1933 Act Registration No.
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 1998
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ___ [ ]
Post-Effective Amendment No. ___ [ ]
(Check appropriate box or boxes)
- --------------------------------------------------------------------------------
Exact name of Registrant as Specified in Charter:
FIRST AMERICAN INVESTMENT FUNDS, INC.
Area Code and Telephone Number:
(610) 676-1924
Address of Principal Executive Offices:
Oaks, Pennsylvania 19456
Name and Address of Agent for Service:
Kathryn Stanton, Esq.
c/o SEI Investments Company
Oaks, Pennsylvania 19456
COPIES TO:
Kathleen L. Prudhomme, Esq.
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
It is proposed that this filing shall become effective on May 15, 1998
(30 days after filing) pursuant to Rule 488
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No filing fee is required because an indefinite number of shares have previously
been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940.
Registrant is filing as an exhibit to this Registration Statement a copy of its
earlier declaration under Rule 24f-2. Registrant filed its Rule 24f-2 Notice on
December 9, 1997 for its fiscal year ended September 30, 1997.
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<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
REGISTRATION STATEMENT ON FORM N-14
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 481 (a))
<TABLE>
<CAPTION>
PART A OF FORM N-14 PROSPECTUS/PROXY STATEMENT CAPTION
<S> <C>
1. Beginning of Registration Statement and Outside
Front Cover Page of Prospectus ..................... Cross Reference Sheet and Cover Page
2. Beginning and Outside Back Cover Page of
Prospectus ......................................... Table of Contents
3. Fee Table, Synopsis Information
and Risk Factors ................................... Summary; Principal Risk Factors; Comparison of FAIF
and the Piper Funds; Appendix X
4. Information about the Transaction .................. Summary; Information Relating to the Interim
Agreements; Information Relating to the Proposed
Reorganization; Comparison of FAIF and the Piper
Funds
5. Information about the Registrant .................. Comparison of FAIF and the Piper Funds; Additional
Information about FAIF; Appendix VII; Appendix XII
6. Information about the Company Being
Acquired .......................................... Inside Front Cover (Incorporation by Reference);
Comparison of FAIF and the Piper Funds; Additional
Information about the Piper Funds; Appendix VII
7. Voting Information ................................ Summary; Information about the Reorganization;
Information Relating to Voting Matters
8. Interest of Certain Persons and Experts ........... Information Relating to Voting Matters
9. Additional Information ............................ Not Applicable
PART B OF FORM N-14 STATEMENT OF ADDITIONAL INFORMATION
CAPTION
10. Cover Page ........................................ Cover Page
11. Table of Contents ................................. Table of Contents
12. Additional Information about the
Registrant ........................................ Appendix A to Statement of Additional Information
13. Additional Information about the Company
Being Acquired .................................... Cover Page (Incorporation by Reference); Investment
Objectives and Policies; Tender Offers and Share
Repurchases; Directors and Executive Officers;
Investment Advisory and Other Services; Brokerage and
Portfolio Transactions; Taxation; Additional
Information
14. Financial Statements .............................. Cover Page (Incorporation by Reference); Pro Forma
Financial Statements, Appendix B to the Statement of
Additional Information
</TABLE>
PART C OF FORM N-14
Information required to be included in Part C is set forth
under the appropriate item in Part C of this Registration
Statement.
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
REGISTRATION STATEMENT ON FORM N-14
PART A
PRESIDENT'S LETTER
SHAREHOLDER Q & A
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
PROXY STATEMENT/PROSPECTUS
<PAGE>
THE AMERICAS INCOME TRUST INC.
HIGHLANDER INCOME FUND INC.
222 SOUTH NINTH STREET
MINNEAPOLIS, MINNESOTA 55402-3804
_______, 1998
Dear Piper Fund Shareholder:
On behalf of the Boards of Directors (the "Piper Boards") of The
Americas Income Trust Inc. ("XUS") and Highlander Income Fund Inc. ("HLA" and
collectively with XUS the "Piper Funds"), we are pleased to invite you to a
special meeting in lieu of the annual meeting of shareholders (the "Meeting").
The Meeting will be held at the offices of the Piper Funds, 222 South Ninth
Street, _____ floor, Minneapolis, Minnesota, on _________, 1998 at ___a.m.
central time.
At the Meeting, you will be asked to consider the following
proposals: (1) for each Piper Fund, the ratification and approval of an interim
advisory agreement with Piper Capital Management Incorporated ("Piper Capital"),
which became effective on April ____, 1998 (when Piper Jaffray Companies Inc.,
the parent company of Piper Capital, merged with U.S. Bancorp, as discussed
below), (2) for XUS, the ratification and approval of an interim sub-advisory
agreement between the Piper Capital and Salomon Brothers Asset Management Inc.
("Salomon") which became effective on April ____, 1998, (3) for HLA, the
ratification and approval of an interim sub-advisory agreement between Piper
Capital and Federated Advisors ("Federated") (Salomon and Federated are also
referred to collectively as the "Sub-Advisers" and individually as a
"Sub-Adviser") which became effective on April __, 1998, and (4) for each Piper
Fund, a proposed reorganization of the Piper Funds into Strategic Income Fund
(the "Strategic Fund"), a newly created open-end fund of First American
Investment Funds, Inc. ("FAIF").
As a result of the merger of Piper Jaffray Companies Inc. and U.S.
Bancorp, representatives of Piper Capital and U.S. Bancorp recommended to the
Boards of Directors of the Piper Funds that the Directors consider and approve
combining the Piper Funds with the Strategic Fund. This recommendation was made
because the representatives of Piper Capital and U.S. Bancorp believed that
combining the Piper Funds and Strategic Fund would offer a number of potential
benefits to the shareholders of the Piper Funds.
EACH OF THE BOARDS OF DIRECTORS OF XUS AND HLA RECOMMENDS THAT YOU
VOTE TO APPROVE BOTH THE APPLICABLE INTERIM ADVISORY AGREEMENT, THE APPLICABLE
INTERIM SUB-ADVISORY AGREEMENT AND THE PROPOSED REORGANIZATION.
BACKGROUND. On April ____, 1998, Piper Jaffray Companies Inc., the
parent company of Piper Capital, merged with U.S. Bancorp. By law, this merger
resulted in the automatic termination of the Piper Funds' then current
investment advisory agreements with Piper Capital, and in the automatic
termination of the then current sub-advisory agreements between Piper Capital
and Salomon (relating to XUS) and between Piper Capital and Federated (relating
to HLA). The Piper Boards approved interim investment advisory agreements with
Piper Capital and interim sub-advisory agreements between Piper Capital and the
Sub-Advisers, effective April __, 1998, after determining that implementing such
interim agreements prior to obtaining shareholder approval was in the best
interests of the Piper Funds and their shareholders. At the upcoming meeting,
you will be asked to ratify and approve the interim advisory and sub-advisory
agreements applicable to your Piper Fund. By approving these agreements, you
also will be approving the receipt of investment advisory fees by
<PAGE>
Piper Capital (or, in the case of the sub-advisory agreements, the receipt of
sub-advisory fees by Salomon or Federated) under the agreements.
In addition, at the upcoming meeting, you will be asked to approve a
reorganization of your Piper Fund into Strategic Fund. Strategic Fund is a
series of FAIF, an open-end investment company advised by U.S. Bank National
Association ("U.S. Bank"). If required approvals are obtained, the Piper Funds
are expected to be reorganized into Strategic Fund on or about July 31, 1998
when your Piper Fund shares will be exchanged for shares of Strategic Fund of
equal net asset value. The reorganization that you are being asked to approve
should benefit shareholders by eliminating any market discounts at which shares
of the Piper Funds trade, by improving efficiency, including the potential for
economies of scale, and by making available to shareholders a number of
investment portfolio options into which their shares may be exchanged.
In considering the interim advisory and sub-advisory agreements, you
should note:
- IDENTICAL TERMS AND FEES
The terms of the interim advisory agreements with Piper
Capital and interim sub-advisory agreements between Piper
Capital and Salomon or Federated are substantially identical
to the terms of the Piper Funds' previous advisory and
sub-advisory agreements.
In considering the proposed reorganization, you should note:
- ELIMINATION OF MARKET DISCOUNT
The price of your shares of the Piper Funds would immediately
increase because the merger would eliminate the market
discounts at which shares of the Piper Funds currently trade.
Shares of Strategic Fund can be redeemed or purchased on
each business day at net asset value, unlike shares of XUS and
HLA which trade at market price on the New York and American
Stock Exchanges, respectively.
- LOWER OR EQUAL OPERATING EXPENSE RATIOS
U.S. Bank has committed that, for a period of two years
following the reorganization, it will waive fees and reimburse
expenses to the extent necessary so that Strategic Fund will
not have total fund operating expense ratios in excess of
those currently applicable to the Piper Funds.
The formal Notice of Special Meeting, a Combined Proxy
Statement/Prospectus and a Proxy Ballot are enclosed. If you own shares in both
of the Piper Funds, more than one Proxy Ballot accompanies these proxy
materials. You will receive additional proxy materials if you are a shareholder
of one or more of the other mutual funds managed by Piper Capital.
YOUR VOTE IS VERY IMPORTANT TO US. WHETHER OR NOT YOU PLAN TO ATTEND
THE SPECIAL MEETING, PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY
BALLOT PROMPTLY, USING THE ENCLOSED POSTAGE-PAID ENVELOPE. YOU MAY ALSO HAVE
YOUR VOTE RECORDED BY TELEPHONE. PLEASE CALL _______________ FOR MORE
INFORMATION.
<PAGE>
The interim investment advisory arrangements with Piper Capital, the
interim sub-advisory arrangements with Federated and Salomon, the proposed
reorganization and the reasons for the recommendation of the Boards of Directors
of the Piper Funds are discussed in detail in the enclosed materials, which you
should read carefully. If you have any questions about the new investment
advisory arrangements or the reorganization, please do not hesitate to call
____________ toll free at 1-800-___-____.
Very truly yours,
Paul A. Dow
President
<PAGE>
[LOGO] PIPER FUNDS
SHAREHOLDER Q & A
May 15, 1997
Shareholders of The Americas Income Trust and Highlander Income Fund are being
asked to approve the following proposals:
1) Shareholders of each fund are being asked to approve an interim advisory
agreement with Piper Capital Management;
2) Shareholders of The Americas Income Trust are being asked to approve an
interim sub-advisory agreement between Piper Capital and Salomon Brothers
Asset Management Inc.;
3) Shareholders of Highlander Income Fund are being asked to approve an interim
sub-advisory agreement between Piper Capital and Federated Advisors;
4) Shareholders of each fund are being asked to approve a reorganization of
their fund into Strategic Income Fund, a newly created open-end fund advised
by First American Asset Management.
WHY AM I BEING ASKED TO APPROVE ADVISORY AND SUB-ADVISORY ARRANGEMENTS WITH
PIPER CAPITAL AND SALOMON BROTHERS ASSET MANAGEMENT OR FEDERATED ADVISORS AT THE
SAME TIME I'M BEING ASKED TO APPROVE THE REORGANIZATION OF MY FUND INTO A NEW
FUND ADVISED BY FIRST AMERICAN ASSET MANAGEMENT?
As you may know, Piper Jaffray Companies, the parent company of Piper Capital,
was acquired by U.S. Bancorp, parent company of First American Asset Management,
on May x, 1998. By law, this acquisition resulted in the termination of the
advisory and sub-advisory arrangements the funds had with Piper Capital, Salomon
Brothers Asset Management and Federated Advisors. To keep the funds' management
in place and running smoothly until the proposed reorganization of these funds,
the board of directors approved interim advisory agreements, which you now are
being asked to approve. These agreements are substantially identical to those in
place prior to the acquisition, and the fee rates are unchanged. By approving
the agreements, you also will be approving the receipt of investment advisory
fees by Piper Capital, Salomon Brothers Asset Management and Federated Advisors
under the agreements. (These fees are currently being held in escrow.)
WHY ARE THE FUNDS BEING REORGANIZED?
Piper Capital and First American Asset Management currently act as advisors to
two separate fund families. Our goal is to consolidate similar funds in the two
families into a single, broadly diversified fund family. Strategic Income Fund
will be a new fund, created for the purposes of this reorganization. The
proposed reorganization is expected to promote efficiency and eliminate
duplicate costs. It is scheduled to take place on or about July 31, 1998,
pending the outcome of the shareholder vote.
WHAT ARE THE ADVANTAGES OF REORGANIZING THESE CLOSED-END FUNDS TO AN OPEN-END
FUND?
The Americas Income Trust and Highlander Income Fund have been trading at market
prices that are less than their net asset values. If this proposal is approved,
this discount would be eliminated. In addition, shareholders who want to redeem
open-end fund shares are able to do so at net asset value without paying a
brokerage commission.
WILL THERE BE ANY COST TO ME?
No. The cost of the reorganization is the responsibility of U.S. Bancorp, to
the extent costs exceed the cost of the annual meeting. Reorganization costs
are not expected to be passed on to shareholders in any way. It would be tax-
free, in the opinion of First American Funds' counsel, and would not involve
any sales charges, commissions or transaction fees.
WHAT EXPERIENCE WILL FIRST AMERICAN ASSET MANAGEMENT BRING TO THE MANAGEMENT OF
THE FUNDS?
First American Asset Management has more than $___ billion under management as
of May 2. The firm employs ____ people, including 41 portfolio managers
averaging 20 years of experience. The company was formed in 1967 and is a
multi-discipline, multi-product investment firm.
<PAGE>
SHAREHOLDER Q & A
IS THERE ANYTHING I NEED TO DO TO CONVERT MY SHARES? COMPLETE A SPECIAL FORM?
SUBMIT SOME SORT OF ORDER?
Soon after the reorganization, the funds' transfer agent, Investors Fiduciary
Trust Company (IFTC), will send a notice and transmittal form to shareholders
of The Americas Income Trust and Highlander Income Fund, which will give
instructions for surrendering shares. You should NOT send in your share
certificate until you receive your notice and instructions from IFTC.
WHEN IS MY PROXY DUE?
We would like to receive your vote as soon as possible. You may cast your
vote...
BY MAIL: Please note that you received one proxy ballot for each fund you own.
All ballots must be marked with your vote and returned in the business reply
envelope included in this package. If you have misplaced your envelope, please
mail your proxy to:
Attn: Piper Funds
SEI Fund Resources
530 E. Swedesford Rd.
Wayne PA 19087.
BY PHONE: Refer to the toll-free number in your proxy and follow the recorded
instructions.
If you have not returned your ballot as the July 10 meeting date approaches,
you may receive a call from SEI Investments reminding you to vote. U.S. Bank
has hired SEI to assist with the solicitation of proxies.
WHEN AND WHERE WILL THE SHAREHOLDER MEETING TAKE PLACE?
The shareholder meeting will be held at 10 a.m. on July 10, 1998, on the third
floor of the Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota. Piper Capital will validate parking for the Energy Center Ramp
located at South Ninth Street and Third Avenue South. Please bring your
parking ticket to the meeting for validation. Regardless of whether you plan to
attend the meeting, you should vote by phone or return your proxy card(s) in
the mail as soon as possible.
PLEASE READ THE FULL TEXT OF THE ATTACHED PROXY STATEMENT/PROSPECTUS FOR FURTHER
INFORMATION. IF YOU HAVE ADDITIONAL QUESTIONS, PLEASE CALL YOUR INVESTMENT
PROFESSIONAL OR PIPER CAPITAL MUTUAL FUND SERVICES AT 800 866-7778.
[LOGO] PIPER FUNDS
PIPER FUNDS 222 South Ninth Street
Minneapolis, MN 55402-3804 Toll Free 800 866-7778
PIPER JAFFRAY INC., FUND DISTRIBUTOR AND NASD MEMBER.
http://www.piperjaffray.com/
<PAGE>
THE AMERICAS INCOME TRUST INC.
HIGHLANDER INCOME FUND INC.
222 SOUTH NINTH STREET
MINNEAPOLIS, MINNESOTA 55402-3804
NOTICE OF SPECIAL MEETING IN LIEU OF ANNUAL SHAREHOLDERS MEETING
TO BE HELD ON _________, 1998
NOTICE IS HEREBY GIVEN THAT a Special Meeting in lieu of the Annual
Meeting of the Shareholders of The Americas Income Trust Inc. ("XUS") and
Highlander Income Fund ("HLA") (each a "Piper Fund"), will be held at the
offices of the Piper Funds, 222 South Ninth Street, ____ floor, Minneapolis,
Minnesota on _________, 1998, at ____ a.m. central time for the purpose of
considering and voting upon:
1. FOR EACH PIPER FUND, a proposal to ratify and approve an
interim investment advisory agreement between such Piper
Fund and Piper Capital Management Incorporated ("Piper
Capital"), and the receipt of investment advisory fees
by Piper Capital under such agreement.
2. FOR XUS, a proposal to ratify and approve interim
sub-advisory agreements between Piper Capital and
Salomon Brothers Asset Management Inc. ("Salomon") and
the receipt of sub-advisory fees by Salomon under such
agreement.
3. For HLA, a proposal to ratify and approve an interim
sub-advisory agreement between Piper Capital and
Federated Advisors ("Federated") and the receipt of
sub-advisory fees by Federated under such agreement.
4. FOR EACH PIPER FUND, a proposal to approve an Agreement
and Plan of Reorganization providing for the transfer of
the assets and liabilities of each Piper Fund to
Strategic Income Fund, a newly created open-end fund of
First American Investment Funds, Inc. ("FAIF"), in
exchange for Class A Shares of Strategic Income Fund.
5. FOR EACH PIPER FUND, such other business as may properly
come before the Special Meeting or any adjournment(s).
The proposals are described in the attached Combined Proxy
Statement/Prospectus. THE DIRECTORS OF EACH PIPER FUND RECOMMEND THAT YOU VOTE
IN FAVOR OF EACH OF THESE PROPOSALS.
Shareholders of record as of the close of business on ______, 1998
are entitled to notice of, and to vote at, the Special Meeting or any
adjournment(s) thereof.
SHAREHOLDERS ARE REQUESTED TO MARK, DATE, SIGN AND RETURN PROMPTLY
IN THE ENCLOSED ENVELOPE THE ACCOMPANYING PROXY CARD, WHICH IS BEING SOLICITED
BY THE BOARD OF DIRECTORS OF THE PIPER FUNDS. THIS IS IMPORTANT TO ENSURE A
QUORUM AT THE MEETING. SHAREHOLDERS MAY ALSO HAVE THEIR VOTES RECORDED BY
TELEPHONE. PLEASE CALL ____________ FOR MORE INFORMATION PROXIES MAY BE REVOKED
AT ANY TIME BEFORE THEY ARE EXERCISED BY SUBMITTING TO THE PIPER FUNDS A WRITTEN
NOTICE OF REVOCATION OR A SUBSEQUENTLY EXECUTED PROXY OR BY ATTENDING THE
MEETING AND VOTING IN PERSON. HOWEVER, ATTENDANCE AT THE MEETING WILL NOT BY
ITSELF SERVE TO REVOKE A PROXY.
Susan Sharp Miley
Secretary
________, 1998
<PAGE>
COMBINED PROXY STATEMENT/PROSPECTUS
DATED _______, 1998
THE AMERICAS INCOME TRUST INC.
HIGHLANDER INCOME FUND INC.
222 SOUTH NINTH STREET
MINNEAPOLIS, MINNESOTA 55402-3804
FIRST AMERICAN INVESTMENT FUNDS, INC.
OAKS, PENNSYLVANIA 19456
1-800-637-2548
This Combined Proxy Statement/Prospectus is furnished in connection
with the solicitation of proxies by the Boards of Directors (the "Piper Boards")
of The Americas Income Trust Inc. ("XUS") and Highlander Income Fund Inc.
("HLA") (XUS and HLA are sometimes referred to collectively as the "Piper Funds"
and individually as a "Piper Fund") in connection with a Special Meeting in lieu
of the Annual Meeting of Shareholders of the Piper Funds to be held at ____ a.m.
central time on ______, 1998 at the offices of the Piper Funds, 222 South Ninth
Street, ____ floor, Minneapolis, Minnesota.
At the meeting, shareholders will be asked to vote on the following
proposals: (1) for each Piper Fund, the ratification and approval of an interim
advisory agreement with Piper Capital Management Incorporated ("Piper Capital"),
and the receipt of investment advisory fees by Piper Capital under the
agreement, to take effect upon the closing of the merger of Piper Jaffray
Companies Inc., the parent company of Piper Capital, with U.S. Bancorp, as
discussed below (the "Merger"), (2) for XUS, the ratification and approval of an
interim sub-advisory agreement between Piper Capital and Salomon Brothers Asset
Management Inc. ("Salomon") and the receipt of sub-advisory fees by Salomon
under such agreement, (3) for HLA, the ratification and approval of an interim
sub-advisory agreement between Piper Capital and Federated Advisors
("Federated") (Salomon and Federated are also referred to collectively as the
"Sub-Advisers" and individually as a "Sub-Adviser") and the receipt of
sub-advisory fees by Federated under such agreement, and (4) for each Piper
Fund, approval of a proposed Agreement and Plan of Reorganization (the
"Reorganization Agreement") dated ________, 1998. Copies of the interim
investment advisory agreements, the interim sub-advisory agreements and the
Reorganization Agreement are attached as Appendices to this Combined Proxy
Statement/Prospectus.
XUS is a non-diversified, closed-end management investment company.
HLA is a diversified, closed-end management investment company. FAIF is open-end
management investment company that offers its shares in a number of different
investment portfolios, or "funds." The Reorganization Agreement provides for the
transfer of the assets and liabilities of the Piper Funds with and into FAIF's
Strategic Income Fund ("Strategic Fund") in exchange for Class A shares of
Strategic Fund having an aggregate net assets value equal to the aggregate net
asset value of the common shares of the Piper Funds that are outstanding
immediately prior the date of such exchange (the "Reorganization"). As a result
of the Reorganization, shareholders of the Piper Funds will become shareholders
of Strategic Fund.
This Combined Proxy Statement/Prospectus sets forth concisely the
information that a shareholder of the Piper Funds should know before voting, and
should be retained for future reference. There is no Annual Report or Prospectus
for Strategic Fund, which has been created for purposes of the reorganization
and has not yet commenced operations. However, information regarding Strategic
Fund is set forth in the preliminary prospectus for the Class A and B Shares,
which is attached hereto as Appendix XII. Additional information relating to
this Combined Proxy Statement/Prospectus is set forth in the Statement of
Additional Information, dated the date hereof, which is incorporated herein by
reference. This document is on file with the Securities and Exchange Commission
(the "SEC"), and is available without charge by calling or writing the Piper
Funds or FAIF at the respective telephone numbers or addresses stated above.
<PAGE>
This Combined Proxy Statement/Prospectus is expected to be first
sent to shareholders on or about _______, 1998.
THE SECURITIES OF STRATEGIC FUND OFFERED HEREBY HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
COMBINED PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS COMBINED PROXY
STATEMENT/PROSPECTUS AND IN THE MATERIALS EXPRESSLY INCORPORATED HEREIN BY
REFERENCE AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE PIPER FUNDS, STRATEGIC FUND
OR THEIR RESPECTIVE ADVISERS OR THE DISTRIBUTOR OF STRATEGIC FUND.
SHARES OF THE PIPER FUNDS AND FAIF ARE NOT DEPOSITS OR OBLIGATIONS
OF, OR GUARANTEED OR ENDORSED BY U.S. BANK NATIONAL ASSOCIATION OR ANY OTHER
BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. MUTUAL FUND SHARES
INVOLVE CERTAIN INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
<PAGE>
TABLE OF CONTENTS
SUMMARY ..................................................................... 5
INTERIM ADVISORY AND SUB-ADVISORY AGREEMENTS ........................ 5
PIPER BOARD CONSIDERATIONS .......................................... 6
PROPOSED REORGANIZATION ............................................. 6
OVERVIEW OF STRATEGIC FUND AND PIPER FUNDS .......................... 6
PIPER FUND AND FAIF BOARD CONSIDERATIONS ............................ 8
VOTING INFORMATION .................................................. 9
DISSENTER'S APPRAISAL RIGHTS ........................................ 9
PRINCIPAL RISK FACTORS ...................................................... 9
INTEREST RATE RISK .................................................. 9
CREDIT RISK ......................................................... 9
CALL RISK ......................................................... 10
MORTGAGE-BACKED SECURITIES .......................................... 10
RISKS OF EQUITY SECURITIES GENERALLY ................................ 10
FOREIGN SECURITIES .................................................. 11
RISKS OF FOREIGN INDEX LINKED INSTRUMENTS ........................... 11
ZERO COUPON SECURITIES .............................................. 11
PAYMENT-IN-KIND DEBENTURES .......................................... 11
RESTRUCTURED DEBT ................................................... 12
MUNICIPAL OBLIGATIONS ............................................... 12
ASSET-BACKED SECURITIES ............................................. 12
ILLIQUID SECURITIES ................................................. 13
OTHER RISKS ......................................................... 13
DIFFERENCES OF CLOSED-END AND OPEN-END FUNDS ........................ 13
INFORMATION RELATING TO THE INTERIM AGREEMENTS .............................. 14
THE MERGER OF PIPER JAFFRAY COMPANIES INC. AND U.S. BANCORP ......... 14
THE INTERIM ADVISORY AND SUB-ADVISORY AGREEMENTS ................... 15
INFORMATION ABOUT PIPER CAPITAL ..................................... 18
INFORMATION ABOUT SALOMON ........................................... 19
INFORMATION ABOUT FEDERATED ......................................... 20
ADMINISTRATION AGREEMENTS ........................................... 21
AFFILIATED BROKER COMMISSIONS ....................................... 21
SECTION 15(f) OF THE 1940 ACT ....................................... 21
APPROVAL OF THE PIPER BOARDS ........................................ 21
INFORMATION RELATING TO THE PROPOSED REORGANIZATION ......................... 22
DESCRIPTION OF THE REORGANIZATION AGREEMENT ......................... 23
BOARD CONSIDERATIONS ................................................ 24
CAPITALIZATION ...................................................... 25
TAX ASPECTS OF THE REORGANIZATION ................................... 25
COMPARISON OF STRATEGIC FUND AND THE PIPER FUNDS ............................ 26
INVESTMENT OBJECTIVES AND POLICIES .................................. 26
INVESTMENT ADVISORY FEES AND TOTAL EXPENSE RATIOS ................... 27
FEES AND EXPENSES OF THE PIPER FUNDS AND STRATEGIC FUND ..................... 27
INVESTMENT ADVISORY AGREEMENTS. ..................................... 28
SUB-ADVISORY AGREEMENTS ............................................. 28
PORTFOLIO MANAGEMENT ................................................ 28
INFORMATION ABOUT U.S. BANK AND OTHER SERVICE PROVIDERS ............. 28
OTHER SERVICE PROVIDERS FOR PIPER FUNDS AND STRATEGIC FUND .......... 29
ADMINISTRATION AGREEMENT ............................................ 29
SHARE STRUCTURE ..................................................... 30
HISTORY OF PUBLIC TRADING OF THE PIPER FUNDS' COMMON SHARES ......... 31
DISTRIBUTION PLAN ................................................... 32
SHAREHOLDER TRANSACTIONS AND SERVICES ............................... 32
INFORMATION RELATING TO VOTING MATTERS ...................................... 33
GENERAL INFORMATION ................................................. 33
SHAREHOLDER AND BOARD APPROVALS ..................................... 34
PIPER FUNDS--5% OWNERSHIP AS OF , 1998 ................... 35
QUORUM .............................................................. 35
ANNUAL MEETINGS ..................................................... 35
DISSENTERS' RIGHTS .................................................. 35
INTERESTS OF CERTAIN PERSONS ........................................ 36
ADDITIONAL INFORMATION ABOUT FAIF ........................................... 36
ADDITIONAL INFORMATION ABOUT THE PIPER FUNDS ................................ 37
<PAGE>
COMPLIANCE WITH SECTION 16(a) .............................................. 37
FINANCIAL STATEMENTS ........................................................ 37
OTHER BUSINESS .............................................................. 37
SHAREHOLDER INQUIRIES ....................................................... 38
APPENDICES
I FORM OF INTERIM INVESTMENT ADVISORY AGREEMENT BETWEEN PIPER CAPITAL
MANAGEMENT INCORPORATED AND THE AMERICAS INCOME TRUST INC.
II FORM OF INTERIM INVESTMENT ADVISORY AGREEMENT BETWEEN PIPER CAPITAL
MANAGEMENT INCORPORATED AND HIGHLANDER INCOME FUND INC.
III FORM OF INTERIM SUB-ADVISORY AGREEMENT BETWEEN PIPER CAPITAL MANAGEMENT
INCORPORATED AND SALOMON BROTHERS ASSET MANAGEMENT INC.
IV FORM OF INTERIM SUB-ADVISORY AGREEMENT BETWEEN PIPER CAPITAL MANAGEMENT
INCORPORATED AND FEDERATED ADVISERS
V PRINCIPAL EXECUTIVE OFFICER AND DIRECTORS OF THE ADVISERS AND THE
SUB-ADVISERS
VI FORM OF AGREEMENT AND PLAN OF REORGANIZATION
VII COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
VIII COMPARISON OF THE INTERIM ADVISORY AGREEMENTS AND STRATEGIC INCOME
FUND'S ADVISORY AGREEMENT
IX COMPARISON OF THE INTERIM SUB-ADVISORY AGREEMENTS AND STRATEGIC INCOME
FUND'S SUB-ADVISORY AGREEMENT
X SHAREHOLDER TRANSACTIONS AND SERVICES
XI PORTFOLIO MANAGERS OF THE PIPER FUNDS
XII PRELIMINARY PROSPECTUS OF STRATEGIC INCOME FUND--RETAIL CLASS SHARES
XIII DISSENTERS' SHAREHOLDERS' RIGHTS OF APPRAISAL
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SUMMARY
The following is a summary of certain information relating to the
interim investment advisory agreements, the interim sub-advisory agreements and
the proposed Reorganization, and is qualified by reference to the more complete
information contained elsewhere in this Combined Proxy Statement/Prospectus and
the Appendices attached hereto.
INTERIM ADVISORY AND SUB-ADVISORY AGREEMENTS. On April __, 1998,
pursuant to an Agreement and Plan of Merger, U.S. Bancorp acquired Piper Jaffray
Companies Inc. ("Piper Jaffray") and its direct and indirect subsidiaries
(including Piper Capital) by merging a wholly owned subsidiary of U.S. Bancorp
with and into Piper Jaffray as the surviving corporation (the "Holding Company
Merger"). As a result of the Holding Company Merger, Piper Capital, the
investment adviser to the Piper Funds, became an indirect wholly-owned
subsidiary of U.S. Bancorp. In accordance with the terms of the then current
investment advisory agreements between Piper Capital and the Piper Funds (the
"Old Advisory Agreements"), and consistent with the requirements of the
Investment Company Act of 1940, as amended (the "1940 Act"), this change in
control of Piper Capital resulted in the automatic and immediate termination of
the Old Advisory Agreements. Similarly, as a result of the Holding Company
Merger, and in accordance with the terms of the then current sub-advisory
agreements with Salomon and Federated (the "Old Sub-Advisory Agreements" and
collectively with the Old Advisory Agreements, the "Old Agreements"), this
change in control of Piper Capital resulted in the automatic and immediate
termination of the Old Sub-Advisory Agreements.
To better ensure that the Holding Company Merger and this automatic
termination would not disrupt the investment advisory and sub-advisory services
provided to Piper Funds, Piper Capital, Salomon, Federated and the Piper Funds
obtained an exemptive order from the SEC (the "Order") permitting Piper Capital
to act as investment adviser to the Piper Funds, and Salomon and Federated to
act as investment sub-advisers to XUS and HLA, respectively, after the
termination of the Old Agreements, but prior to obtaining shareholder approval,
under new, interim investment advisory agreements with each Piper Fund (the
"Interim Advisory Agreements") and new, interim sub-advisory agreements with
Salomon and Federated (the "Interim Sub-Advisory Agreements" and collectively
with the Interim Advisory Agreements, the "Interim Agreements"). In accordance
with the Order, the Interim Agreements are subject to ratification and approval
by the shareholders of the applicable Piper Funds at a meeting to be held within
120 days after April __, 1998 (the "Interim Period").
The Directors of each of the Piper Boards now are proposing that the
shareholders of each Piper Fund ratify and approve their Fund's Interim
Agreements. The Interim Agreements each became effective on April __, 1998, the
effective date of the Holding Company Merger. Pending the ratification and
approval of the Interim Agreements, all fees payable under each agreement are
being held in escrow. Any escrowed fees relating to a Piper Fund will be
received by Piper Capital, Salomon or Federated only if the respective Interim
Agreement is ratified and approved by the shareholders of such Piper Fund.
The terms of the Interim Agreements are substantially identical to
the terms of the respective Old Agreements, except for (i) the effective date,
(ii) the termination date, and (iii) inclusion of a provision requiring that all
fees payable by each Piper Fund under the particular Interim Advisory
Agreements, or by Piper Capital under the particular Interim Sub-Advisory
Agreements be held in escrow until such Interim Agreement is approved by the
applicable Piper Fund's shareholders. The advisory or sub-advisory fee rates
payable under the Interim Agreements are identical to those previously payable
under the Old Agreements. A description of Piper Capital, Salomon, Federated,
the Interim Agreements and the services provided by Piper Capital, Salomon and
Federated thereunder is set forth below under the heading "Information Relating
to the Interim Agreements." Copies of the Interim Agreements are attached to
this Combined Proxy Statement/Prospectus as Appendices I, II, III and IV. The
descriptions
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of the Interim Agreements are qualified in their entirety by reference to the
copies of the Interim Agreements attached hereto.
If ratified and approved, the Interim Agreements will continue in
effect with respect to the Piper Funds either (i) for an initial period of two
years from the effective date (the date of the closing of the Holding Company
Merger) of such Interim Agreement and thereafter for successive one-year terms,
subject to certain annual approval requirements, or (ii) until the
Reorganization is completed (which, subject to various conditions described
herein, is expected to occur on or about July 31, 1998) (the "Closing"),
whichever occurs earlier. In the event that an Interim Agreement is not ratified
and approved with respect to a Piper Fund, the fees applicable to such Interim
Agreement held in escrow with respect to that Fund will be returned to the Fund,
and that Fund's Board of Directors will consider what actions should be taken
with respect to management of the assets of the Piper Fund until a new
investment advisory agreement or new sub-advisory agreement is approved by the
shareholders of the Fund or the Reorganization occurs.
PIPER BOARD CONSIDERATIONS. In approving the Interim Agreements and
recommending their ratification and approval to the shareholders of each Piper
Fund, the Piper Boards considered, among other things, that the provisions of
the Interim Agreements were substantially similar, and advisory fee rates were
exactly the same as those of the Old Agreements. In addition, Piper Capital,
Salomon and Federated provided assurances that the investment advisory and
sub-advisory services provided to the Piper Funds during the Interim Period
would not be diminished in scope or quality, and agreed to certain conditions
that were intended to protect the interests of shareholders. See "Information
Relating to the Interim Agreements--Approval of the Piper Boards." THE PIPER
BOARDS RECOMMEND THAT THE SHAREHOLDERS OF EACH PIPER FUND RATIFY AND APPROVE THE
APPLICABLE INTERIM AGREEMENTS, THE RECEIPT OF INVESTMENT ADVISORY FEES BY PIPER
CAPITAL, AND THE RECEIPT OF SUB-ADVISORY FEES BY SALOMON OR FEDERATED UNDER THE
AGREEMENTS.
PROPOSED REORGANIZATION. The Reorganization Agreement provides for:
(i) the transfer of all of the assets and liabilities of each of the Piper Funds
to Strategic Fund in exchange for Class A Shares of Strategic Fund; and (ii) the
distribution of these Strategic Fund Class A Shares to the shareholders of the
Piper Funds in liquidation of the Piper Funds. The Reorganization is subject to
a number of conditions with respect to each Piper Fund, including the
shareholder approvals described below. Following the Reorganization, it is
contemplated that there will be a winding up of the affairs of each Piper Fund,
including the deregistration of each Piper Fund as a closed-end investment
company under the 1940 Act.
As a result of the proposed Reorganization, each shareholder of a
Piper Fund will become a shareholder of Strategic Fund and will hold,
immediately after the Closing, Class A shares of Strategic Fund having an
aggregate net asset value equal to the aggregate net asset value of the common
shares of the Piper Fund the shareholder holds immediately before the Closing.
The Reorganization Agreement provides that the Reorganization may be
abandoned at any time prior to the Closing upon the mutual consent of each Piper
Fund and FAIF, among other reasons. For further information, see "Information
Relating to the Proposed Reorganization."
OVERVIEW OF STRATEGIC FUND AND PIPER FUNDS. The primary investment
objectives of the Piper Funds are, in general, similar to those of Strategic
Fund. The primary investment objective of each of XUS, HLA and Strategic Fund is
to provide a high level of current income. XUS has a secondary objective of
seeking capital appreciation. However, there are numerous differences in
policies and restrictions of XUS and HLA. The Strategic Fund combines certain
investment policies and restrictions of each Piper Fund. Additional information
is provided below and in Appendix VII to this Combined Proxy
Statement/Prospectus, which sets forth the investment objectives and certain
significant investment policies and limitations of the Piper Funds and Strategic
Fund.
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XUS invests primarily in debt securities denominated in U.S.
dollars, Canadian dollars or Mexican pesos that are: (a) issued or guaranteed by
the U.S., Canadian or Mexican governments, or their political subdivisions,
agencies or instrumentalities or the central bank of any of the foregoing, (b)
of companies organized in the U.S., Canada or Mexico or for which the principal
trading market is located in such countries, (c) of companies that derive at
least 50% of their gross revenues from either goods produced, sales made,
services performed or investments in companies in such countries or (d) of
companies which have at least 50% of their total assets located in the U.S.,
Canada or Mexico. At least 65% of XUS's assets are invested in securities rated
BBB or higher by Moody's Investor Service, Inc. ("Moody's") or Standard & Poor's
Corporation ("Standard & Poor's") or an equivalent rating from another
nationally recognized statistical rating organization ("NRSRO") or, if unrated,
determined by XUS's sub-adviser to be of comparable quality. In addition, XUS
will not invest more than 35% of its total assets collectively in securities
rated in the lower rating categories of a NRSRO (Baa or lower by Moody's and BBB
or lower by Standard & Poor's) or securities than are unrated regardless of
quality. XUS may invest in Mortgage-Backed Securities, Stripped Mortgage-Backed
Securities and Collateralized Mortgage Obligations (as defined in Appendix VII
hereto).
HLA invests primarily in a combination of (a) mortgage-backed
securities rated A or higher by Moody's or Standard & Poor's ("High Grade
Mortgage Securities") and (b) fixed income securities rated in the lower rating
categories of a NRSRO (Baa or lower by Moody's and BBB or lower by Standard &
Poor's) ("Lower-Rated Fixed Income Securities") or, if unrated, determined by
HLA's sub-adviser to be of comparable quality. Under normal circumstances, HLA
will have no more than 70% of its total assets invested in either High Grade
Mortgage Securities or Lower-Rated Fixed Income Securities and at least 30% of
its total assets in High Grade Mortgage Securities and 30% of its total assets
in Lower-Rated Fixed Income Securities. HLA may invest only up to 10% of its
total assets in fixed income securities issued by non-U.S. issuers and must have
at least 65% of its total assets in income producing securities. HLA investments
in Mortgage-Backed Securities may include up to 15% of its total assets,
collectively, in Stripped Mortgage-Backed Securities and inverse floating
Collateralized Mortgage Obligations.
Strategic Fund pursues its investment objective by investing in a
diversified portfolio primarily consisting of domestic corporate debt
obligations, U.S. government securities and foreign government and corporate
debt obligations, including, similar to HLA, fixed income securities rated in
the lower rating categories of any NRSRO (Baa or lower by Moody's and BBB or
lower by Standard & Poor's). Under normal circumstances, one-third of Strategic
Fund's assets will be invested in each of these three sectors. However,
Strategic Fund may from time to time invest up to 100% of its total assets in
any one sector. Strategic Fund's investments may include Mortgage-Backed
Securities, Stripped Mortgage-Backed Securities, and Collateralized Mortgage
Obligations.
The investment objective of each Piper Fund is fundamental, which
means that it cannot be changed without a vote of shareholders. The investment
objective of Strategic Fund is non-fundamental, which means that it can be
changed without a vote of shareholders. Shareholders will receive written
notification at least 30 days prior to any change in Strategic Fund's investment
objective.
In addition to the differences outlined above, there are other
differences between the Piper Funds and Strategic Fund that should be
considered. Additional information is provided below under "Comparison of
Strategic Fund and the Piper Funds--Investment Objectives and Policies" and in
Appendix VII to this Combined Proxy Statement/Prospectus, which sets forth the
investment objectives, certain significant investment policies and limitations
and a description of the securities of each of Strategic Fund, XUS and HLA.
As discussed under "Comparison of Strategic Fund and the Piper Funds
- --Investment Advisory Fees and Total Expense Ratios," U.S. Bank will serve as
the investment adviser to Strategic Fund. As discussed under "Comparison of
Strategic Fund and the Piper Funds--Information About U.S. Bank and Other
Service Providers," the Piper Funds and Strategic Fund have different
administrators, transfer
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agents and directors and Strategic Fund has a distributor, unlike the Piper
Funds which do not have a distributor because they are closed-end investment
companies.
As discussed under "Comparison of FAIF and the Piper Funds--Share
Structure," Strategic Fund will issue Class A shares in connection with the
Reorganization. Strategic Fund will also offer Class B and Class Y shares. Class
A shares of Strategic Fund are sold to the general public as well as to retail
customers of banks and other institutions. Class A shares are sold with a
front-end sales charge and are subject to a Rule 12b-1 shareholder servicing fee
computed at an annual rate of 0.25% of average net assets of that class. Class B
shares are sold at net asset value without a front-end sales load, but are
subject to a contingent deferred sales charge if sold during the first six years
after purchase. Class B shares also are subject to a Rule 12b-1 distribution and
shareholder servicing fees computed at an annual rate of 1.00% of average net
assets of that class. Class Y Shares are offered through banks and certain other
institutions for the investment of their own funds and funds for which they act
in a fiduciary, agency or custodial capacity. Such shares are offered at net
asset value without any front-end or contingent deferred sales charge and are
not subject to any Rule 12b-1 fees. Each of the Piper Funds has only one
outstanding class of common shares which are no longer offered directly from a
Piper Fund, but because they are shares of a closed-end investment company are
publicly traded on the New York Stock Exchange (for XUS) or the American Stock
Exchange (for HLA).
The dividend and distribution policies and procedures of Strategic
Fund and the Piper Funds are generally similar. Because of the differences
between shares of a closed-end investment company and shares of an open-end
investment company, the purchase and redemption polices of the Piper Funds and
Strategic Fund are different. Shares of the Piper Funds are traded on the New
York or American Stock Exchanges at market price, which price may be at either a
discount or a premium to net asset value, whereas shares of Strategic Fund are
purchased and redeemed at net asset value, less any applicable front-end or
contingent deferred sales charge. Additional information concerning these
policies and procedures for the Piper Funds and Strategic Fund is discussed
further under "Comparison of Strategic Fund and the Piper Funds - Shareholder
Transactions and Services" and in Appendix X to this Combined Proxy
Statement/Prospectus. NO FRONT-END OR CONTINGENT DEFERRED SALES CHARGE WILL BE
IMPOSED ON ANY OF THE STRATEGIC FUND SHARES THAT ARE ISSUED TO PIPER FUNDS'
SHAREHOLDERS IN CONNECTION WITH THE REORGANIZATION.
PIPER FUND AND FAIF BOARD CONSIDERATIONS. In reviewing the proposed
Reorganization, the Boards of each Piper Fund and FAIF considered, among other
things, (i) the terms and conditions of the Reorganization Agreement, including
provisions intended to avoid the dilution of shareholder interests; (ii) the
investment management capabilities of U.S. Bank; (iii) the capabilities of the
administrator, distributor and other service providers to Strategic Fund; (iv)
the systems capabilities of U.S. Bank to provide shareholder servicing,
reporting and systems integration with related bank programs for Piper Funds
shareholders; (v) the investment objectives, policies and limitations of the
Piper Funds and Strategic Fund; (vi) the historical investment performance of
the Piper Funds and of funds sub-advised by Federated with objectives and
policies similar to Strategic Fund, (vii) the historical and projected operating
expenses of the Piper Funds and the projected operating expenses of Strategic
Fund; (viii) the anticipated tax treatment of the Reorganization; and (ix) the
effect of a change from a closed-end investment company to a series of an
open-end investment company, including the potential benefits to shareholders
associated with elimination of the market discount at which the shares of XUS
and HLA currently trade. See "Information Relating to the Proposed
Reorganization - Board Considerations."
Based upon their evaluations of the information presented to them,
and in light of their fiduciary duties under Federal and state law, the Piper
Boards and the Board of Directors of FAIF, including all of the members of each
Board who are not interested persons, as that term is defined in the 1940 Act,
of the Piper Funds or FAIF, have determined that the proposed Reorganization is
in the best interests of the shareholders of each Piper Fund and Strategic Fund,
respectively, and that the interests of the shareholders of the respective Piper
Funds and Strategic Fund will not be diluted as a result of the Reorganization.
THE PIPER BOARDS RECOMMEND THAT THE SHAREHOLDERS OF EACH PIPER FUND APPROVE THE
REORGANIZATION AGREEMENT.
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VOTING INFORMATION. This Combined Proxy Statement/Prospectus is
being furnished in connection with the solicitation of proxies by the Piper
Boards for a Special Meeting in lieu of the Annual Meeting of Shareholders to be
held at the offices of the Piper Funds, 222 South Ninth Street, ____ floor,
Minneapolis, Minnesota, on_________, 1998 at a.m. central time. (This meeting
and any adjournment(s) thereof are referred to as the "Meeting.") Only
shareholders of record at the close of business on ______, 1998 will be entitled
to vote at the Meeting. Each shareholder is entitled to one vote for each share
held. Shares represented by a properly executed proxy will be voted in
accordance with the instructions thereon or, if no specification is made, the
persons named as proxies will vote in favor of each proposal set forth in the
Notice of Meeting. Proxies may be revoked at any time before they are exercised
by submitting to the Piper Funds a written notice of revocation or a
subsequently executed proxy or by attending the Meeting and voting in person.
However, attendance at the Meeting will not by itself serve to revoke a proxy.
For additional information, including a description of the shareholder votes
required for approval of the Interim Advisory Agreements, Interim Sub-Advisory
Agreements and the Reorganization Agreement, see "Information Relating to Voting
Matters."
DISSENTER'S APPRAISAL RIGHTS. Although under Minnesota law
shareholders of a company acquired in a merger who do not vote to approve the
merger generally have "appraisal rights" (where they may elect to have the "fair
market value" of their shares (determined in accordance with Minnesota law)
judicially appraised and paid to them), the Division of Investment Management of
the SEC has taken the position that Rule 22c-1 under the 1940 Act supersedes
appraisal provisions in state statues. This rule provides that no open-end
investment company may redeem its shares other than at net asset value next
computed after receipt of a tender of such securities for redemption. See
"Information Relating to Voting Matters--Dissenters' Rights" and Appendix XIII.
PRINCIPAL RISK FACTORS
Because of the differences in the investment policies and
restrictions of XUS, HLA and Strategic Fund, management believes that an
investment in Strategic Fund involves risks that are in some instances different
to those of XUS and/or HLA. In particular, Strategic Fund may invest a greater
percentage of its assets in lower-rated debt obligations. There are also
differences between a closed-end fund and an open-end fund as described under
"--Differences of Closed-End and Open-End Funds." The risks involved in
investing in Strategic Fund are more thoroughly described in the preliminary
prospectus for Strategic Fund, which is attached to this Combined Proxy
Statement/Prospectus as Appendix XII. Such risks include the following:
INTEREST RATE RISK. The Piper Funds and Strategic Fund each invest
in fixed-rate debt securities and therefore are subject to interest rate risk,
which is the risk that the value of a debt security will decline due to changes
in market interest rates. In general, when interest rates rise, the value of a
fixed-rate debt instrument declines. Conversely, when interest rates decline,
the value of a fixed-rate debt instrument generally increases. Thus,
shareholders in the Piper Funds and Strategic Fund bear the risk that increases
in market interest rates will cause the value of the Piper Funds' and Strategic
Fund's portfolio investments to decline.
CREDIT RISK. The Piper Funds and Strategic Funds are also subject to
credit risk. Credit risk is the risk that the issuer of a debt security will
fail to make payments on the security when due. Securities issued or guaranteed
by the U.S. Government generally are viewed as carrying minimal credit risk.
Securities issued by governmental entities but not backed by the full faith and
credit of the U.S. government, and securities issued by private entities, are
subject to higher levels of credit risk. Strategic Fund, HLA and XUS may invest
in securities rated lower than BBB by Standard & Poor's Corporation or Baa by
Moody's Investors Service, Inc., or which have been assigned an equivalent
rating by another nationally recognized statistical rating organization or are
unrated, but of comparable quality in the judgment of the sub-adviser.
Securities within these rating categories are non-investment grade (commonly
referred to as "high yield" or "junk" bonds) and may be more
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susceptible to real or perceived adverse economic conditions than investment
grade securities. These lower-rated securities 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. XUS may invest up to
35% of its total assets in lower-rated securities. HLA may invest up to 70% of
its total assets in lower-rated securities. Strategic Fund may invest up to 100%
of its total assets in lower-rated securities. As a result, Strategic Fund may
be subject to a greater degree of credit risk than the Piper Funds.
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 a Piper Fund or Strategic Fund is called during a
period of declining interest rates, such Piper Fund or Strategic 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 such fund's
income. To the extent that the Piper Funds or Strategic Fund invest in callable
corporate bonds, shareholders bear the risk that reductions in income will
result from the call of bonds in a declining interest rate environment. Most
U.S. government securities are not callable before their stated maturity,
although U.S. agency securities and private issuer securities often are.
RISKS ASSOCIATED WITH MORTGAGE-BACKED SECURITIES. The Piper Funds
and Strategic Fund may invest in mortgage backed securities. Because residential
mortgage loans generally can be prepaid in whole or in part by the borrowers at
any time without any prepayment penalty, the holder of a mortgage-backed
security which represents an interest in a pool of such mortgage loans is
subject to a form of call risk which is generally called "prepayment risk." In
general, it is more difficult to predict the effect of changes in market
interest rates on the return on mortgaged-backed securities than to predict the
effect of such changes on the return of a conventional fixed-rate debt
instrument and the magnitude of such effects may be greater in some cases. In
addition, although the extent of prepayments on a pool of mortgage loans depends
on various economic and other factors, as a general rule prepayments on fixed
rate mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by a Fund are likely to be greater during a period of
declining interest rates and, as a result, likely to be reinvested at lower
interest rates than during a period of rising interest rates. As a result of
prepayment risk, if a Fund purchases a mortgage-backed security at premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect of increasing yield to maturity. Alternatively, if a Fund purchases these
securities at a discount faster than expected prepayments will increase, while
slower than expected will reduce, yield to maturity. For these reasons, a Piper
Fund's or Strategic Fund's investments in mortgage-backed securities may involve
greater risks than investments in governmental or corporate bonds.
In addition, XUS, Strategic Fund and, to a limited extent (only 15%
of total assets), HLA may invest in specific types of Mortgage-Backed Securities
including stripped mortgage-backed securities (interest-only and principal-only)
and inverse floating collateralized mortgage obligations. Such mortgage-backed
securities can be extremely sensitive to interest rate changes and therefore
more volatile than standard mortgage-backed securities.
RISKS OF EQUITY SECURITIES GENERALLY. HLA and Strategic Fund may
each, to a limited extent, invest in equity securities. Market prices of equity
securities generally, and of particular companies' equity securities, frequently
are subject to greater volatility than prices of fixed income securities. Market
prices of equity securities as a group have dropped dramatically in a short
period of time on
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several occasions in the past, and they may do so again in the future. HLA and
Strategic Fund are subject to the risk of generally adverse equity markets.
FOREIGN SECURITIES. Strategic Fund and XUS may invest primarily, and
HLA to a limited extent (not more than 10% of total assets), in securities which
trade in markets other than the United States. 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. In addition, the value of a Fund's
portfolio securities computed in U.S. dollars will vary with changes in the
exchange rate between currencies in which a Fund has invested and the U.S.
dollar. 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 issuer than a United States domiciled issuer. 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 record keeping standards
than those applicable to domestic branches of United States banks and United
States domestic issuers. Accordingly, Strategic Fund and XUS may have more
exposure to the risk of investment in foreign securities than HLA.
RISKS OF FOREIGN INDEX LINKED INSTRUMENTS. XUS and Strategic Fund
may invest without limitation and HLA may invest up to 10% of its total assets
in instruments issued by the U.S. government, its agencies or instrumentalities
or a foreign government, or by private U.S. companies, which return principal
and/or pay interest to investors in amounts which are linked to a particular
foreign index ("Foreign Index Linked Investments"). Such Foreign Index Linked
Instruments may offer higher yields than comparable securities linked to purely
domestic indices but also may be more volatile. The value of such securities
will be affected by fluctuations in foreign exchange rates or in foreign
currencies. If the adviser or sub-adviser is incorrect in its prediction as to
the movements in the direction of particular foreign currencies or foreign
interest rates, the return realized by a Fund on Foreign Index Linked
Instruments may be lower than if such Fund had invested in a similarly rated
domestic security. Foreign currency gains and losses with respect to Foreign
Index Linked Instruments may affect the amount and timing of income recognized
by a Fund.
ZERO COUPON SECURITIES. The Piper Funds and Strategic Fund may
invest in zero coupon securities. Such securities are purchased at a discount
from their face amount, giving the purchaser the right to receive their full
value at maturity. The interest earned on such securities is, implicitly,
automatically compounded and paid out at maturity. While such compounding at a
constant rate eliminates the risk of receiving lower yields upon reinvestment of
interest if prevailing interest rates decline, the owner of a zero coupon
security will be unable to participate in higher yields upon reinvestment of
interest received on interest-paying securities if prevailing interest rates
rise. For this reason zero coupon securities are subject to substantially
greater price fluctuations during periods of changing prevailing interest rates
than are comparable securities which pay interest on a current basis.
PAYMENT-IN-KIND DEBENTURES. Strategic Fund, XUS and HLA may invest
in debentures the interest on which may be paid in other securities rather than
cash ("PIKs"). Typically, during a specified term
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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 Internal Revenue Code of 1986, as
amended (the "Code").
RESTRUCTURED DEBT. XUS and Strategic Fund may invest in Brady Bonds
and other sovereign debt securities of countries that have restructured or are
in the process of restructuring sovereign debt. Brady Bonds are debt securities
issued under the framework of the Brady Plan, which contemplates, among other
things, the adoption by debtor nations of certain economic reforms and the
exchange of commercial bank debt. Under the Brady Plan framework, a debtor
nation negotiates with its existing bank lenders as well as the World Bank
and/or the International Monetary Fund ("IMF"). The World Bank and/or the IMF
support the restructuring by providing funds pursuant to loan agreements or
other arrangements which enable the debtor nation to collateralize the new Brady
Bonds or to replenish reserves used to reduce outstanding bank debt. In light of
the residual risk of Brady bonds and the history of defaults with respect to
commercial bank loan by public and private entities of countries issuing Brady
Bonds, investment in Brady Bonds are viewed as speculative. Accordingly, XUS and
Strategic Fund may be exposed to the risk of such investment while HLA will not.
MUNICIPAL OBLIGATIONS. XUS, HLA and Strategic Fund each may invest
in municipal bonds. However, HLA may not invest more than 10% of its total
assets in municipal bonds and such securities must be rated A or higher by
Moody's. These municipal bonds are issued by states and by their local
special-purpose political subdivisions. The term "municipal bonds" includes
short-term municipal notes and other commercial paper issued by the states and
their political subdivisions. The two general classifications of municipal bonds
are "general obligation" bonds and "revenue" bonds. General obligations are
secured by the governmental issuer's pledge of its faith, credit and taxing
power for the payment of principal and interest. Revenue bonds ordinarily are
not backed by the faith, credit or taxing power of the issuing governmental
entity. The principal and interest on revenue bonds for private facilities are
typically paid out of rents or other specified payments made to the issuing
governmental entity by a private company which uses or operates the facilities.
Obligations of issuers of such municipal obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Bankruptcy Reform Act of 1978. In addition,
the obligations of such issuers may become subject to the laws enacted in the
future by Congress, state legislatures or referenda extending the time for
payment of principal and/or interest, or imposing other constraints upon
enforcement of such obligations or upon municipalities to levy taxes. There is
also the possibility that, as a result of legislation or other conditions, the
power or ability of any issuer to pay, when due, the principal of or interest on
its Municipal Obligations may be materially affected. Because HLA may invest
only 10% of its total assets in such municipal obligations, it is less likely to
be subject to such risks than Strategic Fund.
ASSET-BACKED SECURITIES. The Piper Funds and Strategic Fund may
invest in asset-backed securities including, but not limited to, interest in
pools of receivables, such as credit card and accounts receivable and motor
vehicle and other installment purchase obligations and leases. These securities
may be in the form of pass-through instruments or asset-backed obligations. The
securities are all issued by non-governmental entities and carry no direct or
indirect government guarantee. Asset-backed securities do not have the benefit
of the same security interest in the related collateral as do mortgage-backed
securities. Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain amounts owed
on the credit cards, thereby reducing the balance due. Most issuers of
automobile receivables permit the servicers to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire
<PAGE>
an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance, and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a perfected security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recovered on repossessed collateral may not, in some cases,
be available to support payments on these securities.
ILLIQUID SECURITIES. Certain of the securities in which the Piper
Funds and Strategic Fund are authorized to invest may lack an established
secondary trading market or otherwise be considered illiquid. The Piper Funds or
Strategic Fund may be limited in its ability to sell such securities at a time
when the adviser deems it advisable to do so or may have to sell them at a price
lower than could be obtained if the security was more liquid. This could have an
adverse impact on net asset value of a Fund. As a fund of an open-end investment
company, Strategic Fund may invest no more than 15% of its net assets in
illiquid securities. XUS may invest up to 25% of its total assets in illiquid
securities and HLA may invest without limitation in illiquid securities.
OTHER RISKS. The Piper Funds and Strategic Fund may engage in
certain other investment techniques, including entering into repurchase
agreements, reverse repurchase agreements, interest rate transactions (Piper
Funds only), purchasing and selling put and call options, entering into futures
contracts, purchasing securities on a when-issued or delayed-delivery basis,
borrowing funds and lending portfolio securities. These techniques involve
certain risks, which are more completely described in Appendix VII to this
Combined Proxy Statement/Prospectus, and, for Strategic Fund, described in the
preliminary prospectus for such Fund, which is attached to this Combined Proxy
Statement/Prospectus as Appendix XII.
DIFFERENCES OF CLOSED-END AND OPEN-END FUNDS. The Piper Funds are
closed-end investment companies. Strategic Fund is a series of an open-end
investment company. The differences between closed-end and open-end investment
companies are described below.
ELIMINATION OF POTENTIAL FOR PURCHASE DISCOUNT OR SALE PREMIUM. To
the extent shares of the Piper Funds trade at a discount from net asset value, a
shareholder currently may purchase shares at this discounted price and
potentially may be able to sell such shares at a later date at net asset value
or a premium thereto. Of course, there is also the possibility that such
discount will remain in place or increase. Shares of Strategic Fund will be
purchased and redeemed daily at their net asset value (plus any applicable
front-end or contingent deferred sales load), thereby eliminating the potential
of purchasing at a discount from net asset value and later selling at net asset
value, or at a premium thereto.
In addition, shareholders of Strategic Fund who wish to realize the
value of their shares are able to do so by redeeming their shares at net asset
value. While this will eliminate any discount from the net asset value, it also
will eliminate any possibility that a shareholder will be able to sell his or
her shares at a premium over net asset value. Also, there is a possibility that
the net asset value of shares of Strategic Fund may be lower on the day a
shareholder redeems his or her shares than on the day the shares were purchased.
SALES CHARGES. Shares of XUS and HLA are currently traded on the New
York and American Stock Exchanges, respectively. Investors thus generally pay
brokerage commissions when purchasing and selling shares of the Piper Funds.
Investors in Strategic Fund are not required to pay brokerage commissions;
however, investors in certain classes of shares of Strategic Fund pay or may pay
a sales charge upon the purchase or sale of shares of such classes. (However,
shareholders of the Piper Funds will not incur such a charge for the Class A
shares of Strategic Fund they receive in the Reorganization). Sales charges
could tend to discourage future investment in Strategic Fund and restrict the
size of Strategic Fund, thereby limiting the investment opportunities available
to Strategic Fund, which could adversely affect the performance of Strategic
Fund.
<PAGE>
PORTFOLIO MANAGEMENT. Unlike open-end funds, closed-end investment
companies are not subject to pressures to sell portfolio securities at
disadvantageous times to meet net redemptions. Most open-end funds maintain
adequate reserves of cash or cash equivalents to meet net redemptions as they
arise. Because closed-end investment companies do not have to meet redemptions,
their cash reserves can be substantial or minimal, depending primarily on
management's perception of market conditions and on decisions to use fund assets
to repurchase shares. The larger reserves of cash or cash equivalents required
to operate prudently as an open-end fund when net redemptions are anticipated
could reduce Strategic Fund's investment flexibility and the scope of its
investment opportunities. Strategic Fund may have to sell portfolio securities
to accommodate the need for large reserves of cash or cash equivalents,
resulting in an increase in transaction costs, taxable distributions and
portfolio turnover.
EXPENSES. Open-end funds generally have higher fund operating
expenses than closed-end funds, primarily, as a result of: (i) ongoing
distribution and shareholder serving costs paid by many open-end funds
(including Strategic Fund) pursuant to plans adopted pursuant to Rule 12b-1
under the 1940 Act, which closed-end funds are not permitted to adopt, and (ii)
higher transfer agency costs associated with, among other things, continuing
shareholder purchases and redemptions. Strategic Fund's total operating expenses
are estimated to be equal to XUS and less than HLA. Strategic Fund has agreed to
maintain operating expenses for two years from the date of the Closing of the
Reorganization at a level equal to or less than the total operating expenses of
each of XUS and HLA.
SENIOR SECURITIES. The 1940 Act prohibits open-end investment
companies from issuing "senior securities" representing indebtedness (i.e.
bonds, debentures, notes and other similar securities), other than indebtedness
to banks where there is an asset coverage of at least 300% for all borrowings.
Closed-end investment companies, on the other hand, are permitted to issue
senior securities representing indebtedness to any lender if the requirement of
300% asset coverage is met. In addition, closed-end investment companies may
issue preferred stock (subject to various limitations), whereas open-end
investment companies generally may not issue preferred stock. Currently, each of
the Piper Funds has a fundamental investment restriction providing that it may
borrow money in an amount up to 33 1/3% of its total assets. Strategic Fund has
a fundamental investment restriction providing that it may borrow money only for
temporary or emergency purposes in an amount up to 33 1/3% of the value of its
total assets.
VALUATION TIMING. XUS and HLA currently calculate net asset values
of their shares on a weekly basis as of the closing time on the New York Stock
Exchange (for XUS) (the "NYSE") and the American Stock Exchange (for HLA).
Strategic Fund will compute its net asset value as of the earlier of the close
of the NYSE or 3:00 p.m. Central time on each day the NYSE and
federally-chartered banks are open for business, provided that net asset value
need not be determined for shares of Strategic Fund on days when no shares of
Strategic Fund are tendered for redemption and no order for shares of Strategic
Fund 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
Strategic Fund's shares. The price per share for purchases or redemptions is
such value next computed after the transfer agent for Strategic Fund or
authorized financial institution receives a purchase order or redemption
request. For a complete description of how the net asset value of shares of
Strategic Fund is determined, see the preliminary prospectus for Strategic Fund
attached as Appendix XII to this Combined Proxy Statement/Prospectus.
INFORMATION RELATING TO THE INTERIM AGREEMENTS
THE MERGER OF PIPER JAFFRAY COMPANIES INC. AND U.S. BANCORP. On
April __, 1998, pursuant to an Agreement and Plan of Merger dated as of December
14, 1997 (the "Merger Agreement"), U.S. Bancorp acquired Piper Jaffray and its
direct and indirect subsidiaries (including Piper Capital) by merging Cub
Acquisition Corporation the ("Merger Subsidiary") with and into Piper Jaffray.
The Merger Subsidiary was a wholly owned subsidiary of U.S. Bancorp, organized
for the purpose of participating in the Holding Company Merger. On the date and
at the time when the Holding Company Merger became
<PAGE>
effective (the "Effective Time"), the Merger Subsidiary merged into Piper
Jaffray with Piper Jaffray as the surviving corporation and a wholly owned
subsidiary of U.S. Bancorp.
At the Effective Time, each issued and outstanding share of the
common stock, $1.00 par value, of Piper Jaffray common stock, other than
treasury shares and dissenters' shares, was converted into the right to receive
$37.25 in cash, without interest thereon. Shares of Piper Jaffray common stock
held by Piper Jaffray or any of its subsidiaries and shares of Piper Jaffray
common stock the holders of which perfected their dissenters' rights to payment
under Delaware law immediately prior to the Effective Time were excluded from
this conversion.
The officers and directors of Piper Capital had no interest in the
Holding Company Merger other than as a result of their ownership of shares of
Piper Jaffray common stock. The officers and directors of U.S. Bank had no
interest in the Holding Company Merger.
As a result of the Holding Company Merger, Piper Capital, the
investment adviser to the Piper Funds, became an indirect wholly-owned
subsidiary of U.S. Bancorp. In accordance with the terms of the Old Advisory and
Sub-Advisory Agreements, and consistent with the requirements of the 1940 Act,
this change in control of Piper Capital resulted in the automatic and immediate
termination of the Old Advisory and Sub-Advisory Agreements. The Old Advisory
Agreement for XUS was dated January 21, 1994, was adopted by the sole
shareholder of XUS prior to commencement of operations, and was last approved by
the Board of Directors of XUS on May 23, 1997. The Old Advisory Agreement for
HLA was dated March 24, 1994, was adopted by the sole shareholder of HLA prior
to commencement of operations, and was last approved by the Board of Directors
of HLA on May 23, 1997. The Old Sub-Advisory Agreement for XUS was dated May 14,
1996, was adopted by the shareholders of XUS at a meeting of shareholders held
May 9, 1996, and was last approved by the Board of Directors of XUS on May 23,
1997. The Old Sub-Advisory Agreement for HLA was dated March 24, 1994, was
adopted by the sole shareholder of HLA prior to commencement of operations, and
was last approved by the Boards of Directors of HLA on May 23, 1997.
The table under "Comparison of Strategic Fund and the Piper Funds--Investment
Advisory Fees and Total Expense Ratios" shows the contractual rates that Piper
Capital, Salomon and/or Federated are entitled to receive under the Old
Agreements. (Piper Capital, Salomon and Federated did not waive any fees during
such fiscal year under their respective advisory and sub-advisory agreements).
For the advisory and sub-advisory fees paid to Piper Capital, Salomon and
Federated for the latest fiscal year, see "--Information about Piper Capital,"
"--Information about Salomon," and "--Information about Federated,"
respectively.
To better ensure that the automatic termination of the Old
Agreements would not disrupt the investment advisory services provided to the
Piper Funds, Piper Capital, Salomon, Federated and the Piper Funds filed an
exemptive application with the SEC on March 12, 1998. This Application requested
that the SEC permit Piper Capital to act as investment adviser to the Piper
Funds, and Salomon and Federated to act as sub-advisers to XUS and HLA,
respectively, after the termination of the Old Agreements, but prior to
obtaining shareholder approval, under Interim Agreements. The application also
requested that the SEC permit Piper Capital, Salomon and Federated to receive
fees (which are currently held in escrow) under the respective Interim
Agreements, subject to approval of such agreements by the shareholders of the
respective Piper Funds at a meeting to be held no later than August ___, 1998.
In connection with this application, Piper Capital, Salomon and Federated agreed
to take steps to ensure that the scope and quality of the investment advisory
and sub-advisory services will be the same during the Interim Period as
previously provided under the Old Advisory Agreements and the Old Sub-Advisory
Agreements. The requested Order was granted by the SEC on ________, 1998.
THE INTERIM ADVISORY AND SUB-ADVISORY AGREEMENTS. As a result of the
automatic termination of the Old Agreements as described above, the Directors of
the Piper Boards are proposing that the shareholders of XUS and HLA ratify and
approve the respective Interim Agreements. The Interim Agreements each became
effective on April __,1998, the effective time of the Holding Company
<PAGE>
Merger. Pending such ratification and approval, in accordance with the
conditions of the Order, all fees payable by the Piper Funds under the Interim
Advisory Agreements, including all fees payable by Piper Capital to Salomon or
Federated under the Interim Sub-Advisory Agreements, are being held in escrow.
Such escrowed fees attributable to a Piper Fund under an Interim Agreement will
be received by Piper Capital, Salomon or Federated only if the applicable
Interim Agreement is ratified and approved by the shareholders of that Piper
Fund. If ratified and approved, the Interim Agreements will continue in effect
for an initial period of two years and thereafter for successive one-year terms,
subject to certain annual approval requirements, or until the Closing (which,
subject to various conditions described herein, is expected to occur on or about
July 31, 1998), whichever occurs earlier. In the event that one of the Interim
Agreements is not ratified and approved with respect to the applicable Piper
Fund, in accordance with the conditions of the Order, the escrowed fees payable
by that Piper Fund will be returned to such Piper Fund and the applicable Piper
Board will consider what actions should be taken with respect to management of
the assets of such Piper Fund until a new investment advisory agreement and/or
sub-advisory agreement is approved by the shareholders of such Piper Fund or the
Reorganization occurs.
The terms of the Interim Agreements, which are more fully described
below, are substantially identical to the terms of the Old Agreements, except
for (i) the effective date, (ii) the termination date, and (iii) inclusion of a
provision requiring that all fees payable by each Piper Fund under the
particular Interim Advisory Agreement, or by Piper Capital under the particular
Interim Sub-Advisory Agreement be held in escrow until such Interim Agreement is
approved by the applicable Fund's shareholders. The advisory or sub-advisory fee
rates payable under the Interim Agreements are identical to those payable under
the Old Agreements. A copies of the Interim Agreements are attached to this
Combined Proxy Statement/Prospectus as Appendices, I, II, III and IV.
INTERIM ADVISORY AGREEMENTS. Pursuant to the Interim Advisory
Agreements, Piper Capital agrees to supervise, direct and monitor the day-to-day
operations of the Piper Funds in accordance with each Fund's investment
objective, policies and restrictions, as well as the implementation of
investment programs formulated by Salomon (for XUS) or Federated (for HLA's
investments in lower-rated fixed income securities). Piper Capital reviews
investment and allocation determinations of the applicable Sub-Adviser. Piper
Capital furnishes at its own expense all necessary administrative services,
office space, equipment and clerical personnel for providing the foregoing
services. In addition, Piper Capital pays the salaries and fees of all officers
and directors of the Piper Funds who are affiliated with Piper Capital. Under
the Interim Advisory Agreements, Piper Capital is liable to the applicable Piper
Fund for losses resulting from willful misconduct, bad faith or gross negligence
in performance of its duties or from its reckless disregard of its duties under
such Interim Advisory Agreement.
Under the Interim Advisory Agreements, Piper Capital is free to
render services to others similar to those rendered under such Interim Advisory
Agreements or of a different nature except as such services may conflict with
the services to be rendered or duties to be assumed thereunder.
Each Interim Advisory Agreement provides that it will terminate
immediately in the event of an assignment and that each is terminable at any
time without penalty by such Piper Fund (either by vote of the applicable Piper
Board or by vote of a majority of the outstanding shares of such Piper Fund), or
by Piper Capital, on 60 days' written notice. To the extent required by the 1940
Act, the Interim Advisory Agreements may not be amended as to a Piper Fund
without the approval of the shareholders of such Piper Fund.
The Interim Advisory Agreements will continue in effect for an
initial period of two years and thereafter for successive annual terms, provided
that such successive terms are specifically approved at least annually (i) by a
vote of a majority of those members of the applicable Piper Board of the
applicable Piper Fund who are not parties to the Agreement or "interested
persons" (as defined in the 1940 Act) of any party to the Agreement, cast in
person at a meeting called for the purpose of voting on
<PAGE>
such approval, and (ii) by the vote of a majority of the applicable Piper Board
or, with respect to a particular Piper Fund, a vote of a majority of the
outstanding shares of such Piper Fund.
As investment adviser to the Piper Funds, Piper Capital receives
research services from broker-dealers that execute portfolio transactions for
the Piper Funds. In selecting brokers to execute portfolio transactions for the
Piper Funds, Piper Capital seeks to obtain the best price and execution of
orders. When consistent with these criteria, business may be placed with
broker-dealers who furnish investment research services to Piper Capital. Such
research services are used by Piper Capital in carrying out its investment
management responsibilities with respect to its client accounts generally, but
not necessarily in connection with the applicable Piper Fund.
INTERIM SUB-ADVISORY AGREEMENTS. Under the Interim Sub-Advisory
Agreement with XUS, Salomon is responsible for the formulation and
implementation of a continuing program for the management of XUS's assets.
Salomon is responsible for making all determinations with respect to the
investment of the assets of XUS and for taking all steps as may be necessary to
implement the determinations, including the placement of purchase and sale
orders on behalf of XUS. Federated is responsible only for HLA's investments in
lower-rated fixed income securities. Under the Interim Sub- Advisory Agreement
for HLA, Federated is responsible for the formulation and implementation of a
continuing program for the management of HLA's investments in such securities
and for making all determinations with respect to the investment of the assets
of HLA and for taking all steps as may be necessary to implement the
determinations, including the placement of purchase and sale orders on behalf of
HLA.
Each Sub-Adviser's power to direct the investment and reinvestment
of the assets of the Piper Fund will be exercised in accordance with applicable
law, the articles of incorporation of the Piper Fund, the investment objectives,
policies and restrictions of the Piper Funds and any other limitations that a
Piper Fund or Piper Capital may place on the Sub-Adviser's investment decisions.
The Sub-Adviser is responsible for selecting brokers and dealers through whom
transactions on behalf of the Piper Funds will be executed and the markets on or
in which such transactions would be executed and placing, in the name of the
Piper Funds or its nominee, all such orders, provided the Sub-Adviser complies
with the description of the process contained in the prospectus for the Piper
Funds.
