PAGE>
----------------------------------------------------------------------------
MID CAP GROWTH FUND CLASS Y SHARES
<TABLE>
<CAPTION>
SIX MONTHS PERIOD FROM
ENDED 3/31/98 2/18/97(1)
(UNAUDITED) TO 9/30/97
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period $ 15.29 $ 12.54
- -----------------------------------------------------------------------------------------------
Operations:
Net investment loss (0.02) (0.01)
Net realized and unrealized gains on investments 1.46 2.76
- -----------------------------------------------------------------------------------------------
Total from operations 1.44 2.75
- -----------------------------------------------------------------------------------------------
Distributions to shareholders:
From net realized gains on investments (1.56) --
- -----------------------------------------------------------------------------------------------
Net asset value, end of period $ 15.17 $ 15.29
- -----------------------------------------------------------------------------------------------
SELECTED INFORMATION
Total return(2) 11.45% 21.93%
Net assets at end of period (in millions) $ 61 $ 59
Ratio of expenses to average daily net assets(3) 0.85% 0.87%
Ratio of net investment loss to average daily net assets(3) (0.33)% (0.16)%
Average commission rate paid on portfolio transactions $0.0600 $0.0600
Portfolio turnover rate (excluding short-term securities) 21% 51%
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OFFERING OF CLASS Y SHARES.
(2) TOTAL RETURN ASSUMES REINVESTMENT OF DISTRIBUTIONS AND DOES NOT REFLECT A
SALES CHARGE.
(3) ANNUALIZED.
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
----------------------------------------------------------------------------
MINNESOTA TAX FREE FUND CLASS Y SHARES
<TABLE>
<CAPTION>
SIX MONTHS PERIOD FROM
ENDED 3/31/98 8/1/97(1)
(UNAUDITED) TO 9/30/97
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period $ 11.14 $ 11.16
- -----------------------------------------------------------------------------------------------
Operations:
Net investment income 0.29 0.10
Net realized and unrealized gains (losses) on investments 0.14 (0.02)
- -----------------------------------------------------------------------------------------------
Total from operations 0.43 0.08
- -----------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income (0.29) (0.10)
From net realized gains on investments (0.06) --
- -----------------------------------------------------------------------------------------------
Total distributions to shareholders (0.35) (0.10)
- -----------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.22 $ 11.14
- -----------------------------------------------------------------------------------------------
SELECTED INFORMATION
Total return(2) 3.89% 0.72%
Net assets at end of period (in millions) $ 8 $ 9
Ratio of expenses to average daily net assets 0.70%(3) 0.75%(3)
Ratio of net investment income to average daily net assets 5.30%(3) 5.73%(3)
Portfolio turnover rate (excluding short-term securities) 13% 17%
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OFFERING OF CLASS Y SHARES.
(2) TOTAL RETURN ASSUMES REINVESTMENT OF DISTRIBUTIONS AND DOES NOT REFLECT A
SALES CHARGE.
(3) ANNUALIZED.
<PAGE>
THE FUNDS
FAIF is an open-end management investment company which offers shares in
several different mutual funds (collectively, the "FAIF Funds"), each of
which evidences an interest in a separate and distinct investment portfolio.
Shareholders may purchase shares in each FAIF Fund through several separate
classes which provide for variations in distribution costs, shareholder
servicing fees, voting rights and dividends. Except for these differences
among classes, each share of each FAIF Fund represents an undivided
proportionate interest in that Fund. FAIF is incorporated under the laws of
the State of Maryland, and its principal offices are located at Oaks,
Pennsylvania 19456.
This Prospectus relates only to the Class 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 limitations on illiquid investments and borrowing.
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. In addition, if a Fund
is restricted to investing in securities which have received at least a
specific rating, the Fund may invest in securities of the lowest gradation
within that category. 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
<PAGE>
matters is set forth under "Special Investment Methods."
----------------------------------------------------------------------------
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 Advisor'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 limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed on
a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
associated risks, see "Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund and write call options
on stock indices related to such equity securities; (iv) purchase securities
on a when-issued or delayed delivery basis; and (v) engage in the lending of
portfolio securities. For information about these investment methods,
restrictions on their use, and certain associated risks, see the related
headings under "Special Investment Methods."
For temporary defensive purposes, the Fund may without limitation hold cash
or invest in cash items of the kinds described under "Special Investment
Methods -- Cash Items." The Fund also may invest not more 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 a 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
<PAGE>
time, the Fund has no intention of investing all of its assets in a single
country.
In investing the Fund's assets, the Sub-Advisor expects to place primary
emphasis on country selection, followed by selection of industries or
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.
----------------------------------------------------------------------------
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 with adjustable interest rates that reset at
periodic intervals ("adjustable rate mortgage securities" or "ARMS"). ARMS
have interest rates which reset periodically in response to changes in the
current interest rate environment. ARMS 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 payment of
principal or interest by the U.S. government or its agencies or
instrumentalities, private pass-through securities, asset backed securities
and other 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 contracts and options thereon; (iii) in order to attempt to reduce
risk, invest in exchange traded put and call options 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 85% of the Fund's total assets must be invested in securities
issued or guaranteed by the U.S. government or its agencies or
instrumentalities or securities rated AA or better by Standard & Poor's, Aa
or better by Moody's, comparably rated by another nationally recognized
statistical rating organization ("NRSRO") or, if unrated, of comparable
quality as determined by the Advisor. The Fund may not invest in any
security rated
<PAGE>
lower than A by Standard & Poor's or Moody's (or below a comparable rating
by any other NRSRO) or, if unrated, of a quality lower than A as determined
by the Advisor. Unrated securities deemed to be of comparable quality to
rated securities will not exceed 25% of the Fund's total assets.
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 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 or 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 Advisor. Unrated securities
deemed to be of comparable quality to rated securities as set forth above
will not exceed 25% in the aggregate of the value of the Fund's total
assets.
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 net 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 net 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 Advisor. 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
<PAGE>
contracts and options thereon; (iii) in order to attempt to reduce risk,
invest in exchange traded put and call options 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."
----------------------------------------------------------------------------
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 the 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 or 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 Advisor. Unrated securities
deemed to be of comparable quality to rated securities as set forth above
will not exceed 25% in the aggregate of the value of the Fund's total
assets.
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 net 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 net 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 Advisor. 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
<PAGE>
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
contracts and options thereon; (iii) in order to attempt to reduce risk,
invest in exchange traded put and call options 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."
----------------------------------------------------------------------------
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 Advisor, or in the case of Emerging Markets Fund,
the Sub-Advisor. The performance of these Funds will reflect in part the
ability of the Advisor or Sub-Advisor 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. Emerging Markets Fund is also subject to
risks associated with investing in securities issued by issuers in emerging
market countries. These risks are discussed under "Special Investment
Methods -- Foreign Securities" elsewhere herein. Because of the special
risks associated with foreign investing, Emerging Markets Fund 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-backed
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.
<PAGE>
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 Intermediate Tax Free Fund.
Although the Advisor may engage in transactions intended to hedge the value
of the Funds' portfolios against changes in market interest rates, there is
no assurance that such hedging transactions will be undertaken or will
fulfill their purpose. See "Special Investment Methods -- Options
Transactions," "-- Futures and Options on Futures" and "-- Interest Rate
Transactions."
CREDIT RISK. Credit risk is the risk that the issuer of a debt security will
fail to make payments on the security when due. Because Adjustable Rate
Mortgage Securities Fund, Tax Free Fund and Minnesota Tax Free Fund invest
in debt securities, they are subject to credit risk.
As described under "Special Investment Methods -- Municipal Bonds and Other
Municipal Obligations," the revenue bonds and municipal lease obligations in
which 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, which have been assigned an equivalent rating by another
nationally recognized statistical rating organization, or which are of
comparable quality in the judgment of the Advisor. 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 and corporate bonds may be redeemed at the option
of the issuer ("called") at a specified price prior to their stated maturity
date. In general, it is advantageous for an issuer to call its bonds if they
can be refinanced through the issuance of new bonds which bear a lower
interest rate than that of the called bonds. Call risk is the risk that
bonds will be called during a period of declining market interest rates so
that such refinancings may take place.
If a bond held by a Fund is called during a period of declining interest
rates, the Fund probably will have to reinvest the proceeds received by it
at a lower interest rate than that borne by the called bond, thus resulting
in a decrease in the Fund's income. To the extent that the Funds invest in
callable bonds, Fund shareholders bear the risk that reductions in income
will result from the call of bonds.
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
<PAGE>
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 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.
YEAR 2000. Like other mutual funds, financial and business organizations,
the Funds could be adversely affected if the computer systems used by the
Advisor, the Sub-Advisor, the Administrator and other service providers and
entities with computer systems that are linked to Fund records do not
properly process and calculate date-related information and data from and
after January 1, 2000. This is commonly known as the "Year 2000 issue." The
Funds have undertaken a Year 2000 program that is believed by the Advisor to
be reasonably designed to assess and monitor the steps being taken by the
Funds' service providers to address the Year 2000 issue with respect to the
computer systems they use. However, there can be no assurance that these
steps will be sufficient to avoid any adverse impact on the Funds.
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 Advisor
acts as investment advisor for and manages the investment portfolios of
FAIF.
<PAGE>
----------------------------------------------------------------------------
INVESTMENT ADVISOR
U.S. Bank National Association, 601 Second Avenue South, Minneapolis,
Minnesota 55402, acts as the Funds' investment advisor through its First
American Asset Management group. The Advisor has acted as an investment
advisor to FAIF since its inception in 1987 and has acted as investment
advisor to First American Funds, Inc. since 1982 and to First American
Strategy Funds, Inc. since 1996. As of September 30, 1997, the Advisor 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 Advisor.
Each of the Funds, other than Emerging Markets Fund, has agreed to pay the
Advisor monthly fees calculated on an annual basis equal to 0.70% of its
average daily net assets. Emerging Markets Fund pays the Advisor a monthly
fee calculated on the same basis equal to 1.25% of its average daily net
assets, out of which the Advisor pays the Sub-Advisor's fee. The Advisor
may, at its option, waive any or all of its fees, or reimburse expenses,
with respect to any Fund from time to time. Any such waiver or reimbursement
is voluntary and may be discontinued at any time except as discussed under
"Fees and Expenses -- Class Y Share Fees and Expenses." The Advisor also may
absorb or reimburse expenses of the Funds from time to time, in its
discretion, while retaining the ability to be reimbursed by the Funds for
such amounts prior to the end of the fiscal year. This practice would have
the effect of lowering a Fund's overall expense ratio and of increasing
yield to investors, or the converse, at the time such amounts are absorbed
or reimbursed, as the case may be.
The Glass-Steagall Act generally prohibits banks from engaging in the
business of underwriting, selling or distributing securities and from being
affiliated with companies principally engaged in those activities. In
addition, administrative and judicial interpretations of the Glass-Steagall
Act prohibit bank holding companies and their bank and nonbank subsidiaries
from organizing, sponsoring or controlling registered open-end investment
companies that are continuously engaged in distributing their shares. Bank
holding companies and their bank and nonbank subsidiaries may serve,
however, as investment advisors to registered investment companies, subject
to a number of terms and conditions.
Although the scope of the prohibitions and limitations imposed by the
Glass-Steagall Act has not been fully defined by the courts or the
appropriate regulatory agencies, FAIF has received an opinion from its
counsel that the Advisor is not prohibited from performing the investment
advisory services described above. In the event of changes in federal or
state statutes or regulations or judicial and administrative interpretations
or decisions pertaining to permissible activities of bank holding companies
and their bank and nonbank subsidiaries, the Advisor might be prohibited
from continuing these arrangements. In that event, it is expected that the
Board of Directors would make other arrangements and that shareholders would
not suffer adverse financial consequences.
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SUB-ADVISOR TO EMERGING MARKETS FUND
Marvin & Palmer Associates, Inc., 1201 North Market Street, Suite 2300,
Wilmington, Delaware 19801, is sub-advisor to Emerging Markets Fund under an
agreement with the Advisor (the "Sub-Advisory Agreement"). The Sub-Advisor
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-Advisor is paid a monthly fee by the Advisor calculated on an annual
basis equal to 0.85% of the first $100 million of Emerging Markets Fund's
average daily net assets, 0.60% of the Fund's average daily net assets in
excess of $100 million up to $300 million, 0.55% of the Fund's average daily
net assets in excess of $300 million up to $500 million and 0.50% of the
Fund's average daily net assets in excess of $500 million.
<PAGE>
The Sub-Advisor, a privately held company, was founded in 1986 by David F.
Marvin and Stanley Palmer. The stock of the Sub-Advisor is owned by Mr.
Marvin, Mr. Palmer and 24 other holders. The Sub-Advisor is engaged in the
management of global, non-United States and emerging markets equity
portfolios for institutional accounts. At January 1, 1998, the Sub-Advisor
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 Advisor in 1998, Ms. Shrewsbury served as a senior vice
president and portfolio manager for Piper Capital Management 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 four years of investment industry experience. Prior to
joining the Advisor 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 Advisor 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
Advisor. 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 Advisor 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 Advisor overseeing the
management of the Advisor'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 Advisor 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
<PAGE>
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 nine years of investment industry experience.
Prior to joining the Advisor 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 Advisor in 1998, Mr. McGlinch
served as a senior vice president and 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.
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 Advisor 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 Advisor 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
Advisor, 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 Advisor in 1998, Mr. Reuss served as an economist,
senior vice president and portfolio manager for Piper Capital Management
Incorporated overseeing the management of several Piper Funds, including 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 Advisor in 1998, Mr. White served as a
senior vice president and portfolio manager for Piper Capital Management
Incorporated overseeing the management of several Piper Funds, including
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 seven individuals shares the
management of Emerging Markets Fund on behalf of the Sub-Advisor:
DAVID F. MARVIN is Chairman of the Sub-Advisor and founded the firm
together with Mr. Palmer in
<PAGE>
1986. Before founding the Sub-Advisor, 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 and President of the Sub-Advisor 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.
TERRY B. MASON is a Senior Vice President and portfolio manager of the
Sub-Advisor. Before joining the Sub-Advisor, 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-Advisor 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-Advisor and joined the firm in 1991. Before joining the Sub-Advisor,
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-Advisor. Before becoming a Portfolio Manager, Mr. Schaen was Head
Trader for the Sub-Advisor from 1991 to 1994 and an International Analyst
for the Sub-Advisor 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-Advisor and joined the firm in 1994. Before joining the Sub-Advisor,
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 National Association (the
"Custodian"), U.S. Bank 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
<PAGE>
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.
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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 Advisor.
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 Advisor, is a
wholly-owned subsidiary of SEI Investments Company and is located at Oaks,
Pennsylvania 19456.
The Distributor, the Administrator and the Advisor 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 Advisor and their 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
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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
<PAGE>
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.
Shares may be purchased through a financial institution which has a sales
agreement with the Distributor. An investor may call its 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.
The Funds are required to redeem for cash all full and fractional shares of
the Funds. Redemption requests may be made any time before 3:00 p.m. Central
time in order to receive that day's redemption price. For redemption
requests received before 3:00 p.m. Central time, payment will ordinarily be
made the next business day by transfer of federal funds, but payment may be
made up to 7 days after the request.
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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.
<PAGE>
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 asked price for a short position.
Foreign currency forward contracts are valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
exchange rate, and the thirty, sixty, ninety and one-hundred eighty day
forward rates provided by the Reuters system.
Although the methodology and procedures for determining net asset value are
identical for all classes of shares, the net asset value per share of
different classes of shares of the same Fund may differ because of
distribution, shareholder servicing, transfer agent and/or dividend
disbursing 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.
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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 Advisor or Sub-Advisor 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
<PAGE>
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, shareholder servicing, transfer agent and/or dividend
disbursing expenses charged to Class A and Class B Shares.
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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
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.
Written exchange requests must be signed exactly as shown on the
authorization form. Neither the Funds, the Distributor, the Transfer Agent,
any shareholder servicing agent, nor any financial institution will be
responsible for further verification of the authenticity of the exchange
instruction.
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 the
Funds will be responsible for the authenticity of exchange instructions
received by telephone if it reasonably believes those instructions to be
genuine. The Funds and the Transfer Agent will each employ reasonable
procedures to confirm that telephone instructions are genuine, and they may
be liable for losses resulting from unauthorized or fraudulent telephone
instructions if they do not employ these procedures.
Shareholders of the Funds may have difficulty in making exchanges by
telephone through brokers and other financial institutions during times of
drastic economic or market changes. If a shareholder cannot contact his or
her broker or financial institution by telephone, it is recommended that an
exchange request be made in writing and sent by overnight mail to DST
<PAGE>
Systems, Inc., 330 West Ninth Street, Kansas City, Missouri 64105. The
exchange 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 periodic investment programs). 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 this kind of exchange would be a situation in
which Class Y Shares held by a financial institution in a trust or agency
capacity for one or more individual beneficiaries are exchanged for Class A
Shares and distributed to the individual beneficiaries.
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 so. Shareholders will be notified of the imposition of
any additional fees or charges.
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 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 the shares represented a
capital asset in the hands of the shareholder. Such gain or loss will be
long term (subject to a maximum 20% tax rate in the case of individuals,
estates and trusts), if the shares were held for more than one year.
A Fund may be required to "back-up" withhold 31% of any dividend,
distribution, or redemption payment made to a shareholder who fails to
furnish the Fund with the shareholder's Social Security number or other
taxpayer identification number or to certify that he or she is not subject
to back-up withholding.
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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
<PAGE>
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 advisor 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 Advisor, 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 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
<PAGE>
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.
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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 that are not exempt-interest 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.
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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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
Tax-Equivalent Yields
<TABLE>
<CAPTION>
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>
federal income taxes). Shareholders are urged to consult their own tax
advisors regarding state and local taxation.
TAX-EXEMPT VS. TAXABLE INCOME
The tables above show the approximate yields that taxable securities must
earn to equal yields that are (i) exempt from federal income taxes; (ii)
exempt from both federal and 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 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 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
<PAGE>
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, shareholder servicing, transfer agent and/or dividend
disburing 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.
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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
<PAGE>
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 Advisor, 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.
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
<PAGE>
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. Tax Free Fund and Minnesota Tax Free Fund may each invest up to
10% of their total assets in custodial receipts which have inverse floating
interest rates. See "-- Inverse Floating Rate Obligations" below.
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, 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 Advisor 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
<PAGE>
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 Advisor and, in the case of Emerging
Markets Fund, Sub-Advisor 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 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.
<PAGE>
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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 Advisor or, in the case of Emerging Markets
Fund, the Sub-Advisor 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 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
<PAGE>
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. Mid Cap Growth Fund and Emerging Markets Fund may
write (sell) covered call options to the extent specified under "Investment
Objectives and Policies." These transactions would be undertaken principally
to produce additional income. These transactions may include the writing of
covered call options on equity securities or, in the case of Emerging
Markets Fund, on foreign currencies which the Fund owns or has the right to
acquire.
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 futures
contracts based on foreign currencies.
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
<PAGE>
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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FOREIGN SECURITIES
IN 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 up to 25% of
its total assets in securities of foreign issuers which are either listed on
a United States securities exchange or represented by American Depositary
Receipts.
Investment in foreign securities is subject to special investment risks that
differ in some respects from those related to investments in securities of
United States domestic issuers. These risks include political, social or
economic instability in the country of the issuer, the difficulty of
predicting international trade patterns, the possibility of the imposition
of exchange controls, expropriation, limits on removal of currency or other
assets, nationalization of assets, foreign withholding and income taxation,
and foreign trading practices (including higher trading commissions,
custodial charges and delayed settlements). Foreign securities also may be
subject to greater fluctuations in price than securities issued by United
States corporations. The principal markets on which these securities trade
may have less volume and liquidity,
<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.
