1933 Act Registration No. 33-16905
1940 Act Registration No. 811-5309
As filed with the Securities and Exchange Commission on August 14, 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. 40 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 [X]
Amendment No. 40
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. 40
CROSS REFERENCE SHEET FOR ITEMS REQUIRED BY FORM N-1A
ITEM NUMBER OF FORM N-1A
PART A CAPTION IN PROSPECTUS
CLASS A SHARES AND CLASS B SHARES PROSPECTUS
1 Cover Page
2 Fees and Expenses
3 Financial Highlights
4 The Funds; Investment Objectives and Policies; Special
Investment Methods
5 Management; Distributor
5A Not Applicable
6 Fund Shares; Investing in the Funds; Federal Income Taxes
7 Distributor; Investing in the Funds; Determining the Price of
Shares
8 Redeeming Shares
9 Not Applicable
CLASS Y PROSPECTUS
1 Cover Page
2 Fees and Expenses
3 Financial Highlights
4 The Funds; Investment Objectives and Policies; Special
Investment Methods
5A Not Applicable
5 Management; Distributor
6 Fund Shares; Purchases and Redemptions of Shares; Federal
Income Taxes
7 Distributor; Purchases and Redemptions of Shares
8 Purchases and Redemptions of Shares
9 Not Applicable
CAPTION IN COMBINED STATEMENT
PART B OF ADDITIONAL INFORMATION
10 Cover Page
11 Table of Contents
12 General Information
13 Additional Information Concerning Fund Investments; Investment
Restrictions
14 Directors and Executive Officers
15 Capital Stock
16 Investment Advisory and Other Services
17 Portfolio Transactions and Allocation of Brokerage
18 Not Applicable
19 Net Asset Value and Public Offering Price
20 Taxation
21 Investment Advisory and Other Services
22 Fund Performance
23 Not Applicable
<PAGE>
AUGUST 14, 1998
EQUITY FUNDS
CLASS A AND CLASS B SHARES
Balanced Fund Small Cap Growth Fund
Real Estate Securities Fund Small Cap Value Fund
Equity Income Fund Micro Cap Value Fund
Equity Index Fund International Index Fund
Large Cap Value Fund International Fund
Large Cap Growth Fund Health Sciences Fund
Mid Cap Value Fund Technology Fund
Regional Equity 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 6
............................................
Financial Highlights 11
............................................
The Funds 21
............................................
Investment Objectives and Policies 21
............................................
Management 36
............................................
Distributor 43
............................................
Investing in the Funds 44
............................................
Redeeming Shares 52
............................................
Determining the Price of Shares 54
............................................
Federal Income Taxes 55
............................................
Fund Shares 56
............................................
Calculation of Performance Data 56
............................................
Performance Information for Successors to
Common Trust Funds 57
............................................
Special Investment Methods 58
............................................
Information Concerning Compensation
Paid to U.S. Bank National Association
and Other Affiliates 67
............................................
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
CLASS A AND CLASS B SHARES PROSPECTUS
The shares described in this Prospectus represent interests in First
American Investment Funds, Inc., which consists of mutual funds with several
different investment portfolios and objectives. This Prospectus relates to
the Class A and Class B Shares of the following funds (the "Funds"):
* BALANCED FUND
* REAL ESTATE SECURITIES FUND
* EQUITY INCOME FUND
* EQUITY INDEX FUND
* LARGE CAP VALUE FUND
* LARGE CAP GROWTH FUND
* MID CAP VALUE FUND
* REGIONAL EQUITY FUND
* SMALL CAP GROWTH FUND
* SMALL CAP VALUE FUND
* MICRO CAP VALUE FUND
* INTERNATIONAL INDEX FUND
* INTERNATIONAL FUND
* HEALTH SCIENCES FUND
* TECHNOLOGY FUND
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED 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 August 14, 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 August 14, 1998.
1
<PAGE>
SUMMARY
First American Investment Funds, Inc. ("FAIF") is an open-end investment
company which offers shares in several different mutual funds. This
Prospectus provides information with respect to the Class A and Class B
Shares of the following funds (the "Funds"):
BALANCED FUND has an objective of maximizing total return (capital
appreciation plus income). The Fund seeks to achieve its objective by
investing in a balanced portfolio of equity securities and fixed income
securities. Over the long term, it is anticipated that the Fund's asset
mix will average approximately 60% equity securities and 40% fixed income
securities, with the asset mix normally ranging between 40% and 75% equity
securities, between 25% and 60% fixed income securities (including only
that portion of the value of the convertible securities attributable to
their fixed income characteristics) and between 0% and 25% money market
instruments.
REAL ESTATE SECURITIES FUND has an objective of providing above average
current income and long-term capital appreciation by investing primarily
in equity securities of real estate companies. Under normal market
conditions, the Fund invests at least 65% of its total assets in income
producing equity securities of publicly traded companies principally
engaged in the real estate industry. A majority of the Fund's total assets
will be invested in securities of real estate investment trusts ("REITs"),
with an expected emphasis on equity REITs.
EQUITY INCOME FUND has an objective of long-term growth of capital and
income. Under normal market conditions, the Fund invests at least 65% of its
total assets in equity securities of issuers believed by the Fund's advisor
to be characterized by sound management, the ability to finance expected
growth and the ability to pay above average dividends.
EQUITY INDEX FUND has an objective of providing investment results that
correspond to the performance of the Standard & Poor's 500 Composite Stock
Price Index (the "S&P 500"). The Fund invests primarily (at least 65% of
total assets) in common stocks included in the S&P 500. The Fund's advisor
believes that its objective can best be achieved by investing in the
common stocks of approximately 50% to 100% of the issues included in the
S&P 500, depending on the size of the Fund.
LARGE CAP VALUE FUND (formerly known as Stock Fund) has a primary
objective of capital appreciation and a secondary objective to provide
current income. Under normal market conditions, the Fund invests at least
65% of its total assets in common stocks diversified among a broad range
of industries and among companies that have a market capitalization of at
least $1 billion at the time of purchase. In selecting equity securities,
the Fund's advisor employs a value-based selection discipline, investing
in equity securities it believes are undervalued relative to other
securities in the same industry or market at the time of purchase.
LARGE CAP GROWTH FUND (formerly known as Diversified Growth Fund) has a
primary objective of long-term growth of capital and a secondary objective
to provide current income. Under normal market conditions, the Fund
invests at least 65% of its total assets in equity securities of companies
that have a market capitalization of at least $1 billion at the time of
purchase that, in the Fund's advisor's judgment, exhibit a combination of
above average growth in revenue and earnings, strong management and sound
and improving financial condition.
MID CAP VALUE FUND (formerly known as Special Equity Fund) has an
objective of capital appreciation. Under normal market conditions, the
Fund invests at least 65% of its total assets in equity securities of
mid-capitalization companies (those with market capitalizations from $1
billion to $5 billion at the time of purchase). The Fund's policy is to
invest in equity securities which the Fund's advisor believes offer the
potential for greater than average capital appreciation. In selecting
equity securities, the Fund's advisor employs a value-based selection
discipline, investing in equity securities it believes are undervalued
relative to other securities in the same industry or market at the time of
purchase.
2
<PAGE>
REGIONAL EQUITY FUND has an objective of capital appreciation. The Fund
seeks to achieve its objective by investing, in normal market conditions, at
least 65% of its total assets in equity securities of small-capitalization
companies (those with market capitalizations of less than $1 billion at the
time of purchase) headquartered in Minnesota, North and South Dakota,
Montana, Wisconsin, Michigan, Iowa, Nebraska, Colorado and Illinois. The
Fund invests in the securities of rapidly growing companies within this size
category and geographic area. In selecting equity securities, the Fund's
advisor employs a value-based selection discipline, investing in equity
securities it believes are undervalued relative to other securities in the
same industry or market at the time of purchase.
SMALL 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 small-capitalization companies (those with market
capitalizations of less than $1 billion at the time of purchase) that
exhibit, in the Fund's advisor's opinion, outstanding potential for
superior growth. Companies that participate in sectors that are identified
by the advisor as having long-term growth potential generally are expected
to make up a substantial portion of the Fund's holdings.
SMALL CAP VALUE FUND has an objective of capital appreciation. Under normal
market conditions, the Fund invests at least 65% of its total assets in
equity securities of small-capitalization companies (those with market
capitalizations of less than $1 billion at the time of purchase). In
selecting equity securities, the Fund's advisor employs a value-based
selection discipline, investing in equity securities it believes are
undervalued relative to other securities in the same industry or market at
the time of purchase.
MICRO CAP VALUE FUND has an objective of capital appreciation. Under
normal market conditions, the Fund invests at least 65% of its total
assets in equity securities of very small-capitalization companies (those
with market capitalizations of less than $500 million at the time of
purchase). In selecting equity securities, the Fund's advisor employs a
value-based selection discipline, investing in equity securities it
believes are undervalued relative to other securities in the same industry
or market at the time of purchase.
INTERNATIONAL INDEX FUND has an objective of providing investment results
that correspond to the performance of the Morgan Stanley Europe,
Australia, Far East Composite Index (the "EAFE Index"). The Fund invests
primarily (at least 65% of total assets) in common stocks included in the
EAFE Index. The Fund's advisor believes that its objective can be best
achieved by investing in common stocks of approximately 50% to 100% of the
issues included in the EAFE Index, depending on the size of the Fund.
INTERNATIONAL FUND has an objective of long-term growth of capital. Under
normal market conditions, the Fund invests at least 65% of its total
assets in an internationally diversified portfolio of equity securities
which trade in markets other than the United States. Investments are
expected to be made primarily in developed markets and larger
capitalization companies. However, the Fund also may invest in emerging
markets where smaller capitalization companies are the norm.
HEALTH SCIENCES FUND has an objective of long-term growth of capital.
Under normal market conditions, the Fund invests at least 65% of its total
assets in equity securities of companies which the Fund's advisor
considers to be principally engaged in the development, production or
distribution of products or services connected with health care or
medicine.
TECHNOLOGY FUND has an objective of long-term growth of capital. Under
normal market conditions, the Fund invests at least 65% of its total
assets in equity securities of companies which the Fund's advisor believes
have, or will develop, products, processes or services that will provide
or will benefit significantly from technological advances and
improvements.
3
<PAGE>
INVESTMENT ADVISOR AND SUB-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 International
Fund. See "Management."
DISTRIBUTOR; ADMINISTRATOR. SEI Investments Distribution Co. (the
"Distributor") serves as the distributor of the Funds' shares. SEI
Investments Management Corporation (the "Administrator") serves as the
administrator of the Funds. See "Management" and "Distributor."
OFFERING PRICES. Class A Shares of the Funds are sold at net asset value
plus a maximum sales charge of 4.50%. These sales charges are reduced on
purchases of $50,000 or more. Purchases of $1 million or more of Class A
Shares are not subject to an initial sales charge, but the Distributor and
certain securities firms, financial institutions (including, without
limitation, banks) and other industry professionals may receive a commission
of 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, except in the case of Equity Index Fund.
If such a commission is paid, redemptions of Class A Shares within 12 months
following such purchases will be subject to a contingent deferred sales
charge of 1.00% except in the case of Equity Index Fund. Class A Shares of
the Funds otherwise are redeemed at net asset value without any additional
charge. Class A Shares of each Fund are subject to a shareholder servicing
fee computed at an annual rate of 0.25% of the average daily net assets of
that class. See "Investing in the Funds -- Alternative Sales Charge
Options."
Class B Shares of the Funds are sold at net asset value without an initial
sales charge. Class B Shares of each Fund are subject to Rule 12b-1
distribution and shareholder servicing fees computed at an annual rate
totaling 1.00% of the average daily net assets of that class. If Class B
Shares are redeemed within six years after purchase, they are subject to a
contingent deferred sales charge declining from 5.00% in the first year to
zero after six years. Class B Shares automatically convert into Class A
Shares approximately eight years after purchase. See "Investing in the Funds
-- Alternative Sales Charge Options."
MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS. The minimum initial investment
is $1,000 ($250 for IRAs) for each Fund. Subsequent investments must be
$100 or more. Regular investment in the Funds is simplified through the
Systematic Investment Program through which monthly purchases of $100 or
more are possible. See "Investing in the Funds -- Minimum Investment
Required" and "-- Systematic Investment Program."
EXCHANGES. Shares of any Fund may be exchanged for the same class of
shares of other funds in the First American family of funds at the shares'
respective net asset values with no additional charge. See "Investing in
the Funds -- Exchange Privilege."
REDEMPTIONS. Shares of each Fund may be redeemed at any time at their net
asset value next determined after receipt of a redemption request by the
Funds' transfer agent or by an authorized financial institution, less any
applicable contingent deferred sales charge. Each Fund may, upon 60 days
written notice, redeem an account if the account's net asset value falls
below $500. See "Investing in the Funds" and "Redeeming Shares."
RISKS TO CONSIDER. Each of the Funds is subject to the risk of generally
adverse equity markets. Investors also should recognize that market prices
of equity securities generally, and of particular companies' equity
securities, frequently are subject to greater volatility than prices of
fixed income securities.
Because each of the Funds other than Equity Index Fund and International
Index Fund is actively managed to a greater or lesser degree, their
performance will reflect in part the ability of the Advisor or Sub-Advisor
to select securities which are suited to achieving their investment
objectives.
4
<PAGE>
Due to their active management, these Funds could underperform other
mutual funds with similar investment objectives or the market generally.
In addition, (i) certain of the Funds are subject to risks associated with
investing in small-capitalization companies; (ii) Micro Cap Value Fund is
subject to risks associated with investing in very small-capitalization
companies; (iii) Regional Equity Fund is subject to risks associated with
concentrating its investments in a single geographic region; (iv) Real
Estate Securities Fund, Health Sciences Fund and Technology Fund are
subject to risks associated with concentrating their investments in a
single or related economic sectors; (v) Real Estate Securities Fund is
subject to risks associated with direct investments in REITs; (vi)
International Index Fund and International Fund are subject to risks
associated with investing in foreign securities and to currency risk;
(vii) Equity Income Fund may invest a significant portion of its assets in
less than investment grade convertible debt obligations; (viii) certain
Funds other than International Index Fund and International Fund may
invest specified portions of their assets in securities of foreign issuers
which are listed on a United States stock exchange or represented by
American Depositary Receipts or, in the case of Balanced Fund, are debt
obligations of foreign issuers denominated in United States dollars; and
(ix) certain Funds may invest (but not for speculative purposes) in stock
index futures contracts, options on stock indices, options on stock index
futures, index participation contracts based on the S&P 500 or the EAFE
Index, and/or exchange traded put and call options on interest rate
futures contracts and on interest rates indices. See "Investment
Objectives and Policies" and "Special Investment Methods."
SHAREHOLDER INQUIRIES. Any questions or communications regarding the Funds
or a shareholder account should be directed to the Distributor by calling
(800) 637-2548, or to the financial institution which holds shares on an
investor's behalf.
5
<PAGE>
FEES AND EXPENSES
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CLASS A SHARE FEES AND EXPENSES
<TABLE>
<CAPTION>
REAL ESTATE EQUITY EQUITY LARGE CAP LARGE CAP
BALANCED SECURITIES INCOME INDEX VALUE GROWTH
FUND FUND FUND FUND FUND FUND
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<S> <C> <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% 4.50% 4.50% 4.50% 4.50%
Maximum sales load imposed on
reinvested dividends None None None None None None
Deferred sales load None None None None None None
Redemption fees None None None None None None
Exchange fees None None None None None None
- ---------------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fee (after voluntary
fee waivers)(2) 0.62% 0.45% 0.53% 0.17% 0.61% 0.61%
Rule 12b-1 fees 0.25%(3) 0.25%(3) 0.25%(3) 0.25%(3) 0.25%(3) 0.25%(3)
Other expenses 0.18% 0.35% 0.22% 0.18% 0.19% 0.19%
Total fund operating expenses
(after voluntary fee waivers)(2) 1.05% 1.05% 1.00% 0.60% 1.05% 1.05%
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EXAMPLE(4)
You would pay the following expenses on a $1,000 investment, assuming (i) the
maximum applicable sales charge for all Funds; (ii) a 5% annual return; and
(iii) redemption at the end of each time period:
1 year $55 $55 $55 $51 $55 $ 55
3 years $77 $77 $75 $63 $77 $ 77
5 years $100 $100 $98 $77 $100 $ 100
10 years $167 $167 $162 $117 $167 $ 167
</TABLE>
+ THE ADVISORY FEES, OTHER EXPENSES AND TOTAL FUND OPERATING EXPENSES SET
FORTH ABOVE REFLECT ESTIMATES OF CURRENT EXPENSES.
(1) THE RULES OF THE SECURITIES AND EXCHANGE COMMISSION REQUIRE THAT THE MAXIMUM
SALES CHARGE BE REFLECTED IN THE ABOVE TABLE. HOWEVER, CERTAIN INVESTORS MAY
QUALIFY FOR REDUCED SALES CHARGES. PURCHASES OF $1 MILLION OR MORE OF CLASS
A SHARES ARE NOT SUBJECT TO AN INITIAL SALES CHARGE, BUT THE DISTRIBUTOR AND
CERTAIN SECURITIES FIRMS, FINANCIAL INSTITUTIONS (INCLUDING, WITHOUT
LIMITATION, BANKS) AND OTHER INDUSTRY PROFESSIONALS MAY RECEIVE A COMMISSION
OF UP TO 1.00% ON SUCH SALES EXCEPT IN THE CASE OF EQUITY INDEX FUND. IN
ADDITION, A CONTINGENT DEFERRED SALES CHARGE OF UP TO 1.00% MAY BE IMPOSED
ON SUCH PURCHASES IN THE EVENT OF REDEMPTION WITHIN 12 MONTHS FOLLOWING THE
DATE OF THE APPLICABLE PURCHASE EXCEPT IN THE CASE OF EQUITY INDEX FUND AND
INTERNATIONAL INDEX FUND. SEE "INVESTING IN THE FUNDS -- ALTERNATIVE SALES
CHARGE OPTIONS."
(2) THE ADVISOR 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 ADVISOR INTENDS TO MAINTAIN SUCH WAIVERS IN EFFECT FOR THE
CURRENT FISCAL YEAR BUT RESERVES THE RIGHT TO DISCONTINUE SUCH WAIVERS AT
ANY TIME IN ITS SOLE DISCRETION. NOTWITHSTANDING THE FOREGOING, THE
ADVISOR WILL MAINTAIN SUCH WAIVERS OF LARGE CAP VALUE FUND, EQUITY INDEX
FUND, SMALL CAP VALUE FUND AND INTERNATIONAL INDEX FUND IN EFFECT THROUGH
SEPTEMBER 30, 1998. IN ADDITION, THE ADVISOR WILL MAINTAIN SUCH WAIVERS
FOR THE APPLICABLE FUNDS AT LEAST THROUGH JULY 31, 2000 SO THAT THE TOTAL
FUND OPERATING EXPENSES DO NOT EXCEED 1.34% FOR BALANCED FUND, 1.34% FOR
LARGE CAP VALUE FUND, 1.26% FOR LARGE CAP GROWTH FUND, 1.34% FOR SMALL CAP
GROWTH FUND, AND 1.72% FOR INTERNATIONAL FUND. FOR MID CAP VALUE FUND, THE
ADVISOR HAS AGREED TO WAIVE ADVISORY FEES ON A VOLUNTARY BASIS TO THE
EXTENT NECESSARY TO KEEP TOTAL FUND OPERATING EXPENSES FOR THE CURRENT
FISCAL YEAR FROM EXCEEDING 1.15%. ABSENT ANY FEE WAIVERS, INVESTMENT
ADVISORY FEES AS AN ANNUALIZED PERCENTAGE OF AVERAGE DAILY NET ASSETS
WOULD BE 0.70% FOR EACH FUND EXCEPT INTERNATIONAL FUND, AS TO WHICH THEY
WOULD BE 1.25%; AND TOTAL FUND OPERATING EXPENSES CALCULATED ON SUCH BASIS
WOULD BE 1.13% FOR BALANCED FUND, 1.30% FOR REAL ESTATE
6
<PAGE>
<TABLE>
<CAPTION>
MID CAP REGIONAL SMALL CAP SMALL CAP MICRO CAP INTERNATIONAL HEALTH
VALUE EQUITY GROWTH VALUE VALUE INDEX INTERNATIONAL SCIENCES TECHNOLOGY
FUND FUND FUND FUND FUND FUND FUND FUND FUND
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
None None None None None None None None None
None None None None None None None None None
None None None None None None None None None
None None None None None None None None None
- ------------------------------------------------------------------------------------------------------------------------
0.70% 0.70% 0.69% 0.70%+ 0.53% 0.46%+ 1.08% 0.56% 0.68%
0.25%(3) 0.25%(3) 0.25%(3) 0.25%(3) 0.25%(3) 0.25%(3) 0.25%(3) 0.25%(3) 0.25%(3)
0.19% 0.20% 0.21% 0.20%+ 0.37% 0.29%+ 0.27% 0.34% 0.22%
1.14% 1.15% 1.15% 1.15%+ 1.15% 1.00%+ 1.60% 1.15% 1.15%
- -----------------------------------------------------------------------------------------------------------------------
$56 $56 $56 $56 $56 $55 $61 $56 $56
$80 $80 $80 $80 $80 $75 $93 $80 $80
$105 $105 $105 $105 $105 $98 $128 $105 $105
$177 $178 $178 $178 $178 $162 $226 $178 $178
</TABLE>
SECURITIES FUND, 1.17% FOR EQUITY INCOME FUND, 1.13% FOR EQUITY INDEX FUND,
1.14% FOR LARGE CAP VALUE FUND, 1.14% FOR LARGE CAP GROWTH FUND, 1.15% FOR
MID CAP VALUE FUND, 1.15% FOR REGIONAL EQUITY FUND, 1.16% FOR SMALL CAP
GROWTH FUND, 1.15% FOR SMALL CAP VALUE FUND, 1.32% FOR MICRO CAP VALUE FUND,
1.24% FOR INTERNATIONAL INDEX FUND, 1.77% FOR INTERNATIONAL FUND, 1.29% FOR
HEALTH SCIENCES FUND AND 1.17% FOR TECHNOLOGY FUND. "OTHER EXPENSES"
INCLUDES AN ADMINISTRATION FEE AND, FOR SMALL CAP VALUE FUND AND
INTERNATIONAL INDEX FUND, IS BASED ON ESTIMATED AMOUNTS FOR THE CURRENT
FISCAL YEAR.
(3) OF THIS AMOUNT, 0.25% IS DESIGNATED AS A SHAREHOLDER SERVICING FEE AND NONE
AS A DISTRIBUTION FEE.
(4) ABSENT THE FEE WAIVERS REFERRED TO IN (2) ABOVE, THE DOLLAR AMOUNTS FOR THE
1, 3, 5 AND 10-YEAR PERIODS WOULD BE AS FOLLOWS: BALANCED FUND $56, $79,
$104 AND $176; REAL ESTATE SECURITIES FUND, $58, $84, $113 AND $195; EQUITY
INCOME FUND, $56, $80, $106 AND $181; EQUITY INDEX FUND, $56, $79, $104 AND
$176; LARGE CAP VALUE FUND, $56, $80, $105 AND $177; LARGE CAP GROWTH FUND,
$56, $80, $105 AND $177; MID CAP VALUE FUND, $56, $80, $105 AND $177;
REGIONAL EQUITY FUND, $56, $80, $105 AND $177; SMALL CAP GROWTH FUND, $56,
$80, $106 AND $180; SMALL CAP VALUE FUND, $56, $80, $105 AND $178; MICRO CAP
VALUE FUND, $58, $85, $114 AND $197; INTERNATIONAL INDEX FUND, $57, $83,
$110 AND $188; INTERNATIONAL FUND, $62, $98, $137 AND $244; HEALTH SCIENCES
FUND, $58, $84, $113 AND $194; AND TECHNOLOGY FUND, $56, $80, $106 AND $181.
7
<PAGE>
FEES AND EXPENSES (continued)
----------------------------------------------------------------------------
CLASS B SHARE FEES AND EXPENSES
<TABLE>
<CAPTION>
REAL ESTATE EQUITY EQUITY LARGE CAP LARGE CAP
BALANCED SECURITIES INCOME INDEX VALUE GROWTH
FUND FUND FUND FUND FUND FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on
purchases (as a percentage of offering
price) None None None None None None
Maximum sales load imposed on
reinvested dividends None None None None None None
Maximum contingent deferred sales
charge (as a percentage of original
purchase price or redemption proceeds, as
applicable) 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Redemption fees None None None None None None
Exchange fees None None None None None None
- --------------------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees (after voluntary
fee waivers)(1) 0.62% 0.45% 0.53% 0.17% 0.61% 0.61%
Rule 12b-1 fees 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2)
Other expenses 0.18% 0.35% 0.22% 0.18% 0.19% 0.19%
Total fund operating expenses
(after voluntary fee waivers)(3) 1.80% 1.80% 1.75% 1.35% 1.80% 1.80%
- --------------------------------------------------------------------------------------------------------------------------------
EXAMPLE:
ASSUMING REDEMPTION(3)
You would pay the following expenses on a $1,000 investment, assuming (i) a 5%
annual return; (ii) redemption at the end of each time period; and (iii)
payment of the maximum applicable contingent deferred sales charge of 5% in
year 1, 4% in year 3, 2% in year 5, and automatic conversion to Class A Shares
at the end of year 8:
1 year $68 $68 $68 $64 $68 $68
3 years $97 $97 $95 $83 $97 $97
5 years $117 $117 $115 $94 $117 $117
10 years $192 $192 $186 $142 $192 $192
ASSUMING NO REDEMPTION(4)
You would pay the following expenses on the same investment, assuming no redemption:
1 year $18 $18 $18 $14 $18 $18
3 years $57 $57 $55 $43 $57 $57
5 years $97 $97 $95 $74 $97 $97
10 years $192 $192 $186 $142 $192 $192
</TABLE>
+ THE ADVISORY FEES, OTHER EXPENSES AND TOTAL FUND OPERATING EXPENSES SET
FORTH ABOVE REFLECT ESTIMATES OF CURRENT EXPENSES.
(1) THE ADVISOR 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 ADVISOR INTENDS TO MAINTAIN SUCH WAIVERS IN EFFECT FOR THE
CURRENT FISCAL YEAR BUT RESERVES THE RIGHT TO DISCONTINUE SUCH WAIVERS AT
ANY TIME IN ITS SOLE DISCRETION. FOR MID CAP VALUE FUND, THE ADVISOR HAS
AGREED TO WAIVE ADVISORY FEES ON A VOLUNTARY BASIS TO THE EXTENT NECESSARY
TO KEEP TOTAL FUND OPERATING EXPENSES FOR THE CURRENT FISCAL YEAR FROM
EXCEEDING 1.90%. ABSENT ANY FEE WAIVERS, INVESTMENT ADVISORY FEES FOR EACH
FUND AS AN ANNUALIZED PERCENTAGE OF AVERAGE DAILY NET ASSETS WOULD BE
0.70% FOR EACH FUND EXCEPT INTERNATIONAL FUND, AS TO WHICH THEY WOULD BE
1.25%; AND TOTAL FUND OPERATING EXPENSES CALCULATED ON SUCH BASIS WOULD BE
1.88% FOR BALANCED FUND, 2.00% FOR REAL ESTATE SECURITIES FUND, 1.92% FOR
EQUITY INCOME FUND, 1.88% FOR EQUITY INDEX FUND, 1.89% FOR LARGE CAP VALUE
FUND, 1.89% FOR LARGE CAP GROWTH FUND, 1.90% FOR MID CAP VALUE FUND, 1.90%
FOR REGIONAL EQUITY FUND, 1.91% FOR SMALL CAP GROWTH FUND, 1.90% FOR SMALL
CAP VALUE FUND, 2.07% FOR MICRO CAP VALUE FUND, 1.99% FOR INTERNATIONAL
INDEX FUND, 2.52% FOR INTERNATIONAL FUND, 2.04% FOR HEALTH SCIENCES FUND
AND 1.92% FOR TECHNOLOGY FUND. "OTHER EXPENSES" INCLUDES AN ADMINISTRATION
FEE AND, FOR SMALL CAP VALUE FUND AND INTERNATIONAL INDEX FUND, IS BASED
ON ESTIMATED AMOUNTS FOR THE CURRENT FISCAL YEAR.
8
<PAGE>
<TABLE>
<CAPTION>
MID CAP REGIONAL SMALL CAP SMALL CAP MICRO CAP INTERNATIONAL HEALTH
VALUE EQUITY GROWTH VALUE VALUE INDEX INTERNATIONAL SCIENCES TECHNOLOGY
FUND FUND FUND FUND FUND FUND FUND FUND FUND
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <S> <C> <C> <C> <C>
None None None None None None None None None
None None None None None None None None None
5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
None None None None None None None None None
None None None None None None None None None
- -------------------------------------------------------------------------------------------------------------------------
0.70% 0.70% 0.69% 0.70%+ 0.53% 0.46%+ 1.08% 0.56% 0.68%
1.00%(2) 1.00%( 2) 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2)
0.20% 0.20% 0.21% 0.20%+ 0.37% 0.29%+ 0.27% 0.34% 0.22%
1.90% 1.90% 1.90% 1.90%+ 1.90% 1.75%+ 2.35% 1.90% 1.90%
- -------------------------------------------------------------------------------------------------------------------------
$ 69 $ 69 $ 69 $ 69 $ 69 $ 68 $ 74 $ 69 $ 69
$100 $100 $100 $100 $100 $ 95 $113 $100 $100
$123 $123 $123 $123 $123 $115 $146 $123 $123
$202 $203 $203 $203 $203 $186 $250 $203 $203
$ 19 $ 19 $ 19 $ 19 $ 19 $ 18 $ 24 $ 19 $ 19
$ 60 $ 60 $ 60 $ 60 $ 60 $ 55 $ 73 $ 60 $ 60
$103 $103 $103 $103 $103 $ 95 $126 $103 $103
$202 $203 $203 $203 $203 $186 $250 $203 $203
</TABLE>
(2) OF THIS AMOUNT, 0.25% IS DESIGNATED AS A SHAREHOLDER SERVICING FEE AND
0.75% AS A DISTRIBUTION FEE.
(3) ABSENT THE FEE WAIVERS REFERRED TO IN (1) ABOVE, THE DOLLAR AMOUNTS FOR THE
1, 3, 5 AND 10-YEAR PERIODS WOULD BE AS FOLLOWS: BALANCED FUND, $69, $99,
$122 AND $201; REAL ESTATE SECURITIES FUND, $70, $103, $128 AND $213;
EQUITY INCOME FUND, $69, $100, $124 AND $205; EQUITY INDEX FUND, $69, $99,
$122 AND $201; LARGE CAP VALUE FUND, $69, $99, $122 AND $202; LARGE CAP
GROWTH FUND, $69, $99, $122 AND $202; MID CAP VALUE FUND, $69, $100, $123
AND $203; REGIONAL EQUITY FUND, $69, $100, $123 AND $203; SMALL CAP GROWTH
FUND, $69, $100, $123 AND $204; SMALL CAP VALUE FUND, $69, $100, $123 AND
$203; MICRO CAP VALUE FUND, $71, $105, $131 AND $221; INTERNATIONAL INDEX
FUND, $70, $102, $127 AND $212; INTERNATIONAL FUND, $76, $118, $154 AND
$267; HEALTH SCIENCES FUND, $71, $104, $130 AND $218; AND TECHNOLOGY FUND,
$69, $100, $124 AND $205.
(4) ABSENT THE FEE WAIVERS REFERRED TO IN (1) ABOVE (ASSUMING NO REDEMPTION),
THE DOLLAR AMOUNTS FOR THE 1, 3, 5 AND 10-YEAR PERIODS WOULD BE AS
FOLLOWS: BALANCED FUND, $19, $59, $102 AND $202; REAL ESTATE SECURITIES
FUND, $21, $64, $110 AND $219; EQUITY INCOME FUND, $19, $60, $104 AND
$205; EQUITY INDEX FUND, $19, $59, $102 AND $202; LARGE CAP VALUE FUND,
$19, $59, $102 AND $202; LARGE CAP GROWTH FUND, $19, $59, $102 AND $202;
MID CAP VALUE FUND, $19, $60, $103 AND $203; REGIONAL EQUITY FUND, $19,
$60, $103 AND $203; SMALL CAP GROWTH FUND, $19, $60, $103 AND $204; SMALL
CAP VALUE FUND, $19, $60, $103 AND $203; MICRO CAP VALUE FUND, $21, $65,
$111 AND $221; INTERNATIONAL INDEX FUND, $20, $62, $107 AND $212;
INTERNATIONAL FUND, $26, $78, $134 AND $267; HEALTH SCIENCES FUND, $21,
$64, $110 AND $218; AND TECHNOLOGY FUND, $19, $60, $104 AND $205.
9
<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.
10
<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 and Class B Shares
of Small Cap Growth Fund represents the financial highlights of the Class A
Shares and the Class B Shares of Piper Small Company Growth Fund,
respectively. On July 31, 1998, Piper Small Company Growth Fund and First
American Small Cap Growth Fund consummated a reorganization transaction
pursuant to which shares of Piper Small Company Growth Fund were exchanged
for shares of Small Cap Growth Fund. Piper Small Company Growth Fund is the
financial reporting survivor. Therefore, the financial highlights for Small
Cap Growth Fund represent the financial highlights of Piper Small Company
Growth Fund.
Except as indicated, this information has been audited by KPMG Peat Marwick
LLP, independent auditors. The financial highlights for the Funds should be
read in conjunction with the respective financial statements of such Funds.
The independent auditors' reports and related financial statements can be
found in the September 30, 1997 and November 30, 1997 (for Small Cap Value
Fund and International Index Fund) Annual Reports to Shareholders of the
First American Funds and the September 30, 1997 Annual Report to
Shareholders for Piper Small Company Growth Fund, respectively, which, along
with the respective March 31, 1998 Semiannual Reports of the First American
Funds and Piper Small Company Growth Fund, can be obtained without charge by
calling (800) 637-2548.
11
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
Except as indicated, for the period ended March 31, 1998 (unaudited)
and for the periods ended September 30,
For a share outstanding throughout the applicable period
<TABLE>
<CAPTION>
REALIZED AND
UNREALIZED DIVIDENDS
NET ASSET NET GAINS OR FROM NET DISTRIBUTIONS
VALUE BEGINNING INVESTMENT (LOSSES) ON INVESTMENT FROM
OF PERIOD INCOME INVESTMENTS INCOME CAPITAL GAINS
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCED FUND Class A
1998 (unaudited)** $ 15.41 $ 0.19 $ 0.77 $ (0.19) $ (1.12)
1997 13.14 0.39 2.85 (0.39) (0.58)
1996 12.12 0.39 1.43 (0.39) (0.41)
1995 10.54 0.38 1.72 (0.37) (0.15)
1994 10.73 0.34 (0.02) (0.34) (0.17)
1993(1) 10.00 0.28 0.75 (0.28) (0.02)
Class B
1998 (unaudited)** $ 15.36 $ 0.13 $ 0.77 $ (0.13) $ (1.12)
1997 13.10 0.29 2.84 (0.29) (0.58)
1996 12.09 0.31 1.42 (0.31) (0.41)
1995 10.53 0.29 1.71 (0.29) (0.15)
1994(2) 10.66 0.06 (0.12) (0.07) --
REAL ESTATE SECURITIES FUND Class A
1998 (unaudited)** $ 14.97 $ 0.32 $ (0.07) $ (0.32) $ (0.33)
1997 11.52 0.72 3.42 (0.65) (0.03)
1996 10.38 0.52 1.30 (0.51) --
1995(3) 10.37 -- 0.01 -- --
Class B
1998 (unaudited)** $ 14.86 $ 0.27 $ (0.08) $ (0.27) $ (0.33)
1997 11.46 0.63 3.38 (0.57) (0.03)
1996 10.37 0.44 1.27 (0.45) --
1995(3) 10.37 -- -- -- --
EQUITY INCOME FUND Class A
1998 (unaudited)** $ 15.69 $ 0.21 $ 1.96 $ (0.21) $ (0.85)
1997 12.65 0.40 3.40 (0.41) (0.35)
1996 11.24 0.39 1.42 (0.39) (0.01)
1995 9.89 0.41 1.33 (0.39) --
1994(4) 9.87 0.41 -- (0.39) --
1993(5)(6) 10.00 0.57 (0.14) (0.56) --
Class B
1998 (unaudited)** $ 15.62 $ 0.15 $ 1.98 $ (0.15) $ (0.85)
1997 12.61 0.29 3.37 (0.30) (0.35)
1996 11.20 0.31 1.42 (0.31) (0.01)
1995 9.88 0.33 1.32 (0.33) --
1994(2) 9.87 0.04 0.02 (0.05) --
EQUITY INDEX FUND Class A
1998 (unaudited)** $ 20.76 $ 0.12 $ 3.08 $ (0.12) $ (1.54)
1997 15.49 0.12 5.70 (0.12) (0.43)
1996 13.35 0.27 2.32 (0.27) (0.18)
1995 10.68 0.25 2.76 (0.25) (0.09)
1994 10.60 0.25 0.09 (0.25) (0.01)
1993(1) 10.00 0.20 0.60 (0.20) --
Class B
1998 (unaudited)** $ 20.67 $ 0.05 $ 3.05 $ (0.05) $ (1.54)
1997 15.43 0.12 5.67 (0.12) (0.43)
1996 13.30 0.17 2.31 (0.17) (0.18)
1995 10.66 0.23 2.68 (0.18) (0.09)
1994(2) 10.68 0.01 0.04 (0.07) --
- --------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
NET ASSET RATIO OF INVESTMENT AVERAGE
DISTRIBUTIONS VALUE NET ASSETS EXPENSES TO INCOME TO NET ASSETS PORTFOLIO AVERAGE
FROM RETURN END OF TOTAL END OF AVERAGE AVERAGE (EXCLUDING TURNOVER COMMISSION
OF CAPITAL PERIOD RETURN* PERIOD (000) NET ASSETS NET ASSETS WAIVERS) RATE RATE (A)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ -- $ 15.06 6.89%+ $ 44,692 1.05% 2.57% 1.13% 50% $ 0.0509
-- 15.41 25.80 32,309 1.05 2.74 1.13 84 0.0700
-- 13.14 15.61 20,927 1.05 3.05 1.14 73 0.0619
-- 12.12 20.57 15,288 0.99 3.41 1.19 77 --
-- 10.54 3.02 13,734 0.77 2.63 1.24 98 --
-- 10.73 10.39+ 111,225 0.75 3.31 1.29 77 --
$ -- $ 15.01 6.52%+ $ 61,333 1.80% 1.81% 1.88% 50% $ 0.0509
-- 15.36 24.93 43,707 1.80 1.99 1.88 84 0.0700
-- 13.10 14.78 15,542 1.80 2.32 1.89 73 0.0619
-- 12.09 19.58 3,120 1.79 2.60 1.94 77 --
-- 10.53 (0.55)+ 270 1.75 2.80 2.05 98 --
$ -- $ 14.57 1.79%+ $ 2,443 1.05% 4.38% 1.17% 21% $ 0.0600
(0.01) 14.97 36.77 2,105 1.05 4.46 1.30 14 0.0700
(0.17) 11.52 18.17 226 1.05 4.36 1.76 8 0.0704
-- 10.38 0.00 1 1.05 0.00 2.59 0 --
$ -- $ 14.45 1.36%+ $ 3,766 1.80% 3.64% 1.92% 21% $ 0.0600
(0.01) 14.86 35.77 3,318 1.80 3.61 2.00 14 0.0700
(0.17) 11.46 17.00 263 1.80 4.29 2.51 8 0.0704
-- 10.37 0.00 1 1.80 0.00 3.34 0 --
$ -- $ 16.80 14.57%+ $ 9,810 1.00% 2.63% 1.11% 11% $ 0.0600
-- 15.69 31.16 7,276 1.00 2.96 1.17 39 0.0571
-- 12.65 16.41 2,581 1.00 3.25 1.20 23 0.0700
-- 11.24 18.06 1,995 0.92 3.91 1.31 23 --
-- 9.89 4.22+ 1,852 0.88 4.88 1.39 108 --
-- 9.87 4.44+ 28,786 0.75 6.09 1.36 68 --
$ -- $ 16.75 14.37%+ $ 8,393 1.75% 1.86% 1.86% 11% $ 0.0600
-- 15.62 30.06 6,619 1.75 2.19 1.92 39 0.0571
-- 12.61 15.66 3,770 1.75 2.49 1.95 23 0.0700
-- 11.20 17.10 1,233 1.75 3.05 2.06 23 --
-- 9.88 0.57+ 1 1.75 4.39 2.14 108 --
$ -- $ 22.30 16.79%+ $ 37,032 0.60% 1.18% 1.12% 15% $ 0.0300
-- 20.76 39.47 15,977 0.60 1.36 1.13 8 0.0419
-- 15.49 19.75 6,221 0.60 1.87 1.15 10 0.0377
-- 13.35 28.90 2,140 0.57 2.16 1.20 9 --
-- 10.68 3.25 758 0.35 2.23 1.23 11 --
-- 10.60 8.02+ 139,957 0.35 2.52 1.30 1 --
$ -- $ 22.18 16.33%+ $ 36,591 1.35% 0.43% 1.87% 15% $ 0.0300
-- 20.67 38.45 23,733 1.35 0.61 1.88 8 0.0419
-- 15.43 18.95 8,252 1.35 1.11 1.90 10 0.0377
-- 13.30 27.87 1,197 1.35 1.34 1.95 9 --
-- 10.66 0.48+ 29 1.35 1.68 2.03 11 --
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
Except as indicated, for the period ended March 31, 1998 (unaudited)
and for the periods ended September 30,
For a share outstanding throughout the applicable period
<TABLE>
<CAPTION>
REALIZED AND
UNREALIZED DIVIDENDS
NET ASSET NET GAINS OR FROM NET DISTRIBUTIONS
VALUE BEGINNING INVESTMENT (LOSSES) ON INVESTMENT FROM
OF PERIOD INCOME INVESTMENTS INCOME CAPITAL GAINS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LARGE CAP VALUE FUND (formerly known as Stock Fund) Class A
1998 (unaudited)** $ 28.74 $ 0.11 $ 1.83 $ (0.11) $ (3.76)
1997 22.59 0.33 7.90 (0.32) (1.76)
1996 19.57 0.36 4.07 (0.36) (1.05)
1995 16.51 0.33 3.64 (0.32) (0.59)
1994 16.00 0.31 1.00 (0.30) (0.50)
1993 14.04 0.22 1.99 (0.23) (0.02)
1992 13.62 0.24 0.81 (0.29) (0.34)
1991(7) 10.64 0.28 2.95 (0.22) (0.03)
1990(8) 12.09 0.25 (1.17) (0.25) (0.28)
1989(8) 10.35 0.25 1.70 (0.20) (0.01)
1988(8)(9) 10.03 0.27 0.35 (0.30) --
Class B
1998 (unaudited)** $ 28.55 $ 0.04 $ 1.81 $ (0.04) $ (3.76)
1997 22.50 0.18 7.81 (0.18) (1.76)
1996 19.49 0.22 4.06 (0.22) (1.05)
1995 16.49 0.26 3.55 (0.22) (0.59)
1994(2) 16.65 0.03 (0.10) (0.09) --
LARGE CAP GROWTH FUND (formerly known as Diversified Growth Fund) Class A
1998 (unaudited)*** $ 17.63 $ 0.05 $ 1.93 $ (0.05) $ (1.36)
1997 13.63 0.09 4.28 (0.10) (0.27)
1996 11.75 0.15 1.88 (0.15) --
1995 9.09 0.15 2.66 (0.15) --
1994(4) 9.39 0.10 (0.29) (0.11) --
1993(5)(6) 10.00 0.11 (0.63) (0.09) --
Class B
1998 (unaudited)** $ 17.47 $ 0.02 $ 1.90 $ (0.02) $ (1.36)
1997 13.57 0.01 4.18 (0.02) (0.27)
1996 11.73 0.08 1.84 (0.08) --
1995 9.09 0.09 2.65 (0.10) --
1994(2) 8.87 0.01 0.23 (0.02) --
MID CAP VALUE FUND (formerly known as Special Equity Fund) Class A
1998 (unaudited)** $ 24.19 $ 0.02 $ 1.67 $ (0.02) $ (2.74)
1997 20.41 0.11 6.98 (0.11) (3.20)
1996 17.89 0.20 3.94 (0.20) (1.42)
1995 17.30 0.35 1.60 (0.34) (1.02)
1994 15.81 0.28 2.52 (0.28) (1.03)
1993 13.61 0.23 2.32 (0.25) (0.10)
1992 12.98 0.21 1.61 (0.27) (0.92)
1991(7) 10.33 0.30 2.61 (0.26) --
1990(8) 12.96 0.47 (2.03) (0.46) (0.61)
1989(8) 11.55 0.47 1.39 (0.41) (0.04)
1988(8)(9) 10.03 0.34 1.57 (0.39) --
Class B
1998 (unaudited)** $ 23.96 $ -- $ 1.58 $ -- $ (2.74)
1997 20.31 0.02 6.85 (0.02) (3.20)
1996 17.83 0.09 3.91 (0.10) (1.42)
1995 17.29 0.29 1.51 (0.24) (1.02)
1994(2) 16.51 0.01 0.85 (0.08) --
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
NET ASSET NET RATIO OF INVESTMENT AVERAGE
DISTRIBUTIONS VALUE ASSETS EXPENSES TO INCOME (LOSS) NET ASSETS PORTFOLIO AVERAGE
FROM RETURN END OF TOTAL END OF AVERAGE TO AVERAGE (EXCLUDING TURNOVER COMMISSION
OF CAPITAL PERIOD RETURN* PERIOD (000) NET ASSETS NET ASSETS WAIVERS) RATE RATE (A)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ -- $ 26.81 8.49%+ $ 78,011 1.05% 0.88% 1.13% 40% $ 0.0592
-- 28.74 38.82 50,381 1.05 1.14 1.14 57 0.0640
-- 22.59 23.90 22,965 1.05 1.64 1.13 40 0.0653
-- 19.57 25.26 13,076 1.00 1.89 1.19 52 --
-- 16.51 8.35 8,421 0.76 1.51 1.20 65 --
-- 16.00 15.82 134,186 0.75 1.94 1.28 48 --
-- 14.04 7.88 3,644 1.45 1.75 4.46 39 --
-- 13.62 30.49+ 2,386 1.45 2.47 7.42 76 --
-- 10.64 (8.22) 1,161 1.45 2.24 9.47 41 --
-- 12.09 20.33 323 1.24 2.26 36.39 74 --
-- 10.35 6.40+ 206 1.02 2.67 28.60 80 --
$ -- $ 26.60 8.19%+ $ 67,068 1.80% 0.16% 1.88% 40% $ 0.0592
-- 28.55 37.71 53,420 1.80 0.39 1.89 57 0.0640
-- 22.50 23.08 23,316 1.80 0.89 1.88 40 0.0653
-- 19.49 24.20 7,051 1.79 1.10 1.94 52 --
-- 16.49 (0.43)+ 346 1.75 1.58 2.01 65 --
$ -- $ 18.20 12.76%+ $ 19,474 1.05% 0.63% 1.11% 10% $ 0.0596
-- 17.63 32.69 12,017 1.05 0.57 1.14 34 0.0633
-- 13.63 17.38 5,318 1.04 1.13 1.17 21 0.0593
-- 11.75 31.21 2,710 0.92 1.52 1.26 28 --
-- 9.09 (2.07)+ 1,900 0.90 1.15 1.33 101 --
-- 9.39 (5.18)+ 31,084 0.78 1.26 1.25 5 --
$ -- $ 18.01 12.18%+ $ 11,290 1.80% (0.13)% 1.86% 10% $ 0.0596
-- 17.47 31.42 9,487 1.80 (0.18) 1.89 34 0.0633
-- 13.57 16.41 5,775 1.79 0.36 1.92 21 0.0593
-- 11.73 30.29 819 1.75 0.58 2.01 28 --
-- 9.09 2.75+ 12 1.75 1.20 2.08 101 --
$ -- $ 23.12 9.21%+ $ 46,164 1.14% 0.32% 1.14% 69% $ 0.0598
-- 24.19 39.93 35,207 1.14 0.58 1.15 82 0.0691
-- 20.41 25.23 17,987 1.13 1.06 1.13 143 0.0673
-- 17.89 12.63 11,609 1.09 2.08 1.20 72 --
-- 17.30 18.70 7,333 0.81 1.88 1.23 116 --
-- 15.81 18.91 81,899 0.81 2.07 1.31 104 --
-- 13.61 15.17 3,586 1.50 1.61 4.18 146 --
-- 12.98 28.38+ 3,423 1.50 2.60 5.13 116 --
-- 10.33 (13.24) 2,761 1.50 4.09 4.21 113 --
-- 12.96 17.41 2,000 1.38 4.07 8.68 102 --
-- 11.55 19.56+ 578 1.20 4.02 15.60 51 --
$ -- $ 22.80 8.75%+ $ 47,481 1.89% (0.42)% 1.89% 69% $ 0.0598
-- 23.96 38.81 36,649 1.90 (0.18) 1.90 82 0.0691
-- 20.31 24.35 12,847 1.88 0.25 1.88 143 0.0673
-- 17.83 11.64 4,847 1.88 1.22 1.95 72 --
-- 17.29 5.22+ 370 1.68 0.47 2.03 116 --
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
Except as indicated, for the period ended March 31, 1998 (unaudited)
and for the periods ended September 30,
For a share outstanding throughout the applicable period
<TABLE>
<CAPTION>
REALIZED AND
UNREALIZED DIVIDENDS
NET ASSET NET GAINS OR FROM NET DISTRIBUTIONS
VALUE BEGINNING INVESTMENT (LOSSES) ON INVESTMENT FROM
OF PERIOD INCOME INVESTMENTS INCOME CAPITAL GAINS
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REGIONAL EQUITY FUND Class A
1998 (unaudited)** $ 23.12 $ -- $ 0.95 $ -- $ (0.95)
1997 17.71 0.03 6.14 (0.07) (0.69)
1996 17.12 0.04 1.70 (0.04) (1.11)
1995 12.52 0.08 4.90 (0.06) (0.32)
1994 11.96 0.08 0.71 (0.07) (0.16)
1993(1) 10.00 0.05 1.96 (0.05) --
Class B
1998 (unaudited)** $ 22.72 $ -- $ 0.84 $ -- $ (0.95)
1997 17.47 (0.03) 5.97 $ -- (0.69)
1996 16.99 (0.04) 1.64 (0.01) (1.11)
1995 12.50 0.04 4.80 (0.03) (0.32)
1994(2) 12.19 -- 0.33 (0.02) --
SMALL CAP GROWTH FUND Class A(10)
1998 (unaudited)** $ 17.41 $ (0.06) $ 1.02 $ -- $ (0.29)
1997 17.11 (0.16) 5.66 (0.04) (5.16)
1996(21)(22) 17.68 0.06 0.87 (0.07) (1.43)
1995 15.61 0.09 2.07 (0.09) --
1994 15.30 0.07 0.27 (0.03) --
1993 12.33 0.02 3.00 (0.05) --
1992 11.65 0.07 0.65 (0.04) --
1991 8.34 0.07 3.31 (0.07) --
1990 9.14 0.09 (0.67) (0.22) --
1989(23) 7.34 0.35 1.69 (0.24) --
1988(8) 7.18 0.09 0.18 (0.11) --
Class B(10)
1998 (unaudited)** $ 17.35 $ (0.09) $ 1.00 $ -- $ (0.29)
1997(24) 13.17 (0.06) 4.24 -- --
SMALL CAP VALUE FUND(11) Class A
1998 (unaudited)*** $ 18.20 $ -- $ 1.21 $ -- $ (1.27)
1997(12)(13) 17.86 (0.03) 0.37 -- --
1997(14) 13.95 0.01 5.43 (0.01) (1.52)
1996(14) 13.23 0.04 1.83 (0.04) (1.11)
1995(14)(15) 10.00 0.09 3.29 (0.10) (0.05)
Class B
1998 (unaudited)*** $ 18.23 $ 0.01 $ 1.14 $ (0.01) $ (1.27)
1997(16) 18.36 0.00 (0.13) -- --
MICRO CAP VALUE FUND Class A
1998 (unaudited)** $ 10.96 $ -- $ (0.09) $ -- $ (0.59)
1997(17) 10.00 -- 0.96 -- --
Class B
1998 (unaudited)** $ 10.95 $ -- $ (0.14) $ -- $ (0.59)
1997(17) 10.00 -- 0.95 -- --
INTERNATIONAL INDEX FUND(11) Class A
1998 (unaudited)*** $ 10.94 $ 0.03 $ 1.50 $ (0.08) $ --
1997(12)(13) 12.32 0.05 (1.41) (0.02) --
1997(14) 10.64 0.10 1.70 (0.10)(B) (0.02)
1996(14) 10.45 0.07 0.17 (0.05) --
1995(14)(18) 10.00 -- 0.45 -- --
Class B(16)
1998 (unaudited)*** $ 10.99 $ 0.02 $ 1.49 $ (0.10) $ --
1997 11.08 0.00 (0.09) -- --
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
NET ASSET NET RATIO OF INVESTMENT AVERAGE
DISTRIBUTIONS VALUE ASSETS EXPENSES TO INCOME (LOSS) NET ASSETS PORTFOLIO AVERAGE
FROM RETURN END OF TOTAL END OF AVERAGE TO AVERAGE (EXCLUDING TURNOVER COMMISSION
OF CAPITAL PERIOD RETURN* PERIOD (000) NET ASSETS NET ASSETS WAIVERS) RATE RATE (A)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ -- $ 23.12 4.59%+ $36,810 1.15% (0.12)% 1.16% 6% $ 0.0543
-- 23.12 36.13 37,677 1.15 0.11 1.15 17 0.0699
-- 17.71 10.97 25,325 1.13 0.24 1.15 36 0.0697
-- 17.12 41.17 14,917 1.05 0.58 1.20 42 --
-- 12.52 6.76 8,345 0.82 0.59 1.25 41 --
-- 11.96 20.17+ 58,427 0.80 0.59 1.30 28 --
$ -- $ 22.61 4.18%+ $44,024 1.90% (0.86)% 1.91% 6% $ 0.0543
-- 22.72 35.18 39,683 1.90 (0.65) 1.90 17 0.0699
-- 17.47 10.14 27,671 1.88 (0.52) 1.90 36 0.0697
-- 16.99 39.98 7,630 1.84 (0.25) 1.95 42 --
-- 12.50 2.73+ 185 1.80 (0.41) 2.05 41 --
$ -- $ 18.08 5.72%+ $35,730 1.33% (0.57)% 1.86% 43% $ 0.0600
-- 17.41 45.66 35,647 1.34 (0.75) 1.98 109 0.0600
-- 17.11 5.38 30,968 1.32 0.20 1.79 125 0.0600
-- 17.68 13.88 48,421 1.40 0.43 1.63 182 --
-- 15.61 2.12 78,376 1.32 0.37 1.54 177 --
-- 15.30 24.56 84,008 1.28 0.50 1.86 154 --
-- 12.33 6.18 9,084 1.47 0.56 2.49 420 --
-- 11.65 40.71 9,194 1.32 0.61 2.39 507 --
-- 8.34 (6.61) 8,414 1.49 1.03 2.55 514 --
-- 9.14 27.86+ 12,534 1.30 3.95 2.23 375 --
-- 7.34 3.47 19,325 1.52 1.13 2.20 202 --
$ -- $ 17.97 5.42%+ $ 1,015 1.99% (1.27)% 2.43% 43% $ 0.0600
-- 17.35 31.77+ 480 1.98 (1.49) 2.15 109 0.0600
$ -- $ 18.14 9.28%+ $19,613 1.12% 0.24% 1.12% 7% $ 0.0600
-- 18.20 1.90+ 19,194 1.37 (0.38) 1.37 3 0.0638
-- 17.86 41.71 22,429 1.31 0.01 1.31 29 0.0519
-- 13.95 14.93 10,247 1.33 0.14 1.33 34 0.0398
-- 13.23 34.29+ 1,569 1.11 0.63 1.38 37 --
$ -- $ 18.10 8.97%+ $ 135 1.98% (0.44)% 1.98% 7% $ 0.0600
-- 18.23 (0.70)+ 1 1.90 (1.53) 1.90 3 0.0638
$ -- $ 10.28 (0.14)%+ $ 511 1.12% (0.07)% 1.12% 3% $ 0.0600
-- 10.96 9.60 44 1.15 (0.25) 1.32 0 0.0676
$ -- $ 10.22 (0.64)%+ $ 202 1.87% (0.81)% 1.87% 3% $ 0.0600
-- 10.95 9.50 50 1.90 (1.04) 2.07 0 0.0676
$ -- $ 12.39 13.95%+ $ 1,599 1.00% 0.84% 1.21% 7% $ 0.0249
-- 10.94 (11.03)+ 1,270 0.92 0.98 1.21 0 0.0207
-- 12.32 17.03 1,605 0.98 0.90 1.28 3 0.0241
-- 10.64 2.29 2,005 1.06 0.84 1.35 6 0.0221
-- 10.45 4.50+ 20 1.40 0.23 1.54 0 --
$ -- $ 12.40 13.73%+ $ 44 1.75% 0.75% 1.96% 7% $ 0.0249
-- 10.99 (0.36)+ 1 1.29 0.00 1.29 0 0.0207
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
Except as indicated, for the period ended March 31, 1998 (unaudited)
and for the periods ended September 30,
For a share outstanding throughout the applicable period
<TABLE>
<CAPTION>
REALIZED AND
NET UNREALIZED DIVIDENDS
NET ASSET INVESTMENT GAINS OR FROM NET DISTRIBUTIONS
VALUE BEGINNING INCOME (LOSSES) ON INVESTMENT FROM
OF PERIOD (LOSS) INVESTMENTS INCOME CAPITAL GAINS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTERNATIONAL FUND Class A
1998 (unaudited)** $ 13.18 $ 0.32 $ 0.76 $ (0.46) $ (0.25)
1997 10.28 0.01 3.04 (0.15)(B) --
1996 10.28 (0.02) 0.20 (0.18)(B) --
1995 10.21 -- 0.07 -- --
1994(19) 9.98 (0.01) 0.24 -- --
Class B
1998 (unaudited)** $ 12.97 $ (0.04) $ 1.04 $ (0.41) $ (0.25)
1997 10.14 (0.08) 3.01 (0.10)(B) --
1996 10.20 (0.07) 0.17 (0.16)(B) --
1995 10.21 (0.03) 0.02 -- --
1994(2) 10.23 (0.01) (0.01) -- --
HEALTH SCIENCES FUND Class A
1998 (unaudited)** $ 12.05 $ -- $ 0.77 $ -- $ (1.46)
1997 9.86 (0.01) 2.30 -- (0.10)
1996(20) 10.00 0.01 (0.14) (0.01) --
Class B
1998 (unaudited)** $ 11.90 $ -- $ 0.72 $ -- $ (1.46)
1997 9.81 (0.01) 2.20 -- (0.10)
1996(20) 10.00 (0.02) (0.16) (0.01) --
TECHNOLOGY FUND Class A
1998 (unaudited)** $ 20.20 $ -- $ 0.08 $ -- $ (1.21)
1997 19.25 (0.11) 3.12 -- (2.06)
1996 18.24 (0.05) 2.95 -- (1.89)
1995 11.19 (0.03) 7.31 -- (0.23)
1994(25) 10.00 (0.01) 1.20 -- --
Class B
1998 (unaudited)** $ 19.58 $ -- $ 0.03 $ -- $ (1.21)
1997 18.85 (0.20) 2.99 -- (2.06)
1996 18.02 (0.14) 2.86 -- (1.89)
1995 11.17 (0.04) 7.12 -- (0.23)
1994(2) 9.85 (0.02) 1.34 -- --
- ----------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
NET ASSET NET RATIO OF INVESTMENT AVERAGE
DISTRIBUTIONS VALUE ASSETS EXPENSES TO INCOME (LOSS) NET ASSETS PORTFOLIO AVERAGE
FROM RETURN END OF TOTAL END OF AVERAGE TO AVERAGE (EXCLUDING TURNOVER COMMISSION
OF CAPITAL PERIOD RETURN* PERIOD (000) NET ASSETS NET ASSETS WAIVERS) RATE RATE (A)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ -- $ 13.55 8.16%+ $10,818 1.78% (0.45)% 1.82% 53% $ 0.1473
-- 13.18 30.03 8,003 1.92 (0.09) 1.92 96 0.0199
-- 10.28 1.84 1,964 1.97 (0.28) 1.97 100 0.0345
-- 10.28 0.69 876 1.93 (0.13) 2.06 57 --
-- 10.21 2.30+ 464 1.75 (0.26) 2.30 16 --
$ -- $ 13.31 7.68%+ $ 2,616 2.53% (1.41)% 2.60% 53% $ 0.1473
-- 12.97 29.13 2,188 2.67 (0.94) 2.67 96 0.0199
-- 10.14 1.02 1,175 2.72 (0.96) 2.72 100 0.0345
-- 10.20 (0.10) 306 2.76 (0.95) 2.81 57 --
-- 10.21 (0.20)+ 22 2.75 (0.71) 3.05 16 --
$ -- $ 11.36 8.61%+ $ 2,431 1.15% 0.15% 1.19% 22% $ 0.0600
-- 12.05 23.60 849 1.15 (0.20) 1.29 54 0.0695
-- 9.86 (1.32)+ 629 1.15 0.18 2.12 19 0.0700
$ -- $ 11.16 8.24%+ $ 749 1.90% (0.65)% 1.94% 22% $ 0.0600
-- 11.90 22.69 516 1.90 (0.94) 2.04 54 0.0695
-- 9.81 (1.86)+ 281 1.90 (0.61) 2.87 19 0.0700
$ -- $ 19.07 1.84%+ $11,901 1.15% (0.61)% 1.15% 53% $ 0.0599
-- 20.20 17.71 5,564 1.15 (0.59) 1.17 150 0.0675
-- 19.25 18.60 4,799 1.15 (0.85) 1.26 119 0.0700
-- 18.24 66.22 1,464 1.13 (0.61) 1.55 74 --
-- 11.19 11.90+ 61 0.80 (0.21) 3.37 43 --
$ -- $ 18.40 1.63%+ $ 9,296 1.90% (1.42)% 1.90% 53% $ 0.0599
-- 19.58 16.82 8,463 1.90 (1.41) 1.92 150 0.0675
-- 18.85 17.75 4,881 1.90 (1.60) 2.01 119 0.0700
-- 18.02 64.52 2,031 1.88 (1.41) 2.30 74 --
-- 11.17 13.40+ 2 1.80 (1.44) 4.12 43 --
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
* TOTAL RETURN EXCLUDES SALES CHARGES.