Although each Sub-Adviser may employ, retain, or otherwise avail
itself of the services or the facilities of persons and entities within its own
organization or any other organization for the purposes of providing such
information, advice or assistance as the Sub-Adviser may deem necessary for the
discharge of its obligations under the applicable Interim Sub-Advisory
Agreement, the Sub-Adviser may not delegate its investment advisory
responsibilities as Sub-Adviser to the respective Piper Funds.
Each Interim Sub-Advisory Agreement provides that the applicable
Sub-Adviser will not be liable for any error of judgment or mistake of law or
for any loss suffered by the applicable Piper Fund or its shareholders in
connection with the performance by the Sub-Adviser of its duties under such
Interim Sub-Advisory Agreement, except a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its duties under such Agreement.
Each Interim Sub-Advisory Agreement will continue in effect with
respect to the Piper Funds for a period of two years from its effective date,
and thereafter will continue in effect only so long as such continuance is
specifically approved at least annually by (a) the Board of Directors of the
Fund or by the vote of a majority of the outstanding voting securities of the
Fund, and (b) by the vote of a majority of the directors who are not parties to
the applicable Interim Sub-Advisory Agreements or interested persons of such
parties. Besides automatic termination in the event of its assignment (as
defined in the 1940 Act), each Interim Sub-Advisory Agreement will terminate at
any time without the payment of a penalty by the applicable Piper Fund (i) by
the Board of Directors of such Piper Fund on 60 days' written notice to the
Adviser and the Sub- Adviser, (ii) by a vote of a majority of such Piper Fund's
<PAGE>
outstanding voting securities or (iii) by the Sub-Adviser on 60 days' written
notice to the Adviser and the applicable Piper Fund. Each Interim Sub-Advisory
Agreement will terminate automatically in the event of its assignment (as
defined in the 1940 Act).
INFORMATION ABOUT PIPER CAPITAL. In addition to acting as the
investment adviser for the Piper Funds, Piper Capital also serves as investment
adviser to other investment companies, and to various other concerns, including
pension and profit-sharing funds, corporate funds and individuals. Piper Capital
is a registered investment adviser under the Investment Advisers Act of 1940 and
is an indirect wholly owned subsidiary of U.S. Bancorp, 601 Second Avenue South,
Minneapolis, Minnesota 55480. U.S. Bancorp is a multi-state bank holding company
headquartered in Minneapolis, Minnesota with a geographic service area spanning
17 states.
In addition to serving as the investment adviser to the Piper Funds,
Piper Capital acts as the investment adviser to a number of other closed-end
investment companies and series of open-end investment companies that have
investment objectives similar to those of the Piper Funds. For the closed-end
investment companies listed below, Piper Capital also serves as the companies'
administrator. Piper Capital is entitled to receive advisory and administration
fees from such investment companies or series thereof as follows:
<TABLE>
<CAPTION>
Advisory Fee Administration Fee
Net Assets as of (as a percentage (as a percentage
Name of Fund March 31, 1998 of net assets) of net assets)
- ------------ ---------------- -------------- -------------
<S> <C> <C> <C>
American Government Income
Fund Inc. ("AGF") $ 94,212,390 *see below 0.20%
American Government Income
Portfolio, Inc. ("AAF") $ 127,793,694 *see below 0.20%
American Opportunity Income
Fund Inc. ("OIF") $ 113,904,601 **see below 0.20%
American Strategic Income
Portfolio Inc, ("ASP") $ 61,192,895 **see below 0.20%
American Strategic Income
Portfolio Inc.--II ("BSP") $ 234,151,160 **see below 0.20%
American Strategic Income
Portfolio Inc.--III ("CSP") $ 299,349,331 **see below 0.20%
Government Income Fund
(Series of Piper Funds Inc.) $ 62,601,686 ***see below N/A
Intermediate Bond Fund
(Series of Piper Funds Inc.) $ 59,183,886 ****see below N/A
American Select Portfolio Inc. $ 154,317,436 0.50% 0.20%
</TABLE>
- ------------------
* With respect to AGF and AAF, Piper Capital receives monthly advisory
fees in an amount equal to the sum of 0.025% of the average weekly net
assets of each such fund during the month (approximately .30 of 1% on an
annual basis) and 5.25% of the daily gross income (i.e., income other
than gains from the sale of securities or gains received from options
and futures contracts less interest on money borrowed by the fund)
accrued by the fund during the month, but such monthly management fee
may not exceed in the aggregate 1/12 of 0.60% of such fund's average
weekly net assets during the month (approximately 0.60% on an annual
basis).
** Piper Capital receives a monthly management fee from each of OIF, ASP,
BSP and CSP equal to the sum of 0.01667% of the average weekly net
assets of such fund during the month (approximately .20 of 1% on an
annual basis) and 4.50% of the daily gross income (i.e., income other
than gains from
<PAGE>
the sale of securities or gains received from options and futures
contracts less interest on money borrowed by such fund) accrued by such
fund during the month, but such monthly management fee shall not exceed
in the aggregate 1/12 of 0.725% of the fund's average weekly net assets
during the month (approximately 0.725% on an annual basis).
*** Annual rate of 0.50% on first $250,000,000; 0.45% on next $250,000,000;
and 0.40% on average daily net assets over $500,000,000.
**** Annual rate of 0.30% on first $100,000,000; 0.25% on next $150,000,000;
and 0.20% on average daily net assets over $250,000,000.
Piper Capital has not waived, reduced or otherwise agreed to reduce
its compensation under any contract applicable to the above investment companies
or series thereof.
In addition to providing investment advisory services to the Piper
Funds, Piper Capital provides administrative services to the Piper Funds
pursuant to an Administrative Agreement between Piper Capital and each Piper
Fund. For fiscal year ended October 31, 1997, XUS paid $288,685 in investment
advisory fees ($216,514 of which was paid by Piper Capital to Salomon). For
fiscal year ended February 28, 1998, HLA paid $172,843 in investment advisory
fees ($86,422 of which was paid by Piper Capital to Federated).
As of March 31, 1998, Piper Capital had approximately $12.8 billion
under management. The address of Piper Capital is 222 South Ninth Street,
Minneapolis, Minnesota 55402. Appendix V to this Combined Proxy
Statement/Prospectus identifies the principal executive officers and the
directors of Piper Capital.
No officer or director of the Piper Funds is an officer, employee,
director, general partner or shareholder of Piper Capital or any of its
affiliates. In addition, no officer or director of the Piper Funds has any
material interest in any material transaction in which Piper Capital or its
affiliates is a party.
INFORMATION ABOUT SALOMON. Salomon is a corporation organized under
the laws of Delaware on December 24, 1987 and is registered as an investment
adviser pursuant to the Investment Advisers Act of 1940, as amended. Salomon has
served as sub-adviser to XUS since May 14, 1996. As of February 28, 1998,
Salomon and its worldwide investment advisory affiliates managed approximately
$27 billion of assets, of which Salomon managed approximately $20.7 billion. The
principal business address of Salomon is 7 World Trade Center, New York, NY
10048.
Salomon is a wholly owned subsidiary of Salomon Smith Barney
Holdings, Inc. ("Salomon Smith Barney"), which is in turn wholly owned by
Travelers Group Inc. ("Travelers"). The principal business address of Salomon
Smith Barney and Travelers is 388 Greenwich Street, New York, NY 10013.
Appendix V to this Combined Proxy Statement/Prospectus identifies
the principal executive officer and the directors of Salomon.
No officer or Director of the Piper Funds is an officer, employee,
director, general partner or shareholder of Salomon or any of its affiliates. In
addition, no officer or Director of the Piper Funds has any material interest in
any material transaction in which Salomon or its affiliates is a party.
For fiscal year ended October 31, 1997, Salomon received $216,514 in
sub-advisory fees for XUS from Piper Capital.
<PAGE>
In addition to serving as the investment adviser to the XUS, Salomon
acts as the investment adviser to a number of other investment companies that
have investment objectives similar to those of one of the Piper Funds. Salomon
is entitled to receive advisory fees from such investment companies as follows:
<TABLE>
<CAPTION>
Net Assets at
Funds Rate of Compensation March 31, 1998
----- -------------------- --------------
<S> <C> <C>
Salomon Brothers High Yield Annual rate of .75% of average daily net $647,847,370
Bond Fund Inc. * assets
Salomon Brothers High Income Annual rate of .70% of average daily net 72,859,846
Fund Inc. assets
Salomon Brothers Worldwide Annual rate of .90% of average weekly net 206,800,279
Income Fund Inc. ** assets
Global Partners Income Annual rate of .65% of average weekly net 221,353,108
Fund Inc. *** assets
</TABLE>
- ------------------------
* For the last fiscal year SBAM waived certain management fees.
** SBAM also serves as Administrator and is paid a monthly fee at an annual
rate of .15% of the value of the Fund's average weekly net assets up to
$250 million and .125% of the value of such net assets in excess of $250
million for its services. SBAM in turn pays 80% of such fees collected
to Prudential Mutual Fund Management, Inc. which serves as
sub-administrator for the Fund. During the last fiscal year, SBAM was
paid $315,258 by the Fund for its services as Administrator.
*** Fee is paid by Value Advisors LLC out of its management fee and includes
compensation for administration services.
INFORMATION ABOUT FEDERATED. Federated is a Delaware business trust
organized in 1989 and a registered investment adviser under the 1940 Act.
Federated and other subsidiaries of Federated Investors, the parent company of
Federated, serve as investment advisers to a number of investment companies and
private accounts. As of March 31, 1997, Federated and such other subsidiaries of
Federated Investors rendered investment advice regarding over $1.26 billion of
assets. The principal business address of Federated is Federated Investors
Tower, Pittsburgh, PA 15222-3779.
Appendix V to this Combined Proxy Statement/Prospectus identifies
the principal executive officers and the directors of Federated.
No officer or Director of the Piper Funds is an officer, employee,
director, general partner or shareholder of Federated or any of its affiliates.
In addition, no officer or Director of the Piper Funds has any material interest
in any material transaction in which Federated or its affiliates is a party.
For fiscal year ended February 28, 1998, Federated received $86,422
in sub-advisory fees for HLA from Piper Capital.
In addition to serving as the investment adviser to HLA, Federated
acts as the investment adviser to a number of other investment companies that
have investment objectives similar to those of one of the Piper Funds. Federated
is entitled to receive advisory fees from such investment companies as follows:
<PAGE>
<TABLE>
<CAPTION>
Funds Net Assets at
----- Rate of Compensation March 31, 1998
-------------------- --------------
<S> <C> <C>
Federated High Yield Trust 0.75% $1,224,299,324
Federated High Income Bond Fund 0.60% $1,917,467,004
Federated High Income Bond Fund II 0.75% $178,303,688
Federated High Yield Bond Portfolio * $389,804,167
Federated International High Income Fund 0.85% $85,994,019
</TABLE>
* Federated High Yield Bond Portfolio invests in high yield securities for
certain affiliated funds and does not charge an advisory fee. The
underlying funds are subject to advisory fees.
ADMINISTRATION AGREEMENTS. Piper Capital also serves as each Piper
Fund's administrator pursuant to an Administration Agreement between Piper
Capital and each Piper Fund. Under each Administration Agreement, Piper Capital
is required to manage the respective Piper Fund's business affairs, supervise
its overall day-to-day operations (other than providing investment advice) and
provide other administrative services.
For the services rendered to the Piper Funds and related expenses
borne by Piper Capital in its capacity as the Piper Funds' administrator and not
paid by the Piper Funds, each Piper Fund currently pays Piper Capital an
administrative fee, calculated weekly and paid monthly, at an annual rate of
0.20% of such Piper Fund's average weekly net assets. For fiscal year ended
October 31, 1997, XUS paid administration fees in the amount of $115,474 to
Piper Capital. For fiscal year ended February 28, 1998, HLA paid administration
fees in the amount of $57,625 to Piper Capital.
AFFILIATED BROKER COMMISSIONS. During the fiscal year ended October
31, 1997 (for XUS) and February 28, 1998 (for HLA), the Piper Funds paid no
brokerage commissions to affiliates of Piper Capital. During such fiscal years,
XUS paid no brokerage commissions to affiliates of Salomon and HLA paid no
brokerage commissions to affiliates of Federated.
SECTION 15(f) OF THE 1940 ACT. Piper Capital and U.S. Bank have
agreed to use their best efforts to meet the requirements for the statutory
exemption offered by Section 15(f) of the 1940 Act to an investment adviser that
receives "any amount or benefit" in connection with the sale of interests that
constitute a "change in control" of the adviser. The statutory exemption under
Section 15(f) is available provided two conditions are satisfied: (1) for a
three-year period following the transaction, each of the Piper Funds or their
successors (which, assuming the Reorganization is consummated, may include FAIF)
maintains a Board of Directors at least 75% of whose members are not "interested
persons," as that term is defined in the 1940 Act, of the predecessor or
successor investment adviser, and (2) no "unfair burden" is imposed on the Piper
Funds as a result of the transaction. As defined in the 1940 Act, an "unfair
burden" includes any arrangement during the two-year period after the change in
control whereby the investment adviser (or predecessor or successor adviser), or
any interested person of such adviser, receives or is entitled to receive any
compensation directly or indirectly, from the investment company or its security
holders (other than fees for bona fide investment advisory or other services),
or from any person in connection with the purchase or sale of securities or
other property to, from, or on behalf of, the investment company (other than
fees for bona fide principal underwriting services provided to the investment
company). Piper Capital and U.S. Bank have agreed that no such prohibited
compensation arrangements will be entered into in connection with either the
Holding Company Merger or the Reorganization.
APPROVAL OF THE PIPER BOARDS. As described above, the Old Agreements
that were previously in effect for the Piper Funds automatically terminated on
April __, 1998 as a result of the Holding Company Merger. In anticipation of
this termination, and in order to minimize any potential disruption
<PAGE>
of the advisory and sub-advisory services provided to the Piper Funds, on
January 21, 1998 the Piper Boards authorized the filing of the exemptive
application described above with the SEC in order to permit Piper Capital to act
as investment adviser to the Piper Funds, Salomon to act as the sub-adviser to
XUS and Federated to act as the sub-adviser to HLA on and after April __, 1998
but prior to obtaining shareholder approval. In addition, at a meeting held
April 13, 1998, the Piper Board, including all of the Directors who are not
interested persons (as that term is defined in the 1940 Act) of Piper Capital,
the Piper Funds, Salomon or Federated (the "Non-Interested Directors"), approved
each Interim Agreement with Piper Capital, Salomon and Federated that became
effective upon the consummation of the Holding Company Merger on April __ 1998.
If approved by shareholders of the respective Piper Funds at the Meeting, these
Interim Agreements will continue in effect either (i) for an initial period of
two years from the effective date of such agreements and thereafter for
successive one-year terms, subject to certain annual approval requirements, or
(ii) until the consummation of the Reorganization applicable to such Piper Fund.
In considering whether to approve the Interim Agreements and submit
them to shareholders for their approval, the Piper Boards considered the
following factors: (i) representations of Piper Capital, Salomon and Federated
that they would provide investment advisory and other services to the Piper
Funds of a scope and quality at least the scope and quality previously provided
by them to the Piper Funds; (ii) the substantially identical terms and
conditions contained in the Interim Agreements as compared to the corresponding
Old Agreements; and (iii) representations by each of Piper Capital, Salomon and
Federated that in the event of any material change in personnel providing
services under an Interim Agreement during the Interim Period, the Piper Board
would be consulted for the purpose of assuring themselves that the services
provided would not be diminished in scope or quality. Additionally, the Piper
Boards considered the benefits that would be obtained by the Piper Funds in
maintaining continuity of investment advisory services for the Piper Funds
during the Interim Period, and determined that continuity was advantageous to
the Piper Funds as it would minimize any potential disruption in the advisory
services provided to the Piper Funds resulting from the Holding Company Merger.
Based on the foregoing factors, the Piper Boards concluded that
approval of the Interim Agreements was in the best interests of the Piper Funds
and their shareholders. The Piper Boards further concluded that entering into
the Interim Agreements would be appropriate and fair considering that (i) the
fees to be paid, and the services to be provided therefor, would be unchanged
from the Old Agreements; (ii) the fees would be maintained in an
interest-bearing escrow account until payment was approved or disapproved by
shareholders of the Piper Funds; (iii) because of the relatively short period
for the consummation of the Holding Company Merger, there was insufficient time
to seek prior shareholder approval of the Interim Agreements; and (iv) the
non-payment of investment advisory and sub-advisory fees during the Interim
Period would be an unduly harsh result to Piper Capital, Salomon and Federated
in view of the services provided by them to the Piper Funds, and the expenses
incurred in connection with such services, under the Interim Agreements.
XUS and HLA will vote separately on with respect to the approval of
their respective Interim Advisory Agreements and Interim Sub-Advisory
Agreements. THE PIPER BOARDS RECOMMEND THAT SHAREHOLDERS OF EACH FUND RATIFY AND
APPROVE THE APPLICABLE INTERIM AGREEMENTS AND THE RECEIPT OF INVESTMENT ADVISORY
FEES BY PIPER CAPITAL AND SUB-ADVISORY FEES BY SALOMON OR FEDERATED UNDER THE
AGREEMENTS.
INFORMATION RELATING TO THE PROPOSED REORGANIZATION
The terms and conditions of the Reorganization are set forth in the
Reorganization Agreement. Significant provisions of the Reorganization Agreement
are summarized below; however, this summary is qualified in its entirety by
reference to the Reorganization Agreement, a copy of which is attached as
Appendix VI to this Combined Proxy Statement/Prospectus.
<PAGE>
DESCRIPTION OF THE REORGANIZATION AGREEMENT. The Reorganization
Agreement provides that at the Closing the assets and liabilities of each of the
Piper Funds will be transferred to Strategic Fund in exchange for full and
fractional Class A Shares of Strategic Fund.
The Class A Shares issued by Strategic Fund in the Reorganization
will have an aggregate net asset value equal to the aggregate net asset value of
the common shares of the Piper Funds that are outstanding immediately before the
Closing. Immediately after the Closing, the Piper Funds will distribute the
shares of Strategic Fund received in the Reorganization to their shareholders in
liquidation of the Piper Funds. Each shareholder owning common shares of a Piper
Fund at the Closing will receive Class A shares of Strategic Fund of equal net
asset value.
Prior to the Reorganization, each of XUS and HLA will make one or
more distributions of all of its net income and net realized capital gains for
the current taxable year that have not previously been distributed. For
shareholders participating in the dividend reinvestment plans of XUS and HLA,
these distributions will be reinvested in shares of XUS or HLA only if they are
made prior to the suspension of share trading on the New York Stock Exchange, in
the case of XUS, or the American Stock Exchange, in the case of HLA. (Trading
will be suspended for a period of time prior to the Closing.) Otherwise, the
distributions will be made in cash. These cash distributions will be taxable to
all XUS or HLA shareholders who are subject to taxation.
As soon as practicable after the Closing, Investors Fiduciary Trust
Company ("IFTC"), the transfer agent for XUS and HLA, will send a notice and
transmittal form to each record holder of XUS and HLA common shares as of the
Closing advising such holder of the effectiveness of the Reorganization and of
the procedure for surrendering to IFTC his or her certificates formerly
evidencing common shares of XUS or HLA. SHAREHOLDERS SHOULD NOT SEND IN THEIR
SHARE CERTIFICATES UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL FORM AND
INSTRUCTIONS FROM IFTC. Ownership of Strategic Fund shares by former
shareholders of XUS and HLA will be recorded in book-entry form, and Strategic
Fund will issue confirmations to such shareholders setting forth the number and
net asset value of Strategic Fund shares held by such shareholders. Strategic
Fund will not issue share certificates. Any share certificates not submitted to
IFTC within three months of the Closing will be automatically deemed submitted
and then canceled and recorded in book-entry form.
After the Closing, XUS and HLA will wind up their affairs and be
deregistered as investment companies under the 1940 Act. The separate corporate
existence of XUS and HLA will cease and their shares will no longer be publicly
traded or listed in the New York Stock Exchange or American Stock Exchange.
The Reorganization is subject to a number of conditions, including
approval of the Reorganization Agreement by the shareholders of at least one of
the Piper Funds; the receipt of certain legal opinions described in the
Reorganization Agreement (which include an opinion of counsel to FAIF that the
Strategic Fund shares issued in the Reorganization will be validly issued, fully
paid and non-assessable); the receipt of certain certificates from the parties
concerning the continuing accuracy of the representations and warranties in the
Reorganization Agreement; and the parties' performance in all material respects
of their respective agreements and undertakings in the Reorganization Agreement.
Assuming satisfaction of the conditions in the Reorganization Agreement, the
Closing will be effective on July 31, 1998 or such other date as agreed to by
the parties.
U.S. Bank has undertaken to bear any Reorganization expenses
incurred by the Piper Funds and Strategic Fund, not including the standard costs
related to an annual meeting of the Piper Funds (based on the costs related to
the 1997 Annual Meeting of the Piper Funds) and share registration expenses.
The Reorganization of each of the Piper Funds may be abandoned at
any time prior to the Closing upon the mutual consent of such Piper Fund and
FAIF, or by such Piper Fund or FAIF if
<PAGE>
determined by the applicable Board of Directors that proceeding with the
Reorganization is inadvisable. The Reorganization Agreement provides further
that at any time before or (to the extent permitted by law) after approval of
the agreement by the shareholders of a Piper Fund (i) the parties may, by
written agreement authorized by their respective Boards of Directors and with or
without the approval of their shareholders, amend any of the provisions of the
Reorganization Agreement and (ii) either party may waive any default by the
other party or the failure to satisfy any of the conditions to its obligations
(the waiver to be in writing and authorized by the Board of Directors of the
waiving party with or without the approval of such party's shareholders).
BOARD CONSIDERATIONS. At a meeting held February 13, 1998, the Piper
Boards were advised that U.S. Bank was considering the possibility of
consolidating the Piper Funds with Strategic Fund following the Holding Company
Merger. Following that meeting, U.S. Bank provided information requested by the
Piper Boards relating to the possible consolidation of the two fund groups. This
information was reviewed in detail by the Piper Boards at a meeting held on
April 13, 1998, at which the proposal that the Piper Funds be reorganized into
Strategic Fund, as set forth in the Reorganization Agreement, was approved by
the Piper Boards.
During its deliberations, the Piper Boards (with the advice and
assistance of independent counsel) reviewed, among other things: (i) the
potential effect of the Reorganizations on the shareholders of the Piper Funds;
(ii) the investment management capabilities of U.S. Bank; (iii) the sub-advisory
capabilities of Federated; (iv) the capabilities of the administrator,
distributor and other service providers to Strategic Fund; (v) the systems
capabilities of U.S. Bank to provide shareholder servicing, reporting and
systems integration with related programs for Piper Funds shareholders; (vi) the
distribution channels used and to be used by the Strategic Fund; (vii) the
investment advisory, sub-advisory and other fees to be paid by the Strategic
Fund, and the projected expense ratios (contractual and after waivers) of
Strategic Fund as compared to the historical expense ratios of the Piper Funds;
(viii) the expected cost-savings for the Piper Funds as a result of the
Reorganization; (ix) the investment objectives, policies, limitations and risks
of the Strategic Fund and their relative compatibility with those of the Piper
Funds as discussed further in this Combined Proxy Statement/Prospectus; (x) the
historical investment performance records of the Piper Funds; (xi) the terms and
conditions of the Reorganization Agreement, including those provisions that were
intended to avoid dilution of the interests of the Piper Funds shareholders;
(xii) the anticipated tax treatment of the Reorganizations for the respective
Piper Funds and their shareholders; and (xiii) the effect on Piper Fund
shareholders of a change from a closed-end investment company to a series of an
open-end investment company, including the potential benefits to shareholders
associated with elimination through the Reorganization of the market discount at
which the shares of XUS and HLA currently trade.
The Piper Boards also noted U.S. Bank's offer to pay the expenses
incurred by the Piper Funds and FAIF in connection with the Reorganization (to
the extent such expenses exceed the cost of the Piper Funds' 1997 Annual
Meeting). In addition, the Piper Boards considered U.S. Bank's written
commitment that, for two years following the closing, it will waive fees and
reimburse expenses to the extent necessary so that Strategic Fund will not have
total fund operating expense ratios in excess of those currently applicable to
either XUS or HLA, as set forth in the table titled "Fees and Expenses of the
Piper Funds and Strategic Fund." In their deliberations, the Piper Boards also
considered: (i) that generally open-end funds have higher total fund operating
expense ratios than closed-end funds; (ii) alternative structures such as
reorganizing each Piper Fund into separate open-end investment companies; and
(iii) the fact that FAIF has a distribution plan pursuant to Rule 12b-1 of the
1940 Act in effect.
The Piper Board also considered the limitations on the use of the
capital loss carryovers of XUS that would result from the Reorganization (see
"Tax Aspects of the Reorganization" below) and the likelihood that such capital
loss carryovers would be utilized by XUS.
<PAGE>
After consideration of all of the factors described above, the Piper
Boards determined that the Reorganization Agreement was in the best interests of
the shareholders of XUS and HLA, and that the interests of the shareholders of
XUS and HLA would not be diluted as a result of the Reorganization.
The Board of Directors of FAIF also determined after considering the
factors discussed above with respect to the Piper Board's deliberations, that
the Reorganization is in the best interest of Strategic Fund.
CAPITALIZATION. The following table sets forth the unaudited
capitalization of the Piper Funds as of March 31, 1998 and as adjusted to give
effect to the Reorganization of both XUS and HLA into Strategic Fund. The pro
forma financial information is based on the assumption that both XUS and HLA
will approve the Reorganization.
Strategic Fund
XUS HLA Pro Forma Combined
--- --- ------------------
Net assets (in thousands) $29,515 $60,118 $89,633
Net asset value per share $14.84 $9.62 $10.00
Shares outstanding (in thousands) 1,989 6,251 8,963
Based on the above capitalization table, shareholders holding one share of XUS
or HLA would receive 1.48 and .96 shares, respectively, of Strategic Fund, upon
effectiveness of the Reorganization.
TAX ASPECTS OF THE REORGANIZATION. Consummation of the
Reorganization with respect to each of the Piper Funds is subject to the
condition that each of the Piper Funds and FAIF receive an opinion from Dorsey &
Whitney LLP, counsel to FAIF, to the effect that, for federal income tax
purposes: (i) the transfer of all of the assets and liabilities of each of the
Piper Funds to Strategic Fund in exchange for shares of Strategic Fund and the
distribution of these shares of Strategic Fund to shareholders of each of the
Piper Funds, as described in the Reorganization Agreement, will constitute a
reorganization within the meaning of Section 368(a)(1)(C) or Section
368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the "Code"); (ii)
no income, gain or loss will be recognized by either of the Piper Funds as a
result of these transactions; (iii) no income, gain or loss will be recognized
by Strategic Fund as a result of these transactions; (iv) no income, gain or
loss will be recognized by the shareholders of each of the Piper Funds on the
distribution to them of shares of Strategic Fund in exchange for their shares of
the Piper Funds (but shareholders of a Piper Fund subject to taxation will
recognize income upon receipt of any net investment income or net capital gains
of such Piper Fund which are distributed by such Piper Fund prior to the
Closing); (v) the tax basis of Strategic Fund shares received by a shareholder
of a Piper Fund will be the same as the tax basis of the shareholder's Piper
Fund shares immediately before the Reorganization; (vi) the tax basis to
Strategic Fund of the assets of the Piper Funds received pursuant to the
Reorganization will be the same as the tax basis of the assets in the hands of
the Piper Funds immediately before the Reorganization; (vii) a shareholder's
holding period for Strategic Fund shares will be determined by including the
period for which the shareholder held the Piper Funds shares exchanged therefor,
provided the shareholder held the Piper Funds shares as a capital asset; (viii)
Strategic Fund's holding period with respect to the assets received in the
Reorganization will include the period for which the assets were held by each of
the Piper Funds provided that the Piper Funds held such assets as capital
assets; and (ix) Strategic Fund will succeed to and take into account the
earnings and profits, or deficit in earnings and profits, of each of the Piper
Funds immediately before the Reorganization.
As of October 31, 1997, XUS had capital loss carryovers of
$15,339,829, due to expire between 2002 and 2004. The Board noted that, as a
result of the Reorganization, Strategic Fund's ability to use these capital loss
carryovers to offset its net capital gains will be limited. Generally, the
amount of XUS's capital loss carryovers that Strategic Fund will be able to use
to offset net capital gains in any future year will be limited to the value of
the outstanding shares of XUS at the time of its Reorganization multiplied by
the federal long-term
<PAGE>
tax-exempt interest rate in effect at the time of the reorganization. Based on
the value of XUS's outstanding shares as of March 31, 1998, and the long-term
tax-exempt interest rate in effect for March 1998, the maximum amount of XUS's
capital loss carryovers that Strategic Fund will be able to use in any post-
Reorganization taxable years is $ ________.
FAIF and the Piper Funds have not sought, and do not intend to seek,
a ruling from the Internal Revenue Service ("IRS") concerning the tax treatment
of the Reorganization. The opinion of counsel is not binding on the IRS and does
not preclude the IRS from adopting a contrary position. Shareholders may wish to
consult their own tax advisors concerning the potential tax consequences of the
Reorganization to them, including state and local income tax consequences.
COMPARISON OF STRATEGIC FUND AND THE PIPER FUNDS
INVESTMENT OBJECTIVES AND POLICIES. The investment objectives of
Strategic Fund are, in general, similar to those of the Piper Funds. However,
the policies and restrictions of XUS, HLA and Strategic Fund are different, as
noted above under "Summary--Overview of Strategic Fund and Piper Funds." Other
differences in the investment objectives, and in certain significant investment
policies and restrictions, are discussed in Appendix VII to this Combined Proxy
Statement/Prospectus.
Additional information with respect to the investment policies and
restrictions of Strategic Fund is included in the preliminary prospectus for the
Class A and Class B Shares of Strategic Fund, attached as Appendix XII, to this
Combined Proxy Statement/Prospectus.
Shareholders should also review the section captioned "Principal
Risk Factors" above, which provides information concerning certain risks
associated with investments in the Piper Funds and Strategic Fund.
<PAGE>
INVESTMENT ADVISORY FEES AND TOTAL EXPENSE RATIOS. After the
Reorganization, U.S. Bank will serve as the investment adviser to Strategic
Fund, at the fee rates stated on the table below.
The table below shows the current fees and expenses that the
shareholders of XUS and HLA incurred during the most recent fiscal year, and
that shareholders of Strategic Fund can expect to bear if shareholders of XUS
and HLA approve the Merger. U.S. Bank has agreed that, for two years following
the Closing, it will waive fees and reimburse expenses of Strategic Fund to the
extent necessary to maintain Strategic Fund total operating expenses at the
levels provided in the tables. THE EXAMPLES CONTAINED IN THE TABLES SHOULD NOT
BE CONSIDERED REPRESENTATIONS OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN.
FEES AND EXPENSES OF THE PIPER FUNDS AND STRATEGIC FUND
<TABLE>
<CAPTION>
The Americas Highlander Strategic
Income Trust Inc. Income Fund Inc. Income Fund
------------------ ----------------- -----------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)...................... (1) (1) 4.50%(2)
Maximum Sales Charge Imposed on Reinvested
Dividends................................................ N/A N/A None
Deferred Sales Charge (as a percentage of redemption
proceeds)................................................ N/A N/A None
Redemption Fees............................................ N/A N/A None
Exchange Fees.............................................. N/A N/A None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fees .................................. 0.50%(3) 0.60%(4) 0.70%(5)
Rule 12b-1 Fees ........................................... N/A N/A 0.25%(6)
Other Expenses(7) ......................................... 0.65% 0.76% 0.20%
Total Fund Operating Expenses ............................. 1.15% 1.36% 1.15%
</TABLE>
- --------------------
1 Shareholders purchasing shares of a Piper Fund in the initial public
offering paid a sales load of 6.00%. Thereafter, shares have been
purchased through brokers at market price plus brokerage commission.
2 No sales charge will be imposed on Strategic Income Fund Shares acquired
pursuant to the Reorganization. Subsequent purchases of Strategic Income
Fund Class A Shares will be subject to a maximum front-end sales charge of
4.50%.
3 For XUS, Piper Capital pays the Sub-Adviser a fee calculated and paid
monthly at the per annum rate of .375% of the Fund's average weekly net
assets.
4 For HLA, Piper Capital pays the Sub-Adviser a fee calculated and paid
monthly at the per annum rate of .30% of the Fund's average weekly net
assets.
5 For Strategic Fund, the Adviser will pay the Sub-Advisers a fee calculated
and paid monthly at a per annum rate equal to 0.40% of the first $25
million of the Fund's average daily net assets, 0.33% of the Fund's
average daily net assets in excess of $25 million up to $50 million, 0.26%
of the Fund's average daily net assets in excess of $50 million up to
$100 million and 0.21% of the Fund's average daily net assets in excess of
$100 million.
6 Of this amount, 0.25% is designated as a shareholder servicing fee and
none as a distribution fee.
7 Does not include interest expense of XUS and HLA.
Example:
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, (2) for Strategic Income Fund, redemption at the
end of each time period and (3) for Strategic Income Fund, the maximum
applicable sales charge for the Fund:
<TABLE>
<CAPTION>
The Americas Highlander Strategic
Income Trust Inc.(1) Income Fund Inc.(1) Income Fund
------------------ ----------------- -----------
<S> <C> <C> <C>
1 year .................................. $ 12 $ 14 $56
3 years ................................. $ 37 $ 43 $80
5 years ................................. $ 63 $ 74
10 years ................................ $140 $164
</TABLE>
(1) The dollar amounts do not reflect any sales charge because shares of
closed-end funds are purchased without a sales charge. However, purchases
of such shares are normally subject to a brokerage commission. If
purchases included a 6.00% sales load, similar to the sales load paid on
shares purchased in the initial public offering, the dollar amounts for
the 1, 3, 5, and 10-year periods would be as follows: for XUS, $71, $94,
$119 and $191 and for HLA, $73, $100, $130 and $214.
<PAGE>
INVESTMENT ADVISORY AGREEMENTS. After the Closing, U.S. Bank will
serve as the investment adviser for Strategic Fund pursuant to Strategic Fund's
Investment Advisory Agreement. As set forth in table above, the contractual
advisory fee rate of Strategic Fund is higher than those of the Piper Funds. In
addition, there are certain differences between the Interim Advisory Agreements
and the Strategic Fund's Investment Advisory Agreement. The significant
differences between these agreements are summarized and compared in Appendix
VIII to this Combined Proxy Statement/Prospectus.
SUB-ADVISORY AGREEMENTS. Salomon currently acts as sub-adviser to
XUS and Federated currently acts as sub-adviser to HLA. After the closing,
Federated Investment Counseling ("FIC") will serve as the sub-adviser for
Strategic Fund's high yield investments and Federated Global Research Corp.
("FGRC") will serve as sub-adviser for Strategic Fund's international
investments and foreign currency transactions pursuant to Strategic Fund's
Sub-Advisory Agreement. The differences between the Interim Sub-Advisory
Agreements and Strategic Fund's Sub-Advisory Agreement are summarized and
compared in Appendix IX to this Combined Proxy Statement/Prospectus. Information
about Salomon and Federated is contained under the heading "Information Relating
to the Interim Agreements--Information about Salomon" and "Information Relating
to the Interim Agreements--Information about Federated," respectively, in this
Combined Proxy Statement/Prospectus.
FIC, which is a Delaware business trust, and FGRC, which is a
Delaware corporation, are each subsidiaries of Federated Investors, the parent
company of Federated, and registered as investment advisers under the Investment
Advisers Act of 1940.
PORTFOLIO MANAGEMENT. Peter Wilby has been primarily responsible for
the management of XUS. Mark E. Durbiano, Tom McGlinch and Wan-Chong Kung have
been primarily responsible for the management of HLA. Biographical information
about each portfolio manager of the Piper Funds is contained in Appendix XI to
this Combined Proxy Statement/Prospectus. Following the Reorganization, Mark E.
Durbiano will be primarily responsible for the management of Strategic Fund's
investments in high-yield investments, Robert M. Kowit, Michael W. Casey, Drew
J. Collins, and Henry A. Frantzen will be primarily responsible for the
management of Strategic Fund's international investments and foreign currency
transactions and Tom McGlinch and Wan-Chong Kung will be primarily responsible
for the management of Strategic Fund's investments in U.S. government
securities. Information about the management of Strategic Fund is contained in
the preliminary prospectus attached to this Combined Proxy Statement/Prospectus
as Appendix XII.
INFORMATION ABOUT U.S. BANK AND OTHER SERVICE PROVIDERS. U.S. Bank
acts as the investment adviser to Strategic Fund through its First American
Asset Management group. U.S. Bank has acted as an investment adviser to FAIF
since its inception in 1987 and has acted as investment adviser to First
American Funds, Inc. since 1982 and to First American Strategy Funds, Inc. since
1996. As of December 31, 1997, U.S. Bank managed more than $55 billion in
assets, including approximately $20.5 billion in assets of the First American
Fund family. U.S. Bank is a wholly-owned subsidiary of U.S. Bancorp. The address
of U.S. Bank and U.S. Bancorp is 601 Second Avenue South, Minneapolis, MN 55402.
U.S. Bank is a national banking association organized under the laws of the
United States and, as such, is exempt from registration as an investment adviser
under the Investment Advisers Act of 1940.
The Glass-Steagall Act generally prohibits banks from engaging in
the business of underwriting, selling or distributing securities and from being
affiliated with companies principally engaged in those activities. In addition,
administrative and judicial interpretations of the Glass-Steagall Act prohibit
bank holding companies and their bank and nonbank subsidiaries from organizing,
sponsoring or controlling registered open-end investment companies that are
continuously engaged in distributing their shares. Bank holding companies and
their bank and nonbank subsidiaries may serve, however, as investment advisers
to registered investment companies, subject to a number of terms and conditions.
<PAGE>
Although the scope of the prohibitions and limitations imposed by
the Glass-Steagall Act has not been fully defined by the courts or the
appropriate regulatory agencies, FAIF has received an opinion from its counsel
that U.S. Bank and its affiliates are not prohibited from performing the
services contemplated by Strategic Fund's Investment Advisory Agreement and the
prospectus for Strategic Fund. In the event of changes in federal or state
statutes or regulations or judicial and administrative interpretations or
decisions pertaining to permissible activities of bank holding companies and
their bank and nonbank subsidiaries, U.S. Bank and its affiliates might be
prohibited from continuing these arrangements. In that event, it is expected
that the FAIF Board of Directors would make other arrangements and that
shareholders would not suffer adverse financial consequences.
OTHER SERVICE PROVIDERS FOR PIPER FUNDS AND STRATEGIC FUND. The
Piper Funds and Strategic Fund employ the same independent auditors, but the
other service providers for the Piper Funds and Strategic Fund are different, as
set forth in the following table.
<TABLE>
<CAPTION>
PIPER FUNDS STRATEGIC FUND
----------- --------------
<S> <C> <C>
Adviser Piper Capital U.S. Bank
Sub-Adviser Salomon (XUS) Federated Investment Counseling
(high yield investments)
Federated (HLA) Federated Global Research Corp.
(international investments and foreign
currency transactions)
Distributor None SEI Investments Distribution Co.
Administrator Piper Capital SEI Investments Management Corporation
Transfer Agent Investors Fiduciary Trust Company DST Systems, Inc.
Custodian Investors Fiduciary Trust Company U.S. Bank Trust National Association
Independent
Auditors KPMG Peat Marwick LLP KPMG Peat Marwick LLP
</TABLE>
Piper Capital Management Incorporated maintains offices at 222 South
Ninth Street, Minneapolis, Minnesota 55402-3804. SEI Investments Distribution
Co. and SEI Investments Management Corporation, wholly owned subsidiaries of SEI
Investments Company, are located at Oaks, Pennsylvania 19456. FIC and FGRC are
subsidiaries of Federated Investors, the parent company of Federated. FIC is
located at 1001 Liberty Avenue, Pittsburgh, Pennsylvania 15222-3779 and FGRC is
located at 175 Water Street, New York 10038-4965 ("FGRC"). Investors Fiduciary
Trust Company's custodian and accounting agent offices are located at 801
Pennsylvania Avenue, Kansas City, Missouri 64105. Its transfer agent offices are
located at 1004 Baltimore Avenue, Kansas City, Missouri 64105. DST Systems, Inc.
is located at 1004 Baltimore, Kansas City, Missouri 64105.
ADMINISTRATION AGREEMENT. Under FAIF's Amended and Restated
Administration Agreement, dated July 1, 1997 (the Administration Agreement"),
SEI Investments Management Corporation (the "Administrator") performs
administrative services in connection with the operation of the funds of FAIF,
including providing each fund with regulatory reporting, accounting services,
all necessary office space, equipment, personnel, compensation and facilities
for handling the affairs of the funds. The Administration Agreement has an
initial term of two years (the "Initial Term") and will automatically renew for
an additional one year upon achievement of certain written service level
standards (as described in the Administration Agreement). The Administration
Agreement may be terminated by FAIF: (i) for any reason on six months prior
written notice; (ii) in the event of the Administrator's bankruptcy or
insolvency; (iii) in the event of a conviction of the Administrator for criminal
activity; (iv) if in any consecutive six-month period the average cumulative
Service Level Percentage (as defined in the Administration Agreement) is less
than 50%; (v) if the Administrator has materially failed to perform its
responsibilities under the Administration Agreement; or (vi) by delivery to the
Administrator of
<PAGE>
written notice of termination delivered no less than 180 days prior to the end
of the Initial Term. The Administration Agreement may be terminated by the
Administrator by delivery to FAIF of written notice: (i) if FAIF has materially
failed to perform its responsibilities under the Administration Agreement and
such material failure has not been cured within 45 days after written notice is
received by FAIF specifying the nature of the failure; or (ii) by delivery to
FAIF of written notice of termination delivered no less than 180 days prior to
the end of the Initial Term.
U.S. Bank assists the Administrator and provides sub-administration
services for the FAIF Funds, including Strategic Fund. For these services, the
Administrator compensates the sub-administrator at an annual rate of up to 0.05%
of the applicable fund's average daily net assets.
SHARE STRUCTURE. XUS is registered as a non-diversified closed-end
management investment company. HLA is registered as a diversified closed-end
management investment company. FAIF is registered as open-end management
investment companies under the 1940 Act and offers its shares in a number of
separate investment portfolios, or "funds."
Each Piper Fund is organized as a corporation under the laws of the
State of Minnesota and is subject to the provisions of its Articles of
Incorporation and Bylaws, as amended. XUS is authorized to issue up to
1,000,000,000 shares of capital stock, $.01 par value, all of which are
classified as common stock. The common stock is listed on the New York Stock
Exchange under the symbol "XUS." HLA is authorized to issue up to 200,000,000
shares of capital stock, $.01 par value, all of which are classified as common
stock. The common stock is listed on the American Stock Exchange under the
symbol "HLA."
FAIF is organized as a corporation under the laws of the State of
Maryland and is subject to the provisions of its Amended and Restated Articles
of Incorporation, as amended and supplemented, and Bylaws. FAIF is authorized to
issue 250 billion shares, par value $.0001 per share, which may be divided into
separate funds and separate classes of shares. The attributes of a share of
common stock in FAIF are comparable to those of a share of common stock of a
Piper Fund, except for those differences attributable to the differences between
closed-end and open-end investment companies. For a description of the
differences between closed-end and open-end investment companies, see "Principal
Risk Factors--Differences of Closed-End and Open End Funds."
Each share of a Piper Fund or of Strategic Fund is fully paid,
nonassessable and transferrable when issued for payment or in accordance with
the applicable Fund's dividend reinvestment plan. In addition, such shares have
no preemptive or conversion rights, and shares of the Piper Funds have no
exchange or redemption rights. Shares of Strategic Fund have such conversion and
exchange rights as the Board of Directors of FAIF may grant in its discretion.
Shares of the Piper Funds and Strategic Fund have one vote per share. For
Strategic Fund, shares may be issued as either full or fractional shares, with
fractional shares having pro rata the same rights and privileges as full shares.
For the Piper Funds and Strategic Fund, 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 of they choose to
do so. Shares of FAIF will vote in the aggregate and not by series or class
except as otherwise required by law or when series or class voting is permitted
by the FAIF Board of Directors. Each Piper Fund currently has only one class of
shares outstanding.
The Strategic Fund offers separate share classes in order to provide
for different sales load structures and to allocate certain expenses, such as
distribution payments, shareholder servicing fees and other "class" expenses, to
the different shareholder groups for which the fees and expenses are incurred.
In this regard, FAIF's Board of Directors has authorized the issuance of three
classes of shares in Strategic Fund (Class A, Class B and Class Y shares). No
shareholders of the Piper Funds will receive Class B or Class Y shares in the
Reorganization. Each share of a class of Strategic Fund represents an equal
proportionate interest in the Fund with other shares of the same class and is
entitled to cash dividends and distributions earned on such shares as are
declared in the discretion of the FAIF Board of Directors.
Shares of each class of Strategic Fund bear a pro rata portion of
all operating expenses paid by the Fund except for distribution payments and
shareholder servicing fees paid on Class A and Class B Shares and other "class"
expenses that are allocated to a particular share class. Class Y shares do not
have a distribution or shareholder servicing plan.
Additional information concerning the attributes of the shares
issued by Strategic Fund is included in the preliminary prospectuses of the
Class A and Class B shares attached as Appendix XII to
<PAGE>
this Combined Proxy Statement/Prospectus. Shareholders may obtain copies of
FAIF's Amended and Restated Articles of Incorporation and Bylaws and the Piper
Funds' Articles of Incorporation and By-Laws from FAIF or the Piper Funds
respectively upon written request at their principal office.
HISTORY OF PUBLIC TRADING OF THE PIPER FUNDS' COMMON SHARES. The
following table shows the history of public trading of the common shares of each
Piper Fund, by quarter for the last two fiscal years, and for each full fiscal
quarter since the beginning of the current fiscal year, as reported on the New
York Stock Exchange for XUS and on the American Stock Exchange for HLA.
<TABLE>
<CAPTION>
Net Asset Value Market Price Percentage Discount Percentage Premium
--------------- ------------ ------------------- ------------------
Quarter
Ended High Low High Low High Low High Low
----- ---- --- ---- --- ---- --- ---- ---
THE AMERICAS INCOME TRUST INC.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10/31/95 $8.240 $8.090 $7.250 $6.750 -13.32% -16.56% N/A N/A
01/31/96 $8.350 $8.070 $7.250 $6.625 -12.97% -17.88% N/A N/A
04/30/96 $8.300 $8.050 $7.500 $6.500 -10.93% -18.85% N/A N/A
07/31/96 $8.150 $7.930 $6.875 $6.500 -14.81% -19.11% N/A N/A
10/31/96 $8.810 $8.160 $7.375 $6.750 -15.75% -17.73% N/A N/A
01/31/97 $9.190 $8.900 $7.625 $7.250 -16.94% -20.23% N/A N/A
04/30/97 $9.310 $8.750 $7.750 $7.250 -13.98% -19.44% N/A N/A
07/31/97 $9.640 $8.970 $8.563 $7.500 -11.18% -17.38% N/A N/A
10/31/97 $9.750 $8.970 $8.500 $8.063 -8.72% -15.38% N/A N/A
01/31/98 $9.350 $8.890 $8.500 $7.500 -9.66% -15.71% N/A N/A
04/30/98 $ $ $ $ N/A N/A
------- ------- ------- ------- ------% -------%
HIGHLANDER INCOME FUND INC.
02/29/96 $14.150 $13.930 $12.625 $12.000 -9.95% -13.92% N/A N/A
05/31/96 $13.980 $13.620 $12.500 $11.500 -10.59% -15.5% N/A N/A
08/31/96 $13.830 $13.520 $11.875 $11.375 -13.89% -16.3% N/A N/A
11/30/96 $14.200 $13.640 $12.375 $11.875 -11.48% -13.95% N/A N/A
02/28/97 $14.330 $14.090 $12.750 $12.000 -10.84% -14.63% N/A N/A
05/31/97 $14.170 $13.820 $13.000 $12.375 -8.19% -11.79% N/A N/A
08/31/97 $14.680 $14.240 $13.813 $12.875 -7.58% -10.40% N/A N/A
11/30/97 $14.730 $14.470 $13.563 $12.938 -7.19% -11.81% N/A N/A
02/28/98 $14.870 $14.620 $14.375 $13.125 -2.94% -10.29% N/A N/A
</TABLE>
The market prices, net asset values and discounts of the common shares of the
Piper Funds as of May ___, 1998, were as follows:
<PAGE>
XUS HLA
--- ---
Market Price.......................... $ $
---------- ---------
Net Asset Value....................... $ $
---------- ---------
Percentage Discount................... % %
---------- ---------
DISTRIBUTION PLAN. An open-end investment company, unlike a
closed-end investment company, is permitted to finance the distribution of its
shares by adopting a plan of distribution pursuant to Rule 12b-1 under the 1940
Act. Strategic Fund has adopted a distribution plan pursuant to Rule 12b-1 under
the 1940 Act (the "Distribution Plan"). Pursuant to the Distribution Plan
adopted for the Class A shares, Strategic Fund pays the distributor of the
Fund's shares a shareholder servicing fee monthly at an annual rate of 0.25% of
the average daily net assets of the Fund's Class A shares. The shareholder
servicing fee is intended to compensate the distributor for ongoing servicing
and/or maintenance of shareholder accounts and may be used by the distributor to
provide compensation to institutions through which shareholders hold their
shares for ongoing servicing and/or maintenance of shareholder accounts. The
shareholder servicing fee may be used to provide compensation for shareholder
servicing provided by "one-stop" mutual fund networks through which the FAIF
Funds are made available. Because the Piper Funds are closed-end investment
companies, they do not have a distribution plan pursuant to Rule 12b-1 under the
1940 Act and do not bear distribution expenses.
SHAREHOLDER TRANSACTIONS AND SERVICES. The respective purchase,
redemption and exchange policies of the Piper Funds and Strategic Fund differ
significantly because of the differences between open-end investment companies
and closed-end investment companies. Dividend polices of the Piper Funds and
Strategic Fund are similar.
Shares of XUS and HLA trade on the New York Stock Exchange and
American Stock Exchange, respectively. Shares of Strategic Fund are offered to
the public on a continuous basis and are not listed on a stock exchange. Unlike
shares of the Piper Funds, which are purchased at current market price (which
may be higher or lower than their current net asset value) plus a brokerage
commission, Class A shares of Strategic Fund are available for purchase at the
net asset value per share next calculated after receipt of an order, plus a
front-end sales charge of 4.50% of the offering price on purchases of less than
$50,000. The sales charge is reduced on a graduated scale on purchases of
$50,000 or more. For purchases of $1 million or more, there is no front-end
sales charge but redemptions of Class A Shares within 24 months following such
purchases are subject to a contingent deferred sales charge of 1.00%. Shares of
the Piper Funds may be sold through a broker-dealer on any business day at the
current market price and a commission is generally charged. After the
Reorganization, shares of Strategic Fund will be redeemable on any business day
at the net asset value next calculated after the receipt of redemption
instructions. No fee or other charge is imposed on the redemption of Class A
Shares of Strategic Fund (except Class A Shares initially purchased without a
front-end sales charge in connection with purchases of $1 million or more).
Holders of Class A Shares of Strategic Fund may exchange such shares
for Class A Shares of other series of FAIF, First American Funds, Inc. and First
American Strategy Funds, Inc. at net asset value without a sales charge.
Strategic Fund also has other shareholder services available. For a complete
description of procedures for share purchases, redemptions, exchanges and other
shareholder services, see the preliminary prospectus for Strategic Fund,
attached hereto as Appendix XII.
DIVIDENDS. Each Piper Fund under normal circumstances distributes
monthly dividends from its net investment income (non-capital gain income less
expenses). Net short term capital gains not previously distributed and net
long-term gains, if any, are distributed at least once annually. Shareholders
may elect to participate in their Piper Fund's dividend reinvestment plan.
Similarly, dividends with respect to Strategic Fund are declared
monthly to all shareholders of record. 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 Strategic
Fund, unless shareholders request cash payments.
<PAGE>
Additional information with respect to shareholder transactions and
services is included in Appendix X to this Combined Proxy Statement/Prospectus.
INFORMATION RELATING TO VOTING MATTERS
GENERAL INFORMATION. This Combined Proxy Statement/Prospectus is
being furnished in connection with the solicitation of proxies for the Meeting
by the Piper Board. Officers and service contractors of the Piper Funds and the
FAIF Funds may, without cost to the Piper Funds, solicit proxies on behalf of
management of the Piper Funds personally or by mail, telephone, telegraph or
otherwise. In addition, the Piper Funds have retained ____________ to assist in
the solicitation of proxies. The cost of solicitation is estimated to be
____________. U.S. Bank has agreed to pay any costs in excess of the standard
costs related to a annual meeting of the Piper Funds (based on the costs related
to the 1997 Annual Meeting of the Piper Funds).
____________________ may call shareholders to ask if they would be
willing to have their votes recorded by telephone. The telephone voting
procedure is designed to authenticate shareholders' identities, to allow
shareholders to authorize the voting of their shares in accordance with their
instructions, and to confirm that their instructions have been recorded
properly. The Piper Funds have been advised by counsel that these procedures are
consistent with the requirements of applicable law. Shareholders voting by
telephone will be asked for their social security number or other identifying
information and will be given an opportunity to authorize proxies to vote their
shares in accordance with their instructions. To ensure that the shareholders'
instructions have been recorded correctly, they will receive a confirmation of
their instructions in the mail. A special toll-free number will be available in
case the information contained in the confirmation is incorrect. Although a
shareholder's vote may be taken by telephone, each shareholder will receive a
copy of this Proxy Statement/Prospectus and may vote by mail using the enclosed
proxy card. If you have any questions or need assistance in voting, please
contact ____________________ at its toll-free number, 1-800-__________.
Any shareholder giving a proxy may revoke it at any time before it
is exercised by submitting to the Piper Funds a written notice of revocation or
a subsequently executed proxy or by attending the Meeting and voting in person.
Only shareholders of record at the close of business on
____________, 1998 will be entitled to vote at the Meeting. On that date, _____
shares of XUS and _____ shares of HLA were outstanding and entitled to be voted.
Shares are entitled to one vote per common share.
SHAREHOLDER AND BOARD APPROVALS. Pursuant to the Order granted by
the SEC, the Interim Agreements are being submitted for the ratification and
approval of the shareholders of the applicable Piper Fund. Each Interim
Agreement must be ratified and approved by a majority of the outstanding shares
(as defined below) of the respective Piper Fund. In the event an Interim
Agreement is not ratified and approved, such agreement will terminate, the
investment advisory fees accrued under such agreement and held in escrow with
respect to that Piper Fund will be returned to the applicable Piper Fund, and
the applicable Piper Board will consider what actions should be taken with
respect to management of the assets of such Piper Fund until a new investment
advisory or sub-advisory agreement is approved by the shareholders of that Piper
Fund or the Reorganization occurs.
The Reorganization Agreement is being submitted for approval at the
Meeting by the shareholders of XUS and HLA pursuant to the provisions of their
respective Articles of Incorporation. The Reorganization Agreement must be
approved by a majority of the outstanding shares (as defined below) of each
Piper Fund. The Reorganization Agreement provides that in the event the
Reorganization Agreement is approved with respect to one but not the other of
the Piper Funds, the Boards of Directors of FAIF and the Piper Funds may, in the
exercise of their reasonable business judgment, either abandon the
<PAGE>
Reorganization Agreement with respect to both of the Piper Funds or direct that
the Reorganization and the other transactions described in the Reorganization
Agreement be consummated with respect to the approving Piper Fund to the extent
they deem advisable.
With respect to approval of the Interim Advisory and Sub-Advisory
Agreements, the term "majority of the outstanding shares" of a particular Piper
Fund means the lesser of (i) 67% of the shares of the Fund present at the
Meeting if the holders of more than 50% of the outstanding shares of such Fund
are present or (ii) more than 50% of the outstanding shares of the Fund. With
respect to approval of the Reorganization Agreements, the term "majority of the
outstanding shares" of a particular Piper Fund means more than 50% of the
outstanding shares of such Fund. The vote of the shareholders of the Strategic
Fund is not being solicited, since their approval or consent is not necessary
for the Reorganization.
The approval of the Reorganization Agreement by the Piper Boards is
discussed above under "Information Relating to the Proposed
Reorganization--Piper Board Considerations." The Reorganization Agreement was
unanimously approved by the Board of Directors of FAIF at a meeting held on
____________, 1998.
As of ___________, 1998, the officers and Directors of each of the
Piper Funds as a group owned less than 1% of each Piper Fund. The table below
shows the name, address and share ownership of each person known to the Piper
Funds to have beneficial or record ownership with respect to 5% or more of a
Piper Fund as of ____________, 1998. Prior to the Reorganization, no shares of
Strategic Fund are issued and outstanding.
PIPER FUNDS--5% OWNERSHIP AS OF __________, 1998
AMOUNT OF PERCENTAGE PERCENTAGE
PIPER NAME AND SHARES OWNED AND OF OF FUND
FUNDS ADDRESS TYPE OF OWNERSHIP FUND POST-CLOSING
- ----- ------- ----------------- ---- ------------
The Americas
Income Trust Inc.
Highlander Income
Fund Inc.
For purposes of the 1940 Act, any person who owns directly or
through one or more controlled companies more than 25% of the voting securities
of a company is presumed to "control" such company. Under this definition,
__________ and its affiliates may be deemed to be controlling persons of the
Piper Funds, and __________ and its affiliates may be deemed to be controlling
persons of Strategic Fund.
QUORUM. In the event that a quorum is not present at the Meeting, or
in the event that a quorum is present at the Meeting but sufficient votes to
approve the Interim Agreements or the Reorganization Agreement are not received
with respect to one or both of the Piper Funds, the persons named as proxies may
propose one or more adjournments of the Meeting to permit further solicitation
of proxies. Any such adjournment(s) will require the affirmative vote of a
majority of those shares affected by the adjournment(s) that are represented at
the Meeting in person or by proxy. If a quorum is present, the persons named as
proxies will vote those proxies which they are entitled to vote FOR the
particular proposal for which a quorum exists in favor of such adjournment(s),
and will vote those proxies required to be voted AGAINST such proposal against
any adjournment(s). A shareholder vote may be taken with respect to one Piper
Fund (but not the other Piper Fund) on some or all matters before any such
adjournment(s) if sufficient votes have been received for approval. A quorum is
constituted with respect to a Piper Fund by the presence in person or by proxy
of the holders of more than 50% of the outstanding
<PAGE>
shares of the applicable Piper Fund entitled to vote at the Meeting. For
purposes of determining the presence of a quorum for transacting business at the
Meeting, abstentions will be treated as shares that are present at the Meeting
but which have not been voted. Abstentions will have the effect of a "no" vote
for purposes of obtaining the requisite approvals. Broker "non-votes" (that is,
proxies from brokers or nominees indicating that such persons have not received
instructions from the beneficial owners or other persons entitled to vote shares
on a particular matter with respect to which the brokers or nominees do not have
discretionary power) will not be treated as shares that are present at the
Meeting and, accordingly, could make it more difficult to obtain the requisite
approvals.
ANNUAL MEETINGS. With respect to annual meetings, the Piper Funds
are subject to the rules and regulations of the New York Stock Exchange (for
XUS) and the American Stock Exchange (for HLA) which require a company whose
shares are listed on such exchange to hold an annual meeting each fiscal year.
The Bylaws of FAIF provide that annual shareholders' meetings are not required
and that meetings of shareholders need be held only with such frequency as
required under Minnesota law and the 1940 Act.
DISSENTERS' RIGHTS. Pursuant to Sections 302A.471 and 302A.473 of
the Minnesota Business Corporation Act (the "MBCA Sections"), record holders of
shares of the Piper Funds on _________, 1998 are entitled to assert dissenters'
rights in connection with the Reorganization and obtain payment of the "fair
value" of their shares, provided that such shareholders comply with the
requirements of the MBCA Sections. NOTWITHSTANDING THE PROVISIONS OF THE MBCA
SECTIONS, THE DIVISION OF INVESTMENT MANAGEMENT OF THE SEC HAS TAKEN THE
POSITION THAT ADHERENCE TO STATE APPRAISAL PROCEDURES BY A REGISTERED INVESTMENT
COMPANY ISSUING REDEEMABLE SECURITIES WOULD CONSTITUTE A VIOLATION OF RULE 22C-1
UNDER THE 1940 ACT. THIS RULE PROVIDES THAT NO OPEN-END INVESTMENT COMPANY MAY
REDEEM ITS SHARES OTHER THAN AT NET ASSET VALUE NEXT COMPUTED AFTER RECEIPT OF A
TENDER OF SUCH SECURITY FOR REDEMPTION. IT IS THE VIEW OF THE DIVISION OF
INVESTMENT MANAGEMENT THAT RULE 22C-L SUPERSEDES APPRAISAL PROVISIONS IN STATE
STATUTES.
In the interests of ensuring equal valuation of all interests in the
Piper Funds, the Piper Funds will determine dissenters' rights in accordance
with the Division interpretation. Accordingly, in the event that any shareholder
elects to exercise dissenters' rights under Minnesota law, the Piper Funds
intend to submit this question to a court of competent jurisdiction. In such
event, a dissenting shareholder would not receive any payment until disposition
of any such court proceeding. It should be emphasized that Piper Fund
shareholders may sell their shares in the open market prior to the Closing Date,
provided that it is expected that trading of shares will be suspended for a
period of time prior to the Closing Date. In addition, shareholders will be able
to redeem Strategic Fund shares immediately after the Closing Date at their net
asset value.
A summary of the statutory procedures to be followed by Piper Fund
shareholders electing to exercise their dissenters' rights, along with copies of
the relevant MBCA Sections, is set forth in Appendix XIII. Shareholders who wish
to assert their dissenters' rights or who wish to preserve the right to do so
should review the MBCA Sections carefully, since failure to comply with the
procedures set forth in the MBCA Sections will result in the loss of such
dissenters' rights.
INTERESTS OF CERTAIN PERSONS. The following receive payments from
Strategic Fund for services rendered pursuant to contractual arrangements with
Strategic Fund: U.S. Bank, as the adviser of Strategic Fund, receives payments
for its investment advisory and management services; FIC and FGRC, as the sub-
advisers of Strategic Fund, receive payments for their sub-advisory services;
SEI Investments Distribution Co., as the distributor for Strategic Fund,
receives payments for providing distribution services; SEI Investments
Management Corporation, in its capacity as the administrator for Strategic Fund,
receives payments for providing shareholder servicing, legal and accounting and
other administrative personnel and services; DST Systems, Inc., in its capacity
as transfer and dividend disbursing agent for Strategic Fund, receives payments
for providing transfer agency and dividend disbursing services; and U.S. Bank
<PAGE>
Trust National Association, a subsidiary of U.S. Bancorp, which also controls
U.S. Bank, receives payments for providing custodial services for Strategic
Fund, and may also act as securities lending agent in connection with Strategic
Fund's securities lending transactions and receive, as compensation for such
services, fees equal to 40% of the Fund's income from such securities lending
transactions. U.S. Bank also acts as Sub-administrator to SEI Investments
Management Corporation, for which it receives fees from SEI Management
Corporation. Piper Jaffray Inc., a subsidiary of U.S. Bancorp, acts a servicing
agent to perform certain transfer agent and dividend disbursing agent services
with respect to Class A Shares of Strategic Fund held through accounts at Piper
Jaffray Inc. and its affiliates.
ADDITIONAL INFORMATION ABOUT FAIF
Additional information about Strategic Fund is included in
preliminary Prospectus and preliminary Statement of Additional Information,
copies of which, to the extent not included herewith, may be obtained without
charge by writing to FAIF, c/o SEI Investments Distribution Co., Oaks,
Pennsylvania 19456, or by calling 1-800-637-2548. FAIF is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and the 1940 Act, and in accordance therewith it files reports, proxy materials
and other information with the SEC. Reports and other information filed by FAIF
can be inspected and copied at the Public Reference Facilities maintained by the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, these
materials can be inspected and copied at the SEC's Regional Offices at 7 World
Trade Center, Suite 1300, New York, New York 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such materials also can be obtained from the Public Reference Branch, Office of
Consumer Affairs and Information Services, Securities and Exchange Commission,
Washington, D.C. 20549, at prescribed rates.
Information included in this Combined Proxy Statement/Prospectus
concerning Strategic Fund and FAIF was provided by FAIF.
ADDITIONAL INFORMATION ABOUT THE PIPER FUNDS
XUS and HLA are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and the 1940 Act, and in accordance
therewith, are required to file reports, proxy statement and other information
with the SEC. Any such reports, proxy statements and other information filed by
the Piper Funds can be inspected and copied at the Public Reference Facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the offices of the Piper Funds listed above. In addition, these materials can be
inspected and copied at the SEC's Regional Offices at 7 World Trade Center,
Suite 1300, New York, New York 10048, and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
also can be obtained from the Public Reference Branch, Office of Consumer
Affairs and Information Services, Securities and Exchange Commission,
Washington, D.C. 20549, at prescribed rates. The common shares of XUS are listed
on the New York Stock Exchange and of HLA are listed on the American Stock
Exchange, and such reports, proxy statements and other information concerning
the Piper Funds can also be inspected at the offices of the applicable exchange
and for XUS at the offices of the Chicago Stock Exchange. The offices of the New
York Stock Exchange are 20 Broad Street, New York, New York 10005. The offices
for the American Stock Exchange are 86 Trinity Place, New York, New York 10006.
The offices of the Chicago Stock Exchange are One Financial Plaza, 440 S.
LaSalle Street, Chicago, Illinois 60605.
Information included in this Combined Proxy Statement/Prospectus
concerning the Piper Funds was provided by the Piper Funds.
COMPLIANCE WITH SECTION 16(a)
Based on the records of the Piper Funds and other information, each
Piper Fund believes that all SEC filing requirements applicable to their
respective directors, officers, Piper Capital and companies affiliated with
Piper Capital, pursuant to Section 16(a) of the Securities Exchange Act of 1934,
as amended, with respect to the Piper Funds' most recent fiscal year end, were
satisfied.
<PAGE>
FINANCIAL STATEMENTS
The audited statements of assets and liabilities, including the
schedules of investments in securities, of XUS as of October 31, 1997 and of HLA
as of February 28, 1998, and the related statements of operations for the
respective years then ended, the statements of changes in net assets for each of
the periods indicated therein, and the financial highlights for the periods
indicated therein, as included in the October 31, 1997 Annual Report of XUS and
the February 28, 1998 Annual Report of HLA, have been incorporated by reference
into this Combined Proxy Statement/Prospectus in reliance on the respective
reports of KPMG Peat Marwick LLP, independent auditors for the Piper Funds,
given on the authority of such firms as experts in accounting and auditing.
OTHER BUSINESS
The Piper Boards know of no other business to be brought before the
Meeting. However, if any other matters come before the Meeting, it is the
intention that proxies which do not contain specific restrictions to the
contrary will be voted on such matters in accordance with the judgment of the
persons named in the enclosed form of proxy.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Piper Funds or to
First American Investment Funds, Inc. in writing at the appropriate addresses on
the cover page of this Combined Proxy Statement/Prospectus or by telephoning the
Piper Funds at 1-800-866-7778 or FAIF at 1-800-637-2548.
* * *
SHAREHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE MEETING ARE
REQUESTED TO MARK, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE
ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
SHAREHOLDERS ALSO MAY RETURN PROXIES BY TELEFAX OR VOTE BY TELEPHONE.
THE PIPER FUNDS WILL FURNISH, WITHOUT CHARGE, COPIES OF THEIR
RESPECTIVE SHAREHOLDERS REPORTS TO ANY SHAREHOLDER UPON REQUEST ADDRESSED TO 222
SOUTH NINTH STREET, MINNEAPOLIS, MINNESOTA 55402-3804 OR BY TELEPHONE AT
1-800-866-7778.
<PAGE>
APPENDIX I
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This AGREEMENT, made this ___________ day of ______________
1998, by and between The Americas Income Trust Inc., a Minnesota corporation
(the "Fund") and Piper Capital Management Incorporated, a Delaware corporation
(the "Adviser").
1. Investment Advisory and Management Services. The Fund hereby engages
the Adviser, and the Adviser hereby agrees to act as investment adviser for, and
to manage the affairs, business and the investment of the assets of the Fund.
The investment of the assets of the Fund shall at all times be
subject to the applicable provisions of the Articles of Incorporation, Bylaws,
Registration Statement on Form N-2 and any representations contained in the
Prospectus of the Fund and shall conform to the policies and purposes of the
Fund as set forth in such Registration Statement and Prospectus and (i) as
interpreted from time to time by the Board of Directors of the Fund and (ii) as
may be amended from time to time by the Board of Directors and/or the
shareholders of the Fund as permitted by the Investment Company Act of 1940, as
amended (the "1940 Act"). Within the framework of the investment policies of the
Fund, the Adviser shall have the sole and exclusive responsibility for the
management of the Fund's assets and the making and execution of all investment
decisions for the Fund; provided that the Adviser is authorized, at its option
and expense, to retain a sub-adviser or sub-advisers to assist the Adviser in
furnishing investment advice to the Fund; and further provided that the Adviser
shall be responsible for monitoring compliance by such sub-adviser(s) with the
investment policies and restrictions of the Fund and with such other limitations
or directions as the Board of Directors of the Fund may from time to time
prescribe. Any such retention of a sub-adviser shall be subject to approval by
the Board of Directors of the Fund and, to the extent required by law, the
shareholders of the Fund. Any appointment of a subadviser pursuant hereto shall
in no way limit or diminish the Adviser's obligations and responsibilities under
the Advisory Agreement. The Adviser shall report to the Board of Directors of
the Fund regularly at such times and in such detail as the Board may from time
to time determine to be appropriate, in order to permit the Board to determine
the adherence of the Adviser to the investment policies of the Fund.
The Adviser shall, at its own expense, furnish the Fund
suitable office space, and all necessary office facilities, equipment and
personnel for servicing the investments of the Fund. The Adviser shall arrange,
if requested by the Fund, for officers, employees or other Affiliated Persons
(as defined in Section 2(a)(3) of the 1940 Act and the rules, regulations and
releases relating thereto) of the Adviser to serve without compensation from the
Fund as directors, officers or employees of the Fund if duly elected to such
positions by the shareholders or directors of the Fund.
The Adviser hereby acknowledges that all records necessary in
the operation of the Fund, including records pertaining to its shareholders and
investments, are the property of the Fund, and in the event that a transfer of
management or investment advisory services to someone other than the Adviser
<PAGE>
should ever occur, the Adviser will promptly, and at its own cost, take all
steps necessary to segregate such records and deliver them to the Fund.
2. Compensation for Services. In payment for all services, facilities,
equipment and personnel, and for other costs of the Adviser hereunder, the Fund
shall pay to the Adviser an investment management fee calculated and paid
monthly at the per annum rate of .50 of 1% of the Fund's average weekly net
assets. For purposes of the calculation of the fee payable to the Adviser,
average weekly net assets shall be determined on the basis of the Fund's average
net assets for each weekly period ending during the month. The net assets for
each weekly period are determined by averaging the net assets on the last day of
such weekly period with the net assets on the last day of the immediately
preceding weekly period. When the last day of a weekly period is not a Fund
business day, then the calculation will be based on the net assets of the Fund
on the immediately preceding Fund business day. Such fee shall be payable on the
fifth day of each calendar month for services performed hereunder during the
preceding month. If the Fund's Registration Statement on Form N-2 is declared
effective by the Securities and Exchange Commission after the beginning of a
month or this Agreement terminates prior to the end of a month, such fee shall
be prorated according to the proportion which such portion of the month bears to
the full month.
Pursuant to the terms of an order of exemption granted by the
Securities and Exchange Commission in Piper Funds Inc., et al., Investment
Company Act Rel. No. ( , 1998), all fees payable under this Agreement by the
Fund shall be payable to an independent escrow agent to be maintained in an
interest-bearing escrow account until this Agreement is approved by shareholders
in accordance with the provisions of Section 5 of this Agreement. If
shareholders of the Fund fail to approve this Agreement, the escrow agent will
pay to the Fund the applicable escrowed amounts (including interest earned). The
escrow agent will release the escrowed funds only upon receipt of a certificate
from officers of the Fund stating whether the escrowed funds are to be delivered
to the Adviser or the Fund.
3. Allocation of Expenses. In addition to the fees described in Section
2 hereof, the Fund shall pay all its expenses which are not assumed by the
Adviser in its capacity as the Fund's investment adviser or in its capacity as
the Fund's administrator. These Fund expenses include, by way of example, but
not by way of limitation, (a) brokerage and commission expenses; (b) Federal,
state, local and foreign taxes, including issue and transfer taxes incurred by
or levied on the Fund; (c) interest charges on borrowings; (d) the Fund's
organizational and offering expenses, whether or not advanced by the Adviser;
(e) the cost of other personnel providing services to the Fund; (f) fees and
expenses of registering the Fund's shares under the appropriate Federal
securities laws and qualifying the Fund's shares under applicable state
securities laws; (g) fees and expenses of listing and maintaining the listing of
the Fund's shares on the principal securities exchanges where listed, or, if the
Fund's shares are not so listed, fees and expenses of listing and maintaining
the quotation of the Fund's shares on the principal securities
<PAGE>
market where traded; (h) expenses of printing and distributing reports to
shareholders; (i) costs of shareholders' meetings and proxy solicitation; (j)
charges and expenses of the Fund's Administrator, custodian and registrar,
transfer agent and dividend disbursing agent; (k) compensation of the Fund's
officers, directors and employees that are not affiliated persons or interested
persons (as defined in Section 2(a)(19) of the 1940 Act and the rules,
regulations and releases relating thereto) of the Adviser; (l) legal and
auditing expenses; (m) cost of certificates representing shares of the Fund; (n)
costs of stationery and supplies; (o) insurance expenses; and (p) association
membership dues.
4. Freedom to Deal with Third Parties. The Adviser shall be free to
render services to others similar to those rendered under this Agreement or of a
different nature except as such services may conflict with the services to be
rendered or the duties to be assumed hereunder.
5. Effective Date, Duration and Termination of Agreement. The effective
date of this Agreement shall be the date first set forth above. Wherever
referred to in this Agreement, the vote or approval of the holders of a majority
of the outstanding shares of the Fund shall mean the vote of 67% or more of such
shares if the holders of more than 50% of such shares are present in person or
by proxy or the vote of more than 50% of such shares, whichever is less.