EMERGING MARKETS. Emerging Markets Fund may invest in securities issued by
governmental and corporate issuers that are located in emerging market
countries. Investing in securities of issuers in emerging markets involves
exposure to economic infrastructures that are generally less diverse and
mature than, and to political systems that can be expected to have less
stability than, those of developed countries. Other characteristics of
emerging market countries that may affect investment in their markets
include certain governmental policies that may restrict investment by
foreigners and the absence of developed legal structures governing private
and foreign investments and private property. The typical small size of the
markets for securities issued by issuers located in emerging markets and the
possibility of low or nonexistent volume of trading in those securities may
also result in a lack of liquidity and in price volatility of those
securities. In addition, issuers in emerging market countries are typically
subject to a greater degree of change in earnings and business prospects
than are companies in developed markets.
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.
<PAGE>
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-Advisor's decision whether to enter into currency hedging
transactions will depend in part on its view regarding the direction and
amount in which exchange rates are likely to move. The forecasting of
movements in exchange rates is extremely difficult, so that it is highly
uncertain whether a hedging strategy, if undertaken, would be successful. To
the extent that the Sub-Advisor'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 may invest in adjustable rate
mortgage securities ("ARMS"). ARMS are pass-through mortgage securities
collateralized by mortgages with interest rates that are adjusted from time
to time. ARMS also include adjustable rate tranches of collateralized
mortgage obligations. The adjustments usually are determined in accordance
with a predetermined interest rate index and may be subject to certain
limits. While the values of ARMS, like other debt securities, generally vary
inversely with changes in market interest rates (increasing in value during
periods of declining interest rates and decreasing in value during periods
of increasing interest rates), the values of ARMS should generally be more
resistant to price 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
<PAGE>
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.
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
<PAGE>
by residential or commercial mortgage loans or Agency Pass-Through
Certificates. 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 meet the Fund's rating
requirements.
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.
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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.
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CORPORATE FIXED-INCOME SECURITIES
Adjustable Rate Mortgage Securities Fund may invest in corporate
fixed-income securities, which include corporate bonds, debentures, notes
and other similar corporate debt instruments. Fixed-income securities may be
acquired with warrants attached. Corporate income-producing securities may
also include forms of preferred or preference stock. The values of corporate
fixed-income securities typically will fluctuate in response to general
economic conditions, to changes in interest rates and, to a greater extent
than the values of mortgage-related securities, to business conditions
affecting the specific industries in which the issuers are engaged.
Corporate fixed-income securities will typically decrease in value as a
result of increases in interest rates. The Fund may invest in certain types
of corporate fixed-income securities that have been issued with original
issue discount or market discount. An investment in such securities poses
certain economic risks and may have certain adverse cash flow consequences
to the investor.
<PAGE>
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U.S. GOVERNMENT SECURITIES
Adjustable Rate Mortgage Securities Fund may invest in securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities in
addition to the U.S. government ARMS and other mortgage-backed securities
described above. U.S. government securities in which Adjustable Rate
Mortgage Securities Fund may invest include a variety of Treasury
securities, which differ in their interest rates, maturities and times of
issuance. Treasury bills have maturities of one year or less, Treasury notes
have maturities of one to ten years, and Treasury bonds generally have
maturities of greater than ten years. Some obligations issued or guaranteed
by U.S. government agencies or instrumentalities, for example, GNMA
pass-through certificates, are supported by the full faith and credit of the
U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the
right of the issuer to borrow from the Treasury; others, such as those
issued by FNMA, by the discretionary authority of the U.S. government to
purchase certain obligations of the agency or instrumentality; finally,
obligations of other agencies or instrumentalities are backed only by the
credit of the agency or instrumentality issuing the obligations. While the
U.S. government provides financial support to such U.S. government-sponsored
agencies and instrumentalities, no assurance can be given that it will
always do so since it is not so obligated by law.
----------------------------------------------------------------------------
INTEREST RATE TRANSACTIONS
Adjustable Rate Mortgage Securities Fund may purchase or sell interest rate
caps and floors to preserve a return or a spread on a particular investment
or portion of its portfolio or for other non-speculative purposes. The
purchase of an interest rate cap entitles the purchaser, to the extent a
specified index exceeds a predetermined interest rate, to receive payments
of interest on a contractually-based principal amount from the party selling
such interest rate cap. The purchase of an interest rate floor entitles the
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.
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FIXED INCOME SECURITIES
The fixed income securities in which Mid Cap Growth 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 Advisor. 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 the Fund); (ii) credit risk (the
risk that the issuers of debt securities held by the Fund default in making
required payments); and (iii) call or prepayment risk (the risk that a
borrower may exercise the right to prepay a debt obligation before its
stated maturity, requiring the Fund to reinvest the prepayment at a lower
interest rate).
<PAGE>
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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 Advisor, and in the case of
Emerging Markets Fund, the Sub-Advisor. 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 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 to pollution control revenue bonds.
However, in the case of Minnesota Tax Free Fund, it is anticipated that
normally (unless
<PAGE>
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, Rule 144A securities and municipal lease
obligations may be determined to be "liquid" under guidelines adopted by the
Board of Directors. Investing in Rule 144A securities could have the effect
of increasing the level of illiquidity in a Fund to the extent that
qualified institutional buyers become, for a time, uninterested in
purchasing these securities.
INFORMATION CONCERNING COMPENSATION PAID TO U.S. BANK NATIONAL ASSOCIATION
AND OTHER AFFILIATES
U.S. Bank 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 Advisor"
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 Advisor
U.S. BANK NATIONAL ASSOCIATION
601 Second Avenue South
Minneapolis, Minnesota 55402
Custodian
U.S. BANK 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>
FIRST AMERICAN INVESTMENT FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED JULY 31, 1998
MID CAP GROWTH FUND TAX FREE FUND
EMERGING MARKETS FUND MINNESOTA TAX FREE FUND
ADJUSTABLE RATE MORTGAGE SECURITIES 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
and Emerging Markets Fund. This Statement of Additional Information is not a
prospectus, but should be read in conjunction with the Funds' current
Prospectuses dated July 31, 1998. This Statement of Additional Information is
incorporated into the Funds' Prospectuses by reference. To obtain copies of a
Prospectus, write or call the Funds' distributor SEI Investments Distribution
Co., Oaks, Pennsylvania 19456, telephone: (800) 637-2548. Please retain this
Statement of Additional Information for future reference.
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION .................................... 2 INVESTMENT ADVISORY AND OTHER SERVICES ................. 17
ADDITIONAL INFORMATION CONCERNING FUND INVESTMENTS ..... 3 INVESTMENT ADVISORY AGREEMENT ........................ 17
SHORT-TERM INVESTMENTS ............................... 3 SUB-ADVISORY AGREEMENT FOR EMERGING MARKETS FUND ..... 18
REPURCHASE AGREEMENTS ................................ 3 ADMINISTRATION AGREEMENT ............................. 18
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS ........ 4 DISTRIBUTOR AND DISTRIBUTION PLANS ................... 19
LENDING OF PORTFOLIO SECURITIES ...................... 4 CUSTODIAN; TRANSFER AGENT; COUNSEL; ACCOUNTANTS ...... 20
OPTIONS TRANSACTIONS ................................. 4 PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE ..... 20
FUTURES AND OPTIONS ON FUTURES ....................... 5 CAPITAL STOCK ........................................ 22
EURODOLLAR INSTRUMENTS ............................... 6 NET ASSET VALUE AND PUBLIC OFFERING PRICE ............ 22
INTEREST RATE TRANSACTIONS ........................... 6 FUND PERFORMANCE ..................................... 23
FOREIGN SECURITIES ................................... 6 SEC STANDARDIZED PERFORMANCE FIGURES ................. 23
FOREIGN CURRENCY TRANSACTIONS ........................ 7 NON-STANDARD DISTRIBUTION RATES ...................... 25
MORTGAGE-BACKED SECURITIES ........................... 8 CERTAIN PERFORMANCE COMPARISONS ...................... 26
DERIVATIVE MUNICIPAL SECURITIES ...................... 9 TAXATION ............................................... 27
U.S. TREASURY INFLATION-PROTECTION SECURITIES ........ 10 RATINGS ................................................ 31
SPECIAL FACTORS AFFECTING MINNESOTA TAX FREE FUND .... 11 RATINGS OF CORPORATE DEBT OBLIGATIONS AND MUNICIPAL
CFTC INFORMATION ..................................... 12 BONDS .............................................. 31
INVESTMENT RESTRICTIONS ................................ 12 RATINGS OF PREFERRED STOCK ........................... 33
DIRECTORS AND EXECUTIVE OFFICERS ....................... 15 RATINGS OF MUNICIPAL NOTES ........................... 34
DIRECTORS ............................................ 15 RATINGS OF COMMERCIAL PAPER .......................... 34
EXECUTIVE OFFICERS ................................... 15 BEST'S RATING SYSTEM FOR INSURANCE COMPANIES ........ 35
COMPENSATION ......................................... 16 FINANCIAL STATEMENTS ................................... 35
</TABLE>
<PAGE>
GENERAL INFORMATION
First American Investment Funds, Inc. ("FAIF") was incorporated in the
State of Maryland on August 20, 1987 under the name "SECURAL Mutual Funds, Inc."
The Board of Directors and shareholders, at meetings held January 10, 1991, and
April 2, 1991, respectively, approved amendments to the Articles of
Incorporation providing that the name "SECURAL Mutual Funds, Inc." be changed to
"First American Investment Funds, Inc."
FAIF is organized as a series fund and currently issues its shares in 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."
Shaholders may purchase shares of each Fund through three separate
classes, Class A, Class B (Mid Cap Growth Fund and Emerging Markets 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, for Mid Cap Growth Fund and Emerging Markets Fund, Class B shares of the
Funds, and Prospectuses relating to the Class Y Shares of the Funds. These
Prospectuses can be obtained by calling or writing SEI Investments Distribution
Co., at the address and telephone number set forth on the cover of this
Statement of Additional Information. This Statement of Additional Information
relates both to the 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.
<PAGE>
ADDITIONAL INFORMATION CONCERNING FUND INVESTMENTS
The investment objectives, policies and restrictions of the Funds are set
forth in the 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 Prospectuses. Short-term investments and repurchase
agreements may be entered into on a joint basis by the Funds and other funds
advised by the Advisor to the extent permitted by 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 Advisor to
be of comparable quality to instruments that are so rated. For a description of
the rating categories of Standard & Poor's and Moody's, see "Ratings" herein.
BANKERS' ACCEPTANCES. Bankers' acceptances are credit instruments
evidencing the obligation of a bank to pay a draft drawn on it by a customer.
These instruments reflect the obligation both of the bank and of the drawer to
pay the full amount of the instrument upon maturity.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes
are unsecured demand notes that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate according to the terms of
the instrument. Because master demand notes are direct lending arrangements
between a Fund and the issuer, they are not normally traded. Although there is
no secondary market in the notes, a Fund may demand payment of principal and
accrued interest at any time. While the notes are not typically rated by credit
rating agencies, issuers of variable amount master demand notes (which are
normally manufacturing, retail, financial, and other business concerns) must
satisfy the same criteria as set forth above for commercial paper. The Advisor
or Sub-Advisor will consider the earning power, cash flow, and other liquidity
ratios of the issuers of such notes and will continuously monitor their
financial status and ability to meet payment on demand.
REPURCHASE AGREEMENTS
The Funds may invest in repurchase agreements to the extent specified in
the Prospectuses. The Funds' custodian will hold the securities underlying any
repurchase agreement, or the securities will be part of the Federal
Reserve/Treasury Book Entry System. The market value of the collateral
underlying the repurchase agreement will be determined on each business day. If
at any time the market value of the collateral falls below the repurchase price
under the repurchase agreement (including any accrued interest), the appropriate
Fund will promptly receive additional collateral (so the total collateral is an
amount at least equal to the repurchase price plus accrued interest).
<PAGE>
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
When a Fund agrees to purchase securities on a when-issued or delayed
delivery basis, the Custodian will maintain in a segregated account cash or
liquid securities in an amount sufficient to meet the Fund's purchase
commitments. It may be expected that a Fund's net assets will fluctuate to a
greater degree when it sets aside securities to cover such purchase commitments
than when it sets aside cash. In addition, because a Fund will set aside cash or
liquid securities to satisfy its purchase commitments in the manner described
above, its liquidity and the ability of the Advisor to manage it might be
affected in the event its commitments to purchase when-issued or delayed
delivery securities ever exceeded 25% of the value of its assets. Under normal
market conditions, however, a Fund's commitments to purchase when-issued or
delayed delivery securities will not exceed 25% of the value of its assets.
LENDING OF PORTFOLIO SECURITIES
When a Fund lends portfolio securities, it must receive 100% collateral as
described in the Prospectuses. This collateral must be valued daily by the
Advisor or Sub-Advisor and, if the market value of the loaned securities
increases, the borrower must furnish additional collateral to the lending Fund.
During the time portfolio securities are on loan, the borrower pays the lending
Fund any dividends or interest paid on the securities. Loans are subject to
termination 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 National Association, the Funds' custodian and the Advisor, 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 to
provide such services and receive such compensation.
OPTIONS TRANSACTIONS
OPTIONS ON SECURITIES. To the extent specified in the Prospectuses, Funds
may purchase put and call options on securities and may write covered call
options on securities which they own or have the right to acquire. A Fund may
purchase put options to hedge against a decline in the value of its portfolio.
By using put options in this way, a Fund would reduce any profit it might
otherwise have realized in the underlying security by the amount of the premium
paid for the put option and by transaction costs. In similar fashion, a Fund may
purchase call options to hedge against an increase in the price of securities
that the Fund anticipates purchasing in the future. The premium paid for the
call option plus any transaction costs will reduce the benefit, if any, realized
by the Fund upon exercise of the option, and, unless the price of the underlying
security rises sufficiently, the option may expire unexercised.
The writer (seller) of a call option has no control over when the
underlying securities must be sold; the writer may be assigned an exercise
notice at any time prior to the termination of the option. If a call option is
exercised, the writer experiences a profit or loss from the sale of the
underlying security. The writer of a call option that wishes to terminate its
obligation may effect a "closing purchase transaction." This is accomplished by
buying an option on the same security as the option previously written. If a
Fund was unable to effect a closing purchase transaction in a secondary market,
it would not be able to sell the underlying security until the option expires or
it delivers the underlying security upon exercise.
OPTIONS ON STOCK INDICES. Options on stock indices are similar to options
on individual stocks except that, rather than the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
value of the stock index upon which the option is based is greater than, in the
case of a call, or
<PAGE>
less 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 less 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 options on securities, 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 Prospectuses.
At the same time a futures contract is purchased or sold, a Fund generally
must allocate cash or securities as a deposit payment ("initial deposit"). It is
expected that the initial deposit would be approximately 1-1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Fund would
provide or receive cash that reflects any decline or increase in the contract's
value. Futures transactions also involve brokerage costs and require a Fund to
segregate liquid assets, such as cash, United States Government securities or
other liquid high grade debt obligations, to cover its performance under such
contracts.
A Fund may lose the expected benefit of futures transactions if interest
rates, securities prices or foreign exchange rates move in an unanticipated
manner. Such unanticipated changes may also result in poorer overall performance
than if the Fund had not entered into any futures transactions. In addition, the
value of a Fund's futures positions may not prove to be perfectly or even highly
correlated with the value of its portfolio securities and foreign currencies,
limiting the Fund's ability to hedge effectively against interest rate, foreign
exchange rate and/or market risk and giving rise to additional risks. Because of
the low margin requirements in the futures markets, they may be subject to
market forces, including speculative activity, which do not affect the cash
markets. There also is no assurance of liquidity in the secondary market for
purposes of closing out futures positions.
<PAGE>
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.
FOREIGN SECURITIES
As described in the Prospectuses, under normal market conditions Emerging
Markets Fund invests principally in foreign securities, and certain other Funds
may invest lesser proportions of their assets in securities of foreign issuers
which are either listed on a United States securities exchange or represented by
American Depositary Receipts.
Fixed commissions on foreign securities exchanges are generally higher
than negotiated commissions on United States exchanges. Foreign markets also
have different clearance and settlement procedures, and in some markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of Emerging Markets Fund are uninvested. In addition, settlement problems
could cause Emerging Markets Fund to miss attractive investment opportunities or
to incur losses due to an inability to sell or deliver securities in a timely
<PAGE>
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 Prospectuses, Emerging Markets 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 will not enter into
such forward contracts or maintain a net exposure in such contracts where the
Fund would be obligated to deliver an amount of foreign currency in excess of
the value of the Fund's securities or other assets denominated in that currency.
The Fund will comply with applicable Securities and Exchange Commission
announcements requiring the Fund to segregate assets to cover its 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. Emerging Markets Fund
generally will not enter into a forward contract with a term longer than one
year.
FOREIGN CURRENCY FUTURES TRANSACTIONS. Unlike forward foreign currency
exchange contracts, foreign currency futures contracts and options on foreign
currency futures contracts are standardized as to amount and delivery period and
may be traded on boards of trade and commodities exchanges or directly with a
dealer which makes a market in such contracts and options. It is anticipated
that such contracts may provide greater liquidity and lower cost than forward
foreign currency exchange contracts. As part of its financial futures
transactions, Emerging Markets 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 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 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
<PAGE>
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 Prospectuses, Adjustable Rate Mortgage Securities Fund
invests in mortgage-backed securities. The Fund 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 the 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 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 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
<PAGE>
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
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
<PAGE>
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."
U.S. TREASURY INFLATION-PROTECTION SECURITIES
To the extent they may invest in fixed-income securities, the 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
<PAGE>
inflation-protection security is outstanding, the Treasury will, in consultation
with the Bureau of Labor Statistics (or successor agency), determine an
appropriate substitute index and methodology for linking the discontinued series
with the new price index series. Determinations of the Secretary of the Treasury
in this regard are final.
Inflation-protection securities will be held and transferred in either of
two book-entry systems: the commercial book-entry system (TRADES) and TREASURY
DIRECT. The securities will be maintained and transferred at their original par
amount, i.e., not at their inflation-adjusted value. STRIPS components will be
maintained and transferred in TRADES at their value based on the original par
amount of the fully constituted security.
SPECIAL FACTORS AFFECTING MINNESOTA TAX FREE FUND
As described in the Prospectuses, except during temporary defensive
periods, Minnesota Tax Free 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 projected that,
under then current law, the State would 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, adopted various tax cuts, spending
increases, and other budgetary changes. As a result, the Department of Finance
now estimates that the State will complete the June 30, 1999 biennium with an
unrestricted balance of approximately $35 million, plus a $350 million cash flow
account balance, plus a $613 million budget reserve. Total General Fund
expenditures and transfers for the biennium are projected to be $21.5 billion.
The State is party to a variety of civil actions that could adversely
affect the State's General Fund. In addition, substantial portions of State and
local revenues are derived from federal
<PAGE>
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 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
<PAGE>
assets would be invested in the securities of issuers conducting
their principal business activities in any one industry. Neither of
the Tax Free Funds will invest 25% or more of the value of its total
assets in revenue bonds or notes, payment for which comes from
revenues from any one type of activity (for this purpose, the term
"type of activity" shall include without limitation (i) sewage
treatment and disposal; (ii) gas provision; (iii) electric power
provision; (iv) water provision; (v) mass transportation systems;
(vi) housing; (vii) hospitals; (viii) nursing homes; (ix) street
development and repair; (x) toll roads; (xi) airport facilities; and
(xii) educational facilities), except that, in circumstances in
which other appropriate available investments may be in limited
supply, such Funds may invest without limitation in gas provision,
electric power provision, water provision, housing and hospital
obligations. This restriction does not apply to general obligation
bonds or notes or to pollution control revenue bonds. However, in
the case of Minnesota Tax Free 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. With respect to each of the Funds, this
restriction does not apply to securities of the United States
Government or its agencies and instrumentalities or repurchase
agreements relating thereto.