** FOR THE SIX MONTH PERIOD ENDED MARCH 31, 1998. ALL RATIOS FOR THE PERIOD
HAVE BEEN ANNUALIZED.
*** FOR THE FOUR MONTH PERIOD ENDED MARCH 31, 1998. ALL RATIOS FOR THE PERIOD
HAVE BEEN ANNUALIZED.
+ RETURNS, EXCLUDING SALES CHARGES, ARE FOR THE PERIOD INDICATED AND HAVE NOT
BEEN ANNUALIZED.
(A) BEGINNING IN 1996, AVERAGE COMMISSION RATE PAID PER SHARE IS DISCLOSED FOR
ALL APPLICABLE SECURITY PURCHASES AND SALES SUBJECT TO COMMISSIONS. THE
COMPARABILITY OF THIS INFORMATION MAY BE AFFECTED BY THE FACT THAT
COMMISSION RATES PER SHARE VARY SIGNIFICANTLY AMONG FOREIGN COUNTRIES.
(B) REPRESENTS A DISTRIBUTION OR PARTIAL DISTRIBUTION IN EXCESS OF NET
INVESTMENT INCOME DUE TO THE TAX TREATMENT OF FOREIGN CURRENCY RELATED
TRANSACTIONS.
(1) COMMENCED OPERATIONS ON DECEMBER 14, 1992. ALL RATIOS FOR THE PERIOD HAVE
BEEN ANNUALIZED.
(2) CLASS B SHARES HAVE BEEN OFFERED SINCE AUGUST 15, 1994. ALL RATIOS FOR THE
PERIOD HAVE BEEN ANNUALIZED.
(3) COMMENCED OPERATIONS ON SEPTEMBER 29, 1995. ALL RATIOS FOR THE PERIOD HAVE
BEEN ANNUALIZED.
(4) ON APRIL 28, 1994 THE BOARD OF DIRECTORS APPROVED A CHANGE IN THIS FUND'S
FISCAL YEAR END FROM NOVEMBER 30 TO SEPTEMBER 30, EFFECTIVE SEPTEMBER 30,
1994, AND SHAREHOLDERS APPROVED A CHANGE OF INVESTMENT ADVISOR FROM
BOULEVARD BANK NATIONAL ASSOCIATION TO FIRST BANK NATIONAL ASSOCIATION.
ALL RATIOS FOR THE PERIOD HAVE BEEN ANNUALIZED.
(5) FOR THE PERIOD ENDED NOVEMBER 30.
(6) COMMENCED OPERATIONS ON DECEMBER 18, 1992. ALL RATIOS FOR THE PERIOD HAVE
BEEN ANNUALIZED.
(7) ON SEPTEMBER 3, 1991, THE BOARD OF DIRECTORS OF FAIF APPROVED A CHANGE IN
FAIF'S FISCAL YEAR END FROM OCTOBER 31 TO SEPTEMBER 30, EFFECTIVE
SEPTEMBER 30, 1991. ALL RATIOS FOR THE PERIOD HAVE BEEN ANNUALIZED.
(8) FOR THE PERIOD ENDED OCTOBER 31.
(9) COMMENCED OPERATIONS ON DECEMBER 22, 1987. ALL RATIOS FOR THE PERIOD HAVE
BEEN ANNUALIZED.
(10) PER SHARE AMOUNTS FOR SMALL CAP GROWTH FUND HAVE BEEN ADJUSTED TO REFLECT
THE CONVERSION RATIOS UTILIZED FOR THE REORGANIZATION OF PIPER SMALL
COMPANY GROWTH FUND AND FAIF SMALL CAP GROWTH FUND THAT OCCURRED ON
JULY 31, 1998. PIPER SMALL COMPANY GROWTH FUND IS THE FINANCIAL REPORTING
SURVIVOR. THEREFORE, THE FINANCIAL HIGHLIGHTS FOR SMALL CAP GROWTH FUND
REPRESENT THE FINANCIAL HIGHLIGHTS OF PIPER SMALL COMPANY GROWTH FUND.
(11) THE FINANCIAL HIGHLIGHTS FOR INTERNATIONAL INDEX FUND AND SMALL CAP VALUE
FUND AS SET FORTH HEREIN INCLUDE THE HISTORICAL FINANCIAL HIGHLIGHTS OF
THE QUALIVEST INTERNATIONAL OPPORTUNITIES FUND AND THE QUALIVEST SMALL
COMPANIES VALUE FUND (CLASS A SHARES), RESPECTIVELY. THE ASSETS OF THE
QUALIVEST INTERNATIONAL OPPORTUNITIES FUND AND THE QUALIVEST SMALL
COMPANIES VALUE FUND WERE ACQUIRED BY INTERNATIONAL INDEX FUND AND SMALL
CAP VALUE FUND, RESPECTIVELY, ON NOVEMBER 21, 1997. IN CONNECTION WITH
SUCH ACQUISITION, CLASS A AND CLASS C SHARES OF THE QUALIVEST
INTERNATIONAL OPPORTUNITIES FUND AND THE QUALIVEST SMALL COMPANIES VALUE
FUND WERE EXCHANGED FOR CLASS A SHARES OF INTERNATIONAL INDEX FUND AND
SMALL CAP VALUE FUND, RESPECTIVELY.
(12) FOR THE FOUR MONTH PERIOD ENDED NOVEMBER 30, 1997. ALL RATIOS FOR THE
PERIOD HAVE BEEN ANNUALIZED.
(13) THE BOARD OF DIRECTORS OF FAIF APPROVED A CHANGE IN THE FUND'S FISCAL YEAR
END FROM JULY 31 TO NOVEMBER 30, EFFECTIVE NOVEMBER 30, 1997.
(14) FOR THE PERIOD ENDED JULY 31.
(15) COMMENCED OPERATIONS ON AUGUST 1, 1994. ALL RATIOS FOR THE PERIOD HAVE
BEEN ANNUALIZED.
(16) COMMENCED OPERATIONS ON NOVEMBER 24, 1997. ALL RATIOS FOR THE PERIOD HAVE
BEEN ANNUALIZED.
(17) COMMENCED OPERATIONS ON AUGUST 8, 1997. ALL RATIOS FOR THE PERIOD HAVE
BEEN ANNUALIZED.
(18) COMMENCED OPERATIONS ON JULY 3, 1995. ALL RATIOS FOR THE PERIOD HAVE BEEN
ANNUALIZED.
(19) CLASS A SHARES HAVE BEEN OFFERED SINCE APRIL 7, 1994. ALL RATIOS FOR THE
PERIOD HAVE BEEN ANNUALIZED.
(20) COMMENCED OPERATIONS ON JANUARY 31, 1996. ALL RATIOS FOR THE PERIOD HAVE
BEEN ANNUALIZED.
(21) ON SEPTEMBER 12, 1996, SHAREHOLDERS OF PIPER SMALL COMPANY GROWTH FUND
APPROVED A CHANGE IN THE FUND'S INVESTMENT OBJECTIVE FROM HIGH TOTAL
INVESTMENT RETURN CONSISTENT WITH PRUDENT INVESTMENT RISK TO LONG-TERM
CAPITAL APPRECIATION. IN CONNECTION WITH THIS CHANGE, PIPER SMALL COMPANY
GROWTH FUND'S INVESTMENT POLICIES WERE REVISED ACCORDINGLY.
(22) PER SHARE AMOUNTS HAVE BEEN ADJUSTED TO REFLECT THE EFFECT OF THE STOCK
DIVIDEND DECLARED ON OCTOBER 21, 1996.
(23) EFFECTIVE SEPTEMBER 30, 1989, THE BOARD OF DIRECTORS OF THIS FUND APPROVED
A CHANGE IN THE FUND'S FISCAL YEAR END FROM OCTOBER 31 TO SEPTEMBER 30.
ALL RATIOS FOR THE PERIOD HAVE BEEN ANNUALIZED.
(24) CLASS B SHARES HAVE BEEN OFFERED SINCE FEBRUARY 18, 1997. ALL RATIOS FOR
THE PERIOD HAVE BEEN ANNUALIZED.
(25) COMMENCED OPERATIONS ON APRIL 4, 1994. ALL RATIOS FOR THE PERIOD HAVE BEEN
ANNUALIZED.
20
<PAGE>
THE FUNDS
FAIF is an open-end management investment company which offers shares in
several different mutual funds (collectively, the "FAIF Funds"), each of
which evidences an interest in a separate and distinct investment
portfolio. Shareholders may purchase shares in each FAIF Fund through
three separate classes (Class A, Class B and Class Y) which provide for
variations in distribution costs, shareholder servicing fees, voting
rights and dividends. Except for these differences among classes, each
share of each FAIF Fund represents an undivided proportionate interest in
that Fund. FAIF is incorporated under the laws of the State of Maryland,
and its principal offices are located at Oaks, Pennsylvania 19456.
This Prospectus relates only to the Class A and Class B Shares of the
Funds named on the cover hereof. Information regarding the Class 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 Real
Estate Securities Fund, Health Sciences Fund and Technology Fund is a
diversified investment company, as defined in the Investment Company Act of
1940 (the "1940 Act"). Real Estate Securities Fund, Health Sciences Fund and
Technology Fund are non-diversified companies under the 1940 Act.
If a percentage limitation on investments by a Fund stated below or in the
Statement of Additional Information is adhered to at the time of an
investment, a later increase or decrease in percentage resulting from
changes in asset values will not be deemed to violate the limitation
except in the case of the 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 its 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, except in the case of Equity Income
Fund, in no event will more than 5% of any Fund's net assets be invested
in non-investment grade securities. Descriptions of the rating categories
of Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies, Inc. ("Standard & Poor's") and Moody's Investors Service, Inc.
("Moody's") are contained in the Statement of Additional Information.
When the term "equity securities" is used in this Prospectus, it refers to
common stock and securities which are convertible into or exchangeable
for, or which carry warrants or other rights to acquire, common stock.
This section also contains information concerning certain investment risks
borne by Fund shareholders under the heading "-- Risks to
21
<PAGE>
Consider" below. Further information concerning the securities in which
the Funds may invest and related matters is set forth under "Special
Investment Methods."
----------------------------------------------------------------------------
BALANCED FUND
OBJECTIVE. Balanced Fund has an objective of maximizing total return
(capital appreciation plus income).
INVESTMENT POLICIES. Balanced Fund seeks to achieve its objective by
investing in a balanced portfolio of equity securities and fixed income
securities. Over the long term, it is anticipated that the Fund's asset
mix will average approximately 60% equity securities and 40% fixed income
securities with the asset mix normally ranging between 40% and 75% equity
securities, between 25% and 60% fixed income securities (including only
that portion of the value of convertible securities attributable to their
fixed income characteristics), and between 0% and 25% money market
instruments. The Advisor may make moderate shifts among asset classes in
order to attempt to increase returns or reduce risk.
With respect to the equity security portion of the Fund's portfolio, the
Advisor follows the same investment policies as are described below under
"-- Large Cap Value Fund -- Investment Policies."
The fixed income portion of the Fund's portfolio is invested in investment
grade debt securities, at least 65% of which are United States Government
obligations and corporate debt obligations and mortgage-related securities
rated at least A by Standard & Poor's or Moody's or which have been assigned
an equivalent rating by another nationally recognized statistical rating
organization. Under normal market conditions, the weighted average maturity
of the fixed income securities held by the Fund will not exceed 15 years.
The Fund's permitted fixed income investments include notes, bonds and
discount notes of United States Government agencies or instrumentalities
(including zero coupon securities); domestic issues of corporate debt
obligations having floating or fixed rates of interest and rated at least
BBB by Standard & Poor's or Baa by Moody's, or which have been assigned an
equivalent rating by another nationally recognized statistical rating
organization, or which are of comparable quality in the judgment of the
Advisor; other investments, including mortgage-backed securities, which
are rated in one of the four highest categories by a nationally recognized
statistical rating organization or which are of comparable quality in the
judgment of the Advisor; and commercial paper which is rated A-1 by
Standard & Poor's or P-1 by Moody's or which has been assigned an
equivalent rating by another nationally recognized statistical rating
organization. Unrated securities deemed to be of comparable quality to
rated securities as set forth above will not exceed 25% of the aggregate
value of the Fund's total fixed income assets.
Subject to the foregoing limitations, the fixed income securities in which
the Fund may invest include (i) mortgage-backed securities (provided that
the Fund will not invest more than 10% of its total fixed income assets in
interest-only, principal-only or inverse floating rate mortgage-backed
securities); (ii) asset-backed securities; and (iii) bank instruments. In
addition, the Fund may invest up to 15% of its total fixed income assets
in foreign securities payable in United States dollars. For information
about these kinds of investments and certain associated risks, see the
related headings under "Special Investment Methods," and for information
concerning certain risks associated with investing in fixed income
securities generally, see "Special Investment Methods -- Fixed Income
Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund and write call
options on stock indices related to such equity securities; (iv) purchase
securities on a when-issued or delayed delivery basis; (v) engage in the
lending of portfolio
22
<PAGE>
securities; (vi) in order to attempt to reduce risk, invest in exchange
traded put and call options on interest rate futures contracts and on
interest rate indices; (vii) in order to attempt to reduce risk, invest in
exchange traded interest rate futures contracts and options thereon;
(viii) invest up to 25% of its total fixed income assets in mortgage
dollar roll transactions; and (ix) in order to attempt to reduce risk,
write covered call options on interest rate indices. For information about
these investment methods, restrictions on their use, and certain
associated risks, see the related headings under "Special Investment
Methods."
For temporary defensive purposes, the Fund may, without limitation, hold
cash or invest in cash items of the kinds described under "Special
Investment Methods -- Cash Items." The Fund also may invest not more than
35% of its total assets in cash and cash items in order to utilize assets
awaiting normal investment.
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REAL ESTATE SECURITIES FUND
OBJECTIVE. Real Estate Securities Fund has an objective of providing above
average current income and long-term capital appreciation by investing
primarily in equity securities of real estate companies.
INVESTMENT POLICIES. Under normal market conditions, Real Estate Securities
Fund invests at least 65% of its total assets in income producing equity
securities of publicly traded companies principally engaged in the real
estate industry. For this purpose, a company is deemed to be "principally
engaged" in the real estate industry if (i) it derives at least 50% of its
revenues or profits from the ownership, construction, management, financing
or sale of residential, commercial or industrial real estate, or (ii) has at
least 50% of the fair market value of its assets invested in such real
estate. The Fund seeks to invest in equity securities that provide a
dividend yield that exceeds the composite dividend yield of the securities
included in the S&P 500.
A majority of the Fund's total assets will be invested in securities of
real estate investment trusts ("REITs"). REITs are publicly traded
corporations or trusts that specialize in acquiring, holding, and managing
residential, commercial or industrial real estate. A REIT is not taxed at
the entity level on income distributed to its shareholders or unitholders
if it distributes to shareholders or unitholders at least 95% of its
taxable income for each taxable year and complies with regulatory
requirements relating to its organization, ownership, assets and income.
REITs generally can be classified as Equity REITs, Mortgage REITs, and
Hybrid REITs. An Equity REIT invests the majority of its assets directly
in real property and derives its income primarily from rents and from
capital gains on real estate appreciation which are realized through
property sales. A Mortgage REIT invests the majority of its assets in real
estate mortgage loans and derives its income primarily from interest
payments. A Hybrid REIT combines the characteristics of an Equity REIT and
a Mortgage REIT. Although the Fund can invest in all three kinds of REITs,
its emphasis is expected to be on investments in Equity REITs.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods --
Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed
on a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
associated risks, see "Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund and write call
options on stock indices related to such equity securities; (iv) purchase
securities on a when-issued or delayed delivery
23
<PAGE>
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.
Because Real Estate Securities Fund invests primarily in the real estate
industry, it is particularly subject to risks associated with that industry.
The real estate industry has been subject to substantial fluctuations and
declines on a local, regional and national basis in the past and may
continue to be in the future. Real property values and incomes from real
property may decline due to general and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, changes in zoning laws, casualty or condemnation losses,
regulatory limitations on rents, changes in neighborhoods and in
demographics, increases in market interest rates, or other factors. Factors
such as these may adversely affect companies which own and operate real
estate directly, companies which lend to such companies, and companies which
service the real estate industry. Although the Fund will operate as a
non-diversified investment company under the 1940 Act, it intends to conduct
its operations so as to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code").
Because the Fund may invest a substantial portion of its assets in REITs,
it also is subject to risks associated with direct investments in REITs.
Equity REITs will be affected by changes in the values of and incomes from
the properties they own, while Mortgage REITs may be affected by the
credit quality of the mortgage loans they hold. In addition, REITs are
dependent on specialized management skills and on their ability to
generate cash flow for operating purposes and to make distributions to
shareholders or unitholders. REITs may have limited diversification and
are subject to risks associated with obtaining financing for real
property, as well as to the risk of self-liquidation. REITs also can be
adversely affected by their failure to qualify for tax-free pass-through
treatment of their income under the Code or their failure to maintain an
exemption from registration under the 1940 Act. By investing in REITs
indirectly through the Fund, a shareholder bears not only a proportionate
share of the expenses of the Fund, but also may indirectly bear similar
expenses of some of the REITs in which it invests.
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EQUITY INCOME FUND
OBJECTIVE. Equity Income Fund has an objective of long-term growth of
capital and income.
INVESTMENT POLICIES. Under normal market conditions, Equity Income Fund
invests at least 65% of its total assets in equity securities of issuers
believed by the Advisor to be characterized by sound management, the
ability to finance expected growth and the ability to pay above average
dividends.
The Fund invests in equity securities that have relatively high dividend
yields and which, in the Advisor's opinion, will result in a relatively
stable Fund dividend with a growth rate sufficient to maintain the
purchasing power of the income stream. Although the Advisor anticipates
that higher yielding equity securities will generally represent the core
holdings of the Fund, the Fund may invest in lower yielding but higher
growth equity securities to the extent that the Advisor believes such
investments are appropriate to achieve portfolio balance. All securities
held by the Fund will provide current income consistent with the Fund's
investment objective.
The "equity securities" in which the Fund may invest include corporate
debt obligations which are convertible into common stock. These
convertible debt obligations may include obligations rated at the time of
purchase as low as
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<PAGE>
CCC by Standard & Poor's or Caa by Moody's, or which have been assigned an
equivalent rating by another nationally recognized statistical rating
organization, or which are of comparable quality in the judgment of the
Advisor. Debt obligations rated less than BBB by Standard & Poor's or Baa
by Moody's are considered to be less than "investment grade" and are
sometimes referred to as "junk bonds." Obligations rated CCC by Standard &
Poor's or Caa by Moody's are considered to be of poor standing and are
predominantly speculative. Descriptions of Standard & Poor's and Moody's
rating categories are contained in the Statement of Additional
Information. If the rating of an obligation is reduced below the
categories set forth above after purchase or is discontinued, the Fund is
not required to sell the obligation but may consider doing so.
Purchases of less than investment grade convertible debt obligations are
intended to advance the Fund's objective of long-term growth of capital
through the "upside" potential of the obligations' conversion features and
to advance the Fund's objective of income through receipt of interest
payable on the obligations. The Fund will not invest more than 25% of its
total assets in convertible debt obligations which are rated less than
investment grade or which are of comparable quality in the judgment of the
Advisor. For the year ended September 30, 1997, the following weighted
average percentages of the Fund's total assets were invested in
convertible and nonconvertible debt obligations with the indicated
Standard & Poor's ratings or their equivalents: AAA, 0%; AA, 0%; A, 0%;
BBB, 1%; BB, 0%; B, 1%; and CCC, 0%.
Debt obligations which are rated less than investment grade generally are
subject to greater market fluctuations and greater risk of loss of income
and principal due to default by the issuer than are higher-rated
obligations. The value of these obligations tends to reflect short-term
corporate, economic, interest rate and market developments and investor
perceptions of the issuer's credit quality to a greater extent than
investment grade obligations. In addition, since the market for these
obligations is relatively new and does not have as many participants as
the market for higher-rated obligations, it may be more difficult to
dispose of or to determine the value of these obligations. In the case of
a convertible debt obligation, these risks may be present in a greater
degree where the principal amount of the obligation is greater than the
current market value of the common stock into which it is convertible.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods --
Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed
on a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
associated risks, see "Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund and write call
options on stock indices related to such equity securities; (iv) purchase
securities on a when-issued or delayed delivery basis; and (v) engage in
the lending of portfolio securities. For information about these
investment methods, restrictions on their use, and certain associated
risks, see the related headings under "Special Investment Methods."
For temporary defensive purposes, the Fund may, without limitation, hold
cash or invest in cash items of the kinds described under "Special
Investment Methods -- Cash Items." The Fund also may invest not more than
35% of its total assets in cash and cash items in order to utilize assets
awaiting normal investment.
25
<PAGE>
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EQUITY INDEX FUND
OBJECTIVE. Equity Index Fund has an objective of providing investment
results that correspond to the performance of the "S&P 500."
INVESTMENT POLICIES. Equity Index Fund invests primarily (at least 65% of
total assets) in common stocks included in the S&P 500. The Advisor believes
that the Fund's objective can best be achieved by investing in the common
stocks of approximately 50% to 100% of the issues included in the S&P 500,
depending on the size of the Fund.
Standard & Poor's designates the stocks included in the S&P 500 on a
statistical basis. A particular stock's weighting in the S&P 500 is based on
its total market value (that is, its market price per share times the number
of shares outstanding) relative to that of all stocks included in the S&P
500. From time to time, Standard & Poor's may add or delete stocks to or
from the S&P 500. Inclusion of a particular stock in the S&P 500 does not
imply any opinion by Standard & Poor's as to its merits as an investment,
nor is Standard & Poor's a sponsor of or in any way affiliated with the
Fund.
The Fund is managed by utilizing a computer program that identifies which
stocks should be purchased or sold in order to replicate, as closely as
possible, the composition of the S&P 500. The Fund includes a stock in its
investment portfolio in the order of the stock's weighting in the S&P 500,
starting with the most heavily weighted stock. Thus, the proportion of Fund
assets invested in a stock or industry closely approximates the percentage
of the S&P 500 represented by that stock or industry. Portfolio turnover is
expected to be well below that of actively managed mutual funds. Inasmuch as
the common stock of the Advisor's parent company U.S. Bancorp is included in
the S&P 500, such stock may be purchased by the Fund consistent with its
indexing-based policies.
Because the Fund may not always hold all of the stocks included in the S&P
500, the Fund will not duplicate the S&P 500's performance precisely.
However, there will be a close correlation between the Fund's performance
and that of the S&P 500 in both rising and falling markets. The Fund will
attempt to achieve a correlation between the performance of its portfolio
and that of the S&P 500 of at least 95%, without taking into account
expenses of the Fund. A perfect correlation would be indicated by a figure
of 100%, which would be achieved if the Fund's net asset value, including
the value of its dividends and capital gains distributions, increased or
decreased in exact proportion to changes in the S&P 500. The Fund's
ability to replicate the performance of the S&P 500 may be affected by,
among other things, changes in securities markets, the manner in which
Standard & Poor's calculates the S&P 500, the amount and timing of cash
flows into and out of the Fund, commissions, sales charges (if any) and
other expenses. Although cash flows into and out of the Fund will affect
the Fund's portfolio turnover rate and its ability to replicate the S&P
500's performance, investment adjustments will be made, as practicably as
possible, to account for these circumstances. In the event the Fund is
unable to achieve this correlation over time, the Board of Directors of
the Fund will consider alternative strategies for the Fund.
The Fund also may invest up to 20% of its total assets, in the aggregate,
in stock index futures contracts, options on stock indices, options on
stock index futures, and index participation contracts based on the S&P
500. The Fund will not invest in these types of contracts and options for
speculative purposes, but rather to maintain sufficient liquidity to meet
redemption requests; to increase the level of Fund assets devoted to
replicating the composition of the S&P 500; and to reduce transaction
costs. These types of contracts and options and certain associated risks
are described under "Special Investment Methods -- Options Transactions."
In addition, the Fund may engage in securities lending as described under
"Special Investment Methods -- Lending of Portfolio Securities."
For temporary defensive purposes, the Fund may, without limitation, hold
cash or invest in cash
26
<PAGE>
items of the kinds described under "Special Investment Methods -- Cash
Items." The Fund also may invest not more than 35% of its total assets in
cash and cash items in order to utilize assets awaiting normal investment.
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LARGE CAP VALUE FUND
OBJECTIVES. Large Cap Value Fund has a primary objective of capital
appreciation. A secondary objective of the Fund is to provide current
income.
INVESTMENT POLICIES. Under normal market conditions, Large Cap Value Fund
invests at least 65% of its total assets in common stocks diversified
among a broad range of industries and among companies that have a market
capitalization of at least $1 billion at the time of purchase. In
selecting equity securities, the Advisor employs a value-based selection
discipline, investing in equity securities it believes are undervalued
relative to other securities in the same industry or market at the time of
purchase. In assessing relative value, the Advisor will consider factors
such as ratios of market price to earnings, market price to book value,
market price to assets, estimated earnings growth rate, cash flow and
liquidation value.
The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of less than $1
billion and in fixed income securities of the kinds described under
"Special Investment Methods -- Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed on
a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
associated risks, see "Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund and write call
options on stock indices related to such equity securities; (iv) purchase
securities on a when-issued or delayed delivery basis; and (v) engage in
the lending of portfolio securities. For information about these
investment methods, restrictions on their use, and certain associated
risks, see the related headings under "Special Investment Methods."
For temporary defensive purposes, the Fund may, without limitation, hold
cash or invest in cash items of the kinds described under "Special
Investment Methods -- Cash Items." The Fund also may invest not more than
35% of its total assets in cash and cash items in order to utilize assets
awaiting normal investment.
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LARGE CAP GROWTH FUND
OBJECTIVES. Large Cap Growth Fund has a primary objective of long-term
growth of capital. A secondary objective of the Fund is to provide current
income.
INVESTMENT POLICIES. Under normal market conditions, Large Cap Growth Fund
invests at least 65% of its total assets in equity securities of companies
that have a market capitalization of at least $1 billion at the time of
purchase and that, in the Advisor's judgment, exhibit a combination of
above average growth in revenue and earnings, strong management and sound
and improving financial condition.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods --
Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed
on a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
27
<PAGE>
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.
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MID CAP VALUE FUND
OBJECTIVE. Mid Cap Value Fund has an objective of capital appreciation.
INVESTMENT POLICIES. Under normal market conditions, Mid Cap Value Fund
invests at least 65% of its total assets in equity securities of
mid-capitalization companies. For these purposes, mid-capitalization
companies are deemed those with market capitalizations of from $1 billion to
$5 billion at the time of purchase. In selecting equity securities, the
Advisor employs a value-based selection discipline, investing in equity
securities it believes are undervalued relative to other securities in the
same industry or market at the time of purchase. In assessing relative
value, the Advisor will consider factors such as ratios of market price to
earnings, market price to book value, market price to assets, estimated
earnings growth rate, cash flow and liquidation value.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods --
Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed
on a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
associated risks, see "Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund and write call
options on stock indices related to such equity securities; (iv) purchase
securities on a when-issued or delayed delivery basis; and (v) engage in
the lending of portfolio securities. For information about these
investment methods, restrictions on their use, and certain associated
risks, see the related headings under "Special Investment Methods."
For temporary defensive purposes, the Fund may without limitation hold
cash or invest in cash items of the kinds described under "Special
Investment Methods -- Cash Items." The Fund also may invest not more than
35% of its total assets in cash and cash items in order to utilize assets
awaiting normal investment.
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REGIONAL EQUITY FUND
OBJECTIVE. Regional Equity Fund has an objective of capital appreciation.
INVESTMENT POLICIES. Regional Equity Fund seeks to achieve its objective
by investing, in normal market conditions, at least 65% of its total
assets in equity securities of small-capitalization companies
headquartered in Minnesota, North and South Dakota, Montana, Wisconsin,
Michigan, Iowa, Nebraska, Colorado and Illinois. For these purposes,
small-capitalization companies are deemed those with market
capitalizations of
28
<PAGE>
less than $1 billion at the time of purchase. In selecting equity
securities, the Advisor employs a value-based selection discipline,
investing in equity securities it believes are undervalued relative to
other securities in the same industry or market at the time of purchase.
In assessing relative value, the Advisor will consider factors such as
ratios of market price to earnings, market price to book value, market
price to assets, estimated earnings growth rate, cash flow and liquidation
value.
In addition to the risks associated with investing in small-capitalization
companies, see "-- Risks to Consider -- Small-Capitalization Companies"
below, the Fund's policy of concentrating its equity investments in a
geographic region means that it will be subject to adverse economic,
political or other developments in that region. Although the region in
which the Fund principally invests has a diverse industrial base
(including, but not limited to, agriculture, mining, retail,
transportation, utilities, heavy and light manufacturing, financial
services, insurance, computer technology and medical technology), this
industrial base is not as diverse as that of the country as a whole. The
Fund therefore may be less diversified by industry and company than other
funds with a similar investment objective and no geographic limitation.
The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities without regard to the location of the issuer's
headquarters or the issuer's market capitalization and in fixed income
securities of the kinds described under "Special Investment Methods --
Fixed Income Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund and write call options
on stock indices related to such equity securities; (iv) purchase securities
on a when-issued or delayed delivery basis; and (v) engage in the lending of
portfolio securities. For information about these investment methods,
restrictions on their use, and certain associated risks, see the related
headings under "Special Investment Methods."
For temporary defensive purposes, the Fund may without limitation hold
cash or invest in cash items of the kinds described under "Special
Investment Methods -- Cash Items." The Fund also may invest not more than
35% of its total assets in cash and cash items in order to utilize assets
awaiting normal investment.
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SMALL CAP GROWTH FUND
OBJECTIVE. Small Cap Growth Fund has an objective of growth of capital.
INVESTMENT POLICIES. Under normal market conditions, Small Cap Growth Fund
invests at least 65% of its total assets in equity securities of
small-capitalization companies that exhibit, in the Advisor's opinion,
outstanding potential for superior growth. For these purposes,
small-capitalization companies are deemed those with market
capitalizations of less than $1 billion at the time of purchase. Companies
that participate in sectors that are identified by the Advisor as having
long-term growth potential generally are expected to make up a substantial
portion of the Fund's holdings. These companies often have established a
market niche or have developed unique products or technologies that are
expected by the Advisor to produce superior growth in revenues and
earnings.
The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of $1 billion or
more and in fixed income securities of the kinds described under "Special
Investment Methods -- Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed
on a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
29
<PAGE>
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.
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SMALL CAP VALUE FUND
OBJECTIVE. Small Cap Value Fund has an objective of capital appreciation.
INVESTMENT POLICIES. Under normal market conditions, Small Cap Value Fund
invests at least 65% of its total assets in equity securities of small-
capitalization companies. For these purposes, small-capitalization companies
are deemed those with market capitalizations of less than $1 billion at the
time of purchase. In selecting equity securities, the Advisor utilizes a
value-based selection discipline, investing in equity securities it believes
are undervalued relative to other securities in the same industry or market
at the time of purchase. In assessing relative value, the Advisor will
consider such factors as ratios of market price to earnings, market price to
book value, market price to assets, estimated earnings growth rate, cash
flow and liquidation value.
The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of $1 billion or
more and in fixed income securities of the kinds described under "Special
Investment Methods -- Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed
on a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
associated risks, see "Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund; (iv) purchase
securities on a when-issued or delayed delivery basis; and (v) engage in
the lending of portfolio securities. For information about these
investment methods, restrictions on their use, and certain associated
risks, see the related headings under "Special Investment Methods."
For temporary defensive purposes, the Fund may without limitation hold
cash or invest in cash items of the kinds described under "Special
Investment Methods -- Cash Items." The Fund also may invest not more than
35% of its total assets in cash and cash items in order to utilize assets
awaiting normal investment.
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MICRO CAP VALUE FUND
OBJECTIVE. Micro Cap Value Fund has an objective of capital appreciation.
INVESTMENT POLICIES. Under normal market conditions, Micro Cap Value Fund
invests at least 65% of its total assets in equity securities of very
small-capitalization companies. For these purposes, very
small-capitalization companies are deemed those with market
capitalizations of less than $500 million at the time of purchase. In
selecting equity securities, the Advisor utilizes a value-based
30
<PAGE>
selection discipline, investing in equity securities it believes are
undervalued relative to other securities in the same industry or market at
the time of purchase. In assessing relative value, the Advisor will
consider such factors as ratios of market price to earnings, market price
to book value, and market price to assets, estimated earnings growth rate,
cash flow and liquidation value.
The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of $500 million
or more and in fixed income securities of the kinds described under
"Special Investment Methods -- Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed
on a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
associated risks, see "Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund; (iv) purchase
securities on a when-issued or delayed delivery basis; and (v) engage in
the lending of portfolio securities. For information about these
investment methods, restrictions on their use, and certain associated
risks, see the related headings under "Special Investment Methods."
For temporary defensive purposes, the Fund may without limitation hold cash
or invest in cash items of the kinds described under "Special Investment
Methods -- Cash Items." The Fund also may invest not more than 35% of its
total assets in cash and cash items in order to utilize assets awaiting
normal investment.
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INTERNATIONAL INDEX FUND
OBJECTIVE. International Index Fund has an objective of providing
investment results that correspond to the performance of the Morgan
Stanley Europe, Australia, Far East Composite Index (the "EAFE Index").
INVESTMENT POLICIES. International Index Fund invests primarily (at least
65% of total assets) in common stocks included in the EAFE Index. The EAFE
Index includes approximately 1,077 companies representing the stock
markets of approximately 14 European countries, Australia, New Zealand,
Japan, Hong Kong and Singapore/Malaysia. The Advisor believes that the
Fund's objective can best be achieved by investing in the common stocks of
approximately 50% to 100% of the issues included in the EAFE Index,
depending on the size of the Fund. Normally, International Index Fund will
invest at least 65% of its total assets in securities traded in at least
three foreign countries.
Morgan Stanley designates the stocks included in the EAFE Index. A
particular stock's weighting in the EAFE Index is based on its total
market value (that is, its market price per share times the number of
shares outstanding) relative to that of all stocks included in the EAFE
Index. From time to time, Morgan Stanley may add or delete stocks to or
from the EAFE Index. Inclusion of a particular stock in the EAFE Index
does not imply any opinion by Morgan Stanley as to its merits as an
investment, nor is Morgan Stanley a sponsor of or in any way affiliated
with the Fund.
The Fund is managed by utilizing a computer program that identifies which
stocks should be purchased or sold in order to replicate, as closely as
possible, the composition of the EAFE Index. The Fund includes a stock in
its investment portfolio in the order of the stock's weighting in the EAFE
Index, starting with the most heavily weighted stock. Thus, the proportion
of Fund assets invested in an industry or country closely approximates the
percentage of the EAFE Index represented by that industry or country.
Portfolio turnover is expected to be well below that of actively managed
mutual funds.
Because the Fund may not always hold all of the stocks included in the
EAFE Index, the Fund will
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not duplicate the EAFE Index performance precisely. However, there will be
a close correlation between the Fund's performance and that of the EAFE
Index in both rising and falling markets. The Fund will attempt to achieve
a correlation between the performance of its portfolio and that of the
EAFE Index of at least 95%, without taking into account expenses of the
Fund. A perfect correlation would be indicated by a figure of 100%, which
would be achieved if the Fund's net asset value, including the value of
its dividends and capital gains distributions, increased or decreased in
exact proportion to changes in the EAFE Index. The Fund's ability to
replicate the performance of the EAFE Index may be affected by, among
other things, changes in securities markets, the manner in which Morgan
Stanley calculates the EAFE Index, administrative and other expenses
incurred by the Fund, taxes (including foreign withholding taxes, which
will affect the Fund), the amount and timing of cash flows into and out of
the Fund, commissions, sales charges (if any) and other expenses. Although
cash flows into and out of the Fund will affect the Fund's portfolio
turnover rate and its ability to replicate the EAFE Index's performance,
investment adjustments will be made, as practicably as possible, to
account for these circumstances. In the event the Fund is unable to
achieve this correlation over time, the Board of Directors of the Fund
will consider alternative strategies for the Fund.
The Fund also may invest up to 20% of its total assets in the aggregate in
stock index futures contracts, options on stock indices, options on stock
index futures and index participation contracts based on the EAFE Index. The
Fund will not invest in these types of contracts and options for speculative
purposes, but rather to maintain sufficient liquidity to meet redemption
requests; to increase the level of Fund assets devoted to replicating the
composition of the EAFE Index; and to reduce transaction costs. These types
of contracts and options and certain associated risks are described under
"Special Investment Methods -- Options Transactions." In addition, the Fund
may enter into repurchase agreements and engage in securities lending as
described under "Special Investment Methods -- Repurchase Agreements" and
"Special Investment Methods -- Lending of Portfolio Securities."
For temporary defensive purposes, the Fund may, without limitation, hold
cash or invest in cash items of the kinds described under "Special
Investment Methods -- Cash Items." The Fund also may invest not more than
35% of its total assets in cash and cash items in order to utilize assets
awaiting normal investment.
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INTERNATIONAL FUND
OBJECTIVE. International Fund has an objective of long-term growth of
capital.
INVESTMENT POLICIES. Under normal market conditions, International Fund
invests at least 65% of its total assets in an internationally diversified
portfolio of equity securities which trade in markets other than the
United States. Generally these securities are issued by companies (i)
domiciled in countries other than the United States, or (ii) that derive
at least 50% of either their revenues or their pre-tax income from
activities outside of the United States. The securities in which the Fund
invests include common and preferred stock, securities (bonds and
preferred stock) convertible into common stock, warrants and securities
representing underlying international securities such as American
Depositary Receipts and European Depositary Receipts. The Fund also may
hold securities of other investment companies (which investments are also
subject to the advisory fee) and depositary or custodial receipts
representing beneficial interests in any of the foregoing securities.
The Fund may invest in securities of issuers in, but not limited to,
Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China,
Colombia, the Czech Republic, Denmark, Finland, France, Germany, Greece,
Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan,
Korea, Luxembourg, Malaysia, Mexico, the Netherlands, New Zealand, Norway,
Pakistan, Peru, the
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Philippines, Poland, Portugal, Singapore, South Africa, Spain, Sri Lanka,
Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Kingdom, and
Venezuela. Normally, the Fund will invest at least 65% of its total assets
in securities traded in at least three foreign countries, including the
countries listed above. It is possible, although not currently
anticipated, that up to 35% of the Fund's assets could be invested in
United States companies.
In investing the Fund's assets, the Sub-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. Investments are
expected to be made primarily in developed markets and larger
capitalization companies. However, the Fund also may invest in emerging
markets where smaller capitalization companies are the norm.
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 50% of the equity securities owned by the Fund and write call options
on stock indices related to such equity securities; (iv) purchase securities
on a when-issued or delayed delivery basis; (v) engage in the lending of
portfolio securities; (vi) engage in foreign currency transactions; (vii) in
order to attempt to reduce risk, purchase put and call options on foreign
currencies; (viii) write covered call options on foreign currencies owned by
the Fund; and (ix) enter into contracts for the future purchase or delivery
of securities, foreign currencies, and indices, purchase or sell options on
any such futures contracts and engage in related closing transactions. For
information about these investment methods, restrictions on their use, and
certain associated risks, see the related headings under "Special Investment
Methods."
Under normal market conditions, it is expected that the Fund will be fully
invested in equity securities and related hedging instruments (except for
short-term investments of cash for liquidity purposes and pending
investment). However, for temporary defensive purposes, the Fund may,
without limitation, hold cash or invest in cash items of the kinds
described under "Special Investment Methods -- Cash Items." The Fund also
may invest not more than 35% of its total assets in cash and cash items in
order to utilize assets awaiting normal investment.
International Fund is subject to special risks associated with investing
in foreign securities and to declines in net asset value resulting from
changes in exchange rates between the United States dollar and foreign
currencies. These risks are discussed under "Special Investment Methods --
Foreign Securities" and "-- Foreign Currency Transactions" elsewhere
herein. Because of the special risks associated with foreign investing and
the Sub-Advisor's ability to invest substantial portions of the Fund's
assets in a small number of countries, the Fund may be subject to greater
volatility than most mutual funds which invest principally in domestic
securities.
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HEALTH SCIENCES FUND
OBJECTIVE. Health Sciences Fund has an objective of long-term growth of
capital.
INVESTMENT POLICIES. Under normal market conditions, Health Sciences Fund
invests at least 65% of its total assets in equity securities of companies
which the Advisor considers to be principally engaged in the development,
production or distribution of products or services connected with health
care or medicine. Examples of these products and services include
pharmaceuticals, health care services and administration, diagnostics,
medical equipment and supplies, medical technology, and medical research
and development. The Advisor anticipates investing in companies that have
the potential for above average growth in revenue and earnings as a result
of new or unique products, processes or services, increasing demand for a
company's products or services, established market leadership, or
exceptional management. A company will be
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<PAGE>
deemed "principally engaged" in the health sciences industries if at the
time of investment the Advisor determines that at least 50% of its assets,
revenues or profits are derived from those industries.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods --
Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed
on a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
associated risks, see "Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund and write call
options on stock indices related to such equity securities; (iv) purchase
securities on a when-issued or delayed delivery basis; and (v) engage in
the lending of portfolio securities. For information about these
investment methods, restrictions on their use, and certain associated
risks, see the related headings under "Special Investment Methods."
For temporary defensive purposes, the Fund may, without limitation, hold
cash or invest in cash items of the kinds described under "Special
Investment Methods -- Cash Items." The Fund also may invest not more than
35% of its total assets in cash and cash items in order to utilize assets
awaiting normal investment.
Health Sciences Fund operates as a non-diversified investment company, as
defined in the 1940 Act, but intends to conduct its operations so as to
qualify as a regulated investment company for purposes of the Internal
Revenue Code of 1986, as amended. Since a relatively high percentage of
the assets of the Fund may be invested in the securities of a limited
number of issuers which will be in the same or related economic sectors,
the Fund's portfolio securities may be more susceptible to any single
economic, technological or regulatory occurrence than the portfolio
securities of diversified investment companies. Many products and services
in the health sciences industries may become rapidly obsolete due to
technological and scientific advances. In addition, the health sciences
industries generally are subject to greater governmental regulation than
many other industries, so that changes in governmental policies may have a
material effect on the demand for products and services in these
industries. Regulatory approvals generally are required before new drugs,
medical devices or medical procedures can be introduced and before health
care providers can acquire additional facilities or equipment.
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TECHNOLOGY FUND
OBJECTIVE. Technology Fund has an objective of long-term growth of
capital.
INVESTMENT POLICIES. Under normal market conditions, Technology Fund
invests at least 65% of its total assets in equity securities of companies
which the Advisor believes have, or will develop, products, processes or
services that will provide or will benefit significantly from
technological advances and improvements. The description of the technology
sector is interpreted broadly by the Advisor and may include such products
or services as inexpensive computing power, such as personal computers;
improved methods of communications, such as satellite transmission; or
labor saving machines or instruments, such as computer-aided design
equipment. The prime emphasis of the Fund is to identify those companies
positioned, in the Advisor's opinion, to benefit from technological
advances in areas such as semiconductors, minicomputers and peripheral
equipment, scientific instruments, computer software, communications, and
future automation trends in both office and factory settings.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds
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<PAGE>
described under "Special Investment Methods -- Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed
on a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
associated risks, see "Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund and write call
options on stock indices related to such equity securities; (iv) purchase
securities on a when-issued or delayed delivery basis; and (v) engage in
the lending of portfolio securities. For information about these
investment methods, restrictions on their use, and certain associated
risks, see the related headings under "Special Investment Methods."
For temporary defensive purposes, the Fund may without limitation hold
cash or invest in cash items of the kinds described under "Special
Investment Methods -- Cash Items." The Fund also may invest not more than
35% of its total assets in cash and cash items in order to utilize assets
awaiting normal investment.
Technology Fund operates as a non-diversified investment company, as defined
in the 1940 Act, but intends to conduct its operations so as to qualify as a
regulated investment company for purposes of the Internal Revenue Code of
1986, as amended. Since a relatively high percentage of the assets of the
Fund may be invested in the securities of a limited number of issuers which
will be in the same or related economic sectors, the Fund's portfolio
securities may be more susceptible to any single economic, technological or
regulatory occurrence than the portfolio securities of diversified
investment companies. In addition, competitive pressures may have a
significant effect on the financial condition of companies in the technology
industry. For example, if technology continues to advance at an accelerated
rate, and the number of companies and product offerings continue to expand,
these companies could become increasingly sensitive to short product cycles
and aggressive pricing.
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RISKS TO CONSIDER
An investment in any of the Funds involves certain risks in addition to
those noted above with respect to particular Funds. These include the
following:
EQUITY SECURITIES GENERALLY. Market prices of equity securities generally,
and of particular companies' equity securities, frequently are subject to
greater volatility than prices of fixed income securities. Market prices
of equity securities as a group have dropped dramatically in a short
period of time on several occasions in the past, and they may do so again
in the future. Each of the Funds is subject to the risk of generally
adverse equity markets.
SMALL-CAPITALIZATION COMPANIES. Regional Equity Fund, Small Cap Growth
Fund, Small Cap Value Fund and Micro Cap Value Fund emphasize investments
in companies with small or very small market capitalizations, and the
remaining Funds (excluding Equity Index Fund and International Index Fund)
are permitted to invest in equity securities of such companies. The equity
securities of such companies frequently have experienced greater price
volatility in the past than those of larger-capitalization companies, and
they may be expected to do so in the future. To the extent that the Funds
invest in small or very small capitalization companies, they are subject
to this risk of greater volatility.
ACTIVE MANAGEMENT. All of the Funds other than Equity Index Fund and
International Index Fund are actively managed to a greater or lesser
degree by the Advisor or, in the case of International Fund, the
Sub-Advisor. The performance of these Funds therefore will reflect in part
the ability of the Advisor or Sub-Advisor to select securities which are
suited to achieving
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<PAGE>
the Funds' investment objectives. Due to their active management, these
Funds could underperform other mutual funds with similar investment
objectives or the market generally.
FOREIGN SECURITIES. International Index Fund and International Fund are
subject to special risks associated with investing in foreign securities
and to declines in net asset value resulting from changes in exchange
rates between the United States dollar and foreign securities. These risks
are discussed under "Special Investment Methods -- Foreign Securities"
elsewhere herein. Because of the special risks associated with foreign
investing, the Funds may be subject to greater volatility than most mutual
funds which invest principally in domestic securities.
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 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. 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, 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 International Fund has agreed to pay the
Advisor monthly fees calculated on an annual basis equal to 0.70% of its
average daily net assets. International 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.
While the advisory fee payable to the Advisor with respect to
International Fund is higher than the advisory fee paid by most mutual
funds, the
36
<PAGE>
Advisor believes it is comparable to that paid by many funds having
similar investment objectives and policies.
The Glass-Steagall Act generally prohibits banks from engaging in the
business of underwriting, selling or distributing securities and from
being affiliated with companies principally engaged in those activities.
In addition, administrative and judicial interpretations of the
Glass-Steagall Act prohibit bank holding companies and their bank and
nonbank subsidiaries from organizing, 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 a
Participating Institution as described herein. In the event of changes in
federal or state statutes or regulations or judicial and administrative
interpretations or decisions pertaining to permissible activities of bank
holding companies and their bank and nonbank subsidiaries, the 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 INTERNATIONAL FUND
Marvin & Palmer Associates, Inc., 1201 North Market Street, Suite 2300,
Wilmington, Delaware 19801, is Sub-Advisor to International Fund under an
agreement with the Advisor (the "Sub-Advisory Agreement"). The Sub-Advisor
is responsible for the investment and reinvestment of International Fund's
assets and the placement of brokerage transactions in connection
therewith. For its services under the Sub-Advisory Agreement, the
Sub-Advisor is paid a monthly fee by the Advisor calculated on an annual
basis equal to 0.75% of the first $100 million of International Fund's
average daily net assets, 0.50% of International Fund's average daily net
assets in excess of $100 million up to $300 million, 0.45% of the
International Fund's average daily net assets in excess of $300 million up
to $500 million and 0.40% of International Fund's average daily net assets
in excess of $500 million.
The Sub-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 25 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
Balanced Fund is managed by a committee comprised of Mr. Twele, Mr. Doak,
Mr. Murphy, Mr. Rovner, Mr. Dubiak, Mr. Whitcomb, Mr. Dow, Mr. Mellum, Ms.
Rehkamp, Mr. Green, Mr. Shields and Mr. Steele, whose backgrounds are set
forth below.
Equity Income Fund and Large Cap Growth Fund are managed by a committee
comprised of Mr. Doak, Mr. Murphy, Ms. Johnson, Mr. Bren, Mr. Dow, Ms.
Shrewsbury, Mr. Markusen, Mr. Glenn Johnson, Mr. Jeff Johnson, Mr.
Kelliher and Mr. Zarling, whose backgrounds are set forth below.
Large Cap Value Fund is managed by a committee comprised of Mr. Doak, Mr.
Murphy, Mr. Rovner, Mr. Dubiak, Mr. Whitcomb, Mr. Twele, Mr. Dow, Mr.
Mellum and Mr. Shields, whose backgrounds are set forth below.
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<PAGE>
Mid Cap Value Fund is managed by a committee comprised of Mr. Rovner, Mr.
Shields and Mr. Lundquist, whose backgrounds are set forth below.
Small Cap Growth Fund is managed by a committee comprised of Ms.
Shrewsbury, Mr. Benson, Ms. Halbe, Ms. Hoyme, Mr. McSweeney and Ms.
Thompson, whose background are set forth below.
Regional Equity Fund, Small Cap Value Fund and Micro Cap Value Fund are
managed by a committee comprised of Mr. Dubiak, Mr. Rose, Mr. Buss, Mr.
Hipple, Mr. Sabbann, Mr. Grangaard and Mr. Magdlen, whose backgrounds are
set forth below.
Health Sciences Fund is managed by a committee comprised of Mr. Bren, Mr.
Kelliher and Ms. Halbe, whose backgrounds are set forth below.
The remaining Funds are managed or co-managed as indicated below.
JAMES DOAK is a member of the committees which manage four of the Funds,
as set forth above. Mr. Doak joined the Advisor in 1982 after serving for
two years as vice president of INA Capital Advisors and ten years as Vice
President of Loomis-Sayles & Co. He has managed assets for individual and
institutional clients, specializing in equity investments. Mr. Doak
received his bachelor's degree from Brown University and his master's
degree in business administration from the Wharton School of Business. He
is a Chartered Financial Analyst.
JOHN M. MURPHY, JR. is a member of the committees which manage four of the
Funds, as set forth above. Mr. Murphy is Chief Investment Officer of the
Advisor's First American Asset Management group, having joined the Advisor
in 1984. He has more than 30 years in the investment management field and
served with Investment Advisers, Inc. and Blyth, Eastman, Dillon & Co.
before joining the Advisor. Mr. Murphy received his bachelor's degree from
Regis College.
JAMES S. ROVNER is a member of the committees which manage three of the
Funds (as set forth above) and is portfolio co-manager for Equity Index Fund
and International Index Fund. Mr. Rovner joined the Advisor in 1986 and has
managed assets for institutional and individual clients for over 15 years,
specializing in equity and balanced investment strategies. Mr. Rovner
received his bachelor's degree and his master's degree in business
administration from the University of Wisconsin. He is a Chartered Financial
Analyst.
GERALD C. BREN is a member of the committees which manage three of the
Funds, as set forth above. Mr. Bren joined the Advisor in 1972 as an
investment analyst. Mr. Bren received his master's degree in business
administration from the University of Chicago. He is a Chartered Financial
Analyst.
ALBIN S. DUBIAK is a member of the committees which manage five of the
Funds, as set forth above. Mr. Dubiak began his investment career as a
security trader with The First National Bank of Chicago in 1963 before
joining the Advisor as an investment analyst in 1969. Mr. Dubiak received
his bachelor's degree from Indiana University and his master's degree in
business administration from the University of Arizona.
CORI B. JOHNSON is a member of the committee which manages two of the
Funds, as set forth above, and she is portfolio co-manager for Real Estate
Securities Fund. She joined the Advisor in 1991 as a securities analyst.
Ms. Johnson received her bachelor's degree from Concordia College and her
master's degree in business administration from the University of
Minnesota. She is a Chartered Financial Analyst.
ROLAND P. WHITCOMB, JR. is a member of the committees which manage two of
the Funds (as set forth above) and is portfolio manager for Technology Fund.
Mr. Whitcomb joined the Advisor in 1986 after serving as an account
executive with Smith Barney & Co. since 1979. Mr. Whitcomb received his
bachelor's degree from the University of Chicago. He is a Chartered
Financial Analyst.
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<PAGE>
KEVIN SHIELDS is a member of the committees which manage three of the
Funds, as set forth above. Mr. Shields joined the Advisor in 1993 and has
five years of investment industry experience. Mr. Shields has analytic
responsibilities for the banking, financial services and insurance
industries. Mr. Shields received his bachelor's degree from Marquette
University and his master's degree from the Applied Security and Analysis
program at the University of Wisconsin.
JOHN A. TWELE is a member of the committees which manage two of the Funds,
as set forth above. Prior to joining the Advisor in 1996, he was employed
in various positions at American Express Financial Advisors, Investment
Advisers, Inc., Kemper Financial, and Mercantile Trust. Mr. Twele received
his bachelor's degree from Indiana University.
DOUGLAS K. ROSE is a member of the committee which manages three of the
Funds, as set forth above. Mr. Rose joined the Advisor in 1996 and has 10
years of investment industry experience. Mr. Rose has analytic
responsibilities for the business services, environmental services,
leisure and restaurant/lodging industries. Mr. Rose holds a bachelor's
degree from the University of Nebraska, and a master's degree in business
administration from the University of Minnesota. He is a Chartered
Financial Analyst.
ROBERT L. BUSS is a member of the committee which manages three of the
Funds, as set forth above. Mr. Buss joined the Advisor in 1989 and has nine
years of investment industry experience. In 1996, Mr. Buss began analytical
work in the equity research area covering electric equipment, machinery and
diversified manufacturing. Mr. Buss holds a bachelor's degree in economics
from the University of Minnesota.
ANTHONY W. HIPPLE is a member of the committee which manages three of the
Funds, as set forth above. Mr. Hipple is primarily responsible for
portfolio analytics and screening. Mr Hipple joined the Advisor in 1996
and has 4 years of investment industry experience. Mr. Hipple holds a
bachelor's degree from the University of Northern Iowa and a master's
degree in business administration from the University of Iowa.
EVAN C. LUNDQUIST is a member of the committee which manages Mid Cap Value
Fund, and is a portfolio co-manager of Equity Index Fund and International
Index Fund. Mr. Lundquist joined the Advisor in 1993 and has four years of
investment industry experience. Mr. Lundquist has analytic
responsibilities for paper/forest products, metals and mining, steel,
engineering and construction, and building and appliances industries. Mr.
Lundquist received his bachelor's degree from St. Mary's College.
FRANK G. MAGDLEN is a member of the committee which manages three of the
Funds, as set forth above. He joined the Advisor in 1979 and has 24 years
of investment industry experience. Prior to joining the Advisor, he was
with First Interstate and Farmers Group. Mr. Magdlen received his
bachelor's degree from the University of Portland and his master's degree
in business administration from the University of Southern California. He
is a Chartered Financial Analyst and past president of the Portland
Society of Financial Analysts.
