1933 Act Registration No. 33-16905
1940 Act Registration No. 811-5309
As filed with the Securities and Exchange Commission on July 24, 1998
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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. 38 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 [X]
Amendment No. 38
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. 38
CROSS REFERENCE SHEET FOR ITEMS REQUIRED BY FORM N-1A
ITEM NUMBER OF FORM N-1A
PART A CAPTION IN PROSPECTUS
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RETAIL CLASSES PROSPECTUS
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1 Cover Page
2 Fees and Expenses
3 Not Applicable
4 The Fund; Investment Objectives and Policies; Special Investment Methods
5 Management; Distributor
5A Not Applicable
6 Fund Shares; Investing in the Funds; Federal Income Taxes
7 Distributor; Investing in the Fund; Determining the Price of Shares
8 Redeeming Shares
9 Not Applicable
INSTITUTIONAL CLASS PROSPECTUS
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1 Cover Page
2 Fees and Expenses
3 Not Applicable
4 The Fund; Investment Objectives and Policies; Special Investment Methods
5A Not Applicable
5 Management; Distributor
6 Fund Shares; Purchases and Redemptions of Shares; Federal Income Taxes
7 Distributor; Purchases and Redemptions of Shares
8 Purchases and Redemptions of Shares
9 Not Applicable
CAPTION IN COMBINED STATEMENT
PART B OF ADDITIONAL INFORMATION
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10 Cover Page
11 Table of Contents
12 General Information
13 Additional Information Concerning Fund Investments; Investment
Restrictions
14 Directors and Executive Officers
15 Capital Stock
16 Investment Advisory and Other Services
17 Portfolio Transactions and Allocation of Brokerage
18 Not Applicable
19 Net Asset Value and Public Offering Price
20 Taxation
21 Investment Advisory and Other Services
22 Fund Performance
23 Not Applicable
<PAGE>
JULY 24, 1998
CLASS A AND CLASS B SHARES
STRATEGIC INCOME FUND
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(R)
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TABLE OF CONTENTS
Summary 2
.........................................
Fees and Expenses 4
.........................................
The Fund 7
.........................................
Investment Objective and Policies 7
.........................................
Management 10
.........................................
Distributor 13
.........................................
Investing in the Fund 14
.........................................
Redeeming Shares 21
.........................................
Determining the Price of Shares 23
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Federal Income Taxes 25
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Fund Shares 25
.........................................
Calculation of Performance Data 26
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Special Investment Methods 27
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Appendix 37
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Information Concerning Compensation
Paid to U.S. Bank National Association
and Other Affiliates 38
.........................................
<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 Strategic Income Fund (the "Fund").
The Fund may invest primarily in lower-rated bonds, commonly referred to as
"junk bonds." Investments of this type are subject to greater loss of
principal and interest than investments in higher rated securities.
Purchasers should carefully assess the risks associated with an investment
in this Fund.
SHARES OF THE FUND 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 FUND
INVOLVES INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL, DUE TO
FLUCTUATIONS IN THE FUND'S NET ASSET VALUE.
This Prospectus concisely sets forth information about the Fund that a
prospective investor should know before investing. It should be read and
retained for future reference.
A Statement of Additional Information dated July 24, 1998 for the Fund 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 Fund, call (800) 637-2548 or
write SEI Investments Distribution Co., Oaks, Pennsylvania 19456. The SEC
maintains a World Wide Web site that contains reports and information
regarding issuers that file electronically with the SEC. The address of such
site is "http://www.sec.gov."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is July 24, 1998.
<PAGE>
SUMMARY
First American Investment Funds, Inc. ("FAIF") is an open-end investment
company which offers shares in several different mutual funds. This
Prospectus provides information with respect to the Class A and Class B
Shares of the following Fund:
STRATEGIC INCOME FUND has an objective of providing a high level of current
income. The Fund invests at least 65% of its total assets in a combination
of (i) U.S. government securities and domestic investment grade corporate
debt obligations; (ii) high yield (i.e. non-investment grade) domestic and
U.S. dollar denominated foreign corporate debt obligations; and (iii)
investment grade and high yield foreign government and foreign corporate
debt obligations. Under normal market conditions, the Fund's assets will be
invested in each of these three sectors, with no more than 50% of its total
assets invested in any one sector.
INVESTMENT ADVISOR AND SUB-ADVISORS. U.S. Bank National Association (the
"Advisor" or "U.S. Bank") serves as investment advisor to the Fund through
its First American Asset Management group. Federated Investment Counseling
and Federated Global Research Corp. (the "Sub-Advisors"and individually a
"Sub-Advisor") serve as the sub-advisors to the Fund. See "Management."
DISTRIBUTOR; ADMINISTRATOR. SEI Investments Distribution Co. (the
"Distributor") serves as the distributor of the Fund's shares. SEI
Investments Management Corporation (the "Administrator") serves as the
administrator of the Fund. See "Management" and "Distributor."
OFFERING PRICES. Class A Shares of the Fund 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
equal to 1.00% of the first $3 million of shares purchased, 0.75% of shares
purchased in excess of $3 million up to $5 million, and 0.50% of shares
purchased in excess of $5 million. If such a commission is paid, redemptions
of Class A Shares purchased at net asset value within 12 months following
such purchases will be subject to a contingent deferred sales charge of
1.00%. Class A Shares of the Fund otherwise are redeemed at net asset value
without any additional charge. Class A Shares of the 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 Fund -- Alternative
Sales Charge Options."
Class B Shares of the Fund are sold at net asset value without an initial
sales charge. Class B Shares of the 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 Fund
-- Alternative Sales Charge Options."
MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS. The minimum initial investment
is $1,000 ($250 for IRAs). Subsequent investments must be $100 or more.
Regular investment in the Fund is simplified through the Systematic
Investment Program through which monthly purchases of $100 or more are
possible. See "Investing in the Fund -- Minimum Investment Required" and
"-- Systematic Investment Program."
EXCHANGES. Shares of the 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 Fund -- Exchange Privilege."
REDEMPTIONS. Shares of the Fund may be redeemed at any time at their net
asset value next determined after receipt of a redemption request by the
Fund's transfer agent or an authorized
<PAGE>
financial institution, less any applicable contingent deferred sales
charge. The Fund may, upon 60 days written notice, redeem an account if
the account's net asset value falls below $500. See "Investing in the
Fund" and "Redeeming Shares."
RISKS TO CONSIDER. The Fund is subject to (i) interest rate risk (the risk
that increases in market interest rates will cause declines in the value of
debt securities held by the Fund); (ii) credit risk (the risk that the
issuers of debt securities held by the Fund default in making required
payments); (iii) call or prepayment risk (the risk that a borrower may
exercise the right to prepay a debt obligation before its stated maturity,
requiring the Fund to reinvest the prepayment at a lower interest rate);
(iv) the risks associated with investing in foreign securities; and (v) the
risks associated with investing in securities issued by issuers in emerging
market countries. The Fund may invest a significant portion of its assets in
high yield securities, which generally have more volatile prices and carry
more risk to principal than investment grade securities. In addition, the
Fund, which may invest in mortgage-backed securities, is subject to certain
additional risks associated with investing in securities representing
interests in, or secured by, pools of residential mortgage loans. The Fund
engages in a number of investment techniques which may involve additional
risks. See "Investment Objectives and Policies -- Risks to Consider" and
"Special Investment Methods."
SHAREHOLDER INQUIRIES. Any questions or communications regarding the Fund or
a shareholder account should be directed to the Distributor by calling (800)
637-2548, or to the financial institution which holds shares on an
investor's behalf.
<PAGE>
FEES AND EXPENSES
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CLASS A SHARE FEES AND EXPENSES
STRATEGIC
INCOME
FUND
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SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases
(as a percentage of offering price)(1) 4.50%
Maximum sales load imposed on reinvested dividends None
Deferred sales load None
Redemption fees None
Exchange fees None
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ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees 0.70%
Rule 12b-1 fees(2) 0.25%
Other expenses(3) 0.20%
Total fund operating expenses 1.15%
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EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (i)
the maximum applicable sales charge for the fund; (ii) a 5% annual return;
and (iii) redemption at the end of each
time period:
1 year $56
3 years $80
(1) THE RULES OF THE SECURITIES AND EXCHANGE COMMISSION REQUIRE THAT THE MAXIMUM
SALES CHARGE BE REFLECTED IN THE ABOVE TABLE. HOWEVER, CERTAIN INVESTORS MAY
QUALIFY FOR REDUCED SALES CHARGES. PURCHASES OF $1 MILLION OR MORE OF CLASS
A SHARES ARE NOT SUBJECT TO AN INITIAL SALES CHARGE, BUT THE DISTRIBUTOR AND
CERTAIN SECURITIES FIRMS, FINANCIAL INSTITUTIONS (INCLUDING, WITHOUT
LIMITATION, BANKS) AND OTHER INDUSTRY PROFESSIONALS MAY RECEIVE A COMMISSION
OF UP TO 1.00% ON SUCH SALES. IN ADDITION, A CONTINGENT DEFERRED SALES
CHARGE OF UP TO 1.00% MAY BE IMPOSED ON SUCH PURCHASES IN THE EVENT OF
REDEMPTION WITHIN 24 MONTHS FOLLOWING THE DATE OF THE APPLICABLE PURCHASE.
SEE "INVESTING IN THE FUND -- ALTERNATIVE SALES CHARGE OPTIONS."
(2) OF THIS AMOUNT, 0.25% IS DESIGNATED AS A SHAREHOLDER SERVICING FEE AND NONE
AS A DISTRIBUTION FEE.
(3) OTHER EXPENSES ARE BASED ON ESTIMATED AMOUNTS FOR THE CURRENT FISCAL YEAR.
<PAGE>
FEES AND EXPENSES
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CLASS B SHARE FEES AND EXPENSES
STRATEGIC
INCOME
FUND
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SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases (as a
percentage of offering price) None
Maximum sales load imposed on reinvested dividends None
Deferred sales load None
Redemption fees 5.00%
Exchange fees None
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ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees 0.70%
Rule 12b-1 fees(1) 1.00%
Other expenses(2) 0.20%
Total fund operating expenses 1.90%
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EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (i)
the maximum applicable sales charge for all funds; (ii) a 5% annual return;
and (iii) redemption at the end of each time period:
1 year $69
3 years $100
ASSUMING NO REDEMPTION
You would pay the following expenses on the same investment, assuming no
redemption:
1 year $19
3 years $60
(1) OF THIS AMOUNT, 0.25% IS DESIGNATED AS A SHAREHOLDER SERVICING FEE AND 0.75%
AS A DISTRIBUTION FEE.
(2) OTHER EXPENSES ARE BASED ON ESTIMATED AMOUNTS FOR THE CURRENT FISCAL YEAR.
<PAGE>
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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 the Fund
may bear directly or indirectly. THE EXAMPLES CONTAINED IN THE TABLES SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
<PAGE>
THE FUND
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 to the Class A and Class B Shares of Strategic
Income Fund. Information regarding the Class Y Shares of this Fund and
regarding the Class A, Class B and Class Y Shares of the other FAIF Funds is
contained in separate prospectuses that may be obtained from FAIF's
Distributor, SEI Investments Distribution Co., Oaks, Pennsylvania 19456, or
by calling (800) 637-2548. The Board of Directors of FAIF may authorize
additional series or classes of common stock in the future.
INVESTMENT OBJECTIVE AND POLICIES
This section describes the investment objective and policies of the Fund.
There is no assurance that the Fund's objective will be achieved. The Fund's
investment objective is not fundamental and therefore may be changed without
a vote of shareholders. Such a change could result in the Fund having an
investment objective different from that which shareholders considered
appropriate at the time of their investment in the Fund. Shareholders will
receive written notification at least 30 days prior to any change in the
Fund's investment objective. The Fund is a diversified investment company,
as defined in the Investment Company Act of 1940 (the "1940 Act").
If a percentage limitation on investments by the 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. The
Fund, which in certain instances 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.
Descriptions of the rating categories of Standard & Poor's Rating Services,
a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's") and
Moody's Investors Service, Inc. ("Moody's") are contained in the Statement
of Additional Information.
This section also contains information concerning certain investment risks
borne by Fund shareholders under the heading "-- Risks to Consider." Further
information concerning the securities in which the Fund may invest and
related matters is set forth under "Special Investment Methods."
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STRATEGIC INCOME FUND
OBJECTIVE. Strategic Income Fund has an investment objective of providing
a high level of current income.
INVESTMENT POLICIES. Under normal market conditions, Strategic Income Fund
invests at least 65% of its total assets in a combination of (i) U.S.
government securities and investment grade domestic corporate debt
obligations; (ii) high yield (i.e. non-investment grade) domestic and U.S.
dollar denominated foreign corporate debt obligations; and (iii) investment
grade and high yield foreign government and foreign corporate debt
obligations. Under normal market conditions, the Fund's assets will be
invested in each of these three sectors, with no more than 50% of its total
assets invested in any one sector. However, the Fund may from time to time
invest up to 100% of its total assets in any one sector, if, in the judgment
<PAGE>
of the Advisor, the Fund has the opportunity to seek its investment
objective without undue risk to principal.
The Fund's permitted investments include direct obligations of the U.S.
Treasury; notes, bonds and discount notes of United States government
agencies and instrumentalities; debt obligations issued by foreign
governments; and domestic or foreign issues of corporate debt obligations
having floating or fixed rates of interest (including participation
interests). Such corporate debt obligations may include obligations rated BB
or lower by Standard & Poor's or Ba or lower by Moody's (such as obligations
that are currently in default), given an equivalent rating by a nationally
recognized statistical rating organization (commonly referred to as "junk
bonds") or unrated but deemed of comparable quality by the Sub-Advisor.
There are no minimum rating requirements for these investments by the Fund.
The Fund may also invest in mortgage-backed securities (government and
non-government), asset-backed securities, and zero coupon, pay-in-kind and
delayed interest securities issued by corporations. In addition, the Fund
may invest in preferred stock and in equity securities, including common
stock, convertible securities and warrants issued by corporations in any
industry which may be denominated in U.S. dollars or foreign currencies. The
Fund's investments may also include securities representing underlying
foreign securities such as American Depositary Receipts and European
Depositary Receipts. No more than 25% of the Fund's total assets, at the
time of purchase, may be invested in government securities of any one
foreign country.
The securities that the Fund may purchase may be issued by government
agencies or instrumentalities or corporate issuers located in emerging
market countries. For a description of emerging market countries and the
risks associated with investing in emerging market countries, see "-- Risks
to Consider" and the related heading under "Special Investment Methods."
For temporary defensive purposes, the Fund may without limitation hold cash
or invest in cash items of the kinds described in "Special Investment
Methods -- Bank Instruments."
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, foreign government debt obligations, stock indices and interest
rate indices; (iii) write covered call options on equity securities covering
up to 25% of its net assets; (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 owned by
the Fund; (viii) write covered call options on foreign currencies owned by
the Fund; (ix) engage in mortgage dollar roll transactions; (x) invest up to
10% of its total assets in the aggregate in interest only, principal only or
inverse floating rate mortgage-backed securities; and (xi) enter into
contracts for the future purchase or delivery of securities, foreign
currencies and indices, purchase or sell options on any such futures
contracts and engage in related closing purchase transactions. For
information about these investment methods, restrictions on their use and
certain associated risks, see the related headings under "Special Investment
Methods."
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RISKS TO CONSIDER
An investment in the Fund involves certain risks. These include the
following:
INTEREST RATE RISK. Interest rate risk is the risk that the value of a
fixed-rate debt security will decline due to changes in market interest
rates. Because the Fund invests in fixed-rate debt securities, it is subject
to interest rate risk. In general, when interest rates rise, the value of a
fixed-rate debt security declines. Conversely, when interest rates decline,
the value of a fixed-rate debt security generally increases. Thus,
shareholders in the Fund bear the risk that increases in market interest
rates will cause the value of the Fund's portfolio investments to decline.
<PAGE>
In general, the value of fixed-rate debt securities with longer maturities
is more sensitive to changes in market interest rates than the value of such
securities with shorter maturities. As described below under "Special
Investment Methods -- Mortgage-Backed Securities," it is more difficult to
generalize about the effect of changes in market interest rates on the
values of mortgage-backed securities.
Although the Advisor and Sub-Advisors may engage in transactions intended to
hedge the value of the Fund's portfolio against changes in market interest
rates, there is no assurance that such hedging transactions will be
undertaken or will fulfill their purpose. See "Special Investment Methods --
Options Transactions."
CREDIT RISK. Credit risk is the risk that the issuer of a debt security will
fail to make payments on the security when due. Because the Fund invests in
debt securities, it is subject to credit risk.
Securities issued or guaranteed by the United States Government generally
are viewed as carrying minimal credit risk. Securities issued by
governmental entities but not backed by the full faith and credit of the
United States, securities issued by foreign governments and securities
issued by private entities, are subject to higher levels of credit risk.
RISKS OF LOWER RATED DEBT SECURITIES. From time to time, a significant
portion of the Fund's portfolio may consist primarily of lower-rated (i.e.,
rated Ba or lower by Moody's or BB or lower by Standard & Poor's) corporate
debt obligations, which are commonly referred to as "junk bonds."
Lower-rated securities will usually offer higher yields than higher-rated
securities. However, there is more risk associated with these investments.
(For example, securities rated in the lowest category have been unable to
satisfy their obligations under the bond indenture.) These lower-rated bonds
may be more susceptible to real or perceived adverse economic conditions
than investment grade bonds. These lower-rated bonds are regarded as
predominantly speculative with regard to each issuer's continuing ability to
make principal and interest payments. In addition, the secondary trading
market for lower-rated bonds may be less liquid than the market for
investment grade bonds. As a result of these factors, lower-rated securities
tend to have more price volatility and carry more risk to principal than
higher-rated securities. The Advisor and Sub-Advisors will endeavor to limit
these risks through diversifying the portfolio and through careful credit
analysis of individual issuers. Purchasers should carefully assess the risks
associated with an investment in the Fund.
CALL RISK. Many corporate bonds may be redeemed at the option of the issuer
("called") at a specified price prior to their stated maturity date. In
general, it is advantageous for a corporate issuer to call its bonds if they
can be refinanced through the issuance of new bonds which bear a lower
interest rate than that of the called bonds. Call risk is the risk that
corporate bonds will be called during a period of declining market interest
rates so that such refinancings may take place.
If a bond held by the Fund is called during a period of declining interest
rates, the Fund probably will have to reinvest the proceeds received by it
at a lower interest rate than that borne by the called bond, thus resulting
in a decrease in the Fund's income. To the extent that the Fund invests in
callable corporate bonds, Fund shareholders bear the risk that reductions in
income will result from the call of bonds. Most United States Government
securities are not callable before their stated maturity, although U.S.
agency securities often are.
RISKS OF FOREIGN SECURITIES. The Fund is subject to special risks associated
with investing in foreign securities and to a decline in net asset value
resulting from changes in exchange rates between the United States dollar
and foreign currencies. The Fund is also subject to risks associated with
investing in securities issued by issuers in emerging market countries.
These risks are discussed under "Special Investment Methods -- Foreign
Securities" elsewhere herein. Because of the special risks associated with
foreign investing, the Fund may be subject to greater
<PAGE>
volatility than most mutual funds which invest primarily in domestic
securities.
YEAR 2000. Like other mutual funds, financial and business organizations,
the Fund could be adversely affected if the computer systems used by the
Advisor, the Sub-Advisors, 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
Fund has 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
Fund's 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 Fund.
OTHER. Investors also should review "Special Investment Methods" for
information concerning risks associated with certain investment techniques
which may be utilized by the Fund.
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 Fund's 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.
The Fund has agreed to pay the Advisor monthly fees calculated on an annual
basis equal to 0.70% of its average daily net assets out of which the
Advisor pays the Sub-Advisors' fees. The Advisor may, at its option, waive
any or all of its fees, or reimburse expenses, with respect to the Fund from
time to time. Any such waiver or reimbursement is voluntary and may be
discontinued at any time except as otherwise discussed under "Fees and
Expenses -- Class A Share Fees and Expenses." The Advisor also may absorb or
reimburse expenses of the Fund from time to time, in its discretion, while
retaining the ability to be reimbursed by the Fund for such amounts prior to
the end of the fiscal year. This practice would have the effect of lowering
a Fund's overall expense ratio and of increasing yield to investors, or the
converse, at the time such amounts are absorbed or reimbursed, as the case
may be.
The Glass-Steagall Act generally prohibits banks from engaging in the
business of underwriting, selling or distributing securities and from being
affiliated with companies principally engaged in those activities. In
addition, administrative and judicial interpretations of the Glass-Steagall
Act prohibit bank holding companies and their bank and nonbank subsidiaries
from organizing, sponsoring or controlling registered open-end investment
companies that are continuously engaged in distributing their shares. Bank
holding companies and their bank and nonbank subsidiaries may serve,
however, as investment advisors to registered investment companies, subject
to a number of terms and conditions.
Although the scope of the prohibitions and limitations imposed by the
Glass-Steagall Act has not been fully defined by the courts or the
appropriate regulatory agencies, FAIF has received an opinion from its
counsel that the Advisor is not
<PAGE>
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.
----------------------------------------------------------------------------
SUB-ADVISORS
Federated Investment Counseling, 1001 Liberty Avenue, Pittsburgh,
Pennsylvania 15222-3779 and Federated Global Research Corp., 175 Water
Street, New York, New York 10038-4965, both subsidiaries of Federated
Investors, Inc. serve as sub-advisors to the Fund under an agreement with
the Advisor (the "Sub-Advisory Agreement"). The Sub-Advisors are responsible
for the investment and reinvestment of a portion of the Fund's assets and
the placement of brokerage transactions in connection therewith. Federated
Investment Counseling manages the Fund's investments in high yield (i.e.,
non-investment grade) domestic debt obligations and U.S. dollar denominated
foreign corporate debt obligations. Federated Global Research Corp. manages
the Fund's investments in investment grade and high yield foreign government
and foreign corporate debt obligations and the Advisor manages the Fund's
investments in U.S. government securities and investment grade domestic
corporate debt obligations. For their services under the Sub-Advisory
Agreement, each Sub-Advisor is paid a monthly fee by the Advisor calculated
on an annual basis equal to 0.20% of the first $25 million of the Fund's
average daily net assets, 0.165% of the Fund's average daily net assets in
excess of $25 million up to $50 million, 0.13% of the Fund's average daily
net assets in excess of $50 million up to $100 million and 0.105% of the
Fund's average daily net assets in excess of $100 million.
Federated Investment Counseling, a Delaware business trust, and Federated
Global Research Corp., a Delaware corporation, are each registered
investment advisors under the Investment Advisers Act. The Sub-Advisors and
other subsidiaries of Federated Investors serve as investment advisors to a
number of investment companies and private accounts.
----------------------------------------------------------------------------
PORTFOLIO MANAGERS
The Fund's investments in high yield (i.e., non-investment grade) domestic
debt obligations and U.S. dollar denominated foreign corporate debt
obligations are managed by Mark E. Durbiano and Constantine Kartsonas. The
Fund's investments in investment grade and high yield foreign government
and foreign corporate debt obligations are managed by a committee
comprised of Robert M. Kowit, Michael W. Casey, Drew J. Collins and Henry
A. Frantzen. The Fund's investments in U.S. government and investment
grade domestic corporate debt obligations are managed by a committee
comprised of Thomas McGlinch and Wan-Chong Kung. The backgrounds of the
portfolio managers are set forth below.
MARK E. DURBIANO is a portfolio manager of the Sub-Advisor who co-manages
the Fund's investments in high yield (i.e., non-investment grade) domestic
debt obligations and U.S. dollar denominated foreign corporate debt
obligations. Mr. Durbiano joined Federated Investors, the predecessor to
the parent company of the Sub-Advisors, in 1982 and has been a Senior Vice
President of Federated Investment Counseling, a subsidiary of Federated
Investors, Inc., since March 1997. From 1988 through 1995, Mr. Durbiano
was a Vice President of Federated Advisors, a subsidiary of Federated
Investors, Inc. Mr. Durbiano is a Chartered Financial Analyst and received
his master's degree in business adminis-
<PAGE>
tration with a concentration in Finance from the University of Pittsburgh.
CONSTANTINE KARTSONAS is a portfolio manager of the Sub-Advisor who
co-manages the Fund's investments in high yield (i.e., non-investment grade)
domestic debt obligations and U.S. dollar denominated foreign corporate debt
obligations. Mr. Kartsonas joined Federated Investors in 1994 as an
investment analyst and has been an Assistant Vice President of Federated
Investment Counseling since March 1997. From 1990 to 1993, Mr. Kartsonas
served as an operations analyst at Lehman Brothers. Mr. Kartsonas received
his master's degree in business administration with a concentration in
economics from the University of Pittsburgh.
ROBERT M. KOWIT is a member of the committee which manages the Fund's
investments in investment grade and high yield foreign government and
foreign corporate debt obligations. Mr. Kowit joined Federated Investors
in 1995 as a Vice President. Mr. Kowit served as a Managing Partner of
Copernicus Global Asset Management from January 1995 through October 1995.
From 1990 to 1994, he served as Senior Vice President of International
Fixed Income and Foreign Exchange for John Hancock Advisers. Mr. Kowit
received his master's degree in business administration from Iona College
with a concentration in finance.