2. Issue any senior securities (as defined in the 1940 Act), other than
as set forth in restriction number 3 below and except to the extent
that using options or purchasing securities on a when-issued basis
may be deemed to constitute issuing a senior security.
3. Borrow money, except from banks for temporary or emergency purposes.
The amount of such borrowing may not exceed 10% of the borrowing
Fund's total assets. None of the Funds will borrow money for
leverage purposes. For the purpose of this investment restriction,
the use of options and futures transactions and the purchase of
securities on a when-issued or delayed delivery basis shall not be
deemed the borrowing of money. (As a non-fundamental policy, no Fund
will make additional investments while its borrowings exceed 5% of
total assets.)
4. Make short sales of securities.
5. Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions and
except 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 may invest in mortgage-backed securities.
<PAGE>
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,
publicly traded real estate limited partnership interests or REITS),
or oil, gas or other mineral leases, rights or royalty contracts,
except that the Funds may purchase or sell securities of companies
which invest in or hold the foregoing.
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
may purchase shares of open-end investment companies which invest in
permitted investments for such Fund; (c) each of Mid Cap Growth
Fund, Emerging Markets Fund and Adjustable Rate Mortgage Securities
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 such 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
Emerging Markets Fund may invest in foreign securities without
limitation.
15. Except for Emerging Markets Fund, invest in warrants; provided, that
Mid Cap Growth Fund and Adjustable Rate Mortgage Securities Fund 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 Advisor. For
example, an asset-backed security known as "Money Store 94D A2" would be
classified as follows: the issuer or sponsor of the security is The Money Store,
a personal finance company, and the collateral underlying the security is
automobile receivables. Therefore, the industry classification would be Personal
Finance Companies -- Automobile. Similarly, an asset-backed security known as
"Midlantic Automobile Grantor Trust 1992-1 B" would be classified as follows:
the issuer or sponsor of the security is Midlantic National Bank, a banking
organization, and the collateral underlying the security is automobile
receivables. Therefore, the industry classification would be Banks --
Automobile. Thus, an issuer or sponsor may be included in more than one
"industry" classification, as may a particular type of collateral.
<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.
<PAGE>
Carmen V. Romeo, SEI Investments Company, Oaks, Pennsylvania 19456:
Treasurer and Assistant Secretary of FAIF and FAF since November 1992 and of
FASF since June 1996; Director, Executive Vice President, Chief Financial
Officer and Treasurer of SEI Investments Company ("SEI"), SEI Investments
Management Corporation (the "Administrator") and the Distributor since 1981.
Age: 52.
Kevin P. Robins, SEI Investments Company, Oaks, Pennsylvania 19456: Vice
President and Assistant Secretary of FAIF and FAF since April 1994 and of FASF
since June 1996; Vice President, Assistant Secretary and General Counsel of the
Administrator and the Distributor. Age: 36.
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.
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
<PAGE>
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.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
U.S. Bank National Association (the "Advisor"), 601 Second Avenue South,
Minneapolis, Minnesota 55480, serves as the investment advisor and manager of
the Funds through its First American Asset Management group. The Advisor is a
national banking association that has professionally managed accounts for
individuals, insurance companies, foundations, commingled accounts, trust funds,
and others for over 75 years. The Advisor is a subsidiary of U.S. Bancorp
("USB"), 601 Second Avenue South, Minneapolis, Minnesota 55480, which is a
regional multi-state bank holding company headquartered in Minneapolis,
Minnesota that primarily serves the Midwestern, Rocky Mountain and Northwestern
states. USB operates five banks and eleven trust companies with offices in 17
contiguous states from Illinois to Washington. USB also has various other
subsidiaries engaged in financial services. At December 31, 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"), FAIF has engaged the Advisor to act as investment advisor
for and to manage the investment of the assets of the Funds. Each Fund pays the
Advisor 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 Advisor to
provide FAIF with all necessary office space, personnel and facilities necessary
and incident to the Advisor's performance of its services thereunder. The
Advisor is responsible for the payment of all compensation
<PAGE>
to personnel of FAIF and the officers and directors of FAIF, if any, who are
affiliated with the Advisor or any of its affiliates.
In addition to the investment advisory fee, each Fund pays all its
expenses that are not expressly assumed by the Advisor or any other organization
with which the Fund may enter into an agreement for the performance of services.
Each Fund is liable for such nonrecurring expenses as may arise, including
litigation to which the Fund may be a party, and it may have an obligation to
indemnify its directors and officers with respect to such litigation.
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
Marvin & Palmer Associates, Inc., 1201 North Market Street, Suite 2300,
Wilmington, Delaware 19801 ("Marvin & Palmer") is Sub-Advisor for Emerging
Markets Fund under an agreement with the Advisor (the "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
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 Sub-Advisory Agreement, Marvin &
Palmer is required, among other things, to report to the Advisor or the Board
regularly at such times and in such detail as the Advisor or the Board may from
time to time request in order to permit the Advisor and the Board to determine
the adherence of Emerging Markets Fund to its investment objectives, policies
and restrictions. The 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 Sub-Advisory Agreement.
For its services under the Sub-Advisory Agreement, Marvin & Palmer is paid
a monthly fee by the Advisor calculated on an annual basis equal to 0.85% of the
first $100 million of 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.
ADMINISTRATION AGREEMENT
SEI Investments Management Corporation (the "Administrator") serves as
administrator for the Funds pursuant to an Administration Agreement between it
and the Funds. The Administrator is a wholly-owned subsidiary of SEI Investments
Company, which also owns the Funds' distributor. See "-- Distributor and
Distribution Plans" below. Under the Administration Agreement, the Administrator
provides administrative personnel and services to the Funds for a fee as
described in the Funds' Prospectuses. These services include, among others,
regulatory reporting, fund and portfolio accounting, shareholder reporting
services, and compliance monitoring services.
The Funds have approved the appointment of the Advisor as a
sub-administrator (the "Sub-Administrator") 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.
<PAGE>
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 FAIF, and as distributor for the
Class B Shares pursuant to a Distribution and Service Agreement dated August 1,
1994, as amended September 14, 1994 (the "Class B Distribution and Service
Agreement") between itself and FAIF. 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 Prospectus.
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 Prospectus. 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
<PAGE>
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 Advisor, 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
Advisor at any time.
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, and the
Distributor received no sales charges for such fiscal year.
CUSTODIAN; TRANSFER AGENT; COUNSEL; ACCOUNTANTS
The custodian of the Funds' assets is U.S. Bank National Association (the
"Custodian"), U.S. Bank Center, 180 East Fifth Street, St. Paul, Minnesota
55101. The Custodian is a subsidiary of USB.
The Custodian takes no part in determining the investment policies of the
Funds or in deciding which securities are purchased or sold by the Funds. All of
the instruments representing the investments of the Funds and all cash is held
by the Custodian or, 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 and assistance and
consultation in connection with SEC filings.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Decisions with respect to placement of the Funds' portfolio transactions
are made by the Advisor or, in the case of Emerging Markets Fund, 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 Advisor or Marvin & Palmer may, however, select
a broker or dealer to effect a particular transaction without communicating with
all brokers or dealers
<PAGE>
who might be able to effect such transaction because of the volatility of the
market and the desire of the Advisor 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.
While the Advisor 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 Advisor to posted commission rates
as well as to other information concerning the level of commissions charged on
comparable transactions by other qualified brokers.
It is expected that Emerging Markets Fund 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 Advisor 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
Advisor or Marvin & Palmer. In accordance with this policy, the Funds do not
execute brokerage transactions solely on the basis of the lowest commission rate
available for a particular transaction. Subject to the requirements of favorable
price and efficient execution, placement of orders by securities firms for the
purchase of shares of the Funds may be taken into account as a factor in the
allocation of portfolio transactions.
Research services that may be received by the Advisor 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 Advisor or Marvin & Palmer to
supplement its own investment research activities and enable the Advisor or
Marvin & Palmer to obtain the views and information of individuals and research
staffs of many different securities firms prior to making investment decisions
for the Funds. To the extent portfolio transactions are effected with brokers
and dealers who furnish research services, the Advisor or Marvin & Palmer would
receive a benefit, which is not capable of evaluation in dollar amounts, without
providing any direct monetary benefit to the Funds from these transactions.
Research services furnished by brokers and dealers used by the Funds for
portfolio transactions may be utilized by the Advisor or Marvin & Palmer in
connection with investment services for other accounts and, likewise, research
services provided by brokers and dealers used for transactions of other accounts
may be utilized by the Advisor or Marvin & Palmer in performing services for the
Funds. The Advisor or Marvin &
<PAGE>
Palmer determine the reasonableness of the commissions paid in relation to their
view of the value of the brokerage and research services provided, considered in
terms of the particular transactions and their overall responsibilities with
respect to all accounts as to which they exercise investment discretion.
The Advisor or Marvin & Palmer have not entered into any formal or
informal agreements with any broker or dealer, and do not maintain any "formula"
that must be followed in connection with the placement of Fund portfolio
transactions in exchange for research services provided to the Advisor or Marvin
& Palmer, except as noted below. The Advisor or Marvin & Palmer may, from time
to time, maintain an informal list of brokers and dealers that will be used as a
general guide in the placement of Fund business in order to encourage certain
brokers and dealers to provide the Advisor or Marvin & Palmer with research
services, which the Advisor or Marvin & Palmer anticipates will be useful to it.
Any list, if maintained, would be merely a general guide, which would be used
only after the primary criteria for the selection of brokers and dealers
(discussed above) had been met, and, accordingly, substantial deviations from
the list could occur. The Advisor or Marvin & Palmer would authorize the Funds
to pay an amount of commission for effecting a securities transaction in excess
of the amount of commission another broker or dealer would have charged only if
the Advisor or Marvin & Palmer determined in good faith that the amount of such
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the overall responsibilities of the Advisor or Marvin
& Palmer with respect to the Funds.
The Funds do not effect any brokerage transactions in their portfolio
securities with any broker or dealer affiliated directly or indirectly with the
Advisor or the Distributor unless such transactions, including the frequency
thereof, the receipt of 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 Advisor or Marvin & Palmer are
simultaneously engaged in the purchase or sale of the same security, the prices
and amounts are allocated in accordance with a formula considered by the Advisor
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 July 30, 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 and Class B 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
<PAGE>
extent that the securities of a Fund are traded on days that the Fund is not
open for business, such Fund's net asset value per share may be affected on days
when investors may not purchase or redeem shares. This may occur, for example,
where a Fund holds securities which are traded in foreign markets.
FUND PERFORMANCE
All performance information presented in this section represents the
performance of the Funds' predecessors for financial reporting purposes.
Performance for Mid Cap Growth Fund, Tax Free Fund and Minnesota Tax Free Fund
is that of Emerging Growth Fund, National Tax-Exempt Fund and Minnesota Tax-
Exempt Fund, each of which is a series of Piper Funds Inc. Performance for
Emerging Markets Fund is that of Emerging Markets Growth Fund, a series of Piper
Global Funds Inc. Performance of Adjustable Rate Mortgage Securities Fund is
that of the Adjustable Rate Mortgage Securities Fund series of Piper Funds
Inc.--II, from September 1, 1995 forward. Prior thereto, performance of
Adjustable Rate Mortgage Securities Fund is that of American Adjustable Rate
Term Trust Inc. -- 1998.
SEC STANDARDIZED PERFORMANCE FIGURES
YIELD FOR THE FUNDS. Yield for the Funds is a measure of the net
investment income per share (as defined) earned over a 30-day period expressed
as a percentage of the maximum offering price of a Fund's shares at the end of
the period. Based on the 30-day period ended September 30, 1997, the yields for
the Class A, Class B and Class Y Shares of the Funds were as follows:
Class A Class B Class Y
------- ------- -------
Mid Cap Growth Fund............................. 0.00% N/A 0.00%
Emerging Markets Fund........................... 0.00% N/A N/A
Adjustable Rate Mortgage Securities Fund........ 5.77% N/A N/A
Tax Free Fund................................... 4.02% N/A N/A
Minnesota Tax Free Fund......................... 4.56% N/A 4.90%
Yield figures were determined by dividing the net investment income per share
earned during the specified 30-day period by the maximum offering price per
share on the last day of the period, according to the following formula:
Yield = 2 [((a - b) / cd) + 1)6 - 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. Based on the maximum federal income tax rate of 39.6% (applicable to
Tax Free Fund) and a combined maximum federal/state tax rate of 44.7% for
Minnesota (applicable to Minnesota Tax Free Fund), the tax equivalent yields for
the Tax Free Funds for the 30-day period ended September 30, 1997, computed as
described above, were as follows:
<PAGE>
Class A Class Y
------- -------
Tax Free Fund.......................................... 6.66% N/A
Minnesota Tax Free Fund................................ 8.25% 8.86%
TOTAL RETURN. Total return measures both the net investment income
generated by, and the effect of any realized or unrealized appreciation or
depreciation of, the underlying investments in a Fund's portfolio. The Funds'
average annual and cumulative total return figures are computed in accordance
with the standardized methods prescribed by the Securities and Exchange
Commission.
AVERAGE ANNUAL TOTAL RETURN. Average annual total return figures are
computed by determining the average annual compounded rates of return over the
periods indicated in the advertisement, sales literature or shareholders'
report, that would equate the initial amount invested to the ending redeemable
value, according to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of
such period
This calculation (i) assumes all dividends and distributions are reinvested at
net asset value on the appropriate reinvestment dates as described in the
Prospectuses, and (ii) deducts (a) the maximum sales charge from the
hypothetical initial $1,000 investment (if applicable), and (b) all recurring
fees, such as advisory fees, charged as expenses to all shareholder accounts.
CUMULATIVE TOTAL RETURN. Cumulative total return is computed by
finding the cumulative compounded rate of return over the period indicated in
the advertisement that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
CTR = ((ERV - P) / P ) 10
Where: CTR = cumulative total return
ERV = ending redeemable value at the end of, the period of a
hypothetical $1,000 payment made at the beginning of
such period; and
P = initial payment of $1,000
This calculation (i) assumes all dividends and distributions are reinvested at
net asset value on the appropriate reinvestment dates as described in the
Prospectuses, and (ii) deducts (a) the maximum sales charge from the
hypothetical initial $1,000 investment (if applicable), and (b) all recurring
fees, such as advisory fees, charged as expenses to all shareholder accounts.
Based on the foregoing, the average annual total return and aggregate
total return for each class of the Funds from inception through September 30,
1997 were as follows. The performance of Class A and Class B Shares (when
available for purchase) will normally be lower than that of Class Y Shares
because Class A and Class B Shares are subject to sales and distribution charges
and/or shareholder servicing fees not charged to Class Y Shares.
<PAGE>
<TABLE>
<CAPTION>
Cumulative Average Average Average Annual
Since Inception* Annual One Year Annual Five Year Since Inception *
---------------- --------------- ---------------- -----------------
Without With Without With Without With Without With
Sales Sales Sales Sales Sales Sales Sales Sales
Charge Charge Charge Charge Charge Charge Charge Charge
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MID CAP GROWTH FUND
Class A......................... 273.50% 258.56% 21.04% 16.20% 20.74% 19.76% 19.37% 18.71%
Class B......................... N/A N/A N/A N/A N/A N/A N/A N/A
Class Y......................... 21.93% 21.93% N/A N/A N/A N/A N/A N/A
EMERGING MARKETS FUND
Class A......................... 9.65% 5.27% 23.91% 18.95% N/A N/A 2.40% 1.33%
Class B......................... N/A N/A N/A N/A N/A N/A N/A N/A
Class Y......................... N/A N/A N/A N/A N/A N/A N/A N/A
ADJUSTABLE RATE MORTGAGE
SECURITIES FUND
Class A......................... 31.67% 29.04% 7.16% 5.02% 4.43% 4.01% 4.97% 4.60%
Class Y......................... N/A N/A N/A N/A N/A N/A N/A N/A
TAX FREE FUND
Class A......................... 99.93% 95.93% 9.09% 6.91% 6.73% 6.30% 7.80% 7.56%
Class Y......................... N/A N/A N/A N/A N/A N/A N/A N/A
MINNESOTA TAX FREE FUND
Class A......................... 97.34% 93.40% 8.32% 6.15% 6.91% 6.48% 7.65% 7.41%
Class Y......................... 0.09% 0.09% N/A N/A N/A N/A N/A N/A
</TABLE>
- --------------------
* Inception dates are as follows:
Mid Cap Growth Fund--April 1990 (Class A Shares); February 1997 (Class Y
Shares)
Emerging Markets Fund--November 1993
Adjustable Rate Mortgage Securities Fund--January 1992
Tax Free Fund--July 1988
Minnesota Tax Free Fund--July 1988 (Class A Shares); August 1997 (Class Y
Shares)
NON-STANDARD DISTRIBUTION RATES
HISTORICAL DISTRIBUTION RATES. The Funds' historical annualized
distribution rates are computed by dividing the income dividends of a Fund for a
stated period by the maximum offering price on the last day of such period. For
the one-year period ended September 30, 1997, the historical distribution rates
of the Class A, Class B and Class Y Shares of the Funds were as follows:
Class A Class B Class Y
------- ------- -------
Mid Cap Growth Fund............................. 0.00% N/A *
Emerging Markets Fund........................... 0.04% N/A N/A
Adjustable Rate Mortgage Securities Fund........ 5.69% N/A N/A
Tax Free Fund................................... 4.70% N/A N/A
Minnesota Tax Free Fund......................... 4.56% N/A *
- --------------------
* Not in operation during the entire fiscal year ended September 30, 1997.
ANNUALIZED CURRENT DISTRIBUTION RATES. The Funds' annualized current
distribution rates are computed by dividing a Fund's income dividends for a
specified month (or three-month period, in the case of an Equity Fund) by the
number of days in that month (or three-month period, in the case of an Equity
Fund) and multiplying by 365, and dividing the resulting figure by the maximum
offering price
<PAGE>
on the last day of the specified period. The annualized current distribution
rates for the one- or three-month period (as appropriate) ended September 30,
1997 for the Funds are as follows:
Class A Class B Class Y
------- ------- -------
Mid Cap Growth Fund............................. 0.00% N/A 0.00%
Emerging Markets Fund........................... 0.00% N/A N/A
Adjustable Rate Mortgage Securities Fund........ 5.72% N/A N/A
Tax Free Fund................................... 4.35% N/A N/A
Minnesota Tax Free Fund......................... 5.04% N/A 5.52%
TAX EQUIVALENT DISTRIBUTION RATES. The tax equivalent distribution rates
for the Tax Free Funds are computed by dividing that portion of such a Fund's
annualized current distribution rate (computed as described above) which is
tax-exempt by one minus the stated federal or combined federal/state income tax
rate, and adding the resulting figure to that portion, if any, of the annualized
current distribution rate which is not tax-exempt. Based on the maximum federal
or combined federal/state income tax rates set forth above under "--SEC
Standardized Performance Figures--Tax Equivalent Yield for Tax Free Funds," the
annualized current distribution rates for the month ended September 30, 1997,
for each class of the Tax Free Funds were as follows:
Class A Class Y
------- -------
Tax Free Fund................................... 7.20% N/A
Minnesota Tax Free Fund......................... 9.12% 9.99%
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 3000 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
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
<PAGE>
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 funds that invest at least 65% of
total assets in municipal debt issues in the top four credit ratings, and to the
LEHMAN BROTHERS 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 FUNDS AVERAGE, which is an average of funds that limit
their assets to those securities that are exempt from taxation in the State of
Minnesota, and the LEHMAN BROTHERS MUNICIPAL BOND INDEX, which is described
above.
Each of the Funds also may compare its performance to the CONSUMER PRICE
INDEX, which is a measure of the average change in prices over time in a fixed
market basket of goods and services.