Unless sooner terminated as hereinafter provided, this
Agreement shall continue in effect for a period of two years from the date of
its execution hereof, and thereafter shall continue in effect only so long as
such continuance is specifically approved at least annually by the Board of
Directors of the Fund, including the specific approval of a majority of the
Directors who neither are interested persons of the Fund or of the Adviser nor
have any director or indirect financial interest in this Agreement, cast in
person at a meeting called for the purpose of voting on such approval or by the
vote of the holders of a majority of the Fund's outstanding shares.
This Agreement may be terminated at any time without the
payment of any penalty by the vote of the Board of Directors of the Fund or by
the vote of the holders of a majority of the outstanding shares of the Fund, or
by the Adviser, upon sixty (60) days written notice to the other party. Any such
termination may be made effective with respect to both the investment advisory
and management services provided for in this Agreement or with respect to either
of such kinds of services. This Agreement shall automatically terminate in the
event of its assignment as defined in the 1940 Act and the rules thereunder.
This Agreement shall automatically terminate upon completion of the dissolution,
liquidation or winding up of the Fund.
6. Amendments to Agreement. No material amendment to this Agreement
shall be effective until approved by vote of the holders of a majority of the
outstanding shares of the Fund.
<PAGE>
7. Notices. Any notice under this Agreement shall be in writing,
addressed, delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate in writing for receipt of such notice.
IN WITNESS WHEREOF, the Fund and the Adviser have caused this
Agreement to be executed by their duly authorized officers as of the day and
year first above written.
THE AMERICAS INCOME TRUST INC.
By
----------------------------
Its
-------------------------
PIPER CAPITAL MANAGEMENT
INCORPORATED
By
----------------------------
Its
-------------------------
<PAGE>
APPENDIX II
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This AGREEMENT, made this ___________ day of ________________
1998, by and between Highlander Income Fund Inc., a Minnesota corporation (the
"Fund") and Piper Capital Management Incorporated, a Delaware corporation (the
"Adviser").
1. Investment Advisory and Management Services. The Fund hereby
engages the Adviser, and the Adviser hereby agrees to act as investment adviser
for, and to manage the affairs, business and the investment of the assets of the
Fund.
The investment of the assets of the Fund shall at all times be
subject to the applicable provisions of the Articles of Incorporation, Bylaws,
Registration Statement on Form N-2 and any representations contained in the
Prospectus of the Fund and shall conform to the policies and purposes of the
Fund as set forth in such Registration Statement and Prospectus and (a) as
interpreted from time to time by the Board of Directors of the Fund and (b) as
may be amended from time to time by the Board of Directors and/or the
shareholders of the Fund as permitted by the Investment Company Act of 1940, as
amended (the "1940 Act"). Within the framework of the investment policies of the
Fund, the Adviser shall have the sole and exclusive responsibility for the
management of the Fund's assets and the making and execution of all investment
decisions for the Fund; provided that the Adviser shall be authorized to retain
a sub-adviser or sub-advisers (the "Sub-Adviser(s)") to assist the Adviser in
furnishing investment advice to the Fund; and further provided that the Adviser
shall be responsible for monitoring compliance by the Sub-Adviser(s) with the
investment policies and restrictions of the Fund and with such other limitations
or directions as the Board of Directors of the Fund may from time to time
prescribe. The Adviser shall report to the Board of Directors of the Fund
regularly at such times and in such detail as the Board may from time to time
determine to be appropriate, in order to permit the Board to determine the
adherence of the Adviser to the investment policies of the Fund.
The Adviser shall, at its own expense, furnish the Fund
suitable office space, and all necessary office facilities, equipment and
personnel for servicing the investments of the Fund. The Adviser shall arrange,
if requested by the Fund, for officers, employees or other Affiliated Persons
(as defined in Section 2(a)(3) of the 1940 Act and the rules, regulations and
releases relating thereto) of the Adviser to serve without compensation from the
Fund as directors, officers or employees of the Fund if duly elected to such
positions by the shareholders or directors of the Fund.
The Adviser hereby acknowledges that all records necessary in
the operation of the Fund, including records pertaining to its shareholders and
investments, are the property of the Fund, and in the event that a transfer of
management or investment advisory services to someone other than the Adviser
should ever occur, the Adviser will promptly, and at its own cost, take all
steps necessary to segregate such records and deliver them to the Fund.
<PAGE>
2. Compensation for Services. In payment for all services, facilities,
equipment and personnel, and for other costs of the Adviser hereunder, the Fund
shall pay to the Adviser a monthly investment advisory fee. Such monthly fee
shall be 1/12 or the per annum rate of .60 of 1% of the Fund's average weekly
net assets during each month, calculated as described below.
For purposes of the calculation of such fee payable, average
weekly net assets shall be determined on the basis of the Fund's average net
assets for each weekly period (ending on Friday) ending during the month. The
net assets for each weekly period are determined by averaging the net assets on
the Friday of such weekly period with the net assets on the Friday of the
immediately preceding weekly period. When a Friday is not a business day for the
Fund, then the calculation will be based on the Fund's net assets on the
business day immediately preceding such Friday. Such fee shall be payable on the
fifth day of each calendar month for services performed hereunder during the
preceding month. If the Fund's Registration Statement on Form N-2 is declared
effective by the Securities and Exchange Commission after the beginning of a
month or this Agreement terminates prior to the end of a month, such fee shall
be prorated according to the proportion which such portion of the month bears to
the full month.
Pursuant to the terms of an order of exemption granted by the
Securities and Exchange Commission in PIPER FUNDS INC., ET AL., Investment
Company Act Rel. No. ______________ (_____________________, 1998), all fees
payable under this Agreement by the Fund shall be payable to an independent
escrow agent to be maintained in an interest-bearing escrow account until this
Agreement is approved by shareholders in accordance with the provisions of
Section 5 of this Agreement. If shareholders of the Fund fail to approve this
Agreement, the escrow agent will pay to the Fund the applicable escrowed amounts
(including interest earned). The escrow agent will release the escrowed funds
only upon receipt of a certificate from officers of the Fund stating whether the
escrowed funds are to be delivered to the Adviser or the Fund.
3. Allocation of Expenses. In addition to the fees described in Section
2 hereof, the Fund shall pay all its expenses which are not assumed by the
Adviser in its capacity as the Fund's investment adviser or in its capacity as
the Fund's administrator. These Fund expenses include, by way of example, but
not by way of limitation, (a) brokerage and commission expenses; (b) Federal,
state, local and foreign taxes, including issue and transfer taxes incurred by
or levied on the Fund; (c) interest charges on borrowings; (d) the Fund's
organizational and offering expenses, whether or not advanced by the Adviser;
(e) the cost of other personnel providing services to the Fund; (f) fees and
expenses of registering or otherwise qualifying the Fund's shares under
applicable state securities laws; (g) fees and expenses of registering the Fund
and its shares with the Securities and Exchange Commission; (h) fees and
expenses of listing and maintaining the listing of the Fund's shares on the
principal securities exchanges where listed, or, if the Fund's shares are not so
listed, fees and expenses of listing and maintaining the quotation of the Fund's
shares on the principal over-the-counter market where traded;
<PAGE>
(i) expenses of printing and distributing reports to shareholders; (j) costs of
shareholders' meetings and proxy solicitation; (k) charges and expenses of the
Fund's Administrator, custodian and registrar, transfer agent and dividend
disbursing agent; (l) compensation of the Fund's officers, directors and
employees that are not Affiliated Persons or Interested Persons (as defined in
Section 2(a)(19) of the 1940 Act and the rules, regulations and releases
relating thereto) of the Adviser; (m) legal and auditing expenses; (n) costs of
certificates representing common shares of the Fund; (o) costs of stationery and
supplies; (p) insurance expenses; and (q) association membership dues.
4. Freedom to Deal with Third Parties. The Adviser shall be free to
render services to others similar to those rendered under this Agreement or of a
different nature except as such services may conflict with the services to be
rendered or the duties to be assumed hereunder.
5. Effective Date, Duration and Termination of Agreement. The effective
date of this Agreement shall be the date first set forth above. Wherever
referred to in this Agreement, the vote or approval of the holders of a majority
of the outstanding shares of the Fund shall mean the vote of 67% or more of such
shares if the holders of more than 50% of such shares are present in person or
by proxy or the vote of more than 50% of such shares, whichever is less.
Unless sooner terminated as hereinafter provided, this
Agreement shall continue in effect for a period of two years from the date of
its execution hereof, and thereafter shall continue in effect only so long as
such continuance is specifically approved at least annually (a) by the Board of
Directors of the Fund or by the vote of the holders of a majority of the Fund's
outstanding shares, and (b) by the vote of a majority of the Directors who are
not parties to this Agreement or Interested Persons of the Adviser or of the
Fund cast in person at a meeting called for the purpose of voting on such
approval.
This Agreement may be terminated at any time without the
payment of any penalty by the vote of the Board of Directors of the Fund or by
the vote of the holders of a majority of the outstanding shares of the Fund, or
by the Adviser, upon sixty (60) days written notice to the other party. Any such
termination may be made effective with respect to both the investment advisory
and management services provided for in this Agreement or with respect to either
of such kinds of services. This Agreement shall automatically terminate in the
event of its assignment as defined in the 1940 Act and the rules thereunder.
This Agreement shall automatically terminate upon completion of the dissolution,
liquidation or winding up of the Fund.
6. Amendments to Agreement. No material amendment to this Agreement
shall be effective until approved by vote of the holders of a majority of the
outstanding shares of the Fund.
<PAGE>
7. Notices. Any notice under this Agreement shall be in writing,
addressed, delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate in writing for receipt of such notice.
IN WITNESS WHEREOF, the Fund and the Adviser have caused this
Agreement to be executed by their duly authorized officers as of the day and
year first above written.
HIGHLANDER INCOME FUND INC.
By
-------------------------
Its
----------------------
PIPER CAPITAL MANAGEMENT
INCORPORATED
By
-------------------------
Its
----------------------
<PAGE>
APPENDIX III
SUB-ADVISORY AGREEMENT
Agreement, dated as of _______________, 1998, by and between
Piper Capital Management Incorporated, a Delaware corporation (the "Adviser"),
and Salomon Brothers Asset Management Inc, a Delaware corporation (the
"Sub-Adviser").
WHEREAS, the Adviser is the investment adviser to The Americas
Income Trust Inc. (the "Company"), a closed-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"); and
WHEREAS, the Adviser desires to retain the Sub-Adviser to
assist the Adviser in furnishing an investment program to the Company.
NOW, THEREFORE, in consideration of the mutual agreements
herein made, the Adviser and the Sub-Adviser agree as follows:
1. The Adviser hereby employs the Sub-Adviser to serve as sub-adviser
with respect to the assets of the Company, and to perform the services
hereinafter set forth. The Sub-Adviser hereby accepts such employment and
agrees, for the compensation herein provided, to assume all obligations herein
set forth and to bear all expenses of its performance of such obligations (but
no other expenses). The Sub-Adviser shall not be required to pay expenses of the
Company, including, but not limited to (a) brokerage and commission expenses;
(b) federal, state, local and foreign taxes, including issue and transfer taxes
incurred by or levied on the Company; (c) interest charges on borrowings; (d)
the cost of other personnel providing services to the Company; (e) fees and
expenses of registering and maintaining registration of the Company's shares
under appropriate federal securities laws and of registering or otherwise
qualifying and maintaining registration or qualification of the shares of the
Company under applicable state securities laws; (f) fees and expenses of listing
and maintaining the listing of the Company's shares on the principal exchanges
where listed or, if the Company's shares are not so listed, fees and expenses of
listing and maintaining the quotation of the Company's shares on the principal
over-the-counter market where traded; (g) expenses of printing and distributing
reports to shareholders; (h) costs of shareholders' meetings and proxy
solicitation; (i) charges and expenses of the Company's administrator, custodian
and registrar, transfer agent and dividend disbursing agent; (j) compensation of
the Company's officers, directors and employees that are not Affiliated Persons
or Interested Persons (as defined in Section 2(a)(19) of the 1940 Act and the
rules, regulations and releases relating thereto) of the Adviser or the
Sub-Adviser; (k) legal and auditing expenses; (l) costs of certificates
representing common shares of the Company; (m) costs of stationery and supplies;
(n) insurance expenses; (o) association membership dues; (p) travel expenses of
officers and employees of the Sub-Adviser to the extent such expenses relate to
the attendance of such persons at meetings at the request of the Board of
Directors of the Company; (q) travel expenses for attendance at Board of
Directors meetings by members of the Board of Directors of the Company, if any,
who are also
<PAGE>
"interested persons" or "affiliated persons" of the Sub-Adviser; and (r) all
other charges and costs of the Company's operation unless otherwise explicitly
provided herein. The Sub-Adviser shall for all purposes herein be deemed to be
an independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or on behalf of the
Company in any way or otherwise be deemed an agent of the Company.
2. The Sub-Adviser shall direct the investment of the Company's assets
in accordance with the 1940 Act, the provisions of the Internal Revenue Code of
1986, as amended, relating to regulated investment companies, applicable laws,
and the investment objective, policies and restrictions set forth in the
Company's Prospectus and Statement of Additional Information filed with the
Securities and Exchange Commission pursuant to Rule 497 under the Securities Act
of 1933, subject to the supervision of the Company, its officers and directors,
and the Adviser and in accordance with the investment objectives, policies and
restrictions from time to time prescribed by the Board of Directors of the
Company and communicated by the Adviser to the Sub-Adviser and subject to such
further limitations as the Adviser may from time to time impose by written
notice to the Sub-Adviser.
3. The Sub-Adviser shall formulate and implement a continuing program
for the management of the Company's assets. The Sub-Adviser shall amend and
update such program from time to time as financial and other economic conditions
warrant. The Sub-Adviser shall make all determinations with respect to the
investment of the assets of the Company and shall take such steps as may be
necessary to implement the same, including the placement of purchase and sale
orders on behalf of the Company. The Sub-Adviser shall advise the Adviser and,
if requested by the Adviser, advise the Company's Board of Directors (which
shall make all non-investment decisions with respect to the securities in which
the assets of the Company may be invested), of the manner in which voting
rights, rights to consent to corporate action, and any other noninvestment
decisions pertaining to the Company's portfolio securities should be exercised.
4. The Sub-Adviser shall furnish such reports to the Adviser as the
Adviser may reasonably request for the Adviser's use in discharging its
obligations under the Investment Advisory and Management Agreement between the
Company and the Adviser (the "Advisory Agreement"), which reports may be
distributed by the Adviser to the Company's Board of Directors at periodic
meetings of such Board and at such other times as may be reasonably requested by
the Company's Board of Directors. Copies of all such reports shall be furnished
to the Adviser for examination and review within a reasonable time prior to the
presentation of such reports to the Company's Board of Directors.
5. The Sub-Adviser shall select the brokers and dealers that will
execute the purchases and sales of portfolio instruments for the Company and
markets on or in which such transactions will be executed and shall place, in
the name of the Company or its nominee, all such orders.
(a) When placing such orders, the Sub-Adviser is authorized to
employ such dealers and brokers as may, in the judgment of the
Sub-Adviser (taking into account such factors as price, including
dealer spread, the size,
<PAGE>
type and difficulty of the transaction involved, the firm's general
execution and operational facilities and the firm's risk in positioning
the securities), implement the policy of the Company to obtain the best
price and execution. Consistent with this policy, the Sub-Adviser is
authorized to direct the execution of the Company's portfolio
transactions to dealers and brokers furnishing statistical information
or research deemed by the Sub-Adviser to be useful or valuable to the
performance of its sub-advisory functions for the Company. Information
so received will be in addition to and not in lieu of the services
required to be performed by the Sub-Adviser.
It is understood that certain other clients of the Sub-Adviser
may have investment objectives and policies similar to those of the
Company, and that the Sub-Adviser may, from time to time, make
recommendations that result in the purchase or sale of a particular
security by its other clients simultaneously with the Company. If
transactions on behalf of more than one client during the same period
increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price or
quantity. In such event, the Sub-Adviser shall allocate advisory
recommendations and the placing of orders in a manner that is deemed
equitable by the Sub-Adviser to the accounts involved, including the
Company. When two or more of the clients of the Sub-Adviser (including
the Company) are purchasing or selling the same security on a given day
from the same broker or dealer, such transactions may be averaged as to
price.
(b) The Sub-Adviser agrees that, except to the extent
permitted under Rule 17a-7 under the 1940 Act, or under any no-action
letter or exemptive order issued to the Company by the Securities and
Exchange Commission, it will not purchase or sell securities for the
Company in any transaction in which it, the Adviser or any "affiliated
person" of the Company, the Adviser or Sub-Adviser or any affiliated
person of such "affiliated person" is acting as principal. The
Sub-Adviser agrees that any transactions effected under Rule 17a-7
shall comply with the then-effective procedures adopted under such rule
by the Company's Board of Directors.
(c) The Sub-Adviser agrees that it will not execute any
portfolio transactions for the Company with a broker or dealer or
futures commission merchant which is an "affiliated person" of the
Company, the Adviser or the Sub-Adviser or an "affiliated person" of
such an "affiliated person" without the prior written consent of the
Adviser. Notwithstanding the foregoing, transactions may be effected
through Piper Jaffray Inc. if commissions, fees or other remuneration
received are reasonable and fair compared to the commissions, fees or
other remuneration paid to other brokers or dealers or other futures
commission merchants in connection with comparable transactions
involving similar securities or similar futures contracts or options
thereon being purchased or sold on an exchange or contract market
during a comparable period of time. In effecting such transactions, the
Sub-Adviser shall comply with Section 17(e)(1) of the 1940 Act and the
then-effective procedures adopted under such rule by the Company's
Board of Directors.
<PAGE>
(d) The Sub-Adviser shall promptly communicate to the Adviser
and, if requested by the Adviser, to the Company's Board of Directors,
such information relating to portfolio transactions as the Adviser may
reasonably request. The parties understand that the Company shall bear
all brokerage commissions in connection with the purchases and sales of
portfolio securities for the Company and all ordinary and reasonable
transaction costs in connection with purchases of such securities in
private placements and subsequent sales thereof.
6. The Sub-Adviser may (at its cost except as contemplated by paragraph
5 of this Agreement) employ, retain or otherwise avail itself of the services
and facilities of persons and entities within its own organization or any other
organization for the purpose of providing the Sub-Adviser, the Adviser or the
Company with such information, advice or assistance, including but not limited
to advice regarding economic factors and trends and advice as to transactions in
specific securities, as the Sub-Adviser may deem necessary, appropriate or
convenient for the discharge of its obligations hereunder or otherwise helpful
to the Adviser or the Company, or in the discharge of the Sub-Adviser's overall
responsibilities with respect to the other accounts for which it serves as
investment manager or investment adviser.
7. The Sub-Adviser shall cooperate with and make available to the
Adviser, the Company and any agents engaged by the Company, the Sub-Adviser's
expertise relating to matters affecting the Company.
8. For the services to be rendered and the facilities to be furnished
under this Agreement, the Adviser shall pay to the Sub-Adviser a monthly
management fee at the annual rate of .375% of the Company's average weekly net
assets during each month, as calculated below.
For purposes of the calculation of such fee, average weekly
net assets shall be determined on the basis of the Company's average net assets
for each weekly period (ending on Friday) ending during the month. The net
assets for each weekly period are determined by averaging the net assets on the
Friday of such weekly period with the net assets on the Friday of the
immediately preceding weekly period. When a Friday is not a business day for the
Company, then the calculation will be based on the Company's net assets on the
business day immediately preceding such Friday. Such fee shall be payable on the
fifth day of each calendar month for services performed hereunder during the
preceding month. If this Agreement becomes effective subsequent to the first day
of a month or shall terminate before the last day of a month, compensation for
that part of the month during which this Agreement is in effect shall be
prorated in a manner consistent with the calculation of fees as set forth above.
Anything to the contrary herein notwithstanding, the
Sub-Adviser may at any time and from time to time waive any part or all of any
fee payable to it pursuant to this Agreement.
<PAGE>
9. The Sub-Adviser represents, warrants and agrees that:
(a) The Sub-Adviser is registered as an "investment adviser"
under the Investment Advisers Act of 1940 ("Advisers Act") and is
currently in compliance and shall at all times continue to comply with
the requirements imposed upon it by the Advisers Act and other
applicable laws and regulations. The Sub-Adviser agrees to (i) supply
the Adviser with such documents as the Adviser may reasonably request
to document compliance with such laws and regulations and (ii)
immediately notify the Adviser of the occurrence of any event which
would disqualify the Sub-Adviser from serving as an investment adviser
of a registered investment company pursuant to any applicable law or
regulation.
(b) The Sub-Adviser will maintain, keep current and preserve
on behalf of the Company in the manner provided by the 1940 Act all
records required by the 1940 Act with respect to the Sub-Adviser's
activities hereunder. The Sub-Adviser agrees that such records are the
property of the Company, and will be surrendered to the Company
promptly upon request.
(c) The Sub-Adviser will complete such reports concerning
purchases or sales of securities on behalf of the Company as the
Adviser or the Company's administrator may from time to time require to
document compliance with the 1940 Act, the Advisers Act, the Internal
Revenue Code, applicable state securities laws and other applicable
laws and regulations or regulatory and taxing authorities in countries
other than the United States.
(d) After filing with the Securities and Exchange Commission
any amendment to its Form ADV, the Sub-Adviser will promptly furnish a
copy of such amendment to the Adviser.
(e) The Sub-Adviser will immediately notify the Adviser of the
occurrence of any event which would disqualify the Sub-Adviser from
serving as an investment adviser of an investment company pursuant to
Section 9 of the 1940 Act or any other applicable statute or
regulation.
10. The Adviser represents, warrants and agrees that:
(a) It has been duly authorized by the Board of Directors of
the Company to delegate to the Sub-Adviser the provision of the
services contemplated hereby.
(b) The Adviser and the Company are currently in compliance
and shall at all times continue to comply with the requirements imposed
upon the Adviser and the Company by applicable law and regulations.
11. The Sub-Adviser will not be liable for any error of judgment or
mistake of law or for any loss suffered by the Company or its shareholders in
connection with the performance of its duties under this Agreement, except a
loss resulting from willful misfeasance, bad faith or gross negligence on its
part in the
<PAGE>
performance of its duties or from reckless disregard by it of its duties under
this Agreement.
12. This Agreement shall become effective as of the date first set
forth above. Unless sooner terminated as hereinafter provided, this Agreement
shall continue in effect for a period of two years from the date of its
execution, and thereafter shall continue in effect only so long as such
continuance is specifically approved at least annually (a) by the Board of
Directors of the Company or by the vote of a majority of the outstanding voting
securities of the Company, and (b) by the vote of a majority of the directors
who are not parties to this Agreement or Interested Persons of any such parties,
cast in person at a meeting called for the purpose of voting on such approval.
It shall be the duty of the Directors of the Company to request and evaluate,
and the duty of the Adviser and Sub-Adviser to furnish, such information as may
be reasonably necessary to evaluate the terms of this Agreement and any renewal
thereof.
This Agreement may be terminated at any time without the
payment of any penalty (a) by the vote of the Board of Directors of the Company
or by the vote of the holders of a majority of the outstanding voting securities
of the Company, upon 60 days' written notice to the Adviser and the Sub-Adviser,
or (b) by the Adviser, upon 60 days' written notice to the Sub-Adviser; or (c)
by the Sub-Adviser, upon 60 days' written notice to the Adviser. This Agreement
shall automatically terminate in the event of its assignment as defined in the
1940 Act and the rules thereunder. This Agreement shall automatically terminate
upon completion of the dissolution, liquidation or winding up of the Company.
Wherever referred to in this Agreement, the vote or approval
of the holders of a majority of the outstanding voting securities or shares of
the Company shall mean the vote of 67% or more of such shares if the holders of
more than 50% of such shares are present in person or by proxy or the vote of
more than 50% of such shares, whichever is less.
13. No amendment to or modification of this Agreement shall be
effective unless and until approved by the vote of a majority of the outstanding
shares of the Company.
14. This Agreement shall be binding upon, and inure to the benefit of,
the Adviser and the Sub-Adviser, and their respective successors.
15. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby.
16. Nothing herein shall be deemed to limit or restrict the right of
the Sub-Adviser, or any affiliate of the Sub-Adviser, or any employee of the
Sub-Adviser, to engage in any other business or to devote time and attention to
the management or other aspects of any other business, whether of a similar or
dissimilar nature, or to render services of any kind to any other corporation,
firm, individual or association.
<PAGE>
17. To the extent that state law is not preempted by the provisions of
any law of the United States heretofore or hereafter enacted, as the same may be
amended from time to time, this Agreement shall be administered, construed and
enforced according to the laws of the State of Minnesota.
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers thereunto duly authorized in
multiple counterparts, each of which shall be an original but all of which shall
constitute one of the same instrument.
PIPER CAPITAL MANAGEMENT
INCORPORATED
By
------------------------------
Name:
Title:
SALOMON BROTHERS ASSET
MANAGEMENT INC
By
------------------------------
Name:
Title:
<PAGE>
APPENDIX IV
SUB-ADVISORY AGREEMENT
Agreement, dated as of _________________, 1998, by and between
Piper Capital Management Incorporated (the "Adviser"), a Delaware corporation,
and Federated Advisers, a Delaware business trust (the "Sub-Adviser").
WHEREAS, the Adviser is the investment adviser to Highlander
Income Fund Inc. (the "Company"), a closed-end management investment company;
and
WHEREAS, the Adviser desires to retain the Sub-Adviser to
assist the Adviser in furnishing an investment program to the Company with
respect to the Company's investments in fixed income securities rated in the
lower rating categories of any nationally recognized statistical rating
organization or unrated securities determined by the Sub-Adviser to be of
comparable quality ("Lower-Rated Fixed Income Securities").
NOW, THEREFORE, in consideration of the mutual agreements
herein made, the Adviser and the Sub-Adviser agree as follows:
1. The Adviser hereby employs the Sub-Adviser to serve as sub-adviser
with respect to the assets of the Company to be invested in Lower-Rated Fixed
Income Securities, as allocated to the Sub-Adviser by the Adviser, and to
perform the services hereinafter set forth. The Sub-Adviser hereby accepts such
employment and agrees, for the compensation herein provided, to assume all
obligations herein set forth and to bear all expenses of its performance of such
obligations (but no other expenses). The Sub-Adviser shall not be required to
pay expenses of the Company, including, but not limited to (a) brokerage and
commission expenses; (b) federal, state, local and foreign taxes, including
issue and transfer taxes incurred by or levied on the Company; (c) interest
charges on borrowings; (d) the Company's organizational and offering expenses,
whether or not advanced by the Adviser; (e) the cost of other personnel
providing services to the Company; (f) fees and expenses of registering or
otherwise qualifying the shares of the Company under applicable state securities
laws; (g) fees and expenses of listing and maintaining the listing of the
Company's shares on the principal exchanges where listed or, if the Company's
shares are not so listed, fees and expenses of listing and maintaining the
quotation of the Company's shares on the principal over-the-counter market where
traded; (h) expenses of printing and distributing reports to shareholders; (i)
costs of shareholders' meetings and proxy solicitation; (j) charges and expenses
of the Company's Administrator, custodian and registrar, transfer agent and
dividend disbursing agent; (k) compensation of the Company's officers, directors
and employees that are not Affiliated Persons or Interested Persons (as defined
in Section 2(a)(19) of the Investment Company Act of 1940, as amended (the "1940
Act"), and the rules, regulations and releases relating thereto) of the Adviser;
(l) legal and auditing expenses; (m) costs of certificates representing common
shares
<PAGE>
of the Company; (n) costs of stationery and supplies; (o) insurance expenses;
(p) association membership dues; (q) the fees and expenses of registering the
Company and its shares with the Securities and Exchange Commission; (r) travel
expenses of officers and employees of the Sub-Adviser to the extent such
expenses relate to the attendance of such persons at meetings at the request of
the Board of Directors of the Company; (r) all other charges and costs of the
Company's operation unless otherwise explicitly provided herein. The Sub-Adviser
shall for all purposes herein be deemed to be an independent contractor and
shall, except as expressly provided or authorized (whether herein or otherwise),
have no authority to act for or on behalf of the Company in any way or otherwise
be deemed an agent of the Company.
2. The Sub-Adviser shall direct the Company's investments in Lower-
Rated Fixed Income Securities in accordance with applicable law and the
investment objective, policies and restrictions set forth in the Company's
Prospectus and Statement of Additional Information filed with the Securities and
Exchange Commission pursuant to Rule 497 under the Securities Act of 1933,
subject to the supervision of the Company, its officers and directors, and the
Adviser and in accordance with the investment objectives, policies and
restrictions from time to time prescribed by the Board of Directors of the
Company and communicated by the Adviser to the Sub-Adviser and subject to such
further limitations as the Adviser may from time to time impose by written
notice to the Sub-Adviser.
3. The Sub-Adviser shall formulate and implement a continuing program
for the management of the Company's investments in Lower-Rated Fixed Income
Securities. The Sub-Adviser shall amend and update such program from time to
time as financial and other economic conditions warrant. The Sub-Adviser shall
make all determinations with respect to the Company's investments in Lower-Rated
Fixed Income Securities and shall take such steps as may be necessary to
implement the same, including the placement of purchase and sale orders on
behalf of the Company.
4. The Sub-Adviser shall furnish such reports to the Adviser as the
Adviser may reasonably request for the Adviser's use in discharging its
obligations under the Investment Advisory and Management Agreement between the
Company and the Adviser (the "Advisory Agreement"), which reports may be
distributed by the Adviser to the Company's Board of Directors at periodic
meetings of the Board and at such other times as may be reasonably requested by
the Board of Directors. Copies of all such reports shall be furnished to the
Adviser for examination and review within a reasonable time prior to the
presentation of such reports to the Company's Board of Directors.
5. The Sub-Adviser shall select the brokers and dealers that will
execute the purchases and sales of Lower-Rated Fixed Income Securities for the
Company and markets on or in which such transactions will be executed and shall
place, in the name of the Company or its nominee, all such orders.
<PAGE>
(a) When placing such orders, the Sub-Adviser shall use its
best efforts to obtain the best available price and most favorable and
efficient execution for the Company. Where best price and execution may
be obtained from more than one broker or dealer, the Sub-Adviser may,
in it discretion, purchase and sell securities through brokers or
dealers who provide research, statistical and other information to the
Sub-Adviser. It is understood that such services may be used by the
Sub-Adviser for all of its investment advisory accounts and
accordingly, not all such services may be used by the Sub-Adviser in
connection with the Company.
It is understood that certain other clients of the Sub-Adviser
may have investment objectives and policies similar to those of the
Company, and that the Sub-Adviser may, from time to time, make
recommendations that result in the purchase or sale of a particular
security by its other clients simultaneously with the Company. If
transactions on behalf of more than one client during the same period
increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price or
quantity. In such event, the Sub-Adviser shall allocate advisory
recommendations and the placing of orders in a manner that is deemed
equitable by the Sub-Adviser to the accounts involved, including the
Company. When two or more of the clients of the Sub-Adviser (including
the Company) are purchasing or selling the same security on a given day
from the same broker or dealer, such transactions may be averaged as to
price.
(b) The Sub-Adviser agrees that, except to the extent
permitted under Rule 17a-7 under the 1940 Act, or under any no-action
letter or exemptive order issued to the Company by the Securities and
Exchange Commission, it will not purchase or sell securities for the
Company in any transaction in which it, the Adviser or any "affiliated
person" of the Company, the Adviser or Sub-Adviser or any "affiliated
person" of such "affiliated person" is acting as principal. The
Sub-Adviser agrees that any transactions effected under Rule 17a-7
shall comply with the then-effective procedures adopted under such rule
by the Company's Board of Directors.
(c) The Sub-Adviser agrees that it will not execute any
portfolio transactions for the Company with a broker or dealer or
futures commission merchant which is an "affiliated person" of the
Company, the Adviser or the Sub-Adviser or an "affiliated person" of
such an "affiliated person" without the prior written consent of the
Adviser. Notwithstanding the foregoing, transactions may be effected
through Piper Jaffray Inc. if commissions, fees or other remuneration
received are reasonable and fair compared to the commissions, fees or
other remuneration paid to other brokers or dealers or other futures
commission merchants in connection with comparable transactions
involving similar securities or similar futures contracts or options
thereon being purchased or sold on an exchange or contract market
during a comparable period of time. In effecting such transactions, the
Sub-Adviser shall comply with Section 17(e)(1) of the 1940 Act and the
then-
<PAGE>
effective procedures adopted under such rule by the Company's Board of
Directors.
(d) The Sub-Adviser shall promptly communicate to the Adviser
and, if requested by the Adviser, to the Company's Board of Directors,
such information relating to portfolio transactions as the Adviser may
reasonably request. The parties understand that the Company shall bear
all brokerage commissions in connection with the purchases and sales of
portfolio securities for the Company and all ordinary and reasonable
transaction costs in connection with purchases of such securities in
private placements and subsequent sales thereof.
6. The Sub-Adviser may (at its cost except as contemplated by paragraph
5 of this Agreement) employ, retain or otherwise avail itself of the services
and facilities of persons and entities within its own organization or any other
organization for the purpose of providing the Sub-Adviser, the Adviser or the
Company with such information, advice or assistance, including but not limited
to advice regarding economic factors and trends and advice as to transactions in
specific securities, as the Sub-Adviser may deem necessary, appropriate or
convenient for the discharge of its obligations hereunder or otherwise helpful
to the Adviser or the Company, or in the discharge of the Sub-Adviser's overall
responsibilities with respect to the other accounts for which it serves as
investment manager or investment adviser.
7. The Sub-Adviser shall cooperate with and make available to the
Adviser, the Company and any agents engaged by the Company, the Sub-Adviser's
expertise relating to matters affecting the Company.
8. For the services to be rendered under this Agreement, and the
facilities to be furnished for each fiscal year of the Company, the Adviser
shall pay to the Sub-Adviser a monthly management fee at the annual rate of .30
of 1% of the Company's average weekly net assets during each month, as
calculated below.
For purposes of the calculation of such fee, average weekly
net assets shall be determined on the basis of the Company's average net assets
for each weekly period (ending on Friday) ending during the month. The net
assets for each weekly period are determined by averaging the net assets on the
Friday of such weekly period with the net assets on the Friday of the
immediately preceding weekly period. When a Friday is not a business day for the
Company, then the calculation will be based on the Company's net assets on the
business day immediately preceding such Friday. Such fee shall be payable on the
fifth day of each calendar month for services performed hereunder during the
preceding month. If this Agreement becomes effective subsequent to the first day
of a month or shall terminate before the last day of a month, compensation for
that part of the month during which this Agreement is in effect shall be
prorated in a manner consistent with the calculation of fees as set forth above.
<PAGE>
Anything to the contrary herein notwithstanding, the
Sub-Adviser may at any time and from time to time waive any part or all of any
fee payable to it pursuant to this Agreement.
9. The Sub-Adviser represents, warrants and agrees that:
(a) The Sub-Adviser is registered as an "investment adviser"
under the Investment Advisers Act of 1940 ("Advisers Act") and is
currently in compliance and shall at all times continue to comply with
the requirements imposed upon it by the Advisers Act and other
applicable laws and regulations. The Sub-Adviser agrees to (i) supply
the Adviser with such documents as the Adviser may reasonably request
to document compliance with such laws and regulations and (ii)
immediately notify the Adviser of the occurrence of any event which
would disqualify the Sub-Adviser from serving as an investment adviser
of a registered investment company pursuant to any applicable law or
regulation.
(b) The Sub-Adviser will maintain, keep current and preserve
on behalf of the Company all records required or permitted by the 1940
Act in the manner provided by such Act. The Sub-Adviser agrees that
such records are the property of the Company, and will be surrendered
to the Company promptly upon request.
(c) The Sub-Adviser will complete such reports concerning
purchases or sales of securities on behalf of the Company as the
Adviser or the Company's administrator may from time to time require to
document compliance with the 1940 Act, the Advisers Act, the Internal
Revenue Code, applicable state securities laws and other applicable
laws and regulations or regulatory and taxing authorities in countries
other than the United States.
(d) After filing with the Securities and Exchange Commission
any amendment to its Form ADV, the Sub-Adviser will promptly furnish a
copy of such amendment to the Adviser.
(e) The Sub-Adviser will immediately notify the Adviser of the
occurrence of any event which would disqualify the Sub-Adviser from
serving as an investment adviser of an investment company pursuant to
Section 9 of the 1940 Act or any other applicable statute or
regulation.
10. The Adviser represents, warrants and agrees that:
(a) It has been duly authorized by the Board of Directors of
the Company to delegate to the Sub-Adviser the provision of the
services contemplated hereby.
<PAGE>
(b) The Adviser and the Company are currently in compliance
and shall at all times continue to comply with the requirements imposed
upon the Adviser and the Company by applicable law and regulations.
11. The Sub-Adviser will not be liable for any error of judgment or
mistake of law or for any loss suffered by the Company or its shareholders in
connection with the performance of its duties under this Agreement, except a
loss resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
duties under this Agreement.
12. This Agreement shall become effective as of the date first set
forth above. Wherever referred to in this Agreement, the vote or approval of the
holders of a majority of the outstanding voting securities or shares of the
Company shall mean the vote of 67% or more of such shares if the holders of more
than 50% of such shares are present in person or by proxy or the vote of more
than 50% of such shares, whichever is less.
Unless sooner terminated as hereinafter provided, this
Agreement shall continue in effect for a period of two years from the date of
its execution, and thereafter shall continue in effect only so long as such
continuance is specifically approved at least annually (a) by the Board of
Directors of the Company or by the vote of a majority of the outstanding voting
securities of the Company, and (b) by the vote of a majority of the directors
who are not parties to this Agreement or Interested Persons of any such parties,
cast in person at a meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time without the
payment of any penalty (a) by the vote of the Board of Directors of the Company
or by the vote of the holders of a majority of the outstanding voting securities
of the Company, upon 60 days' written notice to the Adviser and the Sub-Adviser,
or (b) by the Adviser, upon 60 days' written notice to the Sub-Adviser; or (c)
by the Sub-Adviser, upon 60 days' written notice to the Adviser. This Agreement
shall automatically terminate in the event of its assignment as defined in the
1940 Act and the rules thereunder. This Agreement shall automatically terminate
upon completion of the dissolution, liquidation or winding up of the Company.
13. No amendment to or modification of this Agreement shall be
effective unless and until approved by the vote of a majority of the outstanding
shares of the Company.
14. This Agreement shall be binding upon, and inure to the benefit of,
the Adviser and the Sub-Adviser, and their respective successors.
15. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby.
<PAGE>
16. To the extent that state law is not preempted by the provisions of
any law of the United States heretofore or hereafter enacted, as the same may be
amended from time to time, this Agreement shall be administered, construed and
enforced according to the laws of the State of Minnesota.
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers thereunto duly authorized in
multiple counterparts, each of which shall be an original but all of which shall
constitute one of the same instrument.
PIPER CAPITAL MANAGEMENT
INCORPORATED
By
---------------------------
Name:
Title:
FEDERATED ADVISERS
By
---------------------------
Name:
Title:
<PAGE>
APPENDIX V
PRINCIPAL EXECUTIVE OFFICER AND DIRECTORS OF
THE ADVISERS AND SUB-ADVISERS
PIPER CAPITAL MANAGEMENT INCORPORATED
The directors and the principal executive officers of Piper Capital are
listed below, together with their addresses and principal occupations.
<TABLE>
<CAPTION>
Positions and Offices Other Positions and Offices
Name with Piper Capital and Principal Business Address
- ---- ------------------ ------------------------------
<S> <C> <C>
Paul A. Dow Chief Executive Officer and *
Chief Investment Officer
Deborah K. Roesler Director Chief Financial Officer/Treasurer
of Piper Jaffray Companies Inc.*
Paula R. Meyer Director and President *
Keith A. Kale Director Director of Marketing for
Piper Jaffray Inc.*
</TABLE>
- ------------------------------
* Address: 222 South Ninth Street, Minneapolis, Minnesota 55402-3804
SALOMON BROTHERS ASSET MANAGEMENT INC.
The directors and the principal executive officers of Salomon are
listed below, together with their addresses and principal occupations.
<TABLE>
<CAPTION>
Positions and Offices Other Positions and Offices
Name with Salomon Brothers Inc. and Principal Business Address
- ---- -------------------------- ------------------------------
<S> <C> <C>
Thomas W. Brock Chairman, Chief Executive Officer Managing Director and Member of the
and Managing Director of Salomon Management Board of Salomon
Brothers Inc.*
Michael S. Hyland President, Managing Director and Managing Director of Salomon
Member of the Board of Salomon Brothers Inc.*
Rodney B. Berens Managing Director and Member of Managing Director and Member of
the Board of Salomon the Management Board of Salomon
Brothers Inc.*
Vilas V. Gadkari Managing Director and Member of Managing Director of Salomon
the Board of Salomon Brothers Inc. **
Zachary Snow Secretary of Salomon Managing Director and Counsel of
Salomon Brothers Inc. *
</TABLE>
- ------------------------------
* Address: 7 World Trade Center, New York, New York 10048
** Address: Victoria Plaza, 111 Buckingham Palace Road, London,
England SWIW OSB
<PAGE>
FEDERATED ADVISERS
The directors and the principal executive officers of Federated are
listed below, together with their addresses and principal occupations.
<TABLE>
<CAPTION>
Positions and Offices Other Positions and Offices
Name with Federated Advisers and Principal Business Address
- ---- ----------------------- ------------------------------
<S> <C> <C>
J. Christopher Donahue President and Trustee President and Trustee of Federated
Investors ("FI"), Federated Management
("FM"), and Federated Research ("FR");
President and Director of Federated
Research Corp. ("FRC") and Federated
Global Research Corp; ("FGRC")
Trustee of Federated Shareholder
Services Company ("FSSC") and
Federated Shareholder Services ("FSS");
and Director of Federated Services
Company ("FS Co.") *
Edward C. Gonzales Vice President Vice Chairman, Treasurer, and Trustee
of FI; Vice President of FM, FR, FRC,
FGRC; Executive Vice President and
Director of Federated Securities Corp.
("FSC"); Trustee of FSSC *
John F. Donahue Chairman and Trustee Chairman and Trustee of FI, FM, and
FR; Chairman and Director of FRC and
FGRC *
John W. McGonigle Trustee Executive Vice President, Secretary and
Trustee of FI; Trustee of FM, and FR;
Director of FRC and FGRC; Trustee of
FSSC; Director of FSC; President and
Trustee of FSS; Director of FSC *
</TABLE>
- ------------------------------
* Address: Federated Investors Tower, Pittsburg, Pennsylvania 15222-3779
<PAGE>
APPENDIX VI
AGREEMENT AND PLAN OF REORGANIZATION
BY AND BETWEEN
FIRST AMERICAN INVESTMENT FUNDS, INC.
AND
THE AMERICAS INCOME TRUST INC.
AND
HIGHLANDER INCOME FUND INC.
DATED: AS OF __________ __, 1998
TABLE OF CONTENTS
SECTION PAGE
- ------- ----
1. CONVEYANCE OF ASSETS OF THE PIPER FUNDS........................... 2
2. LIQUIDATION OF THE PIPER FUNDS.................................... 3
3. EFFECTIVE TIME OF THE REORGANIZATION.............................. 3
4. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF
THE PIPER FUNDS................................................... 6
5. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF FAIF........ 8
6. SHAREHOLDER ACTION................................................ 8
7. REGULATORY FILINGS................................................ 8
8. AMENDMENT FILING.................................................. 8
9. FAIF CONDITIONS................................................... 8
10. THE PIPER FUNDS CONDITIONS........................................ 11
11. FURTHER ASSURANCES................................................ 12
12. INDEMNIFICATION................................................... 12
13. SURVIVAL OF REPRESENTATIONS AND WARRANTIES........................ 13
14. TERMINATION OF AGREEMENT.......................................... 13
15. AMENDMENT AND WAIVER.............................................. 13
16. GOVERNING LAW..................................................... 13
17. SUCCESSORS AND ASSIGNS............................................ 13
18. BENEFICIARIES..................................................... 13
19. BROKERAGE FEES AND EXPENSES....................................... 13
20. NOTICES........................................................... 13
21. ANNOUNCEMENTS..................................................... 14
22. ENTIRE AGREEMENT.................................................. 14
23. COUNTERPARTS...................................................... 14
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this ____ day of _____, 1998 by and between The Americas Income Trust Inc., a
Minnesota corporation ("XUS"), Highlander Income Fund Inc., a Minnesota
corporation ("HLA" and collectively with XUS the "Piper Funds") and First
American Investment Funds, Inc. ("FAIF"), a Maryland corporation consisting of
multiple investment portfolios including, among others, Strategic Income Fund
(the "FAIF Fund").
WHEREAS, each of the Piper Funds is a closed-end management investment
company and FAIF is an open-end management investment company, each registered
with the Securities and Exchange Commission (the "SEC") under the Investment
Company Act of 1940, as amended (the "1940 Act");
<PAGE>
WHEREAS, the parties desire that the assets and liabilities of the
Piper Funds be conveyed to, and be acquired and assumed by, the FAIF Fund, in
exchange for shares of the FAIF Fund which shall thereafter promptly be
distributed by the Piper Funds to the shareholders of the Piper Funds in
connection with their liquidation as described in this Agreement (the
"Reorganization");
WHEREAS, the parties intend that the FAIF Fund shall have nominal
assets and liabilities before the Reorganization and shall continue the
investment operations of the Piper Funds thereafter, and that in this regard
certain actions shall be taken as described in this Agreement;
WHEREAS, FAIF also maintains twenty-eight additional investment
portfolios -- Micro Cap Value Fund, Regional Equity Fund, Small Cap Value Fund,
Mid Cap Value Fund, Equity Income Fund, Equity Index Fund, Health Sciences Fund,
Real Estate Securities Fund, Technology Fund, Emerging Markets Fund,
International Fund, International Index Fund, Minnesota Intermediate Tax Free
Fund, California Intermediate Tax Free Fund, Colorado Intermediate Tax Free
Fund, Intermediate Tax Free Fund, Limited Term Income Fund, Intermediate
Government Bond Fund, Small Cap Growth Fund, Mid Cap Growth Fund, Large Cap
Growth Fund, Large Cap Value Fund, Balanced Fund, Intermediate Term Income Fund,
Fixed Income Fund, Tax Free Fund, Minnesota Tax Free Fund and ADjustable Rate
Mortgage Securities Fund -- that are not parties to the Reorganization.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth and subject to the terms and conditions hereof, the
parties hereto, intending to be legally bound, agree as follows:
1. CONVEYANCE OF ASSETS OF THE PIPER FUNDS. (a) At the Effective Time
of the Reorganization, as defined in Section 3, all assets of every kind, and
all interests, rights, privileges and powers of the Piper Funds, subject to all
liabilities of the Piper Funds, whether accrued, absolute, contingent or
otherwise existing as of the Effective Time of the Reorganization, which
liabilities shall include any obligation of a Piper Fund to indemnify the
directors and officers of such Piper Fund, acting in their capacities as such,
to the fullest extent permitted by law and the Articles of Incorporation of the
applicable Piper Fund as in effect on the date hereof (such assets subject to
such liabilities are herein referred to as the "Fund Assets"), shall be
transferred and conveyed by the Piper Funds to the FAIF Fund and shall be
accepted and assumed by the FAIF Fund as more particularly set forth in this
Agreement, such that at and after the Effective Time of the Reorganization: (i)
all assets of each Piper Fund shall become and be the assets of the FAIF Fund;
and (ii) all liabilities of each Piper Fund shall attach to the FAIF Fund as
aforesaid and may thenceforth be enforced against the FAIF Fund to the same
extent as if incurred by it.
(b) Without limiting the generality of the foregoing, it is understood
that the Fund Assets shall include all property and assets of any nature
whatsoever, including, without limitation, all cash, cash equivalents,
securities, claims (whether absolute or contingent, known or unknown, accrued or
unaccrued) and receivables (including dividend and interest receivables) owned
by each Piper Fund, and any deferred or prepaid expenses shown as an asset on
each Piper Fund's books, at the Effective Time of the Reorganization, and all
goodwill, all other intangible property and all books and records belonging to
the Piper Funds. Notwithstanding anything herein to the contrary, FAIF shall not
be deemed to have assumed any liability of a Piper Fund to FAIF that arises as a
result of the breach of any of the representations, warranties and agreements of
the Piper Funds set forth in Section 4, hereof.
(c) In exchange for the transfer of the Fund Assets, the FAIF Fund
shall simultaneously issue to the Piper Funds at the Effective Time of the
Reorganization full and fractional shares of common stock in the FAIF Fund
having an aggregate net asset value equal to the net value of the Fund Assets so
conveyed, all determined and adjusted as provided in this Section 1. In
particular, the FAIF Fund shall deliver to each Piper Fund the number of shares,
including fractional shares, determined by dividing the value of the Fund Assets
of such Piper Fund that are so conveyed, computed in the manner and as of
<PAGE>
the time and date set forth in this Section, by the net asset value of one FAIF
Fund share, computed in the manner and as of the time and date set forth in this
Section.
(d) The net asset value of shares to be delivered by the FAIF Fund, and
the net value of the Fund Assets to be conveyed by each Piper Fund, shall, in
each case, be determined as of the Effective Time of the Reorganization. The net
asset value of shares of the FAIF Fund shall be computed in the manner set forth
in the FAIF Fund's then current prospectuses under the Securities Act of 1933,
as amended (the "1933 Act"). The net value of the Fund Assets to be transferred
by each Piper Fund shall be computed by such Piper Fund and shall be subject to
adjustment by the amount, if any, agreed to by FAIF and such Piper Fund. In
determining the value of the securities transferred by the Piper Funds to the
FAIF Fund, each security shall be priced in accordance with the pricing policies
and procedures of the Piper Funds as previsously adopted by the Piper Funds.
For such purposes, price quotations and the security characteristics relating to
establishing such quotations shall be determined by the Piper Funds, provided
that such determination shall be subject to the approval of FAIF. The Piper
Funds and FAIF agree to use all commercially reasonable efforts to resolve any
material pricing differences between the prices of portfolio securities
determined in accordance with the pricing policies and procedures of the Piper
Funds and those determined in accordance with the pricing policies and
procedures of FAIF prior to the Effective Time of the Reorganization.
2. LIQUIDATION OF THE PIPER FUNDS. At the Effective Time of the
Reorganization, each Piper Fund shall make a liquidating distribution to its
shareholders as follows. Shareholders of record of a Piper Fund shall be
credited with full and fractional shares of the common stock that is issued by
the FAIF Fund in connection with the Reorganization. In addition, each
shareholder of record of a Piper Fund shall have the right to receive any unpaid
dividends or other distributions which were declared before the Effective Time
of the Reorganization with respect to the shares of such Piper Fund that are
held by the shareholder at the Effective Time of the Reorganization. As soon as
practicable after the Effective Time, Investors Fiduciary Trust Company
("IFTC"), the transfer agent for the Piper Funds will send a notice and
transmittal form to each record holder of a common share of one of the Piper
Funds at the Effective Time advising such holder of the effectiveness of the
Reorganization and of the procedure for surrendering to IFTC his or her
certificates formerly evidencing common shares of such Piper Fund. Ownership of
the FAIF Fund shares by former shareholders of the Piper Funds will be recorded
in book-entry form, and the FAIF Fund will issue confirmations to such
shareholder setting forth the number and net asset value of the FAIF Fund common
shares held by such shareholders. Fractional shares of the FAIF Fund will be
carried to the third decimal place. The FAIF Fund will not issue share
certificates. Any share certificates not submitted to IFTC within three months
of the Effective Time will be automatically deemed submitted and then canceled
and recorded in book-entry form. After the Effective Time of the Reorganization,
the Piper Funds shall wind up their affairs and shall file any final regulatory
reports, including but not limited to any Form N-SAR filing with respect to each
Piper Fund and an application pursuant to Section 8(f) of the 1940 Act for an
order declaring that each Piper Fund has ceased to be an investment company.
3. EFFECTIVE TIME OF THE REORGANIZATION. (a) Delivery of the Fund
Assets and the shares of the FAIF Fund to be issued pursuant to Section 1 and
the liquidation of the Piper Funds pursuant to Section 2 (the "Closing") shall
occur as of the close of normal trading on the New York Stock Exchange (the
"Exchange") (currently, 4:00 p.m. Eastern time), and after the declaration of
any dividends or distributions on such date, on July 31, 1998, or at such time
on such later date as provided herein or as the parties otherwise may agree in
writing. (The date and time at which such actions are taken are referred to
herein as the "Effective Time of the Reorganization.") To the extent any Fund
Assets are, for any reason, not transferred at the Effective Time of the
Reorganization, Piper shall cause such Fund Assets to be transferred in
accordance with this Agreement at the earliest practicable date thereafter. All
acts taking place at the Closing shall be deemed to take place simultaneously as
of the Effective Time of the Reorganization unless otherwise agreed to by the
parties. The Closing shall be held at the offices of Dorsey & Whitney LLP, 220
South Sixth Street, Minneapolis, Minnesota 55402, or at such other place as the
parties may agree.
(b) In the event the Effective Time of the Reorganization occurs on a
day on which (i) the Exchange or another primary trading market for portfolio
securities of the FAIF Fund or the Piper Funds shall be closed to trading or
trading thereon shall be restricted, or (ii) trading or the reporting of trading
on the Exchange or elsewhere shall be disrupted so that accurate appraisal of
the value of the net assets of the FAIF Fund or the Piper Funds is
impracticable, the Effective Time of the
<PAGE>
Reorganization shall be postponed until the close of normal trading on the
Exchange on the first business day when trading shall have been fully resumed
and reporting shall have been restored.
4. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE PIPER
FUNDS. Each Piper Fund, on behalf of itself, represents and warrants to, and
agrees with, FAIF as follows:
(a) It is a Minnesota corporation duly created pursuant to its
Articles of Incorporation for the purpose of acting as a management
investment company under the 1940 Act, and is validly existing under
the laws of the State of Minnesota. It is registered as an closed-end
management investment company under the 1940 Act, and its registration
with the SEC as an investment company is in full force and effect.
(b) It has the power to own all of its properties and assets
and, subject to the approvals of shareholders referred to in Section 6,
to carry out and consummate the transactions contemplated herein, and
has all necessary federal, state and local authorizations to carry on
its business as now being conducted and, except as stated in Section
4(j), below, to consummate the transactions contemplated by this
Agreement.
(c) This Agreement has been duly authorized, executed and
delivered by it, and represents a valid and binding contract,
enforceable in accordance with its terms, subject as to enforcement to
bankruptcy, insolvency, reorganization, moratorium or other similar
laws of general application relating to or affecting creditors' rights
and to the application of general principles of equity. The execution
and delivery of this Agreement does not, and, subject to the approval
of shareholders referred to in Section 6, the consummation of the
transactions contemplated by this Agreement will not, violate its
Articles of Incorporation or By-Laws or any agreement or arrangement to
which it is a party or by which it is bound.
(d) It has elected to qualify and has qualified as a regulated
investment company under Part I of Subchapter M of Subtitle A, Chapter
1, of the Internal Revenue Code of 1986, as amended (the "Code"), as of
and since its first taxable year; it has been a regulated investment
company under such Part of the Code at all times since the end of its
first taxable year when it so qualified; and it qualifies and shall
continue to qualify as a regulated investment company for its taxable
year ending upon its liquidation.
(e) (1) For XUS, the audited financial statements for its
fiscal year ended October 31, 1997 and unaudited financial statements
for the period ended April 30, 1998, copies of which have been
previously furnished to FAIF, present fairly the financial position of
XUS as of such dates and the results of its operations and changes in
its net assets for the periods indicated, in conformity with generally
accepted accounting principles applied on a consistent basis. To the
best of the knowledge of XUS, there are no liabilities of a material
amount of XUS, whether accrued, absolute, contingent or otherwise
existing, other than: (i) as of April 30, 1998, liabilities disclosed
or provided for in the unaudited financial statements for the period
ended April 30, 1998 and liabilities incurred in the ordinary course of
business subsequent to April 30, 1998 and (ii) as of the Effective Time
of the Reorganization, liabilities disclosed or provided for in the
statement of assets and liabilities of XUS that is delivered to FAIF
pursuant to Section 8(b) of this Agreement and liabilities incurred in
the ordinary course of business.
(2) For HLA, the audited financial statements for its fiscal
year ended February 28, 1998, copies of which have been previously
furnished to FAIF, present fairly the financial position of HLA as of
such dates and the results of its operations and changes in its net
assets for the periods indicated, in conformity with generally accepted
accounting principles applied on a consistent basis. To the best of the
knowledge of HLA, there are no liabilities of a material amount of HLA,
whether accrued, absolute, contingent or otherwise existing, other
than: (i) as of February 28, 1998, liabilities disclosed or provided
for in the audited financial
<PAGE>
statements for the period ended February 28, 1998 and liabilities
incurred in the ordinary course of business subsequent to February 28,
1998 and (ii) as of the Effective Time of the Reorganization,
liabilities disclosed or provided for in the statement of assets and
liabilities of XUS that is delivered to FAIF pursuant to Section 8(b)
of this Agreement and liabilities incurred in the ordinary course of
business.
(f) Since the end of its most recently concluded fiscal year,
there have been no material changes by it in accounting methods,
principles or practices, including those required by generally accepted
accounting principles, except as disclosed in writing to FAIF.
(g) It has valued, and will continue to value, its portfolio
securities and other assets in accordance with applicable legal
requirements.
(h) Except as disclosed in its most recent Annual Report or as
otherwise disclosed in writing to FAIF, there are no material legal,
administrative or other proceedings pending or, to its knowledge,
threatened, against it which could result in liability on its part and
it knows of no facts that might form the basis of a legal,
administrative or other proceeding which, if adversely determined,
would materially and adversely affect its financial condition or the
conduct of its business and it is not a party to or subject to the
provisions of any order, decree or judgment of any court or
governmental body that materially and adversely affects, or is
reasonably likely to materially and adversely affect, its business or
its ability to consummate the transactions contemplated herein.
(i) At the Effective Time of the Reorganization, all federal
and other tax returns and reports of the Piper Fund required by law to
have been filed by such time shall have been filed, and all federal and
other taxes shall have been paid so far as due, or provision shall have
been made for the payment thereof and, to the best of its knowledge, no
such return or report shall be currently under audit and no assessment
shall have been asserted with respect to such returns or reports.
(j) Subject to the approvals of shareholders referred to in
Section 6, at the Effective Time of the Reorganization, it shall have
full right, power and authority to sell, assign, transfer and deliver
the Fund Assets and, upon delivery and payment for the Fund Assets as
contemplated herein, the FAIF Fund shall acquire good and marketable
title thereto, subject to no restrictions on the ownership or transfer
thereof, except as imposed by federal or state securities laws or as
disclosed to FAIF in writing prior to the Effective Time of the
Reorganization.
(k) No consent, approval, authorization or order of any court
or governmental authority is required for the consummation by it of the
transactions contemplated by this Agreement, except such as may be
required under the 1933 Act, the Securities Exchange Act of 1934, as
amended (the "1934 Act"), the 1940 Act, the rules and regulations under
those Acts, or state securities laws, all of which shall have been
received prior to the Effective Time of the Reorganization, except for
such consents, approvals, authorizations or orders as may be required
subsequent to the Effective Time of the Reorganization.
(l) Insofar as the following relate to it, (i) the
registration statement filed by FAIF on Form N-14 relating to the
shares of the FAIF Fund that will be registered with the SEC pursuant
to this Agreement, which shall include or incorporate by reference the
proxy statement of the Piper Funds and prospectus of the FAIF Fund with
respect to the transactions contemplated by this Agreement, and any
supplement or amendment thereto or to the documents contained or
incorporated therein by reference (the "N-14 Registration Statement"),
and (ii) the proxy materials of the Piper Funds included in the N-14
Registration Statement and filed
<PAGE>
with the SEC pursuant to Section 14(a) of the 1934 Act and Section
20(a) of the 1940 Act with respect to the transactions contemplated by
this Agreement, and any supplement or amendment thereto or the
documents appended thereto (the "Reorganization Proxy Materials"), from
their respective effective and clearance dates with the SEC, through
the time of the shareholders meeting referred to in Section 6 and at
the Effective Time of the Reorganization: (i) shall comply in all
material respects with the provisions of the 1933 Act, 1934 Act and the
1940 Act, and the rules and regulations thereunder, and (ii) shall not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, that the representations
and warranties made by it in this subsection shall not apply to
statements in or omissions from the N-14 Registration Statement or the
Reorganization Proxy Materials made in reliance upon and in conformity
with information furnished by or on behalf of FAIF for use therein as
provided in Section 7. For these purposes, information shall be
considered to have been provided "on behalf" of FAIF if furnished by
its investment adviser, administrator, custodian or transfer agent,
acting in their capacity as such.
(m) All of its issued and outstanding shares have been validly
issued and are fully paid and non-assessable, and were offered for sale
and sold in conformity with the registration requirements of all
applicable federal and state securities laws.
(n) It shall not sell or otherwise dispose of any shares of
the FAIF Fund to be received in the transactions contemplated herein,
except in distribution to its shareholders as contemplated herein.
(o) It shall operate its business in the ordinary course
between the date hereof and the Effective Time of the Reorganization.
It is understood that such ordinary course of business will include the
declaration and payment of customary dividends and distributions and
any other dividends and distributions deemed advisable.
(p) Any reporting responsibility of the Piper Fund is and
shall remain the responsibility of the Piper Fund for all periods
before and including the Effective Time of the Reorganization and such
later date on which the Piper Fund is terminated.
(q) Except for agreements or other arrangements relating to
the purchase and sale of portfolio securities, it has furnished FAIF
with copies or descriptions of all contracts to which it is a party.
(r) It shall provide a list of all portfolio securities held
by it to FAIF at least fifteen days before the Effective Time of the
Reorganization and shall immediately notify FAIF's investment adviser
of any portfolio security thereafter acquired or sold by it. At the
Effective Time of the Reorganization, it shall not hold any portfolio
security that is impermissible under the investment policies,
objectives and limitations of the FAIF Fund.
5. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF FAIF. FAIF, on
behalf of the FAIF Fund, represents and warrants to, and agrees with, Piper as
follows:
(a) It is a Maryland corporation duly created pursuant to its
Articles of Incorporation for the purpose of acting as a management
investment company under the 1940 Act, and is validly existing under
the laws of the State of Maryland. It is registered as an open-end
management investment company under the 1940 Act and its registration
with the SEC as an investment company is in full force and effect.
<PAGE>
(b) It has the power to own all of its properties and assets
and to consummate the transactions contemplated herein, and has all
necessary federal, state and local authorizations to carry on its
business as now being conducted and, except as stated in Section 5(j)
below, to consummate the transactions contemplated by this Agreement.
(c) This Agreement has been duly authorized, executed and
delivered by it, and represents a valid and binding contract,
enforceable in accordance with its terms, subject as to enforcement to
bankruptcy, insolvency, reorganization, moratorium or other similar
laws of general application relating to or affecting creditors' rights
and to the application of general principles of equity. The execution
and delivery of this Agreement does not, and the consummation of the
transactions contemplated by this Agreement will not, violate FAIF's
Articles of Incorporation or By-Laws or any agreement or arrangement to
which it is a party or by which it is bound.
(d) The FAIF Fund intends to qualify as a regulated investment
company under Part I of Subchapter M of the Code.
(e) It will value its portfolio securities and other assets in
accordance with applicable legal requirements.
(f) There are no material contracts outstanding with respect
to the FAIF Fund that have not been disclosed in FAIF's current
registration statement and which under applicable law are required to
be disclosed therein.
(g) At the Effective Time of the Reorganization, all federal
and other tax returns and reports of the FAIF Fund required by law to
have been filed by such time shall have been filed, and all federal and
other taxes shall have been paid so far as due, or provisions shall
have been made for the payment thereof and, to the best knowledge of
the FAIF Fund, no such return or report shall be currently under audit
and no assessment shall have been asserted with respect to such returns
or reports.
(h) There are no material legal, administrative or other
proceedings pending or, to its knowledge threatened, against it or the
FAIF Fund which could result in liability on the part of FAIF or the
FAIF Fund and FAIF knows of no facts that might form the basis of a
legal, administrative or other proceeding which, if adversely
determined, would materially and adversely affect the FAIF Fund's
financial condition or the conduct of its business and FAIF is not a
party to or subject to the provisions of any order, decree or judgment
of any court or governmental body that materially and adversely
affects, or is reasonably likely to materially and adversely affect,
its business or its ability to consummate the transactions contemplated
herein.
(i) No consent, approval, authorization or order of any court
or governmental authority is required for the consummation by FAIF of
the transactions contemplated by this Agreement, except such as may be
required under the 1933 Act, the 1934 Act, the 1940 Act, the rules and
regulations under those Acts, or state securities laws, all of which
shall have been received prior to the Effective Time of the
Reorganization, except for such consents, approvals, authorizations or
orders as may be required subsequent to the Effective Time of the
Reorganization.
(j) The N-14 Registration Statement and the Reorganization
Proxy Materials, from their respective effective and clearance dates
with the SEC, through the time of the shareholders meeting referred to
in Section 6 and at the Effective Time of the Reorganization, insofar
as they relate to FAIF (i) shall comply in all material respects with
the provisions of the 1933 Act, the 1934 Act and the 1940 Act, and the
rules and regulations thereunder, and (ii)
<PAGE>
shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements made therein not misleading; provided, that the
representations and warranties in this subsection shall not apply to
statements in or omissions from the N-14 Registration Statement or the
Reorganization Proxy Materials made in reliance upon and in conformity
with information furnished by or on behalf of the Piper Funds for use
therein as provided in Section 7. For those purposes, information shall
be considered to have been provided "on behalf" of the Piper Funds if
furnished by their investment adviser, administrator, custodian or
transfer agent, acting in their capacity as such.
(k) The shares of the FAIF Fund to be issued and delivered to
the Piper Funds for the account of the shareholders of the Piper Funds,
pursuant to the terms hereof, shall have been duly authorized as of the
Effective Time of the Reorganization and, when so issued and delivered,
shall be duly and validly issued, fully paid and non-assessable, and no
shareholder of FAIF shall have any preemptive right of subscription or
purchase in respect thereto.
(l) All of the issued and outstanding shares of the FAIF Fund
have been validly issued and are fully paid and non-assessable, and
were offered for sale and sold in conformity with the registration
requirements of all applicable federal and state securities laws.
(m) It shall operate its business in the ordinary course
between the date hereof and the Effective Time of the Reorganization.
It is understood that such ordinary course of business will include the
declaration and payment of customary dividends and distributions and
any other dividends and distributions deemed advisable.
6. SHAREHOLDER ACTION. As soon as practicable after the effective date
of the N-14 Registration Statement and SEC clearance of the proxy solicitation
materials referred to in Section 7, but in any event prior to the Effective Time
of the Reorganization and as a condition thereto, the Board of Directors of the
Piper Funds shall call, and Piper shall hold, a meeting of the shareholders of
each Piper Fund for the purpose of considering and voting upon:
(a) a proposal, in connection with the merger between U.S.
Bancorp and Piper Jaffray Companies Inc., to ratify and approve an
investment advisory agreements between each Piper Fund and Piper
Capital Management Incorporated ("Piper Capital");
(b) a proposal, in connection with the merger between U.S.
Bancorp and Piper Jaffray Companies Inc., to ratify and approve a
sub-advisory agreement for XUS between Salomon Brothers Asset
Management Inc. and Piper Capital and for HLA between Federated
Advisors and Piper Capital;
(c) approval of this Agreement and the transactions
contemplated hereby; and
(d) such other matters as may be determined by the Boards of
Directors of Piper and FAIF.
7. REGULATORY FILINGS. FAIF shall file a post-effective amendment (the
"N-1A Post-Effective Amendment") to its registration statement on Form N-1A
(File Nos. 33-16905; 811-5309) with the SEC as promptly as practicable so that
the FAIF Fund and its shares are registered under the 1933 Act and 1940 Act and
shall take all required actions to qualify such shares for sale in the
appropriate states. In addition, FAIF shall file an N-14 Registration Statement,
which shall include the Reorganization Proxy Materials of the Piper Funds, with
the SEC, and with the appropriate state securities commissions, relating to the
matters described in Section 6 as promptly as practicable. FAIF and the Piper
Funds have cooperated and shall continue to cooperate with each other, and have
furnished and shall continue to furnish each other with the information relating
to itself that is required by the 1933 Act, the 1934 Act, the 1940 Act, and the
rules and regulations under each of those Acts, to be included in
<PAGE>
the N-1A Post-Effective Amendment, the N-14 Registration Statement and the
Reorganization Proxy Materials.
8. FAIF CONDITIONS. The obligations of FAIF hereunder shall be subject
to the following conditions precedent:
(a) This Agreement and the transactions contemplated by this
Agreement (which shall not be deemed to include, for these purposes,
the matters described in Section 6(a)) shall have been approved by the
Board of Directors of each Piper Fund and by the shareholders of each
Piper Fund in the manner required by law and this Agreement.
(b) Each Piper Fund shall have delivered to FAIF a statement
of assets and liabilities of such Piper Fund, together with a list of
the portfolio securities of such Piper Fund showing the tax costs of
such securities by lot and the holding periods of such securities, as
of the Effective Time of the Reorganization, certified by the Treasurer
of such Piper Fund as having been prepared in accordance with generally
accepted accounting principles consistently applied.
(c) Each Piper Fund shall have duly executed and delivered to
FAIF such bills of sale, assignments, certificates and other
instruments of transfer ("Transfer Documents") as FAIF may reasonably
deem necessary or desirable to transfer all of the Piper Funds' right,
title and interest in and to the Fund Assets. Such Fund Assets shall be
accompanied by all necessary state stock transfer stamps or cash for
the appropriate purchase price therefor.
(d) All representations and warranties of each Piper Fund made
in this Agreement shall be true and correct in all material respects as
if made at and as of the Effective Time of the Reorganization.
(e) Each Piper Fund shall have delivered to FAIF a certificate
executed in its name by its President or Vice President and its
Treasurer or Assistant Treasurer, in a form reasonably satisfactory to
FAIF and dated as of the Effective Time of the Reorganization, to the
effect that the representations and warranties of the Piper Fund made
in this Agreement are true and correct at and as of the Effective Time
of the Reorganization, except as they may be affected by the
transactions contemplated by this Agreement.
(f) Each Piper Fund shall have delivered to FAIF written
instructions to the custodian for the Piper Fund, acknowledged and
agreed to in writing by such custodian, irrevocably instructing such
custodian to transfer to the FAIF Fund all of such Piper Fund's
portfolio securities, cash and any other assets to be acquired by the
FAIF Fund pursuant to this Agreement.
(g) Each Piper Fund shall have delivered to FAIF a certificate
of such Piper Fund's transfer agent stating that the records maintained
by the transfer agent (which shall be made available to FAIF) contain
the names and addresses of the shareholders of such Piper Fund and the
numbers and classes of the outstanding shares of such Piper Fund owned
by each such shareholder as of the Effective Time of the
Reorganization.
(h) At or prior to the Effective Time of the Reorganization,
the expenses incurred by each Piper Fund (or accrued up to the
Effective Time of the Reorganization) shall have been maintained by
such Piper Fund's investment adviser or otherwise so as not to exceed
any
<PAGE>
contractual expense limitations or any expense limitations set forth in
the Piper Fund's Annual Report, dated October 31, 1997 (for XUS) and
February 28, 1998 (for HLA).
(i) At or prior to the Effective Time of the Reorganization,
appropriate action shall have been taken by each Piper Fund's
investment adviser or otherwise such that no unamortized organizational
expenses shall be reflected in such Piper Fund's statement of assets
and liabilities delivered pursuant to Section 8(b).
(j) FAIF shall have received an opinion of Dorsey & Whitney
LLP, counsel to the Piper Funds, in form reasonably satisfactory to
FAIF and dated the Effective Time of the Reorganization, substantially
to the effect that (i) each Piper Fund is a Minnesota corporation duly
established and validly existing under the laws of the State of
Minnesota; (ii) this Agreement and the Transfer Documents have been
duly authorized, executed and delivered by each Piper Fund and
represent legal, valid and binding contracts, enforceable in accordance
with their terms, subject as to enforcement to bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance and other similar
laws of general application relating to or affecting creditors' rights
and to the application of general principles of equity; (iii) the
execution and delivery of this Agreement did not, and the consummation
of the transactions contemplated by this Agreement will not, violate
the Articles of Incorporation or Bylaws of each Piper Fund or any
material contract known to such counsel to which either Piper Fund is a
party or by which it is bound; (iv) the only Piper Funds shareholder
approval required with respect to the consummation of the transactions
contemplated by this Agreement is the approval of a majority of the
outstanding shares of the Piper Funds; and (v) no consent, approval,
authorization or order of any court or governmental authority is
required for the consummation by the Piper Funds of the transactions
contemplated by this Agreement, except such as have been obtained under
the 1933 Act, the 1934 Act, the 1940 Act, the rules and regulations
under those Acts and such as may be required under the state securities
laws or such as may be required subsequent to the Effective Time of the
Reorganization. Such opinion may rely on the opinion of other counsel
to the extent set forth in such opinion, provided such other counsel is
reasonably acceptable to FAIF.
(k) FAIF shall have received an opinion of Dorsey & Whitney
LLP addressed to FAIF and the Piper Funds in form reasonably
satisfactory to them, and dated the Effective Time of the
Reorganization, substantially to the effect that, for federal income
tax purposes (i) the transfer by each Piper Fund of all of its Fund
Assets to the FAIF Fund in exchange for shares of the FAIF Fund, and
the distribution of such shares to the shareholders of the Piper Funds,
as provided in this Agreement, will constitute a reorganization within
the meaning of Section 368(a)(1)(C), (D) or (F) of the Code; (ii) no
income, gain or loss will be recognized by either Piper Fund as a
result of such transactions; (iii) no income, gain or loss will be
recognized by the FAIF Fund as a result of such transactions; (iv) no
income, gain or loss will be recognized by the shareholders of either
Piper Fund on the distribution to them by the Piper Funds of shares of
the FAIF Fund in exchange for their shares of the Piper Funds (but
shareholders of the Piper Fund subject to taxation will recognize
income upon receipt of any net investment income or net capital gains
of the Piper Funds which are distributed by the Piper Funds prior to
the Effective Time of the Reorganization); (v) the tax basis of the
FAIF Fund shares received by each shareholder of the Piper Funds will
be the same as the tax basis of the shareholder's Piper Funds shares
exchanged therefor; (vi) the tax basis of the Fund Assets received by
the FAIF Fund will be the same as the basis of such Fund Assets in the
hands of the Piper Funds immediately prior to the transactions; (vii) a
shareholder's holding period for FAIF Fund shares will be determined by
including the period for which the shareholder held the shares of the
Piper Funds exchanged therefor, provided that the shareholder held such
shares of the Piper Funds as a capital asset at the Effective Time of
the Reorganization; (viii) the holding period of the FAIF Fund with
respect to the Fund Assets will include the period for which such Fund
Assets were held by the Piper Funds, provided that the Piper Funds held
such assets as
<PAGE>
capital assets; and (ix) the FAIF Fund will succeed to and take into
account the earnings and profits, or deficit in earnings and profits,
of the Piper Funds as of the Effective Time of the Reorganization.