MICHEAL W. CASEY, PH.D. is a member of the committee which manages the
Fund's investments in investment grade and high yield foreign government and
foreign corporate debt obligations. Dr. Casey joined Federated Investors in
1996 as an Assistant Vice President. From 1990 to 1996, Dr. Casey served as
an International Economist and Portfolio Strategist for Maria Fiorini
Ramirez Inc. Dr. Casey earned a doctorate degree concentrating in economics
from The New School for Social Research and a master's of science from the
London School of Economics.
DREW J. COLLINS is a member of the committee which manages the Fund's
investments in investment grade and high yield foreign government and
foreign corporate debt obligations. Mr. Collins joined Federated Investors
in 1995 as a Senior Vice President. Mr. Collins served as Vice
President/Portfolio Manager of international equity portfolios at Arnhold
and Bleichroeder, Inc. from 1994 to 1995. He served as an Assistant Vice
President/Portfolio Manager for international equities at the College
Retirement Equities Fund from 1986 to 1994. Mr. Collins is a Chartered
Financial Analyst and received his M.B.A. in finance from the Wharton
School of The University of Pennsylvania.
HENRY A. FRANTZEN is a member of the committee which manages the Fund's
investments in investment grade and high yield foreign government and
foreign corporate debt obligations. Mr. Frantzen joined Federated
Investors in 1995 as an Executive Vice President. Mr. Frantzen served as
Chief Investment Officer of international equities at Brown Brothers
Harriman & Co. from 1992 until 1995.
THOMAS MCGLINCH is a member of the committee which manages the Fund's
investments in U.S. government securities and investment grade domestic
corporate debt obligations. Mr. McGlinch has over 16 years of investment
industry experience. Prior to joining the Advisor in 1998, Mr. McGlinch
served as a portfolio co-manager for Piper Capital Management Incorporated
overseeing the management of several Piper Funds. Mr. McGlinch received
his bachelor's degree in accounting from St. John's University and
master's degree in business administration from the University of St.
Thomas. Mr. McGlinch is a Chartered Financial Analyst.
WAN-CHONG KUNG is a member of the committee which manages the Fund's
investments in U.S. government securities and investment grade domestic
corporate debt obligations. Ms. Kung has over five years of investment
industry experience. Prior to joining the Advisor in 1998, Ms. Kung served
as a vice president and a portfolio co-manager for Piper Capital
Management Incorporated, overseeing the management of several Piper Funds.
Ms. Kung received her
<PAGE>
bachelor's degree in economics from the University of the Philippines and
received her master's degree in business administration from the
University of Minnesota. Ms. Kung is a Chartered Financial Analyst.
----------------------------------------------------------------------------
CUSTODIAN
The Custodian of the Fund's 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 Fund, the Custodian is paid monthly
fees calculated on an annual basis equal to 0.03% of the Fund's average
daily net assets. In addition, the Custodian is reimbursed for its
out-of-pocket expenses incurred while providing its services to the Fund.
----------------------------------------------------------------------------
ADMINISTRATOR
The administrator for the Fund is SEI Investments Management Corporation,
Oaks, Pennsylvania 19456. The Administrator, a wholly-owned subsidiary of
SEI Investments Company, provides the Fund with certain administrative
services necessary to operate the Fund. 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
the 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 the Fund. 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
Fund. For these services, the Administrator compensates the
sub-administrator at an annual rate of up to 0.05% of the Fund's average
daily net assets.
----------------------------------------------------------------------------
TRANSFER AGENT
DST Systems, Inc. (the "Transfer Agent") serves as the transfer agent and
dividend disbursing agent for the Fund. 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 Class A and Class B Shares of the Fund held through accounts
at U.S. Bank and its affiliates. The Fund pays 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 Fund 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 Fund are distributed through the Distributor and securities
firms, financial institutions (including, without limitation, banks) and
other industry professionals (the "Participating Institutions") which enter
into sales agreements with the Distributor to perform share distribution or
shareholder support services.
FAIF has adopted a Plan of Distribution for the Class A Shares pursuant to
Rule 12b-1 under the 1940 Act (the "Class A Distribution Plan"), pursuant to
which the Distributor agrees to provide, or enter into written agreements
with service providers to provide, one or more specified shareholder
services to beneficial owners of shares of the Fund. 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
<PAGE>
Institutions. See "Investing in the Fund -- Alternative Sales Charge
Options." In consideration of the services and facilities to be provided by
the Distributor or any service provider, the Fund also pays the Distributor
a shareholder servicing fee at an annual rate of 0.25% of the Fund's Class A
Shares' average daily net asset value, which fee is computed and paid
monthly. However, for a one year period following the date of purchase, the
Fund pays no shareholder servicing fee 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 is intended to compensate the Distributor for
ongoing servicing and/or maintenance of shareholder accounts and may be used
by the Distributor to provide compensation to institutions through which
shareholders hold their shares for ongoing servicing and/or maintenance of
shareholder accounts. The shareholder servicing fee may be used to provide
compensation for shareholder servicing provided by "one-stop" mutual fund
networks through which the Fund is made available. In addition, the
Distributor and the Advisor and their affiliates may provide compensation
for services provided by such networks from their own resources. From time
to time, the Distributor may voluntarily waive its fees with respect to the
Class A Shares of the Fund. 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 Fund may pay to the
Distributor a sales support fee at an annual rate of up to 0.75% of the
Fund's Class B Shares' average daily net asset value, which fee is computed
and paid monthly. The sales support fee may be used by the Distributor to
provide compensation for sales support and distribution activities with
respect to Class B Shares of the Fund. 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 Fund. 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 FUND
----------------------------------------------------------------------------
SHARE PURCHASES
Shares of the Fund are sold at their net asset value, next determined after
an order is received, plus any applicable sales charge, on days on which
both the New York Stock Exchange and federally-chartered banks are open for
business. Shares may be purchased as described below. The Fund reserves 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
<PAGE>
processing, and purchase orders must be transmitted to and received by the
Fund 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 Fund. 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 Fund's agent for the
purpose of accepting purchase orders, and the Fund 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 Fund
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);
* 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 the 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
the New York Stock Exchange is closed or federally-chartered banks are
closed.
----------------------------------------------------------------------------
MINIMUM INVESTMENT REQUIRED
The minimum initial investment for the 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 Fund reserves 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 the 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 the Fund's interest in its
portfolio of investments. The classes have the same rights and are identical
in all respects except that (i) Class B Shares bear the expenses of the
contingent deferred sales charge arrangement and distribution and service
fees resulting from such sales arrangement, while Class A Shares bear only
shareholder servicing fees; (ii) each class has exclusive voting rights with
respect to approvals of any Rule 12b-1 distribution plan related to that
specific class (although Class B shareholders may vote on any distribution
fees imposed on Class A Shares as long as Class B Shares convert into Class
<PAGE>
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 Fund's shares, and other persons entitled to
receive compensation for selling shares, may receive differing compensation
for selling Class A and Class B Shares.
These alternative purchase arrangements permit an investor to choose the
method of purchasing shares that is more beneficial to that investor. The
amount of a purchase, the length of time an investor expects to hold the
shares, and whether the investor wishes to receive dividends in cash or in
additional shares, will all be factors in determining which sales charge
option is best for a particular investor. An investor should consider
whether, over the time he or she expects to maintain the investment, the
accumulated sales charges on Class B Shares prior to conversion would be
less than the initial sales charge on Class A Shares, and to what extent the
differential may be offset by the expected higher yield of Class A Shares.
Class A Shares will normally be more beneficial to an investor if he or she
qualifies for reduced sales charges as described below. Accordingly, orders
for Class B Shares for $250,000 or more ordinarily will be treated as orders
for Class A Shares or declined.
The Directors of FAIF have determined that no conflict of interest currently
exists between the Class A and Class B Shares. On an ongoing basis, the
Directors, pursuant to their fiduciary duties under the 1940 Act and state
laws, will seek to ensure that no such conflict arises.
----------------------------------------------------------------------------
CLASS A SHARES
WHAT CLASS A SHARES COST. Class A Shares of the Fund are offered on a
continuous basis at their next determined offering price, which is net asset
value, plus a sales charge as set forth below:
MAXIMUM
AMOUNT OF
SALES CHARGE SALES CHARGE SALES CHARGE
AS PERCENTAGE AS PERCENTAGE REALLOWED TO
OF OFFERING OF NET ASSET PARTICIPATING
PRICE VALUE INSTITUTIONS
- --------------------------------------------------------------------------------
Less than $50,000 4.50% 4.71% 4.05%
$50,000 but less
than $100,000 4.00% 4.17% 3.60%
$100,000 but less
than $250,000 3.50% 3.63% 3.15%
$250,000 but less
than $500,000 2.75% 2.83% 2.47%
$500,000 but less
than $1,000,000 2.00% 2.04% 1.80%
$1,000,000 and over 0.00% 0.00% 0.00%
- --------------------------------------------------------------------------------
There is no initial sales charge on purchases of Class A Shares of $1
million or more. However, Participating Institutions may receive a
commission equal to 1.00% of the first $3 million of shares purchased, 0.75%
of shares purchased in excess of $3 million up to $5 million, and 0.50% of
shares purchased in excess of $5 million. If such a commission is paid,
redemptions of Class A Shares purchased at net asset value within 12 months
of such purchases will be subject to a contingent deferred sales charge of
1.00%. Class A Shares that are redeemed will not be subject to this
contingent deferred sales charge to the extent that the value of the shares
represents capital appreciation of Fund assets or reinvestment of dividends
or capital gain distributions.
Net asset value is determined as of the close of normal trading on the New
York Stock Exchange (3:00 p.m. Central time) Monday through Friday except on
(i) days on which there are not sufficient changes in the value of the
Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no shares are tendered for redemption and
no orders to purchase shares are received; and (iii) days in which the New
York Stock Exchange or federally-chartered banks are closed including, but
not limited to, the
<PAGE>
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
Fund. Promotional incentives of these kinds will be offered uniformly to all
dealers and predicated upon the amount of shares of the Fund 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. The 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
the 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 the Fund and other FAIF Funds over the next 13 months,
the sales charge may be reduced by signing a letter of intent to that
effect. This letter of intent includes a provision for a sales charge
adjustment depending on the amount actually purchased within the
13-month period and a provision for the Custodian to hold a percentage
equal to the particular FAIF Fund's maximum sales charge rate of the
total amount intended to be purchased in escrow (in shares) for all FAIF
Funds until the purchase is completed.
The amount held in escrow for all FAIF Funds will be applied to the
investor's account at the end of the 13-month period after deduction of
the sales load applicable to the dollar value of shares actually
purchased. In this event, an appropriate number of escrowed shares may
be redeemed in order to realize the difference in the sales charge.
A letter of intent will not obligate the investor to purchase shares,
but if he or she does, each purchase during the period will be at the
sales charge applicable to the total amount intended
<PAGE>
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 the Fund's Class A
Shares by the Advisor, the Sub-Advisors 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. The 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 Fund is 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 to
Participating Institutions 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 a Participating Institution that is an affiliate of the Advisor. A
contingent deferred sales charge of 1.00% will be imposed if such shares are
redeemed within 12 months of purchase. Participating Institutions may
receive a commission on such sales equal to 1.00% of the first $3 million of
shares sold, 0.75% of shares sold in excess of $3 million up to $5 million,
and 0.50% of shares sold in excess of $5 million.
If Class A Shares of the 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
the Fund, there may be tax consequences.
In addition, purchases of Class A Shares of the 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
Fund as investment options may be made at net asset value. To make such a
purchase at net asset value, an investor or the investor's broker must, at
the time of purchase, submit a written request to the Transfer Agent that
the purchase be processed at net asset value pursuant to this privilege,
accompanied by a photocopy of the confirmation (or similar evidence) showing
the redemption from the unrelated fund. The redemption of the shares of the
non-related fund is, for federal income tax purposes, a sale upon which a
gain or loss may be realized.
----------------------------------------------------------------------------
CLASS B SHARES
CONTINGENT DEFERRED SALES CHARGE. Class B Shares are sold at net asset value
without any initial sales charge. If an investor redeems Class B Shares
within eight years of purchase, he or she will pay a contingent deferred
sales charge at the rates set forth below. This charge is assessed on an
amount equal to the lesser of the then-current market value or the cost of
the shares being
<PAGE>
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price or on shares derived from
reinvestment of dividends or capital gain distributions.
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
YEAR SINCE DOLLAR AMOUNT
PURCHASE SUBJECT TO CHARGE
- --------------------------------------------------------------------------------
First 5.00%
Second 5.00%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh None
Eighth None
- --------------------------------------------------------------------------------
In determining whether a particular redemption is subject to a contingent
deferred sales charge, it is assumed that the redemption is first of any
Class A Shares in the shareholder's Fund account; second, 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 701/2. A shareholder or his or her representative must notify the
Transfer Agent prior to the time of redemption if such circumstances exist
and the shareholder is eligible for this waiver.
CONVERSION FEATURE. At the end of the period ending eight years after the
beginning of the month in which the shares were issued, Class B Shares will
automatically convert to Class A Shares and will no longer be subject to the
Class B distribution and service fees. This conversion will be on the basis
of the relative net asset values of the two classes.
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SYSTEMATIC EXCHANGE PROGRAM
Shares of the 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 the Fund 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 Fund. 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 Fund. This effect also can be achieved through
the systematic investment program described below. Because purchases of
Class A Shares are subject to an initial sales charge, it may be beneficial
for an investor to execute a Letter of Intent in connection with the
systematic exchange program. A shareholder may apply for participation in
this program through his or her financial institution or by calling (800)
637-2548.
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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.
<PAGE>
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EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund shares. The Fund will
allow such exchanges only upon the prior approval by the Fund and a
determination by the Fund and the Advisor or Sub-Advisors that the
securities to be exchanged are acceptable. Securities accepted by the Fund
will be valued in the same manner that the 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 Fund.
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 Fund.
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DIVIDENDS AND DISTRIBUTIONS
Dividends with respect to the Fund are declared and paid monthly to all
shareholders of record on the record date.
Distributions of any net realized long-term capital gains will be made at
least once every 12 months. Dividends and distributions are automatically
reinvested in additional shares of the Fund paying the dividend on payment
dates at the ex-dividend date net asset value without a sales charge, unless
shareholders request cash payments on the new account form or by writing to
the Fund.
All shareholders on the record date are entitled to the dividend. If shares
are purchased before a record date for a dividend or a distribution of
capital gains, a shareholder will pay the full price for the shares and will
receive some portion of the purchase price back as a taxable dividend or
distribution (to the extent, if any, that the dividend or distribution is
otherwise taxable to holders of Fund shares). If shares are redeemed or
exchanged before the record date for a dividend or distribution or are
purchased after the record date, those shares are not entitled to the
dividend or distribution.
The amount of dividends payable on Class A 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 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 the Fund for
currently available Class A or Class B Shares, respectively, of the other
FAIF Funds or of other funds in the First American family of funds. Class A
Shares of the Fund, 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 charge payable upon redemption, the holding
period of Class B Shares of the "old" fund and the holding period of the
Class B Shares of the "new" fund are aggregated.
The ability to exchange shares of the Fund does not constitute an offering
or recommendation of shares of one fund by another fund. This privilege is
available to shareholders resident in any state in which the fund shares
being acquired may be sold. An investor who is considering acquiring shares
in another First American Fund pursuant to the exchange privilege should
obtain and carefully read a prospectus of the fund to be acquired.
<PAGE>
Exchanges may be accomplished by a written request, or by telephone if a
preauthorized exchange authorization is on file with the Transfer Agent,
shareholder servicing agent, or financial institution.
Written exchange requests must be signed exactly as shown on the
authorization form, and the signatures may be required to be guaranteed as
for a redemption of shares by an entity described below under "Redeeming
Shares -- By Mail." Neither the Fund, 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 the Fund
will be responsible for the authenticity of exchange instructions received
by telephone if it reasonably believes those instructions to be genuine. The
Fund 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 Fund 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 should not be used to take advantage of short-term swings in the
securities markets. The Fund reserves the right to limit or terminate
exchange privileges as to any shareholder who makes exchanges more than four
times a year (other than through the Systematic Exchange Program or similar
periodic investment program). The Fund may modify or revoke the exchange
privilege for all shareholders upon 60 days' prior written notice or without
notice in times of drastic economic or market changes.
Shares of a class may be exchanged for shares of a class in which an
investor subsequently becomes eligible to participate. An example of such an
exchange would be a situation in which an individual holder of Class A
Shares subsequently opens a fiduciary, custody or agency account with a
financial institution which invests in Class Y Shares.
There are currently no additional fees or charges for the exchange service.
The Fund does not contemplate establishing such fees or charges, but it
reserves the right to do so. Shareholders will be notified of the imposition
of any additional fees or charges.
REDEEMING SHARES
The 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 the Fund, if he or she elects the
privilege on the initial
<PAGE>
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 Fund 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 Fund.
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 Fund's agent for
the purpose of accepting redemption requests, and the Fund 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 the 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 Fund determines 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 the 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 Fund will each employ reasonable procedures to confirm that
instructions communicated are genuine. These procedures may include taping
of telephone conversations. To ensure authenticity of redemption or exchange
instructions received by telephone, the Transfer Agent examines each
shareholder request by verifying the account number and/or tax
identification number at the time such request is made. The Transfer Agent
subsequently sends confirmations of both exchange sales and exchange
purchases to the shareholder for verification. If reasonable procedures are
not employed, the Transfer Agent and the Fund may be liable for any losses
due to unauthorized or fraudulent telephone transactions.
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BY MAIL
Any shareholder may redeem Fund shares by sending a written request to the
Transfer Agent, shareholder servicing agent, or financial institution. The
written request should include the shareholder's name, the Fund name, the
account number, and the share or dollar amount requested to be redeemed, and
should be signed exactly as the shares are registered. Shareholders should
call the Fund, shareholder servicing agent or financial institution for
assistance in redeeming by mail. A check for redemption proceeds normally is
mailed within one business day, but in no event more than seven days, after
receipt of a proper written redemption request.
Shareholders requesting a redemption of $5,000 or more, a redemption of any
amount to be sent to an address other than that on record with the Fund, or
a redemption payable other than to the shareholder of record, must have
signatures on written redemption requests guaranteed by:
* a trust company or commercial bank the deposits of which are insured by
the Bank Insurance
<PAGE>
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 Fund does not accept signatures guaranteed by a notary public.
The Fund and the Transfer Agent have adopted standards for accepting
signature guarantees from the above institutions. The Fund may elect in the
future to limit eligible signature guarantees to institutions that are
members of a signature guarantee program. The Fund 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, the 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 the Fund's net asset value. Before shares are
redeemed to close an account, the shareholder will be notified in writing
and allowed 60 days to purchase additional shares to meet the minimum
account requirement.
DETERMINING THE PRICE OF SHARES
Class A Shares of the Fund 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 Fund -- 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 the 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
<PAGE>
Transfer Agent or an 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 the 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 the Fund 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 Fund, cash and receivables
will be valued at their face amounts. Interest will be recorded as accrued
and dividends will be recorded on the ex-dividend date. Security valuations
are furnished by an independent pricing service that has been approved by
the Board of Directors. Securities listed on a securities exchange or an
automated quotation system for which quotations are readily available,
including securities traded over the counter, are valued at the last quoted
sale price on the principal exchange on which they are traded on the
valuation date, or, if there is no such reported sale on the valuation date,
at the most recently quoted bid price.
Debt obligations with remaining maturities in excess of sixty days are
valued at the most recently quoted bid price. For such debt obligations the
pricing service may employ methods that utilize actual market transactions,
broker-dealer valuations, or other electronic data processing techniques.
These techniques generally consider such factors as security prices, yields,
maturities, call features, ratings and developments relating to specific
securities in arriving at security valuations. Debt obligations with
remaining maturities of sixty days or less may be valued at their amortized
cost which approximates market value. If a security price cannot be obtained
from an independent pricing service a bid price may be obtained from an
independent broker who makes a market in the security.
Foreign securities owned by the Fund 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 systems.
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 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 Fund 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
<PAGE>
business on each business day of the Fund. Thus, the calculation of the
Fund's net asset value may not take place contemporaneously with the
determination of the prices of foreign securities held in the Fund's
portfolio. 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 the Fund might be
significantly affected on days when an investor has no access to the Fund.
FEDERAL INCOME TAXES
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"),
during its current taxable year in order to be relieved of payment of
federal income taxes on amounts of taxable income it distributes to
shareholders.
Distributions paid from the Fund's net investment income and net short-term
capital gains will be taxable to shareholders as ordinary income, whether or
not the shareholder elects to have such dividends automatically reinvested
in additional shares. Dividends paid by the Fund will not be eligible for
the 70% deduction for dividends received by corporations.
Distributions paid from the net capital gains of the Fund and designated as
capital gain dividends generally will be taxable to shareholders as
long-term capital gains, regardless of the length of time for which they
have held their shares in the Fund. In the case of shareholders who are
individuals, estates, or trusts, the Fund will designate the portion of each
capital gain dividend that must be treated as mid-term capital gain (subject
to a maximum tax rate of 28%) and the portion that must be treated as
long-term capital gain (subject to a maximum tax rate of 20%).
Gain or loss realized upon the sale of shares in the Fund will be treated as
capital gain or loss, provided that the shares represented a capital asset
in the hands of the shareholder. Such gain or loss will be long-term
(subject to a maximum 20% tax rate in the case of individuals, estates and
trusts) if the shares were held for more than one year.
The Fund is required by federal law to withhold 31% of reportable payments
(including dividends, capital gain distributions, and redemptions) paid to
certain shareholders who have not complied with IRS regulations. In order to
avoid this withholding requirement, each investor will be asked to certify
on his or her account application that the social security or taxpayer
identification number provided is correct and that the investor is not
subject to backup withholding for previous underreporting to the IRS.
This is a general summary of the federal tax laws applicable to the Fund
and its shareholders as of the date of this Prospectus. See the Statement
of Additional Information for further details.
FUND SHARES
Each share of the 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
Fund have no preemptive or conversion rights.
Each share of the 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 class of shares, that class will vote as a separate series.
Examples of such issues would be proposals 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
<PAGE>
(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, the Fund may advertise information regarding its
performance. The 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 Fund is computed by dividing the net investment income per
share (as defined in applicable SEC regulations) earned during a 30-day
period (which period will be stated in the advertisement) by the maximum
offering price per share on the last day of the period. Yield is an
annualized figure, in that it assumes that the same level of net investment
income is generated over a one year period. The yield formula annualizes net
investment income by providing for semi-annual compounding.
"Total return" is based on the overall dollar or percentage change in value
of a hypothetical investment in the 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 the 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 the Fund's performance, they are
not the same as actual year-by-year results. As a supplement to total return
computations, the 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 Fund 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 the
Fund) and total return (which measures actual income, plus realized and
unrealized gains or losses of the 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 the 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 the
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 the 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 the
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 the Fund may include in
such reports,
<PAGE>
communications and advertising material evaluations published by nationally
recognized independent ranking services and publications. For further
information regarding the Fund's performance, see "Fund Performance" in the
Statement of Additional Information.
SPECIAL INVESTMENT METHODS
This section provides additional information concerning the securities in
which the Fund may invest and related topics. Further information concerning
these matters is contained in the Statement of Additional Information.
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U.S. GOVERNMENT SECURITIES
The U.S. government securities in which the Fund invests are either issued
or guaranteed by the U.S. government, its agencies or instrumentalities.
The U.S. government securities in which the Fund invests principally are:
* direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds;
* notes, bonds, and discount notes issued and guaranteed by U.S.
government agencies and instrumentalities supported by the full faith
and credit of the United States;
* notes, bonds, and discount notes of U.S. government agencies or
instrumentalities which receive or have access to federal funding; and
* notes, bonds, and discount notes of other U.S. government
instrumentalities supported only by the credit of the instrumentalities.
The government securities in which the Fund may invest are backed in a
variety of ways by the U.S. government or its agencies or instrumentalities.
Some of these securities, such as Government National Mortgage Association
("GNMA") mortgage-backed securities, are backed by the full faith and credit
of the U.S. government. Other securities, such as obligations of the Federal
National Mortgage Association ("FNMA") or Federal Home Loan Mortgage
Corporation ("FHLMC") are backed by the credit of the agency or
instrumentality issuing the obligations but not the full faith and credit of
the U.S. government. No assurances can be given that the U.S. government
will provide financial support to these other agencies or instrumentalities
because it is not obligated to do so.
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MORTGAGE-BACKED SECURITIES
The Fund may invest in mortgage-backed securities which are Agency
Pass-Through Certificates, private pass-through securities, collateralized
mortgage obligations ("CMOs"), or Real Estate Mortgage Investment Conduits
("REMICS").
Agency Pass-Through Certificates are mortgage pass-through certificates
representing undivided interests in pools of residential mortgage loans.
Distribution of principal and interest on the mortgage loans underlying an
Agency Pass-Through Certificate is an obligation of or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC"). The obligation of GNMA with respect to such certificates is
backed by the full faith and credit of the United States, while the
obligations of FNMA and FHLMC with respect to such certificates rely solely
on the assets and credit of those entities. The mortgage loans underlying
GNMA certificates are partially or fully guaranteed by the Federal Housing
Administration or the Veterans Administration, while the mortgage loans
underlying FNMA certificates and FHLMC certificates are conventional
mortgage loans which are, in some cases, insured by private mortgage
insurance companies. Agency Pass-Through Certificates may be issued in a
single class with respect to a given pool of mortgage loans or in multiple
classes.