TAXATION
The tax status of the Funds and the distributions that the Funds will make
to shareholders are summarized in the Prospectuses in the sections entitled
"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 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
<PAGE>
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" may be treated as ordinary income under Section 1258 of the Code.
"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 Prospectus for Class A and Class B
Shares, and "Purchases and Redemptions of Shares -- Exchange Privilege" in the
Prospectus 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 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.
<PAGE>
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 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 the Fund has paid during the year to foreign countries.
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 advisors 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
<PAGE>
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 it 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) 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.
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.
<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.
<PAGE>
CCC: Securities rated CCC have a currently identifiable vulnerability to
default, and are dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial, or economic
conditions, they are not likely to have the capacity to pay interest and
repay principal. The CCC rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied B or B-
rating.
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 Standard & Poor's 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.
<PAGE>
C: An issue which is rated C is recorded 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.
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 rated "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.
<PAGE>
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."
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.
<PAGE>
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.
Upon completion of analysis, Best's Ratings are assigned to those
companies that meet the qualifications for rating. The Best's Rating
classifications are A+ (Superior); A & A- (Excellent); B+ (Very Good); B & B-
(Good); C+ (Fairly Good); and C & C- (Fair). Those not qualifying for a current
Best's Rating are classified in the "Not Assigned" category that has ten
classifications which identify why a company is not eligible for a Best's
Rating. Care should be exercised in the use of Best's Ratings without further
reference to additional Best's publications.
FINANCIAL STATEMENTS
The audited financial statements as of September 30, 1997, and the
unaudited financial statements as of March 31, 1998, for Emerging Growth Fund,
National Tax-Exempt Fund and Minnesota Tax-Exempt Fund, series of Piper Funds,
Inc., Emerging Markets Growth Fund, a series of Piper Global Funds Inc., and
Adjustable Rate Mortgage Securities Fund, a series of Piper Funds Inc.--II, as
included in the annual and semiannual reports to shareholders of such funds, are
incorporated by reference into this Statement of Additional Information.
Shareholders of such funds (the "Piper Funds") have approved reorganizations
into the following corresponding First American Funds: Mid Cap Growth Fund, Tax
Free Fund, Minnesota Tax Free Fund, Emerging Markets Fund and Adjustable Rate
Mortgage Securities Fund, respectively. These reorganizations will become
effective as of the close of business on July 31, 1998 for Adjustable Rate
Mortgage Securities Fund, Tax Free Fund and Minnesota Tax Free Fund and August
7, 1998 for Mid Cap Growth Fund and Emerging Markets Fund. Since the First
American Funds will have no assets or liabilities prior to such reorganizations,
the financial history of each First American Fund will be that of its
corresponding Piper Fund upon consummation of the respective reorganization.
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
PART C -- OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Not applicable
(b) Exhibits
(1) Amended and Restated Articles of Incorporation, as
amended through March 30, 1998. (Incorporated by
reference to Exhibit (1) to Post-Effective Amendment No.
36.)
(2) Bylaws, as amended through February 23, 1998.
(Incorporated by reference to Exhibit (2) to
Post-Effective Amendment No. 36.)
(3) Not applicable.
(4) Not applicable.
(5)(a) Investment Advisory Agreement dated April 2, 1991,
between the Registrant and First Bank National
Association, as amended and supplemented through August
1994. (Incorporated by reference to Exhibit (5)(a) to
Post-Effective Amendment No. 21.)
(5)(b) Amendment No. 8 to Investment Advisory Agreement.
(Incorporated by reference to Exhibit 5(c) to
Post-effective Amendment No. 34.)
(5)(c) Supplement dated July 24, 1998, to Investment Advisory
Agreement dated April 2, 1991, with respect to Strategic
Income Fund. (Incorporated by reference to Exhibit 5(c)
to Post-effective Amendment No. 38.)
* (5)(d) Supplement dated July 23, 1998, to Investment Advisory
Agreement dated April 2, 1991, with respect to Emerging
Markets Fund.
(5)(e) Sub-Advisory Agreement dated March 28, 1994, between
First Bank National Association and Marvin & Palmer
Associates, Inc., with respect to International Fund.
(Incorporated by reference to Exhibit 5(b) to
Post-effective Amendment No. 21.)
* (5)(f) Sub-Advisory Agreement dated July 23, 1998, between U.S.
Bank National Association and Marvin & Palmer
Associates, Inc., with respect to Emerging Markets Fund.
* (5)(g) Sub-Advisory Agreement dated July 24, 1998, between U.S.
Bank National Association and Federated Global Research
Corp., with respect to Strategic Income Fund.
* (5)(h) Sub-Advisory Agreement dated July 24, 1998, between U.S.
Bank National Association and Federated Investment
Counseling, with respect to Strategic Income Fund.
(5)(i) Amendment No. 1 to Sub-Advisory Agreement. (Incorporated
by reference to Exhibit 5(d) to Post-effective Amendment
No. 34.)
<PAGE>
(6)(a) Distribution Agreement [Class A and Class C Shares,]
dated February 10, 1994, between the Registrant and SEI
Financial Services Company. (Incorporated by reference
to Exhibit (6)(a) to Post-Effective Amendment No. 21.)
(6)(b) Distribution and Service Agreement [Class B] dated
August 1, 1994, as amended September 14, 1994 between
Registrant and SEI Financial Services Company.
(Incorporated by reference to Exhibit (6)(b) to
Post-Effective Amendment No. 21.)
(6)(c) Form of Dealer Agreement. (Incorporated by reference to
Exhibit (6)(c) to Post-Effective Amendment No. 21.)
(7) Not applicable.
(8)(a) Custodian Agreement dated September 20, 1993, between
the Registrant and First Trust National Association, as
supplemented through August 1994. (Incorporated by
reference to Exhibit (8) to Post-Effective Amendment No.
18.)
(8)(b) Supplement dated March 15, 1994, to Custodian Agreement
dated September 20, 1993.
* (8)(c) Further Supplement dated November 21, 1997, with respect
to International Index Fund, and July 23, 1998, with
respect to Strategic Income Fund and Emerging Markets
Fund, to Custodian Agreement dated September 20, 1993.
(8)(d) Compensation Agreement dated July 23, 1998, pursuant to
Custodian Agreement dated September 20, 1993.
(Incorporated by reference to Exhibit (8)(b) to Post-
Effective Amendment No. 38.)
(9)(a) Amended and Restated Administration Agreement, dated
July 1, 1997, by and between the Registrant and SEI
Investments Management Corporation. (Incorporated herein
by reference to Exhibit 9(f) to Post-effective Amendment
No. 31.)
(9)(b) Sub-Administration Agreement effective January 1, 1998,
by and between SEI and First Bank National Association.
(Incorporated herein by reference to Exhibit (9)(e) to
Post-Effective Amendment No. 31.)
(9)(c) Form of Transfer Agency Agreement dated as of October 1,
1996, between Registrant and DST Systems, Inc.
(Incorporated by reference to Exhibit 9(d) to
Post-Effective Amendment No. 27.)
* (9)(d) Shareholder Account Servicing Agreement dated October 1,
1998, between the Registrant and U.S. Bank National
Association.
(10)(a) Opinion and Consent of D'Ancona & Pflaum dated November
10, 1987. (Incorporated by reference to Exhibit (10)(a)
to Post-Effective Amendment No. 21.)
(10)(b) Opinion and Consent of Dorsey & Whitney. (Incorporated
by reference to Exhibit (10)(a) to Post-Effective
Amendment No. 15.)
<PAGE>
(10)(c) Opinion and Consent of Dorsey & Whitney, LLP with
respect to Strategic Income Fund, Class HH, dated July
24, 1998. (Incorporated by reference to Exhibit (10)(c)
to Post-Effective Amendment No. 38.)
* (10)(d) Opinion and Consent of Dorsey & Whitney, LLP with
respect to Adjustable Rate Mortgage Securities Fund
(Class CC), Tax Free Fund (Class DD), Minnesota Tax Free
Fund (Class EE), Mid Cap Growth Fund (Class FF) and
Emerging Markets Fund (Class GG), dated July 31, 1998.
(11)(a) Consent of KPMG Peat Marwick LLP
(11)(b) Opinion and Consent of Dorsey & Whitney, dated November
25, 1991. (Incorporated by reference to Exhibit (11)(b)
to Post-Effective Amendment No. 21.)
(12) Not applicable.
(13) Not applicable.
(14)(a) 401(k) Prototype Basic Plan Document # 02 (1989
Restatement), including Amendment Nos. 1, 2, and 3 and
sample Adoption Agreement. (Incorporated by reference to
Exhibit 14(a) to Post-Effective Amendment No. 27.)
(14)(b) Defined Contribution Prototype Basic Plan Document # 01
(1989 Restatement), including Amendment Nos. 1 and 2 and
sample Adoption Agreement. (Incorporated by reference to
Exhibit 14(b) to Post-Effective Amendment No. 27.)
(14)(c) IRA Applications and Documentation. (Incorporated by
reference to Exhibit 14(c) to Post-Effective Amendment
No. 27.)
(15)(a) Form of Distribution Plan [Class A]. (Incorporated by
reference to Exhibit (15)(a) to Post-Effective Amendment
No. 21.)
(15)(b) Class B Distribution Plan. (Incorporated by reference to
Exhibit 15(b) to Post-Effective Amendment No. 21.)
(15)(c) Service Plan [Class B]. (Incorporated by reference to
Exhibit (15)(c) to Post-Effective Amendment No. 21.)
(16) Not Applicable
(17) Not Applicable
(18) Multiple Class Plan Pursuant to Rule 18f-3.
(Incorporated by reference to Exhibit (18) to
Post-Effective Amendment No. 23.)
(19)(a) Powers of Attorney of Directors Dayton, Kedrowski and
Stringer. (Incorporated by reference to Exhibit (19) to
Post-Effective Amendment No. 26.)
(19)(b) Power of Attorney of Director Hunter. (Incorporated by
reference to Exhibit 19(b) to Post-Effective Amendment
No. 27)
<PAGE>
(19)(c) Consent to being named and power of attorney of director
nominee Spies. (Incorporated by reference to Exhibit
19(c) to Post-Effective Amendment No. 27.)
(19)(d) Power of Attorney of Director Gibson. (Incorporated by
reference to Exhibit 19(d) to Post-effective Amendment
No. 34.)
* Filed herewith
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
The following table sets forth the number of holders of shares of each
series and class of First American Investment Funds, Inc. as of July 21, 1998.
Mid Cap Growth Fund, Emerging Markets Fund, Adjustable Rate Mortgage Securities
Fund, Tax Free Fund, Minnesota Tax Free Fund and Strategic Income Fund were not
in existence as of this date.
Number of
Fund Title of Class Record Holders
- ---- -------------- --------------
Large Cap Value Fund Class A 5,903
Large Cap Value Fund Class B 7,284
Large Cap Value Fund Class Y 179
Equity Index Fund Class A 4,438
Equity Index Fund Class B 4,230
Equity Index Fund Class Y 37
Balanced Fund Class A 3,335
Balanced Fund Class B 4,719
Balanced Fund Class Y 12
Equity Income Fund Class A 670
Equity Income Fund Class B 776
Equity Income Fund Class Y 47
Large Cap Growth Fund Class A 1,138
Large Cap Growth Fund Class B 1,330
Large Cap Growth Fund Class Y 62
Small Cap Growth Fund Class A 434
Small Cap Growth Fund Class B 338
Small Cap Growth Fund Class Y 24
Regional Equity Fund Class A 3,273
Regional Equity Fund Class B 5,146
Regional Equity Fund Class Y 43
Mid Cap Value Fund Class A 4,599
Mid Cap Value Fund Class B 5,835
Mid Cap Value Fund Class Y 41
Technology Fund Class A 1,000
Technology Fund Class B 1,596
Technology Fund Class Y 23
Health Sciences Fund Class A 202
Health Sciences Fund Class B 280
Health Sciences Fund Class Y 7
Real Estate Securities Fund Class A 234
<PAGE>
Real Estate Securities Fund Class B 434
Real Estate Securities Fund Class Y 11
International Fund Class A 474
International Fund Class B 581
International Fund Class Y 28
Micro Cap Value Fund Class A 107
Micro Cap Value Fund Class B 55
Micro Cap Value Fund Class Y 14
Small Cap Value Fund Class A 2,422
Small Cap Value Fund Class B 125
Small Cap Value Fund Class Y 21
International Index Fund Class A 292
International Index Fund Class B 44
International Index Fund Class Y 14
Limited Term Income Fund Class A 160
Limited Term Income Fund Class B 0
Limited Term Income Fund Class Y 8
Intermediate Term Income Fund Class A 300
Intermediate Term Income Fund Class B 0
Intermediate Term Income Fund Class Y 24
Fixed Income Fund Class A 689
Fixed Income Fund Class B 875
Fixed Income Fund Class Y 83
Intermediate Government Bond Fund Class A 250
Intermediate Government Bond Fund Class B 0
Intermediate Government Bond Fund Class Y 15
Intermediate Tax Free Fund Class A 125
Intermediate Tax Free Fund Class Y 14
Minnesota Intermediate Tax Free Fund Class A 144
Minnesota Intermediate Tax Free Fund Class Y 9
Colorado Intermediate Tax Free Fund Class A 130
Colorado Intermediate Tax Free Fund Class Y 10
California Intermediate Tax Free Fund Class A 11
California Intermediate Tax Free Fund Class Y 7
Oregon Intermediate Tax Free Fund Class Y 11
ITEM 27. INDEMNIFICATION
The Registrant's Articles of Incorporation and Bylaws provide that the
Registrant shall indemnify such persons for such expenses and liabilities, in
such manner, under such circumstances, and to the full extent as permitted by
Section 302A.521 of the Minnesota Statutes, as now enacted or hereafter amended;
provided, however, that no such indemnification may be made if it would be in
violation of Section 17(h) of the Investment Company Act of 1940, as now enacted
or hereafter amended, and any rules, regulations, or releases promulgated
thereunder.
Section 302A.521 of the Minnesota Statutes, as now enacted, provides
that a corporation shall indemnify a person made or threatened to be made a
party to a proceeding by reason of the former or present official capacity of
the person against judgments, penalties, fines, settlements and reasonable
expenses, including attorneys' fees and disbursements, incurred by the person in
connection with the proceeding if, with respect to the acts or omissions of the
person complained of in the proceeding, the person has not been indemnified by
another organization for the same judgments, penalties, fines, settlements, and
reasonable expenses incurred by the person in connection with the proceeding
with respect to the same acts or omissions; acted in good faith, received no
improper personal benefit, and the
<PAGE>
Minnesota Statutes dealing with directors' conflicts of interest, if applicable,
have been satisfied; in the case of a criminal proceeding, had no reasonable
cause to believe that the conduct was unlawful; and reasonably believed that the
conduct was in the best interests of the corporation or, in certain
circumstances, reasonably believed that the conduct was not opposed to the best
interests of the corporation.
The Registrant undertakes that no indemnification or advance will be
made unless it is consistent with Sections 17(h) or 17(i) of the Investment
Company Act of 1940, as now enacted or hereafter amended, and Securities and
Exchange Commission rules, regulations, and releases (including, without
limitation, Investment Company Act of 1940 Release No. 11330, September 2,
1980).
Insofar as the indemnification for liability arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in such Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any action,
suit, or proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Information on the business of the Registrant's investment adviser, U.S.
Bank National Association (the "Manager"), is described in the section of each
series' Statement of Additional Information, filed as part of this Registration
Statement, entitled "Investment Advisory and Other Services." The directors and
officers of the Manager are listed below, together with their principal
occupation or other positions of a substantial nature during the past two fiscal
years.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES OTHER POSITIONS AND OFFICES
NAME WITH THE MANAGER AND PRINCIPAL BUSINESS ADDRESS
---- ---------------- ------------------------------
<S> <C> <C>
John F. Grundhofer Chairman, President and Chief Chairman, President and Chief
Executive Officer Executive Officer of U.S. Bancorp*
Richard A. Zona Director and Vice Chairman--Finance Vice Chairman--Finance of U.S. Bancorp *
Philip G. Heasley Director and Vice Chairman Vice Chairman and Group Head of the
Retail Product Group of U.S. Bancorp *
J. Robert Hoffmann Director, Chief Credit Officer Executive Vice President and Chief
and Executive Vice President Credit Officer of U.S. Bancorp *
Lee R. Mitau Director, General Counsel, Executive Vice President, Secretary,
Executive Vice President and Secretary and General Counsel of U.S. Bancorp;
prior to October 1995 partner in Dorsey
& Whitney LLP *
<PAGE>
Susan E. Lester Director, Executive Vice President and Executive Vice President and Chief
Chief Financial Officer Financial Officer of U.S. Bancorp; prior
to December 1995 executive vice
president and chief financial officer of
Shawmut National Corporation *
Robert D. Sznewajs Director and Vice Chairman Vice Chairman of U.S. Bancorp *
Gary T. Duim Director and Vice Chairman Vice Chairman of U.S. Bancorp *
</TABLE>
- ---------------
* Address: 601 Second Avenue South, Minneapolis, Minnesota 55402.
ITEM 29. PRINCIPAL UNDERWRITERS:
(a) Furnish the name of each investment company (other than the
Registrant) for which each principal underwriter currently distributing
securities of the Registrant also acts as a principal under-writer, distributor
or investment adviser:
Registrant's distributor, SEI Investments Distribution Co. (the
"Distributor") acts as distributor for SEI Liquid Asset Trust, SEI Daily Income
Trust, SEI Tax Exempt Trust, SEI Index Funds, SEI Institutional Managed Trust,
SEI Institutional International Trust, The Advisors' Inner Circle Fund, Pillar
Funds, CUFund, STI Classic Funds, CoreFunds, Inc., First American Funds, Inc.,
First American Investment Funds, Inc., The Arbor Fund, Boston 1784 Funds, PBHG
Funds, Inc., Marquis Funds, Morgan Grenfell Investment Trust, The Achievement
Funds Trust, Bishop Street Funds, CrestFunds, Inc., STI Classic Variable Trust,
ARK Funds, Monitor Funds, SEI Asset Allocation Trust, Expedition Funds, TIP
Funds, SEI Institutional Investments Trust, First American Strategy Funds, Inc.,
Highmark Funds, Armada Funds, PBHG Insurance Series Fund, Inc., TIP
Institutional Funds, Oak Associates Funds and The Nevis Funds, Inc., pursuant to
distribution agreements dated November 29, 1982, July 15, 1982, December 3,
1982, July 10, 1985, January 22, 1987, August 30, 1988, November 14, 1991,
February 28, 1992, May 1, 1992, May 29, 1992, October 30, 1992, November 1,
1992, November 1, 1992, January 28, 1993, June 1, 1993, July 16, 1993, August
17, 1993, January 3, 1994, December 27, 1994, January 27, 1995, March 1, 1995,
August 18, 1995, November 1, 1995, January 11, 1996, April 1, 1996, April 29,
1996, June 14, 1996, October 1, 1996, February 15, 1997, March 8, 1997, April 1,
1997, June 9, 1997, January 1, 1998, February 27, 1998 and June 29, 1998,
respectively.
The Distributor provides numerous financial services to investment
managers, pension plan sponsors, and bank trust departments. These services
include portfolio evaluation, performance measurement, and consulting services
("Funds Evaluation") and automated execution, clearing and settlement of
securities transactions ("MarketLink").
(b) Furnish the information required by the following table with respect
to each director, officer or partner of each principal underwriter named in the
answer to Item 21 of Part B. Unless otherwise noted, the business address of
each director or officer is One Freedom Valley Drive, Oaks, Pennsylvania 19456.