(l) The Fund Assets to be transferred to the FAIF Fund under
this Agreement shall include no assets which the FAIF Fund may not
properly acquire pursuant to its investment limitations or objectives
or may not otherwise lawfully acquire.
(m) The N-1A Post-Effective Amendment and the N-14
Registration Statement shall have become effective under the 1933 Act
and no stop order suspending such effectiveness shall have been
instituted or, to the knowledge of FAIF, contemplated by the SEC and
the parties shall have received all permits and other authorizations
necessary under state securities laws to consummate the transactions
contemplated by this Agreement.
(n) No action, suit or other proceeding shall be threatened or
pending before any court or governmental agency in which it is sought
to restrain or prohibit or obtain damages or other relief in connection
with this Agreement or the transactions contemplated herein.
(o) The SEC shall not have issued any unfavorable advisory
report under Section 25(b) of the 1940 Act nor instituted any
proceeding seeking to enjoin consummation of the transactions
contemplated by this Agreement under Section 25(c) of the 1940 Act.
(p) Prior to the Effective Time of the Reorganization, each
Piper Fund shall have declared a dividend or dividends, with a record
date and ex-dividend date prior to the Effective Time of the
Reorganization, which, together with all previous dividends, shall have
the effect of distributing to its shareholders all of its net
investment company taxable income, if any, for the taxable years ending
October 31, 1997 (for XUS) and February 28, 1998 (for HLA) and for the
taxable periods from said date to and including the Effective Time of
the Reorganization (computed without regard to any deduction for
dividends paid), and all of its net capital gain, if any, realized in
taxable years ending October 31, 1997 (for XUS) and February 28, 1998
(for HLA), and in the taxable periods from said date to and including
the Effective Time of Reorganization.
(q) The Piper Fund shall have performed and complied in all
material respects with each of its agreements and covenants required by
this Agreement to be performed or complied with by it prior to or at
the Effective Time of the Reorganization.
(r) FAIF shall have been furnished at the Effective Time of
the Reorganization with a certificate signed by an appropriate officer
of Piper Capital dated as of such date stating that all statistical and
research data, clerical, accounting and bookkeeping records, periodic
reports to the SEC and any state securities agencies, tax returns and
other tax filings, shareholder lists and other material shareholder
data, complaint files and all other information, books, records and
documents maintained by Piper Capital and belonging to the Piper Fund,
including those required to be maintained by Section 31(a) of the 1940
Act and Rules 31a-1 to 31a-3 thereunder, have been delivered to FAIF.
9. THE PIPER FUNDS CONDITIONS. The obligations of the Piper Funds
hereunder shall be subject to the following conditions precedent:
(a) This Agreement and the transactions contemplated by this
Agreement (which shall not be deemed, for these purposes, to include
the matter described in Section 6(a)) shall have been approved by the
Board of Directors of FAIF and by the shareholders of the Piper Fund in
the manner required by law and this Agreement.
<PAGE>
(b) All representations and warranties of FAIF made in this
Agreement shall be true and correct in all material respects as if made
at and as of the Effective Time of the Reorganization.
(c) FAIF shall have delivered to Piper a certificate executed
in its name by its President or Vice President and its Treasurer or
Assistant Treasurer, in a form reasonably satisfactory to the Piper
Funds and dated as of the Effective Time of the Reorganization, to the
effect that the representations and warranties of the FAIF Fund made in
this Agreement are true and correct at and as of the Effective Time of
the Reorganization, except as they may be affected by the transactions
contemplated by this Agreement and that, to its best knowledge, the
Fund Assets to be transferred to the FAIF Fund under this Agreement as
set forth in Subsection 8(b) include only assets which the FAIF Fund
may properly acquire under its investment policies, limitations and
objectives and may otherwise be lawfully acquired by the FAIF Fund.
(d) The Piper Fund shall have received an opinion of Dorsey &
Whitney LLP in form reasonably satisfactory to the Piper Funds and
dated the Effective Time of the Reorganization, substantially to the
effect that (i) FAIF is a Maryland corporation duly established and
validly existing under the laws of the State of Maryland; (ii) the
shares of the FAIF Fund to be delivered to the Piper Funds as provided
for by this Agreement are duly authorized and upon delivery will be
validly issued, fully paid and non-assessable by FAIF; (iii) this
Agreement has been duly authorized, executed and delivered by FAIF, and
represents a legal, valid and binding contract, enforceable in
accordance with its terms, subject as to enforcement to bankruptcy,
insolvency, reorganization, moratorium or other similar laws of general
application relating to or affecting creditors' rights generally and to
the application of general principles of equity; (iv) the execution and
delivery of this Agreement did not, and the consummation of the
transactions contemplated by this Agreement will not, violate the
Articles of Incorporation or By-Laws of FAIF or any material contract
known to such counsel to which FAIF is a party or by which it is bound;
and (v) no consent, approval, authorization or order of any court or
governmental authority is required for the consummation by FAIF of the
transactions contemplated by this Agreement, except such as have been
obtained under the 1933 Act, the 1934 Act, the 1940 Act, the rules and
regulations under those Acts and such as may be required by state
securities laws or such as may be required subsequent to the Effective
Time of the Reorganization. Such opinion may rely on the opinion of
other counsel to the extent set forth in such opinion, provided such
other counsel is reasonably acceptable to the Piper Funds.
(e) The Piper Funds shall have received an opinion of Dorsey &
Whitney LLP addressed to FAIF and the Piper Funds in form reasonably
satisfactory to them, and dated the Effective Time of Reorganization,
with respect to the matters specified in Subsection 9(k).
(f) The N-1A Post-Effective Amendment and the N-14
Registration Statement shall have become effective under the 1933 Act
and no stop order suspending the effectiveness shall have been
instituted, or to the knowledge of FAIF, contemplated by the SEC and
the parties shall have received all permits and other authorizations
necessary under state securities laws to consummate the transactions
contemplated herein.
(g) No action, suit or other proceeding shall be threatened or
pending before any court or governmental agency in which it is sought
to restrain or prohibit, or obtain damages or other relief in
connection with, this Agreement or the transactions contemplated
herein.
(h) The SEC shall not have issued any unfavorable advisory
report under Section 25(b) of the 1940 Act nor instituted any
proceeding seeking to enjoin consummation of the transactions
contemplated by this Agreement under Section 25(c) of the 1940 Act.
<PAGE>
(i) FAIF shall have performed and complied in all material
respects with each of its agreements and covenants required by this
Agreement to be performed or complied with by it prior to or at the
Effective Time of the Reorganization.
(j) The Piper Funds shall have received from FAIF a duly
executed instrument whereby the FAIF Fund assumes all of the
liabilities of the Piper Fund.
10. FURTHER ASSURANCES. Subject to the terms and conditions herein
provided, each of the parties hereto shall use its best efforts to take, or
cause to be taken, such action, to execute and deliver, or cause to be executed
and delivered, such additional documents and instruments and to do, or cause to
be done, all things necessary, proper or advisable under the provisions of this
Agreement and under applicable law to consummate and make effective the
transactions contemplated by this Agreement, including without limitation,
delivering and/or causing to be delivered to the other party hereto each of the
items required under this Agreement as a condition to such party's obligations
hereunder.
11. INDEMNIFICATION. (a) FAIF agrees to indemnify and hold harmless
each Piper Fund and each director and officer of each Piper Fund from and
against any and all losses, claims, damages, liabilities or expenses (including,
without limitation, the payment of reasonable legal fees and reasonable costs of
investigation) to which, jointly or severally, the Piper Funds and any director
and officer of a Piper Fund may become subject, insofar as any such loss, claim,
damage, liability or expense (or actions with respect thereto) arises out of or
is based on any breach by FAIF of any of its representations, warranties,
covenants or agreements set forth in this Agreement.
(b) Each Piper Fund agrees to indemnify and hold harmless FAIF and each
of FAIF's directors and officers from and against any and all losses, claims,
damages, liabilities or expenses (including, without limitation, the payment of
reasonable legal fees and reasonable costs of investigation) to which, jointly
or severally, FAIF or any of its directors or officers may become subject,
insofar as any such loss, claim, damage, liability or expense (or actions with
respect thereto) arises out of or is based on any breach by such Piper Fund of
any of its representation, warranties, covenants or agreements set forth in this
Agreement.
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the parties set forth in this Agreement shall survive the delivery
of the Fund Assets to the FAIF Fund and the issuance of the shares of the FAIF
Fund at the Effective Time of the Reorganization.
13. TERMINATION OF AGREEMENT. This Agreement may be terminated by a
party at or, in the case of Subsections 13(c) or (d), below, at any time prior
to, the Effective Time of the Reorganization by a vote of a majority of its
Board of Directors as provided below:
(a) by FAIF if the conditions set forth in Section 8 are not
satisfied as specified in said Section;
(b) by the Piper Funds if the conditions set forth in Section
9 are not satisfied as specified in said Section;
(c) by mutual consent of both parties; and
(d) by the Piper Funds or FAIF if determined by its Board of
Directors that proceeding with the transactions contemplated herein is
inadvisable.
14. AMENDMENT AND WAIVER. At any time prior to or (to the fullest
extent permitted by law) after approval of this Agreement by the shareholders of
the Piper Funds (a) the parties hereto may, by written agreement authorized by
their respective Boards of Directors and with or without the further approval of
their shareholders, amend any of the provisions of this Agreement, and (b)
either party
<PAGE>
may waive any breach by the other party or the failure to satisfy any of the
conditions to its obligations (such waiver to be in writing and authorized by
the Board of Directors of the waiving party with or without the approval of such
party's shareholders).
15. GOVERNING LAW. This Agreement and the transactions contemplated
hereby shall be governed, construed and enforced in accordance with the laws of
the State of Minnesota.
16. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
respective successors and permitted assigns of the parties hereto. This
Agreement and the rights, obligations and liabilities hereunder may not be
assigned by either party without the consent of the other party.
17. BENEFICIARIES. Except as set forth in Section 11 hereof with
respect to the directors and officers of the Piper Funds and of FAIF, nothing
contained in this Agreement shall be deemed to create rights in persons not
parties hereto, other than the successors and permitted assigns of the parties.
18. BROKERAGE FEES AND EXPENSES. FAIF and each Piper Fund each
represents and warrants to the other that there are no brokers or finders
entitled to receive any payments in connection with the transactions provided
for herein.
19. NOTICES. All notices required or permitted herein shall be in
writing and shall be deemed to be properly given when delivered personally or by
facsimile to the party entitled to receive the notice or when sent by certified
or registered mail, postage prepaid, or delivered to an internationally
recognized overnight courier service, in each case properly addressed to the
party entitled to receive such notice at the address or facsimile number stated
below or to such other address or facsimile number as may hereafter be furnished
in writing by notice similarly given by one party to the other party hereto:
If to FAIF: First American Investment Funds, Inc.
Oaks, Pennsylvania 19456
With copies to: Kathleen L. Prudhomme
Dorsey & Whitney LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402
Facsimile Number: (612) 340-8738
If to XUS: The Americas Income Trust Inc.
222 South Ninth Street
Minneapolis, MN 55402-3804
With copies to: Susan S. Miley, Esq.
Piper Capital Management Incorporated
222 South Ninth Street
Minneapolis, MN 55402-3804
Facsimile Number: (612) 342-1673
Stuart Strauss, Esq.
Gordon Altman Butowsky Weitzen
Shalov & Wein
114 W. 47th Street
New York, New York 10036
Facsimile Number: (212) 626-0799
<PAGE>
If to HLA: Highlander Income Fund Inc.
222 South Ninth Street
Minneapolis, MN 55402-3804
With copies to: Susan S. Miley, Esq.
Piper Capital Management Incorporated
222 South Ninth Street
Minneapolis, MN 55402-3804
Facsimile Number: (612) 342-1673
Stuart Strauss, Esq.
Gordon Altman Butowsky Weitzen
Shalov & Wein
114 W. 47th Street
New York, New York 10036
Facsimile Number: (212) 626-0799
20. ANNOUNCEMENTS. Any announcement or similar publicity with respect
to this Agreement or the transactions contemplated herein shall be made only at
such time and in such manner as the parties shall agree; provided that nothing
herein shall prevent either party upon notice to the other party from making
such public announcements as such party's counsel may consider advisable in
order to satisfy the party's legal and contractual obligations in such regard.
21. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding of the parties hereto and supersedes any and all prior agreements,
arrangements and understandings relating to matters provided for herein.
22. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed to be an
original, but all of which together shall constitute one and the same
instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their duly authorized officers designated below as of the date
first written above.
THE AMERICAS INCOME TRUST INC.
ATTEST:
- ---------------------------------- -------------------------------------
- ---------------- -------------------
Secretary President
HIGHLANDER INCOME FUND INC.
ATTEST:
- ---------------------------------- -------------------------------------
- ---------------- -------------------
Secretary President
FIRST AMERICAN INVESTMENT FUNDS, INC.
ATTEST:
- ---------------------------------- -------------------------------------
Michael J. Radmer
Secretary -------------------
President
<PAGE>
APPENDIX VII
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
This Appendix compares the investment objectives and certain investment
policies and restrictions of XUS and HLA (the "Piper Funds") and Strategic Fund.
The following as it relates to Strategic Fund is qualified in its entirety by
the more detailed information included in the preliminary prospectus for the
Class A shares Strategic Fund, which is attached to the Combined Proxy
Statement/Prospectus as Appendix XII.
The investment objective of each Piper Fund is fundamental, which means
that it may not be changed without a vote of the holders of a majority, as that
term is defined in the 1940 Act, of the outstanding shares of that Piper Fund.
The investment objectives and restrictions of Strategic Fund are not fundamental
and therefore may be changed without a vote of shareholders. Such changes could
result in Strategic Fund having investment objectives different from those which
shareholders considered appropriate at the time of approving the Reorganization.
Shareholders will receive written notification at least 30 days prior to any
change in Strategic Fund's investment objectives.
INVESTMENT OBJECTIVES AND POLICIES
The Americas Income Trust Inc.
The primary investment objective of XUS is to provide a high level of
current income; its secondary objective is to seek capital appreciation. XUS
will seek to achieve its investment objectives through investment primarily in
North American Debt Securities. North American Debt Securities are debt
securities denominated in U.S. dollars, Canadian dollars or Mexican pesos that
are: (a) issued or guaranteed by the U.S., Canadian or Mexican governments, or
their political subdivisions (including the Canadian Provinces but excluding
individual states of the United States), agencies or instrumentalities or the
central bank of any of the foregoing, (b) of companies organized in the U.S.,
Canada or Mexico or for which the principal trading market is located in such
countries, (c) of companies that derive at least 50% of their gross revenues
from either goods produced, sales made, services performed or investments in
companies in such countries or (d) of companies which have at least 50% of their
total assets located in the U.S., Canada or Mexico. The balance of XUS's assets
may be invested in debt securities issued by issuers located outside of North
America. At least 65% of XUS's assets will be invested in securities rated BBB
or higher by Standard & Poor's or an equivalent rating from another NRSRO or, if
unrated, determined by XUS's adviser to be of comparable quality. XUS may invest
up to 35% of its in debt securities rated below BBB by Standard & Poor's or
another NRSRO or, if unrated, determined by the sub-adviser to be of comparative
quality. In addition, XUS may invest up to 35% of its total assets in unrated
securities. The Fund may not invest more than 35% of its total assets,
collectively, in unrated securities and non-investment grade or comparable
quality securities. Securities rated below Baa by Moody's or below BBB by
Standard & Poor's, and unrated securities of comparable quality, are commonly
known as "junk bonds." There is no minimum rating requirement for the
lower-rated debt securities in which XUS will invest; XUS may invest in
lower-rated debt securities rated as low as C by Moody's or D by Standard &
Poor's, or in unrated securities that the Sub-Adviser deems of comparable
quality. Securities rated D are in default.
ALLOCATION OF ASSETS AMONG GEOGRAPHIC REGIONS. Under normal
circumstances, at least 65% of XUS's total assets will be invested in North
American Debt Securities. XUS's adviser actively manages XUS's assets in
relation to market conditions and changes in general economic conditions in the
U.S., Canada and Mexico, including its expectations regarding interest rate
changes and changes in currency exchange rates between the currencies of these
countries, to attempt to take advantage of favorable investment opportunities in
each country. The allocation between the U.S., Canada and Mexico may change in
accordance with the foregoing considerations. XUS is authorized to invest up to
35% of its total assets in issuers located outside of North America. The
investments outside of North America are made principally in debt securities
issued by issuers located in Central America or South America and denominated or
payable in any currency in which XUS may invest. In determining the extent to
which assets are allocated to Central America and South America, XUS's
sub-adviser monitors developments in the economic status of such countries, as
reflected in, among other things, their inflation rates, the amount of their
external debt and their gross domestic product to determine
<PAGE>
the ability of issuers in these countries to honor their obligations. Central
America and South America consist of: Argentina, the Bahamas, Barbados, Belize,
Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El
Salvador, French Guiana, Guatemala, Guyana, Haiti, Honduras, Jamaica, the
Netherlands Antilles, Nicaragua, Panama, Paraguay, Peru, Suriname, Trinidad and
Tobago, Uruguay and Venezuela. The investments outside of North American consist
primarily of securities issued by foreign governments, their political
subdivisions, agencies, instrumentalities or central banks thereof.
ALLOCATION OF ASSETS AMONG CURRENCIES AND MATURITIES. The debt
securities in which XUS is authorized to invest may be denominated or payable in
any currency. An integral part of the Adviser's investment strategy is to seek
to benefit from favorable changes in the value of non-U.S. currencies relative
to the U.S. dollar. Accordingly, a substantial portion of XUS's assets are
invested in debt securities denominated in currencies other than the U.S. dollar
and hedging transactions generally are not utilized to seek to lock in the U.S.
dollar equivalent of such securities. The securities in which XUS invests may
have stated maturities ranging from overnight to 40 years. The average maturity
of XUS's portfolio will vary based upon the assessment by XUS's sub-adviser of
economic and market conditions.
Highlander Income Fund Inc.
The investment objective of HLA is to provide a high level of current
income. HLA seeks to achieve its objective by investing in a diversified,
professionally managed portfolio of fixed income securities consisting primarily
of a combination of High Grade Mortgage-Backed Securities and Lower-Rated Fixed
Income Securities (as both terms are defined below).
Under normal circumstances, between 80% and 100% of the total assets of
the Fund will be invested in a combination of (a) Mortgage-Backed Securities
(described below) rated A or higher by Moody's or Standard & Poor's, comparably
rated by any other NRSRO or issued or guaranteed by the U.S. Government or its
agencies or instrumentalities ("High Grade Mortgage-Backed Securities") and (b)
fixed income securities rated in the lower rating categories of any NRSRO (Baa
or lower by Moody's and BBB or lower by Standard & Poor's) or, if unrated, of
comparable quality as determined by the Sub-Adviser ("Lower-Rated Fixed Income
Securities"). Securities rated below Baa by Moody's or below BBB by Standard &
Poor's, and unrated securities of comparable quality, are commonly known as
"junk bonds." There is no minimum rating requirement for the Lower-Rated Fixed
Income Securities in which HLA will invest; HLA may invest in Lower-Rated Fixed
Income Securities rated as low as C by Moody's or D by Standard & Poor's, or in
unrated securities that the Sub-Adviser deems of comparable quality. Securities
rated D are in default. HLA's adviser may vary the average maturity of the
securities in HLA without limit, and there is no restriction on the maturity of
any individual security. Under normal circumstances, at least 65% of the total
assets of HLA will be invested in securities producing current income.
Under normal circumstances, the Fund will have at least 30% of its
total assets invested in High Grade Mortgage Securities and at least 30% of its
total assets invested in Lower-Rated Fixed Income Securities. In addition, under
normal circumstances HLA will not invest any more than 70% of its total assets
in either typed security. The allocation of assets in HLA's portfolio varies
from time to time based on the Adviser's evaluation of economic and market
trends and its perception of the relative values available from such types of
securities at any time.
In a further attempt to decrease portfolio volatility, HLA's
sub-adviser uses certain professional portfolio management techniques to reduce
the risks of investing of Lower-Rated Fixed Income Securities. These techniques
include:
CREDIT RESEARCH -- HLA's sub-adviser performs its own credit
analysis in addition to using recognized rating agencies and other
sources, including discussions with the issuer's management, the
judgment of other investment analysts, and its own informed judgment.
The
<PAGE>
credit analysis of HLA's sub-adviser considers the issuer's financial
soundness, its responsiveness to changes in interest rates and business
conditions, and its anticipated cash flow, interest, or dividend
coverage and earnings. In evaluating an issuer, HLA's sub-adviser
places special emphasis on the estimated current value of the issuer's
assets rather than historical cost.
DIVERSIFICATION -- HLA invests in securities of many different
issuers, industries, and economic sectors to reduce portfolio risk.
ECONOMIC ANALYSIS -- HLA's sub-adviser analyzes current
developments and trends in the economy and in the financial markets.
When investing in lower-rated securities, timing and selection are
critical, and analysis of the business cycle can be important.
HLA may invest without limitation in securities that lack an
established trading market or are otherwise considered illiquid. Unlike XUS,
which may invest primarily in fixed income securities issued by non-U.S.
issuers, HLA may invest only up to 10% of its total assets in fixed income
securities issued by non-U.S. issuers.
Under unusual market or economic conditions, HLA for temporary
defensive purposes may invest up to 100% of its total assets in U.S.
Governmental Securities (as described below), high quality debt securities with
less than one year remaining to maturity, certificates of deposit, bankers'
acceptances and other bank obligations, commercial paper rated in the highest
category by an established rating agency, and repurchase agreements relating to
any of the foregoing, or may hold its assets in cash.
FAIF Strategic Income Fund
Similar to XUS and HLA, the objective of Strategic Fund is to provide a
high level of current income. Strategic Fund pursues its investment objective by
investing in a diversified portfolio primarily consisting of domestic corporate
debt obligations, U.S. government securities and foreign government and
corporate debt obligations, including Lower-Rated Fixed Income Securities. Under
normal circumstances, Strategic Fund's assets will be invested in each of these
three sectors, with no more than 50% invested in any one sector. Distributable
income will fluctuate as Strategic Fund shifts assets among the three sectors.
Unlike HLA, which may invest no more than 10% of its total assets in fixed
income securities issued by non-U.S. issuers, Strategic Fund may, from time to
time, invest up to 100% of its total assets in foreign government and corporate
debt obligations, if, in the judgment of its adviser, Strategic Fund has the
opportunity of seeking a high level of current income without undue risk to
principal. In addition, unlike XUS, which may not invest more than 35% of its
total assets in fixed income securities rated BB or lower by Standard & Poor's,
or HLA which may invest no more than 70% of its net assets in such lower-rated
debt fixed income securities, Strategic Fund may invest without limitation in
such lower-rated debt securities. Accordingly, Strategic Fund's investments
should be considered speculative. There will be no limit to weighted average
maturity of the fund. For a complete description of the investment objectives
and policies of Strategic Fund, see the preliminary prospectus attached to the
Combined Proxy Statement/Prospectus as Appendix XII.
INVESTMENT RESTRICTIONS
The Americas Income Trust Inc.
XUS has adopted certain fundamental investment restrictions that may
not be changed without shareholder approval. XUS may not issue senior securities
in the form of indebtedness or borrow money (including on margin if marginable
securities are owned), except if after each borrowing there is asset coverage of
at least 300% (including the proceeds of such senior securities issued and money
borrowed) or pledge its assets other than to secure such issuances or borrowings
or in connection with, to the extent
<PAGE>
permitted under the 1940 Act, interest rate transactions, currency swaps,
options on securities, futures contracts and options on futures contracts,
foreign currency transactions, when-issued and forward commitment transactions,
repurchase agreements, reverse repurchase agreements and similar investment
strategies. XUS's collateral arrangements with respect to options, futures
contracts and options on futures contracts, and collateral requirements with
respect to initial and variation margin are not considered by the Trust to be
the issuance of a senior security. A complete list of XUS's investment
restrictions is set forth in the Statement of Additional Information relating to
this Proxy Statement/Prospectus.
Highlander Income Fund Inc.
HLA has adopted certain fundamental investment restrictions that may
not be changed without shareholder approval. For example, HLA may not invest 25%
or more of the value of its total assets in the securities of any one issuer or
in the securities of issuers conducting their principal business activities in
the same industry, provided that HLA will invest more than 25% of its total
assets in mortgage-backed securities, exclusive of stripped mortgage-backed
securities. This restriction does not apply to securities issued or guaranteed
by the United Stated Government or its agencies or instrumentalities (other than
securities included in the definition of Mortgage Backed Securities). Similar to
XUS, a second restriction provides that HLA may not issue senior securities in
the form of indebtedness or borrow money (including on margin if marginable
securities are owned), except if after each borrowing there is asset coverage of
at least 300% (including the proceeds of such senior securities issued and money
borrowed), or pledge its assets other than to secure such issuances or borrowing
or in connection with, to the extent permitted under the 1940 Act, hedging
transactions, reverse repurchase agreements, when-issued and forward commitment
transactions and similar investment strategies. HLA's collateral arrangements
with respect to options, futures contracts and options on future contracts, and
collateral requirements with respect to initial and variation margin are not
considered by HLA to be the issuance of a senior security. A complete list of
HLA's investment restrictions is set forth in the Statement of Additional
Information relating to this Proxy Statement/Prospectus.
FAIF Strategic Income Fund
Strategic Fund has adopted certain fundamental investment restrictions
that may not be changed without shareholder approval. The Fund will not borrow,
except from banks for temporary or emergency purposes. The amount of such
borrowing may not exceed one-third of the Fund's total assets. The Fund will not
lend any of its assets, except portfolio securities up to one-third of the
Fund's total assets. The Fund will not 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.
The Fund will not issue any senior securities (as defined in the 1940 Act),
except under certain circumstances. The Fund will not make short sales of
securities or purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions and as may be
necessary to make margin payments in connectin with foreign currency futures and
other derivative transactions. The Fund will not purchase or sell physical
commodities or futures or options contracts with respect to physical
commodities. The Fund will not purchase or sell real estate or real estate
mortgage loans, except in mortgage-backed securities. The Fund will not act as
an underwriter of securities of other issuers, except to the extent a Fund may
be deemed to be an underwriter, under Federal securities laws, in connection
with the disposition of portfolio securities.
Comparison of Other Investment Restrictions
Unlike HLA, which has no limit on investments in securities that lack
an established secondary trading market or are otherwise illiquid, XUS will not
invest more than 25% of its total assets in such illiquid securities and
Strategic Fund, as a non-fundamental policy, will not invest more than 15% of
its net assets in such illiquid securities. Both XUS and Strategic Fund will not
invest more than 25% of the value of its total assets in any one industry or
government securities of any one foreign country, except for securities issued
or guaranteed by the U.S. government, its agencies or instrumentalities.
Similarly, HLA will not invest more than 25% of its total assets in the
securities of any one issuer or in the securities of issuers conducting their
principal business activities in the same industry, provided that HLA will
invest more than 25% of its total assets in mortgage-backed securities,
exclusive of stripped mortgage-backed securities. XUS is a "non-diversified"
investment company and, as such, may invest a relatively high percentage of its
assets in the securities of a limited number of issuers, which may result in
XUS's portfolio securities being more susceptible to any single economic,
political or regulatory occurrence than the portfolio securites of HLA or
Strategic Fund. Nevertheless, XUS must meet certain diversification tests in
order to maintain its status as a regulated investment company. As such with
respect to 50% of its total assets, XUS will not invest more than 5% of the
value of its total assets in the outstanding securities of any one issuer or
more than 10% of the outstanding voting securities of any one issuer, other than
securities issued or guaranteed by the U.S. government or any agency or
instrumentality thereof. HLA and Strategic Fund are both diversified funds.
Therefore, each Fund, with respect to 75% of its total assets, will not invest
more than 5% of the value of its total assets in the outstanding securities of
any one issuer or more than 10% of the outstanding voting securites of any one
issuer, other than securities issued of guaranteed by the U.S. government or any
agency or instrumentality thereof.
In addition, none of Strategic Fund or the Piper Funds will: (i)
underwrite the securities of other issuers, except in certain circumstances;
(ii) purchase, hold, sell or deal in real estate or interests therein, except
for Mortgage-Backed Securities (described below) and similar instruments; (iii)
make
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any short sale of securities; (iv) purchase or sell commodities or commodity
contracts, except that each Fund amy purchase and sell future contracts and
options on futures; (v) invest for the purpose of exercising control over the
management of any company; and (vi) purchase securities on margin.
DESCRIPTION OF PORTFOLIO SECURITIES
Government Securities
XUS and Strategic Fund may invest in debt securities issued or
guaranteed by governments of the U.S., or any other foreign government, their
political subdivisions and agencies and instrumentalities or the central bank of
any of the foregoing. XUS focuses its foreign government securities investments
in Canada and Mexico. HLA limits its government securities investments primarily
to debt securities issued or guaranteed by the U.S. government.
UNITED STATES GOVERNMENT SECURITIES. U.S. Government Securities are
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities including: (i) U.S. Treasury obligations, all of which are
backed by the full faith and credit of the United States and which differ only
in their interest rates, maturities and times of issuance U.S. Treasury bills
(maturities of one year or less), U.S. Treasury notes (maturities of one to ten
years), and U.S. Treasury bonds (generally maturities of greater than ten
years); and (ii) obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, including government-guaranteed Mortgage-Backed Securities,
some of which are backed by the full faith and credit of the U.S. Treasury
(e.g., Government National Mortgage Association direct pass-through
certificates), some of which are supported by the right of the issuer to borrow
from the U.S. Government (e.g., obligations of Federal Home Loan Banks), and
some of which are backed only by the credit of the issuer itself (e.g.,
obligations of the Student Loan Marketing Association). The U.S. Government may
also guarantee other debt obligations of special purpose borrowers.
CANADIAN GOVERNMENT SECURITIES. Canadian Government Securities include
securities issued or guaranteed by the Government of Canada, the Government of a
Province of Canada or their agencies and Crown corporations.
The Bank of Canada, acting on behalf of the federal government, is
responsible for the distribution of Government of Canada Treasury bills and
federal bond issues. The Bank of Canada holds weekly auctions of Treasury bills
(maturities of one year or less) and offers new issues of federal bonds through
investment dealers and banks. An offering of Government of Canada bonds
frequently consists of several different issues with various maturity dates,
representing different segments of the yield curve and generally having
maturities ranging from three to 25 years. The Bank of Canada usually purchases
a previously announced amount of each offering of bonds. NHA Mortgage-Backed
Securities, described below, are also Canadian Government Securities because
they benefit from a guarantee by the Canada Mortgage and Housing Corporation
("CMHC") but are not distributed by the Bank of Canada.
All Canadian Provinces have outstanding bond issues and several
Provinces also guarantee bond issues of Provincial authorities, agencies and
Provincial Crown corporations. Spreads in the marketplace are determined by
various factors, including the relative supply and the rating assigned by the
rating agencies. Most Canadian Provinces also issue treasury bills.
Many municipalities and municipal financial authorities in Canada raise
funds through the bond market in order to finance capital expenditures. Unlike
U.S. municipal securities, which have special tax status, Canadian municipal
securities have the same tax status as other Canadian Government Securities and
trade similarly to such securities. The Canadian municipal market may be less
liquid than the Provincial bond market.
<PAGE>
MEXICAN GOVERNMENT SECURITIES. Mexican Government Securities include
those securities which are issued or guaranteed by the Mexican Treasury or by
Mexican government agencies or instrumentalities or by Mexican states.
The debt market in Mexico began to develop rapidly after the
promulgation of the Securities Market Law in 1975. Since 1975, the government
has issued the following types of debt securities, all of which are traded on
the Mexican Stock Exchange: (i) CETES--peso-denominated discount debt securities
having maturities of one year or less sold through auctions regulated by Banco
de Mexico; (ii) BONDES--peso-denominated long-term development bonds sold
through a weekly auction regulated by Banco de Mexico; (iii)
AJUSTABONOS--peso-denominated three-year bonds with a fixed coupon rate on a
variable face amount which is adjusted in proportion to fluctuations in the
Mexican consumer price index; and (iv) TESOBONOS--U.S. dollar-denominated
securities sold at a weekly auction which are paid in pesos equal to the value
of the U.S. dollar calculated at the prevailing exchange rate.
In addition, a variety of other special purpose bonds are issued by the
Mexican federal government or its agencies, such as development bonds, bank
indemnity bonds and urban renovation bonds, as well as bank development bonds
and industrial development bonds.
OTHER GOVERNMENT SECURITIES. Other Government Securities are debt
securities issued by the governments of a country other than the U.S., Canada or
Mexico or an agency, instrumentality or central bank thereof. Other government
securities also include debt obligations of supranational entities, which
include international organizations designated or backed by governmental
entities to promote economic reconstruction or development, international
banking institutions and related government agencies. Examples include the
International Bank for Reconstruction and Development (the World Bank), the
European Coal and Steel Community, the Asian Development Bank and the
InterAmerican Development Bank.
Mortgage-Backed Securities
Each of XUS, HLA and Strategic Fund may invest a substantial portion of
its assets in securities that directly or indirectly represent a participation
in or are secured by and payable from mortgage loans on real property
("Mortgage-Backed Securities"). HLA only invests in Mortgage-Backed Securities
rated A or higher by Moody's or Standard & Poor's, comparably rated by any
NRSRO, or issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
U.S. MORTGAGE-BACKED SECURITIES. U.S. Mortgage-Backed Securities are
securities that, directly or indirectly, represent participation in, or are
secured by and payable from, loans secured by real property including
pass-through securities such as Government National Mortgage Association
("Ginnie Mae" or "GNMA"), Federal National Mortgage Association ("Fannie Mae" or
"FNMA") and Federal Home Loan Mortgage Corporation ("Freddie Mac" or "FHLMC")
Certificates, private pass-through securities, commercial mortgage-backed
securities and certain collateralized mortgage obligations. Mortgage-Backed
Securities may have fixed or adjustable interest rates. There are currently
three basic types of U.S. Mortgage-Backed Securities: (i) those issued or
guaranteed by the United States Government or one of its agencies or
instrumentalities, such as Ginnie Mae, Fannie Mae and Freddie Mac; (ii) those
issued by non-governmental issuers that represent interests in, or are
collateralized by, Mortgage-Backed Securities issued or guaranteed by the United
States Government or one of its agencies or instrumentalities; and (iii) those
issued by non-governmental issuers that represent an interest in, or are
collateralized by, whole mortgage loans or Mortgage-Backed Securities without a
government guarantee but usually with over-collateralization or some other form
of private credit enhancement. Non-governmental issuers referred to in (ii) and
(iii) above include 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.
<PAGE>
STRIPPED MORTGAGE-BACKED SECURITIES. XUS, HLA and Strategic Fund may
also invest in Stripped Mortgage-Backed Securities ("SMBS"). SMBS are derivative
multi-class mortgage securities which may entitle the holders thereof to receive
distributions consisting solely or primarily of all or a portion of the interest
(the "IO class") or the principal (the "PO class") on the underlying pool of
mortgage loans or Mortgage-Backed Securities. The cash flows and yields on IO
and PO classes are extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying pool of mortgage loans or
Mortgage-Backed Securities. These securities may be extremely volatile. Under
the Internal Revenue Code, SMBS generate taxable income from the current accrual
of original issue discount, without a corresponding distribution of cash to the
applicable fund. In addition, the Staff of the Division of Investment Management
of the Securities and Exchange Commission considers privately issued SMBS to be
illiquid securities.
CMOS. XUS, HLA and Strategic Fund may invest in collateralized mortgage
obligations ("CMOs"). CMOs are pass-through securities collateralized by
mortgages or mortgage-backed securities. CMOs are issued in classes and series
that have different maturities and often are retired in sequence although
certain classes of CMOs may have priority over others with respect to the
receipt of prepayments on the mortgages. Therefore, depending on the type of
CMOs in which the applicable fund invests, the investment may be subject to a
greater or lesser risk of prepayment than other types of mortgage-related
securities. CMOs are issued by government or non-government entities such as
banks, mortgage lenders, or other financial institutions. HLA does not invest
more than 15% of its total assets, collectively, in SMBS or inverse or reverse
floating CMOs.
OTHER MORTGAGE-BACKED SECURITIES. It is anticipated that as the housing
markets of countries other than the U.S. and Canada continue to grow, the
development of a market for mortgage-backed securities in such countries is
likely. XUS, HLA and Strategic Fund may each invest in mortgage-backed
securities issued by issuers outside of the U.S. and Canada.
Other Debt Securities
RESTRUCTURED DEBT. XUS may invest in Brady Bonds and other sovereign
debt securities of countries that have restructured or are in the process of
restructuring sovereign debt. Brady Bonds are debt securities issued under the
framework of the Brady Plan, an initiative announced by U.S. Treasury Secretary
Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their
outstanding external indebtedness. The Brady Plan contemplates, among other
things, the adoption by debtor nations of certain economic reforms and the
exchange of commercial bank debt. Under the Brady Plan framework, a debtor
nation negotiates with its existing bank lenders as well as the World Bank
and/or the International Monetary Fund ("IMF"). The World Bank and/or the IMF
support the restructuring by providing funds pursuant to loan agreements or
other arrangements which enable the debtor nation to collateralize the new Brady
Bonds or to replenish reserves used to reduce outstanding bank debt. Under these
loan agreements or other arrangements with the World Bank or the IMF, debtor
nations have been required to agree to the implementation of certain domestic
monetary and fiscal reforms. The Brady Plan only sets forth general guiding
principles for economic reform and debt reduction, emphasizing that solutions
must be negotiated on a case-by-case basis between debtor nations and their
creditors. Brady Bonds have been issued only recently and accordingly do not
have a long payment history. Agreements implemented under the Brady Plan to date
are designed to achieve debt and debt-service reduction through specific options
negotiated by a debtor nation with its creditors. As a result, the financial
packages offered by each country differ. The types of options have included the
exchange of outstanding commercial bank debt for bonds issued at 100% of face
value of such debt, and bonds bearing an interest rate which increases over time
and the advancement of the new money for bonds. The principal of certain Brady
Bonds has been collateralized by Treasury zero coupon bonds with a maturity
equal to the final maturity of such Brady Bonds. Collateral purchases are
financed by the IMF, the World Bank and the debtor nation's reserves. In
addition, the first two or three interest payments on certain types of Brady
Bonds may be collateralized by cash or securities agreed upon by creditors.
<PAGE>
FOREIGN INDEX LINKED INSTRUMENTS. XUS, HLA and Strategic Fund may
invest in instruments issued by the U.S. or a foreign government, or by private
companies, which return principal and/or pay interest to investors in amounts
which are linked to the level of a particular foreign index ("Foreign Index
Linked Instruments"). A foreign index may be based upon the exchange rate of a
particular currency or currencies or the differential in interest rates between
two currencies, or the level of interest rate in a particular country or
countries. In the case of Foreign Index Linked Instruments linking the principal
amount to a foreign index, the amount of principal payable by the issuer at
maturity will increase or decrease in response to changes in the level of the
foreign index during the term of the Foreign Index Linked Instrument. In the
case of Foreign Index Linked Instruments linking the interest component to a
foreign index, the amount of interest payable will adjust periodically in
response to changes in the level of the foreign index during the term of the
Foreign Index Linked Instrument. HLA may not invest more than 10% of its total
assets in Foreign Index Linked Instruments. Strategic Income has no such limit.
MUNICIPAL OBLIGATIONS. Municipal Obligations include debt obligations
issued by states, cities and local authorities, and possessions and certain
territories of the United States to obtain funds for various public purposes,
including the construction of such public facilities as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets, and water
and sewer works. Other public purposes for which Municipal Obligations may be
used include the refinancing of outstanding obligations, the obtaining of funds
for general operating expenses and for loans to other public institutions and
facilities. In addition, certain industrial development, private activity and
pollution control bonds may be included within the term "Municipal Obligations"
if the interest paid thereon qualifies as exempt from federal income tax.
Municipal Obligations in which XUS, HLA and Strategic Fund will invest bear
interest that, in the opinion of bond counsel to the issuer, is exempt from
federal income tax, although such interest may be subject to the federal
alternative minimum tax. However, because XUS, HLA and Strategic Fund will not
satisfy the requirements for passing through the character of tax-exempt
interest to shareholders, distributions to shareholders attributable to
tax-exempt interest will be taxed in the same manner as distributions to
shareholders attributable to taxable interest. XUS, HLA and Strategic Fund may
purchase Municipal Zero Coupon Securities which are debt obligations that do not
entitle the holder to periodic interest payments prior to maturity and are
issued and traded at a discount from their face amounts. However, HLA may not
invest more than 10% of its total assets in Municipal Obligations and such
Municipal Obligations must be rated A or higher by Moody's or Standard & Poor's
or another NRSRO.
Municipal Obligations may be classified as either "general obligation"
or "revenue" bonds. General obligation bonds are secured by the issuer's pledge
of its full faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in the some cases, from the
proceeds of a special excise or other specific revenue source. Industrial
development, private activity and pollution control bonds are in most cases
revenue bonds and do not generally constitute the pledge of the credit or taxing
power of the issuer of such bonds. There are, of course, variations in the
security of Municipal Obligations, both within a particular classification and
between classifications, depending upon numerous factors. Obligations of issuers
of Municipal Obligations are subject to the provisions of bankruptcy, insolvency
and other laws affecting the rights and remedies of creditors, such as the
Bankruptcy Reform Act of 1978. In addition, the obligations of such issuers may
become subject to the laws enacted in the future by Congress, state legislatures
or referenda extending the time for payment of principal and/or interest, or
imposing other constraints upon enforcement of such obligations or upon
municipalities to levy taxes. There is also the possibility that, as a result of
legislation or other conditions, the power or ability of any issuer to pay, when
due, the principal of or interest on its Municipal Obligations may be materially
affected. The market prices of Municipal Zero Coupon Securities are more
volatile than the market prices of securities of comparable quality and similar
maturity that pay interest periodically and may respond to a greater degree to
fluctuations in interest rates than do such non-Municipal Zero Coupon
Securities.
<PAGE>
ASSET-BACKED SECURITIES. Each of XUS, HLA and Strategic Fund may invest
in Asset-Backed Securities, which are securities that directly or indirectly
represent a participation in or are secured by or payable from a pool of assets
representing the obligation of a number of different parties. Asset-Backed
Securities apply the securitization techniques used to develop Mortgage-Backed
Securities. Through the use of trusts and special purpose corporations, various
types of assets, primarily automobile and credit card receivables, are being
securitized in pass-through structures similar to the mortgage pass-through
structures described above or in a pay-through structure similar to the CMO
structure. In general, the collateral supporting Asset-Backed Securities is of
shorter maturity than mortgage loans and is less likely to experience
substantial prepayments. Furthermore, the effect of prepayments on securities
that have shorter maturities such as Asset-Backed Securities is much smaller
than the effect of prepayments on securities having longer maturities such as
Mortgage-Backed Securities.
Corporate Fixed Income Securities
XUS, HLA and Strategic Fund may invest in Corporate Fixed Income
Securities. The Corporate Fixed Income Securities in which XUS, HLA and
Strategic Fund may invest include corporate fixed-income securities of both
domestic and foreign issuers, such as bonds, debentures, notes, equipment lease
certificates, equipment trust certificates and preferred stock. Certain of the
Corporate Fixed Income Securities in which the Funds may invest may involve
equity characteristics. The Funds may, for example, invest in warranties for the
acquisition of stock of the same or of a different issuer or in corporate
fixed-income securities that have conversion or exchange rights permitting the
holder to convert or exchange the securities at a stated price within a
specified period of time into a specified number of shares of common stock. In
addition, the Funds may invest in participations that are based on revenues,
sales or profits of an issuer or in common stock offered as a unit with
corporate fixed-income securities. No more than 5% of HLA's total assets is
invested in common stock. XUS and Strategic Fund have no such limit.
CONVERTIBLE SECURITIES. Each of XUS, HLA and Strategic Fund may invest
in convertible securities. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest generally paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Convertible securities have
several unique investment characteristics, such as (a) higher yields than common
stocks, but lower yields than comparable nonconvertible securities, (b) a lesser
degree of fluctuation in value than the underlying stock since they have fixed
income characteristics, and (c) the potential for capital appreciation if the
market price of the underlying common stock increases.
WARRANTS. Warrants are securities permitting, but not obligating, their
holder to subscribe for other securities. Each of XUS, HLA and Strategic Fund
may invest in warrants for equity securities that are acquired as units with
debt instruments and warrants for debt securities. Warrants do not carry with
them the right to dividends or voting rights with respect to the securities that
they entitle their holder to purchase, and they do not represent any rights in
the assets of the issuer. As a result, an investment in warrants does not
necessarily change with the value of the underlying securities and a warrant
ceases to h ave value if it is not exercised prior to its expiration date.
ZERO COUPON, PAY-IN-KIND AND DELAYED INTEREST SECURITIES. XUS, HLA and
Strategic Fund each may invest in zero coupon, pay-in-kind and delayed interest
securities, including custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on the underlying 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. Pay-in-kind securities pay interest through the issuance to the
holders
<PAGE>
of additional securities. Delayed interest securities are securities that remain
zero coupon securities until a predetermined date at which time the stated
coupon rate becomes effective and interest becomes payable at regular intervals.
Because interest in zero coupon, pay-in-kind and delayed interest securities is
not paid on a current basis, the values of securities of type are subject to
greater fluctuations than are the values of securities that distribute income
regularly and may be more speculative than such securities. Accordingly, the
values of these securities may be highly volatile as interest rates rise or
fall. In addition, investments by the Funds in zero coupon, pay-in-kind and
delayed interest securities will result in special tax consequences. Although
zero coupon securities do not make payments, for tax purposes a portion of the
difference between a zero coupon security's maturity value and its purchase
price is taxable income of the applicable fund each year.
INVESTMENT MANAGEMENT PRACTICES AND TECHNIQUES
The Funds may engage in the following investment techniques to the
extent indicated.
Hedging
Each of the Funds may engage in various interest rate transactions,
consisting of interest rate swaps, caps and floors, futures, and put and call
transactions (collectively, "Hedging Transactions"). Hedging Transactions may be
used to attempt to protect against possible declines in the market value of the
Fund's portfolio resulting from downward trends in the debt securities markets
(generally due to the rise in interest rates), to protect a fund's unrealized
gains in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes or to establish a position int he securities
markets as a temporary substitute for purchasing particular securities or, in
the case of calls, to enhance income. The Hedging Transactions that each of the
Funds may use are described below.
INTEREST RATE TRANSACTIONS. Each of XUS, HLA and Strategic Fund may
engage in interest rate transactions. To preserve a return or spread on a
particular investment or portion of its portfolio, or for other non-speculative
purposes, a Fund may enter into interest rate swaps and the purchase or sale of
interest rate caps and floors. Such Fund does not intend to use these
transactions for speculative purposes. Interest rate swaps involve the exchange
by a Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a contractually-based principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a contractually-based
principal amount from the party selling such interest rate floor.
The Funds may enter into interest rate swaps, caps and floors on either
an asset-based or liability-based basis, depending upon whether it is hedging
its assets or its liabilities, and will usually enter into interest rate swaps
on a net basis, i.e., the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. The Funds will not enter into any interest rate swap, cap or floor
transaction unless the unsecured senior debt or the claims paying ability of the
other party thereto is rated at least A by Moody's or S&P, comparably rated by
any other nationally recognized statistical rating organization or, if unrated,
determined by their adviser to be of comparable quality. Each Fund's adviser
monitors the creditworthiness of contraparties on an ongoing basis. If there is
a default by the other party to such a transaction, the Funds will have
contractual remedies pursuant to the agreements related to the transaction.
There is no limit on the amount of interest rate swap transactions that
may be entered into by the Funds. These transactions do not involve the delivery
of securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rate swaps is limited to the net amount
<PAGE>
of interest payments that a Fund is contractually obligated to make. If the
other party to an interest rate swap defaults, the Funds' risk of loss consists
of the net amount of interest payments that such Fund contractually is entitled
to receive. For XUS and HLA, the aggregate purchase price of caps and floors
held by the fund may not exceed 5% of the Fund's total assets. The Fund may sell
(i.e., write) caps and floors without limitation, subject to a segregated
account requirement described in the Statement of Additional Information under
"Investment Objective and Policies."
OPTIONS ON SECURITIES. In order to reduce fluctuations in net asset
value, each of the Funds may write (i.e., sell) covered put and call options
and, for hedging purposes, purchase put and call options on the securities in
which it may invest. Strategic Fund may not write or purchase options, except
that it may write covered call options and secured put options on up to 25% of
its net asses and may purchase put and call options, provided that no more than
5% of the fair market value of its net assets may be invested in premiums on
such options. XUS and HLA do not have a similar limitation. Such options are
traded on United States and foreign securities exchanges and in the
over-the-counter markets.
A put option gives the buyer of such option, upon payment of a premium,
the right to deliver a specified amount of a security to the writer of the
option on or before a fixed date at a predetermined price. A call option gives
the buyer of the option, upon payment of a premium, the right to call upon the
writer to deliver a specified amount of a security on or before a fixed date, at
a predetermined price. A call option written by one of the Funds is "covered" if
such Fund owns the underlying security covered by the call or has an absolute
and immediate right to acquire that security without additional cash
considerations (or for additional cash consideration held in a segregated
account by its custodian) upon conversion or exchange of other securities held
in its portfolio. A call option is also covered if a Fund holds a call on the
same security and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise price
of the call written or (b) is greater than the exercise price of the call
written if the difference is maintained by such Fund in cash, U.S. Government
Securities or other liquid high-grade debt securities in a segregated account
with its custodian. A put option written by one of the Funds is "covered" if
such Fund maintains cash, U.S. Government Securities or other liquid high-grade
debt securities with a value equal to the exercise price in a segregated account
with its custodian, or else holds a put on the same security and in the same
principal amount as the put written where the exercise price of the put held is
equal to or greater than the exercise price of the put written. Each of the
Funds will not write puts if, as a result, more than 50% of the Fund's total
assets would be required to be segregated. The premium paid by the purchaser of
an option will reflect, among other things, the relationship of the exercise
price to the market price and volatility of the underlying security, the
remaining term of the option, supply and demand and interest rates.
The Funds may write call options that are not covered for cross-hedging
purposes. A call option written for cross-hedging purposes is designed to
provide a hedge against a decline in the value of another security that the Fund
owns or has the right to acquire. A Fund will write such a call option only when
its adviser expects that price changes in the security on which the option is
written will correlate well with price changes in a security in such Fund's
portfolio. The risk of imperfect correlation, however, always exists. In such
circumstances, a Fund collateralizes the option by maintaining in a segregated
account with such Fund's custodian cash, U.S. Government Securities or other
liquid high-grade debt securities in an amount not less than the market value of
the underlying security, marked to market daily. There are no numerical
limitations on the Funds' ability to write call options.
In purchasing a call option, a Fund would be in a position to realize a
gain if, during the option period, the price of the security increased by an
amount in excess of the premium paid. It would realize a loss if the price of
the security declined or remained the same or did not increase during the period
by more than the amount of the premium. In purchasing a put option, a Fund would
be a position to realize a gain if, during the option period, the price of the
security declined by an amount in excess of the premium paid. It would realize a
loss if the price of the security increased or remained the same or did
<PAGE>
not decrease during that period by more than the amount of the premium. If a put
or call option purchased by one of the Funds were permitted to expire without
being sold or exercised, its premium would be lost by such Fund.
If a put option written by one of the Funds were exercised, such Fund
would be obligated to purchase the underlying security at the exercise price. If
a call option written by one of the Funds were exercised, such Fund would be
obligated to sell the underlying security at the exercise price. The risk
involved in writing a put option is that there could be a decrease in the market
value of the underlying security caused by rising interest rates or other
factors. If this occurred, the option could be exercised and the underlying
security would then be sold to the Fund at a higher price than its current
value. The risk involved in writing a call option is that there could be an
increase in the market value of the underlying security caused by declining
interest rates or other factors. If this occurred, the option could be exercised
and the underlying security would then be sold by such Fund at a lower price
than its current market value. A Fund retains the premium received from writing
a put or call option whether or not the option is exercised.
The exchanges have established position limits governing the maximum
number of options which may be written by an investor or group of investors
acting in concert. Similarly, the Commodities Features Trading Commission and
the Chicago Board of Trade have established futures position limits for an
investor or group of investors acting in concert. (A discussion of the Funds'
ability to invest in futures contracts and options thereon is set forth below).
The position limits may restrict a Fund's ability to purchase or write options
on a particular security or to enter into futures contracts. It is possible that
a Fund and other clients of its adviser may be considered to be a group of
investors acting in concert. Thus, the number of options or futures transactions
which a Fund may enter into may be affected by options or futures transactions
of other investment advisory clients of its adviser.
Over-the-counter options are purchased or written by one of the Funds
in privately negotiated transactions. Such options are illiquid and it may not
be possible for such Fund to dispose of an option it has purchased or terminate
its obligations under an option it has written at a time when its Adviser
believes it would be advantageous to do so.
A more complete discussion of the general characteristics and risk of
options is included in the Statement of Additional Information.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Funds may enter
into contracts for the purchase or sale for future delivery of fixed income
securities or contracts based on financial indices including any index of
securities in which the Funds may invest, including for XUS and Strategic Fund
foreign securities and currencies ("futures contracts") and may purchase and
write put and call options to buy or sell futures contracts ("options on futures
contracts"). A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract at a
specified price on a specified date. The purchaser of a futures contract on an
index agrees to take or make delivery of an amount of cash equal to the
difference between a specified dollar multiple of the value of the index on the
expiration date of the contract ("current contract value") and the price at
which the contract was originally struck. No physical delivery of the fixed
income securities underlying the index is made. Options on futures contracts to
be written or purchased by one of the Funds will be traded on exchanges or
over-the-counter. These investment techniques will be used only to hedge against
anticipated future changes in interest rates which otherwise might either
adversely affect the value of a Fund's portfolio securities or adversely affect
the prices of securities which such Fund intends to purchase at a later date.
The successful use of such instruments relies upon an adviser's experience with
respect to such instruments and usually depends upon an adviser's ability to
forecast interest rate movements correctly. Should interest rates move in an
unexpected manner, a Fund may not achieve the anticipated benefits of futures
contracts or options on futures contracts or may realize losses and would thus
be in a worse position than if such strategies had not been used. For example,
if a Fund has hedged against the possibility of an increase in interest rates
which would adversely affect the price of bonds
<PAGE>
held in its portfolio and interest rates decrease instead, such Fund will lose
part or all of the benefit of the increased value of its bonds which it has
hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if such Fund has insufficient cash, it may have to
sell bonds from its portfolio to meet daily variation margin requirements. Such
sales of bonds may be, but will not necessarily be, at increased prices which
reflect the rising market. Such Fund may have to sell securities at a time when
it may be disadvantageous to do so. In addition, the correlation between
movements in the price of futures contracts or options on futures contracts and
movements in the prices of the securities hedged or used for cover will not be
perfect.
Futures contracts and options on futures contracts will be used only
for hedging or for other risk management purposes. HLA will not enter into any
futures contracts or options on futures contracts if immediately thereafter the
amount of initial margin deposits on all the futures contracts of the Fund and
premiums paid on options on futures contracts for other than bona fide hedging
purposes would exceed 5% of the market value of the total assets of the Fund.
This restriction will not be changed by the HLA's Board of Directors without
considering the policies and concerns of the various applicable federal and
state regulatory agencies. There are no other numerical limitations on the
Fund's use of futures contracts and options on futures contracts.
Options on securities may be traded over-the-counter. In an
over-the-counter trading environment, any of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer could lose
amounts substantially in excess of its initial investment, due to the margin
requirements associated with such positions.
In addition, options on securities, futures contracts and options on
future contracts may be traded on foreign exchanges. Such transactions are
subject to the risk of governmental actions affecting trading in or the prices
of foreign currencies or securities. The value of such positions also could be
adversely affected by (a) other complex foreign political and economic factors;
(b) lesser availability than in the United States of data on which to make
trading decisions; (c) delays in a Fund's ability to act upon economic events
occurring in foreign markets during nonbusiness hours in the United States; (d)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the United States; and (e) lesser trading volume.
The Funds may, following written notice thereof to its shareholders,
take advantage of opportunities in the area of options and futures contracts and
options on futures contracts which are not currently contemplated or used by the
Fund or which are not currently available but which may be developed, to the
extent such opportunities are both consistent with the Fund's investment
objective and legally permissible for the Fund.
A more complete discussion of the general characteristics and risk of
futures contacts and options on futures contracts is included in the Statement
of Additional Information.
When-Issued and Forward Commitment Securities
XUS, HLA and Strategic Fund may, without a numerical limitation,
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis in order to hedge against anticipated changes in
interest rates and prices and secure a favorable rate of return. When such
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date, which can be a month or more after
the date of the transaction. At the time a Fund makes the commitment to purchase
securities on a when-issued or forward commitment basis, it will record the
transaction and thereafter reflect the value of such securities in determining
its net asset value. If such
<PAGE>
Fund disposes of the right to acquire a when-issued security prior to its
acquisition or disposes of its right to deliver or receive against a forward
commitment, it can incur a gain or loss due to market fluctuations. In some
instances, the third-party seller of when-issued or forward commitment
securities may determine prior to the settlement date that it will be unable to
meet its existing transaction commitments without borrowing securities. If
advantageous from a yield perspective, such Fund may, in that event, agree to
resell its purchase commitment to the third-party seller at the current market
price on the date of sale and concurrently enter into another purchase
commitment for such securities at a later date. As an inducement for such Fund
to "roll over" its purchase commitment, such Fund may receive a negotiated fee.
There is always a risk that the securities may not be delivered and
that a Fund may incur a loss or will have lost the opportunity to invest the
amount set aside for such transaction in the segregated asset account.
Settlements in the ordinary course, which may take substantially more than five
business days for mortgage-related securities, are not treated by a Fund as
when-issued or forward commitment transactions and, accordingly, are not subject
to the foregoing limitations even though some of the risks described above may
be present in such transactions. For additional information concerning
when-issued and forward commitment securities, see the Statement of Additional
Information.
Leverage and Borrowing
XUS and HLA may borrow money from a financial institution unrelated to
such Fund (including through reverse repurchase agreements) in an amount up to
33 1/3% of the Fund's total assets (including the amount borrowed), less its
liabilities not including such borrowings. XUS and HLA may also borrow an
additional 5% of its total assets for temporary defense purposes without regard
to the foregoing limitation. XUS and HLA will not make any such additional
borrowings, however, without receipt of an opinion of counsel to the effect that
such borrowings are in compliance with applicable provisions of the 1940 Act.
XUS and HLA may also enter into reverse repurchase agreements which create
leverage and, therefore, will be considered borrowings for purposes of a Fund's
limitation on borrowing (as described below). XUS and HLA reserve the right to
issue commercial paper, bonds, debentures, notes or preferred stock, in series
or otherwise with such interest rates, conversion rights, preferences and other
terms and provisions as are determined by the Fund's Board of Directors.
Strategic Fund may not borrow, except from banks for temporary or
emergency purposes. The amount of such borrowing may not exceed one-third of
Strategic Fund's total assets. Notwithstanding the foregoing, Strategic Fund may
engage in reverse repurchase agreement transactions. Strategic Fund may not
issue commercial paper, bonds, debentures, notes or preferred stock.
Utilization of leverage, which is a speculative technique, creates
special risk considerations. For example, leveraging may exaggerate changes in
the net asset value of a Fund's shares and in the yield on a Fund's portfolio.
Although the principal of such borrowings will be fixed, a Fund's assets may
change in value during the time the borrowing is outstanding. Borrowing will
create interest expense for such Fund which can exceed the income from the
assets retained. To the extent income derived from securities purchased with
borrowed funds exceeds the interest such Fund will have to pay, such Fund's net
income will be greater than if borrowing were not used. Conversely, if the
income from the assets retained with borrowed funds is not sufficient to cover
the cost of borrowing, the net income of such Fund will be less than if
borrowing were not used, and therefore the amount available for distribution to
shareholders as dividends will be reduced. A failure to pay dividends or make
distributions could result in a Fund ceasing to qualify as a regulated
investment company under the Code.
The Funds expect that some of its permitted borrowings may be made on a
secured basis. In such situations, either a Fund's custodian will segregate the
pledged assets for the benefit of the lender or arrangements will be made with
(a) the lender to act as a subcustodian if the lender is a bank or otherwise
qualifies as a custodian of investment company assets, or (b) a suitable
subcustodian.
<PAGE>
Repurchase Agreements
The Piper Funds and Strategic Fund may enter, without numerical
limitation, into "repurchase agreements" pertaining to the securities in which
it may invest with securities dealers or member banks of the Federal Reserve
System. A repurchase agreement arises when a buyer such as one of the Funds
purchases a security and simultaneously agrees to resell it to the vendor at an
agreed upon future date, normally one day or a few days later. The resale price
is greater than the purchase price, reflecting an agreed upon interest rate
which is effective for the period of time the buyer's money is invested in the
security and which is related to the current market rate than the coupon rate on
the purchased security. Such agreements permit a Fund to keep all of its assets
at work while retaining "overnight" flexibility in pursuit of investments of a
longer-term nature. The Funds require continual maintenance by its custodian for
its account in the Federal Reserve/Treasury Book Entry System of collateral in
an amount equal to, or in excess of, the resale price. In the event a vendor
defaulted on its repurchase obligation, a Fund might suffer a loss to the extent
that the proceeds from the sale of the collateral were less than the repurchase
price. In the event of a vendor's bankruptcy, a Fund might be delayed in, or
prevented from, selling the collateral for such Fund's benefit. For additional
information concerning repurchase agreements, see "Investment Objective and
Policies" in the Statement of Additional Information related to this Proxy
Statement/Prospectus.
Reverse Repurchase Agreements
The Piper Funds and Strategic Fund may enter into reverse repurchase
agreements. Under a reverse repurchase agreement, a Fund sells securities and
agrees to repurchase them at mutually agreed upon date and price. Reverse
repurchase agreements involve the risk that the market value of the securities
retained in lieu of sale by a Fund may decline more than or appreciate less than
the securities such Fund has sold but is obligated to repurchase. In the event
the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce a Fund's obligation
to repurchase the securities and a Fund's use of the proceeds of the reverse
repurchase agreement may effectively be restricted pending such decisions.
Reverse repurchase agreements create leverage, a speculative factor, and will be
considered borrowing for purposes of a Fund's limitation on borrowing.
Lending of Securities
In order to increase income, the Funds may from time to time lend
securities from its portfolio to brokers dealers and financial institutions and
receive collateral in the form of cash or U.S. Government Securities. Under each
Fund's procedures, collateral for such loans must be maintained at all times in
an amount equal to at least 100% of the current market value of the loaned
securities (including interest on the loaned securities). The interest accruing
on the loaned securities will be paid to the Fund and the Fund will have the
right, on demand, to call back the loaned securities. A Fund may pay fees to
arrange the loans. XUS and HLA will not lend portfolio securities in excess of
30% of the value of its total assets (including such loans). Strategic Fund will
not lend portfolio securities in excess of 33 1/3% of the value of its total
assets (including such loans). A Fund will not lend its portfolio securities to
any officer, director, employee or affiliate of such Fund or its Adviser.
Currency Swaps
XUS and Strategic Fund may enter into currency swaps to protect against
adverse currency fluctuations and to enhance returns. Currency swaps involve an
exchange of each party's respective rights to make or receive payments in
particular currencies. In contrast to interest rate swaps which are typically
netted out, currency swaps usually involve the delivery of the entire payment
stream in one designated currency in exchange for the entire payment stream in
the other designated currency. Therefore, the entire principal value of a
currency swap is subject to the risk that the other party to the swap will
default on its contract delivery obligation.
<PAGE>
Foreign Currency Transactions
XUS and Strategic Fund may engage in currency exchange transactions in
connection with the purchase and sale of its investments. Currency exchange
transactions are necessary to enable such Funds to purchase securities
denominated in a foreign currency and to convert interest and dividend payments
or sales proceeds paid in a foreign currency into U.S. dollars or into another
currency.
XUS and Strategic Fund may engage in "transaction hedging" to protect
against a change in foreign currency exchange rates between the date on which it
contracts to purchase or sell the security and the settlement date, or to "lock
in" the U.S. dollar equivalent (or other foreign currency equivalent to the
extent needed for purposes of purchasing securities) of a dividend or interest
payment in a foreign currency. For that purpose, XUS and Strategic Fund may
enter into forward foreign currency exchange contracts ("Forward Contracts"). A
Forward Contract is a negotiated agreement to exchange currency at a future time
at a rate or rates that may be higher or lower than the spot rate.
For transaction hedging purposes, XUS and Strategic Fund may also
purchase exchange-listed and over-the-counter call and put options on foreign
currency futures contracts and on foreign currencies. A put option on a futures
contract gives XUS and Strategic Fund the right to assume a short position in
the futures contract until expiration of the option. A put option on currency
gives XUS and Strategic Fund the right to sell a currency at an exercise price
until the expiration of the option. A call option on a futures contract gives
XUS and Strategic Fund the right to assume a long position in the futures
contract until the expiration of the option. A call option on currency gives XUS
and Strategic Fund the right to purchase a currency at the exercise price until
the expiration of the option.
XUS and Strategic Fund may enter into Forward Contracts or foreign
currency options or futures to protect against a decline in the value relative
to the U.S. dollar of the currencies in which its portfolio securities are
denominated or quoted (or an increase in the value of currency for securities
which XUS and Strategic Fund intend to buy when they hold cash reserves and
short-term investments) ("position hedging"). For position hedging purposes, XUS
and Strategic Fund may enter into a forward contract to sell, for a fixed amount
of U.S. dollars or other currency, an amount of foreign currency other than the
currency in which the securities to be hedged are denominated approximating the
value of some or all of the portfolio securities to be hedged. XUS and Strategic
Fund will select this method of hedging, called "cross-hedging" when it is
determined that the foreign currency is which the portfolio securities are
denominated have insufficient liquidity or are trading at a discount as compared
with some other foreign currency with which it tends to move in tandem.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which XUS or Strategic Fund own or intend to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
the value of such currency. In addition, currency transactions involve
transaction costs. XUS and Strategic Fund may write covered call options on
foreign currencies to offset some of the costs of currency transactions. The
ability of XUS and Strategic Fund to engage in currency and related option
transactions may be limited by tax considerations. See "Taxation" in the
Statement of Additional Information.
<PAGE>
APPENDIX VIII
COMPARISON OF INTERIM ADVISORY AGREEMENT AND
STRATEGIC INCOME FUND'S ADVISORY AGREEMENT
This Appendix summarizes and compares certain significant provisions
of the Interim Advisory Agreements (the "Interim Agreements") against
corresponding provisions of the FAIF Strategic Income Fund's Investment Advisory
Agreement (the "FAIF Agreement"). Advisory fees payable under the Agreements are
set forth in Table I and II in the Combined Proxy Statement/Prospectus.
ADVISORY SERVICES. The Interim Agreements provide that Piper Capital
will manage the affairs, business and the investment of the assets of each Piper
Fund in accordance with the applicable provisions of the articles of
incorporation, bylaws, registration statement, and any representations contained
in the Prospectuses of the Piper Funds. Under each Interim Agreement, Piper
Capital has the sole and exclusive responsibility for the management of the
respective Fund's assets and the making and execution of all investment
decisions for the Fund, except investment decisions by the Fund, except that
Piper Capital is authorized to retain a sub-adviser or sub-advisers to assist it
in furnishing investment advice to the Fund. Under each Interim Agreement, Piper
Capital will, at its own expense, furnish to the respective Piper Fund suitable
office space and all necessary office facilities, equipment and personnel for
serving the investments of such Piper Fund. Piper Capital will arrange, if
requested, for officers, employees and "affiliated persons" of Piper Capital to
serve without compensation from a Piper Fund as directors, officers, or
employees of such Piper Fund.
Similarly, the FAIF Agreement provides that U.S. Bank agrees to act
as the investment adviser for, and to manage the investment of the assets of,
the Strategic Fund. The adviser is also authorized to hire a sub-adviser to
assist in such responsibilities. Under the FAIF Agreement, U.S. Bank adviser is
required, at its own expense, to provide Strategic Fund with all office space,
personnel and facilities necessary and incident to the performance of the
adviser's services under the Agreement. In addition, under the FAIF Agreement,
U.S. Bank is required to pay or be responsible for the payment of all
compensation to personnel of Strategic Fund and the officers and directors of
the Strategic Fund who are affiliated with U.S. Bank or any entity which
controls, is controlled by or is under common control with U.S. Bank.
Under the Interim Agreements and the FAIF Agreement, the respective
advisers will report to the Board of Directors for each Fund regularly at such
times and in such detail as the Board of Directors may determine.
FEE AND EXPENSE LIMITATIONS. The FAIF Agreement requires that if, in
any fiscal year, the aggregate expenses of any Fund exceed the expense
limitations imposed under the securities regulations of a state, U.S. Bank will
reimburse Strategic Fund. Such reimbursement shall not exceed the advisory fees
paid to U.S. Bank during the year, unless otherwise required by the state and,
in the case of the FAIF Agreement, unless the adviser agrees to be bound by such
state requirement. Under federal law, states may no longer impose expense
limitations on mutual funds.
STANDARD OF CARE. The FAIF Agreement provides that U.S. Bank will be
liable to Strategic Fund and its shareholders or former shareholders for any
negligence or willful misconduct on the part of U.S. Bank or any of its
directors, officers, employees, representatives or agents in connection with the
responsibilities assumed by it under the FAIF Agreement, provided that U.S. Bank
shall not be liable for any investments made by U.S. Bank in accordance with the
explicit or implicit direction of the Board of Directors of FAIF or the
investment objectives and policies of Strategic Fund, and provided further that
any liability of U.S. Bank resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services shall be limited to the
period and amount set forth in Section 36(b)(3) of the 1940 Act. In addition,
U.S. Bank agrees in the FAIF Agreement to indemnify FAIF and Strategic Fund with
respect to any loss, liability, judgment, cost or penalty which FAIF or
Strategic
<PAGE>
Fund may directly or indirectly suffer or incur in any way arising out of or in
connection with any breach of the FAIF Agreement by U.S. Bank. The Interim
Agreements do not contain provisions pertaining to standard of care.
DURATION AND TERMINATION. The Interim Agreements will continue in
effect with respect to the Piper Funds either (i) for an initial period of two
years and thereafter successive one-year terms, subject to approval of (a) the
Board of Directors of the Fund or by the vote of a majority of the outstanding
voting securities of the Fund, and (b) by the vote of a majority of the
directors who are no parties to the Interim Agreements or interested persons of
such parties, or (ii) until the Reorganization is completed. Similarly, the FAIF
Agreement will remain in force for successive annual periods, subject to the
same annual approval requirements. Besides automatic termination in the event of
its assignment (as defined in the 1940 Act), the Interim Agreements and the FAIF
Agreement may be terminated at any time without the payment of any penalty by
the vote of the Board of Directors of the Fund or by the vote of the holders of
a majority of the outstanding shares of the applicable Fund, or by the
applicable adviser, upon 60 days' written notice to the other party.
<PAGE>
APPENDIX IX
COMPARISON OF THE INTERIM SUB-ADVISORY AGREEMENTS AND
STRATEGIC INCOME FUND'S SUB-ADVISORY AGREEMENT
This Appendix summarizes and compares certain significant provisions
of the Interim Sub-Advisory Agreements between Piper Capital and Salomon (for
XUS) and Federated (for HLA) (the "Interim Sub-Advisory Agreements") against
corresponding provisions of the Sub-Advisory Agreement between U.S. Bank and
Strategic Fund (the "FAIF Sub-Advisory Agreement").
SUB-ADVISORY SERVICES. Under the Interim Sub-Advisory Agreement with
XUS, Salomon is responsible for the formulation and implementation of a
continuing program for the management of their respective Fund's assets. Salomon
is responsible for making all determinations with respect to the investment of
the assets of XUS and for taking take all steps as may be necessary to implement
the determinations, including the placement of purchase and sale orders on
behalf of XUS. Federated is responsible only for HLA's investments in
lower-rated fixed income securities. Under the Interim Sub-Advisory Agreement
with HLA, Federated is responsible for the formulation and implementation of a
continuing program for the management of HLA's investments in such securities
and for making all determinations with respect to the investment of the assets
of HLA and for taking take all steps as may be necessary to implement the
determinations, including the placement of purchase and sale orders on behalf of
HLA. Under the FAIF Sub-Advisory Agreement, Federated Investment Counseling and
Federated Global Research Corp. will each be responsible for similar management
duties of certain of Strategic Fund's assets.
Under each of the Interim Sub-Advisory Agreements and the FAIF
Sub-Advisory Agreement, a sub-adviser's power to direct the investment and
reinvestment of the assets of the applicable Fund will be exercised in
accordance with applicable law, the articles of incorporation of such Fund, the
investment objectives, policies and restrictions of such Fund and any other
limitations that such Fund or the Adviser may place on a sub-adviser's
investment decisions. Under each of the Interim Sub-Advisory Agreements and the
FAIF Sub-Advisory Agreement, the sub-adviser may employ, retain, or otherwise
avail itself of the services or the facilities of persons and entities within
its own organization or any other organization for the purposes of providing
such information, advice or assistance as such sub-adviser may deem necessary
for the discharge of its obligations under the applicable sub-advisory
agreements.