Private mortgage pass-through securities ("Private Pass-Throughs") are
structured similarly to GNMA, FNMA and FHLMC mortgage pass-through
securities and are issued by originators of and investors in mortgage loans,
<PAGE>
including savings and loan associations, mortgage bankers, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. These
securities usually are backed by a pool of conventional fixed rate or
adjustable loans. Since Private Pass-Throughs typically are not guaranteed
by an entity having the credit status of GNMA, FNMA or FHMLC, such
securities generally are structured with one or more types of credit
enhancement. Such credit support falls into two categories: (i) liquidity
protection and (ii) protection against losses resulting from ultimate
default by an obligor on the underlying assets. Liquidity protection refers
to the provision of advances, generally by the entity administering the pool
of assets, to ensure that the pass-through of payments due on the underlying
pool occurs in a timely fashion. Protection against losses resulting from
ultimate default enhances the likelihood of ultimate payment of the
obligations on at least a portion of the assets in the pool. Such protection
may be provided through guarantees, insurance policies or letters of credit
obtained by the issuer or sponsor from third parties, through various means
of structuring the transaction or through a combination of such approaches.
The Fund will not pay any additional fees for such credit support, although
the existence of credit support may increase the price of a security.
The ratings of securities for which third-party credit enhancement provides
liquidity protection or protection against losses from default are generally
dependent upon the continued creditworthiness of the enhancement provider.
The ratings of such securities could be subject to reduction in the event of
deterioration in the creditworthiness of the credit enhancement provider
even in cases where the delinquency and loss experience on the underlying
pool of assets is better then expected.
CMOs are debt obligations typically issued by a private special-purpose
entity and collateralized by residential or commercial mortgage loans or
Agency Pass-Through Certificates. The Fund has no minimum rating
requirements for these investments. Because CMOs are debt obligations of
private entities, payments on CMOs generally are not obligations of or
guaranteed by any governmental entity, and their ratings and
creditworthiness typically depend on, among other factors, the legal
insulation of the issuer and transaction from the consequences of a
sponsoring entity's bankruptcy. CMOs generally are issued in multiple
classes, with holders of each class entitled to receive specified portions
of the principal payments and prepayments and/or of the interest payments on
the underlying mortgage loans. These entitlements can be specified in a wide
variety of ways, so that the payment characteristics of various classes may
differ greatly from one another. For instance, holders may hold interests in
CMO tranches called Z-tranches which defer interest and principal payments
until one or more other classes of the CMO have been paid in full. Examples
of the more common classes are provided in the Statement of Additional
Information. The CMOs in which the Fund may invest include classes which are
subordinated in right of payment to other classes.
REMICs are offerings of multiple class real estate mortgage-backed
securities which qualify and elect treatment as such under provisions of the
Internal Revenue Code. Issuers of REMICs may take several forms, such as
trusts, partnerships, corporations, associations, or segregated pools of
mortgages. Once REMIC status is elected and obtained, the entity is not
subject to federal income taxation. Instead, income is passed through the
entity and is taxed to the person or persons who hold interests in the
REMIC. A REMIC interest must consist of one or more classes of "regular
interests," some of which may offer adjustable rates of interest (the type
in which the Fund primarily invests), and a single class of "residual
interests." To qualify as a REMIC, substantially all the assets of the
entity must be in assets directly or indirectly secured principally by real
property.
It is generally more difficult to predict the effect of changes in market
interest rates on the return on mortgaged-backed securities than to predict
the effect of such changes on the return of a conventional fixed-rate debt
instrument, and the magnitude of such effects may be greater in some
<PAGE>
cases. The return on interest-only and principal-only mortgage-backed
securities is particularly sensitive to changes in interest rates and
prepayment speeds. When interest rates decline and prepayment speeds
increase, the holder of an interest-only mortgage-backed security may not
even recover its initial investment. Similarly, the return on an inverse
floating rate CMO is likely to decline more sharply in periods of increasing
interest rates than that of a fixed-rate security. For these reasons,
interest-only, principal-only and inverse floating rate mortgage-backed
securities generally have greater risk than more conventional classes of
mortgage-backed securities.
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ASSET-BACKED SECURITIES
The 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
For defensive purposes and to maintain liquidity, the Fund may temporarily
invest in debt obligations maturing in one year or less, including time and
savings deposits, deposit notes and bankers' acceptances (including
certificates of deposit) in commercial or savings banks. They also include
Eurodollar Certificates of Deposit issued by foreign branches of United
States or foreign banks; Eurodollar Time Deposits, which are United States
dollar-denominated deposits in foreign branches of United States or foreign
banks; and Yankee Certificates of Deposit, which are United States
dollar-denominated certificates of deposit issued by United States branches
of foreign banks and held in the United States. For a description of certain
risks of investing in foreign issuers' securities, see "-- Foreign
Securities" below. In each instance, the 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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DEBT OBLIGATIONS
The Fund may invest in both investment grade and non-investment grade
(lower-rated) bonds (which may be denominated in U.S. dollars or non-U.S.
currencies) and other debt obligations issued by domestic and foreign
corporations and other private issuers. There are no minimum rating
requirements for these investments by the Fund. The Fund's investments may
include U.S. dollar-denominated debt obligations known as "Brady Bonds,"
which are issued for the exchange of existing commercial bank loans to
foreign entities for new obligations that are generally collateralized by
zero coupon Treasury securities having the same maturity. From time to time,
the Fund's portfolio may consist primarily of lower-rated (i.e., rated Ba or
lower by Moody's, or BB or lower by Standard & Poor's) corporate debt
obligations, which are commonly referred to as "junk bonds." Certain debt
obligations in which the Fund invests may involve equity characteristics.
The Fund may, for example, invest in unit offerings that combine debt
securities and common stock equivalents such as warrants, rights and
options. It is anticipated that the majority of the value attributable to
the unit will relate to its debt component.
The prices and yields of non-investment grade securities generally fluctuate
more than investment grade securities, and such prices may decline signif-
<PAGE>
icantly in periods of general economic difficulty or rising interest
rates.
Participation in non-investment grade securities globally involves greater
returns in the form of higher average yields. The prices of high-yielding
securities have generally been less sensitive to interest rate changes than
higher-rated investments, but more sensitive to individual issuer
developments. During an economic downturn or substantial period of rising
interest rates highly leveraged issuers may experience financial stress
which could adversely affect their ability to service their principal and
interest payment obligations, to meet projected business goals, and to
obtain additional financing. If the issuer of a security held by the Fund
defaulted, the Fund might incur additional expenses to seek recovery. In
addition, periods of economic uncertainty and changes can be expected to
result in increased volatility of market prices of high-yielding securities
and the Fund's net asset value. Because the Fund invests in non-investment
grade securities, investors should carefully consider their ability to
assume the risks involved before making an investment in the Fund.
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FLOATING RATE CORPORATE DEBT OBLIGATIONS
The Fund expects to invest in floating rate corporate debt obligations,
including increasing rate securities. Floating rate securities are generally
offered at an initial interest rate which is at or above prevailing market
rates. The interest rate paid on these securities is then reset periodically
(commonly every 90 days) to an increment over some predetermined interest
rate index. Commonly utilized indices include the three-month Treasury bill
rate, the 180-day Treasury bill rate, the one-month or three-month London
Interbank Offered Rate (LIBOR), the prime rate of a bank, the commercial
paper rates, or the longer-term rates on U.S. Treasury securities.
----------------------------------------------------------------------------
FIXED RATE CORPORATE DEBT OBLIGATIONS
The Fund will also invest in fixed rate securities. Fixed rate securities
tend to exhibit more price volatility during times of rising or falling
interest rates than securities with floating rates of interest. This is
because floating rate securities, as described above, behave like short-term
instruments in that the rate of interest they pay is subject to periodic
adjustments based on a designated interest rate index. Fixed rate securities
pay a fixed rate of interest and are more sensitive to fluctuating interest
rates. In periods of rising interest rates the value of a fixed rate
security is likely to fall. Fixed rate securities with short-term
characteristics are not subject to the same price volatility as fixed rate
securities without such characteristics. Therefore, they behave more like
floating rate securities with respect to price volatility.
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PARTICIPATION INTERESTS
The Fund may acquire participation interests in senior, fully secured
floating rate loans that are made primarily to U.S. companies. The Fund's
investments in participation interests are subject to its limitation on
investments in illiquid securities. The Fund may purchase only those
participation interests that mature in one year or less, or, if maturing in
more than one year, have a floating rate that is automatically adjusted at
least once each year according to a specified rate for such investments,
such as a published interest rate or interest rate index. Participation
interests are primarily dependent upon the creditworthiness of the borrower
for payment of interest and principal. Such borrowers may have difficulty
making payments and may have senior securities rated as low as C by Moody's,
or D by Standard & Poor's.
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FOREIGN SECURITIES
IN GENERAL. The Fund may invest in foreign securities, including
securities not publicly traded in the United States and securities
denominated in currencies other than U.S. dollars. The Fund may hold funds
in bank deposits or other money market investments denominated in foreign
currencies. The Fund may purchase securities issued in any country,
developed or undeveloped; there are no
<PAGE>
minimum rating requirements for the foreign securities in which the Fund
invests.
Investment in foreign securities is subject to special investment risks that
differ in some respects from those related to investments in securities of
United States domestic issuers. These risks include political, social or
economic instability in the country of the issuer, the difficulty of
predicting international trade patterns, the possibility of the imposition
of exchange controls, expropriation, limits on removal of currency or other
assets, nationalization of assets, foreign withholding and income taxation,
and foreign trading practices (including higher trading commissions,
custodial charges and delayed settlements). Foreign securities also may be
subject to greater fluctuations in price than securities issued by United
States corporations. The principal markets on which these securities trade
may have less volume and liquidity, and may be more volatile, than
securities markets in the United States.
In addition, there may be less publicly available information about a
foreign company than about a United States domiciled company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to United
States domestic companies. There is also generally less government
regulation of securities exchanges, brokers and listed companies abroad than
in the United States. Confiscatory taxation or diplomatic developments could
also affect investment in those countries. In addition, foreign branches of
United States banks, foreign banks and foreign issuers may be subject to
less stringent reserve requirements and to different accounting, auditing,
reporting, and recordkeeping standards than those applicable to domestic
branches of United States banks and United States domestic issuers.
EMERGING MARKETS. The Fund may invest in securities issued by governmental
and corporate issuers that are located in emerging market countries.
Investing in securities of issuers in emerging markets involves exposure to
economic infrastructures that are generally less diverse and mature than,
and to political systems that can be expected to have less stability than,
those of developed countries. Other characteristics of emerging market
countries that may affect investment in their markets include certain
governmental policies that may restrict investment by foreigners and the
absence of developed legal structures governing private and foreign
investments and private property. The typical small size of the markets for
securities issued by issuers located in emerging markets and the possibility
of low or non-existent volume of trading in those securities may also result
in a lack of liquidity and in price volatility of those securities. In
addition, issuers in emerging market countries are typically subject to a
greater degree of change in earnings and business prospects than are
companies in developed markets.
AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS. For many
foreign securities, United States dollar-denominated American Depositary
Receipts, which are traded in the United States on exchanges or
over-the-counter, are issued by domestic banks. American Depositary Receipts
represent the right to receive securities of foreign issuers deposited in a
domestic bank or a correspondent bank. American Depositary Receipts do not
eliminate all the risk inherent in investing in the securities of foreign
issuers. However, by investing in American Depositary Receipts rather than
directly in securities of foreign issuers, the 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. The 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
<PAGE>
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 FORWARD EXCHANGE CONTRACTS
To settle transactions in foreign currencies or to protect the Fund's assets
against adverse changes in foreign currency exchange rates or exchange
control regulations, the Fund may enter into foreign currency transactions.
Currency transactions may be conducted either on a spot or cash basis at
prevailing rates or through forward foreign currency exchange contracts. A
forward foreign currency exchange contract is an obligation to purchase or
sell an amount of a particular currency at a specific price and on a future
date agreed upon by the parties. At the time the Fund enters into a forward
foreign currency exchange contract, Fund assets with a value equal to the
Fund's obligation under the forward foreign currency exchange contract are
segregated on the Fund's records, in accordance with the guidelines of the
SEC and are maintained until the contract has been settled. The Fund will
not enter into a forward foreign currency exchange contract with a term of
more than six months.
To protect against the fluctuation of a particular foreign currency, the
Fund may also enter into a forward foreign currency exchange contract to
purchase or sell an amount of that currency. The Fund may enter into these
contracts for the purpose of hedging against foreign exchange risk arising
from the Fund's investment or anticipated investment in securities
denominated in foreign currencies. This type of short-term hedging involves
significant risk due to the difficulties of predicting short-term currency
market movements and precisely matching forward foreign currency exchange
contract amounts and the constantly changing value of the securities
involved.
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PAYMENT-IN-KIND DEBENTURES AND DELAYED INTEREST SECURITIES
The Fund may invest in debentures the interest on which may be paid in other
securities rather than cash ("PIKs"). Typically, during a specified term
prior to the debenture's maturity, the issuer of a PIK may provide for the
option or the obligation to make interest payments in debentures, common
stock or other instruments (i.e. "in kind" rather than in cash). The type of
instrument in which interest may or will be paid would be known by the Fund
at the time of investment. While PIKs generate income for purposes of
generally accepted accounting standards, they do not generate cash flow and
thus could cause the Fund to be forced to liquidate securities at an
inopportune time in order to distribute cash, as required by the Code.
Unlike PIKs, delayed interest securities do not pay interest for a specified
period. Because values of securities of this type are subject to greater
fluctuations than are the values of securities that distribute income
regularly, they may be more speculative than such securities.
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ZERO COUPON OBLIGATIONS
The Fund may invest in zero coupon securities. Zero coupon securities pay no
cash income to their holders until they mature and are issued at substantial
discounts from their value at maturity. When held to maturity, their entire
return comes from the difference between their purchase price and their
maturity value. Because interest on zero coupon securities is not paid on a
current basis,
<PAGE>
the values of securities of this type are subject to greater fluctuations
than are the values of securities that distribute income regularly and they
may be more speculative than such securities. Accordingly, the values of
these securities may be highly volatile as interest rates rise or fall.
----------------------------------------------------------------------------
CORPORATE EQUITY SECURITIES
The Fund may also invest in equity securities, including common stocks,
warrants and rights issued by corporations in any industry (industrial,
financial or utility) which may be denominated in U.S. dollars or in foreign
currencies.
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PREFERRED STOCK
The Fund may invest in preferred stock. Preferred stock, unlike common
stock, offers a stated dividend rate payable from the issuer's earnings.
Preferred stock dividends may be cumulative or non-cumulative,
participating, or auction rate. If interest rates rise, the fixed dividend
on preferred stocks may be less attractive, causing the price of preferred
stocks to decline. Preferred stock may have mandatory sinking fund
provisions, as well as call/redemption provisions prior to maturity, a
negative feature when interest rates decline.
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OPTIONS TRANSACTIONS
PURCHASES OF PUT AND CALL OPTIONS. The Fund may purchase put and call
options. These transactions will be undertaken only for the purpose of
reducing risk to the Fund; that is, for "hedging" purposes. These
transactions may include the purchase of put and call options on equity
securities, on foreign government debt obligations, on stock indices, on
interest rate indices, or on foreign currencies. Options on futures
contracts are discussed below under "-- Futures and Options on Futures."
A put option on a security gives the purchaser of the option the right (but
not the obligation) to sell, and the writer of the option the obligation to
buy, the underlying security at a stated price (the "exercise price") at any
time before the option expires. A call option on a security gives the
purchaser the right (but not the obligation) to buy, and the writer the
obligation to sell, the underlying security at the exercise price at any
time before the option expires. The purchase price for a put or call option
is the "premium" paid by the purchaser for the right to sell or buy.
Options on indices are similar to options on securities except that, rather
than the right to take or make delivery of a specific security at a stated
price, an option on an index gives the holder the right to receive, upon
exercise of the option, a defined amount of cash if the closing value of the
index upon which the option is based is greater than, in the case of a call,
or less than, in the case of a put, the exercise price of the option.
The Fund will not 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. The 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 the Fund and the prices of options, and the risk of
limited liquidity in the event that the Fund seeks to close out an option's
position before expiration by entering into an offsetting transaction.
WRITING OF CALL OPTIONS. The Fund may write (sell) covered call options on
up to 25% of its net assets. These transactions would be undertaken
principally to produce additional income. These transactions may include
the writing of covered call options on equity securities or on foreign
<PAGE>
currencies which the Fund owns or has the right to acquire or on interest
rate indices.
When the 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 Fund also may write call options on stock indices the movements of which
generally correlate with those of the Fund's 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
The Fund may engage in futures transactions and purchase options on futures.
These transactions may include the purchase of interest rate futures and
options on interest rate futures.
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 the 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.
The Fund may use futures contracts and options on futures in an effort to
reduce investment risk and as a part of its management of foreign currency
transactions.
Aggregate initial margin deposits for futures contracts, and premiums paid
for related options, may not exceed 5% of the 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 one-third of the market value of
the Fund's total assets. Futures transactions will be limited to the extent
necessary to maintain the Fund's qualification as a regulated investment
Company under the Code.
Where the 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 the Fund's total assets.
Where the Fund is permitted to enter into futures contracts obligating it to
purchase securities, currency or an index in the future at a specified
price, the 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 the Fund was
permitted to enter. When the Fund enters into futures contracts obligating
it to sell securities or currencies, 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 of the contracts prior to the settlement date.
Futures transactions involve brokerage costs and require the Fund to
segregate assets to cover contracts that would require it to purchase
securities or currencies. The 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
<PAGE>
performance than if the Fund had not entered into any futures transactions.
In addition, the value of the 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.
----------------------------------------------------------------------------
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements. A repurchase agreement
involves the purchase by the 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 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), the Fund would suffer a loss if the proceeds
from the sale of the collateral were less than the agreed-upon repurchase
price. The Advisor and Sub-Advisors will monitor the creditworthiness of the
firms with which the Fund enter into repurchase agreements.
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WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS; DOLLAR ROLLS
The 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. The 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, the
Fund will maintain in a segregated account cash or liquid securities in an
amount sufficient to meet its purchase commitments.
The purchase of securities on a when-issued or delayed delivery basis
exposes the Fund to risk because the securities may decrease in value prior
to delivery. In addition, the 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 Fund will engage in when-issued and delayed
delivery transactions only for the purpose of acquiring portfolio securities
consistent with its investment objectives, and not for the purpose of
investment leverage. A seller's failure to deliver securities to the 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, the Fund may enter into mortgage "dollar rolls" in
which the Fund sells securities and simultaneously contracts with the same
counterparty to repurchase similar (same type, coupon and maturity) but not
identical securities on a 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. The Fund will hold
and maintain in a segregated account until the settlement date cash or
liquid securities in an amount equal to the forward purchase price.
<PAGE>
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LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio
securities representing up to one-third of the value of its total assets to
broker-dealers, banks or other institutional borrowers of securities. 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 Fund will only enter into
loan arrangements with broker-dealers, banks, or other institutions which
the Advisor has determined are creditworthy under guidelines established by
the Board of Directors. In these loan arrangements, the Fund 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 Fund 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 National Association, are 40% of the Fund's income from such
securities lending transactions.
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PORTFOLIO TRANSACTIONS
Portfolio transactions in the over-the-counter market will be effected with
market makers or issuers, unless better overall price and execution are
available through a brokerage transaction. It is anticipated that most
portfolio transactions involving debt securities will be executed on a
principal basis. Also, with respect to the placement of portfolio
transactions with securities firms, subject to the overall policy to seek to
place portfolio transactions as efficiently as possible and at the best
price, research services and placement of orders by securities firms for the
Fund's shares may be taken into account as a factor in placing portfolio
transactions for the Fund.
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PORTFOLIO TURNOVER
The Fund may trade or dispose of portfolio securities as considered
necessary to meet its investment objective. Because the Fund will actively
use trading to benefit from short term yield disparities among different
issues of fixed-income securities or otherwise to increase its income, the
Fund may be subject to a greater degree of portfolio turnover than might be
expected from funds which invest substantially all of their assets on a
long-term basis. The Fund cannot accurately predict its portfolio turnover
rate, but it is anticipated that its annual turnover rate generally will not
exceed 200%. Higher portfolio turnover rates (100% or more) generally result
in higher transaction costs and could result in additional tax consequences
to the Fund's shareholders.
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INVESTMENT RESTRICTIONS
The fundamental and nonfundamental investment restrictions of the Fund are
set forth in full in the Statement of Additional Information. The
fundamental restrictions include the following:
* The Fund will not borrow money or pledge securities except, under
certain circumstances, the Fund may borrow up to one-third of the value
of its total assets and pledge up to 15% of the value of those assets to
secure such borrowings.
* The Fund will not lend any of its assets, except portfolio securities up
to one-third of the Fund's total assets.
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 Fund, as defined in the 1940 Act.
As a nonfundamental policy, the Fund will not invest more than 15% of its
net assets in all forms of illiquid investments, as determined pursuant to
applicable Securities and Exchange Commission rules and interpretations.
Certain securities (such as 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 the
<PAGE>
Fund to the extent that qualified institutional buyers become, for a time,
uninterested in purchasing these securities.
APPENDIX
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STANDARD & POOR'S CORPORATE BOND RATINGS
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
BB, B, CCC, CC -- Debt rated BB, B, CCC and CC 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 CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties of major risk exposures to
adverse conditions.
C -- The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC--" debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
D -- Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
NR -- Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of policy.
----------------------------------------------------------------------------
MOODY'S CORPORATE BOND RATINGS
Aaa -- Bonds 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 edged." Interest payments are protected by a large or by an
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 -- Bonds 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 bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long term risks appear somewhat
larger than in Aaa securities.
A -- Bonds 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 suceptibility to impairment sometime in the
future.
<PAGE>
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are 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 bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are Ba are judged to have speculative elements; their
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 bonds in this class.
B -- Bonds which are rated B generally lack 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 -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NR -- Not rated by Moody's.
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 Fund. These U.S. Bancorp affiliates may receive
compensation from the Fund for the services they provide to the Fund, 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"
Transfer Agent Services -- see "Management-Transfer Agent"
Shareholder servicing -- see "Distributor"
Securities lending -- see "Special Investment Methods-Lending of Portfolio
Securities"
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
Oaks, Pennsylvania 19456
Investment Advisor
U.S. BANK NATIONAL ASSOCIATION
601 Second Avenue South
Minneapolis, Minnesota 55402
Custodian
U.S. BANK NATIONAL ASSOCIATION
180 East Fifth Street
St. Paul, Minnesota 55101
Distributor
SEI INVESTMENTS DISTRIBUTION CO.
Oaks, Pennsylvania 19456
Administrator
SEI INVESTMENTS MANAGEMENT CORPORATION
Oaks, Pennsylvania 19456
Transfer Agent
DST SYSTEMS, INC.
330 West Ninth Street
Kansas City, Missouri 64105
Independent Auditors
KPMG PEAT MARWICK LLP
90 South Seventh Street
Minneapolis, Minnesota 55402
Counsel
DORSEY & WHITNEY LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
FAIF-1301 (7/98) R
<PAGE>
JULY 24, 1998
CLASS Y SHARES
STRATEGIC INCOME 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 3
..............................................
The Fund 4
..............................................
Investment Objective and Policies 4
..............................................
Management 7
..............................................
Distributor 10
..............................................
Purchases and Redemptions of Shares 10
..............................................
Federal Income Taxes 14
..............................................
Fund Shares 14
..............................................
Calculation of Performance Data 15
..............................................
Special Investment Methods 16
..............................................
Appendix 26
..............................................
Information Concerning Compensation Paid
to U.S. Bank National Association and Other
Affiliates 28
..............................................
<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 Strategic Income Fund (the "Fund").
The Fund may invest primarily in lower-rated bonds, commonly referred to as
"junk bonds." Investments of this type are subject to greater loss of
principal and interest than investments in higher rated securities.
Purchasers should carefully assess the risks associated with an investment
in this Fund.
SHARES OF THE FUND 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 FUND
INVOLVES INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL, DUE TO
FLUCTUATIONS IN THE FUND'S NET ASSET VALUE.
This Prospectus concisely sets forth information about the Fund that a
prospective investor should know before investing. It should be read and
retained for future reference.
A Statement of Additional Information dated July 24, 1998 for the Fund 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 Fund, call (800) 637-2548 or
write SEI Investments Distribution Co., Oaks, Pennsylvania 19456. The SEC
maintains a World Wide Web site that contains reports and information
regarding issuers that file electronically with the SEC. The address of such
site is "http://www.sec.gov."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is July 24, 1998.
<PAGE>
SUMMARY
First American Investment Funds, Inc. ("FAIF") is an open-end investment
company which offers shares in several different mutual funds. This
Prospectus provides information with respect to the Class Y Shares of the
following Fund:
STRATEGIC INCOME FUND has an objective of providing a high level of current
income. The Fund invests at least 65% of its total assets in a combination
of (i) U.S. government securities and domestic investment grade corporate
debt obligations; (ii) high yield (i.e. non-investment grade) domestic and
U.S. dollar denominated foreign corporate debt obligations; and (iii)
investment grade and high yield foreign government and foreign corporate
debt obligations. Under normal market conditions, the Fund's assets will be
invested in each of these three sectors, with no more than 50% of its total
assets invested in any one sector.