<TABLE>
<CAPTION>
NAME POSITIONS AND OFFICES WITH UNDERWRITER POSITIONS AND OFFICES WITH REGISTRANT
- ---- -------------------------------------- -------------------------------------
<S> <C> <C>
Alfred P. West, Jr. Director, Chairman & Chief --
Executive Officer
Henry H. Greer Director --
Carmen V. Romeo Director --
Mark J. Held President & Chief Operating Officer --
Gilbert L. Beebower Executive Vice President --
<PAGE>
NAME POSITIONS AND OFFICES WITH UNDERWRITER POSITIONS AND OFFICES WITH REGISTRANT
- ---- -------------------------------------- -------------------------------------
Richard B. Lieb Executive Vice President, President -
Investment Services Division --
Dennis J. McGonigle Executive Vice President --
Robert M. Silvestri Chief Financial Officer & Treasurer --
Leo J. Dolan, Jr. Senior Vice President --
Carl A. Guarino Senior Vice President --
Larry Hutchinson Senior Vice President --
Jack May Senior Vice President --
Hartland J. McKeown Senior Vice President --
Barbara J. Moore Senior Vice President --
Kevin P. Robins Senior Vice President & General Counsel Vice President & Assistant Secretary
Patrick K. Walsh Senior Vice President --
Ronert Aller Vice President --
Gordon W. Carpenter Vice President --
Todd Cipperman Vice President & Assistant Secretary --
S. Courtney E. Collier Vice President & Assistant Secretary Vice President & Assistant Secretary
Robert Crudup Vice President & Managing Director --
Barbara Doyne Vice President --
Jeff Drennen Vice President --
Vic Galef Vice President & Managing Director --
Lydia A. Gavalis Vice President & Assistant Secretary Vice President & Assistant Secretary
Greg Gettinger Vice President & Assistant Secretary --
Jeff Jacobs Vice President --
Samuel King Vice President --
Kim Kirk Vice President & Managing Director --
John Krzeminski Vice President & Managing Director --
Carolyn McLaurin Vice President & Managing Director --
W. Kelso Morrill Vice President --
Mark Nagle Vice President President
Joanne Nelson Vice President --
Joseph M. O'Donnell Vice President & Assistant Secretary Vice President & Assistant Secretary
Sandra K. Orlow Vice President & Secretary Vice President & Assistant Secretary
Cynthia M. Parrish Vice President & Assistant Secretary --
Donald Pepin Vice President & Managing Director --
Kim Rainey Vice President --
Rob Redecan Vice President --
Maria Reinhart Vice President --
Mark Samuels Vice President & Managing Director --
Steve Smith Vice President --
Daniel Spaventa Vice President --
Kathryn L. Stanton Vice President & Assistant Secretary Vice President & Assistant Secretary
Lynda J. Striegel Vice President & Assistant Secretary Vice President & Assistant Secretary
Lori L. White Vice President & Assistant Secretary --
Wayne M. Withrow Vice President & Managing Director --
</TABLE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books, and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are maintained by SEI Investments Distribution Co., Oaks,
Pennsylvania 19456.
<PAGE>
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
Registrant undertakes to call a meeting of shareholders for the purpose
of voting upon the question of removal of a Director(s) when requested in
writing to do so by the holders of at least 10% of Registrant's outstanding
shares and in connection with such meetings to comply with the provisions of
Section 16(c) of the Investment Company Act of 1940 relating to Shareholder
communications.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940 the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Post-Effective
Amendment to its Registration Statement No. 33-16905 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Oaks, Commonwealth
of Pennsylvania, on the 31st day of July 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 Accounting
Michael G. Beattie Officer)
* Director **
- ------------------------------
Robert J. Dayton
* Director **
- ------------------------------
Andrew M. Hunter III
* Director **
- ------------------------------
Robert L. Spies
* Director **
- ------------------------------
Leonard W. Kedrowski
* Director **
- ------------------------------
Joseph D. Strauss
* Director **
- ------------------------------
Virginia L. Stringer
* Director **
- ------------------------------
Roger A. Gibson
* By: /s/ Kathryn L. Stanton
- ------------------------------
Kathryn L. Stanton
Attorney in Fact
** July 31, 1998
EXHIBIT 5(d)
FIRST AMERICAN INVESTMENT FUNDS, INC.
SUPPLEMENT DATED AS OF JULY 23, 1998 TO
INVESTMENT ADVISORY AGREEMENT
(Emerging Markets Fund)
WHEREAS, First American Investment Funds, Inc., a Maryland
corporation (the "Fund"), and U.S. Bank National Association, a national banking
association organized and existing under the laws of the United States of
America (the "Adviser"), previously entered into that Investment Advisory
Agreement dated April 2, 1991 (the "Advisory Agreement"); and
WHEREAS, the Fund is creating a new Portfolio (as such term is
defined in the Advisory Agreement) known as Emerging Markets Fund; and
WHEREAS, the Fund and the Adviser contemplate that the Adviser will
retain a sub-adviser with respect to Emerging Markets Fund and wish to make
provision therefor.
NOW, THEREFORE, the Fund and the Adviser agree as follows:
1. In performing its services under the Advisory Agreement, the
Adviser may at its option and expense, with respect to Emerging Markets Fund
only, appoint a sub-adviser, which shall assume such responsibilities and
obligations of the Adviser pursuant to the Advisory Agreement as shall be
delegated to the sub-adviser; provided, however, that any discretionary
investment decisions made by the sub-adviser on behalf of Emerging Markets Fund
shall be subject to approval or ratification by the Adviser. Any appointment of
a sub-adviser and assumption of responsibilities and obligations of the Adviser
by such sub-adviser shall be subject to approval by the Board of Directors of
the Fund and, to the extent (if any) required by law, by the shareholders of
Emerging Markets Fund. Any appointment of a sub-adviser for Emerging Markets
Fund pursuant hereto shall in no way limit or diminish the Adviser's obligations
and responsibilities under the Advisory Agreement.
2. The Advisory Agreement, as supplemented hereby, is hereby
ratified and confirmed in all respects.
IN WITNESS WHEREOF, the Fund and the Adviser have caused this
Supplement to be executed by their duly authorized officers as of the day and
year first above written.
FIRST AMERICAN INVESTMENT
FUNDS, INC.
By /s/ Kathryn L. Stanton
-----------------------------------
Its Vice President
-----------------------------------
U.S. BANK NATIONAL ASSOCIATION
By /s/ Jeffrey M. Wilson
-----------------------------------
Its Vice President
-----------------------------------
EXHIBIT 5(f)
SUB-ADVISORY AGREEMENT
This Agreement, made as of this 23rd day of July, 1998, by and
between U.S. Bank National Association, a national banking association organized
and existing under the laws of the United States of America (the "Adviser"), and
Marvin & Palmer Associates, Inc., a Delaware corporation (the "Sub-Adviser").
WHEREAS, First American Investment Funds, Inc., a Maryland
corporation ("FAIF"), on behalf of its Emerging Markets Fund, a separately
managed series of FAIF ("Emerging Markets Fund"), has appointed the Adviser as
Emerging Markets Fund's investment adviser pursuant to an Investment Advisory
Agreement dated April 2, 1991, as amended (the "Advisory Agreement"); and
WHEREAS, pursuant to the terms of the Advisory Agreement, the
Adviser desires to appoint the Sub-Adviser as its sub-adviser for Emerging
Markets Fund, and the Sub-Adviser is willing to act in such capacity upon the
terms set forth herein; and
WHEREAS, pursuant to the terms of the Advisory Agreement, FAIF has
approved the appointment of the Sub-Adviser as the sub-adviser for Emerging
Markets Fund.
NOW, THEREFORE, the Adviser and the Sub-Adviser agree as follows:
1. The Adviser hereby retains the Sub-Adviser, and the Sub-Adviser
hereby agrees to act, as sub-adviser for, and to manage the investment of the
assets of, Emerging Markets Fund as set forth herein. Without limiting the
generality of the foregoing, it is specifically understood and agreed by the
Adviser and the Sub-Adviser that:
(a) The investment of Emerging Markets Fund's assets shall at all
times be subject to the investment objectives, policies and restrictions
of Emerging Markets Fund as set forth in FAIF's then-effective
Registration Statement under the Securities Act of 1933, as amended,
including the Prospectus and Statement of Additional Information of
Emerging Markets Fund contained therein. The Adviser shall communicate to
the Sub-Adviser any changes or additions to or interpretations of such
investment objectives, policies and restrictions of Emerging Markets Fund
made by the Board of Directors of FAIF (the "Board"). The Sub-Adviser
shall report to the Adviser and 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.
(b) The Sub-Adviser hereby agrees that upon the request of the Board
or the Adviser, copies of all records pertaining to Emerging Markets
Fund's investments will be provided to FAIF or to such person as is
designated by FAIF. If a transfer of investment advisory or sub-advisory
services with respect to Emerging Markets Fund should occur, the
Sub-Adviser will promptly and at its own expense take all steps necessary
or appropriate to segregate such records and deliver them to FAIF or to
such person as is designated by FAIF.
(c) Any investment decisions made by the Sub-Adviser on behalf of
Emerging Markets Fund shall be subject, in the discretion of the Adviser,
to review, approval or ratification by the Adviser.
In acting hereunder the Sub-Adviser shall be an independent contractor and,
unless otherwise expressly provided or authorized hereunder or by the Board,
shall have no authority to act for or represent the Adviser, FAIF or Emerging
Markets Fund in any way or otherwise be an agent of the Adviser, FAIF or
Emerging Markets Fund.
2. The Sub-Adviser, at its own expense, shall provide all office
space, personnel and facilities necessary and incident to the performance of the
Sub-Adviser's services hereunder. The Sub-Adviser may consult with counsel to
Emerging Markets Fund and shall be protected insofar as it
<PAGE>
acts in conformity with advice rendered to it by such counsel. The fees and
expenses of counsel to Emerging Markets Fund shall be paid by Emerging Markets
Fund.
3. The Sub-Adviser shall be responsible only for those expenses
expressly stated in paragraph 2 to be the responsibility of the Sub-Adviser and
shall not be responsible for any other expenses of the Adviser, Emerging Markets
Fund or FAIF, including, as illustrative and without limitation, fees and
charges of any custodian (including charges as custodian and for keeping books
and records and similar services to FAIF and Emerging Markets Fund); fees and
expenses of directors; fees and expenses of independent auditors, legal counsel,
transfer agents, dividend disbursing agents, and registrars; costs of and
incident to issuance, redemption and transfer of Emerging Markets Fund's shares,
and distributions to shareholders (including dividend payments and reinvestment
of dividends); brokers' commissions; interest charges; taxes and corporate fees
payable to any government or governmental body or agency (including those
incurred on account of the registration or qualification of securities issued by
FAIF); dues and other expenses incident to FAIF's membership in the Investment
Company Institute and other like associations; costs of stock certificates,
shareholder meetings, corporate reports, reports and notices to shareholders;
and costs of printing, stationery and bookkeeping forms.
4. The Sub-Adviser shall not purchase or sell securities for
Emerging Markets Fund in any transaction in which the Sub-Adviser or any
affiliate of the Sub-Adviser is acting as broker or dealer. The Sub-Adviser may,
with the prior consent of the Adviser, utilize FAIF's distributor or the Adviser
or an affiliate of the Adviser as a broker, including as a principal broker,
provided that the brokerage transactions and procedures are in accordance with
Rule 17e-1 under the Investment Company Act of 1940, as amended (the "Act"),
other applicable provisions, if any, of the Act, and the then-effective
Registration Statement of FAIF under the Securities Act of 1933, as amended. All
allocation of portfolio transactions shall be subject to such policies and
supervision as the Board or any committee thereof deem appropriate and any
brokerage policy set forth in the then-current Registration Statement of FAIF as
provided to the Sub-Adviser. The Sub-Adviser shall provide to the Adviser and
the Board such reports in respect to placement of security transactions for
Emerging Markets Fund as the Adviser or the Board may reasonably request. The
Sub-Adviser also shall provide to the Adviser and the Board such reports
assessing the likelihood, if any, of expropriation, nationalization, freezes or
confiscation of Emerging Markets Fund's assets in each country in which it
invests; foreseeable difficulties, if any, in converting Emerging Markets Fund's
cash and cash equivalents into U.S. dollars; and similar matters, as the Adviser
or the Board may reasonably request in order to assist the Board in making the
determinations required to be made pursuant to Rule 17f-5 under the Act.
5. For the services provided and the expenses assumed by the
Sub-Adviser pursuant to this Agreement, the Adviser will pay to the Sub-Adviser
as full compensation therefor a fee based on an annual rate of 0.85% of the
first $100 million of Emerging Markets Fund's average daily net assets; 0.60% of
Emerging Markets Fund's average daily 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 assets in excess of $500 million. This fee will be computed based
on net assets at the beginning of each day and will be paid to the Sub-Adviser
monthly on or before the fifteenth day of the month next succeeding the month
for which the fee is paid. The fee shall be prorated for any fraction of a
fiscal year at the commencement and termination of this Agreement. Anything to
the contrary herein notwithstanding, the Sub-Adviser may at any time and from
time to time waive any part or all of any fee payable to it pursuant to this
Agreement.
6. Nothing in this Agreement shall prevent the Sub-Adviser or any
partner, officer, employee or other affiliate thereof from acting as investment
adviser for any other person, firm or corporation, or from engaging in any other
lawful activity, and shall not in any way limit or restrict the Sub-Adviser or
any of its partners, officers, employees or agents from buying, selling or
trading any securities for its or their own accounts or for the accounts of
others for whom it or they may be acting,
<PAGE>
provided, however, that the Sub-Adviser will undertake and permit such persons
to undertake no activities which, in its judgment, will adversely affect the
performance of its obligations under this Agreement.
The Sub-Adviser agrees to indemnify Emerging Markets Fund, FAIF and
the Adviser with respect to any loss, liability, judgment, cost or penalty which
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
this Agreement by the Sub-Adviser. The Adviser agrees to indemnify the
Sub-Adviser with respect to any loss, liability, judgment, cost or penalty which
the Sub-Adviser may directly or indirectly suffer or incur in any way arising
out of the performance of its duties under this Agreement, except as provided in
the following paragraph.
The Sub-Adviser shall give Emerging Markets Fund the benefit of its
best judgment and effort in rendering services hereunder, but the Sub-Adviser
shall not be liable for any act or omission or for any loss sustained by
Emerging Markets Fund in connection with the matters to which this Agreement
relates, except a loss 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 this Agreement. The Sub-Adviser
shall not be entitled to indemnity for any loss, liability, 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 this Agreement.
7. The Sub-Adviser represents, warrants and agrees that the Sub-
Adviser is registered as an "investment adviser" under the Investment Advisers
Act of 1940, as amended (the "Advisers Act") and is and shall continue at all
times to be in compliance in all material respects with the requirements imposed
upon it by the Advisers Act. The Sub-Adviser agrees to (a) supply the Adviser
with such documents as the Adviser may reasonably request to document the
Sub-Adviser's compliance with such laws and regulations, and (b) 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 any applicable law or regulation. The Sub-Adviser will furnish to
the Adviser a copy of any amendment to the Sub-Adviser's Form ADV promptly
following the filing of such amendment with the Securities and Exchange
Commission.
8. The Adviser and the Sub-Adviser each represents and warrants that
it has the power to execute and deliver this Agreement and any other
documentation relating hereto and to perform its respective obligations under
this Agreement and that it has taken all necessary action to authorize such
execution, delivery and performance. Such execution, delivery and performance do
not violate or conflict with any law applicable to the Adviser or the
Sub-Adviser, respectively, any order or judgment of any court or other
governmental agency, or any contractual restriction binding on or affecting the
Adviser or the Sub-Adviser, respectively. The obligations of the Adviser and the
Sub-Adviser, respectively, under this Agreement constitute their respective
legal, valid and binding obligations, enforceable against each of them in
accordance with the terms hereof.
9. The effective date of this Agreement shall be the date set forth
in the first paragraph hereof. Unless sooner terminated as hereinafter provided,
this Agreement shall continue in effect for a period of more than two years from
the date of its execution but only as long as such continuance is specifically
approved at least annually by (a) the Board or by the vote of a majority of the
outstanding shares of Emerging Markets Fund and (b) the vote of a majority of
the directors, who are not parties to this Agreement or "interested persons" (as
defined in the Act) of the Adviser, of the Sub-Adviser or of FAIF, cast in
person at a meeting called for the purpose of voting on such approval.
10. This Agreement may be terminated at any time, without the
payment of any penalty, by the Board or by the vote of a majority of the
outstanding shares of Emerging Markets Fund, or by the Adviser or the
Sub-Adviser, upon 60 days' written notice to the other parties.
<PAGE>
This Agreement shall automatically terminate in the event of its
"assignment" (as defined in the Act), provided, however, that such automatic
termination shall be prevented in a particular case by an order of exemption
from the Securities and Exchange Commission or a no-action letter of the staff
of the Commission to the effect that such assignment does not require
termination as a statutory or regulatory matter.
11. This Agreement may be modified by mutual consent, such consent
only to be authorized by a majority of the directors of FAIF who are not parties
to this Agreement or "interested persons" (as defined in the Act) of the
Adviser, of the Sub-Adviser or of FAIF and the vote of a majority of the
outstanding shares of Emerging Markets Fund.
12. Wherever referred to in this Agreement, the vote or approval of
the holders of a majority of the outstanding shares of Emerging Markets Fund
shall mean the lesser of (a) the vote of 67% or more of the shares of Emerging
Markets Fund at a meeting where more than 50% of the outstanding shares are
present in person or by proxy, or (b) the vote of more than 50% of the
outstanding shares of Emerging Markets Fund.
13. If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder shall not be
thereby affected.
14. 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.
15. The internal law, and not the law of conflicts, of the State of
Minnesota will govern all questions concerning the construction, validity and
interpretation of this Agreement and the performance of the obligations imposed
by this Agreement.
16. This Agreement constitutes the entire agreement between the
parties concerning its subject matter and supersedes all prior and
contemporaneous agreements, representations and understandings of the parties.
IN WITNESS WHEREOF, the Adviser and the Sub-Adviser have caused this
Agreement to be executed by their duly authorized officers as of the day and
year first above written.
MARVIN & PALMER ASSOCIATES, INC.
By /s/ Karen T. Buckley
--------------------------------
Its Senior Vice President
--------------------------------
U.S. BANK NATIONAL ASSOCIATION
By /s/ Jeffrey M. Wilson
--------------------------------
Its Vice President
--------------------------------
EXHIBIT 5(g)
SUB-ADVISORY AGREEMENT
This Agreement, made as of this 24th day of July, 1998, by and
between U.S. Bank National Association, a national banking association organized
and existing under the laws of the United States of America (the "Adviser"), and
Federated Global Research Corp., a Delaware corporation (the "Sub-Adviser").
WHEREAS, First American Investment Funds, Inc., a Maryland
corporation ("FAIF"), on behalf of its Strategic Income Fund, a separately
managed series of FAIF ("Strategic Income Fund"), has appointed the Adviser as
Strategic Income Fund's investment adviser pursuant to an Investment Advisory
Agreement dated April 2, 1991, as amended (the "Advisory Agreement"); and
WHEREAS, pursuant to the terms of the Advisory Agreement, the
Adviser desires to appoint the Sub-Adviser as its sub-adviser for Strategic
Income Fund, and the Sub-Adviser is willing to act in such capacity upon the
terms set forth herein; and
WHEREAS, pursuant to the terms of the Advisory Agreement, FAIF has
approved the appointment of the Sub-Adviser as the sub-adviser for Strategic
Income Fund.
NOW, THEREFORE, the Adviser and the Sub-Adviser agree as follows:
1. The Adviser hereby retains the Sub-Adviser, and the Sub-Adviser
hereby agrees to act, as sub-adviser for, and to manage the investment of the
assets of, Strategic Income Fund as follows:
(a) The Adviser shall determine the proportions in which Strategic
Income Fund's assets shall be allocated and re-allocated among (i) U.S.
government and domestic corporate investment grade fixed income
securities; (ii) domestic corporate high yield (as defined in Strategic
Income Fund's prospectus) fixed income securities; (iii) foreign
government and foreign corporate investment grade and high yield fixed
income securities; and (iv) cash equivalents. The Adviser shall
communicate such asset allocation determinations to the Sub-Adviser at
such times and in such manner as the Sub-Adviser reasonably requests.