Under the Interim Sub-Advisory Agreements, the Piper Sub-Advisers
will promptly communicate to the Adviser and to the Boards of the Directors of
the Piper Funds, such information and reports relating to the portfolio
transactions as the adviser may reasonably request. Similarly, under the FAIF
Sub-Advisory Agreement, Federated will provide copies of all records, documents
and reports pertaining to Strategic Fund to FAIF, the Adviser or any such person
designated by FAIF.
EXPENSES. Under the Interim Sub-Advisory Agreements, a Sub-Adviser
assumes expenses of its performance of its obligations, but is not obligated to
pay expenses of the Piper Funds. Under the FAIF Sub-Advisory Agreement,
Federated will provide all office space, personnel and facilities necessary and
incident to the performance of its sub-advisory services, but will not be
obligated to pay expenses of Strategic Fund, the Adviser or FAIF.
PORTFOLIO TRANSACTIONS. Under each of the Interim Sub-Advisory
Agreements and the FAIF Sub-Advisory Agreement, a sub-adviser will select the
brokers and dealers that will execute the purchases and sales of portfolio
instruments for the Fund and markets on or in which such transaction will be
<PAGE>
executed and will place all such orders. A sub-adviser is authorized to direct
the execution of a Fund's portfolio transaction to brokers and dealers who
furnish statistical information or research deemed by the sub-adviser to be
useful or valuable to the performance of its sub-advisory function. The sub-
adviser will not purchase or sell securities for their respective Fund in which
it, such fund's investment adviser or any "affiliated person" is acting as
principal and the sub-adviser will not execute any portfolio transaction for
their respective Fund with a broker or dealer which is an "affiliated person" of
the applicable fund, the fund's adviser or sub-adviser, except that transactions
may be effected through Piper Jaffray Inc., if commission, fees or other
remuneration received are reasonable and fair and as permitted pursuant to Rule
17a-7 under the 1940 Act.
STANDARD OF CARE. Under each of the Interim Sub-Advisory Agreements
and the FAIF Sub-Advisory Agreement, a sub-adviser will not be liable for any
error of judgment or mistake of law or for any loss suffered by a Fund or its
shareholders in connection with the performance by such sub-adviser of its
duties thereunder, except a loss resulting from willful misfeasance, bad faith
or gross negligence on the part of such sub-adviser in the performance of its
duties or from reckless disregard by such sub-adviser of its duties under the
applicable sub-advisory agreement.
DURATION AND TERMINATION. The Interim Sub-Advisory Agreements will
continue in effect with respect to the Piper Funds either (i) for a period of
two years from its effective date, and thereafter will continue in effect only
so long as such continuance is specifically approved at least annually by (a)
the Board of Directors of the Fund or by the vote of a majority of the
outstanding voting securities of the Fund, and (b) by the vote of a majority of
the directors who are not parties to the Interim Sub-Advisory Agreements or
interested persons of such parties, or (ii) until the Reorganization is
completed. Similarly, the FAIF Sub-Advisory Agreement will remain in force for
successive annual periods, subject to the same annual approval requirements.
Besides automatic termination in the event of its assignment (as defined in the
1940 Act), the Interim Sub-Advisory Agreements and the FAIF Sub-Advisory
Agreement will each terminate at any time (i) by either party to the agreement
on 60 days' written notice to other party, or (ii) by a vote of the Board of
Directors of the applicable Fund or of a majority of the applicable Fund's
outstanding voting securities upon 60 days' written notice to the adviser and
sub-adviser of such Fund.
<PAGE>
APPENDIX X
SHAREHOLDER TRANSACTIONS AND SERVICES
This Appendix compares the shareholder transactions and services of
the Piper Funds and Strategic Fund. The following as it applies to Strategic
Fund is qualified in its entirety by the more detailed information included in
the preliminary prospectuses for the Class A shares and of Strategic Fund, which
is attached to this Combined Proxy Statement/Prospectus as Appendix XI.
PURCHASE, EXCHANGE AND REDEMPTION PROCEDURES
The common shares of XUS currently trade on the New York Stock
Exchange and common shares of HLA trade on the American Stock Exchange. Shares
of Strategic Fund will be offered to the public on a continuous basis and will
not be listed in any stock exchange. Common shares of the Piper Funds may only
be purchased through a broker. Following the Reorganization, shares of Strategic
Fund may be purchased at the net asset value through a financial institution
which has a sales agreement with the Funds' distributor, by mail directly
through the Funds' transfer agent, or by wire. In addition, Strategic Fund has
an automatic investment program which allows shareholders to make regular
purchases of shares through automatic deduction from a shareholder's account in
the same class of shares of the Prime Obligations Fund, a series of First
American Funds, Inc.
PURCHASE PRICE. Shares of the Piper Funds may be purchased at their
current market price (which may be higher or lower than their current net asset
value) plus brokerage commission. Shares of Strategic Fund will be available for
purchase at the net asset value per share next calculated after receipt of an
order, plus the applicable front sales charge as set forth in the table below.
Sales Charges for Strategic Fund
Strategic Fund
Sales Charge as
-------------------------------
% of % of Net
Size of Transaction at Offering Price Offering Price Asset Value
- ------------------------------------- -------------- -----------
Less than $50,000............................ 4.50 % 4.71 %
$50,000 but less than $100,000............... 4.00 % 4.17 %
$100,000 but less than $250,000.............. 3.50 % 3.63 %
$250,000 but less than $500,000.............. 2.75 % 2.83 %
$500,000 but less than $1,000,000............ 2.00 % 2.04 %
$1,000,000 and over*......................... 0.00 % 0.00 %
- --------------------
** No initial sales charge applies to purchases of Class A shares of $1,000,000
or more. However, a 1.00% contingent deferred sales charge will be imposed
if those shares are redeemed within 24 months of purchase.
The minimum initial investment for Strategic 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 Piper Funds have no minimum
investment requirement.
PURCHASES AT REDUCED OR NO SALES CHARGE. For the Class A shares of
Strategic Fund, various persons, entities and groups may qualify for reduced
sales charges, or for purchases at net asset value without a sales charge.
<PAGE>
EXCHANGES. Shareholders of Strategic Fund will be able to exchange
their Class A shares for shares of the same class of other mutual funds of FAIF,
First American Funds, Inc. and Firs America Strategy Funds, Inc.
REDEMPTIONS. Shares of the Piper Funds may sold through
broker-dealers on any business day. A commission is generally charged for each
sale. After the Reorganization, shares of Strategic Fund will be redeemable, in
whole or in part, on any day on which Strategic Fund computes its net asset
value. No fee or other charge is imposed on the redemption of Strategic Fund
shares, except that a contingent deferred sales charge will be imposed upon
redemption of certain shares initially purchased without a sales charge. No
contingent deferred sales charge will be imposed on sales of shares acquired as
a result of the Reorganization. Strategic Fund reserves the right to redeem an
account at any time the net asset value of that account falls below $ 500 as a
result of a redemption request or exchange request. Shareholders will be
notified in writing prior to any such redemption and will be allowed 60 days to
make additional investments before the redemption is processed.
Additional information regarding share purchases, sales charges,
exchange procedures and redemption procedures, redemption procedures is set
forth in the preliminary prospectus for Strategic Fund, which is attached as
Appendix XII to this Combined Proxy Statement/Prospectus.
DIVIDENDS AND DISTRIBUTIONS.
The Piper Funds under normal circumstances distributes monthly
dividends from its net investment income (non-capital gain income less
expenses). The Piper Funds may at times pay out more or less than the entire
amount of net investment income in any particular period to permit a Piper Fund
to maintain a stable level of distributions. As a result the distributions paid
by a Piper Fund for any particular period may be more or less than the amount of
net investment income earned by a Piper Fund during such period. Monthly
distributions may also include amounts attributable to net short-term capital
gains if necessary to maintain stable level of distributions. This may result in
a portion of the monthly distributions constituting a return of capital to the
extent the Piper Fund subsequently realized capital losses. Net short term
capital gains not previously distributed and net long-term gains, if any, are
distributed at least once annually.
Similar to the Piper Funds, dividends with respect to Strategic 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 will be automatically
reinvested in additional shares of Strategic Fund paying the dividend on payment
dates at the next dividend date net assets value without a sales charge, unless
shareholders request cash payments.
Additional information regarding dividends and distributions for
Strategic Fund is set forth in the preliminary prospectus for Strategic Fund,
which is attached as Appendix XI to this combined Proxy Statement/Prospectus.
<PAGE>
APPENDIX XI
PORTFOLIO MANAGERS OF
THE PIPER FUNDS
THE AMERICAS INCOME TRUST INC.
XUS is managed primarily by Peter Wilby. Mr. Wilby is a managing
director at Salomon Brothers Asset Management Inc. and has 14 years of financial
experience. Mr. Wilby is a Chartered Financial Analyst, a Certified Public
Accountant and a member of the New York Society of Securities Analysts. He
received his bachelor's degree in business administration and his master's
degree in business administration from Pace University.
HIGHLANDER INCOME FUND INC.
HLA is managed by Mark E. Durbiano, Tom McGlinch and Wan-Chong Kung.
Mr. Durbiano joined Federated Investors in 1982 and has been a
Senior Vice President of Federated Advisors, HLA's sub-adviser since January
1996. From 1988 through 1995, Mr. Durbiano was a Vice President of an affiliate
of Federated Advisors. 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.
Mr. McGlinch has over sixteen years of investment industry
experience. He 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.
Ms. Kung has over five years of investment industry experience. She
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>
APPENDIX XII
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION AND AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
, 1998
CLASS A AND CLASS B SHARES
Strategic Income Fund
FIRST AMERICAN
INVESTMENT FUNDS, INC.
PROSPECTUS
Subject to Completion -- April 15, 1998
[LOGO]
FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING (R)
<PAGE>
TABLE OF CONTENTS
Summary 2
............................................
Fees and Expenses 4
............................................
The Fund 7
............................................
Investment Objectives and Policies 7
............................................
Management 10
............................................
Distributor 13
............................................
Investing in the Fund 14
............................................
Redeeming Shares 21
............................................
Determining the Price of Shares 23
............................................
Federal Income Taxes 24
............................................
Fund Shares 24
............................................
Calculation of Performance Data 25
............................................
Special Investment Methods 26
............................................
Information Concerning Compensation Paid
to U.S. Bank National Association, U.S.
Bank Trust National Association and
Other Affiliates 35
............................................
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
CLASS A AND CLASS B
SHARES PROSPECTUS
The shares described in this Prospectus represent interests in First
American Investment Funds, Inc., which consists of mutual funds with several
different investment portfolios and objectives. This Prospectus relates to
the Class A and Class B Shares of the following fund (the "Fund"):
* STRATEGIC INCOME FUND
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING U.S. BANK NATIONAL ASSOCIATION AND ANY OF
ITS AFFILIATES, NOR ARE THEY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. AN INVESTMENT IN
THE FUND INVOLVES INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL, DUE
TO FLUCTUATIONS IN EACH FUND'S NET ASSET VALUE.
This Prospectus concisely sets forth information about the Fund that a
prospective investor should know before investing. It should be read and
retained for future reference.
A Statement of Additional Information dated ___________, 1998 for the Funds
has been filed with the Securities and Exchange Commission ("SEC") and is
incorporated in its entirety by reference in this Prospectus. To obtain
copies of the Statement of Additional Information at no charge, or to obtain
other information or make inquiries about the Funds, call (800) 637-2548 or
write SEI Investments Distribution Co., Oaks, Pennsylvania 19456. The SEC
maintains a World Wide Web site that contains reports and information
regarding issuers that file electronically with the SEC. The address of such
site is "http://www.sec.gov."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of this Prospectus is ________, 1998.
<PAGE>
SUMMARY
First American Investment Funds, Inc. ("FAIF") is an open-end investment
company which offers shares in several different mutual funds. This
Prospectus provides information with respect to the Class 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 in U.S. government securities, investment and
non-investment grade fixed-income securities issued by foreign governments
and companies, and non-investment grade fixed income securities issued by
U.S. issuers. Under normal market conditions, the Fund's assets will be
invested in each of these three sectors, with no more than 50% invested in
any one sector.
INVESTMENT ADVISER AND SUB-ADVISER. U.S. Bank National Association (the
"Adviser" or "U.S. Bank") serves as investment adviser to the Fund through
its First American Asset Management group. Federated Investment Counseling
and Federated Global Research Corp. (the "Sub-Advisers"and individually a
"Sub-Adviser") serve as the sub-advisers 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
of up to 1.00% on such sales. Redemptions of Class A Shares within 24 months
following such purchases will be subject to a contingent deferred sales
charge of up to 1.00%. Class A Shares of the 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) for the Fund. 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 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."
<PAGE>
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); and
(iv) the risks associated with investing in foreign 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 also may, in order to attempt to reduce risk, invest in
exchange traded interest rate futures contracts, interest rate index futures
contracts and put and call options on interest rate futures contracts and on
interest rate indices. See "Investment Objectives and Policies -- Risks to
Consider" and "Special Investment Methods."
SHAREHOLDER INQUIRIES. Any questions or communications regarding the 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 A SHARE FEES AND EXPENSES
STRATEGIC
INCOME
FUND
================================================================================
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
================================================================================
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees (after voluntary fee waivers)(2) 0.70%
Rule 12b-1 fees(3) 0.25%
Other expenses 0.20%
Total fund operating expenses
(after voluntary fee waivers)(2) 1.15%
================================================================================
EXAMPLE(4)
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) THE ADVISER HAS AGREED TO WAIVE ADVISORY FEES IN THE FUTURE TO THE EXTENT
NECESSARY TO KEEP TOTAL FUND OPERATING EXPENSES FROM EXCEEDING 1.15% AT
LEAST UNTIL JULY 31, 2000.
(3) OF THIS AMOUNT, 0.25% IS DESIGNATED AS A SHAREHOLDER SERVICING FEE AND NONE
AS A DISTRIBUTION FEE.
(4) ABSENT THE FEE WAIVERS REFERRED TO IN (2) ABOVE, THE DOLLAR AMOUNTS FOR THE
1 AND 3-YEAR PERIODS FOR THE FUND WOULD BE $56 AND $80.
<PAGE>
FEES AND EXPENSES
---------------------------------------------------------------------------
CLASS B 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 5.00%
Exchange fees None
================================================================================
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees (after voluntary fee waivers) 0.70%
Rule 12b-1 fees(1) 1.00%
Other expenses 0.20%
Total fund operating expenses
(after voluntary fee waivers) 1.90%
================================================================================
EXAMPLE(2)
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(3)
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) ABSENT THE FEE WAIVERS REFERRED TO IN (1) ABOVE, THE DOLLAR AMOUNTS FOR THE
1 AND 3-YEAR PERIODS WOULD BE $69 AND $100.
(3) ABSENT THE FEE WAIVER REFERRED TO IN (1) ABOVE (ASSUMING NO REDEMPTION), THE
DOLLAR AMOUNTS FOR THE 1 AND 3-YEAR PERIODS WOULD BE $19 AND $60.
<PAGE>
---------------------------------------------------------------------------
INFORMATION CONCERNING FEES AND EXPENSES
The purpose of the preceding tables is to assist the investor in
understanding the various costs and expenses that an investor in 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 the Fund named
on the cover hereof. 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 OBJECTIVES
AND POLICIES
This section describes the investment objectives and policies of the Fund.
There is no assurance that any of these objectives will be achieved. The
Fund's investment objectives are not fundamental and therefore may be
changed without a vote of shareholders. Such changes could result in the
Fund having investment objectives different from those 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 objectives. 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 limitation on illiquid investments. 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 to provide a
high level of current income.
INVESTMENT POLICIES. Under normal market conditions, Strategic Income Fund
invests in U.S. government securities, investment and non-investment grade
fixed income securities issued by governments and companies, both domestic
and foreign, which in the opinion of the Adviser, do not subject the Fund to
unreasonable investment risk. Under normal market conditions, the Fund's
assets will be invested in each of these three sectors, with no more than
50% invested in any one sector. However, the Fund may from time to time
invest up to 100% of its total assets in any one sector, if, in the judgment
of the Adviser, the Fund has the opportunity to seek its investment
objective without undue risk to principal.
<PAGE>
There will be no limit to the weighted average maturity of the Fund. It will
generally be of longer duration. Duration is a commonly used measure of the
potential volatility of the price of a debt security, or the aggregate
market value of a portfolio of debt securities, prior to maturity.
Securities with longer durations generally have more volatile prices than
securities of comparable quality with shorter durations.
The Fund's permitted investments include notes, bonds and discount notes of
United States government agencies and instrumentalities; domestic or foreign
issues of corporate debt obligations having floating rates of interest or
fixed rates of interests (including participation interests, and convertible
securities). Such corporate debt obligations may include obligations rated
BB or lower by Standard & Poor's or Ba or lower by Moody's, or 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-Adviser. 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, zero
coupon, pay-in-kind and delayed interest securities issued by corporations.
The Fund may also invest in preferred stock and in equity securities,
including common stock, convertible securities and warrants issued by
corporations in any industry which may be dominated in U.S. dollars or
foreign currencies, although 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.
For temporary defensive purposes, the Fund may without limitation hold cash
or invest in cash items. Cash items may include short-term obligations such
as rated commercial paper and variable amount master demand notes; time and
savings deposits (including certificates of deposit); bankers' acceptances;
obligations of the United States Government or its agencies or
instrumentalities; repurchase agreements collateralized by eligible
investments; and securities of other mutual funds which invest primarily in
debt securities with remaining maturities of 13 months or less (which
investments also are subject to the advisory fee). Such other mutual funds
include money market funds advised by the Adviser, subject to certain
restrictions contained in an exemptive order issued by the Securities and
Exchange Commission with respect thereto.
In addition, the Fund may (i) enter into repurchase and reverse repurchase
agreements; (ii) in order to attempt to reduce risk, purchase put and call
options on equity securities, 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 100% of
its total assets in the aggregate in interest only, principal only, inverse
interest 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, they are
subject to interest rate risk. In general, when interest rates rise, the
value of a fixed-rate debt security declines. Conversely, when interest
rates decline, the value of a fixed-rate debt
<PAGE>
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.
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. Thus, the net asset value of the Fund,
which invests in securities with longer weighted average maturities, should
be expected to have greater volatility in periods of changing market
interest rates than that of a fund which invests in securities with shorter
weighted average maturities. 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 Adviser and Sub-Advisers 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; RISKS OF LOWER RATED DEBT SECURITIES. 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, and securities issued by private entities, are subject to
higher levels of credit risk.
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 Adviser and
Sub-Advisers 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
<PAGE>
resulting from changes in exchange rates between the United States dollar
and foreign currencies. These risks are discussed under "Special Investment
Methods -- Foreign Securities" elsewhere herein. Because of the special
risks associated with foreign investing, the Fund may be subject to greater
volatility than most mutual funds which invest primarily in domestic
securities.
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 Adviser
acts as investment adviser for and manages the investment portfolios of
FAIF.
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INVESTMENT ADVISER
U.S. Bank National Association, 601 Second Avenue South, Minneapolis,
Minnesota 55402, acts as the Fund's investment adviser through its First
American Asset Management group. The Adviser has acted as an investment
adviser to FAIF since its inception in 1987 and has acted as investment
adviser to First American Funds, Inc. since 1982 and to First American
Strategy Funds, Inc. since 1996. As of September 30, 1997, the Adviser was
managing accounts with an aggregate value of approximately $55 billion,
including mutual fund assets of approximately $20 billion. U.S. Bancorp, 601
Second Avenue South, Minneapolis, Minnesota 55402, is the holding company
for the Adviser.
The Fund has agreed to pay the Adviser monthly fees calculated on an annual
basis equal to 0.70% of its average daily net assets out of which the
Adviser pays the Sub-Advisers' fees. The Adviser 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 Adviser 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 advisers to registered investment companies, subject
to a number of terms and conditions.
Although the scope of the prohibitions and limitations imposed by the
Glass-Steagall Act has not been fully defined by the courts or the
appropriate regulatory agencies, the Fund has received an opinion from their
counsel that the Adviser is not prohibited from performing the investment
advisory services described above, and that certain broker-dealers
affiliated with the Adviser are not prohibited from serving as a
Participating Institution as described herein. In the event of changes in
federal or state statutes or regulations or judicial and administrative
interpretations or decisions pertaining to permissible activities of bank
holding companies and their bank and nonbank subsidiaries, the Adviser and
certain affiliated broker-dealers might be prohibited from continuing these
arrangements. In that event, it is expected that the Board of Directors
would make other arrangements and that shareholders would not suffer adverse
financial consequences.
<PAGE>
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SUB-ADVISERS
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, serve as Sub-Advisers to the Fund under an agreement with the
Adviser (the "Sub-Advisory Agreement"). The Sub-Advisers 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
investments, Federated Global Research Corp. manages the Fund's
international investments and foreign currency transactions and the Adviser
manages the Fund's investments in U.S. government and domestic investment
grade securities. For their services under the Sub-Advisory Agreement, the
Sub-Advisers are paid a monthly fee by the Adviser calculated on an annual
basis equal to 0.40% of the first $25 million of the Fund's average daily
net assets, 0.33% of the Fund's average daily net assets in excess of $25
million up to $50 million, 0.26% of the Fund's average daily net assets in
excess of $50 million up to $100 million and 0.21% of the Fund's average
daily net assets in excess of $100 million.
Federated Investment Counseling, a Delaware business trust, and Federated
Global Research Corp., a Delaware corporation, are each registered
investment advisers under the 1940 Act. The Sub-Advisers and other
subsidiaries of Federated Investors serve as investment advisers to a number
of investment companies and private accounts. As of December 31, 1997, the
Sub-Advisers and such other subsidiaries of Federated Investors rendered
investment advice regarding over $ billion of assets.
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PORTFOLIO MANAGERS
The Fund's investments in high yield securities are managed by Mark E.
Durbiano. The Fund's international investments and foreign currency
transactions 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 domestic investment grade securities
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-Adviser. Mr. Durbiano
joined Federated Investors, the parent company of the Sub-Advisers, in 1982
and has been a Senior Vice President of Federated Advisors, a subsidiary of
Federated Investors, since January 1996. From 1988 through 1995, Mr.
Durbiano was a Vice President of an affiliate of Federated Advisers. 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.
ROBERT M. KOWIT is a member of the committee which manages the Fund's
international investments and foreign currency transactions. 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.
MICHAEL W. CASEY, PH.D. is a member of the committee which manages the
Fund's international investments and foreign currency transactions. Dr.
Casey joined Federated Investors in 1996 as an Assistant Vice President.
Dr. Casey served as an International Economist and Portfolio Strategist
for Maria Fiorini Ramirez Inc. from 1990 to 1996. 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
international
<PAGE>
investments and foreign currency transactions. Mr. Collins joined
Federated Investors in 1996 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
international investments and foreign currency transactions. Mr. Frantzen
joined Federated Investors in 1995 as an Executive Vice President of the
Federated Advisers. 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 and domestic investment grade securities.
Mr. McGlinch has over 16 years of investment industry experience. Prior to
joining the Adviser in 1998, Mr. McGlinch served as a portfolio co-manager
for Piper Capital Management Incorporated overseeing the management of
several Piper Funds. 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 and domestic investment grade securities. Ms.
Kung has over five years of investment industry experience. Prior to joining
the Adviser in 1998, Ms. Kung served as a vice president and a portfolio
co-manager for Piper Capital Management Incorporated overseeing the
management of several Piper Funds. 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.
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CUSTODIAN
The Custodian of the Fund's assets is U.S. Bank Trust National Association
(the "Custodian"), U.S. Bank Trust Center, 180 East Fifth Street, St.
Paul, Minnesota 55101. The Custodian is a subsidiary of U.S. Bancorp.
As compensation for its services to the 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.
<PAGE>
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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 Adviser.
FAIF has appointed Piper Jaffray Inc., a broker-dealer affiliated with the
Adviser, as servicing agent to perform certain transfer agent and dividend
disbursing agent services with respect to Class A and Class B Shares of the
Fund held through accounts at Piper Jaffray Inc. and its affiliates. The
Fund pays Piper Jaffray Inc. an annual fee of $15 per account for such
services.
DISTRIBUTOR
SEI Investments Distribution Co. is the principal distributor for shares of
the 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 Adviser, 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 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. 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 are made
available. In addition, the Distributor and the Adviser and its affiliates
may provide compensation for services provided by such networks from their
own resources. From time to time, the Distributor may voluntarily waive its
fees with respect to the Class A Shares of 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
<PAGE>
pays a total of 4.25% of the amount invested (including a prepaid service
fee of 0.25% of the amount invested) to dealers who sell Class B Shares
(excluding exchanges from other Class B Shares in the First American family
of funds). The service fee payable under the Class B Service Plan is prepaid
for the first year as described above.
The Class A and Class B Distribution Plans recognize that the Adviser, the
Administrator, the Distributor, and any Participating Institution may in
their discretion use their own assets to pay for certain additional costs of
distributing Fund shares. Any arrangement to pay such additional costs may
be commenced or discontinued by any of these persons at any time. In
addition, while there is no sales charge on purchases of Class A Shares of
$1 million and more, the Adviser may pay amounts to broker-dealers from its
own assets with respect to such sales. U.S. Bancorp Investments, Inc. and
Piper Jaffray Inc., broker-dealers affiliated with the Adviser ("USBI"), are
each Participating Institutions.
INVESTING IN THE FUND
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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 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
<PAGE>
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.
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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 Adviser 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
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.
<PAGE>
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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:
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STRATEGIC INCOME FUND:
Maximum
Amount of
Sales Charge Sales Charge Sales Charge
As Percentage As Percentage Reallowed to
of Offering of Net Asset Participating
Price Value Institutions
================================================================================
Less than $50,000 4.50% 4.71% 4.05%
$50,000 but less
than $100,000 4.00% 4.17% 3.60%
$100,000 but less
than $250,000 3.50% 3.63% 3.15%
$250,000 but less
than $500,000 2.75% 2.83% 2.47%
$500,000 but less
than $1,000,000 2.00% 2.04% 1.80%
$1,000,000 and over 0.00% 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 of up to 1.00% on such sales. Redemptions of Class A Shares
purchased at net asset value within 24 months of such purchases will be
subject to a contingent deferred sales charge of up to 1.00%. Class A Shares
that are redeemed will not be subject to this contingent deferred sales
charge to the extent that the value of the shares represents capital
appreciation of Fund assets or reinvestment of dividends or capital gain
distributions.
Net asset value is determined as of the close of normal trading on the New
York Stock Exchange (3:00 p.m. Central time) Monday through Friday except on
(i) days on which there are not sufficient changes in the value of 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 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
<PAGE>
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 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 Adviser, the Sub-Advisers or any of their affiliates, or any
of its 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 advisers,
financial planners and registered broker-dealers who are purchasing shares
on behalf of their customers and by purchasers through "one-stop" mutual
fund networks through which the Fund are made available. In addition, Class
A Shares may be purchased at net asset value without a sales charge by
qualified defined contribution plans participating in the First American
401(k) Plan Program, investors participating in asset allocation "wrap"
accounts offered by the Adviser or any of its affiliates, and by retirement
and deferred compensation plans and the trusts used to fund such plans
(including, but not limited to, those defined in 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.
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
<PAGE>
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.
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CLASS B SHARES
CONTINGENT DEFERRED SALES CHARGE. Class B Shares are sold at net asset value
without any initial sales charge. If an investor redeems Class B Shares
within eight years of purchase, he or she will pay a contingent deferred
sales charge at the rates set forth below. This charge is assessed on an
amount equal to the lesser of the then-current market value or the cost of
the shares being redeemed. Accordingly, no sales charge is imposed on
increases in net asset value above the initial purchase price or on shares
derived from reinvestment of dividends or capital gain distributions.
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
YEAR SINCE DOLLAR AMOUNT
PURCHASE SUBJECT TO CHARGE
===================================
First 5.00%
Second 5.00%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh None
Eighth None
===================================
In determining whether a particular redemption is subject to a contingent
deferred sales charge, it is assumed that the redemption is first of any
Class A Shares in the shareholder's Fund account; second, of any Class B
Shares held for more than eight years and Class B Shares acquired pursuant
to reinvestment of dividends or other distributions; and third, of Class B
Shares held longest during the eight-year period. This method should result
in the lowest possible sales charge.
The contingent deferred sales charge is waived on redemption of Class B
Shares (i) within one year following the death or disability (as defined in
the Code) of a shareholder and (ii) to the extent that the redemption
represents a minimum required distribution from an individual retirement
account or other retirement plan to a shareholder who has attained the age
of 70 1/2. A shareholder or his or her representative must notify the
Transfer Agent prior to the time of redemption if such circumstances exist
and the shareholder is eligible for this waiver.
CONVERSION FEATURE. At the end of the period ending eight years after the
beginning of the month in which the shares were issued, Class B Shares will
automatically convert to Class A Shares and will no longer be subject to the
Class B distribution and service fees. This conversion will be on the basis
of the relative net asset values of the two classes.
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SYSTEMATIC EXCHANGE PROGRAM
Shares of 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
<PAGE>
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.
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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 Adviser or Sub-Advisers 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 and/or shareholder servicing expenses charged to Class A and
Class B Shares. The amount of dividends payable on Class A Shares generally
will be more than the dividends on the Class B Shares because of the higher
distribution and shareholder servicing fees paid by Class B Shares.
---------------------------------------------------------------------------
EXCHANGE PRIVILEGE
Shareholders may exchange Class A or Class B Shares of the Fund for
currently available Class A or Class B Shares, respectively, of the other
FAIF
<PAGE>
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. Exchanges
may be accomplished by a written request, or by telephone if a preauthorized
exchange authorization is on file with the Transfer Agent, shareholder
servicing agent, or financial institution.
Written exchange requests must be signed exactly as shown on the
authorization form, and the signatures may be required to be guaranteed as
for a redemption of shares by an entity described below under "Redeeming
Shares -- Directly From the Fund -- Signatures." 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 in which an investor is no longer eligible to participate
may be exchanged for shares of a class in which that investor is eligible to
participate. An example of such an exchange would be a situation in which an
individual holder of
<PAGE>
Class A Shares subsequently opens a fiduciary, custody or agency account
with a financial institution which invests in Class Y Shares.
The terms of any exchange privilege may be modified or terminated by the
Fund at any time. There are currently no additional fees or charges for the
exchange service. The Fund does not contemplate establishing such fees or
charges, but they reserve the right to do so. Shareholders will be notified
of any modification or termination of the exchange privilege and of the
imposition of any additional fees or charges.
REDEEMING SHARES
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.
---------------------------------------------------------------------------
BY TELEPHONE
A shareholder may redeem shares of the Fund, if he or she elects the
privilege on the initial shareholder application, by calling his or her
financial institution to request the redemption. Shares will be redeemed at
the net asset value next determined after the Fund receives the redemption
request from the financial institution (less the amount of any applicable
contingent deferred sales charge). Redemption requests must be received by
the financial institution by the time specified by the institution in order
for shares to be redeemed at that day's net asset value, and redemption
requests must be transmitted to and received by the 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
<PAGE>
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.
---------------------------------------------------------------------------
BY MAIL
Any shareholder may redeem Fund shares by sending a written request to the
Transfer Agent, shareholder servicing agent, or financial institution. The
written request should include the shareholder's name, the Fund name, the
account number, and the share or dollar amount requested to be redeemed, and
should be signed exactly as the shares are registered. Shareholders should
call the Fund, shareholder servicing agent or financial institution for
assistance in redeeming by mail. A check for redemption proceeds normally is
mailed within one business day, but in no event more than seven days, after
receipt of a proper written redemption request.
Shareholders requesting a redemption of $5,000 or more, a redemption of any
amount to be sent to an address other than that on record with the Fund, or
a redemption payable other than to the shareholder of record, must have
signatures on written redemption requests guaranteed by:
* a trust company or commercial bank the deposits of which are insured by
the Bank Insurance Fund, which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
* a member firm of the New York, American, Boston, Midwest, or Pacific
Stock Exchanges or of the National Association of Securities Dealers;
* a savings bank or savings and loan association the deposits of which are
insured by the Savings Association Insurance Fund, which is administered
by the FDIC; or
* any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The 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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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
<PAGE>
balance falls below the required minimum value of $500. Shares will not be
redeemed in this manner, however, if the balance falls below $500 because of
changes in a Fund's net asset value. Before shares are redeemed to close an
account, the shareholder will be notified in writing and allowed 60 days to
purchase additional shares to meet the minimum account requirement.
DETERMINING THE PRICE
OF SHARES
Class A Shares of the 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 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.
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.
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.
<PAGE>
Although the methodology and procedures for determining net asset value are
identical for all classes of shares, the net asset value per share of
different classes of shares of the Fund may differ because of the differing
distribution and/or shareholder servicing 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 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 portfolios. In addition, trading in securities on foreign
markets may not take place on all days on which the New York Stock Exchange
is open for business or may take place on days on which the New York Stock
Exchange is not open for business. Therefore, the net asset value of a Fund
which holds foreign securities might be significantly affected on days when
an investor has no access to the Fund.
FEDERAL INCOME TAXES
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 each 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. For corporate shareholders, such gain or
loss will be long-term gain or loss if the shares were held for more than
one year. For shareholders who are individuals, estates, or trusts the gain
or loss will be considered long-term (subject to a maximum tax rate of 20%)
if the shareholder has held the shares for more than 18 months and mid-term
(subject to a maximum tax rate of 28%) if the shareholder has held the
shares for more than one year but not more than 18 months.
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
<PAGE>
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
the Fund or a particular class of shares, the shares of the Fund or that
class will vote as a separate series. Examples of such issues would be
proposals to alter a fundamental investment restriction pertaining to the
Fund or to approve, disapprove or alter a distribution plan pertaining to a
class of shares.
Under the laws of the State of Maryland and FAIF's Articles of
Incorporation, FAIF is not required to hold shareholder meetings unless they
(i) are required by the 1940 Act, or (ii) are requested in writing by the
holders of 25% or more of the outstanding shares of FAIF.
CALCULATION OF
PERFORMANCE DATA
From time to time, 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
<PAGE>
Class Y Shares because Class Y Shares are not subject to the sales charges
and distribution and/or shareholder servicing 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, 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.
---------------------------------------------------------------------------
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
<PAGE>
Home Loan Mortgage Corporation ("FHLMC"). The obligation of GNMA with
respect to such certificates is backed by the full faith and credit of the
United States, while the obligations of FNMA and FHLMC with respect to such
certificates rely solely on the assets and credit of those entities. The
mortgage loans underlying GNMA certificates are partially or fully
guaranteed by the Federal Housing Administration or the Veterans
Administration, while the mortgage loans underlying FNMA certificates and
FHLMC certificates are conventional mortgage loans which are, in some cases,
insured by private mortgage insurance companies. Agency Pass-Through
Certificates may be issued in a single class with respect to a given pool of
mortgage loans or in multiple classes.
Private mortgage pass-through securities ("Private Pass-Throughs") are
structured similarly to GNMA, FNMA and FHLMC mortgage pass-through
securities and are issued by originators of and investors in mortgage loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. These
securities usually are backed by a pool of conventional fixed rate or
adjustable loans. Since Private Pass-Throughs typically are not guaranteed
by an entity having the credit status of GNMA, FNMA or FHMLC, such
securities generally are structured with one or more types of credit
enhancement. Such credit support falls into two categories: (i) liquidity
protection and (ii) protection against losses resulting from ultimate
default by an obligor on the underlying assets. Liquidity protection refers
to the provision of advances, generally by the entity administering the pool
of assets, to ensure that the pass-through of payments due on the underlying
pool occurs in a timely fashion. Protection against losses resulting from
ultimate default enhances the likelihood of ultimate payment of the
obligations on at least a portion of the assets in the pool. Such protection
may be provided through guarantees, insurance policies or letters of credit
obtained by the issuer or sponsor from third parties, through various means
of structuring the transaction or through a combination of such approaches.
The Funds will not pay any additional fees for such credit support, although
the existence of credit support may increase the price of a security.
The ratings of securities for which third-party credit enhancement provides
liquidity protection or protection against losses from default are generally
dependent upon the continued creditworthiness of the enhancement provider.
The ratings of such securities could be subject to reduction in the event of
deterioration in the creditworthiness of the credit enhancement provider
even in cases where the delinquency and loss experience on the underlying
pool of assets is better than expected.
CMOs are debt obligations typically issued by a private special-purpose
entity and collateralized by residential or commercial mortgage loans or
Agency Pass-Through Certificates. The Fund may invest in both investment
grade and non-investment grade bonds (which may be denominated in U.S.
dollars or in non-U.S. currencies) and other fixed income obligations issued
by domestic and foreign corporations and other private issuers. 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. 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
<PAGE>
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 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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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 Funds 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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FIXED INCOME 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 fixed-income obligations (including, but not limited
to, preferred stock) 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 for 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 fixed-income obligations in
which the Fund invests may involve equity characteristics. The Fund may, for
example, invest in unit offerings that combine fixed-income 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 fixed-income component.
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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
<PAGE>
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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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 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.
<PAGE>
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 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 respective 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 stock index futures and
options on stock index futures, and 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 against market risks 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
<PAGE>
settlement date fell to zero for all contracts, into which a 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 assurance of liquidity in
the secondary market for purposes of closing out futures positions.
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FOREIGN SECURITIES
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 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.
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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 rate 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 prices and on a future
date agreed upon by the parties. At the time the Fund
<PAGE>
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 decline of a particular foreign currency, the Fund
may also enter into a forward foreign currency exchange contract to sell an
amount of that currency approximating the value of all or a portion of the
Fund's assets denominated in that currency. 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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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.
---------------------------------------------------------------------------
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 Sub-Adviser will monitor the creditworthiness of the firms with
which the Fund enter into repurchase agreements.
---------------------------------------------------------------------------
REVERSE REPURCHASE AGREEMENTS
Although it currently does not do so, the Fund may also enter into reverse
repurchase agreements. A reverse repurchase agreement is similar to
borrowing cash. In a reverse repurchase agreement the Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in
the future, the Fund will repurchase the portfolio instrument by remitting
the original consideration plus interest at an agreed upon rate. The use of
reverse repurchase agreements may enable the Fund to avoid selling portfolio
instruments at a time when a sale may be deemed to be disadvantageous, but
the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
<PAGE>
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WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
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 high-grade
securities in an amount sufficient to meet its purchase commitments.
The purchase of securities on a when-issued or delayed delivery basis
exposes 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.
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PAYMENT-IN-KIND DEBENTURES
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.
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ZERO COUPON OBLIGATIONS
The Fund may invest in zero-coupon fixed-income securities. Zero-coupon
securities pay no cash income to their holders until they mature and are
issued at substantial discounts from their value at maturity. When held to
maturity, their entire return comes from the difference between their
purchase price and their maturity value. Because interest on zero-coupon,
securities is not paid on a current basis, the values of securities of this
type are subject to greater fluctuations than are the value of securities
that distribute income regularly and may be more speculative than such
securities. Accordingly, the values of these securities may be highly
volatile as interest rates rise or fall.
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LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, 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 Adviser 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
<PAGE>
the Adviser) in connection with these loans which, in the case of U.S. Bank
Trust National Association, are 40% of the Funds' income from such
securities lending transactions.
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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 directly or through reverse repurchase
agreements 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.
* The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933, as
amended, in connection with the sale of restricted securities which the
Fund may purchase consistent with its investment objectives.
A fundamental policy or restriction, including those stated above, cannot be
changed without an affirmative vote of the holders of a "majority" of the
outstanding shares of the applicable Fund, as defined in the 1940 Act.
As a nonfundamental policy, 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.
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>
INFORMATION CONCERNING
COMPENSATION PAID TO
U.S. BANK NATIONAL
ASSOCIATION, U.S. BANK
TRUST NATIONAL ASSOCIATION
AND OTHER AFFILIATES
U.S. Bank National Association, U.S. Bank Trust National Association and
other affiliates of U.S. Bancorp may act as 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 Adviser"
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 Adviser
U.S. BANK NATIONAL ASSOCIATION
601 Second Avenue South
Minneapolis, Minnesota 55402
Custodian
U.S. BANK TRUST NATIONAL ASSOCIATION
180 East Fifth Street
St. Paul, Minnesota 55101
Distributor
SEI INVESTMENTS DISTRIBUTION CO.
Oaks, Pennsylvania 19456
Administrator
SEI INVESTMENTS MANAGEMENT CORPORATION
Oaks, Pennsylvania 19456
Transfer Agent
DST SYSTEMS, INC.
330 West Ninth Street
Kansas City, Missouri 64105
Independent Auditors
KPMG PEAT MARWICK LLP
90 South Seventh Street
Minneapolis, Minnesota 55402
Counsel
DORSEY & WHITNEY LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
FAIF-1001 (7/98) R
<PAGE>
APPENDIX XIII
DISSENTING SHAREHOLDERS' RIGHTS OF APPRAISAL
Shareholders who elect to exercise dissenters' rights must satisfy
each of the following conditions: (a) dissenting holders must file with the
Company, before the vote on the Reorganization is taken, written notice of their
intention to demand payment of the fair value of their shares (this written
notice must be in addition to and separate from any proxy or vote against the
Reorganization--voting against or failing to vote for the Reorganization will
not constitute such a notice); and (b) dissenting holders must not vote in favor
of the Reorganization (a failure to vote will satisfy this requirement, but a
vote in favor of the Reorganization, by proxy or in person, will constitute a
waiver of dissenters' rights and will nullify any previously filed written
notice of intent to demand payment). Shareholders who fail to comply with either
of these conditions will have no dissenters' rights with respect to their
shares.
SHAREHOLDERS SHOULD BE AWARE THAT THE DIVISION OF INVESTMENT
MANAGEMENT OF THE COMMISSION HAS TAKEN THE POSITION THAT ADHERENCE TO STATE
APPRAISAL PROCEDURES BY A REGISTERED INVESTMENT COMPANY ISSUING REDEEMABLE
SECURITIES WOULD CONSTITUTE A VIOLATION OF RULE 22C-1 UNDER THE 1940 ACT. THIS
RULE PROVIDES THAT NO OPEN-END INVESTMENT COMPANY MAY REDEEM ITS SHARES OTHER
THAN AT NET ASSET VALUE NEXT COMPUTED AFTER RECEIPT OF A TENDER OF SUCH SECURITY
FOR REDEMPTION. IT IS THE VIEW OF THE DIVISION OF INVESTMENT MANAGEMENT THAT
RULE 22C-1 SUPERSEDES APPRAISAL PROVISIONS IN STATE STATUTES. IN THE INTERESTS
OF ENSURING EQUAL VALUATION OF ALL INTERESTS IN THE PIPER FUNDS, THE COMPANY
WILL DETERMINE DISSENTERS' RIGHTS IN ACCORDANCE WITH THE DIVISION
INTERPRETATION. ACCORDINGLY, IN THE EVENT THAT ANY SHAREHOLDER ELECTS TO
EXERCISE DISSENTERS' RIGHTS UNDER MINNESOTA LAW, THE COMPANY INTENDS TO SUBMIT
THIS QUESTION TO A COURT OF COMPETENT JURISDICTION.
All written notices should be addressed to XUS or HLA at the offices
of the Piper Funds, 222 South Ninth Street, Minneapolis, Minnesota 55402,
Attention: Corporate Secretary, and should be executed by, or with the consent
of, the holder of record. The notice must identify the shareholder and indicate
the intention of such shareholder to demand payment of fair value of his or her
shares. In the notice the shareholder's name should be stated as it appears on
his or her stock certificates, if any, or in the manner in which his or her
shares are registered. A beneficial owner of shares who is not the registered
owner may assert dissenters' rights as to shares held on such person's behalf,
provided that such beneficial owner submits a written consent of the registered
owner to the Company at or before the time such rights are asserted.
A Piper Fund shareholder may not assert dissenters' rights as to
less than all of the shares registered in such shareholder's name, except in the
situation in which certain shares are beneficially owned by another person but
registered in such shareholder's name. If a shareholder wishes to dissent with
respect to shares beneficially owned by another person, such shareholder must
dissent with respect to all of such shares and disclose the name and address of
the beneficial owner on whose behalf the holder is dissenting.
After a vote approving the Reorganization, and assuming the
Reorganization is consummated, the Company must give written notice that the
Reorganization has been approved to each shareholder who filed a written notice
of intent to demand payment for such shareholder's shares and who did not vote
in favor of the Reorganization. This notice sent by the Company shall specify
the address to which a demand for payment and stock certificates, if any, must
be sent by such shareholder in order to obtain payment and shall include a form
for demanding payment to be completed by the shareholder. In order to receive
the fair value of his or her shares, a dissenting shareholder must, within 30
days after the date of such notice, send such holder's share certificates, if
any, together with certain
<PAGE>
information concerning such shareholder's shares, on the form supplied by the
Company. After a valid demand for payment and the related certificates, if any,
are received, the Company must remit to each dissenting shareholder who has
complied with the above-referenced requirements the amount it deems to be the
fair value of that shareholder's shares, plus interest from the fifth day after
the effective date of the Reorganization to the date of such payment, together
with a brief description of the method used to reach such estimate and certain
updated interim financial data of the Company, if available.
If a dissenting shareholder believes that the amount remitted by the
Company is less than the fair value of such shareholder's shares, plus interest,
the shareholder may give written notice to the Company of his own estimate of
fair value of his Piper Fund shares within 30 days after the mailing date of the
remittance and demand payment of the difference. If the shareholder fails to
give written notice of such estimate and demand for the difference with the
30-day time period, the shareholder will be entitled only to the amount
remitted.
If the Piper Fund and the dissenting shareholder are unable to
settle the shareholder's demand within 60 days, the Company shall file in court
a petition requesting that the court determine the fair value of the shares,
plus interest. All shareholders whose demands are not settled within the
applicable 60-day settlement periods shall be made parties to this proceeding.
The court, after determining that the shareholder has complied with all
statutory requirements, may use any valuation method or combination of methods
it deems appropriate, whether or not used by the Company or the dissenting
shareholder, or may appoint appraisers to determine the fair value of the
shares. The court's determination is binding on all shareholders of the Piper
Funds, and the court must enter judgment for any amount by which the court
determines fair value exceeds the amount remitted to the shareholders by the
Company.
The costs and expenses of such a proceeding, including the expenses
and compensation of any appraisers, will be assessed against the Company unless
the court, in its discretion, determines that the dissenting shareholder's
action in demanding supplemental payment was arbitrary, vexatious, or not in
good faith, in which event the court may assess all or a part of such costs
against the shareholder. Fees and expenses of counsel for the dissenting
shareholder may be awarded by the court out of the amount, if any, awarded to
such shareholder.
The following sections of the Minnesota Business Corporation Act set
forth the rights of dissenting shareholders and the procedures to be followed
for asserting dissenters' rights:
302A.471. RIGHTS OF DISSENTING SHAREHOLDERS
Subdivision 1. Actions creating rights. A shareholder of a
corporation may dissent from, and obtain payment for the fair value of the
shareholder's shares in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely
affects the rights or preferences of the shares of the dissenting shareholder in
that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the
redemption of the shares, including a provision respecting a sinking fund for
the redemption or repurchase of the shares;
<PAGE>
(3) alters or abolishes a preemptive right of the holder of the
shares to acquire shares, securities other than shares, or rights to purchase
shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a
matter, or to cumulate votes, except as the right may be excluded or limited
through the authorization or issuance of securities of an existing or new class
or series with similar or different voting rights; except that an amendment to
the articles of an issuing public corporation that provides that section
302A.671 does not apply to a control share acquisition does not give rise to the
right to obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or
substantially all of the property and assets of the corporation, but not
including a transaction permitted without shareholder approval in section
302A.661, subdivision 1, or a disposition in dissolution described in section
302A.725, subdivision 2, or a disposition pursuant to an order of a court, or a
disposition for cash on terms requiring that all or substantially all of the net
proceeds of disposition be distributed to the shareholders in accordance with
their respective interests within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter
322B, to which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter
322B, to which the corporation is a party as the corporation whose shares will
be acquired by the acquiring corporation, if the shares of the shareholder are
entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote
with respect to which the articles, the bylaws, or a resolution approved by the
board directs that dissenting shareholders may obtain payment for their shares.
Subd. 2. Beneficial owners. (a) A shareholder shall not assert
dissenters' rights as to less than all of the shares registered in the name of
the shareholder, unless the shareholder dissents with respect to all the shares
that are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as to which the shareholder has dissented
and the other shares were registered in the names of different shareholders.
(b) The beneficial owner of shares who is not the shareholder may
assert dissenters' rights with respect to shares held on behalf of the
beneficial owner, and shall be treated as a dissenting shareholder under the
terms of this section and section 302A.473, if the beneficial owner submits to
the corporation at the time of or before the assertion of the rights a written
consent of the shareholder.
Subd. 3. Rights not to apply. (a) Unless the articles, the bylaws,
or a resolution approved by the board otherwise provide, the right to obtain
payment under this section does not apply to a shareholder of the surviving
corporation in a merger, if the shares of the shareholder are not entitled to be
voted on the merger.
(b) If a date is fixed according to section 302A.445, subdivision 1,
for the determination of shareholders entitled to receive notice of and to vote
on an action described in subdivision 1, only shareholders as of the date fixed,
and beneficial owners as of the date fixed who hold through shareholders, as
provided in subdivision 2, may exercise dissenters' rights.
<PAGE>
Subd. 4. Other rights. The shareholders of a corporation who have a
right under this section to obtain payment for their shares do not have a right
at law or in equity to have a corporate action described in subdivision 1 set
aside or rescinded, except when the corporate action is fraudulent with regard
to the complaining shareholder or the corporation.
302A.473. PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS
Subdivision 1. Definitions. (a) For purposes of this section, the
terms defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action referred to in section 302A.471, subdivision 1 or
the successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the
effective date of the corporate action referred to in section 302A.471,
subdivision 1, up to and including the date of payment, calculated at the rate
provided in section 549.09 for interest on verdicts and judgments.
Subd. 2. Notice of action. If a corporation calls a shareholder
meeting at which any action described in section 302A.471, subdivision 1 is to
be voted upon, the notice of the meeting shall inform each shareholder of the
right to dissent and shall include a copy of section 302A.471 and this section
and a brief description of the procedure to be followed under these sections.
Subd. 3. Notice of dissent. If the proposed action must be approved
by the shareholders, a shareholder who is entitled to dissent under section
302A.471 and who wishes to exercise dissenters' rights must file with the
corporation before the vote on the proposed action a written notice of intent to
demand the fair value of the shares owned by the shareholder and must not vote
the shares in favor of the proposed action.
Subd. 4. Notice of procedure; deposit of shares. (a) After the
proposed action has been approved by the board and, if necessary, the
shareholders, the corporation shall send to all shareholders who have complied
with subdivision 3 and to all shareholders entitled to dissent if no shareholder
vote was required, a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder,
or the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief
description of the procedures to be followed under these sections.
<PAGE>
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a shareholder until the proposed action takes effect.
Subd. 5. Payment; return of shares. (a) After the corporate action
takes effect, or after the corporation receives a valid demand for payment,
whichever is later, the corporation shall remit to each dissenting shareholder
who has complied with subdivisions 3 and 4 the amount the corporation estimates
to be the fair value of the shares, plus interest, accompanied by:
(1) The corporation's closing balance sheet and statement of income
for a fiscal year ending not more than 16 months before the effective date of
the corporate action, together with the latest available interim financial
statements;
(2) An estimate by the corporation of the fair value of the shares
and a brief description of the method used to reach the estimate; and
(3) A copy of section 302A.471 and this section, and a brief
description of the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in
paragraph (a) from a person who was not a shareholder on the date the action
dissented from was first announced to the public or who is dissenting on behalf
of a person who was not a beneficial owner on that date. If the dissenter has
complied with subdivisions 3 and 4, the corporation shall forward to the
dissenter the materials described in paragraph (a) a statement of the reason for
withholding the remittance, and an offer to pay to the dissenter the amount
listed in the materials if the dissenter agrees to accept that amount in full
satisfaction. The dissenter may decline the offer and demand payment under
subdivision 6. Failure to do so entitles the dissenter only to the amount
offered. If the dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the
deposit of certificates or the imposition of transfer restrictions on
uncertificated shares, it shall return all deposited certificates and cancel all
transfer restrictions. However, the corporation may again give notice under
subdivision 4 and require deposit or restrict transfer at a later time.
Subd. 6. Supplemental payment; demand. If a dissenter believes that
the amount remitted under subdivision 5 is less than the fair value of the
shares plus interest, the dissenter may give written notice to the corporation
of the dissenter's own estimate of the fair value of the shares, plus interest,
within 30 days after the corporation mails the remittance under subdivision 5,
and demand payment of the difference. Otherwise, a dissenter is entitled only to
the amount remitted by the corporation.
Subd. 7. Petition; determination. If the corporation receives a
demand under subdivision 6, it shall, within 60 days after receiving the demand,
either pay to the dissenter the amount demanded or agreed to by the dissenter
after discussion with the corporation or file in court a petition requesting
that the court determine the fair value of the shares, plus interest. The
petition shall be filed in the county in which the registered office of the
corporation is located, except that a surviving foreign corporation that
receives a demand relating to the shares of a constituent domestic corporation
shall file the petition in the county in this state in which the last registered
office of the constituent corporation was located. The petition shall name as
parties all dissenters who have demanded payment under subdivision 6 and who
have not reached agreement with the corporation. The corporation shall, after
filing the petition, serve all parties with a summons and copy of the petition
under the rules of civil
<PAGE>
procedure. Nonresidents of this state may be served by registered or certified
mail or by publication as provided by law. Except as otherwise provided, the
rules of civil procedure apply to this proceeding. The jurisdiction of the court
is plenary and exclusive. The court may appoint appraisers, with powers and
authorities the court deems proper, to receive evidence on and recommend the
amount of the fair value of the shares. The court shall determine whether the
shareholder or shareholders in question have fully complied with the
requirements of this section, and shall determine the fair value of the shares,
taking into account any and all factors the court finds relevant, computed by
any method or combination of methods that the court, in its discretion, sees fit
to use, whether or not used by the corporation or by a dissenter. The fair value
of the shares as determined by the court is binding on all shareholders,
wherever located. A dissenter is entitled to judgment in cash for the amount by
which the fair value of the shares as determined by the court, plus interest,
exceeds the amount, if any, remitted under subdivision 5, but shall not be
liable to the corporation for the amount, if any, by which the amount, if any,
remitted to the dissenter under subdivision 5 exceeds the fair value of the
shares as determined by the court, plus interest.
Subd. 8. Costs; fees; expenses. (a) The court shall determine the
costs and expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if any.
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
DATED _______, 1998
PROPOSED ACQUISITION OF ASSETS OF
THE AMERICAS INCOME TRUST INC. AND
HIGHLANDER INCOME FUND INC.
PIPER CAPITAL MANAGEMENT INCORPORATED
222 SOUTH NINTH STREET
MINNEAPOLIS, MINNESOTA 55402-3894
1-800-866-7778 EXT. 6786
BY AND IN EXCHANGE FOR SHARES OF
STRATEGIC INCOME FUND
A PORTFOLIO OF FIRST AMERICAN INVESTMENT FUNDS, INC.
OAKS, PENNSYLVANIA 19456
1-800-637-2548
This Statement of Additional Information relates to the proposed Agreement and
Plan of Reorganization providing for (a) the acquisition of all of the assets
and the assumption of all liabilities of The Americas Income Trust Inc. ("XUS")
and Highlander Income Fund Inc. ("HLA"), each closed-end investment companies,
by Strategic Income Fund ("Strategic Fund"), a newly created open-end fund of
First American Investment Funds, Inc. ("FAIF"), in exchange for Class A shares
of common stock of Strategic Fund having an aggregate net asset value equal to
the aggregate value of the assets acquired (less the liabilities assumed) of XUS
and HLA (collectively, the "Piper Funds") and (b) the liquidation of the Piper
Funds and the pro rata distribution of the Piper Funds common shares to
Strategic Fund shareholders. This Statement of Additional Information consists
of (a) this cover page, (b) the combined Statement of Additional Information of
the Piper Funds, (c) the preliminary Statement of Additional Information of
Strategic Fund, and five additional funds of FAIF: Mid Cap Growth Fund, Emerging
Markets Fund, Adjustable Rate Mortgage Securities Fund, Tax Free Fund, Minnesota
Tax Free Fund, which is attached as Appendix A to this Statement of Additional
Information, (d) the Pro Forma Financial Statements of the Piper Funds and
Strategic Fund, which are attached as Appendix B to this Statement of Additional
Information, and the following documents, each of which is incorporated by
reference herein:
1. Annual report of XUS for the fiscal year ended October 31, 1997.
2. Annual report of HLA for the fiscal year ended February 28, 1998.
3. Financial Statements required by Form N-14, Item 14 (to the extent
not included in Items 1 and 2 above).
This Statement of Additional Information is not a prospectus. The Proxy
Statement/Prospectus dated the date hereof relating to the above-referenced
transaction may be obtained without charge by writing or calling the Piper Funds
or FAIF at the addresses or telephone numbers noted above. This Statement of
Additional Information relates to, and should be read in conjunction with, such
Proxy Statement/Prospectus.
<PAGE>
Table of Contents
INVESTMENT OBJECTIVES AND POLICIES .......................................... 1
Description of Portfolio Securities ................................... 1
Mortgage-Backed Securities ...................................... 1
Corporate Fixed Income Securities ............................... 4
Other Fixed Income-Securities ................................... 5
Zero Coupon Securities .......................................... 5
Other Investment Management Practices ................................. 6
Hedging ......................................................... 6
Options and Futures Contracts ................................... 6
Foreign Currency Exchange Transactions .......................... 11
When-Issued and Forward Commitment Securities ................... 13
Repurchase Agreements ........................................... 13
Portfolio Turnover .............................................. 14
Investment Restrictions ............................................... 14
TENDER OFFERS AND SHARE REPURCHASES ......................................... 16
DIRECTORS AND EXECUTIVE OFFICERS ............................................ 17
INVESTMENT ADVISORY AND OTHER SERVICES ...................................... 19
General ......................................................... 19
Control of the Adviser .......................................... 20
Investment Advisory Agreements .................................. 20
Sub-Adviser ..................................................... 20
Control of the Sub-Advisers ..................................... 20
Sub-Advisory Agreements ......................................... 20
Fund Administration ............................................. 21
Independent Auditors ............................................ 22
BROKERAGE AND PORTFOLIO TRANSACTIONS ........................................ 22
TAXATION .................................................................... 23
General ......................................................... 23
Federal Tax Treatment of Shareholders ........................... 24
Consequences of Certain Fund Investments ........................ 25
Pass-through of Foreign Tax Credits ............................. 26
ADDITIONAL INFORMATION ...................................................... 26
RATINGS ..................................................................... 27
Ratings of Corporate Debt Obligations and Municipal Bonds ....... 27
Standard & Poor's ......................................... 27
Moody's ................................................... 28
Ratings of Preferred Stock ...................................... 29
Standard & Poor's ......................................... 29
Moody's ................................................... 29
Ratings of Municipal Notes ...................................... 30
Standard & Poor's ......................................... 30
Moody's ................................................... 30
Ratings of Commercial Paper ..................................... 30
Standard & Poor's ......................................... 30
Moody's ................................................... 30
Best's Rating System for Insurance Companies .................... 31
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of the Piper Funds are set forth in
the Proxy Statement/Prospectus. Certain additional investment information is set
forth below. Defined terms used herein and not otherwise defined shall have the
meanings ascribed to them in the Prospectus.
Description of Portfolio Securities
Mortgage-Backed Securities
GINNIE MAE CERTIFICATES--Ginnie Mae is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. The National Housing Act of 1934, as amended (the "Housing Act"),
authorizes Ginnie Mae to guarantee the timely payment of the principal of and
interest on certificates that are based on and backed by a pool of mortgage
loans insured by the Federal Housing Administration under the Housing Act, or
Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed by the Veterans'
Administration under the Servicemen's Readjustment Act of 1944, as amended ("VA
Loans"), or by pools of other eligible mortgage loans. The Housing Act provides
that the full faith and credit of the United States Government is pledged to the
payment of all amounts that may be required to be paid under any guaranty. In
order to meet its obligations under such guaranty, Ginnie Mae is authorized to
borrow from the United States Treasury with no limitations as to amount.
The Ginnie Mae Certificates will represent a pro rata interest in one or
more pools of the following types of mortgage loans: (i) fixed rate level
payment mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii)
fixed rate growing equity mortgage loans; (iv) fixed rate mortgage loans secured
by manufactured (mobile) homes; (v) mortgage loans on multifamily residential
properties under construction; (vi) mortgage loans on completed multifamily
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (ix) mortgage-backed serial notes. All
of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on one-
to four-family housing units.
FANNIE MAE CERTIFICATES--Fannie Mae is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act of 1938. The obligations of FNMA are obligations solely
of FNMA and are not backed by the full faith and credit of the United States
Government.
Each Fannie Mae Certificate will represent a pro-rata interest in one or
more pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) fixed rate and adjustable mortgage loans secured by multifamily
projects.
FREDDIE MAC CERTIFICATES--Freddie Mac is a corporate instrumentality of
the United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). The obligations of Freddie Mac are obligations solely
of Freddie Mac and are not backed by the full faith and credit of the United
States Government.
Freddie Mac Certificates represent a pro-rata interest in a group of
mortgage loans (a "Freddie Mac Certificate group") purchased by Freddie Mac. The
mortgage loans underlying the Freddie Mac Certificates will consist of fixed
rate or adjustable rate mortgage loans with original terms to maturity of
between ten and thirty years, substantially all of which are secured by first
liens on one to four-family residential properties or multifamily projects. Each
mortgage loan must meet the applicable
<PAGE>
standards set forth in the FHLMC Act. A Freddie Mac Certificate group may
include whole loans, interests in whole loans and participations comprising
another Freddie Mac Certificate group.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES. The guaranteed mortgage
pass-through securities in which the Piper Funds will invest will include
certificates issued or guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac,
which represent interests in underlying residential mortgage loans. These
mortgage pass-through securities provide for the pass-through to investors of
their pro-rata share of monthly payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans, net of any fees paid to the
guarantor of such securities and the services of the underlying mortgage loans.
Each of GNMA, FNMA and FHLMC guarantee timely distributions of interest to
certificate holders. GNMA and FNMA guarantee timely distributions of scheduled
principal. FHLMC generally guarantees only ultimate collection of principal of
the underlying mortgage loans, which collection may take up to one year.
Ginnie Mae Certificates are direct obligations of the United States
Government and as such are backed by the full faith and credit of the United
States. Fannie Mae is a federally chartered and privately owned corporation and
Freddie Mac is a corporate instrumentality of the United States. Fannie Mae and
Freddie Mac Certificates are solely obligations of the issuing entity and are
not backed by the full faith and credit of the United States.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private Mortgage Pass-Through
Securities ("Private Pass-Throughs") are structured similarly to the Ginnie
Mae, Fannie Mae and Freddie Mac mortgage pass-through securities described above
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. Private Pass Throughs
constituting adjustable rate mortgage securities are backed by a pool of
conventional adjustable rate mortgage loans. Since Private Pass-Throughs
typically are not guaranteed by an entity having the credit status of Ginnie
Mae, Fannie Mae or Freddie Mac, such securities generally are structured with
one or more types of credit enhancement. See "Types of Credit Support" below.
CMOS AND MULTI-CLASS PASS-THROUGH SECURITIES. Collateralized mortgage
obligations ("CMOs") are debt instruments issued by special purpose entities
which are secured by pools of mortgage loans or other Mortgage-Backed
Securities. Multi-class pass-through securities are equity interests in a trust
composed of mortgage loans or other Mortgage-Backed Securities. Payments of
principal and interest on underlying collateral provide the funds to pay debt
service on the CMO or make scheduled distributions on the multi-class
pass-through security. CMOs and multi-class pass-through securities
(collectively "CMOs" unless the context indicates otherwise) may be issued by
agencies or instrumentalities of the United States Government or by private
organizations. The issuer of a CMO may elect to be treated as a Real Estate
Mortgage Investment Conduit ("REMIC").
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of a CMO, often referred to as a "tranche," is issued at a specified
coupon rate and has a stated maturity or final distribution date. Principal
prepayments on collateral underlying a CMO may cause it to be retired
substantially earlier than the stated maturities or final distribution dates.
Interest is paid or accrues on all classes of a CMO on a monthly, quarterly or
semi-annual basis. The principal and interest on the underlying mortgages may be
allocated among the several classes of a series of a CMO in many ways. In a
common structure, payments of principal, including any principal prepayments, on
the underlying mortgages are applied to the classes of the series of a CMO in
the order of their respective stated maturities or final distribution dates, so
that no payment of principal will be made on any class of a CMO until all other
classes having an earlier stated maturity or final distribution date have been
paid in full.
<PAGE>
The Piper Funds may also invest in inverse or reverse floating CMOs.
Inverse or reverse floating CMOs constitute a tranche of a CMO with a coupon
rate that moves in the reverse direction to an applicable index such as the
London Interbank Offered Rate ("LIBOR"). Accordingly, the coupon rate thereon
will increase as interest rates decrease. Inverse or reverse floating CMOs are
typically more volatile than fixed or adjustable rate tranches of CMOs.
Investments in inverse or reverse floating CMOs would be purchased by the Piper
Funds to attempt to protect against a reduction in the income earned on a Piper
Fund's investments due to a decline in interest rates. A Piper Fund would be
adversely affected by the purchase of such CMOs in the event of an increase in
interest rates since the coupon rate thereon will decrease as interest rates
increase, and, like other Mortgage-Backed Securities, the value will decrease
as interest rates increase. See "Description of Portfolio Securities--Derivative
Mortgage-Backed Securities."
DERIVATIVE MORTGAGE-BACKED SECURITIES. Derivative Mortgage-Backed
Securities are securities, such as interest-only and principal-only stripped
mortgage-backed securities and subordinated interests in private pass-through
pools, that directly or indirectly represent a participation in, or are secured
by and payable from, mortgage loans on real property or Mortgage-Backed
Securities.
The yields on Derivative Mortgage-Backed Securities are generally higher
than prevailing market yields on Mortgage Backed Securities because their market
prices are more volatile and there is a greater risk that the initial investment
will not be fully recouped. The Adviser will seek to manage these risks (and
potential benefits) by investing in a variety of such securities and by using
hedging techniques. See "Other Investment Management Practices--Derivative
Mortgage-Backed Securities."
Although Derivative Mortgage-Backed Securities are purchased and sold by
institutional investors through several investment banking firms acting as
brokers or dealers, these securities were only recently developed. As a result,
established trading markets have not yet developed and, accordingly, these
securities are still less liquid than most other types of investments.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped Mortgage-Backed Securities
("SMBS") are derivative multiclass mortgage securities. SMBS may be issued by
agencies or instrumentalities of the United States Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage bankers, commercial banks, investment banks and special
purpose subsidiaries of the foregoing.
There are generally two types of classes of SMBS, one of which (the "IO
class") entitles the holders thereof to receive distributions consisting solely
or primarily of all or a portion of the interest on the underlying pool of
mortgage loans or Mortgage-Backed Securities ("Mortgage Assets") and the other
of which (the "PO class") entitles the holders thereof to receive distributions
consisting solely or primarily of all or a portion of the principal of the
underlying pool of Mortgage Assets. The cash flows and yields on IO and PO
classes are extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying Mortgage Assets. For example, a rapid or
slow rate of principal payments may have a material adverse effect on the yield
to maturity of IOs or POs, respectively. If the underlying Mortgage Assets
experience greater than anticipated prepayments of principal, an investor may
incur substantial losses, even if the IO class is rated AAA. Conversely, if the
underlying Mortgage Assets experience slower than anticipated prepayments of
principal, the yield on a PO class will be affected more severely than would be
the case with a traditional Mortgage-Backed Security.
Under the Internal Revenue Code of 1986, as amended (the "Code"), SMBS
generate taxable income from the current accrual of original issue discount,
without a corresponding distribution of cash to the Piper Funds. In addition,
the Staff of the Division of Investment Management of the Securities Exchange
Commission considers privately issued SMBS to be illiquid securities.
<PAGE>
SUBORDINATED MORTGAGE-BACKED SECURITIES. Credit enhancement in the form of
subordination provides for the issuance of a senior class of certificates that
are generally rated at least AA by S&P and one or more classes of subordinated
certificates that bear ratings lower than the senior certificates or are
non-rated. Holders of either the senior or the subordinated certificates will
ordinarily be entitled to a pro-rata share of distributions of principal and
interest. However, in the event that delinquencies and defaults on the
underlying mortgage loans cause a shortfall in the distributions to the senior
certificates, distributions otherwise payable to the subordinated certificates
will be distributed to the senior certificates to the extent required. The
characteristics of the mortgage loans and other credit enhancement features will
determine the size of the subordinated interest required to obtain the desired
rating on the senior securities.
To the extent that actual delinquency and loss experience is greater than
that anticipated, the return on the subordinated certificates will be adversely
affected and, in extreme cases, a portion of the principal could be lost; to the
extent that such experience is more favorable than anticipated, the return on
the subordinated certificates will be increased. The Piper Funds may invest in
subordinated certificates, which securities, at the time of investment, are
rated BBB or higher by S&P, or, if unrated, determined by the Adviser to be of
comparable quality. Descriptions of the rating categories are set forth in this
Statement of Additional Information under "Ratings."
TYPES OF CREDIT SUPPORT. To lessen the effect of failures by obligors on
underlying mortgages to make payments, Mortgage-Backed Securities may contain
elements of credit support. 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 Piper Funds will
not pay any additional fees for such credit support, although the existence of
credit support may increase the price of a security.
The ratings of securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued credit worthiness of the enhancement
provider. The ratings of such securities could be subject to reduction in the
event of deterioration in the 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.
Corporate Fixed Income Securities
HLA may invest in certain types of Corporate Fixed Income Securities that
have been issued with original issue discount or market discount. An investment
in such securities poses certain economic risks and may have certain adverse
cash flow consequences to HLA as such securities generate taxable income from
the current accrual of original issue discount, without a corresponding
distribution of cash to HLA. These risks are described under "Risk Factors" in
the Proxy Statement/Prospectus.
Other Fixed Income-Securities
U. S. GOVERNMENT SECURITIES. Each Piper Fund may invest in U.S. Government
Securities which are not backed by the full faith and credit of the Untied
States. No assurance can be given that the United States Government will provide
financial support in the future to United States Government agencies,
<PAGE>
authorities or instrumentalities that are not supported by the full faith and
credit of the United States.
Each Piper Fund may invest in zero coupon U.S. Government Securities. A
Piper Fund accrues income on such securities for tax and accounting purposes,
which is distributable to shareholders and which, because no cash is received at
the time of accrual, may require the liquidation of other portfolio securities
to satisfy such Piper Fund's distribution obligations. Certain zero coupon
obligations are issued by the United States Treasury and others are issued by
government agencies or instrumentalities. Investment banks may also strip
Treasury securities and sell them under proprietary names. Only "stripped" U.S.
Government Securities which are issued through the United States Treasury's
STRIPS program are considered to be direct obligations of the United States
Government.
MUNICIPAL OBLIGATIONS. Municipal Obligations include debt obligations
issued by states, cites and local authorities, and including possessions and
certain territories of the United States, to obtain funds for various public
purposes, including the construction of such public facilities as airports,
bridges, highways, housing, hospitals, mass transportation, schools, streets,
and water and sewer works. Other public purposes for which Municipal Obligations
may be used include the refinancing of outstanding obligations, the obtaining of
funds for general operating expenses and for loans to other public institutions
and facilities. In addition, certain industrial development, private activity
and pollution control bonds may be included within the term "Municipal
Obligations" if the interest paid thereon qualifies as exempt from federal
income tax. Municipal Obligations in which the Fund will invest bear interest
that, in the opinion of bond counsel to the issuer, is exempt from federal
income tax, although such interest may be subject to the federal alternative
minimum tax.
Municipal Obligations may be classified as either "general obligation" or
"revenue" bonds. General obligation bonds are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise or other specific revenue source. Industrial development,
private activity and pollution control bonds are in most cases revenue bonds and
do not generally constitute the pledge of the credit or taxing power of the
issuer of such bonds. There are, of course, variations in the security of
Municipal Obligations, both within a particular classification and between
classifications, depending upon numerous factors. Obligations of issuers of
Municipal Obligations are subject to the provisions of bankruptcy, insolvency
and other laws affecting the rights and remedies of creditors, such as the
Bankruptcy Reform Act of 1978. In addition, the obligations of such issuers may
become subject to the laws enacted in the future by Congress, state legislatures
or referenda extending the time for payment of principal and/or interest, or
imposing other constraints upon enforcement of such obligations or upon
municipalities to levy taxes. There is also the possibility that, as a result of
legislation or other conditions, the power or ability of any issuer to pay, when
due, the principal of or interest on its Municipal Obligations may be materially
affected.
Zero Coupon Securities
Each Piper Fund may invest in zero coupon securities. A Piper Fund accrues
income on such securities for tax and accounting purposes, which is
distributable to shareholders and which, because no cash is received at the time
of accrual, may require the liquidation of other portfolio securities to satisfy
such Piper Fund's distribution obligations. Certain zero coupon obligations are
issued by the United States Treasury and others are issued by government
agencies or instrumentalities. Investment banks may also strip Treasury
securities and sell them under proprietary names. Only "stripped" U.S.
Government Securities which are issued through the United States Treasury's
STRIPS program are considered to be direct obligations of the United States
Government.
<PAGE>
Other Investment Management Practices
Hedging
The net amount of the excess, if any, of a Piper Fund's obligations
over its entitlements with respect to each interest rate swap will be accrued on
a daily basis and an amount of cash or high-quality liquid debt securities
having an aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by a Piper Fund's custodian. If a Piper Fund
enters into an interest rate swap on other than a net basis, such Piper Fund
would maintain a segregated account in the full amount accrued on a daily basis
of such Piper Fund's obligations with respect to the swap. To the extent a Piper
Fund sells (i.e., writes) caps and floors, it will maintain in a segregated
account cash or high-quality liquid debt securities having an aggregate net
asset value at least equal to the full amount, accrued on a daily basis, of such
Piper Fund's obligations with respect to any caps or floors.
Options and Futures Contracts
OPTIONS ON SECURITIES. The Piper Funds are authorized to write
covered put and call options and purchase put and call options on the securities
in which it may invest that are traded on U.S. and foreign securities exchanges
and in over-the-counter markets. The Piper Funds also intend to write call
options that are not covered for cross-hedging purposes.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
The writer of an option that wished to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writers position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit a Piper Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option will permit such Piper Fund to write another put
option to the extent that the exercise price thereof is secured by deposited
cash or short-term securities. Also, effecting a closing transaction will permit
the cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Piper Funds' investments. If a Piper Fund desires to
sell a particular security from its portfolio on which it has written a call
option, it will effect a closing transaction prior to or concurrent with the
sale of the security.