INVESTMENT ADVISOR AND SUB-ADVISORS. U.S. Bank National Association (the
"Advisor" or "U.S. Bank") serves as investment advisor to the Fund through
its First American Asset Management group. Federated Investment Counseling
and Federated Global Research Corp. (the "Sub-Advisors"and individually a
"Sub-Advisor") serve as the sub-advisors to the Fund. See "Management."
DISTRIBUTOR; ADMINISTRATOR. SEI Investments Distribution Co. (the
"Distributor") serves as the distributor of the Fund's shares. SEI
Investments Management Corporation (the "Administrator") serves as the
administrator of the Fund. 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. Shares of the 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 Fund -- Exchange Privilege."
REDEMPTIONS. Shares of the Fund may be redeemed at any time at their net
asset value next determined after receipt of a redemption request by the
Fund's transfer agent, with no additional charge. See "Purchases and
Redemptions of Shares."
RISKS TO CONSIDER. The Fund is subject to (i) interest rate risk (the risk
that increases in market interest rates will cause declines in the value of
debt securities held by the Fund); (ii) credit risk (the risk that the
issuers of debt securities held by the Fund default in making required
payments); (iii) call or prepayment risk (the risk that a borrower may
exercise the right to prepay a debt obligation before its stated maturity,
requiring the Fund to reinvest the prepayment at a lower interest rate);
(iv) the risks associated with investing in foreign securities; and (v) the
risks associated with investing in securities issued by issuers in emerging
market countries. The Fund may invest a significant portion of its assets in
high yield securities, which generally have more volatile prices and carry
more risk to principal than investment grade securities. In addition, the
Fund, which may invest in mortgage-backed securities, is subject to certain
additional risks associated with investing in securities representing
interests in, or secured by, pools of residential mortgage loans. The Fund
engages in a number of investment techniques which may involve additional
risks. See "Investment Objectives and Policies -- Risks to Consider" and
"Special Investment Methods."
SHAREHOLDER INQUIRIES. Any questions or communications regarding the Fund or
a shareholder account should be directed to the Distributor by calling (800)
637-2548, or to the financial institution which holds shares on an
investor's behalf.
<PAGE>
FEES AND EXPENSES
----------------------------------------------------------------------------
CLASS Y SHARE FEES AND EXPENSES
STRATEGIC
INCOME
FUND
- --------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases
(as a percentage of offering price) None
Maximum sales load imposed on reinvested dividends None
Deferred sales load None
Redemption fees None
Exchange fees None
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees 0.70%
Rule 12b-1 fees None
Other expenses(1) 0.20%
Total fund operating expenses 0.90%
- --------------------------------------------------------------------------------
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (i) the
maximum applicable sales charge for the fund; (ii) a 5% annual return; and
(iii) redemption at the end of each time period:
1 year $9
3 years $29
(1) OTHER EXPENSES ARE BASED ON ESTIMATED AMOUNTS FOR THE CURRENT FISCAL YEAR.
----------------------------------------------------------------------------
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 the Fund
may bear directly or indirectly. THE EXAMPLES CONTAINED IN THE TABLES SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
<PAGE>
THE FUND
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 to the Class Y Shares of Strategic Income Fund.
Information regarding the Class A and Class B Shares of this Fund and
regarding the Class A, Class B and Class Y Shares of the other FAIF Funds is
contained in separate prospectuses that may be obtained from FAIF's
Distributor, SEI Investments Distribution Co., Oaks, Pennsylvania 19456, or
by calling (800) 637-2548. The Board of Directors of FAIF may authorize
additional series or classes of common stock in the future.
INVESTMENT OBJECTIVE AND POLICIES
This section describes the investment objective and policies of the Fund.
There is no assurance that the Fund's objective will be achieved. The Fund's
investment objective is not fundamental and therefore may be changed without
a vote of shareholders. Such a change could result in the Fund having an
investment objective different from that which shareholders considered
appropriate at the time of their investment in the Fund. Shareholders will
receive written notification at least 30 days prior to any change in the
Fund's investment objective. The Fund is a diversified investment company,
as defined in the Investment Company Act of 1940 (the "1940 Act").
If a percentage limitation on investments by the 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. The
Fund, which in certain instances 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.
Descriptions of the rating categories of Standard & Poor's Rating Services,
a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's") and
Moody's Investors Service, Inc. ("Moody's") are contained in the Statement
of Additional Information.
This section also contains information concerning certain investment risks
borne by Fund shareholders under the heading "-- Risks to Consider." Further
information concerning the securities in which the Fund may invest and
related matters is set forth under "Special Investment Methods."
----------------------------------------------------------------------------
STRATEGIC INCOME FUND
OBJECTIVE. Strategic Income Fund has an investment objective of providing
a high level of current income.
INVESTMENT POLICIES. Under normal market conditions, Strategic Income Fund
invests at least 65% of its total assets in a combination of (i) U.S.
government securities and investment grade domestic corporate debt
obligations; (ii) high yield (i.e. non-investment grade) domestic and U.S.
dollar denominated foreign corporate debt obligations; and (iii) investment
grade and high yield foreign government and foreign corporate debt
obligations. Under normal market conditions, the Fund's assets will be
invested in each of these three sectors, with no more than 50% of its total
assets invested in any one sector. However, the Fund may from time to time
invest up to 100% of its total assets in any one sector, if, in the judgment
<PAGE>
of the Advisor, the Fund has the opportunity to seek its investment
objective without undue risk to principal.
The Fund's permitted investments include direct obligations of the U.S.
Treasury; notes, bonds and discount notes of United States government
agencies and instrumentalities; debt obligations issued by foreign
governments; and domestic or foreign issues of corporate debt obligations
having floating or fixed rates of interest (including participation
interests). Such corporate debt obligations may include obligations rated BB
or lower by Standard & Poor's or Ba or lower by Moody's (such as obligations
that are currently in default), given an equivalent rating by a nationally
recognized statistical rating organization (commonly referred to as "junk
bonds") or unrated but deemed of comparable quality by the Sub-Advisor.
There are no minimum rating requirements for these investments by the Fund.
The Fund may also invest in mortgage-backed securities (government and
non-government), asset-backed securities, and zero coupon, pay-in-kind and
delayed interest securities issued by corporations. In addition, the Fund
may invest in preferred stock and in equity securities, including common
stock, convertible securities and warrants issued by corporations in any
industry which may be denominated in U.S. dollars or foreign currencies. The
Fund's investments may also include securities representing underlying
foreign securities such as American Depositary Receipts and European
Depositary Receipts. No more than 25% of the Fund's total assets, at the
time of purchase, may be invested in government securities of any one
foreign country.
The securities that the Fund may purchase may be issued by government
agencies or instrumentalities or corporate issuers located in emerging
market countries. For a description of emerging market countries and the
risks associated with investing in emerging market countries, see " -- Risks
to Consider" and the related heading under "Special Investment Methods."
For temporary defensive purposes, the Fund may without limitation hold cash
or invest in cash items of the kinds described in "Special Investment
Methods -- Bank Instruments."
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, foreign government debt obligations, stock indices and interest
rate indices; (iii) write covered call options on equity securities covering
up to 25% of its net assets; (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 owned by
the Fund; (viii) write covered call options on foreign currencies owned by
the Fund; (ix) engage in mortgage dollar roll transactions; (x) invest up to
10% of its total assets in the aggregate in interest only, principal only or
inverse floating rate mortgage-backed securities; and (xi) enter into
contracts for the future purchase or delivery of securities, foreign
currencies and indices, purchase or sell options on any such futures
contracts and engage in related closing purchase transactions. For
information about these investment methods, restrictions on their use and
certain associated risks, see the related headings under "Special Investment
Methods."
----------------------------------------------------------------------------
RISKS TO CONSIDER
An investment in the Fund involves certain risks. These include the
following:
INTEREST RATE RISK. Interest rate risk is the risk that the value of a
fixed-rate debt security will decline due to changes in market interest
rates. Because the Fund invests in fixed-rate debt securities, it is subject
to interest rate risk. In general, when interest rates rise, the value of a
fixed-rate debt security declines. Conversely, when interest rates decline,
the value of a fixed-rate debt security generally increases. Thus,
shareholders in the Fund bear the risk that increases in market interest
rates will cause the value of the Fund's portfolio investments to decline.
<PAGE>
In general, the value of fixed-rate debt securities with longer maturities
is more sensitive to changes in market interest rates than the value of such
securities with shorter maturities. As described below under "Special
Investment Methods -- Mortgage-Backed Securities," it is more difficult to
generalize about the effect of changes in market interest rates on the
values of mortgage-backed securities.
Although the Advisor and Sub-Advisors may engage in transactions intended to
hedge the value of the Fund's portfolio against changes in market interest
rates, there is no assurance that such hedging transactions will be
undertaken or will fulfill their purpose. See "Special Investment Methods --
Options Transactions."
CREDIT RISK. Credit risk is the risk that the issuer of a debt security will
fail to make payments on the security when due. Because the Fund invests in
debt securities, they are subject to credit risk.
Securities issued or guaranteed by the United States Government generally
are viewed as carrying minimal credit risk. Securities issued by
governmental entities but not backed by the full faith and credit of the
United States, securities issued by foreign governments and securities
issued by private entities, are subject to higher levels of credit risk.
RISKS OF LOWER RATED DEBT SECURITIES. From time to time, a significant
portion of the Fund's portfolio may consist primarily of lower-rated (i.e.,
rated Ba or lower by Moody's or BB or lower by Standard & Poor's) corporate
debt obligations, which are commonly referred to as "junk bonds."
Lower-rated securities will usually offer higher yields than higher-rated
securities. However, there is more risk associated with these investments.
(For example, securities rated in the lowest category have been unable to
satisfy their obligations under the bond indenture.) These lower-rated bonds
may be more susceptible to real or perceived adverse economic conditions
than investment grade bonds. These lower-rated bonds are regarded as
predominantly speculative with regard to each issuer's continuing ability to
make principal and interest payments. In addition, the secondary trading
market for lower-rated bonds may be less liquid than the market for
investment grade bonds. As a result of these factors, lower-rated securities
tend to have more price volatility and carry more risk to principal than
higher-rated securities. The Advisor and Sub-Advisors will endeavor to limit
these risks through diversifying the portfolio and through careful credit
analysis of individual issuers. Purchasers should carefully assess the risks
associated with an investment in the Fund.
CALL RISK. Many corporate bonds may be redeemed at the option of the issuer
("called") at a specified price prior to their stated maturity date. In
general, it is advantageous for a corporate issuer to call its bonds if they
can be refinanced through the issuance of new bonds which bear a lower
interest rate than that of the called bonds. Call risk is the risk that
corporate bonds will be called during a period of declining market interest
rates so that such refinancings may take place.
If a bond held by the Fund is called during a period of declining interest
rates, the Fund probably will have to reinvest the proceeds received by it
at a lower interest rate than that borne by the called bond, thus resulting
in a decrease in the Fund's income. To the extent that the Fund invests in
callable corporate bonds, Fund shareholders bear the risk that reductions in
income will result from the call of bonds. Most United States Government
securities are not callable before their stated maturity, although U.S.
agency securities often are.
RISKS OF FOREIGN SECURITIES. The Fund is subject to special risks associated
with investing in foreign securities and to a decline in net asset value
resulting from changes in exchange rates between the United States dollar
and foreign currencies. The Fund is also subject to risks associated with
investing in securities issued by issuers in emerging market countries.
These risks are discussed under "Special Investment Methods -- Foreign
Securities" elsewhere herein. Because of the special risks associated with
foreign investing, the Fund may be subject to greater
<PAGE>
volatility than most mutual funds which invest primarily in domestic
securities.
YEAR 2000. Like other mutual funds, financial and business organizations,
the Fund could be adversely affected if the computer systems used by the
Advisor, the Sub-Advisors, 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
Fund has 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
Fund's 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 Fund.
OTHER. Investors also should review "Special Investment Methods" for
information concerning risks associated with certain investment techniques
which may be utilized by the Fund.
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.
----------------------------------------------------------------------------
INVESTMENT ADVISOR
U.S. Bank National Association, 601 Second Avenue South, Minneapolis,
Minnesota 55402, acts as the Fund's 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.
The Fund has agreed to pay the Advisor monthly fees calculated on an annual
basis equal to 0.70% of its average daily net assets, out of which the
Advisor pays the Sub-Advisors' fees. The Advisor may, at its option, waive
any or all of its fees, or reimburse expenses, with respect to the Fund from
time to time. Any such waiver or reimbursement is voluntary and may be
discontinued at any time. The Advisor also may absorb or reimburse expenses
of the Fund from time to time, in its discretion, while retaining the
ability to be reimbursed by the Fund for such amounts prior to the end of
the fiscal year. This practice would have the effect of lowering a Fund's
overall expense ratio and of increasing yield to investors, or the converse,
at the time such amounts are absorbed or reimbursed, as the case may be.
The Glass-Steagall Act generally prohibits banks from engaging in the
business of underwriting, selling or distributing securities and from being
affiliated with companies principally engaged in those activities. In
addition, administrative and judicial interpretations of the Glass-Steagall
Act prohibit bank holding companies and their bank and nonbank subsidiaries
from organizing, sponsoring or controlling registered open-end investment
companies that are continuously engaged in distributing their shares. Bank
holding companies and their bank and nonbank subsidiaries may serve,
however, as investment advisors to registered investment companies, subject
to a number of terms and conditions.
Although the scope of the prohibitions and limitations imposed by the
Glass-Steagall Act has not been fully defined by the courts or the
appropriate regulatory agencies, FAIF has received an opinion from its
counsel that the Advisor is not prohibited from performing the investment
advisory services described above, and that certain
<PAGE>
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.
----------------------------------------------------------------------------
SUB-ADVISORS
Federated Investment Counseling, 1001 Liberty Avenue, Pittsburgh,
Pennsylvania 15222-3779 and Federated Global Research Corp., 175 Water
Street, New York, New York 10038-4965, both subsidiaries of Federated
Investors, Inc., serve as sub-advisors to the Fund under an agreement with
the Advisor (the "Sub-Advisory Agreement"). The Sub-Advisors are responsible
for the investment and reinvestment of a portion of the Fund's assets and
the placement of brokerage transactions in connection therewith. Federated
Investment Counseling manages the Fund's investments in high yield (i.e.,
non-investment grade) domestic debt obligations and U.S. dollar denominated
foreign corporate debt obligations, Federated Global Research Corp. manages
the Fund's investments in investment grade and high yield foreign government
and foreign corporate debt obligations and the Advisor manages the Fund's
investments in U.S. government securities and investment grade domestic
corporate debt obligations. For their services under the Sub-Advisory
Agreement, each Sub-Advisor is paid a monthly fee by the Advisor calculated
on an annual basis equal to 0.20% of the first $25 million of the Fund's
average daily net assets, 0.165% of the Fund's average daily net assets in
excess of $25 million up to $50 million, 0.13% of the Fund's average daily
net assets in excess of $50 million up to $100 million and 0.105% of the
Fund's average daily net assets in excess of $100 million.
Federated Investment Counseling, a Delaware business trust, and Federated
Global Research Corp., a Delaware corporation, are each registered
investment advisors under the Investment Advisers Act. The Sub-Advisors and
other subsidiaries of Federated Investors serve as investment advisors to a
number of investment companies and private accounts.
----------------------------------------------------------------------------
PORTFOLIO MANAGERS
The Fund's investments in high yield (i.e., non-investment grade) domestic
debt obligations and U.S. dollar denominated foreign corporate debt
obligations are managed by Mark E. Durbiano and Constantine Kartsonas. The
Fund's investments in investment grade and high yield foreign government
and foreign corporate debt obligations are managed by a committee
comprised of Robert M. Kowit, Michael W. Casey, Drew J. Collins and Henry
A. Frantzen. The Fund's investments in U.S. government and investment
grade domestic corporate debt obligations are managed by a committee
comprised of Thomas McGlinch and Wan-Chong Kung. The backgrounds of the
portfolio managers are set forth below.
MARK E. DURBIANO is a portfolio manager of the Sub-Advisor who co-manages
the Fund's investments in high yield (i.e., non-investment grade) domestic
debt obligations and U.S. dollar denominated foreign corporate debt
obligations. Mr. Durbiano joined Federated Investors, the predecessor to the
parent company of the Sub-Advisors, in 1982 and has been a Senior Vice
President of Federated Investment Counseling, a subsidiary of Federated
Investors, Inc., since March 1997. From 1988 through 1995, Mr. Durbiano was
a Vice President of an affiliate of Federated Advisors, a subsidiary of
Federated Investors, Inc. Mr. Durbiano is a Chartered Financial Analyst and
received his master's degree in business administration with a concentration
in finance from the University of Pittsburgh.
CONSTANTINE KARTSONAS is a portfolio manager of the Sub-Advisor who
co-manages the Fund's
<PAGE>
investments in high yield (i.e., non-investment grade) domestic debt
obligations and U.S. dollar denominated foreign corporate debt
obligations. Mr. Kartsonas joined Federated Investors in 1994 as an
investment analyst and has been an Assistant Vice-President of Federated
Investment Counseling since March 1997. From 1990 to 1993, Mr. Kartsonas
served as an operations analyst at Lehman Brothers. Mr. Kartsonas received
his master's degree in business administration with a concentration in
economics from the University of Pittsburgh.
ROBERT M. KOWIT is a member of the committee which manages the Fund's
investments in investment grade and high yield foreign government and
foreign corporate debt obligations. Mr. Kowit joined Federated Investors
in 1995 as a Vice President. Mr. Kowit served as a Managing Partner of
Copernicus Global Asset Management from January 1995 through October 1995.
From 1990 to 1994, he served as Senior Vice President of International
Fixed Income and Foreign Exchange for John Hancock Advisers. Mr. Kowit
received his master's degree in business administration from Iona College
with a concentration in finance.
MICHEAL W. CASEY, PH.D. is a member of the committee which manages the
Fund's investments in investment grade and high yield foreign government and
foreign corporate debt obligations. Dr. Casey joined Federated Investors in
1996 as an Assistant Vice President. From 1990 to 1996, Dr. Casey served as
an International Economist and Portfolio Strategist for Maria Fiorini
Ramirez Inc. Dr. Casey earned a doctorate degree concentrating in economics
from The New School for Social Research and a master's of science from the
London School of Economics.
DREW J. COLLINS is a member of the committee which manages the Fund's
investments in investment grade and high yield foreign government and
foreign corporate debt obligations. Mr. Collins joined Federated Investors
in 1995 as a Senior Vice President. Mr. Collins served as Vice
President/Portfolio Manager of international equity portfolios at Arnhold
and Bleichroeder, Inc. from 1994 to 1995. He served as an Assistant Vice
President/Portfolio Manager for international equities at the College
Retirement Equities Fund from 1986 to 1994. Mr. Collins is a Chartered
Financial Analyst and received his M.B.A. in finance from the Wharton
School of The University of Pennsylvania.
HENRY A. FRANTZEN is a member of the committee which manages the Fund's
investments in investment grade and high yield foreign government and
foreign corporate debt obligations. Mr. Frantzen joined Federated
Investors in 1995 as an Executive Vice President. Mr. Frantzen served as
Chief Investment Officer of international equities at Brown Brothers
Harriman & Co. from 1992 until 1995.
THOMAS MCGLINCH is a member of the committee which manages the Fund's
investments in U.S. government securities and investment grade domestic
corporate debt obligations. Mr. McGlinch has over 16 years of investment
industry experience. Prior to joining the Advisor in 1998, Mr. McGlinch
served as a portfolio co-manager for Piper Capital Management Incorporated
overseeing the management of several Piper Funds. Mr. McGlinch received
his bachelor's degree in accounting from St. John's University and
master's degree in business administration from the University of St.
Thomas. Mr. McGlinch is a Chartered Financial Analyst.
WAN-CHONG KUNG is a member of the committee which manages the Fund's
investments in U.S. government securities and investment grade domestic
corporate debt obligations. Ms. Kung has over five years of investment
industry experience. Prior to joining the Advisor in 1998, Ms. Kung served
as a vice president and a portfolio co-manager for Piper Capital
Management Incorporated, overseeing the management of several Piper Funds.
Ms. Kung received her bachelor's degree in economics from the University
of the Philippines and received her master's degree in business
administration from the University of Minnesota. Ms. Kung is a Chartered
Financial Analyst.
<PAGE>
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CUSTODIAN
The Custodian of the Fund's 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 Fund, the Custodian is paid monthly
fees calculated on an annual basis equal to 0.03% of the Fund's average
daily net assets. In addition, the Custodian is reimbursed for its
out-of-pocket expenses incurred while providing its services to the Fund.
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ADMINISTRATOR
The administrator for the Fund is SEI Investments Management Corporation,
Oaks, Pennsylvania 19456. The Administrator, a wholly-owned subsidiary of
SEI Investments Company, provides the Fund with certain administrative
services necessary to operate the Fund. 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
the 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 the Fund. 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
Fund. For these services, the Administrator compensates the
sub-administrator at an annual rate of up to 0.05% of the 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 Fund. 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 Fund 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 Fund is made
available.
PURCHASES AND REDEMPTIONS OF SHARES
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SHARE PURCHASES AND REDEMPTIONS
Shares of the Fund are sold and redeemed on days on which both the New York
Stock Exchange and federally-chartered banks are open for business
("Business Days").
Payment for shares can be made only by wire transfer. All information
needed will be taken over the telephone and the order will be considered
placed when the Custodian receives payment by wire. Federal funds should
be wired as follows: U.S. Bank National Association, Minneapolis,
Minnesota, ABA Number 091000022; For Credit to: DST Systems, Inc.: Account
Number
<PAGE>
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 Fund reserves 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 Fund 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 Fund. It is the financial
institution's responsibility to transmit orders promptly.
The Fund is required to redeem for cash all full and fractional shares of
the Fund. Redemption requests may be made any time before 3:00 p.m. Central
time in order to receive that day's redemption price. For redemption
requests received before 3:00 p.m. Central time, payment will ordinarily be
made the next business day by transfer of federal funds, but payment may be
made up to 7 days after the request.
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WHAT SHARES COST
Class Y Shares of the Fund 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 the 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 the Fund 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
Fund, cash and receivables will be valued at their face amounts. Interest
will be recorded as accrued and dividends will be recorded on the
ex-dividend date. Security valuations are furnished by an independent
pricing service that has been approved by the Board of Directors. Securities
listed on a securities exchange or an automated quotation system for which
quotations are readily available, including securities traded over the
counter, are valued at the last quoted sale price on the principal exchange
on which they are traded on the valuation date, or, if there is no such
reported sale on the valuation date, at the most recently quoted bid price.
Debt obligations with remaining maturities in excess of sixty days are
valued at the most recently quoted bid price. For such debt obligations the
pricing service may employ methods that utilize actual market transactions,
broker-dealer valuations, or other electronic data processing techniques.
These techniques generally consider such factors as security prices, yields,
maturities, call features, ratings and developments relating to specific
securities in arriving at security valuations. Debt obligations with
remaining maturities of sixty
<PAGE>
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 Fund 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 the 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 Fund may differ because of distribution,
shareholder servicing, transfer agent and/or dividend disbursing expenses
charged to Class A and Class B Shares.
FOREIGN SECURITIES. Any assets or liabilities of the Fund 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 Fund. Thus, the calculation of the Fund's net asset value may not
take place contemporaneously with the determination of the prices of foreign
securities held in the Fund's portfolio. 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 the Fund might be significantly affected on days when an investor
has no access to the Fund.
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EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund shares. The Fund will
allow such exchanges only upon the prior approval by the Fund and a
determination by the Fund and the Advisor or Sub-Advisors that the
securities to be exchanged are acceptable. Securities accepted by the 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 Fund.
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 Fund.
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DIVIDENDS AND DISTRIBUTIONS
Dividends with respect to the Fund are declared and paid monthly to all
shareholders of record on the record date.
Distributions of any net realized long-term capital gains will be made at
least once every 12 months. Dividends and distributions are automatically
reinvested in additional shares of the Fund paying the dividend on payment
dates at the ex-dividend date net asset value without a sales charge, unless
<PAGE>
shareholders request cash payments on the new account form or by writing
to the Fund.
All shareholders on the record date are entitled to the dividend. If shares
are purchased before a record date for a dividend or a distribution of
capital gains, a shareholder will pay the full price for the shares and will
receive some portion of the purchase price back as a taxable dividend or
distribution (to the extent, if any, that the dividend or distribution is
otherwise taxable to holders of Fund shares). If shares are redeemed or
exchanged before the record date for a dividend or distribution or are
purchased after the record date, those shares are not entitled to the
dividend or distribution.
The amount of dividends payable on Class Y Shares generally will be more
than the dividends payable on Class A and Class B Shares because of
distribution, shareholder servicing, transfer agent and/or dividend
disbursing expenses charged to Class A and Class B Shares.
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EXCHANGE PRIVILEGE
Shareholders may exchange Class Y Shares of the 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 Fund does not constitute an offering
or recommendation of shares of one fund by another fund. This privilege is
available to shareholders resident in any state in which the fund shares
being acquired may be sold. An investor who is considering acquiring shares
in another First American fund pursuant to the exchange privilege should
obtain and carefully read a prospectus of the fund to be acquired. Exchanges
may be accomplished by a written request, or by telephone if a preauthorized
exchange authorization is on file with the Transfer Agent, shareholder
servicing agent, or financial institution.