(b) The Sub-Adviser shall manage the investment of those proportions
of Strategic Income Fund's assets which the Adviser determines, pursuant
to (a) above, shall be allocated to and invested in securities described
in (a)(iii) above. It is understood and agreed that the Adviser, acting
alone or through another sub-adviser, shall manage the investment of those
proportions of Strategic Income Fund's assets which the Adviser
determines, pursuant to (a) above, shall be allocated to and invested in
securities described in (a)(i), (ii) and (iv) above.
Without limiting the generality of the foregoing, it is specifically understood
and agreed by the Adviser and the Sub-Adviser that:
(x) The investment of Strategic Income Fund's assets by the Sub-
Adviser as set forth in (b) above shall at all times be subject to the
investment objectives, policies and restrictions of Strategic Income Fund
as set forth in FAIF's then-effective Registration Statement under the
Securities Act of 1933, as amended, including the Prospectus and Statement
of Additional Information of Strategic Income Fund contained therein. The
Adviser shall communicate to the Sub-Adviser any changes or additions to
or interpretations of such investment objectives, policies and
restrictions of Strategic Income Fund made by the Board of Directors of
FAIF (the "Board"). The Sub-Adviser shall have a reasonable opportunity to
review and comment on proposed changes, additions or interpretations
before they take effect. The Sub-Adviser will maintain books and records
relating to its management of Strategic Income Fund under its customary
procedures and in compliance with applicable regulations
<PAGE>
under the Investment Company Act of 1940, as amended (the "Act") and the
Investment Advisers Act of 1940, as amended (the "Advisers Act"). The
Sub-Adviser will permit the Adviser to inspect and copy such books and
records at all reasonable times during normal business hours, upon
reasonable notice. Prior to each Board meeting, the Sub-Adviser will
provide the Adviser and the Board with reports regarding its management of
Strategic Income Fund during the interim period in such form as may be
mutually agreed upon by the Sub-Adviser and the Adviser. The Sub-Adviser
will also provide the Adviser with any information regarding its
management of Strategic Income Fund required for any shareholder report,
amended registration statement or prospectus supplement filed by Strategic
Income Fund with the Securities and Exchange Commission.
(y) If a transfer of investment advisory or sub-advisory services
with respect to Strategic Income Fund should occur, the Sub-Adviser will
within a reasonable period of time and at the Adviser's expense take all
steps necessary or appropriate to segregate such records and deliver them
to FAIF or to such person as is designated by FAIF.
(z) Subject to paragraphs (a) and (x) above and the supervision of
the Adviser and the Board, the Sub-Adviser will manage the investment
operations of the portion of Strategic Income Fund allocated to its
management pursuant to paragraph (b) above (the "Sub-Adviser's Portfolio")
and the composition of the Sub-Adviser's Portfolio, including the
purchase, retention and disposition of, and exercise of all rights
pertaining to, the securities comprising the Sub-Adviser's Portfolio.
Subject to the foregoing, the Adviser hereby authorizes the Sub-Adviser,
in its discretion and without prior consultation with the Adviser, to buy,
sell and otherwise trade in any stocks, bonds, instruments, financial
contracts and other investment assets ("Securities") on behalf of
Strategic Income Fund. Subject to the foregoing, the Sub-Adviser may
invest the Sub-Adviser's Portfolio in such proportions of stocks, bonds,
instruments, financial contracts and other investment assets as the
Sub-Adviser shall determine, and may dispose of securities without regard
to the length of time the Securities have been held, the resulting rate of
portfolio turnover or any tax considerations.
In acting hereunder the Sub-Adviser shall be an independent contractor and,
unless otherwise expressly provided or authorized hereunder or by the Board,
shall have no authority to act for or represent the Adviser, FAIF or Strategic
Income Fund in any way or otherwise be an agent of the Adviser, FAIF or
Strategic Income Fund.
2. The Sub-Adviser, at its own expense, shall provide all office
space, personnel and facilities necessary and incident to the performance of the
Sub-Adviser's services hereunder. The Sub-Adviser may consult with counsel to
Strategic Income Fund and shall be protected insofar as it acts in conformity
with advice rendered to it by such counsel. The fees and expenses of counsel to
Strategic Income Fund shall be paid by Strategic Income Fund.
3. The Sub-Adviser shall be responsible only for those expenses
expressly stated in paragraph 2 to be the responsibility of the Sub-Adviser and
shall not be responsible for any other expenses of the Adviser, Strategic Income
Fund or FAIF, including, as illustrative and without limitation, the fees and
expenses of organizing FAIF and continuing its existence; expenses of
administrative support and personnel services; fees and expenses of preparing
and printing registration statements under the Securities Act of 1933 and the
Act and any amendments thereto; expenses of preparing, printing and distributing
prospectuses (and any amendments thereto) to shareholders; fees and charges of
any custodian (including charges as custodian and for keeping books and records
and similar services to FAIF and Strategic Income Fund) and including any
expenses relating to foreign country registration and relating to the Board's
Rule 17f-5 determinations; fees and expenses of directors
<PAGE>
and officers; fees and expenses of accounting, insurance, independent auditors,
legal counsel, transfer agents, dividend disbursing agents, shareholder
servicing agents, and registrars; costs of and incident to issuance, purchase,
redemption and transfer of Strategic Income Fund's shares, and distributions to
shareholders (including dividend payments and reinvestment of dividends);
brokers' commissions; interest charges; taxes and corporate fees payable to any
government or governmental body or agency (including those incurred on account
of the registration or qualification of securities issued by FAIF); dues and
other expenses incident to FAIF's membership in the Investment Company Institute
and other like associations; costs of stock certificates, directors and
shareholder meetings, corporate reports, reports and notices to shareholders and
proxy solicitations thereof and reports to governmental officers and
commissions; and costs of printing and mailing, stationery and bookkeeping
forms. Strategic Income Fund will also pay its allocable share of such
extraordinary expenses as may arise including expenses incurred in connection
with litigations, proceedings and claims and the legal obligations of Strategic
Income Fund to indemnify its officers and agents with respect thereto.
4. To the extent consistent with applicable law, the Sub-Adviser may
aggregate purchase or sell orders for Strategic Income Fund with contemporaneous
purchase or sell orders of other clients of the Sub-Adviser or its affiliated
persons. In such event, allocation of the Securities so purchased or sold, as
well as the expenses incurred in the transaction, will be made by the
Sub-Adviser in the manner the Sub-Adviser considers to be the most equitable and
consistent with its and its affiliates' fiduciary obligations to Strategic
Income Fund and to such other clients. The Adviser hereby acknowledges that such
aggregation of orders may not result in a more favorable price or lower
brokerage commissions in all instances.
The Sub-Adviser will place purchase and sell orders for Strategic
Income Fund with or through such banks, brokers, dealers, futures commission
merchants or other firms dealing in Securities ("Brokers") as it determines,
which may include Brokers which are affiliated persons of the Sub-Adviser,
provided such orders are exempt from the provisions of Section 17(a), (d) and
(e) of the Act. The Sub-Adviser will use its best efforts to obtain execution of
transactions for Strategic Income Fund at prices which are advantageous to
Strategic Income Fund and at commission rates that are reasonable in relation to
the services received. The Sub-Adviser may, however, select Brokers on the basis
that they provide brokerage, research or other services or products to Strategic
Income Fund and/or other clients of the Sub-Adviser and its affiliated persons.
In selecting Brokers, the Sub-Adviser may also consider the reliability,
integrity and financial condition of the Broker, and the size of and difficulty
in executing the order.
To the extent consistent with applicable law, and subject to review
by the Board, the Sub-Adviser may pay a Broker an amount of commission for
effecting a Securities transaction in excess of the amount of commission or
dealer spread another Broker would have charged for effecting that transaction,
if the Sub-Adviser determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research products
and/or services provided by such Broker to Strategic Income Fund and/or other
clients of the Sub-Adviser and its affiliated persons. This determination, with
respect to brokerage and research services or products, may be viewed in terms
of either that particular transaction or the overall responsibilities which the
Sub-Adviser and its affiliated persons have with respect to Strategic Income
Fund or their other clients, and may include services or products that the
Sub-Adviser does not use in managing Strategic Income Fund. The Sub-Adviser's
placement of orders and receipt of research products and/or services shall
comply with any applicable policies and procedures adopted by the Board and with
Strategic Income Fund's registration statement.
The Sub-Adviser shall provide to the Adviser and the Board such
reports in respect to placement of security transactions for Strategic Income
Fund as the Adviser or the Board may
<PAGE>
reasonably request. The Sub-Adviser also shall provide to the Adviser and the
Board such reports as are mutually agreed upon by the Adviser and the
Sub-Adviser in connection with the determinations required to be made by the
Board or its delegate pursuant to Rule 17f-5 under the Act.
5. For the services provided and the expenses assumed by the
Sub-Adviser pursuant to this Agreement, the Adviser will pay to the Sub-Adviser
as full compensation therefor a fee based on an annual rate of 0.20% of the
first $25 million of Strategic Income Fund's average daily net assets, 0.165% of
its average daily net assets in excess of $25 million up to $50 million, 0.13%
of its average daily net assets in excess of $50 million up to $100 million and
0.105% of its average daily net assets in excess of $100 million. This fee will
be computed based on net assets at the beginning of each day and will be paid to
the Sub-Adviser monthly on or before the fifteenth day of the month next
succeeding the month for which the fee is paid. The fee shall be prorated for
any fraction of a fiscal year at the commencement and termination of this
Agreement. Anything to the contrary herein notwithstanding, the Sub-Adviser may
at any time and from time to time waive any part or all of any fee payable to it
pursuant to this Agreement.
6. Nothing in this Agreement shall prevent the Sub-Adviser or any
partner, officer, employee or other affiliate thereof from acting as investment
adviser for any other person, firm or corporation, or from engaging in any other
lawful activity, and shall not in any way limit or restrict the Sub-Adviser or
any of its partners, officers, employees or agents from buying, selling or
trading any securities for its or their own accounts or for the accounts of
others for whom it or they may be acting, provided, however, that the
Sub-Adviser will undertake and permit such persons to undertake no activities
which, in its judgment, will adversely affect the performance of its obligations
under this Agreement.
Except as provided in the following paragraph, the Sub-Adviser
agrees to indemnify Strategic Income Fund, FAIF and the Adviser with respect to
any loss, liability, judgment, cost or penalty which Strategic Income 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 this Agreement by the Sub-
Adviser. In no event shall this be construed to have the Sub-Adviser incur any
liability for investment decisions made prior to the effective date of this
Agreement. The Adviser agrees to indemnify the Sub-Adviser with respect to any
loss, liability, judgment, cost or penalty which the Sub-Adviser may directly or
indirectly suffer or incur in any way arising out of the performance of its
duties under this Agreement, except as provided in the following paragraph. The
Adviser will not be entitled to indemnity for any loss, liability, or judgment,
cost or penalty resulting from willful malfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations and duties, under this Agreement.
The Sub-Adviser shall give Strategic Income Fund the benefit of its
best judgment and effort in rendering services hereunder, but the Sub-Adviser
shall not be liable for any act or omission or for any loss sustained by
Strategic Income Fund in connection with the matters to which this Agreement
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations and duties, under this Agreement. The Sub-Adviser
shall not be entitled to indemnity for any loss, liability, judgment, cost or
penalty resulting from willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations and duties, under this Agreement.
7. The Sub-Adviser represents, warrants and agrees that the Sub-
Adviser is registered as an "investment adviser" under the Investment Advisers
Act of 1940, as amended (the "Advisers Act") and is and shall continue at all
times to be in compliance in all material respects with the requirements imposed
upon it by the Advisers Act. The Sub-Adviser agrees to (a) supply the
<PAGE>
Adviser with such documents as the Adviser may reasonably request to document
the Sub-Adviser's compliance with such laws and regulations, and (b) 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 any applicable law or regulation. The Sub-Adviser will furnish to
the Adviser a copy of any amendment to Part II of the Sub-Adviser's Form ADV
most recently filed with the Securities and Exchange Commission.
8. The Adviser and the Sub-Adviser each represents and warrants that
it has the power to execute and deliver this Agreement and any other
documentation relating hereto and to perform its respective obligations under
this Agreement and that it has taken all necessary action to authorize such
execution, delivery and performance. Such execution, delivery and performance do
not violate or conflict with any law applicable to the Adviser or the
Sub-Adviser, respectively, any order or judgment of any court or other
governmental agency, or any contractual restriction binding on or affecting the
Adviser or the Sub-Adviser, respectively. The obligations of the Adviser and the
Sub-Adviser, respectively, under this Agreement constitute their respective
legal, valid and binding obligations, enforceable against each of them in
accordance with the terms hereof.
9. Subject to any other written instructions of the Adviser or FAIF,
the Sub-Adviser is hereby appointed FAIF's agent and attorney-in-fact for the
limited purposes of executing account documentation, agreements, contracts and
other documents as the Sub-Adviser shall be requested by brokers, dealers,
counterparties and other persons in connection with its management of Strategic
Income Fund's assets. The Adviser and FAIF hereby ratify and confirm as good and
effectual, at law or in equity, all that the Sub-Adviser and its officers and
employees, may do in its capacity as attorney-in-fact. However, nothing herein
shall be construed as imposing a duty on the Sub-Adviser to act or assume
responsibility for any matters in its capacity as attorney-in-fact for FAIF. Any
person, partnership, corporation or other legal entity dealing with the
Sub-Adviser in its capacity as attorney-in-fact hereunder for FAIF is hereby
expressly put on notice that the Sub-Adviser is acting solely in the capacity as
an agent of FAIF and that any such person. partnership, corporation or other
legal entity must look solely to FAIF for enforcement of any claim against FAIF,
as the Sub-Adviser assumes no personal liability whatsoever for obligations of
FAIF entered into by the Sub-Adviser in its capacity as attorney-in-fact for
FAIF.
10. The Adviser hereby acknowledges that the Sub-Adviser is not
responsible for pricing portfolio Securities, and that the Adviser and the
Sub-Adviser will rely on the pricing agent chosen by the Board for prices of
Securities, for any purposes.
11. The Sub-Adviser's and the Adviser's obligations under this
Agreement are subject to the satisfaction of the following conditions precedent:
(a) Receipt by the Sub-Adviser of a certificate of an officer of
Strategic Income Fund stating that (i) this Agreement and the Advisory
Agreement have been approved by the vote of a majority of the directors,
who are not interested persons of Sub-Adviser or the Adviser, cast in
person at a meeting of the Board called for the purpose of voting on such
approval, and (ii) this Agreement and the Advisory Agreement have been
approved by the vote of a majority of the outstanding voting securities of
Strategic Income Fund.
(b) Authorization by Strategic Income Fund to its custodian
designating the persons specified by the Sub-Adviser as "Authorized
Persons" under Strategic Income Fund's custody agreement.
<PAGE>
(c) Strategic Income Fund's execution and delivery of a limited
power of attorney-in-fact of the Sub-Adviser, in a form mutually agreeable
to the Sub-Adviser, the Adviser and the Board.
(d) Receipt by the Sub-Adviser of Board resolutions, certified by an
officer of Strategic Income Fund, adopting all procedures and guidelines
required by any exemptive order listed on Schedule 2 to this Agreement and
all policies, procedures, guidelines, and codes listed on Schedule 1 to
this Agreement;
(e) Receipt by the Sub-Adviser of a list of entities affiliated with
FAIF and an opinion of counsel concerning the placement of principal and
brokerage securities transactions with affiliated entities of FAIF by the
Sub-Adviser and its affiliated entities.
(f) Any other documents, certificates or other instruments that the
Sub-Adviser or the Adviser may reasonably request from Strategic Income
Fund.
12. The effective date of this Agreement shall be the date set forth
in the first paragraph hereof. Unless sooner terminated as hereinafter provided,
this Agreement shall continue in effect for a period of more than two years from
the date of its execution but only as long as such continuance is specifically
approved at least annually by (a) the Board or by the vote of a majority of the
outstanding shares of Strategic Income Fund and (b) the vote of a majority of
the directors, who are not parties to this Agreement or "interested persons" (as
defined in the Act) of the Adviser, of the Sub-Adviser or of FAIF, cast in
person at a meeting called for the purpose of voting on such approval.
13. This Agreement may be terminated at any time, without the
payment of any penalty, by the Board or by the vote of a majority of the
outstanding shares of Strategic Income Fund, or by the Adviser or the
Sub-Adviser, upon 60 days' written notice to the other parties.
This Agreement shall automatically terminate in the event of its
"assignment" (as defined in the Act), provided, however, that such automatic
termination shall be prevented in a particular case by an order of exemption
from the Securities and Exchange Commission or a no-action letter of the staff
of the Commission to the effect that such assignment does not require
termination as a statutory or regulatory matter.
14. This Agreement may be modified by mutual consent, such consent
only to be authorized by a majority of the directors of FAIF who are not parties
to this Agreement or "interested persons" (as defined in the Act) of the
Adviser, of the Sub-Adviser or of FAIF and the vote of a majority of the
outstanding shares of Strategic Income Fund.
15. Wherever referred to in this Agreement, the vote or approval of
the holders of a majority of the outstanding shares of Strategic Income Fund
shall mean the lesser of (a) the vote of 67% or more of the shares of Strategic
Income Fund at a meeting where more than 50% of the outstanding shares are
present in person or by proxy, or (b) the vote of more than 50% of the
outstanding shares of Strategic Income Fund.
16. If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder shall not be
thereby affected.
17. 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>
18. The internal law, and not the law of conflicts, of the
Commonwealth of Pennsylvania will govern all questions concerning the
construction, validity and interpretation of this Agreement and the performance
of the obligations imposed by this Agreement.
19. This Agreement constitutes the entire agreement between the
parties concerning its subject matter and supersedes all prior and
contemporaneous agreements, representations and understandings of the parties.
20. This Agreement may be executed simultaneously in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the Adviser and the Sub-Adviser have caused this
Agreement to be executed by their duly authorized officers as of the day and
year first above written.
U.S. BANK NATIONAL ASSOCIATION
By /s/ Jeffrey M. Wilson
--------------------------------
Its Vice President
----------------------------
FEDERATED GLOBAL RESEARCH CORP.
By /s/ William Dawson
--------------------------------
Its Executive Vice President
----------------------------
<PAGE>
SCHEDULE 1 - FUND DOCUMENTATION
1. FAIF's Articles of Incorporation and Bylaws.
2. 10 copies of the most current Prospectus and Statement of Additional
Information for each class of Strategic Income Fund's shares.
3. Information regarding the Custody Agreement between FAIF and U.S. Bank
National Association, as Custodian for Strategic Income Fund's
Securities, including information as to:
* Strategic Income Fund's nominee,
* the Federal tax identification numbers of Strategic Income
Fund and its nominee,
* all routing, bank, participant and account numbers and other
information necessary to provide proper instructions for
transfer and delivery of Securities to Strategic Income Fund's
accounts at the Custodian,
* the name, address, phone and fax number of the Custodian's
employees responsible for Strategic Income Fund's accounts,
and
* Strategic Income Fund's pricing service and contact persons.
4. All policies, procedures, guidelines and codes adopted by the Board
under the Act or any regulation thereunder, including:
* Rule 10f-3 (relating to affiliated underwriting syndicates),
* Rule 17a-7 (relating to interfund transactions),
* Rule 17e-1 (relating to transactions with affiliated Brokers),
* Rule 17-f-4 (relating to securities held in securities
depositories),
* Rule 17j-1 (relating to a code of ethics), and
* Rule 17f-5 (relating to foreign custody).