GLENN E. JOHNSON is a member of the committee which manages two of the
Funds, as set forth above. He joined the Advisor in 1989 and has 13 years
of investment industry experience. Prior to joining the Advisor, he was an
analyst with Piper Jaffray Inc. Mr. Johnson received his bachelor's degree
and his master's degree in business administration from the University of
Minnesota. He is a Chartered Financial Analyst.
DAVID JOHNSON is a co-manager of Real Estate Securities Fund. He joined
the Advisor in 1997 and has four years of investment industry experience.
He has analytic responsibilities for REITS, business services, printing
and publishing, and advertising. Prior to joining the Advisor, he was with
the State of Wisconsin Investment Board. Mr. Johnson received his
bachelor's degree from St. Lawrence University and his master's degree in
business administration from the University of Connecticut.
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<PAGE>
SANDRA SHREWSBURY is a member of the committee which manages Small 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 Small 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 committees which manage two of the Funds, as
set forth above. Ms. Halbe has over 13 years of investment industry
experience. From 1996 to 1998, Ms. Halbe 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. 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 Small Cap Growth Fund.
Ms. Hoyme has over 15 years of investment industry experience. From 1996 to
1998, Ms. Hoyme 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. 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 Small Cap
Growth Fund. Mr. McSweeney has over 11 years of investment industry
experience. From 1997 to 1998, Mr. McSweeney served as assistant vice
president and portfolio co-manager for Piper Capital Management Incorporated
overseeing the management of the Piper Funds Emerging Growth Fund and Small
Company Growth Fund. Prior to 1997, Mr. McSweeney served as a technology
analyst for Gintel Asset Management. Mr. McSweeney received his bachelor's
degree in economics from Clark University and master's degree in business
administration from Northeastern University.
JILL THOMPSON is a member of the committee which manages Small 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.
MARK M. GREEN is a member of the committee which manages Balanced 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
40
<PAGE>
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.
DAVID STEELE is a member of the committee which manages Balanced Fund. Mr.
Steele has over 18 years of investment industry experience. Prior to
joining the Advisor in 1998, Mr. Steele served as a senior vice president
and portfolio co-manager for Piper Capital Management Incorporated. Mr.
Steele received his bachelor's degree in business administration from the
University of Washington and a master's degree in business administration
from the University of Southern California.
PAUL A. DOW is a member of the committees which manage four of the Funds, as
set forth above, and is Senior Managing Director of the Advisor. He joined
the Advisor in 1998 and has 24 years of investment industry experience.
Prior to joining the Advisor, Mr. Dow served as Chief Executive Officer and
Chief Investment Officer of Piper Capital Management Incorporated. Mr. Dow
received his bachelor's degree in marketing from Southwest Missouri State
University. He is a Chartered Financial Analyst.
JOHN D. GRANGAARD is a member of the committee which manages three of the
Funds, as set forth above. Mr. Grangaard joined the Advisor in 1998 and has
over 18 years of investment industry experience. Prior to joining the
Advisor, Mr. Grangaard served as a vice president and senior analyst with
G.S.2 Securities. Mr. Grangaard received his bachelor's degree from Yale
University, his master's degree in finance from the University of Minnesota,
and his law degree from the University of North Dakota.
STEVEN B. MARKUSEN is a member of the committee which manages two of the
Funds, as set forth above. Mr. Markusen joined the Advisor in 1998 and has
over 14 years of investment industry experience. Prior to joining the
Advisor, Mr. Markusen served as a senior vice president of Piper Capital
Management Incorporated. Mr. Markusen received his bachelor's degree from
Colorado State University and his master's degree in finance from the
University of Denver. He is a Chartered Financial Analyst.
MARK P. KELLIHER is a member of the committee which manages three of the
Funds, as set forth above. Mr. Kelliher joined the Advisor in 1997 and has
over 7 years of investment industry experience. Prior to joining the
Advisor, Mr. Kelliher served as a senior healthcare analyst for Principal
Financial Securities. Mr. Kelliher received his bachelor's degree from the
University of Minnesota and his master's degree from the University of St.
Thomas.
LUCILLE C. REHKAMP is a member of the committee which manages Balanced
Fund. Ms. Rehkamp joined the Advisor in 1979 and has 21 years of
investment industry experience. Ms. Rehkamp received her bachelor's degree
from Marquette University.
BRENT MELLUM is a member of the committees which manage two of the Funds,
as set forth above. Mr. Mellum joined the Advisor in 1998 and has over 4
years of investment industry experience. Prior to joining the Advisor, Mr.
Mellum served as an analyst for Piper Capital Management Incorporated. Mr.
Mellum received his bachelor's degree in finance from the University of
Texas -- Dallas. He is a Chartered Financial Analyst.
MICHAEL K. SABBANN is a member of the committee which manages three of the
Funds, as set forth above. Mr. Sabbann joined the Advisor in 1998 and has
over 12 years of investment industry experience. Prior to joining the
Advisor, Mr. Sabbann served as an analyst with Piper Jaffray Companies.
Mr. Sabbann received his bachelor's degree from the University of
Minnesota -- Duluth and his master's degree in finance from the University
of Minnesota. He is a Chartered Financial Analyst.
DANIEL W. ZARLING is a member of the committee which manages two of the
Funds, as set forth above. Mr. Zarling joined the Advisor in 1996
41
<PAGE>
and has over 6 years of investment industry experience. Prior to joining the
Advisor, Mr. Zarling served as an analyst for American Express Financial
Advisors. Mr. Zarling received his bachelor's degree from the University of
Minnesota and his master's degree in finance from the University of Chicago.
He is a Chartered Financial Analyst.
A committee comprised of the following seven individuals shares the
management of International 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 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 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 equal to 0.03% of the applicable Fund's average daily net assets (0.10%
of average daily net assets in the case of
42
<PAGE>
International Index Fund and International Fund). In addition, the Custodian
is reimbursed for its out-of-pocket expenses incurred while providing its
services to the Funds.
Rules adopted under the 1940 Act permit International Index Fund and
International Fund to maintain their securities and cash in the custody of
certain eligible foreign banks and depositories. International Index
Fund's and International Fund's portfolio of non-United States securities
are held by sub-custodians which are approved by the directors of FAIF or
a foreign custody manager appointed by the directors in accordance with
these rules. This determination is made pursuant to these rules following
a consideration of a number of factors including, but not limited to, the
reliability and financial stability of the institution; the ability of the
institution to perform custodian services for International Index Fund and
International Fund; the reputation of the institution in its national
market; the political and economic stability of the country in which the
institution is located; and the risks of potential nationalization or
expropriation of International Index Fund's or International Fund's
assets.
Sub-custodian fees with respect to International Index Fund and
International Fund are paid by the Custodian out of the Custodian's fees.
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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.
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 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.
43
<PAGE>
FAIF has adopted a Plan of Distribution for the Class A Shares pursuant to
Rule 12b-1 under the 1940 Act (the "Class A Distribution Plan") pursuant to
which the Distributor agrees to provide, or enter into written agreements
with service providers to provide, one or more specified shareholder
services to beneficial owners of shares of the Funds. The Class A
Distribution Plan authorizes the Distributor to retain the sales charge paid
upon purchase of Class A Shares, except that portion which is reallowed to
Participating Institutions. See "Investing in the Funds -- Alternative Sales
Charge Options." In consideration of the services and facilities to be
provided by the Distributor or any service provider, each Fund also pays the
Distributor a shareholder servicing fee at an annual rate of 0.25% of the
Fund's Class A Shares' average daily net asset value, computed and paid
monthly. The shareholder servicing fee is intended to compensate the
Distributor for ongoing servicing and/or maintenance of shareholder accounts
and may be used by the Distributor to provide compensation to institutions
through which shareholders hold their shares for ongoing servicing and/or
maintenance of shareholder accounts. 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 servicing provided by "one-stop" mutual fund networks through
which the Funds are made available. In addition, the Distributor and the
Advisor and its affiliates may provide compensation for services provided by
such networks from their own resources. From time to time, the Distributor
may voluntarily waive its fees with respect to the Class A Shares of any of
the Funds. Any such waivers may be made at the Distributor's discretion and
may be terminated at any time.
Under another distribution plan (the "Class B Distribution Plan") adopted
in accordance with Rule 12b-1 under the 1940 Act, the Funds may pay to the
Distributor a sales support fee at an annual rate of up to 0.75% of the
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
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SHARE PURCHASES
Shares of the Funds are sold at their net asset value, next determined after
an order is received, plus any applicable sales charge, on days on which
44
<PAGE>
both the New York Stock Exchange and federally-chartered banks are open for
business. Shares may be purchased as described below. The Funds reserve the
right to reject any purchase order.
THROUGH A FINANCIAL INSTITUTION. Shares may be purchased through a
financial institution which has a sales agreement with the Distributor. An
investor may call his or her financial institution to place an order.
Purchase orders must be received by the financial institution by the time
specified by the institution to be assured same day processing, and
purchase orders must be transmitted to and received by the Funds by 3:00
p.m. Central time in order for shares to be purchased at that day's price
unless the financial institution has been authorized to accept purchase
orders on behalf of the Funds. It is the financial institution's
responsibility to transmit orders promptly.
Certain financial institutions assist their clients in the purchase or
redemption of shares and charge a fee for this service. In addition,
certain financial institutions are authorized to act as the Funds' agent
for the purpose of accepting purchase orders, and the Funds will be deemed
to have received a purchase order upon receipt of the order by the
financial institution.
BY MAIL. An investor may place an order to purchase shares of the Funds
directly through the Transfer Agent. Orders by mail will be executed upon
receipt of payment by the Transfer Agent. If an investor's check does not
clear, the purchase will be cancelled and the investor could be liable for
any losses or fees incurred. Third-party checks, credit cards, credit card
checks and cash will not be accepted. When purchases are made by check, the
proceeds of redemptions of the shares purchased are not available until the
Transfer Agent is reasonably certain that the purchase payment has cleared,
which could take up to ten calendar days from the purchase date. In order to
purchase shares by mail, an investor must:
* complete and sign the new account form;
* enclose a check made payable to (Fund name); and
* mail both to DST Systems, Inc., P.O. Box 419382, Kansas City, Missouri
64141-6382.
After an account is established, an investor can purchase shares by mail by
enclosing a check and mailing it to DST Systems, Inc. at the above address.
BY WIRE. To purchase shares of a Fund by wire, call (800) 637-2548 before
3:00 p.m. Central time. All information needed will be taken over the
telephone, and the order will be considered placed when the Custodian
receives payment by wire. If the Custodian does not receive the wire by 3:00
p.m. Central time, the order will be executed the next business day. Federal
funds should be wired as follows: U.S. Bank National Association,
Minneapolis, Minnesota, ABA Number 091000022; For Credit To: DST Systems,
Inc.: Account Number #160234580266; For Further Credit To: (Investor Name
and Fund Name). Shares cannot be purchased by Federal Reserve wire on days
on which the New York Stock Exchange is closed or federally-chartered banks
are closed.
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MINIMUM INVESTMENT REQUIRED
The minimum initial investment for each Fund is $1,000 unless the
investment is in a retirement plan, in which case the minimum investment
is $250. The minimum subsequent investment is $100. The Funds reserve the
right to waive the minimum investment requirement for employees of the
Advisor and its affiliates.
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ALTERNATIVE SALES CHARGE OPTIONS
THE TWO ALTERNATIVES: OVERVIEW. An investor may purchase shares of a Fund at
a price equal to its net asset value per share plus a sales charge which, at
the investor's election, may be imposed either (i) at the time of the
purchase (the Class A "initial sales charge alternative"), or (ii) 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
45
<PAGE>
rights and are identical in all respects except that (i) Class B Shares bear
the expenses of the contingent deferred sales charge arrangement and
distribution and service fees resulting from such sales arrangement, while
Class A Shares bear only shareholder servicing fees; (ii) each class has
exclusive voting rights with respect to approvals of any Rule 12b-1
distribution plan related to that specific class (although Class B
shareholders may vote on any distribution fees imposed on Class A Shares as
long as Class B Shares convert into Class A Shares); (iii) only Class B
Shares carry a conversion feature; and (iv) each class has different
exchange privileges. Sales personnel of financial institutions distributing
the Funds' shares, and other persons entitled to receive compensation for
selling shares, may receive differing compensation for selling Class A and
Class B Shares.
These alternative purchase arrangements permit an investor to choose the
method of purchasing shares that is more beneficial to that investor. The
amount of a purchase, the length of time an investor expects to hold the
shares, and whether the investor wishes to receive dividends in cash or in
additional shares, will all be factors in determining which sales charge
option is best for a particular investor. An investor should consider
whether, over the time he or she expects to maintain the investment, the
accumulated sales charges on Class B Shares prior to conversion would be
less than the initial sales charge on Class A Shares, and to what extent
the differential may be offset by the expected higher yield of Class A
Shares. Class A Shares will normally be more beneficial to an investor if
he or she qualifies for reduced sales charges as described below.
Accordingly, orders for Class B Shares for $250,000 or more ordinarily
will be treated as orders for Class A Shares or declined.
The Directors of FAIF have determined that no conflict of interest
currently exists between the Class A and Class B Shares. On an ongoing
basis, the Directors, pursuant to their fiduciary duties under the 1940
Act and state laws, will seek to ensure that no such conflict arises.
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CLASS A SHARES
WHAT CLASS A SHARES COST. Class A Shares of each Fund are offered on a
continuous basis at their next determined offering price, which is net asset
value, plus a sales charge as set forth below:
<TABLE>
<CAPTION>
EACH FUND:
MAXIMUM
AMOUNT OF
SALES CHARGE SALES CHARGE SALES CHARGE
AS PERCENTAGE AS PERCENTAGE REALLOWED TO
OF OFFERING OF NET ASSET PARTICIPATING
PRICE VALUE INSTITUTIONS
- ------------------------------------------------------------------------------------------
<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 $500,00 0 2.75% 2.83% 2.47%
$500,000 but less than $1,000,000 2.00% 2.04% 1.80%
$1,000,000 and over 0.00% 0.00% 0.00%
- ------------------------------------------------------------------------------------------
</TABLE>
There is no initial sales charge on purchases of Class A Shares of $1
million or more. However, Participating Institutions 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, except in the case of Equity Index
Fund. If such a commission is paid, redemptions of Class A Shares purchased
at net asset value within 12 months of such purchases will be subject to a
contingent deferred sales charge
46
<PAGE>
of 1.00% except in the case of Equity Index Fund. Class A Shares that are
redeemed will not be subject to this contingent deferred sales charge to the
extent that the value of the shares represents capital appreciation of Fund
assets or reinvestment of dividends or capital gain distributions.
Net asset value is determined as of the close of normal trading on the New
York Stock Exchange (3:00 p.m. Central time) Monday through Friday except
on (i) days on which there are not sufficient changes in the value of a
Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no shares are tendered for redemption and
no orders to purchase shares are received; and (iii) days on which the New
York Stock Exchange or federally-chartered banks are closed including, but
not limited to, the following federal holidays: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day. In addition, net asset
value will not be calculated on Good Friday.
DEALER CONCESSION. A dealer will normally receive up to 90% of the
applicable sales charge. Any portion of the sales charge which is not paid
to a dealer will be retained by the Distributor. In addition, the
Distributor may, from time to time in its sole discretion, institute one or
more promotional incentive programs which will be paid by the Distributor
from the sales charge it receives or from any other source available to it.
Under any such program, the Distributor will provide promotional incentives,
in the form of cash or other compensation including merchandise, airline
vouchers, trips and vacation packages, to all dealers selling shares of the
Funds. Promotional incentives of these kinds will be offered uniformly to
all dealers and predicated upon the amount of shares of the Funds sold by
the dealer. Whenever 90% or more of a sales charge is paid to a dealer, that
dealer may be deemed to be an underwriter as defined in the Securities Act
of 1933.
The sales charge for shares sold other than through registered
broker-dealers will be retained by the Distributor. The Distributor may
pay fees to financial institutions out of the sales charge in exchange for
sales and/or administrative services performed on behalf of the
institution's customers in connection with the initiation of customer
accounts and purchases of Fund shares.
REDUCING THE CLASS A SALES CHARGE. The sales charge can be reduced on the
purchase of Class A Shares through (i) quantity discounts and accumulated
purchases or (ii) signing a 13-month letter of intent:
* QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES: As shown in the table
above, larger 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
47
<PAGE>
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 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 section 401(a), 403(b) and 457 of the
Internal Revenue Code and "rabbi trusts"), which plans and trusts purchase
through "one-stop" mutual fund networks. 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,
except in the case of Equity Index Fund. 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
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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.
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CLASS B SHARES
CONTINGENT DEFERRED SALES CHARGE. Class B Shares are sold at net asset
value without any initial sales charge. If an investor redeems Class B
Shares within eight years of purchase, he or she will pay a contingent
deferred sales charge at the rates set forth below. This charge is
assessed on an amount equal to the lesser of the then-current market value
or the cost of the shares being redeemed. Accordingly, no sales charge is
imposed on increases in net asset value above the initial purchase price
or on shares derived from reinvestment of dividends or capital gain
distributions.
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
--------------------------------------------------------------
First 5.00%
Second 5.00%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh None
Eighth None
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In determining whether a particular redemption is subject to a contingent
deferred sales charge, it is assumed that the redemption is first of any
Class A Shares in the shareholder's Fund account; second, of any Class B
Shares 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 Code) of a shareholder and (ii) to the extent that the redemption
represents a minimum required distribution from an individual retirement
account or other retirement plan to a shareholder who has attained the age
of 70 1/2. A shareholder or his or her representative must notify the
Transfer Agent prior to the time of redemption if such circumstances exist
and the shareholder is eligible for this waiver.
CONVERSION FEATURE. At the end of the period ending eight years after the
beginning of the month 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.
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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
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shareholder may apply for participation in this program through his or her
financial institution or by calling (800) 637-2548.
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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.
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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 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 are declared and paid monthly with respect to Balanced Fund,
Equity Income Fund, Equity Index Fund, Large Cap Value Fund, Large Cap
Growth Fund and Mid Cap Value Fund, to all shareholders of record on the
record date. Dividends are declared and paid quarterly with respect to
Real Estate Securities Fund, Small Cap Growth Fund, Small Cap Value Fund,
Micro Cap Value Fund, International Index Fund, Health Sciences Fund, and
Technology Fund, and annually with respect to International Fund.
Distributions of any net realized long-term capital gains will be made at
least once every 12 months. A portion of the quarterly distributions paid
by Real Estate Securities Fund may be a return of capital. Dividends and
distributions are automatically reinvested in additional shares of the
Fund paying the dividend on payment dates at the ex-dividend date net
asset value without a sales charge, unless shareholders request cash
payments on the new account form or by writing to the Fund.
All shareholders on the record date are entitled to the dividend. If
shares are purchased before a record date for a dividend or a distribution
of capital gains, a shareholder will pay the full price for the shares and
will receive some portion of the purchase price back as a taxable dividend
or distribution (to the extent, if any, that the dividend or distribution
is otherwise taxable to holders of Fund shares). If shares are redeemed or
exchanged before the record date for a dividend or distribution or are
purchased after the record date, those shares are not entitled to the
dividend or distribution.
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.
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EXCHANGE PRIVILEGE
Shareholders may exchange Class A or Class B Shares of a Fund for currently
available Class A or
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Class B Shares, respectively, of the other FAIF Funds or of other funds in
the First American family of funds. Class A Shares of the Funds, whether
acquired by direct purchase, reinvestment of dividends on such shares, or
otherwise, may be exchanged for Class A Shares of other funds without the
payment of any sales charge (i.e., at net asset value). Exchanges of shares
among the First American family of funds must meet any applicable minimum
investment of the fund for which shares are being exchanged.
For purposes of calculating the Class B Shares' eight-year conversion
period or contingent deferred sales charges payable upon redemption, the
holding period of Class B Shares of the "old" fund and the holding period
of Class B Shares of the "new" fund are aggregated.
The ability to exchange shares of the Funds does not constitute an
offering or recommendation of shares of one fund by another fund. This
privilege is available to shareholders resident in any state in which the
fund shares being acquired may be sold. An investor who is considering
acquiring shares in another First American Fund pursuant to the exchange
privilege should obtain and carefully read a prospectus of the fund to be
acquired. Exchanges may be accomplished by a written request, or by
telephone if a preauthorized exchange authorization is on file with the
Transfer Agent, shareholder servicing agent, or financial institution.
Written exchange requests must be signed exactly as shown on the
authorization form, and the signatures may be required to be guaranteed as
for a redemption of shares by an entity described below under "Redeeming
Shares -- By Mail." None of the Funds, the Distributor, the Transfer
Agent, any shareholder servicing agent, nor any financial institution will
be responsible for further verification of the authenticity of the
exchange instructions.
Telephone exchange instructions made by an investor may be carried out
only if a telephone authorization form completed by the investor is on
file with the Transfer Agent, shareholder servicing agent, or financial
institution. Shares may be exchanged between two First American funds by
telephone only if both funds have identical shareholder registrations.
Telephone exchange instructions may be recorded and will be binding upon
the shareholder. Telephone instructions must be received by the Transfer
Agent before 3:00 p.m. Central time, or by a shareholder's shareholder
servicing agent or financial institution by the time specified by it, in
order for shares to be exchanged the same day. Neither the Transfer Agent
nor any Fund will be responsible for the authenticity of exchange
instructions received by telephone if it reasonably believes those
instructions to be genuine. The Funds and the Transfer Agent will each
employ reasonable procedures to confirm that telephone instructions are
genuine, and they may be liable for losses resulting from unauthorized or
fraudulent telephone instructions if they do not employ these procedures.
Shareholders of the Funds may have difficulty in making exchanges by
telephone through brokers 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 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 may be exchanged for shares of a class in which an
investor subsequently becomes eligible to participate. An example of such an
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<PAGE>
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 any
additional fees or charges.
REDEEMING SHARES
Each Fund redeems shares at their net asset value next determined after
the Transfer Agent receives the redemption request, reduced by any
applicable contingent deferred sales charge. Redemptions will be made on
days on which the Fund computes its net asset value. Redemption requests
can be made as described below and must be received in proper form.
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BY TELEPHONE
A shareholder may redeem shares of a Fund, if he or she elects the privilege
on the initial shareholder application, by calling his or her financial
institution to request the redemption. Shares will be redeemed at the net
asset value next determined after the Fund receives the redemption request
from the financial institution (less the amount of any applicable contingent
deferred sales charge). Redemption requests must be received by the
financial institution by the time specified by the institution in order for
shares to be redeemed at that day's net asset value, and redemption requests
must be transmitted to and received by the Funds by 3:00 p.m. Central time
in order for shares to be redeemed at that day's net asset value unless the
financial institution has been authorized to accept redemption requests on
behalf of the Funds. Pursuant to instructions received from the financial
institution, redemptions will be made by check or by wire transfer. It is
the financial institution's responsibility to transmit redemption requests
promptly.
Certain financial institutions are authorized to act as the Funds' agent
for the purpose of accepting redemption requests, and the Funds will be
deemed to have received a redemption request upon receipt of the request
by the financial institution.
Shareholders who did not purchase their shares of a Fund through a
financial institution may redeem their shares by telephoning (800)
637-2548. At the shareholder's request, redemption proceeds will be paid
by check mailed to the shareholder's address of record or wire transferred
to the shareholder's account at a domestic commercial bank that is a
member of the Federal Reserve System, normally within one business day,
but in no event more than seven days after the request. Wire instructions
must be previously established on the account or provided in writing. The
minimum amount for a wire transfer is $1,000. If at any time the Funds
determine it necessary to terminate or modify this method of redemption,
shareholders will be promptly notified.
In the event of drastic economic or market changes, a shareholder may
experience difficulty in redeeming shares by telephone. If this should
occur, another method of redemption should be considered. Neither the
Transfer Agent nor any Fund will be responsible for any loss, liability,
cost or expense for acting upon wire transfer instructions or telephone
instructions that it reasonably believes to be genuine. The Transfer Agent
and the Funds will each employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These procedures may
include taping of telephone conversations. To ensure authenticity of
redemption or exchange instructions received by telephone, the Transfer
Agent examines each shareholder request by verifying the account number
and/or tax identification number at the time such request is made. The
Transfer Agent subsequently sends confirmations of both exchange sales and
exchange purchases to the shareholder for verification. If reasonable
procedures are not employed, the Transfer Agent and the Funds may be liable
for any losses due to unauthorized or fraudulent telephone transactions.
52
<PAGE>
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BY MAIL
Any shareholder may redeem Fund shares by sending a written request to the
Transfer Agent, shareholder servicing agent, or financial institution. The
written request should include the shareholder's name, the Fund name, the
account number, and the share or dollar amount requested to be redeemed,
and should be signed exactly as the shares are registered. Shareholders
should call the Fund, shareholder servicing agent or financial institution
for assistance in redeeming by mail. A check for redemption proceeds
normally is mailed within one business day, but in no event more than
seven days, after receipt of a proper written redemption request.
Shareholders requesting a redemption of $5,000 or more, a redemption of
any amount to be sent to an address other than that on record with the
Fund, or a redemption payable other than to the shareholder of record,
must have signatures on written redemption requests guaranteed by:
* a trust company or commercial bank the deposits of which are insured by
the Bank Insurance Fund, which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
* a member firm of the New York, American, Boston, Midwest, or Pacific
Stock Exchanges or of the National Association of Securities Dealers;
* a savings bank or savings and loan association the deposits of which are
insured by the Savings Association Insurance Fund, which is administered
by the FDIC; or
* any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public.
The Funds and the Transfer Agent have adopted standards for accepting
signature guarantees from the above institutions. The Funds may elect in
the future to limit eligible signature guarantees to institutions that are
members of a signature guarantee program. The Funds and the Transfer Agent
reserve the right to amend these standards at any time without notice.
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BY SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders whose account value is at least $5,000 may elect to
participate in the Systematic Withdrawal Program. Under this program, Fund
shares are redeemed to provide for periodic withdrawal payments in an
amount directed by the shareholder. A shareholder may apply to 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.
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<PAGE>
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 or
authorized financial institution receives a purchase order or redemption
request.
It is the responsibility of Participating Institutions promptly to forward
purchase and redemption orders to the Transfer Agent. In the case of
redemptions and repurchases of shares owned by corporations, trusts or
estates, the Transfer Agent or Fund may require additional documents to
evidence appropriate authority in order to effect the redemption, and the
applicable price will be that next determined following the receipt of the
required documentation.
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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 60 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 60 days or less
may be valued at their amortized cost which approximates market value. If
a security price cannot be obtained from an independent pricing service a
bid price may be obtained from an independent broker who makes a market in
the security.
Foreign securities owned by the Funds are valued at the closing prices on
the principal exchange on which they trade.
If the value for a security cannot be obtained from the sources described
above, the security's value may be determined pursuant to the fair value
procedures established by the Board of Directors.
Financial futures are valued at the settlement price established each day by
the board of exchange on which they are traded. Portfolio securities
underlying actively traded options are valued at their market price as
determined above. The current market value of any exchange traded options
held or written by a Fund, are valued at the closing bid price for a long
position or the closing ask price for a short position.
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<PAGE>
Foreign currency forward contracts are valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
exchange rate, and the thirty, sixty, ninety and one-hundred eighty day
forward rates provided by the Reuters system.
Although the methodology and procedures for determining net asset value
are identical for all classes of shares, the net asset value per share of
different classes of shares of the same Fund may differ because of the
differing distribution, shareholder servicing, transfer agent and/or
dividend disbursing expenses charged to Class A and Class B Shares.
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FOREIGN SECURITIES
Any assets or liabilities of the Funds initially expressed in terms of
foreign currencies are translated into United States dollars using current
exchange rates. Trading in securities on foreign markets may be completed
before the close of business on each business day of the Funds. Thus, the
calculation of the Funds' net asset value may not take place
contemporaneously with the determination of the prices of foreign securities
held in the Funds' portfolios. In addition, trading in securities on foreign
markets may not take place on all days on which the New York Stock Exchange
is open for business or may take place on days on which the New York Stock
Exchange is not open for business. Therefore, the net asset value of a Fund
which holds foreign securities might be significantly affected on days when
an investor has no access to the Fund.
FEDERAL INCOME TAXES
Each Fund is treated as a different entity for federal income tax
purposes. Each of the Funds intends to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended. If so
qualified and provided certain distribution requirements are met, a Fund
will not be liable for federal income taxes to the extent it distributes
its income to its shareholders.
Distributions paid from the net investment income and from any net
realized short-term capital gains of a Fund, will be taxable to
shareholders as ordinary income, whether received in cash or in additional
shares. Dividends paid by the Funds attributable to investments in the
securities of foreign issuers will not be eligible for the 70% deduction
for dividends received by corporations.
Distributions paid from a Fund's net capital gains and designated as
capital gain dividends generally are taxable as long-term capital gains in
the hands of shareholders, regardless of the length of time during which
they have held their shares. In the case of shareholders who are
individuals, estates, or trusts, each Fund will designate the portion of
each capital gain dividend that must be treated as mid-term capital gain
and the portion that must be treated as long-term capital gain.
Gain or loss realized on the sale or exchange of shares in a Fund will be
treated as capital gain or loss, provided that (as is usually the case)
the shares represented a capital asset in the hands of the shareholder.
For shareholders who are individuals, estates or trusts the gain or loss
will be considered long-term if the shareholder has held the shares for
more than 18 months and mid-term if the shareholder has held the shares
for more than one year but not more than 18 months.
A Fund may be required to "back-up" withhold 31% of any dividend,
distribution, or redemption payment made to a shareholder who fails to
furnish the Fund with the shareholder's Social Security number or other
taxpayer identification number or to certify that he or she is not subject
to back-up withholding.
International Index Fund and International Fund may be required to pay
withholding and other taxes imposed by foreign countries, generally at rates
from 10% to 40%, which would reduce each Fund's investment income. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes.
If at the end of International Index Fund's and International Fund's taxable
year more than 50%
55
<PAGE>
of their respective total assets consist of securities of foreign
corporations, such Fund will be eligible to file an election with the
Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their respective pro rata portions of such foreign taxes
in gross income, treat such amounts as foreign taxes paid by them, and
deduct such amounts in computing their taxable income or, alternatively, use
them as foreign tax credits against their federal income taxes. If such an
election is filed for a year, International Index Fund and International
Fund shareholders will be notified of the amounts which they may deduct as
foreign taxes paid or used as foreign tax credits. International Fund filed
this election for each of its two most recent completed fiscal years ending
September 30, 1997 and 1996.
Alternatively, if the amount of foreign taxes paid by International Index
Fund or International Fund is not large enough in future years to warrant
making the election described above, each Fund may claim the amount of
foreign taxes paid as a deduction against its own gross income. In that
case, shareholders would not be required to include any amount of foreign
taxes paid by each Fund in their income and would not be permitted either
to deduct any portion of foreign taxes from their own income or to claim
any amount of foreign tax credit for taxes paid by the Funds.
This is a general summary of the federal tax laws applicable to the Funds
and their shareholders as of the date of this Prospectus. See the
Statement of Additional Information for further details.
FUND SHARES
Each share of a Fund is fully paid, nonassessable, and transferable.
Shares may be issued as either full or fractional shares. Fractional
shares have pro rata the same rights and privileges as full shares. Shares
of the Funds have no preemptive or conversion rights.
Each share of a Fund has one vote. On some issues, such as the election of
directors, all shares of all FAIF Funds vote together as one series. The
shares do not have cumulative voting rights. Consequently, the holders of
more than 50% of the shares voting for the election of directors are able
to elect all of the directors if they choose to do so. On issues affecting
only a particular Fund or class of shares, the shares of that Fund or
class will vote as a separate series. Examples of such issues would be
proposals to alter a fundamental investment restriction pertaining to a
Fund or to approve, disapprove or alter a distribution plan pertaining to
a class of shares.
Under the laws of the State of Maryland and FAIF's Articles of
Incorporation, FAIF is not required to hold shareholder meetings unless
they (i) are required by the 1940 Act, or (ii) are requested in writing by
the holders of 25% or more of the outstanding shares of FAIF.
CALCULATION OF PERFORMANCE DATA
From time to time, any of the Funds may advertise information regarding
its performance. Each Fund may publish its "yield," its "cumulative total
return," its "average annual total return" and its "distribution rate."
Distribution rates may only be used in connection with sales literature
and shareholder communications preceded or accompanied by a Prospectus.
Each of these performance figures is based upon historical results and is
not intended to indicate future performance, and, except for "distribution
rate," is standardized in accordance with 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.
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<PAGE>
"Total return" is based on the overall dollar or percentage change in value
of a hypothetical investment in a Fund assuming reinvestment of dividend
distributions and deduction of all charges and expenses, including, as
applicable, the maximum sales charge imposed on Class A Shares or the
contingent deferred sales charge imposed on Class B Shares redeemed at the
end of the specified period covered by the total return figure. "Cumulative
total return" reflects a Fund's performance over a stated period of time.
"Average annual total return" reflects the hypothetical annually compounded
rate that would have produced the same cumulative total return if
performance had been constant over the entire period. Because average annual
returns tend to smooth out variations in a Fund's performance, they are not
the same as actual year-by-year results. As a supplement to total return
computations, a Fund may also publish "total investment return" computations
which do not assume deduction of the maximum sales charge imposed on Class A
Shares or the contingent deferred sales charge imposed on Class B Shares.
"Distribution rate" is determined by dividing the income dividends per share
for a stated period by the maximum offering price per share on the last day
of the period. All distribution rates published for the Funds are measures
of the level of income dividends distributed during a specified period.
Thus, these rates differ from yield (which measures income actually earned
by a Fund) and total return (which measures actual income, plus realized and
unrealized gains or losses of a Fund's investments). Consequently,
distribution rates alone should not be considered complete measures of
performance.
The performance of the Class A and Class B Shares of a Fund will normally
be lower than for the Class Y Shares because Class Y Shares are not
subject to the sales charges and distribution, 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.
PERFORMANCE INFORMATION FOR SUCCESSORS TO COMMON TRUST FUNDS
From time to time, Small Cap Value Fund and Micro Cap Value Fund may
advertise performance information which includes performance data for
certain predecessor common trust funds.
On November 21, 1997, Small Cap Value Fund acquired the assets and assumed
all identified liabilities of the Qualivest Small Companies Value Fund.
The Qualivest Small Companies Value Fund commenced operations on August 1,
1994, when substantially all of the assets of a certain common trust fund
which was exempt from registration under the 1940 Act was transferred to
such fund.
Micro Cap Value Fund commenced operations on August 8, 1997, when
substantially all of the assets of a certain common trust fund which was
exempt from registration under the 1940 Act was transferred to the Fund.
This predecessor common trust fund was managed by Qualivest Capital
Management, Inc. prior to the acquisition of its parent company by the
Advisor's parent company.
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The personnel who managed this common trust fund on behalf of Qualivest
Capital Management, Inc. became employees of the Advisor, and assumed
management of the Fund, at the time the assets were transferred from the
common trust fund to the Fund.
Such performance data is deemed relevant because the respective common
trust funds were managed using investment objectives, policies and
restrictions very similar to those of their corresponding Funds. However,
the predecessor common trust funds were not subject to certain investment
restrictions that are imposed by the 1940 Act. Accordingly, if the common
trust funds had been registered under the 1940 Act, their performance
could have been adversely affected by virtue of such investment
restrictions. In addition, the predecessor common trust funds did not
incur the same expenses as the corresponding Funds.
SPECIAL INVESTMENT METHODS
This section provides additional information concerning the securities in
which the Funds may invest and related topics. Further information
concerning these matters is contained in the Statement of Additional
Information.
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CASH ITEMS
The "cash items" in which the Funds may invest, as described under
"Investment Objectives and Policies," include short-term obligations such
as rated commercial paper and variable amount master demand notes; United
States dollar-denominated time and savings deposits (including
certificates of deposit); bankers' acceptances; obligations of the United
States Government or its agencies or instrumentalities (including, in the
case of Balanced Fund, 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 issued by the
Securities and Exchange Commission with respect thereto.
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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
or, in the case of International Fund, the Sub-Advisor will monitor the
creditworthiness of the firms with which the Funds enter into repurchase
agreements.
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WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
Each of the Funds (excluding Equity Index Fund and International Index Fund)
may purchase securities on a when-issued or delayed delivery basis. When
such a transaction is negotiated, the purchase price is fixed at the time
the purchase commitment is entered, but delivery of and payment for the
securities take place at a later
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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.
In connection with its ability to purchase securities on a when-issued or
delayed delivery basis, Balanced Fund may, with respect to its fixed income
assets, enter into mortgage "dollar rolls" in which the Fund sells
securities and simultaneously contracts with the same counterparty to
repurchase similar (same type, coupon and maturity) but not identical
securities on a specified future date. In a mortgage dollar roll, the Fund
gives up the right to receive principal and interest paid on the securities
sold. However, the Fund would benefit to the extent of any difference
between the price received for the securities sold and the lower forward
price for the future purchase plus any fee income received. Unless such
benefits exceed the income, capital appreciation and gain or loss due to
mortgage prepayments that would have been realized on the securities sold as
part of the mortgage dollar roll, the use of this technique will diminish
the investment performance of the Fund compared with what such performance
would have been without the use of mortgage dollar rolls. Balanced Fund will
hold and maintain in a segregated account until the settlement date cash or
liquid securities in an amount equal to the forward purchase price.
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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. 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 International 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 (including fees to an affiliate of the
Advisor) in connection with these loans which, in the case of U.S. Bank,
are 40% of the Funds' income from such securities lending transactions.
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OPTIONS TRANSACTIONS
PURCHASES OF PUT AND CALL OPTIONS. The Funds may purchase put and call
options. These transactions will be undertaken only for the purpose of
reducing risk to the Funds; that is, for "hedging" purposes. Depending on
the Fund, these transactions may include the purchase of put and call
options on equity securities, on stock indices, on interest rate indices, or
(only in the case of International Fund) on foreign currencies. Options
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<PAGE>
on futures contracts are discussed below under "Futures and Options on
Futures."
A put option on a security gives the purchaser of the option the right
(but not the obligation) to sell, and the writer of the option the
obligation to buy, the underlying security at a stated price (the
"exercise price") at any time before the option expires. A call option on
a security gives the purchaser the right (but not the obligation) to buy,
and the writer the obligation to sell, the underlying security at the
exercise price at any time before the option expires. The purchase price
for a put or call option is the "premium" paid by the purchaser for the
right to sell or buy.
Options on indices are similar to options on securities except that,
rather than the right to take or make delivery of a specific security at a
stated price, an option on an index gives the holder the right to receive,
upon exercise of the option, a defined amount of cash if the closing value
of the index upon which the option is based is greater than, in the case
of a call, or less than, in the case of a put, the exercise price of the
option.
None of the Funds other than International Fund will invest more than 5% of
the value of its total assets in purchased options, provided that options
which are "in the money" at the time of purchase may be excluded from this
5% limitation. A call option is "in the money" if the exercise price is
lower than the current market price of the underlying security or index, and
a put option is "in the money" if the exercise price is higher than the
current market price. A Fund's loss exposure in purchasing an option is
limited to the sum of the premium paid and the commission or other
transaction expenses associated with acquiring the option.
The use of purchased put and call options involves certain risks. These
include the risk of an imperfect correlation between market prices of
securities held by a Fund and the prices of options, and the risk of
limited liquidity in the event that a Fund seeks to close out an options
position before expiration by entering into an offsetting transaction.
WRITING OF CALL OPTIONS. The Funds may write (sell) covered call options
to the extent specified with respect to particular Funds under "Investment
Objectives and Policies." These transactions would be undertaken
principally to produce additional income. Depending on the Fund, these
transactions may include the writing of covered call options on equity
securities or (only in the case of International Fund) on foreign
currencies which a Fund owns or has the right to acquire or on interest
rate indices.
When a Fund sells a covered call option, it is paid a premium by the
purchaser. If the market price of the security covered by the option does
not increase above the exercise price before the option expires, the
option generally will expire without being exercised, and the Fund will
retain both the premium paid for the option and the security. If the
market price of the security covered by the option does increase above the
exercise price before the option expires, however, the option is likely to
be exercised by the purchaser. In that case the Fund will be required to
sell the security at the exercise price, and it will not realize the
benefit of increases in the market price of the security above the
exercise price of the option.
The Funds also may, to the extent specified with respect to particular
Funds under "Investment Objectives and Policies," write call options on
stock indices the movements of which generally correlate with those of the
respective Funds' 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
Balanced Fund, Equity Index Fund, International Index Fund and International
Fund may engage in futures transactions and purchase options on futures to
the extent specified with under "Investment Objectives and Policies."
Depending on the Fund, these transactions may include the
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<PAGE>
purchase of stock index futures and options on stock index futures, and the
purchase of interest rate futures and options on interest rate futures. In
addition, International Fund may enter into contracts for the future
delivery of securities or foreign currencies and futures contracts based on
a specific security, class of securities, or foreign currency.
A futures contract on a security obligates one party to purchase, and the
other to sell, a specified security at a specified price on a date certain
in the future. A futures contract on an index obligates the seller to
deliver, and entitles the purchaser to receive, an amount of cash equal to
a specific dollar amount times the difference between the value of the
index at the expiration date of the contract and the index value specified
in the contract. The acquisition of put and call options on futures
contracts will, respectively, give a Fund the right (but not the
obligation), for a specified exercise price, to sell or to purchase the
underlying futures contract at any time during the option period.
A Fund may use futures contracts and options on futures in an effort to
hedge against market risks and, in the case of International Fund, as part
of its management of foreign currency transactions. In addition, Equity
Index Fund and International Index Fund may use stock index futures and
options on futures to maintain sufficient liquidity to meet redemption
requests, to increase the level of Fund assets devoted to replicating the
composition of the S&P 500 or EAFE Index, respectively, and to reduce
transaction costs.
Aggregate initial margin deposits for futures contracts, and premiums paid
for related options, may not exceed 5% of a Fund's total assets, and the
value of securities that are the subject of such futures and options (both
for receipt and delivery) may not exceed 1/3 of the market value of a
Fund's total assets. Futures transactions will be limited to the extent
necessary to maintain each Fund's qualification as a regulated investment
company under the Code.
Where a Fund is permitted to purchase options on futures, its potential
loss is limited to the amount of the premiums paid for the options. As
stated above, this amount may not exceed 5% of a Fund's total assets.
Where a Fund is permitted to enter into futures contracts obligating it to
purchase securities, currency or an index in the future at a specified
price, such Fund could lose 100% of its net assets in connection therewith
if it engaged extensively in such transactions and if the market value or
index value of the subject securities, currency or index at the delivery
or settlement date fell to zero for all contracts into which a Fund was
permitted to enter. Where a Fund is permitted to enter into futures
contracts obligating it to sell securities or currencies (as is the case
with respect only to International Fund), its potential losses are
unlimited if it does not own the securities or currencies covered by the
contracts and it is unable to close out the contracts prior to the
settlement date.
Futures transactions involve brokerage costs and require a Fund to
segregate assets to cover contracts that would require it to purchase
securities or currencies. A Fund may lose the expected benefit of futures
transactions if interest rates, exchange rates or securities prices move
in an unanticipated manner. Such unanticipated changes may also result in
poorer overall performance than if the Fund had not entered into any
futures transactions. In addition, the value of a Fund's futures positions
may not prove to be perfectly or even highly correlated with the value of
its portfolio securities or foreign currencies, limiting the Fund's
ability to hedge effectively against interest rate, exchange rate and/or
market risk and giving rise to additional risks. There is no assurance of
liquidity in the secondary market for purposes of closing out futures
positions.
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FIXED INCOME SECURITIES
The fixed income securities in which Real Estate Securities Fund, Equity
Income Fund, Large Cap Value Fund, Large Cap Growth Fund, Mid Cap Value
Fund, Regional Equity Fund, Small Cap Growth Fund, Small Cap Value Fund,
Micro Cap Value Fund, Health Sciences Fund and Technology
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<PAGE>
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.
In addition, Equity Income Fund may invest up to 25% of its total assets,
and each of the other Funds may invest up to 5% of its net assets, in less
than investment grade convertible debt obligations. For a description of
such obligations and the risks associated therewith, see "Investment
Objectives and Policies -- Equity Income Fund."
The fixed income securities specified above, as well as the fixed income
securities in which Balanced Fund may invest as described under "Investment
Objectives and Policies," are subject to (i) interest rate risk (the risk
that increases in market interest rates will cause declines in the value of
debt securities held by a Fund); (ii) credit risk (the risk that the issuers
of debt securities held by a Fund default in making required payments); and
(iii) call or prepayment risk (the risk that a borrower may exercise the
right to prepay a debt obligation before its stated maturity, requiring a
Fund to reinvest the prepayment at a lower interest rate).
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FOREIGN SECURITIES
GENERAL. Under normal market conditions International Index Fund and
International Fund invest at least 65% of their respective total assets in
equity securities which trade in markets other than the United States. In
addition, the other Funds (excluding Equity Index Fund and Regional Equity
Fund) may invest lesser proportions of their assets in securities of
foreign issuers which are either listed on a United States securities
exchange or represented by American Depositary Receipts.
Investment in foreign securities is subject to special investment risks
that differ in some respects from those related to investments in
securities of United States domestic issuers. These risks include
political, social or economic instability in the country of the issuer,
the difficulty of predicting international trade patterns, the possibility
of the imposition of exchange controls, expropriation, limits on removal
of currency or other assets, nationalization of assets, foreign
withholding and income taxation, and foreign trading practices (including
higher trading commissions, custodial charges and delayed settlements).
Foreign securities also may be subject to greater fluctuations in price
than securities issued by United States corporations. The principal
markets on which these securities trade may have less volume and
liquidity, and may be more volatile, than securities markets in the United
States.
In addition, there may be less publicly available information about a
foreign company than about a United States domiciled company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to United
States domestic companies. There is also generally less government
regulation of securities exchanges, brokers and listed companies abroad than
in the United States. Confiscatory taxation or diplomatic developments could
also affect investment in those countries. In addition, foreign branches of
United States banks, foreign banks and foreign issuers may be subject to
less stringent reserve requirements and to different accounting, auditing,
reporting, and recordkeeping standards than those applicable to domestic
branches of United States banks and United States domestic issuers.
JAPANESE SECURITIES. Japanese securities comprised 29.2% of the EAFE Index
as of
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September 30, 1997. As a result, securities of Japanese companies may
represent a significant component of International Index Fund's investment
assets.
Japan is politically organized as a democratic, parliamentary republic and
has a population of approximately 122 million. The Japanese economy is
heavily industrial and export-oriented. Although Japan is dependent upon
foreign economies for raw materials, Japan's balance of payments in recent
years has been strong and positive. Japan has eight stock exchanges
located throughout the country, but over 80% of all trading is conducted
on the Tokyo Stock Exchange. Prices of stocks listed on the Japanese stock
exchanges are quoted continuously during regular business hours. Trading
commissions are at fixed scale rates which vary by the type and the value
of the transaction, but can be negotiable for large transactions.
Securities in Japan are denominated and quoted in yen. Yen are fully
convertible and transferable based on floating exchange rates into all
currencies, without administrative or legal restrictions, for both
nonresidents and residents of Japan.
A significant investment in Japanese securities by International Index
Fund may entail a higher degree of risk than with more diversified
international portfolios.
AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS. For many
foreign securities, United States dollar-denominated American Depositary
Receipts, which are traded in the United States on exchanges or
over-the-counter, are issued by domestic banks. American Depositary Receipts
represent the right to receive securities of foreign issuers deposited in a
domestic bank or a correspondent bank. American Depositary Receipts do not
eliminate all the risk inherent in investing in the securities of foreign
issuers. However, by investing in American Depositary Receipts rather than
directly in foreign issuers' stock, a Fund can avoid currency risks during
the settlement period for either purchases or sales. In general, there is a
large, liquid market in the United States for many American Depositary
Receipts. The information available for American Depositary Receipts is
subject to the accounting, auditing and financial reporting standards of the
domestic market or exchange on which they are traded, which standards are
more uniform and more exacting than those to which many foreign issuers may
be subject. International Index Fund and International Fund also may invest
in European Depositary Receipts, which are receipts evidencing an
arrangement with a European bank similar to that for American Depositary
Receipts and which are designed for use in the European securities markets.
European Depositary Receipts are not necessarily denominated in the currency
of the underlying security.
Certain American Depositary Receipts and European Depositary Receipts,
typically those denominated as unsponsored, require the holders thereof to
bear most of the costs of the facilities while issuers of sponsored
facilities normally pay more of the costs thereof. The depository of an
unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited
securities or to pass through the voting rights to facility holders in
respect to the deposited securities, whereas the depository of a sponsored
facility typically distributes shareholder communications and passes
through voting rights.
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FOREIGN CURRENCY TRANSACTIONS
International Index Fund and International Fund invest in securities which
are purchased and sold in foreign currencies. The value of its assets as
measured in United States dollars therefore may be affected favorably or
unfavorably by changes in foreign currency exchange rates and exchange
control regulations. International Index Fund and International Fund also
will incur costs in converting United States dollars to local currencies,
and vice versa.
International Index Fund and International Fund will conduct their foreign
currency exchange transactions either on a spot (i.e., cash) basis at the
spot rate prevailing in the foreign currency
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exchange market, or through forward contracts to purchase or sell foreign
currencies. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date certain
at a specified price. These forward currency contracts are traded directly
between currency traders (usually large commercial banks) and their
customers.
International Fund may enter into forward currency contracts in order to
hedge against adverse movements in exchange rates between currencies. It may
engage in "transaction hedging" to protect against a change in the foreign
currency exchange rate between the date the Fund contracts to purchase or
sell a security and the settlement date, or to "lock in" the United States
dollar equivalent of a dividend or interest payment made in a foreign
currency. It also may engage in "portfolio hedging" to protect against a
decline in the value of its portfolio securities as measured in United
States dollars which could result from changes in exchange rates between the
United States dollar and the foreign currencies in which the portfolio
securities are purchased and sold. International Fund also may hedge its
foreign currency exchange rate risk by engaging in currency financial
futures and options transactions.
Although a foreign currency hedge may be effective in protecting the Fund
from losses resulting from unfavorable changes in exchanges rates between
the United States dollar and foreign currencies, it also would limit the
gains which might be realized by the Fund from favorable changes in exchange
rates. The Sub-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, International Fund may realize losses on its
foreign currency transactions.
International Fund does not intend to enter into forward currency
contracts or maintain a net exposure in such contracts where it would be
obligated to deliver an amount of foreign currency in excess of the value
of its portfolio securities or other assets denominated in that currency.
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MORTGAGE-BACKED SECURITIES
Balanced Fund may invest in mortgage-backed securities which are Agency
Pass-Through Certificates or collateralized mortgage obligations ("CMOs"),
as described below.
Agency Pass-Through Certificates are mortgage pass-through certificates
representing undivided interests in pools of residential mortgage loans.
Distribution of principal and interest on the mortgage loans underlying an
Agency Pass-Through Certificate is an obligation of or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA"), or the Federal Home Loan Mortgage Corporation
("FHLMC"). The obligation of GNMA with respect to such certificates is
backed by the full faith and credit of the United States, while the
obligations of FNMA and FHLMC with respect to such certificates rely solely
on the assets and credit of those entities. The mortgage loans underlying
GNMA certificates are partially or fully guaranteed by the Federal Housing
Administration or the Veterans Administration, while the mortgage loans
underlying FNMA certificates and FHLMC certificates are conventional
mortgage loans which are, in some cases, insured by private mortgage
insurance companies. Agency Pass-Through Certificates may be issued in a
single class with respect to a given pool of mortgage loans or in multiple
classes.
CMOs are debt obligations typically issued by a private special-purpose
entity and collateralized by residential or commercial mortgage loans or
Agency Pass-Through Certificates. Balanced Fund will invest only in CMOs
which are rated in one of the four highest rating categories by a nationally
recognized statistical rating organization or which are of comparable
quality in the judgment of the Advisor. Because CMOs are debt obligations of
private entities, payments on CMOs generally are
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not obligations of or guaranteed by any governmental entity, and their
ratings and creditworthiness typically depend, among other factors, on the
legal insulation of the issuer and transaction from the consequences of a
sponsoring entity's bankruptcy. CMOs generally are issued in multiple
classes, with holders of each class entitled to receive specified portions
of the principal payments and prepayments and/or of the interest payments on
the underlying mortgage loans. These entitlements can be specified in a wide
variety of ways, so that the payment characteristics of various classes may
differ greatly from one another. Examples of the more common classes are
provided in the Statement of Additional Information. The CMOs in which the
Fund may invest include classes which are subordinated in right of payment
to other classes, as long as they have the required rating referred to
above.
It generally is more difficult to predict the effect of changes in market
interest rates on the return on mortgaged-backed securities than to predict
the effect of such changes on the return of a conventional fixed-rate debt
instrument, and the magnitude of such effects may be greater in some cases.
The return on interest-only and principal-only mortgage-backed securities is
particularly sensitive to changes in interest rates and prepayment speeds.
When interest rates decline and prepayment speeds increase, the holder of an
interest-only mortgage-backed security may not even recover its initial
investment. Similarly, the return on an inverse floating rate CMO is likely
to decline more sharply in periods of increasing interest rates than that of
a fixed-rate security. For these reasons, interest-only, principal-only and
inverse floating rate mortgage-backed securities generally have greater risk
than more conventional classes of mortgage-backed securities. Balanced Fund
will not invest more than 10% of its total fixed income assets in
interest-only, principal-only or inverse floating rate mortgage-backed
securities.
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ASSET-BACKED SECURITIES
Balanced Fund may invest in asset-backed securities. Asset-backed
securities generally constitute interests in, or obligations secured by, a
pool of receivables other than mortgage loans, such as automobile loans
and leases, credit card receivables, home equity loans and trade
receivables. Asset-backed securities generally are issued by a private
special-purpose entity. Their ratings and creditworthiness typically
depend on the legal insulation of the issuer and transaction from the
consequences of a sponsoring entity's bankruptcy, as well as on the credit
quality of the underlying receivables and the amount and credit quality of
any third-party credit enhancement supporting the underlying receivables
or the asset-backed securities. Asset-backed securities and their
underlying receivables generally are not issued or guaranteed by any
governmental entity.
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BANK INSTRUMENTS
The bank instruments in which Balanced Fund may invest include time and
savings deposits, deposit notes and bankers' acceptances (including
certificates of deposit) in commercial or savings banks. They also include
Eurodollar Certificates of Deposit issued by foreign branches of United
States or foreign banks; Eurodollar Time Deposits, which are United States
dollar-denominated deposits in foreign branches of United States or
foreign banks; and Yankee Certificates of Deposit, which are United States
dollar-denominated certificates of deposit issued by United States
branches of foreign banks and held in the United States. For a description
of certain risks of investing in foreign issuers' securities, see "--
Foreign Securities" above. In each instance, Balanced Fund may only invest
in bank instruments issued by an institution which has capital, surplus
and undivided profits of more than $100 million or the deposits of which
are insured by the Bank Insurance Fund or the Savings Association
Insurance Fund.
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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
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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.
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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 or, in the
case of International 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.
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INVESTMENT RESTRICTIONS
The fundamental and nonfundamental investment restrictions of the Funds
are set forth in full in the Statement of Additional Information. The
fundamental restrictions include the following:
* None of the Funds will borrow money, except from banks for temporary or
emergency purposes. The amount of such borrowing may not exceed 10% of
the borrowing Fund's total assets.
* None of the Funds will borrow money for leverage purposes. For the
purpose of this investment restriction, the use of options and futures
transactions and the purchase of securities on a when-issued or delayed
delivery basis shall not be deemed the borrowing of money. If a Fund
engages in borrowing, its share price may be subject to greater
fluctuation, and the interest expense associated with the borrowing may
reduce the Fund's net income.
* None of the Funds will make short sales of securities.
* None of the Funds will purchase any securities on margin except to
obtain such short-term credits as may be necessary for the clearance of
transactions and except, in the case of Small Cap Growth Fund,
Technology Fund, and International Fund as may be necessary to make
margin payments in connection with foreign currency futures and other
derivative transactions.
A fundamental policy or restriction, including those stated above, cannot be
changed without an affirmative vote of the holders of a "majority" of the
outstanding shares of the applicable Fund, as defined in the 1940 Act.
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 SEC rules and interpretations. Section 4(2) commercial paper
and Rule 144A securities may be determined to be "liquid" under guidelines
adopted by the Board of Directors. Investing in Rule 144A securities could
have the effect of increasing the level of illiquidity in a Fund to the
extent that qualified institutional buyers become, for a time, uninterested
in purchasing these securities.
66
<PAGE>
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 a fiduciary with respect to plans subject to the Employee Retirement
Income Security Act of 1974 ("ERISA") and other trust and agency accounts
that invest in the Funds. These U.S. Bancorp affiliates may receive
compensation from the Funds for the services they provide to the Funds, as
described more fully in the following sections of this Prospectus:
Investment advisory services -- see "Management-Investment Advisor"
Custodian services -- see "Management-Custodian"
Sub-administration services -- see "Management-Administrator"
Shareholder servicing -- see "Distributor"
Securities lending -- see "Special Investment Methods-Lending of Portfolio
Securities"
Transfer agent services -- see "Management-Transfer Agent"
67
<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-1003 (8/98) R
<PAGE>
AUGUST 14, 1998
EQUITY FUNDS
CLASS Y SHARES
Balanced Fund Small Cap Growth Fund
Real Estate Securities Fund Small Cap Value Fund
Equity Income Fund Micro Cap Value Fund
Equity Index Fund International Index Fund
Large Cap Value Fund International Fund
Large Cap Growth Fund Health Sciences Fund
Mid Cap Value Fund Technology Fund
Regional Equity 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 6
............................................
Financial Highlights 9
............................................
The Funds 16
............................................
Investment Objectives and Policies 16
............................................
Management 31
............................................
Distributor 38
............................................
Purchases and Redemptions of Shares 38
............................................
Federal Income Taxes 42
............................................
Fund Shares 43
............................................
Calculation of Performance Data 43
............................................
Performance Information for Successors to
Common Trust Funds 44
............................................
Special Investment Methods 45
............................................
Information Concerning Compensation Paid
to U.S. Bank National Association and
Other Affiliates 54
............................................
<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"):
* BALANCED FUND
* REAL ESTATE SECURITIES FUND
* EQUITY INCOME FUND
* EQUITY INDEX FUND
* LARGE CAP VALUE FUND
* LARGE CAP GROWTH FUND
* MID CAP VALUE FUND
* REGIONAL EQUITY FUND
* SMALL CAP GROWTH FUND
* SMALL CAP VALUE FUND
* MICRO CAP VALUE FUND
* INTERNATIONAL INDEX FUND
* INTERNATIONAL FUND
* HEALTH SCIENCES FUND
* TECHNOLOGY FUND
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED 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 August 14, 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 August 14, 1998.