Written exchange requests must be signed exactly as shown on the
authorization form. Neither the Fund, 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 Transer Agent nor the Fund
will be responsible for the authenticity of exchange instructions received
by telephone if it reasonably believes those instructions to be genuine. The
Fund 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 Fund 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 should not be used to take advantage of short-term swings in the
securities markets. The Fund reserves the right to limit or terminate
exchange privileges as to any
<PAGE>
shareholder who makes exchanges more than four times a year (other than
through periodic investment programs). The Fund may modify or revoke the
exchange privilege for all shareholders upon 60 days' prior written notice
or without notice in times of drastic economic or market changes.
Shares of a class in which an investor is no longer eligible to participate
may be exchanged for shares of a class in which that investor is eligible to
participate. An example of this kind of exchange would be a situation in
which Class Y Shares held by a financial institution in a trust or agency
capacity for one or more individual beneficiaries are exchanged for Class A
Shares and distributed to the individual beneficiaries.
There are currently no additional fees or charges for the exchange service.
The Fund does not contemplate establishing such fees or charges, but it
reserves the right to do so. Shareholders will be notified of the imposition
of any additional fees or charges.
FEDERAL INCOME TAXES
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"),
during its current taxable year in order to be relieved of payment of
federal income taxes on amounts of taxable income it distributes to
shareholders.
Distributions paid from the Fund's net investment income and net short-term
capital gains will be taxable to shareholders as ordinary income, whether or
not the shareholder elects to have such dividends automatically reinvested
in additional shares. Dividends paid by the Fund will not be eligible for
the 70% deduction for dividends received by corporations.
Distributions paid from the net capital gains of the Fund and designated as
capital gain dividends generally will be taxable to shareholders as
long-term capital gains, regardless of the length of time for which they
have held their shares in the Fund. In the case of shareholders who are
individuals, estates, or trusts, the Fund will designate the portion of each
capital gain dividend that must be treated as mid-term capital gain (subject
to a maximum tax rate of 28%) and the portion that must be treated as
long-term capital gain (subject to a maximum tax rate of 20%).
Gain or loss realized upon the sale of shares in the Fund will be treated as
capital gain or loss, provided that the shares represented a capital asset
in the hands of the shareholder. Such gain or loss will be long-term
(subject to a maximum 20% tax rate in the case of individuals, estates and
trusts) if the shares were held for more than one year.
The Fund is required by federal law to withhold 31% of reportable payments
(including dividends, capital gain distributions, and redemptions) paid to
certain shareholders who have not complied with IRS regulations. In order to
avoid this withholding requirement, each investor will be asked to certify
on his or her account application that the social security or taxpayer
identification number provided is correct and that the investor is not
subject to backup withholding for previous underreporting to the IRS.
This is a general summary of the federal tax laws applicable to the Fund
and its shareholders as of the date of this Prospectus. See the Statement
of Additional Information for further details.
FUND SHARES
Each share of the 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
Fund have no preemptive or conversion rights.
Each share of the 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
<PAGE>
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
class of shares, that class will vote as a separate series. Examples of such
issues would be proposals to 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, the Fund may advertise information regarding its
performance. The 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 Fund is computed by dividing the net investment income per
share (as defined in applicable SEC regulations) earned during a 30-day
period (which period will be stated in the advertisement) by the maximum
offering price per share on the last day of the period. Yield is an
annualized figure, in that it assumes that the same level of net investment
income is generated over a one year period. The yield formula annualizes net
investment income by providing for semi-annual compounding.
"Total return" is based on the overall dollar or percentage change in value
of a hypothetical investment in the Fund assuming reinvestment of dividend
distributions and deduction of all charges and expenses. "Cumulative total
return" reflects the 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 the 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 Fund 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 the
Fund) and total return (which measures actual income, plus realized and
unrealized gains or losses of the Fund's investments). Consequently,
distribution rates alone should not be considered complete measures of
performance.
The performance of the Class Y Shares of the Fund will normally be higher
than for the Class A or 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 the 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 the
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 the 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 Fund's performance, see "Fund Performance"
in the Statement of Additional Information.
<PAGE>
SPECIAL INVESTMENT METHODS
This section provides additional information concerning the securities in
which the Fund may invest and related topics. Further information concerning
these matters is contained in the Statement of Additional Information.
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U.S. GOVERNMENT SECURITIES
The U.S. government securities in which the Fund invests are either issued
or guaranteed by the U.S. government, its agencies or instrumentalities.
The U.S. government securities in which the Fund invests principally are:
* direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds;
* notes, bonds, and discount notes issued and guaranteed by U.S.
government agencies and instrumentalities supported by the full faith
and credit of the United States;
* notes, bonds, and discount notes of U.S. government agencies or
instrumentalities which receive or have access to federal funding; and
* notes, bonds, and discount notes of other U.S. government
instrumentalities supported only by the credit of the instrumentalities.
The government securities in which the Fund may invest are backed in a
variety of ways by the U.S. government or its agencies or instrumentalities.
Some of these securities, such as Government National Mortgage Association
("GNMA") mortgage-backed securities, are backed by the full faith and credit
of the U.S. government. Other securities, such as obligations of the Federal
National Mortgage Association ("FNMA") or Federal Home Loan Mortgage
Corporation ("FHLMC") are backed by the credit of the agency or
instrumentality issuing the obligations but not the full faith and credit of
the U.S. government. No assurances can be given that the U.S. government
will provide financial support to these other agencies or instrumentalities
because it is not obligated to do so.
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MORTGAGE-BACKED SECURITIES
The Fund may invest in mortgage-backed securities which are Agency
Pass-Through Certificates, private pass-through securities, collateralized
mortgage obligations ("CMOs"), or Real Estate Mortgage Investment Conduits
("REMICS").
Agency Pass-Through Certificates are mortgage pass-through certificates
representing undivided interests in pools of residential mortgage loans.
Distribution of principal and interest on the mortgage loans underlying an
Agency Pass-Through Certificate is an obligation of or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC"). The obligation of GNMA with respect to such certificates is
backed by the full faith and credit of the United States, while the
obligations of FNMA and FHLMC with respect to such certificates rely solely
on the assets and credit of those entities. The mortgage loans underlying
GNMA certificates are partially or fully guaranteed by the Federal Housing
Administration or the Veterans Administration, while the mortgage loans
underlying FNMA certificates and FHLMC certificates are conventional
mortgage loans which are, in some cases, insured by private mortgage
insurance companies. Agency Pass-Through Certificates may be issued in a
single class with respect to a given pool of mortgage loans or in multiple
classes.
Private mortgage pass-through securities ("Private Pass-Throughs") are
structured similarly to GNMA, FNMA and FHLMC mortgage pass-through
securities and are issued by originators of and investors in mortgage loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. These
securities usually are backed by a pool of conventional fixed rate or
adjustable loans. Since Private Pass-Throughs typically are not guaranteed
by an entity having the credit status of GNMA, FNMA or FHMLC, such
securities generally are structured with one or more types of credit
<PAGE>
enhancement. Such credit support falls into two categories: (i) liquidity
protection and (ii) protection against losses resulting from ultimate
default by an obligor on the underlying assets. Liquidity protection refers
to the provision of advances, generally by the entity administering the pool
of assets, to ensure that the pass-through of payments due on the underlying
pool occurs in a timely fashion. Protection against losses resulting from
ultimate default enhances the likelihood of ultimate payment of the
obligations on at least a portion of the assets in the pool. Such protection
may be provided through guarantees, insurance policies or letters of credit
obtained by the issuer or sponsor from third parties, through various means
of structuring the transaction or through a combination of such approaches.
The Fund will not pay any additional fees for such credit support, although
the existence of credit support may increase the price of a security.
The ratings of securities for which third-party credit enhancement provides
liquidity protection or protection against losses from default are generally
dependent upon the continued creditworthiness of the enhancement provider.
The ratings of such securities could be subject to reduction in the event of
deterioration in the creditworthiness of the credit enhancement provider
even in cases where the delinquency and loss experience on the underlying
pool of assets is better than expected.
CMOs are debt obligations typically issued by a private special-purpose
entity and collateralized by residential or commercial mortgage loans or
Agency Pass-Through Certificates. The Fund has no minimum rating
requirements for these investments. Because CMOs are debt obligations of
private entities, payments on CMOs generally are not obligations of or
guaranteed by any governmental entity, and their ratings and
creditworthiness typically depend on, among other factors, the legal
insulation of the issuer and transaction from the consequences of a
sponsoring entity's bankruptcy. CMOs generally are issued in multiple
classes, with holders of each class entitled to receive specified portions
of the principal payments and prepayments and/or of the interest payments on
the underlying mortgage loans. These entitlements can be specified in a wide
variety of ways, so that the payment characteristics of various classes may
differ greatly from one another. For instance, holders may hold interests in
CMO tranches called Z-tranches which defer interest and principal payments
until one or more other classes of the CMO have been paid in full. Examples
of the more common classes are provided in the Statement of Additional
Information. The CMOs in which the Fund may invest include classes which are
subordinated in right of payment to other classes.
REMICs are offerings of multiple class real estate mortgage-backed
securities which qualify and elect treatment as such under provisions of the
Internal Revenue Code. Issuers of REMICs may take several forms, such as
trusts, partnerships, corporations, associations, or segregated pools of
mortgages. Once REMIC status is elected and obtained, the entity is not
subject to federal income taxation. Instead, income is passed through the
entity and is taxed to the person or persons who hold interests in the
REMIC. A REMIC interest must consist of one or more classes of "regular
interests," some of which may offer adjustable rates of interest (the type
in which the Fund primarily invests), and a single class of "residual
interests." To qualify as a REMIC, substantially all the assets of the
entity must be in assets directly or indirectly secured principally by real
property.
It is generally more difficult to predict the effect of changes in market
interest rates on the return on mortgaged-backed securities than to predict
the effect of such changes on the return of a conventional fixed-rate debt
instrument, and the magnitude of such effects may be greater in some cases.
The return on interest-only and principal-only mortgage-backed securities is
particularly sensitive to changes in interest rates and prepayment speeds.
When interest rates decline and prepayment speeds increase, the holder of an
interest-only mortgage-backed security may not even recover its initial
investment. Similarly, the return on an inverse floating rate CMO is likely
to
<PAGE>
decline more sharply in periods of increasing interest rates than that of a
fixed-rate security. For these reasons, interest-only, principal-only and
inverse floating rate mortgage-backed securities generally have greater risk
than more conventional classes of mortgage-backed securities.
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ASSET-BACKED SECURITIES
The 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
For defensive purposes and to maintain liquidity, the Fund may temporarily
invest in debt obligations maturing in one year or less, including time and
savings deposits, deposit notes and bankers' acceptances (including
certificates of deposit) in commercial or savings banks. They also include
Eurodollar Certificates of Deposit issued by foreign branches of United
States or foreign banks; Eurodollar Time Deposits, which are United States
dollar-denominated deposits in foreign branches of United States or foreign
banks; and Yankee Certificates of Deposit, which are United States
dollar-denominated certificates of deposit issued by United States branches
of foreign banks and held in the United States. For a description of certain
risks of investing in foreign issuers' securities, see "-- Foreign
Securities" below. In each instance, the 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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DEBT OBLIGATIONS
The Fund may invest in both investment grade and non-investment grade
(lower-rated) bonds (which may be denominated in U.S. dollars or non-U.S.
currencies) and other debt obligations issued by domestic and foreign
corporations and other private issuers. There are no minimum rating
requirements for these investments by the Fund. The Fund's investments may
include U.S. dollar-denominated debt obligations known as "Brady Bonds,"
which are issued for the exchange of existing commercial bank loans to
foreign entities for new obligations that are generally collateralized by
zero coupon Treasury securities having the same maturity. From time to time,
the Fund's portfolio may consist primarily of lower-rated (i.e., rated Ba or
lower by Moody's, or BB or lower by Standard & Poor's) corporate debt
obligations, which are commonly referred to as "junk bonds." Certain debt
obligations in which the Fund invests may involve equity characteristics.
The Fund may, for example, invest in unit offerings that combine debt
securities and common stock equivalents such as warrants, rights and
options. It is anticipated that the majority of the value attributable to
the unit will relate to its debt component.
The prices and yields of non-investment grade securities generally fluctuate
more than investment grade securities, and such prices may decline
significantly in periods of general economic difficulty or rising interest
rates. Participation in non-investment grade securities generally involves
greater returns in the form of higher average yields. The prices of
high-yielding securities have generally been less sensitive to interest rate
changes than higher-rated investments, but more sensitive to individual
issuer developments. During an
<PAGE>
economic downturn or substantial period of rising interest rates highly
leveraged issuers may experience financial stress which could adversely
affect their ability to service their principal and interest payment
obligations, to meet projected business goals, and to obtain additional
financing. If the issuer of a security held by the Fund defaulted, the Fund
might incur additional expenses to seek recovery. In addition, periods of
economic uncertainty and changes can be expected to result in increased
volatility of market prices of high-yielding securities and the Fund's net
asset value. Because the Fund invests in non-investment grade securities,
investors should carefully consider their ability to assume the risks
involved before making an investment in the Fund.
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FLOATING RATE CORPORATE DEBT OBLIGATIONS
The Fund expects to invest in floating rate corporate debt obligations,
including increasing rate securities. Floating rate securities are generally
offered at an initial interest rate which is at or above prevailing market
rates. The interest rate paid on these securities is then reset periodically
(commonly every 90 days) to an increment over some predetermined interest
rate index. Common utilized indices include the three-month Treasury bill
rate, the 180-day Treasury bill rate, the one-month or three-month London
Interbank Offered Rate (LIBOR), the prime rate of a bank, the commercial
paper rates, or the longer-term rates on U.S. Treasury securities.
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FIXED RATE CORPORATE DEBT OBLIGATIONS
The Fund will also invest in fixed rate securities. Fixed rate securities
tend to exhibit more price volatility during times of rising or falling
interest rates than securities with floating rates of interest. This is
because floating rate securities, as described above, behave like short-term
instruments in that the rate of interest they pay is subject to periodic
adjustments based on a designated interest rate index. Fixed rate securities
pay a fixed rate of interest and are more sensitive to fluctuating interest
rates. In periods of rising interest rates the value of a fixed rate
security is likely to fall. Fixed rate securities with short-term
characteristics are not subject to the same price volatility as fixed rate
securities without such characteristics. Therefore, they behave more like
floating rate securities with respect to price volatility.
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PARTICIPATION INTERESTS
The Fund may acquire participation interests in senior, fully secured
floating rate loans that are made primarily to U.S. companies. The Fund's
investments in participation interests are subject to its limitation on
investments in illiquid securities. The Fund may purchase only those
participation interests that mature in one year or less, or, if maturing in
more than one year, have a floating rate that is automatically adjusted at
least once each year according to a specified rate for such investments,
such as a published interest rate or interest rate index. Participation
interests are primarily dependent upon the creditworthiness of the borrower
for payment of interest and principal. Such borrowers may have difficulty
making payments and may have senior securities rated as low as C by Moody's,
or D by Standard & Poor's.
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FOREIGN SECURITIES
IN GENERAL. The Fund may invest in foreign securities, including securities
not publicly traded in the United States and securities denominated in
currencies other than U.S. dollars. The Fund may hold funds in bank deposits
or other money market investments denominated in foreign currencies. The
Fund may purchase securities issued in any country, developed or
undeveloped; there are no minimum rating requirements for the foreign
securities in which the Fund invests.
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
<PAGE>
political, social or economic instability in the country of the issuer, the
difficulty of predicting international trade patterns, the possibility of
the imposition of exchange controls, expropriation, limits on removal of
currency or other assets, nationalization of assets, foreign withholding and
income taxation, and foreign trading practices (including higher trading
commissions, custodial charges and delayed settlements). Foreign securities
also may be subject to greater fluctuations in price than securities issued
by United States corporations. The principal markets on which these
securities trade may have less volume and liquidity, and may be more
volatile, than securities markets in the United States.
In addition, there may be less publicly available information about a
foreign company than about a United States domiciled company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to United
States domestic companies. There is also generally less government
regulation of securities exchanges, brokers and listed companies abroad than
in the United States. Confiscatory taxation or diplomatic developments could
also affect investment in those countries. In addition, foreign branches of
United States banks, foreign banks and foreign issuers may be subject to
less stringent reserve requirements and to different accounting, auditing,
reporting, and recordkeeping standards than those applicable to domestic
branches of United States banks and United States domestic issuers.
EMERGING MARKETS. The Fund may invest in securities issued by governmental
and corporate issuers that are located in emerging market countries.
Investing in securities of issuers in emerging markets involves exposure to
economic infrastructures that are generally less diverse and mature than,
and to political systems that can be expected to have less stability than,
those of developed countries. Other characteristics of emerging market
countries that may affect investment in their markets include certain
governmental policies that may restrict investment by foreigners and the
absence of developed legal structures governing private and foreign
investments and private property. The typical small size of the markets for
securities issued by issuers located in emerging markets and the possibility
of low or non-existent volume of trading in those securities may also result
in a lack of liquidity and in price volatility of those securities. In
addition, issuers in emerging market countries are typically subject to a
greater degree of change in earnings and business prospects than are
companies in developed markets.
AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS. For many
foreign securities, United States dollar-denominated American Depositary
Receipts, which are traded in the United States on exchanges or
over-the-counter, are issued by domestic banks. American Depositary Receipts
represent the right to receive securities of foreign issuers deposited in a
domestic bank or a correspondent bank. American Depositary Receipts do not
eliminate all the risk inherent in investing in the securities of foreign
issuers. However, by investing in American Depositary Receipts rather than
directly in securities of foreign issuers, the 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. The 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
<PAGE>
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 FORWARD EXCHANGE CONTRACTS
To settle transactions in foreign currencies or to protect the Fund's assets
against adverse changes in foreign currency exchange rates or exchange
control regulations, the Fund may enter into foreign currency transactions.
Currency transactions may be conducted either on a spot or cash basis at
prevailing rates or through forward foreign currency exchange contracts. A
forward foreign currency exchange contract is an obligation to purchase or
sell an amount of a particular currency at a specific price and on a future
date agreed upon by the parties. At the time the Fund enters into a forward
foreign currency exchange contract, Fund assets with a value equal to the
Fund's obligation under the forward foreign currency exchange contract are
segregated on the Fund's records, in accordance with the guidelines of the
SEC and are maintained until the contract has been settled. The Fund will
not enter into a forward foreign currency exchange contract with a term of
more than six months.
To protect against the fluctuation of a particular foreign currency, the
Fund may also enter into a forward foreign currency exchange contract to
purchase or sell an amount of that currency. The Fund may enter into these
contracts for the purpose of hedging against foreign exchange risk arising
from the Fund's investment or anticipated investment in securities
denominated in foreign currencies. This type of short-term hedging involves
significant risk due to the difficulties of predicting short-term currency
market movements and precisely matching forward foreign currency exchange
contract amounts and the constantly changing value of the securities
involved.
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PAYMENT-IN-KIND DEBENTURES AND DELAYED INTEREST SECURITIES
The Fund may invest in debentures the interest on which may be paid in other
securities rather than cash ("PIKs"). Typically, during a specified term
prior to the debenture's maturity, the issuer of a PIK may provide for the
option or the obligation to make interest payments in debentures, common
stock or other instruments (i.e. "in kind" rather than in cash). The type of
instrument in which interest may or will be paid would be known by the Fund
at the time of investment. While PIKs generate income for purposes of
generally accepted accounting standards, they do not generate cash flow and
thus could cause the Fund to be forced to liquidate securities at an
inopportune time in order to distribute cash, as required by the Code.
Unlike PIKs, delayed interest securities do not pay interest for a specified
period. Because values of securities of this type are subject to greater
fluctuations than are the values of securities that distribute income
regularly, they may be more speculative than such securities.
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ZERO COUPON OBLIGATIONS
The Fund may invest in zero coupon securities. Zero coupon securities pay no
cash income to their holders until they mature and are issued at substantial
discounts from their value at maturity. When held to maturity, their entire
return comes from the difference between their purchase price and their
maturity value. Because interest on zero coupon securities is not paid on a
current basis, the values of securities of this type are subject to greater
fluctuations than are the values of securities that distribute income
regularly and they may be more speculative than such securities.
Accordingly, the values of these securities may be highly volatile as
interest rates rise or fall.
<PAGE>
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CORPORATE EQUITY SECURITIES
The Fund may also invest in equity securities including common stocks,
warrants and rights issued by corporations in any industry (industrial,
financial or utility) which may be denominated in U.S. dollars or in foreign
currencies.
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PREFERRED STOCK
The Fund may invest in preferred stock. Preferred stock, unlike common
stock, offers a stated dividend rate payable from the issuer's earnings.
Preferred stock dividends may be cumulative or non-cumulative,
participating, or auction rate. If interest rates rise, the fixed dividend
on preferred stocks may be less attractive, causing the price of preferred
stocks to decline. Preferred stock may have mandatory sinking fund
provisions, as well as call/redemption provisions prior to maturity, a
negative feature when interest rates decline.
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OPTIONS TRANSACTIONS
PURCHASES OF PUT AND CALL OPTIONS. The Fund may purchase put and call
options. These transactions will be undertaken only for the purpose of
reducing risk to the Fund; that is, for "hedging" purposes. These
transactions may include the purchase of put and call options on equity
securities, on foreign government debt obligation, on stock indices, on
interest rate indices, or on foreign currencies. Options on futures
contracts are discussed below under "-- Futures and Options on Futures."
A put option on a security gives the purchaser of the option the right (but
not the obligation) to sell, and the writer of the option the obligation to
buy, the underlying security at a stated price (the "exercise price") at any
time before the option expires. A call option on a security gives the
purchaser the right (but not the obligation) to buy, and the writer the
obligation to sell, the underlying security at the exercise price at any
time before the option expires. The purchase price for a put or call option
is the "premium" paid by the purchaser for the right to sell or buy.
Options on indices are similar to options on securities except that, rather
than the right to take or make delivery of a specific security at a stated
price, an option on an index gives the holder the right to receive, upon
exercise of the option, a defined amount of cash if the closing value of the
index upon which the option is based is greater than, in the case of a call,
or less than, in the case of a put, the exercise price of the option.
The Fund will not 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. The 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 the Fund and the prices of options, and the risk of
limited liquidity in the event that the Fund seeks to close out an option's
position before expiration by entering into an offsetting transaction.
WRITING OF CALL OPTIONS. The Fund may write (sell) covered call options on
up to 25% of its net assets. These transactions would be undertaken
principally to produce additional income. These transactions may include the
writing of covered call options on equity securities or on foreign
currencies which the Fund owns or has the right to acquire or on interest
rate indices.
When the 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
<PAGE>
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 Fund also may write call options on stock indices the movements of which
generally correlate with those of the Fund's 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
The Fund may engage in futures transactions and purchase options on futures.
These transactions may include the purchase of interest rate futures and
options on interest rate futures.
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 the 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.
The Fund may use futures contracts and options on futures in an effort to
reduce investment risk and as a part of its management of foreign currency
transactions.
Aggregate initial margin deposits for futures contracts, and premiums paid
for related options, may not exceed 5% of the 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 one-third of the market value of
the Fund's total assets. Futures transactions will be limited to the extent
necessary to maintain the Fund's qualification as a regulated investment
Company under the Code.
Where the 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 the Fund's total assets.
Where the Fund is permitted to enter into futures contracts obligating it to
purchase securities, currency or an index in the future at a specified
price, the 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 the Fund was
permitted to enter. When the Fund enters into futures contracts obligating
it to sell securities or currencies, 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 of the contracts prior to the settlement date.
Futures transactions involve brokerage costs and require the Fund to
segregate assets to cover contracts that would require it to purchase
securities or currencies. The 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 the 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
<PAGE>
assurance of liquidity in the secondary market for purposes of closing out
futures positions.
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REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements. A repurchase agreement
involves the purchase by the 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 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), the Fund would suffer a loss if the proceeds
from the sale of the collateral were less than the agreed-upon repurchase
price. The Advisor and Sub-Advisors will monitor the creditworthiness of the
firms with which the Fund enter into repurchase agreements.
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WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS; DOLLAR ROLLS
The 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. The 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, the
Fund will maintain in a segregated account cash or liquid securities in an
amount sufficient to meet its purchase commitments.
The purchase of securities on a when-issued or delayed delivery basis
exposes the Fund to risk because the securities may decrease in value prior
to delivery. In addition, the 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 Fund will engage in when-issued and delayed
delivery transactions only for the purpose of acquiring portfolio securities
consistent with its investment objectives, and not for the purpose of
investment leverage. A seller's failure to deliver securities to the 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, the Fund may enter into mortgage "dollar rolls" in
which the Fund sells securities and simultaneously contracts with the same
counterparty to repurchase similar (same type, coupon and maturity) but not
identical securities on a 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. The Fund will hold
and maintain in a segregated account until the settlement date cash or
liquid securities in an amount equal to the forward purchase price.
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LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio
securities representing up to one-third of the value of its total assets to
broker-dealers, banks or other institutional borrowers of
<PAGE>
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 Fund
will only enter into loan arrangements with broker-dealers, banks, or other
institutions which the Advisor has determined are creditworthy under
guidelines established by the Board of Directors. In these loan
arrangements, the Fund 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 Fund 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 National Association, are
40% of the Fund's income from such securities lending transactions.