5. All SEC exemptive orders applicable to Strategic Income Fund, and all
procedures and guidelines adopted by the Board under the terms of such
orders.
6. All procedures and guidelines adopted by the Board or the Adviser
regarding:
* Repurchase agreements,
* Evaluating the liquidity of securities, include restricted
securities, municipal leases and stripped U.S. government
securities,
* Segregation of liquid assets in connection with reverse
repurchase agreements, firm commitments, standby commitments,
short sales, options and futures agreements,
* Derivative contracts and securities, and
* Affiliated bank procedures.
7. Any master agreements that FAIF has entered into on behalf of Strategic
Income Fund, including:
* Master Repurchase Agreement,
* Master Futures and Options Agreements,
* Master Foreign Exchange Netting Agreements, and
* Master Swap Agreements.
8. CFTC Rule 4.5 letter.
9. Schedule of the current year's Board meetings, and the reports needed
by the Board.
10. Pricing and performance calculation entities and contact persons.
<PAGE>
SCHEDULE 2 - SUB-ADVISER DOCUMENTATION
1. Part II of the Sub-Adviser's Form ADV most recently filed with the
Securities and Exchange Commission.
2 All exemptive orders granted by the Securities and Exchange Commission
that will become applicable to Strategic Income Fund, and the
procedures and guidelines followed by the Sub-Adviser in accordance
therewith.
EXHIBIT 5(h)
SUB-ADVISORY AGREEMENT
This Agreement, made as of this 24th day of July, 1998, by and
between U.S. Bank National Association, a national banking association organized
and existing under the laws of the United States of America (the "Adviser"), and
Federated Investment Counseling, a Delaware business trust (the "Sub-Adviser").
WHEREAS, First American Investment Funds, Inc., a Maryland
corporation ("FAIF"), on behalf of its Strategic Income Fund, a separately
managed series of FAIF ("Strategic Income Fund"), has appointed the Adviser as
Strategic Income Fund's investment adviser pursuant to an Investment Advisory
Agreement dated April 2, 1991, as amended (the "Advisory Agreement"); and
WHEREAS, pursuant to the terms of the Advisory Agreement, the
Adviser desires to appoint the Sub-Adviser as its sub-adviser for Strategic
Income Fund, and the Sub-Adviser is willing to act in such capacity upon the
terms set forth herein; and
WHEREAS, pursuant to the terms of the Advisory Agreement, FAIF has
approved the appointment of the Sub-Adviser as the sub-adviser for Strategic
Income Fund.
NOW, THEREFORE, the Adviser and the Sub-Adviser agree as follows:
1. The Adviser hereby retains the Sub-Adviser, and the Sub-Adviser
hereby agrees to act, as sub-adviser for, and to manage the investment of the
assets of, Strategic Income Fund as follows:
(a) The Adviser shall determine the proportions in which Strategic
Income Fund's assets shall be allocated and re-allocated among (i) U.S.
government and domestic corporate investment grade fixed income
securities; (ii) domestic corporate high yield (as defined in Strategic
Income Fund's prospectus) fixed income securities; (iii) foreign
government and foreign corporate investment grade and high yield fixed
income securities; and (iv) cash equivalents. The Adviser shall
communicate such asset allocation determinations to the Sub-Adviser at
such times and in such manner as the Sub-Adviser reasonably requests.
(b) The Sub-Adviser shall manage the investment of those proportions
of Strategic Income Fund's assets which the Adviser determines, pursuant
to (a) above, shall be allocated to and invested in securities described
in (a)(ii) above. It is understood and agreed that the Adviser, acting
alone or through another sub-adviser, shall manage the investment of those
proportions of Strategic Income Fund's assets which the Adviser
determines, pursuant to (a) above, shall be allocated to and invested in
securities described in (a)(i), (iii) and (iv) above.
Without limiting the generality of the foregoing, it is specifically understood
and agreed by the Adviser and the Sub-Adviser that:
(x) The investment of Strategic Income Fund's assets by the Sub-
Adviser as set forth in (b) above shall at all times be subject to the
investment objectives, policies and restrictions of Strategic Income Fund
as set forth in FAIF's then-effective Registration Statement under the
Securities Act of 1933, as amended, including the Prospectus and Statement
of Additional Information of Strategic Income Fund contained therein. The
Adviser shall communicate to the Sub-Adviser any changes or additions to
or interpretations of such investment objectives, policies and
restrictions of Strategic Income Fund made by the Board of Directors of
FAIF (the "Board"). The Sub-Adviser shall have a reasonable opportunity to
review and comment on proposed changes, additions or interpretations
before they take effect. The Sub-Adviser will maintain books and records
relating to its management of Strategic Income Fund under its customary
procedures and in compliance with applicable regulations
<PAGE>
under the Investment Company Act of 1940, as amended (the "Act") and the
Investment Advisers Act of 1940, as amended (the "Advisers Act"). The
Sub-Adviser will permit the Adviser to inspect and copy such books and
records at all reasonable times during normal business hours, upon
reasonable notice. Prior to each Board meeting, the Sub-Adviser will
provide the Adviser and the Board with reports regarding its management of
Strategic Income Fund during the interim period in such form as may be
mutually agreed upon by the Sub-Adviser and the Adviser. The Sub-Adviser
will also provide the Adviser with any information regarding its
management of Strategic Income Fund required for any shareholder report,
amended registration statement or prospectus supplement filed by Strategic
Income Fund with the Securities and Exchange Commission.
(y) If a transfer of investment advisory or sub-advisory services
with respect to Strategic Income Fund should occur, the Sub-Adviser will
within a reasonable period of time and at the Adviser's expense take all
steps necessary or appropriate to segregate such records and deliver them
to FAIF or to such person as is designated by FAIF.
(z) Subject to paragraphs (a) and (x) above and the supervision of
the Adviser and the Board, the Sub-Adviser will manage the investment
operations of the portion of Strategic Income Fund allocated to its
management pursuant to paragraph (b) above (the "Sub-Adviser's Portfolio")
and the composition of the Sub-Adviser's Portfolio, including the
purchase, retention and disposition of, and exercise of all rights
pertaining to, the securities comprising the Sub-Adviser's Portfolio.
Subject to the foregoing, the Adviser hereby authorizes the Sub-Adviser,
in its discretion and without prior consultation with the Adviser, to buy,
sell and otherwise trade in any stocks, bonds, instruments, financial
contracts and other investment assets ("Securities") on behalf of
Strategic Income Fund. Subject to the foregoing, the Sub-Adviser may
invest the Sub-Adviser's Portfolio in such proportions of stocks, bonds,
instruments, financial contracts and other investment assets as the
Sub-Adviser shall determine, and may dispose of securities without regard
to the length of time the Securities have been held, the resulting rate of
portfolio turnover or any tax considerations.
In acting hereunder the Sub-Adviser shall be an independent contractor and,
unless otherwise expressly provided or authorized hereunder or by the Board,
shall have no authority to act for or represent the Adviser, FAIF or Strategic
Income Fund in any way or otherwise be an agent of the Adviser, FAIF or
Strategic Income Fund.
2. The Sub-Adviser, at its own expense, shall provide all office
space, personnel and facilities necessary and incident to the performance of the
Sub-Adviser's services hereunder. The Sub-Adviser may consult with counsel to
Strategic Income Fund and shall be protected insofar as it acts in conformity
with advice rendered to it by such counsel. The fees and expenses of counsel to
Strategic Income Fund shall be paid by Strategic Income Fund.
3. The Sub-Adviser shall be responsible only for those expenses
expressly stated in paragraph 2 to be the responsibility of the Sub-Adviser and
shall not be responsible for any other expenses of the Adviser, Strategic Income
Fund or FAIF, including, as illustrative and without limitation, the fees and
expenses of organizing FAIF and continuing its existence; expenses of
administrative support and personnel services; fees and expenses of preparing
and printing registration statements under the Securities Act of 1933 and the
Act and any amendments thereto; expenses of preparing, printing and distributing
prospectuses (and any amendments thereto) to shareholders; fees and charges of
any custodian (including charges as custodian and for keeping books and records
and similar services to FAIF and Strategic Income Fund) and including any
expenses relating to foreign country registration and relating to the Board's
Rule 17f-5 determinations; fees and expenses of directors
<PAGE>
and officers; fees and expenses of accounting, insurance, independent auditors,
legal counsel, transfer agents, dividend disbursing agents, shareholder
servicing agents, and registrars; costs of and incident to issuance, purchase,
redemption and transfer of Strategic Income Fund's shares, and distributions to
shareholders (including dividend payments and reinvestment of dividends);
brokers' commissions; interest charges; taxes and corporate fees payable to any
government or governmental body or agency (including those incurred on account
of the registration or qualification of securities issued by FAIF); dues and
other expenses incident to FAIF's membership in the Investment Company Institute
and other like associations; costs of stock certificates, directors and
shareholder meetings, corporate reports, reports and notices to shareholders and
proxy solicitations thereof and reports to governmental officers and
commissions; and costs of printing and mailing, stationery and bookkeeping
forms. Strategic Income Fund will also pay its allocable share of such
extraordinary expenses as may arise including expenses incurred in connection
with litigations, proceedings and claims and the legal obligations of Strategic
Income Fund to indemnify its officers and agents with respect thereto.
4. To the extent consistent with applicable law, the Sub-Adviser may
aggregate purchase or sell orders for Strategic Income Fund with contemporaneous
purchase or sell orders of other clients of the Sub-Adviser or its affiliated
persons. In such event, allocation of the Securities so purchased or sold, as
well as the expenses incurred in the transaction, will be made by the
Sub-Adviser in the manner the Sub-Adviser considers to be the most equitable and
consistent with its and its affiliates' fiduciary obligations to Strategic
Income Fund and to such other clients. The Adviser hereby acknowledges that such
aggregation of orders may not result in a more favorable price or lower
brokerage commissions in all instances.
The Sub-Adviser will place purchase and sell orders for Strategic
Income Fund with or through such banks, brokers, dealers, futures commission
merchants or other firms dealing in Securities ("Brokers") as it determines,
which may include Brokers which are affiliated persons of the Sub-Adviser,
provided such orders are exempt from the provisions of Section 17(a), (d) and
(e) of the Act. The Sub-Adviser will use its best efforts to obtain execution of
transactions for Strategic Income Fund at prices which are advantageous to
Strategic Income Fund and at commission rates that are reasonable in relation to
the services received. The Sub-Adviser may, however, select Brokers on the basis
that they provide brokerage, research or other services or products to Strategic
Income Fund and/or other clients of the Sub-Adviser and its affiliated persons.
In selecting Brokers, the Sub-Adviser may also consider the reliability,
integrity and financial condition of the Broker, and the size of and difficulty
in executing the order.
To the extent consistent with applicable law, and subject to review
by the Board, the Sub-Adviser may pay a Broker an amount of commission for
effecting a Securities transaction in excess of the amount of commission or
dealer spread another Broker would have charged for effecting that transaction,
if the Sub-Adviser determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research products
and/or services provided by such Broker to Strategic Income Fund and/or other
clients of the Sub-Adviser and its affiliated persons. This determination, with
respect to brokerage and research services or products, may be viewed in terms
of either that particular transaction or the overall responsibilities which the
Sub-Adviser and its affiliated persons have with respect to Strategic Income
Fund or their other clients, and may include services or products that the
Sub-Adviser does not use in managing Strategic Income Fund. The Sub-Adviser's
placement of orders and receipt of research products and/or services shall
comply with any applicable policies and procedures adopted by the Board and with
Strategic Income Fund's registration statement.
The Sub-Adviser shall provide to the Adviser and the Board such
reports in respect to placement of security transactions for Strategic Income
Fund as the Adviser or the Board may
<PAGE>
reasonably request. The Sub-Adviser also shall provide to the Adviser and the
Board such reports as are mutually agreed upon by the Adviser and the
Sub-Adviser in connection with the determinations required to be made by the
Board or its delegate pursuant to Rule 17f-5 under the Act.
5. For the services provided and the expenses assumed by the
Sub-Adviser pursuant to this Agreement, the Adviser will pay to the Sub-Adviser
as full compensation therefor a fee based on an annual rate of 0.20% of the
first $25 million of Strategic Income Fund's average daily net assets, 0.165% of
its average daily net assets in excess of $25 million up to $50 million, 0.13%
of its average daily net assets in excess of $50 million up to $100 million and
0.105% of its average daily net assets in excess of $100 million. This fee will
be computed based on net assets at the beginning of each day and will be paid to
the Sub-Adviser monthly on or before the fifteenth day of the month next
succeeding the month for which the fee is paid. The fee shall be prorated for
any fraction of a fiscal year at the commencement and termination of this
Agreement. Anything to the contrary herein notwithstanding, the Sub-Adviser may
at any time and from time to time waive any part or all of any fee payable to it
pursuant to this Agreement.
6. Nothing in this Agreement shall prevent the Sub-Adviser or any
partner, officer, employee or other affiliate thereof from acting as investment
adviser for any other person, firm or corporation, or from engaging in any other
lawful activity, and shall not in any way limit or restrict the Sub-Adviser or
any of its partners, officers, employees or agents from buying, selling or
trading any securities for its or their own accounts or for the accounts of
others for whom it or they may be acting, provided, however, that the
Sub-Adviser will undertake and permit such persons to undertake no activities
which, in its judgment, will adversely affect the performance of its obligations
under this Agreement.
Except as provided in the following paragraph, the Sub-Adviser
agrees to indemnify Strategic Income Fund, FAIF and the Adviser with respect to
any loss, liability, judgment, cost or penalty which Strategic Income 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 this Agreement by the Sub-
Adviser. In no event shall this be construed to have the Sub-Adviser incur any
liability for investment decisions made prior to the effective date of this
Agreement. The Adviser agrees to indemnify the Sub-Adviser with respect to any
loss, liability, judgment, cost or penalty which the Sub-Adviser may directly or
indirectly suffer or incur in any way arising out of the performance of its
duties under this Agreement, except as provided in the following paragraph. The
Adviser will not be entitled to indemnity for any loss, liability, or judgment,
cost or penalty resulting from willful malfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations and duties, under this Agreement.
The Sub-Adviser shall give Strategic Income Fund the benefit of its
best judgment and effort in rendering services hereunder, but the Sub-Adviser
shall not be liable for any act or omission or for any loss sustained by
Strategic Income Fund in connection with the matters to which this Agreement
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations and duties, under this Agreement. The Sub-Adviser
shall not be entitled to indemnity for any loss, liability, judgment, cost or
penalty resulting from willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations and duties, under this Agreement.
7. The Sub-Adviser represents, warrants and agrees that the Sub-
Adviser is registered as an "investment adviser" under the Investment Advisers
Act of 1940, as amended (the "Advisers Act") and is and shall continue at all
times to be in compliance in all material respects with the requirements imposed
upon it by the Advisers Act. The Sub-Adviser agrees to (a) supply the
<PAGE>
Adviser with such documents as the Adviser may reasonably request to document
the Sub-Adviser's compliance with such laws and regulations, and (b) 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 any applicable law or regulation. The Sub-Adviser will furnish to
the Adviser a copy of any amendment to Part II of the Sub-Adviser's Form ADV
most recently filed with the Securities and Exchange Commission.
8. The Adviser and the Sub-Adviser each represents and warrants that
it has the power to execute and deliver this Agreement and any other
documentation relating hereto and to perform its respective obligations under
this Agreement and that it has taken all necessary action to authorize such
execution, delivery and performance. Such execution, delivery and performance do
not violate or conflict with any law applicable to the Adviser or the
Sub-Adviser, respectively, any order or judgment of any court or other
governmental agency, or any contractual restriction binding on or affecting the
Adviser or the Sub-Adviser, respectively. The obligations of the Adviser and the
Sub-Adviser, respectively, under this Agreement constitute their respective
legal, valid and binding obligations, enforceable against each of them in
accordance with the terms hereof.
9. Subject to any other written instructions of the Adviser or FAIF,
the Sub-Adviser is hereby appointed FAIF's agent and attorney-in-fact for the
limited purposes of executing account documentation, agreements, contracts and
other documents as the Sub-Adviser shall be requested by brokers, dealers,
counterparties and other persons in connection with its management of Strategic
Income Fund's assets. The Adviser and FAIF hereby ratify and confirm as good and
effectual, at law or in equity, all that the Sub-Adviser and its officers and
employees, may do in its capacity as attorney-in-fact. However, nothing herein
shall be construed as imposing a duty on the Sub-Adviser to act or assume
responsibility for any matters in its capacity as attorney-in-fact for FAIF. Any
person, partnership, corporation or other legal entity dealing with the
Sub-Adviser in its capacity as attorney-in-fact hereunder for FAIF is hereby
expressly put on notice that the Sub-Adviser is acting solely in the capacity as
an agent of FAIF and that any such person. partnership, corporation or other
legal entity must look solely to FAIF for enforcement of any claim against FAIF,
as the Sub-Adviser assumes no personal liability whatsoever for obligations of
FAIF entered into by the Sub-Adviser in its capacity as attorney-in-fact for
FAIF.
10. The Adviser hereby acknowledges that the Sub-Adviser is not
responsible for pricing portfolio Securities, and that the Adviser and the
Sub-Adviser will rely on the pricing agent chosen by the Board for prices of
Securities, for any purposes.
11. The Sub-Adviser's and the Adviser's obligations under this
Agreement are subject to the satisfaction of the following conditions precedent:
(a) Receipt by the Sub-Adviser of a certificate of an officer of
Strategic Income Fund stating that (i) this Agreement and the Advisory
Agreement have been approved by the vote of a majority of the directors,
who are not interested persons of Sub-Adviser or the Adviser, cast in
person at a meeting of the Board called for the purpose of voting on such
approval, and (ii) this Agreement and the Advisory Agreement have been
approved by the vote of a majority of the outstanding voting securities of
Strategic Income Fund.
(b) Authorization by Strategic Income Fund to its custodian
designating the persons specified by the Sub-Adviser as "Authorized
Persons" under Strategic Income Fund's custody agreement.
<PAGE>
(c) Strategic Income Fund's execution and delivery of a limited
power of attorney-in-fact of the Sub-Adviser, in a form mutually agreeable
to the Sub-Adviser, the Adviser and the Board.
(d) Receipt by the Sub-Adviser of Board resolutions, certified by an
officer of Strategic Income Fund, adopting all procedures and guidelines
required by any exemptive order listed on Schedule 2 to this Agreement and
all policies, procedures, guidelines, and codes listed on Schedule 1 to
this Agreement;
(e) Receipt by the Sub-Adviser of a list of entities affiliated with
FAIF and an opinion of counsel concerning the placement of principal and
brokerage securities transactions with affiliated entities of FAIF by the
Sub-Adviser and its affiliated entities.
(f) Any other documents, certificates or other instruments that the
Sub-Adviser or the Adviser may reasonably request from Strategic Income
Fund.
12. The Adviser, FAIF, and Strategic Income Fund are hereby
expressly put on notice of the limitation of liability as set forth in the
Declaration of Trust of the Sub-Adviser and agree that the obligations assumed
by the Sub-Adviser pursuant to this contract shall be limited in any case to the
Sub-Adviser and its assets and the Adviser, FAIF, and Strategic Income Fund
shall not seek satisfaction of any such obligation from the shareholders of the
Sub-Adviser, the Trustees, officers, employees, or agents of the Sub-Adviser, or
any of them.
13. The effective date of this Agreement shall be the date set forth
in the first paragraph hereof. Unless sooner terminated as hereinafter provided,
this Agreement shall continue in effect for a period of more than two years from
the date of its execution but only as long as such continuance is specifically
approved at least annually by (a) the Board or by the vote of a majority of the
outstanding shares of Strategic Income Fund and (b) the vote of a majority of
the directors, who are not parties to this Agreement or "interested persons" (as
defined in the Act) of the Adviser, of the Sub-Adviser or of FAIF, cast in
person at a meeting called for the purpose of voting on such approval.