1
<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"):
BALANCED FUND has an objective of maximizing total return (capital
appreciation plus income). The Fund seeks to achieve its objective by
investing in a balanced portfolio of equity securities and fixed income
securities. Over the long term, it is anticipated that the Fund's asset mix
will average approximately 60% equity securities and 40% fixed income
securities, with the asset mix normally ranging between 40% and 75% equity
securities, between 25% and 60% fixed income securities (including only that
portion of the convertible securities attributable to their fixed income
characteristics), and between 0% and 25% money market instruments.
REAL ESTATE SECURITIES FUND has an objective of providing above average
current income and long-term capital appreciation by investing primarily in
equity securities of real estate companies. Under normal market conditions,
the Fund invests at least 65% of its total assets in income producing equity
securities of publicly traded companies principally engaged in the real
estate industry. A majority of the Fund's total assets will be invested in
securities of real estate investment trusts ("REITs"), with an expected
emphasis on equity REITs.
EQUITY INCOME FUND has an objective of long-term growth of capital and
income. Under normal market conditions, the Fund invests at least 65% of its
total assets in equity securities of issuers believed by the Fund's advisor
to be characterized by sound management, the ability to finance expected
growth and the ability to pay above average dividends.
EQUITY INDEX FUND has an objective of providing investment results that
correspond to the performance of the Standard & Poor's 500 Composite Stock
Price Index (the "S&P 500"). The Fund invests primarily (at least 65% of
total assets) in common stocks included in the S&P 500. The Fund's advisor
believes that its objective can best be achieved by investing in the common
stocks of approximately 50% to 100% of the issues included in the S&P 500,
depending on the size of the Fund.
LARGE CAP VALUE FUND (formerly known as Stock Fund) has a primary objective
of capital appreciation and a secondary objective to provide current income.
Under normal market conditions, the Fund invests at least 65% of its total
assets in common stocks diversified among a broad range of industries and
among companies that have a market capitalization of at least $1 billion at
the time of purchase. In selecting equity securities, the Fund's advisor
employs a value-based selection discipline, investing in equity securities
it believes are undervalued relative to other securities in the same
industry or market at the time of purchase.
LARGE CAP GROWTH FUND (formerly known as Diversified Growth Fund) has a
primary objective of long-term growth of capital and a secondary objective
to provide current income. Under normal market conditions, the Fund invests
at least 65% of its total assets in equity securities of companies that have
a market capitalization of at least $1 billion at the time of purchase and
that, in the Fund's advisor's judgment, exhibit a combination of above
average growth in revenue and earnings, strong management and sound and
improving financial condition.
MID CAP VALUE FUND (formerly known as Special Equity Fund) has an objective
of capital appreciation. Under normal market conditions, the Fund invests at
least 65% of its total assets in equity securities of mid-capitalization
companies (those with market capitalizations from $1 billion to $5 billion
at the time of purchase). The Fund's policy is to invest in equity
securities which the Fund's advisor believes offer the potential for greater
than average capital appreciation. In selecting equity securities, the
Fund's advisor employs a value-based selection discipline, investing in
equity securities it believes are undervalued relative to other securities
in the same industry or market at the time of purchase.
2
<PAGE>
REGIONAL EQUITY FUND has an objective of capital appreciation. The Fund
seeks to achieve its objective by investing, in normal market conditions, at
least 65% of its total assets in equity securities of small-capitalization
companies (those with market capitalizations of less than $1 billion at the
time of purchase) headquartered in Minnesota, North and South Dakota,
Montana, Wisconsin, Michigan, Iowa, Nebraska, Colorado and Illinois. The
Fund invests in the securities of rapidly growing companies within this size
category and geographic area. In selecting equity securities, the Fund's
advisor employs a value-based selection discipline, investing in equity
securities it believes are undervalued relative to other securities in the
same industry or market at the time of purchase.
SMALL 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 small-capitalization companies (those with market
capitalizations of less than $1 billion at the time of purchase) that
exhibit, in the Fund's advisor's opinion, outstanding potential for superior
growth. Companies that participate in sectors that are identified by the
advisor as having long-term growth potential generally are expected to make
up a substantial portion of the Fund's holdings.
SMALL CAP VALUE FUND has an objective of capital appreciation. Under normal
market conditions, the Fund invests at least 65% of its total assets in
equity securities of small-capitalization companies (those with market
capitalizations of less than $1 billion at the time of purchase). In
selecting equity securities, the Fund's advisor employs a value-based
selection discipline, investing in equity securities it believes are
undervalued relative to other securities in the same industry or market at
the time of purchase.
MICRO CAP VALUE FUND has an objective of capital appreciation. Under normal
market conditions, the Fund invests at least 65% of its total assets in
equity securities of very small-capitalization companies (those with market
capitalizations of less than $500 million at the time of purchase). In
selecting equity seecurities, the Fund's advisor employs a value-based
selection discipline, investing in equity securities it believes are
undervalued relative to other securities in the same industry or market at
the time of purchase.
INTERNATIONAL INDEX FUND has an objective of providing investment results
that correspond to the performance of the Morgan Stanley Europe, Australia,
Far East Composite Index (the "EAFE Index"). The Fund invests primarily (at
least 65% of total assets) in common stocks included in the EAFE Index. The
Fund's advisor believes that its objective can be best achieved by investing
in common stocks of approximately 50% to 100% of the issues included in the
EAFE Index, depending on the size of the Fund.
INTERNATIONAL FUND has an objective of long-term growth of capital. Under
normal market conditions, the Fund invests at least 65% of its total assets
in an internationally diversified portfolio of equity securities which trade
in markets other than the United States. Investments are expected to be made
primarily in developed markets and larger capitalization companies. However,
the Fund also may invest in emerging markets where smaller capitalization
companies are the norm.
HEALTH SCIENCES FUND has an objective of long-term growth of capital. Under
normal market conditions, the Fund invests at least 65% of its total assets
in equity securities of companies which the Fund's advisor considers to be
principally engaged in the development, production or distribution of
products or services connected with health care or medicine.
TECHNOLOGY FUND has an objective of long-term growth of capital. Under
normal market conditions, the Fund invests at least 65% of its total assets
in equity securities of companies which the Fund's advisor believes have, or
will develop, products, processes or services that will provide or will
benefit significantly from technological advances and improvements.
INVESTMENT ADVISOR AND SUB-ADVISOR. U.S. Bank National Association (the
"Advisor" or "U.S.
3
<PAGE>
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 International Fund. See
"Management."
DISTRIBUTOR; ADMINISTRATOR. SEI Investments Distribution Co. (the
"Distributor") serves as the distributor of the Funds' shares. SEI
Investments Management Corporation (the "Administrator") serves as the
administrator of the Funds. See "Management" and "Distributor."
ELIGIBLE INVESTORS; OFFERING PRICES. Class 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 by the
Funds' transfer agent, with no additional charge. See "Purchases and
Redemptions of Shares."
RISKS TO CONSIDER. Each of the Funds is subject to the risk of generally
adverse equity markets. Investors also should recognize that market prices
of equity securities generally, and of particular companies' equity
securities, frequently are subject to greater volatility than prices of
fixed income securities.
Because each of the Funds other than Equity Index Fund and International
Index Fund is actively managed to a greater or lesser degree, their
performance will reflect in part the ability of the 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) certain of the Funds are subject to risks associated with
investing in small-capitalization companies; (ii) Micro Cap Value Fund is
subject to risks associated with investing in very small-capitalization
companies; (iii) Regional Equity Fund is subject to risks associated with
concentrating its investments in a single geographic region; (iv) Real
Estate Securities Fund, Health Sciences Fund and Technology Fund are subject
to risks associated with concentrating their investments in a single or
related economic sectors; (v) Real Estate Securities Fund is subject to
risks associated with direct investments in REITs; (vi) International Index
Fund and International Fund are subject to risks associated with investing
in foreign securities and to currency risk; (vii) Equity Income Fund may
invest a significant portion of its assets in less than investment grade
convertible debt obligations; (viii) certain Funds other than International
Index Fund and International Fund may invest specified portions of their
assets in securities of foreign issuers which are listed on a United States
stock exchange or represented by American Depositary Receipts or, in the
case of Balanced Fund, are debt obligations of foreign issuers denominated
in United States dollars; and (ix) certain Funds may invest (but not for
speculative purposes) in stock index futures contracts, options on stock
indices, options on stock index futures, index participation contracts based
on the S&P 500 or the EAFE Index and/or exchange traded put and call options
on interest rate futures contracts and on interest rate indices. See
"Investment Objectives and Policies" and "Special Investment Methods."
SHAREHOLDER INQUIRIES. Any questions or communications regarding the Funds
or a shareholder account should be directed to the Distributor by calling
(800) 637-2548, or to the financial institution which holds shares on an
investor's behalf.
4
<PAGE>
(This page has been left blank intentionally.)
5
<PAGE>
FEES AND EXPENSES
----------------------------------------------------------------------------
CLASS Y SHARE FEES AND EXPENSES
<TABLE>
<CAPTION>
REAL ESTATE EQUITY EQUITY LARGE CAP LARGE CAP
BALANCED SECURITIES INCOME INDEX VALUE GROWTH
FUND FUND FUND FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on
purchases None None None None None None
Maximum sales load imposed on
reinvested dividends None None None None None None
Deferred sales load None None None None None None
Redemption fees None None None None None None
Exchange fees None None None None None None
- ---------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees
(after voluntary fee waivers)(1) 0.62% 0.45% 0.53% 0.17% 0.61% 0.61%
Rule 12b-1 fees None None None None None None
Other expenses(1) 0.18% 0.35% 0.22% 0.18% 0.19% 0.19%
Total fund operating expenses
(after voluntary fee waivers)(1) 0.80% 0.80% 0.75% 0.35% 0.80% 0.80%
- ---------------------------------------------------------------------------------------------------------------
EXAMPLE(2)
You would pay the following expenses on a $1,000 investment, assuming (i) a 5%
annual return, and (ii) redemption at the end of each time period:
1 year $8 $8 $8 $4 $8 $8
3 years $26 $26 $24 $11 $26 $26
5 years $44 $44 $42 $20 $44 $44
10 years $99 $99 $93 $44 $99 $99
</TABLE>
+ THE ADVISORY FEES, OTHER EXPENSES, AND TOTAL FUND OPERATING EXPENSES SET
FORTH ABOVE REFLECT ESTIMATES OF CURRENT EXPENSES.
(1) THE ADVISOR 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 ADVISOR INTENDS TO MAINTAIN SUCH WAIVERS IN EFFECT FOR THE CURRENT
FISCAL YEAR BUT RESERVES THE RIGHT TO DISCONTINUE SUCH WAIVERS AT ANY TIME
IN ITS SOLE DISCRETION. NOTWITHSTANDING THE FOREGOING, THE ADVISOR WILL
MAINTAIN SUCH WAIVERS OF LARGE CAP VALUE FUND, EQUITY INDEX FUND, SMALL CAP
VALUE FUND AND INTERNATIONAL INDEX FUND IN EFFECT THROUGH SEPTEMBER 30,
1998. IN ADDITION, THE ADVISOR WILL MAINTAIN SUCH WAIVERS FOR THE APPLICABLE
FUNDS AT LEAST THROUGH JULY 31, 2000 SO THAT THE TOTAL FUND OPERATING
EXPENSES DO NOT EXCEED 1.00% FOR LARGE CAP VALUE FUND AND 1.39% FOR
INTERNATIONAL FUND. FOR MID CAP VALUE FUND, THE ADVISOR HAS AGREED TO WAIVE
ADVISORY FEES ON A VOLUNTARY BASIS TO THE EXTENT NECESSARY TO KEEP TOTAL
FUND OPERATING EXPENSES FOR THE CURRENT FISCAL YEAR FROM EXCEEDING 0.90%.
ABSENT ANY FEE WAIVERS, INVESTMENT ADVISORY FEES AS AN ANNUALIZED PERCENTAGE
OF AVERAGE DAILY NET ASSETS WOULD BE 0.70% FOR EACH FUND EXCEPT
INTERNATIONAL FUND, AS TO WHICH THEY WOULD BE 1.25%; AND TOTAL FUND
OPERATING EXPENSES CALCULATED ON SUCH BASIS WOULD BE 0.88% FOR BALANCED
FUND, 1.05% FOR REAL ESTATE SECURITIES FUND, 0.92% FOR EQUITY INCOME FUND,
0.88% FOR EQUITY INDEX FUND, 0.89% FOR LARGE CAP VALUE FUND, 0.89% FOR LARGE
CAP GROWTH FUND, 0.90% FOR MID CAP VALUE FUND, 0.90% FOR REGIONAL EQUITY
FUND, 0.91% FOR SMALL CAP GROWTH FUND, 0.90% FOR SMALL CAP VALUE FUND, 1.07%
FOR MICRO CAP VALUE FUND, 0.99% FOR INTERNATIONAL INDEX FUND, 1.52% FOR
INTERNATIONAL FUND, 1.04% FOR HEALTH SCIENCES FUND, AND 0.92% FOR TECHNOLOGY
FUND. "OTHER EXPENSES" INCLUDES AN ADMINISTRATION FEE AND, FOR SMALL CAP
VALUE FUND AND INTERNATIONAL INDEX FUND, IS BASED ON ESTIMATED AMOUNTS FOR
THE CURRENT FISCAL YEAR.
6
<PAGE>
<TABLE>
<CAPTION>
MID CAP REGIONAL SMALL CAP SMALL CAP MICRO CAP INTERNATIONAL HEALTH
VALUE EQUITY GROWTH VALUE VALUE INDEX INTERNATIONAL SCIENCES TECHNOLOGY
FUND FUND FUND FUND FUND FUND FUND FUND FUND
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
None None None None None None None None None
None None None None None None None None None
None None None None None None None None None
None None None None None None None None None
None None None None None None None None None
- -----------------------------------------------------------------------------------------------------------------------------
0.70% 0.70% 0.69% 0.70%+ 0.53% 0.46% + 1.08% 0.56% 0.68%
None None None None None None None None None
0.19% 0.20% 0.21% 0.20%+ 0.37% 0.29% + 0.27% 0.34% 0.22%
0.89% 0.90% 0.90% 0.90%+ 0.90% 0.75% + 1.35% 0.90% 0.90%
- -----------------------------------------------------------------------------------------------------------------------------
$9 $9 $9 $9 $9 $8 $14 $9 $9
$28 $29 $29 $29 $29 $24 $43 $29 $29
$49 $50 $50 $50 $50 $42 $74 $50 $50
$110 $111 $111 $111 $111 $93 $162 $111 $111
</TABLE>
(2) ABSENT THE FEE WAIVERS REFERRED TO IN (1) ABOVE, THE DOLLAR AMOUNTS FOR THE
1, 3, 5 AND 10-YEAR PERIODS WOULD BE AS FOLLOWS: BALANCED FUND, $9, $28, $49
AND $108; REAL ESTATE SECURITIES FUND, $11, $33, $58 AND $128; EQUITY INCOME
FUND, $9, $29, $51 AND $113; EQUITY INDEX FUND, $9, $28, $49 AND $108; LARGE
CAP VALUE FUND, $9, $28, $49 AND $110; LARGE CAP GROWTH FUND, $9, $28, $49
AND $110; MID CAP VALUE FUND, $9, $29, $50 AND $111; REGIONAL EQUITY FUND,
$9, $29, $50 AND $111; SMALL CAP GROWTH FUND, $9, $29, $50 AND $112; SMALL
CAP VALUE FUND, $9, $29, $50 AND $111; MICRO CAP VALUE FUND, $11, $34, $59
AND $131; INTERNATIONAL INDEX FUND, $10, $32, $55 AND $121; INTERNATIONAL
FUND, $15, $48, $83 AND $181; HEALTH SCIENCES FUND, $11, $33, $57 AND $127;
AND TECHNOLOGY FUND, $9, $29, $51 AND $113.
7
<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.
8
<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.
Except as indicated, this information has been audited by KPMG Peat Marwick
LLP, independent auditors. The financial highlights for the Funds should be
read in conjunction with the respective financial statements of such Funds.
The independent auditors' reports and related financial statements can be
found in the September 30, 1997 and November 30, 1997 (for Small Cap Value
Fund and International Index Fund) Annual Reports to Shareholders of the
First American Funds and the September 30, 1997 Annual Report to
Shareholders for Piper Small Company Growth Fund, respectively, which, along
with the respective March 31, 1998 Semiannual Reports of the First American
Funds and Piper Small Company Growth Fund, can be obtained without charge by
calling (800) 637-2548.
9
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
Except as indicated, for the period ended March 31, 1998 (unaudited)
and for the periods ended September 30,
For a share outstanding throughout the applicable period
<TABLE>
<CAPTION>
REALIZED AND
UNREALIZED DIVIDENDS DISTRIBUTIONS
NET ASSET NET GAINS OR FROM NET FROM
VALUE BEGINNING INVESTMENT (LOSSES) ON INVESTMENT CAPITAL
OF PERIOD INCOME INVESTMENTS INCOME GAINS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCED FUND Class Y
1998 (unaudited)** $ 15.43 $ 0.20 $ 0.79 $ (0.20) $ (1.12)
1997 13.15 0.42 2.86 (0.42) (0.58)
1996 12.13 0.42 1.43 (0.42) (0.41)
1995 10.54 0.40 1.73 (0.39) (0.15)
1994(1) 10.86 0.25 (0.32) (0.25) --
REAL ESTATE SECURITIES FUND Class Y
1998 (unaudited)** $ 14.99 $ 0.34 $ (0.07) $ (0.34) $ (0.33)
1997 11.53 0.74 3.43 (0.67) (0.03)
1996 10.37 0.57 1.29 (0.53) --
1995(2) 10.00 0.13 0.39 (0.11) --
EQUITY INCOME FUND Class Y
1998 (unaudited)** $ 15.70 $ 0.23 $ 1.99 $ (0.23) $ (0.85)
1997 12.66 0.43 3.40 (0.44) (0.35)
1996 11.24 0.42 1.43 (0.42) (0.01)
1995 9.89 0.41 1.35 (0.41) --
1994(3) 9.90 0.07 (0.03) (0.05) --
EQUITY INDEX FUND Class Y
1998 (unaudited)** $ 20.74 $ 0.15 $ 3.08 $ (0.15) $ (1.54)
1997 15.47 0.29 5.70 (0.29) (0.43)
1996 13.34 0.31 2.31 (0.31) (0.18)
1995 10.67 0.28 2.75 (0.27) (0.09)
1994(1) 10.85 0.20 (0.18) (0.20) --
LARGE CAP VALUE FUND (formerly known as Stock Fund) Class Y
1998 (unaudited)** $ 28.75 $ 0.14 $ 1.86 $ (0.14) $ (3.76)
1997 22.60 0.39 7.90 (0.38) (1.76)
1996 19.56 0.42 4.09 (0.42) (1.05)
1995 16.50 0.36 3.64 (0.35) (0.59)
1994(4) 16.47 0.25 0.03 (0.25) --
- -----------------------------------------------------------------------------------------------------------
</TABLE>
* TOTAL RETURN EXCLUDES SALES CHARGES.
** FOR THE SIX MONTH PERIOD ENDED MARCH 31, 1998. ALL RATIOS FOR THE PERIOD
HAVE BEEN ANNUALIZED.
*** FOR THE FOUR MONTH PERIOD ENDED MARCH 31, 1998. ALL RATIOS FOR THE PERIOD
HAVE BEEN ANNUALIZED.
+ RETURNS ARE FOR THE PERIOD INDICATED AND HAVE NOT BEEN ANNUALIZED.
(A) BEGINNING IN 1996, AVERAGE COMMISSION RATE PAID PER SHARE IS DISCLOSED FOR
ALL APPLICABLE SECURITIES PURCHASES AND SALES SUBJECT TO COMMISSIONS. THE
COMPARABILITY OF THIS INFORMATION MAY BE AFFECTED BY THE FACT THAT
COMMISSION RATES VARY SIGNIFICANTLY AMONG FOREIGN COUNTRIES.
(B) REPRESENTS A DISTRIBUTION OR PARTIAL DISTRIBUTION IN EXCESS OF NET
INVESTMENT INCOME DUE TO THE TAX TREATMENT OF FOREIGN CURRENCY RELATED
TRANSACTIONS.
(1) THIS CLASS OF SHARES HAS BEEN OFFERED SINCE FEBRUARY 4, 1994 (THE FUND
ITSELF HAVING COMMENCED OPERATIONS ON DECEMBER 14, 1992). ALL RATIOS FOR
THE PERIOD HAVE BEEN ANNUALIZED.
(2) COMMENCED OPERATIONS ON JUNE 30, 1995. ALL RATIOS FOR THE PERIOD HAVE BEEN
ANNUALIZED.
(3) THIS CLASS OF SHARES HAS BEEN OFFERED SINCE AUGUST 2, 1994 (THE FUND ITSELF
HAVING COMMENCED OPERATIONS ON DECEMBER 18, 1992). ALL RATIOS FOR THE PERIOD
HAVE BEEN ANNUALIZED.
(4) THIS CLASS OF SHARES HAS BEEN OFFERED SINCE FEBRUARY 4, 1994 (THE FUND
ITSELF HAVING COMMENCED OPERATIONS ON DECEMBER 22, 1987). ALL RATIOS FOR THE
PERIOD HAVE BEEN ANNUALIZED.
(5) COMMENCED OPERATIONS ON APRIL 4, 1994. ALL RATIOS FOR THE PERIOD HAVE BEEN
ANNUALIZED.
10
<PAGE>
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
NET ASSET RATIO OF INVESTMENT AVERAGE
DISTRIBUTIONS VALUE NET ASSETS EXPENSES TO INCOME TO NET ASSETS PORTFOLIO AVERAGE
FROM RETURN END OF TOTAL END OF AVERAGE AVERAGE (EXCLUDING TURNOVER COMMISSION
OF CAPITAL PERIOD RETURN* PERIOD (000) NET ASSETS NET ASSETS WAIVERS) RATE RATE (A)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ -- $ 15.10 7.15%+ $ 530,425 0.80% 2.81% 0.88% 50% $ 0.0509
-- 15.43 26.17 418,087 0.80 2.99 0.88 84 0.0700
-- 13.15 15.89 332,786 0.80 3.31 0.89 73 0.0619
-- 12.13 20.89 192,145 0.79 3.61 0.94 77 --
-- 10.54 (0.64)+ 125,285 0.75 3.51 1.05 98 --
$ -- $ 14.59 1.92%+ $ 65,511 0.80% 4.71% 0.92% 21% $ 0.0600
(0.01) 14.99 37.07 40,501 0.80 4.57 1.05 14 0.0700
(0.17) 11.53 18.53 17,895 0.80 5.13 1.51 8 0.0704
(0.04) 10.37 5.19+ 5,756 0.80 6.01 2.34 0 --
$ -- $ 16.84 14.92%+ $ 400,750 0.75% 2.87% 0.86% 11% $ 0.0600
-- 15.70 31.45 369,919 0.75 3.12 0.92 39 0.0571
-- 12.66 16.79 64,590 0.75 3.50 0.95 23 0.0700
-- 11.24 18.24 52,126 0.75 4.11 1.06 23 --
-- 9.89 0.45+ 17,489 0.75 5.61 1.14 108 --
$ -- $ 22.28 16.95%+ $1,023,136 0.35% 1.42% 0.87% 15% $ 0.0300
-- 20.74 39.85 557,258 0.35 1.62 0.88 8 0.0419
-- 15.47 19.98 348,539 0.35 2.14 0.90 10 0.0377
-- 13.34 29.17 218,932 0.35 2.41 0.95 9 --
-- 10.67 0.18+ 163,688 0.35 2.59 1.03 11 --
$ -- $ 26.85 8.74%+ $1,521,939 0.80% 1.13% 0.86% 40% $ 0.0592
-- 28.75 39.13 1,095,262 0.80 1.39 0.89 57 0.0640
-- 22.60 24.32 471,206 0.80 1.90 0.88 40 0.0653
-- 19.56 25.50 312,559 0.79 2.10 0.94 52 --
-- 16.50 1.70+ 154,949 0.75 2.28 1.01 65 --
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(6) THE FINANCIAL HIGHLIGHTS FOR INTERNATIONAL INDEX FUND AND SMALL CAP VALUE
FUND AS SET FORTH HEREIN INCLUDE THE HISTORICAL FINANCIAL HIGHLIGHTS OF
THE QUALIVEST INTERNATIONAL OPPORTUNITIES FUND AND THE QUALIVEST SMALL
COMPANIES VALUE FUND (CLASS Y SHARES), RESPECTIVELY. THE ASSETS OF THE
QUALIVEST INTERNATIONAL OPPORTUNITIES FUND AND THE QUALIVEST SMALL
COMPANIES VALUE FUND WERE ACQUIRED BY INTERNATIONAL INDEX FUND AND SMALL
CAP VALUE FUND, RESPECTIVELY, ON NOVEMBER 21, 1997. IN CONNECTION WITH
SUCH ACQUISITION, THE CLASS Y AND CLASS Q SHARES OF THE QUALIVEST
INTERNATIONAL OPPORTUNITIES FUND AND THE QUALIVEST SMALL COMPANIES VALUE
FUND WERE EXCHANGED FOR CLASS C SHARES (NOW DESIGNATED AS CLASS Y SHARES)
OF INTERNATIONAL INDEX FUND AND SMALL CAP VALUE FUND, RESPECTIVELY.
(7) FOR THE FOUR MONTH PERIOD ENDED NOVEMBER 30, 1997. ALL RATIOS FOR THE
PERIOD HAVE BEEN ANNUALIZED.
(8) THE BOARD OF DIRECTORS OF FAIF APPROVED A CHANGE IN THE FUNDS' FISCAL YEAR
END FROM JULY 31 TO NOVEMBER 30, EFFECTIVE NOVEMBER 30, 1997.
(9) FOR THE PERIOD ENDED JULY 31.
(10) COMMENCED OPERATIONS ON AUGUST 1, 1994. ALL RATIOS FOR THE PERIOD HAVE
BEEN ANNUALIZED.
(11) COMMENCED OPERATIONS ON AUGUST 8, 1997. ALL RATIOS FOR THE PERIOD HAVE
BEEN ANNUALIZED.
(12) COMMENCED OPERATIONS ON JULY 3, 1995. ALL RATIOS FOR THE PERIOD HAVE BEEN
ANNUALIZED.
(13) COMMENCED OPERATIONS ON JANUARY 31, 1996. ALL RATIOS FOR THE PERIOD HAVE
BEEN ANNUALIZED.
11
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
Except as indicated, for the period ended March 31, 1998 (unaudited)
and for the periods ended September 30,
For a share outstanding throughout the applicable period
<TABLE>
<CAPTION>
REALIZED AND
UNREALIZED DIVIDENDS
NET ASSET NET GAINS OR FROM NET DISTRIBUTIONS
VALUE BEGINNING INVESTMENT (LOSSES) ON INVESTMENT FROM CAPITAL
OF PERIOD INCOME INVESTMENTS INCOME GAINS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LARGE CAP GROWTH FUND (formerly known as Diversified Growth Fund) Class Y
1998 (unaudited)** $ 17.64 $ 0.07 $ 1.96 $ (0.07) $ (1.36)
1997 13.66 0.12 4.26 (0.13) (0.27)
1996 11.78 0.18 1.88 (0.18) --
1995 9.10 0.17 2.67 (0.16) --
1994(3) 8.92 0.03 0.18 (0.03) --
MID CAP VALUE FUND (formerly known as Special Equity Fund) Class Y
1998 (unaudited)** $ 24.21 $ 0.04 $ 1.68 $ (0.04) $ (2.74)
1997 20.43 0.16 6.98 (0.16) (3.20)
1996 17.89 0.25 3.95 (0.24) (1.42)
1995 17.30 0.38 1.61 (0.38) (1.02)
1994(4) 16.34 0.22 0.96 (0.22) --
REGIONAL EQUITY FUND Class Y
1998 (unaudited)** $ 23.16 $ 0.01 $ 0.98 $ (0.01) $ (0.95)
1997 17.75 0.05 6.18 (0.13) (0.69)
1996 17.13 0.09 1.70 (0.06) $ (1.11)
1995 12.52 0.11 4.90 (0.08) (0.32)
1994(1) 12.41 0.07 0.11 (0.07) --
SMALL CAP VALUE FUND(6) Class Y
1998(unaudited)*** $ 18.23 $ 0.02 $ 1.19 $ (0.02) $ (1.27)
1997(7)(8) 17.87 (0.01) 0.37 -- --
1997(9) 13.96 0.04 5.43 (0.04) (1.52)
1996(9) 13.26 0.06 1.81 (0.06) (1.11)
1995(9)(10) 10.00 0.13 3.30 (0.12) (0.05)
MICRO CAP VALUE FUND Class Y
1998 (unaudited)** $ 10.95 $ 0.01 $ (0.10) $ -- $ (0.59)
1997(11) 10.00 -- 0.95 -- --
INTERNATIONAL INDEX FUND(6) Class Y
1998 (unaudited)*** $ 10.99 $ 0.04 $ 1.49 $ (0.11) $ --
1997(7)(8) 12.37 0.06 (1.41) (0.03) --
1997(9) 10.69 0.13 1.70 (0.13)(B) (0.02)
1996(9) 10.48 0.09 0.18 (0.06) --
1995(9)(12) 10.00 0.01 0.47 -- --
INTERNATIONAL FUND Class Y
1998 (unaudited)** $ 13.23 $ 0.17 $ 0.90 $ (0.51) $ (0.25)
1997 10.31 0.03 3.06 (0.17)(B) --
1996 10.30 (0.01) 0.22 (0.20)(B) --
1995 10.22 0.01 0.07 -- --
1994(5) 10.00 (0.01) 0.23 -- --
HEALTH SCIENCES FUND Class Y
1998 (unaudited)** $ 12.08 $ 0.01 $ 0.78 $ (0.01) $ (1.46)
1997 9.87 (0.01) 2.33 (0.01) (0.10)
1996(13) 10.00 0.03 (0.15) (0.01) --
TECHNOLOGY FUND Class Y
1998 (unaudited)** $ 20.29 $ -- $ 0.14 $ -- $ (1.21)
1997 19.29 (0.06) 3.12 -- (2.06)
1996 18.24 (0.04) 2.98 -- (1.89)
1995 11.19 (0.03) 7.31 -- (0.23)
1994(5) 10.00 (0.01) 1.20 -- --
- -----------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
NET ASSET RATIO OF INVESTMENT AVERAGE
DISTRIBUTIONS VALUE NET ASSETS EXPENSES TO INCOME (LOSS) NET ASSETS PORTFOLIO AVERAGE
FROM RETURN END OF TOTAL END OF AVERAGE TO AVERAGE (EXCLUDING TURNOVER COMMISSION
OF CAPITAL PERIOD RETURN* PERIOD (000) NET ASSETS NET ASSETS WAIVERS) RATE RATE (A)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ -- $ 18.24 12.47%+ $749,737 0.80% 0.86% 0.86% 10% $ 0.0596
-- 17.64 32.75 681,151 0.80 0.77 0.89 34 0.0633
-- 13.66 17.58 255,900 0.79 1.39 0.92 21 0.0593
-- 11.78 31.57 132,854 0.75 1.69 1.01 28 --
-- 9.10 2.36+ 31,875 0.75 2.37 1.08 101 --
$ -- $ 23.15 9.33%+ $634,775 0.89% 0.57% 0.89% 69% $ 0.0598
-- 24.21 40.25 509,308 0.89 0.82 0.90 82 0.0691
-- 20.43 25.61 247,828 0.88 1.35 0.88 143 0.0673
-- 17.89 12.84 201,786 0.88 2.30 0.95 72 --
-- 17.30 7.31+ 128,806 0.79 1.93 1.03 116 --
$ -- $ 23.19 4.77%+ $345,212 0.90% 0.13% 0.91% 6% $ 0.0543
-- 23.16 36.49 351,007 0.90 0.35 0.90 17 0.0699
-- 17.75 11.27 259,138 0.88 0.49 0.90 36 0.0697
-- 17.13 41.40 188,583 0.84 0.78 0.95 42 --
-- 12.52 1.46+ 96,045 0.80 0.82 1.05 41 --
$ -- $ 18.15 9.23%+ $ 19,075 0.87% 0.48% 0.87% 7% $ 0.0600
-- 18.23 2.01+ 461,046 1.06 (0.06) 1.06 3 0.0638
-- 17.87 41.96 449,988 1.06 0.25 1.06 29 0.0519
-- 13.96 14.94 297,793 1.08 0.41 1.08 34 0.0398
-- 13.26 34.76+ 209,626 0.60 1.20 1.12 37 --
$ -- $ 10.27 (0.08)%+ $207,436 0.87% 0.20% 0.87% 3% $ 0.0600
-- 10.95 9.50 246,601 0.90 (0.02) 1.07 0 0.0676
$ -- $ 12.41 13.96%+ 143,911 0.75% 1.02% 0.96% 7% $ 0.0249
-- 10.99 (10.93)+ 155,976 0.66 1.23 0.95 0 0.0207
-- 12.37 17.24 210,538 0.73 1.15 1.03 3 0.0241
-- 10.69 2.56 142,478 0.81 1.18 1.10 6 0.0221
-- 10.48 4.80+ 60,073 1.18 1.32 1.39 0 --
$ -- $ 13.54 8.05%+ $336,651 1.53% (0.36)% 1.59% 53% $ 0.1473
-- 13.23 30.38 217,414 1.67 0.06 1.67 96 0.0199
-- 10.31 2.11 135,238 1.72 (0.06) 1.72 100 0.0345
-- 10.30 0.78 94,400 1.74 0.12 1.81 57 --
-- 10.22 2.20+ 47,963 1.75 (0.19) 2.05 16 --
$ -- $ 11.40 8.77%+ $ 38,952 0.90% 0.34% 0.94% 22% $ 0.0600
-- 12.08 23.89 41,243 0.90 0.06 1.04 54 0.0695
-- 9.87 (1.20)+ 12,485 0.90 0.43 1.87 19 0.0700
$ -- $ 19.22 2.13%+ $136,293 0.90% (0.43)% 0.90% 53% $ 0.0599
-- 20.29 17.95 148,659 0.90 (0.41) 0.92 150 0.0675
-- 19.29 18.85 64,602 0.90 (0.60) 1.01 119 0.0700
-- 18.24 66.22 29,272 0.88 (0.35) 1.30 74 --
-- 11.19 11.90+ 6,491 0.80 (0.21) 3.12 43 --
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
On July 31, 1998, Piper Small Company Growth Fund and First American Small
Cap Growth Fund consummated a reorganization transaction pursuant to which
shares of Piper Small Company Growth Fund were exchanged for shares of Small
Cap Growth Fund. Piper Small Company Growth Fund is the financial reporting
survivor. Therefore, the financial highlights for Small Cap Growth Fund
represent the financial highlights of Piper Small Company Growth Fund. Since
there were no outstanding Class Y Shares of Piper Small Company Growth Fund
immediately prior to such reorganization, no financial information is
provided for the Class Y Shares of Small Cap Growth Fund. Instead, the
financial highlights for the Class A Shares of Small Cap Growth Fund, which
represent the financial highlights of the Class A Shares of Piper Small
Company Growth Fund, are set forth below.
Except as indicated, for the period ended March 31, 1998 (unaudited)
and for the periods ended September 30,
For a share outstanding throughout the applicable period
<TABLE>
<CAPTION>
REALIZED AND DIVIDENDS
NET ASSET NET UNREALIZED FROM NET DISTRIBUTIONS
VALUE BEGINNING INVESTMENT GAINS ON INVESTMENT FROM CAPITAL
OF PERIOD INCOME INVESTMENTS INCOME GAINS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SMALL CAP GROWTH FUND Class A(1)
1998 (unaudited)** $ 17.41 $ (0.06) $ 1.02 $ -- $ (0.29)
1997 17.11 (0.16) 5.66 (0.04) (5.16)
1996(2)(3) 17.68 0.06 0.87 (0.07) (1.43)
1995 15.61 0.09 2.07 (0.09) --
1994 15.30 0.07 0.27 (0.03) --
1993 12.33 0.02 3.00 (0.05) --
1992 11.65 0.07 0.65 (0.04) --
1991 8.34 0.07 3.31 (0.07) --
1990 9.14 0.09 (0.67) (0.22) --
1989(4) 7.34 0.35 1.69 (0.24) --
1988(5) 7.18 0.09 0.18 (0.11) --
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* TOTAL RETURN EXCLUDES SALES CHARGES.
** FOR THE SIX MONTH PERIOD ENDED MARCH 31, 1998. ALL RATIOS FOR THE PERIOD
HAVE BEEN ANNUALIZED.
(1) PER SHARE AMOUNTS FOR SMALL CAP GROWTH FUND HAVE BEEN ADJUSTED TO REFLECT
THE CONVERSION RATIOS UTILIZED FOR THE REORGANIZATION OF PIPER SMALL COMPANY
GROWTH FUND AND FAIF SMALL CAP GROWTH FUND THAT OCCURRED ON JULY 31, 1998.
PIPER SMALL COMPANY GROWTH FUND IS THE FINANCIAL REPORTING SURVIVOR.
THEREFORE, THE FINANCIAL HIGHLIGHTS FOR SMALL CAP GROWTH FUND REPRESENT THE
FINANCIAL HIGHLIGHTS OF PIPER SMALL COMPANY GROWTH FUND.
(2) ON SEPTEMBER 12, 1996, SHAREHOLDERS OF PIPER SMALL COMPANY GROWTH FUND
APPROVED A CHANGE IN THE FUND'S INVESTMENT OBJECTIVE FROM HIGH TOTAL
INVESTMENT RETURN CONSISTENT WITH PRUDENT INVESTMENT RISK TO LONG-TERM
CAPITAL APPRECIATION. IN CONNECTION WITH THIS CHANGE, PIPER SMALL COMPANY
GROWTH FUND'S INVESTMENT POLICIES WERE REVISED ACCORDINGLY.
(3) PER SHARE AMOUNTS HAVE BEEN ADJUSTED TO REFLECT THE EFFECT OF THE STOCK
DIVIDEND DECLARED ON OCTOBER 21, 1996.
(4) EFFECTIVE SEPTEMBER 30, 1989, THE BOARD OF DIRECTORS OF THIS FUND APPROVED
A CHANGE IN THE FUND'S FISCAL YEAR END FROM OCTOBER 31 TO SEPTEMBER 30.
(5) FOR THE PERIOD ENDED OCTOBER 31.
14
<PAGE>
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
NET ASSET RATIO OF INVESTMENT AVERAGE
DISTRIBUTIONS VALUE NET ASSETS EXPENSES TO INCOME (LOSS) NET ASSETS AVERAGE
FROM RETURN END OF TOTAL END OF AVERAGE TO AVERAGE (EXCLUDING PORTFOLIO COMMISSION
OF CAPITAL PERIOD RETURN* PERIOD (000) NET ASSETS NET ASSETS WAIVERS) TURNOVER RATE (A)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ -- $ 18.08 5.72%+ $35,730 1.33% (0.57) % 1.86% 43% $ 0.0600
-- 17.41 45.66 35,647 1.34 (0.75) 1.98 109 0.0600
-- 17.11 5.38 30,908 1.32 0.20 1.79 125 0.0600
-- 17.68 13.88 48,421 1.40 0.43 1.63 182 --
-- 15.61 2.12 78,376 1.32 0.37 1.54 177 --
-- 15.30 24.56 84,008 1.28 0.50 1.86 154 --
-- 12.33 6.18 9,084 1.47 0.56 2.49 420 --
-- 11.65 40.71 9,194 1.32 0.61 2.39 507 --
-- 8.34 (6.61) 8,414 1.49 1.03 2.55 514 --
-- 9.14 27.86+ 12,534 1.30 3.95 2.23 375 --
-- 7.34 3.47 19,325 1.52 1.13 2.20 202 --
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
THE FUNDS
FAIF is an open-end management investment company which offers shares in
several different mutual funds (collectively, the "FAIF Funds"), each of
which evidences an interest in a separate and distinct investment
portfolio. Shareholders may purchase shares in each FAIF Fund through
three separate classes (Class A, Class B and Class Y) 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 and Class B 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 Real
Estate Securities Fund, Health Sciences Fund, and Technology Fund is a
diversified investment company, as defined in the Investment Company Act of
1940 (the "1940 Act"). Real Estate Securities Fund, Health Sciences Fund,
and Technology Fund are non-diversified companies under the 1940 Act.
If a percentage limitation on investments by a Fund stated below or in the
Statement of Additional Information is adhered to at the time of an
investment, a later increase or decrease in percentage resulting from
changes in asset values will not be deemed to violate the limitation
except in the case of the 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 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, except in the case of Equity Income
Fund, in no event will more than 5% of any Fund's net assets be invested
in non-investment grade securities. Descriptions of the rating categories
of Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies, Inc. ("Standard & Poor's") and Moody's Investors Service, Inc.
("Moody's") are contained in the Statement of Additional Information.
When the term "equity securities" is used in this Prospectus, it refers to
common stock and securities which are convertible into or exchangeable
for, or which carry warrants or other rights to acquire, common stock.
This section also contains information concerning certain investment risks
borne by Fund shareholders under the heading "-- Risks to
16
<PAGE>
Consider." Further information concerning the securities in which the
Funds may invest and related matters is set forth under "Special
Investment Methods."
----------------------------------------------------------------------------
BALANCED FUND
OBJECTIVE. Balanced Fund has an objective of maximizing total return
(capital appreciation plus income).
INVESTMENT POLICIES. Balanced Fund seeks to achieve its objective by
investing in a balanced portfolio of equity securities and fixed income
securities. Over the long term, it is anticipated that the Fund's asset
mix will average approximately 60% equity securities and 40% fixed income
securities with the asset mix normally ranging between 40% and 75% equity
securities, between 25% and 60% fixed income securities (including only
that portion of the value of convertible securities attributable to their
fixed income characteristics), and between 0% and 25% money market
instruments. The Advisor may make moderate shifts among asset classes in
order to attempt to increase returns or reduce risk.
With respect to the equity security portion of the Fund's portfolio, the
Advisor follows the same investment policies as are described below under
"-- Large Cap Value Fund -- Investment Policies."
The fixed income portion of the Fund's portfolio is invested in investment
grade debt securities, at least 65% of which are United States Government
obligations and corporate debt obligations and mortgage-related securities
rated at least A by Standard & Poor's or Moody's or which have been assigned
an equivalent rating by another nationally recognized statistical rating
organization. Under normal market conditions, the weighted average maturity
of the fixed income securities held by the Fund will not exceed 15 years.
The Fund's permitted fixed income investments include notes, bonds and
discount notes of United States Government agencies or instrumentalities
(including zero coupon securities); domestic issues of corporate debt
obligations having floating or fixed rates of interest and rated at least
BBB by Standard & Poor's or Baa by Moody's, or which have been assigned an
equivalent rating by another nationally recognized statistical rating
organization, or which are of comparable quality in the judgment of the
Advisor; other investments, including mortgage-backed securities, which
are rated in one of the four highest categories by a nationally recognized
statistical rating organization or which are of comparable quality in the
judgment of the Advisor; and commercial paper which is rated A-1 by
Standard & Poor's or P-1 by Moody's or which has been assigned an
equivalent rating by another nationally recognized statistical rating
organization. Unrated securities deemed to be of comparable quality to
rated securities as set forth above will not exceed 25% of the aggregate
value of the Fund's total fixed income assets.
Subject to the foregoing limitations, the fixed income securities in which
the Fund may invest include (i) mortgage-backed securities (provided that
the Fund will not invest more than 10% of its total fixed income assets in
interest-only, principal-only or inverse floating rate mortgage-backed
securities); (ii) asset-backed securities; and (iii) bank instruments. In
addition, the Fund may invest up to 15% of its total fixed income assets
in foreign securities payable in United States dollars. For information
about these kinds of investments and certain associated risks, see the
related headings under "Special Investment Methods," and for information
concerning certain risks associated with investing in fixed income
securities generally, see "Special Investment Methods -- Fixed Income
Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund and write call
options on stock indices related to such equity securities; (iv) purchase
securities on a when-issued or delayed delivery basis; (v) engage in the
lending of portfolio
17
<PAGE>
securities; (vi) in order to attempt to reduce risk, invest in exchange
traded put and call options on interest rate futures contracts and on
interest rate indices; (vii) in order to attempt to reduce risk, invest in
exchange traded interest rate futures contracts and options thereon;
(viii) invest up to 25% of its total fixed income assets in mortgage
dollar roll transactions and (ix) in order to attempt to reduce risk,
write covered call options on interest rate indices. For information about
these investment methods, restrictions on their use, and certain
associated risks, see the related headings under "Special Investment
Methods."
For temporary defensive purposes, the Fund may without limitation hold
cash or invest in cash items of the kinds described under "Special
Investment Methods -- Cash Items." The Fund also may invest not more than
35% of its total assets in cash and cash items in order to utilize assets
awaiting normal investment.
----------------------------------------------------------------------------
REAL ESTATE SECURITIES FUND
OBJECTIVE. Real Estate Securities Fund has an objective of providing above
average current income and long-term capital appreciation by investing
primarily in equity securities of real estate companies.
INVESTMENT POLICIES. Under normal market conditions, Real Estate Securities
Fund invests at least 65% of its total assets in income producing equity
securities of publicly traded companies principally engaged in the real
estate industry. For this purpose, a company is deemed to be "principally
engaged" in the real estate industry if (i) it derives at least 50% of its
revenues or profits from the ownership, construction, management, financing
or sale of residential, commercial or industrial real estate, or (ii) has at
least 50% of the fair market value of its assets invested in such real
estate. The Fund seeks to invest in equity securities that provide a
dividend yield that exceeds the composite dividend yield of the securities
included in the S&P 500.
A majority of the Fund's total assets will be invested in securities of
real estate investment trusts ("REITs"). REITs are publicly traded
corporations or trusts that specialize in acquiring, holding, and managing
residential, commercial or industrial real estate. A REIT is not taxed at
the entity level on income distributed to its shareholders or unitholders
if it distributes to shareholders or unitholders at least 95% of its
taxable income for each taxable year and complies with regulatory
requirements relating to its organization, ownership, assets and income.
REITs generally can be classified as Equity REITs, Mortgage REITs, and
Hybrid REITs. An Equity REIT invests the majority of its assets directly
in real property and derives its income primarily from rents and from
capital gains on real estate appreciation which are realized through
property sales. A Mortgage REIT invests the majority of its assets in real
estate mortgage loans and derives its income primarily from interest
payments. A Hybrid REIT combines the characteristics of an Equity REIT and
a Mortgage REIT. Although the Fund can invest in all three kinds of REITs,
its emphasis is expected to be on investments in Equity REITs.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods --
Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed
on a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
associated risks, see "Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund and write call
options on stock indices related to such equity securities; (iv) purchase
securities on a when-issued or delayed delivery
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<PAGE>
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.
Because Real Estate Securities Fund invests primarily in the real estate
industry, it is particularly subject to risks associated with that
industry. The real estate industry has been subject to substantial
fluctuations and declines on a local, regional and national basis in the
past and may continue to be in the future. Real property values and
incomes from real property may decline due to general and local economic
conditions, overbuilding and increased competition, increases in property
taxes and operating expenses, changes in zoning laws, casualty or
condemnation losses, regulatory limitations on rents, changes in
neighborhoods and in demographics, increases in market interest rates, or
other factors. Factors such as these may adversely affect companies which
own and operate real estate directly, companies which lend to such
companies, and companies which service the real estate industry. Although
the Fund will operate as a non-diversified investment company under the
1940 Act, it intends to conduct its operations so as to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code").
Because the Fund may invest a substantial portion of its assets in REITs,
it also is subject to risks associated with direct investments in REITs.
Equity REITs will be affected by changes in the values of and incomes from
the properties they own, while Mortgage REITs may be affected by the
credit quality of the mortgage loans they hold. In addition, REITs are
dependent on specialized management skills and on their ability to
generate cash flow for operating purposes and to make distributions to
shareholders or unitholders. REITs may have limited diversification and
are subject to risks associated with obtaining financing for real
property, as well as to the risk of self-liquidation. REITs also can be
adversely affected by their failure to qualify for tax-free pass-through
treatment of their income under the Code or their failure to maintain an
exemption from registration under the 1940 Act. By investing in REITs
indirectly through the Fund, a shareholder bears not only a proportionate
share of the expenses of the Fund, but also may indirectly bear similar
expenses of some of the REITs in which it invests.
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EQUITY INCOME FUND
OBJECTIVE. Equity Income Fund has an objective of long-term growth of
capital and income.
INVESTMENT POLICIES. Under normal market conditions, Equity Income Fund
invests at least 65% of its total assets in equity securities of issuers
believed by the Advisor to be characterized by sound management, the
ability to finance expected growth and the ability to pay above average
dividends.
The Fund invests in equity securities that have relatively high dividend
yields and which, in the Advisor's opinion, will result in a relatively
stable Fund dividend with a growth rate sufficient to maintain the
purchasing power of the income stream. Although the Advisor anticipates
that higher yielding equity securities will generally represent the core
holdings of the Fund, the Fund may invest in lower yielding but higher
growth equity securities to the extent that the Advisor believes such
investments are appropriate to achieve portfolio balance. All securities
held by the Fund will provide current income consistent with the Fund's
investment objective.
The "equity securities" in which the Fund may invest include corporate
debt obligations which are convertible into common stock. These
convertible debt obligations may include obligations rated at the time of
purchase as low as
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<PAGE>
CCC by Standard & Poor's or Caa by Moody's, or which have been assigned an
equivalent rating by another nationally recognized statistical rating
organization, or which are of comparable quality in the judgment of the
Advisor. Debt obligations rated less than BBB by Standard & Poor's or Baa
by Moody's are considered to be less than "investment grade" and are
sometimes referred to as "junk bonds." Obligations rated CCC by Standard &
Poor's or Caa by Moody's are considered to be of poor standing and are
predominantly speculative. Descriptions of Standard & Poor's and Moody's
rating categories are contained in the Statement of Additional
Information. If the rating of an obligation is reduced below the
categories set forth above after purchase or is discontinued, the Fund is
not required to sell the obligation but may consider doing so.
Purchases of less than investment grade convertible debt obligations are
intended to advance the Fund's objective of long-term growth of capital
through the "upside" potential of the obligations' conversion features and
to advance the Fund's objective of income through receipt of interest
payable on the obligations. The Fund will not invest more than 25% of its
total assets in convertible debt obligations which are rated less than
investment grade or which are of comparable quality in the judgment of the
Advisor. For the year ended September 30, 1997, the following weighted
average percentages of the Fund's total assets were invested in
convertible and nonconvertible debt obligations with the indicated
Standard & Poor's ratings or their equivalents: AAA, 0%; AA, 0%; A, 0%;
BBB, 1%; BB, 0%; B, 1%; and CCC, 0%.
Debt obligations which are rated less than investment grade generally are
subject to greater market fluctuations and greater risk of loss of income
and principal due to default by the issuer than are higher-rated
obligations. The value of these obligations tends to reflect short-term
corporate, economic, interest rate and market developments and investor
perceptions of the issuer's credit quality to a greater extent than
investment grade obligations. In addition, since the market for these
obligations is relatively new and does not have as many participants as
the market for higher-rated obligations, it may be more difficult to
dispose of or to determine the value of these obligations. In the case of
a convertible debt obligation, these risks may be present in a greater
degree where the principal amount of the obligation is greater than the
current market value of the common stock into which it is convertible.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods --
Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed
on a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
associated risks, see "Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund and write call
options on stock indices related to such equity securities; (iv) purchase
securities on a when-issued or delayed delivery basis; and (v) engage in
the lending of portfolio securities. For information about these
investment methods, restrictions on their use, and certain associated
risks, see the related headings under "Special Investment Methods."
For temporary defensive purposes, the Fund may without limitation hold
cash or invest in cash items of the kinds described under "Special
Investment Methods -- Cash Items." The Fund also may invest not more than
35% of its total assets in cash and cash items in order to utilize assets
awaiting normal investment.
20
<PAGE>
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EQUITY INDEX FUND
OBJECTIVE. Equity Index Fund has an objective of providing investment
results that correspond to the performance of the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500").
INVESTMENT POLICIES. Equity Index Fund invests primarily (at least 65% of
total assets) in common stocks included in the S&P 500. The Advisor
believes that the Fund's objective can best be achieved by investing in
the common stocks of approximately 50% to 100% of the issues included in
the S&P 500, depending on the size of the Fund.
Standard & Poor's designates the stocks included in the S&P 500 on a
statistical basis. A particular stock's weighting in the S&P 500 is based
on its total market value (that is, its market price per share times the
number of shares outstanding) relative to that of all stocks included in
the S&P 500. From time to time, Standard & Poor's may add or delete stocks
to or from the S&P 500. Inclusion of a particular stock in the S&P 500
does not imply any opinion by Standard & Poor's as to its merits as an
investment, nor is Standard & Poor's a sponsor of or in any way affiliated
with the Fund.
The Fund is managed by utilizing a computer program that identifies which
stocks should be purchased or sold in order to replicate, as closely as
possible, the composition of the S&P 500. The Fund includes a stock in its
investment portfolio in the order of the stock's weighting in the S&P 500,
starting with the most heavily weighted stock. Thus, the proportion of Fund
assets invested in a stock or industry closely approximates the percentage
of the S&P 500 represented by that stock or industry. Portfolio turnover is
expected to be well below that of actively managed mutual funds. Inasmuch as
the common stock of the Advisor's parent company U.S. Bancorp is included in
the S&P 500, such stock may be purchased by the Fund consistent with its
indexing-based policies.
Because the Fund may not always hold all of the stocks included in the S&P
500, the Fund will not duplicate the S&P 500's performance precisely.
However, there will be a close correlation between the Fund's performance
and that of the S&P 500 in both rising and falling markets. The Fund will
attempt to achieve a correlation between the performance of its portfolio
and that of the S&P 500 of at least 95%, without taking into account
expenses of the Fund. A perfect correlation would be indicated by a figure
of 100%, which would be achieved if the Fund's net asset value, including
the value of its dividends and capital gains distributions, increased or
decreased in exact proportion to changes in the S&P 500. The Fund's
ability to replicate the performance of the S&P 500 may be affected by,
among other things, changes in securities markets, the manner in which
Standard & Poor's calculates the S&P 500, the amount and timing of cash
flows into and out of the Fund, commissions, sales charges (if any) and
other expenses. Although cash flows into and out of the Fund will affect
the Fund's portfolio turnover rate and its ability to replicate the S&P
500's performance, investment adjustments will be made, as practicably as
possible, to account for these circumstances. In the event the Fund is
unable to achieve this correlation over time, the Board of Directors of
the Fund will consider alternative strategies for the Fund.
The Fund also may invest up to 20% of its total assets in the aggregate in
stock index futures contracts, options on stock indices, options on stock
index futures, and index participation contracts based on the S&P 500. The
Fund will not invest in these types of contracts and options for
speculative purposes, but rather to maintain sufficient liquidity to meet
redemption requests; to increase the level of Fund assets devoted to
replicating the composition of the S&P 500; and to reduce transaction
costs. These types of contracts and options and certain associated risks
are described under "Special Investment Methods -- Options Transactions."
In addition, the Fund may engage in securities lending as described under
"Special Investment Methods -- Lending of Portfolio Securities."
For temporary defensive purposes, the Fund may, without limitation, hold
cash or invest in cash
21
<PAGE>
items of the kinds described under "Special Investment Methods -- Cash
Items." The Fund also may invest not more than 35% of its total assets in
cash and cash items in order to utilize assets awaiting normal investment.
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LARGE CAP VALUE FUND
OBJECTIVES. Large Cap Value Fund has a primary objective of capital
appreciation. A secondary objective of the Fund is to provide current
income.
INVESTMENT POLICIES. Under normal market conditions, Large Cap Value Fund
invests at least 65% of its total assets in common stocks diversified
among a broad range of industries and among companies that have a market
capitalization of at least $1 billion at the time of purchase. In
selecting equity securities, the Advisor employs a value-based selection
discipline, investing in equity securities it believes are undervalued
relative to other securities in the same industry or market at the time of
purchase. In assessing relative value, the Advisor will consider factors
such as ratios of market price to earnings, market price to book value,
market price to assets, estimated earnings growth rate, cash flow and
liquidation value.
The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of less than $1
billion and in fixed income securities of the kinds described under
"Special Investment Methods -- Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed on
a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
associated risks, see "Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund and write call
options on stock indices related to such equity securities; (iv) purchase
securities on a when-issued or delayed delivery basis; and (v) engage in
the lending of portfolio securities. For information about these
investment methods, restrictions on their use, and certain associated
risks, see the related headings under "Special Investment Methods."
For temporary defensive purposes, the Fund may, without limitation, hold
cash or invest in cash items of the kinds described under "Special
Investment Methods -- Cash Items." The Fund also may invest not more than
35% of its total assets in cash and cash items in order to utilize assets
awaiting normal investment.
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LARGE CAP GROWTH FUND
OBJECTIVES. Large Cap Growth Fund has a primary objective of long-term
growth of capital. A secondary objective of the Fund is to provide current
income.
INVESTMENT POLICIES. Under normal market conditions, Large Cap Growth Fund
invests at least 65% of its total assets in equity securities of companies
that have a market capitalization of at least $1 billion at the time of
purchase that, in the Advisor's judgment, exhibit a combination of above
average growth in revenue and earnings, strong management and sound and
improving financial condition.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods --
Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed
on a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
22
<PAGE>
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.
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MID CAP VALUE FUND
OBJECTIVE. Mid Cap Value Fund has an objective of capital appreciation.
INVESTMENT POLICIES. Under normal market conditions, Mid Cap Value Fund
invests at least 65% of its total assets in equity securities of
mid-capitalization companies. For these purposes, mid-capitalization
companies are deemed those with market capitalizations of from $1 billion to
$5 billion at the time of purchase. In selecting equity securities, the
Advisor employs a value-based selection discipline, investing in equity
securities it believes are undervalued relative to other securities in the
same industry or market at the time of purchase. In assessing relative
value, the Advisor will consider factors such as ratios of market price to
earnings, market price to book value, market price to assets, estimated
earnings growth rate, cash flow and liquidation value.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods --
Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed
on a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
associated risks, see "Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund and write call
options on stock indices related to such equity securities; (iv) purchase
securities on a when-issued or delayed delivery basis; and (v) engage in
the lending of portfolio securities. For information about these
investment methods, restrictions on their use, and certain associated
risks, see the related headings under "Special Investment Methods."
For temporary defensive purposes, the Fund may, without limitation, hold
cash or invest in cash items of the kinds described under "Special
Investment Methods -- Cash Items." The Fund also may invest not more than
35% of its total assets in cash and cash items in order to utilize assets
awaiting normal investment.
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REGIONAL EQUITY FUND
OBJECTIVE. Regional Equity Fund has an objective of capital appreciation.