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PORTFOLIO TRANSACTIONS
Portfolio transactions in the over-the-counter market will be effected with
market makers or issuers, unless better overall price and execution are
available through a brokerage transaction. It is anticipated that most
portfolio transactions involving debt securities will be executed on a
principal basis. Also, with respect to the placement of portfolio
transactions with securities firms, subject to the overall policy to seek to
place portfolio transactions as efficiently as possible and at the best
price, research services and placement of orders by securities firms for the
Fund's shares may be taken into account as a factor in placing portfolio
transactions for the Fund.
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PORTFOLIO TURNOVER
The Fund may trade or dispose of portfolio securities as considered
necessary to meet its investment objective. Because the Fund will actively
use trading to benefit from short term yield disparities among different
issues of fixed-income securities or otherwise to increase its income, the
Fund may be subject to a greater degree of portfolio turnover than might be
expected from funds which invest substantially all of their assets on a
long-term basis. The Fund cannot accurately predict its portfolio turnover
rate, but it is anticipated that its annual turnover rate generally will not
exceed 200%. Higher portfolio turnover rates (100% or more) generally result
in higher transaction costs and could result in additional tax consequences
to the Fund's shareholders.
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INVESTMENT RESTRICTIONS
The fundamental and nonfundamental investment restrictions of the Fund are
set forth in full in the Statement of Additional Information. The
fundamental restrictions include the following:
* The Fund will not borrow money or pledge securities except, under
certain circumstances, the Fund may borrow up to one-third of the value
of its total assets and pledge up to 15% of the value of those assets to
secure such borrowings.
* The Fund will not lend any of its assets, except portfolio securities up
to one-third of the Fund's total assets.
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 Fund, as defined in the 1940 Act.
As a nonfundamental policy, the Fund will not invest more than 15% of its
net assets in all forms of illiquid investments, as determined pursuant to
applicable Securities and Exchange Commission rules and interpretations.
Certain securities (such as 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 the Fund to the extent that
qualified institutional buyers become, for a time, uninterested in
purchasing these securities.
<PAGE>
APPENDIX
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STANDARD & POOR'S CORPORATE BOND RATINGS
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
BB, B, CCC, CC -- Debt rated BB, B, CCC and CC 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 CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties of major risk exposures to
adverse conditions.
C -- The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC--" debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
D -- Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
NR -- Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of policy.
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MOODY'S CORPORATE BOND RATINGS
Aaa -- Bonds 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 edged." Interest payments are protected by a large or by an
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 -- Bonds 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 bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long term risks appear somewhat
larger than in Aaa securities.
A -- Bonds 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 suceptibility to impairment sometime in the
future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, (i.e., they are neither highly protected nor poorly secured.)
Interest
<PAGE>
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 bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are Ba are judged to have speculative elements; their
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 bonds in this class.
B -- Bonds which are rated B generally lack 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 -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NR -- Not rated by Moody's.
<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 Fund. These U.S. Bancorp affiliates may receive
compensation from the Fund for the services they provide to the Fund, 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"
<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-1302 (7/98) I
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED JULY 24, 1998
STRATEGIC INCOME FUND
This Statement of Additional Information relates to the Class A, Class
B and Class Y Shares of Strategic Income Fund (the "Fund") 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
Fund's current Prospectuses dated July 24, 1998. This Statement of Additional
Information is incorporated into the Fund's Prospectuses by reference. To obtain
copies of a Prospectus, write or call the Fund's 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 ........................ 2
SHORT-TERM INVESTMENTS ................................................. 2
REPURCHASE AGREEMENTS .................................................. 3
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS .......................... 3
MORTGAGE DOLLAR ROLLS .................................................. 3
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
CFTC INFORMATION ....................................................... 10
INVESTMENT RESTRICTIONS ................................................... 10
DIRECTORS AND EXECUTIVE OFFICERS .......................................... 12
DIRECTORS .............................................................. 12
EXECUTIVE OFFICERS ..................................................... 12
COMPENSATION ........................................................... 13
INVESTMENT ADVISORY AND OTHER SERVICES .................................... 14
INVESTMENT ADVISORY AGREEMENT .......................................... 14
SUB-ADVISORY AGREEMENT ................................................. 15
ADMINISTRATION AGREEMENT ............................................... 25
DISTRIBUTOR AND DISTRIBUTION PLANS ..................................... 16
CUSTODIAN; TRANSFER AGENT; COUNSEL; ACCOUNTANTS ........................ 17
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE ........................ 18
CAPITAL STOCK ............................................................. 19
NET ASSET VALUE AND PUBLIC OFFERING PRICE ................................. 19
FUND PERFORMANCE .......................................................... 20
SEC STANDARDIZED PERFORMANCE FIGURES ................................... 20
NON-STANDARD DISTRIBUTION RATES ........................................ 21
CERTAIN PERFORMANCE COMPARISONS ........................................ 21
TAXATION .................................................................. 21
RATINGS ................................................................... 24
RATINGS OF CORPORATE DEBT OBLIGATIONS AND
MUNICIPAL BONDS ........................................................ 24
RATINGS OF PREFERRED STOCK ............................................. 34
RATINGS OF MUNICIPAL NOTES ............................................. 26
RATINGS OF COMMERCIAL PAPER ............................................ 27
BEST'S RATING SYSTEM FOR INSURANCE COMPANIES ........................... 27
<PAGE>
GENERAL INFORMATION
First American Investment Funds, Inc. ("FAIF") was incorporated in
the State of Maryland on August 20, 1987 under the name "SECURAL Mutual Funds,
Inc." The Board of Directors and shareholders, at meetings held January 10,
1991, and April 2, 1991, respectively, approved amendments to the Articles of
Incorporation providing that the name "SECURAL Mutual Funds, Inc." be changed to
"First American Investment Funds, Inc."
FAIF is organized as a series fund and currently issues its shares
in 30 series. Each series of shares represents a separate investment portfolio
with its own investment objective and policies (in essence, a separate mutual
fund). This Statement of Additional Information relates to the Strategic Income
Fund series (the "Fund").
Shareholders may purchase shares of the 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. To
the extent permitted by the Investment Company Act of 1940 (the "1940 Act"), the
Fund 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 Fund. Except for differences among
the classes pertaining to distribution costs and shareholder servicing fees,
each share of the Fund represents an equal proportionate interest in the Fund.
FAIF has prepared and will provide Prospectuses relating to the
Class A, Class B and Class Y Shares of Fund. These Prospectuses can be obtained
by calling or writing SEI Investments Distribution Co., at the address and
telephone number set forth on the cover of this Statement of Additional
Information. This Statement of Additional Information relates both to the Class
A and Class B Shares Prospectus and to the Class Y Shares Prospectus for the
Fund. 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.
ADDITIONAL INFORMATION CONCERNING FUND INVESTMENTS
The investment objectives, policies and restrictions of the Fund are
set forth in the Prospectuses. Additional information concerning the investments
which may be made by the Fund is set forth under this caption. Additional
information concerning the Fund's investment restrictions is set forth below
under the caption "Investment Restrictions."
SHORT-TERM INVESTMENTS
The Fund can invest in a variety of short-term instruments which are
specified in the Prospectuses. Short-term investments and repurchase agreements
may be entered into on a joint basis by the Fund 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 Fund 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
<PAGE>
equivalent rating by another nationally recognized statistical rating
organization. The Fund 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 the Fund and the issuer, they are not normally traded. Although there is
no secondary market in the notes, the 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 Fund may invest in repurchase agreements to the extent specified
in the Prospectuses. The Fund's 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 Fund will
promptly receive additional collateral (so the total collateral is an amount at
least equal to the repurchase price plus accrued interest).
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
When the 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 the 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 the Fund will set aside cash
or liquid securities to satisfy its purchase commitments in the manner described
above, its liquidity and the ability of the Advisor or Sub-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, the Fund's commitments to purchase
when-issued or delayed delivery securities will not exceed 25% of the value of
its assets.
MORTGAGE DOLLAR ROLLS
In connection with its ability to purchase securities on a
when-issued or forward commitment basis, the Fund may enter into mortgage
"dollar rolls" in which the Fund sells securities and simultaneously contracts
with the same counterparty to repurchase similar (same type, coupon and
maturity) but not identical securities on a specified future date. In a mortgage
dollar roll, the Fund gives up the right to receive principal and interest paid
on the securities sold. However, the Fund would benefit to the extent of any
difference between the price received for the securities sold and the lower
forward price for the future purchase plus any fee income received. Unless such
benefits exceed the income, capital appreciation and gain or loss due to
mortgage prepayments that would have been realized on the securities sold as
part of the mortgage dollar roll, the use of this technique will diminish the
investment performance of the Fund compared with what such performance would
have been without the use of mortgage dollar rolls. The Fund will hold and
maintain in a segregated account until the settlement date cash or liquid
securities in an amount equal to the forward purchase price.
<PAGE>
The benefits derived from the use of mortgage dollar rolls may depend on the
Advisor's ability to predict correctly mortgage prepayments and interest rates.
There is no assurance that mortgage dollar rolls can be successfully employed.
In addition, the use of mortgage dollar rolls by the Fund while remaining
substantially fully invested increases the amount of the Fund's assets that are
subject to market risk to an amount that is greater than the Fund's net asset
value, which could result in increased volatility of the price of the Fund's
shares.
For financial reporting and tax purposes, mortgage dollar rolls are
considered as two separate transactions: one involving the purchase of a
security and a separate transaction involving a sale. The Fund does not
currently intend to enter into mortgage dollar rolls that are accounted for as a
financing.
LENDING OF PORTFOLIO SECURITIES
When the 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
Fund. During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on the securities. Loans are subject to
termination by the Fund or the borrower at any time. While the 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 Fund's custodian
and an affiliate of the Advisor, may act as securities lending agent for the
Fund 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 Fund may purchase put and call options on securities and may write covered
call options on securities which it owns or has the right to acquire. The Fund
may purchase put options to hedge against a decline in the value of its
portfolio. By using put options in this way, the 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,
the 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 the
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 less than, in the case of a put, the exercise
price of the option. This amount of cash is equal to the difference between the
closing price of the index and the exercise price of the option expressed in
dollars times a specified multiple (the "multiplier"). The writer of the option
is obligated, in return for the premium received, to make delivery of this
amount. Unlike stock options, all settlements for stock index options are in
cash, and gain or loss depends on price movements in the stock market generally
(or
<PAGE>
in a particular industry or segment of the market) rather than price movements
in individual stocks. The multiplier for an index option performs a function
similar to the unit of trading for a stock option. It determines the total
dollar value per contract of each point in the difference between the underlying
stock index. A multiplier of 100 means that a one-point difference will yield
$100. Options on different stock indices may have different multipliers.
OPTIONS ON INTEREST RATE INDICES. An option on an interest rate
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing value of the interest rate index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option. This amount of cash is equal to
the difference between the closing price of the index and the exercise price of
the option expressed in dollars times a specified multiple (the "multiplier").
The writer of the option is obligated, for the premium received, to make
delivery of this amount. Unlike 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, the Fund 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 the Fund holds or intends to
purchase.
At the same time a futures contract is purchased or sold, the 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
the 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.
The 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 the 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 Prospectuses, the Fund may invest in securities
of foreign issuers which are either listed on a United States securities
exchange or represented by American Depositary Receipts. In addition, the Fund
may invest in foreign securities which are not publicly traded in the United
States.
Fixed commissions on foreign securities exchanges are generally
higher than negotiated commissions on United States exchanges. Foreign markets
also have different clearance and settlement procedures, and in some markets
there have been times when settlements have been unable to keep pace with the
volume of securities transactions, making it difficult to conduct such
transactions. Delays in settlement could result in temporary periods when a
portion of the assets of the Fund are uninvested. In addition, settlement
problems could cause the Fund to miss attractive investment opportunities or to
<PAGE>
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 the Fund to obtain or to enforce a judgment against the
issuer.
FOREIGN CURRENCY TRANSACTIONS
As described in the Prospectuses, the 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. The Fund will not enter into such
forward contracts or maintain a net exposure in such contracts where the Fund
would be obligated to deliver an amount of foreign currency in excess of the
value of the Fund's securities or other assets denominated in that currency. The
Fund will comply with applicable Securities and Exchange Commission
announcements requiring the Fund to segregate assets to cover 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, the Fund may use foreign currency futures contracts and
options on such futures contracts. Through the purchase or sale of such
contracts, the Fund may be able to achieve many of the same objectives as
through forward foreign currency exchange contracts more effectively and
possibly at a lower cost.
FOREIGN CURRENCY OPTIONS. A foreign currency option provides the
option buyer with the right to buy or sell a stated amount of foreign currency
at the exercise price at a specified date or during the option period. A call
option gives its owner the right, but not the obligation, to buy the currency,
while a put option gives its owner the right, but not the obligation, to sell
the currency. The option seller (writer) is obligated to fulfill the terms of
the option sold if it is exercised. However, either seller or buyer may close
its position during the option period in the secondary market for such options
at any time prior to expiration.
A foreign currency call option rises in value if the underlying
currency appreciates. Conversely, a foreign currency put option rises in value
if the underlying currency depreciates. While purchasing a foreign currency
option may protect the 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
<PAGE>
date, the Fund would not need to exercise its call if the currency instead
depreciated in value. In such a case, the Fund could acquire the amount of
foreign currency needed for settlement in the spot market at a lower price than
the exercise price of the option.
MORTGAGE-BACKED SECURITIES
As described in the Prospectuses, the Fund also invests in
mortgage-backed securities. The Funds will invest only in mortgage-backed
securities which are Agency Pass-Through Certificates, private pass-through
securities or collateralized mortgage obligations ("CMOs"), as defined and
described in the Prospectuses.
Agency Pass-Through Certificates are issued or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC").
GNMA is a wholly-owned corporate instrumentality of the United States within the
Department of Housing and Urban Development. The guarantee of GNMA with respect
to GNMA certificates is backed by the full faith and credit of the United
States, and GNMA is authorized to borrow from the United States Treasury in an
amount which is at any time sufficient to enable GNMA, with no limitation as to
amount, to perform its guarantee.
FNMA is a federally chartered and privately owned corporation
organized and existing under federal law. Although the Secretary of the Treasury
of the United States has discretionary authority to lend funds to FNMA, neither
the United States nor any agency thereof is obligated to finance FNMA's
operations or to assist FNMA in any other manner.
FHLMC is a federally chartered corporation organized and existing
under federal law, the common stock of which is owned by the Federal Home Loan
Banks. Neither the United States nor any agency thereof is obligated to finance
FNMA's operations or to assist FNMA in any other manner.
The residential mortgage loans evidenced by Agency Pass-Through
Certificates, private pass-through securities and upon which CMOs are based
generally are secured by first mortgages on one- to four-family residential
dwellings. Such mortgage loans generally have final maturities ranging from 15
to 30 years and provide for monthly payments in amounts sufficient to amortize
their original principal amounts by the maturity dates. Thus, each monthly
payment on such mortgage loans generally includes both an interest component and
a principal component, so that the holder of the mortgage loans receives both
interest and a partial return of principal in each monthly payment. In general,
such mortgage loans can be prepaid by the borrowers at any time without any
prepayment penalty. In addition, many such mortgage loans contain a
"due-on-sale" clause requiring the loans to be repaid in full upon the sale of
the property securing the loans. Because residential mortgage loans generally
provide for monthly amortization and may be prepaid in full at any time, the
weighted average maturity of a pool of residential mortgage loans is likely to
be substantially shorter than its stated final maturity date. The rate at which
a pool of residential mortgage loans is prepaid may be influenced by many
factors and is not predictable with precision.
As stated in the Prospectuses, CMOs generally are issued in multiple
classes, with holders of each class entitled to receive specified portions of
the principal payments and prepayments and/or of the interest payments on the
underlying mortgage loans. These entitlements can be specified in a wide variety
of ways, so that the payment characteristics of various classes may differ
greatly from one another. For example:
* In a sequential-pay CMO structure, one class is entitled
to receive all principal payments and prepayments on the
underlying mortgage loans (and interest on unpaid
principal) until the principal of the class is repaid in
full, while the remaining classes 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.
<PAGE>
* 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
Purchases of less than investment grade corporate debt obligations
generally involve greater risks than purchases of higher rated obligations. Less
than investment grade debt obligations are especially subject to adverse changes
in general economic conditions and to changes in the financial condition of
their issuers. During periods of economic downturn or rising interest rates,
issuers of such obligations may experience financial stress that could adversely
affect their ability to make payments of principal and interest and increase the
possibility of default.
Yields on less than investment grade debt obligations will fluctuate
over time. The prices of such obligations have been found to be less sensitive
to interest rate changes than higher rated obligations, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or period of rising interest rates, highly leveraged issuers
may experience financial stress which could adversely affect their ability to
service principal and interest payment obligations, to meet projected business
goals, and to obtain additional financing. In addition, periods of economic
uncertainty and changes can be expected to result in increased volatility of
market prices of less than investment grade debt obligations.
In addition, the secondary trading market for less than investment
grade debt obligations may be less developed than the market for investment
grade obligations. This may make it more difficult for the 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.
<PAGE>
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 the Fund's use of less than investment grade debt obligations may
be more dependent on the Advisor's and Sub-Advisor's own credit analysis than is
the case with investment grade obligations.
U.S. TREASURY INFLATION-PROTECTION SECURITIES
The Fund may invest in U.S. Treasury inflation-protection
securities, which are issued by the United States Department of Treasury
("Treasury") with a nominal return linked to the inflation rate in prices. The
index used to measure inflation is the non-seasonally adjusted U.S. City Average
All Items Consumer Price Index for All Urban Consumers ("CPI-U").
The value of the principal is adjusted for inflation, and pays
interest every six months. The interest payment is equal to a fixed percentage
of the inflation-adjusted value of the principal. The final payment of principal
of the security will not be less than the original par amount of the security at
issuance.
The principal of the inflation-protection security is indexed to the
non-seasonally adjusted CPI-U. To calculate the inflation-adjusted principal
value for a particular valuation date, the value of the principal at issuance is
multiplied by the index ratio applicable to that valuation date. The index ratio
for any date is the ratio of the reference CPI applicable to such date to the
reference CPI applicable to the original issue date. Semiannual coupon interest
is determined by multiplying the inflation-adjusted principal amount by one-half
of the stated rate of interest on each interest payment date.
Inflation-adjusted principal or the original par amount, whichever
is larger, is paid on the maturity date as specified in the applicable offering
announcement. If at maturity the inflation-adjusted principal is less than the
original principal value of the security, an additional amount is paid at
maturity so that the additional amount plus the inflation-adjusted principal
equals the original principal amount. Some inflation-protection securities may
be stripped into principal and interest components. In the case of a stripped
security, the holder of the stripped principal component would receive this
additional amount. The final interest payment, however, will be based on the
final inflation-adjusted principal value, not the original par amount.
The reference CPI for the first day of any calendar month is the
CPI-U for the third preceding calendar month. (For example, the reference CPI
for December 1 is the CPI-U reported for September of the same year, which is
released in October.) The reference CPI for any other day of the month is
calculated by a linear interpolation between the reference CPI applicable to the
first day of the month and the reference CPI applicable to the first day of the
following month.
Any revisions the Bureau of Labor Statistics (or successor agency)
makes to any CPI-U number that has been previously released will not be used in
calculations of the value of outstanding inflation-protection securities. In the
case that the CPI-U for a particular month is not reported by the last day of
the following month, the Treasury will announce an index number based on the
last year-over-year CPI-U inflation rate available. Any calculations of the
Treasury's payment obligations on the inflation-protection security that need
that month's CPI-U number will be based on the index number that the Treasury
has announced. If the CPI-U is rebased to a different year, the Treasury will
continue to use the CPI-U series based on the base reference period in effect
when the security was first issued as long as that series continues to be
published. If the CPI-U is discontinued during the period the
inflation-protection security is outstanding, the Treasury will, in consultation
with the Bureau of Labor Statistics (or successor agency), determine an
appropriate substitute index and methodology for linking the discontinued series
with the new price index series. Determinations of the Secretary of the Treasury
in this regard are final.
<PAGE>
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.
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 the Fund, which
may invest in commodity futures or commodity options contracts.
INVESTMENT RESTRICTIONS
In addition to the investment objectives and policies set forth in
the Prospectuses and under the caption "Additional Information Concerning Fund
Investments" above, the Fund 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 the Fund without approval by
the holders of a majority of the outstanding shares of the 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.
The Fund will not:
1. 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. 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 Fund's total assets. The Fund will not
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, the Fund will not make additional investments
while its borrowings exceed 5% of total assets.)
<PAGE>
4. Make short sales of securities.
5. Purchase any securities on margin except to obtain such
short-term credits as may be necessary for the clearance
of transactions and except, as may be necessary to make
margin payments in connection with foreign currency
futures and other derivative transactions.
6. Purchase or sell physical commodities (including, by way
of example and not by way of limitation, grains,
oilseeds, livestock, meat, food, fiber, metals,
petroleum, petroleum-based products or natural gas) or
futures or options contracts with respect to physical
commodities. This restriction shall not restrict the
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 Fund 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 Fund may invest
in mortgage-backed securities.
8. Act as an underwriter of securities of other issuers,
except to the extent the Fund may be deemed to be an
underwriter, under Federal securities laws, in
connection with the disposition of portfolio securities.
9. Lend any of its assets, except portfolio securities
representing up to one-third of the value of its total
assets.
The following restrictions are non-fundamental and may be changed by
FAIF's Board of Directors without a shareholder vote. The Fund will not:
10. Invest more than 15% of its net assets in all forms of
illiquid investments.
11. Invest for the purpose of exercising control or
management.
12. Purchase or sell real estate limited partnership
interests (other than, publicly traded real estate
limited partnership interests or REITS), or oil, gas or
other mineral leases, rights or royalty contracts,
except that the Fund may purchase or sell securities of
companies which invest in or hold the foregoing.
13. Purchase securities of any other registered investment
company (as defined in the 1940 Act), except, subject to
1940 Act limitations, (a) the Fund may purchase shares
of open-end investment companies which invest in
permitted investments for the Funds; (b) the 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 (c) the Fund may purchase securities
as part of a merger, consolidation, reorganization or
acquisition of assets.
For determining compliance with its investment
restriction relating to industry concentration, the 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 or Sub-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
<PAGE>
Automobile Grantor Trust 1992-1 B" would be classified as follows: the issuer or
sponsor of the security is Midlantic National Bank, a banking organization, and
the collateral underlying the security is automobile receivables. Therefore, the
industry classification would be Banks -- Automobile. Thus, an issuer or sponsor
may be included in more than one "industry" classification, as may a particular
type of collateral.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of FAIF are listed below,
together with their business addresses and their principal occupations during
the past five years. Directors who are "interested persons" (as that term is
defined in the 1940 Act) of FAIF are identified with an asterisk.
DIRECTORS
Robert J. Dayton, 5140 Norwest Center, Minneapolis, Minnesota 55402:
Director of FAIF since September 1994 and of First American Funds, Inc. ("FAF")
since December 1994 and of First American Strategy Funds, Inc. ("FASF") since
June 1996; Chairman (1989-1993) and Chief Executive Officer (1993- present),
Okabena Company (private family investment office). Age: 54.
Roger A. Gibson, 1020 15th Street, Suite 41A, Denver, Colorado
80202: Director of FAF, FAIF and FASF since October 1997; Vice President of
North America-Mountain Region for United Airlines since June 1995; prior to his
current position, served most recently as Vice President, Customer Service for
United Airlines in the West Region in San Francisco, California and the Mountain
Region in Denver, Colorado; employed at United Airlines since 1967. Age: 51.
Andrew M. Hunter III, 537 Harrington Road, Wayzata, Minnesota 55391:
Director of FAIF, FAF and FASF since January 1997; Chairman of Hunter, Keith
Industries, a diversified manufacturing and management services company, since
1975. Age: 49.
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, U.S. Bank National Association. Age: 62.
Joseph D. Strauss, 8617 Edenbrook Crossing, # 443, Brooklyn Park,
Minnesota 55443: Director of FAF since 1984 and of FAIF since April 1991 and of
FASF since June 1996; Chairman of FAF's and FAIF's Boards from 1993 to September
1997 and of FASF's Board from June 1996 to September 1997; President of FAF and
FAIF from June 1989 to November 1989; Owner and President, Strauss Management
Company, since 1993; Owner and President, Community Resource Partnerships, Inc.,
a community business retention survey company, since 1992; attorney-at-law. Age:
56.
Virginia L. Stringer, 712 Linwood Avenue, St. Paul, Minnesota 55105:
Director of FAIF since August 1987 and of FAF since April 1991 and of FASF since
June 1996; Chair of FAIF's, FAF's and FASF's Boards since September 1997; Owner
and President, Strategic Management Resources, Inc. since 1993; formerly
President and Director of The Inventure Group, a management consulting and
training company, President of Scott's, Inc., a transportation company, and Vice
President of Human Resources of The Pillsbury Company. Age: 52.
EXECUTIVE OFFICERS
Kathryn Stanton, SEI Investments Company, Oaks, Pennsylvania 19456:
Acting President, Vice President and Assistant Secretary of FAIF and FAF since
April 1994 and of FASF since June 1996; Vice
<PAGE>
President and Assistant Secretary of the Administrator and the Distributor since
April 1994; Associate, Morgan, Lewis & Bockius, from 1989 to 1994. Age: 37.