14. This Agreement may be terminated at any time, without the
payment of any penalty, by the Board or by the vote of a majority of the
outstanding shares of Strategic Income Fund, or by the Adviser or the
Sub-Adviser, upon 60 days' written notice to the other parties.
This Agreement shall automatically terminate in the event of its
"assignment" (as defined in the Act), provided, however, that such automatic
termination shall be prevented in a particular case by an order of exemption
from the Securities and Exchange Commission or a no-action letter of the staff
of the Commission to the effect that such assignment does not require
termination as a statutory or regulatory matter.
15. This Agreement may be modified by mutual consent, such consent
only to be authorized by a majority of the directors of FAIF who are not parties
to this Agreement or "interested persons" (as defined in the Act) of the
Adviser, of the Sub-Adviser or of FAIF and the vote of a majority of the
outstanding shares of Strategic Income Fund.
16. Wherever referred to in this Agreement, the vote or approval of
the holders of a majority of the outstanding shares of Strategic Income Fund
shall mean the lesser of (a) the vote of 67% or more of the shares of Strategic
Income Fund at a meeting where more than 50% of the outstanding shares are
present in person or by proxy, or (b) the vote of more than 50% of the
outstanding shares of Strategic Income Fund.
<PAGE>
17. If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder shall not be
thereby affected.
18. 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.
19. The internal law, and not the law of conflicts, of the
Commonwealth of Pennsylvania will govern all questions concerning the
construction, validity and interpretation of this Agreement and the performance
of the obligations imposed by this Agreement.
20. This Agreement constitutes the entire agreement between the
parties concerning its subject matter and supersedes all prior and
contemporaneous agreements, representations and understandings of the parties.
21. This Agreement may be executed simultaneously in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the Adviser and the Sub-Adviser have caused this
Agreement to be executed by their duly authorized officers as of the day and
year first above written.
U.S. BANK NATIONAL ASSOCIATION
By /s/ Jeffrey M. Wilson
-------------------------------
Its Vice President
---------------------------
FEDERATED INVESTMENT COUNSELING
By John Fisher
-------------------------------
Its President
---------------------------
<PAGE>
SCHEDULE 1 - FUND DOCUMENTATION
1. FAIF's Articles of Incorporation and Bylaws.
2. 10 copies of the most current Prospectus and Statement of Additional
Information for each class of Strategic Income Fund's shares.
3. Information regarding the Custody Agreement between FAIF and U.S. Bank
National Association, as Custodian for Strategic Income Fund's
Securities, including information as to:
* Strategic Income Fund's nominee,
* the Federal tax identification numbers of Strategic Income
Fund and its nominee,
* all routing, bank, participant and account numbers and other
information necessary to provide proper instructions for
transfer and delivery of Securities to Strategic Income Fund's
accounts at the Custodian,
* the name, address, phone and fax number of the Custodian's
employees responsible for Strategic Income Fund's accounts,
and
* Strategic Income Fund's pricing service and contact persons.
4. All policies, procedures, guidelines and codes adopted by the Board
under the Act or any regulation thereunder, including:
* Rule 10f-3 (relating to affiliated underwriting syndicates),
* Rule 17a-7 (relating to interfund transactions),
* Rule 17e-1 (relating to transactions with affiliated Brokers),
* Rule 17-f-4 (relating to securities held in securities
depositories),
* Rule 17j-1 (relating to a code of ethics), and
* Rule 17f-5 (relating to foreign custody).
5. All SEC exemptive orders applicable to Strategic Income Fund, and all
procedures and guidelines adopted by the Board under the terms of such
orders.
6. All procedures and guidelines adopted by the Board or the Adviser
regarding:
* Repurchase agreements,
* Evaluating the liquidity of securities, include restricted
securities, municipal leases and stripped U.S. government
securities,
* Segregation of liquid assets in connection with reverse
repurchase agreements, firm commitments, standby commitments,
short sales, options and futures agreements,
* Derivative contracts and securities, and
* Affiliated bank procedures.
7. Any master agreements that FAIF has entered into on behalf of Strategic
Income Fund, including:
* Master Repurchase Agreement,
* Master Futures and Options Agreements,
* Master Foreign Exchange Netting Agreements, and
* Master Swap Agreements.
8. CFTC Rule 4.5 letter.
9. Schedule of the current year's Board meetings, and the reports needed
by the Board.
10. Pricing and performance calculation entities and contact persons.
<PAGE>
SCHEDULE 2 - SUB-ADVISER DOCUMENTATION
1. Part II of the Sub-Adviser's Form ADV most recently filed with the
Securities and Exchange Commission.
2. All exemptive orders granted by the Securities and Exchange Commission
that will become applicable to Strategic Income Fund, and the
procedures and guidelines followed by the Sub-Adviser in accordance
therewith.
EXHIBIT 8(c)
FURTHER SUPPLEMENT TO CUSTODIAN AGREEMENT
FIRST AMERICAN INVESTMENT FUNDS, INC.
U.S. BANK NATIONAL ASSOCIATION
WHEREAS, First American Investment Funds, Inc., a mutual fund
organized as a Maryland corporation (hereinafter called the "Fund"), and First
Trust National Association, a national banking association organized and
existing under the laws of the United States of America, previously entered into
that Custodian Agreement dated September 20, 1993 (the "Custodian Agreement")
and that Supplement to Custodian Agreement dated March 15, 1994 (the "Prior
Supplement"); and
WHEREAS, First Trust National Association, with the consent of the
Fund, assigned its rights and obligations under the Custodian Agreement to U.S.
Bank National Association, a national banking association organized and existing
under the laws of the United States of America (the "Custodian") by an
Assignment and Assumption Agreement dated as of May 1, 1998; and
WHEREAS, the Prior Supplement authorizes the Custodian, through
Bankers Trust Company, to employ as sub-custodians for International Fund
securities and other assets maintained outside of the United States certain
foreign banking institutions, foreign securities depositories and foreign
clearing agencies; and
WHEREAS, the Fund and the Custodian wish to supplement the Prior
Supplement so as to extend such authorization to International Index Fund,
Strategic Income Fund, and Emerging Markets Fund.
NOW, THEREFORE, the Fund and the Custodian hereby agree that each
reference in the Prior Supplement to International Fund also shall be deemed a
reference to International Index Fund, Strategic Income Fund, and Emerging
Markets Fund.
IN WITNESS WHEREOF, the parties have caused this Further Supplement
to be duly executed and delivered as of November 21, 1997 with respect to
International Index Fund and July 23, 1998 with respect to Strategic Income Fund
and Emerging Markets Fund.
FIRST AMERICAN INVESTMENT
FUNDS, INC.
By /s/ Kathryn L. Stanton
------------------------------
Its Vice President
------------------------------
U.S. BANK NATIONAL ASSOCIATION
By /s/ Jeffrey M. Wilson
------------------------------
Its Vice President
------------------------------
EXHIBIT 9(d)
SHAREHOLDER ACCOUNT SERVICING AGREEMENT
THIS AGREEMENT, made this 1st day of October, 1998, by and between
First American Investment Funds, Inc., a Maryland corporation (the "Company"),
on behalf of each series of the Company's common stock (such series are referred
to herein individually as a "Fund" and collectively as the "Funds"), and U.S.
Bank National Association, a national banking association (the "Servicing
Agent").
WITNESSETH:
WHEREAS, the Company has entered into an Agency Agreement with DST
Systems, Inc. ("DST") pursuant to which DST was appointed as Transfer Agent and
Dividend Disbursing Agent for the Funds; and
WHEREAS, management of the Company has determined that it would be
in the best interests of each Fund and its shareholders to maintain with DST
certain omnibus accounts, with each such account representing the accounts of a
number of individual shareholders who maintain accounts with the Servicing Agent
or its affiliates in which Class A and Class B shares of the Funds are held, and
to have the Servicing Agent provide transfer agent and dividend disbursing agent
services for such underlying individual shareholder accounts.
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein, the parties hereto agree as follows:
1. Scope of Appointment.
(a) Subject to the conditions set forth in this Agreement, the
Company hereby appoints the Servicing Agent to perform certain transfer agent
and dividend disbursing agent services, and the Servicing Agent accepts such
appointment.
(b) Such services shall be provided with respect to all individual
shareholder accounts encompassed within the omnibus accounts referenced above.
(c) The Servicing Agent agrees to provide the necessary facilities,
equipment and personnel to perform its duties and obligations hereunder in
accordance with industry practice.
(d) The Servicing Agent agrees to perform the usual and ordinary
services of transfer agent and dividend disbursing agent not performed by DST
with respect to the shareholder accounts outlined in Section 1(b), including,
without limitation, the following: maintaining all shareholder accounts;
preparing shareholder meeting lists; mailing shareholder reports and
prospectuses; tracking shareholder accounts for blue sky and Rule 12b-1
purposes; withholding taxes on non-resident alien and foreign corporation
accounts; preparing and mailing checks for disbursement of income dividends and
capital gains distributions; preparing and filing U.S. Treasury Department Form
1099 for all shareholders; preparing and mailing confirmation forms to
shareholders and dealers with respect to all purchases, exchanges and
liquidations of Fund shares and other transactions in shareholder accounts for
which confirmations are required; recording reinvestments of dividends and
distributions in Fund shares; recording redemptions of Fund shares; and
preparing and mailing checks for payments upon redemption and for disbursements
to withdrawal plan holders.
(e) The Servicing Agent shall perform all services relating to
shareholder transactions, share redemptions and maintaining shareholder accounts
on the same business day as the request for the transaction is received. The
Servicing Agent shall perform all services relating to payouts of monies no
later than three business days following the date of receipt of the request for
the transaction. The
<PAGE>
Servicing Agent shall perform all services relating to the provision of
confirmations no later than three business days following the transaction. Any
activities not enumerated will be fulfilled no later than the time required by
applicable law. In each case the time standards will be adjusted to meet any
applicable requirements of law. The time frames above include not only the
performance of the activity, but the appropriate quality control and mailing of
the related checks, confirms, letters or other documents.
The Servicing Agent will maintain records of its performance,
available to the Company for inspection upon reasonable notice.
2. Compensation. As compensation for the services to be provided by
the Servicing Agent hereunder, each Fund will pay to the Servicing Agent an
annual per-account fee as set forth in Exhibit A hereto. Such fee shall be
payable on a monthly basis at a rate of 1/12th of the annual per-account charge,
with payment being made within ten business days following the end of the month
covered by such payment. Such fee covers all services outlined in Section 1(d)
with the exception of preparing shareholder meeting lists and mailing
shareholder reports and prospectuses. These services, along with proxy
processing (if applicable) and other special service requests, will be billable
as performed at a mutually agreed upon fee in addition to the annual fee as
noted, provided that such mutually agreed upon fee shall be fair and reasonable
in light of the usual and customary charges made by others for services of the
same nature and quality.
3. Records.
(a) The Servicing Agent will maintain customary records in
connection with its agency appointment hereunder, and in particular will
maintain those records required to be maintained pursuant to subparagraph 2(iv)
of paragraph (b) of Rule 31a-1 under the Investment Company Act of 1940, as
amended (the "1940 Act").
(b) To the extent required by Section 31 of the 1940 Act and the
rules and regulations thereunder, the Servicing Agent agrees that all records
maintained by the Servicing Agent relating to the services to be performed by it
under this Agreement are the property of the Company and will be preserved in
accordance with Rule 31a-2 under the 1940 Act and will be surrendered promptly
to the Company upon request.
4. Complaints and Regulatory Actions. The Servicing Agent and the
Company shall cooperate fully in any securities regulatory investigation or
proceeding or judicial proceeding with respect to the Servicing Agent, the
Company, their affiliates (as defined in the 1940 Act) and/or their agents,
representatives or employees to the extent that such investigation or proceeding
is in connection with the services subject to this Agreement. Without limiting
the foregoing, the parties shall notify each other promptly of the receipt of
notice of any such investigation or proceeding and of any customer complaint
relating to or learned of in the course of the provision of services subject to
this Agreement.
In the case of any such customer complaint, the Servicing Agent and
the Company and their affiliates shall cooperate in investigating such
complaint. Any response to a customer complaint relating to the Company must be
approved in writing by the Company prior to it being sent to the customer or any
regulatory authority. The Company agrees to review any such response to such
substantive complaint prepared by the Servicing Agent within three (3) business
days of its receipt by the Company, except that, if a more prompt response is
required, the Company shall review such response within the required shorter
time period. Any response by the Servicing Agent to a customer complaint which
relates to the Servicing Agent or its affiliates shall be provided to the
Company no later than the time it is provided to the customer or any regulatory
authority.
<PAGE>
5. Fund Shares Held on Behalf of Servicing Agent Clients. Fund
shares held by the Servicing Agent on behalf of a client of the Servicing Agent
or its affiliates shall be carried in a custody account for the exclusive
benefit of clients of the Servicing Agent or such affiliate, as the case may be,
and shall not be subject to any right, charge, security interest, lien or other
claim against the Servicing Agent or such affiliate in favor of the Company or
any Fund.
6. Indemnification.
(a) The Servicing Agent will not be responsible for, and the Company
will hold harmless and indemnify the Servicing Agent from and against, any loss
by or liability to the Company or a third party, including attorneys' fees, in
connection with any claim or suit asserting any such liability arising out of or
attributable to actions taken by the Servicing Agent pursuant to this Agreement,
unless the Servicing Agent has acted negligently or in bad faith. Without
limitation of the foregoing:
(i) at any time the Servicing Agent may apply to any officer
of the Company for instructions, and may consult with legal counsel
for the Company or its own legal counsel at the expense of the
Company, with respect to any matter arising in connection with its
agency, and the Servicing Agent will not be liable for any action
taken or omitted by it in good faith reliance upon such instructions
or upon the opinion of such counsel; and
(ii) the Servicing Agent may rely upon and will be protected
in acting upon any paper or document reasonably believed by it to be
genuine and to have been signed by the proper person or persons and
will not be held to have notice of any change of authority of any
person until receipt of written notice thereof from the Company.
(b) The Servicing Agent will hold harmless and indemnify the Company
from and against any loss or liability arising out of the Servicing Agent's
failure to comply with the terms of this Agreement or arising out of the
Servicing Agent's negligence, misconduct or bad faith.
7. Interpretation; Governing Law. This Agreement shall be subject to
and interpreted in accordance with all applicable provisions of law, including,
without limitation, the 1940 Act and the rules and regulations promulgated
thereunder. To the extent the provisions herein contained conflict with any such
applicable provisions of law, the latter shall control. The laws of the State of
Minnesota shall otherwise govern the construction, validity and effect of this
Agreement.
8. Effective Date; Duration; Termination.
(a) This Agreement shall be effective as of the date first set forth
above.
(b) Unless sooner terminated as hereinafter provided, this Agreement
shall continue in effect from year to year but only so long as such continuance
is specifically approved at least annually by the Board of Directors of the
Company, including a majority of the Directors who are not parties to this
Agreement or "interested persons" of any such party (as defined in the 1940
Act), by vote cast in person at a meeting called for the purpose of voting on
such approval.
(c) This Agreement may be terminated at any time without the payment
of any penalty by either party upon not less than 60 days' written notice to the
other party. Upon the effective termination date, the Servicing Agent shall make
available to the Company or its designated record keeping successor all of the
records of the Company maintained under this Agreement then in the Servicing
Agent's possession.
<PAGE>
(d) This Agreement shall automatically terminate in the event of its
assignment (as defined by the provisions of the 1940 Act) unless such assignment
is approved in advance by the Board of Directors, including a majority of the
directors of the Company who are not parties to this Agreement or "interested
persons" of any such party (as defined in the 1940 Act).
9. Amendments. No material amendment to this Agreement shall be
effective until approved by the Servicing Agent and by a vote of the Board of
Directors of the Company, including a majority of the Directors who are not
parties to this Agreement or "interested persons" of any such party (as defined
in the 1940 Act).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed by their duly authorized officers as of the day and year first above
written.
FIRST AMERICAN INVESTMENT
FUNDS, INC.
By /s/ Kathryn L. Stanton
------------------------------
Its Vice President
------------------------------
U.S. BANK NATIONAL ASSOCIATION
By /s/ Jeffrey M. Wilson
------------------------------
Its Vice President
------------------------------
<PAGE>
EXHIBIT A TO SHAREHOLDER ACCOUNT SERVICING AGREEMENT
SCHEDULE OF CHARGES
Money Market Fund Accounts
- --------------------------
$9 per account
Non-Money Market Fund Accounts
- ------------------------------
$15 per account
EXHIBIT 10.(d)
First American Investment Funds, Inc.
Oaks, Pennsylvania 19456
Ladies and Gentlemen:
We have acted as counsel to First American Investment Funds, Inc., a
Maryland corporation (the "Fund"), in connection with a Registration Statement
on Form N-1A (File No. 33-16905) (the "Registration Statement") relating to the
sale by the Fund of an indefinite number of shares of the Fund's Class CC Common
Shares and Class CC, Series 3 Common Shares; Class DD Common Shares and Class
DD, Series 3 Common Shares; Class EE Common Shares and Class EE, Series 3 Common
Shares; Class FF Common Shares, Class FF, Series 2 Common Shares and Class FF,
Series 3 Common Shares; and Class GG Common Shares, Class GG, Series 2 Common
Shares and Class GG, Series 3 Common Shares, each with a par value of $.0001 per
share (the "Shares").
We have examined such documents and have reviewed such questions of
law as we have considered necessary and appropriate for the purposes of our
opinions set forth below. In rendering our opinions set forth below, we have
assumed the authenticity of all documents submitted to us as originals, the
genuineness of all signatures and the conformity to authentic originals of all
documents submitted to us as copies. We have also assumed the legal capacity for
all purposes relevant hereto of all natural persons and, with respect to all
parties to agreements or instruments relevant hereto other than the Fund, that
such parties had the requisite power and authority (corporate or otherwise) to
execute, deliver and perform such agreements or instruments, that such
agreements or instruments have been duly authorized by all requisite action
(corporate or otherwise), executed and delivered by such parties and that such
agreements or instruments are the valid, binding and enforceable obligations of
such parties. As to questions of fact material to our opinions, we have relied
upon certificates of officers of the Fund and of public officials. We have also
assumed that the Shares will be issued and sold as described in the Registration
Statement.
Based on the foregoing, we are of the opinion that the Shares have
been duly authorized by all requisite corporate action and, upon issuance,
delivery
<PAGE>
First American Investment Funds, Inc.
July 31, 1998
Page 2
and payment therefore as described in the Registration Statement, will be
validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to our firm on the back cover of
the Prospectus and under the caption "Investment Advisory and Other Services" in
the Statement of Additional Information, each constituting part of the
Registration Statement.
Dated: July 31, 1998
Very truly yours,
/s/ Dorsey & Whitney LLP
JDA
Exhibit 11(a)
Independent Auditors' Consent
The Boards of Directors
First American Investment Funds, Inc.
Piper Funds Inc.
Piper Funds Inc.-II
Piper Global Funds Inc.
We consent to the use of our reports dated November 7, 1997, relating to the
financial statements and financial highlights of Emerging Growth Fund, National
Tax-Exempt Fund and Minnesota Tax-Exempt Fund (series of Piper Funds Inc.),
Emerging Markets Growth Fund (a series of Piper Global Funds Inc.), and
Adjustable Rate Mortgage Securities Fund (a series of Piper Funds Inc.-II),
incorporated by reference herein and to the references to our Firm under the
headings "Financial Highlights" in Part A and "Custodian; Transfer Agent;
Counsel; Accountants" in Part B of the Registration Statement.
KPMG Peat Marwick LLP
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 31, 1998