INVESTMENT POLICIES. Regional Equity Fund seeks to achieve its objective
by investing, in normal market conditions, at least 65% of its total
assets in equity securities of small-capitalization companies
headquartered in Minnesota, North and South Dakota, Montana, Wisconsin,
Michigan, Iowa, Nebraska, Colorado and Illinois. For these purposes,
small-capitalization companies are deemed those with market
capitalizations of
23
<PAGE>
less than $1 billion at the time of purchase. In selecting equity
securities, the Advisor employs a value-based selection discipline,
investing in equity securities it believes are undervalued relative to
other securities in the same industry or market at the time of purchase.
In assessing relative value, the Advisor will consider factors such as
ratios of market price to earnings, market price to book value, market
price to assets, estimated earnings growth rate, cash flow and liquidation
value.
In addition to the risks associated with investing in small-capitalization
companies, see "-- Risks to Consider -- Small-Capitalization Companies"
below, the Fund's policy of concentrating its equity investments in a
geographic region means that it will be subject to adverse economic,
political or other developments in that region. Although the region in
which the Fund principally invests has a diverse industrial base
(including, but not limited to, agriculture, mining, retail,
transportation, utilities, heavy and light manufacturing, financial
services, insurance, computer technology and medical technology), this
industrial base is not as diverse as that of the country as a whole. The
Fund therefore may be less diversified by industry and company than other
funds with a similar investment objective and no geographic limitation.
The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities without regard to the location of the issuer's
headquarters or the issuer's market capitalization and in fixed income
securities of the kinds described under "Special Investment Methods --
Fixed Income Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund and write call options
on stock indices related to such equity securities; (iv) purchase securities
on a when-issued or delayed delivery basis; and (v) engage in the lending of
portfolio securities. For information about these investment methods,
restrictions on their use, and certain associated risks, see the related
headings under "Special Investment Methods."
For temporary defensive purposes, the Fund may, without limitation, hold
cash or invest in cash items of the kinds described under "Special
Investment Methods -- Cash Items." The Fund also may invest not more than
35% of its total assets in cash and cash items in order to utilize assets
awaiting normal investment.
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SMALL CAP GROWTH FUND
OBJECTIVE. Small Cap Growth Fund has an objective of growth of capital.
INVESTMENT POLICIES. Under normal market conditions, Small Cap Growth Fund
invests at least 65% of its total assets in equity securities of
small-capitalization companies that exhibit, in the Advisor's opinion,
outstanding potential for superior growth. For these purposes,
small-capitalization companies are deemed those with market
capitalizations of less than $1 billion at the time of purchase. Companies
that participate in sectors that are identified by the Advisor as having
long-term growth potential generally are expected to make up a substantial
portion of the Fund's holdings. These companies often have established a
market niche or have developed unique products or technologies that are
expected by the Advisor to produce superior growth in revenues and
earnings.
The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of $1 billion or
more and in fixed income securities of the kinds described under "Special
Investment Methods -- Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed
on a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
24
<PAGE>
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.
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SMALL CAP VALUE FUND
OBJECTIVE. Small Cap Value Fund has an objective of capital appreciation.
INVESTMENT POLICIES. Under normal market conditions, Small Cap Value Fund
invests at least 65% of its total assets in equity securities of small-
capitalization companies. For these purposes, small-capitalization companies
are deemed those with market capitalization of less than $1 billion at the
time of purchase. In selecting equity securities, the Advisor utilizes a
value-based selection discipline, investing in equity securities it believes
are undervalued relative to other securities in the same industry or market
at time of purchase. In assessing relative value, the Advisor will consider
such factors as ratios of market price to earnings, market price to book
value, market price to assets, estimated earnings growth rate, cash flow and
liquidation value.
The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of $1 billion or
more and in fixed income securities of the kinds described under "Special
Investment Methods -- Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed
on a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
associated risks, see "Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund; (iv) purchase
securities on a when-issued or delayed delivery basis; and (v) engage in
the lending of portfolio securities. For information about these
investment methods, restrictions on their use, and certain associated
risks, see the related headings under "Special Investment Methods."
For temporary defensive purposes, the Fund may, without limitation, hold
cash or invest in cash items of the kinds described under "Special
Investment Methods -- Cash Items." The Fund also may invest not more than
35% of its total assets in cash and cash items in order to utilize assets
awaiting normal investment.
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MICRO CAP VALUE FUND
OBJECTIVE. Micro Cap Value Fund has an objective of capital appreciation.
INVESTMENT POLICIES. Under normal market conditions, Micro Cap Value Fund
invests at least 65% of its total assets in equity securities of very
small-capitalization companies. For these purposes, very
small-capitalization companies are deemed those with market
capitalizations of less than $500 million at the time of purchase. In
selecting equity securities, the Advisor utilizes a value-based
25
<PAGE>
selection discipline, investing in equity securities it believes are
undervalued relative to other securities in the same industry or market at
time of purchase. In assessing relative value, the Advisor will consider
such factors as ratios of market price to earnings, market price to book
value, market price to assets, estimated earnings growth rate, cash flow
and liquidation value.
The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of $500 million
or more and in fixed income securities of the kinds described under
"Special Investment Methods -- Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed
on a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
associated risks, see "Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund; (iv) purchase
securities on a when-issued or delayed delivery basis; and (v) engage in
the lending of portfolio securities. For information about these
investment methods, restrictions on their use, and certain associated
risks, see the related headings under "Special Investment Methods."
For temporary defensive purposes, the Fund may, without limitation, hold
cash or invest in cash items of the kinds described under "Special
Investment Methods -- Cash Items." The Fund also may invest not more than
35% of its total assets in cash and cash items in order to utilize assets
awaiting normal investment.
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INTERNATIONAL INDEX FUND
OBJECTIVE. International Index Fund has an objective of providing
investment results that correspond to the performance of the Morgan
Stanley Europe, Australia, Far East Composite Index (the "EAFE Index").
INVESTMENT POLICIES. International Index Fund invests primarily (at least
65% of total assets) in common stocks included in the EAFE Index. The EAFE
Index includes approximately 1,077 companies representing the stock
markets of approximately 14 European countries, Australia, New Zealand,
Japan, Hong Kong and Singapore/Malaysia. The Advisor believes that the
Fund's objective can best be achieved by investing in the common stocks of
approximately 50% to 100% of the issues included in the EAFE Index,
depending on the size of the Fund. Normally, International Index Fund will
invest at least 65% of its total assets in securities traded in at least
three foreign countries.
Morgan Stanley designates the stocks included in the EAFE Index. A
particular stock's weighting in the EAFE Index is based on its total
market value (that is, its market price per share times the number of
shares outstanding) relative to that of all stocks included in the EAFE
Index. From time to time, Morgan Stanley may add or delete stocks to or
from the EAFE Index. Inclusion of a particular stock in the EAFE Index
does not imply any opinion by Morgan Stanley as to its merits as an
investment, nor is Morgan Stanley a sponsor of or in any way affiliated
with the Fund.
The Fund is managed by utilizing a computer program that identifies which
stocks should be purchased or sold in order to replicate, as closely as
possible, the composition of the EAFE Index. The Fund includes a stock in
its investment portfolio in the order of the stock's weighting in the EAFE
Index, starting with the most heavily weighted stock. Thus, the proportion
of Fund assets invested in an industry or country closely approximates the
percentage of the EAFE Index represented by that industry or country.
Portfolio turnover is expected to be well below that of actively managed
mutual funds.
Because the Fund may not always hold all of the stocks included in the
EAFE Index, the Fund will
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not duplicate the EAFE Index performance precisely. However, there will be a
close correlation between the Fund's performance and that of the EAFE Index
in both rising and falling markets. The Fund will attempt to achieve a
correlation between the performance of its portfolio and that of the EAFE
Index of at least 95%, without taking into account expenses of the Fund. A
perfect correlation would be indicated by a figure of 100%, which would be
achieved if the Fund's net asset value, including the value of its dividends
and capital gains distributions, increased or decreased in exact proportion
to changes in the EAFE Index. The Fund's ability to replicate the
performance of the EAFE Index may be affected by, among other things,
changes in securities market, the manner in which Morgan Stanley calculates
the EAFE Index, administrative and other expenses incurred by the Fund,
taxes (including foreign withholding taxes, which will affect the Fund), the
amount and timing of cash flows into and out of the Fund, commissions, sales
charges (if any) and other expenses. Although cash flows into and out of the
Fund will affect the Fund's portfolio turnover rate and its ability to
replicate the EAFE Index's performance, investment adjustments will be made,
as practicably as possible, to account for these circumstances. In the event
the Fund is unable to achieve this correlation over time, the Board of
Directors of the Fund will consider alternative strategies for the Fund.
The Fund also may invest up to 20% of its total assets in the aggregate in
stock index futures contracts, options on stock indices, options on stock
index futures and index participation contracts based on the EAFE Index. The
Fund will not invest in these types of contracts and options for speculative
purposes, but rather to maintain sufficient liquidity to meet redemption
requests; to increase the level of Fund assets devoted to replicating the
composition of the EAFE Index; and to reduce transaction costs. These types
of contracts and options and certain associated risks are described under
"Special Investment Methods -- Options Transactions." In addition, the Fund
may enter into repurchase agreements and engage in securities lending as
described under "Special Investment Methods -- Repurchase Agreements" and
"Special Investment Methods -- Lending of Portfolio Securities."
For temporary defensive purposes, the Fund may, without limitation, hold
cash or invest in cash items of the kinds described under "Special
Investment Methods -- Cash Items." The Fund also may invest not more than
35% of its total assets in cash and cash items in order to utilize assets
awaiting normal investment.
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INTERNATIONAL FUND
OBJECTIVE. International Fund has an objective of long-term growth of
capital.
INVESTMENT POLICIES. Under normal market conditions, International Fund
invests at least 65% of its total assets in an internationally diversified
portfolio of equity securities which trade in markets other than the
United States. Generally these securities are issued by companies (i)
domiciled in countries other than the United States, or (ii) that derive
at least 50% of either their revenues or their pre-tax income from
activities outside of the United States. The securities in which the Fund
invests include common and preferred stock, securities (bonds and
preferred stock) convertible into common stock, warrants and securities
representing underlying international securities such as American
Depositary Receipts and European Depositary Receipts. The Fund also may
hold securities of other investment companies (which investments are also
subject to the advisory fee) and depositary or custodial receipts
representing beneficial interests in any of the foregoing securities.
The Fund may invest in securities of issuers in, but not limited to,
Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China,
Colombia, the Czech Republic, Denmark, Finland, France, Germany, Greece,
Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan,
Korea, Luxembourg, Malaysia, Mexico, the Netherlands, New Zealand, Norway,
Pakistan, Peru, the
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<PAGE>
Philippines, Poland, Portugal, Singapore, South Africa, Spain, Sri Lanka,
Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Kingdom, and
Venezuela. Normally, the Fund will invest at least 65% of its total assets
in securities traded in at least three foreign countries, including the
countries listed above. It is possible, although not currently
anticipated, that up to 35% of the Fund's assets could be invested in
United States companies.
In investing the Fund's assets, the Sub-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. Investments are
expected to be made primarily in developed markets and larger
capitalization companies. However, the Fund also may invest in emerging
markets where smaller capitalization companies are the norm.
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 50% of the equity securities owned by the Fund and write call options
on stock indices related to such equity securities; (iv) purchase securities
on a when-issued or delayed delivery basis; (v) engage in the lending of
portfolio securities; (vi) engage in foreign currency transactions; (vii) in
order to attempt to reduce risk, purchase put and call options on foreign
currencies; (viii) write covered call options on foreign currencies owned by
the Fund; and (ix) enter into contracts for the future purchase or delivery
of securities, foreign currencies, and indices, purchase or sell options on
any such futures contracts and engage in related closing transactions. For
information about these investment methods, restrictions on their use, and
certain associated risks, see the related headings under "Special Investment
Methods."
Under normal market conditions, it is expected that the Fund will be fully
invested in equity securities and related hedging instruments (except for
short-term investments of cash for liquidity purposes and pending
investment). However, for temporary defensive purposes, the Fund may,
without limitation, hold cash or invest in cash items of the kinds
described under "Special Investment Methods -- Cash Items." The Fund also
may invest not more than 35% of its total assets in cash and cash items in
order to utilize assets awaiting normal investment.
International Fund is subject to special risks associated with investing
in foreign securities and to declines in net asset value resulting from
changes in exchange rates between the United States dollar and foreign
currencies. These risks are discussed under "Special Investment Methods --
Foreign Securities" and "-- Foreign Currency Transactions" elsewhere
herein. Because of the special risks associated with foreign investing and
the Sub-Advisor's ability to invest substantial portions of the Fund's
assets in a small number of countries, the Fund may be subject to greater
volatility than most mutual funds which invest principally in domestic
securities.
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HEALTH SCIENCES FUND
OBJECTIVE. Health Sciences Fund has an objective of long-term growth of
capital.
INVESTMENT POLICIES. Under normal market conditions, Health Sciences Fund
invests at least 65% of its total assets in equity securities of companies
which the Advisor considers to be principally engaged in the development,
production or distribution of products or services connected with health
care or medicine. Examples of these products and services include
pharmaceuticals, health care services and administration, diagnostics,
medical equipment and supplies, medical technology, and medical research
and development. The Advisor anticipates investing in companies that have
the potential for above average growth in revenue and earnings as a result
of new or unique products, processes or services, increasing demand for a
company's products or services, established market leadership, or
exceptional management. A company will be
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<PAGE>
deemed "principally engaged" in the health sciences industries if at the
time of investment the Advisor determines that at least 50% of its assets,
revenues or profits are derived from those industries.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods --
Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed
on a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
associated risks, see "Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund and write call
options on stock indices related to such equity securities; (iv) purchase
securities on a when-issued or delayed delivery basis; and (v) engage in
the lending of portfolio securities. For information about these
investment methods, restrictions on their use, and certain associated
risks, see the related headings under "Special Investment Methods."
For temporary defensive purposes, the Fund may, without limitation, hold
cash or invest in cash items of the kinds described under "Special
Investment Methods -- Cash Items." The Fund also may invest not more than
35% of its total assets in cash and cash items in order to utilize assets
awaiting normal investment.
Health Sciences Fund operates as a non-diversified investment company, as
defined in the 1940 Act, but intends to conduct its operations so as to
qualify as a regulated investment company for purposes of the Code. Since
a relatively high percentage of the assets of the Fund may be invested in
the securities of a limited number of issuers which will be in the same or
related economic sectors, the Fund's portfolio securities may be more
susceptible to any single economic, technological or regulatory occurrence
than the portfolio securities of diversified investment companies. Many
products and services in the health sciences industries may become rapidly
obsolete due to technological and scientific advances. In addition, the
health sciences industries generally are subject to greater governmental
regulation than many other industries, so that changes in governmental
policies may have a material effect on the demand for products and
services in these industries. Regulatory approvals generally are required
before new drugs, medical devices or medical procedures can be introduced
and before health care providers can acquire additional facilities or
equipment.
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TECHNOLOGY FUND
OBJECTIVE. Technology Fund has an objective of long-term growth of
capital.
INVESTMENT POLICIES. Under normal market conditions, Technology Fund
invests at least 65% of its total assets in equity securities of companies
which the Advisor believes have, or will develop, products, processes or
services that will provide or will benefit significantly from
technological advances and improvements. The description of the technology
sector is interpreted broadly by the Advisor and may include such products
or services as inexpensive computing power, such as personal computers;
improved methods of communications, such as satellite transmission; or
labor saving machines or instruments, such as computer-aided design
equipment. The prime emphasis of the Fund is to identify those companies
positioned, in the Advisor's opinion, to benefit from technological
advances in areas such as semiconductors, minicomputers and peripheral
equipment, scientific instruments, computer software, communications, and
future automation trends in both office and factory settings.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds
29
<PAGE>
described under "Special Investment Methods -- Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of
its total assets in securities of foreign issuers which are either listed
on a United States stock exchange or represented by American Depositary
Receipts. For information about these kinds of investments and certain
associated risks, see "Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering
up to 25% of the equity securities owned by the Fund and write call
options on stock indices related to such equity securities; (iv) purchase
securities on a when-issued or delayed delivery basis; and (v) engage in
the lending of portfolio securities. For information about these
investment methods, restrictions on their use, and certain associated
risks, see the related headings under "Special Investment Methods."
For temporary defensive purposes, the Fund may without limitation hold
cash or invest in cash items of the kinds described under "Special
Investment Methods -- Cash Items." The Fund also may invest not more than
35% of its total assets in cash and cash items in order to utilize assets
awaiting normal investment.
Technology Fund operates as a non-diversified investment company, as defined
in the 1940 Act, but intends to conduct its operations so as to qualify as a
regulated investment company for purposes of the Code. Since a relatively
high percentage of the assets of the Fund may be invested in the securities
of a limited number of issuers which will be in the same or related economic
sectors, the Fund's portfolio securities may be more susceptible to any
single economic, technological or regulatory occurrence than the portfolio
securities of diversified investment companies. In addition, competitive
pressures may have a significant effect on the financial condition of
companies in the technology industry. For example, if technology continues
to advance at an accelerated rate, and the number of companies and product
offerings continue to expand, these companies could become increasingly
sensitive to short product cycles and aggressive pricing.
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RISKS TO CONSIDER
An investment in any of the Funds involves certain risks in addition to
those noted above with respect to particular Funds. These include the
following:
EQUITY SECURITIES GENERALLY. Market prices of equity securities generally,
and of particular companies' equity securities, frequently are subject to
greater volatility than prices of fixed income securities. Market prices
of equity securities as a group have dropped dramatically in a short
period of time on several occasions in the past, and they may do so again
in the future. Each of the Funds is subject to the risk of generally
adverse equity markets.
SMALL-CAPITALIZATION COMPANIES. Regional Equity Fund, Small Cap Growth
Fund, Small Cap Value Fund and Micro Cap Value Fund emphasize investments
in companies with small or very small market capitalizations, and the
remaining Funds (excluding Equity Index Fund and International Index Fund)
are permitted to invest in equity securities of such companies. The equity
securities of such companies frequently have experienced greater price
volatility in the past than those of larger-capitalization companies, and
they may be expected to do so in the future. To the extent that the Funds
invest in small or very small capitalization companies, they are subject
to this risk of greater volatility.
ACTIVE MANAGEMENT. All of the Funds other than Equity Index Fund and
International Index Fund are actively managed to a greater or lesser
degree by the Advisor or, in the case of International Fund, the
Sub-Advisor. The performance of these Funds therefore will reflect in part
the ability of the Advisor or Sub-Advisor to select securities which are
suited to achieving the Funds' investment objectives. Due to their
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<PAGE>
active management, these Funds could underperform other mutual funds with
similar investment objectives or the market generally.
FOREIGN SECURITIES. International Index Fund and International Fund are
subject to special risks associated with investing in foreign securities
and to declines in net asset value resulting from changes in exchange
rates between the United States dollar and foreign securities. These risks
are discussed under "Special Investment Methods -- Foreign Securities"
elsewhere herein. Because of the special risks associated with foreign
investing, the Funds may be subject to greater volatility than most mutual
funds which invest principally in domestic securities.
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 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, 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 International Fund has agreed to pay the
Advisor monthly fees calculated on an annual basis equal to 0.70% of its
average daily net assets. International 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.
While the advisory fee payable to the Advisor with respect to
International Fund is higher than the advisory fee paid by most mutual
funds, the
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<PAGE>
Advisor believes it is comparable to that paid by many funds having
similar investment objectives and policies.
The Glass-Steagall Act generally prohibits banks from engaging in the
business of underwriting, selling or distributing securities and from
being affiliated with companies principally engaged in those activities.
In addition, administrative and judicial interpretations of the
Glass-Steagall Act prohibit bank holding companies and their bank and
nonbank subsidiaries from organizing, 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 INTERNATIONAL FUND
Marvin & Palmer Associates, Inc., 1201 North Market Street, Suite 2300,
Wilmington, Delaware 19801, is Sub-Advisor to International Fund under an
agreement with the Advisor (the "Sub-Advisory Agreement"). The Sub-Advisor
is responsible for the investment and reinvestment of International Fund's
assets and the placement of brokerage transactions in connection
therewith. For its services under the Sub-Advisory Agreement, the
Sub-Advisor is paid a monthly fee by the Advisor calculated on an annual
basis equal to 0.75% of the first $100 million of International Fund's
average daily net assets, 0.50% of International Fund's average daily net
assets in excess of $100 million up to $300 million, 0.45% of
International Fund's average daily net assets in excess of $300 million up
to $500 million and 0.40% of International Fund's average daily net assets
in excess of $500 million.
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 25 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
Balanced Fund is managed by a committee comprised of Mr. Twele, Mr. Doak,
Mr. Murphy, Mr. Rovner, Mr. Dubiak, Mr. Whitcomb, Mr. Dow, Mr. Mellum, Ms.
Rehkamp, Mr. Green, Mr. Shields and Mr. Steele, whose backgrounds are set
forth below.
Equity Income Fund and Large Cap Growth Fund are managed by a committee
comprised of Mr. Doak, Mr. Murphy, Ms. Johnson, Mr. Bren, Mr. Dow, Ms.
Shrewsbury, Mr. Markusen, Mr. Glenn Johnson, Mr. Jeff Johnson, Mr. Kelliher
and Mr. Zarling, whose backgrounds are set forth below.
Large Cap Value Fund is managed by a committee comprised of Mr. Doak, Mr.
Murphy, Mr. Rovner, Mr. Dubiak, Mr. Whitcomb, Mr. Twele, Mr. Dow, Mr. Mellum
and Mr. Shields, whose backgrounds are set forth below.
Mid Cap Value Fund is managed by a committee comprised of Mr. Rovner, Mr.
Shields and Mr. Lundquist, whose backgrounds are set forth below.
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<PAGE>
Small 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.
Regional Equity Fund, Small Cap Value Fund and Micro Cap Value Fund are
managed by a committee comprised of Mr. Dubiak, Mr. Rose, Mr. Buss, Mr.
Hipple, Mr. Sabbann, Mr. Grangaard and Mr. Magdlen, whose backgrounds
are set forth below.
Health Sciences Fund is managed by a committee comprised of Mr. Bren, Mr.
Kelliher and Ms. Halbe, whose backgrounds are set forth below.
The remaining Funds are managed or co-managed as indicated below.
JAMES DOAK is a member of the committees which manage four of the Funds
as set forth above. Mr. Doak joined the Advisor in 1982 after serving for
two years as vice president of INA Capital Advisors and ten years as Vice
President of Loomis-Sayles & Co. He has managed assets for individual and
institutional clients, specializing in equity investments. Mr. Doak
received his bachelor's degree from Brown University and his master's
degree in business administration from the Wharton School of Business. He
is a Chartered Financial Analyst.
JOHN M. MURPHY, JR. is a member of the committees which manage four of the
Funds, as set forth above. Mr. Murphy is Chief Investment Officer of the
Advisor's First American Asset Management group, having joined the Advisor
in 1984. He has more than 30 years in the investment management field and
served with Investment Advisers, Inc. and Blyth, Eastman, Dillon & Co.
before joining the Advisor. Mr. Murphy received his bachelor's degree from
Regis College.
JAMES S. ROVNER is a member of the committees which manage three of the
Funds (as set forth above) and is portfolio co-manager for Equity Index
Fund and International Index Fund. Mr. Rovner joined the Advisor in 1986
and has managed assets for institutional and individual clients for over
15 years, specializing in equity and balanced investment strategies. Mr.
Rovner received his bachelor's degree and his master's degree in business
administration from the University of Wisconsin. He is a Chartered
Financial Analyst.
GERALD C. BREN is a member of the committees which manage three of the
Funds, as set forth above. Mr. Bren joined the Advisor in 1972 as an
investment analyst. Mr. Bren received his master's degree in business
administration from the University of Chicago. He is a Chartered Financial
Analyst.
ALBIN S. DUBIAK is a member of the committees which manage five of the
Funds, as set forth above. Mr. Dubiak began his investment career as a
security trader with The First National Bank of Chicago in 1963 before
joining the Advisor as an investment analyst in 1969. Mr. Dubiak received
his bachelor's degree from Indiana University and his master's degree in
business administration from the University of Arizona.
CORI B. JOHNSON is a member of the committee which manages two of the
Funds, as set forth above, and she is portfolio co-manager for Real Estate
Securities Fund. She joined the Advisor in 1991 as a securities analyst.
Ms. Johnson received her bachelor's degree from Concordia College and her
master's degree in business administration from the University of
Minnesota. She is a Chartered Financial Analyst.
ROLAND P. WHITCOMB, JR. is a member of the committees which manage two of
the Funds (as set forth above) and is portfolio co-manager for Technology
Fund. Mr. Whitcomb joined the Advisor in 1986 after serving as an account
executive with Smith Barney & Co. since 1979. Mr. Whitcomb received his
bachelor's degree from the University of Chicago. He is a Chartered
Financial Analyst.
KEVIN SHIELDS is a member of the committees which manage three of the Funds,
as set forth above. Mr. Shields joined the Advisor in 1993 and has five
33
<PAGE>
years of investment industry experience. Mr. Shields has analytic
responsibilities for the banking, financial services and insurance
industries. Mr. Shields received his bachelor's degree from Marquette
University and his master's degree from the Applied Security and Analysis
program at the University of Wisconsin.
JOHN A. TWELE is a member of the committees which manage two of the Funds,
as set forth above. Prior to joining the Advisor in 1996, he was employed
in various positions at American Express Financial Advisors, Investment
Advisers, Inc., Kemper Financial, and Mercantile Trust. Mr. Twele received
his bachelor's degree from Indiana University.
DOUGLAS K. ROSE is a member of the committee which manages three of the
Funds, as set forth above. Mr. Rose joined the Advisor in 1996 and has ten
years of investment industry experience. Mr. Rose has analytic
responsibilities for business services, environmental services, leisure
and restaurant/lodging industries. Mr. Rose holds a bachelor's degree from
the University of Nebraska, and master's degree in business administration
from the University of Minnesota. He is a Chartered Financial Analyst.
ROBERT L. BUSS is a member of the committee which manages three of the
Funds, as set forth above. Mr. Buss joined the Advisor in 1989 and has
nine years of investment industry experience. In 1996, Mr. Buss began
analytical work in the equity research area covering electric equipment,
machinery and diversified manufacturing. Mr. Buss holds a bachelor's
degree in economics from the University of Minnesota.
ANTHONY W. HIPPLE is a member of the committee which manages three of the
Funds, as set forth above. Mr. Hipple is primarily responsible for
portfolio analytics and screening. Mr. Hipple joined the Advisor in 1996
and has four years of investment industry experience. Mr. Hipple holds a
bachelor's degree from the University of Northern Iowa and a master's
degree in business administration from the University of Iowa.
EVAN C. LUNDQUIST is a member of the committee which manages Mid Cap Value
Fund, and is a portfolio co-manager of Equity Index Fund and International
Index Fund. Mr. Lundquist joined the Advisor in 1993 and has four years of
investment industry experience. Mr. Lundquist has analytic
responsibilities for paper/forest products, metals and mining, steel,
engineering and construction, and building and appliances industries. Mr.
Lundquist received his bachelor's degree from St. Mary's College.
FRANK G. MAGDLEN is a member of the committee which manages three of the
Funds, as set forth above. He joined the Advisor in 1979 and has 24 years
of investment industry experience. Prior to joining the Advisor, he was
with First Interstate and Farmers Group. Mr. Magdlen received his
bachelor's degree from the University of Portland and his master's degree
in business administration from the University of Southern California. He
is a Chartered Financial Analyst and past president of the Portland
Society of Financial Analysts.
GLENN E. JOHNSON is a member of the committee which manages two of the
Funds, as set forth above. He joined the Advisor in 1989 and has 13 years
of investment industry experience. Prior to joining the Advisor, he was an
analyst with Piper Jaffray Inc. Mr. Johnson received his bachelor's degree
and his master's degree in business administration from the University of
Minnesota. He is a Chartered Financial Analyst.
DAVID JOHNSON is a co-manager of Real Estate Securities Fund. He joined
the Advisor in 1997 and has four years of investment industry experience.
He has analytic responsibilities for REITs, business services, printing
and publishing, and advertising. Prior to joining the Advisor, he was with
the State of Wisconsin Investment Board. He received his bachelor's degree
from St. Lawrence University and his master's degree in business
administration from the University of Connecticut.
SANDRA SHREWSBURY is a member of the committee which manages Small Cap
Growth Fund. Ms. Shrewsbury has over 11 years of investment
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<PAGE>
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 Small 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 committees which manage two of the Funds, as
set forth above. Ms. Halbe has over 13 years of investment industry
experience. From 1996 to 1998, Ms. Halbe 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. 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 Small Cap Growth Fund.
Ms. Hoyme has over 15 years of investment industry experience. From 1996 to
1998, Ms. Hoyme 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. 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 Small Cap
Growth Fund. Mr. McSweeney has over 11 years of investment industry
experience. From 1997 to 1998, Mr. McSweeney served as assistant vice
president and portfolio co-manager for Piper Capital Management Incorporated
overseeing the management of the Piper Funds Emerging Growth Fund and Small
Company Growth Fund. Prior to 1997, Mr. McSweeney served as a technology
analyst for Gintel Asset Management. Mr. McSweeney received his bachelor's
degree in economics from Clark University and master's degree in business
administration from Northeastern University.
JILL THOMPSON is a member of the committee which manages Small 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.
MARK M. GREEN is a member of the committee which manages Balanced 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
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manager at Wells Fargo Investment Management. Mr. Green received his
bachelor's degree andmaster's degree from San Francisco State University.
DAVID STEELE is a member of the committee which manages Balanced Fund. Mr.
Steele has over 18 years of investment industry experience. Prior to
joining the Advisor in 1998, Mr. Steele served as a senior vice president
and portfolio co-manager for Piper Capital Management Incorporated. Mr.
Steele received his bachelor's degree in Business Administration from the
University of Washington and a master's degree in Business Administration
from the University of Southern California.
PAUL A. DOW is a member of the committees which manage four of the Funds, as
set forth above, and is Senior Managing Director of the Advisor. He joined
the Advisor in 1998 and has 24 years of investment industry experience.
Prior to joining the Advisor, Mr. Dow served as Chief Executive Officer and
Chief Investment Officer of Piper Capital Management Incorporated. Mr. Dow
received his bachelor's degree in marketing from Southwest Missouri State
University. He is a Chartered Financial Analyst.
JOHN D. GRANGAARD is a member of the committee which manages three of the
Funds, as set forth above. Mr. Grangaard joined the Advisor in 1998 and has
over 18 years of investment industry experience. Prior to joining the
Advisor, Mr. Grangaard served as a vice president and senior analyst with
G.S.2 Securities. Mr. Grangaard received his bachelor's degree from Yale
University, his master's degree in finance from the University of Minnesota,
and his law degree from the University of North Dakota.
STEVEN B. MARKUSEN is a member of the committee which manages two of the
Funds, as set forth above. Mr. Markusen joined the Advisor in 1998 and has
over 14 years of investment industry experience. Prior to joining the
Advisor, Mr. Markusen served as a senior vice president of Piper Capital
Management Incorporated. Mr. Markusen received his bachelor's degree from
Colorado State University and his master's degree in finance from the
University of Denver. He is a Chartered Financial Analyst.
MARK P. KELLIHER is a member of the committee which manages three of the
Funds, as set forth above. Mr. Kelliher joined the Advisor in 1997 and has
over 7 years of investment industry experience. Prior to joining the
Advisor, Mr. Kelliher served as a senior healthcare analyst for Principal
Financial Securities. Mr. Kelliher received his bachelor's degree from the
University of Minnesota and his master's degree from the University of St.
Thomas.
LUCILLE C. REHKAMP is a member of the committee which manages Balanced
Fund. Ms. Rehkamp joined the Advisor in 1979 and has 21 years of
investment industry experience. Ms. Rehkamp received her bachelor's degree
from Marquette University.
BRENT MELLUM is a member of the committees which manage two of the Funds,
as set forth above. Mr. Mellum joined the Advisor in 1998 and has over 4
years of investment industry experience. Prior to joining the Advisor, Mr.
Mellum served as an analyst for Piper Capital Management Incorporated. Mr.
Mellum received his bachelor's degree in finance from the University of
Texas -- Dallas. He is a Chartered Financial Analyst.
MICHAEL K. SABBANN is a member of the committee which manages three of the
Funds, as set forth above. Mr. Sabbann joined the Advisor in 1998 and has
over 12 years of investment industry experience. Prior to joining the
Advisor, Mr. Sabbann served as an analyst with Piper Jaffray Companies.
Mr. Sabbann received his bachelor's degree from the University of
Minnesota -- Duluth and his master's degree in finance from the University
of Minnesota. He is a Chartered Financial Analyst.
DANIEL W. ZARLING is a member of the committee which manages two of the
Funds, as set forth above. Mr. Zarling joined the Advisor in 1996 and has
over 6 years of investment industry experience. Prior to joining the
Advisor, Mr.
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Zarling served as an analyst for American Express Financial Advisors. Mr.
Zarling received his bachelor's degree from the University of Minnesota and
his master's degree in finance from the University of Chicago. He is a
Chartered Financial Analyst.
A committee comprised of the following seven individuals shares the
management of International 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 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 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 equal to 0.03% of the applicable Fund's average daily net assets (0.10%
of average daily net assets in the case of International Index Fund and
International Fund).
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In addition, the Custodian is reimbursed for its out-of-pocket expenses
incurred while providing its services to the Funds.
Rules adopted under the 1940 Act permit International Index Fund and
International Fund to maintain their securities and cash in the custody of
certain eligible foreign banks and depositories. International Index Fund's
and International Fund's portfolio of non-United States securities are held
by sub-custodians which are approved by the directors of FAIF or a foreign
custody manager appointed by the directors in accordance with these rules.
This determination is made pursuant to these rules following a consideration
of a number of factors including, but not limited to, the reliability and
financial stability of the institution; the ability of the institution to
perform custodian services for International Index Fund and International
Fund; the reputation of the institution in its national market; the
political and economic stability of the country in which the institution is
located; and the risks of potential nationalization or expropriation of
International Index Fund's or International Fund's assets.
Sub-custodian fees with respect to International Index Fund and
International Fund are paid by the Custodian out of the Custodian's fees.
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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 its affiliates may provide compensation
from their own resources for shareholder services provided by third
parties, including "one-stop" mutual fund networks through which the Funds
are made available.
PURCHASES AND REDEMPTIONS OF SHARES
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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
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and federally-chartered banks are open for business ("Business Days").
Payment for shares can be made only by wire transfer. All information needed
will be taken over the telephone, and the order will be considered placed
when the Custodian receives payment by wire. Federal funds should be wired
as follows: U.S. Bank National Association, Minneapolis, Minnesota, ABA
Number 091000022; For Credit To: DST Systems, Inc.: Account Number
160234580266; For Further Credit To: (Investor Name and Fund Name). Shares
cannot be purchased by Federal Reserve wire on days on which the New York
Stock Exchange is closed or federally-chartered banks are closed. Purchase
orders will be effective and eligible to receive dividends declared the same
day if the Transfer Agent receives an order before 3:00 p.m. Central time
and the Custodian receives Federal funds before the close of business that
day. Otherwise, the purchase order will be effective the next Business Day.
The Funds reserve the right to reject a purchase order.
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. 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 orders received before 3:00 p.m. Central time, payment will
ordinarily be made the next Business Day by transfer of Federal funds, but
payment may be made up to 7 days after the request.
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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
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<PAGE>
quoted bid price. For such debt obligations the pricing service may employ
methods that utilize actual market transactions, broker-dealer valuations,
or other electronic data processing techniques. These techniques generally
consider such factors as security prices, yields, maturities, call features,
ratings and developments relating to specific securities in arriving at
security valuations. Debt obligations with remaining maturities of sixty
days or less may be valued at their amortized cost which approximates market
value. If a security price cannot be obtained from an independent pricing
service a bid price may be obtained from an independent broker who makes a
market in the security.
Foreign securities owned by the Funds are valued at the closing prices on
the principal exchange on which they trade.
If the value for a security cannot be obtained from the sources described
above, the security's value may be determined pursuant to the fair value
procedures established by the Board of Directors.
Financial futures are valued at the settlement price established each day by
the board of exchange on which they are traded. Portfolio securities
underlying actively traded options are valued at their market price as
determined above. The current market value of any exchange traded options
held or written by a Fund, are valued at the closing bid price for a long
position or the closing ask price for a short position.
Foreign currency forward contracts are valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
exchange rate, and the thirty, sixty, ninety and one-hundred eighty day
forward rates provided by the Reuters system.
Although the methodology and procedures for determining net asset value
are identical for all classes of shares, the net asset value per share of
different classes of shares of the same Fund may differ because of the
distribution, 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 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 are declared and paid monthly with respect to Balanced Fund,
Equity Income Fund,
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Equity Index Fund, Large Cap Value Fund, Large Cap Growth Fund and Mid Cap
Value Fund, to all shareholders of record on the record date. Dividends are
declared and paid quarterly with respect to Real Estate Securities Fund,
Small Cap Growth Fund, Small Cap Value Fund, Micro Cap Value Fund,
International Index Fund, Health Sciences Fund, and Technology Fund, and
annually with respect to International Fund. Distributions of any net
realized long-term capital gains will be made at least once every 12 months.
A portion of the quarterly distributions paid by Real Estate Securities Fund
may be a return of capital. Dividends and distributions are automatically
reinvested in additional shares of the Fund paying the dividend on payment
dates at the ex-dividend date net asset value without a sales charge, unless
shareholders request cash payments on the new account form or by writing to
the Fund.
All shareholders on the record date are entitled to the dividend. If shares
are purchased before a record date for a dividend or a distribution of
capital gains, a shareholder will pay the full price for the shares and will
receive some portion of the purchase price back as a taxable dividend or
distribution (to the extent, if any, that the dividend or distribution is
otherwise taxable to holders of Fund shares). If shares are redeemed or
exchanged before the record date for a dividend or distribution or are
purchased after the record date, those shares are not entitled to the
dividend or distribution.
The amount of dividends payable on Class Y Shares generally will be more
than the dividends payable on Class A or Class B Shares because of the
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. None of the Funds, the Distributor, the Transfer
Agent, any shareholder servicing agent, nor any financial institution will
be responsible for further verification of the authenticity of the
exchange instructions.
Telephone exchange instructions made by an investor may be carried out
only if a telephone authorization form completed by the investor is on
file with the Transfer Agent, shareholder servicing agent or financial
institution. Shares may be exchanged between two 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
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<PAGE>
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 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 of a Fund held by a financial institution in a trust or
agency capacity for one or more individual beneficiaries are exchanged for
Class A Shares of that Fund and distributed to the individual beneficiaries.
There are currently no additional fees or charges for the exchange
service. The Funds do not contemplate establishing such fees or charges,
but they reserve the right to do so. Shareholders will be notified of any
modification or termination of the exchange privilege and of the
imposition of any additional fees or charges.
FEDERAL INCOME TAXES
Each Fund is treated as a different entity for federal income tax
purposes. Each of the Funds intends to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code").
If so qualified and provided certain distribution requirements are met, a
Fund will not be liable for federal income taxes to the extent it
distributes its income to its shareholders.
Distributions paid from the net investment income and from any net
realized short-term capital gains of a Fund, will be taxable to
shareholders as ordinary income, whether received in cash or in additional
shares. Dividends paid by the Funds attributable to investments in the
securities of foreign issuers will not be eligible for the 70% deduction
for dividends received by corporations.
Distributions paid from a Fund's net capital gains and designed as capital
gain dividends generally are taxable as long-term capital gains in the
hands of shareholders, regardless of the length of time during which they
have held their shares. In the case of shareholders who are individuals,
estates, or trusts, each Fund will designate the portion of each capital
gain dividend that must be treated as mid-term capital gain and the
portion that must be treated as long-term capital gain.
Gain or loss realized on the sale or exchange of shares in a Fund will be
treated as capital gain or loss, provided that (as is usually the case)
the shares represented a capital asset in the hands of the shareholder.
For shareholders who are individuals, estates or trusts, the gain or loss
will be considered long-term if the shareholder has held the shares for
more than 18 months and mid-term if the shareholder has held the shares
for more than one year but not more than 18 months.
A Fund may be required to "back-up" withhold 31% of any dividend,
distribution, or redemption payment made to a shareholder who fails to
furnish the Fund with the shareholder's Social Security number or other
taxpayer identification number or to certify that he or she is not subject
to back-up withholding.
International Index Fund and International Fund may be required to pay
withholding and other taxes imposed by foreign countries, generally at
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<PAGE>
rates from 10% to 40%, which would reduce each Fund's investment income. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes.
If at the end of International Index Fund's and International Fund's taxable
year more than 50% of their respective total assets consist of securities of
foreign corporations, such Fund will be eligible to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will
be required to include their respective pro rata portions of such foreign
taxes in gross income, treat such amounts as foreign taxes paid by them, and
deduct such amounts in computing their taxable income or, alternatively, use
them as foreign tax credits against their federal income taxes. If such an
election is filed for a year, International Index Fund and International
Fund shareholders will be notified of the amounts which they may deduct as
foreign taxes paid or used as foreign tax credits. International Fund filed
this election for each of its two most recent completed fiscal years ended
September 30, 1997 and 1996.
Alternatively, if the amount of foreign taxes paid by International Index
Fund or International Fund is not large enough in future years to warrant
making the election described above, each Fund may claim the amount of
foreign taxes paid as a deduction against its own gross income. In that
case, shareholders would not be permitted either to deduct any portion of
foreign taxes from their own income or to claim any amount of foreign tax
credit for taxes paid by the Funds.
This is a general summary of the federal tax laws applicable to the Funds
and their shareholders as of the date of this Prospectus. See the
Statement of Additional Information for further details.
FUND SHARES
Each share of a Fund is fully paid, nonassessable, and transferable.
Shares may be issued as either full or fractional shares. Fractional
shares have pro rata the same rights and privileges as full shares. Shares
of the Funds have no preemptive or conversion rights.
Each share of a Fund has one vote. On some issues, such as the election of
directors, all shares of all FAIF Funds vote together as one series. The
shares do not have cumulative voting rights. Consequently, the holders of
more than 50% of the shares voting for the election of directors are able
to elect all of the directors if they choose to do so. On issues affecting
only a particular Fund or class of shares, the shares of that Fund or
class will vote as a separate series. Examples of such issues would be
proposals to alter a fundamental investment restriction pertaining to a
Fund or to approve, disapprove or alter a distribution plan pertaining to
a class of shares.
Under the laws of the State of Maryland and FAIF's Articles of
Incorporation, FAIF is not required to hold shareholder meetings unless
they (i) are required by the 1940 Act, or (ii) are requested in writing by
the holders of 25% or more of the outstanding shares of FAIF.
CALCULATION OF PERFORMANCE DATA
From time to time, any of the Funds may advertise information regarding
its performance. Each Fund may publish its "yield," its "cumulative total
return," its "average annual total return" and its "distribution rate."
Distribution rates may only be used in connection with sales literature
and shareholder communications preceded or accompanied by a Prospectus.
Each of these performance figures is based upon historical results and is
not intended to indicate future performance, and, except for "distribution
rate," is standardized in accordance with 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
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level of net investment income is generated over a one year period. The
yield formula annualizes net investment income by providing for semi-annual
compounding.
"Total return" is based on the overall dollar or percentage change in
value of a hypothetical investment in a Fund assuming reinvestment of
dividend distributions and deduction of all charges and expenses.
"Cumulative total return" reflects a Fund's performance over a stated
period of time. "Average annual total return" reflects the hypothetical
annually compounded rate that would have produced the same cumulative
total return if performance had been constant over the entire period.
Because average annual returns tend to smooth out variations in a Fund's
performance, they are not the same as actual year-by-year results.
"Distribution rate" is determined by dividing the income dividends per
share for a stated period by the maximum offering price per share on the
last day of the period. All distribution rates published for the Funds are
measures of the level of income dividends distributed during a specified
period. Thus, these rates differ from yield (which measures income
actually earned by a Fund) and total return (which measures actual income,
plus realized and unrealized gains or losses of a Fund's investments).
Consequently, distribution rates alone should not be considered complete
measures of performance.
The performance of the Class Y Shares of a Fund will normally be higher
than for the Class A and Class B Shares because Class Y Shares are not
subject to the sales charges and distribution, shareholder servicing,
transfer agent and/or dividend disbursing expenses applicable to Class A
and Class B Shares.
In reports or other communications to shareholders and in advertising
material, the performance of each Fund may be compared to recognized
unmanaged indices or averages of the performance of similar securities and
to composites of such indices and averages. Also, the performance of each
Fund may be compared to that of other funds of similar size and objectives
as listed in the rankings prepared by Lipper Analytical Services, Inc. or
similar independent mutual fund rating services, and each Fund may include
in such reports, communications and advertising material evaluations
published by nationally recognized independent ranking services and
publications. For further information regarding the Funds' performance,
see "Fund Performance" in the Statement of Additional Information.
PERFORMANCE INFORMATION FOR SUCCESSORS TO COMMON TRUST FUNDS
From time to time, Small Cap Value Fund and Micro Cap Value Fund may
advertise performance information which includes performance data for
certain predecessor common trust funds.
On November 21, 1997, Small Cap Value Fund acquired the assets and assumed
all identified liabilities of the Qualivest Small Companies Value Fund.
The Qualivest Small Companies Value Fund commenced operations on August 1,
1994, when substantially all of the assets of a certain common trust fund
which was exempt from registration under the 1940 Act was transferred to
such fund.
Micro Cap Value Fund commenced operations on August 8, 1997, when
substantially all of the assets of a certain common trust fund which was
exempt from registration under the 1940 Act was transferred to the Fund.
This predecessor common trust fund was managed by Qualivest Capital
Management, Inc. prior to the acquisition of its parent company by the
Advisor's parent company. The personnel who managed the common trust fund
on behalf of Qualivest Capital Management, Inc. became employees of the
Advisor, and assumed management of the Fund, at the time the assets were
transferred from the common trust fund to the Fund.
Such performance data is deemed relevant because the common trust funds were
managed using investment objectives, policies and restrictions very similar
to those of their corresponding Fund. However, the predecessor common trust
funds were not subject to certain investment restrictions
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that are imposed by the 1940 Act. Accordingly, if the common trust funds had
been registered under the 1940 Act, their performance could have been
adversely affected by virtue of such investment restrictions. In addition,
the predecessor common trust funds did not incur the same expenses as the
corresponding Funds.
SPECIAL INVESTMENT METHODS
This section provides additional information concerning the securities in
which the Funds may invest and related topics. Further information
concerning these matters is contained in the Statement of Additional
Information.
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CASH ITEMS
The "cash items" in which the Funds may invest, as described under
"Investment Objectives and Policies," include short-term obligations such as
rated commercial paper and variable amount master demand notes; United
States dollar-denominated time and savings deposits (including certificates
of deposit); bankers' acceptances; obligations of the United States
Government or its agencies or instrumentalities (including, in the case of
Balanced Fund, 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 issued by the SEC with respect thereto.
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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
or, in the case of International Fund, the Sub-Advisor will monitor the
creditworthiness of the firms with which the Funds enter into repurchase
agreements.
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WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
Each of the Funds (excluding Equity Index Fund and International Index
Fund) may purchase securities on a when-issued or delayed delivery basis.
When such a transaction is negotiated, the purchase price is fixed at the
time the purchase commitment is entered, but delivery of and payment for
the securities take place at a later date. A Fund will not accrue income
with respect to securities purchased on a when-issued or delayed delivery
basis prior to their stated delivery date. Pending delivery of the
securities, each Fund will maintain in a segregated account cash or liquid
high-grade securities in an amount sufficient to meet its purchase
commitments.
The purchase of securities on a when-issued or delayed delivery basis
exposes a Fund to risk because the securities may decrease in value prior to
delivery. In addition, a Fund's purchase of securities on a when-issued or
delayed delivery basis while remaining substantially fully invested
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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.
In connection with its ability to purchase securities on a when-issued or
delayed delivery basis, Balanced Fund may, with respect to its fixed income
assets, enter into mortgage "dollar rolls" in which the Fund sells
securities and simultaneously contracts with the same counter party to
repurchase similar (same type, coupon and maturity) but not identical
securities on a specified future date. In a mortgage dollar roll, the Fund
gives up the right to receive principal and interest paid on the securities
sold. However, the Fund would benefit to the extent of any difference
between the price received for the securities sold and the lower forward
price for the future purchase plus any fee income received. Unless such
benefits exceed the income, capital appreciation and gain or loss due to
mortgage prepayments that would have been realized on the securities sold as
part of a mortgage dollar roll, the use of this technique will diminish the
investment performance of the Fund compared with what such performance would
have been without the use of mortgage dollar rolls. Balanced Fund will hold
and maintain in a segregated account until the settlement date cash or
liquid securities in an amount equal to the forward purchase price.
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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. 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 International 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 (including fees to an affiliate of the
Advisor) in connection with these loans, which, in the case of U.S. Bank,
are 40% of the Fund's income from such securities lending transactions.
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OPTIONS TRANSACTIONS
PURCHASES OF PUT AND CALL OPTIONS. The Funds may purchase put and call
options. These transactions will be undertaken only for the purpose of
reducing risk to the Funds; that is, for "hedging" purposes. Depending on
the Fund, these transactions may include the purchase of put and call
options on equity securities, on stock indices, on interest rate indices,
or (only in the case of International Fund) on foreign currencies. Options
on futures contracts are discussed below under "Futures and Options on
Futures."
A put option on a security gives the purchaser of the option the right (but
not the obligation) to sell, and the writer of the option the obligation to
buy, the underlying security at a stated price (the "exercise price") at any
time before the option expires. A call option on a security gives the
purchaser the right (but not the obligation) to buy, and the writer the
obligation to sell, the underlying security at the exercise price at any
time before the option expires. The purchase price for a put or call option
is the "premium" paid by the purchaser for the right to sell or buy.
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<PAGE>
Options on indices are similar to options on securities except that, rather
than the right to take or make delivery of a specific security at a stated
price, an option on an index gives the holder the right to receive, upon
exercise of the option, a defined amount of cash if the closing value of the
index upon which the option is based is greater than, in the case of a call,
or less than, in the case of a put, the exercise price of the option.
None of the Funds other than International Fund will invest more than 5%
of the value of its total assets in purchased options, provided that
options which are "in the money" at the time of purchase may be excluded
from this 5% limitation. A call option is "in the money" if the exercise
price is lower than the current market price of the underlying security or
index, and a put option is "in the money" if the exercise price is higher
than the current market price. A Fund's loss exposure in purchasing an
option is limited to the sum of the premium paid and the commission or
other transaction expenses associated with acquiring the option.
The use of purchased put and call options involves certain risks. These
include the risk of an imperfect correlation between market prices of
securities held by a Fund and the prices of options, and the risk of
limited liquidity in the event that a Fund seeks to close out an options
position before expiration by entering into an offsetting transaction.
WRITING OF CALL OPTIONS. The Funds may write (sell) covered call options to
the extent specified with respect to particular Funds under "Investment
Objectives and Policies." These transactions would be undertaken principally
to produce additional income. Depending on the Fund, these transactions may
include the writing of covered call options on equity securities or (only in
the case of International Fund) on foreign currencies which a Fund owns or
has the right to acquire or on interest rate indices.
When a Fund sells a covered call option, it is paid a premium by the
purchaser. If the market price of the security covered by the option does
not increase above the exercise price before the option expires, the
option generally will expire without being exercised, and the Fund will
retain both the premium paid for the option and the security. If the
market price of the security covered by the option does increase above the
exercise price before the option expires, however, the option is likely to
be exercised by the purchaser. In that case the Fund will be required to
sell the security at the exercise price, and it will not realize the
benefit of increases in the market price of the security above the
exercise price of the option.
The Funds also may, to the extent specified with respect to particular
Funds under "Investment Objectives and Policies," write call options on
stock indices the movements of which generally correlate with those of the
respective Funds' 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
Balanced Fund, Equity Index Fund, International Index Fund and
International Fund may engage in futures transactions and purchase options
on futures to the extent specified with under "Investment Objectives and
Policies." Depending on the Fund, these transactions may include the
purchase of stock index futures and options on stock index futures, and
the purchase of interest rate futures and options on interest rate
futures. In addition, International Fund may enter into contracts for the
future delivery of securities or foreign currencies and futures contracts
based on a specific security, class of securities, or foreign currency.
A futures contract on a security obligates one party to purchase, and the
other to sell, a specified security at a specified price on a date certain
in the future. A futures contract on an index obligates the seller to
deliver, and entitles the purchaser to receive, an amount of cash equal to a
specific
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<PAGE>
dollar amount times the difference between the value of the index at the
expiration date of the contract and the index value specified in the
contract. The acquisition of put and call options on futures contracts will,
respectively, give a Fund the right (but not the obligation), for a
specified exercise price, to sell or to purchase the underlying futures
contract at any time during the option period.
A Fund may use futures contracts and options on futures in an effort to
hedge against market risks and, in the case of International Fund, as part
of its management of foreign currency transactions. In addition, Equity
Index Fund and International Index Fund may use stock index futures and
options on futures to maintain sufficient liquidity to meet redemption
requests, to increase the level of Fund assets devoted to replicating the
composition of the S&P 500 or EAFE Index, respectively, and to reduce
transaction costs.
Aggregate initial margin deposits for futures contracts, and premiums paid
for related options, may not exceed 5% of a Fund's total assets, and the
value of securities that are the subject of such futures and options (both
for receipt and delivery) may not exceed 1/3 of the market value of a
Fund's total assets. Futures transactions will be limited to the extent
necessary to maintain each Fund's qualification as a regulated investment
company under the Code.
Where a Fund is permitted to purchase options on futures, its potential loss
is limited to the amount of the premiums paid for the options. As stated
above, this amount may not exceed 5% of a Fund's total assets. Where a Fund
is permitted to enter into futures contracts obligating it to purchase
securities, currency or an index in the future at a specified price, such
Fund could lose 100% of its net assets in connection therewith if it engaged
extensively in such transactions and if the market value or index value of
the subject securities, currency or index at the delivery or settlement date
fell to zero for all contracts into which a Fund was permitted to enter.
Where a Fund is permitted to enter into futures contracts obligating it to
sell securities or currencies (as is the case with respect only to
International Fund), its potential losses are unlimited if it does not own
the securities or currencies covered by the contracts and it is unable to
close out the contracts prior to the settlement date.
Futures transactions involve brokerage costs and require a Fund to
segregate assets to cover contracts that would require it to purchase
securities or currencies. A Fund may lose the expected benefit of futures
transactions if interest rates, exchange rates or securities prices move
in an unanticipated manner. Such unanticipated changes may also result in
poorer overall performance than if the Fund had not entered into any
futures transactions. In addition, the value of a Fund's futures positions
may not prove to be perfectly or even highly correlated with the value of
its portfolio securities or foreign currencies, limiting the Fund's
ability to hedge effectively against interest rate, exchange rate and/or
market risk and giving rise to additional risks. There is no assurance of
liquidity in the secondary market for purposes of closing out futures
positions.
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FIXED INCOME SECURITIES
The fixed income securities in which Real Estate Securities Fund, Equity
Income Fund, Large Cap Value Fund, Large Cap Growth Fund, Mid Cap Value
Fund, Regional Equity Fund, Small Cap Growth Fund, Small Cap Value Fund,
Micro Cap Value Fund, Health Sciences Fund and Technology Fund may invest
include securities issued or guaranteed by the United States Government or
its agencies or instrumentalities, nonconvertible preferred stocks,
nonconvertible corporate debt securities, and short-term obligations of the
kinds described above under "-- Cash Items." Investments in nonconvertible
preferred stocks and nonconvertible corporate debt securities will be
limited to securities which are rated at the time of purchase not less than
BBB by Standard & Poor's or Baa by Moody's (or equivalent short-term
ratings), or which have been assigned an equivalent rating by another
nationally recognized statistical
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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.
In addition, Equity Income Fund may invest up to 25% of its total assets,
and each of the other Funds may invest up to 5% of its net assets, in less
than investment grade convertible debt obligations. For a description of
such obligations and the risks associated therewith, see "Investment
Objectives and Policies -- Equity Income Fund."
The fixed income securities specified above, as well as the fixed income
securities in which Balanced Fund may invest as described under
"Investment Objectives and Policies," are subject to (i) interest rate
risk (the risk that increases in market interest rates will cause declines
in the value of debt securities held by a Fund); (ii) credit risk (the
risk that the issuers of debt securities held by a Fund default in making
required payments); and (iii) call or prepayment risk (the risk that a
borrower may exercise the right to prepay a debt obligation before its
stated maturity, requiring a Fund to reinvest the prepayment at a lower
interest rate).
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FOREIGN SECURITIES
GENERAL. Under normal market conditions International Index Fund and
International Fund invests at least 65% of their respective total assets in
equity securities which trade in markets other than the United States. In
addition, the other Funds (excluding Equity Index Fund and Regional Equity
Fund) may invest lesser proportions of their assets in securities of foreign
issuers which are either listed on a United States securities exchange or
represented by American Depositary Receipts.
Investment in foreign securities is subject to special investment risks
that differ in some respects from those related to investments in
securities of United States domestic issuers. These risks include
political, social or economic instability in the country of the issuer,
the difficulty of predicting international trade patterns, the possibility
of the imposition of exchange controls, expropriation, limits on removal
of currency or other assets, nationalization of assets, foreign
withholding and income taxation, and foreign trading practices (including
higher trading commissions, custodial charges and delayed settlements).
Foreign securities also may be subject to greater fluctuations in price
than securities issued by United States corporations. The principal
markets on which these securities trade may have less volume and
liquidity, and may be more volatile, than securities markets in the United
States.
In addition, there may be less publicly available information about a
foreign company than about a United States domiciled company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to United
States domestic companies. There is also generally less government
regulation of securities exchanges, brokers and listed companies abroad
than in the United States. Confiscatory taxation or diplomatic
developments could also affect investment in those countries. In addition,
foreign branches of United States banks, foreign banks and foreign issuers
may be subject to less stringent reserve requirements and to different
accounting, auditing, reporting, and recordkeeping standards than those
applicable to domestic branches of United States banks and United States
domestic issuers.
JAPANESE SECURITIES. Japanese securities comprised 29.2% of the EAFE Index
as of September 30, 1997. As a result, securities of Japanese companies
may represent a significant component of International Index Fund's
investment assets.
Japan is politically organized as a democratic, parliamentary republic and
has a population of approximately 122 million. The Japanese economy is
heavily industrial and export-oriented. Although Japan is dependent upon
foreign economies for raw materials, Japan's balance of payments in
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recent years has been strong and positive. Japan has eight stock exchanges
located throughout the country, but over 80% of all trading is conducted on
the Tokyo Stock Exchange. Prices of stocks listed on the Japanese stock
exchanges are quoted continuously during regular business hours. Trading
commissions are at fixed scale rates which vary by the type and the value of
the transaction, but can be negotiable for large transactions. Securities in
Japan are denominated and quoted in yen. Yen are fully convertible and
transferable based on floating exchange rates into all currencies, without
administrative or legal restrictions, for both nonresidents and residents of
Japan.
A significant investment in Japanese securities by International Index
Fund may entail a higher degree of risk than with more diversified
international portfolios.
AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS. For many
foreign securities, United States dollar-denominated American Depositary
Receipts, which are traded in the United States on exchanges or over-the-
counter, are issued by domestic banks. American Depositary Receipts
represent the right to receive securities of foreign issuers deposited in a
domestic bank or a correspondent bank. American Depositary Receipts do not
eliminate all the risk inherent in investing in the securities of foreign
issuers. However, by investing in American Depositary Receipts rather than
directly in foreign issuers' stock, a Fund can avoid currency risks during
the settlement period for either purchases or sales. In general, there is a
large, liquid market in the United States for many American Depositary
Receipts. The information available for American Depositary Receipts is
subject to the accounting, auditing and financial reporting standards of the
domestic market or exchange on which they are traded, which standards are
more uniform and more exacting than those to which many foreign issuers may
be subject. International Index Fund and International Fund also may invest
in European Depositary Receipts, which are receipts evidencing an
arrangement with a European bank similar to that for American Depositary
Receipts and which are designed for use in the European securities markets.
European Depositary Receipts are not necessarily denominated in the currency
of the underlying security.
Certain American Depositary Receipts and European Depositary Receipts,
typically those denominated as unsponsored, require the holders thereof to
bear most of the costs of the facilities while issuers of sponsored
facilities normally pay more of the costs thereof. The depository of an
unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited
securities or to pass through the voting rights to facility holders in
respect to the deposited securities, whereas the depository of a sponsored
facility typically distributes shareholder communications and passes
through voting rights.
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FOREIGN CURRENCY TRANSACTIONS
International Index Fund and International Fund invest in securities which
are purchased and sold in foreign currencies. The value of its assets as
measured in United States dollars therefore may be affected favorably or
unfavorably by changes in foreign currency exchange rates and exchange
control regulations. International Index Fund and International Fund also
will incur costs in converting United States dollars to local currencies,
and vice versa.
International Index Fund and International Fund will conduct their foreign
currency exchange transactions either on a spot (i.e., cash) basis at the
spot rate prevailing in the foreign currency exchange market, or through
forward contracts to purchase or sell foreign currencies. A forward
foreign currency exchange contract involves an obligation to purchase or
sell a specific currency at a future date certain at a specified price.
These forward currency contracts are traded directly between currency
traders (usually large commercial banks) and their customers.
International Fund may enter into forward currency contracts in order to
hedge against
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adverse movements in exchange rates between currencies. It may engage in
"transaction hedging" to protect against a change in the foreign currency
exchange rate between the date the Fund contracts to purchase or sell a
security and the settlement date, or to "lock in" the United States dollar
equivalent of a dividend or interest payment made in a foreign currency. It
also may engage in "portfolio hedging" to protect against a decline in the
value of its portfolio securities as measured in United States dollars which
could result from changes in exchange rates between the United States dollar
and the foreign currencies in which the portfolio securities are purchased
and sold. International Fund also may hedge its foreign currency exchange
rate risk by engaging in currency financial futures and options
transactions.
Although a foreign currency hedge may be effective in protecting the Fund
from losses resulting from unfavorable changes in exchanges rates between
the United States dollar and foreign currencies, it also would limit the
gains which might be realized by the Fund from favorable changes in
exchange rates. The Sub-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, International Fund may
realize losses on its foreign currency transactions.
International Fund does not intend to enter into forward currency contracts
or maintain a net exposure in such contracts where it would be obligated to
deliver an amount of foreign currency in excess of the value of its
portfolio securities or other assets denominated in that currency.
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MORTGAGE-BACKED SECURITIES
Balanced Fund may invest in mortgage-backed securities which are Agency
Pass-Through Certificates or collateralized mortgage obligations ("CMOs"),
as described below.
Agency Pass-Through Certificates are mortgage pass-through certificates
representing undivided interests in pools of residential mortgage loans.
Distribution of principal and interest on the mortgage loans underlying an
Agency Pass-Through Certificate is an obligation of or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA"), or the Federal Home Loan Mortgage
Corporation ("FHLMC"). The obligation of GNMA with respect to such
certificates is backed by the full faith and credit of the United States,
while the obligations of FNMA and FHLMC with respect to such certificates
rely solely on the assets and credit of those entities. The mortgage loans
underlying GNMA certificates are partially or fully guaranteed by the
Federal Housing Administration or the Veterans Administration, while the
mortgage loans underlying FNMA certificates and FHLMC certificates are
conventional mortgage loans which are, in some cases, insured by private
mortgage insurance companies. Agency Pass-Through Certificates may be
issued in a single class with respect to a given pool of mortgage loans or
in multiple classes.
CMOs are debt obligations typically issued by a private special-purpose
entity and collateralized by residential or commercial mortgage loans or
Agency Pass-Through Certificates. Balanced Fund will invest only in CMOs
which are rated in one of the four highest rating categories by a nationally
recognized statistical rating organization or which are of comparable
quality in the judgment of the Advisor. Because CMOs are debt obligations of
private entities, payments on CMOs generally are not obligations of or
guaranteed by any governmental entity, and their ratings and
creditworthiness typically depend, among other factors, on the legal
insulation of the issuer and transaction from the consequences of a
sponsoring entity's bankruptcy. CMOs generally are issued in multiple
classes, with holders of each class entitled to receive specified portions
of the principal payments and prepayments and/or of the interest payments on
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the underlying mortgage loans. These entitlements can be specified in a wide
variety of ways, so that the payment characteristics of various classes may
differ greatly from one another. Examples of the more common classes are
provided in the Statement of Additional Information. The CMOs in which the
Fund may invest include classes which are subordinated in right of payment
to other classes, as long as they have the required rating referred to
above.
It generally is more difficult to predict the effect of changes in market
interest rates on the return on mortgaged-backed securities than to
predict the effect of such changes on the return of a conventional
fixed-rate debt instrument, and the magnitude of such effects may be
greater in some cases. The return on interest-only and principal-only
mortgage-backed securities is particularly sensitive to changes in
interest rates and prepayment speeds. When interest rates decline and
prepayment speeds increase, the holder of an interest-only mortgage-backed
security may not even recover its initial investment. Similarly, the
return on an inverse floating rate CMO is likely to decline more sharply
in periods of increasing interest rates than that of a fixed-rate
security. For these reasons, interest-only, principal-only and inverse
floating rate mortgage-backed securities generally have greater risk than
more conventional classes of mortgage-backed securities. Balanced Fund
will not invest more than 10% of its total fixed income assets in
interest-only, principal-only or inverse floating rate mortgage backed
securities.
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ASSET-BACKED SECURITIES
Balanced Fund may invest in asset-backed securities. Asset-backed
securities generally constitute interests in, or obligations secured by, a
pool of receivables other than mortgage loans, such as automobile loans
and leases, credit card receivables, home equity loans and trade
receivables. Asset-backed securities generally are issued by a private
special-purpose entity. Their ratings and creditworthiness typically
depend on the legal insulation of the issuer and transaction from the
consequences of a sponsoring entity's bankruptcy, as well as on the credit
quality of the underlying receivables and the amount and credit quality of
any third-party credit enhancement supporting the underlying receivables
or the asset-backed securities. Asset-backed securities and their
underlying receivables generally are not issued or guaranteed by any
governmental entity.
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BANK INSTRUMENTS
The bank instruments in which Balanced Fund may invest include time and
savings deposits, deposit notes and bankers acceptances (including
certificates of deposit) in commercial or savings banks. They also include
Eurodollar Certificates of Deposit issued by foreign branches of United
States or foreign banks; Eurodollar Time Deposits, which are United States
dollar-denominated deposits in foreign branches of United States or
foreign banks; and Yankee Certificates of Deposit, which are United States
dollar-denominated certificates of deposit issued by United States
branches of foreign banks and held in the United States. For a description
of certain risks of investing in foreign issuers' securities, see "--
Foreign Securities" above. In each instance, Balanced Fund may only invest
in bank instruments issued by an institution which has capital, surplus
and undivided profits of more than $100 million or the deposits of which
are insured by the Bank Insurance Fund or the Savings Association
Insurance Fund.
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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
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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.
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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 or, in the case of
International 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.
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INVESTMENT RESTRICTIONS
The fundamental and nonfundamental investment restrictions of the Funds
are set forth in full in the Statement of Additional Information. The
fundamental restrictions include the following:
* None of the Funds will borrow money, except from banks for temporary or
emergency purposes. The amount of such borrowing may not exceed 10% of
the borrowing Fund's total assets.
* None of the Funds will borrow money for leverage purposes. For the
purpose of this investment restriction, the use of options and futures
transactions and the purchase of securities on a when-issued or delayed
delivery basis shall not be deemed the borrowing of money. If a Fund
engages in borrowing, its share price may be subject to greater
fluctuation, and the interest expense associated with the borrowing may
reduce the Fund's net income.
* None of the Funds will make short sales of securities.
* None of the Funds will purchase any securities on margin except to
obtain such short-term credits as may be necessary for the clearance of
transactions and except, in the case of Small Cap Growth Fund,
Technology Fund, and International Fund, as may be necessary to make
margin payments in connection with foreign currency futures and other
derivative transactions.
A fundamental policy or restriction, including those stated above, cannot be
changed without an affirmative vote of the holders of a "majority" of the
outstanding shares of the applicable Fund, as defined in the 1940 Act.
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 SEC rules and interpretations. Section 4(2) commercial paper
and Rule 144A securities may be determined to be "liquid" under guidelines
adopted by the Board of Directors. Investing in Rule 144A securities could
have the effect of increasing the level of illiquidity in a Fund to the
extent that qualified institutional buyers become, for a time, uninterested
in purchasing these securities.
53
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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 a fiduciary with respect to plans subject to the Employee Retirement
Income Security Act of 1974 ("ERISA") and other trust and agency accounts
that invest in the Funds. These U.S. Bancorp affiliates may receive
compensation from the Funds for the services they provide to the Funds, as
described more fully in the following sections of this Prospectus:
Investment advisory services -- see "Management-Investment Advisor"
Custodian services -- see "Management-Custodian"
Sub-administration services -- see "Management-Administrator"
Shareholder servicing -- see "Distributor"
Securities lending -- see "Special Investment Methods-Lending of Portfolio
Securities"
54
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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-1503 (8/98) I
<PAGE>
PART B
FIRST AMERICAN INVESTMENT FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED AUGUST 14, 1998
BALANCED FUND INTERNATIONAL FUND
REAL ESTATE SECURITIES FUND HEALTH SCIENCES FUND
EQUITY INCOME FUND TECHNOLOGY FUND
EQUITY INDEX FUND LIMITED TERM INCOME FUND
LARGE CAP VALUE FUND INTERMEDIATE TERM INCOME FUND
LARGE CAP GROWTH FUND FIXED INCOME FUND
MID CAP VALUE FUND INTERMEDIATE GOVERNMENT BOND FUND
REGIONAL EQUITY FUND INTERMEDIATE TAX FREE FUND
SMALL CAP GROWTH FUND CALIFORNIA INTERMEDIATE TAX FREE FUND
SMALL CAP VALUE FUND COLORADO INTERMEDIATE TAX FREE FUND
MICRO CAP VALUE FUND MINNESOTA INTERMEDIATE TAX FREE FUND
INTERNATIONAL INDEX FUND OREGON INTERMEDIATE TAX FREE FUND
This Statement of Additional Information relates to the Class A, Class B
and Class Y Shares of the funds named above (the "Funds"), each of which is a
series of First American Investment Funds, Inc. ("FAIF"). This Statement of
Additional Information is not a prospectus, but should be read in conjunction
with the Funds' current Prospectuses dated August 14, 1998. This Statement of
Additional Information is incorporated into the Funds' Prospectuses by
reference. To obtain copies of a Prospectus, write or call the Funds'
distributor SEI Investments Distribution Co., Oaks, Pennsylvania 19456,
telephone: (800) 637-2548. Please retain this Statement of Additional
Information for future reference.
TABLE OF CONTENTS
GENERAL INFORMATION ....................................................... 2
ADDITIONAL INFORMATION CONCERNING FUND
INVESTMENTS ............................................................... 3
SHORT-TERM INVESTMENTS ............................................... 3
REPURCHASE AGREEMENTS ................................................ 3
WHEN-ISSUED AND DELAYED DELIVERY
TRANSACTIONS ......................................................... 4
LENDING OF PORTFOLIO SECURITIES ...................................... 4
OPTIONS TRANSACTIONS ................................................. 4
FUTURES AND OPTIONS ON FUTURES ....................................... 5
FOREIGN SECURITIES ................................................... 5
FOREIGN CURRENCY TRANSACTIONS ........................................ 6
MORTGAGE-BACKED SECURITIES ........................................... 7
DEBT OBLIGATIONS RATED LESS THAN INVESTMENT
GRADE ................................................................ 8
U.S. TREASURY INFLATION-PROTECTION SECURITIES ........................ 9
SPECIAL FACTORS AFFECTING CALIFORNIA
INTERMEDIATE TAX FREE FUND ........................................... 10
SPECIAL FACTORS AFFECTING COLORADO
INTERMEDIATE TAX FREE FUND ........................................... 14
SPECIAL FACTORS AFFECTING MINNESOTA
INTERMEDIATE TAX FREE FUND .......................................... 16
SPECIAL FACTORS AFFECTING OREGON INTERMEDIATE
TAX FREE FUND ........................................................ 18
CFTC INFORMATION ..................................................... 21
INVESTMENT RESTRICTIONS ................................................... 22
DIRECTORS AND EXECUTIVE OFFICERS .......................................... 25
DIRECTORS ............................................................ 25
EXECUTIVE OFFICERS ................................................... 25
COMPENSATION ......................................................... 27
INVESTMENT ADVISORY AND OTHER SERVICES .................................... 27
INVESTMENT ADVISORY AGREEMENT ........................................ 27
SUB-ADVISORY AGREEMENT FOR INTERNATIONAL
FUND ................................................................. 29
ADMINISTRATION AGREEMENT ............................................. 29
DISTRIBUTOR AND DISTRIBUTION PLANS ................................... 30
CUSTODIAN; TRANSFER AGENT; COUNSEL;
ACCOUNTANTS .......................................................... 32
PORTFOLIO TRANSACTIONS AND ALLOCATION OF
BROKERAGE ................................................................. 33
CAPITAL STOCK ............................................................. 37
NET ASSET VALUE AND PUBLIC OFFERING PRICE ................................. 46
FUND PERFORMANCE .......................................................... 49
SEC STANDARDIZED PERFORMANCE FIGURES ................................. 49
NON-STANDARD DISTRIBUTION RATES ...................................... 54
CERTAIN PERFORMANCE COMPARISONS ...................................... 56
TAXATION .................................................................. 58
RATINGS ................................................................... 62
FINANCIAL STATEMENTS ...................................................... 66
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GENERAL INFORMATION
First American Investment Funds, Inc. ("FAIF") was incorporated in the
State of Maryland on August 20, 1987 under the name "SECURAL Mutual Funds, Inc."
The Board of Directors and shareholders, at meetings held January 10, 1991, and
April 2, 1991, respectively, approved amendments to the Articles of
Incorporation providing that the name "SECURAL Mutual Funds, Inc." be changed to
"First American Investment Funds, Inc."
FAIF is organized as a series fund and currently issues its shares in
24 series. Each series of shares represents a separate investment portfolio with
its own investment objective and policies (in essence, a separate mutual fund).
The series of FAIF to which this Statement of Additional Information relates are
named on the cover hereof. These series are referred to in this Statement of
Additional Information as the "Funds."
Shareholders may purchase shares of each Fund through three separate
classes, Class A (except for Oregon Intermediate Tax Free Fund), Class B (except
for the Tax Free Funds) and Class Y (previously designated as Class C Shares),
which provide for variations in distribution costs, shareholder servicing fees,
voting rights and dividends. To the extent permitted by the Investment Company
Act of 1940 (the "1940 Act"), the Funds may also provide for variations in other
costs among the classes although they have no present intention to do so. In
addition, a sales load is imposed on the sale of Class A and Class B Shares of
the Funds. Except for differences among the classes pertaining to distribution
costs and shareholder servicing fees, each share of each Fund represents an
equal proportionate interest in that Fund.
FAIF has prepared and will provide Prospectuses relating to the Class
A, Class B and Class Y Shares of Funds. These Prospectuses can be obtained by
calling or writing SEI Investments Distribution Co., at the address and
telephone number set forth on the cover of this Statement of Additional
Information. This Statement of Additional Information relates 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.
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ADDITIONAL INFORMATION CONCERNING FUND INVESTMENTS
The investment objectives, policies and restrictions of the Funds are
set forth in their respective Prospectuses. Additional information concerning
the investments which may be made by the Funds is set forth under this caption.
Additional information concerning the Funds' investment restrictions is set
forth below under the caption "Investment Restrictions."
SHORT-TERM INVESTMENTS
Most of the Funds can invest in a variety of short-term instruments
which are specified in the respective Prospectuses. Short-term investments and
repurchase agreements may be entered into on a joint basis by the Funds and
other funds advised by the 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 their respective Prospectuses. The Funds' custodian will hold the securities
underlying any repurchase agreement, or the securities will be part of the
Federal Reserve/Treasury Book Entry System. The market value of the collateral
underlying the repurchase agreement will be determined on each business day. If
at any time the market value of the collateral falls below the repurchase price
under the repurchase agreement (including any accrued interest), the appropriate
Fund will promptly receive additional collateral (so the total collateral is an
amount at least equal to the repurchase price plus accrued interest).
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WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
When a Fund agrees to purchase securities on a when-issued or delayed
delivery basis, the Custodian will maintain in a segregated account cash or
liquid securities in an amount sufficient to meet the Fund's purchase
commitments. It may be expected that a Fund's net assets will fluctuate to a
greater degree when it sets aside securities to cover such purchase commitments
than when it sets aside cash. In addition, because a Fund will set aside cash or
liquid securities to satisfy its purchase commitments in the manner described
above, its liquidity and the ability of the 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 ("U.S. Bank"), the Funds' custodian and
an affiliate of their 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, the
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 lesser than, in the case of a put, the exercise
price of the option. This amount of cash is equal to the difference between the
closing price of the index and the exercise price of the option expressed in
dollars times a specified multiple (the
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<PAGE>
"multiplier"). The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. Unlike stock options, all settlements
for stock index options are in cash, and gain or loss depends on price movements
in the stock market generally (or in a particular industry or segment of the
market) rather than price movements in individual stocks. The multiplier for an
index option performs a function similar to the unit of trading for a stock
option. It determines the total dollar value per contract of each point in the
difference between the underlying stock index. A multiplier of 100 means that a
one-point difference will yield $100. Options on different stock indices may
have different multipliers.
OPTIONS ON INTEREST RATE INDICES. An option on an interest rate index
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing value of the interest rate index upon which the option is
based is greater than, in the case of a call, or lesser than, in the case of a
put, the exercise price of the option. This amount of cash is equal to the
difference between the closing price of the index and the exercise price of the
option expressed in dollars times a specified multiple (the "multiplier"). The
writer of the option is obligated, for the premium received, to make delivery of
this amount. Unlike interest rate futures options contracts, settlements for
interest rate index options are always in cash. Gain or loss depends on price
movements in the interest rate movements with respect to specific financial
instruments. As with stock index options, the multiplier for interest rate index
options determines the total dollar value per contract of each point in the
difference between the exercise price of an option and the current value of the
underlying interest rate index. Options on different interest rate indices may
have different multipliers.
FUTURES AND OPTIONS ON FUTURES
As discussed in the Prospectuses, certain of the Funds may enter into
futures contracts and may purchase options on futures contracts of various
types. These investment techniques are designed primarily to hedge against
anticipated future changes in market conditions or foreign exchange rates which
otherwise might adversely affect the value of securities which a Fund holds or
intends to purchase. The types of futures and options on futures which
particular Funds may utilize are described in the applicable Prospectuses.
At the same time a futures contract is purchased or sold, a Fund
generally must allocate cash or securities as a deposit payment ("initial
deposit"). It is expected that the initial deposit would be approximately 1-1/2%
to 5% of a contract's face value. Daily thereafter, the futures contract is
valued and the payment of "variation margin" may be required, since each day the
Fund would provide or receive cash that reflects any decline or increase in the
contract's value. Futures transactions also involve brokerage costs and require
a Fund to segregate liquid assets, such as cash, United States Government
securities or other liquid high grade debt obligations, to cover its performance
under such contracts.
A Fund may lose the expected benefit of futures transactions if
interest rates, securities prices or foreign exchange rates move in an
unanticipated manner. Such unanticipated changes may also result in poorer
overall performance than if the Fund had not entered into any futures
transactions. In addition, the value of a Fund's futures positions may not prove
to be perfectly or even highly correlated with the value of its portfolio
securities and foreign currencies, limiting the Fund's ability to hedge
effectively against interest rate, foreign exchange rate and/or market risk and
giving rise to additional risks. Because of the low margin requirements in the
futures markets, they may be subject to market forces, including speculative
activity, which do not affect the cash markets. There also is no assurance of
liquidity in the secondary market for purposes of closing out futures positions.
FOREIGN SECURITIES
As described in the applicable Prospectuses, under normal market
conditions International Index Fund and International Fund invest principally in
foreign securities, and certain other Funds may invest lesser proportions of
their assets in securities of foreign issuers which are either listed on a
United States securities exchange or represented by American Depositary
Receipts.
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<PAGE>
Fixed commissions on foreign securities exchanges are generally higher
than negotiated commissions on United States exchanges. Foreign markets also
have different clearance and settlement procedures, and in some markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of International Index Fund or International Fund is uninvested. In
addition, settlement problems could cause International Index Fund or
International Fund to miss attractive investment opportunities or to incur
losses due to an inability to sell or deliver securities in a timely fashion. In
the event of a default by an issuer of foreign securities, it may be more
difficult for a Fund to obtain or to enforce a judgment against the issuer.
FOREIGN CURRENCY TRANSACTIONS
As described in the applicable Prospectuses, International Fund may
engage in a variety of foreign currency transactions in connection with its
investment activities. These include forward foreign currency exchange
contracts, foreign currency futures, and foreign currency options.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
These contracts are traded directly between currency traders (usually large
commercial banks) and their customers. International Fund will not enter into
such forward contracts or maintain a net exposure in such contracts where the
Fund would be obligated to deliver an amount of foreign currency in excess of
the value of the Fund's securities or other assets denominated in that currency.
The Fund will comply with applicable Securities and Exchange Commission
announcements requiring it to segregate assets to cover the Fund's commitments
with respect to such contracts. At the present time, these announcements
generally require a fund with a long position in a forward foreign currency
contract to establish with its custodian a segregated account containing cash or
liquid high grade debt securities equal to the purchase price of the contract,
and require a fund with a short position in a forward foreign currency contract
to establish with its custodian a segregated account containing cash or liquid
high grade debt securities that, when added to any margin deposit, equal the
market value of the currency underlying the forward contract. These requirements
will not apply where a forward contract is used in connection with the
settlement of investment purchases or sales or where the position has been
"covered" by entering into an offsetting position. The Fund generally will not
enter into a forward contract with a term longer than one year.
FOREIGN CURRENCY FUTURES TRANSACTIONS. Unlike forward foreign currency
exchange contracts, foreign currency futures contracts and options on foreign
currency futures contracts are standardized as to amount and delivery period and
may be traded on boards of trade and commodities exchanges or directly with a
dealer which makes a market in such contracts and options. It is anticipated
that such contracts may provide greater liquidity and lower cost than forward
foreign currency exchange contracts. As part of its financial futures
transactions, International Fund may use foreign currency futures contracts and
options on such futures contracts. Through the purchase or sale of such
contracts, the Fund may be able to achieve many of the same objectives as
through forward foreign currency exchange contracts more effectively and
possibly at a lower cost.
FOREIGN CURRENCY OPTIONS. A foreign currency option provides the option
buyer with the right to buy or sell a stated amount of foreign currency at the
exercise price at a specified date or during the 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
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<PAGE>
currency option may protect International Fund against an adverse movement in
the value of a foreign currency, it would not limit the gain which might result
from a favorable movement in the value of the currency. For example, if the Fund
were holding securities denominated in an appreciating foreign currency and had
purchased a foreign currency put to hedge against a decline in the value of the
currency, it would not have to exercise its put. In such an event, however, the
amount of the Fund's gain would be offset in part by the premium paid for the
option. Similarly, if the Fund entered into a contract to purchase a security
denominated in a foreign currency and purchased a foreign currency call to hedge
against a rise in the value of the currency between the date of purchase and the
settlement date, the Fund would not need to exercise its call if the currency
instead depreciated in value. In such a case, the Fund could acquire the amount
of foreign currency needed for settlement in the spot market at a lower price
than the exercise price of the option.
MORTGAGE-BACKED SECURITIES
As described in the applicable Prospectuses, Balanced Fund, Limited
Term Income Fund, Intermediate Term Income Fund and Fixed Income Fund also
invest in mortgage-backed securities. Each of these Funds will invest only in
mortgage-backed securities which are Agency Pass-Through Certificates or
collateralized mortgage obligations ("CMOs"), as defined and described in those
Prospectuses.
Agency Pass-Through Certificates are issued or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC").
GNMA is a wholly-owned corporate instrumentality of the United States within the
Department of Housing and Urban Development. The guarantee of GNMA with respect
to GNMA certificates is backed by the full faith and credit of the United
States, and GNMA is authorized to borrow from the United States Treasury in an
amount which is at any time sufficient to enable GNMA, with no limitation as to
amount, to perform its guarantee.
FNMA is a federally chartered and privately owned corporation organized
and existing under federal law. Although the Secretary of the Treasury of the
United States has discretionary authority to lend funds to FNMA, neither the
United States nor any agency thereof is obligated to finance FNMA's operations
or to assist FNMA in any other manner.
FHLMC is a federally chartered corporation organized and existing under
federal law, the common stock of which is owned by the Federal Home Loan Banks.
Neither the United States nor any agency thereof is obligated to finance FNMA's
operations or to assist FNMA in any other manner.
The residential mortgage loans evidenced by Agency Pass-Through
Certificates and upon which CMOs are based generally are secured by first
mortgages on one- to four-family residential dwellings. Such mortgage loans
generally have final maturities ranging from 15 to 30 years and provide for
monthly payments in amounts sufficient to amortize their original principal
amounts by the maturity dates. Thus, each monthly payment on such mortgage loans
generally includes both an interest component and a principal component, so that
the holder of the mortgage loans receives both interest and a partial return of
principal in each monthly payment. In general, such mortgage loans can be
prepaid by the borrowers at any time without any prepayment penalty. In
addition, many such mortgage loans contain a "due-on-sale" clause requiring the
loans to be repaid in full upon the sale of the property securing the loans.
Because residential mortgage loans generally provide for monthly amortization
and may be prepaid in full at any time, the weighted average maturity of a pool
of residential mortgage loans is likely to be substantially shorter than its
stated final maturity date. The rate at which a pool of residential mortgage
loans is prepaid may be influenced by many factors and is not predictable with
precision.
As stated in the applicable Prospectuses, CMOs generally are issued in
multiple classes, with holders of each class entitled to receive specified
portions of the principal payments and prepayments and/or of the interest
payments on the underlying mortgage loans. These entitlements can be specified
in a wide variety
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of ways, so that the payment characteristics of various classes may differ
greatly from one another. For example:
* In a sequential-pay CMO structure, one class is entitled to receive all
principal payments and prepayments on the underlying mortgage loans
(and interest on unpaid principal) until the principal of the class is
repaid in full, while the remaining classes receive only interest; when
the first class is repaid in full, a second class becomes entitled to
receive all principal payments and prepayments on the underlying
mortgage loans until the class is repaid in full, and so forth.
* A planned amortization class ("PAC") of CMOs is entitled to receive
principal on a stated schedule to the extent that it is available from
the underlying mortgage loans, thus providing a greater (but not
absolute) degree of certainty as to the schedule upon which principal
will be repaid.
* An accrual class of CMOs provides for interest to accrue and be added
to principal (but not be paid currently) until specified payments have
been made on prior classes, at which time the principal of the accrual
class (including the accrued interest which was added to principal) and
interest thereon begins to be paid from payments on the underlying
mortgage loans.
* As discussed above with respect to Agency Pass-Through Certificates, an
interest-only class of CMOs entitles the holder to receive all of the
interest and none of the principal on the underlying mortgage loans,
while a principal-only class of CMOs entitles the holder to receive all
of the principal payments and prepayments and none of the interest on
the underlying mortgage loans.
* A floating rate class of CMOs entitles the holder to receive interest
at a rate which changes in the same direction and magnitude as changes
in a specified index rate. An inverse floating rate class of CMOs
entitles the holder to receive interest at a rate which changes in the
opposite direction from, and in the same magnitude as or in a multiple
of, changes in a specified index rate. Floating rate and inverse
floating rate classes also may be subject to "caps" and "floors" on
adjustments to the interest rates which they bear.
* A subordinated class of CMOs is subordinated in right of payment to one
or more other classes. Such a subordinated class provides some or all
of the credit support for the classes that are senior to it by
absorbing losses on the underlying mortgage loans before the senior
classes absorb any losses. A subordinated class which is subordinated
to one or more classes but senior to one or more other classes is
sometimes referred to as a "mezzanine" class. A subordinated class
generally carries a lower rating than the classes that are senior to
it, but may still carry an investment grade rating.
DEBT OBLIGATIONS RATED LESS THAN INVESTMENT GRADE
As described in the applicable Prospectuses, the "equity securities" in
which certain Funds may invest include corporate debt obligations which are
convertible into common stock. These convertible debt obligations may include
obligations rated as low as CCC by Standard & Poor's or Caa by Moody's or which
have been assigned an equivalent rating by another nationally recognized
statistical rating organization. Debt obligations rated BB, B or CCC by Standard
& Poor's or Ba, B or Caa by Moody's are considered to be less than "investment
grade" and are sometimes referred to as "junk bonds." The limitations on
investments by these Funds in less than investment grade convertible debt
obligations are set forth in the applicable Prospectuses.
Purchases of less than investment grade corporate debt obligations
generally involve greater risks than purchases of higher rated obligations. Less
than investment grade debt obligations are especially subject to adverse changes
in general economic conditions and to changes in the financial condition of
their issuers. During periods of economic downturn or rising interest rates,
issuers of such obligations may
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experience financial stress that could adversely affect their ability to make
payments of principal and interest and increase the possibility of default.
Yields on less than investment grade debt obligations will fluctuate
over time. The prices of such obligations have been found to be less sensitive
to interest rate changes than higher rated obligations, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or period of rising interest rates, highly leveraged issuers
may experience financial stress which could adversely affect their ability to
service principal and interest payment obligations, to meet projected business
goals, and to obtain additional financing. In addition, periods of economic
uncertainty and changes can be expected to result in increased volatility of
market prices of less than investment grade debt obligations.
In addition, the secondary trading market for less than investment
grade debt obligations may be less developed than the market for investment
grade obligations. This may make it more difficult for a Fund to value and
dispose of such obligations. Adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may decrease the values and liquidity of
less than investment grade obligations, especially in a thin secondary trading
market.
Certain risks also are associated with the use of credit ratings as a
method for evaluating less than investment grade debt obligations. For example,
credit ratings evaluate the safety of principal and interest payments, not the
market value risk of such obligations. In addition, credit rating agencies may
not timely change credit ratings to reflect current events. Thus, the success of
a Fund's use of less than investment grade convertible debt obligations may be
more dependent on the Advisor's own credit analysis than is the case with
investment grade obligations.
U.S. TREASURY INFLATION-PROTECTION SECURITIES
Intermediate Government Bond Fund and, to the extent they may invest in
fixed-income securities, the other Funds, may invest in U.S. Treasury
inflation-protection securities, which are issued by the United States
Department of Treasury ("Treasury") with a nominal return linked to the
inflation rate in prices. The index used to measure inflation is the
non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All
Urban Consumers ("CPI-U").
The value of the principal is adjusted for inflation, and pays interest
every six months. The interest payment is equal to a fixed percentage of the
inflation-adjusted value of the principal. The final payment of principal of the
security will not be less than the original par amount of the security at
issuance.
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.
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The reference CPI for the first day of any calendar month is the CPI-U
for the third preceding calendar month. (For example, the reference CPI for
December 1 is the CPI-U reported for September of the same year, which is
released in October.) The reference CPI for any other day of the month is
calculated by a linear interpolation between the reference CPI applicable to the
first day of the month and the reference CPI applicable to the first day of the
following month.
Any revisions the Bureau of Labor Statistics (or successor agency)
makes to any CPI-U number that has been previously released will not be used in
calculations of the value of outstanding inflation-protection securities. In the
case that the CPI-U for a particular month is not reported by the last day of
the following month, the Treasury will announce an index number based on the
last year-over-year CPI-U inflation rate available. Any calculations of the
Treasury's payment obligations on the inflation-protection security that need
that month's CPI-U number will be based on the index number that the Treasury
has announced. If the CPI-U is rebased to a different year, the Treasury will
continue to use the CPI-U series based on the base reference period in effect
when the security was first issued as long as that series continues to be
published. If the CPI-U is discontinued during the period the
inflation-protection security is outstanding, the Treasury will, in consultation
with the Bureau of Labor Statistics (or successor agency), determine an
appropriate substitute index and methodology for linking the discontinued series
with the new price index series. Determinations of the Secretary of the Treasury
in this regard are final.
Inflation-protection securities will be held and transferred in either
of two book-entry systems: the commercial book-entry system (TRADES) and
TREASURY DIRECT. The securities will be maintained and transferred at their
original par amount, i.e., not at their inflation-adjusted value. STRIPS
components will be maintained and transferred in TRADES at their value based on
the original par amount of the fully constituted security.
SPECIAL FACTORS AFFECTING CALIFORNIA INTERMEDIATE TAX FREE FUND
As described in the Prospectuses relating to California Intermediate
Tax Free Fund, except during temporary defensive periods, California
Intermediate Tax Free Fund will invest most of its total assets in California
municipal obligations. This Fund therefore is susceptible to political, economic
and regulatory factors affecting issuers of California municipal obligations.
The following information provides only a brief summary of the complex factors
affecting the financial situation in California. This information is derived
from sources that are generally available to investors and is based in part on
information obtained from various state and local agencies in California. It
should be noted that the creditworthiness of obligations issued by local
California issuers may be unrelated to the creditworthiness of obligations
issued by the State of California, and that there is no obligation on the part
of California to make payment on such local obligations in the event of default.
GENERAL ECONOMIC CONDITIONS. California's economy is the largest among
the 50 states and one of the largest in the world. This diversified economy has
major components in agriculture, manufacturing, high-technology, trade,
entertainment, tourism, construction and services. Total state gross domestic
product of $1 trillion in 1997 will be larger than all but seven nations in the
world and California will become the first state to produce over one trillion
dollars worth of goods and services in a single year.
Events in Asia could have implications for California. Over half of
California-made goods exports are sold to Asia, and the state has already seen
declines in cargoes destined for Japan, South Korea, Singapore and Malaysia. At
the same time, strong growth continues in exports to Taiwan, Hong Kong, and
Mexico. Overall, exports of California-made goods slowed to 2% growth in the
first half of 1997, from over 8% the year before. Strong export growth was a
major element during the initial stages of the state's recovery in 1994 and
1995. The upturn has broadened sufficiently over the last two years, to the
point that California is now posting solid gains in employment and income
despite the slowing of exports.
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After suffering through a severe recession, California's economy has
been on a steady recovery since the start of 1994. In 1996, California had eight
consecutive months of record high employment levels. Employment grew over
330,000 non-farm jobs in 1996, and between November 1996 and November 1997,
335,000 jobs were added for a growth rate of 2.6%. All industry divisions showed
job gains over the year. The service industries continue to post the largest job
growth, on a numerical basis, up 151,400 jobs or 3.8%. The growth continues to
be primarily in the business service sector. On a percentage basis, employment
in construction shows the strongest job growth, up 8.1%, for an increase of
43,000 jobs. The growth in construction is predominantly in the special trade
contractors sector. Other industries posting strong job growth over the year
were wholesale and trade (up 43,200 jobs), manufacturing (up 38,500) and
government (up 33,200). Residential housing construction reached a seven-year
high at an annual rate of 134,000 units in October 1997, up 29% from the
year-ago poll.
California's population grew by 386,000 people in 1996 to a total of
32.6 million in January 1997. This reflects a 1.2% increase of population for
the year, compared to 1.0% growth posted in calendar year 1995. California's
population is concentrated in metropolitan areas. Los Angeles County posted the
highest annual numerical population gain, adding 113,800 people in 1996 for a
total of 9.49 million. San Diego County posted the second highest numerical
growth, gaining 42,300 for a total of 2.7 million.
California enjoys a large and diverse labor force. As of November 1997,
the total civilian labor force was 15,931,000 with 15,000,000 individuals
employed and 931,000, or 5.8%, unemployed. In comparison, the unemployment rate
for the United States during the same time was 4.6%.
BUDGETARY PROCESS. The State's fiscal year begins on July 1 and ends on
June 30. The annual budget is proposed by the Governor by January 10 of each
year for the next fiscal year (the "Governor's Budget"). Under State law, the
annual proposed Governor's Budget cannot provide for projected expenditures in
excess of projected revenues and balances available from prior fiscal years.
Under the State Constitution, money may be drawn from the Treasury only through
an appropriation made by law. The primary source of the annual expenditure
authorizations is the Budget Act as approved by the Legislature and signed by
the Governor. The Budget Act must be approved by a two-thirds majority vote of
each House of the Legislature. The Governor may reduce or eliminate specific
line items in the Budget Act or any other appropriations bill without vetoing
the entire bill. Such individual line-item vetoes are subject to override by a
two-thirds majority vote of each House of the Legislature.
Appropriations also may be included in legislation other than the
Budget Act. Bills containing appropriations (except K-14 education) must be
approved by a two-thirds majority vote in each House of the Legislature and be
signed by the Governor. Bills containing K-14 education appropriations only
require a simple majority vote. Continuing appropriations, available without
regard to fiscal year, may also be provided by statute or the State
Constitution. Funds necessary to meet an appropriation need not be in the State
Treasury at the time such appropriation is enacted; revenues may be appropriated
in anticipation of their receipt.
REVENUES AND EXPENDITURES. The moneys of the State are segregated into
the General Fund and approximately 600 Special Funds. The General Fund consists
of revenues received by the State Treasury and not required by law to be
credited to any other fund, as well as earnings from the investment of State
moneys not allocable to another fund. The General Fund is the principal
operating fund for the majority of governmental activities and is the depository
of most of the major revenue sources of the State. The General Fund may be
expended as a consequence of appropriation measures enacted by the Legislature
and approved by the Governor, as well as appropriations pursuant to various
constitutional authorizations and initiative statutes.
Moneys on deposit in the State's Centralized Treasury System are
invested by the Treasurer in the Pooled Money Investment Account ("PMIA"). As of
December 17, 1997, the PMIA held approximately $16.8 billion of State moneys,
and $10.3 billion of moneys invested for 2,538 local governmental entities
through
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the Local Agency Investment Fund ("LAIF"). The total assets of the PMIA as of
December 17, 1997 were $27.1 billion. The Treasurer does not invest in leveraged
products or inverse floating rate securities. The investment policy permits the
use of reverse repurchase agreements subject to limits of no more than 10% of
PMIA. All reverse repurchase agreements are cash matched either to the maturity
of the reinvestment or an adequately positive cash flow date which is
approximate to the maturity date. The average life of the investment portfolio
of the PMIA as of December 17, 1997 was 199 days.
SPECIAL FUND FOR ECONOMIC UNCERTAINTIES. The Special Fund for Economic
Uncertainties ("SFEU") is funded with General Fund revenues and was established
to protect the State from unforeseen revenue reductions and/or unanticipated
expenditure increases. Amounts in the SFEU may be transferred by the State
Controller as necessary to meet cash needs of the General Fund. The State
Controller is required to return moneys so transferred without payment of
interest as soon as there are sufficient moneys in the General Fund. For
budgeting and accounting purposes, any appropriation made from the SFEU is
deemed an appropriation from the General Fund. For year-end reporting purposes,
the State Controller is required to add the balance in the SFEU to the balance
in the General Fund so as to show the total moneys then available for General
Fund purposes. Inter-fund borrowing has been used for many years to meet
temporary imbalances of receipts and disbursements in the General Fund. As of
November 30, 1997, the General Fund had outstanding internal loans from Special
Funds of $2.8 billion (in addition, there are $3 billion of external loans
represented by the 1997 Revenue Anticipation Notes, which mature on June 30,
1998). The revised projected 1997-98 fiscal year General Fund Reserve for
Economic Uncertainties is $329 million.
PROPOSITION 13. The primary units of local government in California are
the counties. Counties are responsible for the provision of many basic services,
including indigent health care, welfare, courts, jails and public safety in
unincorporated areas. There are also about 480 unincorporated cities, and
thousands of other special districts formed for education, utility and other
services. The fiscal condition of local governments has been constrained since
the enactment of "Proposition 13" in 1978, which reduced and limited the future
growth of property taxes, and limited the ability of local governments to impose
"special taxes" (those devoted to a specific purpose) without two-thirds voter
approval. A recent California Supreme Court decision has upheld the
constitutionality of an initiative statute, previously held invalid by lower
courts, which requires voter approval for "general" as well as "special" taxes
at the local level. Counties, in particular, have had fewer options to raise
revenues than many other local government entities, yet have been required to
maintain many services.
In the aftermath of Proposition 13, the State provided aid from the
General Fund to make up some of the loss of property tax moneys, including
taking over the principal responsibility for funding local K-12 schools and
community colleges. Under the pressure of the recent recession, the Legislature
has eliminated the remnants of this post-Proposition 13 aid to entities other
than K-14 education districts, although it has also provided additional funding
sources (such as sales taxes) and reduced mandates for local services. Many
counties continue to be under severe fiscal stress. While such stress has in
recent years most often been experienced by smaller, rural counties, larger
urban counties, such as Los Angeles, have also been affected.
STATE APPROPRIATIONS LIMIT. The State is subject to an annual
appropriations limit imposed by Article XIII B of the State Constitution (the
"Appropriations Limit"). The Appropriations Limit does not restrict
appropriations to pay debt service on voter-authorized bonds. Article XIII B
prohibits the State from spending "appropriations subject to limitation" in
excess of the Appropriations Limit. "Appropriations subject to limitation," with
respect to the State, are authorizations to spend "proceeds of taxes," which
consist of tax revenues, and certain other funds, including proceeds from
regulatory licenses, user charges or other fees to the extent that such proceeds
exceed "the cost reasonably borne by that entity in providing the regulation,
product or service," but "proceeds of taxes" exclude most state subventions to
local governments, tax refunds and some benefit payments such as unemployment
insurance. No limit is imposed on appropriations of funds which are not
"proceeds of taxes," such as reasonable user charges or fees and certain other
non-tax funds.
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Not included in the Appropriations Limit are appropriations for the
debt service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government, appropriations for qualified
capital outlay projects, appropriations of revenues derived from any increase in
gasoline taxes and motor vehicle weight fees above January 1, 1990 levels, and
appropriation of certain special taxes imposed by initiative (e.g., cigarette
and tobacco taxes). The Appropriations Limit may also be exceeded in cases of
emergency.
ORANGE COUNTY, CA. On December 6, 1994, Orange County, together with
its pooled investment funds (the "Pools") filed for protection under Chapter 9
of the federal Bankruptcy Code, after reports that the Pools had suffered
significant market losses in their investments, causing a liquidity crisis for
the Pools and Orange County. More than 200 other public entities, most of which,
but not all, are located in Orange County, were also depositors in the Pools.
Orange County has reported the Pools' loss at about $1.69 billion, or about 23%
of their initial deposits of approximately $7.5 billion. Many of the entities
which deposited moneys in the Pools, including Orange County, faced interim
and/or extended cash flow difficulties because of the bankruptcy filing and may
be required to reduce programs or capital projects. Orange County has embarked
on a fiscal recovery plan based on sharp reductions in services and personnel,
and rescheduling of outstanding short term debt using certain new revenues
transferred to Orange County from other local governments pursuant to special
legislation enacted in October, 1995. The State has no existing obligation with
respect to any outstanding obligations or securities of Orange County or any of
the other participating entities.
LITIGATION GENERALLY. The State is a party to numerous legal
proceedings, many of which normally occur in governmental operations. In the
consolidated state case of Malibu Video Systems, et al. v. Kathleen Brown and
Abramovitz, et al., a stipulated judgment has been entered requiring return of
$119 million plus interest to specified special funds over a period of up to
five years beginning in fiscal year 1996-1997. The lawsuit challenges the
transfer of monies from special fund accounts within the State Treasury to the
State's General Fund pursuant to the Budget Acts of 1991, 1992, 1993, and 1994.
Plaintiffs allege that the monetary transfers violated various statutes and
provisions of the State Constitution.
FISCAL YEAR 1996 - 1997. General Fund revenues and transfers for fiscal
year 1996-97 were $49.2 billion, a 6% increase from the prior year. Expenditures
for the 1996-97 fiscal year were $49.1 billion, an 8% increase. As of June 30,
1997, the General Fund balance was $906 million.
Overall, General Fund revenues and transfers represent about
78% of total revenues. The remaining 22% are special funds, dedicated to
specific programs. The three largest revenue sources (personal income, sales,
and bank and corporation) account for about 73% of total revenues.
Several important tax changes were enacted in 1996. The bank
and corporation tax was reduced by 5%, and a number of targeted business tax
incentives were put into place.
1997-98 FISCAL YEAR. A revised balance of $329 million is
expected in the General Fund Reserve for Economic Uncertainties at June 30,
1998. The balance in the General Fund at the end of fiscal year 1998 is forecast
at $773.8 million. Special Fund revenues are estimated to be $14.2 billion and
appropriated Special Fund expenditures are projected at $14.4 billion.
K-12 education remains the state's top funding priority --
nearly 42 cents of every General Fund dollar is spent on K-12 education.
Education, public safety, and health and welfare expenditures constitute nearly
93% of all state General Fund expenditures. General Fund expenditures for
1997-98 were proposed in the following amounts and programs: $20.9 billion or
41.6% for K-12 education, $14.6 billion or 28.9% for health and welfare, $6.5
billion or 12.9% for higher education, and $4.3 billion, or 8.5% for youth and
correctional programs. The remaining expenditures were in areas such as
business, transportation, housing, and environmental protection.
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As of November 1997, General Fund cash receipts for the year
are $407 million below the 1997 Budget Act Forecast. Also, personal income tax
revenues for the year are below expectations by $56 million. Yet, year-to-date
sales and use tax receipts are $48 million above forecast. Bank and corporation
tax receipts are $384 million below the 1997 Budget Act Forecast.
DEBT ADMINISTRATION AND LIMITATION. The State Treasurer is
responsible for the sale of debt obligations of the State and its various
authorities and agencies. The State Constitution prohibits the creation of
indebtedness of the State unless a bond law is approved by a majority of the
electorate voting at a general election or a direct primary. General obligation
bond acts provide that debt service on general obligation bonds shall be
appropriated annually from the General Fund and all debt service on general
obligation bonds is paid from the General Fund. Under the State Constitution,
debt service on general obligation bonds is the second charge to the General
Fund after the application of moneys in the General Fund to the support of the
public school system and public institutions of higher education. Certain
general obligation bond programs receive revenues from sources other than the
sale of bonds or the investment of bond proceeds. The State had $14.9 billion
aggregate principal amount of non-self liquidating general obligation bonds
outstanding, and $6.4 billion authorized and unissued, as of December 31, 1997.
Outstanding lease revenue bonds totaled $7.2 billion as of December 31, 1997,
and are estimated to total $7.5 billion as of June 30, 1998.
From July 1, 1996 to July 1, 1997, the State issued
approximately $1.03 billion in non-self liquidating general obligation bonds
and $1.26 billion in revenue bonds. Refunding bonds, which are used to refinance
existing long-term debt, accounted for none of the general obligation bonds and
$841.38 million of the revenue bonds.
General Fund general obligation debt service expenditures for
fiscal year 1996-97 were $1.92 billion, and are estimated at $1.89 billion for
fiscal year 1997-98.
The State's general obligation bonds have received ratings of
"A1" by Moody's Investors Service, "A+" by Standard & Poor's and "A+" by Fitch
IBCA, Inc. (formerly Fitch Investors Service, L.P.) ("Fitch").
SPECIAL FACTORS AFFECTING COLORADO INTERMEDIATE TAX FREE FUND
As described in the Prospectuses relating to Colorado
Intermediate Tax Free Fund, except during temporary defensive periods, this Fund
will invest most of its total assets in Colorado municipal obligations. Colorado
Intermediate Tax Free Fund therefore is susceptible to political, economic and
regulatory factors affecting issuers of Colorado municipal obligations. The
following information provides only a brief summary of the complex factors
affecting the financial situation in Colorado. This information is derived from
sources that are generally available to investors and is based in part on
information obtained from various state and local agencies in Colorado. It
should be noted that the creditworthiness of obligations issued by local
Colorado issuers may be unrelated to the creditworthiness of obligations issued
by the State of Colorado, and that there is no obligation on the part of the
State of Colorado to make payment on such local obligations in the event of
default.
COLORADO FISCAL CONDITION. The Colorado Constitution allocates
to the General Assembly legislative responsibility for appropriating State
moneys to pay the expenses of State government. The fiscal year of the State is
the 12-month period commencing July 1 and ending June 30. During the fiscal year
for which appropriations have been made, the General Assembly may increase or
decrease appropriations through supplementary appropriations.
State general fund tax collections for fiscal year 1996-97
increased 9.6% over fiscal year 1995-96 to reach $4,679.4 million. The current
estimate for fiscal year 1997-98 is $5,178.6 million, or an
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increase of 10.7%. State cash funds, which consist of a variety of program
revenues, totalled $2,007.7 million for fiscal year 1996-97, and are projected
to increase 4.3% for fiscal year 1997-98 to $2,093.1 million.
The State Constitution requires that expenditures for any
fiscal year not exceed revenues for such fiscal year. In addition, Article X,
Section 20, of the State Constitution (see "-- State Constitutional Amendment"
below) limits increases in expenditures of state general funds and cash revenues
from year to year to the sum of State inflation plus the percentage change in
population (adjusted for revenue changes approved by voters). Expenditures in
fiscal year 1997-98 are limited to an increase of no more than 5.5% over 1996-97
expenditures. The 5.5% increase factor is equal to the sum of 1996 inflation of
3.5% and population growth of 2.0%. Based upon total general fund tax
collections and state cash revenues for fiscal year 1996-97 of $6,647.6 million,
expenditures for 1997-98 will be limited to $6,866.6 million. December 20, 1997
estimates show total revenues for the 1997-98 fiscal year to be $7,226.7
million, or $360.1 million over the limit. The 1997 fiscal year General Fund and
program revenues (cash funds) were $139.0 million more than expenditures allowed
under the spending limitation. This is the first time the State breached the
limit since its implementation in 1992. This excess revenue of $139.0 million
will be refunded to Colorado taxpayers during the 1998 tax filing season.
STATE CONSTITUTIONAL AMENDMENT. Section 20, Article X of the
Colorado Constitution ("Amendment One") contains limitations on the ability of
"Districts," which are defined as Colorado State and local governments, to
increase taxes and issue debt obligations, as well as limitations on spending
and revenue generation. The amendment does not apply to "Enterprises," which are
defined as government-owned businesses that are authorized to issue their own
revenue bonds and that receive under 10% of annual revenues in grants from all
Colorado state and local governments combined.
Amendment One limits the ability of Districts to increase
taxes by providing that advance voter approval is required for "any new tax, tax
rate increase, mill levy above that for the prior year, valuation for assessment
ratio increase for a property class, or extension of an expiring tax, or a tax
policy change directly causing a net tax revenue gain to any district." An
additional limitation is placed on the maximum annual percentage increase in
property tax revenue.
Amendment One also imposes limitations on government
borrowing. The amendment provides that Districts must have advance voter
approval for the "creation of any multiple-fiscal year direct or indirect
district debt or other financial obligation whatsoever without adequate present
cash reserves pledged irrevocably and held for payments in all future fiscal
years," except for refinancing District bonded debt at a lower interest rate or
adding new employees to existing District pension plans. Prior to the adoption
of Amendment One, voter approval was generally required only for the creation of
general obligation debt.
Spending limitations applicable to the State and separately to
local governments are also included in Amendment One. The amendment provides
that the maximum annual percentage change in each local District's Fiscal Year
Spending shall equal inflation in the prior calendar year plus annual local
growth, adjusted for revenue changes approved by voters after 1991 and certain
other allowed adjustments. "Fiscal Year Spending" is defined as all District
expenditures and reserve increases except refunds made in the current or next
fiscal year, gifts, federal funds, collections for another government, pension
contributions by employees and pension fund earnings, reserve transfers or
expenditures, damage awards and property sales. If revenue from sources not
excluded from Fiscal Year Spending exceeds the spending limit for a fiscal year,
Amendment One provides that the excess must be refunded to taxpayers in the next
fiscal year unless voters approve a revenue change as an offset.
Elections required under Amendment One are limited to the
State general election (the first Tuesday after the first Monday in November in
even numbered years), an election held on the first Tuesday in November in odd
numbered years, or the regular biennial election of the local government.
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While it is too early to determine what impacts Amendment One
will ultimately have on the financial operations of Colorado state and local
governments, these constraints on budgetary and debt management flexibility may
create credit concerns. Furthermore, the language of Amendment One is not clear
as to certain matters, including (a) whether property tax rates can be increased
without voter approval to support outstanding or refunding general obligation
bonds, (b) whether new lease rental bonds and certificates of participation
constitute multiple-year financial obligations within the context of the
amendment, and (c) the precise definition of exempt Enterprises. A number of
Colorado courts have rendered decisions regarding various provisions of
Amendment One since its passage. However, there are still many uncertainties as
to the appropriate construction of certain provisions of Amendment One. In view
of the fact that no appellate court has ruled on Amendment One comprehensively,
there can still be no assurance as to the appropriate construction of certain
provisions of Amendment One.
COLORADO ECONOMY. Colorado employment has slowed from 5.1% at
its peak in 1994 to 3.4% in 1996. Job creation back in 1994 hit 85,200. During
1996, only 62,500 jobs were created with services and trade being the number one
and two, respectively, largest growing industries in Colorado. Construction
reported the largest percentage gain from 1995 to 1996, at 8.8%, or an
additional 9,000 employees. Mining continued to be the weakest industry sector
with a loss of 8.1% or 1,200 employees in 1996.
Colorado's job growth is expect to remain at 3.4% for 1997 and
an estimated 64,500 jobs will be created. Growth is expected in every industry
except TCPU (Transportation, Communications and Public Utilities). High
technology industries such as computer services and manufacturing, telephone
communications, cable television and communications equipment manufacturing
continue to expand. The pace of growth in 1997 was brisk, even with such
high-profile losses as Southern Pacific's merger with Union Pacific and
subsequent relocation to Nebraska and the Public Service Company's merger and
downsizing. In 1998, overall growth is expected to continue to shrink as the
building and real estate sectors begin to top out and as manufacturing slows.
Unemployment will bottom out at 3.4% of the workforce in 1997,
breaking through the 4.2% threshold that has held for three years in a row. In
comparison, the national unemployment rate in 1996 was 5.4%. In 1973, Colorado's
unemployment was at 3.0%. In this business cycle, however, that 24-year low
will not be breached. Unemployment rates will rise slightly in 1998 and continue
to creep upward into 2001, as a result of slower labor force growth and slowing
participation rates. Furthermore, as newly-trained former welfare recipients
enter the labor market, the ranks of the unemployed will swell. Those looking
for first-time jobs and those who must go through several employment situations
before find the right job will add to the unemployment rate.
Total personal income in Colorado during 1997 is projected to
reach $104.7 billion, an increase of 6.5%, yet lower than the 7.1% increase
reached in 1996. During 1996, total United States personal income increased 5.6%
and is estimated to increase 5.8% in 1997. Preliminary estimates for Colorado
personal income predict an annual growth rate of 6.7% for 1998.
Total population in Colorado increased by 75,100 during 1996,
resulting in a growth rate of 2.0%. The preliminary estimate for total
population increase for 1997 is 73,300 or 1.9%.
SPECIAL FACTORS AFFECTING MINNESOTA INTERMEDIATE TAX FREE FUND
As described in the Prospectuses relating to Minnesota Intermediate Tax
Free Fund, except during temporary defensive periods, this Fund will invest most
of its total assets in Minnesota municipal obligations. This Fund therefore is
susceptible to political, economic and regulatory factors affecting issuers of
Minnesota municipal obligations. The following information provides only a brief
summary of the complex factors affecting the financial situation in Minnesota.
This information is derived from sources that are generally available to
investors and is based in part on information obtained from
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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.
Diversity and a significant natural resource base are two important
characteristics of the Minnesota economy. Generally, the structure of the
State's economy parallels the structure of the United States economy as a whole.
There are, however, employment concentration in durable goods and non-durable
goods manufacturing, particularly industrial machinery, instruments and
miscellaneous, food, paper and related industries, and printing and publishing.
During the period from 1980 to 1990, overall employment growth in Minnesota
lagged behind national employment growth, in large part due to declining
agricultural employment. The rate of non-farm employment growth in Minnesota
exceeded the rate of national growth, however, in the period of 1990 to 1997.
Minnesota continues to have one of the lowest unemployment rates in the nation.
Since 1980, Minnesota per capita income generally has remained above the
national average.
The State relies heavily on a progressive individual income tax and a
retail sales tax for revenue, which results in a fiscal system that is sensitive
to economic conditions. On a number of occasions in previous years, legislation
has been required to eliminate projected budget deficits by raising additional
revenue, reducing expenditures, including aids to political subdivisions and
higher eduction, 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 November 1997 Forecast projected
that, under then current law, the State would complete its current biennium June
30, 1999 with a $453 million surplus, plus a $350 million cash flow account
balance, a $522 million budget reserve. 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 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
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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 Intermediate Tax Free Fund or the ability of respective
obligors to make timely payment of the principal and interest on such
obligations.
SPECIAL FACTORS AFFECTING OREGON INTERMEDIATE TAX FREE FUND
As described in the Prospectus relating to Oregon Intermediate Tax Free
Fund, except during temporary defensive periods, Oregon Intermediate Tax Free
Fund will invest most of its total assets in Oregon municipal obligations. This
Fund therefore is susceptible to political, economic and regulatory factors
affecting issuers of Oregon municipal obligations. The following information
provides only a brief summary of the complex factors affecting the financial
situation in Oregon. This information is derived from sources that are generally
available to investors and is based in part on information obtained from various
state and local agencies in Oregon. It should be noted that the creditworthiness
of obligations issued by local Oregon issuers may be unrelated to the
creditworthiness of obligations issued by the State of Oregon, and that there is
no obligation on the part of Oregon to make payment on such local obligations in
the event of default.