The Piper Funds will realize a profit from a closing transaction if
the price of the transaction is less than the premium received from writing the
option or is more than the premium paid to purchase the option; the Piper Funds
will realize a loss from a closing transaction if the price of the transaction
<PAGE>
is more than the premium received from writing the option or is less than the
premium paid to purchase the option. Because increases in the market price of a
call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security owned by the Piper Funds.
An option position may be closed out only where there exists a
secondary market for an option of the same series. If a secondary market does
not exist, it might not be possible to effect closing transactions in particular
options with the result that the Piper Funds would have to exercise the options
in order to realize any profit. If a Piper Fund is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise. Reasons for the absence of a liquid secondary market
include the following: (i) there may be insufficient trading interest in certain
options, (ii) restrictions may be imposed by a national securities exchange
("Exchange") on opening transactions or closing transactions or both, (iii)
trading halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities, (iv) unusual
or unforeseen circumstances may interrupt normal operations on an Exchange, (v)
the facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume, or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
The Piper Funds may write options in connection with buy-and-write
transactions; that is, the Piper Funds may purchase a security and then write a
call option against that security. The exercise price of the call the Piper
Funds determines to write will depend upon the expected price movement of the
underlying security. The exercise price of a call option may be below
("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the
current value of the underlying security at the time the option is written.
Buy-and-write transactions using in-the-money call options may be used when it
is expected that the price of the underlying security will remain flat or
decline moderately during the option period. Buy-and-write transactions using
out-of-the-money call options may be used when it is expected that the premiums
received from writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call options
are exercised in such transactions, the Piper Funds' maximum gain will be the
premium received by it for writing the option, adjusted upwards or downwards by
the difference between the Piper Funds' purchase price of the security and the
exercise price. If the options are not exercised and the price of the underlying
security declines, the amount of such decline will be offset in part, or
entirely, by the premium received.
The writing of covered put options is similar in terms of
risk/return characteristics to buy-and-write transactions. If the market price
of the underlying security rises or otherwise is above the exercise price, the
put option will expire worthless and the Piper Funds' gain will be limited to
the premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, the Piper Funds may elect to close the
position or take delivery of the security at the exercise price and the Piper
Funds' return will be the premium received from the put option minus the amount
by which the market price of the security is below the exercise price.
Out-of-the-money, at-the-money and in-the-money put options may be used by the
Piper Funds in the same market environments that call options are used in
equivalent buy-and-write transactions.
The Piper Funds may purchase put options to hedge against a decline
in the value of their portfolio. By using put options in this way, the Piper
Funds will reduce any profit they might
<PAGE>
otherwise have realized in the underlying security by the amount of the premium
paid for the put option and by transaction costs.
A Piper Fund may purchase call options to hedge against an increase
in the price of securities that such Piper Fund anticipate purchasing in the
future. The premium paid for the call option plus any transaction costs will
reduce the benefit, if any, realized by the Piper Funds' upon exercise of the
option, and, unless the price of the underlying security rises sufficiently, the
option may expire worthless to the Piper Funds.
FUTURES CONTRACTS. The Piper Funds may enter into contracts for the
purchase or sale for future delivery of fixed income securities, or contracts
based on bonds or financial indices including any index of the types of
securities in which the Piper Funds may invest. U.S. futures contracts have been
designed by exchanges which have been designated "contracts markets" by the
Commodity Futures Trading Commission and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market. Futures contracts trade on a number of exchange markets, and,
through their clearing corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange.
At the same time a futures contract is purchased or sold, the Piper
Funds 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 Piper Funds
would provide or receive cash that reflects any decline or increase in the
contract's value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual
delivery or acquisition of securities, in most cases the contractual obligation
is fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearing house associated with the exchange on which the contracts are traded,
the Piper Funds will incur brokerage fees when it purchases or sells futures
contracts.
The purpose of the acquisition or sale of a futures contract, in the
case of a portfolio, such as the portfolio of the Piper Funds, which holds or
intends to acquire long-term fixed income securities, is to attempt to protect
the Piper Funds from fluctuations in interest rates without actually buying or
selling long-term fixed income securities. For example, if the Piper Funds owns
long-term bonds, and interest rates were expected to increase, the Piper Funds
might enter into futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling an equivalent value of the long-term
bonds owned by a Piper Fund. If interest rates did increase, the value of the
debt securities in the portfolio would decline, but the value of the futures
contracts to the Piper Funds would increase at approximately the same rate,
thereby keeping the net asset value of a Piper Fund from declining as much as it
otherwise would have. The Piper Funds could accomplish similar results by
selling bonds with long maturities and investing in bonds with short maturities
when interest rates are expected to increase. However, since the futures market
is more liquid than the cash market, the use of futures
<PAGE>
contracts as an investment technique allows the Piper Funds to maintain a
defensive position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline,
futures contracts may be purchased to attempt to hedge against anticipated
purchases of long-term bonds at higher prices. Since the fluctuations in the
value of futures contracts should be similar to that of long-term bonds, a Piper
Fund could take advantage of the anticipated rise in the value of long-term
bonds without actually buying them until the market had stabilized. At that
time, the futures contracts could be liquidated and a Piper Fund could then buy
long-term bonds on the cash market. To the extent a Piper Fund enters into
futures contracts for this purpose, the assets in the segregated asset account
maintained to cover such Piper Fund's obligations with respect to such futures
contracts will consist of cash, cash equivalents or high-quality debt securities
from its portfolio in an amount equal to the difference between the fluctuating
market value of such futures contracts and the aggregate value of the initial
and variation margin payments made by such Piper Fund with respect to such
futures contracts.
The ordinary spreads between prices in the cash and futures markets,
due to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Adviser may still not
result in a successful transaction.
In addition, futures contracts entail risks. Although the Adviser
will only enter into futures contracts if it believes that use of such contracts
will benefit a particular Piper Fund, if the Adviser's investment judgment about
the general direction of interest rates is incorrect, a Piper Fund's overall
performance would be poorer than if it had not entered into any such contract.
For example, if a Piper Fund has hedged against the possibility of an increase
in interest rates which would adversely affect the price of bonds held in its
portfolio and interest rates decrease instead, such Piper Fund will lose part or
all of the benefit of the increased value of its bonds which it has hedged
because it will have offsetting losses in its futures positions. In addition, in
such situations, if such Piper Fund has insufficient cash, it may have to sell
bonds from its portfolio to meet daily variation margin requirements. Such sales
of bonds may be, but will not necessarily be, at increased prices which reflect
the rising market. A Piper Fund may have to sell securities at a time when it
may be disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS. A Piper Fund is authorized to purchase
and write options on futures contracts for hedging purposes. The purchase of a
call option on a futures contract is similar in some respects to the purchase of
a call option on an individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying debt securities, it may or may not be less risky
than ownership of the futures contract or underlying debt securities. As with
the purchase of futures contracts, when the Piper Funds are not fully invested
they may purchase a call option on a futures contract to hedge against a market
advance due to declining interest rates.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the security which is deliverable upon
exercise of the futures contract. If the futures price at
<PAGE>
expiration of the option is below the exercise price, a Piper Fund will retain
the full amount of the option premium which provides a partial hedge against any
decline that may have occurred in such Piper Fund's portfolio holdings. The
writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the security which is deliverable upon exercise of
the futures contract. If the futures price at expiration of the option is higher
than the exercise price, a Piper Fund will retain the full amount of the option
premium which provides a partial hedge against any increase in the price of
securities which such Piper Fund intends to purchase. If a put or call option
the Piper Funds have written is exercised, the Piper Funds will incur loss which
will be reduced by the amount of the premium they receive. Depending on the
degree of correlation between changes in the value of its portfolio securities
and changes in the value of its futures positions, a Piper Fund's losses from
existing options may to some extent be reduced or increased by changes in the
value of portfolio securities.
The purchase of a put option on a futures contract is similar in
some respects to the purchase of protective put options on portfolio securities.
For example, a Piper Fund may purchase a put option on a futures contract to
hedge such Piper Fund's portfolio against the risk of rising interest rates.
The amount of risk a Piper Fund assumes when it purchases an option
on a futures contract is the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed above, the
purchase of an option also entails the risk that changes in the value of the
underlying futures contract will not be fully reflected in the value of the
option purchased.
A Piper Fund's ability to engage in the options and futures
strategies described above will depend on the availability of liquid markets in
such instruments. Markets in options and futures with respect to many types of
securities in which the Piper Funds invest are relatively new and still
developing. It is impossible to predict the amount of trading interest that may
exist in various types of options or futures. Therefore no assurance can be
given that the Piper Funds will be able to utilize these instruments effectively
for the purposes set forth above. Furthermore, the Piper Funds' ability to
engage in options and futures transactions may be limited by tax considerations.
See "Taxation--General" herein.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES AND OPTIONS ON FUTURES
CONTRACTS. Options on securities may be traded over-the-counter. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer could lose
amounts substantially in excess of its initial investment, due to the margin
requirements associated with such positions.
In addition, options on securities, futures contracts and options on
futures contracts may be traded on foreign exchanges. Such transactions are
subject to the risk of governmental actions affecting trading in or the prices
of foreign currencies or securities. The value of such positions also could be
adversely affected by (i) other complex foreign political and economic factors,
(ii) lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in the Piper Funds' ability to act upon economic
events occurring in foreign markets during nonbusiness hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) lesser
trading volume.
Foreign Currency Exchange Transactions
XUS may engage in foreign currency exchange transactions to protect
against uncertainty in the level of the rate of exchange between the U.S. dollar
and foreign currencies. XUS may engage in such
<PAGE>
transactions in connection with the purchase and sale of portfolio securities
("transaction hedging"), and to protect the value of specific portfolio
positions ("position hedging").
The Piper Funds may engage in "transaction hedging" to protect
against a change in the exchange rate between the date on which XUS contracts to
purchase or sell the security and the settlement date, or to "lock in" the U.S.
dollar equivalent of a dividend or interest payment in a foreign currency. For
that purpose, XUS may purchase or sell any foreign currency on a spot (or cash)
basis at the prevailing spot rate in connection with the settlement of
transactions in portfolio securities denominated in such foreign currencies. If
conditions warrant, XUS may also enter into contracts to purchase or sell
foreign currencies at a future date ("forward contracts") and purchase and sell
foreign currencies or futures contracts as a hedge against changes in foreign
currencies or exchange rates between the trade and settlement dates on
particular transactions and not for speculation.
A foreign currency forward contract is a negotiated agreement to
exchange currency at a future time at a rate or rates that may be higher or
lower than the spot rate. Foreign currency futures contracts are standardized
exchange-traded contracts and have margin requirements. For transaction hedging
purposes, XUS may also purchase exchange-listed and over-the-counter call and
put options on foreign currencies or future contracts thereon. A put option on a
futures contract gives XUS the right to assume a short position in the futures
contract until expiration of the option. A put option on currency gives XUS the
right to sell a currency at an exercise price until the expiration of the
option. A call option on a futures contract gives XUS the right to assume a long
position in the futures contract until the expiration of the option. A call
option on currency gives XUS the right to purchase a currency at the exercise
price until the expiration of the option.
XUS may engage in "position hedging" to protect against a decline in
the value relative to the U.S. dollar in its securities denominated in foreign
currencies (or an increase in the value of the foreign currency for securities
which XUS intends to buy, when it holds cash reserves and short-term
investments). For position hedging purposes, XUS may purchase or sell foreign
currency futures contracts and forward contracts, and may purchase put or call
options on foreign currencies or on futures contracts thereon on exchanges or
over-the-counter markets. In connection with position hedging, XUS may also
purchase or sell foreign currencies on a spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of
portfolio securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for XUS to purchase additional
amounts of foreign currencies on the spot market (and bear the expenses of such
purchase) if the market value of the security or securities being hedged is less
than the amount of such foreign currencies XUS is obligated to deliver and if a
decision is made to sell the security or securities and make delivery of the
foreign currencies. Conversely, it may be necessary to sell on the spot market
some of the foreign currencies received upon the sale of the portfolio security
or securities if the market value of such security or securities exceeds the
amount of foreign currencies XUS is obligated to deliver.
Hedging transactions involve costs and may result in losses. XUS may
write covered call options on foreign currencies to offset some of such costs.
XUS may engage in over-the-counter transactions only when appropriate
exchange-traded transactions are unavailable and when, in the opinion of the
Adviser, the pricing mechanism and liquidity are satisfactory and the
participants are responsible parties likely to meet their contractual
obligations. XUS's ability to engage in hedging and
<PAGE>
related option transactions may be limited to tax considerations. See
"Taxation-Consequences of Certain Piper Funds Investments."
Transaction and position hedging do not eliminate fluctuations in
the underlying prices of the securities which XUS owns or intends to purchase or
sell. They simply establish a rate of exchange which one can achieve at some
future point in time. Additionally, although these techniques tend to minimize
the risk of loss due to a decline in the value of the hedged currency, they tend
to limit any potential gain which might result from the increase in the value of
such currency.
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 as agreed by the parties, at a
price set at the time of the contract. In the case of a cancelable forward
contract, the holder has the unilateral right to cancel the contract at maturity
by paying a specified fee. The contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. A foreign currency futures
contract is a standardized contract for the future delivery of a specified
amount of a foreign currency at a future date at a price set at the time of the
contract. Foreign currency futures contracts traded in the United States are
designated by and traded on exchanges regulated by the Commodities Futures
Trading Commission (the "CFTC") such as the New York Mercantile Exchange. XUS
would enter into foreign currency futures contracts solely for hedging or other
appropriate risk management purposes as defined in CFTC regulations.
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in any
given month. Forward contracts may be in any amounts agreed upon by the parties
rather than predetermined amounts. Also, forward foreign exchange contracts are
traded directly between currency traders so that no intermediary is required. A
forward contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, XUS may either
accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are effected with the currency trader who is a party to the original
forward contract. Closing transactions with respect to futures contracts are
effected on a commodities exchange; a clearing corporation associated with the
exchange assumes responsibility for closing out such contracts.
Positions in foreign currency futures contracts may be closed out
only on an exchange or board of trade which provides a secondary market in such
contracts. Although XUS intends to purchase or sell foreign currency futures
contracts only on exchanges or boards of trade where there appears to be an
active secondary market, there is no assurance that a secondary market on an
exchange or board of trade will exist for any particular contract or at any
particular time. In such event, it may not be possible to close a futures
position and, in the event of adverse price movements, XUS would continue to be
required to make daily cash payments of variation margin.
Options on foreign currencies operate similarly to options on
securities, and are traded primarily in the over-the-counter market, although
options on foreign currencies have recently been listed on several exchanges.
Options traded in the over-the-counter market are illiquid and it may not be
possible for XUS to dispose of an option it has purchased or terminate its
obligations under an option it has written at a time when the Adviser believes
it would be advantageous to do so. Options on foreign currencies are affected by
all of those factors which influence foreign exchange rates and investments
generally.
<PAGE>
The value of a foreign currency option is dependent upon the value
of the foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign debt security. Because foreign currency
transactions occurring in the interbank market involve substantially larger
amounts than those that may be involved in the use of foreign currency options,
investors may be disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for
foreign currencies and there is no regulatory requirement that quotations
available through dealers or other market sources be firm or revised on a timely
basis. Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options market.
Although foreign exchange dealers do not charge a fee for currency
conversion, they do realize a profit based upon the difference (the "spread")
between prices at which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to XUS at one rate, while offering a
lesser rate of exchange should XUS desire to resell that currency to the dealer.
When-Issued and Forward Commitment Securities
Each Piper Fund may purchase securities offered on a "when-issued"
basis and may purchase or sell securities on a "forward commitment" basis. When
a Piper Fund purchase securities on a when-issued or forward commitment basis,
it will segregate cash or liquid high-grade debt obligations having an aggregate
value equal to the amount of such purchase commitments, marked to the market
daily, until payment is made; the Piper Funds will likewise segregate securities
it sells on a forward commitment basis. On the delivery date, a Piper Fund will
meet their obligations from securities that are then maturing or sales of the
securities held in the segregated asset account and/or from the available cash
flow.
Repurchase Agreements
Each Piper Fund may invest in repurchase agreements. Each Piper
Fund's custodian will hold the securities underlying any repurchase agreement or
such securities will be part of the Federal Reserve 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 of the repurchase agreement
(including any accrued interest), the Piper Funds will promptly receive
additional collateral (so the total collateral is an amount at least equal to
the repurchase price plus accrued interest).
Pursuant to an exemptive order received from the Securities and
Exchange Commission, the Piper Funds may, along with any open-end investment
companies or series thereof and any other closed-end investment companies
currently managed by Piper Capital Management Incorporated (the "Adviser"), and
all future investment companies or series thereof advised by the Adviser or its
affiliates, deposit uninvested cash balances into one joint account to be used
to enter into one or more large repurchase agreements.
<PAGE>
Portfolio Turnover
Because the Piper Funds will actively manage their portfolio to
benefit from yield disparities among different issues of securities or otherwise
to achieve its investment objectives and policies, the Piper Funds may be
subject to a greater degree of portfolio turnover and, thus, a higher incidence
of short-term capital gain than might be expected from investment companies that
invest substantially all of their funds on a long-term basis. Correspondingly
larger transaction costs can be expected to be borne by each Piper Fund. The
Piper Funds cannot accurately predict their portfolio turnover rate, but it is
anticipated that the annual turnover rate of each Piper Fund generally will not
exceed 100% (excluding turnover of securities having a maturity of one year or
less). An annual turnover rate of 100% occurs, for example, when all of the
securities in a Piper Fund's portfolio are replaced once in a period of one
year. A greater turnover rate can be expected to result in a higher incidence of
short-term capital gain and will also result in correspondingly greater
transaction costs (I.E., underwriters' commissions and the spread of the bid and
asked prices quoted by dealers) to be borne by such Piper Fund.
Investment Restrictions
The investment objectives and the following investment restrictions
of the Piper Funds are fundamental and cannot be changed without the approval of
the holders of a majority of the applicable Piper Fund's outstanding voting
securities (defined in the Investment Company Act of 1940, as amended (the "1940
Act") as the lesser of (a) more than 50% of the outstanding shares or (b) 67% or
more of the shares represented at a meeting where more than 50% of the
outstanding shares are represented). All other investment policies or practices
are considered by the Funds not to be fundamental and, accordingly, may be
changed without shareholder approval. If a percentage restriction on investment
or use of assets set forth below is adhered to at the time a transaction is
effected, later changes in percentage resulting from changing market values will
not be considered a deviation from policy. The Piper Funds may not:
(1) invest 25% or more of the value of its total assets
in the securities of any one issuer or in the securities of issuers
conducting their principal business activities in the same industry
or in the obligations of any one government; provided that this
limitation does not apply to U.S. Government Securities; and further
provided that XUS may invest 25% or more of its total assets in
Canadian Government Securities or Mexican Government Securities in
the event that the Board of Directors determines that the XUS's
ability to achieve its investment objectives would be materially
adversely effected if XUS were not permitted to invest 25% or more
of its total assets in such securities, and so long as XUS notifies
shareholders of any decision by the Board of Directors to permit or
cease to permit XUS to invest 25% or more of its total assets in
such securities, such notice to include a discussion of any
increased investment risks to which XUS may be subjected as a result
of the Board's determination; provided that HLA will not invest more
than 25% of its total assets in Mortgage-Backed Securities,
exclusive of Stripped Mortgage-Backed Securities (SMBS), each as
defined herein;
(2) issue senior securities in the form of indebtedness
or borrow money (including on margin if marginable securities are
owned), except if after each borrowing there is asset coverage of at
least 300% (including the proceeds of such senior securities issued
and money borrowed), or pledge its assets other than to secure such
issuances or borrowings or in connection with, to the extent
permitted under the 1940 Act, interest rate transactions, currency
swaps, options on securities, futures contracts and options on
futures contracts, foreign currency transactions, when issued and
forward commitment transactions, reverse repurchase agreements and
similar investment strategies. A Piper Fund's collateral
arrangements with respect to options, futures contracts, and options
on futures contracts, collateral requirements with respect
<PAGE>
to initial and variation margin are not considered by a Piper Fund
to be the issuance of a senior security;
(3) pledge, hypothecate, mortgage or otherwise encumber
its assets, except to secure issuances or borrowings permitted by
restriction (2) above (collateral arrangements with respect to
reverse repurchase agreements or to margin for futures contracts and
options are not deemed to be pledges or other encumbrances for
purposes of this restriction);
(4) make loans of money or property to any person,
except through loans of portfolio securities, the purchase of debt
obligations in which a Piper Fund may invest consistently with a
Piper Fund's investment objectives and policies or the acquisition
of securities subject to repurchase agreements;
(5) underwrite the securities of other issuers, except
to the extent that in connection with the disposition of portfolio
securities or the sale of its own shares a Piper Fund may be deemed
to be an underwriter;
(6) invest for the purpose of exercising control over
management of any company;
(7) purchase, hold, sell or deal in real estate or
interests therein other than Mortgage-Backed Securities and similar
instruments;
(8) purchase or sell commodities or commodity contracts
except that a Piper Fund may purchase and sell futures contracts and
options on futures contracts for hedging or for other
non-speculative purposes;
(9) make any short sale of securities;
(10) purchase any security or evidence therein on
margin, except that such short-term credit may be obtained as may be
necessary for the clearance of purchases and sales of securities and
except that, with respect to a Piper Fund's permissible options and
futures transactions, deposits of initial and variation margin may
be made in connection with the purchase, ownership, holding or sale
of futures or options positions.
In addition, HLA may not:
(1) with respect to 75% of its total assets, invest more
than 5% of the value of its total assets (taken at market value at
the time of purchase) in the outstanding securities of any one
issuer, or own more than 10% of the outstanding voting securities of
any one issuer, in each case other than securities issued or
guaranteed by the United States Government or any agency or
instrumentality thereof.
Each Piper Fund's investments in collateralized mortgage obligations
("CMOs"), multi-class pass-through securities and stripped mortgage-backed
securities ("SMBS") are not subject to the 1940 Act's limitation on investments
in other investment companies if the CMO, multi-class pass-through security or
SMBS (a) is not definitionally an investment company or (b) is an unmanaged,
fixed-asset issuer that invests primarily in mortgage-backed securities, does
not issue redeemable securities, operates under general exemptive orders
exempting them from all provisions of the 1940 Act and is not registered or
regulated under the 1940 Act as an investment company. To the extent that a
Piper Fund selects CMOs, multi-class pass-through securities and SMBS that do
not meet the above requirements, the Piper Fund may not invest more than 10% of
its assets in all such entities and may not acquire more than 3% of the voting
securities of any single such entity.
<PAGE>
TENDER OFFERS AND SHARE REPURCHASES
Under certain circumstances, a Piper Fund may make a tender offer
for its shares. If a tender offer has been made, it is the Piper Fund's policy,
which may be changed by the Board, not to accept tenders or effect repurchases
if (1) such transactions, if consummated, would either (a) result in the
delisting of the Shares by the New York Stock Exchange for XUS and by the
American Stock Exchange for HLA (the applicable exchange having advised the
applicable Piper Fund that it would consider delisting if the aggregate market
value of the outstanding shares is less than $5,000,000 for XUS and $1,000,000
for HLA, the number of publicly held shares falls below 600,000 for XUS and
200,000 for HLA or the number of round-lot holders falls below 1,200 for XUS and
300 for HLA) or (b) impair a Piper Fund's status as a regulated investment
company under the Code (which would make a Piper Fund a taxable entity, causing
such Piper Fund's income to be taxed at the corporate level in addition to the
taxation of shareholders who receive dividends from such Piper Fund); (2) a
Piper Fund would not be able to borrow money or liquidate portfolio securities
in an orderly manner to fund such purchases consistent with a Piper Fund's
investment objectives and policies without creating a negative impact on the net
asset value of such Piper Fund to the detriment of non-tendering shareholders;
or (3) there is, in the Board's judgment, any material (a) legal action or
proceeding instituted or threatened challenging such transactions or otherwise
materially adversely affecting a Piper Fund, (b) suspension of or limitation on
prices for trading securities generally on the New York Stock Exchange or
American Stock Exchange, whichever is applicable, or any other exchange on which
portfolio securities of the Piper Funds are traded, (c) declaration of a banking
moratorium by federal or state authorities or any suspension of payment by banks
in the United States, (d) limitation affecting a Piper Fund or the issuers of
its portfolio securities imposed by federal or state authorities on the
extension of credit by lending institutions, (e) commencement of war, armed
hostilities or other international or national calamity directly or indirectly
involving the United States, or (f) other event or condition that would have a
material adverse effect on a Piper Fund or its shareholders if Shares of the
applicable Piper Fund were repurchased. The Board of Directors may modify these
conditions in light of experience and in light of then applicable federal and
state securities laws and regulations and interpretations thereof.
It is currently anticipated that when a tender offer is authorized
to be made by a Piper Fund's Board of Directors, a shareholder wishing to accept
the offer will be required to tender all (but not less than all) of the Shares
owned by such shareholder (or attributed to him for federal income tax purposes
under Section 318 of the Code). Each person tendering Shares will pay to the
applicable Piper Fund a service charge of $25 to help defray certain costs,
including the processing of tender forms, effecting payment, postage and
handling. Such Piper Fund's transfer agent will receive the service charge as an
offset to these costs. The service charge will not be deducted from the proceeds
of the purchase. The Piper Funds expect the cost to the Piper Funds of effecting
a tender offer will exceed the aggregate of all service charges received from
those who tender their shares of the Piper Funds. Costs associated with the
tender will be charged against capital. The Board of Directors may modify these
procedures in light of experience and in light of then applicable federal and
state securities laws and regulations and interpretations thereof.
DIRECTORS AND EXECUTIVE OFFICERS
The names, addresses and principal occupations during the past five
years of the directors and executive officers of the Piper Funds are given
below. Each of the Piper Funds' directors and officers also serves as a director
and/or officer of each of the open-end and closed-end investment companies
managed by the Adviser.
Name, Address and (Age) Position
- ----------------------- --------
David T. Bennett* (57) Chairman of Board of Directors
3400 City Center
<PAGE>
33 South Sixth Street
Minneapolis, MN 55402
Jaye F. Dyer (70) Director
4670 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402
William H. Ellis* (55) Director
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, MN 55402-3804
Karol D. Emmerich (48) Director
7302 Clarendon Drive
Edina, MN 55439
Luella G. Goldberg (60) Director
7019 Tupa Drive
Edina, MN 55435
David A. Hughey (66) Director
134 Powers Road
Meridith, NH 55105
George Latimer (62) Director
1536 Hewitt Avenue
Saint Paul, MN 55105
Paul A. Dow (46) President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, MN 55402-3804
Robert H. Nelson (34) Vice President
Piper Jaffray Tower and Treasurer
222 South Ninth Street
Minneapolis, MN 55402-3804
Susan Sharp Miley (40) Secretary
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, MN 55402-3804
- ---------------
* Directors of the Company who are interested persons (as that term is
defined by the 1940 Act) of Piper Capital Management Incorporated and the
Piper Funds.
David T. Bennett is of counsel to the law firm of Gray, Plant,
Mooty, Mooty & Bennett, P.A., located in Minneapolis, Minnesota. Mr. Bennett is
chairman of a group of privately held companies and serves on the board of
directors of a number of nonprofit organizations.
<PAGE>
Jaye F. Dyer has been President of Dyer Management Company, a
private investment management company, since 1991. Mr. Dyer serves on the board
of directors various privately held and nonprofit corporations.
William H. Ellis is retired. Prior to September 1997, he was
President of Piper Jaffray Companies Inc., President, Director and Chairman of
the Board of Piper Capital and Director of Piper Jaffray Inc.
Karol D. Emmerich has been a President of Paraclete Group, a
consultant to nonprofit and other organizations, since May 1993. Ms Emmerich is
an Executive Fellow at the University of St. Thomas Graduate School of Business
and serves on the board of directors of a number of privately held and nonprofit
organizations.
Luella G. Goldberg has served as a director of Northwestern National
Life Insurance Company (since 1976), The Reliastar Financial Corp. (since 1989),
TCF Bank Savings fsb (since 1985), TCF Financial Corp. (since 1988), and Hormel
Foods Corp. (since 1993). Ms. Goldberg also serves as Trustee of Wellesley
College and as a director of a number of other organizations, including the
University of Minnesota Foundation and the Minnesota Orchestral Association, Ms.
Goldberg was Chairman of the Board of Trustees of Wellesley College from 1985 to
1993 and acting President from July 1, 1993 to October 1, 1993.
David A. Hughey is a trustee of Bentley College. Prior to September
1996, he was Executive Vice President and Chief Administrative Officer of Dean
Witter InterCapital Inc., Dean Witter Services Company Inc. and Dean Witter
Distributors Inc.; Director, Executive Vice President and Chief Administrative
Officer of Dean Witter Trust Company; Vice President of Dean Witter Family of
Funds and TCW/DW Family of Funds; and Director of ISI Mutual Insurance Company.
George Latimer has been Chief Executive Officer of National Equity
Fund, Chicago, Illinois since November 1995; prior thereto, Mr. Latimer was
Director, Special Actions Office, Office of the Secretary, Department of Housing
and Urban Development since 1993. Mr. Latimer also serves on the board of
director of Digital Biometrics, Inc. and Payless Cashways, Inc.
Paul A. Dow is Chief investment Officer of the Adviser and has been
Chief Executive Officer of the Adviser since 1997, prior to which he served as
Senior Vice President of Piper Capital.
Robert H. Nelson has been Senior Vice President of Piper Capital
since 1993.
Susan Sharp Miley has been Senior Vice President and General Counsel
of Piper Capital since 1995 and Secretary of the Adviser since 1996; prior
thereto she was counsel for American Express Financial Advisers, Minneapolis,
Minnesota from 1994 to 1995 and an attorney at Simpson Thatcher & Bartlett, New
York, New York from 1984 to 1992.
Ms. Emmerich, Ms. Goldberg and Mr. Hughey are members of the Audit
Committee of the Piper Funds. Ms. Emmerich acts as the chairperson of such
committee. The Audit Committee oversees the financial reporting process of the
Piper Funds, reviews audit results and recommends annually to the Piper Funds, a
firm of independent certified public accountants.
The directors of the Piper Funds who are officers or employees of
the Adviser or any of its affiliates receive no remuneration from the Piper
Funds. The Piper Funds, together with all closed-end investment companies
managed by the Adviser, pays each of the other directors an aggregate quarterly
retainer of $5,000, which is allocated among the Piper Funds and such other
investment companies on the basis of each company's net assets. In addition, the
Piper Funds pay each such director a fee for
<PAGE>
each in-person meeting of the Board of Directors he or she attends. Such fee
will be based upon the net asset value of the Piper Funds and could range from
$250 (net assets under $200 million) to $1,500 (net assets of $5 billion or
more). Members of the Audit Committee who are not affiliated with the Adviser
receive $1,000 per meeting attended ($2,000 for the Chairperson of such
Committee) with such fee being allocated among all closed- and open-end
investment companies managed by the Adviser on the basis of relative net asset
values. In addition, each director who is not affiliated with the Adviser is
reimbursed for expenses incurred in connection with attending meetings. [UPDATE
$ AMOUNTS]
The following table sets forth the compensation received by each
director from XUS and HLA during the fiscal years ended October 31, 1997 and
February 28, 1998, respectively, as well as the total compensation received by
each director from the Piper Funds and all other registered investment companies
managed by the Adviser or affiliates of the Adviser during the calendar year
ended December 31, 1997 (the "Fund Complex"). Directors who are officer or
employees of the Adviser or any of its affiliates did not receive any such
compensation and are not included in the table.
Compensation Compensation Total Compensation
Director from XUS from HLA from Fund Complex*
- -------- -------- -------- ------------------
David T. Bennett $2,031 $2,031 $ 59,000
Jaye F. Dyer $1,906 $1,906 $ 55,000
Karol D. Emmerich $2,031 $2,031 $ 59,000
Luella G. Goldberg $1,969 $1,969 $ 57,000
George Latimer $1,906 $1,906 $ 55,000
David A. Hughey $1,969 $1,969 $ 57,000
- -----------------
* Currently consists of 20 registered investment companies managed by Piper
Capital or an affiliate of Piper Capital, including the Company. Each
director included in the table serves on the board of each such open-end
and closed-end investment company.
INVESTMENT ADVISORY AND OTHER SERVICES
General
The investment adviser of Piper Funds is Piper Capital Management
Incorporated (the "Adviser" or "Piper Capital"). It acts as such pursuant to a
written agreement with each Piper Fund which is periodically approved by the
directors or the shareholders of the Funds. The address of the Adviser is Piper
Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402-3804.
Control of the Adviser
The Adviser is a wholly-owned subsidiary of Piper Jaffray Companies
Inc., a publicly held corporation which is engaged through its subsidiaries in
various aspects of the financial services industry. As a result of the Holding
Company Merger, the Adviser became indirect wholly-owned subsidiary of U.S.
Bancorp, a bank holding company. The principal business address of U.S. Bancorp
is 601 Second Avenue South, Minneapolis, Minnesota 55402.
Investment Advisory Agreements
The Old Investment Advisory Agreements (the "Old Advisory
Agreements") were approved by the Directors of each Piper Fund and its initial
shareholder. As more completely described in the Proxy Statement/Prospectus, on
the date of the Holding Company Merger, in accordance with the terms
<PAGE>
of the Old Advisory Agreements, and consistent with the requirements of the 1940
Act, the Old Advisory Agreements terminated.
Pursuant to an Exemptive Order filed by Piper Jaffray Inc., the
Adviser, and the Sub-Advisers (Salomon, Federated), the Adviser was permitted to
enter into interim Investment Advisory Agreements with the Piper Funds (the
"Interim Advisory Agreements"). The Interim Advisory Agreements are subject to
approval of the shareholders of each Piper Fund. At the Meeting to which the
Proxy Statement/Prospectus is related, shareholders will vote on a proposal to
approve the Interim Advisory Agreement. If ratified and approved, the Interim
Advisory Agreements will continue in effect with respect to the Piper Funds
either (i) for successive one-year terms, subject to certain annual approval
requirements, or (ii) until the Reorganization is completed (which, subject to
various conditions described herein, is expected to occur on or about July 31,
1998).
Sub-Adviser
The sub-adviser for XUS is Salomon Brothers Asset Management Inc
("Salomon"). It acts pursuant to a written agreement with XUS which is
periodically approved by the directors or the shareholders of XUS. The
sub-adviser for HLA is Federated Advisors ("Federated"). It acts pursuant to a
written agreement with HLA which is periodically approved by the directors or
the shareholders of HLA.
Control of the Sub-Advisers
Salomon is a wholly owned subsidiary of Salomon Smith Barney
Holdings, Inc. ("Salomon Smith Barney"), which is in turn wholly owned by
Travelers Group Inc. ("Travelers"). The principal business address of Salomon
Smith Barney and Travelers is 388 Greenwich Street, New York, New York 10013.
Federated is a wholly owned subsidiaries of Federated Investors. The
principal business address of Federated Investors and Federated Advisors is 1001
Liberty Avenue, Pittsburgh, Pennsylvania 15222-3779.
Sub-Advisory Agreements
The Old Sub-Advisory Agreements (the "Old Sub-Advisory Agreements")
were approved by the Directors of each Piper Fund and its initial shareholder.
As more completely described in the Proxy Statement/Prospectus, on the date of
the Holding Company Merger, in accordance with the terms of the Old Sub-Advisory
Agreements, and consistent with the requirements of the 1940 Act, the Old
Sub-Advisory Agreements terminated.
Pursuant to an Exemptive Order filed by Piper Jaffray Inc., the
Adviser and the Sub-Advisers, the Sub-Advisers were permitted to enter into
interim Sub-Advisory Agreements with the respective Piper Funds (the "Interim
Sub-Advisory Agreements"). The Interim Sub-Advisory Agreements are subject to
approval of the shareholders of the respective Piper Fund. At the Meeting to
which the Proxy Statement/Prospectus is related, shareholders will vote on a
proposal to approve the applicable Interim Sub-Advisory Agreement. If ratified
and approved, the Sub-Advisory Agreements will continue in effect with respect
to the Piper Funds either (i) for successive one-year terms, subject to certain
annual approval requirements, or (ii) until the Reorganization is completed
(which, subject to various conditions described herein, is expected to occur on
or about July 31, 1998).
<PAGE>
Fund Administration
The Administration Agreements for each Piper Fund were approved by
the directors and initial shareholder. The Administration Agreements may
continue in effect only so long as such continuance is specifically approved at
least annually by the Board of Directors, including the specific approval of a
majority of the directors who neither are interested persons (as defined in the
1940 Act) of the Piper Funds or of the Adviser nor have any direct or indirect
financial interest in the Administration Agreement, cast in person at a meeting
called for the purpose of voting on such approval or by the vote of the holders
of a majority of the outstanding shares (as defined in the 1940 Act) of the
Piper Funds.
In its capacity as administrator and in consideration of its
administrative fee, the Adviser (i) will prepare all semi-annual and annual
reports required to be sent to shareholders and arrange for the printing and
dissemination of such reports to shareholders; (ii) will assemble all reports
required to be filed with the SEC on Form N-SAR, or such other form as the SEC
may substitute for Form N-SAR, and file such completed form with the SEC; (iii)
will review the provision of services by the independent accountants of the
Piper Funds, including, but not limited to, the auditing by such accountants of
the Piper Funds' annual financial statements and the preparation of the Piper
Funds' federal, state and local tax returns, and will make such reports and
recommendations to the Board of Directors concerning the performance of the
independent accountants as the Board reasonably requests or as it deems
appropriate; (iv) will file with the appropriate authorities all required
federal, state and local tax returns; (v) will arrange for the dissemination to
shareholders of the Piper Funds' proxy materials, and will oversee the
tabulation of proxies by the Piper Funds' transfer agent; (vi) will negotiate
the terms and conditions under which custodian services will be provided to the
Piper Funds and the fees to be paid by the Piper Funds in connection therewith;
(vii) will recommend an accounting agent (which may or may not be the same party
as the Piper Funds' custodian or an affiliate of the Piper Funds' custodian) to
the Board, which agent would be responsible for computing the Piper Funds' net
asset value in accordance with the Piper Funds' registration statement under the
1940 Act and Securities Act of 1933, will negotiate the terms and conditions
under which such accounting agent would compute the Piper Funds' net asset
value, and the fees to be paid by the Piper Funds in connection therewith, will
review the provision of such accounting services to the Piper Funds, and will
make such reports and recommendations to the Board concerning the provision of
such services as the Board reasonably requests or it deems appropriate; (viii)
will negotiate the terms and conditions under which transfer agency and dividend
disbursing services will be provided to the Piper Funds and the fees to be paid
by the Piper Funds in connection therewith, will review the provision of
transfer agency and dividend disbursing services to the Piper Funds, and will
make such reports and recommendations to the Board concerning the provision of
such services as the Board reasonably requests or deems appropriate; (ix) will
establish the accounting policies of the Piper Funds, will reconcile accounting
issues which may arise with respect to the Piper Funds' operations, and will
consult with the Piper Funds' independent accountants, legal counsel, custodian,
accounting agent and transfer and dividend disbursing agent as necessary in
connection therewith; (x) will determine the amount of all dividends and
distributions to be paid by the Piper Funds to its shareholders, will prepare
and arrange for the printing of dividend notices to shareholders, and will
provide the Piper Funds' transfer and dividend disbursing agent and custodian
with such information as is required for such parties to effect the payment of
dividends and distributions and to implement the Piper Funds' dividend
reinvestment plan; and (xi) will review the Piper Funds' bills and make payment
of such bills for reimbursement by the Piper Funds' custodian.
The Adviser reserves the right to voluntarily reduce or waive fees
under the Advisory Agreement or Administration Agreement, based upon such terms
and conditions as the Adviser may determine. Any such reduction or waiver of
fees may be discontinued by the Adviser at any time
<PAGE>
Independent Auditors
KPMG Peat Marwick LLP, 4200 Norwest Center, Minneapolis, Minnesota
55402, acts as the independent certified accountants for the Piper Funds and in
such capacity will examine each Piper Fund's annual financial statements.
BROKERAGE AND PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Directors of the
Piper Funds and the Adviser, the applicable Sub-Adviser is responsible for the
investment decisions and the placing of the orders for portfolio transactions
for the Piper Funds. The Piper Funds' portfolio transactions in debt securities
occur primarily with issuers, underwriters or major dealers acting as
principals. Such transactions are normally on a net basis that do not involve
payment of brokerage commissions. The cost of securities purchased from an
underwriter usually includes a commission paid by the issuer to the
underwriters; transactions with dealers normally reflect the spread between bid
and asked prices. Commissions are paid with respect to the purchase of certain
other securities in which the Piper Funds may invest, and with respect to
options on securities, futures contracts and options on futures contracts
purchased by the Piper Funds.
The Piper Funds have no obligation to enter into transactions in
portfolio securities with any dealer, issuer, underwriter or other entity. The
Piper Funds will not purchase securities from, or sell securities to, the
Adviser or Sub-Adviser or their respective affiliates acting as principal. In
placing orders, it is the policy of the Piper Funds to obtain the best price and
execution for its transactions. Where best price and execution may be obtained
from more than one dealer, the Sub-Adviser may, in its discretion, purchase and
sell securities through dealers who provide research, statistical and other
information to the Sub-Adviser. The investment information provided to the
Sub-Adviser is of the types described in Section 28(e)(3) of the Securities
Exchange Act of 1934 and is designed to augment the Sub-Adviser's own internal
research and investment strategy capabilities. Research and statistical services
furnished by brokers through which the Piper Funds effects securities
transactions are used by the Sub-Adviser in carrying out its investment
management responsibilities with respect to all its client accounts but not all
such services may be used by the Sub-Adviser in connection with the Piper Funds.
The Piper Funds will not purchase at a higher price or sell at a lower price in
connection with transactions effected with a dealer, acting as principal, who
furnishes research services to the Piper Funds than would be the case if no
weight were given by the Adviser to the dealer's furnishing of services.
The supplemental information received from a dealer is in addition
to the services required to be performed by the Sub-Adviser under the Interim
Sub-Advisory Agreements, and the expenses of the Sub-Adviser will not
necessarily be reduced as a result of the receipt of such information.
Certain clients of the Adviser and Sub-Adviser may have investment
objectives and policies similar to those of the Piper Funds. The Adviser and
Sub-Adviser may, from time to time, make recommendations that result in the
purchase or sale of a particular security by its other clients simultaneously
with the Piper Funds. ("Security" is defined for these purposes to include
options, futures contracts and options on futures contracts.) If transactions on
behalf of more than one client during the same period increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price or quantity. In addition, it is possible that the
number of options or futures transactions that the Piper Funds may enter into
may be affected by options or futures transactions entered into by other
investment advisory clients of the Adviser or Sub-Adviser. It is the policy of
the Adviser and Sub-Adviser to allocate advisory recommendations and the placing
of orders in a manner that is deemed equitable by the Adviser or Sub-Adviser to
the accounts involved, including the Piper Funds. When two or more of the
clients of the Adviser or Sub-Adviser (including one of the
<PAGE>
Piper Funds) are purchasing or selling the same security on a given day from the
same broker-dealer, such transactions may be averaged as to price.
Transactions in securities, options on securities, futures contracts
and options on futures contracts may be effected through Piper Jaffray Inc. if
the commissions, fees or other remuneration received by Piper Jaffray Inc. are
reasonable and fair compared to the commissions, fees or other remuneration paid
to other brokers or other futures commission merchants in connection with
comparable transactions involving similar securities or similar futures
contracts or options thereon being purchased or sold on an exchange or contract
market during a comparable period of time. In effecting portfolio transactions
through Piper Jaffray Inc., the Piper Funds intend to comply with Section
17(e)(l) of the 1940 Act.
TAXATION
General
Each Piper Fund intends to qualify under Subchapter M for tax
treatment as a regulated investment company for federal income tax purposes. In
order to so qualify, each Piper Fund must meet certain requirements imposed by
the Internal Revenue Code of 1986, as amended (the "Code"), as to the sources of
its income and the diversification of its assets. Each Piper Fund must, among
other things, (a) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to loans of securities, gains
from the sale or other disposition of securities or other income derived with
respect to its business of investing in such securities (including, but not
limited to, gains from options, futures or forward contracts); and (b) diversify
its holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
value of its assets is represented by (A) cash, United States government
securities or securities of other regulated investment companies, and (B) other
securities that, with respect to any one issuer, do not represent more than 5%
of the value of its assets or more than 10% of the voting securities of such
issuer, and (ii) not more than 25% of the value of its assets is invested in the
securities of any issuer (other than United States government securities or the
securities of other regulated investment companies) or two or more issuers
controlled by the Piper Fund and determined to be engaged in the same trade or
business.
If a Piper Fund qualifies as a regulated investment company and
satisfies a minimum distribution requirement, such Piper Fund will not be
subject to federal income tax on income and gains to the extent that it
distributes such income and gains to its shareholders. The minimum distribution
requirement is satisfied if a Piper Fund distributes at least 90% of its net
investment income (including tax-exempt interest) and net short-term capital
gains for the taxable year. Although each Piper Fund intends to satisfy the
above minimum distribution requirement, it may elect to retain its remaining net
investment income and net short-term capital gains. In such an event, a Piper
Fund would be subject to corporate tax (currently at a 35% rate) on any
undistributed income. Each Piper Fund will be subject to a nondeductible 4%
excise tax to the extent that it does not distribute by the end of each calendar
year (or is not subjected to regular corporate tax in such year on) an amount
equal to the sum of (a) 98% of its ordinary income for such calendar year; (b)
98% of the excess of capital gains over capital losses for the one-year period
generally ending on October 31 of each year; and (c) the undistributed income
and gains from the preceding years (if any).
As discussed above, each Piper Fund intends to continue to
distribute sufficient income to qualify as a regulated investment company.
However, each Piper Fund may retain all or a portion of its net investment
income in excess of such amount, which net investment income may be subject to
the corporate income or the excise tax. In addition, each Piper Fund may in the
future decide to retain all or a portion of its net capital gain, as described
under "Federal Tax Treatment of Shareholders" below.
Federal Tax Treatment of Shareholders
<PAGE>
DISTRIBUTIONS TO SHAREHOLDERS. Distributions to shareholders
attributable to the Piper Funds' net investment income (including interest
income and net short-term capital gains) are taxable as ordinary income whether
paid in cash or reinvested in additional shares of a Piper Fund. In general,
distributions will qualify for the dividends received deduction for corporate
shareholders only to the extent that such distributions are attributable to
dividends which are received from U.S. corporations and which satisfy certain
other requirements.
Distributions of any net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss, if any) that are
designated as capital gain dividends are taxable as long-term capital gains,
whether paid in cash or additional shares of a Piper Fund, regardless of how
long the shares have been held. For individuals, long-term capital gains are
generally subject to a maximum tax rate of 28% while ordinary income is
generally subject to a maximum rate of 39.6%. In the case of shareholders who
are individuals, estates, or trusts, each Fund will designate the portion of
each capital gain dividend that must be treated as mid-term capital gain ("28%
gain") and the portion that must be treated as long-term capital gain ("20%
gain"). For corporations, long-term capital gains are currently subject to the
same rates of tax as ordinary income (maximum rate of 35%).
Each Piper Fund may elect to retain all or a portion of its net
capital gain and be taxed at the corporate tax rate for such capital gains,
which is currently 35%. In such event, such Piper Fund would most likely make an
election that would require each shareholder of record on the last day of the
Piper Fund's taxable year to include in income for tax purposes his
proportionate share of the Piper Fund's undistributed net capital gain. If such
an election is made, each shareholder would be entitled to credit his
proportionate share of the tax paid by the Piper Fund against his federal income
tax liabilities and to claim refunds to the extent that the credit exceeds such
liabilities. In addition, the shareholder would be entitled to increase the
basis of his shares for federal tax purposes by an amount equal to 65% of his
proportionate share of the undistributed net capital gain.
Dividends and distributions by the Piper Funds are generally taxable
to the shareholders at the time the dividend or distribution is made (even if
reinvested in additional shares of the Piper Funds). However, any dividend
declared by the Piper Funds in October, November or December of any calendar
year which is payable to shareholders of record on a specified date in such a
month will be treated as received by the shareholders as of December 31 of such
year if the dividend is paid during January of the following year. The accrual
by the Piper Funds of original issue or market discount will increase the
investment income of the Piper Funds and the amount required to be distributed.
With respect to distributions received in cash or reinvested in
shares of common stock purchased under the dividend reinvestment plan on the
open market, the amount of the distribution for tax purposes is the amount of
cash distributed or allocated to the shareholder. In such case, a participating
shareholder's tax basis in each share is its cost, including applicable
brokerage commissions. With respect to distributions received in shares issued
by the Piper Funds, the amount of the distribution for tax purposes is generally
the fair market value of the issued shares. In such case, a participating
shareholder's tax basis in each share received is generally its fair market
value.
Shareholders will normally have to pay federal income taxes on the
dividends they receive from a Piper Fund to the extent of the Piper Fund's
earnings and profits. Any distributions by a Piper Fund in excess of its current
and accumulated earnings and profits will be treated as a nontaxable return of
capital to the extent of the shareholder's basis in his or her shares (with a
corresponding reduction in such basis) and the remainder would generally be
treated as capital gains.
SALE OF SHARES. In general, if a share of common stock is sold or
exchanged, the seller will recognize gain or loss equal to the difference
between the amount received in the sale or exchange and the seller's adjusted
basis in the share of common stock. For corporate shareholders, such gain or
loss
<PAGE>
will be long-term gain or loss if the shares were held more than one year. For
shareholders who are individuals, estates, or trusts the gain or loss will be
considered long-term if the shareholder has held the shares for more than 18
months and mid-term if the shareholder has held the shares for more than one
year but not more than 18 months. Further, if such shares are held for six
months or less, loss realized by a shareholder will be treated as long-term
capital loss to the extent of the total of any capital gain dividend received by
the shareholder. In addition, any loss realized on a sale or exchange of shares
of common stock will be disallowed to the extent the shares disposed of are
replaced within a period of 61 days beginning 30 days before and ending 30 days
after disposition of the shares. In such case, the basis of the shares acquired
will be adjusted to reflect the disallowed loss.
OTHER TAXES. Distributions may also be subject to state, local and
foreign taxes depending on each shareholder's particular situation.
FOREIGN SHAREHOLDERS. The foregoing discussion relates solely to
United States federal income tax law as applicable to "U.S. persons" (i.e., U.S.
citizens and residents and U.S. domestic corporations, partnerships, trusts and
estates). Shareholders who are not U.S. persons should consult their tax
advisers regarding the U.S. and non-U.S. tax consequences of ownership of shares
of the Piper Funds, including the fact that such a shareholder may be subject to
U.S. withholding tax at a rate of 30% (or at a lower rate under an applicable
U.S. income tax treaty) on amounts constituting ordinary income from U.S.
sources, including ordinary dividends paid by the Piper Funds.
Consequences of Certain Fund Investments
The Piper Funds may engage in various hedging transactions. Under
various provisions of the Code, the result of such transactions may be to change
the character of recognized gains and losses, accelerate the recognition of
certain gains and losses, and defer the recognition of certain losses.
Under Section 988 of the Code, all or a portion of gains and losses
from certain transactions is treated as ordinary income or loss. These rules
generally apply to transactions in certain securities denominated in foreign
currencies, forward contracts in foreign currencies, futures contracts in
foreign currencies that are not "regulated futures contracts," certain unlisted
options and foreign currency swaps. The rules under Section 988 may also affect
the timing of income recognized by the Piper Funds.
The Piper Funds may be subject to U.S. taxes resulting from holdings
in a passive foreign investment company ("PFIC"). A foreign corporation is a
PFIC when 75% or more of its gross income for the taxable year is passive income
or 50% or more of the average value of its assets consists of assets that
produce or could produce passive income. Because of the expansive definition of
a PFIC, it is possible that a portion of the a Piper Fund's assets will be
invested in PFICs. However, such portion (if any) is not expected to be
significant.
Pass-through of Foreign Tax Credits
If more than 50% of XUS's total assets at the close of its fiscal
year consist of securities of foreign corporations, it will be eligible to, and
may, file an election with the Internal Revenue Service pursuant to which
shareholders will be required to include their pro rata portions of foreign
taxes paid by the Fund as income received by them. Shareholders may then either
deduct such pro rata portions in computing their taxable income or use them as
foreign tax credits against their United States income taxes. If XUS makes such
an election, it will report annually to each shareholder the amount of foreign
taxes to be included in income and then either deducted or credited.
Alternatively, if the amount of foreign taxes paid by XUS is not
large enough to warrant its making the election described above, XUS may claim
the amount of foreign taxes paid as a deduction
<PAGE>
against its own gross income. In that case, shareholders would not be required
to include any amount of foreign taxes paid by XUS in their income and would not
be permitted either to deduct any portion of foreign taxes from their own income
or to claim any amount of foreign tax credit for taxes paid by the Fund.
ADDITIONAL INFORMATION
Under Minnesota law, each director owes certain fiduciary duties to
the Piper Funds and its shareholders. Minnesota law provides that a director
"shall discharge the duties of the position of director in good faith, in a
manner the director reasonably believes to be in the best interest of the
corporation, and with the care an ordinarily prudent person in a like position
would exercise under similar circumstances." Fiduciary duties of a director of a
Minnesota corporation include, therefore, a duty of "loyalty" (to act in good
faith and in a manner reasonably believed to be in the best interest of the
corporation) and a duty of "care" (to act with the care an ordinarily prudent
person in a like position would exercise under similar circumstances). Minnesota
law authorizes corporations to eliminate or limit the personal liability of a
director to the corporation or its shareholders for monetary damages for breach
of the fiduciary duty of "care." Minnesota law does not, however, permit a
corporation to eliminate or limit the liability of a director (a) for any breach
of the director's duty of "loyalty" to the corporation or its shareholders, (b)
for acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of the law, (c) for authorizing a dividend, stock
repurchase or redemption or other distribution in violation of Minnesota law or
for violation of certain provisions of Minnesota securities laws, or (d) for any
transaction from which the director derived an improper personal benefit. The
Articles of Incorporation of each Piper Fund limit the liability of directors to
the fullest extent permitted by Minnesota law and the 1940 Act.
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liabilities for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" to the corporation for breach of their
duties as officers (including the liability of directors who serve as officers
for breach of their duties as officers). Minnesota law does not permit
elimination or limitation of the availability of equitable relief, such as
injunctive or rescissionary relief. These remedies, however, may be ineffective
in situations where shareholders become aware of such a breach after a
transaction has been consummated and rescission has become impractical.
Minnesota law does not permit elimination or limitation of a director's
liability under the Securities Act of 1933 or the Securities Exchange Act of
1934, and the 1940 Act prohibits elimination or limitation of a director's
liability for acts involving willful malfeasance, bad faith, gross negligence or
reckless disregard of the duties of a director.
RATINGS
A rating of a rating service represents that service's opinion as to
the credit quality of the rated security. However, such ratings are general and
cannot be considered absolute standards of quality or guarantees as to the
creditworthiness of an issuer. A rating is not a recommendation to purchase,
sell or hold a security, because it does not take into account market value or
suitability for a particular investor. Markets values of debt securities may
change as a result of a variety of factors unrelated to credit quality,
including changes in market interest rates.
When a security has been rated by more than one service, the ratings
may not coincide, and each rating should be evaluated independently. Ratings are
based on current information furnished by the issuer or obtained by the rating
services from other sources which they consider reliable. Ratings may be
changed, suspended or withdrawn as a result of changes in or unavailability of
such information, or for other reasons. In general, the Funds are not required
to dispose of a security if its rating declines after it is purchased, although
they may consider doing so.
<PAGE>
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 of
interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, they are not likely to
have the capacity to pay interest and repay principal. The CCC
rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied B or B- rating.
The ratings from AA to CCC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
MOODY'S
Aaa: Securities which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest
<PAGE>
payments are protected by a large or exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
Aa: Securities which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group, they comprise what
are generally known as high grade securities. They are rated lower
than the best securities because margins of protection may not be as
large as in Aaa securities, or fluctuation of protective elements
may be of greater magnitude, or there may be other elements present
which make the long-term risks appear somewhat greater than in Aaa
securities.
A: Securities which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa: Securities which are rated Baa are considered as medium grade
obligations, being neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
securities lack outstanding investment characteristics, and in fact
have some speculative characteristics.
Ba: An issue which is rated Ba is judged to have speculative
elements; its future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes issues in this
class.
B: An issue which is rated B generally lacks characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa: An issue which is rated Caa is of poor standing. Such an issue
may be in default or there may be present elements of danger with
respect to principal or interest.
Those securities in the Aa, A and Baa groups which Moody's believes possess the
strongest investment attributes are designated by the symbols Aa-1, A-1 and
Baa-1. Other Aa, A and Baa securities comprise the balance of their respective
groups. These rankings (1) designate the securities which offer the maximum in
security within their quality groups, (2) designate securities which can be
bought for possible upgrading in quality and (3) additionally afford the
investor an opportunity to gauge more precisely the relative attractiveness of
offerings in the marketplace.
RATINGS OF PREFERRED STOCK
STANDARD & POOR'S.
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."
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A: An issue rated "A" is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more
susceptible to the adverse effects of changes in circumstances and
economic conditions.
BBB: An issue rated "BBB" is regarded as backed by an adequate
capacity to pay the preferred stock obligations. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions
or changing circumstances are more likely to lead to a weakened
capacity to make payments for a preferred stock in this category
than for issues in the category.
MOODY'S. Moody's ratings for preferred stock include the following:
aaa: An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
aa: An issue which is rated "aa" is considered a high grade
preferred stock. This rating indicates that there is reasonable
assurance that earnings and asset protection will remain relatively
well maintained in the foreseeable future.
a: An issue which is rate "a" is considered to be an upper medium
grade preferred stock. While risks are judged to be somewhat greater
than in the "aaa" and "aa" classifications, earnings and asset
protection are, nevertheless, expected to be maintained at adequate
levels.
baa: An issue which is rated "baa" is considered to be medium grade,
neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over
any great length of time.
RATINGS OF MUNICIPAL NOTES
STANDARD & POOR'S
SP-1: Very strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics are
given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest.
SP-3: Speculative capacity to pay principal and interest.
None of the Funds will purchase SP-3 municipal notes.
MOODY'S. Generally, Moody's ratings for state and municipal
short-term obligations are designated Moody's Investment Grade ("MIG"); however,
where an issue has a demand feature which makes the issue a variable rate demand
obligation, the applicable Moody's rating is "VMIG."
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.
<PAGE>
MIG 3/VMIG 3: This designation denotes favorable quality, with all
security elements accounted for, but lacking the strength of the
preceding grades. Liquidity and cash flow protection may be narrow
and market access for refinancing is likely to be less well
established.
None of the Funds will purchase MIG 3/VMIG 3 municipal notes.
RATINGS OF COMMERCIAL PAPER
STANDARD & POOR'S. Commercial paper ratings are graded into four
categories, ranging from "A" for the highest quality obligations to "D" for the
lowest. Issues assigned the A rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designation 1, 2 and 3 to indicate the relative degree of safety. The "A-1"
designation indicates that the degree of safety regarding timely payment is very
strong. Those issues determined to possess overwhelming safety characteristics
will be denoted with a plus (+) symbol designation. None of the Funds will
purchase commercial paper rated A-3 or lower.
MOODY'S. Moody's commercial paper ratings are opinions as to the
ability of the issuers to timely repay promissory obligations not having an
original maturity in excess of nine months. Moody's makes no representation that
such obligations are exempt from registration under the Securities Act of 1933,
and it does not represent that any specific instrument is a valid obligation of
a rated issuer or issued in conformity with any applicable law. Moody's employs
the following three designations, all judged to be investment grade, to indicate
the relative repayment capacity of rated issuers:
PRIME-1: Superior capacity for repayment.
PRIME-2: Strong capacity for repayment.
PRIME-3: Acceptable capacity for repayment.
None of the Funds will purchase Prime-3 commercial paper.
BEST'S RATING SYSTEM FOR INSURANCE COMPANIES
The objective of Best's Rating System is to evaluate the various
factors affecting the overall performance of an insurance company in order to
provide an opinion as to the company's relative financial strength and ability
to meet its contractual obligations. The procedure includes both a quantitative
and qualitative review of the company.
The quantitative evaluation is based on an analysis of the company's
financial condition and operating performance utilizing a series of financial
tests. These tests measure a company's performance in the three critical areas
of Profitability, Leverage and Liquidity in comparison to the norms established
by the A.M. Best Company. These norms are based on an evaluation of the actual
performance of the insurance industry.
Best's review also includes a qualitative evaluation of the adequacy
and soundness of a company's reinsurance, the adequacy of its reserves and the
experience of its management. In addition, various other factors of importance
are considered such as the composition of the company's book of business and the
quality and diversification of its assets.
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
<PAGE>
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.
<PAGE>
APPENDIX A
FIRST AMERICAN INVESTMENT FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED __________, 1998
MID CAP GROWTH FUND TAX FREE FUND
EMERGING MARKETS FUND MINNESOTA TAX FREE FUND
ADJUSTABLE RATE MORTGAGE SECURITIES FUND STRATEGIC INCOME FUND
This Statement of Additional Information relates to the Class A and
Class Y Shares of the funds named above (the "Funds"), each of which is a series
of First American Investment Funds, Inc. ("FAIF"). In addition, this Statement
of Additional Information relates to the Class B Shares of Mid Cap Growth Fund,
Emerging Markets Fund and Strategic Income Fund. This Statement of Additional
Information is not a prospectus, but should be read in conjunction with the
Funds' current Prospectuses dated __________, 1998. This Statement of Additional
Information is incorporated into the Funds' Prospectuses by reference. To obtain
copies of a Prospectus, write or call the Funds' distributor SEI Investments
Distribution Co., Oaks, Pennsylvania 19456, telephone: (800) 637-2548. Please
retain this Statement of Additional Information for future reference.
TABLE OF CONTENTS
GENERAL INFORMATION ................................................... 2
ADDITIONAL INFORMATION CONCERNING FUND INVESTMENTS .................... 3
SHORT-TERM INVESTMENTS ............................................. 3
REPURCHASE AGREEMENTS .............................................. 3
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS ...................... 4
MORTGAGE DOLLAR ROLLS .............................................. 4
LENDING OF PORTFOLIO SECURITIES .................................... 4
OPTIONS TRANSACTIONS ............................................... 4
FUTURES AND OPTIONS ON FUTURES ..................................... 5
EURODOLLAR INSTRUMENTS ............................................. 6
INTEREST RATE TRANSACTIONS ......................................... 6
FOREIGN SECURITIES ................................................. 7
FOREIGN CURRENCY TRANSACTIONS ...................................... 7
MORTGAGE-BACKED SECURITIES ......................................... 8
DERIVATIVE MUNICIPAL SECURITIES .................................... 9
DEBT OBLIGATIONS RATED LESS THAN INVESTMENT GRADE .................. 10
U.S. TREASURY INFLATION-PROTECTION SECURITIES ...................... 11
SPECIAL FACTORS AFFECTING MINNESOTA TAX FREE FUND .................. 12
CFTC INFORMATION ................................................... 13
INVESTMENT RESTRICTIONS ............................................... 13
DIRECTORS AND EXECUTIVE OFFICERS ...................................... 16
DIRECTORS .......................................................... 16
EXECUTIVE OFFICERS ................................................. 16
COMPENSATION ....................................................... 18
INVESTMENT ADVISORY AND OTHER SERVICES ................................ 19
INVESTMENT ADVISORY AGREEMENT ...................................... 19
SUB-ADVISORY AGREEMENT FOR EMERGING MARKETS FUND AND
STRATEGIC INCOME FUND ........................................... 19
ADMINISTRATION AGREEMENT ........................................... 20
DISTRIBUTOR AND DISTRIBUTION PLANS ................................. 20
CUSTODIAN; TRANSFER AGENT; COUNSEL; ACCOUNTANTS .................... 22
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE .................... 22
CAPITAL STOCK ......................................................... 24
NET ASSET VALUE AND PUBLIC OFFERING PRICE ............................. 24
FUND PERFORMANCE ...................................................... 24
SEC STANDARDIZED PERFORMANCE FIGURES ............................... 24
NON-STANDARD DISTRIBUTION RATES .................................... 26
CERTAIN PERFORMANCE COMPARISONS .................................... 26
TAXATION .............................................................. 26
RATINGS ............................................................... 30
RATINGS OF CORPORATE DEBT OBLIGATIONS AND MUNICIPAL
BONDS ........................................................... 30
RATINGS OF PREFERRED STOCK ......................................... 32
RATINGS OF MUNICIPAL NOTES ......................................... 32
RATINGS OF COMMERCIAL PAPER ........................................ 33
BEST'S RATING SYSTEM FOR INSURANCE COMPANIES ...................... 33
SUBJECT TO COMPLETION -- APRIL 15, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY ANY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A
PROSPECTUS.
<PAGE>
GENERAL INFORMATION
First American Investment Funds, Inc. ("FAIF") was incorporated in
the State of Maryland on August 20, 1987 under the name "SECURAL Mutual Funds,
Inc." The Board of Directors and shareholders, at meetings held January 10,
1991, and April 2, 1991, respectively, approved amendments to the Articles of
Incorporation providing that the name "SECURAL Mutual Funds, Inc." be changed to
"First American Investment Funds, Inc."
FAIF is organized as a series fund and currently issues its shares
in 30 series. Each series of shares represents a separate investment portfolio
with its own investment objective and policies (in essence, a separate mutual
fund). The series of FAIF to which this Statement of Additional Information
relates are named on the cover hereof. These series are referred to in this
Statement of Additional Information as the "Funds."
Shareholders may purchase shares of each Fund through three separate
classes, Class A, Class B (Mid Cap Growth Fund, Emerging Markets Fund and
Strategic Income Fund only) and Class Y, which provide for variations in
distribution costs, shareholder servicing fees, voting rights and dividends. To
the extent permitted by the Investment Company Act of 1940 (the "1940 Act"), the
Funds may also provide for variations in other costs among the classes although
they have no present intention to do so. In addition, a sales load is imposed on
the sale of Class A and Class B Shares of the Funds. Except for differences
among the classes pertaining to distribution costs and shareholder servicing
fees, each share of each Fund represents an equal proportionate interest in that
Fund.
FAIF has prepared and will provide Prospectuses relating to the
Class A and Class Y Shares of Funds, and the Class B Shares of Mid Cap Growth
Fund, Emerging Markets Fund and Strategic Income Fund. These Prospectuses can be
obtained by calling or writing SEI Investments Distribution Co., at the address
and telephone number set forth on the cover of this Statement of Additional
Information. This Statement of Additional Information relates both to the Class
A and Class B Shares Prospectuses and to the Class Y Shares Prospectuses for the
Funds. It should be read in conjunction with the applicable Prospectus.
The Articles of Incorporation and Bylaws of FAIF provide that
meetings of shareholders be held as determined by the Board of Directors and as
required by the 1940 Act. Maryland corporation law requires a meeting of
shareholders to be held upon the written request of shareholders holding 10% or
more of the voting shares of FAIF, with the cost of preparing and mailing the
notice of such meeting payable by the requesting shareholders. The 1940 Act
requires a shareholder vote for all amendments to fundamental investment
policies and restrictions, for approval of all investment advisory contracts and
amendments thereto, and for all amendments to Rule 12b-1 distribution plans.
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ADDITIONAL INFORMATION CONCERNING FUND INVESTMENTS
The investment objectives, policies and restrictions of the Funds
are set forth in their respective Prospectuses. Additional information
concerning the investments which may be made by the Funds is set forth under
this caption. Additional information concerning the Funds' investment
restrictions is set forth below under the caption "Investment Restrictions."
SHORT-TERM INVESTMENTS
Most of the Funds can invest in a variety of short-term instruments
which are specified in the respective Prospectuses. Short-term investments and
repurchase agreements may be entered into on a joint basis by the Funds and
other funds advised by the Adviser to the extent permitted by Securities and
Exchange Commission exemptive order relief obtained by them. A brief description
of certain kinds of short-term instruments follows:
COMMERCIAL PAPER. Commercial paper consists of unsecured promissory
notes issued by corporations. Issues of commercial paper normally have
maturities of less than nine months and fixed rates of return. Subject to the
limitations described in the Prospectuses, the Funds may purchase commercial
paper consisting of issues rated at the time of purchase within the two highest
rating categories by Standard & Poor's Rating Services, a division of the
McGraw-Hill Companies, Inc. ("Standard & Poor's") or Moody's Investors Service,
Inc. ("Moody's"), or which have been assigned an equivalent rating by another
nationally recognized statistical rating organization. The Funds also may invest
in commercial paper that is not rated but that is determined by the Adviser to
be of comparable quality to instruments that are so rated. For a description of
the rating categories of Standard & Poor's and Moody's, see "Ratings" herein.
BANKERS' ACCEPTANCES. Bankers' acceptances are credit instruments
evidencing the obligation of a bank to pay a draft drawn on it by a customer.
These instruments reflect the obligation both of the bank and of the drawer to
pay the full amount of the instrument upon maturity.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand
notes are unsecured demand notes that permit the indebtedness thereunder to vary
and provide for periodic adjustments in the interest rate according to the terms
of the instrument. Because master demand notes are direct lending arrangements
between a Fund and the issuer, they are not normally traded. Although there is
no secondary market in the notes, a Fund may demand payment of principal and
accrued interest at any time. While the notes are not typically rated by credit
rating agencies, issuers of variable amount master demand notes (which are
normally manufacturing, retail, financial, and other business concerns) must
satisfy the same criteria as set forth above for commercial paper. The Adviser
or Sub-Adviser will consider the earning power, cash flow, and other liquidity
ratios of the issuers of such notes and will continuously monitor their
financial status and ability to meet payment on demand.
REPURCHASE AGREEMENTS
The Funds may invest in repurchase agreements to the extent
specified in their respective Prospectuses. The Funds' custodian will hold the
securities underlying any repurchase agreement, or the securities will be part
of the Federal Reserve/Treasury Book Entry System. The market value of the
collateral underlying the repurchase agreement will be determined on each
business day. If at any time the market value of the collateral falls below the
repurchase price under the repurchase agreement (including any accrued
interest), the appropriate Fund will promptly receive additional collateral (so
the total collateral is an amount at least equal to the repurchase price plus
accrued interest).
In addition, Strategic Income Fund, although it currently does not
do so, may engage in reverse repurchase agreement transactions. At the time the
Fund enters into a reverse repurchase agreement, cash or liquid securities
having a value sufficient to make payments for the securities to be repurchased
will be segregated, and will be maintained throughout the period of the
obligation.
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<PAGE>
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
When a Fund agrees to purchase securities on a when-issued or
delayed delivery basis, the Custodian will maintain in a segregated account cash
or liquid securities in an amount sufficient to meet the Fund's purchase
commitments. It may be expected that a Fund's net assets will fluctuate to a
greater degree when it sets aside securities to cover such purchase commitments
than when it sets aside cash. In addition, because a Fund will set aside cash or
liquid securities to satisfy its purchase commitments in the manner described
above, its liquidity and the ability of the Adviser to manage it might be
affected in the event its commitments to purchase when-issued or delayed
delivery securities ever exceeded 25% of the value of its assets. Under normal
market conditions, however, a Fund's commitments to purchase when-issued or
delayed delivery securities will not exceed 25% of the value of its assets.
MORTGAGE DOLLAR ROLLS
In connection with their ability to purchase securities on a
when-issued or forward commitment basis, Strategic Income Fund may enter into
mortgage "dollar rolls" in which the Fund sells securities and simultaneously
contracts with the same counterparty to repurchase similar (same type, coupon
and maturity) but not identical securities on a specified future date. In a
mortgage dollar roll, the Fund gives up the right to receive principal and
interest paid on the securities sold. However, the Fund would benefit to the
extent of any difference between the price received for the securities sold and
the lower forward price for the future purchase plus any fee income received.
Unless such benefits exceed the income, capital appreciation and gain or loss
due to mortgage prepayments that would have been realized on the securities sold
as part of the mortgage dollar roll, the use of this technique will diminish the
investment performance of the Fund compared with what such performance would
have been without the use of mortgage dollar rolls. Strategic Income Fund will
hold and maintain in a segregated account until the settlement date cash or
liquid securities in an amount equal to the forward purchase price. The benefits
derived from the use of mortgage dollar rolls may depend on the Adviser's
ability to predict correctly mortgage prepayments and interest rates. There is
no assurance that mortgage dollar rolls can be successfully employed. In
addition, the use of mortgage dollar rolls by the Fund while remaining
substantially fully invested increases the amount of the Fund's assets that are
subject to market risk to an amount that is greater than the Fund's net asset
value, which could result in increased volatility of the price of the Fund's
shares.
For financial reporting and tax purposes, mortgage dollar rolls are
considered as two separate transactions: one involving the purchase of a
security and a separate transactions involving a sale. The Fund does not
currently intend to enter into mortgage dollar rolls that are accounted for as a
financing.
LENDING OF PORTFOLIO SECURITIES
When a Fund lends portfolio securities, it must receive 100%
collateral as described in the Prospectuses. This collateral must be valued
daily by the Adviser or Sub-Adviser and, if the market value of the loaned
securities increases, the borrower must furnish additional collateral to the
lending Fund. During the time portfolio securities are on loan, the borrower
pays the lending Fund any dividends or interest paid on the securities. Loans
are subject to termination by the lending Fund or the borrower at any time.
While a Fund does not have the right to vote securities on loan, it would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
U.S. Bank Trust National Association, the Funds' custodian and an
affiliate of their Adviser, may act as securities lending agent for the Funds
and receive separate compensation for such services, subject to compliance with
conditions contained in a Securities and Exchange Commission exemptive order
permitting U.S. Bank Trust to provide such services and receive such
compensation.
OPTIONS TRANSACTIONS
OPTIONS ON SECURITIES. To the extent specified in the Prospectuses,
Funds may purchase put and call options on securities and may write covered call
options on securities which they own or have the
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<PAGE>
right to acquire. A Fund may purchase put options to hedge against a decline in
the value of its portfolio. By using put options in this way, a Fund would
reduce any profit it might otherwise have realized in the underlying security by
the amount of the premium paid for the put option and by transaction costs. In
similar fashion, a Fund may purchase call options to hedge against an increase
in the price of securities that the Fund anticipates purchasing in the future.
The premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
unexercised.
The writer (seller) of a call option has no control over when the
underlying securities must be sold; the writer may be assigned an exercise
notice at any time prior to the termination of the option. If a call option is
exercised, the writer experiences a profit or loss from the sale of the
underlying security. The writer of a call option that wishes to terminate its
obligation may effect a "closing purchase transaction." This is accomplished by
buying an option on the same security as the option previously written. If a
Fund was unable to effect a closing purchase transaction in a secondary market,
it would not be able to sell the underlying security until the option expires or
it delivers the underlying security upon exercise.
OPTIONS ON STOCK INDICES. Options on stock indices are similar to
options on individual stocks except that, rather than the right to take or make
delivery of stock at a specified price, an option on a stock index gives the
holder the right to receive, upon exercise of the option, an amount of cash if
the closing value of the stock index upon which the option is based is greater
than, in the case of a call, or lesser than, in the case of a put, the exercise
price of the option. This amount of cash is equal to the difference between the
closing price of the index and the exercise price of the option expressed in
dollars times a specified multiple (the "multiplier"). The writer of the option
is obligated, in return for the premium received, to make delivery of this
amount. Unlike stock options, all settlements for stock index options are in
cash, and gain or loss depends on price movements in the stock market generally
(or in a particular industry or segment of the market) rather than price
movements in individual stocks. The multiplier for an index option performs a
function similar to the unit of trading for a stock option. It determines the
total dollar value per contract of each point in the difference between the
underlying stock index. A multiplier of 100 means that a one-point difference
will yield $100. Options on different stock indices may have different
multipliers.
OPTIONS ON INTEREST RATE INDICES. An option on an interest rate
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing value of the interest rate index upon which the
option is based is greater than, in the case of a call, or lesser than, in the
case of a put, the exercise price of the option. This amount of cash is equal to
the difference between the closing price of the index and the exercise price of
the option expressed in dollars times a specified multiple (the "multiplier").
The writer of the option is obligated, for the premium received, to make
delivery of this amount. Unlike interest rate futures options contracts,
settlements for interest rate index options are always in cash. Gain or loss
depends on price movements in the interest rate movements with respect to
specific financial instruments. As with stock index options, the multiplier for
interest rate index options determines the total dollar value per contract of
each point in the difference between the exercise price of an option and the
current value of the underlying interest rate index. Options on different
interest rate indices may have different multipliers.
FUTURES AND OPTIONS ON FUTURES
As discussed in the Prospectuses, certain of the Funds may enter
into futures contracts and may purchase options on futures contracts of various
types. These investment techniques are designed primarily to hedge against
anticipated future changes in market conditions or foreign exchange rates which
otherwise might adversely affect the value of securities which a Fund holds or
intends to purchase. The types of futures and options on futures which
particular Funds may utilize are described in the applicable Prospectuses.
At the same time a futures contract is purchased or sold, a Fund
generally must allocate cash or securities as a deposit payment ("initial
deposit"). It is expected that the initial deposit would be
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approximately 1-1/2% to 5% of a contract's face value. Daily thereafter, the
futures contract is valued and the payment of "variation margin" may be
required, since each day the Fund would provide or receive cash that reflects
any decline or increase in the contract's value. Futures transactions also
involve brokerage costs and require a Fund to segregate liquid assets, such as
cash, United States Government securities or other liquid high grade debt
obligations, to cover its performance under such contracts.
A Fund may lose the expected benefit of futures transactions if
interest rates, securities prices or foreign exchange rates move in an
unanticipated manner. Such unanticipated changes may also result in poorer
overall performance than if the Fund had not entered into any futures
transactions. In addition, the value of a Fund's futures positions may not prove
to be perfectly or even highly correlated with the value of its portfolio
securities and foreign currencies, limiting the Fund's ability to hedge
effectively against interest rate, foreign exchange rate and/or market risk and
giving rise to additional risks. Because of the low margin requirements in the
futures markets, they may be subject to market forces, including speculative
activity, which do not affect the cash markets. There also is no assurance of
liquidity in the secondary market for purposes of closing out futures positions.
EURODOLLAR INSTRUMENTS
Adjustable Rate Mortgage Securities Fund may make investments in
Eurodollar instruments in order to attempt to reduce investment risk. Eurodollar
instruments are essentially U.S. dollar denominated futures contracts or options
thereon that are linked to LIBOR. Eurodollar futures contracts enable purchasers
to obtain a fixed rate for the lending of funds and sellers to obtain a fixed
rate for borrowings. Adjustable Rate Mortgage Securities Fund uses Eurodollar
futures contracts and options thereon to hedge against changes in LIBOR, to
which many short-term borrowings and floating rate securities are linked.
Eurodollar instruments are subject to the same limitations and risks as other
futures contracts and options thereon.
INTEREST RATE TRANSACTIONS
Adjustable Rate Mortgage Securities Fund may purchase or sell
interest rate caps and floors to preserve a return or spread on a particular
investment or portion of its portfolio or for other non-speculative purposes.
The aggregate purchase price of caps and floors held by Adjustable Rate Mortgage
Securities Fund may not exceed 5% of the Fund's total assets. Adjustable Rate
Mortgage Securities Fund may sell,, I.E., write, caps and floors without
limitation, subject to the segregated account requirement described below. The
Fund does not intend to use these transactions for speculative purposes. The
purchase of an interest rate cap entitles the purchaser, to the extent a
specified index exceeds a predetermined interest rate, to receive payments or
interest on a contractually-based principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent a specified index falls below a predetermined interest
rate, to receive payments of interest on a contractually-based principal amount
from the party selling such interest rate floor.
Adjustable Rate Mortgage Securities Fund may enter into interest
rate caps and floors on either an asset-based or liability-based basis,
depending on whether it is hedging its assets or its liabilities. To the extent
the Fund sells caps and floors, it will maintain in a segregated account cash or
high quality liquid securities having an aggregate net asset value at least
equal to the full amount, accrued on a daily basis, of the Fund's obligations
with respect to any caps or floors. Adjustable Rate Mortgage Securities Fund
will not enter into any interest rate cap or floor transaction unless the
unsecured senior debt or the claims-paying ability of the other party thereto is
rated at least A by Standard & Poor's or Moody's or is comparably rated by any
other nationally recognized statistical rating organization. If there is a
default by the other party to such a transaction, the Fund will have contractual
remedies pursuant to the agreements related to the transaction. Interest rate
caps and floors are somewhat recent innovations for which standardized
documentation has not yet been developed and, accordingly, they are less liquid
than many other investments.
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FOREIGN SECURITIES
As described in the applicable Prospectuses, under normal market
conditions Emerging Markets Fund invests principally in foreign securities, and
certain other Funds, including Strategic Income Funds, may invest lesser
proportions of their assets in securities of foreign issuers which are either
listed on a United States securities exchange or represented by American
Depositary Receipts. In addition, Strategic Income Fund may invest proportions
of their assets in foreign securities which are not publicly traded in the
United States.
Fixed commissions on foreign securities exchanges are generally
higher than negotiated commissions on United States exchanges. Foreign markets
also have different clearance and settlement procedures, and in some markets
there have been times when settlements have been unable to keep pace with the
volume of securities transactions, making it difficult to conduct such
transactions. Delays in settlement could result in temporary periods when a
portion of the assets of Emerging Markets Fund or Strategic Income Fund are
uninvested. In addition, settlement problems could cause Emerging Markets Fund
or Strategic Income Fund to miss attractive investment opportunities or to incur
losses due to an inability to sell or deliver securities in a timely fashion. In
the event of a default by an issuer of foreign securities, it may be more
difficult for a Fund to obtain or to enforce a judgment against the issuer.
FOREIGN CURRENCY TRANSACTIONS
As described in the applicable Prospectuses, Emerging Markets Fund
and Strategic Income Fund may engage in a variety of foreign currency
transactions in connection with its investment activities. These include forward
foreign currency exchange contracts, foreign currency futures, and foreign
currency options.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded directly between currency traders (usually
large commercial banks) and their customers. Emerging Markets Fund and Strategic
Income Fund will not enter into such forward contracts or maintain a net
exposure in such contracts where the Fund would be obligated to deliver an
amount of foreign currency in excess of the value of the Fund's securities or
other assets denominated in that currency. The Funds will comply with applicable
Securities and Exchange Commission announcements requiring each Fund to
segregate assets to cover the Fund's commitments with respect to such contracts.
At the present time, these announcements generally require a Fund with a long
position in a forward foreign currency contract to establish with its custodian
a segregated account containing cash or liquid high grade debt securities equal
to the purchase price of the contract, and require a Fund with a short position
in a forward foreign currency contract to establish with its custodian a
segregated account containing cash or liquid high grade debt securities that,
when added to any margin deposit, equal the market value of the currency
underlying the forward contract. These requirements will not apply where a
forward contract is used in connection with the settlement of investment
purchases or sales or where the position has been "covered" by entering into an
offsetting position. The Funds generally will not enter into a forward contract
with a term longer than one year.
FOREIGN CURRENCY FUTURES TRANSACTIONS. Unlike forward foreign
currency exchange contracts, foreign currency futures contracts and options on
foreign currency futures contracts are standardized as to amount and delivery
period and may be traded on boards of trade and commodities exchanges or
directly with a dealer which makes a market in such contracts and options. It is
anticipated that such contracts may provide greater liquidity and lower cost
than forward foreign currency exchange contracts. As part of its financial
futures transactions, Emerging Markets Fund and Strategic Income Fund may use
foreign currency futures contracts and options on such futures contracts.
Through the purchase or sale of such contracts, the Fund may be able to achieve
many of the same objectives as through forward foreign currency exchange
contracts more effectively and possibly at a lower cost.
FOREIGN CURRENCY OPTIONS. A foreign currency option provides the
option buyer with the right to buy or sell a stated amount of foreign currency
at the exercise price at a specified date or during the
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<PAGE>
option period. A call option gives its owner the right, but not the obligation,
to buy the currency, while a put option gives its owner the right, but not the
obligation, to sell the currency. The option seller (writer) is obligated to
fulfill the terms of the option sold if it is exercised. However, either seller
or buyer may close its position during the option period in the secondary market
for such options at any time prior to expiration.
A foreign currency call option rises in value if the underlying
currency appreciates. Conversely, a foreign currency put option rises in value
if the underlying currency depreciates. While purchasing a foreign currency
option may protect Emerging Markets Fund and Strategic Income Fund against an
adverse movement in the value of a foreign currency, it would not limit the gain
which might result from a favorable movement in the value of the currency. For
example, if the Fund were holding securities denominated in an appreciating
foreign currency and had purchased a foreign currency put to hedge against a
decline in the value of the currency, it would not have to exercise its put. In
such an event, however, the amount of the Fund's gain would be offset in part by
the premium paid for the option. Similarly, if the Fund entered into a contract
to purchase a security denominated in a foreign currency and purchased a foreign
currency call to hedge against a rise in the value of the currency between the
date of purchase and the settlement date, the Fund would not need to exercise
its call if the currency instead depreciated in value. In such a case, the Fund
could acquire the amount of foreign currency needed for settlement in the spot
market at a lower price than the exercise price of the option.
MORTGAGE-BACKED SECURITIES
As described in the applicable Prospectuses, Adjustable Rate
Mortgage Securities Fund and Strategic Income Fund also invest in
mortgage-backed securities. Each of these Funds will invest only in
mortgage-backed securities which are Agency Pass-Through Certificates, private
pass-through securities or collateralized mortgage obligations ("CMOs"), as
defined and described in those Prospectuses.
Agency Pass-Through Certificates are issued or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC").
GNMA is a wholly-owned corporate instrumentality of the United States within the
Department of Housing and Urban Development. The guarantee of GNMA with respect
to GNMA certificates is backed by the full faith and credit of the United
States, and GNMA is authorized to borrow from the United States Treasury in an
amount which is at any time sufficient to enable GNMA, with no limitation as to
amount, to perform its guarantee.
FNMA is a federally chartered and privately owned corporation
organized and existing under federal law. Although the Secretary of the Treasury
of the United States has discretionary authority to lend funds to FNMA, neither
the United States nor any agency thereof is obligated to finance FNMA's
operations or to assist FNMA in any other manner.
FHLMC is a federally chartered corporation organized and existing
under federal law, the common stock of which is owned by the Federal Home Loan
Banks. Neither the United States nor any agency thereof is obligated to finance
FNMA's operations or to assist FNMA in any other manner.
The residential mortgage loans evidenced by Agency Pass-Through
Certificates, private pass-through securities and upon which CMOs are based
generally are secured by first mortgages on one- to four-family residential
dwellings. Such mortgage loans generally have final maturities ranging from 15
to 30 years and provide for monthly payments in amounts sufficient to amortize
their original principal amounts by the maturity dates. Thus, each monthly
payment on such mortgage loans generally includes both an interest component and
a principal component, so that the holder of the mortgage loans receives both
interest and a partial return of principal in each monthly payment. In general,
such mortgage loans can be prepaid by the borrowers at any time without any
prepayment penalty. In addition, many such mortgage loans contain a
"due-on-sale" clause requiring the loans to be repaid in full upon the sale of
the property securing the loans. Because residential mortgage loans generally
provide for monthly amortization and may be prepaid in full at any time, the
weighted average maturity of a pool of residential mortgage loans is likely to
be substantially shorter than its
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stated final maturity date. The rate at which a pool of residential mortgage
loans is prepaid may be influenced by many factors and is not predictable with
precision.
As stated in the applicable Prospectuses, CMOs generally are issued
in multiple classes, with holders of each class entitled to receive specified
portions of the principal payments and prepayments and/or of the interest
payments on the underlying mortgage loans. These entitlements can be specified
in a wide variety of ways, so that the payment characteristics of various
classes may differ greatly from one another. For example:
* In a sequential-pay CMO structure, one class is entitled to
receive all principal payments and prepayments on the
underlying mortgage loans (and interest on unpaid principal)
until the principal of the class is repaid in full, while the
remaining classes receive only interest; when the first class
is repaid in full, a second class becomes entitled to receive
all principal payments and prepayments on the underlying
mortgage loans until the class is repaid in full, and so
forth.
* A planned amortization class ("PAC") of CMOs is entitled to
receive principal on a stated schedule to the extent that it
is available from the underlying mortgage loans, thus
providing a greater (but not absolute) degree of certainty as
to the schedule upon which principal will be repaid.
* An accrual class of CMOs provides for interest to accrue and
be added to principal (but not be paid currently) until
specified payments have been made on prior classes, at which
time the principal of the accrual class (including the accrued
interest which was added to principal) and interest thereon
begins to be paid from payments on the underlying mortgage
loans.
* As discussed above with respect to Agency Pass-Through
Certificates, an interest-only class of CMOs entitles the
holder to receive all of the interest and none of the
principal on the underlying mortgage loans, while a
principal-only class of CMOs entitles the holder to receive
all of the principal payments and prepayments and none of the
interest on the underlying mortgage loans.
* A floating rate class of CMOs entitles the holder to receive
interest at a rate which changes in the same direction and
magnitude as changes in a specified index rate. An inverse
floating rate class of CMOs entitles the holder to receive
interest at a rate which changes in the opposite direction
from, and in the same magnitude as or in a multiple of,
changes in a specified index rate. Floating rate and inverse
floating rate classes also may be subject to "caps" and
"floors" on adjustments to the interest rates which they bear.
* A subordinated class of CMOs is subordinated in right of
payment to one or more other classes. Such a subordinated
class provides some or all of the credit support for the
classes that are senior to it by absorbing losses on the
underlying mortgage loans before the senior classes absorb any
losses. A subordinated class which is subordinated to one or
more classes but senior to one or more other classes is
sometimes referred to as a "mezzanine" class. A subordinated
class generally carries a lower rating than the classes that
are senior to it, but may still carry an investment grade
rating.
DERIVATIVE MUNICIPAL SECURITIES
Tax Free Fund and Minnesota Tax Free Fund (the "Tax Free Funds") may
also acquire derivative municipal securities, which are custodial receipts or
certificates underwritten by securities dealers or banks that evidence ownership
of future interest payments, principal payments or both on certain municipal
securities. The underwriter of these certificates or receipts typically
purchases municipal securities and deposits them in an irrevocable trust or
custodial account with a custodian bank, which then issues receipts or
certificates that evidence ownership of the periodic unmatured coupon payments
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and the final principal payment on the obligations. Although under the terms of
a custodial receipt a Fund typically would be authorized to assert its rights
directly against the issuer of the underlying obligation, the Fund could be
required to assert through the custodian bank those rights as may exist against
the underlying issuer. Thus, in the event the underlying issuer fails to pay
principal and/or interest when due, a Fund may be subject to delays, expenses
and risks that are greater than those that would have been involved if the Fund
had purchased a direct obligation of the issuer. In addition, in the event the
trust or custodial account in which the underlying security has been deposited
is determined to be an association taxable as a corporation, instead of a
non-taxable entity, it would be subject to state income tax (but not federal
income tax) on the income it earned on the underlying security, and the yield on
the security paid to the fund and its shareholders would be reduced by the
amount of taxes paid. Furthermore, amounts paid by the trust or custodial
account to a Fund would lose their tax-exempt character and become taxable, for
federal and state purposes, in the hands of the Fund and its shareholders.
However, custodial receipts in which the Funds will invest will be accompanied
by a tax opinion stating that interest payable on the receipts is tax exempt. If
a Fund invests in custodial receipts, it is possible that a portion of the
discount at which the Fund purchases the receipts might have to be accrued as
taxable income during the period that the Fund holds the receipts. See
"Taxation."
DEBT OBLIGATIONS RATED LESS THAN INVESTMENT GRADE
As described in the applicable Prospectuses, certain Funds may
invest include corporate debt obligations which are convertible into common
stock. These convertible debt obligations may include obligations rated as low
as CCC by Standard & Poor's or Caa by Moody's or which have been assigned an
equivalent rating by another nationally recognized statistical rating
organization or are unrated but deemed of comparable quality by the Adviser or
Sub-Adviser. There are no minimum rating requirements for these investments by
Strategic Income Fund. Debt obligations rated BB, B or CCC by Standard & Poor's
or Ba, B or Caa by Moody's are considered to be less than "investment grade" and
are sometimes referred to as "junk bonds." The limitations on investments by
these Funds in less than investment grade convertible debt obligations are set
forth in the applicable Prospectuses.
Purchases of less than investment grade corporate debt obligations
generally involve greater risks than purchases of higher rated obligations. Less
than investment grade debt obligations are especially subject to adverse changes
in general economic conditions and to changes in the financial condition of
their issuers. During periods of economic downturn or rising interest rates,
issuers of such obligations may experience financial stress that could adversely
affect their ability to make payments of principal and interest and increase the
possibility of default.
Yields on less than investment grade debt obligations will fluctuate
over time. The prices of such obligations have been found to be less sensitive
to interest rate changes than higher rated obligations, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or period of rising interest rates, highly leveraged issuers
may experience financial stress which could adversely affect their ability to
service principal and interest payment obligations, to meet projected business
goals, and to obtain additional financing. In addition, periods of economic
uncertainty and changes can be expected to result in increased volatility of
market prices of less than investment grade debt obligations.
In addition, the secondary trading market for less than investment
grade debt obligations may be less developed than the market for investment
grade obligations. This may make it more difficult for a Fund to value and
dispose of such obligations. Adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may decrease the values and liquidity of
less than investment grade obligations, especially in a thin secondary trading
market.
Certain risks also are associated with the use of credit ratings as
a method for evaluating less than investment grade debt obligations. For
example, credit ratings evaluate the safety of principal and interest payments,
not the market value risk of such obligations. In addition, credit rating
agencies may not timely change credit ratings to reflect current events. Thus,
the success of a Fund's use of less
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than investment grade convertible debt obligations may be more dependent on the
Adviser's own credit analysis than is the case with investment grade
obligations.
U.S. TREASURY INFLATION-PROTECTION SECURITIES
To the extent they may invest in fixed-income securities, certain
Funds, may invest in U.S. Treasury inflation-protection securities, which are
issued by the United States Department of Treasury ("Treasury") with a nominal
return linked to the inflation rate in prices. The index used to measure
inflation is the non- seasonally adjusted U.S. City Average All Items Consumer
Price Index for All Urban Consumers ("CPI-U").
The value of the principal is adjusted for inflation, and pays
interest every six months. The interest payment is equal to a fixed percentage
of the inflation-adjusted value of the principal. The final payment of principal
of the security will not be less than the original par amount of the security at
issuance.
The principal of the inflation-protection security is indexed to the
non-seasonally adjusted CPI-U. To calculate the inflation-adjusted principal
value for a particular valuation date, the value of the principal at issuance is
multiplied by the index ratio applicable to that valuation date. The index ratio
for any date is the ratio of the reference CPI applicable to such date to the
reference CPI applicable to the original issue date. Semiannual coupon interest
is determined by multiplying the inflation-adjusted principal amount by one-half
of the stated rate of interest on each interest payment date.
Inflation-adjusted principal or the original par amount, whichever
is larger, is paid on the maturity date as specified in the applicable offering
announcement. If at maturity the inflation-adjusted principal is less than the
original principal value of the security, an additional amount is paid at
maturity so that the additional amount plus the inflation-adjusted principal
equals the original principal amount. Some inflation-protection securities may
be stripped into principal and interest components. In the case of a stripped
security, the holder of the stripped principal component would receive this
additional amount. The final interest payment, however, will be based on the
final inflation-adjusted principal value, not the original par amount.
The reference CPI for the first day of any calendar month is the
CPI-U for the third preceding calendar month. (For example, the reference CPI
for December 1 is the CPI-U reported for September of the same year, which is
released in October.) The reference CPI for any other day of the month is
calculated by a linear interpolation between the reference CPI applicable to the
first day of the month and the reference CPI applicable to the first day of the
following month.
Any revisions the Bureau of Labor Statistics (or successor agency)
makes to any CPI-U number that has been previously released will not be used in
calculations of the value of outstanding inflation-protection securities. In the
case that the CPI-U for a particular month is not reported by the last day of
the following month, the Treasury will announce an index number based on the
last year-over-year CPI-U inflation rate available. Any calculations of the
Treasury's payment obligations on the inflation-protection security that need
that month's CPI-U number will be based on the index number that the Treasury
has announced. If the CPI-U is rebased to a different year, the Treasury will
continue to use the CPI-U series based on the base reference period in effect
when the security was first issued as long as that series continues to be
published. If the CPI-U is discontinued during the period the
inflation-protection security is outstanding, the Treasury will, in consultation
with the Bureau of Labor Statistics (or successor agency), determine an
appropriate substitute index and methodology for linking the discontinued series
with the new price index series. Determinations of the Secretary of the Treasury
in this regard are final.
Inflation-protection securities will be held and transferred in
either of two book-entry systems: the commercial book-entry system (TRADES) and
TREASURY DIRECT. The securities will be maintained and transferred at their
original par amount, i.e., not at their inflation-adjusted value.
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STRIPS components will be maintained and transferred in TRADES at their value
based on the original par amount of the fully constituted security.
SPECIAL FACTORS AFFECTING MINNESOTA TAX FREE FUND
As described in the Prospectuses relating to Minnesota Tax Free
Fund, except during temporary defensive periods, this Fund will invest most of
its total assets in Minnesota municipal obligations. This Fund therefore is
susceptible to political, economic and regulatory factors affecting issuers of
Minnesota municipal obligations. The following information provides only a brief
summary of the complex factors affecting the financial situation in Minnesota.
This information is derived from sources that are generally available to
investors and is based in part on information obtained from various state and
local agencies in Minnesota. It should be noted that the creditworthiness of
obligations issued by local Minnesota issuers may be unrelated to the
creditworthiness of obligations issued by the State of Minnesota, and that there
is no obligation on the part of Minnesota to make payment on such local
obligations in the event of default.
MINNESOTA FISCAL CONDITION. Minnesota's constitutionally prescribed
fiscal period is a biennium, and Minnesota operates on a biennial budget basis.
Legislative appropriations for each biennium are prepared and adopted during the
final legislative session of the immediately preceding biennium. Prior to each
fiscal year of a biennium, Minnesota's Department of Finance allots a portion of
the applicable biennial appropriation to each agency or other entity for which
an appropriation has been made. An agency or other entity may not expend moneys
in excess of its allotment. If revenues are insufficient to balance total
available resources and expenditures, Minnesota's Commissioner of Finance, with
the approval of the Governor, is required to reduce allotments to the extent
necessary to balance expenditures and forecasted available resources for the
then current biennium. The Governor may prefer legislative action when a large
reduction in expenditures appears necessary, and if Minnesota's legislature is
not in session the Governor is empowered to convene a special session.
Frequently in recent years, legislation has been required to
eliminate projected budget deficits by raising additional revenue, reducing
expenditures, including aids to political subdivisions and higher education,
reducing the State's budget reserve, imposing a sales tax on purchases by local
governmental units, and making other budgetary adjustments.
The Minnesota Department of Finance February 1998 Forecast projects
that, under current law, the State will complete its current biennium June 30,
1999 with a more than $1 billion surplus, plus a $350 million cash flow account
balance, plus a $522 million budget reserve. Total General Fund expenditures and
transfers for the biennium are projected to be $20.6 billion.
The 1998 Legislature, however, is considering tax cuts and spending
increases that would reduce the projected budget surplus.
The State is party to a variety of civil actions that could
adversely affect the State's General Fund. In addition, substantial portions of
State and local revenues are derived from federal expenditures, and reductions
in federal aid to the State and its political subdivisions and other federal
spending cuts may have substantial adverse effects on the economic and fiscal
condition of the State and its local governmental units. Risks are inherent in
making revenue and expenditure forecasts. Economic or fiscal conditions less
favorable than those reflected in State budget forecasts and planning estimates
may create additional budgetary pressures.
State grants and aids represent a large percentage of the total
revenues of cities, towns, counties and school districts in Minnesota. Even with
respect to bonds that are revenue obligations of the issuer and not general
obligations of Minnesota, there can be no assurance that the fiscal problems
referred to above will not adversely affect the market value or marketability of
the bonds or the ability of the respective obligors to pay interest on and
principal of the bonds.
There can be no assurance that Minnesota's economy and fiscal
condition will not materially change in the future or that future difficulties
will not occur. Economic difficulties and the resultant
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impact on state and local government finances may adversely affect the market
value of obligations in the portfolio of Minnesota Tax Free Fund or the ability
of respective obligors to make timely payment of the principal and interest on
such obligations.
CFTC INFORMATION
The Commodity Futures Trading Commission (the "CFTC"), a federal
agency, regulates trading activity pursuant to the Commodity Exchange Act, as
amended. The CFTC requires the registration of "commodity pool operators," which
are defined as any person engaged in a business which is of the nature of an
investment trust, syndicate or a similar form of enterprise, and who, in
connection therewith, solicits, accepts or receives from others funds,
securities or property for the purpose of trading in a commodity for future
delivery on or subject to the rules of any contract market. The CFTC has adopted
Rule 4.5, which provides an exclusion from the definition of commodity pool
operator for any registered investment company which (i) will use commodity
futures or commodity options contracts solely for bona fide hedging purposes
(provided, however, that in the alternative, with respect to each long position
in a commodity future or commodity option contract, an investment company may
meet certain other tests set forth in Rule 4.5); (ii) will not enter into
commodity futures and commodity options contracts for which the aggregate
initial margin and premiums exceed 5% of its assets; (iii) will not be marketed
to the public as a commodity pool or as a vehicle for investing in commodity
interests; (iv) will disclose to its investors the purposes of and limitations
on its commodity interest trading; and (v) will submit to special calls of the
CFTC for information. Any investment company desiring to claim this exclusion
must file a notice of eligibility with both the CFTC and the National Futures
Association. FAIF has made such notice filings with respect to those Funds which
may invest in commodity futures or commodity options contracts.
INVESTMENT RESTRICTIONS
In addition to the investment objectives and policies set forth in
the Prospectuses and under the caption "Additional Information Concerning Fund
Investments" above, each of the Funds is subject to the investment restrictions
set forth below. The investment restrictions set forth in paragraphs 1 through 9
below are fundamental and cannot be changed with respect to a Fund without
approval by the holders of a majority of the outstanding shares of that Fund as
defined in the Investment Company Act of 1940, as amended (the "1940 Act"),
i.e., by the lesser of the vote of (a) 67% of the shares of the Fund present at
a meeting where more than 50% of the outstanding shares are present in person or
by proxy, or (b) more than 50% of the outstanding shares of the Fund.
None of the Funds will:
1. Except for Tax Free Fund and Minnesota Tax Free Fund
(collectively, the "Tax Free Funds"), invest in any securities
if, as a result, 25% or more of the value of its total assets
would be invested in the securities of issuers conducting
their principal business activities in any one industry.
None of the Tax Free Funds will invest 25% or more of the
value of its total assets in revenue bonds or notes, payment
for which comes from revenues from any one type of activity
(for this purpose, the term "type of activity" shall include
without limitation (i) sewage treatment and disposal; (ii) gas
provision; (iii) electric power provision; (iv) water
provision; (v) mass transportation systems; (vi) housing;
(vii) hospitals; (viii) nursing homes; (ix) street development
and repair; (x) toll roads; (xi) airport facilities; and (xii)
educational facilities), except that, in circumstances in
which other appropriate available investments may be in
limited supply, such Funds may invest without limitation in
gas provision, electric power provision, water provision,
housing and hospital obligations. This restriction does not
apply to general obligation bonds or notes or, in the case of
the Tax Free Funds, to pollution control revenue bonds.
However, in the case of the latter Fund, it is anticipated
that normally (unless there are unusually favorable interest
and market factors) less than 25% of such Fund's total
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assets will be invested in pollution control bonds. This
restriction does not apply to securities of the United States
Government or its agencies and instrumentalities or repurchase
agreements relating thereto.
2. Issue any senior securities (as defined in the 1940 Act),
other than as set forth in restriction number 3 below and
except to the extent that using options or purchasing
securities on a when-issued basis may be deemed to constitute
issuing a senior security.
3. Borrow money, except from banks for temporary or emergency
purposes. Notwithstanding the foregoing, Strategic Income Fund
may engage in reverse repurchase agreement transactions. The
amount of such borrowing may not exceed 10% of the borrowing
Fund's total assets. None of the Funds will borrow money for
leverage purposes. For the purpose of this investment
restriction, the use of options and futures transactions and
the purchase of securities on a when-issued or delayed
delivery basis shall not be deemed the borrowing of money. (As
a non-fundamental policy, no Fund will make additional
investments while its borrowings exceed 5% of total assets.)
4. Make short sales of securities.
5. Purchase any securities on margin except to obtain such
short-term credits as may be necessary for the clearance of
transactions and except, in the case of Emerging Markets Fund
and Strategic Income Fund as may be necessary to make margin
payments in connection with foreign currency futures and other
derivative transactions.
6. Purchase or sell physical commodities (including, by way of
example and not by way of limitation, grains, oilseeds,
livestock, meat, food, fiber, metals, petroleum,
petroleum-based products or natural gas) or futures or options
contracts with respect to physical commodities. This
restriction shall not restrict any Fund from purchasing or
selling any financial contracts or instruments which may be
deemed commodities (including, by way of example and not by
way of limitation, options, futures and options on futures
with respect, in each case, to interest rates, currencies,
stock indices, bond indices or interest rate indices) or any
security which is collateralized or otherwise backed by
physical commodities.
7. Purchase or sell real estate or real estate mortgage loans,
except that the Funds may invest in securities secured by real
estate or interests therein or issued by companies that invest
in or hold real estate or interests therein, and except that
Adjustable Rate Mortgage Securities Fund and Strategic Income
Fund may invest in mortgage-backed securities.
8. Act as an underwriter of securities of other issuers, except
to the extent a Fund may be deemed to be an underwriter, under
Federal securities laws, in connection with the disposition of
portfolio securities.
9. Lend any of their assets, except portfolio securities
representing up to one-third of the value of their total
assets.
The following restrictions are non-fundamental and may be changed by
FAIF's Board of Directors without a shareholder vote. None of the Funds will:
10. Invest more than 15% of its net assets in all forms of
illiquid investments.
11. Invest for the purpose of exercising control or management.
12. Purchase or sell real estate limited partnership interests
(other than, in the case of Adjustable Rate Mortgage
Securities Fund and Strategic Income Fund, publicly traded
real estate limited partnership interests or REITS), or oil,
gas or other mineral leases,
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rights or royalty contracts, except that the Funds may
purchase or sell securities of companies which invest in or
hold the foregoing.
13. Purchase securities of any other registered investment company
(as defined in the 1940 Act), except, subject to 1940 Act
limitations, (a) the Tax Free Funds may purchase shares of
open-end investment companies investing primarily in municipal
obligations with remaining maturities of 13 months or less;
(b) Emerging Markets Fund and Strategic Income Fund may
purchase shares of open-end investment companies which invest
in permitted investments for such Funds; (c) each of Mid Cap
Growth Fund, Emerging Markets Fund, Adjustable Rate Mortgage
Securities Fund and Strategic Income Fund may, as part of its
investment in cash items, invest in securities of other mutual
funds which invest primarily in debt obligations with
remaining maturities of 13 months or less; and (d) all Funds
may purchase securities as part of a merger, consolidation,
reorganization or acquisition of assets.
14. Invest in foreign securities, except that Mid Cap Growth Fund
may invest may invest up to 25% of its total assets in
securities of foreign issuers which are either listed on a
United States stock exchange or represented by American
Depositary Receipts; and (c) Emerging Markets Fund and
Strategic Income Fund may invest in foreign securities without
limitation.
15. Except for Emerging Markets Fund and Strategic Income Fund,
invest in warrants; provided, that the other Funds except for
the Tax Free Funds may invest in warrants in an amount not
exceeding 5% of a Fund's net assets. No more than 2% of this
5% may be warrants which are not listed on the New York Stock
Exchange.
For determining compliance with its investment restriction relating
to industry concentration, each Fund classifies asset-backed securities in its
portfolio in separate industries based upon a combination of the industry of the
issuer or sponsor and the type of collateral. The industry of the issuer or
sponsor and the type of collateral will be determined by the Adviser. For
example, an asset-backed security known as "Money Store 94D A2" would be
classified as follows: the issuer or sponsor of the security is The Money Store,
a personal finance company, and the collateral underlying the security is
automobile receivables. Therefore, the industry classification would be Personal
Finance Companies -- Automobile. Similarly, an asset-backed security known as
"Midlantic Automobile Grantor Trust 1992-1 B" would be classified as follows:
the issuer or sponsor of the security is Midlantic National Bank, a banking
organization, and the collateral underlying the security is automobile
receivables. Therefore, the industry classification would be Banks --
Automobile. Thus, an issuer or sponsor may be included in more than one
"industry" classification, as may a particular type of collateral.
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DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of FAIF are listed below,
together with their business addresses and their principal occupations during
the past five years. Directors who are "interested persons" (as that term is
defined in the 1940 Act) of FAIF are identified with an asterisk.
DIRECTORS
Robert J. Dayton, 5140 Norwest Center, Minneapolis, Minnesota 55402:
Director of FAIF since September 1994 and of First American Funds, Inc. ("FAF")
since December 1994 and of First American Strategy Funds, Inc. ("FASF") since
June 1996; Chairman (1989-1993) and Chief Executive Officer (1993- present),
Okabena Company (private family investment office). Age: 54.
Roger A. Gibson, 1020 15th Street, Suite 41A, Denver, Colorado
80202: Director of FAF, FAIF and FASF since October 1997; Vice President of
North America-Mountain Region for United Airlines since June 1995; prior to his
current position, served most recently as Vice President, Customer Service for
United Airlines in the West Region in San Francisco, California and the Mountain
Region in Denver, Colorado; employed at United Airlines since 1967. Age: 51.
Andrew M. Hunter III, 537 Harrington Road, Wayzata, Minnesota 55391:
Director of FAIF, FAF and FASF since January 1997; Chairman of Hunter, Keith
Industries, a diversified manufacturing and management services company, since
1975. Age: 49.
Leonard W. Kedrowski, 16 Dellwood Avenue, Dellwood, Minnesota 55110:
Director of FAIF and FAF since November 1993 and of FASF since June 1996;
President and owner of Executive Management Consulting, Inc., a management
consulting firm; Vice President, Chief Financial Officer, Treasurer, Secretary
and Director of Anderson Corporation, a large privately-held manufacturer of
wood windows, from 1983 to October 1992. Age: 55.
* Robert L. Spies, 4715 Twin Lakes Avenue, Brooklyn Center,
Minnesota 55429: Director of FAIF, FAF and FASF since January 31, 1997; employed
by First Bank System, Inc. and subsidiaries from 1957 to January 31, 1997, most
recently as Vice President, First Bank National Association. Age: 62.
Joseph D. Strauss, 8617 Edenbrook Crossing, # 443, Brooklyn Park,
Minnesota 55443: Director of FAF since 1984 and of FAIF since April 1991 and of
FASF since June 1996; Chairman of FAF's and FAIF's Boards from 1993 to September
1997 and of FASF's Board from June 1996 to September 1997; President of FAF and
FAIF from June 1989 to November 1989; Owner and President, Strauss Management
Company, since 1993; Owner and President, Community Resource Partnerships, Inc.,
a community business retention survey company, since 1992; attorney-at-law. Age:
56.
Virginia L. Stringer, 712 Linwood Avenue, St. Paul, Minnesota 55105:
Director of FAIF since August 1987 and of FAF since April 1991 and of FASF since
June 1996; Chair of FAIF's, FAF's and FASF's Boards since September 1997; Owner
and President, Strategic Management Resources, Inc. since 1993; formerly
President and Director of The Inventure Group, a management consulting and
training company, President of Scott's, Inc., a transportation company, and Vice
President of Human Resources of The Pillsbury Company. Age: 52.
EXECUTIVE OFFICERS
Kathryn Stanton, SEI Investments Company, Oaks, Pennsylvania 19456:
Acting President, Vice President and Assistant Secretary of FAIF and FAF since
April 1994 and of FASF since June 1996; Vice President and Assistant Secretary
of the Administrator and the Distributor since April 1994; Associate, Morgan,
Lewis & Bockius, from 1989 to 1994. Age: 37.
Carmen V. Romeo, SEI Investments Company, Oaks, Pennsylvania 19456:
Treasurer and Assistant Secretary of FAIF and FAF since November 1992 and of
FASF since June 1996; Director, Executive Vice President, Chief Financial
Officer and Treasurer of SEI Investments Company ("SEI"),
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SEI Investments Management Corporation (the "Administrator") and the Distributor
since 1981. Age: 52.
Kevin P. Robins, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF and FAF since April 1994 and of
FASF since June 1996; Vice President, Assistant Secretary and General Counsel of
the Administrator and the Distributor. Age: 36.
Sandra K. Orlow, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF and FAF since 1992 and of FASF
since June 1996; Vice President and Assistant Secretary of SEI, the
Administrator and the Distributor since 1983. Age: 40.
Todd Cipperman, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF, FAF and FASF since December
1996; Vice President and Assistant Secretary of SEI, the Administrator and the
Distributor since 1995. Associate, Dewey Ballantine from 1994 to 1995;
Associate, Winston & Strawn from 1991 to 1994. Age: 31.
Michael G. Beattie, SEI Investments Company, Oaks, Pennsylvania
19456: Controller of FAIF, FAF and FASF since December 1997; Associate Director,
Funds Accounting, SEI Investments Company since July 1997; prior to his current
position, served most recently as Fund Accounting Manager of SEI (from 1993 to
1997); Registered Representative, First Investors Corporation from 1988 to 1990.
Age: 32
Lydia A. Gavalis, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF, FAF and FASF, and Vice President
and Assistant Secretary of the Administrator and the Distributor each since
_____________, 1998. Assistant General Counsel and Director of Arbitration,
Philadelphia Stock Exchange from 1989 to 1998. Age: 33
Lynda J. Streigel, SEI Investments Company, Oaks, Pennsylvania
19456: Vice President and Assistant Secretary of FAIF, FAF and FASF, and Vice
President and Assistant Secretary of the Administrator and the Distributor since
_____________, 1998; Senior Asset Management Counsel, Barnett Banks, Inc. from
1993 to 1997; Partner, Groom and Nordberg, Chartered from 1996 to 1997; and
Associate General Counsel, Riggs Bank, N.A. from 1991 to 1995. Age: 49.
Kathy Heilig, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF, FAF and FASF, and Treasurer of
the SEI Investments Company since 1997; Assistant Controller of SEI Investments
Company from 1995 to 1997; and Vice President of SEI Investments Company from
1991 to 1995. Age: 39.
Michael J. Radmer, 220 South Sixth Street, Minneapolis, Minnesota
55402: Secretary of FAIF since April 1991 and of FAF since 1981 and of FASF
since June 1996; Partner, Dorsey & Whitney LLP, a Minneapolis-based law firm and
general counsel of FAIF, FAF and FASF. Age: 52.
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COMPENSATION
The First American Family of Funds, which includes FAIF, FAF and
FASF, currently pays only to directors of the funds who are not paid employees
or affiliates of the funds a fee of $15,000 per year ($22,500 in the case of the
Chair) plus $2,500 ($3,750 in the case of the Chair) per meeting of the Board
attended and $800 per committee meeting attended ($1,600 in the case of a
committee chair) and reimburses travel expenses of directors and officers to
attend Board meetings. In the event of telephonic Board or committee meetings,
each director receives a fee of $500 per Board or committee meeting ($750 in the
case of the Chair or committee chair). In addition, directors may receive a per
diem fee of $1,000 per day, plus travel expenses when directors travel out of
town on Fund business. However, directors do not receive the $1,000 per diem
amount plus the foregoing Board or committee fee for an out-of-town committee or
Board meeting but instead receive the greater of the total per diem fee or
meeting fee. Legal fees and expenses are also paid to Dorsey & Whitney LLP, the
law firm of which Michael J. Radmer, secretary of FAIF, FAF and FASF, is a
partner. The following table sets forth information concerning aggregate
compensation paid to each director of FAIF (i) by FAIF (column 2), and (ii) by
FAIF, FAF and FASF collectively (column 5) during the fiscal year ended
September 30, 1997. No executive officer or affiliated person of FAIF had
aggregate compensation from FAIF in excess of $60,000 during such fiscal year:
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Total Compensation
Aggregate Pension or Retirement Estimated From Registrant and
Name of Compensation Benefits Accrued as Annual Benefits Fund Complex
Person, Position From Registrant Part of Fund Expenses Upon Retirement Paid to Directors
----------------- --------------- --------------------- --------------- -----------------
<S> <C> <C> <C> <C>
Robert J. Dayton, Director $12,632 -0- -0- $33,500
Roger A. Gibson, Director * -0- -0- -0- -0-
Andrew M. Hunter III, Director $9,046 -0- -0- $23,250
Leonard W. Kedrowski, Director $12,291 -0- -0- $32,700
Robert L. Spies, Director $9,331 -0- -0- $24,050
Joseph D. Strauss, Director $14,974 -0- -0- $39,925
Virginia L. Stringer, Director $15,254 -0- -0- $39,925
</TABLE>
- ---------------
* Not a director during the fiscal year ended September 30, 1997.
- 18 -
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
U.S. Bank National Association (the "Adviser"), 601 Second Avenue
South, Minneapolis, Minnesota 55480, serves as the investment adviser and
manager of the Funds through its First American Asset Management group. The
Adviser is a national banking association that has professionally managed
accounts for individuals, insurance companies, foundations, commingled accounts,
trust funds, and others for over 75 years. The Adviser is a subsidiary of U.S.
Bancorp ("USB"), 601 Second Avenue South, Minneapolis, Minnesota 55480, which is
a regional multi-state bank holding company headquartered in Minneapolis,
Minnesota that primarily serves the Midwestern, Rocky Mountain and Northwestern
states. USB operates five banks and eleven trust companies with offices in 17
contiguous states from Illinois to Washington. USB also has various other
subsidiaries engaged in financial services. At December 31, 1997, on a pro forma
combined basis, USB and its consolidated subsidiaries had consolidated assets of
approximately $71 billion, consolidated deposits of $48 billion and
shareholders' equity of $6 billion.
Pursuant to an Investment Advisory Agreement dated April 2, 1991
(the "Advisory Agreement"), the Funds engage the Adviser to act as investment
adviser for and to manage the investment of the assets of the Funds. Each Fund
pays the Adviser monthly fees calculated on an annual basis equal to 0.70% of
its average daily net assets except, in the case of Emerging Markets Fund, 1.25%
of the Fund's average daily net assets. The Advisory Agreement requires the
Adviser to provide FAIF with all necessary office space, personnel and
facilities necessary and incident to the Adviser's performance of its services
thereunder. The Adviser is responsible for the payment of all compensation to
personnel of FAIF and the officers and directors of FAIF, if any, who are
affiliated with the Adviser or any of its affiliates.
In addition to the investment advisory fee, each Fund pays all its
expenses that are not expressly assumed by the Adviser or any other organization
with which the Fund may enter into an agreement for the performance of services.
Each Fund is liable for such nonrecurring expenses as may arise, including
litigation to which the Fund may be a party, and it may have an obligation to
indemnify its directors and officers with respect to such litigation.
Because the Funds were not in operation prior to the date hereof, no
advisory fees were paid in fiscal year ended September 30, 1997.
SUB-ADVISORY AGREEMENT FOR EMERGING MARKETS FUND AND STRATEGIC INCOME FUND
Marvin & Palmer Associates, Inc., 1201 North Market Street, Suite
2300, Wilmington, Delaware 19801 ("Marvin & Palmer") is sub-adviser for Emerging
Markets Fund under an agreement with the Adviser (the "Marvin & Palmer
Sub-Advisory Agreement"). Marvin & Palmer, a privately-held company, was founded
in 1986 by David F. Marvin and Stanley Palmer. Marvin & Palmer is engaged in the
management of global, non-United States and emerging markets equity portfolios
for institutional accounts. At January 1, 1998, Marvin & Palmer managed a total
of $4.6 billion in investments for 53 institutional investors. Pursuant to the
Marvin & Palmer Sub-Advisory Agreement, Marvin & Palmer is responsible for the
investment and reinvestment of Emerging Markets Fund's assets and the placement
of brokerage transactions in connection therewith. Under the Marvin & Palmer
Sub-Advisory Agreement, Marvin & Palmer is required, among other things, to
report to the Adviser or the Board regularly at such times and in such detail as
the Adviser or the Board may from time to time request in order to permit the
Adviser and the Board to determine the adherence of Emerging Markets Fund to its
investment objectives, policies and restrictions. The Marvin & Palmer
Sub-Advisory Agreement also requires Marvin & Palmer to provide all office
space, personnel and facilities necessary and incident to Marvin & Palmer 's
performance of its services under the Marvin & Palmer Sub-Advisory Agreement.
For its services under the Marvin & Palmer Sub-Advisory Agreement,
Marvin & Palmer is paid a monthly fee by the Adviser calculated on an annual
basis equal to 0.85% of the first $100 million of
- 19 -
<PAGE>
International Fund's average daily net assets, 0.60% of Emerging Markets Fund's
average daily net assets in excess of $100 million up to $300 million, 0.55% of
Emerging Markets Fund's average daily net assets in excess of $300 million up to
$500 million, and 0.50% of Emerging Markets Fund's average daily net assets in
excess of $500 million.
Federated Investment Counseling, 1001 Liberty Avenue, Pittsburgh,
Pennsylvania 15222-3779 and Federated Global Research Corp., 175 Water Street,
New York, New York 10038-4965 (collectively, the "Sub-Advisers"), each
subsidiaries of Federated Investors ("Federated") are sub-advisers for Strategic
Income Fund under an agreement with the Adviser (the "Federated Sub-Advisory
Agreement"). Federated Investment Counseling, which is a Delaware business
trust, and Federated Global Research Corp., which is a Delaware corporation, are
each registered investment advisers under the 1940 Act. As of March 31, 1998,
Federated Investment Counseling, Federated Global Research Corp. and such other
subsidiaries of Federated rendered investment advice regarding over $1.26
billion of assets. Pursuant to the Federated Sub-Advisory Agreement, Federated
Investment Counseling is responsible for investment of the high yield portion of
Strategic Income Fund's assets and Federated Global Research Corp. is
responsible for the investment of the international portion of Strategic Income
Fund. Under the Federated Sub-Advisory Agreement, the Sub-Advisers are required,
among other things, to report to the Adviser or the Board regularly at such
times and in such detail as the Adviser or the Board may from time to time
request in order to permit the Adviser and the Board to determine the adherence
of Strategic Income Fund to its investment objectives, policies and
restrictions. The Federated Sub-Advisory Agreement also requires the
Sub-Advisers to provide all office space, personnel and facilities necessary and
incident to the Sub-Adviser's performance of their services under the Federated
Sub-Advisory Agreement.
For their services under the Sub-Advisory Agreement, the Sub-Advisers
are paid a monthly fee by the Adviser calculated on an annual basis equal to
0.40% of the first $25 million of the Fund's average daily net assets, 0.33% of
the Fund's average daily net assets in excess of $25 million up to $50 million,
0.26% of the Fund's average daily net assets in excess of $50 million up to $100
million and 0.21% of the Fund's average daily net assets in excess of $100
million.
ADMINISTRATION AGREEMENT
SEI Investments Management Corporation (the "Administrator") serves
as administrator for the Funds pursuant to an Administration Agreement between
it and the Funds. The Administrator is a wholly-owned subsidiary of SEI
Investments Company, which also owns the Funds' distributor. See "-- Distributor
and Distribution Plans" below. Under the Administration Agreement, the
Administrator provides administrative personnel and services to the Funds for a
fee as described in the Funds' Prospectuses. These services include, among
others, regulatory reporting, fund and portfolio accounting, shareholder
reporting services, and compliance monitoring services.
The Funds have approved the appointment of the Adviser as a
sub-administrator (the "Sub- Administrator") effective January 1, 1998. It is
contemplated that the Sub-Administrator will assist the Administrator in the
performance of administrative services for the Funds.
Because the Funds were not in operation before the date hereof, no
administrative fees were paid in fiscal year ended September 30, 1997.
DISTRIBUTOR AND DISTRIBUTION PLANS
SEI Investments Distribution Co. (the "Distributor") serves as the
distributor for the Class A, Class B and Class Y Shares of the Funds. The
Distributor is a wholly-owned subsidiary of SEI Investments Company, which also
owns the Funds' Administrator. See "-- Administration Agreement" above.
The Distributor serves as distributor for the Class A and Class Y
Shares pursuant to a Distribution Agreement dated [February 10, 1994] (the
"Class A/Class Y Distribution Agreement") between itself and the Funds , and as
distributor for the Class B Shares pursuant to a Distribution and Service
Agreement dated [August 1, 1994, as amended September 14, 1994] (the "Class B
Distribution
- 20 -
<PAGE>
and Service Agreement") between itself and the Funds. These agreements are
referred to collectively as the "Distribution Agreements."
Under the Distribution Agreements, the Distributor has agreed to
perform all distribution services and functions of the Funds to the extent such
services and functions are not provided to the Funds pursuant to another
agreement. The Distribution Agreements provide that shares of the Funds are
distributed through the Distributor and, with respect to Class A and Class B
Shares, through securities firms, financial institutions (including, without
limitation, banks) and other industry professionals (the "Participating
Institutions") which enter into sales agreements with the Distributor to perform
share distribution or shareholder support services.
The Distributor receives no compensation for distribution of the
Class Y Shares. With respect to the Class A Shares, the Distributor receives all
of the front-end sales charges paid upon purchase of the Funds' shares except
for a portion (as disclosed in the Prospectuses) which may be re-allowed to
Participating Institutions. The Class A Shares of each Fund also pay a
shareholder servicing fee to the Distributor monthly at the annual rate of 0.25%
of each Fund's Class A average daily net assets, which fee may be used by the
Distributor to provide compensation for shareholder servicing activities with
respect to the Class A Shares of the kinds described in the Class A and Class B
Shares Prospectuses.
The Funds which offer Class B Shares pay to the Distributor a sales
support fee at an annual rate of 0.75% of the average daily net assets of the
Class B Shares of such Fund, which fee may be used by the Distributor to provide
compensation for sales support and distribution activities with respect to the
Class B Shares. This fee is calculated and paid each month based on average
daily net assets of Class B of each Fund for that month. In addition to this
fee, the Distributor is paid a shareholder servicing fee at an annual rate of
0.25% of the average daily net assets of each Fund's Class B Shares pursuant to
a service plan (the "Class B Service Plan"), which fee may be used by the
Distributor to provide compensation for shareholder servicing activities with
respect to the Class B Shares of a Fund of the kinds described in the Class A
and Class B Shares Prospectuses. Although Class B Shares are sold without a
front-end sales charge, the Distributor pays a total of 4.25% of the amount
invested (including a pre-paid service fee of 0.25% of the amount invested) to
dealers who sell Class B Shares (excluding exchanges from other Class B Shares
in the First American family). The servicing fee payable under the Class B
Service Plan is prepaid as described above.
The Distribution Agreements provide that they will continue in
effect for a period of more than one year from the date of their execution only
so long as such continuance is specifically approved at least annually by the
vote of a majority of the Board members of FAIF and by the vote of the majority
of those Board members of FAIF who are not interested persons of FAIF and who
have no direct or indirect financial interest in the operation of FAIF's Rule
12b-1 Plans of Distribution or in any agreement related to such Plans.
FAIF has adopted Plans of Distribution with respect to the Class A
and Class B Shares of the Funds, respectively, pursuant to Rule 12b-1 under the
1940 Act (collectively, the "Plans"). Rule 12b-1 provides in substance that a
mutual fund may not engage directly or indirectly in financing any activity
which is primarily intended to result in the sale of shares, except pursuant to
a plan adopted under the Rule. The Plans authorize the Distributor to retain the
sales charges paid upon purchase of Class A and Class B Shares. Each of the
Plans is a "compensation-type" plan under which the Distributor is entitled to
receive the distribution fee regardless of whether its actual distribution
expenses are more or less than the amount of the fee. The Class B Plan
authorizes the Distributor to retain the contingent deferred sales charge
applied on redemptions of Class B Shares, except that portion which is reallowed
to Participating Institutions. The Plans recognize that the Distributor, any
Participating Institution, the Administrator, and the Adviser, in their
discretion, may from time to time use their own assets to pay for certain
additional costs of distributing Class A and Class B Shares. Any such
arrangements to pay such additional costs may be commenced or discontinued by
the Distributor, any Participating Institution, the Administrator, or the
Adviser at any time.
- 21 -
<PAGE>
Because the Funds were not in operation prior to the date hereof, no
Rule 12b-1 fees were paid in fiscal year ended September 30, 1997.
The Distributor received no sales charges for fiscal year ended
September 30, 1997.
CUSTODIAN; TRANSFER AGENT; COUNSEL; ACCOUNTANTS
The custodian of the Funds' assets is U.S. Bank Trust National
Association (the "Custodian"), U.S. Bank Trust Center, 180 East Fifth Street,
St. Paul, Minnesota 55101. The Custodian is a subsidiary of USB.
The Custodian takes no part in determining the investment policies
of the Funds or in deciding which securities are purchased or sold by the Funds.
All of the instruments representing the investments of the Funds and all cash is
held by the Custodian or, as described in the Prospectuses for Emerging Markets
Fund, by a sub-custodian with respect to such Fund. The Custodian or such
sub-custodian delivers securities against payment upon sale and pays for
securities against delivery upon purchase. The Custodian also remits Fund assets
in payment of Fund expenses, pursuant to instructions of FAIF's officers or
resolutions of the Board of Directors.
As compensation for its services to the Funds, the Custodian is paid
a monthly fee calculated on an annual basis equal to 0.03% of such Fund's
(except Emerging Markets Fund) average daily net assets and, in the case of
Emerging Markets Fund, 0.10% of the Funds average daily net assets.
Sub-custodian fees with respect to Emerging Markets Fund are paid by the
Custodian out of its fees from such Fund. In addition, the Custodian is
reimbursed for its out-of-pocket expenses incurred while providing its services
to the Funds. The Custodian continues to serve so long as its appointment is
approved at least annually by the Board of Directors including a majority of the
directors who are not interested persons (as defined under the 1940 Act) of
FAIF.
DST Systems, Inc., 330 West Ninth Street, Kansas City, Missouri
64105, is transfer agent and dividend disbursing agent for the shares of the
Funds.
Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402, is independent General Counsel for the Funds.
KPMG Peat Marwick LLP, 90 South Seventh Street, Minneapolis,
Minnesota 55402, acts as the Funds' independent auditors, providing audit
services including audits of the annual financial statements.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Decisions with respect to placement of the Funds' portfolio
transactions are made by the Adviser, in the case of Strategic Income Fund,
Federated, or in the case of Emerging Markets Fund, Marvin & Palmer. The Funds'
policy is to seek to place portfolio transactions with brokers or dealers who
will execute transactions as efficiently as possible and at the most favorable
price. The Adviser, Federated or Marvin & Palmer may, however, select a broker
or dealer to effect a particular transaction without communicating with all
brokers or dealers who might be able to effect such transaction because of the
volatility of the market and the desire of the Adviser, Federated or Marvin &
Palmer to accept a particular price for a security because the price offered by
the broker or dealer meets guidelines for profit, yield or both. Many of the
portfolio transactions involve payment of a brokerage commission by the
appropriate Fund. In some cases, transactions are with dealers or issuers who
act as principal for their own accounts and not as brokers. Transactions
effected on a principal basis are made without the payment of brokerage
commissions but at net prices, which usually include a spread or markup. In
effecting transactions in over-the-counter securities, the Funds deal with
market makers unless it appears that better price and execution are available
elsewhere.
- 22 -
<PAGE>
While the Adviser does not deem it practicable and in the Funds'
best interest to solicit competitive bids for commission rates on each
transaction, consideration will regularly be given by the Adviser to posted
commission rates as well as to other information concerning the level of
commissions charged on comparable transactions by other qualified brokers.
It is expected that Emerging Markets Fund and Strategic Income Fund
will purchase most foreign equity securities in the over-the-counter markets or
stock exchanges located in the countries in which the respective principal
offices of the issuers of the various securities are located if that is the best
available market. The fixed commissions paid in connection with most such
foreign stock transactions generally are higher than negotiated commissions on
United States transactions. There generally is less governmental supervision and
regulation of foreign stock exchanges than in the United States. Foreign
securities settlements may in some instances be subject to delays and related
administrative uncertainties.
Foreign equity securities may be held in the form of American
Depositary Receipts, or ADRs, European Depositary Receipts, or EDRs, or
securities convertible into foreign equity securities. ADRs and EDRs may be
listed on stock exchanges or traded in the over-the-counter markets in the
United States or overseas. The foreign and domestic debt securities and money
market instruments in which the Funds may invest are generally traded in the
over-the-counter markets.
Subject to the policy of seeking favorable price and execution for
the transaction size and risk involved, in selecting brokers and dealers other
than the Distributor and determining commissions paid to them, the Adviser,
Federated or Marvin & Palmer may consider ability to provide supplemental
performance, statistical and other research information as well as computer
hardware and software for research purpose for consideration, analysis and
evaluation by the staff of the Adviser, Federated or Marvin & Palmer. In
accordance with this policy, the Funds do not execute brokerage transactions
solely on the basis of the lowest commission rate available for a particular
transaction. Subject to the requirements of favorable price and efficient
execution, placement of orders by securities firms for the purchase of shares of
the Funds may be taken into account as a factor in the allocation of portfolio
transactions.
Research services that may be received by the Adviser, Federated or
Marvin & Palmer would include advice, both directly and in writing, as to the
value of securities, the advisability of investing in, purchasing, or selling
securities, and the availability of securities or purchasers or sellers of
securities, as well as analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts. The research services may allow the Adviser, Federated or Marvin &
Palmer to supplement its own investment research activities and enable the
Adviser, Federated or Marvin & Palmer to obtain the views and information of
individuals and research staffs of many different securities firms prior to
making investment decisions for the Funds. To the extent portfolio transactions
are effected with brokers and dealers who furnish research services, the
Adviser, Federated or Marvin & Palmer would receive a benefit, which is not
capable of evaluation in dollar amounts, without providing any direct monetary
benefit to the Funds from these transactions. Research services furnished by
brokers and dealers used by the Funds for portfolio transactions may be utilized
by the Adviser, Federated or Marvin & Palmer in connection with investment
services for other accounts and, likewise, research services provided by brokers
and dealers used for transactions of other accounts may be utilized by the
Adviser, Federated or Marvin & Palmer in performing services for the Funds. The
Adviser, Federated or Marvin & Palmer determine the reasonableness of the
commissions paid in relation to their view of the value of the brokerage and
research services provided, considered in terms of the particular transactions
and their overall responsibilities with respect to all accounts as to which they
exercise investment discretion.
The Adviser, Federated or Marvin & Palmer have not entered into any
formal or informal agreements with any broker or dealer, and do not maintain any
"formula" that must be followed in connection with the placement of Fund
portfolio transactions in exchange for research services provided to the
Adviser, Federated or Marvin & Palmer, except as noted below. The Adviser,
Federated or Marvin & Palmer may, from time to time, maintain an informal list
of brokers and dealers that will be
- 23 -
<PAGE>
used as a general guide in the placement of Fund business in order to encourage
certain brokers and dealers to provide the Adviser, Federated or Marvin & Palmer
with research services, which the Adviser, Federated or Marvin & Palmer
anticipates will be useful to it. Any list, if maintained, would be merely a
general guide, which would be used only after the primary criteria for the
selection of brokers and dealers (discussed above) had been met, and,
accordingly, substantial deviations from the list could occur. The Adviser,
Federated or Marvin & Palmer would authorize the Funds to pay an amount of
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged only if the Adviser,
Federated or Marvin & Palmer determined in good faith that the amount of such
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the overall responsibilities of the Adviser, Federated
or Marvin & Palmer with respect to the Funds.
The Funds do not effect any brokerage transactions in their
portfolio securities with any broker or dealer affiliated directly or indirectly
with the Adviser or the Distributor unless such transactions, including the
frequency thereof, the receipt of commissions payable in connection therewith,
and the selection of the affiliated broker or dealer effecting such transactions
are not unfair or unreasonable to the shareholders of the Funds, as determined
by the Board of Directors. Any transactions with an affiliated broker or dealer
must be on terms that are both at least as favorable to the Funds as the Funds
can obtain elsewhere and at least as favorable as such affiliated broker or
dealer normally gives to others.
When two or more clients of the Adviser, Federated or Marvin &
Palmer are simultaneously engaged in the purchase or sale of the same security,
the prices and amounts are allocated in accordance with a formula considered by
the Adviser, Federated or Marvin & Palmer to be equitable to each client. In
some cases, this system could have a detrimental effect on the price or volume
of the security as far as each client is concerned. In other cases, however, the
ability of the clients to participate in volume transactions may produce better
executions for each client.
CAPITAL STOCK
As of April 14, 1998, no shares of the Funds were outstanding.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of the shares
of a Fund is summarized in the Class A Shares Prospectus under the captions
"Investing in the Funds" and "Determining the Price of Shares" and in the Class
Y Shares Prospectus under the caption "Purchases and Redemptions of Shares." The
net asset value of each Fund's shares is determined on each day during which the
New York Stock Exchange (the "NYSE") and federally-chartered banks are open for
business. The NYSE is not open for business on the following holidays (or on the
nearest Monday or Friday if the holiday falls on a weekend): New Year's Day,
Martin Luther King, Jr. Day, Washington's Birthday (observed), Good Friday,
Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Each year the NYSE may designate different dates for the
observance of these holidays as well as designate other holidays for closing in
the future. To the extent that the securities of a Fund are traded on days that
the Fund is not open for business, such Fund's net asset value per share may be
affected on days when investors may not purchase or redeem shares. This may
occur, for example, where a Fund holds securities which are traded in foreign
markets.
As of April 14, 1998, the Funds had not commenced operations.
FUND PERFORMANCE
SEC STANDARDIZED PERFORMANCE FIGURES
- 24 -
<PAGE>
YIELD FOR THE FUNDS. Yield for the Funds is a measure of the net
investment income per share (as defined) earned over a 30-day period expressed
as a percentage of the maximum offering price of a Fund's shares at the end of
the period.
Because the Funds were not in operation prior to the date hereof,
yield information is not available.
Yield figures were determined by dividing the net investment income per share
earned during the specified 30-day period by the maximum offering price per
share on the last day of the period, according to the following formula:
Yield = 2 [((a - b) / cd) + 1)(6th power) - 1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of
reimbursements)
c = average daily number of shares outstanding during
the period that were entitled to receive dividends
d = maximum offering price per share on the last day of
the period
TAX EQUIVALENT YIELD FOR TAX FREE FUNDS. Tax equivalent yield is the
yield that a taxable investment must generate in order to equal a Fund's yield
for an investor in a stated federal or combined federal/state income tax
bracket. The tax equivalent yield for each Tax Free Fund is computed by dividing
that portion of such Fund's yield (computed as described above) that is tax
exempt by one minus the stated federal or combined federal/state income tax
rate, and adding the resulting number to that portion, if any, of such Fund's
yield that is not tax exempt. Because Tax Free Fund and Minnesota Tax Free Fund
were not in operation prior to the date hereof, information on tax equivalent
yield information is not available for such Funds.
TOTAL RETURN. Total return measures both the net investment income
generated by, and the effect of any realized or unrealized appreciation or
depreciation of, the underlying investments in a Fund's portfolio. The Fund
average annual and cumulative total return figures are computed in accordance
with the standardized methods prescribed by the Securities and Exchange
Commission.
AVERAGE ANNUAL TOTAL RETURN. Average annual total return figures are
computed by determining the average annual compounded rates of return over the
periods indicated in the advertisement, sales literature or shareholders'
report, that would equate the initial amount invested to the ending redeemable
value, according to the following formula:
P(1 + T)(nth power) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the period
of a hypothetical $1,000 payment made at the
beginning of such period
This calculation (i) assumes all dividends and distributions are reinvested at
net asset value on the appropriate reinvestment dates as described in the
Prospectuses, and (ii) deducts (a) the maximum sales charge from the
hypothetical initial $1,000 investment (if applicable), and (b) all recurring
fees, such as advisory fees, charged as expenses to all shareholder accounts.
CUMULATIVE TOTAL RETURN. Cumulative total return is computed by
finding the cumulative compounded rate of return over the period indicated in
the advertisement that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
CTR = ((ERV - P) / P ) 10
- 25 -
<PAGE>
Where: CTR = cumulative total return
ERV = ending redeemable value at the end of, the period
of a hypothetical $1,000 payment made at the
beginning of such period; and
P = initial payment of $1,000
This calculation (i) assumes all dividends and distributions are reinvested at
net asset value on the appropriate reinvestment dates as described in the
Prospectuses, and (ii) deducts (a) the maximum sales charge from the
hypothetical initial $1,000 investment (if applicable), and (b) all recurring
fees, such as advisory fees, charged as expenses to all shareholder accounts.
Because the Funds were not in operation prior to the date hereof,
information on average annual return and aggregate total returns is not
available.
NON-STANDARD DISTRIBUTION RATES
HISTORICAL DISTRIBUTION RATES. The Funds' historical annualized
distribution rates are computed by dividing the income dividends of a Fund for a
stated period by the maximum offering price on the last day of such period.
Because the Funds were not in operation prior to the date hereof, no information
on historical annualized distribution rates is available.
ANNUALIZED CURRENT DISTRIBUTION RATES. The Funds' annualized current
distribution rates are computed by dividing a Fund's income dividends for a
specified month (or three-month period, in the case of an Equity Fund) by the
number of days in that month (or three-month period, in the case of an Equity
Fund) and multiplying by 365, and dividing the resulting figure by the maximum
offering price on the last day of the specified period. Because the Funds were
not in operation prior to the date hereof, no information on the annualized
current distribution rates is available.
TAX EQUIVALENT DISTRIBUTION RATES. The tax equivalent distribution
rate for the Tax Free Funds is computed by dividing that portion of such a
Fund's annualized current distribution rate (computed as described above) which
is tax-exempt by one minus the stated federal or combined federal/state income
tax rate, and adding the resulting figure to that portion, if any, of the
annualized current distribution rate which is not tax-exempt. Because the Tax
Free Fund and Minnesota Tax Free Fund were not in operation prior to the date
hereof, no information on the tax equivalent distribution rates is available.
CERTAIN PERFORMANCE COMPARISONS
The Funds may compare their performance to that of certain published
or otherwise widely disseminated indices or averages compiled by third parties.
The Funds, and the indices and averages to which they may compare their
performance, are as follows, among others:
MID CAP GROWTH FUND may compare its performance to the LIPPER
MID-CAP FUNDS AVERAGE, which is an average of funds which limit their
investments to companies with average market capitalizations and/or revenues
between $800 million and the average market capitalization of the Wilshire 4500
Index. Mid Cap Growth Fund may also compare its performance to the S&P 400
MIDCAP AVERAGE, which is a capitalization-weighted index that measures the
performance of the mid-range sector of the U.S. stock market where the median
market capitalization is approximately $700 million and the RUSSELL MID-CAP
INDEX, which is an index that measures the performance of the 800 smallest
companies in the Russell 1000 Index, which measures the performance of the 1,000
largest companies in the Russell 1000 Index. The Russell 1000 Index represents
approximately 90% of the total market capitalization of the Russell 3000 Index.
EMERGING MARKETS FUND may compare its performance to the LIPPER
EMERGING MARKETS FUNDS AVERAGE, which is an average of funds that seek long-term
capital appreciation by investing at least 65% of total assets in emerging
market equity securities, where "emerging market" is defined by a country's GNP
per capita or other economic measures. The Emerging Markets Fund may also
compare its
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performance to the MSCI EMERGING MARKETS FREE INDEX, which is an unmanaged index
of securities from emerging markets, limited to securities in which foreigners
may invest.
ADJUSTABLE RATE MORTGAGE SECURITIES FUND may compare its performance
to the LIPPER ADJUSTABLE RATE MORTGAGE AVERAGE, which is an average of funds
that invest at least 65% of total assets in adjustable rate mortgage securities
or other securities collaterized by or representing an interest in mortgages.
Adjustable rate Mortgage Securities Fund may also compare its performance to the
LEHMAN ADJUSTABLE RATE MORTGAGE INDEX, which is an unmanaged index of U.S.
agency adjustable rate mortgage (ARM) securities that include no expenses or
transaction charges.
TAX FREE FUND may compare its performance to the LIPPER GENERAL
MUNICIPAL DEBT FUNDS AVERAGE, which is an average of fund that invest at least
65% of total assets in municipal debt issues in the top four credit ratings, and
to the LEHMAN BROTHER MUNICIPAL BOND INDEX, which is an index comprised of 8,000
actual bonds, all of which are investment grade, fixed rate with long term (more
than two years) maturities and are selected from issues larger than $50 million
dated since January, 1984.
MINNESOTA TAX FREE FUND may compare its performance to the LIPPER
MINNESOTA MUNICIPAL BOND AVERAGE, which is an average of funds that limit their
assets to those securities that are exempt from taxation in a specified state
(double tax-exempt) or city ( triple tax-exempt), and the LEHMAN BROTHER
MUNICIPAL BOND INDEX, which is described above.
STRATEGIC INCOME FUND may compare its performance to the LIPPER
MULTI SECTOR INCOME FUNDS AVERAGE, which is an average of funds that seek
current income by allocating assets among several different fixed income
securities sectors (with no more than 65% in any one sector except for defensive
purposes) including U.S. government and foreign sectors, with a significant
portion of assets in securities rated below investment grade, and the J.P.
MORGAN GLOBAL GOVERNMENT BOND INDEX, an index with total return calculated based
on gross that assumes that a coupon received in one currency is immediately
reinvestment back into the bonds of that country's index, and the local currency
return is expressed as a basket of currencies which make up the index. Strategic
Income Fund may also compare its performance to the LEHMAN SINGLE B-RATED INDEX,
which is a proprietary unmanaged index of single B -rated securities and the
LEHMAN MORTGAGE-BACKED INDEX, which is an index that covers all fixed-rate
securities backed by mortgage pools of the GNMA, FHLMC and FNMA. Strategic
Income Fund may also compare its performance to the LEHMAN AGGREGATE BOND INDEX,
which is an index composed of the Lehman Government/Corporate Index and the
Mortgage-Backed Securities Index and includes treasury issues, agency issues,
corporate bond issues and mortgage-backed securities.
Each of the Funds also may compare its performance to the CONSUMER
PRICE INDEX, which is a measure of the average change in prices over time in a
fixed market basket of goods and services.
TAXATION
The tax status of the Funds and the distributions that the Funds
will make to shareholders are summarized in the Prospectuses in the sections
entitled "Income Taxes" (or, in the Prospectus for Strategic Income Fund,
"Federal Income Taxes"). Each Fund intends to fulfill the requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), as a
regulated investment company. If so qualified, each Fund will not be liable for
federal income taxes to the extent it distributes its taxable income to its
shareholders.
To qualify under Subchapter M for tax treatment as a regulated
investment company, each Fund must, among other things: (1) derive at least 90%
of its gross income from dividends, interest, and certain other types of
payments related to its investment in stock or securities; (2) distribute to its
shareholders at least 90% of its investment company taxable income (as that term
is defined in the Code determined without regard to the deduction for dividends
paid) and 90% of its net tax-exempt income; and (3) diversify its holdings so
that, at the end of each fiscal quarter of the Fund, (a) at least 50% of the
market value of the Fund's assets is represented by cash, cash items, U.S.
Government
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securities and securities of other regulated investment companies, and other
securities, with these other securities limited, with respect to any one issuer,
to an amount no greater than 5% of the Fund's total assets and no greater than
10% of the outstanding voting securities of such issuer, and (b) not more than
25% of the market value of the Fund's total assets is invested in the securities
of any one issuer (other than U.S. Government securities or securities of other
regulated investment companies).
Each Fund is subject to a nondeductible excise tax equal to 4% of
the excess, if any, of the amount required to be distributed for each calendar
year over the amount actually distributed. For this purpose, any amount on which
the Fund is subject to corporate-level income tax is considered to have been
distributed. In order to avoid the imposition of this excise tax, each Fund must
declare and pay dividends representing 98% of its net investment income for that
calendar year and 98% of its capital gains (both long-term and short-term) for
the twelve-month period ending October 31 of the calendar year.