Carmen V. Romeo, SEI Investments Company, Oaks, Pennsylvania 19456:
Treasurer and Assistant Secretary of FAIF and FAF since November 1992 and of
FASF since June 1996; Director, Executive Vice President, Chief Financial
Officer and Treasurer of SEI Investments Company ("SEI"), SEI Investments
Management Corporation (the "Administrator") and the Distributor since 1981.
Age: 52.
Kevin P. Robins, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF and FAF since April 1994 and of
FASF since June 1996; Vice President, Assistant Secretary and General Counsel of
the Administrator and the Distributor. Age: 36.
Sandra K. Orlow, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF and FAF since 1992 and of FASF
since June 1996; Vice President and Assistant Secretary of SEI, the
Administrator and the Distributor since 1983. Age: 40.
Todd Cipperman, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF, FAF and FASF since December
1996; Vice President and Assistant Secretary of SEI, the Administrator and the
Distributor since 1995. Associate, Dewey Ballantine from 1994 to 1995;
Associate, Winston & Strawn from 1991 to 1994. Age: 31.
Michael G. Beattie, SEI Investments Company, Oaks, Pennsylvania
19456: Controller of FAIF, FAF and FASF since December 1997; Associate Director,
Funds Accounting, SEI Investments Company since July 1997; prior to his current
position, served most recently as Fund Accounting Manager of SEI (from 1993 to
1997); Registered Representative, First Investors Corporation from 1988 to 1990.
Age: 32
Lydia A. Gavalis, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF, FAF and FASF, and Vice President
and Assistant Secretary of the Administrator and the Distributor each since
1998. Assistant General Counsel and Director of Arbitration, Philadelphia Stock
Exchange from 1989 to 1998. Age: 33
Lynda J. Streigel, SEI Investments Company, Oaks, Pennsylvania
19456: Vice President and Assistant Secretary of FAIF, FAF and FASF, and Vice
President and Assistant Secretary of the Administrator and the Distributor since
1998; Senior Asset Management Counsel, Barnett Banks, Inc. from 1993 to 1997;
Partner, Groom and Nordberg, Chartered from 1996 to 1997; and Associate General
Counsel, Riggs Bank, N.A. from 1991 to 1995. Age: 49.
Kathy Heilig, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF, FAF and FASF, and Treasurer of
the SEI Investments Company since 1997; Assistant Controller of SEI Investments
Company from 1995 to 1997; and Vice President of SEI Investments Company from
1991 to 1995. Age: 39.
Michael J. Radmer, 220 South Sixth Street, Minneapolis, Minnesota
55402: Secretary of FAIF since April 1991 and of FAF since 1981 and of FASF
since June 1996; Partner, Dorsey & Whitney LLP, a Minneapolis-based law firm and
general counsel of FAIF, FAF and FASF. Age: 52.
COMPENSATION
The First American Family of Funds, which includes FAIF, FAF and
FASF, currently pays only to directors of the funds who are not paid employees
or affiliates of the funds a fee of $15,000 per year ($22,500 in the case of the
Chair) plus $2,500 ($3,750 in the case of the Chair) per meeting of the Board
attended and $800 per committee meeting attended ($1,600 in the case of a
committee chair) and reimburses travel expenses of directors and officers to
attend Board meetings. In the event of telephonic Board or committee meetings,
each director receives a fee of $500 per Board or committee meeting ($750 in the
case of the Chair or committee chair). In addition, directors may receive a per
diem fee of $1,000 per day, plus travel expenses when directors travel out of
town on Fund business. However, directors do
<PAGE>
not receive the $1,000 per diem amount plus the foregoing Board or committee fee
for an out-of-town committee or Board meeting but instead receive the greater of
the total per diem fee or meeting fee. Legal fees and expenses are also paid to
Dorsey & Whitney LLP, the law firm of which Michael J. Radmer, secretary of
FAIF, FAF and FASF, is a partner. The following table sets forth information
concerning aggregate compensation paid to each director of FAIF (i) by FAIF
(column 2), and (ii) by FAIF, FAF and FASF collectively (column 5) during the
fiscal year ended September 30, 1997. No executive officer or affiliated person
of FAIF had aggregate compensation from FAIF in excess of $60,000 during such
fiscal year:
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Total Compensation
Aggregate Pension or Retirement Estimated From Registrant and
Name of Compensation Benefits Accrued as Annual Benefits Fund Complex
Person, Position From Registrant Part of Fund Expenses Upon Retirement Paid to Directors
----------------- --------------- --------------------- --------------- -----------------
<S> <C> <C> <C> <C>
Robert J. Dayton, Director $12,632 - 0 - - 0 - $33,500
Roger A. Gibson, Director * - 0 - - 0 - - 0 - -0-
Andrew M. Hunter III, Director $9,046 - 0 - - 0 - $23,250
Leonard W. Kedrowski, Director $12,291 - 0 - - 0 - $32,700
Robert L. Spies, Director $9,331 - 0 - - 0 - $24,050
Joseph D. Strauss, Director $14,974 - 0 - - 0 - $39,925
Virginia L. Stringer, Director $15,254 - 0 - - 0 - $39,925
</TABLE>
- ---------------
* Not a director during the fiscal year ended September 30, 1997.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
U.S. Bank National Association (the "Advisor"), 601 Second Avenue
South, Minneapolis, Minnesota 55480, serves as the investment advisor and
manager of the Fund through its First American Asset Management group. The
Advisor is a national banking association that has professionally managed
accounts for individuals, insurance companies, foundations, commingled accounts,
trust funds, and others for over 75 years. The Advisor is a subsidiary of U.S.
Bancorp ("USB"), 601 Second Avenue South, Minneapolis, Minnesota 55480, which is
a regional multi-state bank holding company headquartered in Minneapolis,
Minnesota that primarily serves the Midwestern, Rocky Mountain and Northwestern
states. USB operates five banks and eleven trust companies with offices in 17
contiguous states from Illinois to Washington. USB also has various other
subsidiaries engaged in financial services. At December 31, 1997, on a pro forma
combined basis, USB and its consolidated subsidiaries had consolidated assets of
approximately $71 billion, consolidated deposits of $48 billion and
shareholders' equity of $6 billion.
Pursuant to an Investment Advisory Agreement dated April 2, 1991
(the "Advisory Agreement"), the Fund engages the Advisor to act as investment
advisor for and to manage the investment of the assets of the Fund. The Fund
pays the Advisor monthly fees calculated on an annual basis equal to 0.70% 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.
<PAGE>
In addition to the investment advisory fee, the 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.
The Fund is liable for such nonrecurring expenses as may arise, including
litigation to which the Fund may be a party, and it may have an obligation to
indemnify its directors and officers with respect to such litigation.
Because the Fund was not in operation prior to the date hereof, no
advisory fees were paid for the fiscal year ended September 30, 1997.
SUB-ADVISORY AGREEMENT
Federated Investment Counseling, 1001 Liberty Avenue, Pittsburgh,
Pennsylvania 15222-3779 and Federated Global Research Corp., 175 Water Street,
New York, New York 10038-4965 (collectively, the "Sub- Advisors"), each
subsidiaries of Federated Investors, Inc. ("Federated") are sub-advisors for the
Fund under an agreement with the Advisor (the "Federated Sub-Advisory
Agreement")./1 Federated Investment Counseling, which is a Delaware business
trust, and Federated Global Research Corp., which is a Delaware corporation, are
each registered investment advisors under the 1940 Act. As of March 31, 1998,
Federated Investment Counseling, Federated Global Research Corp. and other
subsidiaries of Federated rendered investment advice regarding over $1.26
billion of assets. Pursuant to the Federated Sub-Advisory Agreement, Federated
Investment Counseling is responsible for investment of the high yield (i.e.,
non-investment grade) domestic and U.S. dollar denominated foreign corporate
debt obligation portion of the Fund's assets and Federated Global Research Corp.
is responsible for the investment of the foreign investments and foreign
currency transactions of the Fund. Under the Federated Sub-Advisory Agreement,
the Sub-Advisors are required, among other things, to report to the Advisor or
the Board regularly at such times and in such detail as the Advisor or the Board
may from time to time request in order to permit the Advisor and the Board to
determine the adherence of the Fund to its investment objectives, policies and
restrictions. The Federated Sub-Advisory Agreement also requires the
Sub-Advisors to provide all office space, personnel and facilities necessary and
incident to the Sub-Advisor's performance of their services under the Federated
Sub-Advisory Agreement.
For their services under the Sub-Advisory Agreement, each of the
Sub-Advisors is paid a monthly fee by the Advisor calculated on an annual basis
equal to 0.20% of the first $25 million of the Fund's average daily net assets,
0.165% of the Fund's average daily net assets in excess of $25 million up to $50
million, 0.13% of the Fund's average daily net assets in excess of $50 million
up to $100 million and 0.105% of the Fund's average daily net assets in excess
of $100 million.
ADMINISTRATION AGREEMENT
SEI Investments Management Corporation (the "Administrator") serves
as administrator for the Fund pursuant to an Administration Agreement between it
and the Fund. The Administrator is a wholly-owned subsidiary of SEI Investments
Company, which also owns the Fund's distributor. See "-- Distributor and
Distribution Plans" below. Under the Administration Agreement, the Administrator
provides administrative personnel and services to the Fund for a fee as
described in the Fund's Prospectuses. These services include, among others,
regulatory reporting, fund and portfolio accounting, shareholder reporting
services, and compliance monitoring services.
The Fund has approved the appointment of the Advisor as a
sub-administrator (the "Sub- Administrator"). It is contemplated that the
Sub-Administrator will assist the Administrator in the performance of
administrative services for the Funds.
- ---------------------
1/ All of the Class A (voting) stock of Federated is owned by a trust, the
trustees of which are John F. Donahue, Chairman and Director of Federated, Mr.
Donahue's wife and Mr. Donahue's son, J. Christopher Donahue, President and
Director of Federated.
<PAGE>
Because the Fund was not in operation before the date hereof, no
administrative fees were paid in the fiscal year ended September 30, 1997.
DISTRIBUTOR AND DISTRIBUTION PLANS
SEI Investments Distribution Co. (the "Distributor") serves as the
distributor for the Class A, Class B and Class Y Shares of the Fund. The
Distributor is a wholly-owned subsidiary of SEI Investments Company, which also
owns the Fund's Administrator. See "-- Administration Agreement" above.
The Distributor serves as distributor for the Class A and Class Y
Shares pursuant to a Distribution Agreement dated February 10, 1994 (the "Class
A/Class Y Distribution Agreement") between itself and FAIF, and as distributor
for the Class B Shares pursuant to a Distribution and Service Agreement dated
August 1, 1994, as amended September 14, 1994 (the "Class B Distribution and
Service Agreement") between itself and FAIF. These agreements are referred to
collectively as the "Distribution Agreements."
Under the Distribution Agreements, the Distributor has agreed to
perform all distribution services and functions of the Fund to the extent such
services and functions are not provided to the Fund pursuant to another
agreement. The Distribution Agreements provide that shares of the Fund 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 Fund's shares except
for a portion (as disclosed in the Prospectuses) which may be re-allowed to
Participating Institutions. The Class A Shares of the Fund also pay a
shareholder servicing fee to the Distributor monthly at the annual rate of 0.25%
of the 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 Fund pays 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 the Fund,
which fee may be used by the Distributor to provide compensation for sales
support and distribution activities with respect to the Class B Shares. This fee
is calculated and paid each month based on average daily net assets of Class B
of the 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 the 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 the
Fund of the kinds described in the Class A and Class B Shares Prospectus.
Although Class B Shares are sold without a front-end sales charge, the
Distributor pays a total of 4.25% of the amount invested (including a 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).
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 Fund, respectively, pursuant to Rule 12b-1 under the
1940 Act (collectively, the "Plans"). Rule 12b-1
<PAGE>
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.
Because the Fund was not in operation prior to the date hereof, no
Rule 12b-1 fees were paid for fiscal year ended September 30, 1997 and the
Distributor received no sales charges for such fiscal year.
CUSTODIAN; TRANSFER AGENT; COUNSEL; ACCOUNTANTS
The custodian of the Fund's 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.
All of the instruments representing the investments of the Fund and
all cash is held by the Custodian. The 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 Fund, the Custodian is paid
a monthly fee calculated on an annual basis equal to 0.03% of the Fund's average
daily net assets. In addition, the Custodian is reimbursed for its out-of-pocket
expenses incurred while providing its services to the Fund. 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
Fund.
Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402, is independent General Counsel for the Fund.
KPMG Peat Marwick LLP, 90 South Seventh Street, Minneapolis,
Minnesota 55402, acts as the Fund's independent auditors, providing audit
services including audits of the annual financial statements and assistance and
consultation in connection with SEC filings.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Decisions with respect to placement of the Fund's portfolio
transactions are made by the Advisor and the Sub-Advisors. The Fund's 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 a 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 and such 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 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
<PAGE>
transactions in over-the-counter securities, the Fund deals with market makers
unless it appears that better price and execution are available elsewhere.
While the Advisor and the Sub-Advisors do not deem it practicable
and in the Fund's best interest to solicit competitive bids for commission rates
on each transaction, consideration will regularly be given by the Advisor and
the Sub-Advisors to posted commission rates as well as to other information
concerning the level of commissions charged on comparable transactions by other
qualified brokers.
It is expected that the Fund will purchase most foreign equity
securities in the over-the-counter markets or stock exchanges located in the
countries in which the respective principal offices of the issuers of the
various securities are located if that is the best available market. The fixed
commissions paid in connection with most such foreign stock transactions
generally are higher than negotiated commissions on United States transactions.
There generally is less governmental supervision and regulation of foreign stock
exchanges than in the United States. Foreign securities settlements may in some
instances be subject to delays and related administrative uncertainties.
Foreign equity securities may be held in the form of American
Depositary Receipts, or ADRs, European Depositary Receipts, or EDRs, or
securities convertible into foreign equity securities. ADRs and EDRs may be
listed on stock exchanges or traded in the over-the-counter markets in the
United States or overseas. The foreign and domestic debt securities and money
market instruments in which the Fund may invest are generally traded in the
over-the-counter markets.
Subject to the policy of seeking favorable price and execution for
the transaction size and risk involved, in selecting brokers and dealers other
than the Distributor and determining commissions paid to them, the Advisor or a
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 such Sub-Advisor. In accordance with this policy, the
Fund does 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 Fund may be taken into
account as a factor in the allocation of portfolio transactions.
Research services that may be received by the Advisor or a
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 a Sub-Advisor to
supplement its own investment research activities and enable the Advisor or a
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 Fund. To the extent portfolio transactions are effected with brokers and
dealers who furnish research services, the Advisor or a Sub-Advisor would
receive a benefit, which is not capable of evaluation in dollar amounts, without
providing any direct monetary benefit to the Fund from these transactions.
Research services furnished by brokers and dealers used by the Funds for
portfolio transactions may be utilized by the Advisor or the Sub-Advisors 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 the Sub-Advisors in performing services for
the Fund. The Advisor or a Sub-Advisor determines the reasonableness of the
commissions paid in relation to its 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 the Sub-Advisors 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 the
Sub-Advisors except as noted below. The Advisor or the Sub-Advisors may, from
time to time,
<PAGE>
maintain an informal list of brokers and dealers that will be used as a general
guide in the placement of Fund business in order to encourage certain brokers
and dealers to provide the Advisor or the Sub-Advisors with research services,
which the Advisor or the Sub-Advisors anticipate 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 a Sub-Advisor would authorize the Fund 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
the 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 the Sub-Advisor
with respect to the Fund.
The Fund does not effect any brokerage transactions in its portfolio
securities with any broker or dealer affiliated directly or indirectly with the
Advisor, the Sub-Advisors 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 Fund, as
determined by the Board of Directors. Any transactions with an affiliated broker
or dealer must be on terms that are both at least as favorable to the Fund as
the Fund 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 a 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 such 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.
CAPITAL STOCK
As of July 24, 1998, no shares of the Fund were outstanding.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of the shares
of the Fund is summarized in the Class A Shares Prospectus under the captions
"Investing in the Fund" and "Determining the Price of Shares" and in the Class Y
Shares Prospectus under the caption "Purchases and Redemptions of Shares." The
net asset value of the 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 the Fund are traded on days
that the Fund is not open for business, the 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 the Fund holds securities which are traded in foreign
markets.
As of July 24, 1998, the Fund had not commenced operations.
<PAGE>
FUND PERFORMANCE
SEC STANDARDIZED PERFORMANCE FIGURES
YIELD. Yield for the Fund 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 the Fund's shares at the end of the period.
Because the Fund was not in operation prior to the date hereof,
yield information is not available.
Yield figures were determined by dividing the net investment income per share
earned during the specified 30-day period by the maximum offering price per
share on the last day of the period, according to the following formula:
Yield = 2 [((a - b) / cd) + 1)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
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 the Fund's portfolio. The Fund's
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
<PAGE>
This calculation (i) assumes all dividends and distributions are reinvested at
net asset value on the appropriate reinvestment dates as described in the
Prospectuses, and (ii) deducts (a) the maximum sales charge from the
hypothetical initial $1,000 investment (if applicable), and (b) all recurring
fees, such as advisory fees, charged as expenses to all shareholder accounts.
Because the Fund was not in operation prior to the date hereof,
information on average annual return and aggregate total returns is not
available.
NON-STANDARD DISTRIBUTION RATES
HISTORICAL DISTRIBUTION RATES. The Fund's historical annualized
distribution rates are computed by dividing the income dividends of the Fund for
a stated period by the maximum offering price on the last day of such period.
Because the Fund was not in operation prior to the date hereof, no information
on historical annualized distribution rates is available.
ANNUALIZED CURRENT DISTRIBUTION RATES. The Fund's annualized current
distribution rates are computed by dividing the Fund's income dividends for a
specified month by the number of days in that month and multiplying by 365, and
dividing the resulting figure by the maximum offering price on the last day of
the specified period. Because the Fund was not in operation prior to the date
hereof, no information on the annualized current distribution rates is
available.
CERTAIN PERFORMANCE COMPARISONS
The Fund may compare its performance to that of certain published or
otherwise widely disseminated indices or averages compiled by third parties. The
Fund, and the indices and averages to which it may compare its performance, are
as follows, among others:
The Fund may compare its performance to the LIPPER MULTI SECTOR
INCOME FUNDS AVERAGE, which is an average of funds that seek current income by
allocating assets among several different fixed income securities sectors (with
no more than 65% in any one sector except for defensive purposes) including U.S.
government and foreign sectors, with a significant portion of assets in
securities rated below investment grade, and the J.P. MORGAN GLOBAL GOVERNMENT
BOND INDEX, an index with total return calculated based on gross price that
assumes that a coupon received in one currency is immediately reinvestment back
into the bonds of that country's index, and the local currency return is
expressed as a basket of currencies which make up the index. The Fund may also
compare its performance to the LEHMAN SINGLE B-RATED INDEX, which is a
proprietary unmanaged index of single B-rated securities and the LEHMAN
MORTGAGE-BACKED OINDEX, which is an index that covers all fixed-rate securities
backed by mortgage pools of the GNMA, FHLMC and FNMA. The Fund may also compare
its performance to the LEHMAN AGGREGATE BOND INDEX, which is an index composed
of the Lehman Government/Corporate Index and the Mortgage-Backed Securities
Index and includes treasury issues, agency issues, corporate bond issues and
mortgage-backed securities.
The Fund 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 Fund and the distributions that the Fund will
make to shareholders are summarized in the Prospectuses in the section entitled
"Federal Income Taxes." The 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, the 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, the Fund must, among other things: (1) derive at least 90%
of its gross income from dividends, interest, and certain other types of
payments related to its investment in stock or securities; (2) distribute to its
<PAGE>
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).
The 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, the 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 the Fund generally
will be disallowed to the extent that a shareholder acquires or contracts to
acquire shares of the 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.
For federal tax purposes, if a shareholder exchanges shares of the
Fund for shares of any other FAIF Fund pursuant to the exchange privilege (see
"Investing in the Funds -- Exchange Privilege" in the Prospectuses for Class A
and Class B Shares, and "Purchases and Redemptions of Shares -- Exchange
Privilege" in the Prospectuses for Class Y Shares), such exchange will be
considered a taxable sale of the shares being exchanged. Furthermore, if a
shareholder of Class A Shares carries out the exchange within 90 days of
purchasing shares in a fund on which he or she has incurred a sales charge, the
sales charge cannot be taken into account in determining the shareholder's gain
or loss on the sale of those shares to the extent that the sales charge that
would have been applicable to the purchase of the later-acquired shares in the
other fund is reduced because of the exchange privilege. However, the amount of
any sales charge that may not be taken into account in determining the
shareholder's gain or loss on the sale of the first-acquired shares may be taken
into account in determining gain or loss on the eventual sale or exchange of the
later-acquired shares.
Dividends generally are taxable to shareholders at the time they are
paid. However, dividends declared in October, November and December, made
payable to shareholders of record in such a month and actually paid in January
of the following year are treated as paid and are thereby taxable to
shareholders as of December 31.
If the 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 the 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. If the Fund holds an
obligation with original issue discount, it 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 the 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, the Fund may be required to borrow or
liquidate securities.
<PAGE>
Under Code Section 1256, except for the transactions the Fund has
identified as hedging transactions, the 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 or options, 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.
Under recently enacted Code Section 1259, if the Fund enters into
short sales of securities that it holds, notional principal contracts or certain
other transactions designed to hedge against the loss of value in appreciated
positions that it holds, it will be treated as having sold such appreciated
positions and will be required to recognize gain on the constructive sale. This
constructive sale rule will not apply in the case of any appreciated position
that the Fund is required to mark-to-market at the close of the year, as
described above.
As stated above, the Code requires a regulated investment company to
diversify its holdings. The Internal Revenue Service has not made its position
clear regarding the treatment of futures contracts and options for purposes of
the diversification test, and the extent to which the 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 or
option, 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.
The 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.
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.
<PAGE>
RATINGS
A rating of a rating service represents that service's opinion as to
the credit quality of the rated security. However, such ratings are general and
cannot be considered absolute standards of quality or guarantees as to the
creditworthiness of an issuer. A rating is not a recommendation to purchase,
sell or hold a security, because it does not take into account market value or
suitability for a particular investor. Markets values of debt securities may
change as a result of a variety of factors unrelated to credit quality,
including changes in market interest rates.
When a security has been rated by more than one service, the ratings
may not coincide, and each rating should be evaluated independently. Ratings are
based on current information furnished by the issuer or obtained by the rating
services from other sources which they consider reliable. Ratings may be
changed, suspended or withdrawn as a result of changes in or unavailability of
such information, or for other reasons. In general, the Fund are not required to
dispose of a security if its rating declines after it is purchased, although it
may consider doing so.
RATINGS OF CORPORATE DEBT OBLIGATIONS AND MUNICIPAL BONDS
STANDARD & POOR'S
AAA: Securities rated AAA have the highest rating assigned by
Standard & Poor's to a debt obligation. Capacity to pay interest and
repay principal is extremely strong.
AA: Securities rated AA have a very strong capacity to pay interest
and repay principal and differ from the highest rated issues only to
a small degree.
A: Securities rated A have a strong capacity to pay interest and
repay principal, although they are somewhat more susceptible to
adverse effects of changes in circumstances and economic conditions
than bonds in higher rated categories.
BBB: Securities rated BBB are regarded as having an adequate
capacity to pay interest and repay principal. Although such
securities normally exhibit adequate protection standards, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal for
securities in this category than for those in higher rated
categories.
Debt rated BB, B, CCC, CC, and C by Standard & Poor's is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
BB: Securities rated BB have less near-term vulnerability to default
than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to meet
timely interest and principal payments. The BB rating category is
also used for debt subordinated to senior debt that is assigned an
actual or implied BBB- rating.
B: Securities rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Securities rated CCC have a currently identifiable
vulnerability to default, and are dependent upon favorable business,
financial, and economic conditions to meet timely payment
<PAGE>
of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, they are not likely to
have the capacity to pay interest and repay principal. The CCC
rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied B or B- rating.
D: An issue which is rated D is used when interest payments or
principal payments are not made on the due date even if the
applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period.
The ratings from AA to CCC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
MOODY'S
Aaa: Securities which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or exceptionally stable margin and principal is
secure. While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Securities which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group, they comprise what
are generally known as high grade securities. They are rated lower
than the best securities because margins of protection may not be as
large as in Aaa securities, or fluctuation of protective elements
may be of greater magnitude, or there may be other elements present
which make the long-term risks appear somewhat greater than in Aaa
securities.
A: Securities which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa: Securities which are rated Baa are considered as medium grade
obligations, being neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
securities lack outstanding investment characteristics, and in fact
have some speculative characteristics.
Ba: An issue which is rated Ba is judged to have speculative
elements; its future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes issues in this
class.
B: An issue which is rated B generally lacks characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa: An issue which is rated Caa is of poor standing. Such an issue
may be in default or there may be present elements of danger with
respect to principal or interest.
Ca: An issue which is rated Ca represents an obligation which is
speculative in a high degree.
C: An issue which is rated C is recorded as having extremely poor
prospects of ever attaining any real investment standing.
<PAGE>
Those securities in the Aa, A and Baa groups which Moody's believes possess the
strongest investment attributes are designated by the symbols Aa-1, A-1 and
Baa-1. Other Aa, A and Baa securities comprise the balance of their respective
groups. These rankings (1) designate the securities which offer the maximum in
security within their quality groups, (2) designate securities which can be
bought for possible upgrading in quality and (3) additionally afford the
investor an opportunity to gauge more precisely the relative attractiveness of
offerings in the marketplace.