GENERAL ECONOMIC CONDITIONS. Oregon's December 1997 forecast issued by
the Department of Administrative Services predicts that downside risks have
increased with volatility in worldwide financial markets and the likelihood of
slower growth in important Asian markets. Yet, there is most likely to be a
continuation of the modest deceleration that has taken place during 1997. Growth
is expected to be led by further expansion of the State's high technology
manufacturing industries and their suppliers, along with additional gains in
transportation equipment manufacturing. Expansion of these manufacturing sectors
will translate into job creation in the service-producing sectors. The
construction sector is expected to level off after four years of extremely rapid
growth, thereby slowing the State's overall growth rate.
A pattern of slowing growth is expected for both personal income and
employment. Total non-farm wage and salary employment is projected to increase
3.5% for 1997, down from 4.0% in 1996. Job growth is expected to slow further to
2.6% in 1998. Personal income will grow a projected 6.7% for 1997 and 5.6% for
1998, down from 7.0% growth in 1996. The State's population is forecast to
increase 1.6% in 1998, up slightly from an estimated 1.5% in 1997.
Oregon's unemployment rate increased from 4.8% in 1995 to 5.2% in 1996.
This compares favorably with the national unemployment rates of 5.6% in 1995 and
5.4% in 1996. However, as of November 1997, Oregon's unemployment rate was 5.3%
while the U.S. unemployment rate was 4.6%.
The statewide timber harvest is expected to be 4.0 billion board feet
for both 1997 and 1998, a slight increase from 3.932 billion board feet in 1996.
The 1996 statewide timber harvest was a decrease of 8.9% from 1995. In the
agricultural industry, cash commodities include farm forest products, cattle and
calves, nursery crops, dairy, wheat, potatoes, alfalfa hay, and perennial rye
grass seed.
BUDGETARY PROCESS. The Oregon budget is approved on a biennial basis by
separate appropriation measures. A biennium begins July 1 and ends June 30 of
odd-numbered years. Measures are passed for the approaching biennium during each
regular Legislative session, held beginning in January of odd-numbered years.
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Because the Oregon Legislative Assembly meets in regular session for
approximately six months of each biennium, provision is made for interim funding
through the Legislative Emergency Board. The Emergency Board is authorized to
make allocations of General Fund monies to State agencies from the State
Emergency Fund. The Emergency Board may also authorize increases in expenditure
limitations from Other or Federal Funds (dedicated or continuously appropriated
funds), and may take other actions to meet emergency needs when the Legislative
Assembly is not in session. The most significant feature of the budgeting
process in Oregon is the constitutional requirement that the budget be in
balance at the end of each biennium. Because of this provision, Oregon may not
budget a deficit and is required to alleviate any revenue shortfalls within each
biennium.
REVENUE AND EXPENDITURES. The Oregon Biennial budget is a two-year
fiscal plan balancing proposed spending against expected revenues. The total
budget consists of three segments distinguished by source of revenues: program
supported by General Fund revenues; programs supported by Other Funds (dedicated
fund) revenues, including lottery funds; and, Federal Funds. General Fund
revenue totaled $7,731.58 million for the 1995-1997 biennium. Revenue exceeded
the May estimate by $187.7 million.
General Fund revenue is projected to be $8,477.4 million for the
1997-99 biennium. The beginning balance is estimated to be $794.2 million for a
total General Fund resource estimate of $9,271.6 million. The December 1997-99
General Fund revenue estimate is $42.9 million higher than the September 1997
forecast. It is $252.4 million higher than the Close of Session (COS) forecast.
The State is involved in certain legal proceedings that, if decided
against the State, may require the State to make significant future expenditures
or may impair future revenue sources. Because of the prospective nature of these
legal proceedings, no provision for these potential liabilities has been
recorded in the publicly disclosed financial statements. Additionally, 1,229
notices of tort claims have been filed against the State. Of those claims, 544
also have been filed as court actions, and are pending against the State. These
cases are pending in State courts and are subject to the liability limitations
stated in the Tort Claims Act of $500,000 per occurrence, $200,000 per
individual for physical injuries, and $50,000 per occurrence for property
damage. The likelihood of an unfavorable outcome in these cases ranges from
probable to remote, but it is certain that these cases do not involve real
exposure of $25 million in the aggregate.
In the November 1994 general election, Oregonians approved a ballot
measure, introduced through the initiative process, that will have, or may have,
a material financial impact on the State. "Measure 11" amends Oregon statutes to
require mandated minimum sentences for certain felonies, effective April 1,
1995. "Measure 11" creates a need for an estimated 6,085 new prison beds by the
year 2001 and calls for State correction facility construction costs of
approximately $462 million in the next five years. The State also estimates
increases in State expenditures for correctional operations, beginning with an
increase of $3.2 million in fiscal year 1996, with accelerating costs that
should peak at an annual increase of up to $101.6 million by fiscal year 2001.
Because these demands will be made by on the State General Fund, they will
reduce amounts that otherwise would be available in the future for the Oregon
Legislative Assembly to appropriate for other purposes.
In November of 1996, voters approved Ballot Measure 47, the property
tax cut and cap. It will reduce revenues to schools, cities and counties by as
much as $1 billion and put pressure on the General Fund to make up some or all
of the difference.
Ballot Measure 50, passed by Oregon voters in May of 1997, limits the
taxes a property owner must pay. It limits taxes on each property by rolling
back the 1997-98 assessed value of each property to 90% of its 1995-96 value.
The measure also limits future growth on taxable value to 3% a year, with
exceptions for items such as new construction, remodeling, subdivisions, and
rezoning. It establishes
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permanent tax rates for Oregon's local taxing districts, yet allows voters to
approve new, short-term option levies outside the permanent rate limit if
approved by a majority of a 50% voter turnout.
DEBT ADMINISTRATION AND LIMITATION. Oregon statutes give the State
Treasurer authority to review and approve the terms and conditions of sale for
State agency bonds. The Governor, by statute, seeks the advice of the State
Treasurer when recommending the total biennial bonding level for State programs.
Agencies may not request that the Treasurer issue bonds or certificates of
requirements for state agencies on proposed and outstanding debt. Statutes
contain management and reporting requirements for state agencies on proposed and
outstanding debt.
A variety of general obligation and revenue bond programs have been
approved in Oregon to finance public purpose programs and projects. General
obligation bond authority requires voter approval or a constitutional amendment,
while revenue bonds may be issued under statutory authority. However, under the
Oregon Constitution the state may issue up to $50,000 of general obligation debt
without specific voter approval. The State Legislative Assembly has the right to
place limits on general obligation bond programs which are more restrictive than
those approved by the voters. General obligation authorizations are normally
expressed as a percentage of statewide True Cash Value (TCV) of taxable
property. Revenue bonds usually are limited by the Legislative Assembly to a
specific dollar amount.
The State's constitution authorizes the issuance of general obligation
bonds for financing community colleges, highway construction, and pollution
control facilities. Higher education institutions and activities and community
colleges are financed through an appropriation from the General Fund. Facilities
acquired under the pollution control program are required to conservatively
appear to be at least 70% self-supporting and self-liquidating from revenues,
gifts, federal government grants, user charges, assessments, and other fees.
Additionally, the State's constitution authorizes the issuance of
general obligation bonds to make farm and home loans to veterans, provide loans
for state residents to construct water development projects, provide credit for
multi-family housing for elderly and disabled persons, and for small scale local
energy projects. These bonds are self-supporting and are accounted for as
enterprise funds. Certain provisions of the Water Resources general obligation
bond indenture conflict with State statutes. Upon the advice of the Attorney
General, the method of handling investment interest is in compliance with the
statutes rather than the bond indenture. Currently there is litigation pending
against the State concerning this treatment of the investment interest.
The State's constitution further authorizes the issuance of general
obligation bonds for financing higher education building projects, facilities,
institutions, and activities. As of September 1, 1997, the total balance of
general obligation bonds was $3.26 billion. The debt service requirements for
general obligation bonds, including interest of approximately $2.39 billion, as
of September 1, 1997, was $5.66 billion.
In addition to general obligation and direct revenue bonds, the State
of Oregon issues industrial development revenue bonds ("IDBs"), Oregon Mass
Transportation Financing Authority revenue bonds and Health, Housing,
Educational and Cultural Facilities Authority ("HHECFA") revenue bonds. The IDBs
are issued to finance the expansion, enhancement or relocation of private
industry in the State. Before such bonds are issued, the project application
must be reviewed and approved by both the Oregon State Treasury and the Oregon
Economic Development Commission. Strict guidelines for eligibility have been
developed to ensure that the program meets a clearly defined development
objective. IDBs issued by the State are secured solely by payments from the
private company and there is no obligation, either actual or implied, to provide
state funds to secure the bonds. The Oregon Mass Transportation Financing
Authority ("OMTFA") reviews financing requests from local mass transit
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districts and may authorize issuance of revenue bonds to finance eligible
projects. The State has no financial obligation for these bonds, which are
secured solely by payments from local transit districts.
The State is statutorily authorized to enter into financing agreements
through the issuance of certificates of participation. Certificates of
participation have been used for the acquisition of computer systems by the
Department of Transportation, Department of Administrative Services, and the
Department of Higher Education. Also, certificates of participation have been
used for the acquisition or construction of buildings by the Department of
Administrative Services, Department of Fish and Wildlife, Department of
Corrections, State Police, and Department of Higher Education. Further,
certificates of participation were used in the acquisition of telecommunication
systems by the Department of Administrative Services and the Adult & Family
Services Division. As of September 1, 1997, the certificates of participation
debt totaled $634.9 million. The debt service requirements for certificates of
participation for 1995-1997 is estimated at $70.1 million.
HHECFA is a public corporation created in 1989, and modified in 1991,
to assist with the assembling and financing of lands for health care, housing,
educational and cultural uses and for the construction and financing of
facilities for such uses. The Authority reviews proposed projects and makes
recommendations to the State Treasurer as to the issuance of bonds to finance
proposed projects. The State has no financial obligation for these bonds, which
are secured solely by payments from the entities for which the projects were
financed.
The Treasurer on behalf of the State may also issue federally taxable
bonds in those situations where securing a federal tax exemption is unlikely or
undesirable; regulate "current" as well as "advance" refunding bonds; enter into
financing agreements, including lease purchase agreements, installment sales
agreements and loan agreements to finance real or personal property and approve
certificates of participation with respect to the financing agreements. Amounts
payable by the State under a financing agreement are limited to funds
appropriated or otherwise made available by the Legislative Assembly for such
payment. The principal amount of such financing agreements are treated as bonds
subject to maximum annual bonding levels established by the Legislative Assembly
under Oregon statute.
Each of Fitch, Moody's and Standard & Poor's has assigned their
municipal bond ratings of "AA," "Aa," and "AA," respectively.
CFTC INFORMATION
The Commodity Futures Trading Commission (the "CFTC"), a federal
agency, regulates trading activity pursuant to the Commodity Exchange Act, as
amended. The CFTC requires the registration of "commodity pool operators," which
are defined as any person engaged in a business which is of the nature of an
investment trust, syndicate or a similar form of enterprise, and who, in
connection therewith, solicits, accepts or receives from others funds,
securities or property for the purpose of trading in a commodity for future
delivery on or subject to the rules of any contract market. The CFTC has adopted
Rule 4.5, which provides an exclusion from the definition of commodity pool
operator for any registered investment company which (i) will use commodity
futures or commodity options contracts solely for bona fide hedging purposes
(provided, however, that in the alternative, with respect to each long position
in a commodity future or commodity option contract, an investment company may
meet certain other tests set forth in Rule 4.5); (ii) will not enter into
commodity futures and commodity options contracts for which the aggregate
initial margin and premiums exceed 5% of its assets; (iii) will not be marketed
to the public as a commodity pool or as a vehicle for investing in commodity
interests; (iv) will disclose to its investors the purposes of and limitations
on its commodity interest trading; and (v) will submit to special calls of the
CFTC for information. Any investment company desiring to claim this exclusion
must file a notice of eligibility with both the CFTC and the National Futures
Association. FAIF has made such notice filings with respect to those Funds which
may invest in commodity futures or commodity options contracts.
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INVESTMENT RESTRICTIONS
In addition to the investment objectives and policies set forth in the
Prospectuses and under the caption "Additional Information Concerning Fund
Investments" above, each of the Funds is subject to the investment restrictions
set forth below. The investment restrictions set forth in paragraphs 1 through 9
below are fundamental and cannot be changed with respect to a Fund without
approval by the holders of a majority of the outstanding shares of that Fund as
defined in the Investment Company Act of 1940, as amended (the "1940 Act"),
i.e., by the lesser of the vote of (a) 67% of the shares of the Fund present at
a meeting where more than 50% of the outstanding shares are present in person or
by proxy, or (b) more than 50% of the outstanding shares of the Fund.
None of the Funds will:
1. Except for Intermediate Tax Free Fund, California Intermediate
Tax Free Fund, Colorado Intermediate Tax Free Fund, Minnesota
Intermediate Tax Free Fund and Oregon Intermediate Tax Free
Fund (collectively, the "Tax Free Funds") and for Technology
Fund and Health Sciences Fund, invest in any securities if, as
a result, 25% or more of the value of its total assets would
be invested in the securities of issuers conducting their
principal business activities in any one industry, except that
Real Estate Securities Fund will invest without restriction in
issuers principally engaged in the real estate industry.
Intermediate Tax Free Fund will not invest 25% or more of the
value of its total assets in obligations of issuers located in
the same state (for this purpose, the location of an "issuer"
shall be deemed to be the location of the entity the revenues
of which are the primary source of payment of the location of
the project or facility which may be the subject of the
obligation). None of the Tax Free Funds will invest 25% or
more of the value of its total assets in revenue bonds or
notes, payment for which comes from revenues from any one type
of activity (for this purpose, the term "type of activity"
shall include without limitation (i) sewage treatment and
disposal; (ii) gas provision; (iii) electric power provision;
(iv) water provision; (v) mass transportation systems; (vi)
housing; (vii) hospitals; (viii) nursing homes; (ix) street
development and repair; (x) toll roads; (xi) airport
facilities; and (xii) educational facilities), except that, in
circumstances in which other appropriate available investments
may be in limited supply, such Funds may invest without
limitation in gas provision, electric power provision, water
provision, housing and hospital obligations. This restriction
does not apply to general obligation bonds or notes or, in the
case of Intermediate Tax Free Fund, to pollution control
revenue bonds. However, in the case of the latter Fund, it is
anticipated that normally (unless there are unusually
favorable interest and market factors) less than 25% of such
Fund's total assets will be invested in pollution control
bonds. This restriction does not apply to securities of the
United States Government or its agencies and instrumentalities
or repurchase agreements relating thereto.
2. Issue any senior securities (as defined in the 1940 Act),
other than as set forth in restriction number 3 below and
except to the extent that using options or purchasing
securities on a when-issued basis may be deemed to constitute
issuing a senior security.
3. Borrow money, except from banks for temporary or emergency
purposes. The amount of such borrowing may not exceed 10% of
the borrowing Fund's total assets. None of the Funds will
borrow money for leverage purposes. For the purpose of this
investment restriction, the use of options and futures
transactions and the purchase of securities on a when-issued
or delayed delivery basis shall not be deemed the borrowing of
money. (As a non-fundamental policy, no Fund will make
additional investments while its borrowings exceed 5% of total
assets.)
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4. Make short sales of securities.
5. Purchase any securities on margin except to obtain such
short-term credits as may be necessary for the clearance of
transactions and except, in the case of Emerging Growth Fund,
International Fund and Technology Fund as may be necessary to
make margin payments in connection with foreign currency
futures and other derivative transactions.
6. Purchase or sell physical commodities (including, by way of
example and not by way of limitation, grains, oilseeds,
livestock, meat, food, fiber, metals, petroleum,
petroleum-based products or natural gas) or futures or options
contracts with respect to physical commodities. This
restriction shall not restrict any Fund from purchasing or
selling any financial contracts or instruments which may be
deemed commodities (including, by way of example and not by
way of limitation, options, futures and options on futures
with respect, in each case, to interest rates, currencies,
stock indices, bond indices or interest rate indices) or any
security which is collateralized or otherwise backed by
physical commodities.
7. Purchase or sell real estate or real estate mortgage loans,
except that the Funds may invest in securities secured by real
estate or interests therein or issued by companies that invest
in or hold real estate or interests therein, and except that
the Funds (other than Equity Income Fund, Equity Index Fund,
Large Cap Value Fund, Large Cap Growth Fund, Mid Cap Value
Fund, Regional Equity Fund, Small Cap Value Fund, Micro Cap
Value Fund and International Index Fund) may invest in
mortgage-backed securities.
8. Act as an underwriter of securities of other issuers, except
to the extent a Fund may be deemed to be an underwriter, under
Federal securities laws, in connection with the disposition of
portfolio securities.
9. Lend any of their assets, except portfolio securities
representing up to one-third of the value of their total
assets.
The following restrictions are non-fundamental and may be changed by
FAIF's Board of Directors without a shareholder vote. None of the Funds will:
10. Invest more than 15% of its net assets in all forms of
illiquid investments.
11. Invest in any securities, if as a result more than 5% of the
value of its total assets is invested in the securities of any
issuers (other than, in the case of Real Estate Securities
Fund, publicly traded real estate investment trusts) which,
with their predecessors, have a record of less than three
years continuous operation. (Securities of any of such issuers
will not be deemed to fall within this limitation if they are
guaranteed by an entity which has been in continuous operation
for more than three years.)
12. Invest for the purpose of exercising control or management.
13. Purchase or sell real estate limited partnership interests
(other than, in the case of Real Estate Securities Fund,
publicly traded real estate limited partnership interests), or
oil, gas or other mineral leases, rights or royalty contracts,
except that the Funds may purchase or sell securities of
companies which invest in or hold the foregoing.
14. Purchase securities of any other registered investment company
(as defined in the 1940 Act), except, subject to 1940 Act
limitations, (a) the Tax Free Funds may purchase shares of
open-end investment companies investing primarily in municipal
obligations with remaining
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maturities of 13 months or less; (b) International Index Fund
and International Fund may purchase shares of open-end
investment companies which invest in permitted investments for
such Funds; (c) each of Balanced Fund, Real Estate Securities
Fund, Equity Income Fund, Equity Index Fund, Large Cap Value
Fund, Large Cap Growth Fund, Mid Cap Value Fund, Regional
Equity Fund, Small Cap Growth Fund, International Fund, Health
Sciences Fund, Technology Fund, Limited Term Income Fund,
Intermediate Term Income Fund, Fixed Income Fund and
Intermediate Government Bond Fund may, as part of its
investment in cash items, invest in securities of other mutual
funds which invest primarily in debt obligations with
remaining maturities of 13 months or less; and (d) all Funds
may purchase securities as part of a merger, consolidation,
reorganization or acquisition of assets. Further, so long as
its shares are registered for sale in the state of California,
Intermediate Tax Free Fund will invest in securities of other
open-end investment companies primarily for the purpose of
investing short-term cash on a temporary basis; in addition,
the Fund will waive its advisory fee on any portion of its
assets invested in other open-end investment companies.
15. Invest in foreign securities, except that (a) Limited Term
Income Fund, Intermediate Term Income Fund, and Fixed Income
Fund each may invest up to 15% of its total assets in foreign
securities payable in United States Dollars; (b) Balanced
Fund, Real Estate Securities Fund, Equity Income Fund, Large
Cap Value Fund, Large Cap Growth Fund, Mid Cap Value Fund,
Small Cap Growth Fund, Small Cap Value Fund, Micro Cap Value
Fund, Health Sciences Fund and Technology Fund each may invest
may invest up to 25% of its total assets in securities of
foreign issuers which are either listed on a United States
stock exchange or represented by American Depositary Receipts;
and (c) International Index Fund and International Fund may
invest in foreign securities without limitation.
16. Except for International Fund, invest in warrants; provided,
that the other Funds except for the Tax Free Funds may invest
in warrants in an amount not exceeding 5% of a Fund's net
assets. No more than 2% of this 5% may be warrants which are
not listed on the New York Stock Exchange.
For determining compliance with its investment restriction relating to
industry concentration, each Fund classifies asset-backed securities in its
portfolio in separate industries based upon a combination of the industry of the
issuer or sponsor and the type of collateral. The industry of the issuer or
sponsor and the type of collateral will be determined by the 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.
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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 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: 38.
-25-
<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: 53.
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: 37.
Sandra K. Orlow, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF and FAF since 1992 and of FASF
since June 1996; Vice President and Assistant Secretary of SEI, the
Administrator and the Distributor since 1983. Age: 41.
Todd Cipperman, SEI Investments Company, Oaks, Pennsylvania 19456: Vice
President and Assistant Secretary of FAIF, FAF and FASF since December 1996;
Vice President and Assistant Secretary of SEI, the Administrator and the
Distributor since 1995. Associate, Dewey Ballantine from 1994 to 1995;
Associate, Winston & Strawn from 1991 to 1994. Age: 31.
Joseph M. O'Donnell, Vice President and Assistant Secretary of FAIF,
FAF and FASF beginning in February 1998; Vice President and Assistant Secretary
of the Administrator and Distributor since January 1998; Vice President and
General Counsel, FPS Services, Inc. from 1993 to 1997; Staff Counsel and
Secretary, Provident Mutual Family of Funds from 1990 to 1993. Age: 43.
Michael G. Beattie, SEI Investments Company, Oaks, Pennsylvania 19456:
Controller of FAIF, FAF and FASF since December 1997; Associate Director, Funds
Accounting, SEI Investments Company since July 1997; prior to his current
position, served most recently as Fund Accounting Manager of SEI (1993-1997);
Registered Representative, First Investors Corporation from 1988 to 1990. Age:
32
Michael J. Radmer, 220 South Sixth Street, Minneapolis, Minnesota
55402: Secretary of FAIF since April 1991 and of FAF since 1981 and of FASF
since June 1996; Partner, Dorsey & Whitney LLP, a Minneapolis-based law firm and
general counsel of FAIF, FAF and FASF. Age: 52.
Lydia A. Gavalis, SEI Investments Company, Oaks, Pennsylvania 19456;
Vice President and Assistant Secretary of FAIF, FAF and FASF, and Vice President
and Assistant Secretary of the Administrator and the Distributor each since
January 1998. Assistant General Counsel and Director of Arbitration,
Philadelphia Stock Exchange from 1989 to 1998. Age: 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 January
1998; Senior Asset Management Counsel, Barnett Banks, Inc. from 1993 to 1997;
Partner, Groom and Nordberg, Chartered from 1996 to 1997; and Associate General
Counsel, Riggs Bank, N.A. from 1992 to 1995. Age: 49
Kathy Heilig, SEI Investments Company, Oaks, Pennsylvania 19456; Vice
President and Assistant Secretary of FAIF, FAF and FASF, and Treasurer of SEI
Investments Company since 1997; Assistant Controller of SEI Investments Company
from 1995 to 1997; and Vice President of SEI Investments Company from 1991 to
1995. Age: 39.
-26-
<PAGE>
COMPENSATION
The First American Family of Funds, which includes FAIF, FAF and FASF,
currently pays only to directors of the funds who are not paid employees or
affiliates of the funds a fee of $15,000 per year ($22,500 in the case of the
Chair) plus $2,500 ($3,750 in the case of the Chair) per meeting of the Board
attended and $800 per committee meeting attended ($1,600 in the case of a
committee chair) and reimburses travel expenses of directors and officers to
attend Board meetings. In the event of telephonic Board or committee meetings,
each director receives a fee of $500 per Board or committee meeting ($750 in the
case of the Chair or committee chair). In addition, directors may receive a per
diem fee of $1,000 per day, plus travel expenses when directors travel out of
town on Fund business. However, directors do not receive the $1,000 per diem
amount plus the foregoing Board or committee fee for an out-of-town committee or
Board meeting but instead receive the greater of the total per diem fee or
meeting fee. Legal fees and expenses are also paid to Dorsey & Whitney LLP, the
law firm of which Michael J. Radmer, secretary of FAIF, FAF and FASF, is a
partner. The following table sets forth information concerning aggregate
compensation paid to each director of FAIF (i) by FAIF (column 2), and (ii) by
FAIF, FAF and FASF collectively (column 5) during the fiscal year ended
September 30, 1997. No executive officer or affiliated person of FAIF had
aggregate compensation from FAIF in excess of $60,000 during such fiscal year:
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Total Compensation
Aggregate Pension or Retirement Estimated From Registrant and
Name of Compensation Benefits Accrued as Annual Benefits Fund Complex
Person, Position (1) From Registrant Part of Fund Expenses Upon Retirement Paid to Directors
-------------------- --------------- --------------------- --------------- -----------------
<S> <C> <C> <C> <C>
Robert J. Dayton, Director $ 12,632 - 0 - - 0 - $ 33,500
Roger A. Gibson, Director * - 0 - - 0 - - 0 - - 0 -
Andrew M. Hunter III, Director $ 9,046 - 0 - - 0 - $ 23,250
Leonard W. Kedrowski, Director $ 12,291 - 0 - - 0 - $ 32,700
Robert L. Spies, Director $ 9,331 - 0 - - 0 - $ 24,050
Joseph D. Strauss, Director $ 14,974 - 0 - - 0 - $ 39,925
Virginia L. Stringer, Director $ 15,254 - 0 - - 0 - $ 39,925
</TABLE>
- ---------------
* Not a director during the fiscal year ended September 30, 1997.
(1) Gae B. Veit resigned as director of FAIF, FASF and FAF on September 12,
1997.
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.
-27-
<PAGE>
Pursuant to an Investment Advisory Agreement dated April 2, 1991 (the
"Advisory Agreement"), the Funds engage the Advisor to act as investment Advisor
for and to manage the investment of the assets of the Funds. Each Fund, other
than International Fund, pays the Advisor monthly fees calculated on an annual
basis equal to 0.70% of its average daily net assets. International Fund pays
the Advisor monthly fees calculated on an annual basis equal to 1.25% of its
average daily net assets. The Advisory Agreement requires the Advisor to provide
FAIF with all necessary office space, personnel and facilities necessary and
incident to the Advisor's performance of its services thereunder. The Advisor is
responsible for the payment of all compensation to personnel of FAIF and the
officers and directors of FAIF, if any, who are affiliated with the Advisor or
any of its affiliates.
In addition to the investment advisory fee, each Fund pays all its
expenses that are not expressly assumed by the Advisor or any other organization
with which the Fund may enter into an agreement for the performance of services.
Each Fund is liable for such nonrecurring expenses as may arise, including
litigation to which the Fund may be a party, and it may have an obligation to
indemnify its directors and officers with respect to such litigation.
The following table sets forth total advisory fees before waivers and
after waivers for each of the Funds for the fiscal years ended September 30,
1995, September 30, 1996 and September 30, 1997:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
---------------------------- ---------------------------- ----------------------------
ADVISORY FEE ADVISORY FEE ADVISORY FEE
BEFORE WAIVER AFTER WAIVER BEFORE WAIVER AFTER WAIVER BEFORE WAIVER AFTER WAIVER
------------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund .................... $ 1,174,571 $ 959,016 $ 1,935,552 $ 1,680,465 $ 2,969,361 $ 2,633,982
Real Estate Securities Fund ...... 8,078 0 82,152 (1,797) 216,398 141,149
Equity Income Fund ............... 289,812 165,042 447,530 316,928 1,471,595 1,105,166
Equity Index Fund ................ 1,276,975 223,149 2,033,763 452,121 3,273,380 822,100
Large Cap Value Fund ............. 1,704,596 1,377,513 2,987,619 2,624,360 6,016,828 5,258,308
Large Cap Growth Fund ............ 574,300 367,357 1,327,317 1,072,105 3,690,541 3,206,103
Mid Cap Value Fund ............... 1,240,586 1,158,848 1,583,474 1,583,474 3,025,411 3,002,763
Regional Equity Fund ............. 994,725 870,505 2,009,755 1,952,912 2,402,445 2,384,184
Small Cap Growth Fund (1)......... 153,171 76,396 415,300 374,771 834,130 819,610
Small Cap Value Fund (2) ......... -- -- -- -- 1,288,688 1,287,355
Micro Cap Value Fund ............. * * * * 241,606 182,150
International Index Fund (2) ..... -- -- -- -- 408,101 210,642
International Fund ............... 868,706 824,596 1,473,242 1,473,242 2,143,703 2,143,703
Health Sciences Fund ............. * * 48,383 (19,192) 238,884 189,036
Technology Fund .................. 121,419 51,186 345,213 291,109 872,103 843,048
Limited Term Income Fund ......... 748,504 379,177 771,402 493,749 826,265 477,717
Intermediate Term Income
Fund ........................ 572,967 393,264 692,483 510,735 1,097,629 756,616
Fixed Income Fund ................ 1,394,513 945,687 2,619,764 1,980,027 4,163,377 3,118,330
Intermediate Government
Bond Fund ................... 565,522 367,513 861,440 640,855 1,205,293 908,919
Intermediate Tax Free Fund ....... 205,854 93,837 412,479 260,272 1,593,177 1,007,487
California Intermediate
Tax Free Fund ............... * * * * 32,438 13,450
Colorado Intermediate Tax
Free Fund ................... 284,161 158,606 362,608 243,815 381,297 265,043
Minnesota Intermediate
Tax Free Fund ............... 377,450 227,989 562,547 378,439 1,853,372 1,326,104
Oregon Intermediate Tax
Free Fund ................... * * * * 180,599 80,601
</TABLE>
* Fund was not in operation during this fiscal year.
(1) On July 31, 1998, Piper Small Company Growth Fund and Small Cap Growth Fund
consummated a reorganization transaction pursuant to which shares of Piper
Small Company Growth Fund were exchanged for shares of Small Cap Growth
Fund. Piper Small Company Growth Fund is the financial reporting survivor of
Small Cap Growth Fund. The total advisory fees for Piper Small Company
Growth Fund for the fiscal years ended September 30, 1995, September 30,
1996 and September 30, 1997 were $463,332, $307,937 and $223,793,
respectively.
(2) For the four month period from August 1, 1997 to November 30, 1997.
-28-
<PAGE>
SUB-ADVISORY AGREEMENT FOR INTERNATIONAL FUND
Marvin & Palmer Associates, Inc., 1201 North Market Street, Suite 2300,
Wilmington, Delaware 19801, is Sub-Advisor for International Fund under an
agreement with the Advisor (the "Sub-Advisory Agreement"). The Sub-Advisor, a
privately-held company, was founded in 1986 by David F. Marvin and Stanley
Palmer. 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. Pursuant to the Sub-Advisory Agreement, the
Sub-Advisor is responsible for the investment and reinvestment of International
Fund's assets and the placement of brokerage transactions in connection
therewith. Under the Sub-Advisory Agreement, the Sub-Advisor 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
International Fund to its investment objectives, policies and restrictions. The
Sub-Advisory Agreement also requires the Sub-Advisor to provide all office
space, personnel and facilities necessary and incident to the Sub-Advisor's
performance of its services under the Sub-Advisory Agreement.
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 0.75%
of the first $100 million of International Fund's average daily net assets,
0.50% of International Fund's average daily net assets in excess of $100 million
up to $300 million, 0.45% of International Fund's average daily net assets in
excess of $300 million up to $500 million, and 0.40% of International Fund's
average daily net assets in excess of $500 million.
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.
The following table sets forth total administrative fees, after
waivers, paid by each of the Funds for the fiscal years ended September 30,
1995, September 30, 1996 and September 30, 1997:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPT. 30, 1995 SEPT. 30, 1996 SEPT. 30, 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Balanced Fund ................................. $200,402 $328,792 $483,173
Real Estate Securities Fund ................... 12,603 50,010 49,002
Equity Income Fund ............................ 55,267 76,098 238,527
Equity Index Fund ............................. 225,545 345,460 532,263
Large Cap Value Fund .......................... 294,658 507,743 977,071
Large Cap Growth Fund ......................... 101,760 225,373 599,349
Mid Cap Value Fund ............................ 210,800 269,161 491,566
Regional Equity Fund .......................... 168,525 341,361 390,986
Small Cap Growth Fund (1)...................... 50,000 70,492 135,387
Small Cap Value Fund (2) ...................... -- -- 209,129
Micro Cap Value Fund (3) ...................... * * 38,730
</TABLE>
-29-
<PAGE>
<TABLE>
<S> <C> <C> <C>
International Index Fund (2) .................. -- -- 86,702
International Fund ............................ 89,791 140,215 195,362
Health Sciences Fund .......................... * 33,059 48,839
Technology Fund ............................... 50,000 61,764 141,679
Limited Term Income Fund ...................... 126,380 135,704 134,340
Intermediate Term Income Fund ................. 98,013 117,703 178,052
Fixed Income Fund ............................. 233,555 445,300 676,891
Intermediate Government Bond Fund ............. 100,551 146,381 196,129
Intermediate Tax Free Fund .................... 50,199 70,107 258,212
California Intermediate Tax Free Fund (3) ..... * * 5,200
Colorado Intermediate Tax Free Fund ........... 56,486 61,659 62,075
Minnesota Intermediate Tax Free Fund .......... 68,304 95,590 301,176
Oregon Intermediate Tax Free Fund (3) ......... * * 28,951
</TABLE>
- -------------------
* Fund was not in operation during this fiscal year.
(1) On July 31, 1998, Piper Small Company Growth Fund and Small Cap Growth Fund
consummated a reorganization transaction pursuant to which shares of Piper
Small Company Growth Fund were exchanged for shares of Small Cap Growth
Fund. Piper Small Company Growth Fund is the financial reporting survivor of
Small Cap Growth Fund. During the foregoing fiscal years, Piper Small
Company Growth Fund did not pay any administration fees.
(2) For the four month period from August 1, 1997 to November 30, 1997.
(3) Commenced operations on August 8, 1997.
DISTRIBUTOR AND DISTRIBUTION PLANS
SEI Investments Distribution Co. (the "Distributor") serves as the
distributor for the Class A, Class B and Class Y Shares of the Funds. The
Distributor is a wholly-owned subsidiary of SEI Investments Company, which also
owns the Funds' Administrator. See "-- Administration Agreement" above.
The Distributor serves as distributor for the Class A and Class Y
Shares pursuant to a Distribution Agreement dated February 10, 1994 (the "Class
A/Class Y Distribution Agreement") between itself and the Funds, and as
distributor for the Class B Shares pursuant to a Distribution and Service
Agreement dated August 1, 1994, as amended September 14, 1994 (the "Class B
Distribution and Service Agreement") between itself and the Funds. These
agreements are referred to collectively as the "Distribution Agreements."
Under the Distribution Agreements, the Distributor has agreed to
perform all distribution services and functions of the Funds to the extent such
services and functions are not provided to the Funds pursuant to another
agreement. The Distribution Agreements provide that shares of the Funds are
distributed through the Distributor and, with respect to Class A and Class B
Shares, through securities firms, financial institutions (including, without
limitation, banks) and other industry professionals (the "Participating
Institutions") which enter into sales agreements with the Distributor to perform
share distribution or shareholder support services.
The Distributor receives no compensation for distribution of the Class
Y Shares. With respect to the Class A Shares, the Distributor receives all of
the front-end sales charges paid upon purchase of the Funds' shares except for a
portion (as disclosed in the Prospectuses) which may be re-allowed to
Participating Institutions. The Class A Shares of each Fund also pay a
shareholder servicing fee to the Distributor monthly at the annual rate of 0.25%
of each Fund's Class A average daily net assets, which fee may be used by the
Distributor to provide compensation for shareholder servicing activities with
respect to the Class A Shares of the kinds described in the Class A and Class B
Shares Prospectuses.
The Class B Shares of each Fund which offers Class B Shares pay to the
Distributor a sales support fee at an annual rate of 0.75% of the average daily
net assets of the Class B Shares of such Fund, which fee may be used by the
Distributor to provide compensation for sales support and distribution
activities with respect to the Class B Shares. This fee is calculated and paid
each month based on average daily net assets
-30-
<PAGE>
of Class B of each Fund for that month. In addition to this fee, the Distributor
is paid a shareholder servicing fee at an annual rate of 0.25% of the average
daily net assets of each Fund's Class B Shares pursuant to a service plan (the
"Class B Service Plan"), which fee may be used by the Distributor to provide
compensation for shareholder servicing activities with respect to the Class B
Shares of a Fund of the kinds described in the Class A and Class B Shares
Prospectuses. Although Class B Shares are sold without a front-end sales charge,
the Distributor pays a total of 4.25% of the amount invested (including a
pre-paid service fee of 0.25% of the amount invested) to dealers who sell Class
B Shares (excluding exchanges from other Class B Shares in the First American
family). The servicing fee payable under the Class B Service Plan is prepaid as
described above.
The Distribution Agreements provide that they will continue in effect
for a period of more than one year from the date of their execution only so long
as such continuance is specifically approved at least annually by the vote of a
majority of the Board members of FAIF and by the vote of the majority of those
Board members of FAIF who are not interested persons of FAIF and who have no
direct or indirect financial interest in the operation of FAIF's Rule 12b-1
Plans of Distribution or in any agreement related to such Plans.
FAIF has adopted Plans of Distribution with respect to the Class A and
Class B Shares of the Funds, respectively, pursuant to Rule 12b-1 under the 1940
Act (collectively, the "Plans"). Rule 12b-1 provides in substance that a mutual
fund may not engage directly or indirectly in financing any activity which is
primarily intended to result in the sale of shares, except pursuant to a plan
adopted under the Rule. The Plans authorize the Distributor to retain the sales
charges paid upon purchase of Class A and Class B Shares. Each of the Plans is a
"compensation-type" plan under which the Distributor is entitled to receive the
distribution fee regardless of whether its actual distribution expenses are more
or less than the amount of the fee. The Class B Plan authorizes the Distributor
to retain the contingent deferred sales charge applied on redemptions of Class B
Shares, except that portion which is reallowed to Participating Institutions.
The Plans recognize that the Distributor, any Participating Institution, the
Administrator, and the 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.
The following table sets forth the total Rule 12b-1 fees, after
waivers, paid by each of the Funds for the fiscal years ended September 30,
1995, September 30, 1996, and September 30, 1997 with respect to the Class A
Shares and the Class B Shares of the Funds. As noted above, no distribution fees
are paid with respect to Class Y Shares of the Funds.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPT. 30, 1995 SEPT. 30, 1996 SEPT. 30, 1997
--------------------- --------------------- ---------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
SHARES SHARES SHARES SHARES SHARES SHARES
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund ......................... 28,075 11,450 43,620 83,213 65,211 284,082
Real Estate Securities Fund ........... 0 0 397 1,660 2,975 17,056
Equity Income Fund .................... 3,108 3,382 5,787 24,127 10,355 50,769
Equity Index Fund ..................... 2,789 3,291 10,536 43,676 24,989 139,149
Large Cap Value Fund .................. $ 20,690 $ 24,481 $ 44,423 $148,550 82,694 367,871
Large Cap Growth Fund ................. 3,503 2,020 10,113 36,952 21,223 75,168
Mid Cap Value Fund .................... 18,403 23,203 32,527 79,817 59,658 227,800
Regional Equity Fund .................. 21,635 22,185 52,806 182,709 68,712 313,016
Small Cap Growth Fund (1).............. 331 965 2,147 4,985 9,165 8,939
Small Cap Value Fund (2) .............. -- -- -- -- 23,014 0
Micro Cap Value Fund (3) .............. * * * * 8 12
International Index Fund (2) .......... -- -- -- -- 1,250 0
International Fund .................... 1,099 1,229 3,203 6,605 9,497 15,477
Health Sciences Fund .................. * * 554 1,001 1,725 3,921
Technology Fund ....................... 960 4,739 5,967 31,470 12,736 58,415
Limited Term Income Fund .............. 0 * 0 * 0 0
Intermediate Term Income Fund ......... 0 * 0 * 0 0
</TABLE>
-31-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Fixed Income Fund ..................... 11,797 24,078 20,620 134,380 20,065 156,180
Intermediate Government Bond Fund ..... 0 * 0 * 0 0
Intermediate Tax Free Fund ............ 0 * 0 * 0 0
California Intermediate Tax
Free Fund (3) .................... * * * * 0 0
Colorado Intermediate Tax Free Fund ... 0 * 0 * 0 0
Minnesota Intermediate Tax Free Fund .. 0 * 0 * 0 0
Oregon Intermediate Tax
Free Fund (3) .................... * * * * 0 0
</TABLE>
- --------------------
* Fund or class was not in operation during this fiscal year.
(1) On July 31, 1998, Piper Small Company Growth Fund and Small Cap Growth Fund
consummated a reorganization transaction pursuant to which shares of Piper
Small Company Growth Fund were exchanged for shares of Small Cap Growth
Fund. Piper Small Company Growth Fund is the financial reporting survivor of
Small Cap Growth Fund. Total distribution fees for the fiscal year ended
September 30, 1997 paid by Piper Small Company Growth Fund were $101,905.
(2) For the four month period from August 1, 1997 to November 30, 1997.
(3) Commenced operations on August 8, 1997.
For the fiscal years ended September 30, 1995, September 30, 1996, and
September 30, 1997, the Distributor received $56,437, $103,810, and $144,487
respectively, in sales charges. For the fiscal years ended September 30, 1995,
September 30, 1996 and September 30, 1997, the aggregate amount of commissions
paid by Piper Small Company Growth Fund were $39,339, $23,234 and $51,378,
respectively.
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 International
Fund, by a sub-custodian with respect to such Fund. The Custodian or such
sub-custodian delivers securities against payment upon sale and pays for
securities against delivery upon purchase. The Custodian also remits Fund assets
in payment of Fund expenses, pursuant to instructions of FAIF's officers or
resolutions of the Board of Directors.
As compensation for its services to the Funds, the Custodian is paid a
monthly fee calculated on an annual basis equal to 0.03% (0.10% in the case of
International Index Fund and International Fund) of such Fund's average daily
net assets. Sub-custodian fees with respect to International Fund are paid by
the Custodian out of its fees from such Fund. In addition, the Custodian is
reimbursed for its out-of-pocket expenses incurred while providing its services
to the Funds. The Custodian continues to serve so long as its appointment is
approved at least annually by the Board of Directors including a majority of the
directors who are not interested persons (as defined under the 1940 Act) of
FAIF.
DST Systems, Inc., 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.
-32-
<PAGE>
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 International Fund, the
Sub-Advisor. 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 Sub-Advisor may, however, select a
broker or dealer to effect a particular transaction without communicating with
all brokers or dealers who might be able to effect such transaction because of
the volatility of the market and the desire of the Advisor or Sub-Advisor to
accept a particular price for a security because the price offered by the broker
or dealer meets guidelines for profit, yield or both. Many of the portfolio
transactions involve payment of a brokerage commission by the appropriate Fund.
In some cases, transactions are with dealers or issuers who act as principal for
their own accounts and not as brokers. Transactions effected on a principal
basis are made without the payment of brokerage commissions but at net prices,
which usually include a spread or markup. In effecting transactions in
over-the-counter securities, the Funds deal with market makers unless it appears
that better price and execution are available elsewhere.
-33-
<PAGE>
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. The following table sets
forth the aggregate brokerage commissions paid by each of the Funds during the
fiscal years ended September 30, 1995, September 30, 1996, and September 30,
1997:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPT. 30, 1995 SEPT. 30, 1996 SEPT. 30, 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Balanced Fund............................. 187,224 232,149 290,704
Real Estate Securities Fund .............. 16,261 34,674 56,817
Equity Income Fund ....................... 24,246 32,789 180,195
Equity Index Fund ........................ 48,310 85,568 117,618
Large Cap Value Fund ..................... $ 549,774 $ 565,446 1,205,280
Large Cap Growth Fund .................... 82,987 142,912 327,653
Mid Cap Value Fund ....................... 545,209 1,192,448 1,489,411
Regional Equity Fund ..................... 102,861 213,138 96,219
Small Cap Growth Fund (1)................. 20,076 18,305 63,981
Small Cap Value Fund (2) ................. -- -- 5,845
Micro Cap Value Fund ..................... * * 31,662
International Index Fund (2) ............. -- -- 81,688
International Fund ....................... 405,632 598,535 818,016
Health Sciences Fund ..................... * 11,932 17,550
Technology Fund .......................... 21,126 31,789 60,918
Limited Term Income Fund ................. 0 0 0
Intermediate Term Income Fund ............ 0 0 0
Fixed Income Fund ........................ 0 0 0
Intermediate Government Bond Fund ........ 0 0 0
Intermediate Tax Free Fund ............... 0 0 0
California Intermediate Tax Free Fund .... * * 0
Colorado Intermediate Tax Free Fund ...... 0 0 0
Minnesota Intermediate Tax Free Fund ..... 0 0 0
Oregon Intermediate Tax Free Fund ........ * * 0
</TABLE>
- -------------------
* Fund was not in operation during this fiscal year.
(1) On July 31, 1998, Piper Small Company Growth Fund and Small Cap Growth Fund
consummated a reorganization transaction pursuant to which shares of Piper
Small Company Growth Fund were exchanged for shares of Small Cap Growth
Fund. Piper Small Company Growth Fund is the financial reporting survivor of
Small Cap Growth Fund. Piper Small Company Growth Fund paid aggregate
brokerage commissions during the fiscal years ended September 30, 1995,
September 30, 1996 and September 30, 1997 of $125,638, $65,924 and $4,020,
respectively.
(2) For the four month period from August 1, 1997 to November 30, 1997.
At September 30, 1997, Balanced Fund held a bond security of Merrill
Lynch & Company which is deemed to be a "regular broker or dealer" of the Funds
under the 1940 Act (or of such broker-dealer's parent companies) in the amount
of $7,552,625. In addition, at September 30, 1997, Large Cap Growth Fund held an
equity security of Morgan Stanley Group in the amount of $7,165,984; Limited
Term Income Fund held a corporate obligation of Salomon Brothers in the amount
of $7,603,125; and Intermediate Term Income Fund held a corporate obligation of
Lehman Brothers in the amount of $6,231,500, all of which are deemed "principal
brokers or dealers."
It is expected that International Index Fund and International Fund
will purchase most foreign equity securities in the over-the-counter markets or
stock exchanges located in the countries in which the respective principal
offices of the issuers of the various securities are located if that is the best
available market. The fixed commissions paid in connection with most such
foreign stock transactions generally are higher than negotiated commissions on
United States transactions. There generally is less governmental supervision and
regulation of foreign stock exchanges than in the United States. Foreign
securities settlements may in some instances be subject to delays and related
administrative uncertainties.
-34-
<PAGE>
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 and, in
the case of International Fund, the Sub-Advisor 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 Sub-Advisor. 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 Sub-Advisor
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 Sub-Advisor to
supplement its own investment research activities and enable the Advisor or
Sub-Advisor 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 Sub-Advisor 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 Sub-Advisor 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 Sub-Advisor in performing services for the
Funds. The Advisor and Sub-Advisor 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 and Sub-Advisor 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
Sub-Advisor, except as noted below. The Advisor and Sub-Advisor 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 and Sub-Advisor with research
services, which the Advisor or Sub-Advisor 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 Sub-Advisor 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 Sub-Advisor 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 Sub-
Advisor 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
-35-
<PAGE>
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 Sub-Advisor 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 Sub-Advisor 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.
-36-
<PAGE>
CAPITAL STOCK
As of December 1, 1997, the directors of FAIF, owned shares of FAIF,
FAF and FASF with an aggregate net asset value of $3,596,000. As of August 4,
1998, the directors and officers of FAIF as a group owned less than one percent
of each class of each Fund's outstanding shares. As of that date, the Funds were
aware that the following persons owned of record five percent or more of the
outstanding shares of each class of stock of the Funds. Please note that Class C
Shares are now designated as Class Y Shares.
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING SHARES
CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
BALANCED FUND
Piper Jaffray for the Exclusive Benefit of Piper Jaffray 42.24%
222 South 9th Street
Minneapolis, MN 55432
Var & Co.................................................. 5.66%
P.O. Box 64482
St. Paul, MN 55164-0482
Var & Co.................................................. 53.47%
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust NA as fiduciary for First Retirement.......... 46.33%
Attn: Reconciliation SPFT0401
180 East Fifth Street
St. Paul, MN 55101-1631
REAL ESTATE SECURITIES FUND
U.S. Bancorp Investments Inc.............................. 7.26%
FBO 304029031
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
Var & Co.................................................. 80.42%
P.O. Box 64482
St. Paul, MN 55164-0482
First American Strategy Growth and Income Fund............ 8.13%
C/O First Trust National Assn.
Attn: Greg Wilhelmy SPFT 0912
P.O. Box 64010
St. Paul, MN 55164-0010
First American Strategy Income Fund....................... 9.22%
C/O First Trust National Assn.
Attn: Greg Wilhelmy SPFT 0912
P.O. Box 64010
St. Paul, MN 55164-0010
EQUITY INCOME FUND
Var & Co.................................................. 88.34%
P.O. Box 64482
St. Paul, MN 55164-0482
First American Strategy Income Fund....................... 5.94%
c/o First Trust National Assn
Attn Greg Wilhelmy SPFT0912
P.O. Box 64010
St. Paul, MN 55164-0010
</TABLE>
-37-
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING SHARES
CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
EQUITY INDEX FUND
Var & Co.................................................. 71.97%
P.O. Box 64482
St. Paul, MN 55164-0482
Metlife Defined Contribution Group........................ 14.41%
as Agent for First Tr. Ntl. Assoc. Tr.
FBO UTD Healthcare Corp. 401(k) SP
180 East Fifth Street
P.O. Box 64488
St. Paul, MN 55164-0488
First Trust National Association.......................... 12.45%
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East Fifth Street
St. Paul, MN 55101-1631
LARGE CAP VALUE FUND
Piper Jaffray for the Exclusive Benefit of Piper Jaffray.. 58.58%
222 South 9th Street
Minneapolis, MN 55432
Var & Co.................................................. 75.89%
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust National Association.......................... 17.98%
As a Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East 5th Street
St. Paul, MN 55101-1631
LARGE CAP GROWTH FUND
Piper Jaffray for the Exclusive Benefit of Piper Jaffray.. 84.67%
222 South 9th Street
Minneapolis, MN 55432
Var & Co.................................................. 88.06%
P.O. Box 64482
St. Paul, MN 55164-0482
MID CAP VALUE FUND
Var & Co.................................................. 74.79%
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust National Association.......................... 13.71%
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East Fifth Street
St. Paul, MN 55101-1631
Investors Bank & Trust Co. Tr............................. 5.48%
U/A 06-15-98
Hormel Foods Corp Trust
Attn Bob Dana
P.O. Box 9130
Boston, MA 02117-9130
</TABLE>
-38-
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING SHARES
CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
REGIONAL EQUITY FUND
Var & Co.................................................. 63.72%
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust National Association.......................... 27.17%
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East Fifth Street
St. Paul, MN 55101-1631
SMALL CAP GROWTH FUND
Piper Jaffray for the Exclusive Benefit of Piper Jaffray.. 83.12%
222 South 9th Street
Minneapolis, MN 55432
Var & Co.................................................. 75.03%
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust National Association.......................... 7.79%
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East 5th Street
St. Paul, MN 55101-1631
First American Strategy Growth and Income Fund............ 6.68%
C/O First Trust National Assn.
Attn: Greg Wilhelmy SPFT 0912
P.O. Box 64010
St. Paul, MN 55164-0010
First American Strategy Aggressive Growth Fund............ 5.42%
c/o First Trust National Assn
Attn Greg Wilhelmy SPFT 0912
P.O. Box 64010
St. Paul, MN 55164-0010
SMALL CAP VALUE FUND
Paul A. Bareilles......................................... 10.07%
P.O. Box 6610
Eureka, CA 95502-6610
U.S. Bancorp Investments, Inc............................. 7.40%
FBO 373710021
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
U.S. Bancorp Investments, Inc............................. 5.22%
FBO 305888261
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
Var & Co.................................................. 93.09%
P.O. Box 64482
St. Paul, MN 55164-0482
</TABLE>
-39-
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING SHARES
CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
MICRO CAP VALUE FUND
BHC Securities Inc........................................ 28.64%
FBO William Maingwaring
A/C 332406737 Attn TOA
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103-7042
Santa Barbara Bank & Trust................................ 8.54%
William J. Weeks Trust
P.O. Box 2340
Santa Barbara, CA 93120-2340
Shangri-La & Co........................................... 13.79%
c/o Northwest National Bank Trust
P.O. Box 1867
Vancouver, WA 98668-1867
U.S. Bancorp Investments, Inc............................. 5.83%
FBO 362046751
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
U.S. Bancorp Investments, Inc............................. 14.38%
FBO 363124861
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
U.S. Bancorp Investments, Inc............................. 5.22%
FBO 394723781
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
U.S. Bancorp Investments, Inc............................. 7.38%
FBO 369232821
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
Piper Jaffray Cust........................................ 5.98%
FBO Duane C. Bernhardt
IRA 430132781
222 South 9th Street
Minneapolis, MN 55402-3389
Var & Co.................................................. 96.84%
P.O. Box 64482
St. Paul, MN 55164-0482
INTERNATIONAL INDEX FUND
BHC Securities Inc........................................ 6.26%
FAO 32206314
Attn: Mutual Funds
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103-7042
BHC Securities, Inc. ..................................... 13.51%
FBO William Maingwaring
A/C 332406737 Attn TOA
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103-7042
</TABLE>
-40-
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING SHARES
CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
U.S. Bancorp Investments, Inc............................. 7.51%
FBO 365823511
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
U.S. Bancorp Investments, Inc............................. 9.69%
FBO 314174701
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
U.S. Bancorp Investments, Inc............................. 8.47%
FBO 354681071
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
U.S. Bancorp Investments, Inc............................. 8.25%
FBO 397786181
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
U.S. Bancorp Investments, Inc............................. 13.40%
FBO 570323021
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
U.S. Bancorp Investments, Inc............................. 15.01%
FBO 385803041
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
Var & Co ................................................. 99.31%
P.O. Box 64482
St. Paul, MN 55164-0482
INTERNATIONAL FUND
Piper Jaffray for the Exclusive Benefit of Piper Jaffray.. 81.09%
222 South 9th Street
Minneapolis, MN 55432
Var & Co.................................................. 87.03%
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust National Association.......................... 5.59%
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East 5th Street
St. Paul, MN 55101-1631
HEALTH SCIENCES FUND
Northern Trust Co. Tr..................................... 45.63%
FBO James L. French Irrev. Trust
of 1991 #2 A/C #2242148
P.O. Box 92956
Chicago, IL 60675-2956
U.S. Bancorp Investments, Inc............................. 10.72%
FBO 130266871
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
</TABLE>
-41-
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING SHARES
CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
Var & Co.................................................. 99.82%
P.O. Box 64482
St. Paul, MN 55164-0482
TECHNOLOGY FUND
Northern Trust Co. Tr..................................... 23.23%
FBO James L. French Irrev. Trust
of 1991 #2 A/C #2242148
P.O. Box 92956
Chicago, IL 60675-2956
Var & Co.................................................. 89.98%
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust National Association.......................... 9.29%
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East 5th Street
St. Paul, MN 55101-1631
LIMITED TERM INCOME FUND
Planned Parenthood of Minnesota........................... 16.32%
Operating Reserve Fund
Thomas Webber, Executive Director
1965 Ford Parkway
St. Paul, MN 55116-1996
Charles A. Beck, M.D...................................... 5.94%
Charles A. Beck, M.D. LTD.
Money Purchase Trust
71 West 156 Street, Apt. 210
Harvey, IL 60426-4293
Var & Co.................................................. 91.04%
P.O. Box 64482
St. Paul, MN 55164-0482
First Trust National Association.......................... 8.63%
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East 5th Street
St. Paul, MN 55101-1631
INTERMEDIATE TERM INCOME FUND
Piper Jaffray for the Exclusive Benefit of Piper Jaffray.. 80.85%
222 South 9th Street
Minneapolis, MN 55432
Var & Co.................................................. 92.53%
P.O. Box 64482
St. Paul, MN 55164-0482
FIXED INCOME FUND
Var & Co.................................................. 78.55%
P.O. Box 64482
St. Paul, MN 55164-0482
</TABLE>
-42-
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING SHARES
CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
First American Strategy Income Fund....................... 5.64%
c/o First Trust National Assn
Attn Greg Wilhelmy SPFT0912
PO Box 64010
St. Paul, MN 55164-0010
First American Strategy Growth and Income Fund............ 7.15%
C/O First Trust National Assn.
Attn: Greg Wilhelmy SPFT 0912
P.O. Box 64010
St. Paul, MN 55164-0010
First Trust National Association.......................... 5.94%
as Fiduciary for First Retirement
Attn: Reconciliation SPFT0401
180 East Fifth Street
St. Paul, MN 55101-1631
INTERMEDIATE GOVERNMENT BOND FUND
U.S. Bancorp Investments, Inc............................. 12.23%
FBO 120039921
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
U.S. Bancorp Investments, Inc............................. 6.93%
FBO 173182051
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
Gretchen Cowles........................................... 5.90%
c/o Pitcairn Trust Co.
1 Pitcairn Pl., Suite 3000
Jenkington, PA 19046-3531
Var & Co.................................................. 93.56%
P.O. Box 64482
St. Paul, MN 55164
INTERMEDIATE TAX FREE FUND
U.S. Bancorp Investments, Inc............................. 14.23%
FBO 180931041
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
Carl Thomas............................................... 8.73%
8633 Trianon Lane
Las Vegas, NV 89128-4875
Eleanor C. Nolan Trust.................................... 5.79%
U/A U/A 05-22-1998
Eleanor C. Nolan Rev Trust
P.O. Box 160450
Big Sky, MT 59716-0450
BHC Securities............................................ 5.09%
FBO Joseph & Patsy Rosenzweig
Acct 33822372
1 Commerce Square
2005 Market Street, 12th Floor
Philadelphia, PA 19103-7042
</TABLE>
-43-
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING SHARES
CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
Shangri-La & Co .......................................... 8.99%
C/o Northwest National Bank Trust
P.O. Box 1867
Vancouver, WA 98668-1867
Var & Co.................................................. 99.70%
P.O. Box 6482
St. Paul, MN 55164-0482
CALIFORNIA INTERMEDIATE TAX FREE FUND
Richard & Diane Develyn Trust............................. 91.89%
U/A 1997
The Richard & Diane Develyn Family Trust
42 West Grandview Avenue
Arcadia, CA 91006-1616
Var & Co.............................................`.... 98.86%
P.O. Box 64482
St. Paul, MN 55164-0482
COLORADO INTERMEDIATE TAX FREE FUND
U.S. Bancorp Investments, Inc............................. 5.14%
FBO 349087311
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
U.S. Bancorp Investments, Inc............................. 5.32%
FBO 172385771
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
Donaldson Lufkin Jenrette................................. 6.05%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
Var & Co.................................................. 96.85%
P.O. Box 64482
St. Paul, MN 55164-0482
MINNESOTA INTERMEDIATE TAX FREE FUND
Alfred P. Gale............................................ 12.39%
2350 Highland Rd.
Maple Plain, MN 55359-9570
U.S. Bancorp Investments Inc.............................. 10.36%
FBO 130015321
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
U.S. Bancorp Investments Inc.............................. 10.27%
FBO 112089981
100 South Fifth Street, Suite 1400
Minneapolis, MN 55402-1217
Var & Co.................................................. 97.25%
P.O. Box 64482
St. Paul, MN 55164-0482
</TABLE>
-44-
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING SHARES
CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
OREGON INTERMEDIATE TAX FREE FUND
Var & Co.................................................. 95.41%
P.O. Box 64482
St. Paul, MN 55164-0482
</TABLE>
-45-
<PAGE>
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of the shares of a
Fund is summarized in the Class A and Class B Shares Prospectuses under the
captions "Investing in the Funds" and "Determining the Price of Shares" and in
the Class Y Shares Prospectuses under the caption "Purchases and Redemptions of
Shares." The net asset value of each Fund's shares is determined on each day
during which the New York Stock Exchange (the "NYSE") and federally-chartered
banks are open for business. The NYSE is not open for business on the following
holidays (or on the nearest Monday or Friday if the holiday falls on a weekend):
New Year's Day, Martin Luther King, Jr. Day, Washington's Birthday (observed),
Good Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving
Day and Christmas Day. Each year the NYSE may designate different dates for the
observance of these holidays as well as designate other holidays for closing in
the future. To the extent that the securities of a Fund are traded on days that
the Fund is not open for business, such Fund's net asset value per share may be
affected on days when investors may not purchase or redeem shares. This may
occur, for example, where a Fund holds securities which are traded in foreign
markets.