Any loss on the sale or exchange of shares of a Fund generally will
be disallowed to the extent that a shareholder acquires or contracts to acquire
shares of the same Fund within 30 days before or after such sale or exchange.
Furthermore, if Fund shares with respect to which a long-term capital gain
distribution has been made are held for less than six months, any loss on the
sale or exchange of such shares will be treated as a long-term capital loss to
the extent of such long-term capital gain distribution. Furthermore, if a
shareholder of Tax Free Fund or Minnesota Tax Free Fund receives an
exempt-interest dividend from such fund and then disposes of his or her shares
in such fund within six months after acquiring them, any loss on the sale or
exchange of such shares will be disallowed to the extent of the exempt-interest
dividend.
If Tax Free Fund or Minnesota Tax Free Fund disposes of a municipal
obligation that it acquired after April 30, 1993 at a market discount, it must
recognize any gain it realizes on the disposition as ordinary income (and not as
capital gain) to the extent of the accrued market discount. In addition, all or
a portion of the gain that any of the Funds realize from engaging in "conversion
transactions" are defined to include certain forward, futures, option and
"straddle" transactions marketed or sold to produce capital gains, or
transactions described in Treasury regulations to be issued in the future.
For federal tax purposes, if a shareholder exchanges shares of a
Fund for shares of any other FAIF Fund pursuant to the exchange privilege (see
"Investing in the Funds -- Exchange Privilege" in the Prospectuses for Class A
and Class B Shares, and "Purchases and Redemptions of Shares -- Exchange
Privilege" in the Prospectuses for Class Y Shares), such exchange will be
considered a taxable sale of the shares being exchanged. Furthermore, if a
shareholder of Class A Shares carries out the exchange within 90 days of
purchasing shares in a fund on which he or she has incurred a sales charge, the
sales charge cannot be taken into account in determining the shareholder's gain
or loss on the sale of those shares to the extent that the sales charge that
would have been applicable to the purchase of the later-acquired shares in the
other fund is reduced because of the exchange privilege. However, the amount of
any sales charge that may not be taken into account in determining the
shareholder's gain or loss on the sale of the first-acquired shares may be taken
into account in determining gain or loss on the eventual sale or exchange of the
later-acquired shares.
Dividends generally are taxable to shareholders at the time they are
paid. However, dividends declared in October, November and December, made
payable to shareholders of record in such a month and actually paid in January
of the following year are treated as paid and are thereby taxable to
shareholders as of December 31.
If a Fund invests in U.S. Treasury inflation-protection securities,
it will be required to treat as original issue discount any increase in the
principal amount of the securities that occurs during the course of its taxable
year. If a Fund purchases such inflation-protection securities that are issued
in stripped form either as stripped bonds or coupons, it will be treated as if
it had purchased a newly issued debt instrument having original issue discount.
Generally, the original issue discount equals the difference between the "stated
redemption price at maturity" of the obligation and its "issue price" as those
terms are defined in the Code. A Fund holding an obligation with original issue
discount is
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required to accrue as ordinary income a portion of such original issue discount
even though it receives no cash currently as interest payment corresponding to
the amount of the original issue discount. Because each Fund is required to
distribute substantially all of its net investment income (including accrued
original issue discount) in order to be taxed as a regulated investment company,
it may be required to distribute an amount greater than the total cash income it
actually receives. Accordingly, in order to make the required distributions, a
Fund may be required to borrow or liquidate securities.
Under Code Section 1256, except for the transactions the Fund has
identified as hedging transactions, each Fund is required for federal income tax
purposes to recognize as income for each taxable year its net unrealized gains
and losses on futures contracts, options, and (in the case of Emerging Markets
Fund) forward currency contracts as of the end of the year as well as those
actually realized during the year. Except for transactions in futures contracts,
options, or forward currency contracts that are classified as part of a "mixed
straddle," gain or loss recognized with respect to such contracts or options is
considered to be 60% long-term capital gain or loss and 40% short-term capital
gain or loss, without regard to the holding period of the contract. In the case
of a transaction classified as a "mixed straddle," the recognition of losses may
be deferred to a later taxable year.
Sales of forward currency contracts that are intended to hedge
against a change in the value of securities or currencies held by Emerging
Markets Fund may affect the holding period of such securities or currencies and,
consequently, the nature of the gain or loss on such securities or currencies
upon disposition.
Under recently enacted Code Section 1259, if a Fund enters into
short sales of securities that it holds, notional principal contracts or certain
other transactions designed to hedge against the loss of value in appreciated
positions that it holds, it will be treated as having sold such appreciated
positions and will be required to recognize gain on the constructive sale. This
constructive sale rule will not apply in the case of any appreciated position
that the Fund is required to mark-to-market at the close of the year, as
described above. As stated above, the Code requires a regulated investment
company to diversify its holdings. The Internal Revenue Service has not made its
position clear regarding the treatment of futures contracts and options for
purposes of the diversification test, and the extent to which a Fund can buy or
sell futures contracts and options may be limited by this requirement.
It is expected that any net gain realized from the closing out of
futures contracts, options, or forward currency contracts will be considered
gain from the sale of securities or currencies and therefore qualifying income
for purposes of the 90% of gross income from qualified sources requirement, as
discussed above.
Any realized gain or loss on closing out a futures contract, option,
or forward currency contract such as a forward commitment for the purchase or
sale of foreign currency will generally result in a recognized capital gain or
loss for tax purposes. Code Section 988 may also apply to forward currency
contracts. Under Section 988, each foreign currency gain or loss is generally
computed separately and treated as ordinary income or loss. In the case of
overlap between Sections 1256 and 988, special provisions determine the
character and timing of any income, gain or loss. Emerging Markets Fund will
attempt to monitor Section 988 transactions to avoid an adverse tax impact.
Each Fund will distribute to shareholders annually any net long-term
capital gains that have been recognized for federal income tax purposes
(including unrealized gains at the end of the Fund's fiscal year) on futures
contract, option, or forward currency contract transactions. Such distributions
will be combined with distributions of capital gains realized on the Fund's
other investments.
As stated in the Prospectuses relating to Emerging Markets Fund
under "Income Taxes," Emerging Markets Fund may make an election pursuant to
which shareholders will be able to claim on their tax returns a foreign tax
credit for their pro rata share of the income taxes that that Fund has paid
during the year to foreign countries.
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<PAGE>
Generally, a credit for foreign taxes is subject to the limitation
that it may not exceed the shareholder's federal income tax (before the credit)
attributable to the shareholder's total foreign source taxable income. For this
purpose, the portion of dividends and distributions paid by Emerging Markets
Fund from its foreign source income will be treated as foreign source income.
Emerging Markets Fund's gains and losses from the sale of securities, and
certain currency gains and losses, will generally be treated as derived from
United States sources. The limitation on the foreign tax credit is applied
separately to foreign source "passive income," such as dividend income. Because
of these limitations, a shareholder may be unable to claim a credit for the full
amount of the shareholder's proportionate share of foreign income taxes paid by
Emerging Markets Fund. In addition, no deduction for foreign income taxes may be
claimed by a shareholder who does not itemize deductions. Shareholders are
advised to consult their tax advisers on the application of the foreign tax
credit rules to their own particular circumstances.
Emerging Markets Fund will invest in, among other things, foreign
securities. If, in connection with such investments, Emerging Markets Fund owns
shares of stock in certain foreign investment entities, referred to as passive
foreign investment companies ("PFICs"), the Fund may be subject to U.S. federal
income tax, and additional charges in the nature of interest, on a portion of
any "excess distribution" from such company or gain from the disposition of such
shares, even if the entire distribution or gain is distributed by Emerging
Markets Fund to its shareholders. If Emerging Markets Fund were able and elected
to treat a PFIC as a "qualified electing fund," in lieu of the treatment
described above, Emerging Markets Fund would be required each year to include in
income its pro rata share of the ordinary earnings and net capital gains of the
company, whether or not actually received by the Fund. Proposed Treasury
Regulations and newly enacted provisions of the Code would allow certain
regulated investment companies to elect to mark-to-market their stock in certain
PFICs at the end of each taxable year, whereby Emerging Markets Fund would
include in its taxable income each year any unrealized gain on such PFIC
investments. In order to distribute the income includible in Emerging Markets
Fund's income under either election, maintain its qualification as a regulated
investment company, and avoid income or excise taxes, Emerging Markets Fund may
be required to liquidate portfolio securities that is might otherwise have
continued to hold. In the case of the proposed Treasury Regulations, there can
be no assurance that these regulations will be finalized in the form proposed or
as to the effective date of any such final regulations.
Pursuant to the Code, distributions of net investment income by a
Fund to a shareholder who is a foreign shareholder (as defined below) as to the
United States, is a nonresident alien individual, nonresident alien fiduciary of
a trust or estate, foreign corporation, or foreign partnership (a "foreign
shareholder") will be subject to U.S. withholding tax (at a rate of 30% or lower
treaty rate). Withholding will not apply if a dividend paid by a Fund to a
foreign shareholder is `'effectively connected" with a U.S. trade or business of
such shareholder, in which case the reporting and withholding requirements
applicable to U.S. citizens or domestic corporations will apply. Distributions
of net long-term capital gains are not subject to tax withholding but, in the
case of a foreign shareholder who is a nonresident alien individual, such
distributions ordinarily will be subject to U.S. income tax at a rate of 30% if
the individual is physically present in the U.S. for more than 182 days during
the taxable year. Each Fund will report annually to its shareholders the amount
of any withholding.
A foreign shareholder is any person who is not (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
organized in the United States or under the laws of the United States or
political subdivision thereof, (iii) an estate whose income is includible in
gross income for U.S. federal income tax purposes or (iv) a trust whose
administration is subject to the primary supervision of a U.S. court and which
has one or more U.S. fiduciaries who have authority to control all substantial
decisions of the trust.
The foregoing relates only to federal income taxation and is a
general summary of the federal tax law in effect as of the date of this
Statement of Additional Information.
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With respect to the Minnesota Tax Free Fund, the 1995 Minnesota
Legislature enacted a statement of intent that interest on obligations of
Minnesota governmental units and Indian tribes be included in net income of
individuals, estates and trusts for Minnesota income tax purposes if a court
determines that Minnesota's exemption of such interest unlawfully discriminates
against interstate commerce because interest on obligations of governmental
issuers located in other states is so included. This provision applies to
taxable years that begin during or after the calendar year in which any such
court decision becomes final, irrespective of the date on which the obligations
were issued. Minnesota Tax Free Fund is not aware of any decision in which a
court has held that a state's exemption of interest on its own bonds or those of
its political subdivisions or Indian tribes, but not of interest on the bonds of
other states or their political subdivisions or Indian tribes, unlawfully
discriminates against interstate commerce or otherwise contravenes the United
States Constitution. Nevertheless, the Fund cannot predict the likelihood that
interest on the Minnesota bonds held by the Fund would become taxable under this
Minnesota statutory provisions.
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RATINGS
A rating of a rating service represents that service's opinion as to
the credit quality of the rated security. However, such ratings are general and
cannot be considered absolute standards of quality or guarantees as to the
creditworthiness of an issuer. A rating is not a recommendation to purchase,
sell or hold a security, because it does not take into account market value or
suitability for a particular investor. Markets values of debt securities may
change as a result of a variety of factors unrelated to credit quality,
including changes in market interest rates.
When a security has been rated by more than one service, the ratings
may not coincide, and each rating should be evaluated independently. Ratings are
based on current information furnished by the issuer or obtained by the rating
services from other sources which they consider reliable. Ratings may be
changed, suspended or withdrawn as a result of changes in or unavailability of
such information, or for other reasons. In general, the Funds are not required
to dispose of a security if its rating declines after it is purchased, although
they may consider doing so.
RATINGS OF CORPORATE DEBT OBLIGATIONS AND MUNICIPAL BONDS
STANDARD & POOR'S
AAA: Securities rated AAA have the highest rating assigned by
Standard & Poor's to a debt obligation. Capacity to pay interest and
repay principal is extremely strong.
AA: Securities rated AA have a very strong capacity to pay interest
and repay principal and differ from the highest rated issues only to
a small degree.
A: Securities rated A have a strong capacity to pay interest and
repay principal, although they are somewhat more susceptible to
adverse effects of changes in circumstances and economic conditions
than bonds in higher rated categories.
BBB: Securities rated BBB are regarded as having an adequate
capacity to pay interest and repay principal. Although such
securities normally exhibit adequate protection standards, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal for
securities in this category than for those in higher rated
categories.
Debt rated BB, B, CCC, CC, and C by Standard & Poor's is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
BB: Securities rated BB have less near-term vulnerability to default
than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to meet
timely interest and principal payments. The BB rating category is
also used for debt subordinated to senior debt that is assigned an
actual or implied BBB- rating.
B: Securities rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied BB or BB-
rating.
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
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of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, they are not likely to
have the capacity to pay interest and repay principal. The CCC
rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied B or B- rating.
D: An issue which is rated D is used when interest payments or
principal payments are not made on the due date even if the
applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period.
The ratings from AA to CCC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
MOODY'S
Aaa: Securities which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or exceptionally stable margin and principal is
secure. While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Securities which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group, they comprise what
are generally known as high grade securities. They are rated lower
than the best securities because margins of protection may not be as
large as in Aaa securities, or fluctuation of protective elements
may be of greater magnitude, or there may be other elements present
which make the long-term risks appear somewhat greater than in Aaa
securities.
A: Securities which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa: Securities which are rated Baa are considered as medium grade
obligations, being neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
securities lack outstanding investment characteristics, and in fact
have some speculative characteristics.
Ba: An issue which is rated Ba is judged to have speculative
elements; its future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes issues in this
class.
B: An issue which is rated B generally lacks characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa: An issue which is rated Caa is of poor standing. Such an issue
may be in default or there may be present elements of danger with
respect to principal or interest.
Ca: An issue which is rated Ca represents an obligation which is
speculative in a high degree.
C: An issue which is rated C is regarded as having extremely poor
prospects of ever attaining any real investment standing.
Those securities in the Aa, A and Baa groups which Moody's believes possess the
strongest investment attributes are designated by the symbols Aa-1, A-1 and
Baa-1. Other Aa, A and Baa securities comprise the balance of their respective
groups. These rankings (1) designate the securities which offer the maximum in
security within their quality groups, (2) designate securities which can be
bought for possible upgrading in quality and (3) additionally afford the
investor an opportunity to gauge more precisely the relative attractiveness of
offerings in the marketplace.
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RATINGS OF PREFERRED STOCK
STANDARD & POOR'S. Standard & Poor's ratings for preferred stock
have the following definitions:
AAA: An issue rated "AAA" has the highest rating that may be
assigned by Standard & Poor's to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock
obligations.
AA: A preferred stock issue rated "AA" also qualifies as a
high-quality fixed income security. The capacity to pay preferred
stock obligations is very strong, although not as overwhelming as
for issues rated "AAA."
A: An issue rated "A" is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more
susceptible to the adverse effects of changes in circumstances and
economic conditions.
BBB: An issue rated "BBB" is regarded as backed by an adequate
capacity to pay the preferred stock obligations. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions
or changing circumstances are more likely to lead to a weakened
capacity to make payments for a preferred stock in this category
than for issues in the category.
MOODY'S. Moody's ratings for preferred stock include the following:
aaa: An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
aa: An issue which is rated "aa" is considered a high grade
preferred stock. This rating indicates that there is reasonable
assurance that earnings and asset protection will remain relatively
well maintained in the foreseeable future.
a: An issue which is rate "a" is considered to be an upper medium
grade preferred stock. While risks are judged to be somewhat greater
than in the "aaa" and "aa" classifications, earnings and asset
protection are, nevertheless, expected to be maintained at adequate
levels.
baa: An issue which is rated "baa" is considered to be medium grade,
neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over
any great length of time.
RATINGS OF MUNICIPAL NOTES
STANDARD & POOR'S
SP-1: Very strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics are
given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest.
SP-3: Speculative capacity to pay principal and interest.
None of the Funds will purchase SP-3 municipal notes.
MOODY'S. Generally, Moody's ratings for state and municipal
short-term obligations are designated Moody's Investment Grade ("MIG"); however,
where an issue has a demand feature which makes the issue a variable rate demand
obligation, the applicable Moody's rating is "VMIG."
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MIG 1/VMIG 1: This designation denotes the best quality. There is
strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for
refinancing.
MIG 2/VMIG 2: This designation denotes high quality, with margins of
protection ample although not so large as available in the preceding
group.
MIG 3/VMIG 3: This designation denotes favorable quality, with all
security elements accounted for, but lacking the strength of the
preceding grades. Liquidity and cash flow protection may be narrow
and market access for refinancing is likely to be less well
established.
None of the Funds will purchase MIG 3/VMIG 3 municipal notes.
RATINGS OF COMMERCIAL PAPER
STANDARD & POOR'S. Commercial paper ratings are graded into four
categories, ranging from "A" for the highest quality obligations to "D" for the
lowest. Issues assigned the A rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designation 1, 2 and 3 to indicate the relative degree of safety. The "A-1"
designation indicates that the degree of safety regarding timely payment is very
strong. Those issues determined to possess overwhelming safety characteristics
will be denoted with a plus (+) symbol designation. None of the Funds will
purchase commercial paper rated A-3 or lower.
MOODY'S. Moody's commercial paper ratings are opinions as to the
ability of the issuers to timely repay promissory obligations not having an
original maturity in excess of nine months. Moody's makes no representation that
such obligations are exempt from registration under the Securities Act of 1933,
and it does not represent that any specific instrument is a valid obligation of
a rated issuer or issued in conformity with any applicable law. Moody's employs
the following three designations, all judged to be investment grade, to indicate
the relative repayment capacity of rated issuers:
PRIME-1: Superior capacity for repayment.
PRIME-2: Strong capacity for repayment .
PRIME-3: Acceptable capacity for repayment .
None of the Funds will purchase Prime-3 commercial paper.
BEST'S RATING SYSTEM FOR INSURANCE COMPANIES
The objective of Best's Rating System is to evaluate the various
factors affecting the overall performance of an insurance company in order to
provide an opinion as to the company's relative financial strength and ability
to meet its contractual obligations. The procedure includes both a quantitative
and qualitative review of the company.
The quantitative evaluation is based on an analysis of the company's
financial condition and operating performance utilizing a series of financial
tests. These tests measure a company's performance in the three critical areas
of Profitability, Leverage and Liquidity in comparison to the norms established
by the A.M. Best Company. These norms are based on an evaluation of the actual
performance of the insurance industry.
Best's review also includes a qualitative evaluation of the adequacy
and soundness of a company's reinsurance, the adequacy of its reserves and the
experience of its management. In addition, various other factors of importance
are considered such as the composition of the company's book of business and the
quality and diversification of its assets.
- 35 -
<PAGE>
Upon completion of analysis, Best's Ratings are assigned to those
companies that meet the qualifications for rating. The Best's Rating
classifications are A+ (Superior); A & A- (Excellent); B+ (Very Good); B & B-
(Good); C+ (Fairly Good); and C & C- (Fair). Those not qualifying for a current
Best's Rating are classified in the "Not Assigned" category that has ten
classifications which identify why a company is not eligible for a Best's
Rating. Care should be exercised in the use of Best's Ratings without further
reference to additional Best's publications.
FINANCIAL STATEMENTS
Because the Funds were not in operation prior to the date hereof, no
financial statements for the Funds are available.
- 36 -
<PAGE>
APPENDIX B
FIRST AMERICAN STRATEGIC INCOME FUND
INTRODUCTION TO PRO FORMA COMBINING STATEMENTS
OCTOBER 31, 1997
The accompanying unaudited pro forma combining Statement of Assets and
Liabilities, Statement of Operations and Schedule of Investments, reflect the
accounts of The Americas Income Trust Inc. (XUS) and Highlander Income Fund Inc.
(HLA) (the Funds).
These statements have been derived from the underlying accounting records for
the Funds used in calculating net asset values for the twelve-month period ended
October 31, 1997. The pro forma combining Statement of Operations has been
prepared based upon the fee and expense structure of the First American
Strategic Income Fund (Strategic Income Fund), a newly created fund of First
American Investment Funds, Inc. (the FAIF Fund). Given the numerous differences
of investment policies and restrictions of XUS and HLA, the accounting entity
for future financial reporting purposes will be the newly created Strategic
Income Fund.
The pro forma combining statements have been prepared assuming that each of the
Funds are merged into Strategic Income Fund. However, it is possible that one of
the Funds will not approve the merger, in which case the resulting Strategic
Income Fund will be comprised of only the Fund that approves the merger.
Under the proposed merger agreement and plan of reorganization, all outstanding
shares of XUS and HLA will be issued in exchange for shares of Class A of the
corresponding FAIF Fund.
<PAGE>
First American Investment Funds, Inc.
Strategic Income Fund
Pro Forma Combining Statement of Assets and Liabilities
October 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Americas Highlander Pro Forma
Income Income Adjustments Pro Forma
Trust Fund (Note 2) Combined
(000) (000) (000) (000)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Assets:
Total investments (Cost $74,005,
$31,261 and $105,266,
respectively) $ 72,268 $ 32,772 $ - $ 105,040
Cash 1,486 - - 1,486
Receivables:
Accrued income 767 362 - 1,129
Capital shares sold - 158 - 158
Income and other receivables 4,734 41 - 4,775
Other assets - 8 - 8
--------- --------- --------- ---------
Total Assets 79,255 33,341 - 112,596
--------- --------- --------- ---------
Liabilities:
Payables
Investment securities purchased on
a when-issued basis 19,376 3,973 - 23,349
Investment securities purchased 3,878 83 - 3,961
Accrued expenses 60 13 - 73
Other liabilities - 41 - 41
--------- --------- --------- ---------
Total Liabilities 23,314 4,110 - 27,424
--------- --------- --------- ---------
Net Assets:
Strategic Income Class A capital
based on 8,517,226 shares outstanding - - 100,173(a) 100,173
Americas Income Trust capital based on
6,251,305 shares outstanding 72,466 - (72,466)(a) -
Highlander Income capital based on
1,989,467 shares outstanding - 27,707 (27,707)(a) -
Undistributed net investment income 556 10 - 566
Accumulated net realized gain/(loss)
on investments (15,340) 57 - (15,283)
Net unrealized appreciation/(depreciation)
of investments and open futures contracts (1,741) 1,457 - (284)
--------- --------- --------- ---------
Total Net Assets $ 55,941 $ 29,231 $ - $ 85,172
========= ========= ========= =========
Net Asset Value per share $ 8.95 $ 14.54
========= =========
Net Asset Value
and redemption price per share - Class A $ 10.00
=========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
First American Investment Funds, Inc.
Strategic Income Fund
Pro Forma Combining Statement of Operations
For the Year Ended October 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Americas Highlander Pro Forma Adjustments
Income Income (Note 2) Pro Forma
Trust Fund Debit Credit Combined
(000) (000) (000) (000) (000)
------- ------- ------- ------- -------
Investment Income:
<S> <C> <C> <C> <C> <C>
Interest $ 5,087 $ 2,579 $ -- $ -- $ 7,666
Dividends -- 31 -- -- 31
------- ------- ------- ------- -------
Total investment income 5,087 2,610 -- -- 7,697
------- ------- ------- ------- -------
Expenses:
Investment advisory fees 289 171 604(b) 460(b) 604
Administrative, accounting and custodian fees 227 102 124(b) 329(b) 124
Transfer agent fees 20 13 22(c) 33(c) 22
Directors' fees 12 11 2(c) 23(c) 2
Registration fees -- -- 11(c) -- 11
Professional fees 49 25 5(c) 74(c) 5
Printing 42 30 6(c) 72(c) 6
Distribution fees - FAIF Retail Class A -- -- 216(b) -- 216
Other 27 26 3(c) 53(c) 3
------- ------- ------- ------- -------
Net expenses before expenses paid indirectly 666 378 993 1,044 993
Less: Expenses paid indirectly (4) (2) -- -- (6)
------- ------- ------- ------- -------
Total net expenses 662 376 993 1,044 987
------- ------- ------- ------- -------
Investment income - net 4,425 2,234 (993) (1,044) 6,710
------- ------- ------- ------- -------
Realized and Unrealized Gains (Losses) on Investments
and Foreign Currency Transactions
Net realized gain on investments 4,886 698 -- -- 5,584
Net realized loss on foreign currency transactions (94) -- -- -- (94)
Net realized loss on closed futures contracts -- (6) -- -- (6)
Net change in unrealized appreciation/ (depreciation)
of investments and foreign currency transactions (4,463) 571 -- -- (3,892)
------- ------- ------- ------- -------
Net gain on investments and foreign currency
transactions 329 1,263 -- -- 1,592
------- ------- ------- ------- -------
Net increase in net assets resulting from operations $ 4,754 $ 3,497 $ (993) $(1,044) $ 8,302
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
First American Investment Funds, Inc
Strategic Income Fund
Pro Forma Combining Schedule of Investments
October 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Par(000)/Shares Value
--------------- -----
Americas Highlander Americas Highlander
Income Income Pro Forma Income Income Pro Forma
Trust Fund Combined Trust Fund Combined
(000) (000) (000) Security Coupon Maturity (000) (000) (000)
----- ----- ----- -------- ------ -------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S GOVERNMENT & AGENCY SECURITIES- 52.3% (Percentages represent pro forma value of investments compared to pro forma net assets)
U.S. GOVERNMENT SECURITIES- 13.3%
$ 1,000 $ - $ 1,000 U.S. TREASURY NOTE 5.875% 03/31/99 $ 1,004 $ - $ 1,004
4,000 - 4,000 U.S. TREASURY NOTE 6.750 04/30/00 4,098 - 4,098
- 750 750 U.S. TREASURY NOTE 8.750 08/15/00 - 808 808
- 1,150 1,150 U.S. TREASURY NOTE 6.375 03/31/01 - 1,173 1,173
2,000 - 2,000 U.S. TREASURY NOTE 5.875 02/15/04 2,011 - 2,011
2,000 - 2,000 U.S. TREASURY NOTE 7.250 05/15/16 2,234 - 2,234
------------------------------
9,347 1,981 11,328
------------------------------
U.S. AGENCY MORTGAGE-BACKED SECURITIES- 38.1%
- 2,000 2,000 FHLMC (c) 6.000 01/26/08 - 1,976 1,976
- 1,261 1,261 FHLMC 6.500 03/15/24 - 1,142 1,142
5,000 - 5,000 FHLMC (c) 6.500 10/01/30 4,922 - 4,922
- 1,413 1,413 FNMA 6.500 02/01/04 - 1,415 1,415
- 2,000 2,000 FNMA (c) 7.000 01/01/08 - 2,027 2,027
- 933 933 FNMA 8.000 03/01/08 - 974 974
- 904 904 FNMA 6.000 03/01/11 - 890 890
- 398 398 FNMA 10.000 10/01/17 - 439 439
- 249 249 FNMA (a) 11.000 10/01/20 - 282 282
- 692 692 FNMA 9.000 07/01/24 - 738 738
- 697 697 FNMA 6.500 09/01/25 - 688 688
- 937 937 FNMA 6.000 03/01/26 - 904 904
- 928 928 FNMA 6.500 05/01/26 - 914 914
13,000 - 13,000 FNMA (c) 8.000 01/01/30 13,467 - 13,467
- 1,269 1,269 FNMA 6.500 12/25/23 - 1,168 1,168
- 166 166 GNMA 9.000 06/15/16 - 179 179
-------------------------------
18,389 13,736 32,125
-------------------------------
SHORT-TERM SECURITIES- 1.3%
444 609 1,053 GOLDMAN SACHS 5.730 11/03/97 444 609 1,053
-------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
SECURITIES 28,180 16,326 44,506
-------------------------------
U.S. INVESTMENT GRADE CORPORATE BONDS- 2.7%
AUTOMOTIVE- 1.4%
1,000 - 1,000 GENERAL MOTORS 8.800 03/01/21 1,216 - 1,216
-------------------------------
LEISURE & ENTERTAINMENT- 1.3%
1,000 - 1,000 ROYAL CARIBBEAN CRUISES 8.125 07/28/04 1,079 - 1,079
-------------------------------
TOTAL U.S. INVESTMENT GRADE
CORPORATE BONDS 2,295 - 2,295
-------------------------------
U.S. NON-INVESTMENT GRADE CORPORATE BONDS- 19.8% (b)
AUTOMOTIVE- 0.5%
- 112 112 AFTERMARKET TECHNOLOGY 12.000 08/01/04 - 125 125
- 150 150 COLLINS & AIKMAN PRODUCTS 11.500 04/15/06 - 171 171
- 100 100 LEAR SEATING CORP 8.250 02/01/02 - 102 102
-------------------------------
- 398 398
-------------------------------
BANKING- 0.5%
- 250 250 FIRST NATIONWIDE HOLDINGS 10.625 10/01/03 - 279 279
-------------------------------
BEVERAGE AND TOBACCO- 0.2%
- 175 175 DR. PEPPER BOTTLING HOLDINGS 10.630 02/15/03 - 175 175
-------------------------------
BROADCAST RADIO & TELEVISION- 1.0%
- 100 100 ACME TELEVISION (STEP BOND) 0.0/10.875 09/30/04 - 74 74
- 75 75 CAPALER BROADCASTING 9.250 07/01/07 - 77 77
- 50 50 CHANCELLOR MEDIA CORP 9.375 10/01/04 - 52 52
- 75 75 CHANCELLOR MEDIA CORP 8.750 06/15/07 - 76 76
- 150 150 ECHOSTAR SATELLITE BROADCAST 13.250 03/15/04 - 121 121
- 50 50 FOX/LIBERTY NETWORKS LLC 8.875 08/15/07 - 50 50
- 150 150 FOX/LIBERTY NETWORKS LLC 8.880 08/15/07 - 95 95
See accompanying notes to financial statements.
<PAGE>
BROADCAST RADIO & TELEVISON (Continued)
$ - $ 125 $ 125 OUTDOOR SYSTEMS 8.875% 06/15/07 $ - $ 129 $ 129
- 200 200 SINCLAIR BROADCAST GROUP INC 10.000 12/15/03 - 211 211
- 25 25 SULLIVAN BROADCASTING HOLDINGS 13.250 12/15/06 - 26 26
-------------------------------
- 911 911
-------------------------------
BUILDER- 0.1%
- 50 50 AMERICAN BUILDERS 10.625 05/15/07 - 52 52
-------------------------------
BUSINESS SERVICES- 0.6%
- 50 50 DECISION ONE CORP 9.750 08/01/07 - 52 52
- 75 75 ELECTRONIC RETAILING SYSTEMS 13.920 02/01/04 - 52 52
- 114 114 KNOLL INC 10.875 03/15/06 - 127 127
- 100 100 OUTSOURCING SOLUTIONS 11.000 11/01/06 - 111 111
- 125 125 UNITED STATIONERY SUPPLY 12.750 05/01/05 - 143 143
-------------------------------
- 485 485
-------------------------------
CABLE TELEVISION- 2.2%
- 50 50 CABLEVISION SYSTEMS CORP 9.875 05/15/06 - 53 53
- 150 150 CABLEVISION SYSTEMS CORP 9.875 02/15/13 - 161 161
- 100 100 CHARTER COMMUNICATIONS SOUTHEAST 11.250 03/15/06 - 110 110
- 75 75 COMCAST CORP 9.375 05/15/05 - 81 81
- 125 125 COMCAST UK CABLE PARTNERS LTD 11.070 11/15/07 - 98 98
- 300 300 DIAMOND CABLE COMMUNICATIONS 10.520 02/15/07 - 196 196
- 75 75 FRONTIERVISION HOLDINGS
(STEP BOND) 0.0/11.875 09/15/07 - 51 51
- 250 250 NTL INC 10.840 10/15/03 - 233 233
- 50 50 PEGASUS COMMUNICATIONS 9.625 10/15/05 - 50 50
- 150 150 ROGERS CABLESYSTEMS 10.000 03/15/05 - 164 164
- 375 375 TELEWEST COMMUNICATIONS 10.880 10/01/07 - 283 283
- 150 150 UNITED INTERNATIONAL HOLDINGS 13.990 05/15/06 - 107 107
- 300 300 WESTPOINT STEVENS INC 9.375 12/15/05 - 314 314
-------------------------------
- 1,901 1,901
-------------------------------
CHEMICALS AND PLASTICS- 0.5%
- 150 150 ISP HOLDINGS INC 9.000 10/15/03 - 156 156
- 75 75 RBX CORP 11.250 10/15/05 - 66 66
- 100 100 STERLING CHEMICAL HOLDINGS 12.990 08/15/08 - 73 73
- 125 125 UNIROYAL TECHNOLOGY CORP 11.750 06/01/03 - 129 129
-------------------------------
- 424 424
-------------------------------
CONSUMER HEALTH- 0.3%
- 100 100 ICON HEALTH CORP 13.580 11/15/06 - 59 59
- 100 100 RENAISSANCE COSMETICS 11.750 02/15/04 - 99 99
- 150 150 SIMMONS CO 10.750 04/15/06 - 157 157
-------------------------------
- 315 315
-------------------------------
CONSUMER NON-DURABLES- 0.3%
- 75 75 CURTICE-BURNS FOODS INC 12.250 02/01/05 - 83 83
- 150 150 PLAYTEX FAMILY PRODUCTS CORP 9.000 12/15/03 - 151 151
-------------------------------
- 234 234
-------------------------------
COSMETICS & TOILETRIES- 0.1%
- 50 50 REVLON CONSUMER PRODUCTS 10.500 02/15/03 - 53 53
-------------------------------
ECOLOGICAL SERVICES & EQUIPMENT- 0.4%
- 200 200 ALLIED WASTE INDUSTRIES 10.360 06/01/07 - 137 137
- 100 100 ALLIED WASTE NORTH AMERICAN INC 10.250 12/01/06 - 109 109
- 250 250 MID-AMERICAN WASTE SYSTEM INC 12.250 02/15/03 - 101 101
-------------------------------
- 347 347
-------------------------------
ELECTRICAL UTILITIES- 0.2%
- 150 150 EL PASO ELECTRIC CO 9.400 05/01/11 - 170 170
-------------------------------
FINANCE- 0.1%
- 50 50 TRIZEC FINANCE LTD 10.875 10/15/05 - 57 57
-------------------------------
FOOD PRODUCTS- 0.4%
- 100 100 CARR-GOTTSTEIN FOODS CO 12.000 11/15/05 - 111 111
- 175 175 INTERNATIONAL HOME FOODS 10.375 11/01/06 - 186 186
- 100 100 VAN DE KAMPS INC 12.000 09/15/05 - 112 112
-------------------------------
- 409 409
-------------------------------
FOOD SERVICES- 0.2%
- 125 125 AMERISERV FOOD COMPANY 10.125 07/15/07 - 131 131
- 75 75 AMERISERV FOOD CORP 8.875 10/15/06 - 75 75
-------------------------------
- 206 206
-------------------------------
See accompanying notes to financial statements.
<PAGE>
FOOD & DRUG RETAILING- 0.2%
$ - $ 175 $ 175 RALPHS GROCERY CO 10.450% 06/15/04 $ - $ 194 $ 194
-------------------------------
FOREST PRODUCTS- 0.6%
- 125 125 CONTAINER CORPORATION OF AMERICA 9.750 04/01/03 - 135 135
- 100 100 FOUR M CORP 12.000 06/01/06 - 106 106
- 50 50 REPAP NEW BRUNSWICK 10.625 04/15/05 - 50 50
- 100 100 SD WARREN CO 12.000 12/15/04 - 113 113
- 150 150 STONE CONTAINER CORP 11.500 10/01/04 - 163 163
-------------------------------
- 567 567
-------------------------------
HEALTH CARE SERVICES- 0.6%
- 150 150 DADE INTERNATIONAL INC 11.125 05/01/06 - 167 167
- 100 100 GENESIS HEALTH VENTURES 9.250 10/01/06 - 103 103
- 50 50 TENET HEALTHCARE CORP 8.000 01/15/05 - 51 51
- 200 200 TENET HEALTHCARE CORP 10.125 03/01/05 - 218 218
-------------------------------
- 539 539
-------------------------------
HEAVY ELECTRICAL MACHINERY- 0.4%
- 150 150 ALVEY SYSTEMS INC 11.375 01/31/03 - 158 158
- 150 150 TOKHEIM CORP 11.500 08/01/06 - 170 170
-------------------------------
- 328 328
-------------------------------
HOME PRODUCTS & FURNISHINGS- 0.1%
- 50 50 SYRATECH CORP 11.000 04/15/07 - 49 49
-------------------------------
HOTELS & LEISURE- 0.1%
- 100 100 COURTYARD BY MARRIOTT 10.750 02/01/08 - 109 109
-------------------------------
INDUSTRIAL PRODUCTS & EQUIPMENT- 1.0%
- 150 150 CABOT SAFETY CORP 12.500 07/15/05 - 164 164
- 100 100 CLARK MATERIALS HANDLING INC 10.750 11/15/06 - 106 106
- 50 50 CONTINENTAL GLOBAL GROUP 11.000 04/01/07 - 53 53
- 100 100 FAIRCHILD SEMICONDUCTOR 10.125 03/15/07 - 106 106
- 100 100 INTERNATIONAL KNIFE AND SAW INC 11.375 11/15/06 - 109 109
- 75 75 METTLER-TOLEDO INC 9.750 10/01/06 - 85 85
- 75 75 MMI PRODUCTS INC 11.250 04/15/07 - 82 82
- 100 100 RCN CORP (STEP BOND) 0.0/11.125 10/15/07 - 58 58
- 100 100 UNIFRAX INVESTMENT CORP 10.500 11/01/03 - 104 104
-------------------------------
- 867 867
-------------------------------
LEISURE & ENTERTAINMENT- 1.3%
- 250 250 AMF GROUP INC 11.030 03/15/06 - 189 189
- 150 150 COBBLESTONE GOLF GROUP 11.500 06/01/03 - 163 163
- 50 50 LIVENT INCORPORATED 9.375 10/15/04 - 50 50
- 150 150 PREMIER PARKS 12.000 08/15/03 - 167 167
- 200 200 SIX FLAGS THEME PARKS INC 12.530 06/15/05 - 210 210
- 300 300 VIACOM INC 8.000 07/07/06 - 296 296
-------------------------------
- 1,075 1,075
-------------------------------
METAL & MINING- 0.2%
- 125 125 EURAMAX INTERNATIONAL 11.250 10/01/06 - 136 136
-------------------------------
OIL & GAS- 1.0%
- 125 125 ABRAXAS PETRO 11.500 11/01/04 - 138 138
- 250 250 CALIFORNIA ENERGY COMPANY INC 10.700 01/15/04 - 271 271
- 50 50 DAILEY PETROLEUM SERVICES CORP 9.750 08/15/07 - 52 52
- 50 50 DI INDUSTRIES INC 8.875 07/01/07 - 51 51
- 100 100 FALCON DRILLING COMPANY INC 9.750 01/15/01 - 105 105
- 100 100 FORCENERGY INC 9.500 11/01/06 - 106 106
- 50 50 PACALTA RESOURCES LTD 10.750 06/15/04 - 50 50
- 50 50 UNITED MERIDIAN CORP 10.375 10/15/05 - 55 55
- 50 50 XCL LIMITED 13.500 05/01/04 - 65 65
-------------------------------
- 893 893
-------------------------------
PRINTING & PUBLISHING- 1.8%
- 200 200 AFFILIATED NEWSPAPER INVESTMENTS 12.790 07/01/06 - 186 186
- 50 50 HOLLINGER INTERNATIONAL
PUBLISHING 9.250 03/15/07 - 52 52
1,250 - 1,250 HOLLINGER INTERNATIONAL
PUBLISHING 9.250 02/01/06 1,283 - 1,283
-------------------------------
1,283 238 1,521
-------------------------------
RETAIL STORES- 0.4%
- 150 150 BRYLANE 10.000 09/01/03 - 159 159
- 100 100 HERFF JONES INC 11.000 08/15/05 - 108 108
See accompanying notes to financial statements.
<PAGE>
RETAIL STORES (Continued)
$ - $ 100 $ 100 HOSIERY CORPORATION OF AMERICA 13.750% 08/01/02 $ - $ 108 $ 108
-------------------------------
- 375 375
-------------------------------
STEEL MANUFACTURERS- 0.5%
- 75 75 ACME METALS INC 13.190 08/01/04 - 84 84
- 50 50 BAYOU STEEL CORP 10.250 03/01/01 - 52 52
- 250 250 GS TECHNOLOGIES 12.000 09/01/04 - 271 271
-------------------------------
- 407 407
-------------------------------
SURFACE TRANSPORTATION- 0.8%
- 50 50 CHEMICAL LEAMAN CORP 10.375 06/15/05 - 52 52
- 75 75 GEARBULK HOLDING 11.250 12/01/04 - 83 83
- 100 100 STATIA TERMINALS 11.750 11/15/03 - 107 107
- 150 150 STENA AB 10.500 12/15/05 - 164 164
- 50 50 STENA AB 8.750 06/15/07 - 51 51
- 215 215 TRISM INC 10.750 12/15/00 - 212 212
-------------------------------
- 669 669
-------------------------------
TELECOMMUNICATIONS & CELLULAR- 2.8%
- 50 50 AMERICAN COMMUNICATION SERVICES 13.750 07/15/07 - 58 58
- 50 50 AMPHENOL CORP 9.875 05/15/07 - 53 53
- 300 300 BROOKS FIBER PROPERTIES 10.810 03/01/06 - 244 244
- 150 150 CELLULAR COMMUNICATIONS 12.680 08/15/00 - 117 117
- 100 100 HERMES EUROPE RAILTEL 11.500 08/15/07 - 110 110
50 50 HIGHWAYMASTER COMMUNICATIONS 13.750 09/15/05 50 50
- 250 250 INTERMEDIA COMMUNICATIONS OF
FLORIDA 11.030 05/15/06 - 189 189
- 100 100 METRONET COMMUNICATIONS 12.000 08/15/07 - 112 112
- 175 175 MILLICOM INTERNATIONAL CELLULAR 12.680 06/01/06 - 132 132
- 150 150 NEXTEL COMMUNICATIONS
(STEP BOND) 0.0/9.750 08/15/04 - 129 129
- 250 250 PAGING NETWORK 10.000 10/15/08 - 254 254
- 250 250 QUEST COMMUNICATIONS
(STEP BOND) 0.0/9.470 10/15/07 - 161 161
- 100 100 SYGNET WIRELESS INC 11.500 10/01/06 - 109 109
- 300 300 TELEPORT COMMUNICATIONS 10.540 07/01/07 - 236 236
- 125 125 TELESYSTEM INTERNATIONAL
WIRELESS 13.010 06/30/07 - 76 76
- 50 50 TELESYSTEM INTERNATIONAL
WIRELESS (STEP) 0.0/10.500 11/01/07 - 27 27
- 100 100 USA MOBILE COMMUNICATIONS
INC 9.500 02/01/04 - 99 99
- 200 200 VANGUARD CELLULAR SYSTEM 9.375 04/15/06 - 204 204
-------------------------------
- 2,360 2,360
-------------------------------
TEXTILES & APPAREL- 0.3%
- 100 100 GLENOIT CORP 11.000 04/15/07 - 108 108
- 100 100 PILLOWTEX CORP 10.000 11/15/06 - 106 106
- 50 50 SOURCE MEDIA 12.000 11/01/04 - 50 50
-------------------------------
- 264 264
-------------------------------
TRANSPORTATION- 0.1%
- 75 75 LEAR CORP 9.500 07/15/06 - 82 82
-------------------------------
TOTAL U.S. NON-INVESTMENT GRADE
CORPORATE BONDS 1,283 15,568 16,851
-------------------------------
FOREIGN SECURITIES- 47.6%
CANADA- 15.3%
CORPORATE SECURITIES- 1.9%
1,500 - 1,500 ROGERS CABLESYSTEMS 10.000 03/15/05 1,635 - 1,635
-------------------------------
GOVERNMENT SECURITIES- 10.4%
2,850 - 2,850 CANADIAN GOVERNMENT 8.750 12/01/05 2,460 - 2,460
3,000 - 3,000 CANADIAN GOVERNMENT 8.000 06/01/23 2,675 - 2,675
2,900 - 2,900 CANADIAN GOVERNMENT 9.750 05/01/00 2,296 - 2,296
3,700 - 3,700 CANADIAN GOVERNMENT
RESIDUAL 7.170 10/01/08 1,404 - 1,404
-------------------------------
8,835 - 8,835
-------------------------------
MORTGAGE-BACKED SECURITIES- 3.0%
1,026 - 1,026 FIRST HERITAGE 6.630 12/01/98 741 - 741
1,900 - 1,900 FIRSTLINE TRUST 7.250 11/01/00 1,404 - 1,404
582 - 582 FIRSTLINE TRUST 8.000 08/01/18 441 - 441
-------------------------------
2,586 - 2,586
-------------------------------
TOTAL-CANADA 13,056 - 13,056
-------------------------------
MEXICO- 14.6%
GOVERNMENT SECURITIES- 3.8%
3,100 - 3,100 UNITED MEXICAN STATES 11.375 09/15/16 3,269 - 3,269
-------------------------------
See accompanying notes to financial statements.
<PAGE>
SHORT-TERM SECURITIES- 10.8%
$85,000 $ - $ 85,000 MEXICAN CETES 17.700% 04/02/98 $ 9,190 $ - $ 9,190
-------------------------------
TOTAL-MEXICO 12,459 - 12,459
-------------------------------
ARGENTINA- 2.9%
GOVERNMENT SECURITIES
125 - 125 ARGENTINA GLOBAL 8.375 12/20/03 112 - 112
1,750 - 1,750 ARGENTINA GLOBAL 11.750 02/12/07 1,449 - 1,449
1,000 - 1,000 ARGENTINA GLOBAL 144A 11.750 02/12/07 826 - 826
-------------------------------
TOTAL-ARGENTINA 2,387 - 2,387
-------------------------------
BRAZIL- 1.6%
GOVERNMENT SECURITIES
2,000 - 2,000 BRAZIL DCB 6.750 04/15/12 1,370 - 1,370
-------------------------------
BULGARIA- 0.6%
GOVERNMENT SECURITIES
1,000 - 1,000 BULGARIA FLIRB 2.250 07/28/12 543 - 543
-------------------------------
ECUADOR- 1.7%
GOVERNMENT SECURITIES
1,640 - 1,640 EQUADOR PDI 6.690 02/27/15 943 - 943
820 - 820 ECUADOR PDI BEARER 6.690 02/27/15 472 - 472
-------------------------------
1,415 - 1,415
-------------------------------
PANAMA- 3.6%
GOVERNMENT SECURITIES
1,750 - 1,750 PANAMA IRB 3.750 07/17/14 1,234 - 1,234
2,465 - 2,465 PANAMA PDI 4.000 07/17/16 1,812 - 1,812
-------------------------------
TOTAL-PANAMA 3,046 - 3,046
-------------------------------
PERU- 3.6%
GOVERNMENT SECURITIES
3,000 - 3,000 PERU FLIRB 3.250 03/07/17 1,500 - 1,500
2,700 - 2,700 PERU PDI 4.000 03/07/17 1,532 - 1,532
-------------------------------
TOTAL-PERU 3,032 - 3,032
-------------------------------
POLAND- 2.5%
GOVERNMENT SECURITIES
2,250 - 2,250 POLAND DISCOUNT 6.938 10/27/24 2,115 - 2,115
-------------------------------
RUSSIA- 0.9%
GOVERNMENT SECURITIES
1,200 - 1,200 RUSSIAN WHEN ISSUED 6.690 12/29/49 797 - 797
-------------------------------
VENEZUELA- 0.3%
GOVERNMENT SECURITIES
350 - 350 VENEZUELA GLOBAL 9.250 09/15/27 290 - 290
-------------------------------
TOTAL FOREIGN SECURITIES 40,510 - 40,510
-------------------------------
STOCKS & OTHER SECURITIES- 1.0%
COMMON STOCKS- 0.1%
CABLE TELEVISION- 0.0%
- 27 27 CS WIRELESS SYSTEMS INC - - - - -
- 400 400 SULLIVAN BROADCASTING HOLDINGS - - - 4 4
-------------------------------
- 4 4
-------------------------------
PRINTING & PUBLISHING- 0.1%
- 500 500 AFFILIATED NEWSPAPER INVESTMENTS - - - 50 50
-------------------------------
RETAIL TRADE- 0.0%
- 50 50 HOSIERY CORP OF AMERICA - - - - -
-------------------------------
TECHNOLOGY- 0.0%
- 232 232 NEXTEL COMMUNICATIONS - - - 6 6
- 225 225 PEGASUS COMMUNICATIONS - - - 5 5
-------------------------------
- 11 11
-------------------------------
TOTAL COMMON STOCKS - 65 65
-------------------------------
PREFERRED STOCKS- 0.9%
COMMERCIAL SERVICES- 0.6%
- 1,438 1,438 AMERICAN RADIO SYSTEMS CORP 11.375 - - 166 166
See accompanying notes to financial statements.
<PAGE>
COMMERCIAL SERVICES (Continued)
- 794 794 CHANCELLOR MEDIA CORP 12.000 - $ - $ 93 $ 93
- 3 3 K - III COMMUNICATIONS CORP 11.625 - - - -
- 100 100 PEGASUS COMMUNICATIONS CORP 12.750 - - 110 110
- 1,250 1,250 SFX BROADCASTING INC 12.625 - - 146 146
- 750 750 SINCLAIR CAPITAL 2.906 - - 83 83
-------------------------------
- 598 598
-------------------------------
FINANCIAL SERVICES- 0.1%
- 1,500 1,500 CROWN AMERICAN REALTY TRUST 5.500 - - 82 82
-------------------------------
BROADCAST RADIO & TELEVISION- 0.1%
- 50 50 ECHOSTAR COMMUNICATIONS 12.125 - - 52 52
-------------------------------
TECHNOLOGY- 0.1%
- 50 50 NEXTEL COMMUNICATIONS 13.000 - - 56 56
-------------------------------
TOTAL PREFERRED STOCKS - 788 788
-------------------------------
WARRANTS- 0.0%
- 50 50 BAR TECHNOLOGIES - 04/01/01 - 3 3
- 150 150 CELLULAR COMMUNICATIONS - 08/15/03 - 3 3
- 75 75 ELECTRONIC RETAILING SYSTEMS - 01/24/98 - 4 4
- 120 120 ICF KAISER INTERNATIONAL - 12/31/98 - - -
- 150 150 ICON HEALTH CORP - 11/14/99 - 7 7
- 250 250 NEXTEL COMMUNICATIONS - 04/15/99 - - -
- 100 100 STERLING CHEMICALS HOLDINGS - 08/15/08 - 4 4
- 1,250 1,250 UNIROYAL TECHNOLOGY CORP - 06/01/03 - 4 4
- 150 150 WIRELESS ONE INC - 10/19/00 - - -
-------------------------------
TOTAL WARRANTS - 25 25
-------------------------------
TOTAL STOCKS & OTHER SECURITIES - 878 878
-------------------------------
TOTAL INVESTMENTS (Cost $74,005, $31,261
and $105,266, respectively) $ 72,268 $ 32,772 $105,040
===============================
</TABLE>
Notes to Investments in Securities
(a) This issue is partially pledged as initial margin deposit on open interest
rate futures sales contracts. At October 31, 1997, the fund had outstanding 10
interest rate futures sales contracts on 30 year U.S. Treasury bonds expiring in
December 1997 with a net unrealized loss of $54,063. The market value and par
value of the open contracts were $1,184,688 and $1,000,000, respectively.
Securities with a market value of $56,384 were pledged as collateral to cover
initial margin deposits on these contracts.
(b) Non-investment grade corporate bonds include obligations rated BB or lower
by Standard & Poor's or Ba or lower by Moody's, or 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-Adviser.
(c) At October 31, 1997, the cost of securities purchased on a when issued basis
was $19,375,937, $3,973,438, and $23,349,375 for Americas Income Trust,
Highlander Income Fund, and Pro Forma Combined, respectively.
See accompanying notes to financial statements.
<PAGE>
FIRST AMERICAN STRATEGIC INCOME FUND
NOTES TO PRO FORMA STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION
The unaudited pro forma combining Statement of Assets and Liabilities, Statement
of Operations and Schedule of Investments give effect to the proposed
acquisition of The Americas Income Trust Inc. (XUS) and Highlander Income Fund
Inc. (HLA) (the Funds) into the First American Strategic Income Fund (Strategic
Income Fund), a newly created fund of First American Investment Funds, Inc.
(FAIF) and reflect the accounts for the twelve-month period ended October 31,
1997. The acquisition will be accomplished by an exchange of all outstanding
shares of each Piper Fund for Class A shares of the Strategic Income Fund.
The pro forma combining schedule of investments does not reflect any changes
which could occur before or after the acquisition closing date due to changes in
market conditions or differences in investment management practices of the
Strategic Income Fund compared with the Funds. However, aside from portfolio
decisions made as a result of market condition changes that have or may occur
between the date of the pro forma financial statements and the acquisition
closing date, management does not have any specific plans at this time regarding
the disposition of investments presented in the pro forma schedules of
investments that would have a material impact on the presentation of such
schedules.
The pro forma combining statements should be read in conjunction with the
historical financial statements of the constituent funds and the notes thereto
incorporated by reference in the Statement of Additional Information.
Strategic Income Fund is a portfolio offered by First American Investment Funds,
Inc. (FAIF) a diversified, open-end, management investment company registered
under the Investment Company Act of 1940, as amended. FAIF presently includes a
series of twenty-six funds.
2. PRO FORMA ADJUSTMENTS
(a) The pro forma combining statements of assets and liabilities
assumes the issuance of shares of the Strategic Income Fund as
if the reorganization were to have taken place on October 31,
1997 and is based on the net asset value of the newly created
fund. Transactions in shares of capital stock are as follows:
6,251,305 shares of XUS and 1,989,467 shares of HLA exchanged
for 8,517,226 Class A shares of Strategic Income Fund.
<PAGE>
(b) The pro forma adjustments to investment advisory fees,
administrative fees, custodian fees and distribution fees
reflect the difference in fees charged by the Strategic Income
Fund based upon the effective fee schedule.
U.S. Bank National Association has agreed to waive fees and
reimburse expenses through September 30, 1998, to the extent
necessary to maintain overall total Fund operating expense
ratios at the pro forma expense levels of 1.15% of Strategic
Income Fund's net assets
(c) The pro forma adjustments to transfer agent fees, directors'
fees, professional fees, printing expenses and other expenses
reflect the expected savings (or in the case of registration
fees, additional costs) due to the combination of the funds.
<PAGE>
FIRST AMERICAN INVESTMENT FUNDS, INC.
PART C - OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
The first four paragraphs of Item 27 of Part C of Pre-Effective
Amendment No. 1 to the Registrant's Registration Statement on Form N-1A, dated
November 27, 1987, are incorporated herein by reference.
On February 18, 1988 the indemnification provisions of the Maryland
General Corporation Law (the "Law") were amended to permit, among other things,
corporations to indemnify directors and officers unless it is proved that the
individual (1) acted in bad faith or with active and deliberate dishonesty, (2)
actually received an improper personal benefit in money, property or services,
or (3) in the case of a criminal proceeding, had reasonable cause to believe
that his act or omission was unlawful. The Law was also amended to permit
corporations to indemnify directors and officers for amounts paid in settlement
of stockholders' derivative suits.
The Registrant undertakes that no indemnification or advance will be
made unless it is consistent with Sections 17(h) or 17(i) of the Investment
Company Act of 1940, as now enacted or hereafter amended, and Securities and
Exchange Commission rules, regulations, and releases (including, without
limitation, Investment Company Act of 1940 Release No. 11330, September 2,
1980).
Insofar as the indemnification for liability arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in such Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any action,
suit, or proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
The Registrant maintains officers' and directors' liability
insurance providing coverage, with certain exceptions, for acts and omissions in
the course of the covered persons' duties as officers and directors.
ITEM 16. EXHIBITS.
1.1 Amended and Restated Articles of Incorporation, as
supplemented through March 30, 1998. (Incorporated by
reference to Post-Effective Amendment No. 36 to the
Registrant's Registration Statement on Form N-1A, File
No. 33-16905.)
2. Bylaws, as amended through February 23, 1998.
(Incorporated by reference to Post-Effective Amendment
No. 36 to the Registrant's Registration Statement on
Form N-1A, File No. 33-16905.)
<PAGE>
3. Not applicable.
* 4. Agreement and Plan of Reorganization by and between the
Registrant and Piper Funds Inc., attached as Appendix
VI to the Prospectus/Proxy Statement included in Part
A of this Registration Statement on Form N-14.
5. Not applicable.
6.1 Investment Advisory Agreement dated April 2, 1991
between Registrant and First Bank National Association,
as amended and supplemented through August 1994.
(Incorporated by reference to Post-Effective Amendment
No. 21 to the Registrant's Registration Statement on
Form N-1A, File No. 33-16905.)
6.2 Sub-Advisory Agreement dated March 28, 1994 relating to
International Fund between First Bank National
Association and Marvin & Palmer Associates, Inc.
(Incorporated by reference to Post-Effective Amendment
No. 21 to the Registrant's Registration Statement on
Form N-1A, File No. 33-16905.)
6.3 Amendment No. 8 to Investment Advisory Agreement.
(Incorporated by reference to Post-Effective Amendment
No. 34 to the Registrant's Registration Statement on
Form N-1A, File No. 33-16905.)
6.4 Amendment No. 1 to Sub-Advisory Agreement. (Incorporated
by reference to Post-Effective Amendment No. 34 to the
Registrant's Registration Statement on Form N-1A, File
No. 33-16905.)
7.1 Distribution Agreement [Class A and Class C shares]
dated February 10, 1994 between Registrant and SEI
Financial Services Company. (Incorporated by reference
to Post-Effective Amendment No. 21 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
7.2 Distribution and Service Agreement [Class B shares]
dated August 1, 1994, as amended September 14, 1994,
between Registrant and SEI Financial Services Company.
(Incorporated by reference to Post-Effective Amendment
No. 21 to the Registrant's Registration Statement on
Form N-1A, File No. 33-16905.)
7.3 Form of Dealer Agreement. (Incorporated by reference to
Post-Effective Amendment No. 21 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
8. Not applicable.
9.1 Custodian Agreement dated September 20, 1993, between
Registrant and First Trust National Association, as
supplemented through August 1994. (Incorporated by
<PAGE>
reference to Post-Effective Amendment No. 18 to the
Registrant's Registration Statement on Form N-1A, File
No. 33-16905.)
9.2 Compensation Agreement dated June 1, 1995, pursuant to
Custodian Agreement. (Incorporated by reference to
Post-Effective Amendment No. 24 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
9.3 Compensation Agreement dated January 1, 1997, pursuant
to Custodian Agreement. (Incorporated by reference to
Post-Effective Amendment No. 27 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
9.4 Compensation Agreement dated January 1, 1997, pursuant
to Custodian Agreement. (Incorporated by reference to
Post-Effective Amendment No. 27 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
9.5 Compensation Agreement dated August 5, 1997, pursuant to
Custodian Agreement. (Incorporated by reference to
Post-Effective Amendment No. 34 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
9.6 Compensation Agreement dated November 21, 1997, pursuant
to Custodian Agreement. (Incorporated by reference to
Post-Effective Amendment No. 34 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
10.1 Form of Distribution Plan [Class A shares].
(Incorporated by reference to Exhibit (15)(a) to the
Post-Effective Amendment No. 21 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
10.2 Distribution Plan [Class B shares]. (Incorporated by
reference to Post-Effective Amendment No. 21 to the
Registrant's Registration Statement on Form N-1A, File
No. 33-16905.)
10.3 Service Plan [Class B shares]. (Incorporated by
reference to Post-Effective Amendment No. 21 to the
Registrant's Registration Statement on Form N-1A, File
No. 33-16905.)
10.4 Multiple Class Plan Pursuant to Rule 18f-3.
(Incorporated by reference to Post-Effective Amendment
No. 23 to the Registrant's Registration Statement on
Form N-1A, File No. 33-16905.)
* 11. Opinion and Consent of Dorsey & Whitney LLP with respect
to the legality of the securities being registered.
** 12. Opinion and Consent of Dorsey & Whitney LLP with respect
to tax matters.
13.1 Administration Agreement dated January 1, 1995 between
Registrant and SEI Financial Management Corporation.
(Incorporated by reference to Post-Effective Amendment
No. 23 to the Registrant's Registration Statement on
Form N-1A, File No. 33-16905.)
13.2 Transfer Agent Agreement dated March 31, 1994 between
Registrant and Supervised Service Company, Inc.
[superseded] (Incorporated by reference to
Post-Effective Amendment No. 23 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
<PAGE>
13.3 Assignment of Transfer Agency Agreement to DST Systems,
Inc. [superseded] (Incorporated by reference to
Post-Effective Amendment No. 24 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
13.4 Form of Transfer Agency Agreement dated October 1, 1996
between Registrant and DST Systems, Inc. (Incorporated
by reference to Post-Effective Amendment No. 27 to the
Registrant's Registration Statement on Form N-1A, File
No. 33-16905.)
13.5 Sub-Administration Agreement effective January 1, 1998
between SEI and First Bank National Association.
(Incorporated by reference to Post-Effective Amendment
No. 31 to the Registrant's Registration Statement on
Form N-1A, File No. 33-16905.)
13.6 Amended and Restated Administration Agreement dated July
1, 1997 between Registrant and SEI Investments
Management Corporation. (Incorporated by reference to
Post-Effective Amendment No. 31 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
13.7 Agreement dated July 1, 1997 between SEI and First Bank
National Association. (Incorporated by reference to
Post-Effective Amendment No. 31 to the Registrant's
Registration Statement on Form N-1A, File No. 33-16905.)
13.8 Agreement dated July 1, 1997 between First Bank National
Association and SEI Investments Management Corporation.
(Incorporated by reference to Post-Effective Amendment
No. 31 to the Registrant's Registration Statement on
Form N-1A, File No. 33-16905.)
* 14 Consent of KPMG Peat Marwick LLP.
15. Not applicable.
* 16. Powers of Attorney of Directors signing the Registration
Statement.
* 17. (a) Rule 24f-2 Election of Registrant.
* (b) Form of Proxy Card.
* Filed herewith.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus which is
a part of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered
<PAGE>
therein, and the offering of the securities at that time shall be deemed to be
the initial bona fide offering of them.
(3) The undersigned Registrant agrees to file, by post-effective
amendment, an opinion of counsel or a copy of a ruling of the Internal Revenue
Service supporting the tax consequences of the proposed reorganization within a
reasonable time after receipt of such opinion or ruling.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this registration
statement has been signed on behalf of the registrant, in the City of Oaks,
Commonwealth of Pennsylvania, on the 15th day of April, 1998.
FIRST AMERICAN INVESTMENT FUNDS, INC.
ATTEST: /s/ Michael Beattie By: /s/ Kathryn L. Stanton
------------------------------- ----------------------------------
Michael 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 **
- ----------------------------
Roger A. Gibson
* Director **
- ----------------------------
Andrew M. Hunter III
* Director **
- ----------------------------
Leonard W. Kedrowski
* Director **
- ----------------------------
Robert L. Spies
* Director **
- ----------------------------
Joseph D. Strauss
* Director **
- ----------------------------
Virginia L. Stringer
* By: /s/Kathryn L. Stanton
-----------------------
Kathryn L. Stanton
Attorney in Fact
** April 15, 1998
Exhibit 11
[LETTERHEAD OF DORSEY & WHITNEY LLP]
April _____, 1998
First American Investment Funds, Inc.
Oaks, Pennsylvania 19456
Re: First American Investment Funds, Inc.
Shares to be Issued Pursuant to Agreement and Plan of Reorganization
Ladies and Gentlemen:
We have acted as counsel to First American Investment Funds, Inc., a
Maryland corporation ("FAIF"), in connection with FAIF's authorization and
proposed issuance of its Class A common shares, par value $.0001 per share, of
Strategic Income Fund (the "Shares"). The Shares are to be issued pursuant to
Agreement and Plan of Reorganization (the "Agreement"), by and between FAIF (the
"Acquiring Fund"), and The Americas Income Trust Inc. and Highlander Income Fund
Inc. (the "Acquired Fund"), the form of which Agreement is included as Appendix
VI, to the Combined Proxy Statement/Prospectus relating to the transactions
contemplated by the Agreement included in FAIF's Registration Statement on Form
N-14 filed with the Securities and Exchange Commission (the "Registration
Statement").
In rendering the opinions hereinafter expressed, we have reviewed
the corporate proceedings taken by FAIF in connection with the authorization and
issuance of the Shares, and we have reviewed such questions of law and examined
copies of such corporate records of FAIF, certificates of public officials and
of responsible officers of FAIF, and other documents as we have deemed necessary
as a basis for such opinions. As to the various matters of fact material to such
opinions, we have, when such facts were not independently established, relied to
the extent we deem proper on certificates of public officials and of responsible
officers of FAIF. In connection with such review and examination, we have
assumed that all copies of documents provided to us conform to the originals;
that all signatures are genuine; and that prior to the consummation of the
transactions contemplated thereby, the Agreement will have been duly and validly
executed and delivered on behalf of each of the parties thereto in substantially
the form included in the Registration Statement.
<PAGE>
Based on the foregoing, it is our opinion that:
1. FAIF is validly existing as a corporation in good standing under
the laws of the State of Maryland.
2. The Shares, when issued and delivered by the Acquiring Fund
pursuant to, and upon satisfaction of the conditions contained in, the
Agreement, will be duly authorized, validly issued, fully paid and
non-assessable.
In rendering the foregoing opinions (a) we express no opinion as to
the laws of any jurisdiction other than the State of Maryland and (b) we have
assumed, with your concurrence, that the conditions to closing set forth in the
Agreement will have been satisfied.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Information Relating to the Proposed Reorganization-Federal Income Tax
Consequences" in FAIF's final Combined Proxy Statement/Prospectus relating to
the Shares included in the Registration Statement.
Very truly yours,
/s/ Dorsey & Whitney LLP
Exhibit 14
Independent Auditors' Consent
The Board of Directors
First American Investment Funds, Inc.:
We consent to the incorporation by reference in the registration statement on
Form N-14 (the "Registration Statement") of First American Investment Funds,
Inc. (the "Strategic Fund") of our reports dated December 12, 1997 and April 3,
1998, relating to the financial statements and financial highlights of The
Americas Income Trust Inc. and Highlander Income Fund Inc. (collectively, the
"Piper Funds"), respectively. We also consent to the references to our Firm
under the headings "Financial Statements" and "Comparison of Strategic Fund and
the Piper Funds" in the Registration Statement.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
April 14, 1998
Exhibit 16
FIRST AMERICAN INVESTMENT FUNDS, INC.
POWER OF ATTORNEY -- N-14 REGISTRATION STATEMENT
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Kathryn L. Stanton, Michael J.
Radmer, and Donna Rafa, and each of them, his or her true and lawful
attorneys-in-fact and agents, each acting alone, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign a Registration Statement on Form N-14 of First
American Investment Funds, Inc. ("FAIF"), relating to the combination of each of
The Americas Income Trust Inc. and Highlander Income Fund Inc., with and into
FAIF's Strategic Income Fund, respectively, and any and all amendments thereto,
including post-effective amendments, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or the
substitutes for such attorneys-in-fact and agents, may lawfully do or cause to
be done by virtue hereof.
Signature Title Date
--------- ----- ----
/s/Robert J. Dayton Director April 8 , 1998
- ----------------------------- ------
Robert J. Dayton
/s/Roger A. Gibson Director April 14 , 1998
- ----------------------------- ------
Roger A. Gibson
/s/Andrew M. Hunter III Director April 8 , 1998
- ----------------------------- ------
Andrew M. Hunter III
/s/Leonard W. Kedrowski Director April 8 , 1998
- ----------------------------- ------
Leonard W. Kedrowski
Director April , 1998
- ----------------------------- ------
Robert L. Spies
/s/Joseph D. Strauss Director April 8 , 1998
- ----------------------------- ------
Joseph D. Strauss
/s/Virginia L. Stringer Director April 8 , 1998
- ----------------------------- ------
Virginia L. Stringer
Exhibit 17(a)
APPENDIX 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 24F-2
Annual Notice of Securities Sold
Pursuant to Rule 24f-2
OMB APPROVAL
OMB Number: 3235-0456
Expires: August 31, 2000
Estimated average burden
hours per response . . . . . 1
1. Name and address of issuer:
First American Investment Funds, Inc.
530 East Swedesford Road
Wayne, PA 19087
2. The name of each series or class of securities for which this notice is
filed (if the form is being filed for all series and classes of securities
of the issuer, check the box but do not list series or classes): [ ]
Intermediate Government Bond Fund
Intermediate Tax Free Fund
Fixed Income Fund
Stock Fund
Special Equity Fund
Equity Index Fund
Regional Equity Fund
Limited Term Income Fund
Intermediate Term Income Fund
Balanced Fund
Asset Allocation Fund
Colorado Intermediate Tax Free Fund
Minnesota Insured Intermediate Tax Free Fund
Technology Fund
Emerging Growth Fund
Equity Income Fund
Diversified Growth Fund
Real Estate Securities Fund
Health Sciences Fund
California Intermediate Tax Free Fund
Oregon Intermediate Tax Free Fund
Micro Cap Value Fund
International Fund
<PAGE>
3. Investment Company Act File Number: 811-5309
Securities Act File Number: 033-16905
4(a). Last day of fiscal year for which this Form is filed: September 30, 1997
4(b). Check box if this Form is being filed late (i.e., more than 90 calendar
days after the end of the issuer's fiscal year). (See Instruction A-2)
[ ]
Note: If the Form is being filed late, interest must be paid on the
registration fee due.
4(c). Check box if this is the last time the issuer will be filing this Form.
[ ]
5. Calculation of registration fee:
(i) Aggregate sale price of securities sold during the fiscal year pursuant to
section 24(f): $4,901,403,931
(ii) Aggregate price of securities redeemed or repurchased during the fiscal
year: $1,555,720,311
(iii) Aggregate price of securities redeemed or repurchased during any prior
fiscal year ending no earlier than October 11, 1995 that were not
previously used to reduce registration fees payable to the commission:
$ 0
(iv) Total available redemption credits [add Items 5(ii) and 5(iii)]:
$4,901,403,931
(v) Net Sales - if Item 5(i) is greater than Item 5(iv) [subtract Item 5(iv)
from Item 5(i)] $3,345,683,620
(vi) Redemption credits available for use in future years __if Item 5(i) is
less than Item 5 (iv) [subtract Item 5(iv) from Item 5(i)]: $ 0
(vii) Multiplier for determining registration fee (See Instruction C.9):
x .000295
(viii) Registration fee due [multiply item 5(v) by Item 5(vii)] (enter "0" if no
fee is due): + $986,976.67
6. If the response to Item 5(i) was determined by deducting an amount of
securities that were registered under the Securities Act of 1933 pursuant
to rule 24e-2 as in effect before October 11, 1997, then report the amount
of securities (number of shares or other units) deducted here:
_____0_____. If there is a number of shares or other units that were
registered pursuant to rule 24e-2 remaining unsold at the end of the
fiscal
<PAGE>
year for which this form is filed that are available for use by the issuer
in future fiscal years, then state that number here: __0___.
7. Interest due - if this Form is being filed more than 90 days after the end
of the issuer's fiscal year (see instruction D):
+ $
---------
8. Total of the amount of the registration fee due plus any interest due
[line 5(viii) plus line 7]:
= $986,976.67
9. Date the registration fee and any interest payment was sent to the
Commission's lockbox depository:
Method of Delivery:
[x] Wire Transfer
[ ] Mail or other means
SIGNATURES
This report has been signed below by the following person on behalf of the
issuer and in the capacities and on the dates indicated.
By (Signature and Title)* /s/Stephen G. Meyer, Controller
Stephen G. Meyer, Controller and Chief Financial Officer
Date: December 9, 1997
Exhibit 17(b) - Proxy Card
FORM OF PROXY
FUND
(A SERIES OF QUALIVEST FUNDS)
OAKS, PENNSYLVANIA 19456
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF QUALIVEST FUNDS
The undersigned hereby appoints Kathryn L. Stanton, Michael J.
Radmer and Donna Rafa, and each of them, with power to act without the other and
with the right of substitution in each, as proxies of the undersigned and hereby
authorizes each of them to represent and to vote, as designated below, all the
shares of _______________ Fund (the "Piper Fund"), held of record by the
undersigned on _________________, 1998, at the Special Meeting of Shareholders
of the Fund to be held on __________, 1998, or any adjournments or postponements
thereof, with all powers the undersigned would possess if present in person. All
previous proxies given with respect to the Special Meeting hereby are revoked.
THE PROXIES ARE INSTRUCTED TO VOTE AS FOLLOWS:
1. PROPOSAL TO RATIFY AND APPROVE AN INTERIM ADVISORY AGREEMENT between
the Piper Fund, and Piper Capital Management Incorporated ("Piper
Capital"), and the receipt of investment advisory fees by Piper
Capital under such agreement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. PROPOSAL TO RATIFY AND APPROVE AN INTERIM SUB-ADVISORY AGREEMENT
between the Piper Capital Management Incorporated and the Sub-
Adviser and the receipt of sub-advisory fees by the Sub-Adviser
under such agreement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. PROPOSAL TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION
providing for the transfer of the assets and liabilities of the
Piper Fund to Strategic Income Fund, a fund of First American
Investment Funds, Inc. ("FAIF"), in exchange for Class A Shares of
Strategic Income Fund.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the annual meeting or any
adjournments or postponements thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS GIVEN, THIS
PROXY WILL BE VOTED "FOR" THE PROPOSALS ABOVE. RECEIPT OF THE NOTICE OF SPECIAL
MEETING OF SHAREHOLDERS AND THE PROXY STATEMENT RELATING TO THE MEETING IS
ACKNOWLEDGED BY YOUR EXECUTION OF THIS PROXY.
PLEASE SIGN THIS PROXY EXACTLY AS YOUR NAME APPEARS BELOW. WHEN
SHARES ARE HELD BY JOINT TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY,
EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF
A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR
<PAGE>
OTHER AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY
PARTNER OR OTHER AUTHORIZED PERSON.
DATED: , 1998
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Signature
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Signature if held jointly
TO SAVE FURTHER SOLICITATION EXPENSE, PLEASE MARK, SIGN, DATE AND RETURN THIS
PROXY PROMPTLY USING THE ENCLOSED POSTAGE-PREPAID ENVELOPE.