RATINGS OF PREFERRED STOCK
STANDARD & POOR'S. Standard & Poor's ratings for preferred stock
have the following definitions:
AAA: An issue rated "AAA" has the highest rating that may be
assigned by Standard & Poor's to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock
obligations.
AA: A preferred stock issue rated "AA" also qualifies as a
high-quality fixed income security. The capacity to pay preferred
stock obligations is very strong, although not as overwhelming as
for issues rated "AAA."
A: An issue rated "A" is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more
susceptible to the adverse effects of changes in circumstances and
economic conditions.
BBB: An issue rated "BBB" is regarded as backed by an adequate
capacity to pay the preferred stock obligations. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions
or changing circumstances are more likely to lead to a weakened
capacity to make payments for a preferred stock in this category
than for issues in the category.
MOODY'S. Moody's ratings for preferred stock include the following:
aaa: An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
aa: An issue which is rated "aa" is considered a high grade
preferred stock. This rating indicates that there is reasonable
assurance that earnings and asset protection will remain relatively
well maintained in the foreseeable future.
a: An issue which is 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.
<PAGE>
SP-3: Speculative capacity to pay principal and interest.
None of the Funds will purchase SP-3 municipal notes.
MOODY'S. Generally, Moody's ratings for state and municipal
short-term obligations are designated Moody's Investment Grade ("MIG"); however,
where an issue has a demand feature which makes the issue a variable rate demand
obligation, the applicable Moody's rating is "VMIG."
MIG 1/VMIG 1: This designation denotes the best quality. There is
strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for
refinancing.
MIG 2/VMIG 2: This designation denotes high quality, with margins of
protection ample although not so large as available in the preceding
group.
MIG 3/VMIG 3: This designation denotes favorable quality, with all
security elements accounted for, but lacking the strength of the
preceding grades. Liquidity and cash flow protection may be narrow
and market access for refinancing is likely to be less well
established.
None of the Funds will purchase MIG 3/VMIG 3 municipal notes.
RATINGS OF COMMERCIAL PAPER
STANDARD & POOR'S. Commercial paper ratings are graded into four
categories, ranging from "A" for the highest quality obligations to "D" for the
lowest. Issues assigned the A rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designation 1, 2 and 3 to indicate the relative degree of safety. The "A-1"
designation indicates that the degree of safety regarding timely payment is very
strong. Those issues determined to possess overwhelming safety characteristics
will be denoted with a plus (+) symbol designation. None of the Funds will
purchase commercial paper rated A-3 or lower.
MOODY'S. Moody's commercial paper ratings are opinions as to the
ability of the issuers to timely repay promissory obligations not having an
original maturity in excess of nine months. Moody's makes no representation that
such obligations are exempt from registration under the Securities Act of 1933,
and it does not represent that any specific instrument is a valid obligation of
a rated issuer or issued in conformity with any applicable law. Moody's employs
the following three designations, all judged to be investment grade, to indicate
the relative repayment capacity of rated issuers:
PRIME-1: Superior capacity for repayment.
PRIME-2: Strong capacity for repayment.
PRIME-3: Acceptable capacity for repayment.
None of the Funds will purchase Prime-3 commercial paper.
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
<PAGE>
norms established by the A.M. Best Company. These norms are based on an
evaluation of the actual performance of the insurance industry.
Best's review also includes a qualitative evaluation of the adequacy
and soundness of a company's reinsurance, the adequacy of its reserves and the
experience of its management. In addition, various other factors of importance
are considered such as the composition of the company's book of business and the
quality and diversification of its assets.
Upon completion of analysis, Best's Ratings are assigned to those
companies that meet the qualifications for rating. The Best's Rating
classifications are A+ (Superior); A & A- (Excellent); B+ (Very Good); B & B-
(Good); C+ (Fairly Good); and C & C- (Fair). Those not qualifying for a current
Best's Rating are classified in the "Not Assigned" category that has ten
classifications which identify why a company is not eligible for a Best's
Rating. Care should be exercised in the use of Best's Ratings without further
reference to additional Best's publications.
FINANCIAL STATEMENTS
Because the Fund was not in operation prior to the date hereof, no
financial statements for the Fund are available.
<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.
(5)(d) Sub-Advisory Agreement, dated March 28, 1994, relating
to International Fund between First Bank National
Association and Marvin & Palmer Associates, Inc.
(Incorporated by reference to Exhibit 5(b) to
Post-effective Amendment No. 21.)
(5)(e) 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.
<PAGE>
(8)(a) Custodian Agreement dated September 20, 1993, between
the Registrant and First Trust National Association, as
supplemented through August 1994. (Incorporated by
reference to Exhibit (8) to Post-Effective Amendment No.
18.)
* (8)(b) Compensation Agreement dated July 23, 1998, pursuant to
Custodian Agreement dated September 20, 1993. *
(9)(a) Administration Agreement dated January 1, 1995 between
the Registrant and SEI Financial Management Corporation.
(Incorporated by reference to Exhibit (9)(a) to
Post-Effective Amendment No. 23.)
(9)(b) 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)(c) 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)(d) 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)(e) Agreement dated July 1, 1997 between SEI and First Bank
National Association. (Incorporated herein by reference
to Exhibit 9(g) to Post-Effective Amendment No. 31.)
(9)(f) Agreement dated July 1, 1997, by and between First Bank
National Association and SEI Investments Management
Corporation. (Incorporated herein by reference to
Exhibit (9)(h) to Post-Effective Amendment No. 26.)
(10)(a) Opinion and Consent of D'Ancona & Pflaum dated November
10, 1987. (Incorporated by reference to Exhibit (10)(a)
to Post-Effective Amendment No. 21.)
(10)(b) Opinion and Consent of Dorsey & Whitney. (Incorporated
by reference to Exhibit (10)(a) to Post-Effective
Amendment No. 15.)
* (10)(c) Opinion and Consent of Dorsey & Whitney, LLP with
respect to Strategic Income Fund, Class HH, dated July
24, 1998. *
(11)(a) Not Applicable
(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.
<PAGE>
(14)(a) 401(k) Prototype Basic Plan Document # 02 (1989
Restatement), including Amendment Nos. 1, 2, and 3 and
sample Adoption Agreement. (Incorporated by reference to
Exhibit 14(a) to Post-Effective Amendment No. 27.)
(14)(b) Defined Contribution Prototype Basic Plan Document # 01
(1989 Restatement), including Amendment Nos. 1 and 2 and
sample Adoption Agreement. (Incorporated by reference to
Exhibit 14(b) to Post-Effective Amendment No. 27.)
(14)(c) IRA Applications and Documentation. (Incorporated by
reference to Exhibit 14(c) to Post-Effective Amendment
No. 27.)
(15)(a) Form of Distribution Plan [Class A]. (Incorporated by
reference to Exhibit (15)(a) to Post-Effective Amendment
No. 21.)
(15)(b) Class B Distribution Plan. (Incorporated by reference to
Exhibit 15(b) to Post- Effective Amendment No. 21.)
(15)(c) Service Plan [Class B]. (Incorporated by reference to
Exhibit (15)(c) to Post- Effective Amendment No. 21.)
(16) Not Applicable
(17) Not Applicable
(18) Multiple Class Plan Pursuant to Rule 18f-3.
(Incorporated by reference to Exhibit (18) to
Post-Effective Amendment No. 23.)
(19)(a) Powers of Attorney of Directors Dayton, Kedrowski and
Stringer. (Incorporated by reference to Exhibit (19) to
Post-Effective Amendment No. 26.)
(19)(b) Power of Attorney of Director Hunter. (Incorporated by
reference to Exhibit 19(b) to Post-Effective Amendment
No. 27)
(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. Strategic Income Fund was not in existence as of this
date.
<PAGE>
Number of
Fund Title of Class Record Holders
- ---- -------------- --------------
Large Cap Value Fund Class A 5903
Large Cap Value Fund Class B 7284
Large Cap Value Fund Class Y 179
Equity Index Fund Class A 4438
Equity Index Fund Class B 4230
Equity Index Fund Class Y 37
Balanced Fund Class A 3335
Balanced Fund Class B 4719
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 1138
Large Cap Growth Fund Class B 1330
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 3273
Regional Equity Fund Class B 5146
Regional Equity Fund Class Y 43
Mid Cap Value Fund Class A 4599
Mid Cap Value Fund Class B 5835
Mid Cap Value Fund Class Y 41
Technology Fund Class A 1000
Technology Fund Class B 1596
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 2422
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
<PAGE>
Fixed Income Fund Class A 689
Fixed Income Fund Class B 875
Fixed Income Fund Class Y 83
Intermediate Government Bond Fund Class A 250
Intermediate Government Bond Fund Class B 0
Intermediate Government Bond Fund Class Y 15
Intermediate Tax Free Fund Class A 125
Intermediate Tax Free Fund Class Y 14
Minnesota Intermediate Tax Free Fund Class A 144
Minnesota Intermediate Tax Free Fund Class Y 9
Colorado Intermediate Tax Free Fund Class A 130
Colorado Intermediate Tax Free Fund Class Y 10
California Intermediate Tax Free Fund Class A 11
California Intermediate Tax Free Fund Class Y 7
Oregon Intermediate Tax Free Fund Class Y 11
ITEM 27. INDEMNIFICATION
The Registrant's Articles of Incorporation and Bylaws provide that
the Registrant shall indemnify such persons for such expenses and liabilities,
in such manner, under such circumstances, and to the full extent as permitted by
Section 302A.521 of the Minnesota Statutes, as now enacted or hereafter amended;
provided, however, that no such indemnification may be made if it would be in
violation of Section 17(h) of the Investment Company Act of 1940, as now enacted
or hereafter amended, and any rules, regulations, or releases promulgated
thereunder.
Section 302A.521 of the Minnesota Statutes, as now enacted, provides
that a corporation shall indemnify a person made or threatened to be made a
party to a proceeding by reason of the former or present official capacity of
the person against judgments, penalties, fines, settlements and reasonable
expenses, including attorneys' fees and disbursements, incurred by the person in
connection with the proceeding if, with respect to the acts or omissions of the
person complained of in the proceeding, the person has not been indemnified by
another organization for the same judgments, penalties, fines, settlements, and
reasonable expenses incurred by the person in connection with the proceeding
with respect to the same acts or omissions; acted in good faith, received no
improper personal benefit, and the 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
<PAGE>
asserted by such director, officer, or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933, as amended,
and will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Information on the business of the Registrant's investment adviser,
U.S. Bank National Association (the "Manager"), is described in the section of
each series' Statement of Additional Information, filed as part of this
Registration Statement, entitled "Investment Advisory and Other Services." The
directors and officers of the Manager are listed below, together with their
principal occupation or other positions of a substantial nature during the past
two fiscal years.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES OTHER POSITIONS AND OFFICES
NAME WITH THE MANAGER AND PRINCIPAL BUSINESS ADDRESS
---- ---------------- ------------------------------
<S> <C> <C>
John F. Grundhofer Chairman, President and Chief Chairman, President and Chief
Executive Officer Executive Officer of U.S. Bancorp*
Richard A. Zona Director and Vice Chairman--Finance Vice Chairman--Finance of U.S. Bancorp *
Philip G. Heasley Director and Vice Chairman Vice Chairman and Group Head of the
Retail Product Group of U.S. Bancorp *
J. Robert Hoffmann Director, Chief Credit Officer Executive Vice President and Chief
and Executive Vice President Credit Officer of U.S. Bancorp *
Lee R. Mitau Director, General Counsel, Executive Vice President, Secretary,
Executive Vice President and Secretary and General Counsel of U.S. Bancorp;
prior to October 1995 partner in Dorsey
& Whitney LLP *
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:
<PAGE>
Registrant's distributor, SEI Investments Distribution Co. (the
"Distributor") acts as distributor for SEI Liquid Asset Trust, SEI Daily Income
Trust, SEI Tax Exempt Trust, SEI Index Funds, SEI Institutional Managed Trust,
SEI Institutional International Trust, The Advisors' Inner Circle Fund, Pillar
Funds, CUFund, STI Classic Funds, CoreFunds, Inc., First American Funds, Inc.,
First American Investment Funds, Inc., The Arbor Fund, Boston 1784 Funds, PBHG
Funds, Inc., Marquis Funds, Morgan Grenfell Investment Trust, The Achievement
Funds Trust, Bishop Street Funds, CrestFunds, Inc., STI Classic Variable Trust,
ARK Funds, Monitor Funds, SEI Asset Allocation Trust, TIP Funds, SEI
Institutional Investments Trust, First American Strategy Funds, Inc., Highmark
Funds, Armada Funds, PBHG Insurance Series Fund, Inc., Expedition Funds, TIP
Institutional Funds, Oak Associates Funds and The Nexis Funds, Inc., pursuant to
distribution agreements dated November 29, 1982, July 15, 1982, December 3,
1982, July 10, 1985, January 22, 1987, August 30, 1988, November 14, 1991,
February 28, 1992, May 1, 1992, May 29, 1992, October 30, 1992, November 1,
1992, November 1, 1992, January 28, 1993, June 1, 1993, July 16, 1993, August
17, 1993, January 3, 1994, December 27, 1994, January 27, 1995, March 1, 1995,
August 18, 1995, November 1, 1995, January 11, 1996, April 1, 1996, April 29,
1996, June 14, 1996, October 1, 1996, February 15, 1997, March 8, 1997, April 1,
1997, June 9, 1997, January 1, 1998, February 27, 1998, and June 29, 1998,
respectively.
The Distributor provides numerous financial services to investment
managers, pension plan sponsors, and bank trust departments. These services
include portfolio evaluation, performance measurement, and consulting services
("Funds Evaluation") and automated execution, clearing and settlement of
securities transactions ("MarketLink").
(b) Furnish the information required by the following table with
respect to each director, officer or partner of each principal underwriter named
in the answer to Item 21 of Part B. Unless otherwise noted, the business address
of each director or officer is One Freedom Valley Drive, Oaks, Pennsylvania
19456.
<TABLE>
<CAPTION>
NAME POSITIONS AND OFFICES WITH UNDERWRITER POSITIONS AND OFFICES WITH REGISTRANT
- ---- -------------------------------------- -------------------------------------
<S> <C> <C>
Alfred P. West, Jr. Director, Chairman & Chief --
Executive Officer
Henry H. Greer Director --
Carmen V. Romeo Director --
Mark J. Held President & Chief Operating Officer --
Gilbert L. Beebower Executive Vice President --
Richard B. Lieb Executive Vice President, President -
Investment Services Division --
Dennis J. McGonigle Executive Vice President --
Robert M. Silvestri Chief Operating 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 Secrerary Vice President & Assistant Secretary
Robert Crudup Vice President & Managing Director --
Barbara Doyne Vice President --
Jeff Drennen Vice President --
<PAGE>
Vic Galef Vice President & Managing Director --
Lydia A. Gavalis Vice President & Assistant Secretary Vice President & Assistant Secretary
Greg Gettinger Vice President & Assistant Secretary --
Jeff Jacobs Vice President --
Samuel King Vice President --
Kim Kirk Vice President & Managing Director --
John Krzeminski Vice President & Managing Director --
Carolyn McLaurin Vice President & Managing Director --
W. Kelso Morrill Vice President --
Mark Nagle Vice President President
Joanne Nelson Vice President --
Joseph M. O'Donnell Vice President & Assistant Secretary Vice President & Assistant Secretary
Sandra K. Orlow Vice President & Secretary Vice President & Assistant Secretary
Cynthia M. Parrish Vice President & Assistant Secretary --
Donald Pepin Vice President & Managing Director --
Kim Rainey Vice President --
Rob Redecan Vice President --
Maria Reinhart Vice President --
Mark Samuels Vice President & Managing Director --
Steve Smith Vice President --
Daniel Spaventa Vice President --
Kathryn L. Stanton Vice President & Assistant Secretary Vice President & Assistant Secretary
Lynda J. Striegel Vice President & Assistant Secretary Vice President & Assistant Secretary
Lori L. White Vice President & Assistant Secretary --
Wayne M. Withrow Vice President & Managing Director --
</TABLE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books, and other documents required to be maintained
by Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are maintained by SEI Investments Distribution Co., Oaks,
Pennsylvania 19456.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
Registrant undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of a Director(s) when requested
in writing to do so by the holders of at least 10% of Registrant's outstanding
shares and in connection with such meetings to comply with the provisions of
Section 16(c) of the Investment Company Act of 1940 relating to Shareholder
communications.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940 the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Post-Effective
Amendment to its Registration Statement No. 33-16905 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Oaks, Commonwealth
of Pennsylvania, on the 24th day of July, 1998.
FIRST AMERICAN INVESTMENT FUNDS, INC.
ATTEST: /s/ Michael G. Beattie By /s/ Kathryn L. Stanton
--------------------------------- ----------------------------------
Michael G. Beattie Kathryn L. Stanton,
Acting President and
Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacity and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Michael G. Beattie Controller (Principal **
- ------------------------------ Financial and Accounting
Michael G. Beattie Officer)
* Director **
- ------------------------------
Robert J. Dayton
* Director **
- ------------------------------
Andrew M. Hunter III
* Director **
- ------------------------------
Robert L. Spies
* Director **
- ------------------------------
Leonard W. Kedrowski
* Director **
- ------------------------------
Joseph D. Strauss
* Director **
- ------------------------------
Virginia L. Stringer
* Director **
- ------------------------------
Roger A. Gibson
* By: /s/ Kathryn L. Stanton
-------------------------
Kathryn L. Stanton
Attorney in Fact
**July 24, 1998
EXHIBIT 5(c)
FIRST AMERICAN INVESTMENT FUNDS, INC.
SUPPLEMENT DATED AS OF JULY 24, 1998 TO
INVESTMENT ADVISORY AGREEMENT
(Strategic Income Fund)
WHEREAS, First American Investment Funds, Inc., a Maryland
corporation (the "Fund"), and U.S. Bank National Association, a national banking
association organized and existing under the laws of the United States of
America (the "Adviser"), previously entered into that Investment Advisory
Agreement dated April 2, 1991 (the "Advisory Agreement"); and
WHEREAS, the Fund is creating a new Portfolio (as such term is
defined in the Advisory Agreement) known as Strategic Income Fund; and
WHEREAS, the Fund and the Adviser contemplate that the Adviser will
retain one or more sub-advisers with respect to Strategic Income Fund and wish
to make provision therefor.
NOW, THEREFORE, the Fund and the Adviser agree as follows:
1. In performing its services under the Advisory Agreement, the
Adviser may at its option and expense, with respect to Strategic Income Fund
only, appoint one or more sub-advisers, which shall assume such responsibilities
and obligations of the Adviser pursuant to the Advisory Agreement as shall be
delegated to the sub-adviser; provided, however, that any discretionary
investment decisions made by the sub-adviser on behalf of Strategic Income Fund
shall be subject to approval or ratification by the Adviser. Any appointment of
a sub-adviser and assumption of responsibilities and obligations of the Adviser
by such sub-adviser shall be subject to approval by the Board of Directors of
the Fund and, to the extent (if any) required by law, by the shareholders of
Strategic Income Fund. Any appointment of a sub-adviser for Strategic Income
Fund pursuant hereto shall in no way limit or diminish the Adviser's obligations
and responsibilities under the Advisory Agreement.
2. The Advisory Agreement, as supplemented hereby, is hereby
ratified and confirmed in all respects.
IN WITNESS WHEREOF, the Fund and the Adviser have caused this
Supplement to be executed by their duly authorized officers as of the day and
year first above written.
FIRST AMERICAN INVESTMENT
FUNDS, INC.
By /s/ Kathryn L. Stanton
-------------------------------
Its Vice President
-------------------------------
U.S. BANK NATIONAL
ASSOCIATION
By /s/ Jeffrey M. Wilson
-------------------------------
Its Vice President
-------------------------------
EXHIBIT 8(b)
FIRST AMERICAN INVESTMENT FUNDS, INC.
COMPENSATION AGREEMENT DATED AS OF JULY 23, 1998
PURSUANT TO CUSTODIAN AGREEMENT
WHEREAS, First American Investment Funds, Inc., a Maryland
corporation (hereinafter called the "Fund"), and First Trust National
Association, a national banking association organized and existing under the
laws of the United States of America, previously entered into that Custodian
Agreement dated September 20, 1993 (the "Custodian Agreement"); and
WHEREAS, First Trust National Association, with the consent of the
Fund, assigned its rights and obligations under the Custodian Agreement to U.S.
Bank National Association, a national banking association organized and existing
under the laws of the United States of America (the "Custodian") by an
Assignment and Assumption Agreement dated as of May 1, 1998; and
WHEREAS, Article 12 of the Custodian Agreement provides that the
Custodian shall be paid compensation at such rates and at such times as may from
time to time be agreed on in writing by the parties thereto; and
WHEREAS, the Fund and the Custodian previously entered into that
Compensation Agreement dated as of January 31, 1998, for such purpose with
respect to the then-existing series of the Fund; and
WHEREAS, the Fund and the Custodian wish to amend such compensation
agreement in order to add provisions thereto relating to certain new funds.
NOW, THEREFORE, the Fund and the Custodian agree as follows:
1. The compensation payable to the Custodian pursuant to the
Custodian Agreement with respect to the respective series of the Fund shall be
payable monthly at the following annual rates as percentages of the respective
series' average daily net assets: Large Cap Value Fund, Equity Index Fund,
Balanced Fund, Regional Equity Fund, Mid Cap Value Fund, Limited Term Income
Fund, Intermediate Term Income Fund, Fixed Income Fund, Intermediate Government
Bond Fund, Health Sciences Fund, Real Estate Securities Fund, Equity Income
Fund, Large Cap Growth Fund, Small Cap Growth Fund, Technology Fund,
Intermediate Tax Free Fund, Minnesota Intermediate Tax Free Fund, Colorado
Intermediate Tax Free Fund, Oregon Intermediate Tax Free Fund, California
Intermediate Tax Free Fund, Micro Cap Value Fund, Small Cap Value Fund,
Adjustable Rate Mortgage Securities Fund, Tax Free Fund, Minnesota Tax Free
Fund, Mid Cap Growth Fund, and Strategic Income Fund, .03%; and International
Fund, International Index Fund, and Emerging Markets Fund, 0.10%. The Custodian
shall pay sub-custodian fees with respect to those funds which are authorized to
utilize foreign sub-custodians out of the compensation payable to the Custodian
with respect to such
<PAGE>
funds as set forth above. The Fund shall reimburse the Custodian for all other
out-of-pocket expenses incurred by the Custodian in connection with the
performance of the Custodian's services under the Custodian Agreement.
2. This Compensation Agreement restates and supersedes all prior
compensation agreements pursuant to Article 12 of the Custodian Agreement.
IN WITNESS WHEREOF, the Fund and the Custodian have caused this
instrument to be executed in duplicate as of the date first above written by
their duly authorized officers.
FIRST AMERICAN INVESTMENT
FUNDS, INC.
By /s/ Kathryn L. Stanton
-------------------------------
Its Vice President
-------------------------------
U.S. BANK NATIONAL ASSOCIATION
By /s/ Jeffrey M. Wilson
-------------------------------
Its Vice President
-------------------------------
EXHIBIT 10(c)
[DORSEY & WHITNEY LLP LETTERHEAD]
First American Investment Funds, Inc.
Oaks, Pennsylvania 19456
Ladies and Gentlemen:
We have acted as counsel to First American Investment Funds, Inc., a
Maryland corporation (the "Fund"), in connection with a Registration Statement
on Form N-1A (File No. 33-16905) (the "Registration Statement") relating to the
sale by the Fund of an indefinite number of shares of the Fund's Class HH Common
Shares, Class HH, Series 2 Common Shares and Class HH, Series 3 Common Shares,
par value of $.0001 per share (the "Shares").
We have examined such documents and have reviewed such questions of
law as we have considered necessary and appropriate for the purposes of our
opinions set forth below. In rendering our opinions set forth below, we have
assumed the authenticity of all documents submitted to us as originals, the
genuineness of all signatures and the conformity to authentic originals of all
documents submitted to us as copies. We have also assumed the legal capacity for
all purposes relevant hereto of all natural persons and, with respect to all
parties to agreements or instruments relevant hereto other than the Fund, that
such parties had the requisite power and authority (corporate or otherwise) to
execute, deliver and perform such agreements or instruments, that such
agreements or instruments have been duly authorized by all requisite action
(corporate or otherwise), executed and delivered by such parties and that such
agreements or instruments are the valid, binding and enforceable obligations of
such parties. As to questions of fact material to our opinions, we have relied
upon certificates of officers of the Fund and of public officials. We have also
assumed that the Shares will be issued and sold as described in the Registration
Statement.
Based on the foregoing, we are of the opinion that the Shares have
been duly authorized by all requisite corporate action and, upon issuance,
delivery and payment therefore as described in the Registration Statement, will
be validly issued, fully paid and nonassessable.
<PAGE>
[DORSEY & WHITNEY LLP]
First American Investment Funds, Inc.
July 24, 1998
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to our firm on the back cover of
the prospectus and under the caption "Investment Advisory and Other Services" in
the Statement of Additional Information, each constituting part of the
Registration Statement.
Dated: July 24, 1998
Very truly yours,
/s/ Dorsey & Whitney LLP
Dorsey & Whitney LLP
KLP