On September 30, 1997, the net asset values per share for each class of
shares of the Funds were calculated as follows (Note: Class C Shares are now
designated as Class Y Shares):
<TABLE>
<CAPTION>
NET ASSET
NET ASSETS SHARES VALUE PER SHARE
(IN DOLLARS) / OUTSTANDING = (IN DOLLARS)
------------ ----------- ------------
<S> <C> <C> <C>
BALANCED FUND
Class A................... $ 32,309,175 2,096,489 $15.41
Class B................... 43,707,370 2,845,117 15.36
Class Y................... 418,086,401 27,092,341 15.43
REAL ESTATE SECURITIES FUND
Class A................... 2,104,503 140,570 14.97
Class B................... 3,318,256 223,313 14.86
Class Y................... 40,501,453 2,701,235 14.99
EQUITY INCOME FUND
Class A................... 7,276,508 463,864 15.69
Class B................... 6,618,640 423,601 15.62
Class Y................... 369,919,266 23,562,347 15.70
EQUITY INDEX FUND
Class A................... 15,977,167 769,703 20.76
Class B................... 23,733,407 1,148,323 20.67
Class Y................... 557,257,826 26,863,917 20.74
LARGE CAP VALUE FUND
Class A................... 50,380,441 1,753,223 28.74
Class B................... 53,420,365 1,870,880 28.55
Class Y................... 1,095,261,426 38,093,463 28.75
LARGE CAP GROWTH FUND
Class A................... 12,017,275 681,691 17.63
Class B................... 9,486,600 543,043 17.47
Class Y................... 681,151,065 38,611,657 17.64
</TABLE>
-46-
<PAGE>
<TABLE>
<CAPTION>
NET ASSET
NET ASSETS SHARES VALUE PER SHARE
(IN DOLLARS) / OUTSTANDING = (IN DOLLARS)
------------ ----------- ------------
<S> <C> <C> <C>
MID CAP VALUE FUND
Class A................... 35,206,757 1,455,137 24.19
Class B................... 36,649,074 1,529,714 23.96
Class Y................... 509,308,332 21,036,357 24.21
REGIONAL EQUITY FUND
Class A................... 37,676,498 1,629,280 23.12
Class B................... 39,683,442 1,746,718 22.72
Class Y................... 351,007,153 15,153,019 23.16
SMALL CAP GROWTH FUND (1)
Class A................... 5,270,053 300,199 17.55
Class B................... 1,262,837 73,646 17.15
Class Y................... 151,607,069 8,596,681 17.64
SMALL CAP VALUE FUND (2)
Class A................... 19,193,610 1,054,515 18.20
Class B................... 1,002 55 18.23
Class Y................... * 25,279,446 18.23
MICRO CAP VALUE FUND
Class A................... 44,137 4,026 10.96
Class B................... 49,803 4,550 10.95
Class Y................... 246,600,679 22,511,045 10.95
INTERNATIONAL INDEX FUND (2)
Class A................... 1,270,411 116,143 10.94
Class B................... 996 91 10.99
Class Y................... 155,975,605 14,194,328 10.99
INTERNATIONAL FUND
Class A................... 8,003,455 607,164 13.18
Class B................... 2,187,473 168,706 12.97
Class Y................... 217,413,753 16,436,608 13.23
HEALTH SCIENCES FUND
Class A................... 848,991 70,458 12.05
Class B................... 515,590 43,337 11.90
Class Y................... 41,243,216 3,413,801 12.08
TECHNOLOGY FUND
Class A................... 5,564,117 275,483 20.20
Class B................... 8,463,043 432,292 19.58
Class Y................... 148,658,692 7,327,467 20.29
LIMITED TERM INCOME FUND
Class A................... 7,151,719 719,548 9.94
Class B................... * * *
Class Y................... 184,368,139 18,555,702 9.94
</TABLE>
-47-
<PAGE>
<TABLE>
<CAPTION>
NET ASSET
NET ASSETS SHARES VALUE PER SHARE
(IN DOLLARS) / OUTSTANDING = (IN DOLLARS)
------------ ----------- ------------
<S> <C> <C> <C>
INTERMEDIATE TERM INCOME FUND
Class A............................ 2,483,832 248,466 10.00
Class B............................ * * *
Class Y............................ 324,250,121 32,474,228 9.98
FIXED INCOME
Class A............................ 8,534,875 778,307 10.97
Class B............................ 15,253,084 1,398,464 10.91
Class Y............................ 705,718,768 64,393,856 10.96
INTERMEDIATE GOVERNMENT BOND FUND
Class A............................ 3,525,380 380,039 9.28
Class B............................ * * *
Class Y............................ 181,889,221 19,626,325 9.27
INTERMEDIATE TAX FREE FUND
Class A............................ 3,848,588 355,190 10.84
Class B............................ * * *
Class Y............................ 430,993,021 39,838,786 10.82
CALIFORNIA INTERMEDIATE TAX FREE FUND
Class A............................ 1,055 105 10.04
Class B............................ * * *
Class Y............................ 33,287,025 3,317,702 10.03
COLORADO INTERMEDIATE TAX FREE FUND
Class A............................ 4,187,099 394,652 10.61
Class B............................ * * *
Class Y............................ 54,377,857 5,126,395 10.61
MINNESOTA INTERMEDIATE TAX FREE FUND
Class A............................ 7,453,069 738,624 10.09
Class B............................ * * *
Class Y............................ 297,121,718 29,528,389 10.06
OREGON INTERMEDIATE TAX FREE FUND
Class A............................ * * *
Class B............................ * * *
Class Y............................ 182,069,069 18,120,305 10.05
</TABLE>
- ---------------------
* Not in operation during fiscal year ended September 30, 1997.
(1) On July 31, 1998, Piper Small Company Growth Fund and Small Cap Growth Fund
consummated a reorganization transaction pursuant to which shares of Piper
Small Company Growth Fund were exchanged for shares of Small Cap Growth
Fund. Piper Small Company Growth Fund is the financial reporting survivor of
Small Cap Growth Fund. The net asset value per share for the Class A and
Class B Shares of Piper Small Company Growth Fund on September 30, 1997
were calculated as follows:
<TABLE>
<CAPTION>
NET ASSETS SHARES VALUE PER SHARE
(IN DOLLARS) / OUTSTANDING = (IN DOLLARS)
------------ ----------- ------------
<S> <C> <C> <C>
Class A............................ 35,647,823 2,047,549 17.41
Class B............................ 479,635 27,645 17.35
</TABLE>
(2) As of November 30, 1997.
-48-
<PAGE>
FUND PERFORMANCE
SEC STANDARDIZED PERFORMANCE FIGURES
YIELD FOR THE FUNDS. Yield for the Funds is a measure of the net
investment income per share (as defined) earned over a 30-day period expressed
as a percentage of the maximum offering price of a Fund's shares at the end of
the period. Based upon the 30-day period ended March 31, 1998, the yields for
the Class A, Class B and Class Y Shares (previously designated as Class C
Shares) of the Funds were as follows:
CLASS A CLASS B CLASS Y
------- ------- -------
Balanced Fund........................... 2.40% 1.78% 2.76%
Real Estate Securities Fund............. 4.34% 3.82% 4.83%
Equity Income Fund...................... 1.98% 1.35% 2.32%
Equity Index Fund....................... 0.98% 0.29% 1.26%
Large Cap Value Fund.................... 0.78% 0.09% 1.06%
Large Cap Growth Fund................... 0.52% ----- 0.79%
Mid Cap Value Fund...................... 0.29% ----- 0.53%
Regional Equity Fund.................... ----- ----- 0.13%
Small Cap Growth Fund .................. ----- ----- -----
Small Cap Value Fund ................... 0.12% ----- 0.36%
Micro Cap Value Fund.................... ----- ----- -----
International Index Fund ............... ----- ----- -----
International Fund...................... ----- ----- -----
Health Sciences Fund.................... ----- ----- -----
Technology Fund......................... ----- ----- -----
Limited Term Income Fund................ 5.36% * 5.47%
Intermediate Term Income Fund........... 5.07% * 5.27%
Fixed Income Fund....................... 4.85% 4.29% 5.30%
Intermediate Government Bond Fund....... 4.88% * 5.04%
Intermediate Tax Free Fund.............. 3.81% * 3.92%
California Intermediate Tax Free Fund... 3.44% * 3.75%
Colorado Intermediate Tax Free Fund..... 3.70% * 3.81%
Minnesota Intermediate Tax Free Fund.... 3.76% * 3.87%
Oregon Intermediate Tax Free Fund....... * * 3.95%
- --------------
* Not in operation during fiscal period ended March 31, 1998.
Such yield figures were determined by dividing the net investment income per
share earned during the specified 30-day period by the maximum offering price
per share on the last day of the period, according to the following formula:
Yield = 2 [((a - b) / cd) + 1)6 - 1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = average daily number of shares outstanding during the
period that were entitled to receive dividends
d = maximum offering price per share on the last day of
the period
TAX EQUIVALENT YIELD FOR TAX FREE FUNDS. Tax equivalent yield is the
yield that a taxable investment must generate in order to equal a Fund's yield
for an investor in a stated federal or combined federal/state income tax
bracket. The tax equivalent yield for each tax free Fund named below is computed
by dividing that portion of such Fund's yield (computed as described above) that
is tax exempt by one minus the stated federal or combined federal/state income
tax rate, and adding the resulting number to that portion, if any, of such
Fund's yield that is not tax exempt. Based upon the maximum federal income tax
rate of 39.6% and the combined maximum federal/state tax rates of 48.9% for
California, 44.6% for Colorado, 48.1% for
-49-
<PAGE>
Minnesota and 48.6% for Oregon, the tax equivalent yields for the Tax Free Funds
named below for the 30-day period ended March 31, 1998, computed as described
above, were as follows:
CLASS A CLASS Y
Intermediate Tax Free Fund................................ 3.81% 3.92%
California Intermediate Tax Free Fund..................... 3.44% 3.75%
Minnesota Intermediate Tax Free Fund...................... 3.70% 3.81%
Colorado Intermediate Tax Free Fund....................... 3.76% 3.87%
Oregon Intermediate Tax Free Fund......................... * 3.95%
- --------------
* Not in operation during fiscal period ended March 31, 1998.
TOTAL RETURN. Total return measures both the net investment income
generated by, and the effect of any realized or unrealized appreciation or
depreciation of, the underlying investments in a Fund's portfolio. The Fund"
average annual and cumulative total return figures are computed in accordance
with the standardized methods prescribed by the Securities and Exchange
Commission.
AVERAGE ANNUAL TOTAL RETURN. Average annual total return figures are
computed by determining the average annual compounded rates of return over the
periods indicated in the advertisement, sales literature or shareholders'
report, that would equate the initial amount invested to the ending redeemable
value, according to the following formula:
P(1 + T)n = 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.
-50-
<PAGE>
Based on the foregoing, the average annual and aggregate total returns
for each class of the Funds from inception through March 31, 1998 were as
follows. The performance for Class A and Class B Shares will normally be lower
than for Class Y Shares because Class A and Class B Shares are subject to sales
and distribution charges and/or shareholder servicing fees not charged to Class
Y Shares.
<TABLE>
<CAPTION>
Cumulative Average Annual Average Annual Average Annual
Since Inception* Since Inception* One Year Five Year
-------------------- ------------------- ------------------ -----------------
Without With Without With Without With Without With
Sales Sales Sales Sales Sales Sales Sales Sales
Charge Charge Charge Charge Charge Charge Charge Charge
------- ------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCED FUND
Class A .............. 113.98% 103.61% 15.37% 14.38% 25.37% 19.71% 15.23% 14.17%
Class B .............. 81.64% 78.64% 17.90% 17.36% 24.46% 19.46% ** **
Class Y .............. 88.18% 16.45% 25.90% **
REAL ESTATE SECURITIES
Class A .............. 64.53% 57.10% 22.00% 19.77% 18.29% 12.97% ** **
Class B .............. 61.01% 57.01% 20.95% 19.74% 17.37% 12.37% ** **
Class Y .............. 74.19% 22.33% 18.63% **
EQUITY INCOME FUND
***Class A ........... 124.81% 114.72% 16.57% 15.57% 36.90% 30.72% 17.11% 16.04%
Class B .............. 102.59% 99.59% 21.50% 21.01% 35.95% 30.95% ** **
Class Y .............. 109.54% 22.40% 37.36% **
EQUITY INDEX FUND
Class A .............. 180.44% 167.85% 21.51% 20.46% 47.01% 40.41% 21.75% 20.63%
Class B .............. 146.15% 143.15% 28.21% 27.78% 45.80% 40.80% ** **
Class Y .............. 153.91% 25.17% 47.33% **
LARGE CAP VALUE FUND
Class A .............. 387.46%+ 365.33%+ 17.16%+ 16.62%+ 36.20% 30.10% 21.71% 20.60%
Class B .............. 126.76% 123.76% 25.34% 24.88% 35.31% 30.31% ** **
Class Y .............. 140.05% 23.49% 36.73% **
LARGE CAP GROWTH FUND
***Class A ........... 113.42% 103.84% 15.43% 14.43% 42.69% 36.24% 17.25% 16.18%
Class B .............. 129.77% 126.77% 25.80% 25.34% 41.46% 36.46% ** **
Class Y .............. 137.03% 26.59% 42.92% **
MID CAP VALUE FUND
Class A .............. 404.95%+ 382.12%+ 17.58%+ 17.03%+ 36.80% 30.66% 21.89% 20.77%
Class B .............. 120.51% 117.51% 24.38% 23.91% 35.72% 30.72% ** **
Class Y .............. 133.20% 22.63% 37.09% ** **
REGIONAL EQUITY FUND
Class A .............. 186.19% 173.34% 21.98% 20.92% 41.67% 35.32% 20.88% 19.78%
Class B .............. 123.05% 120.05% 24.77% 24.31% 40.64% 35.64% ** **
Class Y .............. 128.27% 22.00% 42.13% **
SMALL CAP GROWTH FUND (1)
Class A .............. 293.12%+ 275.65%+ 14.67%+ 14.15%+ 57.84% 50.69% 14.99% 13.93%
Class B .............. 38.91% 34.91% 34.38% 30.89% 57.15% 53.15% ** **
Class Y ..............
SMALL CAP VALUE FUND (2)
Class A .............. 549.40%+ 520.80%+ 20.57%+ 20.03%+ 31.30% 25.41% 23.09% 21.96%
Class B .............. 7.20% 2.23% 22.12% 6.55% ** ** ** **
Class Y .............. 546.22%+ 22.01%+ 31.48% 23.33%
</TABLE>
-51-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MICRO CAP VALUE FUND (3)
Class A........... 6.03%+ 5.71%+ 18.40%+ 17.87%+ 34.48% 28.38% 24.03 22.89%
Class B........... 5.92%+ 5.92%+ 18.14%+ 18.14%+ 33.69% 28.69% 23.83% 23.66%
Class Y........... 604.74%+ 18.45% 34.11% 23.96% 21.60%
INTERNATIONAL INDEX FUND (4)
Class A........... 26.92%+ 21.22% 9.07% 7.26% 16.30% 11.05% ** **
Class B........... 13.46% 8.46% 43.77% 26.30% ** ** ** **
Class Y........... 28.09% ** 9.44% 16.55% **
INTERNATIONAL FUND
Class A........... 48.91% 42.21% 10.52% 9.25% 31.77% 25.89% ** **
Class B........... 41.28% 38.28% 10.00% 9.35% 30.81% 25.81% ** **
Class Y........... 49.63% 10.63% 32.09% **
HEALTH SCIENCES FUND
Class A........... 32.46% 26.52% 13.87% 11.48% 35.34% 29.19% ** **
Class B........... 30.33% 26.33% 13.02% 11.40% 34.45% 29.45% ** **
Class Y........... 33.15% 14.14% 35.74% **
TECHNOLOGY FUND
Class A........... 164.44% 152.57% 27.61% 26.15% 46.73% 40.14% ** **
Class B........... 160.83% 157.83% 30.28% 29.86% 45.78% 40.78% ** **
Class Y........... 166.30% 27.83% 47.28% **
LIMITED TERM INCOME FUND
Class A........... 30.25% 27.70% 5.12% 4.73% 6.25% 4.14% 5.09% 4.68%
Class B........... ** ** ** ** ** ** ** **
Class Y........... 24.51% 5.42% 6.25% **
INTERMEDIATE TERM INCOME FUND
Class A........... 37.48% 32.32% 6.20% 5.43% 8.96% 4.88% 5.82% 5.01%
Class B........... ** ** ** ** ** ** ** **
Class Y........... 27.41% 6.01% 8.75% **
FIXED INCOME FUND
Class A........... 116.14%+ 107.96%+ 8.01%+ 7.60%+ 10.67% 6.56% 6.37% 5.57%
Class B........... 28.49% 25.49% 7.16% 6.46% 10.00% 5.00% ** **
Class Y........... 29.83% 6.49% 11.05% **
INTERMEDIATE GOVERNMENT
BOND FUND
Class A........... 88.16%+ 82.56%+ 6.53%+ 6.20%+ 8.37% 5.14% 5.31% 4.67%
Class B........... ** ** ** ** ** ** ** **
Class Y........... 25.26% 5.58% 8.38% **
INTERMEDIATE TAX FREE FUND
Class A........... 81.51%+ 76.05%+ 6.14%+ 5.82%+ 7.68% 4.42% 5.34% 4.69%
Class B........... ** ** ** ** ** ** ** **
Class Y........... 21.38% 4.78% 7.79% **
CALIFORNIA INTERMEDIATE
TAX FREE FUND (5)
Class A........... 40.20% 35.97% 5.96% 5.41% 7.80% 4.59% 5.39% 4.75%
Class B........... ** ** ** ** ** ** ** **
Class Y........... 39.92% 5.93% 7.69% 5.37%
COLORADO INTERMEDIATE
TAX FREE FUND
Class A........... 29.60% 25.70% 6.71% 5.90% 7.95% 4.72% ** **
Class B........... ** ** ** ** ** ** **
Class Y........... 29.48% 6.69% 7.96% **
</TABLE>
-52-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MINNESOTA INTERMEDIATE
TAX FREE FUND
Class A........... 22.64% 18.95% 5.11% 4.33% 7.59% 4.41% ** **
Class B........... ** ** ** ** ** ** ** **
Class Y........... 22.29% 5.04% 7.61% **
OREGON INTERMEDIATE TAX
FREE FUND (6)
Class A........... ** ** ** ** ** ** ** **
Class B........... ** ** ** ** ** ** ** **
Class Y........... 87.89%+ 6.50%+ 7.88% 5.02%
</TABLE>
- ------------------------
+ For the ten year period ended March 31, 1998.
* Inception dates are as follows: Balanced Fund, Class A, December 14, 1992;
Class B, August 15, 1994; Class C, February 4, 1994; Real Estate Securities
Fund, Class A, September 29, 1995; Class B, September 29, 1995; Class C,
June 30, 1995; Equity Income Fund, Class A, December 18, 1992; Class B,
August 15, 1994; Class C, August 2, 1994; Equity Index Fund, Class A,
December 14, 1992; Class B, August 15, 1994; Class C, February 4, 1994;
Stock Fund (now known as Large Cap Value Fund), Class B, August 15, 1994;
Class C, February 4, 1994; Diversified Growth Fund (now known as Large Cap
Growth Fund), Class A, December 18, 1992; Class B, August 15, 1994; Class
C, August 2, 1994; Special Equity Fund (now known as Mid Cap Value Fund),
Class B, August 15, 1994; Class C, February 4, 1994; Regional Equity Fund,
Class A, December 14, 1992; Class B, August 15, 1994; Class C, February 4,
1994; Micro Cap Value Fund Class A, August 8, 1997; Class B, August 8,
1997; and Class C, August 8, 1997; International Fund, Class A, April 7,
1994, Class B, August 15, 1994, Class C, April 4, 1994; Health Sciences
Fund, Class A, Class B and Class C, January 31, 1996; Technology Fund,
Class A, April 4, 1994; Class B, August 15, 1994; Class C, April 4, 1994;
Limited Term Income Fund, Class A, December 14, 1992; Class B, August 15,
1994 (closed January 31, 1995); Class C, February 4, 1994; Intermediate
Term Income Fund, Class A, December 14, 1992; Class B, not in operation at
September 30, 1997; Class C, February 4, 1994; Fixed Income Fund, Class B,
August 15, 1994; Class C, February 4, 1994; Intermediate Government Bond
Fund, Class B, not in operation at March 31 1998; Class C, February 4,
1994; Intermediate Tax Free Fund, Class C, February 4, 1994; Colorado
Intermediate Tax Free Fund, Class C, April 4, 1994; Minnesota Insured
Intermediate Tax Free Fund (now known as Minnesota Intermediate Tax Free
Fund), Class A, February 25, 1994, Class C, February 28, 1994. Please note
that Class C Shares are now designated as Class Y Shares.
** Not in operation for entire period.
*** Performance is presented for the period beginning March 25, 1994, the date
U.S. Bank National Association became the Advisor. The per share income and
capital changes for these Funds since inception can be found in the
financial highlights section of the prospectus and annual report to
shareholders. Total return figures from inception of these Funds are
available upon request from the Funds' Distributor SEI Investments
Distribution Co., Oaks, Pennsylvania 19456, telephone (800) 637-2548.
(1) Reflects performance of Piper Small Company Growth Fund, which consummated
a reorganization transaction with Small Cap Growth Fund on July 31, 1998.
Piper Small Company Growth Fund is the financial reporting survivor.
Effective September 12, 1996, shareholders of Piper Small Company Growth
Fund approved a change in the fund's investment objective from high total
investment return consistent with prudent investment risk to long-term
capital appreciation. In connection with this change, the fund's investment
policies were revised accordingly.
(2) Reflects performance commencing January 1, 1988 of a predecessor common
trust fund of the Qualivest Small Companies Value Fund, adjusted for fees
and expenses for periods prior to August 1, 1994 (the inception date of the
Qualivest Small Companies Value Fund). The common trust fund was not
registered under the 1940 Act and therefore was not subject to certain
investment restrictions which may have adversely affected performance. On
November 1, 1997, Small Cap Value Fund became the successor by merger to
the Qualivest Small Companies Value Fund.
(3) Reflects performance commencing on September 25, 1987 of a predecessor
common trust fund of Micro Cap Value Fund, adjusted for fees and expenses
for periods prior to August 8, 1997 (the inception date of Micro Cap Value
Fund). The common trust fund was not registered under the 1940 Act and
therefore was not subject to certain investment restrictions which may have
adversely affected performance.
(4) Reflects performance commencing on July 3, 1995 of the Qualivest
International Opportunities Fund. On November 21, 1997, the International
Index Fund became the successor by merger to the Qualivest International
Opportunities Fund.
(5) Reflects performance commencing on May 31, 1992 of predecessor common trust
funds of California Intermediate Tax Free Fund, adjusted for fees and
expenses for periods prior to August 8, 1997 (the inception date of
California Intermediate Tax Free Fund). The common trust funds were not
registered under the 1940 Act and therefore were not subject to certain
investment restrictions which may have adversely affected performance.
(6) Reflects performance commencing on October 31, 1986 of a predecessor common
trust fund of Oregon Intermediate Tax Free Fund, adjusted for fees and
expenses for periods prior to August 8, 1997 (the inception date of Oregon
Intermediate Tax Free Fund). The common trust fund was not registered under
the 1940 Act and therefore was not subject to certain investment
restrictions which may have adversely affected performance.
-53-
<PAGE>
NON-STANDARD DISTRIBUTION RATES
HISTORICAL DISTRIBUTION RATES. The Funds' historical annualized
distribution rates are computed by dividing the income dividends of a Fund for a
stated period by the maximum offering price on the last day of such period. For
the one-year period ended March 31, 1998, 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
------- ------- -------
Balanced Fund........................... 1.20% 0.87% 1.32%
Real Estate Securities Fund............. 2.10% 1.87% 2.33%
Equity Income Fund...................... 1.19% 0.90% 1.37%
Equity Index Fund....................... 0.51% 0.23% 0.67%
Large Cap Value Fund.................... 0.39% 0.15% 0.52%
Large Cap Growth Fund................... 0.26% 0.11% 0.38%
Mid Cap Value Fund...................... 0.08% ----- 0.17%
Regional Equity Fund.................... ----- ----- 0.04%
Small Cap Growth Fund .................. ----- ----- -----
Small Cap Value Fund (1)................ ----- 0.06% 0.11%
Micro Cap Value Fund.................... ----- ----- 0.01%
International Index Fund (1)............ 0.62% 0.81% 0.89%
International Fund...................... 3.24% 3.08% 3.77%
Health Sciences Fund.................... ----- ----- 0.09%
Technology Fund......................... ----- ----- -----
Limited Term Income Fund................ 2.66% * 2.72%
Intermediate Term Income Fund........... 2.58% * 2.69%
Fixed Income Fund....................... 2.51% 2.26% 2.79%
Intermediate Government Bond Fund....... 2.81% * 2.90%
Intermediate Tax Free Fund.............. 2.15% * 2.22%
California Intermediate Tax Free Fund... 2.12% * 2.18%
Colorado Intermediate Tax Free Fund..... 2.18% * 2.25%
Minnesota Intermediate Tax Free Fund.... 2.11% * 2.18%
Oregon Intermediate Tax Free Fund....... * * 2.19%
- -------------------
* Not in operation during fiscal period ended March 31, 1998.
(1) For the period from August 1, 1997 to March 31, 1998.
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ANNUALIZED CURRENT DISTRIBUTION RATES. The Funds' annualized current
distribution rates are computed by dividing a Fund's income dividends for a
specified month (or three-month period, in the case of an Equity Fund) by the
number of days in that month (or three-month period, in the case of an Equity
Fund) and multiplying by 365, and dividing the resulting figure by the maximum
offering price on the last day of the specified period. The annualized current
distribution rates for the one or three-month period (as appropriate) ended
March 31, 1998, for Funds were as follows:
Class A Class B Class Y
------- ------- -------
Balanced Fund........................... 1.78% 1.23% 2.07%
Real Estate Securities Fund............. 4.48% 3.95% 4.95%
Equity Income Fund...................... 2.30% 1.78% 2.61%
Equity Index Fund....................... 1.05% 0.48% 1.31%
Large Cap Value Fund.................... 0.22% ----- 0.45%
Large Cap Growth Fund................... 0.42% ----- 0.64%
Mid Cap Value Fund...................... 0.66% 0.06% 0.91%
Regional Equity Fund.................... ----- ----- -----
Small Cap Growth Fund .................. ----- ----- -----
Small Cap Value Fund ................... ----- ----- 0.09%
Micro Cap Value Fund.................... ----- ----- 0.05%
International Index Fund ............... 0.25% ----- 0.46%
International Fund...................... ----- ----- -----
Health Sciences Fund.................... ----- ----- -----
Technology Fund......................... ----- * -----
Limited Term Income Fund................ 5.33% * 5.43%
Intermediate Term Income Fund........... 5.05% * 5.26%
Fixed Income Fund....................... 4.99% 4.54% 5.40%
Intermediate Government Bond Fund....... 5.49% * 5.67%
Intermediate Tax Free Fund.............. 4.19% * 4.33%
California Intermediate Tax Free Fund... 4.04% * 4.17%
Colorado Intermediate Tax Free Fund..... 4.25% * 4.39%
Minnesota Intermediate Tax Free Fund.... 4.26% * 4.40%
Oregon Intermediate Tax Free Fund....... * * 4.41%
- --------------
* Not in operation during fiscal period ended March 31, 1998.
TAX EQUIVALENT DISTRIBUTION RATES. The tax equivalent distribution rate
for the Tax Free Funds is computed by dividing that portion of such a Fund's
annualized current distribution rate (computed as described above) which is
tax-exempt by one minus the stated federal or combined federal/state income tax
rate, and adding the resulting figure to that portion, if any, of the annualized
current distribution rate which is not tax-exempt. Based upon the maximum
federal or combined federal/state income tax rates set forth above under "-- SEC
Standardized Performance Figures -- Tax Equivalent Yield for Tax Free Funds,"
the annualized current distribution rates for the month ended March 31, 1998,
for each class of the Tax Free Funds were as follows:
CLASS A CLASS Y
------- -------
Intermediate Tax Free Fund................................ 6.94% 7.17%
California Intermediate Fax Free Fund..................... 7.71% 8.16%
Colorado Intermediate Tax Free Fund....................... 7.40% 7.65%
Minnesota Intermediate Tax Free Fund...................... 7.70% 7.96%
Oregon Intermediate Tax Free Fund......................... * 8.54%
* Not in operation during fiscal period ended March 31, 1998.
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CERTAIN PERFORMANCE COMPARISONS
The Funds may compare their performance to that of certain published or
otherwise widely disseminated indices or averages compiled by third parties. The
Funds, and the indices and averages to which they may compare their performance,
are as follows, among others:
BALANCED FUND may compare its performance to the S&P 500, which is
described above. Balanced Fund also may compare its performance to the LEHMAN
GOVERNMENT/CORPORATE (TOTAL) INDEX, which is a market weighted index comprised
of all public obligations of the U.S. Treasury, excluding flower bonds and
foreign-targeted issues; all publicly issued debt of U.S. Government agencies
and quasi-federal corporations, and corporate debt guaranteed by the U.S.
Government; and all publicly issued, fixed rate, nonconvertible investment grade
dollar-denominated SEC-registered corporate debt. Balanced Fund also may compare
its performance to the LIPPER BALANCED FUNDS AVERAGE, which is an average of
funds whose primary objective is to conserve principal by maintaining at all
times a balanced portfolio of both stocks and bonds. Balanced Fund also may
compare its performance to a composite constructed from the S&P 500 and the
Lehman Government/Corporate (Total) Index.
REAL ESTATE SECURITIES FUND may compare its performance to the MORGAN
STANLEY REIT INDEX, which is a capitalization weighted index with dividends
reinvested in the most actively traded real estate investment trusts and is
designed to be a measure of real estate equity performance based on the last
closing price of the month for all tax-qualified Equity REITs listed on the New
York Stock Exchange, the American Stock Exchange and the NASDAQ National Market
System. Real Estate Securities Fund also may compare its performance to the
LIPPER REAL ESTATE FUNDS AVERAGE, which is an average of real estate-oriented
funds.
EQUITY INCOME FUND may compare its performance to the S&P 500 and the
LEHMAN GOVERNMENT/CORPORATE (TOTAL) INDEX, each of which is described above, and
to a composite constructed from these two indices. Equity Income Fund also may
compare its performance to the LIPPER EQUITY INCOME FUNDS AVERAGE, which is an
average of funds which seek relatively high current income and growth of income
through investing 60% or more of their portfolios in equities.
EQUITY INDEX FUND may compare its performance to the S&P 500, which is
described above, and to the LIPPER S&P 500 INDEX FUNDS AVERAGE.
LARGE CAP VALUE FUND may compare its performance to the STANDARD &
POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS ("S&P 500"), which is a
composite index of common stocks in industrial, transportation, and financial
and public utility companies. The S&P 500 index assumes reinvestment of all
dividends paid by stocks listed in its index. Taxes due on any of these
distributions are not included, nor are brokerage or other fees calculated in
Standard & Poor's figures. Large Cap Value Fund also may compare its performance
to the LIPPER GROWTH & INCOME FUNDS AVERAGE, which is an average of funds which
combine a growth of earnings orientation and an income requirement for level
and/or rising dividends.
LARGE CAP GROWTH FUND may compare its performance to the S&P 500 and
the LIPPER GROWTH & INCOME FUNDS AVERAGE, each of which is described above.
MID CAP VALUE FUND may compare its performance to the S&P 400 MIDCAP
AVERAGE, which is a capitalization-weighted index that measures the performance
of the mid-range sector of the U.S. stock market where the median market
capitalization is approximately $700 million, and the LIPPER MID-CAP FUNDS
AVERAGE, which is an average of funds which limit their investments to companies
with average market capitalizations and/or revenues between $800 million and the
average market capitalization of the Wilshire 4500 Index. Mid Cap Value Fund may
also compare its performance to the RUSSELL MID-CAP INDEX, which is an index
that measures the performance of the 800 smallest companies in the Russell 1000
Index, which measures the performance of the 1,000 largest companies in the
Russell 1000 Index. The Russell 1000 Index represents approximately 90% of the
total market capitalization of the Russell 3000 Index.
REGIONAL EQUITY FUND may compare its performance to the RUSSELL 2000
INDEX and the LIPPER SMALL CAP FUNDS AVERAGE, each of which is described below.
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SMALL CAP GROWTH FUND may compare its performance to the RUSSELL 2000
INDEX, which is a broadly diversified index consisting of approximately 2,000
small capitalization common stocks that can be used to compare to the total
returns of funds whose portfolios are invested primarily in small capitalization
common stocks. Small Cap Growth Fund also may compare its performance to the
LIPPER SMALL COMPANY GROWTH FUNDS AVERAGE, which is an average of funds which
limit their investments to smaller capitalization companies.
SMALL CAP VALUE FUND may compare its performance to the RUSSELL 2000
INDEX, which is described above. Small Cap Value Fund may also compare its
performance to the LIPPER SMALL CAP FUNDS AVERAGE which is an average of funds
which invest primarily in companies with market capitalizations of less than $1
billion at the time of purchase.
MICRO CAP VALUE FUND may compare its performance to the RUSSELL 2000
INDEX, which is described above. Micro Cap Value Fund may also compare its
performance to the LIPPER MICRO CAP FUNDS AVERAGE, which is an average of funds
which invest primarily in companies with market capitalizations of less than
$300 million at the time of purchase.
INTERNATIONAL INDEX FUND may compare its performance to the MORGAN
STANLEY EUROPE, AUSTRALIA, FAR EAST COMPOSITE INDEX (the "EAFE Index") which is
an aggregate of 15 individual country indices that collectively represent many
of the major markets in the world, excluding the United States and Canada.
International Index Fund also may compare its performance to the LIPPER
INTERNATIONAL FUNDS AVERAGE, which is an average of funds which primarily invest
in equity securities whose primary trading markets are outside the United
States.
INTERNATIONAL FUND may compare its performance to that of the EAFE
Index, which is described above. International Fund also may compare its
performance to the LIPPER INTERNATIONAL FUNDS AVERAGE, which is described above.
HEALTH SCIENCES FUND may compare its performance to that of the LIPPER
HEALTH/BIOTECHNOLOGY FUNDS AVERAGE, which is an average of funds which invest at
least 65% of their equity portfolio in shares of companies engaged in health
care, medicine and biotechnology. Health Sciences Fund may also compare its
performance to the Russell 2000 Index, which is described above.
TECHNOLOGY FUND may compare its performance to the LIPPER TECHNOLOGY
FUNDS AVERAGE, which is an average of funds which invest in technology-related
equities, the RUSSELL 2000 INDEX, which is described above, and the PSE
TECHNOLOGY 100 INDEX, which is a broad-based, price-weighted index measuring the
combined performance of 100 listed and over-the-counter stocks in 15 different
industries.
LIMITED TERM INCOME FUND may compare its performance to the MERRILL
LYNCH ONE-YEAR TREASURY INDEX, which is an unmanaged index of a one-year
constant maturity Treasury bills. Limited Term Income Fund also may compare its
performance to the LIPPER SHORT INVESTMENT GRADE DEBT FUNDS AVERAGE, which is an
average of funds which invest at least 65% of assets in investment grade debt
issues with dollar-weighted average maturities of five years or less.
INTERMEDIATE TERM INCOME FUND may compare its performance to the LEHMAN
INTERMEDIATE GOVERNMENT/CORPORATE INDEX, which is a market weighted index
comprised of all public obligations of the U.S. Treasury, excluding flower bonds
and foreign-targeted issues; all publicly issued debt of U.S. Government
agencies and quasi-federal corporations, and corporate debt guaranteed by the
U.S. Government; and all publicly issued, fixed rate, nonconvertible investment
grade dollar-denominated SEC-registered corporate debt, in each case with
maturities of up to ten years. Intermediate Term Income Fund also may compare
its performance to the LIPPER SHORT-INTERMEDIATE INVESTMENT GRADE DEBT FUNDS
AVERAGE, which is an average of funds which invest at least 65% of assets in
investment grade debt with dollar-weighted average maturities of one to five
years.
FIXED INCOME FUND may compare its performance to the LEHMAN
GOVERNMENT/CORPORATE (TOTAL) INDEX, which is described above. Fixed Income Fund
also may compare its performance to the LIPPER
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CORPORATE DEBT FUNDS A-RATED AVERAGE, which is an average of funds which invest
65% or more of assets in corporate debt issues rated "A" or better or government
issues.
INTERMEDIATE GOVERNMENT BOND FUND may compare its performance to the
LEHMAN INTERMEDIATE GOVERNMENT INDEX, which is a market weighted index comprised
of all public obligations of the U.S. Treasury, excluding flower bonds and
foreign-targeted issues, and all publicly issued debt of U.S. Government
agencies and quasi-federal corporations, and corporate debt guaranteed by the
U.S. Government, in each case with maturities of up to ten years. Intermediate
Government Bond Fund also may compare its performance to the LIPPER
SHORT-INTERMEDIATE U.S. GOVERNMENT FUNDS AVERAGE, which is an average of funds
which invest at least 65% of assets in securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities with dollar-weighted average
maturities of one to five years.
INTERMEDIATE TAX FREE FUND may compare its performance to the LEHMAN
7-YEAR G.O. INDEX, which is an unmanaged index comprised of state and local
general obligation issues with maturities between 6 and 8 years which were
issued as part of a transaction of at least $50 million and which have a minimum
credit rating of at least Baa. Intermediate Tax Free Fund also may compare its
performance to the LIPPER INTERMEDIATE MUNICIPAL DEBT FUNDS AVERAGE, which is an
average of funds which invest in municipal debt issues with dollar-weighted
average maturities of five to ten years.
CALIFORNIA INTERMEDIATE TAX FREE FUND may compare its performance to
the LEHMAN 7-YEAR G.O. INDEX, which is described above, and the LIPPER CA
INTERMEDIATE MUNICIPAL DEBT FUNDS AVERAGE, which is an average of funds that
invest in municipal debt issues which are exempt from taxation in California
with dollar-weighted average maturities of five to ten years.
COLORADO INTERMEDIATE TAX FREE FUND may compare its performance to the
LEHMAN 7-YEAR G.O. INDEX and the LIPPER INTERMEDIATE MUNICIPAL DEBT FUNDS
AVERAGE, each of which is described above, and the LIPPER OTHER STATES
INTERMEDIATE MUNICIPAL DEBT FUNDS AVERAGE, which invests in debt issues with
dollar-weighted average maturities of five to ten years and which are exempt
from taxation on a specified city or state basis.
MINNESOTA INTERMEDIATE TAX FREE FUND may compare its performance to the
LEHMAN 7-YEAR G.O. INDEX and the LIPPER INTERMEDIATE MUNICIPAL DEBT FUNDS
AVERAGE, each of which is described above, and the LIPPER OTHER STATES
INTERMEDIATE MUNICIPAL DEBT FUNDS AVERAGE, which is described above.
OREGON INTERMEDIATE TAX FREE FUND may compare its performance to the
LEHMAN 7-YEAR G.O. INDEX and LIPPER INTERMEDIATE MUNICIPAL DEBT FUNDS AVERAGE,
each of which is described above, and the LIPPER OTHER STATES INTERMEDIATE
MUNICIPAL DEBT FUNDS AVERAGE, which is described above.
Each of the Funds also may compare its performance to the CONSUMER
PRICE INDEX, which is a measure of the average change in prices over time in a
fixed market basket of goods and services.
TAXATION
The tax status of the Funds and the distributions that the Funds will
make to shareholders are summarized in the Prospectuses in the sections entitled
"Federal Income Taxes" (or, in the Prospectuses for the Tax Free Funds, "Income
Taxes"). Each Fund intends to fulfill the requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), as a regulated
investment company. If so qualified, each Fund will not be liable for federal
income taxes to the extent it distributes its taxable income to its
shareholders.
To qualify under Subchapter M for tax treatment as a regulated
investment company, each Fund must, among other things: (1) derive at least 90%
of its gross income from dividends, interest, and certain
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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 any of the Tax-Free Funds receives an exempt-interest dividend
from such fund and then disposes of his or her shares in such fund within six
months after acquiring them, any loss on the sale or exchange of such shares
will be disallowed to the extent of the exempt-interest dividend.
If one of the Tax-Free Funds disposes of a municipal obligation that it
acquired after April 30, 1993 at a market discount, it must recognize any gain
it realizes on the disposition as ordinary income (and not as capital gain) to
the extent of the accrued market discount.
For federal tax purposes, if a shareholder exchanges shares of a Fund
for shares of any other FAIF Fund pursuant to the exchange privilege (see
"Investing in the Funds -- Exchange Privilege" in the Prospectuses for Class A
and Class B Shares, and "Purchases and Redemptions of Shares -- Exchange
Privilege" in the Prospectuses for Class Y Shares), such exchange will be
considered a taxable sale of the shares being exchanged. Furthermore, if a
shareholder of Class A or Class B Shares carries out the exchange within 90 days
of purchasing shares in a fund on which he or she has incurred a sales charge,
the sales charge cannot be taken into account in determining the shareholder's
gain or loss on the sale of those shares to the extent that the sales charge
that would have been applicable to the purchase of the later-acquired shares in
the other fund is reduced because of the exchange privilege. However, the amount
of any sales charge that may not be taken into account in determining the
shareholder's gain or loss on the sale of the first-acquired shares may be taken
into account in determining gain or loss on the eventual sale or exchange of the
later-acquired shares.
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.
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If a Fund invests in U.S. Treasury inflation-protection securities, it
will be required to treat as original issue discount any increase in the
principal amount of the securities that occurs during the course of its taxable
year. If a Fund purchases such inflation-protection securities that are issued
in stripped form either as stripped bonds or coupons, it will be treated as if
it had purchased a newly issued debt instrument having original issue discount.
Generally, the original issue discount equals the difference between the "stated
redemption price at maturity" of the obligation and its "issue price" as those
terms are defined in the Code. A Fund holding an obligation with original issue
discount is required to accrue as ordinary income a portion of such original
issue discount even though it receives no cash currently as interest payment
corresponding to the amount of the original issue discount. Because each Fund is
required to distribute substantially all of its net investment income (including
accrued original issue discount) in order to be taxed as a regulated investment
company, it may be required to distribute an amount greater than the total cash
income it actually receives. Accordingly, in order to make the required
distributions, a Fund may be required to borrow or liquidate securities.
Under Code Section 1256, except for the transactions the Fund has
identified as hedging transactions, each Fund is required for federal income tax
purposes to recognize as income for each taxable year its net unrealized gains
and losses on futures contracts, options, and (in the case of International
Fund) forward currency contracts as of the end of the year as well as those
actually realized during the year. Except for transactions in futures contracts,
options, or forward currency contracts that are classified as part of a "mixed
straddle," gain or loss recognized with respect to such contracts or options is
considered to be 60% long-term capital gain or loss and 40% short-term capital
gain or loss, without regard to the holding period of the contract. In the case
of a transaction classified as a "mixed straddle," the recognition of losses may
be deferred to a later taxable year.
Sales of forward currency contracts that are intended to hedge against
a change in the value of securities or currencies held by a Fund may affect the
holding period of such securities or currencies and, consequently, the nature of
the gain or loss on such securities or currencies upon disposition.
As stated above, the Code requires a regulated investment company to
diversify its holdings. The Internal Revenue Service has not made its position
clear regarding the treatment of futures contracts and options for purposes of
the diversification test, and the extent to which a Fund can buy or sell futures
contracts and options may be limited by this requirement.
It is expected that any net gain realized from the closing out of
futures contracts, options, or forward currency contracts will be considered
gain from the sale of securities or currencies and therefore qualifying income
for purposes of the 90% of gross income from qualified sources requirement, as
discussed above.
Any realized gain or loss on closing out a futures contract, option, or
forward currency contract such as a forward commitment for the purchase or sale
of foreign currency will generally result in a recognized capital gain or loss
for tax purposes. Code Section 988 may also apply to forward currency contracts.
Under Section 988, each foreign currency gain or loss is generally computed
separately and treated as ordinary income or loss. In the case of overlap
between Sections 1256 and 988, special provisions determine the character and
timing of any income, gain or loss. International Fund will attempt to monitor
Section 988 transactions to avoid an adverse tax impact.
Each Fund will distribute to shareholders annually any net long-term
capital gains that have been recognized for federal income tax purposes
(including unrealized gains at the end of the Fund's fiscal year) on futures
contract, option, or forward currency contract transactions. Such distributions
will be combined with distributions of capital gains realized on the Fund's
other investments.
Pursuant to the Code, distributions of net investment income by a Fund
to a shareholder who 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
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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 State, (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 the U.S. court and which
has one of 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 Intermediate Tax Free Fund, the 1995
Minnesota Legislature enacted a statement of intent that interest on obligations
of Minnesota governmental units and Indian tribes be included in net income of
individuals, estates and trusts for Minnesota income tax purposes if a court
determines that Minnesota's exemption of such interest unlawfully discriminates
against interstate commerce because interest on obligations of governmental
issuers located in other states 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 Intermediate 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.
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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.
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CCC: Securities rated CCC have a currently identifiable vulnerability
to default, and are dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial, or economic
conditions, they are not likely to have the capacity to pay interest
and repay principal. The CCC rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied B or
B- rating.
The ratings from AA to CCC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
MOODY'S
Aaa: Securities which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected
by a large or exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Securities which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group, they comprise what are
generally known as high grade securities. They are rated lower than the
best securities because margins of protection may not be as large as in
Aaa securities, or fluctuation of protective elements may be of greater
magnitude, or there may be other elements present which make the
long-term risks appear somewhat greater than in Aaa securities.
A: Securities which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa: Securities which are rated Baa are considered as medium grade
obligations, being neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
securities lack outstanding investment characteristics, and in fact
have some speculative characteristics.
Ba: An issue which is rated Ba is judged to have speculative elements;
its future cannot be considered as well assured. Often the protection
of interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes issues in this class.
B: An issue which is rated B generally lacks characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa: An issue which is rated Caa is of poor standing. Such an issue may
be in default or there may be present elements of danger with respect
to principal or interest.
Those securities in the Aa, A and Baa groups which Moody's believes possess the
strongest investment attributes are designated by the symbols Aa-1, A-1 and
Baa-1. Other Aa, A and Baa securities comprise the balance of their respective
groups. These rankings (1) designate the securities which offer the maximum in
security within their quality groups, (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.
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<PAGE>
RATINGS OF PREFERRED STOCK
STANDARD & POOR'S. Standard & Poor's ratings for preferred stock have
the following definitions:
AAA: An issue rated "AAA" has the highest rating that may be assigned
by Standard & Poor's to a preferred stock issue and indicates an
extremely strong capacity to pay the preferred stock obligations.
AA: A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated "AAA."
A: An issue rated "A" is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more susceptible
to the adverse effects of changes in circumstances and economic
conditions.
BBB: An issue rated "BBB" is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the
category.
MOODY'S. Moody's ratings for preferred stock include the following:
aaa: An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
aa: An issue which is rated "aa" is considered a high grade preferred
stock. This rating indicates that there is reasonable assurance that
earnings and asset protection will remain relatively well maintained in
the foreseeable future.
a: An issue which is rate "a" is considered to be an upper medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa: An issue which is rated "baa" is considered to be medium grade,
neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any
great length of time.
RATINGS OF MUNICIPAL NOTES
STANDARD & POOR'S
SP-1: Very strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are given a
plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest.
SP-3: Speculative capacity to pay principal and interest.
None of the Funds will purchase SP-3 municipal notes.
MOODY'S. Generally, Moody's ratings for state and municipal short-term
obligations are designated Moody's Investment Grade ("MIG"); however, where an
issue has a demand feature which makes the issue a variable rate demand
obligation, the applicable Moody's rating is "VMIG."
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<PAGE>
MIG 1/VMIG 1: This designation denotes the best quality. There is
strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes high quality, with margins of
protection ample although not so large as available in the preceding
group.
MIG 3/VMIG 3: This designation denotes favorable quality, with all
security elements accounted for, but lacking the strength of the
preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
None of the Funds will purchase MIG 3/VMIG 3 municipal notes.
RATINGS OF COMMERCIAL PAPER
STANDARD & POOR'S. Commercial paper ratings are graded into four
categories, ranging from "A" for the highest quality obligations to "D" for the
lowest. Issues assigned the A rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designation 1, 2 and 3 to indicate the relative degree of safety. The "A-1"
designation indicates that the degree of safety regarding timely payment is very
strong. Those issues determined to possess overwhelming safety characteristics
will be denoted with a plus (+) symbol designation. None of the Funds will
purchase commercial paper rated A-3 or lower.
MOODY'S. Moody's commercial paper ratings are opinions as to the
ability of the issuers to timely repay promissory obligations not having an
original maturity in excess of nine months. Moody's makes no representation that
such obligations are exempt from registration under the Securities Act of 1933,
and it does not represent that any specific instrument is a valid obligation of
a rated issuer or issued in conformity with any applicable law. Moody's employs
the following three designations, all judged to be investment grade, to indicate
the relative repayment capacity of rated issuers:
PRIME-1: Superior capacity for repayment.
PRIME-2: Strong capacity for repayment .
PRIME-3: Acceptable capacity for repayment .
None of the Funds will purchase Prime-3 commercial paper.
BEST'S RATING SYSTEM FOR INSURANCE COMPANIES
The objective of Best's Rating System is to evaluate the various
factors affecting the overall performance of an insurance company in order to
provide an opinion as to the company's relative financial strength and ability
to meet its contractual obligations. The procedure includes both a quantitative
and qualitative review of the company.
The quantitative evaluation is based on an analysis of the company's
financial condition and operating performance utilizing a series of financial
tests. These tests measure a company's performance in the three critical areas
of Profitability, Leverage and Liquidity in comparison to the norms established
by the A.M. Best Company. These norms are based on an evaluation of the actual
performance of the insurance industry.
Best's review also includes a qualitative evaluation of the adequacy
and soundness of a company's reinsurance, the adequacy of its reserves and the
experience of its management. In addition, various other factors of importance
are considered such as the composition of the company's book of business and the
quality and diversification of its assets.
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<PAGE>
Upon completion of analysis, Best's Ratings are assigned to those
companies that meet the qualifications for rating. The Best's Rating
classifications are A+ (Superior); A & A- (Excellent); B+ (Very Good); B & B-
(Good); C+ (Fairly Good); and C & C- (Fair). Those not qualifying for a current
Best's Rating are classified in the "Not Assigned" category that has ten
classifications which identify why a company is not eligible for a Best's
Rating. Care should be exercised in the use of Best's Ratings without further
reference to additional Best's publications.
FINANCIAL STATEMENTS
The audited financial statements as of September 30 1997, and November
30, 1997, and the unaudited financial statements as of March 31, 1998, for the
FAIF Funds, as included in the annual and semiannual reports to shareholders of
such funds, are incorporated by reference into this Statement of Additional
Information. In addition, the audited financial statements as of September 30,
1997, and the unaudited financial statements as of March 31, 1998, for Piper
Small Company Growth Fund, as included in the annual and semiannual reports to
shareholders of the Piper Small Company Growth Fund, are incorporated by
reference into this Statement of Additional Information. On July 31, 1998, Piper
Small Company Growth Fund and First American Small Cap Growth Fund consummated a
reorganization transaction pursuant to which shares of Piper Small Company
Growth Fund were exchanged for shares of Small Cap Growth Fund. Piper Small
Company Growth Fund is the financial reporting survivor.
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<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. (Incorporated by reference
to Exhibit 5(d) to Post-Effective Amendment No. 39.)
(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. (Incorporated by reference to Exhibit 5(f) to
Post-Effective Amendment No. 39.)
(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. (Incorporated by reference to Exhibit 5(g) to
Post-Effective Amendment No. 39.)
(5)(h) Sub-Advisory Agreement dated July 24, 1998, between
U.S. Bank National Association and Federated
Investment Counseling, with respect to Strategic
Income
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Fund. (Incorporated by reference to Exhibit 5(h) to
Post-Effective Amendment No. 39.)
(5)(i) Amendment No. 1 to Sub-Advisory Agreement.
(Incorporated by reference to Exhibit 5(d) to
Post-Effective Amendment No. 34.)
(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. (Incorporated by reference to
Exhibit 8(c) to Post-Effective Amendment No. 39.)
(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. (Incorporated by reference to
Exhibit 9(d) to Post-Effective Amendment No. 39.)
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(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.)
(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. (Incorporated by reference to Exhibit 10(d) to
Post-Effective Amendment No. 39.)
* (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) Financial Data Schedule meeting the requirements of
Rule 483.
(18) Multiple Class Plan Pursuant to Rule 18f-3.
(Incorporated by reference to Exhibit (18) to
Post-Effective Amendment No. 23.)
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(19)(a) Powers of Attorney of Directors Dayton, Kedrowski and
Stringer. (Incorporated by reference to Exhibit (19)
to Post-Effective Amendment No. 26.)
(19)(b) Power of Attorney of Director Hunter. (Incorporated
by reference to Exhibit 19(b) to Post-Effective
Amendment No. 27)
(19)(c) Consent to being named and power of attorney of
director nominee Spies. (Incorporated by reference to
Exhibit 19(c) to Post-Effective Amendment No. 27.)
(19)(d) Power of Attorney of Director Gibson. (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
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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
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)
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of the Investment Company Act of 1940, as now enacted or hereafter amended, and
any rules, regulations, or releases promulgated thereunder.
Section 302A.521 of the Minnesota Statutes, as now enacted, provides
that a corporation shall indemnify a person made or threatened to be made a
party to a proceeding by reason of the former or present official capacity of
the person against judgments, penalties, fines, settlements and reasonable
expenses, including attorneys' fees and disbursements, incurred by the person in
connection with the proceeding if, with respect to the acts or omissions of the
person complained of in the proceeding, the person has not been indemnified by
another organization for the same judgments, penalties, fines, settlements, and
reasonable expenses incurred by the person in connection with the proceeding
with respect to the same acts or omissions; acted in good faith, received no
improper personal benefit, and the Minnesota Statutes dealing with directors'
conflicts of interest, if applicable, have been satisfied; in the case of a
criminal proceeding, had no reasonable cause to believe that the conduct was
unlawful; and reasonably believed that the conduct was in the best interests of
the corporation or, in certain circumstances, reasonably believed that the
conduct was not opposed to the best interests of the corporation.
The Registrant undertakes that no indemnification or advance will be
made unless it is consistent with Sections 17(h) or 17(i) of the Investment
Company Act of 1940, as now enacted or hereafter amended, and Securities and
Exchange Commission rules, regulations, and releases (including, without
limitation, Investment Company Act of 1940 Release No. 11330, September 2,
1980).
Insofar as the indemnification for liability arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in such 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
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and Executive Vice President Credit Officer of U.S. Bancorp *
Lee R. Mitau Director, General Counsel, Executive Vice President, Secretary,
Executive Vice President and Secretary and General Counsel of U.S. Bancorp; prior to October 1995
partner in Dorsey & Whitney LLP *
Susan E. Lester Director, Executive Vice President and Executive Vice President and Chief
Chief Financial Officer Financial Officer of U.S. Bancorp; prior to December 1995
executive vice president and chief financial officer of
Shawmut National Corporation *
Robert D. Sznewajs Director and Vice Chairman Vice Chairman of U.S. Bancorp *
Gary T. Duim Director and Vice Chairman Vice Chairman of U.S. Bancorp *
- ---------------
</TABLE>
* Address: 601 Second Avenue South, Minneapolis, Minnesota 55402.
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
- ---- -------------------------------------- -------------------------------------
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<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 --
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>
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ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books, and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are maintained by SEI Investments Distribution Co., Oaks,
Pennsylvania 19456.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
Registrant undertakes to call a meeting of shareholders for the purpose
of voting upon the question of removal of a Director(s) when requested in
writing to do so by the holders of at least 10% of Registrant's outstanding
shares and in connection with such meetings to comply with the provisions of
Section 16(c) of the Investment Company Act of 1940 relating to Shareholder
communications.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all of the requirements for effectiveness of this Registration Statement
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 14th day of August, 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
**August 14, 1998
EXHIBIT 11(a)
[LOGO] PEAT MARWICK LLP
4200 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS' CONSENT
The Boards of Directors
First American Investment Funds, Inc.:
We consent to the use of our report dated November 7, 1997, relating to the
financial statements and financial highlights of Balanced Fund, Real Estate
Securities Fund, Equity Income Fund, Equity Index Fund, Large Cap Value Fund
(formerly Stock Fund), Large Cap Growth Fund (formerly Diversified Growth Fund),
Mid Cap Value Fund (formerly Special Equity Fund), Regional Equity Fund, Micro
Cap Value Fund, International Fund, Health Sciences Fund and Technology Fund
(funds within First American Investment Funds, Inc.), our report dated January
9, 1998, relating to the financial statements and financial highlights of Small
Cap Value Fund and International Index Fund (funds within First American
Investment Funds, Inc.), and our report dated November 7, 1997, relating to the
financial statements and financial highlights of Small Cap Growth Fund (formerly
Small Company Growth Fund - a series of Piper Funds Inc.), (as filed with Post-
Effective Amendment No. 42 for Piper Funds, Inc.) incorporated by reference
herein and to the references to our Firm under the headings "Financial
Highlights" in Part A and "Custodian; Transfer Agent; Counsel; Accountants" in
Part B of the Registration Statement.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
August 11, 1998
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<PER-SHARE-NAV-BEGIN> 10.05
<PER-SHARE-NII> .22
<PER-SHARE-GAIN-APPREC> .03
<PER-SHARE-DIVIDEND> (.22)
<PER-SHARE-DISTRIBUTIONS> (.02)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.06
<EXPENSE-RATIO> .69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
